WEBVTT - Surveillance: Succession Plan with Gorman 0:00:05.120 --> 0:00:09.200 Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane along 0:00:09.200 --> 0:00:12.720 with Jonathan Ferroll and Lisa o Brawmowitz Jay Lee. We 0:00:12.840 --> 0:00:16.760 bring you insight from the best and economics, finance, investment, 0:00:17.079 --> 0:00:22.400 and international relations. Find Bloomberg Surveillance on Apple Podcast, Suncloud, 0:00:22.800 --> 0:00:31.160 Bloomberg dot com and of course on the Bloomberg Terminal. Davos, Switzerland. 0:00:31.480 --> 0:00:35.080 Are David Weston with James Gorman. David, thank you so much. 0:00:35.120 --> 0:00:37.320 Tim Well, I don't hear what you're calling car Lissa o'bramowitz, 0:00:37.360 --> 0:00:39.360 and we do, indeed have James Gorman, the chair and 0:00:39.560 --> 0:00:41.760 CEO of Morgan Stanley said, James, thanks so much for 0:00:41.840 --> 0:00:44.519 joining us here in Dabos. Your earnings came out everybody 0:00:44.520 --> 0:00:46.280 pay attention to him. And I heard a story you 0:00:46.320 --> 0:00:48.240 can tell it's true or not that once some time 0:00:48.240 --> 0:00:50.879 ago you're recruiting senior executives that you know. Wealth management 0:00:50.880 --> 0:00:53.160 may not be as exciting, but over time you do better, 0:00:53.280 --> 0:00:55.279 more steady. Is that what we saw? I noticed your 0:00:55.280 --> 0:00:57.960 stock one up six percent when when Goldman's went down 0:00:57.960 --> 0:01:00.120 six pers on the same day. Well, firstly, thank for 0:01:00.200 --> 0:01:03.040 having us um you know it was a good day 0:01:03.080 --> 0:01:05.800 because I told our board a couple of years ago 0:01:05.880 --> 0:01:09.560 what I'd really like to see selfishly is a very 0:01:09.560 --> 0:01:11.759 difficult environment. I don't want to see it for the country. 0:01:11.800 --> 0:01:14.000 I mean it's not fair, but but for Morgan Sending, 0:01:14.040 --> 0:01:17.640 because I wanted to prove the business model would do 0:01:17.840 --> 0:01:21.120 fine when things are really difficult. And in fact we 0:01:21.200 --> 0:01:26.959 had our second best year ever in revenues and net income, 0:01:28.360 --> 0:01:31.760 third best in EPs in our history. So you know 0:01:31.800 --> 0:01:35.399 what what it proved was the volatility of the markets business. 0:01:35.400 --> 0:01:38.480 Everybody understands the volatively of underwriting I p o s 0:01:38.520 --> 0:01:41.840 are not happening when things are very uncertain, trading on 0:01:41.880 --> 0:01:45.039 the like. But what we proved is by having you know, 0:01:45.120 --> 0:01:48.440 between five and six three and dollars of people's money 0:01:48.480 --> 0:01:52.440 under management that is stable. And that's that was the 0:01:52.480 --> 0:01:55.040 design twelve years ago and we've got there. One thing 0:01:55.080 --> 0:01:57.240 that you said was you are planning to expand some 0:01:57.320 --> 0:01:59.320 of the wealth management aspect even as you cut back 0:01:59.360 --> 0:02:03.360 other parts of the business acquired each trade eating vance. 0:02:03.720 --> 0:02:07.120 Is there another acquisition that you're trying to target or 0:02:07.200 --> 0:02:09.799 is it going to be just sort of organic growth. No, 0:02:09.960 --> 0:02:11.680 I think it's a mix of both. I mean we 0:02:11.720 --> 0:02:15.079 started off with Smith Bunney fourteen years ago. Then we 0:02:15.160 --> 0:02:21.080 acquite a wonderful little company in Calgary, Canada called Sling, 0:02:21.200 --> 0:02:25.000 which did all the sort of workplace stock plan businesses 0:02:25.960 --> 0:02:27.960 for a lot of the SMP companies. Then we bought 0:02:27.960 --> 0:02:30.240 each Trade. Then we bought Eating Vans, and we bought 0:02:30.240 --> 0:02:33.079 Masa West, which is another company. So we've we've been 0:02:33.200 --> 0:02:35.280 we've been building them, and those opportunities come up, we 0:02:35.440 --> 0:02:38.080 keep we keep acquiring those spaces. Is a room for 0:02:38.120 --> 0:02:43.520 another large acquisition, there's always room, um, But we like 0:02:43.680 --> 0:02:47.320 things that aren't balance sheet intensive. We like things that 0:02:47.440 --> 0:02:51.959 help grow scale in spaces that we understand and um, 0:02:52.000 --> 0:02:54.200 you know, we like things when we know what the 0:02:54.280 --> 0:02:57.320 capital picture looks like. So we you know, at the moment, 0:02:57.360 --> 0:03:00.480 we've been quite aggressive with our buy back. Doubled our 0:03:00.560 --> 0:03:02.600 dividend two years ago, we increased the eleven per cent 0:03:02.680 --> 0:03:06.560 last year. But we're also dealing with changing regulatory environment. 