1
00:00:00,200 --> 00:00:03,360
Speaker 1: Hey, they're ad Loots listeners. It's Tracy Alloway.

2
00:00:03,000 --> 00:00:04,000
Speaker 2: And Joe Wisenthal.

3
00:00:04,280 --> 00:00:07,720
Speaker 1: We are very excited to announce that Oudlots is going

4
00:00:07,800 --> 00:00:09,680
Speaker 1: to Washington That's right.

5
00:00:09,760 --> 00:00:11,560
Speaker 2: For the first time, we are going to do a

6
00:00:11,640 --> 00:00:16,439
Speaker 2: live public Odd Lots recording in our nation's capital. That's

7
00:00:16,440 --> 00:00:19,680
Speaker 2: going to be March twelfth in Washington, DC at the

8
00:00:19,760 --> 00:00:23,560
Speaker 2: Miracle Theater and guests will be announced in the coming days,

9
00:00:23,600 --> 00:00:25,960
Speaker 2: but in the meantime you can find a ticket link

10
00:00:26,000 --> 00:00:27,880
Speaker 2: at Bloomberg dot com, slash odd.

11
00:00:27,800 --> 00:00:44,480
Speaker 3: Lots, Bloomberg Audio Studios, Podcasts, Radio News.

12
00:00:47,159 --> 00:00:51,040
Speaker 2: Hello and welcome to another episode of the Odd Lots podcast.

13
00:00:51,159 --> 00:00:53,600
Speaker 1: I'm Joe Wisenthal and I'm Tracy Alloway.

14
00:00:53,760 --> 00:00:54,920
Speaker 2: Tracy remember SVB.

15
00:00:56,120 --> 00:00:59,880
Speaker 1: I vaguely remember something happening with a bank called Silicon Valley.

16
00:01:00,880 --> 00:01:03,880
Speaker 2: Here's actually sort of something I've been wondering about, is like, Okay,

17
00:01:04,160 --> 00:01:07,800
Speaker 2: there was this moment where suddenly people got anxious about

18
00:01:07,920 --> 00:01:10,760
Speaker 2: regional banks and stuff like that. You know, we like

19
00:01:10,840 --> 00:01:13,520
Speaker 2: did episodes like how should we reform banking? And should

20
00:01:13,560 --> 00:01:16,320
Speaker 2: banking be semi public and all this stuff, but like

21
00:01:16,360 --> 00:01:17,720
Speaker 2: nothing happened in the week of it.

22
00:01:17,720 --> 00:01:21,440
Speaker 1: Right, No, And in fact, I mean, the basel endgame

23
00:01:21,560 --> 00:01:25,000
Speaker 1: stuff seems to be pretty much off the table at

24
00:01:25,000 --> 00:01:25,520
Speaker 1: this point.

25
00:01:25,560 --> 00:01:27,840
Speaker 2: But yeah, what, actually I haven't been following that. What's

26
00:01:27,880 --> 00:01:28,360
Speaker 2: happening with that?

27
00:01:28,520 --> 00:01:31,600
Speaker 1: I don't think it's happening. Michael Barr has like he's left,

28
00:01:31,640 --> 00:01:34,759
Speaker 1: hasn't he? So yeah, I mean it seems like there's

29
00:01:34,800 --> 00:01:37,399
Speaker 1: not going to be a big change on that front.

30
00:01:37,520 --> 00:01:39,720
Speaker 1: I will also say, like one of the interesting things

31
00:01:39,720 --> 00:01:42,080
Speaker 1: when it comes to bank regulation is there was a

32
00:01:42,080 --> 00:01:46,720
Speaker 1: twenty eighteen change where I think the Trump administration made

33
00:01:46,720 --> 00:01:51,880
Speaker 1: it easier for regional banks to do some potentially riskier stuff.

34
00:01:52,440 --> 00:01:55,280
Speaker 1: And the argument there was that regional banks should be

35
00:01:55,360 --> 00:01:59,440
Speaker 1: treated differently to large banks, they should be able to

36
00:01:59,440 --> 00:02:02,560
Speaker 1: do certain things blah blah blah blah blah. And I

37
00:02:02,560 --> 00:02:05,000
Speaker 1: guess you could argue that that might have fed into

38
00:02:05,080 --> 00:02:06,800
Speaker 1: some of the SVB drama as well.

39
00:02:07,280 --> 00:02:09,639
Speaker 2: Actually it's good that we're talking about this because when

40
00:02:09,680 --> 00:02:12,360
Speaker 2: we talk about financial markets these days, like so much

41
00:02:12,400 --> 00:02:15,480
Speaker 2: of it is about tech in particular. But if you

42
00:02:15,520 --> 00:02:18,120
Speaker 2: go back and look at a chart of KRE, the

43
00:02:18,160 --> 00:02:21,040
Speaker 2: regional bank ETF, that is another one that was just

44
00:02:21,080 --> 00:02:24,640
Speaker 2: a straight line up on November fifth, and there's a

45
00:02:24,680 --> 00:02:28,720
Speaker 2: widespread expectation, and I think pretty well founded that the

46
00:02:28,760 --> 00:02:31,320
Speaker 2: Trump administration is going to have a much more sort

47
00:02:31,360 --> 00:02:35,760
Speaker 2: of liberal attitude towards financial market regulation than the last administration.

48
00:02:36,280 --> 00:02:38,600
Speaker 2: And so we shouldn't go too long with, you know,

49
00:02:38,639 --> 00:02:41,480
Speaker 2: take our eye off the ball of financial regulatory issues

50
00:02:41,560 --> 00:02:44,240
Speaker 2: because also, if history is any guide, like the next

51
00:02:44,280 --> 00:02:46,560
Speaker 2: thing that happens, like we'll get no warning of it. It

52
00:02:46,560 --> 00:02:48,000
Speaker 2: will just happen one day. Yeah.

53
00:02:48,040 --> 00:02:51,280
Speaker 1: Also, I love talking about banks, like let's just do

54
00:02:51,360 --> 00:02:53,239
Speaker 1: it for bank purposes.

55
00:02:53,520 --> 00:02:56,520
Speaker 2: Okay, Well, I'm very excited about this episode. It's a

56
00:02:56,520 --> 00:02:58,799
Speaker 2: guest I've actually wanted to have on for a very

57
00:02:58,840 --> 00:03:02,120
Speaker 2: long time. We're going to be speaking with Elham Saidenishon.

58
00:03:02,480 --> 00:03:05,760
Speaker 2: She's a term assistant professor of economics at Bernard College

59
00:03:05,800 --> 00:03:08,560
Speaker 2: at Columbia as well as an adjunct professor at NYU,

60
00:03:09,000 --> 00:03:11,840
Speaker 2: and also the author of a recent paper sort of

61
00:03:12,040 --> 00:03:15,760
Speaker 2: revisiting the collapse of SVB and plying a new lend

62
00:03:15,840 --> 00:03:19,280
Speaker 2: to it. The paper is called Banks a Synthetic hedge Fund. So, Elham,

63
00:03:19,320 --> 00:03:21,239
Speaker 2: thank you so much for coming on out lots.

64
00:03:21,160 --> 00:03:23,239
Speaker 4: Thank you so much for having me. I'm very happy

65
00:03:23,240 --> 00:03:23,760
Speaker 4: to be here.

66
00:03:24,160 --> 00:03:26,799
Speaker 2: Absolutely, I'm not used to this phrase. So this term

67
00:03:26,880 --> 00:03:29,680
Speaker 2: synthetic hedge funds, I could sort of take a stab

68
00:03:29,720 --> 00:03:32,160
Speaker 2: in my mind of what it means. But what is

69
00:03:32,200 --> 00:03:34,160
Speaker 2: this term synthetic hedge funds mean?

70
00:03:34,720 --> 00:03:37,320
Speaker 4: A synthetic hash fund is a type of activity and

71
00:03:37,480 --> 00:03:40,520
Speaker 4: rather than being a specific type of like firm. And

72
00:03:40,560 --> 00:03:43,560
Speaker 4: this is when a non hedge fund wants to replicate

73
00:03:43,600 --> 00:03:45,960
Speaker 4: the activities of a hedge fund and therefore get the

74
00:03:46,000 --> 00:03:49,120
Speaker 4: same type of return. And this is about a replication,

75
00:03:49,520 --> 00:03:52,480
Speaker 4: but it's about the replication of the return and risk

76
00:03:52,520 --> 00:03:55,360
Speaker 4: of a hedge fund without being an actual hedge fund.

77
00:03:55,800 --> 00:03:58,880
Speaker 4: So this is when we call an institution doing what

78
00:03:58,920 --> 00:04:01,720
Speaker 4: we call SYNTHETI had fun type of activity.

