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Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim Fox.

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Speaker 1: Along with my co host Lisa Bramowitz. Each day we

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Speaker 1: bring you the most important, noteworthy, and useful interviews for

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Speaker 1: you and your money, whether you're at the grocery store

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Speaker 1: or the trading floor. Find the Bloomberg p m L

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Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. President

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Speaker 1: Ronald Reagan is often upheld as the conservative gold standard,

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Speaker 1: the Republican president that led the Golden era for a

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Speaker 1: lot of Republicans. And Henry Olsen was so compelled by

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Speaker 1: Ronald Reagan that he wrote a book about him. Henry

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Speaker 1: Wilson joins us now. He's author and senior fellow at

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Speaker 1: Ethics and Public Policy Center in Washington, d C. It's

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Speaker 1: the Center to the right leading group, and he joins

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Speaker 1: us right now in our Bloomberger eleven three oh studios.

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Speaker 1: He just released his book, The Working Class Republican Ronald

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Speaker 1: Reagan and the Return of Blue Collar Conservatism. And in

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Speaker 1: the book you highlight some of his democratic roots, some

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Speaker 1: of his admiration for FDR, who has thought of as

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Speaker 1: a very liberal president. What were you trying to accomplish

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Speaker 1: with the book. What I wanted to accomplish was two things.

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Speaker 1: One is to show who the real Ronald Reagan was.

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Speaker 1: He's somebody who never left his admiration of FDR behind.

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Speaker 1: In fact, many of his most famous lines were unattributed

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Speaker 1: but direct paraphrases of FDR. For example, the night clothes

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Speaker 1: in the debate, where he said, are you better off

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Speaker 1: than you were four years ago? Was a direct rip

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Speaker 1: off of FDR's fifth Fireside chap. But more than historical,

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Speaker 1: what I wanted to show was that that attitude, that

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Speaker 1: combination of traditional conservatism of freedom and conservation of liberalism,

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Speaker 1: of giving people a hand up in American life, is

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Speaker 1: what Reagan was all about, and that was the secret sauce.

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Speaker 1: That's what let him win, that's what let him set

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Speaker 1: the agenda, and that today's Democrats and Republicans have separate

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Speaker 1: it into partisan squabbling brothers, neither of whom understand what

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Speaker 1: Americans want, which is the continuation, not the repudiation of

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Speaker 1: Franklin Roosevelt. So you wrote this book when President Obama

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Speaker 1: was in charge, right, I mean, it comes out now,

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Speaker 1: but I imagine this was written during a period pre

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Speaker 1: any reality of President Donald Trump. How does that change

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Speaker 1: the equation for you. It doesn't actually change the equation

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Speaker 1: that much. And it doesn't because, oddly enough, for what

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Speaker 1: Trump did was tapped into the Reagan Democrat. Trump is

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Speaker 1: the first person since Reagan to carry the five Midwestern

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Speaker 1: states that are dominated by blue collar whites, the traditional

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Speaker 1: Reagan Democrat Iowa, Michigan, Ohio, Pennsylvania, and Wisconsin. And he

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Speaker 1: did it by focusing on their concerns. He came out

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Speaker 1: and he said, I understand you're struggling. I'm going to

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Speaker 1: put you at the center of my agenda. I'm not

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Speaker 1: going to touch, unlike those other Republicans social Security and medicare.

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Speaker 1: I'm going to deal with getting your jobs back. And

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Speaker 1: that was a modern version of what FDR did in

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Speaker 1: the Great Depression, saying you cared more about these people

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Speaker 1: than about financiers on Wall Street, and a modern version

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Speaker 1: of what Reagan did. He was focusing on the blue

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Speaker 1: collar white, but blue collar voters generally, but particularly the

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Speaker 1: blue collar white, and he won their support in degree

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Speaker 1: that hasn't been seen at all since the degree that

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Speaker 1: they backed Reagan in the nineteen eighties. So are the

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Speaker 1: measures that we have seen out of the President Trump administration.

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Speaker 1: Have they been coherent with what President Reagan would have done. No. Uh.

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Speaker 1: Trump campaign more coherently than he's governed so far. A

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Speaker 1: lot of the things that he talked about that would

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Speaker 1: have appealed to these voters are falling by the wayside.

