Bloomberg Businessweek Weekend - February 15th, 2020

be the coronavirus. Later on in the show, we'll hear about the impact of virus is having on Chinese factories and about a Norwegian based coalition working on a vaccine. Also in the show, an in depth, provocative conversation with the former chairman of Lehman Brothers, Michael Ainsley. He was in the room where it happened, as they say, that

fateful decision to declare bankruptcy. And this hour we'll take a look at why Vanguard Group is moving into private equity along with it seems like the rest of the world plus subdued inflation, has some investors worried about global central bank policy, whether there are any arrows left in the quiver, and a little bit of complacency. But first, Bernie Sanders rise and Joe Biden's fall. Tyler Pager is here for the latest from the campaign trail, Tyler, what

went on in New Hampshire. Yeah, so the big story obviously is Bernie Sanders wins again. He won in sixteen and he continued that track record. He won by a smaller margin though, and I think the big story behind that is people jug and Amy clob which are kind of fighting to be that moderate alternative to Bernie Sanders.

And then again Joe Biden's collapsed finishing fifth in a distant, distant fifth, not getting any delegates from that contest right and and basically like say in peace Out before the numbers were even tallied, heading to South Carolina, That's where

it all hangs in the balance for him. At sais they saw the writing on the wall and decided it's better to try to save face, go to where his stronghold is supposed to be in South Carolina, and start to build up the campaign there and kind of relaunch it as they prepare for that primary at the end

of the month. That is his firewall, and it shows some cracks, but we'll see if he's able to maintain that lead and and catapult him him out of South Carolina into Super Tuesday was the mood on the ground, How did people feel, what did they say was new or different here in than from sixteen or even going back to two eight. I mean, the biggest difference is just how big the field is and how big it remains. You think, Iowa New Hampshire are kind of these winnowing

contests where people start to drop out. After that, we saw a few people in the single digit chop out, but we still have a pretty large field heading onto these next two states of Nevada and South Carolina and then into Super Tuesday. So I think obviously the biggest difference is it wasn't a binary contest between Hillary Clinton and Bernie Sanders. There are a lot of choices across the spectrum, both moderates and progressives that that voters could

choose from. And life for Amy Klobuchar exactly, she is gets out of New Hampshire um with with some momentum. She's going to struggle a little bit because it's shown that she's not pulling as well with voters of color, and she needs to build an organization that can capture this momentum. She gets out of New Hampshire, but but she gets life in and and and live stifout another day. And meanwhile the press that sort of feasting on a lot of this discord. Yeah, this is exactly what the

president wants. There's no one clear front runner at this moment that the Democrats can rally behind and unite behind Um. And Donald Trump is excited about the prospect of facing Bernie Sanders. His campaign thinks that's the best person for him. He can paint him as a as a democratic socialist, which is what he identifies as in and really harness um that energy against that kind of mindset and bring

in moderates and independence into the folds. All right, Tyler Pager headed back to d C. We know you'll be on the campaign trail a lot more to come. Thank you. We turned out to Tracy Alloway via Skype. She's got the cover story. It's all about fragile China. Tracy, thank you so much for joining me. So you understand the economics in the markets so incredibly well here you know the history and there is a sense, to the point of the cover that China is fragile in a way

that maybe none of us fully understand. Help us understand it, well, this is always been the big existential question about China and its role not just in the world economy, but also in global financial markets. You know, people like the Trump administration, they tend to portray China as this big threat to the American economy, to the American worker. But there's also a line of thought that China is much

weaker than many people actually think. And one area of weakness in particular has been the notion of debt and leverage in its financial system. We've heard people talk about this for years and years and years now. China's financial system relies heavily on debt fueled growth. It's what they reach for whatever they have a slowdown in the economy, Like back in two thousand and eight, we saw a

lot of infrastructure spending. That's what they reach for, really to develop their economy and get the standard of living up to where they want it to be in order to solidify the CCPs power. And of course, when you have growth that is driven by debt and by leverage, there is always a chance that it could take a hint and the whole edifice could come falling down. And so in Hong Kong, we're not just talking about the financial system we're talking about protests, and obviously we're talking

more and more about the coronavirus. Tie it all together for me, How worried are people that this could be the thing that starts to pull this apart. Yeah. So, one of the really interesting things about being here on the ground in Hong Kong is that you are seeing this variety of opinion. At the moment, Hong Kong is Asia's biggest financial center. We have a lot of people here who have basically tied their careers, their money, their lives to the growth of China and its integration into

the world economy and financial markets. Now there seems to be a little bit of doubt creeping in as to whether that might happen to the extent or at the pace that a lot of people had expected or hoped that it would. The Corona Una virus outbreak really, uh, I should say, the coronavirus outbreak really puts a question mark over the Chinese growth story. Now, what we're seeing from some fund managers is their positioning for a big

stimulus effort from the Chinese government. They're buying things like cement stocks, property stocks on the expectation that that's going to come. But some other people are getting pretty wary at this point. They think if China unleushas stimulus, they're not going to be able to do infrastructure spending like they did before. They're probably not going to be able to lower rates as much as they would have hoped

because rates are already low. And again you get back to that question of whether or not you can keep prompting additional economic growth through the use of additional leverage. And that's Bloomberg Tracy Allaway with this week's cover story. So if you want to get one of the most read stories, most talked about stories on the Bloomberg, just call up a well known investor and say, what do

you think about China. You think it's in trouble. We've seen it time and time again, and yet crash hasn't happened, and yet the worries still seem to be out there. Pat Regnier and his team dug into that in this week's edition. Tell us what you found, So, I mean, what we really found was a system that just looks really fragile. Um It's it's a system where you know, debt has been piling up. You know, the Chinese economy

