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Private Equity Sowed the Seeds For Toys, iHeart Bankruptcies · Bloomberg Intelligence

0:05
Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm pim Fox.
0:08
Speaker 1: Along with my co host Lisa Bramowitz. Each day we
0:11
Speaker 1: bring you the most important, noteworthy, and useful interviews for
0:15
Speaker 1: you and your money, whether you're at the grocery store
0:17
Speaker 1: or the trading floor. Find the Bloomberg P M L
0:20
Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Toys
0:27
Speaker 1: r Us and I Heart Media once known as uh
0:31
Speaker 1: I Heart Communications and a whole bunch of other names.
0:34
Speaker 1: What do these companies have in common? Both filing for bankruptcy,
0:38
Speaker 1: both ending years of difficulties with their balance sheets, Both
0:43
Speaker 1: otherwise viable businesses except for the mass of debt on
0:47
Speaker 1: their books. Here to talk about that with us is
0:49
Speaker 1: Matt Townsend, Global business reporter for Bloomberg, as well as
0:52
Speaker 1: Philip Brendel, Senior credit analyst for Bloomberg Intelligence. Matt, I
0:56
Speaker 1: want to start with you. Toys r US is liquidating
0:59
Speaker 1: as the retailer I was unable to successfully turn around
1:03
Speaker 1: its business. You guys have been reporting on this, broke
1:05
Speaker 1: the news on this. Uh, what really is the reason
1:10
Speaker 1: for this demise? Well, from my view, haven't covering the
1:13
Speaker 1: company for number of years. This is a private equity story. Uh,
1:17
Speaker 1: all the people we talked to over the past several months,
1:20
Speaker 1: almost to a tea, said there's a viable business here,
1:23
Speaker 1: but the debt structure is so messed up and the
1:25
Speaker 1: company so over levered. And even the CEO when he
1:28
Speaker 1: was speaking to employees yesterday, we know that he basically said, look,
1:32
Speaker 1: the deck was stacked against us for years. Maybe we
1:35
Speaker 1: could could have done some things differently, of course, but
1:37
Speaker 1: at the end of the day, it was just too
1:38
Speaker 1: hard to get from out from under that debt. Can
1:42
Speaker 1: we just go back a little bit and maybe just
1:44
Speaker 1: set the stage here for a little kind of history
1:47
Speaker 1: lesson when it comes to a choice rust Right, because
1:51
Speaker 1: this is not a brand new thing. Debt was downgraded
1:54
Speaker 1: a junk status. This is back in January of two
1:56
Speaker 1: thousand and five. Right, Amazon sales were just four percent
2:02
Speaker 1: of their current level in two thousand five, and a
2:06
Speaker 1: year later, the company was taken private by KKR, Bain Capital,
2:10
Speaker 1: and Cornado. Six and a half billion dollars purchase left
2:15
Speaker 1: it with five point three billion dollars in debt. How
2:19
Speaker 1: do can you make those numbers work? It's hard? And
2:22
Speaker 1: you know, did KKR and Bain know what was coming
2:25
Speaker 1: with the recession, Do they know how prevalent online shopping
2:28
Speaker 1: would be. No, that definitely hurt the business. But from
2:31
Speaker 1: the years of covering this company, talking to former executives
2:34
Speaker 1: to a t they would say, now, maybe they were
2:36
Speaker 1: trying to cover themselves, but they would say, we had
2:39
Speaker 1: big plans. We want to invest in these kinds of
2:41
Speaker 1: things with the company operations, doing things with the online platform,
2:45
Speaker 1: and the private equity owners just wouldn't let us do
2:47
Speaker 1: it to the level we wanted. So that's why I
2:51
Speaker 1: say this is really a private equity story in many respects. Um,
2:54
Speaker 1: it's very sad. You know, Toys Ours and the US
2:57
Speaker 1: has over thirty thousand employees over sixty worldwide, and the
3:01
Speaker 1: US business for most part is winding down. There is
3:03
Speaker 1: some hope that maybe some stars will stay open, but
3:05
Speaker 1: for most part winding down. So Phil, come on in here.
3:09
Speaker 1: From your perspective, from a debt analysis point of view,
3:14
Speaker 1: was Toys r US inviable given where it's debt was
3:20
Speaker 1: and sort of what the revenue prospects were. I think
3:23
Speaker 1: the biggest problem with Toys r US was that they
3:27
Speaker 1: kept adding debt to it and restructuring debt, and they
3:30
Speaker 1: tried to do everything out of court without ever saying,
3:33
Speaker 1: you know what, this is simply too much debt for
3:35
Speaker 1: this business. We have to reduce it going through bankruptcy
3:38
Speaker 1: once and then you know, try and get the capital
3:41
Speaker 1: structure in the right place. Um. You know that they
3:44
Speaker 1: kept playing games making the capital structure more complex. And
3:49
Speaker 1: one of the things that's fascinating to look at with
3:51
Speaker 1: Toys r US is if you take a look at
3:53
Speaker 1: each of the separate companies that they created, they now
3:56
Speaker 1: each have their own set advisors, financial advisors, lawyers, um,
4:00
Speaker 1: with their own you know, stet of fees and so
4:05
Speaker 1: I think a lot of the complexity here. They went
4:08
Speaker 1: into bankruptcy without a plan, and uh, I think this
4:11
Speaker 1: is ultimately what you're seeing in retails and extremely uh
4:15
Speaker 1: difficult industry to be doing that. In Yeah, they did
4:20
Speaker 1: go in to bankruptcy a plan. You know, the result
4:24
Speaker 1: the company's results were somewhat okay. But what happened was
4:27
Speaker 1: they did hire restructuring advisor late last year that news
4:31
Speaker 1: got out that created that spooked vendors. They stopped shipping
4:34
Speaker 1: or we're gonna hold back shipments, and so they had
4:35
Speaker 1: to file didn't have a plan and it just snowballed
4:39
Speaker 1: from there. And we know that their holiday quarter in
4:41
Speaker 1: the fourth quarter was terrible. They basically got they basically
4:45
Speaker 1: earned half the ibada they expected and that just increased
4:48
Speaker 1: more dowbs with lenders and they decided to pull the plug.
