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Facetime October 8, 2008, 6:42PM EST

BlackRock's Peter Fisher on When the Pain Will End

(page 2 of 2)

Fuld in D.C.: he told Congress he was baffled why the feds didn't bail out Lehman Mannie Garcia/Bloomberg News

Do you worry that as this landscape continues to evolve there's too much concentration of capital?

I hope when we come out of this, we don't end up with just a handful of big institutions. I don't think that's actually a likely outcome even though that's what it looks like while we're in the midst of this turmoil. There really are only six businesses in finance: You can write loans, underwrite loans, distribute assets, hold assets on behalf of retail investors or institutional investors, or hold assets on your own balance sheet. It's unlikely that someone really is an efficient competitor in all six businesses. So there's going to be a reorganization. I think we're going to see the industry breaking into these different units. And I think that will be part of what comes about as Washington looks at the question of regulation.

You were an Under Secretary of the Treasury. What should the feds be doing that they aren't doing, and what are they doing that they shouldn't be doing?

Both the Federal Reserve and the Treasury have got to focus on investor confidence. But they've got to be careful not to roll everything up on the taxpayer and guarantee every investor out there.

What can they be doing to make people feel confident?

They've got to help sort out the institutions that are going to be survivors and those that aren't. One of the problems has been that when you give a speech or announce that all the banks in America have got to raise capital, you're pre-announcing dilution, and that doesn't do much for the existing equity owner's confidence. It makes them run for the exits. So I think if banks are going to raise capital, you've got to do it really quickly. Goldman Sachs (GS) raised capital in a heartbeat. You don't threaten dilution and therefore upset your shareholders. The other thing is that the authorities have got to close those firms that are not going to be survivors as quickly as possible. We can't wait around for consolidation.

Do you think we will see more bank failures?

I think we're likely to see some banks being closed. It's not just about commercial banks. There are other kinds of lenders that overextended themselves, and they're probably going to be reduced in number, too.

Lehman (LEHMQ) CEO Dick Fuld said in congressional hearings on Oct. 6 that he would go to his death wondering why the feds did not bail out Lehman. Was letting it go under a mistake?

It was probably a mistake to wind it up the way they did—by announcing it was going into Chapter 11 and then keeping the broker-dealer business open for another week here in the U.S. That may have helped facilitate a winding up of its affairs, but it created more chaos.

By all accounts, New York Fed President Tim Geithner refused to let Lehman recast itself as a commercial bank. But days later, Goldman and Morgan Stanley were allowed to transform themselves. What was his rationale?

I don't know.

How could all of these institutions, run by very smart people, get caught in the same trap?

In the middle years of this decade, we had negative real short-term interest rates. And that really means free money, which really distorts the system. Capitalism is premised on the idea that capital is a scarce commodity rationed with a price mechanism. It wasn't just a handful of clever guys on Wall Street who figured out what to do with the free money. People all over the housing and financial-services industries figured out ways to lever themselves up way too far. That's the engine that led us this far astray.

Maria Bartiromo is the anchor of CNBC's Closing Bell.

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