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The high-flying days of highly leveraged Wall Street firms are clearly a thing of the past. In fact, those “drunken times” might go down in history as astounding to even the major players.
Morgan Stanley Chief Executive John Mack tells CNBC’s David Faber that the current financial crisis is like nothing he's ever seen before, and it will take time for firms to deleverage from the excessive levels financial firms had reached.
Morgan Stanley [MS
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] and its competitors "all have to take some blame for that," he said.
One year ago, Morgan Stanley ran leverage at some 30-times, Mack said. This means for every dollar of capital the firm had, it carried some $30 in debt. Morgan currently sits at "slightly below 20-times leverage," he said. With the $9 billion investment from Mitsubshi UFJ Financial Group and future federal aide, Mack expects leverage to fall into the teens.
Mack indicated he now questions whether it was wise to maintain such a high leverage ratio, and he noted that other financial institutions abroad had leverage ratios of as much as 40 or more.
"We're all learning that leverage works both ways," Mack said.
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Did they not know that when they took the leverage, exclaims an exasperated Dylan Ratigan in response to Mr. Mack’s comments.
I think going forward we need to have very strict rules about what is on the books of these banks and very strict rules about any off-balance sheet transactions. The lack of transparency is what got us into this mess,” adds Jon Najarian.
Dylan Ratigan changes the topic somewhat and says he’s outraged that the people who are dealing with the current Wall Street crisis are in part the people who contributed to its construction.
To illustrate his point, Dylan introduces a pair of quotes from Hank Paulson when he was the CEO of Goldman Sachs back in 2000. They follow:
“We and other global firms have, for many years, urged the SEC to reform its net capital rule to allow for more efficient use of capital. This is the single most important factor in driving significant parts of our business offshore, so that our firms can remain competitive with our foreign competitors risk-based capital standards must become the norm. "
- Goldman Sachs, CEO Hank Paulson, Feb. 29, 2000
Markets should be open, accessible and transparent. Consistent with the concept that no exchange or venue should enjoy unfair advantage or entitlement, we believe that price discovery information and execution quality should be easily accessible to a much broader cross section of market participants.
- Goldman Sachs, CEO Hank Paulson, Feb. 29, 2000
For more of Dylan's editorial on the issue of transparency please watch the video.
Read More:
> “Morgan's Mack: Firm Was Excessively Leveraged”
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Trader disclosure: On Oct.16, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami Owns (AGU), (BTU), (C), (GS), (INTC), (MSFT), (NUE); Pete Najarian Owns (AAPL), Is Short (AAPL) Calls, Owns (AAPL) Puts; Pete Najarian Owns (C) Put Spread; Pete Najarian Owns (GS) Call Spread; Pete Najarian Owns (MS), Is SHort (MS) Calls, Owns (MS) Puts; Pete Najarian Owns (YHOO) Call Spread; Pete Najarian Owns (SLB) And Is Short (SLB) Calls; Pete Najarian Owns (SCHW) And Is Short (SCHW) Calls; Finerman Owns (GS); Finerman's Firm Owns (MSFT), (DEO), (MO); Finerman's Firm Owns (DNA) Call Spreads; Finerman's Firm Is Short (USO), (IYR), (IJR), (MDY), (SPY), (IWM); Terranova Owns (AAPL), (EXM), (FCX), (FTO), (MA), (NOV), (POT), (X), (VLO);
Terranova Is Co-Portfolio Manager Of The Virtus Diversifier PHOLIO; Virtus Diversifier PHOLIO Owns (IGE), (DBC), (DBV)
Terranova Is Chief Alternatives Strategist Of Virtus Investment Partners, Ltd.; Virtus Investment Partners Owns More Than 1% Of (ABD), (ARE), (BIG), (CNW), (OFC), (DLM), (DRH), (DLR), (EPR), (EXR), (FL), (SLB), (LNET), (MAC), (DBC), (DBV), (SKT), (UA), (BLV), (VV), (CLB), (GWX), (IGE), (FSMXX); Virtus Investment Partners Owns Seagate Tax Refund Rights; Virtus Investment Partners Owns Seagate Technology Tax Refund Rights; Virtus Investment Partners Owns More Than 1% Of Shares Of Incitec Pivot Ltd.; Virtus Investment Partners Owns More Than 1% Of Shares Of Essex Property Trust Inc.
Jon Najarian Owns (AMP) And (AMP) Collar; Jon Najarian Owns (AKS) And (AKS) Collar; Jon Najarian Owns (MGM) And (MGM) Collar; Jon Najarian Owns (CHK) And (CHK) Collar; Jon Najarian Owns (MET) And (MET) Collar
GE Is The Parent Company Of CNBC; Charles Schwab Is A Sponsor Of "Fast Money"
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