4:51
Speaker 1: This is going to be a textbook case. Uh and uh,
4:55
Speaker 1: I know that we're going to talk to you more
4:56
Speaker 1: about it in the future. Thanks very much, Matt Towns
4:59
Speaker 1: and he's global business reporter for Bloomberg News. You can
5:02
Speaker 1: follow Matt on Twitter at Matt Underscore Townsend. Uh. Phil Brent,
5:08
Speaker 1: I just want you to stay with us for a
5:09
Speaker 1: little bit longer because of course another bankruptcy. I heart media.
5:15
Speaker 1: Give us an update there and what are their future prospects? Sure? Um,
5:21
Speaker 1: you know this is a very different story. I think
5:24
Speaker 1: much of the drama and squabbling has actually been done
5:28
Speaker 1: before it filed for bankruptcy. I've been following this for
5:31
Speaker 1: two years and uh, you know they have. They filed
5:35
Speaker 1: with a restructuring support agreement a term sheet um the
5:41
Speaker 1: support of a class that represents thirteen billion of the
5:45
Speaker 1: fifteen point five billion dollars of death that they're looking
5:48
Speaker 1: to restructure. Uh, so I think it should be on
5:52
Speaker 1: a pretty clean path to getting out of bankruptcy. And uh,
5:57
Speaker 1: you know what's interesting is you have this massive radio
6:00
Speaker 1: business and this massive outdoor business, both of which will
6:04
Speaker 1: ultimately be changing ownership. Bin and th H Lee, which
6:09
Speaker 1: bought this you know, pretty great recession, are are now
6:15
Speaker 1: looking at, you know, getting a much. They do own
6:18
Speaker 1: some of the debt, so they'll own a smaller stake here,
6:21
Speaker 1: but ultimately it will be these creditors who will own
6:24
Speaker 1: both sides of this business. Although this is hardly a
6:27
Speaker 1: model for what private equity ought to do with a company, right,
6:31
Speaker 1: I mean, this is the largest US radio station owner,
6:35
Speaker 1: and uh, from many accounts, would have also been a
6:38
Speaker 1: viable business were it not for the more than twenty
6:41
Speaker 1: billion dollars of debt on its balance sheet stemming from
6:44
Speaker 1: its l b O. Right. Uh, this is what private
6:48
Speaker 1: equity does, right. They've lever up companies that they funded,
6:52
Speaker 1: uh with hopefully cheap debt from their perspective, and they
6:57
Speaker 1: write an equity check. The equity checks here were relatively
7:01
Speaker 1: small because this was another pretty great recession. Lbl Um.
7:06
Speaker 1: Actually this one was a little bit troubled. They in
7:08
Speaker 1: fact had to they had to actually own some of
7:11
Speaker 1: the debt, and this one it was a complicated uh
7:14
Speaker 1: LBO closing. UH. But ultimately, I mean to a certain extent,
7:21
Speaker 1: how long this has been going on. It's ten years
7:25
Speaker 1: before it had ultimately filed for bankruptcy. So that the
7:29
Speaker 1: testament to the strong cash flow here in strong underlying business. UH.
7:33
Speaker 1: The radio side generates a ton of three cash flow
7:36
Speaker 1: and the outdoor side, UH it does, it does a
7:39
Speaker 1: good job as well. So did the firms that put
7:43
Speaker 1: the steel together. Were they able to get some of
7:45
Speaker 1: their money out that? I don't know that. You know
7:49
Speaker 1: that those funds, those private equity funds that actually made
7:52
Speaker 1: the original investment have seemed to do well when I
7:55
Speaker 1: took a look I think it was last year I
7:57
Speaker 1: took a look at that they did UM and you know,
8:01
Speaker 1: presumably they've been writing down the equity as it's traded down.
8:04
Speaker 1: Both these UH stocks actually trade publicly as well. UH.
8:09
Speaker 1: But it's it is possible that perhaps they invested in
8:14
Speaker 1: the debt. UM they did have initial debt investments. They've
8:19
Speaker 1: reduced that over the year. But it's it's it I
8:23
Speaker 1: haven't been able to piece together you know their profitability.
8:26
Speaker 1: I want to thank you very much for helping us
8:29
Speaker 1: a piece together some of the pieces of I heart media.
8:32
Speaker 1: Much appreciated. Also a story that will continue to attract
8:36
Speaker 1: our attention. Phil Brental is a senior credit analyst for
8:39
Speaker 1: Bloomberg in Intelligence. President Trump has talked a lot about
8:47
Speaker 1: deregulating corporate America, including Wall Street banks, but taking a
8:52
Speaker 1: look at what senators and congressmen have done, it isn't
8:56
Speaker 1: quite as much as the rhetoric has made it out
8:59
Speaker 1: to be. Joining us right now is Galman, owner and
9:01
Speaker 1: senior writer focusing on banking and finance for Bloomberg News,
9:06
Speaker 1: and Yeoman, thanks so much for being here with us.
