Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim Fox.
Speaker 1: Along with my co host Lisa Bramowitz. Each day we
Speaker 1: bring you the most important, noteworthy, and useful interviews for
Speaker 1: you and your money, whether you're at the grocery store
Speaker 1: or the trading floor. Find the Bloomberg p m L
Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. President
Speaker 1: Ronald Reagan is often upheld as the conservative gold standard,
Speaker 1: the Republican president that led the Golden era for a
Speaker 1: lot of Republicans. And Henry Olsen was so compelled by
Speaker 1: Ronald Reagan that he wrote a book about him. Henry
Speaker 1: Wilson joins us now. He's author and senior fellow at
Speaker 1: Ethics and Public Policy Center in Washington, d C. It's
Speaker 1: the Center to the right leading group, and he joins
Speaker 1: us right now in our Bloomberger eleven three oh studios.
Speaker 1: He just released his book, The Working Class Republican Ronald
Speaker 1: Reagan and the Return of Blue Collar Conservatism. And in
Speaker 1: the book you highlight some of his democratic roots, some
Speaker 1: of his admiration for FDR, who has thought of as
Speaker 1: a very liberal president. What were you trying to accomplish
Speaker 1: with the book. What I wanted to accomplish was two things.
Speaker 1: One is to show who the real Ronald Reagan was.
Speaker 1: He's somebody who never left his admiration of FDR behind.
Speaker 1: In fact, many of his most famous lines were unattributed
Speaker 1: but direct paraphrases of FDR. For example, the night clothes
Speaker 1: in the debate, where he said, are you better off
Speaker 1: than you were four years ago? Was a direct rip
Speaker 1: off of FDR's fifth Fireside chap. But more than historical,
Speaker 1: what I wanted to show was that that attitude, that
Speaker 1: combination of traditional conservatism of freedom and conservation of liberalism,
Speaker 1: of giving people a hand up in American life, is
Speaker 1: what Reagan was all about, and that was the secret sauce.
Speaker 1: That's what let him win, that's what let him set
Speaker 1: the agenda, and that today's Democrats and Republicans have separate
Speaker 1: it into partisan squabbling brothers, neither of whom understand what
Speaker 1: Americans want, which is the continuation, not the repudiation of
Speaker 1: Franklin Roosevelt. So you wrote this book when President Obama
Speaker 1: was in charge, right, I mean, it comes out now,
Speaker 1: but I imagine this was written during a period pre
Speaker 1: any reality of President Donald Trump. How does that change
Speaker 1: the equation for you. It doesn't actually change the equation
Speaker 1: that much. And it doesn't because, oddly enough, for what
Speaker 1: Trump did was tapped into the Reagan Democrat. Trump is
Speaker 1: the first person since Reagan to carry the five Midwestern
Speaker 1: states that are dominated by blue collar whites, the traditional
Speaker 1: Reagan Democrat Iowa, Michigan, Ohio, Pennsylvania, and Wisconsin. And he
Speaker 1: did it by focusing on their concerns. He came out
Speaker 1: and he said, I understand you're struggling. I'm going to
Speaker 1: put you at the center of my agenda. I'm not
Speaker 1: going to touch, unlike those other Republicans social Security and medicare.
Speaker 1: I'm going to deal with getting your jobs back. And
Speaker 1: that was a modern version of what FDR did in
Speaker 1: the Great Depression, saying you cared more about these people
Speaker 1: than about financiers on Wall Street, and a modern version
Speaker 1: of what Reagan did. He was focusing on the blue
Speaker 1: collar white, but blue collar voters generally, but particularly the
Speaker 1: blue collar white, and he won their support in degree
Speaker 1: that hasn't been seen at all since the degree that
Speaker 1: they backed Reagan in the nineteen eighties. So are the
Speaker 1: measures that we have seen out of the President Trump administration.
Speaker 1: Have they been coherent with what President Reagan would have done. No. Uh.
Speaker 1: Trump campaign more coherently than he's governed so far. A
Speaker 1: lot of the things that he talked about that would
Speaker 1: have appealed to these voters are falling by the wayside.
Speaker 1: I think that the debate over the healthcare replacement bill
Speaker 1: is a perfect example of that. That he said he
Speaker 1: wouldn't cut Medicaid, but in fact the bill cutts Medicaid.
