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The Saudis Need To Pick A Fall Guy: CIA Veteran Devine · Bloomberg Intelligence

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  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
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  Speaker 1: or the trading floor. Find the Bloomberg p m L
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  Speaker 1: Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Let's
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  Speaker 1: turn our focus now to Jamal Kashogi, the Saudi Arabian
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  Speaker 1: writer journalist who was killed sensibly at the Saudi consulate
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  Speaker 1: high level Turkish officials so that they have evidence about this.
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  Speaker 1: This has thrown a lot of diplomatic relations into questions,
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  Speaker 1: particularly between the US and Saudi Arabia. Saudi Arabia had
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  Speaker 1: to care is is having to see corporate leaders move
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  Speaker 1: away from the nation joining us now to try to
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  Speaker 1: give us some insight into the potential impact of this
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  Speaker 1: move is Jack Divine, former acting director of the CIA
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  Speaker 1: and founding partner and president of security firm The Arkan Group. Jack,
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  Speaker 1: what do you make of this? What's going on here? Well,
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  Speaker 1: the news is unfolding by the minute. I mean, it
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  Speaker 1: is one of the more bizarre cases that I can
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  Speaker 1: remember in terms of diplomacy or in the intelligence world.
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  Speaker 1: So what's going on is our one of our most
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  Speaker 1: important allies now has a political crisis on his hands,
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  Speaker 1: which by extension, draws us into it and everybody and
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  Speaker 1: and uh, I was just going to say in the
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  Speaker 1: Middle East, but also in Europe. So it's it's a
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  Speaker 1: big story that has to be resolved. How could it
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  Speaker 1: be resolved? Well, the blue book would tell you that
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  Speaker 1: when you get a crisis like this, um, the the
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  Speaker 1: focus of it steps aside and a new person is appointed. Okay,
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  Speaker 1: Unfortunately blue blue books are collecting dust on OCE shelves nowaday,
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  Speaker 1: But I think the I don't think. Yeah, the way
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  Speaker 1: the way the game is played, so to speak, whether
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  Speaker 1: it's diplomacy, military, there are all there are a set
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  Speaker 1: of principles on pond which each of the people in
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  Speaker 1: those fields of endeavor operate. Right, So you would say,
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  Speaker 1: when you get this crisis. For example, when Jack Kennedy
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  Speaker 1: ran into debate at Pigs and it turned into fiasco,
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  Speaker 1: he told Alan Donalds, the director of CIA, fiasco, one
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  Speaker 1: of us has to go, I'm president, You're you're resigning,
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  Speaker 1: You're fired. So uh, no matter where who's called here,
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  Speaker 1: somebody has to take a fall on a new person
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  Speaker 1: comes into it. That's the only way you can move forward.
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  Speaker 1: Dying every day A slice salami slice at the time
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  Speaker 1: is a really difficult policy. This. The sooner this thing
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  Speaker 1: can be said right, the better it is for everybody. Wait,
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  Speaker 1: hold on a second, said right, because this has been
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  Speaker 1: sort of the focus of a lot of articles that
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  Speaker 1: have been written, which is, how can Saudi Arabia and
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  Speaker 1: the US joined forces this of spin this in the
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  Speaker 1: right way to be able to continue things as things
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  Speaker 1: were before, and my characterizing that correctly because that seems
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  Speaker 1: to be the way that I think I would agree with,
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  Speaker 1: at least other than the words spin. I don't think
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  Speaker 1: Spain is viable. In other words, I think the war
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  Speaker 1: you try and spend it, this is one where you
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  Speaker 1: have to get as close to the truth as possible.
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  Speaker 1: And I would hope that you know, we just saw
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  Speaker 1: that our secretary state was out there in the desert,
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  Speaker 1: and you know, I think the point is to make
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  Speaker 1: clear what we think is is known, and that the
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  Speaker 1: story needs not to wander too far from that. So
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  Speaker 1: how should the US react if indeed the Saudi Arabian
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  Speaker 1: leadership led by Mohammed bin Salman, who has been close
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  Speaker 1: with our leadership here in the US. How should the
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  Speaker 1: US respond if they did just outright kill a critic
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  Speaker 1: of their of their administration. I think the burden really
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  Speaker 1: begins with the Saudis. The Saudis need to decide how
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  Speaker 1: they are going to respond because we are their most
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  Speaker 1: important now I and so are all. There are other
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  Speaker 1: important allies. Um UH need to be in the zone
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  Speaker 1: where it's comfortable dealing with them. So at this point,
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  Speaker 1: if the record shows that MBS the Crown Prince is involved,
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  Speaker 1: than the only way this goes forward if somehow he
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  Speaker 1: steps aside, which is a really high ask. But I
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  Speaker 1: think the Saudis have to decide where they're going, and
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  Speaker 1: I think we have to stay as close to the
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  Speaker 1: reality as possible. I don't think there's this is not
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  Speaker 1: a spin opportunity. Floating floating floating ideas is probably one
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  Speaker 1: thing to see what's viable. But I think it's a
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  Speaker 1: huge mistake for anybody to try and work between the lines.
