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Silicon Valley Bank, Treasuries, and CPI · Bloomberg Intelligence

0:00
Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
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Speaker 1: my co host Matt Miller. Every business day, we bring
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Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along
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Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast
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Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and
0:18
Speaker 1: at Bloomberg dot com slash podcast. Let's get to Ira Jersey.
0:22
Speaker 1: He's the interest rate dude UM for Bloomberg Intelligence. Ira.
0:26
Speaker 1: If I'm the Fed here, if I'm j Pale, I
0:28
Speaker 1: gotta continue to fight inflation. But I got a market
0:32
Speaker 1: that's spooked at there about the whole banking system. What
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Speaker 1: do I do next week? Yeah, it winds up becoming
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Speaker 1: a massive communication challenge. So I think that the feder
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Speaker 1: Reserve will hike twenty five basis points and then UM
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Speaker 1: say that, you know, we're ready to step in to
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Speaker 1: provide be the lender of last resort, as is our mandate,
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Speaker 1: and we do care about financial stability, so I think.
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Speaker 1: But but like you said, you know, with inflation still
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Speaker 1: running at you know, four tenths a month on headline inflation,
1:00
Speaker 1: there's very little reason to think that the Fed's actually
1:03
Speaker 1: going to cut. You know, I know that there's at
1:05
Speaker 1: least one or two banks out there saying that maybe
1:08
Speaker 1: the Fed's going to cut interest rates because of the
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Speaker 1: financial stability issues. That's not going to happen. They're not
1:13
Speaker 1: going to cut much more likely to pause and then
1:15
Speaker 1: say we might restart hiking later than they would be
1:19
Speaker 1: to actually lower interest rates, because I think I've told
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Speaker 1: you before, Paul, you know, I think we saw have
1:24
Speaker 1: a FED put, but that FED put is very far
1:26
Speaker 1: out of the money because inflation still is their key mandate. Yeah,
1:31
Speaker 1: we should remind our listeners that inflation did come in
1:34
Speaker 1: hotter than expected. If you're looking at the core number
1:37
Speaker 1: for CPI, so CPI X food and Energy month over
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Speaker 1: month was up zero point five percent. We were looking
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Speaker 1: for a gain of zero point four percent, and it's
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Speaker 1: also higher than the zero point four percent gain that
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Speaker 1: we saw in the previous month. So it's still a
1:51
Speaker 1: problem by the time we get to the FED meeting.
1:54
Speaker 1: So you think they're going to hike another twenty five
1:56
Speaker 1: basis points, that puts some at the upper range five percent,
2:00
Speaker 1: so four seventy five to five and markets still pricing
2:04
Speaker 1: and just a smidge more than that or it was
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Speaker 1: a second ago in May. Do you think we're going
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Speaker 1: to get another hike after that? Do they need to
2:11
Speaker 1: go to higher than five in terms of the target
2:16
Speaker 1: rate or is that going to be the ceiling? Well, man,
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Speaker 1: I've been I've been talking to you about the fact
2:21
Speaker 1: that I think that now they're in calibration mode. So
2:23
Speaker 1: I think it really depends on the data and also
2:28
Speaker 1: at now you have to think the financial stability situation
2:31
Speaker 1: going forward. Right, So if if in the environment where
2:34
Speaker 1: they hike to five percent and then they um, they
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Speaker 1: get a string of okay, maybe we get point threes
2:39
Speaker 1: for example on CPI UM and then we get additional
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Speaker 1: volatility in the banking sector, then then that's the situation
2:46
Speaker 1: where the Fed may actually pause. But but I think
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Speaker 1: that you know, cumulatively, they've obviously increased interest rates, you know,
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Speaker 1: nearly nearly five percent UM, and you know that's quite
2:56
Speaker 1: a bit. And so I think at this point taking
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Speaker 1: a pause and then saying, look, we're not going to
3:00
Speaker 1: be cutting anytime soon. And I think that's the important
3:03
Speaker 1: point that that J. Powell has to make is look,
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Speaker 1: we're still fighting inflation even if we stop hiking interest rates.
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Speaker 1: That doesn't mean that we're immediately going to be cutting.
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Speaker 1: There was at one point yesterday we were pricing for
3:17
Speaker 1: seventy five bases points of interest rate cuts this year,
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Speaker 1: and so so first get those out of the market,
3:22
Speaker 1: and if you can get those out of the market,
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Speaker 1: then I think that that, you know, policy might be
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Speaker 1: calibrated appropriately. Right if we have to think about this,
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Speaker 1: Matt point four percent annualize that it's four point eight percent.
3:36
Speaker 1: That's exactly where basically where the Fed funds rate is
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Speaker 1: going to be after they hike one more time, so
3:40
Speaker 1: they can say, hey, we're at you know, we're basically
3:44
Speaker 1: at a neutral Fed funds rate. Now we have to
3:47
Speaker 1: convince everyone that hey, we're not going to be cutting
3:50
Speaker 1: until that goes much lower. Is financial stability really still
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Speaker 1: a problem? I mean, you know, SVB had an unbelievable
4:00
Speaker 1: rations mismatch, plus an incredibly uniform depositor base, and plus
4:08
Speaker 1: now you know there's no limit to deposit insurance. It's
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Speaker 1: whatever you have in any financial institution that's regulated. So
4:17
Speaker 1: is there any reason to think we have a financial
4:20
Speaker 1: stability problem? M Well, you do in so far as
4:25
Speaker 1: if people don't have um their own Uh, if they're
4:30
Speaker 1: not confident in their financial institution, they might still pull
4:33
Speaker 1: their deposits out right, and that's that's your typical bank
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Speaker 1: run and that's basically what happened to SVB. But now
4:38
Speaker 1: they can right, Fed's got your back. Well yeah so,
4:42
Speaker 1: but but keep in mind, like even during the financial crisis,
4:45
Speaker 1: the depositors rarely lose money in bank workouts, and I
4:49
Speaker 1: think that it's showing that the regulatory environment is working.
4:51
Speaker 1: And the reason is is because now you have all
4:54
Speaker 1: these other capital layers below depositors, where you know, equity
4:58
Speaker 1: holders and bondholders and equity holders, all of those people
5:02
Speaker 1: you know will potentially lose a lot of money, if
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Speaker 1: not all of their money in their investments in those institutions.
5:09
Speaker 1: But but to make the depositors whole, um, So you know,
5:12
Speaker 1: you go back and look at watching the mutual or INDIMAC.
5:15
Speaker 1: You know, those are kind of some of the earlier
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Speaker 1: banks that failed during the financial crisis, and even their depositors, um,
5:22
Speaker 1: even there's some of their large depositors, they were mostly
5:24
Speaker 1: made whole. So so keep in mind that when we
5:27
Speaker 1: talk about the deposit insurance being up there, it's not
5:29
Speaker 1: so much deposit insurance. The regulators and bank workouts always
5:33
Speaker 1: try to make the depositors whole as much as they can. Um.
5:36
Speaker 1: It's that you're only guaranteed to do that up to
5:38
Speaker 1: the FDIC limit, right, so, um so you have to
5:41
Speaker 1: keep that in mind. But but I think that there
5:43
Speaker 1: is still a risk that people are you know, get nervous,
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Speaker 1: and they want to pull their money out of some
5:48
Speaker 1: certain banks that maybe they're not so sure about that
5:51
Speaker 1: they'll be able to get their money in a timely fashion.
5:53
Speaker 1: I think that that's that still remains at risk today.
5:56
Speaker 1: All Right, it's March madness. So I don't know how
5:58
Speaker 1: much free time I'm going to have here, But if
6:00
Speaker 1: I catch one soccer match over the next several days,
6:02
Speaker 1: which one is it? Uh? Yeah, you know, I hate
6:05
Speaker 1: to say this. I have not looked at the fixture
6:07
Speaker 1: list for this weekend. Um so that's resolutely horrible of me. Well,
6:11
Speaker 1: all right, we'll give us the third, give us the tense.
6:13
Speaker 1: Was something else going on? Yes, exactly, Rayal Central, New Jersey.
