Dodd-Frank Repeal Won't Happen This Year, Nathan Dean Says

I thought was fascinating and kind of funny. Gutting Dodd Frank is hard to Republicans turn to easier things, things like a bill about publishing research on exchange traded funds, which is a bit less controversial than rolling back, say, all of the banking regulations that were put in place in two ten. To get a little bit more perspective, Nathan Dean is here with us. He has a government analyst for Bloomberg Intelligence, and it is so nice to see him in person. He is with us in our

Bloomberg eleven three oh studio. So, Nathan, how much can we really read into this idea? Uh that you know? Because there because Congress is focusing on these sort of smaller, more bipartisan issues they're just disregarding the idea of an overhaul of god Frank. So I don't think they're disregarding the idea of an overhaul of Dodd Frank. They're just recognizing the fact that it's going to take time. You know.

I think that the House bill, the Financial Choice Act Bill, that the next version two point oh, it was supposed to be out in February. Now it's looking like we'll be out in March. It may be out in April. But I think the congressman's, especially the Senate, they recognize that, you know, if we want to replace dot Frank, it's going to take a long time. So let's try and do some stuff and get it out of the way. First, bipartisan bills like a need T F research, opening up

venture capital funds to more investors. And just today they're having a hearing that on the House side about flood insurance. Nathan, maybe you can explain this because this also goes to the issue of reform for the Affordable Care Act for Obamacare. Republicans in Congress were not in favor of Dodd Frank legislation, correct, correct, And they've had a fair amount of time to come up with an alternative plan. Is that accurate? Correct? So

where is this alternative plan? Why are they just crafting this plan now? So the House has crafted this Financial Choice Act very broad. It's never gonna pass it past the House and won't pass the Senate. In order to get anything past you've got to parrot down, you have to get specific. There is bipartisan openness to relieving banks below two fifty billion in assets. Correct, exactly, exactly, But

right now, there's just no incentive to negotiate. I mean, if I'm if I'm on the Democratic side, for example, why would I negotiate on a DoD Frank bill? You know, when there are other things like Obamacare, attacks, reform, infrastructure, you know that they want to tackle first. I mean, it's not like banks are hurting right now. The fd i C put out a report last week saying record profits,

you know, record small business lending. So does that mean that some of the optimism that's been baked into bank stocks and bank bonds is per ups a little ahead of itself just because there isn't likely to be anything in the cards for these very big banks, at least within the next set of know eight months, certainly within the short term, you know, we don't see any relief for the large investment banks coming from Congress in the short term. Regulatory side, it's a different matter, but even

then that's going to take time and process. Gairman Henstling has said that this financial regulation is a year one issue, but if you look at the Senate side, it's probably more a year two issues. So I think if you're gonna look and see what can Congress do to replace dot Frank, It's not gonna happen this year. It's probably gonna happen next year. And if that, that's even if

they negotiate. As someone who walks the halls of the Capital and Washington in general, wanting if you can give us who are looking into that bubble world into the belt Way a sort of an idea of what has changed. There's the tenor changed. I mean just in the last let's say a month or so in terms of trying to get anything actually out of the House, get it

approved by the Senate, and get it on the President's desk. So, you know, there was this idea that when the new Congress takes took shape, that the Senate was going to negotiate Senate Democrats were gonna be willing to negotiate. You know, there was some toxicity about the Supreme Court choice, etcetera.

You know that sort of pushed it off. But if Senator Creepo and the Senate Banking Committee is looking at Capital Form formation and these small bipartisan bills, he's trying to build up that goodwill so when that eventual financial regulation bill comes, he'll be able to work. Can we just get a sense, as somebody who does walk the halls, how much goodwill is there at this point between Republicans and Democrats? Is there anything? So? Goodwill is probably a

strong word. But you know, the the Senate in particular are full of experienced senators who have faith in the institution. They know how to work together. Senator Schumer, Senator McConnell, Senator Shared Brown. You know they know that eventually they're

going to have to negotiate um. You know, so, I I still think that it's much less It's certainly toxic, but it's much less toxic than if you were in the House or if you're dealing with the White House, and that it goes with legend, that goes for legislation. But as you said, it doesn't really apply to any of the regulatory changes that might happen, because that can become from an executive order or from many agency changes.