79
00:04:02,360 --> 00:04:05,000
Speaker 2: Tracy. I already like this conversation because normally we talk

80
00:04:05,040 --> 00:04:07,200
Speaker 2: about shadow banks, right, and so the idea that there's

81
00:04:07,240 --> 00:04:11,280
Speaker 2: banks inside regulated institutions and then other non banks sort

82
00:04:11,320 --> 00:04:14,200
Speaker 2: of replicate their activity. And it feels like we're looking

83
00:04:14,240 --> 00:04:17,080
Speaker 2: through the other end of the telescope here talking about,

84
00:04:17,800 --> 00:04:21,640
Speaker 2: you know, hedge funds being replicated inside regulated institutions.

85
00:04:21,720 --> 00:04:25,000
Speaker 1: Yeah, it's replication all the way down. But okay, talk

86
00:04:25,040 --> 00:04:28,800
Speaker 1: to us about how SVB fits into the category of

87
00:04:29,160 --> 00:04:31,919
Speaker 1: synthetic hedge funds because I think that'll help us understand

88
00:04:32,000 --> 00:04:33,000
Speaker 1: exactly what's going on.

89
00:04:33,640 --> 00:04:36,120
Speaker 4: So basically, a SVP kind of like FeAs in this

90
00:04:36,279 --> 00:04:40,080
Speaker 4: category from two different perspectives, and like one type of

91
00:04:40,120 --> 00:04:44,120
Speaker 4: activity is actually being generated through the unbalanced it kind

92
00:04:44,120 --> 00:04:46,560
Speaker 4: of like operation, and the other one is being generated

93
00:04:46,600 --> 00:04:49,280
Speaker 4: through off balance it operation. So I want to start

94
00:04:49,320 --> 00:04:51,480
Speaker 4: with the off balance it operation and then I kind

95
00:04:51,480 --> 00:04:54,600
Speaker 4: of like continue the conversation to discuss what SWEP has

96
00:04:54,640 --> 00:04:57,080
Speaker 4: done and the balance it as well. When it comes

97
00:04:57,080 --> 00:04:59,240
Speaker 4: to the off balance it operation, it is like the

98
00:04:59,400 --> 00:05:03,800
Speaker 4: way as we have used interest rates, SWAB replicates what

99
00:05:03,920 --> 00:05:06,560
Speaker 4: a hedge fund does in order to conduct a fixed

100
00:05:06,640 --> 00:05:10,240
Speaker 4: income arbitration strategy, rather than what a bank does in

101
00:05:10,320 --> 00:05:13,760
Speaker 4: order to protect itself against interest rate risk. So, to

102
00:05:13,800 --> 00:05:16,160
Speaker 4: be more specific, what do I mean by that? Like

103
00:05:16,520 --> 00:05:19,840
Speaker 4: when you try to kind of like match the activities

104
00:05:19,880 --> 00:05:23,200
Speaker 4: of the SVB risk managers with the narratives of the

105
00:05:23,240 --> 00:05:27,000
Speaker 4: CFO of the SVB, we see that the timing of

106
00:05:27,360 --> 00:05:31,000
Speaker 4: entering and exiting the interest rates toob by SVP really

107
00:05:31,080 --> 00:05:34,360
Speaker 4: replicates what a hedge fund would do in order to

108
00:05:34,480 --> 00:05:37,240
Speaker 4: kind of like exploit the so called mispricing in the

109
00:05:37,279 --> 00:05:40,920
Speaker 4: bond market. And that mispricing in the bond market would

110
00:05:40,960 --> 00:05:45,040
Speaker 4: generate this so called like arbitrage opportunity that a hedge

111
00:05:45,080 --> 00:05:48,919
Speaker 4: fund wants to naturally exploit. So I want to start

112
00:05:48,960 --> 00:05:52,240
Speaker 4: with what happened to the SVB in order to decide

113
00:05:52,279 --> 00:05:55,600
Speaker 4: to exit the interest rates to oppositions. So when you

114
00:05:55,640 --> 00:05:58,039
Speaker 4: look at like the timing of the exit, it just

115
00:05:58,080 --> 00:06:00,480
Speaker 4: doesn't make sense if you think of a VB as

116
00:06:00,520 --> 00:06:04,080
Speaker 4: a bank that wants to actually hedge itself against interest

117
00:06:04,120 --> 00:06:07,640
Speaker 4: rate movements, but if you think of it as a

118
00:06:07,680 --> 00:06:12,320
Speaker 4: hedge fund who has entered this particular position of having

119
00:06:12,320 --> 00:06:15,520
Speaker 4: a long position in the US treasuries and a short

120
00:06:15,560 --> 00:06:19,680
Speaker 4: position in interst rate swap because it was actually thinking

121
00:06:19,760 --> 00:06:23,080
Speaker 4: that the swop rate, which is the difference between the

122
00:06:23,120 --> 00:06:26,120
Speaker 4: swap spread, which is the difference between the swap rate

123
00:06:26,200 --> 00:06:29,480
Speaker 4: and the US treasure rate, is too narrow, and like

124
00:06:29,520 --> 00:06:32,479
Speaker 4: the hedge fund was predicting that this spread is going

125
00:06:32,520 --> 00:06:35,039
Speaker 4: to widen in the future. But at some point it

126
00:06:35,160 --> 00:06:39,240
Speaker 4: realizes that that prediction was wrong and the swab spread

127
00:06:39,360 --> 00:06:42,599
Speaker 4: is not actually going to widen, and in order to

128
00:06:42,640 --> 00:06:45,320
Speaker 4: minimize as the losses, it tried to kind of like

129
00:06:45,800 --> 00:06:50,040
Speaker 4: exed that particular position sooner rather than later. This is

130
00:06:50,080 --> 00:06:53,960
Speaker 4: the narrative that the SVBCFO was kind of like offering

131
00:06:54,000 --> 00:06:57,280
Speaker 4: to the rest of us that they tried to minimize

132
00:06:57,440 --> 00:07:01,880
Speaker 4: losses and that's why they exist the interest rate stop position,

133
00:07:02,440 --> 00:07:06,400
Speaker 4: which again matches with what the very same CFO and

134
00:07:06,600 --> 00:07:09,320
Speaker 4: very same type of like people from the SVP group

135
00:07:09,360 --> 00:07:13,280
Speaker 4: were telling us about their prediction about the shape of

136
00:07:13,480 --> 00:07:17,880
Speaker 4: the yield cave, which informs such a strategy, But it

137
00:07:17,960 --> 00:07:22,440
Speaker 4: does not align with what a typical bank risk manager

138
00:07:22,520 --> 00:07:26,960
Speaker 4: would do if it wanted to actually protect itself against

139
00:07:27,000 --> 00:07:30,960
Speaker 4: interest rate risks because it was holding very long term

140
00:07:31,120 --> 00:07:35,280
Speaker 4: US Treasury securities. So in short, when it comes to

141
00:07:35,320 --> 00:07:39,640
Speaker 4: the off balanceet operation, the timing of entering and exiting

142
00:07:39,680 --> 00:07:43,600
Speaker 4: the swap positions, and the reason the SVIB has actually

143
00:07:43,920 --> 00:07:48,840
Speaker 4: conducted both operations matched with their understanding of what the

144
00:07:48,920 --> 00:07:52,400
Speaker 4: yield care should be and what the yield cave is

145
00:07:52,800 --> 00:07:56,400
Speaker 4: rather than what the interesst rate risks are, and they

146
00:07:56,480 --> 00:08:00,960
Speaker 4: wanted to protect themselves against those type of risks. So

147
00:08:01,000 --> 00:08:03,480
Speaker 4: if you want to understand it from the traditional bank

148
00:08:03,560 --> 00:08:06,000
Speaker 4: risk management, this doesn't make sense. If you want to

149
00:08:06,080 --> 00:08:09,200
Speaker 4: understand it through a hedge fund strategy that want to

150
00:08:09,240 --> 00:08:13,600
Speaker 4: actually exploit mispricing in the bond market, and then realizes

151
00:08:13,640 --> 00:08:17,400
Speaker 4: that that mispricing was mistake, that estimation of a mispricing

152
00:08:17,480 --> 00:08:20,240
Speaker 4: was mistake, then it does make sense to do what

153
00:08:20,320 --> 00:08:23,440
Speaker 4: the SWEB did. At the same time, when it comes

154
00:08:23,480 --> 00:08:27,400
Speaker 4: to the unbalanced operations, when we look at the asset

155
00:08:27,560 --> 00:08:30,320
Speaker 4: side of the SVB, there is this item in the

156
00:08:30,360 --> 00:08:33,040
Speaker 4: asset site which I think we should explore more and

157
00:08:33,120 --> 00:08:35,920
Speaker 4: we haven't done so yet. And that's what we call

158
00:08:36,000 --> 00:08:39,760
Speaker 4: the subscription line or a capitol call line of credit,

159
00:08:40,160 --> 00:08:42,920
Speaker 4: which is something that I think is growing in the

160
00:08:43,000 --> 00:08:46,360
Speaker 4: commercial banking world, and in terms of the economics of

161
00:08:46,400 --> 00:08:50,280
Speaker 4: this credit line is a very unusual type of bank credit.