6:17
Speaker 1: Do I come down and catch a game? Yeah? Yeah,
6:19
Speaker 1: we we have a we have a match. We're playing
6:21
Speaker 1: Philadelphia Soccer Club this weekend, and if we win we'll
6:24
Speaker 1: we'll move up the third place. We we had a
6:27
Speaker 1: cup game this weekend the unfortunately we lost one nil
6:29
Speaker 1: to a very good team from the Jersey Shore. But
6:32
Speaker 1: if yeah, if we win this game, we'll jump up
6:35
Speaker 1: into third place and have a shot at second. So
6:37
Speaker 1: we're trying to move up the table here Rayal Central,
6:39
Speaker 1: New Jersey. How about that? Kids, You can check that
6:41
Speaker 1: out if you're in the area. IRA Jersey soccer club
6:46
Speaker 1: magnet as well as a interest rate strategist for Bloomberg Intelligence.
6:50
Speaker 1: He brings it all. We're gonna have more coming up.
6:52
Speaker 1: This is Bloomberg. There's still a little tech round table here.
6:59
Speaker 1: There's a lot of news there of course SVB. Then
7:02
Speaker 1: this morning we had the layoffs coming out of Meta,
7:04
Speaker 1: so lots to talk about. So we got a couple
7:06
Speaker 1: of our smart tech geeks joining us here in the
7:08
Speaker 1: Bloomberg Inactive broker studio. Dan, I've senior equity annals at
7:11
Speaker 1: web Bush Securities, Mandeep saying, senior tech annals for Bloomberg Intelligence,
7:16
Speaker 1: both here in our studio here. Hey, Dan, let's start
7:19
Speaker 1: with just SVB, the fallout for the valley. Some of
7:24
Speaker 1: the tech companies I know you cover I know you're
7:25
Speaker 1: tight with all the folks in the valley and the
7:28
Speaker 1: venture capital stuff. What's how are you getting business done
7:31
Speaker 1: day today? Look, they were the godfather of Silicon Valley banking,
7:36
Speaker 1: and I think that the impact here is going to
7:38
Speaker 1: be for I think many years to come in terms
7:41
Speaker 1: of the startups and for the tech world. So even
7:44
Speaker 1: though this has been ring fence in terms of the
7:46
Speaker 1: actual SVP the situation, I think it's really going to
7:50
Speaker 1: be a big change from a financing perspective. What's happened
7:54
Speaker 1: in the startup community. Well, do you think someone eventually
7:58
Speaker 1: comes in and takes that role. I mean, one bank,
8:03
Speaker 1: you know, reclaims the mantle of Silicon Valley godfather in
8:07
Speaker 1: terms of you know, the Sandhill customers. I think in theory,
8:11
Speaker 1: but I just don't see that it's going to happen
8:13
Speaker 1: because right now, the risk, especially with so many of
8:15
Speaker 1: these companies burning cash, spending money is like nineteen eighties
8:19
Speaker 1: rock stars as VP has obviously been a sup a
8:22
Speaker 1: black guy. And now what's going to happen is you're
8:24
Speaker 1: gonna see vcs that are gonna, of course be much
8:28
Speaker 1: more reliant in terms of from a funding perspective, and
8:32
Speaker 1: then a lot of the venture funding that they did,
8:34
Speaker 1: a lot of the venture financing that as Ab did.
8:37
Speaker 1: No big center money bank is going to do that
8:39
Speaker 1: a regional and that's going to be the issue now
8:41
Speaker 1: going forward. I think it's going to catalyze m Anda.
8:44
Speaker 1: I think Big Tax is going to accelerate that. And
8:46
Speaker 1: clearly there's many on the outside looking in. I think
8:49
Speaker 1: that Hubris is now going to start to be over
8:51
Speaker 1: in terms of valuation haircuts. Talking about Hubris maybe coming
8:55
Speaker 1: out of the Valley Meta laying off ten thousand employees,
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Speaker 1: Man Deep just will simply what does this mean for
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Speaker 1: the investment and the pivot towards the metaverse for our
9:06
Speaker 1: good friends at Facebook. So so far, what they have
9:09
Speaker 1: said is they're focused on efficiencies in the core business.
9:13
Speaker 1: They're not curtailing their ambitions on the metaverse side, although
9:18
Speaker 1: I think you can see how they are reducing their
9:20
Speaker 1: hiring for this year and they talked about you know,
9:23
Speaker 1: the open roles going away, So clearly there is focus
9:27
Speaker 1: on efficiencies. But my point over there is more around
9:30
Speaker 1: their R and D expense. They spend about thirty five
9:33
Speaker 1: billion dollars a year. Compare that to Apple and Microsoft's
9:37
Speaker 1: R and D expense it's around twenty five billion. So
9:39
Speaker 1: why is Facebook or Meta spending more when their revenue
9:43
Speaker 1: base is like half or even you know, one fourth
9:46
Speaker 1: of Apple size. And I think that's where all the
9:49
Speaker 1: tech companies are looking at their fixed costs and saying,
9:52
Speaker 1: do we really need to spend that much? And I
9:54
Speaker 1: think Meta is clearly leading that. So Dan, what do
9:57
Speaker 1: you think about that move? And it seems to me
10:00
Speaker 1: that Mark Zuckerberg at least is squaring himself up with
10:05
Speaker 1: investors who are worried about an interest rate regime that
10:08
Speaker 1: is here to stay, you know, higher rates for longer,
10:11
Speaker 1: and that name change came too soon because they might
10:14
Speaker 1: go back to Facebook because realistically, I think, you know,
10:17
Speaker 1: as Mandeep talked about, I mean, this is just a
10:20
Speaker 1: new world. And that's why Zuckerberg finally read the room.
10:23
Speaker 1: That's why the stocks you know, more than doubled from
10:25
Speaker 1: bomb because they need to cut significant cause double down
10:28
Speaker 1: on social media. And you look at the metaverse strategy.
10:31
Speaker 1: When you look what they're investing, it's good money after
10:33
Speaker 1: bad and I think this is really it's a pivotable
10:36
Speaker 1: time for Zuckerberg. But clearly you see a new Zuckerberg
10:40
Speaker 1: in terms of how he's acting, especially on the cost side,
10:44
Speaker 1: and that's why the stock wall streets rewarded. Yeah, and interesting,
10:47
Speaker 1: all right, I want to pivot to Uber and Lyft
10:50
Speaker 1: because there was an interesting story that I really found interesting.
10:55
Speaker 1: California says that these drivers are in fact gig workers
11:00
Speaker 1: an appeals court right back in Prop twenty two. Yeah,
11:02
Speaker 1: and to me, that's kind of existential to the entire
11:05
Speaker 1: business model. If you don't have that ruling, you don't
11:07
Speaker 1: have a company. A business MENTEEP talkers about kind of
11:10
Speaker 1: what you learn there and what it means for these companies. Yeah.
11:12
Speaker 1: So look, if you are operating in the US as
11:15
Speaker 1: a gig economy company, this is huge because it's setting
11:18
Speaker 1: up a precedent where all these companies can operate with
11:21
Speaker 1: the current business model. They don't have to do anything
11:23
Speaker 1: in terms of changing their cost structure, and we've seen
11:27
Speaker 1: with Uber they are clearly showing operating leverage. So to me,
11:30
Speaker 1: this is a positive sign that the scale players in
11:34
Speaker 1: this business, your Uber and door Dash will likely benefit
11:38
Speaker 1: more simply because they have that organic driver supply growth,
11:41
Speaker 1: which is what you need for driving top line. And
11:44
Speaker 1: if the cost structure isn't changing. I think the incremental
11:47
Speaker 1: margin will be much higher than it was before. What
11:51
Speaker 1: do you think about those companies, Dan, Look, I think
11:53
Speaker 1: Uber it's a winner. Take Off, I mean, right now, Lift,
11:57
Speaker 1: I go back, that was probably the worst common it's
12:00
Speaker 1: called top three that I've heard in twenty two years.