0:03:06.960 --> 0:03:10.560 So you're managing between what are the capital demands regulators require, 0:03:11.000 --> 0:03:14.320 how do you distribute it through dividends and through buy backs, 0:03:14.400 --> 0:03:16.040 and then what do you need to do to invest 0:03:16.040 --> 0:03:18.320 in the business. And part of that investment, of course, 0:03:18.440 --> 0:03:21.839 his acquisitions, so it's a multi sort of chess game 0:03:21.919 --> 0:03:24.320 that we're playing. James said, it was some there were 0:03:24.320 --> 0:03:26.400 some difficulties, and you were happy that you could manage 0:03:26.400 --> 0:03:28.920 those difficulties and show that your map model works. Some 0:03:29.000 --> 0:03:32.360 of the difficulties were highly leveraged loans for some acquisitions 0:03:32.360 --> 0:03:36.040 and things like that. Is that crimping your ability going 0:03:36.120 --> 0:03:38.440 forward to make some of those highly leveraged loans. Are 0:03:38.480 --> 0:03:42.120 you changing the risk calculus? No, we've We've been I 0:03:42.160 --> 0:03:47.080 would say um urd conservative over the last two years. 0:03:47.400 --> 0:03:50.240 In fact, it was September I think September year, year 0:03:50.280 --> 0:03:52.440 and a half ago that I met with the management 0:03:52.440 --> 0:03:54.960 committee and said, let's let's all just pull it in 0:03:55.080 --> 0:03:58.400 five ten per cent, right um and our our w 0:03:58.480 --> 0:04:02.200 A is a risk weighted asset. It's actually declined at 0:04:02.200 --> 0:04:04.960 the end of the year. So we did that, and 0:04:05.080 --> 0:04:08.880 so within the leverage loan space, again ear a little conservative, 0:04:08.920 --> 0:04:11.240 but we have a large portfolio obviously going to take 0:04:11.280 --> 0:04:14.120 some losses in these markets. Within that they are absorbed 0:04:14.120 --> 0:04:16.760 in our numbers, but you're also generating a lot of 0:04:16.760 --> 0:04:19.760 interest income, a lot of fees on it. So I balanced, David, 0:04:19.800 --> 0:04:22.400 I think we're reasonably well positioned, but we're definitely not 0:04:22.400 --> 0:04:24.440 trying to be aggressive in this environment. There is one 0:04:24.520 --> 0:04:29.320 high profile loan that rhyme with Twitter that we're going 0:04:29.400 --> 0:04:31.719 to have to talk about, the Twitter loan that I 0:04:31.760 --> 0:04:35.080 know Morgan Stanley lead on. Could Morgan Stanley end up 0:04:35.120 --> 0:04:40.440 owning Twitter? Could Morgan that I've never been asked that question. No, 0:04:40.640 --> 0:04:42.640 we could not end up owning true. Do you play 0:04:42.640 --> 0:04:45.560 on offloading those loans or do you just flater that? Firstly, 0:04:45.560 --> 0:04:48.080 Twitter is a great company, and and let's be fair, 0:04:48.120 --> 0:04:51.080 Elon musk Is is one of the greatest entrepreneurs and 0:04:51.120 --> 0:04:53.960 business people you know, in the last century, and that's 0:04:54.000 --> 0:04:56.599 something that's something exaggeration. Look what he did. Just take 0:04:56.800 --> 0:05:01.000 the boring company alone, let alone SpaceX, let alone Tesla. 