Latest / Bloomberg Intelligence / Ex-SEC Chair Levitt: It’s A Bad Idea to Reduce EPS Reporting

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Ex-SEC Chair Levitt: It’s A Bad Idea to Reduce EPS Reporting · 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
0:11
Speaker 1: bring you the most important, noteworthy, and useful interviews for
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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. Well,
0:32
Speaker 1: we are getting more information about President Trump's proposal to
0:36
Speaker 1: potentially allow companies to report earnings every six months rather
0:41
Speaker 1: than quarterly. On a quarterly basis, President Trump says the
0:45
Speaker 1: idea comes from outgoing PepsiCo chief executive Indra Nuye, who
0:50
Speaker 1: attended last week's at Bedminster business dinner, So that is
0:54
Speaker 1: where the idea came from. Joining me now, I'm very
0:57
Speaker 1: pleased to say, is Arthur Lovitt. He is the former
1:00
Speaker 1: chairman of the U S Securities and Exchange Commission and
1:03
Speaker 1: I believe the longest serving ever SEC chair. He also
1:07
Speaker 1: is a current member of the board at Bloomberg LP.
1:10
Speaker 1: He also is an advisor to the Promontory Financial Group. Arthur,
1:13
Speaker 1: thank you so much for being with me today. What
1:16
Speaker 1: was your reaction to President Trump's tweet this morning? About
1:20
Speaker 1: allowing companies to report every six months. I don't like it.
1:25
Speaker 1: I think that investors have much better results when they're
1:29
Speaker 1: better informed, not less than the US capital markets with
1:34
Speaker 1: their quarterly reporting have generated higher returns centers as a result,
1:40
Speaker 1: attracted a lot more capital than those international capital markets
1:46
Speaker 1: with semiannual reporting. Yeah. In the instance of Enron, they
1:51
Speaker 1: reported serious problems in the third quarter of two thousand
1:56
Speaker 1: and one in that earning call and Q and they
2:01
Speaker 1: filed for bankruptcy the first Greek of December in two
2:05
Speaker 1: thousand and two. With semi annual reporting, investors wouldn't have
2:10
Speaker 1: received the bad news from October until two thousand and two,
2:15
Speaker 1: by which time the company was broke. Otherwise you could say,
2:20
Speaker 1: you know, it just doesn't doesn't make sense. So, coming
2:27
Speaker 1: coming from your background at the end, oh go ahead, Arthur,
2:31
Speaker 1: coming from your background at the SEC, I'm wondering what
2:35
Speaker 1: the process would be like that it could potentially undergo
2:38
Speaker 1: in order to make this happen. I mean, how long
2:42
Speaker 1: would a study like this take and could they just
2:44
Speaker 1: sort of implement this in the near term. I think
2:49
Speaker 1: the study is likely to take at least six months,
2:54
Speaker 1: and I don't believe they could do this virtually overnight.
2:59
Speaker 1: I think this is a very hot button issue, and
3:04
Speaker 1: I think it will raise a lot of attention, not
3:07
Speaker 1: just in corporate America, but in academia, which is very
3:12
Speaker 1: concerned about how information gets to the public and when
3:17
Speaker 1: they can act on it. Do you think that if
3:21
Speaker 1: we did move to a six month reporting period that
3:26
Speaker 1: US markets have become less liquid. Yes, I think that
3:33
Speaker 1: they would become less liquid, But more important than that,
3:39
Speaker 1: we would have less information on which to base decisions.
3:43
Speaker 1: And I think a market without information is not as
3:48
Speaker 1: not as nearly as liquid, or as good as a
3:51
Speaker 1: market where information is readily available on a regular basis.
3:57
Speaker 1: I have to think that some people believe that this
4:00
Speaker 1: was a good thing, that this would reduce short termism
4:04
Speaker 1: among the C suite executives and that people would be
4:08
Speaker 1: looking more longer term for business strategies. That makes sense.
4:12
Speaker 1: What do you say to that, because there are even
4:15
Speaker 1: some investors who think that this would be better for
4:17
Speaker 1: them over the long term. I think from the perspective
4:21
Speaker 1: of business, it would be less costly to relax these standards.
4:28
Speaker 1: But I honestly believe that the best capital markets are
4:33
Speaker 1: the ones which are the most often, report the most frequently,
4:39
Speaker 1: and the argument for more information for individual investors trumps
4:44
Speaker 1: the argument that providing this information is costly to American business.
4:52
Speaker 1: When you were the SEC chair, did a lot of
4:54
Speaker 1: executives petition you to make this change? No, h uh,
5:00
Speaker 1: they did not. I think there is always a certain
5:05
Speaker 1: amount of tension between business and regulation, and that's certainly existed,
5:12
Speaker 1: but I was not pressured extensively in connection with this change.
