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Speaker 1: Bloomberg Audio Studios, podcasts, radio News.

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Speaker 2: We're with Ronald Handley, of course and head State Street.

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Speaker 2: You're actually fresh off one of the inaugural panels here

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Speaker 2: at the Milkin twenty twenty four conference, a panel that

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Speaker 2: was ostensibly really about the future of capital markets, and

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Speaker 2: I sort of wonder, what exactly is that future going

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Speaker 2: to look like. A lot of people look at us

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Speaker 2: right now and say, grown the precipice of something new.

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Speaker 1: Yeah, I would actually be much more optimistic about that.

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Speaker 1: And before talking about the future, let's just talk about

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Speaker 1: the recent past. I mean, if you think about what

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Speaker 1: the world has been grow in terms of the challenges

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Speaker 1: it's faced, and any kind of challenge in the real

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Speaker 1: economy translates to the financial economy. So we've had a pandemic,

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Speaker 1: a once in a century kind of pandemic, and we've

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Speaker 1: also had ground war breakout in Europe. And if you

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Speaker 1: think about how capital markets have actually adapted to that,

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Speaker 1: how you've seen underlying economies repair themselves. And again, the

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Speaker 1: capital markets is very much a function of what goes

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Speaker 1: on in the real economy, and you've seen I think

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Speaker 1: extraordinary resilience in the real economy relative to what any

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Speaker 1: of us would have expected.

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Speaker 2: What do you think was behind that resilience?

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Speaker 1: Not to sound jingoistic, but I think a lot of

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Speaker 1: it was the US led the way in terms of

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Speaker 1: certainly in the repair of supply chains. I mean, what

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Speaker 1: we were talking about in the middle of twenty twenty

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Speaker 1: was the potential for this going on for four or

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Speaker 1: five six years, and the rebalancing would take that long,

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Speaker 1: and in fact really led by the US corporations, but

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Speaker 1: also just large corporations around the world. Was really led

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Speaker 1: by large companies figuring this out and saying, what do

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Speaker 1: we need to do here.

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Speaker 3: You know, it's interesting that you bring that up, Ron

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Speaker 3: because if you think about the pandemic, companies, global companies

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Speaker 3: are rethinking their supply chains and that has led to

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Speaker 3: a new kind of investible idea. Walk us through kind

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Speaker 3: of the new investable ideas coming off of the pandemic

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Speaker 3: and just a lot of things being different.

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Speaker 1: Well, let's just stick with supply chains for a moment.

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Speaker 1: I think that, uh, maybe with globalization we went a

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Speaker 1: little bit too far because supply chains became highly highly

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Speaker 1: optimized with very little built in if you will, slack

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Speaker 1: or for that matter, capacity for the unexpected. So what

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Speaker 1: you're seeing now is really a much more resiliency being

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Speaker 1: built in supply chains instead of having single.

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Speaker 4: Source, it might be a double source, criple source.

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Speaker 1: You're seeing some activities being brought to back to countries reshoring,

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Speaker 1: and it's not so much a Those aren't political statements

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Speaker 1: as much as they are you know what, we really

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Speaker 1: ought to have a little capacity in whatever.

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Speaker 4: Country here in the US, here in Germany, here in

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Speaker 4: the UK.

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Speaker 1: And then finally you're seeing opportunities being created by other

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Speaker 1: for other countries right where it may be that a

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Speaker 1: country like China had it all or had a large

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Speaker 1: portion of it, and China is not going to lose everything,

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Speaker 1: but you're starting to see other countries in Southeast Asia.

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Speaker 1: All of these represent investment ideas.

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Speaker 4: We're seeing a.

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Speaker 3: Lot of more things shifted into like South America, Latin America.

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Speaker 3: One thing I want to ask you, we were all

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Speaker 3: focused this weekend over the annual meeting out at Berkshire.

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Speaker 3: Hathaway and Warren Buffett Moore in saying Wall Street creating

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Speaker 3: kind of a casino like atmosphere. He's talked about this

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Speaker 3: before for investors. Do you agree with that assessment? Or

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Speaker 3: how do you see it.

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Speaker 1: So I think there's a concern about market valuations, and

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Speaker 1: it's really a concern about a relatively small number of

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Speaker 1: companies that are seeing lots of valuation expansion driven by

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Speaker 1: things like AI in the belief of AI. So a

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Speaker 1: couple things I'd say about that. If you take the

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Speaker 1: S and P five hundred index, right, which is cap

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Speaker 1: weighted and each just equal weighted, you actually say it's

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Speaker 1: actually not that overvalued. And by the way, there's opportunities

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Speaker 1: and lots of other companies. Right, you were talking about

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Speaker 1: seven companies in the S and P five hundred, so

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Speaker 1: that would be point number one point number two, which

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Speaker 1: I do think we do need to think about.

