WEBVTT - Bloomberg Wall Street Week: June 30th, 2023 0:00:00.240 --> 0:00:02.440 This is Bloomberg Wall Street Week. 0:00:02.480 --> 0:00:04.400 And we may not have an overall recession, we're having 0:00:04.400 --> 0:00:06.840 a rolling recession. Econe roll looks pretty strongly. It is 0:00:06.840 --> 0:00:07.680 when it comes to jobs. 0:00:07.720 --> 0:00:09.840 The financial stories that shape our world. 0:00:09.960 --> 0:00:13.640 Three major regional bank failures send shockwaves through the banking system. 0:00:13.680 --> 0:00:15.440 We're all trying to figure out what to make of 0:00:15.600 --> 0:00:17.000 generative AI. 0:00:16.920 --> 0:00:19.320 Through the eyes of the most influential voices. 0:00:19.440 --> 0:00:22.400 Welcome down, Doctor Paul Krugman, Ryan moynihan, a Bank of America, 0:00:22.520 --> 0:00:25.320 deebro Lair of the Paulson Institute, Len Hubbard of the 0:00:25.360 --> 0:00:26.280 Columbia Business School. 0:00:26.280 --> 0:00:30.160 Bloomberg Wall Street Week with David Weston from Bloomberg Radio. 0:00:31.000 --> 0:00:34.839 A whole lot of stress in Moscow, in the banking sector, 0:00:34.880 --> 0:00:37.560 at what's left of credit series, and even in a 0:00:37.680 --> 0:00:41.879 surprisingly resilient economy. This is Bloomberg Wall Street Week. I'm 0:00:41.960 --> 0:00:46.120 David Weston. This week Michael jay A Blackstone on where 0:00:46.159 --> 0:00:49.320 the economy is headed and what it means for his business. 0:00:49.560 --> 0:00:52.040 Our business model is really made for times like this. 0:00:52.360 --> 0:00:56.040 Former fdi C chair Shila Behar on what we learned 0:00:56.040 --> 0:00:57.520 from the FED stress tests. 0:00:57.920 --> 0:00:59.600 I don't think we should take a lot of comfortable 0:00:59.680 --> 0:01:01.320 that there's a lot of work that needs to be done. 0:01:01.400 --> 0:01:03.480 And Darren Walker of the Ford Foundation on what the 0:01:03.520 --> 0:01:06.520 Supreme Court ruling out a firm reaction means for us. 0:01:06.600 --> 0:01:24.080 All the playing field tilts towards those who are already advantage. 0:01:25.880 --> 0:01:26.360 Stress. 0:01:26.840 --> 0:01:29.520 Measuring it and dealing with it was the order of 0:01:29.560 --> 0:01:32.240 the day this week in Global Wall Street. It all 0:01:32.280 --> 0:01:35.319 started in Moscow with a letter of Prutin backing down 0:01:35.480 --> 0:01:39.600 in the face of a mutiny. Raghi Drusian, Dear friends, 0:01:39.720 --> 0:01:43.039 today I address once again for all Russian citizens. I 0:01:43.160 --> 0:01:47.640 thank you for your endurance, solidarity and patriotism. At UBS 0:01:47.640 --> 0:01:50.840 in Switzerland, it wasn't so much an attempted mutiny as 0:01:50.880 --> 0:01:53.960 it was cleaning house. With reports that more than half 0:01:54.000 --> 0:01:56.919 of the Credit SUITEZ team it inherited will be shown 0:01:57.120 --> 0:01:57.600 the door. 0:01:58.040 --> 0:02:02.360 UBS is preparing to cut more than half of the 0:02:02.400 --> 0:02:06.000 credit Swee workforce that i ITT bought back. 0:02:06.000 --> 0:02:08.760 In the United States, the Supreme Court raised the stress 0:02:08.840 --> 0:02:11.959 level for colleges and universities, trying to make sure they 0:02:12.000 --> 0:02:14.040 have diverse student bodies. 0:02:14.240 --> 0:02:17.400 This essentially ends affirmative action as we know it. 0:02:17.639 --> 0:02:19.959 US Bank's got a report card this week on their 0:02:20.000 --> 0:02:22.920 ability to withstand stress in the aftermath of the Silicon 0:02:23.000 --> 0:02:23.960 Valley bank failure. 0:02:24.360 --> 0:02:27.000 All in all, all the banks had passed pretty clean 0:02:27.080 --> 0:02:27.840 read but for. 0:02:27.800 --> 0:02:30.960 Those waiting for FED rate cuts, the stress level if 0:02:31.000 --> 0:02:34.600 anything went up as housing numbers came in surprisingly strong, 0:02:35.160 --> 0:02:38.839 and Chair Pale over at Central Portugal wouldn't rule out 0:02:38.919 --> 0:02:41.360 consecutive rate hikes yet to come. 0:02:41.480 --> 0:02:44.800 But I wouldn't take moving at consecutive meetings off the table. 