So the executive orders that Donald Trump put out don't apply to the financial regulators, the independent overseen by Congress. Yet you know, if I'm at the SEC, or if the CFDC in the White House calls me up to say follow my executive order, I'm going to say yes. You know, I think on the regulatory side, were really need to wait until Janet Yellen leaves in February two eighteen. When Donald Trump starts getting his own people in mid two eighteen, I think you'll start seeing a lot of stuff.

But before then you're gonna see some small jurisdictional I mean small rulemaking, small tweaks. You know, nothing brought or any anything like that. Thanks very much for enlightening us. And Nathan Dean is a government analyst for Bloomberg Intelligence. He knows all about what's going on in Washington. Right now, we want to turn to another bit of news on

President Trump's radar. John Huntsman has been picked by President Trump to be his Russian ambassador and to get a better sense of what this might mean for US Russian relations. I want to bring in Richard Kahan, a managing partner at Eurasia Advisors who has intimate knowledge of Russia and has boots on the ground, very close sense of what is going on there. Richard, what do you make of

this selection? Well, look, I think John Huntsman is a seasoned diplomat, uh, someone extremely well connected politically with the Republican Party, and someone who is a very safe, solid choice during a period when the last thing Trump needs is a messy confirmation hearing. And so I think part of the explanation for the choice is the domestic aspect. But he's also a very experienced leman who I think can do a fine job in terms of representing our

country in Russia. Um, he does not, as you know, have a background, if you will, in the Russian world, but former US Ambassador to China, former US Ambassador to Singapore, and former governor of Utah. Absolutely so, Uh, this is a man of great experience and I'm sure he'll handle this posting extremely well. And I think we're lucky, frankly to have someone with his level of experience serving our

country in that capacity. You know, Richard, One of the reasons why I was really eager to speak with you was because of some of the messiness that we've been hearing about the President Trump's campaign with respect to its

relationship with China. In your opinion of somebody who does have a pretty close knowledge and contacts in Russia, do you think that there is enough evidence that has already been presented to give you a concrete feeling that there was some kind of collusion between the Trump campaign and

Russia to win the US election. I would say that I think the wise course at this stage to put this behind us, and for the president to put it behind him, is to get in front of it by calling, for example, for an independent commission to look at it, to go forward with disclosure on his own part in terms of all of his contacts, all the rumors of compliment, anything that could potentially come out, because we are going to see an ongoing trickle of information, so I think

that is the wisest court. Of course. It also will help him avoid any issues relating to UH interfering with the you know, with an investigation, which as we know, it's it's not necessarily the actions themselves, it's the actions subsequent that can lead to various legal problems. So I think he's asking for trouble by having this handled exclusively by a Republican dominated committee, and that then a long term, you know, this is only going to lead to a

longer and more painful situation. But I guess a long it's a long way of getting into the answer to your question. I do have genuine concerns. I thought it was,

but no, I am gonna answer. I do think that from what I've both seen and what I've heard in Moscow, that there is reason to be concerned about this issue of whether, uh, the decisions that he made in the past and potentially sound that he will make in the future are fully independent, or whether they are in part influenced by relationships financial or otherwise, or compromat that the Russians may have. And Uh, I think it's healthy for

us to get to the bottom of all of that. UM. I regret that that's a situation, but I think that that is the case. I wonder if you could comment on the state of the Russian economy having come out of a recession, and I'm wondering whether you can speak to the issue of economic performing in not just taking into account the oil sector, because chemical, agriculture, machinery, food. Uh, what is the state of the Russian economy right now? The Russian economy has largely been frozen for some period,

has been compared often to the bression of years. The financial markets really have not been functioning. This is in part due, of course, to sanctions, but that's not the entire story. It's also due to just the sense of anuih, the freezing, if you will, of the initiative in that environment, because people recognize that if they build a company and have success, that ultimately some government related entities will seek

