Stewards of Capital Gather at NYSE. What Happens Next? Who Knows?
The market fell 678 points yesterday. Are things getting better, or getting worse?
The best minds of our generation are thinking about it, but — sorry, Error 404– they don’t have an answer to the tangled, worldwide web of the crisis. Which makes sense, because, trillions of dollars later, it has metastasized well beyond any one human being’s understanding — even the most powerful human beings.
How do we know? Well, if you heard a rumble in lower Manhattan today, it was the sound of a supercollider of power and finance: Blackstone Group chairman Stephen Schwarzman, BlackRock CEO Larry Fink, Goldman Sachs CEO Lloyd Blankfein, J.P. Morgan CEO Jamie Dimon, and Silver Lake Partners co-founder Glenn Hutchins were gathered in the luncheon room on the seventh floor of the New York Stock Exchange in a panel moderated by our managing editor, Robert Thomson.
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| Associated Press |
The audience of about 75 people included just as many bigwigs: News Corp. chairman Rupert Murdoch, State Assembly Speaker Sheldon Silver, New York State Comptroller Thomas DiNapoli and ZelnickMedia founder Strauss Zelnick.
Deal Journal attended with the intention of live-blogging the discussion, but computers were not allowed at the session. [Update: In an earlier version, we tweaked the NYSE. Someone had told us that the NYSE had banned computers from the event. In fact, they didn’t. The Exchange itself was very amenable and ended up taking the fall for other computer-averse parties.] Anyway, we live-scribbled it instead.
7:45: Opening remarks from Mr. Thomson. He recounts a trip to Tokyo where he discussed Mitsubishi UFJ keeping its investment in Morgan Stanley as a matter of honor. He wryly makes a reference to New York remaining the center of the universe, which, given his international background, Deal Journal believes may be a friendly tweak to the collected New York dignitaries.
7:50: First question. Thomson asks the panelists to “freeze the frame.” Where are we in the credit crisis now?
7:50: Schwarzman is the first to answer. “We’re more than halfway through the public waking up to the problem,” he says, later amending that rather specifically to “five-eighths of the way through understanding where they need to be.” He’s clearly a numbers guy. He gives an overview of the situation right now: people taking their money out of the system, banks not lending it, economies in the United Kingdom and Greece and Europe following like “dominoes.”
7:54: Dimon is up next. “Nobody really knows. Clearly we’re in the panic stage of unreasonable behavior.” He goes on, “the governments of the world will eventually win,” in reference to the measures taken by the Fed, Treasury, European Central Bank and others. But it’s hard to tell what inning we’re in, he says, because “there’s a whole other round of issues we have to deal with.”
Reuters7:55: Blankfein’s turn. “In the past few days, the pessimism is total,” he starts off, gloomily. He points out that things are so dire now that we have no time for all the bickering about the credit crisis before — issues about whether it’s a U.S. problem or a global problem, for instance. We know, right? That’s so quaint now, like arguing about how many angels can dance on the head of a pin. He has some nice words about Treasury and TARP, noting, “if we started now with that debate, it would have gone differently.” They did it right, he notes of Treasury. We hope Treasury is feeling all warm and fuzzy with Blankfeinian approval at hand.
7:56: Anyway, Blankfein says nothing lasts forever. Wise words. He has seen markets of “unbridled exultation” and those of “unlimited pessimism,” and “neither is ever right…things run their course.” But he stresses that confidence is low right now. “I don’t know who’s left who has to get one bit more pessimistic than he is today,” Blankfein says, to laughter. [Deal Journal trivia: one of our favorite observations of all time came from Blankfein at the WSJ’s Deals & Deal Makers conference in June 2007, when he predicted a credit crunch and noted that “the biggest mistake anyone can make is to believe that the future will be just like the past….My parents are still waiting for the Great Depression.”]
7:58: Larry Fink is up. He calls the GE capital raise “a sudden awakening that Main Street is being impacted.” Main Street, apparently, slept through its foreclosure alarm again. His suggestions: “In the short run, we have to address this liquidity issue underlying all the problems.” Such as? “We have to do more on commercial paper. I don’t know any institution that will buy more than overnight money.” He predicts more failures, but notes, “we’ll want to have organized failures.”
8:00: Question: panic is everywhere. What’s the connection between the behavior of people and institutions?