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Speaker 4: I'm old enough to remember the advent of the Internet.

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Speaker 1: And if you think about the mids of the late

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Speaker 1: if you think about the mid to the late nineties,

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Speaker 1: there was that same kind of excitement, same kind of

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Speaker 1: exuberance around a few companies. The Internet was going to

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Speaker 1: change everything, and it was going to change everything right away.

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Speaker 1: And then nineteen ninety nine and two thousand came and

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Speaker 1: we could find ourselves in a situation like that again.

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Speaker 1: Because the hype of the technology oftentimes isn't met by

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Speaker 1: the actual implementation of it.

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Speaker 4: So if you ask me, what do I believe?

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Speaker 1: I think that artificial intelligence and all of its forms

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Speaker 1: will be a fundamental, fundamental game changer for many industries.

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Speaker 1: Is it going to happen overnight and is it going

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Speaker 1: to kind of reflect the valuations that you're seeing in

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Speaker 1: a few companies? Probably not, None of these things wherever

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Speaker 1: straight lines. I remember it was the Internet's going to

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Speaker 1: change everything. Ninety nine and two thousand came, we realize

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Speaker 1: there's a lot of stupid companies out there.

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Speaker 4: Why do we have these companies?

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Speaker 1: And then ten years later it had changed everything, So

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Speaker 1: it was really not a It wasn't an if it

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Speaker 1: was a win, we might see the same kind of

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Speaker 1: thing in artificial intelligence.

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Speaker 2: Another big change out there is the importance of the

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Speaker 2: retail investor. Obviously, State Street has kind of made its

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Speaker 2: bread and butter in the institutional space, but you made

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Speaker 2: a lot of big strides right now in the ETF

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Speaker 2: space and more products targeted towards the retail set.

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Speaker 4: Is that going to continue?

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Speaker 1: Well, I think it needs to continue because and that's

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Speaker 1: typically the way things have worked over time. I mean,

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Speaker 1: if you think about going back, the mutual fund is

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Speaker 1: one hundred years old. Now, right before the mutual fund,

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Speaker 1: it was only the very influence that.

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Speaker 4: Could participate in these markets.

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Speaker 1: The mutual fund made it enabled it for the retail

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Speaker 1: investor to do that, where the big gap now remains

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Speaker 1: in privates. I mean, if you think about just private credit,

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Speaker 1: for example, private credit represents half of all credited origination

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Speaker 1: in the US, yet the ability for the retail investor

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Speaker 1: to participate that is low.

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Speaker 4: So we do have to think about this and where.

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Speaker 1: The real unmet need is in my mind as it

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Speaker 1: comes to the democratizing of privates is in the retirement space.

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Speaker 1: I mean, we're all defined contribution investors. I'm sure you

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Speaker 1: do the same thing that I do. I think about

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Speaker 1: it once a year, you set it, and you forget it.

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Speaker 1: That is the definition of somebody that ought to get

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Speaker 1: an illiquidity premium.

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Speaker 4: So in my mind, some of.

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Speaker 1: The biggest reform that needs to be made is how

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Speaker 1: do you enable the incorporation of private investments into traditional

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Speaker 1: defined contribution vehicles?

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Speaker 4: But do you think regulators will allow that?

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Speaker 1: So I think it's a combination of regulators. But it's

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Speaker 1: also right now if you think about the average defining

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Speaker 1: contribution trustee. What he or she is worried about is

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Speaker 1: being sued and being sued for the products are inappropriate

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Speaker 1: or the fees are too high.

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Speaker 4: Fees by themselves don't mean anything. You have to look

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Speaker 4: at what's the after fee.

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Speaker 1: Return over time, and that's where I think the analysis

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Speaker 1: needs to be done. And I fear that we're in

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Speaker 1: this situation that the over concern about lawsuits, that retirement

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Speaker 1: trustees are too reluctant to actually incorporate these products into

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Speaker 1: their real simple and kind.

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Speaker 3: Of playing off of what Remain is saying, like, is

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Speaker 3: there enough transparency in the private credit world or the

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Speaker 3: private space at this point for you to feel comfortable

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Speaker 3: about it kind of being available to a lot more

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Speaker 3: investors at this point in reachail investments.

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Speaker 4: And that's a legitimate concern.

