Speaker 1: This is Bloomberg Wall Street Week. We turn our attention
Speaker 1: to the markets this week. USCPI members reinforcing concerns about inflation,
Speaker 1: the financial stories that cheap our world a really different
Speaker 1: reaction to Mark. It's more indications of just how hot
Speaker 1: the US economy really is. Through the eyes of the
Speaker 1: most influential voices Larry Summers, the former Treachery Secretary, Katherine Keening,
Speaker 1: CEO of ny Moen, Samzel Sherman and founder of Equatic
Speaker 1: Group Investment in Bloomberg wool Street Week with David Weston
Speaker 1: from Bloomberg Radio. An irresistible force meets an immovable object
Speaker 1: as inflation fever continues, but the central bank remedy to
Speaker 1: bring it down shakes Global Wall Street to its core.
Speaker 1: This is Bloomberg Wall Street Week. I'm David Weston, this
Speaker 1: week's special contributor. Larry Summers on reacting to the bank
Speaker 1: crisis without giving up the fight against inflation. I think
Speaker 1: it's appropriate, at least on current facts, to raise rates
Speaker 1: by twenty five basis points. The economists Danny Bettos on
Speaker 1: whether we should have seen it coming, well, I think
Speaker 1: we are seeing a realization that the banks are more
Speaker 1: fragile than people thought they were. And Joshua Friedman of
Speaker 1: Kenyon Valley Partners on what it all means for credit
Speaker 1: and for private equity. Any other week we'd be talking
Speaker 1: about the ECB decision on Thursday to raise rates. Despite
Speaker 1: all the uncertainty surrounding the banks, the Governing Council today
Speaker 1: decided to increase the three key ECB interest rates by
Speaker 1: fifty basis points and a Russian fighter jet forcing down
Speaker 1: a US drone over the Black Sea. This incident demonstrates
Speaker 1: a lack of competence in addition to being unsafe and unprofessional,
Speaker 1: and China is lowering its growth target to achieve and
Speaker 1: around five percent growth. It's not an easy task. It's
Speaker 1: going to require redoubled efforts. But this week we watched
Speaker 1: as the foundations of the banking sector trembled in the
Speaker 1: face of the failure of Silicon Valley Bank. There's never
Speaker 1: just one cop roach like we've seen several banks here
Speaker 1: fault end of Signature Bank. It was the second largest
Speaker 1: bank failure in US history, followed by the third largest
Speaker 1: bank failure in US history when Signature Bank was taken
Speaker 1: over its wealth. And if that weren't enough, the systemically
Speaker 1: important Credit Suite Teacher as it first announced material weaknesses
Speaker 1: in its financial reporting controls, even as its chairman Uric
Speaker 1: Kerner reassured Bloomberg's Francine Laque that it was not seeing
Speaker 1: fund outflows material good influence. Yesterday still I had a
Speaker 1: Climb meeting which was very positive from that one. So
Speaker 1: so far it's come, but I think it's only days
Speaker 1: TiAl goodness. But by the end of the week, the
Speaker 1: Swiss National Bank had to step in with guarantees of
Speaker 1: liquidity as pressure built for some strategic resolution for Switzerland's
Speaker 1: second largest bank, and the hits just kept on coming
Speaker 1: as First Republic Bank came under siege, prompting Secretary Yelling
Speaker 1: to put together a group of banks to inject thirty
Speaker 1: billion dollars in depots posits into the bank, which as
Speaker 1: of Friday's clothes did not appear to have stopped the doubts.
Speaker 1: And as we head into the weekend now markets are
Speaker 1: reacting to reports of UBS possibly stepping in to help
Speaker 1: with problems at Credit Suite. Through it, all equities held
Speaker 1: up reasonably well. The SMP five hundred ended up the
Speaker 1: week up one point four percent. Then Azek was up
Speaker 1: four point four percent. Investors flocked to the relative safety
Speaker 1: of bonds, taking the yield on the ten year down
Speaker 1: three DP basis points, ending the week just over three
Speaker 1: point four percent, and the yield on the two year
Speaker 1: fell over seven basis points to wind up just over
Speaker 1: three point eight percent. Take us through it all. We
Speaker 1: welcome now Peter Krauss. He's chairman and CEO of Aperture Investors,
Speaker 1: So welcome back, Peter. Great to have you here. Did here, David? So,
Speaker 1: as we sit here, it's hard to know exactly what
Speaker 1: to address because it's moving. It's moving on both sides
Speaker 1: of the Atlantic with credit suis ubs maybe over there,
Speaker 1: we've still got new Republican and other issue here. So
Speaker 1: as an investor, what do you do in these circumstances? Yeah, Look,
Speaker 1: it's very difficult. Investing is alway to challenge, but in
Speaker 1: these markets it's even more difficult. Risk is hard to
Speaker 1: take right now because if we really don't know where
Speaker 1: to take the risk, it's very difficult to put the
Speaker 1: risk on. So I think right now, in today's markets,
Speaker 1: probably investors shouldn't be committing more to a particular risk position.