8:01: Hutchins is the first to answer and agrees that people and institutions are behaving similarly, i.e., panicky. He compares the current crisis to people leaving the burning theater, two by two. “When you have a panic like this, you need a systemic shock,” he says, praising TARP as just the kind of thing we needed. He says we need more, such as letting people refinance their homes at lower interest rates, a plan suggested by academics Glenn Hubbard, Marty Feldstein and presidential candidate John McCain and written about by Deal Journal here. The problem, he says, “is that nobody trusts their money to anybody but the government,” he notes. “We have to create a way to let government step out of the way.”
8:04: Question: What measure will show that sanity has returned? Will it be LIBOR?
8:04: Dimon answers that Libor is one measure. But he thinks the problem is beyond measuring. “Today a financial company can’t make a car loan and make a profit, so they’re not doing it,” he says.
8:05: Blankfein notes that reluctant asset sales are one good sign, including Wells Fargo’s acquisition of Wachovia. When we have more like that and they don’t generate surprise, we’ll be in a good place.
8:06: Schwarzman puts in a vote for lower borrowing costs “so the system can restart.” He notes scornfully, “you can’t have Morgan Stanley [borrowing] at 1500 basis points above Libor — what is that?” The system, in his opinion, is dysfunctional.
8:07: Blankfein: “These aren’t necessarily broken companies; it’s broken confidence.”
8:09: Question: what regulations should be in place?
8:09: Fink, a proponent of global regulation and enemy of Sarbanes-Oxley for years, jumps in. He wants one central regulator in the U.S. to work with other regulators in Europe and Asia. He also says, “Any institution that manages over $5 billion should be regulated, whether it’s public or private, an insurance company, bank or private equity fund.” He wants regulation that is principles-based and consistent so that “capitalism will not arbitrage between regulators, capitalism will not arbitrage between public and private. Capitalism at its finest had the ability to arbitrage between different regulators, capital structures and platforms.” He complains, “our regulatory system is predicated on U.S. needs and our business is so global.”
8:10: Jamie Dimon slams the regulatory system, noting that the SEC apparently had no idea that Bear Stearns was going to go down. (We hear annoyance in his voice, but maybe that’s just us.) He gets all historical and geographic on us. “We have a byzantine, balkanized system where our laws are closer to the Civil War than today.” Take that, regulators!
8:14: Blankfein says the lesson of the crisis is “that size matters; if you’re wrong, it’s far more consequential if you have $50 billion than $5 million.” Inarguable. He gets his shots in on the regulators, too. “Regulation has to be less as a prosecutorial system and more of a consultative system…not as an exercise in blame assignment and retribution because that’s not helpful,” he notes.
8:18: Are you prepared for some heresy? Because Larry Fink is about to lay some heresy on you. He suggests that all mortgages underwritten by Fannie Mae and Freddie Mac and under TARP should be 30-year fixed mortgages. Why? Because a good part of the mortgage financing mess is the adjustable-rate mortgage problem today.
8:19: Schwarzman suggests one location where regulators worldwide can congregate. Then they should publish their minutes so everyone in the markets know where risk is. The message is one of transparency and communication. We just wonder what it would look like. The U.N? Congress? The Cone of Silence?
8:21: Schwarzman takes aim at fair-value accounting, which requires financial institutions to mark down their assets every quarter. He knows he is alone in this quest, as Dimon and Blankfein — both light on writedowns, we might note — aren’t bothered by it. “It’s like a religious matter,” Schwarzman says of fair-value accounting. “When you talk against it, people say you’re a heretic.” We didn’t hear the rest, because of the sound of accountants being burned at the stake.
8:23: Hutchins notes that regulators need the ability to shut down a financial institution well before a failure that would cause a systemic risk. He notes that the global capital markets also act as a regulator, and they’re getting sick of all these capital-raisings. “At some point, the global capital markets are going to need to see a business plan from the U.S. for solving corporate problems.”
8:25: Thomson asks what New York can do to remain “pre-eminent in the global financial universe.” Fink’s three-part suggestion: 1)lower taxes, 2)make it easier to integrate foreign workers 3)be at the forefront of pushing new regulation for the financial markets. Blankfein’s answer: “It’s a relative performance world,” which means that as long as the U.S. is successful, New York will be strong.
