Latest / Bloomberg Intelligence / Dodd-Frank Repeal Won't Happen This Year, Nathan Dean Says

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Dodd-Frank Repeal Won't Happen This Year, Nathan Dean Says · Bloomberg Intelligence

• 0:04
  Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm pim
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• 0:29
  Speaker 1: There is this headline that crossed the terminal today that
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  Speaker 1: I thought was fascinating and kind of funny. Gutting Dodd
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  Speaker 1: Frank is hard to Republicans turn to easier things, things
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  Speaker 1: like a bill about publishing research on exchange traded funds,
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  Speaker 1: which is a bit less controversial than rolling back, say,
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  Speaker 1: all of the banking regulations that were put in place
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  Speaker 1: in two ten. To get a little bit more perspective,
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  Speaker 1: Nathan Dean is here with us. He has a government
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  Speaker 1: analyst for Bloomberg Intelligence, and it is so nice to
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  Speaker 1: see him in person. He is with us in our
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  Speaker 1: Bloomberg eleven three oh studio. So, Nathan, how much can
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  Speaker 1: we really read into this idea? Uh that you know?
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  Speaker 1: Because there because Congress is focusing on these sort of smaller,
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  Speaker 1: more bipartisan issues they're just disregarding the idea of an
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  Speaker 1: overhaul of god Frank. So I don't think they're disregarding
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  Speaker 1: the idea of an overhaul of Dodd Frank. They're just
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  Speaker 1: recognizing the fact that it's going to take time. You know.
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  Speaker 1: I think that the House bill, the Financial Choice Act Bill,
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  Speaker 1: that the next version two point oh, it was supposed
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  Speaker 1: to be out in February. Now it's looking like we'll
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  Speaker 1: be out in March. It may be out in April.
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  Speaker 1: But I think the congressman's, especially the Senate, they recognize that,
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  Speaker 1: you know, if we want to replace dot Frank, it's
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  Speaker 1: going to take a long time. So let's try and
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  Speaker 1: do some stuff and get it out of the way. First,
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  Speaker 1: bipartisan bills like a need T F research, opening up
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  Speaker 1: venture capital funds to more investors. And just today they're
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  Speaker 1: having a hearing that on the House side about flood insurance. Nathan,
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  Speaker 1: maybe you can explain this because this also goes to
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  Speaker 1: the issue of reform for the Affordable Care Act for Obamacare.
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  Speaker 1: Republicans in Congress were not in favor of Dodd Frank legislation, correct, correct,
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  Speaker 1: And they've had a fair amount of time to come
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  Speaker 1: up with an alternative plan. Is that accurate? Correct? So
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  Speaker 1: where is this alternative plan? Why are they just crafting
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  Speaker 1: this plan now? So the House has crafted this Financial
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  Speaker 1: Choice Act very broad. It's never gonna pass it past
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  Speaker 1: the House and won't pass the Senate. In order to
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  Speaker 1: get anything past you've got to parrot down, you have
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  Speaker 1: to get specific. There is bipartisan openness to relieving banks
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  Speaker 1: below two fifty billion in assets. Correct, exactly, exactly, But
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  Speaker 1: right now, there's just no incentive to negotiate. I mean,
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  Speaker 1: if I'm if I'm on the Democratic side, for example,
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  Speaker 1: why would I negotiate on a DoD Frank bill? You know,
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  Speaker 1: when there are other things like Obamacare, attacks, reform, infrastructure,
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  Speaker 1: you know that they want to tackle first. I mean,
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  Speaker 1: it's not like banks are hurting right now. The fd
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  Speaker 1: i C put out a report last week saying record profits,
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  Speaker 1: you know, record small business lending. So does that mean
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  Speaker 1: that some of the optimism that's been baked into bank
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  Speaker 1: stocks and bank bonds is per ups a little ahead
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  Speaker 1: of itself just because there isn't likely to be anything
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  Speaker 1: in the cards for these very big banks, at least
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  Speaker 1: within the next set of know eight months, certainly within
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  Speaker 1: the short term, you know, we don't see any relief
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  Speaker 1: for the large investment banks coming from Congress in the
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  Speaker 1: short term. Regulatory side, it's a different matter, but even
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  Speaker 1: then that's going to take time and process. Gairman Henstling
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  Speaker 1: has said that this financial regulation is a year one issue,
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  Speaker 1: but if you look at the Senate side, it's probably
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  Speaker 1: more a year two issues. So I think if you're
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  Speaker 1: gonna look and see what can Congress do to replace
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  Speaker 1: dot Frank, It's not gonna happen this year. It's probably
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  Speaker 1: gonna happen next year. And if that, that's even if
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  Speaker 1: they negotiate. As someone who walks the halls of the
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  Speaker 1: Capital and Washington in general, wanting if you can give
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  Speaker 1: us who are looking into that bubble world into the
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  Speaker 1: belt Way a sort of an idea of what has changed.