9:09
Speaker 1: So yesterday the US Senate took a concrete step towards
9:13
Speaker 1: rolling back specific regulations. Let's start there and talk about
9:17
Speaker 1: what those are. So the biggest relief really comes for
9:21
Speaker 1: small banks and some regional banks as well. Um, you know,
9:25
Speaker 1: there was a lot of small banks got swept up
9:28
Speaker 1: in dot frank and these were I mean so small
9:31
Speaker 1: that that they were they were a couple of billion
9:33
Speaker 1: dollars in assets, and um, you know the problem with this,
9:37
Speaker 1: and there was a lot of bi properties and support
9:39
Speaker 1: for this um and they've been talking about it for years,
9:42
Speaker 1: basically since Dot Frank passed. Democrats and Republicans have been saying,
9:46
Speaker 1: we need to give some relief to small banks because
9:49
Speaker 1: those are the banks when they fail. We know how
9:51
Speaker 1: to deal with them. We have fd I C which
9:54
Speaker 1: takes over a bank on Friday and opens it Monday
9:57
Speaker 1: morning with some stuff sold in between, and and the
10:00
Speaker 1: system works. It's the too big to fail that we
10:03
Speaker 1: don't know, we didn't know how to deal with during
10:05
Speaker 1: the crisis, and we still are struggling to figure out
10:09
Speaker 1: if we know what to do with, you know, ten
10:11
Speaker 1: years later. But but these these things for the small banks,
10:15
Speaker 1: you know, aren't as as bad as what big banks
10:17
Speaker 1: have been pushing for in their regulation. So what's the
10:20
Speaker 1: likely outcome. We're gonna see changes in the regulation that
10:23
Speaker 1: would what make it more possible for banks of smaller
10:26
Speaker 1: size and scale to combine or be bought out. Um. So,
10:30
Speaker 1: I mean, you know, that has that's a secular trend
10:33
Speaker 1: that's been going on for decades in the US. You know,
10:36
Speaker 1: just twenty years ago, we had you know, more than
10:39
Speaker 1: eight thousand banks. Now we're five thousands and some change
10:42
Speaker 1: there's always mergers constantly happening. Uh small you know, small
10:47
Speaker 1: banks have a hard time surviving anyway. The economies of
10:50
Speaker 1: scaling banking has forced them to keep merging. And it's
10:53
Speaker 1: not just the banking if you look at other sectors
10:55
Speaker 1: of the economy. You know, Amazon pushes small retailers out,
10:59
Speaker 1: even in big retails out, but but a lot of
11:01
Speaker 1: you know, companies get bigger. So there, I don't think
11:04
Speaker 1: the rules will change much. But at least the ones
11:07
Speaker 1: that are managing to survive the months, that are still
11:10
Speaker 1: able to fund their communities will be able to do
11:13
Speaker 1: things easier because they don't have as much compliance cost.
11:17
Speaker 1: That's the important thing. Okay, So that's the step that
11:19
Speaker 1: the Senate took yesterday on a broader issue, just talking
11:24
Speaker 1: about the deregulation of Wall Street. What has happened that
11:29
Speaker 1: does affect the too big to fail institutions. We've heard
11:32
Speaker 1: a lot about Vulcar and how there's a lot of
11:34
Speaker 1: support to roll that back. Of course, that provision of
11:37
Speaker 1: the Dodd Frank Act of prohibited banks are curved their
11:42
Speaker 1: ability to use their own money to just make bets.
11:45
Speaker 1: So what's the stance on that. So there's a there's
11:49
Speaker 1: a five regulator commission that's that's trying to work on
11:54
Speaker 1: revising vocal rule. Um. It was it was done by
11:58
Speaker 1: five regulators. That's what God Frank require them to do it.
12:00
Speaker 1: So that so once it became law, UM, they had
12:04
Speaker 1: to also write detailed rules on how that law can
12:06
Speaker 1: be implemented and that took three and a half years initially.
12:10
Speaker 1: So this is not going to be so easy either
12:13
Speaker 1: because to get five regulators, including the SEC and the
12:16
Speaker 1: CFTC who are not really prudential regulators there the market
12:20
Speaker 1: regulators and the prudential regulators like the FED together and
12:24
Speaker 1: make them agree on some things that is so technical
12:28
Speaker 1: is not easy. So so my best guests and I've
12:31
Speaker 1: talked to a lot of people you know working on
12:33
Speaker 1: this as well as observing from outside the industry. Uh,
12:37
Speaker 1: it's nothing's gonna come out this year, but something maybe
12:39
Speaker 1: next year. And they can really tweak on the margins
12:42
Speaker 1: because the law that Frank is not being changed, it
12:46
Speaker 1: was not touched on. This volcal rule stays. But there
12:49
Speaker 1: are certain things again they can ease which can help
12:51
Speaker 1: with compliance. In other words, instead of the big bank
12:54
Speaker 1: proving that they did not do every act as as
12:58
Speaker 1: a non prop trading act, they can do all their acts.
13:02
Speaker 1: And if the regulators come in and said this looks
13:05
Speaker 1: like prop trading, explain to me why it wasn't. Then
13:07
Speaker 1: you got to prove. I mean, it is the burden, right.
