WEBVTT - Learn to Perch: WFC, BBB, TOPS 0:00:02.720 --> 0:00:07.200 Bloomberg Audio Studios, Podcasts, radio News. 0:00:08.160 --> 0:00:12.160 There was a comment on Spotify on our most recent podcast, 0:00:12.240 --> 0:00:14.120 last week's We Just Find It. I thought it was 0:00:15.280 --> 0:00:17.640 Hello and welcome to the bird Stuff Podcast, your weekly 0:00:17.680 --> 0:00:21.279 podcast where we talk about stuff related to birds and 0:00:21.520 --> 0:00:24.000 the European starling. He's doing quite well. He's perching, he 0:00:24.079 --> 0:00:25.200 started to feed himself. 0:00:25.320 --> 0:00:27.520 Oh great, two out of three exactly. 0:00:27.560 --> 0:00:30.680 He's stopped screaming quite as loudly as my parents to 0:00:30.720 --> 0:00:33.400 feed him like a baby. The flying we need to 0:00:33.440 --> 0:00:36.360 work on though. He's really good at flapping, but you 0:00:36.360 --> 0:00:39.360 know he's lacking some confidence when it comes to flight. 0:00:39.640 --> 0:00:42.519 Do you have a training program ready for working on 0:00:42.560 --> 0:00:42.960 the flying? 0:00:43.200 --> 0:00:44.800 I think we just need to let him out of 0:00:44.800 --> 0:00:48.120 the cage, similar to Wells Fargo, which we'll talk about. 0:00:48.400 --> 0:00:51.960 Oh what a transition. Hello and welcome to the bird 0:00:51.960 --> 0:00:54.720 Stuff Podcast, your weekly podcast where we talk about stuff 0:00:54.720 --> 0:00:59.480 related to birds. I'm Matt Levine and I wrote the 0:00:59.480 --> 0:01:01.400 Bunny Stuff column for Bloomberg Opinion. 0:01:01.920 --> 0:01:04.720 And I'm Katie Greifeld, a reporter for Bloomberg News and 0:01:04.760 --> 0:01:07.080 an anchor for Bloomberg Television and a bird owner. 0:01:07.400 --> 0:01:10.120 It's actually the money Stuff podcast in case anyone has, 0:01:10.120 --> 0:01:11.640 I mean dots. It's gonna be weird if this is 0:01:11.640 --> 0:01:15.120 your first episode speaking of being let out of your cage. 0:01:15.280 --> 0:01:17.600 Wells Fargo let out of its game. 0:01:18.600 --> 0:01:25.720 Charlie Sharp playing offense. This was expected, but I think 0:01:25.760 --> 0:01:28.800 it was still somewhat surprising to get this news this 0:01:28.840 --> 0:01:33.119 past week that the asset cap the FED had imposed 0:01:33.120 --> 0:01:35.960 on Wells Fargo back in twenty eighteen has been lifted. 0:01:36.840 --> 0:01:42.280 So. The Bloomberg article about this reported that when Charlie Sharff, 0:01:42.360 --> 0:01:45.280 the CEO of Wells Fargo, he joined the bank like 0:01:45.319 --> 0:01:48.240 a year after the asset capitalism post, and when he 0:01:48.280 --> 0:01:50.640 was like interviewing, he was aware of the asset cap 0:01:50.640 --> 0:01:55.080 because it was a pretty high pye profile thing, but 0:01:55.120 --> 0:01:58.680 according to the article, they couldn't tell him exactly how 0:01:59.360 --> 0:02:04.080 they were doing with progressing to fix it because that 0:02:04.200 --> 0:02:07.160 was confidential supervisory information and it would be illegal to 0:02:07.240 --> 0:02:10.240 leak it to anyone, including the CEO candidate. So basically 0:02:10.280 --> 0:02:12.239 he was like, so, how's it going with the FED? 0:02:12.240 --> 0:02:14.919 And they're like, hey, I can't tell you. And then 0:02:14.960 --> 0:02:16.600 they hired him and he came in and he's like, okay, 0:02:16.639 --> 0:02:17.880 so how's it going with the Fed? And they're like, 0:02:17.960 --> 0:02:20.400 really bad. Sorry we didn't tell you earlier. 0:02:20.919 --> 0:02:21.440 Surprise. 