5:19
Speaker 1: I'm curious to know whether you think that the pendulum
5:21
Speaker 1: has swung too far toward deregulating things, or how much
5:25
Speaker 1: further it would have to swing before you get concerned
5:29
Speaker 1: that we're sowing the seeds for another problem. I don't
5:35
Speaker 1: think there's a specific moment that you can point to,
5:38
Speaker 1: but clearly deregulation is in the air, and that's not bad.
5:44
Speaker 1: I think the pendulum does shift, as you say, but
5:47
Speaker 1: I think we've rolled back a number of things. We've
5:51
Speaker 1: made it easier for business in a number of ways
5:56
Speaker 1: in terms of regulatory context. But I think going much
6:01
Speaker 1: further than we are now, we would do that at
6:04
Speaker 1: the expense of investor interest and the greatest danger to
6:09
Speaker 1: our capital markets. His lack of transparency, and so far
6:14
Speaker 1: as investors are concerned, that's why I think we can
6:18
Speaker 1: go so far and really not go any further. Just
6:23
Speaker 1: a real quick here. I'm curious, are you worried about
6:25
Speaker 1: as you see independence here? I haven't thought of that.
6:31
Speaker 1: I think that agencies are independent, have been independent, and
6:37
Speaker 1: I think any effort to change that would be terrible
6:41
Speaker 1: for our markets. I don't regard this as an urgent
6:45
Speaker 1: threat at this point in time, and a lot of
6:47
Speaker 1: it depends on who's running the Commission, and the president
6:51
Speaker 1: SEC chair is mindful of those risks, and I think
6:55
Speaker 1: it's unlikely to move in that direction. Arthur Lovett, thank
6:59
Speaker 1: you so much for taking of time. Always wonderful hearing
7:01
Speaker 1: your insights, especially on an issue so close to your experiences.
7:05
Speaker 1: Arthur Lovitt is former chairman of the U S Securities
7:08
Speaker 1: and Exchange Commission, current member of the board of Bloomberg LP,
7:11
Speaker 1: as well as an advisor to the Promontory Financial Group.
7:29
Speaker 1: Dominating this otherwise relatively quiet Friday has been the President's
7:33
Speaker 1: tweet respecting the SEC and how it requires companies to
7:39
Speaker 1: report their earnings. Should we be moving to a six
7:43
Speaker 1: months schedule rather than a quarterly one. I should just
7:46
Speaker 1: note the White House just released a statement saying the
7:48
Speaker 1: President is interested in examining this issue on whether short
7:51
Speaker 1: term earnings reporting requirements for public companies reduce incentives for
7:55
Speaker 1: them to engage in long term investing in the United States.
7:58
Speaker 1: This is part of the administrations on going regulatory reform
8:01
Speaker 1: efforts that aim to ensure that the U. S economy
8:04
Speaker 1: remains the most productive in the world. Joining me now
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Speaker 1: Hans Olsen, chief investment officer at Fiduciary Trust, which overseas
8:11
Speaker 1: about seventy eight billion dollars. It is based in Boston.
8:14
Speaker 1: Hans joins me today in a very sweaty and warm
8:18
Speaker 1: New York City in our eleven three oh studios. Hans,
8:21
Speaker 1: thank you so much for being here. What do you
8:23
Speaker 1: think of this idea of six months reporting six month reporting, Well,
8:26
Speaker 1: you know, it's it's kind of moving, at least in
8:28
Speaker 1: the same direction that the Europeans have moved in. They
8:32
Speaker 1: were on a six month um schedule and I think
8:35
Speaker 1: they went to three and then back to six. In
8:37
Speaker 1: the UK, I think it's similarly the same thing. You know,
8:41
Speaker 1: at the end of the day, it's probably less meaningful
8:44
Speaker 1: for equity investors. Than it is for bond investors. Um um.
