WEBVTT - Big Tech Unlikely To Truly Challenge Wall Street: Ex-OCC Chair 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg p m L Podcast. I'm pim Fox. 0:00:08.760 --> 0:00:11.440 Along with my co host Lisa A. Bramowitz. Each day 0:00:11.480 --> 0:00:15.000 we bring you the most important, noteworthy, and useful interviews 0:00:15.040 --> 0:00:17.520 for you and your money, whether you're at the grocery 0:00:17.560 --> 0:00:20.560 store or the trading floor. Find the Bloomberg p m 0:00:20.680 --> 0:00:33.320 L Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. 0:00:33.320 --> 0:00:37.600 Over the past twelve months, there's been increasing discussion about 0:00:37.840 --> 0:00:42.760 perhaps whether Google and Amazon and other big technology companies 0:00:42.960 --> 0:00:45.920 will become the next Wall Street. Here to talk about 0:00:45.920 --> 0:00:48.199 that with us is Keith Norika. He's a partner in 0:00:48.440 --> 0:00:52.239 the financial institution's practice at Simpson Thatcher and Bartlett. He's 0:00:52.280 --> 0:00:55.760 also former Acting Controller of the Currency from May fifth 0:00:55.880 --> 0:00:59.760 November of last year. Keith, thank you so much for 0:01:00.000 --> 0:01:04.040 winning us. During your tenure, there was discussion that the 0:01:04.120 --> 0:01:07.280 o c C would be open to some kind of 0:01:07.280 --> 0:01:11.440 fintech charter, allowing the Googles and Amazons of the world 0:01:11.840 --> 0:01:14.760 to UH act more like banks. Can you talk a 0:01:14.760 --> 0:01:17.600 little bit about what future you envision for big tech 0:01:17.760 --> 0:01:21.720 as as as banks? Well? Sure, Thanks Lisa for having 0:01:21.760 --> 0:01:26.800 me today. UM. During my tenure, UM we continued UH 0:01:26.840 --> 0:01:31.000 in a initiative by my predecessor, Tom Curry, UH that 0:01:31.080 --> 0:01:34.000 dealt with a fintech charter, which was a limited purpose charter. 0:01:34.280 --> 0:01:38.119 UM that would allow UH institutions to get a bank 0:01:38.200 --> 0:01:41.720 charter to undertake one of the core elements of banking, 0:01:41.800 --> 0:01:45.720 taking deposits, lending money, or or processing payments. And and 0:01:46.120 --> 0:01:50.040 I think you know, there was a concern UM of that, 0:01:50.040 --> 0:01:53.000 that that large companies like Amazon or Google could get 0:01:53.000 --> 0:01:56.120 a charter. Now. UM, in my own view, UM, I 0:01:56.160 --> 0:01:59.160 don't necessarily see UM that that may be the case. 0:01:59.240 --> 0:02:02.680 I think there that they're sort of a superficial allure 0:02:03.160 --> 0:02:06.640 of that charter for those companies. But on the other hand, 0:02:06.680 --> 0:02:10.799 a lot of regulation comes with getting a bank charter. UM. 0:02:10.919 --> 0:02:14.799 And UH, these companies right now, UM, these large tech 0:02:14.840 --> 0:02:18.000 companies have a good position in the market. They're heavily 0:02:18.040 --> 0:02:22.520 engaged in commerce as we see UM and UM. Obviously UM, 0:02:22.560 --> 0:02:26.440 a part of commerce involves processing payments to pay for commerce. 0:02:26.919 --> 0:02:29.400 UH and I think that UM, what we're seeing is 0:02:29.440 --> 0:02:31.840 they're they're trying to take advantage of everything up to 0:02:31.960 --> 0:02:35.520 the up to the line of being a bank without 0:02:35.560 --> 0:02:39.440 actually having UH to bear the responsibilities of being a bank. 0:02:39.520 --> 0:02:43.160 And banks have a lot of obligations and regulations that 0:02:43.240 --> 0:02:47.360 come with them and compliance obligations. Uh And at the moment, 0:02:47.400 --> 0:02:50.640 at least, I think the model is more of them 0:02:50.680 --> 0:02:52.919 trying to capture as much as they can of the 0:02:53.520 --> 0:02:57.640 non bank um sort of financial market, uh, but still 0:02:57.720 --> 0:03:01.480 having to ultimately use banks to process and clear payments 0:03:01.560 --> 0:03:04.639 and and to do all the compliance obligations that come 0:03:04.720 --> 0:03:07.359 with them. And uh so while there, you know, may 0:03:07.800 --> 0:03:10.360 in the future be some type of limited purpose bank 