Speaker 1: This is Bloomberg Wall Street Week.
Speaker 2: And we may not have an overall recession, we're having
Speaker 2: a rolling recession to kind of ROWL looks pretty strongly.
Speaker 2: It is when it comes to jobs, the financial stories
Speaker 2: that shape our world. Three major regional bank failures send
Speaker 2: shockwaves through the banking system. We're all trying to figure
Speaker 2: out what to make of generative AI through.
Speaker 3: The eyes of the most influential voices.
Speaker 2: Welcome down, Doctor Paul Krugman, Ryan moynihan, am Bank of America,
Speaker 2: deebro Lair of the Paulson Institute, well then Hubbard of
Speaker 2: the Columbia Business School.
Speaker 1: Bloomberg Wall Street Week with David Weston from Bloomberg Radio.
Speaker 2: Making history and not always in a good way, in
Speaker 2: the Middle East, in California, in regional banking, and in
Speaker 2: sports streaming. This is Bloomberg Wall Street Week. I'm David Weston.
Speaker 2: This week, Julian Salisbury of Sixth Street on the surge
Speaker 2: and alternative investing.
Speaker 4: You've seen like a greater interest in investing in private capital.
Speaker 2: Former FDIC had Sheila Bear on the continuing struggles of
Speaker 2: regional banks.
Speaker 5: That's really more about commercial real estate than New York Community.
Speaker 2: Bank and Jonathan Karp of Simon and Schuster with Petz
Speaker 2: stavros O Kkar on an iconic publishing house in the
Speaker 2: hands of private equity.
Speaker 6: This idea of broad based ownership has really energized the company.
Speaker 7: With this unloved gem of a business inside of paramount.
Speaker 2: Living through history can sometimes try the nerves Global Wall Street.
Speaker 2: This week watch with concern as Israel's fight with Mamas
Speaker 2: threatened to spill over into the Greater Region, even as
Speaker 2: Secretary of State Blincoln continued shuttle diplomacy to contain the fighting.
Speaker 8: There's still a lot of work to be done, but
Speaker 8: we continue to believe that an agreement is possible and
Speaker 8: indeed essential, and we will continue to work relentlessly to
Speaker 8: achieve it.
Speaker 2: California spent much of the week battling rains that were
Speaker 2: truly historic, causing buildings to slide down mountains in floods
Speaker 2: of mud. Regional banks took another shot this week as
Speaker 2: New York Community Bank stock fell to its lowest level
Speaker 2: in twenty seven years after it cut its dividend and
Speaker 2: had its credit rating lowered, leading it to try to
Speaker 2: clean up its balance sheet.
Speaker 5: This is a bank that's very large and has just
Speaker 5: gone over the one hundred billion dollar.
Speaker 9: Asset level.
Speaker 5: That is, that is giving it a lot closer regulatory scrutinate.
Speaker 2: And the Walt Disney Company announced earnings that beat all
Speaker 2: expectations and drove the stock up, even as it sought
Speaker 2: to combine its sports streaming business with that of Fox
Speaker 2: and Warner Brothers Discovery in what would make sports history.
Speaker 2: The purpose of the venture is purely distribution.
Speaker 8: It's not about procurement of content.
Speaker 3: So we'll continue to compete with each other for sports rights,
Speaker 3: just as we always have.
Speaker 2: Thursday evening, President Biden made an impromptu appearance at the
Speaker 2: White House to denounce a Special Councils report that had
Speaker 2: said there would be no prosecution for misuse of classified documents,
Speaker 2: but only because no jury would convict an elderly man
Speaker 2: with a poor memory. My memory is fine, my memory.
Speaker 2: Take a look at what I've done since I've become pressive.
Speaker 2: None of you thought I could pass any of the
Speaker 2: things I got passed.
Speaker 9: How'd that happen?
Speaker 10: You know?
Speaker 2: I guess I just forgot.
Speaker 5: What was going on.
Speaker 2: The equity markets responded to an event packed week by
Speaker 2: continuing their march upward with the s and P five hundred,
Speaker 2: adding almost one point four percent to close for the
Speaker 2: first time over five thousand, already putting it over the
Speaker 2: median point for where the bloomberg Els think will end
Speaker 2: up the year. The NAZAC climb two point three percent,
Speaker 2: while the yield on the tenure also rose some fifteen
Speaker 2: basis points to end at one point four point one
Speaker 2: point seven. To give us his read on where these
Speaker 2: equities are headed. We welcome back now, Scott Kroner, City
Speaker 2: US equity strategist. Scott, great to have you back with us.
Speaker 2: So I guess the basic question is have they gone
Speaker 2: far enough? Are we overpriced now in the equity markets?
Speaker 2: Because they really marched.
Speaker 11: Up, I'd say evaluations are certainly getting to a more
Speaker 11: stretched level. What we think this really does those put
Speaker 11: an ongoing burden.
Speaker 12: On a couple of forces.
Speaker 11: First, we do need to see an ongoing tailwind from
Speaker 11: a fundamental perspective.
Speaker 12: Second, we have to keep.
Speaker 11: An eye on ten year yields, which are around the
Speaker 11: four percent level we think send a pretty decent signal
Speaker 11: for equities.
Speaker 12: But at this point it's really.
Speaker 11: The Q four earnings period that we think is supporting
Speaker 11: a lot of the action we've seen thus far, and
Speaker 11: we think of bodes well for the fundamental outlook for
Speaker 11: the SP five hundred over the course of twenty twenty four.
Speaker 2: All the talk in your equity area is about those
Speaker 2: Magnificent seven. However, many I think six ' eight whatever
Speaker 2: they are, magnificent seven, is that likely to broaden out?
