Diamond Is A Market's Best Friend

Bob Diamond, President of Barclays PLC and the visionary behind the creation and rise of Barclays Capital, gave an insightful interview in today's Financial Times "View From The Top." It was quintessentially Bob - controlled, concise and erudite. Cagey when he needed to be and direct when he wanted to be: a tour de force. Watch in on the FT website
http://publish.vx.roo.com/ftvideo/portal/viewfromthetop/

Mr. Diamond held forth on the intervention of the Fed in their cut last Friday of the discount rate and their widening of the collateral base for borrowing (the position we took in our post of last Friday “Chairman Bernanke Rises To The Occasion"):
“I think we have to give somewhat of a chance for the actions that were taken most recently to take hold. When one is looking for the positives, I think the connection between the European Central Bank and the Fed, I think the thoughtfulness with which they’ve implemented action, and I think particularly of Friday with the change to the discount rate. The Federal Reserve has two primary objectives. One is as a lender of last resort and the other is to regulate the economy, to be part of regulating the economy. I think, in the first role as lender of last resort, the actions were quite thoughtful. It addressed the types of collateral that can be used, it addressed the number of participants in the market that can access liquidity, it also addressed term versus just overnight funding.”

Mr. Diamond went on to repeat his call for more time when questioned on the issue of a further cut in the Federal Funds rate:
"I think fundamentally the issue that the Fed is dealing with right now, having already taken some thoughtful and concrete action, is really one of confidence. And I think if they believed that the right thing to do, to put a bolt of confidence into the markets, was to reduce rates, I think they would do that. I think it’s appropriate to see how this works for a while more. I think there are other things they can do besides cutting rates, and as I mentioned earlier, the other role of the Fed is a regulator of the economy, and they’re certainly concerned that in past experiences like this, certainly in 1998, the success of rate cuts boosted the economy beyond which I think they would have been happy. ….. I think 20/20 hindsight is easy and I think economic growth, post the crisis in the summer of 1998, was ahead of what the Fed would have thought with those rate cuts. This is not a credit crisis, this is a liquidity and a confidence crisis.

While I agree that the 1998 rate cuts did over-accelerate the economy, the issues faced in August/September 1998 were, whilst different in their cause (Russia v. sub-prime), very similar in their outcome – illiquidity causing panic and market “freezing” resulting, among other things in the failure of Long Term Capital Management which lost $4 billion in a similar “confidence crisis”. Having watched him as we lived through the 1998 meltdown, I do not believe that Mr. Diamond is ignoring this episode. Rather, in his present role, his job is to try to calm the markets and dampen the panic in the hopes of not adding another name to LTCM on the wall of the fallen.

Being the consummate professional, Mr. Diamond gave his view on Bear Stern by passing on giving his view on Bear Sterns, stating,
“I would never comment on a competitor in the market.”

Although he did respond to a re-phrased question on the issue that has plagued Bear Sterns, the liquidation of conduits, saying,
“The markets seemed to be showing some very, very, very early signs of being able to price some of these liquidations. So I think we need to give this a little bit of time before we try and make a conclusion.”

When queried on the role, if any, the rating agencies have played in the sub-prime problem (and, by extension, in the CDO problems), Mr. Diamond took the appropriate diplomatic stance,
“I wouldn’t want to make a comment there.”

I would not take that as comfort if I were Moody’s, S&P or Fitch but rather only be glad that he is circumspect and happy to leave their “shellacking” to the SEC/FRB/FSA/ECB et alia.

It was only on the subject of whether the LBO and Private Equity “boom” was over that Mr. Diamond allowed himself a bit more latitude and telegraphed, quite clearly the new reality in credit, stating
“We’ve had three or four or five years where the originators have had pricing power. And for the first time in four or five years, fixed-income investors have pricing power. And we’ve seen a real cracking of the liquidity bubble, we see fixed-income investors now with pricing power, and we’ve seen a slowdown on the market, which frankly, I think is quite healthy. It isn’t a question of which side of the market is winning or losing. We probably went too far in terms of covenants, we probably went too far in terms of leverage, we probably went too far in terms of pricing. Not by any major extreme, but the market was a bit out of balance and it’s moving back the other way now. … What I’m saying, is that the situation in leverage finance is very important to us because we’re one of the leaders in that business, and we’re thinking the October/November, November/December timeframe, that market will likely be back to more normalised levels, but it will be back to those levels at a different pricing."

As I said in my earlier posts this is the sign that I have been looking and hoping for – a major well-respected and highly thoughtful banker who heads a leading player has told the market that whilst they are open for business the terms have changed. This cannot be downplayed or naysayed; rather, it should be applauded. Mr. Bernancke last week, Mr. Diamond this week, should be lauded for their willingness to face the reality of what has occurred and not to flinch from talking about and taking decisive action.

Now Bob, if you would only get real about the Red Sox and Chelsea - please!!

Cassandra