Wall Street Week - Full Show 03/31/2023

Name: Wall Street Week - Full Show 03/31/2023
Uploaded: 2023-03-31T23:46:20.000Z
Duration: 1 h 36 min 13 s

Introduction

The transcript introduces the topic of the episode and provides an overview of what will be discussed.

Picking up the pieces after a thunderstorm hit banks from Silicon Valley to Zurich. Congress, central banks and investors try to regain their bearings. This is Bloomberg Wall Street week.

The episode discusses the aftermath of a banking crisis that affected banks in Silicon Valley and Zurich.

Congress, central banks, and investors are trying to recover from the crisis.

Larry Summers of Harvard on the effects of a shaken banking system on the economy.

Larry Summers from Harvard discusses how a shaken banking system can affect the economy.

Sharma Rockefeller Capital on whether there's a price we will pay for all of that government intervention.

Sharma Rockefeller Capital discusses whether there will be consequences for government intervention during the banking crisis.

Bill Gates and former Treasury and CFTC official Tim Massad on whether we should have seen it coming at the end of the day. This really was about bad bank management.

Bill Gates and Tim Massad discuss whether bad bank management was responsible for the banking crisis.

Sorting Through Wreckage

The transcript discusses various events related to sorting through wreckage caused by the banking crisis.

The month of March is supposed to come in like a lion and out like a lamb. But this march entered like a lamb and then was savaged by serial banking crises.

March started off calmly but was later affected by multiple banking crises.

SVP sold to First Citizens Bank shares.

SVP was sold to First Citizens Bank shares.

FDIC off the hook. I think everyone's happy with this deal.

The FDIC is no longer responsible for SVP, which makes everyone happy with this deal.

Congress honed in on SVP debacle with Fed vice chair Michael Barr saying there's a lot of blame to go around. Anytime you have a bank failure like this, bank management clearly failed.

Congress focused on the SVP debacle and Fed vice chair Michael Barr stated that there is a lot of blame to go around, with bank management being responsible for the failure.

UBS started the process of completing its forced marriage to Credit Suisse UBS chair Colleen Keller. Her announced that bankers from Credit Suisse would have to be put through what he called a cultural filter to make sure they fit and that Sergio Marti would return to take over as CEO.

UBS began integrating with Credit Suisse and will put bankers from Credit Suisse through a cultural filter. Sergio Marti will return as CEO.

French banks, including BNP Paribas and Society, generally faced collective fines of more than a billion euros as part of an investigation into tax fraud and money laundering in China.

French banks faced collective fines for tax fraud and money laundering in China.

Alibaba Breakup

The transcript discusses Alibaba's decision to break itself into six separate parts.

Alibaba announced it would try to avoid the government's hostility to big tech by getting smaller, specifically by breaking itself into six separate parts.

Alibaba decided to break itself into six separate parts in order to avoid government hostility towards big tech.

Job Cuts

The transcript discusses job cuts announced by various companies.

Another week of job cut announcements with McKenzie adding fourteen hundred and Disney seven thousand, which notably included Ike Perlmutter, who sold Marvel to Bob Iger.

McKenzie added 1400 jobs cuts while Disney added 7000 job cuts, including Ike Perlmutter who sold Marvel.

Disney has begun the first round of the 7000 job cuts that it announced in early February in a memo that fall by get a CEO who sent to staff.

Disney has started the first round of job cuts.

Trump Indictment

The transcript discusses Donald Trump becoming the first former U.S. president to be indicted.

On Thursday, Donald Trump became the first former president in U.S. history to be indicted with criminal charges filed in Manhattan tied to hush money payments to adult film star Stormy Daniels.

Donald Trump was indicted with criminal charges related to hush money payments to Stormy Daniels.

Market Reaction

The transcript discusses how the markets reacted during and after the banking crisis.

For all the drama of the week and the month, for that matter, the markets in the end pretty much took it in stride.

Despite all of the events that occurred during this time, the markets remained stable.

S&P 500 wound up the week up a solid three point five percent. The Nasdaq was up three point four percent, while the yield on the 10 year

Equity Investors Ready to Move On

The equity investors are ready to move on from 2023 and look ahead. Technology has been doing the heavy lifting.

Key Points:

Equity investors are ready to move on from 2023 and look ahead.

Technology has been doing the heavy lifting.

Investors Expecting Sluggish Growth Environment

Investors are expecting a sluggish growth environment going forward, which makes tech stocks attractive.

Key Points:

Investors are expecting a sluggish growth environment going forward.

Tech stocks normally work well in such an environment.

Markets are still trading the pause and ultimate return of cuts.

Tech stocks tend to be one of the best performing sectors after both of those. It's quite rational.

