Speaker 1: Welcome to the Bloomberg Penl podcast. I'm Paul swing you
Speaker 1: along with my co host Lisa brahma Witz. Each day
Speaker 1: we bring you the most noteworthy and useful interviews for
Speaker 1: you and your money, whether at the grocery store or
Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
Speaker 1: podcast or wherever you listen to podcasts, as well as
Speaker 1: at Bloomberg dot com. We've seen that federal government step
Speaker 1: up with some significant fiscal stimulus. A lot of that
Speaker 1: is geared towards small business loans and actually getting money
Speaker 1: to these small businesses that need it the most. And
Speaker 1: a key part of that is the banks that will
Speaker 1: actually get the capital into the local marketplace. To get
Speaker 1: a sense of how that's all playing out, we welcome
Speaker 1: Frank Sor and Tino. Frank is the chief executive officer
Speaker 1: of Connect One Bank that's based based on Englewood Cliffs,
Speaker 1: New Jersey. Franks, thanks so much for joining us. So
Speaker 1: we're really early days in terms of getting some of
Speaker 1: this fiscal stimulus money into the marketplace, where you understand
Speaker 1: there's been kind of a bumpy start to it all
Speaker 1: from in terms of the banks and getting coordinated with
Speaker 1: the government. What's been your experience, so good morning and
Speaker 1: thank you. Um, yeah, you know, bumpy start. I guess
Speaker 1: that may be partially true, but um, you know, think
Speaker 1: about the scale and size of this program. Think about
Speaker 1: how it compares to any other program that you know
Speaker 1: would go through, like the Defense Department to go do
Speaker 1: something huge like this. I think they're doing pretty good. Actually,
Speaker 1: I think the SBA has done a fantastic job. I
Speaker 1: think the banks are doing a fantastic job. And I
Speaker 1: believe that here we are two weeks from or two
Speaker 1: weeks and a couple of days from the signing of
Speaker 1: the President's bill, and money is already flowing out into
Speaker 1: the into the small business pands. So yes, there's a
Speaker 1: backlog of applications. Banks are working as quickly as they can,
Speaker 1: but money is flowing into small business plands. And Frank,
Speaker 1: it's the money is flowing from your bank as well.
Speaker 1: And can you just give us a sense of the
Speaker 1: demand for these loans from small business is that you've
Speaker 1: seen and and and how many have been saved and
Speaker 1: able to maintain their staffs as a result of the loans. Well,
Speaker 1: we have business small business owners that when we notified
Speaker 1: them that they were approved. They just they almost break
Speaker 1: down in that, you know, with with joy that they
Speaker 1: are now able to keep their employees on staff, be
Speaker 1: able to pay them. As we're dispersing funds. I can't
Speaker 1: tell you how many text messages and emails we're receiving
Speaker 1: from clients from all over telling us how this is
Speaker 1: saving their livelihood for their business and in turn how
Speaker 1: good they feel about saving their employees livelihood and their
Speaker 1: ability to put food on their table and pay their
Speaker 1: rent and do what they need to do. So I
Speaker 1: think this program is critical at this moment in time. So, Frank,
Speaker 1: do you, from your perspective just in your local markets,
Speaker 1: do you think it will be enough or do you suspect,
Speaker 1: given the demand that you're seeing, that Congress should and
Speaker 1: perhaps maybe likely to come back with some more. Yeah.