0:02:22.200 --> 0:02:23.880 I think he sort of came in expecting it to 0:02:23.880 --> 0:02:27.240 be a one year process after he joined. It turned 0:02:27.240 --> 0:02:30.040 out to be like a five year process after he gied. 0:02:30.280 --> 0:02:32.639 But now now it's all better. Yeah. 0:02:32.680 --> 0:02:36.480 Our reporting on the matter suggested the same. Well, fast 0:02:36.480 --> 0:02:40.799 forward to twenty twenty five, and we're finally here. It's 0:02:41.720 --> 0:02:45.880 again somewhat interesting that it happened this week. There had 0:02:45.919 --> 0:02:47.840 been a lot of anticipation about this, if you just 0:02:47.919 --> 0:02:51.000 look at the share price, for example, since President Trump's 0:02:51.000 --> 0:02:55.240 election in November, I think Wells Fargo heading into this 0:02:55.320 --> 0:02:57.639 week was up like twenty percent on a total repase 0:02:57.919 --> 0:03:02.000 return basis, and the KVW Bank Index as a whole 0:03:02.160 --> 0:03:04.080 was only up about seven percent in that time. So 0:03:04.120 --> 0:03:07.320 there was the anticipation was there. But also according to 0:03:07.360 --> 0:03:11.120 our reporting, it took some senior executives by surprise. 0:03:11.400 --> 0:03:13.160 Oh yeah, one of them was like doing an intern 0:03:13.560 --> 0:03:14.400 visitor or something. 0:03:14.760 --> 0:03:17.840 I think the chairman was celebrating his seventy third birthday, 0:03:18.120 --> 0:03:20.720 So this is a nice surprise. Before we talk about 0:03:20.840 --> 0:03:23.639 what this means for Wells Fargo, the future of Wells Fargo, 0:03:24.520 --> 0:03:29.200 Matt I wasn't really paying that close attention to Wells 0:03:29.200 --> 0:03:31.560 Fargo when this cap went into place in twenty eighteen. 0:03:32.240 --> 0:03:34.480 I'd love to hear your thoughts on the lead up 0:03:34.520 --> 0:03:37.400 there and how unprecedented this was. 0:03:37.840 --> 0:03:40.760 I feel like in twenty eighteen everyone was paying attention to. 0:03:40.800 --> 0:03:43.600 Wellswere I was worried about currencies. 0:03:44.000 --> 0:03:46.520 I have rarely seen a bank scandal get people so 0:03:46.640 --> 0:03:50.320 angry as the Wells Fargo fake account scandal, which I'm 0:03:50.320 --> 0:03:52.280 not sure was like the direct precipitator of this, but 0:03:52.320 --> 0:03:54.120 it was like one of the big things they pointed 0:03:54.160 --> 0:03:56.400 to to be like you can never grow again. Wells 0:03:56.480 --> 0:04:01.120 Fargo opened millions of fake accounts because they had like 0:04:01.320 --> 0:04:06.720 a culture of cross selling and also not a culture 0:04:06.760 --> 0:04:09.800 of supervising people very closely, I guess, And so like 0:04:10.200 --> 0:04:13.640 they told thousands of bankers, your job is to open 0:04:13.680 --> 0:04:16.920 eight new financial products today, and so they're like, okay, fine, 0:04:16.920 --> 0:04:18.520 everyone who signs up for a check account, we're gonna 0:04:18.520 --> 0:04:20.640 give them a credit card too, and like didn't tell 0:04:20.640 --> 0:04:22.760 the customers, and so people got all these credit cards 0:04:22.760 --> 0:04:26.560 they didn't sign up for, and that got Wells Fargo 0:04:26.640 --> 0:04:29.320 in trouble. And also many people are really mad because 0:04:29.320 --> 0:04:32.360 it just sounds bad. I think it, like it sounded 0:04:32.360 --> 0:04:34.080 a little worse than it was, but it was pretty bad. 0:04:34.480 --> 0:04:38.200 And I thought it was an interesting scandal because people 0:04:38.240 --> 0:04:40.600 disagree with me about this, but like it didn't help 0:04:40.640 --> 0:04:43.080 Wells Farga to open these fake accounts. There were like 0:04:43.120 --> 0:04:45.000 a few accounts where like you know, you open a 0:04:45.000 --> 0:04:46.560 credit card and you charge your credit card fee, so 0:04:46.600 --> 0:04:48.040 like Wells Fargo made a little bit of money from 0:04:48.040 --> 0:04:50.360 the fake accounts, but it's like negligible. Almost all of 0:04:50.400 --> 0:04:52.840 these fake accounts were like nothing happened in them. It 0:04:52.920 --> 0:04:57.080 was truly just like the employees gaming the management right, 0:04:57.120 --> 0:04:58.599 Like the employees were told you got to open eight 0:04:58.600 --> 0:05:00.400 accounts to day. I'm like, fine, we'll do that. But 0:05:00.440 --> 0:05:02.800 like it was just these meaningless accounts that didn't help 0:05:02.800 --> 0:05:06.719 Paul's fago. But that like met quotas, and that is 0:05:06.760 --> 0:05:09.160 not a problem of a