Does anyone on Wall Street remember Irving Fisher? Rosy prognostications from the securities industry’s top dogs certainly bring the Yale economist to mind. In early October of 1929, Fisher confidently predicted that stocks “reached what looks like a permanently high plateau”. The market, of course, promptly crashed.
Fisher’s mistake stemmed from his biases. Because he was fully invested in stocks himself, he was blinded to the risks of one of the greatest speculative bubbles in history. Despite the lessons of history, this natural instinct of human behaviour has repeated itself often—most recently in the millennial technology stock bubble.
Today’s credit boom could end with a similar thump. Yet some of Wall Street’s titans appear unusually confident in predicting that this time things will be different. On Wednesday, Merrill Lynch boss Stanley O’Neal stated that the turmoil of the subprime mortgage market is “well contained” and “there have been no clear signs it’s spilling over” into other markets.
It is easy to see why O’Neal would hope that to be the case. Merrill is a big player in the mortgage and other fixed-income markets, and has participated with its own capital in a handful of big buyouts. But the brisk widening of credit spreads over the past week suggests that there has been substantial spillage from the latest burp in the subprime market: attempts to bail out two hedge funds run by Bear Stearns.
O’Neal’s not the only sanguine figure on the Street. Also on Wednesday, Goldman Sachs chief Lloyd Blankfein declared that buyouts aren’t “going out of style”. He, too, had better hope so. Goldman is backing two giant deals led by Kohlberg Kravis Roberts & Co. (KKR), the leveraged buyout of First Data and TXU. They will be the biggest tests yet of the financing markets after investors sent a $1.6 billion (Rs6,560 crore) KKR bond deal for US Foodservice packing on Tuesday. Given their privileged seats in the capital markets, Messrs O’Neal and Blankfein may have a good handle on what’s happening in the credit markets. Before losing his family’s fortune on Black Tuesday, Fisher thought he did, too.