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Morgan Stanley (NYSE:MS)

Annual Shareholders Meeting Conference Call

May 14, 2013 9:00 am ET

Executives

James P. Gorman – Chairman and Chief Executive Officer

Martin M. Cohen – Counsel and Secretary

Robert H. Herz – Director

Eric Grossman – Chief Legal Officer

Erskine B. Bowles – Director

C. Robert Kidder – Director

Analysts

Mike Mayo – CLSA

James P. Gorman

Good morning everyone. I believe its 9 o’clock, so we can begin and this is being webcast, so that’s why we were delaying a couple of minutes. Welcome to Westchester on a beautiful day and welcome again to the Annual Meeting which we look forward to and hope to have a very productive session.

I would like to call the meeting to order. I am James Gorman, Chairman and CEO of Morgan Stanley and I am welcoming all of our shareholders who are here with us today and other friends from Morgan Stanley. At the podium today, we have Ruth Porat, Executive Vice President and Chief Financial Officer; Eric Grossman, Executive Vice President and Chief Legal Officer; and Martin Cohen, Vice President Council and Corporate Secretary.

At registration, you have received a copy of the agenda hopefully for today’s meeting and acknowledge receipt of our rules of conduct. As set forth in the agenda, I will open the meeting with a brief strategic report on the company, then I will present the proposals to be voted on and our Corporate Secretary Martin Cohen would deliver the preliminary report of the inspector of elections. The formal annual meeting will conclude and then shareholders will have the opportunity to ask questions not related to those proposals. So, we’ll have sort of two sessions in the meeting if you will.

As set forth in our meeting rules, shareholders wishing to ask questions on topics other than the proposals to be voted on must wait until Q&A session begins. Those wishing to speak should go to the standing microphones, I think we have three or four around the room and just wait for me to recognize you if you wouldn’t mind. Once recognized, if you could state your name and whether you are a shareholder and you are representing a shareholder by proxy. Please be considered of our fellow shareholders observe a polite decorum, we’ve had a great track record on that, so let’s not mess it up today. And as set forth in our meeting rules, the use of PDA, cellphones, cameras, tablets, laptops and other forms of reporting electronic or mobile devices is specifically prohibited.

Before we begin, I like to introduce Board of Directors, but also most recently retired director Mr. Roy Bostock, who in accordance with our age requirements and governance rules is no longer standing for reelection. I want to thank Roy. He has been a wonderful director. He has added enormous value to this firm and we have been very fortunate to have him. He joined the board I believe in 2005 for the couple of years perceiving the financial crisis, was a great steady hand during the financial crisis providing wise counsel to my predecessor John Mack and since I have been CEO and Chairman and CEO has been a tremendous source of counsel in addition to helping us think through a range of marketing and communication issues we have as a company, so please join me in thanking Mr. Bostock. Thank you.

So now, alphabetically let me just remind you who our directors are; Erskine Bowles and I will ask each director to stand for a moment when I am talking about them. Erskine was Co-chair of the National Commission on Fiscal Responsibility and Reform and is President, America for the University of North Carolina. He chairs compensation, management development and succession committee.

Howard Davies, Mr. Howard is a non-executive chairman of Phoenix Group Holdings and a professor of Sciences Po in Paris. He previously was Director of London School of Economics and Political Science and head of the UK FSA of financial services authority. He is chair of our risk committee and serves on our order committee and operations and technology committee.

Tom Glocer, Tom is standing for election for the first time today. Tom served as CEO of Thomson Reuters Corporation and was previously CEO of Reuters Group. He will be great addition to the Board, welcome Tom. Bob Herz, Bob formally served as Chairman of the Financial Accounting Standards Board, FASB, and was previously a partner of PricewaterhouseCoopers and he serves on our Audit Committee.

Bob Kidder, Bob is the Lead Independent Director, he is the former Non-executive Chairman of Chrysler, he was the Chairman and CEO of Borden Chemical and Duracell; Bob serves on a Compensation, Management Development & Succession Committee, and on a Nominating and Governance Committee.

Klaus Kleinfeld, Klaus is Chairman and CEO of Alcoa, he previously spent over 20 years at Siemens, ultimately serving as CEO and President. Klaus serves on a Nominating and Governance Committee.

Don Nicolaisen, Don served as the Chief Accountant at the Securities and Exchange Commission and was previously Senior Partner of PricewaterhouseCoopers. Don chairs our Audit Committee and Operations Technology Committee, and serves on a Compensation, Management Development and Succession Committee.

Hutham Olayan, Hutham is being President and CEO of the Olayan Group’s U.S. Operations more than 25 years. She serves on Compensation, Management Development & Succession Committee.

Jim Owens, Jim was with Caterpillar for over 30 years ultimately serving as Chairman and CEO; he also recently served on the President’s Economic Recovery Advisory Board. Jim chairs our Nominating and Governance Committee and serves on our Risk Committee.