bank with like evil intent 0:05:09.200 --> 0:05:11.240 at the top. That is the problem of a bank 0:05:11.480 --> 0:05:16.640 that has management troubles, and like trouble like supervising it's 0:05:16.680 --> 0:05:20.000 thousands of employees, and trouble like designing incentives and designing 0:05:20.000 --> 0:05:22.200 programs to make sure that people are operating the best 0:05:22.240 --> 0:05:25.400 interests of the bank. And you know, you always used 0:05:25.440 --> 0:05:27.839 to read like people talking about banks being too big 0:05:27.880 --> 0:05:30.359 to manage, and you know, like you look at that 0:05:30.400 --> 0:05:33.080 scandal and you're like, yeah, like this is maybe a 0:05:33.080 --> 0:05:34.840 bank that doesn't have a handle on all of its 0:05:34.839 --> 0:05:36.720 employees and all of what it's doing right. This is 0:05:36.760 --> 0:05:39.000 a bank that has not figured out how to manage 0:05:39.040 --> 0:05:40.880 its bigness. And so I always thought that there was 0:05:40.920 --> 0:05:43.200 like a poet of justice to like the punishment for 0:05:43.240 --> 0:05:46.200 some of these scandals being bank regulators saying you can't 0:05:46.200 --> 0:05:49.120 grow your balance sheet anymore, because you know, that's like 0:05:49.160 --> 0:05:51.400 a direct cap on bigness. It's not a cap on 0:05:51.440 --> 0:05:55.080 like employee numbers, but it's a cap on size, and 0:05:55.160 --> 0:05:58.360 it sort of focuses the mind on like, Okay, we 0:05:58.480 --> 0:06:00.479 got to be able to manage the bank the size 0:06:00.480 --> 0:06:04.120 that it is before we grow any bigger. The punishment 0:06:04.160 --> 0:06:06.479 is like an asset cap and then like stays in 0:06:06.560 --> 0:06:11.240 place basically until they convince their regulators that they have 0:06:11.920 --> 0:06:15.400 improved their risk management and board processes such that you know, 0:06:15.480 --> 0:06:18.760 they can run their business in a safe way. And 0:06:18.839 --> 0:06:21.480 I don't know, they seemed like sort of a reasonable punishment. 0:06:21.760 --> 0:06:25.840 I have two thoughts. One, I have a Wells Fargo account, 0:06:26.000 --> 0:06:28.520 which is funny. So you know, the extent of me 0:06:28.560 --> 0:06:31.920 thinking about this in twenty eighteen was I wonder if 0:06:31.920 --> 0:06:33.120 they gave me a credit card too. 0:06:33.320 --> 0:06:34.800 I don't have a well Swargo looking at I do 0:06:34.839 --> 0:06:38.200 have a well Square credit card and I use it 0:06:38.279 --> 0:06:41.640 almost never. It's just like a spare credit card. And 0:06:41.640 --> 0:06:43.640 like once every like two years, I get a letter 0:06:43.680 --> 0:06:45.839 from them being like, we're going to close your credit 0:06:45.880 --> 0:06:49.000 card unless you tell us not to or use it. 0:06:49.040 --> 0:06:50.880 And I'll like go to the store and buy a 0:06:50.880 --> 0:06:53.480 pack of gums so that I give the credit card open. 0:06:53.680 --> 0:06:55.200 Oh you want it, I don't care. 0:06:55.720 --> 0:06:58.320 Okay, It's like sitting in my desk doesn't bother me, right. 0:06:58.320 --> 0:06:59.960 I wonder if I get those letters because they're like, 0:07:00.560 --> 0:07:02.159 you know, they're looking at my account. They're like, oh no, 0:07:02.200 --> 0:07:05.000 what if this is a fake account, So they're making 0:07:05.040 --> 0:07:06.560 sure that my credit card is not fake. 0:07:06.880 --> 0:07:10.119 I will say I decided to specifically open a Wells 0:07:10.120 --> 0:07:12.600 Fargo account right before I went to college because I 0:07:12.680 --> 0:07:15.280 was going to Haverford College, which we'll actually get to 0:07:15.640 --> 0:07:19.120 a little bit, but it was very close to campus 0:07:19.160 --> 0:07:23.800 and they had horses on the card the stagecoach, which 0:07:23.840 --> 0:07:25.960 is one of the things that Charlie Sharp did away with. 0:07:26.040 --> 0:07:26.760 He did away with the. 0:07:26.720 --> 0:07:29.040 Look to keep it, to keep them under the asset cap. 0:07:29.080 --> 0:07:30.320 They fired the horses. 