0:05:01.360 --> 0:05:05.640 I mean this, this person has extraordinary capabilities. Twitter is 0:05:05.640 --> 0:05:09.680 a great company. Obviously, it's gone through restructuring. Um uh, 0:05:09.800 --> 0:05:11.599 you know, it's it's part of our I'm not going 0:05:11.680 --> 0:05:15.160 to talk about the specific loan position we have, but 0:05:15.839 --> 0:05:19.320 we're very comfortable with that position. So there are things 0:05:19.400 --> 0:05:21.400 we don't know about the economy going forward. One thing 0:05:21.440 --> 0:05:24.080 that people see the reasonably coveted the rates are gonna 0:05:24.080 --> 0:05:25.760 be higher interest rates are going to be higher than 0:05:25.800 --> 0:05:28.080 they have been in the past. How does that basic 0:05:28.160 --> 0:05:30.760 fact change your business? How do you manage your business 0:05:30.800 --> 0:05:33.120 differently when you've got rates at four or five six 0:05:33.160 --> 0:05:35.800 percents that have zero to one half percent? Well, we 0:05:35.839 --> 0:05:38.640 had we had an artificial environment, you know. I remember 0:05:38.640 --> 0:05:40.480 when I came to the United States. I mean obviously 0:05:40.560 --> 0:05:43.200 as as an unsecured student, it wasn't a great credit 0:05:43.560 --> 0:05:47.000 and the bank loan reflected it. I paid My first 0:05:47.000 --> 0:05:49.599 mortgage was fourteen and a half percent. So we've lived 0:05:49.600 --> 0:05:51.880 in a sort of we've lived in a surreal world 0:05:51.960 --> 0:05:55.000 for a decade, which is the legacy of the financial crisis. 0:05:55.040 --> 0:05:57.680 To get the economy back to where it was, central 0:05:57.680 --> 0:06:00.359 governments around the world kept rates nes eerra and along 0:06:00.440 --> 0:06:03.679 came COVID, which delayed what would have been a natural 0:06:03.760 --> 0:06:07.320 rising rates clearly. Then long came the Russian invasion the Ukraine, 0:06:07.400 --> 0:06:10.599 which further delayed it. Finally you turned the corner in 0:06:10.640 --> 0:06:14.360 two thousand two, mid twenty two, when the Federal Reserve 0:06:14.480 --> 0:06:18.479 and other central banks around the world, um not by coordination, 0:06:18.720 --> 0:06:21.479 just by need, had to normalize rates back to neutral. 0:06:21.720 --> 0:06:24.280 They've gone higher than that. They had to go higher 0:06:24.320 --> 0:06:26.400 in order to take some of the fluff house the economy. 0:06:26.520 --> 0:06:28.680 So I see it as sort of a natural consequence. 0:06:28.720 --> 0:06:32.440 I don't think of it's particularly alarming, a natural consequence. 0:06:32.520 --> 0:06:35.159 But which parts of Morgan Stands business are hurt by 0:06:35.240 --> 0:06:37.520 higher rates and which are helped by higher rates? Well? 0:06:37.560 --> 0:06:41.599 Were benefit net interest income? In the wealth business, we 0:06:41.800 --> 0:06:46.479 you know, we manage over dollars to deposits um and 0:06:46.640 --> 0:06:51.679 you know rate rate volatility obviously helps your macro trading 0:06:51.680 --> 0:06:55.760 businesses in foreign exchange in rates. It hurts companies trying 0:06:55.760 --> 0:06:58.080 to wanting to do deals because the cost of financing 0:06:58.440 --> 0:07:01.200 is higher. It hurts your marginal loan business people bring 0:07:01.240 --> 0:07:04.360 down their margin loans because it's more expensive. So there 0:07:04.360 --> 0:07:08.120 there gifts and gets, if you will. But what I 0:07:08.200 --> 0:07:10.440 loved about the performance of the business last year, which 0:07:10.440 --> 0:07:13.880 again wasn't a record uh but was a great year, 0:07:14.240 --> 0:07:16.960 was that with those gifts and gets, we came out 0:07:17.000 --> 0:07:21.640 in a position of ROTC and attracted over three hundred 0:07:21.680 --> 0:07:25.360 billion of new money from clients. Here Davos, there seems 0:07:25.360 --> 0:07:28.000 to be an incredible amount of optimism and people have 0:07:28.040 --> 0:07:30.840 noted the shift in tone and that suddenly things seem 0:07:30.920 --> 0:07:33.640 to be moving around the corner, and I had asked 0:07:33.680 --> 0:07:35.440 you, you you know, do you think it's overplayed? You said, 0:07:35.440 --> 0:07:37.720 you're the most optimistic person you know, So why are 0:07:37.720 --> 0:07:41.120 you so optimistic? What does optimistic look like here? Well, 0:07:41.440 --> 0:07:43.400 you know, I've seen I've seen a lot of cycles 0:07:43.400 --> 0:07:47.400 in my career, and I've seen some really really dark periods. 