Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along
Speaker 1: with Jonathan Faroe and Lisa Abramowitz. Join us each day
Speaker 1: for insight from the best and economics, geopolitics, finance and investment.
Speaker 1: Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and
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Speaker 1: the Bloomberg Terminal, and the Bloomberg Business App. We are
Speaker 1: thrilled to have one of our good friends back. Nora
Speaker 1: Roubini is the CEO of Rubini Macro Associates, but far
Speaker 1: more than that, someone who brilliantly was out front of
Speaker 1: previous crisis. Will keep the introduction short. This morning, Noriel,
Speaker 1: good morning to you. How is this crisis different than
Speaker 1: ninety eight? How is this crisis different than two thousand
Speaker 1: and eight, Well, compared to two thousand eighth. Right now,
Speaker 1: we don't have the credits yet, we're not in a resison.
Speaker 1: And the losses that occurred they seemed to be related
Speaker 1: to market race. A number of financial institution did not
Speaker 1: realize that with rising interest rates the price of bonds
Speaker 1: would fall, and last year US banks alone have something
Speaker 1: like six hundred and twenty billion dollars of unrealized losses
Speaker 1: on their securities with a capital of about two point
Speaker 1: two trade, so the average losses about twenty eight percent
Speaker 1: will reduce significantly the capital ratio, the Tier one ratio
Speaker 1: for some banks actually the numbers like Silicon Valley Bank.
Speaker 1: Of course the number was one hundred percent, but I
Speaker 1: would still have the regional banks where that possess will
Speaker 1: be fifty percent of the current capital. I want to
Speaker 1: go back to your Tellian economics, your public service to
Speaker 1: President Clinton, where you were experts on the regulatory framework.
Speaker 1: Switzerland is a devolved federal government with the cantons with
Speaker 1: great strength. What is your knowledge of Swiss regulators right now?
Speaker 1: How removed are they from the credit Swiss crisis? Or
Speaker 1: they can they be active today to help their beleaguered bank. Well,
Speaker 1: they can be active today, even if they're a system
Speaker 1: that is delegated. However, the problem is that trying to
Speaker 1: twisted by some standards might be too big to fail
Speaker 1: but also too big to be saved. Is not clear
Speaker 1: that I Unlike the United States, the federal system is
Speaker 1: enough resources who engineer a bailout and what they need
Speaker 1: certain is more capital and the question is whether they're
Speaker 1: going to get that capital or not. Otherwise bad things
Speaker 1: can happen. Well, bad things are happening this morning, Noria,
Speaker 1: I'd love your take on this. There might be some
Speaker 1: people waking up this morning looking at what's happening with
Speaker 1: Credit Suis, perhaps perhaps based here in the United States,
Speaker 1: and thinking what does this mean for me? Why is
Speaker 1: this important? Could you explain to those people, Norille, just
Speaker 1: how important Credit Swiss might be to the financial system. Well,
Speaker 1: it's important because the SVP was only about a one
Speaker 1: hundred and fifty billion lawlers of assets, while in the
Speaker 1: case of Credit Swiss were speaking about at least a
Speaker 1: seven hundred billion. So anything will happen to Credit Whiss
Speaker 1: will be of systemic effect for not just the European
Speaker 1: financial system, but also for the global financial system. So
Speaker 1: if Silicon Valley Bank create repal effects in global financial market,
Speaker 1: something bad happening into Credit Swiss will be an order
Speaker 1: magnitude more, something more like a Leman moment. A lot
Speaker 1: of people are talking about the implications of this on
Speaker 1: monetary policy, and Torsten Stock earlier said when the facts change,
Speaker 1: his view changes from no landing to a hard landing.
Speaker 1: He sees perhaps the end of a rate hiking cycle,
Speaker 1: as does the market, including one hundred basis points of
Speaker 1: cuts in the next year. Nuriel, do you agree with
Speaker 1: this assessment. Have the facts changed where suddenly rate hikes
Speaker 1: are out of the picture and you see that the
Speaker 1: inflation story will get solved by a crisis elsewhere. I
Speaker 1: don't think so. I think that the dilemma for central
Speaker 1: bank has got to be worse because the latest economic
Speaker 1: data for inflation in the Eurozone or the US suggests
Speaker 1: that inflation is still to ye, is falling, but is
Speaker 1: not falling as fast as the FED or ECB wanted
Speaker 1: to be. So, based on what's the economy doing right now,
Speaker 1: we need to hike and like much more. The FAT
Speaker 1: should go at least closer to six percent. The CEB
Speaker 1: should bring the deep or rate to at least four percent.
