WEBVTT - Flashbacks to 2008 0:00:13.800 --> 0:00:17.480 Hello, and welcome to What Goes Up a weekly markets podcast. 0:00:17.720 --> 0:00:20.400 My name is Mike Reagan. I'm a senior editor at Bloomberg, 0:00:20.680 --> 0:00:23.720 and I'm Aldana hire Across as a reporter with Bloomberg. 0:00:25.079 --> 0:00:28.080 And this week on the show. Well, as you've probably 0:00:28.120 --> 0:00:31.120 heard by now, for the last two weeks, trouble in 0:00:31.160 --> 0:00:34.760 the US and European banking sectors, not to mention the 0:00:34.840 --> 0:00:40.000 responses to it from authorities, has captivated the intention of investors, 0:00:40.600 --> 0:00:43.160 and it's sparking fears of a credit crunch that could 0:00:43.240 --> 0:00:47.519 ultimately drag the economy into a recession. It doesn't yet 0:00:47.520 --> 0:00:49.599 appear to be as big of a train wreck as 0:00:49.600 --> 0:00:53.160 the global financial crisis in two thousand and eight knock 0:00:53.240 --> 0:00:56.960 on wood, fingers crossed and all that. Still, it's hard 0:00:57.000 --> 0:01:00.360 not to get flashbacks to that troubling era. So we're 0:01:00.400 --> 0:01:03.640 gonna do a little comparing and contrasting to that ugly 0:01:03.720 --> 0:01:06.840 time with a veteran market strategist who was helping to 0:01:06.880 --> 0:01:10.360 manage a three point four billion dollars market making book 0:01:10.520 --> 0:01:14.399 back then. But first, Phil donna Um, I did hear 0:01:14.440 --> 0:01:16.959 from a loyal listener because you left us with a 0:01:16.959 --> 0:01:20.240 little bit of a Cliffhanger last week, and he was 0:01:20.280 --> 0:01:23.240 worried about you. You had told us you were just 0:01:23.319 --> 0:01:29.880 about to close on a mortgage with dot First Republican. Yeah, 0:01:29.959 --> 0:01:32.759 so how did it go? Tell what was the resolution? 0:01:32.840 --> 0:01:34.560 You have no idea? How's trusted? I was like a 0:01:34.680 --> 0:01:37.280 nutcase last week. I was so worried about First just 0:01:37.400 --> 0:01:40.560 last just last week, more so than usual, like way 0:01:40.600 --> 0:01:44.080 more so than usual. And I I like, when something's 0:01:44.240 --> 0:01:46.440 really weighing on me, I can't help but bring it 0:01:46.520 --> 0:01:49.440 up all the time. So I would run Iran into 0:01:49.600 --> 0:01:52.800 the radio. I've never noticed. Yes, but even like the 0:01:52.880 --> 0:01:55.600 radio producer Paul Brennan. We took the escalator up at 0:01:55.600 --> 0:01:57.600 the Bloomberg office. He was like, how are you? And 0:01:57.640 --> 0:02:00.680 I was like, I'm not. Well. First republic is my bank. 0:02:01.720 --> 0:02:04.720 He was like, okay, well, it's it's stressful enough to 0:02:04.800 --> 0:02:08.760 close on a new home in normal time, so I 0:02:08.760 --> 0:02:12.000 can't even imagine. Yeah, but oh so we closed. We 0:02:12.080 --> 0:02:14.120 rushed it, and we closed in front. Rushing is not 0:02:14.240 --> 0:02:16.760 a good thing, obviously, but in this case, I think 0:02:16.760 --> 0:02:22.240 it's okay to make an exception. So it's closed, it's done. 0:02:22.360 --> 0:02:26.280 It's good as a Friday night. Yeah, but you know 0:02:26.320 --> 0:02:28.600 even our guests on the podcast this week, I told 0:02:28.639 --> 0:02:34.359 because I couldn't help myself but to to to tell 0:02:34.440 --> 0:02:36.320 him about all my troubles. When I was talking to 0:02:36.360 --> 0:02:38.639 him last week and I told him, I was like, oh, 0:02:38.680 --> 0:02:40.640 I have this mortgage pending with the First Republic, And 0:02:40.680 --> 0:02:43.560 all he said back was oh, And then we never 0:02:43.600 --> 0:02:47.639 spoke again, which was not a good sign of confidence. 