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July 7, 2008

Ted Forstmann Says We're All Going to Hell

Ted Forstmann says we're all going to hell. That's the message I got from a cheerfully apocalyptic interview with financier Forstmann that appears in Monday's WSJ. Granted, Fortsmann's never been a fan of current financial markets, right back to the sort of things he put up with during the RJR-Nabisco takeover battle, so it's not necessarily news to find out he thinks credit markets are screwed and we're all going to suffer for it.

Nevertheless, he does have a way of getting the point across:

Once upon a time, when credit conditions and the costs of borrowing money were normal, the bank opened at 9:00 a.m. and closed at 5:00 p.m. For eight hours a day, bankers made loans and took deposits, and then they went home.

But after 9/11, the Fed opened the spigot. Short-term interest rates went to zero in real terms and then into negative territory. When real interest rates are negative, borrowing money is effectively free – the debt loses value faster than the interest adds up. This led to a series of distortions in the financial sector that are only now coming to light. The children's story continues: "Now they [the banks] have all this excess money. And they open at nine, and from nine to noon or so, they're doing all the same kind of basically legitimate things with it that they did before."

So far, so good. "But at noon, they have tons of money left. They have all this supply, and the, what I would call 'legitimate' demand – it's probably not a good word – but where risk and reward are still in balance, has been satisfied. But they're still open until five. And around 3:30 in the afternoon they get to such things as subprime mortgages, OK? And what you guys haven't seen yet is what happened between noon and 3:30."

It's a cute story. And he has another cute story about Warren Buffett and the three "I"s of innovation. Nevertheless, there is no doubt credit markets remain in worse shape than most observers think, and oil hasn't helped their recuperation.

Then again, I remain somewhat baffled by the following Forstmann quote:

The credit problems in this country are considerably worse than people have said or know. I didn't even know subprime mortgages existed and I was worried about the credit crisis.

I know what he is trying to say -- there was a credit crisis ex-subprime -- but I have to confess that were I him I wouldn't confess that I didn't know what subprime mortgages were. For a guy who operates in the debt-driven world of private equity that seems a little .... nutty. Maybe's he just pissed that Forstmann-supported Vijay Singh is falling out of the PGA top ten.

[via WSJ]

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