Speaker 1: The problem right now we're facing a situation of financial instability,
Speaker 1: and financial instability would suggests to stop hiking, maybe even
Speaker 1: cutting rates and maybe even resuming quantity division. And what
Speaker 1: the FAT has done is back to or quantity divising.
Speaker 1: But if you do that, you have a risk of
Speaker 1: the antoorg of inflation inflation expectation that tradeoff existed even
Speaker 1: before raising rates would have led to stresses in financial
Speaker 1: market like last year where bond yields went much higher
Speaker 1: credit spread widen. That stress is becoming more severe today
Speaker 1: because now we have systemic financial problems, But we're also
Speaker 1: in a situation in the state way to hyge, and
Speaker 1: the idea that this financial stress is going to cause
Speaker 1: inflation of drop is not yet in economic data, So
Speaker 1: there is a dilemma for sentle bands. Although a lot
Speaker 1: of people are saying that they see credit conditions tightening,
Speaker 1: we heard earlier from Larry Fink of Black Rock saying
Speaker 1: that he sees a slow rolling crisis that's going to
Speaker 1: move from the banking system to private credit to private equity.
Speaker 1: How does your view kind of tie into this sort
Speaker 1: of inherent credit tightening that we see across a whole
Speaker 1: host of assets. Certain there's going to be a tightening
Speaker 1: of financial conditions, at least in terms of credit spreads.
Speaker 1: Bond deals are falling, But on the short and long end,
Speaker 1: that's an easing of financial condition that eventually might lead
Speaker 1: to an economic slow down. But there we have the
Speaker 1: inflation today is way too high and it's going to
Speaker 1: remain too high because the forces are leading to high inflation,
Speaker 1: like for example, very tightly or market are still with us,
Speaker 1: and therefore that's going to be a cause of persistent inflation.
Speaker 1: And the idea that eventually sighting of financial condition is
Speaker 1: going to cause a slowdown of the column and a
Speaker 1: weakening of inflation is not yet in the data. So
Speaker 1: there is a really contradiction between achieving economic stability and
Speaker 1: lower inflation and maintaining financial stability. To today, what a conflict.
Speaker 1: What a conflict. I've got forty five seconds left. I
Speaker 1: wanted to give the opportunity to try and answer this.
Speaker 1: Banks found out that the risk was where they thought
Speaker 1: the safety was Noria West the safety now when the
Speaker 1: safety is not in long term treasuries. I've been writing
Speaker 1: for it for over a year. You know, if average
Speaker 1: inflation were to be say five percent, ten year treasury
Speaker 1: eventually have to be seven percent to data around three
Speaker 1: and a half. Last year, you lost twenty percent on
Speaker 1: your safe bonds, more than you lost on your SMP
Speaker 1: because yill went from one towards three. If they go
Speaker 1: from three and a half to seven or the medium term,
Speaker 1: they'll be further blood bat on twenty three dollars of
Speaker 1: long duration risk assets. The solution is going to be
Speaker 1: short term treasury tapes, gold pressures, matter another head just
Speaker 1: against inflation. That's where you have to outgo, and investor
Speaker 1: sort only now started to realize it that that's where
Speaker 1: you have to do. It's going to be a conversation.
Speaker 1: You and I have the whole of this team for
Speaker 1: a long time, no doubt, Thank you, sir, No Robeini,
Speaker 1: the Robini Macro Associates and Tom of course, the author
Speaker 1: of Mega Threats. Peter Cha, head of Macro Strategy Academy Securities,
Speaker 1: joins us. Pete, let's talk about it one ninety seven.
Speaker 1: I think we're all sort of clude on the interday
Speaker 1: chat tick for tick at the moment, Pete, what's your
Speaker 1: take on what's unfolding? You know, I'm watching the CDs market.
Speaker 1: We've seen the one year jump to say eight to
Speaker 1: nine points up front, so someone has to pay eight
Speaker 1: or nine percent of principle to ensure the credit risk
Speaker 1: per year. Part of that's concerning because you're starting to
Speaker 1: see the curve invert, so there's a bid for frind
Speaker 1: AD and CDs. Having said that, I think two things
Speaker 1: that are mitigating that are liquidity is still just abysmos,
Speaker 1: so liquidity is low. European credit to false twap. Liquidity
Speaker 1: is not what it once was, so the moves can
Speaker 1: be exaggerated. And it is a name that people hold
Speaker 1: so much that they do need to hedge. People have
Speaker 1: been playing around in the cocos various parts of the
Speaker 1: cap structure, so you do get this volatility. It is
Speaker 1: a bit concerning though that every you know it seems
Speaker 1: to be reaching you highs in terms of CDs spreads.
