Bruce Wasserstein: "Expect Lots More Embarrassment"
Bruce Wasserstein is no stranger to the gyrations of Wall Street. Over three decades, the former co-head of mergers and acquisitions at First Boston and current CEO of Lazard (LAZ ) has helped broker more than $250 billion in deals. National Correspondent Anthony Bianco asked Wasserstein about the latest market meltdown.
You've seen plenty of turmoil on Wall Street. What distinguishes this round?
Of course, it started with problems in the subprime [mortgage] market. To protect themselves from that exposure, banks pulled back from risky assets of other sorts. Lenders are waiting for existing loans to wash through the system and for credit spreads and asset prices to recalibrate. Panic followed—an undifferentiated, very unsophisticated panic that persists.
What do you see as the underlying causes of this market convulsion?
Part of it is related to the lack of transparency in many of these assets. The regulators and rating agencies also allowed piling risk upon risk. Financial institutions spread the risk to people who weren't quite sure what they were getting. Others thought they had outsmarted the market and added leverage to make it interesting. But as my chief financial officer says, risk is sometimes risky.
Are we through the worst of it?
Many assets still are not yet fully marked to market. That's because for some of these securities, there is no market. We would expect lots more embarrassment in unforeseen places, where some people tried to spike their returns with this paper without regard to risk.
What consequences do you envision as losses are taken?
In the financial institutions market, you will see consolidation. There are firms that don't have a strong core business that basically got their profits during the bull market by being principal risk takers in debt. Those days are over. There will be a lot of pain and a lot of finger-pointing, but I don't think the financial system has suffered a fundamental wounding.
Is the meltdown threatening the economy?
If you look at the big industries, this has nothing to do with health care or food. It's got nothing to do, for the most part, with utilities, or energy, or resources, or technology. The stock market has drifted down, but it's still at a reasonably strong level because the world economy is reasonably strong. Obviously there is a storm, but this is not Katrina.
Do you think the Fed was wise to lower the discount rate?
It's a rough tool, but the Fed felt a confidence booster was necessary. The problem wasn't the discount rate. The issue was that the banks called in loans, and it caused traders to dump positions. With illiquidity and margin calls, the market became volatile and irrational, fueled by computerized trading and hedges that didn't work. Globally, there is still a lot of liquidity. Big companies, the investment arms of international government agencies, and large banks still have capital.
What is the outlook for mergers and acquisitions?
For strategic buyers, there are real opportunities as asset prices decline and there is less aggressive competition from LBO firms, although some boards will be frozen and want to wait.
In private equity, it is more difficult to do super-large deals, but all the talk about the end of private equity is just silly. These people are not going to say to their investors: "Here's your money back," and there should be some good buys. In addition, the strategic imperatives to merge remain strong, and there are powerful new sources of capital in the Middle East, Russia, India, and Brazil.
Are there lessons to be learned?
One is some modesty for all concerned: the rating agencies, the banks, asset managers. And certainly the masters of the debt universe and the PhDs with their black boxes turned out to be fallible. You can look at this as a shakedown cruise of our modern financial system. There are a lot of loose bolts here and there. That's O.K., if they are tightened. A return to common sense is overdue. We need a dramatic retooling of risk management and portfolio selection. The regulatory techniques and the rating agency approaches also need a revamp.
Will government likely legislate reform?
I hope the market participants are savvy enough to do it on their own. There is a lot of political fallout to come. Many homeowners financed themselves off the assumption that house prices would rise. Variable rates on mortgages are higher and, for many, mortgages are unavailable. Therefore housing prices have fallen, wiping out savings and costing people their homes. It's a populist issue. A real legitimate question for Hillary, Obama, or even Mitt Romney to raise is: Who is responsible for this scenario.?