WEBVTT - Chris Whalen on PPP Loans (Podcast) 0:00:02.200 --> 0:00:06.800 This is Masters in Business with Barry Ridholts on Bloomberg Radio. 0:00:07.320 --> 0:00:11.119 This week on the podcast, Chris Whalen, chairman of Whalen 0:00:11.160 --> 0:00:15.040 Global Advisors, and an old fishing buddy and friends. Chris 0:00:15.160 --> 0:00:20.840 knows more about the details and back offices of banking 0:00:21.000 --> 0:00:24.720 and mortgages and credit than just about anybody I know 0:00:24.840 --> 0:00:29.200 who's not currently running the Federal Reserve. He has a 0:00:29.360 --> 0:00:34.680 fascinating background and family history. UH. It was through Chris 0:00:34.720 --> 0:00:37.440 that I got to meet Paul Boker. It was through 0:00:37.560 --> 0:00:41.040 Chris that I really learned a lot about how the 0:00:41.080 --> 0:00:44.400 Federal Reserve works, how the mortgage market works, how the 0:00:44.479 --> 0:00:49.680 securitization market works decades ago. In fact, when I was 0:00:49.760 --> 0:00:54.880 researching Bailout Nation, a lot of his work found its 0:00:54.920 --> 0:00:57.800 way into some of the end notes in that book. 0:00:58.240 --> 0:01:01.480 He is really a health of knowledge when it comes 0:01:01.520 --> 0:01:05.640 to UH this area of finance. And if you are 0:01:05.680 --> 0:01:12.520 remotely interested in securitized products, mortgages, banking, UH and banking analysis, 0:01:13.440 --> 0:01:15.959 you're going to really enjoy this conversation. So, with no 0:01:16.040 --> 0:01:22.839 further ado, my conversation with Christopher Whalen, this is Masters 0:01:22.880 --> 0:01:26.840 in Business with Barry Ridholts on Bloomberg Radio. It is 0:01:26.880 --> 0:01:30.399 still a shelter and home addition, and for this week 0:01:30.600 --> 0:01:34.920 I brought a very special guest, Christopher Whalen. He is 0:01:35.440 --> 0:01:38.479 the chairman of will and Global Advisors and has a 0:01:38.520 --> 0:01:42.479 long and deep background in the financial sector, working at 0:01:42.480 --> 0:01:46.200 such firms as Bear Stearns and as a researcher for 0:01:46.240 --> 0:01:51.640 the Federal Reserve. Chris Whalen, Welcome to Bloomberg. Hey, Barry, 0:01:51.720 --> 0:01:54.840 but a pleasure. So let's start out with a little 0:01:54.840 --> 0:01:57.720 bit of your background. I know you as a bank 0:01:57.840 --> 0:02:03.200 analyst and uh an a specialist, but let's go back 0:02:03.200 --> 0:02:05.680 to when you were at Bear Stearns. What were you 0:02:05.720 --> 0:02:09.000 doing at Bear and how is that related to your 0:02:09.040 --> 0:02:14.320 work at the Federal Reserve. Well, I grew up in Washington. 0:02:14.639 --> 0:02:17.760 My parents, Joan and Richard Whalen, were some of the 0:02:17.800 --> 0:02:22.640 most interesting Republicans operating in the town, and it was 0:02:22.680 --> 0:02:25.600 a Democratic town in those days. Bearing the Democrats still 0:02:25.680 --> 0:02:28.960 ran everything. Um. But that's how I got to know 0:02:29.080 --> 0:02:33.120 FED chairman, people like Paul Vulker, Arthur Burns, Alan Greenspan. 0:02:33.560 --> 0:02:36.120 They all came to Mom's parties. In fact, if you 0:02:36.120 --> 0:02:38.680 didn't get an invitation to Jones Christmas party, there was 0:02:38.720 --> 0:02:41.720 something seriously wrong with you. So I grew up in 0:02:41.760 --> 0:02:45.640 this very political household, went to college, went to Villanova, 0:02:45.880 --> 0:02:47.720 and then when I got out, I worked for Jack 0:02:47.800 --> 0:02:50.440 Kemp for a couple of years on Capitol Hill, really 0:02:50.600 --> 0:02:53.919 learned the right. Two brilliant editors used to just pound 0:02:54.000 --> 0:02:57.200 us because we had to report on different committees. And 0:02:57.240 --> 0:02:59.520 I eventually ended up moving to New York and I 0:02:59.600 --> 0:03:01.800 was a man Aagemont trainee at the at the Fete 0:03:01.800 --> 0:03:05.280 of New York. I worked in bank supervision first for 0:03:05.639 --> 0:03:08.720 Jerry Minnahan and Bill Rutledge, and then I went across 0:03:08.760 --> 0:03:11.760 the street and worked in foreign exchange for Gretchen Green 0:03:12.280 --> 0:03:15.760 