State Street CEO Ron O'Hanley Talks AI, Capital Markets

Bloomberg Audio Studios, podcasts, radio News.

We're with Ronald Handley, of course and head State Street. You're actually fresh off one of the inaugural panels here at the Milkin twenty twenty four conference, a panel that was ostensibly really about the future of capital markets, and I sort of wonder, what exactly is that future going to look like. A lot of people look at us right now and say, grown the precipice of something new.

Yeah, I would actually be much more optimistic about that. And before talking about the future, let's just talk about the recent past. I mean, if you think about what the world has been grow in terms of the challenges it's faced, and any kind of challenge in the real economy translates to the financial economy. So we've had a pandemic, a once in a century kind of pandemic, and we've also had ground war breakout in Europe. And if you think about how capital markets have actually adapted to that,

What do you think was behind that resilience?

Not to sound jingoistic, but I think a lot of it was the US led the way in terms of certainly in the repair of supply chains. I mean, what we were talking about in the middle of twenty twenty was the potential for this going on for four or five six years, and the rebalancing would take that long, and in fact really led by the US corporations, but also just large corporations around the world. Was really led by large companies figuring this out and saying, what do we need to do here.

You know, it's interesting that you bring that up, Ron because if you think about the pandemic, companies, global companies are rethinking their supply chains and that has led to a new kind of investible idea. Walk us through kind of the new investable ideas coming off of the pandemic and just a lot of things being different.

Well, let's just stick with supply chains for a moment. I think that, uh, maybe with globalization we went a little bit too far because supply chains became highly highly optimized with very little built in if you will, slack or for that matter, capacity for the unexpected. So what you're seeing now is really a much more resiliency being built in supply chains instead of having single.

Source, it might be a double source, criple source.

You're seeing some activities being brought to back to countries reshoring, and it's not so much a Those aren't political statements as much as they are you know what, we really ought to have a little capacity in whatever.

Country here in the US, here in Germany, here in the UK.

And then finally you're seeing opportunities being created by other for other countries right where it may be that a country like China had it all or had a large portion of it, and China is not going to lose everything, but you're starting to see other countries in Southeast Asia. All of these represent investment ideas.

We're seeing a.

Lot of more things shifted into like South America, Latin America. One thing I want to ask you, we were all focused this weekend over the annual meeting out at Berkshire. Hathaway and Warren Buffett Moore in saying Wall Street creating kind of a casino like atmosphere. He's talked about this before for investors. Do you agree with that assessment? Or how do you see it.

So I think there's a concern about market valuations, and it's really a concern about a relatively small number of companies that are seeing lots of valuation expansion driven by things like AI in the belief of AI. So a couple things I'd say about that. If you take the S and P five hundred index, right, which is cap weighted and each just equal weighted, you actually say it's actually not that overvalued. And by the way, there's opportunities

I'm old enough to remember the advent of the Internet.

And if you think about the mids of the late if you think about the mid to the late nineties, there was that same kind of excitement, same kind of exuberance around a few companies. The Internet was going to change everything, and it was going to change everything right away. And then nineteen ninety nine and two thousand came and we could find ourselves in a situation like that again. Because the hype of the technology oftentimes isn't met by the actual implementation of it.

So if you ask me, what do I believe?

I think that artificial intelligence and all of its forms will be a fundamental, fundamental game changer for many industries. Is it going to happen overnight and is it going to kind of reflect the valuations that you're seeing in a few companies? Probably not, None of these things wherever straight lines. I remember it was the Internet's going to change everything. Ninety nine and two thousand came, we realize there's a lot of stupid companies out there.

Why do we have these companies?

And then ten years later it had changed everything, So it was really not a It wasn't an if it was a win, we might see the same kind of thing in artificial intelligence.

Another big change out there is the importance of the retail investor. Obviously, State Street has kind of made its bread and butter in the institutional space, but you made a lot of big strides right now in the ETF space and more products targeted towards the retail set.

Is that going to continue?

