Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. If you watched our
Speaker 1: video podcast, you saw us in the fancy studio of it.
Speaker 1: Now we're in the other studio.
Speaker 2: Yeah, we're in the little box on the fourth floor
Speaker 2: of Bloomberg. The women's order room is right there, and
Speaker 2: I often play music to myself because I usually have
Speaker 2: time alone in there, and sometimes I think there's probably
Speaker 2: people recording a podcast right next door.
Speaker 1: Yeah, we're definitely in the partially soundproofed recording studio.
Speaker 2: It could it could be you think being soundproof is binary.
Speaker 1: Oh, I would never think that.
Speaker 2: I I mean, ideally it would be. This room is
Speaker 2: not soundproofish.
Speaker 1: No, it has a lot of patting on the walls,
Speaker 1: but a lot of sirens in the background. Hello, and
Speaker 1: welcome to the Money Stuff Podcast. You're a weekly podcast
Speaker 1: where we talk about stuff related to money. I'm Matt
Speaker 1: Levine and I write the Money Stuff column for Bloomberg Opinion.
Speaker 2: And I'm Katie Greifeld, a reporter for Blomberg News and
Speaker 2: an anchor for Bloomberg Television.
Speaker 1: I feel like people get mad at me because I
Speaker 1: am not very good at like sitting at the right
Speaker 1: distance from the mic, and I end up like yo
Speaker 1: yoing around and so I get closer and further from
Speaker 1: the mic. But this mic is really vibrating toward and
Speaker 1: away from it because one time it's not entirely my fault.
Speaker 2: Yeah, we're not familiar with these mics.
Speaker 1: Mike is on a pendulum.
Speaker 2: Yeah, it does feel like it is shaking a little bit,
Speaker 2: but that's fine. You know, maybe the lad a little
Speaker 2: new vibrato. Maybe the audience will appreciate that.
Speaker 1: They do love vibrada.
Speaker 2: But you know what, the US Court of Appeals for
Speaker 2: the Federal Circuit on Friday does not necessarily love. They're
Speaker 2: still illegal, as you laid out. Yeah, they're saying in
Speaker 2: place though, Right, we.
Speaker 1: Live in a weird world where like the government does
Speaker 1: a lot of stuff that's illegal, and the courts are like, well,
Speaker 1: this is illegal, but we can't stop you. So I
Speaker 1: don't know. It's very depressing. District Court a while back
Speaker 1: ruled that the broad Trump tariffs are illegal because, as
Speaker 1: I've written a number of times, the US Constitution is
Speaker 1: really clear that Congress has the power to impose taxes.
Speaker 1: Doesn't like, that's like a really core part of the Constitution,
Speaker 1: And so when the president announces swooping new taxes without
Speaker 1: any legislation does seem very illegal, and the court found
Speaker 1: it illegal, and the government appealed, and this week the
Speaker 1: appeals court, the Court for the Federal Circuit, agreed that
Speaker 1: those tariffs remain illegal. And the way it works is that,
Speaker 1: like the government's position is that there's a statute called AEPA,
Speaker 1: the International Emergency Economic Powers Act, Yes, got it, And
Speaker 1: AIPA gives the president some powers to deal with unusual
Speaker 1: and extraordinary threats from abroad by doing any number of things,
Speaker 1: including regulate importation. And the government argued, well, if the
Speaker 1: president can regulate importation, that means he can impose tariffs
Speaker 1: on imports, and because trade deficits are an emergency, he
Speaker 1: can declare an emergency and impose tariffs to stop trade deficits.
Speaker 1: And there are a lot of holes in that argument,
Speaker 1: one of which is that, as the appeals court wrote,
Speaker 1: saying that you can regulate importation does not actually mean
Speaker 1: that you can impose taxes. And as they point out,
Speaker 1: the sec the Securitiest Exchange Commission, has the power to
Speaker 1: regulate financial market activity, but that doesn't give it the
Speaker 1: power to make up new taxes because that's part of
Speaker 1: financial markets. Yeah, Like the sec has regulatory power, but
Speaker 1: not tax inventing power yea. And so similarly here, the
Speaker 1: president doesn't have the power to invent new taxes or
Speaker 1: so the appeals Court held, but it also state its
Speaker 1: ruling because it's kind of got appealed to the Supreme
Speaker 1: Court and nobody knows it'll happen there.
Speaker 2: Yeah, I mean President Trump didcide this week that they're
Speaker 2: going to ask the Supreme Court for an expedited ruling,
Speaker 2: So we'll see. There.
Speaker 1: There's a pretty consistent situation where the president loses in
Speaker 1: lower courts because the lower courts follow a precedent inside
Speaker 1: this is illegal, and then he gets the Supreme Court,
Speaker 1: and the Supreme Court is the more flexible you have precedents,
Speaker 1: so they tend to let him duty once. So we'll see.
Speaker 2: We'll see. Anyway, the scope period this covers most of
Speaker 2: President Trump's tariffs. There are some specific sections that he's
Speaker 2: used which are a little bit more cumbersome.
Speaker 1: Yeah, Congress has a long history of delegating tariff power
Speaker 1: to the president. There are specific statutes doing that, saying,
Speaker 1: you know, for particular industries or for particular reasons you
Speaker 1: can impose tariffs, and usually there's like an administrative process
Speaker 1: where they have to like go through some sort of
Speaker 1: review in fact finding before imposing tariffs. And so the
Speaker 1: Trump administration has done a little of that, and that
Speaker 1: stuff is fine. But most of their tariffs though, you
Speaker 1: know what they call reciprocal tarffs tariffs, but whatever, most
Speaker 1: of that is opposed with no kind of fact finding.
Speaker 1: A review based on AIPA and IEPA pretty clearly doesn't
Speaker 1: give them the power tom post tars.
Speaker 2: Yeah. Yeah, so the terrorists are saying in place. Now,
Speaker 2: we'll see what the Supreme Court does. But it is
Speaker 2: fun to game plan what would happen if the majority
Speaker 2: of the tariffs had to be rolled back. I mean,
Speaker 2: you think about where that would leave the US, first all,
Speaker 2: when it comes to negotiating trade deals, et cetera. Obviously,
Speaker 2: that would put the US in a worse position.
Speaker 1: Sort of, right, I mean, like it depends on what
Speaker 1: you think is worse or better.
Speaker 2: Stick if you can't a stick to.
Speaker 1: Trade like we did, you know, a year.
Speaker 2: Ago, I don't think that that's necessarily the goal of this.
Speaker 2: If they're trying to pursue you know, the world.
Speaker 1: You're trying to pursue no free trade. And by the way,
Speaker 1: like there's still some you know, as you said, there's
Speaker 1: other statutes that I give him some tariffing and frankly
Speaker 1: there's you know, but those are the possibility of going
Speaker 1: to Congress and asking for tarifs, like it's a Republican
Speaker 1: controlled Congress and like you could imagine Trump saying tariffs
Speaker 1: are good and getting Congress to fulfill its constitutional role
Speaker 1: of passing terrors.
Speaker 2: Yeah. The problem that probably the Oval offices with all
Speaker 2: of that is that would just take more time. It's
Speaker 2: not as easy as sending a truth social.
Speaker 1: Posts of course, of course. Yeah, that's the problem that
Speaker 1: the Oval Office is with it. Many people would say
Speaker 1: it's good to have a rule of anyway.
Speaker 2: Anyway, we'll see what the Supreme Court does.
Speaker 1: Yeah, there's a lot of stuff. Like to me, like
Speaker 1: the interesting gaming out what would happen is if they
Speaker 1: agree with the lower courts that the tariffs are illegal,
Speaker 1: does that make them refundable? Because you know they're in
Speaker 1: place now. The government is collecting tens of billions of
Speaker 1: dollars a month from Yeah, lots, you know, lots of
Speaker 1: boats coming.
Speaker 2: In and thirty billion dollars in July.
Speaker 1: Actually, and like what happens if those tariffs are all illegal?
Speaker 1: Do they have to pay them money back?
Speaker 2: Yeah, that's a good question, right, it seems very hard.
Speaker 1: And in fact I read about this on Thursday. There
Speaker 1: are you can go to the prediction markets, you know,
Speaker 1: to Calshier polymarket, and they give odds for the Supreme
Speaker 1: Court upholding the tariffs, and then they're like fifty to fifty,
Speaker 1: which seems right, right Court, But the odds of the
Speaker 1: chans of the tariffs being refunded are lower than that.
Speaker 1: They're lower than fifty to fifty because there's some sense
Speaker 1: that even if the tariffs are illegal, it's like kind
Speaker 1: of hard to unscramble that egg. And yeah, just say okay,
Speaker 1: going forward, no more tariffs, but like you don't have
Speaker 1: to refund them, yeah, if you do have to refund
Speaker 1: them to be one of the really interesting questions is
Speaker 1: if you are an importer who paid tariffs and you
Speaker 1: somehow pass those tariffs along, right, like you charged your
Speaker 1: customers or you like didn't explicitly charge them, but you
Speaker 1: raised prices, Like do you have to refund them if
Speaker 1: you're like just the company that raised prices to consumers
Speaker 1: because of tariffs, and then like you got all the
Speaker 1: tariffs back, Like, are consumer is going to be mad?
Speaker 1: Are you going to have to refund them the money?
Speaker 1: It's like an interesting tariff effect is like it is
Speaker 1: hard to unscramble even if you refund the actual tariffs.
Speaker 2: Yeah, I mean you could say I've already raised my prices,
Speaker 2: I might as well just keep them here.
Speaker 1: Oh yeah, yeah, yeah.
Speaker 2: It is interesting to think about some of that. There
Speaker 2: was an interesting column from former New York Fed President
Speaker 2: Bill Dudley on the Terminal sometime this week saying that,
Speaker 2: you know, if you do game plan out this scenario,
Speaker 2: the tariffstary, illegal, et cetera, what does that mean for companies?
Speaker 2: His view is that companies are going to be slower
Speaker 2: to pass on their cost increases if we do have
Speaker 2: this wildly swinging pendulum. And what that means for the
Speaker 2: Federal Reserve is a fun thought exercise. Is inflation transitory?
Speaker 2: Once again, seems like a difficult environment to make policy in,
Speaker 2: but probably not any more difficult than it is right now.
Speaker 1: I was going to say, there's a really distinct lack
Speaker 1: of clarity on tireffs, both in terms of their legality
Speaker 1: and in terms of what the negotiated rights will be. Yeah,
Speaker 1: and I was going to say that at the Supreme
Speaker 1: Court definitively rules that the AJEPA illegal, then you get
Speaker 1: more clarity. But that's not really true, right, because then
Speaker 1: they go back and use other statutes, and it's like
Speaker 1: it just takes a more drawn out, more complicated process
Speaker 1: with further legal challenges. And yeah, yeah myself, out of
Speaker 1: that sounds it's all pretty grim.
Speaker 2: Yeah, it is pretty grim. It's also grim just for
Speaker 2: the US government and the fiscal outlook sort of well,
Speaker 2: Scott Vesson, Treasury Secretary Scott Besson has projected that tariffs
Speaker 2: are supposed to bring in like five hundred billion dollars
Speaker 2: in a year in annual income. They would have a
Speaker 2: hole there.
Speaker 1: Yeah, But like the US fiscal outlook is a long
Speaker 1: term outlook, and if you think as most economists still
Speaker 1: seem to think that tariffs are bad for the US economy,
Speaker 1: which is a separate from the legality question. But again,
Speaker 1: most economists think that not Scott Bessant, not Donald Trump,
Speaker 1: but most economists think that tariffs are not really helping
Speaker 1: economic growth. If you think that, then getting rid of
Speaker 1: the tariffs is good for fiscal sustainability, right because like
Speaker 1: in the long run, right, like fiscal sustainability is driven
Speaker 1: by like the economist's capacity rather than like the particular
Speaker 1: text rate on. Yeah.
Speaker 2: Just in terms of though bringing down the budget deficit,
Speaker 2: it does hurt there. This was part of the pillars
Speaker 2: that US treasure Secretary Scott Best and put in place, Like, yeah,
Speaker 2: plants have been built around this revenue coming in to
Speaker 2: the government's coffers and taking that out would I don't know.
Speaker 1: Yeah, no, it's it's like super disruptive, yeah, right, Like
Speaker 1: on the one hand, you could imagine a court somewhat
Speaker 1: unconstrained by precedent on law saying it would be so
Speaker 1: disruptive to the government to take away this thirty billion
Speaker 1: dollars a month of revenue source that we're just gonna
Speaker 1: benever backwards not to do it. It really is what
Speaker 1: the constitution says, is said Congress system post taxes, Right,
Speaker 1: it's a really important part of the constitutional structure. And
Speaker 1: it's like, you know, there's hundreds of years of history
Speaker 1: of like kings and executives in wanting to raise taxes,
Speaker 1: and the only constraint on them being the legislature's power
Speaker 1: to raise taxes. And so for the Supreme Court to say, eh,
Speaker 1: it's like too important for the president to be able
Speaker 1: to impost whatever taxes he wants. It's like really a
Speaker 1: shocking change in the constitutional structure. But here we are.
Speaker 2: Maybe the government can make up what they're not making
Speaker 2: a terror revenue from their stakes in US companies. Maybe
Speaker 2: that's the future we're rattling towards.
Speaker 1: How did this get more depressing? It's true that the
Speaker 1: Trump administration has found many new revenue sources, like owning
Speaker 1: ten percent of Intel. This is a real tangent, But like,
Speaker 1: I do think that one model that people have is that,
Speaker 1: like the US government has a twenty percent stake in
Speaker 1: every company because it taxes twenty percent of their earnings.
Speaker 1: If you take an additional ten percent stake and Intel,
Speaker 1: then that's like kind of an additional tax, but whatever,
Speaker 1: that's not really a tax. It's fine, but right. I mean,
Speaker 1: the other like truly novel revenue source that the Trump
Speaker 1: administration has found, not for the government but for Trump
Speaker 1: personally is cryptos shitandingg it and like you could probably
Speaker 1: make thirty billion dollars a month telling US government crypto
Speaker 1: that's true.
Speaker 2: I thought you were gonna bring up the revenue share
Speaker 2: that has been floated with AMD in video, but that's
Speaker 2: you know, the crypto she innigans is probably a much
Speaker 2: more short thing. I don't think that the Trump family
Speaker 2: is giving that.
Speaker 1: You like Intel and AMD and video.
Speaker 2: It's like we talked about this on the podcast.
Speaker 1: I don't write about it. It's not that fun. But
Speaker 1: like these are all like voluntary taxating. They're like voluntary taxes, right,
Speaker 1: they're like, yeah, Talald Trump goes to like in video
Speaker 1: and it's like, hey, you give you ten percent of
Speaker 1: your revenue? No, And they're like yes, no, well no
Speaker 1: they I mean right, like they're thinking, no, I don't
Speaker 1: want to give you ten percent of my revenue. But like, yeah,
Speaker 1: you know there's like a certain like nice chip company here,
Speaker 1: anything were to happen to it, right, Like if you
Speaker 1: replaced the tariffs of voluntary tariffs, like how much revenue
Speaker 1: would you collect? Like not none? Yeah, it's like voluntary
Speaker 1: like nudge nudge.
Speaker 2: I don't know enough about a MD's situation to pine
Speaker 2: on it too confidently, but at least in video Bloomberg
Speaker 2: had an interview with Invidia CFO last week, and she
Speaker 2: said something along the lines of, I haven't seen anything,
Speaker 2: I haven't signed anything. We're not giving up fifteen percent
Speaker 2: of our Chinese chip revenue yet, so I might be editorializing.
Speaker 2: I don't know if she said it with that much passion.
Speaker 1: Happened to that Chinee.
Speaker 2: Well, I don't know even if Chinese companies are going
Speaker 2: to be able to continue buying it. Apparently the Chinese
Speaker 2: government reportedly has encouraged companies not to buy American chips.
Speaker 2: But anyway, Charlie move long, what tickles your fancy to
Speaker 2: talk about? Second? This week my old haunts Coldman Goldman.
Speaker 2: I am excited to talk about this. This is a
Speaker 2: weird one.
Speaker 1: Yeah, it's sort of. It's not that way, it's like
Speaker 1: it seems weird. It's weird in detail, but like effectively,
Speaker 1: every week on this podcast we talk about some sort
Speaker 1: of deal where a big traditional asset manager is buying
Speaker 1: like an alterative asset manager, like a private markets are
Speaker 1: just partnering, or a private manager is buying a traditional
Speaker 1: manager or a private manager and a traditional manager or
Speaker 1: partnering to do like an ETF or whatever. And this
Speaker 1: week it is Goldman partnering with Tierro Price and no
Speaker 1: one's buying each other. Golden's buying a little too. Yeah,
Speaker 1: they're buying a billion dollars of Tiro in the inn
Speaker 1: open market.
Speaker 2: To be clear, The weird part, at least from where
Speaker 2: I'm sitting, is that Goldman will make a series of
Speaker 2: open market purchases to a mass up to three point
Speaker 2: five percent of TIRO stock. That's as much as one
Speaker 2: billion dollars. That would make them, I think, one of
Speaker 2: the top five biggest shareholders in Tiro. Why do they
Speaker 2: have to go through all that? Why can't they just
Speaker 2: do a little jv A partnership.
Speaker 1: I don't know. We are in a moment where there's
Speaker 1: a lot of momentum behind alts managers by alts managers,
Speaker 1: I mean, you know KKR, Apollo, you know Blackstone. But also,
Speaker 1: and I think we've talked about this on the pod
Speaker 1: and I've certainly written about it, like Goldman is very much,
Speaker 1: very much wants to be an altimage.
Speaker 2: We've talked about it, and you know.
Speaker 1: Look it is right, it like it runs alternative assets fun,
Speaker 1: you know, it manages assets well.
Speaker 2: Didn't it use that to justify the pay packages for
Speaker 2: David Suleman and John Waldron.
Speaker 1: Like, Goldman is an investment bank and it's also it
Speaker 1: manages a lot of money for institutions that it invests
Speaker 1: in alternative assets, and it's been a big business for
Speaker 1: a long time. So it's not quite the same as
Speaker 1: like KKR, but it's you know, it's like they think
Speaker 1: that they can.
Speaker 2: Well I was going to ask who is the alts
Speaker 2: manager in this scenario?
Speaker 1: And it's funny, right because like Tiro actually owns a
Speaker 1: private credit manager. Yeah. Cool, But if you read the
Speaker 1: press release in this deal, it's like it kind of
Speaker 1: says we're bringing goldbn's ALTS assets to Tiro's retail and
Speaker 1: retirement distribution. And then Okayill is like we're here too,
Speaker 1: because I think how I read that? But right, so
Speaker 1: Goldman is I think the alts manager here, and that
Speaker 1: they do you know, they raise a lot of money
Speaker 1: to invest in alts and you know they do that
Speaker 1: from institutions and they do that from their private wealth clients. Yeah.
Speaker 1: The story and private credit and private equity these days
Speaker 1: is like trying to find like true retail distribution, trying
Speaker 1: to sell through financial advisors and in particularly trying to
Speaker 1: sell to fore own K plans. Yeah, And Tiro has
Speaker 1: a lot of furrow and K business, and like they
Speaker 1: do target dated funds for own case, right, And if
Speaker 1: you can put private assets into target date funds, like
Speaker 1: that's a no brainer, right, It's like it's exactly the
Speaker 1: liquidity profile you want and you're selling alts assets to
Speaker 1: your giant pool of retirement savers. Yeah. I mean Tiro
Speaker 1: is like very much classic Like, Okay, they have some alts,
Speaker 1: but like they're very much a classic traditional long only
Speaker 1: activity manage mutual fund manager. And that is a tough business, right,
Speaker 1: I mean the Bloomberg article about this tie up mentions
Speaker 1: that Tiro has had like two hundred billion dollars of
Speaker 1: client outflows. Yeah, their stock is down fifty from where
Speaker 1: it wasn't twenty twenty one. It's a tough business to
Speaker 1: beg in. And you know everyone in that business is
Speaker 1: like looking around and me like, how can we get
Speaker 1: into privates because the fees are better?
Speaker 2: Yeah, Well that's the thing. I guess. I'm surprised that
Speaker 2: this search led them to Tiro, which isn't entirely fair.
Speaker 2: The Bloomberg News article does also point out that two
Speaker 2: thirds of Tiro's assets are in retirement funds. They're one
Speaker 2: of the largest firms in that part of the market.
Speaker 1: Everyone in privates wants retail distribution. This gets back to
Speaker 1: your question about why do they have to buy three
Speaker 1: point five?
Speaker 2: Yeah, is it just because the stock was on sale?
Speaker 1: To your point, I think it's the stock was on self.
Speaker 1: But I think a lot of it is like if
Speaker 1: you're Tiro, you know, you're like every alt manager wants
Speaker 1: to distribute through every four O, one K channel, and
Speaker 1: we want a real partnership with Goldlan rather than just
Speaker 1: like letting them stuff their funds into our clients. Right,
Speaker 1: And what does a real partnership mean. Well, I think
Speaker 1: it means like giving Golden some incentive of to have,
Speaker 1: you know, some upside in Tiro stock, so that Golvin
Speaker 1: has some incentives.
Speaker 2: To actually skin in the game.
Speaker 1: Yeah. Actually, you know, not just like used to as
Speaker 1: a dumping ground for its products, but like try to
Speaker 1: you know, be a real partnership.
Speaker 2: Yeah.
Speaker 1: I think that's like it makes sense to say you
Speaker 1: should buy some stock.
Speaker 2: Yeah. It is interesting because I mean you think about
Speaker 2: some of the other partnerships that we've talked about on
Speaker 2: this show. You have Vanguard and Wellington with Blackstone that's
Speaker 2: just partnering on fun. State Street has partnered with Apollo.
Speaker 1: Like Van Garden. State Street are not in the same
Speaker 1: position as like the traditional active management firms Wellington. Well, yeah,
Speaker 1: come on, I was saying, yeah, yeah, right, I mean,
Speaker 1: like I think of it as like the investment world
Speaker 1: now is like focused on alts and index ones, and
Speaker 1: if you're a traditional active manager, it's really hard. And
Speaker 1: so you can get into indexing, but that's like you
Speaker 1: know that stuff, isn't it get into Yeah, and so
Speaker 1: you get into get adults.
Speaker 2: Yeah, I'm interested to see how this turns out, to
Speaker 2: see this sort of transaction to.
Speaker 1: Call my eye, deal contingent hedges.
Speaker 2: Are we only talking about currency hudges here?
Speaker 1: You can do deal contingent rates hudges?
Speaker 2: Okay, yeah, spiritually similar, It's possible.
Speaker 1: That someone somewhere has done a deal contingent oil hedge.
Speaker 1: Yeah maybe, yeah, but no, I mean it's mostly currency
Speaker 1: and occasionally rate. So like you're a company, you're buying
Speaker 1: another company.
Speaker 2: I'm a business man.
Speaker 1: You buy another company, you sign a deal to buy
Speaker 1: the company, and it's closing in like six months, and
Speaker 1: if it's in a foreign country, you might have to
Speaker 1: get a lot of foreign currency and you want to
Speaker 1: lock in your currency rate today, but if the deal
Speaker 1: doesn't close, you don't want to have liability for that currency.
Speaker 1: Similarly like you might lock in your bar in cost today, right,
Speaker 1: like you might hedge with treasuries to hadge your you know,
Speaker 1: interest rates in some months, but if the deal doesn't closed,
Speaker 1: you don't need that interest rate hedge anymore. And so
Speaker 1: there's a long time banking product of deal contingent hedges
Speaker 1: where you go to your investment bank that did the
Speaker 1: merger for you and you say, I would like to
Speaker 1: hedge my currency risk or my rates risk or whatever,
Speaker 1: but I want to lock in my rates today, and
Speaker 1: if the deal doesn't close, I want to tear up
Speaker 1: the contract to not owe you anything, right, and for
Speaker 1: some price, the bank will do that. And historically this
Speaker 1: was like what banks did, right. Banks had big balance sheets,
Speaker 1: and they were good at pricing complicated risks, and they
Speaker 1: were in a client service business, so you know, as
Speaker 1: their merger client, if you wanted that sort of hedge,
Speaker 1: that was a nice thing for them to sell you, right,
Speaker 1: help them win merger business. And it's also very risky
Speaker 1: because like it's easy to do a foreign currency hedge right,
Speaker 1: like you you know, just buy the right delta in
Speaker 1: the spot link.
Speaker 2: I could do that right now, right.
Speaker 1: But like a foreign currency hedge that is torn up
Speaker 1: when a deal falls apart is very difficult to hedge.
Speaker 1: And banks sometimes get it wrong or get surprised by
Speaker 1: deals falling apart and lose you one hundred million dollars
Speaker 1: on a deal. And so there've been a series of
Speaker 1: IFI articles, like International Financing Review articles about how hedge
Speaker 1: funds are getting into the deal contention hedge business, where
Speaker 1: you know, there's an article last year that I read
Speaker 1: about where basically a number of banks will do these
Speaker 1: deals with their clients, like they'll do a deal with
Speaker 1: a corporate client saying, well, you know, hedge your foreign
Speaker 1: currency risk and tear it up if the deal falls apart,
Speaker 1: and then they'll go to a big hedge fund and
Speaker 1: buy the offsetting trade, and the hedge fund will price
Speaker 1: the merger risk and give them the trade, and the
Speaker 1: bank will collect a little fee for setting up the deal,
Speaker 1: but the hedge fund will take the risk. Right, And
Speaker 1: I thought of this is like an interesting story about
Speaker 1: how like banks don't have the risk appetite and balance
Speaker 1: sheet that they used to, and like the big hedge
Speaker 1: funds are becoming that the source of risk capital. But
Speaker 1: then this last month there's an IFI article about how
Speaker 1: the hedge funds are taking the next logical step and
Speaker 1: just going directly to the clients and saying, hey, we'll
Speaker 1: do the hedge for you. You don't need to go to
Speaker 1: your bank at all.
Speaker 2: Yeah.
Speaker 1: One, then that's interesting. You know, when I was a banker,
Speaker 1: like I thought of like bankers as covering companies, large
Speaker 1: corporate right, I did deals, But increasingly the main client
Speaker 1: of investment banking is private equity, right, Like a lot
Speaker 1: of deals are done by private equity, and so particularly
Speaker 1: deal contentionent hedges. It's a lot of private equity firms
Speaker 1: saying we're going to buy this foreign company, the deal's
Speaker 1: going to close in sixty nine months, we want to
Speaker 1: have your currency arrest today, and we're interested in structure,
Speaker 1: so we're happy to do a deal contentionent hedge. And
Speaker 1: the good and bad thing with private equity firms as
Speaker 1: a client for a bank is like there's like twelve
Speaker 1: of them and stuff of thousands.
Speaker 2: Yeah.
Speaker 1: And so if you're a hedge fund and banks are
Speaker 1: constantly coming to you to do deal contentionent hedges and
Speaker 1: they're all for like three private equity firms, You're like,
Speaker 1: why do not I just call those three private equity
Speaker 1: firms myself? Why do I need the bank at all? Right? Like,
Speaker 1: if banks have thousands of corporate clients, like they're client
Speaker 1: relationships are important and hard to replicate, right, HAG fund
Speaker 1: is not going to get into that business. But if
Speaker 1: they have like twelve private equity clients, you could do that.
Speaker 1: You can cover twelve.
Speaker 2: My first thought reading this was wouldn't it be inefficient to,
Speaker 2: you know, try to take a guess of which of
Speaker 2: the private equity clients are bound to do cross border deal?
Speaker 1: But putting it like you no, right, because like they've
Speaker 1: done the deals right, Like yeah, Like, if you do
Speaker 1: a deal contingent heads like regardless of whether the bank
Speaker 1: tells you who's on the other side of it, like
Speaker 1: it's continuent on a particular merger, so you can tell
Speaker 1: who's doing the merger, right, Yeah, And if you do
Speaker 1: three deals for one private equity firm, You're like, hey,
Speaker 1: I should get to know that.
Speaker 2: Yeah, so I understand I can put myself in the
Speaker 2: shoes of the banks being upset about this. I can
Speaker 2: put myself in the shoes of the hedge funds who
Speaker 2: are doing this. But I think it's also interesting to
Speaker 2: think about the private equity firms. And the article does
Speaker 2: ask the question should it really matter to the client
Speaker 2: who is the back ends? And it raises good points
Speaker 2: that you know, you could get worried about the possibility
Speaker 2: of leaks surrounding M and A. There's potential conflicts of
Speaker 2: interest here. It'd be interesting to hear from the perspective
Speaker 2: of the private equity clients how they feel about this.
Speaker 1: Yeah. I always assume you could do these hedges the
Speaker 1: day after you sign the deal rather than the day before.
Speaker 1: Maybe that's wrong, but like if you do the day after,
Speaker 1: you don't have to car about leaks. Yeah, I guess
Speaker 1: you'd worry about credit. Like the nice thing of doing
Speaker 1: this trade with like a big bank is like you're
Speaker 1: facing the big bank and they probably went to Faull,
Speaker 1: Whereas if you're facing a hedge fund, you.
Speaker 2: Have to have some counterparty, yes.
Speaker 1: Some diligence on how well the hedge fund is, But
Speaker 1: I don't know. If I were a big private equity firm,
Speaker 1: I would find it cool to like diversify my pool
Speaker 1: of counterparties and like decent deals with DJA or whatever
Speaker 1: instead of with a bank. Yeah.
Speaker 2: Well that's actually all I have to say. I guess
Speaker 2: there's more deals happening, so this will.
Speaker 1: I always thought this is like a really niche, like
Speaker 1: unusual business, and now it's like a thing. It's weird,
Speaker 1: but uh, yeah, the smart deal's happening. Yeah, sort of.
Speaker 1: There's no private equity actual acquisition, so that's true.
Speaker 2: Though apparently August was the best month for deal making
Speaker 2: since twenty twenty one or something along those lines.
Speaker 1: Yeah, good news, we're back.
Speaker 2: We're back.
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