Morgan Stanley’s CEO Gives Himself an A-Minus

Morgan Stanley had plenty of doubters, and Chief Executive Officer James Gorman has won them over. When then-CEO John Mack hired Gorman in 2006 to run wealth management, Morgan Stanley was still reeling from a vicious internal struggle that ousted CEO Philip Purcell. It seemed impossible that Morgan Stanley would ever let another former McKinsey & Co. consultant lead the firm. But the financial crisis changed everything. Saved in part by an infusion from Japan’s Mitsubishi UFJ Financial Group Inc. (MUFG), Morgan Stanley pivoted toward Gorman’s wealth-management business with the acquisition of Citigroup Inc.’s Smith Barney, and he became CEO in 2010. After building a deposit base and staving off a potentially fatal credit downgrade, Morgan Stanley reengineered its fixed-income business and even beat longtime archrival Goldman Sachs Group Inc. in debt trading in the first half of 2017. Its stock has more than quadrupled from a 2012 low. The Australian-born Gorman, 59, now sees a possible scenario of global economic growth, lower taxes, higher interest rates, and easier regulations ahead. And he’s beaten the consultant label. “The reality is I’ve been on Wall Street now for 18 years, and I was a consultant for 12,” he says. “I’m also a lawyer.”

This interview appears in the February / March 2018 issue of Bloomberg Markets. Subscribe now.
Cover artwork: Kelsey Henderson

ERIK SCHATZKER You’ve been CEO of Morgan Stanley for eight years, chairman for six. Give yourself a grade.

JAMES GORMAN Oh, God. Um, I think, A-minus.

ES Pretty good grade. Tell me why.

JG We inherited an organization that had many very significant issues to be dealt with, as did many of the banks. And we were dealing with them in an environment where the markets were not very trusting of the business model in the sector.

But we were forced to plow through and make some very difficult decisions quite rapidly. You never have a control function to say, “What if I’d done it differently?” So you can only look at what actually happened—and I think the record would show that the big decisions turned out to be the right ones. The stock has obviously recovered. People feel proud about working here. The leadership team is cohesive and as apolitical as I’ve seen during my 18 years on Wall Street.

ES Why not A-plus?

JG It took quite a long time to get the team that I wanted at the top. And, you know, with hindsight maybe there were things I could have done earlier. I really think these organizations have a certain amount of momentum on their own. Management either amplifies that momentum or really screws it up. We took a few years to get to a really cohesive team. The measurement of a great management team is competence and cohesiveness. It’s not good enough to be tribal and loyal—you’ve got to be good at what you do. And it’s not good enough to be good at what you do—you’ve got to be cohesive.

We sold a couple of businesses in the asset-management space. In hindsight, I’m not sure that was a great idea. We took quite a long time to dispose of our physical commodities business, which disproportionately weighed on our fixed-income results, which disproportionately implied we had weaker fixed income than we do. If we’d been more aggressive in getting rid of those earlier—maybe at some cost, higher cost, there’s always a trade-off—fixed income might not have looked as weak and wouldn’t have attracted the glare that it did.

ES What yardsticks do you use to measure yourself day to day, quarter to quarter, year to year?

JG Funnily enough, I have three sheets of paper that I try to run the business by. Which sounds ridiculous, but it’s actually what I do. One is to record every night before I go to bed the numbers of our businesses from around the world and then to use that to engage with managers about why we’re doing well or not doing well in certain areas.

I’m very focused on our daily numbers. What you see over many, many quarters and years are patterns, seasonality, aberrations—aberrations caused by good things happening, aberrations caused by bad things happening, taking losses in a certain part of the portfolio. That gives you a tactile feeling for how we’re doing on a day-to-day basis.

