Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: This week on the podcast, Chris Whalen, chairman of Whalen
Speaker 1: Global Advisors, and an old fishing buddy and friends. Chris
Speaker 1: knows more about the details and back offices of banking
Speaker 1: and mortgages and credit than just about anybody I know
Speaker 1: who's not currently running the Federal Reserve. He has a
Speaker 1: fascinating background and family history. UH. It was through Chris
Speaker 1: that I got to meet Paul Boker. It was through
Speaker 1: Chris that I really learned a lot about how the
Speaker 1: Federal Reserve works, how the mortgage market works, how the
Speaker 1: securitization market works decades ago. In fact, when I was
Speaker 1: researching Bailout Nation, a lot of his work found its
Speaker 1: way into some of the end notes in that book.
Speaker 1: He is really a health of knowledge when it comes
Speaker 1: to UH this area of finance. And if you are
Speaker 1: remotely interested in securitized products, mortgages, banking, UH and banking analysis,
Speaker 1: you're going to really enjoy this conversation. So, with no
Speaker 1: further ado, my conversation with Christopher Whalen, this is Masters
Speaker 1: in Business with Barry Ridholts on Bloomberg Radio. It is
Speaker 1: still a shelter and home addition, and for this week
Speaker 1: I brought a very special guest, Christopher Whalen. He is
Speaker 1: the chairman of will and Global Advisors and has a
Speaker 1: long and deep background in the financial sector, working at
Speaker 1: such firms as Bear Stearns and as a researcher for
Speaker 1: the Federal Reserve. Chris Whalen, Welcome to Bloomberg. Hey, Barry,
Speaker 1: but a pleasure. So let's start out with a little
Speaker 1: bit of your background. I know you as a bank
Speaker 1: analyst and uh an a specialist, but let's go back
Speaker 1: to when you were at Bear Stearns. What were you
Speaker 1: doing at Bear and how is that related to your
Speaker 1: work at the Federal Reserve. Well, I grew up in Washington.
Speaker 1: My parents, Joan and Richard Whalen, were some of the
Speaker 1: most interesting Republicans operating in the town, and it was
Speaker 1: a Democratic town in those days. Bearing the Democrats still
Speaker 1: ran everything. Um. But that's how I got to know
Speaker 1: FED chairman, people like Paul Vulker, Arthur Burns, Alan Greenspan.
Speaker 1: They all came to Mom's parties. In fact, if you
Speaker 1: didn't get an invitation to Jones Christmas party, there was
Speaker 1: something seriously wrong with you. So I grew up in
Speaker 1: this very political household, went to college, went to Villanova,
Speaker 1: and then when I got out, I worked for Jack
Speaker 1: Kemp for a couple of years on Capitol Hill, really
Speaker 1: learned the right. Two brilliant editors used to just pound
Speaker 1: us because we had to report on different committees. And
Speaker 1: I eventually ended up moving to New York and I
Speaker 1: was a man Aagemont trainee at the at the Fete
Speaker 1: of New York. I worked in bank supervision first for
Speaker 1: Jerry Minnahan and Bill Rutledge, and then I went across
Speaker 1: the street and worked in foreign exchange for Gretchen Green
Speaker 1: and Terry CHECKI one of the great uh FED officers
Speaker 1: of his age. He was responsible for foreign so all
Speaker 1: the other central banks would talk to Terry uh In fact,
Speaker 1: he was probably the only person in the building they
Speaker 1: would talk to. So that's kind of where I got
Speaker 1: my start. And then I went to Bear in London
Speaker 1: fixed income trading and sales, worked with David Setchem and
Speaker 1: Joey Calvo and a whole bunch of great people who
Speaker 1: are now at R. W. Pressbridge Special Situation uh Fixed
Speaker 1: Income Shop here in New York, so that's really where
Speaker 1: I started in credit and I had to learn about banks. Obviously,
Speaker 1: I went to night school for accounting. And it was
Speaker 1: very funny in those days because New York was empty
Speaker 1: Barry in the eighties. There was no one here, you know,
Speaker 1: especially oh God. We used to go to Raccoon Lodge
Speaker 1: and there would be bikes parked up and down the street,
Speaker 1: you know, two blox of City Hall, middle of the
Speaker 1: night and there'd be no one there, no one. That's
Speaker 1: that's amazing, that's amazing. You mentioned Jones parties. I recall
Speaker 1: a party of yours. I believe it was election night
Speaker 1: in two thousand and eight, and that was the only
Speaker 1: time in my life I got to meet Paul Vulker
Speaker 1: was sitting in your kitchen telling jokes about the Bush
Speaker 1: administration with tall Paul. The fact that I got Paul
Speaker 1: to laugh is one of the highlights of of that
Speaker 1: decade for me. Yeah, he was a great, great guy,
Speaker 1: and he did have quite a sense of humor. Um.
Speaker 1: He was a member of the Lotus Club, so I
Speaker 1: did get to see him a couple of times there
Speaker 1: before his passing. But he was just a lovely man.
Speaker 1: There were times we disagreed on things, but I always
Speaker 1: came around to his point of view because he was
Speaker 1: such a real guy and he was grounded in in reality.
Speaker 1: He reminds me a lot out of what my dad
Speaker 1: said to me years ago. He said, Christy, task of
Speaker 1: this generation is to pass the bubble onto the next
Speaker 1: generation intact. And that's what Paul Volker did. I asked
Speaker 1: him once about the banks. I said, Paul, why did
Speaker 1: you let this? In two thousand seventeen, which is where
Speaker 1: that picture I put on Twitter came from. And we
Speaker 1: had gone to lunch in this little cafeteria right there
Speaker 1: in Rockefeller Center where he used to go and you know,
Speaker 1: get his lunch every day. It's very bad, it's very nice, uh,
Speaker 1: And we're sitting there and I said, like, why did
Speaker 1: you let the banks do off balance sheet finance? All
Speaker 1: of these bad things happened subsequently, right, And he said, well,
Speaker 1: they were broke. What else was I gonna do? So,
Speaker 1: you know, he was just such a suite and I think,
Speaker 1: very committed public servant, and I always respected that about him.
