Transcripts For CNBC Fast Money Halftime Report 20160929

Demographic or socioeconomic characteristics of the people being served . First of all, and i dont know im not trying to be careful on words here, i dont know what fraud exactly. I know whats right and i know whats wrong. I dont know what the intent of all these people were. But to answer your question specifically, there was no that i understand racial or ethnicity difference other than what the communities are, because we try to have people in our banks that represent the communities. So well take racial and ethnicity off the table here. As someone who also represents a district heavily populated by seniors, im worried that wells fargo may have intentionally preyed upon those they saw as vulnerable. Do you believe seniors were purposely targeted as a result of employees stretching to meet their sales goals . In fact weve looked at because we actually capture data so we could tell that and, no, there was no disproportionate it did not in fact it was younger people, not seniors. If there was any emphasis at all or any all right, another day, another grilling for wells fargo ceo john stumpf, as you see there. Were going to take you back washington, d. C. Inside that hearing room at some point during the Halftime Report today, but just to get you caught up, mr. Stumpf has been there all morning long saying there was no orchestrated effort or scheme in that false account scandal. That he will not rest until the problem was fixed. He was also forced on multiple occasions to defend some stock sales around the time of the disclosure of that scandal. As i said, well get to wilfred frost who has been there for the entire time. As you see at the bottom of your screen righthand corner, s p down 4. 5 points. The Dow Jones Industrial average down by a little more than 39 points. Right at 18,300. Theres the s p call, as i said, and the nasdaq as well, which is down a bit more than 22 points. That is nearly onehalf of 1 . Thats where the russell 2000 is. As i mentioned, our own wilfred frost covering this story from the outset inside the hearing room has jumped outside now. Whats the highlight . Reporter the hearing started actually pretty well for mr. Stumpf. The questions were calm, his responses much better than last week, fairly considered highlighting a few key points. You mentioned some of them. He also got across the point that that 2 million of fake accounts may end up being some 75 low once internal investigations are finished. He also revealed its not just executives but also the whole board that are facing the internal investigation. Though sadly for him, that wasnt enough to stop the temperature rising soon after. The whole board needs to go. If theyre going to allow someone to be in charge when time after time you just talked about you fired 5300 employees. When you found out that they are doing something wrong. They were fired. Because they were doing something wrong. Well, something is going wrong at this bank and you are the head of it. So shouldnt the board then turn around from your own admission, if the buck stops with you, as you came out here and said i apologize, the buck stops with me, and you have to also admit that criminal activity was going on in your bank, then you should be fired because it stops with you. In his defense, mr. Stumpf wasnt often given that much time to respond to the questions, or perhaps i should say the statements that he was facing. Often words like felon, criminal, fraud were used pretty liberally. Lets remember the investigation did not prove any outright wrongdoing. Either way, the pressure as you saw there intense. Not just on wells fargo, on other banks too. We have institutions that are too big to fail. In 2008 we found they were too big not to bail. Eric holder has told us that they are too big to jail saying that he fears for putting them for bringing a criminal indictment. We now learn that theyre too big to manage, too big to regulate, its time to break them up. Now, we were told today that mr. Stumpf facing the questions today, this would be a shorter hearing. As you well know, it continues. Thanks so much. Wilfred just outside the hearing room. Lets bring in now mike mayo who joins us on the phone from london. Mike, welcome back. Thanks for having me. Does stumpf survive this . Its tough. My takeaway about the banking industry, you heard the phrase crossselling mania and crossselling bubble as it refers to the industry. So what i think happens here is if you dont want people in Bank Branches to offer products, extra products to customers, i think this accelerates the transition from physical banking to virtual banking. What i mean by that is there are 90,000 branches at the start of the decade. Theres 87,000 branches now. And its possible that if the industry reduced branches back to the level of the 1950s, and thats relative to households, youd have a reduction in 35,000 branches and 200,000 jobs eliminated. So be careful what you wish for. Be careful about the unintended consequences. Again, if the goal is not to have the branch employees, you know, offer more products and they arent as productive, obviously you always have to be within the law. Right. But i think this will accelerate the stream lining of the Branch System in the United States. We dont need 87,000 branches. That would help improve efficiency and reduce pressure on the branch employees to sell, if thats the goal of the regulators. Let me get back to the original question, if i could, mike. Are you modeling now for wfc without stumpf . I will say im shocked last week