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Speaker 1: Welkner Trallins, I'm Joel Weber and I'm Eric Beltunas. So, Eric,

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Speaker 1: there's been this big shake up in banking, specifically in

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Speaker 1: Europe where ubs and credit squeeze have become one. That's

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Speaker 1: been a huge story at Bloomberg. Lots of ins and outs,

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Speaker 1: and here we are in the aftermath. Yeah. Absolutely, I

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Speaker 1: mean this is our second straight banking episode. That's a

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Speaker 1: big of a deal. It is. In TV they call

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Speaker 1: it staying in the news. So we're staying in the news.

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Speaker 1: We're gonna look at some of the etf angles and

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Speaker 1: also just how this changes the whole asset management industry landscape,

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Speaker 1: and it's going to have a couple of different sort

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Speaker 1: of ripple effects that we should look at that will

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Speaker 1: impact the industry and investors. And so joining us Alison Williams,

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Speaker 1: who's a senior analyst at Bloomberg Intelligence where she covers

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Speaker 1: global investment banks and asset managers, as well as Athanasio

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Speaker 1: Sarah Fagus who's an ETF anily with lumber Intelligence, this

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Speaker 1: time on trains Takeaways from a European banking saga. Alison Athanasios,

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Speaker 1: thanks for joining us on trillions. Yeah, Glad, to be

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Speaker 1: back on. Thanks for having us, Alison. Credit Sweets has

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Speaker 1: been troubled for years. It finally has collapsed into this

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Speaker 1: forced marriage with UBS, creating this megabank, this new megabank.

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Speaker 1: We've also not seen a globally systemic bank fail. Credit

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Speaker 1: Sweez is the first since the financial crisis. So, as

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Speaker 1: a close watcher of this space, just what's the greater

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Speaker 1: meaning here? Well, I think I guess we can. We

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Speaker 1: can talk about a couple of things, So you're perhaps

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Speaker 1: alluding to the regular Tory landscape. I think it's difficult

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Speaker 1: because this is a situation where market sentiment almost drives

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Speaker 1: reality creates reality. And so the bank, which had raised

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Speaker 1: capital looked very well capitalized, had a lot of liquidity

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Speaker 1: at the end of the quarter, although that had been

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Speaker 1: slipping away with some of the outflows. And just the

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Speaker 1: fact that liquidity is something that can change quickly and

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Speaker 1: can be impacted by sentiment, and that's a fundamental tenant

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Speaker 1: of the business. So it's difficult to say how regulators

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Speaker 1: can change that except to be vigilant. How much of

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Speaker 1: this and just all you know, all the banks is

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Speaker 1: just a byproduct of the central banks of the world,

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Speaker 1: namely the FED shifting course to fight inflation and raising

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Speaker 1: interest rates. It seems like there's just been a lot

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Speaker 1: of things caught on the wrong side of that shift.

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Speaker 1: Did Credit Suite not prepare for that properly? Was that

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Speaker 1: a factor in this? The issue with the quantitative easing

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Speaker 1: was there was so much stimulus coming in. It really

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Speaker 1: heightened all the deposit bases. There were no loans to

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Speaker 1: invest in, so these loans were invested in securities. But

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Speaker 1: it really heightened the need to manage your balance sheet.

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Speaker 1: And because as banks are getting all these access deposits,

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Speaker 1: they have to estimate how much of that is sort

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Speaker 1: of permanent, if you will, how much is more hot

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Speaker 1: money that will flow out once there are other opportunities.

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Speaker 1: And so I think that QE really sowed the seeds,

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Speaker 1: if you will, of you know, placing the banks in

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Speaker 1: that situation that when rates row so rapidly, those who

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Speaker 1: were really focused on managing risk and more conservative were

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Speaker 1: in a better spot than those who did not. And

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Speaker 1: so the parallel I suppose I would draw with credit suites,

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Speaker 1: which is a little bit of a different situation, but

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Speaker 1: it does come down to managing risk when there is

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Speaker 1: a lot of ebulence in the markets, if you will.