went through this kind of extraordinary transformation. I mean, if you remember a decade ago we talked about China sort of doing vendor financing for consumers in the US. Well, what have they had over the last decade. But they've had a consumer boom. It's been a partly a debt finance consumer boom. You've seen uh, you know, a real estate boom there. Uh, you know, huge levels of you know, peer to peer internet finance, kinds of debt, lots of

corporate debt, lots of defaults. And through it all you've had a central government that has been managing it and many ways they have more tools to manage the economy and to fine tune it. And uh then in some other countries, and the question is always will they you know, get this kind of you know, lumbering economy across the tight rope so to speak, uh, you know, to safety. Can they let the air out of this uh slowly? Or is there you know, the possibility of some kind

of crack up along the way. All right, So let's go down a level, because there are a lot of different components to this. One is the consumer economy that, as you say, has just i mean blossomed boomed, exploded. You know in so many aspects. What are the concerns there? Well, one is just that you know again uh, you know, high levels of household indebtedness. I mean that was just something that China didn't used to have UM and and

now it does. And you know, some of that has come from the kinds of lenders that if we had them here, we'd say, like, you know, that looks like you know, possibly you know, a predatory lender. Uh, you know, some of it has maybe come from lenders that weren't particularly well financed themselves. So you know, there there's worries on that side. So you have you have that UM. You have really you know, high um price to income

ratios for housing in the major cities. You know, these are unaffordable cities that they've had to apply these kinds of cooling measures to things again that you you couldn't do here, you know, caps on how many units a family can own. And when people you start to think maybe people are trying to get around that by like you know, somebody divorcing. Well, one of the things that can happen in China is they can say, well, you know,

we're gonna put restrictions on borrowing. Uh you know, if if you're divorcing, so that you're not trying to get around those caps. So the government's local governments have been really sort of trying to like keep a lid on things that you know, in other places, uh, you know

might run wild. But even there, you've just you know, you've had over you know, a series of just a few years, you know, price increases well and the government's role excuse me, and in all of this is a really important one to to understand, and it is complicated in many you mentioned sort of the tools that the government has. The entire system is one of command and control.

But control only goes so far. It's clear right right, and you know, as as we're sitting here talking right now with uh, you know, the coronavirus, I mean, we're beginning to see, like you know, when you look to one institution to control everything, I mean right now, they are having you know, you know, huge issues containing you know, a difficult outbreak, um, and all of those things get kind of you know tied up together. Uh you know, are they if you know, are they managing that competently?

And if they're managing that competently or not. How does how do we how do we take that for how they're going to be able to manage and finding the economy? Right? Yeah, So let's talk about that because you know, we've talked about the debt side. You mentioned the virus. What do we know so far in terms of the economic management, the financial management, sort of the social management that that the government has employed as you look at this a financial lens, Well, I think for a lot of people,

you know, what what's interesting and what you know? We asked um our writers in Hong Kong Tracy Alloway to to ask, is are people, um, you know, blurring these two things together or are they compartmentalizing it like there's an economic management over here and there's virus management over here? And you know, I mean I think you're actually beginning to see some of that, some of that blurring together,

um you know. And yet you know here here in the U s. If you look at how markets are responding, even with all this stuff happening in the world second largest economy, people still seem to not be quite ready to like look at this as an economic crisis. Yeah. Does that surprise you as someone who's looked at the world through that economic and financial lens for a long time. Well you know, as we've said, people have been called

calling a crisis in China for a decade. I mean I so in a sense, it doesn't surprise me in that, you know, it's always very hard to call the top

of something. And I think you know, most people in uh, you know, in the United States and Europe are still like working to kind of get their heads around like all, you know, the size and the pace, the pace of change and showing right, well, and we shouldn't forget you know, one of the elements that brought this to the for two things actually, one is the trade war, you know that obviously sort of put the Chinese economy in a

different light. And then something as seemingly separate but important, especially to our financial audience, as the protests in Hong Kong. But all of this sort of starts to play into this stu in a way. It's it's all happening at once.

And again, now that's something that I think a lot of people in the United States or the UK may may may experience to like suddenly all the news is happening at once, and it seems like we're all kind of caught in these cycles of you know, of of all this and and and look at look at all those places in the the US, US and Europe. I mean, the the markets have kind of trondled along right exactly well,

and the and the Hong Kong. When I think, you know, I think about some of the work you and I have done together around the financials US in the big financial firms, and wrestling with how to understand Hong Kong and its role in the in the broader financial world, which brings me to to one thing I wanted to make sure we talked about, which is the role of the banking system and the government's role in all of that state control lack of state control. Where does the

banking system fit into all of this? Well, I mean this is this is one of the key levers that you know that Chinese authorities have to pull. They can they can control you know, interest rates, they can control lending um. They particularly have to think about the rise of shadow banking UM that that's such an important factor in China, the rise of these financial institutions that are

outside of the traditional UM lending system. And when we were talking about P two p UM you know, just the rise in the amount of dead outstanding in peer to peer lending a few years ago, and then how quickly you know that that was brought down? I mean you you you don't. You don't see changes of that scale without a crisis happening, um uh in in most

in most other countries. You know, we did an interesting story, um not too long ago about default about bad loans and defaults in China, and they're rising and rising and rising and um. At some point I asked, you know, it's like, we keep doing these stories about record record defaults in China. If we kept having headlines like this, um here, we'd be talking about a crisis. And one of the things that one of the reporters explained to me,

it's like, you know, this isn't a crisis. This was a plan, right, You know that that that the Chinese government has a policy now of sort of encouraging companies to instead of extend and pretend to start to default. And so that so that investors who are coming in as as money from around the world is beginning to be invested in the domestic Chinese bond market, are will begin to have expectations that when you lend to a Chinese company they could default. And that's editor Pat Regnar.

So this is a story we've been following very closely. It's about the mutual fund business, but it's also a about the increasing power of the big three Vanguards. Certainly one of them, any Massa has been falling this so closely. She's got a story in this week's edition in the finance section. Tell me what's going on with Vanguard? Not

just for index and passive investing anymore. Yeah, Vanguard announced plans to make its first real foray into private equity with a fund that's going to be managed by an outside firm called Harbor Vest Partners. All Right, this feels like a big deal. Uh, it feels like this is one of the holy grails on all sides of this, which is more people getting into what his largely been a pretty exclusive club. Why do they want in? Holy grill?

Is exactly the right way of describing it. I would say, I think if you're a Vanguard, you see that there's so much more focus on private markets recently. Fewer companies are going public now and you can frankly earn higher fees in that area. Um So if you're Vanguard, and you're a big index fund provider, I mean, a giant of index and truly the world's second largest asset manager,

and you typically compete on costs. Um they see a window where they can compete on costs for PE funds while still earning higher fees on those funds than they would on cheap index Alright, let's talk about that, because the fees you start to get into one of the most interesting aspects of all of this at a time. And you know this better than anyone. Where fees are going down, down, down, all the way to free, we're talking about an industry where the fees are by most accounts,

pretty extraordinary. Two and twenty is the way that private equity funds, as you well know, charge two percent annual fees of profits. That seems like mind blowing in the world of low fees. How do they square all that? Yeah, compare that too in twenty two a cheap SMP five tracking fund that might just charge three basis points and that's it. So, I mean, there's obvious appeal on the fee side. Uh for a firm like Vanguard. They will first of all, only offer this to institutions in the

beginning phases smaller institutions like endowments and nonprofit foundations. But their aspirations are clear to bring to bring this to a wider audience, and they might be able to do that through their advisor channels. They've got UM a growing network and a huge network of advisors UM who could eventually, if UM it were allowed, UM bring these kinds of investments to their clients. And so this isn't the first time that a big money manager has sort of flirted

with this idea, right, remind us of the history here? Yeah, Actually, I mean going back to UM. Around two thousand and one, Vanguard itself tried to make a push into private equity, UM, bringing in Hamilton Lane for a fund of funds, and in the fallout from the dot com bust, they just abandoned that effort and they said that they couldn't raise enough assets for it. UM. But you've also seen black Rock again world's biggest asset. Man. You're seven trillion in assets.

Two threads of that comes from UM its index product suite. UM. They've also made a bigger push into alternatives and private equity, specifically UM. They launched this fund called Long Term Private Capital that takes stakes in private companies about two years ago. Now that could be seen as a cautionary tale in some ways because it hasn't progressed as quickly as they initially said it would. So that shows some of the struggle for an outsider um trying to get into private equity,

such a relationships based kind of arena, right right. You fast forward to now, the private equity industry you point this out in your story, has a trillion and a half dollars or so just in dry powder, three four trillion dollars in total assets under management, names like black Stone and KKR and Carlisle. At the same time those names, the Blackstones and the Carlisles, they're trying to get to

some of these same investors. How is that going in terms of getting to the retail Holy growl, that's right sore seeing this real convergence. At the same time that Vanguard is trying to sneak into private equity, the Blackstones and Kkrs are trying to see how they could get their private equity vehicles into the hands of more investors, more retail investors. Even traditionally private equity is walled off from all but the institutions and the high net worth individuals,

accredited investors. You've got to be accredited to get in right exactly, and what Blackstone would like to see, what the private equity giants would like to see. Um are some of those restrictions being loosened. And they've made that case in front of the SEC, and the SEC is looking at it and assessing whether it would make sense to ever open up private equity style investments to a larger audience, because I think that they fear that an average investor could be missing out on those returns um

if you know, if they're increasingly walled off from that realm. Right. Critics and skeptics look at that and say, well, maybe there's a reason that retail investors aren't in there. It's much less liquid in many ways, it's much more opaque. The transparency just isn't there. What do you make of those arguments as you talk to people? That's exactly right. So investor advocates say, wait a minute, this is really

a sales push on the private equity side. It can be hard enough for an average investor to just sort out the right mix of stocks and bonds and a portfolio without getting in cash without getting involved in something as opaque as private equity and something where they might not understand the complexities, might not be as happy with the longer lock up periods um So, there is definitely a vocal piece of the market that's saying that private

equity style investments are not right for your average retail investor. And that's reporter Annie Massa. So, first came the trade war, now the virus, all of this playing into the Chinese economy, especially when it comes to manufacturers. Here with more on the impact as the virus spreads not just in that country but potentially globally, is the editor of the Economic section, Christina limp lad high Hi. Alright, so we spend so much time talking about is this going to spread? What's

going to happen? Meanwhile, back in this one province where it all started in China, what does it look like economically? Well, that province, Whovey, is important to China's economy. It's about the GDP of that province alone is bigger than Poland's, but that that province is not a big exporter onto itself. So what we looked at in our story is what is happening to the to China's industrial heartland, which is more on the East coast. Um, and they are you know,

it's it's been freezing. Like the disruptions are just sort of you know, like radiating through the country and then internationally. So at one point last week of China's productive capacity was offline because authorities had not allowed um, you know, company owners to reopen. Now we've been seeing this week gradually some places start to say you can go back

to work. Of course, um, that is not possible for every company because a lot of them have their workers are stuck in their home counties because they went home for the Lunar New Year holiday and then face quarantines and then travel bands. So even if today you know, local authorities said it's okay, go back, go back to work, because I think there is now this push in China to normalize at least like you know, economically, um, and maybe that you you know, we talked to one company.