12:03
Speaker 1: They're the little brother Uber and right now, I mean
12:06
Speaker 1: they just have an ever psych uphill battle competing in
12:09
Speaker 1: an environment where it's no more free money. So I'm
12:12
Speaker 1: looking at just the A and R page Dan, under
12:15
Speaker 1: your bio for your recommendations, you've got a neutral on
12:18
Speaker 1: Lift and outperform on Uber. So you're not just saying
12:21
Speaker 1: to buy this rat ride sharing thing. You're saying you
12:25
Speaker 1: need to be selective. Oh yeah, I think Uber is
12:27
Speaker 1: the way to play it. I mean Lift right now,
12:30
Speaker 1: I mean that feels like sort of jump in front
12:32
Speaker 1: of a train relative to what's happening in that business.
12:36
Speaker 1: And it feels like the management team doggate the homework
12:39
Speaker 1: next time as the weather, maybe they could blame you know, traffic,
12:43
Speaker 1: and then that's been the problem in terms of just
12:46
Speaker 1: no comfort in terms of this management team, the way
12:49
Speaker 1: they navigate, and you mentioned the rates environment, right, man, Deep,
12:54
Speaker 1: this rates environment seems to be something that texeos are
12:57
Speaker 1: waking up to. Mark Zuckerberg says, I think we should
13:01
Speaker 1: this is a direct quote. I think we should prepare
13:03
Speaker 1: ourselves for the possibility that this new economic reality will
13:06
Speaker 1: continue for many years. Hello. Yeah, Well look, I think
13:11
Speaker 1: all these are long duration of stocks. So when you
13:14
Speaker 1: think about, you know, the terminal value of these businesses,
13:17
Speaker 1: you have to discount them at the rate where VR
13:20
Speaker 1: right now. And that's where you will never see software
13:24
Speaker 1: or an internet company trading at forty fifty times sales anymore.
13:28
Speaker 1: And I think that's the realization everyone is having that
13:31
Speaker 1: there is a cap in terms of the multiple these
13:33
Speaker 1: companies can trade at all. Right, let's pivot to digital advertising.
13:38
Speaker 1: I'm thinking meta, you know, all that kind of stuff Google,
13:42
Speaker 1: Where are we in that trend? Man, Deep? Because I mean,
13:46
Speaker 1: you know, when I was covering these stocks, they were
13:48
Speaker 1: going nothing but up. So I don't know what you
13:50
Speaker 1: guys are doing. And that's because I had this secular
13:52
Speaker 1: twenty percent growth story in digital ad spending and I
13:54
Speaker 1: don't know where it was coming from, radio, TV, wherever?
13:58
Speaker 1: Where what's the story there? Now? Look, there will always
14:01
Speaker 1: be a secular kind of transition from linear TV to
14:06
Speaker 1: the digital app platforms, and that trend is intact. I
14:09
Speaker 1: think with connected TV you're probably going to see some
14:12
Speaker 1: more tailwinds. The problem with digital ad businesses it's discretion
14:16
Speaker 1: or even you compare it to a software business where
14:19
Speaker 1: you still have to, you know, keep your business running
14:22
Speaker 1: and you require that software. On the other hand, ads
14:25
Speaker 1: can be shut on and off. And right now we're
14:27
Speaker 1: in an environment where businesses are focused on costs and
14:31
Speaker 1: the easiest thing to cut is your ad spend. So
14:34
Speaker 1: I do think this is going to last a while,
14:36
Speaker 1: but we will rebound and the cyclical aspect will come
14:39
Speaker 1: into play, you know, once we are in a lower
14:41
Speaker 1: rate and a better economic growth environment. How concerned are
14:45
Speaker 1: you Dan about that? I mean, look, I think you're
14:48
Speaker 1: seeing just the digital advertising headwinds, the Appleios privacy issues.
14:52
Speaker 1: If continue to sort of be there slow an economy,
14:55
Speaker 1: I do think a lot of bad news been baked in.
14:57
Speaker 1: That's where a lot of these stocks are bouncing, you know,
15:00
Speaker 1: And I think now you're starting to see the cut,
15:02
Speaker 1: so we's now you're preserved in the bottom line in
15:05
Speaker 1: this environment. That's why tech stocks are rallying, and even
15:09
Speaker 1: now the SVP, you know, Fed's basically handcuffed. That feels
15:12
Speaker 1: like that's gonna be positive in terms of what we're
15:15
Speaker 1: seeing on hikes four attack and that's sort of this
15:18
Speaker 1: dynamic that's pointing out with this sort of tago war
15:21
Speaker 1: Fed's handcuffed. Yeah, I mean, this is exactly what I
15:24
Speaker 1: was thinking on Sunday after the bailout, really on Friday
15:29
Speaker 1: after the bank was taken it seemed like this is
15:35
Speaker 1: this is something that's something that broke that we were
15:37
Speaker 1: waiting for, and now they're done. But the question is
15:40
Speaker 1: does that continue, especially if we keep getting you know,
15:43
Speaker 1: half percent month over month core inflation increases. Yeah, I
15:47
Speaker 1: don't know, I'm i'm supplies. We haven't seen just smart
15:49
Speaker 1: experience back in a great financial crisis that we didn't
15:53
Speaker 1: go to bed Sunday night with announcement that x y
15:55
Speaker 1: Z Bank had bought SVB, and we haven't seen a
15:58
Speaker 1: huge surprise. And we heard a member of Congress tell
16:00
Speaker 1: Joe Matthew on sound On that there was an offer,
16:04
Speaker 1: but the regulators rejected it. Have you heard that too, Dan,
16:08
Speaker 1: Yean look, And I think that was just something where
16:11
Speaker 1: the last thing warned was the contague and they need
16:13
Speaker 1: to ring fence. And yep, all right, guys, good stuff.
16:16
Speaker 1: Thanks so much for coming in to the studio here
16:18
Speaker 1: today talking all things tech. We love doing that. Dan,
16:21
Speaker 1: I've senior equity annalys at web Bush Securities and Man
16:23
Speaker 1: Deep Seeing he's a senior technology annals at Bloomberg in intelligence.
16:28
Speaker 1: Both in our study here talking all things tech, SVB
16:31
Speaker 1: seems to have been as Dan was just suggesting, perhaps
16:34
Speaker 1: ring fence a little bit in terms of that risk.
16:37
Speaker 1: That's what the market's kind of telling you here. The
16:38
Speaker 1: SMP up one point eight percent, and I said yesterday, Matt,
16:41
Speaker 1: I thought we'd have a two percent to move up
16:43
Speaker 1: in the market yesterday. But I guess people didn't want
16:45
Speaker 1: to get in front of that CPI print today. But
16:47
Speaker 1: they're certainly coming in with both feet right now. You know,
16:53
Speaker 1: you pick a look at today's CPI print and you
16:56
Speaker 1: could say you can make the argument that Fen's got
16:57
Speaker 1: some more work to do there. But if you're the
17:00
Speaker 1: you gotta recognize we've got some bank instability in the
17:03
Speaker 1: system here. What are you supposed to do? Let's check
17:05
Speaker 1: in with a real expert on some of these issues
17:09
Speaker 1: that can maybe give us some headway here. Chevine Yeltakindane
17:13
Speaker 1: at the University of Rochester Business School joins us. Cheven,
17:18
Speaker 1: thank you, Chevine, thank you so much for joining us here. Again,
17:21
Speaker 1: what do you think our Federal Reserve does because they
17:24
Speaker 1: have a balancing act visa v inflation and what's happening
17:28
Speaker 1: in the banking system. Oh? Absolutely, Hi. Their job just
17:33
Speaker 1: got a lot harder over the last week, for sure,
17:36
Speaker 1: when we were just waiting for the kind of the
17:38
Speaker 1: unemployment report and the inflation numbers this week and last week,
17:43
Speaker 1: SVBS collapsed along with its signature bank. This has now
17:47
Speaker 1: become a lot harder. And because we see some of
17:51
Speaker 1: the repercussions of banks or certain types of institutions not
17:56
Speaker 1: taking into account interest rate risk, they're gonna have to
18:00
Speaker 1: ounce is very very tightly. It's a tight rope. So,
18:05
Speaker 1: uh should mean Matt Miller here? Um, I wonder if
18:09
Speaker 1: you think the Fed made the right move along with
18:11
Speaker 1: the other regulators involved and the Treasury in terms of
18:15
Speaker 1: bailing out the depositors of this bank. It wasn't like,
18:18
Speaker 1: you know, uh, mom and pop. This wasn't Joe Plummer
18:21
Speaker 1: in the Midwest. These were you know, the wealthiest people
18:26
Speaker 1: from from Sandhill Road and tech startups. You know, kids
18:29
Speaker 1: who are going to work at places with ping pong
18:32
Speaker 1: tables in the cafeteria. So you know, was it necessary
18:36
Speaker 1: and does it create moral hazard? Oh? It absolutely creates
18:40
Speaker 1: moral hazard because you know, every time you come exposed
18:45
Speaker 1: after the damage in Bindom to create more insurances than
18:50
Speaker 1: you know, not bailing out the bank, but bailing out
18:52
Speaker 1: the depositors, it certainly creates moral hazard. But what's interesting
18:57
Speaker 1: about this are two things that one of which you've mentioned.
