Ross: It's About the Liquidity Mindset, Not Credit

Today's current crisis is not so much about credit as it is about liquidity, according to one billionaire investor.

"I think liquidity was more the issue. That was what was driving the money funds bad, not so much credit," said Wilbur Ross, CEO of WL Ross & Co., on CNBC Monday. "Credit was a little tiny part of it. It was more the illiquidity and the rush of people to exit."

He suggested that psychology will have to change in order to combat the problem.

"I think we have two problems with liquidity. One is the physical issue, but the other is the psychological one. The same banks that weren't afraid of anything the last several years now are afraid of everything. You've got to change that if you're going to have liquidity come back into the system." (See his full comments in the video)

But there's a danger, he warned.

"I think it creates an odd situation for the money funds, in that during this one-year period, will their yields be higher than the yields on bank deposits? If they are, you're liable to create an inadvertent run on the banks."

Ross indicated he's not sure whether or not the current bailout proposal being discussed in Congress will be the cure everyone is looking for.

"I think government has been under-reacting for quite a little while, and now the question is, is this over-reaction, or is this really going to work? I don't have any idea how they came up with 700 as the magic number; that's one random example of what we don't know about it. ..."

"I think it will serve to stabilize the banking industry to some degree. I think it's going to be fascinating to see the new world of Goldman and Morgan Stanley being banks. I suspect that accounting treatment had a lot to do with that decision, as well as access to the Fed window, because, remember, banks do not have the same mark-to-market requirement as do Wall Street firms...."

He added that he'd be "very interested" in money from a bailout fund.

"We are not big users of leverage, so the leveraging dissipation has not been a particular problem for us. Our general feeling is, if the only way we can get a good rate of return is with a lot of leverage, we're probably paying too much."

He added: "I believe that a lot of the money will not go into mortgages, because with the banks, mortgages are the 'dirty M word.'"