Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Faroll and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best and economics, geopolitics, finance and investment.
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Speaker 1: now head over to London to catch up with France,
Speaker 1: Saint Laqua and the kratiswee Thank you so much, John.
Speaker 1: We are delighted to be joined by of course Aldrich
Speaker 1: Corner of the the Kurti Sweet, chief executive officer. Thank you
Speaker 1: for joining us. It's a difficult day, another difficult day
Speaker 1: for Krati Sweeze. What can you tell us about the
Speaker 1: outflows in the wake of SEB so as we be
Speaker 1: As you know, it's a very recent saying which happened
Speaker 1: up a weekend and yesterday. So far it's pretty calm
Speaker 1: even so material good influence yesterday still Also, you know,
Speaker 1: I had a client meeting which was very positive on
Speaker 1: their one. So so far it's kind but I think
Speaker 1: it's early days to look at the calm. Are you
Speaker 1: suggesting that you could also actually get inflows. We got
Speaker 1: them yesterday, which is a positive sign, I would say,
Speaker 1: and you know, for us, and that is maybe a
Speaker 1: little bit if I may say so, unseeing in comparison
Speaker 1: to SVB. It's a very different situation. You know, we
Speaker 1: are GCIP as you know, we are following materially different
Speaker 1: and higher standards when it comes to capital funding, liquidity
Speaker 1: and so on. And that's why we said, you know,
Speaker 1: we gave I think this situation is important. We gave
Speaker 1: r capital ratio of like one hundred and forty forty
Speaker 1: at the at the end of Q four, which is
Speaker 1: strong ratio, which has improved as we went through this
Speaker 1: quarter to like hundred and fifty on average and spot
Speaker 1: being even high on that. But so outflows have not reversed,
Speaker 1: but they've actually lowered. Are they reversing? Look, they have
Speaker 1: significantly moderated, as I put it. We gave an update
Speaker 1: on February nine in terms of where we are on
Speaker 1: the passts and addu ascess and so on. We will
Speaker 1: give next update with the first quarter result. But this
Speaker 1: is also very clear. You know, if and we talked
Speaker 1: about that. What has happened in like Furce quarter. You know,
Speaker 1: we are fully focused on it, turn it around, but
Speaker 1: that takes longer than like just two months. But then
Speaker 1: you do you have this material weakness today? What happened there?
Speaker 1: There's concerned that actually almost every day there's some kind
Speaker 1: of bad news and you have your share price at
Speaker 1: a record low like that can't be a comfortable position, no,
Speaker 1: But we published our report today as we have seen
Speaker 1: the financial result. I think that's a key message. The
Speaker 1: financial result is unchanged for twenty twenty two and previous years.
Speaker 1: We delayed the reporters you have seen a couple of
Speaker 1: days to appropriately deal with you know, questions the SEC
Speaker 1: had and we did, and that is part of an
Speaker 1: longer ongoing dialogue. And we acknowledge that we have a
Speaker 1: material weakness in the financial in the financial reporting control,
Speaker 1: which we are addressing and immediating forcefully. How are you
Speaker 1: addressing that? So? Is that an auditor problem had PwC
Speaker 1: on the case? Is it their fault? No, it's absolutely
Speaker 1: not their fault. That is obviously you know that cause
Speaker 1: higher hand in hand as you work together with your auditor,
Speaker 1: but it's a collective fining and we are addressing it.
Speaker 1: We have remediation planner. We are addressing it. So you
Speaker 1: have an anchor investor that put one point five million
Speaker 1: in the bank, Now their share value has gone down
Speaker 1: by one third. Will they have to inject more? What
Speaker 1: kind of conversations are you having with them? Well, look,
Speaker 1: nobody's pleased devolve the SHAPERCE development, you know, but we
Speaker 1: match what we can match. And this is the execution
Speaker 1: of our plan. That's a white strategy. This is a
Speaker 1: white plan. We are executing at pace and even ahead
Speaker 1: of the plan. And I think I'll sharel to see
Speaker 1: that as well. That's an unpleasant situation. Chap Price or
Speaker 1: Dotcom match CHAPERCE. I can match the execution and I do.
Speaker 1: So you don't think you're getting pressure from shareholders. You're
Speaker 1: not getting pressure from you know, certain big shareholders to
Speaker 1: do more and actually to have all options on the
Speaker 1: table now. As I said, they are obviously they're obviously
Speaker 1: not pleased with the development. I'm not please developed the
Speaker 1: first hand, obviously, but you know, we are executing and
Speaker 1: once we are executing step by step, and we show
Speaker 1: the market and this is exactly why we said it's
Speaker 1: a three years process and we are executing and that
Speaker 1: is you know, the market will acknowledge that and the
Speaker 1: share process will follow. Do you think all options should
Speaker 1: be on the table? What about breaking up the bank?
Speaker 1: If you look and I know understand your frustration with
Speaker 1: the share price and saying, look, you're just executing. But
Speaker 1: when you look at the share price ninety seven percent
Speaker 1: below that two thousand and seven high, like how do
Speaker 1: you regain from that now? But that you can can't
Speaker 1: compare as you know, but you know, as I said,
Speaker 1: it's a right Swagi and fully fully convinced off the Swagi.
Speaker 1: We are executing at past. We have the right team
Speaker 1: and you know that's why we said in October it
Speaker 1: needs radical change. You know, the bank needs to be changed,
Speaker 1: and we said it's a three years transformation and you
Speaker 1: can't come after two months and Salo, why is not
Speaker 1: everything done? But radical change could be splitting off the bank.
Speaker 1: Is it something that you're you're valuing? Oh? Look, the
Speaker 1: new Creates visa is focused on the course lengths of
Speaker 1: the bank. This is welds management. The swis spend persons
Speaker 1: asset management. What we put the market either trading and
Speaker 1: sales business that makes entirely sense, entirely different risk profile,
Speaker 1: will be very profitable and we reward shareholders. And I
Speaker 1: think the sheilds understand it. When will you be able
Speaker 1: to say, like the worst is really behind us? But
Speaker 1: we said it's three years transformation. We said we are
Speaker 1: going to make a loss unfortunately this year because you know,
Speaker 1: and this is something which you need to understand, a
Speaker 1: lot of the restructuring courts, you know, baked into the
Speaker 1: transformation are coming in twenty twenty three before we see
Speaker 1: a lot of benefits out of that transformation, and that
Speaker 1: is something which happens. That's why we said it takes
Speaker 1: three years. Three years is a long time work. I
Speaker 1: mean a lot of but a lot of the shareholders
Speaker 1: will start asking questions. I mean, have you asked them
Speaker 1: for more money to make it faster for three years,
Speaker 1: especially in this banking world than anything could happen? No,
Speaker 1: But you know, as I said, our LCR ratio is
Speaker 1: strong and very strong, has has getting stronger as we speak.
