Now, you shouldn’t need a law to tell someone that if you are buying a loan from a bank, that is going to stop being on the hook and probably knew it was going to get off the hook — and as a consequence might not have been concerned with long-term credit worthiness — you should pay less for it or maybe not consider buying it. Thus buyers’ behavior should police the market, and we shouldn’t need regulation. It’s easy to say that. And that is the way the world should be. But the world is not often the way it should be, and in the last go around, certainly people did not take enough cognizance of the fact that mortgage generators were making loans and packaging and selling them onward in a way that introduced moral hazard. It would be nice not to need regulation. I went to the University of Chicago which talks about the wisdom of the free market, and sometimes that proves to be an oxymoron, and the market does not function as wisely as it should. Do we need laws to protect people from themselves, and do we want them? That is an interesting philosophical question. I believe that in the long run, the free market is the best allocator of capital and resources. And we should leave it alone. But the interesting thing about the world we live in is that there is always another hand. And on the other hand, if you let the free market operate freely and achieve that great long-term allocation of resources, you are going to have some chaotic periods in the short run. And you are going to have bubbles and crashes. Some part of us says we don’t want to endure that. So in order to avoid bubbles and crashes, you probably need regulation to moderate behavior. And you know, I’m in the financial industry, but that doesn’t make me say zero regulation is always the right thing. At the bottom line, I don’t think the entire financial industry covered itself with distinction in the years leading up the crisis. Stephen Renna: So going back to my question, do you think that the level of regulation that has resulted, whether it is the Basel rules or Volcker or risk retention, is the pendulum swinging too far? Howard Marks: Personally, I probably don’t. I’m not familiar enough with the details to say that it has or hasn’t gone too far, but I think the idea of risk retention is not a bad thing. And given people’s naiveté, it does seem to be required. And the idea that banks, which are systemically important and would have to be bailed out if they got into trouble, should not engage in adventurous proprietary activities doesn’t seem silly to me. Stephen Renna: Okay, fair enough. And just a couple more questions, Howard, and thank you again for your time. One of the things we are doing right now is surveying our members with respect to the market outlook for 2015. Do you care to discuss what you have experienced in 2014 from an investor’s perspective and what you anticipate 2015 to bring? Howard Marks: Well, first of all, I want to point out that I don’t believe in forecasts, including my own. Secondly, while we might talk about what should happen or might happen, we never know CRE Finance World Winter 2015 20 what will happen and we absolutely never know when it will happen. So when you say next year as opposed to this year or 2016, I get a little squeamish. But right now, we see a high level of liquidity, and we have a wideopen capital market in which it is easy for people to access money. And this has an appearance, as it always does, of a virtuous circle in which business conditions are good, which makes the capital markets generous, which contributes to the good business conditions, et cetera. And right now, you can’t think of anything that is going to make defaults rise or capital become in short supply. Historically, however, that has always been the case. Eventually, someday, defaults go up, capital markets become tighter, and people who have to refinance have more trouble doing it, and it gets harder to start new businesses and finance new projects and so forth. It’s hard for me to sign off on what is going to happen in 2015. It is hard to imagine what is going to make things turn negative in 2015, which is very different from saying it’s not going to happen. But eventually, business conditions will get less good, and eventually people who are holding assets will probably say, “I should have sold six months ago.” Unless they are real estate dynasties. But I certainly wouldn’t say it is going to happen in 2015. Stephen Renna: Well, this next question might be something that you can predict with a little more certainty. Have you decided on the topic of your next client memo? Howard Marks: I have not. If I had a good idea, I probably would have written it by now. Stephen Renna: Howard, we also wanted to give you an opportunity to raise a topic that you would like to speak to that we haven’t addressed. Certainly, we haven’t covered all issues of investing. Is there anything that you would like to comment on at this point? Howard Marks: No, I don’t have anything in mind, Steve, I think your questions have covered a lot. Very few trees grow to the sky and I think people already are cognizant that most things are cyclical. And with that in mind, I think people will do the right thing. Stephen Renna: Okay, well, Howard, this has been terrific. Thank you very much for your time. Howard Marks: Sure. Stephen Renna: I have just one little side question and that is, does your wife really think your client memos are all the same? Howard Marks: She sure does. And I’m starting to think she’s right. Stephen Renna: Well, thank you, again, Howard. This has been terrific. Howard Marks: My pleasure. CREFC Exclusive Interview with Howard Marks
CREFW-Winter Edition
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