0:02:44.639 --> 0:02:47.920 At all, while his counterpart at the ECB, Christine Legard, 0:02:48.000 --> 0:02:51.240 said she's not even considering a rage pause at this point. 0:02:51.600 --> 0:02:55.400 If our baseline stands, then we also know that we 0:02:55.480 --> 0:02:57.160 will very likely hike again. 0:02:58.840 --> 0:03:01.160 But for all the stress this week, the markets pretty 0:03:01.200 --> 0:03:02.840 much took it in stride. The S and P five 0:03:02.919 --> 0:03:05.520 hundred was up another two point three five percent end 0:03:05.520 --> 0:03:07.240 of the week at forty four to fifty, and that 0:03:07.400 --> 0:03:10.200 is way above the medium call of our Bloomberg elves 0:03:10.320 --> 0:03:11.639 who are saying by the end of the year she 0:03:11.760 --> 0:03:15.040 hit forty one hundred. The NASAC wasn't too far behind, 0:03:15.200 --> 0:03:17.359 of about two point two percent of the week, while 0:03:17.360 --> 0:03:19.840 the yield on the ten year was up nine basis points, 0:03:19.919 --> 0:03:22.320 finishing the week at three point eight three to take 0:03:22.360 --> 0:03:24.359 us through what was driving the markets this week. We 0:03:24.320 --> 0:03:27.560 welcome net back Rebecca Patterson, who earlier served as chief 0:03:27.600 --> 0:03:30.200 market strategist at Bridgeway. Rebecca, always great to have you here. 0:03:30.280 --> 0:03:32.400 Thank you for being here. So as you look at 0:03:32.440 --> 0:03:34.519 all that happened, a lot happened this week. Actually, yeah, 0:03:34.560 --> 0:03:35.960 what do you think was driving the markets? Because for 0:03:36.080 --> 0:03:38.000 the stock market sure liked whatever they saw. 0:03:38.280 --> 0:03:40.160 Well, I think there's still a sense out there that 0:03:40.200 --> 0:03:43.840 there's a reasonable probability of a soft landing that the 0:03:43.880 --> 0:03:47.120 FED maybe have to hike one or two more times max, 0:03:47.160 --> 0:03:50.760 but that's largely discounted now, and that the everything is 0:03:50.800 --> 0:03:53.160 going to line up perfectly, a moderation and growth but 0:03:53.240 --> 0:03:56.240 not too much, and a quick moderation and inflation that 0:03:56.240 --> 0:03:59.240 it would allow the FED to ease significantly next year. 0:03:59.800 --> 0:04:02.680 I think that hope, and you get some data that 0:04:02.720 --> 0:04:05.800 supports it, some that doesn't, is what's really leading the 0:04:05.800 --> 0:04:09.640 stocks higher. Largely. Obviously there's structural issues with AI and 0:04:09.680 --> 0:04:12.920 how that could help tech stocks in particular and ancillary 0:04:12.960 --> 0:04:16.160 businesses through new sources of revenue. But I think the 0:04:16.200 --> 0:04:19.080 macro picture is really these hopes for a soft landing, 0:04:19.120 --> 0:04:21.400 which I still personally think are premature. 0:04:21.680 --> 0:04:24.360 So we're about halfway through the year now, exactly halfway 0:04:24.360 --> 0:04:27.200 through the year. Did you expect that's what this is 0:04:27.200 --> 0:04:29.640 where we'd be when January one came around. 0:04:29.600 --> 0:04:31.560 You know, the beginning of the year, we had the 0:04:31.640 --> 0:04:34.720 China reopening, and everyone was very excited about that. It 0:04:34.800 --> 0:04:37.240 happened faster, it was sort of a big bang reopening. 0:04:37.960 --> 0:04:42.280 I have been a little surprised with the degree of 0:04:42.680 --> 0:04:44.839 how quickly it's moderated. You know, the fact that we 0:04:44.839 --> 0:04:48.719 have youth unemployment in China at over twenty percent. Manufacturing 0:04:48.760 --> 0:04:52.640 in China is contracting out right now. Services is positive, 0:04:52.680 --> 0:04:55.680 but just barely so. China is going to need to 0:04:55.720 --> 0:04:58.400 do more stimulus, and we have the poll up Euro 0:04:58.520 --> 0:05:01.480 meeting coming up in July. I think if they do something, 0:05:01.480 --> 0:05:04.920 it'll be then. But if we don't see something bigger 0:05:04.920 --> 