WEBVTT - Surveillance: JPMorgan To Acquire First Republic 0:00:05.120 --> 0:00:08.920 This is the Bloomberg Surveillance Podcast. I'm Lisa A. Bromoid's 0:00:08.920 --> 0:00:11.879 along with Tom Keen and Jonathan Ferrell, join us each 0:00:11.960 --> 0:00:15.760 day for insight from the best in economics, geopolitics, finance 0:00:15.800 --> 0:00:19.520 and investment. Subscribe to Bloomberg Surveillance on demand on Apple, 0:00:19.600 --> 0:00:22.840 Spotify and anywhere you get your podcasts, and always on 0:00:22.880 --> 0:00:26.440 Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business app. 0:00:26.760 --> 0:00:30.400 Chris Maronak joins us now director of Research at Jenny Montgomery. Scott, Chris, 0:00:30.440 --> 0:00:32.839 We've been on this journey with you. We've appreciated it 0:00:32.840 --> 0:00:35.560 every step of the way. We've got some kind of resolution. 0:00:35.760 --> 0:00:37.640 I think what's interesting for us this morning is JP 0:00:37.760 --> 0:00:40.240 Morgan is positive in the pre market when they say 0:00:40.240 --> 0:00:42.839 things like our government invited us and others to step up, 0:00:42.840 --> 0:00:45.280 and we did. Are they doing us a favor or 0:00:45.280 --> 0:00:46.400 have they got something good here? 0:00:47.280 --> 0:00:48.600 Well? I think they did both. 0:00:48.640 --> 0:00:50.320 I think they did us a favor because they were 0:00:50.400 --> 0:00:52.879 able to do this at a lower cost to the government. 0:00:53.200 --> 0:00:55.520 If you look at the bid that they made and 0:00:55.560 --> 0:00:57.840 the gain that they're booking, it's a lesser gain than 0:00:57.840 --> 0:01:01.320 what we've seen at the other transactions, particularly comparing the SVB. 0:01:01.440 --> 0:01:03.600 For Citizens deal for Citizens. 0:01:03.120 --> 0:01:06.200 Had a real excellent transaction a month ago. This is 0:01:06.240 --> 0:01:08.200 a less of a gain for JPM, But I also 0:01:08.200 --> 0:01:11.039 think it represents the upside to the wealth management business 0:01:11.040 --> 0:01:15.039 the FRC had. So that's really the honeyhole that JPM 0:01:15.080 --> 0:01:17.959 Morgan sees, and that's where I think that there's opportunity 0:01:18.000 --> 0:01:20.040 for them in the long term with the assets and 0:01:20.080 --> 0:01:21.399 the asset management clients. 0:01:21.640 --> 0:01:23.759 Chris, is this a bailout by the FDIC. 0:01:24.680 --> 0:01:28.560 Not really, because the FDIC could have made much better terms. 0:01:28.840 --> 0:01:31.320 I think that's ultimately why PNC or other bidders were 0:01:31.360 --> 0:01:34.040 not successful. I think JPM was willing to come in 0:01:34.080 --> 0:01:36.640 at at a less of a data, less of a discount. 0:01:37.080 --> 0:01:38.840 So at the end of the day, the FDIC is 0:01:38.880 --> 0:01:39.399 seizing the. 0:01:39.360 --> 0:01:42.160 Assets, they are going to do a loss share, similar 0:01:42.200 --> 0:01:45.080 to other smaller transactions we saw back in twenty eight, 0:01:45.160 --> 0:01:48.720 nine and ten, and really the SVB and signature transactions too. 0:01:48.760 --> 0:01:50.000 But I think at the end of the day, it's 0:01:50.040 --> 0:01:54.520 a better transaction for the system and the DIF. 0:01:54.960 --> 0:01:57.680 Did the FDC wait too long, Chris to allow this 0:01:57.840 --> 0:02:01.480 crisis to continue to allow the drip drip of good assets, 0:02:01.560 --> 0:02:03.760 of good workers at this bank to leave. 0:02:04.720 --> 0:02:06.840 I think in a case of a week or two, yes, 0:02:06.920 --> 0:02:09.680 I would have preferred to see this resolved earlier in April, 0:02:09.960 --> 0:02:11.120 But at the end of the day, I think we 0:02:11.160 --> 0:02:12.200 got where we needed to go. 0:02:12.840 --> 0:02:14.680 I think they were trying to see if there was a. 0:02:14.639 --> 0:02:18.280 Private market solution, perhaps private capital, perhaps the equity markets 0:02:18.320 --> 0:02:20.959 would step up with the preferred or an equity raise, 0:02:21.000 --> 0:02:22.959 but that was just not in the cards for a 0:02:23.040 --> 0:02:23.760 first republic. 