O. Griffith Sexton, Griffith is an Adjunct Professor of Finance at Columbia Business School and Visiting Lecturer at Princeton University. He worked in investment banking for many years of Morgan Stanley prior to his retirement in 1995 and Griff servers on our Audit Committee.

Ryosuke Tamakoshi, Ryosuke is senior advisor of The Bank of Tokyo-Mitsubishi UFJ, Ltd. Group. The core commercial banking unit of our strategic partner Mitsubishi UFJ Financial Group. Previously, he was Chairman of the Mitsubishi UFJ Financial Group. He serves on our Operations and Technology Committee.

MasakazuTanaka, Massa is Representative Director and Deputy President of our strategic partner Mitsubishi UFJ Financial Group. Masa servers on our Risk Committee. And finally, Laura Tyson, Laura is the professor of Haas School of Business at the University of California, Berkeley. She currently serves on the President’s Council on Jobs and Competitiveness and served on the President’s Economic Recovery Advisory Board. Laura serves on our Risk Committee. Thank you. Thank you all for being here.

So let me turn to a brief discussion of our strategy and strategic presentation. 2012 was an inflection point for Morgan Stanley. We’ve spent several years refining our business model and investing heavily to position our firm for a new regulatory regime, as well as structural changes in our industry. With those major steps behind us, this past January, we made clear what we expect from Morgan Stanley over the next several years. We did this by laying out a very specific plan to increase shareholder returns. That plan, which we’re now working relentlessly to achieve, consists of the following.

Firstly, to apply 100% of the wealth-management joint venture. Second, our mid-teens margin goals through Global Wealth Management through expense control and exceed that goal through revenue growth. Thirdly, reduce risk-weighted assets within our Fixed Income and Commodity business. Fourthly, drive expenses lower in 2013, 2014 and beyond. Fifthly, to grow earnings through opportunities idiosyncratic to Morgan Stanley, and sixthly, to achieve returns with meet and normally exceed our cost of capital.

Today, I’d like to review our progress against this plan along with other important milestones we achieved in the past year. Firstly, in September, we purchased another 14% of the wealth management joint venture, bringing our ownership to 65%. At the same time, we negotiated a timetable and an extremely attractive price for acquiring the balance of the business. This past April, we received no objection from the Federal Reserve to our capital plan, which included full acquisition of the JV.

We look forward to receiving the additional and final regulatory approvals that are required in due course. This will be a signature event for Morgan Stanley. Full ownership allows us to capture additional revenue, expand our deposit base and fund our firm with a greater degree of flexibility.

After three-year integration, global wealth management has proven to be extremely attractive franchise for Morgan Stanley, delivering strong stable revenues, while consuming relatively low amounts of capital.

The business achieved record operating pre-tax profit in the first quarter of 2013, and our pretax margin of 17% was driven by increased investor activity. More importantly, we’ve been able to reduce costs very aggressively after completing the integration of two legacy technology systems last summer. That asset involved the transfer of more than $900 billion of client assets under one platform.

Third objective related to fixed income and commodities. And we’ve been able to move faster than we originally planned in reducing risk-weighted assets or RWAs tied up in that business. As with the first quarter, we have reduced these RWAs to $253 billion, that is down 11% from the end of last year. Reducing risk weighted assets is important, because it frees up capital that can optimally be returned to you our shareholders.

Fourthly, we’re managing expenses aggressively. In the first quarter our firm wide and Institutional Securities Group compensation ratios excluding DVA and severance costs were well below our full year 2012 ratios. Total compensation dollars were also below the levels from a year ago. Since the end of 2011, we’ve reduced headcount by approximately 6,000 people.

Fifthly, consistent with our strategic plan, we’ve now implemented more than 40 initiatives that will align our institutional and wealth management businesses more closely. These initiatives elevate the level of service, accounts received while providing new opportunities to grow revenues. Our bank strategy is another very important driver, the offside for Morgan Stanley over the next several years.

As of the first quarter, we grew our bank’s combined lending portfolio by 34% year-over-year. And finally, we seek not only high absolute returns, but also consistency of returns. Excluding DVA, our first quarter net income was $1.2 billion. Net revenues were $8.5 billion and return on equity was 8%. Our operating profit has increased over three consecutive quarters, and we expect our return on equity to improve from the first quarter driven by the plan I’ve described here.

Outside of the six step plan, our businesses continued to excel. Our investment banking equity sales and trading franchises remain industry leaders. For 2012, we achieved top two rankings globally in M&A, equity underwriting and equity sales and trading wallet share. In addition, asset management has delivered steady revenue growth, and solid investment performance, and it continues to be a very attractive capitalized part of our business mix.

I’d also like to mention the importance of our joint ventures with Mitsubishi UFJ Financial Group or MUFG. We recently marked the third anniversary of our strategic alliance with MUFG as of May 1. And I’m pleased to say, the relationship continues to be enormously advantageous to both parties.