that the ceo didnt answer three key questions and why did it take place so long, why are the checks and balances, and what are the repercussions. You know, the clawback certainly hurt, but i still think wells fargo could and should do more. Fire the head of the committee on the board in charge of human resources. Fire the head of the committee on the board in charge of customer relations. Go ahead and do a little bit more for the customers that were impacted and better define the culture. Hes made some attempts today, but better define why its still a great culture and how these crosssell mishaps could still happen. Does buffett hold the key here . There was a story written by doug cass saying among other things mr. Buffett had spoken to the board directly, he expressed his own satisfaction. Becky quick spoke to somebody directly in buffetts office and reported that news in the last half hour or so. Does buffett hold the key once in fact he does speak publicly . Well, as the largest shareholder certainly can sway things one way or another. Ive been talking to many of the largest Institutional Investors too, and some people say, you know, john stumpf has to throw a hail mary to survive. Other people say, well, maybe he can still make it. Id say as of this point, its a tossup. They have to come through with more, you know, repercussions for management and the board, i think, for him to survive. Mike, i appreciate the time. I know youre trying to catch a flight, but thanks for spending some time with us. Pete, what do you do here, wells fargo . Well, i think the difficult thing is whether we like it or not, whether its deserved or not, im in the camp that i think that hes probably under going to be looked at as somebody whos going to have to go, scott. This is nothing like the financial crisis. He has not put this company in jeopardy in terms of leveraging them like we had seen in the financial crisis. As a matter of fact, this was the name everybody pointed to, including Warren Buffett, as the clean bank. So is this black eye enough . Unfortunately, it might be because its turned into a bit of a witch hunt. If he goes, do you need to rethink the way you look at wells fargo as a company for all of the things it has done, the growth that its enjoyed, the image that it once had under stumpf . This puts a tarnish on the image, theres no doubt about it. But i think this is a small blemish relative to what the rest of the banks did. I think if you go back to the financial crisis. So for that answer, i think the interesting thing is does the stock go a little bit lower because of this and because of whats going on . It probably does. I think this is a lot different where we are a week later is a lot different than a week ago. Steve, how do you view this . Look, stumpf has done a great job. If you take a look lets go before this and i remember talking about this beforehand. If you take a look at any of the financial metrics and if you go back to 08, they were the best run bank, period. And the market gave them that multiple. What were seeing here in terms of whats being alleged and what they have admitted to is its disgraceful. Its a very large company. We see this kind of behavior in even the smallest company. However, whats really disgraceful is the way congress is doing it, just grandstanding in election season. That aside, i think stumpf should stay. We cant judge him on his performance which was less than optimum in front of Congress Last week. Im saying he should stay. So companies have a process. And the process stakes longer than how the media or congress would like it. So we havent let them go through that process. Think of all the ways it impacts the culture and impacts the bank. This is a small part of their business. I think if were done behind closed doors wed have a much different outcome, much different view. Lets view it through the prism of an investment decision. Stock is at 45 and pretty much hasnt budged throughout the day other than a little volume pickup during beckys report on what buffett was thinking according to someone in his office. At 45, can you buy the stock today . If stumpf loses his job, how much risk is in that number . Theres a bench behind him. I did the analysis on it. Theres a bench behind him. Its a culture. Its a culture that not one guy was running it. You can snicker if you want. I am snickering. You can look at a microcosm of it and that is it. The fact is they stayed out of europe, they stuck to their knitting. They run risk exceptionally well across all product lines. And by the way, they have had the only a Credit Rating, jpmorgan was a minus. Banks are too big, theyre all too big. Have we all lost our minds . This isnt obvious . This has to be explained . You have an organization this size with this percentage of the american publics deposits, with this percentage of the Customer Base, with this number of employees in offices doing all these things . Hold on, hold on. Different question. Lets say stumpf is a great executive and he should survive this because of the things steve mentioned and all true. At the end of the day it doesnt matter because the bank is too big and cant be managed. Jamie dimon is the best and that can go on under his nose. It may be too big to manage in your estimation. Is it too big to investment in . No, no, no, it is demonstrably too big to manage if upwards of 5,000 employees are implicated in whats essentially the largest, in my opinion the largest case of identity theft. Literally taking someones Social Security number and opening up now, youre not stealing from them, youre