0:05:07.559 than the incremental steps they've taken so far, and something 0:05:07.600 --> 0:05:11.600 really aimed at the consumer, building consumer confidence, getting companies 0:05:11.640 --> 0:05:13.880 to bring people back to work, I think that one 0:05:13.960 --> 0:05:16.320 keeps moderating. I think the other thing that surprised me 0:05:16.400 --> 0:05:19.960 so far this year was the strength and tech. I mean, 0:05:20.000 --> 0:05:22.520 I think everyone's been surprised by the strength and tech 0:05:22.560 --> 0:05:24.880 You've still had higher yields this year, you still had 0:05:24.920 --> 0:05:28.359 fed hikes, and normally those longer duration assets are going 0:05:28.440 --> 0:05:30.680 to be more sensitive to that. But I think what's 0:05:30.720 --> 0:05:34.039 driven it regardless has been the very strong underlying consumer 0:05:34.160 --> 0:05:35.640 because at the end of the day, there's still a 0:05:35.640 --> 0:05:39.479 big consumer cyclical component to tech stocks. But in addition, 0:05:39.560 --> 0:05:42.800 again these structural hopes around AI and what that's going 0:05:42.839 --> 0:05:43.200 to bring. 0:05:43.360 --> 0:05:45.800 As you say, China right now seems to be disappointing, 0:05:45.839 --> 0:05:48.000 if anything, a bit. We'll see how it plays out 0:05:48.040 --> 0:05:50.080 the rest of the year. What's the knock on effect 0:05:50.160 --> 0:05:52.200 of that? For example in the United States. I mean, 0:05:53.120 --> 0:05:55.400 China has traditionally been the source of a lot of 0:05:55.440 --> 0:05:58.599 growth globally. It looks like it's not going to be 0:05:58.760 --> 0:06:01.280 play that same role for the United States economy. 0:06:01.440 --> 0:06:04.400 Well, it's so interesting. I think the US could actually 0:06:04.440 --> 0:06:08.040 be a small net beneficiary when it comes to stock market. 0:06:08.200 --> 0:06:12.080 So again, think back to November, December, January, when we 0:06:12.120 --> 0:06:15.599 had the speculation and then actual reopening in China. You 0:06:15.680 --> 0:06:19.159 saw economies that are more sensitive to China, that have 0:06:19.240 --> 0:06:23.400 stronger trade relationships business relationships benefit even more than the 0:06:23.520 --> 0:06:26.440 US did. So Germany, for example, fifty percent of their 0:06:26.480 --> 0:06:30.000 GDPs exports. China is a huge trade partner Italy a 0:06:30.000 --> 0:06:34.120 lot of the emerging Asian economies commodity prices, so all 0:06:34.160 --> 0:06:38.280 the capital was going to these more cheaply valued, attractively 0:06:38.400 --> 0:06:41.839 valued stocks overseas that would benefit from China. Now with 0:06:42.000 --> 0:06:44.840 China sputtering and people saying where do I want to 0:06:44.880 --> 0:06:47.840 allocate for the second half of the year, even though 0:06:47.960 --> 0:06:50.760 certain parts of the US equity market could be seemed 0:06:50.880 --> 0:06:53.960 very pricey, especially some of those tech names, the US 0:06:54.000 --> 0:06:57.960 economy still looks more resilient than a lot of places overseas. 0:06:58.040 --> 0:07:00.479 So one thing that could be a surprise for the 0:07:00.520 --> 0:07:04.080 second half of the year is that the US outperforms again. 0:07:06.000 --> 0:07:08.400 You know, it's amazing to say that with the tech 0:07:08.400 --> 0:07:10.640 stocks valued where they are today, and I think that 0:07:10.840 --> 0:07:13.920 has to slow at some point soon, especially with the 0:07:13.920 --> 0:07:16.600 FED continuing to raise rates. But if the US is 0:07:16.640 --> 0:07:19.000 the best house on the block, and I think it 0:07:19.080 --> 0:07:21.320 will be in the second half of the year, most likely, 0:07:21.760 --> 0:07:24.280 that might keep capital coming in here, which means a 0:07:24.280 --> 0:07:27.920 stronger dollar, and so certain US stocks will benefit more 0:07:27.960 --> 0:07:28.400 than others. 