8:32: Dimon’s perspective: Whatever we do, we must not screw it up. “We can’t let this city erode like it did in the 70s,” says the native New Yorker (who lived in our neighborhood as a kid, FYI.) Right now, hiring in New York is so expensive that “if you have a choice where to put a job, it will not be here.” Dimon then goes on the offensive against the legal system, in which (he doesn’t note this, but we do) J.P. Morgan is defending itself against numerous class-action lawsuits leveled against Bear Stearns: “It’s run amok, it is corrupt, it is wrong, it is a crap shoot,” he exclaims. “People overseas don’t want to get involved in our legal system, and I don’t blame them.”
8:35: Hutchins argues it would help if we stopped pouring our dollars into Saudi Arabia or wherever. “Transferring our wealth to the energy-owners is a major headwind.”
8:36: Fink goes after Sarbanes-Oxley, which requires “mindless compliance” and is a “disaster” for companies that want to do business in the U.S. “Nor has it stopped the implosion of the financial system,” he notes, archly. “It failed to do what it set out to do.” Washington says “yes, yes, we know it’s a problem, but we won’t get to it.”
8:39: Town Hall time! Questions from the audience. The first question is a great one: the questioner notes that the four candidates for president and vice president rarely say “Wall Street” without also saying “greed and corruption.” Which is funny because, you know, it’s Washington.
8:40: Fink is lead counsel for the defense. “What we’re hearing from the candidates is politics as usual. I think Secretary Paulson is doing everything he can, and the government is actually working with” — subtle sarcasm creeps into his voice — “the ‘Evil Empire’ [of Wall Street] to fix it. After Nov. 4, the rhetoric will abate. It is just rhetoric.” He notes, “as an industry we had cover stories on how good we are, and now we have cover stories on how bad we are.”
8:42: Blankfein links arms in a metaphorical Kumbaiyyah. Wall Street has a crucial role in the system, and mea culpas won’t help, and neither will finger-pointing. It has to focus on solutions instead. “The way this [political rhetoric] turns counterproductive as opposed to just painful to listen to, is that people like us may not lift their heads above the parapet to give ideas for fear that their heads may be shot off.” He points out that the real estate bubble grew from politics, when Washington chose to make real estate a subsidized industry. That’s why Fannie and Freddie exist and why interest on mortgages is deductible. “It was a political choice to have a disproportionate amount of society’s capital allocated to the [real estate] sector,” Blankfein says pointedly.
8:45: Dimon’s voice joins them in song, talking up the decency and honesty and trustworthiness of America’s small-businessmen. He notes with some sarcasm that regulators visiting J.P. Morgan are shocked when they find that everyone is just trying to do the right thing. “There are legitimate complaints,” he concedes. “Errors made, people paid that didn’t deserve it,” and a passing reference to “bad apples.” But Washington should lay off, he argues. “Stand on principle, but don’t attack business, because it won’t work.”
8:48: Schwarzman says the anger on Main Street is intense: “The anger is substantial and it has legs,” he says, which is amazing because he has not yet read Deal Journal’s commenters’ explosive views. He rounds out the pro-Street chorus: “I don’t see corruption in this room….every bad actor in this drama has washed away. There’s no one left in place.” Does this mean that all the corruption was at Lehman and Bear Stearns and Fannie and Freddie and AIG? He says Wall Street has to do a better job of marketing. “TARP wasn’t a bailout for fat cats; it was a stabilization fund for the country. We’re using rescue techniques that may turn a profit for society.” That is an important point that often gets lost in the “bailout” rhetoric.
8:53: Sheldon Silver, in the audience, asks what is necessary for stimulus.
Hutchins suggests infrastructure projects: building broadband, roads and bridges. It sounds pretty WPA to us, which is a little scary. Blankfein brings up the WPA similarity and urges the government to cut taxes or provide relief to the states. “The temptation is to deliver checks to consumers,” he says, but that won’t cut it.
8:57: Eric Dinallo, the state superintendent of insurance, gets up to ask for advice. Fink calls for principles-based regulation like that in the U.K, and notes, “The speed with which Bear Stearns declined while the SEC was there is an indication that our regulatory system has failed.”
9:00 to 9:09: Some talk about inflation and deflation that goes nowhere.
