Bank balance sheets have changed in nature

Business banker and genuine figure in Wall Street, "Jo" Perella exposes in an interview to the "Echos" his analysis of the current crisis and the various rescue plans.

What is your analysis of the current crisis

What crisis The crisis was already there a year ago, but nobody wanted to hear. The U.S. Government intervened only when the situation became dramatic. It is often in the nature of democratic institutions cannot decide when the difficulties become obvious. This is exactly as for the terrorist attacks of September 11. There had been prior alerts to the subject of terrorism and of bin Laden, but nobody took seriously.

What were the warning signs

The fall of 2007, it was enough to look at finance blogs to see that people wrote on the topic of financial assets classified in the category "level 3", i.e. those devoid of objective mode of recovery, in the balance sheets of investment banks.

Why this constituted an alert

Let me explain. When I started to work on Wall Street in 1972, the investment banks were private and functioned as "partnerships" belonging to Associates. They held their balance of the obligations of State or of companies, or actions of large listed companies. Their level of debt was high, but their assets were both easy to use and easy to resell. Then, over the years, they have decided to rating on the stock market, which has brought them to engage in a race to profitability. The structure of the financial industry was then changed. The competition grew between the houses of Wall Street, their balance sheets loaded for "exotic" financial products, in particular of securitized products, whose development started from the 1980s.

At the same time, the information technology revolution has accelerated montages and transactions and it made them more complex. The industry is fully globalized; It became possible to perform transactions at the speed of light anywhere on the planet. Thereafter, changes in regulation intervened as the abandonment of the Glass-Steagall Act (legislation prohibiting cohabitation in the same group of commercial bank and investment bank activities, repealed in 1999, Editor's note). Greenspan was added to this policy of easy credit from the era.

And the result...

Bank balance sheets have changed in nature. Very quickly, it appeared that the assets were not liquid than believed. This was visible in the accounts in banks in investment a year ago, but nobody really wanted to believe. This crisis is not the responsibility of a person or a Bank, but the result of multiple factors. It was in germ in the structural sector transformation and the inability of the regulator to cope with the increasing complexity of it.

But the banks have financed insolvent populations...

Banks were under enormous pressure from regulatory authorities, asking them to grant credits to the poorest populations. Regulators for example looked the part of credit to poor households by banks before giving them the authorization to buy back other institutions. Then, the institutions agreed to do so because they were able to get rid of the risk in the markets, and that the rating agencies crédibiliseraient montages. Banks have also participated in this phenomenon because compensation systems have led individuals to take these risks.

How is the crisis unprecedented

Has something exceptional because it is the first crisis that puts the banking industry in the eye of the cyclone. When we look at the history, whether the collapse of American savings and loan, bankruptcy of the Bank Drexel, the Mexican crisis, the Asian crisis Russia, LTCM, each time, the banks have paid hundreds of millions of dollars and problems could be contained. This time, they are at the centre of the problem; There is no escape. The crisis affects all countries, all asset classes, it is the first that is truly global.

What do you think precisely of these different rescue plans

The Governors of central banks, regulators have never nothing had similar. Therefore, there is no experience curve. Regulators who have decided to save Bear Stearns were thus left Lehman go bankrupt. That, with hindsight, was a major mistake, when we look at the consequences that this has had.

AIG was a second error. When the Fed made 85 billion on the table, people suddenly became aware of the extent and the seriousness of the situation. Sales had been formulated, which caused panic. That said, I think that Henry Paulson has done the best possible in the United States. No one could predict the reaction of the markets. Perhaps it would have been better sell Lehman to Barclays, even for 1 symbolic dollar, it would not have the same effect on the markets as a bankruptcy. Maybe even that Henry Paulson tried to intervene a year ago and that person do listened it to.

What do you think of the European plan

The British plan was very good. It is the first who proposed to inject equity into the banks. I think it's a better idea that out toxic assets hands of banks, as proposed the first version of the Paulson plan. Banks know better these assets than anyone else, they manage! It is not easy to manage what is not known. Conversely, take 50 of the capital of a bank to then be pressured it manages its balance sheet seems to me a better idea. In the end, Paulson's plan is also to make capital injections.

Is the worst over

I think that the markets need out of the crisis. They know for a long time that we entered into recession. Markets fall because people sell their shares for cash. "hedge funds" are selling large volumes, such as mutual funds. They have no choice, so their investors their request. Many ordinary people have called me to know is it contribution that they withdraw their funds. I tell them to leave their money, but within the limits of the State guarantee, which was noted to 250,000 dollars in Paulson's plan.

What will look like the banking industry emerges from this crisis

The past investment banking model is dead. Goldman Sachs and Morgan Stanley will continue to exist, but never more with effects of leverage of $ 30 for 1 dollar of capital assets. What will be the new generator of income from the Investment Bank No one knows. It was found that the results of Wall Street banks were swollen by structured products. What will their balance sheets without these products be like And without leverage It really is the end of an era.

Is the concentration of the banking sector to accelerate

In the United States, banks will disappear, the sector strongly will shrink. But there are also very healthy as banks Wells Fargo and US Bancorp. The real question is how many time Goldman Sachs and Morgan Stanley will be able to remain without a base of deposits. I think that they will try to remain independent for as long as possible and perhaps will buy small banks. But rapprochement with Citi and JP Morgan would be a mistake, because there are duplicates in the Investment Bank and they would lose customers, it would be a bloodbath.