19:00
Speaker 1: One of them is that this is not your regular
19:03
Speaker 1: kind of retail deposit bank very much. So we have
19:08
Speaker 1: these very very large deposits in this bank from a
19:11
Speaker 1: very concentrated industry base, mostly the tech sectors, some of
19:16
Speaker 1: which is encrypto as we so uc DC. And at
19:20
Speaker 1: the same time, you know, this was whereas it was
19:24
Speaker 1: the sixteenth largest bank in the United States, it certainly
19:28
Speaker 1: wasn't large enough to also get the scrutiny it needs
19:31
Speaker 1: in terms of naging its risk. So did they do
19:35
Speaker 1: the right policy? I would have liked to have had
19:38
Speaker 1: heard from the FED and FDIC that they will be
19:40
Speaker 1: guaranteeing the deposits of not just these two banks, but
19:45
Speaker 1: all banking, you know, throughout the banking sector, because what
19:50
Speaker 1: is now going to still be on the minds of
19:53
Speaker 1: any depositor within higher than two hundred and fifty k
19:56
Speaker 1: deposit is well, is my bank safe? I mean I've
19:59
Speaker 1: just received any emails from my own bank saying we're safe,
20:02
Speaker 1: you know, don't take out your deposits. I mean, not
20:04
Speaker 1: exactly those words, but but well, you don't have to
20:08
Speaker 1: worry now, I mean, didn't the FED implicitly say we
20:11
Speaker 1: got your back, don't worry about the insurance level. I mean,
20:14
Speaker 1: that's a joke. Carson Block from Muddy Waters said, you know,
20:19
Speaker 1: corporate depositors should be expected to manage their counterparty risk,
20:23
Speaker 1: but bailing out uninsured depositors SVB, which are mostly corporates,
20:27
Speaker 1: further infantilizes markets by sending the message that such risk
20:32
Speaker 1: management is anachronistic. Wow. Yes, I don't disagree with you.
20:37
Speaker 1: I mean I do think that you know, this wasn't
20:40
Speaker 1: something completely unexpected. Yes, we've seen an increased, uh you know,
20:45
Speaker 1: quick increase and interest rates over the last year. But
20:50
Speaker 1: for anybody who's who who is in risk management in
20:53
Speaker 1: terms of understanding the maturity structure. This is not a
20:56
Speaker 1: liquidity issue. You can think about the FED coming in
20:58
Speaker 1: and providing some liquid This is an insolvent bank. They
21:03
Speaker 1: manage their assets very badly compared to especially the kind
21:07
Speaker 1: of deposits that they were getting very short termed very
21:11
Speaker 1: large deposit. And we still don't know what else is
21:14
Speaker 1: on their books. You know, we know about the Treasury
21:16
Speaker 1: bonds and we know that they sold those that are lost,
21:20
Speaker 1: but we have no idea about the other loans and
21:22
Speaker 1: investments that they have made. Huge, huge issue for the
21:26
Speaker 1: FED going forward, and the amount of FED backup that's
21:29
Speaker 1: being provided as well. I mean that's very small compared
21:32
Speaker 1: to the amount of uninsured deposits in the economy. So
21:36
Speaker 1: you know, whether it's a joke or not, it doesn't
21:39
Speaker 1: feel a little bit like cheap talk. I agree. Hey, Chevin,
21:43
Speaker 1: the last time we spoke to you, you it was
21:45
Speaker 1: in our studios here in New York City and you were,
21:47
Speaker 1: I believe, on your way to your native Turkey for
21:49
Speaker 1: a visit. And there's a country and there's a people
21:52
Speaker 1: that have had such incredible challenges thrown their way, most
21:55
Speaker 1: recently in terms of the earthquakes. What did you find
21:59
Speaker 1: what was your beings over there? Oh, it's it's even
22:03
Speaker 1: more devastating on the ground. I didn't go exactly to
22:06
Speaker 1: the area where where the earthquake happened, but I was
22:10
Speaker 1: in Istanbul in the northwest part of the country. But um,
22:14
Speaker 1: you know, it's in the news all day long, and
22:16
Speaker 1: the devastation. We have an election coming up in May,
22:19
Speaker 1: that's of course, you know, combined with the devastation, and
22:23
Speaker 1: it's just completely rattled all the markets. I mean, the
22:26
Speaker 1: Turkish vera continues to lose its um. You know, it's
22:29
Speaker 1: a value there isn't you know. There's a scrambling of
22:33
Speaker 1: kind of the government trying to provide some sort of
22:36
Speaker 1: aid both in kind as well as in monetary aid
22:40
Speaker 1: to those affected by the by the earthquake. But this
22:44
Speaker 1: is going to also of course provide you know, give
22:48
Speaker 1: up huge burden, just just deliver a huge burden on
22:52
Speaker 1: the government and on the taxpayers. At the end of
22:54
Speaker 1: the day, it's a very devastating situation. It's going to
22:57
Speaker 1: take a very long time to get from underneath it.
23:02
Speaker 1: To be honest, what is the expectation when this as
23:05
Speaker 1: this election comes up, because again, as you mentioned, it'll
23:08
Speaker 1: be a referendum on maybe how the government dealt with
23:10
Speaker 1: all these challenges and maybe who's best prepared to deal
23:13
Speaker 1: with them going forward. What's the expectations or what did
23:16
Speaker 1: you experience when you were into in Turkey. Well, that
23:19
Speaker 1: was the interesting thing when I was there. You know,
23:21
Speaker 1: there's an there isn't really a single opposition party that's
23:26
Speaker 1: strong enough to be able to provide an alternative single handedly,
23:31
Speaker 1: individual alternative to the AKP, the reigning party, but there
23:36
Speaker 1: had been a coalition of six parties coming together to
23:40
Speaker 1: unite and to provide an alternative at the ballot box.
23:45
Speaker 1: That coalition actually fell apart while I was there, so
23:48
Speaker 1: I was staying up really late listening to all the
23:50
Speaker 1: news and listening to all the political commentary that was happening.
23:54
Speaker 1: They tried to sort of reinstitute it a little bit
23:58
Speaker 1: as I was leaving the country, but it's very very fragile,
24:02
Speaker 1: and unfortunately, I think that has strengthened the position of
24:07
Speaker 1: AKAP despite their mishandling of the of the all right, vine,
24:13
Speaker 1: thank you so much. I really appreciate getting your thoughts
24:15
Speaker 1: on obviously the economic issues that we love discussing with you,
24:18
Speaker 1: the business issues, but also just kind of getting your
24:19
Speaker 1: experiences from your recent trip to your native Turkey. We've
24:23
Speaker 1: all seen the devastated devastation there. Chevin Yeltikin. She is
24:27
Speaker 1: the dean at the University of Rochester, a business school.