0:02:49.120 --> 0:02:50.480 I thought you were going to be looking for a 0:02:50.480 --> 0:02:53.120 couch to crash rone. Oh my gosh, stop it, Oh 0:02:53.160 --> 0:02:56.840 my gosh. No. But maybe maybe our guests can explain 0:02:56.880 --> 0:02:59.120 why he just left me hanging like that when I 0:02:59.160 --> 0:03:03.760 was looking for reassurances. I want to bring in Steve Sausnick, 0:03:03.880 --> 0:03:07.400 chief strategists at Interactive Brokers. Thanks so much for joining us. 0:03:08.000 --> 0:03:10.280 It's great to be here, Valdona. Great to be here, Mike. 0:03:10.919 --> 0:03:13.000 If just in my own defense, I figured, if I 0:03:13.040 --> 0:03:15.920 had nothing constructive to say, and I could sort of 0:03:15.960 --> 0:03:20.000 sense the nervousness even via the via the interview, you know, 0:03:20.040 --> 0:03:22.760 the IB messages, I figured it was best not to 0:03:22.800 --> 0:03:26.160 say anything. But fortunately it worked out because I really 0:03:26.200 --> 0:03:30.320 had no idea what would happen. I think nobody knows. 0:03:30.600 --> 0:03:32.959 But and you did the opposite of what Mike did. 0:03:33.200 --> 0:03:37.560 Mike would find really bad stories and then copy paste 0:03:37.600 --> 0:03:41.320 the worst parts of people panicking, and he would send 0:03:41.320 --> 0:03:44.080 them to me highlighted with the worst parts. And I'm 0:03:44.080 --> 0:03:47.760 sure you already saw this, but just FYI, you better 0:03:47.800 --> 0:03:50.080 start double apping at, which is a new word. I 0:03:50.720 --> 0:03:55.280 learned people with pending mortgages at First Republic were applying 0:03:55.280 --> 0:03:58.200 for other mortgages double apping, they call it. Yeah. I 0:03:58.240 --> 0:04:00.640 was like, Phildoni better, why aren't you double lapping? But 0:04:01.200 --> 0:04:03.640 hey came through. Hey, yeah, you know, shout out to 0:04:03.680 --> 0:04:06.480 my banker, Kyle. One thing I was going to say 0:04:06.960 --> 0:04:09.520 was already too late because once you'd already closed was 0:04:09.880 --> 0:04:12.040 once they got the lifeline, you figured you got a 0:04:12.080 --> 0:04:15.840 three to four month window because well I figured they're 0:04:15.880 --> 0:04:19.840 not going anywhere for a while, They're not going immediately out, 0:04:19.880 --> 0:04:22.400 and uh but you know, not knowing how long, not 0:04:22.480 --> 0:04:24.279 knowing how far along you are in the process. I 0:04:24.360 --> 0:04:26.960 just you know, if I don't have anything helpful to say, 0:04:27.000 --> 0:04:30.599 it's best not to say. And I would also assume, 0:04:30.960 --> 0:04:33.520 you know, if if you're if you're getting a mortgage 0:04:33.560 --> 0:04:35.880 at you know, I know you got a pretty good rate, 0:04:35.920 --> 0:04:39.040 but at any rate sort that's sort of a perfect 0:04:39.160 --> 0:04:41.479 prevailing market rate or close to it. They're gonna want 0:04:41.480 --> 0:04:44.160 to close on that, regardless of the buildings on fire, 0:04:44.200 --> 0:04:48.359 I would think, you know at this point, So there's that, okay. So, Steve, 0:04:48.720 --> 0:04:50.800 the reason I was talking to you last week and 0:04:50.839 --> 0:04:53.200 some of my teammates is because we've been asking people 0:04:53.600 --> 0:04:55.400 where were you in two thousand and eight and what 0:04:55.520 --> 0:04:58.080 were some of the lessons learned that you can apply 0:04:58.279 --> 0:05:01.960 to today? And obviously we're getting a ton of comparisons 0:05:02.279 --> 0:05:06.560 to that period of time. I think Jonathan Pharaoh from 0:05:06.600 --> 0:05:09.960 Bloomberg TV said something just to put it a bit 0:05:10.000 --> 0:05:15.120 more in perspective, because maybe it's sort of like panicky 0:05:15.160 --> 0:05:18.520 to make comparisons to two thousand and eight at this point. 0:05:18.520 --> 0:05:21.479 So he said something like, you know, it's like saying, 0:05:22.040 --> 0:05:24.720 oh I broke my foot. It really hurts, but it's 0:05:24.720 --> 0:05:26.719 all right. It's not as bad as like that time 0:05:26.760 --> 0:05:32.760 I got shot, you know, So like, can you can like, 0:05:33.120 --> 0:05:36.480 is it warranted at this point to be making those comparisons, 0:05:36.520 --> 0:05:38.559 and maybe you can tell us about some of those 0:05:39.120 --> 0:05:41.920 lessons learned from two thousand and eight to that you're 0:05:41.920 --> 0:05:45.960 applying to today. It's not unwarranted. You know the problem 0:05:46.080 --> 0:05:49.840 is we're always looking for a historical precedent, and you know, 0:05:49.960 --> 0:05:53.919 it behooves us to think about what paradigm because we 0:05:54.000 --> 0:05:57.279 all need to think in terms of some sort of paradigm. 