Latest / Bloomberg Intelligence / Plea Deal Suggests Flynn Gave FBI A Lot to Work With: Grasso

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Plea Deal Suggests Flynn Gave FBI A Lot to Work With: Grasso · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm Pim Fox.
• 0:08
  Speaker 1: Along with my co host Lisa Bramowitz. Each day we
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  Speaker 1: or the trading floor. Find the Bloomberg p m L
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  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Michael
• 0:27
  Speaker 1: Flynn has left the courthouse after entering a guilty plea
• 0:32
  Speaker 1: to making false statements to FBI agents. And we did
• 0:36
  Speaker 1: get that statement from Flynn's attorney. We also are getting
• 0:40
  Speaker 1: a statement from President Trump's lawyer, Ty Cobb. I will
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  Speaker 1: read the whole thing to you. It is quote today,
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  Speaker 1: Michael Flynn, a former National security adviser at the White
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  Speaker 1: House for twenty five days during the Trump administration and
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  Speaker 1: a former Obama administration official, entered a guilty plea to
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  Speaker 1: a single count of making a false statement to the FBI.
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  Speaker 1: The false statements involved mirror the false statements to the
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  Speaker 1: White House officials, which resulted in his resignation in February
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  Speaker 1: of this year. Nothing about the guilty plea or the
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  Speaker 1: charge implicates anyone other than Mr Flynn. The conclusion of
• 1:13
  Speaker 1: this phase of the Special Counsel's work demonstrates again that
• 1:15
  Speaker 1: the Special Counsel is moving with all deliberate speed and
• 1:18
  Speaker 1: clears the way for a prompt and reasonable conclusion. Here
• 1:23
  Speaker 1: with us to discuss the process that Mueller is going
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  Speaker 1: through and to sort of speak about what went into
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  Speaker 1: or likely went into this plea agreement. As June Grosso,
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  Speaker 1: host of Bloomberg Law and Bloomberg Beast, thank you so
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  Speaker 1: much for joining us, Jun, So let's start with with
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  Speaker 1: just that. I mean, what what do you think reasonably
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  Speaker 1: went into this plea that we saw today from Michael Flinn. Well,
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  Speaker 1: I think what you have to look at is the
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  Speaker 1: fact that he's pleading guilty to one count of lying
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  Speaker 1: to federal investigators. Even in the information itself it lists
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  Speaker 1: two separate instances of lying. So this is a very
• 2:00
  Speaker 1: good deal for him. It's it's a one felony account
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  Speaker 1: that's as much as five years. What's happening is he
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  Speaker 1: has admitted in a statement today he is cooperating with
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  Speaker 1: Muller and he must have some very important information to
• 2:14
  Speaker 1: give him. And he's also it's said that he was
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  Speaker 1: instructed by people in the transition team to he called
• 2:22
  Speaker 1: them before he made these approaches to the Russians. So
• 2:26
  Speaker 1: you have to look at what's going on, and remember,
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  Speaker 1: if you put it in context, two days after this meeting,
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  Speaker 1: you had former Deputy Attorney General Sally Yates warning the
• 2:37
  Speaker 1: Trump White House that Flynn was a security risk, and
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  Speaker 1: you had after that, you had President Trump allegedly asking
• 2:46
  Speaker 1: Jim Comey for that oath of loyalty. So if you
• 2:49
  Speaker 1: put all this in context, you can see that he
• 2:51
  Speaker 1: is building his case. Well, I'm just wondering, though, what
• 2:55
  Speaker 1: this sort of plea deal does to Michael Flynn's credibility,
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  Speaker 1: because you know how much could people say, well, he's
• 3:02
  Speaker 1: gonna say all sorts of stuff because he's trying to
• 3:05
  Speaker 1: get his son off, and he's trying to get himself
• 3:07
  Speaker 1: a sweet deal, and he has serious charges pending. So yeah,
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  Speaker 1: he'll throw President Trump under the bus. That's what people
• 3:14
  Speaker 1: say that all the time about co operators. And you
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  Speaker 1: know what, juris believe co operators almost every single time.
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  Speaker 1: It's not just his word. He's Muller isn't is really
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  Speaker 1: building such a strong case. He's going to be backed
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  Speaker 1: up by so many other people, by evidence, by papers
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  Speaker 1: and this isn't the end um. Mueller is not stopping here.
• 3:35
  Speaker 1: So and people, you know, there are there are cases
• 3:37
  Speaker 1: where there are murderers. I can think of, you know,
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  Speaker 1: the mob cases where people get on the stand and
• 3:43
  Speaker 1: they admit to killing people. You think of some of
• 3:46
  Speaker 1: the famous mob cases, and everyone says, well, who's going
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  Speaker 1: to believe a co operator? He's he's making a deal.
