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Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim Fox.

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Speaker 1: Along with my co host Lisa Abramowitz. Each day we

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Speaker 1: bring you the most important, noteworthy, and useful interviews for

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Speaker 1: you and your money, whether you at the grocery store

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Speaker 1: or the trading floor. Find the Bloomberg P L Podcast

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Speaker 1: on iTunes, SoundCloud and at Bloomberg dot com. I want

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Speaker 1: to bring in Dan Fuss. I am so excited to

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Speaker 1: uh to speak with him. He has vice chairman of

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Speaker 1: Blooma's sales, very respected bond manager over the years who

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Speaker 1: has made a lot of right calls. I am so

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Speaker 1: pleased to have you here. Dan. I want to start

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Speaker 1: with longer dated US government bonds because duration levels have

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Speaker 1: reached the highest on record. Rates are going back down

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Speaker 1: near the record loads. You're seeing people pile into the

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Speaker 1: longer dated debt. You have Jeffrey Gunlock coming out and

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Speaker 1: saying it's the word first possible set up versus history.

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Speaker 1: Do you agree, Well, my history doesn't go all that

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Speaker 1: far back. It goes I'm not meaning to imply that

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Speaker 1: you can. I'm just you know, from your perspective, do

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Speaker 1: you think that the long bond is poised for a

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Speaker 1: big fall, a big fall. Note. What I do think, however,

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Speaker 1: is I think interest rates are on an upward track.

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Speaker 1: Right now. The Fed is raising short race and that

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Speaker 1: gradually does feed out the yield curve. Now, if they

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Speaker 1: do this for a long time, eventually, based on history,

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Speaker 1: the long end of the curves sort of bends over.

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Speaker 1: In other words, long yields will be lower than the

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Speaker 1: ten year, etcetera. So when the yield curve bends, it

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Speaker 1: normally bends at the long year long end, and the

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Speaker 1: fields keep going up, then at least the way it

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Speaker 1: used to be back way back, uh to peak on

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Speaker 1: polls in But something else is going on, uh, And

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Speaker 1: we do have money flows into the country from elsewhere,

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Speaker 1: and we also have something else I don't understand. I

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Speaker 1: understand part of it, the liability matching at the long

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Speaker 1: end for the corporate to find benefit plans. I mean,

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Speaker 1: we're that's important business for us, and so the money

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Speaker 1: is coming in. UM now that's easing off a bit.

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Speaker 1: But when stocks were really up there, it made sense

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Speaker 1: to go say Salsa SMP five undered and go out

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Speaker 1: and buy long investment grade corporates. If you can't get

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Speaker 1: what you want, you buy the long treasury and then

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Speaker 1: you hope to swap. Just to be clear, this is

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Speaker 1: pension plans in particular. They're looking to lock in their

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Speaker 1: gains so that they can provide there. Well, what they're

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Speaker 1: doing this is most nearly all on the corporate side. Uh.

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Speaker 1: What they're doing is their liability man matching. In other words,

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Speaker 1: the here's their liability and that's that's a double digit

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Speaker 1: number in terms of duration, and so let's buy some

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Speaker 1: long corporates against that and then get this volatility off

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Speaker 1: our income statement and off our balance sheet. Dan, I

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Speaker 1: wonder if you could speak to the issue of liquidity

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Speaker 1: in bond markets and what this means specifically for hedge

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Speaker 1: funds that focus on fixed income. Okay, uh, let me

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Speaker 1: find the short way to do this. The liquidity in

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Speaker 1: the most of the fixed income market is good. It's

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Speaker 1: actually a little better than it was the last time

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Speaker 1: I was here, visiting all the way from treasuries on

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Speaker 1: down through investment grade corputs. Once you get to high yield, however,

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Speaker 1: it starts to shift a little bit, and the liquidity

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Speaker 1: in high yield and the lower edge of investment grade

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Speaker 1: also is there for the on the run issues as

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Speaker 1: you get off the run. Then liquidity uh is a

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Speaker 1: sometime thing in the high yield area and once in

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Speaker 1: a while in the lower edge of investment grade, so

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Speaker 1: you can't count on it above that you can normally

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Speaker 1: count on. And one thing that used to worry me

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Speaker 1: a lot, uh, well, the e T s. I worry

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Speaker 1: far less about them now in the investment grade on up.

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Speaker 1: I think they're actually a good thing for liquidity most

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Speaker 1: not all, but most of the time. But but with

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Speaker 1: respect to high yield perhaps, uh, it's a it's a

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Speaker 1: little bit of a diceer prospect. Its start hearing from you,

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Speaker 1: you know, I want to just go back you were saying,

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Speaker 1: you know, you seem pretty sanguine about longer term bonds,

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Speaker 1: just based on the fact that pensions that have been

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Speaker 1: going into them and locking in those yields, as well

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Speaker 1: as the yield curved dynamic as the FED tightens the

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Speaker 1: short end. But you know, there are a lot of

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Speaker 1: other areas that people are worried about. People have been

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Speaker 1: piling into a emerging market step, people have been piling