Speaker 1: So I'm watching that and I think one lesson all
Speaker 1: the US banks should be taking is when it comes
Speaker 1: to capital raising, you have to be aggressive and get
Speaker 1: it done early. Right. This seems to be today's story
Speaker 1: is about not raising capital maybe a few months ago,
Speaker 1: and that's what's hurting them today. I think every US
Speaker 1: bank that's kind of that weaker end should be thinking
Speaker 1: how do I raise capital? Because we in the US
Speaker 1: have to fill that big void of the unmarked, unrealized
Speaker 1: losses and treasures. Some financial institutions that some people had
Speaker 1: never heard of would declared systemically impulsant by regulators in
Speaker 1: order to make DEPOSITUS hold over the weekend in America.
Speaker 1: How would you describe the important secredit swat to the
Speaker 1: financial system. You know, it's an incredibly important company. It's
Speaker 1: a awesome company's as you say, we all know people
Speaker 1: who are there. I think we need to see this
Speaker 1: get resolved, because the one thing we do tend to see, unfortunately,
Speaker 1: is if one gets into trouble, people very quickly start looking, oh,
Speaker 1: what's the next one that looks remotely like this? And
Speaker 1: it may be unfair, but that's kind of the pattern
Speaker 1: we saw during the European deck crisis, during the Great
Speaker 1: Financial Crisis. I think we just saw it here in
Speaker 1: the regional banks. So this has to be a priority
Speaker 1: for the ECB and Yes to get together. Peter, I
Speaker 1: just want to cut to the chase here in contagion.
Speaker 1: I'm looking at Deutsche Bank. I'm looking at the retail
Speaker 1: French giant BMP Perry, same idea. They give way as well. Peter.
Speaker 1: We don't have time for the tech dynamics, but it
Speaker 1: is grim. There's no other way to put it with John,
Speaker 1: help me here A one ninety four one point nine
Speaker 1: four zero five on credit sueees. Do you look at
Speaker 1: this is a EU regulatory contagion or is it contained
Speaker 1: to Zurich. It should be contained to Zurich. But again
Speaker 1: I think, just like the FED was the ECBs acknowledge
Speaker 1: that they've got to ring fence things and make sure
Speaker 1: that they're putting up firewalls in place, actually to help
Speaker 1: cs lets get time, but more importantly to ensure that
Speaker 1: there's no chance of this attracting the attention of other
Speaker 1: banks and people pushing on them. That's what happened to
Speaker 1: the US, That's happened past, and I do like what
Speaker 1: the regulators did in the US. I think they were
Speaker 1: very aggressive on Sunday night. I think there's more to do.
Speaker 1: They've got to address the core problem, which again is
Speaker 1: these huge unrealized losses. But it's a step in the
Speaker 1: right direction. It starts ring fencing it and making sure
Speaker 1: that people understand there is time for these things to
Speaker 1: work out. The core problem is also though, that regulators
Speaker 1: missed some of the red flags, not only with respect
Speaker 1: to Credit Suite, so now having to go back and
Speaker 1: rethink some of the statements as the SEC raised flags,
Speaker 1: but also over in the US where there wasn't even
Speaker 1: a chief risk officer at SVB I'm wondering, from your perspective,
Speaker 1: at what point does the market lose faith in the
Speaker 1: ability of regulators to flag risks that might emerge next?
Speaker 1: You know, it's I think one of the problems that
Speaker 1: we face is the regulators are often get caught fighting
Speaker 1: the last battle, and the Great Financial Crisis was all
Speaker 1: about the big banks, and that's where the focus was.
Speaker 1: And clearly we've got to do more to make sure
Speaker 1: that everyone's well managed, everyone's being within limits. You know,
Speaker 1: I think the things that they did, by the surface,
Speaker 1: looks completely allowed to do. Now why you would want
Speaker 1: to take that much duration Rims, that's a separate question.
Speaker 1: I know you like the midsize lenders in the United States,
Speaker 1: particularly after what you heard on Sunday evening. European banks
Speaker 1: have been a massive trade and if we can step
Speaker 1: away from Switzerland just for a moment, Soakedin's down eight percent,
Speaker 1: being paced down eight percent, I in Chase down six
Speaker 1: point five percent, Pete, can you say the same thing
Speaker 1: about the European lenders in this moment they faced this morning?
Speaker 1: Not yet. I prefer the US right now because I
Speaker 1: think it was way overdone. It was a very isolated case.