and Terry CHECKI one of the great uh FED officers 0:03:15.840 --> 0:03:19.560 of his age. He was responsible for foreign so all 0:03:19.560 --> 0:03:23.000 the other central banks would talk to Terry uh In fact, 0:03:23.040 --> 0:03:24.960 he was probably the only person in the building they 0:03:24.960 --> 0:03:27.680 would talk to. So that's kind of where I got 0:03:27.680 --> 0:03:29.760 my start. And then I went to Bear in London 0:03:29.919 --> 0:03:33.799 fixed income trading and sales, worked with David Setchem and 0:03:33.880 --> 0:03:36.440 Joey Calvo and a whole bunch of great people who 0:03:36.440 --> 0:03:40.600 are now at R. W. Pressbridge Special Situation uh Fixed 0:03:40.600 --> 0:03:43.440 Income Shop here in New York, so that's really where 0:03:43.440 --> 0:03:46.200 I started in credit and I had to learn about banks. Obviously, 0:03:46.240 --> 0:03:48.720 I went to night school for accounting. And it was 0:03:48.800 --> 0:03:51.040 very funny in those days because New York was empty 0:03:51.080 --> 0:03:54.120 Barry in the eighties. There was no one here, you know, 0:03:54.200 --> 0:03:59.080 especially oh God. We used to go to Raccoon Lodge 0:03:59.160 --> 0:04:01.440 and there would be bikes parked up and down the street, 0:04:01.480 --> 0:04:03.720 you know, two blox of City Hall, middle of the 0:04:03.840 --> 0:04:06.480 night and there'd be no one there, no one. That's 0:04:06.560 --> 0:04:11.320 that's amazing, that's amazing. You mentioned Jones parties. I recall 0:04:11.400 --> 0:04:15.080 a party of yours. I believe it was election night 0:04:15.240 --> 0:04:18.479 in two thousand and eight, and that was the only 0:04:18.520 --> 0:04:21.360 time in my life I got to meet Paul Vulker 0:04:21.560 --> 0:04:25.960 was sitting in your kitchen telling jokes about the Bush 0:04:25.960 --> 0:04:29.840 administration with tall Paul. The fact that I got Paul 0:04:29.920 --> 0:04:32.760 to laugh is one of the highlights of of that 0:04:32.839 --> 0:04:36.760 decade for me. Yeah, he was a great, great guy, 0:04:36.880 --> 0:04:40.000 and he did have quite a sense of humor. Um. 0:04:40.120 --> 0:04:42.320 He was a member of the Lotus Club, so I 0:04:42.400 --> 0:04:44.280 did get to see him a couple of times there 0:04:45.080 --> 0:04:48.279 before his passing. But he was just a lovely man. 0:04:48.640 --> 0:04:51.480 There were times we disagreed on things, but I always 0:04:51.520 --> 0:04:54.760 came around to his point of view because he was 0:04:54.800 --> 0:04:58.320 such a real guy and he was grounded in in reality. 0:04:58.760 --> 0:05:00.719 He reminds me a lot out of what my dad 0:05:00.760 --> 0:05:03.400 said to me years ago. He said, Christy, task of 0:05:03.480 --> 0:05:06.279 this generation is to pass the bubble onto the next 0:05:06.320 --> 0:05:10.559 generation intact. And that's what Paul Volker did. I asked 0:05:10.600 --> 0:05:12.600 him once about the banks. I said, Paul, why did 0:05:12.600 --> 0:05:16.040 you let this? In two thousand seventeen, which is where 0:05:16.040 --> 0:05:19.400 that picture I put on Twitter came from. And we 0:05:19.400 --> 0:05:22.159 had gone to lunch in this little cafeteria right there 0:05:22.160 --> 0:05:24.520 in Rockefeller Center where he used to go and you know, 0:05:24.600 --> 0:05:27.880 get his lunch every day. It's very bad, it's very nice, uh, 0:05:27.920 --> 0:05:29.560 And we're sitting there and I said, like, why did 0:05:29.560 --> 0:05:32.280 you let the banks do off balance sheet finance? All 0:05:32.320 --> 0:05:35.479 of these bad things happened subsequently, right, And he said, well, 0:05:35.600 --> 0:05:40.120 they were broke. What else was I gonna do? So, 0:05:40.440 --> 0:05:43.159 you know, he was just such a suite and I think, 0:05:43.240 --> 0:05:46.960 very committed public servant, and I always respected that about him. 0:05:46.960 --> 0:05:49.279 But he was a family friend, which is why I 0:05:49.400 --> 0:05:52.520 never asked him for anything. What about some of the 0:05:52.600 --> 0:05:57.680 other um said chairman that you had relationships with. What 0:05:57.720 --> 0:06:00.600 can you tell us about Arthur