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

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

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

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

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Speaker 1: anywhere you get your podcasts, and always on Bloomberg dot com,

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Speaker 1: the Bloomberg Terminal and the Bloomberg Business app. If you

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Speaker 1: are part of Global Wall Street, this is the point

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Speaker 1: where you stop on radio, on television and you listen.

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Speaker 1: In this banking crisis, you need somebody that is so

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Speaker 1: knowledgeable on it. And at Middlebury College a few years

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Speaker 1: ago study back the ten banking crisis, back to Jackson.

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Speaker 1: That would be Thomas Machow. Thomas showed is CEO of

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Speaker 1: kbwor thrilled he could join us this morning here within

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Speaker 1: the crisis perspective as well. How's a week then, what's

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Speaker 1: the biggest sweat this week for you on a day

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Speaker 1: to day grank? Well, first of all, it's been NonStop.

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Speaker 1: You know, you really can have markets work and economy work.

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Speaker 1: At the banking system's not working, and it's really it's

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Speaker 1: a step beyond that because it creates a lack of confidence.

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Speaker 1: You mentioned earlier about a history of bank panics. You

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Speaker 1: can argue whether it was eight, nine or ten, but

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Speaker 1: let's say roughly ten bank panics in the history of

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Speaker 1: the United States. It's not it is. Look, banks made mistakes.

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Speaker 1: We just had the second and third largest bank failure

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Speaker 1: in American history. But the banking industry is built on confidence,

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Speaker 1: and when confidence is shaken, it could absolutely impact the

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Speaker 1: whole economy. Eighteen thirty one National Bank of Middlebury, perfect

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Speaker 1: example of a small bank going, wait, they're gonna come

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Speaker 1: in here, cash out and give it to James Diamond

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Speaker 1: explain to us the dynamic right now of the National

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Speaker 1: Banks of Middlebury out there, scared stiff of those top five. Well,

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Speaker 1: first of all, so it's not only National Bank of Middlebury,

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Speaker 1: which actually is a bank that you mentioned specifically, but

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Speaker 1: it's but the big banks lead the global banking system.

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Speaker 1: This is an industry where the American big banks lead

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Speaker 1: the global financial system. That's number one. But it's really

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Speaker 1: the midsize banks that I think we want need to

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Speaker 1: talk about. And if let's just say for around numbers,

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Speaker 1: the big banks today have sixty percent of the deposits

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Speaker 1: in America. There is they do not make sixty percent

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Speaker 1: of the loans to Middle America and small America. So

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Speaker 1: if the deposits are going to the big banks but

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Speaker 1: they're not the ones making the loans to middle and

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Speaker 1: small America, it's going to have an impact on the economy.

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Speaker 1: And I think long term down the road, we're not

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Speaker 1: going to be in a good place. But the last

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Speaker 1: thing is you would say, why is that happening, Tom,

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Speaker 1: because there's this implicit guarantee that banks can be too

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Speaker 1: big to fail. We just saw it with Credit Suiee.

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Speaker 1: There was really no worry that counterparties or credit suite

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Speaker 1: weren't going to be made whole. And if that is

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Speaker 1: the sense of the land, it's going to drive business

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Speaker 1: away from these midsized banks, and I think is going

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Speaker 1: to have a detrimental effect on the economy. So why

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Speaker 1: haven't the steps that the FDIC, that the Federal Reserve,

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Speaker 1: that the Treasure Department already have taken to basically de

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Speaker 1: facto ensure all deposits for most midsized banks been enough

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Speaker 1: to really garner that support that they're backstop two. We

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Speaker 1: got close, Lisa, but we didn't go the distance. So

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Speaker 1: Secretary yelling when she spoke still left the door open

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Speaker 1: between implicit and explicit. And look, if you saw what

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Speaker 1: the first reaction was at the FDIC with Silicon Valley,

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Speaker 1: it was to give certificates, not deposits, money back. So

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Speaker 1: I think that actually accelerated the outflows of banks on

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Speaker 1: that Friday, and I think what we need is orderliness.

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Speaker 1: My preference would be the administration came out right now

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Speaker 1: and said we're going to use our authorities and we're

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Speaker 1: going to say that any bank that fails of any

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Speaker 1: size the next year, we're going to guarantee the deposits

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Speaker 1: while we figure this out. I think it would be

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Speaker 1: very good for the economy. Putting long standing solutions aside

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Speaker 1: for a minute. You talked about how a lot of

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Speaker 1: these smaller banks punch above their weight when it comes

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Speaker 1: to lending. How much have you actually heard of tightening

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Speaker 1: of lending standards, of actually retracing some of the loans

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Speaker 1: that some of these regional banks have been making. It's

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Speaker 1: going to be the story of the second half of

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Speaker 1: twenty twenty three that that is happening. It was happening

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Speaker 1: before we had the recent bank run. It was happening

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Speaker 1: before that, and I'll tell you that story. As soon

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Speaker 1: as COVID started, the first thing that happened over twenty

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Speaker 1: four months was about five trillion dollars of deposits came

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Speaker 1: into the banking system. We had thirteen trillion go to eighteen.

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Speaker 1: Never in my career has I seen the deposit system

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Speaker 1: grow that quickly. That was the COVID relief and the

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Speaker 1: stimulus coming into the system. It's now being drained as

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Speaker 1: a purposeful part of our policy. So we are probably,

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Speaker 1: according to our number, still ten percent too high in

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Speaker 1: terms of surge COVID deposits. So the industry sort of

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Speaker 1: fighting two competitive elements. Number one is FDIC deposits are

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Speaker 1: shrinking as a part of government policy. That's going to

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Speaker 1: be a tightening effect in the economy. And then number two,

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Speaker 1: we have this confidence which is a little bit shaken,

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Speaker 1: which by the way, it's gotten better. I want to

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Speaker 1: make sure it's gotten better, but it is still shaken

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Speaker 1: and that is driving deposit flows. Two, so it's really

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Speaker 1: turmoil in the economy, which is going to slow the economy.

