"The authorities have got to close those firms that are not going to be survivors.…We can't wait around for consolidation"
As the struggle to contain the worst Wall Street wildfire in decades continues, nonfinancial companies are showing the strains of a constricted credit market. For example, on Oct. 1 billionaire investor Warren Buffett pumped $3 billion into GE (GE), giving the company a liquidity cushion as lending dries up. And on Oct. 7 the Federal Reserve announced its intention to buy short-term debt issued by corporations after top-rated AT&T (T) was unable to raise money in the commercial paper market. To make sense of what feels like endless economic turmoil, I talked with Peter Fisher, co-head of portfolio management at the investment firm BlackRock (BLK), which seems to be sailing through the crisis. Fisher is also a former Treasury Under Secretary for domestic finance and spent 15 years at the Federal Reserve Bank of New York.
How would you describe where we are today?
The fourth quarter jumped off with both AT&T and GE not being able to roll over their commercial paper, telling us that two premier names of Corporate America couldn't get the short-term financing they were looking for. That's the most extreme expression of the unwillingness of the financial community to lend. If GE has to sell a piece of itself to roll its short-term credit, other companies are going to find the cost of short-term financing prohibitive.
How long will it take to loosen credit markets up and get stability back?
This fourth quarter is going to be very hard. We just got off to a painful start. It's going to be several quarters from now, the middle of next year.
Are the Fed, the Treasury, and the global central banks headed down the right road, or are they perhaps creating new problems in the rush to shore up world credit markets?
I think there's a dilemma. It's important for them to step in, but it's also important for them to do this in a way that instills confidence in other financial institutions. And that's what we're still struggling with: Where do we start to find a bottom? The Citi-Wachovia, then Wells Fargo-Wachovia deal, that may be a kind of turning point, where Wells Fargo (WFC) is prepared to step up and say they don't need any government support. We need a few more episodes like that.
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.