8:48
Speaker 1: That said, if we went to six months, wouldn't be
8:50
Speaker 1: the end of the world. But I do think that
8:52
Speaker 1: in the interest of transparency, right um, more information is
8:57
Speaker 1: better than less information. And I think this this whole
9:00
Speaker 1: notion of quarterly capitalism, as the CEO of Unilever put it, um,
9:05
Speaker 1: is of CEO's own making. We get into the earning
9:09
Speaker 1: season they've released, they have analyst conference calls, we go
9:13
Speaker 1: through the kabuki theater of of analysts calling in and
9:16
Speaker 1: congratulating the CEO is in a good quarter and and
9:19
Speaker 1: basically they're reading from the press release, right um. I
9:22
Speaker 1: think a better way, right to relieve some of the
9:25
Speaker 1: the emphasis around quarterly capitalism is to release the numbers
9:28
Speaker 1: on a quarterly quarterly basis, but only do a semi
9:31
Speaker 1: annual deep dive on the operations of the company. So
9:34
Speaker 1: you keep the transparency and um uh, and you perhaps
9:38
Speaker 1: less than this emphasis on quarter to quarter data. I
9:41
Speaker 1: think it's really interesting what you just said about this
9:44
Speaker 1: mattering more for bond investors than stock investors. And I
9:47
Speaker 1: think that this really goes to the heart of the
9:49
Speaker 1: short terms short termism is um versus long termism debate
9:53
Speaker 1: that this really highlights, which is perhaps companies would be
9:56
Speaker 1: incentivized to make better longer term decision as if they
10:00
Speaker 1: didn't have to meet these sort of quarterly hurdles. But
10:03
Speaker 1: for a bond investor, the key is, are you guys
10:06
Speaker 1: losing money? Are you getting off track to the point
10:08
Speaker 1: where you're not gonna be able to pay me back?
10:10
Speaker 1: And so do you think that for equity investors six
10:13
Speaker 1: month reporting would actually increase longer termism thought among corporate
10:19
Speaker 1: executives or do you think it would just be less
10:20
Speaker 1: transparency full stop? I don't. I don't think so. I mean,
10:23
Speaker 1: at the end of the day, CEO is going to
10:24
Speaker 1: be compensated on his or her UM stock price, right
10:28
Speaker 1: and so UM you know from and that's on a
10:31
Speaker 1: year to year basis. So if you are really talking
10:34
Speaker 1: about long term, you're talking three to five years or more,
10:38
Speaker 1: you know, a business cycle that's just too long for
10:42
Speaker 1: for most investors UM to for you to be able
10:45
Speaker 1: to evaluate a company standing or not. So I think
10:49
Speaker 1: this is much to do about nothing really. All right, well,
10:53
Speaker 1: let's move on to some things that are ado about something.
10:57
Speaker 1: I do want to just let people know that there
10:59
Speaker 1: is a headline crossing the Business Insider is now reporting
11:02
Speaker 1: that Turkey is preparing to release the imprisoned US Pastor.
11:06
Speaker 1: This of course at the heart of the dispute between
11:09
Speaker 1: the US and Turkey, with the US threatening additional sanctions
11:12
Speaker 1: on Turkey and unless they release this Pastor, so this
11:17
Speaker 1: might be a softening of that issue. Hans, come on
11:20
Speaker 1: in here, because you noted that you are underweight emerging markets.
11:24
Speaker 1: And I'm wondering how much you see Turkey is an
11:26
Speaker 1: iducent cradit case and how much you see it as
11:29
Speaker 1: emblematic of broader weakness that is going to be felt
11:31
Speaker 1: increasingly across the developing markets. So I think Turkey is
11:34
Speaker 1: a unique case. And and this the issue of the
11:37
Speaker 1: Pastor aside Turkey's problems is an old problem, UH that
11:43
Speaker 1: is very familiar to emerging markets. Where you get a
11:45
Speaker 1: country that's running a large current account deficit, UH that
11:49
Speaker 1: that is financing it's spending from foreign sources and depending
11:53
Speaker 1: upon exchange rates, and they're engaging in policies that are
11:58
Speaker 1: are not prudent over time, and and finally you start
12:01
Speaker 1: messing around with the country central bank, and you have
12:03
Speaker 1: the cocktail for disaster, and that's essentially what's played out
12:07
Speaker 1: in Turkey. The the issue with the pastor was a
12:10
Speaker 1: secondary but perhaps exacerbating case, but it perhaps is moving
12:14
Speaker 1: in the right direction. But Turkeys problems isn't going to
12:17
Speaker 1: be cured by the release of this of this pastor.
12:21
Speaker 1: It's really about maintaining the independence of the central bank
12:23
Speaker 1: getting handled on their current account deficits and and the like.
12:27
Speaker 1: Within a broader perspective, though, Lisa, the the emerging market
12:31
Speaker 1: issue is we're underweight, and we're underweight because the notion
12:36
Speaker 1: that when you start to have a price of money
12:37
Speaker 1: here in the United States, uh, and people have a choice.
