Over the past
On how the crisis happened and the reaction to it.
On the roles of Secretary Paulson and Fed Chairman Bernanke.
The Fed has several powerful tools that it hasn’t used. When banks fail, by definition they had inadequate reserves. So when you have a bunch of banks failing, you drop reserve requirements.
The other thing you do [is] manipulate, planfully, the spread between the discount rate, the Fed funds rate, and the T-bill rate…The way to end the liquidity crisis is to drop the discount rate relative to the Fed fund rate, which then motivates banks which are troubled to go to the discount window, plead baby shoes, get cheap money at the discount window, and then turn their rear ends around and lend it out at the Fed fund market rate because it’s free money. You borrow at the discount window cheap, you lend it to the safest bank you know, and now that bank has excess reserves, and they lend it out. The way the Fed has always unlocked liquidity freezes is to increase the spread between the discount rate and the fund rate. If you want to get more extreme, drop the discount rate below the T-bill rate, and now you have a riskless transaction.
In my view, Paulson is evil. Bernanke isn’t evil, he’s just not doing what he’s supposed to do….There’s no way that three years from now Goldman doesn’t gain market share because of this, materially...
The effect of the crisis on our industry, and for clients.
This is going to affect people just like when you find out your spouse has been cheating. You may be able to forgive your spouse for the indiscretion if your spouse is serious about repairing the marriage, but you’ll forever be more skeptical. That’s the new car smell. When the person gets a divorce, and finds someone new, they can pretend that they don’t have those same concerns about the new person, because the new person has the new car smell.
If you had a balanced account or all-equity account [for your clients], which is most of the industry, your client is going to look at you like you were the spouse who cheated.
Coming out of this, the weak will get killed and the strong will pick up market share. How do you get strong? Keeping your termination rate from going up too darn much—no one’s termination rate is going down after this, unless you had everyone in all cash—and getting new clients.
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