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  Speaker 1: But juries believe co operators every day of the week
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  Speaker 1: in courthouses across the country. June, we were speaking early
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  Speaker 1: there with Marty Schenker, Bloomberg chief Content Officer, and one
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  Speaker 1: of the things he brought up is that, uh, Robert
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  Speaker 1: Muller and the investigators and the FBI, they have perhaps
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  Speaker 1: wire taps, they have a variety of interviews with people
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  Speaker 1: that we don't know about. So is that apostle is
• 4:20
  Speaker 1: the way the case is built? Is that in the
• 4:23
  Speaker 1: example of Michael Flynn, you present him with evidence that
• 4:27
  Speaker 1: he may not know that you have. The way the
• 4:32
  Speaker 1: FBI often operates, and in this instance, it looks like
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  Speaker 1: that's what happened because he lied to them. The FBI,
• 4:38
  Speaker 1: when they interview these people, has information and they asked
• 4:43
  Speaker 1: them questions about it. But they withhold some information, they don't.
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  Speaker 1: They don't give it all at once, and then they
• 4:50
  Speaker 1: bring them back and there's a process of going back
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  Speaker 1: and forth. It can go in different ways. In this case,
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  Speaker 1: it may have been with his lawyer where they started
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  Speaker 1: to negotiate and say, look, we have this and here's
• 5:02
  Speaker 1: you know, what can you give us. It seems to
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  Speaker 1: me as if Flynn is giving them a lot, because
• 5:08
  Speaker 1: remember it's not just these charges there. They also have
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  Speaker 1: uh investigations of his his dealings with Turkey, his failure
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  Speaker 1: to make make statements about being a foreign advisor. They
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  Speaker 1: have all that, and none of that is here, and
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  Speaker 1: neither is his son. Remember we've talked before about how
• 5:27
  Speaker 1: his son was under investigation and how that might be
• 5:30
  Speaker 1: the real button that would push him to cooperate. So
• 5:33
  Speaker 1: here's something that I'm trying to understand. How long was
• 5:37
  Speaker 1: Michael Flynn cooperating with the Muller investigation. I know we
• 5:41
  Speaker 1: don't know exactly, But the reason why I ask is
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  Speaker 1: because if he's been cooperating with them for months, that
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  Speaker 1: means that Mueller has been building his case with Flynn's help,
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  Speaker 1: and all this obviously a speculation for a longer period
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  Speaker 1: of time. Do you think that this is more recent
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  Speaker 1: than that, I don't know it. It's months. I think
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  Speaker 1: that they have been going back and forth and negotiating
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  Speaker 1: perhaps for months. But you see so on this in
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  Speaker 1: this indictment, they alleged that he lied on January, so
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  Speaker 1: you know that at that point he's not cooperating with them.
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  Speaker 1: Then they have to go through all of what you know,
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  Speaker 1: federal prosecutors and the FBI does in bringing information forward,
• 6:20
  Speaker 1: in trying to show them what what they do is,
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  Speaker 1: they show you a lot of what they have against you.
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  Speaker 1: They lay out the case against you, and then you
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  Speaker 1: either decide, Okay, I'm gonna go to trial on this
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  Speaker 1: or I'm gonna work with them. And in this case,
• 6:35
  Speaker 1: he said, I'm going to work with them. And then
• 6:38
  Speaker 1: what will happen is as this goes along, he'll they'll
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  Speaker 1: see how much his cooperation is worth, how much does
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  Speaker 1: he give them, and then he'll come down to the
• 6:46
  Speaker 1: point where the the sentencing is done and depending on
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  Speaker 1: how he cooperates. So based on what he's pleading pleading to,
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  Speaker 1: do you think that he gave them a lot? Yes,
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  Speaker 1: a lot, a lot, because this is as I said,
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  Speaker 1: one count of line of federal which is five years maximum.
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  Speaker 1: But it's one count and there are two. There are
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  Speaker 1: two counts right here in the in the information, so
• 7:13
  Speaker 1: and and a lot more. And so I think that
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  Speaker 1: he is going to be a lynch bin. I think
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  Speaker 1: we're going to see people fall. Remember some of the
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  Speaker 1: meetings that he was in on, other people were in
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  Speaker 1: on those meetings with him, so we wasn't alone. So
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  Speaker 1: this is just the first And I think it's it's
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  Speaker 1: sort of telling that Mueller did it on a Friday,
• 7:31
  Speaker 1: because it it takes the news cycle through the weekend. Well,
• 7:35
  Speaker 1: the other thing that's telling is he's doing it on
• 7:37
  Speaker 1: the friday that the GOP is holding their tax But
• 7:39
  Speaker 1: I don't know that's deliberate. But well, we'll be talking
• 7:42
  Speaker 1: about that throughout the day. And what this does him
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  Speaker 1: to those GOP efforts that you have to wonder whether
• 7:48
  Speaker 1: they can pass this bill right right well and and
• 7:51
  Speaker 1: just quickly. June Grosso Prosecutor Brandon Van Grack said in
• 7:55
  Speaker 1: court that quote, a very senior member of the transition
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  Speaker 1: team directed Michael Flynn to contact the Russian ambassador at
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  Speaker 1: one point that will come back and hurt somebody, Yes,
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  Speaker 1: who and the question is who is that transition member.