0:02:23.840 --> 0:02:25.360 So this was the best alternative. 0:02:25.480 --> 0:02:27.400 Chris, when you read lines like and you mentioned it 0:02:27.480 --> 0:02:30.400 a moment ago that jp Morgan and the FDIC have 0:02:30.480 --> 0:02:33.320 agreed to share the burden of losses, what does that 0:02:33.320 --> 0:02:34.360 actually mean in practice? 0:02:34.360 --> 0:02:36.160 Can you explain that for our audience? 0:02:36.760 --> 0:02:40.480 Sure, so, as JPM now has the assets and deposits, 0:02:40.960 --> 0:02:43.480 they will work through those and particularly loans. As they 0:02:43.520 --> 0:02:45.760 collect those loans, there'll be a laws share agreement for 0:02:45.760 --> 0:02:48.240 any losses that come out, and then that will be 0:02:48.240 --> 0:02:50.880 shared with the FDIC. It's very similar to what we 0:02:50.960 --> 0:02:54.160 had in twenty eight, nine and ten. Typically the assets 0:02:54.240 --> 0:02:57.360 back then were much worse. These are assets that are 0:02:57.400 --> 0:02:59.959 simply marked for interest rate risk, not for credit n 0:03:00.480 --> 0:03:02.680 so Ultimately, I think you'll see JP Morgan sit with 0:03:02.720 --> 0:03:06.240 these assets and sell them and move forward. It's possible 0:03:06.280 --> 0:03:09.320 that much of what they are holding here comes back 0:03:09.320 --> 0:03:11.040 to them in the next twelve day, ten months of 0:03:11.160 --> 0:03:14.359 interest rates change and the FED change is policy perhaps 0:03:14.639 --> 0:03:16.520 a quarter or two from now, that's going to have 0:03:16.520 --> 0:03:18.800 a ce change to how these assets are valued. 0:03:18.840 --> 0:03:20.720 So timing is everything, and I think. 0:03:20.560 --> 0:03:23.360 That's ultimately why the bid end up being less of 0:03:23.400 --> 0:03:25.560 a discount for JP Morgan than the other banks. 0:03:25.639 --> 0:03:27.880 Did they share the upside as well than Chris? 0:03:29.200 --> 0:03:31.560 They capture most of the upside, so I think the 0:03:31.639 --> 0:03:33.120 upside all goes to JP Morgan. 0:03:33.480 --> 0:03:36.800 That's fascinates in Premo well, especially fasciniting. 0:03:36.560 --> 0:03:39.080 Especially because in the stories it actually said they shared 0:03:39.120 --> 0:03:41.520 the upside as well as a downside. So it's confusing 0:03:41.560 --> 0:03:45.200 that basically JP Morgan ends up with the entirety of 0:03:45.720 --> 0:03:48.120 the upside at a time where the FBIIC wants to 0:03:48.200 --> 0:03:51.320 mitigate socializing the losses and privatizing the games. 0:03:51.400 --> 0:03:53.040 Chris, can you give us a little bit more clarity 0:03:53.320 --> 0:03:53.680 on that. 0:03:53.720 --> 0:03:55.240 What are you reading at the moment that gives you 0:03:55.800 --> 0:03:57.440 a better idea of what's going to happen there. 0:03:58.200 --> 0:03:59.840 Well, I think the laws share agreement's going to be 0:03:59.920 --> 0:04:00.480 very typical. 0:04:00.480 --> 0:04:03.600 And what we saw back in the transactions in twentyd 0:04:03.600 --> 0:04:05.760 and eight, nine and ten it was a very typical 0:04:05.840 --> 0:04:09.520 law share arrangement where the FDIC sees the bank, they 0:04:09.560 --> 0:04:11.760 cut the law share arrangement, and then the bank collected 0:04:11.800 --> 0:04:15.120 the assets. The bank becomes the conduit for the FBIC 0:04:15.360 --> 0:04:18.080 to collect the money to collect the loans. It's less 0:04:18.120 --> 0:04:20.360 of an issue with deposits. It's much more with the 0:04:20.400 --> 0:04:22.560 loans that were made. To remember, the loans the First 0:04:22.560 --> 0:04:24.800 Republic had were largely. 0:04:24.839 --> 0:04:28.239 Low rate mortgages with low loan to value. 