0:05:57.279 --> 0:06:00.440 What paradigm is most is most like what we're seeing. Well, 0:06:00.880 --> 0:06:04.200 the last bank crisis, you know that we that we know, 0:06:04.360 --> 0:06:06.800 you know that really took hold was in two thousand 0:06:06.839 --> 0:06:09.680 and eight. We're not there yet. We're not at that 0:06:09.839 --> 0:06:11.720 full flat and I hope we don't get there. Let 0:06:11.720 --> 0:06:14.240 me be very clear. We're not at the point where 0:06:14.279 --> 0:06:17.599 things you know, have really begun to metastasize. And I 0:06:17.600 --> 0:06:21.400 do think because we've set up some firewalls systemically, you know, 0:06:21.480 --> 0:06:24.600 Dodd Frank and and and you know, some of the 0:06:25.320 --> 0:06:29.400 um exotic products that cause the last crisis are not 0:06:29.520 --> 0:06:34.320 really as prevalent. We're not. You know, subprime mortgages UM 0:06:34.640 --> 0:06:37.400 are not are not a thing this time. I assume 0:06:37.440 --> 0:06:39.680 you went through all kinds of nice credit checks to 0:06:39.720 --> 0:06:42.080 get your mortgage bill, Donna. You know they weren't just 0:06:42.160 --> 0:06:44.520 handing them out. Banks this time around have not been 0:06:44.600 --> 0:06:48.120 using credit to fault swaps to substitute for permanent capital 0:06:48.400 --> 0:06:50.839 that sort of thing. So so it is different. There's 0:06:50.839 --> 0:06:53.680 a lot so far the banks that have come out 0:06:53.760 --> 0:06:57.640 under crisis it's a little more straightforward. I mean, we'd 0:06:57.680 --> 0:07:01.040 silver Gate and the Culprit there as crypto as part 0:07:01.080 --> 0:07:03.800 of so of the ongoing crypto troubles, which you know 0:07:03.880 --> 0:07:06.800 you can speak to better than I can. But then 0:07:06.839 --> 0:07:08.839 you had SBB, which you know, we all know the 0:07:08.880 --> 0:07:12.120 story there. It's a classic mismatch. It's really they had 0:07:12.120 --> 0:07:14.360 too much. They had too many deposits that they couldn't 0:07:14.400 --> 0:07:18.320 actually loan out in sort of an efficient way, but 0:07:18.400 --> 0:07:21.000 they kept taking them in any way, and so that 0:07:21.200 --> 0:07:23.400 was sort of a plain vanilla type of a problem. 0:07:23.400 --> 0:07:27.080 Really duration risk, which always is a risk for banks. 0:07:27.600 --> 0:07:29.920 You know, along the way you had Signature Bank, which 0:07:30.080 --> 0:07:32.080 you know was not only a little bit of crypto 0:07:32.200 --> 0:07:33.960 and a little bit of they seem to have their 0:07:33.960 --> 0:07:37.240 finger in every sort of odd pot, you know, oddball 0:07:37.480 --> 0:07:40.760 place in the banking system, taxi loans, etc. Etc. And 0:07:40.800 --> 0:07:43.680 then of course Credit Squeeze, which has been choose my 0:07:43.720 --> 0:07:47.480 words carefully, they've been under some stress for first quite 0:07:47.520 --> 0:07:50.280 some time, love me put it that way, and so 0:07:50.360 --> 0:07:52.920 that's a nice way to put it. So in that sense, 0:07:53.040 --> 0:07:55.360 we're not at the level where you started to work, 0:07:55.400 --> 0:07:57.559 where we started to worry about banks like City Group 0:07:57.600 --> 0:08:00.000 and Deutsche Bank and things like that, although I guess 0:08:00.000 --> 0:08:03.840 Credit suieces analogous to Deutsche Bank and UBS, which ironically 0:08:03.840 --> 0:08:06.560 had its own issues back then and is now the acquirer. 