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Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along

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Speaker 1: with Jonathan Faroll and Lisa Abramowitz. Join us each day

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Speaker 1: for insight from the best and economics, geopolitics, finance and investment.

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Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and

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Speaker 1: anywhere you get your podcasts, and always I'm Bloomberg dot Com,

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Speaker 1: the Bloomberg Terminal and the Bloomberg Business App. We can

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Speaker 1: now head over to London to catch up with France,

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Speaker 1: Saint Laqua and the kratiswee Thank you so much, John.

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Speaker 1: We are delighted to be joined by of course Aldrich

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Speaker 1: Corner of the the Kurti Sweet, chief executive officer. Thank you

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Speaker 1: for joining us. It's a difficult day, another difficult day

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Speaker 1: for Krati Sweeze. What can you tell us about the

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Speaker 1: outflows in the wake of SEB so as we be

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Speaker 1: As you know, it's a very recent saying which happened

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Speaker 1: up a weekend and yesterday. So far it's pretty calm

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Speaker 1: even so material good influence yesterday still Also, you know,

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Speaker 1: I had a client meeting which was very positive on

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Speaker 1: their one. So so far it's kind but I think

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Speaker 1: it's early days to look at the calm. Are you

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Speaker 1: suggesting that you could also actually get inflows. We got

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Speaker 1: them yesterday, which is a positive sign, I would say,

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Speaker 1: and you know, for us, and that is maybe a

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Speaker 1: little bit if I may say so, unseeing in comparison

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Speaker 1: to SVB. It's a very different situation. You know, we

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Speaker 1: are GCIP as you know, we are following materially different

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Speaker 1: and higher standards when it comes to capital funding, liquidity

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Speaker 1: and so on. And that's why we said, you know,

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Speaker 1: we gave I think this situation is important. We gave

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Speaker 1: r capital ratio of like one hundred and forty forty

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Speaker 1: at the at the end of Q four, which is

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Speaker 1: strong ratio, which has improved as we went through this

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Speaker 1: quarter to like hundred and fifty on average and spot

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Speaker 1: being even high on that. But so outflows have not reversed,

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Speaker 1: but they've actually lowered. Are they reversing? Look, they have

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Speaker 1: significantly moderated, as I put it. We gave an update

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Speaker 1: on February nine in terms of where we are on

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Speaker 1: the passts and addu ascess and so on. We will

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Speaker 1: give next update with the first quarter result. But this

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Speaker 1: is also very clear. You know, if and we talked

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Speaker 1: about that. What has happened in like Furce quarter. You know,

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Speaker 1: we are fully focused on it, turn it around, but

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Speaker 1: that takes longer than like just two months. But then

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Speaker 1: you do you have this material weakness today? What happened there?

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Speaker 1: There's concerned that actually almost every day there's some kind

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Speaker 1: of bad news and you have your share price at

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Speaker 1: a record low like that can't be a comfortable position, no,

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Speaker 1: But we published our report today as we have seen

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Speaker 1: the financial result. I think that's a key message. The

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Speaker 1: financial result is unchanged for twenty twenty two and previous years.

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Speaker 1: We delayed the reporters you have seen a couple of

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Speaker 1: days to appropriately deal with you know, questions the SEC

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Speaker 1: had and we did, and that is part of an

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Speaker 1: longer ongoing dialogue. And we acknowledge that we have a

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Speaker 1: material weakness in the financial in the financial reporting control,

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Speaker 1: which we are addressing and immediating forcefully. How are you

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Speaker 1: addressing that? So? Is that an auditor problem had PwC

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Speaker 1: on the case? Is it their fault? No, it's absolutely

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Speaker 1: not their fault. That is obviously you know that cause

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Speaker 1: higher hand in hand as you work together with your auditor,

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Speaker 1: but it's a collective fining and we are addressing it.

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Speaker 1: We have remediation planner. We are addressing it. So you

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Speaker 1: have an anchor investor that put one point five million

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Speaker 1: in the bank, Now their share value has gone down

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Speaker 1: by one third. Will they have to inject more? What

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Speaker 1: kind of conversations are you having with them? Well, look,

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Speaker 1: nobody's pleased devolve the SHAPERCE development, you know, but we

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Speaker 1: match what we can match. And this is the execution

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Speaker 1: of our plan. That's a white strategy. This is a

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Speaker 1: white plan. We are executing at pace and even ahead

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Speaker 1: of the plan. And I think I'll sharel to see

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Speaker 1: that as well. That's an unpleasant situation. Chap Price or

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Speaker 1: Dotcom match CHAPERCE. I can match the execution and I do.

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Speaker 1: So you don't think you're getting pressure from shareholders. You're

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Speaker 1: not getting pressure from you know, certain big shareholders to

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Speaker 1: do more and actually to have all options on the

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Speaker 1: table now. As I said, they are obviously they're obviously

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Speaker 1: not pleased with the development. I'm not please developed the

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Speaker 1: first hand, obviously, but you know, we are executing and

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Speaker 1: once we are executing step by step, and we show

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Speaker 1: the market and this is exactly why we said it's

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Speaker 1: a three years process and we are executing and that

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Speaker 1: is you know, the market will acknowledge that and the

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Speaker 1: share process will follow. Do you think all options should

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Speaker 1: be on the table? What about breaking up the bank?

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Speaker 1: If you look and I know understand your frustration with

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Speaker 1: the share price and saying, look, you're just executing. But

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Speaker 1: when you look at the share price ninety seven percent

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Speaker 1: below that two thousand and seven high, like how do

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Speaker 1: you regain from that now? But that you can can't

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Speaker 1: compare as you know, but you know, as I said,

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Speaker 1: it's a right Swagi and fully fully convinced off the Swagi.

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Speaker 1: We are executing at past. We have the right team

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Speaker 1: and you know that's why we said in October it

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Speaker 1: needs radical change. You know, the bank needs to be changed,

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Speaker 1: and we said it's a three years transformation and you

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Speaker 1: can't come after two months and Salo, why is not

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Speaker 1: everything done? But radical change could be splitting off the bank.

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Speaker 1: Is it something that you're you're valuing? Oh? Look, the

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Speaker 1: new Creates visa is focused on the course lengths of

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Speaker 1: the bank. This is welds management. The swis spend persons

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Speaker 1: asset management. What we put the market either trading and

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Speaker 1: sales business that makes entirely sense, entirely different risk profile,

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Speaker 1: will be very profitable and we reward shareholders. And I

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Speaker 1: think the sheilds understand it. When will you be able

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Speaker 1: to say, like the worst is really behind us? But

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Speaker 1: we said it's three years transformation. We said we are

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Speaker 1: going to make a loss unfortunately this year because you know,

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Speaker 1: and this is something which you need to understand, a

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Speaker 1: lot of the restructuring courts, you know, baked into the

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Speaker 1: transformation are coming in twenty twenty three before we see

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Speaker 1: a lot of benefits out of that transformation, and that

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Speaker 1: is something which happens. That's why we said it takes

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Speaker 1: three years. Three years is a long time work. I

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Speaker 1: mean a lot of but a lot of the shareholders

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Speaker 1: will start asking questions. I mean, have you asked them

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Speaker 1: for more money to make it faster for three years,

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Speaker 1: especially in this banking world than anything could happen? No,

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Speaker 1: But you know, as I said, our LCR ratio is

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Speaker 1: strong and very strong, has has getting stronger as we speak.

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Speaker 1: Our capital ratio is very strong at fourteen point one

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Speaker 1: and as we gave it to Q four, so we

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Speaker 1: have everything we need to go through the transformation. Mars

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Speaker 1: or are you expecting, you know, the first quarter to

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Speaker 1: be good enough to keep shareholders off your back. The

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Speaker 1: first quarter is, as we said, and we put it

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Speaker 1: very clearly, we will make a loss in the first quarter,

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Speaker 1: but you will see progress in the first quarter numbers.

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Speaker 1: It's not in terms of what outflows in certain business momentum.

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Speaker 1: We're specifically businessman and the market business for example, which

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Speaker 1: was as we all discussed for the for four reasons,

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Speaker 1: clearly understandable reasons. A week in the Q four looks better.

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Speaker 1: We else management, we are making progress, certainly not yet

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Speaker 1: there where we should be, but we are making progress.

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Speaker 1: Are you comfortable with the banking system as a whole.

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Speaker 1: I mean, we've we've lived through a pretty incredible couple

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Speaker 1: of days and if you look at the markets are

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Speaker 1: all over the place. No, I think so. I mean

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Speaker 1: this is somewhat an isolated problem. If you want tool

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Speaker 1: and as I said, you know, if you are guzip

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Speaker 1: it or if you look at the large banks, I

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Speaker 1: see we will manage to it. Talk to me a

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Speaker 1: little bit about Cratty sweet first, Boston. So, first of all,

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Speaker 1: what's the timeline for the IPO. The timeline Fancy is unchanged,

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Speaker 1: a discussed last time. So we have a very clear

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Speaker 1: plan to put it into market creating liquidity event most

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Speaker 1: likely in IPO. We are working against our internal plans forcefully,

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Speaker 1: and I would expect such an event in like twenty

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Speaker 1: twenty five. As I said earlier, Okay, any news, I

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Speaker 1: mean today you had news about the twenty percent that

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Speaker 1: would go to craze Piece first Boston Partners. What happens

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Speaker 1: to the rest? The rest is owned by us and

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Speaker 1: obviously also portioned by Michael as as as we announce

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Speaker 1: it in like February, the rest is own past So

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Speaker 1: this is this is our part of the bank, remains

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Speaker 1: our part of the bank. We are going into liquidity

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Speaker 1: and again most likely IPO you will be probably a

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Speaker 1: majority shold and then we make decision you know how

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Speaker 1: our holding develops over the next following years. So you're

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Speaker 1: still looking for an anchor investor for Crazpiece first, Are

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Speaker 1: you closer to finding well, I don't know. Yeah, we

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Speaker 1: are close to, but I'm not sure if it's anchor.