Speaker 1: I believe Congress will come back for more. I think
Speaker 1: there will be demand for more than they I do
Speaker 1: believe that it is doing the job that it needs
Speaker 1: to do, and it is helping to float the economy
Speaker 1: through the next you know, for the last couple of
Speaker 1: weeks and through the next few weeks. I think if
Speaker 1: we think this is going to go on beyond May then, Yeah,
Speaker 1: I think they're going to need a lot more, But
Speaker 1: for right now, I think between this this current draft
Speaker 1: of billion plus what they're contemplating in the new bill
Speaker 1: of two hundred and fifty billion should be sufficient. So
Speaker 1: that's on the small business side. You have a long
Speaker 1: history in the mortgage market, in the housing market, in
Speaker 1: the building market, and there isn't growing concern that that
Speaker 1: particular market is suffering disproportionately without necessarily a clear backstop
Speaker 1: from the government, particularly for mortgages that are not backed
Speaker 1: by Fannie and Freddie May. What are you seeing on
Speaker 1: that up front? How concerned are you there? It's going
Speaker 1: to be a concern as we move through the next
Speaker 1: phase of this right right now where everyone's focused on
Speaker 1: stabilizing where we are today, but if you can think out,
Speaker 1: you know, sixty days, ninety days, or even a year
Speaker 1: from now, and people start applying for mortgages and there
Speaker 1: was this huge business disruption um and by the way,
Speaker 1: I think that you know, constructions come to the halt,
Speaker 1: which is also an issue, but the but the disruption
Speaker 1: that's gone on and people's financial lives is going to
Speaker 1: have to be reconciled at some point. And it probably
Speaker 1: will have some negative effects of the market. So that's
Speaker 1: kind of where I want to go. Based upon your
Speaker 1: discussion with your customers and your clients, are you getting
Speaker 1: a sense that, boy, this is really gonna have some
Speaker 1: long lasting implications for you know, business cycles and maybe
Speaker 1: even consumer psyche in terms of demand. Well, I think
Speaker 1: the Fed is very concerned about deflation in the marketplace.
Speaker 1: And so I think that's and that should tell you
Speaker 1: everything you need to know. Right. That tells you that
Speaker 1: the consumer is probably going to move less consumption and
Speaker 1: more savings. And so what's that saying. It's saying that
Speaker 1: they're changing their psyche about how they think about the world.
Speaker 1: I think what we're doing today, I think the programs
Speaker 1: that the Federal Reserve is pushing forward today, the programs
Speaker 1: that the Administration's pushing forward, the programs that Congress is
Speaker 1: thinking about, is all to help to keep that psyche
Speaker 1: you know, where it's been and you know, keep the
Speaker 1: United States the great country that has always been in that.
Speaker 1: You know, we are a country that likes to spend,
Speaker 1: We are a country that innovates, We are a country
Speaker 1: that takes risks. And so by freeing up this capital
Speaker 1: so that people don't have to worry about that. We
Speaker 1: will minimize that disruption of the future. So, Frank, we're
Speaker 1: hearing from JP Morgan and Wells Fargo today. We're going
Speaker 1: to hear from City Group and some of the other
Speaker 1: banks throughout the rest of the week, and we're really
Speaker 1: focusing on loan loss prevent Jians. What are you seeing
Speaker 1: with respect to that at your bank? So, I think
Speaker 1: what you've seen from those larger institutions is that no
Speaker 1: one really knows, and so they've taken some certainly they've
Speaker 1: taken some general approaches to what they have modeled that
Speaker 1: they think things could be, But nobody really knows for sure.
Speaker 1: It is way too early in the game to make
Speaker 1: decisions about, you know what, what what losses may occur,
Speaker 1: who's going to be impacted, what segments are going to
Speaker 1: be hurt the most. It really depends a lot on
Speaker 1: how successful some of these programs are, how we all
Speaker 1: work together to get through this next phase to reopen
Speaker 1: the economy, how long that looks like. I think without
Speaker 1: answering those questions, I think it's difficult to really assess
Speaker 1: what what damage, If there's damage, how much damage, and
Speaker 1: what it's going to look like on the bank's financial statement.
Speaker 1: Frank Sartino, thank you so much for being with us
Speaker 1: and all my best to you through this period as
Speaker 1: you work to manage and get loans out to all
Speaker 1: of those small businesses in the path forward. Frank Sorrentino
Speaker 1: as chief executive officer of Connect One Bank, joining us
Speaker 1: from Englewood Cliffs, New Jersey, oh JP, Morgan Chase and
Speaker 1: Wells Fargo kicked off earning season for the big banks today,
Speaker 1: and I think what investors are really focusing on was
Speaker 1: those loan lost provisions. Combine those two banks set aside
Speaker 1: more than twelve billion dollars to cover the faults across
Speaker 1: the economy. So just extraordinary numbers coming out of there.
Speaker 1: To get a sense of kind of what we're going
Speaker 1: to see from the banking sector coming up, we welcome
Speaker 1: Chris Whale and chairman of Whale and Global Advisors, based
Speaker 1: in New York. Chris, thanks so much for joining us. Boy,
Speaker 1: those low lost provisions were just extraordinary. What's your takeaway, Well,
Speaker 1: I was actually too conservative in my model for the industry.
