1
00:00:02,440 --> 00:00:06,760
Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

2
00:00:07,040 --> 00:00:09,160
Speaker 2: For more on well to Expect, We are joined by

3
00:00:09,160 --> 00:00:12,039
Speaker 2: Sheila Bher. She's the former chair of the FDA c

4
00:00:12,200 --> 00:00:15,240
Speaker 2: of course, especially during the financial crisis, of course, the

5
00:00:15,320 --> 00:00:18,759
Speaker 2: senior fellow at the Center for Financial Stability. And you

6
00:00:18,840 --> 00:00:21,800
Speaker 2: think a lot about Dudley's comments here was really rooted

7
00:00:21,840 --> 00:00:24,840
Speaker 2: in the worry about a recession if you did not

8
00:00:25,040 --> 00:00:28,720
Speaker 2: see a rate cut soon enough. Do you share those concerns?

9
00:00:29,840 --> 00:00:32,880
Speaker 3: No, I think the Feds handling it right. It sounds

10
00:00:32,880 --> 00:00:34,800
Speaker 3: like they're going to stand cat next week.

11
00:00:34,840 --> 00:00:35,440
Speaker 1: They should.

12
00:00:36,400 --> 00:00:39,440
Speaker 3: A lot of this is just reverting to pre pandemic norms,

13
00:00:40,080 --> 00:00:43,440
Speaker 3: So you know, I think we don't. We want to

14
00:00:43,800 --> 00:00:48,000
Speaker 3: keep our heads here in unduly panic. And I do

15
00:00:48,040 --> 00:00:49,920
Speaker 3: think not certainly with mister Dudley, who I have a

16
00:00:49,960 --> 00:00:52,320
Speaker 3: lot of respect for him, worked within a lot during

17
00:00:52,320 --> 00:00:54,920
Speaker 3: the Great Financial Crisis. But I do think a lot

18
00:00:54,960 --> 00:00:57,880
Speaker 3: of this Wall Street clamoring for rate reductions, it's really

19
00:00:57,960 --> 00:01:00,440
Speaker 3: more they're saying is for main street I get those

20
00:01:00,480 --> 00:01:03,280
Speaker 3: credit card rates down, But it's really for them because

21
00:01:03,320 --> 00:01:07,360
Speaker 3: that will boost their asset valuations, maybe generating some refinancing

22
00:01:07,440 --> 00:01:08,960
Speaker 3: income help.

23
00:01:08,800 --> 00:01:11,160
Speaker 1: There get distress burrows help them.

24
00:01:11,520 --> 00:01:14,640
Speaker 3: I mean it really, it will be a clear booth

25
00:01:14,880 --> 00:01:17,040
Speaker 3: to Wall Street when rates start to go down again.

26
00:01:17,160 --> 00:01:20,280
Speaker 3: But it's not clear it is for main Street what

27
00:01:20,360 --> 00:01:22,680
Speaker 3: main Street is hurting. Those credit card balances are high

28
00:01:22,720 --> 00:01:25,800
Speaker 3: because of inflation, because it's more expensive to live these days,

29
00:01:26,360 --> 00:01:28,440
Speaker 3: and that hits everybody, not just farmworths.

30
00:01:28,480 --> 00:01:30,319
Speaker 1: So I think if it is handling this right.

31
00:01:30,520 --> 00:01:33,000
Speaker 4: Well, Sheila, that's so interesting to hear you say that,

32
00:01:33,040 --> 00:01:34,880
Speaker 4: because the point has been made again and again that

33
00:01:35,240 --> 00:01:38,520
Speaker 4: the medicine is worth worse than the illness. At this point,

34
00:01:38,600 --> 00:01:41,679
Speaker 4: you're taking the opposite view here that actually, no, inflation

35
00:01:41,920 --> 00:01:45,160
Speaker 4: is the main thing that consumers are suffering from right now.

36
00:01:45,200 --> 00:01:47,320
Speaker 4: It's not necessarily those higher interest rates.

37
00:01:48,240 --> 00:01:49,560
Speaker 1: No, I don't think it is.

38
00:01:49,680 --> 00:01:53,320
Speaker 3: And you know, look race or not high historical standards.

39
00:01:53,320 --> 00:01:56,080
Speaker 3: These are kind of normal interest rates, and there are

40
00:01:56,120 --> 00:01:59,480
Speaker 3: benefits from higher rates. You get more discipline capital allocation,

41
00:02:00,440 --> 00:02:03,080
Speaker 3: You reduce incentives to lever up, and that's.

42
00:02:02,960 --> 00:02:05,640
Speaker 1: Painful because we had a lot of leverage build.

43
00:02:05,440 --> 00:02:08,240
Speaker 3: Up during the long protracted era of surp and so

44
00:02:08,840 --> 00:02:10,639
Speaker 3: people are having to deal with that now.

45
00:02:11,160 --> 00:02:14,080
Speaker 1: But higher rates are actually productive for the economy.

46
00:02:14,160 --> 00:02:16,520
Speaker 3: Low rates for productivity, there are a number of academic

47
00:02:16,600 --> 00:02:20,200
Speaker 3: studies that show that so their economic benefits to it.

48
00:02:20,280 --> 00:02:23,200
Speaker 3: And yeah, but I also think any kind of incremental

49
00:02:23,240 --> 00:02:25,679
Speaker 3: reductions and rates and I think at some point that

50
00:02:25,720 --> 00:02:28,519
Speaker 3: fat can nage them down a bit. But how much

51
00:02:28,560 --> 00:02:32,720
Speaker 3: that's going to flow down to help main street is

52
00:02:32,760 --> 00:02:35,400
Speaker 3: a question for me. And I think the real problem

53
00:02:35,480 --> 00:02:38,600
Speaker 3: is we've had some real wage booth, thank goodness, but

54
00:02:38,680 --> 00:02:41,239
Speaker 3: things are more expensive. We need to focus on real

55
00:02:41,280 --> 00:02:44,200
Speaker 3: wage growth as a way to empower consumers, just not

56
00:02:44,320 --> 00:02:48,200
Speaker 3: more debt, whether it's twenty five basis points less or

57
00:02:48,240 --> 00:02:51,440
Speaker 3: what have you. And housing mortgage rate, which is the

58
00:02:51,480 --> 00:02:53,000
Speaker 3: other area that Wall Street targets.

59
00:02:53,000 --> 00:02:54,760
Speaker 1: You know, that is a supply problem.

60
00:02:56,120 --> 00:02:58,040
Speaker 3: Lower rates, fine, you're going to juice demand, it is

61
00:02:58,080 --> 00:02:59,800
Speaker 3: still supply constrained. You're just going to get a home

62
00:03:00,160 --> 00:03:03,959
Speaker 3: is going up more So that doesn't help a mainStreet either.

63
00:03:04,080 --> 00:03:05,960
Speaker 1: So I think we need to look at the root

64
00:03:06,040 --> 00:03:09,679
Speaker 1: causes and stop you know, saying that monetary calls he

65
00:03:09,720 --> 00:03:11,240
Speaker 1: has a solution to all these problems.

66
00:03:11,480 --> 00:03:16,040
Speaker 5: I mean, higher rates should also encourage more savings. Right, theoretically,

67
00:03:16,800 --> 00:03:19,160
Speaker 5: you've got a rainy day fund, you get in five

68
00:03:19,200 --> 00:03:22,639
Speaker 5: and a half percent on your CD or whatnot, Sheila.

69
00:03:22,680 --> 00:03:27,840
Speaker 5: I wonder though about your confidence in the Federal Reserves independence.

70
00:03:28,480 --> 00:03:32,760
Speaker 5: Some people running for office right now may want to

71
00:03:33,200 --> 00:03:36,760
Speaker 5: weigh on the FED more heavily than others. Are you

72
00:03:36,840 --> 00:03:38,800
Speaker 5: concerned about FED independence?

73
00:03:40,320 --> 00:03:40,920
Speaker 1: Well, I am.

74
00:03:41,000 --> 00:03:45,000
Speaker 3: I mean mister Trump clearly is not very respectful of itaid,

75
00:03:45,120 --> 00:03:48,320
Speaker 3: he's already you know, pressuring them to he doesn't want

76
00:03:48,320 --> 00:03:49,800
Speaker 3: them to lower now if he wants them to lower

77
00:03:49,800 --> 00:03:50,960
Speaker 3: when he becomes president.

78
00:03:51,000 --> 00:03:54,160
Speaker 1: If he becomes president. So yeah, but I have a

79
00:03:54,160 --> 00:03:55,360
Speaker 1: lot of confidence in the time.

80
00:03:55,360 --> 00:03:57,920
Speaker 3: Said, I've not always agreed with them, but I have

81
00:03:58,080 --> 00:04:02,520
Speaker 3: never questioned that they have political motivations behind the decisions

82
00:04:02,520 --> 00:04:05,880
Speaker 3: they're making on monetary policies. So I do you know

83
00:04:05,920 --> 00:04:09,280
Speaker 3: it's going to be all about the leadership. But if

84
00:04:09,320 --> 00:04:12,800
Speaker 3: mister Trump comes in, there are strong status for productions

85
00:04:12,840 --> 00:04:15,520
Speaker 3: against FIT independence. I think if he tries to assault

86
00:04:16,080 --> 00:04:20,120
Speaker 3: that independence, there could be a significant local barrier to

87
00:04:20,200 --> 00:04:23,279
Speaker 3: doing that. And if it's Kamala Harris, and if she

88
00:04:23,360 --> 00:04:25,320
Speaker 3: wins as kind of an unknown mister.

89
00:04:25,120 --> 00:04:28,000
Speaker 1: Biden has respect to their independence, I hope she would

90
00:04:28,000 --> 00:04:29,200
Speaker 1: continue to do the same.

91
00:04:29,960 --> 00:04:32,000
Speaker 2: I want to switch gears here and talk to you

92
00:04:32,240 --> 00:04:36,640
Speaker 2: about an opinion article that was written in Political this week,

93
00:04:36,880 --> 00:04:40,680
Speaker 2: and it's entitled why is the government encouraging a tax

94
00:04:40,760 --> 00:04:44,920
Speaker 2: payer bailout? The idea here is that mortgage origination and

95
00:04:45,000 --> 00:04:48,080
Speaker 2: servicing has really moved out of the banking system. This

96
00:04:48,160 --> 00:04:50,760
Speaker 2: is the system here, of course, at the federal regulators

97
00:04:50,800 --> 00:04:53,479
Speaker 2: really oversee and out of the purview for the most

98
00:04:53,560 --> 00:04:57,320
Speaker 2: part from these regulators. Just this week, one of the

99
00:04:57,400 --> 00:05:01,680
Speaker 2: companies named mister Cooper became even more powerful by buying

100
00:05:02,240 --> 00:05:06,640
Speaker 2: a set of assets from New York Community Bank, arguably

101
00:05:06,720 --> 00:05:09,520
Speaker 2: unbattled a little bit at this point in time. How

102
00:05:09,560 --> 00:05:12,480
Speaker 2: do you feel about this move from the banks to

103
00:05:12,600 --> 00:05:17,040
Speaker 2: the non banks and the move by regulators to really

104
00:05:17,200 --> 00:05:20,040
Speaker 2: try to backstop this system.

105
00:05:20,279 --> 00:05:22,640
Speaker 1: Yeah, well, I think it's unfortunate.

106
00:05:23,160 --> 00:05:27,320
Speaker 3: You know, it bears repeating over and over again that

107
00:05:27,400 --> 00:05:30,680
Speaker 3: the majority of these toxic subprime loans that cause so

108
00:05:30,800 --> 00:05:35,400
Speaker 3: much heartache for families and so much disruption in our markets,

109
00:05:35,720 --> 00:05:39,040
Speaker 3: the majority were originated by non bank lenders. So the

110
00:05:39,080 --> 00:05:41,320
Speaker 3: irony that they go from about what I think thirty

111
00:05:41,360 --> 00:05:46,760
Speaker 3: four percent two thirds of mortgage originations now is supremely ironic.

112
00:05:46,800 --> 00:05:49,480
Speaker 1: And the servicing has moved too, is about four percent.

113
00:05:49,560 --> 00:05:51,880
Speaker 1: During the crisis. Now it's well over half.

114
00:05:52,640 --> 00:05:56,560
Speaker 3: So this is a problem with bank regulation when you

115
00:05:56,600 --> 00:06:00,680
Speaker 3: just clamp down on the banks and capital quirements on

116
00:06:00,760 --> 00:06:03,159
Speaker 3: mortgage servicing rights I think are part of the reasons

117
00:06:03,160 --> 00:06:03,600
Speaker 3: why the.

118
00:06:03,520 --> 00:06:05,679
Speaker 1: Servicing have also moved to the non banks.

119
00:06:06,240 --> 00:06:10,919
Speaker 3: But you just force this activity into less regulated sectors

120
00:06:11,480 --> 00:06:13,360
Speaker 3: and then to have an answer, Okay, we're going to

121
00:06:13,400 --> 00:06:15,040
Speaker 3: clamp down to the banks, we're going to push this

122
00:06:15,440 --> 00:06:17,520
Speaker 3: and not to say we didn't need more capital. We did,

123
00:06:17,560 --> 00:06:20,800
Speaker 3: of course, but you can't do that in isolation without

124
00:06:20,800 --> 00:06:23,120
Speaker 3: paying attention to kind of risks are being created when

125
00:06:23,120 --> 00:06:24,280
Speaker 3: it moves out of the banks.

126
00:06:24,800 --> 00:06:25,800
Speaker 1: So this is a problem.

127
00:06:26,000 --> 00:06:29,440
Speaker 3: They need more prudential supervision. They don't need bailouts. And

128
00:06:29,920 --> 00:06:31,800
Speaker 3: there are plenty of tools now. I used to be

129
00:06:31,839 --> 00:06:34,840
Speaker 3: the chair of the Fanning Made Board. Fanny Freddy Jinny

130
00:06:35,520 --> 00:06:38,920
Speaker 3: can set standards. They do, set standards of financial and integrity.

131
00:06:39,000 --> 00:06:42,359
Speaker 3: Their businesses are at risked these mortgage servicers get into problems.

132
00:06:42,640 --> 00:06:46,000
Speaker 3: They could strengthen those requirements. FAHFA could help them with that,

133
00:06:47,160 --> 00:06:48,840
Speaker 3: and so I think there are current tools.

134
00:06:48,880 --> 00:06:50,440
Speaker 1: It would be great if Congress.

135
00:06:50,040 --> 00:06:54,040
Speaker 3: Provided more regulatory direct regulatory authority over them.

136
00:06:54,160 --> 00:06:54,840
Speaker 1: But pending that.

137
00:06:55,000 --> 00:06:57,200
Speaker 3: I think the tools are there now, and that's where

138
00:06:57,200 --> 00:06:59,560
Speaker 3: the focus should be, not on creating bail out funds.

139
00:07:00,080 --> 00:07:01,960
Speaker 3: I mean, that's just you know, if they if the

140
00:07:02,000 --> 00:07:05,800
Speaker 3: FED thinks or Fstock thinks mister Cooper's is systemic, you know,

141
00:07:05,880 --> 00:07:09,600
Speaker 3: there's a process called Title one designations. They can designate

142
00:07:09,640 --> 00:07:12,880
Speaker 3: mister Cooper's as a Title one systemic entity, put it

143
00:07:12,960 --> 00:07:15,920
Speaker 3: under the FED supervision supervisor regime, make them have a

144
00:07:15,960 --> 00:07:20,400
Speaker 3: resolution plan, increase circapital requirements. Those tools are there if

145
00:07:20,440 --> 00:07:23,120
Speaker 3: they really think these services are systemic.

146
00:07:23,400 --> 00:07:25,640
Speaker 2: I think this is an important conversation because you know,

147
00:07:25,880 --> 00:07:28,520
Speaker 2: I did ask at one point even JD. Vans if

148
00:07:28,520 --> 00:07:31,120
Speaker 2: the private equity community and the private credit community and

149
00:07:31,160 --> 00:07:34,800
Speaker 2: the non banking community at large needs more regulation, and

150
00:07:34,880 --> 00:07:38,360
Speaker 2: he even he agreed, for example, that there should be more. So,

151
00:07:38,680 --> 00:07:41,840
Speaker 2: you know, there's another story in the Financial Times about

152
00:07:41,840 --> 00:07:44,560
Speaker 2: how private equity has been tangled in a web of

153
00:07:44,600 --> 00:07:47,760
Speaker 2: bank debt. Bloomberg reported this morning that there are banks

154
00:07:47,760 --> 00:07:51,440
Speaker 2: looking to restructure one of those debts, for example Bright Speed,

155
00:07:51,440 --> 00:07:53,920
Speaker 2: they might be stuck with losses on their books. Is

156
00:07:53,960 --> 00:07:56,800
Speaker 2: there a deeper connection than meets the eye between the

157
00:07:56,840 --> 00:08:00,000
Speaker 2: private community, non banks and the banking system that regular

158
00:08:00,320 --> 00:08:01,040
Speaker 2: are not privy to.