0:03:10.440 --> 0:03:14.240 charter available to them, just as there has been in 0:03:14.280 --> 0:03:17.920 the past for big industrial companies. That's that's our history, 0:03:18.440 --> 0:03:22.240 uh and tradition in this country to allow certain limited 0:03:22.280 --> 0:03:26.760 purpose banking charters to large industrial companies and tech maybe 0:03:26.800 --> 0:03:31.960 the the new um sort of industry that that may support. UM. 0:03:32.000 --> 0:03:36.640 I don't foresee them becoming the new Wall Street, so 0:03:36.680 --> 0:03:39.680 to speak, because there's a lot of regulation that just 0:03:39.760 --> 0:03:44.840 necessarily comes from processing and clearing payments and from really 0:03:44.880 --> 0:03:48.320 handling the type of risks that come from, uh, from 0:03:48.360 --> 0:03:50.600 from that type of activity. Well and Keith, that's what 0:03:50.640 --> 0:03:53.760 I wanted to ask when you were the acting o 0:03:53.920 --> 0:03:58.480 c C chair in your conversations with executives at Google 0:03:58.520 --> 0:04:01.600 and Amazon and other big technology companies. Was there the 0:04:01.720 --> 0:04:06.880 desire to get further into this territory and and be 0:04:07.080 --> 0:04:10.920 processors of payment systems? Well, first, I guess start with 0:04:10.960 --> 0:04:13.320 the premise of the question. I actually never had any 0:04:13.360 --> 0:04:17.520 conversations with any executives from those companies, and I think 0:04:17.560 --> 0:04:20.560 that you know, that may tell you a lot right there, 0:04:21.040 --> 0:04:24.640 Um that there wasn't that desire to pursue that. Now, 0:04:24.760 --> 0:04:28.320 you know, we're starting to see some limited interest in 0:04:28.360 --> 0:04:32.240 the traditional limited purpose charters, like uh, you know, Square 0:04:32.640 --> 0:04:36.559 has filed an application for an industrial loan company. That's 0:04:36.720 --> 0:04:41.960 usually the way, um that that these type of commercial companies, 0:04:42.000 --> 0:04:45.640 if you will get into a limited purpose bank charter, 0:04:46.520 --> 0:04:49.279 or traditionally has been that case. The fintech charter is 0:04:49.279 --> 0:04:52.279 is somewhat new, it's never been used. Uh, and we'll 0:04:52.279 --> 0:04:55.880 see how that goes. That's obviously something for my successor 0:04:56.320 --> 0:05:00.800 to deal with rather than me. But I think that, um, 0:05:01.120 --> 0:05:04.880 you know, there there wasn't yet the sort of interest 0:05:05.000 --> 0:05:08.600 that I saw of those large companies, even even in 0:05:08.680 --> 0:05:11.640 our even in the o c c S proposed limited 0:05:11.680 --> 0:05:15.000 purpose charter. Can you just tell succinctly what does the 0:05:15.040 --> 0:05:19.280 controller of the currency do? What is that person's specific responsibility. 0:05:19.480 --> 0:05:23.480 Sure UM the controller of the currency charters and supervisors 0:05:23.560 --> 0:05:26.960 the national banks in this country, which hold approximately seventy 0:05:27.160 --> 0:05:30.679 eight percent of the banking assets UH in the United States. 0:05:30.720 --> 0:05:34.560 And it's UH. It's a UM an office that date 0:05:34.880 --> 0:05:37.680 dates back to the Civil War as a means to 0:05:37.760 --> 0:05:41.200 provide a national currency for the country. The currency function 0:05:41.640 --> 0:05:44.960 was later transferred to the Federal Reserve in nineteen thirteen, 0:05:45.040 --> 0:05:47.960 but the the office remains as an independent bureau of 0:05:48.000 --> 0:05:52.240 the Treasury Department UH to supervise UM really UM the 0:05:52.279 --> 0:05:55.920 money center banks, but also many community banks across the country. Okay, 0:05:55.960 --> 0:05:58.440 so then what would it What would be the requirements 0:05:58.560 --> 0:06:01.360 if you wanted to start your own community bank. Well, 0:06:01.360 --> 0:06:03.120 if you want to start your own community bank, you 0:06:03.200 --> 0:06:06.839 have to satisfy the chartering requirements UH that you have 0:06:06.880 --> 0:06:10.239 a reasonable prospect for success, you have a good management team, 0:06:10.320 --> 0:06:12.600 you have a business plan. UH. The O c C 0:06:12.760 --> 0:06:15.000 has to have confidence in you to grant that charter. 