Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm pim
Speaker 1: Fox along with my co host Lisa Abramowitz. Each day
Speaker 1: we bring you the most important, noteworthy, and useful interviews
Speaker 1: for you and your money, whether you at the grocery
Speaker 1: store or the trading floor. Find the Bloomberg pm L
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Speaker 1: There is this headline that crossed the terminal today that
Speaker 1: I thought was fascinating and kind of funny. Gutting Dodd
Speaker 1: Frank is hard to Republicans turn to easier things, things
Speaker 1: like a bill about publishing research on exchange traded funds,
Speaker 1: which is a bit less controversial than rolling back, say,
Speaker 1: all of the banking regulations that were put in place
Speaker 1: in two ten. To get a little bit more perspective,
Speaker 1: Nathan Dean is here with us. He has a government
Speaker 1: analyst for Bloomberg Intelligence, and it is so nice to
Speaker 1: see him in person. He is with us in our
Speaker 1: Bloomberg eleven three oh studio. So, Nathan, how much can
Speaker 1: we really read into this idea? Uh that you know?
Speaker 1: Because there because Congress is focusing on these sort of smaller,
Speaker 1: more bipartisan issues they're just disregarding the idea of an
Speaker 1: overhaul of god Frank. So I don't think they're disregarding
Speaker 1: the idea of an overhaul of Dodd Frank. They're just
Speaker 1: recognizing the fact that it's going to take time. You know.
Speaker 1: I think that the House bill, the Financial Choice Act Bill,
Speaker 1: that the next version two point oh, it was supposed
Speaker 1: to be out in February. Now it's looking like we'll
Speaker 1: be out in March. It may be out in April.
Speaker 1: But I think the congressman's, especially the Senate, they recognize that,
Speaker 1: you know, if we want to replace dot Frank, it's
Speaker 1: going to take a long time. So let's try and
Speaker 1: do some stuff and get it out of the way. First,
Speaker 1: bipartisan bills like a need T F research, opening up
Speaker 1: venture capital funds to more investors. And just today they're
Speaker 1: having a hearing that on the House side about flood insurance. Nathan,
Speaker 1: maybe you can explain this because this also goes to
Speaker 1: the issue of reform for the Affordable Care Act for Obamacare.
Speaker 1: Republicans in Congress were not in favor of Dodd Frank legislation, correct, correct,
Speaker 1: And they've had a fair amount of time to come
Speaker 1: up with an alternative plan. Is that accurate? Correct? So
Speaker 1: where is this alternative plan? Why are they just crafting
Speaker 1: this plan now? So the House has crafted this Financial
Speaker 1: Choice Act very broad. It's never gonna pass it past
Speaker 1: the House and won't pass the Senate. In order to
Speaker 1: get anything past you've got to parrot down, you have
Speaker 1: to get specific. There is bipartisan openness to relieving banks
Speaker 1: below two fifty billion in assets. Correct, exactly, exactly, But
Speaker 1: right now, there's just no incentive to negotiate. I mean,
Speaker 1: if I'm if I'm on the Democratic side, for example,
Speaker 1: why would I negotiate on a DoD Frank bill? You know,
Speaker 1: when there are other things like Obamacare, attacks, reform, infrastructure,
Speaker 1: you know that they want to tackle first. I mean,
Speaker 1: it's not like banks are hurting right now. The fd
Speaker 1: i C put out a report last week saying record profits,
Speaker 1: you know, record small business lending. So does that mean
Speaker 1: that some of the optimism that's been baked into bank
Speaker 1: stocks and bank bonds is per ups a little ahead
Speaker 1: of itself just because there isn't likely to be anything
Speaker 1: in the cards for these very big banks, at least
Speaker 1: within the next set of know eight months, certainly within
Speaker 1: the short term, you know, we don't see any relief
Speaker 1: for the large investment banks coming from Congress in the
Speaker 1: short term. Regulatory side, it's a different matter, but even
Speaker 1: then that's going to take time and process. Gairman Henstling
Speaker 1: has said that this financial regulation is a year one issue,
Speaker 1: but if you look at the Senate side, it's probably
Speaker 1: more a year two issues. So I think if you're
Speaker 1: gonna look and see what can Congress do to replace
Speaker 1: dot Frank, It's not gonna happen this year. It's probably
Speaker 1: gonna happen next year. And if that, that's even if
Speaker 1: they negotiate. As someone who walks the halls of the
Speaker 1: Capital and Washington in general, wanting if you can give
Speaker 1: us who are looking into that bubble world into the
Speaker 1: belt Way a sort of an idea of what has changed.
Speaker 1: There's the tenor changed. I mean just in the last
Speaker 1: let's say a month or so in terms of trying
Speaker 1: to get anything actually out of the House, get it
Speaker 1: approved by the Senate, and get it on the President's desk. So,
Speaker 1: you know, there was this idea that when the new
Speaker 1: Congress takes took shape, that the Senate was going to
Speaker 1: negotiate Senate Democrats were gonna be willing to negotiate. You know,
Speaker 1: there was some toxicity about the Supreme Court choice, etcetera.
Speaker 1: You know that sort of pushed it off. But if
Speaker 1: Senator Creepo and the Senate Banking Committee is looking at
Speaker 1: Capital Form formation and these small bipartisan bills, he's trying
Speaker 1: to build up that goodwill so when that eventual financial
Speaker 1: regulation bill comes, he'll be able to work. Can we
Speaker 1: just get a sense, as somebody who does walk the halls,
Speaker 1: how much goodwill is there at this point between Republicans
Speaker 1: and Democrats? Is there anything? So? Goodwill is probably a
Speaker 1: strong word. But you know, the the Senate in particular
Speaker 1: are full of experienced senators who have faith in the institution.
Speaker 1: They know how to work together. Senator Schumer, Senator McConnell,
Speaker 1: Senator Shared Brown. You know they know that eventually they're
Speaker 1: going to have to negotiate um. You know, so, I
Speaker 1: I still think that it's much less It's certainly toxic,
Speaker 1: but it's much less toxic than if you were in
Speaker 1: the House or if you're dealing with the White House,
Speaker 1: and that it goes with legend, that goes for legislation.
Speaker 1: But as you said, it doesn't really apply to any
Speaker 1: of the regulatory changes that might happen, because that can
Speaker 1: become from an executive order or from many agency changes.
Speaker 1: So the executive orders that Donald Trump put out don't
Speaker 1: apply to the financial regulators, the independent overseen by Congress.
Speaker 1: Yet you know, if I'm at the SEC, or if
Speaker 1: the CFDC in the White House calls me up to
Speaker 1: say follow my executive order, I'm going to say yes.
Speaker 1: You know, I think on the regulatory side, were really
Speaker 1: need to wait until Janet Yellen leaves in February two eighteen.
Speaker 1: When Donald Trump starts getting his own people in mid
Speaker 1: two eighteen, I think you'll start seeing a lot of stuff.
Speaker 1: But before then you're gonna see some small jurisdictional I
Speaker 1: mean small rulemaking, small tweaks. You know, nothing brought or
Speaker 1: any anything like that. Thanks very much for enlightening us.
Speaker 1: And Nathan Dean is a government analyst for Bloomberg Intelligence.
Speaker 1: He knows all about what's going on in Washington. Right now,
Speaker 1: we want to turn to another bit of news on
Speaker 1: President Trump's radar. John Huntsman has been picked by President
Speaker 1: Trump to be his Russian ambassador and to get a
Speaker 1: better sense of what this might mean for US Russian relations.
Speaker 1: I want to bring in Richard Kahan, a managing partner
Speaker 1: at Eurasia Advisors who has intimate knowledge of Russia and
Speaker 1: has boots on the ground, very close sense of what
Speaker 1: is going on there. Richard, what do you make of
Speaker 1: this selection? Well, look, I think John Huntsman is a
Speaker 1: seasoned diplomat, uh, someone extremely well connected politically with the
Speaker 1: Republican Party, and someone who is a very safe, solid
Speaker 1: choice during a period when the last thing Trump needs
Speaker 1: is a messy confirmation hearing. And so I think part
Speaker 1: of the explanation for the choice is the domestic aspect.
Speaker 1: But he's also a very experienced leman who I think
Speaker 1: can do a fine job in terms of representing our
Speaker 1: country in Russia. Um, he does not, as you know,
Speaker 1: have a background, if you will, in the Russian world,
Speaker 1: but former US Ambassador to China, former US Ambassador to Singapore,
Speaker 1: and former governor of Utah. Absolutely so, Uh, this is
Speaker 1: a man of great experience and I'm sure he'll handle
Speaker 1: this posting extremely well. And I think we're lucky, frankly
Speaker 1: to have someone with his level of experience serving our
Speaker 1: country in that capacity. You know, Richard, One of the
Speaker 1: reasons why I was really eager to speak with you
Speaker 1: was because of some of the messiness that we've been
Speaker 1: hearing about the President Trump's campaign with respect to its
Speaker 1: relationship with China. In your opinion of somebody who does
Speaker 1: have a pretty close knowledge and contacts in Russia, do
Speaker 1: you think that there is enough evidence that has already
Speaker 1: been presented to give you a concrete feeling that there
Speaker 1: was some kind of collusion between the Trump campaign and
Speaker 1: Russia to win the US election. I would say that
Speaker 1: I think the wise course at this stage to put
Speaker 1: this behind us, and for the president to put it
Speaker 1: behind him, is to get in front of it by calling,
Speaker 1: for example, for an independent commission to look at it,
Speaker 1: to go forward with disclosure on his own part in
Speaker 1: terms of all of his contacts, all the rumors of compliment,
Speaker 1: anything that could potentially come out, because we are going
Speaker 1: to see an ongoing trickle of information, so I think
Speaker 1: that is the wisest court. Of course. It also will
Speaker 1: help him avoid any issues relating to UH interfering with
Speaker 1: the you know, with an investigation, which as we know,
Speaker 1: it's it's not necessarily the actions themselves, it's the actions
Speaker 1: subsequent that can lead to various legal problems. So I
Speaker 1: think he's asking for trouble by having this handled exclusively
Speaker 1: by a Republican dominated committee, and that then a long term,
Speaker 1: you know, this is only going to lead to a
Speaker 1: longer and more painful situation. But I guess a long
Speaker 1: it's a long way of getting into the answer to
Speaker 1: your question. I do have genuine concerns. I thought it was,
Speaker 1: but no, I am gonna answer. I do think that
Speaker 1: from what I've both seen and what I've heard in Moscow,
Speaker 1: that there is reason to be concerned about this issue
Speaker 1: of whether, uh, the decisions that he made in the
Speaker 1: past and potentially sound that he will make in the
Speaker 1: future are fully independent, or whether they are in part
Speaker 1: influenced by relationships financial or otherwise, or compromat that the
Speaker 1: Russians may have. And Uh, I think it's healthy for
Speaker 1: us to get to the bottom of all of that. UM.
Speaker 1: I regret that that's a situation, but I think that
Speaker 1: that is the case. I wonder if you could comment
Speaker 1: on the state of the Russian economy having come out
Speaker 1: of a recession, and I'm wondering whether you can speak
Speaker 1: to the issue of economic performing in not just taking
Speaker 1: into account the oil sector, because chemical, agriculture, machinery, food. Uh,
Speaker 1: what is the state of the Russian economy right now?
Speaker 1: The Russian economy has largely been frozen for some period,
Speaker 1: has been compared often to the bression of years. The
Speaker 1: financial markets really have not been functioning. This is in
Speaker 1: part due, of course, to sanctions, but that's not the
Speaker 1: entire story. It's also due to just the sense of anuih,
Speaker 1: the freezing, if you will, of the initiative in that environment,
Speaker 1: because people recognize that if they build a company and
Speaker 1: have success, that ultimately some government related entities will seek
Speaker 1: to obtain control of that. So I was I was
Speaker 1: hoping to lead you down to military spending, because the
Speaker 1: Russians of this said that they are going to increase
Speaker 1: the military spending, but also the way that they calculate
Speaker 1: GDP has changed and they now include military spending as
Speaker 1: part of that GDP report. Well, first, let me say,
Speaker 1: Russian military spending is a fraction of what we spend. Uh.
Speaker 1: The statistics I've seen is somewhere in the area of
Speaker 1: maybe six to seven percent of what we spend on
Speaker 1: on on our defense spending. And indeed, the increase that
Speaker 1: is now being proposed by the current administration would be
Speaker 1: in the amount of the total amount of what Russia
Speaker 1: spends on defense. UH. So, you know, Russia is not
Speaker 1: in a position to compete with US on defense spending,
Speaker 1: but we're already in a position that dramatically exceeds anything
Speaker 1: that the Russians can put up on all sorts of
Speaker 1: military fronts. I want to thank you very much for
Speaker 1: joining us. Richard con he is managing partner for Eurasia Advisers,
Speaker 1: giving us some detail about the United States relationship with Russia,
Speaker 1: maybe pointing out that John Huntsman Ambassador, he's been selected
Speaker 1: to be the U s Ambassador to Russia by President
Speaker 1: Donald Trump. Perhaps he can change the relations and with
Speaker 1: more and more positive note. Is your phone spying on you?
Speaker 1: That is the big question of the day. I want
Speaker 1: to bring in David Garrity. He's CEO of g v
Speaker 1: A Research, also a columnist at Investo PDA. Uh he
Speaker 1: is here with us in our Bloomberg eleven three oh studio.
Speaker 1: And David, I know that you're interested in talking about
Speaker 1: Alphabet's launch of Android android messages, but I kind of
Speaker 1: feel like we have to start with the recent CIA
Speaker 1: leaks and the emphasis that that's placed on security, particularly
Speaker 1: with respect to your phone. David, do you expect that
Speaker 1: this new emphasis on potential hacks could alter the landscape
Speaker 1: for demand for Androids versus iPhones? Well, certainly, I will
Speaker 1: lead to a greater demand for more secure software. And clearly, Android,
Speaker 1: with about eighty eight percent share of globally installed smartphone
Speaker 1: operating systems, is a big target where and it's easier
Speaker 1: to break into the Android than the iPhone currently. Yes,
Speaker 1: it is. And to the extent that you have anyone
Speaker 1: of a number of smartphone original equipment manufacturers or o
Speaker 1: e m s who have been taking the basic Android
Speaker 1: software system and then custom tailoring it. In the process
Speaker 1: of doing that, they may also have created further security risk,
Speaker 1: which is what helps assist hackers in terms of getting
Speaker 1: access to Android powered phones. David Garty, I mean, I'm
Speaker 1: not going to pursue the security issue for the time
Speaker 1: being because I mean, everybody knows that you know, everything
Speaker 1: is hackable, right, I mean, there's nothing that is not hackable.
Speaker 1: Although hold on a second, because I think it will
Speaker 1: make a difference if people are focusing more on this,
Speaker 1: it might determine whether they decide to buy an Android
Speaker 1: or an iPhone. I mean that's my point, all right,
Speaker 1: Well so okay, well good, well let's take that, because David,
Speaker 1: I want you to talk about the different marketplaces for
Speaker 1: Apple iOS devices and Android operating system devices, because I
Speaker 1: understand that the Android operating system device that's a mid
Speaker 1: to lower market price point, that's going to be a
Speaker 1: lot of a lot more growth there than it is
Speaker 1: going to be at the higher end. And that's a
Speaker 1: de facto Chrome experience, right Google out of Chrome, and
Speaker 1: then that's a Google Search experience. And now I want
Speaker 1: you to tell us about messaging because they also want
Speaker 1: that to be a Google experience. Yeah, certainly. I mean,
Speaker 1: with respect of messaging, we've been seeing essentially a shift
Speaker 1: in terms of people's communication away from email and over
Speaker 1: towards messaging. It used to be SMS messages, but it's
Speaker 1: really more taking place within I Message, Android or Google's
Speaker 1: problem with respect to messaging was again this proliferation if
Speaker 1: you will, across various handset O E MS. They needed
Speaker 1: to establish a standard out. They have a product that's
Speaker 1: been coming onto the market called Android Messages. They're trying
Speaker 1: to acquire a certain base experience and standard that applies
Speaker 1: across all Android instances, so they can be as competitive
Speaker 1: as say Apple's EYE message has been. And understand, Apple
Speaker 1: I Message has recently generated about sixty three quadrillion. That's
Speaker 1: ten to the fifteen Power messages per year, or to
Speaker 1: put it differently, that's two hundred thousand EYE messages per
Speaker 1: second that are being sent. So that's an ecosystem that
Speaker 1: has a wall around it because I understand you know,
Speaker 1: if you do not have an iOS phone, you're not
Speaker 1: getting anything but those I Well, if you have let's
Speaker 1: say an I uh Touch or at iPad or something,
Speaker 1: then you're inside the Apple ecosystem. Yes you are, and
Speaker 1: to the extent that you're obviously sending to someone who
Speaker 1: has an Apple device. On the other side, it's all
Speaker 1: gonna be done within I message. That doesn't say that
Speaker 1: you have messages incent outside they will be sending text messages.
Speaker 1: But yes, your points correct. We've a lot about sort
Speaker 1: of the saturation of mobile phones, and I'm wondering from
Speaker 1: your perspective, is there anything that Alphabet could do, or
Speaker 1: frankly even Samsung or Apple to change that or to
Speaker 1: sort of suddenly change the landscape and cause people to
Speaker 1: buy more iPhones or um or or greatly expand potential
Speaker 1: places where people use them. Well, this has been a
Speaker 1: problem certainly, you know that the smartphone market has been
Speaker 1: bumping up against and the whole knock on Apple had
Speaker 1: been the fact that their market was saturated, and you're
Speaker 1: looking at users who were holding onto their phones for
Speaker 1: a longer period of time just because of the cost
Speaker 1: relative to their incomes. And you know, Jason chafe It's
Speaker 1: comment about sort of saying well they should buy healthcare
Speaker 1: premiums and not iPhones, you know, certainly goes over like
Speaker 1: like a lead balloon. But it does touch on the
Speaker 1: fact that you know, smartphones have become more expensive. Clearly
Speaker 1: we're looking more in growth in other areas being able
Speaker 1: to apply these software systems to the Internet of things,
Speaker 1: which is where you are to raise more concerns having
Speaker 1: to do with some of these security elements that you
Speaker 1: were talking about earlier. But I would make one point
Speaker 1: is that while technology itself is capable of being hacked,
Speaker 1: we know from the experience around the Democratic National Committee
Speaker 1: last year that is really more human behavior which is hackable,
Speaker 1: not necessarily the devices. So if people are concerned about
Speaker 1: their security. The first thing they need to do is
Speaker 1: look to themselves and how is it that they're interacting
Speaker 1: with technologies? How is it that they control the information
Speaker 1: that they either access or create themselves? With respect to that,
Speaker 1: is there a differential between messaging versus phone voice phone
Speaker 1: over the phones? You know what I mean? As far
Speaker 1: as hackability, well, to the extent that I messages are
Speaker 1: are encrypted. And it's something where Apple in dealing with
Speaker 1: the San Bernardino massacre. You know, Apple had taken a
Speaker 1: stand that they didn't want to provide access to the
Speaker 1: shooters phones and their devices. Um. You know certainly in
Speaker 1: that respect now that there are hacks that were found
Speaker 1: around it. Um, but Apple tends to be more secure
Speaker 1: in this regard relatives, say to an Android. And certainly
Speaker 1: if you looked at voice communications, you know, for for
Speaker 1: an encrypted voice call, uh, you'd have to go to
Speaker 1: a special hand set. So from that standpoint, you would
Speaker 1: be interestingly enough find that messaging, say on an Apple platform,
Speaker 1: tends to be more secure relative to other means of communication.
Speaker 1: I want to get your thoughts on investing in Alphabet,
Speaker 1: the parent company of Google. Here's a stock that is
Speaker 1: up about nine percent so far this year. And I
Speaker 1: just love this comparison. In two thousand seven, Google's revenue
Speaker 1: was sixteen and a half billion revenue two thousand sixteen
Speaker 1: over nine billion. This is a company went sixteen and
Speaker 1: a half to over nine billion, and it's still growing
Speaker 1: at double digit rates. Yes, And from that standpoint, I mean,
Speaker 1: the big search applications are still you know, very solid
Speaker 1: in the margins are certainly something that the desire of
Speaker 1: many other businesses, but we are looking at larger addressable
Speaker 1: markets that they're potentially moving into. People have certainly talked
Speaker 1: about driverless vehicles and the scale. But even if just
Speaker 1: the messaging that you've described becomes moderately successful, is this
Speaker 1: a company is just going to continue to bold, you know,
Speaker 1: bowl forward. In this way, Google is is very much
Speaker 1: well established in terms of the human capital that they
Speaker 1: have in place and capability of the people who are there,
Speaker 1: in their ability to continue to retract and retain these people.
Speaker 1: And from that standpoint, um, you know, Trump's blathering about
Speaker 1: immigration aside, Google could just as easily set up its
Speaker 1: operations outside the US to the detriment of the U
Speaker 1: S tax base and still continue to be a very
Speaker 1: competitive company on a global scale. So from that standpoint,
Speaker 1: we clearly look at Google as being a company that
Speaker 1: arguably has be part of a core portfolio for anybody
Speaker 1: who's looking at the technology sector. Other names like Snap
Speaker 1: perhaps not so much. Thanks very much. David Garretty is
Speaker 1: always a pleasure. He is the chief executive a g
Speaker 1: v A Research. President Donald Trump is scheduled to meet
Speaker 1: with almost a dozen chief executives of small and mid
Speaker 1: size banks from around the United States. There he is
Speaker 1: seeking their their contribution and their input for a discussion
Speaker 1: about regulations which may be hurting their ability to lend
Speaker 1: the consumers and small businesses. This is all part of
Speaker 1: the listening sessions that are taking place under the ages
Speaker 1: of the National Economic Council, and we will bring that
Speaker 1: to you as it happens. Well, let's focus our attention
Speaker 1: more closely on one element of President Donald Trump and
Speaker 1: the Republicans plans for taxes. Uh. They've said they'd like
Speaker 1: to court cut corporate taxes, allow the repatriation of cash
Speaker 1: that are in corporate accounts overseas, and also eliminate company's
Speaker 1: ability to deduct interest expenses from taxes. Here to tell
Speaker 1: us more is Noah Smith a contributor to Bloomberg View
Speaker 1: and he blogs at No Opinion. No, it's great to
Speaker 1: have you here in the studio. Thanks for being with us.
Speaker 1: All right, So this, let's say that this is the
Speaker 1: focus of the attention of bond market participants is whether
Speaker 1: corporations will continue to be allowed to deduct bond interest payments.
Speaker 1: What is going on there? Right? So, uh, for every company,
Speaker 1: you have to make a decision how much do we
Speaker 1: fund our operations with equity and how much do we
Speaker 1: fund our operations with debt? Actually, most US corporations fund
Speaker 1: mostly with equity. Actually debt is is smaller for equity,
Speaker 1: fine for US corporations, but there's still a lot of
Speaker 1: debt out there. For banks, it's the opposite. Banks really
Speaker 1: take on a lot of debt, have very high leverage ratios,
Speaker 1: so they are the ones who would be most affected,
Speaker 1: although all all companies would be someone affected. The idea is,
Speaker 1: right now we actually privileged debt finance over equity finance,
Speaker 1: and under this new policy that would be changed going forward,
Speaker 1: it would be a much more level playing field between
Speaker 1: the two. Well, no, this is actually shaking debt markets
Speaker 1: in a pretty massive way. There is some speculation that
Speaker 1: the record pace of investment grade issuance that we've seen
Speaker 1: this year is to lock in the current deduction over
Speaker 1: a longer period of time that it will be grandfathered
Speaker 1: in as they are unable to deduct these interest payments
Speaker 1: from their taxes going forward. You made an interesting argument
Speaker 1: in a recent column. You're saying, you know, this is
Speaker 1: very important, that this is part of the tax postal,
Speaker 1: and it's probably a good thing. You highlight how studies
Speaker 1: have shown that the more debt levels are elevated in
Speaker 1: a country, the more damaging asset price declines are for
Speaker 1: an economy. So, in other words, you're saying, structurally, this
Speaker 1: might actually be a good thing to push corporations to
Speaker 1: take on less debt and to fund themselves more with equity.