Speaker 1: He said people wouldn't lose their health insurance and to
Speaker 1: be cheaper. In fact, there's a great risk that people
Speaker 1: will lose their health insurance. He's become more of the
Speaker 1: traditional Goldwater right, anti state Republican in office than he
Speaker 1: campaigned as, and that's a huge problem for him. What
Speaker 1: would Ronald Reagan do with the GOP healthcare plan? I
Speaker 1: think Reagan would want to cover as many people as possible,
Speaker 1: but remove as many regulations as possible. Reagan said throughout
Speaker 1: his career that he believed that nobody in America should
Speaker 1: go without medical care because of a lack of funds.
Speaker 1: He supported that when he was a conservative in the
Speaker 1: nineteen sixty one. He supported it when he was a governor.
Speaker 1: He's tried to expand various medical programs as governor and
Speaker 1: as president. So I think that Reagan would try and
Speaker 1: cover as many people as he could, but do it
Speaker 1: more efficiently through the private sector than through a mandated
Speaker 1: benefit structure, which is what Obamacare was. In the introduction,
Speaker 1: you talked about how you grew up in California as
Speaker 1: a staunch Republican and how you volunteered for GOP causes,
Speaker 1: and you really looked up to President Reagan as an
Speaker 1: archetype of a good leader. I'm wondering, do you still
Speaker 1: identify as Republican. I do, but I identify as a
Speaker 1: Reagan Republican. Uh. And what I've come to do is
Speaker 1: under Dan my idol better and consequently become even more
Speaker 1: devoted to what he believed than I was when I
Speaker 1: misunderstood him. It's harder, though, today, to be a staunch
Speaker 1: Republican when you see um the sort of mistakes, when
Speaker 1: you see the sort of oftentimes disregard for the wishes
Speaker 1: of the common man that too many in our party exact.
Speaker 1: And I'd like to see a return to what worked
Speaker 1: and what Americans want, which is a Republican party that
Speaker 1: focuses on love of the average person rather than love
Speaker 1: of an abstract ideal or love of the pursuit of wealth.
Speaker 1: You know, President Reagan oversaw the US during a time
Speaker 1: of remarkable economic growth. Uh. He oversaw inflation to decline
Speaker 1: while growth accelerated. It was considered a golden economic era.
Speaker 1: But there is a lot of discussion and frankly dissent
Speaker 1: about whether the sort of voodoo economics, that trickle down
Speaker 1: economics that he espoused was responsible for that, or whether
Speaker 1: that was something else altogether. Where do you fall on that, Well,
Speaker 1: I think one Reagan never espouse trickle down economics. What
Speaker 1: Reagan did actually was criticized that he always spoke of
Speaker 1: a humane economy. He spoke about the American worker, not
Speaker 1: the entrepreneurs, the foundation of the American economy. In fact,
Speaker 1: when his first budget director had a revealing interview in
Speaker 1: one and said that Reagan's tax plan was actually trickled
Speaker 1: down in disguised, Reagan criticized him for it, and, as
Speaker 1: they said, took him to the woodshed. What Reagan believed
Speaker 1: was that incentives worked for everybody, and that people from
Speaker 1: all spectrums of the economics Ladder contributed to economic growth.
Speaker 1: I think a lot of what Reagan did helped increase
Speaker 1: the economy. I think lowering tax rates on everybody. Today
Speaker 1: we've got a top tax rate of on the richest people.
Speaker 1: We used to have a top tax rate of forty
Speaker 1: people on the middle class. Before Reagan got into office,
Speaker 1: tax rates were so much higher. He brought them down,
Speaker 1: encouraged everybody to work more, and deregulation opened up new
Speaker 1: industries that were unimaginable. For Reagan, I think he was
Speaker 1: very much responsible for the economic boom that occurred on
Speaker 1: his watch. Proportion of Congressman, of senators and representatives UH
Speaker 1: currently adhered to Reagan Republicanism. In your view, I think
Speaker 1: more in practice than in theory that what they've been
Speaker 1: there's a number of people who are remain unreconciled to
Speaker 1: UH the New Deal, remain not unreconciled to a mixed economy.
