Big Tech Unlikely To Truly Challenge Wall Street: Ex-OCC Chair

will become the next Wall Street. Here to talk about that with us is Keith Norika. He's a partner in the financial institution's practice at Simpson Thatcher and Bartlett. He's also former Acting Controller of the Currency from May fifth November of last year. Keith, thank you so much for winning us. During your tenure, there was discussion that the o c C would be open to some kind of fintech charter, allowing the Googles and Amazons of the world

to UH act more like banks. Can you talk a little bit about what future you envision for big tech as as as banks? Well? Sure, Thanks Lisa for having me today. UM. During my tenure, UM we continued UH in a initiative by my predecessor, Tom Curry, UH that dealt with a fintech charter, which was a limited purpose charter. UM that would allow UH institutions to get a bank charter to undertake one of the core elements of banking,

taking deposits, lending money, or or processing payments. And and I think you know, there was a concern UM of that, that that large companies like Amazon or Google could get a charter. Now. UM, in my own view, UM, I don't necessarily see UM that that may be the case. I think there that they're sort of a superficial allure of that charter for those companies. But on the other hand, a lot of regulation comes with getting a bank charter. UM. And UH, these companies right now, UM, these large tech

companies have a good position in the market. They're heavily engaged in commerce as we see UM and UM. Obviously UM, a part of commerce involves processing payments to pay for commerce. UH and I think that UM, what we're seeing is they're they're trying to take advantage of everything up to the up to the line of being a bank without actually having UH to bear the responsibilities of being a bank. And banks have a lot of obligations and regulations that

come with them and compliance obligations. Uh And at the moment, at least, I think the model is more of them trying to capture as much as they can of the non bank um sort of financial market, uh, but still having to ultimately use banks to process and clear payments and and to do all the compliance obligations that come with them. And uh so while there, you know, may in the future be some type of limited purpose bank charter available to them, just as there has been in

the past for big industrial companies. That's that's our history, uh and tradition in this country to allow certain limited purpose banking charters to large industrial companies and tech maybe the the new um sort of industry that that may support. UM. I don't foresee them becoming the new Wall Street, so to speak, because there's a lot of regulation that just necessarily comes from processing and clearing payments and from really handling the type of risks that come from, uh, from

from that type of activity. Well and Keith, that's what I wanted to ask when you were the acting o c C chair in your conversations with executives at Google and Amazon and other big technology companies. Was there the desire to get further into this territory and and be processors of payment systems? Well, first, I guess start with

the premise of the question. I actually never had any conversations with any executives from those companies, and I think that you know, that may tell you a lot right there, Um that there wasn't that desire to pursue that. Now, you know, we're starting to see some limited interest in the traditional limited purpose charters, like uh, you know, Square

has filed an application for an industrial loan company. That's usually the way, um that that these type of commercial companies, if you will get into a limited purpose bank charter, or traditionally has been that case. The fintech charter is is somewhat new, it's never been used. Uh, and we'll see how that goes. That's obviously something for my successor

to deal with rather than me. But I think that, um, you know, there there wasn't yet the sort of interest that I saw of those large companies, even even in our even in the o c c S proposed limited purpose charter. Can you just tell succinctly what does the controller of the currency do? What is that person's specific responsibility.

Sure UM the controller of the currency charters and supervisors the national banks in this country, which hold approximately seventy eight percent of the banking assets UH in the United States. And it's UH. It's a UM an office that date dates back to the Civil War as a means to

provide a national currency for the country. The currency function was later transferred to the Federal Reserve in nineteen thirteen, but the the office remains as an independent bureau of the Treasury Department UH to supervise UM really UM the money center banks, but also many community banks across the country. Okay, so then what would it What would be the requirements

if you wanted to start your own community bank. Well, if you want to start your own community bank, you have to satisfy the chartering requirements UH that you have a reasonable prospect for success, you have a good management team, you have a business plan. UH. The O c C has to have confidence in you to grant that charter. But then most of the times UH in this country, you also will need to go get f D I C insurance. That's a separate application to the f D I C UH. And if you want to have any

sort of controlling investor. If your company, you need to become a bank holding company and get permission for that from the from the Federal Reserve Board. So given the fact that the o C oversees the monetary supply, what's your take on bitcoin and all of these cryptocurrencies that are getting increasingly popular. Well, look, I think there is a lot of interest in this, and I would say my um my agency only dealt with a very small

part of this. I think we're seeing, uh, certain securities issues come into into play here where the sec maybe take king the lead with the Treasury Department because of uh, you know, any type of any terrorism, type of or money laundering concerns. But generally, um, I am. You know, I believe that people should be able to order their affairs in a way that makes the most sense for them.