0:06:15.120 --> 0:06:18.360 But then most of the times UH in this country, 0:06:18.400 --> 0:06:20.520 you also will need to go get f D I 0:06:20.560 --> 0:06:23.400 C insurance. That's a separate application to the f D 0:06:23.520 --> 0:06:25.920 I C UH. And if you want to have any 0:06:25.960 --> 0:06:28.520 sort of controlling investor. If your company, you need to 0:06:28.520 --> 0:06:31.480 become a bank holding company and get permission for that 0:06:31.560 --> 0:06:34.880 from the from the Federal Reserve Board. So given the 0:06:34.920 --> 0:06:38.840 fact that the o C oversees the monetary supply, what's 0:06:38.839 --> 0:06:42.599 your take on bitcoin and all of these cryptocurrencies that 0:06:42.640 --> 0:06:46.080 are getting increasingly popular. Well, look, I think there is 0:06:46.800 --> 0:06:49.359 a lot of interest in this, and I would say 0:06:49.560 --> 0:06:52.480 my um my agency only dealt with a very small 0:06:52.520 --> 0:06:55.719 part of this. I think we're seeing, uh, certain securities 0:06:55.720 --> 0:06:59.760 issues come into into play here where the sec maybe 0:06:59.800 --> 0:07:03.280 take king the lead with the Treasury Department because of uh, 0:07:03.320 --> 0:07:06.360 you know, any type of any terrorism, type of or 0:07:06.560 --> 0:07:10.520 money laundering concerns. But generally, um, I am. You know, 0:07:10.680 --> 0:07:12.800 I believe that people should be able to order their 0:07:12.840 --> 0:07:16.200 affairs in a way that makes the most sense for them. 0:07:16.280 --> 0:07:19.120 And if there's a certain unit of value that they 0:07:19.200 --> 0:07:22.920 wish to base their transactions on, uh, then you know, 0:07:23.040 --> 0:07:25.000 they should be free to do that, but they need 0:07:25.000 --> 0:07:27.240 to be fully aware of the risks that may come 0:07:27.280 --> 0:07:30.080 from that. And just to come full circle, when we 0:07:30.080 --> 0:07:34.600 were talking about fintech charters, which firm do you think 0:07:34.720 --> 0:07:38.000 is sort of most positioned to engage in more bank 0:07:38.080 --> 0:07:41.360 like activities that we should pay attention to. Well, look, 0:07:41.400 --> 0:07:45.920 I think to me, the big challenge was finding a firm. 0:07:46.280 --> 0:07:48.720 I think in my own view, I was open to 0:07:48.840 --> 0:07:52.280 granting such a charter, but there wasn't necessarily a good 0:07:52.440 --> 0:07:55.880 match at the time of during my tenure of a 0:07:55.960 --> 0:07:59.320 company that was willing to adhere to sort of bank 0:07:59.400 --> 0:08:03.720 like restricts and have sort of bank like um prospects 0:08:03.760 --> 0:08:06.120 of success. And so, you know, when you look at 0:08:06.160 --> 0:08:09.080 the smaller companies, a lot of these fintech companies are 0:08:09.080 --> 0:08:12.119 more tech like in the sense of they're more try 0:08:12.160 --> 0:08:14.560 and see how it works. Maybe it'll work, maybe it won't. 0:08:14.840 --> 0:08:16.800 That that's not really the way the O c C 0:08:17.080 --> 0:08:20.040 charters banks in this country, or any bank regulator for 0:08:20.080 --> 0:08:23.000 that matter. There has to be sort of they're sort 0:08:23.040 --> 0:08:26.640 of a reputational element um. And so so I'm i 0:08:27.600 --> 0:08:30.040 I we didn't find one during my tenure. So I 0:08:30.040 --> 0:08:31.840 think we're gonna have to see, all right, we gotta 0:08:31.920 --> 0:08:34.920 leave it there, Thanks very much, Keith Norieka. He is 0:08:35.000 --> 0:08:38.640 a partner in the financial institutions practice of Simpson Simpson 0:08:38.720 --> 0:08:57.280 Thatcher and Bartlett cell Gene is spending a lot of 0:08:57.360 --> 0:08:59.120 money they have announced that they're going to be spending 0:08:59.160 --> 0:09:03.200 nine billion dollars for Juno Therapeutics. Also Santa Fee spending 0:09:03.200 --> 0:09:06.280 about eleven and a half billion dollars for bio Verative. 