0:04:28.320 --> 0:04:31.320 So these are not risky loans that in many cases 0:04:31.320 --> 0:04:34.159 these are very low risk loans. They simply had interest 0:04:34.200 --> 0:04:36.400 rate risks because they were done at three and a 0:04:36.480 --> 0:04:38.679 quarter three and a half, and the mortgage market today 0:04:38.760 --> 0:04:39.479 is closer. 0:04:39.200 --> 0:04:40.159 To six chris. 0:04:40.360 --> 0:04:42.280 As you know, and as we know because we've talked 0:04:42.279 --> 0:04:44.240 about this over the last couple of weeks in a 0:04:44.320 --> 0:04:47.040 much bigger way. JP Morgan already had more than ten 0:04:47.080 --> 0:04:50.520 percent of US deposits. Now that's been seen as problematic 0:04:50.880 --> 0:04:53.520 for the regulator. We assume in this morning that that 0:04:53.600 --> 0:04:56.000 exception has been granted already just by the very nature 0:04:56.000 --> 0:04:57.640 of this being authorized. 0:04:57.120 --> 0:04:57.680 At the moment. 0:04:58.600 --> 0:05:01.800 Correct, absolutely, So can I ask the question, then, does 0:05:01.800 --> 0:05:04.160 this become a problem if they hold more than ten 0:05:04.200 --> 0:05:06.880 percent of US deposits. I assume that was a line 0:05:06.920 --> 0:05:08.960 in the send for a reason. Why are we willing 0:05:09.000 --> 0:05:09.640 to go beyond it? 0:05:10.880 --> 0:05:12.240 Well, I think at the end of the day, if 0:05:12.279 --> 0:05:15.400 you had to take a lower bid and therefore a 0:05:15.440 --> 0:05:19.119 bigger loss for the FDIC and for the Deposit Insurance Fund, 0:05:19.360 --> 0:05:21.200 it would have been problematic for the other banks. The 0:05:21.240 --> 0:05:23.360 other banks would have had to pay more than they 0:05:23.400 --> 0:05:27.560 already are paying. The cost of FDS insurance will go 0:05:27.720 --> 0:05:30.760 higher in the coming quarters the next year. So if 0:05:30.800 --> 0:05:33.000 you could limit the hit to the DIIF to the 0:05:33.040 --> 0:05:36.400 Deposit Insurance Fund, that really is the best outcome for 0:05:36.560 --> 0:05:39.360 both the banks and for the system. So ultimately, this 0:05:39.400 --> 0:05:42.080 is about building confidence, and I think you build confidence 0:05:42.120 --> 0:05:45.360 a by having first Republic result and b by seeing 0:05:45.400 --> 0:05:49.200 that a very good operator who has strong capital, remember 0:05:49.240 --> 0:05:52.080 the Fortress balance sheet that JP Morgan has always advocated 0:05:52.279 --> 0:05:54.000 that allows them to do the transaction. 0:05:54.360 --> 0:05:55.760 I think it's going to be rare. I don't think 0:05:55.760 --> 0:05:56.919 we're going to see others like this. 0:05:57.080 --> 0:05:59.440 It really was the bank that was caught by the 0:05:59.480 --> 0:06:02.720 Friendly five A BESTVB six weeks ago. 0:06:02.960 --> 0:06:04.520 Chris, is too big to fail a good thing? 0:06:04.560 --> 0:06:07.320 Now? Well, not necessarily. 0:06:07.760 --> 0:06:10.760 I feel that the regional banks and mid sized community 0:06:10.800 --> 0:06:12.839 banks are in a great position to step up and 0:06:12.920 --> 0:06:15.839 serve the businesses and the households of the country, So 0:06:16.000 --> 0:06:18.599 too big to fail is not necessarily the outcome that 0:06:18.640 --> 0:06:20.960 I'm looking for. I think there's a many banks who 0:06:20.960 --> 0:06:23.360 are well capitalized that can step up, So the su 0:06:23.520 --> 0:06:26.560 regards having this episode resolved is a good thing. I 0:06:26.600 --> 0:06:28.159 do think you're going to see that part of the 0:06:28.160 --> 0:06:31.159 credit solution in the country is seeing these mid. 0:06:31.000 --> 0:06:32.840 Sized banks perform and perform well. 0:06:33.440 --> 0:06:35.880 I think you're correct that the credit is tightening, but 0:06:35.920 --> 0:06:37.480 I don't think it is being shut off. 0:06:37.560 --> 0:06:39.279 Hey, Chris Wonderfu to get your view on things. 