Speaker 1: Hello, and welcome to the Votes and Verdicts podcast, hosted
Speaker 1: by the Litigation and Policy team at Bloomberg Intelligence, the
Speaker 1: investment research platform of Bloomberg LP. This podcast series examines
Speaker 1: the intersection of business policy and law, and today we'll
Speaker 1: be looking at the litigation and policy catalysts that we're
Speaker 1: watching in November twenty twenty three and that we think
Speaker 1: will impact companies across a number of different sectors. My
Speaker 1: name is Elliott Stein. I'm a senior litigation analyst covering
Speaker 1: the financial sector. I'll be your host for today, October
Speaker 1: thirty first, twenty twenty three. As always, if you have
Speaker 1: any questions about any of the matters that we'll be
Speaker 1: discussing on this episode, please don't hesitate to reach out
Speaker 1: to us at your convenience with questions. So we'll be
Speaker 1: discussing a handful of sectors and topics today. First, our
Speaker 1: anti trust analyst Jen Ree will discuss a number of
Speaker 1: trials in her space, including the DOJ's case against Google oversearch,
Speaker 1: DOJ's suit challenging the Jet Blue Spirit merger, and Epic
Speaker 1: Games's trial against Google over the latter's play store. After that,
Speaker 1: Matt Schuttenhelm our TMT litigation and policy analyst will preview
Speaker 1: an anticipated decision on a motion by Meta to stop
Speaker 1: the FTC from blocking the company's use of teams data.
Speaker 1: After that, Tamlin Basin, our tech IP litigation analyst, will
Speaker 1: discuss Pegasystem's effort to reduce and possibly eliminate a two
Speaker 1: billion dollar jury award for Appian in a trade secrets case.
Speaker 1: Following that, Dwayne Wright, who covers healthcare policy for US
Speaker 1: in Washington, d C. We'll discuss an FDA proposal to
Speaker 1: extend medical device oversight to laboratory developed tests, and he'll
Speaker 1: also discuss the proposal to exempt orphan drugs that treat
Speaker 1: more than one disease from the drug pricing provisions of
Speaker 1: the Inflation Reduction Act. After that, Nathan Dean, our financials
Speaker 1: policy analyst, also in Washington, DC, will talk about a
Speaker 1: federal reserve proposal to lower the amounts that banks can
Speaker 1: charge for debit card transactions. He'll also talk about the
Speaker 1: Basel three end Game proposal to increase banks capital requirements,
Speaker 1: and he'll also briefly address what Mike Johnson's ascension to
Speaker 1: the House speakership means for a potential government shutdown.
Speaker 2: This year.
Speaker 1: Last, but not least, i'll discuss an upcoming hearing where
Speaker 1: Berkshire Hathaway's ener subsidiary, Pacific Corps, will try to trim
Speaker 1: its exposure in Oregon wildfire litigation, and also briefly talk
Speaker 1: about marketmaker Virtue's anticipated motion to dismiss an sec lawsuit
Speaker 1: accusing the company of failing to enforce in our information
Speaker 1: barriers around trade data. And finally, let me just add
Speaker 1: that our colleague Holly Frome, who covers consumer and industrials litigation,
Speaker 1: couldn't be on today's episode, but she is awaiting key
Speaker 1: court rulings in Buyer roundup litigation and also Peloton Securities
Speaker 1: fraud litigation. So if you're interested in those cases, please
Speaker 1: don't hesitate to reach out to her or to me,
Speaker 1: and I can point you in the right direction. As always,
Speaker 1: all of our research is available on the Bloomberg terminal
Speaker 1: at BI go. And just a quick word about Bloomberg
Speaker 1: Intelligence for those who don't know. We are the investment
Speaker 1: research platform on the Bloomberg term and all, providing in
Speaker 1: depth research on industries, companies and markets and delivering key
Speaker 1: data from BI analysts in their given industries. All right,
Speaker 1: So with all that out of the way, let's get
Speaker 1: started with the content. Jen Ree, let's bring you in
Speaker 1: to talk all things antitrust. As always, there's a ton
Speaker 1: of stuff going on in your coverage. You have three trials,
Speaker 1: at least three trials overlapping just in November. Two of
Speaker 1: them involve Google. The third involves Jeb Blue and Spirit.
Speaker 1: Why don't you come in and tell us what investors
Speaker 1: should know about these cases?
Speaker 3: You are, thanks, elliot. Yeah, let me start with Google
Speaker 3: since we have two trials, one of which is halfway through,
Speaker 3: so I'll talk about that first. And these are This
Speaker 3: is a lawsuit against Google over its search business. It's
Speaker 3: search browser, essentially by the DOJ in a group of states.
Speaker 3: It started on September twelfth, and it's basically been sued
Speaker 3: for illegally maintaining a monopoly in general search and search advertising.