Speaker 1: But he was a family friend, which is why I
Speaker 1: never asked him for anything. What about some of the
Speaker 1: other um said chairman that you had relationships with. What
Speaker 1: can you tell us about Arthur Burns or Alan Greenspan
Speaker 1: or anybody else on the FMC that that stands out
Speaker 1: in your mind. Arthur Burns was a very sweet, self
Speaker 1: effacing man, Um who my dad got to know because
Speaker 1: Pop was a speechwriter for Richard Nixon and he left
Speaker 1: the Nixon campaign just as Nixon was going to the
Speaker 1: White House. So, you know, because of my father's press
Speaker 1: credentials and connections and everything else, and also because of
Speaker 1: the fact he was a Republican again in a Democratic
Speaker 1: dominated town. Um, he quickly got to know people like
Speaker 1: Burns and Greenspan and became kind of their political counselor
Speaker 1: in a sense, because the decision by both men to
Speaker 1: get into the FED and get deeply involved in national
Speaker 1: economic policy was a very momentous one because it meant
Speaker 1: a lot of compromises for both Um. You know, I
Speaker 1: don't remember Burns as well because I was so young,
Speaker 1: But Greenspan was always a a long uh family friend,
Speaker 1: and he had gotten to know my pop when Pop
Speaker 1: was working with Ronald Reagan. When you know, during the
Speaker 1: seventies six cycle, when Ford eventually got denomination Greenspan was
Speaker 1: trying to figure out when he was going to go
Speaker 1: to the Council of Economic Advisors and then end up
Speaker 1: at the FAT of course, and that was also a
Speaker 1: very political decision, very because you know, the FET is
Speaker 1: the most political entity in Washington by far. Fan was
Speaker 1: very astute political analysts, not a great economist, but really
Speaker 1: really sharp judge of politics. So you know, it was
Speaker 1: a fascinating thing for a young man to have access to.
Speaker 1: I would sit on the stairs in our house in
Speaker 1: for Sunthern, Maryland, off of Massachusetts Avenue, and just listen
Speaker 1: to these parties, uh and meet the people sometimes because
Speaker 1: we were all very little, but as we grew up,
Speaker 1: these people were part of our lives and we were
Speaker 1: kind of Washington insiders. That's what Washington was like in
Speaker 1: the eighties and the nineties. You could actually get stuff done.
Speaker 1: People would talk to one another, they would have dinner, drinks,
Speaker 1: you know, a little a little different than today. Yeah,
Speaker 1: I think we have to restore civility and there by
Speaker 1: communication that would go a long way. That would go
Speaker 1: a long way. I have to follow up with one question.
Speaker 1: You mentioned FED chairman making compromises. Were you talking philosophically
Speaker 1: or politically, or across the board. I think it's across
Speaker 1: the board. You cannot survive as FED chairman without the
Speaker 1: at least the acquiescence of the White House. And you know,
Speaker 1: Trump brates Powell and says things in public. But as
Speaker 1: Judy Shelton said, I think so wonderfully, at least he
Speaker 1: does it in public. What Richard Nixon did Darthur Burns
Speaker 1: was criminal. His anti Semitism and his just nastiness was
Speaker 1: was awful. And you know, Reagan, on the other hand,
Speaker 1: was very affable. My dad got Paul Vulcer reappointed and
Speaker 1: it was a little cabal between him and Paul Laxolt,
Speaker 1: the Great Senator UM. One weekend, the Laxalts and the
Speaker 1: Reagans were at Camp David, and my dad gave Paul,
Speaker 1: the Paul Laxalt the phone number and said, have Reagan
Speaker 1: call Vulker. And it happened. And then my dad said
Speaker 1: to me later, I put this in inflated. This is
Speaker 1: how stuff gets done. And watching the phone call from
Speaker 1: gathering at Camp David. Yeah, And you know, Beryl Sprinkle
Speaker 1: was being pushed very very hard by Don Reagan, the
Speaker 1: former chairman of Mary Lynch and Dad won. So, you know,
Speaker 1: kudos to Paul Laxol. Let's talk a little bit about
Speaker 1: debt and building the American dream. So how have mortgages
Speaker 1: over time helped to build the American dream? Mortgages, you know,
Speaker 1: are frequently cited as evidence of the American dream, the
Speaker 1: ownership of a home, the homestead, right, but the actual
Speaker 1: marketplace goes back to the Depression. When the government got
Speaker 1: involved in the mid and late nineteen thirties, uh and
Speaker 1: created uh Fannie May, which was an agency that would
Speaker 1: go out and buy loans, long term loans, and hold them,
Speaker 1: and they funded these operations by issuing government guaranteed debt.
Speaker 1: Before that, you couldn't get a thirty year mortgage. You
Speaker 1: couldn't get a ten year mortgage. Berry. My grandmother Vera
Speaker 1: actually lost her house in the early last century because
Speaker 1: they had a balloon. In other words, you had small
Speaker 1: payments initially, and then you owed everything and there was well,
Speaker 1: there was no such thing as a thirty year fixed mortgage.
Speaker 1: It was interest only payments, and then you would if
Speaker 1: you were a borrower in good standing, at the end
Speaker 1: of the loan period, you would roll it over into
Speaker 1: a new one. And startle over. If you weren't making
Speaker 1: principal payments, you still owed exactly what you owed when
Speaker 1: you begin. That's right correct. And and really if you
Speaker 1: work in the mortgage business and in the world of
Speaker 1: fixed income, you understand if we don't really have thirty
Speaker 1: year mortgages, we have dirty day mortgages with an option
Speaker 1: to renew, which is held by the homeowner. And so
Speaker 1: every month the investor has to try and figure out
Speaker 1: how many of the loans in a given pool, which
Speaker 1: is how they do bond mortgage bond issuance, are going
Speaker 1: to prepay, refinance, sell the house, default, whatever. And it's
Speaker 1: that optionality that makes mortgages so interesting and also so treacherous.
Speaker 1: It's a huge asset class. It's almost twelve trillion dollars now,
Speaker 1: but interestingly it didn't grow for ten years after the crisis.