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Speaker 1: I think that the debate over the healthcare replacement bill

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Speaker 1: is a perfect example of that. That he said he

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Speaker 1: wouldn't cut Medicaid, but in fact the bill cutts Medicaid.

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Speaker 1: He said people wouldn't lose their health insurance and to

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Speaker 1: be cheaper. In fact, there's a great risk that people

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Speaker 1: will lose their health insurance. He's become more of the

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Speaker 1: traditional Goldwater right, anti state Republican in office than he

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Speaker 1: campaigned as, and that's a huge problem for him. What

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Speaker 1: would Ronald Reagan do with the GOP healthcare plan? I

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Speaker 1: think Reagan would want to cover as many people as possible,

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Speaker 1: but remove as many regulations as possible. Reagan said throughout

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Speaker 1: his career that he believed that nobody in America should

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Speaker 1: go without medical care because of a lack of funds.

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Speaker 1: He supported that when he was a conservative in the

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Speaker 1: nineteen sixty one. He supported it when he was a governor.

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Speaker 1: He's tried to expand various medical programs as governor and

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Speaker 1: as president. So I think that Reagan would try and

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Speaker 1: cover as many people as he could, but do it

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Speaker 1: more efficiently through the private sector than through a mandated

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Speaker 1: benefit structure, which is what Obamacare was. In the introduction,

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Speaker 1: you talked about how you grew up in California as

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Speaker 1: a staunch Republican and how you volunteered for GOP causes,

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Speaker 1: and you really looked up to President Reagan as an

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Speaker 1: archetype of a good leader. I'm wondering, do you still

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Speaker 1: identify as Republican. I do, but I identify as a

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Speaker 1: Reagan Republican. Uh. And what I've come to do is

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Speaker 1: under Dan my idol better and consequently become even more

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Speaker 1: devoted to what he believed than I was when I

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Speaker 1: misunderstood him. It's harder, though, today, to be a staunch

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Speaker 1: Republican when you see um the sort of mistakes, when

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Speaker 1: you see the sort of oftentimes disregard for the wishes

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Speaker 1: of the common man that too many in our party exact.

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Speaker 1: And I'd like to see a return to what worked

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Speaker 1: and what Americans want, which is a Republican party that

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Speaker 1: focuses on love of the average person rather than love

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Speaker 1: of an abstract ideal or love of the pursuit of wealth.

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Speaker 1: You know, President Reagan oversaw the US during a time

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Speaker 1: of remarkable economic growth. Uh. He oversaw inflation to decline

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Speaker 1: while growth accelerated. It was considered a golden economic era.

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Speaker 1: But there is a lot of discussion and frankly dissent

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Speaker 1: about whether the sort of voodoo economics, that trickle down

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Speaker 1: economics that he espoused was responsible for that, or whether

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Speaker 1: that was something else altogether. Where do you fall on that, Well,

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Speaker 1: I think one Reagan never espouse trickle down economics. What

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Speaker 1: Reagan did actually was criticized that he always spoke of

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Speaker 1: a humane economy. He spoke about the American worker, not

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Speaker 1: the entrepreneurs, the foundation of the American economy. In fact,

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Speaker 1: when his first budget director had a revealing interview in

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Speaker 1: one and said that Reagan's tax plan was actually trickled

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Speaker 1: down in disguised, Reagan criticized him for it, and, as

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Speaker 1: they said, took him to the woodshed. What Reagan believed

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Speaker 1: was that incentives worked for everybody, and that people from

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Speaker 1: all spectrums of the economics Ladder contributed to economic growth.

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Speaker 1: I think a lot of what Reagan did helped increase

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Speaker 1: the economy. I think lowering tax rates on everybody. Today

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Speaker 1: we've got a top tax rate of on the richest people.

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Speaker 1: We used to have a top tax rate of forty

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Speaker 1: people on the middle class. Before Reagan got into office,

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Speaker 1: tax rates were so much higher. He brought them down,

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Speaker 1: encouraged everybody to work more, and deregulation opened up new

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Speaker 1: industries that were unimaginable. For Reagan, I think he was

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Speaker 1: very much responsible for the economic boom that occurred on

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Speaker 1: his watch. Proportion of Congressman, of senators and representatives UH

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Speaker 1: currently adhered to Reagan Republicanism. In your view, I think

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Speaker 1: more in practice than in theory that what they've been

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Speaker 1: there's a number of people who are remain unreconciled to

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Speaker 1: UH the New Deal, remain not unreconciled to a mixed economy.