0:06:39.279 --> 0:06:41.719 No down will catch up again soon, Chris marinak there 0:06:41.800 --> 0:06:48.040 of Jenny Montgomery's scuff. Kathy James with this around the 0:06:48.080 --> 0:06:50.279 table from Schwab Kathy Wander for to catch up with you. 0:06:50.600 --> 0:06:52.520 I can't believe it's the first time we're talking in person. 0:06:52.560 --> 0:06:54.200 It's under like three years because I get to talk 0:06:54.240 --> 0:06:55.840 to you so often. It feels so bizarre. 0:06:56.000 --> 0:06:58.599 I know, just great to be back in the studio. 0:06:58.400 --> 0:06:59.279 Wonderful to be with you. 0:06:59.560 --> 0:07:02.200 This is another bank that's gone under in the United 0:07:02.240 --> 0:07:05.520 States for America, another last minute deal, spending the whole 0:07:05.560 --> 0:07:09.440 weekend negotiating this mess, and here we are. The Federal 0:07:09.440 --> 0:07:12.440 Reserve gets to decide to high interest rates on Wednesday, 0:07:12.640 --> 0:07:14.200 and seemingly it is going to go another twenty five 0:07:14.240 --> 0:07:16.360 basis points. And I'm sure you've heard the same commentry 0:07:16.360 --> 0:07:19.480 we have that every single bank that goes under is idiosyncratic, 0:07:19.520 --> 0:07:21.880 and this isn't about what the Federal Reserve's done. In fact, 0:07:21.960 --> 0:07:24.880 we heard from John Williams, the New York Fed President, 0:07:24.920 --> 0:07:26.600 just say a couple of weeks ago that he doesn't 0:07:26.600 --> 0:07:29.160 think it's because they went from zero to five so quickly. 0:07:29.600 --> 0:07:30.600 How do you respond to. 0:07:30.560 --> 0:07:32.920 That, Oh, I think it has a lot to do 0:07:33.160 --> 0:07:35.560 with how much the Fed has tightened and how rapidly 0:07:35.600 --> 0:07:38.600 they've tightened. You know the old saying that the Fed 0:07:38.600 --> 0:07:42.640 titans until something breaks. I think that clearly they've moved 0:07:42.680 --> 0:07:46.240 at such a rapid pace that there's an impact on 0:07:46.320 --> 0:07:48.680 financial stability, and we're seeing it in some of the 0:07:48.680 --> 0:07:52.960 bankings areas now. It doesn't mean that credit risk, which 0:07:53.040 --> 0:07:57.720 is what they normally get concerned about, is a big issue. 0:07:58.000 --> 0:08:00.800 But I think it's hard to divorce the Fed's actions 0:08:00.800 --> 0:08:02.560 from what's happening in the banking sector. 0:08:02.920 --> 0:08:04.840 Do you think it gets worse then, given that they're 0:08:04.840 --> 0:08:06.360 going to keep on hiking, or at least we'll hid 0:08:06.400 --> 0:08:07.440 one more time this week. 0:08:08.000 --> 0:08:10.520 Yeah, we're kind of hoping this is the last rate hike. 0:08:11.000 --> 0:08:12.760 But it tells you a lot about this FED that 0:08:12.800 --> 0:08:16.679 they hiked in March when we had banking sector problems, 0:08:16.720 --> 0:08:18.280 and they look like they're going to go ahead in 0:08:18.320 --> 0:08:21.520 May when they have banking sector problems. One would think 0:08:21.560 --> 0:08:24.320 that this is probably the end of the rate hike 0:08:24.440 --> 0:08:25.760 cycle at this stage of the game. 0:08:25.880 --> 0:08:27.720 I wonder what kind of key man risk there is 0:08:27.800 --> 0:08:30.080 for the Federal Reserve at this point, given the fact 0:08:30.120 --> 0:08:32.360 that on Friday they did put out a report talking 0:08:32.400 --> 0:08:35.440 about what went wrong with SVB, seem to have passed 0:08:36.040 --> 0:08:38.959 in the back few mirror, but there are ongoing questions 0:08:38.960 --> 0:08:42.040 about how accurately they are regulating some of these banks. 0:08:42.080 --> 0:08:45.320 I mean, is this potentially going to, I don't know, 0:08:45.400 --> 0:08:48.040 up end the leadership at the fed at a certain point. 