159
00:08:02,720 --> 00:08:05,320
Speaker 3: Yeah, I think there absolutely is that there's a there's

160
00:08:05,320 --> 00:08:09,480
Speaker 3: a real lack of transparency around what the exposures are

161
00:08:09,520 --> 00:08:10,840
Speaker 3: on these private funds.

162
00:08:11,360 --> 00:08:14,040
Speaker 1: My gut tells me they use leverage on leverage, you know, the.

163
00:08:14,000 --> 00:08:17,120
Speaker 3: Conventional wisdom is they rely much more on equity financing,

164
00:08:17,120 --> 00:08:20,120
Speaker 3: are less leverate than banks. I don't think that's the case.

165
00:08:20,760 --> 00:08:25,840
Speaker 3: And here again banks have tremendous lending exposure to them.

166
00:08:26,000 --> 00:08:28,680
Speaker 3: Is a lot of the you know, the lending and

167
00:08:28,720 --> 00:08:32,680
Speaker 3: other financial services that moved out of banks driven by capital,

168
00:08:33,160 --> 00:08:35,920
Speaker 3: the capital regime and the lack of these capital requirements

169
00:08:35,920 --> 00:08:38,760
Speaker 3: in the non banks. This this business has gone out,

170
00:08:38,840 --> 00:08:41,160
Speaker 3: but the banks are still lending to the private.

171
00:08:40,800 --> 00:08:42,040
Speaker 1: Funds that are now doing this.

172
00:08:42,720 --> 00:08:45,320
Speaker 3: But the capital treatment is more lenient because they basically

173
00:08:45,320 --> 00:08:48,520
Speaker 3: do it on a collateralized basis. The exposures are structured

174
00:08:48,520 --> 00:08:51,280
Speaker 3: differently than just making ones and holding them on your

175
00:08:51,280 --> 00:08:56,640
Speaker 3: balance sheet. So again it's a phenomenon of only slapping

176
00:08:56,720 --> 00:08:59,760
Speaker 3: regulation and tougher standards on the banking sector that looking

177
00:08:59,760 --> 00:09:01,960
Speaker 3: toy what you're doing on the non banks, And at

178
00:09:02,120 --> 00:09:06,200
Speaker 3: very minimum, we could impose tighter requirements, things that the

179
00:09:06,240 --> 00:09:09,720
Speaker 3: banks should know about those private funds, having a holistic

180
00:09:09,800 --> 00:09:13,360
Speaker 3: view of their financial position, not just looking narrowly at

181
00:09:13,360 --> 00:09:17,040
Speaker 3: the collateral and Gosh only knows they probably bought that

182
00:09:17,040 --> 00:09:17,960
Speaker 3: collateral with the loan.

183
00:09:18,120 --> 00:09:21,320
Speaker 1: Who else has a claim on that collateral? They don't

184
00:09:21,360 --> 00:09:23,199
Speaker 1: have good The banks don't have it. I don't think

185
00:09:23,200 --> 00:09:24,360
Speaker 1: the regulators have it too.

186
00:09:24,520 --> 00:09:27,000
Speaker 3: And I think if T had a very good piece

187
00:09:27,040 --> 00:09:29,480
Speaker 3: on this kind of breaking down all the different financial

188
00:09:29,520 --> 00:09:32,679
Speaker 3: engineering that's used to pile leverage on leverage.

189
00:09:32,520 --> 00:09:36,160
Speaker 1: In these funds, and it doesn't you know, we talk

190
00:09:36,200 --> 00:09:37,320
Speaker 1: about recession risk.

191
00:09:37,480 --> 00:09:41,600
Speaker 3: I worry more about that so much private credit has

192
00:09:41,880 --> 00:09:47,440
Speaker 3: shifted into the non bank sector and if that sector

193
00:09:48,040 --> 00:09:50,000
Speaker 3: implodes and that fulls back.

194
00:09:49,800 --> 00:09:51,599
Speaker 1: Into the banks, then we are going to have a

195
00:09:51,640 --> 00:09:53,600
Speaker 1: real problem. Then we are going to have a deeper

196
00:09:53,679 --> 00:09:55,160
Speaker 1: sept along the lines we have.

197
00:09:56,120 --> 00:09:58,520
Speaker 2: Unfortunately I have to leave it there, but something to

198
00:09:58,720 --> 00:10:01,839
Speaker 2: rediscuss very soon. Shei la bert Up, formerly of the

199
00:10:01,960 --> 00:10:02,360
Speaker 2: FBI c