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Speaker 1: And these are like the people you find and the

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Speaker 1: Freedom Caucus that Rand paul ted Cruz. But I think

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Speaker 1: a lot more Republicans are there where Reagan was, but

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Speaker 1: they just don't have a language for it. They've been

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Speaker 1: told that they have to talk in terms of freedom

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Speaker 1: and opportunity. And entrepreneurship and trickle down um. And so

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Speaker 1: they don't pursue the sort of policies that in their

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Speaker 1: heart they might want to pursue, but they don't really

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Speaker 1: have a grounding for going forward. And that's what I'm

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Speaker 1: trying to do in this book. I could talk with

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Speaker 1: you for another hour, particularly about the trickle down point,

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Speaker 1: which is uh an issue that I would love to

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Speaker 1: understand a little bit better, because it's sort of a

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Speaker 1: narrow distinction there between high tax you know, lowering taxes

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Speaker 1: and expecting it to go into economic growth versus trickle

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Speaker 1: down what you label it. But unfortunately we have to

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Speaker 1: leave it there. Thank you so much for joining us. Thanks.

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Speaker 1: Henry Olson is an author and senior Fellow at the

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Speaker 1: Ethics and Public Policy Center based in Washington, d C.

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Speaker 1: His new book, The Working Class Republican Ronald Reagan and

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Speaker 1: the Return of Blue Collar Conservatism is out now and

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Speaker 1: it's a fascinating look at one of the Republican heroes

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Speaker 1: in American history. Well, last week I read a survey

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Speaker 1: that was somewhat alarming income investors. According to the survey,

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Speaker 1: so he can overall average rate of return and expect

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Speaker 1: a rate of return of eight point six percent on

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Speaker 1: averages is, according to a leg Mason survey, that is

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Speaker 1: higher than may have been able to get rely and

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Speaker 1: is higher than many money managers can imagine that they

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Speaker 1: could possibly achieve at a time when average high bond

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Speaker 1: heels are five point seven percent compared with an average

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Speaker 1: of more than eight percent over the past decade. Michael

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Speaker 1: Buchanan joins US now. He is deputy Chief Investment Officer

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Speaker 1: of Western Asset Management Company, which is an independent affiliate

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Speaker 1: of Like Mason UH and it oversees four hundred and

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Speaker 1: thirty three billion dollars. Michael, thank you so much for

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Speaker 1: joining US. Um have you ever seen such a big

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Speaker 1: gap in investor expectations versus reality? Well, I can't tell

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Speaker 1: you that we've actually gone out and measured that gap

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Speaker 1: on a regular basis, but um, you know, I would

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Speaker 1: say that intuitively, it definitely feels today that, um, that

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Speaker 1: gap is certainly large. And is it, you know, as

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Speaker 1: large as it's ever been. Not really sure, but it's

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Speaker 1: it's certainly up there in terms of magnitude. Well, here's

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Speaker 1: why it seems somewhat concerning. If investors want more than

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Speaker 1: eight percent returns, there will be some money managers who say, look,

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Speaker 1: I can do that for you. I can lever up

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Speaker 1: something uh that's fairly risky at a time of high

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Speaker 1: valuations and ostensibly rising yields uh, and you could you

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Speaker 1: could win big. You could also lose big, but you

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Speaker 1: could win big. Do you see that happening? Um? There?

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Speaker 1: You know, there's always that risk, and I think it's

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Speaker 1: a good point. I mean, there aren't too many opportunities

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Speaker 1: out there where you can even get close to that

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Speaker 1: type of return. So I think at leasta, you're right,

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Speaker 1: the only way you really can get there is with leverage.