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Speaker 1: And so we have a lot of interest from SERTA

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Speaker 1: parties to be invested into that. It tells you something

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Speaker 1: about the Surgia. I would say and we are evaluating

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Speaker 1: that Middle Eastern investors, different kinds of investors, different parts

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Speaker 1: of the world, but large chunk investors decision. And I

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Speaker 1: will inform you first as Okay, how far away are

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Speaker 1: we from that? We are pretty close. I would say

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Speaker 1: a couple of weeks will come before the first quarter.

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Speaker 1: I will tell the market if we are there. What

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Speaker 1: do you find most difficult about Your job is to

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Speaker 1: make it understandable. I would say, you know that we

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Speaker 1: are absolutely doing the right things that we need some

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Speaker 1: time to get through. And and this is what all

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Speaker 1: my colleagues and I try to do, you know, to

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Speaker 1: regain the trust off the bank over the next couple

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Speaker 1: of months. But is it more important to regain the

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Speaker 1: trust of shareholders or or clients? It is look clients,

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Speaker 1: is I told you last time? I would say one

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Speaker 1: of the best experience, even in this very difficult months

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Speaker 1: last year. I mean, they are so supportive of us,

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Speaker 1: they are listening to us, they're doing active things to

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Speaker 1: support they like to bank with create switch is a

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Speaker 1: fantastic experience. But you know, the convincing of this is

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Speaker 1: the right thing to do. We are executing at pace

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Speaker 1: and the head of plan is with all different stakeholders,

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Speaker 1: all different ones, But why are they taking money out?

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Speaker 1: Then if your clients are happy, because and that's what

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Speaker 1: I also said, if you are in a situation like

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Speaker 1: we were in October, you know where you had malicious

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Speaker 1: information out in the market. At the beginning of October,

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Speaker 1: we were not able to speak, legally not able to speak.

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Speaker 1: And that's why I said, like two thirds of the

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Speaker 1: outflaw stemming from October alone, eighty five percent from October

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Speaker 1: and November. And the moment we could reach out, we

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Speaker 1: started that huge program talk to our clients. More than

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Speaker 1: ten thousand clients in wealth managements since then, more than

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Speaker 1: fifty thousand individual meetings in Switzerland, and that has created momentum.

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Speaker 1: Are you frustrated though that the actually you haven't been

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Speaker 1: able to get ahead of that quicker? No, I think

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Speaker 1: we are really doing the utmost possible and I'm proud,

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Speaker 1: not frustrated. I'm proud of what my colleagues, my people

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Speaker 1: at the front units have done since months. I'm really

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Speaker 1: proud of. But the message today, I mean, if you

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Speaker 1: look at your share price, you're proud. You think you're

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Speaker 1: executing You're on a three year ap plan, if you

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Speaker 1: look at the share price at a record low, does

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Speaker 1: your stomach sink a little bit when you look at

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Speaker 1: the share price? Nothing, which I like obviously, But look,

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Speaker 1: I can't control what I can control. I don't control

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Speaker 1: a share price. I control the execution of the right strategy,

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Speaker 1: and you think the share price will will catch up

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Speaker 1: if you execute? All right, thank you so much for

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Speaker 1: your time, But it was all recruiter. They're the Credit

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Speaker 1: Swiss chief executive officer and with that, I'm going to

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Speaker 1: send it back to you, a friend, saint, just absolutely fantastic.

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Speaker 1: And now we're going to take a different perspective here

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Speaker 1: Magnus Billing joining. He's the chief executive officer of Sweden's elector,

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Speaker 1: and we're thrilled he could join us this morning here

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Speaker 1: with perspective on the American banks and with the perspective

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Speaker 1: on the pension responsibilities in his Sweden, across Europe and

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Speaker 1: frankly at worldwide. Magnus, the path is this October of

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Speaker 1: last year, a small matter of a busted shure thing

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Speaker 1: in the United Kingdom, a ballot by the Bank of England,

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Speaker 1: literally in hours. What we've all observed over the last

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Speaker 1: four days and we look at Sweden as the bastion.

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Speaker 1: What are the shadows within the Swedish pension system right now?

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Speaker 1: Is it pricing commercial real estate is a different nuances

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Speaker 1: of European banking. What are the shadows you confront this morning? Well,

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Speaker 1: good morning, thank you for having me. I think first

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Speaker 1: of all that the Swedish pension system it's very robot

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Speaker 1: it's small, the robust that it's been in the last

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Speaker 1: ten fifteen years. But having said at obviously end of

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Speaker 1: the day, it's a lot about liquidity when the psychology

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Speaker 1: kicks in the dugle market space, and I think the

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Speaker 1: issue that you brought up about the UK event that

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Speaker 1: took place last year and also what we see now

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Speaker 1: in the past week or so, it's a lot of

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Speaker 1: liquidity psycholity around liquidity and the easiness one can move

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Speaker 1: capital today with the digital development that we've seen in

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Speaker 1: the past number of years. But looking at just a

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Speaker 1: balance sheet of basically across all the pension funds in

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Speaker 1: Sweden and an order gredion, they are very robust today.

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Speaker 1: Do you bring the money home? My experience on the

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Speaker 1: geography of crisis is one endowed pollet home to Swedish

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Speaker 1: pension plans and would you guess European continental plans do

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Speaker 1: they just bring the assets home. I think the under

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Speaker 1: the lying fundamentals of the US market is still very

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Speaker 1: attractive for any investors, so I think in the mid

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Speaker 1: to long term US will always be able to attract

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Speaker 1: the investors to invest into the market space. That goes

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Speaker 1: also for the pension funds, and I think looking at

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Speaker 1: the size of many of the pension funds in the

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Speaker 1: Nordics and the European space, they need to diversify into

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Speaker 1: the US market and under regions around the globe. So

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Speaker 1: I think I have at least a positive mid to

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Speaker 1: long term view on the US markets capacity to deliver

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Speaker 1: shareholder value to us. The magnets. You have a problem

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Speaker 1: this morning, as most people know, so let's talk about

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Speaker 1: that problem. Now. How does the Swedish pension fund end

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Speaker 1: up allocated to Signature Bank First republic An SVP. Yeah,

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Speaker 1: I mean we've been we invested in those companies starting

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Speaker 1: twenty seventeen up until twenty nineteen, and we've been growing

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Speaker 1: that allocation over the years. So obviously we thought that

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Speaker 1: the initial year was good for US investing that, but

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Speaker 1: with what's happened last week. Obviously we think it's a

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Speaker 1: big failure for us as an investor, and we need

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Speaker 1: to learn something from that and take actions based upon

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Speaker 1: the lessons learned. So it's a failure. I just want

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Speaker 1: to sort of put that in proportion to the total

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Speaker 1: portfolio that we're managing. We're talking about one percent of

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Speaker 1: a total capital that we manage. So from a customer

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Speaker 1: point of view, this does not have a material impact

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Speaker 1: at all. It will not impact the pensions that we

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Speaker 1: are committing to our customers. I understand that, but it

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Speaker 1: just speaks a weak internal controls and some odd decisions

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Speaker 1: that we need to talk about. Magnus, the fact that

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Speaker 1: you were allocated to those names, but some of the

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Speaker 1: conservative Swedish lenders you ended up selling those positions in

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Speaker 1: twenty twenty two. So I guess the question that will

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Speaker 1: be repeatedly asked of you is just what happened? What

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Speaker 1: happened and why did you buy more of those names

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Speaker 1: and sound more conservative names. Well, those are two separate issues.

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Speaker 1: The divestment of the Swedish banks is a standalone assessment

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Speaker 1: and the decision made made at a different time. Talking

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Speaker 1: about the US banks, what we liked about then was

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Speaker 1: the market position, the position when it comes to transformation

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Speaker 1: in the digital space and the US market generally speaking,

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Speaker 1: the depth of that and the size of it. We

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Speaker 1: had discussion with the Silicon Valley Bank during the fall

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Speaker 1: because we also saw as many others, you know, the

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Speaker 1: withdrawal of the post sits and the investments the company

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Speaker 1: did in the long term government securities and what that

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Speaker 1: led when it comes to durational liquidity aspects. We thought

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Speaker 1: that the action plan that the company had was they

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Speaker 1: were transparent about that, and we thought it was well

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Speaker 1: fought through. Then last week the company acted not in

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Speaker 1: accordance with the action plan we had discussed and talked

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Speaker 1: with them about, and that we had been presentative, and

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Speaker 1: that surprised us, and I think that was a big

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Speaker 1: mistake from the company's side. Well, clearly, mcnus. It didn't

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Speaker 1: just surprise you, It surprised many people, including the regulator

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Speaker 1: here in the United States. So a lot of people

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Speaker 1: have questions they'll need to answer as well. I want

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Speaker 1: to understand how you responded to that in the last

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Speaker 1: couple of days. So you've identified some banks that you

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Speaker 1: hold that haven't managed their interest rate risk properly. Are

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Speaker 1: you worried that you also hold some European banking names

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Speaker 1: that maybe you're in the same position, perhaps even worse.