Speaker 3: And they do this by paying a lot of money.
Speaker 3: It came out in trial about twenty six billion in
Speaker 3: just twenty twenty one to be set as the default
Speaker 3: search engine and essentially all the apps and various digital
Speaker 3: places a user would go to search outside of Microsoft's products,
Speaker 3: which obviously use BING. So the DOJ claims this has
Speaker 3: blocked rival search engines from access to the market and
Speaker 3: made it impossible for them to actually develop into a
Speaker 3: good competitor because there's this feed feedback loop. The more
Speaker 3: searches that are done, the more data a search engine collects,
Speaker 3: and then each search becomes better after that and they
Speaker 3: become the best search engine. And it also says that
Speaker 3: by dominating search, Google then dominates the search ads that
Speaker 3: pop up when you do your search, and they can
Speaker 3: charge high prices to advertisers. So we've got halfway done.
Speaker 3: The dj completed its case in chief, and we think
Speaker 3: it presented really compelling evidence to essentially meet the elements
Speaker 3: that it has to meet, and that is whether Google
Speaker 3: has a monopoly in a market that's properly defined as
Speaker 3: general search, and whether it has a foreclosed competitors from
Speaker 3: more than about forty percent of the outlets for distribution.
Speaker 3: I mean, these are all in question right whether that's
Speaker 3: the proper market or whether being a default search is
Speaker 3: actually foreclosure because a user can go in and change that.
Speaker 3: So at least right now on the question of whether
Speaker 3: there's wrongdoing, we're kind of leaning toward the DOJ. But
Speaker 3: the thing is, we only have half the picture. So
Speaker 3: the view could change because monopolization suits are judged in
Speaker 3: a very difficult, subjective way called the rule of reason,
Speaker 3: and this requires first determining whether there's conduct that causes harm,
Speaker 3: That's what we've done, but then asking whether the defendant
Speaker 3: has legitimate pro competitive justifications for that conduct. That's what
Speaker 3: Google's presenting now, it just started. And if it has
Speaker 3: valid pro competitive justifications for its agreements that are supported
Speaker 3: by the evidence, then essentially what the judge has to
Speaker 3: do is way which one is stronger. So it's really
Speaker 3: a difficult decision. It's very subjective. So once I see
Speaker 3: what Google presents, I could change my view on this.
Speaker 3: The trial is supposed to go through number sixteenth. I
Speaker 3: think we'll get a ruling in the first half of
Speaker 3: next year. Toward the end of it, I think either
Speaker 3: side will appeal if they lose. This trial is only
Speaker 3: on liability, that's it wrongdoing, So once it's done, there's
Speaker 3: going to be an entirely new trial to determine what
Speaker 3: the remedy should be. The DOJ will seek to have
Speaker 3: the company broken up. We don't think that's going to happen.
Speaker 3: It's more likely that Google is going to have to
Speaker 3: get out of the agreements that has to be the default,
Speaker 3: or share data with rivals, or provide a choice screen,
Speaker 3: or somehow educate users on switching defaults, or facilitate that.
Speaker 3: We don't even know what the dj is going to
Speaker 3: ask for, because no one has talked about any of
Speaker 3: this yet, because that'll be in the second trial, so
Speaker 3: it remains to be seen. Let me move over to
Speaker 3: Google play Store, so this is going to start pretty soon.
Speaker 3: This is a challenge to Google's Playstore policies by Epic Games,
Speaker 3: Indmatch dot Com. Now there used to be states and
Speaker 3: other consumers and developers in it, but they have all
Speaker 3: settled and the developers basically don't want to have to
Speaker 3: distribute through the play Store to get on the Android devices,
Speaker 3: or be required to use Google's payment system for the
Speaker 3: payment for apps or in app payments, and Google requires that. Now,
Speaker 3: this exact same case was pretty much brought against Apple
Speaker 3: by Epic Games, and Apple has largely won, although they're
Speaker 3: waiting to hear if the Supreme Court will review those decisions. Now,
Speaker 3: primarily because of that, we favor Google. But there's a
Speaker 3: wrinkle because this is a jury trial and that Apple
Speaker 3: trial was not. It was a judge trial and Apple
Speaker 3: won on really technical antitrust aspects. This jury may not
Speaker 3: look at it that way. They may judge the case
Speaker 3: more on what they view as fair or unfair conduct,
Speaker 3: and it's possible there could be a different outcome. This
Speaker 3: trial starts November six, that's going to run through mid December,
Speaker 3: and since it's a jury trial, we should get a
Speaker 3: decision in December now. Really, lastly, because I've taken too
Speaker 3: much time, lawsuits started today. This is the DOJ suit
Speaker 3: to Blockjeptly from buying Spirit. They view it as anti
Speaker 3: competitive because the deal would remove Spirit, an ultra low
Speaker 3: cost carrier, from the market, eliminates a lower cost option
Speaker 3: for consumers that might want the a la carte option
Speaker 3: Spirit offers. The companies have agreed to divest a bunch
Speaker 3: of assets for the routes that they both fly, but
Speaker 3: I think they have a big problem on the routes
Speaker 3: They don't fly where Spirit flies today but Jet Blue
Speaker 3: doesn't because Jet Blue's been clear it intends to retrofit
Speaker 3: Spirits playing to the Jetlue model, which means fewer seats
Speaker 3: and higher fares, which means lower output and higher prices
Speaker 3: which are antitrust harms. So I favor the DOJ on
Speaker 3: this one. The Tarleston Federal Court in Boston starts today,
Speaker 3: it ends December December fifth. I think we'll get a
Speaker 3: decision in January.
