Morgan Still Wants All of Smith Barney

NEW YORK -- (TheStreet) Morgan Stanley (MS) - Get Report CEO James Gorman said Monday that his firm still expects to purchase all of Smith Barney, despite indications that tighter capital requirements might hinder the deal's progress.

"We fully intend to buy it," said Gorman, with the caveat: "as soon as we can."

Part of Morgan Stanley's problem in moving forward with the acquisition is the way it was structured.

In Janauary 2009, Morgan Stanley agreed to buy a 51% stake in Smith Barney from Citigroup for $2.7 billion, and eventually all of it by 2014.

Gorman said the deal represented a "phoenix from the ashes" of the financial crisis -- in other words, a steal. But since then, more restrictive capital requirements have been outlined by the Basel III accord. Uncertainty lingers regarding the treatment of capital levels under some parts of Dodd-Frank legislation.

A recent story in

The Wall Street Journal

indicated that the capital changes were causing uncertainty about whether Morgan Stanley would complete its acquisition, too. But Gorman said that article was "inaccurate."

"We expect to move forward on that as soon as it

acquisition clause triggers," he said at an annual meeting by the Securities Industry and Financial Markets Association (SIFMA), the securities industry trade group.

In a wide-ranging interview with Charlie Rose at the Marriott Marquis hotel in Times Square, Gorman also talked about the new difficulties Wall Street faces in the post-crisis era.

Gorman said the biggest challenge was explaining to average Americans on Main Street why Wall Street's allocation of capital matters to them. "We've clearly lost the consumer ear," he said, adding that anti-Wall-Street political rhetoric "pushed it too far."

He also said that Dodd-Frank "laid out the sandbox dimensions" of what large financial services firms are able to do. However, the rulemaking process for the bill's 2,000 pages of legislative "architecture" stands to be a long and difficult one with regulators.

Regarding the Volcker rule's restrictions on proprietary investments, Gorman seemed to be on the same page as the Obama administraion and Democratic lawmakers. He sees Morgan Stanley's role as a market-maker and provider of client services rather than as a prop-trading-and-investing shop.

For instance, Gorman said, if Morgan Stanley were to help launch a $2 billion hedge fund, in the past it might've considered a 30% or 40% investment for the upside exposure whereas today, risk aversion makes just a 5% invesment more preferable.

"We should have as little capital as we can in a fund to get it launched" then provide services to "help investors make money," said Gorman.

Looking ahead, Gorman said the key things to come out of Washington will be entitlement reform and figuring out how to get more people to work.

But he still believes there's a strong "bull case" for America: It's got population growth (unlike Japan); it's got a great education system that outsiders vie to get into (unlike some European nations); and it's got a "dynamic economy under strong rule of law" (unlike developing nations).

However, Gorman noted that the war generation and entrepreneurs of the past few decades didn't have any guarantee of success. He believes the latest generation needs to learn the virtues of patience and hard work.

Along those lines, the Australia native offered two interesting personal tidbits. When asked by Rose whether he had planned to stay in the U.S. after graduating from an Ivy League school, he said no -- Gorman planned to stay as long as it took to pay off his student loans with a big American paycheck: "Then I decided I'd like another one," he quipped.

But Gorman also noted that attending Columbia University was costly, with a 24% interest rate on his student loans -- something unheard of today. When asked what his key takeaway was from the financial crisis, he said: "Leverage is killer."

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