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Speaker 1: Given what's happened with the bond market there over the

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Speaker 1: last couple of years. We see in the European market

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Speaker 1: as well withdraw all of deposits and it's increasing. So

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Speaker 1: we're monitoring that very closely, and we're monitoring basically the

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Speaker 1: whole exposure we have to the banking sector, which is

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Speaker 1: in total two percent of the total portfolio. So I

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Speaker 1: think we need the last few days has been you know,

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Speaker 1: escalating a little bit in the European market, but we're

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Speaker 1: monitoring that. I think the loss to equity ratio is

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Speaker 1: completely different or very different in the European space compared

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Speaker 1: to some of the banks in the US market that

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Speaker 1: you mentioned earlier. Magis, Can we just focus on Europe

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Speaker 1: just a little bit more. Do you hold credit suites? No,

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Speaker 1: we don't have you sold any names in the last

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Speaker 1: twenty four rounds the last four yeer hours. If you

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Speaker 1: de risk around the European banks at all in any way,

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Speaker 1: shape or form, we have not. We have we hold

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Speaker 1: shares in two Nordic banks SCB and Nordia. You also, though,

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Speaker 1: have taken on these credit risk transfers over the past

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Speaker 1: few years, or basically you take on the risk associated

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Speaker 1: with particularly European bank books tied to commercial loans to

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Speaker 1: stress that how confident are you that those are going

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Speaker 1: to be solid investments. I think the banking sector in

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Speaker 1: Europe is stronger than whether we're in prior to the

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Speaker 1: global financial crisis, so I think we're in a better

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Speaker 1: starting position. Obviously, a lot of things are happening around now,

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Speaker 1: and it's clearly a transition face that the market is

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Speaker 1: going through with the enormous increase in the interest rate

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Speaker 1: that we've seen in the past twelve months and the

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Speaker 1: speed of that, and we haven't transitioned through that yet.

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Speaker 1: But I think the banks, the Nordic banks that we

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Speaker 1: hold chairs are in a solid position as of today.

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Speaker 1: Given the bet that you made on some of the

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Speaker 1: US banks, I'm wondering how you're handling the fallout, whether

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Speaker 1: you're getting out of the positions, whether you're doubling down,

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Speaker 1: whether you're buying more. What's been sort of the positioning

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Speaker 1: over the past couple of days. Well, when you talk

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Speaker 1: about the silicon value Bank and the signature bank being

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Speaker 1: in a receivership. I think it's more a legal issue

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Speaker 1: for us to ensure that we protect our legal rights there.

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Speaker 1: I don't expect any value to come out with that

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Speaker 1: ass of today when it comes to First Republic. Obviously,

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Speaker 1: it's very volatile and it's day to day. Basically, yesterday

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Speaker 1: it fell a lot, today it's up again. Well, we

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Speaker 1: haven't taken any decision yet, but we are ready to

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Speaker 1: take decisions as we see appropriate for us at any stage.

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Speaker 1: But we haven't taken a major actions today which brought

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Speaker 1: to that bank magus. Every crisis unfolds with a certain character.

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Speaker 1: We make note of Sweden's wonderful work many many decades

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Speaker 1: ago and inventing a whole bit of central bank theory

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Speaker 1: with how Stockholm handled a crisis. The theme right now

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Speaker 1: seems to be the shadows or the mysteries of private

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Speaker 1: equity and venture capital in America. Conservative money is addicted

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Speaker 1: to the potential return of that group. Are you exposed

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Speaker 1: to private equity and venture capital long term locked in

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Speaker 1: holdings and do you worry that there could be some

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Speaker 1: real issues there with liquidity in our equity portfolio, our

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Speaker 1: investment model is predominantly focused on more mature companies and

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Speaker 1: we invest directly in those. So we're looking for strong

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Speaker 1: cash flow RODDAM potential growth and future positive cash flow.

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Speaker 1: With that set, that means that we don't we basically

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Speaker 1: don't have any private equity exposure and VC exposure, not portfolio.

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Speaker 1: You've been doing this for a few years. Do you

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Speaker 1: assume in crisis, with the way yields are gyrating, the

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Speaker 1: way all central banks have become more restrictive in the

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Speaker 1: last four or five days, do you suggest that not

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Speaker 1: the actual assumption, but just the expected return of pension

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Speaker 1: portfolios will come down. Yes. I do think that the

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Speaker 1: next ten years will be more difficult to generate return,

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Speaker 1: and I think we will see changes in the investment

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Speaker 1: models in the pension fund industry in order to secure

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Speaker 1: adequate return for for the beneficiarcy. Sir, My great theme

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Speaker 1: here is we've had interest rate come in as we've

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Speaker 1: come back and normalized yield, certainly normalized yield. Within the

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Speaker 1: europe p and sphere as well, is a troubled non

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Speaker 1: profitable companies what we call in America zombies, that they

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Speaker 1: will go away, whether they're banks or anything else. As well.

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Speaker 1: Do you suggest that we will see combinations and transactions

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Speaker 1: to clear out companies have had essentially a free lunch

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Speaker 1: for sixteen years. Yeah, I do think some companies are

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Speaker 1: have benefited too much or all the center banks put

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Speaker 1: and the fact that we've been living in the world

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Speaker 1: for many years where cost of capital has been basically zero,

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Speaker 1: and I don't think that that is sustainable little long

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Speaker 1: term and I would suspect that some businesses out there

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Speaker 1: will struggle to adjust to more normalized interest rate level

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Speaker 1: long term magnets as you and I talking, as we're

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Speaker 1: all speaking, the first Deputy Governor of the Swedish Central

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Speaker 1: Banks address in Parliament at the moment, suggesting that we

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Speaker 1: need more timing despite well it's ability. There are people

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Speaker 1: who believe that things are breaking now and these central

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Speaker 1: banks need to back away. Can we finish on that?

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Speaker 1: What's your take on that? So I didn't hear the

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Speaker 1: question that properly, so could you I can repeat it, sir?

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Speaker 1: By all means. So, the first Deputy government of the

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Speaker 1: ricks Bank is speaking to Parliament right now suggesting that

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Speaker 1: we need more tightening despite the volatility. Magnus. As you know,

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Speaker 1: the conversation in the last twenty four hours is that people,

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Speaker 1: some people believe things are breaking and central banks should

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Speaker 1: back away. What's your take on that, sir. I do

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Speaker 1: think that we in the market space today actually see

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Speaker 1: a de facto tightening, and I think that should be

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Speaker 1: catered into the policy decisions to be made going forward.

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Speaker 1: And it's very difficult assessments to make, obviously, but I'm

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Speaker 1: a little bit concern that we're breaking or breaking the

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Speaker 1: markets if we're too aggressive. Obviously, we need to bring

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Speaker 1: down the inflation because that is the long term number

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Speaker 1: one fall for all the market participants. But it's a

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Speaker 1: balancing act here, and I think again that the current

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Speaker 1: defect of marketing, it tightening, that's happening, should be catered

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Speaker 1: into the consideration. Magnus, is a difficult time for everyone,

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Speaker 1: particularly for you this morning, and we appreciate the opportunity

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Speaker 1: to speak with you at that difficult time. Thanks for BEINGMDUS.

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Speaker 1: Magnus billing the I've elect a Swedish pension fund with

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Speaker 1: exposure to all the wrong names. This is a joy.

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Speaker 1: His name is Ethan Harris. He's an author. He's also

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Speaker 1: had a global research at Bank of America's Securities and

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Speaker 1: stopped economics with appression book Ben Vernanke's Fed a few

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Speaker 1: years ago. In that book, you talked about a theme

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Speaker 1: I just talked to Vincent Reinhardt about, which was the

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Speaker 1: shadow of Alan Greenspan. Are we in this mess, doctor Harris,

431
00:23:46,640 --> 00:23:51,880
Speaker 1: because we became unmeasured? Well, I think that. I don't

432
00:23:51,920 --> 00:23:55,400
Speaker 1: think Alan Greenspan's legacy is really that strong right now.

