Confidence Crisis is Spreading...to Europe

April 3, 2008

American billionaire of Lebanese descent, Thomas J. Barrack, Jr. 60 yrs old, has made a name in France in becoming the primary shareholder in Accor, then buying out on March 9th, 2007, 9.1% capital of Carrefour, to general amazement. This former lawyer, head of Colony Capital, one of the global giants in real estate with 36 billion dollars invested, is today listed as #524 on the global fortune list by Forbes, with 2.3 billion dollars. Little present in the media, this investor, whose activities put him in the heart of the finance system, delivers exclusively his analysis of the financial crisis.

Paris Match: How do you explain the aggravation of the financial crisis, with the quasi failure of Bear Stearns, nine months after the US mortgage loan - the subprime - alert?

Tom Barrack: Bear Stearns' management is not uniquely guilty of any error. If the Fed had not intervened, four other banks would have suffered the same fate. The ėsubprime îare just the tip of the iceberg. We have not even started to feel the real pain of this gigantic correction: the US banking system is on the brink of insolvency. It cannot cover its positions, despite the actions of the central bank, which is applying bandages to stop a massive hemorrhage. The commercial banks are highly vulnerable: one third of the 3,500 regional banks could collapse in the United States.

P.M: All because of housing loans granted to people in precarious financial circumstances?

T.B: This situation is a direct result of the attitude of many Americans, who for 20 years have believed you can get rich by buying and selling your home, rather than from the fruits of your labor. Many don't buy a house to live in, but to speculate on an increase in its value. It's not like what happens in France. In the USA, many people sell their house every two to three years and take on new debt to buy another one, more each time. Now that the property market has weakened, this doubling of bets has stopped working and homeowners are finding themselves with negative equity-- loans that are higher than the value of their asset. The phenomenon is exacerbated by the fact that many Americans live on credit, particularly for consumer goods: household debt today represents 9 trillion Euros . The total equity that Americans have in their homes has dropped to about 50%. Since all the banks and financial institutions throughout the world bought bits of this mortgage debt, they are being forced to continuously write down their assets. And this is in vain, because the model is broken. Confidence has disappeared because no one knows any longer who owes what to whom, or what it's worth. It's as if toxic waste had been sold in cans with "gold" printed on the lid.

P.M: In Europe, a lot of people think that the crisis won't be as serious since patterns of household consumption are different...

T.B: That's crazy. Everyone is concerned. No economy in the world is "uncoupled" from, that is to say, independent of the others, neither Europe - even if European banks acquired less of these dubious products - nor Asia. American companies, which are posting good results today, will feel the shock of the fall in consumer spending. Everyone is asking when we'll hit bottom and so far no one can say. 2008 is already a black year. No one will be making money on Wall Street, because the usual banking activities are in free fall: flotations, mergers and acquisitions, investment capital, property loans... The only people that will emerge unscathed are a few heads of banks who departed with 200 million dollar parachutes when their bank was losing 60 billion. Another anomaly of the system!

P.M: How can we emerge from the crisis?

T.B: The Fed will undoubtedly, in the end, have no other choice than to intervene by purchasing the financial products in question to set a floor price - a psychological threshold - and stop the downward spiral. The banks will also need massive injections of new capital. We'll have to change the financial regulations which today require "non-liquid" products to be posted at their theoretical same-day value. We need greater transparency. The Fed will have to continue lowering rates, perhaps to 1%, so that the banks can get back on an even keel. Congress will probably have to pass bills like it did in the 1990s before the end of President Bush's term. And the taxpayer will take the hit for the rescue package.

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Contact:
Lisa Baker
Owen Blicksilver Public Relations, Inc.
+1 914-725-5949
lisa@blicksilverpr.com