WEBVTT - NBA Suspension Costs Lebron James $404K Per Game 0:00:02.640 --> 0:00:05.320 Welcome to the Bloomberg Penel Podcast. I'm Paul Swinge. You 0:00:05.360 --> 0:00:07.680 along with my co host Lisa Brahma Wicks. Each day 0:00:07.720 --> 0:00:10.240 we bring you the most noteworthy and useful interviews for 0:00:10.280 --> 0:00:12.520 you and your money. Whether at the grocery store or 0:00:12.560 --> 0:00:15.480 the trading floor. Find a Bloomberg Penl podcast on Apple 0:00:15.520 --> 0:00:17.959 Podcast or wherever you listen to podcasts, as well as 0:00:17.960 --> 0:00:20.680 that Bloomberg dot Com. A piece of news that really 0:00:20.680 --> 0:00:22.400 shocked not just the sports world, but I think the 0:00:22.440 --> 0:00:25.479 market in general. Was the n b A coming out 0:00:25.560 --> 0:00:28.920 and suspending their season until further notice, really came out 0:00:28.960 --> 0:00:30.680 of nowhere. To get a sense of what that means 0:00:31.000 --> 0:00:34.640 for everybody involved, we welcome Scott Sashnik, sports business reporter 0:00:35.000 --> 0:00:37.199 for Bloomberg News, joining us here on a Bloomberg Interactive 0:00:37.200 --> 0:00:39.879 broker studio. So, Scott, really kind of shocking piece of 0:00:39.920 --> 0:00:43.479 news by the NBA. What are the ramifications? But shocking 0:00:43.600 --> 0:00:46.320 in that it happened, but in where we were headed 0:00:46.360 --> 0:00:48.600 and the news that we were looking at not really 0:00:48.600 --> 0:00:52.720 shocking at all. Because you had the nuclear scenario of 0:00:52.880 --> 0:00:56.560 a player testing positive for Corona. What are they to do? 0:00:56.720 --> 0:01:00.360 That player and his teammates must be isolated that had 0:01:00.360 --> 0:01:04.319 Phase six teams in that incubation period. They have to 0:01:04.360 --> 0:01:07.399 be isolated. You just cannot play. The referees have to 0:01:07.440 --> 0:01:09.800 be isolated. You don't have enough players to go around 0:01:09.840 --> 0:01:12.240 her teams anymore. You had no choice but to suspend 0:01:12.240 --> 0:01:14.479 this season. Can you give us some color on that 0:01:14.600 --> 0:01:17.720 one player who made fun of this whole thing and 0:01:17.760 --> 0:01:20.000 went around touching all the Michael that's the guy who 0:01:20.000 --> 0:01:22.160 tested positives, Rudy Gilbert, So I'm not sure he was 0:01:22.200 --> 0:01:24.920 making fun as much he was he. I believe from 0:01:25.040 --> 0:01:28.520 the folks I've read and talked to in the city, 0:01:28.640 --> 0:01:30.400 in the Salt Lake City that it was a bit 0:01:30.400 --> 0:01:34.360 of solidarity with the reporters saying this is not a 0:01:34.400 --> 0:01:37.040 solution to the problem, that you guys are six to 0:01:37.120 --> 0:01:39.520 eight feet away from us, and they were worried about 0:01:39.520 --> 0:01:41.399 by the way the reporters giving it to the players, 0:01:41.440 --> 0:01:46.560 and a solidarity, okay. At the same time, with hindsight, 0:01:47.040 --> 0:01:50.440 it seems seriously irresponse, absolutely insane that he went around 0:01:50.440 --> 0:01:53.920 and touched every absolutely And I'm wondering, you know, is 0:01:53.920 --> 0:01:55.520 there going to be some sort of penalty or something. 0:01:55.680 --> 0:01:57.440 I'm just throwing this out there because I read this, 0:01:57.440 --> 0:02:00.600 and I'm just thinking from a social responsibility, my guests 0:02:00.640 --> 0:02:02.920 would be no, there will be no penalty, but the 0:02:03.000 --> 0:02:06.760 ramifications we don't know yet. As you know, Paul, the 0:02:06.880 --> 0:02:10.800 NBA's backbone is the billion dollar TV contracts. That's Turner 0:02:11.200 --> 0:02:15.800 and espn Um. There are fource maasure clauses in the 0:02:15.919 --> 0:02:18.560 in the in the labor contract with the players, by 0:02:18.639 --> 0:02:21.680 the way, inserted after nine eleven, so you've got things 0:02:21.680 --> 0:02:27.360 like earthquakes, terrorism specifically inserted at that time, epidemics, so 0:02:27.919 --> 0:02:31.080 you would think, Uh, the labor contract calls for a 0:02:31.160 --> 0:02:35.400 forfeiture on the