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Speaker 1: Keep talking, you're lifting the two year yield. I got

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Speaker 1: bad news time I showed for you, You're not the

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Speaker 1: most important person at Keif Brietton Woods. Jade Romany is

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Speaker 1: right now when you look at commercial real estate and

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Speaker 1: his work in mortgages and your security analysts, what you

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Speaker 1: guys are known for for decades At KBW, Jade Romany

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Speaker 1: is the guy on what's going to happen with commercial

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Speaker 1: real estate? What's he telling you when you call him?

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Speaker 1: So about a month ago we came out with this

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Speaker 1: call because the other thing is this banking issue is

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Speaker 1: not just the banking. It's not specific just the banks.

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Speaker 1: What we're dealing with is when interest rates go up

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Speaker 1: this fast, there are implications and there will be other implications.

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Speaker 1: So we wrote a report about a month ago that

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Speaker 1: Jade Lee led the author Good Memory Tom, and he said, basically,

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Speaker 1: he thinks there's thirty percent downside in office buildings in

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Speaker 1: major markets around the country, with about half of that

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Speaker 1: due to the cap rates, and about half of it

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Speaker 1: do just the factors of other factors around occupancy and inflation.

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Speaker 1: You're already seeing it. This is a more slow motion event.

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Speaker 1: It's going to take two years to play out. But

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Speaker 1: that's the next. That's the next. What's it means for

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Speaker 1: Global Wall Street. What's it mean? I'm selfish here. What's

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Speaker 1: it mean for the people in Manhattan, including Bramo, And

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Speaker 1: what's it mean critically for our viewers and listeners. If

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Speaker 1: we're going to see a thirty percent negative. I just

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Speaker 1: think it's gonna I think it's going to impact economic growth,

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Speaker 1: and I think it'll just mean that we're not going

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Speaker 1: to have a in my opinion, I think that will

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Speaker 1: be a headwind for economic growth as all the industries

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Speaker 1: adjust around that, and it is going to cause banks

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Speaker 1: to tighten their lending criteria, which in and of itself

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Speaker 1: is a big form of at least you just see

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Speaker 1: this in car loans right now. I mean, I'm reading

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Speaker 1: about it percolating and you can't go out, you know,

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Speaker 1: there's a general statement you can't go out in an

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Speaker 1: auto loan nut because they're tightening up. Yeah, and I

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Speaker 1: think there was something like the lending that a lot

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Speaker 1: of them have been rejected Tom But but don't remember too.

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Speaker 1: We just came through a period where zero interest rates

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Speaker 1: was the rocket fuel for shadow banking. So and now

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Speaker 1: we're we're gonna dial that back somewhat too, in my opinion,

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Speaker 1: which will be will be an effect for slower growth.

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Speaker 1: There's a confluence of a lot of different factors here,

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Speaker 1: and teasing out all of the different interconnected pieces can

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Speaker 1: be tough. I want to go back to something that

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Speaker 1: you said that we're still about ten percent elevated when

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Speaker 1: it comes to the deposits. The cash sort of a

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Speaker 1: wash in the banking system, and you talked about how

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Speaker 1: that's going to get withdrawn and that that's going to

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Speaker 1: have a sort of accelerating tightening feature to the economy.

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Speaker 1: Is that deposit base going to disproportionately leave those regional banks?

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Speaker 1: In other words, it might be ten percent of overall deposits,

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Speaker 1: but a much greater portion of just the specific smaller

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Speaker 1: and mid sized banks. Given the consolidation of deposits in

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Speaker 1: some of the big vehemence, it actually was going to

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Speaker 1: leave the bigger banks more because they're bigger. So, for example,

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Speaker 1: our estimate is roughly sixty billion dollars I think we

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Speaker 1: were going to see come out of JP Morgan this quarter,

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Speaker 1: and now it'll be less because of this remixing. But

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Speaker 1: even Jamie Diamond's been in his calls talking about the

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Speaker 1: fact that he saw hundreds of billions of dollars of

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Speaker 1: shrinkage in his deposits. But I don't want to alarm

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Speaker 1: anybody by that because the industry has been planning for

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Speaker 1: that and knew that that was going to happen. And

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Speaker 1: remember when we talk about it, what is that, Well,

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Speaker 1: that's the FED shrinking the money supply. It's also depositors

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Speaker 1: buying Treasury bonds because they yield more rather than bank deposits.

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Speaker 1: That's cash sorting. So I think it's navigable, but if

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Speaker 1: we put a crisis around it, it just makes it trickier,

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Speaker 1: given the likely increase in it flows out of some

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Speaker 1: of these deposits, given commercial real estate and the stress there,

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Speaker 1: given the shadow banking system and potential fractures that people

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Speaker 1: are expecting there. Do you think that this banking crisis

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Speaker 1: is over? I think every day that goes by, we're

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Speaker 1: getting more stability. I think Washington wants it to stop.

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Speaker 1: I think, barring any other major shocks, I think it's

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Speaker 1: behind us and that we can now deal with some

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Speaker 1: of the more challenged institutions. But also too, if we

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Speaker 1: had more time and I laid out the statistics of

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Speaker 1: Silicon Valley, it was off the charts on a couple

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Speaker 1: of risk measures. I mean off the charts. And remember

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Speaker 1: we have forty seven hundred banks in the United States.