433
00:23:55,480 --> 00:23:58,399
Speaker 1: I think we got into this mess because, like a

434
00:23:58,440 --> 00:24:01,560
Speaker 1: lot of central banks and a lot of economists, the

435
00:24:01,600 --> 00:24:05,320
Speaker 1: FED started to believe that inflation was largely dead and

436
00:24:05,400 --> 00:24:08,119
Speaker 1: you didn't have to worry about a sloped Phillips curve

437
00:24:08,160 --> 00:24:10,919
Speaker 1: to put a technical term on it, and so they

438
00:24:10,960 --> 00:24:15,480
Speaker 1: adopted a very passive monetary policy. Now we're seeing a

439
00:24:15,640 --> 00:24:19,560
Speaker 1: massive ketchup by the FED, and of course financial accidents

440
00:24:19,600 --> 00:24:23,679
Speaker 1: happen when you're hiking rates very fast, and so some

441
00:24:23,760 --> 00:24:26,280
Speaker 1: of this is a legacy of the FED and other

442
00:24:26,280 --> 00:24:29,560
Speaker 1: central banks starting too slowly to deal with inflation. The

443
00:24:29,720 --> 00:24:34,200
Speaker 1: legacy and reality that I've seen within Brian moynihan in

444
00:24:34,240 --> 00:24:38,560
Speaker 1: his Modern Bank of America is he's viscerally granular. Brian,

445
00:24:38,640 --> 00:24:42,080
Speaker 1: more than any other CEO I know, has a granular

446
00:24:42,200 --> 00:24:46,800
Speaker 1: feel with all that research on your banking side, do

447
00:24:46,880 --> 00:24:51,560
Speaker 1: you see a financial integrity to our banking system beneath

448
00:24:51,840 --> 00:24:54,359
Speaker 1: the massive Bank of America. Well, I don't want to

449
00:24:54,400 --> 00:24:56,879
Speaker 1: comment on Bank of America specific, no, I mean on

450
00:24:56,880 --> 00:24:59,520
Speaker 1: the other banks. So I think then that Moynahan's glued

451
00:24:59,560 --> 00:25:03,800
Speaker 1: to when I think one of the questions for investors

452
00:25:03,840 --> 00:25:06,080
Speaker 1: these days is how healthy is a banking system? And

453
00:25:06,160 --> 00:25:09,800
Speaker 1: I think, as your previous guests said, the banking system

454
00:25:09,800 --> 00:25:15,520
Speaker 1: overalls and excellent health. It's heavily regulated, heavily capitalized. You're

455
00:25:15,560 --> 00:25:19,600
Speaker 1: always going to have during periods of stress, some events,

456
00:25:20,040 --> 00:25:23,760
Speaker 1: and I would think of this as a stress event

457
00:25:24,600 --> 00:25:28,919
Speaker 1: in the context of otherwise not just strong financial banking system,

458
00:25:28,960 --> 00:25:31,440
Speaker 1: but strong financial system in general. So when you look

459
00:25:31,440 --> 00:25:33,199
Speaker 1: at the balance of risks right now, and this is

460
00:25:33,240 --> 00:25:34,879
Speaker 1: something that I've been giving a lot of thought too.

461
00:25:34,960 --> 00:25:37,360
Speaker 1: If the financial system is strong, you have these supports,

462
00:25:37,359 --> 00:25:39,639
Speaker 1: you get a best sense of a rebound. It doesn't

463
00:25:39,680 --> 00:25:42,920
Speaker 1: really tighten financial conditions all that much from where we were,

464
00:25:42,960 --> 00:25:46,600
Speaker 1: and in fact, given the lower expectations for FED rate hikes,

465
00:25:46,760 --> 00:25:50,199
Speaker 1: you have easier financial conditions and you did just a

466
00:25:50,200 --> 00:25:53,639
Speaker 1: bit ago. At what point does that become a huge

467
00:25:53,760 --> 00:25:56,800
Speaker 1: risk for inflation that does not come down. Well, I

468
00:25:56,800 --> 00:25:59,399
Speaker 1: think we need to recognize that we're in the middle

469
00:25:59,400 --> 00:26:02,040
Speaker 1: of a of a stress event, and so it's very

470
00:26:02,040 --> 00:26:05,479
Speaker 1: hard to predict where things are going. The markets will

471
00:26:05,520 --> 00:26:08,760
Speaker 1: always price out the central bank during a crisis like this.

472
00:26:09,560 --> 00:26:13,840
Speaker 1: But the real question is does the policy efforts. Does

473
00:26:13,880 --> 00:26:16,440
Speaker 1: the attempt to ring friends the problem? Does it work.

474
00:26:16,600 --> 00:26:19,679
Speaker 1: If it works, the FED then goes back to their

475
00:26:19,720 --> 00:26:22,720
Speaker 1: regularly scheduled program and they have to deal with inflation.

476
00:26:22,760 --> 00:26:26,560
Speaker 1: If it doesn't work, then monetary policy gets drawn into

477
00:26:26,600 --> 00:26:30,800
Speaker 1: the process of supporting the financial system. Our view is

478
00:26:30,840 --> 00:26:34,200
Speaker 1: that ultimately the ring fencing works and the FED goes

479
00:26:34,200 --> 00:26:37,520
Speaker 1: back to hiking interest rates. So I think our view

480
00:26:37,560 --> 00:26:42,200
Speaker 1: would be that the markets understandably are in a very

481
00:26:43,119 --> 00:26:46,280
Speaker 1: risk off mode, but ultimately the Fed's going to end

482
00:26:46,359 --> 00:26:48,240
Speaker 1: up having to fight inflation. And this is the reason

483
00:26:48,280 --> 00:26:50,520
Speaker 1: why you're in the camp of another twenty five bases

484
00:26:50,520 --> 00:26:53,320
Speaker 1: point rate hike next week. But I do wander longer

485
00:26:53,440 --> 00:26:56,720
Speaker 1: term whether the signs of stress have kind of gut

486
00:26:56,800 --> 00:26:59,159
Speaker 1: checked your sense of how much these long and variable

487
00:26:59,200 --> 00:27:01,920
Speaker 1: lags have come to the four and put a higher

488
00:27:02,320 --> 00:27:04,879
Speaker 1: or rather a lower cap on how high rates can

489
00:27:04,920 --> 00:27:09,520
Speaker 1: go well. I think that unquestionably this this stress and

490
00:27:09,560 --> 00:27:12,919
Speaker 1: the system now titans financial conditions and is a warning

491
00:27:12,960 --> 00:27:16,440
Speaker 1: about the lag defects of monetary policy. It's actually been

492
00:27:16,640 --> 00:27:19,720
Speaker 1: surprising how little impact the Feds had up to now.

493
00:27:20,560 --> 00:27:24,359
Speaker 1: They hiked at a very fast pace. Now we're seeing

494
00:27:24,400 --> 00:27:28,359
Speaker 1: some effects, and perhaps an extreme effect, and so it

495
00:27:28,400 --> 00:27:30,440
Speaker 1: does have to make you a little more cautious about

496
00:27:30,440 --> 00:27:33,640
Speaker 1: how far the Fed needs to go. Mike. But let's

497
00:27:33,640 --> 00:27:35,400
Speaker 1: get out in front of Michael Gapan in the next

498
00:27:35,400 --> 00:27:37,439
Speaker 1: hour with John Ferrell. He's a good economist, I mean

499
00:27:37,480 --> 00:27:39,840
Speaker 1: he is, I think so. But let's get let's get

500
00:27:39,880 --> 00:27:42,800
Speaker 1: the hair escape in view here. Did they hike too rapidly?

501
00:27:42,920 --> 00:27:44,960
Speaker 1: Were you guys sitting over the last number of weeks

502
00:27:45,000 --> 00:27:48,119
Speaker 1: going at the rate of change and Newtonian calculus of

503
00:27:48,119 --> 00:27:50,879
Speaker 1: all this dance is just a little bit off. No,

504
00:27:51,480 --> 00:27:54,240
Speaker 1: I don't think so. I'm sitting now. I think that

505
00:27:54,280 --> 00:27:57,760
Speaker 1: the the original error was waiting too long to hike.

506
00:27:59,359 --> 00:28:01,399
Speaker 1: The graduate was some of green span. You know, the

507
00:28:01,440 --> 00:28:05,040
Speaker 1: idea of hiker early so you can hike slowly wasn't

508
00:28:05,560 --> 00:28:08,240
Speaker 1: carried out and wasn't the stands of the shadow of Greenspan.

509
00:28:08,359 --> 00:28:11,760
Speaker 1: Here the shadows do it that they didn't do with Well,

510
00:28:11,800 --> 00:28:13,720
Speaker 1: we got to just go to Michael mcughs diving into

511
00:28:13,760 --> 00:28:16,600
Speaker 1: forty seven pages of inflation data. Goods you said was

512
00:28:16,680 --> 00:28:22,159
Speaker 1: one percent. Can you joyous about a service disinflation? No, Unfortunately,

513
00:28:22,200 --> 00:28:25,480
Speaker 1: services go up a little bit seven point two six percent.

514
00:28:25,800 --> 00:28:28,240
Speaker 1: But a lot of that, as we mentioned, is housing

515
00:28:28,240 --> 00:28:30,879
Speaker 1: owner's equivalent rent up seven tenths, same as it was

516
00:28:31,320 --> 00:28:34,360
Speaker 1: last month. Rent of primary residence up eight tenths. That's

517
00:28:34,359 --> 00:28:37,480
Speaker 1: a tenth more than it was in the month of January.