Speaker 1: And these are like the people you find and the
Speaker 1: Freedom Caucus that Rand paul ted Cruz. But I think
Speaker 1: a lot more Republicans are there where Reagan was, but
Speaker 1: they just don't have a language for it. They've been
Speaker 1: told that they have to talk in terms of freedom
Speaker 1: and opportunity. And entrepreneurship and trickle down um. And so
Speaker 1: they don't pursue the sort of policies that in their
Speaker 1: heart they might want to pursue, but they don't really
Speaker 1: have a grounding for going forward. And that's what I'm
Speaker 1: trying to do in this book. I could talk with
Speaker 1: you for another hour, particularly about the trickle down point,
Speaker 1: which is uh an issue that I would love to
Speaker 1: understand a little bit better, because it's sort of a
Speaker 1: narrow distinction there between high tax you know, lowering taxes
Speaker 1: and expecting it to go into economic growth versus trickle
Speaker 1: down what you label it. But unfortunately we have to
Speaker 1: leave it there. Thank you so much for joining us. Thanks.
Speaker 1: Henry Olson is an author and senior Fellow at the
Speaker 1: Ethics and Public Policy Center based in Washington, d C.
Speaker 1: His new book, The Working Class Republican Ronald Reagan and
Speaker 1: the Return of Blue Collar Conservatism is out now and
Speaker 1: it's a fascinating look at one of the Republican heroes
Speaker 1: in American history. Well, last week I read a survey
Speaker 1: that was somewhat alarming income investors. According to the survey,
Speaker 1: so he can overall average rate of return and expect
Speaker 1: a rate of return of eight point six percent on
Speaker 1: averages is, according to a leg Mason survey, that is
Speaker 1: higher than may have been able to get rely and
Speaker 1: is higher than many money managers can imagine that they
Speaker 1: could possibly achieve at a time when average high bond
Speaker 1: heels are five point seven percent compared with an average
Speaker 1: of more than eight percent over the past decade. Michael
Speaker 1: Buchanan joins US now. He is deputy Chief Investment Officer
Speaker 1: of Western Asset Management Company, which is an independent affiliate
Speaker 1: of Like Mason UH and it oversees four hundred and
Speaker 1: thirty three billion dollars. Michael, thank you so much for
Speaker 1: joining US. Um have you ever seen such a big
Speaker 1: gap in investor expectations versus reality? Well, I can't tell
Speaker 1: you that we've actually gone out and measured that gap
Speaker 1: on a regular basis, but um, you know, I would
Speaker 1: say that intuitively, it definitely feels today that, um, that
Speaker 1: gap is certainly large. And is it, you know, as
Speaker 1: large as it's ever been. Not really sure, but it's
Speaker 1: it's certainly up there in terms of magnitude. Well, here's
Speaker 1: why it seems somewhat concerning. If investors want more than
Speaker 1: eight percent returns, there will be some money managers who say, look,
Speaker 1: I can do that for you. I can lever up
Speaker 1: something uh that's fairly risky at a time of high
Speaker 1: valuations and ostensibly rising yields uh, and you could you
Speaker 1: could win big. You could also lose big, but you
Speaker 1: could win big. Do you see that happening? Um? There?
Speaker 1: You know, there's always that risk, and I think it's
Speaker 1: a good point. I mean, there aren't too many opportunities
Speaker 1: out there where you can even get close to that
Speaker 1: type of return. So I think at leasta, you're right,
Speaker 1: the only way you really can get there is with leverage.