Speaker 2: And are they likely to keep marching on?
Speaker 3: Well?
Speaker 12: Okay, so the big seven are magnificent seven? Really is three?
Speaker 12: This year there's three of.
Speaker 11: Those components that have contributed half of the index gained
Speaker 11: year to date. We've been arguing that they become more
Speaker 11: idiosyncratic in their behavior.
Speaker 12: That's unfolding.
Speaker 11: Our big theme, though, has been one of broadening beyond
Speaker 11: the S and p's exposure to just those megacaps, and
Speaker 11: we are seeing evidence of that as well.
Speaker 12: So from our first.
Speaker 11: Active broadening from a fundamental earnings growth perspective is mission
Speaker 11: critical to further upside for the SMP. And what we
Speaker 11: think that does is lend itself to a broadening from
Speaker 11: a performance perspective across a broader array of sectors.
Speaker 2: So you talk about fundamentals, I interpret that as earnings
Speaker 2: and telling me about earnings. Where we are in earnings.
Speaker 2: Where we're headed earnings, I mean, you're you're actually toward
Speaker 2: the top of the Bloomberg elves and your projection for
Speaker 2: where we're going to be earnings this year.
Speaker 11: Yeah, we're pretty bullish on the earnings out look and
Speaker 11: the fundamental picture for the S and B of five
Speaker 11: hundred for sure. And what I would say about that
Speaker 11: is going into the Q four reporting period, which obviously
Speaker 11: sets up for twenty twenty four, expectations had come down
Speaker 11: and so they're being easily exceeded at this point, again
Speaker 11: something that we had expected.
Speaker 12: We had also expected that we'd see a.
Speaker 11: Downward bias to full your twenty twenty four estimates, and
Speaker 11: in fact that had been occurring. But we're now seeing
Speaker 11: some signs of stabilization. We think the path higher for
Speaker 11: equities from here begins with fundamentals, and there we were quite.
Speaker 12: Constructive on the earnings picture.
Speaker 11: We're looking for the S and P earnings growth in
Speaker 11: the twenty twenty four time frame to be in the
Speaker 11: neighborhood of ten to twelve percent.
Speaker 2: When it comes to tech, does a lot to talk
Speaker 2: about AI and its effect on productivity and where we're
Speaker 2: going there. What's your take on a on how it's
Speaker 2: going to affect equities.
Speaker 11: Well, the way we've been viewing it is that it's
Speaker 11: going to affect it in two ways. First, you're going
Speaker 11: to have that subset of companies that has a direct
Speaker 11: beneficiary you can measure either via revenues or earnings. That's
Speaker 11: a small subset of the megacap growth cohort that we've.
Speaker 12: Been discussing already.
Speaker 11: But under the surface, we're looking for AI to lead
Speaker 11: to productivity enhancements across a broader swath of companies. That's
Speaker 11: going to be much harder to get one's hands around
Speaker 11: from a granular perspective, but we expect to see it
Speaker 11: in margins and profitability.
Speaker 2: I'm not sure we call it a fundamental But what
Speaker 2: about the election? I mean I keep hearing that historically
Speaker 2: in years where incumbent presidents are running for re election,
Speaker 2: whether they get, whether they win or lose, the market, Well,
Speaker 2: do you ascribe to that view?
Speaker 3: Yeah?
Speaker 11: I think the way we're approaching this election is you
Speaker 11: can throw out historic playbooks. We don't think that a
Speaker 11: lot of the performance patterns from previous presidential elections will
Speaker 11: hold out this time. We think there is a different
Speaker 11: set of issues that need to be contented with, and
Speaker 11: each of the two candidates, in our view, has some
Speaker 11: aspects of their policy stance that are not particularly a
Speaker 11: US equity friendly, and so we're going to have to
Speaker 11: monitor the way their platforms really fall into place over
Speaker 11: the next several months.
Speaker 2: As in so many elections, risks on both sides, many
Speaker 2: thanks to Scott Kroner of City. It started with private
Speaker 2: equity engineering the leveraged buyout of our Ja and Ebisco
Speaker 2: back in the mid nineteen eighties, but it's gone far
Speaker 2: beyond leverage buyouts and far beyond private equity alone, as
Speaker 2: private credit, real estate infrastructure on a range of alternative
Speaker 2: investment vehicles have blossomed. One of those is six Street Partners,
Speaker 2: now investing some seventy five billion dollars, and we welcome
Speaker 2: its new co cio, Julian Starsbury.
Speaker 13: Welcome back to Wall Street. We're good to have you, Julian,
Speaker 13: great to be here. So tell me about the move
Speaker 13: from Goldman to Six Street Partners. Not so much about
Speaker 13: why you personally did it, but what is it represented
Speaker 13: in your mind about larger trends in Wall Street and investing.
Speaker 4: Yeah, if you go back twenty or thirty years, I
Speaker 4: would say private equity was a relatively niche area. Private
Speaker 4: credit was people didn't really talk about private credit. There
Speaker 4: was middle market lending going on at banks certainly, you know,
Speaker 4: you had hedge funds out there who may do the
Speaker 4: odd private loan here and there. Infrastructure really wasn't, you know,
Speaker 4: on the tip of everybody's tongue. And what you've seen
Speaker 4: is just this gradual trend over the last twenty or
Speaker 4: thirty years. As you saw some of the early moves
Speaker 4: into alternatives back in the eighties and nineties, the endowments
Speaker 4: and the state pension plans, they were generating tremendous returns
Speaker 4: from the asset class. This was giving rise to increased
Speaker 4: allocations towards initially private equity, but then wanting to broaden
Speaker 4: into other diversifiers, and then subsequently that brought in other capital.