0:07:28.760 --> 0:07:30.720 We all pay so much attention to the central banks, 0:07:30.720 --> 0:07:32.240 not just the FED with the center banks. We heard 0:07:32.280 --> 0:07:34.720 from them this week. It's CenTra over in Portugal, and 0:07:34.760 --> 0:07:37.800 certainly we heard a message from j Powell, from the 0:07:37.840 --> 0:07:41.360 feder Reserve, from Christine Lagarden, even from mister Bailey that 0:07:41.360 --> 0:07:44.000 if anything's indicated we're going to have higher for longer. 0:07:44.040 --> 0:07:45.520 How does that affect the market? 0:07:45.760 --> 0:07:47.760 You know, I think that's really going to be an 0:07:48.000 --> 0:07:50.640 end of the year and early next year story. So again, 0:07:50.720 --> 0:07:54.040 right now, the market is pricing in higher for longer 0:07:54.080 --> 0:07:57.200 for this year, especially compared to January. January, we're still 0:07:57.240 --> 0:07:59.680 thinking we could get rate cuts during this year. That's 0:07:59.760 --> 0:08:02.920 largely been removed, but we're still looking at a market 0:08:02.960 --> 0:08:05.400 discounting significant easing next year. 0:08:05.800 --> 0:08:06.040 Now. 0:08:06.200 --> 0:08:09.600 J Powell himself has said that for inflation to get 0:08:09.600 --> 0:08:12.280 back to two percent their target, it's probably not happening 0:08:12.360 --> 0:08:15.520 until twenty twenty five. So are they actually going to 0:08:15.560 --> 0:08:20.360 be easing a year ahead of that? If inflation's above target? Maybe, 0:08:20.400 --> 0:08:23.560 if there's a huge crisis, or if the jobless claims 0:08:23.560 --> 0:08:28.200 and the payroll numbers deteriorate very materially. But if they don't, 0:08:28.440 --> 0:08:30.600 it's hard for me to see that easing coming. So 0:08:30.680 --> 0:08:32.400 I think that is going to be a headwind for 0:08:32.440 --> 0:08:35.320 equities in the US and globally probably as we get 0:08:35.360 --> 0:08:37.760 towards later in the year, and the FED is signaling 0:08:37.840 --> 0:08:38.960 that we're not there yet. 0:08:39.040 --> 0:08:40.760 As a recovering lawyer, I have to ask one quick 0:08:40.760 --> 0:08:44.000 one about the Supreme Court. We had several controversial decisions 0:08:44.000 --> 0:08:46.160 come down. Do they have any economic effect you think? 0:08:46.400 --> 0:08:48.760 You know, the one decision that we got about the 0:08:48.800 --> 0:08:53.040 student loan forgiveness that that that's not going to go forward. 0:08:53.280 --> 0:08:57.600 You the decision itself is not as economically important, But 0:08:58.320 --> 0:09:02.480 there is a relative to this, which is that student 0:09:02.679 --> 0:09:05.439 loans have been Forbaard right, they haven't had to pay 0:09:05.480 --> 0:09:08.679 them since March twenty twenty, and that ends this fall. 0:09:08.880 --> 0:09:11.959 The Bureau of Economic Analysis is saying thirty eight billion 0:09:12.200 --> 0:09:16.240 annual rate of disposable income they had from not paying 0:09:16.240 --> 0:09:18.520 those loans. That goes away. So I think when we 0:09:18.559 --> 0:09:20.880 think about what could hurt GDP at the end of 0:09:20.920 --> 0:09:24.000 the year, Q four, Q one, this could be a 0:09:24.040 --> 0:09:25.520 material hit for the consumer. 0:09:25.720 --> 0:09:26.000 Interesting. 0:09:26.080 --> 0:09:27.640 I'm not sure we'd figure that out yet. Thank you 0:09:27.679 --> 0:09:29.080 so much, re Becca, it's really great to have you 0:09:29.120 --> 0:09:32.480 with us. That's Rebecca Patterson, formerly with Bridgewater. Coming up 0:09:32.520 --> 0:09:34.840 we go over the results of the first bank stress 0:09:34.920 --> 0:09:37.680 tests since all those bank failures back in March, with 0:09:37.800 --> 0:09:42.439 former FDIIC chair Sheila Beher. That's next time Wall Street 0:09:42.480 --> 0:09:43.640 Week on Bloomberg. 0:09:50.400 --> 0:09:54.640 This is Bloomberg Wall Street Week with David Weston from 0:09:54.720 --> 0:09:55.680 Bloomberg Radio. 