Speaker 1: I'm not sure they should reduce their risk, because it's
Speaker 1: hard to know where to reduce the risk. None of
Speaker 1: us thought the two year was going to rally a
Speaker 1: hundred basis points in less than seven days. That's a dramatic,
Speaker 1: dramatic move, and none of us had any thought that,
Speaker 1: in fact, these banks were as unstable as they are.
Speaker 1: So I think at the present time, if I was
Speaker 1: investing incremental dollars, I'd probably have it in cash. So
Speaker 1: as a practical matter, what we saw was silicon value.
Speaker 1: Back in other places, it seemed to be a mismatch,
Speaker 1: a mismatch with respect to duration and respect to liquidity.
Speaker 1: As you had long term treasuries and other securities matched
Speaker 1: up against deposits, people could withdraw right away. Where might
Speaker 1: there be similar mismatches? Do you think in the system,
Speaker 1: either in the banking system or beyond the banking system. Now,
Speaker 1: I think that's an excellent point. I think one of
Speaker 1: the challenges that the world has, this is not just
Speaker 1: a US issue, is that for ten plus years, interest
Speaker 1: rates have been very benign, inflation benign, volatility benign, and
Speaker 1: people have gotten comfortable with that, and so they've invested
Speaker 1: more money than they probably would historically into private assets,
Speaker 1: into public private equity, into private credit, and places in
Speaker 1: which they don't have liquidity, and now that interest rates
Speaker 1: are much much higher in the front end, that cost
Speaker 1: of that liquidity is actually significant. And what we're seeing
Speaker 1: is the disintermediation of cash moving to where you can
Speaker 1: get five percent in short rates, whereas before you were
Speaker 1: getting zero. So, yes, it's happening in the banking system.
Speaker 1: It's happening any place that is actually benefited from very
Speaker 1: low rates and low volatility. It's happening in the insurance
Speaker 1: business where actually people who have insurance policies are saying, well,
Speaker 1: if I actually terminate my insurance policy and buy a
Speaker 1: new one, or actually buy a public security like a bond,
Speaker 1: I might get a better return. So we're going to
Speaker 1: see this continue to roll through the economic environment, and
Speaker 1: it's not over yet and it's going to continue. Part
Speaker 1: of the problem is marketing to market. We haven't had it,
Speaker 1: and obviously we've now learned the banking sector when it
Speaker 1: comes to some of these long term treasures. You've been
Speaker 1: on Wall Street week before talking about in some of
Speaker 1: the private markets, private credit, private equity, and things like that,
Speaker 1: how does that work its way through the system, because
Speaker 1: sooner or later, if it's less worth less, we have
Speaker 1: to recognize that. Yeah, I think that that's right. Look,
Speaker 1: what we sort of don't want is we don't want
Speaker 1: people with private assets to be forced to sell because
Speaker 1: they're not liquid. They ultimately will be sold at significant discounts,
Speaker 1: and the buyers of them are going to charge the
Speaker 1: lat for little liquidity. So it would be better if
Speaker 1: people who had those assets could hold them. But you're right,
Speaker 1: they're valued at rates or levels that are probably higher
Speaker 1: than what their actual value is, and so we have
Speaker 1: to sort of engineer a change over time. So foundations, endowments,
Speaker 1: pension plans, any investor that has a sizeable amount of
Speaker 1: private equity or private capital is going to have to
Speaker 1: figure out where to take their incremental dollars and invest
Speaker 1: them in public securities. And I think another issue that
Speaker 1: people have is they spend out of these foundations turn endowments.
Speaker 1: So if your private equity investment is not actually selling
Speaker 1: companies and producing cash, then you're gonna have to take
Speaker 1: that cash from the public side, which is going to
Speaker 1: put more pressure on that unequal or imbalanced ratio. So
Speaker 1: I think this is again not going to get solved
Speaker 1: over the short run, and it could create some acute
Speaker 1: cases in which people have to sell these assets. Where
Speaker 1: does this TELEFED. We've got a FED meeting coming up
Speaker 1: next week. We had the ECP this week say the
Speaker 1: course as it was anticipated with the fifty basis point increase,
Speaker 1: What does it say to the FED? Does the FED
Speaker 1: need to be worried about financial stability? At this point?
Speaker 1: FED is worried about financial stability. They've proved that over
Speaker 1: the weekend they did exactly what they should have done,
Speaker 1: which was to stabilize the two bankings situations that the
Speaker 1: FDIC took over and the transaction that you discussed earlier
Speaker 1: where large US New York banks put money into the
Speaker 1: end of First Republic. Having said that, inflation is still
Speaker 1: very high, and we have to think about the fact
Speaker 1: that inflation affects the broad economy, not just the banks.