Its workers, um, you know are from other from other provinces, and so excuse me and remind us of the geography here. You mentioned it briefly, but we're talking about the Pearl River delta, right, I mean, this is global supply chain practically like global headquarters of global supply chain in many ways delta and a little bit wider. But yes, these are companies that are very, very embedded in global supply chains, which is not always the case for you know, the

companies that are in the epicenter of the outbreak. So, I mean, there was a company we talked to in India that makes capacitors and they were saying basically that they just haven't received any supplies from China that they need for parts, so they're going out to South Korean suppliers. But those companies also sourced from China, so their inventories

are running down fast. And so synthesize this with the trade war because that was already sort of top of mind for the Chinese economy obviously in the U. S economy too, but there had already been correct me, if I'm a sort of changes made to the supply chain to some extent in a positive way in a negative way,

like how do we sort of put all this together? Well, I my concern and I think we're an economists are going to be looking at and there's not as much clarity as it might be for big companies, as small and meeting size companies in China because obviously they just don't have the deep pocket to some of the national

champions do. And so there was a survey that came out recently of almost a thousand and and you know, the owners of these firms said that they couldn't um sustain three months of the kind of situation that they've been experiencing the last few weeks, and about a third said that they expect to see half of their revenues

wiped out this year. You know, you have to remember that for certain types of companies, this this happened at a crucial time of the year, which would be equivalent to like, let's say, like you know, the the holiday's chapping season in the US. So I mean, there's no way to recoup those sales. They're not coming back, even if you're going to be able to open tomorrow. So I think that that's where a lot of people are sort of feeling their way what is going to be

the impact on China's economy. I think a lot of the thinking is if this is kind of quickly contained, there is going to be a bounce back in the second quarter and by the like second half of the year, we'll see a stabilization. Still, a lot of people are every going around to the idea that it's going to be very hard for China to make a six six percent growth rate, which is sort of originally where the

government you know, had had forecast was. So I think a lot of what we're going to be seeing this year is for people in the next few weeks and months for people to be constantly revising those numbers of up and so, you know, speaking of the government, we spent a lot of time around this table over the years with you talking about the government's role. You know, you mentioned national champions and the idea that the government really does get behind especially some of the bigger companies

and support some of the smaller companies to do. We anticipate that the government is going to have to step in a more meaningful way to sort of prop up the manufacturing industry more broadly. Um At this moment, what we're seeing is they're doing things, for example, is urging local governments to speed up issuance of this special type of bonds is used for infrastructure spending. So the you know, so there are things that we're already in the pipe

blind and they're being moved up. So right now we're not seeing giant new stimulus coming along, just kind of stimulus. I was already there being advanced with Christina Lindblad, the editor or the economic section of the magazine. Christina, another story from your section. It's all about inflation and monetary policy and it's wide ranging impact on all of us. A lot of people are talking about inflation lately. It's something top of mind, especially here at Bloomberg. Why are

we so concerned about it now? Well, I think a lot of it was a great deal of attention paid to the comments that Ken Griffin, the founder of Citadel Hedge Fund, made at the Economic Clove of New York last week in which he said, we are totally unprepared for the return of inflation um. And he's basically alluding to the fact that monetary policy in the US and other places is so loose that it would be hard to you know, to quickly ramp up to contain you know,

price pressures um. And then some other people bull piped in saying, you know, you know, the death of inflation. You know, it's grossly exaggerated, Like why are we writing these obituaries? You know, so I think a lot of people are thinking, like, you know, they're not ready to write off the idea that that there is inflation in the system, that this kind of this economic perennial thing, right like. But then though, there's a whole other camp that's pooh poo. This is sort of like this almost

like a New Year's tradition. One person said to start the year saying, this year is going to be different. This is the year where we're going to see a return of inflation. And certainly there are many factors that you could say would would make this year actually be the one that we should be looking at, because we have in the US in the UK very tight labor markets, and those are have traditionally been you know, kind of

precursors um. But there are a couple of other things going on, and one thing is the trade war and the other one is coronavirus, and those two are disruptive to supply chains, which is another place where inflation can

come up. I mean, if you're losing access to your regular suppliers and all of a sudden, let's say in China, and all of a sudden you have to go to South Korean company, Well, a lot of other companies may be knocking on that firm store that's going to go up, right, that's an opportunity for that company to, you know, to

put up prices, right. So that and and the idea being that that company puts up prices and it sort of has this ripple effect where ultimately the prices of things just start to go up finally, but we're not seeing but we're not seeing it yet, right, And so let's go back to to what you started with a minute ago, which is this idea of a tight labor market. We've been in a tight labor market now for it feels like a pretty long time. How has that not

played through yet? What do people say in terms of that lack of cause and effect that maybe we've seen thus far? Well, I think, you know, there's this kind of ritual now where the monthly job numbers come out and they're like gangbusters cons and while they're not but mostly I mean, certainly the most recent want surprise on the upside. So there's this you know, there's this like, wow, how how is this not affecting prices? But you know, you have to remember that wage gains have come late

in this more than ten years. Essentially non existed for a long time. Um, and they're not and wages you know, are still not growing that that strongly. Like in the in December there was actually a blip in which we saw a break in this sort of trend in which they had been growing you know, modestly, right. So that's

one factor, um. And also you know, it's like it could be that companies are choosing to swallow you know, price increases from suppliers and sacrifice some margins, although um, I haven't seen studies about how, you know, how widespread that is. So in a world in which comparison shopping for all sorts of things is so easy, people are more I mean, companies are businesses are more reluctant I

think to put up prices. Some people have alluded to this mentality that you have in hand, where like even convenience stores you know, are just completely freaked out by the idea of having to mark anything up because you know, people will just go to like the rival down the street. So I think that mentality writ large, you know, is

a factor. Um. And also so we looked at market measures of inflation of anticipation and basically you know, they're not we don't really see anything um the in the large majority of investors feeling that that anything surprising is around the corner. I mean, inflation has been tracking closer to the two percent target that is the Fed's target. But you know, Clarida um said recently that they're not right right, that they're not ready to say we're at

full employment. I mean, this, you know, was something that happened in eighteen where the FED came very you know, basically decided that economy was a full employment you know, and that we were above four percent at that point unemployment, and and then they started high rates. This mistake is not going to happen again, certainly not in an election year when they're even more cautious about, you know, about

moving around the extension. Well. And meanwhile, you know, anecdotally, I feel like we all talk about this idea that, yes, while there are no good gauges that prices are going up, housing prices continue to rise, at least in certain you know, parts of the country, So it doesn't for the average person, it just doesn't quite square right, It's true. I mean, I think for a lot of people, housing prices is

what they feel strongly. But you know, if you look at prices gasoline, thanks, you know that are in the basket in the consumer price and next like they're not going out. And that's editor Christina Lynn Blad. As the coronavirus continues to be the biggest story of the week, one Norwegian based coalition is looking for a vaccine. Economics editor Peter Coy joins us now with that story, Peter, the virus. It's the first big test for the Coalition

for Epidemic Preparedness Innovation and SEPPI for short. Where did this group come from? Well back when we had the Ebola outbreak in governments had been working on funding a vaccine for the Ebola had been known about since the nineteen seventies, but nothing had ever been done, and no company had taken the baton and gone out and developed a vaccine because look um, its outbreaks are fairly rare. The people who would be vaccinated or quite poor canon

really afford a vaccines. So the private market just wasn't doing the job of protecting people from Ebola. So they looked at us and said, we're gonna have other viruses striking, you know, we need to have a plan. So at DABOS, the World Economic Forum annual meeting in Switzerland, and the idea was conceived. They went back to the drawing board and then a year later went ahead with it. So it's headquartered in Norway, of all places, which has had zero k is of the coronavirus so far. So it

has like three years old, sixty eight employees. So in one way it's very small. In another way, it's very big because of its power to coordinate. As you said, a lot of different players, the research team community. That would include the boutique researchers on vaccines as well as the big manufacturers who need to be able to work together, governments, supplying funds, regulators so that we can speed these new vaccines through the regulatory process. It's sort of like a

providing a needed coordination function. Well, and what's so interesting you point this out in your piece is that there obviously is an element of this that is medical and biological. This is largely organizational right precisely. You know, I actually liken it to um sort of a societal immune response. In the same way the body produces antibodies against society produces new structures to fine outbreaks. And because of the

world we're living in. Those need to be pretty complex, those organizations, you know, pulling together all of those different elements that you describe. How optimistic are people that this is working or can work. I talked to Dr Richard Hatchett, the executive director for the article, and he's thinking now they'll take twelve to eighteen months before a vaccine as ready. It sounds like a long time, except it used to be like a decade and more to create a vaccine.

So this is like running a lot of processes in parallel that would normally be done one at a time, getting everybody on board, making sure there are no glitches, no hitches, everything happens, So it may not even happen that fast. That's he said. He's almost reluctant to give a date. Could be wrong. But while that might seem like a long time, it's going to be too late

for the people in this initial outbreak. If this coronavirus is as bad as some people fear it will be, the vaccine will be crucial for future outbreaks or the possibility that this vaccine, this this virus never goes away, it just becomes an endemic in the population like the

common cold right. Well, and also this element of every time something like this happens, whether it's stars or ebola or something else, there is looking at them sort of an academic perspective, something to be learned, right, in terms of reaction, in terms of all these different stakeholders and their actions and the speed of their actions in coordination.

I hate to be ghoulish, but in some ways an outbreak as an opportunity because you can't test a vaccine against the disease in which nobody has it, right, It's only when people have contracted it that you can introduce the vaccine to people who are not affected to see if they are protected from it. So that's why you take advantage of this terrible event to try to create

and test the vaccine that will pretict other people from it. Well, and as you say, we are talking about ultimately people here, we're talking about human behavior, and you can't model that so well, even the most advanced artificial intelligence still is ultimately artificial in terms of determining how humans are going

to react. You know, even thinking about something as small an example of how cruise ships are sort of playing a part in this whole current crisis, you know, cruise ships trying to pour in different places, and governments having different reactions, and all of those sorts of things just goes back to the complexity of all the stakeholders here well, So that Hatchet would say the efforts to isolate people protect from the current outbreak, the main reason for that

is just trying to slow down the advance until the vaccine can come in, like the cavalry riding over the ridge to the rescue. Once there's a vaccine, then we actually have hope of arresting this right. You know. One of the things that your peace calls to mind, Peter, thinking about sort of your body of work as it were, is this does require a level a level of coordination that maybe in today's world, as small as it feels, is a little more complicated. You know, on a medical level,

there's been an enormous amount of co operation. The Chinese scientists immediately supplied scientists all of the world with the data they needed to start working on vaccines, scientists a scientists. The cooperation the globalization is still there. Whether that carries over to coordination between countries as you gave the example the cruise ships is not so clear, but That's why

SEPPI is. It's called Coalition for Epidemic Preparedness. Innovations can can try to knit together people who might otherwise be going off in different directions. That's Economics editor Peter coy So in this week's issue, it's a tale of one steel company totally in favor of President Trump's tariffs until it wasn't here to explain his story, Joe Do, He covers the commodity space here at Bloomberg. This is quite a tale. How did you get turned onto this? So?

Brian Really, the reporter who is the head byline on this, came to me a few months ago, maybe three months ago,

and said, had you heard about this whole story? I said, I have, actually, and I told him a year before I had been sitting in a conference room in Chicago and an industry event and John Heritz, the CEO of js W Steele, was up there and he basically said, I got a billion dollar investment from corporate which is back in India for js W Steele essentially because of the Trump administration passing these terrors, and I could not be happier about the terrorists flash forward did everything short

of like wearing a maga hat at that. I mean pretty much right. I mean, listen, John's a straightforward guy. He will tell you he was a supporter of these terraces. A supporter of the press, isn't it. He's been in photo ops with the president many times before. Fast forward to August and we get a thing in the wire that says that they're suing the Trump administration, and Brian says, we gotta write this story. So how do you unpack something like? I mean, you just pick up the phone

and call this guy. What happened? Yeah, the first thing I did was I actually had run into him recently and said, you know, I'd like to chat with you more about this case if you have the time. And um, you know, we had a trouble kind of getting to him, and finally, after various calls and you know, jumping through various soups, they said, come on down and see us in Mingo Junction out in Ohio. And so we did that right before the holiday break. We sat down with John.

He told us what was what, He ran us through everything and said, listen, you know, it's basically we're putting in new facilities. We're putting in new mills were investing a billion dollars or we're hoping to invest a billion dollars so that we can be self sufficient making steel slabs and turning him into pipe down in Baytown. Those

pipes obviously would be supplied to the energy industry. So they thought in the meantime it could just import the slabs from their parent company in India, and ultimately the Commerce Department said, now, we're not gonna let you do that, and so you get their argument right there, like, well, we're investing this money because the whole point of the terrace was to do that, and in the meantime, so we're not losing money, we'll be able to import for free.

And a big part of that is they're saying they're actually losing money right now because they're paying the Terrors to import, which means that one billion dollar investment is looking down more at the million dollar investment, and they're serious questions as to whether or not they're actually going to follow through with all of the build out that they were going to do at these two mills in Texas and in Ohio. Alright, so take us to Bingo juncture, like like take us to to the field because or

take us into the field. I should say, because part of what this sort of reporting really helps us understand, especially candidly, we're sitting here in New York City. We don't really understand fully until we go what it actually looks at and feels like, what are people saying? What are they feeling? There? So it is this hill town, I mean we write it in the story. Right there, Ohio. You come out of West Virginia into a high because we flew into Pittsburgh, we drove out of Pennsylvania through

a part of West Virginia. We pull into Ohio and then all of a sudden, there's this valley. Right, there's this river, The Ohio River is just right there, and you kind of drive down the Ohio River for a few miles and you're basically in this old steel town. Right. I mean this town was actually viewed in The Deer Hunter. Right, so all the guys are coming out of this this old steel mill, which is where the current steel mill sits. It's entirely different, but there it is, right you think

of the Deer Hunter. I've been to a lot of steel mills. This one it's an E A F. So it's a mini mill that you scrap and they re melt it and turn it into steel. But it had very clearly not been operating for a while. And I've heard about this mill in my other reporting where people say, yeah, this mill, it's gotten up, and then it has it hasn't really produced and it has it's been too costly. We show up and that they take us on a

tour through the mill, right. And the thing that struck me is when we walked into the area where the slabs were sitting, so literal, just massive, just bricks like you know, just the size of the side of a building, just sitting there, laid on top of each other. You could still feel the heat emanating off the steel. The room where they were sitting was just a dirt floor. And when you go to the back of the room, because I said, can can we go? Can we go

further back? There was just a bunch of junk metals sitting around, just scrap metals sitting there. I said, you know, what is this and and the guy said, you know, this is just a lot of the parts that we found over the past year and have put off to the corner since we've restarted the mill. Some of it could probably be used, you know, as parts. Most of it will be scrapped because listen, any steel, whatever it is, it's it's got value. Somebody sees value in that steel.

So that's what. And then you walk out of the mill, right, and you're very much just in this town with there's a few you know, spots of homes, couple on the on the hillside, and uh, and it feels very you know, middle America, right blue collar. You know. We went into the town and and and met a couple of the store owners. It's not much though, right, it's a very small town and and and and it's forty five not even forty five minutes outside of Pittsburgh, Pennsylvania, but you

feel like you're a world away from it, right. And is the feel in the town that things are going well with the mill or tbd? Well, listen, they're happy the mills back, right and and and this is the truth of anybody who's gotten back to work and steel. They're happy that jobs are back. And you're talking about telling someone there is no job and the mill is done and it's never coming back to it's actually there.

And I think the feel was this is great that it's here, you know, let's see what they can really do with it. Our hope is, you know, they'll stick to their promise and they'll be able to make money and and keep it open, because the whole idea is they're going to ship if they get it operating the way they wanted to, they ship it down the Ohio River into the Mississi it be, you know, and then on down to Texas. I mean that it's kind of the lifeblood of of American metal here in the United States,

especially in the East Coast. And so that's how it's supposed to work. That's how it was designed. And yet it gets really complicated. Where does it sort of go pun intended, like off the rails a little bit. Uh, it's it's the tariffs. So they they're still importing all of this slab from India, right, So they have the shipping costs to get it from India and then they have to pay a tariff on top of on top

of that. So right now they're essentially a reroller where they just get metal and they reroll it into the stuff that you know, goes into infrastructure or goes into automobiles or whatever it might be. But it's that simple. That cost, you know, the shipping plus the tariff makes it unprofitable and makes it very difficult for them to follow through with this plan that they had. So what's

the argument on the government side. Well, the government's saying, listen, we we wrote it in Stone you get arabs if you're importing foreign steel, and we've had enough. Uh. Steelmakers in the United States say they can supply you with the slab in the meantime. So they had been filing these exemptions to the Commerce Department, and UH, companies like New Core and U. S Steel, who we know very well, we're saying, um, actually, Commerce Department, we can supply them

with what they need. Uh. Of course JS W. Steele saying it's not that easy. You know, they're saying they have far more steel they can supply than they actually produce in a year. And that's where you kind of get in the back and forth. And that's reporter Joe do love talking to him. He knows this space so well. And this story is far from over. So I'm just gonna say, one of my favorite stories in the magazine this week. It also was one of the most read