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  Speaker 1: You do not know what everyone else knows, so you
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  Speaker 1: put out a story. The next day of the story
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  Speaker 1: is overtaken because there's more information credible information put into it.
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  Speaker 1: The charts are sitting a lot of information. I suspect
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  Speaker 1: that we are others people within the Saudi government. You
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  Speaker 1: this is one that's not going to go away easily, Jack.
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  Speaker 1: Do you believe that U. S Intelligence assets know what happened?
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  Speaker 1: I think you know what happened. It covers a lot
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  Speaker 1: of territory. I would say that because of our relationship
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  Speaker 1: with a lot of foreign governments, our own collection capabilities,
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  Speaker 1: I think we'd have a pretty good sense of what happened.
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  Speaker 1: What literally happened inside the consulate may not be uh
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  Speaker 1: noable for some time. Do you believe the Turkish government knows?
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  Speaker 1: They say, Well, they say in the press says that
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  Speaker 1: they do. Um. My own instinct as opposed to fact,
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  Speaker 1: is that they probably know a heck of a lot
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  Speaker 1: more than anybody wish they know. So I'm wondering about
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  Speaker 1: the arms deal. I believe it's a hundred and ten
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  Speaker 1: billion dollar arms deal at the US has with Saudi Arabia.
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  Speaker 1: There have been numerous reports that one reason why President
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  Speaker 1: Trump was initially reluctant to sort of castigate Mohammed bin
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  Speaker 1: Salman and the Saudi Arabian government was because he didn't
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  Speaker 1: want to jeopardize this deal. Do you buy that now?
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  Speaker 1: I think it's too small of the piece. I mean,
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  Speaker 1: I think there's the bigger relationship. I mean, we're in
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  Speaker 1: a you know, and when you look at the Middle East,
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  Speaker 1: you know, in terms of countering around which is a
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  Speaker 1: large part of the last several administrations, you have to
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  Speaker 1: look at Saudi Arabia as a key the key player,
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  Speaker 1: and this when you look at oil and the oil industry.
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  Speaker 1: I mean, I think the deal is is an important deal.
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  Speaker 1: You don't want to see it go up and smoke,
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  Speaker 1: But there's an awful lot riding on the overall relationship.
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  Speaker 1: It's in everyone interested to get this thing reset. And
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  Speaker 1: as I said, I and you know that this place
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  Speaker 1: out the way it appears to play out, it's going
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  Speaker 1: to be very hard to reset it without a change
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  Speaker 1: in in in leadership, which means Mohammed bin Salman stepping
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  Speaker 1: down or being pushed out of office, out of the leadership.
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  Speaker 1: That that I mean again, I would come back to
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  Speaker 1: you know, if I were looking at old formulas on
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  Speaker 1: how problems are resolved quickly, it's to change personnel and
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  Speaker 1: the basic relationship stays in fact intact This one is
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  Speaker 1: a seems to me a great deal more difficult than
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  Speaker 1: others I've seen in the past, because it's not clear
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  Speaker 1: to me, uh, how much wait the king has or
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  Speaker 1: is willing to exert, and how much the person it
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  Speaker 1: has to step aside is going to be prepared to
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  Speaker 1: do that. And you know, people's first instinct, as we
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  Speaker 1: saw in this case, is to try and weather this storm.
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  Speaker 1: It is not weatherable and particularly if the pace of
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  Speaker 1: attention stays where it is now. Is there any chance
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  Speaker 1: that this reflects a power struggle inside of Saudi Arabia, Well,
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  Speaker 1: clearly this has been a in my I shouldn't say clearly.
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  Speaker 1: In my view, it's been a path coo. The the
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  Speaker 1: MBS coming into power is really I think took people
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  Speaker 1: by surprise. But it's not a singleton. It's uh, it's
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  Speaker 1: a the predominant faction. But there are a lot of
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  Speaker 1: losers and um, you know, there are the prospects of
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  Speaker 1: external forces, in other words, those that have been thrown
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  Speaker 1: back orchestrating something that would remove MBS is unlikely. Any
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  Speaker 1: change would have to come from the internal forces. Thank
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  Speaker 1: you very much for being with us. Jack Divine, former
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  Speaker 1: acting director of the Central Intelligence Agency, founding partner and
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  Speaker 1: president of the security firm the Arkin Group. Return on
• 8:42
  Speaker 1: equity is up for the revenue trend is good. So
• 8:47
  Speaker 1: why is the stock down thirteen and a half percent
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  Speaker 1: so far this year? I'm talking about Morgan Stanley. And
• 8:55
  Speaker 1: here to help us understand the situation is Chris Whalen.