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  Speaker 1: There's the tenor changed. I mean just in the last
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  Speaker 1: let's say a month or so in terms of trying
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  Speaker 1: to get anything actually out of the House, get it
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  Speaker 1: approved by the Senate, and get it on the President's desk. So,
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  Speaker 1: you know, there was this idea that when the new
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  Speaker 1: Congress takes took shape, that the Senate was going to
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  Speaker 1: negotiate Senate Democrats were gonna be willing to negotiate. You know,
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  Speaker 1: there was some toxicity about the Supreme Court choice, etcetera.
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  Speaker 1: You know that sort of pushed it off. But if
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  Speaker 1: Senator Creepo and the Senate Banking Committee is looking at
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  Speaker 1: Capital Form formation and these small bipartisan bills, he's trying
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  Speaker 1: to build up that goodwill so when that eventual financial
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  Speaker 1: regulation bill comes, he'll be able to work. Can we
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  Speaker 1: just get a sense, as somebody who does walk the halls,
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  Speaker 1: how much goodwill is there at this point between Republicans
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  Speaker 1: and Democrats? Is there anything? So? Goodwill is probably a
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  Speaker 1: strong word. But you know, the the Senate in particular
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  Speaker 1: are full of experienced senators who have faith in the institution.
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  Speaker 1: They know how to work together. Senator Schumer, Senator McConnell,
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  Speaker 1: Senator Shared Brown. You know they know that eventually they're
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  Speaker 1: going to have to negotiate um. You know, so, I
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  Speaker 1: I still think that it's much less It's certainly toxic,
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  Speaker 1: but it's much less toxic than if you were in
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  Speaker 1: the House or if you're dealing with the White House,
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  Speaker 1: and that it goes with legend, that goes for legislation.
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  Speaker 1: But as you said, it doesn't really apply to any
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  Speaker 1: of the regulatory changes that might happen, because that can
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  Speaker 1: become from an executive order or from many agency changes.
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  Speaker 1: So the executive orders that Donald Trump put out don't
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  Speaker 1: apply to the financial regulators, the independent overseen by Congress.
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  Speaker 1: Yet you know, if I'm at the SEC, or if
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  Speaker 1: the CFDC in the White House calls me up to
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  Speaker 1: say follow my executive order, I'm going to say yes.
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  Speaker 1: You know, I think on the regulatory side, were really
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  Speaker 1: need to wait until Janet Yellen leaves in February two eighteen.
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  Speaker 1: When Donald Trump starts getting his own people in mid
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  Speaker 1: two eighteen, I think you'll start seeing a lot of stuff.
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  Speaker 1: But before then you're gonna see some small jurisdictional I
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  Speaker 1: mean small rulemaking, small tweaks. You know, nothing brought or
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  Speaker 1: any anything like that. Thanks very much for enlightening us.
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  Speaker 1: And Nathan Dean is a government analyst for Bloomberg Intelligence.
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  Speaker 1: He knows all about what's going on in Washington. Right now,
• 6:05
  Speaker 1: we want to turn to another bit of news on
• 6:08
  Speaker 1: President Trump's radar. John Huntsman has been picked by President
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  Speaker 1: Trump to be his Russian ambassador and to get a
• 6:17
  Speaker 1: better sense of what this might mean for US Russian relations.
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  Speaker 1: I want to bring in Richard Kahan, a managing partner
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  Speaker 1: at Eurasia Advisors who has intimate knowledge of Russia and
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  Speaker 1: has boots on the ground, very close sense of what
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  Speaker 1: is going on there. Richard, what do you make of
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  Speaker 1: this selection? Well, look, I think John Huntsman is a
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  Speaker 1: seasoned diplomat, uh, someone extremely well connected politically with the
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  Speaker 1: Republican Party, and someone who is a very safe, solid
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  Speaker 1: choice during a period when the last thing Trump needs
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  Speaker 1: is a messy confirmation hearing. And so I think part
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  Speaker 1: of the explanation for the choice is the domestic aspect.