Private Credit and Real Estate Attracting Interest

Private credit and private real estate continue to attract interest due to volatility and uncertainty in the environment.

Key Points:

Private credit, private real estate is still attracting a lot of interest due to volatility and uncertainty in the environment.

There is continued demand for alternative asset classes.

We're still seeing sluggishness in terms of interest in private equity and growth equity.

Yielding income producing assets are attracting people because of the low at higher base rate environment, so actual nominal yields on these asset classes is interesting to investors.

Turmoil in Banks Helped Bonds

Turmoil in banks helped bonds as people rushed into bonds due to uncertainty.

Key Points:

Turmoil in banks helped bonds as people rushed into bonds due to uncertainty.

Flight to quality generally saw money moving out of weaker banks and the stronger banks from a deposit perspective.

Significant fund flows into money market funds, an example of people looking to really move their money out of weaker banks into more diversified risk.

Expectation that wherever you thought the path of rates was going to be, that the peak rate and the time horizon in which rates start to roll over is probably come in because of the dampening effect that this has happened having on the economy.

Tech Stocks Another Safe Haven

Technology stocks have become another safe haven for investors.

Key Points:

Utilities, health care, consumer staples tend to be where people go big caps in general. Small caps underperform.

Technology stocks have become another safe haven for investors over the last five or six years.

Areas like utilities, consumer staples have been highly overvalued because people were really pushing into them last year when they were moving out of tech.

Tech had already been largely depressed last year so people feel comfortable now coming back to it as more of a safety trade.

Policy Actions Stabilized Banks

The policy actions taken by governments stabilized banks and proved effective.

Key Points:

The very acute near-term issue has been taken off the table as policy actions stabilized banks and proved effective.

Impact of Greater Regulation on Credit Availability

In this section, Julian Salisbury of Goldman Sachs and Lloyd Covid of RBC Capital Markets discuss the impact of greater regulation on credit availability.

Tighter Credit Availability

Banks are being forced to pull back due to concerns around their own liquidity situation.

Credit availability is going to become tighter as a result of these actions.

This will impact certain areas of the economy, particularly commercial real estate which was already feeling fragile.

Private Credit Market Opportunities

In this section, Julian Salisbury and Lloyd Covid discuss private credit market opportunities.

Banks vs. Private Credit Market

Banks are pulling back from making loans due to concerns around their own liquidity situation.

The private credit market is not a shadow banking problem but rather a banking problem with classic asset liability mismatch problems.

Advantages of Private Credit Market

Participants in the private credit market have very long-dated liabilities and can be consistent relationship lenders to private equity firms.

The private credit market is an attractive asset class that is defensive in nature and floating rate in nature. It allows for extraction of an attractive credit and illiquidity premium.

Transparency Risk in Credit Markets

There may be transparency risks in private markets compared to public markets where you know where the value is.

However, large sophisticated investors manage these pools of money which allows them to take a long-term view of value rather than thinking about what's going to happen over the next week or three months.

Banking Crisis or Silicon Valley Banks Crisis?

In this section, the speakers discuss whether the recent events should be called a banking crisis or a crisis for Silicon Valley banks.

Turmoil in the Banking Industry

There is debate about whether to call this a banking crisis or a crisis for Silicon Valley banks.

Regardless, there was certainly a lot of turmoil in the banking industry overall.

Unique Crisis Ahead

In this section, the speaker discusses the unique crisis that is expected to occur and compares it to previous crises such as WorldCom and Bear Lehman. The speaker also talks about how banks are trying to stabilize recently.

Comparison with Previous Crises

The upcoming crisis is expected to have its own name and be unique.

The crisis is more similar to WorldCom than Bear Lehman.

After the 2000-2003 period and financial crisis, banks continued to act poorly.

After WorldCom during the tech bubble period, Nasdaq 100 stabilized and entered a lengthy bottoming process.

Making Money in Equity Market

Small caps are an area of interest due to underperformance in consumer stocks, tech stocks, and energy stocks.

Non-financial sectors may provide opportunities for finding bargains.

Opportunities in Debt and Alternatives

In this section, the speakers discuss areas where they see opportunities for investment in debt and alternatives.

Investment Grade Credit

Investment grade credit is an attractive area right now due to low risk credit offering nominal rates of return at 5% or higher.

Private Credit Products

Private credit products such as private credit for corporates and real estate offer significant opportunity sets currently.

Secondary private equity side offers opportunities due to owners of private equity assets looking to rebalance their portfolio because of the denominator effect.

Concern About Complacency on Recession Possibility

In this section, the speakers discuss the possibility of a recession and whether there is complacency about it.