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  Speaker 1: He is the chairman of Whalen Global Advisors. Chris, why
• 9:03
  Speaker 1: is the stock of Morgan Stanley down when the results
• 9:08
  Speaker 1: seem so good? Well, the results are not bad. Um,
• 9:13
  Speaker 1: there's done a lot of animal spirits in these stocks
• 9:16
  Speaker 1: like Morgan Stanley. Now their asset managers, Uh, predominantly they
• 9:20
  Speaker 1: have a banking business, of course, um, but they are
• 9:23
  Speaker 1: really feed driven. They don't make money on interest rates.
• 9:26
  Speaker 1: So Goldman, Morgan Stanley, all the near banks, if you will, um,
• 9:31
  Speaker 1: are a function in the market. So if they have
• 9:33
  Speaker 1: some big deals that make you know, good money on
• 9:36
  Speaker 1: the trading investment banking side, and then the rest is
• 9:39
  Speaker 1: pretty much fixed. Um. You have treasury and then you
• 9:42
  Speaker 1: have the asset managers who work for a set feet right,
• 9:45
  Speaker 1: That's why they like it. It's stable, but it's not exciting.
• 9:48
  Speaker 1: So no biggish about City was the best of a
• 9:51
  Speaker 1: bunch so far, but really why Yeah, just in terms
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  Speaker 1: of you know, year over year comparisons of falling credit
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  Speaker 1: costs in all of the two key factors for the
• 10:03
  Speaker 1: last eight nine years have been cost cutting and cheap funding.
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  Speaker 1: So the question is how do we transition from that
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  Speaker 1: when the banks, you know, a year from now, their
• 10:12
  Speaker 1: funding costs are almost going to be normalized back to
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  Speaker 1: where they were in two thousand eight, more balanced by
• 10:18
  Speaker 1: the way between investors and equity because during the crisis.
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  Speaker 1: After the crisis, the bank equity holders got the interest
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  Speaker 1: dollar well through banks and their depositor has got nothing.
• 10:31
  Speaker 1: Well well, I mean, that's actually exactly where I wanted
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  Speaker 1: to go with this, right. I mean, we talk about
• 10:34
  Speaker 1: the KNT interest margins, which have been increasing, but the
• 10:38
  Speaker 1: gap between what big banks are paying people to put
• 10:42
  Speaker 1: their money in their deposit accounts and what the banks
• 10:47
  Speaker 1: are earning from the Fed funds overnight rate has widened dramatically.
• 10:51
  Speaker 1: I mean, I think it's more than a percentage point
• 10:53
  Speaker 1: now on average for the four biggest banks that they're
• 10:56
  Speaker 1: basically capturing an extra and extra revenue without doing any thing.
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  Speaker 1: And at what point will they be forced to pay up.
• 11:03
  Speaker 1: Will big banks be forced to offer depositors some additional
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  Speaker 1: yield to entice deposits? And how much could that hurt
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  Speaker 1: their earnings? Well, it's already happening. Um, as the FED
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  Speaker 1: balance she runs off, you eliminated dollar of deposits for
• 11:17
  Speaker 1: every dollar in access to reserves. So that's just mechanistic. Um.
• 11:22
  Speaker 1: The other thing, remember is that the FED crush funding
• 11:25
  Speaker 1: costs in two thousand eleven, I think it was or fourteen.
• 11:29
  Speaker 1: It was literally done like ten billion dollars for the
• 11:31
  Speaker 1: whole industry for a quarter. So normal is closer to
• 11:34
  Speaker 1: a hundred. Right now it's about thirty, and it's increasing
• 11:39
  Speaker 1: year over year, so buying you know, a second quarter
• 11:42
  Speaker 1: next year, the increase in funding costs will be higher
• 11:46
  Speaker 1: than the increase in interest earnings. And that's when you'll
• 11:48
  Speaker 1: see him flatten out and go down. Now, Chris, you
• 11:53
  Speaker 1: talked about the City Group and they're they're sort of
• 11:56
  Speaker 1: a report and saying that that they're better. But I'm
• 12:00
  Speaker 1: just trying to understand wouldn't this wouldn't this whole group
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  Speaker 1: benefit from what you described maybe a low valuation base,
• 12:10
  Speaker 1: also cost pressures. You said they're abating they're expanding the
• 12:15
  Speaker 1: net interest margin, you've got shared buy back programs and
• 12:19
  Speaker 1: better than anticipated EPs growth. Why wouldn't. Yeah, the business
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  Speaker 1: is okay, but for banks that really run off of
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  Speaker 1: interest rates, of the advantages eving um. You know, as
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  Speaker 1: I said before, the last five years, cost cutting, reserve reverses,
• 12:37
  Speaker 1: things of that nature really drove Burnning to Then we
• 12:39
  Speaker 1: had the tax bill. The text bill structurally increased those
• 12:42
  Speaker 1: equity returns you were talking about earlier, So at one
• 12:46
  Speaker 1: time adjustment both asset and equity returns after tax obviously, right,
• 12:50
  Speaker 1: But if you really want to understand the business, you
• 12:52
  Speaker 1: look at the pre tax line, you look at credit
• 12:55
  Speaker 1: costs and other factors, and they've all been very low.