Speaker 1: Our capital ratio is very strong at fourteen point one
Speaker 1: and as we gave it to Q four, so we
Speaker 1: have everything we need to go through the transformation. Mars
Speaker 1: or are you expecting, you know, the first quarter to
Speaker 1: be good enough to keep shareholders off your back. The
Speaker 1: first quarter is, as we said, and we put it
Speaker 1: very clearly, we will make a loss in the first quarter,
Speaker 1: but you will see progress in the first quarter numbers.
Speaker 1: It's not in terms of what outflows in certain business momentum.
Speaker 1: We're specifically businessman and the market business for example, which
Speaker 1: was as we all discussed for the for four reasons,
Speaker 1: clearly understandable reasons. A week in the Q four looks better.
Speaker 1: We else management, we are making progress, certainly not yet
Speaker 1: there where we should be, but we are making progress.
Speaker 1: Are you comfortable with the banking system as a whole.
Speaker 1: I mean, we've we've lived through a pretty incredible couple
Speaker 1: of days and if you look at the markets are
Speaker 1: all over the place. No, I think so. I mean
Speaker 1: this is somewhat an isolated problem. If you want tool
Speaker 1: and as I said, you know, if you are guzip
Speaker 1: it or if you look at the large banks, I
Speaker 1: see we will manage to it. Talk to me a
Speaker 1: little bit about Cratty sweet first, Boston. So, first of all,
Speaker 1: what's the timeline for the IPO. The timeline Fancy is unchanged,
Speaker 1: a discussed last time. So we have a very clear
Speaker 1: plan to put it into market creating liquidity event most
Speaker 1: likely in IPO. We are working against our internal plans forcefully,
Speaker 1: and I would expect such an event in like twenty
Speaker 1: twenty five. As I said earlier, Okay, any news, I
Speaker 1: mean today you had news about the twenty percent that
Speaker 1: would go to craze Piece first Boston Partners. What happens
Speaker 1: to the rest? The rest is owned by us and
Speaker 1: obviously also portioned by Michael as as as we announce
Speaker 1: it in like February, the rest is own past So
Speaker 1: this is this is our part of the bank, remains
Speaker 1: our part of the bank. We are going into liquidity
Speaker 1: and again most likely IPO you will be probably a
Speaker 1: majority shold and then we make decision you know how
Speaker 1: our holding develops over the next following years. So you're
Speaker 1: still looking for an anchor investor for Crazpiece first, Are
Speaker 1: you closer to finding well, I don't know. Yeah, we
Speaker 1: are close to, but I'm not sure if it's anchor.
Speaker 1: And so we have a lot of interest from SERTA
Speaker 1: parties to be invested into that. It tells you something
Speaker 1: about the Surgia. I would say and we are evaluating
Speaker 1: that Middle Eastern investors, different kinds of investors, different parts
Speaker 1: of the world, but large chunk investors decision. And I
Speaker 1: will inform you first as Okay, how far away are
Speaker 1: we from that? We are pretty close. I would say
Speaker 1: a couple of weeks will come before the first quarter.
Speaker 1: I will tell the market if we are there. What
Speaker 1: do you find most difficult about Your job is to
Speaker 1: make it understandable. I would say, you know that we
Speaker 1: are absolutely doing the right things that we need some
Speaker 1: time to get through. And and this is what all
Speaker 1: my colleagues and I try to do, you know, to
Speaker 1: regain the trust off the bank over the next couple
Speaker 1: of months. But is it more important to regain the
Speaker 1: trust of shareholders or or clients? It is look clients,
Speaker 1: is I told you last time? I would say one
Speaker 1: of the best experience, even in this very difficult months
Speaker 1: last year. I mean, they are so supportive of us,
Speaker 1: they are listening to us, they're doing active things to
Speaker 1: support they like to bank with create switch is a
Speaker 1: fantastic experience. But you know, the convincing of this is
Speaker 1: the right thing to do. We are executing at pace
Speaker 1: and the head of plan is with all different stakeholders,
Speaker 1: all different ones, But why are they taking money out?
Speaker 1: Then if your clients are happy, because and that's what
Speaker 1: I also said, if you are in a situation like
Speaker 1: we were in October, you know where you had malicious
Speaker 1: information out in the market. At the beginning of October,
Speaker 1: we were not able to speak, legally not able to speak.
Speaker 1: And that's why I said, like two thirds of the
Speaker 1: outflaw stemming from October alone, eighty five percent from October
Speaker 1: and November. And the moment we could reach out, we
Speaker 1: started that huge program talk to our clients. More than
Speaker 1: ten thousand clients in wealth managements since then, more than
Speaker 1: fifty thousand individual meetings in Switzerland, and that has created momentum.
Speaker 1: Are you frustrated though that the actually you haven't been
Speaker 1: able to get ahead of that quicker? No, I think
Speaker 1: we are really doing the utmost possible and I'm proud,
Speaker 1: not frustrated. I'm proud of what my colleagues, my people
Speaker 1: at the front units have done since months. I'm really
Speaker 1: proud of. But the message today, I mean, if you
Speaker 1: look at your share price, you're proud. You think you're
Speaker 1: executing You're on a three year ap plan, if you
Speaker 1: look at the share price at a record low, does
Speaker 1: your stomach sink a little bit when you look at
Speaker 1: the share price? Nothing, which I like obviously, But look,
Speaker 1: I can't control what I can control. I don't control
Speaker 1: a share price. I control the execution of the right strategy,
Speaker 1: and you think the share price will will catch up
Speaker 1: if you execute? All right, thank you so much for
Speaker 1: your time, But it was all recruiter. They're the Credit
Speaker 1: Swiss chief executive officer and with that, I'm going to
Speaker 1: send it back to you, a friend, saint, just absolutely fantastic.
