Bloomberg Wall Street Week: Capito, Palmisano, Mallaby

David Weston from Bloomberg Radio. The game stops, circus moves on, and investors turned to hopes of more help from Congress and of more vaccines on their way. This is Bloomberg Wall Street Week. I'm David Weston. It seems as if everyone in America with access to a microphone has been telling us this week with stunning hindsight, precisely why the Dow Jones industrials took a record five d eight point

twenty two point six percent NOS dive. Monday time alone will tell whether Black Monday enters the history book as the day American confidence was so shaken that a premature recession resulted. That was Lewis Ruckiser on Wall Street week

back in seven after Black Monday. Markets have been shaken again over the past two weeks as Reddit Day traders boosted shares of companies like game Stop and sent short selling hedge funds running, with long short funds losing six percent overall last month and Melvin Capital alone plummeting fifty But most hedge funds emerged unscathed, and Steve Cohen's point seventy two even attracted one point five billion dollars in

new money. Here's SWIFEI Ramachandra, gam investment manager. I assume hedge funds are probably reluctant to short small cat stops right now the fear that the Reddit brigade might be behind those. But by early this week, Game Stops to the Moon rallies started to come back towards Earth and not even the Reddit flash mob or changes at the top of the company could get the irrational exuberance going again, reminding us why hedge funds and short sellers target companies

like Hi Stop. The investor that gets caught in the updraft on that and doesn't understand that investing while it looks like it's all going up. Did the person who clicked the last by understand that could happen to them that quickly? That's former each read Financial CEO Carl Rossner. I asked counsel on Foreign Relations Senior Fellow Sebasha Malby, if anything will fundamentally change in the hedge fund world.

I don't really. I mean, I think that hedge funds, which of course go back to the sixties at least, have proven to be an amazingly robust platform from which to think creatively about risk um and so they adapt, you know, they get new, stuff gets straight in their ways. When they began, there was no such thing as trading currencies because currencies world fixed together on markets hardly existed.

You had to trade stocks by appointment. And they adapted all the way through that as everything changing, fintech um, the advent of Reddit, the advent of robin Hood. This is just the latest iteration in a long, long history of financial innovation. And every time hedge funds figure it out, you also have regulators trying to figure it out, as

it were. After the fact, we have the Treasure Secretary Janet Yellen now saying she's meeting with regulators saying we need to take a hard look at this about the volatility and whether this might actually put in jeopardy some investors. We also have hearings in Congress coming up. Do you expect there might be some tweaking at least of the regulations.

I think with respect to robin Hood and the fact that it had to close down access to trading on certain stocks, that's the kind of market interruption which regulators ought to take action on. Um. You need the infrastructure of trading to be reversed, you you know, you need to look at the plumbing, as some regulators put it. UM So, I think that part of the system will definitely deserve a fresh look. What about on the short

selling side. There have been proposals, as you know well, for short sellers to have to disclose their positions individual positions, which is done as I understand in Europe. Do you think there might be a renewal of that call. And by the way, why do we have to disclose on the long side and not the short I'm not sure actually that hedge funds do disclose on the long side unless they buy more than that disclosable threshold. I believe it's five percent or something of the company, So you

can get away with a lot without disclosing. Um. I think you know, when you are taking a really big position, probably there's a it becomes a systemic threat to you. You know, you might blow up if that position were to go very badly wrong. And so regulators who care about the sundus of the system everall have a legitimate interest. But I think, you know, small positions shouldn't have to be disclosed. But we certainly had some large hedge ones who took a big head, uh, And I wonder whether

they did suggest it could be systemic risk here. Well, the beauty of hedge funds is that through their long history they've proven to be small enough to fail, not too big to fail. They actually can blow up, and people often cite long term capital management as the big except actually, if you go back and look at that incident, the New York Fed convened the banks to recapitalize it,