Speaker 1: I said, fine, well, double provisions this month and then
Speaker 1: double them or this quarter and then duble them again
Speaker 1: second quarter that gets up to two thousand and eight levels.
Speaker 1: But I think JP Morgan and decided to go big.
Speaker 1: I agree with what they've done. Takes a little pressure
Speaker 1: off them in the next couple of quarters because they've
Speaker 1: put a fair amount of money out there. But they've
Speaker 1: also said that they expect loss rates to be extraordinary,
Speaker 1: and and that says to me, well above two thousand
Speaker 1: and eight levels. So we're starting to use the nineteen
Speaker 1: thirties as our model simply because of the dislocation both
Speaker 1: in terms of unemployment and small and midsized enterprises, which
Speaker 1: looks to be a horror show. I think we could
Speaker 1: see a large chunk of the service sector essentially disappear
Speaker 1: simply because they don't have a lot of capital, and
Speaker 1: if you impose losses on them, you take them out
Speaker 1: of uh, you know, circulation in terms of revenue. They
Speaker 1: die and small businesses turn over quite a lot anyway,
Speaker 1: but when you put this kind of stress situation on them.
Speaker 1: The only sector of this economy that's liquid right now
Speaker 1: are basically those that are supported directly by the government,
Speaker 1: particularly the mortgage sector. But everything else is in um
Speaker 1: and I think that's going to have a real serious
Speaker 1: repercussion on GDP and how long it takes us to
Speaker 1: get through a you know that. I think a couple
Speaker 1: of observers, in fact, have suggested we may not see
Speaker 1: normal earnings, normal kind of trend earnings for a couple
Speaker 1: of years. Uh. And I think that's what the banks
Speaker 1: are telling us. What about when it comes to the
Speaker 1: health of the banks themselves, because a lot of regulators
Speaker 1: and analysts who said that the banks are incredibly well
Speaker 1: capitalized and the fact that they can put aside such
Speaker 1: a big amount for loan losses that they're expecting shows
Speaker 1: their fortitude and their fortress like balance sheets. Would you
Speaker 1: agree with that characterization? Oh very much? And I think
Speaker 1: you know, the political dialogue on this is immediately focused
Speaker 1: on the banks and the fact that they pay dividends. Um,
Speaker 1: we've already gotten most banks to or stop share repurchases,
Speaker 1: which is worth a hundred and ten billion dollars a
Speaker 1: year in terms of capital retention for the top twenty banks.
Speaker 1: That's enough that funds your reserve built by the way, Paul, So,
Speaker 1: I think that what I would tell policy makers is
Speaker 1: leave the dividends alone. You're going to deal with this
Speaker 1: on a bank by bank basis, but you don't want
Speaker 1: to cut off that cash flow to investors because there
Speaker 1: are a lot of people who depend on dividends from
Speaker 1: public companies to pay their bills. And I think it's
Speaker 1: important for us to realize that the banks are well
Speaker 1: capitalized and they have a hundred and fifty billion dollars
Speaker 1: in cash flow every quarter, earnings, share repurchases, dividends that
Speaker 1: they can draw on to meet this wave of default.
Speaker 1: And so I think that's the good news. I would
Speaker 1: agree with you, Lisa. So Chris, let's take a look
Speaker 1: at some maybe some of the regional banks. Are they
Speaker 1: in a similar position in terms of relative health of
Speaker 1: their balance sheets? Well, they deal with a smaller community typically,
Speaker 1: so they will have more idiosyncratic risk elements in their portfolio.
Speaker 1: They're not that diversified. But diversification is not going to
Speaker 1: help us this time. I think the country generally is
Speaker 1: going to see both heavy consumer default activity and we're
Speaker 1: also going to see a lot of business defaults. So
Speaker 1: the good news is, unlike two thou eight, this didn't
Speaker 1: start on Wall Street. It didn't start with subprime mortgages
Speaker 1: that nobody wanted anymore truly and something. Remember uh, this
Speaker 1: time around, it's an external shock which has taken GDP
Speaker 1: down significantly and is pushing unemployment up to ridiculous levels.