On an annual basis, the second sheet of paper is a summary of 10 goals that I put aside for myself, separate from the board, CEO, organization. What’s the difference? One, they’re my personal goals, and they sometimes include personal things. And two, they’re reflective of the skills, strengths, and weaknesses that you bring to the seat. A different CEO, faced with the same environment, would have a different set of goals, because they’d have different skills, strengths, and weaknesses.

The third is a sheet of paper that summarizes our strategy—­it’s more of a mission statement than a true strategy statement—in about 72 words. When we make strategic decisions, I go back to the sheet of paper and think, Does it fit? And if it doesn’t fit, we need to change the 72 words, or we don’t do it.

ES Why 72 words?

JG It just happens to be. If I were more verbose, it might be 93.

ES What was on the list of annual goals for 2017?

JG To pass my annual fitness test, which I do the night before my birthday [July 14]. It’s a rowing test: 10 500-meter sprints, each under 2 minutes, with a 1-minute interval. I’ve now done this for about six years since I started rowing on the ergometer, and it’s like an annual mark-to-market of how you’re aging.

For me, physical fitness—not at a crazy jock level, but strong and healthy—is a really important part of keeping on top and in the game.

ES You didn’t mention the stock price.

JG Stock price is an outcome. You can’t manage the outcome. You manage the inputs.

Put it this way: I’m not surprised by what the stock has done. In fact, I predicted it at the management offsite a couple of years ago. I thought we would be a $50 stock, and we’re going to be a significantly higher stock over the next couple of years. The inputs would suggest that. The question is: Are the inputs on track?

I have the stock on my screen. I have it on my iPhone, I have it on my personal iPhone, I have it on my iPad. I have four ways I can find the stock price within about 2 seconds, and I would freely admit I look at it on each of those screens more than once a day. It’s the ultimate report card.

ES How long do you think it’s going to take before Morgan Stanley stock sets a new high-water mark? The old high-water mark was set during the Purcell era.

JG That was a time when the world thought Morgan Stanley and some other institutions were behaving like internet companies. We traded at six times book value. For a point of reference, during the financial crisis we traded at less than 0.2 times book value, so 30 times less in terms of valuation. We should never trade at six times book value. I’m sorry if that’s going to disappoint an investor out there, but that would be a very bad sign. That would mean that we’d done something to engineer a rate of growth that implies we’re a massive growth stock company. We’re not.

Historically in this industry, you bought these shares at 1.25 times book value and sold them at 2.5. That changed when leverage changed in the industry. So that 1.25 moved down to probably 0.7. Below that you really had to question what you were buying. Around 0.7, if you saw value, that could be very attractive. And at 2 times book value, you were doing very well. So the range has shifted.

Photographer: Sasha Arutyunova for Bloomberg Markets

ES So what’s on the list for 2018?

JG They’re personal goals. They relate to management, development, use of new forms of technology, automation, AI, digital, and how they’re impacting our business. Certain financial metrics in areas I think we can improve—I won’t publicly say what they are, but they’re areas where we can improve.

I’m conscious about how to build the institution for the next 10 to 15 years, not just the next year.

ES What are the hardest things you’ve had to do in this job?

JG Making people decisions. Deciding who gets which job, what roles they play, how you develop the people, how they live up to your expectations.

Strategy is easy. You make a binary decision. We buy or sell X. Executing the integration? That’s messy.

Some of the execution with Smith Barney, you could argue there are things we should have done differently. But having the people in place to drive and lead that execution—far beyond myself and the top couple of lieutenants, having the top 10, 20, 30, 40 people in place to lead it—that’s hard. And to make real-time people decisions when the Earth is moving under your feet makes it even harder. If things are static, decisions are easier. When the world is not static, and the world hasn’t been for most of the last decade, people decisions are exponentially harder.

ES Which big decisions were most important? What are you most proud of?

JG Aggressively restructuring wealth management. Had we not done that, we wouldn’t have had a business fit for purpose to do the Smith Barney deal. In the first months we fired nearly 2,000 financial advisers. We cleaned out the bottom end. And that set a tone and a standard, to everybody, that we were serious. We thought this business had tremendous potential, but it needed to be done in a first-class way.