At a time, when new monetary and fiscal policies are taking hold in Japan, we have emerged as one of the country’s dominant securities firms. I believe no other firm is better positioned to intermediate capital flows and advice corporations in Japan. The combinational of Morgan Stanley’s global capabilities and MUFG’s domestic footprint make this partnership truly powerful.

Let me turn briefly to our capital strategy. As we made clear during the CCAR process, our capital strategy has focused on full ownership of the wealth management joint venture, because the earnings power incremental from that venture is compelling, but over the longer term, our strong financial foundation puts us in a position to return capital to shareholders. By accreting earnings and reducing risk-weighted assets, we have established a strong foundation capital under Basel I framework and future Basel III regime. Our Basel I Tier 1 common ration was a 11.5% as of the first quarter, well in excess of minimum requirements.

Since 2010, we have increased common equity from approximately $40 billion to more than $60 billion, and we have a reserve of unencumbered liquid assets, which totaled $186 billion as of the first quarter. In conclusion, let me say a few words about the broader financial services industry. In recent weeks, policy makers have continued to explore additional reforms and refinements of the Dodd-Frank day, including limitations on the activities of so-called too big to fail financial institutions. We strongly believe no institution should be too big to fail and that efforts exploring how to best eliminate risk to taxpayers are indeed appropriate.

At the same time, the banking system capital is at historic highs. Banks have nearly doubled their capital levels since 2009. New rules imposing excessively high capital requirements we believe would bank’s ability to lend to businesses and potentially restrain the access to credit that’s needed for economic growth. The Dodd-Frank legislation has still not been fully implemented. We believe, regulators should carefully assess the full scope and impact of Dodd-Frank on the economy, before considering new additional capital rules.

In closing, the Morgan Stanley of today is made up of three leading businesses that advise, originate, trade, manage and distribute capital and we do so for governments, institutions and individuals across the world and we do so with the highest standard of excellence. We do it in a way consistent with our values and we seek wherever possible to deliver more than just one part of our firm to our clients. By executing consistently on this strategy, we will continue to attract and retain the best people in our industry and deliver strong returns to you, our shareholders. Thank you. We will now proceed with the remaining items on today’s agenda.

At this time I’d like to introduce representatives of Deloitte & Touche our independent auditor. Jeff Kottkamp, Greg Durant and [Sam Haddad], three partners of the firm, they are here and available to answer your questions, should they be in need. IVS Associates, the Inspector of Elections for this meeting is represented by William Marsh. He has taken the oath of office and a copy of his oath will be filed with the meeting minutes. The Inspector of Elections has determined that we have a quorum to conduct business in this meeting.

I’ll move all of the management proposals, and then open the floor to discussion on those proposals. Please raise your hand at this time need if you need a ballot. We have one in the center. So those of you who have already submitted the proxy, it’s not necessary to complete the ballot unless of course you wish to change your vote. So, I’ll now move the fine proposals that appear in the proxy statement. The Election of Directors, the ratification of the audit committee’s appointment of Deloitte & Touche as the company’s independent auditor for 2013.

The approval of compensation of executives as disclosed in the proxy statement. The amendment of the 2007 equity incentive compensation plan to increase shares available for grant. The amendment of the 2007 equity incentive compensation plan to provide for qualifying performance based long-term incentive awards under Internal Revenue Code Section 162(m). And finally, the amendment of Section 162(m) performance formula governing annual incentive compensation for certain offices.

So all of those proposals; six proposals are now before the meeting. If I may ask at this point, is there any discussion on those proposals? Okay. Then in that case, the polls are now open to Board on the proposals listed on the agenda. If you’re voting in person, please complete you ballots, and raise your hands, so [Inotia] can collect your ballot, and will deliver to the Inspector of Elections. So wait just a moment for that transfer.

Okay, looks out real good. The voting is now ended, and the polls are officially closed. So the next item on our agenda is the preliminary report of the Inspector of Elections. And Martin Cohen, our Corporate Sectary will provide the report. Marti?

Martin M. Cohen

Thanks, James. The preliminary report of the Inspector of Elections indicates that at least 94.2% of the votes cast for and against have voted for election of each director nominee. Approximately 99% of the votes cast are voted for the ratification of the audit committee’s appointment of Deloitte & Touche LLP as the Company’s independent auditor for 2013.

Approximately, 86.2% of the votes cast have voted for the approval of the compensation of executives as disclosed in the proxy statement. Approximately 80% of the votes cast have voted for the amendment to the 2007 equity incentive compensation plan to increase shares available for grant. Approximately 97% of the votes cast have voted for the amendments to the 2007 equity incentive compensation plan to provide for qualifying performance based long-term incentive awards under Section 162(m), and approximately 97.4% of the votes cast have voted for the amendment of the Section 162(m) performance formula governing annual incentive compensation for certain officers. That summarizes the preliminary report of the Inspector of Elections.