Speaker 1: I mean, you know, in credit models, unemployments your biggest factor,
Speaker 1: that's what you start with. Over the weekend, my wife
Speaker 1: kept looking at me and go, why are you in
Speaker 1: such a bad It was because I was writing my
Speaker 1: earnings note for the banks, and basically, by the second quarter,
Speaker 1: I think two thirds of bank earnings are going to
Speaker 1: be gone because of provisioning and other expenses, operating expenses,
Speaker 1: and then over time they're going to come out of
Speaker 1: the whole. So to me, I'm still very positive on
Speaker 1: the banks. I own banks, you know, Jay piece at
Speaker 1: one point two times book value this morning, so it's
Speaker 1: not like they're cheap cheap. But on the other hand,
Speaker 1: I think that the whole industry is going to have
Speaker 1: to divert income. They're not going to consume capital. That's
Speaker 1: always the misnomer in these discussions, right, They're going to
Speaker 1: use the income that they generate, the plow through the
Speaker 1: losses and they'll be Okay, yeah, when you talk about
Speaker 1: job losses, I'm just struck by the fact that nearly
Speaker 1: one in ten Americans lost their jobs in the past
Speaker 1: three weeks. And probably we're gonna get another multimillion print
Speaker 1: in the jobless claims report that we're getting out on Thursday.
Speaker 1: In the meantime, there's a question about consolidation. Does the
Speaker 1: likes of JP Morgan end up more powerful at the
Speaker 1: end of this because they do have the capacity to
Speaker 1: withstand this and that fortress like balance sheet. What do
Speaker 1: you think, Well, JP is not going to get any bigger,
Speaker 1: but they do have a lot of monopoly power. Um
Speaker 1: They are also reacting to the madness we see in
Speaker 1: Washington at the Federal Housing Finance Administration. The regulator for
Speaker 1: Fanning and Freddie mac basically came out and said that
Speaker 1: they wouldn't support the non bank servicers were the most
Speaker 1: important part of the mortgage market. Um. So JP changed
Speaker 1: their warehouse guidelines last week. They basically cut off all
Speaker 1: the non banks in terms of funding for new loans
Speaker 1: and also for servicing advances. And it's really bad. We
Speaker 1: need to get the government on track here because we
Speaker 1: don't need them saying bad things in public, and we
Speaker 1: don't need to have a regulator out attacking the institutions
Speaker 1: he's responsible for regulating and preserving. So I think we
Speaker 1: need to get everybody on the same page. The FEDS great,
Speaker 1: The other regulators, Jenny May and f h A are awesome.
Speaker 1: They've been moving heaven and earth. Um, Chris, I'm worried
Speaker 1: that the default wave we're gonna see, Lisa is going
Speaker 1: to be really big. Chris Whalen, thank you so much
Speaker 1: for being with us, Chairman of Whalen Global Advisors. This
Speaker 1: period of time so unprecedented and jarring, and its magnitude
Speaker 1: and depth has lead to a lot of philosophical musings
Speaker 1: and a lot of historical references. One that really caught
Speaker 1: my attention, Paul, was about the hobbsy and state of Man,
Speaker 1: and the and and and the West versus the East,
Speaker 1: and sort of jostle for power that we see going
Speaker 1: on and perhaps transforming at this moment as the world
Speaker 1: fights the pandemic. And I'm so glad to join us
Speaker 1: right now. I'm pleased to say John mckelthwaite, editor in
Speaker 1: chief of Bloomberg News, who wrote this column the virus
Speaker 1: should wake up the West, and John, I want to
Speaker 1: frame this from the view of an argument that people
Speaker 1: are making that China's success in fighting off the spread
Speaker 1: of the coronavirus shows that autocracies are preferable to democracies.
Speaker 1: How much of that has been borne out by what
Speaker 1: we've seen in the past few weeks and months, Well,
Speaker 1: I would argue um that high disciple. Um, I would
Speaker 1: argue very little, because I think that if you look
Speaker 1: at it, yes, I mean China has done quite well,
Speaker 1: and we should immediately put an enormous caveat against both
Speaker 1: its numbers, which people raise considerable suspicions about, and also
Speaker 1: its role in the very um starting point of the virus,
Speaker 1: where if it had had less of a police state
Speaker 1: and wuhren't more, people would have known about the virus
Speaker 1: much earlier. So China is definitely cultival than that. But
Speaker 1: in terms of the sort of secondary stage of reacting
Speaker 1: to it, yes, China does look better than the United States.