The core DNA, in my mind, had to be the Morgan Stanley DNA, because that was a culture of smart people dealing with complicated issues. Wealthy individuals with complex financial needs could be well served by those people.

We have aggressively moved toward the more complex, more affluent segment, because that fits best with our culture, with our DNA, and with our capabilities.

When I took over, I think the most important decisions were to buy Smith Barney; to take the old Dean Witter platform and the Smith Barney platform and convert them into one; to convert [Japanese bank] MUFG to a common shareholder, which removed the preferred [share] payment but locked their partnership in essentially forever; to take very aggressive decisions on the problem issues we had out there: the MBIA exposure, the Revel Casino—we took the attitude that these were never going to age well and we had to rip the Band-Aid off—the settlement with the Department of Justice.

Then the talent decisions, the key operating decisions—Ruth [Porat] first as my CFO, Colm [Kelleher] to run the business, Greg Fleming, who helped a lot, to lead wealth management during a difficult period. Those decisions were the critical ones. Putting Ted Pick in [as head of equities and then as head of all sales and trading].

“Nobody likes to be unpopular, but you have to accept that as part of the job”

ES I remember seeing you sometime in the first few months of 2012, when you were trying to forestall a three-notch downgrade by Moody’s.

JG That wasn’t a decision so much as a sort of an existential challenge. Had they downgraded us three notches, there was a reasonable probability we couldn’t fund ourselves. And if we couldn’t fund ourselves we were done. For them it was analytic models.

I probably met with them 10 or 12 times. And that was a war to the finish. I believed fundamentally that we were not being given credit for how the firm had transformed itself.

My argument was, “You cannot measure us by what got us into the financial crisis. We are not the same firm.” Everything about the organization had changed. We had global risk committees, we’d shut down our prop businesses, many of the key leadership roles had changed, the leverage had dropped from more than 30 times to 11, the fixed-income risk-weighted assets had dropped from nearly $400 billion to $100 billion.

They were listening to history. It’s very hard for someone who’s been scarred by history to dismiss that and put it away and say this time it’s different. We as a management team had overcome that. Moody’s had not yet. They eventually did, to their credit. They downgraded us two notches, not three.

ES You were in Russia when that decision came in. How did you celebrate?

JG It was during July, the White Nights or whatever they call it when the sky is still light at 11, and I got a call from New York. I was looking outside–I don’t know why I remember this—and there was a soldier on the canal running through St. Petersburg, standing guard. I was thinking about what it was like for him to be standing out there on his own, guarding no one in particular, and what it was like for me to be sitting in my room alone, with the best news I’d received probably in my whole professional career—and yet nobody but this anonymous soldier to celebrate it with. He was the only physical human being I could see.

So I thought, I’m going to go downstairs and celebrate. I went down to the bar, had a glass of wine to toast Morgan Stanley.

ES Would employees describe you as a people person?

JG I came from a very large and gregarious family. But in business, I’m not overly extroverted. I keep a little distance between myself and the employees. Whether that’s right or wrong, and depending on how they translate that, I’d hope they describe me as a fair person.

ES How did your background growing up in a large family in Melbourne shape your values, your outlook, and your ambitions?

JG Living with that many people, you have to beat a path of your own. And I think it causes you to drive a little harder. I also think it’s readily apparent that there are people better than you at everything. There’s no superstar who dominates in all fields. Somebody is more attractive, somebody is more athletic, somebody is more intelligent, somebody is more intellectual. Somebody is funnier, someone is more social. Everyone has a role to play. I think it causes you to understand that you have strengths and you have weaknesses. So hopefully you develop some modesty from knowing you’re not the bee’s knees.

ES What are your strengths and weaknesses?

