Video Transcription
"US Banking Sector: Lehman Q3 Net Falls Less Than Expected"
Host 1: Geoff Cutmore
About CNBC's "Squawk Box" (Europe)
CNBC Europe's signature program, " Squawk
Box Europe", is the pre-game show for the markets. The focus is on stocks
and stories that affect the way markets trade. "Squawk Box Europe" is lively, timely
and irreverent. Every day anchor, Geoff Cutmore, is joined by a guest host, either
a leading business figure or financial market specialist, they provide three hours
of must-see commentary and analysis wrapped around the European market open.
Host: Let’s get to Hong Kong, Todd Everts, he’s the CEO of Wall Street Global.
Todd, you are looking very closely at what these banks are telling us at this point.
How confident can we feel that Lehman is on the mark both with its numbers at this
point and the message?
Todd G. Everts: Well, the message that they’re putting out is obviously the
one that they want to be on their favor based on their stock price. The issues that
face us going forward are the further fallout from the sub prime crisis. I mean
if we look at these borrowers, may of these borrowers, if we start at one end, the
borrowers maybe shouldn’t have a mortgage to begin with and we’re finding the possibility
of a lot of fraud and inflated values of these homes. On the other end we have large
investors that are using tremendous amounts of credit to purchase, namely hedge
funds, buying these mortgages and so we have in the middle the banks and these banks
are tightening their lines with the hedge funds and on the other end we have people
that just can’t pay their mortgages. So this is an event that we’re going to continue
to see fall out in the weeks to come.
Host: In terms of the...you know...what the banks have to tell us about the
earnings that they’ve been able to generate through the recent period, are we going
to start to see any big hit to trading income given the difficulty now with which
many professionals are having making money in this environment?
Todd G. Everts: You know Geoff, that’s a fantastic point. If we go back to,
let’s say the early 80s and the mid-80s the financial markets were really driven
by large pension plans, institutional investors, insurance companies. Through the
90s we saw the markets really dictated by mutual fund managers as the industry in
the US grew to 10 trillion dollars. Neither of those two investors in the 80s or
the 90s were using a lot of leverage. Today the markets are really being controlled
by hedge funds and these hedge funds can lever up 2,3,5,10 times. The other thing
that we have to remember is mutual fund managers – they can have a knee-jerk reaction:
if the investor is putting in a redemption as an example, that is seen in the market
within a matter of a couple of days or a couple of weeks. Hedge funds are using
a tremendous amount of leverage but their investors oftentimes need to put in a
60 or 90 day notice where they might have liquidity annually or quarterly. So when
we see negative-marked months like July and now August in the hedge fund world,
we’ll continue to see redemptions but those redemptions won’t play into the market
until some time around the 1st of the year, and that can hit the bottom line of
the trading profits from these big banks.
Host: So Todd what is your expectation as the way the market will treat these
banks from here because the message it seems from you is that, look, trying to get
a book value for these businesses at this point is nearly impossible?
Todd G. Everts: It is very difficult because of the various ways that they
book their income as well as their exposure but I think it’s important to remember
that the cash is obviously king and over the next few days we should continue to
see a lot of volatility in the US markets simply because this was a knee-jerk reaction,
this was a way of applauding the Fed, thanks for the 50 basis points but now let’s
get back to the problems. The problems are the sub-prime event has not been fully
played out. People can’t pay their mortgages, the consumers are not going to be
spending that much this Christmas as they have in the past and the dollar’s going
to continue to be weak.
Host: So thank you for your time. We’ll catch you on another occasion. Todd
Everts, the CEO of Wall Street Global with us from Hong Kong.
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