Speaker 1: And you know, our view is, you know, you don't
Speaker 1: necessarily have to solve for that. Just because investors expect
Speaker 1: that type of return doesn't mean we actually have to
Speaker 1: go and try to reach for that. But we what
Speaker 1: we do want to do is make sure that we're
Speaker 1: utilizing all different parts of the fixed income market to
Speaker 1: minimize that gap in a in a thoughtful way, in
Speaker 1: a in a good, risk controlled way. Do you think
Speaker 1: that because investors have expectation, they will be more aggressive
Speaker 1: and it will fuel gains in areas that some people
Speaker 1: think are already perhaps stretched, like high yield. Yeah, I think,
Speaker 1: you know, to some extent um, we we're seeing a
Speaker 1: little bit of that, but I think we're we're far
Speaker 1: from a point where I would call valuations and a
Speaker 1: lot of these traditional fixed income markets, whether it's high
Speaker 1: yield or structured products or emerging markets, I don't feel
Speaker 1: like we're at a point where valuations are are stretched. Certainly,
Speaker 1: all the Central Bank accommodation has caused investors to uh
Speaker 1: reach a little bit in terms of risk, but I
Speaker 1: still think when you go back to two thousand and
Speaker 1: eight in the crisis, that was so damaging that it
Speaker 1: really did damage risk profiles, investors spirits. So it's just
Speaker 1: taking longer than it normally would to have those investors
Speaker 1: take that or take on that risk seeking behavior that
Speaker 1: you know ultimately will and does get them into trouble. So,
Speaker 1: given this gap in expectations and reality, how have you
Speaker 1: kind of rejiggered your recommendations as for how people should
Speaker 1: allocate specifically within fixed income. Well, we definitely are encouraging
Speaker 1: and have been encouraging our clients to emphasize the the
Speaker 1: income oriented sectors, the so called spread sectors, and those
Speaker 1: are like I just mentioned, um and no particular order,
Speaker 1: corporate credit UM, specifically high yield UH and bank loans UH,
Speaker 1: select emerging markets, structured products, whether it's UH non agency
Speaker 1: mortgages or UH CMBs UH. So there's a lot of
Speaker 1: areas within fixed income. And one of the things that
Speaker 1: we're seeing and we think this makes a lot of sense,
Speaker 1: is when our clients give us the the allowance to
Speaker 1: make dynamic allocations to these sectors. In other words, it's
Speaker 1: not a dedicated allocation, but they say on opportunity, UM,
Speaker 1: we're gonna let you allocate to the various sectors and
Speaker 1: really kind of take advantage of the best risk adjusted
Speaker 1: returns within those sectors. So you don't see it sounds
Speaker 1: like UM irresponsible investing by fellow money managers, let's say,
Speaker 1: using a lot of leverage or kind of creating a
Speaker 1: riskier environment for some of these already UH somewhat riskier
Speaker 1: asset classes. You know, I really don't, And people will
Speaker 1: will talk about high yield in that capacity or that
Speaker 1: regard UH. The amount of triple c issuance UH is
Speaker 1: still relatively low. A lot of the more aggressive structures
Speaker 1: that you typically see when a cycle is getting ready
Speaker 1: to turn, these are you know, kind of deferred interest
Speaker 1: mechanisms like paying kind bonds. We're really not seeing a
Speaker 1: lot of that. We're still seeing a lot of investor
Speaker 1: discipline in terms of the high yield market. And I
Speaker 1: always say right now that it's it's it's a lot
Speaker 1: easier for a company to uh bring a you know,
Speaker 1: double be kind of the call it a four and
Speaker 1: a quarter four and a half percent yield deal. You
Speaker 1: can sell a lot more of that than a triple
Speaker 1: ce deal with a double digit coupon. Because I think
Speaker 1: investors are still you know again they're they're they're they're
Speaker 1: still very cautious. So embedded in your outlook seems to
Speaker 1: be an assumption that we will not have a recession
Speaker 1: in the next twelve months, perhaps eighteen months. Is that correct, Yeah,
Speaker 1: that's definitely our view. We think that, um, the economy
Speaker 1: is you know, sort of a slow growth, but positive growth,
Speaker 1: an environment that necessitates continued accommodation, even as the FED
Speaker 1: is removing accommodation. UM. But we don't see those headwinds
Speaker 1: that UM really give us a lot of cause or
Speaker 1: concern for a recession, certainly in the near term. What's
Speaker 1: the biggest risk, I mean, is there anything that you're
Speaker 1: looking at right now that could change that you yeahs
Speaker 1: as portfolio managers, you're always trying to think about, you know,
Speaker 1: the risk that that can you know, really damage your
Speaker 1: your main view. Um, you know, I think China is
Speaker 1: one that um it kind of comes and goes and uh,
Speaker 1: you know there there is clearly you know when you
Speaker 1: think of China, it is a big growth engine for
Speaker 1: the global economy. We all know there are some latent
Speaker 1: risks there and um, if if if China were too
Speaker 1: you know, underwhelm if if you saw a little bit
Speaker 1: of a hiccup there, if you saw some of those
Speaker 1: risks and in corporate credits start to manifest themselves into
Speaker 1: more volatility or slow slower global growth, you know, those
Speaker 1: could all derail the momentum of the very fragile recovery.