generating paperwork under their name. But at the end of the day if this can be overlooked, lets say its not stumpfs fault, lets say theres a culture. The bank is too big, theyre all too big. I dont think that any person, dimon, stumpf, can actually manage an organization of this size. I dont think that we should have Internet Companies either because yahoo was able to hide that massive fraud for so many years. To your point. Im not sure what were getting at here. I dont think yahoo is systemic financially. Scott, come back to your question. If something happens to stumpf, i think one of the issues is wells fargo investable today at 45. I would not be investable today for the reason that the perception right now is that the culture there, there is something wrong. If stumpf leaves, until somebody comes in to clean the house and bring new management in, youre going to have this perception that things can still go on, right . It wasnt just one or two people, there was thousands of this happening. Lets jump back to the hearing now. Theres congressman fitzpatrick questioning john stumpf. We have a nonretaliation policy on whistleblowers. Being fired in the federal government for being a whistleblower is a very serious matter. Hopefully youre taking it as seriously as anybody else would . Were taking that very seriously. We have a nonretaliation policy. Time of the gentleman has expired. The chair now recognizing the gentle lady from wisconsin, miss moore, Ranking Member of our Monetary Policy and trade subcommittee. Thank you so much, mr. Chairman. I want to welcome our witness here today. Ive learned so much here. I know when you go to the wells fargo website, there your picture is, john g. Stumpf. The vision and values of wells fargo. And it features you. You say that you started with wells fargo in 1981 . In 1982. 82. Okay. My math is not that good. And you you succeeded mr. Kovachevic. So you were trained and you knew what the culture of this nor west company, i guess that was the merger of wells fargo and norwest. And so did you receive training or do you know if the employees received training on this going for Great Program that weve talked about here today where, you know, most of your customers only had five accounts in your bank and that there was an effort to get at least eight sort of accounts for the customers . Was that part of the culture . Thank you for the question. As i mentioned before, that was an aspirational goal. Most of our customers had 14. I dont have much time. And so as your predecessor noted, there is just abundant Growth Potential in the wells fargo Customer Base and that one of the sayings around that place was, hey, we expect what we expect. So were there constant monitorings to see if people were meeting these goals . It says that we expect what we expect. What does that mean . We expect our people to live according to our vision, our values, our ethics and our culture. If they dont i am so happy. Im going to congratulate you on draining the swamp of these 5300 low level employees because they almost brought down one of the greatest companies that our country has ever known. I remember wells fargo, the old wagon train days. So im happy that you got rid of those employees. And i am sorry for your loss, your 41 million. And im sorry for the loss of the investors whose stock dropped. But i am wondering what the relief is for one of my constituents, and i have her letter and i want to enter it into the record. She worked at wells fargo without objection. Okay, thank you. And she started making 13 an hour and she ended making 15 an hour. She was one of those whistleblowers who complained to the manager and then they changed her performance numbers and pushed her out. And so shes a person that lost their job and other stuff that happens to you when you make 13 an hour. 15 an hour, im sorry. And youre pushed out by people because you dont want to because you dont fit in with the expectations and the culture. What is the remedy, is there a fund for these employees, the good ones, not these 5300, you know, what was it, 12 an hour, 13 an hour employees. What is the remedy for my constituent at wells fargo . We want to know about every one. And were going to review their files for anyone who had anything to do she has a case with wisconsin equal rights division. How come she couldnt just come to you and tell you and we have people that she can talk to. No, the people she talked to fired her. We have Corporate Resources here. If you could give me that name, congresswoman, let our people know let me ask a question. I have 49 seconds. I was very disturbed to hear about, you said that the numbers were just not large enough to rise to the level of being material for security law purposes. I guess i dont really i dont understand that. Would you as an investor invest in sort of the Bernie Madoff type enterprise this seems like it was, these huge dividends, would you make this kind of investment yourself . This is not any this is a Quality Company who made some mistakes, but our investment thesis is all about our capital, our growth, our revenue i just have nine seconds left and i want to ask this one question. You have stated that you think the doddfrank overregulates. Do you still believe that . Ive never said that. Oh, really . I dont recall saying that. The time has expired. Thank you mr. Chairman. Were going to jump away from washington, d. C. , once again and show you what continues to be a developing story, at least over the last 24 hours. That is on the righthand side of your screen now. That is the price of crude oil