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Speaker 1: So if we look at twenty twenty and the trading

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Speaker 1: that went on on the significant amount of revenue that

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Speaker 1: was generated across these global banks, and some banks looking

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Speaker 1: to make sure that they keep their risk management in place,

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Speaker 1: whereas others potentially might be wanting to expand that net

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Speaker 1: to make more revenue, and then the cost comes back

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Speaker 1: to bite them. And so I would say in both cases,

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Speaker 1: the key Israeli risk management. Risk management has to increase

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Speaker 1: and be even more stringent in a period where we're

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Speaker 1: facing unprecedented times, So unprecedented action with que to the

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Speaker 1: extent that we got that qe QT is something we've

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Speaker 1: never experienced. And so I think that when people invest

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Speaker 1: in banks, you look at bank managers. It's similar to

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Speaker 1: a portfolio manager. You have to manage your risks across

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Speaker 1: a variety of environment. So one interesting thing that UM

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Speaker 1: this revealed about Credit Swiss Athanasios is that they were

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Speaker 1: a big name in exchange traded notes, which is different

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Speaker 1: than an exchange traded fund and lacks a lot of

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Speaker 1: the oversight that ETFs get. So what does this mean

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Speaker 1: for et ns and specifically the ones that Credit Swiss

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Speaker 1: there's always an ETF ETN angle. I guess in this

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Speaker 1: case ETNS. Yeah, so they have this dubious pass of these.

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Speaker 1: Now I'm not saying these products are bad, but they

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Speaker 1: are used in cases speaking of risk. They want to

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Speaker 1: give you exposure to areas that may be hard to

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Speaker 1: do in an ETF. So they want to use leverage,

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Speaker 1: or they want to give you exposure to some frontier market.

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Speaker 1: So if you remember that XIV product, which was the

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Speaker 1: inverse val Valmageddon, that was a credit Swiss product. Um,

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Speaker 1: you know they had t VX, which is a levered

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Speaker 1: volatility one. That's a credit by the way. So he

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Speaker 1: so you know there's there's an audience for it, right,

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Speaker 1: people that like Eric leverage. Eric's dad he probably just

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Speaker 1: quick backstory, my my dad. My dad asked me what

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Speaker 1: ETF will go up the most if the market crashes,

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Speaker 1: because he thought Hillary Clinton would win the twenty sixteen

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Speaker 1: election and the stock market would sell off. And I said, well,

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Speaker 1: t VIX. But you cannot hold it, No, you can.

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Speaker 1: And not only did Hillary not win, the market didn't crash,

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Speaker 1: it went up, and he held it. Everything that everything

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Speaker 1: went wrong went wrong with him anyway, by the way,

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Speaker 1: this is the whole episode. We interviewed our Dads. It

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Speaker 1: was called Our Two Dads. We interviewed Eric's dad, who

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Speaker 1: tends to like risk and my dad less risky. But

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Speaker 1: the real key factor with these is not even the exposure.

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Speaker 1: It's that it's essentially a note right back by the bank,

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Speaker 1: and so if the bank something happens. That's one of

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Speaker 1: those things that you don't really think about, Like, you know,

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Speaker 1: it's like, oh, well, what it's twenty twenty three, wins

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Speaker 1: a bank and go under. These notes are probably pretty safe,

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Speaker 1: but this was a reminder that, you know what, this

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Speaker 1: is a risk that you need to be aware of. Now,

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Speaker 1: considering that UBS also has etns there, it's probably the

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Speaker 1: best partner. Like if this business is going to live on,

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Speaker 1: because they also offer them here too, I would suspect either,

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Speaker 1: you know, they're going to change the name. You know,

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Speaker 1: it's pretty unprecedented, So I don't know if maybe they

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Speaker 1: want to close on the smaller ones or if they're

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Speaker 1: gonna redeem them and just keep the UBS business. Eric

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Speaker 1: and I were actually talking about this. I think at

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Speaker 1: first glance, I said etns are done, Like I just

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Speaker 1: think people are over them. When we studied in the

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Speaker 1: past what happened two thousand and eight COVID. People love leverage,

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Speaker 1: they love juice, and these things have endured on even

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Speaker 1: despite some of the you know, some of the hiccups.

