Inside the Trauma Ward of the World's Financial Markets
I feel like I work in the trauma unit. Not in a hospital as you might imagine, but at the heart of the global financial crisis. And for some weird reason I really enjoy it.
At Vanderbilt I shifted from premed to economics as I concluded that passing out at the sight of blood might not be good in a medical career. Now I tie tourniquets to stem the hemorrhaging of capital in the credit markets.
Lots of organizations are having trouble making sense of what their credit portfolios are worth and if they are financially solid. That’s when they call someone like us. We have been very busy.
I am a managing director at BlackRock Inc., one of the world’s largest publicly traded investment management firms, responsible for overseeing more than $1.3 trillion of assets. My division is in BlackRock Solutions, where I have responsibility for the financial markets advisory business started in 2008 when I joined the firm. As the name implies, we provide solutions and services to clients with complex financial risk situations. We assess and value their investment portfolios, assist them in developing strategies to deal with financial challenges, and can even provide asset disposition services.
Right now, lots of organizations are having trouble making sense of what their credit portfolios are worth and if they are financially solid. That’s when they call someone like us. We have been very busy.
My career has spanned more than 30 years at major investment banks. I moved to New York City a week after graduation from the College of Arts and Science in 1976. My first job was focused on what was very new at the time—packaging mortgages for sale as bonds. Mortgage-backed securities boomed and created a new market called “securitization.” I was an early entrant to that market and due to my longevity, could be considered a founding father. Securitization grew to package almost every type of credit risk imaginable.
What went wrong? Securitization and its cousin, credit derivatives, were the means by which overly aggressive credit dominated the financial landscape. Think of securitization as a conduit, a means of spreading credit exposure. The easy credit and permissive standards prevailing after 2005 became a big chocolate malt that everyone enjoyed through one big straw. Once tainted, all were infected. I mean everybody. Everywhere.
When Bear Stearns, then the fifth-largest U.S. investment bank, was failing last year, we were called in to advise the Federal Reserve Bank of New York (the Fed) during the crucial Thursday-through-Sunday-night period in mid-March. After Bear merged with JP Morgan Chase, BlackRock took over management of $30 billion of toxic mortgage and other exposures on behalf of the Fed.
By summer 2008, the U.S. government was concerned about Fannie Mae and Freddie Mac, and we were hired to assess whether they had adequate capital. They didn’t. Those two behemoths of the global capital markets were put into conservatorship. That was when the crisis metastasized. If they failed, wouldn’t every financial institution be at risk? If the government had not stepped in, what would have happened?
We got an answer on September 15, 2008, when Lehman Brothers filed for bankruptcy. On that fateful weekend, I was in Abu Dhabi, United Arab Emirates, visiting with clients. When word of Lehman’s failure spread on Sunday night, I flew back to New York after being on the ground less than 24 hours. Concern over counterparty exposure erupted globally and without prejudice. No financial institution was deemed sound.
Monday night, I joined my team at the corporate headquarters of AIG in lower Manhattan. For weeks, we had been analyzing their complex financial situation. An effort to privately recapitalize the company failed that evening. Senior AIG management adjourned with representatives of the N.Y. State Insurance Commissioner to the Fed’s offices. By morning AIG had $85 billion in credit from the Fed, and its life as a public, independent company was no more. In December the Fed and AIG had BlackRock assume management of nearly $100 billion face value of cash and derivative instruments held by AIG, removing them from the company’s balance sheet in an effort to “derisk” the company and stabilize its ratings.
Hard to believe, but BlackRock has analyzed and valued over $4 trillion of assets since the summer of 2007. Our work has spread from the U.S. to other countries, including the United Kingdom, Germany, France, Switzerland, Sweden and Belgium. We have been entrusted with management and disposition responsibility on more than $170 billion (face value) of exposures since we started—an accomplishment of which our whole team is quite proud.
My liberal arts degree has served me well throughout my career, and particularly during this crisis. Problem solving, communication and the ability to navigate cultural differences all are key life skills enhanced by my general education at the College of Arts and Science.
What have I learned? I have seen a lot of scared people and how they behave. All told, panic brings out the best and worst in people, although I have seen more good than bad with people trying to do the right thing. I have been particularly impressed by the tireless and dedicated commitment of financial regulators around the world to step in when needed and do whatever it takes.
Markets and the economy are driven by the psychology of its participants—I learned that at Vanderbilt. We have seen giddiness over market highs, accompanied by wild speculative behavior, replaced by extreme caution and a very low interest in risk taking. Markets and the economy are driven by momentum, and right now, the momentum is universally negative. That will take some time to reverse.
In an effort to stabilize the economy, government funding has effectively replaced the private capital markets. The nexus of financial power and control has shifted to the political realm, away from Wall Street and other money centers around the world. The implications of this shift will be far-reaching into the next generation and possibly beyond.
I am confident that there will be growth, opportunities and new products for that next generation. Just as my first job at Lehman Brothers was in an emerging market, my children and the next generation of Vanderbilt students will work in new fields with new challenges and opportunities. I don’t know what the future will hold for them, but I do know that the College of Arts and Science is preparing them for it. Whether the students study economics, political science, Spanish, math or interdisciplinary studies, they will have the tools, the curiosity and the ability to cope with—no, to manage—the world’s latest financial crisis and whatever crisis comes up.