JG God, this sounds like my therapist. I’d better get a therapist, then I’d really know what it sounds like. I think most people would say, and I would agree, that I’m very calm under pressure. The more complex and the more volatile, the calmer I become and the more I enjoy being in that position. I like to be able to make decisions, to make the call. You have to live with the consequences, live with being unpopular. Nobody likes to be unpopular, but you have to accept that as part of the job.

ES You have a reputation for not suffering fools gladly. Is that true?

JG I don’t suffer bullshit. And if I know something about a topic and someone is just trying to get one past me or pretending they know more than they do, then I might well ask them a couple of follow-up questions just to expose them and let them know that I know that they don’t know.

ES Would you say you’re competitive?

JG Yes, I’m competitive. I like to win. I probably hide it a little more than some people. One time my father gave us all IQ tests, and he published the results. He wrote them up and stuck them up on the wall in the living room. And next to each result he put the prospective career of whoever was at that particular IQ level. We used to compete over tennis, over swimming, over who could catch a Frisbee the best.

ES What did he put next to your name on that list?

JG Middle manager. I had the probable career outcome of middle manager. So I said to him on his 90th birthday, when one of my siblings asked me to give a toast, I said, “I think I achieved the objective.”

ES You appeared to be on something of a fast track at Merrill Lynch. Why’d you leave?

JG I had spent a lot of my career working as a strategist and advising CEOs and organizations on complex strategic issues. I moved from that to operating a business, which I really loved doing. Moving back to a strategy role was not what I wanted to do. I wanted to own and operate businesses.

ES There’s a persistent view on Wall Street that the best CEOs can only come from banking or trading. What do you have to say about that?

JG There should be a strong bias to having people who’ve grown up in the business. There should be a strong bias inside these kinds of firms for bankers and traders running them. But it shouldn’t be the only consideration. We’ve had bankers and traders who have done very poorly in these jobs.

ES I’ve heard people dismiss James Gorman as a consultant. How did you fight that perception?

JG You don’t! I was a consultant for 12 years of my career. I’m very proud of it. I worked for what I think is the No. 1 consulting firm in the world. The reality is I’ve been on Wall Street now for 18 years, and I was a consultant for 12. I’m also a lawyer.

ES How dramatically will artificial intelligence, machine learning, and automation reshape this industry?

JG How will it reshape the M&A advantage our bankers lend to global cross-border transactions? I would say relatively little. How will it shape the potential for more electronic trading aided by various algorithms in our fixed-income businesses? I think quite a lot.

If you looked at the trading floor 15 years ago, there was very little electronic trading. Now our equities business is almost entirely electronic. If you looked at the role of the so-called strats—the technology strategists and the people that write the programs to enable better client trading, better activity—they’re ever-present on the trading floor. They didn’t exist a few years ago. If you look at the branch offices in wealth management, the old cashier rooms, they used to manually match trades at the end of the day. They had vacuum tubes.

ES What’ll be gone in the future?

JG Nearly 10 years ago we had 62,000 people. Now we have 57,000. But we have as much revenue and profit as we had 10 years ago.

ES Will you be down that much again 10 years from now?

JG I don’t want to predict how many people. I’m more focused on the function. Is it people-driven, or is it technology-­driven? And our total technology spend is not going down. It’s going up.

ES Why won’t computers just over time pick off one bit or another of what humans have historically done?

JG Doing analysis, compiling spreadsheets, looking at industry trends, machines will do that better than humans, because they’ll do it perfectly and faster. To the extent you’re using intuition—How will this person respond if there are three of us in the meeting or one of us in the meeting? Should I do this on a Friday afternoon or a Monday? Should I do this over dinner or over breakfast? Should I present my best case at the outset or my worst case at the outset?—I think that’s very, very hard to replace.

You could have a machine tell a client who’s panicking in a market down cycle, “Do not sell,” and show them a thousand risk-return models mapped out beautifully on the screen. And then that person gets a phone call from a friend saying, “Hey, I just sold my stock. What are you doing?” And they immediately jump on the phone and sell. But when an adviser says, “No, you really shouldn’t sell. You can look at the models, but I’m telling you from experience,” that has value. That’s not going away.