24:30
Speaker 1: Just an extraordinary background, undergrad at Wellesley, PhD in economics
24:34
Speaker 1: from Stanford. So she knows herself, and that's why we
24:37
Speaker 1: like to talk to smart people like that. Yeah, absolutely,
24:40
Speaker 1: I mean she, I'm sure knows a lot of the
24:41
Speaker 1: people who were involved in SVB because that's where they banked.
24:48
Speaker 1: You know, Stanford grads get out of school if they're
24:52
Speaker 1: fortunate enough, if that, the US lets them stay and
24:54
Speaker 1: work here. They start businesses that hire people, but they
24:57
Speaker 1: get their banking or they got it at SVB. All right,
25:00
Speaker 1: we're gonna have more coming up. This is Bloomberg, Chris Whaling.
25:06
Speaker 1: He's a chairman of the Whaling Global Advisors. He joins
25:09
Speaker 1: us here. Hey, Chris, we don't see a bank run
25:12
Speaker 1: very often. What did she take from the news on
25:15
Speaker 1: Friday with SBB. It was a disaster of bad risk
25:22
Speaker 1: management by the bank. They were loading up on mortgage
25:25
Speaker 1: backed securities in anticipation of a FED pivot that they
25:29
Speaker 1: were early and they had been doing this three years.
25:33
Speaker 1: They had an outsized position and needs securities, and then
25:36
Speaker 1: they fed, you know, added to the problem. The real
25:39
Speaker 1: issue I think we have to deal with. And you know,
25:41
Speaker 1: the crisis is not over, guys. There's stuff going on
25:44
Speaker 1: in the background. I can't even talk about that is
25:46
Speaker 1: really mind numbing. But you know, the FED created securities
25:52
Speaker 1: in twenty twenty and twenty one that you cannot hedge.
25:56
Speaker 1: The hedge is twice the coupon or more. So tell
25:59
Speaker 1: me again, and why do we want to own these securities?
26:02
Speaker 1: The FED should have bought them all. I swear the
26:04
Speaker 1: FED should have bought every single security from that period
26:08
Speaker 1: and just hold on to it because it is unfair. Well,
26:11
Speaker 1: they will lend you know against them now you can
26:14
Speaker 1: get for collateral. Does that make any sense to you, Chris,
26:19
Speaker 1: because I kind of want to buy SVP and then
26:23
Speaker 1: load up on a whole bunch of crappy bonds that
26:26
Speaker 1: are only training at seventy five cents on the dollar
26:28
Speaker 1: and then use them as collateral for sweet loans. No,
26:32
Speaker 1: but remember these aren't crappy bonds. These are triple A
26:35
Speaker 1: rated securities with a zero risk way under Bonsle. But
26:40
Speaker 1: the market risk because the coupons are so low is astronomical.
26:45
Speaker 1: You can't even measure it. So if I finance collateral
26:48
Speaker 1: like this today, I'm going to hair cut it the
26:51
Speaker 1: market value I have to. So, Chris, do you feel
26:53
Speaker 1: like this SVB issue, I'll even go out The signature
26:57
Speaker 1: bank as well, is kind of ring fenced, if you will.
27:02
Speaker 1: Or do you think there's no more risk out there
27:04
Speaker 1: in the banking system. Well, it was nice to see
27:07
Speaker 1: First Republic rally. I think all their clients and advisers
27:10
Speaker 1: came in about the stock this morning. I'm not really
27:13
Speaker 1: worried about the bank. You notice Jamie came in and
27:15
Speaker 1: supported them too, Dat Morgan. Yeah, because First Republic is
27:19
Speaker 1: a big issuer of non QM mortgages. Guess who's the
27:23
Speaker 1: leader in that space, Chase. Guess who's the biggest work
27:26
Speaker 1: warehouse lender in that space, Chase. So you know, everything
27:31
Speaker 1: has a reason. But I'm very worried about smaller banks,
27:34
Speaker 1: and by small I mean triple digits, okay, I mean
27:37
Speaker 1: large regionals, because they are being forced to do things
27:41
Speaker 1: to hold on to uninsured deposits that I think are untenable.
27:46
Speaker 1: I think within a matter of days, if not a
27:48
Speaker 1: week or so, we're gonna have another bank in big troubles.
27:51
Speaker 1: Are there still uninsured deposits? I thought the implicit message
27:55
Speaker 1: from the regulators was so there, you are covered, and
28:00
Speaker 1: they had to make a systemic risk exception when they
28:03
Speaker 1: passed Odd Frank the tactic did Sheila Bear use. Remember
28:09
Speaker 1: she extended coverage to all of the transaction accounts. Because
28:14
Speaker 1: when Treasury guaranteed the money market funds, the banks are
28:17
Speaker 1: losing their money. They're all going into the guaranteed assets.
28:20
Speaker 1: So we have the same problem today. I think it's
28:23
Speaker 1: a matter of prudence. We should extend the blanket. They
28:26
Speaker 1: should go to Congress ask them to act now, or
28:30
Speaker 1: maybe we'll have a systemic risk exception for everybody. But
28:35
Speaker 1: you know, we still have a problem. I think the
28:37
Speaker 1: Fed should drop rates fifty bits, and I think they
28:40
Speaker 1: should open the discount window, very similar to what they
28:42
Speaker 1: did with the collateral, and say, if you want to
28:45
Speaker 1: sell us that bond back, we'll take it at car
28:47
Speaker 1: and we'll hold it until you want it back. But okay,
28:50
Speaker 1: but they're they're unlikely to do that right now. Chris,
28:54
Speaker 1: what does that mean in terms of those other regional
28:59
Speaker 1: banks with triple digit deposit bases, triple digit billions and
29:03
Speaker 1: deposits are they Are we going to see more bank
29:06
Speaker 1: runs you think in the next couple weeks. Yes, because
29:10
Speaker 1: look at what happened with Signature. Signature is different than
29:12
Speaker 1: Silicon Valley. Silicon Valley was just a management mistake, Frankly,
29:17
Speaker 1: and the regulators took their eye off the ball. Why
29:19
Speaker 1: do you think Janet Yellen was on TV Sunday. She
29:22
Speaker 1: didn't have a plan, but she was worried about the
29:24
Speaker 1: blowback on the FED and her former colleagues at San Francisco,
29:28
Speaker 1: and they dropped the ball. They didn't even look at
29:30
Speaker 1: the data. It was right there. So what's going to
29:34
Speaker 1: happen is that small, mid sized banks are going to
29:36
Speaker 1: be under attack, especially if they're public. The shorts are
29:40
Speaker 1: going to come after them. They have the list, right,
29:42
Speaker 1: and I think that the bankers are going to try
29:45
Speaker 1: and hold on to their deposits. But if they start
29:47
Speaker 1: going down as we saw the Signature right, they lost
29:50
Speaker 1: twenty percent of deposits in three quarters. A bank can't
29:53
Speaker 1: do that, you know. We spoke Christie, We spoke at
29:58
Speaker 1: Barney Frank yesterday which I thought it was a very
30:00
Speaker 1: interesting conversation. He said a number of things that I
30:03
Speaker 1: found fascinating. Number One, he said Dignature was not insolvent,
30:07
Speaker 1: they were singled out because of their work with crypto.
30:10
Speaker 1: Number two, he said he didn't have any problem with
30:13
Speaker 1: the twenty eighteen amendments that died Frank, there's no reason
30:17
Speaker 1: that they need extra scrutiny. And number three, he didn't
30:21
Speaker 1: think that we needed really any more bank regulation. I know, well,
30:27
Speaker 1: he's right about regulation. If we're not going to enforce
30:29
Speaker 1: the rules and review the numbers that thanks provide us,
30:33
Speaker 1: then why do we need more regulation? Right? I mean, seriously, guys,
30:36
Speaker 1: it's right in the data. You can see forty percent
30:39
Speaker 1: of total assets mortgage backed securities, and you know that
30:43
Speaker 1: they can't hedge those securities. But the problem is the
30:46
Speaker 1: folks at the Board of Governors who took over bank
30:49
Speaker 1: supervision after two thousand and eight, they basically took it
30:52
Speaker 1: away from the reserve banks, so they have no connection
30:55
Speaker 1: with the markets, and they're sitting there looking at their
30:58
Speaker 1: data and they don't realize that this whole class of
31:01
Speaker 1: securities for really two years during COVID are toxic waste.