0:09:06.760 --> 0:09:10.440 Here to help us understand this merger activity is Max 0:09:10.520 --> 0:09:16.640 Neeson Our Bloomberg, Gadfly, Columis. He covers healthcare, biotechnology and pharmaceuticals. Max, 0:09:16.840 --> 0:09:19.320 I'm looking at your most recent column that you just 0:09:19.400 --> 0:09:23.920 put out, and you are skeptical about the price that 0:09:23.960 --> 0:09:27.440 the companies are paying for this. You say that perhaps 0:09:27.800 --> 0:09:32.360 this just is a case of being forced to do mergers. 0:09:32.440 --> 0:09:36.280 Why is that so? Both companies are under a good 0:09:36.320 --> 0:09:39.000 deal pressure to do a sizeable deal for for a 0:09:39.040 --> 0:09:42.520 couple of different reasons. Celgene last year cut their long 0:09:42.679 --> 0:09:46.600 term revenue forecast ended up really doing a big hit 0:09:46.679 --> 0:09:49.680 to the share price. And then Santa Fee. Um, you know, 0:09:49.720 --> 0:09:52.840 it's involved heavily in the diabetes business with some aging 0:09:52.840 --> 0:09:56.040 products and a lot of price competition. It also kind 0:09:56.040 --> 0:09:58.360 of swung and missed on on two big deals over 0:09:58.400 --> 0:10:00.680 the past couple of years, so as really looking to 0:10:00.720 --> 0:10:03.440 get something done, and um, I do think that that 0:10:03.480 --> 0:10:07.040 pressure might have played a role in moving these companies 0:10:07.040 --> 0:10:09.760 to do deals that definitely have risks. Okay, so let's 0:10:09.760 --> 0:10:12.160 talk about those risks. First of all, why don't you 0:10:12.240 --> 0:10:14.920 start with the deal that you think holds the most risks? 0:10:14.920 --> 0:10:19.360 And interestingly, both cell Gene and Santa Fees shares both declined, 0:10:19.720 --> 0:10:21.760 uh and perhaps that had to do with the price 0:10:21.840 --> 0:10:25.040 that they were paying for their acquisition target. I definitely 0:10:25.040 --> 0:10:26.600 think so, I'd say, if I had to pick one 0:10:26.640 --> 0:10:29.600 that has the biggest kind of downside risk, it's it's 0:10:29.640 --> 0:10:33.439 probably Santa Fees deal. Um it's for a company Biovariative 0:10:33.480 --> 0:10:37.120 that focuses on hemophilia, and um it sells kind of 0:10:37.160 --> 0:10:40.360 prophylactic treatments that you take ahead of time to reduce 0:10:40.440 --> 0:10:44.800 the likelihood of a bleeding event. Um And and make clear, 0:10:44.800 --> 0:10:47.040 hemophilia is when your blood can't close. Yeah, it's a 0:10:47.080 --> 0:10:50.600 clouding disorder exactly gion etique. But there are a bunch 0:10:50.600 --> 0:10:53.959 of companies that are working on kind of gene therapies 0:10:54.000 --> 0:10:59.160 that that potentially offer um one time effective cures for hemophilia. 0:10:59.440 --> 0:11:01.600 They're very early stage. We still don't know if they're 0:11:01.600 --> 0:11:04.160 gonna kind of work and last, and they're gonna be 0:11:04.160 --> 0:11:06.960 really expensive, but that's kind of an existential threat to 0:11:07.160 --> 0:11:09.960 this company's business model. And they're working on the same 0:11:10.000 --> 0:11:12.400 thing but really early stage, their way behind some of 0:11:12.440 --> 0:11:14.560 these other firms. So you know, this is gonna be 0:11:14.559 --> 0:11:17.800 a near term burst boost for their sales and earnings, 0:11:18.360 --> 0:11:21.880 but you know it really could go pretty badly. Cell 0:11:21.960 --> 0:11:24.760 Gene um, you know, they're making a bet on these 0:11:24.800 --> 0:11:28.440 kind of new cell therapies that offer a potential cure 0:11:28.480 --> 0:11:31.280 for blood cancers. But um, it's a company it's a 0:11:31.320 --> 0:11:33.960 little bit late to the first generation of these treatments 0:11:34.559 --> 0:11:36.240 and um, so that means that this is a big 0:11:36.280 --> 0:11:39.559 bet on the future generations the kind of more advanced 0:11:39.600 --> 0:11:42.040 and safer versions of these therapies. And there are a 0:11:42.040 --> 0:11:44.200 lot of companies involved in that. Um. You know, it's 0:11:44.280 --> 0:11:47.000 unclear if if Juno and Celgene are gonna come ahead, 0:11:47.000 --> 0:11:49.320 so so they're risk with that as well. Now. Bio 0:11:49.400 --> 0:11:52.920 Verative based in Waltham, mass home to Bloomberg one six 0:11:52.920 --> 0:11:56.000 one Boston, New Report, and thirty in Metro West and 0:11:56.160 --> 0:11:59.040 the South Shore. We of course welcome all of our listeners. 