WEBVTT - Mayo Says Banks `Part of Solution'

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<v Speaker 1>You're listening to Bloomberg Business Week with Carol Masser and

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<v Speaker 1>Jason Kelly on Bloomberg Radio. Well, this got our attention

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<v Speaker 1>this week and has to do with Mike Mayo, well known,

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<v Speaker 1>very well known to our Bloomberg audience, and rightfully so

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<v Speaker 1>based on his calls and really summing up where we are,

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<v Speaker 1>especially when crisis hits the financial industry or even a

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<v Speaker 1>particular bank, and we know banks actually got a nice

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<v Speaker 1>bounce today and really helped lead the market higher. Mike

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<v Speaker 1>is analyst, managing director and head of large camp bank

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<v Speaker 1>Research over at Wells Fargo Securities. Has covered banks for

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<v Speaker 1>years and recently caught up with a Trump administration insider

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<v Speaker 1>and came away with quite a headline for a Bloomberg story.

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<v Speaker 1>Mike joining us on the phone in New York. Mike,

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<v Speaker 1>thank you so much for joining us. Um. First of all,

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<v Speaker 1>let's talk a bit about the markets, and then we'll

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<v Speaker 1>get back to this meeting you had. The banks today

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<v Speaker 1>certainly helped late lead stocks higher. What do you make

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<v Speaker 1>of the sector, Does it make sense and what's the

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<v Speaker 1>outlook generally speaking? Yeah, I think there's a misperception here

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<v Speaker 1>that this is tooth thousand and eight. In two thousand eight,

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<v Speaker 1>there was a banking crisis. Banks for the cause of

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<v Speaker 1>the problem. Today banks are stronger than they've been in

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<v Speaker 1>a generation, and they're part of the of the solution.

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<v Speaker 1>So there's this recency bias as if it's still the

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<v Speaker 1>global financial crisis, and that's not the case. There is earnings.

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<v Speaker 1>There are earnings issues with banks. I mean, but it's

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<v Speaker 1>it's it's our earnings hell in the first quarter. It's

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<v Speaker 1>going to be earnings hell in the second quarter. Maybe

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<v Speaker 1>for some more of this year's banks set aside reserves

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<v Speaker 1>for problem loans as their borrowers have issues. But we

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<v Speaker 1>would call this an income statement recession and not a

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<v Speaker 1>balance sheet recession. And that's a world of difference versus

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<v Speaker 1>a decade ago. And so I guess that one of

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<v Speaker 1>the questions that we've been asking too very smart people

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<v Speaker 1>like you, Mike about the banking system is so, did

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<v Speaker 1>what we we collectively and what the government did and

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<v Speaker 1>what ultimately the banks did maybe under dress coming out

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<v Speaker 1>of the financial crisis? Did it work? You know, thank

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<v Speaker 1>you regulators, thank you, thank you, thank you regulators. Yes,

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<v Speaker 1>it worked in spades. I mean, you've had stress tests

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<v Speaker 1>of banks for a situation like this. For almost a decade,

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<v Speaker 1>the capital, which is the cushion to protect banks against losses,

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<v Speaker 1>it's doubled. The most risky activities are no longer done

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<v Speaker 1>by the banks themselves. They're done by other financial firms,

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<v Speaker 1>but not within the banking industry itself. You have oversight

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<v Speaker 1>by the regulators and boards and investors, and everyone's looking

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<v Speaker 1>over their shoulders. So, yes, it worked, and this is

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<v Speaker 1>the ultimate test to show that it will work. And

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<v Speaker 1>we think, uh, this will be a tough situation. I mean,

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<v Speaker 1>these are sobering times. We're expecting not a v recovery,

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<v Speaker 1>but more of a deep view recovery. But even with that,

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<v Speaker 1>we think banks can be a source of strength and

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<v Speaker 1>stability to the rest of the economy. All right, So

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<v Speaker 1>let's get to this story because it did catch our attention.

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<v Speaker 1>We've been talking about a lot in the newsroom. Um,

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<v Speaker 1>you had a meeting with Gary Cone. Tell us a

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<v Speaker 1>little bit about that our conversation. Um, how that came

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<v Speaker 1>to be and what you guys talked about. Well, I look,

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<v Speaker 1>I I talked to Gary Cone. Um he's no longer

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<v Speaker 1>part of the administration, to make that clear, but I

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<v Speaker 1>just talked to him, like I talked to a lot

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<v Speaker 1>of smart people to understand the world. And his view,

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<v Speaker 1>which you know is in sync with with my view,

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<v Speaker 1>is that Washington, d C. Has done a phenomenal job

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<v Speaker 1>at getting on this problem very quickly. So you have Treasury,

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<v Speaker 1>you have the FED, you have Congress identifying the issue

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<v Speaker 1>quickly and really going with a bazuka to try to

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<v Speaker 1>bridge the gap between the pre and the post virus economy.

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<v Speaker 1>And they're going to go wave after wave after wave.