Speaker 1: And if we don't continue to fight inflation, then the
Speaker 1: bill we're gonna have to pay at the end it's
Speaker 1: going to be even bigger. So I think that the
Speaker 1: liquidity that was created by the bank actions over the
Speaker 1: weekend created space for the FED to actually continue to
Speaker 1: take rates up by twenty five basis points. Will they
Speaker 1: continue to watch the banking situation more carefully, Of course
Speaker 1: they will. That could change in the future if a
Speaker 1: systemic bank fails, that may actually change the Fed's position,
Speaker 1: But for right now, I think the FED probably moves
Speaker 1: twenty five basis points. Would you expect going forward investors
Speaker 1: would be a little less so willing to put it
Speaker 1: in private and maybe you stick on the public market.
Speaker 1: I do think the cost of liquidity has now gone
Speaker 1: up antically and where it was kind of a no
Speaker 1: brainer to put money in private assets given what you
Speaker 1: would get in public assets or certainly in short data
Speaker 1: public assets, that's changed dramatically, and so I do think
Speaker 1: on the margin for two reasons. One the rebalancing issue
Speaker 1: we discussed, and two is the relative attractiveness of the
Speaker 1: yields of public securities versus private securities. I also think
Speaker 1: that there is going to be a reckoning in the
Speaker 1: private capital or the private credit world, where the loans
Speaker 1: that have been made have been made over the last
Speaker 1: ten years in a very benign credit environment. People look
Speaker 1: at the credit history of those assets and see very
Speaker 1: few losses and feel comfortable with that. That could change.
Speaker 1: And if people then begin to understand well, those populations
Speaker 1: of loans are not quite as free from credit risk
Speaker 1: as I thought. That will also make people think a
Speaker 1: little bit more about putting money in the public side
Speaker 1: versus the private side. What does this mean for if
Speaker 1: I can call it this the real economy, I mean,
Speaker 1: for example, to be very direct with you, is a
Speaker 1: recession more likely today than it was a week ago. Yes,
Speaker 1: to be very direct with you, I think that the
Speaker 1: FED has been saying again since it started raising rates,
Speaker 1: they want to restrict financial conditions. If you restrict financial conditions,
Speaker 1: by definition, you have to slow growth. Of course, the
Speaker 1: FED is trying to slow growth without creating a recession.
Speaker 1: That is a very hard thing to do. With the
Speaker 1: banking crisis, you're probably also seeing financial conditions both loosen
Speaker 1: as a result of the Fed's action, but also tighten
Speaker 1: as a result of regional banks husbanding their cash and
Speaker 1: not lending as aggressively and wearing more about credit risk
Speaker 1: and therefore on the margin, probably not lending. So I
Speaker 1: suspect on the real economy, by the end of the
Speaker 1: year there will be a significant slowing, potential recession, and
Speaker 1: that's what we need, because we're not going to get
Speaker 1: inflation down unless that happens. Peters, so great to have
Speaker 1: your here again. That's Peter Krauss of Aperture Investments coming up.
Speaker 1: Economists editor in chief Zanni Bedos joins us about yet
Speaker 1: another banking crisis. Well, we may risk by counting the
Speaker 1: government to make it all go away. This is Wall
Speaker 1: Street Week. I'm Bloomberg. This is Bloomberg Wall Street Week
Speaker 1: with David Weston from Bloomberg Radio. This is Wall Street Week.
Speaker 1: I'm David Weston. It has been quite a week in
Speaker 1: the markets, and particularly triggered by some crises in several banks.
Speaker 1: But now it's time to take a step back and
Speaker 1: maybe think about broader consequences of what we have seen
Speaker 1: this week and help us do that. We're welcome to
Speaker 1: Zanny Minton Batto. She is editor in chief of the Economist. So, Zannie,
Speaker 1: welcome back. It's great to have you here. Thank you
Speaker 1: for having me. It's great to be back here. So
Speaker 1: you had you were covering the two eight two thousand
Speaker 1: and nine great great financial crisis. Do you have PTSD?
Speaker 1: I certainly have a sense of I'm as You're right.
Speaker 1: I lived in Washington throughout that crisis, and I'm here.
