Why Carson Block's Short on Bank of Ozarks Has Failed

Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot Com. You know, Lisa, one of the things I like to do when we talk about interest rates, for example, is always think of context, right, because we're worried about whether the federal rates interest rates a quarter? You know, how many interest rate increases will

we get this year? Do you know the back in seventy nine, um FED funds rate was eleven percent and it wasn't even done then because in nineteen one, I remember, I think it was in that summer, the June that summer, they were twenty percent believed. Do you think that would be a good time to buy a bank, Well, I think that it was. For George Gleeson, he's our next guest. She's a chief executive officer and chairman of the Bank

of the Ozarks based in Little Rocks. We did that, thanks for us, You know it seems like a very different era from back then. Well, that's what I want to Maybe we could just start off. I'd like maybe just for you to tell a little bit of the story of the bank. And as I said, nineteen seventy nine eleven percent FED funds and we're worried about quarter in crease. Well, that's true, and of course Paul Volker was at the FED and was pursuing the quest to

slay inflation by all possible means. So within my first two years as chairman, CEO and majority owner of Bank of the Ozarks, the FED funds, right, did go from ten to twenty percent. And the interesting thing about that was that we were in a state that had a institutional usery law then that limited our interest rate we

could charge on loans to ten percent. Needless to say, we were doing a lot of investments and not much lending in those days and still managed to have record profits that year, both those years actually well, and partly probably because of net interest margin, right, I mean, you could just generate so much from your loans from just client activity, and I have to wonder how that contrasts with today when we're facing pretty low rates for the

foreseeable future regardless of h to minimus interest rate tikes. Uh, you know how optimistic are you? Well, we're very optimistic about our situation. Of course, our net interest margin is close to five percent. The quarter just ended, our net interest margin was four point nine So we've very carefully built all of our lines of business over the thirty eight years that I've been chairman, chief executive officer to to generate really good return better than average returns, while

we have much better than average industry credit quality. Well, I have to wonder how you're doing. And I do know that there was some controversy over your bank at this own conference when Carson Flock of Muddy Waters UH labeled your firm is the big short, They're big short, they're big idea, which failed spectacularly, I should say, with your firm gaining about thirty the shares in the following year.

So people who followed that advice would have been badly burned if they had tried to go against the momentum in your shares. But but part of the rational was that, Uh, you were investing a lot in bigger cities and real estate, and that this could potentially be a problem. Are you

still investing in that and what's your rational? Well, absolutely, we're commercial real estate lender first and foremost, and we've done that all of my career, and our clients include probably eighty five of the hundred largest real estate develop oppers in the country. Uh. We do very high quality projects with very sophisticated, high quality sponsors, but we do

those transactions at very low leverage. The Real Estate Specialties Group which handles all of our large national commercial real estate leaning and accounts for about sixty eight percent of our non purchase loans loans other than those loans we've acquired in acquisitions, the weighted average loan to cost if we fully advance every one of those loans is forty nine percent, and the weighted average loan to appraise value

is forty two percent. Obviously, a commercial real estate loan that you're at forty two percent loan to value and forty nine percent loan to cost has an incredibly different risk profile than a commercial real estate loan at eighty or eighty five percent loan to value and loan to cost.

So we're very conservative. Um, and I think uh, when UM that the sis was introduced at the SOUND conference early in two six the guys had probably screened us and knew, wow, look at their commercial real estate concentration, look at their growth rates, they must be doing something very risky. But in fact, we've probably got the most conservative commercial real estate loan portfolio in the US banking industry.

The way that you described how Carson Block may or may not have arrived at what this conclusion the very nature that's screening and the very nature of how markets have evolved. I'm wondering if you could just offer, as I think, you're the fourth largest shareholder in the bank. Uh, the bank makes no bones about your participation in its founding and running. I mean that's so there's a level of personal responsibility. And I'm wondering how that maybe even

ties in with the map of where you locate. Well, there there is a great of personal responsibility. And and um, I see all of the loans in the company above ten million dollars. Of course, Dan Thomas, who runs our real estate specialties group for US, sees all of those loans, and all those loans are approved by committee. Um. But the culture that we've built over thirty eight years is

far more important than individuals. We have created a culture um that is very conservative, very customer centric, and very focused on excellence in all we do. Uh for example, on asset quality. In the twenty years we just celebrated today at at NASDAC ringing the bell, they're celebrated our twentieth anniversary as a public company. And in that twenty years, there's not been a single year where our net charge offer ratio has equalled or exceeded the industry's average net

charge offeration. We beat the industry every single year for twenty years and beat them on average by sixty So we're very conservative and and to do that, it's not one person or a loan committee or two or three people. It is a culture that invades and and pervades the

entire company. So given the fact that you do have very high standards, you're expecting to increase your assets from about twenty billion dollars to fifty billion dollars of us it's probably over the next three years, well, I would I would say that's an overstatement. And of course we've made fifteen acquisitions in the last eight years, so the

pace of acquisitions one can never predict. You don't know whether you're going to do an acquisition or not, because you have to find a transaction that makes sense and reach agreement between a willing buyer and a willing seller. So if you exclude acquisitions, I would say it's more realistic to assume that we would grow from twenty bill and to fifty b and over a five, six or

seven year time frame apart from acquisitions. All right, So I imagine it's it's an interesting time right now, and I wish we could speak for the next hour because frankly, I have so many questions about running a bank in this current environment. And we didn't even get into the regulatory rollbacks and what that might do. I mean, there's so much. Unfortunately we have to leave it there, but I promise back he'll give you the phone number, please do.

George Gleeson, thank you so much for joining us. Truly fascinating uh story and a fascinating bank. Really, Chief executive Officer and Chairman of the Bank of the Ozarks in Little Rock, Arkansas. Since that zone meeting, the shares gained

more than thirty percent in the following year. Well, there is a new sub prime boom, and here to tell us about it is Gabrielle Coppola and Gabrielle, you know you are I always I didn't think of you necessarily just as someone who's interested in the credit but also in the underlying manufacture of vehicles autumn, you know, around

the world. Can you just describe what you're trying to get at here in terms of the US and the way we buy cars and what's happened, because a lot of this has to do with the way people finance their automobiles. Yeah, um, I think that. You know, after the mortgage crisis, Um, the housing sector wasn't a very healthy place for banks to play. But then there was also the rebound, the revival of the auto industry, helped in course by the you know, bailout by the US government.

Car sales came booming back, and um, people needed banks to finance that, and that created a huge opportunity. There was a huge credit expansion, and we saw a huge credit expansion for people with lower credit scores buying cars. Right. And we've heard a lot about has some of the subprime auto loans that have been originated since the crisis have been souring at a faster pace than many have expected.

That it's kind have created this spiraling effect where you had a lot of not only subprime auto loans, but you also had a lot of auto leases. So then the resale values are going down as the leases come up,

and you know, there's been a big issue here. But I really want to home in on two companies in particular Santander, which is the leading subprime auto loan originator, as well as Fiat Chrysler, which is thought of as sort of the third in the triumvirate of vehicle manufacturers in the US, And how do they come to kind of join forces and how it significantly it has their partnership kind of created a lot of the subprime auto

loans that weren't looking at right now. Well again, when Chrysler was sort of coming back from the dead, you know, in the wake of the financial crisis, they needed they didn't have a captive finance arm anymore, and they needed one, just like you have Foreign Motor Credit or GM financial.

Chrysler needed a partner to finance its car sales instead of I think they didn't have the money to buy one, so they made this partnership with Sintender, And I think one of the reasons the head of sales for cry sort of at the time said he chose Santanair because

their expertise in automated decision NG and big data. So the idea that they could really um use big data to kind of harness get it on this boom um speed up the process of buying cars, like big data meaning that they could they could use less information from each borrower to more quickly originate loans, or big data to basically identify the credit quality. I think that more that's the idea that analytics data mining being able to kind of assess people's credit quality in a more efficient way.

And by the reason why Ascess in particular is because Santandair in particular has been pinpointed is not verifying the incomes of a lot of the uh people who uh it lends to right, yes, And that is actually in my story I talked about this settlement they had with attorneys general in Massachusetts and and and Delaware where they

paid twenty six million dollars. They you know, they didn't neither admit nor deny any wrongdoing, but if you read that settlement, it talks about what they're basically, what they're accused of by the prosecutors is kind of looking the other way when there's very obvious signs of fraud, you know, when when you get there's They had a group they

called them the fraud dealers, their internal audit system. There were dealers who were um sending applications where someone would um default you know on the very first payment or you find out that the car they said the certain trim levels were a certain level that made the collateral bigger so that they could justify getting a bigger loan and put that person in that car. And turned out

that those were not true. So that's happening at the at the real originator is the car dealer who's getting you in that car, right, But they're saying, Santander, you did not do your job in terms of having your due diligence to check that and that issue came up again. This is separate, but when you know, Moody's did a report early this year looking at the A B S that Santender originates. They said they only chat securities and

thank you. Um they said, oh we did. We had this new data that came out under some new rule, you know, they were able to see more data and said, uh, Santenda only checks eight percent of the incomes in this subprime this's a billion dollars of of subprime auto auto loans. Santandera will say that they have other criteria that they're using to check and it's not just that that's basically one of the things that they say. But that's the issue,

and I think that's what people are uh scrutinizing. What's regulators are looking at eight percent and that compares with ally, which is another big old GM. Yes, now they're quite separate from GM, but they said, hey, you know, by the way, we check sixty five percent of our incomes, and GM Financial also said we check about sixty So how many vehicles do you have any sense of how many or the proportion of Chrysler vehicles sold that relied

on santan Dair for financing. Well, that's actually so the actual it's kind of so they have this partnership and it's been very hard for them to meet the pennant. They wanted Santender to be doing like sixty of their you know, Chrysler capital, that's the brand of it. They wanted it by this time, but this year it should have been sixty. It's so it's actually very low. So even though Sintenda is a very low proportion of Chrysler financing, christ would makes up a very more than half of

the auto financing that Santander does. Well. That goes back to that agreement that you described earlier, saying that maybe Fiat was not large enough to buy or uh, Fiat Chrysler was not large enough to buy its own credit company, so they had to make where they did make this alliance with Santander, right, and this is supposed to be and it still is. I think Santander still wants it to be a big avenue for expansion. Growth is Chrysler,

and they're actually doing a lot of things. You know, they have a program to clean up, They're trying the new CEO, Scott Powell. They've actually fired eight hundred dealers across their network to clean They're trying, they are doing things, but this is still out there. Gabrielle Coppola, thank you so much for joining us, and uh, congratulations on an awesome story. It definitely takes a look at a deeper look at an issue that a lot of people have

been homing in on as a possible problem. Gabrielle Coppola is an autos writer for Bloomberg US. Well, to learn more about what's going on with Blue Apron, we have an expert, Selena Wang is joining us now she is are Bloomberg. I gotta say, you're like the meal You cover meal companies and uh delivery companies, but they're really tech companies. Right, this is Blue Apron. What is going on? The stock was down as much as twelve right. I think you just hit on something that a lot of

people say. You know, just because they sell orders digitally doesn't make it a tech company necessarily. This is a super cost intensive business. They have to source all the ingredients, they have to put it all together. These are really expensive ingredients, put them to fulfillment centers, delivered to people. And this Amazon trademark filing is just another kind of nail on the coffin for Blue Apron, as some investors

would see it. I mean, Blue Apron already has all of these financial issues, and now you have a behemoth that may be getting into the same business that it's in. Okay, so that maybe getting into the same business, right, I mean they file a trademark Apple hard food kits. This is Amazon dot Com? How soon? How quickly could they develop an actual business based on this filing? And second of all, do we have a sense of whether it really does directly overlap with bluavor? I mean it does.

It definitely sounds like right right. So, in the world of these types of applications, there's kind of two categories. So there's one which is, we're already using this trademark for products, so you should consider application. And the second one is we're planning to use this trademark for products, so you should uh is we're planning to use this

trademark for products, so you should consider application. Amazon filed under the ladder, which means they're planning to use it, doesn't necessarily mean this is all going to go through that is going to get approved. So that means that they're definitely looking at the business and they're considering it. Uh. No idea when they would actually start doing this. Why why would they get into it? It's a crowded business

that is of dubious lucrative nous. Well, if we look at this Amazon Whole Foods deal, they were willing to put in PLoP down billions of dollars to buy a grocery store business. Now, uh, food is incredibly important. It's a huge, huge market. Amazon clearly wants to get into it. They have the brand now, they have the distribution, they

have the fulfillment centers with the Whole Food's acquisition. So you can think of all sorts of integrations to make something like meal delivery actually pretty efficient for somebody like Amazon when they have so much backing and support on the back end and in terms of the physical locations. Have you heard anybody saying that, uh, Blue Apron is now a buy at six? I mean, if you're talking about it right, because nothing the deal was done right

June Stockho's public at ten. They sold thirty million shares and stock is what trading at six and change what That doesn't necessarily mean they're, you know, throwing away all their strategic plans. They already had the money, They've got big cash flow. Um, they have a brand name. I'm just wondering, they've built infrastructure that is theirs, and I'm wondering, you know, you hear anybody saying anything like, well, no,

they're a player. Remember what happened to Facebook. It came out I think at thirty five, and was that whole thing with the Nastac and you know, people were furious, but the turn out that if you had held on it was a good bed, right. I mean, I don't think we can say for sure right now whether it's going to be a total flop or if it's going

to succeed and get to facebooks. I mean, it's not like Amazon was buying, you know, the sharpest hack in the box in the sense that the Whole Foods was facing competition, when I mean in a way, this was great for Whole Foods to get. Asking whether Amazon would consider buying Blue Apron, I don't think it would make a lot of sense for them at this point. I mean, they have Whole Foods, they could build their own Blue Apron esque sort of business. But like as you did say,

it is quite cheap right now. I mean Blue Apron does have the brand, that's true, they have you know, people know that it's a quality product they're getting when they go to Blue Brint. But this is not a cheap product. And the type of customer that's going to Whole Foods is a very similar demographic as a type of customer that is going to Blue Apron. Kind of this top ten percent of income in households, it's not cheap.

At what point does Amazon just have so much momentum because they already have the brand name, They're already associated with something that many people view as quality and reliable and consistent, so they don't have to spend all this money on advertising like Blue Apron has, which has been the bulk of their revenue right exactly, I mean marketing and fulfillment centers had has been a huge reason why they've had net losses even as revenue has been growing.

And you're right, I mean Amazon with Amazon Prime, they already have kind of like an existing customer base and you can think of all sorts of ways where you know, you order you know, Amazon sort of meal delivery kit and shop at Whole Foods and you get extra Prime points and this all kind of works together. An ecosystem makes it very easy to sign up and and get people to use whatever service they may come up with in the future. Zappos, that was what was thinking of.

Zap Posts was the shoe business, and they've let it have its own brand name, and everyone knows it's owned by Amazon, but it's let you know, it's doing its own thing. Who news I wouldn't put anything past Amazon, right, Well, I'm clearly a strategic vision that is not just confined to uh, you know what has happened, more like making it up into the future. I have to wonder how

much this is related to the Whole Foods purchase. Well, you know this did come around the same time, this patent application, this trademark application as a Whole Foods purchase. And I think that now that they have Whole Foods, they have so many a whole world of opportunities in the space of food um to go forth with now that they have these physical locations in this brand. So retailers of all types are just cowering in the corners

hoping that Amazon won't come after them. Selena Wayne, thank you so much for joining us and for illuminating what's going on today with Blue Apron shares, which have dropped as much as twelve percent following this trademark application for something that Amazon just consider at some point in the future. Selena Wayan is a Bloomberg Tech reporter and she joins

us here at our Bloomberg eleven three oh studios. Well here to help us define the polls about President Donald Trump is and Selzer, the president of Selzer and Company are based in the Mourne Right Public opinion Research firm. And uh, and thank you very much for being with us. Um, just according to the new poll, just of Americans approve of the job that President Donald Trump is doing. Now you are this is the polling number that you've been

able to put together and analyze. Correct, you're doing this for for Bloomberg, for us, that's right? Where the proposter for Bloomberg nots right? And maybe just explain how do you actually go about this polling and how does it vary so much between polls. Well, if what we do is do a scientific survey of a randomly selected sample of a thousand people across the country, uh, and make sure that that's a good cross section of residents of

the United States. And we asked them a battery of questions. Some of these questions we've been asking since the inception of the poll in two thousand nine. And UM, that gives us a way to kind of track how things have changed and how things have stayed the same over time. So you know, two thousand nine was the beginning of

the Obama administration. So we have the highs and the lows of that presidency, and early in Obama's presidency his numbers were in the fifty percent and mid fifty percent range. So Donald Trump is beginning his presidency at a historic low. And there's some other polls out right now which are UM have a longer history, that are saying this is

the lowest for any president this early in his presidency. So, and let's talk about the latest survey that you just conducted on behalf of Bloomberg and what it says about the state of the American consumer. There's some good news and there's some bad news. Yes, there there is good news. There's optimism, Uh, there's good feeling. Is people take a look at job security very specifically, and people take a

look at the value of their home. Uh. It's the highest numbers that we've seen for both of those since we've been asking those questions. So that's a very personal look at what's happening economically. But we all going back to before the crisis or since the crisis. UM. We started asking those questions in December of two thousand twelves,

so since the crisis exactly. UM. But and and then a more general question about whether the people feel they are moving closer to their hopes for their career, and finances are moving farther away from their dreams. Now say that they're moving closer. That's as high as we've ever seen it. So you have this juxtaposition of feeling good about things and what's happening with them personally, and and

yet awarding a low approval rating for the president. And so I kind of think about Jim Carvel, who was an advisor to President Clinton, who said, you know, when you see a turtle on a on a sense post, it didn't get there by themselves by itself. So you kind of think, well, what is that that's happening in the economy, and did it happen by itself? Or is Donald Trump having any leadership impact. It's just there's a

little bit of a disconnect. There's a little bit of a dissonance between the goodness that people are feeling and not getting any attribution for the president who's leading this country. You know, And just to play devil's advocate, what if somebody said, look, polls have been radically inaccurate for the past few elections, and you know, maybe this dissonance reflects the way that questions are being asked to get an unfavored opinion. Well, I would I would take issue with

the radically inaccurate. In fact, our polls have been highly accurate. Were rated among the most accurate polling companies in of the three hundred and fifty polling companies that have been ranked. And the fact of the matter is that we we see remarkable consistencies. We see things only fluctuating by a little bit. So it's not as though we suddenly got

something very different. Um. You know, I think there is no way, given that we asked these questions the same way that they were asked of Barack Obama, to say that it's the wording of the question that is leading us to say that that, but Donald Trump's numbers are lower, that there's just no evidence that would support that claim.

And do the poll results indicate to you a polarized nation the way it is often described anecdotally, Well, what the poll results do tell us is that there's a there's a there's a market difference in how Trump Trump voters are rating their president, which is they are sticking with him. Uh, there is a very strong majority who

approve of the job that he's doing. Um, So that overall low rating is the people who did not vote for him, whether they didn't vote in that election at all, or whether they voted for Hillary Clinton or for somebody else. What kind of number was What was that coming up as that you describe. The Trump voter number is in the high eighties. So there that base that he has created is still saying that what they see him doing

is what they hired him to do. And unrelated to Bloomberg, we did some focus groups earlier this year to ask exactly that question, focus groups with exclusively Trump voters who said, look, we hired him so that he would create some havoc, and he's creating some havoc, and we're not going to like all of it, but it's that general approach that they were looking for. They were looking to shake things up.

So while they might not agree with all of the specifics, the general idea of changing the way that the nation is governed they were supportive of. And Seltzer really fascinating. Thank you so much for joining us and for conducting the poll, which is really illuminating and a good look into some of the polarization within people's own opinions about what's going on right now and Seltzer, President of Seltzer

and Company based in De Moyne, Iowa. She's sharing the results of this broad based poll on President Trump conducted for Bloomberg. It was a telephone poll of more than a thousand American adults. 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 abramoids one Before the podcast, you can always catch us worldwide on Bloomberg Radio.