Speaker 4: So you've seen like a greater interest in investing in
Speaker 4: private capital, which means the roles for banks has just changed.
Speaker 4: That there's still an incredibly important role for banks to
Speaker 4: play as a financier, as an intermediary, as an advisor
Speaker 4: around these given situations, but actually the retention of the
Speaker 4: risk capital in these deals whether it's owning the private
Speaker 4: equity transaction or owning the you know, the junior debt tranchers,
Speaker 4: owning the real estate asset is increasingly just moving into
Speaker 4: the hands of long dated private capital that typically, if
Speaker 4: structured right, has a liability set which is matched against
Speaker 4: the assets that they're invested in.
Speaker 2: We were a tendency in financial media to talk about
Speaker 2: active investing passive investing. What about active management and passive
Speaker 2: management in this sense? We had Tony James on a
Speaker 2: little while ago and you said, in private agrey, it
Speaker 2: evolves from something that was basically a financial transaction. We'd
Speaker 2: love ridge things up. We can make money, you can
Speaker 2: flip it in privately. Increasingly you have to actually manage
Speaker 2: the business, make some change the business, make it more valuable.
Speaker 2: Are you seeing that with the various vehicles you're looking
Speaker 2: at that you are more involved in the business.
Speaker 3: Absolutely.
Speaker 4: I think about there's a continuum of investments that you
Speaker 4: can make somewhat where which are relatively more passive and
Speaker 4: some that require very active involvement. And one could say,
Speaker 4: you know, building a company from scratch or or scaling
Speaker 4: up a platform control. Private equity being the most active
Speaker 4: form of active management, and there's a continuum in between.
Speaker 4: And I think what you're going to see over time
Speaker 4: is areas where you're simply an intermediary between capital from
Speaker 4: a client going into a situation where it's a relatively
Speaker 4: light touch will be harder to prove value and add value.
Speaker 2: And if you you know, and whereas you.
Speaker 4: Know, the more actively managed situations, you can really demonstrate
Speaker 4: to your clients that you're value to them, but also
Speaker 4: you're a better solution provider to the company that you're
Speaker 4: that you're investing in.
Speaker 2: Given what you said, I'm not going to ask you
Speaker 2: what categories private equity versus private credit for something make
Speaker 2: the most sense, because what you said is it depends
Speaker 2: depends on the problem. We'll use different tools for different purposes.
Speaker 2: What about sectors. One of the things that we're hearing
Speaker 2: a lot about and now, for example, is infrastructure. You've
Speaker 2: seen some big deals now in infrastructure with some other
Speaker 2: investment firms. Is that a real opportunity that you're looking
Speaker 2: at going forward?
Speaker 4: Look, I think it's pretty consensus that there's some like
Speaker 4: big long term themes that everybody's spending time on. I
Speaker 4: would say infrastructure is one of those because that kind
Speaker 4: of ties into a number of themes. Digital transformation of
Speaker 4: the economy, reorienting of the energy infrastructure across the across
Speaker 4: across the globe, decarbonization. I think that the demographic shifts
Speaker 4: and then also the deglobalization trends that we're seeing with
Speaker 4: more businesses wanting to not necessarily exit on mass from
Speaker 4: certain markets, but at least to think more about supply
Speaker 4: chain certainty and security and all of those mega trends
Speaker 4: essentially necessity infrastructure investment, and that will give rise to
Speaker 4: tremendous investment opportunities, trillions of dollars that need to be
Speaker 4: invested in infrastructure in the coming decades.
Speaker 2: Okay, thank you so much. It's really great to have you.
Speaker 10: This.
Speaker 2: That's Julian Salisbury, Six Street Partners coming up anticipating a
Speaker 2: possible Trump rally if he's reelected this fall. We'll talk
Speaker 2: with Scott Vessant of Key Square Capital Management.
Speaker 14: I would say, right now, this is a Nirvana situation
Speaker 14: for the market.
Speaker 2: That's next on Wall Street Week on Bloomberg.
Speaker 1: This is Bloomberg Wall Street Week with David Weston from
Speaker 1: Bloomberg Radio.
Speaker 10: If you look at history, election years are always up heres,
Speaker 10: this is going to be a year where the economy
Speaker 10: medals along. So as Mary said, interest rates are going
Speaker 10: to stay down, stocks are going up, so they're probably,
Speaker 10: in my view, we're going to continue for the balance
Speaker 10: of the year. If you want to worry about something,
Speaker 10: I'd start to worry about.
Speaker 2: Nineteen ninety seven, that was Harvey Eisen of Wright Investors
Speaker 2: Service on Wall Street Week with Lewis Rockeiser, anticipating what
Speaker 2: the presidential election year of nineteen ninety six could mean
Speaker 2: for investors back then. For his thoughts on the twenty
Speaker 2: twenty four election and what it could mean for Wall Street. Today,
Speaker 2: we welcome now Scott's Bessen of Key Square Management. Scott,
Speaker 2: thank you so much for being here. Great to have you.
Speaker 3: Good, thanks for having me.
Speaker 2: So you have looked into this, you have an analysis. Actually,
Speaker 2: you're not just picking things out of the air about
Speaker 2: what you think is going on right now. Let's start
Speaker 2: with a so called Trump rally. We had one last
Speaker 2: time back in twenty sixteen. You think we're in one
Speaker 2: right now.
Speaker 3: We finance people are simple.
Speaker 14: In twenty sixteen, the market crashed on election eve and
Speaker 14: then took off for three four weeks after that, had
Speaker 14: a big run. So you know, Pablovian investors are anchoring
Speaker 14: to November fifth, the twenty twenty four on what a
Speaker 14: Trump win could mean, and you know they're generally market
Speaker 14: friendly policies.