The word "accelerant" is concerning, and there is worry that we will still be debating whether or not we are about to enter a recession in September or October.

The Market Pricing Perspective

In this section, the speakers discuss the market pricing perspective and how it is better to have damage contained in 2023 than in 2020.

Market Pricing Perspective

From a market pricing perspective, it is better to have damage contained in 2023 than in 2020.

People's longer-term views haven't changed much, but maybe just the path to how we get there is a little bit different.

Government Intervention and Zombie Companies

In this section, Rauscher Sharma discusses the consequences of government intervention and low productivity growth on zombie companies.

Consequences of Government Intervention

The lowered bar for government intervention has become very apparent.

Low productivity growth is a direct consequence of expansive government intervention.

Keeping alive a lot of zombie companies in this country due to constant government intervention leads to low economic growth and less living standards.

Zombie Companies

Nearly 20% of all companies can be classified as zombie companies today. This number needs to be barely 2% in the 1980s or so.

Low productivity is the direct consequence of such expansive government intervention.

The Contradiction of Capitalism

In this section, the guest discusses the contradiction of capitalism and how it relates to government intervention.

Capitalism and Company Creation

A capitalist economy should be dynamic with much company creation.

Deadwood companies die, and monopolies or very large companies that benefit from low-interest rates are not created.

Engineering Pain in Capitalism

Is there a way to engineer pain away while still having discipline in the market?

Each individual instance is hard to argue against, but what are the consequences of so much government intervention?

Moving Away from Free Enterprise System

The size of government stimulus has increased massively over time.

America is moving away from a true free enterprise system towards something more statist.

Industrial policy is becoming more prevalent in America.

Undermining Capitalism

In this section, the guest talks about how various factors are undermining capitalism.

Evidence Suggesting Change in America

The share of government in the total economy keeps going up over time.

Productivity growth has fallen dramatically to just half a percent per year.

Insidious Effects on Capitalism

All these things undermine the fabric and dynamism of capitalism.

Society is moving closer to statism as productivity growth falls.

There's mission creep in the Fed as well.

Safeguarding the Banks

In this section, the guest discusses whether Dodd-Frank regulations have put systemic banking risk behind us.

Dodd-Frank Regulations

The Dodd-Frank regulations were supposed to put systemic banking risk behind us.

No further bullet points.

Bank Failures and Management

In this section, the speaker discusses the recent bank failures in the US and attributes them to bad bank management. The failure of Silicon Valley Bank followed by Signature Bank is discussed, as well as Credit Suisse's failure over the weekend.

Bank Management Failure

Anytime there is a bank failure like this, it is clear that bank management failed.

Bad bank management was responsible for these failures.

Silicon Valley Bank's management did not have a credit risk officer or chief risk officer and overestimated the stickiness of its deposits.

Regulatory System Failure

Supervisors also failed in their regulatory duties.

There was a significant supervisory failure somewhere along the way leading to questions about how to prevent future failures.

Early Warning System Failure

In this section, Tim Massad discusses what went wrong with early warning systems that could have prevented these bank failures.

Warning Signs Ignored

Regulators gave some warnings but management did not act on them.

Rating agencies and most Wall Street analysts did not see this coming either.

Deposit Profile Issues

Silicon Valley Bank's deposit profile was concentrated in the venture industry where deposits are expected to be less sticky.

Interest rate rises affect deposit side as well, making deposits more hot as people look for higher yields.

Conditions were building up that could easily lead to a flight of deposits.

Rethinking the Banking Model

In this section, Tim Geithner discusses the need to rethink the banking model and whether different types of banks are needed for different purposes.

Different Types of Banks

The banking model needs to be rethought in order to have a system where a bank can fail without triggering a systemic problem.

Different types of banks may be needed for different purposes, such as narrow banks that do more limited functions and have guarantees of all deposits versus banks that are more engaged in creating credit and are subject to tougher requirements.

A broader definition of banking may be necessary to achieve a system where risk and failure do not require government bailouts or pose systemic risks.

Government Intervention in Bank Failures

In this section, Tim Geithner discusses the government's role in guaranteeing bank deposits during times of crisis and how it has changed over time.

FDIC Guarantees

The current system requires the Fed and agencies to allow a bank to fail before they have statutory authority to step in.

In 2008, the FDIC guaranteed all bank deposits when the crisis escalated after Lehman failed using what was called the systemic risk exception.

Traditionally, this exception was only used in cases of failed banks. After Dodd-Frank was implemented, the FDIC's ability to guarantee all deposits of solvent banks was taken away unless approved by Congress.

Currently, regulators would have to go through Congress if they wanted to guarantee all deposits.

