One on One with John Duffy, Chairman and CEO of Keefe, Bruyette & Woods
Wednesday, July 16, 2008
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SUSIE GHARIB: There's a lot of anxiety about the outlook for the sector, despite today's big rally in bank stocks. Earlier today, I talked with John Duffy, chairman and CEO of Keefe, Bruyette & Woods, a Wall Street investment firm that specializes in financials. And I began by asking him to describe the health of America's banks.
JOHN DUFFY, CEO, KEEFE, BRUYETTE & WOODS: Overall, the banking system, which will raise a lot of capital I think in the coming year, is in OK shape. I think the market in some cases has overreacted. This is probably the most severe crisis we've had facing the banking industry since the depression, but it's not the depression. I think the correction that we're seeing is probably at least as severe as we saw in the early '90s.
GHARIB: Mr. Duffy, do you expect more bank failure?
DUFFY: Oh, without a doubt. If you go back to the period of the early '90s, coming out of the real estate recession of the late '08s, early '90s, I think we had over 800 failures. We're not forecasting that many because we have many fewer banks today. We're almost half the number of institutions that we had 15 and 20 years ago, but I wouldn't be surprised if there were a couple of hundred failures in the next few years.
GHARIB: Everybody wants to know which bank is next.
DUFFY: Well, we're not in the business of forecasting bank failures, but I think if you look at institutions' stock prices and if you look at their concentration of real estate by loan type, you can get a pretty good idea which banks are in trouble.
GHARIB: We've seen so many Americans withdrawing their funds from banks that they consider are on shaky ground. What advice can you give to people about the safety of their deposits and their savings?
DUFFY: Well, if there is an institution out there paying well above market rates, that institution may be having liquidity concerns. If you're below the $100,000 limit, I think you're very, very safe and there is no reason for concern. If you have individual deposits above the insurance limit -- and they are higher for IRA accounts -- I think it would be prudent to know something about the safety and soundness of the bank.
GHARIB: Do you think that Fannie Mae and Freddie Mac are out of the danger zone now that the government has a rescue plan?
DUFFY: No, I don't. They are very levered institutions. Clearly, the real estate market is in very bad shape, so I think one would be foolhardy to say that they don't have very serious issues. But I believe the government will do whatever it takes to make sure those institution stay viable.
GHARIB: Citigroup reports earnings this week, as you know, and it's taken massive writeoffs in the past. Is the worst over for Citigroup?
DUFFY: I would expect an ugly second quarter because certainly the credit markets did not improve in the second quarter. So whether the worst is over, you know, I doubt it. They've had a lot of pain, and I think most of the people in the businesses that they're in aren't feeling overly optimistic, certainly over the next six or nine months.
GHARIB: JPMorgan is also reporting this week. Should we feel better about the results coming out of JPMorgan?
DUFFY: Yes, I think they've done a much better job managing the risk, and I would expect their results are better. And I think vis-a-vis some of the competition, JPMorgan Chase is in a relatively strong position.
GHARIB: Let's talk a little bit about the investment banks. There is considerable concern about the outlook for Lehman Brothers. Do you think that it's going to go private, or might it go the way of Bear Stearns?
DUFFY: I don't think it will go the route of Bear Stearns, given the support mechanisms that the Fed has put in place. I think Lehman has got a very valuable franchise. I expect them to survive. Whether that's in a public or private form, I don't really know.
GHARIB: What about Merrill Lynch? What's your analysis of its financial condition?
DUFFY: I think a lot of people would love to have Merrill's footprint and franchise. That's not easily duplicated. So while I'm sure it's been very, very painful to go through what they've gone through in the last nine to 10 months, I don't have much doubt that they'll come through this. And, if you give me five years, I'm pretty confident that they'll be back up on their feet well before then.
GHARIB: So what is it going to take to bring stability back to the financial sector? Is it going to be a wave of mergers? Is it going to be government intervention or something else?
DUFFY: I think it will be a combination of some government intervention, some increased regulation, and some commitments from the private markets in terms of capital, but there's a lot of capital out there. I think the franchises that have a real value will be able to attract that capital and get through this storm.
GHARIB: Mr. Duffy, thanks so much for your time.
DUFFY: You're very, very welcome, Susie. Nice to see you again.