but no taxpayer money zero went in. So free standing hedge funds I'm not counting here the subsidiary of bare stones that went wrong in oh It, But free standing hedge funds have never had a taxpayer bailout. Melvin Capital has not needed a taxpayer bailout. That's the good thing about hedge funds. That's one of the ironies you point out in your Wash and Post column. Actually that aunt Reddit people were saying, look at the government bailed out

these hedge funds. In fact, they didn't get bailed out in two thousand eight, two thousand nine at all. Pretty much everybody did edgy and ensure all sorts of broker dealers like you know, Best Stands and Lehman Brothers went wrong. The money market sector, the whole thing went wrong, But there isn't an example of a free standing hedge fund that needed a bailout. You mentioned robin Hood and its role in all this, and the fact that it had

to curtail trading at one point. Is there room for requiring larger reserves coming out of to those nature As a nine, I think it's fair to say the banks had to have larger reserves to protect the system overall. Did this suggest that, particularly when you come to things like sort of flash mob phenomenon in social media, maybe the broker deals have to have larger reserves. Yes, I do think that, and I think particularly the newer brokers like Robin Hood which have emerged on the West coast,

or fintech. They're not a kind of traditional Wall Street firm. And those guys have often grown so quickly that the regulators are behind the curve. And so I think that is the legitimate, you know, focused for for the government. Thanks to Sebastian Maloby of the Council on Foreign Relations coming up. Big tech gets big earnings, but that doesn't keep Jeff Bezos at the helm of Amazon. Sam Pomisano ran IBM and he says it's understandable. That's next on

Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week. David Weston from Bloomberg Radio. The Everything Store is getting a new CEO. Amazon's founder Jeff Bezos is stepping down as CEO to become executive chairman later this year. Here's company's CFO, Brian Olsofski. I will reiterate that Jeff is not leaving, he is getting a new job. Over the last twenty five years under bezos leadership, an idea for an online bookstore evolved into a one point seven trillion

dollar company that changed the face of retail. Like many Silicon Valley success stories. Amazon started in a garage after Jeff Bezos left his job as a vice president at df SHAW in in the late nineteen nineties. The startup expanded its offerings from books and music to include consumer goods. I emailed a thousand randomly selected customers and asked them, besides the things we felt today, what would you like

to see us? So remember one of the answers was I wish you sold Winshield wiper blades because I really need Winsfield wiper blades. And I thought to myself, we can sell anything this way. That's Jeff Bezos in two eighteen. Even after Amazon went public, it failed to turn a profit until two thousand one. Bezos business model of keeping inventory low and selling products for low prices save the company during the dot com bubble. Even his peers like

pets dot Com went bust. Here's Scott Kessler from Third Bridge. He obviously is going to have huge influence still, but it's going to be more from a vision and strategic perspective. Bezos returned to his passion for books when Amazon released its first Kindle in two thousand seven, changing the way people read books while building an e commerce empire. Bezos also wears a couple of other hats, as the owner of The Washington Post and founder of the space company

Blue Origin. So I think it leaves Jeff Bezos able to concentrate on building rockets and the things that he wants to do with someone at the helm that he can really trust. That's Melissa Burdick, the president of pack View. More recently, Amazon's profit and has been its cloud computing arm, Amazon Web Services, which launched in two thousand three, AWS accounted for six of Amazon's operating income in making Amazon

the world leader in cloud computing. And so it should come as no surprise the Bezo successor will be the man who runs AWS, Andy Jesse. Here's estimized CEO Lee Droken. I think this makes total sense. I think it's underappreciated just how amazing and innovative and important to everything that goes on basically in technology today that AWS is and was Wall Street We contributor Sam Paul Maisano ran IBM, and he says it's understandable that Jeff Bezos has decided

to make the transition. Well, it's not really a hard thing to do, I mean, especially when you've built the company. I mean one thing, I was nine to ten years of CEO and I grew up in IBM. I love IBM obviously, but it wasn't mine, it wasn't my creation. It was the Watson family. And so if you're the founder like Jeff, I can imagine it's a very very difficult decision to make. However, at the same time, he's really not leaving the company because he's still executive chairman,

so he still has a role. But at the same time, his role the company is really different. The company is different at this point as well. It's not at this Mete York rise that it's had. It's now getting the siege by the government. Yeah, well that's exactly as quite interesting as you know. And the same thing has happened

to other companies. We've talked about Microsoft, IBM, A, T and T, and it's I would I look back when it comes with success, I mean, when you're that successful, when you get that large, people are going to come after you, and usually it's your competition quite honestly. But then they lobbed me the various government entities, and then politics takes over and then you find yourself on these difficult situations. My experience, the founders have a very hard

time with that. They can't understand how that could happen. I'm not saying that's the case for Jeff, but my experience with both talking with Bill Gates and spending a lot of time because I support Mr Watson Jr. As when I was executive assistant to the chairman and the CEO of IBM H and I had firsthand conversations with him, so you could see as a foundery that was a very hard thing for him to psychologically cope with. Well, I mean, you ran a big company that was under

siege from the government. Is it possible not just for psychological reasons, is not not as much fun to defend? But also for the stake of the company. Is it better to have somebody a little more detached where it's not literally their child. I think that that is that's the way to think about it. I mean, basically what happened in IBM's example, UM and I spent a time with Tom Watson, and I was Frank Cary who became chairman,

and then John ople who became CEO. But Mr Watson uh made a decision and he was still the founder in the majority shareholder, but made a decision that Kerry would become chairman and worked with the government and try to resolve the suit and John Wan around the company. So there really was kind of a division of responsibilities. I think that's really really important because it's really hard not think it distracted if you look what happens long

term over these suits. IBM, we missed the thing called client server. Microsoft obviously did extremely well there. Microsoft missed the Internet, you know, And I think it's distraction. I really think a lot of that is because when you are the CEO and you're also dealing with the government suit, between the legal pressures and the advice you're getting from counsel and how you should proceed, how you should set strategy, the company gets distracted for a period of time. In

our case that was almost ten years. Of Microsoft's case, I think it was more than ten, maybe twelve. A T and T you know, that happens, and then as a result of that, you missed these big technological shifts. One of the things that no one's been distracted from is the cloud. The dramatic rise in the cloud, including an Amazon not loomed Amazon. It's probably no coincidence that the person is succeeding Jeff Bezos really was running the cloud operation at Amazon. What do you make of that

change in technology overall, that huge move into the cloud. Well, it's interesting because if you if you think about where Amazon began, there was an engine, apes and books on the internet. Basically right now they're the largest provider of cloud services to AWS, which you know, as you knew

Andy was running UH at Amazon. Now having said all that, um, it's a huge transition of the infrastructure, I think I think you might find of interest is that if you look at the most recent CEO appointments over the past

couple of years, they all have cloud experience. Amazon, Google, Microsoft, IVM, right, So that indicates that the the leadership of those companies have concluded that the skill set required for the future is someone who understands those technologies that are going to transition those companies and those business models into this cloud ear and put on top of that, artificial intelligence is the compounding of both of those things. But all those

people have those backgrounds. So I think there's a it's an interesting pattern and emerging here becomes the leadership of these tech companies. We've already seen dramatic growth in the cloud business overall, just the business growing. How far along the curve are we, I mean, how far are they from it being a matur of business as it were. It's very early stage. I mean, it's been going on.

I'm going to guess ten fifteen. If you get back to the early days of research and I was still working back then, a lot of this stuff was in researcher and academic institutions, and then it went from simple things like application development to actually doing production work, you know, real work the companies do in their core in a safe and resilient way. So now it's going to go

beyond that. It's going to support all these advanced technologies as far as application I mean obviously artificial intelligence and those sorts of things. That was former IBM CEO Sam Pomisano coming up the prospects for another round of fiscal simulus. Senator Shelley Moore, Capital of West Virginia, says Democrats are committed to getting it done one way or the other. That next on Wall Street Week on Bloomberg. This is