0:08:07.040 --> 0:08:10.760 So there's definitely you know, history. They say history doesn't repeat, 0:08:10.800 --> 0:08:13.560 but it often rhymes, and I think there's there's a 0:08:13.600 --> 0:08:17.360 certain rhyme to it. But we're not there yet, and 0:08:17.440 --> 0:08:20.200 I certainly hope we don't get there. But so, I mean, 0:08:20.280 --> 0:08:23.920 I was at that point my responsibility was making markets 0:08:23.920 --> 0:08:28.000 and being a specialist in bank options, and so that 0:08:28.080 --> 0:08:32.839 was a very it was a very challenging time. I 0:08:32.880 --> 0:08:36.240 do think we actually, I will say we did. We 0:08:36.280 --> 0:08:40.040 did rather well then I you know, I know that's 0:08:40.120 --> 0:08:44.560 really counterintuitive, and especially when systemic risk is a foot. Um. 0:08:44.800 --> 0:08:47.520 But the thing that really got us on the right 0:08:47.600 --> 0:08:52.960 foot was almost a random conversation I had Yeah tell 0:08:53.040 --> 0:08:55.920 us about this because we talked about this, and UM, 0:08:55.960 --> 0:08:58.400 I want to give credit to Katie Garfield who originally 0:08:58.440 --> 0:09:00.480 asked you this question and you told this story, so 0:09:00.520 --> 0:09:04.880 if you wouldn't mind, not at all, we you know, 0:09:05.640 --> 0:09:08.520 we're in a we're in a small office building in Greenwich, 0:09:08.559 --> 0:09:11.400 and you know, you park in the garage underneath because 0:09:11.480 --> 0:09:15.040 you know that's everybody commutes by car because it's Connecticut. UM. 0:09:15.120 --> 0:09:18.320 And so you know, get in the elevator and there's 0:09:18.400 --> 0:09:21.520 Thomas Patterfie who founded the firm and UM, you know, 0:09:21.760 --> 0:09:25.760 whom I'm sure the listeners are familiar with. UM. Get 0:09:25.760 --> 0:09:30.360 in the elevator. UM. You know what's new? UM, And 0:09:30.440 --> 0:09:34.480 you know Thomas's Thomas is not a man who's big 0:09:34.480 --> 0:09:37.040 on small talk. So it's it's you know, that was 0:09:37.120 --> 0:09:38.720 I think more. You know, I took that as a 0:09:38.840 --> 0:09:41.920 business related question rather than you know, tell them about 0:09:41.960 --> 0:09:43.800 you know, tell them about the kids and stuff. And 0:09:43.840 --> 0:09:47.439 I said, you know what's really interesting to me is UM, 0:09:47.480 --> 0:09:50.319 this story that the story that that that I'm reading 0:09:50.360 --> 0:09:53.520 this morning about how bear Stearns may have as much 0:09:53.520 --> 0:09:57.080 as twenty billion in losses at some of their hedge funds. 0:09:58.240 --> 0:10:00.679 And he said twenty billion. I said, I said, no, 0:10:00.840 --> 0:10:03.400 that's that's the number that's being thrown around. I don't, 0:10:03.440 --> 0:10:05.520 you know, I obviously I don't know if it's one 0:10:05.559 --> 0:10:08.120 hundred percent true, but I trust I trust the reporting 0:10:08.840 --> 0:10:11.440 um and he said, how big is you know? What's 0:10:11.440 --> 0:10:16.520 their market cap? And I said, I think about twenty billion. 0:10:16.559 --> 0:10:18.800 Now at this point, it's only like a it's only 0:10:18.800 --> 0:10:20.839 like a four story building. So we're out of the 0:10:20.880 --> 0:10:23.959 elevator at this point, walking down the hall um, you know, 0:10:24.000 --> 0:10:25.880 and I said it, I think it's about twenty billion 0:10:25.960 --> 0:10:27.719 ish and he looks at me. He said, he are 0:10:27.760 --> 0:10:32.160 you telling me bear Stearns is broke? And I said, 0:10:32.160 --> 0:10:35.320 I wasn't going to put it that way. But now 0:10:35.360 --> 0:10:39.320 that you you know this, this is why Thomas is. 0:10:39.360 --> 0:10:41.280 You know this why Thomas is the success he is. He's, 0:10:41.320 --> 0:10:43.800 you know, because he sees right through these situations. I said, 0:10:43.800 --> 0:10:47.760 I I guess I am, aren't I? And he looked 0:10:47.760 --> 0:10:50.240 at me and he said, don't sell any puts on 0:10:50.280 --> 0:10:52.560 banks until you hear until you hear from me otherwise, 0:10:53.160 --> 0:10:56.960 And that was that was probably you know, I don't 0:10:56.960 --> 0:10:58.720 think I heard from a motherwise for about a year 0:10:58.760 --> 0:11:01.079 and a half. But which is not to say I 0:11:01.160 --> 