NYSE Euronext's Thain sees higher liquidity risk
NEW YORK (Reuters) - Markets face a greater risk for a liquidity crisis than a decade ago, when the Long-Term Capital Management hedge fund collapsed, potentially jeopardizing the private equity takeover boom, NYSE Euronext's (NYX.N) (NYX.PA) chief executive said on Tuesday.
"Right now, we're in a high-liquidity, low-rate, low credit spread environment," said John Thain, who runs the trans-Atlantic exchange, at the Reuters Exchanges and Trading Summit in New York. "That's probably not going to continue forever.
"The combination of money available to the private equity world and the hedge fund world, and that needs to be put to work to earn returns, is what's driving this," he added. "For me, the question is, does this liquidity get drained out of the system, (and) does it happen in an orderly or disorderly way."
Private equity firms buy controlling stakes in companies, restructure the businesses, and often sell a couple of years later, keeping perhaps one-fifth of the profits.
Three of this year's largest announced takeovers have been led by private equity: Texas power company TXU Corp. TXU.N for $32 billion; credit card processor First Data Corp. FDC.N for $26 billion, and student loan provider SLM Corp. (SLM.N) or Sallie Mae, for $25 billion.
Many private equity firms fund takeovers through the issuance of below-investment-grade, or junk-rated, debt.
That's often cheap now. As of Monday, the average junk bond yielded just 7.452 percent, or 2.69 percentage points more than U.S. Treasuries, Merrill Lynch & Co. data show.
In contrast, the average yield was 14.24 percent and average spread 11 percentage points in October 2002, at the depths of a three-year bear market in stocks.
Thain joined what became NYSE Euronext in early 2004. He left Goldman Sachs Group Inc. (GS.N), where he had been president, to join what was then the New York Stock Exchange as chief executive. He later took the exchange public as NYSE Group Inc., and this year merged it with Paris-based Euronext NV.
Thain said a liquidity crisis "probably" requires a "triggering event," but is "certainly a bigger risk today than it has been probably since the summer of 1997."
That summer, many markets grew unsteady as an Asian financial crisis hit currencies and growth in that region.
The following year, a Russian debt default helped trigger a global liquidity crisis, including a rapid widening of credit spreads, that would ultimately undo Long-Term Capital.
Thain said even if credit spreads widen rapidly, markets won't necessarily convulse.
"The risk of a significant market impact is there," he said, "but I don't think it's possible to really guess what the probability is that you get a disruptive type of decline (rather) than a gradual decline."
(For more on the Reuters Exchanges and Trading Summit, see ID:nN07328661