Bloomberg Wall Street Week with David Weston from Bloomberg. Rady President Biden pressed his case for another one point nine trillion dollars in stimulus money to support the U. S economy, including meeting at the White House with ten Republican senators who have proposed a compromise package that would get bipartisan support. We talked with one of those who met with the President, Senator Shelley Moore, Capital of West Virginia, for her take

on that meeting. He didn't make any promises, He listened intently, is very well prepared, and he seemed to be interested in particularly in the targeting numbers on individual checks in terms of do we really want to be sending checks to families that are making three thousand dollars a years whose life really have not changed. And so I think that was the biggest area that he signaled that he might make some make some adjustments, but that's yet to

be seen. There are some reports on the Bloomberg actually about the very point you just made that if you really look at the upper end before it really phases out, there are some people who are making a fair amount of money and as you say, maybe didn't lose their jobs. Do you have an approach in euro compromise proposal to deal with that, and did the President indicate maybe that

made sense that sort of approach. Well, what we did was we lowered the the income level of which you would be available to get a stimulus check to about a hundred and fifty thousand per couple, and we felt like in the statistics bear out that you're using this a stimulus, this is money. We went back into the economy and at those income levels where people really are hurting, maybe can't pay their rent, by their food, Uh, they

are spending their stimulus checks. If you get up into over two hundred or three hundred thousand dollars, people are saving it or they're not using it to provide that stimulus that we really need to keep this economy moving. And and also I think do we want, really want to be sending two expayer dollars to people who have

had really little or no effects during this pandemic. Talk about climate for a second, because President Biden has been fairly aggressive and executive orders so far, and your home state of West Virginia, do you envision a world in which you can redirect your economy into clean energy and actually keep the jobs or even increase the jobs. Well, let's look at what a state like West Virginia has

provided and provides for the nation. We have natural resources of coal and natural gas that we've powered this nation for over a century, and and we have a lot of great, hard working people. We're looking for stability and we're looking for easier transitions. We did not get that

in the Obama administration. The troubling thing to me is it's the same faces and the Biden administration, and that signals to me that they have no interest in taking into consideration the ravage that the policies reek on places like West Virginia. But we are transitioning in West Virginia to a more high tech economy. We're working as hard as we can to work with research and development to

keep those energy processes moving. But we cannot just drop certain people off of the ledge like that like we were dropped off over the last eight years of the Obama administration and think it's okay. Because joblessness, depression, rise in opioid and drug addiction, it's been really devastating for our state and tough for me to watch as a

native West Virginia. The Senate has other business it has to attend to with a trial of former President Trump coming up on impeachment charges, is there any prospect of his being convicted? And specifically, as I understand it, you were one of the Republican senators who voted to say, actually, it shouldn't even going forward because he's no longer in office.

So those people who voted that way, there's no way you're gonna convict him, and haven't said you shouldn't be having a trial, right, And doesn't that take care of the two thirds requirement? You know, I am charged as being a jour and I'm going to listen to what comes through on the appeachment trial. But I do believe, as I voted, that the Constitution says that you would

remove and uh and prevent the president from running again. Well, we can't remove an impeachment because he's not the president. So that sort of nullifies, in my view, the vision that the founders had and making it I think a strong constitutional argument that you can impeach a president who's already out of office. So I think a lot of us felt that way. I think it's gonna be difficult to convict, but we haven't heard the evidence yet, and I think I would reserve judgment on that the center.