0:11:03.440 never sold a put. It's impractical. You can't do that 0:11:03.480 --> 0:11:05.320 as a market maker. But what it means is don't 0:11:05.320 --> 0:11:08.400 be a net seller puts. If you sell them, replace them, 0:11:08.920 --> 0:11:11.520 adjust the models so that we are not the best 0:11:11.600 --> 0:11:14.240 offer on them. And one of the interesting features that 0:11:14.320 --> 0:11:17.520 came out in two thousand and eight was because credit 0:11:17.559 --> 0:11:20.360 to fault swaps were pretty new, and really, you know, 0:11:20.440 --> 0:11:24.600 I believe that every new financial innovation gets a real 0:11:24.600 --> 0:11:26.840 world test, and some of them pass, and some of 0:11:26.840 --> 0:11:29.120 them fail, and some of them get rejiggered as a 0:11:29.160 --> 0:11:31.959 result of it. And that was credit to fault swaps 0:11:32.040 --> 0:11:36.520 real world test, and they were being used in inappropriate 0:11:36.600 --> 0:11:40.080 ways and the market wasn't ready for a full scale 0:11:41.080 --> 0:11:44.800 test of credit default of the how they work. But 0:11:44.920 --> 0:11:49.040 the logical hedge if you're trading credit to fault swaps 0:11:49.240 --> 0:11:52.880 is to buy long term out of the money puts 0:11:52.960 --> 0:11:57.280 on equities. And so the big trade there was people 0:11:57.320 --> 0:12:03.199 buying whatever the lowest strike leap put was on insert 0:12:03.280 --> 0:12:06.520 bank name here, because that would be you know, if 0:12:06.600 --> 0:12:11.600 I had sold credit to fault swaps on um Lehman Brothers. 0:12:12.120 --> 0:12:14.640 You know, the bond. Because of the way a capital 0:12:14.679 --> 0:12:18.839 structure works, the bonds bonds go bad before stocks. And 0:12:19.160 --> 0:12:21.280 I know that's an issue here with credits WEE and 0:12:21.280 --> 0:12:24.800 the Coco bonds, etc. We'll get it. You know, I'm 0:12:24.840 --> 0:12:27.360 not a restructuring expert. My brother actually is you know, 0:12:27.360 --> 0:12:28.840 I haven't gotten a straight answer at it. I haven't 0:12:28.840 --> 0:12:32.600 asked him actually how that all is working out. But um, 0:12:32.760 --> 0:12:34.960 but what happens is, you know what happened there is 0:12:34.960 --> 0:12:36.480 so if the bonds are going to go bad, well 0:12:36.480 --> 0:12:38.080 then the stock is going to go bad. The stock 0:12:38.160 --> 0:12:41.480 is going to go worse. So um, so people were 0:12:41.559 --> 0:12:45.160 really clamoring for those So it just basically kept ratcheting 0:12:45.240 --> 0:12:47.720 up that volatility and kept ratcheting it up and and 0:12:48.000 --> 0:12:52.000 but as a result, we went into this um and 0:12:52.120 --> 0:12:57.240 stayed into it pretty you know, pretty much on on 0:12:57.240 --> 0:13:00.280 a decent footing um, which is not to say there 0:13:00.280 --> 0:13:03.920 weren't hiccups and accidents and everything else. As a market maker, 0:13:04.080 --> 0:13:07.280 you you you sort of expect that you're going to 0:13:07.440 --> 0:13:10.040 have your bad days and your bad weeks, and you 0:13:10.080 --> 0:13:12.800 know you're even your bad months, but you keep tight 0:13:12.920 --> 0:13:16.440 risk parameters and over time, um, if you're doing it right, 0:13:17.480 --> 0:13:20.400 it pays off. You know. You you you collect a 0:13:20.400 --> 0:13:22.720 lot of change along the way, and sometimes you you know, 0:13:22.800 --> 0:13:25.280 sometimes you make pennies and give back dollars, but you 0:13:25.320 --> 0:13:27.600 have to manage the dollars that you give back and 0:13:27.640 --> 0:13:32.240 We fortunately were able to um not give back to dollars. 