13:10
Speaker 1: You don't have to go every trade in every day
13:12
Speaker 1: you do hundreds and thousands and put paperwork to prove
13:15
Speaker 1: it's not prop trading. You have to prove when there's
13:20
Speaker 1: some suspicion that it wasn't. So you know, if some
13:22
Speaker 1: compliance costs could come down on that too. Yeah. Man,
13:26
Speaker 1: is there a quid pro quo when it comes to
13:28
Speaker 1: Dodd Frank, which is that if you live under the
13:30
Speaker 1: rules and regulations of Dodd Frank, the government will come
13:33
Speaker 1: and save you if you do something really dumb. That's
13:37
Speaker 1: an interesting one. Well. I mean one of the actually,
13:40
Speaker 1: um elements of DoD Frank was tying the hands of
13:44
Speaker 1: the Federal Reserve for providing bailout money. Um. And it's
13:50
Speaker 1: I mean to call it bailout money is a little stretched.
13:53
Speaker 1: I think it's it's the emergency funding, which of course
13:57
Speaker 1: can become bailout when you really cannot survive the other way. Um.
14:01
Speaker 1: But you know, some critics think that that actually is
14:06
Speaker 1: too restrictive, and the FED in bad times might have
14:09
Speaker 1: to provide temper funding. Doesn't mean the bank cannot stand
14:13
Speaker 1: on its own landro of last resort, which is what
14:15
Speaker 1: central banks are. So you know in those ways that
14:19
Speaker 1: nothing has changed the FED. The FED can provide that
14:22
Speaker 1: kind of emergence funding when it's a group of banks,
14:26
Speaker 1: but they couldn't just do it to bear Stars, which
14:28
Speaker 1: ten years ago they did through JP morgan Um. In
14:31
Speaker 1: the future, it has to be a whole banking sector
14:34
Speaker 1: or a group of banks they can provide funding to.
14:36
Speaker 1: Thank you very much for being with us, y'allmen Onoran
14:38
Speaker 1: as our senior writer for banking and Finance for Bloomberg,
14:41
Speaker 1: and I recommend his book, Zombie Banks. It's a great
14:44
Speaker 1: read and it has not lost its timeliness. President Trump
14:51
Speaker 1: has talked a lot about deregulating corporate America, including Wall
14:56
Speaker 1: Street banks, but taking a look at what senators and
15:00
Speaker 1: congressmen have done, it isn't quite as much as the
15:04
Speaker 1: rhetoric has made it out to be. Joining us right
15:06
Speaker 1: now as Galman owner and senior writer focusing on banking
15:09
Speaker 1: and finance for Bloomberg, news and Yeoman, thanks so much
15:13
Speaker 1: for being here with us. So yesterday the US Senate
15:17
Speaker 1: took a concrete step towards rolling back specific regulations. Let's
15:21
Speaker 1: start there and talk about what those are. So the
15:25
Speaker 1: biggest relief really comes for small banks and some regional
15:29
Speaker 1: banks as well. Um, you know, there was a lot
15:33
Speaker 1: of small banks got swept up in dot frank. And
15:36
Speaker 1: these were I mean so small that that they were
15:38
Speaker 1: they were a couple of billion dollars in assets, and um,
15:42
Speaker 1: you know the problem with this. And there was a
15:43
Speaker 1: lot of bi properties in support for this, um and
15:46
Speaker 1: they've been talking about it for years, basically since dot
15:49
Speaker 1: frank passed. Democrats and Republicans have been saying, we need
15:52
Speaker 1: to give some relief to small banks because those are
15:55
Speaker 1: the banks when they fail. We know how to deal
15:57
Speaker 1: with them. We have fd I C which takes over
16:00
Speaker 1: a bank on Friday and opens Monday morning with some
16:04
Speaker 1: stuff sold in between, and and the system works. It's
16:07
Speaker 1: the too big to fail that we don't know, we
16:10
Speaker 1: didn't know how to deal with during the crisis, and
16:12
Speaker 1: we still are struggling to figure out if we know
16:15
Speaker 1: what to do with, you know, ten years later. But
16:18
Speaker 1: but these these things for the small banks, you know,
16:21
Speaker 1: aren't as as bad as what big banks have been
16:24
Speaker 1: pushing for in their regulation. So what's the likely outcome.
16:27
Speaker 1: We're gonna see changes in the regulation that would what
16:30
Speaker 1: make it more possible for banks of smaller size and
16:33
Speaker 1: scale to combine or be brought out. Um So, I mean,
16:37
Speaker 1: you know that has that's a secular trend that's been
16:39
Speaker 1: going on for decades in the US. You know, just
16:42
Speaker 1: twenty years ago we had you know, more than eight
16:45
Speaker 1: thousand banks. Now we're five thousands and some change. There's
16:49
Speaker 1: always mergers constantly happening. Uh. Small you know, small banks
16:53
Speaker 1: have a hard time surviving anyway. The economies of scaling
16:56
Speaker 1: banking has forced them to keep merging. And it's not
16:59
Speaker 1: just the banking if you look at other sectors of
17:01
Speaker 1: the economy. You know, Amazon pushes small retailers out, even
17:05
Speaker 1: big retailers out, but but a lot of you know,
17:07
Speaker 1: companies get bigger. So there, I don't think the rules
17:10
Speaker 1: will change much. But at least the ones that are
17:13
Speaker 1: managing to survive the months, that are still able to
17:16
Speaker 1: fund their communities will be able to do things easier
17:20
Speaker 1: because they don't have as much compliance cost. That's the
17:23
Speaker 1: important thing. Okay, So that's the step that the Senate
17:26
Speaker 1: took yesterday on a broader issue, just talking about the
17:30
Speaker 1: deregulation of Wall Street. What has happened that does affect
17:36
Speaker 1: the two big to fail institutions. We've heard a lot
17:38
Speaker 1: about VULCAR and how there's a lot of support to
17:40
Speaker 1: roll that back. Of course, that provision of the Dodd
17:44
Speaker 1: Frank Act of prohibited banks are curved their ability to
17:49
Speaker 1: use their own money to just make bets. So what's
17:52
Speaker 1: the stance on that. So there's a there's a five
17:55
Speaker 1: regulator commission that's that's trying to work on revising vocal rule. Um,
18:02
Speaker 1: it was. It was done by five regulators. That's what
18:05
Speaker 1: do Frank required them to do it. So that so
18:07
Speaker 1: once it became law, um, they had to also write
18:10
Speaker 1: detailed rules on how that law can be implemented. And
18:13
Speaker 1: that took three and a half years initially. So this
18:17
Speaker 1: is not going to be so easy either, because to
18:19
Speaker 1: get five regulators, including the SEC and the CFTC who
18:24
Speaker 1: are not really prudential regulators there the market regulators, and
18:27
Speaker 1: then prudential regulators like the FED together and make them
18:31
Speaker 1: agree on some things that is so technical is not easy.