Speaker 1: And now we're going to take a different perspective here
Speaker 1: Magnus Billing joining. He's the chief executive officer of Sweden's elector,
Speaker 1: and we're thrilled he could join us this morning here
Speaker 1: with perspective on the American banks and with the perspective
Speaker 1: on the pension responsibilities in his Sweden, across Europe and
Speaker 1: frankly at worldwide. Magnus, the path is this October of
Speaker 1: last year, a small matter of a busted shure thing
Speaker 1: in the United Kingdom, a ballot by the Bank of England,
Speaker 1: literally in hours. What we've all observed over the last
Speaker 1: four days and we look at Sweden as the bastion.
Speaker 1: What are the shadows within the Swedish pension system right now?
Speaker 1: Is it pricing commercial real estate is a different nuances
Speaker 1: of European banking. What are the shadows you confront this morning? Well,
Speaker 1: good morning, thank you for having me. I think first
Speaker 1: of all that the Swedish pension system it's very robot
Speaker 1: it's small, the robust that it's been in the last
Speaker 1: ten fifteen years. But having said at obviously end of
Speaker 1: the day, it's a lot about liquidity when the psychology
Speaker 1: kicks in the dugle market space, and I think the
Speaker 1: issue that you brought up about the UK event that
Speaker 1: took place last year and also what we see now
Speaker 1: in the past week or so, it's a lot of
Speaker 1: liquidity psycholity around liquidity and the easiness one can move
Speaker 1: capital today with the digital development that we've seen in
Speaker 1: the past number of years. But looking at just a
Speaker 1: balance sheet of basically across all the pension funds in
Speaker 1: Sweden and an order gredion, they are very robust today.
Speaker 1: Do you bring the money home? My experience on the
Speaker 1: geography of crisis is one endowed pollet home to Swedish
Speaker 1: pension plans and would you guess European continental plans do
Speaker 1: they just bring the assets home. I think the under
Speaker 1: the lying fundamentals of the US market is still very
Speaker 1: attractive for any investors, so I think in the mid
Speaker 1: to long term US will always be able to attract
Speaker 1: the investors to invest into the market space. That goes
Speaker 1: also for the pension funds, and I think looking at
Speaker 1: the size of many of the pension funds in the
Speaker 1: Nordics and the European space, they need to diversify into
Speaker 1: the US market and under regions around the globe. So
Speaker 1: I think I have at least a positive mid to
Speaker 1: long term view on the US markets capacity to deliver
Speaker 1: shareholder value to us. The magnets. You have a problem
Speaker 1: this morning, as most people know, so let's talk about
Speaker 1: that problem. Now. How does the Swedish pension fund end
Speaker 1: up allocated to Signature Bank First republic An SVP. Yeah,
Speaker 1: I mean we've been we invested in those companies starting
Speaker 1: twenty seventeen up until twenty nineteen, and we've been growing
Speaker 1: that allocation over the years. So obviously we thought that
Speaker 1: the initial year was good for US investing that, but
Speaker 1: with what's happened last week. Obviously we think it's a
Speaker 1: big failure for us as an investor, and we need
Speaker 1: to learn something from that and take actions based upon
Speaker 1: the lessons learned. So it's a failure. I just want
Speaker 1: to sort of put that in proportion to the total
Speaker 1: portfolio that we're managing. We're talking about one percent of
Speaker 1: a total capital that we manage. So from a customer
Speaker 1: point of view, this does not have a material impact
Speaker 1: at all. It will not impact the pensions that we
Speaker 1: are committing to our customers. I understand that, but it
Speaker 1: just speaks a weak internal controls and some odd decisions
Speaker 1: that we need to talk about. Magnus, the fact that
Speaker 1: you were allocated to those names, but some of the
Speaker 1: conservative Swedish lenders you ended up selling those positions in
Speaker 1: twenty twenty two. So I guess the question that will
Speaker 1: be repeatedly asked of you is just what happened? What
Speaker 1: happened and why did you buy more of those names
Speaker 1: and sound more conservative names. Well, those are two separate issues.
Speaker 1: The divestment of the Swedish banks is a standalone assessment
Speaker 1: and the decision made made at a different time. Talking
Speaker 1: about the US banks, what we liked about then was
Speaker 1: the market position, the position when it comes to transformation
Speaker 1: in the digital space and the US market generally speaking,
Speaker 1: the depth of that and the size of it. We
Speaker 1: had discussion with the Silicon Valley Bank during the fall
Speaker 1: because we also saw as many others, you know, the
Speaker 1: withdrawal of the post sits and the investments the company
Speaker 1: did in the long term government securities and what that
Speaker 1: led when it comes to durational liquidity aspects. We thought
Speaker 1: that the action plan that the company had was they
Speaker 1: were transparent about that, and we thought it was well
Speaker 1: fought through. Then last week the company acted not in
Speaker 1: accordance with the action plan we had discussed and talked
Speaker 1: with them about, and that we had been presentative, and
Speaker 1: that surprised us, and I think that was a big
Speaker 1: mistake from the company's side. Well, clearly, mcnus. It didn't
Speaker 1: just surprise you, It surprised many people, including the regulator
Speaker 1: here in the United States. So a lot of people
Speaker 1: have questions they'll need to answer as well. I want
Speaker 1: to understand how you responded to that in the last
Speaker 1: couple of days. So you've identified some banks that you
Speaker 1: hold that haven't managed their interest rate risk properly. Are
Speaker 1: you worried that you also hold some European banking names
Speaker 1: that maybe you're in the same position, perhaps even worse.