12:41
Speaker 1: Where where when we had negative real rates and really
12:44
Speaker 1: quite negative real rates on on on cash, money got
12:49
Speaker 1: pushed into motion. It was looking for a return and
12:51
Speaker 1: it had to go increasingly to places that it normally
12:54
Speaker 1: wouldn't go emerging market debt, emerging market equities and the
12:57
Speaker 1: like for a return. Now that we're getting a return
13:00
Speaker 1: on cash, they're starting to be a choice. And and
13:04
Speaker 1: as the dollar goes up and as interest rates go up,
13:07
Speaker 1: which reinforces the currency, you know, uh, the attractiveness of
13:11
Speaker 1: emerging markets become somewhat suspect right. I do want to
13:14
Speaker 1: also talk about the attractiveness of risk assets in the US,
13:17
Speaker 1: and you noted that you've been reducing high yield exposure
13:20
Speaker 1: and some of your portfolios. I would love to get
13:22
Speaker 1: your perspective on where. How why? Yeah, Yeah, So we've
13:27
Speaker 1: been we've been essentially moving to eliminate our high yield
13:30
Speaker 1: exposure was about three or four percent of portfolio three
13:37
Speaker 1: or four pers three or four, so taking that out,
13:40
Speaker 1: and the reason that we're doing is that we've seen
13:42
Speaker 1: a progressively deteriorating UM backdrop for UM, the underwriting standards
13:47
Speaker 1: for high yield, whether it be bonds or loans. So
13:50
Speaker 1: when you look at the number of covenant light launs,
13:52
Speaker 1: you look at the valuations spreads that have come to market, UM,
13:55
Speaker 1: the protections that are normally afforded investor has been have
13:59
Speaker 1: been systematically eroded UM as as people have sought for
14:03
Speaker 1: yield and try to protect against rising interest rates. What
14:07
Speaker 1: that doesn't do is protect against the next part of
14:10
Speaker 1: the business cycle, when you know, you go into recession
14:13
Speaker 1: and the fault rate start rise. You know, it was
14:15
Speaker 1: interesting you noted before the segment that you've reduced all
14:19
Speaker 1: you're gotten rid of all of your leverage loan exposure.
14:21
Speaker 1: And part this has to do with the weakening underwriting standards.
14:25
Speaker 1: And we were talking about this moody Is report showing
14:27
Speaker 1: that recoveries the next downturn for leverage loans will be
14:30
Speaker 1: sixty from pent historically, And I'm just wondering, you know,
14:36
Speaker 1: why do you find it important to get rid of
14:38
Speaker 1: things now before the cycle is turning? And just I'll
14:41
Speaker 1: give you about sure, that's a good question, uh, position
14:44
Speaker 1: of strength. You do it when the prices are good.
14:47
Speaker 1: You do it ahead of the curve, when you're when
14:50
Speaker 1: you do it when the information is out there, when
14:52
Speaker 1: you're starting to suffer the adversity. It's too late because
14:55
Speaker 1: the prices moved too quickly, as we you know, and
14:57
Speaker 1: when you go looking forbids in this market, it'll be
15:00
Speaker 1: hard to find them. So we're doing it ahead of
15:02
Speaker 1: the curve. Interesting, So even if we're I don't know,
15:05
Speaker 1: eighteen months out, now is the time in your view.
15:08
Speaker 1: Hans Olsen, a pleasure speaking with you. Thank you so
15:10
Speaker 1: much for coming in. Hans Olsen chief investment officer at
15:13
Speaker 1: Fiduciary Trust based in Boston, but he joins us here
15:16
Speaker 1: in our eleven three oh studios. I do want to
15:19
Speaker 1: know that President Trump is talking to reporters and we
15:23
Speaker 1: will take those uh comments to you when we get them.
15:27
Speaker 1: He's talking about everything from Paul man Afford to John Brennan.