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Speaker 1: into high yield it. Do you think there are any

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Speaker 1: dangerous spots right now that you personally are avoiding in

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Speaker 1: debt markets. Yes, but uh, well the long end uh

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Speaker 1: over the last couple of years. Uh, it's been pretty

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Speaker 1: well publicized. We we are average maturity and the Loomis

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Speaker 1: Sales bond Fund, the biggest of the funds, used to

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Speaker 1: run around thirteen years. Not the average maturity, not the duration,

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Speaker 1: the average maturity UM, and now it's about six. It

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Speaker 1: was six and a half and then quite recently brought

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Speaker 1: down to about six. Uh. That's that's a huge difference,

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Speaker 1: that's uh. And that's because I think the trend of

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Speaker 1: rates is up and longer term even yes, I don't

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Speaker 1: expect the yield curve to invert for quite a while.

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Speaker 1: Now you say, well, in that case, Dan, how come

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Speaker 1: Uh you know long end prices are going up at

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Speaker 1: the moment. Yes, that's true, they are. Have you contrasted

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Speaker 1: with a year ago? Oh? Good point? Okay, Uh, same

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Speaker 1: all the way out the curve. The curve has definitely

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Speaker 1: flattened in treasuries, and spreads of everything else against treasuries

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Speaker 1: have been narrowing. So you see what's going on. Well,

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Speaker 1: more buyers and sellers whatever you want to call it, um,

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Speaker 1: but it's not the way to bet. I think the

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Speaker 1: Fed governors and regional bank presence in their speeches have

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Speaker 1: made it very clear data dependent rates are going up

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Speaker 1: at least two times more this year and maybe three

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Speaker 1: And in twenty seconds. Do you think that the longer

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Speaker 1: end is going to suffer as the Fed unwind its

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Speaker 1: balance sheet? Yes, okay, that was sort of got fifteen

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Speaker 1: seconds left. If you'd like to elaborate, well, I mean

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Speaker 1: it will actually be felt more in the intermediate area.

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Speaker 1: All right, Thanks very much. Dan Fuss is always great

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Speaker 1: to have you with us. He is the vice chairman

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Speaker 1: of Loomis Sales. They're based in Boston, of course, home

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Speaker 1: to Bloomberg twelve, and he is one of the managers

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Speaker 1: of the Loomis Sales bond Fund. They've got fourteen billion

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Speaker 1: dollars in assets. We wish Matt Tucker a happy birthday,

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Speaker 1: not for himself but for his fund. He is head

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Speaker 1: of North American Fixed Income I share strategy at black Rock,

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Speaker 1: and he helped found the suite of fixed income ETFs

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Speaker 1: that have dominated headlines and dominated bond market trading for years.

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Speaker 1: We want to talk specifically about the tenure anniversary of

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Speaker 1: h y G. This is the biggest high old bond

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Speaker 1: et F out there with almost nineteen billion dollars of assets. Matt,

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Speaker 1: we are so glad that you are with us. I

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Speaker 1: want to start with being the black shape of the

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Speaker 1: fund management complex for so long, so many people picked

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Speaker 1: on h y G as sort of harbinger of doom

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Speaker 1: in bond markets, that it was going to destroy things,

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Speaker 1: that people were going to withdraw money all at once.

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Speaker 1: Have those dark clouds lifted? Do you feel like much

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Speaker 1: more embraced by fund managers and investors alike. Now, well,

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Speaker 1: thanks for having me this morning. So you know, if

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Speaker 1: I think about the history of h y G and

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Speaker 1: kind of how it's really matured over the years, I

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Speaker 1: do think there's been a shift. I think initially people

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Speaker 1: saw it as just an index fund in the high

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Speaker 1: old market, and there are questions about how the fund

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Speaker 1: would react in different stressed markets, what happened when investors

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Speaker 1: might rush in or rush out of the fund. But

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Speaker 1: I think we've seen so many different crises since the

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Speaker 1: fund was launched ten years ago, and so many different

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Speaker 1: stress events in the market. You've got a lot of

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Speaker 1: really good data now you can look at and say, well,

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Speaker 1: what did what did the fund next to do? What

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Speaker 1: is HyG actually done in his markets. I think people

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Speaker 1: realize that, you know, what actually performs kind of as

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Speaker 1: you expect. You know, it trades like the high old market. Um.

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Speaker 1: So it's used increasingly by a lot of institutions who

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Speaker 1: might not have reached for it, you know, even five

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Speaker 1: years ago. It's not becoming a pretty core part of

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Speaker 1: a lot of institutional HIRLED portfolios just because it's another

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Speaker 1: way to invest in the market, another way to get

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Speaker 1: access to liquidity. Let's talk a little bit about some

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Speaker 1: of the characteristics of h y G. The I shares

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Speaker 1: eybox high old corporate bond e t F and I

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Speaker 1: wonder if you could start with this idea that the

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Speaker 1: over the counter to an exchange traded fund. Yeah, I

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Speaker 1: think a lot of ways this is the core innovation

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Speaker 1: behind bond ETFs in general, and it's something that I

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Speaker 1: think people lose sight of when they look at just

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Speaker 1: e t f s broadly and look at equity t s.

