Speaker 1: This is Bloomberg Wall Street Week. Market shruggle, higher consumer prices,
Speaker 1: The economy is in the process of rebounding. Will the
Speaker 1: futteral reserve have its own digital currency? The financial stories
Speaker 1: that cheap hard work. Many people think the eels are
Speaker 1: just going to keep marching up. We have more spending
Speaker 1: coming out of Congress. One of the big questions I
Speaker 1: think on investors minds inflation through the eyes of the
Speaker 1: most influential voices. Larry Summer is the former Treasury Secretary
Speaker 1: Bryan Wynhan a backup America, Will Smart, CEO of Charlie Sharp.
Speaker 1: Bloomberg wool Street Week with David Weston from Bloomberg Radio.
Speaker 1: Global investors search for direction with global economic recovery uneven,
Speaker 1: pandemic risk not going away, and geopolitical risk on the rise.
Speaker 1: This is Bloomberg Wall Street Week. I'm David Weston. A
Speaker 1: lot of ups and downs this week, but no clear direction,
Speaker 1: with concerns over the pandemic shifting overseas to places like India.
Speaker 1: As the United States makes progress on vaccinations, with much
Speaker 1: more yet to do, we let up now and stop
Speaker 1: being vigilant. This virus will erase the progress we've already achieved,
Speaker 1: the sacrifices we've made, the lives that have been put
Speaker 1: on hold, the loved ones who've been taken from us,
Speaker 1: the time we're never going to get back. There was
Speaker 1: a lot of talk about infrastructure, including what it means,
Speaker 1: and some groping toward a compromise, but prospects remained very unclear.
Speaker 1: And US corporate earnings have come in strong so far,
Speaker 1: but let's be honest, that was more or less expected,
Speaker 1: wasn't it. And the markets by and large reflected the
Speaker 1: gifts and the takes, with equities hesitating in their reflation
Speaker 1: march upward and the tenuere yields staying just about one
Speaker 1: point five, neither surging toward two nor falling back down.
Speaker 1: Bloomberg broke the news that President Biden maybe getting ready
Speaker 1: to follow through un Candidate Biden's commitment to eliminate preferential
Speaker 1: tax treatment for capital gains at least for those making
Speaker 1: over one million dollars a year, as part of an
Speaker 1: effort to pay for some of the other Grahams that
Speaker 1: the administration wants to take us through. What this could mean.
Speaker 1: We welcome now David Herzig. He is tax principal in
Speaker 1: the e y private client services tax practice. So, David,
Speaker 1: thank you so much for being with us. As I say,
Speaker 1: this doesn't come as unnecessary shocked anybody because the President
Speaker 1: had it in his campaign website as a practical matter,
Speaker 1: But what would this mean for the taxpayer and that
Speaker 1: for that matter, for capital formation generally in the country,
Speaker 1: Because David, thanks for having me. Um. I mean, I
Speaker 1: think you hit the nail on the head with the
Speaker 1: first thing, right. This isn't a surprise that you know
Speaker 1: present Finden proposes during the campaign. Um, we haven't seen
Speaker 1: the actual proposal, the American Family Plan yet, which which
Speaker 1: will kind of give us some more guidance. But it
Speaker 1: is really interesting to see what might happen with these
Speaker 1: tax rates increasing, because you know, if you're in New
Speaker 1: York or California, even the marginal rate might even be
Speaker 1: higher than than the proposed rate because you have the
Speaker 1: state level tax too, So you're seeing tax salvation putting
Speaker 1: out that New York might have a mark general rate
Speaker 1: of fifty eight point two percent, California might have a
Speaker 1: marginal rate of fifty six point seven. So these rates
Speaker 1: will really I think impact, you know, the way people
Speaker 1: look at us, a capital formation how they balance their
Speaker 1: portfoldio on what kind of goes on in kind of
Speaker 1: their overall tax plan. Yeah, so so, Um, the real
Speaker 1: question is for the people who are making more than
Speaker 1: a dog a year, they they can afford some really
Speaker 1: frust rate tax advice, the kind that you give them. Actually,
Speaker 1: So if people come to you and say, what do
Speaker 1: I do in response to this? How do you change
Speaker 1: your investment behavior in response to something like eliminating the
Speaker 1: preferential treatment for capital tax game for capital gains? Well,
Speaker 1: I mean, I think that's all. I mean, it's a
Speaker 1: hard question, right because we don't I guess there's an
Speaker 1: initial matter. You don't know if really that will get
Speaker 1: to the thirty nine point six percent that President bidence proposing. Right,
Speaker 1: There's there's questions of how this might work through the
Speaker 1: actual budget process. But let's assume for your argument, right,
Speaker 1: that will use the thirty nine points. That's that that's
Speaker 1: actually what gets past the Congress. The question is what
Speaker 1: do you do about that? And I think that's a
Speaker 1: challenging question for most taxpayers. Right when we talk to
Speaker 1: taxpayers about this, you know, the questions become, you know,
Speaker 1: is this going to be retroactive? Should I sell now
Speaker 1: and then think about buying later and capturing the lower
Speaker 1: tax right now, should we wait and see kind of
Speaker 1: what happens and see if the rate actually goes not
Speaker 1: but maybe a thirty percent ort and kind of see
Speaker 1: what happens. There's a lot of questions and moving parts
Speaker 1: about what you might want to do depending on where
Speaker 1: the rate lands. I mean, there's just a lot of
Speaker 1: uncertainty right now. I got a glimpse of one report
Speaker 1: that came out on what's happened in the past that
Speaker 1: suggested that if you do increase taxes on capital gains,
Speaker 1: that you may move more business into pass throughs and
Speaker 1: away from separate entities. Does that make sense? Well, I
Speaker 1: mean I think generally, like what the way you have
Speaker 1: to look at this is there's this kind of the
Speaker 1: big elephant in the room that no one's really discussing analysis,
Speaker 1: this thing called the locked in effect, right, and so
Speaker 1: the locked in effect is basically this economic theory that
Speaker 1: says you you won't sell if the tax rates get
Speaker 1: too high. Right, So if if tax rates get too high,
Speaker 1: I'm just going to hold onto my stock and wait.
Speaker 1: And so one of the things that Democrats are kind
Speaker 1: of proposing is saying one of the key drivers of
Speaker 1: the locked in effect is step up a basis at death.
Speaker 1: So what happens then is that when I die, I
Speaker 1: get an increased basis in my stock or whatever it is,
Speaker 1: and that kind of helps eliminate or mitigate against this
Speaker 1: capital gains rate increase. So when you look at this,
Speaker 1: you say to your point about like should we move
Speaker 1: from corporate to partnerships, or or how should I think
Speaker 1: about my investment strategy. If you eliminate capital gains preferences
Speaker 1: at death, you're going to see some different kinds of
Speaker 1: drivers for taxpayers trying to figure out which is the
Speaker 1: most efficient kind of capital structure and and it you know,
Speaker 1: generally partnerships have lower overall rates than corporate structures, so
Speaker 1: you could definitely see a shift to kind of the
Speaker 1: move to more partnership type structure. Yeah, but it's very interesting.
Speaker 1: I had not made the connection. I'm not a tax
Speaker 1: lawyer like you, but I had made the connection actually
Speaker 1: with the stepped up basis uh in inheritance. That's that's
Speaker 1: very interesting. Let me turn to a different subject, which
Speaker 1: is proposals to increase the funding for auditing by the
Speaker 1: I r S. You've seen that now to paper various things,
Speaker 1: maybe elimiting the salt limitation, but for whatever purpose, is
Speaker 1: it pretty clear that if we ramped up the spending
Speaker 1: on I R S assets, we would ramp up the
Speaker 1: revenue we get. Yeah, I mean, I think what you see,
Speaker 1: like all the all the kind of studies that have
Speaker 1: been done and all the the research that's been done
Speaker 1: on the matter, is if you increase spending on audits,
Speaker 1: you increase tax revenues. David, thanks, that's David Herzig tax
Speaker 1: principle with Ian Wise Private client services tax practice coming up.
Speaker 1: It's bad enough to speculate on doge coin or non
Speaker 1: fungible tokens, but European football. We talked with Steve Pluka
Speaker 1: of Bain Capital about what was behind that attempted cop
Speaker 1: who that was the Super Soccer league. That's next on
Speaker 1: Wall Street Week on Bloomberg. This is Bloomberg Wall Street
Speaker 1: Week with David Weston from Bloomberg Radio. Investors are getting
Speaker 1: creative in a low rate, low return world. Spacks, for instance,
Speaker 1: used to be a last resort for companies struggling to
Speaker 1: go public, but they've become all the rage, at least
Speaker 1: until the SEC warned this month about accounting errors. They
Speaker 1: raised nearly twenty six billion dollars of share sales in
Speaker 1: January alone, compared with less than fourteen billion dollars in
Speaker 1: all of two nineteen. Here's Scott Minored of Googgenheim. The
Speaker 1: upside is if the sponsor finds are really good in Loveland, uh,
Speaker 1: you know, you could still double or triple your money.
Speaker 1: It's a similar story with cryptocurrencies. Bitcoin broke out in
Speaker 1: two seventeen before plunging, and shot up to nearly sixty
Speaker 1: five thousand dollars last week before tumbling once again. In
Speaker 1: addition to institutional interests, the Nasdaq listing of coin based
Speaker 1: last week lifted crypto's profile in mainstream markets. It's obvious
Speaker 1: is an asset people are investing in. Our clients are
Speaker 1: asking ascamely invest in assasset, and you put it on
Speaker 1: our accounts and look at it. That's Back of America
Speaker 1: chairman Brian moynihan. Smaller coins like doge Coin, which was
Speaker 1: created as a joke, soared along with Bitcoin and has
Speaker 1: Elon Musk's backing. Here's Galaxy Digital's Mike Novograts. You know
Speaker 1: does was a main coin it doesn't really have a purpose.
Speaker 1: Let's put people in the safest, best stuff. Uh not,
Speaker 1: you know these joke coins. The crypto cras also fueled
Speaker 1: the rise of n f t s non fungible tokens
Speaker 1: unique irreplaceable identifiers created by algorithms, which gives value to
Speaker 1: digital art and other assets. There's money to be made
Speaker 1: with n f t s. In February, and animated image
Speaker 1: of a flying cat leaving a rainbow trail went for
Speaker 1: almost six hundred thousand dollars realities. A collectibles market is
Speaker 1: somewhere between three or five hundred billion dollars US per total,
Speaker 1: and I think that the reality is this market could
Speaker 1: get just as large. That's Jonathan Bixby from n FT Investments.
Speaker 1: There was a time when the ultra wealthy might buy
Speaker 1: a sports team as a way to diversify their portfolio.
Speaker 1: But this week a group of elite European football clubs
Speaker 1: decided to go further and create a whole new league,
Speaker 1: a super soccer league that would turn the richest and
Speaker 1: most popular sport in the world on its head. Twelve
Speaker 1: clubs from England, Spain and Italy signed on, backed by
Speaker 1: four point eight billion dollars in debt financing from JP Morgan,
Speaker 1: but it created a storm of protests from fans and
Speaker 1: from UK Prime Minister Boris Johnson. By the end of
Speaker 1: the week, several teams were backing out. Here's European Commission
Speaker 1: Executive Vice President Margaret Vestaire. I myself just you know,
Speaker 1: kind of relief that now some of the clubs are
Speaker 1: dropping at as you have heard my colleague Marguerite Taskinas
Speaker 1: very very strong that this is not in the European
Speaker 1: way when it comes to football. Turns out the Super
Speaker 1: Soccer League may not make it, but you have to
Speaker 1: wonder whether it made sound business sense or was just
Speaker 1: another example of too much money searching for too few opportunities.
Speaker 1: Before the league collapsed, we heard from someone who resides
Speaker 1: at the crossroads of high finance and sports ownership. Steve
Speaker 1: Paluka is co chairman of private equity giant Bayne Capital
Speaker 1: and co owner of the Boston Celtics. So we spoke
Speaker 1: with him before the league collapse about what was up
Speaker 1: with the Super Soccer League. On paper, conceptually, moving to
Speaker 1: a more American style sports ownership situation will be great
Speaker 1: for those big clubs because right now in europe UM,
Speaker 1: there is no there are no cost controls, virtually no
Speaker 1: cost controls. You can own a major franchise and be
Speaker 1: relegated UM. So that is a lot of uncertainty from
Speaker 1: a business standpoint, and uh, and so on paper, they've
Speaker 1: been talking about this, I think for close to twenty
Speaker 1: years now. But on paper it makes a lot of
Speaker 1: sense for those large clubs and as gonna cause a
Speaker 1: lot of disruption and and football is a way of
Speaker 1: life in England and countries of Europe, so I think
Speaker 1: you'll see a battle of go on. But ultimately, uh,
Speaker 1: the large city owners that are supplying a lot of
Speaker 1: those revenues, I think want to capitalize on that and
Speaker 1: want a more stable structure. I think I may have
Speaker 1: a rough, very rough understanding of why they also rans
Speaker 1: if I can call them, that want to participate in this,
Speaker 1: because they'll get a bigger piece of the pies. I
Speaker 1: understand there'll be some caps on how much people can spend.
Speaker 1: Why do the rich clubs want this? Because don't they
Speaker 1: rich get richer when it comes to European football? Well,
Speaker 1: I think part of the proposal is is to have
Speaker 1: a more partnership with players where there's A. I think
Speaker 1: they're talking about of the take goes goes to the players,
Speaker 1: and right now I think the players are taking eight
Speaker 1: percent of the take, and therefore even these big clubs
Speaker 1: are losing money, you know, given the transfer costs and
Speaker 1: given the cost of players. So I think part and
Speaker 1: parcel with it is is a you can't be relegated,
Speaker 1: and then having some cost controls in to ensure and
Speaker 1: you can make modicum of profitability. This is a different
Speaker 1: world from what I think a lot of people have seen.
Speaker 1: With so much monetary and fiscal stimulus in the United
Speaker 1: States but also in Europe and Japan. How does that
Speaker 1: affect the investment decision? How do you avoid overpriced assets?
Speaker 1: How do you find bargains in that world? Well, there's
Speaker 1: very few bargains in that world. Uh, we're kind of
Speaker 1: all time high multiples. As you know, the money supply
Speaker 1: increased over which one leads to inflation and uh and
Speaker 1: and the devastit is an all time might as well.
Speaker 1: So so that's the that's the the situation that there's
Speaker 1: a lot of money chasing a few deals, and that's
Speaker 1: been great for private equity because what you have to
Speaker 1: do in private equity is a be patient b You
Speaker 1: have to have a thesis when you buy a company
Speaker 1: on how you're going to improve it, make it larger,
Speaker 1: make it global, have new products, because at the end
Speaker 1: of the day, fundamentally people will pay for burrowing companies.
Speaker 1: So if you're gonna pay those high multiples, you have
Speaker 1: to have a plan that's going to justify that UM
Speaker 1: and UH and that's what we do at Bank Account
Speaker 1: But were formed, as you know, from a consulting firm,
Speaker 1: Well Banting and Company. And from day one we've been
Speaker 1: helping companies grow and and UH and prosper and as
Speaker 1: we have to keep doing. And we got perceived with
Speaker 1: caution not get carried away to pay be the last
Speaker 1: one to pay the hyble before the crash, but pay.
Speaker 1: You have to pay a fair multiple and then make
Speaker 1: those companies grow. You mentioned the money supply and inflation.
Speaker 1: There's something a debate going on between. On the one hand,
Speaker 1: I put might put j Pal on one side saying,
Speaker 1: don't really worry about inflation that much, given for a
Speaker 1: long time it's been deflationary disinflationary rather inflationary, and Larry
Speaker 1: Summers perhaps on the other side saying, wait a second,
Speaker 1: pumping this much money need economy, you're going to get
Speaker 1: more inflation than you think. Where do you come out
Speaker 1: on that, and how do you take that into account?
Speaker 1: If you do when you're looking at investments, Well, I'm
Speaker 1: with Larry Summers on that if you look at at
Speaker 1: all the data points in any country in the last
Speaker 1: hundred years, when the money supplies increased that level, you
Speaker 1: have gotten inflation percent at the time. Within a year
Speaker 1: or two after those kinds of massive and resist So
Speaker 1: I think there will be inflation. And so what you
Speaker 1: have to do is factor that into your investment decisions
Speaker 1: and uh and and figure out what companies will will
Speaker 1: will be able to get through an inflationary period. So
Speaker 1: companies that companies that can withstand that kind of inflation,
Speaker 1: you have to factor that in your models. In fact
Speaker 1: of that impression back, do you take into account the
Speaker 1: future strength or weakness of the dollar, because typically when
Speaker 1: you run record deficits trade deficit as well as budget deficity,
Speaker 1: you're gonna have a weaker currency. Do you anticipate that possibility?
Speaker 1: Do you take that into account in investing? I think
Speaker 1: you have to take that into account as well, especially
Speaker 1: if you're if you're on both sides of it. If
Speaker 1: you're if the dollar appreciates and you're in a highly
Speaker 1: export driven business USA business and exports all over the world,
Speaker 1: that's gonna be beneficial with you. UM. If you have
Speaker 1: raw materials and you have things that you're important to manufacture, UM,
Speaker 1: that's going to be not the infestially used. So I
Speaker 1: would suspect we're gonna have an inflationary environment of those
Speaker 1: things will have to be factored in all all of
Speaker 1: our investment decisions. Thanks to Steve Alucca of Bain Cap
Speaker 1: coming up investing in our Future. What would putting two
Speaker 1: point to five trillion dollars to work on infrastructure do
Speaker 1: for our economy and for US business? From Ralph Schlastein
Speaker 1: of Evercore. That's next on Wall Street Week on Bloomberg.
Speaker 1: This is Bloomberg Wall Street Week with David Weston from
Speaker 1: Bloomberg Radio. There was a lot more talking about infrastructure
Speaker 1: this week, including talk between the President and a bipartisan
Speaker 1: group of lawmakers about what's needed and about how to
Speaker 1: pay for it. Everyone seems to agree something needs to
Speaker 1: be done, but we don't always hear exactly what it
Speaker 1: would accomplish. So we asked someone who spent his career
Speaker 1: walking the halls of power in Washington, and then those
Speaker 1: of Wall Street Avercorp. Co Chairman and co CEO, Ralph Schlastein.
Speaker 1: I think the economy is in very very uh good
Speaker 1: shape poise to make a quite rapid recovery. And I believe,
Speaker 1: if anything, the ECONO to me is going to surprise
Speaker 1: on the upside because there's so much uh pent up
Speaker 1: demand to consume, so much uh build up of net
Speaker 1: worth uh and savings on personal balance sheets UH that
Speaker 1: if we're gonna if we're going to get a surprise,
Speaker 1: I believe it's on the upside. And I think if
Speaker 1: we're going to get a surprise and unemployment, I think
Speaker 1: it will be and how rapidly it declines. And I
Speaker 1: think if we get a surprise and earnings, it will
Speaker 1: also be on the upside. So I think one of
Speaker 1: the questions people have is people expect that sort of upswing.
Speaker 1: No question, is it going to be a sugar rish
Speaker 1: sugar high that we come down off of quickly? Or
Speaker 1: what do you think about the longer term prospects, not
Speaker 1: just for going into and beyond the challenge here is
Speaker 1: to get back to potential uh as rapidly as possible,
Speaker 1: but not on a path that causes you to overshoot
Speaker 1: and cause uh, you know, longer term and more sustained inflation.
Speaker 1: As you said in your opening remarks, Uh, the amount
Speaker 1: of fiscal and monetary stimulus that has been applied is
Speaker 1: absolutely unprecedented, and the rapidity with which it's been applied
Speaker 1: is also unprecedented. So we're a little bit in uncharted
Speaker 1: waders as to uh what happens after we get closer
Speaker 1: uh to uh, you know, potential growth. I will say
Speaker 1: that over the long term, we have to get more
Speaker 1: balance between revenues and expenditures in the government. Uh. You know.
Speaker 1: The pace at which debt is expanding is tolerable in
Speaker 1: a period of economic decline like we're like we've been
Speaker 1: in for the last year or so, but it's not
Speaker 1: sustainable over the longer term. One of the advantages I
Speaker 1: think of your job is you get to talk to
Speaker 1: c e O s all the time. Are they concerned
Speaker 1: about overshooting I think was the term you used. Are
Speaker 1: they are worried about running economy too hot? At this point,
Speaker 1: I'd say there's very little concern about that. Uh, CEOs
Speaker 1: are concerned about making sure they have uh sufficient uh
Speaker 1: trained and qualified workers. UH. They're concerned about their uh
Speaker 1: supply chains due to the rapidity of the recovery. But
Speaker 1: at this point, uh, you know, we're still so far
Speaker 1: away from uh you know capacity uh that that concern
Speaker 1: really doesn't exist today. And I will say also that
Speaker 1: the the logical concerned that one might have is that
Speaker 1: inflation UH is that's is sustained at a much higher
Speaker 1: level than we would like. And I do believe that
Speaker 1: uh you know, technology, including some of the advances that
Speaker 1: we've made uh as a result of COVID, does serve
Speaker 1: as a longer term depressant on inflation. So one of
Speaker 1: the things we're seeing proposed now by President Biden is
Speaker 1: a massive I think that's not an overstatement of proposal
Speaker 1: for what he calls infrastructure two point two five trillion dollars.
Speaker 1: We also now have Republican senators coming back and saying, well,
Speaker 1: we believe in infrastructure, but maybe institute of rather than
Speaker 1: two trillion. But whatever the number is, what is that
Speaker 1: likely to do the economy? It's going to provide uh
Speaker 1: longer term uh, not immediate uh stimulus, because as we
Speaker 1: all know. UH. The idea of quote unquote shovel ready
Speaker 1: projects for economic stimulus has been tried UH in many
Speaker 1: past recessions, UH and doesn't really work. Shove already never
Speaker 1: seems to be shove already. I think the proposition that
Speaker 1: we need to make uh multi hundred billion, perhaps trillion
Speaker 1: ish dollar investments in UH roads, bridges, broadband, all things
Speaker 1: that enhance productivity over the intermediates a longer term, I
Speaker 1: think there's broad based agreement on that UH, and I
Speaker 1: think there is still compromise or disagreement on the amount. UH.
Speaker 1: There's a there's certainly disagreement on what constitutes infrastructure, and
Speaker 1: there are certainly things in President Biden's proposal that uh,
Speaker 1: you know, expand the historical definition of infrastructure. And then
Speaker 1: of course there's the big question about how does this
Speaker 1: get financed? Thanks to Ralph last line ever Corps coming up.
Speaker 1: It's the second largest economy in the world, and if
Speaker 1: we thought China might be throwing its economic weight around,
Speaker 1: now we have the evidence from special contributor Larry Summers
Speaker 1: of Harvard and Anna Gaelpern of Georgetown University. That's next
Speaker 1: on Wall Street Week on Bloomberg. This is Bloomberg Wall
Speaker 1: Street Week with David Weston from Bloomberg Radio. China the
Speaker 1: number two economy in the world, gaining on the United States,
Speaker 1: and it is coming to exercise its economic power around
Speaker 1: the world, including through that One Belt one Road. Were's
Speaker 1: making a lot of sovereign loans all around the world.
Speaker 1: We don't know very much about them, but we now
Speaker 1: have a new insight into them, and that is because
Speaker 1: of professor Anna Gelpert. She is from Georgetown University and
Speaker 1: we welcome her now she's done a study and we're
Speaker 1: joined our special contributor Larry Summers, who really pointed out
Speaker 1: and to be so and it's a fascinating thing you did.
Speaker 1: You actually got your hands on some of these contracts
Speaker 1: because most of us never see what they are, the
Speaker 1: terms on which China is lending to some sovereigns around
Speaker 1: the world. What did you learn? The project is very
Speaker 1: much a collaboration. There are folks from AID Data William
Speaker 1: and Mary specialized in finding UM project documents about various
Speaker 1: bilateral deals with China and otherwise and UM they found
Speaker 1: a hundred pure accident, by the way, a hundred nice
Speaker 1: round number contracts between Chinese lenders primarily China x and
Speaker 1: Bank and China Development Bank and governments in developing countries,
Speaker 1: and it's both one belt, one road and you know
Speaker 1: large emerging markets in Latin America, Argentina, Ecuador among them.
Speaker 1: UM And the question was so UM Brad Parks at
Speaker 1: AID Data, Scott Morris at Center for Global Development, and
Speaker 1: Christoph Trebish and Sebastian Hornet Heel and i UM tried
Speaker 1: to figure out whether these Chinese contracts were normal, whether
Speaker 1: they were um UH roughly in line with other bilateral
Speaker 1: official contracts, with other commercial contracts, or whether in fact
Speaker 1: the story that you see in the papers about China
Speaker 1: taking over Sri Lanka courts and electricitys and wows is
Speaker 1: the right story. There's an enormous amount of kind of
Speaker 1: myth making and myth busting space, but not a whole
Speaker 1: lot of um facts. So what did you find? What
Speaker 1: was the myth? What was the reality? The myth was
Speaker 1: China lens against infrastructure. China takes over these facilities on
Speaker 1: the one hand, and the other myth is um. You know,
Speaker 1: China is a benevolent lender UM that helps development. Well,
Speaker 1: neither of those is really quite right, and these warring
Speaker 1: myths are sort of beside. At the point where we
Speaker 1: found was terms that are more aggressive, more muscular than
Speaker 1: other bilateral official contracts UM, and more muscular than most
Speaker 1: commercial contracts. But the difference we found was really a
Speaker 1: difference of degree. So China is much more likely to
Speaker 1: use revenue accounts so to control cash for example UM
Speaker 1: in a bank account, as addtional security beyond sovereign credit
Speaker 1: than other lenders. China is much more likely to use.
Speaker 1: Chinese lenders much more likely to use very expansive confidentiality
Speaker 1: clauses UM. Again, others use them, but not nearly as often.
Speaker 1: We see a lot more linkages between the loan contracts
Speaker 1: and other projects by the same Chinese lender or other
Speaker 1: Chinese lenders of Chinese enterprises in the borrowing country UM
Speaker 1: so across default linkages UM. And then there's one clause
Speaker 1: that we found that is truly unique, and that is
Speaker 1: a promise not to restructure the debt in the Paris
Speaker 1: Club of government to government creditors or otherwise in these
Speaker 1: coordinated structuring. So Larry R. Goes to you actually, as
Speaker 1: former Treasury secretary, you know the Paris Club well, that's
Speaker 1: been historically sort of ad hoc way we work it
Speaker 1: out when people can't pay their debts. Did it come
Speaker 1: as a surprise to you that the exclude these debt
Speaker 1: agreements from the Paris Club. I've learned not to be
Speaker 1: surprised too often. I think Anna has done hugely important
Speaker 1: research that moves us beyond ideology to some practicalities. And
Speaker 1: I think those practicalities are that it's wrong when people
Speaker 1: go on go into strong rhetoric about debt trapped diplomacy.
Speaker 1: But at the same time, China isn't completely play and
Speaker 1: fair vise a the other creditors and writing clauses into
Speaker 1: its contract that says that we won't participate in the
Speaker 1: global multigatural rescheduling processes isn't really fair. And you can't
Speaker 1: have a system where people right go to people who
Speaker 1: are desperate for money and get them to agree to
Speaker 1: contracts that one particular category of debt can't ever be restructured.
Speaker 1: So I think we're gonna be in a much more
Speaker 1: fruitful position to have international dialogue on these matters because
Speaker 1: of uh the research that Anna and her many colleagues
Speaker 1: and her many colleagues have done. But look this is
Speaker 1: a big deal. We've got more flow of credit across
Speaker 1: international borders than at almost any point in history. You
Speaker 1: look at the amount of debt that's carrying junk bond spreads,
Speaker 1: and that's telling you that people think that not always
Speaker 1: that debt's gonna get repaid, and sometimes it's gonna have
Speaker 1: to be restructured. And the right time to think about
Speaker 1: the restructuring of debt is not when we're an extremist,
Speaker 1: but in advance. And so I think it's gonna need
Speaker 1: to be a lot of soul searching in the international
Speaker 1: community around these debt issues. And you know, I think
Speaker 1: that it's gonna take it's gonna take time. I think
Speaker 1: one of the important conclusions of Anna's research is that
Speaker 1: none of us have a monopoly on virtue, and that
Speaker 1: some of the practices that people thought of as problematic
Speaker 1: Chinese practices are also problematic European practices, and maybe even
Speaker 1: problematic in some cases American UH practices. And so we
Speaker 1: just need to work through a system that can work
Speaker 1: for everybody. Oh and let's pick upbout what Larry just said. UH,
Speaker 1: And you are an expert on sovereign debt, not just Chinese,
Speaker 1: but in general sovereign debt. It doesn't make sense to
Speaker 1: ask the question, how many of these provisions muscular you
Speaker 1: call them provisions are to protect China as a lender
Speaker 1: as opposed to advance China China policies, or is it
Speaker 1: inherent in any sovereign debt and in fact the sovereign
Speaker 1: doing the lending is going to try to have their
Speaker 1: will in things other than just getting repaid. So that's
Speaker 1: a fabulous question data because I think that we spend
Speaker 1: way much time haggling over these boundaries between official and
Speaker 1: commercial lending, whereas in fact, I think the assumption has
Speaker 1: got to be and what we see is it's all
Speaker 1: mixed motive and the motives shift over time. What we
Speaker 1: see in the contracts is the leverage that the lender
Speaker 1: has to pursue their goals. And we saw this in
Speaker 1: Russia Ukraine, mind you right where the Russian sovereign left
Speaker 1: fund sued Ukraine for three billion dollars in London. Was
Speaker 1: that a commercial transaction or was that part of a
Speaker 1: broader strategy in some sense? Commercial official is is not
Speaker 1: a fruitful question to ask. The question is what are
Speaker 1: the objectives of the slender, what tools does the slender
Speaker 1: have and what bargaining power does the borrower have. I mean,
Speaker 1: borrowers have agency, and I think that it's um important
Speaker 1: for us to make sure that a um countries know
Speaker 1: what they're getting into and that there is some sort
Speaker 1: of a set of norms and in particular surrounding disclosure.
