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NewsRedwood Capital Group's CEO, Gregory Bedrosian, speaks at Crain's New York Business Economic Forecast Breakfast01.31.08 New York, January 31, 2008 – Redwood Capital Group, a leading investment banking firm serving the technology, communications and media industries, reported that the firm’s Chief Executive Officer, Gregory Bedrosian, spoke today at the Crain’s New York Business Economic Forecast Breakfast entitled “What’s Ahead for New York in 2008?” Crain’s New York Business Editor, Greg David, moderated the panel and Gregory Bedrosian led a discussion related to trends and themes for Wall Street and the financial services sector in New York City for 2008. Highlights of his presentation are included below. Good morning and many thanks to Greg David and everyone at Crain’s for hosting this important and timely event. By way of introduction, I am Gregory Bedrosian, co-founder and CEO of Redwood Capital Group. We are an investment banking firm headquartered here in New York City serving the technology, communications and media industries. We focus on mergers & acquisitions, corporate finance advisory and private equity for our clients on a worldwide basis. When Greg David reached out to me earlier this month to invite me to participate in this forum, I knew the topic of Wall Street trends for 2008 would be interesting. The events in the capital markets and in Washington over the course of the month of January have made it even more timely and provocative. Let me start with a brief personal anecdote. I was recently at a meeting with a partner of a New York-based private equity firm which specializes in investments in banks and other financial institutions. A question came up as follows -- “Is reality really as bad for the banks and investment banks as the all of the media headline hype?” He immediately shot back with his answer – “No… reality is much worse than the media hype!” The current difficulties in the credit markets which are severely impacting Wall Street have been called many things by industry players and pundits. George Soros recently called this “The worst market crisis in 60 years,” and Soros continued by saying “This is not a normal crisis but the end of an era.” So, the question this morning is what do we think will be the key trends and themes for Wall Street and the broader financial services sector in New York City for 2008? We are all aware of the unprecedented $100 billion in write downs that the major Wall Street banks have announced over the past few quarters. We are also all aware of the more than $40 billion of equity capital these banks have secured from sovereign wealth funds and other investors to shore up their balance sheets. Over the past 13 months, Wall Street bellwethers Citi and Merrill Lynch have seen their stock price fall 47% and 38% respectively. Citi alone has lost over $130 billion of market value since January 2007. How do we see 2008 developing? We believe the first half of 2008 will remain extremely challenging for many of the bulge bracket Wall Street banks. However, we do see gradual improvement during the second half of 2008 and heading into 2009. There are 5 key themes to keep in mind for 2008 – Wall Street is not out of the woods yet. Theme 1 – There may be more write downs to come Even after the substantial balance sheet purging, there may still be more write downs to come for some of the leading Wall Street banks. For example, today Citi still has approximately $20 billion of mortgage-related exposure on its balance sheet, and Merrill Lynch still has approximately $18 billion of mortgage-related exposure. Former US Treasury Secretary Lawrence Summers put it well when he recently commented “I am particularly worried that there are some growing indications that the same bond sitting in different financial institutions is being marked and evaluated in very different prices.” Theme 2 –Credit card and consumer loans – the other shoe to drop? If 2007 was the year of sub-prime mortgage crisis, 2008 may be the year of credit card and consumer loan delinquencies – further impacting those banks particularly exposed to consumer businesses and impacting overall consumer-driven economic growth. John Thain, Merrill Lynch’s new CEO recently said “The problems in the credit market are spreading, they are spreading to the consumer sector.” Thain continued by commenting, “We are likely to see another wave of problems on the consumer-credit side.” Theme 3 – The “R word” - Recession While the economists and pundits have varying predictions for 2008, based on the current data, we feel that the US economy will experience a mild recession in 2008. It will probably last 2-3 quarters and we are likely entering the beginning phase of this recession now during Q1 of 2008. It is important to emphasize that various industries will be impacted to different degrees – with the housing, automotive and financial services sectors being more severely impacted than the energy and technology sectors. The good news is that by the end of 2008 or early 2009, we feel that we will be gradually growing out of the recession -- global demand from the rest of the world and domestic stimuli -- the Fed’s significant rate cuts and Washington’s planned $150 billion stimulus package -- will likely help keep any recession relatively mild and short lived. Theme 4 – Don’t expect much consolidation amongst the big Wall Street firms in 2008 There has recently been much speculation that the banks which weathered the recent storm best, such as Goldman Sachs or JPMorgan, might be acquisitive during 2008. We actually don’t anticipate any mega banking mergers in the near term. With new management taking over at Citi, Merrill Lynch, Bear Stearns, and elsewhere, it seems unlikely that these new leadership teams would advocate a major tie up without first trying to successfully implement their own strategic plans during 2008. The wild cards might include those international banks actively seeking to acquire a major Wall Street firm. This might be some of the mega-banks in Asia, including major Japanese or Chinese banks, if the strategic rationale can be demonstrated and if politics don’t get in the way. Theme 5 - Don’t underestimate the resilience of Wall Street! As Alex Pollack of the American Enterprise Institute commented on the current environment, “Foreign investment [into Wall Street firms] is a symbol of past mistakes but also of somebody’s view of future potential.” Whether it was the high yield bond era of the 80s, technology IPOs in the late 90s or the private equity, hedge fund and credit market rise of the 2000s, Wall Street consistently attracts some of the most entrepreneurial and creative minds in the business world. It is only a matter of time before Wall Street recovers and identifies the next financial innovation or “new new thing” on its path to even greater opportunity for its clients, its people and for the economic development of New York City. About Redwood Capital Public Relations |
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