Question-and-Answer Session

James P. Gorman

Thank you, Martin. So ladies that concludes the formal part of our Annual Meeting, and the Annual Meeting is now adjourned. So if you will, we will now proceed with the question-and-answer session. Again a reminder, if you do have a question, please proceed to a microphone, there are several around the room, and raise your hand at the microphone, wait for me to recognize you, so we can make sure we answer all of our shareholders’ questions in an orderly fashion. Yes, sir.

Mike Mayo – CLSA

Mr. Chairman, my name is Mike Mayo securities analyst. I own stock. I also do this as a full time job. I appreciate the access that Morgan Stanley management has given to me apart from my day-to-day analyst duties. I’m here to hopefully ask questions from the Directors who I don’t have normal access to. So my first question is.

James P. Gorman

Mike, can I ask you to just move a little closer to the microphone.

Mike Mayo – CLSA

Oh, sure. Okay.

James P. Gorman

And welcome as a shareholder.

Mike Mayo – CLSA

Thank you. So…

James P. Gorman

You’ve landed in your confidence.

Mike Mayo – CLSA

The reason I’m here is to hopefully ask questions directly to Directors who I don’t have normal access to. My main question is…

James P. Gorman

I think, just as a matter of procedure, if you could direct the questions through the Chair, and then I’ll adjudicate what’s appropriate, what’s not appropriate till we run a official meeting. So…

Mike Mayo – CLSA

Fair enough. So Mr. Chairman, you’ve mentioned in January, and today you reiterated that. Morgan Stanley is targeting an ROE of 10%?

James P. Gorman

Yes.

Mike Mayo – CLSA

But we don’t know if that’s over 18 months or five years. So my question hopefully to another member of the Board is, how do you evaluate management if there is no specific timeframe on that target, and if there are internal metrics, how do we on the outside know if the board is doing an adequate job?

James P. Gorman

Sure. It’s good question and a very fair question. Let me just touch on it, and I’m not sure that there is another Director that would want to add to this, but I’ll touch on it. If you think about what we’re doing as a firm, we did indeed say that we believe it’s critical that we achieve and exceed our cost of capital.

As you know Mike, under the new regulatory regime, capital is assigned to your business based upon the risk-weighted assets that you have in the business, and the minimum leverage you’re required in the business.

So, we have been working hard to reduce our risk-weighted assets to free up a lot of capital, and believe we now are in a position where we have excess capital. However, returning that to shareholders is dependent upon our regulators granting that, desire to return that, indeed we have the same desire you have in that, so, we’d very much like to return. So, we deliberately did not say specifically without regulatory approval, what our goals would be, because it’s highly dependent not just on the returns, but on the easy equity and our ability to return that capital to shareholders.

But we expect with reasonable capital returns that we would deliver those goals in 2014, that’s been our expectation, but again subject to appropriate capital returns. What we did though for our shareholders to provide more transparencies as indeed you are asking is to set more specific goals to some of the pieces that would add up to that. So for example, we said, we would achieve pre-tax margins in the wealth management business by the middle of this year, and so far, we’ve had two quarters of exceeding the 15% goal and we hope obviously to keep that up.

We said, we would reduce our risk-weighted assets and fixed income to $255 billion this year. And so far in the first quarter, we’re at $253 billion. We said that we would buy the balance of the Smith Barney joint venture with Citigroup subject to regulatory approval, and as I’ve mentioned earlier we applied for and received initial capital approval and now we are waiting for the final steps. So we are trying to get some transparency of the elements along the way.

Mike Mayo – CLSA

If I have one follow-up and again I appreciate the insight, but I came up to Purchase, New York here to hopefully see some of the directors who are holding your feet to the fire to achieve these goals. So if I may…

James P. Gorman

Should see the bottom of my feet, might that really.

Mike Mayo – CLSA

So with all the respect if I could either have Mr. Bowles or Mr. Kidder answer the question, how do they hold your feet to the fire and other management’s feet to the fire as part of their oversight role?

James P. Gorman

Sure. Why don’t I ask our lead director I think that’s an appropriate question for lead director too? And do we have a roving microphone. This is being webcast, so we don’t have that we want to (inaudible) as the same. So I think the question Bob was how do you hold out feet to the fire?

Robert H. Herz

The question is how do we hold Mr. Gorman’s feet to the fire and the management team more broadly. There are wide variety of things of course, but foremost is reaching the return on equity that is greater in our cost of capital, hopefully considerably greater in our cost of capital. We have a wide variety of objectives that we look at and review on a meeting-by-meeting basis, and that we use to measure whether management has performed as expected. We focused in our meetings and the agenda on those issues where we have yet to achieve a level of performance that is consistent with our objective.