on the Bloomberg scaling Mount Everest in Vermont. Wait what, well, we're gonna get into it? Andrew's mellon. He wrote it. He did it here to tell us about in New York City. Hello, how are you all right? How do you get an idea like this? How do you get the idea to even think about this? It kind of came across my desk and I thought it sounded a bit too weird and funny to pass off an opportunity to check it out because I had the same reaction

climbing Mount Everest in Vermont. What's going on here? And the guy who's behind all this is named Jesse Hitzler, well known in some circles. He most famously in some ways or most publicly literally had a Navy seale move into his house and then wrote a book about it in New York Times bestseller. This is a pretty accomplished guy, very much so. He's siri entrepreneur. He was a rapper

early in his career. Then he founded a private check company that Berkshire Hathaway bought in about a decade ago, and since then he's been an inmester. He's helped build and sell a couple of companies and now he is a life coach, essentially runs a life coaching program and this eversting challenge is part of that. All right, So take us to Vermont. What what's entailed here? First of all,

it cost four thousand dollars. It does, it does, so it's it's a pretty penny just to go on a really long hike, a really long series of hikes in in many ways. All right. So you arrive and you sort of show up. It's like I'm a reporter, I'm just gonna sort of chat with people. But you're also a very accomplished athlete in and of your own right,

So you get sucked at. I did. Yeah, I showed up in in the Stratton Mountain in Vermont, where this event took place in October, which essentially entails that you hike up the ski slope it's a black diamond ski slope, and then you take the gondala down and then you repeat that sixteen times, seventeen times in total, and then by that time, the altitude that you've gained equals Mount Everest, So you've effectively climbed Mount Everest, but without the oxygen

tanks and right feet. Yeah, a little over um why, why, why why do people do this? That's what I asked dozens of them out there on the course. There were about two hundred of us that did this over thirty six hours, and everybody had a slightly different answer. Some people were there because they're you know, many were a mid career and kind of felt a bit of a

life crisis. But many just simply said that, you know, I'm very accomplished professionally and I have I like my life the way it is, but you know, I don't really have these things when I get out and really test my limits physically, So you almost one guy told me that, you know, you almost have to manufacture these insanely hard things for yourself, and I think they sharpen you, right, And I mean, and this is of the moment in

many ways. And you and I have spent a lot of time off air talking about our various pursuits in this regard. You're very accomplished swimmer runner, all of these different things. What was it like for you physically? You're in unbelievable shape. This was still pretty hard. I used to be in a good eight when I was still a swimmer, but that was years ago. Um, but I showed up there, hadn't really planned on doing the whole thing. I figured I would scale two three times with them

and just get the feel for it. But then I showed it up and realized that I was out of the two hundred participants, I was pretty much the youngest person there, and then felt compelled to you know, compe never quite leave you. So I was very underprepared in terms of equipment. It had rained, and it was windy and cold, and I was wearing running gear and and just a couple of sweaters and a beanie. But got ahold of a couple of ski poles and and decided that,

you know, let's try it. And ultra events and ultra endurance events are a bit different than you know, even a marathon, where you know that it starts grinding on you after a while. This it takes about roughly an hour and hour plus for the average person to scale the mountain once, and then you do that's seventeen times, which means that it's a lot of time that you spend on your feet. So it's this low intensity um exhaustion that that builds up that it just kind of

it wears you down for time. Well sort of strips away everything right, And that's part of the reason that people do it is we've all got all these things going on in our minds. We've got all these plans, all these feelings and emotions and and whatnot, and there's only nothing in front of you except the mountain and the next step and the next step and the next step.

That's part of the appeal. Yeah, after a while, it gets hard to really think about anything else but just one foot in front of the other because you are just you get so exhausted and and but you still got to keep going. And it's not a race or is it. No, Like many endurance events, this is finishing.

It's the goal, and everybody finishes at their pace and completed at their own pace and in their own way, so that the which also brings out a very supportive or it creates a very supportive environment on the course because you're not competing with other people. It's about finishing, and then everybody can rally around that and support each other. And that's reporter Ander's melon an incredible athlete and as you heard, couldn't help himself once he got a chance

to everest. There are some individuals who live a life that often finds them in the center of high profile events. That includes Michael Ainsley. He has done so many things and found himself really at moments in our history. Well, we talked so much about being in the room where it happens, of course, but so many rooms and some amazing places that he's been. He's got a new book out, it's called A Nose for Trouble, and we're so delighted he's here with us in New York City. First of all, Michael,

congrats on the book. Welcome back to Bloomberg. Thank you. It's nice to be here. So why do it? You know? Two reasons. I have a lot of young people that I care about, five kids, eight grandkids, scores of posse scholars that I've mentored over the years. I want them to know that life is not easy. There are a lot of bad things happened to all of us, and the question is how do you deal with it, how do you learn from it? Where do you go next?

So my Nose for Trouble got me into some difficulty every decade of my life, and I think I've made some pretty good choices afterwards. Second reason, there's a whole story about Lehman. That's never been told. We were muzzled as directors for five six years by the lawyers saying we couldn't talk, and I have views on that. The rest of that story, well, Jason, I would go through the galleys, and I think both of us were like, all right, where's the Lehman party? Because I do think

you were in the room where it happened. When it came to the vote on whether or not Lehman should file for bankruptcy. Take us there. It was incredibly scary. Uh. It happened so fast. We thought the Fed would continue to lend to us, we thought there might be a merger, and yet that weekend it became clear the government was backing out. They were not going to do their job as a lender of two financial institutions, and the biggest bankruptcy in world history was facing us. We considered not

doing it. We said, let's see if they'll really flinch. Will they lend tomorrow morning if we don't declare? But what a terrible game of chicken to be playing. It was if if if we had said no and they had said no, we'd probably all not be here right now. It would have been awful. And so as you've had time to both think about it yourself, obviously you put a lot of it down in the book. As you've

had a chance to talk to to other people. What were those sort of catalytic moments both in your board room and in Washington that ultimately led to the fate of Lehman. Well, Hank Paulson, Well, not like my book, but he's got a tough skin. Uh. First of all, it was Bernankee's decision. The Federal Reserve is supposed to lend to financial institutions. They abdicated and turned it over to Paulson. Paulson made a political decision. It was not

an economic decision. He was not based on Lehman's collateral. There was plenty of collateral there. I want to promote not only my book, but this book. This is by Lawrence Ball, the dean of economics at Johns Hopkins. This is the ultimate book about the Lehman bankruptcy. It's two hundred pages of data and very very thoughtful prose about what went on. And I really recommended anyone that's serious about financial history take a look at Larry Ball's book.