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Speaker 1: And you know, our view is, you know, you don't

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Speaker 1: necessarily have to solve for that. Just because investors expect

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Speaker 1: that type of return doesn't mean we actually have to

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Speaker 1: go and try to reach for that. But we what

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Speaker 1: we do want to do is make sure that we're

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Speaker 1: utilizing all different parts of the fixed income market to

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Speaker 1: minimize that gap in a in a thoughtful way, in

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Speaker 1: a in a good, risk controlled way. Do you think

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Speaker 1: that because investors have expectation, they will be more aggressive

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Speaker 1: and it will fuel gains in areas that some people

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Speaker 1: think are already perhaps stretched, like high yield. Yeah, I think,

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Speaker 1: you know, to some extent um, we we're seeing a

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Speaker 1: little bit of that, but I think we're we're far

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Speaker 1: from a point where I would call valuations and a

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Speaker 1: lot of these traditional fixed income markets, whether it's high

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Speaker 1: yield or structured products or emerging markets, I don't feel

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Speaker 1: like we're at a point where valuations are are stretched. Certainly,

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Speaker 1: all the Central Bank accommodation has caused investors to uh

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Speaker 1: reach a little bit in terms of risk, but I

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Speaker 1: still think when you go back to two thousand and

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Speaker 1: eight in the crisis, that was so damaging that it

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Speaker 1: really did damage risk profiles, investors spirits. So it's just

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Speaker 1: taking longer than it normally would to have those investors

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Speaker 1: take that or take on that risk seeking behavior that

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Speaker 1: you know ultimately will and does get them into trouble. So,

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Speaker 1: given this gap in expectations and reality, how have you

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Speaker 1: kind of rejiggered your recommendations as for how people should

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Speaker 1: allocate specifically within fixed income. Well, we definitely are encouraging

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Speaker 1: and have been encouraging our clients to emphasize the the

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Speaker 1: income oriented sectors, the so called spread sectors, and those

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Speaker 1: are like I just mentioned, um and no particular order,

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Speaker 1: corporate credit UM, specifically high yield UH and bank loans UH,

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Speaker 1: select emerging markets, structured products, whether it's UH non agency

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Speaker 1: mortgages or UH CMBs UH. So there's a lot of

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Speaker 1: areas within fixed income. And one of the things that

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Speaker 1: we're seeing and we think this makes a lot of sense,

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Speaker 1: is when our clients give us the the allowance to

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Speaker 1: make dynamic allocations to these sectors. In other words, it's

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Speaker 1: not a dedicated allocation, but they say on opportunity, UM,

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Speaker 1: we're gonna let you allocate to the various sectors and

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Speaker 1: really kind of take advantage of the best risk adjusted

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Speaker 1: returns within those sectors. So you don't see it sounds

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Speaker 1: like UM irresponsible investing by fellow money managers, let's say,

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Speaker 1: using a lot of leverage or kind of creating a

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Speaker 1: riskier environment for some of these already UH somewhat riskier

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Speaker 1: asset classes. You know, I really don't, And people will

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Speaker 1: will talk about high yield in that capacity or that

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Speaker 1: regard UH. The amount of triple c issuance UH is

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Speaker 1: still relatively low. A lot of the more aggressive structures

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Speaker 1: that you typically see when a cycle is getting ready

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Speaker 1: to turn, these are you know, kind of deferred interest

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Speaker 1: mechanisms like paying kind bonds. We're really not seeing a

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Speaker 1: lot of that. We're still seeing a lot of investor

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Speaker 1: discipline in terms of the high yield market. And I

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Speaker 1: always say right now that it's it's it's a lot

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Speaker 1: easier for a company to uh bring a you know,

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Speaker 1: double be kind of the call it a four and

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Speaker 1: a quarter four and a half percent yield deal. You

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Speaker 1: can sell a lot more of that than a triple

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Speaker 1: ce deal with a double digit coupon. Because I think

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Speaker 1: investors are still you know again they're they're they're they're

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Speaker 1: still very cautious. So embedded in your outlook seems to

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Speaker 1: be an assumption that we will not have a recession

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Speaker 1: in the next twelve months, perhaps eighteen months. Is that correct, Yeah,

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Speaker 1: that's definitely our view. We think that, um, the economy

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Speaker 1: is you know, sort of a slow growth, but positive growth,

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Speaker 1: an environment that necessitates continued accommodation, even as the FED

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Speaker 1: is removing accommodation. UM. But we don't see those headwinds

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Speaker 1: that UM really give us a lot of cause or

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Speaker 1: concern for a recession, certainly in the near term. What's

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Speaker 1: the biggest risk, I mean, is there anything that you're