Speaker 1: And the regulators come out quickly. So I want to
Speaker 1: see some sense that the regulators and the ECB are
Speaker 1: coming out and doing what they can. Then I think
Speaker 1: it's a buying opportunity. Again, it's been a great run,
Speaker 1: so I'm much more comfortable right now with the US
Speaker 1: and the mid market banks. That's where I want. If anything,
Speaker 1: I expect news over the weekend where you see some
Speaker 1: progress from some of these banks and storing up their capital,
Speaker 1: whether it's to a merger or getting an infusion. That
Speaker 1: would be great for the market. So I like that. Europe,
Speaker 1: I think we got to see where this plays out.
Speaker 1: It's too early. I pay thank you, sir I As
Speaker 1: always Pittacha of Academy Securities. We are informed by ken
Speaker 1: Leon with decades of experience with CFI A and of
Speaker 1: course helping us with American banks. Is it trust and
Speaker 1: confidence Dearth and Zurich ken Leon? Is it basically the
Speaker 1: same as in Palo Alto or California? Is the trust
Speaker 1: and confidence lack? Is it the same everywhere for investors
Speaker 1: and customers? Yes, and it comes in different levels. This
Speaker 1: one is concerning because it's global and for the ft
Speaker 1: they're still in their domain of financial stability, which is
Speaker 1: an issue, and there's lots of new takers into the story,
Speaker 1: whether it be Congress policy makers. What does the central
Speaker 1: Bank in Switzerland say about perhaps their major franchise that
Speaker 1: has dwindled over the years. It's a pretty sad story.
Speaker 1: Training again at one point eight seven, John, A nice
Speaker 1: lift there, but nowhere above even on the last ten
Speaker 1: minute interval that would need to get to one point
Speaker 1: nine two or one point ninety three, and we're not
Speaker 1: even there yet. One five is music to nobody says, yeah,
Speaker 1: I'm looking at that stock. Let's continue with Ken Leon.
Speaker 1: Is kredit suis trade this morning, Ken Leon, As you mentioned,
Speaker 1: Kredit suis a global name. It's all part of our
Speaker 1: heritage as well. I'm thunderstruck at where Swiss regulators are.
Speaker 1: Can American regulators apply any sense of force here on
Speaker 1: a foreign bank? They they can im as it relates
Speaker 1: to their assets in the US or the cooperation that
Speaker 1: you see at the highest levels of Japal working with
Speaker 1: other central branks around the world, the ECP in particular.
Speaker 1: But this one spot on the timeline is short. You
Speaker 1: don't have to may Or June J. Pal Monday said
Speaker 1: to Michael Barr, head of Supervision, is that I need
Speaker 1: a report and it will be shared with the public
Speaker 1: by May first. Congress will have hearings about what's happened
Speaker 1: in the US with the regional banks. A lot of
Speaker 1: this is trust and confidence versus panic, and then when
Speaker 1: you get into the weeds, that's the important areas what happened,
Speaker 1: when did it happen, what went wrong? And I'd like
Speaker 1: to share more about that because the other major part
Speaker 1: of the feed is bank supervision. Again, there's a story
Speaker 1: of trust and confidence when it comes to specific issues,
Speaker 1: whether it's hedging interestry risk or whether it's just you know,
Speaker 1: management missteps on consecutive years. In the case of Credit
Speaker 1: suis where are the linkages beyond just simply a lack
Speaker 1: of confidence, But the weakness is really getting large banks
Speaker 1: and in this and now smaller banks to invest in
Speaker 1: technology platforms for compliance and regulation. Michael Corbetta City Group
Speaker 1: for years was told to invest and he didn't, and
Speaker 1: then there was penalties and hundreds of millions of dollars
Speaker 1: spent at City Wells far goes another example, and you
Speaker 1: take this at that scale of a global bank, Credit Swiss,
Speaker 1: it's critical to have that. It's taken US five seven
Speaker 1: years for all of our globe and Sacks Morgan Stanley
Speaker 1: to do that. But when you get down to midsize
Speaker 1: banks one hundred billion or more or intent to one
Speaker 1: hundred billion, they don't have the manpower or the resources
Speaker 1: to do it like the large banks who've done it well.
Speaker 1: And on the other side is the set has thousands
Speaker 1: of bank examiners, but after twenty eighteen regulation just staying
Speaker 1: very focused and tight for those above two hundred and
Speaker 1: fifty billion, not fifty and long. Behold Barney frank Is
Speaker 1: on the board of truck. There's a signature back unreal. Yeah,
Speaker 1: we're going to get theater and Congress on all this,
Speaker 1: but also the bank examiners and what the banks respond
Speaker 1: to really matters a lot. Kennon got thirty seconds on
Speaker 1: the clock. There might be some people engaging in this program.