to obtain control of that. So I was I was hoping to lead you down to military spending, because the Russians of this said that they are going to increase the military spending, but also the way that they calculate GDP has changed and they now include military spending as part of that GDP report. Well, first, let me say, Russian military spending is a fraction of what we spend. Uh. The statistics I've seen is somewhere in the area of maybe six to seven percent of what we spend on

on on our defense spending. And indeed, the increase that is now being proposed by the current administration would be in the amount of the total amount of what Russia spends on defense. UH. So, you know, Russia is not in a position to compete with US on defense spending, but we're already in a position that dramatically exceeds anything that the Russians can put up on all sorts of military fronts. I want to thank you very much for

joining us. Richard con he is managing partner for Eurasia Advisers, giving us some detail about the United States relationship with Russia, maybe pointing out that John Huntsman Ambassador, he's been selected to be the U s Ambassador to Russia by President Donald Trump. Perhaps he can change the relations and with more and more positive note. Is your phone spying on you? That is the big question of the day. I want to bring in David Garrity. He's CEO of g v

A Research, also a columnist at Investo PDA. Uh he is here with us in our Bloomberg eleven three oh studio. And David, I know that you're interested in talking about Alphabet's launch of Android android messages, but I kind of feel like we have to start with the recent CIA leaks and the emphasis that that's placed on security, particularly with respect to your phone. David, do you expect that this new emphasis on potential hacks could alter the landscape

for demand for Androids versus iPhones? Well, certainly, I will lead to a greater demand for more secure software. And clearly, Android, with about eighty eight percent share of globally installed smartphone operating systems, is a big target where and it's easier to break into the Android than the iPhone currently. Yes, it is. And to the extent that you have anyone of a number of smartphone original equipment manufacturers or o e m s who have been taking the basic Android

software system and then custom tailoring it. In the process of doing that, they may also have created further security risk, which is what helps assist hackers in terms of getting access to Android powered phones. David Garty, I mean, I'm not going to pursue the security issue for the time being because I mean, everybody knows that you know, everything is hackable, right, I mean, there's nothing that is not hackable.

Although hold on a second, because I think it will make a difference if people are focusing more on this, it might determine whether they decide to buy an Android

or an iPhone. I mean that's my point, all right, Well so okay, well good, well let's take that, because David, I want you to talk about the different marketplaces for Apple iOS devices and Android operating system devices, because I understand that the Android operating system device that's a mid to lower market price point, that's going to be a lot of a lot more growth there than it is going to be at the higher end. And that's a de facto Chrome experience, right Google out of Chrome, and

then that's a Google Search experience. And now I want you to tell us about messaging because they also want that to be a Google experience. Yeah, certainly. I mean, with respect of messaging, we've been seeing essentially a shift in terms of people's communication away from email and over towards messaging. It used to be SMS messages, but it's really more taking place within I Message, Android or Google's problem with respect to messaging was again this proliferation if

you will, across various handset O E MS. They needed to establish a standard out. They have a product that's been coming onto the market called Android Messages. They're trying to acquire a certain base experience and standard that applies across all Android instances, so they can be as competitive as say Apple's EYE message has been. And understand, Apple

I Message has recently generated about sixty three quadrillion. That's ten to the fifteen Power messages per year, or to put it differently, that's two hundred thousand EYE messages per second that are being sent. So that's an ecosystem that has a wall around it because I understand you know, if you do not have an iOS phone, you're not getting anything but those I Well, if you have let's say an I uh Touch or at iPad or something,

then you're inside the Apple ecosystem. Yes you are, and to the extent that you're obviously sending to someone who has an Apple device. On the other side, it's all gonna be done within I message. That doesn't say that you have messages incent outside they will be sending text messages.