Speaker 4: With that.
Speaker 1: Back to you, Elliott, all right, good stuff, Jen, thank you.
Speaker 1: All right, Matt, let's bring you in to talk some
Speaker 1: more tech. I think last months on this call you
Speaker 1: previewed in October seventeenths here in involving Meta, the FTC
Speaker 1: and Meta's use of teens data, and now it sounds
Speaker 1: like you're waiting for the decision on that issue. Do
Speaker 1: you want to come in and give us more details
Speaker 1: about this?
Speaker 5: Yeah? Absolutely, Elliott. I thought i'd give an update on
Speaker 5: that story, especially because Meta just had its earnings release
Speaker 5: last week and it and it highlighted this issue as
Speaker 5: something that could be disruptive to its business if it
Speaker 5: goes the wrong way. So let's step back first, Well,
Speaker 5: what's an issue here? So, so, Facebook in twenty twenty
Speaker 5: entered into a settlement with the Federal Trade Commission after
Speaker 5: the Cambridge Analytica matter, and the company agreed to pay
Speaker 5: five billion dollars and agreed to a number of terms
Speaker 5: related to its privacy compliance. But the twist is that
Speaker 5: in May of this year, the Federal Trade Commission, now
Speaker 5: under Lena Kahn's leadership, said that it doesn't think Facebook
Speaker 5: has complied with with those promises, and so the FTC
Speaker 5: is going to unilaterally change the terms of those of
Speaker 5: that settlement, and it pose to add a couple terms
Speaker 5: that the company doesn't like very much, including a total
Speaker 5: ban on advertising to kids, as well as a requirement
Speaker 5: that anytime the company introduces a new feature or new service,
Speaker 5: it has to first get a clearance from an assessor
Speaker 5: that its privacy program is in good shape. So there's
Speaker 5: good reason for the company to highlight this as presenting
Speaker 5: a risk to the business. So let's talk about next
Speaker 5: steps here from an investor perspective. As Elliott said, there
Speaker 5: was a hearing October seventeenth here in DC on this,
Speaker 5: and that is about Facebook's effort, or Meta's effort to
Speaker 5: stop it before it can even start to say, look this,
Speaker 5: the Federal Trade Commission doesn't have the ability to unilaterally
Speaker 5: modify a court approved settlement, and that hearing on October
Speaker 5: seventeenth tested that effort to stop it before it even starts.
Speaker 5: In my view, Judge Timothy Kelly at that hearing didn't
Speaker 5: seem very warm to that idea. I think there's a
Speaker 5: general sympathy for Meta's position here, but I don't think
Speaker 5: that the judge had a sense that he has the
Speaker 5: authority to stop the process before it starts. So he
Speaker 5: told us that he's likely to rule before a November
Speaker 5: thirtieth date for the company to respond at the FTC,
Speaker 5: and so that tells us this month we're going to
Speaker 5: see his ruling, and so I think that sort of
Speaker 5: gives give shape to how this is likely to play out.
Speaker 5: I think Meta is likely to suffer an early loss
Speaker 5: when he releases his decision in the next couple weeks,
Speaker 5: and that will let the Federal Trade Commission move ahead
Speaker 5: with this process to modify the settlement along the lines
Speaker 5: of what it proposed. But that that's where, in my view,
Speaker 5: Meta's position gets much stronger legally. If the Federal Trade
Speaker 5: Commission moves ahead with these changes that it's proposed, I
Speaker 5: think the company's going to be in a very strong
Speaker 5: legal position to challenge it after the fact, and I
Speaker 5: think it will it will race into court to to
Speaker 5: try to stay anything as soon as the company as
Speaker 5: soon as the Federal Trade Commission imposes a date for
Speaker 5: those changes to take effect. So big picture, I'm not
Speaker 5: too concerned about a disruption to the company's business. I
Speaker 5: think it wins this fight, but near term there could
Speaker 5: be some bumps along the road. Let me pass it
Speaker 5: back to you, Elliott.
