Milken started with a wide-ranging review of credit history stretching back to the 1600s, elaborating on different forms of credit risk, including real estate and interest rate risk. All the panelists agreed that today's credit situation has a markedly different character from the crises of the 1980s and the 1990s.
Wesley Edens of Fortress Investment Group noted that this credit cycle is more severe than other recent downturns. Investment-grade bonds are trading at remarkable spreads over Treasuries. "The bulk of it has been due to a tremendous liquidity crisis," he said. "It's what happens when the buyers of the assets all become sellers."
To expand on the impact of the credit crisis on the international market, Rajeev Misra of Deutsche Bank discussed his recent visit to Asia. He cited the fact that almost 80 percent of Indian companies have relatively little debt on their balance sheets. He also stated that the emerging markets have not developed complex financial tools and still lack the qualified human resources to manage these tools — and the lack of leverage in this asset class may have saved them. "The lack of these two things helped the emerging market avoid the pain of the credit crisis," he noted.
Misra went on to note that there is currently an unusually large spread between cash bonds and credit-default swaps in the investment-grade space. It is a sign of strange times indeed when such a huge spread with little default risk does not have immediate takers. He observed that it's a relatively small slice of highly risky subprime loans bundled into CDOs, but they were structured in such a way that they undermined vast sums of solid debt.
Noel Kirnon of Moody's Investors Service expressed his concern that financial tools have become so complicated that the market sometimes could not evaluate their risks. But he also noted that today's structured finance is still less volatile than corporate debt in the mid-1980s.
Analyzing the situation from the perspective of credit cycles and market efficiency, Steven Tananbaum of GoldenTree Asset Management predicted that we might see improved returns within a two-year period. Logic says that most credits are not going to default, so if investors can identify those opportunities, there are excellent yields to be had.
Richard Sandor of the Chicago Climate Exchange posited that the talent in major financial markets was now smarter than before and could handle the financial tools better. But Milken interjected that this new talent has a short memory.
Regulation of the new financial tools can be a mitigating factor in responding to concerns about a lack of transparency. "Regulation is a good thing," insisted Sandor. "The tools are helpful but should not be misused."
Referring to Charles Dickens's famous line that "It was the best of times, it was the worst of times," Milken argued that these might actually be good times. He cited the fact that market capitalizations in the United States and Japan accounted for 68 percent of world totals in 1950s, while by 2007, that proportion had declined to only to 37 percent. Economies in the rest of the world are not as vulnerable to downturns in the United States as before.
The session ended with Milken asking each panelist for their outlook on future opportunities and risks. Kirnon responded that high-yield volatility was still the major risk and that tightening regulation will create new opportunities with the start of a new cycle.