162
00:08:50,720 --> 00:08:53,600
Speaker 1: I just want to ask a question on the swaps, right, So,

163
00:08:53,679 --> 00:08:56,320
Speaker 1: I remember this came up a lot when the vocal

164
00:08:56,440 --> 00:08:59,319
Speaker 1: rule was coming into being. But a reality of the

165
00:08:59,360 --> 00:09:01,760
Speaker 1: way banks are operate is that the line between a

166
00:09:01,800 --> 00:09:06,000
Speaker 1: hedge and a trade can be pretty thin, and hedges

167
00:09:06,080 --> 00:09:09,280
Speaker 1: can end up being very profitable or they can end

168
00:09:09,360 --> 00:09:12,240
Speaker 1: up losing a lot of money. How do you actually

169
00:09:12,360 --> 00:09:16,960
Speaker 1: distinguish between the two, because again, one man's hedge is

170
00:09:17,000 --> 00:09:18,000
Speaker 1: another man's trade.

171
00:09:18,080 --> 00:09:22,320
Speaker 4: Right, that's a very very good question. Like, one way

172
00:09:22,360 --> 00:09:25,600
Speaker 4: to distinguish between the two is that again listening to

173
00:09:25,679 --> 00:09:29,160
Speaker 4: what they are saying and the reasoning behind their entrance,

174
00:09:29,240 --> 00:09:32,760
Speaker 4: and they entering a particular position and they exit from

175
00:09:32,760 --> 00:09:36,360
Speaker 4: that particular position. So it's really about collecting narrative. That's

176
00:09:36,440 --> 00:09:39,320
Speaker 4: one thing. The second thing is to match what they

177
00:09:39,320 --> 00:09:42,840
Speaker 4: are doing with what they also doing in peril and

178
00:09:43,000 --> 00:09:45,959
Speaker 4: saying in peril about their prediction of what the shape

179
00:09:46,000 --> 00:09:49,200
Speaker 4: of the yield care should be. Because when it comes

180
00:09:49,240 --> 00:09:53,280
Speaker 4: to like most hedge funded strategies, especially the fixed income

181
00:09:53,400 --> 00:09:57,959
Speaker 4: hedge funded strategies, is all about what a particular head

182
00:09:58,080 --> 00:10:01,760
Speaker 4: fund manager thinks they yield curve should be and what

183
00:10:01,880 --> 00:10:05,080
Speaker 4: the yield cave in the market actually is today. And

184
00:10:05,160 --> 00:10:08,120
Speaker 4: if there's a difference between the two, a hedge fund

185
00:10:08,200 --> 00:10:12,240
Speaker 4: is going to conduct a sort of an intere and

186
00:10:12,800 --> 00:10:17,720
Speaker 4: compose a portfolio that enables the hedge fund to actually

187
00:10:17,800 --> 00:10:21,880
Speaker 4: exploit that's so called mispricing. So what I would say

188
00:10:21,960 --> 00:10:27,520
Speaker 4: is that the defining point here is whether that particular entity,

189
00:10:27,600 --> 00:10:29,960
Speaker 4: it can be a synthetic hash fund such as a

190
00:10:30,040 --> 00:10:34,160
Speaker 4: bank or an actual hedge fund, is connecting is activity

191
00:10:34,280 --> 00:10:38,520
Speaker 4: with the mispricing in the bond market. And what the

192
00:10:38,559 --> 00:10:41,160
Speaker 4: shape of the yield cave should be versus what the

193
00:10:41,200 --> 00:10:44,520
Speaker 4: shape of the yield cave is or what they do

194
00:10:44,600 --> 00:10:48,920
Speaker 4: think about, like a particular direction in the prices, and

195
00:10:48,960 --> 00:10:52,320
Speaker 4: then they want to actually kind of like very immediately

196
00:10:52,400 --> 00:10:56,559
Speaker 4: and short term exploit those particular directional benefits.

197
00:10:56,840 --> 00:11:00,199
Speaker 2: So I take your point about Okay, the if I

198
00:11:00,280 --> 00:11:02,360
Speaker 2: were saying one thing, we're doing a hedge, but some

199
00:11:02,440 --> 00:11:06,480
Speaker 2: of the stuff doesn't line up, could it be inconfidence? Right? Like,

200
00:11:06,559 --> 00:11:09,160
Speaker 2: so there's one stay, Okay, this does not look like

201
00:11:09,200 --> 00:11:11,920
Speaker 2: a hedge. They're making a trade. They're taking some sort

202
00:11:11,920 --> 00:11:14,240
Speaker 2: of risk that's different from the economics of the bank.

203
00:11:14,840 --> 00:11:16,240
Speaker 2: Could it just be bad management.

204
00:11:16,960 --> 00:11:19,480
Speaker 4: It can be, But in terms of SVB, I don't

205
00:11:19,520 --> 00:11:22,560
Speaker 4: think it was. I do think it was incompetence, but

206
00:11:22,679 --> 00:11:24,920
Speaker 4: not because they were incompetent in terms of being a

207
00:11:24,960 --> 00:11:28,000
Speaker 4: bad risk manager as a bank or as a banker.

208
00:11:28,400 --> 00:11:31,560
Speaker 4: But I think they were a very bad hedge fund manager.

209
00:11:31,640 --> 00:11:33,679
Speaker 4: And again I want to go back to what they

210
00:11:33,720 --> 00:11:37,800
Speaker 4: were saying about, like what they think the market is doing,

211
00:11:37,880 --> 00:11:40,160
Speaker 4: which they thought is this wrong? And they thought that

212
00:11:40,520 --> 00:11:42,800
Speaker 4: the swop press are too low, and they thought the

213
00:11:42,840 --> 00:11:45,720
Speaker 4: swop pres they're based on the fundamental value they should

214
00:11:45,760 --> 00:11:48,360
Speaker 4: be higher. And then when you look at their action,

215
00:11:48,520 --> 00:11:52,040
Speaker 4: they were actually acting based on that particular belief, and

216
00:11:52,080 --> 00:11:55,720
Speaker 4: I would not call that incompetence. I would call that

217
00:11:55,880 --> 00:11:59,640
Speaker 4: someone in this case a banker who is actually trying

218
00:11:59,640 --> 00:12:02,400
Speaker 4: to see like a hedge fund and it's trying to

219
00:12:02,480 --> 00:12:06,960
Speaker 4: align his action based on that particular belief about the

220
00:12:07,000 --> 00:12:10,520
Speaker 4: shape of the yield cave. And the other important difference

221
00:12:10,520 --> 00:12:12,800
Speaker 4: between a hedge fund and strategy and a trade, just

222
00:12:12,840 --> 00:12:15,360
Speaker 4: going back to the previous point, is that a trade

223
00:12:15,400 --> 00:12:17,680
Speaker 4: is usually shorter term, but when it comes to the

224
00:12:17,679 --> 00:12:20,480
Speaker 4: hedge fund of strategies, these guys are patients. At least

225
00:12:20,520 --> 00:12:22,800
Speaker 4: some of these guys are very very patient, and especially

226
00:12:22,880 --> 00:12:26,079
Speaker 4: in the world of fixing comarbitrash, you need to be patient,

227
00:12:26,600 --> 00:12:29,800
Speaker 4: but when you are acting, you need to be very quick.

228
00:12:30,400 --> 00:12:33,520
Speaker 4: And that's also one of the distinctions between just like

229
00:12:33,960 --> 00:12:36,200
Speaker 4: you are entering the interest rate saw because you just

230
00:12:36,240 --> 00:12:38,880
Speaker 4: want to trade a particular a derivative in this case

231
00:12:39,320 --> 00:12:42,760
Speaker 4: SAB versus your intering interest rate SAB because it is

232
00:12:42,920 --> 00:12:47,800
Speaker 4: part of your brother portfolio. And I do think that

233
00:12:47,840 --> 00:12:51,240
Speaker 4: in the case of a SWEEB, the very interest rate

234
00:12:51,320 --> 00:12:55,600
Speaker 4: SWAB because it was part of a broader portfolio, and

235
00:12:55,840 --> 00:12:59,559
Speaker 4: that portfolio, the goal of that core portfolio was not

236
00:12:59,720 --> 00:13:03,360
Speaker 4: to head a particular risk, in this case the interest

237
00:13:03,440 --> 00:13:06,880
Speaker 4: rate risk of the those US treasuries, but rather the

238
00:13:07,000 --> 00:13:11,760
Speaker 4: goal was to exploit a mispricing in the yieldcare.

239
00:13:27,040 --> 00:13:30,240
Speaker 1: Talk to us about the on balance sheet activities you

240
00:13:30,280 --> 00:13:34,319
Speaker 1: mentioned them earlier. So alternative credit line, subscription lines. How

241
00:13:34,360 --> 00:13:38,240
Speaker 1: did those actually factor into this idea of SVB being

242
00:13:38,240 --> 00:13:39,280
Speaker 1: a synthetic hedge fund.