0:08:48.640 --> 0:08:50.480 Well, I would think at least we're going to get 0:08:50.520 --> 0:08:53.880 some dissenting boats this week, or at least one or two, 0:08:54.040 --> 0:08:56.440 and I think that, yeah, they have to reconsider the 0:08:56.480 --> 0:09:00.520 regulatory environment that they're in as a banking regulator and 0:09:00.600 --> 0:09:05.000 supervisory capacity. So I would think, you know, I don't know. 0:09:05.040 --> 0:09:08.000 I don't have any particular predictions in that, but I 0:09:08.080 --> 0:09:10.920 do think that there may be certainly some rewritten rules 0:09:11.480 --> 0:09:14.040 and certainly a re examination of what's been going on. 0:09:14.160 --> 0:09:16.160 We were just talking with Michael Showell and he was 0:09:16.160 --> 0:09:19.360 talking about how for now it's interest rate risk, but 0:09:19.400 --> 0:09:23.040 that eventually it could very easily become credit risk, especially 0:09:23.080 --> 0:09:25.240 as a lot of companies and individuals have a trouble 0:09:25.280 --> 0:09:28.800 paying back such high rates. What's your sense of just 0:09:29.120 --> 0:09:31.679 how significant that credit risk is and whether it's accurately 0:09:31.720 --> 0:09:33.960 reflected and where the market is right now. 0:09:34.360 --> 0:09:36.760 Yeah, one thing that we've seen is the credit spreads 0:09:36.800 --> 0:09:39.360 really haven't blown out in the way that you would 0:09:39.400 --> 0:09:42.760 anticipate given what's going on in the market. So we 0:09:42.840 --> 0:09:45.480 do think that there's some risk of widening where I 0:09:45.520 --> 0:09:50.200 think the bank loan sector certainly is vulnerable. Private credit. 0:09:50.280 --> 0:09:52.320 We don't know what's happening there because they don't mark 0:09:52.360 --> 0:09:54.040 the market, but I have to think that there's some 0:09:54.520 --> 0:09:57.880 bad loans there that are having to be restructured, and 0:09:57.920 --> 0:10:00.480 the high yield spreads have been much to than I 0:10:00.520 --> 0:10:02.480 would have anticipated at this stage of the game. 0:10:02.600 --> 0:10:06.840 Just very specifically, after SVB happened and now First Republic, 0:10:06.880 --> 0:10:08.320 some people were saying they were going to come in 0:10:08.760 --> 0:10:11.800 and buy bank bonds that had gotten beaten up because 0:10:11.840 --> 0:10:14.199 particularly for regional banks, that there was still value there. 0:10:15.120 --> 0:10:18.480 Gerard Cassidy of RBC put this out, where JP Morgan 0:10:18.600 --> 0:10:21.640 is not assuming First Republic's corporate debt or preferred stock, 0:10:21.960 --> 0:10:25.120 does this raise another risk, another layer of risk that 0:10:25.240 --> 0:10:28.240 makes that proposition perhaps less valuable than some people were 0:10:28.320 --> 0:10:29.080 arguing initially. 0:10:29.320 --> 0:10:33.080 Yeah, you've seen bond holders and equity holders and preferred 0:10:33.080 --> 0:10:36.080 holders get washed out in these deals. So I think 0:10:36.120 --> 0:10:38.640 you have to be pretty selective when you're looking at 0:10:38.640 --> 0:10:42.640 the banking sector now in terms of the bonds. You know, again, 0:10:42.800 --> 0:10:45.280 I think they're good bonds and they're not so good bonds, 0:10:45.280 --> 0:10:47.600 and maybe there's some opportunities there, but I do think 0:10:47.640 --> 0:10:48.720 you have to be really selective. 0:10:48.920 --> 0:10:51.000 Kathy, I've asked this question a few times, so I'm 0:10:51.040 --> 0:10:53.240 going to ask it again. It's a little bit unfair 0:10:53.280 --> 0:10:54.680 of me. So you can take as much time to 0:10:54.679 --> 0:10:57.240 think about it if you want. The risk that sham 0:10:57.240 --> 0:10:59.800 and pound runs now for months, In fact, for the 0:10:59.840 --> 0:11:01.760 linelast twelve months, we've been talking about the risk of 0:11:01.840 --> 0:11:04.679 him becoming Burns. Is the bigger risk now that he 0:11:04.720 --> 0:11:07.120 becomes treche and hikes at the most inappropriate time? 0:11:07.760 --> 0:11:09.640 Just think that's thrue. Why do you come down on 0:11:09.679 --> 0:11:11.520 that one right now? Is it Burns or Treesche? What's 0:11:11.559 --> 0:11:12.320 the big risk for him? 0:11:13.000 --> 0:11:15.600 I think it's Treche And have all along I thought 0:11:15.600 --> 0:11:20.360 that this FED was moving too fast and ignoring some 0:11:20.400 --> 0:11:25.000 of the lags between tightening monetary policy and what impact 0:11:25.080 --> 0:11:27.640 it has on the economy and on the financial system. 