Crisis Counsel

Chairman and CEO, Morgan Stanley

Is this a crisis? Anytime you have this kind of market dislocation, it is. It's not so much a credit crisis as a liquidity crisis, largely because of the subprime market meltdown. As a result, the quant funds de-leveraged. We processed 8.25 million tickets in one day. Just for perspective, we thought we had set a record two weeks before, when we processed 3.6 million tickets.

I was around in 1987, and that crisis was more disruptive and much more alarming than this is. So was the 1998 foreign-debt crisis. It's not all bad news now. There's still liquidity in the markets. There's plenty of investor money in China, Russia, the Middle East, as well as the U.S.  The rest of the world has developed to the point that, if the U.S. goes into a recession, I don't think we'll have a global recession. I don't think a recession is going to happen, but it's what our central banks have to worry about.

It's too early to tell how this will shake out. The markets will eventually normalize, but things have changed. Investment banks and commercial banks will be much more conservative with their leveraged loans (for private equity buyouts). They'll demand full flexibility. There will be much stronger covenants structured into deals so that if things go wrong, the deals can be repriced. When buyers start paying a higher price for liquidity, clearly their returns have to go down. Six months ago I was saying that we'll eventually see a $100 billion private equity deal. We got halfway there. (BCE, the Canadian phone giant, is the biggest pending buyout to date, at $48.5 billion.) A deal that size is on the back burner now. The Street is not going to structure these giant transactions as they have in the past.