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  Speaker 1: Did that transition member have a direct line to President Trump?
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  Speaker 1: Or you know, you have to see that we only
• 8:18
  Speaker 1: see one little part. He is connecting all kinds of things,
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  Speaker 1: and they probably have a huge board up or several
• 8:26
  Speaker 1: huge boards around their offices with the connections. Thank you
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  Speaker 1: very much, June A. Grosshow, host of Bloomberg Law and
• 8:33
  Speaker 1: Bloomberg Best, joining us now as Marty Shanker, chief content
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  Speaker 1: officer for Bloomberg. Marty, what do we know at this point?
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  Speaker 1: And just how serious is this? It's pretty serious? Uh,
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  Speaker 1: And as the markets are reflecting for the first time
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  Speaker 1: in quite a while, it poses a serious threat to
• 8:54
  Speaker 1: the President of the United States, Donald Trump. And that
• 8:58
  Speaker 1: Michael Flynn is reporting in his plea agreement that he's
• 9:02
  Speaker 1: going to cooperate with the Mueller investigation. Well, it's almost
• 9:06
  Speaker 1: as if you can watch the VIX and figure out
• 9:08
  Speaker 1: how important is the news. The VIX is now up
• 9:11
  Speaker 1: nearly thirty percent. Marty after, was anybody not expecting a
• 9:18
  Speaker 1: plea deal? No, I mean I think that it was
• 9:21
  Speaker 1: a question of when, rather than whether we knew that
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  Speaker 1: um Bob Mueller had Uh interviewed Michael Flynn, and that
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  Speaker 1: he had made some statements which were at odds with
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  Speaker 1: what he told the FBI. UM, the question was the timing, uh,
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  Speaker 1: And the idea would be that he would UH regent
• 9:44
  Speaker 1: agreement that would keep his charges to a minimum. And
• 9:47
  Speaker 1: in fact, there was some thought that his son himself
• 9:52
  Speaker 1: would be indicted, and that at least for now has
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  Speaker 1: not happened. So was the questions was that part of
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  Speaker 1: the agreement. So the fact that Bob Muller has come
• 10:00
  Speaker 1: forward today with and what the guilty ply means he's
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  Speaker 1: ready to move forward with his investigation moving forward. And
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  Speaker 1: this this is important also, Marty, the time frame going
• 10:11
  Speaker 1: forward from Mueller because a lot of people were wondering,
• 10:14
  Speaker 1: you know, is he moving slowly as he moving quickly?
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  Speaker 1: It seems like there's been a lot behind the scenes
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  Speaker 1: to get to this point with Michael Flynn. Uh. How
• 10:21
  Speaker 1: quickly could things accelerate at this point? I mean, could
• 10:24
  Speaker 1: we see another charge come out within the next few weeks? Well,
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  Speaker 1: you know, first of all, there's no reason why not
• 10:31
  Speaker 1: why he couldn't do a superseding indictment of Michael Flynn
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  Speaker 1: should he feel he is not cooperating fully. With his investigation,
• 10:39
  Speaker 1: superseding superseding in typeming, can you just explain what that is? Well,
• 10:43
  Speaker 1: I mean, just because he's pled guilty to one charge
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  Speaker 1: does not mean he can come forward with more charges.
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  Speaker 1: Should hate Mike Flynn or anyone else failed to provide
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  Speaker 1: uh full and transparent accounting of what happened during that transition.
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  Speaker 1: So um, this sort of guarantees that Michael Flynn will
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  Speaker 1: fully cooperate lest he faced further charges if for some
• 11:08
  Speaker 1: reason he stops. But the the documents that that were
• 11:12
  Speaker 1: filed in court that explained the details of the Pola
• 11:16
  Speaker 1: agreement make it quite clear that Mike Flynn is ready
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  Speaker 1: to testify against senior administration officials that they had established
• 11:24
  Speaker 1: contact with the Russians before Donald Trump officially became president,
• 11:30
  Speaker 1: which could constitute a violation of the Logan Act. Well, apparently,
• 11:34
  Speaker 1: Uh and Martin, you tell us this is wrong. Speaking
• 11:37
  Speaker 1: in court as part of the plea agreement, Flynn said
• 11:40
  Speaker 1: that Trump's team asked him to make contact with Russians
• 11:43
  Speaker 1: and that he told incoming administration what he was doing.
• 11:47
  Speaker 1: And just to mention in context, there's a statement that's
• 11:51
  Speaker 1: been released by Lieutenant Cheneral Uh Michael Flynn and just
• 11:56
  Speaker 1: part of it. He talks about the painful UH many
• 11:59
  Speaker 1: months false accusations of trees, treason, and other outrageous acts.
• 12:03
  Speaker 1: He says, such false accusations are contrary to everything I
• 12:07
  Speaker 1: have ever done and stood for. But I recognize that
• 12:10
  Speaker 1: the actions I acknowledged in court today were wrong, and
• 12:13
  Speaker 1: through my faith in God, I'm working to set things right.
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  Speaker 1: My guilty plea and agreement to cooperate with the Special
• 12:18
  Speaker 1: Counsel's Office reflected decision I made in the best interests
• 12:21
  Speaker 1: of my family and our country, except full responsibility for
• 12:25
  Speaker 1: my actions. Is this going to spur? Do you believe
• 12:31
  Speaker 1: any other individuals to come forward who are perhaps not
• 12:36
  Speaker 1: necessarily the focus of Robert Mueller's investigation, because if one
• 12:40
  Speaker 1: person knows something, you've got to think that there are
• 12:44
  Speaker 1: other people in the same room. Well, but you know,
• 12:47
  Speaker 1: we have we and others have reported to over the
• 12:49
  Speaker 1: last few months that various members of the Trump transition team,
• 12:53
  Speaker 1: some who are still in the White House, some who
• 12:55
  Speaker 1: have left the White House, Straw and Spicy or for instance,
• 12:57
  Speaker 1: have been interviewed by Mueller. So it was probably uh
• 13:04
  Speaker 1: people's descriptions of what it's like to be interviewed by
• 13:07
  Speaker 1: the FBI. Are quite chilling. It's a moment where you
• 13:11
  Speaker 1: have you you have to make sure that you're telling
• 13:15
  Speaker 1: the absolute truth because you don't do not know what
• 13:19
  Speaker 1: Bob Mueller knows. Um, don't forget the FBI is conducting
• 13:23
  Speaker 1: this investigation. They have there's reports of you know, wire
• 13:27
  Speaker 1: tap surveillance, they have audio of conversations. So, um, there
• 13:33
  Speaker 1: has already been many, many people who have already been
• 13:36
  Speaker 1: interviewed by Mueller. Could there be more? It's possible, And
• 13:40
  Speaker 1: we have no indication whatsoever that is actually interviewed the
• 13:44
  Speaker 1: President of the United States. In fact, we've been told
• 13:46
  Speaker 1: just the opposite that that that has not taken place. Marty, Uh,
• 13:51
  Speaker 1: just real quick here, I want to get your take
• 13:54
  Speaker 1: on how important this whole development is for the g
• 13:57
  Speaker 1: ob tax plan. And the reason why I say that
• 13:59
  Speaker 1: is because markets are continuing to sell off. The S
• 14:03
  Speaker 1: and P five hund just bounced back a little bit,
• 14:04
  Speaker 1: but the dollar has continue to fall U ten your
• 14:06
  Speaker 1: yields still down as well as thirty year yield. So
• 14:09
  Speaker 1: I'm just wondering, I mean, does this throw a kink
• 14:11
  Speaker 1: into the Republican agenda or is this a side show. No,
• 14:15
  Speaker 1: it could slow things down. No, And you know, we
• 14:18
  Speaker 1: can speculate wildly about what happens next, but I think
• 14:22
  Speaker 1: the markets are now focused on what does President Trump do?
• 14:26
  Speaker 1: Does he remain silent? There's been speculation over months of
• 14:31
  Speaker 1: what he would do with Robert Mueller once he gets
• 14:34
  Speaker 1: closer to the White House. He doesn't. You know, there's
• 14:37
  Speaker 1: a controversy of whether he could fire Bob Mueller. We
• 14:40
  Speaker 1: think he probably can't, but he can set in motion
• 14:43
  Speaker 1: a process in which he could remove him. And that
• 14:47
  Speaker 1: is I think what the markets are concerned about. That
• 14:50
  Speaker 1: would create a constitutional crisis and everything gets put on hold,
• 14:54
  Speaker 1: including the tax bill. And just also to add that
• 14:59
  Speaker 1: Michael Flynn. The charges that are being talked about has
• 15:03
  Speaker 1: to do with conversations between Flynn and the Russian ambassador.
• 15:06
  Speaker 1: Thanks very much, Marty Schenker, Bloomberg Chief Content Officer. Tax
• 15:15
  Speaker 1: overhaul in Washington, How does it affect corporations? So let's
• 15:19
  Speaker 1: find out more from Joel Stern. He is the chairman,
• 15:21
  Speaker 1: chief executive officer of Stern Value Management and he joins
• 15:25
  Speaker 1: us here in our eleven three oh studios. Joel, thank
• 15:27
  Speaker 1: you for coming in. You know One of the things
• 15:30
  Speaker 1: I wanted to just begin by putting out to you
• 15:33
  Speaker 1: is your thoughts about the tax deductibility of the interest
• 15:38
  Speaker 1: expense when corporations issue debt, and I'm wondering if you
• 15:42
  Speaker 1: could speak to that. But also you've spoken about the
• 15:46
  Speaker 1: money that companies think about spending when they look at
• 15:50
  Speaker 1: research and development, and how we seem to have rules
• 15:54
  Speaker 1: and regulations that really contradict what we really are trying
• 15:58
  Speaker 1: to achieve. Is that it is I think maybe we
• 16:01
  Speaker 1: should set up with the second instead of the first.
• 16:03
  Speaker 1: Firms invest money in R and D intel billions right
• 16:07
  Speaker 1: every year, CoA Cola building brand value, Goldman Sachs, training
• 16:12
  Speaker 1: and developing their people. These are called intangible assets. And
• 16:16
  Speaker 1: so what the accountants do with this is they write
• 16:18
  Speaker 1: it off immediately. Peter Drucker, the great management guru and
• 16:21
  Speaker 1: professor at Claremont College, he had a very interesting comment
• 16:25
  Speaker 1: in one of his books. It's called out of sight,
• 16:27
  Speaker 1: out of mind. What gets measured gets managed. What that
• 16:30
  Speaker 1: means is that if people are spending money as they
• 16:33
  Speaker 1: should on these things, how is the board of directors
• 16:36
  Speaker 1: going to hold them accountable in future years for earning
• 16:40
  Speaker 1: a proper return? On that investment if the investment doesn't
• 16:43
  Speaker 1: show up on the balance sheet. Okay, that's a very
• 16:46
  Speaker 1: big thing with me, and I work with my clients
• 16:48
  Speaker 1: to try to show them what they need to do.
• 16:51
  Speaker 1: That is, they need to have their own balance sheet
• 16:53
  Speaker 1: and their own income statement where they then can hold
• 16:55
  Speaker 1: their people accountable properly. That's that's the answer to that.
• 16:58
  Speaker 1: That that part of the issue, and the research the issue.
• 17:01
  Speaker 1: I bring this up because research and development costs do
• 17:04
  Speaker 1: not when you spend money as a corporation on research
• 17:06
  Speaker 1: and development, that does not look good on the balance sheet. Well,
• 17:11
  Speaker 1: why the accountants claim they're being conservative by assuming that
• 17:19
  Speaker 1: those investments don't work out? Is that sensible? The most
• 17:23
  Speaker 1: important thing to do is to follow the trail of
• 17:26
  Speaker 1: cash and say the people, we're going to give you
• 17:28
  Speaker 1: this cash in the firm to to to manage people,
• 17:31
  Speaker 1: to build brand value and the like, but we have
• 17:34
  Speaker 1: to hold you accountable for delivering on the investment. Otherwise,
• 17:37
  Speaker 1: everybody can ask for money. Wouldn't you ask for money
• 17:39
  Speaker 1: if nobody said to you, you'd have to tell us
• 17:41
  Speaker 1: what you did with it and how well you did it.
• 17:43
  Speaker 1: Seems to me it's just wrong. That's all I want
• 17:46
  Speaker 1: to I want to move to the first part of
• 17:47
  Speaker 1: Pam's question, because that's a very current with respect to
• 17:52
  Speaker 1: the tax plan that does plan to limit some of
• 17:55
  Speaker 1: the tax deductibility of interest payments that companies pay, and
• 17:59
  Speaker 1: I'm wondering at that level, we are seeing some language
• 18:04
  Speaker 1: that would even have a bigger effect than previously expected
• 18:07
  Speaker 1: on highly leveraged companies with respect to the lack of deductibility. Here,
• 18:11
  Speaker 1: I'm just wondering, what do you expect the consequences to
• 18:14
  Speaker 1: be should the bill get passed. I mean, does this
• 18:16
  Speaker 1: mean that highly leveraged companies are going to have a
• 18:19
  Speaker 1: harder time refinancing? Does it mean that they're gonna not
• 18:23
  Speaker 1: take on as much leverage? Let me step back from this.
• 18:27
  Speaker 1: There's a huge problem here. If the emphast is tax deductible.
• 18:32
  Speaker 1: Professors of finance everywhere teach that for every one dollar
• 18:36
  Speaker 1: that affirm borrows, the value of their shares goes up
• 18:40
  Speaker 1: by whatever the tax rate is times that dollar. So
• 18:43
  Speaker 1: let's assume the tax rate was at the corporate level.
• 18:46
  Speaker 1: It is close to that if you include city and state,
• 18:48
  Speaker 1: by the way, so let's assume it. That means for
• 18:51
  Speaker 1: every one dollar of that on the balance shade, the
• 18:54
  Speaker 1: market value of the shares is higher by So this
• 18:58
  Speaker 1: is a very appealing thing. What stop, what what wide
• 19:01
  Speaker 1: companies have lots more leverage? The answer, what about the
• 19:04
  Speaker 1: associated bankruptcy risk on the other side of the equation.
• 19:08
  Speaker 1: We call it the cost of financial distress. So we're
• 19:11
  Speaker 1: balancing the cost of financial distress against the benefits of
• 19:14
  Speaker 1: the tax benefit. Just extrapolating out here, this is This
• 19:17
  Speaker 1: is really important because if companies borrowing boost stock prices,
• 19:23
  Speaker 1: and companies are disincentivized from borrowing due to the tax plan,
• 19:28
  Speaker 1: since they won't be uh, it won't be treated as beneficially.
• 19:32
  Speaker 1: If they reduced leverage, that will give less of a boom. Yes,
• 19:36
  Speaker 1: it's even worse than that at least. So the most
• 19:39
  Speaker 1: interesting thing about this is that if the Trump tax
• 19:42
  Speaker 1: bill is approved as we expected with the numbers that
• 19:46
  Speaker 1: I've been telling, it means that the tax benefit of
• 19:51
  Speaker 1: debt has now been reduced by say, close to half,
• 19:55
  Speaker 1: and maybe the risk of bankruptcy on the other side
• 19:59
  Speaker 1: overwhelm the tax spent of it. Say you say to me,
• 20:02
  Speaker 1: give me an example. How about all of the highly
• 20:05
  Speaker 1: cyclical industries that have very high fixed uprating expenses. So
• 20:09
  Speaker 1: there's their profits in cash are very volatile over time.
• 20:13
  Speaker 1: I got news those companies better look at this very carefully.
• 20:17
  Speaker 1: I'm talking about cement, I'm talking about steel, aluminum, glass,
• 20:23
  Speaker 1: industrial machinery, machine tools, textiles. These are companies that are
• 20:27
  Speaker 1: very volatile during the business cycle. And my prediction is
• 20:31
  Speaker 1: that if they don't examine this very carefully, a lot
• 20:34
  Speaker 1: more of those companies are likely not to make it
• 20:37
  Speaker 1: through the next recession. So when you look at the
• 20:41
  Speaker 1: details as much as you can of the tax overhaul bill, uh,
• 20:45
  Speaker 1: what would you like to see in it? And what
• 20:48
  Speaker 1: would you like to see out of it? Okay, let
• 20:50
  Speaker 1: me say it again. That's a great question. But my
• 20:52
  Speaker 1: brain does not function the way us does. Here's my suggestion.
• 20:58
  Speaker 1: I think companies have got to take a look at
• 21:00
  Speaker 1: this risk versus reward, which is now going to be
• 21:02
  Speaker 1: much less Okay, And what they've got to say to
• 21:04
  Speaker 1: themselves is what are my alternatives? Now, there is an
• 21:07
  Speaker 1: alternative and it's used of all places in South Africa.
• 21:11
  Speaker 1: Can you believe that I just came back from Cape
• 21:13
  Speaker 1: Town for some good c Gucci with my my grandkids? Okay,
• 21:16
  Speaker 1: three and four years old. They're going to be happy
• 21:18
  Speaker 1: to hear that. But listen to this. They used preferred
• 21:21
  Speaker 1: stock there, and they use it actively. What is preferred stock?
• 21:25
  Speaker 1: It's non tax deductible debt. It's a non tax deductible debt.
• 21:29
  Speaker 1: And the same time, uh, there's no bankruptcy risk. And
• 21:33
  Speaker 1: so the companies that I just just described, the six
• 21:35
  Speaker 1: or seven industries that are clearly volatile, they are the
• 21:38
  Speaker 1: ones who should say to themselves, it's time for us
• 21:40
  Speaker 1: to take a real hard look at this because we
• 21:43
  Speaker 1: don't want bailouts. We don't want more of what we
• 21:45
  Speaker 1: had back in oh seven, aw eight, o nine. We
• 21:47
  Speaker 1: don't want that. But we want people to do things sensibly.
• 21:50
  Speaker 1: Do I think the tax coat is a good thing?
• 21:52
  Speaker 1: I sure do. Hey, listen, right now, we're growing at
• 21:54
  Speaker 1: three plus. The tax bill goes through, it'll be over four.
• 21:59
  Speaker 1: That's why the stock mark it is so strong, and
• 22:01
  Speaker 1: r OTC return on capital is going right through the roof.
• 22:04
  Speaker 1: We're going to the economy is going to be so
• 22:06
  Speaker 1: strong next year. You're gonna have to hold my feet
• 22:09
  Speaker 1: down for me to say to you, can you believe
• 22:11
  Speaker 1: what happened here? All because of this, we're gonna have
• 22:14
  Speaker 1: to hold his feet down him. You know. I will
• 22:16
  Speaker 1: say though, just really quick ten seconds preferred shares. If
• 22:20
  Speaker 1: companies do start to issue a lot more of those
• 22:22
  Speaker 1: in lieu of debt, the net benefit to stocks will
• 22:26
  Speaker 1: be less, right, yes, But on the other hand, the
• 22:28
  Speaker 1: bankruptcy risk for the companies that do use this will
• 22:32
  Speaker 1: mitigate that loss and value, so they might go up
• 22:34
  Speaker 1: in credit worthiness. And yeah, right, absolutely fascinating. Thank you
• 22:38
  Speaker 1: so much for joining us. This is truly a very
• 22:40
  Speaker 1: helpful perspective. Joel Stern, who is chairman and chief executive
• 22:43
  Speaker 1: officer of Stern Value Management based in New York, just
• 22:47
  Speaker 1: back from some in South Africa. Him, there was a
• 22:58
  Speaker 1: story that really caught my I today about an m
• 23:00
  Speaker 1: I T study that suggests that the US vastly overstates
• 23:05
  Speaker 1: it's oil output forecasts. And here to talk about the
• 23:08
  Speaker 1: implications of this study is Mark Rossano, energy analyst for
• 23:12
  Speaker 1: Bloomberg Intelligence. Mark, thank you so much for joining us.
• 23:15
  Speaker 1: Can you just walk us through this study and explain
• 23:18
  Speaker 1: the implications for the price of crude? Sure, so, thanks
• 23:22
  Speaker 1: for having me. Uh. The biggest implication is really the
• 23:26
  Speaker 1: methodology in which the e I A is trying to
• 23:29
  Speaker 1: project what the production numbers will be. You know, given
• 23:33
  Speaker 1: the fact that it's hard to dictate what is technology
• 23:37
  Speaker 1: going to be four years out, what are things going
• 23:39
  Speaker 1: to look like? So the M I T study really
• 23:42
  Speaker 1: kind of honed in on a proper or at least
• 23:45
  Speaker 1: a regression that will help us kind of identify what
• 23:49
  Speaker 1: the growth will look like. You know. The problem when
• 23:52
  Speaker 1: you look at the overall study itself though, is it's
• 23:55
  Speaker 1: it's using the baking, which is you know, just given
• 23:57
  Speaker 1: the size of the data set, it makes it a
• 23:59
  Speaker 1: lot easier. But when you think of where the growth
• 24:03
  Speaker 1: is going to originate and come from on a go
• 24:05
  Speaker 1: forward basis, it's really going to be the Permian. So
• 24:08
  Speaker 1: when you think of things from the perspective of you know,
• 24:11
  Speaker 1: baking versus Permian, you know, the baking is measured in
• 24:14
  Speaker 1: hundreds of feet, with the Permian measured in thousands of feet.
• 24:17
  Speaker 1: I mean, just think of three freedom towers sitting on
• 24:20
  Speaker 1: top of each other. I mean, that's what we're working
• 24:22
  Speaker 1: worth working with in West Texas. So realistically, I think
• 24:26
  Speaker 1: it's a very good way of of analyzing and looking
• 24:30
  Speaker 1: at things going forward. But then the problem is, how
• 24:33
  Speaker 1: do we take that and extrapolated out into West Texas.
• 24:38
  Speaker 1: I'm probably gonna get myself in trouble here, but I'm
• 24:40
  Speaker 1: quoting you, so we'll both be in trouble. Longer is better.
• 24:44
  Speaker 1: And this has to do as you just described, with
• 24:47
  Speaker 1: the technology that is allowing horizontal drilling in some cases
• 24:52
  Speaker 1: to go to four miles. As a recent story that
• 24:54
  Speaker 1: Eclipse Resources drilled the horizontal well in Ohio that is
• 25:00
  Speaker 1: nearly four miles in length. That is I mean, that's astounding.
• 25:06
  Speaker 1: And also Chesapeake Energy, Exxon Mobile, Continental Resources, they've all
• 25:11
  Speaker 1: broken that three mile mark. How can a study from
• 25:16
  Speaker 1: m I T not take notice of the fact that
• 25:19
  Speaker 1: you are now drilling wells that are four miles long
• 25:24
  Speaker 1: horizontally well. And that's the thing is is looking at
• 25:27
  Speaker 1: what is the overall spacing, how many stages are there,
• 25:30
  Speaker 1: and what is the cost. So you have to factor
• 25:33
  Speaker 1: in on a geological level. You know what kind of
• 25:36
  Speaker 1: um hydrocarbon are we going for? Is it natural gas?
• 25:40
  Speaker 1: Is that heavy oil is a light oil? Because each
• 25:42
  Speaker 1: one has their own pitfalls when it comes down to
• 25:45
  Speaker 1: geography and uh and well construction. So if you look
• 25:48
  Speaker 1: at the what the has been achieved within the Marcellus
• 25:51
  Speaker 1: in the Utica up in that northeast region. You know,
• 25:54
  Speaker 1: we've seen significant gains in terms of length and cutting
• 25:58
  Speaker 1: costs as well as sand stings, just in terms of
• 26:01
  Speaker 1: prop in and we've been able to replicate that pretty
• 26:04
  Speaker 1: much across the country to increase the amount of recoveries.
• 26:08
  Speaker 1: And that's a big cost savings, right because you said that,
• 26:10
  Speaker 1: you know, if you do a ten thousand foot lateral well,
• 26:15
  Speaker 1: that's twenty less in cost than if you do to
• 26:19
  Speaker 1: five thousand uh foot wells. Correct. So when you look
• 26:23
  Speaker 1: at it from the perspective of going forward, you know
• 26:25
  Speaker 1: you want to consolidate your acreage. You're starting to see
• 26:28
  Speaker 1: that and and have the ability to to do those
• 26:31
  Speaker 1: longer laterals. So as you start to stack the different pays,
• 26:35
  Speaker 1: and just by looking at the different shale locations within
• 26:37
  Speaker 1: the Permian, you know you have and this unencumbered growth
• 26:42
  Speaker 1: that will only really be impeded by the takeaway, not
• 26:45
  Speaker 1: so much by the production. And I just want to
• 26:47
  Speaker 1: underscore message from a listener Harry Shapiro at Shapiro Capital
• 26:51
  Speaker 1: saying those are gas versus oil wells. Correct. Correct. So
• 26:55
  Speaker 1: the difference is at this point when you're looking at
• 26:58
  Speaker 1: the actual hydrocarbon, natural gas flows freer and and it's
• 27:02
  Speaker 1: easier to get out. So when you think about as
• 27:05
  Speaker 1: the molecule itself becomes more complex, which is, you know,
• 27:08
  Speaker 1: the baking has a little bit heavier oil where the
• 27:10
  Speaker 1: Permian is a little bit lighter. We should be able
• 27:13
  Speaker 1: to see more uplift by replicating some of the technologies
• 27:18
  Speaker 1: just as we learn more and more. I mean, we've
• 27:20
  Speaker 1: had three iterations of well well structures and recipes within
• 27:25
  Speaker 1: the Permian and each one has grossly outperformed the previous
• 27:29
  Speaker 1: just given the knowledge base that we've been able to develop.
• 27:33
  Speaker 1: So mark real quick, thirty seconds. It sounds like you're
• 27:36
  Speaker 1: thinking that the m I T study is compelling, but
• 27:40
  Speaker 1: US shell production is going to go strong. Yes, and
• 27:43
  Speaker 1: it's just a matter of your You have to take
• 27:45
  Speaker 1: that type of the methodology that was used and try
• 27:48
  Speaker 1: to replicate that into something where the data set isn't
• 27:52
  Speaker 1: as strong, just because we're still very early stages in
• 27:55
  Speaker 1: the Permian. And once we start to continue those those
• 27:58
  Speaker 1: recipes and learn more or we'll be able to do
• 28:01
  Speaker 1: more with less. Thanks very much for being with us,
• 28:04
  Speaker 1: a pleasure, really interesting stuff. Marca Rosano is our Energy
• 28:08
  Speaker 1: analyst for Bloomberg Intelligence. I encourage you to read his
• 28:12
  Speaker 1: work on the Bloomberg Thanks for listening to the Bloomberg
• 28:17
  Speaker 1: P and L podcast. You can subscribe and listen to
• 28:19
  Speaker 1: interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
• 28:24
  Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm
• 28:28
  Speaker 1: on Twitter at Lisa Abramo. It's one before the podcast.
• 28:31
  Speaker 1: You can always catch us worldwide on Bloomberg Radio