0:11:59.520 --> 0:12:03.040 If had three four hundred employees, I mean this is 0:12:03.080 --> 0:12:06.240 not a I'm just saying this is a through eleven 0:12:06.360 --> 0:12:10.280 and a half billion dollar deal. They do they have 0:12:10.400 --> 0:12:15.679 something so special for hemophilia and blood disorders that would 0:12:15.720 --> 0:12:18.440 create this kind of premium. And if you've got four 0:12:18.520 --> 0:12:21.000 hundred employees and someone spending eleven and a half billion dollars, 0:12:21.040 --> 0:12:24.040 you better have something. Yeah. So that that's the thing 0:12:24.080 --> 0:12:25.560 that I And if it was so great, why did 0:12:25.600 --> 0:12:27.680 bioge and spin them off? Exactly? I mean, so I 0:12:27.679 --> 0:12:30.560 think Biogen's motivation was that they're trying to become more 0:12:30.679 --> 0:12:34.560 narrowly focused on um on neurology, on on disease of 0:12:34.559 --> 0:12:37.000 the brain, and this was kind of ancillary to that. 0:12:37.679 --> 0:12:39.640 But um, you know that that is the thing that's troubling. 0:12:39.640 --> 0:12:41.720 They're paying a big premium for that kind of near 0:12:41.880 --> 0:12:45.599 term growth boost. There are some you know, longer term 0:12:45.640 --> 0:12:48.319 prospects for for growth that more people are going to 0:12:48.400 --> 0:12:51.920 move to this sort of prophylactic treatment from kind of 0:12:51.920 --> 0:12:54.080 the acute treat No, no no, no, I understand that on 0:12:54.080 --> 0:12:56.120 the on the on the medical side, but I mean, 0:12:56.400 --> 0:12:59.680 this company is it's a nine million dollar revenue company, 0:13:00.240 --> 0:13:02.720 So I mean, is there a metric? Is there some 0:13:02.800 --> 0:13:05.360 kind of magic formula that they ended up coming up with? 0:13:05.400 --> 0:13:08.920 This eleven and a half billion dollar price tag. You know, 0:13:09.160 --> 0:13:12.360 with with biotech, it's always a little bit of the 0:13:12.520 --> 0:13:14.160 you know, the kind of on market growth. You have 0:13:14.160 --> 0:13:16.160 to pay a premium for that because there's just not 0:13:16.200 --> 0:13:19.480 that many companies with kind of recently approved in growing drugs. 0:13:20.200 --> 0:13:22.160 And then there's the fact that you put some premium 0:13:22.280 --> 0:13:25.599 on the pipeline, which you know is always an exercise 0:13:25.679 --> 0:13:28.920 and in kind of shaking a magic eight ball. Um, 0:13:29.200 --> 0:13:31.680 you do your best based on the science and you know, 0:13:31.720 --> 0:13:34.040 evaluating similar treatments that are actually on the market, but 0:13:34.080 --> 0:13:35.720 you really have no idea until they hit the market 0:13:35.720 --> 0:13:38.120 and start selling. How are these companies planning to pay 0:13:38.120 --> 0:13:42.560 for their acquisitions? How are they going to pay for them? 0:13:42.920 --> 0:13:48.720 To centerfes leveraging up to some degree, I think, Um, 0:13:48.800 --> 0:13:50.679 but you know they both have a ton of cash. 0:13:50.800 --> 0:13:53.079 You know, these are really high margin business of the 0:13:53.160 --> 0:13:55.920 drug business in general, you're always going to have money 0:13:56.120 --> 0:13:59.640 to make acquisitions the builder to finance them. But um, 0:13:59.760 --> 0:14:02.440 you know the type of return you're going to generate. Um, 0:14:02.440 --> 0:14:05.200 there's a lot more variants than in just about any 0:14:05.200 --> 0:14:07.680 other business. Making an acquisition. You could have you know, 0:14:07.720 --> 0:14:10.560 no return or very little, very easily. All right, So 0:14:11.080 --> 0:14:13.600 real quick, which company do you think will be the 0:14:13.679 --> 0:14:18.400 next to announce a big acquisition in the biopharmaceutical space? UM, 0:14:18.440 --> 0:14:20.480 I would guess if it's anyone, it's gonna be m 0:14:20.520 --> 0:14:24.440 gen early enormous cash pile hasn't made a deal in 0:14:24.440 --> 0:14:27.440 in some time, and um, you know all of that 0:14:28.080 --> 0:14:30.360 overseas cash coming, and they have a particularly large chunk 0:14:30.360 --> 0:14:33.360 of it. UM, I'd say they're they're probably next up. 0:14:33.640 --> 0:14:35.680 All right, Max Neison, thank you so much for joining us. 0:14:35.880 --> 0:14:40.080 Max Neson is biotic, pharma and healthcare calumnist with Bloomberg 0:14:40.200 --> 0:14:43.359 gad Fly, joining us here in our eleven three oh studios. 