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Speaker 1: You know, the equity tp was a very interesting idea.

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Speaker 1: You took a bunch of securities, a bunch of stocks

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Speaker 1: which trade on the exchange, and you stuff them and

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Speaker 1: do this thing called an e t F, which is

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Speaker 1: also on the exchange. UM. That is important a lot

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Speaker 1: of benefits to it. But I think the fixed income

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Speaker 1: ETF was really transformative because you took this over the

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Speaker 1: counter bond market, which is very hard for a lot

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Speaker 1: of investors to see, hard to invest in, challenges with information,

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Speaker 1: transparent liquidity, and you put it onto the exchange. We're

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Speaker 1: successible and visible to everybody. And I really think that

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Speaker 1: as a transformative change. I mean, you now can see

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Speaker 1: a portfolio of high old bonds trading tick by ticks

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Speaker 1: throughout the day UM, which is a pretty crazy concept

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Speaker 1: when you think about it relative to the rest of

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Speaker 1: the high old bond market, where it's really hard to

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Speaker 1: get information about transactions that are actually taking place. And

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Speaker 1: h y G certainly was innovative and has been rewarded

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Speaker 1: for that as UH it has become really a note

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Speaker 1: of activity unto itself within the high old market and

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Speaker 1: really dominated a lot of the trading. I want to

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Speaker 1: want to ask you though about some of the choices

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Speaker 1: that black Rock didn't make, that I Shares didn't make,

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Speaker 1: in particular leveraged loans, because we have seen, uh, you know,

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Speaker 1: with throughout the fixed income space, we've seen a proliferation

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Speaker 1: of e t f s, and we have seen some

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Speaker 1: try to get into the leverage loan space and including

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Speaker 1: invest Goo with their Power Shows Power Shares Senior Loan portfolio.

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Speaker 1: It's a nine point two billion dollar fund. There clearly

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Speaker 1: is a lot of demand. Why has black Rock not

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Speaker 1: created a fund like this? Well, you know we have,

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Speaker 1: you know, but at products on the market, you you've

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Speaker 1: got funds give you access to a lot of different

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Speaker 1: segments to the market. We just didn't feel like it

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Speaker 1: was prudent to launch a loan e t f UM.

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Speaker 1: You know, black Rock has a big loan mutual fund

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Speaker 1: business that we run UM and I think that the

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Speaker 1: real question we asked ourselves as well. You know, if

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Speaker 1: you haven't asked a class like loans that really it's

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Speaker 1: not really there's already even securities, right, loans are basically

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Speaker 1: you know, actual bank loans. Those things cannot be in kinded,

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Speaker 1: meaning that let's see, everyone wants to leave a fund.

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Speaker 1: Everyone wants to go and leave h y G tomorrow.

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Speaker 1: HyG can actually in kind of all its securities out

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Speaker 1: give them back to investors. There's no liquidity risk that's

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Speaker 1: worn by the fund that is not presented to investors. Um,

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Speaker 1: that's not the same thing in that market like loans,

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Speaker 1: where you may not be able to actually liquid it

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Speaker 1: all your security. So we just kind of looked at

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Speaker 1: it and said, you know what, there may be some

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Speaker 1: risks and some stressed markets that a lone ETF could present,

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Speaker 1: and we didn't feel like that was consistent with how

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Speaker 1: we think about our platform. Are you concerned about the

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Speaker 1: increase in proposals for active ETFs and non transparent et

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Speaker 1: fs and the potential for this innovative, very simple model

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Speaker 1: of creating redeem and taking something and putting it in

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Speaker 1: in something that's transparent and able to trade daily like

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Speaker 1: a stock. Do you think that that this new kind

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Speaker 1: of element to the market could end up changing the

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Speaker 1: image of ETFs, which has so far been been fairly pristine. Well,

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Speaker 1: I do think we're seeing an evolution in e t

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Speaker 1: F and kind of what E t F means. Um,

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Speaker 1: you know, for a long time, E t F meant

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Speaker 1: index fund right in and meant index fund that had

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Speaker 1: generally made a fund that had this in kind creation redemption,

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Speaker 1: And to your point, pretty much every et F on

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Speaker 1: the market fit that description. But we've already seen over

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Speaker 1: the years, A lot of variants come in on this,

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Speaker 1: you know, whether it's you know, funds that use commodities

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Speaker 1: as opposed to securities, whether it's funds that employed leverage

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Speaker 1: in some way, funds that are actively managed. I think

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Speaker 1: what needs to happen is the market needs to get

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Speaker 1: more sophisticated about subdividing the e t F as a

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Speaker 1: class and thinking about different types of funds. So maybe

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Speaker 1: not everything is an e t F. There are things

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Speaker 1: out there that we should describe as an active et

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Speaker 1: F or as some other use some other term to

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Speaker 1: help really specify the type of exposure it gives an

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Speaker 1: investor and the risks it presents the investor. Man, I

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Speaker 1: wonder if you could speak about the use of h