0:09:56.160 --> 0:09:58.360 This is Wall Street Week. I'm David Weston. This week, 0:09:58.400 --> 0:10:00.760 the Federal Reserve is at least the results of their 0:10:00.800 --> 0:10:04.400 stress tests and all twenty three banks pass. I would say, 0:10:04.400 --> 0:10:06.679 with flying colors, to take us through what we learned, 0:10:06.679 --> 0:10:08.280 and maybe it is important what we may not have 0:10:08.360 --> 0:10:10.800 learned from these tests. Were welcome now, Shila Beer she 0:10:10.880 --> 0:10:13.240 of course served as the chair of the fdi C, 0:10:13.440 --> 0:10:15.400 so she'l thanks so much for being back with us. 0:10:15.720 --> 0:10:17.800 What did these trust tests tell us about the state 0:10:17.840 --> 0:10:18.680 of the banking industry. 0:10:19.760 --> 0:10:25.880 Well, they told us that in a severe stress scenario, 0:10:26.240 --> 0:10:28.960 as if it has defined it, they would survive quite 0:10:29.000 --> 0:10:31.560 well and still have plenty of capital to keep blending. 0:10:32.120 --> 0:10:33.680 But I think there are a lot of problems with 0:10:33.760 --> 0:10:38.200 the scenario and the assumptions that underpin the stress tests, 0:10:38.240 --> 0:10:39.720 so I don't think we should take a lot of 0:10:39.720 --> 0:10:41.960 comfort from it. There's a lot of work that needs 0:10:41.960 --> 0:10:44.800 to be done, and to us credit, the Fed acknowledge 0:10:44.840 --> 0:10:47.040 that there are a lot of different potential risks out 0:10:47.040 --> 0:10:51.000 there that may not be reflected. So I do think 0:10:51.200 --> 0:10:53.400 we should not take a lot of a lot of 0:10:53.440 --> 0:10:57.559 comfort in this. The big issue obviously is they don't 0:10:57.559 --> 0:11:00.640 stress high interest rates. That is the issue confronting the 0:11:00.640 --> 0:11:05.480 bank banking industry right now. And ironically, if you assume, 0:11:05.480 --> 0:11:08.240 as their stress test does, that rates go back to 0:11:08.360 --> 0:11:12.719 zero in a severe recession, that actually helps banks that 0:11:12.800 --> 0:11:17.520 have a lot of unrealized losses in their on their 0:11:17.520 --> 0:11:20.760 books because when you take rates back to zero, those 0:11:20.800 --> 0:11:24.200 loll yielding assets regain value quickly, So in a way, 0:11:24.240 --> 0:11:27.160 they're rewarding banks for not managing their indust rate ris 0:11:27.360 --> 0:11:32.360 very well, and that's a big problem. The other issue 0:11:32.480 --> 0:11:35.720 is that again related interest rates, is what happens if 0:11:35.760 --> 0:11:38.920 we have a protracted period where the yield curve is inverted, 0:11:39.640 --> 0:11:43.320 meaning that short term borrowing rates are higher than long 0:11:43.400 --> 0:11:45.440 term rates, which is a situation we've had for a 0:11:45.440 --> 0:11:48.839 while now. That leads you into a situation which we're 0:11:48.840 --> 0:11:52.360 already seeing where banks cost of funding what they have 0:11:52.440 --> 0:11:55.560 to pay on deposits or borrowing will exceed what they 0:11:55.600 --> 0:11:57.560 can get on their loans, and that's going to be 0:11:57.600 --> 0:11:59.800 a real challenge for banks, and those are the kinds 0:11:59.840 --> 0:12:02.680 of issues the FAD really needs to be thinking about 0:12:03.240 --> 0:12:07.120 and putting banks through. Not this kind of artificial assumption 0:12:07.200 --> 0:12:08.880 that if we have a recession, rates go back to 0:12:09.000 --> 0:12:11.600 zero and we start the party all over again and 0:12:11.600 --> 0:12:13.640 their assets are inflated and they don't have to pay 0:12:13.640 --> 0:12:16.719 anything on the deposits anymore. That's just not realistic. 