31:06
Speaker 1: It might as well be subprime mortgages. You know what
31:09
Speaker 1: I'm saying. Even though it has a triple A rating
31:11
Speaker 1: and the people have a hard time with it. They say, Chris,
31:14
Speaker 1: this is a treasury bond, but why shouldn't I buy it?
31:16
Speaker 1: So Chris is the next bank to go. You know,
31:19
Speaker 1: if I screen on the Bloomberg and look for other
31:22
Speaker 1: banks that have such a huge hold to maturity portfolio,
31:25
Speaker 1: I don't see anything that looks like as bad a mismatches.
31:29
Speaker 1: Look at the funding match, look for banks that have
31:32
Speaker 1: large blocks of uninsured deposits tied to commercial customers. You see,
31:38
Speaker 1: let me give you some context here. You guys always
31:40
Speaker 1: helved this sim bloom book less ten years of FED
31:43
Speaker 1: benevolence at low interest rates allow of a lot of
31:46
Speaker 1: business models to flourish. Business models that might not have
31:50
Speaker 1: done well in a less hospitable environment. Sill a convalidate signature,
31:55
Speaker 1: because remember, these guys compete with big banks. The big
31:58
Speaker 1: banks are right there, and so they were able to
32:00
Speaker 1: carve out niches for themselves. But I think we're going
32:03
Speaker 1: into a much less friendly environment now, and I think
32:06
Speaker 1: you're going to see big time consolidation. I expect to
32:09
Speaker 1: see a number of banks get bought to avoid being
32:13
Speaker 1: taken down by the fdi C. So I'm still unclear
32:17
Speaker 1: why the regulators or how the regulators missed this. That
32:21
Speaker 1: seems to be the most immediate issue. You know, we're
32:23
Speaker 1: all human, we're all conflicted agents. It's like my friends
32:27
Speaker 1: in the ratings world, you know, S ANDP acted today
32:30
Speaker 1: they downgraded the banks across the board and said, hey,
32:33
Speaker 1: we have a problem. But the whole industry should have
32:37
Speaker 1: downgraded every rating they had after quantitative easing was over.
32:42
Speaker 1: You know, when you move five hundred basis points, think
32:45
Speaker 1: about what that means in terms of ratings. Okay, five
32:48
Speaker 1: hundred basis points is barely investment grade. So if you
32:51
Speaker 1: subject that you know stress tests. Remember the FED does
32:54
Speaker 1: dress tests, but they don't understand bonds. And you said,
32:58
Speaker 1: Bloomberg do You're the best shop in the world of media,
33:02
Speaker 1: So think about stressing a portfolio of Jinny May security
33:06
Speaker 1: six hundred basis points. Guys, let's see answer. The answer
33:09
Speaker 1: is you're insolvent. Okay, right, yeah, any first year bank
33:14
Speaker 1: you associate notices Barney Frank would know that he's a
33:17
Speaker 1: smart guy. All right, safe, but you know we have
33:20
Speaker 1: to do the work. Yep, I got it. Hey, Chris,
33:22
Speaker 1: we gotta go for time. But thanks so much for
33:24
Speaker 1: joining us. We really appreciate getting your thoughts clearly non
33:26
Speaker 1: consensus from my I hope we can get you back
33:28
Speaker 1: on again soon as well. Absolutely, Chris Whalend, chairman of
33:31
Speaker 1: the Whale and Global Advices, let's dive in here because
33:35
Speaker 1: we got a better reserve meeting February twenty second. That
33:38
Speaker 1: he's gonna be very interesting. And I'm glad I'm not
33:41
Speaker 1: fed Chairman j Pal because he's kind of got, you know,
33:44
Speaker 1: a balancing act here. So let's check you with Jeff
33:47
Speaker 1: Cleveland Jeffrey Cleveland as a director in chief econdoms of
33:50
Speaker 1: paid in Regal. So, Jeff, Jeffrey, I'm gonna put you
33:52
Speaker 1: in the hot seat. You're fed Chairman j Pal next
33:56
Speaker 1: week on the twenty second. What do you do and
33:59
Speaker 1: why I don't want the job? You can keep the
34:02
Speaker 1: job where I am. That's a tough that's a tough call.
34:06
Speaker 1: I guess I think given the current situation, it'd be
34:10
Speaker 1: prudent to pause here, just let the dust settle. I mean,
34:13
Speaker 1: I think you could. One of the reasons we have.
34:17
Speaker 1: The financial instability is due to the last twelve months
34:21
Speaker 1: and the rate hikes that have been put into the system,
34:24
Speaker 1: so maybe it would be prudent just to take a
34:26
Speaker 1: step back. The problem with that is inflation. So when
34:30
Speaker 1: I you know, I looked at that report this morning,
34:32
Speaker 1: point five percent month to month for the core CPI,
34:37
Speaker 1: and you know, I'd love to look at this median
34:39
Speaker 1: CPI that the Cleveland Fed tabulates later in the morning,
34:42
Speaker 1: and that thing for the month of February came in
34:47
Speaker 1: even hotter. Right, That thing is point six percent month
34:50
Speaker 1: to month after a point seven percent month a month
34:53
Speaker 1: rating the prior month on a year on year basis.
34:56
Speaker 1: I think that's a record high for the series seven
34:59
Speaker 1: point two percent year on year for the median price change.
35:02
Speaker 1: So that tells me there is a lot of underlying inflation.
35:07
Speaker 1: It's just way too hot, So I think the Fed
35:09
Speaker 1: has to address that as well. So maybe he's doing
35:13
Speaker 1: the best he can here. He's going to use the
35:15
Speaker 1: battle sheet to address the financial stability, and he's going
35:20
Speaker 1: to use the policy rate to keep badding away at
35:23
Speaker 1: inflation and try to get inflation back under control. But
35:26
Speaker 1: it's a tricky situation. Well, when we're talking about bringing
35:29
Speaker 1: inflation back to control. I feels like one of the
35:31
Speaker 1: arguments here is that in the here and now, financial
35:35
Speaker 1: stability matters more than price stability for kind of the
35:39
Speaker 1: average consumer. And I wonder that for those folks who
35:43
Speaker 1: are saying that's the trade off you kind of have
35:45
Speaker 1: to make for this FED decision, to what extent does
35:47
Speaker 1: that imply that at the next meeting they have to
35:50
Speaker 1: be even more hawkish? I think that's it's tricky. I mean,
35:55
Speaker 1: I still get friends and family and colleagues and clients
35:59
Speaker 1: even that say to me, you know, um, that the
36:02
Speaker 1: bigger problem is inflation. You know that that's what they're
36:04
Speaker 1: really feeling in terms of what's eating into their their
36:07
Speaker 1: income with they're facing you know, in terms of energy
36:11
Speaker 1: costs or at the at the gas pumps. So I
36:13
Speaker 1: don't know, I think there could be a healthy debate over, um,
36:17
Speaker 1: what's the what is the primary concern? I do think though,
36:20
Speaker 1: at the end of the day, a central bank. What
36:22
Speaker 1: is the job of a central bank? I mean, first
36:23
Speaker 1: and foremost, it's it's the banker's bank, right, It's to
36:26
Speaker 1: keep the financial system healthy. So they do have to
36:29
Speaker 1: take to take that into account. But these I think
36:32
Speaker 1: these two are at odds is I guess what I'm
36:34
Speaker 1: trying to express, Um, if you want to rein in inflation,
36:39
Speaker 1: then you need to continue to bike and that will
36:41
Speaker 1: continue to send us down this road work. There will
36:44
Speaker 1: probably be other institutions that get into trouble. Maybe this
36:47
Speaker 1: is just the beginning of that phase here. This is
36:50
Speaker 1: a sort of August of two thousand and seven m
36:53
Speaker 1: type period, and then there will be more, There'll be
36:55
Speaker 1: more volatility. Ed Jeff, Well, we don't hear much about,
37:00
Speaker 1: I guess recently. Maybe it's just because we're dealing with
37:02
Speaker 1: a good old fashioned bank run. Is the economy in
37:05
Speaker 1: just terms of recession, where are you right now? And
37:08
Speaker 1: kind of your recession call for the US economy? Well,
37:13
Speaker 1: all the day that we saw, you know, up until
37:16
Speaker 1: the middle of last week, was pointing towards the no
37:19
Speaker 1: landing scenario. So you know, you had very pretty strong
37:25
Speaker 1: GDP tracking for the first quarter. It's drawn consumer spending
37:29
Speaker 1: the last couple of months. You have inflation that's still elevated.