Speaker 1: It was flat and no surprise there. Yeah, but it's interesting,
Speaker 1: very because socio logically and in terms of you know,
Speaker 1: the baby boom and everything else. When you study how
Speaker 1: the mortgage industry has behaved over time. In the eighties
Speaker 1: crashed and burned, destroyed all the savings and loans. The
Speaker 1: nineties was kind of flat, now there were fringe products there,
Speaker 1: specifically our friends at City Bank who decided they could
Speaker 1: do no DOC, no income verification mortgages for self employed. Right,
Speaker 1: that's where subprime mortgages came from, was in the nineties.
Speaker 1: But then they got out because the results were so horrific.
Speaker 1: And they did this in the US and other countries too.
Speaker 1: When I was working at the FED, I was in
Speaker 1: charge of overseeing city banks foreign adventures in places like Japan. Well, Japan,
Speaker 1: they have no credit information on individuals, so someone could
Speaker 1: default and just disappear, and they did. So. You know
Speaker 1: what's the las of mortgages in Japan, Chris? Oh god,
Speaker 1: they can be quite long, they can be multi generational
Speaker 1: mortgages are unheard of, no, no, because the rates are
Speaker 1: very low. And so what happens is if a young
Speaker 1: couple is getting married, the family will typically cool their
Speaker 1: resources go buy them a house, and if they need debt,
Speaker 1: they'll pay it off as fast as they can. You know,
Speaker 1: you may have heard of stated income loans. They're prey
Speaker 1: popular out on the West Coast among the Asian community, Koreans, Chinese,
Speaker 1: and very typically these loans performed great even though they
Speaker 1: don't fit in the box for you know, Fannie Mae,
Speaker 1: Freddie mack j and you make kind of loans, they're
Speaker 1: they're typically private. The communities hate debt, so you know,
Speaker 1: if a young couple starts a family, they'll they'll pay
Speaker 1: it down five years. So all of that has to
Speaker 1: be factored into your analysis as an investor if you're
Speaker 1: buying these loans right. You know, like the last few
Speaker 1: years because of the bondmarket volatility, all of the mortgage
Speaker 1: loans that were made in eighteen and nineteen are pre
Speaker 1: pain because they're all in the money now, they can
Speaker 1: all refin yts and I take over the next year
Speaker 1: or two, you're going to see the fig gently step
Speaker 1: on the bottom of the yield curve and force that
Speaker 1: front coupon down for both government loans and and Fenny
Speaker 1: and Freddie loans, and we'll see three percent mortgages in
Speaker 1: this country I think by the end of the year,
Speaker 1: which means you're gonna have a Jinny May two out there.
Speaker 1: You're gonna have a two percent coupon. Let's let's talk
Speaker 1: about that a second, because if I remember, pre crisis,
Speaker 1: the average length of a mortgage was about seven years,
Speaker 1: meaning people typically would move into a house their starter home,
Speaker 1: have the first kid outgrow the house, and by year
Speaker 1: seven they're selling and trading up to the three bedroom split.
Speaker 1: And that was fairly typical. Are those numbers about what
Speaker 1: you recall and what does that look like today? Yeah,
Speaker 1: it would be seven years or even shorter during periods
Speaker 1: of very high labor market mobility for example, um, you
Speaker 1: also have the speculative component. Back in the two thousand's
Speaker 1: a lot of second homes which would flip quite quite fast. Today,
Speaker 1: average lives are ten plus years. In fact, the servicing
Speaker 1: portfolios that are being created right now Barry with refinancings
Speaker 1: are going to be worth a lot of money because
Speaker 1: they're gonna have average lives over ten years. Whereas the
Speaker 1: older strips, like I said, bonds that were sold you know,
Speaker 1: one and two years ago with much higher coupons, they're
Speaker 1: going to pre pay. And so the average life of
Speaker 1: those pools it already has, it's it's shrinking down to
Speaker 1: like three years. And if you're in Eastern and you
Speaker 1: paid you know, one oh four for the bond and
Speaker 1: you're getting redemptions back at par that's kind of painful.
Speaker 1: That's a loss. So so we don't. We don't really
Speaker 1: love predictions here. We kind of frown on predictions around
Speaker 1: these parts. But what I'm hearing from you is that
Speaker 1: you think, as part of the Corona a virus pandemic response,
Speaker 1: the FED is going to encourage another wave of refinancing
Speaker 1: by keeping part of the curve low, not inverted, but
Speaker 1: low and flat, so that it becomes attractive for homeowners
Speaker 1: to refinance. Did I hear that right? Oh? Yes, I
Speaker 1: think you're gonna see what we call streamlined refine that
Speaker 1: don't require appraisals. In other words, you have an existing borrower,
Speaker 1: you already know who they are, right, you're lowering their costs.
Speaker 1: You're typically doing a rate refine rather than having them
Speaker 1: take cash out. But that's okay. If you lower the
Speaker 1: household's expenses, you're improving the credit. It's gonna have a
Speaker 1: lower probability at default. And overall, what you want is
Speaker 1: to get cash into the economy right now, right, So yeah,
Speaker 1: I think the FED would love to see a gradual
Speaker 1: surgeon refines because you know what they have to buy
Speaker 1: the paper Barry, Uh, their mortgage portfolio is going to
Speaker 1: prepay in the next six months. It's like a trillion dollars.
Speaker 1: So just to replace that and keep their balance sheet
Speaker 1: stable in terms of monetary policy purposes, they're gonna have
Speaker 1: to buy a lot of paper, and I think the
Speaker 1: predominant UH source will be the government market. Jennie May,
Speaker 1: we've had some problems with the Fanny Freddie component for
Speaker 1: the last couple of weeks. While they're a regulator, Mark
Speaker 1: Collabria has figured out what to do. But I think
Speaker 1: the good news this week is he's figuring it out.
Speaker 1: We're helping him. Um. So hopefully the whole mortgage complex
Speaker 1: is going to have a solution to both the forbearance
Speaker 1: with the COVID nineteen and then the resulting defaults. I
Speaker 1: think a third or more the people who look for
Speaker 1: forbearance on their mortgages barrier are going to ultimately default.
Speaker 1: Let's talk a little bit about something that is in
Speaker 1: the news today, namely the government's Paycheck Protection Program better
Speaker 1: known as p p P. How are banks handling this?