518
00:28:37,680 --> 00:28:41,800
Speaker 1: But also we got a big boost in the lodging category.

519
00:28:42,080 --> 00:28:45,000
Speaker 1: For shelter, it's up two point three percent. That's more

520
00:28:45,040 --> 00:28:51,040
Speaker 1: than double what it was the month of January. Air

521
00:28:51,040 --> 00:28:53,400
Speaker 1: fares were up. But here's an interesting thing, and it'd

522
00:28:53,400 --> 00:28:55,920
Speaker 1: be interested to see if if Ethan would go so

523
00:28:55,960 --> 00:28:58,480
Speaker 1: far as to extrapolate the way I'm trying to hear.

524
00:28:58,560 --> 00:29:01,760
Speaker 1: But if you're looking at where you might be seeing

525
00:29:01,880 --> 00:29:05,720
Speaker 1: wage increases, we've talked about leisure and hospitality a lot.

526
00:29:06,320 --> 00:29:09,840
Speaker 1: Food away from home up six tenths for the second

527
00:29:09,920 --> 00:29:14,120
Speaker 1: month in a row, and full service meals up six tenths.

528
00:29:14,440 --> 00:29:18,240
Speaker 1: That's a tenth higher than it was so prices are

529
00:29:18,280 --> 00:29:22,400
Speaker 1: going up at restaurants, Alcoholic beverage prices went down. I'm

530
00:29:22,440 --> 00:29:25,640
Speaker 1: not sure if that's not went down but tailed off

531
00:29:25,640 --> 00:29:28,200
Speaker 1: in inflation. I'm not sure as Tom help with that,

532
00:29:28,640 --> 00:29:30,840
Speaker 1: But to that point, and Ethan, I'd love you to

533
00:29:30,840 --> 00:29:33,200
Speaker 1: weigh in on this, because we have seen people willing

534
00:29:33,240 --> 00:29:35,400
Speaker 1: to spend, and they're willing to spend on services, and

535
00:29:35,440 --> 00:29:39,880
Speaker 1: that isn't diminishing. Distress in the financial system really change that.

536
00:29:39,960 --> 00:29:42,720
Speaker 1: If people can get their deposits and everyone just goes

537
00:29:42,760 --> 00:29:45,240
Speaker 1: on their way. Well, if you can get past the

538
00:29:45,400 --> 00:29:48,880
Speaker 1: panic moment here in the markets, which it is, you're

539
00:29:48,960 --> 00:29:53,320
Speaker 1: back to an economy that's solid. It hasn't threatened the

540
00:29:53,360 --> 00:29:57,640
Speaker 1: recession yet. As Mike pointed out, there's a lot of

541
00:29:57,680 --> 00:30:02,600
Speaker 1: inflation in areas where labor class are important. You can't

542
00:30:02,680 --> 00:30:05,360
Speaker 1: fix your inflation problem just by getting an improvement in

543
00:30:05,440 --> 00:30:09,360
Speaker 1: supply chains. You need to get the service side under control.

544
00:30:09,400 --> 00:30:11,600
Speaker 1: You need a normal labor market, and we don't have

545
00:30:11,640 --> 00:30:14,160
Speaker 1: a normal labor market just quickly. I'd love your sense.

546
00:30:14,400 --> 00:30:16,400
Speaker 1: Vincent Reinhart was on and he said that if this

547
00:30:16,440 --> 00:30:20,000
Speaker 1: FED reserve comes out and doesn't hike rates because of

548
00:30:20,240 --> 00:30:23,920
Speaker 1: potential financial system stress. It is basically saying that what

549
00:30:23,960 --> 00:30:27,080
Speaker 1: they did on Sunday was not effective, that that program

550
00:30:27,320 --> 00:30:30,400
Speaker 1: was not sufficient to stave off any distress. Do you agree,

551
00:30:30,440 --> 00:30:32,080
Speaker 1: I mean, do you think that if they do not

552
00:30:32,200 --> 00:30:34,479
Speaker 1: raise twenty five bases points that will be a policy

553
00:30:34,600 --> 00:30:37,640
Speaker 1: error given the data we've seen. I would never contradict Vince.

554
00:30:37,920 --> 00:30:41,640
Speaker 1: He and I were grad students together, anyways. No, I

555
00:30:41,640 --> 00:30:46,400
Speaker 1: think that. I think that it depends on how stress

556
00:30:46,480 --> 00:30:49,520
Speaker 1: the markets are. If the markets are in serious distress,

557
00:30:49,640 --> 00:30:53,240
Speaker 1: pausing is okay. If they're improving a lot and the

558
00:30:53,320 --> 00:30:56,840
Speaker 1: ring fencing is working, then you can start to wonder

559
00:30:56,880 --> 00:30:59,719
Speaker 1: whether the FED has confidence in its ring fencing. So

560
00:31:00,000 --> 00:31:03,120
Speaker 1: think that's a legitimate concern. You and Vincent Reinhardt were

561
00:31:03,160 --> 00:31:08,440
Speaker 1: the laureate Ned Phelps. His later career is dynamism. Do

562
00:31:08,560 --> 00:31:12,880
Speaker 1: we risk losing our dynamism because of this crisis, and

563
00:31:13,000 --> 00:31:16,520
Speaker 1: particularly the Silicon Valley crisis. Well, I think that there's

564
00:31:16,600 --> 00:31:19,960
Speaker 1: been The COVID crisis itself has taken some of the

565
00:31:20,040 --> 00:31:23,040
Speaker 1: mojo out of the economy. I think that the tech

566
00:31:23,120 --> 00:31:26,520
Speaker 1: sector to some degree has overexpanded. I think this is

567
00:31:26,520 --> 00:31:28,760
Speaker 1: a temporary thing for tech. Tech is still going to

568
00:31:28,800 --> 00:31:31,240
Speaker 1: be a driver of growth going forward. Don't be a stranger.

569
00:31:32,360 --> 00:31:34,920
Speaker 1: Ring mister moynihan with you next time. Doctor Harris is

570
00:31:34,920 --> 00:31:48,960
Speaker 1: with the Bank of America. We are thrilled to have

571
00:31:48,960 --> 00:31:51,760
Speaker 1: the former banker of Little Rock with us right now.

572
00:31:51,960 --> 00:31:54,360
Speaker 1: He is a name that will become very familiar to

573
00:31:54,400 --> 00:31:57,280
Speaker 1: Americans here in the study of this financial blow up.

574
00:31:57,760 --> 00:32:01,560
Speaker 1: He is french Hill, Republican from Arkansas. French Show. When

575
00:32:01,560 --> 00:32:03,800
Speaker 1: you were at Vanderbilt, if you went down forty and

576
00:32:03,920 --> 00:32:06,360
Speaker 1: north on two sixty five, you ended up where this

577
00:32:06,400 --> 00:32:11,800
Speaker 1: debate began, at the Hermitage. It Andrew Jackson's spectacular home

578
00:32:12,000 --> 00:32:15,560
Speaker 1: east of Nashville, and that's where this debate started, the

579
00:32:15,680 --> 00:32:19,400
Speaker 1: raging debate over the Second Bank of the United States.

580
00:32:19,760 --> 00:32:24,000
Speaker 1: The Republicans are Jacksonian, They're scared stiff of the big

581
00:32:24,040 --> 00:32:28,440
Speaker 1: money of New York, etc. Etc. And the Democrats of

582
00:32:28,480 --> 00:32:31,880
Speaker 1: the urban milieu push against that. How is this battle

583
00:32:31,960 --> 00:32:34,680
Speaker 1: going to play out? Are we still in fear of

584
00:32:34,800 --> 00:32:39,600
Speaker 1: the Second Bank of the United States? Well, Tom, I

585
00:32:39,680 --> 00:32:42,480
Speaker 1: love the history lesson and the Hermitage is a beautiful spot.

586
00:32:42,480 --> 00:32:47,000
Speaker 1: And Jackson was a super controversial president. But today we're

587
00:32:47,040 --> 00:32:49,920
Speaker 1: faced with a situation where I think after ten years

588
00:32:49,960 --> 00:32:54,080
Speaker 1: of easy money and amazing amounts of fiscal stimulus. I

589
00:32:54,120 --> 00:32:58,320
Speaker 1: think some management teams have forgotten their prudential obligations to

590
00:32:58,360 --> 00:33:01,560
Speaker 1: their depositors and their shareholders. So we have a real

591
00:33:01,640 --> 00:33:04,920
Speaker 1: laxity and risk management in some of our financial institutions,

592
00:33:05,360 --> 00:33:08,080
Speaker 1: and perhaps we've got laxity in the supervision of those

593
00:33:08,120 --> 00:33:11,440
Speaker 1: institutions as well, particularly in the case of Silicon Valley.

594
00:33:11,520 --> 00:33:14,080
Speaker 1: Do we need to treat the banks such as Delphire

595
00:33:14,160 --> 00:33:16,520
Speaker 1: that you ran in Arkansas? Do we need to treat

596
00:33:16,640 --> 00:33:20,400
Speaker 1: smaller banks like the bigger banks out of Dadd Frank?

