On October 15, 2008, Mr. Roger Altman, Evercore Partners Founder and CEO, gave a speech in Spangler Auditorium about the long-term implications of the current financial crisis.
Roger Altman is the Chairman and CEO of Evercore Partners. Mr. Altman began his investment banking career at Lehman Brothers in 1974. Beginning in 1977, he served as Assistant Secretary of the U.S. Treasury for four years. He then returned to Lehman Brothers, later becoming co-head of overall investment banking. In 1987, Mr. Altman joined The Blackstone Group as Vice Chairman and head of the Mergers and Acquisitions advisory business. Beginning in January 1993, Mr. Altman returned to Washington to serve as Deputy Secretary of the U.S. Treasury for two years. In 1996, he formed Evercore Partners.
As he indicated at the beginning of his friendly speech, rather than focusing on the diagnostics of the current financial crisis, Mr. Altman pointed out the implications of the sub-prime mortgage crisis on the US financial sector, the financial sector of European countries and eventually the global markets, including important Asian markets such as China and Singapore.
Mr. Altman began his speech summarizing the actions of fiscal and monetary authorities in the western countries. Emphasizing the fact that the amount of equity injected into the financial system by Fed and EU monetary authorities had already reached $2.5 trillion (1.3 + 1.2), quoting directly from IMF authorities and the Congress, he pointed out that the markets are at the edge of a “systematic meltdown” and that “American life, as we know, could end.” In the long run, extreme indicators of such a meltdown would be that individuals are prevented from accessing their funds with the payment system crashing down and households incurring huge losses. Fortunately enough, this has not been the case up until now even though there were some panic indicators: Last week the weekly outflow from money market reached some $145 billion compared to an average $5 billion and yield on Treasury Bonds were negative for a very short period of time.
Mr. Altman pointed out the likelihood of a recession as the second major implication of the financial crisis. Despite the Congressional acceptance of the Bailout, the markets did not adjust themselves accordingly, indicating they did not accept the bailout as it was originally structured. Even though the current amount of losses incurred by US and European financial institutions together is around $160 billion, it is expected to exceed $ 1 trillion. Combining these expectations with the fact that consumer confidence is decreasing (as reflected in a decreased consumer spending), economists forecast GDP contraction in the next three consecutive quarters, a phenomenon not seen in over 50 years. Mr. Altman commented that it’s hard to predict how long or how deep the recession will be. But in his opinion the current shape of monetary and fiscal policies are less likely to get us out of recession, because neither a reduction in interest rates nor an equity injection of $300 billion more would have any effect in a $14 billion economy.
Yet another effect of the mortgage crisis would be a weakened US Dollar in the long run. According to Mr. Altman, the current strength of the US Dollar will diminish over a period of 1.5 years and in the long-term the US Dollar will lose its unique reserve status with the emergence of other reserve currencies.
Finally, Mr. Roger Altman explained that the entire structure of “Western Finance” would change over time. Currently the financial institutions are “de-leveraging” themselves and are shrinking as a result of new regulations. Conservatism is sure to follow with an unwillingness “to be the person who approved a failed commitment.” The motto now is “don’t lend to anybody!” As a result of this conservatism, fewer players will be left in the market, who will become the dominant players in the face of reduced competition. A “wholesale” model of finance, where liabilities have been rolled over and over again in capital markets, will transform into a “deposit-based” system.
Mr. Altman concluded that US will lose its place as the finance source of the world due to its weakened economy. Even though the financial markets will slowly recover, the days of “unipolarity” are over.