Burns or Alan Greenspan 0:06:00.839 --> 0:06:05.719 or anybody else on the FMC that that stands out 0:06:05.760 --> 0:06:10.000 in your mind. Arthur Burns was a very sweet, self 0:06:10.040 --> 0:06:14.360 effacing man, Um who my dad got to know because 0:06:14.480 --> 0:06:17.719 Pop was a speechwriter for Richard Nixon and he left 0:06:18.040 --> 0:06:21.000 the Nixon campaign just as Nixon was going to the 0:06:21.000 --> 0:06:25.279 White House. So, you know, because of my father's press 0:06:25.320 --> 0:06:28.320 credentials and connections and everything else, and also because of 0:06:28.360 --> 0:06:31.120 the fact he was a Republican again in a Democratic 0:06:31.240 --> 0:06:34.720 dominated town. Um, he quickly got to know people like 0:06:34.760 --> 0:06:38.680 Burns and Greenspan and became kind of their political counselor 0:06:38.680 --> 0:06:42.320 in a sense, because the decision by both men to 0:06:42.400 --> 0:06:46.200 get into the FED and get deeply involved in national 0:06:46.279 --> 0:06:50.159 economic policy was a very momentous one because it meant 0:06:50.160 --> 0:06:53.599 a lot of compromises for both Um. You know, I 0:06:53.640 --> 0:06:56.400 don't remember Burns as well because I was so young, 0:06:57.480 --> 0:07:02.120 But Greenspan was always a a long uh family friend, 0:07:02.160 --> 0:07:05.200 and he had gotten to know my pop when Pop 0:07:05.320 --> 0:07:08.520 was working with Ronald Reagan. When you know, during the 0:07:08.560 --> 0:07:14.720 seventies six cycle, when Ford eventually got denomination Greenspan was 0:07:14.720 --> 0:07:16.600 trying to figure out when he was going to go 0:07:16.680 --> 0:07:19.560 to the Council of Economic Advisors and then end up 0:07:19.600 --> 0:07:22.080 at the FAT of course, and that was also a 0:07:22.160 --> 0:07:25.520 very political decision, very because you know, the FET is 0:07:25.560 --> 0:07:29.720 the most political entity in Washington by far. Fan was 0:07:30.280 --> 0:07:34.520 very astute political analysts, not a great economist, but really 0:07:34.600 --> 0:07:37.920 really sharp judge of politics. So you know, it was 0:07:37.960 --> 0:07:41.360 a fascinating thing for a young man to have access to. 0:07:41.520 --> 0:07:43.960 I would sit on the stairs in our house in 0:07:45.040 --> 0:07:48.960 for Sunthern, Maryland, off of Massachusetts Avenue, and just listen 0:07:49.520 --> 0:07:53.160 to these parties, uh and meet the people sometimes because 0:07:53.200 --> 0:07:55.880 we were all very little, but as we grew up, 0:07:55.960 --> 0:07:58.280 these people were part of our lives and we were 0:07:58.360 --> 0:08:02.080 kind of Washington insiders. That's what Washington was like in 0:08:02.120 --> 0:08:04.680 the eighties and the nineties. You could actually get stuff done. 0:08:05.280 --> 0:08:08.760 People would talk to one another, they would have dinner, drinks, 0:08:09.080 --> 0:08:12.520 you know, a little a little different than today. Yeah, 0:08:12.760 --> 0:08:16.280 I think we have to restore civility and there by 0:08:16.400 --> 0:08:20.480 communication that would go a long way. That would go 0:08:20.480 --> 0:08:23.320 a long way. I have to follow up with one question. 0:08:23.440 --> 0:08:30.200 You mentioned FED chairman making compromises. Were you talking philosophically 0:08:30.560 --> 0:08:35.520 or politically, or across the board. I think it's across 0:08:35.559 --> 0:08:40.040 the board. You cannot survive as FED chairman without the 0:08:40.160 --> 0:08:42.960 at least the acquiescence of the White House. And you know, 0:08:43.120 --> 0:08:47.760 Trump brates Powell and says things in public. But as 0:08:47.800 --> 0:08:50.560 Judy Shelton said, I think so wonderfully, at least he 0:08:50.640 --> 0:08:54.640 does it in public. What Richard Nixon did Darthur Burns 0:08:54.760 --> 0:09:00.520 was criminal. His anti Semitism and his just nastiness was 0:09:00.520 --> 0:09:03.160 was awful. And you know, Reagan, on the other hand, 0:09:03.280 --> 0:09:07.960 was very affable. My dad got Paul Vulcer reappointed and 0:09:08.000 --> 0:09:11.800 it was a little cabal between him and Paul Laxolt, 0:09:11.840 --> 0:09:16.440 the Great Senator UM. One weekend, the Laxalts and the 0:09:16.440 --> 0:09:19.640 Reagans were at Camp David, and my dad gave Paul, 0:09:20.160 --> 0:09:23.160 the Paul Laxalt the phone number and said, have Reagan 0:09:23.280 --> 0:09:27.480 call Vulker. And it happened. And then my dad said 0:09:27.480 --> 0:09:29.839 to me later, I put this in inflated. This is 0:09:29.880 --> 0:09:34.960 how stuff gets done. And watching the phone call from 0:09:35.240 --> 0:09:39.440 gathering at Camp David. Yeah, And you know, Beryl Sprinkle 0:09:39.600 --> 0:09:42.560 was being pushed very very hard by Don Reagan, the 0:09:42.640 --> 0:09:47.360 former chairman of Mary Lynch and Dad won. So, you know, 0:09:47.760 --> 0:09:50.840 kudos to Paul Laxol. Let's talk a little bit about 0:09:51.120 --> 0:09:55.760 debt and building the American dream. So how have mortgages 0:09:56.679 --> 0:10:03.120 over time helped to build the American dream? Mortgages, you know, 0:10:03.160 --> 0:10:07.600 are frequently cited as evidence of the American dream, the 0:10:07.600 --> 0:10:11.920 ownership of a home, the homestead, right, but the actual 0:10:12.040 --> 0:10:15.920 marketplace goes back to the Depression. When the government got 0:10:16.000 --> 0:10:20.240 involved in the mid and late nineteen thirties, uh and 0:10:20.400 --> 0:10:23.880 created uh Fannie May, which was an agency that would 0:10:23.880 --> 0:10:27.440 go out and buy loans, long term loans, and hold them, 0:10:28.160 --> 0:10:31.880 and they funded these operations by issuing government guaranteed debt. 0:10:33.000 --> 0:10:35.959 Before that, you couldn't get a thirty year mortgage. You 0:10:35.960 --> 0:10:39.040 couldn't get a ten year mortgage. Berry. My grandmother Vera 0:10:39.080 --> 0:10:42.480 actually lost her house in the early last century because 0:10:42.480 --> 0:10:44.920 they had a balloon. In other words, you had small 0:10:44.920 --> 0:10:49.079 payments initially, and then you owed everything and there was well, 0:10:49.559 --> 0:10:52.160 there was no such thing as a thirty year fixed mortgage. 0:10:52.320 --> 0:10:56.040 It was interest only payments, and then you would if 0:10:56.080 --> 0:10:59.000 you were a borrower in good standing, at the end 0:10:59.000 --> 0:11:02.439 of the loan period, you would roll it over into 0:11:02.520 --> 0:11:05.200 a new one. And startle over. If you weren't making 0:11:05.240 --> 0:11:08.520 principal payments, you still owed exactly what you owed when 0:11:08.520 --> 0:11:12.360 you begin. That's right correct. And and really if you 0:11:12.400 --> 0:11:14.439 work in the mortgage business and in the world of 0:11:14.520 --> 0:11:17.960 fixed income, you understand if we don't really have thirty 0:11:18.040 --> 0:11:22.000 year mortgages, we have dirty day mortgages with an option 0:11:22.080 --> 0:11:25.480 to renew, which is held by the homeowner. And so 0:11:25.559 --> 0:11:28.160 every month the investor has to try and figure out 0:11:28.720 --> 0:11:31.480 how many of the loans in a given pool, which 0:11:31.559 --> 0:11:35.320 is how they do bond mortgage bond issuance, are going 0:11:35.400 --> 0:11:40.800 to prepay, refinance, sell the house, default, whatever. And it's 0:11:40.880 --> 0:11:45.719 that optionality that makes mortgages so interesting and also so treacherous. 0:11:46.080 --> 0:11:49.880 It's a huge asset class. It's almost twelve trillion dollars now, 0:11:49.920 --> 0:11:54.000 but interestingly it didn't grow for ten years after the crisis. 0:11:54.280 --> 0:11:58.880 It was flat and no surprise there. Yeah, but it's interesting, 0:11:59.000 --> 0:12:02.120 very because socio logically and in terms of you know, 0:12:02.160 --> 0:12:04.920 the baby boom and everything else. When you study how 0:12:04.920 --> 0:12:08.400 the mortgage industry has behaved over time. In the eighties 0:12:08.520 --> 0:12:11.440 crashed and burned, destroyed all the savings and loans. The 0:12:11.559 --> 0:12:15.559 nineties was kind of flat, now there were fringe products there, 0:12:15.600 --> 0:12:19.280 specifically our friends at City Bank who decided they could 0:12:19.280 --> 0:12:23.360 do no DOC, no income verification mortgages for self employed. Right, 0:12:23.840 --> 0:12:27.200 that's where subprime mortgages came from, was in the nineties. 