597
00:33:20,480 --> 00:33:23,400
Speaker 1: Do we need a one regulatory system? Is that the

598
00:33:23,480 --> 00:33:27,600
Speaker 1: lesson learned well? I think some of the costs of

599
00:33:27,680 --> 00:33:31,360
Speaker 1: Dodd Frank on small banks made them less competitive, harder

600
00:33:31,400 --> 00:33:35,640
Speaker 1: to earn a return on invested capital there, and that's

601
00:33:35,640 --> 00:33:39,880
Speaker 1: why Democrats and Republicans came together, as you noted earlier,

602
00:33:39,920 --> 00:33:43,680
Speaker 1: and Barney Frank supported it to make modifications in Dodd

603
00:33:43,760 --> 00:33:48,440
Speaker 1: Frank's regulatory burden on small financial institutions. I don't think

604
00:33:48,480 --> 00:33:52,040
Speaker 1: that in any way, shape or form reduced the obligations

605
00:33:52,040 --> 00:33:55,880
Speaker 1: of the bankers for their risk management legal requirements or

606
00:33:55,920 --> 00:33:59,080
Speaker 1: for the supervisors to do their routine job on a

607
00:33:59,160 --> 00:34:02,360
Speaker 1: quarterly basis to make sure the system is safe and sound. Comngressman,

608
00:34:02,400 --> 00:34:05,240
Speaker 1: you keep mentioning the supervision, and I'm wondering how much

609
00:34:05,240 --> 00:34:08,279
Speaker 1: you fault Jerome Powell's voter to reserve for the lack

610
00:34:08,440 --> 00:34:13,640
Speaker 1: of supervision that you're talking about. Well, the Silicon Valley

611
00:34:13,719 --> 00:34:19,120
Speaker 1: Bank clearly had risk management problems in their strategy about

612
00:34:19,840 --> 00:34:23,479
Speaker 1: short term deposits that were unensured invested in long term

613
00:34:23,520 --> 00:34:28,000
Speaker 1: treasury and mortgage securities. And the California Bank Regulators, the

614
00:34:28,080 --> 00:34:31,920
Speaker 1: state bank regulators, were the principal regulator, backed up by

615
00:34:31,920 --> 00:34:36,440
Speaker 1: the San Francisco Bank of the FED, and so they

616
00:34:36,480 --> 00:34:40,560
Speaker 1: do have a supervisory obligation. This bank grew very very

617
00:34:40,640 --> 00:34:43,440
Speaker 1: fast over the last two years, and that is usually

618
00:34:43,480 --> 00:34:47,439
Speaker 1: a huge red flag to supervisors, and perhaps they could

619
00:34:47,440 --> 00:34:50,480
Speaker 1: have intervened and helped the management team steer in a

620
00:34:50,600 --> 00:34:53,200
Speaker 1: much more safe and sound direction. Do you think that

621
00:34:53,280 --> 00:34:56,160
Speaker 1: things have stabilized enough that you have confidence, given the

622
00:34:56,200 --> 00:35:00,760
Speaker 1: intelligence that you've received, that the stability in the financial

623
00:35:00,760 --> 00:35:03,240
Speaker 1: system is sound and that we're unlikely to see something

624
00:35:03,239 --> 00:35:06,799
Speaker 1: else like this in the near future. Well, you never

625
00:35:06,920 --> 00:35:08,600
Speaker 1: know what's going to happen. In the future. But we

626
00:35:08,680 --> 00:35:11,600
Speaker 1: do have a safe and sound banking system with good

627
00:35:11,640 --> 00:35:16,160
Speaker 1: capital and good earnings and generally good liquidity planning across

628
00:35:16,200 --> 00:35:18,880
Speaker 1: the nation. I think that's clear over the past decade.

629
00:35:18,920 --> 00:35:22,320
Speaker 1: But I think with the low interest rates at zero

630
00:35:22,400 --> 00:35:25,760
Speaker 1: and then a sharp increase in short rates, some management

631
00:35:25,800 --> 00:35:30,160
Speaker 1: teams were not prepared for handling that in the right way,

632
00:35:30,200 --> 00:35:32,640
Speaker 1: and so we may have bumps in the road as

633
00:35:32,640 --> 00:35:34,640
Speaker 1: a result of that, And you've certainly seen that in

634
00:35:34,680 --> 00:35:38,759
Speaker 1: the case of Silicon Valley last week. Congressman. You've come

635
00:35:38,760 --> 00:35:41,440
Speaker 1: on the show before and talked about how inflation is

636
00:35:41,480 --> 00:35:44,440
Speaker 1: at tax on the poorest members of our society, about

637
00:35:44,480 --> 00:35:48,000
Speaker 1: how when inflation gets this high it becomes punitive for

638
00:35:48,040 --> 00:35:51,520
Speaker 1: so many families. How important is it from your vantage

639
00:35:51,520 --> 00:35:54,640
Speaker 1: point to see the ongoing rate hikes or some sort

640
00:35:54,680 --> 00:35:58,520
Speaker 1: of continuation in monetary policy regardless of some of the

641
00:35:58,560 --> 00:36:00,880
Speaker 1: concerns that we've seen in the financial system, or do

642
00:36:00,920 --> 00:36:03,600
Speaker 1: you think that this is the clarion call that perhaps

643
00:36:03,640 --> 00:36:07,719
Speaker 1: what we've seen is enough. Lisa, it's a it's a

644
00:36:07,719 --> 00:36:10,160
Speaker 1: tough question. As I've said on your show before, that's

645
00:36:10,160 --> 00:36:14,000
Speaker 1: the anguish of central banking to try to balance these factors.

646
00:36:14,040 --> 00:36:17,000
Speaker 1: But look, the FED has a central obligation to all

647
00:36:17,040 --> 00:36:20,080
Speaker 1: of us in our families of price stability, so they've

648
00:36:20,120 --> 00:36:22,479
Speaker 1: got to have that as their principal mission. But they'll

649
00:36:22,520 --> 00:36:26,080
Speaker 1: look at financial fragility as well. But I think the

650
00:36:26,120 --> 00:36:29,160
Speaker 1: FED should stay on track, using their best judgment and

651
00:36:29,239 --> 00:36:31,759
Speaker 1: looking at the data and make sure that they can

652
00:36:31,800 --> 00:36:35,040
Speaker 1: beat this inflation and get it back down to closer

653
00:36:35,040 --> 00:36:38,200
Speaker 1: to that target of two percent. If we get to

654
00:36:38,280 --> 00:36:43,360
Speaker 1: some new insurance regime. The belief here, Congressman, is the

655
00:36:43,440 --> 00:36:46,040
Speaker 1: banks are going to pay for it, not to taxpayer.

656
00:36:46,120 --> 00:36:51,800
Speaker 1: I get that idea, But is our Vest Bank of Bentonville, Arkansas?

657
00:36:52,280 --> 00:36:54,400
Speaker 1: Are they going to have to pick up the tab

658
00:36:54,960 --> 00:37:01,560
Speaker 1: for the irresponsible behavior of West Coast technocrats. Yeah, Tom,

659
00:37:01,560 --> 00:37:03,560
Speaker 1: this is a great question. And you know, back in

660
00:37:03,600 --> 00:37:05,680
Speaker 1: two thousand and eight and two thousand and nine we

661
00:37:05,719 --> 00:37:10,200
Speaker 1: moved to risk based premiums based on the bank's camel rating,

662
00:37:10,200 --> 00:37:13,280
Speaker 1: their risk rating by the regulators. That was a step

663
00:37:13,320 --> 00:37:16,920
Speaker 1: to making sure that people who run a poorer shop

664
00:37:16,960 --> 00:37:20,600
Speaker 1: pay a higher deposit insurance premium. Now the question is

665
00:37:20,600 --> 00:37:24,439
Speaker 1: should we have some sort of premium on top of

666
00:37:24,880 --> 00:37:27,920
Speaker 1: this risk based premium that would cover these sorts of

667
00:37:28,280 --> 00:37:31,160
Speaker 1: situations where a bank is determined to be like they

668
00:37:31,200 --> 00:37:35,440
Speaker 1: did this weekend, systemically important, and yet we're ensuring deposits

669
00:37:35,440 --> 00:37:38,120
Speaker 1: for which no premium was paid. I think this is

670
00:37:38,160 --> 00:37:41,080
Speaker 1: an important area for policy to consider. We looked at

671
00:37:41,120 --> 00:37:43,759
Speaker 1: it back into O eight to ten. I think we

672
00:37:43,840 --> 00:37:45,560
Speaker 1: need to look at it again in the face of

673
00:37:45,560 --> 00:37:48,960
Speaker 1: this new banking system and Twitter runs, which is what

674
00:37:50,160 --> 00:37:54,120
Speaker 1: was precipitating this collapse last week. Let's meet in the rotunda.

