WEBVTT - Wells Fargo's Mike Mayo Talks New Era for Bank Mergers

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Long ago and far away, there was a bank roll

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<v Speaker 2>up and I don't have the numbers in front of me,

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<v Speaker 2>but there was like sixteen thousand American banks. Now there's

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<v Speaker 2>under five thousand American banks. And someday we're going to

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<v Speaker 2>be like Canada and have five banks. Someone that's been

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<v Speaker 2>just absolutely legendary and following saying yes, we'll get the

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<v Speaker 2>Mic Mayo on City Group as well. What a moonshot

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<v Speaker 2>that is. Mayo finally gets Jane Frasier to behave yourself

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<v Speaker 2>and get something done here. But today, with Webster Financial

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<v Speaker 2>of Waterbury, Connecticut, four thousand employees, they're going to be

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<v Speaker 2>taken out by the Spanish Santander Bank. It's like a

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<v Speaker 2>new era. You say, good to see you. You look great.

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<v Speaker 2>I mean, you know, I look at this and you've

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<v Speaker 2>given me. This is a new era for bank mergers.

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<v Speaker 2>We've said that like five times. What's different now, Well.

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<v Speaker 1>You have night and day difference in bank regulation. This

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<v Speaker 1>is once in a generation deregulation. Since the Financial crisis,

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<v Speaker 1>regulators didn't want banks to merge so much, and now

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<v Speaker 1>it's back to the future. It's when I worked at

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<v Speaker 1>the FED thirty five years ago. We approved bank deals

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<v Speaker 1>in ninety days and guess what they're back to doing.

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<v Speaker 1>They're back to approving deals.

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<v Speaker 2>Is that a one off with Trump? And after President

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<v Speaker 2>Trump we see something different. No.

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<v Speaker 1>I think there's a realization that the lack of bank

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<v Speaker 1>deals was a gift to Jamie Diamond.

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<v Speaker 3>I mean, you just prevented a lot.

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<v Speaker 2>I happen to agree with this, but continue.

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<v Speaker 1>Yeah, like bank murders are needed instead of just having

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<v Speaker 1>you know, Goliath is winning.

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<v Speaker 3>Jake Morgan is the Goliath of Goliath.

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<v Speaker 1>And to put this in perspective, the bank that just

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<v Speaker 1>sold to Bank of Santander JP Morgan is going to

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<v Speaker 1>spend about twenty billion dollars on tech expenses this year.

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<v Speaker 1>That would equal fifteen years of the bank that just

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<v Speaker 1>sold total expenses. So how do you compete if you're

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<v Speaker 1>a small bank? Scale is more important than ever before

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<v Speaker 1>in banking. So you have the need, you have the

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<v Speaker 1>ability with the regulation, and it's happening, it's just getting started.

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<v Speaker 1>This is a new error for bank mergers once again, Thomas,

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<v Speaker 1>you may recall in the nineteen nineties that's what I

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<v Speaker 1>made a name for myself with our bank franchise value model,

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<v Speaker 1>and this morning I reintroduced that bank franchise value model

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<v Speaker 1>to highlight hidden values at banks.

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<v Speaker 2>You used to pay a royalty to credit, Sueeze Paul,

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<v Speaker 2>so you jump into my bank.

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<v Speaker 4>So, Mike, how is this mergers wave going to look

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<v Speaker 4>like in the bank space? Is it the regional banks

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<v Speaker 4>just tight? You know, regional banks merging? Are we going

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<v Speaker 4>to see creation of more super regionals?

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<v Speaker 2>What are we going?

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<v Speaker 3>How's that going to look for us?

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<v Speaker 1>I think it's going to be banks that rank you know,

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<v Speaker 1>twentieth to one hundredth in size, and I think you'll see,

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<v Speaker 1>you know, deals where you.

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<v Speaker 3>Have undervalued banks.