Speaker 1: I musta say, the one thing that I learned from
Speaker 1: this project is I really want to see the contract.
Speaker 1: There are set of special features about sovereign debt and
Speaker 1: policy and all that, but some of this comes back
Speaker 1: to something that in a way is even uh simpler.
Speaker 1: If I'm borrowing to buy a car, I want two things.
Speaker 1: I want as low and interest right as possible, and
Speaker 1: I also want, in the event that I don't pay
Speaker 1: the car back pay the debt back, it to be
Speaker 1: as hard for the lender to repossess the car as possible.
Speaker 1: And there's some trade off between those two things. If
Speaker 1: it's gonna be really hard to repossess the car, the
Speaker 1: lender is gonna demand a higher rate, And so you
Speaker 1: have to think about it both at the beginning in
Speaker 1: terms of the desire to have lower rates, and part
Speaker 1: way through in the event that thing that things go wrong,
Speaker 1: and that's really the subtlety uh in this subject. Okay,
Speaker 1: thank you so very much the Professor Anna Gaelpern of
Speaker 1: Georgetown Law and of course Wall Street Weeks special contributed
Speaker 1: Larry Summers of Harvard University. Finally, one more thought. Can
Speaker 1: zoom be hazardous to your health? Working from home? A
Speaker 1: year ago most of us didn't really think much about it.
Speaker 1: But thirteen months ago we all packed up our things
Speaker 1: and we left the office and we went off to
Speaker 1: work from our homes, never thinking that it might last
Speaker 1: for over a year. So now we've spent a year
Speaker 1: figuring it all out, the tech, the kids learning from home,
Speaker 1: finding someplace to do our work, and oh yes, learning
Speaker 1: how to use Zoom or Skype or whatever. At first
Speaker 1: it was a rush how much we could get accomplished.
Speaker 1: But now it's starting to dawn on us that there's
Speaker 1: another side of this working from home business. Sure, it's
Speaker 1: convenient to walk down the hall around the corner, but
Speaker 1: it's equally convenient for everyone else to reach out and
Speaker 1: get us any time of day or night. And that includes,
Speaker 1: goodness knows, on the weekends, which takes us to that
Speaker 1: health issue and the HSBC program manager working from home
Speaker 1: who on a Sunday afternoon felt tightness in his chest
Speaker 1: and some difficulty breathing. Yes, he was having a heart attack,
Speaker 1: and as Johnny Frostick laid out in a LinkedIn post
Speaker 1: that's been liked over two hundred thousand times, his first
Speaker 1: thoughts weren't about himself or about his family. He told
Speaker 1: Bloomberg News he was worried about missing a meeting with
Speaker 1: his manager coming up the next day. In his words,
Speaker 1: this isn't convenient. Let's be clear, we all had the
Speaker 1: ability to work too much without the help of Zoom,
Speaker 1: and Mr Frostick is the first to admit he needs
Speaker 1: to lose a bit of weight. But as we go
Speaker 1: forward into this new world, maybe we should think about
Speaker 1: whether it may be a bit too easy to work
Speaker 1: anytime and anywhere. When Mr Frostick listed his new priorities
Speaker 1: in his LinkedIn post, the first was I'm not spending
Speaker 1: all day on Zoom anymore. Sound like someone you know
Speaker 1: that does it. For this episode of Wall Street Week,
Speaker 1: I'm David Weston. This is Bloomberg. See you next week.