Speaker 1: Given what's happened with the bond market there over the
Speaker 1: last couple of years. We see in the European market
Speaker 1: as well withdraw all of deposits and it's increasing. So
Speaker 1: we're monitoring that very closely, and we're monitoring basically the
Speaker 1: whole exposure we have to the banking sector, which is
Speaker 1: in total two percent of the total portfolio. So I
Speaker 1: think we need the last few days has been you know,
Speaker 1: escalating a little bit in the European market, but we're
Speaker 1: monitoring that. I think the loss to equity ratio is
Speaker 1: completely different or very different in the European space compared
Speaker 1: to some of the banks in the US market that
Speaker 1: you mentioned earlier. Magis, Can we just focus on Europe
Speaker 1: just a little bit more. Do you hold credit suites? No,
Speaker 1: we don't have you sold any names in the last
Speaker 1: twenty four rounds the last four yeer hours. If you
Speaker 1: de risk around the European banks at all in any way,
Speaker 1: shape or form, we have not. We have we hold
Speaker 1: shares in two Nordic banks SCB and Nordia. You also, though,
Speaker 1: have taken on these credit risk transfers over the past
Speaker 1: few years, or basically you take on the risk associated
Speaker 1: with particularly European bank books tied to commercial loans to
Speaker 1: stress that how confident are you that those are going
Speaker 1: to be solid investments. I think the banking sector in
Speaker 1: Europe is stronger than whether we're in prior to the
Speaker 1: global financial crisis, so I think we're in a better
Speaker 1: starting position. Obviously, a lot of things are happening around now,
Speaker 1: and it's clearly a transition face that the market is
Speaker 1: going through with the enormous increase in the interest rate
Speaker 1: that we've seen in the past twelve months and the
Speaker 1: speed of that, and we haven't transitioned through that yet.
Speaker 1: But I think the banks, the Nordic banks that we
Speaker 1: hold chairs are in a solid position as of today.
Speaker 1: Given the bet that you made on some of the
Speaker 1: US banks, I'm wondering how you're handling the fallout, whether
Speaker 1: you're getting out of the positions, whether you're doubling down,
Speaker 1: whether you're buying more. What's been sort of the positioning
Speaker 1: over the past couple of days. Well, when you talk
Speaker 1: about the silicon value Bank and the signature bank being
Speaker 1: in a receivership. I think it's more a legal issue
Speaker 1: for us to ensure that we protect our legal rights there.
Speaker 1: I don't expect any value to come out with that
Speaker 1: ass of today when it comes to First Republic. Obviously,
Speaker 1: it's very volatile and it's day to day. Basically, yesterday
Speaker 1: it fell a lot, today it's up again. Well, we
Speaker 1: haven't taken any decision yet, but we are ready to
Speaker 1: take decisions as we see appropriate for us at any stage.
Speaker 1: But we haven't taken a major actions today which brought
Speaker 1: to that bank magus. Every crisis unfolds with a certain character.
Speaker 1: We make note of Sweden's wonderful work many many decades
Speaker 1: ago and inventing a whole bit of central bank theory
Speaker 1: with how Stockholm handled a crisis. The theme right now
Speaker 1: seems to be the shadows or the mysteries of private
Speaker 1: equity and venture capital in America. Conservative money is addicted
Speaker 1: to the potential return of that group. Are you exposed
Speaker 1: to private equity and venture capital long term locked in
Speaker 1: holdings and do you worry that there could be some
Speaker 1: real issues there with liquidity in our equity portfolio, our
Speaker 1: investment model is predominantly focused on more mature companies and
Speaker 1: we invest directly in those. So we're looking for strong
Speaker 1: cash flow RODDAM potential growth and future positive cash flow.
Speaker 1: With that set, that means that we don't we basically
Speaker 1: don't have any private equity exposure and VC exposure, not portfolio.
Speaker 1: You've been doing this for a few years. Do you
Speaker 1: assume in crisis, with the way yields are gyrating, the
Speaker 1: way all central banks have become more restrictive in the
Speaker 1: last four or five days, do you suggest that not
Speaker 1: the actual assumption, but just the expected return of pension
Speaker 1: portfolios will come down. Yes. I do think that the
Speaker 1: next ten years will be more difficult to generate return,
Speaker 1: and I think we will see changes in the investment
Speaker 1: models in the pension fund industry in order to secure
Speaker 1: adequate return for for the beneficiarcy. Sir, My great theme
Speaker 1: here is we've had interest rate come in as we've
Speaker 1: come back and normalized yield, certainly normalized yield. Within the
Speaker 1: europe p and sphere as well, is a troubled non
Speaker 1: profitable companies what we call in America zombies, that they
Speaker 1: will go away, whether they're banks or anything else. As well.
Speaker 1: Do you suggest that we will see combinations and transactions
Speaker 1: to clear out companies have had essentially a free lunch
Speaker 1: for sixteen years. Yeah, I do think some companies are
Speaker 1: have benefited too much or all the center banks put
Speaker 1: and the fact that we've been living in the world
Speaker 1: for many years where cost of capital has been basically zero,
Speaker 1: and I don't think that that is sustainable little long
Speaker 1: term and I would suspect that some businesses out there
Speaker 1: will struggle to adjust to more normalized interest rate level
Speaker 1: long term magnets as you and I talking, as we're
Speaker 1: all speaking, the first Deputy Governor of the Swedish Central
Speaker 1: Banks address in Parliament at the moment, suggesting that we
Speaker 1: need more timing despite well it's ability. There are people
Speaker 1: who believe that things are breaking now and these central
Speaker 1: banks need to back away. Can we finish on that?
Speaker 1: What's your take on that? So I didn't hear the
Speaker 1: question that properly, so could you I can repeat it, sir?
Speaker 1: By all means. So, the first Deputy government of the
Speaker 1: ricks Bank is speaking to Parliament right now suggesting that
Speaker 1: we need more tightening despite the volatility. Magnus. As you know,
Speaker 1: the conversation in the last twenty four hours is that people,
Speaker 1: some people believe things are breaking and central banks should
Speaker 1: back away. What's your take on that, sir. I do
Speaker 1: think that we in the market space today actually see
Speaker 1: a de facto tightening, and I think that should be
Speaker 1: catered into the policy decisions to be made going forward.
Speaker 1: And it's very difficult assessments to make, obviously, but I'm
Speaker 1: a little bit concern that we're breaking or breaking the
Speaker 1: markets if we're too aggressive. Obviously, we need to bring
Speaker 1: down the inflation because that is the long term number
Speaker 1: one fall for all the market participants. But it's a
Speaker 1: balancing act here, and I think again that the current
Speaker 1: defect of marketing, it tightening, that's happening, should be catered
Speaker 1: into the consideration. Magnus, is a difficult time for everyone,
Speaker 1: particularly for you this morning, and we appreciate the opportunity
Speaker 1: to speak with you at that difficult time. Thanks for BEINGMDUS.
Speaker 1: Magnus billing the I've elect a Swedish pension fund with
Speaker 1: exposure to all the wrong names. This is a joy.