0:07:47.400 --> 0:07:52.040 You know, the financial crisis after September eleven, even though 0:07:52.120 --> 0:07:55.760 you know the early recessions in the US, the market 0:07:55.840 --> 0:07:57.640 bust and seven year I go back up a lot 0:07:57.720 --> 0:08:00.680 olderan you. I go back a long way and and um, 0:08:00.880 --> 0:08:03.520 you know, I think what we've been through if you 0:08:03.600 --> 0:08:07.240 stack up the negative stuff that happened, first land war 0:08:07.280 --> 0:08:11.200 in Europe in forty years, first global pandemic in a century, 0:08:12.280 --> 0:08:14.520 first lamb or in Europe in seventy years, first global 0:08:14.600 --> 0:08:18.880 pandemic in a century, and highest rate increase because of 0:08:18.920 --> 0:08:22.680 inflation in forty years, that's a lot to throw up people. 0:08:23.360 --> 0:08:26.440 And where are we now? So bad? That debate is 0:08:26.520 --> 0:08:28.600 will it be a recession? Will it be shortened? Shall 0:08:28.920 --> 0:08:32.720 nobody's saying we're going depression right, everybody's saying we can 0:08:32.800 --> 0:08:34.760 kind of deal with this. And two things I think 0:08:34.800 --> 0:08:37.840 have changed in the last month, which has caused this 0:08:38.360 --> 0:08:41.200 echo chamber we live in here and doub us where 0:08:41.160 --> 0:08:43.720 everybody's basically repeating back to each other what they've heard 0:08:43.760 --> 0:08:46.680 from the last person. Let's be honest. I'm not hopefully, 0:08:46.760 --> 0:08:52.600 but most people are. Is two things have changed. Number One, 0:08:52.640 --> 0:08:55.959 the inflation numbers are definitely there's clear evidence inflation has 0:08:55.960 --> 0:08:59.480 in fact peaked and is coming down right how quickly 0:08:59.600 --> 0:09:01.520 whether it will get us to two percent and when 0:09:01.920 --> 0:09:04.880 remains the debate, but it is clearly the slope of 0:09:04.920 --> 0:09:07.800 the line is positive. Is to everybody's favorite. And the 0:09:07.840 --> 0:09:11.680 second is not just the opening up of China, but 0:09:11.960 --> 0:09:16.640 China has embraced the rest of the world more aggressively 0:09:16.800 --> 0:09:19.000 in the last few weeks, witnessed by the Vice Premier 0:09:19.120 --> 0:09:22.280 meeting with Treasury Secretary yell on this morning things this 0:09:22.320 --> 0:09:25.120 morning um in a way that we haven't seen for 0:09:25.200 --> 0:09:27.800 some time. So the big question coming out of the 0:09:27.920 --> 0:09:32.120 Party Congress and President she uh you know, being real 0:09:32.400 --> 0:09:36.520 reelected by the Congress was where does China go from here? 0:09:37.640 --> 0:09:42.320 Does common prosperity mean effectively dividing the pie up so 0:09:42.440 --> 0:09:45.400 everybody gets a piece of it, or by growing the pie? 0:09:45.559 --> 0:09:47.640 And what we're seeing is the tilter is now from 0:09:47.960 --> 0:09:50.120 divide the pie to grow the pipe. Does that mean 0:09:50.160 --> 0:09:53.800 you've got more confidence to expand in China? We've We've 0:09:53.840 --> 0:09:56.520 got We've got a very good business in Greater China. Obviously, 0:09:56.559 --> 0:09:59.800 we have a huge business in Hong Kong. Um, and 0:10:00.080 --> 0:10:02.200 we you know, we continue to have I think on 0:10:02.240 --> 0:10:04.320 the main land up to a thousand people in various 0:10:04.520 --> 0:10:07.320 various functions. But no, I think we need to see 0:10:07.320 --> 0:10:11.240 a little more clarity of Chinese policy, a little more 0:10:11.280 --> 0:10:16.320 you know, sober discussion around global trade relations. Um. And uh, 0:10:16.400 --> 0:10:19.040 you know, right now, I think we're certainly in in 0:10:19.120 --> 0:10:23.840 a watch, but tilting more positive than we would have 0:10:23.880 --> 0:10:25.920 been three six months ago. We've come all the way 0:10:25.920 --> 0:10:27.240 over the Switzer and I'm struck at least by the 0:10:27.280 --> 0:10:29.679 fact that and I'll talk about Washington to be a 0:10:29.720 --> 0:10:31.920 debt ceiling a lot of concerning I hear two things. 0:10:32.120 --> 0:10:35.360 One is it's ridiculous, and two is it would be catastrophic. 