243
00:13:39,840 --> 00:13:42,440
Speaker 4: That's a very good question. And when it comes to

244
00:13:42,640 --> 00:13:46,600
Speaker 4: the capital line of credit, there are so many interesting

245
00:13:46,640 --> 00:13:50,800
Speaker 4: differences between this particular credit line and a typical bank

246
00:13:50,840 --> 00:13:54,400
Speaker 4: credit line. I want to start by saying something which

247
00:13:54,480 --> 00:13:57,880
Speaker 4: is very different from what banks do. So, as a bank,

248
00:13:57,920 --> 00:14:00,560
Speaker 4: when you extend a line of credit, you extend the

249
00:14:00,600 --> 00:14:04,840
Speaker 4: loan which earns interest. Your biggest incentive is to actually

250
00:14:04,880 --> 00:14:08,120
Speaker 4: earn return based on the interest you are actually kind

251
00:14:08,120 --> 00:14:11,280
Speaker 4: of like earning, and your biggest fear is for the

252
00:14:11,320 --> 00:14:14,520
Speaker 4: guy for your counterparty not to show up. You don't

253
00:14:14,520 --> 00:14:17,559
Speaker 4: want to actually be engaged in this type of credit activity.

254
00:14:18,160 --> 00:14:21,360
Speaker 4: But when it comes to the capital line of credit

255
00:14:21,440 --> 00:14:25,840
Speaker 4: or subscription line, is actually the opposite. When it comes

256
00:14:25,920 --> 00:14:29,040
Speaker 4: to the interest rate on these lines of credit, the

257
00:14:29,080 --> 00:14:32,240
Speaker 4: interest rate is actually very low. They are a structured

258
00:14:32,240 --> 00:14:34,520
Speaker 4: to below. They are a structure to be too low,

259
00:14:35,000 --> 00:14:38,360
Speaker 4: so that in this case, this is actually a line

260
00:14:38,400 --> 00:14:42,440
Speaker 4: of credit between the bank and usually a private equity

261
00:14:42,600 --> 00:14:46,000
Speaker 4: fund manager. So the interest rates are very low because

262
00:14:46,000 --> 00:14:49,160
Speaker 4: you want to attract those private equity fund managers to

263
00:14:49,240 --> 00:14:53,720
Speaker 4: come to you and actually postpone the capital call and

264
00:14:54,000 --> 00:14:57,800
Speaker 4: in instead bring those funding gaps through this particle a

265
00:14:57,880 --> 00:14:58,480
Speaker 4: line of credit.

266
00:14:58,800 --> 00:15:00,760
Speaker 2: I explained that, sorry, don't understand that.

267
00:15:01,160 --> 00:15:05,280
Speaker 4: Basically, like, the first thing is that these subscription lines

268
00:15:05,360 --> 00:15:08,160
Speaker 4: are not a credit line between a bank and a

269
00:15:08,160 --> 00:15:11,920
Speaker 4: private equity It is a credit line between a bank

270
00:15:12,160 --> 00:15:16,640
Speaker 4: and a private equity fund manager. So the reason the

271
00:15:16,640 --> 00:15:20,640
Speaker 4: private equity fund manager goes to the bank in order

272
00:15:20,720 --> 00:15:23,640
Speaker 4: to kind of like establish this line of credit is

273
00:15:23,680 --> 00:15:28,160
Speaker 4: that they want to postpone capital call from their limited partner,

274
00:15:28,760 --> 00:15:33,640
Speaker 4: because that's how the private equity fund manager can actually

275
00:15:33,840 --> 00:15:38,120
Speaker 4: kind of like synthetically or artificially increase the internal rate

276
00:15:38,200 --> 00:15:42,960
Speaker 4: of return and therefore increases own compensation. So we know

277
00:15:43,200 --> 00:15:47,680
Speaker 4: why private equity fund manager is doing so, but why

278
00:15:47,760 --> 00:15:51,720
Speaker 4: the bank is involved in this type of activity. Given

279
00:15:51,760 --> 00:15:54,680
Speaker 4: that the interest rate on this particular alone is not

280
00:15:54,800 --> 00:15:58,040
Speaker 4: very attractive. The answer to this question is the type

281
00:15:58,040 --> 00:16:02,400
Speaker 4: of collateral. The other type of credit lines where the

282
00:16:02,400 --> 00:16:06,440
Speaker 4: collateral is usually let's say the physical assets or you know,

283
00:16:06,600 --> 00:16:10,040
Speaker 4: another type of like financial assets. In this case, the

284
00:16:10,160 --> 00:16:17,880
Speaker 4: collateral is the imployed liability of private equity limited partners,

285
00:16:18,600 --> 00:16:22,760
Speaker 4: even though these limited partners may have no idea. As

286
00:16:22,840 --> 00:16:25,640
Speaker 4: a matter of fact, they do not have any idea

287
00:16:25,760 --> 00:16:28,440
Speaker 4: that this line of credit has been established at all.

288
00:16:29,400 --> 00:16:33,480
Speaker 4: In this case, the incentive is a structure. In a

289
00:16:33,600 --> 00:16:36,960
Speaker 4: very interesting way, the incentive for the bank care is

290
00:16:36,960 --> 00:16:41,520
Speaker 4: a structure so that if for any reason, the private

291
00:16:41,680 --> 00:16:44,960
Speaker 4: equity fund manager doesn't show up and does not clear

292
00:16:45,080 --> 00:16:48,280
Speaker 4: the loan or the line of credit and it defaults,

293
00:16:48,640 --> 00:16:53,040
Speaker 4: that's where the money and the profit and the attraction

294
00:16:53,240 --> 00:16:55,400
Speaker 4: is going to be for the banker. So what is

295
00:16:55,440 --> 00:16:58,320
Speaker 4: going to happen in this case. In this case, the

296
00:16:58,400 --> 00:17:02,119
Speaker 4: banker can use what we call the power of attorney

297
00:17:02,760 --> 00:17:07,720
Speaker 4: and then it becomes a synthetic limited partner in that

298
00:17:07,840 --> 00:17:12,400
Speaker 4: particular private equity and the amount of loan, the amount

299
00:17:12,400 --> 00:17:16,639
Speaker 4: of credit that was extended to the private equity fund

300
00:17:16,760 --> 00:17:20,600
Speaker 4: manager now is going to be like as if the

301
00:17:20,680 --> 00:17:25,200
Speaker 4: banker was actually one of the limited partners in that

302
00:17:25,320 --> 00:17:30,840
Speaker 4: particular private equity investment, and the rate of return for

303
00:17:30,960 --> 00:17:33,560
Speaker 4: the banker in this case is going to be the

304
00:17:33,600 --> 00:17:37,920
Speaker 4: intelal rate of return of the private equity fund, which

305
00:17:37,960 --> 00:17:42,080
Speaker 4: is considerably higher than the interest rate. In a sense,

306
00:17:42,800 --> 00:17:46,239
Speaker 4: if you're a banker and if you have extended this

307
00:17:46,560 --> 00:17:49,880
Speaker 4: type of line of credit, you're just like praying and

308
00:17:50,000 --> 00:17:53,120
Speaker 4: like you're hoping that the fund manager doesn't show up

309
00:17:53,480 --> 00:17:56,800
Speaker 4: so that you become the synthetic private equity fund manager.

310
00:17:57,480 --> 00:18:02,320
Speaker 4: So in this paper, basically I am actually highlighting this

311
00:18:02,480 --> 00:18:06,720
Speaker 4: activity which was actually a significant part of sweb's activity

312
00:18:06,760 --> 00:18:09,960
Speaker 4: as well to say that in this case, what the

313
00:18:10,080 --> 00:18:14,159
Speaker 4: banker wants to be is to become a synthetic private

314
00:18:14,200 --> 00:18:18,280
Speaker 4: equity limited partner, and this particular line of credit is

315
00:18:18,400 --> 00:18:21,120
Speaker 4: enabling the bank to do so. And I also want

316
00:18:21,160 --> 00:18:24,159
Speaker 4: to say something about the prospect of like other banks

317
00:18:24,240 --> 00:18:27,600
Speaker 4: using this This is actually a growing business. Wells Fargo

318
00:18:27,800 --> 00:18:32,040
Speaker 4: now does have a whole department trying to exploit this

319
00:18:32,160 --> 00:18:35,640
Speaker 4: type of line off credit. And I do think if

320
00:18:35,680 --> 00:18:38,320
Speaker 4: a bank is interested in this, it is because the

321
00:18:38,359 --> 00:18:42,960
Speaker 4: bank wants to become a synthetic private equity investor.

322
00:18:43,680 --> 00:18:47,200
Speaker 1: Wait, talk to us more about how endemic this actually is.

323
00:18:47,280 --> 00:18:50,239
Speaker 1: And I'm curious as well, like how you know that

324
00:18:50,320 --> 00:18:53,399
Speaker 1: other banks are doing this? And I can think of

325
00:18:53,480 --> 00:18:57,560
Speaker 1: one to posit taking institution that does this, and loads

326
00:18:57,600 --> 00:19:00,960
Speaker 1: has been written about them over the years, But where

327
00:19:01,000 --> 00:19:02,919
Speaker 1: are you getting the data from and how are you

328
00:19:02,960 --> 00:19:03,840
Speaker 1: making that judgment?

