Schwarzman & Wasserstein Discuss Financial Crisis

NEW YORK (Reuters) – Lazard Ltd (LAZ.N) Chief Executive Bruce Wasserstein warned on Thursday the global financial crisis is going to get worse, and consumer credit and commercial real estate losses are just beginning.

“What we see is the world getting much worse,” said Wasserstein, a legendary dealmaker since the 1970s. “The financial system has a long way to go” before rebounding, he said.

There are several reasons for near-term pessimism, including misleading accounting standards, the unwillingness of banks to lend, and ineffective regulation, Wasserstein said in an interview with Fortune Magazine that was open to the media. Blackstone Group (BX.N) CEO Stephen Schwarzman was interviewed at the same session.

“We have yet to begin to see writeoffs,” Wasserstein said, citing emerging losses from credit cards and commercial real estate. “Global financial institutions are just beginning to get to the depths of their problems. Our rule of thumb is that the amount of (capital) support required here will be roughly three times what is assumed currently.”

A big part of the problem is that accounting rules have allowed banks to inflate the value of their assets, he said.

“Accounting has become a new exercise in creative fiction,” with the result that banks are carrying a lot of “sludge” assets clogging up the balance sheet, hindering their ability to fuel economic growth, he said.

Schwarzman, who runs one of the world’s largest private equity investment firms, said banks have failed to use U.S. Treasury funds for their intended purpose: stimulating the economy with new loans.

“To the extent they are not putting that money back into the economy, that is a very bad thing,” Schwarzman said. Blackstone has billions of cash it can pour into buyouts, but deal activity has been slowed by a lack of bank financing.

Schwarzman said mark-to-market accounting rules and the world’s disjointed regulatory system have exacerbated the financial crisis.

“Among the two most regulated industries in the United States are the banking industry and the broker industry,” said Schwarzman. “Regulation per se isn’t a solution, because these were the institutions that were regulated and they got in trouble.”

He added, “Regulation, the way we do it, clearly doesn’t work correctly.”

Schwarzman took issue with current mark-to-market accounting rules, which require banks to write assets up or down daily, saying they had been a “major contributor” to the financial crisis.

The U.S. government’s decision not to rescue Lehman Brothers Holdings Inc (LEHMQ.PK: Quote, Profile, Research, Stock Buzz) also contributed to the crisis, said Schwarzman, who previously worked at the investment bank.

Lehman filed for bankruptcy on Sept. 15, an event that accelerated a crisis of confidence in banking and brokerage.

“Retrospectively, I don’t think there’s much dispute that (Lehman) should have been saved for the stability of the system,” Schwarzman said.

By Joseph A. Giannone and Megan Davies
(Editing by John Wallace)