Speaker 1: Maybe they've never listened or watched this program ever before.
Speaker 1: They've watched what's happened with banks over the last week,
Speaker 1: and they've taken an interest, and they hear us talk
Speaker 1: about Credit Suite and they say credit who They've never
Speaker 1: engaged with this Lenda before. They don't know what this
Speaker 1: bank does. They've seen futures down ken Why does this
Speaker 1: bank matter? Waking up in the United States this morning,
Speaker 1: such a global bank, there might be counterparty risk for
Speaker 1: some of the US banks. It's also, you know, significant
Speaker 1: in the cog of the capital markets. So if it's
Speaker 1: not related to direct lending in the US, it does
Speaker 1: matter significantly for the capital markets. And that's where you
Speaker 1: really have to look on what it impacts in terms
Speaker 1: of debt instruments, derivatives as well as equities. Can appreciate
Speaker 1: your perspective ready today, Thank you, sir Kenley on that
Speaker 1: CF all right, we are well timed here joining us
Speaker 1: as David Rubinstein, you know him of course from the
Speaker 1: Carlisle Group, his public service to the nation and the
Speaker 1: Carter administration and David Rubinstein peer to peer conversations, and
Speaker 1: as David knows, I'm wont to say we'll rip up
Speaker 1: the script today. We're going to rip up the script.
Speaker 1: I've got eight ways to go here. You with your
Speaker 1: philanthropy have a wonderful linkage between financial elites and the
Speaker 1: government in America. We've seen the government begin to step
Speaker 1: in in this crisis. Are you surprised that European and
Speaker 1: particularly Swiss authorities have not stepped in on credit suits.
Speaker 1: I am surprised that nothing has happened yet, But it
Speaker 1: took a day or two for the United States to
Speaker 1: get its act together, so I suspect it'll take a
Speaker 1: day or two there. But remember, the US regulatory scheme
Speaker 1: is much different than the Swiss one or the European one,
Speaker 1: and so we have one regulatory scheme more or less
Speaker 1: the United States. They have many different ones in Europe,
Speaker 1: and I don't think the Swiss authorities have quite the
Speaker 1: authority over the banking system that the US one does
Speaker 1: have over our banking system. David, That's what I wanted
Speaker 1: to go to. What would you suppose snapping in looks
Speaker 1: like in Swisland? What does that look like? Well, we
Speaker 1: did in the United States is we protected depositors, so
Speaker 1: we didn't protect creditors, and we didn't protect shareholders, and
Speaker 1: we didn't protect really employees. I suspect the Swiss situation
Speaker 1: is more complicated because the existence of the bank is
Speaker 1: more at stake here, and it's such a well known
Speaker 1: bank around the world that I think the Swiss authorities
Speaker 1: have to worry more than just about the depositors. The
Speaker 1: chairman of the Swiss of the Saudi National Bank, who
Speaker 1: I do know, made a statement that you broadcast recently
Speaker 1: saying that they were not going to put more money
Speaker 1: in and that would probably a bit of a blow
Speaker 1: to Credit Swiss. Were you surprised by that that he
Speaker 1: said that out loud on the record. I was surprised
Speaker 1: by it. I just saw him a few weeks ago,
Speaker 1: and I think, you know, they have a lot of
Speaker 1: authority in Swiss, the Saudi National Bank, and I suspect
Speaker 1: they wanted the Protector investment. But obviously there's a reason
Speaker 1: why they're not doing that. Well, there's a theory that
Speaker 1: perhaps Middle Eastern investors would want to come in and
Speaker 1: help Credit Swiss more substantially, not just because they think
Speaker 1: it's a good investment, so that they could do business
Speaker 1: and have that be the European node. Is that basically
Speaker 1: off the table based on the very public comments that
Speaker 1: we heard earlier this morning, I don't have enough information
Speaker 1: to say that that's the case. I was surprised that
Speaker 1: the Saudi National Bank chairman did not want to put
Speaker 1: more money in, but he may be under some regulatory
Speaker 1: constraints to put more money in so I just don't
Speaker 1: have all the facts there, but I do know that
Speaker 1: there's a lot of Middle East interest in Credit Swiss,
Speaker 1: and over the years there have been a lot of
Speaker 1: activity between the Credit Swiss and Noways bankers and Middleways investors.
Speaker 1: We'll just have to wait and see. David, you said
Speaker 1: that this is more complicated because of all the interconnectedness
Speaker 1: of Credit Swiss and the global banking system, and I'm
Speaker 1: wondering what your concern is, whether you think that the
Speaker 1: worry and market this morning markets is warranted based on
Speaker 1: how systemic it really is. Well. I think in the
Speaker 1: United States the regulators thought over the weekend they had
Speaker 1: solved the problem. Clearly, they haven't really solved the problem
Speaker 1: because some banks are still weaker than they would prefer
Speaker 1: to be. I think the contagion that spread to Europe
Speaker 1: is something that the regulators here probably did not anticipate,
Speaker 1: and so we'll just have to wait and see what
Speaker 1: the impact is. Right now, the US banking system is
Speaker 1: in pretty good shape. There's obviously some weak banks, but
Speaker 1: basically we don't have a systemic run on the major
Speaker 1: banks in the United States. I would say that Credit
Speaker 1: Swiss is a major bank in Europe, not as portant
Speaker 1: as it was many years ago, but still an important bank.
Speaker 1: So if we were to have serious problems and have
Speaker 1: more of a contagient effect than Silicon Valley Bank would
Speaker 1: have on our banking system, some people talk, other people do.
Speaker 1: In March of two thousand and eight, you did, Carlisle
Speaker 1: Capital to be polite, was challenged to be polite about it.
Speaker 1: You stepped up verbally and with action to help make
Speaker 1: people whole. How do we affect that now with this
Speaker 1: complex crisis that we have. Well, that was something that
Speaker 1: was unanticipated by many people. It came about in part
Speaker 1: because the concerns about the regulatory system and interest rates
Speaker 1: were going up. I think here the Federal Reserve probably
Speaker 1: did not spend as much time worrying about the impact
Speaker 1: on banks and their ability to survive. When interest rates
Speaker 1: were going up. The Fed was mostly focused, I think,
Speaker 1: on inflation and not worry about the bank regulatory system,
Speaker 1: and I think they may have been caught unaware of
Speaker 1: how SERI the problem was. So what should Powell do here?
Speaker 1: These are delicate questions. I don't want to put you
Speaker 1: in a corner, mister Rubinstein, but you've got tangible experience here. Well,
Speaker 1: my experience may not be that relevant for this, but
Speaker 1: I would say the big decision that has to be
Speaker 1: made by the Federal Reserve is do they increase interest
Speaker 1: rates by fifty basis points, twenty five basis points or
Speaker 1: no basis points. And the conventional wisdom in Washington today,
Speaker 1: and that conventional wisdom's not always right, is that the
Speaker 1: Fed will probably go with twenty five basis points. If
Speaker 1: they were to go with no increase in all people
Speaker 1: would think that they've lost their interest in fighting inflation.
Speaker 1: They go with fifty basis points, it might be seen
Speaker 1: as too much for some of the banking companies right now.
Speaker 1: So I suspect twenty five basis points is to split
Speaker 1: the baby decision. It's most likely. Meanwhile, earlier this morning,
Speaker 1: we got this letter from black Rock's Larry Fink, and
Speaker 1: he was talking about potentially a slow rolling crisis in
Speaker 1: the US, with the first shoe to drop Silicon Valley Bank,
Speaker 1: the next with some regional banks, and then he pointed
Speaker 1: to a third to drop, where he pointed at private equity,
Speaker 1: and he pointed to some of these less liquid assets
Speaker 1: that have built up in size over the past few years.
Speaker 1: Do you agree that that could be a node of
Speaker 1: concern in the next couple of months and year ahead.
Speaker 1: Private equity is not the same situation as banks. We
Speaker 1: don't have typically runs on private equity firms and the bank.
Speaker 1: The private equity firms did quite well in the last recession.