Speaker 1: His name is Ethan Harris. He's an author. He's also
Speaker 1: had a global research at Bank of America's Securities and
Speaker 1: stopped economics with appression book Ben Vernanke's Fed a few
Speaker 1: years ago. In that book, you talked about a theme
Speaker 1: I just talked to Vincent Reinhardt about, which was the
Speaker 1: shadow of Alan Greenspan. Are we in this mess, doctor Harris,
Speaker 1: because we became unmeasured? Well, I think that. I don't
Speaker 1: think Alan Greenspan's legacy is really that strong right now.
Speaker 1: I think we got into this mess because, like a
Speaker 1: lot of central banks and a lot of economists, the
Speaker 1: FED started to believe that inflation was largely dead and
Speaker 1: you didn't have to worry about a sloped Phillips curve
Speaker 1: to put a technical term on it, and so they
Speaker 1: adopted a very passive monetary policy. Now we're seeing a
Speaker 1: massive ketchup by the FED, and of course financial accidents
Speaker 1: happen when you're hiking rates very fast, and so some
Speaker 1: of this is a legacy of the FED and other
Speaker 1: central banks starting too slowly to deal with inflation. The
Speaker 1: legacy and reality that I've seen within Brian moynihan in
Speaker 1: his Modern Bank of America is he's viscerally granular. Brian,
Speaker 1: more than any other CEO I know, has a granular
Speaker 1: feel with all that research on your banking side, do
Speaker 1: you see a financial integrity to our banking system beneath
Speaker 1: the massive Bank of America. Well, I don't want to
Speaker 1: comment on Bank of America specific, no, I mean on
Speaker 1: the other banks. So I think then that Moynahan's glued
Speaker 1: to when I think one of the questions for investors
Speaker 1: these days is how healthy is a banking system? And
Speaker 1: I think, as your previous guests said, the banking system
Speaker 1: overalls and excellent health. It's heavily regulated, heavily capitalized. You're
Speaker 1: always going to have during periods of stress, some events,
Speaker 1: and I would think of this as a stress event
Speaker 1: in the context of otherwise not just strong financial banking system,
Speaker 1: but strong financial system in general. So when you look
Speaker 1: at the balance of risks right now, and this is
Speaker 1: something that I've been giving a lot of thought too.
Speaker 1: If the financial system is strong, you have these supports,
Speaker 1: you get a best sense of a rebound. It doesn't
Speaker 1: really tighten financial conditions all that much from where we were,
Speaker 1: and in fact, given the lower expectations for FED rate hikes,
Speaker 1: you have easier financial conditions and you did just a
Speaker 1: bit ago. At what point does that become a huge
Speaker 1: risk for inflation that does not come down. Well, I
Speaker 1: think we need to recognize that we're in the middle
Speaker 1: of a of a stress event, and so it's very
Speaker 1: hard to predict where things are going. The markets will
Speaker 1: always price out the central bank during a crisis like this.
Speaker 1: But the real question is does the policy efforts. Does
Speaker 1: the attempt to ring friends the problem? Does it work.
Speaker 1: If it works, the FED then goes back to their
Speaker 1: regularly scheduled program and they have to deal with inflation.
Speaker 1: If it doesn't work, then monetary policy gets drawn into
Speaker 1: the process of supporting the financial system. Our view is
Speaker 1: that ultimately the ring fencing works and the FED goes
Speaker 1: back to hiking interest rates. So I think our view
Speaker 1: would be that the markets understandably are in a very
Speaker 1: risk off mode, but ultimately the Fed's going to end
Speaker 1: up having to fight inflation. And this is the reason
Speaker 1: why you're in the camp of another twenty five bases
Speaker 1: point rate hike next week. But I do wander longer
Speaker 1: term whether the signs of stress have kind of gut
Speaker 1: checked your sense of how much these long and variable
Speaker 1: lags have come to the four and put a higher
Speaker 1: or rather a lower cap on how high rates can
Speaker 1: go well. I think that unquestionably this this stress and
Speaker 1: the system now titans financial conditions and is a warning
Speaker 1: about the lag defects of monetary policy. It's actually been
Speaker 1: surprising how little impact the Feds had up to now.
Speaker 1: They hiked at a very fast pace. Now we're seeing
Speaker 1: some effects, and perhaps an extreme effect, and so it
Speaker 1: does have to make you a little more cautious about
Speaker 1: how far the Fed needs to go. Mike. But let's
Speaker 1: get out in front of Michael Gapan in the next
Speaker 1: hour with John Ferrell. He's a good economist, I mean
Speaker 1: he is, I think so. But let's get let's get
Speaker 1: the hair escape in view here. Did they hike too rapidly?
Speaker 1: Were you guys sitting over the last number of weeks
Speaker 1: going at the rate of change and Newtonian calculus of
Speaker 1: all this dance is just a little bit off. No,
Speaker 1: I don't think so. I'm sitting now. I think that
Speaker 1: the the original error was waiting too long to hike.
Speaker 1: The graduate was some of green span. You know, the
Speaker 1: idea of hiker early so you can hike slowly wasn't
Speaker 1: carried out and wasn't the stands of the shadow of Greenspan.
Speaker 1: Here the shadows do it that they didn't do with Well,
Speaker 1: we got to just go to Michael mcughs diving into
Speaker 1: forty seven pages of inflation data. Goods you said was
Speaker 1: one percent. Can you joyous about a service disinflation? No, Unfortunately,
Speaker 1: services go up a little bit seven point two six percent.
Speaker 1: But a lot of that, as we mentioned, is housing
Speaker 1: owner's equivalent rent up seven tenths, same as it was
Speaker 1: last month. Rent of primary residence up eight tenths. That's
Speaker 1: a tenth more than it was in the month of January.
Speaker 1: But also we got a big boost in the lodging category.
Speaker 1: For shelter, it's up two point three percent. That's more
Speaker 1: than double what it was the month of January. Air
Speaker 1: fares were up. But here's an interesting thing, and it'd
Speaker 1: be interested to see if if Ethan would go so
Speaker 1: far as to extrapolate the way I'm trying to hear.
Speaker 1: But if you're looking at where you might be seeing
Speaker 1: wage increases, we've talked about leisure and hospitality a lot.
Speaker 1: Food away from home up six tenths for the second
Speaker 1: month in a row, and full service meals up six tenths.
