I’m live from the Bloomberg Markets 50 Summit at the New York Historical society’s gorgeous headquarters on Central Park West. Bloomberg has brought together fifty of the most important, market-moving people on earth for today’s event and I’m taking notes during each of the panels and presentations.
Below are my notes from this morning’s seven segments. Like a jazz musician, my composition below will be free-flowing and improvisational, where you see quotation marks around something it is a direct quote – otherwise I’m paraphrasing as best I can.
A CONVERSATION WITH MARY JO WHITE
Mary Jo White, Chair, Securities & Exchange Commission
Peter Cook, Chief Washington Correspondent, Bloomberg Television
“I think the SEC has had a great record of enforcement even before I got there.”
The admission of wrongdoing is a change and it is clearly important to White. The “no admit, no deny” protocol will still be in use, but not an automatic anymore. She maintains that it is still a valuable tool, especially to get money returned to harmed investors.
“I share the desire for public accountability…But sometimes the evidence just isn’t there.” – when asked about the perception that no one has been punished for the financial crisis. The SEC is trying to be “bold, unrelenting and fair. We’ll be everywhere.”
Can institutions be too big to jail? “No institution can be too large to charge criminally.” She adds the caveat that they must weigh what’s in the public good.
“It’s extremely important that even our settlements have teeth” – on the forcing of Phil Falcone to admit guilt, not just cut a check.
Where is your radar up right now? “One area where we recently enhanced the resources and focus is accounting frauds, financial reporting frauds” and “insider trading always.”
“I know how to investigate, I know how to go up the chain.” – speaking on her experience and how it will aid the agency.
Her comments on the “integrity” of the market re: flash crash, HFT etc sound fairly boiler plate. She mentions a meeting with the heads of the exchanges after the SIP freeze on 8/22. Calls the SEC’s objectives in tech regulation “zero tolerance” and “high priority”. More on HFT: The issue “needs a sense of urgency. But people don’t agree of what the impacts are.” She stresses the jury isn’t out yet on whether or not HFT is inherently harmful to the markets, despite the speed advantage they have.
JOBS Act and Dodd-Frank implementation: “We’ve already lifted the ban on general solicitation as of yesterday.” re: crowdfunding, hedge fund ads: We’re still concerned with investor protections, we’re still listening to comments. She’s okay with Twitter being able to file its initial information with the SEC confidentially, as per the protections afforded it under the JOBS Act.
re: the constant lobbying over regulations, “We want to hear from all constituencies, that makes for better rulemaking.”
Why funding is important: If we can’t enforce the rules we make, the rules aren’t going to accomplish anything.
The Volcker Rule is still being worked on, she notes how complex the process is several times, she’s working with the banking regulators to minimize “unintended consequences.”
She’s asked about whether or not she’s still able to follow the Yankees and ride her Honda motorcycle while she’s located in DC. The Yankees yes, the motorcycle not so much anymore.
NEW ERA AT THE FEDERAL RESERVE
Dr. Randall Kroszner, Norman R. Bobins Professor of Economics, The University of Chicago Booth School of Business; Former Governor, U.S. Federal Reserve System
Laurence Meyer, Co-Founder and Senior Managing Director, Macroeconomic Advisers, LLC; Former Governor, Federal Reserve Board
Michael McKee, Economics Editor, Bloomberg Television & Bloomberg Radio; Co-Host, “Bloomberg On The Economy,” Bloomberg Radio
Both former governors of the Federal Reserve, I shall henceforth refer to them as Larry and Randy.
Larry says he never grades what the current Fed governors do or says what he would have done in their place. The Fed chose not to taper because the Fed’s forecast was simply not coming true. There was “no momentum” and there was “no sign that inflation was going up to 2%. Where people got it wrong is that people thought they were itching to taper.”
Randy: “It would be very odd to say ‘well, we’re very data-dependent’ and then downgrade the economic forecast while taking away some stimulus.”