0:13:32.280 --> 0:13:34.679 And those days we ran pretty much a we always 0:13:34.720 --> 0:13:38.559 pretty much did, ran a long volatility UM model. Just 0:13:38.760 --> 0:13:41.559 that was the way we traded. It could be expensive UM. 0:13:41.679 --> 0:13:44.040 A lot of a lot of people don't do that UM. 0:13:44.200 --> 0:13:49.280 But in an era where volatility was constantly UM, constantly 0:13:50.240 --> 0:13:54.080 rising more or less UM, and skew was getting extraordinarily steep, 0:13:54.440 --> 0:13:56.679 it was. It was the right It worked for us, 0:13:56.760 --> 0:13:58.200 and we were we were in a good place at 0:13:58.240 --> 0:14:02.199 the right time. Something to be said for taking the 0:14:02.280 --> 0:14:04.280 elevator ride with the boss. I guess this is a 0:14:04.280 --> 0:14:06.960 good argument for everyone getting back into the office. I 0:14:06.960 --> 0:14:09.800 guess I say, yes, I'm working for a moment, but 0:14:16.080 --> 0:14:20.280 big picture wise too, I'm thinking about the difference in 0:14:20.320 --> 0:14:23.480 the reaction function from the government and the central banks 0:14:24.080 --> 0:14:27.960 to this occasion versus two thousand and eight. Yeah, I'm 0:14:28.520 --> 0:14:31.520 thinking back to that original vote. I think it was 0:14:31.560 --> 0:14:34.600 in the House on the TARP bill. There was a 0:14:34.640 --> 0:14:37.280 lot of optimism in the market that, of course they're 0:14:37.320 --> 0:14:41.000 gonna pass this bill, the TARP build to in chect 0:14:41.600 --> 0:14:44.400 capital into all the biggest banks, and it failed on 0:14:44.440 --> 0:14:49.320 the first vote, and the market just you know, went 0:14:49.400 --> 0:14:52.200 down instantly in a big way. I forget the exact numbers, 0:14:52.240 --> 0:14:58.120 but this response to me seems much quicker, much more 0:14:59.480 --> 0:15:05.520 focus and um targeted and sort of able to put 0:15:05.520 --> 0:15:07.280 out the fire a lot quicker. Is that is that 0:15:07.320 --> 0:15:12.440 your impression too? Absolutely? Yes, yeah. Once you know, they 0:15:12.440 --> 0:15:15.600 were writing the playbook in two thousand and eight, and 0:15:16.160 --> 0:15:19.120 I think to a certain extent they've been using that playbook, 0:15:19.240 --> 0:15:24.080 particularly in twenty twenty, and they're using it now, um, 0:15:24.280 --> 0:15:28.600 you know, and that was essentially monetary and fiscal shock 0:15:28.640 --> 0:15:31.080 and awe, and I think you know, in two thousand 0:15:31.120 --> 0:15:34.120 and eight, Um, you know, remember there was the you know, 0:15:34.320 --> 0:15:39.240 they ridiculed helicopter ben um, but that actually he wasn't wrong, 0:15:39.800 --> 0:15:43.520 you know, and and the Nobel Committee eventually agreed. But 0:15:43.600 --> 0:15:45.520 that was you know, real world test at one of 0:15:45.560 --> 0:15:48.240 his theories, which was essentially dropped money out of helicopters 0:15:48.240 --> 0:15:52.360 in the time of a crisis. Um. And I think 0:15:52.400 --> 0:15:56.000 now they've realized, well it works, um. And that was 0:15:56.120 --> 0:15:58.000 you know, and that was that was why it had 0:15:58.040 --> 0:16:02.120 worked during COVID, and that really wasn't much complaint about 0:16:02.160 --> 0:16:04.960 what the FED was doing. And then it was certainly 0:16:05.280 --> 0:16:09.080 you know, the fiscal bills were generally passed along bipartisan 0:16:09.120 --> 0:16:13.560 lines um, so there wasn't. So by now we sort 0:16:13.560 --> 0:16:16.560 of we're going to use that playbook, which I think 0:16:16.600 --> 0:16:18.480 is a good thing. That's that's kind of the that's 0:16:18.640 --> 0:16:22.600 that means we're actually learning from our you know, from 0:16:22.600 --> 0:16:26.560 our efforts you know, societally. Now we can argue to 0:16:26.640 --> 0:16:28.880 what extent it's appropriate. We can you know, we can 0:16:28.960 --> 0:16:31.960 certainly question whether there was moral hazard in the way 0:16:32.000 --> 0:16:35.080 they um in the way they guaranteed all deposits sort 0:16:35.080 --> 0:16:38.560 of with the stroke of a pen um at at 0:16:38.600 --> 0:16:41.760 silic at Silicon Valley Bank, and and and who benefited 0:16:41.800 --> 0:16:43.960 from that. I mean, you know, we're going to be 0:16:44.000 --> 0:16:45.880 arguing about this for a while. And of course we're 0:16:45.880 --> 0:16:49.040 still you know, with the FED meeting yesterday, we're still 0:16:50.000 --> 0:16:52.440 dealing with the idea of did the Fed and the 0:16:52.640 --> 0:16:55.760 and the you know, and the and the and Congress, 0:16:55.760 --> 0:16:58.760 the fiscal authorities overdo it in their response to COVID. 