Speaker 1: Taking it backiste you one is the only major county
Speaker 1: that is still over valued. The end is very far
Speaker 1: from being over valued. The steed A girls and the
Speaker 1: Banking Union rules suggests that we'll have to have balance
Speaker 1: for banks that are failing. That means that investors will
Speaker 1: take classes. Bloomberg Surveillance your link to the world of economics, finance,
Speaker 1: and investment on Bloomberg Radio. Good morning, everybody, Tom Keane
Speaker 1: and Michael McKay. Tom at the I m F meetings
Speaker 1: in Washington. I'm here in our New York studios and
Speaker 1: we are looking at kind of an off day in markets.
Speaker 1: We're waiting for Christine Leguard, who will be speaking with
Speaker 1: Tom a little later in the program. Maybe she can
Speaker 1: turn things around. But right now, SMP futures off by three,
Speaker 1: down futures by twenty four. The stock six D is
Speaker 1: a point lower in Europe. Interestingly, uh FED fears have
Speaker 1: still got the U S YELD curve elevated. We're at
Speaker 1: eighty four basis points of a two year to h
Speaker 1: one point seven on the ten years. So we'll keep
Speaker 1: an eye on that oil prices. UH the hurricane, and
Speaker 1: we should mention this is the forecast has gotten worse
Speaker 1: for Florida and it definitely looks like it's going to
Speaker 1: come in with Category four strength along the whole coast,
Speaker 1: which is not a good thing. West Texas at eighty
Speaker 1: three unchanged. Brent crude is up on the day by
Speaker 1: about a tenth, neither of those really being affected by
Speaker 1: the storms, and of course Tom has been pointing out
Speaker 1: the breakdown in the British currency cable going for one
Speaker 1: fifty eight down three quarters of a percentage point, still
Speaker 1: concerns about what the potential for a hard Brexit might mean.
Speaker 1: We are joined now by one of our favorite people,
Speaker 1: because we've been talking all morning about the impact of
Speaker 1: the banking system in Europe on the rest of the world,
Speaker 1: a not At Mandi, finance professor from UH Stanford University
Speaker 1: and the author of the Banker's New Clothes, which explains
Speaker 1: everything you need to know about banking, in debt and
Speaker 1: capital at all, things like that. So if you're confused
Speaker 1: by what Tom and I are talking about, pick up
Speaker 1: that book. We we urge you. Um. And the timing
Speaker 1: is perfect because yet again today more revelations about Deutsche Bank,
Speaker 1: and this time UH some cooking the books on some
Speaker 1: deals with Blanka Banti depasti um. What kind of is
Speaker 1: fascinating to me is that we went through the financial crisis.
Speaker 1: We put in all kinds of regulations. Not granted these
Speaker 1: are European banks, but they can see what's happening in
Speaker 1: the United States. We've raised capital levels and they're still
Speaker 1: doing this stuff. When we raise capital levels, but with
Speaker 1: these accounting tricks, the capital levels become meaningless. So that's
Speaker 1: a problem right there, and that connects to all kinds
Speaker 1: of other Friday issue consumer issues. We had been was
Speaker 1: far ago and all of that. So good morning Deutsche
Speaker 1: Bank now, and I don't think it's in a vacuum.
Speaker 1: How do you perceive the decades of management of Deutsche
Speaker 1: Bank and the business strategy and the mergers that they've
Speaker 1: been through, including Alex Brown of Baltimore and the rest.
Speaker 1: How do you fold the history of Deutsche Bank into
Speaker 1: the immediate process a prospect of contagion. Well, Deutsche Bank
Speaker 1: has made itself more and more and more systemic in
Speaker 1: chasing returns, in becoming a champion of investment banking. In
Speaker 1: the book, we take Ackerman, one of the previous CEOs,
Speaker 1: for saying he thinks, Oh, he's sort of appropriate. For
Speaker 1: when I show this to a finance mentor of mine
Speaker 1: is like, huh, they don't listen to what the seal say.