I want to wrap this up by letting you brag on your state here a little bit, because your vaccination Rachel West Virginia are pretty impressive. What are you doing in West Virginia? What can you teach the rest of us? You know, what we're doing in West Virginia is we're utilizing all of our local assets. Uh. The governor has done a great job along with the National Guard, our local pharmacies, our city mayors and counties, our county health

departments have been fantastic. The federal government laid out a plan for vaccination delivery and and dispensing. We went away from that and created our own plan because we know each other best and so we have the best vaccine vaccine distribution in the country. We're proud of it. We have I think a a a away, a way forward for states to get more shots in the arms quicker, and that's what we're doing in West Virginia. We have

a vulnerable population. It is really important that we get those nursing home and assisted living folks taking care of First. We knew where they all were because we've been testing them. So it's just really been a logistical win for us. And we're really proud of it. What's I can to do for your economy because a lot of people are can Sara. If you can't get in vaccinaty, you can't

get people back out to restaurants and things like that. Well, our schools reopened about two weeks ago and uh, and you know, there's been some pushback like we see across the nation, but by and large they're reopened and that's big. Our restaurants are reopening. Uh. And as we get this back distribution, we get those double shots for the ones that need the two shots. I think by the time are a great tourism um season comes along in the spring. We have a great winter one two in the spring.

It's going to be great. We have a new National park in West Virginia. We were able to get at the end of the year, so we got lots to see. That was Senator Shelley Wore, Capital of West Virginia. Coming up, we wrap up the week with special contributor Larry Summers of Harvard. This is Wall Street Week on Bloomberg. This is Bloomberg Wall Street Week with David Weston from Bloomberg Radio. We're gonna wrap up the week as always with our

special contributed Larry Summers of Harvard. So, Larry, I guess the big news this week is about the stimulus bill at one point nine trillion dollars President Biden is proposing. It was thought it might be bipartisan. Now it looks like he's going to really push it through, no matter whether Republicans coming aboard or not. You were in the Obama administration when you went for a big stimulus package, and some people think you didn't go far and fast enough.

Do you agree with President Biden's approach that he's got to get this thing through. Let me just first say David that I don't think there's any question that in retrospect it would have been better if we'd done larger stimulus during the Obama administration. I think we understood that at the time the constraint read President Obama's memoirs, was

not an economic judgment. It was a political judgment about what could pass through the Congress, given the consensus that existed at that time, given where Republicans were, and given where Democrats like Senator Kemp Conrad and Iron Oregon and Nelson uh from Nebraska were at that time. So I think the lesson that we need more stimulus, um, we wish we'd had more stimulus, is really a valid lesson.

I'm not in a position to judge the tactics. It's certainly better to do things on a bipartisan basis, but negotiation is about leverage, and if the Democrats have no capacity to act on their own, they don't have much leverage in a bipartisan negotiation, and so if it's come to the point where they need to do it unilaterally, then that's where it's come to. So I'm not prepared at all to second guess UH that UH political judgment.

It's a political judgment, not an economic UH judgment, and it may well be necessary given the intransigence of today's Republican party. I think the really important issues, David Uh go to how we think about fiscal policy over the course of the whole year. And we need to make sure we're supporting demand, we need to make sure that

we're helping people who are in need. We need to take the kind of different perspective on fiscal policy that recent economic thinking about secular stagnation, about low rates has driven us to. But that's not a reason for blank checks. And that's not a reason why any amount of fiscal

policy organized in any way UM is appropriate. And I look at the fiscal stimulus under discussion, and with the one point nine trillion dollars, you're talking about something that, relative to the GDP APP is six times as large as what we did in two thousand and eight. And if that's what we're gonna do, we need to make sure we've got a contingency plan in case we get

a perfect combination of good news. The one point six trillion dollars and pent up savings gets spent, this fiscal stimulus gets delivered, COVID gets behind us, and people feel free UH to spend, and we have an economy that is literally on fire. And if that happens, we're gonna need a framework for UH containing things. And there may well be such a framework, but we're gonna need to hear about it from the Treasury Secretary. We're gonna need

to hear about it from the Federal Reserve chairman. The other question than I have is our economy had fundamental issues before COVID, the need for green investment, the need for investment in a totally decaying infrastructure, the need for investment and opportunity for every child in UH the country and the Build Back Better agenda that President Biden spoke

about so eloquently in the campaign. And if we've got fifteen percent of GDP and stimulus being delivered this year with nothing really that's in the Build Back Better agenda, the question arises, how are we going to fund that vital, build back Better agenda? And maybe the answer is will find a way to legislate it and find a way to pay for it through tax increases, and that could