0:16:58.880 --> 0:17:02.520 I mean, these are that'll be that'll be the stuff, 0:17:02.760 --> 0:17:06.000 you know, when when Vildonna's my age, she'll be having 0:17:06.040 --> 0:17:09.119 that discussion. She'll be having that discussion with the in 0:17:09.160 --> 0:17:11.399 a couple of years, right, you got a waste to 0:17:11.440 --> 0:17:14.879 go to your catch up to me. Um, but but 0:17:15.000 --> 0:17:17.640 that's really the you know, she'll still be talking about 0:17:17.640 --> 0:17:21.120 her mortgage, I think, Steve. So she'll still be telling 0:17:21.160 --> 0:17:24.320 that story. Yeah, yeah, well that's you know mortgage. Well, 0:17:24.960 --> 0:17:27.679 you know it added twenty years to my life just 0:17:27.840 --> 0:17:33.040 from yeah, Steve. One thing. Um, there's almost this knee 0:17:33.080 --> 0:17:36.520 jerk reaction in the market, I think, to this notion 0:17:36.720 --> 0:17:39.399 of the Fed's balance sheet. You know, a bunch of 0:17:39.480 --> 0:17:42.520 banks went to the discount window at the FED and 0:17:42.720 --> 0:17:45.280 borrowed I I don't know what the exact number is 0:17:45.320 --> 0:17:48.000 at the moment, but call it hundreds of billions of dollars. 0:17:48.359 --> 0:17:52.240 The thinking in many quarters is that, well, that's almost 0:17:52.280 --> 0:17:55.720 like quantitative easing, or at least a reversal of the 0:17:55.800 --> 0:18:00.239 quantitative tightening tightening that the central bank was doing. Sure, 0:18:00.240 --> 0:18:03.520 if that's the same the appropriate way to look at it, 0:18:03.560 --> 0:18:08.119 You know, the FED increasing its balance sheet by extending 0:18:08.560 --> 0:18:13.320 discount window loans versus buying treasuries and mortgage securities. Is 0:18:13.320 --> 0:18:15.320 that the wrong way to think about that? Do you 0:18:15.359 --> 0:18:19.000 think it's interesting because I've had this exact debate with 0:18:19.040 --> 0:18:22.439 my colleague Jose Torus, who was an economist and you 0:18:22.440 --> 0:18:25.520 know his his He pointed out after the last h 0:18:25.640 --> 0:18:28.360 dot four dot one report, which is something I actually, 0:18:29.160 --> 0:18:31.160 you know, in a nerdy way, look a look at 0:18:31.200 --> 0:18:35.000 every Thursday afternoon. But but you're even Mike, You're probably 0:18:35.040 --> 0:18:37.560 not old enough to remember on Thursday afternoons everybody stopped 0:18:37.560 --> 0:18:39.479 to wait for the M two report. When I started 0:18:39.480 --> 0:18:41.120 out in the business, you know, that was the thing 0:18:41.160 --> 0:18:44.840 everybody was looking forward to. So so we've had this debate, 0:18:44.880 --> 0:18:46.840 and you know, he said, well, look, you know, the 0:18:46.880 --> 0:18:48.680 deposits went up by I think it was three hundred 0:18:48.720 --> 0:18:53.480 billion or something, which which um, you know, would eradicate 0:18:53.600 --> 0:18:57.520 essentially the QT that's done year to date. Meanwhile, though 0:18:57.560 --> 0:19:01.480 they did continue to let securities roll off the balance sheet. 0:19:02.040 --> 0:19:06.840 So I think that the differentiating factor here is the 0:19:06.920 --> 0:19:09.879 deposit stuff is meant to be a band aid, um, 0:19:09.960 --> 0:19:12.439 whereas the QT is meant to be more of a 0:19:12.480 --> 0:19:15.840 permanent shift in the way the Fed is is approaching that, 0:19:16.600 --> 0:19:19.960 you know, tightening and easing of their balance sheet. But 0:19:19.720 --> 0:19:22.800 they use their balance sheet and a crisis, and so 0:19:23.240 --> 0:19:26.520 I don't think it's apples to apples, but certainly it 0:19:26.680 --> 0:19:29.520 was they did throw money into the system. You know, 0:19:29.520 --> 0:19:32.240 they need to do it to keep lubricating the gears. 