Speaker 1: But right now things look copasetic. Thank you so much
Speaker 1: for joining fortuning me. This is really a fascinating issue.
Speaker 1: In this gap between investor expectations and the reality is
Speaker 1: something definitely to keep an eye on. Mike Buchanan, He's
Speaker 1: deputy Chief investment Officer of Western Asset Management in Pasadena, California.
Speaker 1: I believe overseeing four d and thirty three billion dollars.
Speaker 1: Let's talk taxes. This has been the big issue for markets.
Speaker 1: Everyone has been waiting to hear how much President Trump
Speaker 1: will cut taxes. And I should say also Paul Ryan
Speaker 1: Uh in the House, Linley Browning joined us now she's
Speaker 1: a tax reporter for Bloomberg News coming to us from Fairfield, Connecticut.
Speaker 1: And Linley, before we get into the details of what
Speaker 1: some people are expecting from the tax proposal, I would
Speaker 1: love to get a sense from you. What do we
Speaker 1: have that's concrete about this proposal other than that brief,
Speaker 1: lesson two hundred word description from President Trump a while back.
Speaker 1: Do we have something more concrete to base assumptions on
Speaker 1: at this point? Well, we have, as for example, trumps
Speaker 1: uh tax for potogos. No, we don't have anything more concrete.
Speaker 1: We have his uh roughly two hundred word bullet plan
Speaker 1: proposal in which he reiterated his previous calls for the
Speaker 1: corporate rate and in fact the rate for all types
Speaker 1: of businesses be cut to fift So, but do we
Speaker 1: have are there any bills that have come out of
Speaker 1: the House or the Senate that sort of map out
Speaker 1: a little bit more concretely what they're looking to do. No,
Speaker 1: we have nothing on the level of bills for legislative language.
Speaker 1: Everything right now is on the level of arbitrs and
Speaker 1: concepts and seeing you know what can be done in
Speaker 1: the name of quote unquote tax reform. UH. Senator House
Speaker 1: Speaker Paul Ryan, of course has put forth UH and
Speaker 1: his proposed rate of but it's not clear that that
Speaker 1: UH could be afforded given opposition to other measures he's
Speaker 1: proposed that would help pay for that rate cut. So
Speaker 1: arbitraging out the different scenarios, experts that you have spoken
Speaker 1: to came up with this twenty percent figure, which is
Speaker 1: far higher than the fift tax rate that some Republicans
Speaker 1: have called for. With respect to the corporate tax rate
Speaker 1: being lowered. UH, A lot of experts say twenty eight
Speaker 1: percent is much more realistic. Can you talk a little
Speaker 1: about that. The reason percent roughly is more realistic is
Speaker 1: because it's a rate that, under rules of budget funding
Speaker 1: and deficits, could be wrangled to quote unquote pay for itself.
Speaker 1: The idea is that if you want permanent tax reform,
Speaker 1: are not just temporary rate cut UH. Those UH, any
Speaker 1: rate reduction in the corporate rate has to not increase
Speaker 1: the UH budget deficit over a period of a decade.
Speaker 1: So the question is how do you how do you
Speaker 1: fund what? What are the pay fors for a rate cut?
Speaker 1: And right now the things that the House repos because
Speaker 1: they propose aren't really going anywhere. The border adjustment tax
Speaker 1: and the elimination of the net interstroduction, those collectively would
Speaker 1: raise about two point two trillion over a decade. That
Speaker 1: would more UH than Ox said a rate cut to.
Speaker 1: Trump has no proposals to pay for a rate cut
Speaker 1: to He's been arguing that, well, you don't really need
Speaker 1: to pay for is You're going to get into these
Speaker 1: economic growth and that's going to sort of pay for installed.
Speaker 1: So in other words, a lot of the Republicans in
Speaker 1: the Senate and the House don't buy that argument. They
Speaker 1: want to they want to balance budget. They're not going
Speaker 1: to just go for cutting the taxes first and hoping
Speaker 1: that that growth will offset it in the future. They
Speaker 1: may not. They may, in fact, UH do away with
Speaker 1: the idea that UH tax cuts cannot increase the Federals
Speaker 1: epicits over a ten year windo, and in fact they
Speaker 1: may seek to extend that window to twenty years or
Speaker 1: thirty years. It's completely unknown right now. How much does
Speaker 1: the healthcare bill wag into this. You know, it's for
Speaker 1: both sides have said we want to get healthcare done
Speaker 1: before we get tax reform done. They both tames have
Speaker 1: made that very clear. And the takeaway on the street
Speaker 1: right now is that if you can't get healthcare done,
Speaker 1: how are you going to get tax reform done? Uh.
Speaker 1: The latter is a much thornier, uh and bigger problem.
Speaker 1: So in other words, it kind of dampens the hopes
Speaker 1: for certainly a fifteent tax rate, which probably also factors
Speaker 1: into why people are are kind of settling on the
Speaker 1: as sort of more likely scenario possibly too. Yes, that
Speaker 1: is correct. Thank you so much for joining me. Linley Browning,
Speaker 1: tax reporter for Bloomberg News, coming to us from Fairfield, Connecticut.
Speaker 1: And rarely have I heard a time when taxes were
Speaker 1: such at the forefront of markets. And this has been absolutely,
Speaker 1: uh the biggest driver in some people's estimation of some
Speaker 1: of the stock games and the Trump bump, The expectation
Speaker 1: that tax cuts will bolster corporate growth green on the
Speaker 1: screen across the board, across major U s and dissease
Speaker 1: as well as overseas. Dave Wilson joins me now. Dave
Speaker 1: Wilson is Bloomberg Stocks editor, columnist and blogger and m
Speaker 1: live go on the Bloomberg. You should check it out.
Speaker 1: It's wonderful and comprehensive. Dave. What is driving today's games?
Speaker 1: It's a hard one to kind of pin on much
Speaker 1: of anything, to be honest, other than the market that's
Speaker 1: gotten momentum. You see the financial stocks leading the way
Speaker 1: within the S and P, and certainly that's a group
Speaker 1: that has been through the ring or a bit lately
Speaker 1: with on yields coming down, and of course that means
Speaker 1: that they banks don't stand to earn as much on
Speaker 1: their loans and investments. That being the case, yet pretty
Speaker 1: much every financial stock in the SMP five hundreds higher today,
Speaker 1: So that's certainly a group kind of front and center
Speaker 1: helping things along. Beyond that, I mean, we've kind of
Speaker 1: gotten to the point, you know, week left in the quarter,
Speaker 1: where there's not a whole lot of company news to
Speaker 1: really focus on. So it's maybe just the idea that
Speaker 1: in market in motion stays in motion. As well as
Speaker 1: anything else with financials, there is an interesting dynamic which
Speaker 1: took hold over the weekend. And I want to bring
Speaker 1: in Leonel laurent Uh to join us and sort of
Speaker 1: give us some perspective on what happened in Italy. Leonel
Speaker 1: is a columnist covering finance and markets for Bloomberg gadfline
Speaker 1: comes to us from London. So Leon know, there was
Speaker 1: this uh bailout basically orchestrated by Italy, and nineteen billion
Speaker 1: dollar bailout, the biggest ever for Italy to bail out
Speaker 1: to troubled banks, and the market is cheering. I thought
Speaker 1: that after what happened in the ECB rules and the
Speaker 1: some of the provisions, that there couldn't be a bailout
Speaker 1: like this. How does this? How is this kosher? Yeah?
Speaker 1: I think you've been paying attention maybe too closely, and
Speaker 1: forgotten that actually this is a very political story. I mean,
Speaker 1: Italy is simply a very big economy. If you're going
Speaker 1: to bend the rules for a country, it might as
Speaker 1: well be a big one. And I think that, you know,
Speaker 1: we we shouldn't forget that. The fact this is a
Speaker 1: record is because Italy has actually been been quite a
Speaker 1: good uh you know child in terms of the of
Speaker 1: the crisis. It didn't, It didn't have as bad a
Speaker 1: crisis some of the other countries. But essentially what you're
Speaker 1: seeing here is a is a bailout that basically, you know,
Speaker 1: protects the posters, protect senior bond holders, but at taxpayers expense.
Speaker 1: And I think the market forgot that there just might
Speaker 1: be that little escape route for a country like Italy.