18:34
Speaker 1: So so my best guests, and I've talked to a
18:37
Speaker 1: lot of people you know, working on this as well
18:40
Speaker 1: as observing from outside the industry. Uh, it's nothing's gonna
18:44
Speaker 1: come out this year, but something maybe next year. And
18:46
Speaker 1: they can really tweak on the margins because the law
18:49
Speaker 1: that Frank is not being changed, it was not touched on.
18:53
Speaker 1: This volcan rule stays. But there are certain things again
18:56
Speaker 1: they can ease which can help with compliance. In other words,
18:59
Speaker 1: instead of the Big Bank proving that they did not
19:02
Speaker 1: do every act as as a non prop trading act,
19:07
Speaker 1: they can do all their acts. And if the regulators
19:09
Speaker 1: come in and said this looks like prop trading, explain
19:12
Speaker 1: to me why it wasn't. Then you got to prove.
19:14
Speaker 1: I mean, it is the burden, right. You don't have
19:16
Speaker 1: to go every trade in every day you do hundreds
19:19
Speaker 1: and thousands and put paperwork to prove it's not prop trading.
19:23
Speaker 1: You have to prove when there's some suspicion that it wasn't.
19:27
Speaker 1: So you know, if some compliance costs could come down
19:30
Speaker 1: on that too. Yeah. Is there a quid pro quo
19:33
Speaker 1: when it comes to Dodd Frank, which is that if
19:35
Speaker 1: you live under the rules and regulations of Dodd Frank,
19:38
Speaker 1: the government will come and save you if you do
19:40
Speaker 1: something really dumb. That's an interesting one. Well, I mean
19:44
Speaker 1: one of the actually um elements of dot Frank was
19:49
Speaker 1: tying the hands of the Federal Reserve for providing bailout money. Um.
19:55
Speaker 1: And it's I mean to call it bailout money is
19:57
Speaker 1: a little stretched. I think it's it's the emergency funding,
20:02
Speaker 1: which of course can become bailout when you really cannot
20:05
Speaker 1: survive any other way. Um. But you know, some critics
20:09
Speaker 1: think that that actually is too restrictive, and the FED
20:13
Speaker 1: in bad times might have to provide temperary funding. Doesn't
20:17
Speaker 1: mean the bank cannot stand on its own landard of
20:20
Speaker 1: last resort, which is what central banks are. So you know,
20:24
Speaker 1: in those ways that nothing has changed the FED. The
20:26
Speaker 1: FED can provide that kind of emergence funding when it's
20:30
Speaker 1: a group of banks, but they couldn't just do it
20:33
Speaker 1: to bear Stars, which ten years ago they did through
20:35
Speaker 1: JP Morgan. Um. In the future, it has to be
20:38
Speaker 1: a whole banking sector or a group of banks they
20:41
Speaker 1: can provide funding to Thank you very much for being
20:43
Speaker 1: with us, y'allmen, Onoran as Or, senior writer for Banking
20:46
Speaker 1: and Finance for Bloomberg, and I recommend his book Zombie Banks.
20:50
Speaker 1: It's a great read and it has not lost its
20:52
Speaker 1: timeliness trade wars, trade sanctions, Harriff's allies, enemies, confrontation when
21:03
Speaker 1: it comes to the economy of the United States and
21:06
Speaker 1: the global economy. Here to help us make some sense
21:09
Speaker 1: out of all this is Patrick Chovannack. He is managing
21:12
Speaker 1: director in the chief strategist at Silvercrest Asset Management and
21:16
Speaker 1: you can follow Patrick on Twitter at pr chovannic C
21:21
Speaker 1: H O V A N E C. Alright, the PR
21:25
Speaker 1: sovnic What is the biggest trade blunder that you see
21:31
Speaker 1: happening now that we will not see the consequences for
21:34
Speaker 1: in let's say five to ten years. Oh. I think
21:37
Speaker 1: quitting t p P on day one was the Trans
21:40
Speaker 1: Pacific Partnership. That's correct, because I think it, first of all,
21:43
Speaker 1: had set the tone um for this administration that it
21:46
Speaker 1: saw trade as a losing proposition, that it was seeding leadership.