Speaker 1: But um, there the truth is there are good they
Speaker 1: are good performing autocracism, bad performance axes, good performing democracies,
Speaker 1: and bad performing boxes. If you compare China to Germany,
Speaker 1: if you can compare it to Switzerland, if you compare
Speaker 1: it um to places like Norway, if you compare it
Speaker 1: to South Korea as you prepared to Taiwan and Singapore,
Speaker 1: China does not look great. So in other words, the
Speaker 1: democracies still do it better. Um, and people who jumped
Speaker 1: towards the idea that this has been particularly for China,
Speaker 1: I would rather see it as a warning, especially to America,
Speaker 1: but you know also to that matter, to Britain where
Speaker 1: I am at the moment that you know, really if
Speaker 1: the West does not get it to government into shape, um,
Speaker 1: you know, it will lose the lead that it has
Speaker 1: held over Asia for the past four years. So John,
Speaker 1: just looking at the U S here, what's you know
Speaker 1: kind of brewing? Here is a battle between the you know,
Speaker 1: the federal government in the States, and we're seeing regional
Speaker 1: formations of coalitions, whether it's New York, Connecticut, New Jersey,
Speaker 1: or even out on the West coast with California and Washington.
Speaker 1: How do you think that's going to play out? Because
Speaker 1: it seems like that's the next big bonus contention as
Speaker 1: countries think about, including the US, about reopening the economy.
Speaker 1: So I think that's the reasonable thing. I think you
Speaker 1: can make the argument. I think most outsiders looking at
Speaker 1: the federal reaction to this would say it has been useless. Um,
Speaker 1: you know, it's there are some places which are being worse.
Speaker 1: I think maybe Italy, depending how you measure, but in general,
Speaker 1: you know, this has not been Donald Trump's finest hour.
Speaker 1: By contrast, actually, I think you can give Gavin Newsom
Speaker 1: in California some some good points. Um, you know they
Speaker 1: did with California did react much quicker. It's thought about
Speaker 1: what to do. There are still problems there self, evidently,
Speaker 1: but it's you know, the numbers there speak for themselves
Speaker 1: of some extent, and he had to do it against
Speaker 1: the background of the federal government not being very helpful.
Speaker 1: So in terms of efficacy, I think you could argue
Speaker 1: that the governors have got some right to do this.
Speaker 1: The great tragedy, of course, is that one thinks about
Speaker 1: what other presidents might have done. Is what should have
Speaker 1: happened here is that first the president should have rallied
Speaker 1: the entire country. The beauty of the federal system is, yes,
Speaker 1: you can use states to experiment, but it should also
Speaker 1: be a kind of federal It should be a federally
Speaker 1: coordinated response. What's happened instead of that Trump has used
Speaker 1: suppress compets and things to attack governors, and they have
Speaker 1: also used them to attack him. Meanwhile, it's not just
Speaker 1: in terms of what's happening inside America. The other huge
Speaker 1: tragedy for the West is that you would have hoped
Speaker 1: that America would be leading what might be described as
Speaker 1: the Western pandemic response, and that hasn't happened at all
Speaker 1: in the Even even when it came down to warning
Speaker 1: the Europeans that they were about to impose no fly zones,
Speaker 1: a lot not played, but Pope closed fly bands on
Speaker 1: European countries. You know, America did not tell its closest
Speaker 1: allies about that, and so there is such distrust at
Speaker 1: the moment. It's not working in the traditional coordinating role
Speaker 1: of the presidency in crises is not working. And this
Speaker 1: is this is one of the ramifications of it, and
Speaker 1: it's it's very sad. John, thanks so much for joining us.