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<v Speaker 1>Remember twenty twenty three wasn't that long ago when you

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<v Speaker 1>had some regional bank failures and several banks were looking

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<v Speaker 1>at the abyss and their long term value is debatable,

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<v Speaker 1>but their short term value is still very much there.

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<v Speaker 1>So I think these kind of mid sized banks, you know,

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<v Speaker 1>have their moment reckoning and I think this is and

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<v Speaker 1>this is a window to where I think murders are

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<v Speaker 1>you know, tolerated, encouraged. And that might not last forever

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<v Speaker 1>like after the Trump presidency, but it should.

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<v Speaker 2>How many banks will there be in five years. I mean,

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<v Speaker 2>am I right? We went from sixteen thousand. It's like

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<v Speaker 2>Thomas showed that Keith buryet would know this six down

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<v Speaker 2>to four thousand banks now right.

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<v Speaker 1>From fifteen thousand or forty six hundred, and I'd expect

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<v Speaker 1>the number of banks be cut in half over the

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<v Speaker 1>next next next ten years.

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<v Speaker 2>Ten years. Yeah.

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<v Speaker 4>I got a neighbor of mind when I commute with

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<v Speaker 4>he postponed his retirement. He's a banker on financial services.

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<v Speaker 4>He says, I'm going to make a lot of money

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<v Speaker 4>in M and A the next few years. I'm not retiring.

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<v Speaker 4>So what's driving the consolidation here? Is it that technology

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<v Speaker 4>investment that's required You mentioned JP Morgan to some of

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<v Speaker 4>these smaller banks. Is that what's driving some of this consolidation.

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<v Speaker 3>Yeah, I think the need for scale has never been

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<v Speaker 3>more important. But you know what's happening right now.

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<v Speaker 1>The level of competition in US banking is the greatest

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<v Speaker 1>it's been since before the global financial crisis. Banks are

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<v Speaker 1>adding more branches, bankers marketing, credit card mailings, technology AI

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<v Speaker 1>and so it's competitive out there. And so if you

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<v Speaker 1>can leverage those calls over a larger customer base, that

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<v Speaker 1>tends to benefit. So there's an economic reason for this

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<v Speaker 1>happening across America.

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<v Speaker 2>Everyone listening to mister Mayo as they do within the

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<v Speaker 2>banking business. The Smeed family, fabulous value investors, wonderful, wonderful

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<v Speaker 2>contrarian track record, serious serious stuff and call Smeede emails

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<v Speaker 2>in he says, you got to ask Mike Mayo about

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<v Speaker 2>a bank bigger than Webster. And this gets into almost

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<v Speaker 2>regional and super regional, something like Fifth Third of Cincinnati.

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<v Speaker 2>They don't have four thousand employees, they got nineteen thousand employees.

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<v Speaker 2>What is a bank like that doing right now?

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<v Speaker 1>Well, there's a few idiosyncratic situations where you have exceptional management,

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<v Speaker 1>and Fifth Third is one of those banks. The CEO

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<v Speaker 1>of Fifth Third Tim Spence, He's kind of the next

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<v Speaker 1>generation Jamie Diamond, repackaged in a different form.

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<v Speaker 3>And so so far.

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<v Speaker 1>They started off with their acquisition of this bank called

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<v Speaker 1>Kamerica I was headquartered in Davi. It just closed this

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<v Speaker 1>past weekend and amazing they they are targets that they

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<v Speaker 1>were looking for next year and now they expect to

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<v Speaker 1>achieve in the fourth quarter of this year. And they

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<v Speaker 1>think out of the box. They've had good technology. This

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<v Speaker 1>merger is off to a great start, so I'd say

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<v Speaker 1>they're the exception to the role in terms of a

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<v Speaker 1>bank that size.

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<v Speaker 4>I want to start a business, I want to build

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<v Speaker 4>a multi family residential thing, majig, is my local bank

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<v Speaker 4>going to make a loan to me? Are they going

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<v Speaker 4>to bank me? Or I have to go somewhere else.

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<v Speaker 1>No, you can get loans, I mean for a bank,

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<v Speaker 1>it doesn't matter what size yard. It's easy to make loans.

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<v Speaker 1>The hard part is getting paid back. Okay, In fact,

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<v Speaker 1>a lot of good credit.

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<v Speaker 3>If you're a customer, you go around.

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<v Speaker 1>You can shop around to a lot of different banks,

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<v Speaker 1>and sometimes these smaller banks are the ones that we'll

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<v Speaker 1>give you the.

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<v Speaker 3>Better terms, looser credit.

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<v Speaker 1>I frankly, I think there could be more risk with

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<v Speaker 1>these smaller banks. The reason you had national banking starting

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<v Speaker 1>thirty years ago was for greater diversification.

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<v Speaker 3>Remember the rolling.

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<v Speaker 1>Recessions it was, you know, it was New England and

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<v Speaker 1>in Texas and California. And guess what if you had

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<v Speaker 1>a diversified geographic bookprint less chance of failing where it's

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<v Speaker 1>a lot of these smaller banks. Once again, who looked

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<v Speaker 1>at the abyss in twenty twenty three are not as

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<v Speaker 1>diverse bied Okay.

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<v Speaker 2>City Group finally, with the moonshot two hundred and twenty

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<v Speaker 2>six thousand employees trading at one times book. JP Morgan

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<v Speaker 2>is at two and a half times book is City

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<v Speaker 2>Group with a story you finally got it, You finally

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<v Speaker 2>got your big pop in City Group. Does it keep

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<v Speaker 2>on going and improve that book value?

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<v Speaker 3>You say, finally, Yeah, it was the best performing big

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<v Speaker 3>bank last year. It's filling my dominant number one pick.

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<v Speaker 1>So I have a barbell strategy with my weightlifting theme too.

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<v Speaker 1>We have the takeover target picks banks like Bank United

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<v Speaker 1>and Bank of California and Associated But I also have

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<v Speaker 1>City Group on the other side. And Jane Fraser is

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<v Speaker 1>turning this company around. And if there's one point for

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<v Speaker 1>those who cover all industries, how many restructuring stories out

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<v Speaker 1>there are there that get seven percent revenue growth? That's

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<v Speaker 1>what they got last year even while they're restructuring. This

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<v Speaker 1>is a generational restructuring at a time of generational deregulation.

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<v Speaker 3>City Group is the beneficial for.

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<v Speaker 2>Their distinction be there'll be international more than the other

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<v Speaker 2>great American banks. What's what's the pixie does that's going

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<v Speaker 2>to drive her forward.

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<v Speaker 1>See you're asking that question the way you would have

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<v Speaker 1>for the last fifty years.

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<v Speaker 2>Why you could be like a fossil. I mean, let's

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<v Speaker 2>just wouldn't have ask it that way, I understand. So

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<v Speaker 2>what's the new new?

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<v Speaker 1>The new new is they've only had eight quarters of

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<v Speaker 1>this new structure. For half a century they were organized

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<v Speaker 1>is this global matrix mishmash structure mishmash. And now they

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<v Speaker 1>have five lines of business which I say simply payments, banking, markets, cards,

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<v Speaker 1>and wealth, with the CEO in charge of each of

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<v Speaker 1>those five, each with a line of business target, each

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<v Speaker 1>with and they are responsible and they all report to

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<v Speaker 1>the CEO of That's simple but powerful.

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<v Speaker 2>Twenty second, single, single best buy right now, Michael.

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<v Speaker 1>Mayo City Group, I think in three years will be

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<v Speaker 1>a two hundred dollars stock that's not quite a double

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<v Speaker 1>debt to a long way. And by the way, there's

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<v Speaker 1>no analytical gymnastics to get that valuation. They just go

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<v Speaker 1>to one and a half times to handle book value.

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<v Speaker 2>Michael Maniel, thank you so much. On the new era

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<v Speaker 2>of bank merges. Here we saw that with Webster Financial Waterbury, Connecticut,