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Value or Value Trap? Fed Liquidity Will Ultimately Reignite Banks, Herro Says

Posted Nov 10, 2008 07:00am EST by Aaron Task in Investing, Recession, Banking
Related: UBS, CS, XLF, JPM, BAC, C, WFC
The Fed risks falling into a "liquidity trap" if it continues to slash rates and take other extraordinary steps to quell the financial crisis, says David Herro, who oversees about $11 billion as chief international officer of Harris Associates.

A a liquidity trap occurs when policymakers are unable to stimulate economic activity as banks, businesses and consumers hoard cash rather than lending, borrowing or investing capital.

Herro does not believe this worst-case scenario will come to pass, arguing the "dry straw" in the markets will eventually "catch fire," although the timing is uncertain. (In this analogy, all the Fed's liquidity is the lighter fluid.)

One of the most acclaimed value investors on Wall Street - Smart Money named him one of the "World's Greatest Investors" last summer - Herro's fortunes have fallen more recently: The $3.8 billion Oakmark International fund he manages is down 25% year to date, in large part because of holdings in European banks like Credit Suisse and UBS.

In the accompanying video, I asked Herro for his updated views on those banks, which he still own. The fund manager is much more upbeat about prospects for Credit Suisse, which has emerged relatively unscathed from the financial crisis, and generally downbeat about banks that now have big government ownership.