37:32
Speaker 1: You have the unemployment rate that's you know, flirting with
37:35
Speaker 1: a fifty year low. And we saw that jobs report
37:38
Speaker 1: on Friday more than three hundred thousand jobs. So as
37:41
Speaker 1: far as the data that we have to date, it's
37:43
Speaker 1: it's holding up really well. And for us, the probability
37:46
Speaker 1: of a recession in twenty twenty three was had fallen.
37:52
Speaker 1: We thought we would get through the year without one.
37:54
Speaker 1: Once you start to see financial concerns, when financial conditions
37:59
Speaker 1: start to tighten, um, then we get a bit more concerned.
38:02
Speaker 1: But as you've seen, you know this Morchine, this can
38:05
Speaker 1: change day by day. So actually financial conditions have eased
38:09
Speaker 1: to today, so well, I think we're just we're just
38:12
Speaker 1: have to sit back and wait here. There's you know,
38:14
Speaker 1: seven more days and eight more days until the FED
38:17
Speaker 1: meetings build black and transpire. Yeah, five training sessions exactly.
38:22
Speaker 1: And I have to ask in the next five training sessions,
38:25
Speaker 1: what could be the game changer for the FED? Or
38:28
Speaker 1: is everything in the bare view mirror here? I think
38:31
Speaker 1: the key thing is that it is the containing contained um.
38:35
Speaker 1: Do we get do we get improvement? Um? On that front?
38:38
Speaker 1: So you've seen that. I think with bank stocks that
38:40
Speaker 1: gives you a little sign of where the market is
38:42
Speaker 1: thinking about the risks around financial stability. So you need
38:46
Speaker 1: to we need to see some more signs that maybe
38:48
Speaker 1: this is contained. It's a it's a one off, it's
38:50
Speaker 1: an isolated type event. It's not going to be as
38:53
Speaker 1: a systemic issue. We'll see. I got to push back
38:56
Speaker 1: on that. Are they contained though? Are they stable? Given
38:59
Speaker 1: that around all, we're looking at rallies of say forty
39:01
Speaker 1: fifty percent in one stock. That's not normal even for
39:04
Speaker 1: a regional bank. Yeah. You made a great point earlier
39:08
Speaker 1: though about and we highlighted this in our quarterly for
39:12
Speaker 1: the fourth quarter that came out, just the liquidity issues
39:15
Speaker 1: in the financial system, at least with regard to treasuries
39:19
Speaker 1: liquidity and the bond market in general. I do think
39:22
Speaker 1: you're libel or you're vulnerable to some pretty sharp air pockets,
39:27
Speaker 1: if you will. There a sharp movements and security prices
39:29
Speaker 1: just given the structure of the marketplace. I think you're
39:32
Speaker 1: quoting Ira Jersey, just looking at the size of the
39:36
Speaker 1: bond market relative to the dealer system that has to
39:38
Speaker 1: intermediate all those transactions, you get big movements and prices.
39:42
Speaker 1: I think you know that could that could continue? Jeff,
39:46
Speaker 1: what's your GDPU call going out like this year and
39:48
Speaker 1: next year? You know, maybe there is a little recession
39:51
Speaker 1: in there. But what's the call for you guys? Right
39:55
Speaker 1: now we have point six percent real GDP Q four
39:59
Speaker 1: to Q four for twenty twenty three, and we do
40:03
Speaker 1: think it's prudent to think about a recession. So a
40:06
Speaker 1: contraction in GDP in twenty twenty four, what does that
40:10
Speaker 1: look like right now? Somewhere around half percent maybe to
40:13
Speaker 1: a percentage point. So uh, that's more of a garden
40:16
Speaker 1: variety downturn that you might have seen in the post
40:19
Speaker 1: war era. But that's our that's our current thinking. Like
40:22
Speaker 1: I said, though, the first the data out to start
40:24
Speaker 1: the first order, it was tracking much better than that. So, um,
40:28
Speaker 1: you know, we were we were off to a good
40:30
Speaker 1: start and we hit we stumbled here and we'll have
40:33
Speaker 1: to see how, you know, the next few weeks transpire. Jeff,
40:37
Speaker 1: and I know you're you're based in the LA area.
40:39
Speaker 1: Have you heard from any of the regional banks in
40:41
Speaker 1: the southern California area about their position, their condition, their
40:46
Speaker 1: concern because it seems like, you know, some of the
40:49
Speaker 1: West Coast banks with some exposure obviously the Silicon Valley
40:51
Speaker 1: in the VC community were the ones that were both
40:54
Speaker 1: at risk. You know, I was in La over the
40:57
Speaker 1: weekend and then I flew to DC on Sunday, and
41:01
Speaker 1: it was interesting the contrast between the two coasts. So,
41:05
Speaker 1: you know, contacts on the West Coast were very concerned
41:08
Speaker 1: about the banking system, but also about the prospects for
41:12
Speaker 1: a pretty severe downturn. As you know, many startups fail
41:16
Speaker 1: and layoffs pick up on the West Coast and then
41:18
Speaker 1: the unemployment rate rises, so much more concern about the
41:22
Speaker 1: you know, the health of the economy and the banking
41:24
Speaker 1: system on the West Coast. Then when I got to
41:26
Speaker 1: to DC on Sunday and now I'm in London, so
41:30
Speaker 1: I don't know. I guess I'll find out tomorrow what
41:32
Speaker 1: the view is here. Actually there's an interesting comparison here.
41:36
Speaker 1: I think that's worth thinking about. The Bank of England
41:38
Speaker 1: face some financial stability issues in the guilt market last fall,
41:42
Speaker 1: as you well know, and they dealt they chose a
41:44
Speaker 1: delt deal with that with a temporary program and they
41:48
Speaker 1: kept they maintain the pressure on the overnight rate to
41:51
Speaker 1: deal with the inflation problem here. So similar path maybe
41:54
Speaker 1: will be pursued by the Fed where they will you know,
41:57
Speaker 1: they're very attentive. They don't want to financial crisis They
42:00
Speaker 1: don't mind if the unemployment rate rises because I think
42:02
Speaker 1: the inflation will come down, but they don't want to
42:04
Speaker 1: financial crisis, so they can deal with that with the
42:06
Speaker 1: balance sheet and then try to conduct their inflation control
42:11
Speaker 1: campaign with the overnight rate. So all right, Well, enjoy London,
42:16
Speaker 1: have a good time there. Jeffrey Cleveland, director and chief
42:18
Speaker 1: Economists Payton, and Regaled Elam, President and CEO of the
42:25
Speaker 1: National Bankers Association, joins us. Nicole. Thanks so much for
42:29
Speaker 1: taking the time here help us put into perspective what
42:32
Speaker 1: we've seen with some of these regional banks over the
42:34
Speaker 1: last several days. How concerned are you that this is
42:39
Speaker 1: systemic for some regional banks or it's really kind of
42:43
Speaker 1: ring fenced to a handful of names. Yeah, so, so
42:47
Speaker 1: thank you for having me today. We are seeing three
42:50
Speaker 1: big ways that it's impacting us and that I imagine
42:53
Speaker 1: will continue. The first is impacting customers. There is certainly
42:57
Speaker 1: a deposit flight as customers are moving their deposits and
43:00
Speaker 1: really their banking relationships to big Wall Street banks that
43:04
Speaker 1: are now being perceived as too big to fail post
43:06
Speaker 1: two thousand and eight. We're also paying attention to its
43:09
Speaker 1: impact on regulators We certainly applaud this administration and regulators
43:14
Speaker 1: for being swift in their response. But one thing that
43:17
Speaker 1: we know is that this facility is going to need
43:19
Speaker 1: to be paid for, and is it going to be
43:22
Speaker 1: paid off of the back of small community banks, particularly
43:25
Speaker 1: those banks who have asset sizes under three billion dollars?