Speaker 1: Great, thanks a lot, Matt, all right, Tamlin, our man
Speaker 1: in London, let's bring you in. You're covering Pegasystem's appeal
Speaker 1: of a two billion dollar jury award that went against
Speaker 1: it in a trade secrets case. Sounds like you think
Speaker 1: Pegasystems has better odds of succeeding unappealed, and maybe the
Speaker 1: market st You want to come in and tell us
Speaker 1: more about that.
Speaker 2: Yeah, sure, thanks Elliott. Yeah. So, on November fifteenth, a
Speaker 2: Virginia Intermediate Appeals Court is going to hear arguments and
Speaker 2: Pegasystems did to overturn this two billion dollar damage of
Speaker 2: award that was awarded to rival Appian in a trade
Speaker 2: secrets misappropriation case, and we do believe it's highly likely
Speaker 2: that the amount is overturned. We actually give that an
Speaker 2: eighty percent likelihood of such a reduction. And moreover, we
Speaker 2: think there's a forty percent likelihood that their award is
Speaker 2: erased entirely. Now a little bit of background, So Peggas
Speaker 2: Systems and Appian compete in the business process management software space,
Speaker 2: and there's a lot of the history of litigation between
Speaker 2: the parties and the instant case was filed after a
Speaker 2: Appian hired Pega's former head of competitive intelligence and learned
Speaker 2: that Pega, through a third party software developed developer, had
Speaker 2: learned some various things about Appian's platform. File to complaint
Speaker 2: for trade secret misappropriation in a Virginia state court. There
Speaker 2: was a seven week trial and it concluded with a
Speaker 2: May ninth, twenty twenty two verdict in which the jury
Speaker 2: did award two point zero four billion dollars in damages. Now,
Speaker 2: if that amount holds, this would be the largest trade
Speaker 2: secret damages of the award in history, not just in
Speaker 2: Virginia but anywhere in US state or federal courts. It
Speaker 2: was already the largest damages award of any kind in
Speaker 2: the history of Virginia courts. And just to underscore what
Speaker 2: an outlier of this award was, what we did is
Speaker 2: we looked at other significant trade secret awards and compared
Speaker 2: the amount awarded to the combined pre vertict market caps
Speaker 2: of both parties in the litigation. Now, this award was
Speaker 2: twenty four percent of Pega and Appians combined pre market
Speaker 2: pre verdict market caps. No other awards top five percent
Speaker 2: in that metric. And for finalized amounts, that is amounts
Speaker 2: that have gone through all the appeals, the actual high
Speaker 2: water mark is zero point zero zero four percent. So
Speaker 2: again this is not at all in line with any
Speaker 2: trade taker's case that we could find. Now, how did
Speaker 2: it get so high. It got so high because the
Speaker 2: Dury instruction essentially shifted the burden of proof on damages
Speaker 2: to the defendant Pega Systems. So in trade secrets cases,
Speaker 2: a damage of the amount based on independence profits doesn't
Speaker 2: need to be precise, but it does need to be
Speaker 2: reasonably based on the profit that was actually stemming from
Speaker 2: the alleged theft. So Appian should have had to show
Speaker 2: some relationship between Pega's sales and Appian's trade secrets. That's
Speaker 2: not what happened instead, because of a Duran instruction, and
Speaker 2: the judge gave Appian pretty much simply had had to
Speaker 2: point to all of the revenue Pega had generated since
Speaker 2: this alleged trade secret depth of place, and the CORE
Speaker 2: asked Pega to prove what amount of that revenue had
Speaker 2: no relationship to the trade secrets. Now, proving that kind
Speaker 2: of negative relationship is a incredibly, incredibly difficult and that's
Speaker 2: one of the reason why it's not actually required in
Speaker 2: trade cickets law. And it's not just us saying that.
Speaker 2: An amicus brief pointing out the error in this during
Speaker 2: instruction was filed by the American Intellectual Property Law Association,
Speaker 2: So we're quite confident in the Abell's court will either
Speaker 2: reduce the damage's amount or remand for a new trial.
Speaker 2: We also think Pega has a decent likelihood of totally
Speaker 2: eliminating the award based on its argument that Appian failed
Speaker 2: to identify protectable trade secrets in the first place and
Speaker 2: or failed to adequately safeguard those secrets. Now, a win
Speaker 2: on either of those would wipe out the damages amount entirely.
Speaker 2: So again, arguments are November fifteenth, and it is a
Speaker 2: decision could be expected from two to five months after that,
Speaker 2: so really we're looking out of January to March twenty
Speaker 2: twenty four. Timeline I showed. However, note that We do
Speaker 2: think there's a good chance that this issue goes all
Speaker 2: the way up to the Virginia Supreme Court, so final
Speaker 2: resolution could actually be a few years away. I'm with that,
Speaker 2: Alphin back to you, Elliott.
Speaker 1: Great stuff, Thanks Camlin. All right, let's move on to
Speaker 1: healthcare and bring in Dwayne right to talk some healthcare policy. Dwayne,
Speaker 1: you've written about an FDA proposal to extend medical device
Speaker 1: oversight to laboratory developed tests, and I think you also
Speaker 1: want to talk a little bit about a proposal to
Speaker 1: exempt orphan drugs that tread more than one disease from
Speaker 1: the drug pricing provisions of the IRA. You want to
Speaker 1: come in and tell us more about both of these issues.
Speaker 4: Sure, thanks Elliott. So last month in October, the FDA
Speaker 4: released a proposal to extend medical device oversight two lab
Speaker 4: developed tests, which would impose new regulatory burdens and compliance
Speaker 4: costs for those diagnostic manufacturers of tests developed by and
Speaker 4: used in single labs. We think there's a sixty percent
Speaker 4: chance that the Biden administration will finalize this rule sometime
Speaker 4: in summer of twenty twenty four. So what's the background here.
Speaker 4: LDTs are a class of IVDs or in vitro diagnostics
Speaker 4: designed and made for use in a single clinical laboratory.
Speaker 4: FDA traditionally viewed LDTs as low risk, developed for diagnosing
Speaker 4: a rare disease or for use in local community populations.
Speaker 4: The FDA's exercised enforcement discretion over LDTs by choosing not
Speaker 4: to require may be subject to pre market review or
Speaker 4: clearance before use, which is typical for most medical devices.
Speaker 4: But over time LDTs have become more complex and marketed nationwide.
Speaker 4: Even if the test itself is run in a single lab.
Speaker 4: As I said, LDTs can enter the market without FDA review.
Speaker 4: They're also not tracked, and because of this lack of transparency,
Speaker 4: the FDA estimates estimates as many as one hundred and
Speaker 4: sixty thousand existing tests and fifteen thousand new tests per
Speaker 4: year are developed. So what would the FDA proposal do.
Speaker 4: We would clarify that LDTs are medical devices and subject
Speaker 4: to regulation under the Federal Food, Drug and Cosmetic Cosmetic Act,
Speaker 4: and would be the regulation would be phased in over
Speaker 4: a number of years. In terms of the impact, it's
Speaker 4: highly speculative at this point, which FDA acknowledges, and that's
Speaker 4: largely to my earlier point about how many tests are
Speaker 4: out there and how many tests the anticipate will come
Speaker 4: onto the market. It could be roughly six billion, at
Speaker 4: least that's what the FDA has signaled, but it could
Speaker 4: be much higher. So why do we think there's a
Speaker 4: high likeli that the Biden administration will finalize the rule one?
Speaker 4: The FDA tried in twenty fourteen through guidance to outline
Speaker 4: and oversight framework for LDTs, but it was withdrawn amid
Speaker 4: stakeholder and congressional pushback. Since that time, LDTs continue to
Speaker 4: grow without oversight on effectiveness, and then since the guidance
Speaker 4: was removed, Congress did try to take the lead on
Speaker 4: a legislative solution, but after several legislative sessions, there's been
Speaker 4: very little movement given the diverging views of stakeholders like
Speaker 4: academic medical centers and labs that are less keen on
Speaker 4: FD oversight of these tests, and patient groups and diagnostic
Speaker 4: manufacturers that support more oversight. So there's a sense of
Speaker 4: urgency given the uncertainty with the twenty twenty four elections
Speaker 4: and the likelihood for a change in administration, which is
Speaker 4: why you see the administration moving on this now. Now
Speaker 4: just briefly on the orphan Drug proposal, which was introduced recently.
Speaker 4: What would do is exempt orphan drugs from being eligible
Speaker 4: for negotiation under the Inflation Reduction Act, even with support
Speaker 4: from there for rare disease research and some members of Congress,
Speaker 4: we think the likelihood of action in this Congress is
Speaker 4: pretty small. So just some quick background orphan drugs. They're
Speaker 4: used to treat rare diseases or conditions that affect fewer
Speaker 4: than two hundred thousand people in the US. An orphan
Speaker 4: DRU designation usually occurs early in the development process and
Speaker 4: allows companies to qualify for various incentives like R and
Speaker 4: D text credits and then marketing exclusivity if the drug
Speaker 4: is f to approved. Now, the IRA does exempt from
Speaker 4: negotiation orphan drugs designated for only one rare disease or condition,
Speaker 4: where that approved indication is for the disease or condition.
Speaker 4: Drugs that have multiple designations or designations for multiple rare
Speaker 4: diseases or conditions aren't exempt, even if the additional indications
Speaker 4: have not been approved by the FDA, And we've heard
Speaker 4: from some companies that they're now delaying or foregoing additional
Speaker 4: research for new indications and orphan drugs. For example, over
Speaker 4: the summer, Relay Therapeutics indicated its shifting research it's research
Speaker 4: strategy to larger indications first and then following up with
Speaker 4: research on smaller indications or more orphan drugs. And this
Speaker 4: is because drugs that are seven or eleven years marketed
Speaker 4: or approved by the FDA and have over two hundred
Speaker 4: million in expenditures within the medicare population are negotiation eligible,
Speaker 4: So companies like Relay would prefer the clock to start
Speaker 4: with the larger indication to recruit investment costs. Over the
Speaker 4: last twelve months, we've heard some arguments from other companies
Speaker 4: like al Mylin and Genentech that the IRA was impacting
Speaker 4: research timelines and priorities. Again, we think the chances of
Speaker 4: passage or slim. We don't think Democrats are ready to
Speaker 4: open up the IRA, just as price negotiations on the
Speaker 4: first ten drugs are underway, and Republicans, as much as
Speaker 4: they support some aspects of the law like limiting out
Speaker 4: of pocket drug costs, many would prefer to see aboute
Speaker 4: on repealing the drug provisions rather than amending them. So
Speaker 4: I think this is one we'll hear more about in
Speaker 4: the future, but I don't see a likelihood for passage
Speaker 4: anytime soon. So with that, I will turn it back
Speaker 4: to you.
Speaker 1: Elliott. Great, thanks a lot, Dwayne. All right, let's stick
Speaker 1: with things in Washington, DC and bring in Nathan, but
Speaker 1: we'll move on to the financial sector of course. Nathan,
Speaker 1: why don't you come in and tell us about the
Speaker 1: things you're watching, including the prospects of the government shutdown
Speaker 1: with a new speaker in place in the House.
Speaker 6: Yeah, so, I think as many people aware, Representative Mike
Speaker 6: Johnson of Louisiana is now the new Speaker of the House.
Speaker 6: You know, he's got a big challenge ahead of himself.
Speaker 6: You know, the government funding, the way it works right now,
Speaker 6: would run out November seventeenth. Now, Speaker Johnson has already
Speaker 6: said that, you know, his plan, if he were to
Speaker 6: get his way, would be to somewhat kick the can
Speaker 6: down the road and offer a continuing resolution to January fifteenth. Now,
Speaker 6: we think that there's a high probability of that happening,
Speaker 6: and therefore we don't think the shutdown probability is all
Speaker 6: that high at the moment, say around thirty percent. And
Speaker 6: even if there is a shutdown, you know, we just
Speaker 6: continue to tell our clients that the market impact of
Speaker 6: that isn't all that great, even if you're talking about contractors.
Speaker 6: But there's really no sector out there that's really exposed
Speaker 6: to government shutdowns all that much. Now, you know you're
Speaker 6: going to see political hiccups between now and November seventeenth.
Speaker 6: You know, obviously they've already started wrangling over Israel AID,
Speaker 6: Ukraine AID. We have a farm bill that has to
Speaker 6: be done by the end of the year. There's FAA reauthorization,
Speaker 6: so there's a lot of other things that are in
Speaker 6: play here. But again, just please note the market impact
Speaker 6: of a government shutdown, if it happens, is somewhat low. Now,
Speaker 6: two other things I want to talk about, primarily with
Speaker 6: the Federal Reserve. The first is we got an extension
Speaker 6: to what is known as the Bosle three endgame proposal. Now,
Speaker 6: the extension pushes the comic period from November thirtieth out
Speaker 6: to January fifteenth, twenty twenty four. And if you can recall,
Speaker 6: you know, the Basil three endgame is essentially a recalibration
Speaker 6: of risk weighting of assets for the big bank. So
Speaker 6: if you're Bank of America at JP Morgan, you're looking
Speaker 6: at probably around a nineteen percent increase in capital requirements
Speaker 6: or CET one. If you're a smaller bank, you're probably
Speaker 6: around six percent. Again, this is applicable to banks that
Speaker 6: are hundred billion in assets and up, and you're also
Speaker 6: not allowed to include your own internal model restrictions when
Speaker 6: you're trying to calculate credit and operational risk. Now, there
Speaker 6: is a considerable amount of pushback from the industry on this,
Speaker 6: primarily towards the banks the defense process in doing this,
Speaker 6: whether it's the Administrative Procedures Act or cost benefit analysis.