Speaker 1: They survived and they came back stronger than ever. The
Speaker 1: private equifirms are much bigger than they were the last
Speaker 1: time around, So I don't see any weakness at all
Speaker 1: that we have to worry about in terms of a
Speaker 1: regulatory situation with private equity firms. I think we're not
Speaker 1: the problem. I think other banking regulated companies may have
Speaker 1: bigger problems, but not private equity firms in my view. Clearly,
Speaker 1: private equity firms have illiquid assets, but we've known that
Speaker 1: for a long time, and we don't have a run
Speaker 1: on the bank where we have depositors of pulling their
Speaker 1: money out anytime they want to do so, so that's
Speaker 1: not a problem for us. We had to run on
Speaker 1: the bank acount Square, and the decision that was made
Speaker 1: by authorities was to make deposit its hold. We understood
Speaker 1: there was an FDI say limit on deposits of two
Speaker 1: hundred and fifty thousand. It looks like that's gone. Ken Griffin,
Speaker 1: I believe, spoke to the Financial Times recently of Citadel
Speaker 1: and talked about maybe eroding American capitalism, that this was
Speaker 1: perhaps a mistake. Do you take a view on that yet, Well,
Speaker 1: I think the FED had the federal government, had to
Speaker 1: do something, and had they not protected depositors, there would
Speaker 1: have been run so many banks. So I think by
Speaker 1: protecting depositors, I think that was a wise decision. Whether
Speaker 1: they should have protected creditors as well as shareholders, that's
Speaker 1: a more complicated issue. Ken's a very smart person, has
Speaker 1: outstanding record, and I know him quite well. I really
Speaker 1: respect him. But I don't think that our capitalists and
Speaker 1: system is falling apart. It has challenges, that always has
Speaker 1: from time to time, but I think the system is
Speaker 1: going to survive for sure. In the short time we
Speaker 1: have very quickly commercial real estate. I saw an Orange
Speaker 1: Country shopping while having challenges in the last twenty four hours.
Speaker 1: Is commercial real estate the shadow you're concerned about. Well,
Speaker 1: when interest rates go up, commercial real estate values and
Speaker 1: other real estate values typically go down. So we've seen
Speaker 1: that impact right now. I suspect there are going to
Speaker 1: be some dislocations in commercial real estate. But this has
Speaker 1: been going on for a while because ever since there
Speaker 1: was the tech bubble burst that we saw about a
Speaker 1: year or so ago, real estate has been challenged and
Speaker 1: his interest rates have gone up. Real estate has been challenged,
Speaker 1: and I think the real estate developers are sensitive to this.
Speaker 1: I don't see a widespread collapse in the real estate
Speaker 1: market at all. I think the real estate developers have
Speaker 1: been learned their lessons from ten years ago. They haven't
Speaker 1: made personal guarantees the way they used to, and I
Speaker 1: suspect that the industry will will get through this. David,
Speaker 1: appreciate your time this morning. I expect to have a
Speaker 1: different conversation, but things are moving fast. Well. Next time
Speaker 1: we'll talk about my interview with I'm interviewing next week
Speaker 1: Jane Fraser, who is to see City Bank, and I'll
Speaker 1: be doing that interview for Bloomberg and for others. So
Speaker 1: thank you, very cool, David, Thank you David Rubins. Done
Speaker 1: there of the Carlisle Group, And just a programming note
Speaker 1: for you. You can watch David's interview with the former
Speaker 1: COMMA secretary and PSP Pontis Chairman Penny Potzka on The
Speaker 1: David Rubinstein Show, pats A Pack Conversations tonight nine pm
Speaker 1: in New York, humbling By TV. Joining us now with
Speaker 1: wonderful perspective as we had David Rubinstein earlier and Doctor Rubini.
Speaker 1: Lisa Shaalott joins the chief investment officer from Morgan Stanley
Speaker 1: Wealth Management. It would be inappropriate for her to speak
Speaker 1: for mister Gorman and the executives of Morgan Stanley activity
Speaker 1: in the last four hours. Lisa, I must ask, because
Speaker 1: you are with wealth Management, how do you contain the
Speaker 1: phone calls? How do you contain deposit inflows of a
Speaker 1: certain flight to quality? Look, I think the most important
Speaker 1: thing that we're talking to clients about right now is
Speaker 1: getting folks to understand the difference between what happened in
Speaker 1: the Great Financial Crisis in two thousand and seven and
Speaker 1: two thousand and eight and what's happening now. In two
Speaker 1: thousand and seven two thousand and eight, we had a
Speaker 1: massive credit problem. Hi, there was a quality of credit,
Speaker 1: default risk set of issues this go round. The assets
Speaker 1: that need to be revalued are not you know, mortgages
Speaker 1: and real estate. Uh, they are in many cases you know,
Speaker 1: sovereign bonds of governments, and those are very different things.