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Speaker 1: looking at right now that could change that you yeahs

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Speaker 1: as portfolio managers, you're always trying to think about, you know,

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Speaker 1: the risk that that can you know, really damage your

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Speaker 1: your main view. Um, you know, I think China is

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Speaker 1: one that um it kind of comes and goes and uh,

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Speaker 1: you know there there is clearly you know when you

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Speaker 1: think of China, it is a big growth engine for

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Speaker 1: the global economy. We all know there are some latent

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Speaker 1: risks there and um, if if if China were too

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Speaker 1: you know, underwhelm if if you saw a little bit

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Speaker 1: of a hiccup there, if you saw some of those

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Speaker 1: risks and in corporate credits start to manifest themselves into

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Speaker 1: more volatility or slow slower global growth, you know, those

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Speaker 1: could all derail the momentum of the very fragile recovery.

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Speaker 1: But right now things look copasetic. Thank you so much

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Speaker 1: for joining fortuning me. This is really a fascinating issue.

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Speaker 1: In this gap between investor expectations and the reality is

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Speaker 1: something definitely to keep an eye on. Mike Buchanan, He's

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Speaker 1: deputy Chief investment Officer of Western Asset Management in Pasadena, California.

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Speaker 1: I believe overseeing four d and thirty three billion dollars.

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Speaker 1: Let's talk taxes. This has been the big issue for markets.

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Speaker 1: Everyone has been waiting to hear how much President Trump

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Speaker 1: will cut taxes. And I should say also Paul Ryan

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Speaker 1: Uh in the House, Linley Browning joined us now she's

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Speaker 1: a tax reporter for Bloomberg News coming to us from Fairfield, Connecticut.

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Speaker 1: And Linley, before we get into the details of what

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Speaker 1: some people are expecting from the tax proposal, I would

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Speaker 1: love to get a sense from you. What do we

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Speaker 1: have that's concrete about this proposal other than that brief,

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Speaker 1: lesson two hundred word description from President Trump a while back.

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Speaker 1: Do we have something more concrete to base assumptions on

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Speaker 1: at this point? Well, we have, as for example, trumps

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Speaker 1: uh tax for potogos. No, we don't have anything more concrete.

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Speaker 1: We have his uh roughly two hundred word bullet plan

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Speaker 1: proposal in which he reiterated his previous calls for the

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Speaker 1: corporate rate and in fact the rate for all types

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Speaker 1: of businesses be cut to fift So, but do we

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Speaker 1: have are there any bills that have come out of

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Speaker 1: the House or the Senate that sort of map out

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Speaker 1: a little bit more concretely what they're looking to do. No,

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Speaker 1: we have nothing on the level of bills for legislative language.

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Speaker 1: Everything right now is on the level of arbitrs and

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Speaker 1: concepts and seeing you know what can be done in

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Speaker 1: the name of quote unquote tax reform. UH. Senator House

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Speaker 1: Speaker Paul Ryan, of course has put forth UH and

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Speaker 1: his proposed rate of but it's not clear that that

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Speaker 1: UH could be afforded given opposition to other measures he's

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Speaker 1: proposed that would help pay for that rate cut. So

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Speaker 1: arbitraging out the different scenarios, experts that you have spoken

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Speaker 1: to came up with this twenty percent figure, which is

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Speaker 1: far higher than the fift tax rate that some Republicans

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Speaker 1: have called for. With respect to the corporate tax rate

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Speaker 1: being lowered. UH, A lot of experts say twenty eight

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Speaker 1: percent is much more realistic. Can you talk a little

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Speaker 1: about that. The reason percent roughly is more realistic is

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Speaker 1: because it's a rate that, under rules of budget funding

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Speaker 1: and deficits, could be wrangled to quote unquote pay for itself.

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Speaker 1: The idea is that if you want permanent tax reform,

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Speaker 1: are not just temporary rate cut UH. Those UH, any

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Speaker 1: rate reduction in the corporate rate has to not increase

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Speaker 1: the UH budget deficit over a period of a decade.

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Speaker 1: So the question is how do you how do you

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Speaker 1: fund what? What are the pay fors for a rate cut?