Speaker 6: My guess is is that if you were to listen
Speaker 6: to this podcast a year or two from now, Elliott
Speaker 6: will be talking about this in terms of a lawsuit
Speaker 6: going against this rule. But you know, as Elliot can
Speaker 6: also explain, you know, you can't sue these things until
Speaker 6: they're finalized. So there's gonna be a lot of additional
Speaker 6: hiccups and headlines and so forth between now and next year.
Speaker 6: But you know, we still think at this point the
Speaker 6: regulators have a plan to finalize this in the third
Speaker 6: quarter of next year. The banking industry comes back and says, look,
Speaker 6: because of all these hiccups and stuff. You need to
Speaker 6: repropose this rule. So who is right and who's wrong.
Speaker 6: We'll find out next year. But I think at this
Speaker 6: point the regulators are still trying to finalize that. But
Speaker 6: with the caveat that, you know, anything could potentially push
Speaker 6: this back. The other proposal I want to talk about
Speaker 6: is what is known as Urban Amendment two point zero.
Speaker 6: So if you're in the credit card space or the
Speaker 6: debit card space, actually you may recall that back in
Speaker 6: twenty eleven is part of the Deurbin Amendment of dot Frank.
Speaker 6: Banks were capped at how much they could charge merchants
Speaker 6: in when conducting a debit card transaction, and the interchange
Speaker 6: fee was capped at twenty one cents plus five percent
Speaker 6: of the transaction plus one cent additional for fraud prevention purposes. Now,
Speaker 6: the average cost of transaction has almost decreased by half
Speaker 6: from two thousand and nine to today, and so the
Speaker 6: merchants and the retailers were out there will say, look,
Speaker 6: if the average cost of transaction has declined, well, then
Speaker 6: so should the cap. The original intent of the Durbin
Speaker 6: Amendment was to decrease the amount of fees that banks
Speaker 6: can charge merchants, and therefore merchants will pass those costs
Speaker 6: onto consumers. Now, if I could get one hundred bankers
Speaker 6: on this podcast, I would have one hundred people saying, look,
Speaker 6: the merchants never passed that along. They pocketed the money.
Speaker 6: If I get one hundred merchants on this podcast, they
Speaker 6: would say, look, we're passing this on, you know, and
Speaker 6: it's not something that we're keeping. Now, who is right
Speaker 6: and who's wrong? I've seen studies on both sides suggesting
Speaker 6: that they are. We've the retailers like to push a
Speaker 6: study that says seventy percents on the dollar was pushed out.
Speaker 6: The Reserve of Richmond has put out a study that
Speaker 6: pretty much nothing was passed on to the consumer. So again,
Speaker 6: this is one of those things where who's right, who's wrong?
Speaker 6: They're probably both bit right and wrong. But what the
Speaker 6: FED has done is they have come back and they've said, Okay,
Speaker 6: we're going to propose a new cap, and we've put
Speaker 6: that from going from twenty one cents to fourteen point
Speaker 6: four percent cents, from five percent of the transaction to
Speaker 6: four percent of the transaction, sorry point zero, five percent
Speaker 6: of attraction to point zero four percent of the transaction,
Speaker 6: and from one cent in fraud prevention costs to one
Speaker 6: point three cents overalls, around a twenty eight point six
Speaker 6: percent decline in how much banks can charge. And because
Speaker 6: banks took in about twelve point nine billion dollars in
Speaker 6: such fees in twenty twenty one, you're looking around three
Speaker 6: point sixty nine billion in fees disappearing from the banking sector. Now,
Speaker 6: will all this go to the merchants. No, we don't
Speaker 6: want to say that just yet, because some of this
Speaker 6: probably will be passed on to the consumer. But what
Speaker 6: we're also saying is is that there's really not much
Speaker 6: in the way that we think so banks are going
Speaker 6: to be able to do to minimize this amount. Because
Speaker 6: you know, when the Dibrin Amendment first came out, banks
Speaker 6: were like, right, well, we're gonna lose these, but we're
Speaker 6: gonna increase fees on checking accounts. The political pressure is
Speaker 6: different these days, and if you were in the banking
Speaker 6: sector and you know that banks haven't increased or had
Speaker 6: to do a way away with what are known as
Speaker 6: overdraft fees because of political pressure, that political pressure will remain.
Speaker 6: So it's still to be determined how the banks are
Speaker 6: going to try and minimize this loss. The last thing
Speaker 6: I want to mention on the debit card interchange fee
Speaker 6: card is if you're exposed to vis are a MasterCard,
Speaker 6: you see some pretty scary headlines. Those are just headlines.
Speaker 6: The actual impact of Visa MasterCard is extremely low. They
Speaker 6: take a very small amount of that actual transaction amount
Speaker 6: of that twenty one cents. Very few of that goes
Speaker 6: to Visa MasterCard. The bulk of it goes to the banks.
Speaker 6: So we think this is going to be finalized in
Speaker 6: the third quarter of next year. The comment deadline is
Speaker 6: probably gonna be around January. The banks are going to
Speaker 6: be lobbying pretty heavily against this, but we're calling this
Speaker 6: a secondary risk compared to the Bosle three end game,
Speaker 6: which is one of the bank's primary risks. So with
Speaker 6: Elliott that, I'm going to pass it back to you.
Speaker 1: Great, Thanks a lot, Nathan. All Right, I will wrap
Speaker 1: up with just some discussion of a couple things I'm
Speaker 1: watching in November. First, I'm covering a case and Oregon
Speaker 1: involving Berkshire half Away and their energy well really their
Speaker 1: energy subsidiary, Pacific Corp. That's a party to the case
Speaker 1: Pacific Corpse, the largest grid operator in the western US.
Speaker 1: It was sued in twenty twenty for allegedly causing wildfires
Speaker 1: in Oregon over the Labor Day weekend in twenty twenty.
Speaker 1: A jury returned to verdict for seventeen of the named
Speaker 1: plaintiffs just in June of this year, and the jury
Speaker 1: found Pacific Corp liable and awarded ninety million dollars in economic,
Speaker 1: non economic, and punitive damages. Again, that's just for the
Speaker 1: seventeen named plaintiffs. Trials to determine the damages for the
Speaker 1: remaining class of about forty five hundred people. Those trials
Speaker 1: are scheduled to begin in January. But before that happens,
Speaker 1: and what I'm watching this month is that Pacific Corp.
Speaker 1: Will be in court on November ninth for its post
Speaker 1: trial motions to reduce its exposure. And we think Pacific
Speaker 1: Corp has good arguments. It has good arguments at Oregon
Speaker 1: law bars non economic awards things like pain and suffering.
Speaker 1: That's usually what constantute, it's non economic damages. But Oregon
Speaker 1: has this law that bars non economic awards for damage
Speaker 1: or injury to property caused by wildfire. So we think,
Speaker 1: you know, Pacific Corps has good arguments to reduce its
Speaker 1: potential exposure from what could be about thirteen billion dollars
Speaker 1: to just a few hundred million dollars. The problem is,
Speaker 1: you know, they're going before a trial judge on post
Speaker 1: trial motions, and this trial judge has you know, pretty
Speaker 1: consistently ruled against them. So I don't think Pacific Corp.
Speaker 1: Will necessarily prevail on these arguments before the trial judge
Speaker 1: at this November ninth hearing, but I think the company
Speaker 1: could gain traction with the arguments later on appeal when
Speaker 1: these issues actually you know, move out of the trial
Speaker 1: court and onto the appeals court. So as a result,
Speaker 1: you know, we'll see how compelling these arguments that are
Speaker 1: at the November ninth argument, and I think, you know,
Speaker 1: if Pacific Corp. Does gain traction on some of these arguments,
Speaker 1: could help prompt the settlement, which we think would be
Speaker 1: in the mid single digit billion dollars. A second case
Speaker 1: I'm watching this month is a lawsuit filed by the
Speaker 1: SEC on September twelfth against market maker virtues broker Dealer Units,
Speaker 1: accusing them of failing to protect information barriers around sensitive
Speaker 1: customer information. Virtue is due to respond to the lawsuit
Speaker 1: by November thirteenth, and I think the company has a
Speaker 1: good chance to win dismissal of the fraud type claims
Speaker 1: in the lawsuit because the alleged false statements don't really
Speaker 1: pertain to the sale of any specific securities, as the
Speaker 1: relevant statute I think requires. So you know, either way,
Speaker 1: I think Virtue's monetary risk in this case is relatively small,
Speaker 1: probably no more than twenty five million dollars. But if
Speaker 1: they can knock out some of the fraud type claims,
Speaker 1: it's going to reduce that exposure even more, possibly to
Speaker 1: do single digit millions. So those are the two cases
Speaker 1: I'm watching in November. But you know, in conjunction with
Speaker 1: everyone else who spoke on this call, there's a lot
Speaker 1: going on in November that we think is important for
Speaker 1: investors to be aware of. But for now, I think
Speaker 1: we'll wrap up this episode of Votes and Verdicts. As always,
Speaker 1: thank you for listening, And as a reminder, you can
Speaker 1: find all of our research on the Bloomberg terminal at
Speaker 1: BIG and we encourage you to reach out to us
Speaker 1: with any questions that you may have, and we also
Speaker 1: encourage you to listen to other episodes of Votes and
Speaker 1: Verdicts on whatever podcast platform you like to listen to. So,
Speaker 1: with that, thank you for listening and have a great day.