Speaker 2: Well, what are this positives are we talk about taxes
Speaker 2: and regulation mainly.
Speaker 14: Yeah, so the Trump tax cuts expire in the twenty
Speaker 14: twenty five, so presumably those would be reinstated and extended,
Speaker 14: light touch regulation, energy and dependence. And I think the
Speaker 14: market thinks under Trump two that the international situation would
Speaker 14: calm down a bit.
Speaker 2: We'll talk about international situation before you talk about geopolitics.
Speaker 2: What about trade, because we've had him come out now
Speaker 2: and say this is foreign President Trump's saying ten percent
Speaker 2: traffs across the board, and Robert Leithheiser, his advisor's written
Speaker 2: a book that says we'll start at ten percent and
Speaker 2: then just keep ratching it up until we eliminate trade deficits.
Speaker 3: Right.
Speaker 14: Well, I have a contrary view or a differentiated view
Speaker 14: on that. I actually think that they're putting the gun
Speaker 14: on the table with the notion of not having to
Speaker 14: fire it is. You know, that's how you start a negotiation.
Speaker 14: You go to the most extreme position, and the world's
Speaker 14: already falling for it. Christian Leguard came out, President of
Speaker 14: the ECB, came out last week and said, almost assuredly,
Speaker 14: if Donald Trump comes back, he will put terrorists in Europe.
Speaker 14: So without having done anything, he's in a strong negotiating position.
Speaker 2: But do we want tarifts on Europe or is that
Speaker 2: going to hurt our economy?
Speaker 3: We don't know, is so what will terriffs be.
Speaker 14: Tariffs are inflationary, they tend to strengthen the dollar, but
Speaker 14: it is that it's good for domestic industry.
Speaker 2: So you say, the market's discounting the likelihood or quite
Speaker 2: distinct possibility to down trouble come back, and we saw
Speaker 2: it worked well the last time. But also is they
Speaker 2: kind of getting a little bit of help from the
Speaker 2: current administration.
Speaker 14: Well, so my thesis that this is a Trump rally
Speaker 14: is two parts. So market anchoring on Trump is ahead
Speaker 14: in the polls victory November fifth, But Janet Yellen's also
Speaker 14: looking at that Poles, So David.
Speaker 3: Since nineteen fifty.
Speaker 14: Two, the market has never had a down year when
Speaker 14: in accumu's running, never headed down year.
Speaker 3: And why is that?
Speaker 14: Because the economic apparatus in the White House is pumping away,
Speaker 14: so providing a lot of liquidity, spending a lot of money,
Speaker 14: releasing a lot of the programs that were passed last year.
Speaker 14: Maybe they've delayed, so you know, they're trying to reach
Speaker 14: some kind of crescendo this summer, and the market likes that. So,
Speaker 14: you know, I would say right now, this is a
Speaker 14: nirvana situation for the market.
Speaker 3: Trump's ahead in the polls, Marc's.
Speaker 14: Anchoring on November fifth, and Yellen sees the same poles,
Speaker 14: and she's pumping away as hard as she can.
Speaker 2: It's got One of the things I found fascinating your
Speaker 2: note is you have a chart in there that basically
Speaker 2: tracks where the S and P. Five hundred is gaining
Speaker 2: versus where Trump is versus Biden the polls, which is
Speaker 2: pretty stunning. It tends to say the more Trump gets
Speaker 2: ahead in the polls, the better the market does, and
Speaker 2: when Biden gets the poles, it's flat or even a
Speaker 2: little bit down.
Speaker 14: Yeah, so that's correct. You know, I did put the
Speaker 14: normal disclaimers. There are not a lot of episode, not
Speaker 14: a lot of observations.
Speaker 3: You know, there's a lot of serial correlation.
Speaker 14: In there, but directionally, I think it's correct, and the magnitude,
Speaker 14: as you said, is quite big. On periods when Trump
Speaker 14: is up, we've had a cumulative gain of thirty five percent.
Speaker 14: Periods on Biden's up, it's thirty percent.
Speaker 2: Scott, it's really great to have you in Willsherter. Thank
Speaker 2: you so much. That's Scott Bessent of Key Square Management.
Speaker 2: Regional and community banks. They're important to our financial system
Speaker 2: and the United States has more of them than anyone else.
Speaker 15: I think the regional banks are very important, extremely important.
Speaker 15: You know, we have forty five hundred banks, which is
Speaker 15: a lot more than any other country per capita or
Speaker 15: per dollar of GDP.
Speaker 2: As important as they are, regional banks have come under
Speaker 2: pressure in recent days. First we had the effects of
Speaker 2: a dramatic rise in interest rates leading to the closure
Speaker 2: of Silicon Valley Bank, Signature Bank, and First Republic Bank.
Speaker 16: So breaking news late Sunday, the Treasury Department, the Federal Reserve,
Speaker 16: and the FDIC said it will wind down Silicon Valley
Speaker 16: Bank in a way that quote Tom fully protects all deposits.
Speaker 3: As we know.
Speaker 16: The one question everyone was asking themselves over the weekend,
Speaker 16: why do we bank? And do we need to open
Speaker 16: a new account.
Speaker 2: Then came the decline in commercial real estate values, which
Speaker 2: hit regional banks particularly hard.
Speaker 15: Commercial real estate is not a is not a principal
Speaker 15: risk or a major risk for the very large largest banks.
Speaker 15: It is much more for regional and really the smaller
Speaker 15: banks have proportionally much larger exposure to real estate.
Speaker 2: And now we have new capital requirements proposed by the
Speaker 2: Federal Reserve which would extend to reas not covered before
Speaker 2: and that bankers say will curtail lending.