just breaking above 48. This coming yesterday really in the start after that agreement in algiers by opec to limit production. It sent oil prices sharply higher yesterday. They have just started moving higher yet again during this program, up now 2 . On that note lets bring in doug, the top ranked integrated oil analyst. He is on the phone with us today. Doug, welcome back. Hi, everybody. Do you believe in what happened in algiers yesterday . Well, somewhat. So lets clarify whats happened here because theres meaningful potential here. The first point is that, you know, opec has an understanding, which is not to be confused with an agreement, but if they hash out an agreement and reduce production by half a Million Barrels per day, then the implications can be pretty positive. The issue is that the devil is in the details. They havent yet determined production allocations, the direction of production response, the enforcement mechanism and these are the same hurdles and the reasons why opec has not had a functional supply arrangement since 2008. Simultaneously, the past few years of low oil prices have been very difficult for these countries and so theyre probably more motivated to deal today than ever. If they do deliver, then we think that inventories are going our projections for inventories decline by about a day in 2017 and lead to a Higher Oil Price for us from 55 to 60 in 17, so they have a lot at stake if they can get it right here. You have a buy on just about everything in your coverage list other than tesoro which is a hold. Whats the risk there . Whats the risk . Well, we do have a lot of buy ratings. We have been overweight, the group this year and were still overweight the group. The trying not to overthink the Investment Outlook for energy this year. We think were in the sweet spot of the investment cycle. We think the oil prices will rise, costs will decline and we have stronger capital discipline near term. If this continues to play out in the way that it has, well have pretty significant Earnings Growth in my category and thats why were still positive on shell, bp, exxon, mobile and chevron. So good for s p energy. If someone backed you into a corner and said whats the one name on your list that is a must own today, what do you say . We prefer shell. We really like the dividend yield and the Strategic Transformation that we hope continues to unfold there. If it does continue to unfold, then when you start with a 7 dividend yield, it can be one of the best stocks in portfolios if they deliver. Doug, i appreciate the time, as always. Youre welcome. Guys, what do we think . We think its opec. So its 5050 that they follow through. Do you like his stock pick . I do like it. I actually do like shell. Weve got some issues with exxon on the accounting and theyll have their own time in front of congress im sure at some point. But you have to look at opec and that iran is not involved in it. Plus also the cost of production in the u. S. Has come down quite dramatically because youve renegotiated the bonds, the high yield and the debt, so the Debt Service Payments are lower. So theyre going to keep producing. They have shown no signs of letting up. But i think youre at the lower end of oil prices so it sort of makes sense. Do you go xle and go broad . Ive got a dividend yield thats about 100 basis points over a tenyear treasury. I understand what my risk is. Obviously theres severe linkage with the price of the commodity. If it plunges, daytoday is a little bit less of a linkage and thats fine too. If i can get this up above 71, 72, technically its a breakout. So i feel good being in the space. I understand the risks. Im getting paid while i wait. I think its an attractive investment. Pete, for a guy whos in chevron and enjoyed 13 year to date date, conoco has seen 6 to the other side, what do you do with these stocks today . Im in both so i think you buy both. You continue to buy chevron . Yes, i bought chevron but i trimmed a little bit today. Im in the options there. We bought the 103 calls. There were 16,000 bought on friday. The stock was around 98. 5, Something Like that, and just around 102 yesterday. Its pulled back a little wit today, but were seeing all kinds of unusual activity in the world of energy and so when we see that, you know were going to attack it. Ive done that in conoco as well. Xle, i was in with josh for a very long period of time. I loved that trade. I took some of that off and took the rest of it off. Im out of that now i saved a seat for you. Im in the individual names so im in there essentially with you anyway. Im looking at our notes here and chevron is at a valuation thats more than two and a half times as big as exxon and bp. We dont think chevron is too expensive . I dont think so because i think what youre doing assuming this is right what im looking at. Based on what . 80 times forward pe. You cant go by that because theres so many moving pieces. The writeoffs im just saying it jumps out at you. You want to look at reserves, i think. Look at reserves but exxon is in the penalty box right now as weiss was saying. All of these companies will be looked at to see what is the value of their holdings. If oil starts rising, youll see the Balance Sheets improve as well. But i would be a little careful here because weve seen this story too many times with opec. You have a floor here. Thats an understatement. And potentially the ceiling is not that high because you have shell. Producers will come on at any point in time. If the dollar does strengthen, youve got that inverse correlation. Pete, you have unusual sticking with the energy patch, take a look at baker hughes today as a matter of fact. 10,000 in november, 52. 