Speaker 1: Am I right? That's right? Yeah, Um, whenever you see
Speaker 1: one of these giant financial blow ups that ends up
Speaker 1: tanking the economy for ten years. You've seen this Japan, Korea.
Speaker 1: We might even be seeing it happen with China right now.
Speaker 1: We saw it with us of course in two thousand eight.
Speaker 1: There's always a lot of debt involved, whether it's mortgage
Speaker 1: debt or corporate debt as it was in Korea, or
Speaker 1: commercial real estate debt as it was you know in Japan.
Speaker 1: UM debt is always a big thing that's there and
Speaker 1: that you can show this really easily. Is that because
Speaker 1: a bond comes with a variety of legal constraints and
Speaker 1: restrictions and also obligations that you don't have with equity.
Speaker 1: I mean, if a company goes under and you're stuck
Speaker 1: holding a bunch of stock, you know, great, you're done.
Speaker 1: But if you're a bond holder, now you've got lawyers,
Speaker 1: bankruptcy committee experts, and you have a stake in what
Speaker 1: happens to the company's assets, right, I would say that's
Speaker 1: a that's a lot of it. Um. The legal differences
Speaker 1: are absolutely crucial. Debt has um limited enforceability. We can't
Speaker 1: completely make you pay back debt. In fact, that's what
Speaker 1: they call bankruptcy protection from creditors. And because of this,
Speaker 1: you have this perverse incentive where I can actually have
Speaker 1: an incentive to borrow a lot of money and not
Speaker 1: pay it back. And the econ blogger Carl Smith no
Speaker 1: relation once wrote that it's rational to borrow as much
Speaker 1: as you can and never pay it back. If there's
Speaker 1: no penalty at all. So if this goes through as proposed,
Speaker 1: it will cause a massive shift in the way that
Speaker 1: companies finance themselves, and I would think that it could
Speaker 1: be potentially, I don't know, a painful process. No, absolutely,
Speaker 1: So one thing that economists are starting realize that the
Speaker 1: economy is not nearly as resilient as people have thought,
Speaker 1: and these big adjustments to trade changes, legal changes, and
Speaker 1: just changes in the industrial mix of the country don't
Speaker 1: go so smoothly, and a lot of people can lose
Speaker 1: their jobs and be you know, screwed for their for
Speaker 1: their whole life. So which asset classes would be most
Speaker 1: affected during this shift? I mean afterwards? Granted, maybe it
Speaker 1: would create more stability, but amid all the turmoil you
Speaker 1: mean which industries? Yeah, which industries where we see the pain? Banks?
Speaker 1: I mean there they borrow so much, um, a lot
Speaker 1: of housing related things because housing, you know, rely so
Speaker 1: heavily on debt and so so banks and housing related
Speaker 1: companies will be really affected, I think. And so that's
Speaker 1: why I suggested that we we phase this in over
Speaker 1: a while to to give these companies time to switch
Speaker 1: to more equity finance, because in the long run. It
Speaker 1: will make the economy more stable. There's no reason to
Speaker 1: do this tomorrow. We're not about to have another financial
Speaker 1: says tomorrow. I think you never know. But I famous
Speaker 1: last words, famous last words. But um, but we we
Speaker 1: de leveraged a lot and so but uh, but you know,
Speaker 1: ten years down the line, twenty years down the line,
Speaker 1: this could make a difference. So I think it might
Speaker 1: be good to start phasing that in now. And and
Speaker 1: a lot of people have been calling for more equity
Speaker 1: for banks. Um. Usually this is in the form of
Speaker 1: higher capital requirements, basically hold more cash, and so this
Speaker 1: could be another step in that same direction. Thank you
Speaker 1: so much. Noah Smith, contributor to Bloomberg View. Uh. He's
Speaker 1: also he was an assistant professor of finance at stony
Speaker 1: Brook University. Need blogs that No Opinion. He's also on
Speaker 1: Twitter at that same address at no Opinion. Thank you
Speaker 1: so much for joining us. That was great, um, and
Speaker 1: it is something that we've heard a lot about in
Speaker 1: the corporate bond market, because you have seen a record
Speaker 1: pace of issuance of corporate bonds to date, and people
Speaker 1: are suggesting perhaps it's to get ahead of this rule change.
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