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Speaker 1: And right now the things that the House repos because

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Speaker 1: they propose aren't really going anywhere. The border adjustment tax

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Speaker 1: and the elimination of the net interstroduction, those collectively would

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Speaker 1: raise about two point two trillion over a decade. That

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Speaker 1: would more UH than Ox said a rate cut to.

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Speaker 1: Trump has no proposals to pay for a rate cut

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Speaker 1: to He's been arguing that, well, you don't really need

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Speaker 1: to pay for is You're going to get into these

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Speaker 1: economic growth and that's going to sort of pay for installed.

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Speaker 1: So in other words, a lot of the Republicans in

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Speaker 1: the Senate and the House don't buy that argument. They

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Speaker 1: want to they want to balance budget. They're not going

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Speaker 1: to just go for cutting the taxes first and hoping

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Speaker 1: that that growth will offset it in the future. They

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Speaker 1: may not. They may, in fact, UH do away with

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Speaker 1: the idea that UH tax cuts cannot increase the Federals

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Speaker 1: epicits over a ten year windo, and in fact they

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Speaker 1: may seek to extend that window to twenty years or

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Speaker 1: thirty years. It's completely unknown right now. How much does

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Speaker 1: the healthcare bill wag into this. You know, it's for

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Speaker 1: both sides have said we want to get healthcare done

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Speaker 1: before we get tax reform done. They both tames have

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Speaker 1: made that very clear. And the takeaway on the street

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Speaker 1: right now is that if you can't get healthcare done,

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Speaker 1: how are you going to get tax reform done? Uh.

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Speaker 1: The latter is a much thornier, uh and bigger problem.

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Speaker 1: So in other words, it kind of dampens the hopes

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Speaker 1: for certainly a fifteent tax rate, which probably also factors

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Speaker 1: into why people are are kind of settling on the

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Speaker 1: as sort of more likely scenario possibly too. Yes, that

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Speaker 1: is correct. Thank you so much for joining me. Linley Browning,

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Speaker 1: tax reporter for Bloomberg News, coming to us from Fairfield, Connecticut.

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Speaker 1: And rarely have I heard a time when taxes were

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Speaker 1: such at the forefront of markets. And this has been absolutely,

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Speaker 1: uh the biggest driver in some people's estimation of some

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Speaker 1: of the stock games and the Trump bump, The expectation

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Speaker 1: that tax cuts will bolster corporate growth green on the

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Speaker 1: screen across the board, across major U s and dissease

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Speaker 1: as well as overseas. Dave Wilson joins me now. Dave

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Speaker 1: Wilson is Bloomberg Stocks editor, columnist and blogger and m

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Speaker 1: live go on the Bloomberg. You should check it out.

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Speaker 1: It's wonderful and comprehensive. Dave. What is driving today's games?

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Speaker 1: It's a hard one to kind of pin on much

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Speaker 1: of anything, to be honest, other than the market that's

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Speaker 1: gotten momentum. You see the financial stocks leading the way

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Speaker 1: within the S and P, and certainly that's a group

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Speaker 1: that has been through the ring or a bit lately

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Speaker 1: with on yields coming down, and of course that means

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Speaker 1: that they banks don't stand to earn as much on

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Speaker 1: their loans and investments. That being the case, yet pretty

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Speaker 1: much every financial stock in the SMP five hundreds higher today,

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Speaker 1: So that's certainly a group kind of front and center

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Speaker 1: helping things along. Beyond that, I mean, we've kind of

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Speaker 1: gotten to the point, you know, week left in the quarter,

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Speaker 1: where there's not a whole lot of company news to

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Speaker 1: really focus on. So it's maybe just the idea that

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Speaker 1: in market in motion stays in motion. As well as

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Speaker 1: anything else with financials, there is an interesting dynamic which

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Speaker 1: took hold over the weekend. And I want to bring

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Speaker 1: in Leonel laurent Uh to join us and sort of

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Speaker 1: give us some perspective on what happened in Italy. Leonel

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Speaker 1: is a columnist covering finance and markets for Bloomberg gadfline

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Speaker 1: comes to us from London. So Leon know, there was

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Speaker 1: this uh bailout basically orchestrated by Italy, and nineteen billion

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Speaker 1: dollar bailout, the biggest ever for Italy to bail out

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Speaker 1: to troubled banks, and the market is cheering. I thought

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Speaker 1: that after what happened in the ECB rules and the

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Speaker 1: some of the provisions, that there couldn't be a bailout

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Speaker 1: like this. How does this? How is this kosher? Yeah?