And if there's a certain unit of value that they wish to base their transactions on, uh, then you know, they should be free to do that, but they need to be fully aware of the risks that may come from that. And just to come full circle, when we were talking about fintech charters, which firm do you think is sort of most positioned to engage in more bank like activities that we should pay attention to. Well, look, I think to me, the big challenge was finding a firm.

I think in my own view, I was open to granting such a charter, but there wasn't necessarily a good match at the time of during my tenure of a company that was willing to adhere to sort of bank like restricts and have sort of bank like um prospects of success. And so, you know, when you look at the smaller companies, a lot of these fintech companies are more tech like in the sense of they're more try and see how it works. Maybe it'll work, maybe it won't.

That that's not really the way the O c C charters banks in this country, or any bank regulator for that matter. There has to be sort of they're sort of a reputational element um. And so so I'm i I we didn't find one during my tenure. So I think we're gonna have to see, all right, we gotta

leave it there, Thanks very much, Keith Norieka. He is a partner in the financial institutions practice of Simpson Simpson Thatcher and Bartlett cell Gene is spending a lot of money they have announced that they're going to be spending nine billion dollars for Juno Therapeutics. Also Santa Fee spending about eleven and a half billion dollars for bio Verative. Here to help us understand this merger activity is Max

Neeson Our Bloomberg, Gadfly, Columis. He covers healthcare, biotechnology and pharmaceuticals. Max, I'm looking at your most recent column that you just put out, and you are skeptical about the price that the companies are paying for this. You say that perhaps this just is a case of being forced to do mergers. Why is that so? Both companies are under a good deal pressure to do a sizeable deal for for a

couple of different reasons. Celgene last year cut their long term revenue forecast ended up really doing a big hit to the share price. And then Santa Fee. Um, you know, it's involved heavily in the diabetes business with some aging products and a lot of price competition. It also kind of swung and missed on on two big deals over the past couple of years, so as really looking to get something done, and um, I do think that that pressure might have played a role in moving these companies

to do deals that definitely have risks. Okay, so let's talk about those risks. First of all, why don't you start with the deal that you think holds the most risks? And interestingly, both cell Gene and Santa Fees shares both declined, uh and perhaps that had to do with the price that they were paying for their acquisition target. I definitely think so, I'd say, if I had to pick one that has the biggest kind of downside risk, it's it's

probably Santa Fees deal. Um it's for a company Biovariative that focuses on hemophilia, and um it sells kind of prophylactic treatments that you take ahead of time to reduce the likelihood of a bleeding event. Um And and make clear, hemophilia is when your blood can't close. Yeah, it's a clouding disorder exactly gion etique. But there are a bunch of companies that are working on kind of gene therapies that that potentially offer um one time effective cures for hemophilia.

They're very early stage. We still don't know if they're gonna kind of work and last, and they're gonna be really expensive, but that's kind of an existential threat to this company's business model. And they're working on the same thing but really early stage, their way behind some of these other firms. So you know, this is gonna be a near term burst boost for their sales and earnings,

but you know it really could go pretty badly. Cell Gene um, you know, they're making a bet on these kind of new cell therapies that offer a potential cure for blood cancers. But um, it's a company it's a little bit late to the first generation of these treatments and um, so that means that this is a big bet on the future generations the kind of more advanced and safer versions of these therapies. And there are a

lot of companies involved in that. Um. You know, it's unclear if if Juno and Celgene are gonna come ahead, so so they're risk with that as well. Now. Bio Verative based in Waltham, mass home to Bloomberg one six one Boston, New Report, and thirty in Metro West and the South Shore. We of course welcome all of our listeners. If had three four hundred employees, I mean this is not a I'm just saying this is a through eleven

and a half billion dollar deal. They do they have something so special for hemophilia and blood disorders that would create this kind of premium. And if you've got four hundred employees and someone spending eleven and a half billion dollars, you better have something. Yeah. So that that's the thing that I And if it was so great, why did

bioge and spin them off? Exactly? I mean, so I think Biogen's motivation was that they're trying to become more narrowly focused on um on neurology, on on disease of the brain, and this was kind of ancillary to that. But um, you know that that is the thing that's troubling. They're paying a big premium for that kind of near

term growth boost. There are some you know, longer term prospects for for growth that more people are going to move to this sort of prophylactic treatment from kind of the acute treat No, no no, no, I understand that on the on the on the medical side, but I mean, this company is it's a nine million dollar revenue company, So I mean, is there a metric? Is there some kind of magic formula that they ended up coming up with?