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Speaker 1: y G or indeed other e t s, but specifically

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Speaker 1: h y G for hedging for portfolios for long managers

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Speaker 1: or short managers who want a liquid instrument, whether it

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Speaker 1: be the option or the actual underlying in order to

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Speaker 1: hedge or in some way mitigate the risk in their portfolios. Yeah,

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Speaker 1: this is I think been a really popular usage. We've

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Speaker 1: seen in a growing usage of h YG in particular

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Speaker 1: as a high y old hedging instrument. I think if

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Speaker 1: you look at an investors, say in the equity market,

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Speaker 1: they're very cupful with the idea that there are liquid

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Speaker 1: futures markets that allow them to get exposure to, you know,

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Speaker 1: whatever segment of the equity market they want, right doesn't

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Speaker 1: exist in fixed income. Right in fixed income, if you

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Speaker 1: want to think about hedging instruments, you've got treasury futures

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Speaker 1: which don't really track HILED very well. You've got credit

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Speaker 1: to fault swap in dissees which have their own basis

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Speaker 1: or performance difference first to HILD cash market. So HG

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Speaker 1: has really filled avoid and allowing people to go out

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Speaker 1: and trade an instrument which actually has a return that

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Speaker 1: resembles the HILED cash market, and you can buy it

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Speaker 1: and go along the a t F. And we've seen

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Speaker 1: that you can also borrow it and sell it short

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Speaker 1: much like you would do a stock you know, borrow

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Speaker 1: and short sale um. And there's even an increasing options

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Speaker 1: market on h y G, so you can think aboue

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Speaker 1: different options strategies to be used as hedging. So I

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Speaker 1: think this has actually provided a use case that investors

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Speaker 1: needed for a long time and just didn't really have

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Speaker 1: a product for So how big. Do you think the

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Speaker 1: high led E t F complex can grow too? I said,

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Speaker 1: set of management. Lie, you know, it's really difficult to forecast.

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Speaker 1: I think we're running right around forty billion right now

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Speaker 1: in terms of US listed hildts, just across different flavors,

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Speaker 1: different cuts to the market. Um, could that get bigger?

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Speaker 1: I think it could, But you know, you know it's

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Speaker 1: so can h y g B Instead of nineteen billion

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Speaker 1: it is about now? Okay, it could be twenty or

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Speaker 1: thirty I think definitely. Um. But I think we're actually

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Speaker 1: going to see grow more rapidly is the trading volume

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Speaker 1: on the e t F. And we've actually seen this

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Speaker 1: through time. Is that as the fund has grown and

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Speaker 1: more investors have used it as a hedging as liquidity vehicle,

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Speaker 1: the fun turnover has been increasing. I think it's the

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Speaker 1: turn we're going to see really grow. The assets will grow,

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Speaker 1: but I think it's really the volume and adoption by

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Speaker 1: investors which is going to really be the big driver

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Speaker 1: going forward. Thanks very much, Matt Tucker's head of North

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Speaker 1: American fixed Income. I shares a strategy team for black Rock,

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Speaker 1: helping to manage more than seventeen billion dollars. Let's turn

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Speaker 1: our attention now to Apple and a legal back all

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Speaker 1: that Apple faces from Qualcom, and here to kind of

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Speaker 1: give us the details is Shira Oviday, our technology columnist

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Speaker 1: Bloomberg gad Fly, which of course is our fast commentary

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Speaker 1: section of Bloomberg. You can follow Shira on Twitter at

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Speaker 1: Shira Oviday. So Shara tell us about Qualcom claiming that

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Speaker 1: Apple has made threats and has lied to regulators. What

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Speaker 1: are they making threats and lying to regulators about? Yeah,

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Speaker 1: this is pretty pretty juicy stuff. So let me just

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Speaker 1: turn the clock back to January that Apple basically kicked

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Speaker 1: off this litigation basically saying that Qualcom, which makes very

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Speaker 1: essential technology for basically every smartphone, every phone sold in

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Speaker 1: the world, Apple basically said that Qualcom is unfairly abusing

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Speaker 1: it's its market power to overcharge customers, including Apple, for

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Speaker 1: use of its wireless technology. Every phone that's sold or

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Speaker 1: most phones that sold, Qualcom gets a cut of the

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Speaker 1: sale price of that phone, regardless of whether the phone

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Speaker 1: is using Qualcoms computer ships or not. And Apple basically said,

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Speaker 1: you know, the way that Qualcom charges for its patented

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Speaker 1: technology is unfair. And Qualcom overnight basically said that Apple

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Speaker 1: this litigation from Apple is bogus and that Apple kind

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Speaker 1: of misled regulators UM who are also looking into the

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Speaker 1: same issue and how Qualcom charges for its computer chips

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Speaker 1: and technology. So stock traders seemed to have voted on

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Speaker 1: who they agree with because Qualcom shares are down more

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Speaker 1: than twelve percent since this litigation was first kicked off,

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Speaker 1: or as Apple is not down twelve percent. So is

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Speaker 1: that is that an accurate portrayal or a trader sort

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Speaker 1: of overlooking something? I think it's it's less about which

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Speaker 1: company might win if this litigation can go to trial,

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Speaker 1: and more about the risks for each company, So Qualcom.