9:10: A question about mark-to-market accounting, which the questioner calls “mark to value” accounting repeatedly before he wonders how the press can push Congress into changing the rules. Dimon comes out swinging. “I hope Congress does not get involved in accounting rules,” he says, slightly alarmed. He then says that the whole mark-to-market debate is overblown. The losses on mark-to-market are often painted as mythical, but they “are real,” he notes. “You’re not going to get that money back.” Schwarzman, who supports a change in the rules, says he believes everything will be on the table in the next administration.
9:13: The session ends. With sighs of relief, the panelists start congratulating each other, mingling and chatting onstage. “Guys! Guys!” protests one of the event’s hosts. Apparently she wanted to give the proper due to the politicians attending, while the Wall Street guys were talking over the din. That’s this financial crisis in a nutshell, people.
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CAPTAINS OF INDUSTRY? PLEASE,
THESE ARE THE CULPRITS THAT PUT US IN THIS MESS! THEY ARE ALL MULTI-MILLIONAIRES AND THEY SOLE PURPOSE IS TO MAINTIAN THEIR OWN PILE OF MONEY. PAULSON: $500 MILLION
these folks are just as clueless as you and I.
There is no simple fix. Nobody knows what the earnings will look like next quarter, next year, how can you know where the bottom is then as stock price is ’supposed’ to be the discounted future earnings.
Where were these great minds when the speculators, including themselves, were leveraging themselves beyond control, 40 to 1 or more, were selling insurance with no assets to back up the insurance or a puny amount, where everything was kept from sight of the regulators, where they saw the mortgage market get out of control without any restrictions or controls. They were reaping the gains and when anyone challenged this thinking, they had the gall to say that these bureaucrats and academics did not know what they were talking about. To this group, Greenspan, Rubin and Summer should have been added since they did as much or more in creating ths problem. The so-called greedy people who are unnamed and shielded should be all thrown in jail and their illegal gains confiscated. This will the job of the next President. You can guess who would have a problem with going after these people and bringing some creditability back to the financial world. Our present President did not have the insight, intelligence or guidance which should have been given and tendered.
How about implementing the following:
1. No short selling.
2. Change mark-to-market valuation to discounted cash flow valuation
3. Eliminate double taxation of dividends to encourage more companies to provide a real return to investors
Traders are happy with the crazy market. Investors are leaving quickly.
HEY….FOLKS….IT IS ….”MELT-DOWN”…..TIME!!!!!!!
Was most of the AIG bailout money used to pay Goldman? I think the AIG bailout was a disguised bailout of Goldman. Thank you Hank.
Whether these individuals contributed to the problem, they have a strong grasp of the “mechanics” of the sitution and their opinios are certainly to be listened to.
This mess was created over many years and there were many other people and individuals, Institutions and Government that contributed to this fallout.
I believe all thoughtful suggestion are being reviewed for implementation and hopefully, a solution can be found to staunch this credit crisis.
The above is but one forum for consideration.
It seems necessary that some way is found to capitalize the Banks and get them to lend to Main Street as well as Wall Street
can we freeze trading and only resume once there is a fix, this will help those traders that are just can stick to a position and would rather drag the markets down than contain the problem and find a solution and then let the markets resume? this is a joke, if the feds are prepared to put in trillions of dollars to fix the issues, i think containment may be an option to stop the bleeding…
We need a JP Morgan to walk across Broad Street onto the floor of the NYSE and say, “I’m a buyer.” All the carnage of weeks past, however, suggests that this is a wild fire that will one day simply burn itself out. When people are exhausted from selling and collect their wits, buying will resume. With many blue chip companies trading down 30 - 40 - 50 - 60 - 70% of their levels 1 year ago, and with tons of cash on the sidelines watch out when the herd turns-We will see the biggest 1 day point gain in history.
Gov’t is running Wall Street and Goldman Sachs is running the government. Yikes.
Thank you for this, it was very very interesting and makes me understand that we will find a way out of this problem soon.
All CEO’s & Big Executive who
has received Bonuses including signing bonus or golden parachutes,profit sharing or large pay raise Five Million or more in last 2 years should return 100% of the money or face severe penalty inclusing imprisonment
for lying,stealing and taking advantage of innocent tax payers.This money should be added to help to untangle this economic mess.But in our government all big financial authority are covering each other and hurt middle calss people-while they live high hog-look at Lehman Bros, CEO, AIG officers, wall street hedge fund officers and WAMU, WA bank executives-Its really a reap off of middle class people while they are getting rich.There should be no bailout of any financial institution till they repay 100% of money they received than their normal paycheck-no bonuses of any kind.Believe me they mey be smart but they are ripping off and taking advantage.