Speaker 17: We have the examinations we have on capital. They do
Speaker 17: impact our ability to drive competition the market and help
Speaker 17: America's businesses grow expand around the world, grow domestically and
Speaker 17: on a level playing field. Is a critical issue here
Speaker 17: is that these rules go through the US banking system
Speaker 17: went from being here relative to the European banking capitalization
Speaker 17: or other countries.
Speaker 2: To hear raising questions about the price will pay for
Speaker 2: higher capital requirements.
Speaker 18: Raising capital requirements spy as much as twenty percent on
Speaker 18: an industry that all participants believe is well capitalized is
Speaker 18: a bad idea in any environment, but it becomes even
Speaker 18: more problematic with economic uncertainty ahead.
Speaker 2: And whether the benefits are worth that price.
Speaker 19: I think capital requirements need to be somewhat higher.
Speaker 2: Now.
Speaker 19: Having said that, I think it's incumbent on the banking
Speaker 19: agencies to dig into those analyzes of optimal capital levels,
Speaker 19: to trade off between financial stability and economic growth, and
Speaker 19: to explain in a way that's accessible not just to
Speaker 19: experts but to the public, why the capital increases are warranted,
Speaker 19: and to.
Speaker 2: Tell us what we think we know about what's going
Speaker 2: on with regional banks as well as those proposed new
Speaker 2: capital cords. We welcome back to Wall Street Week Shila Beert.
Speaker 2: She's the former head of the fdi C. Sheila, thank
Speaker 2: you so much for being back on Wall Street Week.
Speaker 2: Let's start with New York Community Bank. Much in the
Speaker 2: news this week. What do we think we know about
Speaker 2: what happened there and is it a one off? Do
Speaker 2: we think or does it say something more broadly about
Speaker 2: regional banks?
Speaker 5: Well, now, I think it says something about the commercial
Speaker 5: real estate markets, especially in urban areas. Office commercial real
Speaker 5: estate and urban areas is suffering a lot of it.
Speaker 5: Some of it's interest rate, some of us just their
Speaker 5: transition to remote work and hybrid work is reducing demand
Speaker 5: for office space and creating high vacancy rates stress.
Speaker 9: For the landlords.
Speaker 5: So and then if they have to refinance about it.
Speaker 5: I think you know about to have a train is
Speaker 5: refinancing this year, I mean after refinance at higher rates.
Speaker 9: So that's what's going on.
Speaker 5: It's really more about commercial real estate than New York
Speaker 5: Community Bank. They do have significant exposure, you know. Uh,
Speaker 5: it seems to me they were under reserved. They had
Speaker 5: they added a lot of a lot of to the
Speaker 5: reserves in the most recent financials, which is a concern.
Speaker 9: But hopefully they've got it covered now.
Speaker 5: You know, we change the rules a while back to
Speaker 5: require banks to reserve against expected losses on their loans
Speaker 5: based on a forward looking through the cycle, looking at
Speaker 5: all market conditions.
Speaker 15: Uh.
Speaker 5: In the FD I see put some really good guidance
Speaker 5: out about this last year, reminding banks that they're supposed
Speaker 5: to be looking at all market conditions, not just historical performance,
Speaker 5: which is pretty good. But historically you didn't have this
Speaker 5: problem with remote and hybrid work.
Speaker 9: So uh, you know, other bags may be under reserve.
Speaker 5: They'll need to get those reserves up, and that's going
Speaker 5: to cut into earnings, but hopefully that plus their capital
Speaker 5: base will be sufficient to get them through this.
Speaker 2: Give us your sense about those capital requirements on how
Speaker 2: they would affect the banks, although things I've read suggested
Speaker 2: really falls more on some of the regional banks that
Speaker 2: on the very big ones.
Speaker 5: Yeah, well, actually the bulk of the capital increases would
Speaker 5: fall on the largest banks.
Speaker 2: They already said that the largest banks already have enough reserves, right,
Speaker 2: that they already have enough capital, That's what I've read.
Speaker 5: Well, so it will increase their regulatory minimum capital requirements
Speaker 5: for the fossil three D end game. That still will
Speaker 5: primarily impact the largest banks.
Speaker 9: And I'm glad you asked this because those rules.
Speaker 5: Really the up of those rules was the Great Financial Crisis,
Speaker 5: and their primary impact is on market risk and operational risk,
Speaker 5: not so much credit risk, which is what we're getting
Speaker 5: into now with commercial real estate.
Speaker 9: So there will be impacts on the regional banks.
Speaker 5: Do lower the higher capital requirements to one hundred and
Speaker 5: billion and about from two fifty, so the assets going
Speaker 5: to have an impact, But there's a very the ficial
Speaker 5: those rules are far from being finalized and it'll be
Speaker 5: many many years before they actually come into effect. When
Speaker 5: they do, so, I think it convestors are ever reacting
Speaker 5: to the prospect of those rules. Now there is no
Speaker 5: not going to be really for better words, there's not
Speaker 5: going to be any real immediate impact.
Speaker 9: On these banks. Is a very long transition period for them,
Speaker 9: and again most of it is actually falling on the.
Speaker 5: Largest banks, especially ones with big investment training operations.
Speaker 2: And the banking industry doesn't seem to like what's been
Speaker 2: proposed so far. I think it's very safe, for sure,
Speaker 2: not a big surprise, and they push back hard, but
Speaker 2: they have from where you say, do they have a
Speaker 2: point because one of the claims is it's going beyond
Speaker 2: what BOSL three actually requires.
Speaker 5: There are many things about this proposed rules I don't
Speaker 5: agree with, and so I think they have legitimate arguments
Speaker 5: on certain aspects of the rules. Issue is around complexity,
Speaker 5: but just I mean, what they're really just saying. Their
Speaker 5: raw argument is any increase in capital is bad and
Speaker 5: it's going to hurt.