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Speaker 1: I mean, look if it Qualcom loses this case of

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Speaker 1: the case goes to trial and qual Come loses, you

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Speaker 1: can see a scenario where Qualcoms essential business model is

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Speaker 1: at risk. And so that's what you've seen in the

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Speaker 1: share place people to pay for intellectual problem correct, Getting

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Speaker 1: people to pay for intellectual property, which is UH generates

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Speaker 1: the majority of Qualcoms profit. And so that's what you've

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Speaker 1: seen in the stock price reaction. Is just this risk

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Speaker 1: two Qualcoms business model and UH, if Apple loses, the

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Speaker 1: risk is is lower. Can I just say um. There

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Speaker 1: was a story about Apple's initial litigation where uh Apple's

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Speaker 1: CEO Tim Cook said that the situation was analogous to

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Speaker 1: someone buying a sofa and then charging that customer a

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Speaker 1: different price depending on the price of the house that

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Speaker 1: it goes into. Is that a valid argument, I don't know.

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Speaker 1: I mean, Apple is not the only person to pick

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Speaker 1: on this particular business approach by Qualcom of charging a

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Speaker 1: patent royalty based on the total cost of a phone

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Speaker 1: rather than a component cost. Right, So, I'm sure there's

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Speaker 1: gonna be lots of scathing analogies back and forth about

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Speaker 1: sofas or whatever other living room furniture there might be. Look,

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Speaker 1: this is a business dispute. Putting aside all kinds of

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Speaker 1: high minded analogies, This is a business dispute. Um. Qualcom

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Speaker 1: has a business model that it wants to protect. Apple's

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Speaker 1: revenue and profit margins are under pressure like they never

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Speaker 1: have been before, and it's trying to reduce the costs

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Speaker 1: that it pays for components of iPhones that can make

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Speaker 1: more money. Business dispute. I wanted to just pick up

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Speaker 1: on that theme because the backdrop to this is there

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Speaker 1: are companies which depend on Apple orders for the significant

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Speaker 1: portion of their business. I'm thinking today about the drop

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Speaker 1: and this shares a Dialogue Semiconductor in Germany down about

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Speaker 1: fourteen and a half percent because there's a rumor or

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Speaker 1: there's a thought that maybe Apple is going to go

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Speaker 1: out and create their own ships, which they have done

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Speaker 1: in the past. Does that really kind of cast a

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Speaker 1: shadow over all the set of Apple decides they're gonna

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Speaker 1: make their own chip, then you know, Qualcom can do

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Speaker 1: whatever it wants with that Snapdragon. Yeah. I mean, look,

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Speaker 1: there's a whole cottage industry of of suppliers to Apple

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Speaker 1: and other smartphone makers that are highly dependent on Apple

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Speaker 1: for business, right, And that's what you see when you

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Speaker 1: have these relatively small companies or even a big company

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Speaker 1: like fox Con, even the specter of losing business from

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Speaker 1: Apple sends the share price down. The same thing happened

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Speaker 1: to Qualcom um Apple and its latest model of iPhone

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Speaker 1: used chips from Intel, qualcom competitor in some handful of

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Speaker 1: of UM phones, and that was something when when that

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Speaker 1: first got announced. That's sent down Qualcom's share price. Now

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Speaker 1: Qualcom is not a tiny uh component maker like Dialogue,

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Speaker 1: but look you it is. It is dependent on Apple

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Speaker 1: for business. So does Qualcom have any leverage here? Does

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Speaker 1: it have leverage? I I mean because basically there are

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Speaker 1: other like Intel. Apple could just go to Intel to

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Speaker 1: make the parts. Yeah. Or Apple could just say, look,

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Speaker 1: we're gonna leave you unless we unless you allow us

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Speaker 1: to pay so much less for for your parts. Qualcoms

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Speaker 1: mobile technology and chips are pretty essential. I don't know

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Speaker 1: to what extent um Apple would be able to completely

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Speaker 1: shift away from Qualcom if it came to that. I

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Speaker 1: think Qualcom does have leverage just because of the power

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Speaker 1: of its technology and how essential it is in in

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Speaker 1: mobile phones. Qualcom has been the target of other regulators,

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Speaker 1: notably in South Korea. Tell us what happened there? Yeah,

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Speaker 1: I mean, this is again, this is not an unusual

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Speaker 1: fight that in South Korea, in China, in the US

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Speaker 1: with the Federal Trade Commission, the regulars are looking into

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Speaker 1: have been looking into similar issues that Apple is alleging, right,

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Speaker 1: which is again Qualcom kind of abusing it's uh, it's

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Speaker 1: market power to use its intellectual property to get customers

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Speaker 1: to pay more um. And you know the question about

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Speaker 1: places like South Korea and in China too, is are

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Speaker 1: the regulators kind of carrying water for local UH companies. Right,

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Speaker 1: So Samsung is obviously one of the largest and most

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Speaker 1: powerful companies in South Korea, and so the question is,

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Speaker 1: did regulators kind of go after Qualcoms business model to

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Speaker 1: help Samsung? Just to give us a sense of how

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Speaker 1: much money is its stake? How much money is its steake?