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Speaker 1: I think you've been paying attention maybe too closely, and

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Speaker 1: forgotten that actually this is a very political story. I mean,

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Speaker 1: Italy is simply a very big economy. If you're going

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Speaker 1: to bend the rules for a country, it might as

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Speaker 1: well be a big one. And I think that, you know,

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Speaker 1: we we shouldn't forget that. The fact this is a

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Speaker 1: record is because Italy has actually been been quite a

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Speaker 1: good uh you know child in terms of the of

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Speaker 1: the crisis. It didn't, It didn't have as bad a

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Speaker 1: crisis some of the other countries. But essentially what you're

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Speaker 1: seeing here is a is a bailout that basically, you know,

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Speaker 1: protects the posters, protect senior bond holders, but at taxpayers expense.

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Speaker 1: And I think the market forgot that there just might

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Speaker 1: be that little escape route for a country like Italy.

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Speaker 1: So is this basically the rally that we're seeing in

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Speaker 1: financials today? Is this basically a relief rally that, yes,

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Speaker 1: if there is a problem in markets, governments will after

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Speaker 1: our bail banks out again. Well, I think, you know,

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Speaker 1: it is good news that you have to weak banks

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Speaker 1: in Italy out of the system. I think that it

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Speaker 1: comes recently after another week bank, this time in Spain

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Speaker 1: was taken out of the system. So I feel like

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Speaker 1: there is good news to be taken out of this, right.

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Speaker 1: I think that that the problem is on a more

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Speaker 1: kind of political level, on a more kind of future level. Right.

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Speaker 1: I mean, if if banks do come back to the market,

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Speaker 1: do investors think twice about the whole story of the

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Speaker 1: Eurozone rule book or will they be as pragmatic as

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Speaker 1: the politicians and regulators seem to be Dave is the

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Speaker 1: rally and financials more pronounced in European firms. Well, let

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Speaker 1: me just take a quick look here. You go to

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Speaker 1: the stock six hundred just to get an idea. I mean,

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Speaker 1: that's essentially the European version of the SNP five hundred.

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Speaker 1: And as far as today's trading goes, well, the financial

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Speaker 1: stocks really aren't kind of leading the way, not not

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Speaker 1: not an extreme move by any means. In fact, a

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Speaker 1: whole lot of groups doing better in Europe than the financials,

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Speaker 1: So you know, it's another day, another advantage, all right, Well, Leonel,

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Speaker 1: I wanted to talk a little bit about the debt,

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Speaker 1: right because as part of this bailout, the senior bondholders

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Speaker 1: would get prioritized, they wouldn't lose any money, and the

431
00:25:15,280 --> 00:25:18,720
Speaker 1: junior bondholders would get wiped out sort of, right because

432
00:25:18,760 --> 00:25:24,439
Speaker 1: there is a large retail ownership component to Italy's junior

433
00:25:24,480 --> 00:25:26,640
Speaker 1: bank bonds. In other words, just your mom and pop

434
00:25:26,680 --> 00:25:31,560
Speaker 1: investors own a lot of the subordinated bonds, and the

435
00:25:31,600 --> 00:25:36,320
Speaker 1: government couldn't let them just take losses, right, right exactly.

436
00:25:36,400 --> 00:25:40,119
Speaker 1: And it's it's the sort of that's key. So basically,

437
00:25:40,400 --> 00:25:43,040
Speaker 1: I think there's going to be an attempt to get

438
00:25:43,040 --> 00:25:46,959
Speaker 1: a fund together of about two million euros to basically

439
00:25:47,040 --> 00:25:52,399
Speaker 1: reimburse investors who have been allegedly missold some of these securities.

440
00:25:52,520 --> 00:25:55,960
Speaker 1: This is from a culture where you know, these bonds,

441
00:25:56,040 --> 00:25:58,720
Speaker 1: these securities and to do with banks were sold as

442
00:25:58,880 --> 00:26:03,000
Speaker 1: you know, really secure, really safe, lifelong investments. And in

443
00:26:03,119 --> 00:26:05,840
Speaker 1: Teza San Paolo, which is the big strong Italian bank

444
00:26:05,880 --> 00:26:07,720
Speaker 1: that's going to be buying these weak banks for about

445
00:26:07,720 --> 00:26:11,000
Speaker 1: a euro has also promised it will pay out money

446
00:26:11,040 --> 00:26:14,159
Speaker 1: to small savers that are going to suffer from this.