Well, I think it needs to continue because and that's typically the way things have worked over time. I mean, if you think about going back, the mutual fund is one hundred years old. Now, right before the mutual fund, it was only the very influence that.

Could participate in these markets.

The mutual fund made it enabled it for the retail investor to do that, where the big gap now remains in privates. I mean, if you think about just private credit, for example, private credit represents half of all credited origination in the US, yet the ability for the retail investor to participate that is low.

So we do have to think about this and where.

The real unmet need is in my mind as it comes to the democratizing of privates is in the retirement space. I mean, we're all defined contribution investors. I'm sure you do the same thing that I do. I think about it once a year, you set it, and you forget it. That is the definition of somebody that ought to get an illiquidity premium.

So in my mind, some of.

The biggest reform that needs to be made is how do you enable the incorporation of private investments into traditional defined contribution vehicles?

But do you think regulators will allow that?

So I think it's a combination of regulators. But it's also right now if you think about the average defining contribution trustee. What he or she is worried about is being sued and being sued for the products are inappropriate or the fees are too high.

Fees by themselves don't mean anything. You have to look at what's the after fee.

Return over time, and that's where I think the analysis needs to be done. And I fear that we're in this situation that the over concern about lawsuits, that retirement trustees are too reluctant to actually incorporate these products into their real simple and kind.

Of playing off of what Remain is saying, like, is there enough transparency in the private credit world or the private space at this point for you to feel comfortable about it kind of being available to a lot more investors at this point in reachail investments.

And that's a legitimate concern.

I mean, I think there's plenty of transparency for the core investors now for the institutional investors, and right now technology is enabling to look through into portfolios. I mean, we actually provide some of this technology institucial investors where they may be LP investors in ten twenty thirty different LPs, and we're enabling them to look through. We have to make that kind of technology available to the retail investor too.

I have another question though, on regulation.

You got dragged before Capitol Hill with the other big banks els. I think it was back in December. There's a lot of talk about the Basil three end game, the additional capital requirements, and most people think are going to come. You guys seem to paint a pretty bleak picture if those rules, at least as written now, go into effect. Do you still feel that way?

Well?

I think if you think about what Buzzle three end game is about, it literally is an endgame on a process that started well over a decade ago to basically.

Level the playing field.

I think some of the rulemaking in the US lost sight of that and became focused almost exclusively on what should we do about raising capital levels and banks?

And I think there it just needs.

To be done around one with an eye towards what's happened in the past, and.

Two, what are the new risks that we're facing so mean?

And I think the FED understands this and the talk of reproposal is probably right. And remember the world changed even as this rule was coming out, right, because we saw the activities in what happened a year ago, back in March Apriol of last year.

You know, we're seeing what's going on in commercial real estate.

So I think they're likely should be and needs to be a leveling up amongst different kinds of banks, and we should take a hard.

Look at capital and liquidity.

But it should be done in light of everything else that's out there and already been done. Remember, we've been regulating and reregulating the large banks in two thousand and eight and appropriately, so there are actions that happened that needed to be changed.

Well, you know, I'm listening to you and I'm thinking to me slide into that the private credit world. But like I do, think about, what are the requirements that they have to just incate something comes undone. Everybody says, well, it's on them, but it isn't ultimately, especially if it's a risk ultimately potentially to the financial system.

So the way I think about private credit is that.

If you're entirely reliant on banks for the extension of credit, banks, by definition, given the way they work, they're concentrators of risk. Right, you make a loan, you make another loan, you make another loan. Sometimes for the sector so they're concentrators of risk. And that's why risk management is so important. That failed

Play that role.

But how does workout work if it's private credit and distributed amount a number of limited partners. So and we have to think about this. Ben Bernanke wrote his doctoral thesis about why did the depression last so long? And his theory on this was so many banks failed that in fact, the loan failed, the borough failed, the bank failed, there was nobody there to work it out to lift the business back up and get it going people. Basically, it dispersed businesses and a lot of capital assets just