Morgan Stanley chief James Gorman warns of financial volatility

Australia’s most senior banker on Wall Street says this country faces a complex challenge juggling rocky China ties with its role as a major US and British ally.

James Gorman says ‘you can’t regulate away fear’.

Australia’s most senior banker on Wall Street says this country faces a difficult and complex challenge juggling its rocky China trading relationship with its role as a major US and British ally, as he warns of a liquidity ­crisis in financial markets.

James Gorman, the Melbourne-raised chief executive of financial giant Morgan Stanley, said in the 2023 Sir Keith Murdoch Oration on Tuesday night that Australia should not back away from the challenge of juggling its different relation­ships with China and the US.

“Australia is in a complex place, as the national debate ­exposes,” Mr Gorman said at the State Library of Victoria. “Australia needs China to consume its iron ore, coal and other products … currently somewhere between 30-40 per cent of Australia’s ­exports are to China. Australia can and should forge alliances, respect its neighbours and treat all countries as relationships to be developed but not co-opted.”

The AUKUS submarine pact had underlined Australia’s deep ties with Washington and London. “An alliance with the US and the UK does not violate that objective, nor does trade with China,” he said. “We should look forward to many decades of US-China-Australia trade and understand the inevitable issues that will be part of that journey.

“To be the ally of one is not to be the enemy of the other.

“Australia’s recent decision to realign itself with its allies, particularly the US and UK through the submarine deal – not so crazy in my view.

“After all, the ANZUS Treaty existed since 1951. And Australia was still part of the Commonwealth last time I checked.”

He also said the current bank volatility sweeping the globe was a liquidity crisis – where companies struggle with a shortage of cash and sources of funding dry up, raising the risk of bankruptcy – whereas 2008 was a ­credit crisis.

Bank runs and government intervention were a fact of life, and Mr Gorman noted “you can’t regulate away fear”.

However, he said regulatory action could keep a cap on the underlying causes of that fear.

“Force banks to operate with small sandboxes, vigilant oversight, aligned compensation policies, strong boards, stable CEOs, intentional succession planning, rigorous annual stress tests and capable supervision,” he said. “Even with that, some ­individual banks may fail but it is much less likely to be systemic.”

The bank chief said it was ­important to align compensation with culture in financial organisations and spoke of the “tyranny of success” where banks chase transformative merger and acquisition deals for the sake of scale. “By being successful you start believe you can keep repeating it,” he said. “Expanding into new regions, not conducting proper due diligence and buying businesses simply to get bigger. Everybody wants to get bigger without considering strategic fit, culture and integration requirements is a recipe for failure. And the list of banks that have so ­failed is long. All banks, not just the big ones, should go through annual stress tests.”

Mr Gorman said the banking crisis across the US and Europe should act as a “warning shot” for boards and management as well as regulators to ensure they were prepared for further shocks.

“With the click of an iPhone $US42bn left one bank in one day,” Mr Gorman said. “Governments stepped in and it appears to have worked for now.”

Recent problems at banks such as Europe’s Credit Suisse and California’s Silicon Valley Bank had been caused “largely through self-inflicted wounds”.

Mr Gorman describes himself as an “eternal optimist” and said the world was in a “place of relative stability, prosperity, innovation and hope”.

The oration pays tribute to Sir Keith Murdoch – father of ­Rupert Murdoch, executive chairman of News Corp, publisher of The Australian.