One on One with Robert Hormats, Vice chairman of Goldman Sachs Reacts To Stock Sell Off
Wednesday, August 15, 2007
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SUSIE GHARIB: Joining us with more analysis of Wall Street's stock sell off is Robert Hormats, vice chairman of Goldman Sachs International. Hi, Bob.
ROBERT HORMATS, VICE CHMN., GOLDMAN SACHS INTERNATIONAL: Hi, Susie. How are you?
GHARIB: So Bob, what's it going to take to stabilize these markets?
HORMATS: I think it's going to take several days of good news or at least several days where you don't hear bad news all the time. It sends to be the case in these jittery environments bad news trumps good news and that's what you had today.
GHARIB: Many market strategists I've been talking to over the past couple of days are saying that this is a normal and healthy correction but is it getting to the point that this market decline is bad for the economy?
HORMATS: Well, it's normal and I'm not sure it's healthy. It could be bad for the economy. That's the real risk. If you've got people losing money in their 401Ks and the value of their home is going down and you have foreclosures and then people can't do this mortgage equity withdrawal which drove a lot of spending over the last several years and then they also find that their mortgage interest rates go up because their adjustable mortgage resets. That could be very harmful to consumer spending and it could have an adverse effect on the national economy, the underlying economy and I think it will. It's a question of how much and how soon, but it certainly will have a negative effect on the domestic economy.
GHARIB: We're going to be getting some consumer numbers out on Friday. How much of a dent do you think that this whole market sell off and the credit crisis is going to have on consumer sentiment? What's your sense of the consumer?
HORMATS: Well, my sense of the consumer is the consumer is already overstretched. The consumer does not have a lot of excess savings and when they see the value of their homes going down and they see the 401Ks going down, they're even more stretched and I think consumers will begin to pull in. How much they will do it, I don't know, but it will have an affect. The Fed will be watching this very carefully along with the jobs market and if they begin to weaken, both of them or one or the other, that will begin to trigger more feelings in the Fed that they've got to make a move, not yet, but I think over time, yes.
GHARIB: Bob, I know you talked to Goldman's international clients on a pretty regular basis. How much of a global impact is this crisis in the U.S. and the stock market sell off having internationally?
HORMATS: More in Europe than in Asia because a lot of these European banks we've seen heavily exposed to some of this paper and they've had to take write-downs. The Asian situation is somewhat different. The Asian economies are doing pretty well, by and large quite well in the case of China. And it's very important to the United States to maintain the confidence of foreign investors because we need $2 to $3 billion every working day because we have such a savings short fall in our country and we want to make sure that money continues to flow. In the medium term it may also be the case that bargain hunters in Asia start looking for distressed assets here, for weaker assets here and they could be part of the answer to the problem as opposed to several months ago China was one of the originators of instability because people perceived the decline in Chinese economy. Now China and other countries in Asia could be part of the salvation of our financial markets.
GHARIB: Do you see international investors still being very interested in U.S. stocks and bonds or are they pulling away?
HORMATS: They're very cautious. We've seen concerns about fixed income assets and also equities at this point and they're nervous along with everyone else, but I know a lot of foreign investors who are beginning to nibble or are thinking about nibbling, doing a little bottom fishing when they think this has reached a bottom.
GHARIB: Real quickly Bob, because we're running out of time here, I'm just wondering what the foreign investors are telling you about how the Fed has been handling the situation. Do they find that it's being responsive?
HORMATS: So far I think they're generally quite happy with the Fed adding liquidity, as did other central banks, including European central bank. But if they see the economy weakening, they will want, as I think many Americans will want to see the Fed take more aggressive action. They don't necessarily expect it to bail out certain companies if they get into trouble, but they want to see that if the economy weakens, if jobs weaken and consumer spending weakens, they'll want to see the Fed take bolder action to avert a downturn or a recession. Now lower interest rates by the Fed may weaken the dollar a little bit, but they want to see strong action if they perceive the biggest economy in the world is drifting towards a significant slow down. They'll want to see that.
GHARIB: All right, we're going to have to wrap it up here, Bob, thank you very much.
HORMATS: Thanks for having me Susie.
GHARIB: My guest tonight, Robert Hormats, vice chairman of Goldman Sachs International.