447
00:26:14,320 --> 00:26:17,200
Speaker 1: So I think, you know, even here you get a yes,

448
00:26:17,280 --> 00:26:19,720
Speaker 1: junior bond holders wiped out, but it's the it's the

449
00:26:19,760 --> 00:26:22,400
Speaker 1: sort of that's that's in question. So so it looks

450
00:26:22,440 --> 00:26:26,160
Speaker 1: like about a quarter of the junior A debt outstanding

451
00:26:26,359 --> 00:26:30,679
Speaker 1: will find some kind of refund or recourse. Does this

452
00:26:30,760 --> 00:26:34,320
Speaker 1: let me precedent? Because in Italy and my mistaken my

453
00:26:34,320 --> 00:26:38,119
Speaker 1: my impression is in Italy, mom and pop investors on

454
00:26:38,160 --> 00:26:42,120
Speaker 1: a disproportionate amount of these junior bonds. Is that correct?

455
00:26:42,400 --> 00:26:45,119
Speaker 1: That's correct. I think it's about half, So I mean,

456
00:26:45,200 --> 00:26:47,280
Speaker 1: does it does this set a precedent that if anything

457
00:26:47,359 --> 00:26:50,879
Speaker 1: does happen, that there needs to be some provision where

458
00:26:51,040 --> 00:26:55,199
Speaker 1: retail holders of these bonds need to get compensated on

459
00:26:55,359 --> 00:26:59,640
Speaker 1: some level, or else they'll be political turmoil. This this

460
00:26:59,680 --> 00:27:02,200
Speaker 1: is all see, all part of the negotiation, all part

461
00:27:02,240 --> 00:27:05,960
Speaker 1: of the calculation. I think it's also pure litigation risk

462
00:27:06,280 --> 00:27:10,240
Speaker 1: as well that you know sadly in this case as well,

463
00:27:10,520 --> 00:27:12,520
Speaker 1: the taxpayer is on the hook for right. I mean

464
00:27:12,560 --> 00:27:16,480
Speaker 1: the taxpayer through guarantees to the buyer in Teza, is

465
00:27:16,480 --> 00:27:19,680
Speaker 1: also helping to cover future litigation risk, which I'm sure

466
00:27:19,920 --> 00:27:23,720
Speaker 1: we'll cover also taxpayers. Were we are we are delving

467
00:27:23,720 --> 00:27:26,600
Speaker 1: into the capital structure of these banks. The next us

468
00:27:26,680 --> 00:27:30,600
Speaker 1: between you know, politics and finance and and households and

469
00:27:30,680 --> 00:27:34,840
Speaker 1: institutional investors, and that is what these governments and regulators

470
00:27:34,880 --> 00:27:37,760
Speaker 1: try to unpick every time a bank goes against the wall.

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00:27:38,240 --> 00:27:40,159
Speaker 1: Leonie Lauren, thank you so much for joining us and

472
00:27:40,200 --> 00:27:42,880
Speaker 1: for your perspective. Leoni Lauren is a calumnist covering finance

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00:27:42,960 --> 00:27:47,200
Speaker 1: and markets for Bloomberg. Gad Fly coming to us from London.

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00:27:49,720 --> 00:27:52,240
Speaker 1: Thanks for listening to the Bloomberg P and L podcast.

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00:27:52,600 --> 00:27:55,600
Speaker 1: You can subscribe and listen to interviews at Apple podcast,

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00:27:55,880 --> 00:27:59,800
Speaker 1: SoundCloud or whatever podcast platform you prefer. I'm pim Fox.

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00:28:00,000 --> 00:28:03,200
Speaker 1: I'm on Twitter at pim Fox. I'm on Twitter at

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00:28:03,320 --> 00:28:06,399
Speaker 1: Lisa Abramo. It's one before the podcast. You can always

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00:28:06,400 --> 00:28:08,440
Speaker 1: catch us worldwide on Bloomberg Radio