Speaker 1: Who's doing this well? Who is not? The banks, like
Speaker 1: all of us in the world of finance, had this
Speaker 1: this Cares Act legislation thrown at us. There was no
Speaker 1: guidance on how we were to implement it, and in
Speaker 1: many cases it was unfunded. So, for example, the entire
Speaker 1: mortgage space, whether it's government guaranteed or private, has to
Speaker 1: figure out how to deal with consumers who've been told
Speaker 1: they don't have to pay their loans. And this really
Speaker 1: only applies to government guaranteed loans, but everything autos, you know,
Speaker 1: if you name it, the rent whatever, So everybody thinks
Speaker 1: they got a free pass, but it's not. Now. With
Speaker 1: small businesses, there was a window there where you could
Speaker 1: go to your bank, typically the bank you use for
Speaker 1: the business and payroll, and you could get a loan
Speaker 1: from them, and if you agreed to keep your people
Speaker 1: on it would eventually be forgiven. There's so much money though,
Speaker 1: so most of the small business people I know who
Speaker 1: have tried to act sess these credits have found out
Speaker 1: that the banks have already run through the money. And
Speaker 1: I think, what's you know important to realize is that
Speaker 1: for a lot of small businesses, it's better to just
Speaker 1: put your people on unemployment and keep their healthcare active
Speaker 1: because in many cases, especially you know, at the lower
Speaker 1: level employees, it's a race, so they can stay home
Speaker 1: with their families, you keep their health insurance intact and
Speaker 1: you just basically wait. And I think that's what a
Speaker 1: lot of small businesses have decided to do. So we've
Speaker 1: heard about a lot of smaller community banks that were
Speaker 1: very effective at processing these p p P applications, but
Speaker 1: less so for the big money center banks. Is that
Speaker 1: simply a function of employee to client ratio. I mean,
Speaker 1: if you're Wells Fargo UM or Bank America, you have
Speaker 1: a bajillion clients. But if you're a smaller community bank
Speaker 1: somewhere in the Midwest, I gotta think it's pretty easy
Speaker 1: for them to process those applications quickly. That's correct. Very
Speaker 1: the larger institutions have trouble with processing anything out of
Speaker 1: the ordinary um In essence, there are no economies of
Speaker 1: scale and banking, right. So the little community bank, even
Speaker 1: the regionals, are typically more flexible. They can handle increase
Speaker 1: at the branch level and they can make decisions because
Speaker 1: they have a flatter organization the big banks or pyramids,
Speaker 1: and they do this intentionally to keep them from causing trouble.
Speaker 1: So essentially, the largest banks are very inefficient by design,
Speaker 1: and that's why when you call them, they have this
Speaker 1: very narrow bottleneck of capacity, for example, to take calls
Speaker 1: because you have to actually talk to someone if you
Speaker 1: want to get one of these loans. And they had
Speaker 1: some online presence, but remember they had to put all
Speaker 1: this up in a matter of days. And banks don't
Speaker 1: move that quickly, see non bank companies. Because they're flat,
Speaker 1: they move very quickly, and smaller banks tend to be
Speaker 1: much more nimble than the larger institutions. So so for
Speaker 1: these banks, how does participating in the p P P
Speaker 1: plan benefit them? It certainly doesn't hurt if your clients
Speaker 1: can survive. But is there any incentive for the banks
Speaker 1: to do something? Oh? Yeah, they make a couple of
Speaker 1: points up front gain on sale, and the loan no
Speaker 1: credit risk. It works, they're all covered credits. It's like
Speaker 1: a small business administration loans. The banks have a nice
Speaker 1: little bump in the front because they typically will sell
Speaker 1: those loans where they can keep me in portfollowing off
Speaker 1: they want. But they have a number of incentives to
Speaker 1: do the business. Believe me, what kind of bank was
Speaker 1: best position for this COVID nineteen crisis? Was it the
Speaker 1: big money center banks, was it the investment banks? Was
Speaker 1: it the regional banks or the smaller community banks. Who
Speaker 1: do you believe EVE is going to come out of
Speaker 1: this um as having not only survived but thrived. I
Speaker 1: think first and foremost, you look at JP Morgan simply
Speaker 1: because of size, you know, a trillion plus and core
Speaker 1: deposits on one side of the business and a pretty
Speaker 1: robust capital markets business and also derivatives on the other side.
Speaker 1: It's about half and half. Well, it's Bank of America likewise,
Speaker 1: big islands of liquidity, more than a trillion dollars in
Speaker 1: court deposits. The ones with more consumer exposure like Capital
Speaker 1: One City. Uh, they've been getting beaten up just for
Speaker 1: that reason. You know, credit is the concern. And in
Speaker 1: the investment banks, interestingly, Morgan Stanley during the sell office,
Speaker 1: the outlier and the whole group, their credit the false
Speaker 1: swaps were trading more than two d basis points over
Speaker 1: the curve, which is a lot. Give you an example,
Speaker 1: before the crisis and the sell off kind of beginning
Speaker 1: of February, most of these banks or forty fifty bits
Speaker 1: over the curve for five year credit the fault swap insurance.
Speaker 1: So they all widened. And Goldman, Morgan Stanley, you know,
Speaker 1: American Express, they got beat up but today MX is
Speaker 1: still trained the three times buck. It's a premium property
Speaker 1: because it's the best performing large bank in the United States,
Speaker 1: even though it's small, it's only about two billion assets.
Speaker 1: So I would tell you the consumer exposure is the
Speaker 1: real pain point. But you're going to see pain on
Speaker 1: the on the institutional and the commercial side too. I
Speaker 1: think low losses for banks, it's going to be across
Speaker 1: the board. Berry. If I recall correctly, Capital One is
Speaker 1: now the largest credit card issue are in the country.
Speaker 1: Is that right. Yes. They rolled up several monol lines,
Speaker 1: you know, ten fifteen years ago, and it's primarily a
Speaker 1: credit card issuer. Pretty high cost of funds, but they're
Speaker 1: very efficient. They've gotten into some other areas that got
Speaker 1: them in trouble, like oil, which was kind of rising.