329
00:19:04,840 --> 00:19:09,240
Speaker 4: So basically like, I am connecting this research on market microstructure,

330
00:19:09,359 --> 00:19:13,199
Speaker 4: and this project is called Market Microstructure Project. And because

331
00:19:13,240 --> 00:19:16,200
Speaker 4: of this project, I am actually kind of like reading

332
00:19:16,440 --> 00:19:20,800
Speaker 4: everything that the bankers, the fund managers are saying, like

333
00:19:20,920 --> 00:19:24,359
Speaker 4: in the news, in the newspaper, in the news articles.

334
00:19:24,760 --> 00:19:27,560
Speaker 4: So to answer your question, I would say that, unfortunately,

335
00:19:27,600 --> 00:19:30,639
Speaker 4: as of now, I do not have access to the

336
00:19:30,760 --> 00:19:34,160
Speaker 4: data set that gives me this kind of like concrete

337
00:19:34,240 --> 00:19:37,600
Speaker 4: picture of like how many banks are actually using these

338
00:19:37,880 --> 00:19:41,840
Speaker 4: subscription lines or extending these subscription lines. But the good

339
00:19:41,920 --> 00:19:44,040
Speaker 4: news here is that I'm in touch with a few

340
00:19:44,040 --> 00:19:46,640
Speaker 4: people in the fat they might extend such a data

341
00:19:46,720 --> 00:19:48,959
Speaker 4: to me. So this is hopefully going to be the

342
00:19:49,000 --> 00:19:51,879
Speaker 4: next project for me to formalize that and showing that

343
00:19:51,960 --> 00:19:55,600
Speaker 4: in the data. But I'm collecting narratives I'm listening to

344
00:19:55,640 --> 00:19:58,960
Speaker 4: the people, and also because of this market microstructure project,

345
00:19:59,000 --> 00:20:01,720
Speaker 4: I'm talking to all the bankers, Like I go to

346
00:20:01,760 --> 00:20:04,320
Speaker 4: this like let's say a half hours of the bank

347
00:20:04,359 --> 00:20:07,760
Speaker 4: cares like the hedge fund association like parties, and I

348
00:20:07,800 --> 00:20:11,240
Speaker 4: talk to these guys and I'm hearing or and or

349
00:20:11,320 --> 00:20:14,520
Speaker 4: again that like the bankers are either using this in

350
00:20:14,560 --> 00:20:17,600
Speaker 4: their business model as part of their business model, or

351
00:20:17,680 --> 00:20:21,159
Speaker 4: they are trying to actually adopt it. So as of now,

352
00:20:21,320 --> 00:20:24,439
Speaker 4: this is me as the one professor who is just

353
00:20:24,640 --> 00:20:27,919
Speaker 4: trying to listen to the market. But hopefully this is

354
00:20:27,960 --> 00:20:30,480
Speaker 4: soon going to be formally shown to the rest of

355
00:20:30,560 --> 00:20:33,560
Speaker 4: us through the data that I will have access to.

356
00:20:34,280 --> 00:20:36,760
Speaker 2: So they're like multiple things going on. There's the question

357
00:20:36,840 --> 00:20:39,800
Speaker 2: of is the bank hedging or is the bank trading.

358
00:20:40,080 --> 00:20:43,560
Speaker 2: There's the question of are they trying to establish collateral

359
00:20:43,800 --> 00:20:46,280
Speaker 2: that's in a sort of like hedge fund or private

360
00:20:46,320 --> 00:20:49,879
Speaker 2: equity structure so that they can get higher returns and

361
00:20:49,960 --> 00:20:53,119
Speaker 2: so forth. If the data is available, is this the

362
00:20:53,160 --> 00:20:56,160
Speaker 2: type of thing that like that you believe is detectable

363
00:20:56,200 --> 00:20:59,040
Speaker 2: in advance? This bank is starting to look more like

364
00:20:59,080 --> 00:21:01,800
Speaker 2: a synthetic hedge fund than what we think of as

365
00:21:01,800 --> 00:21:04,160
Speaker 2: the economics of a bank, I do.

366
00:21:04,000 --> 00:21:06,720
Speaker 4: Think it is, and I do think like the data

367
00:21:06,960 --> 00:21:10,200
Speaker 4: is an amazing source, and I'm very glad that the central bankers,

368
00:21:10,200 --> 00:21:12,400
Speaker 4: at least they do have access to so many data.

369
00:21:12,800 --> 00:21:14,919
Speaker 4: At the same time, I think right now there is

370
00:21:14,960 --> 00:21:17,520
Speaker 4: not that much the question of like data, but rather

371
00:21:17,600 --> 00:21:21,159
Speaker 4: our framework, the lens s trivish while looking at and

372
00:21:21,240 --> 00:21:24,200
Speaker 4: also the lens TRUVISI we are looking at this data.

373
00:21:24,320 --> 00:21:26,320
Speaker 4: If you are looking at the same data and the

374
00:21:26,359 --> 00:21:30,399
Speaker 4: only framework that you have adopted is the industrial organization

375
00:21:30,480 --> 00:21:33,040
Speaker 4: of a bank, you're going to see what you want

376
00:21:33,119 --> 00:21:35,320
Speaker 4: to see. That this was a bank who did a

377
00:21:35,480 --> 00:21:39,000
Speaker 4: very bad and even a stupid type of like risk management,

378
00:21:39,560 --> 00:21:44,280
Speaker 4: and because they just exited their interest rates opposition just

379
00:21:44,400 --> 00:21:47,720
Speaker 4: before the FED started to increase the rates. So it

380
00:21:47,800 --> 00:21:52,680
Speaker 4: is about the industrial organization that you adopt in order

381
00:21:52,800 --> 00:21:56,480
Speaker 4: to assess the data that is being provided to you

382
00:21:56,640 --> 00:22:00,199
Speaker 4: by banks. And I really think that in order for

383
00:22:00,560 --> 00:22:03,320
Speaker 4: the regulators not to fail, it's not that much the

384
00:22:03,400 --> 00:22:06,760
Speaker 4: question of supervision. I think banks are being supervised, but

385
00:22:06,960 --> 00:22:09,960
Speaker 4: you have to supervise and assist the bank through new

386
00:22:10,040 --> 00:22:13,639
Speaker 4: perspectives and understand that the banks do not want to

387
00:22:13,680 --> 00:22:17,119
Speaker 4: be banks anymore, and they want to actually have some

388
00:22:17,400 --> 00:22:21,720
Speaker 4: share of doors higher returns that are actually being accumulated

389
00:22:21,840 --> 00:22:25,879
Speaker 4: and generated in the private market and also like in

390
00:22:25,920 --> 00:22:29,400
Speaker 4: the alternative investment fund market. So once you look at

391
00:22:29,480 --> 00:22:33,640
Speaker 4: what banks are doing through the business model and industrial

392
00:22:33,800 --> 00:22:37,560
Speaker 4: organization of alternative investment fund, I think then you can

393
00:22:37,640 --> 00:22:40,920
Speaker 4: become even a more effective bank supervisor.

394
00:22:41,560 --> 00:22:43,560
Speaker 2: By the way, Tracy, I'm looking at a blog post

395
00:22:43,640 --> 00:22:46,199
Speaker 2: right now from MSCI, and it doesn't look at it

396
00:22:46,240 --> 00:22:49,119
Speaker 2: from the bank level, but through the fund level, you

397
00:22:49,160 --> 00:22:51,280
Speaker 2: can just see the rise in charge. Whether it's looking

398
00:22:51,320 --> 00:22:55,119
Speaker 2: adventure capital, buy out, various forms of private equity, the

399
00:22:55,280 --> 00:22:59,760
Speaker 2: number of them using subscription lines of credit, pretty interesting

400
00:23:00,400 --> 00:23:02,840
Speaker 2: charge lines going up into the right, lots.

401
00:23:02,600 --> 00:23:04,919
Speaker 1: Of lines going up. So I mean, I agree with

402
00:23:04,960 --> 00:23:08,880
Speaker 1: the point that supervisors should be looking at this activity.

403
00:23:08,920 --> 00:23:12,679
Speaker 1: And we probably don't want banks to be synthetic hedge funds.

404
00:23:12,680 --> 00:23:14,639
Speaker 1: We don't want them to do risky things because we

405
00:23:14,680 --> 00:23:17,400
Speaker 1: would all like to one day get our deposits back.