players for every game one nineties second 0:02:35.440 --> 0:02:40.120 point six of their salary, accounting for regular season, h 0:02:40.360 --> 0:02:44.119 preseason and the average of postseason games. So we did 0:02:44.120 --> 0:02:47.280 the math Lebron James, for instance, loses four and four 0:02:47.320 --> 0:02:50.960 thousand dollars per game not played. How long is this 0:02:50.960 --> 0:02:53.679 gonna lasts or any speculation from the NBA office or 0:02:53.720 --> 0:02:57.080 owners or anything like that. Mark Cuban is the one 0:02:57.120 --> 0:02:59.880 who speculated the most, saying we could be looking at 0:02:59.880 --> 0:03:05.040 the NBA into August, the most valuable from a TV perspective, 0:03:05.080 --> 0:03:07.880 from a ticket perspective, the most valuable time of year 0:03:08.440 --> 0:03:11.080 for the sports leagues, especially the NBA is the playoffs. 0:03:11.320 --> 0:03:13.600 You don't want to lose your playoffs. If you can 0:03:13.720 --> 0:03:16.400 nix six to eight weeks and come back in stage 0:03:16.400 --> 0:03:19.440 of playoffs, perhaps with the current standings, that would be 0:03:19.440 --> 0:03:22.160 best case scenario. How well do you play basketball? Not 0:03:22.280 --> 0:03:24.799 that well? All right, we can't. We can't count on 0:03:24.880 --> 0:03:40.840 just watching Scotch sashnik is, Bloomberg Sports columnist. Markets continue 0:03:40.840 --> 0:03:42.960 to sell off in a big way, off seven percent 0:03:43.040 --> 0:03:46.160 across the board. We did have that circuit breaker triggered 0:03:46.200 --> 0:03:49.440 earlier this morning. We were now trading again. One area 0:03:49.440 --> 0:03:51.000 I want to spend a few minutes on least night 0:03:51.040 --> 0:03:53.320 were we really like to focus on crude oil and 0:03:53.360 --> 0:03:56.760 it continues a free fall here West West Texas Intermediate 0:03:56.800 --> 0:04:00.600 crew down six percent today, about thirty one dollar a barrel. 0:04:01.080 --> 0:04:04.080 Really on that thirty dollar barrel, kind of a support 0:04:04.200 --> 0:04:07.400 level right there. Obviously a big issues in global supply 0:04:07.440 --> 0:04:09.880 demand concerns. So let's dig into that for a few minutes. Here. 0:04:09.920 --> 0:04:12.880 Wells Fitzpatrick, he's a managing director for E and P 0:04:13.120 --> 0:04:15.560 Research at sun Trust Robinson Hump. He joins us on 0:04:15.600 --> 0:04:19.200 the phone from Houston, Texas. So, Wells, I mean clearly 0:04:19.279 --> 0:04:21.359 there's a demand issue out there. We've seen that brewing 0:04:21.360 --> 0:04:24.200 in the coronavirus really putting a point on it. But 0:04:24.440 --> 0:04:26.680 in the last week we've also gotten a supply shock 0:04:26.720 --> 0:04:28.720 here and we've had a you know, a week or 0:04:28.720 --> 0:04:31.080 so here to kind of digest what's going on between 0:04:31.080 --> 0:04:34.600 Saudi Arabia and Russia. I want to get your informed 0:04:34.640 --> 0:04:38.080 opinion about what do you think Saudi's and the Russians 0:04:38.080 --> 0:04:43.359 are actually thinking here. Yeah, it's clearly a game of brinksmanship, 0:04:43.480 --> 0:04:47.080 and Saudi Is is putting in all the cards on 0:04:47.120 --> 0:04:50.720 the table to make it a credible, uh move for 0:04:50.760 --> 0:04:54.080 them to go up north of twelve million barrels a day. Obviously, 0:04:54.120 --> 0:04:57.600 they've they've contracted a fleet of tankers. Um, you know, 0:04:57.640 --> 0:05:01.480 they've they've they've lowered their selling prices. They you know, 0:05:01.560 --> 0:05:04.960 they are trying to gut check Rush. Um, you know, 0:05:05.040 --> 0:05:07.480 it's it's a game of chicken at this point. I mean, 0:05:07.520 --> 0:05:10.200 the fact is is that Saudi and the golf increasing 0:05:10.200 --> 0:05:13.479 production by you know, well over two million barrels means 0:05:13.520 --> 0:05:16.039 that they're selling out of storage. So is it a 0:05:16.080 --> 0:05:19.040 long term strategy? I don't know. I mean, swapping your 0:05:19.160 --> 0:05:22.599 storage for Chinese storage at less than thirty thirty dollars 0:05:22.640 --> 0:05:26.480 of barrel doesn't seem like it, but but clearly at 0:05:26.480 --> 0:05:28.960 this point it's a game of chicken, and specifically a 0:05:28.960 --> 0:05:33.799 game of chicken between UH two men, MBS and and putin. 