Speaker 1: I was here in the US this last weekend when
Speaker 1: the whole news broke about Silicon Valley Bank, and there
Speaker 1: was definitely a sense of daja. It's not on the
Speaker 1: scale yet, but it's also I think more systemic than
Speaker 1: people thought even a week ago. So I think we
Speaker 1: are seeing a realization that the banks are more fragile
Speaker 1: than people thought they were. Because after the twenty eight
Speaker 1: financial crisism, we can we can talk about this, but
Speaker 1: there was a huge amount of regulation and recapitalization and
Speaker 1: focus on strengthening the banks. But two things kind of
Speaker 1: we've now realized happens since then. One is that some
Speaker 1: of that regulatory framework was rolled back in twenty seventeen
Speaker 1: and eighteen, and so Silicon Valley Bank would have been
Speaker 1: required to have much more rigorous supervision and to have
Speaker 1: had a kind of what's called a plan for its
Speaker 1: own demise, which the systemically important big banks have to have.
Speaker 1: And the original rules were that any bank bigger than
Speaker 1: without it's more than fifty billion would have to do that.
Speaker 1: That was raised to two hundred and fifty billion, and
Speaker 1: so Silicon Valley Bank and others didn't were no longer
Speaker 1: subject to that. Rigger had they been subject to it,
Speaker 1: this might not have happened. Secondly, and more importantly, the
Speaker 1: whole reorganization after two thousand and two thousand and nine
Speaker 1: was designed to focus on problems of credit because that
Speaker 1: was the cause of the financial crisis. Inflation was loan
Speaker 1: that people worried about deflation. No one worried about duration risk,
Speaker 1: no one worried about what happened to the value of
Speaker 1: treasuries on banks balance sheets when interest rates rose very sharply.
Speaker 1: That wasn't sund part of the thinking in two and nine,
Speaker 1: two ten, when these regularly reforms were done. And now
Speaker 1: we're in an environment where we've had obviously the fastest
Speaker 1: interest rate rise in decades, and we're seeing the consequences
Speaker 1: that actually these large holdings of government bonds, which would
Speaker 1: deem to be part of making banks safer, are less
Speaker 1: safer than you thought because the banks have effectively, if
Speaker 1: you marking to market, they have big losses on them.
Speaker 1: At the same time, we do have the Sunday announcement
Speaker 1: that basically said everything's gonna be fine. We'll back up
Speaker 1: all the pleasant no matter why everything seems super systemic.
Speaker 1: The government steps in makes it all better. We did
Speaker 1: have that, and that's the I think when we look
Speaker 1: back at this episode, that is going to be the
Speaker 1: extraordinary development that on Sunday, not only were all depositors
Speaker 1: in those two banks bailed out, and of course there
Speaker 1: was an FDIC limit of two hundred and fifty thousand,
Speaker 1: that's you know, exemption made all depositors bailed out. But
Speaker 1: in addition, the FED instituted for one year supposedly a
Speaker 1: facility that banks could get liquidity at the par value
Speaker 1: of any treasuries and any government bonds that they hold.
Speaker 1: And the idea of a lender of last resort is
Speaker 1: to lend freely, quickly against good collateral and out of
Speaker 1: punitive rate. But what we've seen really in the last
Speaker 1: few years, a few decades actually has been an expansion
Speaker 1: of the Federal reserves kind of definition of what being
Speaker 1: a lender of last resort is, lending against much more collateral,
Speaker 1: lending more freely, becoming After two thousand and eight two
Speaker 1: thousand nine, people talked of the FED as a market
Speaker 1: maker of last resort much broader. And what happen and
Speaker 1: Las Sunday was a very big shift because in effect,
Speaker 1: it wasn't imposing any haircut on the bank's ability to borrow.
Speaker 1: They can borrow a POW, which meant in effect they're
Speaker 1: getting subsidized by the Federal for their liquidity. And it's
Speaker 1: supposed to be a one year facility. I don't know.
Speaker 1: Those kind of one year facilities have a habit of changing,
Speaker 1: and that's a big shift in what the Fed does. Ny,
Speaker 1: it's so great to have you back on Walsteran. Thank
Speaker 1: you so much for being here. That that's any Minton
Speaker 1: Bettos of The Economist. Welcome now Dave Gitlin, he's chairman
Speaker 1: and CEO of Carrier Global Corporation and he joins us. Now,
Speaker 1: thank you so much for being here with us on
Speaker 1: Wall Street week. So we've had a busy week in
Speaker 1: the markets. A lot has gone on, triggered really by
Speaker 1: the sort of banking crisis started with Silicon Valley Bank.
Speaker 1: I wonder for you, who runs a company that actually
Speaker 1: makes things, sells things in the real world, what effect
Speaker 1: does it hell on you. Well, first, the good news
Speaker 1: is that we have known material exposure to the regional banks.
Speaker 1: The banks involved particularly they're more broadly the regional banks,
Speaker 1: so we're protected there. Our relationships are with the bulgh
Speaker 1: bracket franks. So rates are lower, but do you see
Speaker 1: any tightening of credit? Do you see any reluctance to
Speaker 1: extend credit at this point? Is that picking up at
Speaker 1: all or do you have to anticipate that possibility. We
Speaker 1: have to anticipate anticipate that possibility. We haven't seen that yet.