0:07:30.560 --> 0:07:33.880 They actually they fired the horses. They also fired tens 0:07:33.880 --> 0:07:36.240 of thousands of employees. The other thought that I had 0:07:36.320 --> 0:07:39.280 was that it's interesting that it feels pretty binary, like 0:07:39.320 --> 0:07:42.040 the cap was on and now it's off. There wasn't 0:07:42.880 --> 0:07:45.600 any step like, oh, you can grow the balance sheet 0:07:45.640 --> 0:07:48.880 by half a trillion one trillion because you're doing such 0:07:48.920 --> 0:07:49.480 a good job. 0:07:49.600 --> 0:07:52.760 Yeah, it's a super weird regulatory move. It's not a 0:07:52.760 --> 0:07:55.080 common punishment. Would not be normal to say, okay, you 0:07:55.120 --> 0:07:57.640 can grow by one hundred million dollars. Those be weird. 0:07:58.080 --> 0:08:01.280 They're just like they've put this mary draconian punishment on 0:08:01.360 --> 0:08:03.840 and now it's been fixed, and they're like, okay, fine 0:08:04.040 --> 0:08:06.280 crow again. So it'd be funny if they doubled in 0:08:06.320 --> 0:08:08.960 size next month, but I assume that they won't. 0:08:09.440 --> 0:08:12.400 If you think about the last seven years for Wells Fargo, 0:08:12.640 --> 0:08:17.160 I was obviously fiddling with the charts. JP Morgan's balance sheet, 0:08:17.200 --> 0:08:20.080 one of our reporters sold me has grown by an 0:08:20.320 --> 0:08:24.000 entire Wells Fargo since this cap went into place. You 0:08:24.040 --> 0:08:26.880 take a look at Wells Fargo's shares since the start 0:08:26.880 --> 0:08:30.400 of February and twenty eighteen, They're up forty three percent 0:08:30.440 --> 0:08:33.760 in total return terms since that time. You compare that 0:08:33.800 --> 0:08:36.480 to JP Morgan up one hundred and seventy eight percent, 0:08:37.040 --> 0:08:40.200 Goldman up one hundred and sixty percent. This has been 0:08:40.640 --> 0:08:43.640 crippling for the performance of this company. 0:08:44.200 --> 0:08:47.000 Yeah, I mean, like the Bloomberg reporting suggests that there 0:08:47.080 --> 0:08:49.080 was some amount of like, if you can't grow, you 0:08:49.120 --> 0:08:51.080 have to focus on the businesses that you really like. 0:08:51.440 --> 0:08:55.000 But yes, that only does so much for you in 0:08:55.040 --> 0:08:58.120 an environment of Dellwin's for banks. 0:08:58.559 --> 0:09:01.800 Yeah. Also, this one was kind of funny. I was 0:09:01.840 --> 0:09:04.360 looking at his valuation as well. It's price to book. 0:09:04.440 --> 0:09:06.800 Wells Fargo trades at a price to book of one 0:09:06.840 --> 0:09:10.440 point five. You compare that to JP Morgan's JP Morgan 0:09:10.559 --> 0:09:14.199 trades at like two point two. City City trades at 0:09:14.280 --> 0:09:17.679 point seven, which I think says more about City than 0:09:17.720 --> 0:09:20.720 it does about Wells Fargo. But that was kind of fun. 0:09:21.400 --> 0:09:41.480 Okay, City catching astraight here speaking of Haverford, Pennsylvania. You 0:09:41.520 --> 0:09:44.040 know what else is there besides Katie's College. 0:09:44.440 --> 0:09:47.480 The Egan Jones rating company, No, it was. 0:09:47.520 --> 0:09:49.480 The branch of Wells Fire that you bank on College 0:09:49.559 --> 0:09:54.360 Yesty operates out of a house in Harford, Pennsylvania, where 0:09:54.400 --> 0:09:57.800 they rate thousands of private credit deals. 0:09:58.800 --> 0:10:01.920 They actually have since relocated to King of Prussia, which 0:10:01.920 --> 0:10:04.680 is also in the suburbs of Philadelphia, but we'll get 0:10:04.679 --> 0:10:10.360 to that. Yeah, this ratings company, which calls itself the 0:10:10.400 --> 0:10:13.800 biggest rating company in the private credit space, operated out 0:10:13.800 --> 0:10:18.319 of a four bedroom colonial in Haverford, Pennsylvania, on Haverford 0:10:18.400 --> 0:10:22.320 Station Road, literally across the street from my college. And 0:10:22.880 --> 0:10:25.840 it's a pretty interesting business model, pretty scrappy. 