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Speaker 1: So maybe not the credits ones as much, but I

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Speaker 1: think etns are still going to be okay after a

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Speaker 1: lot of this. Yeah, etns, I feel have just found

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Speaker 1: a way to survive, like a cockroach or something, because

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Speaker 1: they were first used to go places that ETFs couldn't,

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Speaker 1: like India. Then when you know that was you can

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Speaker 1: get to India now easily with the stock market, so ETFs.

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Speaker 1: So if you have a choice ETF or ETN, all

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Speaker 1: else equal, people pick the ETF. The ETN at first

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Speaker 1: offer that. Then they offered a tax treatment that was

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Speaker 1: a little more favorable for things that held futures or MLPs.

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Speaker 1: So that's why you see some of the commodity and

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Speaker 1: vics etns popular. Now it's leverage because a lot of

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Speaker 1: etns have come out that offer three x leverage and

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Speaker 1: you can't do that in ETF anymore. So etns have

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Speaker 1: been creative. I think they should try a bitcoin ETN.

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Speaker 1: I mean it seems like if the SEC's okay with

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Speaker 1: leverage happening at three x and the ETN maybe they'd

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Speaker 1: be okay with a bitcoin. That's just a little sidebar.

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Speaker 1: But I do like you, I think, and in Europe

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Speaker 1: they've always been pretty big. So I think they're ten billion.

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Speaker 1: That's not big. But it's if they've overcome expectations, I think,

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Speaker 1: and they keep hanging around and finding new ways to live,

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Speaker 1: for sure, Alison. I want to go back to you

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Speaker 1: on a question we talk about. This is a big merger.

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Speaker 1: I was looking at the sort of leaderboard of asset

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Speaker 1: managers and I think, you know, we all look at

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Speaker 1: Blackrock is number one, Vanguard number two, but with this

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Speaker 1: this merger puts them at number three? Or am I

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Speaker 1: wrong there? Like? How big is this new company going

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Speaker 1: to be? Well, it depends on I guess if you're

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Speaker 1: looking at the wealth or asset or the combined businesses.

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Speaker 1: I think if you if you're focusing solely on wealth,

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Speaker 1: it will be second behind Morgan Stanley and so within

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Speaker 1: that business, ahead of banks such as Bank America or

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Speaker 1: Wells Fargo. If you're looking at just the pure asset

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Speaker 1: management business, it moves them closer to a top ten

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Speaker 1: perhaps number eleven from being a top twenty. Athanasius I

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Speaker 1: wanted to bring up something that like just lit fire,

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Speaker 1: especially online infilt like, which was these additional tier one

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Speaker 1: bonds that can got wrapped up in this quickly? What

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Speaker 1: are they and where does this net out for investors?

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Speaker 1: Because it turns out that they were wrapped up in

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Speaker 1: a lot of exchange traded funds. Yeah, so it wasn't

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Speaker 1: just the DTF impact, wasn't just their ETN ETF business

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Speaker 1: in Europe, but also where are their credits responds in

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Speaker 1: ETFs um and so this was particularly a European issue.

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Speaker 1: You know these so these AT one bonds or Coco

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Speaker 1: bonds for sure. So it really worked is why would

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Speaker 1: you buy it in the first place. So they tend

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Speaker 1: to pay a higher a little bit of a higher yield.

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Speaker 1: They're convertible, so you get some stock participation that the the

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Speaker 1: stock goes up, but the tradeoff is it could be

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Speaker 1: completely wiped out right in an extreme case like we saw.

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Speaker 1: So this AT one was the ticker. It's an invest

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Speaker 1: go ETF. It's probably the biggest one in Europe and

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Speaker 1: it's pretty decent sized, like a billion in assets. It

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Speaker 1: was down like eighteen percent when this news came out

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Speaker 1: on you know, on Monday. I guess the good news

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Speaker 1: and this is that it was really only in that

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Speaker 1: one product that was one that was hit by far

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Speaker 1: the most um But what I found really interesting is

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Speaker 1: if you started looking at how it was trading a

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Speaker 1: couple of days for it was trading at a pretty

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Speaker 1: big discount even before the news came out over the weekend,

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Speaker 1: So someone with sniffing something out with it. But it's

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Speaker 1: pretty concentrated just to that product. Widentry has won as well,