43:29
Speaker 1: Are they going to be the ones that are now
43:31
Speaker 1: having to bail it out. We also know that the
43:34
Speaker 1: Hill and regulators are responding with new regulations and new
43:38
Speaker 1: and new legislation. And typically when you have something like
43:41
Speaker 1: this that happens, there's this one size fits all approach
43:45
Speaker 1: that can be really burdensome on minority and community banks.
43:48
Speaker 1: And so I think you're going to continue to see
43:50
Speaker 1: deposit flight to Wall Street banks that are too big
43:53
Speaker 1: to fail. You're going to continue to see regulators maybe
43:56
Speaker 1: take as well as policymakers on the Hill continue you
44:00
Speaker 1: to maybe think about a one size fits all approach
44:03
Speaker 1: and how they address this. Well put this into some
44:06
Speaker 1: perspective for us, because my understanding was to your point
44:09
Speaker 1: of who's going to pay for this, is that the
44:11
Speaker 1: fund already exists with the FED slash the FDIC, a
44:15
Speaker 1: fund that banks large and small contribute to based upon
44:19
Speaker 1: the amount of risk taking they do. So aren't the
44:21
Speaker 1: funds already allocated for that? The funds are there, but
44:25
Speaker 1: when something like this happens, there is you do have
44:28
Speaker 1: the right to have what's called a special assessment. And
44:31
Speaker 1: I think how exactly that special assessments is going to
44:35
Speaker 1: be done is going to be is going to be
44:37
Speaker 1: a challenge. That's something that is still being talked about
44:40
Speaker 1: and discussed. So, Nicole, do you believe or in the
44:45
Speaker 1: National Bankers Association believe that Dodd Franks should be kind
44:50
Speaker 1: of applied to not just the large banks, the too
44:53
Speaker 1: big to fail, but to regional banks as well. You
44:58
Speaker 1: know that this idea of keeping the a banking system
45:01
Speaker 1: safe is something that is important regardless of your asset size,
45:05
Speaker 1: whether you're a small bank or a Wall Street bank,
45:07
Speaker 1: that sentiment of keeping the financial system safe is something
45:11
Speaker 1: that is important. I think, whether it's Dot Frank or
45:15
Speaker 1: just in general, regulations that tend to be responsive to
45:18
Speaker 1: something like as cosmic as this. What tends to happen
45:22
Speaker 1: is that you don't have regulations that take into considerations
45:25
Speaker 1: the uniqueness of these small banks, right, so you have
45:28
Speaker 1: regulations that may have capital requirements that don't fit the
45:32
Speaker 1: capital requirement needs of a small bank. And so what
45:35
Speaker 1: tends to happen is that while increased regulations may be
45:39
Speaker 1: needed for all, you cannot have a one size fits
45:43
Speaker 1: all approach. And I think oftentimes that's what you tend
45:45
Speaker 1: to see as a one size fits all approach that
45:47
Speaker 1: can be unfairly burdensome on small banks and Nichole some
45:53
Speaker 1: critics are some observers of the banking industry say, hey,
45:57
Speaker 1: it just needs to have better enforcement of what's already there.
46:00
Speaker 1: I mean, I could have looked at svb's balance sheet
46:03
Speaker 1: and noted the mismatch between their deposits and the duration
46:06
Speaker 1: of their investments. What happened? Do you think it's very
46:13
Speaker 1: interesting because it is, Uh, they did have a rapid
46:17
Speaker 1: growth non traditional model that you know, you would not
46:21
Speaker 1: have thought that that would have it would have it
46:26
Speaker 1: would have passed the stress tests. And so I do
46:29
Speaker 1: think it causes you to wonder, Um, were they not
46:32
Speaker 1: paying attention? Was this for the sake of we want
46:35
Speaker 1: to be innovative? Um? What was going on here? But
46:39
Speaker 1: one would one would have seen if you're growing three
46:41
Speaker 1: fifteen percent in the last two years how are you
46:43
Speaker 1: passing these stress tests? Um, and that's a that's a
46:46
Speaker 1: problem because it's not the creation of something new, it's,
46:49
Speaker 1: as you noted, there was already something there. Well in
46:53
Speaker 1: terms of those stress tests, I have to ask a
46:55
Speaker 1: lot of people are saying, look, a lot of these
46:57
Speaker 1: kind of investment Uh see, sweet folks had said, had
47:02
Speaker 1: not properly hedged the duration risks that they were taking on.
47:06
Speaker 1: Is there a market angle to this were these Was
47:09
Speaker 1: there a way that this could have been prevented from
47:12
Speaker 1: the folks who are making these investment decisions. Yeah. So
47:16
Speaker 1: I think what it really goes to show is that
47:17
Speaker 1: Silicon Valley and Signature Bank have a model that is
47:21
Speaker 1: not reflective of most banks in the country. It is
47:24
Speaker 1: very much a rapid growth, non traditional model that has
47:27
Speaker 1: unstable deposit basis and so the challenges they had high
47:32
Speaker 1: concentrations of VC tech startups and crypto and when you
47:36
Speaker 1: have all of those things happening at the same time,
47:39
Speaker 1: and including uninsured deposits, which ninety eight percent of my
47:43
Speaker 1: banks have MBI deposit accounts that are that are ensured.
47:47
Speaker 1: So when you have all of those things happening at
47:49
Speaker 1: the same time, it's a challenge. I think part of
47:51
Speaker 1: the issue is is that there are only but a
47:53
Speaker 1: handful of crypto banks, right. Crypto is something that there's
47:57
Speaker 1: lots of debate about, but most could say that it
48:00
Speaker 1: not regulated. And so when you have something like crypto,
48:03
Speaker 1: it's also reminiscent to me of marijuana banking. Right. When
48:05
Speaker 1: you have these types of industries where they're not as
48:08
Speaker 1: regulated and so it ends up being consolidated into a
48:11
Speaker 1: couple of banks, it becomes very, very risky. Nicole. Do
48:16
Speaker 1: you expect, or a National Bankers Association expect more failures
48:21
Speaker 1: from regional banks in the coming weeks and months. I
48:25
Speaker 1: don't know that I would expect more failures. I think
48:27
Speaker 1: we made it through the pandemic where you didn't see
48:29
Speaker 1: a decline that you saw post two thousand and eight crisis,
48:32
Speaker 1: where you saw a decline in regional banks and particularly
48:36
Speaker 1: community banks. Not so much regional banks, but you saw
48:38
Speaker 1: a decline in these community banks. You did not see
48:41
Speaker 1: this post the pandemic. I think this was the exception
48:44
Speaker 1: and not the rule. Again, given the fact that these
48:47
Speaker 1: were banks that are not reflective of most banks in
48:50
Speaker 1: the country, that's what led to their failure and so
48:53
Speaker 1: I don't think that you'll continue to see that, all right, Nicole,
48:56
Speaker 1: thank you so much for joining us. Really appreciate getting
48:58
Speaker 1: your perspective here during this time of uncertainty around the
49:03
Speaker 1: regional bank business. Nicole Elam, President and CEO of the
49:06
Speaker 1: National Bankers Association, joining the SERACS based down in Washington,
49:11
Speaker 1: d C. Thanks for listening to the Bloomberg Markets podcast.
49:15
Speaker 1: You can subscribe and listen to interviews with Apple Podcasts
49:18
Speaker 1: or whatever podcast platform you prefer. I'm Matt Miller. I'm
49:22
Speaker 1: on Twitter at Matt Miller nineteen seventy three. And I'm
49:25
Speaker 1: Faull Sweeney. I'm on Twitter at pt Sweeney. Before the podcast,
49:28
Speaker 1: you can always catch us worldwide at Bloomberg Radio