It was early November. Enron Corp. was beginning to crumble amid growing revelations of financial malfeasance, and banks were on the hook for billions in loans. Citigroup executive committee chairman Robert Rubin, the former U.S. Treasury secretary, decided to place a call to Peter Fisher, the Treasury Department’s undersecretary for domestic finance.
Conceding that what he was about to propose might be a bad idea, Rubin suggested to Fisher that he call rating agencies and urge them to work with Citi and Enron’s other bankers to find an alternative to an impending downgrade that would portend almost certain bankruptcy for the energy company.
An adept risk arbitrageur who had been co-chairman of Goldman, Sachs & Co., Rubin is a canny executive who made his fortune by being able to read people as well as markets. Presumably, he wouldn’t have risked making such a questionable proposal if he hadn,t believed there was a reasonable chance that Fisher , who, though he didn,t have direct jurisdiction over Enron, had considerable sway over the company’s fate , would go along with his request.
Rubin, in this rare instance, was dead wrong. To the Citibanker’s embarrassment, Fisher responded with an unequivocal no. Enron was downgraded 20 days later and declared bankruptcy on December 2. “It wasn’t a call that I was expecting to get,” says Fisher. “But once the phone rang, did it surprise me? No.” But as he points out, in justifying his stance, “lots of people in financial markets with important exposures to Enron had the time to make adjustments over summer and fall.”
Democrat Fisher is now celebrated in Republican circles as the bureaucrat who rebuffed fellow Democrat Bob Rubi, thus , ironically , sparing the Bush administration potentially great damage on the Enron front. But the more substantial legacy of this fast-rising 45-year-old finance official is likely to derive from three salient circumstances: First, he is the U.S.'s chief borrowing officer; second, as Rubin shrewdly recognized, he is the Bush administration’s point person on Wall Street; and third, he is seemingly not at all averse to acting on impulse when carrying out his reformist agenda , market, and sometimes political, sensibilities be damned.
For instance, in barely nine months in office, Fisher has alternately delighted and outraged bond market participants by spontaneously issuing ten-year Treasury bonds to clear a market logjam and then scuttling the Treasury’s traditional benchmark 30-year issue, deeming it past its time. His high-handed actions, says one bond trader guardedly, “have given Fisher a reputation as someone who marches to his own music.” Notes Louis Crandall, chief economist at New York,based bond consulting firm Wrightson Associates: “Being noticed is something Fisher does very well. It is an understatement to say that he is not wedded to the status quo.” Others feel that Fisher is more of an outright menace to the markets. “There is still a bad feeling with respect to the elimination of the 30-year bond,” says Stephen Stanley, a senior markets economist at Greenwich Capital Markets, a Connecticut bond trading firm.
One way or another, the bond markets had better brace themselves for more of Fisher. He has begun a drive to make Treasury auctions more efficient and to update outmoded but hallowed practices, such as informing dealers when they have submitted faulty bids. This summer he is expected to play a pivotal role in the Bush administration’s controversial effort to raise the federal debt limit. He will also be laying out the administration’s position on the contentious matter of reforming Fannie Mae and Freddie Mac. And Fisher has cleared space on his crowded agenda to tackle the pressing issues of bond market volatility and the lack of liquidity in swaps and options.
Fisher ended up at the Treasury via a circuitous route that never passed through Wall Street. He comes from a distinguished family of lawyers. A great-grandfather, Walter L. Fisher, served as secretary of the Interior under president William Taft. Grandfather Walter T. Fisher co-founded the American Civil Liberties Union. Peter Fisher’s father, Roger Fisher, worked in the Solicitor General’s office during the Eisenhower administration and is a scholar of negotiation and professor emeritus at Harvard Law School.
Fisher grew up in the academic milieu of Cambridge, Massachusetts. He struggled with dyslexia but attended Concord Academy (where he became friends with fellow student Caroline Kennedy) and went on to Harvard College as a history major. His first job after graduating , working on the AT&T Corp. breakup at a Boston consulting firm , got him interested in regulation. He liked economics but decided law better suited his bent.
After getting his degree from Harvard Law in 1985, he joined the Federal Reserve Bank of New York and remained there until his appointment to Treasury. He received his first assignment in the bank’s legal department from his future wife, lawyer Mary Sue Sullivan. He was soon being viewed by his Fed colleagues as something of a wunderkind. Two of Fisher’s biggest achievements were cleaning up the repo market and creating liquidity options to tide the market over Y2K. But he’s also credited with having prevented a potentially catastrophic market collapse when he encouraged banks to cobble together a $3.65 billion bailout for overextended hedge fund Long-Term Capital Management.
Fisher was recommended for the Treasury job by none other than Alan Greenspan. The Fed chairman got to know him when Fisher made presentations at Federal Open Market Committee meetings. The administration wanted someone in Treasury with a knowledge of the markets. “Peter’s years at the Federal Reserve give him detailed knowledge and experience to draw on as we examine policy initiatives on any number of fronts,” says Treasury Secretary Paul O,Neill.
As debt manager for the Treasury, Fisher’s primary responsibility is to finance Washington’s borrowing needs at the lowest cost , the U.S. will pay some $164 billion in interest this fiscal year , while maintaining liquidity and efficiency in the $3.4 trillion Treasury market. His predecessors proceeded ultracautiously, careful to avoid spooking the markets and thus jeopardizing the stability that is crucial to Treasuries, benchmark status. Fisher, however, hasn,t hesitated to rattle every cup in the china shop.
Take the 30-year bond. No one disputed that it had lost some of its luster in recent years as government deficits became surpluses and the supply of the bonds dwindled; bond dealers themselves had debated the case for scrapping the 30-year. Still, with the return to federal deficits post,September 11, few expected the Treasury to summarily do away with the long bond. And even if it were to be put out to pasture, traders expected Fisher to provide ample warning. For example, he might have raised the issue at the Treasury,s quarterly refunding meetings with the Borrowing Advisory Committee, the group of 21 prominent dealers and investors that counsels the Treasury, before simply announcing it as a done deal.
Cultivating consensus, however, isn,t Fisher’s style. He was convinced that the increasingly illiquid 30-year bond was not necessary from a debt management point of view. “We want to make sure that we have a portfolio of liquid instruments on all points of the curve at which we borrow,” he explains. “Given our likely borrowing needs over the coming years, the 30-year didn,t fit.”
So on October 31, during the quarterly refunding press conference, Fisher proclaimed that, effective immediately, the Treasury would cease to issue 30-year bonds. Dealers and traders who were short the bonds suffered sharp losses as they spiked almost six points , the most since the stock market crash of 1987 , as traders snapped up the suddenly scarce bonds and those with short positions rushed to unwind them.
“Anybody making markets or selling the bonds lost money,” says one still-fuming dealer. “Whenever you have a market reaction like that, policy has failed. Those are the situations Treasury likes to avoid. It means a more volatile issuance environment.”
Fisher misjudged the delicate politics of dealing with the bond community. “We felt the Borrowing Advisory Committee allowed us to prepare the market for changes, and we thought of it as potential political cover,” confides Fisher’s predecessor at Treasury, Gary Gensler. “Fisher has yet to see it in this light, and that has probably made his time in the market more difficult.”
Angry bond dealers warned darkly that if Fisher persisted in his imperious behavior, Treasury actions would become so unpredictable that they could erode the advantage the U.S. now enjoys over other countries in setting the global standard for pricing debt. “The largest issuer in the market needs to be orderly and predictable. If Treasury adds volatility, people could lose faith in the market,” says another dealer. “The 30-year was clearly fumbled.”
Of course, as many dealers and traders are quick to point out, uncertainty also means that taxpayers could wind up having to pay more to underwrite the public debt. “The bridge to the markets was broken,” declares one trader. “Now Fisher has to rebuild it. He has to strike a balance between predictability and flexibility.”
Fisher has sought to rebuild that bridge. In a series of speeches over the past couple of months, he has tried to clarify his approach to debt management, emphasizing that his objective is “to meet the financing needs of the federal government at the lowest cost over time.” Some see that goal as overly narrow, but Fisher has also stressed that “efficient capital markets are a means to the end of lowest-cost borrowing over time.” And he has made an effort to consult more with bond market participants. Fundamentally, however, lawyer Fisher remains an outsider to the markets , a non,Wall Streeter, a nontrader , despite his eight years running the New York Fed’s open market operations.
Nevertheless, partly by default, he has emerged front and center as the Bush administration’s Wall Street guy. Unlike most Republican presidents, George W. Bush didn,t turn to an authentic Wall Streeter , a Nicholas Brady of Dillon, Read & Co. or a Donald Regan of Merrill Lynch & Co. , to be his Treasury secretary. Instead, he tapped industrialist O,Neill , he ran Pittsburgh-based Alcoa for 14 years , who appears to have a Midwestern businessman’s disdain for financiers and their ilk. Last year O,Neill notoriously described traders as “people who sit in front of a flickering green screen,” who are “not the sort you would want to help you think about complex questions.”
If there were any doubts that Fisher is the Bush Treasury,s liaison to the financial community, they were erased during the days and weeks after September 11. Fisher had been in office barely a month when the terrorists struck. He was bundled off to a secure site and began working the phones to try to get the markets , especially the stock market , going again.
Immediately after the attacks, Wall Street chiefs were anxious that Fisher and the other members of the President’s Working Group on Financial Markets , Securities and Exchange Commission chairman Harvey Pitt, vice chairman of the Federal Reserve Board of Governors Roger Ferguson and Commodities Futures Trading Commission chairman James Newsome , issue a statement indicating that the stock and bond markets would remain closed on September 12. Japan,s markets were due to open in a few hours, and firms needed to be made aware that they couldn,t trade U.S. securities over the counter and expect clearing and settlement. The statement was issued by 5:45 p.m. on September 11.
Early on the morning of September 12, Fisher and Pitt, after conferring with White House officials, hopped an Amtrak train for New York. The White House, concerned about a loss of investor confidence, determined to have the stock market reopen as soon as possible. Fisher had instructions to work with Pitt and New York Stock Exchange chief Richard Grasso to get trading restarted. “Harvey packed a clean shirt and a toothbrush, and I didn,t,” recalls Fisher.
While on the train Fisher spoke to major dealers to make sure that the bond market, at least, would be back in action by the following day. “Peter and his leadership were critical” in getting the market going again, says Bond Market Association legal counsel Paul Saltzman, who worked with Fisher that week.
Reopening the stock market proved more challenging. Pitt set up a meeting with major Wall Street firms at Bear, Stearns & Co.,s Midtown headquarters. “It was a very hard meeting,” says Fisher, who along with Pitt was pushing to have the stock market reopen on September 13. “The outcome was not to open the equity markets on the next day. I was urging the Street to get up and running as quickly as possible. I am sure that there were some who didn,t like that, who felt I was being too pushy.”
Wall Street firms weren,t sure that they had the sheer technical capacity to open and didn,t want to commit to a date. According to participants at the meeting, Merrill chairman David Komansky and Lehman Brothers chairman Richard Fuld were extremely pessimistic about resuming trading quickly: Both their firms, New York headquarters had been damaged in the attack.
“We realized that we had a mix of technology and infrastructure issues and human issues all getting wound up together,” says Fisher of the September 12 session. “People didn,t know if they could get into their buildings, if they would have telephone capacity, electrical capacity.” Fisher helped arrange a meeting for the following day that brought together representatives from the mayor’s office, the governor’s office, phone company Verizon Communications, the NYSE and the New York Fed.
This so-called infrastructure group convened at the NYSE on the morning of September 13. It was Fisher’s first sight of Ground Zero. “It was a surreal experience,” he says. “Once we got to the corner of Broad Street and Wall Street, I saw that it was under an inch of mud. There were army guys with M16s and Humvees driving around, and someone handed me a paper mask for the ten steps to the building. It was like being inside a movie about a war zone.”
That afternoon the heads of the Wall Street firms got together again, this time at Credit Suisse First Boston Corp. headquarters. Assured that the necessary infrastructure would be in place, they agreed that the stock market would reopen the following Monday, September 17, after a weekend of testing. “Fisher was a terrifically effective partner to the private sector,” says NYSE chief Grasso.
Their work in New York done, Fisher and Pitt boarded a late afternoon train to Washington. Pitt looked at the disheveled Fisher, who was wearing the same clothes he,d arrived in. “Nice shirt,” he drily remarked.
The White House was impressed with Fisher. “He really shined after September 11,” says Marc Sumerlin, deputy director of the National Economic Council. “He was the lead guy for the administration in getting markets opened. He did incredible work. People were in a panic, and he was very confident and precise.” When insurers canceled liability coverage for the airlines, Sumerlin adds, Fisher negotiated a bill with the House and Senate to keep the planes flying , “and he did it in two days.”
Fisher’s labors weren,t over, however. Out of the corner of his market-attuned eye, he saw trouble developing in the multitrillion-dollar repurchase agreement market. Critical to bond dealers and money managers, which use repos to finance their huge positions, the market had begun showing signs of strain. Were it to have collapsed, the whole bond market would have been starved for liquidity, very possibly triggering a financial panic.
In a typical repo transaction, bond market participants borrow money overnight by pledging five- or ten-year Treasuries as collateral, then repurchasing the bonds at the end of the loan for cash and a slight premium , the repo rate.
Though the bond and repo markets were badly rattled by September 11, they had resumed operating within 48 hours. But in the weeks that followed, the repo market showed a disturbing pattern of failed trades, in which market participants lending short-term money were unable to find securities to clear trades. Nervous investors, including many who had gathered up Treasuries for safety following September 11, were unwilling to lend their bonds. Other bondholders, worried about failed trades, also clutched their securities tightly. A chain reaction of fails was building.
Wall Street dealers reassured Fisher that the situation would improve by the end of September, once the wave of anxiety over the terrorist assaults had subsided. But the number of failed trades continued to climb. “We were hoping that when we got past the quarter end and into October, the fails would decrease,” recalls Fisher. “Instead, we saw a building up of fails in both ten-year and five-year Treasury notes during the first days of October.”
Fisher felt he had three options: Do nothing; create a repo facility at Treasury that could lend out and repurchase five- and ten-year notes from dealers; or increase the supply of the bonds by “reopening” an issue , that is, issuing additional bonds of the same maturity. Fisher discussed the options with the Borrowing Advisory Committee. Some favored creating the repo facility, but Fisher decided that this would be unfair to investors who wouldn,t have direct access to the Treasury’s supply. On October 6, his mind made up, Fisher took the unprecedented step of holding an unscheduled auction of $6 billion in ten-year Treasuries.
It was a bold, even brash, thing to do. But it worked. The number of fails began to decline. Most bond market participants, who ordinarily hate surprises, applauded Fisher’s action. “The ten-year took a lot of guts. The market needed that, and it was the right thing to do,” says Thomas Connor, head of Treasuries at J.P. Morgan Securities.
But it’s tough to be a hero for long with bond traders. Some grumbled that Fisher should have auctioned five-year T-bonds as well. Others worried that he had introduced a new uncertainty into the market and that this was going to be the hallmark of his tenure. Some dealers were miffed that he hadn,t followed their advice and set up a repo facility.
Despite such grumbling, the ten-year auction was generally viewed as a triumph. Fisher’s next dramatic move , dispensing with the 30-year bond on October 31 , plainly wasn,t. Many felt that it displayed the dismaying downside of his extemporaneous style.
Adding fuel to the fire were revelations that Peter Davis, an independent consultant who had been attending Treasury press conferences for years, was in the briefing room during the announcement that the 30-year bond would be eliminated and, allegedly, leaked that sensitive information to clients. The information was embargoed until 10 a.m., but the long bond rose 1.5 points between 9:30 a.m., the end of the press conference, and 10 a.m.
“Coming on top of everything else, the Pete Davis thing just added to the controversy,” says a trader who, like many others, believes the entire episode was badly managed. Indeed, the Treasury violated its own embargo that morning when it posted the news on its Web site at 9:43 a.m. The SEC has reportedly informed Davis as well as Goldman Sachs and MFS Investment Management that it is considering pursuing legal or administrative measures against them. “We continue to believe there is no basis for charges,” says a Goldman spokeswoman. MFS will only confirm that it is under investigation.
Some market participants suspect that abolishing the 30-year bond was really a failed attempt by Fisher to force long bond rates down, something the Fed hadn,t been able to accomplish by easing monetary policy. He also draws flak for dumping the bond just as the government was facing deficits.
Still, many traders concede that eliminating the 30-year wasn,t necessarily a bad idea. Fisher’s predecessor, Gensler, had already begun curbing issuance of long bonds in preparation for just such a move. “If people had paid attention to what Fisher had said in the past, they would have known it was coming,” says John Roberts, New York,based Treasuries head at Barclays Capital. “Maybe there are some sour grapes, but Fisher was doing the right thing for the market at the right time in preserving liquidity.”
Good move or not, canceling the 30-year bond clearly discombobulated dealers, traders and investors alike. Markets were just recovering from September 11, a big fiscal stimulus package was in the works, and Fisher had pulled his surprise ten-year bond auction only a few weeks before. “Treasury historically proceeded cautiously, moving deliberately to prevent markets from being caught off guard,” points out Anthony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York. “Fisher creates uncertainty by doing things seemingly unilaterally. He’s got the maverick mentality that many say Paul O,Neill has. His ideas may be good, but they need to be implemented more cautiously.”
Fisher appears unfazed by all the fuss. He notes that the Bond Advisory Committee had debated doing away with the 30-year bond for two years. And given the issuance calendar, Fisher says, his next opportunity to stop offering the illiquid long bonds wouldn,t have been for another year.
“The 30-year bond was a dangling participle,” he says. “Its liquidity had already been eroded by the reduced issuance and by the market’s switch in focus to the ten-year note as the benchmark. I honestly think it would have bordered on the irresponsible to leave it out there any longer. Compared to the instrument people thought it was, its liquidity was so impaired that it was an accident waiting to happen.” The bottom line, he adds pointedly, is that “no one has said that it wasn,t in the taxpayers, interest.”
The administration’s admiration for Fisher has yet to translate into more power. According to a senior Republican congressional aide, Fisher is “seen more as a technocrat than as having a big role in setting policy. He’s a team player who is seen as having done well overall, but he’s not yet a power broker.”
Fisher, however, will have plenty of chances to be thrust into the limelight. For one thing, he needs to switch Treasury’s tack from dealing with surpluses to financing deficits without upsetting the markets. And he’s determined to bring greater transparency and efficiency to the borrowing process. “Fisher is a modernizer,” says Barclays, Roberts. “The old-line guys just don,t want to change.” Count on continuing controversy.