0:10:26.320 --> 0:10:28.400 I love the ratings business model, right. I mean, like, 0:10:29.280 --> 0:10:31.079 so you can join this fighter by Shawane Egan, who 0:10:32.400 --> 0:10:34.040 kind of made a name for himself in the financial 0:10:34.080 --> 0:10:37.959 crisis criticizing the big three ratings agencies for their conflicts 0:10:37.960 --> 0:10:41.480 of interest. Right. People think of ratings agencies as organizations 0:10:41.520 --> 0:10:44.679 that write reports saying whether an issuer is a good 0:10:44.720 --> 0:10:46.400 credit risk? Right. I mean, like this came up a 0:10:46.400 --> 0:10:48.839 lot recently when the Booty's is the last agency to 0:10:48.920 --> 0:10:52.280 downgrade the US government, and I was like, oh, what 0:10:52.320 --> 0:10:52.800 does it mean? 0:10:52.920 --> 0:10:53.120 Right? 0:10:53.480 --> 0:10:55.760 Because like these agencies are sort of seen as like 0:10:55.840 --> 0:10:58.679 the arbiter of credit risk, and his criticism in two 0:10:58.720 --> 0:11:02.600 thousand and eight was these agencies are paid by the 0:11:02.600 --> 0:11:07.800 issuers of the bonds, and therefore the issuers want to 0:11:07.800 --> 0:11:10.280 have high ratings, and so if a ratings agency gives 0:11:10.280 --> 0:11:13.360 them a low rating, the issue is say, we won't 0:11:13.400 --> 0:11:15.079 pay you anymore if you don't give us a high rating, 0:11:15.080 --> 0:11:16.760 and the agency say, fine, fine, fine, we give your 0:11:16.800 --> 0:11:18.800 high rating. And this is like the sort of conflict 0:11:18.800 --> 0:11:22.280 of interest model. And it's particularly a concern in the 0:11:22.320 --> 0:11:25.080 structured product rating, where you have a bank that gets 0:11:25.160 --> 0:11:28.400 ratings on hundreds of products, and if it isn't satisfied 0:11:28.400 --> 0:11:31.000 with the ratings it gets, it can take its enormous 0:11:31.000 --> 0:11:34.760 book of business to another ratings agency. And the Egan 0:11:34.840 --> 0:11:37.480 Jones model was, I think this is not entire one 0:11:37.520 --> 0:11:39.400 hundred percent try now. But like the general idea of 0:11:39.400 --> 0:11:42.720 the model was they would get paid by consumers, They 0:11:42.720 --> 0:11:45.680 would get paid by people who wanted to buy the debt, 0:11:45.840 --> 0:11:48.200 and therefore they would have fewer conflicts of interest because 0:11:48.480 --> 0:11:51.400 they would be looking at for the interests of the 0:11:51.440 --> 0:11:54.240 investors the lenders, rather than the interests of the issuers, 0:11:54.679 --> 0:11:56.720 and so when they told you this is a good 0:11:56.720 --> 0:11:59.120 credit risk, you would know they mean it because you 0:11:59.160 --> 0:12:04.000 were paying them. And I don't think that's the right 0:12:04.040 --> 0:12:07.080 way to understand a ratings agency. I think that, like 0:12:07.440 --> 0:12:10.520 if you're a buyer of credit, if you're a lender 0:12:11.040 --> 0:12:13.920 and you're getting a rating, you're not doing it for you. 0:12:13.920 --> 0:12:15.600 You're not doing it to figure out if the company 0:12:15.640 --> 0:12:17.360 is a good risk or not right, because, like you're 0:12:17.679 --> 0:12:19.640 a lender, you're in the business of knowing whether it's 0:12:19.679 --> 0:12:21.520 a good risk or not. You might be interested in 0:12:21.520 --> 0:12:23.560 like the credit ratings. It might give you some sort 0:12:23.600 --> 0:12:26.320 of baseline understanding of what the credit is like, but 0:12:26.520 --> 0:12:28.880 you can probably do your own credit analysis. The reason 0:12:28.960 --> 0:12:31.920 you're getting a rating is you have some constraint on 0:12:32.120 --> 0:12:34.199 who you're allowed to lend to, or like what your 0:12:34.200 --> 0:12:36.200 book is supposed to look like. So if you're an 0:12:36.200 --> 0:12:39.080 insurance company and you make investment grade loans or you buy 0:12:39.080 --> 0:12:42.200 investment grade bonds, then you don't have to hold very 0:12:42.280 --> 0:12:45.240 much capital against them. And if you make non investment 0:12:45.240 --> 