be a very very positive strategy. But if not, we're using up an enormous amount of fiscal space, an enormous amount of political and economic energy on measures that are not building back better. And as I hear people starting to talk about making checks for most Americans into not just a one off but a regular fiscal policy, I become uh concerned. And so those are I think the questions that are going to need to be debated and

discussed as we come to a conclusion on fiscal stimulus. So, Larry, let's take a look at one point nine trillion dollar package. As you look at it, give me something you think is absolutely essential must go forward with. Give me something that's sort of nice optional, or maybe we even shouldn't do. Expending every dollar we can productively effectively spend is very very important, and we should certainly do it on COVID, on COVID cure, on vaccination, on testing, on contact tracing,

on epidemiological and biological research. Every dollar that can usefully be spent on something that's costing US tens of billions of dollars a week is an investment we absolutely should make as a country. Do we need to be providing my children with two thousand dollar tax credits? Do we need to be providing families in the upper ten percent of the income distribution with UH families of four with

eight thousand dollars in government cash? Should that be an urgent priority UM that comes before fixing the pot holes in the highways, that comes before green investment? I'm not sure, And especially since the political window is short, especially since the time to start implementing the programs is long, I would rather see US pivot much more quickly to building back better than see us UH in a position of using up all the energy and having the huge big

thing be UM. The provision of funding UM in a very general way, especially if that's a precedent setting thing that we're then going to feel pressure to continue going forward. So let's conclude with a rapid fire around him, Summer says, and pick up on something you just said, number one you referred to game stop if we end up with Robin Hood against the regulators in Washington, because the regulators are certainly going after this thing, who's gonna win regulators?

I think you're going to see a lot of attention two issues around manipulation and retail protection. I don't yet, I don't feel I know what the right public policy answers are, but I think there's a pretty pervasive and pretty valid sense that the spectacle of the last two weeks and the possible systemic risk that could have happened of another LTCM type situation in the last two weeks, that public policy should be working to avoid that. And

I suspect that we'll see new rules and regulations. We heard this week from the Bank of England UH and they didn't change any of their decision making, but they once again sort of had both ways on negative interest rates. We're not doing it now, We're not saying we're gonna do it, but don't be surprised we do it. At some point down the out when history is written, well, negative interest rates proved to have been a success or a failure. I don't think they're going to be remembered

as a great success. I think they're gonna be remembered more as a sign of desperation in a very difficult time. And people are gonna wish that we had used fiscal policy more actively, and so there have been less neat for monetary policy. Okay, Larry, thank you so very much for concluding the week for us, as you always do. That's Larry Summers, our special Wall Street. We contribute from Harvard. Finally,

one more thought. Everybody's doing it now. I'm not talking about buying call options on highly shorted stocks, or planning vacations for whenever they let us out of this cage that is our home, or even buying a COVID puppy. No, the craze that has truly taken over the country is this back that special purpose acquisition company. But going back in is a last resort for companies they couldn't manage.

An I p O. SPACs have become all the rage in this world of cheap money, low returns and volata markets that make it really hard to price a traditional I p O. If you're a private company on the rise, just raise the money without telling anyone what you want to buy, make a deal, and presto, change out. You have a public company where there was a private one. So if you're a former senior member the Trump administration,

what do you do next? Well, for former Commerce Secretary Wilbur Ross, you create a spack and whom you bring in to help you run it? Former Director of the National Economic Council Larry Cudlow. They've announced plans to raise three forty five million dollars for their news back. They haven't said what sectors they'll be looking at, although Mr Ross has always expressed interest in the privatization of space, and Mr Cudlow or Mr Cutler, as we know, knows

the media rather well. But in the end, maybe the price is right for a big private leisure and hospitality group, something like maybe the Trump organization. It would be one way to turn the table on your old boss. That does it. For this episode of Wall Street Week, I'm David Western, This is Bloomberg. See you next week. M