Lazard’s Parr Speaks in Bloomberg TV Interview (Transcript)

Gary Parr, vice chairman of Lazard Ltd., spoke with Tom Keene from the World Economic Forum’s annual meeting in Davos, Switzerland, on Bloomberg Television’s “Surveillance.”

(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy. Mandatory credit Bloomberg Television)

FULL INTERVIEW TRANSCRIPT:

Tom Keene (TK): Gary, wonderful to have you here. Let’s just – instead of the usual Wall Street chit-chat, let’s go right to the moment in Europe. Now, I know you’ve talked to Mario Draghi three times this morning to get the proper perspective.

GP: He did not ask my opinion.

TK: But there is a stereotype that all banks are the same. The European banks, aren’t like Fortress Dimon, Fortress Moynihan or Fortress Parr, are they?

GP: You’re absolutely right. It’s interesting. Europe is in much better shape today than it was, say three years ago. But it’s a highly fragmented and you really do have to parse through what’s going on. So for example, just in the last two months with Swiss franc move, and even the six months earlier the Russian ruble deterioration, has caused all sorts of damage in a number of banks. And so we’re looking at banks that are still recovering from their recession, obviously the economy is weak. But then just to take currency movements, create these issues that U.S. banks don’t face.

TK: Well this may be an exogenous shock, but you know and I know, and this is a terrible bias folks, within the industry, is every time you mention European banks we turn to the Austrian banks. What is it about the oxygen in Vienna that makes you and I always look to Austria to see a challenge.

GP: Well it does actually happen that Austria has particular exposures today – it is one of the riskier markets and today their exposures are pretty straightforward: Ukraine and Russia. Now there are some that are very domestic and Austria, Austria’s doing just fine. But it is those banks that have exposure into Russia or the Ukraine and it happens Austria has a disproportionate movement into Central-Eastern Europe. For that matter, Hungary has issues. So, it’s not Austria itself, Austria is fine. But those banks. And there are a few other banks in Europe that have exposures into those markets and so that’s what you look for.

TK: I get huge response when I’m here to your comments to me on the future of global Wall Street. We’re going through that process right now. Betsy Graseck at Morgan Stanley talking about expense reduction. Chris Whalen talks about asset shutting. The kind of things you do and I don’t want to get into the Lazard business relationships, but in 2015 do we see expense reduction or do we see strategic banking to downsize?

GP: Yes, but you answered the right way. And it’s interesting, you and I when we’ve spoken in the past, a few years ago – I used the term, actually on your show, I remember talking about it: It’s a Darwinian exercise. And what’s fascinating to me is how slowly it’s going. It seems obvious, with the regulators increasing the capital requirements with the burden of regulation, with the charges, particularly for systemically important institutions, a lot of these banks ought to cut back lines of business. They ought to eliminate -

TK: Why is it going so slow?

GP: A number of executives that will say to me, well I’m in better shape than the others are, they will leave the business first. And when they leave then it’ll be a concentration of power, we’ll get our profitability back and it’ll be good. But that’s why I use Darwinian, it just seems like this, everyone’s waiting for the weaker, it’s like the wildebeests are running.

TK: Where are the boards of directors? Is this the executives pushing the boards aside and saying we’re comfortable with the present state, do you need to see a more activist - where’s Carl Icahn to tell a super-regional to do something?

GP: So, somewhere along the way, or even the globals, it’s some of the global investment – those that have wholesale and investment banking, you and I both know some people have been making more noise about ’break up the big banks’. Over two years ago, I mentioned this with you actually -

TK: Yes.

GP: It is a possibility but that it would be three or four years away. And the reason is, today you can’t fund another independent investment bank. So, if someone says split retail wholesale, send off the wholesale, you can’t fund that fully, properly. So I think somewhere there will be an alignment where the markets will accept it and the regulators are clearly in favour. And so I’ll still say it, I’ll call it arbitrarily 18 months to 36 months.

TK: OK.

GP: There will be a much more intense pressure on some number of banks to actually break up. And then the markets will accept it.

TK: In the interest rate environment, we’ve got a nominal rate, we’ve got inflation, we’ve got a real rate. They both come down. This flight to zero and even below zero. Does that set your industry up for a trap? Does humility drift away because money’s cheap?

GP: You know, some would say humility never drifts away in the banking industry. But I would say what’s interesting is that a decline in interest rates actually has one very negative effect on the banking industry and that is they live for a net interest margin and they like to be able to you know, borrow at x and lend at y and have 300 or 400 basis points spread. When you get down to zero in the marketplace, you can’t charge that much to the client base. So, they’re getting actually compressed, so the low level of interest rates, net-net on profitability, is a negative for the big banks, not a positive. It helps on the liquidity front somewhat, but it actually does not help them raise capital through profitability. It creates another problem, which is what you’re alluding to.

TK: And a challenge to 2015.

GP: It is. TK: In the time I’ve got left, you’re ending your stewardship with one of America’s great institutions. An orchestra. And the idea -

GP: Yes, the New York Philharmonic to be precise if you don’t mind me saying.

TK: The New York Philharmonic and all of us remember as children Leonard Bernstein and our parents sitting us down in front of the black-and-white TV – you will listen to Rachmaninoff. We desperately are losing that I would suggest across the nation of America. How do we sustain an interest in classical music in a modernity where it drifts away every day.

GP: It is a conundrum that we all face and we don’t have a ready answer but I will tell you, it’s interesting – just yesterday the philharmonic announced its season for next year and a fundamental theme running through it was education. We’re doing education with academies in China, in the US, in Michigan and California and so education has to be an important part. But we’re also slicing, segmenting audiences. And finding you know, there are a lot of different audiences for different types of music. We don’t have one audience. And this is where you find growth though, new audiences that are interested in film music, for example.

TK: Remember when you held your first Deutsche Grammophon album?

GP: Yes, you and I both remember that.

TK: And it was like, Oh my God, this is the real thing! Is iTunes your friend in the world of classical music?

GP: Yes! You know it’s interesting, we were the first orchestra to put our entire live season on iTunes. That is the good news. We were there, we had an exclusive agreement. This was back maybe three years ago. That’s the good news. The bad news is it’s not a big market, people are buying and selecting by pieces and also, there’s something technologically that’s a dilemma, recordings generally. How many recordings of Beethoven Number 5 do you really need?

TK: Yeah.

GP: And you don’t need that many. So we have to focus much more on live performances and how to scale back – and multimedia.

TK: Wonderful, Gary Parr with us from Lazard as we talk about symphonic orchestras. The drama, the classical music today will be in Frankfurt, Germany. And again, ECB – it is ECB Thursday here in Davos.

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