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Speaker 1: but that one's pretty small. But then there's credits with

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Speaker 1: stock that's splattered all over all these different ETFs you know,

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Speaker 1: ESG funds, factor funds, etc. But that was probably by

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Speaker 1: far the most extreme case of credits bringing down the

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Speaker 1: price of an ETF. Another takeaway for me on all

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Speaker 1: this was something that I was enlightened by and now

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Speaker 1: it makes sense, especially in the banks in the US

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Speaker 1: SVB in particular, and I'll throw this to Alison, you know,

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Speaker 1: it seems to me that like there's un potential other

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Speaker 1: issue with banks in general if they aren't going to

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Speaker 1: give enough money for the people who have put their

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Speaker 1: money with the bank. Like, how much are people getting

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Speaker 1: on deposits, because now you can get four or five

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Speaker 1: percent on a short term treasury ETF and that is

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Speaker 1: pretty juicy or a money market fund, right and the banks,

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Speaker 1: you know, I've looked at some of the rates, they're

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Speaker 1: very low. Are banks going to have to increase their

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Speaker 1: rates on deposits or are they just going to have

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Speaker 1: a lot of people who don't even notice, don't care, Like,

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Speaker 1: is that a risk? Yeah, so's it's a little of both.

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Speaker 1: And by the way, this was something expected for twenty

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Speaker 1: twenty three, and we had already started to see deposit

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Speaker 1: outflows to higher yielding products, right, so money out from

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Speaker 1: core deposits going into CDs and money market funds. And

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Speaker 1: I think that this over the last couple of weeks

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Speaker 1: may have just accelerated that at for some customers. I

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Speaker 1: would also say that the banks strategies. There were definitely

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Speaker 1: banks who had said again since they didn't they don't

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Speaker 1: have loans to put these a lot of these deposits

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Speaker 1: in to let some of them run off. But just

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Speaker 1: given sort of the more dear deposits are at the moment,

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Speaker 1: could that change and could banks start to pay up

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Speaker 1: a little bit at the at the end of the day,

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Speaker 1: we had expected interest margin pressure on banks. So keeping

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Speaker 1: in mind that banks yields, so that's that's their sort

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Speaker 1: of their revenue yield has benefited from the higher rates,

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Speaker 1: and we had expected the cost side of things, which

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Speaker 1: is what they pay for deposits and or other funding,

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Speaker 1: to begin to be more of a headwind for the

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Speaker 1: banks this year because generally as rates go up, the

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Speaker 1: first leg of the increase tends to benefit the banks

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Speaker 1: when you're in a very low interest rate environment such

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Speaker 1: as we're emerging from. But then eventually banks have to

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Speaker 1: increase those costs, and so we had expect this to

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Speaker 1: be coming. We think it's going to accelerate, and the

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Speaker 1: bottom line is it does put a damper on the

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Speaker 1: bank's net interest margin. And the other factor I think

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Speaker 1: that's coming into play is now that we're seeing the

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Speaker 1: need and value of this excess liquidity, especially in a

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Speaker 1: very uncertain environment that while also further way on the

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Speaker 1: banks net interest margins. Yeah, it's interesting and Ethanolsa has

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Speaker 1: been tracking this very well. That cash like ETFs, which

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Speaker 1: again yield four or five percent their assets, have just

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Speaker 1: gone up double to over one hundred billion, and I

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Speaker 1: never thought about them competing with the banks, but that's

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Speaker 1: sort of what's happening, right, yeah, you know, and they

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Speaker 1: make it so easy. And the other thing to remember

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Speaker 1: is you can sell the ETF right away, right So,

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Speaker 1: I mean, you could wait an extra day and get

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Speaker 1: it out of money market fun but it's so easy.