21:51
Speaker 1: I mean, you know, look, t p P. It was
21:53
Speaker 1: not a perfect agreement. You're not going to get a
21:54
Speaker 1: perfect agreement among you know, eleven or twelve trading partners. UH.
22:00
Speaker 1: It was the centerpiece of uh an effort to frame
22:06
Speaker 1: a vision for what an American lad UH economic order
22:10
Speaker 1: would be in Asia in contrast to the Chinese. What
22:15
Speaker 1: how appealing that could be that maybe the Chinese would
22:18
Speaker 1: want to join that and might have to change their
22:19
Speaker 1: behavior to join that. UM and UM. You know, we
22:24
Speaker 1: just walked away from it, and I think it has
22:26
Speaker 1: it will have security implications. I think it will have
22:29
Speaker 1: economic implications, but they because it wasn't walking away from
22:32
Speaker 1: something that we already have, like NAFTA, you won't see
22:35
Speaker 1: it immediately. That's why I give the answer to your
22:38
Speaker 1: question that way. Patrick, You're a perfect person to have
22:41
Speaker 1: on today UH, given your background, given the fact that
22:46
Speaker 1: you have been a top advisor to many Republican UH lawmakers,
22:51
Speaker 1: including UH John Bayner, the Speaker of the House, and
22:55
Speaker 1: you worked for Carrove, You've been many administrations, So coming
23:00
Speaker 1: this from that perspective and also with your hat as
23:03
Speaker 1: a money manager, how do you view the decline in
23:06
Speaker 1: the dollar? Do you view that as a proxy for
23:12
Speaker 1: the political risk that has risen in the US and
23:17
Speaker 1: sort of the distaste that that has left foreign investors
23:20
Speaker 1: with in the past couple of weeks. Yes, because normally,
23:24
Speaker 1: if you looked over the past year, when President Trump
23:28
Speaker 1: announced the possibility of trade sanctions, usually the dollar would
23:32
Speaker 1: go up, uh and the other currency would go down.
23:36
Speaker 1: And that was because just the economic effect would be uh,
23:39
Speaker 1: there would be less US demand for imports, therefore less
23:42
Speaker 1: demand for foreign currency, more demand for the dollar. The
23:47
Speaker 1: fact that that's reversed, and now in reaction to the
23:50
Speaker 1: steel tariffs, you see the dollar going down, and reaction
23:52
Speaker 1: to some of us talking about China, you see the
23:54
Speaker 1: dollar going down. I think that is a vote of
23:56
Speaker 1: no confidence or at least nervousness about out where US
24:01
Speaker 1: policies heading. Okay, so as you decide how to advise
24:05
Speaker 1: your funds to put allocate cash, I mean, how much
24:10
Speaker 1: can you trade on this political risk? Are you advising
24:12
Speaker 1: them to stay bearish on the dollar because of an
24:16
Speaker 1: ongoing political risk factor? Are you saying, you know what,
24:18
Speaker 1: you can't trade, let's just keep an eye on it.
24:20
Speaker 1: So we um, you know, we manage whole portfolios for
24:25
Speaker 1: for families and uh, so we don't really favor any
24:29
Speaker 1: particular asset class. Uh. And you know, we've been actually
24:33
Speaker 1: pretty constructive about the U. S economy and about US markets,
24:36
Speaker 1: because most of the economic data out there is pretty good. Uh,
24:39
Speaker 1: there's a lot of growth momentum. We did say when
24:43
Speaker 1: the announcement about the tariff the deal terrorists came out,
24:46
Speaker 1: that we would if it was enacted, see this as
24:48
Speaker 1: a negative uh in terms of our outlook for the
24:51
Speaker 1: US economy. And I think, you know, we just have
24:55
Speaker 1: to see where this goes, because uh, you know, focusing
24:59
Speaker 1: on just one thing, where where with a dollar there's
25:02
Speaker 1: this can go in so many directions. And I think
25:05
Speaker 1: it's gonna the implications of it, the ramification, are gonna
25:08
Speaker 1: unfold over the next few weeks and months when we
25:11
Speaker 1: see retaliatory measures, when we see further teriff actions, were
25:15
Speaker 1: likely to see that at least probably aimed at China.
25:18
Speaker 1: We're hearing um and so you know, we're kind of
25:21
Speaker 1: rioting this does roller coaster um, trying to figure out,
25:26
Speaker 1: like everyone else, how much of a negative impact this
25:29
Speaker 1: will have in an economy which by and large is
25:33
Speaker 1: doing pretty well. You've spent a lot of time in China,
25:37
Speaker 1: your teacher at university in Beijing. What can you tell
25:43
Speaker 1: us about the Chinese attitude towards the United States right now.
25:48
Speaker 1: The big change that I saw was in two thousand
25:52
Speaker 1: and eight with the financial crisis. Before the financial crisis,
25:55
Speaker 1: China by and large look to the US as a model, UH.
26:00
Speaker 1: Maybe not a political model, but definitely an economic model,
26:03
Speaker 1: which had a lot of implications about openness and um
26:09
Speaker 1: and the reformers, the people in favor of a more
26:12
Speaker 1: open society and more open economy, had the upper hand.
26:16
Speaker 1: After that, there was a lot of disillusionment with the US. UH.
26:20
Speaker 1: There was a belief that China had a better model,
26:23
Speaker 1: better recipe for success. And I think we've seen that
26:26
Speaker 1: work its way out, not just in the economic policies
26:29
Speaker 1: in China, but also the political policies, the tightening up
26:32
Speaker 1: of you know, one party rule and and uh sort
26:37
Speaker 1: of an autocratic top down approach. I think that bodes wealth.