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Speaker 1: It's a little bit unclear, so um, we don't know

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Speaker 1: exactly what um Apple pays Qualcom for each iPhone sold,

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Speaker 1: but it's probably like tens of dollars per phone. And

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Speaker 1: when you're talking about the scale of Apple, right, three

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Speaker 1: million iPhones sold every year, it's a lot of money.

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Speaker 1: Shara Ovida, thank you so much for joining us and

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Speaker 1: explaining things UH in clear terms without even using you know,

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Speaker 1: sofas or lampshades anything else. So Shira O v Day

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Speaker 1: is a technology called columnist for Bloomberg gad Fly, which

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Speaker 1: is our fast commentary group here at Bloomberg, and his

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Speaker 1: terrific I mean, I just throw that in there anyway.

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Speaker 1: But it's a fascinating debate and it's obviously has a

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Speaker 1: very big standing on a huge swath of business. It

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Speaker 1: frankly has been driving a lot of growth in the

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Speaker 1: US regulatory reform and Dodd Frank legislation. What's the future

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Speaker 1: for it in Washington and how will it affect banks?

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Speaker 1: That's why we have Frank Sarentino. He is the chairman

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Speaker 1: and the chief executive of Connect one Bank Assets Center

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Speaker 1: management more than four and a half billion dollars. They're

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Speaker 1: based in Englewood Cliffs, New Jersey, and you can follow

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Speaker 1: Frank on Twitter at Frank three as in Roman numeral three.

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Speaker 1: All right, Frank Sorrentino, tell us about Dodd fran legislation.

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Speaker 1: How will it change and how can banks take advantage

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Speaker 1: of the changes that you foresee? Well, thanks Lisa and

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Speaker 1: Pim and so. Dodd Frank obviously was written in haste

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Speaker 1: in two thousand and ten UH to solve what was

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Speaker 1: thought to be or was a financial crisis here in

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Speaker 1: the United States, and a lot was put into that

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Speaker 1: bill that really wasn't well baked. It took a number

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Speaker 1: of years for all the regulations too, and I think, yeah,

431
00:24:27,119 --> 00:24:29,600
Speaker 1: even as of today, they haven't all been written, and

432
00:24:29,880 --> 00:24:32,199
Speaker 1: so we don't even know what a lot of uh

433
00:24:32,280 --> 00:24:34,680
Speaker 1: the regulation is going to look like. I think only

434
00:24:34,840 --> 00:24:37,879
Speaker 1: sixty or sevent of the bill has been written into regulation,

435
00:24:38,440 --> 00:24:41,240
Speaker 1: and so as you can well imagine, um all banks

436
00:24:41,280 --> 00:24:44,639
Speaker 1: were thrown into one bucket. Regulation was set for you know,

437
00:24:44,720 --> 00:24:47,159
Speaker 1: banks pretty much of all sizes. And so what I

438
00:24:47,240 --> 00:24:51,120
Speaker 1: think we're seeing today is a much calmer mood relative

439
00:24:51,200 --> 00:24:54,000
Speaker 1: to bank regulation. And I think we need to segregate

440
00:24:54,440 --> 00:24:57,320
Speaker 1: the smaller community banks and mid size banks from the

441
00:24:57,520 --> 00:25:02,520
Speaker 1: largest money center institutions and tailor regulation based on those

442
00:25:02,960 --> 00:25:05,920
Speaker 1: financial institutions and the risk appetite for each of those

443
00:25:05,960 --> 00:25:09,359
Speaker 1: types of financial institutions. And it's not just size, right,

444
00:25:09,600 --> 00:25:12,639
Speaker 1: there are banks that are ten billion dollars today that

445
00:25:12,720 --> 00:25:15,359
Speaker 1: could potentially be much riskier than a hundred billion dollar

446
00:25:15,440 --> 00:25:18,560
Speaker 1: institution that has a much more simple business plan. And

447
00:25:18,640 --> 00:25:21,119
Speaker 1: this is something that even some of the current regulators,

448
00:25:21,240 --> 00:25:24,320
Speaker 1: or as of a few weeks ago, current have even

449
00:25:24,359 --> 00:25:27,960
Speaker 1: acknowledged that community banks have gotten disproportionately hit by Dodd

450
00:25:28,080 --> 00:25:30,200
Speaker 1: frank um and that this needs I mean, even Daniel

451
00:25:30,320 --> 00:25:32,840
Speaker 1: Tarullo has come out and said that I'm wondering how

452
00:25:33,000 --> 00:25:35,200
Speaker 1: quickly do you think that some of these provisions could

453
00:25:35,240 --> 00:25:38,720
Speaker 1: be rolled back, given that Dodd frank itself took years

454
00:25:38,760 --> 00:25:41,200
Speaker 1: and years to even get written, let alone get implemented