0:14:59.160 --> 0:15:02.560 A I G certainly getting our attention today. It is 0:15:02.640 --> 0:15:07.000 starting to reverse course after years of retrenchment. Here to 0:15:07.040 --> 0:15:11.040 talk about the latest moves that this insurance behemoth made. 0:15:11.200 --> 0:15:14.400 Jonathan Adams joins us now. He's senior insurance and industry 0:15:14.400 --> 0:15:19.520 analyst who joins us for Bloomberg Intelligence from Princeton. Jonathan, 0:15:19.560 --> 0:15:22.120 thank you so much for being with us. So A 0:15:22.280 --> 0:15:27.240 I G is buying validus put this into perspective for us. 0:15:27.280 --> 0:15:29.000 How big of a deal is this for A I G. 0:15:29.200 --> 0:15:33.880 And is it it the right move. It's a five 0:15:33.920 --> 0:15:37.800 point six billion dollar deal and not huge in terms 0:15:37.880 --> 0:15:42.440 of UM what types of transactions we've seen in the 0:15:42.520 --> 0:15:49.040 industry over the past. UM. It increases their commercial lines 0:15:49.160 --> 0:15:53.320 premium by about ten percent a little bit over UM. 0:15:53.360 --> 0:15:58.120 In terms of whether it is strategically a good move, UM, 0:15:58.360 --> 0:16:01.720 I think it's a It's quite a and UH it's 0:16:01.760 --> 0:16:05.880 moving into the reinsurance business at a time when that 0:16:05.960 --> 0:16:11.120 business has faced some difficult pricing pressure. Not only that, UH, 0:16:11.280 --> 0:16:14.080 you may recall that A i G posted three billion 0:16:14.120 --> 0:16:17.640 dollars of catastrophe losses in the third quarter, and that 0:16:17.720 --> 0:16:20.720 was due to significant exposure they have in their property 0:16:20.880 --> 0:16:23.920 lines business. They said at the time they were looking 0:16:23.960 --> 0:16:28.200 for opportunities to lower the volatility in that business and 0:16:28.240 --> 0:16:33.400 that they would lower their exposure to property risk. This 0:16:33.480 --> 0:16:38.359 deal adds that exposure because that's a primary business for Validus. 0:16:38.360 --> 0:16:43.520 So I'm not sure it ultimately will complete UH some 0:16:43.640 --> 0:16:47.640 of the strategic moves that the company wanted to UH 0:16:47.680 --> 0:16:52.520 to do. So why do this deal? Well, UH CEO 0:16:52.680 --> 0:16:57.640 Brian Duperl has UH said that he wanted to expand 0:16:57.720 --> 0:17:00.000 A I G. And he wanted to make an acquisition 0:17:00.040 --> 0:17:04.840 and that would help the company grow. UM. This certainly 0:17:05.359 --> 0:17:08.840 UH fits in that category to some degree. UH. It 0:17:08.920 --> 0:17:11.920 adds some new lines of business. Validus has a crop 0:17:12.440 --> 0:17:15.600 business that the A I G does not participate in 0:17:15.600 --> 0:17:18.639 that in that business, so it helps them there, and 0:17:18.840 --> 0:17:22.480 it also helps them in their specialty lines business. So 0:17:22.640 --> 0:17:26.240 there are some areas where they could generate some premium growth. 0:17:26.760 --> 0:17:32.480 And it does UM add to earnings UH and their returns. 0:17:32.520 --> 0:17:35.640 But again, UM, I think at at a very constantly 0:17:35.680 --> 0:17:39.080 price that actually slightly dilutive to their tangible book value. 0:17:39.359 --> 0:17:43.000 And I'm not sure this would be the first deal 0:17:43.040 --> 0:17:46.040 I would UM I would look towards. Well, Jonathan, I'm 0:17:46.080 --> 0:17:48.439 confused because a lot of people have been calling for 0:17:48.480 --> 0:17:52.040 A I G to break up further into its parts. 