0:05:34.320 --> 0:05:37.200 Right now, I'm looking at the shale patch, in particular 0:05:37.360 --> 0:05:40.960 high yield debt of the energy companies in the United States. 0:05:41.000 --> 0:05:45.200 I'm trying to understand how deep the pain is going 0:05:45.279 --> 0:05:47.640 to go. I'm looking right now at the market value 0:05:48.160 --> 0:05:51.640 of high yield junk of energy junk bonds. It's fallen 0:05:51.960 --> 0:05:58.200 by fifty billion dollars since the beginning of this year. Yeah, 0:05:58.279 --> 0:06:01.320 it's been it's been brutal. Um, it's been brutal, and 0:06:01.320 --> 0:06:03.760 and you know the market caps are are something similar. 0:06:04.320 --> 0:06:08.320 You know, all the traditional avenues for UH financing for 0:06:08.360 --> 0:06:11.280 the industry have have essentially been shut off. I mean, 0:06:11.320 --> 0:06:15.479 A and D was down over UH in in four 0:06:15.560 --> 0:06:18.600 Q before we really hit the skids. High yield, as 0:06:18.640 --> 0:06:20.560 you said, yield the worst is more than double. The 0:06:20.600 --> 0:06:23.279 bank revolvers are going to be down in the upcoming 0:06:23.320 --> 0:06:28.160 revolver redetermination season. And you know, no one's talking about 0:06:28.200 --> 0:06:34.080 issuing equities. So if you have uh near term debt maturities. Um, 0:06:34.120 --> 0:06:36.880 it's really something that you have to pay out of 0:06:36.960 --> 0:06:39.640 cash flow or out of some sort of fire sales. 0:06:39.680 --> 0:06:42.159 So the companies that were most cautious on are the 0:06:42.200 --> 0:06:45.359 ones with near term debt maturities and the ones that 0:06:45.400 --> 0:06:48.880 are largely drawn on their bank lines, because obviously those 0:06:48.920 --> 0:06:51.240 bank lines are gonna come down. So if if you 0:06:51.279 --> 0:06:54.880 have seventy out, um, you know, it's reasonable to expect 0:06:54.880 --> 0:06:57.599 that you would be a hundred percent or even overdrawn 0:06:58.080 --> 0:07:00.800 at the end of the spring redeterminations. Just to give 0:07:00.800 --> 0:07:03.880 a sense of the scope of the pain, what proportion 0:07:04.360 --> 0:07:07.800 of the shell producers, whether in the premium basin or 0:07:07.839 --> 0:07:10.440 elsewhere in the United States, what percentage do you think 0:07:10.960 --> 0:07:14.560 we'll run into solvency issues and have to either restructure 0:07:15.080 --> 0:07:20.440 or declare bankruptcy. Yeah, that's that's a great question. Um. 0:07:20.480 --> 0:07:22.800 You know, I think that I think that there's a 0:07:22.920 --> 0:07:25.800 there's a very reasonable case if this continues for a 0:07:25.800 --> 0:07:29.000 couple more quarters that we that we challenge the I 0:07:29.040 --> 0:07:30.600 don't want to even call it a record, but the 0:07:30.640 --> 0:07:36.320 previous record of of thirty four uh e MP bankruptcies 0:07:36.440 --> 0:07:38.680 in a quarter, and that was second quarter. A few 0:07:38.760 --> 0:07:42.160 thousand and sixteen. Um, you know, it couldn't get that 0:07:42.160 --> 0:07:45.720 brutal again. Yeah, if they go through with this, with 0:07:45.840 --> 0:07:49.400 this price war, and and oil stays in in the 0:07:49.480 --> 0:07:52.640 low thirties or even dips into the twenties, it gets 0:07:52.680 --> 0:07:55.239 pretty bad pretty quick for a lot of these folks. 0:07:55.440 --> 0:07:59.000 Um and other perhaps under appreciated aspect of a lot 0:07:59.040 --> 0:08:01.480 of these companies had three way hedges, so you know, 0:08:01.520 --> 0:08:05.080 you sell another put to get a little bit more upside. Uh. 0:08:05.120 --> 0:08:07.400 And it's so far out of the money that two 0:08:07.480 --> 0:08:09.960 months ago we didn't really think about them. But you 0:08:10.000 --> 0:08:12.080 know now you have to build all those into your model, 0:08:12.120 --> 0:08:16.280 and these companies have them. Uh And and it limits 0:08:16.480 --> 0:08:20.360 the downside protection. It essentially it limits your insurance. So 0:08:20.680 --> 0:08:23.760 there's a lot of moving parts, um and frankly, not 0:08:23.880 --> 0:08:25.880 a lot of them are good, except for maybe maybe 0:08:25.960 --> 0:08:28.240 the gas side. So well, when are we going to 0:08:28.280 --> 0:08:29.920 see some of the majors come in here and just 0:08:30.000 --> 0:08:33.160 scoop up and buy some quality assets that really just 0:08:33.280 --> 0:08:37.920 kount of prices. You know, that's a great question. I mean, 0:08:38.000 --> 0:08:41.680 I think that they are in in full uh full 0:08:41.720 --> 0:08:45.480 defense of their uh their distributions. Um. I mean it's 0:08:45.480 --> 0:08:48.840 gonna be hard for the big guys, even Exxon to 0:08:48.840 --> 0:08:52.480 to to defend their dividends, uh with with thirty dollar 0:08:52.720 --> 0:08:56.160 w T. I maybe maybe they can do stock deals 0:08:56.160 --> 0:08:58.360 for some of these companies, come in and rescue them. 0:08:58.360 --> 0:09:01.320 But um, you know, to to it to your earlier point, 0:09:02.080 --> 0:09:05.160 If a company's debt is trading at thirty cents on 0:09:05.200 --> 0:09:07.280 the dollar, do you really want to go in and 0:09:07.320 --> 0:09:10.439 buy them out and and make those bond holders whole? 0:09:11.120 --> 0:09:14.240 Um when when you know that value might not be there. 0:09:14.280 --> 0:09:17.520 So when when bonds get this low, I think it 0:09:17.559 --> 0:09:20.160 actually freezes up to a and D market a little 0:09:20.160 --> 0:09:23.760 bit more than the valuation should in theory. Help Wells. 0:09:23.760 --> 0:09:26.319 Thank you so much for being with us well as Fitzpatrick, 0:09:26.640 --> 0:09:42.160 Managing director of NP Research at SunTrust Robinson Humphrey, there 0:09:42.200 --> 0:09:43.840 is a question just to go back to this, uh, 0:09:43.960 --> 0:09:46.200 this sort of idea that the bear market is signaling 0:09:46.559 --> 0:09:50.840 an over chance of recession. Luckily we have someone who 0:09:50.840 --> 0:09:53.440 can kind of weigh it on what to expect in 0:09:53.520 --> 0:09:56.640 a potential downturn in a recession this time around, given 0:09:56.760 --> 0:09:59.440 the lead up, Robert Lawrence, We're so glad to have 0:09:59.679 --> 0:10:02.280 he has, Professor of International Trade and Investment at Harvard 0:10:02.320 --> 0:10:06.679 Kennedy School, former economic advisor to President Clinton, with decades 0:10:06.679 --> 0:10:10.800 of experience throughout watching the economy. I'm trying to get 0:10:10.800 --> 0:10:13.280 your sense of where we are. People say that we 0:10:13.320 --> 0:10:15.400 had a lot of momentum in the United States heading 0:10:15.480 --> 0:10:19.840 into this coronavirus induced slow down. Do you agree with 0:10:19.880 --> 0:10:23.880 that let's start there. Well, I think we we did 0:10:23.880 --> 0:10:26.240 have momentum, but I think it's come to a halt. 0:10:26.800 --> 0:10:30.240 I think that all of the movement is obviously in 0:10:30.240 --> 0:10:33.760 the opposite direction. I think not only is the stock 0:10:33.800 --> 0:10:41.040 market signaling immense uh trouble lies ahead, um. But in 0:10:41.080 --> 0:10:44.760 a sense, the big issue is is there enough liquidity 0:10:44.800 --> 0:10:49.440 in the system. Currently? The big banks look like they're 0:10:49.480 --> 0:10:51.920 in good shape, but the question is are they going 0:10:51.960 --> 0:10:55.920 to be lending to many other companies who have cash 0:10:55.920 --> 0:11:01.120 flow issues? Um. Ironically, I think because we're fighting the 0:11:01.200 --> 0:11:04.600 last war where there was a lot of credit risk 0:11:05.760 --> 0:11:09.400 the current issues that that may have made them more prudent, 0:11:10.280 --> 0:11:12.640 But in a sense, that's simply shifting some of the 0:11:12.679 --> 0:11:20.080 problems onto those who are much less, much more liquidity constrained. So, Robert, 0:11:20.120 --> 0:11:22.800 what do you think the administration needs to do here? 0:11:22.840 --> 0:11:26.040 The U S Government needs to do here, aside from 0:11:26.040 --> 0:11:28.280 what we're already seeing from the federal Reserve, in order 0:11:28.320 --> 0:11:33.320 to combat this coronavirus and mitigate its economic impacts. Well, 0:11:33.360 --> 0:11:38.280 I think certainly it has to be fiscal policy. Uh. First, 0:11:38.360 --> 0:11:43.400 I think the administration has to give the public a 0:11:43.520 --> 0:11:47.840 sense it knows what it's doing. UM. The idea of 0:11:48.559 --> 0:11:55.679 prematurely going public with programs that weren't fully conceived, I 0:11:55.720 --> 0:12:01.120 think was extremely undermining of confidence. Uh. Secondly, I think 0:12:01.280 --> 0:12:06.120 we need across the board physical stimulus UM. You know, 0:12:06.240 --> 0:12:13.079 with with numerous dimensions helping people. I'm less impressed with 0:12:13.160 --> 0:12:19.240 the idea of dealing with payroll taxes, but I think, um, 0:12:19.320 --> 0:12:23.000 we need a We need a whole host of issues 0:12:23.600 --> 0:12:26.760 focused on problems that people are now going to face 0:12:27.520 --> 0:12:32.280 in those who are out of work, UM, extending unemployment, 0:12:32.320 --> 0:12:39.520 insurance helping. By the way, with medical testing, it's very striking. 0:12:39.559 --> 0:12:44.679 We just heard about Tom Hanks UH in Australia where 0:12:44.720 --> 0:12:48.600 tests are available for free. I think, uh that should 0:12:48.640 --> 0:12:51.880 be true in the United States as well. UM. So, 0:12:51.920 --> 0:12:57.000 I think health related dimensions in all respects should be 0:12:57.040 --> 0:13:00.600 focused on and and and physical stimul list should be 0:13:00.720 --> 0:13:04.720 used in order to UH. To do that, the focus 0:13:04.800 --> 0:13:08.679 increasingly on fiscal stimulus. Meanwhile, central banks are throwing what 0:13:08.720 --> 0:13:11.680 they can at the problem, or they're throwing some things 0:13:11.720 --> 0:13:14.440 they can at the problem. Federals are of cutting rates 0:13:14.440 --> 0:13:17.160 by an emergency fifty basis points. They're expected to cut 0:13:17.240 --> 0:13:19.920 rates by another hunter basis points based on FED funds 0:13:19.960 --> 0:13:23.760 futures next week. Meanwhile, the ECB today we got out uh, 0:13:24.240 --> 0:13:26.640 something that was highly disappointing for markets. With now the 0:13:26.679 --> 0:13:29.880 European stock markets tumbling the most on record, is this 0:13:29.960 --> 0:13:37.560 the year the central bank put died? Maybe? I mean, uh, 0:13:37.600 --> 0:13:42.440 you know, uh quite frankly that they appeared cheap, uh 0:13:42.880 --> 0:13:48.040 not moving down and expected the ten basis points, a 0:13:48.200 --> 0:13:54.000 rather small movement by any measure. Um, really deeply disappointed 0:13:54.040 --> 0:13:57.720 the markets. So what we what we've seen is a 0:13:57.800 --> 0:14:01.640 host of measures by policy makers. The markets have have 0:14:02.559 --> 0:14:06.400 viewed these as an inadequate and and that's a striking 0:14:06.440 --> 0:14:12.760 contrast to uh, you know what Mario Druggi did, where 0:14:12.800 --> 0:14:16.280 he made it very evident that he would do whatever 0:14:16.320 --> 0:14:20.000 it would take in order to change the situation. And 0:14:20.040 --> 0:14:22.840 I think that's what the central banks and and particularly 0:14:23.000 --> 0:14:27.360 as we've indicated the physical authorities need to be doing so, Professor, 0:14:27.480 --> 0:14:32.120 if this coronavirus spread a mirror somewhat like what happened 0:14:32.200 --> 0:14:36.320 in China, what do you think the economic impact will 0:14:36.360 --> 0:14:41.640 be on the US? Is that almost guarantee a recession? Well, 0:14:42.600 --> 0:14:48.080 you know what's very striking is that today that China 0:14:48.400 --> 0:14:53.200 doesn't look in bad shape, um so. And that's because 0:14:54.280 --> 0:14:58.160 I think off to Wuhan, they took very decisive action. 