So Mr. Rosenthal sitting right here in front of me for example, has reviewed with us yesterday, 30 such objectives that include the return on capital and individual businesses that includes the return on equity for the firm as a whole, that includes share targets, that includes risk management priorities and that includes [wide rate] of other people development et cetera. But it certainly first and foremost is our return on equity target and by the way we just – also concluded just before walking down here today, our Board’s self assessment and looked at whether or not we were focusing hard enough for example, on the fixed income business and spending enough time understanding exactly how we were going to get beyond the legacy assets that we have, and all the other issues that have kept our returns low and what constitutes scale for us.

So we are very much focused on the important issues and I would define important as ones that we understand keep us from getting through this much more attractive return on equity, all of those which concern investors such as yourself. Yes sir.

Mike Mayo – CLSA

Do they use a blow torch or hot coals?

James P. Gorman

This could use both.

Unidentified Analyst

Yeah, friends. Good morning Mr. Gorman, shareholders, and members of the Board of Directors. I’m [Joe B. Lamar] fathers and brothers with 4,000 shares and on behalf of the interface center and corporate responsibility representing a number of socially responsible and faith to shareholders who have been in dialogue with representatives of our company for a number of years. Over that period of time, they have engaged Morgan Stanley on a wide variety of issues from the handling of loans and mortgages, from community reinvestment compliance to the companies financing our project with major environmental and reputational risks, from risk management, systematic risks, from executive compensation to expenditures on lobbying and political contribution.

We have to say thank you for the openers to those meetings, and how comfortable they were in working with you folks. But nearly five years after the almost complete meltdown of the financial system in September of ’08; and three years after the passage of the Dodd-Frank legislation here in the U.S, and the adoption of other legislative and regulatory safeguards in other jurisdictions; many of the safety and soundness rules that are universally supported are still incomplete as you mentioned in your talk.

The revelation of normal settlements and finds that our company and others have made with regulators has only added to the lack of trust and confidence that many on Main Street still have in a major banks, and the financial service sectors. The company reputation and re-confidence of Main Street will not be restored by the achievement of historic closes on Walls Street or improved returns by individual companies. Too many Americans are still our work, and the mortgage is still under water.

However, my questions are the following; can you give us any new information on the position of our company concerning the broker rule. Second are there further outstanding loans – that our company faces concerning our company’s responsibility about the risk they faced in mortgage related deals, and finally what are the ongoing changes that MS is making to improve risk management across the company. Thank you.

James P. Gorman

Thank you, [Fr. Lamar]. And I appreciate the discussions you’ve had with the management over the years and the thoughtful questions that you put to them. I will answer two of these, I might ask our General Counsel to touch briefly on the, Volcker Rule, the final rule making is still going on with the regulators. It’s been a very complex process. The essence over the course is to eliminate proprietary trading and risk taking above a certain size in merchant banking type activities. I would say Morgan Stanley has complied with those rules very efficiently and effectively.

We’ve actually reduced the capital that we have in our merchant banking businesses significantly consistent with the Volcker Rule. We have shut down our pure proprietary trading desk and we have spun off the two hedge funds, one FrontPoint which was an external fund one, which was an in-house fund PDT. We spun-off those processes to hedge funds.

So we are in a very, very different position from where we were five years ago and where we were, pretty open to be fair well, some of those changes we are initiating on our own and some of them were on customary initiated as a result of the Volcker rule. But the final rules are still being set as it relates to some of the specifics of rule awaiting. We do have a number of law sets as to all the financial institutions coming out of the crisis and we detail those in our annual statements to shareholders in our 10-Qs and 10-Ks and Mr. Grossman our Chief Legal Officer might comment briefly on.

Eric Grossman

So, all I’d say with respect to those is that we are of course, in good company with respect to lawsuits on the back of the credit crisis, but as you know given how long you have been a shareholder lawsuits, a common element of the financial services industry, and it goes back frankly throughout the industry’s history and in corporate America in general. So we do disclose all of those. We handle those in the normal course. And I do expect over the next couple of years to see material change in those cases for the positive.

James P. Gorman

Then to your third final question, which was the broader what changes that we made to risk management. They have been many and substantial. So I have a Davis, Chairs our Board Risk Committee, several years ago, we did not have a Board Risk Committee. Our Chief Risk Officer, Keishi Hotsuki reports to myself and to the Risk Committee. We have double the headcount in our Risk Management Group since 2008. We have put in place many limits across our business, and we have of course, improved our stress testing and being complying with various Federal Reserve SICAV and [see live] tests that have been in place for the last several years.

And I believe we’ve made significant improvement in the quality of the data that we collect in our risk management. Our interests are exactly aligned, we have shareholders, we have no desire for shareholders to be damaged through apparent risk taking or indeed the reputation this great institution to be damaged. Again we recognize the challenges of the past and none of us want to see that happen again.

Unidentified Analyst

I assume that the risk officers spread throughout the Morgan Stanley world, they have direct access back here in direct support back here for their calls and some of the businesses that do produce high risks.

James P. Gorman

There is complete transparency. And in fact the risk committee is – which meets monthly the firm’s risk committee, the business risk committees also meet but firm’s risk committee, which I chair with [Casey] has the risk officers from [Casey’s Group] in addition to the business heads and the heads of our trading and sales businesses. So there is a great transparency in the various position taking and taking to great detail and in fact we had our Morgan meeting yesterday with the Board Risk Committee going through exactly that.

Unidentified Analyst

Thank you very much.

James P. Gorman

You are very welcome. Anymore questions? Mr. Mayo, welcome back.

Mike Mayo – CLSA

Thank you. Again the purpose is hopefully so I can get questions answered by directors, I don’t know we have access to – this is once the year opportunity. So as relates to compensation Mr. Chairman, I hope Mr. Bowles can answer this question but as I talked to…

James P. Gorman

Just a little closer to mic…

Mike Mayo – CLSA

Sure. As I talked to employees and others, there has been some concern that you are not paying employees and not especially what your public comments. On the other hand when you look at the stock price performance over the longer time frame, it looks like you pay employees too much. So my question hopefully for Mr. Bowles is how do you get that balance correct.

James P. Gorman

Well, I of course cant resist answering part of that question but I will indeed let Mr. Bowles as Chairman of our Compensation Committee speak to it I think that’s perfect Mike. You have just laid out the age old dilemma of a talent driven businesses. How much do you pay to talent and how you pay the owner and that’s not unique to Morgan Stanley, it’s not unique to the financial industry. It’s a function of any business where you are using talent and not machines as effectively your cost of goods. So we are very proud of our talent and we know and understand the importance of attracting and keeping the best talent and I was delighted to see some recent polls that show that we are continuing to do that external polls based on campus recruiting and activity and so on.

On the other hand we are also very cognizant of the fact that in a year where we generated a 5% ROE, which was a average ROE last year. We had to make sure that we were judicious in what we provided to our shareholders versus our employees. It’s a balancing act. We try and do our best and [Jacqueline LiCalzi] and based on all the units decisively I think we did a reasonable job of it this year and will be another challenge every year as we go forward. We are guided by very thoughtful compensation committee, who are extremely engaged in asking both sides of that question as they should be. So maybe if I will ask Mr. Bowles might want to add.

Erskine B. Bowles

Hello Mike, nice to see you. I enjoy reading your work. Much of what I will say is a repeat of what you heard Bob and the Chairman say. But I think we have spent an enormous amount of time on the compensation committee trying to focus on the long-term, trying to focus on how do we get our return on equity in our total, in our return on tangible equity above our cost of capital. That is the critical goal that we face.

To do that we have employed several different message to get to the end result, as I think Chairman mentioned we have focused heavily on completing the acquisition of Smith Barney. We like that business because it doesn’t consume a lot of capital we like that business, because the earnings before tax margins are in excess of 15%, if you look at our goal, it’s meant to keep it in excess of 15%, and actually improve it from there. And we’ve actually been to be able to do that over the last couple of months. That will enable us to improve our return on equity.

Secondarily, we’ve spent a lot of time trying to reduce our risk weighted assets. I think the Chairman mentioned, that our goal was to get it down to below 255. We’re now at 253, and thirdly he mentioned or started to talk about our desire to reduce our operating expenses where we’ve tried to work our operating expenses down by about $1.6 billion by 2014.

Those are kind of the financial metrics that we – examples of the financial metrics we’ve been focused on, which are big part of the decision of whether you reward your – not only your shareholders, but also your employees.

As you said in your opening remarks, we have reduced the pay to the employees. We’ve reduced it, we believe for good reasons; our return on investment hasn’t been where we wanted it to be. And while our total return on equity this year was in excess of where the Standard & Poor’s financial companies were, I think we were 28%, they were 23%. We were less than our nine principal competitors. We felt we should take that into effect in addition to the fact that our return on equity was only about 5%.

So we try to look at the financial performance, but we also try to spend a lot of time on things like new business development, we try to look at our ability to reduce our risk weighted assets, to look at our controls of risk, and the management controls that we’ve been trying to institute. We spend a lot of time looking at how we’re going to be able to expand our franchise globally and our success there, we try to spend there, but right amount of time thinking about how can we improve the spend upon our relationship with MUFG, which we think is a fantastic opportunity to grow our business globally and here in the U.S.

And lastly, we are focused on our ability to really meet the firms long-term strategy and our one firm culture, that’s how our balancing act comes into play, it takes a lot to [sell], the reason to take a lot of sell it is clearly improving our return on investments for our shareholders are key, but if we don’t keep the talent, we won’t have a return. So we are trying to balance that, it’s tough, but we think we are making progress if our returns continue to improve this year as we have in the first quarter I think you’ll have a happy management team. Thank you.