• 12:57
  Speaker 1: I mean right now, real estate has gone up so
• 13:00
  Speaker 1: much PIM that banks are making money on defaults. In
• 13:03
  Speaker 1: other words, they get all their money back, they sell
• 13:05
  Speaker 1: the defaulted property, and they make money on that. So
• 13:08
  Speaker 1: it's like negative um. So there's no credit issue on
• 13:12
  Speaker 1: the street today. But to your question, you know, it's
• 13:14
  Speaker 1: a function of deal flow. For Marian Stanley and for
• 13:17
  Speaker 1: Goldman and the transactional houses. JP has a big component
• 13:21
  Speaker 1: of this. But JP also makes money on interest, not
• 13:24
  Speaker 1: as much as their peers, by the way, because they're big,
• 13:27
  Speaker 1: you know, Marianne with Lake would love to be uh
• 13:30
  Speaker 1: you know, no, no, maybe smaller should get much better
• 13:34
  Speaker 1: equity returns, you know, more manageable business. So you know,
• 13:39
  Speaker 1: to me, the Street is losing their advantage on interest
• 13:42
  Speaker 1: that the Fed gave them very quickly. And I think
• 13:45
  Speaker 1: people have to pay attention to this because name is
• 13:47
  Speaker 1: not going to be expanding next year, it's gonna be
• 13:49
  Speaker 1: contracting because the cost of phones has gone up so quickly.
• 13:53
  Speaker 1: Chris Whalen, thank you so much for being with us
• 13:55
  Speaker 1: and for that perspective. Chris Whalen as chairman of Whalen
• 13:58
  Speaker 1: at Global Advisors and some an interesting trend to watch him,
• 14:02
  Speaker 1: and one that we've been talking about for a long time,
• 14:05
  Speaker 1: which is banks are going to have to start paying
• 14:07
  Speaker 1: their depositors more and when they do, will that lead
• 14:11
  Speaker 1: to much more disappointing earnings? Although he did his strength
• 14:14
  Speaker 1: with deals to Yeah, but also if you're going to
• 14:16
  Speaker 1: see higher interest rates, that means that if they are
• 14:19
  Speaker 1: really asset gatherers, they're gonna be making more on the
• 14:22
  Speaker 1: assets that they gather. It depends which interest rates go up.
• 14:25
  Speaker 1: Faster and how I mean if we get the flattening
• 14:27
  Speaker 1: yield curve, if they have to pay depositors more. I
• 14:30
  Speaker 1: mean Ally Bank actually came out with this front page
• 14:32
  Speaker 1: advertisement in the New York Times talking about how the
• 14:34
  Speaker 1: biggest bank heist in the world is going on right now.
• 14:37
  Speaker 1: But we can talk about that later. Well, I know
• 14:42
  Speaker 1: that Paul Sweeney, the US director of Research and senior
• 14:47
  Speaker 1: media and Internet analyst for Bloomberg Intelligence, he's got a
• 14:51
  Speaker 1: list of things he's going to watch on Netflix. He's
• 14:54
  Speaker 1: probably already going to tape Fight World that has already debut.
• 15:00
  Speaker 1: Then he's got The Haunting of Hill House as well
• 15:03
  Speaker 1: as Marvel's Dare Devil. These are all Netflix only on Netflix.
• 15:08
  Speaker 1: I have a whole new feeling towards Paul Sweeney. Now, yeah,
• 15:12
  Speaker 1: he's got it all. The reason I bring up these
• 15:15
  Speaker 1: only on Netflix productions, Paul is this is where the
• 15:19
  Speaker 1: money's going, isn't it. It really is. And uh, you know,
• 15:22
  Speaker 1: for the record, I am a big fan of Ozark.