0:10:35.840 --> 0:10:37.679 What is your reaction that's saying, how do you take 0:10:37.679 --> 0:10:42.319 into account the possibility of US default? Well, um, it 0:10:42.520 --> 0:10:45.040 was a Churchill who said the Americans eventually get it 0:10:45.120 --> 0:10:50.439 right after, you know, and I can't remember thee. Yeah, so, um, 0:10:50.760 --> 0:10:57.800 you know, I'm confident that I'm confident that uh, politics 0:10:57.880 --> 0:11:00.840 will finally get to the right place on this. I'm 0:11:00.920 --> 0:11:03.640 confident about that because the the other option is just 0:11:03.720 --> 0:11:06.080 not an option. One thing, as the people have also 0:11:06.080 --> 0:11:08.120 been talking about, is the new normal for work from home. 0:11:08.480 --> 0:11:10.480 We heard a bit of a retracement from City Group 0:11:10.720 --> 0:11:14.400 in an interview that David did here with Jane Fraser. 0:11:14.760 --> 0:11:16.800 What's the new normal? Is it coming into the office 0:11:16.800 --> 0:11:19.240 four days a week, Is it flexible? Is it work 0:11:19.320 --> 0:11:22.640 from home more freely? I think it's very very specific 0:11:22.679 --> 0:11:26.320 to what you do. Um. You know, if you're a 0:11:26.480 --> 0:11:30.760 tax attorney, UM, who doesn't work with other teams, then 0:11:30.760 --> 0:11:32.559 obviously you can spend a lot more time by yourself. 0:11:32.600 --> 0:11:34.520 Doesn't matter if you're in office or not. I mean, 0:11:34.559 --> 0:11:37.080 there are different kinds of jobs. Is where I'd start with. 0:11:37.440 --> 0:11:41.600 The main point is post COVID, we learned you can function. 0:11:41.640 --> 0:11:43.640 I ran Morgan Centy for three months from my home 0:11:43.640 --> 0:11:48.640 office seventy three people, so that's it's pretty remarkable. We 0:11:48.720 --> 0:11:50.800 proved you actually can do it by not going into 0:11:50.840 --> 0:11:53.199 the office. But should you do it by not going 0:11:53.240 --> 0:11:56.360 to the office? Now that clearly to me, the big answer, 0:11:56.679 --> 0:12:00.320 big answer that is no, Um, we won't put the 0:12:00.320 --> 0:12:02.360 genie back in the bottle. Five days in the office 0:12:02.400 --> 0:12:04.720 for everybody's not going to happen again. For some people, 0:12:04.720 --> 0:12:07.880 of course, and Morgan standing, we're kind of business univate 0:12:08.000 --> 0:12:10.959 business unit, it's three or four days in the office. 0:12:10.720 --> 0:12:13.040 My rule has always been on this. If you're not 0:12:13.120 --> 0:12:16.559 spending a majority of your working time in the company 0:12:16.559 --> 0:12:20.480 of your colleagues, you are missing out on mentorship, on development, 0:12:20.880 --> 0:12:24.320 on EQ, on just reading the signals of being in 0:12:24.360 --> 0:12:27.400 a meeting and watch how people you know, handle the 0:12:27.520 --> 0:12:30.400 stresses that go on and the you know, the unspoken 0:12:30.679 --> 0:12:34.120 body language and so on. So it's three or four 0:12:34.200 --> 0:12:36.679 days a week. I don't think that changes in a hurry. 0:12:36.840 --> 0:12:39.000 Some people in some businesses are trading for is a 0:12:39.080 --> 0:12:41.040 cheek to job. You go in there there five days 0:12:41.080 --> 0:12:44.280 a week. So it's very business specific. But my my 0:12:44.400 --> 0:12:47.199 golden rule is don't put the genie back in the bottle. 0:12:47.280 --> 0:12:50.640 You can't. On the other hand, it's not a complete 0:12:50.760 --> 0:12:53.160 This is not an employee choice. They don't get to 0:12:53.200 --> 0:12:55.640 choose their compensation, they don't get to choose their promotion. 0:12:55.679 --> 0:12:57.800 They don't get to choose stay home five days a week. 0:12:58.120 --> 0:13:00.600 I want them with other employees at least three or 0:13:00.600 --> 0:13:02.640 four days. So, James, you've talked about some of the 0:13:02.640 --> 0:13:05.560 responses with the CEO, which are formidable alcant in capital 0:13:05.559 --> 0:13:07.600 making sure you're right there people sitting around corners. One 0:13:07.640 --> 0:13:10.800 of the jobs is succession for every good CEO, and 0:13:10.840 --> 0:13:12.600 we've seen it done well. We've seen it done that 0:13:12.640 --> 0:13:14.160 so well. A couple of years ago you said, maybe 0:13:14.160 --> 0:13:17.600 three more years. How do you approach the question of succession? 