He's a very very good scholar. In any event, um, we were. We were left with no alternative. Uh did you realize is that in the last week of Lehman's existence, our our clearing bank JP Morgan Chase demanded and got eight point six billion of our cash collateral to shore themselves up against Lehman possible losses. Well, they had the right to do that. Apparently the fine print of their loan agreement let them do that, because we lost that

lawsuit four years later. However, it drained the liquidity out of Lehman. We were solvent until literally three or four days before the bankruptcy. So why why did it happen to Lehman? Why was why was Lehman the one firm that was allowed to fall? Here's my explanation. We all know that A I G was much bigger than Lehman. If they had gone under, the world would have changed A I G. O. Goldman sacks billions and billions of dollars for various commitments. In my belief, Paulson said, I

can't get both done. I can't save Lehman and save I G. And if I can only save one, I'll save A G. And I think we were collateral damage we had done nothing wrong. That's why nobody went to jail. The examiner's suit of the bankruptcy examiners said, there's no colorable crime here and no colorable violation. Value their management for the board. But when the FED closes its window,

you can't function. Michael, one of the things you talk about in your book, both explicitly and implicitly, is that ultimately, these are people making these decisions. These are people with relationships, longstanding relationships, some good, some bad, and at the very least complicated. What do you make of the role that some of those relationships played in the ultimate demise of Lehman. I think they were important. I think Paulson liked and

was close to his successor at Goldman. He didn't like Dick Fauld. They had had very contentious relations over the years. Lehman had stolen some of Goldman's best people. John Walker had just come over to run asset management for Lehman. Fold had turned down a request to put a lot of money into long term capital management back in the late nineties. We were asked to put into fifty million. Dick finally, very late in the game, put in a

hundred million for for Lehman. Paulson was furious. Paulson felt Fold wasn't trying hard enough to find a takeover partner or a merger partner. So there were a lot of frictions there. Do you recall in those days leading up where there was the possibility that they could have been bought at, that there could have been a partnership or a combination that would have really changed the future of Leman,

that Lehman would still be around today. The closest we came to a merger was with Barclay, and that should have happened. Uh. The Chancellor of the Exchequer in in London said, we won't give you a waiver of a shareholder vote that killed the deal. But he could have done that, we believe, and Uh, that should have happened, and Barkley's would be you know, some form of combination

of Barkley's and Lehman would still exist. What were the American officials helping you in terms of that process as as much as they could have, because at that point everybody had to come together because it was a global crisis. I think they were. I think Paulson really did want

to see that happen. The sad thing is that Alistair Darling, the Chancellor of the Exchequer, said we don't want to import your cancer, not knowing that as soon as the bankruptcy occurred, London's Lehman operation, which was huge, would be bankrupt also. So they did get the cancer. And you write about this in the book, Michael, sort of the aftermath and and obviously you've had some years to reflect on it as as we've talked about so as a

businessman is a very successful businessman. As a human being, what do you take away from what do you internalize that either changes your worldview, changes your view of the financial system, changes your view of maybe the next crisis. UM less leverage all the banks, we were right there with them. We were too leveraged, more equity UM. So that's been a good thing coming out of the financial

I think, and we should not be rolling back those regulations. However, the Fed's ability to act has been severely restricted by Dodd Frank for example, and I only recently learned this. Any refinancing that the FED approves now has to be approved by the Secretary of the Treasury, which makes it back to political politics. I don't think that it's a good rule. The FED should focus on the banking system, not on the politics at the moment. What about is

a human being? What what do you take away from it? Because that is a harrowing experience, as harrowing probably as anything from a financial or a business perspective that anyone's gone through in in in our lifetime. You see those people carrying their boxes out like it's it's hard not to have an impact, right, it's uh, you know, you realize how you know how many people were affected? And I study economics. I love the field, and that's why

I became a real fan of Lawrence Ball. He has done a study of the post ten years after Lehman, of the twenty three countries of the o e c D, the growth rates in those countries are still dramatically suppressed because of the Lehman bankruptcy. It's still hurting our world. Why do you think the German bond ten year German bond is selling at minus point six or whatever it is negative yield. The world's economies have not recovered today, twelve years later from the Lehman bankruptcy. That's why I

think it was a huge policy mistake. I think Paulson should have fought to save at least for the moment, wipe out all the equity holders. Dilute. Don't give the shareholders anything or next to nothing, but don't let this cont this company go into bankrupts. That's former Lehman Brothers chairman Michael Ainsley really enjoyed our conversation, wide ranging and going well beyond just Lehman. He was also the former CEO of South Abes. What an amazing career he has

had to hear the full conversation. Download our Bloomberg Business Week Extra podcast. Well, that wraps up the weekend edition of Bloomberg Business Week from Bloomberg Radio. Thanks so much for joining us. I'm Jason Kelly. Be sure to tune into Bloomberg Business Week Radio Live Monday through Friday, starting at two pm Wall Street Time. And if you can't catch us live, get our daily podcast. Download that wherever you get your podcasts. You can also watch the show

now live on YouTube every day. Just go to YouTube and search for Bloomberg Global News. Get this week's edition of the magazine. It's on newsstands now. We'll be back right here next week at the same time. This is Bloomberg,