This eleven and a half billion dollar price tag. You know, with with biotech, it's always a little bit of the you know, the kind of on market growth. You have to pay a premium for that because there's just not that many companies with kind of recently approved in growing drugs. And then there's the fact that you put some premium on the pipeline, which you know is always an exercise

and in kind of shaking a magic eight ball. Um, you do your best based on the science and you know, evaluating similar treatments that are actually on the market, but you really have no idea until they hit the market and start selling. How are these companies planning to pay for their acquisitions? How are they going to pay for them? To centerfes leveraging up to some degree, I think, Um, but you know they both have a ton of cash.

You know, these are really high margin business of the drug business in general, you're always going to have money to make acquisitions the builder to finance them. But um, you know the type of return you're going to generate. Um, there's a lot more variants than in just about any other business. Making an acquisition. You could have you know, no return or very little, very easily. All right, So real quick, which company do you think will be the

next to announce a big acquisition in the biopharmaceutical space? UM, I would guess if it's anyone, it's gonna be m gen early enormous cash pile hasn't made a deal in in some time, and um, you know all of that overseas cash coming, and they have a particularly large chunk of it. UM, I'd say they're they're probably next up. All right, Max Neison, thank you so much for joining us.

Max Neson is biotic, pharma and healthcare calumnist with Bloomberg gad Fly, joining us here in our eleven three oh studios. A I G certainly getting our attention today. It is starting to reverse course after years of retrenchment. Here to talk about the latest moves that this insurance behemoth made. Jonathan Adams joins us now. He's senior insurance and industry analyst who joins us for Bloomberg Intelligence from Princeton. Jonathan,

thank you so much for being with us. So A I G is buying validus put this into perspective for us. How big of a deal is this for A I G. And is it it the right move. It's a five point six billion dollar deal and not huge in terms of UM what types of transactions we've seen in the industry over the past. UM. It increases their commercial lines premium by about ten percent a little bit over UM.

In terms of whether it is strategically a good move, UM, I think it's a It's quite a and UH it's moving into the reinsurance business at a time when that business has faced some difficult pricing pressure. Not only that, UH, you may recall that A i G posted three billion dollars of catastrophe losses in the third quarter, and that was due to significant exposure they have in their property

lines business. They said at the time they were looking for opportunities to lower the volatility in that business and that they would lower their exposure to property risk. This deal adds that exposure because that's a primary business for Validus. So I'm not sure it ultimately will complete UH some of the strategic moves that the company wanted to UH to do. So why do this deal? Well, UH CEO Brian Duperl has UH said that he wanted to expand A I G. And he wanted to make an acquisition

and that would help the company grow. UM. This certainly UH fits in that category to some degree. UH. It adds some new lines of business. Validus has a crop business that the A I G does not participate in that in that business, so it helps them there, and it also helps them in their specialty lines business. So there are some areas where they could generate some premium growth. And it does UM add to earnings UH and their returns.

But again, UM, I think at at a very constantly price that actually slightly dilutive to their tangible book value. And I'm not sure this would be the first deal I would UM I would look towards. Well, Jonathan, I'm confused because a lot of people have been calling for A I G to break up further into its parts.

It was of course pummeled during the two thousand and eight credit crisis UM, and it has stripped down its business quite a It is this sort of signaling that it's now going to embark on bulking back up and going in the opposite direction of what a lot of people are saying. It certainly looks that way. And although I admire valid as his management team, it's certainly a

good group of individuals. I'm not sure the business offers the types of return that UM really investors would would want to see UM when A I G returns to the expansion mode, which obviously it's done, and I think the signals they'll continue to do so. But again I'm not sure this is leading with your uh strongest foot just I mean, this is just you know, uh speculative, Jonathan. But five and a half billion dollars, there's a lot

of money. Why wouldn't they just increase the dividend? Well, I think that goes to the CEO's philosophy and the importance that he puts on signaling to the market ages. Downsizing is over and it's time to look to new industries and to expand. I think that couldn't names I mean, and and clearly I'm not I don't want to put you in the position of having to, you know, offer your A I G. There the perspective, But for five and a half billion dollars, couldn't they have built their

own agriculture insurance business. The agriculture business is UM very much of a regulator business, so that maybe isn't the best example. But in terms of expanding their specialty lines, yes, they certainly could add more underwriters and and have expanded in that area um even though they chose to acquire so UM. From my point of view, I think what they're probably would say to you is, look, we've got a great management team and valid Is. We think they've

done well in diversifying their own business. We like how they assess risk. To my point about their desire to reduce risk and volatility, they would probably say, what better way than to bring in the expert team from a reinsurer that knows how to handle that risk, and that expertise is what we're going to use. I think that's what they tell you. Again. My concern is that they still are bringing in a lot of exposure in risk onto the books as they do that. Thanks very much.

