Titans of Wall St.

Well I am back. I had a great time in Austin meeting up with friends and sitting in on the TRS (Teacher Retirment System of Texas) board meeting. In general it was more informative than I thought it was going to be. I told Britt that I didn’t know if that was because my expectations were so low or if the Wall St. executives were a little more candid in that environment than say on CNBC. It still was overall surface level stuff and I came away wondering if the CEOs really knew what was going on. Though I disagreed with him on a few things I thought Larry Fink was the most candid. Anyway, as part of the board meeting Britt asked them questions over a period of an hour. I took some notes which I share below. What I picked out was paraphrased but you get the general gist. Overall themes had to do with more regulation and the need for it, positive impacts of sovereign wealth funds, and of course, a general optimistic feel on everything. The executives present were:

John Mack – CEO of Morgan Stanley
Dick Fuld – CEO of Lehman
Larry Fink – CEO of BlackRock
James Staley – Head of JP Morgan Asset Management

First question had to do with recent headlines in the press. Things like “This is the most significant financial crises since the Great Depression.” Also, “The Texan said to the New Yorker, what crises?”

John Mack – Not on the verge of a depression but the worry has been will we see the financial system fail. Money has left the system the Federal Reserve can control. How do you get the control the FED had 20 years ago? This is the question to focus on. Talked about all the good things in the U.S. economy. The worry is the consumer getting crushed with the consumer making up over 60% of GDP.

Dick Fuld – Bernanke has done a superb job, as did Greenspan. There is tons of liquidity now unlike in 1998.

Another question dealt with how you felt about level 3 assets (this was never answered), mark to market accounting, hedge funds, leverage, rating agencies.

Larry Fink – Leverage used to be very simple. The last few years to keep the ROE and return on capital people had to put on more and more leverage. Deleveraging is in all asset categories. Used to be common leverage for things like bank debt would be 8 to 1. Will be 4 to 1 going forward or less. Only two ways to deleverage. Sell assets or raise equity. Last 10 years GDP grew 5.7%, capital markets grew 9.5% approximately That is a huge difference (added emphasis in voice) . Leverage is not being sucked out. Will continue to have fear and uncertainty, the capitulation stage has started. Now is when you should be adding risk. BlackRock has raised $100 billion in money market funds. It is fear money. When it returns to the markets it will return quickly. Rating agencies should be regulated as should hedge funds. To many investors, especially foreign, relied on rating agencies.

James Staley – Financial crises comes every 5 to 10 years. The question has to do how much it affects the economy. Most believe regulation needs to be extended, most people would expect us to say that but we collectively believe we need increased transparency.

Next question dealt with Sovereign Wealth Funds and China Investment Corp investing $5 billion in Morgan Stanley.

John Mack – Optimistic what they sovereign wealth funds can do with all that money. China just got another $100 billion. John was in China talking to the head of the fund and the head of the fund said what are we going to do, we only have five people managing this. John told them to go to Austin to meet with Britt and TRS and see how they are changing the investment structure.

James Staley – They receive more pressure from state pension funds then sovereign wealth funds. See it as a good thing. Bringing up leverage again he mentioned the monolines have 90 to 100 times leverage. Unless you have capital somewhere else firms can’t survive a crises of confidence. That is what happened to Bear. The capital requirements are even worse in Europe. AAA paper requires almost zero capital to meet capital requirements in Europe. That is not going to work. Most people would say if Bear had access to the FED window two weeks before they would have survived. Those people are probably right but Washington needed something to move. Bear had 240,000 derivatives with other broker dealers that are not on any exchanges. This would have frozen Wall St like none of us could have ever imagined. The market would have been down over 2000 points.

Next question had to deal with the confidence in regulation and the cycle of disbelief, denial, anger.

Larry Fink – Washington has been in a state of shock and disbelief. In the 3rd quarter you had tons of mark downs of assets but no selling. Now you have fear and anger. This is forcing people to sell, the capitulation stage. This has to happen and he is troubled that Texas feels immune from this, it may take more than Bear Stearns falling to make it work. Republicans and Democrats battling with the FFH bill is just obscene. Government still hasn’t fixed subprime which started all this. It is not overregulated. Instead of hedge funds and other opaque investment vehicles shouldn’t money be going to firms like the investment banks and BlackRock which are regulated.

Question on Hillary or Barrack

John Mack – He said he was a proclaimed Bush supporter and long time Republican. Didn’t like Hillary but got to know her as a NY senator, has become really impressed and now a supporter. Talked about isolationism and how even in the cold way when we had missiles points at us by Russia we still had a Russian Embassy and Trade Bureaus in Russia. We need that in Iran. We can have disagreements but we need a presence. Hillary understands this and grasps the issues. Barrack is just inexperienced.

Larry Fink – Has been a long time Barrack supporter. Barrack has been losing some of his support. Originally he was impressed with Barrack and that he knew what he knew and knew what he did not know. He was not worried about his inexperience. He has become dismayed on Barracks most recent positions. Barrack has become much more of a populist and taking positions that could continue to bankrupt the country. In the NY primary he voted for Barrack but concerned now.

Summary

James Staley –Very optimistic about the invest opportunity. Charged everyone to stay optimistic. (I thought that was the stupidest comment of the entire thing. You charge everyone to be realistic not optimism because that is somehow some higher value).

Additional articles from the Austin Statesmen.
http://www.statesman.com/business/content/business/stories/other/04/11/0411trs.html
http://www.statesman.com/blogs/content/shared-gen/blogs/austin/finance/index.html