0:17:52.480 --> 0:17:55.760 It was of course pummeled during the two thousand and 0:17:55.760 --> 0:17:59.040 eight credit crisis UM, and it has stripped down its 0:17:59.080 --> 0:18:02.760 business quite a It is this sort of signaling that 0:18:02.800 --> 0:18:06.040 it's now going to embark on bulking back up and 0:18:06.440 --> 0:18:08.000 going in the opposite direction of what a lot of 0:18:08.000 --> 0:18:11.960 people are saying. It certainly looks that way. And although 0:18:12.000 --> 0:18:15.399 I admire valid as his management team, it's certainly a 0:18:15.440 --> 0:18:20.800 good group of individuals. I'm not sure the business offers 0:18:20.840 --> 0:18:25.040 the types of return that UM really investors would would 0:18:25.119 --> 0:18:29.320 want to see UM when A I G returns to 0:18:29.480 --> 0:18:32.560 the expansion mode, which obviously it's done, and I think 0:18:32.640 --> 0:18:35.760 the signals they'll continue to do so. But again I'm 0:18:35.800 --> 0:18:39.600 not sure this is leading with your uh strongest foot 0:18:40.560 --> 0:18:44.240 just I mean, this is just you know, uh speculative, Jonathan. 0:18:44.320 --> 0:18:46.280 But five and a half billion dollars, there's a lot 0:18:46.320 --> 0:18:51.080 of money. Why wouldn't they just increase the dividend? Well, 0:18:51.320 --> 0:18:56.200 I think that goes to the CEO's philosophy and the 0:18:56.280 --> 0:19:00.880 importance that he puts on signaling to the market ages. 0:19:01.480 --> 0:19:06.000 Downsizing is over and it's time to look to new 0:19:06.040 --> 0:19:09.640 industries and to expand. I think that couldn't names I mean, 0:19:09.680 --> 0:19:11.320 and and clearly I'm not I don't want to put 0:19:11.320 --> 0:19:13.760 you in the position of having to, you know, offer 0:19:13.800 --> 0:19:17.360 your A I G. There the perspective, But for five 0:19:17.359 --> 0:19:19.199 and a half billion dollars, couldn't they have built their 0:19:19.240 --> 0:19:27.400 own agriculture insurance business. The agriculture business is UM very 0:19:27.440 --> 0:19:30.439 much of a regulator business, so that maybe isn't the 0:19:30.440 --> 0:19:33.960 best example. But in terms of expanding their specialty lines, yes, 0:19:34.040 --> 0:19:38.320 they certainly could add more underwriters and and have expanded 0:19:38.320 --> 0:19:42.600 in that area um even though they chose to acquire 0:19:42.680 --> 0:19:45.639 so UM. From my point of view, I think what 0:19:45.680 --> 0:19:48.480 they're probably would say to you is, look, we've got 0:19:48.520 --> 0:19:51.000 a great management team and valid Is. We think they've 0:19:51.040 --> 0:19:54.360 done well in diversifying their own business. We like how 0:19:54.359 --> 0:19:59.000 they assess risk. To my point about their desire to 0:19:59.200 --> 0:20:03.320 reduce risk and volatility, they would probably say, what better 0:20:03.359 --> 0:20:05.680 way than to bring in the expert team from a 0:20:05.760 --> 0:20:08.560 reinsurer that knows how to handle that risk, and that 0:20:08.680 --> 0:20:10.960 expertise is what we're going to use. I think that's 0:20:10.960 --> 0:20:13.399 what they tell you. Again. My concern is that they 0:20:13.440 --> 0:20:18.240 still are bringing in a lot of exposure in risk 0:20:18.320 --> 0:20:20.760 onto the books as they do that. Thanks very much. 0:20:20.920 --> 0:20:24.879 Jonathan Adams is our senior insurance industry analysts talking about 0:20:24.920 --> 0:20:27.840 a i G spending five and a half billion dollars 0:20:27.840 --> 0:20:45.919 for Validus, the future of General Electric, what do we 0:20:45.960 --> 0:20:49.160 see as the future of the industrial conglomerate. Karen yubile 0:20:49.200 --> 0:20:52.600 Heart is our industrials analyst for Bloomberg Intelligence, and she 0:20:52.720 --> 0:20:57.080 has the enviable task of watching what happens with ge Karen, 0:20:57.200 --> 0:21:00.160 what can you tell us about their actual strategy get 0:21:00.160 --> 0:21:03.840 into the details of a sort of potential aircraft engine. Uh, 0:21:04.119 --> 0:21:06.560 sort of deal in a moment. But what is actually 0:21:06.560 --> 0:21:10.439 the strategy for g E as laid out by management. Well, 0:21:10.480 --> 0:21:14.520 it is