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Kroll's Whalen on Deutsche: Banks Are Over Regulated (Audio) · Bloomberg Intelligence

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  Speaker 1: That's a Bloomberg Business flash. This is taking stock with
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  Speaker 1: Lean Hayes and pin Box on Bloomberg Radio. Taking stock
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  Speaker 1: of Deutsche Bank. The cost of ensuring Deutsche Bank subordinated
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  Speaker 1: that rose to a record all amid growing concerns about
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  Speaker 1: the lenders of financial health. Here to tell us more
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  Speaker 1: about Deutsche Bank, It's role in the global financial system,
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  Speaker 1: and perhaps what happens next, We've got Chris Whalen. He's
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  Speaker 1: senior managing director and head of research at Kroll bond
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  Speaker 1: rating agency. Chris Whalen, Thanks very much for being with us. Hey, Hi,
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  Speaker 1: how are you, pim? I'm I'm fine. How if I
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  Speaker 1: was at Deutsche Bank, would I be saying that? Probably
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  Speaker 1: not a tough day. Um. You know the comments from
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  Speaker 1: Chancellor and la Merkel the other day on not wanting
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  Speaker 1: to support the bank, we're not helpful. Um. But you know,
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  Speaker 1: unfortunately all of the leaders in Europe have their eyes
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  Speaker 1: on elections and politics and they have not been willing
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  Speaker 1: to really focus on what's needed to get the bank
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  Speaker 1: king system in their economy straightened out. So it's kind
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  Speaker 1: of power for the course, I'm afraid. Okay, So give
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  Speaker 1: us the sort of the the a b cs of
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  Speaker 1: what's wrong with Deutsche Bank. Besides the fact that they
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  Speaker 1: may have to pay a US fine. We know that
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  Speaker 1: to pay a fine, but it could be as much
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  Speaker 1: as fourteen billion dollars. One of the astute European bank
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  Speaker 1: watchers I talked to earlier today said, you know, they've
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  Speaker 1: just never come to grips with recapitalizing their banks. But
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  Speaker 1: what is you know, if you had to give it
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  Speaker 1: a talk to your customers right now, you know, thirty
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  Speaker 1: seconds or less, what's wrong with Deutsche Bank? Well? Two
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  Speaker 1: little capital number one, a business that is focused primarily
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  Speaker 1: on the capital markets. They don't have much of a
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  Speaker 1: lending business in Germany, a traditional banking business, and you know,
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  Speaker 1: the capital markets have been tough, Kathleen. So all of
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  Speaker 1: the big banks, universal banks as we refer to them,
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  Speaker 1: that have both the deposit side and the capital market
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  Speaker 1: side of really had a tough time making money. I
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  Speaker 1: think we're going to see foreign any pour into the
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  Speaker 1: European banking system. Be think Chinese investors might want to
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  Speaker 1: come and invest in a Deutsche Bank, Well, I think
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  Speaker 1: they would love to pim But the necessary condition to
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  Speaker 1: get the party started is for the governments in Europe
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  Speaker 1: to extend support and mark their assets to to a
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  Speaker 1: real market. The Europeans tell us that there's a trillion
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  Speaker 1: euros and non performing loans in Europe, and I think
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  Speaker 1: the number is two or three times at and no
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  Speaker 1: investor is going to go diving in there unless they're
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  Speaker 1: sure that they're seeing a clear picture where the bank
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  Speaker 1: actually is in terms of net assets. You know, for example,
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  Speaker 1: in Italy they're trying to convince Jamie Diamond to come
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  Speaker 1: to the rescue about Monte Depeche and again, you know, no,
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  Speaker 1: the government's got to go first. And this is what
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  Speaker 1: you know. I hope the EU leadership is eventually gonna
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  Speaker 1: come to understand, but they're so focused on elections and
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  Speaker 1: on politics that they have been unwilling to do it well.