0:12:27.400 --> 0:12:30.520 But then they got out because the results were so horrific. 0:12:30.559 --> 0:12:33.320 And they did this in the US and other countries too. 0:12:33.640 --> 0:12:35.840 When I was working at the FED, I was in 0:12:35.960 --> 0:12:42.040 charge of overseeing city banks foreign adventures in places like Japan. Well, Japan, 0:12:42.520 --> 0:12:46.160 they have no credit information on individuals, so someone could 0:12:46.200 --> 0:12:50.800 default and just disappear, and they did. So. You know 0:12:50.960 --> 0:12:54.760 what's the las of mortgages in Japan, Chris? Oh god, 0:12:55.320 --> 0:12:58.040 they can be quite long, they can be multi generational 0:12:59.200 --> 0:13:03.560 mortgages are unheard of, no, no, because the rates are 0:13:03.640 --> 0:13:07.320 very low. And so what happens is if a young 0:13:07.400 --> 0:13:10.600 couple is getting married, the family will typically cool their 0:13:10.640 --> 0:13:14.520 resources go buy them a house, and if they need debt, 0:13:14.600 --> 0:13:17.360 they'll pay it off as fast as they can. You know, 0:13:17.440 --> 0:13:20.920 you may have heard of stated income loans. They're prey 0:13:21.040 --> 0:13:25.520 popular out on the West Coast among the Asian community, Koreans, Chinese, 0:13:25.840 --> 0:13:29.480 and very typically these loans performed great even though they 0:13:29.480 --> 0:13:31.840 don't fit in the box for you know, Fannie Mae, 0:13:31.880 --> 0:13:33.760 Freddie mack j and you make kind of loans, they're 0:13:33.800 --> 0:13:38.480 they're typically private. The communities hate debt, so you know, 0:13:38.679 --> 0:13:41.160 if a young couple starts a family, they'll they'll pay 0:13:41.160 --> 0:13:43.960 it down five years. So all of that has to 0:13:44.000 --> 0:13:46.839 be factored into your analysis as an investor if you're 0:13:46.840 --> 0:13:50.679 buying these loans right. You know, like the last few 0:13:50.760 --> 0:13:54.400 years because of the bondmarket volatility, all of the mortgage 0:13:54.559 --> 0:13:56.679 loans that were made in eighteen and nineteen are pre 0:13:56.840 --> 0:13:59.400 pain because they're all in the money now, they can 0:13:59.440 --> 0:14:02.160 all refin yts and I take over the next year 0:14:02.240 --> 0:14:04.400 or two, you're going to see the fig gently step 0:14:04.440 --> 0:14:07.640 on the bottom of the yield curve and force that 0:14:08.000 --> 0:14:12.199 front coupon down for both government loans and and Fenny 0:14:12.240 --> 0:14:15.200 and Freddie loans, and we'll see three percent mortgages in 0:14:15.200 --> 0:14:17.400 this country I think by the end of the year, 0:14:17.800 --> 0:14:20.080 which means you're gonna have a Jinny May two out there. 0:14:20.120 --> 0:14:23.320 You're gonna have a two percent coupon. Let's let's talk 0:14:23.360 --> 0:14:27.480 about that a second, because if I remember, pre crisis, 0:14:28.080 --> 0:14:32.000 the average length of a mortgage was about seven years, 0:14:32.520 --> 0:14:36.440 meaning people typically would move into a house their starter home, 0:14:37.080 --> 0:14:39.920 have the first kid outgrow the house, and by year 0:14:39.960 --> 0:14:43.960 seven they're selling and trading up to the three bedroom split. 0:14:44.120 --> 0:14:48.320 And that was fairly typical. Are those numbers about what 0:14:48.360 --> 0:14:52.720 you recall and what does that look like today? Yeah, 0:14:52.880 --> 0:14:56.400 it would be seven years or even shorter during periods 0:14:56.440 --> 0:15:01.240 of very high labor market mobility for example, um, you 0:15:01.280 --> 0:15:04.280 also have the speculative component. Back in the two thousand's 0:15:04.280 --> 0:15:08.920 a lot of second homes which would flip quite quite fast. Today, 0:15:09.040 --> 0:15:12.840 average lives are ten plus years. In fact, the servicing 0:15:12.920 --> 0:15:17.200 portfolios that are being created right now Barry with refinancings 0:15:17.240 --> 0:15:19.280 are going to be worth a lot