ES How much of a threat are cybervulnerabilities?

JG A real threat. We’re spending several hundred million dollars protecting us on cyber, and a few years ago we spent less than $50 million. So relative to the size of the organization, it’s one of the biggest threats we have. The probability of having losses is high. The probability of having catastrophic losses is low.

ES Restructuring and expanding wealth management was the strategic imperative 10 years ago. What’s important now?

JG Major strategic moves are pretty rare. Success in them is even rarer. For Morgan Stanley to have become a bank, to have built a deposit business, to have built a consumer-­lending capability, in addition to our wealth and investment-­management business, is a very powerful thing. We’ve been as high as the 10th-largest bank [by deposits] in the U.S. And there’s no reason why we can’t be significantly bigger. So that’s one clear space.

A lot of investing seems to be going in two different directions—more complicated and alternative-focused or more passive and index-focused. We’re good at the complicated, alternative-focused side, and we have the client base.

Our asset management business is going to grow. That’s in our wheelhouse.

The combination of intellectual property, global distribution, global client base, local licenses, local trading capability—it’s going to be very hard for somebody to start up over the next five years and beat that. Startups can compete for product, distribution, geography, but those are very hard. The universe of banks that can do the kinds of things we do is relatively small. What remains unclear is how the Googles and Amazons and Facebooks will develop. They have global reach, they clearly have the financial resources, and they have information. But they don’t have the DNA behind a lot of things that we do. A lot of their activity is based upon mass execution. A lot of what we do is idiosyncratic, large-event execution.

The basic model for being an M&A and capital markets advisory firm isn’t going away. What is going away is those who are second tier.

A lot of institutions have backed away from trading as the balance sheets have had to shrink. I think we’ve repositioned ourselves as one of the few equities and fixed-income global sales and trading shops for the next five years.

Photographer: Sasha Arutyunova for Bloomberg Markets

ES The conventional wisdom says scale matters in asset management and to be a scale player you need a trillion dollars of assets or more. That’s more than double what you have now. How do you get there?

JG I think that conventional wisdom is dead wrong. Asset management is a series of many businesses, some in which scale matters a lot, some in which scale doesn’t matter at all. So if you’re in the indexing business, it matters—everything is scale. If you’re in liquidity management, scale is extremely important.

Mezzanine financing, distressed debt, real estate, Asian private equity—it’s much less important. You don’t have to be huge to have a successful Asian private equity fund.

ES You don’t see the need to do anything that people might call transformative?

JG I don’t feel the need to. There’s consolidation taking place across the industry, but they’re hard transactions to do. Culturally, they’re hard to do. One thing I’ve learned: Culture matters when you’re doing M&A.

ES Are you a consolidator in banking?

JG I don’t think it’s likely we’re going to be a consolidator of physical property. We’re more likely to be a consolidator of our clients’ accounts and money.

We have hundreds of billions of dollars of our clients’ money sitting inside banks. It doesn’t need to be. It could be sitting inside Morgan Stanley.

ES What about technology. Is that something you think you need to acquire?

JG Just because someone else has built it successfully doesn’t mean you can. So I am very interested in finding ways to partner and buy technological capabilities.

ES Do you take crypto seriously enough to consider building a business around it?

JG I don’t know what building a business means. We’re not providing for people to buy and sell cryptocurrencies directly through Morgan Stanley. We are building a trading desk to support various derivative forms of cryptocurrency. There’s a lot of work on how blockchain technology will impact various parts of our business. So do I take it seriously? I take it seriously. I don’t think it’s a fad. I think it’s a bubble. I think it’s speculative, so buyer beware.