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Speaker 1: Two of them have failed spectacularly and quite large, so

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Speaker 1: we're not underestimating the impact. Ways to go here, I

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Speaker 1: got time for one question. Somebody emails in here and

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Speaker 1: one hundred to play at Middlebury years ago when Wendell

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Speaker 1: Forbes was coaching. When in God's name is Middlebury going

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Speaker 1: D one hockey? They were born to play D one

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Speaker 1: ecac hockey? When does this happen? You're in charge. Middlebury

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Speaker 1: is good and I gotta tell you now, baseball's made

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Speaker 1: a run at Middlebury. But when I played baseball, we

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Speaker 1: got our fans when they walked past the field to

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Speaker 1: go watch lacrosse. But now get all the visibility. When

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Speaker 1: do you guys go D one high? It was made

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Speaker 1: to happen. I would support that We've got a great

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Speaker 1: there we go. That's the news we need to have today,

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Speaker 1: Thomas show to Middlebury or the support uproot seven And

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Speaker 1: of course a small matter at KBW definitive. I'm banking

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Speaker 1: research stumbling through a Wednesday. Edward als sin He joins

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Speaker 1: us right now. Senior interest rate strategist of Columbia thread.

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Speaker 1: You know, I'm really being in the news with a

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Speaker 1: nice write up. I believe in the ft recently, and

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Speaker 1: I'm going to cut to the chase, and you nail

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Speaker 1: this working in international economics at Harvard years ago. So

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Speaker 1: much about these moments, in these crises is fear of

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Speaker 1: making a mistake that invades monetary policy, including Martin Wolfe's

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Speaker 1: wonderful essay today, what are we afraid of making? Is

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Speaker 1: a mistake in our new central bank policy? Yeah, it's

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Speaker 1: difficult as you're balancing three different elements. You don't know

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Speaker 1: what's going on with inflation, you know, not quickly monitoring

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Speaker 1: policies filtering into the real economy. And now I don't

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Speaker 1: know what's happening with the banking sector and the extent

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Speaker 1: to which that's going to affect growth in inflation down

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Speaker 1: the line, and you have to prioritize these unknowns. Inevitably,

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Speaker 1: in my mind, defense going to prioritize inflation. If they

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Speaker 1: prioritize inflation, we've got to dual mandate. Maybe we have

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Speaker 1: a triple mandate. To Steve Roach invented talking about financial stability,

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Speaker 1: Can financial stability way in on a May third FED

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Speaker 1: meeting debate very unlikely in my mind. They've done really

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Speaker 1: good job of separating the two, at least on paper.

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Speaker 1: In practice, more than anything, they've been looking in the

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Speaker 1: sense that this particular banking crisis hasn't spiraled, particularly hasn't

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Speaker 1: spiraled into credit markets. So I think they can take

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Speaker 1: comfort in the fact that the liquidity facilities they put in,

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Speaker 1: what the FDIC is down, that's rig fence some of

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Speaker 1: the issues at least at this point. And again, one

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Speaker 1: they get to the May meeting, it's more likely than

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Speaker 1: not that the lab we focus on inflation once again,

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Speaker 1: Does it make sense to you that we've priced in

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Speaker 1: at one point almost a hundred basis points of rate

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Speaker 1: cuts by early next year. We've retraced that a little bit,

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Speaker 1: but not that much. It's been very violent, it's very

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Speaker 1: it's been exceptionally violent. Right, So we went from you know,

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Speaker 1: a peak grade of five to seven and the FED

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Speaker 1: on hold in the second half of the year just

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Speaker 1: three weeks ago to now defend entering and aggressive easing

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Speaker 1: cycle in the second half. Um, you know which scenario

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Speaker 1: is most appropriate to the data. I would say something

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Speaker 1: that's closer to a whole. But but now that you

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Speaker 1: know the banking system genies out of the bottle, it's

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Speaker 1: it's exceptionally difficult to price out an easing cycle in

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Speaker 1: a recession of being brought forward. And that's that's what

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Speaker 1: markets are really struggling with. So here's the dissonance risk

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Speaker 1: ass it's a rallying perhaps because you're seeing perhaps a

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Speaker 1: slower pace of rate hikes or rate cuts. Does this

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Speaker 1: make sense if the only way that we get that

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Speaker 1: is with the pain that comes with some sort of

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Speaker 1: either crisis or massive credit tightening. Yeah, it's been interesting,

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Speaker 1: you know, risk again to some extent as reflecting two

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Speaker 1: things in my mind. One, the underlying strength of the

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Speaker 1: economy and the underlying strength of corporate balance sheets is

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Speaker 1: still with us. That's something we entered the year with.

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Speaker 1: We've we've talked to that, you know at length. Um

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Speaker 1: has been actually been one of the frustrations for the FED.

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Speaker 1: The other thing is interest rate politility, which exploded in

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Speaker 1: the course of the asked a couple of weeks, is

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Speaker 1: starting to cool down, particularly in the longer part of

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Speaker 1: the curves. That's a positive backdrop tos gassets. We see

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Speaker 1: let's say an investment grade markets. Markets starting starting to

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Speaker 1: open up, not quite so primary markets in high yield.

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Speaker 1: So it's a different degree of tension that's priced across

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Speaker 1: risk and rates at this point, I would expect those

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Speaker 1: two stories to connect in the coming months. If the

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Speaker 1: Fed does cut rates, as the markets pricing in, do

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Speaker 1: you start to get less constructive on ten year treasuries,

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Speaker 1: which you have been perhaps overweight. We like them, I mean,

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Speaker 1: look at the fat cuts. One of the things that

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Speaker 1: the last couple of weeks as illustrated to us is

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Speaker 1: that treasuries once again play a very very effective role

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Speaker 1: as a buffer against risk. That negative colation between rates

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Speaker 1: and risk returned in the course of the past three

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Speaker 1: weeks as people sought a hate to safe avid acid

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Speaker 1: in the face of heightened possessions. That's fantastic. So if

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Speaker 1: the Fed's cutting, they are seeing something on the horizon

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Speaker 1: that's disinflationary, that's bringing down inflation, that's potentially bringing down roth.

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Speaker 1: That's a really good story for treasuries. We can argue

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Speaker 1: about where you want to be overcurved in that kind

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Speaker 1: of environment, where you want to be long duration and

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Speaker 1: long interest rate risk in that environment. H ed great

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Speaker 1: to catch up as always and our Sonny there of

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Speaker 1: Columbia Threadnadol ed, thank you. Let's get to Jeff, you

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Speaker 1: senior market is trying to just at bmy melon. Jeff,

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Speaker 1: I think reflecting gone yesterday and thanks for being with

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Speaker 1: It's Jeff reflected on yesterday, just trying to work out

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Speaker 1: whether we have a regulatory problem or an enforcement problem.

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Speaker 1: Which one is it? Well, I think the regulators, politicians,

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Speaker 1: all of them, they are going to be looking at

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Speaker 1: this and globally. You know, Tom, you mentioned after each

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Speaker 1: events over the last few decades. You know they do.

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Speaker 1: You know, they do have the discussion at least now.

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Speaker 1: I'll just point you to what Sam would you ahead

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Speaker 1: of the PIRA said yesterday, already calling for a tightening

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Speaker 1: of liquidity rules, so liquidity coverage ratios to make sure

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Speaker 1: that all banks you have enough cash. Right So, I

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Speaker 1: think it is going to be a bit of a both,

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Speaker 1: you know, looking at in the global situation, but crucially

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Speaker 1: for central banks right now, they also really want to

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Speaker 1: steer the discussion away from the impact of monetary policy

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Speaker 1: as well financi stability, priceability, they are separate. There's if

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Speaker 1: you your London school of economics. This warning in magdal

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Speaker 1: lords Lord desided down with a piece of chart in

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Speaker 1: his hand and he's lecturing on the general equilibrium of

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Speaker 1: the system. Are we super restrictive right now in our

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Speaker 1: general equilibrium? Are we at a point of over restriction? Well,

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Speaker 1: you know, as part of a dynamic process. It really

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Speaker 1: depends on where your starting point is. Right. I think

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Speaker 1: all of them would agree with that. But the problem

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Speaker 1: is you only find out you are too restrictive, you know,

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Speaker 1: after the fact. But based on all of the communication

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Speaker 1: we've had in global central banks, and everyone's taking a

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Speaker 1: leak out of Madam the guards, but right now they're

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Speaker 1: still comfortable hiking rates, inflation, managing priceability. That has to

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Speaker 1: remain a priority. And as long as that's the messaging

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Speaker 1: and looking forward to hearing from that lineup. As you mentioned,

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Speaker 1: I don't think we are in fully restrictive territory. Yet.

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Speaker 1: You look at credit spreads, you know, you look at

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Speaker 1: where the dollar is. I think policymakers will say they

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Speaker 1: can do more. When will we start to see, Jeff,

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Speaker 1: the effects of potential credit tightening from some of these

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Speaker 1: regional banks. When will we get that data? Well, I

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Speaker 1: think the data we really have to monitor the twofold.

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Speaker 1: No one is just basically the credit data is loan demand,

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Speaker 1: loan growth, and loan officer surveys. Are they picking up?

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Speaker 1: Are they showing a clear material sign of things been

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Speaker 1: coming off? But at the same time, then the realized data,

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Speaker 1: the hard data, our mortgages, are they starting to come

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Speaker 1: off in mortgage approvals, things like that globally that that

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Speaker 1: will take time. There is a lad process, as Governor

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Speaker 1: Baby has highlighted. But let's be clear, the events over

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Speaker 1: the last few weeks has been an equivalent too tightening

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Speaker 1: or be different in different jurisdictions, but this certainly has

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Speaker 1: slow the overall process of rate heights. Are you sympathetic, Jeff,

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Speaker 1: to the stack balls who are saying, if you look

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Speaker 1: around right now, still look good and if the FED

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Speaker 1: cuts rates, that will make things only look better. So

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Speaker 1: perhaps you can worry, but you're just worrying in a

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Speaker 1: sort of vacuum of information. Yes, I am sympathetic to

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Speaker 1: risk on, but nothing to do with the FED. If anything,

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Speaker 1: I think the FED and global central banks, so they

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Speaker 1: will keep rates higher for longer, not super high as

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Speaker 1: we've feared in the past, but they will be higher

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Speaker 1: for longer. The reason we can be positive on risk

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Speaker 1: data aside cash on the sidelines, there's just so much

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Speaker 1: sitting there. Looking at our investor flows, and we've put

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Speaker 1: out a report on this recently, there's no conviction people

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Speaker 1: at almost like limit underweight risk assets. And it's quarter

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Speaker 1: end rebalancing month and rebalancing we've had another adjustment lower.

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Speaker 1: People are underweight risk relatives to benchmark. We're seeing that

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Speaker 1: in our data, and that in itself is a tactical

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Speaker 1: reason to see risk on across all astic pasts. So

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Speaker 1: I think the NASTAC has had one of the best

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Speaker 1: quarters going back to twenty twenty. Jeff. Now this quarter

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Speaker 1: has still got a couple of days to go. But

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Speaker 1: based on what you just said, Jeff, where's your favorite

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Speaker 1: place to take risk at the moment? Well, right now,

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Speaker 1: I think well within FX. You know, we are looking

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Speaker 1: at emerging markets. You know, this is the area which

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Speaker 1: is heavily sold last year. I look at our month

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Speaker 1: tend to be a balancing Nobles. You know, we're looking

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Speaker 1: at being positive on the Mexican pay so you know,

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Speaker 1: for example, we're seeing buying in Eastern European sovereign debt

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Speaker 1: and that's where you get good nominal yield, maybe good

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Speaker 1: real yield up ahead inflation in Europe's slows as well.

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Speaker 1: So really I would favor EM. But if you look

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Speaker 1: at the n data too, and tech for example, you

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Speaker 1: can see that they're probably quite aligned right now. And

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Speaker 1: that's why we are seeing risk radio across the board.

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Speaker 1: For let's be clear, this is less of a fundamental story,

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Speaker 1: more of an aff allocation story. Hey, Jeff Aha, thank

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Speaker 1: you for that, sir, Jeff you there, I we and

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Speaker 1: wind Mellon right now, the balance of power shifts to privadens.

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Speaker 1: Rude Island, Wendy Schill are absolutely definitive at Brown University

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Speaker 1: and American history. Wendy, when you watch these hearings in

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Speaker 1: the baille and the political pasturing, how close are wed

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Speaker 1: to the debate at Andrew Jackson Learning the ninete century.

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Speaker 1: We've been doing this, not for decades, We've been doing

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Speaker 1: this for centuries. This distrust of fancy people on Wall Street. Yeah, Tom,

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Speaker 1: we can go back to Thomas Jefferson and Alexander Hamilton, right.

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Speaker 1: I mean there are big fights really centered around the

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Speaker 1: role of private industry, private economy. How much should the

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Speaker 1: government subsidize incurred debt, backstop debt. This is all Alexander

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Speaker 1: Hamilton versus Thomas Jefferson at the very beginning, and in

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Speaker 1: the end Alexander hamiltons one and Jefferson lost in the

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Speaker 1: sense that we did have a centralization of financial power

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Speaker 1: and we do have governments of debt as we've seen

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Speaker 1: a bad mistakes, justa and you know, Ron Wine, Senator

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Speaker 1: Winden's you know, it's not an accident. This is coming

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Speaker 1: out today because the Democrats really need to show that

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Speaker 1: in other realms they're going after rich people, they're going

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Speaker 1: after bank let's mess up, right, So this is not

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Speaker 1: an accident. This is coming out today, as I just said,

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Speaker 1: because the Democrats are really are in trouble here in

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Speaker 1: some ways, right, and many Democrats are more than a

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Speaker 1: few voted with the deregulation or the loosening of regulations

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Speaker 1: in twenty eighteen and the Trump administration for banks like SVB,

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Speaker 1: and you know, this is a problem for them. They

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Speaker 1: can go after, you know, somewhat the banks. But on

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Speaker 1: the other hand, they allowed them, you know, they participated

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Speaker 1: in the deregulation and so now that and they're now

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Speaker 1: that has to clean it up. It's clearly documented the

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Speaker 1: Swiss people are livid over the Swiss failures in banking.

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Speaker 1: Here bring it to the present. Are the American people

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Speaker 1: engaged not so much in these hearings, but in the

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Speaker 1: debate about our collapse financial systems center around to collapse banks. Well,

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Speaker 1: I think the American people, you know, are starting to

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Speaker 1: think the government just doesn't work on any dimension we've

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Speaker 1: seen sort of. They can't keep us safe, they can't

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Speaker 1: keep our money safe. We just went through this. And

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Speaker 1: when I say we, you know, there are the vast

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Speaker 1: majority of Americans remember the Great Recession and the banking

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Speaker 1: crisis is not that long ago. So this just compounds

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Speaker 1: the sort of distrust and lack of faith in the

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Speaker 1: federal government. And if you are a party that believes

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Speaker 1: in government, like the Democrats, that's a real political problem

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Speaker 1: for you when you are in charge. Yesterday, there was

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Speaker 1: a lot of finger pointing at the Federal Reserve and

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Speaker 1: their lack of really enforcing some of what they saw

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Speaker 1: at Silicon Valley Bank, at least in the US side

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Speaker 1: of things. What is the policy implication of some of

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Speaker 1: that finger pointing. Well, least that's a fantastic point because

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Speaker 1: we have on some quasi private massive bank right overseeing

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Speaker 1: other banks. It's not a really adal system for enforcement

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Speaker 1: of regulation. And you know, Elizabeth Warren will call for

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Speaker 1: the Federal Reserve to do something, or the executive branch,

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Speaker 1: but the end of the day, Congress has to redo

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Speaker 1: or pass another law, and then regulations have to be issued.

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Speaker 1: And we all know regulations can be influenced by lobbying

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Speaker 1: or court cases. So it's a long road to actually

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Speaker 1: beefing up enforcement. In the end of the day. The

428
00:22:55,320 --> 00:22:58,640
Speaker 1: simple picture is that the federal government did not properly

429
00:22:58,720 --> 00:23:01,920
Speaker 1: oversee what DOES Bank was doing and didn't stop them

430
00:23:02,000 --> 00:23:04,480
Speaker 1: before it was too late. Let's say that they do

431
00:23:04,600 --> 00:23:08,119
Speaker 1: successfully shunt the blame over to the Federal Reserve as

432
00:23:08,160 --> 00:23:10,680
Speaker 1: they're trying to do, and basically the lack of oversight

433
00:23:10,800 --> 00:23:13,880
Speaker 1: there this is my question. Then what does this basically

434
00:23:14,040 --> 00:23:16,320
Speaker 1: remove some of the independence of the Federal Reserve. Does

435
00:23:16,359 --> 00:23:19,399
Speaker 1: this call for some sort of increased scrutiny or increased muscle,

436
00:23:19,560 --> 00:23:22,760
Speaker 1: I mean, what is the natural step with respect to

437
00:23:22,840 --> 00:23:25,880
Speaker 1: some of that criticism. Well, at least this is where

438
00:23:25,880 --> 00:23:28,080
Speaker 1: you have to go to the power of the banking

439
00:23:28,119 --> 00:23:32,000
Speaker 1: and investment industry. Particularly in terms of campaign contributions and lobbying,

440
00:23:32,640 --> 00:23:35,960
Speaker 1: very powerful forces and voices, and say, listen, don't blame

441
00:23:36,080 --> 00:23:39,600
Speaker 1: us for you know, the laziness or the carelessness or

442
00:23:39,680 --> 00:23:42,879
Speaker 1: the greed of one bank or two banks. You know,

443
00:23:43,080 --> 00:23:45,040
Speaker 1: the rest of us, especially the big banks, we do

444
00:23:45,119 --> 00:23:47,800
Speaker 1: what we're supposed to do. So I think what the

445
00:23:47,840 --> 00:23:50,600
Speaker 1: American public might yeer towards this sort of giving bigger banks.

446
00:23:50,720 --> 00:23:53,720
Speaker 1: They trust them more, they seem to be stable. Government

447
00:23:53,760 --> 00:23:56,720
Speaker 1: bailed them out already once, maybe giving them more power

448
00:23:56,760 --> 00:23:58,640
Speaker 1: in the system, which would, of course, we know, would

449
00:23:58,640 --> 00:24:00,920
Speaker 1: be very bad for regional lending. So I think this

450
00:24:01,119 --> 00:24:06,360
Speaker 1: is a case where the federal government, meaning the Biden administration,

451
00:24:06,680 --> 00:24:08,399
Speaker 1: has to pick a side. Are you going to try

452
00:24:08,440 --> 00:24:10,879
Speaker 1: to intervene and control the Fed? Trump actually tried to

453
00:24:10,880 --> 00:24:13,399
Speaker 1: control the bed and some might say he did in

454
00:24:13,520 --> 00:24:15,960
Speaker 1: terms of interest rates. So that's the big question mark.

455
00:24:16,000 --> 00:24:18,439
Speaker 1: Do you try to exert more control but then fail again?

456
00:24:18,840 --> 00:24:21,200
Speaker 1: And that's the puzzle for the Democrats. The irony of

457
00:24:21,280 --> 00:24:23,480
Speaker 1: this is not lost on a lot of people that

458
00:24:23,640 --> 00:24:27,560
Speaker 1: basically we have gone from emphasizing a decentralization of banking

459
00:24:27,880 --> 00:24:29,680
Speaker 1: to now the big banks are better and the bigger

460
00:24:29,720 --> 00:24:31,359
Speaker 1: the better. I mean, can you give a sense of

461
00:24:31,440 --> 00:24:35,000
Speaker 1: the potential political read through of that, Well, I think

462
00:24:35,040 --> 00:24:38,159
Speaker 1: again it's one more layer I think of government, or

463
00:24:38,240 --> 00:24:40,879
Speaker 1: one more layer of sort of people feeling you know,

464
00:24:41,080 --> 00:24:43,520
Speaker 1: disempowered that they now they have to go to the

465
00:24:43,600 --> 00:24:45,639
Speaker 1: big bank. Those restrictions might be are they may not

466
00:24:45,800 --> 00:24:47,399
Speaker 1: know the banker they're dealing with it, maybe just on

467
00:24:47,440 --> 00:24:49,879
Speaker 1: the phone with somebody they never met, you know, closing

468
00:24:49,960 --> 00:24:52,720
Speaker 1: regional branches, which big banks seem to be doing. These

469
00:24:52,760 --> 00:24:55,920
Speaker 1: are all ways in which the average American feels less connected.

470
00:24:56,200 --> 00:24:57,760
Speaker 1: And if you start to feel less connected to the

471
00:24:57,800 --> 00:25:00,680
Speaker 1: economics system I was in or Hamilton's said this, you

472
00:25:00,800 --> 00:25:03,240
Speaker 1: will then feel less connected to the political system. So

473
00:25:03,359 --> 00:25:05,480
Speaker 1: it causes problems not for the economy, not just for

474
00:25:05,560 --> 00:25:08,720
Speaker 1: the economy, but also to the democracy. Wendy, wonderful to

475
00:25:08,800 --> 00:25:10,600
Speaker 1: hear from you and sign those things together. When the

476
00:25:10,640 --> 00:25:17,800
Speaker 1: shit of that a Brandy University, someone who's studied this,

477
00:25:17,880 --> 00:25:20,600
Speaker 1: of course, is the gentleman of that interview. David Rubinstein

478
00:25:20,720 --> 00:25:23,400
Speaker 1: joining us now co chairman and co founder of Carlisle Group.

479
00:25:23,720 --> 00:25:26,480
Speaker 1: It's a happy David Rubinstein is. He joins us today

480
00:25:26,920 --> 00:25:30,639
Speaker 1: from his Duke University. Thank you, David for joining us

481
00:25:30,680 --> 00:25:34,119
Speaker 1: from Duke this morning. So much of this is a

482
00:25:34,280 --> 00:25:39,200
Speaker 1: distrust of these major banks. How did Jane Fraser frame

483
00:25:40,240 --> 00:25:45,200
Speaker 1: that you can trust us this time in this big crisis. Well,

484
00:25:45,240 --> 00:25:48,000
Speaker 1: for those who don't know Jane is it's hard to believe,

485
00:25:48,080 --> 00:25:50,720
Speaker 1: but after two hundred and fifty years of our country's history,

486
00:25:51,080 --> 00:25:54,600
Speaker 1: she's the first woman that had a major money center bank.

487
00:25:55,200 --> 00:25:58,000
Speaker 1: She's a native of Scotland, but educated here at Harvard

488
00:25:58,040 --> 00:26:00,760
Speaker 1: Business School, worked her way up at City over many

489
00:26:00,840 --> 00:26:03,119
Speaker 1: many years, and for the last two years has been

490
00:26:03,160 --> 00:26:06,119
Speaker 1: the CEO of the bank. Her views of the banking

491
00:26:06,200 --> 00:26:09,000
Speaker 1: systems in pretty good shape. Obviously, there are a few

492
00:26:09,560 --> 00:26:12,120
Speaker 1: problem childs and they're being dealt with, like Silicon Valley

493
00:26:12,160 --> 00:26:15,159
Speaker 1: Bank and maybe you could argue First Republic Bank. And

494
00:26:15,280 --> 00:26:18,240
Speaker 1: I think what she's saying is that the banking community

495
00:26:18,359 --> 00:26:20,240
Speaker 1: is coming together to figure out how to solve some

496
00:26:20,280 --> 00:26:23,200
Speaker 1: of these problems, are not relying only on government assistance.

497
00:26:23,560 --> 00:26:26,760
Speaker 1: We've spoken today David Rubinstein of say there were three

498
00:26:26,880 --> 00:26:30,840
Speaker 1: big Swiss banks in her childhood, and now there's one.

499
00:26:31,160 --> 00:26:34,120
Speaker 1: I guess we'll see how that works out. There's also

500
00:26:34,160 --> 00:26:37,399
Speaker 1: been the turmoil and American banking. Do you suggest in

501
00:26:37,480 --> 00:26:40,159
Speaker 1: your conversation with Jane, and for that matter, all of

502
00:26:40,240 --> 00:26:43,800
Speaker 1: your contacts, that things are being sped up now for

503
00:26:43,880 --> 00:26:46,320
Speaker 1: the major banks that they're going to have to move

504
00:26:46,440 --> 00:26:51,600
Speaker 1: and act strategically faster in the coming months. Well, in

505
00:26:51,680 --> 00:26:54,720
Speaker 1: the crisis of ten years ago or so, the major

506
00:26:54,800 --> 00:26:58,320
Speaker 1: banks were to some extent, with one or two exceptions, undercapitalized.

507
00:26:58,840 --> 00:27:02,520
Speaker 1: Now the banks are major banks are well capitalized. Leaving

508
00:27:02,560 --> 00:27:05,639
Speaker 1: Credit Swiss aside. They're well capitalized and therefore they have

509
00:27:06,119 --> 00:27:08,359
Speaker 1: more of an ability to help other banks. And so,

510
00:27:08,560 --> 00:27:11,080
Speaker 1: as you saw in the case of a First Republic,

511
00:27:11,640 --> 00:27:14,640
Speaker 1: the major banks put together money that would go into

512
00:27:14,760 --> 00:27:17,800
Speaker 1: First Republic as deposits, and I hopefully that will shore

513
00:27:17,840 --> 00:27:20,720
Speaker 1: up the situation until a more permanent resolution. But I

514
00:27:20,800 --> 00:27:23,680
Speaker 1: don't think we have a crisis where JP Morgan or

515
00:27:24,240 --> 00:27:27,920
Speaker 1: Wells Fargo or Bank of America have financial problems or

516
00:27:27,960 --> 00:27:31,320
Speaker 1: a city, but they clearly everybody's always nervous when there's

517
00:27:31,560 --> 00:27:34,440
Speaker 1: a banking problem, but I think this one's reasonably under control.

518
00:27:34,720 --> 00:27:36,360
Speaker 1: Do you think that this is the best pr move

519
00:27:36,440 --> 00:27:38,639
Speaker 1: that ever happened for big banks because they can basically

520
00:27:38,720 --> 00:27:41,680
Speaker 1: come to the rescue, be the good golden children, and

521
00:27:41,680 --> 00:27:44,000
Speaker 1: all of a sudden have politicians coming out and saying,

522
00:27:44,280 --> 00:27:48,880
Speaker 1: you guys should all be more like them. Well, I'm

523
00:27:48,960 --> 00:27:50,520
Speaker 1: sure that that might have been in the back of

524
00:27:50,600 --> 00:27:53,480
Speaker 1: their mind. But the truth is the US government used

525
00:27:53,480 --> 00:27:55,280
Speaker 1: to come in and kind of resolve these things. But

526
00:27:55,440 --> 00:27:58,879
Speaker 1: this case, Jamie Diamond, though he's working with Johnny Yellen,

527
00:27:59,160 --> 00:28:01,600
Speaker 1: have taken has taken the lead. So you have banks

528
00:28:01,640 --> 00:28:04,800
Speaker 1: putting in the money in First Republic, and that's unusual.

529
00:28:04,840 --> 00:28:07,080
Speaker 1: You don't usually see that in a kind of voluntary basis.

530
00:28:07,119 --> 00:28:08,639
Speaker 1: But I think it's good for the system and it

531
00:28:08,720 --> 00:28:11,440
Speaker 1: shows how support of the major banks are of any

532
00:28:11,520 --> 00:28:14,000
Speaker 1: problems that they see in the banking system. I love

533
00:28:14,040 --> 00:28:16,119
Speaker 1: that you are the one interviewing Jane Brazier because you're

534
00:28:16,160 --> 00:28:19,520
Speaker 1: two behemoths in the industry, two behemoths and the financial

535
00:28:19,600 --> 00:28:22,160
Speaker 1: system that really is the focal point of so many

536
00:28:22,240 --> 00:28:25,399
Speaker 1: prognostications at this point. From your vantage point, with your

537
00:28:25,440 --> 00:28:28,080
Speaker 1: discussion with Jane, do you get the sense that there

538
00:28:28,160 --> 00:28:31,520
Speaker 1: truly is a mass wave of credit tightening that is

539
00:28:31,560 --> 00:28:33,960
Speaker 1: coming upon us that is going to really become clear

540
00:28:34,280 --> 00:28:38,240
Speaker 1: in the second half of this year. Well, interest rates

541
00:28:38,320 --> 00:28:40,440
Speaker 1: have been going up steadily as we know this year,

542
00:28:40,600 --> 00:28:44,000
Speaker 1: and as a result, their consequences. One of them is

543
00:28:44,040 --> 00:28:46,880
Speaker 1: supposed to be a slowing down the economy and higher unemployment.

544
00:28:47,240 --> 00:28:50,240
Speaker 1: But one of the other consequences, obviously is some banks

545
00:28:50,280 --> 00:28:54,240
Speaker 1: are hurt by this. The general occurrence when interest rates

546
00:28:54,280 --> 00:28:56,280
Speaker 1: go up is it probably usually helps banks a bit

547
00:28:56,320 --> 00:28:58,880
Speaker 1: because they can charge more than otherwise going to charge

548
00:28:58,880 --> 00:29:01,640
Speaker 1: for loans. In this case, what you're seeing is that

549
00:29:02,080 --> 00:29:05,440
Speaker 1: some banks had a lot of securities which become worth

550
00:29:05,480 --> 00:29:07,920
Speaker 1: a lot less when interest rates go up, because say

551
00:29:07,920 --> 00:29:10,200
Speaker 1: they had bonds or treasury bills which go down in

552
00:29:10,280 --> 00:29:12,600
Speaker 1: value as interest rates go up, and that produced a

553
00:29:12,680 --> 00:29:15,440
Speaker 1: credit hole, obviously in Silicon Valley Bank and probably in

554
00:29:15,520 --> 00:29:19,240
Speaker 1: some other banks, or some modest credit holes. So raising

555
00:29:19,320 --> 00:29:22,520
Speaker 1: interest rates has not been an unvarn good thing for

556
00:29:22,600 --> 00:29:25,040
Speaker 1: the banks, though generally when interest rates go up, it's

557
00:29:25,040 --> 00:29:27,000
Speaker 1: not that harmful to banks. Right now, I think the

558
00:29:27,040 --> 00:29:30,360
Speaker 1: banking systems in reasonably good shape. Though, David, you grew

559
00:29:30,480 --> 00:29:33,440
Speaker 1: up basic in Baltimore. There's going to be a House

560
00:29:33,520 --> 00:29:38,160
Speaker 1: Committee meeting today going after guys like you, the vetcats

561
00:29:38,200 --> 00:29:40,800
Speaker 1: out there of Global Wall Street. I want you to

562
00:29:40,880 --> 00:29:45,840
Speaker 1: speak to House Republicans today with their immense distrust of

563
00:29:45,920 --> 00:29:49,400
Speaker 1: the kind of people that blew up SVB. What do

564
00:29:49,520 --> 00:29:54,040
Speaker 1: you say to people representing a broader middle class of

565
00:29:54,120 --> 00:29:57,280
Speaker 1: America that say, who are these guys and why are

566
00:29:57,320 --> 00:30:02,160
Speaker 1: we putting up with them? Well, whenever somebody loses money,

567
00:30:02,480 --> 00:30:05,120
Speaker 1: government's always come in and say who's at fault? Certainly

568
00:30:05,160 --> 00:30:07,360
Speaker 1: it's not the government. The government would say it's never

569
00:30:07,480 --> 00:30:10,240
Speaker 1: at fault. So I'm not surprised that somebody will go

570
00:30:10,320 --> 00:30:14,960
Speaker 1: after somebody that's lost money for shareholders and so forth.

571
00:30:15,280 --> 00:30:19,640
Speaker 1: But beating up on Wall Street types or finance people

572
00:30:19,720 --> 00:30:22,560
Speaker 1: is a relatively common experience. I don't think people are

573
00:30:22,560 --> 00:30:24,240
Speaker 1: going to be shocked by it. In the case of

574
00:30:24,320 --> 00:30:27,040
Speaker 1: Silicon Valley Bank, they clearly did some things that the

575
00:30:27,120 --> 00:30:29,280
Speaker 1: regulators should have been more on top of, and I

576
00:30:29,360 --> 00:30:32,960
Speaker 1: think the under the banking regulations and laws, the Federal

577
00:30:33,000 --> 00:30:35,760
Speaker 1: Reserve Bank in San Francisco was aware of it and

578
00:30:36,000 --> 00:30:37,600
Speaker 1: was working on it. But I don't think they did

579
00:30:37,760 --> 00:30:40,560
Speaker 1: enough quickly enough to take care of the problem. Oh

580
00:30:40,720 --> 00:30:44,360
Speaker 1: that's the question, David, the quickly enough of it. Can

581
00:30:44,480 --> 00:30:51,040
Speaker 1: we legislate the courage to be quickly enough? Whenever you

582
00:30:51,160 --> 00:30:54,760
Speaker 1: have a financial problem and something goes wrong, you always

583
00:30:54,800 --> 00:30:58,120
Speaker 1: try to have a fix, so Dodd Frank or Sarbanes Oxley.

584
00:30:58,440 --> 00:31:01,400
Speaker 1: But the ingenuity of mankind as such that they can

585
00:31:01,440 --> 00:31:04,920
Speaker 1: always figure a way around some legislator or regulatory constraint.

586
00:31:05,120 --> 00:31:07,200
Speaker 1: And so I don't think wherever in our lifetime or

587
00:31:07,240 --> 00:31:09,800
Speaker 1: anybody's lifetime going to solve all these financial problems. There's

588
00:31:09,800 --> 00:31:12,680
Speaker 1: always going to be somebody taking advantage of some rule.

589
00:31:12,960 --> 00:31:14,840
Speaker 1: So I don't think we can fix it overnight, and

590
00:31:14,960 --> 00:31:16,960
Speaker 1: we can't just point a finger in somebody and say

591
00:31:16,960 --> 00:31:19,880
Speaker 1: it's your faught alone. David Rubenstein, thank you so much

592
00:31:19,960 --> 00:31:24,280
Speaker 1: from Duke University this morning. An important conversation mister Rubenstein

593
00:31:24,360 --> 00:31:28,800
Speaker 1: with Jane Fraser. Subscribe to the Bloomberg Surveillance podcast on Apple,

594
00:31:29,040 --> 00:31:33,200
Speaker 1: Spotify and anywhere else you get your podcasts. Listen live

595
00:31:33,360 --> 00:31:37,600
Speaker 1: every weekday starting at seven am Eastern. I'm Bloomberg dot Com,

596
00:31:37,800 --> 00:31:41,920
Speaker 1: the iHeartRadio app, tune In, and the Bloomberg Business app.

597
00:31:42,400 --> 00:31:46,040
Speaker 1: You can watch us live. I'm Bloomberg Television and always

598
00:31:46,440 --> 00:31:50,360
Speaker 1: I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keane,

599
00:31:50,520 --> 00:31:52,280
Speaker 1: and this is Bloomberg