0:13:17.640 --> 0:13:19.319 How do you set it up for the good of 0:13:19.360 --> 0:13:24.079 the institution of Morgan Stanley very intentionally. Firstly, you should 0:13:24.160 --> 0:13:27.440 always have a sort of an envelope for God forbid 0:13:28.160 --> 0:13:31.200 something horrible happens. We've done that from a very first 0:13:31.200 --> 0:13:34.800 board meeting in January of two thousand and ten. Um. 0:13:34.880 --> 0:13:38.480 But more realistically, you plan a generation people who can 0:13:38.480 --> 0:13:41.600 take over with Morgan. Sandy have now three executives whoper 0:13:41.679 --> 0:13:45.440 replace me. They're all very, very talented executives and we're 0:13:45.440 --> 0:13:47.560 trying to fill out their skill base and ultimately the 0:13:47.600 --> 0:13:50.400 board will decide who is the best qualified to run 0:13:50.679 --> 0:13:54.000 our particular company. At this point in time, I'm extremely 0:13:54.040 --> 0:13:57.600 intentional about it. Um, I would definitely step down. I'm 0:13:57.600 --> 0:13:59.400 not I'm not going to stand this job for life. 0:13:59.440 --> 0:14:01.960 I've no us in that and it's unhealthy for our 0:14:02.040 --> 0:14:04.760 organ the way we're constructed. Right, We've we've got to 0:14:04.800 --> 0:14:06.800 focus on what's right for Morgan sounding and it's to 0:14:06.840 --> 0:14:09.520 grow the next generation. I work on a ten year 0:14:09.520 --> 0:14:12.839 and twenty year plan in talent planning, and that's how 0:14:12.880 --> 0:14:14.840 far out I'm thinking about it. And you know, I've 0:14:14.840 --> 0:14:18.480 been in this job, well, this is my four ent years, 0:14:18.480 --> 0:14:20.880 so I've had plenty of opportunity to developed folks. And 0:14:21.360 --> 0:14:24.040 the great news is, David, we've got some unbelievable talent. 0:14:24.440 --> 0:14:26.240 JS Garman, thank you so much for being with us, 0:14:26.440 --> 0:14:39.840 the head of Morgan Stanley, We're gonna get some good 0:14:39.840 --> 0:14:43.160 news later this summer. The debt ceiling standoff looms in Washington. 0:14:43.400 --> 0:14:46.760 Bloomberg Opinions. Bill Dudley wrote the following, the debt limit 0:14:46.840 --> 0:14:52.120 doesn't contribute meaningfully to fiscal discipline. It encourages political grandstanding. 0:14:52.440 --> 0:14:55.080 It risked the default of the world's wealthiest and most 0:14:55.120 --> 0:14:58.760 powerful nation, Tom it should be abolished. The words are 0:14:58.760 --> 0:15:02.240 built Dudley on Bloomberg a strong strong language. William Dudley 0:15:02.280 --> 0:15:04.720 is an important economist, yes, the former president of New 0:15:04.800 --> 0:15:07.320 York FED, but someone more than any of the Feds 0:15:07.320 --> 0:15:11.000 stealed in the grind of market economics and actually working 0:15:11.080 --> 0:15:14.800 day to day through policy realities. Bill Dudley joins us 0:15:15.160 --> 0:15:19.080 this morning writing for Bloomberg Opinion, A huge contributor. Bill, 0:15:19.120 --> 0:15:21.280 I was talking with our Michael McKee and this goes 0:15:21.320 --> 0:15:23.880 back to McKelvey and you on the fiscal state of 0:15:23.920 --> 0:15:28.480 the nation at Goldman Sachs in two thousand eleven and 0:15:28.520 --> 0:15:31.440 even more recently in two thousand and fifteen, the Fed 0:15:31.600 --> 0:15:37.280 was proactive in modeling out debt ceiling outcomes. Do you 0:15:37.320 --> 0:15:40.520 just presume they will do that this time? And how 0:15:40.560 --> 0:15:44.960 wild your own Powell and Company assist Congress in measuring 0:15:45.000 --> 0:15:49.080 those tail risks? I will definitely be contingency playing. What 0:15:49.080 --> 0:15:51.720 do you do if there was a default on the debt? 0:15:51.760 --> 0:15:55.720 What do you do if there's non default? But prioritize payments? 