Speaker 1: Really appreciated as an interesting column that you wrote. John mckelthwaite,
Speaker 1: editor in chief, Bloomberg News, joining us from Britain, giving
Speaker 1: us his thought, Well, we talked about the incredib stimulus,
Speaker 1: We've got to talk about credit and the rally that
Speaker 1: we have seen that's been a complete snap back of
Speaker 1: a lot of the losses that we saw earlier. Just
Speaker 1: to give you a sense of how big this snap
Speaker 1: back was, the extra yield that investors earned UH earned
Speaker 1: to possess junk bonds has compressed from eleven percent to
Speaker 1: seven and a half percentage points over rates in just
Speaker 1: a couple of weeks. Here there's a question hasn't gone
Speaker 1: too far? And the person to answer it is Tad Rafel,
Speaker 1: chief investment officer for fixed income at TCW with more
Speaker 1: than two billion dollars firm wide, joining us from Los Angeles.
Speaker 1: Had I'm so glad that you're the person we're speaking
Speaker 1: to right now. We've heard the Federal Reserve is going
Speaker 1: to start buying credit. But if Trainer has gotten ahead
Speaker 1: of themselves in terms of how broad and how deep
Speaker 1: and how far into below investment grade credit, the Federal
Speaker 1: Reserve will go. Of course, that's the sixty four trillion
Speaker 1: dollar question. I mean, I think the subtext is our investors,
Speaker 1: is the consensus exp patient out there that we are
Speaker 1: going to go back to January, that we're going to
Speaker 1: get a v bottom, that the health issues are going
Speaker 1: to be resolved in the relatively near term, and then
Speaker 1: we just resumed resume the historical trend line, and consequently
Speaker 1: the levels that we saw in the credit markets in January,
Speaker 1: according to that way of thinking, would be reasonably justifiable.
Speaker 1: I think that's unrealistic. I think that therefore, there is
Speaker 1: a lot of mispricing that's going on in the credit markets.
Speaker 1: And the reason that we believe that way is basically several.
Speaker 1: One reason is is that, first of all, a lot
Speaker 1: of uncertainty remains about when the global economy gets back
Speaker 1: up on its feet, and in any case, even if
Speaker 1: it does, it doesn't going to get all up on
Speaker 1: its feet at the same time. So you have kind
Speaker 1: of a rolling recession type situation where even if China
Speaker 1: is in fact getting a little bit better, other parts
Speaker 1: of the world evidently are sinking, unfortunately more so. And
Speaker 1: even if we do solve the public health problem, then
Speaker 1: we still have the reality that we went through a
Speaker 1: long and vast leveraging process over the course of the
Speaker 1: last five plus years. At least, let's say, there were
Speaker 1: a lot of excesses, and the virus, to a greater
Speaker 1: or lesser degree, isn't so much the cause of the
Speaker 1: repricing that we've seen in the credit markets, as it
Speaker 1: is also the catalyst for revealing a lot of those excesses.
Speaker 1: So I think that it's a fair statement to say
Speaker 1: that the FED has done its helicopter drops. It's certainly
Speaker 1: improved the liquidity environment. It's compressed liquidity premium. But can
Speaker 1: it fix fundamentally broken business models that are being revealed
Speaker 1: as we speak, No, it can't do that, all right,
Speaker 1: So tadd and you've been consistently I would say cautious,
Speaker 1: you know, over the last year so that we've been
Speaker 1: chatting on the fixing markets. What is your sense for
Speaker 1: defaults going forward? How do you think this is going
Speaker 1: to play out? And of course that's a I'm also
Speaker 1: asking you to kind of share with this kind of
Speaker 1: your economic outlook as well. Well. The if we begin
Speaker 1: maybe by looking at the loan market as well as
Speaker 1: the high yield market, the compression that we spoke to
Speaker 1: the UH, the overall compression and spread that we've seen
Speaker 1: in high yield. I think high yield now is just
Speaker 1: a touch inside of eight hundred basis points over treasuries
Speaker 1: ignores the fact that there's also been tremendous bifurcation within
Speaker 1: the high yield space. And the bank loan space, meaning
Speaker 1: that there's actually been growth in the size of the
Speaker 1: cohorts that are are priced to yield more than ten percent.
