WEBVTT - State Street CEO Ron O'Hanley Talks AI, Capital Markets

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio News.

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

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<v Speaker 2>You're actually fresh off one of the inaugural panels here

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<v Speaker 2>at the Milkin twenty twenty four conference, a panel that

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<v Speaker 2>was ostensibly really about the future of capital markets, and

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<v Speaker 2>I sort of wonder, what exactly is that future going

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<v Speaker 2>to look like. A lot of people look at us

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<v Speaker 2>right now and say, grown the precipice of something new.

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<v Speaker 1>Yeah, I would actually be much more optimistic about that.

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<v Speaker 1>And before talking about the future, let's just talk about

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<v Speaker 1>the recent past. I mean, if you think about what

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<v Speaker 1>the world has been grow in terms of the challenges

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<v Speaker 1>it's faced, and any kind of challenge in the real

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

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<v Speaker 1>a once in a century kind of pandemic, and we've

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<v Speaker 1>also had ground war breakout in Europe. And if you

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<v Speaker 1>think about how capital markets have actually adapted to that,

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

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<v Speaker 1>capital markets is very much a function of what goes

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<v Speaker 1>on in the real economy, and you've seen I think

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<v Speaker 1>extraordinary resilience in the real economy relative to what any

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<v Speaker 1>of us would have expected.

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<v Speaker 2>What do you think was behind that resilience?

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<v Speaker 1>Not to sound jingoistic, but I think a lot of

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<v Speaker 1>it was the US led the way in terms of

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<v Speaker 1>certainly in the repair of supply chains. I mean, what

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<v Speaker 1>we were talking about in the middle of twenty twenty

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<v Speaker 1>was the potential for this going on for four or

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<v Speaker 1>five six years, and the rebalancing would take that long,

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<v Speaker 1>and in fact really led by the US corporations, but

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<v Speaker 1>also just large corporations around the world. Was really led

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<v Speaker 1>by large companies figuring this out and saying, what do

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<v Speaker 1>we need to do here.

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<v Speaker 3>You know, it's interesting that you bring that up, Ron

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<v Speaker 3>because if you think about the pandemic, companies, global companies

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<v Speaker 3>are rethinking their supply chains and that has led to

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<v Speaker 3>a new kind of investible idea. Walk us through kind

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<v Speaker 3>of the new investable ideas coming off of the pandemic

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<v Speaker 3>and just a lot of things being different.

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

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<v Speaker 1>I think that, uh, maybe with globalization we went a

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<v Speaker 1>little bit too far because supply chains became highly highly

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<v Speaker 1>optimized with very little built in if you will, slack

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<v Speaker 1>or for that matter, capacity for the unexpected. So what

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<v Speaker 1>you're seeing now is really a much more resiliency being

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<v Speaker 1>built in supply chains instead of having single.

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<v Speaker 4>Source, it might be a double source, criple source.

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<v Speaker 1>You're seeing some activities being brought to back to countries reshoring,

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<v Speaker 1>and it's not so much a Those aren't political statements

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<v Speaker 1>as much as they are you know what, we really

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<v Speaker 1>ought to have a little capacity in whatever.

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<v Speaker 4>Country here in the US, here in Germany, here in

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<v Speaker 4>the UK.

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<v Speaker 1>And then finally you're seeing opportunities being created by other

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<v Speaker 1>for other countries right where it may be that a

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<v Speaker 1>country like China had it all or had a large

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<v Speaker 1>portion of it, and China is not going to lose everything,

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<v Speaker 1>but you're starting to see other countries in Southeast Asia.

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<v Speaker 1>All of these represent investment ideas.

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<v Speaker 4>We're seeing a.

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<v Speaker 3>Lot of more things shifted into like South America, Latin America.

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<v Speaker 3>One thing I want to ask you, we were all

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<v Speaker 3>focused this weekend over the annual meeting out at Berkshire.

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<v Speaker 3>Hathaway and Warren Buffett Moore in saying Wall Street creating

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<v Speaker 3>kind of a casino like atmosphere. He's talked about this

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<v Speaker 3>before for investors. Do you agree with that assessment? Or

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<v Speaker 3>how do you see it.

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<v Speaker 1>So I think there's a concern about market valuations, and

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<v Speaker 1>it's really a concern about a relatively small number of

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<v Speaker 1>companies that are seeing lots of valuation expansion driven by

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<v Speaker 1>things like AI in the belief of AI. So a

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<v Speaker 1>couple things I'd say about that. If you take the

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<v Speaker 1>S and P five hundred index, right, which is cap

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<v Speaker 1>weighted and each just equal weighted, you actually say it's

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

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<v Speaker 1>and lots of other companies. Right, you were talking about

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<v Speaker 1>seven companies in the S and P five hundred, so

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<v Speaker 1>that would be point number one point number two, which

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<v Speaker 1>I do think we do need to think about.