0:12:47.280 grade loans, you have a lot of capital. You know, 0:12:47.280 --> 0:12:50.320 you get the rating to satisfy your capital regulators that 0:12:50.360 --> 0:12:53.440 you are running your business prudently, and so you have 0:12:53.480 --> 0:12:55.160 the same incentives as an issue, right, you want a 0:12:55.200 --> 0:12:57.440 high rating. You don't care. Like if the world worked 0:12:57.480 --> 0:12:59.840 in such a way that like every bond could be 0:13:00.120 --> 0:13:02.280 rated triple A, you'd be like, great, I can buy 0:13:02.440 --> 0:13:05.040 every bond I want. You wouldn't buy like the worst bonds. 0:13:05.040 --> 0:13:07.160 You do your own credit analysis, but you wouldn't have 0:13:07.160 --> 0:13:09.880 to worry about regulation anymore, whereas regulators don't like that, right, 0:13:10.280 --> 0:13:14.000 And so the ratings agency ultimately is not really working 0:13:14.040 --> 0:13:16.480 on behalf of the issuer, and it's not really working 0:13:16.559 --> 0:13:18.959 on behalf of the lender. It's working on behalf like 0:13:19.000 --> 0:13:21.960 the lender's regulator or the lender's ultimate customer, right, like 0:13:21.960 --> 0:13:24.480 the insurance company customer or the bank customer or whatever. 0:13:25.120 --> 0:13:28.760 And so you know, you were read at Egan Jentes, 0:13:28.840 --> 0:13:32.280 like you know, there's a big bloomber article about their 0:13:33.000 --> 0:13:35.560 process and they're being run out of a four bedroom 0:13:35.600 --> 0:13:38.040 house and also about like you know, there's a couple 0:13:38.040 --> 0:13:40.160 of deals that they rated that kind of went bad, 0:13:40.200 --> 0:13:42.400 and like there's some criticism of them, and there's some 0:13:42.480 --> 0:13:46.040 like people are like other ratings firms issue twenty page 0:13:46.200 --> 0:13:48.839 ratings reports and they issue one page rating reports. It's 0:13:48.840 --> 0:13:50.599 like no one cares, no one reads that. Like the 0:13:51.000 --> 0:13:55.319 goal is like a regulatory goal, and they are providing 0:13:55.840 --> 0:14:00.320 a product that consumers in the market want, but you know, 0:14:00.520 --> 0:14:02.400 you might not like why they want the product. 0:14:03.520 --> 0:14:06.120 Yeah, So basically what you're saying is that it just 0:14:06.600 --> 0:14:10.960 transfers the risk that is conflict of interest, and the 0:14:11.000 --> 0:14:14.160 heavy insinuation in this article which you alluded to, is 0:14:14.200 --> 0:14:19.239 that they're basically just rubber stamping these ratings on private investments. 0:14:19.440 --> 0:14:22.320 I don't think that that's right. I don't think that. 0:14:22.160 --> 0:14:27.040 They're One of the things the article describes is that, 0:14:27.480 --> 0:14:30.040 I mean you mentioned that they have a small staff 0:14:30.080 --> 0:14:32.800 and they have one page reports. Bloomberg News colleagues also 0:14:32.920 --> 0:14:36.960 write that they offer their initial workups within twenty four hours, 0:14:37.040 --> 0:14:39.920 a formal verdict in less than five days, whereas you 0:14:40.000 --> 0:14:42.000 compare that to an S and P or a Fitch 0:14:42.520 --> 0:14:45.520 and those rating decisions can take months at a time. 0:14:45.720 --> 0:14:49.520 So they're working with a much smaller staff and in 0:14:49.760 --> 0:14:51.360 very compressed timeframes. 0:14:52.040 --> 0:14:55.800 Yeah. Right. They say their ratings generally perform well, right, 0:14:55.800 --> 0:14:57.760 I mean, you can always like find someones that aren't 0:14:57.880 --> 0:15:00.400 very good that you know, the default rate on like 0:15:00.480 --> 0:15:03.320 a you know, triple B company is not supposed to 0:15:03.320 --> 0:15:04.880 be zero, so you can always find some triple B 0:15:04.960 --> 0:15:06.800 company that defaults and then it's like, you know, oh 0:15:06.800 --> 0:15:08.840 that was wrong, right, But it's like, statistically you have 0:15:08.880 --> 0:15:11.080 to have some of those. But if you ran a 0:15:11.120 --> 0:15:13.640 ratings