675
00:37:54,200 --> 00:37:57,840
Speaker 1: What is the common ground, Congressman Hill, of you and

676
00:37:58,000 --> 00:38:02,520
Speaker 1: Senator Warren Well, I think both Senator Warren and I

677
00:38:02,600 --> 00:38:05,080
Speaker 1: want a safe and sound banking system. We want to

678
00:38:05,080 --> 00:38:08,560
Speaker 1: make sure, for example, in the digital assets space, that

679
00:38:08,680 --> 00:38:11,479
Speaker 1: the rules of the road are clear, that we don't

680
00:38:11,520 --> 00:38:14,040
Speaker 1: have this speculation that we've seen in that market, and

681
00:38:14,080 --> 00:38:17,960
Speaker 1: that criminals are prosecuted and fraudsters are prosecuted. But I

682
00:38:17,960 --> 00:38:20,800
Speaker 1: would say to Senator Warren, look, we have a robust

683
00:38:20,960 --> 00:38:24,520
Speaker 1: regulatory system with plenty of rules on banks of all sizes.

684
00:38:24,800 --> 00:38:28,400
Speaker 1: What we need to see is vigorous supervision of those

685
00:38:28,440 --> 00:38:31,520
Speaker 1: banks by their primary regulators at all stages of the

686
00:38:31,560 --> 00:38:34,840
Speaker 1: economic cycle. Does not mean Congressman walking back some of

687
00:38:34,880 --> 00:38:39,640
Speaker 1: the deregulation we silk I throw in twenty eighteen. You know, Jonathan,

688
00:38:39,680 --> 00:38:42,440
Speaker 1: I don't think so, because it was a very bipartisan,

689
00:38:42,680 --> 00:38:46,120
Speaker 1: very modest tiering of the regulatory structure that came out

690
00:38:46,160 --> 00:38:49,760
Speaker 1: of Dodd Frank. I don't think you can lay that.

691
00:38:50,560 --> 00:38:52,680
Speaker 1: I don't think you can lay the collapse of the

692
00:38:53,200 --> 00:38:56,640
Speaker 1: banks last week at the foot of twenty one fifty five.

693
00:38:56,719 --> 00:38:59,560
Speaker 1: I don't know. I just don't think that's relevant. I

694
00:38:59,560 --> 00:39:03,360
Speaker 1: think what is relevant is risky management practices, with or

695
00:39:03,400 --> 00:39:08,200
Speaker 1: without Dodd Frank and lack of supervision by the primary regulator.

696
00:39:08,239 --> 00:39:10,640
Speaker 1: The reason I stats because they regulate to use the

697
00:39:10,680 --> 00:39:14,319
Speaker 1: systemic risk exception to make depositus whole. And Congressmen, what

698
00:39:14,320 --> 00:39:17,000
Speaker 1: we've acknowledged that the weekend is that basically all banks

699
00:39:17,239 --> 00:39:19,959
Speaker 1: in America carries some degree of systemic risks. So should

700
00:39:19,960 --> 00:39:24,239
Speaker 1: they all be regulated in the same fashion, regardless of size. Well,

701
00:39:24,239 --> 00:39:26,399
Speaker 1: I think tiering is important, But that gets back to

702
00:39:26,400 --> 00:39:29,560
Speaker 1: Tom's good question about deposit insurance. Should we have a

703
00:39:29,600 --> 00:39:33,240
Speaker 1: premium on top of the risk based premium that somehow

704
00:39:33,280 --> 00:39:37,640
Speaker 1: reflects that systemic risk and that would be something that

705
00:39:37,680 --> 00:39:40,120
Speaker 1: somebody would have to think through analytically. About how one

706
00:39:40,120 --> 00:39:43,520
Speaker 1: would assess that in a fair and balanced way. But

707
00:39:43,640 --> 00:39:46,840
Speaker 1: that speaks to this question, because you're right, the regulators

708
00:39:46,880 --> 00:39:50,920
Speaker 1: this weekend determined that Silicon Valley's reach went well beyond

709
00:39:51,400 --> 00:39:54,400
Speaker 1: its branches in California and New York. Is it related

710
00:39:54,440 --> 00:39:56,520
Speaker 1: to the economy? A comlreishment always creates to get your

711
00:39:56,560 --> 00:40:01,120
Speaker 1: perspective the banking system, the politics on a day, Congressman

712
00:40:01,160 --> 00:40:11,120
Speaker 1: French Hair god a politician with actual David George, senior

713
00:40:11,160 --> 00:40:16,080
Speaker 1: research analyst, bared very importantly with decades of experience, David,

714
00:40:16,080 --> 00:40:17,959
Speaker 1: what are you writing this morning? Let me just cut

715
00:40:17,960 --> 00:40:20,800
Speaker 1: to the chase. What matters right now for David George

716
00:40:22,880 --> 00:40:26,080
Speaker 1: M We wrote this morning, Tom, good morning, thanks for

717
00:40:26,480 --> 00:40:30,960
Speaker 1: having me. We we believe that this is an asymmetrically

718
00:40:31,120 --> 00:40:34,760
Speaker 1: positive risk reward for regional bank stocks. In fact, probably

719
00:40:34,800 --> 00:40:39,279
Speaker 1: the most constructive that we've been since COVID, maybe even

720
00:40:39,320 --> 00:40:42,319
Speaker 1: more constructive than that. This is one of the best

721
00:40:42,400 --> 00:40:46,000
Speaker 1: setups that we have seen in the last twenty I've

722
00:40:46,040 --> 00:40:49,480
Speaker 1: done this twenty three years, and this is an unbelievably

723
00:40:49,560 --> 00:40:53,560
Speaker 1: good risk reward set up stock. What is the skill

724
00:40:53,600 --> 00:40:57,560
Speaker 1: set to determine that a given bank is not seeing

725
00:40:58,480 --> 00:41:05,000
Speaker 1: outflows and that given bank has trust and confidence. Well,

726
00:41:05,040 --> 00:41:07,600
Speaker 1: you know, part of it is obviously it's it's difficult

727
00:41:07,640 --> 00:41:11,879
Speaker 1: to predict customer behavior. But I think something that has

728
00:41:11,920 --> 00:41:16,359
Speaker 1: gone undiscussed in the financial media is and I don't

729
00:41:16,360 --> 00:41:18,840
Speaker 1: cover Silicon Valley, but I think it's important to note

730
00:41:18,880 --> 00:41:22,040
Speaker 1: that they have two hundred twenty billion deposits. Still, how

731
00:41:22,040 --> 00:41:25,359
Speaker 1: many branches they had eighteen? Do you know how many

732
00:41:25,360 --> 00:41:29,480
Speaker 1: branches US Bank has five thousand? The average deposits per

733
00:41:29,480 --> 00:41:34,200
Speaker 1: branch at most US banks is about fifteen to fifty million,

734
00:41:34,760 --> 00:41:39,240
Speaker 1: not two billion per offers. So the granularity of most

735
00:41:39,360 --> 00:41:43,560
Speaker 1: US regional banks funding is just infinitely different than the

736
00:41:43,680 --> 00:41:47,080
Speaker 1: kind of banks that have been reported that have failed.

737
00:41:47,400 --> 00:41:52,920
Speaker 1: So obviously we are in a period where investors have

738
00:41:53,040 --> 00:41:56,319
Speaker 1: long memories and there's panic, but that is where you

739
00:41:56,440 --> 00:41:59,640
Speaker 1: get these asymmetric opportunities, and that's where we are in

740
00:41:59,680 --> 00:42:02,200
Speaker 1: my O. That said, David, there's a very different scenario

741
00:42:02,280 --> 00:42:05,320
Speaker 1: that is uniform pretty much across all the banking sector

742
00:42:05,360 --> 00:42:08,520
Speaker 1: as well as beyond which is the immediacy of being

743
00:42:08,560 --> 00:42:12,200
Speaker 1: able to withdraw in real time online at any time,

744
00:42:12,400 --> 00:42:14,440
Speaker 1: the ability for there to be a bank run that

745
00:42:14,560 --> 00:42:18,880
Speaker 1: happens so quickly that even regulators are caught completely off guard.

746
00:42:19,200 --> 00:42:21,960
Speaker 1: How does that change your risk assessment of smaller banks,

747
00:42:22,080 --> 00:42:25,080
Speaker 1: especially at a time or cash is paying something and

748
00:42:25,239 --> 00:42:27,480
Speaker 1: a lot of people are concerned that these banks are

749
00:42:27,480 --> 00:42:31,520
Speaker 1: not going to be able to deliver. Well, first of all,

750
00:42:31,560 --> 00:42:34,680
Speaker 1: I am not concerned. Maybe that doesn't matter. But to

751
00:42:34,760 --> 00:42:38,720
Speaker 1: your second point, at least the movement of funds into

752
00:42:38,840 --> 00:42:41,960
Speaker 1: treasuries and higher yielding alternatives, that's been going on for

753
00:42:42,160 --> 00:42:44,879
Speaker 1: over a year, so that is not a new phenomenon. Now.

