As you wrote in the Financial Times this week, you covered a of financial banking
crises in the past. How was this different from those?
Well, it was very striking this current crisis, because in some ways it was
similar. Bank crises are always about a collapse
of credit, meaning trust in the banking system.
Fractional banking doesn't work without trust.
And that's what sparks bank runs. And that's true of the South Sea bubble.
It's true of today, everything in between.
But what was really different this time round was the speed of response and the
virology, because so much of it was conducted on social media and through
mobile banking channels. And what we discovered is that they fed
system for trying to quell a banking crisis.
You just are not in the 21st century when it comes to trying to contain a
panic. We also found out that the contagion
risks associated with small to medium sized banks are significant.
In a world of social media and mobile banking, you go back to the savings and
loans crisis. And yet no one really cared if small
banks collapsed because but didn't really create great such a chain
reaction. In the current hyper connected world of
digital finance and digital social media, it really matters if panic
dropped, if trust is lost. The good news is, of course, that we
actually had a fairly small overall losses from this crisis.
I mean, twenty two point five billion. If you look at what the FDIC says, and
that's pretty small compared to the history of banking crises.
The bad news is, though, that what SBP was was very much a symptom, not a cause
symptom. It was a symptom the fact that the
financial system has had way too much to cheap money for too long.
Many financial institutions and investors have been taking really dumb
bets with that cheap money engaging in a version of a carry trade and eventually
those chickens are going to come home to roost.
So I think the best way to see what happened in March is a symptom, not a
cause of the financial system that is seriously dislocated.
Chris, we've heard from Jamie Diamond, the head of JP Morgan, this week, saying
he thinks we're past the worst with it. Maybe another failure, too, along the
way, but it's not really fundamentally going to continue to be a banking
crisis. From your point of view as an investor,
where might the next shoe drop? Because one of the problems here, as I
understand it, was unrealized losses on balance sheets.
I'm not sure that's only at the banks. No, I agree.
David, then I don't know. I don't disagree with Jamie Diamond.
We may be over the worst. I don't expect a lot of failures, but
there's going to be a lot of pain. First off, from the Fed raises rates
from zero to 500 in nine months. Commercial real estate, particularly
office real estate, is going to be hurt by that.
Cap rates have risen and while they haven't reappraise those properties are
down probably 20 percent in value. And the people that loaned the money on
those buildings are usually the regional banks.
So we'll probably enter a period again this fall of extend and pretend we're
building. Owners have wiped out their equity and
they throw the keys back at the bank. And the bank doesn't want to pullback
that loan. They don't want the commercial real
estate. So I think we're gonna have a long hang
over period of pain just simply because the raise the Fed raised rates so
quickly. Jihye Lee.
So what about another area? And that's private equity, which has
just exploded, as you know. I'm not sure how transparent some of the
losses might be in private equity. The valuations certainly must have come
down and some of those companies. David, that sounds like a masterly
British understatement because the reality is that private equity is
private and we just don't know what is really striking about the last few years
and the gigantic credit bubble. And I do call it a bubble because of the
cheap money. Was it more that happened through
private capital markets than we've ever seen before in history?
And the problem with that and the good news about that is when it starts to
implode, it doesn't necessary immediately hit the regulated banks.
And close of regulated banks are the core of credit transmission and the
economy. But the bad news is that private equity
can't be seen quite so easily. What's happening inside it is private.
And the marks tend to take a very long time to come down.
So you are going to see more of a hissing sound, if you like, as the
bubble deflates. No, a dramatic cop.
And one of the downsides of that is that there's going to be a lot of quite
unpredictable chain reactions because we just don't know the complications of
where these losses will end up being felt.
One area I'm very curious about right now is university endowments, because
endowments have to produce a certain amount of income each year to pay the
bills to qualify for charitable status in some areas of the world.
They're not like sovereign wealth funds that can just swallow losses for a few
years. And a lot of university endowments have
dashed into the private equity and B.S. markets in recent years.
And they could start to see the outlook looking pretty nasty in the next years,
as I recall. Chris, in the past, you have expressed
some skepticism. Private.
I think you pulled back and your calendars.
What about pension plans and their investments in private?
Is their vulnerability their. Well, David, we've actually been a
steady state investor. I'm skeptical of the valuations, just as
Gillian said. But, you know, a lot of private equity,
you can read it from the employment numbers.
They're still kind of steady. So they're not writing it down, but
they're also a fund raising. So they're not motivated to write it
down. And I think really that when you look at
private equity, particularly, as Julian said at the endowment level, there's no
distributions. We're not seeing any transactions.
Merger Monday has disappeared. So it is putting a strain.
I think there's a very serious liquidity crunch going on around the world, not
just in the USA. We can survive it, but it's very tough.
People with cash are hoarding it. And right now, we're not getting any
money back from private equity or real estate.
And that's putting a pinch on everybody's balance sheet.
So people with negative cash flows are going to find it harder and harder to
keep looking at new opportunities. It just is a long, slow grind.
I don't think it's going to lead to an immediate liquidation where somebody
sells that asset on a fire sale because there are other people like she
mentioned, the sovereign wealth funds willing to buy that up.
So it's a tough, tough period.