Speaker 1: But rates coming down is over a positive thing for
Speaker 1: our market because you know, we look at some of
Speaker 1: the rates going up has had a delling effect on
Speaker 1: the new housing market. So we should see some benefit
Speaker 1: in housing as rates start to come down, and our
Speaker 1: larger customers on the property side, as rates come down,
Speaker 1: that'll be a positive thing for commercial construction as well.
Speaker 1: We have the Federal Reserve meeting next week and there's
Speaker 1: a lot of debate about what they're likely to do.
Speaker 1: Talk about the other side of this equation. We're seeing
Speaker 1: the situation with the banks. We'll need to support them.
Speaker 1: At the same time, we do have inflation. We're still
Speaker 1: getting inflation numbers on how does that affect carrier's business. Well,
Speaker 1: if you're a company that has the ability to raise
Speaker 1: price and keep price but also reduced costs, that spread
Speaker 1: can be very beneficial. So we look over the last
Speaker 1: eighteen months and many of our businesses we've raised price
Speaker 1: six times, so we've been coming off very significant price increases.
Speaker 1: We raise price over billion and a half dollars last
Speaker 1: year on a base of twenty billions, so we realized
Speaker 1: last year over seven and a half percent of price increases.
Speaker 1: While we have been experiencing inflation, we look at this
Speaker 1: year inflation is not over. We came out with new
Speaker 1: price increases in January to kind of keep pace with
Speaker 1: the inflationary pressures that we see. But at the same time,
Speaker 1: we will be brutally tenacious on taking costs out of
Speaker 1: the business. We reduced GNA from nine percent to seven percent.
Speaker 1: We're going very aggressively after working with our supply chain
Speaker 1: partners to really partner with suppliers that want to be
Speaker 1: on the journey with us to take costs out. We're
Speaker 1: going back after the basics of getting productivity in our factories,
Speaker 1: so maintain increased price as appropriate and then aggressively reduce costs.
Speaker 1: Are you facing much pressure on the labor side. We are.
Speaker 1: We are. It's mostly acute in the United States. We
Speaker 1: don't have as many you know, we have about fifty
Speaker 1: five thousand people eighty percent of them are outside the
Speaker 1: United States, and most of the labor pressures we see
Speaker 1: still are in the United States, but we're starting to
Speaker 1: see some loosening there. Where are the customers right now,
Speaker 1: maybe are they moving to How is your business changing?
Speaker 1: We look both geographically and bi vertically. Geographically, you know,
Speaker 1: it does look like slower growth in the United States
Speaker 1: and Europe. But I will tell you I was just
Speaker 1: in Saudi last week. The opportunity for infrastructure spend in
Speaker 1: Saudi Arabia is tremendous. It's a once in a generation opportunity.
Speaker 1: But we met with the PIF that has more than
Speaker 1: seven hundred billion dollars that they're investing and with the
Speaker 1: Giga projects that they're investing in. They're going to invest
Speaker 1: more than seven hundred billion dollars in Nielm in erosian
Speaker 1: A housing projects. So we want to be front and
Speaker 1: center as they build out significant infrastructure in Saudi Arabia.
Speaker 1: India looks very encouraging right now, so we want to
Speaker 1: invest very strongly in India. And I think China's going
Speaker 1: to surprise to the upside. There is this geopolitical cloud
Speaker 1: between the United States and Europe and China. But I
Speaker 1: will tell you that if you get beyond the cloud
Speaker 1: and you look in the trenches, there is really strong
Speaker 1: opportunity in China. And what we've done in China is
Speaker 1: shift our focus from property and real estate over to
Speaker 1: the industrial and infrastructure side. It was seventy thirty one
Speaker 1: way now it's seventy percent I and I infrastructure and industrial.
Speaker 1: So we see a positive opportunity in China. And then
Speaker 1: we look by vertical. We just got a shift for
Speaker 1: where there's more opportunities, so Data Center strong, the Chips
Speaker 1: Act is bringing more investment into infrastructure and industrials. In
Speaker 1: the United States, we look at low end certain parts
Speaker 1: of real estate look very encouraging. So we have an
Speaker 1: ability to shift some of our focus and we're landing
Speaker 1: some very encouraging deals here in the United States. You
Speaker 1: mentioned sustainability earlier. Tell us about the Inflation Reduction Acts
Speaker 1: some of the other issues, such as the Bipartisan Infrastructure Bill.
Speaker 1: What is that doing to your business? It's significant, you know,
Speaker 1: you look at the Inflation Reduction Acts. Three hundred and
Speaker 1: seventy billion is going to be spent on clean energy,
Speaker 1: and we expect to be a big recipient, there's going
Speaker 1: to be a two thousand dollars incentive to go to heatpumps.
Speaker 1: Heatpumps is a very significant trend of the United States.
Speaker 1: Thirty five percent of all of our split systems that
Speaker 1: we sell for air conditioning for homes today are heatpumps.
Speaker 1: So if you can use that two thousand dollars and
Speaker 1: have to shift from not only cooling only to a
Speaker 1: heat pump, but use it to shift to a variable speed,
Speaker 1: more energy efficient heat pump, that will have a very
Speaker 1: significant impact. Dave, thank you so much for being a
Speaker 1: Wall Street We're really glad to have you here. As
Speaker 1: Dave Gitlin, he is the chairman and CEO of Carrier
Speaker 1: Global Corporation. Coming up, we wrap up a wild week
Speaker 1: with our special contributor Larry Summers of Harvard. That's next
Speaker 1: on Wall Street Week on Bloomberg. This is Wall Street Week.
Speaker 1: I'm David Western. We're joined once again now by our
Speaker 1: very special contributor here on Wall Street Week. He is
Speaker 1: Larry Summers, of course of Harvard. So, Larry, there are
Speaker 1: so many things to cover, it's hard to know where
Speaker 1: to start, but let's go through a few of them
Speaker 1: and how you would be looking at it if you
Speaker 1: were sitting in one of those policymaking decisions positions that
Speaker 1: you've had in the past. First of all, at the
Speaker 1: very end of the week on Friday, we had SVB Financial,
Speaker 1: as the parent company of Silicon Valley Bank, declare bankruptcy
Speaker 1: here in New York City, and the bonds, as I understand,
Speaker 1: initially went up. What do you make of that? Bankruptcy
Speaker 1: seems like the right thing for a company that's insolvent
Speaker 1: and the government is resolving. It. Worried me to see
Speaker 1: those bonds go up. I don't understand why whatever money
Speaker 1: is going to the bondholders that the bondholders are looking
Speaker 1: at isn't instead being committed to defray the government's liability
Speaker 1: for depositors. I hope somebody's looked carefully at all the
Speaker 1: executive compensation arrangements and that any deferred compensation has been
Speaker 1: wiped out for SVB executives, whether it's coming from the
Speaker 1: bank or it's coming from the holding company wherever it's
Speaker 1: coming out. That was the president's clear commitment, and I'd
Speaker 1: be a little concerned based on what I'm seeing, But
Speaker 1: obviously after respect the rule of law, and I don't
Speaker 1: know all the legal details, Larry, You've been concerned about contagion.
Speaker 1: A lot of people have. All week long, we had
Speaker 1: the First Republic bank it situation, and then late Thursday,
Speaker 1: over night Thursday night, we had Secretary of Yellen apparently
Speaker 1: make an arrangement with Jamie Diamond of JP Morgan for
Speaker 1: an effusion of thirty billion dollars in deposits in the bank.
Speaker 1: What do you think about that? Well, it was JP
Speaker 1: Morgan and a number of other banks who were apparently
Speaker 1: corralled by the Secretary and by JP Morgan. I don't
Speaker 1: know what to make of it. The government has committed
Speaker 1: to put money in there at par above the market
Speaker 1: value of securities for a year. The fact that the
Speaker 1: bank's made a commitment for one hundred and twenty days
Speaker 1: so they can get out well ahead of the government
Speaker 1: at a interest rate that we don't yet know what
Speaker 1: it is with what the understandings in the agreement with
Speaker 1: the Treasury are. I suppose the fact that everybody's acting
Speaker 1: will make people a little more confident, but it made
Speaker 1: me nervous. This was not an objective private sector assessment
Speaker 1: to have confidence in First Republic, So I'm not sure
Speaker 1: what to what to make of it. It seemed a
Speaker 1: little corporatist and deal based between the government and big
Speaker 1: banks to me. But we'll have to see how it unfolds,
Speaker 1: and I hope there'll be total transparency on all the understandings.
Speaker 1: What does all this mean for the central banks, particularly
Speaker 1: the Federal Reserve as we look toward a decision next
Speaker 1: week coming on the heels of the ECB. And when
Speaker 1: you saw it Madame Legarde did this week, I think
Speaker 1: Madame Legarde was terrific. She did three very important things.
Speaker 1: She showed that you can carry through necessary anti inflation
Speaker 1: monetary policy even when there are financial strains. She made
Speaker 1: very clear that with two different problems, inflation and financial stability,
Speaker 1: you can use two different instruments to respond to those
Speaker 1: problems and not sacrifice on the inflation dimension. And she
Speaker 1: ended forward guidance, and I hope in many ways that
Speaker 1: will be a role model for the FED. Forward guidance
Speaker 1: has mostly since rates got off the zero floor, been
Speaker 1: an unfortunate model. I think we can use policy directed
Speaker 1: at standing behind depositors separately from monetary policy, and I
Speaker 1: think it's appropriate at least on current facts, and they're
Speaker 1: changing very quickly these days, but on current facts to
Speaker 1: raise rates by twenty five basis points. So that's where
Speaker 1: I would be coming down. I do think that the
Speaker 1: FED should not allow financial dominance, but does of course
Speaker 1: need to recognize that slower credit is going to be
Speaker 1: the result of that and assess it into its macroeconomic forecast.
Speaker 1: But as I read the economic evidence, the slowing of
Speaker 1: credit is not nearly as much as the amount that
Speaker 1: the FED has that the market has taken out of
Speaker 1: its expectations of how the FED is going to tighten.
Speaker 1: So I hope the FED can move forward twenty five
Speaker 1: basis points. So, Larry, I understand your point. I think
Speaker 1: about marketing dominance. We don't want to have that. At
Speaker 1: the same time, is it exactly right to believe, as
Speaker 1: Madame Regard does, that in fact, using one of those
Speaker 1: policy instruments does not affect the other. And what I'm
Speaker 1: talking about is price stability and financial stability. It didn't
Speaker 1: even not see this week perhaps some evidence that when
Speaker 1: you go after price stability you actually can affect financial stability.
Speaker 1: You can. The way to deal with that is to
Speaker 1: adjust the other policy instrument by standing behind the affected institution.
Speaker 1: If I lose weight. It affects how well my clothes fit.
Speaker 1: But that's not an argument against losing weight. It's an
Speaker 1: argument for going to the tailor. And that's the same
Speaker 1: principle as using policy instruments to respond to financial concerns.
Speaker 1: I think it will be very unfortunate if, out of
Speaker 1: solicitude for the banking system, the FED were to slow
Speaker 1: down its rate of interest rate increase beyond what is
Speaker 1: appropriate given the credit contraction. It would raise inflation expectations
Speaker 1: on the one hand, and I suspect many people would
Speaker 1: feel that if the FED was scared, they should be
Speaker 1: as well, and so ironically it could both raise inflation
Speaker 1: expectations and contract the economy. Larry, what did this week
Speaker 1: mean for financial regulation? And I really, I guess I'm
Speaker 1: asking two questions, how well we're doing it, because there
Speaker 1: are a lot of people are really questioning portunity to
Speaker 1: San Francisco Fed in its regulation its oversight of Silicon
Speaker 1: Valley Bank. But number two are confidence in the regulators.
Speaker 1: And you saw the report that reportedly at least Chair
Speaker 1: Powell delayed the announcement about what was being done with
Speaker 1: Silicon Valley Bank because he wanted to take out any
Speaker 1: reference to problems with regulatory authorities. Look, it's a mistake
Speaker 1: to rush rush to judgment when you don't know all
Speaker 1: the facts, but it sure looks like this was an
Speaker 1: egregious failure supervision. We had hugely rapid growth in deposits,
Speaker 1: we had a obvious mismatch in duration, and it sure
Speaker 1: doesn't look like the supervisors at the San Francisco FED
Speaker 1: were on top of the situation. Again, we don't know
Speaker 1: everything yet, but clearly this needs to be a cause
Speaker 1: for some soul searching within the federal reserve system. We
Speaker 1: have to be careful, David. The central irony of financial
Speaker 1: crisis is that it's caused by excessive lending, and it's
Speaker 1: resolved by more lending. And so we need to be
Speaker 1: careful at in the very short run, throwing the book
Speaker 1: at all the regional banks, because that may exacerbate a
Speaker 1: credit crunch that we don't want to have. For the
Speaker 1: longer term, I think we need to think very carefully
Speaker 1: about whether we want to have this idea of market
Speaker 1: discipline from depositors. Should a five million dollars startup be
Speaker 1: in the position of trying to evaluate the credit worthiness
Speaker 1: of a bank where it just wants to hold cash
Speaker 1: so that it can meet its payroll. I think the
Speaker 1: answer to that question is no, and so I hope
Speaker 1: we move to over time a financial system in which
Speaker 1: basic cash deposits sit in treasury bills or sit in
Speaker 1: institutions that intermediate them into treasury bills, and we separate
Speaker 1: the risk taking function more securely than we do right
Speaker 1: now from the liquidity provision function. But that's for the
Speaker 1: long run. It's going to take a huge amount of thought.
Speaker 1: But they're very profound con sceptual questions raised here. But
Speaker 1: right now it's looking to me like the idea of
Speaker 1: market discipline from depositors just isn't a very strong idea. Larry,
Speaker 1: thank you so much. Quite an important week to have
Speaker 1: you here on Walshret Week. Thank you. It's Larry Summers
Speaker 1: of Harvard coming up. It was a week that cried
Speaker 1: out for leadership and we get a lesson on transformative
Speaker 1: leadership from former Bridgewater CEO Dave McCormick, who's seen it
Speaker 1: from the best. That's next on Wall Street Week on Bloomberg.