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  Speaker 1: It seems like all they've been able to really to
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  Speaker 1: do is an exact duration. But in terms of fiscal union,
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  Speaker 1: banking union in Europe is to build a beautiful building,
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  Speaker 1: right but when it comes to seriously, but in terms
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  Speaker 1: of really having a centralized banking authority they can go
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  Speaker 1: in and make things happen and have the agreements in
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  Speaker 1: place to do that, they seem like they're still too
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  Speaker 1: far away from that. Oh completely, Kathleen. I mean, the
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  Speaker 1: Europeans are where the United States was in nineteen thirty
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  Speaker 1: prior to nineteen thirty three, when we created the Federal
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  Speaker 1: Deposit Insurance corporation. If a bank failed, it ended up
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  Speaker 1: in a state receivership and because of this, the FED
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  Speaker 1: wouldn't lend to banks. You know, the economists often burate
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  Speaker 1: the FED for not doing enough during the depression, but
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  Speaker 1: they would not lend to banks because they didn't think
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  Speaker 1: they get paid back. They would have been a general
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  Speaker 1: creditor standing in front of a state court judge. So
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  Speaker 1: in Europe you have a similar problem right now. If
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  Speaker 1: you want to fix a bank, it is going to
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  Speaker 1: be done nation by nation. There is no fiscal mechanism
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  Speaker 1: in Europe to deal with this, and there is know
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  Speaker 1: European Wide Banking Authority you know that has the power
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  Speaker 1: to really act. And that's the trouble. It's a it's
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  Speaker 1: a nation by nation uh sort of this situation. And
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  Speaker 1: ultimately I think the Germans and the Italians are going
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  Speaker 1: to have to provide support, going back to Pim's questions,
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  Speaker 1: so we can get the party started. It reminds me
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  Speaker 1: of what happened when Indie Mac failed and the fd
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  Speaker 1: I C put it in a conservatorship. The room was empty,
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  Speaker 1: and then Sheila Bear and her colleagues at f d
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  Speaker 1: I s very astutely through risk sharing on the table
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  Speaker 1: and suddenly the room was full. The investors showed up.
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  Speaker 1: And I think that's a good analogy for the Europeans
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  Speaker 1: to think about, because you've got to get the party
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  Speaker 1: started as sure. Of course investors want to come in here.
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  Speaker 1: They see opportunity, but they don't know what the opportunity is.
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  Speaker 1: Because everything in Europe, you know, international UH financial accounting
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  Speaker 1: rules are different from the US, very different through the
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  Speaker 1: opposite of the way a US bank has to deal
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  Speaker 1: with a bad asset. Hey, Chris said, just a thought
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  Speaker 1: from you about to knock on effect. Because Germany's biggest
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  Speaker 1: shipping lender UH North deutsch Landesbank, they they cut their
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  Speaker 1: plans to sell those euro denominated bonds. Also, Deutsche luftonza
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  Speaker 1: with through a euro bond deal. I couldn't get the
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  Speaker 1: desired price, that's right. The lack of purposefulness on the
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  Speaker 1: part of the European leadership, the lack of of clarity,
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  Speaker 1: is causing investors to back away, and this is very dangerous.
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  Speaker 1: If Deutsche Bank gets downgraded again, I think you may
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  Speaker 1: see of the counterparties back away, and that would be
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  Speaker 1: most unfortunate. I think Angela Merkel is playing a very
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  Speaker 1: dangerous game. If she thinks that somehow or another, letting
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  Speaker 1: the biggest bank in Germany go down is going to
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  Speaker 1: help her with her election prospects, I would respectfully beg
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  Speaker 1: to differ. You know, I find it hard to believe
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  Speaker 1: this isn't this potentially just playing politics. It's Germany's largest bank,
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  Speaker 1: it's the third biggest bank in Europe. When push comes
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  Speaker 1: to show, I find it hard to believe they will
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  Speaker 1: not bail them out. And particularly y'allman owner and you
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  Speaker 1: know Yeoman, he's our Bloomberg News college who wrote that
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  Speaker 1: great book that came out in the middle of financial crisis,
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  Speaker 1: Zombie Banks, And a good part of that book is
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  Speaker 1: devoted to showing how the Germans bailed out tons of
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  Speaker 1: those smaller regional lowndes banks that were supported by politicians.
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  Speaker 1: How could they let Deutsche Bank go down? Well, they
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  Speaker 1: think they can because it doesn't have much of a
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  Speaker 1: put print in Germany, Kathleen, As you just said, most
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  Speaker 1: of the real financing in Germany is performed by London,
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  Speaker 1: Spunken and various other types of state supported entities, mostly
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  Speaker 1: at the state level, not at the national level in Germany.
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  Speaker 1: So they look at Deutsche Banker. What did they see?
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  Speaker 1: They see the big brother of bankers trust, all right,
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  Speaker 1: they see a London capital markets operation and they don't
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  Speaker 1: see an immediate domestic threat. But what they have to
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  Speaker 1: understand is that, you know, being bloody minded and somewhat
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  Speaker 1: I think reactionary when it comes to bank solidency issues
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  Speaker 1: is very shortsighted because you know, if you go into
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  Speaker 1: a deflation after a large bank fails, you have big problems.
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  Speaker 1: Benevolence and a willingness to be flexible is always better
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  Speaker 1: because then, as Pim said before, we can get the
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  Speaker 1: investors to come in. This is what we did with
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  Speaker 1: a I G and City Group, and as critical as
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  Speaker 1: I was at the time of those transactions, it was
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  Speaker 1: the right thing to do because it saved us from
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  Speaker 1: a generalized debt deflation, which is destructive for everyone. Chris,
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  Speaker 1: just a little comparison, right, we're talking about a bank.
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  Speaker 1: The market cap now, let's call it, what about sixteen
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  Speaker 1: billion dollars? What's the franchise worth? And just to put
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  Speaker 1: that in the context for you, Apple's market cap is
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  Speaker 1: six and eight billion. Well, at the moment, the markets
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  Speaker 1: telling you that the franchise isn't worth a lot, but
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  Speaker 1: you know, it's a very important bank. It's a large
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  Speaker 1: servicer here in the United States. Deutsche Bank is one
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  Speaker 1: of the most important services of commercial real estate. This
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  Speaker 1: is not a trivial thing. There are a trustee in
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  Speaker 1: many commercial mortgage backed securities transactions. So the US has
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  Speaker 1: a stake here too. And I have to believe the
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  Speaker 1: US authorities are talking to their counterparties in Germany and
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  Speaker 1: very politely and respectfully, looking them in the eye and saying, really,
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  Speaker 1: do you really want to let me bank go? Dan Trulo,
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  Speaker 1: the FED governor, who's who's who's you know, who's portfolio
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  Speaker 1: really is banking? Comes out yesterday says, hey, I think
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  Speaker 1: the bank stress tests are gonna mean show that basically
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  Speaker 1: to have even more capital, our banks holding enough capital? Yet, Chris,
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  Speaker 1: is it Are the regulars wrong now to keep piling
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  Speaker 1: on higher and our capital requirements at a time when
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  Speaker 1: the world is, you know, barely in a strong recovery,
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  Speaker 1: let alone a moderate one. Yes, they are the banks
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  Speaker 1: in the United States who particularly have vote too much capital.
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  Speaker 1: With all due respect to Dan Trulo, I think he's wrong.
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  Speaker 1: The stress tests as the FED is operating them are
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  Speaker 1: pretty much useless from an analytical perspective. I don't think
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  Speaker 1: they tell you anything, and you know you're right. It's
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  Speaker 1: restraining growth. Regulation, over regulation, the demonization of banks instead
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  Speaker 1: of punishing bankers, UH is hurting the US economy, It's
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  Speaker 1: hurting the global economy, and the whole narrative is politicized
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  Speaker 1: and wrong as a result. You know, the politicians caused
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  Speaker 1: a crisis, Kathleen, and then they turned around and blamed
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  Speaker 1: the bankers. You know, and I Chris, when thanks so much.
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  Speaker 1: I want to point out for our listeners are hard
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  Speaker 1: to be listened to Bloomberg Radio watch bloomber TT's seeing Chris.
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  Speaker 1: You know that he is a guy who was very
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  Speaker 1: critical of bank stopping need more capital for them to
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  Speaker 1: say now they've got their overregulated. This is this is
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  Speaker 1: an important thing to hear from. Chris Whalen, Senior Managing
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  Speaker 1: Director and head of Research at Crowl Bond Reading Agency.
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  Speaker 1: I'm Kathleen Hayes along with Pim Fox, and this is
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  Speaker 1: Bloomberg