26:41
Speaker 1: I think it bodes poorly for China. I think it
26:43
Speaker 1: creates a lot of problems they're not they're not really
26:45
Speaker 1: dealing with. But it also poses challenges to us about
26:49
Speaker 1: how we respond to that. You said that you're expecting
26:53
Speaker 1: UH some sort of additional tariffs with respect to China.
26:56
Speaker 1: In particular, what would be construct active tariffs in your mind,
27:01
Speaker 1: and what would not be I mean, this is the
27:03
Speaker 1: big question is is the purpose of of imposing tariffs
27:06
Speaker 1: on China to really to get them to open up
27:09
Speaker 1: their markets or is it just to imitate China and
27:12
Speaker 1: close down our own markets? Um. And a lot of
27:14
Speaker 1: the rhetoric that we've heard from the president themselves suggests
27:17
Speaker 1: it might be the latter. But assuming it's the former, UM,
27:21
Speaker 1: there is a history that shows that, yes, at times
27:24
Speaker 1: you can you know, trade threats against China can sometimes work,
27:28
Speaker 1: but they have to be very carefully calibrated, very carefully
27:32
Speaker 1: targeted UM at sensitive areas, and it's better to go
27:36
Speaker 1: in on a multilateral basis. There are a lot of
27:38
Speaker 1: other countries that are equally concerned about, for instance, over
27:41
Speaker 1: capacity in the steel industry in China. UM, who we
27:45
Speaker 1: can work with, But we've burned a lot of those
27:47
Speaker 1: bridges over the past week or so. UM. You know,
27:50
Speaker 1: the trade fights that we're picking with other countries are
27:53
Speaker 1: going to compromise our ability to work together with those
27:57
Speaker 1: trading partners to target problem behaviors with China. Which industries
28:01
Speaker 1: in China do you think, Oh gosh, I used to
28:04
Speaker 1: so when I was in China. I helped out with
28:07
Speaker 1: the American Chamber of Commerce in China. Every year we
28:09
Speaker 1: would put together a book, I mean a thick book, uh,
28:13
Speaker 1: sector by sector of unfair practices that we wanted to change.
28:18
Speaker 1: And it really ranges from the service industry, where you
28:21
Speaker 1: know a lot of US companies are excluded, uh, to
28:26
Speaker 1: uh you know too things like steal over capacity and
28:29
Speaker 1: the inability to resolve that and dumping. So you know
28:32
Speaker 1: there's a and particularly intellectual property and the theft of
28:37
Speaker 1: intellectual property is a big issue, right, but you need
28:40
Speaker 1: that multilateral kind of approach to to do it effectively.
28:43
Speaker 1: Patrick Shavannick, thank you so much for being with us.
28:45
Speaker 1: Patrick Shavannick, Managing director and chief strategist at Silver Crust
28:48
Speaker 1: Asset Management, joining us here in our Bloomberg eleven three
28:52
Speaker 1: oh studios coming up Bloomberg Politics, Policy, Power and Law.
28:56
Speaker 1: They will be talking about the new sanctions as where
28:59
Speaker 1: as well as Larry Cudlow as the new head of
29:02
Speaker 1: the n EC from New York. This is Bloomberg time.
29:10
Speaker 1: We want to visit with Steve Matthews, our economics reporter
29:12
Speaker 1: from Bloomberg News, who can be followed on Twitter at
29:15
Speaker 1: Steve Matthews twelve, and he's here to discuss Larry Cudler
29:21
Speaker 1: and replacing Gary Cohn as Director of the White House
29:24
Speaker 1: National Economic Council. Steve, what kind of experience is Larry
29:31
Speaker 1: Cuddler going to be bringing to this office that are
29:34
Speaker 1: going to be useful to to the president. So, Larry
29:38
Speaker 1: is best known for the last decade he's been on
29:41
Speaker 1: CNBC and you've been hearing him, you know, basically every
29:46
Speaker 1: night on on with with his views on television. But
29:52
Speaker 1: before that, he was with Bear Stearns as the chief economist,
29:57
Speaker 1: and he's been somebody who's been familiar in in and
30:00
Speaker 1: around Wall Street for you know, a couple of decades.
30:03
Speaker 1: And he brings essentially a traditional conservative Republican view. Uh
30:11
Speaker 1: that is very Wall Street friendly. He believes in free markets,
30:15
Speaker 1: free enterprise, free trade. That may be something that could
30:20
Speaker 1: cause some conflicts, although he has renounced those views to
30:23
Speaker 1: some degree. Yeah, quickly, that's true. He has renounced him Well,
30:28
Speaker 1: I wouldn't say renounced, but he has. He has bought
30:31
Speaker 1: into the recent tariffs that Trump has has announced on
30:37
Speaker 1: I'm stealing aluminum, uh said some comments about China. Uh. So,
30:42
Speaker 1: I mean he's definitely trying to be a team player.
30:45
Speaker 1: But if you read his views, it's pretty clear, Uh,
30:48
Speaker 1: he's on the free trade side of the of the Ledger.
30:51
Speaker 1: All right, let's talk about some of his economic calls
30:54
Speaker 1: and credentials. I want to read you a quote that
30:58
Speaker 1: he uh wrote on December seven, two and seven, in
31:02
Speaker 1: National Review. Despite all the doom and gloom from the
31:06
Speaker 1: economic pessimists, the resilient US economy continues moving ahead. Of course,
31:11
Speaker 1: that was the eve of the worse financial crisis since
31:14
Speaker 1: the Great Depression. Everyone can be forgiven for being wrong.