of money because 0:15:19.320 --> 0:15:23.080 they're gonna have average lives over ten years. Whereas the 0:15:23.200 --> 0:15:26.920 older strips, like I said, bonds that were sold you know, 0:15:27.000 --> 0:15:29.920 one and two years ago with much higher coupons, they're 0:15:29.920 --> 0:15:32.560 going to pre pay. And so the average life of 0:15:32.560 --> 0:15:35.880 those pools it already has, it's it's shrinking down to 0:15:35.960 --> 0:15:38.640 like three years. And if you're in Eastern and you 0:15:38.720 --> 0:15:40.960 paid you know, one oh four for the bond and 0:15:41.000 --> 0:15:45.360 you're getting redemptions back at par that's kind of painful. 0:15:46.040 --> 0:15:49.680 That's a loss. So so we don't. We don't really 0:15:49.800 --> 0:15:54.400 love predictions here. We kind of frown on predictions around 0:15:54.440 --> 0:15:57.520 these parts. But what I'm hearing from you is that 0:15:57.680 --> 0:16:01.720 you think, as part of the Corona a virus pandemic response, 0:16:02.360 --> 0:16:07.560 the FED is going to encourage another wave of refinancing 0:16:07.720 --> 0:16:11.520 by keeping part of the curve low, not inverted, but 0:16:11.720 --> 0:16:16.359 low and flat, so that it becomes attractive for homeowners 0:16:16.360 --> 0:16:19.600 to refinance. Did I hear that right? Oh? Yes, I 0:16:19.640 --> 0:16:22.640 think you're gonna see what we call streamlined refine that 0:16:22.720 --> 0:16:26.080 don't require appraisals. In other words, you have an existing borrower, 0:16:26.600 --> 0:16:29.680 you already know who they are, right, you're lowering their costs. 0:16:29.680 --> 0:16:32.800 You're typically doing a rate refine rather than having them 0:16:32.840 --> 0:16:35.920 take cash out. But that's okay. If you lower the 0:16:35.920 --> 0:16:39.840 household's expenses, you're improving the credit. It's gonna have a 0:16:39.840 --> 0:16:43.200 lower probability at default. And overall, what you want is 0:16:43.240 --> 0:16:46.560 to get cash into the economy right now, right, So yeah, 0:16:46.960 --> 0:16:51.080 I think the FED would love to see a gradual 0:16:51.520 --> 0:16:54.120 surgeon refines because you know what they have to buy 0:16:54.120 --> 0:16:57.840 the paper Barry, Uh, their mortgage portfolio is going to 0:16:57.920 --> 0:17:01.520 prepay in the next six months. It's like a trillion dollars. 0:17:01.560 --> 0:17:05.040 So just to replace that and keep their balance sheet 0:17:05.119 --> 0:17:09.200 stable in terms of monetary policy purposes, they're gonna have 0:17:09.240 --> 0:17:11.359 to buy a lot of paper, and I think the 0:17:11.440 --> 0:17:15.320 predominant UH source will be the government market. Jennie May, 0:17:15.840 --> 0:17:19.080 we've had some problems with the Fanny Freddie component for 0:17:19.119 --> 0:17:21.880 the last couple of weeks. While they're a regulator, Mark 0:17:21.920 --> 0:17:24.840 Collabria has figured out what to do. But I think 0:17:24.880 --> 0:17:27.440 the good news this week is he's figuring it out. 0:17:27.760 --> 0:17:31.560 We're helping him. Um. So hopefully the whole mortgage complex 0:17:31.640 --> 0:17:35.120 is going to have a solution to both the forbearance 0:17:35.640 --> 0:17:39.000 with the COVID nineteen and then the resulting defaults. I 0:17:39.359 --> 0:17:41.920 think a third or more the people who look for 0:17:41.920 --> 0:17:45.000 forbearance on their mortgages barrier are going to ultimately default. 0:17:45.359 --> 0:17:48.040 Let's talk a little bit about something that is in 0:17:48.119 --> 0:17:54.200 the news today, namely the government's Paycheck Protection Program better 0:17:54.200 --> 0:17:58.440 known as p p P. How are banks handling this? 0:17:58.720 --> 0:18:04.320 Who's doing this well? Who is not? The banks, like 0:18:04.400 --> 0:18:06.720 all of us in the world of finance, had this 0:18:07.400 --> 0:18:12.480 this Cares Act legislation thrown at us. There was no 0:18:13.400 --> 0:18:15.760 guidance on how we were to implement it, and in 0:18:15.800 --> 0:18:19.439 many cases it was unfunded. So, for example, the entire 0:18:20.000 --> 0:18:23.720 mortgage space, whether it's government