Speaker 1: That's a tenth higher than it was so prices are
Speaker 1: going up at restaurants, Alcoholic beverage prices went down. I'm
Speaker 1: not sure if that's not went down but tailed off
Speaker 1: in inflation. I'm not sure as Tom help with that,
Speaker 1: But to that point, and Ethan, I'd love you to
Speaker 1: weigh in on this, because we have seen people willing
Speaker 1: to spend, and they're willing to spend on services, and
Speaker 1: that isn't diminishing. Distress in the financial system really change that.
Speaker 1: If people can get their deposits and everyone just goes
Speaker 1: on their way. Well, if you can get past the
Speaker 1: panic moment here in the markets, which it is, you're
Speaker 1: back to an economy that's solid. It hasn't threatened the
Speaker 1: recession yet. As Mike pointed out, there's a lot of
Speaker 1: inflation in areas where labor class are important. You can't
Speaker 1: fix your inflation problem just by getting an improvement in
Speaker 1: supply chains. You need to get the service side under control.
Speaker 1: You need a normal labor market, and we don't have
Speaker 1: a normal labor market just quickly. I'd love your sense.
Speaker 1: Vincent Reinhart was on and he said that if this
Speaker 1: FED reserve comes out and doesn't hike rates because of
Speaker 1: potential financial system stress. It is basically saying that what
Speaker 1: they did on Sunday was not effective, that that program
Speaker 1: was not sufficient to stave off any distress. Do you agree,
Speaker 1: I mean, do you think that if they do not
Speaker 1: raise twenty five bases points that will be a policy
Speaker 1: error given the data we've seen. I would never contradict Vince.
Speaker 1: He and I were grad students together, anyways. No, I
Speaker 1: think that. I think that it depends on how stress
Speaker 1: the markets are. If the markets are in serious distress,
Speaker 1: pausing is okay. If they're improving a lot and the
Speaker 1: ring fencing is working, then you can start to wonder
Speaker 1: whether the FED has confidence in its ring fencing. So
Speaker 1: think that's a legitimate concern. You and Vincent Reinhardt were
Speaker 1: the laureate Ned Phelps. His later career is dynamism. Do
Speaker 1: we risk losing our dynamism because of this crisis, and
Speaker 1: particularly the Silicon Valley crisis. Well, I think that there's
Speaker 1: been The COVID crisis itself has taken some of the
Speaker 1: mojo out of the economy. I think that the tech
Speaker 1: sector to some degree has overexpanded. I think this is
Speaker 1: a temporary thing for tech. Tech is still going to
Speaker 1: be a driver of growth going forward. Don't be a stranger.
Speaker 1: Ring mister moynihan with you next time. Doctor Harris is
Speaker 1: with the Bank of America. We are thrilled to have
Speaker 1: the former banker of Little Rock with us right now.
Speaker 1: He is a name that will become very familiar to
Speaker 1: Americans here in the study of this financial blow up.
Speaker 1: He is french Hill, Republican from Arkansas. French Show. When
Speaker 1: you were at Vanderbilt, if you went down forty and
Speaker 1: north on two sixty five, you ended up where this
Speaker 1: debate began, at the Hermitage. It Andrew Jackson's spectacular home
Speaker 1: east of Nashville, and that's where this debate started, the
Speaker 1: raging debate over the Second Bank of the United States.
Speaker 1: The Republicans are Jacksonian, They're scared stiff of the big
Speaker 1: money of New York, etc. Etc. And the Democrats of
Speaker 1: the urban milieu push against that. How is this battle
Speaker 1: going to play out? Are we still in fear of
Speaker 1: the Second Bank of the United States? Well, Tom, I
Speaker 1: love the history lesson and the Hermitage is a beautiful spot.
Speaker 1: And Jackson was a super controversial president. But today we're
Speaker 1: faced with a situation where I think after ten years
Speaker 1: of easy money and amazing amounts of fiscal stimulus. I
Speaker 1: think some management teams have forgotten their prudential obligations to
Speaker 1: their depositors and their shareholders. So we have a real
Speaker 1: laxity and risk management in some of our financial institutions,
Speaker 1: and perhaps we've got laxity in the supervision of those
Speaker 1: institutions as well, particularly in the case of Silicon Valley.
Speaker 1: Do we need to treat the banks such as Delphire
Speaker 1: that you ran in Arkansas? Do we need to treat
Speaker 1: smaller banks like the bigger banks out of Dadd Frank?
Speaker 1: Do we need a one regulatory system? Is that the
Speaker 1: lesson learned well? I think some of the costs of
Speaker 1: Dodd Frank on small banks made them less competitive, harder
Speaker 1: to earn a return on invested capital there, and that's
Speaker 1: why Democrats and Republicans came together, as you noted earlier,
Speaker 1: and Barney Frank supported it to make modifications in Dodd
Speaker 1: Frank's regulatory burden on small financial institutions. I don't think
Speaker 1: that in any way, shape or form reduced the obligations
Speaker 1: of the bankers for their risk management legal requirements or
Speaker 1: for the supervisors to do their routine job on a
Speaker 1: quarterly basis to make sure the system is safe and sound. Comngressman,
Speaker 1: you keep mentioning the supervision, and I'm wondering how much
Speaker 1: you fault Jerome Powell's voter to reserve for the lack
Speaker 1: of supervision that you're talking about. Well, the Silicon Valley
Speaker 1: Bank clearly had risk management problems in their strategy about
Speaker 1: short term deposits that were unensured invested in long term
Speaker 1: treasury and mortgage securities. And the California Bank Regulators, the
Speaker 1: state bank regulators, were the principal regulator, backed up by
Speaker 1: the San Francisco Bank of the FED, and so they
Speaker 1: do have a supervisory obligation. This bank grew very very
Speaker 1: fast over the last two years, and that is usually
Speaker 1: a huge red flag to supervisors, and perhaps they could
Speaker 1: have intervened and helped the management team steer in a
Speaker 1: much more safe and sound direction. Do you think that
Speaker 1: things have stabilized enough that you have confidence, given the
Speaker 1: intelligence that you've received, that the stability in the financial
Speaker 1: system is sound and that we're unlikely to see something
Speaker 1: else like this in the near future. Well, you never
Speaker 1: know what's going to happen. In the future. But we
Speaker 1: do have a safe and sound banking system with good
Speaker 1: capital and good earnings and generally good liquidity planning across
Speaker 1: the nation. I think that's clear over the past decade.
