Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: For more on well to Expect, We are joined by
Speaker 2: Sheila Bher. She's the former chair of the FDA c
Speaker 2: of course, especially during the financial crisis, of course, the
Speaker 2: senior fellow at the Center for Financial Stability. And you
Speaker 2: think a lot about Dudley's comments here was really rooted
Speaker 2: in the worry about a recession if you did not
Speaker 2: see a rate cut soon enough. Do you share those concerns?
Speaker 3: No, I think the Feds handling it right. It sounds
Speaker 3: like they're going to stand cat next week.
Speaker 1: They should.
Speaker 3: A lot of this is just reverting to pre pandemic norms,
Speaker 3: So you know, I think we don't. We want to
Speaker 3: keep our heads here in unduly panic. And I do
Speaker 3: think not certainly with mister Dudley, who I have a
Speaker 3: lot of respect for him, worked within a lot during
Speaker 3: the Great Financial Crisis. But I do think a lot
Speaker 3: of this Wall Street clamoring for rate reductions, it's really
Speaker 3: more they're saying is for main street I get those
Speaker 3: credit card rates down, But it's really for them because
Speaker 3: that will boost their asset valuations, maybe generating some refinancing
Speaker 3: income help.
Speaker 1: There get distress burrows help them.
Speaker 3: I mean it really, it will be a clear booth
Speaker 3: to Wall Street when rates start to go down again.
Speaker 3: But it's not clear it is for main Street what
Speaker 3: main Street is hurting. Those credit card balances are high
Speaker 3: because of inflation, because it's more expensive to live these days,
Speaker 3: and that hits everybody, not just farmworths.
Speaker 1: So I think if it is handling this right.
Speaker 4: Well, Sheila, that's so interesting to hear you say that,
Speaker 4: because the point has been made again and again that
Speaker 4: the medicine is worth worse than the illness. At this point,
Speaker 4: you're taking the opposite view here that actually, no, inflation
Speaker 4: is the main thing that consumers are suffering from right now.
Speaker 4: It's not necessarily those higher interest rates.
Speaker 1: No, I don't think it is.
Speaker 3: And you know, look race or not high historical standards.
Speaker 3: These are kind of normal interest rates, and there are
Speaker 3: benefits from higher rates. You get more discipline capital allocation,
Speaker 3: You reduce incentives to lever up, and that's.
Speaker 1: Painful because we had a lot of leverage build.
Speaker 3: Up during the long protracted era of surp and so
Speaker 3: people are having to deal with that now.
Speaker 1: But higher rates are actually productive for the economy.
Speaker 3: Low rates for productivity, there are a number of academic
Speaker 3: studies that show that so their economic benefits to it.
Speaker 3: And yeah, but I also think any kind of incremental
Speaker 3: reductions and rates and I think at some point that
Speaker 3: fat can nage them down a bit. But how much
Speaker 3: that's going to flow down to help main street is
Speaker 3: a question for me. And I think the real problem
Speaker 3: is we've had some real wage booth, thank goodness, but
Speaker 3: things are more expensive. We need to focus on real
Speaker 3: wage growth as a way to empower consumers, just not
Speaker 3: more debt, whether it's twenty five basis points less or
Speaker 3: what have you. And housing mortgage rate, which is the
Speaker 3: other area that Wall Street targets.
Speaker 1: You know, that is a supply problem.
Speaker 3: Lower rates, fine, you're going to juice demand, it is
Speaker 3: still supply constrained. You're just going to get a home
Speaker 3: is going up more So that doesn't help a mainStreet either.
Speaker 1: So I think we need to look at the root
Speaker 1: causes and stop you know, saying that monetary calls he
Speaker 1: has a solution to all these problems.
Speaker 5: I mean, higher rates should also encourage more savings. Right, theoretically,
Speaker 5: you've got a rainy day fund, you get in five
Speaker 5: and a half percent on your CD or whatnot, Sheila.
Speaker 5: I wonder though about your confidence in the Federal Reserves independence.
Speaker 5: Some people running for office right now may want to
Speaker 5: weigh on the FED more heavily than others. Are you
Speaker 5: concerned about FED independence?
Speaker 1: Well, I am.
Speaker 3: I mean mister Trump clearly is not very respectful of itaid,
Speaker 3: he's already you know, pressuring them to he doesn't want
Speaker 3: them to lower now if he wants them to lower
Speaker 3: when he becomes president.
Speaker 1: If he becomes president. So yeah, but I have a
Speaker 1: lot of confidence in the time.
Speaker 3: Said, I've not always agreed with them, but I have
Speaker 3: never questioned that they have political motivations behind the decisions
Speaker 3: they're making on monetary policies. So I do you know
Speaker 3: it's going to be all about the leadership. But if
Speaker 3: mister Trump comes in, there are strong status for productions
Speaker 3: against FIT independence. I think if he tries to assault
Speaker 3: that independence, there could be a significant local barrier to
Speaker 3: doing that. And if it's Kamala Harris, and if she
Speaker 3: wins as kind of an unknown mister.
Speaker 1: Biden has respect to their independence, I hope she would
Speaker 1: continue to do the same.
Speaker 2: I want to switch gears here and talk to you
Speaker 2: about an opinion article that was written in Political this week,
Speaker 2: and it's entitled why is the government encouraging a tax
Speaker 2: payer bailout? The idea here is that mortgage origination and
Speaker 2: servicing has really moved out of the banking system. This
Speaker 2: is the system here, of course, at the federal regulators
Speaker 2: really oversee and out of the purview for the most
Speaker 2: part from these regulators. Just this week, one of the
Speaker 2: companies named mister Cooper became even more powerful by buying
Speaker 2: a set of assets from New York Community Bank, arguably
Speaker 2: unbattled a little bit at this point in time. How
Speaker 2: do you feel about this move from the banks to
Speaker 2: the non banks and the move by regulators to really
Speaker 2: try to backstop this system.
Speaker 1: Yeah, well, I think it's unfortunate.
Speaker 3: You know, it bears repeating over and over again that
Speaker 3: the majority of these toxic subprime loans that cause so
Speaker 3: much heartache for families and so much disruption in our markets,
Speaker 3: the majority were originated by non bank lenders. So the
Speaker 3: irony that they go from about what I think thirty
Speaker 3: four percent two thirds of mortgage originations now is supremely ironic.
Speaker 1: And the servicing has moved too, is about four percent.
Speaker 1: During the crisis. Now it's well over half.
Speaker 3: So this is a problem with bank regulation when you
Speaker 3: just clamp down on the banks and capital quirements on
Speaker 3: mortgage servicing rights I think are part of the reasons
Speaker 3: why the.
Speaker 1: Servicing have also moved to the non banks.
Speaker 3: But you just force this activity into less regulated sectors
Speaker 3: and then to have an answer, Okay, we're going to
Speaker 3: clamp down to the banks, we're going to push this
Speaker 3: and not to say we didn't need more capital. We did,
Speaker 3: of course, but you can't do that in isolation without
Speaker 3: paying attention to kind of risks are being created when
Speaker 3: it moves out of the banks.
Speaker 1: So this is a problem.
Speaker 3: They need more prudential supervision. They don't need bailouts. And
Speaker 3: there are plenty of tools now. I used to be
Speaker 3: the chair of the Fanning Made Board. Fanny Freddy Jinny
Speaker 3: can set standards. They do, set standards of financial and integrity.
Speaker 3: Their businesses are at risked these mortgage servicers get into problems.
Speaker 3: They could strengthen those requirements. FAHFA could help them with that,
Speaker 3: and so I think there are current tools.
Speaker 1: It would be great if Congress.
Speaker 3: Provided more regulatory direct regulatory authority over them.
Speaker 1: But pending that.
Speaker 3: I think the tools are there now, and that's where
Speaker 3: the focus should be, not on creating bail out funds.
Speaker 3: I mean, that's just you know, if they if the
Speaker 3: FED thinks or Fstock thinks mister Cooper's is systemic, you know,
Speaker 3: there's a process called Title one designations. They can designate
Speaker 3: mister Cooper's as a Title one systemic entity, put it
Speaker 3: under the FED supervision supervisor regime, make them have a
Speaker 3: resolution plan, increase circapital requirements. Those tools are there if
Speaker 3: they really think these services are systemic.
Speaker 2: I think this is an important conversation because you know,
Speaker 2: I did ask at one point even JD. Vans if
Speaker 2: the private equity community and the private credit community and
Speaker 2: the non banking community at large needs more regulation, and
Speaker 2: he even he agreed, for example, that there should be more. So,
Speaker 2: you know, there's another story in the Financial Times about
Speaker 2: how private equity has been tangled in a web of
Speaker 2: bank debt. Bloomberg reported this morning that there are banks
Speaker 2: looking to restructure one of those debts, for example Bright Speed,
Speaker 2: they might be stuck with losses on their books. Is
Speaker 2: there a deeper connection than meets the eye between the
Speaker 2: private community, non banks and the banking system that regular
Speaker 2: are not privy to.
Speaker 3: Yeah, I think there absolutely is that there's a there's
Speaker 3: a real lack of transparency around what the exposures are
Speaker 3: on these private funds.
Speaker 1: My gut tells me they use leverage on leverage, you know, the.
Speaker 3: Conventional wisdom is they rely much more on equity financing,
Speaker 3: are less leverate than banks. I don't think that's the case.
Speaker 3: And here again banks have tremendous lending exposure to them.
Speaker 3: Is a lot of the you know, the lending and
Speaker 3: other financial services that moved out of banks driven by capital,
Speaker 3: the capital regime and the lack of these capital requirements
Speaker 3: in the non banks. This this business has gone out,
Speaker 3: but the banks are still lending to the private.
Speaker 1: Funds that are now doing this.
Speaker 3: But the capital treatment is more lenient because they basically
Speaker 3: do it on a collateralized basis. The exposures are structured
Speaker 3: differently than just making ones and holding them on your
Speaker 3: balance sheet. So again it's a phenomenon of only slapping
Speaker 3: regulation and tougher standards on the banking sector that looking
Speaker 3: toy what you're doing on the non banks, And at
Speaker 3: very minimum, we could impose tighter requirements, things that the
Speaker 3: banks should know about those private funds, having a holistic
Speaker 3: view of their financial position, not just looking narrowly at
Speaker 3: the collateral and Gosh only knows they probably bought that
Speaker 3: collateral with the loan.
Speaker 1: Who else has a claim on that collateral? They don't
Speaker 1: have good The banks don't have it. I don't think
Speaker 1: the regulators have it too.
Speaker 3: And I think if T had a very good piece
Speaker 3: on this kind of breaking down all the different financial
Speaker 3: engineering that's used to pile leverage on leverage.
Speaker 1: In these funds, and it doesn't you know, we talk
Speaker 1: about recession risk.
Speaker 3: I worry more about that so much private credit has
Speaker 3: shifted into the non bank sector and if that sector
Speaker 3: implodes and that fulls back.
Speaker 1: Into the banks, then we are going to have a
Speaker 1: real problem. Then we are going to have a deeper
Speaker 1: sept along the lines we have.
Speaker 2: Unfortunately I have to leave it there, but something to
Speaker 2: rediscuss very soon. Shei la bert Up, formerly of the
Speaker 2: FBI c