Speaker 9: Some main street et cetera.
Speaker 5: And there, you know, they raise a lot of false
Speaker 5: arguments We've heard over and over again. The common one
Speaker 5: is that it's going to hurt lending, it's going to
Speaker 5: constrain lending. First of all, these rules primarily impact trading
Speaker 5: operations and opera trading and operations, not lending. Actually in
Speaker 5: aggregate capital, pharmas go down a little bit under those
Speaker 5: proposed rules were so called credit risks. So and even
Speaker 5: if that was true, we all capitalized banks do a
Speaker 5: better job of blending through the cycle.
Speaker 9: You want them to be resilient enough.
Speaker 5: We've been talking about the situation we have now with
Speaker 5: commercial real estate. This is going to create more increased
Speaker 5: credit losses on the banking system, and large banks have
Speaker 5: some exposure here. Two Also, as you know, as monetary
Speaker 5: policy titans, again, you have market law inflated asset valuations adjust,
Speaker 5: low yielding assets lose marketa So when we get to
Speaker 5: these cycles and of monetary tightening, we talk about a
Speaker 5: hard landing. But the way you avoid a hard landing
Speaker 5: is to make sure that the banking system has enough
Speaker 5: capital to absorb the kinds of losses we're seeing right
Speaker 5: now at which time with monetary tightening.
Speaker 2: Chilla, thank you so much for being back on Wallshers
Speaker 2: are always great to have you. That's Shila Beart. She
Speaker 2: is the former chair of the FDIC. Coming up, Private
Speaker 2: Equity seeks to Breathe New Life. In the book publishing business.
Speaker 2: We talk with Pete, staffers of KKR and Simon and
Speaker 2: Schuster CEO Jonathan Carp.
Speaker 7: What's possible if we become the destination of choice for editors.
Speaker 6: It is a tracking more town. Already we've already been
Speaker 6: able to hire marquee editors.
Speaker 2: That's next on Wall Street Week on Bloomberg.
Speaker 1: This is Bloomberg Well Street Week with David Weston from
Speaker 1: Bloomberg Radio.
Speaker 2: This is Wall Street Week. I'm David western Iconic publishing
Speaker 2: house has changed hands as Simon and Schuster has been
Speaker 2: bought by KKR. And we're joined now by the two
Speaker 2: individuals who've driven this deal. They are the president of
Speaker 2: the CEO of Simon Schuster he is Jonathan Carp, and
Speaker 2: by our friend and colleague from k Pete Stavros. So. Pete, welcome,
Speaker 2: Thank you for having me. Great to have you back,
Speaker 2: and great to have you here. Jonathan.
Speaker 6: Thanks.
Speaker 2: So Pete, let me start with you. We've talked to
Speaker 2: you about KKR's theory about acquisitions at this point, explain
Speaker 2: why you picked book publishing because there's a lot of
Speaker 2: people think that that's not a great business. It's a
Speaker 2: wonderful thing, but it's not necessarily a great growth business, so.
Speaker 7: It's more stable than you might think. So book publishing,
Speaker 7: the volumes are stable, and they've survived the Internet. They've
Speaker 7: survived mobile in a way that a lot of old
Speaker 7: line media businesses have not in industries have not. If
Speaker 7: you look at their content library at Simon and Schuster
Speaker 7: company's been around one hundred years, They've published everything from
Speaker 7: The Great Gas b to Catch twenty two, it's you
Speaker 7: could not replace their content library. And now on top
Speaker 7: of that, what gets us excited is it was this
Speaker 7: unloved gem of a business inside of Paramount, so it
Speaker 7: did not get an investment, it did not get a
Speaker 7: lot of attention, and so we looked at it and
Speaker 7: we said, well, could they do more with audiobooks? What
Speaker 7: type of operational improvements could there be? You know, Jonathan
Speaker 7: and I have talked about this. Forecasting demand for a
Speaker 7: new book is really hard. How many copies of that
Speaker 7: book are going to be sold is very difficult to predict.
Speaker 7: We think there's ways to do bring a little more
Speaker 7: science to that, and also to shrink our supply chain
Speaker 7: and be more responsive so we're not producing excess books
Speaker 7: that end up getting thrown out employee engagement. There's sixteen
Speaker 7: hundred and fifty employees at the company, fewer than five
Speaker 7: percent head ownership in the company, which is something we're
Speaker 7: going to bring to the table around employee engagement and ownership.
Speaker 7: You know, what's possible if we become the destination of
Speaker 7: choice for editors, you know, who are effectively talent agents
Speaker 7: for authors. So then we're going to be the destination
Speaker 7: of choice for authors. And what this could all unleash
Speaker 7: in now being the only standalone book publishing company out there,
Speaker 7: This could be a big deal.
Speaker 2: So, Jonathan, what about from your side, from Simon and
Speaker 2: Schuster side of it, what does KKR potentially bring to
Speaker 2: the tables? K said, they don't want to start picking
Speaker 2: the books, they don't want to do your job.
Speaker 6: Well, I mean, first of all, the idea of giving
Speaker 6: all of the employees a piece of the action, This
Speaker 6: idea of broad based ownership has really energized a company,
Speaker 6: and I think it's got all of us rowing together,
Speaker 6: and I think it was it was a jolt of
Speaker 6: excitement that went through the company when this was announced.
Speaker 2: And you know, I really.
Speaker 6: Credit Pee with with you know, being an advocate and
Speaker 6: an evangelist, for this idea because it is attracting more talent. Already,
Speaker 6: We've already been able to hire some marquee editors, and
Speaker 6: as Pete said, I mean those editors are going to
Speaker 6: attract the authors.