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Speaker 1: I mean, I think there's plenty of transparency for the

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Speaker 1: core investors now for the institutional investors, and right now

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Speaker 1: technology is enabling to look through into portfolios. I mean,

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Speaker 1: we actually provide some of this technology institucial investors where

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Speaker 1: they may be LP investors in ten twenty thirty different LPs,

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Speaker 1: and we're enabling them to look through. We have to

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Speaker 1: make that kind of technology available to the retail investor too.

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Speaker 4: I have another question though, on regulation.

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Speaker 2: You got dragged before Capitol Hill with the other big

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Speaker 2: banks els. I think it was back in December. There's

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Speaker 2: a lot of talk about the Basil three end game,

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Speaker 2: the additional capital requirements, and most people think are going

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Speaker 2: to come. You guys seem to paint a pretty bleak

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Speaker 2: picture if those rules, at least as written now, go

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Speaker 2: into effect. Do you still feel that way?

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Speaker 4: Well?

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Speaker 1: I think if you think about what Buzzle three end

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Speaker 1: game is about, it literally is an endgame on a

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Speaker 1: process that started well over a decade ago to basically.

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Speaker 4: Level the playing field.

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Speaker 1: I think some of the rulemaking in the US lost

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Speaker 1: sight of that and became focused almost exclusively on what

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Speaker 1: should we do about raising capital levels and banks?

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Speaker 4: And I think there it just needs.

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Speaker 1: To be done around one with an eye towards what's

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Speaker 1: happened in the past, and.

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Speaker 4: Two, what are the new risks that we're facing so mean?

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Speaker 1: And I think the FED understands this and the talk

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Speaker 1: of reproposal is probably right. And remember the world changed

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Speaker 1: even as this rule was coming out, right, because we

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Speaker 1: saw the activities in what happened a year ago, back

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Speaker 1: in March Apriol of last year.

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Speaker 4: You know, we're seeing what's going on in commercial real estate.

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Speaker 1: So I think they're likely should be and needs to

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Speaker 1: be a leveling up amongst different kinds of banks, and

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Speaker 1: we should take a hard.

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Speaker 4: Look at capital and liquidity.

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Speaker 1: But it should be done in light of everything else

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Speaker 1: that's out there and already been done. Remember, we've been

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Speaker 1: regulating and reregulating the large banks in two thousand and

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Speaker 1: eight and appropriately, so there are actions that happened that

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Speaker 1: needed to be changed.

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Speaker 3: Well, you know, I'm listening to you and I'm thinking

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Speaker 3: to me slide into that the private credit world. But

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Speaker 3: like I do, think about, what are the requirements that

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Speaker 3: they have to just incate something comes undone. Everybody says, well,

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Speaker 3: it's on them, but it isn't ultimately, especially if it's

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Speaker 3: a risk ultimately potentially to the financial system.

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Speaker 4: So the way I think about private credit is that.

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Speaker 1: If you're entirely reliant on banks for the extension of credit, banks,

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Speaker 1: by definition, given the way they work, they're concentrators of risk. Right,

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Speaker 1: you make a loan, you make another loan, you make

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Speaker 1: another loan. Sometimes for the sector so they're concentrators of risk.

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Speaker 1: And that's why risk management is so important. That failed

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Speaker 1: in two thousand and eight at some large banks. So

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Speaker 1: from a regulatory perspective, you like private credit because private

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Speaker 1: credit is a distribution of risk, right, You're pushing it

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Speaker 1: out into hundreds of limited partners, and you're avoiding or

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Speaker 1: at least minimizing the likelihood of a systemic failure in

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Speaker 1: a large financial institution. So that's the advantage the disadvantage,

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Speaker 1: And I think regulators need to be thinking about this

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Speaker 1: is banks play a role not just in extending credit,

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Speaker 1: but at the end of the cycle or in the

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Speaker 1: situation where a company is facing the inability to pay

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Speaker 1: or an individual there's this workout function and that puzzle

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Speaker 1: hasn't been solved yet because banks.

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Speaker 4: Play that role.

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Speaker 1: But how does workout work if it's private credit and

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Speaker 1: distributed amount a number of limited partners. So and we

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Speaker 1: have to think about this. Ben Bernanke wrote his doctoral

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Speaker 1: thesis about why did the depression last so long? And

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Speaker 1: his theory on this was so many banks failed that

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Speaker 1: in fact, the loan failed, the borough failed, the bank failed,

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Speaker 1: there was nobody there to work it out to lift

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Speaker 1: the business back up and get it going people. Basically,

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Speaker 1: it dispersed businesses and a lot of capital assets just

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Speaker 1: when fallow, empty factories and all that. You don't want

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Speaker 1: to see that happen again