Relief Money Is Flowing Into Small Businesses: ConnectOne CEO

up with some significant fiscal stimulus. A lot of that is geared towards small business loans and actually getting money to these small businesses that need it the most. And a key part of that is the banks that will actually get the capital into the local marketplace. To get a sense of how that's all playing out, we welcome Frank Sor and Tino. Frank is the chief executive officer of Connect One Bank that's based based on Englewood Cliffs,

New Jersey. Franks, thanks so much for joining us. So we're really early days in terms of getting some of this fiscal stimulus money into the marketplace, where you understand there's been kind of a bumpy start to it all from in terms of the banks and getting coordinated with the government. What's been your experience, so good morning and thank you. Um, yeah, you know, bumpy start. I guess that may be partially true, but um, you know, think

about the scale and size of this program. Think about how it compares to any other program that you know would go through, like the Defense Department to go do something huge like this. I think they're doing pretty good. Actually, I think the SBA has done a fantastic job. I think the banks are doing a fantastic job. And I believe that here we are two weeks from or two weeks and a couple of days from the signing of the President's bill, and money is already flowing out into

the into the small business pands. So yes, there's a backlog of applications. Banks are working as quickly as they can, but money is flowing into small business plands. And Frank, it's the money is flowing from your bank as well. And can you just give us a sense of the demand for these loans from small business is that you've seen and and and how many have been saved and able to maintain their staffs as a result of the loans. Well, we have business small business owners that when we notified

them that they were approved. They just they almost break down in that, you know, with with joy that they are now able to keep their employees on staff, be able to pay them. As we're dispersing funds. I can't tell you how many text messages and emails we're receiving from clients from all over telling us how this is saving their livelihood for their business and in turn how good they feel about saving their employees livelihood and their ability to put food on their table and pay their

rent and do what they need to do. So I think this program is critical at this moment in time. So, Frank, do you, from your perspective just in your local markets, do you think it will be enough or do you suspect, given the demand that you're seeing, that Congress should and perhaps maybe likely to come back with some more. Yeah.

I believe Congress will come back for more. I think there will be demand for more than they I do believe that it is doing the job that it needs to do, and it is helping to float the economy through the next you know, for the last couple of

weeks and through the next few weeks. I think if we think this is going to go on beyond May then, Yeah, I think they're going to need a lot more, But for right now, I think between this this current draft of billion plus what they're contemplating in the new bill of two hundred and fifty billion should be sufficient. So

that's on the small business side. You have a long history in the mortgage market, in the housing market, in the building market, and there isn't growing concern that that particular market is suffering disproportionately without necessarily a clear backstop from the government, particularly for mortgages that are not backed by Fannie and Freddie May. What are you seeing on

that up front? How concerned are you there? It's going to be a concern as we move through the next phase of this right right now where everyone's focused on stabilizing where we are today, but if you can think out, you know, sixty days, ninety days, or even a year from now, and people start applying for mortgages and there was this huge business disruption um and by the way, I think that you know, constructions come to the halt, which is also an issue, but the but the disruption

that's gone on and people's financial lives is going to have to be reconciled at some point. And it probably will have some negative effects of the market. So that's kind of where I want to go. Based upon your discussion with your customers and your clients, are you getting a sense that, boy, this is really gonna have some long lasting implications for you know, business cycles and maybe

even consumer psyche in terms of demand. Well, I think the Fed is very concerned about deflation in the marketplace. And so I think that's and that should tell you everything you need to know. Right. That tells you that the consumer is probably going to move less consumption and more savings. And so what's that saying. It's saying that they're changing their psyche about how they think about the world.