But yes, your points correct. We've a lot about sort of the saturation of mobile phones, and I'm wondering from your perspective, is there anything that Alphabet could do, or frankly even Samsung or Apple to change that or to sort of suddenly change the landscape and cause people to buy more iPhones or um or or greatly expand potential

places where people use them. Well, this has been a problem certainly, you know that the smartphone market has been bumping up against and the whole knock on Apple had been the fact that their market was saturated, and you're looking at users who were holding onto their phones for a longer period of time just because of the cost

relative to their incomes. And you know, Jason chafe It's comment about sort of saying well they should buy healthcare premiums and not iPhones, you know, certainly goes over like like a lead balloon. But it does touch on the

fact that you know, smartphones have become more expensive. Clearly we're looking more in growth in other areas being able to apply these software systems to the Internet of things, which is where you are to raise more concerns having to do with some of these security elements that you

were talking about earlier. But I would make one point is that while technology itself is capable of being hacked, we know from the experience around the Democratic National Committee last year that is really more human behavior which is hackable, not necessarily the devices. So if people are concerned about their security. The first thing they need to do is look to themselves and how is it that they're interacting with technologies? How is it that they control the information

that they either access or create themselves? With respect to that, is there a differential between messaging versus phone voice phone over the phones? You know what I mean? As far as hackability, well, to the extent that I messages are are encrypted. And it's something where Apple in dealing with the San Bernardino massacre. You know, Apple had taken a stand that they didn't want to provide access to the

shooters phones and their devices. Um. You know certainly in that respect now that there are hacks that were found around it. Um, but Apple tends to be more secure in this regard relatives, say to an Android. And certainly if you looked at voice communications, you know, for for an encrypted voice call, uh, you'd have to go to

a special hand set. So from that standpoint, you would be interestingly enough find that messaging, say on an Apple platform, tends to be more secure relative to other means of communication. I want to get your thoughts on investing in Alphabet, the parent company of Google. Here's a stock that is up about nine percent so far this year. And I just love this comparison. In two thousand seven, Google's revenue was sixteen and a half billion revenue two thousand sixteen

over nine billion. This is a company went sixteen and a half to over nine billion, and it's still growing at double digit rates. Yes, And from that standpoint, I mean, the big search applications are still you know, very solid in the margins are certainly something that the desire of many other businesses, but we are looking at larger addressable markets that they're potentially moving into. People have certainly talked

about driverless vehicles and the scale. But even if just the messaging that you've described becomes moderately successful, is this a company is just going to continue to bold, you know, bowl forward. In this way, Google is is very much well established in terms of the human capital that they have in place and capability of the people who are there, in their ability to continue to retract and retain these people.

And from that standpoint, um, you know, Trump's blathering about immigration aside, Google could just as easily set up its operations outside the US to the detriment of the U S tax base and still continue to be a very competitive company on a global scale. So from that standpoint, we clearly look at Google as being a company that arguably has be part of a core portfolio for anybody who's looking at the technology sector. Other names like Snap

perhaps not so much. Thanks very much. David Garretty is always a pleasure. He is the chief executive a g v A Research. President Donald Trump is scheduled to meet with almost a dozen chief executives of small and mid size banks from around the United States. There he is seeking their their contribution and their input for a discussion about regulations which may be hurting their ability to lend

the consumers and small businesses. This is all part of the listening sessions that are taking place under the ages of the National Economic Council, and we will bring that to you as it happens. Well, let's focus our attention more closely on one element of President Donald Trump and the Republicans plans for taxes. Uh. They've said they'd like to court cut corporate taxes, allow the repatriation of cash that are in corporate accounts overseas, and also eliminate company's

ability to deduct interest expenses from taxes. Here to tell us more is Noah Smith a contributor to Bloomberg View and he blogs at No Opinion. No, it's great to have you here in the studio. Thanks for being with us. All right, So this, let's say that this is the focus of the attention of bond market participants is whether corporations will continue to be allowed to deduct bond interest payments.