31:18
Speaker 1: But has his record been more right than wrong? You know,
31:22
Speaker 1: if you look at the last decade, he has made
31:24
Speaker 1: lots and lots of bad calls. He was wrong on
31:28
Speaker 1: the recession. That that the comment you are citing are
31:31
Speaker 1: from December two thousand and seven. That was the month
31:35
Speaker 1: that the NBR National Bureau of Economic Research dated the
31:40
Speaker 1: recession starting. He said a bit before then, there's no
31:45
Speaker 1: housing bubble, and specifically cited Naples, Florida, in Las Vegas. No,
31:50
Speaker 1: there's no housing bubble in Las Vegas or Naples. It's
31:54
Speaker 1: like that was not exactly right. When Yellen was promoted
31:59
Speaker 1: by person Obama, Janet Yellen. He said, this is gonna
32:04
Speaker 1: usher in higher inflation, and you know, you just better
32:08
Speaker 1: watch out. We're gonna see higher inflation. No, we really
32:11
Speaker 1: haven't seen higher inflation. Uh So, the one prediction that
32:16
Speaker 1: he's made recently that has turned out to be right
32:19
Speaker 1: and has actually been actionable was he said, if Trump
32:23
Speaker 1: is elected, by stocks, stocks are gonna go up. Lots
32:26
Speaker 1: of people are negative on stocks because they're worried about Trump.
32:30
Speaker 1: By them turned out to be right. Steve, Aside from
32:35
Speaker 1: his prognostications and whether he got this right that right,
32:39
Speaker 1: I mean, I guess a lot of you know, a
32:41
Speaker 1: lot of people can get things wrong. I get things
32:43
Speaker 1: wrong all the time. But I want to focus on
32:46
Speaker 1: his role in the White House because Gary Khone is
32:50
Speaker 1: often mentioned as one of the lead architects of the
32:55
Speaker 1: tax cuts that were passed in Washington. Is Larry Cudler
32:59
Speaker 1: a good person to have if you want to do
33:01
Speaker 1: let's say, tax cuts round two, or you want to
33:05
Speaker 1: sort of get a group of people like legislators to
33:09
Speaker 1: support other economic programs, uh like an infrastructure plan. Is
33:14
Speaker 1: he a good cheerleader to help make that happen? I
33:16
Speaker 1: think Cudlow is a very articulate spokesman for the administration.
33:22
Speaker 1: And you know, one thing that he brings uh that
33:26
Speaker 1: maybe more than Gary Cohne, is the ability to kind
33:30
Speaker 1: of you know, browbeat Congress to to make his case
33:35
Speaker 1: to the people. And Yes, on taxes, he is very
33:39
Speaker 1: much in favor of low taxes. Uh, he's already talking
33:43
Speaker 1: about perhaps a round two. You could have capital gains
33:47
Speaker 1: taxes or something that was not in So maybe this
33:49
Speaker 1: is so, maybe it's actually a very good fit. And
33:52
Speaker 1: maybe having Larry Cudlow, who is no stranger obviously to
33:56
Speaker 1: to the media and being able to communicate to idea
34:00
Speaker 1: of constituencies is exactly the kind of person the president
34:04
Speaker 1: needs right now. There's a good case to be made
34:06
Speaker 1: that he is exactly what is needed. He'll be a
34:09
Speaker 1: great communicator. Uh. There are the points of friction that
34:13
Speaker 1: you could have, would be over trade, particularly if you know,
34:16
Speaker 1: if NAFTA negotiations, uh, you know don't work out so
34:20
Speaker 1: well that he could be on the free trade side.
34:23
Speaker 1: The other thing that you know a number of of
34:28
Speaker 1: commentators point out is that Larry likes the camera. He
34:32
Speaker 1: has outspoken. Uh. That can cause some friction if you know,
34:37
Speaker 1: if he if he gets too much into the spotlight,
34:41
Speaker 1: and some people have already predicted he won't be around
34:43
Speaker 1: past Thanksgiving because you know that can cause friction. Well, yeah,
34:47
Speaker 1: especially when you have proclamations like the one that he
34:49
Speaker 1: came out and said that he would buy the king
34:51
Speaker 1: dollar and sell gold. You know if that were I mean,
34:55
Speaker 1: guess the dollar is up minorly today, but if that
34:58
Speaker 1: were to start some massive dollar rally that then, yeah,
35:01
Speaker 1: that will cause friction because supposedly the Treasury Department is
35:04
Speaker 1: only supposed to speak about the dollar. So here we
35:07
Speaker 1: go in minution. The Treasury Secretary has, as you know,
35:12
Speaker 1: made nuance comments but basically suggested he would be fine
35:16
Speaker 1: with a week or dollar. Right. This will be an
35:17
Speaker 1: interesting White House conversation, I am sure, and you will
35:21
Speaker 1: be covering it for a Steve Matthews, economics reporter for
35:24
Speaker 1: Bloomberg News, Thank you so much. Thanks for listening to
35:29
Speaker 1: the Bloomberg P and L podcast. You can subscribe and
35:32
Speaker 1: listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast
35:36
Speaker 1: platform you prefer. I'm pim Fox. I'm on Twitter at
35:39
Speaker 1: pim Fox. I'm on Twitter at Lisa Abramowits one before
35:43
Speaker 1: the podcast. You can always catch us worldwide on Bloomberg
35:46
Speaker 1: Radio