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  Speaker 1: But he's also a very experienced leman who I think
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  Speaker 1: can do a fine job in terms of representing our
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  Speaker 1: country in Russia. Um, he does not, as you know,
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  Speaker 1: have a background, if you will, in the Russian world,
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  Speaker 1: but former US Ambassador to China, former US Ambassador to Singapore,
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  Speaker 1: and former governor of Utah. Absolutely so, Uh, this is
• 7:19
  Speaker 1: a man of great experience and I'm sure he'll handle
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  Speaker 1: this posting extremely well. And I think we're lucky, frankly
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  Speaker 1: to have someone with his level of experience serving our
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  Speaker 1: country in that capacity. You know, Richard, One of the
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  Speaker 1: reasons why I was really eager to speak with you
• 7:32
  Speaker 1: was because of some of the messiness that we've been
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  Speaker 1: hearing about the President Trump's campaign with respect to its
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  Speaker 1: relationship with China. In your opinion of somebody who does
• 7:43
  Speaker 1: have a pretty close knowledge and contacts in Russia, do
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  Speaker 1: you think that there is enough evidence that has already
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  Speaker 1: been presented to give you a concrete feeling that there
• 7:53
  Speaker 1: was some kind of collusion between the Trump campaign and
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  Speaker 1: Russia to win the US election. I would say that
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  Speaker 1: I think the wise course at this stage to put
• 8:05
  Speaker 1: this behind us, and for the president to put it
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  Speaker 1: behind him, is to get in front of it by calling,
• 8:10
  Speaker 1: for example, for an independent commission to look at it,
• 8:14
  Speaker 1: to go forward with disclosure on his own part in
• 8:17
  Speaker 1: terms of all of his contacts, all the rumors of compliment,
• 8:21
  Speaker 1: anything that could potentially come out, because we are going
• 8:24
  Speaker 1: to see an ongoing trickle of information, so I think
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  Speaker 1: that is the wisest court. Of course. It also will
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  Speaker 1: help him avoid any issues relating to UH interfering with
• 8:36
  Speaker 1: the you know, with an investigation, which as we know,
• 8:39
  Speaker 1: it's it's not necessarily the actions themselves, it's the actions
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  Speaker 1: subsequent that can lead to various legal problems. So I
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  Speaker 1: think he's asking for trouble by having this handled exclusively
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  Speaker 1: by a Republican dominated committee, and that then a long term,
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  Speaker 1: you know, this is only going to lead to a
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  Speaker 1: longer and more painful situation. But I guess a long
• 9:05
  Speaker 1: it's a long way of getting into the answer to
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  Speaker 1: your question. I do have genuine concerns. I thought it was,
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  Speaker 1: but no, I am gonna answer. I do think that
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  Speaker 1: from what I've both seen and what I've heard in Moscow,
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  Speaker 1: that there is reason to be concerned about this issue
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  Speaker 1: of whether, uh, the decisions that he made in the
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  Speaker 1: past and potentially sound that he will make in the
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  Speaker 1: future are fully independent, or whether they are in part
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  Speaker 1: influenced by relationships financial or otherwise, or compromat that the
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  Speaker 1: Russians may have. And Uh, I think it's healthy for
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  Speaker 1: us to get to the bottom of all of that. UM.
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  Speaker 1: I regret that that's a situation, but I think that
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  Speaker 1: that is the case. I wonder if you could comment
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  Speaker 1: on the state of the Russian economy having come out
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  Speaker 1: of a recession, and I'm wondering whether you can speak
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  Speaker 1: to the issue of economic performing in not just taking
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  Speaker 1: into account the oil sector, because chemical, agriculture, machinery, food. Uh,
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  Speaker 1: what is the state of the Russian economy right now?
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  Speaker 1: The Russian economy has largely been frozen for some period,
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  Speaker 1: has been compared often to the bression of years. The
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  Speaker 1: financial markets really have not been functioning. This is in
• 10:23
  Speaker 1: part due, of course, to sanctions, but that's not the
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  Speaker 1: entire story. It's also due to just the sense of anuih,
• 10:32
  Speaker 1: the freezing, if you will, of the initiative in that environment,
• 10:36
  Speaker 1: because people recognize that if they build a company and
• 10:39
  Speaker 1: have success, that ultimately some government related entities will seek
• 10:46
  Speaker 1: to obtain control of that. So I was I was
• 10:50
  Speaker 1: hoping to lead you down to military spending, because the
• 10:53
  Speaker 1: Russians of this said that they are going to increase
• 10:55
  Speaker 1: the military spending, but also the way that they calculate
• 10:58
  Speaker 1: GDP has changed and they now include military spending as
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  Speaker 1: part of that GDP report. Well, first, let me say,
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  Speaker 1: Russian military spending is a fraction of what we spend. Uh.