What is going on there? Right? So, uh, for every company, you have to make a decision how much do we fund our operations with equity and how much do we fund our operations with debt? Actually, most US corporations fund mostly with equity. Actually debt is is smaller for equity, fine for US corporations, but there's still a lot of debt out there. For banks, it's the opposite. Banks really take on a lot of debt, have very high leverage ratios, so they are the ones who would be most affected,

although all all companies would be someone affected. The idea is, right now we actually privileged debt finance over equity finance, and under this new policy that would be changed going forward, it would be a much more level playing field between the two. Well, no, this is actually shaking debt markets

in a pretty massive way. There is some speculation that the record pace of investment grade issuance that we've seen this year is to lock in the current deduction over a longer period of time that it will be grandfathered in as they are unable to deduct these interest payments from their taxes going forward. You made an interesting argument in a recent column. You're saying, you know, this is very important, that this is part of the tax postal,

and it's probably a good thing. You highlight how studies have shown that the more debt levels are elevated in a country, the more damaging asset price declines are for an economy. So, in other words, you're saying, structurally, this might actually be a good thing to push corporations to take on less debt and to fund themselves more with equity. Am I right? That's right? Yeah, Um, whenever you see one of these giant financial blow ups that ends up

tanking the economy for ten years. You've seen this Japan, Korea. We might even be seeing it happen with China right now. We saw it with us of course in two thousand eight. There's always a lot of debt involved, whether it's mortgage debt or corporate debt as it was in Korea, or commercial real estate debt as it was you know in Japan. UM debt is always a big thing that's there and

that you can show this really easily. Is that because a bond comes with a variety of legal constraints and restrictions and also obligations that you don't have with equity. I mean, if a company goes under and you're stuck holding a bunch of stock, you know, great, you're done. But if you're a bond holder, now you've got lawyers, bankruptcy committee experts, and you have a stake in what happens to the company's assets, right, I would say that's a that's a lot of it. Um. The legal differences

are absolutely crucial. Debt has um limited enforceability. We can't completely make you pay back debt. In fact, that's what they call bankruptcy protection from creditors. And because of this, you have this perverse incentive where I can actually have an incentive to borrow a lot of money and not pay it back. And the econ blogger Carl Smith no relation once wrote that it's rational to borrow as much as you can and never pay it back. If there's

no penalty at all. So if this goes through as proposed, it will cause a massive shift in the way that companies finance themselves, and I would think that it could

be potentially, I don't know, a painful process. No, absolutely, So one thing that economists are starting realize that the economy is not nearly as resilient as people have thought, and these big adjustments to trade changes, legal changes, and just changes in the industrial mix of the country don't go so smoothly, and a lot of people can lose their jobs and be you know, screwed for their for their whole life. So which asset classes would be most

affected during this shift? I mean afterwards? Granted, maybe it would create more stability, but amid all the turmoil you mean which industries? Yeah, which industries where we see the pain? Banks? I mean there they borrow so much, um, a lot of housing related things because housing, you know, rely so heavily on debt and so so banks and housing related

companies will be really affected, I think. And so that's why I suggested that we we phase this in over a while to to give these companies time to switch to more equity finance, because in the long run. It will make the economy more stable. There's no reason to do this tomorrow. We're not about to have another financial says tomorrow. I think you never know. But I famous

last words, famous last words. But um, but we we de leveraged a lot and so but uh, but you know, ten years down the line, twenty years down the line, this could make a difference. So I think it might be good to start phasing that in now. And and a lot of people have been calling for more equity for banks. Um. Usually this is in the form of higher capital requirements, basically hold more cash, and so this could be another step in that same direction. Thank you

so much. Noah Smith, contributor to Bloomberg View. Uh. He's also he was an assistant professor of finance at stony Brook University. Need blogs that No Opinion. He's also on Twitter at that same address at no Opinion. Thank you so much for joining us. That was great, um, and it is something that we've heard a lot about in the corporate bond market, because you have seen a record pace of issuance of corporate bonds to date, and people are suggesting perhaps it's to get ahead of this rule change.

Thanks for listening to the Bloomberg pien L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm Pim Fox. I'm out there on Twitter at pim Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio