Barclays Capital boss Bob Diamond has made a timely appearance in FT.com’s View from the Top video slot. Here’s are some snaps from Chrystia Freeland’s interview relevant to the subprime/CDO crisis:
This is not a credit crisis, this is a liquidity and a confidence crisis..
…analytically I don’t believe that this is about asset-backed securities. I think we have a very, very serious underlying issue in one concentrated sector of the market: sub-prime. We certainly had significant upticks in volume, we had a lowering of some of the standards around the lending and we, probably with hindsight, had some investors taking too much leverage in that asset class. I don’t believe that over time it’s going to spill over into the securitisation markets or the asset-backed markets.
The perspective I take is that risk management is an extremely important tool today in the financial markets, and it is a big part of the growth and strength of the global economy, and I think for us to look at the strong advances in risk management for some of our clients, we need to separate the positives of that from some of the concerns around liquidity and confidence in the sub-prime market.
And what about LBOs?
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 covenance, 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. Our feeling is that, it’s going to take another month or so for that to work itself out of the system.
Conduits?
Is the issue that we’re dealing with around transparency or is it around confidence? And I think that there are conduits that are functioning very smoothly and there are some conduits particularly where the underlying risk is around sub-prime.
The rating agencies?
I wouldn’t want to make a comment there.
Mr Diamond was speaking before it emerged that the banker running BarCap’s CDO division had resigned. The full interview transcript can be read here.