0:12:17.400 --> 0:12:19.320 Surely, your reference to the interest rate risk takes me 0:12:19.400 --> 0:12:21.400 back to one of the reasons why we were particularly 0:12:21.440 --> 0:12:23.640 eager to see these results in the wake of the 0:12:23.640 --> 0:12:26.480 failure of Silicon Valley Bank and other banks that were 0:12:26.559 --> 0:12:29.160 interest rate risks. Are there things that could be done 0:12:29.200 --> 0:12:31.800 with the stress tests that would have kicked out that 0:12:31.960 --> 0:12:35.000 problem or is it not a stress test or capital 0:12:35.000 --> 0:12:36.679 issue at all? 0:12:36.840 --> 0:12:39.719 It is, so I don't think it's I don't think 0:12:39.720 --> 0:12:41.600 it's realistic, to be honest with you, it's it's not 0:12:41.720 --> 0:12:44.560 the kind of scenario we should be worried about. And 0:12:44.600 --> 0:12:48.719 so yes they should be. Assuming that interest rates stay high, 0:12:48.800 --> 0:12:52.240 inflation stays high, interest rates have to stay high. We 0:12:52.280 --> 0:12:54.680 still have you know, we don't we have a hard 0:12:54.760 --> 0:12:57.079 landing we don't have a soft landing and that the 0:12:57.160 --> 0:13:01.360 yield curd remains inverted for some period of time. That's 0:13:01.440 --> 0:13:05.320 the worst case, nightmare scenario that we need to prepare for. 0:13:05.440 --> 0:13:08.440 I hope it doesn't happen, but it certainly could. And 0:13:08.480 --> 0:13:11.400 I think, you know, keeping interest rates high even if 0:13:11.400 --> 0:13:13.520 we have an economic slow down to recession I think 0:13:13.600 --> 0:13:16.080 is a much more likely. And this idea that the 0:13:16.080 --> 0:13:18.040 FED is going to go back to zero again, that's 0:13:18.080 --> 0:13:21.680 completely inconsistent with the FED itself has been saying about, 0:13:21.679 --> 0:13:27.160 you know, keeping great tie until inflation is defeated. So 0:13:27.640 --> 0:13:29.640 that's really what they need to be working back. And 0:13:29.840 --> 0:13:32.960 now we have real life examples with these recent regional 0:13:33.000 --> 0:13:36.560 bank failures. That's exactly what took them down. They're unrealized 0:13:36.600 --> 0:13:39.800 they had deposit runs, they had a lot of underwater 0:13:39.880 --> 0:13:44.120 securities which they had to start selling to meet deposit redemptions. 0:13:44.240 --> 0:13:47.440 That caused losses. That's what brought them down. So you're 0:13:47.480 --> 0:13:50.040 seeing that in real life right now. And these are 0:13:50.160 --> 0:13:53.000 very poorly managed banks. I think most banks are managing 0:13:53.040 --> 0:13:55.800 these risks well. But this is the scenario that the 0:13:55.840 --> 0:13:57.960 FED needs to take the banking system through. 0:13:58.679 --> 0:14:00.920 How does liquidity figure out because one of the issues 0:14:00.960 --> 0:14:02.959 obviously on lots of banks affails, they just didn't have 0:14:03.000 --> 0:14:05.240 the equalities, so they had to sell the securities. As 0:14:05.280 --> 0:14:08.199 you pointed out, does liquidity factor in the stress as 0:14:08.240 --> 0:14:09.760 should it? 0:14:09.760 --> 0:14:12.480 It does not. Really There are separate tests on liquidity. 0:14:12.520 --> 0:14:15.800 They're not public, but they probably should be public, and 0:14:15.840 --> 0:14:18.640 that liquidity risk needs to be integrated into the capital 0:14:18.720 --> 0:14:23.000 stress testing because you cannot separate these out. A bank 0:14:23.040 --> 0:14:25.320 that is perceived to be weak by the market will 0:14:25.440 --> 0:14:29.600 likely have deposit runs or you know, accelerated deposit withdrawals. 0:14:29.880 --> 0:14:32.600 That means that they might have to sell securities they 0:14:32.600 --> 0:14:37.280 weren't planning on selling so called hold maturity securities, which 0:14:37.320 --> 0:14:40.960 will have a big impact on capital. So these need 0:14:41.040 --> 0:14:44.640 to be integrated together. You can't just have a clean separation. 0:14:45.000 --> 0:14:48.480 And again that's that's part of the broader interstrate scenario, 0:14:48.560 --> 0:14:52.080 is liquidity risks as they impact capital that the FED 0:14:52.160 --> 0:14:53.720 should be running these banks through. 0:14:54.640 --> 0:14:57.280 We're talking about the banking sector. They're regulated banking sector 0:14:57.360 --> 0:15:00.760 right now. There's a lot of transactions being done outside 0:15:00.760 --> 0:15:02.880 of that, as you know so well, and if anything 0:15:02.920 --> 0:15:05.800 has that has been growing dramatically ironically, perhaps in part 0:15:05.800 --> 0:15:07.720 because of the difficulties the banks are having, so they're 0:15:07.720 --> 0:15:09.960 getting out of some of the business the private credit 0:15:10.000 --> 0:15:13.360 is stepping into. Is there an effective way to take 0:15:13.360 --> 0:15:16.960 into account the possible systemic risk from the non bank banks. 