BlackRock’s Larry Fink, who you’d have to say has emerged as one of the winners from the financial crisis, says we shouldn’t worry all too much about too-big-to-fail financial firms staying too big to fail. That’s because the feds are already shrinking them. “They are doing that by reducing leverage,” he said at a breakfast put on by the Wall Street Journal this morning (video will be online later).
First, Fink said, the remaining investment banks are way down from the 30-to-1 and 40-to-1 leverage ratios that prevailed before the financial crisis (Goldman’s leverage ratio is currently 15-to-1, Morgan Stanley’s 16-to-1), and will be forced to keep leverage down by new regulation.
Second, regulators are no longer putting up with dodges like structured investment vehicles that took leverage off the balance sheet but didn’t actually reduce risk.
Third, as more credit default swaps and other over-the-counter derivatives are forced onto exchanges, the possibility of firms taking on big risks that don’t show up in financial statements will be reduced.
I haven’t seen any actual evidence of this movement of derivatives onto exchanges yet. But Fink is confident that risk is being ratcheted down. “I think it’s happening,” he said. “These debates are forcing changes by these businesses.”
Then again, he did admit that the pace of regulatory reform has been awfully slow. “If you look at the financial services industry, they’re spending more money on lobbying than ever before. So I guess the system is still working.” (That last part was meant as a joke, I think.)
What other interesting things did Fink say?
On loan modifications: “I’m a big believer that loan modification is frightening away private capital. There’s a reluctance to buy a mortgage security today because of uncertainty around your rights as a first-lien holder.” He’s not against modification itself, just the failure to protect the contractual rights of first-lien holders vs. other creditors. With other investors scared away, “We have the Federal Reserve buying every mortgage that is originated. That’s going to end in April.”
On currencies: “I don’t think [the dollar] is going to fall that far. I still hate the euro a lot more than the dollar.”
On the causes of the mortgage/housing bubble: “Public policy caused a lot of these things, and then the ingenuity of the Street took it to the extreme.”
On why we shouldn’t worry about conflicts of interest between BlackRock and its many private and governmental clients: “We have no business that we do for our own account. 100% of our business is fiduciary business … I’m not buying or selling for my own account.” (The contrast between this business model and that of the investment banks, which trade for both their own and clients’ accounts, is instructive.)
On whether mortgage securitization, which Fink helped pioneer, is a bad thing: “It wasn’t the structure that blew up. It was the acceptance and underwriting of risk.”
On whether anybody from Merrill Lynch, which owned 49% of BlackRock, ever called to ask for advice on the mortgage business. “They could. They didn’t.”
On whether we’re in a new financial bubble. “Bubbles don’t occur when you talk about them. There are just too many articles about this liquidity bubble.”