0:14:58.840 --> 0:15:02.040 And it's very interesting you eyeball what's happened to stock 0:15:02.080 --> 0:15:04.360 markets around the world. You see the one that's the 0:15:04.360 --> 0:15:09.440 most stable is actually the Chinese. So um so. I 0:15:09.480 --> 0:15:12.880 think the real problem is we if we don't mirror 0:15:12.920 --> 0:15:19.320 what happened in China, where after the Wuhan debacle they 0:15:19.520 --> 0:15:24.080 took very very decisive action, and I think, um it's 0:15:24.120 --> 0:15:30.000 not too late, but social distancing as a matter of 0:15:30.760 --> 0:15:36.000 overt public policy is essential, and so we actually have 0:15:36.120 --> 0:15:40.160 numerous examples in Asia now where countries have been able 0:15:40.320 --> 0:15:44.840 to stem the acceleration, and I think that's the key. 0:15:44.880 --> 0:15:47.400 If we fail to do that, then I think a 0:15:47.960 --> 0:15:51.800 recession is almost inevitable. So do you think, professor, this 0:15:51.880 --> 0:15:55.160 is actually a really compelling point here that China will 0:15:55.240 --> 0:16:00.200 emerge stronger or actually be the fastest to record our 0:16:00.280 --> 0:16:04.480 economically just in general, despite the fact that they're still 0:16:04.560 --> 0:16:08.640 kind of affected by the slowdown globally of commerce and growth. 0:16:09.640 --> 0:16:13.880 I think I think that is right. I think it's ironic. 0:16:14.640 --> 0:16:18.360 You know, they'll lose a point or two um from 0:16:18.360 --> 0:16:21.280 there from the expected growth rate, you know. So so 0:16:21.760 --> 0:16:24.080 from our standpoint, we'd love to have their growth rate 0:16:24.120 --> 0:16:26.480 of say it will be four percent instead of six. 0:16:27.200 --> 0:16:31.960 But um, the fact is that they have taken very, 0:16:32.120 --> 0:16:37.320 very decisive, coordinated action. And what's very striking is if 0:16:37.360 --> 0:16:42.760 you look at what's happening to infection rates outside of Wuhan, um, 0:16:42.840 --> 0:16:47.280 and they've seemed to have flattened out. So um, So 0:16:47.360 --> 0:16:51.280 I think, um, it could turn out. And and certainly 0:16:51.280 --> 0:16:54.840 this is what the Chinese already saying that the centralized 0:16:54.840 --> 0:16:59.760 system has great advantages. We couldn't have had, you know, 0:17:00.160 --> 0:17:04.879 a stronger demonstration of the failures of our health system. 0:17:05.320 --> 0:17:07.479 We have a we have a we have a we 0:17:07.520 --> 0:17:11.080 have a health system that is basically essentially designed to 0:17:11.560 --> 0:17:16.600 as if all health problems are private. Robert Lawrence, Professor 0:17:16.600 --> 0:17:18.600 of Trade and Investment at the Kennedy School of Government 0:17:18.600 --> 0:17:20.720 at Harvard University. Is also a Senior Fellow at the 0:17:20.760 --> 0:17:24.760 Peterson Institute for International Economics. We appreciate you for coming 0:17:24.760 --> 0:17:27.199 on and sharing your thoughts here on the coronavirus and 0:17:27.280 --> 0:17:42.280 potential economic impact. We keep quoting the stock markets today 0:17:42.280 --> 0:17:46.000 because the swoons are remarkable. That said, the focus of 0:17:46.000 --> 0:17:49.120 what's going on right now very much is in credit, 0:17:49.280 --> 0:17:51.600 is in solvency, It is in cash flow. It is 0:17:51.640 --> 0:17:54.520 do companies have enough money on hand and can they 0:17:54.560 --> 0:17:57.760 get it quickly enough to stay in business even if 0:17:57.800 --> 0:18:00.720 people stop coming at their doors and doing business and 0:18:00.760 --> 0:18:04.240 giving them money because of the social distancing and other 0:18:04.280 --> 0:18:06.920 measures due to the coronavirus. Joining us here is someone 0:18:06.920 --> 0:18:09.520 who's been covering this very closely, broken a lot of 0:18:09.600 --> 0:18:13.480 really important news on this matter, Shradar naturage and finance 0:18:13.560 --> 0:18:15.960 reporter for Bloomberg News. Joining us here in our interactive 0:18:15.960 --> 0:18:18.600 Brokers Studios three. I want to get started with this 0:18:18.680 --> 0:18:22.560 concept of drawing down credit lines. That companies basically have 0:18:22.720 --> 0:18:26.240 these revolving lines of credit credit at banks, and they 0:18:26.280 --> 0:18:30.440 have been prophylactically drawing the entire day down so that 0:18:30.480 --> 0:18:32.159 they can have cash in their balance sheets. What do 0:18:32.200 --> 0:18:34.560 we know so far? Well, so let's let's start with 0:18:34.720 --> 0:18:37.960 what a revolvers essentially a credit cards for companies, right, You, 0:18:37.960 --> 0:18:41.240 You drawn them periodically, you pay them down when things 0:18:41.240 --> 0:18:44.520 are going fine, you needed for some specific reason of 0:18:44.600 --> 0:18:47.240 the other, use it, pay back the banks. Everything's good. 0:18:47.720 --> 0:18:51.160 These are These are essentially relationship loans. Banks don't expect 0:18:51.240 --> 0:18:54.240 companies to be tapping them. It's basically saying, hey, here's 0:18:54.280 --> 0:18:55.919 there any day fun for you. If you need it, 0:18:56.040 --> 0:18:58.399 you can use it when you want. But the expectation 0:18:58.560 --> 0:19:00.920 is never that on mass every one will come for it. 0:19:01.280 --> 0:19:03.600 That seems to have changed in the last few weeks, 0:19:03.680 --> 0:19:06.320 or at least the sentiment about how to treat these 0:19:06.359 --> 0:19:09.000 revolvers has changed in the last few weeks. Yesterday we 0:19:09.000 --> 0:19:11.280 had news leaking at one after the other. You had 0:19:11.359 --> 0:19:14.520 going willing to tap down its entire fourteen billion dollar 0:19:14.520 --> 0:19:19.800 alone win Hilton Blackstone and Carlisle, two big private equity shops, 0:19:20.040 --> 0:19:23.080 urging some of their companies. Blackstones, especially those companies that 0:19:23.119 --> 0:19:26.879 are in the virus hit sectors, urging them to go 0:19:26.960 --> 0:19:29.720 out there and draw down their credit lines. Now, that 0:19:29.840 --> 0:19:32.680 seems like a prudent move, that seems like a smart move, 0:19:32.880 --> 0:19:35.160 but at the same time, you have to wonder if 0:19:35.200 --> 0:19:38.520 that accelerates, if that spreads to other companies and to 0:19:38.640 --> 0:19:42.160 other sectors, how does it affect banks which then suddenly 0:19:42.200 --> 0:19:45.000 have a lot of exposure to companies that seem to 0:19:45.040 --> 0:19:47.359 be in a lot of pain right now. Again, if 0:19:47.400 --> 0:19:50.679 everything were to turn around today and we're magically stopped 0:19:50.680 --> 0:19:53.840 going down, we're okay. If it deteriorates, then you have 0:19:53.880 --> 0:19:56.359 to worry about the second order effects. So are the 0:19:56.440 --> 0:19:59.159 banks here do they? I guess? The question is do 0:19:59.280 --> 0:20:01.840 they have if something comes in and draws down their 0:20:01.840 --> 0:20:04.840 credit line or borrows off of their facility? The banks 0:20:04.960 --> 0:20:07.560 can't say no, can they? I guess the rule of 0:20:07.640 --> 0:20:10.520 law upright? So you have governance and you have you 0:20:10.520 --> 0:20:12.840 you have things on dotted lines that tell you in 0:20:12.840 --> 0:20:15.160 the contract how much you can with draw how much 0:20:15.160 --> 0:20:18.119 you can't. The energy sector, for for example, it's a 0:20:18.200 --> 0:20:20.880 very interesting space right every six months or so, they 0:20:20.880 --> 0:20:24.520 have these borrowing base redeterminations where the amount of credit 0:20:24.560 --> 0:20:28.400 that extended to these oil and natural gas producers, for instance, 0:20:28.480 --> 0:20:32.320 is driven off commodity prices. Commodity prices one month ago 0:20:32.720 --> 0:20:36.560 fifty sixty dollars on the barrel commodity prices now horrible. 0:20:37.960 --> 0:20:42.480 So when prices now horrible, and when you go and 0:20:42.520 --> 0:20:46.160 do the redetermination again, their credit line availability is going 0:20:46.200 --> 0:20:49.400 to shrink remarkably. So they're going out there and tapping 0:20:49.440 --> 0:20:51.280 that as much as they can. And the other interesting 0:20:51.400 --> 0:20:53.720 aspect that we have to think about here is the 0:20:54.680 --> 0:20:56.879 thing that people always tell you about credit lines is 0:20:57.200 --> 0:21:00.440 it's always available until you need it was back in 0:21:00.520 --> 0:21:03.080 no wait, there was the other dynamic. Banks were trying 0:21:03.119 --> 0:21:04.920 to freeze the credit lines, were trying to walk out 0:21:04.920 --> 0:21:08.560 of contracts and uh negotiations that they've had with these companies. 0:21:08.600 --> 0:21:10.879 So it's how much you needed, how much banks are 0:21:10.920 --> 0:21:13.920 willing to lend. When it's sort of attacking you from 0:21:13.960 --> 0:21:16.000 both sides, then we have a problem. You wrote a 0:21:16.000 --> 0:21:18.560 story on the Bloomberg that said that two and a 0:21:18.600 --> 0:21:22.840 half trillion dollars of lines undrawn. That's how much credit 0:21:22.960 --> 0:21:25.280 companies have to withdraw. At least it was at the 0:21:25.359 --> 0:21:28.080 end of last year. Probably a somewhat different now given 0:21:28.080 --> 0:21:31.160 how many are actually started to draw them down. Two 0:21:31.200 --> 0:21:35.399 thirds of that held or extended by the four of 0:21:35.440 --> 0:21:37.960 the biggest banks, JP, Morgan City Group, Bank of America, 0:21:37.960 --> 0:21:42.520 and Wells Fargo. How concerned are people about the ability 0:21:42.760 --> 0:21:46.120 of these banks and others to make good on these 0:21:46.160 --> 0:21:49.520 credit lines, extend these loans to companies that could be 0:21:49.600 --> 0:21:54.359 potentially in perilous positions. So let's let's look at that 0:21:54.400 --> 0:21:57.119 based on the people who would who would presumably have 0:21:57.200 --> 0:21:59.480 the best insight into it, the executives of the banks, 0:21:59.480 --> 0:22:01.960 the analyst covering the banks, the investors sort of invested 0:22:02.000 --> 0:22:05.680 in these stocks, executives at the banks. Yet Brian moynihan, 0:22:05.840 --> 0:22:09.240 Michael Corbett sitting next to Donald J. Trump yesterday in 0:22:09.320 --> 0:22:11.719 the over well in the White House and talking about 0:22:12.040 --> 0:22:13.919 how they could help in this time. But there's a 0:22:13.920 --> 0:22:16.960 lot of the questions were also around how strong our banks, 0:22:17.080 --> 0:22:19.600 and one after the other, all the senior executives said, 0:22:19.920 --> 0:22:22.639 we're in great shape, well capitalized. Perhaps a lot of 0:22:22.640 --> 0:22:24.199 it does go down to the fact as to what 0:22:24.320 --> 0:22:27.680 happened after the previous global financial crisis, where we put 0:22:27.720 --> 0:22:30.960 in place a lot of measures that that ten years 0:22:31.040 --> 0:22:33.880 later have resulted in people being able to comfortably say 0:22:33.920 --> 0:22:37.359 that banks are well capitalized, banks are healthy, and banks 0:22:37.359 --> 0:22:39.280 are in a good position. That's what the banks say, 0:22:39.400 --> 0:22:41.200 That's what a lot of the bank analysts say. We're 0:22:41.240 --> 0:22:43.520 a note from City Group today that said, you know, 0:22:43.760 --> 0:22:45.639 they have been getting a lot of questions on what 0:22:45.800 --> 0:22:48.399 happens if everyone starts drawing these credit lines, and they 0:22:48.440 --> 0:22:50.480 said even a hundred percent of the lines were to 0:22:50.560 --> 0:22:53.440 be drawn, we don't think the impact would be dramatic 0:22:53.480 --> 0:22:56.119 that you would have to worry about it in in 0:22:56.280 --> 0:22:59.080 any sort of systemic sense. But then it goes back 0:22:59.119 --> 0:23:01.639 to the discussion we were having off Fair just before 0:23:01.680 --> 0:23:04.000 we started, right where we spoke to Jim biuncle and 0:23:04.000 --> 0:23:06.560 he said he whipped out the crisis at our joke 0:23:07.000 --> 0:23:09.560 about the window washer falling from the tenth floor. When 0:23:09.560 --> 0:23:12.240 he's going by the third floor, he looks in and says, 0:23:12.240 --> 0:23:14.720 so far, so good. That's the problem. We don't know 0:23:14.720 --> 0:23:16.879 what the bottom is. That's the struggle. We don't know 0:23:16.880 --> 0:23:19.639 how to model it, and that is why you're seeing 0:23:19.680 --> 0:23:21.399 this sort of a bout of panic in the markets 0:23:21.400 --> 0:23:22.919 out there. All right, Well, the good news is for us, 0:23:22.920 --> 0:23:24.520 as we know, you're going to continue to follow this 0:23:24.640 --> 0:23:26.679