Speaker 1: Our one more thought this week comes from Dave McCormick,
Speaker 1: a man who's run for the Senate in Pennsylvania run Bridgewater,
Speaker 1: served with Treasury Secretary Hank Paulson during the Great Financial Crisis,
Speaker 1: and commanded troops in Operation Desert Storm. This week, Dave
Speaker 1: published his book on what he has learned and about
Speaker 1: the course direction he believes we need to make. The
Speaker 1: book is Superpower in Peril, a battle plan to renew
Speaker 1: America and in the end, it comes down to what
Speaker 1: Dave calls transformational leadership. One of the main themes of
Speaker 1: the book is transformational leadership, the need for transformational leadership.
Speaker 1: You've gotten the opportunity to lead as well as observe
Speaker 1: leaders or your career at West Point, in Desert Storm,
Speaker 1: in the Treasure Department at Bridgewater, draw from that and
Speaker 1: give us an example or two of people who you
Speaker 1: thought were exceptional leaders or moments of exceptional leadership. Yeah. Well,
Speaker 1: you know, you talk about the transforming the country, and
Speaker 1: the motivation for the book was, you know, taking the
Speaker 1: country in the right direction. And you could have all
Speaker 1: the great ideas in the world, but if you don't
Speaker 1: have leaders that first of all, can win elections. So
Speaker 1: if new leaders who can win elections and then take
Speaker 1: those ideas in our republic and make them reality. Then
Speaker 1: then you're not going to go anywhere. And so I
Speaker 1: talk about the kind of leadership we need. And you know,
Speaker 1: there's so many definitions of leadership, and despite having grown
Speaker 1: up in all these places and study leadership, it's an
Speaker 1: amorphous concept. And so I tried to outline four things
Speaker 1: that I think are so critical to leadership. One's vision.
Speaker 1: You have to you have to have a sense of
Speaker 1: where your headed. Ronald Reagan was the best example of that.
Speaker 1: This simplicity, the clarity. And when we talk about courage,
Speaker 1: we talk about the courage to, you know, run up,
Speaker 1: run up the hill we're going to combat. We have
Speaker 1: so many courageous molitive but there's courage that goes well
Speaker 1: beyond that. It's the courage to stand alone in pursuit
Speaker 1: of your your convictions. It's the courage to make tough decisions.
Speaker 1: The third is humility. And Benjamin Franklin wrote a lot
Speaker 1: about leadership, but humility was the area that he he
Speaker 1: spent a lot of time one and I think that
Speaker 1: one's critical because humility allows you to recognize you're often
Speaker 1: going to be wrong. It allows you to draw in others,
Speaker 1: it allows you to learn from and get better because
Speaker 1: of your mistakes. And uh, and we see this too
Speaker 1: rarely among leaders, because you know, you start to be
Speaker 1: the leader and all of a sudden, people keep telling
Speaker 1: you how smart you are and they're laugh at your jokes.
Speaker 1: And keeping that humility through the course of your leadership
Speaker 1: journey is really critical. And then the final one, I
Speaker 1: talked about caring and uh, you know, I don't think
Speaker 1: we see enough of this today, but people sense when
Speaker 1: you're in it for something bigger than yourself and in
Speaker 1: it for them and to bring them along. And those
Speaker 1: are the things in my career in terms of the humility.
Speaker 1: Hank Paulson sticks out in my mind because Hank I
Speaker 1: worked for him during the financial crisis and and he
Speaker 1: you know, we got a lot wrong. And you know,
Speaker 1: when you're in a crisis, you're going to try to
Speaker 1: do things and you learn from the feedback you get
Speaker 1: and you make mistakes, and your the ability to evolve
Speaker 1: quickly in the middle of a crisis, get feedback, respond
Speaker 1: and not have your ego tied up into all. We
Speaker 1: decided to do this, therefore we're going to stick to it.
Speaker 1: I think really in many ways, save the country because
Speaker 1: he was adaptable and here. He is a you know,
Speaker 1: a bigger than life figure, the CEO of Goldman Sachs,
Speaker 1: the Asury Secretary, you know, a remarkable leader, but one
Speaker 1: who constantly asked himself whether he was wrong, and constantly
Speaker 1: made changes when he thought he was And he's one
Speaker 1: of the people that jumps out of my mind as
Speaker 1: a gracious and successful leader. That was Dave McCormick, author
Speaker 1: of Superpower in Peril. That does it for this episode
Speaker 1: of Wall Street Week. I'm David Weston. This is Bloomberg.
Speaker 1: See you next week.