Marathon sees Wall St banks down for many miles

By Joseph A. Giannone

NEW YORK (Reuters) - Wall Street investment banks face a period of contraction and challenge for as long as 18 months, as markets take time to adjust to a flood of distressed corporate and real estate assets, Marathon Asset Management Chief Executive Bruce Richards told Reuters on Wednesday.

Most major investment banks have been on the defensive since last summer, when an exodus of buyers left bank lenders and underwriters stuck with illiquid assets clogging their books. The impasse has triggered about $200 billion of write-downs.

Bank executives in recent weeks have touted their progress in cleaning house, yet Richards, a former DLJ trader who launched his own hedge fund and private equity firm 10 years ago, said Wall Street banks have a long way before recovery.

"Just because the banks sell down their leveraged loans doesn't mean they all of a sudden become lenders again," Richards told the Reuters Hedge Funds and Private Equity Summit. "They have so many other problems with the business."

Richards outlined a grim outlook for financial markets, noting a glut of property and other assets with few buyers. Banks, which traditionally stepped in as buyers and lenders, are too busy licking their wounds from last year.

And firms are less likely to buy distressed assets for their own accounts, because too many got burned last year. Markets, Richards said, will not recover until Wall Street balance sheets are repaired, leverage ratios are tamed and prices fall low enough to lure cash away from the sidelines.

Richards estimates that could take 12 to 18 months.

"It's going to be a while because the balance sheets need to be marked down. Risk needs to be managed. They need to get to a point where they're making money again," Richards said. "Investment banks are money-making machines that right now are semi-broken."

With the possible exception of Goldman Sachs, investment banks are all shedding assets, shrinking the balance sheet and hoarding capital. These can help take pressure off balance sheets that are leveraged as much as 30 to 1.

"You have to fix the machine, get rid of the worst that's on the balance sheet, get your businesses restarted and then underwrite risk," he said. "The CLO machine will have to restart," he said, referring to the return of collateralized loan obligation vehicles that buy up loans.

But for these things to happen, prices have to fall to levels un-leveraged buyers find attractive, said Richards. Marathon, which manages about $11 billion in assets, runs funds scouring the market for distressed assets.

Restoring the market to health will require the return of buyers. That process starts with central banks like the Federal Reserve providing unprecedented amounts of liquidity, followed by investors diving back in to the market.

"There's lot of money in the world, whether from Asia, the Middle East, Europe or Latin America," or from U.S. money managers," he said. "Prices just have to adjust to levels that make sense."

(For summit blog: summitnotebook.reuters.com/)

(Reporting by Joseph A. Giannone, editing by Richard Chang)