5 calls were bought. Thats a huge commitment. When youre buying 10,000, youre paying approximately a call at 1. 60 for these options. Thats a nice dollar commitment people are putting into the trade so its not just about the big energy names. Were actually now all of a sudden looking at the Service Industry as well. Im in there and will be in there at least a few weeks because theyre going all the way out to november. I like when we see this in a sector where theyre just coming after it, coming after it and they continue to come after it. I think its a great sign. Coming up on the Halftime Report well tell you why fitbit shares are down 8 . Plus the real state of the hedge fund industry. Well have a debate right here on this desk. Halftime back in two. The pursuit of healthier. It begins from the second were born. Because, healthier doesnt happen all by itself. It needs to be earned every day. Using wellness to keep away illness. And believing a single life can be made better by millions of others. As a Health Services and Innovation Company optum powers modern healthcare by connecting every part of it. So while the world keeps searching for healthier were here to make healthier happen. What would help is simply being able to recognize a fair price. Truecar has pricing data on every make and model, so all you have to do is search for the car you want, there it is. Now youre an expert in less than a minute. This is truecar. Welcome back. Lets get you caught up on how the markets look today. Theres the dow, 18,310. Its down about 29 points. Muted reaction across the street. S p is pretty much in the same spot. Nasdaq at 5301, loss of 17. 5. There are a lot of big movers, however. Lets show you a few of them. Intra Cellular Therapy sinking following negative trial results for its schizophrenia drug. Pepsi is in the green today, the stock up more than conag is up just about 8 . Can i throw one into this list . Yeah, go ahead. All the traders are talking about the transports right now. Take a look at iyt if we can get that chart thrown up there. You see this level at 144, 145. This is acted as resistance the entire year. Each time weve seen the iyt up there, weve seen it back off. Now its making another assault on that level. If that thing gets going, that could justify a whole new leg up for the dow industrials and a lot of areas of the market that are cyclical that respond to these types of signals, so i think thats a really worthwhile index to keep an eye on. Hasnt broken out yet but its on the verge. How about this on the face of oil rising. Unbelievable. Thats a kentucky poiy point. Anywhere else you want to go now . I was just curious. Do you want to do ebay . Its moving higher. Deutsche bank ups the shares to a buy from hold. What do we think of ebay. Anybody own that on the desk . I do not. I sold it after the paypal split. Sue herera has the latest headlines starting with that terrible train crash in hoe bowing hoboken, new jersey. This update, a developing story. A commuter train crashed into the station in hoboken, new jersey, causing serious damage. One person is confirmed dead. More than 100 people were injured, some of them critically. The station is a main transit hub for people traveling to and from new york city. The body of former israeli president shimon peres is laying in state at the Israeli Parliament in jerusalem. Israeli Prime Minister Benjamin Netanyahu and the president laid wreaths at the casket. Scores of world leaders, including president obama, will attending the funeral tomorrow. Turkish president erdogan hinting that the threemonth state of emergency declared following a failed coup in july might be extended to more than a year. In a speech in ankara, he dismissed criticism over his plans. On a lighter note, the iconic victorian home that was the setting for the 1993 film mrs. Doubtfire is on the market. The San Francisco home can be yours for almost 4. 5 million. The home was built in 1893. 4. 5 million and i think it probably needs work. Thats the news update this hour. Scott, ill sending it back to you. Well send it back to d. C. That hearing continuing with jau john stumpf being questioned by mulvany, the congressman from south carolina. And to subprime lending as ghetto loans. I cant tell you how hard it is for me to even say that. It targeted black churches. Im not going to defend that. That doesnt even deserve defense. Im going to ask you one question. Does this organization reflect you . Well, i youre in charge. I am deeply sorry and i read that article that you just said. That has no place in our culture, no place in what weve done, and we are today the largest lender to low and moderate income people on housing. We make more loans to africanamericans, latinos, persons of color and were proud of that. And that place and that kind of language and that kind of behavior is not who i am. I have learned my life lessons also from my parents. My dad is 94 and hes still a wonderful guy and still a big influence in my life and so is my mother. And i try to lead with courage and conviction. Our company is based on those values of ethics, of doing whats right, and the company of course weve made mistakes. Not everybody lives up to our vision and values, but the vision and values are 268,000 people aspire to and do every day is consistent with what i want to live my life and what our culture is of our company. Thank you, mr. Stumpf, i appreciate that. For the minute i have left i want to Say Something