754
00:42:44,880 --> 00:42:47,600
Speaker 1: How people feel about that given where the stacks have

755
00:42:47,680 --> 00:42:52,280
Speaker 1: been trading is new, but fundamentally that has been happening

756
00:42:52,320 --> 00:42:56,600
Speaker 1: for several months and several quarters. In terms of the

757
00:42:56,640 --> 00:43:00,600
Speaker 1: movement of deposits and things like social media and media

758
00:43:00,640 --> 00:43:03,400
Speaker 1: like yourself talking about bank runs, that's really not that helpful,

759
00:43:03,440 --> 00:43:07,960
Speaker 1: to be honest, to depositors, because most customers of regional

760
00:43:08,000 --> 00:43:11,600
Speaker 1: banks do not have millions of dollars. They've got maybe

761
00:43:11,600 --> 00:43:13,919
Speaker 1: five thousand dollars in a checking account, maybe a small

762
00:43:13,960 --> 00:43:16,880
Speaker 1: business has got a hundred thousand. They are not focused

763
00:43:16,920 --> 00:43:19,560
Speaker 1: on this, They are focused on running their businesses. So

764
00:43:19,600 --> 00:43:24,520
Speaker 1: I just think that the similarities between silicon ballets and

765
00:43:24,680 --> 00:43:27,800
Speaker 1: most other what I would call main street banks couldn't

766
00:43:27,800 --> 00:43:31,520
Speaker 1: be more different. That said, there is this concern about

767
00:43:31,719 --> 00:43:33,719
Speaker 1: the interest rate risk at a lot of banks, and

768
00:43:33,719 --> 00:43:36,560
Speaker 1: I am wondering, from your perspective, putting aside, you know

769
00:43:36,560 --> 00:43:39,400
Speaker 1: what the media's role is, or what investor's role is,

770
00:43:39,480 --> 00:43:42,120
Speaker 1: or what the reputational risk is. What about the nuts

771
00:43:42,120 --> 00:43:45,120
Speaker 1: and bolts, potential unrealized losses and the balance sheets of

772
00:43:45,120 --> 00:43:48,400
Speaker 1: a number of regional banks that haven't necessarily hedged against

773
00:43:48,480 --> 00:43:51,840
Speaker 1: a dramatic rise in interest rates, and among all of

774
00:43:51,840 --> 00:43:57,000
Speaker 1: their assets they used to back those customer deposits, well,

775
00:43:57,040 --> 00:43:59,640
Speaker 1: a couple of things. So banks, as part of the

776
00:44:00,120 --> 00:44:03,360
Speaker 1: Frank legislation have to own securities as part of what's

777
00:44:03,400 --> 00:44:07,120
Speaker 1: called the LCR liquidity coverage rations. And keep in mind,

778
00:44:07,640 --> 00:44:10,040
Speaker 1: Silicon Valley and banks under two hundred and fifty billion

779
00:44:10,120 --> 00:44:13,200
Speaker 1: ATHLETs are no longer subject to that legislation. All of

780
00:44:13,200 --> 00:44:15,560
Speaker 1: the big banks that we talk about are all subjects

781
00:44:15,560 --> 00:44:17,120
Speaker 1: in that. By the way, that's another thing that has

782
00:44:17,120 --> 00:44:21,440
Speaker 1: gone unreported and unnoticed and undiscussed in terms of the

783
00:44:21,440 --> 00:44:24,280
Speaker 1: interest rate risk. Yes, there are banks that are sitting

784
00:44:24,280 --> 00:44:27,319
Speaker 1: on securities. These are money good securities, by the way,

785
00:44:27,320 --> 00:44:29,600
Speaker 1: These are treasuries an mbs that pay us agreed, These

786
00:44:29,600 --> 00:44:32,680
Speaker 1: are not subprime loans, these are not CBOs. These are

787
00:44:33,120 --> 00:44:37,000
Speaker 1: money good securities and by the way, deposits have value

788
00:44:37,000 --> 00:44:39,959
Speaker 1: as well. They are not marked to market either. So

789
00:44:40,120 --> 00:44:43,720
Speaker 1: despite that, you have banks that are generally jap market.

790
00:44:43,760 --> 00:44:45,880
Speaker 1: Would they make last quarter or eight billion of earnings?

791
00:44:46,080 --> 00:44:48,600
Speaker 1: B of A made five billion of earnings. This is

792
00:44:48,680 --> 00:44:53,160
Speaker 1: just not a crisis. Two thousand and eight was a crisis.

793
00:44:53,160 --> 00:44:57,360
Speaker 1: This is a very short term crisis of componence driven

794
00:44:57,400 --> 00:45:01,640
Speaker 1: by one bank that was essentially a levered funds So um,

795
00:45:02,000 --> 00:45:05,640
Speaker 1: from my perspective, there are obviously unrealized losses, and by

796
00:45:05,680 --> 00:45:08,760
Speaker 1: the way, with bonds rallying, those losses are now becoming

797
00:45:08,840 --> 00:45:13,400
Speaker 1: games and that will change over time. But most banks

798
00:45:13,400 --> 00:45:17,319
Speaker 1: will hold these these securities until maturity. Um. Yeah, but

799
00:45:17,520 --> 00:45:20,040
Speaker 1: I think I think just to say that these banks

800
00:45:20,040 --> 00:45:23,399
Speaker 1: aren't managing interest rate risks, I think is not an

801
00:45:23,400 --> 00:45:26,200
Speaker 1: intellectually honest statement from my perspect Well, David, it's always

802
00:45:26,200 --> 00:45:28,960
Speaker 1: fantastic to get your perspective repeatedly through this conversation. You

803
00:45:29,000 --> 00:45:31,640
Speaker 1: do sound somewhat frustrated with the way this story has

804
00:45:31,680 --> 00:45:34,560
Speaker 1: been covered over the last three days. What would you

805
00:45:34,600 --> 00:45:37,080
Speaker 1: like to say here more of going forward? What are

806
00:45:37,080 --> 00:45:42,080
Speaker 1: the questions that you think have been missing? Um, I

807
00:45:42,200 --> 00:45:46,359
Speaker 1: just think that that the constant focus on is your

808
00:45:46,400 --> 00:45:50,000
Speaker 1: money safe? It's just and I think the prolifration of

809
00:45:50,040 --> 00:45:53,719
Speaker 1: social media is obviously something that you're not necessarily engaged in.

810
00:45:53,840 --> 00:45:58,360
Speaker 1: But but I think it's just too I think I

811
00:45:58,400 --> 00:46:03,400
Speaker 1: think it's important to to just distinguish between banks and

812
00:46:03,520 --> 00:46:08,560
Speaker 1: their funding and their customer bases. And you know, this

813
00:46:08,600 --> 00:46:12,080
Speaker 1: particular situation is frustrating when you've got a not to

814
00:46:12,120 --> 00:46:15,600
Speaker 1: get political, but when you've got a VC legend tells

815
00:46:15,640 --> 00:46:19,440
Speaker 1: everyone that screams fire in a crowded theater, that's not

816
00:46:19,600 --> 00:46:23,440
Speaker 1: helpful either. And that's a whole other discussion. But I

817
00:46:23,480 --> 00:46:27,600
Speaker 1: think I think the main thing is just having some

818
00:46:27,680 --> 00:46:31,920
Speaker 1: differentiation between banks. And by the way, there will be

819
00:46:31,920 --> 00:46:35,040
Speaker 1: beneficiaries of this. All of the large banks, as you

820
00:46:35,120 --> 00:46:38,040
Speaker 1: kind of referenced a little bit earlier before we started

821
00:46:38,080 --> 00:46:41,399
Speaker 1: the show, they will benefit from this. So there will

822
00:46:41,440 --> 00:46:45,279
Speaker 1: be your big ten to fifteen banks, Ye will be

823
00:46:45,400 --> 00:46:48,120
Speaker 1: net beneficiaries, which which is something that again I think

824
00:46:48,800 --> 00:46:51,360
Speaker 1: it's not been discussed, and those stocks have gotten smoked

825
00:46:51,360 --> 00:46:53,359
Speaker 1: as well. It's something we've talked about a lot over

826
00:46:53,400 --> 00:46:55,759
Speaker 1: the last three days. A lot of money is going

827
00:46:55,760 --> 00:46:57,080
Speaker 1: to go to the SI base. There's going to be

828
00:46:57,120 --> 00:46:59,280
Speaker 1: a premium attached to them, just in terms of safety,

829
00:46:59,400 --> 00:47:01,600
Speaker 1: safe safety. David, this was great. Let's try and make

830
00:47:01,640 --> 00:47:03,719
Speaker 1: this rankular because I have no doubt it's going to

831
00:47:03,760 --> 00:47:06,200
Speaker 1: be a story for the next couple of weeks. Maybe

832
00:47:06,200 --> 00:47:08,560
Speaker 1: have the next couple of months, David, George, that of bat.

833
00:47:08,640 --> 00:47:12,480
Speaker 1: Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and

834
00:47:12,640 --> 00:47:16,960
Speaker 1: anywhere else you get your podcasts. Listen live every weekday

835
00:47:17,080 --> 00:47:20,600
Speaker 1: starting at seven am Eastern. I'm Bloomberg dot Com, the

836
00:47:20,680 --> 00:47:25,200
Speaker 1: iHeartRadio app, tune In, and the Bloomberg Business app. You

837
00:47:25,280 --> 00:47:29,319
Speaker 1: can watch us live. I'm Bloomberg Television and always I'm

838
00:47:29,360 --> 00:47:33,279
Speaker 1: the Bloomberg Terminal. Thanks for listening. I'm Tom Keane and

839
00:47:33,440 --> 00:47:35,040
Speaker 1: this is Bloomberg