0:15:56.200 --> 0:15:57.960 The way it works is, if you actually run out 0:15:57.960 --> 0:16:01.360 of money, the treasural just what payments to present to 0:16:01.400 --> 0:16:05.680 the Fed. Presumably the treasure will decide to prioritize debt 0:16:06.000 --> 0:16:08.800 repayment and interest payments, so there isn't a technical to 0:16:08.840 --> 0:16:11.440 fall and then the FED will basically honor the payments 0:16:11.480 --> 0:16:13.880 that the that the Treasury presents. But what the Fed 0:16:13.920 --> 0:16:16.480 can do also is actually shore up market functioning and 0:16:16.520 --> 0:16:19.120 the treasury market. Uh. What we saw in two thousand 0:16:19.200 --> 0:16:22.520 eleven is the treasury market got unset, very unsettled as 0:16:22.560 --> 0:16:24.720 we got close to the deadline. People don't want to 0:16:24.720 --> 0:16:27.360 buy treasury bills. That are worrying. Right around the time 0:16:27.400 --> 0:16:30.560 when the debt limit could be binding money market funds, 0:16:30.800 --> 0:16:33.320 there were outflows from treasury money market funds into commercial 0:16:33.360 --> 0:16:36.240 banks and so the Fed FED does have a responsibility 0:16:36.240 --> 0:16:38.880 here to try to preserve market functioning. And there's also 0:16:38.920 --> 0:16:42.120 the question, of course of the debt auctions themselves. The 0:16:42.160 --> 0:16:45.320 Treasury is auctions the debt, but the Fed actually runs 0:16:45.320 --> 0:16:48.120 the auction process, and it's really important. And we have 0:16:48.200 --> 0:16:51.040 those auctions that there are more bids than what's on offer. 0:16:51.320 --> 0:16:53.600 If if there if there were not enough bids, uh, 0:16:53.800 --> 0:16:56.400 an auction would fail and that would be a terrible 0:16:56.400 --> 0:16:59.920 blow to the financial markets. Yeah, I look at this bill, 0:17:00.000 --> 0:17:01.960 and I'm gonna go to your Berkeley Economics and the 0:17:02.000 --> 0:17:04.679 great Berry Iken Green and what he said about gold 0:17:04.720 --> 0:17:08.720 and the emotion of gold. How do you respond to 0:17:08.840 --> 0:17:12.320 the moral consequences of our debt? The emotion of the 0:17:12.480 --> 0:17:15.760 right And they had a huge response to your Bloomberg essay, 0:17:15.880 --> 0:17:19.240 the moral consequences of this debt. How do you respond 0:17:19.280 --> 0:17:23.040 to that like Iken Green would respond to gold? Well, 0:17:23.200 --> 0:17:25.800 very simple. Uh. The point is that, look what's happened 0:17:25.800 --> 0:17:28.840 to death in deadness over the last twenty thirty years Sword, 0:17:29.119 --> 0:17:32.080 even though we've had this debt limit ceiling in place 0:17:32.920 --> 0:17:35.359 all during that time. So the debt limits clearly doesn't 0:17:35.520 --> 0:17:39.400 restrain spending. We've tripled the amount of government debt relative 0:17:39.600 --> 0:17:42.840 to the economy over the last thirty or forty years, 0:17:42.880 --> 0:17:44.840 and you know, so the debt limit is not really 0:17:44.840 --> 0:17:48.439 doing much to actually constrain things. Uh, As I think 0:17:48.440 --> 0:17:50.040 you don't really want to mess around with the credit 0:17:50.080 --> 0:17:52.160 worthiness of the United States, because if you do mess 0:17:52.160 --> 0:17:54.600 around with it, even if you avert a disaster in 0:17:54.640 --> 0:17:57.479 the end, it can have consequences. In two thousand and eleven, 0:17:57.520 --> 0:17:59.240 the debt limit was raised at the end of the 0:17:59.320 --> 0:18:01.560 day in a time and barely in a timely way, 0:18:01.960 --> 0:18:06.200 and yet the SMP downgraded the reading in the United 0:18:06.200 --> 0:18:08.919 States from triple A to double A plus. So there 0:18:09.000 --> 0:18:11.840 was a consequence even when there wasn't a technical default 0:18:12.359 --> 0:18:14.760 on the dead But will you experienced this when you 0:18:14.760 --> 0:18:17.400 were at the FED. My McKay was talking to us earlier. 