Fixing the Financial Industry

| About: CapitalSource, Inc. (CSE)

Fred Joseph, co-founder of Morgan Joseph had some interesting commentary on the state of the financial industry on Bloomberg last week that I thought would be appropriate to discuss here. The interview with Joseph on Bloomberg can be found below.

Joseph’s commentary is interesting as his firm, Morgan Joseph, is one of the more prominent investment banking firms that spends the majority of its time working almost exclusively with mid and small market companies. His discussion of how these companies are dealing with the turmoil in the credit markets clearly shows that there is still a tremendous amount of work to be done by the Federal Reserve and the Treasury Department in their fight to restore liquidity to the credit markets.

According to Joseph, the current state of government involvement in the operations of financial companies is the “best of both worlds” as it allows the companies to maintain their entrepreneurial spirit while at the same time allowing them to access capital that they desperately need and that would otherwise be unavailable. Such a statement is unequivocally true, as a straight out nationalization of troubled banks would likely trigger another crisis in confidence, similar to what was seen in the fall and in mid January.

During his interview, Joseph also proposed government actions that would support mid and small market firms in their dealings with the credit market. While large market firms have access to the Federal Reserve’s commercial paper programs, mid and small market firms do not. This puts these firms in tight circumstances as they are essentially left with no funding sources. Such a program could easily be structured in such a manner as to allow the government to channel money through regional banks that already pay special attention to mid market firms, such as CapitalSource (NYSE:CSE).

Joseph sees another difficult year ahead and believes that mid and small market firms will be forced to restructure, conduct equity for debt exchanges and undertake debt conversions in an attempt to improve their balance sheets. While companies will undoubtedly be pressed for cash in the year ahead, they will also have enormous opportunities to buy back debt at significant discounts, should they choose to use cash and or credit lines to repurchase debt that is trading at significant discounts to its par value. Overall it is an interesting interview and is worth listening to.

Disclosure: Long CSE