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  Speaker 1: The statistics I've seen is somewhere in the area of
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  Speaker 1: maybe six to seven percent of what we spend on
• 11:17
  Speaker 1: on on our defense spending. And indeed, the increase that
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  Speaker 1: is now being proposed by the current administration would be
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  Speaker 1: in the amount of the total amount of what Russia
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  Speaker 1: spends on defense. UH. So, you know, Russia is not
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  Speaker 1: in a position to compete with US on defense spending,
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  Speaker 1: but we're already in a position that dramatically exceeds anything
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  Speaker 1: that the Russians can put up on all sorts of
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  Speaker 1: military fronts. I want to thank you very much for
• 11:47
  Speaker 1: joining us. Richard con he is managing partner for Eurasia Advisers,
• 11:52
  Speaker 1: giving us some detail about the United States relationship with Russia,
• 11:57
  Speaker 1: maybe pointing out that John Huntsman Ambassador, he's been selected
• 12:02
  Speaker 1: to be the U s Ambassador to Russia by President
• 12:05
  Speaker 1: Donald Trump. Perhaps he can change the relations and with
• 12:09
  Speaker 1: more and more positive note. Is your phone spying on you?
• 12:25
  Speaker 1: That is the big question of the day. I want
• 12:27
  Speaker 1: to bring in David Garrity. He's CEO of g v
• 12:30
  Speaker 1: A Research, also a columnist at Investo PDA. Uh he
• 12:33
  Speaker 1: is here with us in our Bloomberg eleven three oh studio.
• 12:36
  Speaker 1: And David, I know that you're interested in talking about
• 12:39
  Speaker 1: Alphabet's launch of Android android messages, but I kind of
• 12:43
  Speaker 1: feel like we have to start with the recent CIA
• 12:46
  Speaker 1: leaks and the emphasis that that's placed on security, particularly
• 12:51
  Speaker 1: with respect to your phone. David, do you expect that
• 12:55
  Speaker 1: this new emphasis on potential hacks could alter the landscape
• 13:02
  Speaker 1: for demand for Androids versus iPhones? Well, certainly, I will
• 13:05
  Speaker 1: lead to a greater demand for more secure software. And clearly, Android,
• 13:10
  Speaker 1: with about eighty eight percent share of globally installed smartphone
• 13:14
  Speaker 1: operating systems, is a big target where and it's easier
• 13:18
  Speaker 1: to break into the Android than the iPhone currently. Yes,
• 13:21
  Speaker 1: it is. And to the extent that you have anyone
• 13:24
  Speaker 1: of a number of smartphone original equipment manufacturers or o
• 13:27
  Speaker 1: e m s who have been taking the basic Android
• 13:30
  Speaker 1: software system and then custom tailoring it. In the process
• 13:34
  Speaker 1: of doing that, they may also have created further security risk,
• 13:37
  Speaker 1: which is what helps assist hackers in terms of getting
• 13:40
  Speaker 1: access to Android powered phones. David Garty, I mean, I'm
• 13:44
  Speaker 1: not going to pursue the security issue for the time
• 13:47
  Speaker 1: being because I mean, everybody knows that you know, everything
• 13:50
  Speaker 1: is hackable, right, I mean, there's nothing that is not hackable.