I think what we're doing today, I think the programs that the Federal Reserve is pushing forward today, the programs that the Administration's pushing forward, the programs that Congress is thinking about, is all to help to keep that psyche you know, where it's been and you know, keep the United States the great country that has always been in that. You know, we are a country that likes to spend, We are a country that innovates, We are a country

that takes risks. And so by freeing up this capital so that people don't have to worry about that. We will minimize that disruption of the future. So, Frank, we're hearing from JP Morgan and Wells Fargo today. We're going to hear from City Group and some of the other banks throughout the rest of the week, and we're really focusing on loan loss prevent Jians. What are you seeing

with respect to that at your bank? So, I think what you've seen from those larger institutions is that no one really knows, and so they've taken some certainly they've taken some general approaches to what they have modeled that they think things could be, But nobody really knows for sure. It is way too early in the game to make decisions about, you know what, what what losses may occur, who's going to be impacted, what segments are going to

be hurt the most. It really depends a lot on how successful some of these programs are, how we all work together to get through this next phase to reopen the economy, how long that looks like. I think without answering those questions, I think it's difficult to really assess what what damage, If there's damage, how much damage, and what it's going to look like on the bank's financial statement.

Frank Sartino, thank you so much for being with us and all my best to you through this period as you work to manage and get loans out to all of those small businesses in the path forward. Frank Sorrentino as chief executive officer of Connect One Bank, joining us from Englewood Cliffs, New Jersey, oh JP, Morgan Chase and Wells Fargo kicked off earning season for the big banks today, and I think what investors are really focusing on was

those loan lost provisions. Combine those two banks set aside more than twelve billion dollars to cover the faults across the economy. So just extraordinary numbers coming out of there. To get a sense of kind of what we're going to see from the banking sector coming up, we welcome Chris Whale and chairman of Whale and Global Advisors, based in New York. Chris, thanks so much for joining us. Boy,

those low lost provisions were just extraordinary. What's your takeaway, Well, I was actually too conservative in my model for the industry. I said, fine, well, double provisions this month and then double them or this quarter and then duble them again second quarter that gets up to two thousand and eight levels. But I think JP Morgan and decided to go big. I agree with what they've done. Takes a little pressure off them in the next couple of quarters because they've

put a fair amount of money out there. But they've also said that they expect loss rates to be extraordinary, and and that says to me, well above two thousand and eight levels. So we're starting to use the nineteen thirties as our model simply because of the dislocation both in terms of unemployment and small and midsized enterprises, which

looks to be a horror show. I think we could see a large chunk of the service sector essentially disappear simply because they don't have a lot of capital, and if you impose losses on them, you take them out of uh, you know, circulation in terms of revenue. They die and small businesses turn over quite a lot anyway, but when you put this kind of stress situation on them. The only sector of this economy that's liquid right now are basically those that are supported directly by the government,

particularly the mortgage sector. But everything else is in um and I think that's going to have a real serious repercussion on GDP and how long it takes us to get through a you know that. I think a couple of observers, in fact, have suggested we may not see normal earnings, normal kind of trend earnings for a couple of years. Uh. And I think that's what the banks

are telling us. What about when it comes to the health of the banks themselves, because a lot of regulators and analysts who said that the banks are incredibly well capitalized and the fact that they can put aside such a big amount for loan losses that they're expecting shows their fortitude and their fortress like balance sheets. Would you agree with that characterization? Oh very much? And I think you know, the political dialogue on this is immediately focused

on the banks and the fact that they pay dividends. Um, we've already gotten most banks to or stop share repurchases, which is worth a hundred and ten billion dollars a year in terms of capital retention for the top twenty banks. That's enough that funds your reserve built by the way, Paul, So, I think that what I would tell policy makers is

leave the dividends alone. You're going to deal with this on a bank by bank basis, but you don't want to cut off that cash flow to investors because there are a lot of people who depend on dividends from public companies to pay their bills. And I think it's important for us to realize that the banks are well capitalized and they have a hundred and fifty billion dollars in cash flow every quarter, earnings, share repurchases, dividends that they can draw on to meet this wave of default.

And so I think that's the good news. I would agree with you, Lisa. So Chris, let's take a look at some maybe some of the regional banks. Are they in a similar position in terms of relative health of their balance sheets? Well, they deal with a smaller community typically, so they will have more idiosyncratic risk elements in their portfolio. They're not that diversified. But diversification is not going to

help us this time. I think the country generally is going to see both heavy consumer default activity and we're also going to see a lot of business defaults. So the good news is, unlike two thou eight, this didn't start on Wall Street. It didn't start with subprime mortgages that nobody wanted anymore truly and something. Remember uh, this time around, it's an external shock which has taken GDP down significantly and is pushing unemployment up to ridiculous levels.

I mean, you know, in credit models, unemployments your biggest factor, that's what you start with. Over the weekend, my wife kept looking at me and go, why are you in such a bad It was because I was writing my earnings note for the banks, and basically, by the second quarter, I think two thirds of bank earnings are going to be gone because of provisioning and other expenses, operating expenses, and then over time they're going to come out of the whole. So to me, I'm still very positive on

the banks. I own banks, you know, Jay piece at one point two times book value this morning, so it's not like they're cheap cheap. But on the other hand, I think that the whole industry is going to have

to divert income. They're not going to consume capital. That's always the misnomer in these discussions, right, They're going to use the income that they generate, the plow through the losses and they'll be Okay, yeah, when you talk about job losses, I'm just struck by the fact that nearly one in ten Americans lost their jobs in the past three weeks. And probably we're gonna get another multimillion print in the jobless claims report that we're getting out on Thursday.

In the meantime, there's a question about consolidation. Does the likes of JP Morgan end up more powerful at the end of this because they do have the capacity to withstand this and that fortress like balance sheet. What do you think, Well, JP is not going to get any bigger, but they do have a lot of monopoly power. Um They are also reacting to the madness we see in

Washington at the Federal Housing Finance Administration. The regulator for Fanning and Freddie mac basically came out and said that they wouldn't support the non bank servicers were the most important part of the mortgage market. Um. So JP changed their warehouse guidelines last week. They basically cut off all the non banks in terms of funding for new loans

and also for servicing advances. And it's really bad. We need to get the government on track here because we don't need them saying bad things in public, and we don't need to have a regulator out attacking the institutions he's responsible for regulating and preserving. So I think we need to get everybody on the same page. The FEDS great, The other regulators, Jenny May and f h A are awesome.

They've been moving heaven and earth. Um, Chris, I'm worried that the default wave we're gonna see, Lisa is going to be really big. Chris Whalen, thank you so much for being with us, Chairman of Whalen Global Advisors. This period of time so unprecedented and jarring, and its magnitude and depth has lead to a lot of philosophical musings

and a lot of historical references. One that really caught my attention, Paul, was about the hobbsy and state of Man, and the and and and the West versus the East, and sort of jostle for power that we see going on and perhaps transforming at this moment as the world fights the pandemic. And I'm so glad to join us

right now. I'm pleased to say John mckelthwaite, editor in chief of Bloomberg News, who wrote this column the virus should wake up the West, and John, I want to frame this from the view of an argument that people are making that China's success in fighting off the spread of the coronavirus shows that autocracies are preferable to democracies. How much of that has been borne out by what we've seen in the past few weeks and months, Well,

I would argue um that high disciple. Um, I would argue very little, because I think that if you look at it, yes, I mean China has done quite well, and we should immediately put an enormous caveat against both its numbers, which people raise considerable suspicions about, and also its role in the very um starting point of the virus, where if it had had less of a police state and wuhren't more, people would have known about the virus

much earlier. So China is definitely cultival than that. But in terms of the sort of secondary stage of reacting to it, yes, China does look better than the United States. But um, there the truth is there are good they are good performing autocracism, bad performance axes, good performing democracies,

and bad performing boxes. If you compare China to Germany, if you can compare it to Switzerland, if you compare it um to places like Norway, if you compare it to South Korea as you prepared to Taiwan and Singapore, China does not look great. So in other words, the

democracies still do it better. Um, and people who jumped towards the idea that this has been particularly for China, I would rather see it as a warning, especially to America, but you know also to that matter, to Britain where I am at the moment that you know, really if the West does not get it to government into shape, um, you know, it will lose the lead that it has held over Asia for the past four years. So John, just looking at the U S here, what's you know

kind of brewing? Here is a battle between the you know, the federal government in the States, and we're seeing regional formations of coalitions, whether it's New York, Connecticut, New Jersey, or even out on the West coast with California and Washington. How do you think that's going to play out? Because it seems like that's the next big bonus contention as countries think about, including the US, about reopening the economy. So I think that's the reasonable thing. I think you

can make the argument. I think most outsiders looking at the federal reaction to this would say it has been useless. Um, you know, it's there are some places which are being worse. I think maybe Italy, depending how you measure, but in general, you know, this has not been Donald Trump's finest hour. By contrast, actually, I think you can give Gavin Newsom in California some some good points. Um, you know they did with California did react much quicker. It's thought about

what to do. There are still problems there self, evidently, but it's you know, the numbers there speak for themselves of some extent, and he had to do it against the background of the federal government not being very helpful. So in terms of efficacy, I think you could argue that the governors have got some right to do this. The great tragedy, of course, is that one thinks about

what other presidents might have done. Is what should have happened here is that first the president should have rallied the entire country. The beauty of the federal system is, yes, you can use states to experiment, but it should also be a kind of federal It should be a federally coordinated response. What's happened instead of that Trump has used suppress compets and things to attack governors, and they have also used them to attack him. Meanwhile, it's not just

in terms of what's happening inside America. The other huge tragedy for the West is that you would have hoped that America would be leading what might be described as the Western pandemic response, and that hasn't happened at all in the Even even when it came down to warning the Europeans that they were about to impose no fly zones, a lot not played, but Pope closed fly bands on European countries. You know, America did not tell its closest allies about that, and so there is such distrust at

the moment. It's not working in the traditional coordinating role of the presidency in crises is not working. And this is this is one of the ramifications of it, and it's it's very sad. John, thanks so much for joining us.

Really appreciated as an interesting column that you wrote. John mckelthwaite, editor in chief, Bloomberg News, joining us from Britain, giving us his thought, Well, we talked about the incredib stimulus, We've got to talk about credit and the rally that we have seen that's been a complete snap back of

a lot of the losses that we saw earlier. Just to give you a sense of how big this snap back was, the extra yield that investors earned UH earned to possess junk bonds has compressed from eleven percent to seven and a half percentage points over rates in just a couple of weeks. Here there's a question hasn't gone too far? And the person to answer it is Tad Rafel, chief investment officer for fixed income at TCW with more than two billion dollars firm wide, joining us from Los Angeles.

Had I'm so glad that you're the person we're speaking to right now. We've heard the Federal Reserve is going to start buying credit. But if Trainer has gotten ahead of themselves in terms of how broad and how deep and how far into below investment grade credit, the Federal Reserve will go. Of course, that's the sixty four trillion

dollar question. I mean, I think the subtext is our investors, is the consensus exp patient out there that we are going to go back to January, that we're going to get a v bottom, that the health issues are going to be resolved in the relatively near term, and then we just resumed resume the historical trend line, and consequently the levels that we saw in the credit markets in January, according to that way of thinking, would be reasonably justifiable.

I think that's unrealistic. I think that therefore, there is a lot of mispricing that's going on in the credit markets. And the reason that we believe that way is basically several. One reason is is that, first of all, a lot of uncertainty remains about when the global economy gets back up on its feet, and in any case, even if it does, it doesn't going to get all up on

its feet at the same time. So you have kind of a rolling recession type situation where even if China is in fact getting a little bit better, other parts of the world evidently are sinking, unfortunately more so. And even if we do solve the public health problem, then we still have the reality that we went through a long and vast leveraging process over the course of the

last five plus years. At least, let's say, there were a lot of excesses, and the virus, to a greater or lesser degree, isn't so much the cause of the repricing that we've seen in the credit markets, as it is also the catalyst for revealing a lot of those excesses. So I think that it's a fair statement to say that the FED has done its helicopter drops. It's certainly

improved the liquidity environment. It's compressed liquidity premium. But can it fix fundamentally broken business models that are being revealed as we speak, No, it can't do that, all right, So tadd and you've been consistently I would say cautious, you know, over the last year so that we've been chatting on the fixing markets. What is your sense for defaults going forward? How do you think this is going to play out? And of course that's a I'm also asking you to kind of share with this kind of

your economic outlook as well. Well. The if we begin maybe by looking at the loan market as well as the high yield market, the compression that we spoke to the UH, the overall compression and spread that we've seen in high yield. I think high yield now is just a touch inside of eight hundred basis points over treasuries ignores the fact that there's also been tremendous bifurcation within

the high yield space. And the bank loan space, meaning that there's actually been growth in the size of the cohorts that are are priced to yield more than ten percent. Let's say, UM, so as we've seen improvement in the better credits the ones that are viewed as probably survivors or at least survivors for some period of time through this, let's ignore the fact that we have a significant cohort of names that are going to have to go through

some kind of restructuring type of process. I think, if anyone's gas, you know how high defaults are going to get, but they're going to go a whole lot higher. Um, you've got the first hint of that in a way, I suppose from the bank earnings today from Wells IS and JP Morgan's and the significant increase in loan loss allowance that goes into the earnings numbers. So we're still I think at the front end of this, we should remember we've only been shut down for a matter of weeks,

maybe a month, um. And it's really unclear, as I said earlier, what the ultimate impact of shutting down large swats of the U S economy are going to be. Just as a total anecdote, but an important one I think is my understanding is is at twenty of the workforce in Michigan has already applied for unemployment. But I think kind of starts to give you an idea that any type of optimism in terms of pricing at this point maybe getting a little bit ahead of itself. Well,

haven't you checked the stock market. Everything's fine, Ted, everything's great. We just had the biggest REALI since seventy four. You know, I remember when we talked to you, as as Paul referenced, you've embarished for a while, and back in November you wrote about the liquidity issues that we're going to be facing the credit markets, and certainly that did come to

pass in a massive way. Are you becoming more constructive in terms of what you're buying just based on some of the dislocations, or do you think that there is another leg lower in the pricing that we're seeing across credit markets. Well, first of all, there has been actually tremendous opportunity in certain parts of the credit markets, and we've taken advantage of that the first place that we

took advantage of it. In fact, the way we have oftentimes articulated the game plan in the late cycle type of environment that we felt we were in is step zero, so to speak, is get prepared and build defensive. And then step one was the foray into those segments of the marketplace that are the most bendable, the types of assets that are not really going to be subject to

solvency challenge. And so step one was a significant increase in our agency mortgage type of exposure in port with the expectation that the FED would probably liquefy that area first, So we added substantially to our positions and agency mortgages. We've actually been selling them down as the prices have improved. The next step and we've um have have engaged this

as well, is the liquefication of fortress balance sheets. So we've seen Intel come to the market, Exxon, Kimberly, Cark, Procter, and Gamble Disney, and the spread levels were two hundred to two hundred and fifty basis points wider than where they had been in January. Okay, so do the math right?

Two hundred basis points on its twenty duration a thirty year maturity instrument is it's forty points and we've already realized actually we've actually round tripped through some of those names already, so we are constructive on the Fortress balance

sheets and credit. We certainly already have almost round trip with respect to the agency mortgages, and we expect it's going to be a lot more opportunity um, but it will probably be in areas that you have to do a little bit more credit analysis than nine sconds worth, which we kind of joke about almost is all you need to do when you're looking at Disney, P and G and and Intel. Tat thanks so much for joining us.

We're so glad we're able to chat with you today to get your thoughts on what has just been an extraordinary time in the markets and uh you the experience that you have. Tad Revelle, chief Investment Officer for Fixed Income at TCW. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts or whatever podcast platform you prefer. M Paul Sweeney, I'm on Twitter at p T. Sweeney. I'm Lisa Abramoy. It's I'm on Twitter at Lisa abram Woyd's

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