• 15:24
  Speaker 1: I'm kind of hooked on that, so I'm binging the
• 15:26
  Speaker 1: second season of that. But yeah, they're going to spend
• 15:28
  Speaker 1: you know, over eight billion dollars this year in programming. Um,
• 15:32
  Speaker 1: you know, most of that, A lot of that is
• 15:34
  Speaker 1: original programming, So they're not just licensing movies and TV
• 15:37
  Speaker 1: shows from the networks in the studios, they're they're producing
• 15:40
  Speaker 1: more and more of their own content and there, and
• 15:42
  Speaker 1: they they recognize that from their perspective, that is what
• 15:45
  Speaker 1: drives their subscriber growth, that is what their users want,
• 15:47
  Speaker 1: and so they're stepping up to spending there. And maybe
• 15:49
  Speaker 1: even tonight we'll get an an outlook from the company
• 15:52
  Speaker 1: on what they expect to spend next year, and most investors, um,
• 15:56
  Speaker 1: you know, expect that number will be even higher than
• 15:58
  Speaker 1: what it is this year. So they're by far the
• 16:00
  Speaker 1: biggest UH creator of content in Hollywood, the biggest spender
• 16:05
  Speaker 1: on content in Hollywood, and that looks to to get
• 16:07
  Speaker 1: even bigger going forward. Will this be the year that
• 16:09
  Speaker 1: investors start to care about profitability here? You know, I
• 16:13
  Speaker 1: don't think so. Um you know, the the it's interesting
• 16:16
  Speaker 1: as you segment the company, the more mature US business
• 16:19
  Speaker 1: for them already is profitable and and they and they
• 16:21
  Speaker 1: showed a pretty good path to profitability there, so we
• 16:24
  Speaker 1: know the business or investors know the business can be
• 16:27
  Speaker 1: profitable at these expense levels. Uh, internationally, they have not
• 16:31
  Speaker 1: turned a profit corner. That's a less mature business. But
• 16:34
  Speaker 1: we've seen some markets internationally that have turned profitable. So
• 16:37
  Speaker 1: but the big question I think for investors is free
• 16:39
  Speaker 1: cash flow. This is a company that has no free
• 16:42
  Speaker 1: cash flow and they'll probably lose a couple of three
• 16:44
  Speaker 1: billion dollars in free cash flow this year. Um. And
• 16:48
  Speaker 1: so the question is how do you fund eight billion
• 16:50
  Speaker 1: dollars or even more of programming? And the answer as
• 16:53
  Speaker 1: you go to the debt markets and your borrow money
• 16:55
  Speaker 1: and um, and that's kind of how they're funding it.
• 16:57
  Speaker 1: And so the question is how long can they continue
• 16:58
  Speaker 1: to do that? And at increasingly investors are charting starting
• 17:02
  Speaker 1: to get uh, you know, a little sensitive to the
• 17:04
  Speaker 1: kind of the free cash flow generation of the business.
• 17:06
  Speaker 1: They have more than eight billion dollars in debt right right,
• 17:09
  Speaker 1: and uh, you know that the debt markets have been
• 17:11
  Speaker 1: very open and very receptive to this credit, even though
• 17:15
  Speaker 1: there's no profits or cash flow to pay back the debt.
• 17:17
  Speaker 1: But you know, I think they look and they see
• 17:19
  Speaker 1: that big equity valuation cushion underneath their debt supporting their
• 17:24
  Speaker 1: their debt. And you know when you take a look
• 17:25
  Speaker 1: at street consensus numbers, UM, this company will not be
• 17:28
  Speaker 1: free cash flow till one maybe. Uh so there's still
• 17:33
  Speaker 1: ways off from free cash flow, UM, but there is
• 17:35
  Speaker 1: a path. So one question that I have is that
• 17:38
  Speaker 1: Disney is going to take a lot of its content
• 17:40
  Speaker 1: off of Netflix starting at the beginning of next year,
• 17:44
  Speaker 1: and they're starting their own streaming service. And I have
• 17:47
  Speaker 1: to wonder how big of a competitive concern this is
• 17:50
  Speaker 1: for Netflix and how can we really even determine that. Yeah,
• 17:54
  Speaker 1: competition is ramping up, no question about it. That you
• 17:57
  Speaker 1: mentioned Disney, the big reason that they epped up and
• 18:00
  Speaker 1: spend eighty billion dollars to buy Century Fox was to
• 18:03
  Speaker 1: get more content UM for their streaming service which they're
• 18:07
  Speaker 1: going to launch next year, a T and T, which
• 18:09
  Speaker 1: just spent eighty billion dollars buying Time Warner. They announced
• 18:12
  Speaker 1: this week that they in fact are getting into the
• 18:14
  Speaker 1: director consumer streaming business with some of the Warner Brothers content.
• 18:17
  Speaker 1: So competition is absolutely ramping up, UM. And I think
• 18:20
  Speaker 1: Netflix clearly recognized this several years ago. UM, and that's
• 18:24
  Speaker 1: when they really started to ramp up their original program
• 18:26
  Speaker 1: because they knew at some point Hollywood would wisen up
• 18:29
  Speaker 1: and they would, you know, start taking back some of
• 18:32
  Speaker 1: their content and that Netflix would need to rely on
• 18:34
  Speaker 1: more on original programming. And the good news is, um,
• 18:37
  Speaker 1: you know, as long as you have a big check book,
• 18:39
  Speaker 1: and Netflix has a big checkbook, you can get any writer,
• 18:42
  Speaker 1: any talent, any director, uh, any producer to come and
• 18:46
  Speaker 1: make content for you, just like they would make it
• 18:48
  Speaker 1: for one of the big studios. Paul Sweeney just quickly.
• 18:51
  Speaker 1: I understand that Netflix with its understanding of the consumer,
• 18:57
  Speaker 1: meaning they know what you watch, they know what are
• 19:00
  Speaker 1: interested in. They have able they have been able to
• 19:02
  Speaker 1: broaden they're offering. And that's just talking about series. They've
• 19:06
  Speaker 1: got the stand up comedy specials, They've got films. They
• 19:10
  Speaker 1: know what you want to watch, don't they They do.
• 19:13
  Speaker 1: They have a lot of information because they have a
• 19:15
  Speaker 1: direct relationship with the consumer. They know what the consumer wants.
• 19:18
  Speaker 1: As opposed to a cable network which has a you know, intermediary,
• 19:22
  Speaker 1: which is the cable system, the comcast or the satellite provider. Uh,
• 19:26
  Speaker 1: they don't own the content, they don't know what their
• 19:27
  Speaker 1: consumers really run. Netflix does so originally on the original
• 19:31
  Speaker 1: programming the Netflix created in house. They knew that their
• 19:34
  Speaker 1: users liked Kevin Spacey. They knew that their users liked
• 19:39
  Speaker 1: political dramas, so let's create a political drama with Kevin Spacey,
• 19:42
  Speaker 1: as simple as that. And they're they're using that in
• 19:44
  Speaker 1: international markets because they're starting to bring up a lot
• 19:46
  Speaker 1: of original programming in international markets. Paul Sweeney, thank you
• 19:49
  Speaker 1: so much for being with us. Paul Sweeney, us director
• 19:51
  Speaker 1: of Research and senior Senior Media and Internet Analyst for
• 19:54
  Speaker 1: Bloomberg Intelligence. Fidelity Investment is jumping into the world of
• 20:02
  Speaker 1: crypto currency. It is offering to manage digital assets for
• 20:07
  Speaker 1: a hedge funds, family offices and trading firms. And here
• 20:11
  Speaker 1: to tell us more about this particular aspect of the
• 20:14
  Speaker 1: financial industry and fidelities Responses Aaron Brown. He is a
• 20:18
  Speaker 1: former managing director and head of Financial market Research at
• 20:22
  Speaker 1: a q R Capital Management, and he is the author
• 20:26
  Speaker 1: of the book The Poker Face of Wall Street. Aaron Brown,
• 20:30
  Speaker 1: It's always a pleasure to hear your views. Tell us
• 20:32
  Speaker 1: what do you make of Fidelity offering this digital asset
• 20:37
  Speaker 1: management business? Well, thanks for having me, Um. I think
• 20:41
  Speaker 1: this is mostly important symbolically, UH, Fidelity has always been
• 20:46
  Speaker 1: among similar financial institutions they've been a relative cheerleader for crypto.
• 20:52
  Speaker 1: And the fact that they're promising in two thousand nineteen
• 20:55
  Speaker 1: that they'll offer custody and trading for some of the
• 20:58
  Speaker 1: larger cryptos for some larger investors is uh, sort of
• 21:03
  Speaker 1: a you know, it's an affirmation of the legitimacy and
• 21:07
  Speaker 1: the faith they have in crypto. It doesn't really add
• 21:11
  Speaker 1: a lot. If institutional investors have been dying to pour
• 21:14
  Speaker 1: billions and billions of dollars into crypto, They've had many
• 21:18
  Speaker 1: opportunities since two thousands seventeen. We had led your ac
• 21:21
  Speaker 1: c m E, cbo E offering futures claim based, Gemini
• 21:26
  Speaker 1: have offered services. We know Northern Trust is looking at
• 21:30
  Speaker 1: probably all the other big custodians are looking at this.
• 21:33
  Speaker 1: So I don't think there's a lot of pure news
• 21:35
  Speaker 1: here fundamentally, but it's certainly going to uh, you know,
• 21:40
  Speaker 1: charge the market and and give a lot of name
• 21:43
  Speaker 1: recognition to people who perhaps don't really know what a
• 21:46
  Speaker 1: custodian is. But but no the fidelity name well, Aaron,
• 21:50
  Speaker 1: I'm struck by sort of the risk that is implied
• 21:53
  Speaker 1: by holding something uh that could potentially evaporate and value
• 21:58
  Speaker 1: and what is the potential risk that Fidelity would be
• 22:01
  Speaker 1: taking on if it really does become a major player
• 22:04
  Speaker 1: and if this market continues to expand, well, of course
• 22:07
  Speaker 1: they're they're brokeer, so they're holding these for other people,
• 22:10
  Speaker 1: and crypto could go to zero. Um UM. I hope
• 22:12
  Speaker 1: everyone who knows that before they invest, and then Fidelity
• 22:16
  Speaker 1: would be uh, you know, I probably have a lot
• 22:18
  Speaker 1: of customer relation issues. Um. But they're offering this to
• 22:22
  Speaker 1: institutional investors who presumably know the rules. UM. I would
• 22:26
  Speaker 1: say the bigger risks to Fidelity as a company are
• 22:29
  Speaker 1: that they get hacked. Now they're planning to put all
• 22:31
  Speaker 1: of these assets in cold storage, which is supposed to
• 22:33
  Speaker 1: be hacked proof, but you know, you're never quite sure,
• 22:36
  Speaker 1: and cold storage can be very vulnerable to an internal
• 22:39
  Speaker 1: rogue employee and the internal embezzlement or fraud. UM. If
• 22:43
  Speaker 1: there are problems with the pricing, if they sell institutions
• 22:46
  Speaker 1: a lot of assets that you know, six thousand dollars
• 22:49
  Speaker 1: of bitcoin and it turns out that wasn't really the price,
• 22:51
  Speaker 1: that it was being manipulated, and some of the shadowy exchanges,
• 22:55
  Speaker 1: the crypto trades on UM. I think this kind of
• 22:58
  Speaker 1: thing could be a big black eye, or if there's
• 23:02
  Speaker 1: a regulatory problem, if if people give the regulators come
• 23:05
  Speaker 1: in and say the stuff is all illegal. Um, I
• 23:07
  Speaker 1: don't take that. I don't think those are huge risks today.
• 23:10
  Speaker 1: I think, you know, two years ago, people would have
• 23:12
  Speaker 1: worried a lot more about those things. But I think
• 23:14
  Speaker 1: crypto's mainstream enough that Fidelities maybe pushing the envelope a
• 23:18
  Speaker 1: little bit. But I would expect to see all the
• 23:20
  Speaker 1: big financial institutions follow suit. Here. The arm of Fidelity
• 23:25
  Speaker 1: that's going to handle this is going to be called
• 23:27
  Speaker 1: Fidelity Digital Assets. And according to Tom Jessup, who runs
• 23:33
  Speaker 1: that business, they've been mining bitcoin since twenty fifteen. Can
• 23:40
  Speaker 1: you give us your views on mining bitcoin and bitcoin
• 23:44
  Speaker 1: as a proxy for this world of cryptocurrencies? Yeah, I mean,
• 23:49
  Speaker 1: I mean mining was I started mining in two thousand thirteen,
• 23:52
  Speaker 1: and and you know, I quickly got, you know, pushed
• 23:55
  Speaker 1: out of that business. You need to be really big now.
• 23:57
  Speaker 1: Fidelities obviously big enough to do it if they want.
• 24:01
  Speaker 1: It's not a hugely profitable business anymore, but but you know,
• 24:06
  Speaker 1: it pays the bill, but it's a very good way.
• 24:08
  Speaker 1: I always tell people who want to invest in crypto. Listen,
• 24:10
  Speaker 1: mine a little bit. You know you're not going to
• 24:12
  Speaker 1: get rich doing it. If you're doing on your PC.
• 24:14
  Speaker 1: You know you may make making ten cents for for
• 24:17
  Speaker 1: a month of letting your PC churn away at this,
• 24:20
  Speaker 1: But you'll excuse me, eron, Can I just interrupt and
• 24:22
  Speaker 1: ask you what kind of set up of technical setup
• 24:27
  Speaker 1: were you able to put together in order to mine bitcoin? Well, okay,
• 24:33
  Speaker 1: back in two thousand and thirteen, you just did it
• 24:34
  Speaker 1: on your PC. You know, with spare you let it
• 24:36
  Speaker 1: run at night while you weren't using it today to
• 24:40
  Speaker 1: be competitive in mind and you need highly specialized equipment
• 24:43
  Speaker 1: and need to be next door to a hydroelectric plant. Um.
• 24:46
  Speaker 1: So I'm not urging people to go and do this
• 24:48
  Speaker 1: to make money. I'm just saying you do it. You
• 24:51
  Speaker 1: really learn what cryptocurrency is when you mind it and
• 24:53
  Speaker 1: you spend it. And before you invest in something, it's
• 24:56
  Speaker 1: always nice to you know, make it and sell it.
• 24:58
  Speaker 1: And then you say, okay, now, I maybe it was
• 25:00
  Speaker 1: only ten cents worth and maybe he used it to
• 25:02
  Speaker 1: you know, by something you didn't really want. But but
• 25:07
  Speaker 1: but but you know what you're doing in a way
• 25:10
  Speaker 1: that somebody who's just read about bitcoin doesn't and you
• 25:13
  Speaker 1: learned an awful lot about exactly what it is, what
• 25:16
  Speaker 1: a key is, how these work, and how convenient it is.