Speaker 1: I think people were taken aback by that. But the
Speaker 1: reality is, you know, these model lines don't do so well.
Speaker 1: They need to broaden their business and Capital One has
Speaker 1: not been very good at main street banking. They bought
Speaker 1: a couple of retail banks for basically for the funding um,
Speaker 1: but they haven't developed those businesses. In fact, if anything,
Speaker 1: they've shrunk them down. So they have consumer which is
Speaker 1: very nice, very high spreads, and then they have a
Speaker 1: capital markets business that unfortunately it's been in the headlines recently.
Speaker 1: So you mentioned roll ups and some M and A activity.
Speaker 1: I have to assume that in that's completely dried up.
Speaker 1: Or is this still things happening behind the scenes. Well,
Speaker 1: I think for now yes, because valuations are going to
Speaker 1: be difficult until we get through the peak of credit costs.
Speaker 1: It's hard to value a bank if you don't know
Speaker 1: what the next three to four quarters worth of credit
Speaker 1: looks like. Um. So we've got to get through that.
Speaker 1: And there are other assets on bank balance sheets that
Speaker 1: are also you know, big question marks right now. Um.
Speaker 1: And I think as we get through that, well, think
Speaker 1: about servicing portfolios for all kinds of loans. Typically those
Speaker 1: are annuities, right, you get paid a little fee every month.
Speaker 1: It's pretty nice. But because of the uncertainty regarding all
Speaker 1: this forbearance, whether it was legally authorized or not, right,
Speaker 1: the regulators are forcing all lenders, even private lenders, to
Speaker 1: give forbearance. You know, ally just reported Earning said the
Speaker 1: auto lender they basically had to extend a hundred and
Speaker 1: twenty days of loan forbearance on what are private loans.
Speaker 1: The bond horns will pay for this. So you know,
Speaker 1: the regulators essentially threatened all of these non bank lenders
Speaker 1: who operate outside of the government guarantees space and said
Speaker 1: you must provide forebearance. So it's just you know, coercion
Speaker 1: on a national scale, and uh, they'll through it. We
Speaker 1: have to figure out what those loan portfolios are worth. Now,
Speaker 1: how many of the people who ask for help are
Speaker 1: going to get back on track. That's the key question,
Speaker 1: because then you can value the portfolio. So what do
Speaker 1: you think will end up happening with all these lenders
Speaker 1: who suddenly have a four month hold in their revenue
Speaker 1: um or at least they're cash flows. They're still owed
Speaker 1: that money. It's just kicked down the road a little bit.
Speaker 1: In theory, yes, if the consumer cures and for example,
Speaker 1: and this is private by the way, there's no government
Speaker 1: mandate here as to how you fix this. Could say, well,
Speaker 1: we'll push those mispayments to the end of the loan
Speaker 1: and will modify the loan. Okay, just contract we won't
Speaker 1: buy the loan back from the bond investor. We just
Speaker 1: leave it. Because that makes life a little easier. Same
Speaker 1: thing with the mortgages. They would ideally like to leave
Speaker 1: those mortgage notes in these pools to back all these securities,
Speaker 1: because when you buy it out, you have to buy
Speaker 1: it out at par it's of money. If you're talking
Speaker 1: about a couple of months interest payments, given how low
Speaker 1: rates are right now, Barry, that's manageable. And in fact,
Speaker 1: the regulator for Fan and Freddie just came out and said,
Speaker 1: you guys have to advance for four months and then
Speaker 1: we'll come and reimburse you. So we're starting to get
Speaker 1: some clarity on this, right. But for private investors, private mortgages,
Speaker 1: commercial mortgages, you know, multi family, all of this stuff,
Speaker 1: if it doesn't have a government guarantee, then the bond
Speaker 1: holders will pay. The servicers get reimbursed first. By the way,
Speaker 1: if there's misspayments, they get their feet. The bond holders
Speaker 1: basically have to wait. So that's that's how it will work.
Speaker 1: Back in the line. Back to the line, the triple
Speaker 1: ais are in front and then the lower trashes. In
Speaker 1: these deals there tend to be several. Those are the
Speaker 1: ones who will take the pain. So Chris, let's talk
Speaker 1: a little bit about the current state of the economy.
Speaker 1: I don't think many people would deny that we are
Speaker 1: in a recession today. How bad is it? And how
Speaker 1: deep and long can this last? For I was on
Speaker 1: a call yesterday with a bunch of my mortgage buddies,
Speaker 1: a lot of economists, um, you know, Mark uh uh,
Speaker 1: Sam Cattery from Freddie Mack and people like this, and
Speaker 1: they really do excellent research on the demographics, if you will,
Speaker 1: of housing. And then you looked at bankerings. What were
Speaker 1: those provision numbers from JP Morgan and Wells Fargo telling us?
Speaker 1: And it's telling you that the bankers expect a pretty
Speaker 1: large wave of losses the next couple of quarters. So
Speaker 1: when I look at GDP estimates of down thirty in
Speaker 1: the second quarter, which is what I was hearing yesterday,
Speaker 1: I kind of stepped back as a bank analyst, and
Speaker 1: I think to myself, this is gonna be worse than
Speaker 1: two thousand eight. Um to me, I think we will
Speaker 1: have destroyed a lot of the small business service sector
Speaker 1: that was so important as a source of marginal employment
Speaker 1: in the United States. People, you know, look at New York, Marry.
Speaker 1: The entire entertainment industry has gone. Hospitality restaurants. All of these,
Speaker 1: you know, areas that were important for for not just
Speaker 1: for people generally if they needed to find a job
Speaker 1: or you know, younger people who came to the city
Speaker 1: who were trying to get involved in, you know, some career.
Speaker 1: That was the first place they would look for a job.
Speaker 1: And these people have left. I think it's gonna be
Speaker 1: very interesting to see the numbers for New York City
Speaker 1: in the next couple of quarters, because I suspect a
Speaker 1: lot of people went to live with mom and dad. Anecdotally,
Speaker 1: we're hearing a lot of people who have an up
Speaker 1: a second place to live, either a beach house or
Speaker 1: a second property, or if they're younger, with their parents
Speaker 1: or siblings, they've they've fled. Large parts of Brooklyn, half
Speaker 1: the Upper east Side and Upper West Side are supposedly empty.