455
00:25:41,480 --> 00:25:43,960
Speaker 1: well it's not going to happen by executive order, and

456
00:25:44,800 --> 00:25:48,920
Speaker 1: we need Congress to have uh, the want and the

457
00:25:49,040 --> 00:25:51,880
Speaker 1: desire to do this there you know, as in any

458
00:25:51,960 --> 00:25:54,959
Speaker 1: political discourse, Uh, there are those on both sides who

459
00:25:55,000 --> 00:25:57,560
Speaker 1: have different opinions about what cannon can't be done. And

460
00:25:57,880 --> 00:26:01,040
Speaker 1: with the agenda that's in front of Congress right at

461
00:26:01,080 --> 00:26:03,680
Speaker 1: the moment, I think this is one of the top

462
00:26:03,840 --> 00:26:06,600
Speaker 1: three or four priorities, but I'm not sure it's the

463
00:26:06,640 --> 00:26:08,480
Speaker 1: top priority at the moment. So I think we'll see.

464
00:26:08,520 --> 00:26:09,919
Speaker 1: I think we'll see it in stages. I think we'll

465
00:26:09,960 --> 00:26:13,000
Speaker 1: see some simple things be done sooner than later, and

466
00:26:13,080 --> 00:26:14,440
Speaker 1: I think that would be good. I think, you know,

467
00:26:14,600 --> 00:26:17,400
Speaker 1: changing some of the changing some of the caps, whether

468
00:26:17,440 --> 00:26:20,639
Speaker 1: it's the fifty billion dollar threshold for city institution, the

469
00:26:20,720 --> 00:26:24,560
Speaker 1: ten billion dollar threshold for when the CFPB starts to

470
00:26:24,920 --> 00:26:30,120
Speaker 1: you know, regulate institutions, uh, some of those asset based numbers,

471
00:26:30,359 --> 00:26:33,240
Speaker 1: and and and this differentiation between community banks and the

472
00:26:33,320 --> 00:26:35,680
Speaker 1: larger money center banks. I think we'll see legislation around

473
00:26:35,720 --> 00:26:38,720
Speaker 1: that move quicker. I don't know if that means this

474
00:26:38,880 --> 00:26:42,040
Speaker 1: year or next, but certainly there's a bill in Congress

475
00:26:42,080 --> 00:26:44,600
Speaker 1: today that uh, you know, that that they're looking to

476
00:26:44,640 --> 00:26:47,000
Speaker 1: do just that. So how much better would your banks

477
00:26:47,040 --> 00:26:49,960
Speaker 1: earnings be if some of these rules were changed. It

478
00:26:50,080 --> 00:26:53,159
Speaker 1: doesn't really, Uh, it wouldn't impact a bank like connect

479
00:26:53,240 --> 00:26:55,000
Speaker 1: One Bank all that much. We have a very simple

480
00:26:55,080 --> 00:26:57,360
Speaker 1: business model and we're sort of in that sweet spot

481
00:26:57,480 --> 00:27:00,840
Speaker 1: right now. We're way below the ten billion dollar threshold

482
00:27:00,880 --> 00:27:03,600
Speaker 1: at four and a half billion, and Connect One Bank

483
00:27:03,680 --> 00:27:06,280
Speaker 1: has a fairly simple model. We take in deposits in

484
00:27:06,320 --> 00:27:08,520
Speaker 1: our local market and we make loans. We don't do

485
00:27:08,600 --> 00:27:11,720
Speaker 1: a lot of other things that really step over the line.

486
00:27:11,720 --> 00:27:14,720
Speaker 1: There would there may be some compliance cost savings. A

487
00:27:14,800 --> 00:27:17,320
Speaker 1: lot of banks are complaining these days about the cost

488
00:27:17,440 --> 00:27:21,399
Speaker 1: of of of compliance component within the institution and what

489
00:27:21,520 --> 00:27:24,399
Speaker 1: they've had to put in place relative to the regulations.

490
00:27:24,440 --> 00:27:25,920
Speaker 1: So I think there would be some savings there on

491
00:27:25,960 --> 00:27:29,360
Speaker 1: the expense side. As far as your bank goes, I'm

492
00:27:29,359 --> 00:27:32,040
Speaker 1: wondering if you could tell us about the health of business,

493
00:27:32,040 --> 00:27:34,040
Speaker 1: because I know you've got a background and construction, so

494
00:27:34,200 --> 00:27:38,320
Speaker 1: construction lending is is important, and uh, tell us a

495
00:27:38,400 --> 00:27:42,080
Speaker 1: little bit about how you see the pricing of of

496
00:27:42,240 --> 00:27:46,040
Speaker 1: money for those kinds of projects. So today there's availability

497
00:27:46,240 --> 00:27:49,680
Speaker 1: for you know, construction projects Um, there has been some

498
00:27:49,920 --> 00:27:53,280
Speaker 1: pullback in the marketplace, you know, just relative to pricing

499
00:27:53,359 --> 00:27:56,920
Speaker 1: expectations going forward, the threat or the or the the

500
00:27:57,080 --> 00:28:01,240
Speaker 1: outlook that interest rates are rising, although you know, I

501
00:28:01,320 --> 00:28:04,119
Speaker 1: sort of have a mixed view about that going forward. Uh,

502
00:28:04,760 --> 00:28:07,480
Speaker 1: tell us about that, because I mean I keep asking myself, well, gee,

503
00:28:07,480 --> 00:28:11,800
Speaker 1: you know, well, twenty five basis points really crater a project? No, Um,

504
00:28:12,200 --> 00:28:14,400
Speaker 1: I think I think to the extent that interest rates

505
00:28:14,440 --> 00:28:18,160
Speaker 1: are are up at fifty basis points, Uh, that's fine.