• 25:20
  Speaker 1: Um so so for Fidelity, I think, I think, you know,
• 25:23
  Speaker 1: it makes perfect sense. I don't think they're going to
• 25:25
  Speaker 1: go in the business of mining to compete with some
• 25:27
  Speaker 1: of these Chinese giant consortiums, but it does give them
• 25:31
  Speaker 1: a lot of legitimacy in the space, and it's given
• 25:33
  Speaker 1: them a lot of legitimacy among crypto enthusiasts the fact
• 25:36
  Speaker 1: they're actually willing to get their hands dirty with this stuff.
• 25:39
  Speaker 1: A lot of financial people who talk about crypto have never,
• 25:41
  Speaker 1: you know, spent a bitcoin and wouldn't know what it
• 25:43
  Speaker 1: is if you know, somebody gave a hundred Well. One
• 25:46
  Speaker 1: thing that I'm struck by is it seems, on its
• 25:49
  Speaker 1: face as if this is a risk that Fidelity is
• 25:51
  Speaker 1: taking getting into sort of a more niscent market, one
• 25:54
  Speaker 1: that is that is spurned by a lot of people.
• 25:58
  Speaker 1: On the other hand, I'm wondering how much is a
• 26:00
  Speaker 1: move like this is a risk like this required for
• 26:03
  Speaker 1: big asset managers that focus on index funds that increasingly
• 26:07
  Speaker 1: pay zero fees or next to nothing in terms of fees.
• 26:11
  Speaker 1: I mean, in other words, how much do these types
• 26:13
  Speaker 1: of services have to be the drivers of profitability to
• 26:15
  Speaker 1: place like Fidelity going forward? Okay, I'm not an expert
• 26:19
  Speaker 1: in fidelities business. I know more on the hedge fund side,
• 26:21
  Speaker 1: but I do know, yes, everybody and asset management is
• 26:24
  Speaker 1: desperate for new kinds of revenue because the fee impression.
• 26:28
  Speaker 1: We've gotten so efficient with ets with indext funds free
• 26:32
  Speaker 1: now many places, Uh you just can't make money, you know,
• 26:35
  Speaker 1: just for existing the way you used to, and so yeah,
• 26:38
  Speaker 1: you need some sort of value added. Uh. Crypto is one,
• 26:42
  Speaker 1: you know way where they're still margins. You can still
• 26:45
  Speaker 1: differentiate yourself. You know, there are other things you could do.
• 26:48
  Speaker 1: But yes, I think we're going to be seeing more experimentation,
• 26:50
  Speaker 1: more risk taking among asset managers and the ones that refuse,
• 26:54
  Speaker 1: the ones that try to keep just the traditional business alive,
• 26:57
  Speaker 1: I can't see them. I got to see the profits
• 27:00
  Speaker 1: slowly eroding until nobody wants to work there anymore. Aaron,
• 27:03
  Speaker 1: just real quick here, how profitable do you think a
• 27:05
  Speaker 1: cryptocurrency department the way that Fidelity is sort of outlineyone
• 27:10
  Speaker 1: could be well if they're the only one, or if
• 27:13
  Speaker 1: they're you know, they're the giant one, then I think
• 27:15
  Speaker 1: it could be tremendously profitable. I think there's a lot
• 27:18
  Speaker 1: of money that wants to go into crypto and UH,
• 27:20
  Speaker 1: and it's kind of for you know, you buy the
• 27:21
  Speaker 1: crypto and currency exchange yourself to your customers, you keep
• 27:24
  Speaker 1: it in cold storage, costs you nothing, and you can
• 27:27
  Speaker 1: probably charge pretty good fees on it. If everybody in
• 27:30
  Speaker 1: the world gets into this business, and you know, the
• 27:32
  Speaker 1: fees are going to go down to zero, just like
• 27:34
  Speaker 1: everything else. Aaron Brown, thank you so much for being
• 27:37
  Speaker 1: with us. We love having your views highlighted here. Aaron
• 27:39
  Speaker 1: Brown is a columnist for Bloomberg Opinion, also former managing
• 27:42
  Speaker 1: director and head of financial market risk Research at a
• 27:45
  Speaker 1: q R Capital Management. Thanks for listening to the Bloomberg
• 27:49
  Speaker 1: P and L podcast. You can subscribe and listen to
• 27:52
  Speaker 1: interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer.
• 27:57
  Speaker 1: I'm pim Fox, I'm on Twitter at a Fox, I'm
• 28:01
  Speaker 1: on Twitter at Lisa Abramo. It's one before the podcast.
• 28:04
  Speaker 1: You can always catch us worldwide on Bloomberg Radio.