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<v Speaker 4>I'm old enough to remember the advent of the Internet.

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<v Speaker 1>And if you think about the mids of the late

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<v Speaker 1>if you think about the mid to the late nineties,

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<v Speaker 1>there was that same kind of excitement, same kind of

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<v Speaker 1>exuberance around a few companies. The Internet was going to

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<v Speaker 1>change everything, and it was going to change everything right away.

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<v Speaker 1>And then nineteen ninety nine and two thousand came and

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<v Speaker 1>we could find ourselves in a situation like that again.

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<v Speaker 1>Because the hype of the technology oftentimes isn't met by

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<v Speaker 1>the actual implementation of it.

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<v Speaker 4>So if you ask me, what do I believe?

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<v Speaker 1>I think that artificial intelligence and all of its forms

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<v Speaker 1>will be a fundamental, fundamental game changer for many industries.

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<v Speaker 1>Is it going to happen overnight and is it going

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<v Speaker 1>to kind of reflect the valuations that you're seeing in

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<v Speaker 1>a few companies? Probably not, None of these things wherever

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<v Speaker 1>straight lines. I remember it was the Internet's going to

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<v Speaker 1>change everything. Ninety nine and two thousand came, we realize

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<v Speaker 1>there's a lot of stupid companies out there.

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<v Speaker 4>Why do we have these companies?

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<v Speaker 1>And then ten years later it had changed everything, So

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<v Speaker 1>it was really not a It wasn't an if it

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<v Speaker 1>was a win, we might see the same kind of

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<v Speaker 1>thing in artificial intelligence.

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<v Speaker 2>Another big change out there is the importance of the

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<v Speaker 2>retail investor. Obviously, State Street has kind of made its

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<v Speaker 2>bread and butter in the institutional space, but you made

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<v Speaker 2>a lot of big strides right now in the ETF

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<v Speaker 2>space and more products targeted towards the retail set.

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<v Speaker 4>Is that going to continue?

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<v Speaker 1>Well, I think it needs to continue because and that's

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<v Speaker 1>typically the way things have worked over time. I mean,

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<v Speaker 1>if you think about going back, the mutual fund is

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<v Speaker 1>one hundred years old. Now, right before the mutual fund,

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<v Speaker 1>it was only the very influence that.

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<v Speaker 4>Could participate in these markets.

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<v Speaker 1>The mutual fund made it enabled it for the retail

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<v Speaker 1>investor to do that, where the big gap now remains

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<v Speaker 1>in privates. I mean, if you think about just private credit,

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<v Speaker 1>for example, private credit represents half of all credited origination

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<v Speaker 1>in the US, yet the ability for the retail investor

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<v Speaker 1>to participate that is low.

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<v Speaker 4>So we do have to think about this and where.

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<v Speaker 1>The real unmet need is in my mind as it

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<v Speaker 1>comes to the democratizing of privates is in the retirement space.

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

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<v Speaker 1>do the same thing that I do. I think about

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<v Speaker 1>it once a year, you set it, and you forget it.

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<v Speaker 1>That is the definition of somebody that ought to get

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<v Speaker 1>an illiquidity premium.

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<v Speaker 4>So in my mind, some of.

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<v Speaker 1>The biggest reform that needs to be made is how

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<v Speaker 1>do you enable the incorporation of private investments into traditional

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<v Speaker 1>defined contribution vehicles?

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<v Speaker 4>But do you think regulators will allow that?

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<v Speaker 1>So I think it's a combination of regulators. But it's

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<v Speaker 1>also right now if you think about the average defining

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<v Speaker 1>contribution trustee. What he or she is worried about is

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<v Speaker 1>being sued and being sued for the products are inappropriate

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<v Speaker 1>or the fees are too high.

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<v Speaker 4>Fees by themselves don't mean anything. You have to look

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<v Speaker 4>at what's the after fee.

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<v Speaker 1>Return over time, and that's where I think the analysis

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<v Speaker 1>needs to be done. And I fear that we're in

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<v Speaker 1>this situation that the over concern about lawsuits, that retirement

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<v Speaker 1>trustees are too reluctant to actually incorporate these products into

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<v Speaker 1>their real simple and kind.

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<v Speaker 3>Of playing off of what Remain is saying, like, is

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<v Speaker 3>there enough transparency in the private credit world or the

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<v Speaker 3>private space at this point for you to feel comfortable

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<v Speaker 3>about it kind of being available to a lot more

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<v Speaker 3>investors at this point in reachail investments.