Speaker 1: I haven't been back to the city since this started,
Speaker 1: but from what I'm hearing from people who either live
Speaker 1: or lived in the city, they are sheltering outside of Manhattan.
Speaker 1: Are you implying that that might become a permanent situation
Speaker 1: Because people talked about that post not eleven, but we
Speaker 1: really didn't see. Whoever left was very quickly replaced by
Speaker 1: a younger person. Do you think this changes the dynamics
Speaker 1: of urban density and people living in cities. Well, I
Speaker 1: think it's going to change the business dynamics in New
Speaker 1: York for a while, because in you know, in two
Speaker 1: thousand and eight and after nine eleven, um, Yeah, we
Speaker 1: had to hunker down, But then the economy restarted. We
Speaker 1: didn't have the distance from ourselves physically, we didn't have
Speaker 1: to deal with all of the aspects that that implies.
Speaker 1: So I think when you're still worried about vulnerable populations
Speaker 1: and you have to protect them, that means that you're
Speaker 1: gonna try and let the economy restart to a degree.
Speaker 1: But I don't think you regrow these service businesses back overnight. Berry.
Speaker 1: They've been decapitalized, and even if they were helping their
Speaker 1: eployees with the federal money, they still may not survive
Speaker 1: because they're going to be facing a diminished revenue stream
Speaker 1: coming coming back. You know what, what if we have
Speaker 1: to take half the tables out of the restaurants, right
Speaker 1: if people doing a Broadway theater where shoulders and shoulders
Speaker 1: front and back, are they gonna Hamilton's tickets with the
Speaker 1: audience as you know, we just went through Passover and Easter.
Speaker 1: Right These are typically times when Europeans Latin Americans would
Speaker 1: all go to New York for a week with their families.
Speaker 1: They're not here now, you know. There's there's only New
Speaker 1: Yorkers in Central Park right now, and it's it's a
Speaker 1: different scene. In fact, I've been riding my bike around
Speaker 1: the city. I go all the way down the South
Speaker 1: Carria back because there's no traffic. How empty is the
Speaker 1: city compared to uh, what it was like post nine eleven.
Speaker 1: It's more empty than that, very little traffic, although it
Speaker 1: is slowly, slowly starting to increase. You can see that
Speaker 1: there's more will move it around. I think this is
Speaker 1: going to be a profound economic shock to a lot
Speaker 1: of big cities that are used to trying to attract
Speaker 1: people to come in. That's going to be changed. So
Speaker 1: we've had this enormous monetary response from the Fed. They
Speaker 1: took rates to zero. They announced they were gonna add
Speaker 1: two trillion dollars more in lawn furniture and various high
Speaker 1: yield paper whatever whatever they can buy they're gonna put
Speaker 1: on the balance sheets. We've also had, at least not
Speaker 1: over the short term, uh two trillion dollar fiscal stimulus.
Speaker 1: How does this response compare to what we've seen from
Speaker 1: crises in the past. Well, the federal response in the
Speaker 1: thirties was large, but it didn't really do much. In fact,
Speaker 1: it faltered, and then World War Two kind of saved us. UM.
Speaker 1: In two thousand eight, you had the financial response obviously
Speaker 1: to catch some of the banks um, but the industry
Speaker 1: more or less cleaned up its own mess and the
Speaker 1: economy healed itself. I mean, the thing I always remind
Speaker 1: people of Barrier is the fact that we still have
Speaker 1: a private bond market in this country, and we have
Speaker 1: a market for different types of assets. Is so important
Speaker 1: because it restarted by itself. The auto sector restarted by
Speaker 1: itself in two thousand nine because those were fully secured deals.
Speaker 1: But today, given the hit the global auto has taken,
Speaker 1: for example, and you look at sales volume estimates and
Speaker 1: everything else going forward, you know, I think the whole
Speaker 1: credit of this industry has changed. Even the exemplartis like
Speaker 1: the Toyotas and the Daimler's, they've taken a hit. I
Speaker 1: think you'll see consolidation. By the way, back to your
Speaker 1: point about M and A definitely because we have an
Speaker 1: auto bakers. Yeah, if we're doing eleven twelve million units
Speaker 1: next year, you're gonna see m and a. That's in
Speaker 1: the post crisis peak of about seventeen UM cars in
Speaker 1: the US. Yeah, it went down to eleven and it
Speaker 1: was goose by the FED. You know, we were talking
Speaker 1: before about different phases. In the period after the eight crisis,
Speaker 1: you had a lot of fringe products. You had autos,
Speaker 1: you had you know, marketplace loans of all sorts of
Speaker 1: non bank lending to business individuals, etcetera, etcetera, all gone,
Speaker 1: puff gone. In fact, the subprime auto sector is going
Speaker 1: to go through the ringer now because again the bond
Speaker 1: holders are going to pay for the forbearance. So I think,
Speaker 1: you know, it's going to take some time to get
Speaker 1: people back in the game. You're gonna see spread stake
Speaker 1: kind of wide for a while on on high yield
Speaker 1: securities compared to treasuries. And it's just a matter of
Speaker 1: getting everybody focused. But I'll tell you this, Verry, I
Speaker 1: think people are much better conditioned this time than they
Speaker 1: were in O. Eight. I think people are coming back
Speaker 1: to the market's much fair through than they did No. Eight, No. Nine,
Speaker 1: when nothing was happening. You remember that? Do you mean
Speaker 1: do you mean investors or consumers or both institutional investors? O,
Speaker 1: there's I mean we've got uh, you know, MBS fund.
Speaker 1: We're getting ready to launch as soon as we have
Speaker 1: a little more clarity from Washington playing vanilla stuff right.
Speaker 1: But still there's opportunities out there because the markets are disrupted.
Speaker 1: People are looking to buy commercial real estate off distress sales.
Speaker 1: They're looking to buy multi family off distress sales. So
Speaker 1: though perhaps not New York because of the rent control laws, um,
Speaker 1: but around the country. Yeah, definitely, I'm thinking too small.