Larry: “There’s good reasons” to be uncertain given the fiscal drag, but the Fed has very optimistic baseline forecasts.
Randy: “That’s the problem, the Fed is optimistic every year but it’s always wrong.”
On forward guidance and whether or not the Fed is communicating effectively, Larry says “they didn’t get the job done,” as everyone got the September meeting wrong.
Randy: “It’s very clear that interest rates backed up much more than the Fed expected.”
Larry says that most of the Fed speakers don’t matter at all. “When people ask me ‘should I listen to Richard Fisher’s speeches?’ I say ‘why would you?'”
Randy on Janet Yellen: “She always was prepared with data, always made analytical arguments.” She probably sees more efficacy with QE than some other members of the committee, she might be willing to tolerate the costs of stimulus for much longer to ensure”sustainable recovery”. (my translation: she’s an over-shooter).
Larry on Greenspan: He allowed us to talk and dissent, but he had already had his decision. “Democracy is a terrible way to run the Fed.” Larry thinks Bernanke always gets his way, he tells the governors a week before what he wants to do, even though he allows everyone to speak at the meeting. Bernanke, he concedes, is tireless at building consensus, “there’ll never be another Fed Chairman like Ben Bernanke.”
Larry emphasizes how controversial and difficult the decisions awaiting Janet Yellen will be. “We’re trying to end the new era, and we’re trying to get back to the old, boring era. She won’t be able to do that in her first time, but she can begin to do that.”
“We don’t know if it’s effective, and we will never know if it’s effective. The best you can do is model the impact in the financial markets.” – Larry. “But the question is, ‘what else can we do? What else do we have?'”
Randy: “The Chicago Cubs will win the world series around the same time that interest rates are at 4%.” A long-suffering fan’s way of saying never.
FIVE YEARS LATER
Colm Kelleher, President Institutional Securities; Head, EMEA and Asia-Pacific, Morgan Stanley
Sallie Krawcheck, Co-Owner, 85 Broads
Lord Adair Turner, Senior Fellow, Institute for New Economic Thinking; Former Chairman, Financial Services Authority, United Kingdom
William D. Cohan Columnist, Bloomberg View; Author, Money and Power: How Goldman Sachs Came to Rule the World
There’s a Lord in the house, and Sallie’s positively beaming – there’s nothing she loves more than being on a well-lit stage somewhere.
“We are at the point where it was bound to be a crisis – I’m glad we didn’t take that hot potato on from the American regulators.” – the Lord (who was with the FSA, Britain’s SEC) on why Barclays and the FSA didn’t “save Lehman” and merely waited for bankruptcy.
Are we safer? The Lord says “much safer” from a systemic, international standpoint. We’ve changed the definition of what ‘capital’ is in the numerator and denominator of leverage ratios. But we are not safer “in the real economy.” He notes that the total leverage in the world is not declining, it’s just being shifted around. 2008 was not just a financial crisis, “it was a crisis of leverage and debt in the real economy as well.” I don’t think we’ve answered the fundamental question of how we have growth without taking on the kind of debt that leads to crises.
Sallie answers the question of whether or not we are safer today. She answers the question with a series of rhetorical questions. Some platitudes about “we’re taking steps along the way.” One thing she does point out is that she’s surprised there are not stronger rules around money funds five years later. On compensation levels: She says the issue is the structure of compensation, not greed and the absolute levels of compensation.
Colm has a wonderful brogue, I want to share a piping hot bowl of split pea with him. He believes that the structure of comp has changed, he believes the US and UK banking systems are much safer. But he laments the “blunt tool” nature of regulations. Both he and Sallie seem to despise the Basel Accords of international banking norms. Colm is from Morgan Stanley and Sallie was Citi / Smith Barney / Merrill, so restricting their alma maters from levering up is like depriving a human being from oxygen.
By the way, never mind, I don’t think Colm is Irish anymore, the accent is morphing into something more British, perhaps Northumbrian. Not quite as commanding as what Lord Adair Turner has come to the table with. Adair attended Hogwarts probably.
Lord: “We have to accept that large entities cannot simply cease operating.” – in response to why some firms were saved in 2008. “That would have been too shocking to the system.”
Colm: “Nobody had any idea how big the problem at AIG was that last weekend in September.” He had been in the room for a lot of this bailout discussion stuff. ” That is inconceivable now, five years later.”
Bill Cohan (moderator) keeps trying to bring the panelists back to the question of whether or not we’re back to “mispricing risk.”
Lord Adair Turner admits that QE has been causing people to begin engaging in the same types of behaviors as they were pre-crisis (yield-chasing). We cannot scan and detect every wrong risk being taken, but we are much better at it today than we were then. (josh’s note: yeah, okay.)
Sallie on the Volcker Rule: We’re looking at a pool of water (representing risk) and we’re saying ‘we don’t like the purple water, let’s get rid of the purple water.’ But how do we do that and leave the yellow water and green water alone? (audience stares blankly, someone coughs).
A CONVERSATION WITH STEVE SCHWARZMAN AND JIMMY LEE
James B. Lee, Jr., Vice Chairman, JPMorgan Chase
Stephen A. Schwarzman, Chairman, CEO & Co-Founder, Blackstone Group
Jason Kelly, Managing Editor, Bloomberg LINK; Author, The New Tycoons: Inside the Trillion Dollar Private Equity Industry that Owns Everything
Stephen is such a boss. Talks about how when he began in the private equity biz, it wasn’t much of an industry. Now everything is so much bigger with the entrance of sovereign wealth funds. “A lot has changed, but the fundamental business of buying value doesn’t change.”
Leverage is abundant and the Fed’s done a great job at whetting risk appetites, says Schwarzman, but the M&A cycle has not yet come back and you have to be more clever finding things to buy. “It’s easier right now on the sell-side.”
James Lee: Balance sheets are the best that Stephen and I have seen in our entire careers. “The M&A ccycle that’s started now is really more for corporates than for private equity firms.” He thinks deals are happening because corporations are being punished by the markets for not meeting growth targets. he expects “large, prominent transactions” between now and year-end as the realities of the low cost of capital not being here forever are really sinking in.
Schwarzman on his involvement in the Dell deal – “Yes, we rented a room during the dicsussions, but it was only by the day.” he says the real work for Michael Dell begins now, the kind of restructuring that’s “not for the faint of heart.”
James Lee says there is “some sort of echo of the 80’s happening now” in the way that private equity firms are behaving. (josh’s note: I think he is disapprovingly talking about Carl Icahn, given his belligerence during the Dell buyout). He also thinks the young punk activist hedge funds “that no one has ever heard of” are making an impact on the industry thanks to cheap money flowing in.
“You just have to remember the way the movie ends.”
Schwarman is asked about the current state of Blackstone. In summary, he’s ballin’ so hard right now, real estate and whatnot. Forgetaboutit. He is able to attract talent and deals because, like receivers, “we have good hands, and we don’t drop balls.” But he says even when things are going well, “Don’t believe it, be skeptical.” He says periods of success ultimately build up a head of overconfidence if you don’t check yourself.
James Lee: The big lesson was about being vigilant if you’re in the middle of an industry. Lehman and Merrill and Bear were too little and too big at the same time, which is why they got swept up in the wave of consolidation during the crisis. None of them had the fortress balance sheet.
Advice for the new Fed Chair – Schwarzman: “I think the efficacy of the QE system has sort of run its course. It’s time to sort of bring it to an end at some logical point. They go and do it and stop this ‘Hamlet’ approach. A little increase in rates isn’t going to stop this economy. They ought to, more or less, just get to it and we’ll all move on.”
HOW GLOBALIZATION AND ACTIVISM ARE CHANGING M&A
Scott Barshay, Partner, Cravath Swaine & Moore
Kenneth Jacobs, Chairman & CEO, Lazard
Cristina Alesci, Reporter, Bloomberg News & Bloomberg Television
Scott Barshay: It’s tougher to get deals done in this recovery versus prior recoveries.
Ken Jacobs: “M&A is driven by three factors: availability of financing, valuation and confidence. The challenge has been on that last factor – confidence – but optimism is just as infectious as pessimism, and we’re seeing a change now.”
Ken doesn’t think the Fed’s no-taper decision will have much impact on M&A. Although Scott says there are some deals that will get done on the margin that probably wouldn’t without free money.
“Deals above $500 million are up,” says Ken, so the trend is okay. Every potential deal decision being made by CEOs and boards today is being weighed against capital allocation (buybacks, dividends).
The panelists are asked about the surge in shareholder activism. Neither will comment on Icahn and the more aggressive activists referenced in the question. Scott says activism in the short term is a boost for valuations but is not necessarily great for business longer term.
Scott says acquirers are still super-risk averse. “They want deals that are 8s and 9s, not 6s or 7s on the scale of whether or not they’ll get all the benefits of the deal.” (Josh’s note: I wonder is this is because so many transactions turn out to be losers and uneconomical?)
On the participation of private equity firms in partnering with management a la Dell: “I think it’s a one-off”, Scott says, he doesn’t think what happened with Dell is the harbinger of a new trend.
On a CEO protecting himself from activists, “the best answer and defense against a determined activist is a high stock price” – Scott. Having a good answer for questions about strategy and excess cash will help as well. Ken says listening to large shareholders and what they want is the answer.
The panelists believe, in the final tally, M&A totals in 2013 will beat 2012 but just slightly. They point to Asian and European conditions being the wild card.
WHEN ALTERNATIVES BECOME MAINSTREAM
Glenn Dubin, Chairman & Co-Founder, Highbridge Capital
Marc Lasry, Chairman, CEO and Co-Founder, Avenue Capital Group
Bruce Richards, CEO, Co-Managing Partner, Marathon Asset Management
Stephanie Ruhle, Co-Host, “Market Makers”, Bloomberg Television
Here come the hedge fund guys. You can just feel the alpha in the room as they take the stage – you can f***ing smell it. The atmosphere is electric, several women faint.
(Josh’s note: Marc Lasry told us at this event last year that Europe was on the cusp of improvement – he nailed it and changed my way of thinking about it. Thanks Marc!)
(Josh’s other note: Stephanie Ruhle is so gorgeous, just a knockout. I’ve met her a few times, she’s also really cool.)
Lasry says that hedge funds have a lot more say in the markets now that large banks no longer have big trading groups. Banks are being bypassed and Lasry is seeing European banks coming directly to him (Avenue does distressed investing) with assets they want to sell.
Would you set up shop and start a new hedge fund today? Glenn Dubin says it’s obvious much harder than when he started Highbridge in ’92. “The competitive landscape is much tougher, but this new environment where the banks are getting out of the business creates a lot of opportunity.”
Bruce Richards emphasizes how much has changed in Europe over the last year. He says the banks in Spain and Ireland are in a better position to sell assets and delever than they were, now that the sovereign crisis seems to have run its course.
They chuckle about how easy it’s become to recruit the best and brightest from the banks.
On fees: “Either you decide to invest with a manager or you don’t. It’s as simple as that.” says Dubin. I think negotiating fees is a ridiculous discussion. Richards is more congenial, “We’ll reduce our fees for large tickets from institutions.”
Lasry: “All anybody should care about is NAV (josh: net asset value, what their stake in the fund is worth). A 10% return is 40 times the risk-free rate, if someone can make you 40 times the risk-free rate, I think you should pay them their 2%. I think guys who are doing 10% are doing a phenomenal job…We’re not supposed to be judged against the S&P, we’re not supposed to be taking that much risk.”
Dubin says investors today are looking closely not just at returns but at the source of those returns – how they are being generated. “They are interested in consistent returns without beta and they will pay for it.”
Richards explains why lockups determine what kind of assets a hedge fund can buy. Explains that in 2008, there were mismatches and misunderstandings that led to forced liquidations, he believes the hedge funds are engaging in less of this now.
Dubin says lending capital to non-investment grade companies is an extremely attractive opportunity now, one that the banks have vacated and left to funds like his. Lasry: “Basel III has forced banks to sell, and is forcing banks not to lend to non-investment grade borrowers. We’re getting LIBOR +5, LIBOR +10 and we’re getting paid for that.”
Glenn Dubin believes that Larry Summers would have made a tremendous Fed chairman but the White House blew it. Calls the process “horrendous”. Lasry agrees that Summers was the right guy. “It’s sad that he had to pull out.”
Lasry on the no-taper: “I don’t honestly understand what happened last week. I thought the economy was doing muh better. That was a surprise to me.”
Bruce Richards weighs in: He ties the Summers bow-out to Obama’s loss on Syria policy and the coming fiscal debates. He thinks the choice of Yellen is due to Obama wanting to throw Congress a bone and choose to fight the other battles. He says the decision was made by Yellen internally in the Fed once it became clear that she was the inbound chairperson. Bernanke did not want to taper, then have Yellen come in and potentially have to do that. Richards believes Yellen will be great.
Lasry is not letting the issue go, he’s really disenchanted about how Larry Summers was “hung out to dry.” Dubin says he’s totally disillusioned, no longer spends any time at Democratic party functions.
A CONVERSATION WITH NEW YORK’S ATTORNEY GENERAL
Eric Schneiderman, Attorney General, State of New York
Matt Winkler, Editor-in-Chief, Bloomberg News
Schneiderman begins at the podium to make some remarks before the conversation. He feels very strongly about “restoring the public’s trust and confidence.” One set of rules for everyone is important to the integrity of markets and restoring confidence. He understands the drive to compete and to seek to beat the market – he wants to make it so no one starts out with an unfair advantage.
Today, we’re seeing something far more insidious than traditional insider trading. “Far beyond what Boesky or Gekko could have imagined.” (josh’s note: he is aware that Gekko is a fictional character, right?)
He says HFT is exacerbating what his office calls Insider Trading 2.0. There is no investor confidence because the game has been manipulated and perverted as the average holding period for equities has dropped from years to under one minute. “We all might be the dumb money” as the few suck value out of the market.
Schneiderman hammers on the release of early data by Thompson Reuters that allowed high speed traders to skim profits off the rest of the market. He points to action taken by his office and how that game has been ended since his intervention. “Our concern does not end with that firm.” He says they are also looking into early release of analyst recommendations to select groups of customers.
He says that the Martin Act allows him to break red tape on investigations to make agreements with firms like Thompson Reuters – something the Federal agencies cannot do. Then he’s all like My office has a hotline, I need cooperation from the good actors to restore confidence. Holla at your boy.
Matt Winkler (Editor-in-Chief, Bloomberg News) joins Eric onstage for Q&A, he’s rocking his trademark bowtie so you know it’s game on…
On technology: “Every time there are new technologies, there are new frauds. We didn’t have wire fraud before there were wires.”
“A hacked tweet that there is an explosion in the White House is a market-moving event now, this is a whole new world.”
His big frustration is with gridlock and congress, “Everytime I go down to Washington, there’s another crisis or catastrophe underway.” This is why it’s so hard to get anything done.
On other state AGs – he calls them a “fascinating group.” LOL, you can tell he’s holding back on what he really thinks. He does tease the AG from Virginia who stopped University of Virginia from teaching climate change.
He says some money from all the settlements from Wall Street wrongdoing are going to be used for land banks around the state of New York.
I hope these notes have been helpful, the recording of this stuff allows me to better learn as I attend events like these, so I appreciate your being interested in the content.
Check in later for the afternoon session notes! – Josh
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