15:45
Speaker 1: Housing market in the US has seen some signs of
15:49
Speaker 1: stress this year. I'm looking at an index of home
15:52
Speaker 1: builder shares in the SMP five hundred, down nearly eighteen
15:56
Speaker 1: percent so far this year. The question is here, does
16:00
Speaker 1: mark a prolonged takedown of the US housing market or
16:04
Speaker 1: is this a blip to kind of create a more
16:06
Speaker 1: even ground for people who to afford properties. Joining us
16:09
Speaker 1: now to talk about this is Aaron Rozis, Economic research
16:12
Speaker 1: director for Zillo. Aaron, I'm really glad that you're joining
16:16
Speaker 1: us today because this has been sort of an underlying
16:18
Speaker 1: theme for a lot of people, especially if they're barished
16:21
Speaker 1: in the economy. They say, look at the home builders,
16:23
Speaker 1: So what's going on? I mean, do you see that
16:25
Speaker 1: the weakness that has been observed recently is a symptom
16:28
Speaker 1: of some kind of deeper woe that will be expressed
16:31
Speaker 1: throughout the rest of the year. You're you're something right
16:34
Speaker 1: to point out that housing data have been coming in
16:35
Speaker 1: a little bit weaker than expected. You look at home sales,
16:38
Speaker 1: housing starts, home val appreciation. Although it's been very strong,
16:42
Speaker 1: it's starting to slow down. We recently produce some data
16:45
Speaker 1: showing that listings for the price cuts, you're seeing a
16:47
Speaker 1: lot more price cuts out there on the market. That said,
16:49
Speaker 1: it's important to put this in context. The housing market
16:52
Speaker 1: has been first of all, leading the economic recovery, was
16:56
Speaker 1: the first sectors to kind of start showing strength. And second, well,
16:58
Speaker 1: it's been very strong the past few years. Um, I'm
17:01
Speaker 1: normally strong. We saw a rebound and young adult home
17:03
Speaker 1: ownership millennials in particular have been out in force buying homes,
17:07
Speaker 1: and so I think in somewhat some recycle, we're starting
17:09
Speaker 1: to see more of a normalization. Things are kind of
17:11
Speaker 1: coming back to a more normal pace, not the fre netic,
17:15
Speaker 1: hectic pace of the past two years. UM. But still
17:17
Speaker 1: it's it's still very much of a solar's market. So
17:20
Speaker 1: you noted in your recent reports that about four of
17:23
Speaker 1: all listings across the US had a price cut in June.
17:26
Speaker 1: That's up from a recent low of less than twelve
17:29
Speaker 1: percent near the end of twenty sixteen. So you are
17:33
Speaker 1: seeing people have to realize, Wow, if I really want
17:35
Speaker 1: to sell this home, I have to ask for less.
17:38
Speaker 1: I'm just wondering where you're seeing the biggest price cuts.
17:42
Speaker 1: That's that's a great point because so much of this
17:44
Speaker 1: story is where it's happening. First of all, it's happening
17:47
Speaker 1: primarily at the top of the market. If you look
17:50
Speaker 1: at that expensive third of the housing market, that's where
17:53
Speaker 1: you see the biggest jump in price cuts and already
17:56
Speaker 1: kind of more price cuts. We know that a subset
17:59
Speaker 1: of the market that buyers are already being tested at
18:02
Speaker 1: their limits. Um Also, I think the important important thing
18:06
Speaker 1: to keep in mind here is when you look at
18:07
Speaker 1: the size of the price cut, it's actually been pretty stable,
18:10
Speaker 1: you know, the typical price cuts around two to What
18:13
Speaker 1: that tells me is that some of these price cuts
18:15
Speaker 1: that we're seeing has actually been sellers being rather aggressive
18:19
Speaker 1: in their in their listing strategy and then just testing
18:21
Speaker 1: what the market can tolerate. So, you know, they say,
18:24
Speaker 1: the market is so hot, so fast moving, you know,
18:26
Speaker 1: might as well list aggressively see if I get that
18:30
Speaker 1: dream price. One thing I'm wondering, especially as you talk
18:33
Speaker 1: about the high end homes, seeing the biggest price to clients.
18:36
Speaker 1: How much is this tied to the tax policies and
18:40
Speaker 1: places like New York, New Jersey, Connecticut that are typically
18:44
Speaker 1: high tax states seeing price reductions in the homes due
18:48
Speaker 1: to some of the changes that don't allow some deductions.
18:52
Speaker 1: That's a great point, you know, I think kind of
18:55
Speaker 1: there's two forces that have been squeezing that high end
18:59
Speaker 1: on the demand side. You talked about the changes in
19:01
Speaker 1: the tax structure, particularly changes in that state and local
19:05
Speaker 1: tax deduction there. You know, we kepted that deduction at
19:08
Speaker 1: ten tho dollars starting this year for most of these
19:12
Speaker 1: very high end communities. Um, that's not even going to
19:15
Speaker 1: cover local property taxes. And you know, it's something we've
19:18
Speaker 1: been watching in the past few years, past few months,
19:20
Speaker 1: and we are starting to see a little bit of
19:22
Speaker 1: a significant effect of a larger slowdown in places that
19:26
Speaker 1: rely more on that state and local tax deduction. Obviously,
19:29
Speaker 1: the second factor is interest rates. Interest rates are creeping up.
19:31
Speaker 1: Word that matters more at that high price point. One
19:35
Speaker 1: thing that I found interesting in a recent report about
19:37
Speaker 1: household debt by the government, it looked like people were
19:41
Speaker 1: actually incurring a significant increase in mortgage debt recently, which
19:46
Speaker 1: kind of flies against the theory that rising interest rates
19:48
Speaker 1: would dampen the demand for mortgages. What do you make
19:51
Speaker 1: of that, especially since it is toward higher quality borrowers.
19:54
Speaker 1: This is not necessarily another subprime mortgage boom. Just to
19:57
Speaker 1: be very clear that the that definitely right. You know,
20:01
Speaker 1: the people who have been um borrowing tend to be
20:03
Speaker 1: high credit borrowers, people with stable incomes, documentable income. I
20:07
Speaker 1: think two factors are driving that increase in in debt outstanding. One,
20:11
Speaker 1: as I've talked about a moment ago, young adults, first
20:14
Speaker 1: time home buyers, have been out and forced the past
20:16
Speaker 1: two years. They're acquiring more eage debts for the first time,
20:20
Speaker 1: often mortgage debt in pricing markets where we know that
20:24
Speaker 1: there has been a booming jobs uh you know, employment situation. UM,
20:28
Speaker 1: so they're able to kind of buy homes, but very
20:30
Speaker 1: pricing homes at that. I think the second part of
20:33
Speaker 1: that rising debt is borrowing, people borrowing against their homes.
20:37
Speaker 1: Home values have recovered very strongly from the bottom of
20:40
Speaker 1: the market in twelve and so people are starting to
20:42
Speaker 1: feel comfortable enough to borrow a little bit against their home,
20:45
Speaker 1: perhaps to do renovations. Um perhaps you know to fund
20:48
Speaker 1: any other um you know education, so so return of
20:51
Speaker 1: the reverse more. It's just real quick here, Aaron, I'm
20:53
Speaker 1: curious to know a year from now, your best guest,
20:56
Speaker 1: do you think the prices on US homes will have
20:58
Speaker 1: gone up? I think, uh, prices will certainly have gone up,
21:01
Speaker 1: they will have gone up at a slower pace than
21:03
Speaker 1: than they went up the past year. Do you think
21:05
Speaker 1: about nationwide? Over the past year, we've seen home value
21:07
Speaker 1: appreciation up about eight percent. I think we'll go down
21:11
Speaker 1: to about six so slower than it's been, but still positive.
21:14
Speaker 1: Aaron to rozz Is, thank you so much for joining us.
21:16
Speaker 1: Really interesting. Aaron to ROZs is economic research director for Zillo.
21:20
Speaker 1: And uh, yeah, those homebuilders have been really beaten up
21:23
Speaker 1: this year, uh down nearly eighteen per cent. Of course,
21:26
Speaker 1: the home builders have also been hit by higher lumber
21:30
Speaker 1: prices and other higher costs tied to labor, so there
21:35
Speaker 1: could be some other issues there, but certainly a big
21:37
Speaker 1: wild card here. A lot of people looking at the
21:39
Speaker 1: housing market is a possible leading indicator, though, as Aaron
21:43
Speaker 1: just said, it has actually let the market up, so
21:46
Speaker 1: perhaps it's just softening to keep up pace with everything else.
22:05
Speaker 1: Corporate divorce court can be a bitter place. Joining us
22:09
Speaker 1: now is Matthew Shettenham's media litigation analyst for Bloomberg Intelligence.
22:14
Speaker 1: He has had his hands full recently with a number
22:16
Speaker 1: of different issues, but in particular the Tribune versus Sinclair battle.
22:21
Speaker 1: They obviously we're going to get married. Not so. This
22:25
Speaker 1: was because the Federal Communications Commission chair, a g pie
22:29
Speaker 1: for all intents and purposes, put the kabash on this
22:32
Speaker 1: tie up. Matthew, thank you so much for being with me.
22:35
Speaker 1: I'm curious from your perspective, you know, what's its stake
22:39
Speaker 1: going forward between these two companies, how much money is
22:41
Speaker 1: on the line, and what needs to happen now to
22:43
Speaker 1: sort of finish out this chapter of would be Love, Yes, Lisa.
22:48
Speaker 1: So it has been kind of an unfortunate saga for
22:51
Speaker 1: for both of these companies over over the past year.
22:54
Speaker 1: This was a deal that was announced in UH May
22:57
Speaker 1: of seventeen. The companies had hoped to approved when approval
23:02
Speaker 1: of their merger you know, early uh this year, and
23:06
Speaker 1: that just never happened, and it all culminated, as you
23:09
Speaker 1: said last week, UH, with Tribune saying enough is enough,
23:14
Speaker 1: we're going to walk away from this deal. And at
23:16
Speaker 1: the same time we're going to commence a lawsuit in
23:20
Speaker 1: in the Delaware Court of Chancery against Sinclair for our
23:25
Speaker 1: damages and in what you put us through for the
23:27
Speaker 1: past year. And and as part of that they said, hey,
23:30
Speaker 1: we we would also like to get one billion dollars
23:33
Speaker 1: in in premium that have that's been lost to our
23:36
Speaker 1: shareholders as as a result of this. So it's the
23:39
Speaker 1: it's not the end of the story yet between these two.
23:42
Speaker 1: How did Sinclair wrong Tribune Media Company? So it's perspective.
23:47
Speaker 1: So yeah, so the you know, it's certainly not a
23:51
Speaker 1: a breach of contract just to have a deal go bad.
23:54
Speaker 1: Tribune says that Sinclair acted beyond the bounds of reasonableness
24:01
Speaker 1: here and it had a duty in its contract it
24:04
Speaker 1: committed to Tribune to take reasonable best efforts to to
24:08
Speaker 1: make this deal happen, and including in working with the
24:12
Speaker 1: two regulators involved here, the Department of Justice and the
24:15
Speaker 1: Federal Communications Commission. And as part of that, Sinclair even
24:19
Speaker 1: had committed they said, will divest stations in ten markets
24:22
Speaker 1: that are that are most likely to to to cause concerns.
24:25
Speaker 1: They said that in the agreement. What Tribune says is
24:28
Speaker 1: that Sinclair then, when it actually got in negotiations with
24:31
Speaker 1: those regulators, sort of pulled back on that and said
24:35
Speaker 1: and consistently said, well, we don't actually want to divest
24:38
Speaker 1: more than you know, maybe three or four stations of
24:41
Speaker 1: those ten. And according to Tribune, by acting out of
24:45
Speaker 1: its own self interest, uh and and and really kind
24:48
Speaker 1: of going back on its own word and its contract. Uh,
24:51
Speaker 1: the allegation is that Sinclair breached its contract and and
24:55
Speaker 1: and lad to ultimate the ultimate demise of the deal.
24:59
Speaker 1: This is really interesting, and perhaps it's not as much
25:01
Speaker 1: on people's radar as it should be, because if Sinclair
25:04
Speaker 1: were forced to pay Tribune one billion dollars, that could
25:07
Speaker 1: be actually a significant loss for Sinclair and a significant
25:10
Speaker 1: gain for Tribune, which has kind of had a rocky,
25:13
Speaker 1: rocky bunch of years now, right right, and and so
25:16
Speaker 1: so the way I see it, though, and I think
25:18
Speaker 1: Tribune may have some merit to to its lawsuit generally speaking,
25:23
Speaker 1: that the idea that that perhaps Sinclair went a little
25:26
Speaker 1: bit beyond what was reasonable under the terms, I think
25:29
Speaker 1: I think Tribune has a decent shot to to sway
25:32
Speaker 1: the court on on that basis. It's gonna take some
25:35
Speaker 1: some proof and it's gonna take some time, but I
25:36
Speaker 1: think there's there's a valid chance. The idea that it
25:39
Speaker 1: can recover a billion dollars in premium for its shareholders
25:42
Speaker 1: is a longer shot though. Uh it's shareholders aren't named
25:48
Speaker 1: in the contract. We're suing under a contract here, and
25:50
Speaker 1: they're not named as beneficiaries under the contract. And at
25:53
Speaker 1: least and at least one court has has in a
25:56
Speaker 1: similar case said now, sorry, we you know, we we
26:00
Speaker 1: this is about a contract. You the company can recover
26:03
Speaker 1: damages because you will promised something shareholders weren't. And so
26:07
Speaker 1: I think Tribune, uh it's it's throwing that number out there.
26:10
Speaker 1: It's in its complaint. It's saying it's going after that
26:12
Speaker 1: shareholder premium. I'm not so convinced that that that's really
26:17
Speaker 1: likely here. So might just pad the bonuses of the
26:20
Speaker 1: executives and nothing more right, And I mean it helps
26:24
Speaker 1: with with with with settlement talks. It's a point of
26:27
Speaker 1: Delaware law that isn't completely settled and so that it's not,
26:31
Speaker 1: you know, frivolous to make the claim and and it
26:34
Speaker 1: will help them in in negotiations and you know, maybe
26:37
Speaker 1: settlement is where this ultimately goes, and this might help
26:40
Speaker 1: in in in that effort. You know, I have to say,
26:43
Speaker 1: you have one of the most interesting jobs of the
26:46
Speaker 1: moment because there have been so many tie ups among
26:48
Speaker 1: big media companies and everybody's trying to get ahead of
26:51
Speaker 1: the next wave of new media. And while we're talking
26:55
Speaker 1: about FCC chair a pie, uh, certainly we haven't really
26:59
Speaker 1: been focused but probably should be, on all of the
27:01
Speaker 1: net neutrality rules and the fact that the agency has
27:05
Speaker 1: been examining possibly rolling back the Obama era regulations. Has
27:10
Speaker 1: there been any progress made on that front? Yeah, So,
27:13
Speaker 1: I mean the the the Republican controlled FCC is well
27:16
Speaker 1: on its way to doing that. In fact, it's enacted
27:20
Speaker 1: uh in order to undo the net neutrality regulations, and
27:25
Speaker 1: that has actually taken effect. Now where we are now,
27:28
Speaker 1: this is a story that here in d C will
27:30
Speaker 1: will not go away. Uh, and and there's no sign
27:33
Speaker 1: that it's going away anytime soon. Because now what what
27:36
Speaker 1: you have is is the next litigation in that front,
27:40
Speaker 1: where the net neutrality supporters are suing the Federal Communications
27:44
Speaker 1: Commission to say no, you you can't undo those rules. Uh,
27:48
Speaker 1: that that was an unlawful action that's going that won't
27:51
Speaker 1: be decided this year, that will take until sometime next year,
27:54
Speaker 1: could even go to the Supreme Court after that, and
27:56
Speaker 1: then you look at hey, does the FCC change hands
27:59
Speaker 1: in twenty need do we go back to a Democrat
28:01
Speaker 1: controlled FCC and do we do this all over again?
28:03
Speaker 1: In other words, net neutrality isn't going away any time soon. Correct.
28:07
Speaker 1: The technicality, the technical requirement for it technically isn't on
28:11
Speaker 1: the books right now. You know, in theory, Comcast and
28:14
Speaker 1: Charter and the I S Peace could go ahead and
28:16
Speaker 1: and and violate not neutrality, you know, as much as
28:19
Speaker 1: they like because there are no rules there. But the
28:22
Speaker 1: the whole idea that this is still hanging out there
28:25
Speaker 1: is itself a form of a check I think on
28:28
Speaker 1: the companies and that it sort of puts them on
28:29
Speaker 1: their best behavior if they if they started to be
28:32
Speaker 1: real egregious in their traffic management, I think you could
28:35
Speaker 1: you could. You know, there's a real threat of of
28:38
Speaker 1: of regulation and Congress stepping in with with something that
28:40
Speaker 1: the companies wouldn't like. So not neutrality technically isn't required,
28:44
Speaker 1: But practically speaking, I think it will be for for
28:47
Speaker 1: for some time. Just real quick, can you just give
28:50
Speaker 1: us a real quick primer on net neutrality, just in
28:53
Speaker 1: caseity was listening. It sounds great, but I know it's
28:56
Speaker 1: one of those things you know, you have to explain
28:59
Speaker 1: every time. It's just a basic idea that that even
29:01
Speaker 1: though the internet service providers Comcast, Charter and your phone companies,
29:05
Speaker 1: even though they own the network, that doesn't mean they
29:07
Speaker 1: get to control all the traffic or how it runs.
29:10
Speaker 1: Over at the ideas that they should treat the network
29:12
Speaker 1: as an open platform, like an open highway that anyone
29:15
Speaker 1: can get on, and so they shouldn't be able to
29:17
Speaker 1: to set fees to prioritize you know, Facebook over Netflix
29:22
Speaker 1: or you know, the next Netflix doesn't doesn't need to
29:24
Speaker 1: get special permission from Comcast in order to create the
29:27
Speaker 1: next great media company. It should be an open platform.
29:30
Speaker 1: And uh but but the the company's i sp s
29:33
Speaker 1: push back and say, look, we invest billions of dollars
29:35
Speaker 1: to build these networks and so we should be able
29:38
Speaker 1: to control them. Thank you so much for being with
29:40
Speaker 1: us again. I think you have probably one of the
29:42
Speaker 1: most fascinating jobs at this moment of dramatic transformation. In
29:45
Speaker 1: the media industry. Matthew shoulden Helm. He is media litigation
29:49
Speaker 1: analyst for Bloomberg Intelligence. Thanks for listening to the Bloomberg
29:56
Speaker 1: P and L podcast. You can subscribe and listen to
29:59
Speaker 1: interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
30:04
Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm
30:07
Speaker 1: on Twitter at Lisa Abramo. It's one before the podcast.
30:11
Speaker 1: You can always catch us worldwide on Bluebirg Radio.