agency that gave everything in triple A, like there 0:15:13.640 --> 0:15:16.760 would be demand for that, but like you wouldn't last long, 0:15:17.560 --> 0:15:19.760 Like there wouldn't really be demand for that, or like 0:15:19.880 --> 0:15:22.360 it'd be great to get everyone, every anything rated triple A, 0:15:22.400 --> 0:15:24.600 but it wouldn't really satisfy your regulators, It wouldn't really 0:15:24.600 --> 0:15:26.960 satisfy anyone. So I don't think that they are a 0:15:27.000 --> 0:15:29.960 rubber stamp. I think that they're doing genuine credit work. 0:15:30.000 --> 0:15:33.520 But I think, you know, there's some insinuation that they 0:15:33.720 --> 0:15:37.440 have a tendency to rate stuff higher than other people 0:15:37.480 --> 0:15:40.400 would rate it, and particularly they were working in the 0:15:40.400 --> 0:15:44.000 private credit space where the ratings are not for broad 0:15:44.040 --> 0:15:46.880 public consumption because it's a handful of lenders making the loans, 0:15:46.880 --> 0:15:50.400 and those lenders can kind of pick their own rating agency, 0:15:50.520 --> 0:15:53.320 and yeah, they're gonna want the one that works with 0:15:53.360 --> 0:15:55.000 them nicely and is maybe a little bit. 0:15:54.920 --> 0:15:59.040 Generous well to the point on generosity. There is a 0:15:59.080 --> 0:16:01.960 description in this part of about the kerfuffle that was 0:16:02.080 --> 0:16:06.520 raised by this report from the National Association of Insurance Commissioners. 0:16:06.960 --> 0:16:11.280 Apparently they rescinded this report, but it showed that smaller 0:16:11.320 --> 0:16:14.760 outfits such as Egan Jones tended to rate private investments 0:16:14.800 --> 0:16:18.840 three notches higher on average than the association's in house 0:16:19.040 --> 0:16:23.000 valuation office. This report was rescinded, but it was heard 0:16:23.040 --> 0:16:26.840 around the industry. Apparently it was rescinded, according to people familiar, 0:16:26.840 --> 0:16:29.000 because of backlash from insurers as well as some of 0:16:29.000 --> 0:16:31.720 the ratings firms. But kind of, I mean there's some 0:16:31.760 --> 0:16:32.760 evidence there. 0:16:32.840 --> 0:16:35.080 Yeah, I've never fully understood it. Like there's there's some 0:16:35.160 --> 0:16:39.960 real controversy going on at the National Association of Insurance Commissioners. Like, yeah, 0:16:40.160 --> 0:16:46.120 there are a lot of insurers who really like private credit, 0:16:46.160 --> 0:16:49.440 let's say, really like alternative asset managers. Some of these 0:16:49.480 --> 0:16:52.480 insurers are big customers of those alternative asset managers. Some 0:16:52.520 --> 0:16:55.960 of them are owned by those big asset managers, and 0:16:56.000 --> 0:16:58.040 so all of those insurers are like basically like, we 0:16:58.080 --> 0:17:01.000 would like to chuck a lot of our money into 0:17:01.000 --> 0:17:03.640 private credit. We think getting paid for liquidity and like 0:17:03.720 --> 0:17:06.119 it's a good investment and we should be doing this 0:17:06.359 --> 0:17:08.920 and it's professionally managed, and like, you know, we're doing 0:17:08.960 --> 0:17:11.000 a good job. And there's a lot of other insurance 0:17:11.000 --> 0:17:16.320 companies who do more traditional bond investing and are really 0:17:16.359 --> 0:17:20.120 mad at the private credit insurance companies and think that 0:17:20.600 --> 0:17:24.159 they are taking wild risks with customer money. You know, 0:17:24.200 --> 0:17:27.199 they think the asset manager owned insurance companies are like 0:17:27.240 --> 0:17:30.760 making too much money. So there is like controversy within 0:17:30.800 --> 0:17:33.479 the insurance world where like some insurers are trying to 0:17:33.560 --> 0:17:36.160 basically stop people from investing in private credit, and other 0:17:36.200 --> 0:17:38.160 insurers are saying, we want to back up the truck 0:17:38.200 --> 0:17:40.679 for private credit. And so some of that controversy has 0:17:40.680 --> 0:17:43.520 played out in like the issuing and rescinding of reports. 0:17:43.880 --> 0:17:48.439 But it's a point of contention. And yeah, the report 0:17:48.440 --> 0:17:50.280 about ratings is I think part of that. 0:17:50.600 --> 0:17:52.320 I don't have it in front of me, but there 0:17:52.400 --> 0:17:54.800 is a professor quoted in the piece I believe that 0:17:54.920 --> 0:17:58.880 was talking about the performance of their rated companies, and 0:17:59.320 --> 0:18:02.520 the professor make the point that the public investments that 0:18:02.560 --> 0:18:04.399 they rate it tended to do okay. It's just that 0:18:05.080 --> 0:18:08.960 it kind of deteriorated as it got into more private 0:18:09.200 --> 0:18:11.240 sort of investments. It's kind of the whole point of 0:18:11.280 --> 0:18:14.240 their business though, was to rate private investments, and you 0:18:14.320 --> 0:18:18.439 can cherry pick examples and any rating agencies will have that, 0:18:18.720 --> 0:18:22.000 but there were some great examples in this piece as well, 0:18:22.240 --> 0:18:24.399 and most of them were triple BE rated, it seems 0:18:24.440 --> 0:18:25.520 like before they blew up. 0:18:26.240 --> 0:18:29.920 Then as a banker, we did this analysis for companies 0:18:30.160 --> 0:18:32.360 that was like what is the optimal credit rating to have? 0:18:32.880 --> 0:18:36.639 And I never fully understood that there was like some complicated, 0:18:36.760 --> 0:18:40.439 you know, model that told you what the optimal credit 0:18:40.520 --> 0:18:43.760 rating to have was based on your unique facts and circumstances. 0:18:43.760 --> 0:18:45.800 But the answer was always triple to B minus, which 0:18:45.840 --> 0:18:49.359 makes total intuitive sense because basically there's like a break 0:18:49.359 --> 0:18:53.240 point where investors can buy anything grated triple B minus 0:18:53.359 --> 0:18:56.320 or above and they can't buy anything graded w B 0:18:56.400 --> 0:18:59.359 plus or below, and so you get access to the 0:18:59.359 --> 0:19:02.639 investment grade buyers, which lowers your cost of debt if 0:19:02.640 --> 0:19:06.200 you're a triple B minus or above, but anything better 0:19:06.240 --> 0:19:08.000 than that you're leaving money on the table. You're like 0:19:08.119 --> 0:19:10.200 under levered, right, Like you want to be as levered 0:19:10.200 --> 0:19:12.600 as possible and still have access to investment grade credit. 0:19:13.880 --> 0:19:18.320 And you know, like in the private credit wor old 0:19:18.320 --> 0:19:21.080 same story, right, Like you want to lend money to 0:19:21.200 --> 0:19:25.399 the most exciting, riskiest companies that will pay you the 0:19:25.440 --> 0:19:29.840 most consistent with getting a triple B rating, and so yeah, 0:19:29.960 --> 0:19:32.639 if you can push out the boundaries of risk on 0:19:32.680 --> 0:19:34.720 triple B a little bit more, then that's a better 0:19:34.760 --> 0:19:36.959 deal for you. Similarly, like you wouldn't get a lot 0:19:37.000 --> 0:19:40.359 of A ratings because like if a company doing a 0:19:40.400 --> 0:19:44.120 private credit deal would get an A rating, then you're 0:19:44.160 --> 0:19:46.600 just like, well, let's borrow more then until we can 0:19:46.640 --> 0:19:48.840 get down to triple B. But like below triple B 0:19:49.000 --> 0:19:51.280 is bad. So there's a reason it's all triple B. 0:19:51.920 --> 0:19:54.399 But yeah, there's a couple of examples in the story, 0:19:54.520 --> 0:19:58.240 of which the funniest is probably Chicken Soup for the Soul, 0:19:58.280 --> 0:20:00.480 which I think I wrote about in the day, Like 0:20:00.520 --> 0:20:02.720 Chicken seap for this Soul had a weird slide into bankruptcy, 0:20:02.800 --> 0:20:05.359 but it was triple B rated at Egan Jones until 0:20:05.400 --> 0:20:06.760 like through like twenty twenty three. 0:20:07.080 --> 0:20:11.560 Yeah, fourteen months after Egan Jones reiterated it's triple B 0:20:11.680 --> 0:20:15.160 rating for the company, it filed for bankruptcy, and its 0:20:15.240 --> 0:20:17.560