guaranteed or private, has to 0:18:23.760 --> 0:18:26.640 figure out how to deal with consumers who've been told 0:18:26.640 --> 0:18:29.440 they don't have to pay their loans. And this really 0:18:29.440 --> 0:18:33.280 only applies to government guaranteed loans, but everything autos, you know, 0:18:33.280 --> 0:18:36.359 if you name it, the rent whatever, So everybody thinks 0:18:36.359 --> 0:18:39.560 they got a free pass, but it's not. Now. With 0:18:39.680 --> 0:18:43.120 small businesses, there was a window there where you could 0:18:43.160 --> 0:18:45.560 go to your bank, typically the bank you use for 0:18:45.640 --> 0:18:48.720 the business and payroll, and you could get a loan 0:18:48.800 --> 0:18:51.439 from them, and if you agreed to keep your people 0:18:51.480 --> 0:18:56.280 on it would eventually be forgiven. There's so much money though, 0:18:56.520 --> 0:18:59.160 so most of the small business people I know who 0:18:59.200 --> 0:19:01.880 have tried to act sess these credits have found out 0:19:01.960 --> 0:19:04.640 that the banks have already run through the money. And 0:19:05.040 --> 0:19:08.440 I think, what's you know important to realize is that 0:19:08.640 --> 0:19:11.199 for a lot of small businesses, it's better to just 0:19:11.280 --> 0:19:15.480 put your people on unemployment and keep their healthcare active 0:19:15.840 --> 0:19:18.320 because in many cases, especially you know, at the lower 0:19:18.400 --> 0:19:22.280 level employees, it's a race, so they can stay home 0:19:22.280 --> 0:19:26.080 with their families, you keep their health insurance intact and 0:19:26.160 --> 0:19:29.439 you just basically wait. And I think that's what a 0:19:29.480 --> 0:19:33.240 lot of small businesses have decided to do. So we've 0:19:33.240 --> 0:19:36.880 heard about a lot of smaller community banks that were 0:19:37.040 --> 0:19:41.159 very effective at processing these p p P applications, but 0:19:41.560 --> 0:19:44.679 less so for the big money center banks. Is that 0:19:44.960 --> 0:19:49.640 simply a function of employee to client ratio. I mean, 0:19:49.680 --> 0:19:53.560 if you're Wells Fargo UM or Bank America, you have 0:19:53.640 --> 0:19:57.000 a bajillion clients. But if you're a smaller community bank 0:19:57.080 --> 0:20:00.240 somewhere in the Midwest, I gotta think it's pretty easy 0:20:00.320 --> 0:20:05.200 for them to process those applications quickly. That's correct. Very 0:20:05.080 --> 0:20:10.320 the larger institutions have trouble with processing anything out of 0:20:10.359 --> 0:20:14.439 the ordinary um In essence, there are no economies of 0:20:14.440 --> 0:20:19.080 scale and banking, right. So the little community bank, even 0:20:19.119 --> 0:20:23.720 the regionals, are typically more flexible. They can handle increase 0:20:23.760 --> 0:20:28.000 at the branch level and they can make decisions because 0:20:28.000 --> 0:20:31.600 they have a flatter organization the big banks or pyramids, 0:20:31.640 --> 0:20:35.280 and they do this intentionally to keep them from causing trouble. 0:20:35.800 --> 0:20:39.920 So essentially, the largest banks are very inefficient by design, 0:20:40.560 --> 0:20:42.879 and that's why when you call them, they have this 0:20:43.080 --> 0:20:48.199 very narrow bottleneck of capacity, for example, to take calls 0:20:48.240 --> 0:20:50.879 because you have to actually talk to someone if you 0:20:50.920 --> 0:20:53.040 want to get one of these loans. And they had 0:20:53.280 --> 0:20:56.520 some online presence, but remember they had to put all 0:20:56.520 --> 0:20:59.440 this up in a matter of days. And banks don't 0:20:59.480 --> 0:21:03.120 move that quickly, see non bank companies. Because they're flat, 0:21:03.680 --> 0:21:07.080 they move very quickly, and smaller banks tend to be 0:21:07.200 --> 0:21:10.919 much more nimble than the larger institutions. So so for 0:21:11.000 --> 0:21:14.359 these banks, how does participating in the p P P 0:21:14.600 --> 0:21:18.520 plan benefit them? It certainly doesn't hurt if your clients 0:21:18.640 --> 0:21:21.959 can survive. But is there any incentive for the banks 0:21:22.000 --> 0:21:25.399 to