Jonathan Adams is our senior insurance industry analysts talking about a i G spending five and a half billion dollars for Validus, the future of General Electric, what do we see as the future of the industrial conglomerate. Karen yubile Heart is our industrials analyst for Bloomberg Intelligence, and she has the enviable task of watching what happens with ge Karen, what can you tell us about their actual strategy get into the details of a sort of potential aircraft engine. Uh,

sort of deal in a moment. But what is actually the strategy for g E as laid out by management. Well, it is evolving. Uh. You know. The event last week was on the insurance problems on that call um setting aside money because of long term care policies that were sold about a decade ago. Yes, but for the first time the CEO did suggest that he, you know, might

get go for selling parts of business. Has been more aggressive moves which people really were looking for, because which businesses could they or should they sell that would generate the biggest premium, the biggest price, Well not totally, butchering the core of the company that that's the good businesses or healthcare and aviation. I don't think they'll let go of them. They need the earnings, they need the cash flow.

You know. The most immediate one would be Baker, Hughes and a couple of the smaller businesses, which inaggregate would actually help solve the problem if they put all the cash toward debt in their pension, they would solve a go a long way. Bank of America Mary Lynch coming out today with the downgrade of the shares um perhaps a little bit late. I mean the shares trading it around sixteen dollars right now lost since December two thou and eleven. You should say, yeah, okay, good footnote there.

But it's also a report that General Electric supply the engines for the A three eight superjumbos that Emirates has ordered from Airbus. Would that be enough to really change the perception of aviation business? The perception of the aviation business is really good. It's it's it's you know, it's an eighty four billion dollar business. It's got twenty seven ebit margins um you know, mid twenties, just a bit margins, very well positioned, high you know, a lot of parts annuity.

But they don't do it all right, I mean they do it in conjunction with Pratton Whitney. I believe well that those are the two engines, those are the two major engines. And then also they got the deal with Saffran. Yes that's a j V. Yeah, So I mean, why not spin off the aviation business? Uh? That would materially, I guess because it's one of the I mean it

is a standalone It would make some sense. However, they would lose a lot of the earnings while they have a sort of a credit crunch and cash is you know, I um, and then they'd have an earnings problem. But I think it would make some sense in it is a round jewel. Okay, this might be a really basic question. But how will ge go about trying to solicit offers or solicit you know, some estimates of what other companies would pay for their businesses right now without undermining their value. Well,

they're in a weakened state. Uh no, no doubt right. I mean I've done to some of the parts valuation that does show there is you know, a decent amount of value um low twenties um equity value. However, they're going to take haircuts on selling these businesses because as a stock, you know, weekends and people get liquidity fear, fair fears, um, they're not going to get those full values. So uh, you know they're gonna have to They're gonna

shop the baker Use. They can just start selling down now they have a restriction, but that can be dealt with. They have to go to baker Use Conflict Committee, which is part of the board and and you know, asked to get out early because they they are not legal. They the deal is they can't sell down till July. UM. You know, so that that step one. But that's a fair amount of value that they could get out of

that UM. So that would be one fast move they could do without having to you know, they have to get permission of course, but they don't have to look for the market setting the value. So that's that. Okay, So that's Baker hues. What about the Alls Tom acquisition? Could they are they gonna write that off? Do you think that's the latest that people are um speculating on. I don't know that they're going to take a big

right off in power yet. Uh. You know, in the fourth quarter you have to take a look at all your assets. That's why that issue is coming up for discussion. It's possible, I think that they will hold on to that UM at its current value at this point. Do you have a sense of what the time frame is that g is following with the asset sales? Well, I don't know that they have any specifically underway so I but I know that with the liquidity concerns, that it's

going to be sooner, sooner than later they haven't. I mean the the that's the first time he really talked about it. I think he's seeing the seriousness of we've got to do something bigger. So I think you're gonna You're definitely going to see something, uh, you know sometimes this year. In my opinion, I you know, I wouldn't be surprised if they noun something on Baker use in the short term. Actually, Karen, you will, Heart. Thank you

so much for joining us. Karen evel Heart is industrials analyst for Bloomberg is joining us here in our eleven three oh studios. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio.