Latest / Bloomberg Intelligence / Max Grounding Will Cost Boeing $100 Million Per Month (Podcast)

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Max Grounding Will Cost Boeing $100 Million Per Month (Podcast) · Bloomberg Intelligence

0:02
Speaker 1: Welcome to the Bloomberg Penel Podcast. I'm Paul swing you.
0:05
Speaker 1: Along with my co host Lisa Brahma Waits. Each day
0:07
Speaker 1: we bring you the most noteworthy and useful interviews for
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Speaker 1: you and your money. Whether at the grocery store or
0:12
Speaker 1: the trading floor. Find a Bloomberg Penl podcast on Apple
0:15
Speaker 1: podcast or wherever you listen to podcasts, as well as
0:17
Speaker 1: at Bloomberg dot com. Bowing back on the hot seat
0:23
Speaker 1: they cannot catch a break. The latest is at Seattle
0:26
Speaker 1: Times is reporting that the f a A was alerted
0:30
Speaker 1: to issues at Boeing and Bowing should have been aware
0:32
Speaker 1: of some of the regulatory problems here seven years ago.
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Speaker 1: Joining us now to talk about it is Peter Robinson,
0:40
Speaker 1: projects an investigations reporter, as well as George Ferguson of
0:44
Speaker 1: Bloomberg Intelligence. Uh, Peter, let's start with you. What do
0:48
Speaker 1: we know here? What should Boeing have been aware of
0:52
Speaker 1: that led to the two fatal crashes that have left
0:56
Speaker 1: so many people wondering whether their new jet is fit
1:00
Speaker 1: to fly well? The the issue for Boeing and that
1:03
Speaker 1: the reason the shares are down almost three percent today
1:06
Speaker 1: is that the the process by which the seven thirty
1:09
Speaker 1: seven plane and involved in the crashes was certified as
1:12
Speaker 1: by the f a A is is coming under really
1:14
Speaker 1: unusual scrutiny by both the Department of Transportations Inspector General and,
1:19
Speaker 1: according to the Wall Street Journal, federal prosecutors. A grand
1:23
Speaker 1: jury in Washington, d C. That the journal is reporting
1:26
Speaker 1: issued a subpoena to at least one person involved in
1:28
Speaker 1: the planes development, which is not something that in recent
1:33
Speaker 1: memory has happened within a new aircraft program. Yeah, George,
1:38
Speaker 1: a question for you, if I mean, the thing that
1:40
Speaker 1: strikes me about Peter story what was unnamed sources in
1:45
Speaker 1: the Seattle Times that they underestimated the power of the
1:50
Speaker 1: flight control software that they reported to the f a A.
1:53
Speaker 1: And the newspaper also cited and said that the system
1:56
Speaker 1: could not reset itself each time a pilot or or
2:00
Speaker 1: each time a pilot responds. In essence, it ratcheted the
2:03
Speaker 1: horizontal stabilizer into a dive position. How does something like
2:07
Speaker 1: that just go by the boards? Yeah, I mean, I
2:11
Speaker 1: think that's uh, that's going to be the big question here.
2:14
Speaker 1: It sounds like the first time they showed the f
2:16
Speaker 1: a A some of that data, that's the deflection they
2:19
Speaker 1: had on that on the elevator, that trim piece was
2:22
Speaker 1: much less than it ultimately was at at the final
2:26
Speaker 1: approval or what have you gonna call it? For the airplane,
2:28
Speaker 1: so um, it shouldn't go by the boards the f
2:32
Speaker 1: A ship been looking at that closer. I think that
2:35
Speaker 1: there's always a challenge when you're when you're the big
2:39
Speaker 1: behemoth in the in the industry. Right. We've seen it
2:43
Speaker 1: in finance, where the regulators try to regulate an industry
2:46
Speaker 1: that's probably a heck of a lot more conversant and
2:49
Speaker 1: what's going on inside the you know, in the cutting
2:53
Speaker 1: edge of the space. And I think that's you have
2:56
Speaker 1: a bit of maybe the FA differring too much to
2:58
Speaker 1: Boeing here and thinking they're were in the cutting edge
3:00
Speaker 1: and not focusing on details like that, details details that
3:05
Speaker 1: led to the death of hundreds of people. Uh. But
3:08
Speaker 1: Peter to that point to exactly what George Ferguson was
3:11
Speaker 1: just saying, how much is this a problem with the
3:13
Speaker 1: f a A And how much is this a problem
3:15
Speaker 1: with Bowen? I mean, who looks worse here? They both
3:19
Speaker 1: are on the hot seats. As you were saying that
3:21
Speaker 1: the the issue we we we reported on UM concerns
3:25
Speaker 1: that people within the f A had as as long
3:27
Speaker 1: as seven years ago, that people, UH, we were set
3:32
Speaker 1: enough about this way that Boeing had over the approval
3:35
Speaker 1: process that they went to the Department of Transportations Inspector
3:38
Speaker 1: General and said that there needed to be changes in
3:42
Speaker 1: the process. Who are those people? Can you just give us?
3:44
Speaker 1: So the the in its report, which was only released
3:49
Speaker 1: UM in a public records request, which didn't get any
3:51
Speaker 1: attention at the time, some of these allegations weren't anonymous
3:55
Speaker 1: facts is which were sent from f A managers UM
3:58
Speaker 1: to the O I G and and these UH employees
4:01
Speaker 1: that the FAA felt that they weren't being heard and
4:04
Speaker 1: that they were trying to hold Bowing accountable but their
4:07
Speaker 1: managers were not letting them. So. Again but back to
4:11
Speaker 1: the the you know, as you say, who's more culpable,
4:15
Speaker 1: the f A or or Boeing. SKay, we're trying to
4:19
Speaker 1: um Peter. They were trying to speed up the certification
4:22
Speaker 1: process because they were behind. You know, you talk about
4:25
Speaker 1: bank regulation being one thing. You know, somebody embezzles money,
4:28
Speaker 1: a plane doesn't fall out of the sky. To to
4:31
Speaker 1: try to rush a brand new design of an airplane
4:34
Speaker 1: seems perilous and irresponsible. I'm sorry, I understand, but you know, yes,
4:45
Speaker 1: that is a question, and I guess that George to you,
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Speaker 1: I'm curious, do you have a sense of what the
4:51
Speaker 1: bigger liability is to Bowing at this point from a
4:54
Speaker 1: from a financial standpoint? Is it the potential for lawsuits
4:58
Speaker 1: or is this a potential for are for airlines not
5:01
Speaker 1: ordering from them because of concerns about safety? Yes, so,
5:05
Speaker 1: I mean I think you know the numbers that we're
5:07
Speaker 1: starting to run, is that the cost of the airplane
5:11
Speaker 1: being out of service and getting it back in service
5:14
Speaker 1: will be a lot more. I mean, notwithstanding our sensitivity
5:17
Speaker 1: to the fact that people died on this crash, these
5:20
Speaker 1: two crashes, you know, we kind of see Bowings liability
5:23
Speaker 1: being about a hundred million dollars a month um to
5:27
Speaker 1: buy to support airlines that have airplanes grounded in maintaining
5:32
Speaker 1: their um the route networks. We don't think there's enough
5:36
Speaker 1: airplanes actually parked to get that done as we go
5:39
Speaker 1: through the year, because there's the majority of the deliveries
5:42
Speaker 1: for Boeing seven seven throughout this year would be would
5:45
Speaker 1: have been max is like I still think they'll get
5:48
Speaker 1: this airplane in service UM in a bunch of months.
5:50
Speaker 1: I think the the the burden will be hired to
5:54
Speaker 1: get into service, given the issues at the f A
5:56
Speaker 1: A and and Boeing. But we see again a hundred
5:59
Speaker 1: million of month. We think every month as another twelve
6:02
Speaker 1: or months, two hundred and twelve months, three four million UM,
6:06
Speaker 1: and we haven't even started to We can't really give
6:08
Speaker 1: a good estimate on what it's going to take to
6:11
Speaker 1: fix the airplane. We think if it takes work to
6:14
Speaker 1: the structure, that will be a lot more money than
6:17
Speaker 1: just a software fix. And I tend to think there'll
6:19
Speaker 1: be at least some work under the structure UM to
6:21
Speaker 1: make it easier to shut off the autopilot and maybe
6:24
Speaker 1: to manage some of the center gravity issues. So Peter
6:28
Speaker 1: um back to the public if you will, UM. Even
6:32
Speaker 1: solving all these problems, UM, it doesn't strike me that
6:35
Speaker 1: the consumer is going to feel terribly confident flying in
6:39
Speaker 1: this airplane immediately after the fix. How does that impact bowing,
6:43
Speaker 1: how does that impact the air traffic system, etcetera. Well,
6:47
Speaker 1: there there's a lot of conversation that that this is
6:51
Speaker 1: going to impact bowing future sales of this plane. And
6:54
Speaker 1: already you see commentary on social media. You see that
6:57
Speaker 1: Line Air which I had the first seven thirty seven
7:00
Speaker 1: Mac they crashes, has has pulled a twenty two billion
7:03
Speaker 1: dollar order for Boeing planes. Uh so, over time it
7:08
Speaker 1: could create pressure for Boeing to to move on to
7:11
Speaker 1: the next generation of airplanes, which is going to be
7:13
Speaker 1: extremely expensive, and just to sort of finish up here. George,
7:19
Speaker 1: I'm curious from your perspective going forward, what does Boeing
7:22
Speaker 1: need to do to give people confidence that it has
7:25
Speaker 1: reached a bottom in this whole issue. Yeah, I think.
7:30
Speaker 1: I think that any fix that comes out can't be
7:33
Speaker 1: a partial fix. It has to be clear that it
7:36
Speaker 1: is um the right fix, maximize his safety, I think,
7:41
Speaker 1: to restore faith in Boeing, I think that's gonna that's
7:45
Speaker 1: going to be huge. Thank you so much to both
7:47
Speaker 1: of you. Peter Robinson, Projects an investigations reporter for Bloomberg News,
7:51
Speaker 1: joining us from Seattle. George Ferguson, Senior Aerospace, Defense and
7:54
Speaker 1: Airlines analyst for Bloomberg Intelligence. Right now it is that
8:13
Speaker 1: time to take a look at small and mid cap shares.
8:16
Speaker 1: Dave Wilson has not blasted off into space. Just yet,
8:19
Speaker 1: he is joining us here in her believe we're getta active.
8:21
Speaker 1: Broger Studios. Small caps and mid caps doing pretty well.
8:24
Speaker 1: I am firmly on the ground. Cap stocks are firmly higher.
8:30
Speaker 1: The Wrestle two thousand index up one percent, while the
8:32
Speaker 1: S and P five hundred is only up four tenths
8:34
Speaker 1: of a percent. So smaller companies leading the way here
8:37
Speaker 1: and the Russell's biggest game belongs to Dermira, whose ticker
8:40
Speaker 1: is d e r M. The drug developer has soared
8:44
Speaker 1: nineties seven per cent. Second stage study data showed the
8:48
Speaker 1: company's proposed treatment for a skin condition was safe and effective.
8:52
Speaker 1: Dermira's results also lifted shares of a Claris Therapeutics ticker
8:56
Speaker 1: a c r S. They're up twenty two and a
8:59
Speaker 1: half percent. The company is developing a rival medicine for
9:02
Speaker 1: the condition known as a topic dermatitis. Now. The Sans
9:06
Speaker 1: Joanes Solutions ticker dz s I has risen ten and
9:10
Speaker 1: a half percent. To communications equipment maker narrow It is
9:13
Speaker 1: projected first quarter loss before interest, taxes, depreciation and amortization.
9:18
Speaker 1: The russell steepest drop belongs to n II Holdings ticker
9:21
Speaker 1: n i h D, the owner of a seventy percent
9:24
Speaker 1: stake in the wireless company next to Help Brazil is
9:27
Speaker 1: down twenty six percent, and II is Selliens holding to
9:30
Speaker 1: Mexico's American Mobile as part of a nine five million
9:33
Speaker 1: dollar takeover and will dissolve once the deal is final.
9:37
Speaker 1: And Synaptics ticker s y n A as well in
9:39
Speaker 1: twenty percent. The maker of touch sensitive paths from mobile
9:43
Speaker 1: phones and computers, was cut to neutral from by Mitzuho Financial,
9:47
Speaker 1: which cited market share losses. DA Wilson firmly on earth.
9:51
Speaker 1: Thank you so much for that, Davilis some lyrics sucks. Editor.
9:55
Speaker 1: Right now, let us turn our focus to Lift, seeking
9:57
Speaker 1: to raise almost two point one billion dollars in its
10:01
Speaker 1: initial public offering, which will be the largest startup listing
10:04
Speaker 1: since Snaps twenty seventeen. I p O joining us now
10:08
Speaker 1: to discuss a Tish Davda, chief executive officer of Equiti
10:12
Speaker 1: Zen based in New York, A tich, what do you
10:15
Speaker 1: think of this valuation, which would give the firm a
10:18
Speaker 1: value of about twenty billion dollars. Well, I'll tell you this.
10:21
Speaker 1: I don't know that Lift wants to be compared to
10:23
Speaker 1: Snap too many times ahead of this public list they're
10:26
Speaker 1: working on. Uh lifts last valuation was at fifteen billion dollars.
10:31
Speaker 1: UH and Equities and is a firm that allows buying
10:33
Speaker 1: and selling of private companies with issuer approval for many
10:37
Speaker 1: years ahead of the I p O. With that said,
10:40
Speaker 1: you know, looking at our data and not talking about
10:42
Speaker 1: anyone company in particular, I think it's uh, you know,
10:45
Speaker 1: I think it's pretty promising for a company to come
10:47
Speaker 1: out there and put evaluation target meaningfully higher, it's above
10:51
Speaker 1: round um because you know, we've definitely seen some some
10:55
Speaker 1: unicorns go out to the public market with with the
10:58
Speaker 1: value at or even sometimes below their last private valuation.
11:02
Speaker 1: So this definitely seems promising. A question for you is
11:05
Speaker 1: we we had a Bloomberg story that said in its filing,
11:09
Speaker 1: Lifts said that expenses are likely to increase and that
11:12
Speaker 1: it may not be able to achieve or maintain profitability
11:16
Speaker 1: in the future. How does that speak to attended to
11:18
Speaker 1: hold multiple Basically, you know, that's UH that's actually becoming
11:23
Speaker 1: more and more common in a lot of companies going public,
11:26
Speaker 1: a lot of unicorns going public. Look if you take
11:28
Speaker 1: a look at what wall streets looking for Uh. Wall
11:31
Speaker 1: Street seeing a record low number of publicly listed companies
11:34
Speaker 1: into which it can and it can invest. Uh. You know,
11:37
Speaker 1: growth has been continuously rewarded over the last several years.
11:41
Speaker 1: And I think what LIFT is trying to say publicly, um,
11:45
Speaker 1: the same way that you know, Uber apparently next month
11:48
Speaker 1: is going to go out with its own roads show
11:50
Speaker 1: and is gonna likely say the exact same thing, same
11:52
Speaker 1: thing We've seen many other companies out there that are
11:54
Speaker 1: public now say, is we are focused on growth. We
11:59
Speaker 1: believe we have that of the interneconomics. Uh so if
12:02
Speaker 1: we ever turn off the marketings pigot, we automatically turn
12:05
Speaker 1: positive in terms of our net income. But one of
12:08
Speaker 1: the best things we see about LIFT, and it is promising,
12:10
Speaker 1: is that in addition to a growth, you know, they
12:13
Speaker 1: went from about a billion in revenue to over two
12:15
Speaker 1: point one in revenue last year, we see shrinking net income,
12:19
Speaker 1: lost margins. UM. That's not something you see in every company.
12:22
Speaker 1: It's obviously very important to show that there's a line
12:25
Speaker 1: of sight to profitability. UH. And I think the LIFT
12:27
Speaker 1: is trying to make sure that that is seen by
12:30
Speaker 1: its you know, by the investors. It's road showing too today.
12:33
Speaker 1: So one thing a teach that you said was that
12:35
Speaker 1: probably Lift doesn't want to be associated with the Snap
12:38
Speaker 1: i p O too much, given the disastrous performance of
12:42
Speaker 1: that IPO in subsequent trading months. But I do have
12:45
Speaker 1: to wonder if there is a similarity here, because these
12:47
Speaker 1: are both startups that waited quite a long time before
12:51
Speaker 1: the i p oed being able to get financing through
12:54
Speaker 1: private markets and through public debt markets. I'm just wondering,
12:58
Speaker 1: does that set these company needs up to have less upside.
13:01
Speaker 1: In other words, they've already become mature enough that the
13:05
Speaker 1: growth perspective just isn't there. I think that's true for
13:10
Speaker 1: the typical public market only investor. I mean, one of
13:13
Speaker 1: the reasons our business exists is that, you know, equities
13:16
Speaker 1: don't allow is qualified, accredited investors that want to invest
13:20
Speaker 1: ahead of the I p O to actually gain that access.
13:24
Speaker 1: Uh So, whether or not you know it's it's Lift
13:27
Speaker 1: or Uber or the you know twenty other companies that
13:29
Speaker 1: we believe are going to go public later this year,
13:31
Speaker 1: I think one thing is absolutely true is that you know,
13:33
Speaker 1: you hit the nail on the head more and more value,
13:36
Speaker 1: more and more value creation is happening in the private
13:38
Speaker 1: markets now. The story Lift and Uber and many of
13:41
Speaker 1: these other firms are trying to say is that we're
13:44
Speaker 1: still in the kind of early stages of transportation as
13:47
Speaker 1: a service as a sector um and so you know
13:50
Speaker 1: you're gonna see Lift come out and say, you know,
13:52
Speaker 1: here's why we see U. You know, we only operate
13:55
Speaker 1: in North America at the moment. There's the rest of
13:57
Speaker 1: the world to conquer. Uber is going to come out
13:59
Speaker 1: hopefull a month from now and come out and say, look,
14:01
Speaker 1: we already have bits and pieces of the world now.
14:04
Speaker 1: In addition to ride sharing, we're offering Uber eats and
14:08
Speaker 1: autonomous vehicles and you know the four or five other
14:11
Speaker 1: ways in which they can see, um, you know, a
14:14
Speaker 1: way to capture market. I think one comparison though, that
14:17
Speaker 1: Lift wants to avoid but can't get around, is that
14:20
Speaker 1: of corporate governance. You see. You know, the same thing
14:22
Speaker 1: that Google and Facebook did, that Snapped tried to do,
14:26
Speaker 1: it did successfully, really didn't work out well for them,
14:28
Speaker 1: is the dual class listing of shares and listed Lift
14:31
Speaker 1: is uh, you know, it's no different in that matter.
14:33
Speaker 1: A TI Data, Thank you so much for being with
14:35
Speaker 1: us a Ti Dafta, chief executive of Equity Zen talking
14:39
Speaker 1: about that lift I p O. Over the weekend, President
15:01
Speaker 1: Trump tweeting about General Motors plan to close an Ohio
15:06
Speaker 1: factor their closure of an Ohio factory, demanding that the
15:10
Speaker 1: carmaker reopen UH the facility, also saying that the United
15:15
Speaker 1: Auto Workers, run by Democrats, are to blame for this closure.
15:20
Speaker 1: Joining us now, Alan Baum principle of Baum and Associates,
15:23
Speaker 1: which is in a Michigan based research firm focused on
15:26
Speaker 1: automotive UH for analysis of auto sales. Allan, thank you
15:29
Speaker 1: so much for being with us. Let's start with what
15:33
Speaker 1: this closure actually came as a result of How long
15:36
Speaker 1: was it in the works. Can you give us some background? Well,
15:39
Speaker 1: the the obvious problem is that GM has far more
15:43
Speaker 1: assembly plants than it has sales that that justified those plants.
15:47
Speaker 1: And obviously that's particularly true on the car side. UM
15:51
Speaker 1: and so you saw closures uh in Oshua, uh In,
15:55
Speaker 1: in Lordstown, uh and in Detroit ham Trammic the unforced.
16:00
Speaker 1: The thing is GMS cars are a lot better than
16:02
Speaker 1: their sales. UM. Now, of course GM some responsibility for that.
16:07
Speaker 1: They've had some marketing issues on those cars. UM. But
16:11
Speaker 1: the other thing is that cars and crossovers are in
16:14
Speaker 1: fact built on the same platform, and they're they're made
16:17
Speaker 1: to be built together. UH, Honda, Toyota, Nissan all understand that.
16:22
Speaker 1: Obviously the rest of the industry does as well, they're
16:25
Speaker 1: just not as good as implementing it. And obviously GM
16:28
Speaker 1: is is an example of that how much of this
16:31
Speaker 1: is economics and how much of it is politics? And
16:34
Speaker 1: the GM said they've they've placed more than a thousand
16:37
Speaker 1: employees from the unallocated plants and that they have opportunities
16:41
Speaker 1: available for basically all of the impacted employees. And of
16:45
Speaker 1: course those employees are going to have to give up
16:47
Speaker 1: a huge uh portion of their personal lives if because
16:51
Speaker 1: the UW contract allows for bumping UM to other plants,
16:55
Speaker 1: but of course the plants are are not necessarily within
17:00
Speaker 1: the Lord's town or even Cleveland area, and so they're
17:03
Speaker 1: they're talking about major moves the the the issue is
17:08
Speaker 1: obviously much more economic, and the obvious problem is we're
17:11
Speaker 1: also into a period where the auto industry is starting
17:14
Speaker 1: to turn south, not dramatically, but the auto industry was
17:18
Speaker 1: ahead of the overall economy and its recovery. It's also
17:22
Speaker 1: ahead of the overall economy and its downturn. How much
17:26
Speaker 1: is this alan a case of automation taking jobs and
17:31
Speaker 1: just not there being the need for as many plants
17:33
Speaker 1: or as many employees at each plant. And how much
17:37
Speaker 1: is this that it is just cheaper to produce cars
17:40
Speaker 1: in the parts elsewhere? Well, and that's not just a
17:44
Speaker 1: North American issue. Obviously, North America is competing with the
17:49
Speaker 1: rest of the world. When you look at the case
17:51
Speaker 1: of the Detroit three. UH, the Detroit three is generally
17:57
Speaker 1: maintaining obviously declining in some situation issues. It's it's footprint
18:01
Speaker 1: here in then in North America, whereas the rest of
18:04
Speaker 1: the world's automakers see North America as a great opportunity.
18:09
Speaker 1: Our volume is not increasing so much, but our our
18:12
Speaker 1: profitability remains among the highest in the world. UM with
18:16
Speaker 1: respect to automation. That's true across the board. UH. It's
18:21
Speaker 1: it's true when you particularly when you have declining profit
18:26
Speaker 1: margins and you need to reduce your cost UH. The
18:29
Speaker 1: Detroit three UH in cars obviously have had that. Again,
18:34
Speaker 1: the Detroit three could be as profitable UH and sell
18:39
Speaker 1: more cars than they do as compared to their competitors.
18:43
Speaker 1: They simply haven't put as much opportunity or focus on
18:49
Speaker 1: cars and perhaps more importantly, on crossovers where the market
18:54
Speaker 1: is growing. Sure they're strong, but they're losing some of
18:58
Speaker 1: their their share there as well. Is there an opportunity
19:02
Speaker 1: for the for the North American three, if you will,
19:05
Speaker 1: to get a potential bump if we imposed tariffs on
19:08
Speaker 1: European cars, Well, this sort of be a backdoor push
19:11
Speaker 1: for them. Maybe. Well, that's that's the idea. The the
19:15
Speaker 1: of course, the dirty little secret is all automakers use
19:20
Speaker 1: lots of parts and to different levels of degree, car
19:25
Speaker 1: imports from around the world, and of course I should
19:28
Speaker 1: say vehicle imports. Um So in theory the Detroit three
19:34
Speaker 1: would be less disadvantaged in the other players. But the
19:39
Speaker 1: point is what I just said, less disadvantaged. Uh, Those
19:44
Speaker 1: those brute forced tarraffs are likely to reduce the overall industry,
19:50
Speaker 1: and obviously UH to the extent that that a company
19:54
Speaker 1: is less in less than great shape relatively speaking, they'll
19:59
Speaker 1: be heard even more. Allan boun thank you so much
20:02
Speaker 1: for being with us, Alan bound principle of Baum and
20:04
Speaker 1: Associates joining us from Michigan and Vince I am struck
20:08
Speaker 1: by the idea that this is Ohio, we're talking about
20:11
Speaker 1: a swing state, and that President Trump is making this
20:14
Speaker 1: into something of a campaign issue as we sort of
20:17
Speaker 1: have a drumbeat towards elections. Sort Of interesting to note that, yeah,
20:22
Speaker 1: it does have it rings, a lot of politics and
20:25
Speaker 1: a lot less economics to me, to be perfectly honest.
20:27
Speaker 1: Generator shares though, are down one percent today. Interesting to
20:31
Speaker 1: see that to sort of what degree President Trump's involvement
20:35
Speaker 1: in this just there is a certain political risk that
20:39
Speaker 1: is inherent to companies regardless of the economic factors. Right now,
20:57
Speaker 1: let us talk about the wicked experience of trying to
21:00
Speaker 1: bet on the Commerce Bank Deutsche Bank tie up that
21:03
Speaker 1: has been in the works for so long. Joining us
21:06
Speaker 1: now is a Lisa Martin Usy. She's a columnist covering
21:08
Speaker 1: finance for a Bloomberg opinion. Joining us from London. We
21:11
Speaker 1: have seen the shares rally of both Deutsche Bank and
21:14
Speaker 1: Commerce Bank. I guess the key question is how much
21:17
Speaker 1: of a game changer is it that the German government
21:20
Speaker 1: has officially or not officially but given a sign that
21:23
Speaker 1: they are okay with the job cuts that would make
21:27
Speaker 1: this tie up worthwhile? Yes. On the one hand, as
21:29
Speaker 1: you say, the government has signaled that they would be
21:32
Speaker 1: they wouldn't stand in the way of job cuts. On
21:34
Speaker 1: the other hand, you had Angla locals. The chief of
21:37
Speaker 1: staff today is signaling that, you know, there wouldn't be
21:40
Speaker 1: too keen on job cuts. And in the middle all
21:42
Speaker 1: of this is the role that will be played by
21:45
Speaker 1: the employee and label representatives that of course sit on
21:48
Speaker 1: both of those banks supervisory boards. So we are quite
21:52
Speaker 1: a long way, it feels like from from an agreement. Um,
21:56
Speaker 1: the formal discussions only started over the weekend, but critical
22:00
Speaker 1: to the steel working would be tens of thousands of
22:03
Speaker 1: job cuts in Germany, something in the order of you know,
22:06
Speaker 1: as many as thirty thous So getting the backing for
22:10
Speaker 1: those is going to be absolutely crucial. How much of
22:13
Speaker 1: this when you put it all together, um, and you
22:17
Speaker 1: know it's separately, both banks would have had to have
22:19
Speaker 1: job cuts and consolidation to make both institutions work anyway,
22:24
Speaker 1: how much of this makes it a little easier to
22:26
Speaker 1: swallow in job cuts when you say, well, there was
22:29
Speaker 1: a merger and that the job cuts are as a
22:31
Speaker 1: result of the consolidation and the merger as opposed to
22:34
Speaker 1: just meaning both absolutely. But I think the trouble there
22:37
Speaker 1: is that these two banks overlapped considerably in parts of
22:42
Speaker 1: commercial and consumer banking in Germany, and by putting them together,
22:45
Speaker 1: as you are allowing the cost, but you're not necessarily
22:47
Speaker 1: changing the competitive landscape in Germany because they would become
22:51
Speaker 1: the dominant player. They're still competing with hundreds of local
22:55
Speaker 1: savings banks, local cooperatives that compete on very different terms
23:00
Speaker 1: that they're not necessarily competing to make huge you know,
23:02
Speaker 1: to make profit, so that dynamic will remain unchanged. And
23:06
Speaker 1: on top of that, you're not really grapping with the
23:09
Speaker 1: weaknesses the Deutsche Bank banks to the table, which is
23:12
Speaker 1: it's investent bank, because Commis Bank doesn't have much of
23:15
Speaker 1: an investon bank. So putting those together isn't really going
23:18
Speaker 1: to change the difficulties that Deutsche Bank has. On Wall Street,
23:22
Speaker 1: I'm watching the Coco bonds. These are the tier one
23:25
Speaker 1: capital debt instruments of Deutsche Bank that have been pretty
23:29
Speaker 1: volatile over the past few years, and I'm struck by
23:32
Speaker 1: how much they're gaining on this news. I'm just wondering
23:36
Speaker 1: across the board whether this is a bet that the
23:39
Speaker 1: German government will enable Deutsche Bank and Commerce Bank together
23:44
Speaker 1: to have higher capital buffers and that these that these
23:47
Speaker 1: instruments will be treated nicely in any kind of merger. Yes, well,
23:52
Speaker 1: the the expectation is that this deal would come with
23:55
Speaker 1: some kind of capital requirement or capital need and um
23:59
Speaker 1: those talk about how the bad wild the negative good
24:02
Speaker 1: will that the you know, the target would would would
24:07
Speaker 1: bring up, and how that could be used to strengthen
24:09
Speaker 1: capital um. But I think, you know, more to your
24:12
Speaker 1: point about Germany is backing. I think even though on
24:15
Speaker 1: paper the steel doesn't look too great, the fact that
24:18
Speaker 1: Germany behind the scenes seems to be orchestrating it is
24:22
Speaker 1: increasing the odds that there actually happening. Does this does
24:26
Speaker 1: it dramatically change the tier one capital? Holdings of both
24:30
Speaker 1: banks are our Deutsche and commerces Um, for instance, large
24:33
Speaker 1: holders of sovereign debt, as as a lot of the
24:35
Speaker 1: Italian banks are. Does it? Does it does that cause
24:39
Speaker 1: them or will that force them to switch out of
24:41
Speaker 1: some of those assets into others to structure the capital? Well,
24:44
Speaker 1: as you come, as you come together, there's obviously into
24:46
Speaker 1: a review of the assets and both books and you know, yes,
24:49
Speaker 1: Commace Bank UM own some sovereign Talian sovereign a talient
24:54
Speaker 1: debt that it hasn't that mark to market UM though.
24:58
Speaker 1: You know, on the other hand, Deutsche Bank has a
25:00
Speaker 1: very large UM portion of of Level three assets which
25:04
Speaker 1: you know may have to review. So UM I think
25:06
Speaker 1: it's it's you know, we don't really have the numbers yet,
25:08
Speaker 1: so it's a little bit unclear to see how they
25:09
Speaker 1: come out of this. But the expectation is that UM
25:13
Speaker 1: there would be some kind of capital requirement needed. What
25:16
Speaker 1: happens to the investment banking Deutsche Bank, Well, this is
25:20
Speaker 1: what the talk still is about. And you know, the
25:22
Speaker 1: Commons Bank has shifted away from that space, so they're
25:25
Speaker 1: unlikely to want to inherit a large investment bank that's
25:29
Speaker 1: so inefficient UM and so it doesn't really alleviate the
25:33
Speaker 1: pressure on on Deutsche Bank and a combined entity to
25:36
Speaker 1: try and make that business work. People have talked about
25:39
Speaker 1: retrenching from the US, certainly in terms of trying to
25:42
Speaker 1: compete head on with Wall Street firms or new US staff.
25:46
Speaker 1: Is what they would have to look at and potentially
25:49
Speaker 1: scale back considerably their equities business, which is subscale. So
25:53
Speaker 1: but Deutsche Bank has been actually scaling back quite some
25:55
Speaker 1: time in the United States, at least from a competitive advantage.
25:58
Speaker 1: But as you said, putting the banks together, while you
26:01
Speaker 1: you really don't have a United European banking system, puts
26:05
Speaker 1: them continues at a state of disadvantage. Um. Interesting how
26:10
Speaker 1: this is going to play out. Most of the people
26:12
Speaker 1: that I've talked to don't feel terribly confident that this
26:14
Speaker 1: is really a solution for both of the banks. What's
26:16
Speaker 1: your take on that? Agreed? I think you know it
26:19
Speaker 1: leaves you know, it leaves the combined business still very
26:23
Speaker 1: much exposed to the interest rate circle as well here,
26:26
Speaker 1: and of course we're into negative. We have been a
26:28
Speaker 1: negative territory for some years. There's no real end in
26:31
Speaker 1: sight to that. And it still doesn't alleviate um that
26:35
Speaker 1: Prussia and you know, in the in the German market,
26:38
Speaker 1: they're still very exposed to the competitive Prussias. So it
26:42
Speaker 1: doesn't really solve much that they're trying to glapple with independently.
26:46
Speaker 1: A Lisa Martin Newsy, Thank you so much for being
26:48
Speaker 1: with us calumnist covering finance for Bloomberg Opinion. Thanks for
26:51
Speaker 1: listening to the Bloomberg penl podcast. You can subscribe and
26:54
Speaker 1: listen to interviews at Apple Podcasts or whatever podcast platform
26:57
Speaker 1: you prefer. Paul Sweenie, I'm on Twitter at et Sweeney,
27:00
Speaker 1: I'm Lisa Abram Whods. I'm on Twitter at Lisa Abram
27:03
Speaker 1: whits One. Before the podcast, you can always catch us
27:05
Speaker 1: worldwide on Bloomberg Radio