Speaker 1: And so, you know, for the handful of banks that
Speaker 1: have found themselves in a situation where their funding model
Speaker 1: on the asset side of their balance sheet, uh, you know,
Speaker 1: needs to be or should have been more aggressively marked
Speaker 1: and risk managed. That's really the issue. What is fascinating
Speaker 1: here is the role of psychology. Right when you get
Speaker 1: bank runs, when you get depositors starting to worry about uh,
Speaker 1: you know, the integrity of their deposits, that is a
Speaker 1: very different, very different dynamic. And I could suggest to
Speaker 1: you that there is a scenario where, you know, the
Speaker 1: situation at Silicon National Bank did not have to happen
Speaker 1: if all of the folks who were the major deposit holders,
Speaker 1: who were major holders of loans there, who are major
Speaker 1: account holders, didn't suddenly en mass decide not only to
Speaker 1: all withdraw at the same time, but to literally put
Speaker 1: that on social media as an action. Uh. You know
Speaker 1: that we are living in very very different times and
Speaker 1: we have to kind of understand how important it is
Speaker 1: the role that regulators play, the role that uh, you know,
Speaker 1: capital reserves and capital buffers play, and how important you know,
Speaker 1: having the integrity of those RUSS tests is and so
Speaker 1: we talk about, you know, there are the halves and
Speaker 1: you know, the less halves, and the folks who have
Speaker 1: really been put through those pieces and those stress tests,
Speaker 1: and the folks who have been allowed, because of their
Speaker 1: size or their organizational structure to perhaps experience you know,
Speaker 1: quote unquote a lighter touch of that regulatory oversight. Lisa,
Speaker 1: there is a back of the envelope conversation happening right now.
Speaker 1: Maybe it's too simplistic, but it goes a little something
Speaker 1: like this. After what we saw develop in the United
Speaker 1: States last week, the focus quickly went back on duration risk,
Speaker 1: the mismanagement of interest rate exposure, interest rate risk, and Lisa,
Speaker 1: because of that, I think, given the losses you've seen
Speaker 1: in treasuries over the last twelve months, people just instantly said, well,
Speaker 1: wait a minute, what about Europe and what we've seen
Speaker 1: developed there in the last year. Lisa, can you speak
Speaker 1: to that? Yeah? Look, I think you know this is
Speaker 1: a huge wake up call. It's a wake up call
Speaker 1: however that that shouldn't be a brand new thing. Um,
Speaker 1: you know, understanding if you're going to own financials, if
Speaker 1: you're going to be an investor in that sector. Uh,
Speaker 1: you know, understanding the funding model, Understanding you know how
Speaker 1: a bank is generating uh, you know cash flows to
Speaker 1: pay depositors and to attract depositors is a key part
Speaker 1: of your fundamental analysis. And so there's an element of this,
Speaker 1: you know where where this is less about immediate contagion. Again,
Speaker 1: remember in the Great Financial Crisis, there was a lot
Speaker 1: of this that was about you know, cross counter party
Speaker 1: credit risk. That's not what this is about. These are
Speaker 1: about individual banks who potentially have not you know, we're
Speaker 1: overly aggressive in funding themselves out the curve, uh during
Speaker 1: an episode of central bank tightening. And you know that
Speaker 1: is a you know, one could say, you know somewhat
Speaker 1: you know economics one on one, and so I do
Speaker 1: I think that there may be some other mistakes out there, Yes,
Speaker 1: I do, But I do think that the systemic if
Speaker 1: your connection of them, is very different than in two
Speaker 1: thousand and eight, twenty two thousand and eight. Just quickly, Lisa,
Speaker 1: given that perhaps you don't see the systemic irrelevance in
Speaker 1: the same kind of way as two thousand and eight,
Speaker 1: do you still think that it's important for the central
Speaker 1: banks to hike rates to combat inflation, to make sure
Speaker 1: that inflation doesn't get out of hand in the longer term,
Speaker 1: or do you think that there is enough breaking that
Speaker 1: it's time to pause. Unfortunately, you know, I have worried
Speaker 1: about central banks being late to the party on this
Speaker 1: inflation challenge. I think that if central bank credibility has
Speaker 1: a chance of being preserved, I think that the FED,
Speaker 1: especially UH and then secondarily the ECB needs to continue
Speaker 1: on their tightening campaign. They need to make clear as
Speaker 1: they have what their intentions are that their goal is
Speaker 1: to fight inflation, to defend the integrity of you know,
Speaker 1: these fiat currencies, and not doing so has much longer
Speaker 1: term structural damage to the economy in terms of inflation
Speaker 1: risk premiums, overall policy term premiums and turns into higher
Speaker 1: for longer rates over long periods of time. So you know,
Speaker 1: look for the FED. You know they're they're out. Is that,
Speaker 1: you know, the regulatory and examinatory part of the FED
Speaker 1: is separate from the central bank operations open market operations.
Speaker 1: They've got to kind of stay the course, in my
Speaker 1: humble opinion, and I think to do anything else at
Speaker 1: this juncture at least would really be a missed up, Lisa.
Speaker 1: Thanks for BAM with us. Lisa shout at the Mulkin
Speaker 1: Staney Wild Management. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify,
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