do something? Oh? Yeah, they make a couple of 0:21:25.400 --> 0:21:28.840 points up front gain on sale, and the loan no 0:21:28.920 --> 0:21:32.960 credit risk. It works, they're all covered credits. It's like 0:21:33.000 --> 0:21:36.760 a small business administration loans. The banks have a nice 0:21:37.040 --> 0:21:39.480 little bump in the front because they typically will sell 0:21:39.520 --> 0:21:42.400 those loans where they can keep me in portfollowing off 0:21:42.440 --> 0:21:44.800 they want. But they have a number of incentives to 0:21:45.200 --> 0:21:48.840 do the business. Believe me, what kind of bank was 0:21:48.920 --> 0:21:53.240 best position for this COVID nineteen crisis? Was it the 0:21:53.280 --> 0:21:56.000 big money center banks, was it the investment banks? Was 0:21:56.040 --> 0:21:59.400 it the regional banks or the smaller community banks. Who 0:21:59.440 --> 0:22:01.280 do you believe EVE is going to come out of 0:22:01.320 --> 0:22:08.520 this um as having not only survived but thrived. I 0:22:08.600 --> 0:22:11.600 think first and foremost, you look at JP Morgan simply 0:22:11.640 --> 0:22:14.720 because of size, you know, a trillion plus and core 0:22:14.800 --> 0:22:18.000 deposits on one side of the business and a pretty 0:22:18.119 --> 0:22:21.720 robust capital markets business and also derivatives on the other side. 0:22:21.720 --> 0:22:26.280 It's about half and half. Well, it's Bank of America likewise, 0:22:26.320 --> 0:22:29.280 big islands of liquidity, more than a trillion dollars in 0:22:29.359 --> 0:22:33.960 court deposits. The ones with more consumer exposure like Capital 0:22:34.000 --> 0:22:37.919 One City. Uh, they've been getting beaten up just for 0:22:37.960 --> 0:22:41.119 that reason. You know, credit is the concern. And in 0:22:41.200 --> 0:22:45.720 the investment banks, interestingly, Morgan Stanley during the sell office, 0:22:46.480 --> 0:22:49.000 the outlier and the whole group, their credit the false 0:22:49.000 --> 0:22:52.640 swaps were trading more than two d basis points over 0:22:52.680 --> 0:22:55.600 the curve, which is a lot. Give you an example, 0:22:55.720 --> 0:22:58.959 before the crisis and the sell off kind of beginning 0:22:58.960 --> 0:23:02.040 of February, most of these banks or forty fifty bits 0:23:02.080 --> 0:23:05.639 over the curve for five year credit the fault swap insurance. 0:23:06.080 --> 0:23:10.720 So they all widened. And Goldman, Morgan Stanley, you know, 0:23:11.000 --> 0:23:14.359 American Express, they got beat up but today MX is 0:23:14.359 --> 0:23:17.600 still trained the three times buck. It's a premium property 0:23:17.640 --> 0:23:20.760 because it's the best performing large bank in the United States, 0:23:20.800 --> 0:23:24.440 even though it's small, it's only about two billion assets. 0:23:24.440 --> 0:23:27.760 So I would tell you the consumer exposure is the 0:23:27.800 --> 0:23:30.479 real pain point. But you're going to see pain on 0:23:30.520 --> 0:23:33.600 the on the institutional and the commercial side too. I 0:23:33.680 --> 0:23:36.520 think low losses for banks, it's going to be across 0:23:36.520 --> 0:23:39.879 the board. Berry. If I recall correctly, Capital One is 0:23:39.960 --> 0:23:42.880 now the largest credit card issue are in the country. 0:23:42.960 --> 0:23:47.399 Is that right. Yes. They rolled up several monol lines, 0:23:47.680 --> 0:23:51.119 you know, ten fifteen years ago, and it's primarily a 0:23:51.119 --> 0:23:54.440 credit card issuer. Pretty high cost of funds, but they're 0:23:54.520 --> 0:23:57.400 very efficient. They've gotten into some other areas that got 0:23:57.400 --> 0:24:00.439 them in trouble, like oil, which was kind of rising. 0:24:00.680 --> 0:24:03.480 I think people were taken aback by that. But the 0:24:03.520 --> 0:24:06.840 reality is, you know, these model lines don't do so well. 0:24:06.880 --> 0:24:09.920 They need to broaden their business and Capital One has 0:24:09.960 --> 0:24:13.040 not been very good at main street banking. They bought 0:24:13.040 --> 0:24:17.760 a couple of retail banks for basically for the funding um, 0:24:17.800 --> 0:24:20.800