Speaker 1: But I think with the low interest rates at zero
Speaker 1: and then a sharp increase in short rates, some management
Speaker 1: teams were not prepared for handling that in the right way,
Speaker 1: and so we may have bumps in the road as
Speaker 1: a result of that, And you've certainly seen that in
Speaker 1: the case of Silicon Valley last week. Congressman. You've come
Speaker 1: on the show before and talked about how inflation is
Speaker 1: at tax on the poorest members of our society, about
Speaker 1: how when inflation gets this high it becomes punitive for
Speaker 1: so many families. How important is it from your vantage
Speaker 1: point to see the ongoing rate hikes or some sort
Speaker 1: of continuation in monetary policy regardless of some of the
Speaker 1: concerns that we've seen in the financial system, or do
Speaker 1: you think that this is the clarion call that perhaps
Speaker 1: what we've seen is enough. Lisa, it's a it's a
Speaker 1: tough question. As I've said on your show before, that's
Speaker 1: the anguish of central banking to try to balance these factors.
Speaker 1: But look, the FED has a central obligation to all
Speaker 1: of us in our families of price stability, so they've
Speaker 1: got to have that as their principal mission. But they'll
Speaker 1: look at financial fragility as well. But I think the
Speaker 1: FED should stay on track, using their best judgment and
Speaker 1: looking at the data and make sure that they can
Speaker 1: beat this inflation and get it back down to closer
Speaker 1: to that target of two percent. If we get to
Speaker 1: some new insurance regime. The belief here, Congressman, is the
Speaker 1: banks are going to pay for it, not to taxpayer.
Speaker 1: I get that idea, But is our Vest Bank of Bentonville, Arkansas?
Speaker 1: Are they going to have to pick up the tab
Speaker 1: for the irresponsible behavior of West Coast technocrats. Yeah, Tom,
Speaker 1: this is a great question. And you know, back in
Speaker 1: two thousand and eight and two thousand and nine we
Speaker 1: moved to risk based premiums based on the bank's camel rating,
Speaker 1: their risk rating by the regulators. That was a step
Speaker 1: to making sure that people who run a poorer shop
Speaker 1: pay a higher deposit insurance premium. Now the question is
Speaker 1: should we have some sort of premium on top of
Speaker 1: this risk based premium that would cover these sorts of
Speaker 1: situations where a bank is determined to be like they
Speaker 1: did this weekend, systemically important, and yet we're ensuring deposits
Speaker 1: for which no premium was paid. I think this is
Speaker 1: an important area for policy to consider. We looked at
Speaker 1: it back into O eight to ten. I think we
Speaker 1: need to look at it again in the face of
Speaker 1: this new banking system and Twitter runs, which is what
Speaker 1: was precipitating this collapse last week. Let's meet in the rotunda.
Speaker 1: What is the common ground, Congressman Hill, of you and
Speaker 1: Senator Warren Well, I think both Senator Warren and I
Speaker 1: want a safe and sound banking system. We want to
Speaker 1: make sure, for example, in the digital assets space, that
Speaker 1: the rules of the road are clear, that we don't
Speaker 1: have this speculation that we've seen in that market, and
Speaker 1: that criminals are prosecuted and fraudsters are prosecuted. But I
Speaker 1: would say to Senator Warren, look, we have a robust
Speaker 1: regulatory system with plenty of rules on banks of all sizes.
Speaker 1: What we need to see is vigorous supervision of those
Speaker 1: banks by their primary regulators at all stages of the
Speaker 1: economic cycle. Does not mean Congressman walking back some of
Speaker 1: the deregulation we silk I throw in twenty eighteen. You know, Jonathan,
Speaker 1: I don't think so, because it was a very bipartisan,
Speaker 1: very modest tiering of the regulatory structure that came out
Speaker 1: of Dodd Frank. I don't think you can lay that.
Speaker 1: I don't think you can lay the collapse of the
Speaker 1: banks last week at the foot of twenty one fifty five.
Speaker 1: I don't know. I just don't think that's relevant. I
Speaker 1: think what is relevant is risky management practices, with or
Speaker 1: without Dodd Frank and lack of supervision by the primary regulator.
Speaker 1: The reason I stats because they regulate to use the
Speaker 1: systemic risk exception to make depositus whole. And Congressmen, what
Speaker 1: we've acknowledged that the weekend is that basically all banks
Speaker 1: in America carries some degree of systemic risks. So should
Speaker 1: they all be regulated in the same fashion, regardless of size. Well,
Speaker 1: I think tiering is important, But that gets back to
Speaker 1: Tom's good question about deposit insurance. Should we have a
Speaker 1: premium on top of the risk based premium that somehow
Speaker 1: reflects that systemic risk and that would be something that
Speaker 1: somebody would have to think through analytically. About how one
Speaker 1: would assess that in a fair and balanced way. But
Speaker 1: that speaks to this question, because you're right, the regulators
Speaker 1: this weekend determined that Silicon Valley's reach went well beyond
Speaker 1: its branches in California and New York. Is it related
Speaker 1: to the economy? A comlreishment always creates to get your
Speaker 1: perspective the banking system, the politics on a day, Congressman
Speaker 1: French Hair god a politician with actual David George, senior
Speaker 1: research analyst, bared very importantly with decades of experience, David,
Speaker 1: what are you writing this morning? Let me just cut
Speaker 1: to the chase. What matters right now for David George
Speaker 1: M We wrote this morning, Tom, good morning, thanks for
Speaker 1: having me. We we believe that this is an asymmetrically
Speaker 1: positive risk reward for regional bank stocks. In fact, probably
Speaker 1: the most constructive that we've been since COVID, maybe even
Speaker 1: more constructive than that. This is one of the best
Speaker 1: setups that we have seen in the last twenty I've
Speaker 1: done this twenty three years, and this is an unbelievably
Speaker 1: good risk reward set up stock. What is the skill
Speaker 1: set to determine that a given bank is not seeing
Speaker 1: outflows and that given bank has trust and confidence. Well,
Speaker 1: you know, part of it is obviously it's it's difficult
Speaker 1: to predict customer behavior. But I think something that has
Speaker 1: gone undiscussed in the financial media is and I don't
Speaker 1: cover Silicon Valley, but I think it's important to note
Speaker 1: that they have two hundred twenty billion deposits. Still, how
Speaker 1: many branches they had eighteen? Do you know how many
Speaker 1: branches US Bank has five thousand? The average deposits per
Speaker 1: branch at most US banks is about fifteen to fifty million,
Speaker 1: not two billion per offers. So the granularity of most
Speaker 1: US regional banks funding is just infinitely different than the
Speaker 1: kind of banks that have been reported that have failed.