James P. Gorman

I ask if there any other questions.

Mike Mayo – CLSA

If I can ask just two more of that if there is no one else to asking a question.

James P. Gorman

Sure.

Mike Mayo – CLSA

So a separate question I guess I hope Mr. Chairman you can direct this to Mr. Kidder or another director and I again I appreciate the accesses that Morgan Stanley has given me for my research even when I’ve said less new flattering things.

James P. Gorman

We also welcome you to our office whenever you like Mike.

Mike Mayo – CLSA

And I recognize that, no a lot of banks don’t do that, when I don’t say nice things so I – the fixed income strategy [FIX] this is the question I get the most from large institutional investors, you are carrying back reducing risk weighted assets by half, you’ve made progress fantastic, but you are not going as far back, you are not going as far back as UBS. On the other hand you are not in the game sort to speak as much as a JPMorgan, so is this strategy that’s stuck in the middle, what I love to hear perhaps Mr. Kidder’s view of your fixed income strategy the way it stands.

James P. Gorman

Well, again I’m happy given way such nice open folks here to – have (inaudible) question, but I want to keep you my view on it first, if I may. Our fixed income business has been a very long-term successful business of Morgan Stanley. And obviously last year was a difficult year with the opening of the potential Moody’s significant down grade and we dealt with that during the year and business has in fact come back. So one way that think about the business is our revenues in the first quarter almost $1.5 billion again fourth quarter last year with $770 million, so nearly double quarter-over-quarter, year-over-year and obviously that was the disappointment in the marketplace. We understand that.

This is a multi-year turnaround, we’re and backed upon it a couple of years ago, and its started with the reduction of the risk-weighted assets, the closing of the proprietary businesses, the reduction in the reliance upon structured products and they buildup above core businesses across rates, foreign exchange in credit. It has been and well be a long process to one, which is an important process. As to other firms, you can’t really compare strategies across over firms. The big commercial banks have large foreign exchange businesses. I don’t know what the other institution is doing or not doing.

I’ve read stuff in the press, which may or may not be accurate but we don’t wake up every morning same, what if somebody else doing on. What can we copy them, we wake up every morning same how do we do what is the best thing for our clients. I’m pleased in our shareholder to running the businesses that we have with the capabilities that we have. That’s what we get out of bed thinking about. So it’s a working process, I think we are showing good progress and I think the capital tied up in that business importantly is almost half where it was two, three years ago. Now we haven’t as I said early, you have to return that to shareholders, but at some point in this process that’s clearly our objective. So I focus on returns not on size, I guess is the bottom line. Mr. Kidder may want to add something to that.

C. Robert Kidder

I would obviously support what James said, we have worked over a period of time to understand the management strategy and discuss it, that included the activities that James referred to the reduction of risk weighted assets that move, structured to flow the evolution out of our legacy investments, which is holding down our return today.

I would also say, and reinforce what James said, which is that, the sale, the size of JPMorgan is not the goal, the goal is a highly profitable business, it’s important to our clients. So as you know, we’re important in the equity underwriting, fixed income underwriting, and our trading businesses are supported by our clients and (inaudible). So that’s what’s important to us, and having the scale to serve our clients well, and at the same time deliver our return on the capitals employed in that business, that exceeds our cost of capital, is what we’re trying to accomplish.

Mike Mayo – CLSA

If I can just follow-up to Mr. Kidder…

C. Robert Kidder

You could direct to Chairman.

Mike Mayo – CLSA

Okay. Mr. Chairman if I can follow-up?

James P. Gorman

Is this the final question or is there…

Mike Mayo – CLSA

This is the question I wanted to ask if that’s okay.

James P. Gorman

I’m sorry.

Mike Mayo – CLSA

I was going to follow-up to that last answer, if I could before the last question.

James P. Gorman

Let me know want you want to ask?

Mike Mayo – CLSA

Okay. What sort of resources does the lead Director have to ensure that he or other independent Board members are not rubberstamps to approve management proposals?

James P. Gorman

I’m happy to answer that. First off, I’ve got 12 fellow board members, 13 or whatever the number is, and that’s the most important resource as it’s kind of the way they think, the engagement, the critical thinking, the problem solving behavior and concern for firm return on equity, that is the single most important.

In addition the resource is the firm were open to me at anytime I need them, I have never had a communications problem with management obviously as a director and certainly as a lead director running that balance between challenging managements point of view and at the same time being supportive of management is something that we are on a daily basis concerned about.

But we’ve never had anything other than spray shooting on data, slow responses on questions, questions lot’s of them between board meetings that received good answers, discussions that are intense about, various aspects of the business and what our direction is. So but I would come back to the directors themselves who are the single most important resource.

Mike Mayo – CLSA

And then my last question if I may.

James P. Gorman

Sure.