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<v Speaker 1>You're seeing it every day, and if it's not enough,

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<v Speaker 1>then um, you'll have more expansive fiscal and monetary policy

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<v Speaker 1>to to make it right for the country. So you

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<v Speaker 1>know the old adage don't fight the FED, Well, you know,

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<v Speaker 1>take that and put it on steroids. And that's what

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<v Speaker 1>you're looking at when you look at the government's CounterPunch

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<v Speaker 1>to this one year pandemic event. So, Mike, we heard

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<v Speaker 1>j Pal, I think pretty clearly reiterate uh yesterday that

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<v Speaker 1>sort of balls in the court of lawmakers at this

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<v Speaker 1>point that the next real serious stimulus needs to come

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<v Speaker 1>from the fiscal side. Do you agree with that, and

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<v Speaker 1>if so, what does it need to look like? Because

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<v Speaker 1>that has become a pretty contentious debate between the parties. Well, look,

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<v Speaker 1>I look at the economy from the lens of the

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<v Speaker 1>largest banks, and banks will have problems. We expect loan

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<v Speaker 1>losses to increase two to three times. The level of

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<v Speaker 1>reserves for problem loans are the highest in history at

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<v Speaker 1>this stage of a recession. So there is going to

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<v Speaker 1>be pain for the banks. But what's interesting, and this

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<v Speaker 1>is the success of Washington d C, is they've unclogged

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<v Speaker 1>the plumbing of the financi tre markets. So the largest corporations, uh,

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<v Speaker 1>you know, the Doubt Dirty or the SMP five hundred

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<v Speaker 1>have access to borrowing in the capital markets, so they

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<v Speaker 1>should be better off. Once you get down to smaller

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<v Speaker 1>banks with smaller customers, that's where the bigger issues are

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<v Speaker 1>going to be. And so it's a matter of the

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<v Speaker 1>the execution of the ambitious programs you know, set in

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<v Speaker 1>place by washingtond C. And by the way, this is

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<v Speaker 1>these programs. Some of these have never been done before,

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<v Speaker 1>and certainly never on a scale such as that we're seeing.

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<v Speaker 1>How do things though, like more government spending that might

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<v Speaker 1>lead to higher taxes that will ultimately fit into your

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<v Speaker 1>outlook for the big banks. Well, actually, you know, the

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<v Speaker 1>question is does the industry you know, die by fire,

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<v Speaker 1>die by you know ice? Put it very simply, in

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<v Speaker 1>other words, does the economy and two banks fall off

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<v Speaker 1>because there's just no activity? No one can that Again

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<v Speaker 1>the stimulus isn't enough or is it so much that

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<v Speaker 1>things can get overheated. And I think the conclusion here

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<v Speaker 1>is that it's more likely you're not you know, died,

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<v Speaker 1>but you're going to uh, you know, go ahead and

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<v Speaker 1>stimulate the economy so much that on the back end

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<v Speaker 1>will be more concerned about the degree of stimulus UM

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<v Speaker 1>And so under that scenario, you know, our strategy department

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<v Speaker 1>at Wealth Farther Securities expect the ten year treasury yield

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<v Speaker 1>to double by the end of the year UM and

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<v Speaker 1>so that would be a steepening of the yield curve

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<v Speaker 1>or a bear steepener as discussed by Mike Schumacher our

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<v Speaker 1>interest rate strategies. If that's the case, by the way,

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<v Speaker 1>UM expect bank stocks to go higher just on that

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<v Speaker 1>factor alone, right right on higher rates. Hey, one last question,

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<v Speaker 1>because we've heard from James Gorman and Morgan Stanley, you know,

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<v Speaker 1>kind of blown away by how are seeing all of

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<v Speaker 1>his workers at home and basically saying we're not gonna

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<v Speaker 1>need as much real estate. So is do you anticipate

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<v Speaker 1>that banks will be cutting costs and maybe and giving

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<v Speaker 1>up on some of the real estate that they have. Well, first,

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<v Speaker 1>I want to stress the gangs. I actually had. I

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<v Speaker 1>spoke with the chief and answer officer of Mortgage Stanley

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<v Speaker 1>just yesterday. Um, and they do talk about spending money,

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<v Speaker 1>you know, to keep all employees employed and you know,

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<v Speaker 1>serving customers and other banks are differing some payments for loans,

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<v Speaker 1>the investments and employees and communities and customers. Is you know,

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<v Speaker 1>really banks being part of the solution. What's interesting, though,

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<v Speaker 1>is you're seeing a leap frog in digital change by

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<v Speaker 1>like like by five to ten years as a result

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<v Speaker 1>of the last two months. Absolutely, that means less real

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<v Speaker 1>estate for the banks, more digital interactions, less rates of

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<v Speaker 1>cash in society, and an acceleration of the digital changes

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<v Speaker 1>that you saw before this crisis really take off during

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<v Speaker 1>an after crisis. All Right, We're gonna leave it on

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<v Speaker 1>that note. Mike, Ever, enough time, but so grateful that

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<v Speaker 1>you did find some time for us on this Thursday.

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<v Speaker 1>Mike Mayo, of course, over at Wells Fargo Securities, joining

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<v Speaker 1>us on the phone in New York