0:15:18.160 --> 0:15:20.880 So it's a huge issue because in my experience, you know, 0:15:20.880 --> 0:15:23.800 we had a non bank lending during the Great Financial Crisis. 0:15:23.800 --> 0:15:25.920 They were doing the line share of the mortgage limiting, right. 0:15:25.920 --> 0:15:28.440 The big banks were doing thesecuritizations that fed the beast, 0:15:29.080 --> 0:15:31.840 but they were doing the line's share, and they still 0:15:31.880 --> 0:15:35.080 do frankly. But those sources of credit dry up very 0:15:35.160 --> 0:15:39.600 quickly if you get into distressed market situations. The banks 0:15:39.600 --> 0:15:42.240 that have stable to pass the ones that keep blending. 0:15:42.800 --> 0:15:45.760 So if you keep squeezing the banks, and if we overreact, 0:15:45.920 --> 0:15:50.120 especially with the smaller banks, the regional community banks, two 0:15:50.160 --> 0:15:53.080 recent failures you're going to have, you're going to even 0:15:53.160 --> 0:15:55.920 push even more of that into the private sector. You're 0:15:55.920 --> 0:15:58.040 going to constrain their ability in the non bank sector, 0:15:58.040 --> 0:16:00.320 You're going to constrain their ability to lend. That's going 0:16:00.360 --> 0:16:03.320 to make the system even more fragile. There's also not 0:16:03.480 --> 0:16:07.360 a lot of transparency between the intersection of the regulated 0:16:07.360 --> 0:16:10.160 banks and the non bank sector. Again, this was a 0:16:10.280 --> 0:16:13.160 huge problem during the Great Financial Crisis. Most of the 0:16:13.200 --> 0:16:15.520 mortgage lendings was that the non banks, but it certainly 0:16:15.560 --> 0:16:18.480 flowed back into the banks when troubles emerged. 0:16:19.000 --> 0:16:21.800 You refer to regional banks and also community banks and 0:16:21.840 --> 0:16:26.000 their role overall in the ecosystem. That's certainly come to 0:16:26.000 --> 0:16:30.160 the forefront. How concerned should we be about the role 0:16:30.480 --> 0:16:33.680 of the community banks, the regional banks versus the big 0:16:33.720 --> 0:16:36.160 money center banks, And is there something we could do 0:16:36.480 --> 0:16:39.360 to really ensure their strength because they do provide a 0:16:39.400 --> 0:16:42.560 lot of the lending and the credit to some of 0:16:42.600 --> 0:16:44.360 the smaller businesses across the country. 0:16:45.240 --> 0:16:48.480 I do, and those are the engines of job growth. 0:16:48.800 --> 0:16:51.280 So yes, I've been saying for some time now we 0:16:51.360 --> 0:16:54.480 need at least to have a temporary guarantee for transaction 0:16:54.600 --> 0:16:57.760 to positive accounts that these smaller banks have with their 0:16:57.800 --> 0:17:03.200 business customers and other institutions like local governments, nonprofits. These 0:17:03.240 --> 0:17:06.760 are accounts that are used by their customers to pay bills, 0:17:06.800 --> 0:17:11.719 to make payroll, to bring revenues in, pay expenses. They're operational, 0:17:11.760 --> 0:17:16.280 they don't move easily, but they're almost always above the 0:17:16.320 --> 0:17:18.600 insured deposit limits. Because you got a lot of money 0:17:18.720 --> 0:17:23.199 flowing in and out to pay expenses, payroll, and other bills, 0:17:23.560 --> 0:17:26.560 so we provided a temporary guarantee for them. During the 0:17:26.600 --> 0:17:29.960 Great Financial Crisis, we were seeing depositive stability. Then with 0:17:30.040 --> 0:17:33.280 the smaller banks, those deposits were migrating to the so 0:17:33.359 --> 0:17:36.320 called two big defail banks. You want to stop that. 0:17:36.359 --> 0:17:40.360 We've had enough consolidation already, So providing reinstituting at least 0:17:40.400 --> 0:17:43.840 on a temporary basis this guarantee again, I