Mike Mayo – CLSA

I’ve been extremely critical of the company in the past, and I’ve been very positive, I don’t think there’s been another period when I’d been as optimistic about the stock price performance in the last decade, so I’m very positive about that. I’ve said in my resource, I think the stock might be able to double over three years, fantastic. Having said that, I’m always wondering if the board really knows when to intervene or if you are taking actions as aggressively as you can?

So my question again I hope to – we can have an independent director to answer again I appreciate it. Asset sales, if I was trailing at 80% intangible book I’d be selling the Silver Ware to build-up cash flow to buyback, I would be doing whatever I could possibly do. So how open is Morgan Stanley traditional asset sales to free up capital that could potential lead to share buybacks and just a related question, in UFG you mentioned the success of that venture just curious with Japan coming back the way it has over the last few months, if you can give any additional perspective, because that’s one other way may be this unrealized value could get recognized in the share price.

James P. Gorman

So firstly, I applaud your confidence in the stock. I obviously read the stuff you’ve written over the years and appreciate the change that you’ve had on our outlook. And stock was at $12 and changed just 12 months ago and is now over $22. And I agree with you, I think the outlook is bright. But our job as stewards of the company is, to make sure that we generate a future earnings, because of course the valuation is driven off the MPV of future earnings. So you got to be very careful but your – if you’re selling businesses, if you sell businesses that do not have a roll in your future, you don’t sell businesses just to optimize for the current quarter or the current year, but you sell something that you think is not a long term payer in your portfolio, either because the environment has changed around that business, you don’t have the scale in the business or you‘re not very good at running that business.

So I think been very aggressive actually, Mike if you were to compare us to most other financial institutions, I think restructuring that we’ve done in the last four or five years is very aggressive. We sold or spun off Discover, MSCI, PDT, Bank Hampden just to name a few when we made probably the largest wealth management acquisition in history in buying Smith Barney, so we’ve been aggressive in taking businesses that we didn’t feel had a long term fit out of that house and bringing businesses that we think have a long-term fit into the house, so we’ve been aggressive both ways, the board is extraordinarily engaged in those discussions. We are very fortunate, we have a – in U.S. the shareholder are very fortunate. We have a very dedicated, smart focus board, who ask tough questions and demand straight answers. And obviously when we talked about disposing or acquiring there is some of the toughest discussions you can have, because you want to get it right.

Now I am also selling the Silver and not to selling the house, some days it gets so cold, and you need a little protection, so let’s make sure that the things that we sell and dispose of things that make sense, not just knee jerk reactions to what somebody else wants. We have got the right trajectory with this company, the CDS is coming from nearly 500, 12 months ago to 120 the stock has done what it’s done. We’ve sold business as that didn’t fit in the both businesses that do, and I think the board is being very engaged. But if Mr. Kidder wants to add anything to that I would certainly ask him to do so if there is anything to it.

C. Robert Kidder

The challenges has been to have a portfolio of businesses that we believe can deliver strong return on equity overtime that can do it reliably or more consistently than our peers, and we believe we are on that track. We expense with some businesses, we shrunk some businesses by reducing risk weighted assets by stepping out of the structured fixed income, and so on and so forth. So this business all has a result of discussions between management and the board, and I feel very good about the restructuring that the firm is undertaken over the course of last year three or four, five years . By the way just one other answer which is that paying out cash to shareholders today, of course is somewhat governed by our regulatory process.

Mike Mayo – CLSA

On the UFG part of the question, can you comment on if you see new momentum given the resurgence and…

James P. Gorman

I think it’s not another question in here, Mike? I don’t think your arithmetic is too good.

Mike Mayo – CLSA

I included that as part of my last question.

James P. Gorman

Let’s pull the game at six. All right I’ll answer that, but then we’re done, all right?

Mike Mayo – CLSA

Fair enough.

James P. Gorman

And you’re welcome as I said, you can come to our office anytime, we’re still at 1585 Broadway.

Mike Mayo – CLSA

I appreciate you.

James P. Gorman

UFG is of enormous important part of our firm there, great partners they own 22% of the equity of the firm. We have two wonderful Directors with us today that I introduced earlier, Ryosuke Tamakoshi and we have a number of relationships with the institution around the world but a growing (inaudible) is the joint ventures we have in Japan and those joint ventures not surprisingly are performing very well, given the economic outlook in Japan at the moment.

And we constantly look for ways to partner together and you will see more opportunities for Morgan Stanley and MUFG to do business together around the globe. I couldn’t be happier with the partnership and with the quality and professionalism of our friends from the Group. And we meet with our management team, with their management team twice a year. So I think it’s been one of the great things that have happened to our firm and to MUFG both.

Mike Mayo – CLSA

Thank you

James P. Gorman

You’re welcome. If I might ask, are there any other questions from any other shareholders? In that case, ladies and gentlemen, at 55 minutes the meeting is now closed. Thank you very much.

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