Speaker 1: I'm looking to buy distressed sheet metal off the auto
Speaker 1: sites between bring a trailer and classic cars. I've seen
Speaker 1: prices fall about ten fift over the past month, and
Speaker 1: I love the idea of buying something at a discount.
Speaker 1: But that's just me. So. Your first book was Inflated
Speaker 1: that looked at how debt helped build out the American dream,
Speaker 1: especially houses. I was kind of surprised by the topic
Speaker 1: of your recent book, ford Men, from Inspiration to Enterprise.
Speaker 1: What motivated you to pivot from debt and housing? Two
Speaker 1: automobiles and Ford I had always been a student of
Speaker 1: Henry Ford, like many Americans, but particularly his role in
Speaker 1: the Great Depression. And so one of the things I
Speaker 1: focused on in the book was how Henry basically uh
Speaker 1: started the banking crisis in three before FDR took office
Speaker 1: in March of that year. It's an extraordinary story because
Speaker 1: he was such a character and quite did you say,
Speaker 1: did you say started the banking crisis? He initiated it. Yes,
Speaker 1: he said that he was going to take his money
Speaker 1: out of the Detroit banks, and when the governor of
Speaker 1: Michigan and found out about this, he declared the bank
Speaker 1: holiday in Michigan in February of three. This event then
Speaker 1: rippled through the rest of the country. So by the
Speaker 1: time FDR takes office, every bank in the United States
Speaker 1: is closed and had been. The Detroit banks were really
Speaker 1: important in those days. Henry Ford was the biggest cash
Speaker 1: depositor in the country, and he ran the whole company
Speaker 1: on cash out of his pocket. It was like a plantation.
Speaker 1: So I got into Ford, you know, first and foremost,
Speaker 1: because I am a student that that era. And then
Speaker 1: I had been a contributor to the Washington Times magazine
Speaker 1: UH Inside on the News, and I had written a
Speaker 1: whole series of articles about the Explorer rollover, which was
Speaker 1: quite a mess. It was really the beginnings of giving
Speaker 1: teeth to consumer regulation in the United States. If that
Speaker 1: had happened today, a lot of people at Ford would
Speaker 1: have gone to jail for what happened. Vehicles. Oh yeah,
Speaker 1: this is the single vehicle rollovers with some of the
Speaker 1: SUVs that well, the Ranger and you know the bridge
Speaker 1: Stone Firestone tires. It was quite a mess. Take take
Speaker 1: a big, big vehicle, raise it, give it a short wheelbase,
Speaker 1: and uh, that is not a recipe for stability at
Speaker 1: high speeds. If you have to suddenly cut the wheel. No,
Speaker 1: it didn't work. And there you know. It was an
Speaker 1: interesting episode. But what I tried to do with Fordman,
Speaker 1: just in terms of the overall book Barry was remind
Speaker 1: people of the rich literature around for people like John Kiss,
Speaker 1: Call Braith and many others who wrote about the family,
Speaker 1: and they were such a remarkable family. It was really
Speaker 1: the first transformational business fortune in American history, more than steel,
Speaker 1: more than these other types of fortunes that have been
Speaker 1: made in the past. They made things. They made cars,
Speaker 1: but into instantly. The first first were built by the
Speaker 1: Dodge brothers because they were the first great partsmakers in
Speaker 1: the United States. Both of them died in one of
Speaker 1: the Spanish flew. Had the Dodge brothers survived, the auto
Speaker 1: industry would have been dominated by them and not by
Speaker 1: General Motors and a number of other players. History would
Speaker 1: have been quite different. So by the time we get
Speaker 1: to something like Ford versus Ferrari, that's thirty years later. Yeah, Billy,
Speaker 1: you know, Henry the Deuce, Henry Ford the second had
Speaker 1: taken over and they they were still uh and also
Speaker 1: ran compared to GM. They were typically compared to Chevrolet.
Speaker 1: That's how small Ford was um, but they still uh,
Speaker 1: you know, had a lot of staying power. And as
Speaker 1: I've always said, God clearly loves the Fords despite their
Speaker 1: many sins, because somehow they avoided the fault. They were
Speaker 1: the only US maker didn't get need to be restructured. Well,
Speaker 1: they couldn't be restructured as I as I talked about
Speaker 1: in the book, Goldman Sachs had already helped the family
Speaker 1: take money out of the company, and if they had
Speaker 1: been restructured, then the special voting stock held by the
Speaker 1: family would have gone and they would have lost control.
Speaker 1: So there's all these little nuances in Goldman Sachs is
Speaker 1: a very important part of the Ford story. It was
Speaker 1: their design of the Ford Foundation when the Ford family
Speaker 1: gave most of the economics in the company to that
Speaker 1: entity and retain most of the vote in this asymmetrical
Speaker 1: share transaction that Sydney Weinberg created along with the lawyers
Speaker 1: for for Edsel Ford, that saved the company from the
Speaker 1: tax man. Because str hated Henry Ford, and he had
Speaker 1: passed legislation in Washington specifically to kill the Ford fortune,
Speaker 1: and so Goldman forwarded that intention. And now the Ford
Speaker 1: Foundation is a couple of billion dollars and still still active. Well,
Speaker 1: when they did the I P. O for Ford after
Speaker 1: World War two, UH, the foundation was the only seller
Speaker 1: of shares. They didn't have to raise money for the
Speaker 1: company because they had plenty of money. These are the
Speaker 1: work at Home abbreviated version of our favorite podcast questions.