Risk Assessment

Limiting the government's ability to intervene in bank failures was done to prevent moral hazard, but it may have taken away too many tools for regulators to deal with crises.

The US crisis fighting tools are more limited now compared to Japan or Europe.

Moral Hazard

In this section, Tim Geithner discusses the issue of moral hazard and how it relates to government intervention in bank failures.

Government Intervention

There will always be moral hazard in these situations, and balancing the need for government intervention with preventing systemic crises is a difficult task.

Guaranteeing all deposits during a crisis can take care of the moral hazard issue, but shareholders and bondholders may still get wiped out.

Tim Massad on Moral Hazard and Management Changes

In this section, Tim Massad discusses the moral hazard consequences of management changes and bondholder wipeouts. He also questions why the holding company was still present after these changes.

Moral Hazard Consequences

There will be some moral hazard consequences from management changes and bondholder wipeouts.

The alternative to these actions would have been far worse.

Holding Company Presence

Massad questions why the holding company was still present after management changes and bondholder wipeouts.

He wonders if more should have been done in this regard.

Larry Summers on Inflation and Credit Issues

In this section, Larry Summers talks about inflation, credit issues raised by the banking system, and potential outcomes.

Inflation Issues

Core P.C. numbers were better than expected but we are still a substantially unsustainable inflation country unless there is a hard downturn in response to credit issues raised by the banking system.

Serious inflation issues may require the Fed to tighten much more than is priced in.

Potential Outcomes

Either the banking crisis will pass without incident or there will be a real downturn.

Both outcomes are plausible.

A soft landing seems unlikely even in the best environment.

Credit Crunch Timing

It's too early to give any kind of all-clear sign regarding a credit crunch.

We won't know when there's a credit crunch until we're much of the way through summer.

Larry Summers on FDIC Spending for Bank Resolutions

In this section, Larry Summers discusses his surprise at how much money FDIC has had to spend on bank resolutions.

FDIC Spending

Summers is surprised by how much the FDIC has had to spend on bank resolutions relative to what was being said earlier.

There are a lot of questions about transactions related to SBB and Signature Bank.

Overview of the Transcript

The transcript covers a range of topics, including expensive transactions, foreign direct investment in China, chat GPA, and golf. Larry Summers also discusses the indictment of former US President Donald Trump and the risks of politicizing the justice system.

Expensive Transactions

Some transactions were stunningly expensive.

The FDIC spent $23 billion on these transactions, which amounts to $100 per adult American.

There is a need to review the procedures used in these transactions to find ways to do better.

Indictment of Former US President Donald Trump

Donald Trump was indicted for certain allegations arising out of a hush payment that was made.

There are concerns about the connection between politics and the justice system in Israel and the United States.

Everyone, including former presidents, is entitled to a presumption of innocence.

It is important to keep politics out of it and act in ways that will provide reassurance that it is the rule of law being elevated rather than political side.

Foreign Direct Investment in China

Larry Summers is short on foreign direct investment in China due to enormous uncertainties about everything Chinese and Western response.

Chat GPA

Larry Summers is long on Chat GPA as continued development has been engineered so that it can be used on much smaller computers.

Golf

Rory McIlroy is overdue for winning at Masters according to Betting ISE.

What is a true gaffe?

In this section, the speaker discusses what constitutes a true gaffe in politics and gives examples of incidents that do not qualify as true gaffes.

Definition of a True Gaffe

A politician telling an obvious truth he isn't supposed to say.

It must point at some basic truth that no one wanted to say.

Examples of Incidents That Do Not Qualify as True Gaffes

When a politician puts himself in an embarrassing situation and can't quite climb out of it.

When a leader simply forgets how to spell.

When former President Trump praised the Continental Army of 1775 for seizing airports.

Example of a True Gaffe

The head of Saudi National Bank's response when asked whether they might double down on their investment in Credit Suisse was refreshingly clear and emphatic, pointing out that going above 10% ownership would trigger new regulatory rules. This was considered a true gaffe because it pointed at some basic truth that no one wanted to say.

The Consequences of Speaking the Truth

In this section, the speaker talks about how speaking the truth clearly and directly is not always a defense.

Example

S&P chairman Amar Abdul ahead stepped down reportedly for personal reasons but just in terms of credibility and communication and guidance, they felt they had to do this move. He didn't explain why they replaced Mr.Chairman but much of the recent turmoil probably has something to do with it.

Conclusion

Sadly speaking, the truth clearly and directly is not always a defense.

Conclusion

In this section, the speaker concludes the episode.

Speaker's Closing Remarks

That does it for this episode of Wall Street Week. I'm David Westin. This is Bloomberg. See you next week.