Speaker 1: So obviously we are in a period where investors have
Speaker 1: long memories and there's panic, but that is where you
Speaker 1: get these asymmetric opportunities, and that's where we are in
Speaker 1: my O. That said, David, there's a very different scenario
Speaker 1: that is uniform pretty much across all the banking sector
Speaker 1: as well as beyond which is the immediacy of being
Speaker 1: able to withdraw in real time online at any time,
Speaker 1: the ability for there to be a bank run that
Speaker 1: happens so quickly that even regulators are caught completely off guard.
Speaker 1: How does that change your risk assessment of smaller banks,
Speaker 1: especially at a time or cash is paying something and
Speaker 1: a lot of people are concerned that these banks are
Speaker 1: not going to be able to deliver. Well, first of all,
Speaker 1: I am not concerned. Maybe that doesn't matter. But to
Speaker 1: your second point, at least the movement of funds into
Speaker 1: treasuries and higher yielding alternatives, that's been going on for
Speaker 1: over a year, so that is not a new phenomenon. Now.
Speaker 1: How people feel about that given where the stacks have
Speaker 1: been trading is new, but fundamentally that has been happening
Speaker 1: for several months and several quarters. In terms of the
Speaker 1: movement of deposits and things like social media and media
Speaker 1: like yourself talking about bank runs, that's really not that helpful,
Speaker 1: to be honest, to depositors, because most customers of regional
Speaker 1: banks do not have millions of dollars. They've got maybe
Speaker 1: five thousand dollars in a checking account, maybe a small
Speaker 1: business has got a hundred thousand. They are not focused
Speaker 1: on this, They are focused on running their businesses. So
Speaker 1: I just think that the similarities between silicon ballets and
Speaker 1: most other what I would call main street banks couldn't
Speaker 1: be more different. That said, there is this concern about
Speaker 1: the interest rate risk at a lot of banks, and
Speaker 1: I am wondering, from your perspective, putting aside, you know
Speaker 1: what the media's role is, or what investor's role is,
Speaker 1: or what the reputational risk is. What about the nuts
Speaker 1: and bolts, potential unrealized losses and the balance sheets of
Speaker 1: a number of regional banks that haven't necessarily hedged against
Speaker 1: a dramatic rise in interest rates, and among all of
Speaker 1: their assets they used to back those customer deposits, well,
Speaker 1: a couple of things. So banks, as part of the
Speaker 1: Frank legislation have to own securities as part of what's
Speaker 1: called the LCR liquidity coverage rations. And keep in mind,
Speaker 1: Silicon Valley and banks under two hundred and fifty billion
Speaker 1: ATHLETs are no longer subject to that legislation. All of
Speaker 1: the big banks that we talk about are all subjects
Speaker 1: in that. By the way, that's another thing that has
Speaker 1: gone unreported and unnoticed and undiscussed in terms of the
Speaker 1: interest rate risk. Yes, there are banks that are sitting
Speaker 1: on securities. These are money good securities, by the way,
Speaker 1: These are treasuries an mbs that pay us agreed, These
Speaker 1: are not subprime loans, these are not CBOs. These are
Speaker 1: money good securities and by the way, deposits have value
Speaker 1: as well. They are not marked to market either. So
Speaker 1: despite that, you have banks that are generally jap market.
Speaker 1: Would they make last quarter or eight billion of earnings?
Speaker 1: B of A made five billion of earnings. This is
Speaker 1: just not a crisis. Two thousand and eight was a crisis.
Speaker 1: This is a very short term crisis of componence driven
Speaker 1: by one bank that was essentially a levered funds So um,
Speaker 1: from my perspective, there are obviously unrealized losses, and by
Speaker 1: the way, with bonds rallying, those losses are now becoming
Speaker 1: games and that will change over time. But most banks
Speaker 1: will hold these these securities until maturity. Um. Yeah, but
Speaker 1: I think I think just to say that these banks
Speaker 1: aren't managing interest rate risks, I think is not an
Speaker 1: intellectually honest statement from my perspect Well, David, it's always
Speaker 1: fantastic to get your perspective repeatedly through this conversation. You
Speaker 1: do sound somewhat frustrated with the way this story has
Speaker 1: been covered over the last three days. What would you
Speaker 1: like to say here more of going forward? What are
Speaker 1: the questions that you think have been missing? Um, I
Speaker 1: just think that that the constant focus on is your
Speaker 1: money safe? It's just and I think the prolifration of
Speaker 1: social media is obviously something that you're not necessarily engaged in.
Speaker 1: But but I think it's just too I think I
Speaker 1: think it's important to to just distinguish between banks and
Speaker 1: their funding and their customer bases. And you know, this
Speaker 1: particular situation is frustrating when you've got a not to
Speaker 1: get political, but when you've got a VC legend tells
Speaker 1: everyone that screams fire in a crowded theater, that's not
Speaker 1: helpful either. And that's a whole other discussion. But I
Speaker 1: think I think the main thing is just having some
Speaker 1: differentiation between banks. And by the way, there will be
Speaker 1: beneficiaries of this. All of the large banks, as you
Speaker 1: kind of referenced a little bit earlier before we started
Speaker 1: the show, they will benefit from this. So there will
Speaker 1: be your big ten to fifteen banks, Ye will be
Speaker 1: net beneficiaries, which which is something that again I think
Speaker 1: it's not been discussed, and those stocks have gotten smoked
Speaker 1: as well. It's something we've talked about a lot over
Speaker 1: the last three days. A lot of money is going
Speaker 1: to go to the SI base. There's going to be
Speaker 1: a premium attached to them, just in terms of safety,
Speaker 1: safe safety. David, this was great. Let's try and make
Speaker 1: this rankular because I have no doubt it's going to
Speaker 1: be a story for the next couple of weeks. Maybe
Speaker 1: have the next couple of months, David, George, that of bat.
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