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Speaker 1: Right into the ETF getting attractive yields, you can sell

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Speaker 1: it really quickly, right in your broker account. So yeah,

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Speaker 1: we never really thought about that until we started seeing

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Speaker 1: it popping up the now, competing with deposits. And when

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Speaker 1: I was researching Vogel for the Bogel book, I wrote

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Speaker 1: there was an interesting part in one of his books

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Speaker 1: about early in vanguards days, they were offering money market

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Speaker 1: funds for low fees, and he basically said the banks

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Speaker 1: started to notice and got scared, and then they started

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Speaker 1: offering their money market funds. So this whole idea of

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Speaker 1: money market funds and ETFs competing with banks is not new,

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Speaker 1: but with ETFs in particular, how easy and liquid and

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Speaker 1: available they are. I think this is going to be

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Speaker 1: a really interesting thing to watch. And Allison, you know

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Speaker 1: something you and I have talked about and This is

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Speaker 1: a perfect time to ask you about this, is this

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Speaker 1: wave of consolidation. I had talked about the Vanguard effect

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Speaker 1: for years with you, but the thing that offset it

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Speaker 1: was you always had the market going up offsetting the

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Speaker 1: outflows to cheaper passive products. Now the market isn't complying,

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Speaker 1: and like last year, active mutual funds saw five trillion

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Speaker 1: dollars decrease in assets, most of that just because the

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Speaker 1: market went down. Do you see more of this? Be

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Speaker 1: it maybe banks and you know, having problems with people

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Speaker 1: leaving for money market funds or other reasons, or maybe

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Speaker 1: they were overextended in this market. Then you throw in

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Speaker 1: the passive effect and a market that won't help them

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Speaker 1: off set those outflows. Could we see just sort of

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Speaker 1: an avalanche of consolidation if the market stays flat or

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Speaker 1: down over the next two or three years. So I think, Eric,

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Speaker 1: the question is is this a choppy market period or

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Speaker 1: are we going into sustained downturn because I think managers

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Speaker 1: are not going to make or not going to want

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Speaker 1: to make decisions about their long term future because of

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Speaker 1: a tough temporary period in the markets. But to the

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Speaker 1: extent that managers do change their mind and feel that

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Speaker 1: they are entering into a new period, a new paradigm

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Speaker 1: where you're not going to see the market boost that

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Speaker 1: we saw over the last decade or so that really

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Speaker 1: helped the earning their revenue and the earnings of their managers.

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Speaker 1: If managers believe that the longer term future is worse

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Speaker 1: than the past than I think that's what will require

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Speaker 1: them to reevaluate their options. Yeah. I mean we've seen

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Speaker 1: like even Active is going back to a degree in

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Speaker 1: the etf rapper, but it's got to be below forty

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Speaker 1: basis points, like it's not just active to pass. If

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Speaker 1: it's really what I call the great cost migration, I

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Speaker 1: just think it's been hidden up or covered up by

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Speaker 1: the bull market. And as if the market doesn't help

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Speaker 1: these companies out, I think a lot of them will

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Speaker 1: try to join forces, get scale so they can lower

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Speaker 1: fees and ultimately compete against the big two black Rock

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Speaker 1: and Vanguard, And that includes banks. Although banks are lucky

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Speaker 1: they have alternative business lines. And as you said, I

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Speaker 1: also think alternatives are a good place because Vanguard black Rock,

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Speaker 1: I mean a Vanguard particular, doesn't really do a lot there.

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Speaker 1: So I think there'll be they'll have to get clever.

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Speaker 1: They'll have to get cheaper in some places and then

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Speaker 1: go places Vanguard doesn't or where there's it isn't commoditized

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Speaker 1: as much. And I think that's will again will result

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Speaker 1: in more of this consolidation. And of course this is

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Speaker 1: going to be an interesting place to watch to see

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Speaker 1: how UBS just the wealth business, asset management investment bank

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Speaker 1: hanging more. And of course now we know that there's

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Speaker 1: going to be a new CEO, which is a bit

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Speaker 1: of a back to the future move because he was

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Speaker 1: previously the CEO of UBS, Sergio or Mati Alison Athanasias.

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Speaker 1: Thanks so much for joining us on Trains. Thanks for

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Speaker 1: having me on, Thanks for having me Thanks for listening

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Speaker 1: to Trillions until next time. You can find us on

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Speaker 1: the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify, and

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Speaker 1: wherever else you like to listen. We'd love to hear

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Speaker 1: from you. We're on Twitter. I'm at Joel Weppers Show,

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Speaker 1: He's at Eric Balcina's. This episode of Trillions was produced

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Speaker 1: by Magnus Hindrances, but