The Market Whisperer-Peter Fisher

The Market Whisperer-An Opportunity By The Fall?

 

Peter Fisher is the Managing Director of Black Rock Inc., the global investment management and advisory firm with $ 1.2 trillion in assets under management and 49.8 per cent owned by Merrill Lynch and Co.

 

In 1998 Mr. Fisher presided over the rescue of Long Term Capital Management, enlisting the big Wall Street firms in "joining hands under the Fed's protective banner" to help unwind the Hedge fund's positions.

 

As the point man of the Federal Reserve Bank of New York, he played a key role in calming markets, that also turned out to be the high point of his 15 year career at the NY Fed. This was followed by a stint as undersecretary of the US Treasury for domestic finance in the early years of the Bush administration.

 

His thoughts on the present crisis in the financial markets:

 

-In retrospect were interest rates too low for too long? It is hard to escape that conclusion. Did we create too much leverage? Was our credit capacity based upon false assumptions about how low monetary conditions could be? I think so. We have the benefit of hindsight now but interest rates were too low for too long and now we are going to squeeze out the excessive leverage that built up.

 

-A great deal of activity at the Fed has shifted to the capital markets but banks still matter. Banks-both commercial and investment banks-play a pivotal role as asset originators for the capital markets, underwriting both consumer and business credit before it gets distributed to investors in the capital markets. With rapid changes in prices and rise in volatility, the capital markets are less willing to buy these assets and they are piling up on the bank balance sheets.

 

-For the Fed to ease further from hereon, the FOMC will have to reach one or both of two conclusions. First, they would need to believe that credit conditions have tightened sufficiently for all households and businesses so that the economy is receiving tighter overall financial conditions than they intend and this will persist for sometime. Second, they would need to see a convincing internal Fed forecast of an unemployment rate backing up toward 5 per cent in the next few quarters.

 

-Big market events that pose systemic risks tend to reflect the collective mistakes in which most market participants are offside in the same direction. In the summer of 1998 there was a collective misunderstanding about credit risk: everyone underestimated sovereign risk and lived in the fantasy land where sovereigns did not default. And then Russia happened. Suddenly the noise became all about cash flows. It turned out that credit mattered and then we had to revalue a lot of sovereign paper being used as collateral.

 

-Until the brokered collapse and buy-out of Bear Stearns nobody seemed to focus on the uncertainty surrounding the value of mortgage-related and structured finance paper, and then everyone did. The late MIT professor Rudi Dornbusch sagely observed that in financial markets things always take longer to happen than you expect but once they happen, events unfold much more quickly than you expect and this perfectly describes recent events.

 

-Globalisation actually does not lead to dispersion of risk.  The benefits are there, but they are offset by the costs of hedging or imperfect hedging where markets participants sell what they can rather than what they wish, which leads to higher linkages and less benefit of dispersion. In 1998, after Russia's default, there was selling pressure in Mexican Bonds not because the market thought a Mexican default was likely but because the Mexican Bonds were liquid.

 

-So is there an opportunity now? In September of 1998 there were a lot fewer people who thought they saw a buying opportunity-famously, in the case of LTCM, only Warren Buffett and Hank Greenberg. It took until October-November of 1998 for more people to see a buying opportunity and for the markets to find a bottom.