Ted Forstmann Interview

Last weekend's Wall Street Journal's "The Weekend Interview" featured remarks by Ted Forstmann, an early pioneer in the private equity field.

I wish I could say it was an enlightening interview, but it's really not.

Forstmann's apparent big idea is that low interest rates earlier this decade spurred commercial and investment banks to do bad things with money which they would not have done, had the hurdle rates been higher.

Is this really news? Do we actually need Ted Forstmann to tell us this in a special interview?

Honestly, this is the story of every financial services bubble for the past thirty years, beginning with the 'purchased money' bank borrowing problems of the 1970s that drove John Bunting's First Pennsylvania Bank under.

Whether it's cheap money or just a banker's desire for faster growth, the underlying risk in all financial services businesses is that above-average growth must, over time, come from greater risk-taking.

Yes, this time investment and commercial banks have added to the mess with CDOs. But these instruments had to be bought by somebody, as I noted in this post.

Then Forstmann solemnly tells us,

"There's trillions and trillions of dollars that slosh around between all these places and if one fails..." He doesn't finish the thought."

Yes, Ted. That's called our 'fractional reserve' banking system. Bankers are allowed to reserve only a portion of deposits and lend the rest out. That is how banks make money.

Obviously, as investment banks added trading and asset management, they both underwrite and hold the same sorts of instruments.

Oddly, what Forstmann fails to suggest is moving the trading in all these bad instruments to regulated exchanges. Which, by the way, is what Treasury Secretary and former Goldman Sachs CEO Hank Paulsen has already begun to engineer.

Forstmann thinks that "we're in about the second inning of this."

What, specifically, is "this?"

Forstmann doesn't provide a metric by which to measure and indicate when the credit market abnormalities will have abated. So, I guess when you can't really measure something, your call is likely to be right, because you can point to whatever convenient measure fits your assessment at the moment.

Given Forstmann's prior success with leveraged buyouts in the private equity business, I wish he had bestowed upon us some wisdom involving how someone, and who that someone would have been, could have prevented the current credit market debacle.

How would Forstmann have ideally prevented CDOs and SIVs from being created? How would he have halted the lending of cheap money during the "Greenspan put" years early in this decade?

How does Forstmann reconcile our capital markets, such that people like him were free to make literally billions of dollars in creative financial deals, yet, now, he implicitly calls for curbs on, and criticizes, the financial creativity of others?

Ted Forstmann was a successful private equity pioneer, no question. He is a wealthy man- you can't argue that he isn't. He clearly did some clever things which created value for somebody, and certainly, for Ted Forstmann.

Does this give him special insight into today's capital markets? Or how to prevent them ever being cyclical? How to prevent other financiers from engaging in excess?

Do we know that Ted Forstmann, if he were 30 years younger, would not be embroiled in the middle of the current capital markets mess? Did her perhaps do things with private equity which, when he did them, due to smaller scale and impact, worked, but, now when others emulate his creativity, fail due to larger scale and impact on financial markets?

These seem to me to be the interesting questions that went unasked and unanswered in the Journal's interview with the wealthy proto-private equity tycoon.