Speaker 1: Let's say, UM, so as we've seen improvement in the
Speaker 1: better credits the ones that are viewed as probably survivors
Speaker 1: or at least survivors for some period of time through this,
Speaker 1: let's ignore the fact that we have a significant cohort
Speaker 1: of names that are going to have to go through
Speaker 1: some kind of restructuring type of process. I think, if
Speaker 1: anyone's gas, you know how high defaults are going to get,
Speaker 1: but they're going to go a whole lot higher. Um,
Speaker 1: you've got the first hint of that in a way,
Speaker 1: I suppose from the bank earnings today from Wells IS
Speaker 1: and JP Morgan's and the significant increase in loan loss
Speaker 1: allowance that goes into the earnings numbers. So we're still
Speaker 1: I think at the front end of this, we should
Speaker 1: remember we've only been shut down for a matter of weeks,
Speaker 1: maybe a month, um. And it's really unclear, as I
Speaker 1: said earlier, what the ultimate impact of shutting down large
Speaker 1: swats of the U S economy are going to be.
Speaker 1: Just as a total anecdote, but an important one I
Speaker 1: think is my understanding is is at twenty of the
Speaker 1: workforce in Michigan has already applied for unemployment. But I
Speaker 1: think kind of starts to give you an idea that
Speaker 1: any type of optimism in terms of pricing at this
Speaker 1: point maybe getting a little bit ahead of itself. Well,
Speaker 1: haven't you checked the stock market. Everything's fine, Ted, everything's great.
Speaker 1: We just had the biggest REALI since seventy four. You know,
Speaker 1: I remember when we talked to you, as as Paul referenced,
Speaker 1: you've embarished for a while, and back in November you
Speaker 1: wrote about the liquidity issues that we're going to be
Speaker 1: facing the credit markets, and certainly that did come to
Speaker 1: pass in a massive way. Are you becoming more constructive
Speaker 1: in terms of what you're buying just based on some
Speaker 1: of the dislocations, or do you think that there is
Speaker 1: another leg lower in the pricing that we're seeing across
Speaker 1: credit markets. Well, first of all, there has been actually
Speaker 1: tremendous opportunity in certain parts of the credit markets, and
Speaker 1: we've taken advantage of that the first place that we
Speaker 1: took advantage of it. In fact, the way we have
Speaker 1: oftentimes articulated the game plan in the late cycle type
Speaker 1: of environment that we felt we were in is step zero,
Speaker 1: so to speak, is get prepared and build defensive. And
Speaker 1: then step one was the foray into those segments of
Speaker 1: the marketplace that are the most bendable, the types of
Speaker 1: assets that are not really going to be subject to
Speaker 1: solvency challenge. And so step one was a significant increase
Speaker 1: in our agency mortgage type of exposure in port with
Speaker 1: the expectation that the FED would probably liquefy that area first,
Speaker 1: So we added substantially to our positions and agency mortgages.
Speaker 1: We've actually been selling them down as the prices have improved.
Speaker 1: The next step and we've um have have engaged this
Speaker 1: as well, is the liquefication of fortress balance sheets. So
Speaker 1: we've seen Intel come to the market, Exxon, Kimberly, Cark, Procter,
Speaker 1: and Gamble Disney, and the spread levels were two hundred
Speaker 1: to two hundred and fifty basis points wider than where
Speaker 1: they had been in January. Okay, so do the math right?
Speaker 1: Two hundred basis points on its twenty duration a thirty
Speaker 1: year maturity instrument is it's forty points and we've already
Speaker 1: realized actually we've actually round tripped through some of those
Speaker 1: names already, so we are constructive on the Fortress balance
Speaker 1: sheets and credit. We certainly already have almost round trip
Speaker 1: with respect to the agency mortgages, and we expect it's
Speaker 1: going to be a lot more opportunity um, but it
Speaker 1: will probably be in areas that you have to do
Speaker 1: a little bit more credit analysis than nine sconds worth,
Speaker 1: which we kind of joke about almost is all you
Speaker 1: need to do when you're looking at Disney, P and
Speaker 1: G and and Intel. Tat thanks so much for joining us.
Speaker 1: We're so glad we're able to chat with you today
Speaker 1: to get your thoughts on what has just been an
Speaker 1: extraordinary time in the markets and uh you the experience
Speaker 1: that you have. Tad Revelle, chief Investment Officer for Fixed
Speaker 1: Income at TCW. Thanks for listening to the Bloomberg P
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