406
00:23:17,720 --> 00:23:21,000
Speaker 1: But in the case of SVB, I don't think I

407
00:23:21,040 --> 00:23:23,120
Speaker 1: agree with the point that they were a bad synthetic

408
00:23:23,160 --> 00:23:27,080
Speaker 1: hedge fund versus just a bad bank. And I guess

409
00:23:27,160 --> 00:23:30,199
Speaker 1: My question is, like, is this the right thing to

410
00:23:30,400 --> 00:23:35,080
Speaker 1: focus on for SVB, because even without the swap spreads,

411
00:23:35,400 --> 00:23:40,439
Speaker 1: svb's bond portfolio would have had massive losses, right, And

412
00:23:40,480 --> 00:23:44,359
Speaker 1: they also misjudged their deposit base. That's a pretty big

413
00:23:44,400 --> 00:23:48,200
Speaker 1: failure for a bank. And by the way, I saw

414
00:23:48,240 --> 00:23:52,040
Speaker 1: a presentation that was made to their Asset Liability Committee

415
00:23:52,080 --> 00:23:55,240
Speaker 1: in late twenty twenty and the recommendation there from the

416
00:23:55,280 --> 00:24:00,000
Speaker 1: Treasury was to buy shorter term bonds as deposits were

417
00:24:00,119 --> 00:24:05,119
Speaker 1: flowing in, and the ALM committee basically decided not to

418
00:24:05,160 --> 00:24:08,000
Speaker 1: do it. They said, like, if we do it, it'll

419
00:24:08,080 --> 00:24:12,280
Speaker 1: cost eighteen million dollars in earnings. So they didn't want

420
00:24:12,320 --> 00:24:14,520
Speaker 1: to do it because they wanted to protect their profits.

421
00:24:14,760 --> 00:24:17,199
Speaker 4: But it seems to me like there are some bigger

422
00:24:17,280 --> 00:24:21,640
Speaker 4: issues here, really good question. I still do believe that

423
00:24:22,000 --> 00:24:26,240
Speaker 4: SVB was a good bank a very bad alternative investment fund.

424
00:24:26,600 --> 00:24:29,359
Speaker 4: And also they weren't very good like in accounting, so

425
00:24:29,480 --> 00:24:32,679
Speaker 4: like speaking of the US Treasury, the holding of the

426
00:24:32,760 --> 00:24:35,040
Speaker 4: US Treasure is one of the other mistakes they made

427
00:24:35,240 --> 00:24:38,240
Speaker 4: was that in instead of like accounting for them as

428
00:24:38,320 --> 00:24:41,760
Speaker 4: health to maturity, they did do that as available for sale,

429
00:24:41,840 --> 00:24:44,320
Speaker 4: and that was also one of the reasons that their

430
00:24:44,359 --> 00:24:47,639
Speaker 4: balance sheet was negatively affected. So if anything, they weren't

431
00:24:47,680 --> 00:24:50,399
Speaker 4: really good accountant. But in terms of like being a

432
00:24:50,440 --> 00:24:53,639
Speaker 4: bank here, I do think they were decent enough bank,

433
00:24:53,920 --> 00:24:57,520
Speaker 4: but they just didn't like to be that. They wanted

434
00:24:57,560 --> 00:25:00,920
Speaker 4: to be something beyond that, and that where they weren't

435
00:25:01,000 --> 00:25:04,600
Speaker 4: really good at. And again I'm going back to the

436
00:25:04,720 --> 00:25:09,200
Speaker 4: narratives that I collected, and these are all public narratives.

437
00:25:09,240 --> 00:25:12,280
Speaker 4: And when you look at why they did what they did,

438
00:25:12,800 --> 00:25:16,280
Speaker 4: they really had a very very specific view of what

439
00:25:16,320 --> 00:25:18,919
Speaker 4: the yield care should be and what the yield care is.

440
00:25:19,280 --> 00:25:22,920
Speaker 4: They thought the swop press are going to increase and

441
00:25:23,040 --> 00:25:26,720
Speaker 4: in order to actually match their fundamental value, and they

442
00:25:26,760 --> 00:25:30,359
Speaker 4: thought the swop press are kind of like artificially like

443
00:25:30,720 --> 00:25:34,560
Speaker 4: suppress and they wanted to take advantage of that. And

444
00:25:34,880 --> 00:25:39,840
Speaker 4: they failed dramatically, and mostly because they couldn't wait long

445
00:25:39,960 --> 00:25:44,159
Speaker 4: enough because they were actually constrained by regulation as well.

446
00:25:44,600 --> 00:25:48,000
Speaker 4: So for me, rather than thinking that SVB was not

447
00:25:48,040 --> 00:25:51,760
Speaker 4: a good bank, this is actually showing an inherent tension

448
00:25:52,359 --> 00:25:55,080
Speaker 4: for any type of banks who wants to actually do

449
00:25:55,200 --> 00:25:59,280
Speaker 4: something that non banks are doing, especially like alternative investment

450
00:25:59,320 --> 00:26:03,240
Speaker 4: funds are doing. That even if you manipulate your models

451
00:26:03,480 --> 00:26:09,240
Speaker 4: in order to synthetically replicate the trading strategies, investing strategies,

452
00:26:09,480 --> 00:26:12,800
Speaker 4: or the risk and return portfolio of a hedge fund,

453
00:26:13,080 --> 00:26:17,440
Speaker 4: you do not have the same flexibility to execute those

454
00:26:17,480 --> 00:26:21,160
Speaker 4: type of strategies, and you do not have the same time,

455
00:26:21,200 --> 00:26:24,640
Speaker 4: and you are considerably more constrained in terms of being

456
00:26:24,680 --> 00:26:27,560
Speaker 4: supervised in terms of like you have to put considerably

457
00:26:27,640 --> 00:26:30,440
Speaker 4: more capital. This is something that hedge funds do not

458
00:26:30,640 --> 00:26:32,960
Speaker 4: need to do. And you have to respond to people

459
00:26:33,040 --> 00:26:37,159
Speaker 4: who are very impatient, and those are depositors, people that

460
00:26:37,640 --> 00:26:39,600
Speaker 4: as a hedge fund, you don't need to deal with.

461
00:26:40,359 --> 00:26:45,200
Speaker 4: So for me, this is an inherent tension between being

462
00:26:45,240 --> 00:26:48,399
Speaker 4: a bank with all the realities of being a bank,

463
00:26:48,720 --> 00:26:52,320
Speaker 4: and just think that's not good enough. You want to

464
00:26:52,359 --> 00:26:53,119
Speaker 4: be something better.

465
00:27:08,880 --> 00:27:12,000
Speaker 2: You know, I for a long time, and I still do.

466
00:27:12,280 --> 00:27:15,280
Speaker 2: Like I consider myself, like Tracy probably heard me at

467
00:27:15,320 --> 00:27:19,240
Speaker 2: various times, I'm like an SVB apologist, And I've said

468
00:27:19,280 --> 00:27:21,399
Speaker 2: on the podcast, I'm like, oh, they're like a good bank.

469
00:27:21,480 --> 00:27:23,840
Speaker 2: They like took themselves really seriously.

470
00:27:23,920 --> 00:27:26,560
Speaker 1: Everyone here has a different view. Yeah, whether they were

471
00:27:26,600 --> 00:27:27,640
Speaker 1: a good bank, that's right.

472
00:27:27,680 --> 00:27:30,320
Speaker 2: I think like I'm like in the middle here because

473
00:27:30,359 --> 00:27:32,159
Speaker 2: I was for a long time. It's like, no, this

474
00:27:32,280 --> 00:27:33,800
Speaker 2: is like what a bank should be, and they really

475
00:27:33,800 --> 00:27:36,000
Speaker 2: get to know their clients and they really get to

476
00:27:36,040 --> 00:27:40,120
Speaker 2: like know their industry. On the other hand, I agree

477
00:27:40,200 --> 00:27:42,800
Speaker 2: with like Tracy that they just seem to have made

478
00:27:42,840 --> 00:27:47,199
Speaker 2: a lot of bad mistakes and miscalculated the flightiness of

479
00:27:47,240 --> 00:27:50,920
Speaker 2: its depositor base, and they probably didn't have traditional lending

480
00:27:50,960 --> 00:27:53,000
Speaker 2: opportunities like most banks, so they're like, oh, I'll just

481
00:27:53,000 --> 00:27:55,120
Speaker 2: put it in something safe, like Treasury is not thinking

482
00:27:55,119 --> 00:27:59,320
Speaker 2: about then Treasury sometimes go down. I also home take

483
00:27:59,359 --> 00:28:01,840
Speaker 2: your review that you know, like you're in Silicon Valley,

484
00:28:02,240 --> 00:28:04,320
Speaker 2: you probably don't just like want to be a bank, right.

485
00:28:04,400 --> 00:28:07,120
Speaker 2: You know everyone else is like getting super rich and you're.

486
00:28:06,960 --> 00:28:09,840
Speaker 1: Just getting and management is dealing with tech people, right,

487
00:28:09,920 --> 00:28:13,080
Speaker 1: so I imagine some of that optimism kind of rubs off

488
00:28:13,080 --> 00:28:13,440
Speaker 1: on them.