to my democrat colleagues. Who i know will see this and believe me if the role is reversed i might see this as an opportunity to try to push a political initiative, a political agenda, to bang the drums for more heavy regulation. Everything that were talking about here today, including what i just read, which i wont read again, happened since cfpb and doddfrank. It happened after we supposedly fixed all of this with regulation. And maybe i would suggest this. You cant fully regulate bad actors. Im not here in a position to say if mr. Stumpf is a bad person or not. I try not to be in a position of judging other people, thats for his board. I know how i would vote if i were on the board. He wouldnt even be here if i were on the board of that company. But youre never going to be able to fully regulate bad actors and i hope we look at this with a certain level headedness as we move forward. Thank you. The time of the gentleman has expired. The chair now recognizes the gentleman from colorado. First, mr. Chair, id like to introduce into the record the reports, Community Banking reports may 24th, 2016, from wells fargo. Without objection. And the report from may 20th, 2014. Without objection. Mr. Stumpf, about eight years ago you were before this committee and i was so proud of you and proud of wells fargo and the fact that i thought the guy has operated as a bank and really looked after me, a customer, somebody whos been with the bank. I mean all these young guys, ive been with one of the predecessor banks for 40 years. Thank you. And i represented some of the predecessors. First interstate, security pacific, united. The culture is what i want to talk about, because that really is you and it is your board of directors. Right. And ive heard terms today that i dont really align with the banking business, if you will. I look at banks as something different. We came in with 800 billion to save the Banking System when it was collapsing because its something different. But i hear you use words today, and this is where i think the root of this problem is. Sales organization, retail sales, stores. Ive never, ever in my life referred to my branch bank in applewood, colorado, as a store. You dont sell vegematics, you dont sell grapefruit. You take peoples money, you safeguard it and you lend it out to people who may need it at for interest, maybe me. And to get in this is where mr. Green was going with the products. I dont know how many products youve got. I looked at my account. I do like the online banking, by the way, because i can look at all my accounts. I turn out, as mr. Royce says, i have eight accounts, personal accounts with you. How i have eight, the great eight, i dont know, but i do. So talk to me all right, you may have noticed at the bottom of you are screen a headline that read the following, that about ten hedge funds according to a report are said to have cut Deutsche Bank exposure. Deutsche bank shares as we speak are selling off by about 3 . As you can see now they are at the low of the day selling off more than what i just stated. The other headlines within this report, Deutsche Bank is confident, according to this report, that clients understand its stable finances, that some Deutsche Bank clients have been said to reduce collateral on trades as well. This bank really at the focal point of concerns over the european Banking System. Steve, i know youve been following this closely. This not doing much to ensure confidence in the overall picture there. Well, if youre investing in a hedge fund, the first thing you do is call up and say how much of your balances do you have at Deutsche Bank, because i want you to get it out of there. Because theres no upside. For them, they just dont want it there, theyre not making any judgment on Deutsche Bank. But theyre just saying for a matter of caution, we dont want to keep our money there. So thats why theyre taking their balances out of there. Doesnt this seem like were heading in a slow crawl towards the inevitable of some sort of recap talization or whatever is going to happen. Its got to be three times is the rule. Weve seen this movie before. Too many times. Too many times. And you saw the italian banks hanging out there and Commerce Bank came out today, cut their dividend. They have issues. They have never fully taken care of their problems. They have had opportunities to. As long as you have negative rates there, you cant make money so they get penalized for keeping balances there. You know, steve makes such an important point. The law of unintended consequences. The two stories were talking about today, the first is, it turns out it might be a massive policy error to make it so your entire Financial Sector runs unprofitably. Thats in europe. Take a look over here and what wells fargo has done essentially is they have replaced Net Interest Margin with account fees and it worked for a while and now its all unraveling. A lot of this stuff you can point back to Central Bank Policies that are trying to address the greater good but the longer it goes on, the more of this kind of thing comes out and you say, oh, wow, they just they dont make any money on deposits, so they found another way to make money with account fees. Its the same story. Deutsche bank has come out, we dont need capital, you know, dont listen to what the most negative reports have been. You two made the point weve heard the story before. The issue with deutsche is two things. One is the customers that we are seeing now and their counter parts. As soon as the counterparts start saying we dont want to work with you, all of a