0:11:27.679 --> 0:11:29.720 And we've seen a lot of stress in the financial 0:11:29.720 --> 0:11:33.800 system in various ways even before this, and so I 0:11:33.840 --> 0:11:37.040 think the risk is greater that they moved too far 0:11:37.240 --> 0:11:41.720 too fast, as they have then having the Arthur Burns 0:11:41.760 --> 0:11:43.760 problem of having to tighten down the road. I don't 0:11:43.760 --> 0:11:46.040 think this is a repeat of the sixties and seventies. 0:11:46.280 --> 0:11:48.040 It's a very different economic environment. 0:11:48.280 --> 0:11:49.679 Would you go as far as saying you don't think 0:11:49.679 --> 0:11:51.760 the inflation story is as sticky as some people might 0:11:52.200 --> 0:11:52.679 say it is. 0:11:53.280 --> 0:11:56.480 Yeah, I do. I think we've seen the good prices 0:11:56.480 --> 0:11:58.360 come all the way back down. I mean, oil prices 0:11:58.360 --> 0:12:00.439 are lower than they were pre pandemics, so we've seen 0:12:00.480 --> 0:12:03.920 the supply side come back. And when you look at 0:12:04.000 --> 0:12:07.040 your balance sheets on consumer side, are good people spend 0:12:07.040 --> 0:12:10.560 money because they have jobs. But it doesn't look to 0:12:10.600 --> 0:12:13.320 me like that it's necessarily a big push and inflation. 0:12:13.400 --> 0:12:17.960 We still have aging population, we still have demographic drag, 0:12:18.120 --> 0:12:21.800 we still have a lot of savings globally, so I'm 0:12:21.800 --> 0:12:24.319 not sure that we need to move as fast as. 0:12:24.160 --> 0:12:24.800 They have moved. 0:12:24.920 --> 0:12:26.920 Kathy, good to see you. I can't believe it's been 0:12:27.000 --> 0:12:28.760 like three years plus, but it has been. I don't 0:12:28.800 --> 0:12:31.160 know where that time's gone. Kathy Jones a chance swap. 0:12:31.160 --> 0:12:44.080 Thank you very much joining us on Somebody's headlines. Mara 0:12:44.200 --> 0:12:48.720 Rodriguez Va Darrez, managing principal at mr V Associates. Maara, 0:12:48.800 --> 0:12:51.040 wonderful to catch up with you again. Just working through 0:12:51.040 --> 0:12:52.680 this together over the last few weeks. It's been a 0:12:52.679 --> 0:12:54.600 pleasure for all of us here on the show. Can 0:12:54.640 --> 0:12:56.520 I just get to that headline from Jamie Diamond that 0:12:56.559 --> 0:12:59.400 on banking faiblures this is getting near the end of it. 0:12:59.520 --> 0:13:01.439 Do you get this sense that this is anywhe near 0:13:01.480 --> 0:13:01.959 the end of it? 0:13:03.000 --> 0:13:05.559 Respectfully, I'm not sure that I agree. 0:13:05.800 --> 0:13:09.960 What is not idiosyncratic here is we're discovering that, unfortunately, 0:13:10.040 --> 0:13:13.360 a lot of these banks are not very good at 0:13:13.480 --> 0:13:18.920 interest rate risks and liquidity measurements, which really is what 0:13:19.080 --> 0:13:22.719 should be astonishing. This is the basics of banking, and 0:13:23.120 --> 0:13:25.760 as long as the European Central Bank, the Bank of England, 0:13:25.800 --> 0:13:28.640 and of course the Federal Reserve continued to raise rates, 0:13:28.960 --> 0:13:31.679 I'm afraid that this turnoil may not. 0:13:31.679 --> 0:13:34.560 Be over yet. Marie, do you think that the regulators 0:13:34.679 --> 0:13:38.800 models effectively account for interest rate risk given that they 0:13:38.840 --> 0:13:41.319 were not able to get ahead of some of these cases, 0:13:42.440 --> 0:13:42.719 You know. 0:13:42.840 --> 