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Morgan Stanley CEO: More bank deals on the way

November 30, 2012: 9:08 AM ET

James Gorman says 'Too Big to Fail' isn't a problem in the U.S.

James Gorman

Morgan Stanley CEO James Gorman, earlier this year at Fortune event.

FORTUNE -- When it comes to banking, Morgan Stanley CEO James Gorman predicts the U.S. will go the way of Canada or France. Hopefully, more Canada than France.

Gorman, speaking at an industry conference Thursday morning, said he believes there will be many more deals for banks and other financial firms in the next few years. He said that with 7,000 banks, the U.S. is the exception in the world, and that won't continue. Canada has about two dozen large national banks. France has a similar amount. "The economies of regional banks don't add up," said Gorman. "There will be more consolidation."

Gorman's comments follow a spate of bank deals in November. Investment bank Jefferies (JEF) was bought by conglomerate Leucadia (LUK). And boutique investment bank KBW (KBW) was acquired by the larger Stifel Financial (SF), which is based in St. Louis.

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And Gorman expects more deals outside of banking, too. He said it was getting very tough to compete in any part of the financial services business without being large. He cited trading firm Knight Capital Group (KCG), which specializes in market making and high speed trading and recently put itself up for sale, as an example of that. Rivals Getco and Virtu have made bids for the firm. "I expect more deals in the technology side of our business," says Gorman. "That business is going to get a lot tougher than it has been."

Some have said Morgan Stanley (MS) needs a partner. Earlier this year, Moody's (MCO) downgraded the investment bank's credit rating, in part because it didn't have the financial resources of say JPMorgan Chase (JPM), which has over a trillion in deposits from its bank customers. The lower credit rating and the lack of deposits will make it hard for Morgan Stanley to compete in some businesses. Indeed, on Thursday, Gorman said the firm has already begin to exit some structured finance businesses.

Nonetheless, Gorman said he didn't think Morgan Stanley needed to make a deal. He said his first preference for any extra capital would be to return it to shareholders in the form of a dividend or share repurchases, rather than reinvesting it in one of Morgan Stanley's businesses.

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Among the deals Gorman doesn't expect to see would be a break-up of the big banks. He said breaking them up didn't make a lot of sense, and would be bad for the U.S. economy. Large companies like GE want to deal with big banks. "If some of the institutional securities businesses of the big banks were on their own, they would not be able to fund themselves," says Gorman.

One of the few questions Gorman fumbled over from the audience was on 'too big to fail.' Gorman said the U.S. is in a "different stratosphere" in terms of being able to wind down a large institution since the failure of Lehman. He said he thought too big to fail was not a problem the U.S. has, citing the fact that Canada has many fewer banks.

Canada was one of the few countries in the world that was virtually unaffected by 2008's global financial crisis. A number of observers cite Canada's consolidated financial sector as the reason. However, in France the large amounts of debt consolidated in a few banks has raised concerns, and worsened Europe's recent debt crisis.

What's more, some people think the U.S. banks have already become too big. Scott Bok, CEO of boutique investment bank Greenhill (GHL), said at a banking conference on Wednesday that the big banks are overstaffed and in more businesses than they should be. He predicts the big banks will shrink over the next few years and expects more layoffs. "There's a huge overcapacity in the financial services business," says Bok. "Big banks are coming to terms with the fact that they have too many mouths to feed."

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About This Author
Stephen Gandel
Stephen Gandel

Stephen Gandel has covered Wall Street and investing for over 15 years. He joins Fortune from sister publication TIME, where he was a senior business writer and lead blogger for The Curious Capitalist. He has also held positions at Money and Crain's New York Business. Stephen is a four-time winner of the Henry R. Luce Award. His work has also been recognized by the National Association of Real Estate Editors, the New York State Society of CPA and the Association of Area Business Publications. He is a graduate of Washington University, and lives in Brooklyn with his wife and two children.

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