Speaker 2: Well, explain that part of the business exactly. I mean
Speaker 2: they want to work harder because they have a piece
Speaker 2: of the action. Now, if you get those market editors,
Speaker 2: does that bring in authors that will give you hits?
Speaker 2: Because my understanding is it is still a hit driven business.
Speaker 6: Well, it is a hit driven business on the front list,
Speaker 6: but now about half of our sales are coming from
Speaker 6: backlist books that have been out for more than a year,
Speaker 6: and so you want the best editors to attract the
Speaker 6: books that are going to last, and the books that
Speaker 6: are lasting are easier and easier to sell because of
Speaker 6: digital marketing. So it's actually a much better business than
Speaker 6: it's ever been because we can instantly sell books through
Speaker 6: ebooks or through audio. The other part of the business
Speaker 6: that's really really exciting right now is audiobooks because Spotify's
Speaker 6: gotten into the business. Of course, Audible and Apple are
Speaker 6: already there, but with Spotify getting into the market, our
Speaker 6: books are reaching an entirely different audience, and when you
Speaker 6: think about it, only about half of the people in
Speaker 6: the country will buy a book in a year. But
Speaker 6: the people who are listening to Spotify, they may be
Speaker 6: music listeners and they may just be people who aren't
Speaker 6: really into the habit of reading. Last year, when we
Speaker 6: published the Britney Spears Memoir, we set records on Spotify
Speaker 6: and we've sold over a million audio books of Britney Spears.
Speaker 6: So that's a very exciting development for the business.
Speaker 2: So you talked about the catalog before, and I was
Speaker 2: wondering ways to exploit the pathology. It sounds like part
Speaker 2: of it is new outlets, essentially new forms of media.
Speaker 2: What are the margins on that though? When you go
Speaker 2: to a Spotify so you can't make as much money
Speaker 2: off of that as you do off a book. I
Speaker 2: assume I don't think we want to talk about that.
Speaker 6: Yeah, I'm not going to talk about the margins, but
Speaker 6: I mean, but the distribution is frictionless, so there are
Speaker 6: no returns with audio books and there are no returns
Speaker 6: with ebooks. So it's a better way of getting books
Speaker 6: out there to the public. And it's also instant. You're
Speaker 6: always going to be able to find it if you're
Speaker 6: searching for a digitally, that's certainly not as true when
Speaker 6: you go to your local bookstore.
Speaker 2: That's fascinating AI. We've talked about AI before. How does
Speaker 2: that help you with publishing?
Speaker 7: Well, it could be a tool to make authors and
Speaker 7: editors more productive. I mean, just to be clear, what's
Speaker 7: not going to happen is we're not going to go
Speaker 7: start writing books with AI. That's something we talked about
Speaker 7: on the front end. It could be a productivity tool.
Speaker 7: There's so much that's unknown, so we don't know exactly
Speaker 7: how it might help us be more productive in the future,
Speaker 7: but it's something we're thinking about in study.
Speaker 2: It strikes me this is the first time, I think
Speaker 2: since nineteen seventy five Simon Tusher was not owned by
Speaker 2: a conglomerate, I mean, going all the way back to
Speaker 2: Gulf and Western I believe. How does that change your orientation, Jonathan,
Speaker 2: now that you have somebody who's really focused on book
Speaker 2: publishing rather than focusing on a lawful lot of other businesses.
Speaker 6: Well, it is true that KKR is going to allow
Speaker 6: us to invest more in our own business. So there
Speaker 6: are there are several engines that drive our growth one
Speaker 6: of them obviously PU the adult the adult books, but
Speaker 6: also children's books, audio, UH international, and distribution. We actually
Speaker 6: distribute books from many other smaller publishers. So those are
Speaker 6: our five engines of growth. And KKR is going to
Speaker 6: allow us to invest more in our international distribution and
Speaker 6: more in attracting other clients to distribute.
Speaker 2: Is there more transparency now for people at shows about
Speaker 2: how they're business works, about what they're contributing to it,
Speaker 2: and whether you're succeeding or not succeeding.
Speaker 6: Absolutely. We are having quarterly shareholder meetings now. And I
Speaker 6: have to say, before KKR bought us, I was called
Speaker 6: into a meeting with to the principles at R, Richard
Speaker 6: Sarnoff and Ted Oberwager, And before they bought us, they
Speaker 6: wanted to make sure that I was on board with
Speaker 6: the idea of broad based ownership, and they set up
Speaker 6: a whole special meeting just to talk to me about this,
Speaker 6: and I was actually quite surprised. I was incredulous actually
Speaker 6: that they would think that any CEO would be opposed
Speaker 6: to such a thing. But they said that it is
Speaker 6: a lot of work and you have to really communicate
Speaker 6: with the employees and explain all this to them, and
Speaker 6: it actually has been a fair amount of work, but
Speaker 6: worth it every step of the way. And I really
Speaker 6: do think that it has really changed changed the tone
Speaker 6: at this company.
Speaker 7: The pushback we sometimes get from executive Certainly we didn't
Speaker 7: get this from Jonathan, but sometimes people just say, I'm
Speaker 7: so overwhelmed with priorities. You know, I already heard you
Speaker 7: want us to double our earnings. You want our financials
Speaker 7: by the fifteenth of the month. We want us to
Speaker 7: decarbonize ad diversity, and on and on and on, and
Speaker 7: now you want me to teach financial literacy, drive employee engagement,
Speaker 7: make everyone an owner.
Speaker 2: I just can't do it all.