Speaker 1: Is that what he really said? That's unconscionable. How do
Speaker 1: you get You got to take enormous amount of risk,
Speaker 1: obviously and be good at it. So the history of
Speaker 1: Deutsche Bank is is one of basically taking a lot
Speaker 1: of risk expansion, you know, the ultimate of becoming too
Speaker 1: big to faith system. From New York in Washington this morning,
Speaker 1: Bloomberg Surveillance Folks, Michael McKinnon, New York on Tom King
Speaker 1: and Washington. Later on our conversation with Christine Lagard. Bloomberg
Speaker 1: Surveillance this Morning brought to you by Colna Residec Accounting,
Speaker 1: Tax Advisory, look Ahead, Gain Insight, Imagine more of the
Speaker 1: professionals at Colne Resnick can help your business breakthrough. Find
Speaker 1: out more at Coln resnec dot com. Michael, we did,
Speaker 1: uh see a lot of additional regulation put in place
Speaker 1: after the financial crisis, and banks are better capitalized now,
Speaker 1: maybe not as much as you would like, but certainly
Speaker 1: better capitalized than they were. And yet when you look
Speaker 1: at share prices and I'm not just talking Deutsche banker
Speaker 1: Wells Fargo, which have had been in the news, but
Speaker 1: for all banks, you know, I states in Europe. There
Speaker 1: their shares are lower, they've never really recovered, and it
Speaker 1: seems like investors still consider them extremely risk. While they
Speaker 1: are risk, he didn't Larry Summer recently say that as well,
Speaker 1: they're very risk in this thing is that they're very
Speaker 1: highly leverage still in real measures, not in these capital measures.
Speaker 1: They added a lot of regulations, but not cleverly so,
Speaker 1: so their regulations very complex, more complex than they need
Speaker 1: to be, and of course that raises compliance costs and
Speaker 1: other things like that. So between the fines and and
Speaker 1: all the regulatory compliance and and and of course because
Speaker 1: of risk that investors of having a lot of trouble
Speaker 1: assessing because of disclosures are so poor. You see that
Speaker 1: in the stock crisis. So when you have so much leverage,
Speaker 1: price fluctuates a lot. So a tiny bit on the
Speaker 1: downside is a lot on the downside. And the way
Speaker 1: this way it works on the app side, this is
Speaker 1: basic leverage. Everything gets magnified. Well. John Cryan, CEO of
Speaker 1: Joutche Bank, suggests this is deliberate on the part the
Speaker 1: volatilities delivered on the part of investors hedge funds who
Speaker 1: are trying to manipulate the price. People can't see your face,
Speaker 1: but but that that was that was an interesting face
Speaker 1: you just made, didn't anyone see? Also blame short sellers.
Speaker 1: It's deliberate on his part that he stuck is so
Speaker 1: risky and so poorly say there's some poor such more
Speaker 1: information about it, that investors are scared about. What the
Speaker 1: skeleton that he has in the closet and the risk
Speaker 1: of of of Deutsche Bank. So that's what's the deliberate part,
Speaker 1: the deliberate parties their conduct. Is there the type of
Speaker 1: business model that they have, that's the part that that
Speaker 1: that he should look at instead of blaming investors an automotive.
Speaker 1: How do you look at negative interest? Rich You've always
Speaker 1: had a different prism, a different filter. How do you
Speaker 1: look at where we are with chronic negative race? Well,
Speaker 1: I right not to talk about things that I don't
Speaker 1: fully understand. And if most of your guests are saying
Speaker 1: that they really understand all these monetary policy things, I
Speaker 1: think you know to take it with a grain of salt,
Speaker 1: but I'll say it's clear that it's harder in some
Speaker 1: respect to to to make money. It's certainly harder on
Speaker 1: on on many institutions that need returns, like pension funds, endowments, UH,
Speaker 1: insurance companies. It's very difficult and it's such a long
Speaker 1: period of time to have these liabilities, so that I
Speaker 1: think it introduces a lot of fragilities, and uh, it's
Speaker 1: problematic when it goes on so long. I understand that
Speaker 1: you know, there might be really negative really interest right
Speaker 1: to understand that the need to stimulate, But it gets
Speaker 1: to a point where I think, you know it really
Speaker 1: is the overall impact is beginning to not quite do
Speaker 1: what you wanted to do. Well, is the risk risk