sudden all the collateral they have is going to disappear. As i said, weve seen this movie before. Yeah, we have. It didnt end very well. How about the fact that the hedge funds have waited this long, quite honestly. This is not like this is a new story, scott. I know josh was sort of half tongue in cheek but talking about it has to happen three times. Are we saying that their pulling out as a prime brokerage relationship . In the u. S. , their Balance Sheet and their Credit Rating is actually pretty good. I had lunch with the head of their u. S. Business about a month ago and the Balance Sheet is a high Credit Rating. Its a separate business. So let me let me ask the question this way, because its hard to read a couple of headlines and know all of the details around a story, so lets take it sort of at arms length for a second and just say, okay, if Deutsche Bank continues to have problems, if confidence continues to wane, what impact could it potentially have on the way banks trade here and on the overall Global Market picture, including u. S. Equities. I think its fine in terms of buying opportunities because i think we separated off from over there and the contagion. And right now its really isolated to germany and italy. The italian problem has been a big problem for a long time. However, whether they need capital or not, just like goldman didnt need capital during the crisis and jpmorgan didnt need capital during the crisis, they took it for a vote of confidence. Deutsche has got to get there. There is a statement from Deutsche Bank contained in the story to which i was quoting before and i didnt see it. They say, and i quote, we are confident that the vast majority of them are trading clients theyre referring to have a full understanding of our stable financial condition, the macroeconomic environment, the litigation process in the u. S. And the progress we are making with our strategy. Of course this all sort of pertains to that 14 billion fine that the Justice Department has levied on the bank as well. Thats interesting, to the jobs that Deutsche Bank provides here in the u. S. With their Capital Markets business, to those enter into the equation at all when a Government Entity is looking at Something Like a 14 billion fine. Is this a mitigating factor at all . Im not sure it was for u. U. S. Based banks so theyre probably not getting a pass, even though it could be catastrophic for you know, its a foreign company. I dont know how thats looked at. Just take a look, its real easy. Look over at the xlf. Why dont you look at the big board over here. Im just going straight for the financials themselves. Thats what im getting at here. Look at the financials and the xlf. What is an ocean away does really theres going to be an emotional reaction, absolutely no doubt, scott. Youre asking me, i was answering your question from a practical realistic standpoint. From an emotional standpoint, the market is at a nervous point so i agree it will be emotionally. I think ultimately if it goes down low enough, its a buying opportunity. Deutsche is . No, not deutsche. The others. With the financials. All right. Kate kelly is im going right to kate. Shes at the new york stock exchange. I believe youve been listening to our conversation here. I know you specifically are taking a look at hedge funds for us today. But opine, if you would, on the kind of thing that we were just talking about here and the way that sort of the big money is looking at stories like this with a level of nervousness. Yeah, scott. When you said weve seen this movie before, i was sort of smiling in reminisce ens not taking any joy in this of course but in 2008 we saw this with bear stearns. It was essentially the Investment Banking version of a run on the bank. Really their insolvency was precipitated during just a few days period by a lot of hedge funds pulling money out of their prime brokerage. The same thing happened at other banks, including morgan stanley. I remember executives there. That was in december of 2008, but executives say we felt like an atm at the time. When these banks lose their capital for whatever reason and when that results on a loss of confidence and customers and of course we think of runs on the bank with retail customers of the sort that are being discussed at the wells fargo hearing today, but in this case it was hedge funds pulling money out, it can have very dire consequences. As a reporter or an anchor, we all have to be very careful talking about it. You want to acknowledge the story, its a serious story, true. At the same time, you dont want to stoke fear when the underlying picture is a stable one. So i think you guys are having the right discussion around that. Its a smart point and im glad you made it. It makes us all reinforce that in the way we talk about the story, kate. But in the broader sense, you are taking a look for us today on what hedge funds are doing and it has been a difficult a difficult go and thats sort of, to say the least, with the demise of yet another one this week. Thats right. Richard perry of Perry Capital closing down his hedge fund somewhat abruptly after 28 years in the business. This year to date they were down 2. 5 overall, which doesnt sound terrible in the scheme of things. But just to talk a little bit more about some news from overnight, to say its been a tough time is a little bit of an understatement. The average hedge fund is up just 3. 