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<v Speaker 4>And that's a legitimate concern.

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<v Speaker 1>I mean, I think there's plenty of transparency for the

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<v Speaker 1>core investors now for the institutional investors, and right now

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<v Speaker 1>technology is enabling to look through into portfolios. I mean,

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<v Speaker 1>we actually provide some of this technology institucial investors where

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<v Speaker 1>they may be LP investors in ten twenty thirty different LPs,

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<v Speaker 1>and we're enabling them to look through. We have to

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<v Speaker 1>make that kind of technology available to the retail investor too.

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<v Speaker 4>I have another question though, on regulation.

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<v Speaker 2>You got dragged before Capitol Hill with the other big

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<v Speaker 2>banks els. I think it was back in December. There's

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<v Speaker 2>a lot of talk about the Basil three end game,

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<v Speaker 2>the additional capital requirements, and most people think are going

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<v Speaker 2>to come. You guys seem to paint a pretty bleak

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<v Speaker 2>picture if those rules, at least as written now, go

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<v Speaker 2>into effect. Do you still feel that way?

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<v Speaker 4>Well?

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<v Speaker 1>I think if you think about what Buzzle three end

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<v Speaker 1>game is about, it literally is an endgame on a

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<v Speaker 1>process that started well over a decade ago to basically.

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<v Speaker 4>Level the playing field.

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<v Speaker 1>I think some of the rulemaking in the US lost

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<v Speaker 1>sight of that and became focused almost exclusively on what

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<v Speaker 1>should we do about raising capital levels and banks?

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<v Speaker 4>And I think there it just needs.

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<v Speaker 1>To be done around one with an eye towards what's

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<v Speaker 1>happened in the past, and.

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

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<v Speaker 1>And I think the FED understands this and the talk

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<v Speaker 1>of reproposal is probably right. And remember the world changed

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<v Speaker 1>even as this rule was coming out, right, because we

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<v Speaker 1>saw the activities in what happened a year ago, back

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<v Speaker 1>in March Apriol of last year.

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

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<v Speaker 1>So I think they're likely should be and needs to

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<v Speaker 1>be a leveling up amongst different kinds of banks, and

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<v Speaker 1>we should take a hard.

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<v Speaker 4>Look at capital and liquidity.

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<v Speaker 1>But it should be done in light of everything else

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

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<v Speaker 1>regulating and reregulating the large banks in two thousand and

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<v Speaker 1>eight and appropriately, so there are actions that happened that

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<v Speaker 1>needed to be changed.

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<v Speaker 3>Well, you know, I'm listening to you and I'm thinking

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<v Speaker 3>to me slide into that the private credit world. But

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<v Speaker 3>like I do, think about, what are the requirements that

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<v Speaker 3>they have to just incate something comes undone. Everybody says, well,

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<v Speaker 3>it's on them, but it isn't ultimately, especially if it's

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<v Speaker 3>a risk ultimately potentially to the financial system.

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<v Speaker 4>So the way I think about private credit is that.

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

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

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<v Speaker 1>you make a loan, you make another loan, you make

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

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<v Speaker 1>And that's why risk management is so important. That failed

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<v Speaker 1>in two thousand and eight at some large banks. So

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<v Speaker 1>from a regulatory perspective, you like private credit because private

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<v Speaker 1>credit is a distribution of risk, right, You're pushing it

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<v Speaker 1>out into hundreds of limited partners, and you're avoiding or

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<v Speaker 1>at least minimizing the likelihood of a systemic failure in

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<v Speaker 1>a large financial institution. So that's the advantage the disadvantage,

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<v Speaker 1>And I think regulators need to be thinking about this

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<v Speaker 1>is banks play a role not just in extending credit,

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<v Speaker 1>but at the end of the cycle or in the

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<v Speaker 1>situation where a company is facing the inability to pay

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<v Speaker 1>or an individual there's this workout function and that puzzle

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<v Speaker 1>hasn't been solved yet because banks.

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<v Speaker 4>Play that role.

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<v Speaker 1>But how does workout work if it's private credit and

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<v Speaker 1>distributed amount a number of limited partners. So and we

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<v Speaker 1>have to think about this. Ben Bernanke wrote his doctoral

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<v Speaker 1>thesis about why did the depression last so long? And

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<v Speaker 1>his theory on this was so many banks failed that

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<v Speaker 1>in fact, the loan failed, the borough failed, the bank failed,

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<v Speaker 1>there was nobody there to work it out to lift

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<v Speaker 1>the business back up and get it going people. Basically,

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<v Speaker 1>it dispersed businesses and a lot of capital assets just

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

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<v Speaker 1>to see that happen again