think would 0:17:43.880 --> 0:17:49.000 be hugely stabilizing to those regional and community banks. Unfortunately, 0:17:49.040 --> 0:17:51.960 in Dodd Frank for whatever reason, it took the authority 0:17:52.000 --> 0:17:55.000 away from the FDI see using what's called the systemic 0:17:55.080 --> 0:18:00.840 Risk Exception, to which is an extraordinary procedure to reinstate that. 0:18:01.080 --> 0:18:03.800 Now there's a fast track approval process in the Hill. 0:18:03.840 --> 0:18:06.119 It needs to be required. The President has to ask 0:18:06.160 --> 0:18:09.200 for it. The President, for whatever reason, has not asked 0:18:09.240 --> 0:18:11.760 for it. But I do think there's insufficient focus on 0:18:11.880 --> 0:18:16.360 stabilizing liquidity for these community and regional banks. The more 0:18:16.400 --> 0:18:19.040 they have to, you know, pay really high rates on 0:18:19.119 --> 0:18:21.760 deposits or borrow from the Federal Homeland Bank, it's this 0:18:21.840 --> 0:18:25.200 really expensive borrowing, the more that is going to distress 0:18:25.280 --> 0:18:27.560 them and constrain their ability to win. We need to 0:18:27.600 --> 0:18:32.800 stabilize those accounts, especially transaction accounts, with a much higher, 0:18:32.840 --> 0:18:35.720 if not unlimited, guarantee, at least on this temporary basis. 0:18:36.200 --> 0:18:38.160 So this is very helpful. Thank you so much for 0:18:38.280 --> 0:18:40.760 joining us on again. Shila bet She is the former 0:18:40.840 --> 0:18:43.800 chair of the FDI. See coming up the world of 0:18:43.840 --> 0:18:46.439 private equity today from the perspective of one of the 0:18:46.480 --> 0:18:51.040 biggest players, we talk with Blackstone CFO Michael J. That's 0:18:51.040 --> 0:18:52.960 next on Wall Street Week on Bloomberg. 0:18:58.240 --> 0:19:02.480 This is Bloomberg Well Street Week with David Weston from 0:19:02.600 --> 0:19:03.520 Bloomberg Radio. 0:19:03.840 --> 0:19:06.400 This is Wall Street Week. I'm David Weston. Investors these 0:19:06.440 --> 0:19:09.119 days faced a number of real uncertainties about where the 0:19:09.160 --> 0:19:11.320 economy is going, as well as what the FED is 0:19:11.400 --> 0:19:13.600 likely to do in response to that. One of the 0:19:13.640 --> 0:19:16.280 ways to look at what those uncertainties really tell us 0:19:16.320 --> 0:19:17.800 and what we should do about it is through the 0:19:17.960 --> 0:19:21.080 lens of alternative investing. And we welcome to somebody who 0:19:21.240 --> 0:19:23.880 is at one of the biggest most successful term investment 0:19:24.040 --> 0:19:26.560 houses that there is. It is Blackstone. He's the chief 0:19:26.560 --> 0:19:29.280 financial officer there. He is Michael J. So Michael, welcome 0:19:29.320 --> 0:19:30.399 to Wall Street. We great to have you. 0:19:30.480 --> 0:19:32.199 David is great to be here, Thanks for having me. 0:19:32.280 --> 0:19:34.240 So let's start with a macro here if we could, 0:19:34.840 --> 0:19:37.800 what is the Blackstone view the operating thesis right now 0:19:37.840 --> 0:19:39.760 abo where we are in the economy and where it's 0:19:39.760 --> 0:19:43.159 headed on inflation, on whether we're going to have a 0:19:43.160 --> 0:19:44.040 big downturn or not. 0:19:44.240 --> 0:19:48.239 Sure well on the macro, which obviously affects everything. We 0:19:48.320 --> 0:19:50.760 do benefit from having the lens of a really big 0:19:50.800 --> 0:19:53.840 portfolio of investments. So we have stakes and over two 0:19:53.920 --> 0:19:56.840 hundred companies that together have over two hundred million of 0:19:56.920 --> 0:19:59.879 revenues and aggregate. We have a real estate portfolio with 0:20:00.080 --> 0:20:02.520 over twelve thousand individual assets. We have a very big 0:20:02.600 --> 0:20:06.200 private credit portfolio. So that's a very sort of rich sample, 0:20:06.920 --> 0:20:10.040 and I'd start with the good news. So the good 0:20:10.080 --> 0:20:14.480 news first, I think is we pretty definitively, definitively see 0:20:14.520 --> 0:20:18.120