0:13:44.160 They actually do. 0:13:44.440 --> 0:13:47.160 And one of the things that has really come out 0:13:48.040 --> 0:13:51.280 since Friday with the Federal Reserve reports as well as 0:13:51.280 --> 0:13:54.120 the FDIC reports, is that a lot of problems, for 0:13:54.160 --> 0:13:58.840 example with Silicon Valley Bank and Signature, we're actually identified 0:13:58.960 --> 0:14:04.680 by the regular The problem was the enforcement and there 0:14:04.720 --> 0:14:09.240 have long been many, many requirements for banks to measure 0:14:09.800 --> 0:14:13.160 interest rate risks. The problem is Unfortunately, with every new 0:14:13.320 --> 0:14:17.880 crop of risk managers and lenders, they always think that 0:14:18.040 --> 0:14:21.240 this time is going to be different. They don't pay 0:14:21.240 --> 0:14:24.520 attention to the history that interest rates go down and 0:14:24.880 --> 0:14:29.000 they also go up, and you need to constantly be 0:14:29.080 --> 0:14:33.400 testing your asset liability measurements, all your different kinds of 0:14:33.480 --> 0:14:37.040 models for interest rates going up and down. So this 0:14:37.200 --> 0:14:40.960 idea that people have been caught by surprise they didn't 0:14:40.960 --> 0:14:42.520 realize that interest. 0:14:42.320 --> 0:14:44.960 Rates could go up, is really truly astounding. 0:14:45.560 --> 0:14:48.440 One thing that Jamie Diamond did say was that there 0:14:48.480 --> 0:14:51.640 would probably be some reduction in lending on the heels 0:14:51.760 --> 0:14:56.600 of their acquisition of this bank A First Republic. What's 0:14:56.640 --> 0:14:59.640 your sense of how many smaller banks are going to 0:14:59.640 --> 0:15:01.800 get a wired, how much lending is going to get 0:15:01.800 --> 0:15:05.040 taken out of the system if there are more potential 0:15:05.040 --> 0:15:06.160 incidents just like this. 0:15:07.160 --> 0:15:09.680 Yeah, I am worried about some of the smaller banks, 0:15:09.680 --> 0:15:12.200 even some of the community banks, some of the smaller 0:15:12.280 --> 0:15:17.240 regional banks. It's hard to compete with the incredible advantages 0:15:17.280 --> 0:15:20.560 that a JP Morgan, Bank of America City Bank have. 0:15:20.720 --> 0:15:24.840 These are globally systemically important banks. It's not just their size, 0:15:24.880 --> 0:15:27.800 it's just the diversity of the different businesses that we have, 0:15:28.320 --> 0:15:32.920 and here we are twenty twenty three, and it almost feels, 0:15:33.400 --> 0:15:35.840 at least from the history books, that we're kind of 0:15:35.880 --> 0:15:39.680 back to eighteen ninety five with JP Morgan rescuing the 0:15:39.720 --> 0:15:43.440 American government in nineteen thirteen when JP Morgan was rescuing banks, 0:15:43.880 --> 0:15:47.360 that kind of bank has become incredibly powerful, so it 0:15:47.440 --> 0:15:51.920 now has incredible exposure to operational risk. What kinds of 0:15:51.920 --> 0:15:55.560 skeletons are going to come out with this acquisition of 0:15:55.760 --> 0:15:56.520 First Republic. 0:15:56.560 --> 0:15:59.080 We really need to keep an eye on those. 0:15:58.960 --> 0:16:01.960 Kinds of things. Joked about thirty minutes ago that Washington, 0:16:02.040 --> 0:16:05.760 DC was still asleep, wasn't awake yet and hadn't seen 0:16:05.800 --> 0:16:08.160 this deal. Then she messaged me a moment ago and said, 0:16:08.160 --> 0:16:11.000 it looks like people are waking up. Senator Warren on 0:16:11.040 --> 0:16:14.000 Twitter in the last I think twenty minutes said this, 0:16:14.440 --> 0:16:17.360 The failure of First Republic Bank shows how deregulation has 0:16:17.400 --> 0:16:20.160 made the two big to fail problem even worse. A 0:16:20.200 --> 0:16:22.960 poorly supervised bank has been snapped up by an even 0:16:22.960 --> 0:16:26.040 bigger bank. Congress needs to make major reforms to fix 0:16:26.040 --> 0:16:31.040 a broken banking