489
00:28:13,680 --> 00:28:15,760
Speaker 2: Yeah, So it's like everyone else is getting mega ridge

490
00:28:15,800 --> 00:28:17,960
Speaker 2: and they're just getting kind of rich. So it's like

491
00:28:18,000 --> 00:28:20,240
Speaker 2: you probably want to look for ways to like get

492
00:28:20,280 --> 00:28:24,280
Speaker 2: something that resembles equity upside. All this being said, and

493
00:28:24,359 --> 00:28:27,400
Speaker 2: this is sort of like my final question, the fact

494
00:28:27,480 --> 00:28:31,439
Speaker 2: that like we're having this conversation, SDB is like a

495
00:28:31,480 --> 00:28:34,800
Speaker 2: weird situation. There aren't many banks like SVB. I don't

496
00:28:34,880 --> 00:28:38,400
Speaker 2: think in that one specific industry and an industry that's

497
00:28:38,400 --> 00:28:42,560
Speaker 2: specific to a location, et cetera. And then there wasn't

498
00:28:42,600 --> 00:28:44,520
Speaker 2: much contagion. There were a few other sort of similar

499
00:28:44,600 --> 00:28:46,920
Speaker 2: banks that went down. There were some crypto related banks,

500
00:28:47,200 --> 00:28:49,600
Speaker 2: but it was not contagious. In the end, it was

501
00:28:49,680 --> 00:28:52,640
Speaker 2: not a big crisis of regional banks. It was not

502
00:28:52,680 --> 00:28:55,440
Speaker 2: a big flight of deposits away. Regional banks DOCS have

503
00:28:55,480 --> 00:28:58,720
Speaker 2: been doing very well lately and they're like basically they're

504
00:28:58,720 --> 00:29:00,720
Speaker 2: a little bit above where they are when this PHB colaps.

505
00:29:01,000 --> 00:29:03,000
Speaker 2: How do you think this is all along winded way

506
00:29:03,000 --> 00:29:05,400
Speaker 2: to set up like the prevalence of this type of

507
00:29:05,480 --> 00:29:10,680
Speaker 2: risk elsewhere. Because it feels to me that SVB intuitively

508
00:29:10,680 --> 00:29:12,560
Speaker 2: feels like a unique situation.

509
00:29:12,600 --> 00:29:15,040
Speaker 4: I should disagree with you, and I don't think it's

510
00:29:15,040 --> 00:29:18,680
Speaker 4: about the question of like, okay, what happened immediately after

511
00:29:18,680 --> 00:29:20,680
Speaker 4: I met of the claps of SVB. To me, this

512
00:29:20,760 --> 00:29:23,600
Speaker 4: is a signal that where the banking is going, and

513
00:29:23,640 --> 00:29:26,040
Speaker 4: this is about like the commercial banking those are like

514
00:29:26,080 --> 00:29:29,120
Speaker 4: they're not too as big as Jpmerican. The City Bank

515
00:29:29,440 --> 00:29:32,360
Speaker 4: or Bank of America. I do think that the biggest

516
00:29:32,440 --> 00:29:35,120
Speaker 4: lesson we have to learn from this SVB is that

517
00:29:35,440 --> 00:29:41,520
Speaker 4: the business model of banking system is changing, and SVB

518
00:29:41,640 --> 00:29:44,840
Speaker 4: but just showing a window or opening a window towards

519
00:29:44,880 --> 00:29:48,480
Speaker 4: that new world. That the banks are doing different things.

520
00:29:48,520 --> 00:29:54,000
Speaker 4: They're manipulating their model in order to take advantage of

521
00:29:54,960 --> 00:29:59,160
Speaker 4: some flexibility or any flexibility they might have in order

522
00:29:59,240 --> 00:30:04,040
Speaker 4: to co undugged hedge fund like strategies. So to me,

523
00:30:04,520 --> 00:30:08,360
Speaker 4: the collapse of SVB was very important, not because what

524
00:30:08,560 --> 00:30:12,360
Speaker 4: happened immediately afterwards or the bank run on other banks,

525
00:30:12,560 --> 00:30:15,520
Speaker 4: but because it is showing us that there is distension

526
00:30:15,680 --> 00:30:18,600
Speaker 4: in the banking system, that banks do not want to

527
00:30:18,600 --> 00:30:22,840
Speaker 4: be banked anymore, and they are looking for alternatives. And

528
00:30:23,080 --> 00:30:29,200
Speaker 4: these alternatives are usually being found in the alternative investment world,

529
00:30:29,800 --> 00:30:32,920
Speaker 4: and the banks are going to move towards to the

530
00:30:33,000 --> 00:30:38,480
Speaker 4: direction of adopting more of that type of strategies into

531
00:30:38,520 --> 00:30:42,840
Speaker 4: their traditional banking model. And it is in that regard.

532
00:30:43,080 --> 00:30:46,560
Speaker 4: It is from this perspective that I think what happened

533
00:30:46,560 --> 00:30:50,360
Speaker 4: to SVB is very important because it is showing us

534
00:30:50,520 --> 00:30:54,800
Speaker 4: that banks are extremely uncomfortable with their identity and they

535
00:30:54,880 --> 00:30:58,400
Speaker 4: want to shift their identity. Is it a bad thing

536
00:30:58,680 --> 00:31:01,160
Speaker 4: or a good thing? You don't know. I think he's

537
00:31:01,160 --> 00:31:02,200
Speaker 4: a very exciting thing.

538
00:31:03,760 --> 00:31:07,320
Speaker 2: This is Tracy along has my approach to news. No

539
00:31:07,440 --> 00:31:08,720
Speaker 2: better or good, just exciting.

540
00:31:08,920 --> 00:31:11,440
Speaker 1: Yeah, although I was gonna say it was actually pretty

541
00:31:11,480 --> 00:31:14,600
Speaker 1: amazing to hear you take a middle ground position on something.

542
00:31:14,640 --> 00:31:16,280
Speaker 1: I don't think I've ever heard that before.

543
00:31:16,320 --> 00:31:17,840
Speaker 2: I'm just a normal, moderate guy.

544
00:31:18,200 --> 00:31:21,880
Speaker 1: Yeah, okay, So just on this point. One thing I

545
00:31:21,920 --> 00:31:25,400
Speaker 1: remember from our discussions around SVB. I think we were

546
00:31:25,480 --> 00:31:29,080
Speaker 1: talking to levmanand and he made the point that the

547
00:31:29,240 --> 00:31:33,280
Speaker 1: US has basically made a conscious decision to outsource a

548
00:31:33,320 --> 00:31:39,760
Speaker 1: lot of bank supervisory processes to shareholders. And shareholders, you know,

549
00:31:39,960 --> 00:31:43,400
Speaker 1: they like making money, and so the incentive is typically

550
00:31:43,480 --> 00:31:47,280
Speaker 1: skewed towards more risky behavior. If we decide that we

551
00:31:47,320 --> 00:31:50,680
Speaker 1: don't want banks to be synthetic hedge funds, what type

552
00:31:50,680 --> 00:31:55,120
Speaker 1: of regulation or limitations would you envision coming into play.

553
00:31:55,560 --> 00:31:57,800
Speaker 4: I want to ask your question in a different way, like,

554
00:31:57,880 --> 00:32:00,640
Speaker 4: if that's the future of banking, if the banks are

555
00:32:00,720 --> 00:32:04,240
Speaker 4: actually moving towards this world of being a synthetic hatch fund,

556
00:32:04,840 --> 00:32:07,680
Speaker 4: I do not think the next regulatory question is how

557
00:32:07,720 --> 00:32:11,680
Speaker 4: to limit the banks, but how to create a safer

558
00:32:11,840 --> 00:32:14,960
Speaker 4: environment for them, because the other lesson that we learn,

559
00:32:15,040 --> 00:32:17,880
Speaker 4: at least I learned from the Oswebi's failure was that

560
00:32:18,280 --> 00:32:20,840
Speaker 4: one of the reasons they failed was that at some

561
00:32:21,040 --> 00:32:24,560
Speaker 4: point they realized that they do not have enough time

562
00:32:24,720 --> 00:32:29,320
Speaker 4: to fully execute their strategy. Their strategy wasn't necessarily wrong,

563
00:32:29,800 --> 00:32:34,320
Speaker 4: but they actually prematurely exited that as soon as they

564
00:32:34,400 --> 00:32:38,000
Speaker 4: thought they might be wrong and they might actually face

565
00:32:38,120 --> 00:32:41,200
Speaker 4: so many losses. I know this may sound like a

566
00:32:41,320 --> 00:32:44,560
Speaker 4: revolutionary point, but I do think if the reality of

567
00:32:44,600 --> 00:32:47,480
Speaker 4: the banking system is that the banks are moving towards

568
00:32:47,480 --> 00:32:53,240
Speaker 4: that direction, the first regulatory task is for regulators to

569
00:32:53,360 --> 00:32:57,720
Speaker 4: change their identity as well, because you cannot force banks

570
00:32:57,760 --> 00:32:59,840
Speaker 4: to be banks if they do not want to be banks.