People are looking for an alternative way to exchange value. A large part of the global economy is the black-market economy. It doesn’t run through the central banking systems. This presents a safer alternative for many people in that part of the economy. For people using the traditional banking sector, it’s less obvious to me.

ES You don’t think if we went to sleep for 10 years we’d wake up and say, “My goodness, look at the world, it’s all run by blockchain and functions on token-based currency systems?”

JG I doubt it. I think we’re likely to wake up and find there’s no cash. The irony is that countries are moving to remove large-denomination bills to cut down on criminal activity. But that is actually feeding into cryptocurrency. So if you can’t use large bills and you don’t want to carry around thousands and thousands of dollars in small coins, why not buy a piece of Bitcoin? So the irony is that to achieve the goal of reducing criminal activity you may actually be helping it along.

“If you look at fixed income, the irony is that could be our biggest winner in the next several years”

ES Is there any reason you won’t stay on as CEO past the age of 65?

JG Sixty-five is an awfully long time. I think it’s unlikely I will be in this job until I’m 65. You’ve got to think about what’s good for the organization, and partly what’s good for the organization is to move along with enough time for others to be developed. If you stay too long, you run the risk of wiping out a generation. If you stay too short, you run the risk of not developing the next generation.

I’m certainly not leaving any time soon. But 65 is a long way out.

ES If we look at the first part of your tenure as CEO as repairing the damage and repositioning the firm, and the next part of your tenure, the part we’re in right now, as harvesting the fruits of those efforts, what’s the third stage?

JG The next segment is a lot about the future—how we embrace technology, what kind of leadership we need, and what businesses we’ll amplify and what we’ll carve down. I don’t see a major strategic shift. I like our business.

Leadership in these organizations is probably the most important thing to focus on. Too often on Wall Street, leadership changes happen around events. Something goes bad, the CEO steps down. They’re very event-driven. What we’re trying to build is a disciplined management succession, something that is maybe a little more stable than Wall Street has been traditionally.

ES Anything else that you plan to amplify beyond investment management?

JG If you look at fixed income, the irony is that could be our biggest winner in the next several years. It was a serial under-­performer. We restructured it a couple of years ago under the leadership of Colm and Ted and Sam Kellie-Smith, and they’ve done a great job. The markets have been unbelievably light in fixed income, in volume and volatility. That will turn, so fixed income might be the sleeper.

ES Does the looser regulatory environment create opportunities?

JG That and rising interest rates. You could argue we have the perfect trifecta right now. We’re going to have lower corporate taxes, we’re going to have higher interest rates, and we’re going to have a more balanced regulatory environment. So after 10 years of having zero interest rates, extremely demanding regulatory processes—a lot of which were needed—and very high corporate tax rates in this country, all of that is changing at the same time. That’s an inflection point. So the banking sector is in for a very interesting run in the next few years if the global economy cooperates.

ES There was a theoretical limit on what the return on equity (ROE) could be in the post-crisis environment. That environment has changed. To what degree has that theoretical limit on ROE changed?

JG The leverage ratios limit for a large trading business what the ROEs are. What’s different now is half the firm has got nothing to do with total balance sheet size, or very little to do with it. So it’s now for us a question of mix.

ES It took a long time for Morgan Stanley to get back to 10 percent ROE. Could it once again be a 20 percent ROE firm?

JG Not in my career. You can’t do it. Not with the leverage ratios, not with the amount of capital. And remember, when we were a 20 percent ROE firm, it was based upon 30 times leverage. So you can argue it was fake. In this world of fake news, those were fake earnings. By the way, during the crisis, a lot of those earnings were given back. So, no, our aspiration is not to be a 20 percent ROE firm. The only way to achieve that is to take our levels up to a level we’re not prepared to take them to.

We’re very conservatively capitalized, but increasingly our payout ratio is going to exceed 100 percent.

ES Goldman Sachs and Morgan Stanley have been archrivals. That’s how people perceive the firms. Is that an incorrect perception?