What is the play on National City? Will they get bought out or is this a myth to boost the common stock?
What a perfect opportunity this was to quarantine these culprits and isolate them from the society.
If the problem is in the credit markets, why not try and fix it by guaranteeing all inter-bank lending till such time that normalcy returns — measured by LIBOR or other benchmarks? Also, this vicious cycle of CDS pulling down a stock which further increases the credit-default insurance has to just stop. We are losing one after another good institutions for nothing other than fear. Putting an end to that nonsense where the insurance is provided by an Govt agency till a more regulated form of this market develops is yet another option to consider.
But why is this happening here?
The huge debt of the federal government that finances the repair of the money system will need to be reduced. Given the behavior of our Congress and administration, the only politically palatable way to do this will be a national sales tax (Value Added tax, also called a Goods and Services tax). As the experiences of Britain and Canada among others show, this can be done in a reasonably fair way. This will be on the front burner for the new president and Congress. In the meantime, the current president must work closely with the president-elect after the election on these matters in the interim between the election and inauguration. This is a great opporunity for Mr. Bush to improve his tarnshed legacy. We cannot afford two months of inaction.
I had the privilege of learning the mortgage business from Dan Gilbert at Quicken Loans. Dan has publised a simple, yet elegant plan to stop the death spiral of plummeting housing values which spreads across the globe
the reference to setting 30 yrs mortgages is a part of is, but perhaps readers would like to review it for themselves at http://www.asolutionthatworks.com/
clearly, what we do in New York or Wisconsin now effects everyone across the globe:
it does appear that unless we stablize and set a floor, this drop will continue
For the exceptions of thoughtful posts provided by Jerrold and Irascible Iconoclast, the remainder of you should probably go back to college, or at least get your GED. The hypothesis that Goldman or any other bank is running the government is absurd and an insult to people that read WSJ.com. Further more, suggestions like freezing the market, or abolishing short selling as equally obtuse. Borrowing from an earlier post, this problem was created over a period of many years. Suggesting quick fixes are therefore futile and would only lead to further stagnation within the global markets for years to come; just like a consumer’s decision to spend or invest, correcting the issues that have led to this point will require patience and forward thinking.
I have shares in National City. Based on the information I have been reading I should hold and not panic. I have read rumors that if bought out stock will sell for $7.00 to $10.00 a share. What is the thought out there?
Not my opinon, this is what I have read on forums.
I think that we should gather all the heads of Wall Street, the Federal Regulators and Cabinet officers who have a role in this mess, put them on a luxury liner with all the necessities of life for two weeks and put them to sea with the mission to come up with a solution to this mess. Once they have published their plan–SINK THE SHIP!!
Goldman will make sure , it will never die
This will not be over until you are unemployed and have finished raiding your 401k/IRA. Your accts are being raided right now as you are down at least 40%. All of those assets need to be consumed by the system to balance the systemic debt. THAT’S where the bottom is.
Stewards of Capital Gather at NYSE. What Happens Next? Let us line them up and start shooting. These guys are all thieves. We need a president who talks straight and does not tolerate crooks. BaLACK Obama promises anything to everyone and if he wins we have four more years of this mess. McCain will straighten this up.
Boy this is scary; these guys have no clue what is happening! They made a load rubbing us all and clearly remain intoxicated.
America was and is no longer…
Boy, these guys are whining about regulation, taxes and lawsuits? Where’s the vision, where’s the path forward? Where’s reponsiveness to changed conditions. Whining is why they earn the big bucks? Sorry, they need a plan. Does a single one of them have his arms around the CDO or CDS market? Is a single one of them talking about new risk models and where theirs went wrong?
After Jan. 20th lower taxes, deregulation and class-action lawsuit reform will not be high on the agenda. These guys seem incapable of anticipation. Why do they get paid so much?
What do you call 250 Wall Street bankers at the bottom of the ocean?
A start!