system. Mara, what's broken about it and 0:16:31.080 --> 0:16:33.440 what kind of follow through follow up are you expecting 0:16:33.960 --> 0:16:36.200 after this stress of the last couple of months or so. 0:16:37.240 --> 0:16:40.280 Well, one thing that has definitely broken is that after 0:16:40.360 --> 0:16:43.720 all the time that legislators and various lobbyists spent with 0:16:43.840 --> 0:16:47.160 Dodd Frank, there's a good portion of Title one that 0:16:47.280 --> 0:16:50.520 was actually got it where banks the size of Silicon 0:16:50.640 --> 0:16:55.200 Valley or First Republic were no longer considered systomachly important. 0:16:55.240 --> 0:16:59.160 That's incredibly incorrect, as we've seen this, and it has 0:16:59.360 --> 0:17:03.160 very signific and repercussions to the entire financial industry as 0:17:03.160 --> 0:17:04.160 well as to main street. 0:17:04.160 --> 0:17:06.440 Think of all those people who are now getting hurt and. 0:17:06.400 --> 0:17:09.040 Are going to be losing their jobs every time that 0:17:09.080 --> 0:17:11.920 one of these banks fails. So you need to declare 0:17:12.040 --> 0:17:15.680 these banks systemically important. That then means that they would 0:17:15.720 --> 0:17:18.480 get enhanced supervision. They would have to do a better 0:17:18.600 --> 0:17:24.360 job of measuring liquidity risks, especially doing simulations of periods 0:17:24.359 --> 0:17:26.399 of stress, which is what they should have been doing 0:17:26.960 --> 0:17:29.760 all along. And so there is an element of truth 0:17:30.080 --> 0:17:33.320 that there is deregulation. However, you also need to provide 0:17:33.840 --> 0:17:36.159 the examiners and all the different. 0:17:35.920 --> 0:17:38.160 Kinds of supervisors with resources. 0:17:38.800 --> 0:17:42.200 They don't have enough in terms of manpower in terms 0:17:42.280 --> 0:17:45.679 of human resources, and they also need more resources in 0:17:45.800 --> 0:17:49.720 terms of technology to be able to better detect when 0:17:49.800 --> 0:17:52.359 some of these risks are percolating with the banks, and 0:17:52.400 --> 0:17:56.520 you need to fire executives and high level risk managers 0:17:56.560 --> 0:17:59.440 when they don't do their jobs, and they there definitely 0:17:59.440 --> 0:18:02.400 need to be clawbacks. All these executives are walking away 0:18:02.400 --> 0:18:05.240 with millions, and what about everybody else at the bank 0:18:05.320 --> 0:18:07.920 and in the surrounding community that is going to lose 0:18:07.960 --> 0:18:08.359 their job? 0:18:08.600 --> 0:18:10.240 What about firing regulates us. 0:18:11.520 --> 0:18:14.760 That's right if indeed there's a good post mortem and 0:18:14.800 --> 0:18:19.439 we discover that there are any kind of professional in 0:18:19.480 --> 0:18:23.159 the various state as well as the national regulatory entities 0:18:23.200 --> 0:18:25.280 that aren't doing their job, they need to be fired. 0:18:25.320 --> 0:18:27.440 And part of the problem is the tone at the. 0:18:27.359 --> 0:18:29.880 Top, the way that things were. 0:18:30.160 --> 0:18:34.840 You know, let's face it, President former President Trump made 0:18:34.960 --> 0:18:38.240 terrible appointments. The tone of the top then filters down 0:18:38.359 --> 0:18:41.359 and it very much became both to offsite and on 0:18:41.480 --> 0:18:45.919 site examiners to have hands off and to almost be 0:18:46.119 --> 0:18:49.440 friendly with the banks. That's not what we want. We 0:18:49.560 --> 0:18:53.919 want examiners, both on site and the offside supervisors to 0:18:53.920 --> 0:18:57.840 be empowered to not only talk about what the problems 0:18:57.840 --> 0:19:00.440 are at the banks, but then you need enforcement. All 0:19:00.480 --> 0:19:03.560 of the treasure trove of documents that was released on 0:19:03.640 --> 0:19:06.159 Friday shows that those examiners were on top of things. 0:19:06.560 --> 0:19:08.800