Surveillance: Banking Jitters with Roubini

thrilled to have one of our good friends back. Nora Roubini is the CEO of Rubini Macro Associates, but far more than that, someone who brilliantly was out front of previous crisis. Will keep the introduction short. This morning, Noriel, good morning to you. How is this crisis different than ninety eight? How is this crisis different than two thousand and eight, Well, compared to two thousand eighth. Right now, we don't have the credits yet, we're not in a resison.

And the losses that occurred they seemed to be related

to market race. A number of financial institution did not realize that with rising interest rates the price of bonds would fall, and last year US banks alone have something like six hundred and twenty billion dollars of unrealized losses on their securities with a capital of about two point two trade, so the average losses about twenty eight percent will reduce significantly the capital ratio, the Tier one ratio for some banks actually the numbers like Silicon Valley Bank.

Of course the number was one hundred percent, but I would still have the regional banks where that possess will be fifty percent of the current capital. I want to go back to your Tellian economics, your public service to President Clinton, where you were experts on the regulatory framework. Switzerland is a devolved federal government with the cantons with great strength. What is your knowledge of Swiss regulators right now? How removed are they from the credit Swiss crisis? Or

they can they be active today to help their beleaguered bank. Well, they can be active today, even if they're a system that is delegated. However, the problem is that trying to twisted by some standards might be too big to fail but also too big to be saved. Is not clear that I Unlike the United States, the federal system is enough resources who engineer a bailout and what they need certain is more capital and the question is whether they're going to get that capital or not. Otherwise bad things

can happen. Well, bad things are happening this morning, Noria, I'd love your take on this. There might be some people waking up this morning looking at what's happening with Credit Suis, perhaps perhaps based here in the United States, and thinking what does this mean for me? Why is this important? Could you explain to those people, Norille, just

how important Credit Swiss might be to the financial system. Well, it's important because the SVP was only about a one hundred and fifty billion lawlers of assets, while in the case of Credit Swiss were speaking about at least a seven hundred billion. So anything will happen to Credit Whiss will be of systemic effect for not just the European

financial system, but also for the global financial system. So if Silicon Valley Bank create repal effects in global financial market, something bad happening into Credit Swiss will be an order magnitude more, something more like a Leman moment. A lot of people are talking about the implications of this on monetary policy, and Torsten Stock earlier said when the facts change, his view changes from no landing to a hard landing.

He sees perhaps the end of a rate hiking cycle, as does the market, including one hundred basis points of cuts in the next year. Nuriel, do you agree with this assessment. Have the facts changed where suddenly rate hikes are out of the picture and you see that the inflation story will get solved by a crisis elsewhere. I

don't think so. I think that the dilemma for central bank has got to be worse because the latest economic data for inflation in the Eurozone or the US suggests that inflation is still to ye, is falling, but is not falling as fast as the FED or ECB wanted to be. So, based on what's the economy doing right now, we need to hike and like much more. The FAT should go at least closer to six percent. The CEB should bring the deep or rate to at least four percent.

The problem right now we're facing a situation of financial instability, and financial instability would suggests to stop hiking, maybe even cutting rates and maybe even resuming quantity division. And what the FAT has done is back to or quantity divising. But if you do that, you have a risk of the antoorg of inflation inflation expectation that tradeoff existed even before raising rates would have led to stresses in financial market like last year where bond yields went much higher

credit spread widen. That stress is becoming more severe today because now we have systemic financial problems, But we're also in a situation in the state way to hyge, and the idea that this financial stress is going to cause inflation of drop is not yet in economic data, So

there is a dilemma for sentle bands. Although a lot of people are saying that they see credit conditions tightening, we heard earlier from Larry Fink of Black Rock saying that he sees a slow rolling crisis that's going to move from the banking system to private credit to private equity. How does your view kind of tie into this sort of inherent credit tightening that we see across a whole

host of assets. Certain there's going to be a tightening of financial conditions, at least in terms of credit spreads. Bond deals are falling, But on the short and long end, that's an easing of financial condition that eventually might lead

to an economic slow down. But there we have the inflation today is way too high and it's going to remain too high because the forces are leading to high inflation, like for example, very tightly or market are still with us, and therefore that's going to be a cause of persistent inflation. And the idea that eventually sighting of financial condition is going to cause a slowdown of the column and a

weakening of inflation is not yet in the data. So there is a really contradiction between achieving economic stability and lower inflation and maintaining financial stability. To today, what a conflict. What a conflict. I've got forty five seconds left. I wanted to give the opportunity to try and answer this. Banks found out that the risk was where they thought the safety was Noria West the safety now when the safety is not in long term treasuries. I've been writing

for it for over a year. You know, if average inflation were to be say five percent, ten year treasury eventually have to be seven percent to data around three and a half. Last year, you lost twenty percent on your safe bonds, more than you lost on your SMP because yill went from one towards three. If they go from three and a half to seven or the medium term, they'll be further blood bat on twenty three dollars of

long duration risk assets. The solution is going to be short term treasury tapes, gold pressures, matter another head just against inflation. That's where you have to outgo, and investor sort only now started to realize it that that's where you have to do. It's going to be a conversation. You and I have the whole of this team for a long time, no doubt, Thank you, sir, No Robeini, the Robini Macro Associates and Tom of course, the author

of Mega Threats. Peter Cha, head of Macro Strategy Academy Securities, joins us. Pete, let's talk about it one ninety seven. I think we're all sort of clude on the interday chat tick for tick at the moment, Pete, what's your take on what's unfolding? You know, I'm watching the CDs market. We've seen the one year jump to say eight to nine points up front, so someone has to pay eight or nine percent of principle to ensure the credit risk

per year. Part of that's concerning because you're starting to see the curve invert, so there's a bid for frind AD and CDs. Having said that, I think two things that are mitigating that are liquidity is still just abysmos, so liquidity is low. European credit to false twap. Liquidity is not what it once was, so the moves can be exaggerated. And it is a name that people hold so much that they do need to hedge. People have been playing around in the cocos various parts of the

cap structure, so you do get this volatility. It is a bit concerning though that every you know it seems to be reaching you highs in terms of CDs spreads. So I'm watching that and I think one lesson all the US banks should be taking is when it comes to capital raising, you have to be aggressive and get it done early. Right. This seems to be today's story is about not raising capital maybe a few months ago,

and that's what's hurting them today. I think every US bank that's kind of that weaker end should be thinking how do I raise capital? Because we in the US have to fill that big void of the unmarked, unrealized losses and treasures. Some financial institutions that some people had never heard of would declared systemically impulsant by regulators in order to make DEPOSITUS hold over the weekend in America. How would you describe the important secredit swat to the

financial system. You know, it's an incredibly important company. It's a awesome company's as you say, we all know people who are there. I think we need to see this get resolved, because the one thing we do tend to see, unfortunately, is if one gets into trouble, people very quickly start looking, oh, what's the next one that looks remotely like this? And it may be unfair, but that's kind of the pattern we saw during the European deck crisis, during the Great

Financial Crisis. I think we just saw it here in the regional banks. So this has to be a priority for the ECB and Yes to get together. Peter, I just want to cut to the chase here in contagion. I'm looking at Deutsche Bank. I'm looking at the retail French giant BMP Perry, same idea. They give way as well. Peter. We don't have time for the tech dynamics, but it is grim. There's no other way to put it with John, help me here A one ninety four one point nine

four zero five on credit sueees. Do you look at this is a EU regulatory contagion or is it contained to Zurich. It should be contained to Zurich. But again I think, just like the FED was the ECBs acknowledge that they've got to ring fence things and make sure that they're putting up firewalls in place, actually to help cs lets get time, but more importantly to ensure that there's no chance of this attracting the attention of other

banks and people pushing on them. That's what happened to the US, That's happened past, and I do like what the regulators did in the US. I think they were very aggressive on Sunday night. I think there's more to do. They've got to address the core problem, which again is these huge unrealized losses. But it's a step in the right direction. It starts ring fencing it and making sure that people understand there is time for these things to

work out. The core problem is also though, that regulators missed some of the red flags, not only with respect to Credit Suite, so now having to go back and rethink some of the statements as the SEC raised flags, but also over in the US where there wasn't even a chief risk officer at SVB I'm wondering, from your perspective, at what point does the market lose faith in the ability of regulators to flag risks that might emerge next?

You know, it's I think one of the problems that we face is the regulators are often get caught fighting the last battle, and the Great Financial Crisis was all about the big banks, and that's where the focus was. And clearly we've got to do more to make sure that everyone's well managed, everyone's being within limits. You know, I think the things that they did, by the surface, looks completely allowed to do. Now why you would want to take that much duration Rims, that's a separate question.

I know you like the midsize lenders in the United States, particularly after what you heard on Sunday evening. European banks have been a massive trade and if we can step away from Switzerland just for a moment, Soakedin's down eight percent, being paced down eight percent, I in Chase down six point five percent, Pete, can you say the same thing about the European lenders in this moment they faced this morning? Not yet. I prefer the US right now because I

think it was way overdone. It was a very isolated case. And the regulators come out quickly. So I want to see some sense that the regulators and the ECB are coming out and doing what they can. Then I think it's a buying opportunity. Again, it's been a great run, so I'm much more comfortable right now with the US and the mid market banks. That's where I want. If anything, I expect news over the weekend where you see some progress from some of these banks and storing up their capital,

whether it's to a merger or getting an infusion. That would be great for the market. So I like that. Europe, I think we got to see where this plays out. It's too early. I pay thank you, sir I As always Pittacha of Academy Securities. We are informed by ken Leon with decades of experience with CFI A and of course helping us with American banks. Is it trust and confidence Dearth and Zurich ken Leon? Is it basically the same as in Palo Alto or California? Is the trust

and confidence lack? Is it the same everywhere for investors and customers? Yes, and it comes in different levels. This one is concerning because it's global and for the ft they're still in their domain of financial stability, which is an issue, and there's lots of new takers into the story, whether it be Congress policy makers. What does the central Bank in Switzerland say about perhaps their major franchise that has dwindled over the years. It's a pretty sad story.

Training again at one point eight seven, John, A nice lift there, but nowhere above even on the last ten minute interval that would need to get to one point nine two or one point ninety three, and we're not even there yet. One five is music to nobody says, yeah, I'm looking at that stock. Let's continue with Ken Leon. Is kredit suis trade this morning, Ken Leon, As you mentioned, Kredit suis a global name. It's all part of our heritage as well. I'm thunderstruck at where Swiss regulators are.

Can American regulators apply any sense of force here on a foreign bank? They they can im as it relates to their assets in the US or the cooperation that you see at the highest levels of Japal working with other central branks around the world, the ECP in particular. But this one spot on the timeline is short. You don't have to may Or June J. Pal Monday said to Michael Barr, head of Supervision, is that I need a report and it will be shared with the public

by May first. Congress will have hearings about what's happened in the US with the regional banks. A lot of this is trust and confidence versus panic, and then when you get into the weeds, that's the important areas what happened, when did it happen, what went wrong? And I'd like to share more about that because the other major part

of the feed is bank supervision. Again, there's a story of trust and confidence when it comes to specific issues, whether it's hedging interestry risk or whether it's just you know, management missteps on consecutive years. In the case of Credit suis where are the linkages beyond just simply a lack of confidence, But the weakness is really getting large banks and in this and now smaller banks to invest in

technology platforms for compliance and regulation. Michael Corbetta City Group for years was told to invest and he didn't, and then there was penalties and hundreds of millions of dollars spent at City Wells far goes another example, and you take this at that scale of a global bank, Credit Swiss, it's critical to have that. It's taken US five seven years for all of our globe and Sacks Morgan Stanley

to do that. But when you get down to midsize banks one hundred billion or more or intent to one hundred billion, they don't have the manpower or the resources to do it like the large banks who've done it well. And on the other side is the set has thousands of bank examiners, but after twenty eighteen regulation just staying very focused and tight for those above two hundred and fifty billion, not fifty and long. Behold Barney frank Is

on the board of truck. There's a signature back unreal. Yeah, we're going to get theater and Congress on all this, but also the bank examiners and what the banks respond to really matters a lot. Kennon got thirty seconds on the clock. There might be some people engaging in this program. Maybe they've never listened or watched this program ever before.

They've watched what's happened with banks over the last week, and they've taken an interest, and they hear us talk about Credit Suite and they say credit who They've never engaged with this Lenda before. They don't know what this bank does. They've seen futures down ken Why does this bank matter? Waking up in the United States this morning, such a global bank, there might be counterparty risk for some of the US banks. It's also, you know, significant

in the cog of the capital markets. So if it's not related to direct lending in the US, it does matter significantly for the capital markets. And that's where you really have to look on what it impacts in terms

of debt instruments, derivatives as well as equities. Can appreciate your perspective ready today, Thank you, sir Kenley on that CF all right, we are well timed here joining us as David Rubinstein, you know him of course from the Carlisle Group, his public service to the nation and the Carter administration and David Rubinstein peer to peer conversations, and as David knows, I'm wont to say we'll rip up the script today. We're going to rip up the script.

I've got eight ways to go here. You with your philanthropy have a wonderful linkage between financial elites and the government in America. We've seen the government begin to step in in this crisis. Are you surprised that European and particularly Swiss authorities have not stepped in on credit suits. I am surprised that nothing has happened yet, But it took a day or two for the United States to get its act together, so I suspect it'll take a

day or two there. But remember, the US regulatory scheme is much different than the Swiss one or the European one, and so we have one regulatory scheme more or less the United States. They have many different ones in Europe, and I don't think the Swiss authorities have quite the authority over the banking system that the US one does have over our banking system. David, That's what I wanted to go to. What would you suppose snapping in looks

like in Swisland? What does that look like? Well, we did in the United States is we protected depositors, so we didn't protect creditors, and we didn't protect shareholders, and we didn't protect really employees. I suspect the Swiss situation is more complicated because the existence of the bank is more at stake here, and it's such a well known bank around the world that I think the Swiss authorities

have to worry more than just about the depositors. The chairman of the Swiss of the Saudi National Bank, who I do know, made a statement that you broadcast recently saying that they were not going to put more money in and that would probably a bit of a blow to Credit Swiss. Were you surprised by that that he said that out loud on the record. I was surprised by it. I just saw him a few weeks ago, and I think, you know, they have a lot of authority in Swiss, the Saudi National Bank, and I suspect

they wanted the Protector investment. But obviously there's a reason why they're not doing that. Well, there's a theory that perhaps Middle Eastern investors would want to come in and help Credit Swiss more substantially, not just because they think it's a good investment, so that they could do business and have that be the European node. Is that basically off the table based on the very public comments that we heard earlier this morning, I don't have enough information

to say that that's the case. I was surprised that the Saudi National Bank chairman did not want to put more money in, but he may be under some regulatory constraints to put more money in so I just don't have all the facts there, but I do know that there's a lot of Middle East interest in Credit Swiss, and over the years there have been a lot of activity between the Credit Swiss and Noways bankers and Middleways investors.

We'll just have to wait and see. David, you said that this is more complicated because of all the interconnectedness of Credit Swiss and the global banking system, and I'm wondering what your concern is, whether you think that the worry and market this morning markets is warranted based on how systemic it really is. Well. I think in the United States the regulators thought over the weekend they had

solved the problem. Clearly, they haven't really solved the problem because some banks are still weaker than they would prefer to be. I think the contagion that spread to Europe is something that the regulators here probably did not anticipate, and so we'll just have to wait and see what the impact is. Right now, the US banking system is in pretty good shape. There's obviously some weak banks, but basically we don't have a systemic run on the major

banks in the United States. I would say that Credit Swiss is a major bank in Europe, not as portant as it was many years ago, but still an important bank. So if we were to have serious problems and have more of a contagient effect than Silicon Valley Bank would have on our banking system, some people talk, other people do. In March of two thousand and eight, you did, Carlisle Capital to be polite, was challenged to be polite about it. You stepped up verbally and with action to help make

people whole. How do we affect that now with this complex crisis that we have. Well, that was something that was unanticipated by many people. It came about in part because the concerns about the regulatory system and interest rates were going up. I think here the Federal Reserve probably did not spend as much time worrying about the impact on banks and their ability to survive. When interest rates

were going up. The Fed was mostly focused, I think, on inflation and not worry about the bank regulatory system, and I think they may have been caught unaware of how SERI the problem was. So what should Powell do here? These are delicate questions. I don't want to put you

in a corner, mister Rubinstein, but you've got tangible experience here. Well, my experience may not be that relevant for this, but I would say the big decision that has to be made by the Federal Reserve is do they increase interest rates by fifty basis points, twenty five basis points or no basis points. And the conventional wisdom in Washington today, and that conventional wisdom's not always right, is that the

Fed will probably go with twenty five basis points. If they were to go with no increase in all people would think that they've lost their interest in fighting inflation. They go with fifty basis points, it might be seen as too much for some of the banking companies right now. So I suspect twenty five basis points is to split

the baby decision. It's most likely. Meanwhile, earlier this morning, we got this letter from black Rock's Larry Fink, and he was talking about potentially a slow rolling crisis in the US, with the first shoe to drop Silicon Valley Bank, the next with some regional banks, and then he pointed to a third to drop, where he pointed at private equity, and he pointed to some of these less liquid assets that have built up in size over the past few years.

Do you agree that that could be a node of concern in the next couple of months and year ahead. Private equity is not the same situation as banks. We don't have typically runs on private equity firms and the bank. The private equity firms did quite well in the last recession. They survived and they came back stronger than ever. The private equifirms are much bigger than they were the last time around, So I don't see any weakness at all that we have to worry about in terms of a

regulatory situation with private equity firms. I think we're not the problem. I think other banking regulated companies may have bigger problems, but not private equity firms in my view. Clearly, private equity firms have illiquid assets, but we've known that for a long time, and we don't have a run on the bank where we have depositors of pulling their money out anytime they want to do so, so that's not a problem for us. We had to run on the bank acount Square, and the decision that was made

by authorities was to make deposit its hold. We understood there was an FDI say limit on deposits of two hundred and fifty thousand. It looks like that's gone. Ken Griffin, I believe, spoke to the Financial Times recently of Citadel and talked about maybe eroding American capitalism, that this was perhaps a mistake. Do you take a view on that yet, Well, I think the FED had the federal government, had to do something, and had they not protected depositors, there would

have been run so many banks. So I think by protecting depositors, I think that was a wise decision. Whether they should have protected creditors as well as shareholders, that's a more complicated issue. Ken's a very smart person, has outstanding record, and I know him quite well. I really respect him. But I don't think that our capitalists and system is falling apart. It has challenges, that always has from time to time, but I think the system is going to survive for sure. In the short time we

have very quickly commercial real estate. I saw an Orange Country shopping while having challenges in the last twenty four hours. Is commercial real estate the shadow you're concerned about. Well, when interest rates go up, commercial real estate values and other real estate values typically go down. So we've seen that impact right now. I suspect there are going to

be some dislocations in commercial real estate. But this has been going on for a while because ever since there was the tech bubble burst that we saw about a year or so ago, real estate has been challenged and his interest rates have gone up. Real estate has been challenged, and I think the real estate developers are sensitive to this. I don't see a widespread collapse in the real estate market at all. I think the real estate developers have

been learned their lessons from ten years ago. They haven't made personal guarantees the way they used to, and I suspect that the industry will will get through this. David, appreciate your time this morning. I expect to have a different conversation, but things are moving fast. Well. Next time we'll talk about my interview with I'm interviewing next week Jane Fraser, who is to see City Bank, and I'll be doing that interview for Bloomberg and for others. So

thank you, very cool, David, Thank you David Rubins. Done there of the Carlisle Group, And just a programming note for you. You can watch David's interview with the former COMMA secretary and PSP Pontis Chairman Penny Potzka on The David Rubinstein Show, pats A Pack Conversations tonight nine pm in New York, humbling By TV. Joining us now with wonderful perspective as we had David Rubinstein earlier and Doctor Rubini. Lisa Shaalott joins the chief investment officer from Morgan Stanley

Wealth Management. It would be inappropriate for her to speak for mister Gorman and the executives of Morgan Stanley activity in the last four hours. Lisa, I must ask, because you are with wealth Management, how do you contain the phone calls? How do you contain deposit inflows of a

certain flight to quality? Look, I think the most important thing that we're talking to clients about right now is getting folks to understand the difference between what happened in the Great Financial Crisis in two thousand and seven and two thousand and eight and what's happening now. In two thousand and seven two thousand and eight, we had a massive credit problem. Hi, there was a quality of credit,

default risk set of issues this go round. The assets that need to be revalued are not you know, mortgages and real estate. Uh, they are in many cases you know, sovereign bonds of governments, and those are very different things. And so, you know, for the handful of banks that have found themselves in a situation where their funding model on the asset side of their balance sheet, uh, you know, needs to be or should have been more aggressively marked

and risk managed. That's really the issue. What is fascinating here is the role of psychology. Right when you get bank runs, when you get depositors starting to worry about uh, you know, the integrity of their deposits, that is a

very different, very different dynamic. And I could suggest to you that there is a scenario where, you know, the situation at Silicon National Bank did not have to happen if all of the folks who were the major deposit holders, who were major holders of loans there, who are major account holders, didn't suddenly en mass decide not only to all withdraw at the same time, but to literally put

that on social media as an action. Uh. You know that we are living in very very different times and we have to kind of understand how important it is the role that regulators play, the role that uh, you know, capital reserves and capital buffers play, and how important you know, having the integrity of those RUSS tests is and so we talk about, you know, there are the halves and you know, the less halves, and the folks who have really been put through those pieces and those stress tests,

and the folks who have been allowed, because of their size or their organizational structure to perhaps experience you know, quote unquote a lighter touch of that regulatory oversight. Lisa, there is a back of the envelope conversation happening right now. Maybe it's too simplistic, but it goes a little something

like this. After what we saw develop in the United States last week, the focus quickly went back on duration risk, the mismanagement of interest rate exposure, interest rate risk, and Lisa, because of that, I think, given the losses you've seen in treasuries over the last twelve months, people just instantly said, well, wait a minute, what about Europe and what we've seen developed there in the last year. Lisa, can you speak to that? Yeah? Look, I think you know this is

a huge wake up call. It's a wake up call however that that shouldn't be a brand new thing. Um, you know, understanding if you're going to own financials, if you're going to be an investor in that sector. Uh, you know, understanding the funding model, Understanding you know how a bank is generating uh, you know cash flows to pay depositors and to attract depositors is a key part of your fundamental analysis. And so there's an element of this,

you know where where this is less about immediate contagion. Again, remember in the Great Financial Crisis, there was a lot of this that was about you know, cross counter party credit risk. That's not what this is about. These are about individual banks who potentially have not you know, we're overly aggressive in funding themselves out the curve, uh during

an episode of central bank tightening. And you know that is a you know, one could say, you know somewhat you know economics one on one, and so I do I think that there may be some other mistakes out there, Yes, I do, But I do think that the systemic if your connection of them, is very different than in two

thousand and eight, twenty two thousand and eight. Just quickly, Lisa, given that perhaps you don't see the systemic irrelevance in the same kind of way as two thousand and eight, do you still think that it's important for the central banks to hike rates to combat inflation, to make sure that inflation doesn't get out of hand in the longer term, or do you think that there is enough breaking that

it's time to pause. Unfortunately, you know, I have worried about central banks being late to the party on this inflation challenge. I think that if central bank credibility has a chance of being preserved, I think that the FED, especially UH and then secondarily the ECB needs to continue

on their tightening campaign. They need to make clear as they have what their intentions are that their goal is to fight inflation, to defend the integrity of you know, these fiat currencies, and not doing so has much longer term structural damage to the economy in terms of inflation risk premiums, overall policy term premiums and turns into higher for longer rates over long periods of time. So you know,

look for the FED. You know they're they're out. Is that, you know, the regulatory and examinatory part of the FED is separate from the central bank operations open market operations. They've got to kind of stay the course, in my humble opinion, and I think to do anything else at this juncture at least would really be a missed up, Lisa. Thanks for BAM with us. Lisa shout at the Mulkin Staney Wild Management. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify,

and anywhere else you get your podcasts. Listen live every weekday starting at seven am Eastern. I'm Bloomberg dot Com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can watch us live. I'm Bloomberg Television and always I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keane, and this is Bloomberg