Speaker 1: reward calculation tilting now towards too much risk? And are
Speaker 1: central banks working against them selves by keeping rates so
Speaker 1: low or using negative rates so that banks can't earn
Speaker 1: their way out of trouble. Well, I think that some banks,
Speaker 1: you know, shouldn't earn their way out of trouble, should
Speaker 1: just be put out to rest. So I think there
Speaker 1: are a lot of zombie banks in Europe. I think
Speaker 1: there's excessive excess capacity in this industry and that if
Speaker 1: it shrinks some it's Okay, the fact that you need
Speaker 1: to gamble in order to survive all the time. It's
Speaker 1: not a healthy industry that way. So I'm not the
Speaker 1: you know, the banks die with such such little frequency
Speaker 1: despite their conduct and despite living so dangerously that it's
Speaker 1: something's wrong there. So I'm not I'm not shedding too
Speaker 1: many tears on if if some banks are unwound, not
Speaker 1: in a crisis like like you know, in these kinds
Speaker 1: of day, and if they can't make it. But um,
Speaker 1: what do our banks do? What do our banks do
Speaker 1: given sustaining type of GDP if we believe we're not
Speaker 1: going to get back to three percent real GDP? Does
Speaker 1: that just demand consolidation nationwide? Well, the issue with banking
Speaker 1: is the issue of the need for intermediation. What's the
Speaker 1: business of intermediation because the banks are not you know,
Speaker 1: producing you know, realist if they're just allocating the savings
Speaker 1: and all of that. So, you know, there have been
Speaker 1: questions in in finance, even finance academics are beginning to
Speaker 1: wonder just how much given that we have, you know,
Speaker 1: certain technological capabilities, but they still need for for that
Speaker 1: human uh intervention in intermediation, how much of it we
Speaker 1: need so. Yes, if if the economy is smaller than
Speaker 1: maybe the banking sector needs to be smaller as well.
Speaker 1: But I don't you know, I don't think I think
Speaker 1: it should be more natural. My problem continues to be
Speaker 1: that there are so many distortions in this in this
Speaker 1: system that it's bloated because it can be because it
Speaker 1: wants to be. Well. Let's come back with an automotive
Speaker 1: from Stanford University and continue our conversation about the banks.
Speaker 1: Wells Fargo shares right now are off just a few
Speaker 1: sets in early morning trading. We're looking at the Banco
Speaker 1: de Monte de Pasky off three percent today on these
Speaker 1: revelations of uh some book cooking with the Deutsche Bank.
Speaker 1: Deutsche Bank shares up three tenths twelve eleven euros right
Speaker 1: now twelve twelve euros, eleven cents s andp features off
Speaker 1: by four down features by thirty four. The stock six
Speaker 1: hundred is down a point. This is Bloomberg Tom Keene
Speaker 1: in Washington for the I m F meetings. Michael McKee
Speaker 1: here in the studio in New York, along with a
Speaker 1: not at Madi, Stanford finance professor and noted banking analysts.
Speaker 1: Shall we say the other of the book The Banker's
Speaker 1: New Clothes, along with Martin Hollick uh in Germany and
Speaker 1: uh she and we are have been talking about the
Speaker 1: troubles of the banking system lately and how they have
Speaker 1: impact did Um the rest of the world. And I
Speaker 1: want to go back to what we were, what you
Speaker 1: and Tom were talking about just before the break, when
Speaker 1: you were mentioning net interest margins and how that is
Speaker 1: hurting their ability to earn higher regulatory costs also take
Speaker 1: a toll Um. The markets for investment banking are shrinking.
Speaker 1: You've got the shadow banking system getting bigger all the time.
Speaker 1: Are we seeing a a sea change, a secular change
Speaker 1: in banking? Are we going to get the utility model
Speaker 1: that people have talked about for so long because you
Speaker 1: just can't make money in the traditional banking sense. I don't.
Speaker 1: I think that there's a lot of business that is
Speaker 1: not quite net interest margin. When you invest in derivatives
Speaker 1: and you start how you can still do a lot
Speaker 1: of you know, merchant banking and private equity and hedge funds,
Speaker 1: and when you you you start buying up all these
Speaker 1: fintech companies and the shadow banking system is just sort
Speaker 1: of owned or directly related to the regular banking industry.
