You're listening to Bloomberg Business Week with Carol Masser and Jason Kelly on Bloomberg Radio. Well, this got our attention this week and has to do with Mike Mayo, well known, very well known to our Bloomberg audience, and rightfully so based on his calls and really summing up where we are, especially when crisis hits the financial industry or even a particular bank, and we know banks actually got a nice
bounce today and really helped lead the market higher. Mike is analyst, managing director and head of large camp bank Research over at Wells Fargo Securities. Has covered banks for years and recently caught up with a Trump administration insider and came away with quite a headline for a Bloomberg story. Mike joining us on the phone in New York. Mike, thank you so much for joining us. Um. First of all, let's talk a bit about the markets, and then we'll
get back to this meeting you had. The banks today certainly helped late lead stocks higher. What do you make of the sector, Does it make sense and what's the outlook generally speaking? Yeah, I think there's a misperception here that this is tooth thousand and eight. In two thousand eight, there was a banking crisis. Banks for the cause of the problem. Today banks are stronger than they've been in a generation, and they're part of the of the solution.
So there's this recency bias as if it's still the global financial crisis, and that's not the case. There is earnings. There are earnings issues with banks. I mean, but it's it's it's our earnings hell in the first quarter. It's going to be earnings hell in the second quarter. Maybe for some more of this year's banks set aside reserves for problem loans as their borrowers have issues. But we would call this an income statement recession and not a
balance sheet recession. And that's a world of difference versus a decade ago. And so I guess that one of the questions that we've been asking too very smart people like you, Mike about the banking system is so, did what we we collectively and what the government did and what ultimately the banks did maybe under dress coming out of the financial crisis? Did it work? You know, thank you regulators, thank you, thank you, thank you regulators. Yes,
it worked in spades. I mean, you've had stress tests of banks for a situation like this. For almost a decade, the capital, which is the cushion to protect banks against losses, it's doubled. The most risky activities are no longer done by the banks themselves. They're done by other financial firms, but not within the banking industry itself. You have oversight by the regulators and boards and investors, and everyone's looking over their shoulders. So, yes, it worked, and this is
the ultimate test to show that it will work. And we think, uh, this will be a tough situation. I mean, these are sobering times. We're expecting not a v recovery, but more of a deep view recovery. But even with that, we think banks can be a source of strength and stability to the rest of the economy. All right, So let's get to this story because it did catch our attention. We've been talking about a lot in the newsroom. Um, you had a meeting with Gary Cone. Tell us a
little bit about that our conversation. Um, how that came to be and what you guys talked about. Well, I look, I I talked to Gary Cone. Um he's no longer part of the administration, to make that clear, but I just talked to him, like I talked to a lot of smart people to understand the world. And his view, which you know is in sync with with my view, is that Washington, d C. Has done a phenomenal job
at getting on this problem very quickly. So you have Treasury, you have the FED, you have Congress identifying the issue quickly and really going with a bazuka to try to bridge the gap between the pre and the post virus economy. And they're going to go wave after wave after wave. You're seeing it every day, and if it's not enough, then um, you'll have more expansive fiscal and monetary policy to to make it right for the country. So you know the old adage don't fight the FED, Well, you know,
take that and put it on steroids. And that's what you're looking at when you look at the government's CounterPunch to this one year pandemic event. So, Mike, we heard j Pal, I think pretty clearly reiterate uh yesterday that sort of balls in the court of lawmakers at this point that the next real serious stimulus needs to come from the fiscal side. Do you agree with that, and if so, what does it need to look like? Because
that has become a pretty contentious debate between the parties. Well, look, I look at the economy from the lens of the largest banks, and banks will have problems. We expect loan losses to increase two to three times. The level of reserves for problem loans are the highest in history at this stage of a recession. So there is going to be pain for the banks. But what's interesting, and this is the success of Washington d C, is they've unclogged
the plumbing of the financi tre markets. So the largest corporations, uh, you know, the Doubt Dirty or the SMP five hundred have access to borrowing in the capital markets, so they should be better off. Once you get down to smaller banks with smaller customers, that's where the bigger issues are going to be. And so it's a matter of the the execution of the ambitious programs you know, set in place by washingtond C. And by the way, this is
these programs. Some of these have never been done before, and certainly never on a scale such as that we're seeing. How do things though, like more government spending that might lead to higher taxes that will ultimately fit into your outlook for the big banks. Well, actually, you know, the question is does the industry you know, die by fire, die by you know ice? Put it very simply, in other words, does the economy and two banks fall off
because there's just no activity? No one can that Again the stimulus isn't enough or is it so much that
things can get overheated. And I think the conclusion here is that it's more likely you're not you know, died, but you're going to uh, you know, go ahead and stimulate the economy so much that on the back end will be more concerned about the degree of stimulus UM And so under that scenario, you know, our strategy department at Wealth Farther Securities expect the ten year treasury yield to double by the end of the year UM and so that would be a steepening of the yield curve
or a bear steepener as discussed by Mike Schumacher our interest rate strategies. If that's the case, by the way, UM expect bank stocks to go higher just on that factor alone, right right on higher rates. Hey, one last question, because we've heard from James Gorman and Morgan Stanley, you know, kind of blown away by how are seeing all of his workers at home and basically saying we're not gonna
need as much real estate. So is do you anticipate that banks will be cutting costs and maybe and giving up on some of the real estate that they have. Well, first, I want to stress the gangs. I actually had. I spoke with the chief and answer officer of Mortgage Stanley just yesterday. Um, and they do talk about spending money, you know, to keep all employees employed and you know, serving customers and other banks are differing some payments for loans,
the investments and employees and communities and customers. Is you know, really banks being part of the solution. What's interesting, though, is you're seeing a leap frog in digital change by like like by five to ten years as a result of the last two months. Absolutely, that means less real estate for the banks, more digital interactions, less rates of cash in society, and an acceleration of the digital changes that you saw before this crisis really take off during
an after crisis. All Right, We're gonna leave it on that note. Mike, Ever, enough time, but so grateful that you did find some time for us on this Thursday. Mike Mayo, of course, over at Wells Fargo Securities, joining us on the phone in New York