Speaker 7: And the unlock, and Jonathan got there way earlier than
Speaker 7: many others. The unlock is if you do those last
Speaker 7: few things well, then everything else that came before it
Speaker 7: is a lot easier. If you've got a more stable
Speaker 7: workforce that's more engaged on the job, has a stake
Speaker 7: in the outcome, all the other operational initiations are going
Speaker 7: to be easier to accomplish.
Speaker 2: Do you have a time horizon in your head at
Speaker 2: KKR about how long you're likely to hold us. We're
Speaker 2: not in a hurry.
Speaker 7: So I would say KKR is distinguished in taking our time.
Speaker 7: We've owned businesses for twenty years before it takes as
Speaker 7: long as it takes. Our base case would be this is,
Speaker 7: you know, five, six seven years. We've got a bunch
Speaker 7: of things we want to accomplish. Maybe it becomes a
Speaker 7: great public company someday we'll see, but we're not in
Speaker 7: a hurry.
Speaker 2: So fut six seven years, maybe longer over that course.
Speaker 2: I mean, there are things you'll do behind the scenes, Jonathan,
Speaker 2: to improve things. What about in terms of the books
Speaker 2: you publish. What are the categories that you're looking at
Speaker 2: right now that you think are growth categories in terms
Speaker 2: of attractiveness of books.
Speaker 6: Well, we're getting into the Latino market more. Obviously, almost
Speaker 6: twenty percent of the American public is from the Latin
Speaker 6: American background, and that audience hasn't really been reached very
Speaker 6: well by book publishers, So that's a big one. We're
Speaker 6: getting more into science fiction and fantasy. We hadn't really
Speaker 6: been publishing very many books in that category for some reason.
Speaker 6: We want to be publishing more business books on an
Speaker 6: international level. I mean, there are so many categories that
Speaker 6: we're not in right now.
Speaker 2: Okay, thank you so much, Jonathan Kark of Simon Schuster
Speaker 2: and pet Saboroughs of KKR. Finally, one more thought. Former
Speaker 2: World Bank President Paul wolf Woods once said about firing employees,
Speaker 2: that's unfortunately part of doing business. And there's a lot
Speaker 2: lot of that sort of business being done these days.
Speaker 2: Just ask the three thousand people being laid off at Esday.
Speaker 20: Lauder cutting as much as three thousand positions we talk about.
Speaker 20: We continue to see job cuts. This is part of
Speaker 20: a restructuring plan to put one of the world's largest
Speaker 20: beauty companies back on track. Many investors, as we know,
Speaker 20: would have said this was long in coming.
Speaker 2: Or the thirty two thousand tech employees let go already
Speaker 2: this year, including ten percent of those working at a Snap.
Speaker 9: Snap saying, these cuts are being made to quote.
Speaker 20: Best position our business to execute on our highest priorities.
Speaker 20: It's been facing that deceleration and ad revenue, as have
Speaker 20: many of its tech peers.
Speaker 2: Or the twelve thousand people in management at ups who
Speaker 2: are about to be shown the.
Speaker 21: Door, and what they're really doing is looking at the
Speaker 21: structure of their networks, you know, whether that is their
Speaker 21: labor network, and then their management ranks. They're looking at
Speaker 21: their brokerage business. They've decided to put that under a
Speaker 21: strategic review. What it is showing us is that they're
Speaker 21: taking a hard look at their costs. And you know
Speaker 21: we would they have to say, Ups and some other
Speaker 21: large transportation companies have gotten fat over the years.
Speaker 2: Not even those in the relatively new departments devoted to diversity, equity,
Speaker 2: and inclusion are immune. As we heard this week that
Speaker 2: Zoom is shuttering the entire operation and outsourcing it. As
Speaker 2: Paul Wolfowitz suggests, there's nothing new in layoffs. They came
Speaker 2: to my hometown of Flint, Michigan in the nineteen eighties,
Speaker 2: and before they were done, the auto plants where my
Speaker 2: father and grandfather had worked were gone.
Speaker 22: Flint, Michigan, USA built cars for General Motors, the world's
Speaker 22: largest corporation, until Roger Smith, the chairman of General Motors,
Speaker 22: shut down the assembly lines.
Speaker 9: We do not have any plan to cut our workforce.
Speaker 2: Closed eleven automobile plants.
Speaker 5: This is not a plant closing as a loss of
Speaker 5: one product.
Speaker 22: And laid off thirty thousand workers.
Speaker 9: He has as much concern about these people.
Speaker 2: As you do. Anyone who knows business understands that sometimes
Speaker 2: what they call creative destruction is necessary for broader produit
Speaker 2: progress in the economy, in business, and even in the workforce.
Speaker 23: You have some jobs that are lost and other jobs
Speaker 23: that are gained. We had four hundred and fifty thousand
Speaker 23: telephone operators in this country in the nineteen fifties. You
Speaker 23: tell me the last time you talked to a telephone operator,
Speaker 23: we had close to two million people. I assume most
Speaker 23: of them women classified as typists.
Speaker 2: That's not even a.
Speaker 23: Job category anymore in the BLS. And alternately, we've developed
Speaker 23: millions of jobs in technology industries and finance and other
Speaker 23: sectors that have actually been helped by the development of technology.
Speaker 2: And despite all the layoffs, the US unemployment level remains
Speaker 2: in an historically low three point seven percent. But however
Speaker 2: necessary and even beneficial these so called restructurings may be,
Speaker 2: we should never lose sight of what they mean for
Speaker 2: those whose lives are being upended.
Speaker 12: And came here to let you go, pardon, I came
Speaker 12: here to fire you, Jerry.
Speaker 2: That does it. For this episode of Wall Street Week,
Speaker 2: I'm David Weston. This is Blueberg. See you next week.