Speaker 1: And let's just start with streaming. What are you streaming
Speaker 1: these days? What are you watching on Netflix? What are
Speaker 1: you listening to in podcasts? What's keeping you entertained? I
Speaker 1: am watching old movies with my beautiful wife, Nicole, who's
Speaker 1: a recent UH naturalized American citizen, So we're filling in
Speaker 1: some of the blanks with her. And uh. I stream
Speaker 1: a lot of music. I spend my time reading Berry,
Speaker 1: you know, like you, I basically have to consume stuff
Speaker 1: all day. I watched West World, I watched a couple
Speaker 1: of other things on tv. Um, but give us a
Speaker 1: couple of old movie titles for for the youngsters who
Speaker 1: may not be uh oh, well, yeah, we just watched
Speaker 1: Bull the Air with Penelope Crews, which is stunning. I
Speaker 1: could love that movie. So you say old, you're that's
Speaker 1: not really old. No, Bull of ben hur uh that's
Speaker 1: taking in the ecstasy. Then commandments we just did. So
Speaker 1: we're having a lot of quoting. So you're working your
Speaker 1: way through the thirties and forties along with the Ford
Speaker 1: and the post depression era in your guys. You know,
Speaker 1: the girls want buff, right, so they like Tarlton. Charlton
Speaker 1: was a good looking guy. Who are your early mentors
Speaker 1: who helped to shape your career? Oh boy, Well, my
Speaker 1: father first inform us, who taught me how to write
Speaker 1: with a yellow pad and a pencil um and I
Speaker 1: think a number of editors over the years, Terry Houser
Speaker 1: and Karl Flock at the Legislative Digest, the folks at Barns,
Speaker 1: all the editors at Barns, Tommy Donalin, I wrote many
Speaker 1: editorials for him. So as a writer, those are the
Speaker 1: people who really pounded on me and said, you know,
Speaker 1: editing builds character, right, you know all about that. Working
Speaker 1: with Bloomberg as much as you have, I have to
Speaker 1: tell you I wrote one editorial for Barons called a
Speaker 1: Memo Found on the Street that I thought was brilliant.
Speaker 1: When I handed an end to Tom Donalin, it was words,
Speaker 1: and he showed me how to take a scalpel and
Speaker 1: remove everything that wasn't lean sine, And what came out
Speaker 1: of that was seven hundred tight words. And he blew
Speaker 1: me away as that how strong a good editor can
Speaker 1: make your writing. Oh no, that's quite right, that's quite right, um.
Speaker 1: And you know the other people in the financial markets,
Speaker 1: I've had so many teachers, Alan Boyce who taught me
Speaker 1: about mortgage servicing rights, the guys at Bear who taught
Speaker 1: me how to do deals. You learned how to do
Speaker 1: deals by working on deals late at night. You mentioned
Speaker 1: you mentioned reading. Let's talk about your favorite books. What
Speaker 1: books have you been staying occupied with during this lovedown.
Speaker 1: I just finished Dark Towers about Deutsche Bank, because you
Speaker 1: can imagine David and Rich fabulous. He wrote a book
Speaker 1: on the label on the Library scandal. The Library Scandal
Speaker 1: talks a lot about President Trump and how he survived.
Speaker 1: The guy's got amazing grit. The fact that he was
Speaker 1: able to bluff his way through all those situations. You've
Speaker 1: got to hand it to him. What is another title? Uh,
Speaker 1: you know, there are a lot of books I want
Speaker 1: to read. I just don't have time. I've been reading
Speaker 1: legal documents for the past three weeks trying to get
Speaker 1: a liquidity facility in place for the independent mortgage banks
Speaker 1: in Washington. So that's taken a lot of my time.
Speaker 1: And then what's the book the Oh my, well, I
Speaker 1: want to go through George Moore's book on banking. I
Speaker 1: desperately want to go back and reread, uh my, George
Speaker 1: orwell because it's very timely now. And then, you know,
Speaker 1: there were a couple of other things that I have
Speaker 1: on the pile. I did go through Red Notice, Bill
Speaker 1: Browder's book about Russia. I heard that was really interesting.
Speaker 1: Oh my god, you'd never go to Russia Barry, you
Speaker 1: have to read that book. My brother in law used
Speaker 1: to be general counsel for Amaco. That little b p
Speaker 1: Amaco deal was was his doing, and Amaco had relationships
Speaker 1: with with many of the Russian oil companies in the
Speaker 1: Russian government, and that was pretty much his response on So,
Speaker 1: so what's your take on Russia goes, don't ever go there? Like, okay, right,
Speaker 1: although I've been to St. Petersburg, so I really I
Speaker 1: guess I violated that. Um, what sort of advice would
Speaker 1: you give a millennial who was interested in a career
Speaker 1: in banking. Go work for a small bank. Learn as
Speaker 1: much as you can about how the bank operates, particularly
Speaker 1: the back. You want to learn how they do everything
Speaker 1: from an operation's perspective, and then you're gonna have a
Speaker 1: lot of value. And our final question, what do you
Speaker 1: know about the world of banking today that you wish
Speaker 1: you knew thirty years or so ago when you were
Speaker 1: first getting started. I think the evolution of banks in
Speaker 1: the United States away from business lending to uh focusing
Speaker 1: on mostly housing related Two thirds of US banks today, Barry,
Speaker 1: have housing exposure one way or another commercial real estate.
Speaker 1: So it's become really, really heavy on the real estate side,
Speaker 1: and I guess that's as as you would expect because
Speaker 1: most companies just go to capital markets. They don't have
Speaker 1: to go to a bank, so that's a big change.
Speaker 1: We have been speaking with Christopher Wallen. He is the
Speaker 1: chairman of well and Global Advisors and author of several books,
Speaker 1: most recently Ford Men From Inspiration to Enterprise. If you
Speaker 1: enjoy this conversation, oh look up or down in in Shawan,
Speaker 1: Apple iTunes, Spotify, Overcast, wherever you're finer podcasts are found,
Speaker 1: and you could see any of the previous three hundred
Speaker 1: and something conversations we've had over the past five and
Speaker 1: a half years. We love your comments, feedback and suggestions
Speaker 1: right to us at m IB podcast at Bloomberg dot net.
Speaker 1: You can follow me on Twitter at rit Halts, check
Speaker 1: out my daily column on Ridholts dot com, or see
Speaker 1: my weekly Bloomberg column at Bloomberg dot com slash opinion.
Speaker 1: I would be remiss if I did not thank the
Speaker 1: crack staff that helps put this conversation together each week.
Speaker 1: A tikavl Bron is our product supervisor. Michael Boyle is
Speaker 1: our producer. Charlie Volmer is my audio engineer, and Michael
Speaker 1: Batnick is my head of research. I'm Barry Riholts. You've
Speaker 1: been listening to Masters in Business on Bloomberg Radio.