Speaker 1: So is this basically the rally that we're seeing in
Speaker 1: financials today? Is this basically a relief rally that, yes,
Speaker 1: if there is a problem in markets, governments will after
Speaker 1: our bail banks out again. Well, I think, you know,
Speaker 1: it is good news that you have to weak banks
Speaker 1: in Italy out of the system. I think that it
Speaker 1: comes recently after another week bank, this time in Spain
Speaker 1: was taken out of the system. So I feel like
Speaker 1: there is good news to be taken out of this, right.
Speaker 1: I think that that the problem is on a more
Speaker 1: kind of political level, on a more kind of future level. Right.
Speaker 1: I mean, if if banks do come back to the market,
Speaker 1: do investors think twice about the whole story of the
Speaker 1: Eurozone rule book or will they be as pragmatic as
Speaker 1: the politicians and regulators seem to be Dave is the
Speaker 1: rally and financials more pronounced in European firms. Well, let
Speaker 1: me just take a quick look here. You go to
Speaker 1: the stock six hundred just to get an idea. I mean,
Speaker 1: that's essentially the European version of the SNP five hundred.
Speaker 1: And as far as today's trading goes, well, the financial
Speaker 1: stocks really aren't kind of leading the way, not not
Speaker 1: not an extreme move by any means. In fact, a
Speaker 1: whole lot of groups doing better in Europe than the financials,
Speaker 1: So you know, it's another day, another advantage, all right, Well, Leonel,
Speaker 1: I wanted to talk a little bit about the debt,
Speaker 1: right because as part of this bailout, the senior bondholders
Speaker 1: would get prioritized, they wouldn't lose any money, and the
Speaker 1: junior bondholders would get wiped out sort of, right because
Speaker 1: there is a large retail ownership component to Italy's junior
Speaker 1: bank bonds. In other words, just your mom and pop
Speaker 1: investors own a lot of the subordinated bonds, and the
Speaker 1: government couldn't let them just take losses, right, right exactly.
Speaker 1: And it's it's the sort of that's key. So basically,
Speaker 1: I think there's going to be an attempt to get
Speaker 1: a fund together of about two million euros to basically
Speaker 1: reimburse investors who have been allegedly missold some of these securities.
Speaker 1: This is from a culture where you know, these bonds,
Speaker 1: these securities and to do with banks were sold as
Speaker 1: you know, really secure, really safe, lifelong investments. And in
Speaker 1: Teza San Paolo, which is the big strong Italian bank
Speaker 1: that's going to be buying these weak banks for about
Speaker 1: a euro has also promised it will pay out money
Speaker 1: to small savers that are going to suffer from this.
Speaker 1: So I think, you know, even here you get a yes,
Speaker 1: junior bond holders wiped out, but it's the it's the
Speaker 1: sort of that's that's in question. So so it looks
Speaker 1: like about a quarter of the junior A debt outstanding
Speaker 1: will find some kind of refund or recourse. Does this
Speaker 1: let me precedent? Because in Italy and my mistaken my
Speaker 1: my impression is in Italy, mom and pop investors on
Speaker 1: a disproportionate amount of these junior bonds. Is that correct?
Speaker 1: That's correct. I think it's about half, So I mean,
Speaker 1: does it does this set a precedent that if anything
Speaker 1: does happen, that there needs to be some provision where
Speaker 1: retail holders of these bonds need to get compensated on
Speaker 1: some level, or else they'll be political turmoil. This this
Speaker 1: is all see, all part of the negotiation, all part
Speaker 1: of the calculation. I think it's also pure litigation risk
Speaker 1: as well that you know sadly in this case as well,
Speaker 1: the taxpayer is on the hook for right. I mean
Speaker 1: the taxpayer through guarantees to the buyer in Teza, is
Speaker 1: also helping to cover future litigation risk, which I'm sure
Speaker 1: we'll cover also taxpayers. Were we are we are delving
Speaker 1: into the capital structure of these banks. The next us
Speaker 1: between you know, politics and finance and and households and
Speaker 1: institutional investors, and that is what these governments and regulators
Speaker 1: try to unpick every time a bank goes against the wall.
Speaker 1: Leonie Lauren, thank you so much for joining us and
Speaker 1: for your perspective. Leoni Lauren is a calumnist covering finance
Speaker 1: and markets for Bloomberg. Gad Fly coming to us from London.
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