For anyone blaming them for the speculation, please realize that these heads had nothing to do with it. All of their companies, BX, GS, JPM and BLK are all healthy companies in a deteriorating financial industry. If you want to blame the real speculators, go look at LEH, BSC, FNM, FRE, AIG, NCC, and CFC.
how about getting the 24hour news media to stop exacerbating the panic by gleefully touting crisis to ensure ratings?
Why not allow the world’s talent to remain in our city , our immigration laws make it imposible to attract top notch talent and make us less competative and prone to repeat in the future in financial services industry what the US mfg industry is facing today.
It would help if the 24 hour news channels would stop exacerbating the panic by gleefully hyping the crisis in the hope of promoting ratings. when they breathlessly talk about a category 2 hurricane like it’s a 5, they don’t actually make the storm worse. this is different; they’re helping to create the [bad] news
Seems like Wall Street execs are looking to deflect the blame from a crisis that they created by committing wholesale fraud. A credit default swap is merely insurance against the default of the mortgage that was purchased. Only calling it a “credit default swap” takes it out of the regulatory scheme that governs insurance, i.e. maintaining an appropriate reserve to cover losses. You can’t do this in any other business. If a car maker sells you a used car as new because it has a new engine, that would be called fraud. If a restaurant sells you pork but calls it veal, they would be prosecuted. These people should be prosecuted for the fraud they committed that basically caused our 401k’s to lose, at time of this writing, 33%. Putting the blame on Gov’t, borrowers, lenders fails to address the point that only 4-5% of these loans actually defaulted and the huge blow to the system was caused by the banks’ failure to back up their securities like they promised. Fraud, plain and simple.
My solution: convene this group on monday morning, and have Sarah Palin address it on greed and corruption. that oughta give them pause.
Comment by deezee - October 10, 2008 at 11:50 am
Why not?
Because there is more blood in there, and the vampires are insatiable….
How about implementing the following:
1. No short selling.
2. Change mark-to-market valuation to discounted cash flow valuation
3. Eliminate double taxation of dividends to encourage more companies to provide a real return to investors
Traders are happy with the crazy market. Investors are leaving quickly.
Comment by deezee - October 10, 2008 at 11:50 am
Because there is still blood in the water; the sharks are insatiable….
If you schmucks would just get teh hell out of our way our lives will be running just swimmingly.
Larry Fink suggests that all mortgages underwritten by Fannie Mae and Freddie Mac and under TARP should be 30-year fixed mortgages.
Why?
Because a good part of the mortgage financing mess is the adjustable-rate mortgage problem today….
Why are the people with really good ideas, with an eye toward the little guy, being ignored?
Do they really thing that trotting Bush out as an expert on anything is going to provoke a renaissance in confidence???
Thanks Heidi for the report on this important meeting. But I have to admit that the shoot from the hip, look for who else to blame, and the total lack of self awareness of their own culpability in this situation is astounding. No one said we screwed the pooch on this, no one admitted that they personally got out of hand. Some did call for the need or consistent regulatory oversight to ALL aspects of the financial markets, which is clearly needed, but far too many go back to the mantra of less regulation, etc. They need to realize that they need to be regulated to protect the rest of us from their own greed and incompetetence. I hope people will start to take a general look a the basis of our total system and begin to rethink what it means to be responsible stewards of the capital wealth and investment process in the world and get a clue that it is totally broken. We need to get back to first principals and look at this as an opportunity to re set expectations and processes of the whole system. Too many leaders are still thinking that we can just get back to how it was with a bit more tweaking.
Your so called kaptains appear to be a bunch of peasants dressed in officers clothes. These are the dults who will lead you from the kapitalistic abyss? Spare me…Sorry I must go relieve myself…this comedy is precious. Please continue and keep up the good works.
Vlad
One: STOP POINTING FINGERS! Two: Work in the Solution not the Problem. Three: Let the Comapnies like GlobalBanc Corporation (GBC) and Thousands of others efficiently absorb the current assets, mitigate and trade them on our tier of the Secondary Market. This is a working Capital Market capable of creating effeciency and stablizing a Payment Stream Value market for the underlying assets.
Four: Get the Capital flowing, politics aside and have the Feds guaranty the assets that we purchase and trade. Let’s get busy not in fear but in action!
Just 15 years ago we resolved the same situation and here we are again. Solutions in action not fear in problems makes the USA a recognized World Leader!