• 13:53
  Speaker 1: Although hold on a second, because I think it will
• 13:55
  Speaker 1: make a difference if people are focusing more on this,
• 13:57
  Speaker 1: it might determine whether they decide to buy an Android
• 14:00
  Speaker 1: or an iPhone. I mean that's my point, all right,
• 14:01
  Speaker 1: Well so okay, well good, well let's take that, because David,
• 14:04
  Speaker 1: I want you to talk about the different marketplaces for
• 14:07
  Speaker 1: Apple iOS devices and Android operating system devices, because I
• 14:13
  Speaker 1: understand that the Android operating system device that's a mid
• 14:17
  Speaker 1: to lower market price point, that's going to be a
• 14:20
  Speaker 1: lot of a lot more growth there than it is
• 14:22
  Speaker 1: going to be at the higher end. And that's a
• 14:25
  Speaker 1: de facto Chrome experience, right Google out of Chrome, and
• 14:29
  Speaker 1: then that's a Google Search experience. And now I want
• 14:33
  Speaker 1: you to tell us about messaging because they also want
• 14:36
  Speaker 1: that to be a Google experience. Yeah, certainly. I mean,
• 14:39
  Speaker 1: with respect of messaging, we've been seeing essentially a shift
• 14:41
  Speaker 1: in terms of people's communication away from email and over
• 14:45
  Speaker 1: towards messaging. It used to be SMS messages, but it's
• 14:48
  Speaker 1: really more taking place within I Message, Android or Google's
• 14:52
  Speaker 1: problem with respect to messaging was again this proliferation if
• 14:55
  Speaker 1: you will, across various handset O E MS. They needed
• 14:58
  Speaker 1: to establish a standard out. They have a product that's
• 15:01
  Speaker 1: been coming onto the market called Android Messages. They're trying
• 15:04
  Speaker 1: to acquire a certain base experience and standard that applies
• 15:09
  Speaker 1: across all Android instances, so they can be as competitive
• 15:13
  Speaker 1: as say Apple's EYE message has been. And understand, Apple
• 15:17
  Speaker 1: I Message has recently generated about sixty three quadrillion. That's
• 15:21
  Speaker 1: ten to the fifteen Power messages per year, or to
• 15:24
  Speaker 1: put it differently, that's two hundred thousand EYE messages per
• 15:27
  Speaker 1: second that are being sent. So that's an ecosystem that
• 15:31
  Speaker 1: has a wall around it because I understand you know,
• 15:33
  Speaker 1: if you do not have an iOS phone, you're not
• 15:37
  Speaker 1: getting anything but those I Well, if you have let's
• 15:41
  Speaker 1: say an I uh Touch or at iPad or something,
• 15:44
  Speaker 1: then you're inside the Apple ecosystem. Yes you are, and
• 15:48
  Speaker 1: to the extent that you're obviously sending to someone who
• 15:50
  Speaker 1: has an Apple device. On the other side, it's all
• 15:52
  Speaker 1: gonna be done within I message. That doesn't say that
• 15:54
  Speaker 1: you have messages incent outside they will be sending text messages.
• 15:57
  Speaker 1: But yes, your points correct. We've a lot about sort
• 16:01
  Speaker 1: of the saturation of mobile phones, and I'm wondering from
• 16:06
  Speaker 1: your perspective, is there anything that Alphabet could do, or
• 16:10
  Speaker 1: frankly even Samsung or Apple to change that or to
• 16:15
  Speaker 1: sort of suddenly change the landscape and cause people to
• 16:19
  Speaker 1: buy more iPhones or um or or greatly expand potential
• 16:24
  Speaker 1: places where people use them. Well, this has been a
• 16:26
  Speaker 1: problem certainly, you know that the smartphone market has been
• 16:28
  Speaker 1: bumping up against and the whole knock on Apple had
• 16:31
  Speaker 1: been the fact that their market was saturated, and you're
• 16:33
  Speaker 1: looking at users who were holding onto their phones for
• 16:35
  Speaker 1: a longer period of time just because of the cost
• 16:37
  Speaker 1: relative to their incomes. And you know, Jason chafe It's
• 16:40
  Speaker 1: comment about sort of saying well they should buy healthcare
• 16:43
  Speaker 1: premiums and not iPhones, you know, certainly goes over like
• 16:46
  Speaker 1: like a lead balloon. But it does touch on the
• 16:48
  Speaker 1: fact that you know, smartphones have become more expensive. Clearly
• 16:52
  Speaker 1: we're looking more in growth in other areas being able
• 16:55
  Speaker 1: to apply these software systems to the Internet of things,
• 16:59
  Speaker 1: which is where you are to raise more concerns having
• 17:01
  Speaker 1: to do with some of these security elements that you
• 17:04
  Speaker 1: were talking about earlier. But I would make one point
• 17:07
  Speaker 1: is that while technology itself is capable of being hacked,
• 17:11
  Speaker 1: we know from the experience around the Democratic National Committee
• 17:15
  Speaker 1: last year that is really more human behavior which is hackable,
• 17:19
  Speaker 1: not necessarily the devices. So if people are concerned about
• 17:22
  Speaker 1: their security. The first thing they need to do is
• 17:24
  Speaker 1: look to themselves and how is it that they're interacting
• 17:27
  Speaker 1: with technologies? How is it that they control the information
• 17:31
  Speaker 1: that they either access or create themselves? With respect to that,
• 17:35
  Speaker 1: is there a differential between messaging versus phone voice phone
• 17:42
  Speaker 1: over the phones? You know what I mean? As far
• 17:43
  Speaker 1: as hackability, well, to the extent that I messages are
• 17:47
  Speaker 1: are encrypted. And it's something where Apple in dealing with
• 17:51
  Speaker 1: the San Bernardino massacre. You know, Apple had taken a
• 17:55
  Speaker 1: stand that they didn't want to provide access to the
• 17:58
  Speaker 1: shooters phones and their devices. Um. You know certainly in
• 18:01
  Speaker 1: that respect now that there are hacks that were found
• 18:03
  Speaker 1: around it. Um, but Apple tends to be more secure
• 18:07
  Speaker 1: in this regard relatives, say to an Android. And certainly
• 18:10
  Speaker 1: if you looked at voice communications, you know, for for
• 18:13
  Speaker 1: an encrypted voice call, uh, you'd have to go to
• 18:16
  Speaker 1: a special hand set. So from that standpoint, you would
• 18:19
  Speaker 1: be interestingly enough find that messaging, say on an Apple platform,
• 18:22
  Speaker 1: tends to be more secure relative to other means of communication.
• 18:26
  Speaker 1: I want to get your thoughts on investing in Alphabet,
• 18:29
  Speaker 1: the parent company of Google. Here's a stock that is
• 18:32
  Speaker 1: up about nine percent so far this year. And I
• 18:37
  Speaker 1: just love this comparison. In two thousand seven, Google's revenue
• 18:42
  Speaker 1: was sixteen and a half billion revenue two thousand sixteen
• 18:48
  Speaker 1: over nine billion. This is a company went sixteen and
• 18:51
  Speaker 1: a half to over nine billion, and it's still growing
• 18:55
  Speaker 1: at double digit rates. Yes, And from that standpoint, I mean,
• 18:59
  Speaker 1: the big search applications are still you know, very solid
• 19:03
  Speaker 1: in the margins are certainly something that the desire of
• 19:06
  Speaker 1: many other businesses, but we are looking at larger addressable
• 19:10
  Speaker 1: markets that they're potentially moving into. People have certainly talked
• 19:13
  Speaker 1: about driverless vehicles and the scale. But even if just
• 19:16
  Speaker 1: the messaging that you've described becomes moderately successful, is this
• 19:21
  Speaker 1: a company is just going to continue to bold, you know,
• 19:25
  Speaker 1: bowl forward. In this way, Google is is very much
• 19:28
  Speaker 1: well established in terms of the human capital that they
• 19:31
  Speaker 1: have in place and capability of the people who are there,
• 19:34
  Speaker 1: in their ability to continue to retract and retain these people.
• 19:37
  Speaker 1: And from that standpoint, um, you know, Trump's blathering about
• 19:41
  Speaker 1: immigration aside, Google could just as easily set up its
• 19:45
  Speaker 1: operations outside the US to the detriment of the U
• 19:48
  Speaker 1: S tax base and still continue to be a very
• 19:51
  Speaker 1: competitive company on a global scale. So from that standpoint,
• 19:56
  Speaker 1: we clearly look at Google as being a company that
• 19:59
  Speaker 1: arguably has be part of a core portfolio for anybody
• 20:01
  Speaker 1: who's looking at the technology sector. Other names like Snap
• 20:05
  Speaker 1: perhaps not so much. Thanks very much. David Garretty is
• 20:08
  Speaker 1: always a pleasure. He is the chief executive a g
• 20:10
  Speaker 1: v A Research. President Donald Trump is scheduled to meet
• 20:27
  Speaker 1: with almost a dozen chief executives of small and mid
• 20:30
  Speaker 1: size banks from around the United States. There he is
• 20:33
  Speaker 1: seeking their their contribution and their input for a discussion
• 20:38
  Speaker 1: about regulations which may be hurting their ability to lend
• 20:41
  Speaker 1: the consumers and small businesses. This is all part of
• 20:45
  Speaker 1: the listening sessions that are taking place under the ages
• 20:48
  Speaker 1: of the National Economic Council, and we will bring that
• 20:52
  Speaker 1: to you as it happens. Well, let's focus our attention
• 20:56
  Speaker 1: more closely on one element of President Donald Trump and
• 21:00
  Speaker 1: the Republicans plans for taxes. Uh. They've said they'd like
• 21:04
  Speaker 1: to court cut corporate taxes, allow the repatriation of cash
• 21:08
  Speaker 1: that are in corporate accounts overseas, and also eliminate company's
• 21:12
  Speaker 1: ability to deduct interest expenses from taxes. Here to tell
• 21:18
  Speaker 1: us more is Noah Smith a contributor to Bloomberg View
• 21:22
  Speaker 1: and he blogs at No Opinion. No, it's great to
• 21:26
  Speaker 1: have you here in the studio. Thanks for being with us.
• 21:28
  Speaker 1: All right, So this, let's say that this is the
• 21:32
  Speaker 1: focus of the attention of bond market participants is whether
• 21:37
  Speaker 1: corporations will continue to be allowed to deduct bond interest payments.
• 21:42
  Speaker 1: What is going on there? Right? So, uh, for every company,
• 21:46
  Speaker 1: you have to make a decision how much do we
• 21:49
  Speaker 1: fund our operations with equity and how much do we
• 21:51
  Speaker 1: fund our operations with debt? Actually, most US corporations fund
• 21:55
  Speaker 1: mostly with equity. Actually debt is is smaller for equity,
• 21:59
  Speaker 1: fine for US corporations, but there's still a lot of
• 22:02
  Speaker 1: debt out there. For banks, it's the opposite. Banks really
• 22:05
  Speaker 1: take on a lot of debt, have very high leverage ratios,
• 22:08
  Speaker 1: so they are the ones who would be most affected,
• 22:11
  Speaker 1: although all all companies would be someone affected. The idea is,
• 22:15
  Speaker 1: right now we actually privileged debt finance over equity finance,
• 22:19
  Speaker 1: and under this new policy that would be changed going forward,
• 22:24
  Speaker 1: it would be a much more level playing field between
• 22:27
  Speaker 1: the two. Well, no, this is actually shaking debt markets
• 22:30
  Speaker 1: in a pretty massive way. There is some speculation that
• 22:32
  Speaker 1: the record pace of investment grade issuance that we've seen
• 22:35
  Speaker 1: this year is to lock in the current deduction over
• 22:38
  Speaker 1: a longer period of time that it will be grandfathered
• 22:40
  Speaker 1: in as they are unable to deduct these interest payments
• 22:44
  Speaker 1: from their taxes going forward. You made an interesting argument
• 22:47
  Speaker 1: in a recent column. You're saying, you know, this is
• 22:49
  Speaker 1: very important, that this is part of the tax postal,
• 22:51
  Speaker 1: and it's probably a good thing. You highlight how studies
• 22:55
  Speaker 1: have shown that the more debt levels are elevated in
• 22:59
  Speaker 1: a country, the more damaging asset price declines are for
• 23:04
  Speaker 1: an economy. So, in other words, you're saying, structurally, this
• 23:07
  Speaker 1: might actually be a good thing to push corporations to
• 23:09
  Speaker 1: take on less debt and to fund themselves more with equity.
• 23:12
  Speaker 1: Am I right? That's right? Yeah, Um, whenever you see
• 23:15
  Speaker 1: one of these giant financial blow ups that ends up
• 23:18
  Speaker 1: tanking the economy for ten years. You've seen this Japan, Korea.
• 23:22
  Speaker 1: We might even be seeing it happen with China right now.
• 23:24
  Speaker 1: We saw it with us of course in two thousand eight.
• 23:27
  Speaker 1: There's always a lot of debt involved, whether it's mortgage
• 23:29
  Speaker 1: debt or corporate debt as it was in Korea, or
• 23:34
  Speaker 1: commercial real estate debt as it was you know in Japan.
• 23:37
  Speaker 1: UM debt is always a big thing that's there and
• 23:40
  Speaker 1: that you can show this really easily. Is that because
• 23:43
  Speaker 1: a bond comes with a variety of legal constraints and
• 23:48
  Speaker 1: restrictions and also obligations that you don't have with equity.
• 23:53
  Speaker 1: I mean, if a company goes under and you're stuck
• 23:57
  Speaker 1: holding a bunch of stock, you know, great, you're done.
• 24:00
  Speaker 1: But if you're a bond holder, now you've got lawyers,
• 24:04
  Speaker 1: bankruptcy committee experts, and you have a stake in what
• 24:08
  Speaker 1: happens to the company's assets, right, I would say that's
• 24:11
  Speaker 1: a that's a lot of it. Um. The legal differences
• 24:15
  Speaker 1: are absolutely crucial. Debt has um limited enforceability. We can't
• 24:20
  Speaker 1: completely make you pay back debt. In fact, that's what
• 24:23
  Speaker 1: they call bankruptcy protection from creditors. And because of this,
• 24:26
  Speaker 1: you have this perverse incentive where I can actually have
• 24:29
  Speaker 1: an incentive to borrow a lot of money and not
• 24:31
  Speaker 1: pay it back. And the econ blogger Carl Smith no
• 24:35
  Speaker 1: relation once wrote that it's rational to borrow as much
• 24:38
  Speaker 1: as you can and never pay it back. If there's
• 24:41
  Speaker 1: no penalty at all. So if this goes through as proposed,
• 24:46
  Speaker 1: it will cause a massive shift in the way that
• 24:48
  Speaker 1: companies finance themselves, and I would think that it could
• 24:52
  Speaker 1: be potentially, I don't know, a painful process. No, absolutely,
• 24:58
  Speaker 1: So one thing that economists are starting realize that the
• 25:00
  Speaker 1: economy is not nearly as resilient as people have thought,
• 25:03
  Speaker 1: and these big adjustments to trade changes, legal changes, and
• 25:08
  Speaker 1: just changes in the industrial mix of the country don't
• 25:11
  Speaker 1: go so smoothly, and a lot of people can lose
• 25:14
  Speaker 1: their jobs and be you know, screwed for their for
• 25:17
  Speaker 1: their whole life. So which asset classes would be most
• 25:21
  Speaker 1: affected during this shift? I mean afterwards? Granted, maybe it
• 25:25
  Speaker 1: would create more stability, but amid all the turmoil you
• 25:28
  Speaker 1: mean which industries? Yeah, which industries where we see the pain? Banks?
• 25:32
  Speaker 1: I mean there they borrow so much, um, a lot
• 25:35
  Speaker 1: of housing related things because housing, you know, rely so
• 25:38
  Speaker 1: heavily on debt and so so banks and housing related
• 25:43
  Speaker 1: companies will be really affected, I think. And so that's
• 25:47
  Speaker 1: why I suggested that we we phase this in over
• 25:50
  Speaker 1: a while to to give these companies time to switch
• 25:53
  Speaker 1: to more equity finance, because in the long run. It
• 25:55
  Speaker 1: will make the economy more stable. There's no reason to
• 25:57
  Speaker 1: do this tomorrow. We're not about to have another financial
• 26:00
  Speaker 1: says tomorrow. I think you never know. But I famous
• 26:03
  Speaker 1: last words, famous last words. But um, but we we
• 26:06
  Speaker 1: de leveraged a lot and so but uh, but you know,
• 26:10
  Speaker 1: ten years down the line, twenty years down the line,
• 26:11
  Speaker 1: this could make a difference. So I think it might
• 26:14
  Speaker 1: be good to start phasing that in now. And and
• 26:17
  Speaker 1: a lot of people have been calling for more equity
• 26:19
  Speaker 1: for banks. Um. Usually this is in the form of
• 26:22
  Speaker 1: higher capital requirements, basically hold more cash, and so this
• 26:27
  Speaker 1: could be another step in that same direction. Thank you
• 26:29
  Speaker 1: so much. Noah Smith, contributor to Bloomberg View. Uh. He's
• 26:34
  Speaker 1: also he was an assistant professor of finance at stony
• 26:36
  Speaker 1: Brook University. Need blogs that No Opinion. He's also on
• 26:40
  Speaker 1: Twitter at that same address at no Opinion. Thank you
• 26:44
  Speaker 1: so much for joining us. That was great, um, and
• 26:46
  Speaker 1: it is something that we've heard a lot about in
• 26:48
  Speaker 1: the corporate bond market, because you have seen a record
• 26:52
  Speaker 1: pace of issuance of corporate bonds to date, and people
• 26:56
  Speaker 1: are suggesting perhaps it's to get ahead of this rule change.
• 27:07
  Speaker 1: Thanks for listening to the Bloomberg pien L podcast. You
• 27:09
  Speaker 1: can subscribe and listen to interviews at iTunes, SoundCloud, or
• 27:14
  Speaker 1: whatever podcast platform you prefer. I'm Pim Fox. I'm out
• 27:18
  Speaker 1: there on Twitter at pim Fox. I'm out there on
• 27:21
  Speaker 1: Twitter at Lisa Abramo. It's one before the podcast. You
• 27:24
  Speaker 1: can always catch us worldwide on Bloomberg Radio