571
00:33:00,400 --> 00:33:05,040
Speaker 4: At the same time, if banks are actually conducting risk

572
00:33:05,080 --> 00:33:08,960
Speaker 4: care strategies, and if as a regulator you're allowing them

573
00:33:09,000 --> 00:33:11,720
Speaker 4: to take on some of those risks, maybe you want

574
00:33:11,760 --> 00:33:16,000
Speaker 4: to remove some of the protections. What type of protections

575
00:33:16,040 --> 00:33:19,560
Speaker 4: can be removed so that you can still maintain the

576
00:33:19,640 --> 00:33:23,400
Speaker 4: stability of the deposit taking world and the stability of

577
00:33:23,440 --> 00:33:26,760
Speaker 4: the financial system. This is the question that I'm proactively

578
00:33:26,840 --> 00:33:29,400
Speaker 4: thinking about it. I do not have the answer for

579
00:33:30,040 --> 00:33:34,120
Speaker 4: but I don't think the first regulatory step is to

580
00:33:34,360 --> 00:33:38,240
Speaker 4: limit what banks are doing, but rather for regulators to

581
00:33:38,400 --> 00:33:41,760
Speaker 4: change their DNA and identity as well and know that

582
00:33:41,800 --> 00:33:46,720
Speaker 4: they cannot be a simple, plain vanilla bank regulators anymore

583
00:33:47,000 --> 00:33:51,360
Speaker 4: if banks are not banks anymore and banks want to

584
00:33:51,400 --> 00:33:52,320
Speaker 4: be something else.

585
00:33:53,440 --> 00:33:56,720
Speaker 2: Ohmsday, Denijah, Thank you so much for coming on Oline.

586
00:33:57,040 --> 00:33:59,440
Speaker 2: We had a little three way debate therapy and there's

587
00:33:59,440 --> 00:34:00,920
Speaker 2: a lot of fun things. Thank You're so much. Glad

588
00:34:00,920 --> 00:34:01,680
Speaker 2: to finally have you on.

589
00:34:02,040 --> 00:34:03,960
Speaker 4: Thank you so much. It was a pleasure of being

590
00:34:04,080 --> 00:34:05,880
Speaker 4: here and discussing my ideas with you.

591
00:34:18,840 --> 00:34:21,120
Speaker 2: Tracy. I can't believe you've said I've never taken a

592
00:34:21,160 --> 00:34:23,560
Speaker 2: middle ground before. I don't take any positions.

593
00:34:23,600 --> 00:34:27,640
Speaker 1: I just I just like to learn no opinion wise people.

594
00:34:27,719 --> 00:34:28,680
Speaker 2: Yeah, that's me, that's me.

595
00:34:30,040 --> 00:34:32,680
Speaker 1: I thought that was a really interesting discussion. I mean, broadly,

596
00:34:32,719 --> 00:34:36,520
Speaker 1: what we're talking about here is reach for you behavior,

597
00:34:36,760 --> 00:34:42,160
Speaker 1: and whether that comes about through synthetic leverage or something

598
00:34:42,280 --> 00:34:46,280
Speaker 1: old school like just buying a bunch of long duration

599
00:34:46,480 --> 00:34:49,600
Speaker 1: bonds and then not hedging the interest rate risk. It

600
00:34:49,680 --> 00:34:52,200
Speaker 1: kind of amounts to the same thing right, they're still

601
00:34:52,239 --> 00:34:53,960
Speaker 1: doing this to boost returns.

602
00:34:54,520 --> 00:34:57,640
Speaker 2: We should do more on the rise of sublines. There's

603
00:34:57,680 --> 00:34:59,120
Speaker 2: always one more thing, isn't there.

604
00:34:59,360 --> 00:35:01,920
Speaker 1: Yeah. Well, and the other thing I was thinking is

605
00:35:02,080 --> 00:35:06,000
Speaker 1: this feeds into that idea of banks and private credit

606
00:35:06,080 --> 00:35:11,840
Speaker 1: private equity being frenemies, right, like they are objectively becoming

607
00:35:12,080 --> 00:35:15,719
Speaker 1: more intertwined. Insurance companies, by the way, are also big

608
00:35:15,719 --> 00:35:18,319
Speaker 1: players in private credit now, so it does feel like

609
00:35:18,719 --> 00:35:25,760
Speaker 1: the trifecta of the three biggest financial industries, banks, private

610
00:35:25,760 --> 00:35:31,080
Speaker 1: equity slash private credit, and insurers are becoming more intertwined totally.

611
00:35:31,120 --> 00:35:33,879
Speaker 2: I mean, it's interesting and it makes total sense, right,

612
00:35:33,920 --> 00:35:36,600
Speaker 2: if other entities are going to try to become banks

613
00:35:36,719 --> 00:35:39,359
Speaker 2: or credit, you know, expanding entities as we've been talking

614
00:35:39,360 --> 00:35:42,200
Speaker 2: about forever, it makes sense that banks are going to

615
00:35:42,239 --> 00:35:45,360
Speaker 2: want to look for upside elsewhere and maybe take on

616
00:35:45,600 --> 00:35:49,560
Speaker 2: positions that resemble more sort of like equity upside. I

617
00:35:49,640 --> 00:35:52,440
Speaker 2: thought Aham said something kind of fascinating at the end

618
00:35:52,480 --> 00:35:57,200
Speaker 2: in response to your question about regulation, which is that like,

619
00:35:57,680 --> 00:35:59,880
Speaker 2: if banks don't want to be banks, like, there's kind

620
00:35:59,920 --> 00:36:02,040
Speaker 2: of nothing we can do to stop them. And I

621
00:36:02,040 --> 00:36:05,480
Speaker 2: think that's like an interesting principle of like financial regulation

622
00:36:06,080 --> 00:36:08,879
Speaker 2: period that like you know, it is always this cat

623
00:36:08,920 --> 00:36:11,479
Speaker 2: and mouse game, right and in the end, like there's

624
00:36:11,480 --> 00:36:15,040
Speaker 2: sort of like entities will evolve into the new thing

625
00:36:15,080 --> 00:36:16,640
Speaker 2: and at some point there's going to be a blow

626
00:36:16,719 --> 00:36:19,399
Speaker 2: up and you know, hopefully regulators get ahead of the curve.

627
00:36:19,440 --> 00:36:22,279
Speaker 2: But in the end, like it feels like all financial

628
00:36:22,400 --> 00:36:25,080
Speaker 2: entities of any sort will like they'll evolve into what

629
00:36:25,120 --> 00:36:26,160
Speaker 2: they want to evolve into.

630
00:36:26,400 --> 00:36:30,120
Speaker 1: Yeah, you got to change your opinion when the facts change, right, right,

631
00:36:30,200 --> 00:36:33,600
Speaker 1: Shoe Joe.

632
00:36:32,520 --> 00:36:33,080
Speaker 2: Yeah, that's right.

633
00:36:33,239 --> 00:36:34,520
Speaker 4: Yeah, Okay, shall we leave it there.

634
00:36:34,560 --> 00:36:35,239
Speaker 2: Let's leave it there.

635
00:36:35,480 --> 00:36:38,360
Speaker 1: This has been another episode of the All Thoughts podcast.

636
00:36:38,520 --> 00:36:42,040
Speaker 1: I'm Tracy Alloway. You can follow me at Tracy Alloway and.

637
00:36:41,960 --> 00:36:44,759
Speaker 2: I'm Joe Wisenthal. You can follow me at the Stalwart.

638
00:36:45,080 --> 00:36:49,160
Speaker 2: Follow our guest Elham Say She's at el Hamsaiety and

639
00:36:49,280 --> 00:36:52,520
Speaker 2: check out her recent paper banks as synthetic hedge funds.

640
00:36:52,760 --> 00:36:56,000
Speaker 2: Follow our producers Kerman Rodriguez at Carman Ermann, Dash, O

641
00:36:56,040 --> 00:36:59,560
Speaker 2: Bennett at dashbod and kill Brooks at Keil Brooks. More

642
00:36:59,560 --> 00:37:02,360
Speaker 2: odd law content, go to bloomberg dot com slash oddlock,

643
00:37:02,440 --> 00:37:05,120
Speaker 2: where transcripts a blog in a newsletter and you can

644
00:37:05,200 --> 00:37:07,320
Speaker 2: chat about all of these topics twenty four to seven

645
00:37:07,400 --> 00:37:11,320
Speaker 2: in our discord discord dot gg slash oddlocks.

646
00:37:11,200 --> 00:37:12,880
Speaker 4: And if you enjoy add lots.

647
00:37:12,920 --> 00:37:14,840
Speaker 1: If you like it when we talk about banks that

648
00:37:14,920 --> 00:37:17,080
Speaker 1: don't want to be banks, then please leave us a

649
00:37:17,160 --> 00:37:21,440
Speaker 1: positive review on your favorite podcast platform. And remember, if

650
00:37:21,440 --> 00:37:23,960
Speaker 1: you are a Bloomberg subscriber, you can listen to all

651
00:37:24,000 --> 00:37:27,080
Speaker 1: of our episodes absolutely ad free. All you need to

652
00:37:27,080 --> 00:37:29,920
Speaker 1: do is find the Bloomberg channel on Apple Podcasts and

653
00:37:30,040 --> 00:37:32,640
Speaker 1: follow the instructions there. Thanks for listening.