0:19:32.240 --> 0:19:34.960 I just think it's a little bit in theory. This 0:19:35.160 --> 0:19:37.720 three hundred billion can roll itself off. I don't think 0:19:37.720 --> 0:19:41.440 it has yet. Well, well, we'll know this afternoon, I guess. 0:19:42.200 --> 0:19:43.800 But I think as long as their stress in the 0:19:43.800 --> 0:19:46.879 banking system, it's going to the FED. The feed is 0:19:48.119 --> 0:19:51.399 you know, is and can be the guaranteur of you know, 0:19:51.440 --> 0:19:54.200 the lender of last resort. And it's to me, this 0:19:54.240 --> 0:19:56.720 is one of the fascinating things. Right we've talked about 0:19:56.720 --> 0:19:59.880 the we we haven't yet, but the Fed's dual mandate 0:20:00.680 --> 0:20:04.840 is stable prices and full employment. Yet it's very clear 0:20:04.920 --> 0:20:07.280 that the fed's real job and why they were created, 0:20:07.960 --> 0:20:11.840 was to maintain the safety and stability of the banking system. Now, 0:20:11.920 --> 0:20:14.359 without a safety and stability the banking system, you can't 0:20:14.400 --> 0:20:17.800 have stable prices and full employment. But their real mandate 0:20:17.880 --> 0:20:21.040 is sort of unspoken, and I think that's but it's 0:20:21.080 --> 0:20:24.040 important that that mandate really comes into play when there's 0:20:24.080 --> 0:20:27.880 a crisis going on, and that's what we're seeing now. Steve. 0:20:27.960 --> 0:20:31.800 I'm curious because everything keeps changing so much, so fast. 0:20:32.000 --> 0:20:35.359 How you're thinking has evolved since the start of the year. 0:20:35.560 --> 0:20:38.919 And obviously we even had some economists at some of 0:20:38.960 --> 0:20:42.119 the big banks coming out before this week's FED meetings 0:20:42.200 --> 0:20:46.280 saying they're not going to be hiking rates, and obviously 0:20:46.280 --> 0:20:49.239 they're raised by twenty five basis points. So how are 0:20:49.240 --> 0:20:52.000 you thinking about all of the changes? Everything we've seen, 0:20:52.080 --> 0:20:56.200 everything we've heard from the FED, the bank turmoil, everything, 0:20:56.240 --> 0:20:59.560 and how it's you're thinking about what we might be 0:20:59.720 --> 0:21:03.639 seeing for the remainder of the year has evolved. Thinking 0:21:03.680 --> 0:21:07.280 really hasn't changed all that much. You know. I'm still 0:21:07.280 --> 0:21:09.520 of the belief that we're in a period where if 0:21:09.520 --> 0:21:11.200 the FED is raising rates and if the FETE is 0:21:11.240 --> 0:21:13.920 shrinking their balance sheet, things are things are going to 0:21:14.000 --> 0:21:16.840 break and you're going to have accidents. Well we did, 0:21:17.480 --> 0:21:19.800 you know? And I think that the problem here is 0:21:19.840 --> 0:21:22.160 that I'm going to take a little victory lot because 0:21:22.160 --> 0:21:26.000 literally what I wrote yesterday was that, um, let me 0:21:26.080 --> 0:21:28.280 just pull it up, was that my base case was 0:21:28.320 --> 0:21:30.280 for a twenty five basis point hike. The FED doesn't 0:21:30.320 --> 0:21:32.919 typically surprise market. No, no hike would be considered a 0:21:32.920 --> 0:21:35.640 surprise if they stood pat with people would worry about 0:21:35.640 --> 0:21:38.640 what's wrong. Um, you know that, but but you now 0:21:38.680 --> 0:21:40.640 have the dot plot. I won't go into the whole thing, 0:21:40.680 --> 0:21:43.439 but basically then said the dot plot was going to 0:21:43.480 --> 0:21:46.159 be relatively unchanged, which was very much at odds with 0:21:46.200 --> 0:21:49.760 FED funds futures, and that um he would play down 0:21:49.760 --> 0:21:54.800 concerns about, you know, the banking crisis metastasizing, which would 0:21:54.840 --> 0:21:58.040 actually potentially disappoint people. I think, you know, I think 0:21:58.040 --> 0:22:00.879 that all fits, and I think that's still what we 0:22:00.920 --> 0:22:05.160 see now. We saw sort of the way that zero 0:22:05.240 --> 0:22:09.000 dated options can cause, you know, microverse of volatility. That's 0:22:09.000 --> 0:22:11.760