evolving. Uh. You know. The event last week 0:21:14.640 --> 0:21:19.240 was on the insurance problems on that call um setting 0:21:19.240 --> 0:21:22.360 aside money because of long term care policies that were 0:21:22.440 --> 0:21:25.480 sold about a decade ago. Yes, but for the first 0:21:25.520 --> 0:21:29.200 time the CEO did suggest that he, you know, might 0:21:29.440 --> 0:21:33.320 get go for selling parts of business. Has been more 0:21:33.400 --> 0:21:37.440 aggressive moves which people really were looking for, because which 0:21:37.480 --> 0:21:42.160 businesses could they or should they sell that would generate 0:21:42.480 --> 0:21:47.119 the biggest premium, the biggest price, Well not totally, butchering 0:21:47.560 --> 0:21:51.880 the core of the company that that's the good businesses 0:21:51.960 --> 0:21:54.240 or healthcare and aviation. I don't think they'll let go 0:21:54.320 --> 0:21:56.720 of them. They need the earnings, they need the cash flow. 0:21:57.520 --> 0:21:59.840 You know. The most immediate one would be Baker, Hughes 0:22:00.000 --> 0:22:02.720 and a couple of the smaller businesses, which inaggregate would 0:22:02.720 --> 0:22:05.080 actually help solve the problem if they put all the 0:22:05.080 --> 0:22:07.560 cash toward debt in their pension, they would solve a 0:22:07.960 --> 0:22:10.720 go a long way. Bank of America Mary Lynch coming 0:22:10.720 --> 0:22:14.679 out today with the downgrade of the shares um perhaps 0:22:14.680 --> 0:22:16.320 a little bit late. I mean the shares trading it 0:22:16.359 --> 0:22:20.760 around sixteen dollars right now lost since December two thou 0:22:20.920 --> 0:22:23.640 and eleven. You should say, yeah, okay, good footnote there. 0:22:24.119 --> 0:22:30.360 But it's also a report that General Electric supply the 0:22:30.440 --> 0:22:36.040 engines for the A three eight superjumbos that Emirates has 0:22:36.160 --> 0:22:39.880 ordered from Airbus. Would that be enough to really change 0:22:39.960 --> 0:22:44.400 the perception of aviation business? The perception of the aviation 0:22:44.400 --> 0:22:47.080 business is really good. It's it's it's you know, it's 0:22:47.119 --> 0:22:49.880 an eighty four billion dollar business. It's got twenty seven 0:22:50.280 --> 0:22:54.879 ebit margins um you know, mid twenties, just a bit margins, 0:22:55.680 --> 0:22:59.040 very well positioned, high you know, a lot of parts annuity. 0:22:59.080 --> 0:23:01.200 But they don't do it all right, I mean they 0:23:01.240 --> 0:23:05.040 do it in conjunction with Pratton Whitney. I believe well 0:23:05.040 --> 0:23:07.840 that those are the two engines, those are the two 0:23:07.880 --> 0:23:10.080 major engines. And then also they got the deal with Saffran. 0:23:10.320 --> 0:23:13.240 Yes that's a j V. Yeah, So I mean, why 0:23:13.280 --> 0:23:18.520 not spin off the aviation business? Uh? That would materially, 0:23:18.560 --> 0:23:20.520 I guess because it's one of the I mean it 0:23:20.880 --> 0:23:24.960 is a standalone It would make some sense. However, they 0:23:25.040 --> 0:23:27.760 would lose a lot of the earnings while they have 0:23:28.200 --> 0:23:31.320 a sort of a credit crunch and cash is you know, 0:23:31.760 --> 0:23:34.679 I um, and then they'd have an earnings problem. But 0:23:35.200 --> 0:23:37.000 I think it would make some sense in it is 0:23:37.040 --> 0:23:41.280 a round jewel. Okay, this might be a really basic question. 0:23:41.359 --> 0:23:47.080 But how will ge go about trying to solicit offers 0:23:47.200 --> 0:23:50.560 or solicit you know, some estimates of what other companies 0:23:50.600 --> 0:23:55.760 would pay for their businesses right now without undermining their value. Well, 0:23:56.080 --> 0:23:59.080 they're in a weakened state. Uh no, no doubt right. 0:23:59.080 --> 0:24:01.120 I mean I've done to some of the parts valuation 0:24:01.160 --> 0:24:03.720 that does show there is you know, a decent amount 0:24:03.720 --> 0:24:07.480 of value um low twenties um equity value. However, they're 0:24:07.480 --> 0:24:10.080 going to take haircuts on selling these businesses because as 0:24:10.080 --> 0:24:13.000