Morgan Stanley's Newly Named CFO Recalls the Unfolding Crisis, and Sees Progress
Ruth Porat, whose ascent next month to the role of chief financial officer at Morgan Stanley was announced Tuesday, directed the firm's financial-institutions investment-banking business as the financial crisis unfolded in the fall of 2008. At the 10th annual Wharton Finance Conference recently, she said that a key lesson from the meltdown “was that liquidity is critical to financial institutions,” and when it leaves the system, it rushes out like air from a balloon." According to The Wall Street Journal, Porat, 52, worked closely with federal officials as they grappled with the panic. A Morgan Stanley team that she helped run advised the Treasury Department last summer on battered mortgage giants Fannie Mae and Freddie Mac.
At the Wharton conference, Porat pointed to three factors that are critical to the ongoing process of recovery: First, keeping the economy going; second, enacting global regulatory reform without putting a drag on the economy; and third, unwinding the government intervention that was critical to stabilizing the economy in the initial stages of the crisis. She also noted that key data are already showing improvement. Key stock indices have rebounded and market volatility has settled. Debt spreads, which had “exploded, making it very difficult to finance businesses that relied so much on the debt markets,” have been reined in “materially.”
She attributed much of the improvement to the “stress-test process,” which was somewhat maligned in the banking industry. But the tests gave investors "transparency and some greater clarity about the magnitude of losses,” enabling Morgan Stanley and others to raise equity with many of the stress-tested banks. In turn, investors who held shares in just a few institutions were encouraged to “re-wade into the entire financial sector,” confident that a general turnaround would strengthen weaker regional banks. Porat pointed to the re-equitization of smaller banks as “[a] very attractive entry point for many [investors].”
Still, she noted that weakness persists across several asset classes. Among the problem areas, she said: Painfully high jobless claims correlate closely with mortgage losses and home-price declines. The commercial and industrial loan businesses have been similarly battered and will remain so as long as the economy sputters, she predicted. For commercial real estate, “the shoe is dropping quickly,” Porat said. Banks are only halfway through outstanding commercial real estate loans, with about $1 trillion in maturities looming over the next several years.
“One of the key questions that is clearly frustrating many,” Porat noted, “is loan growth. Why aren’t the banks lending more?” She offered a twofold explanation: Demand is low because consumers are saving just when they should be spending to boost the economy. At the same time, banks have tightened credit standards. Both conditions have led to the collapse of loan volume. Making matters worse has been an acceleration of bank failures, which she attributed more to localized economic challenges than to any systemic issue.
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