JG No, there’s no question about it. There are other banks that bounce in and out—and competitors we respect greatly—but if you had to put us against the wall and say who’s the competitor that matters most to you, historically, it’s been Goldman, and I suspect Goldman would say that historically it’s been us.

ES The CEO of Morgan Stanley must take special pleasure in beating Goldman Sachs.

JG No, I don’t. The problem with constantly looking at competitors is you start wanting to mimic them. And you get in that strategy by envy loop. What I care about is, given the resources we have, given the DNA that we have, given the talent that we have, are we optimizing that? I’m not terribly worried about what other people are doing.

ES Let’s take your equities business. It’s become more competitive than theirs. There must be a reason for that.

JG We don’t look at institutions with quite that maniacal focus you might suspect. We care about what’s going on in the industry. How is technology changing this industry? What is the price structure changing? What does MiFID II mean for our business?

We looked at fixed income. Take that as an example. We said the industry was going through structural change. We said the leverage was coming down. Unless you could generate more velocity of assets on the balance sheet, you’re going to do less well in that industry. Unless you had a global macro business where you were the natural player in a lot of the G-10 currencies, you weren’t going to participate at the level of the big banks. So you had to pick your shots. We downsized 25 percent. We sold physical commodities. Those were two massive strategic decisions. We didn’t do it by looking at our competitors. Some of our competitors, including the one you named, did exactly the opposite.

ES China is relaxing and may eliminate its limits on foreign ownership in financial services. How do you respond?

JG We already own part of a joint venture, and we took our ownership from 33 percent to 49 percent. We would move to majority ownership. We should control our destiny. The Chinese economy is the second-biggest economy in the world. We shouldn’t have a minority business in that economy.

It’s not a game changer for Morgan Stanley over the next several years, but it’s more than symbolic, going to 50-plus percent.

ES Citic and CICC are fairly fearsome firms on their own. Can Morgan Stanley or any other global bank compete on its own in China against them?

JG Every market’s got local champions that almost by definition have a massive information and position advantage, because they’re helping finance local companies. On the other hand, they are local players. And if you’re trying to do a global deal, you probably want someone who can take your clients globally. MUFG—as big as they are, and they’re enormous—see the great advantage in the access to the global economy that Morgan Stanley brings.

ES So why not find an MUFG-like partner in China?

JG That’s an interesting question. I think it’s very hard to have cross-border equity holdings in banks for regulatory and cultural reasons. So you’d only do it if you really found something you thought was compelling and could materially change your position in the market.

ES Why shouldn’t China be more of a game-changing opportunity?

JG The vast majority of the economy is state-owned. It’s not as big as the size of the economy implies. That said, it’s big and important and will only get bigger and more important. As more Chinese companies merge globally and buy companies globally, then those opportunities change.

ES Do you believe that infrastructure represents a huge opportunity for financial services firms like yours, and if so, how do you take advantage of it?

JG The obvious place for infrastructure financing is right here in the U.S. I think you need some form of government-private partnership. Everyone knows our airports and roads are in tremendous disrepair. So, yeah, huge opportunity. We’ve raised our second infrastructure fund. The first fund was $4 billion. Ten years ago we had none. Now we have $8 billion-plus under management. Could that be $30 billion? Absolutely.

ES The financial crisis taught us to worry about tails, but there are tails on both sides of the histogram. If there’s one low-­probability outcome, what is it?

JG The obvious risk is the cyber risk. So if you’ve spent several hundred million dollars against something that hasn’t happened, it’s because you’re worried about the low-probability outcome. By definition.

And the positive, which is not low, but low-ish, is this trifecta coming together. We’ve got corporate tax reform, rates are starting to rise, and the regulatory environment looks like it’s changing. If global economic growth keeps going, that combination, that multiplier effect of all those happening, that could be big. That could be big.

Erik Schatzker is an editor-at-large for Bloomberg Television in New York.