0:18:17.520 --> 0:18:21.160 You just messaged me said the f WEMC in game 0:18:21.240 --> 0:18:24.320 down possible FED responses to a default. What did you 0:18:24.320 --> 0:18:27.360 think you could do back then? Well, I think there's 0:18:27.359 --> 0:18:28.840 a couple of things that I can do that FA 0:18:28.920 --> 0:18:31.720 can basically tell tell market participants that we're going to 0:18:31.840 --> 0:18:34.760 continue to engage in the treasury market, will take you know, 0:18:34.760 --> 0:18:37.840 we'll take defaulted securities as collateral just as well as 0:18:38.119 --> 0:18:40.880 the securities that haven't defaulted. You know, you don't want 0:18:40.880 --> 0:18:43.760 the market to start to really uh lock up because 0:18:43.800 --> 0:18:46.800 people can't raise money against treasury collateral because they're worth 0:18:46.840 --> 0:18:49.800 that collateral could be in default. So the FED is 0:18:49.800 --> 0:18:52.320 basically said, we're going to treat, We're gonna treat, We're 0:18:52.359 --> 0:18:55.320 gonna take defaulted treasure securities and all our operations. The 0:18:55.320 --> 0:18:58.400 only difference wing defaulted securities and non defaulted securities would 0:18:58.400 --> 0:19:01.560 be we value default as curious at market prices. So 0:19:01.600 --> 0:19:03.400 the FED basically saying we're going to keep the repo 0:19:03.520 --> 0:19:05.920 market functioning. We're gonna keep the treasury build market functioning. 0:19:06.160 --> 0:19:08.280 Now things got bad enough, the Feder Reserve could also 0:19:08.520 --> 0:19:12.280 engage in, you know, in interventions in the secondary treasury market. 0:19:12.320 --> 0:19:13.880 They can actually coming in and buy, like we saw 0:19:14.720 --> 0:19:17.320 during the early stages of the COVID pandemic. FED would 0:19:17.359 --> 0:19:18.960 not want to do that because they don't want to 0:19:19.000 --> 0:19:22.119 get involved in the middle of a political controversy. But 0:19:22.160 --> 0:19:24.879 if the treasury market really started to melt down, the 0:19:24.920 --> 0:19:27.480 FED would probably come in and and and participate in 0:19:27.480 --> 0:19:29.720 the secondary market. The FED can't do anything about the 0:19:29.760 --> 0:19:33.360 auctions themselves because the FED is precluded from buying directly 0:19:33.400 --> 0:19:35.639 from the U. S. Treasury. So but let's just build 0:19:35.640 --> 0:19:37.560 on this. The attitude of people on Wall Street, as 0:19:37.600 --> 0:19:40.640 you know and we're all familiar with, is that this happens, 0:19:40.920 --> 0:19:43.240 we get through it, and if it gets dicey, guess 0:19:43.240 --> 0:19:45.360 what we do. We buy treasuries now. But you get 0:19:45.359 --> 0:19:47.280 all those kinks of various tennis at the very front 0:19:47.320 --> 0:19:49.960 end of the curve on tables, but they'll ultimately people 0:19:50.000 --> 0:19:53.720 still buy treasuries. Do you see that change in whatsoever? 0:19:54.760 --> 0:19:57.600 I think that that's what generally happens, and I think 0:19:57.640 --> 0:20:00.080 that's mostly right. I mean, basically what people assume that 0:20:00.160 --> 0:20:01.359 is that there's gonna be a lot of drawing, but 0:20:01.359 --> 0:20:04.280 at the end of dead limit will be raised in time. Now, 0:20:04.320 --> 0:20:06.639 So what that what that means is if all, if 0:20:06.680 --> 0:20:09.040 we mess up, even just one time and don't raise 0:20:09.040 --> 0:20:10.680 the debt in the timely way, it's gonna be a 0:20:10.800 --> 0:20:14.639 huge market surprise. So you go from the probability of 0:20:14.640 --> 0:20:18.199 default is you know, point zero one percent to all 0:20:18.200 --> 0:20:20.480 of a sudden there is a technical default, be a 0:20:20.600 --> 0:20:24.720 huge blow to financial markets. Bill tell me about our 0:20:24.840 --> 0:20:27.840 ratios is compared to the maximum doom and gloom of 0:20:27.920 --> 0:20:32.160 Japanese ratios. To our listeners and viewers in a debt 0:20:32.200 --> 0:20:35.400 ceiling debate, the three or the four or the five 0:20:35.560 --> 0:20:39.439 ratios that matter? Are we fiscally constrained or are we 0:20:39.480 --> 0:20:42.600 doing okay? Well? I think the big difference between US 0:20:42.600 --> 0:20:45.280 and Japan is we very much depend on the kindness 0:20:45.280 --> 0:20:47.879 of strangers that could hold our our government debt. The 0:20:48.000 --> 0:20:50.200 U s is run as you know, current account deficits 0:20:50.240 --> 0:20:53.400 for you know, decades, and so a lot of the 0:20:53.480 --> 0:20:56.560 US assets are held by foreigners. Foreigners don't have to 0:20:56.600 --> 0:20:59.280