Speaker 1: So it's not like that there's no bright light there
Speaker 1: at all, right line there at all between you know,
Speaker 1: this banking and that banking. They're all the same. So
Speaker 1: I don't think we're headed to a utility model in
Speaker 1: the sense that I don't think the banks will voluntarily
Speaker 1: become utilities. Whether regulations are going well, you know, my view,
Speaker 1: my views that the regulation is unfocused. I'd like to
Speaker 1: remove complicated regulation that doesn't bring as much as benefit
Speaker 1: for the cost that on everybody that it takes, and
Speaker 1: bring in straightforward regulation that's going to keep viable banks
Speaker 1: kind of healthier and get rid of some unhealthy banks
Speaker 1: that are just kind of trying to stay in And
Speaker 1: in my view, I you know, the banks are showing
Speaker 1: symptoms of kind of the way in solvent of highly
Speaker 1: distressed companies behave. They just are able to stay that
Speaker 1: way because I don't have the creditors to push to
Speaker 1: sort of tell them that they're sick. So anyway, regulators,
Speaker 1: unless they flex muscles and insist at the banking system's
Speaker 1: got to be healthy and stable. We're going to continue
Speaker 1: a man, a little long, a lot of body with
Speaker 1: us of Stanford University, Bloomberg Surveillance this morning from Washington
Speaker 1: and the offices of the International Monetary Fund their annual meetings,
Speaker 1: and from New York, brought to you by Investco to
Speaker 1: the day's headlines. Have you searching for more investment views?
Speaker 1: Investcos high conviction portfolio managers can help find the latest
Speaker 1: at the investco blog. Visit investco dot com slash us
Speaker 1: to subscribe an a body give us an update on
Speaker 1: almost some microeconomics of financial repression and the enthusiasm for
Speaker 1: loan demand. I think there's a lot of ambiguities within
Speaker 1: the certitude of the media and the coverage of this.
Speaker 1: If we're financially repressed, we're gonna stay financially impressed. How
Speaker 1: does that full back into the air almost spirit of
Speaker 1: our middle loan? Well, when people need loans, if you
Speaker 1: talk about micros, you know, foundations of all of this,
Speaker 1: the question is what are they need a loan for?
Speaker 1: And so you can get people too. You can dangle
Speaker 1: alone in front of somebody and they might take it
Speaker 1: and they can't pay it back. So we've seen a
Speaker 1: lot of that in the UH sub prime, you know,
Speaker 1: liar loans and all of that. So you know, demand
Speaker 1: for loans is you know, there's sort of the good
Speaker 1: demand for loans for productive things, for investing in you know,
Speaker 1: good education, small businesses that will do stuff. If the
Speaker 1: economy is not not working, then you don't have the
Speaker 1: kind of good demand for loans. And then if you
Speaker 1: have a lot of credit or credit boom, then it
Speaker 1: doesn't end well usually. So you know, there is landing
Speaker 1: and there's landing, there's credit and there's credit. I make
Speaker 1: a distinction there. If it's very cheap to to borrow,
Speaker 1: then maybe people will, but it's the it alone and
Speaker 1: it still is money that that somebody gets today and
Speaker 1: promises to pay later. We can't let you go without
Speaker 1: asking you. Should you come from Stanford out in the
Speaker 1: San Francisco Bay area about the San Francisco Bay areas,
Speaker 1: Big Bank, wells Fargo. Uh, what happens next with it? Well,
Speaker 1: what's interesting about What's Fargo is that among the numerous scandals,
Speaker 1: this one resonates with people because it's a simple consumer
Speaker 1: issue and so the magnitude of it is like people
Speaker 1: are wowed. A lot of there were there have been
Speaker 1: a lot of scandals here. You mentioned, you know, disclosures
Speaker 1: of well of the bank, and every single day there
Speaker 1: is something credits with now is still dealing with the
Speaker 1: sec Well. This is interesting because it got a lot
Speaker 1: of attention from a lot of stakeholders. For example, the
Speaker 1: treasurer of my state's California has gotten piste off it
Speaker 1: was Fargo and pulled aways business, which a few other
Speaker 1: states treasurers have uh done. And so you ask yourself, Okay,
Speaker 1: can the state of California do something about was Fargo?
Speaker 1: And I think that there's some feeling in my state
Speaker 1: that they want to do something about it, like you know,
Speaker 1: putting a state law something or whatever. We'll have to
Speaker 1: watch for that and unfortunately have to leave it here,
Speaker 1: but come back again because it just seems like these
Speaker 1: thanks stories never end. Keeps anat mighty employed, right, that's
Speaker 1: professor at Stanford University. Thanks for joining us today here
Speaker 1: on surveillance. This is Bloomberg