506
00:28:18,240 --> 00:28:20,800
Speaker 1: The problem we're sort of heading towards, though, is that

507
00:28:21,560 --> 00:28:23,800
Speaker 1: the long end is not moving, is not cooperating with

508
00:28:23,840 --> 00:28:26,520
Speaker 1: the short end. And as you know, banks make their

509
00:28:26,600 --> 00:28:29,920
Speaker 1: money based on a you know, the slope of that curve,

510
00:28:30,000 --> 00:28:32,800
Speaker 1: and if it gets flatter over time, that's not great

511
00:28:32,840 --> 00:28:35,680
Speaker 1: for banks. When will your bank or has your bank

512
00:28:35,760 --> 00:28:38,320
Speaker 1: started to pass along the higher rates that we've seen

513
00:28:38,360 --> 00:28:41,600
Speaker 1: in the front end two depositors, So again, it's it's

514
00:28:41,600 --> 00:28:44,560
Speaker 1: not it's not that simple a question to answer. A

515
00:28:44,600 --> 00:28:47,160
Speaker 1: lot of banks haven't. We'll become an interesting sort of

516
00:28:47,240 --> 00:28:50,520
Speaker 1: pressure right now. So as as rates have gone up

517
00:28:50,560 --> 00:28:52,720
Speaker 1: on the short end by fifty basis points over the

518
00:28:52,800 --> 00:28:54,880
Speaker 1: last six months or so, the rates on the long

519
00:28:55,000 --> 00:28:57,120
Speaker 1: end have actually come down. Right. Rates were as high

520
00:28:57,160 --> 00:28:59,520
Speaker 1: as to sixty seventy not too long ago, right after

521
00:28:59,560 --> 00:29:01,920
Speaker 1: the election, and uh they're now down to to thirty

522
00:29:02,000 --> 00:29:05,160
Speaker 1: or so today. Um, so what's actually happening. There has

523
00:29:05,200 --> 00:29:07,320
Speaker 1: been some flattening in the curve and so banks are

524
00:29:07,360 --> 00:29:09,920
Speaker 1: not able to pass those savings along. If we see

525
00:29:10,160 --> 00:29:12,520
Speaker 1: if we see the curve steepening, I think you will

526
00:29:12,560 --> 00:29:15,640
Speaker 1: see and both are going up at the same time.

527
00:29:15,760 --> 00:29:18,440
Speaker 1: You will start to see depositors start to benefit from that.

528
00:29:19,080 --> 00:29:22,000
Speaker 1: Thank you so much. Frank Sorrentino, Chairman and chief executive

529
00:29:22,040 --> 00:29:25,320
Speaker 1: officer of Connect One Bank in Englewood Cliffs, New Jersey,

530
00:29:25,400 --> 00:29:27,320
Speaker 1: with about four and a half billion dollars under management.

531
00:29:27,400 --> 00:29:30,040
Speaker 1: Should I say Frank Sparentino the third? I should say

532
00:29:30,080 --> 00:29:33,120
Speaker 1: Frank Sarentino the third? What just makes it easier on

533
00:29:33,200 --> 00:29:39,640
Speaker 1: the Twitter handle? Yes, yes, there's an anything else that

534
00:29:39,680 --> 00:29:41,920
Speaker 1: the other middle names we should add. Uh, this is

535
00:29:41,960 --> 00:29:43,680
Speaker 1: a This is a fascinating topic though, and it is

536
00:29:43,760 --> 00:29:46,080
Speaker 1: important to to keep track ups. So we really appreciate

537
00:29:46,120 --> 00:29:54,920
Speaker 1: you taking time with us. Frank Sarentino, thanks for listening

538
00:29:54,960 --> 00:29:57,920
Speaker 1: to the Bloomberg P and L podcast. You can subscribe

539
00:29:57,960 --> 00:30:02,520
Speaker 1: and listen to interviews at iTunes, SoundCloud, or whatever podcast

540
00:30:02,600 --> 00:30:05,600
Speaker 1: platform you prefer. I'm pim Fox. I'm out there on

541
00:30:05,680 --> 00:30:08,840
Speaker 1: Twitter at pim Fox. I'm out there on Twitter at

542
00:30:09,040 --> 00:30:11,960
Speaker 1: Lisa Abramo. It's one before the podcast. You can always

543
00:30:12,080 --> 00:30:14,160
Speaker 1: catch us worldwide on Bloomberg Radio