5 this year. I mentioned Richard Perry just now. Yesterday yet another major pension fund, in this case the rhode island pension fund, which manages about 8 billion overall, announced that it was slashing its Hedge Fund Investments amid poor performance and overlehigh fees. Whats a Hedge Fund Manager to do . One thing could be come up with better ideas. Next wednesday well hopefully we hearing some of them. We have a panoply of interesting Fund Managers there. The idea is to give some of their best ideas for now. Sometimes they talk about previously announced investments but oftentimes they come up with new things and move markets in the process, just as the Deutsche Bank news is today. Mick mcguire whos within rattling things at buffalo wild wings, goodyear tire, his hedge fund is flat so far. Another venture capitalist, now a Hedge Fund Manager as well caused a stir with a rousing endorsement of amazon at a may conference this year. He will also be there presenting. Finally the day ends with mason morfit from value act. That will be interesting. They have sustained a black eye because of their commitment to valia valiant. More recently, they have announced a new active investment in morgan stanley. You and i have both looked into that. They have said a little bit to you, but not a lot. So im hoping that whatever they presenting on maybe theyll give us a little more insight to their thesis there. Morfit is on the board of l valiant as well so that will be very interesting if he has any comments related to whats happening there. Kate, i want you to stay with us. Josh brown, who you may know, weighed in on this subject on cnbc. Com. He titled a piece ive never seen anything like the massacre of the Hedge Fund Business this year, ending quote. We wanted to debate it with our hedge fund insider, steve weiss. Steve, you read the story. You invest in hedge funds. Thats sort of what you do. Right. And you communicate with them often. What do you think of the brown piece . I thought it was extremely well written. It focused on long short equity hedge funds which are 10 of the 3 trillion industry. Performance has been an issue broadly. But its really all active managers. 82 of all active managers, and thats actually a figure that refers to mutual funds, have underperformed the s p over a one year, five year and tenyear period. And weve seen massive outflows, much more so than hedge funds, go into passive investing and index funds. But hedge funds and these are net numbers of course when you talk about fees. We have been disappointed. Some managers, as josh points out, size is the envy are you in agreement or disagreement, though, with his thesis, sort of that times have never been bleaker for by the way, i say it out of shock. These are the best investors in the world. These are the guys who i read books about and we all look up to and we want to hear their viewpoints. Its just astonishing in my view the industry has ballooned in size. Everyone has gotten so good. The level of absolute skill has grown so great that relative skill is the issue and there are too many smart people competing away a lot maybe one of the most controversial things you write, if thats the right term to use, is i believe you wrote that there was a bubble in passive management. That too much has gone that way and its going to eventually, i dont know, endi badly. I didnt say that. I said that. I think theres a bubble of passive management. My bad. My take is that there are some cyclical elements to this and some secular. When the fed allows us to have a down cycle, i think hedge funds will outperform and i think youll see a lot of money come back. But the secular issue is that the industry probably will never shrink enough to allow for the types of returns that were common amongst the relatively few hedge funds that existed in the 90s. Josh, you might be write about that down cycle. Obviously, who knows, we cant predict the future. But in 2008, one of the very disappointing things to Hedge Fund Investors was that hedge funds stank as well. They lost 20 versus 37. Lost 16 versus 32 , 34 for the s p so they didnt stink. What happened was easy moneysti. Easy money came and all assets were corelated, pushing every asset class up. Hedge funds should underreport because theyre only partially exposed for market risk, so if you have 50 net market exposure, youre not going to capture all the upside. Houf, if youre a long holding manager and youre underp underperforming 82 , you have no excuse. Look, ive been looking at this in terms of endowments and institution, when they look at five years and years, if you need a 60, 40 portfolio, much less fees and better performance, so if youre lookinging for the hedge fund, do a 6040 portfolio, onethird of the cost. My own book would be i dont think theyre a nibble. When i look at whats going on here, these guys are so locked and loaded and so exited and they want to be right and their egos tell them. But they some back themselves into a corner. Hang on. Some back themselves into a corner by being too big and concentrated. Thats the problem. We dont invest in those funds. Our sweet spot is a billion dollars. In the modern era, you can hedge without a hedge fund. You dont have to pay two and 20 to have hedging positions in a portfolio. Misnomer. Youre paying 20 for long. Can i tell you why the fee discussions . Be quick about it. I want to get back to the market story, which is shaping up to be a significant one as a result of whats happening with Deutsche Bank. The discussion is a discussion because you should only look at whats left over for you. If somebody is going to charge me 50 of with what they make and till giving me 20 , im more than happy to pay. If they charge me 1 and give me 1 return, im not happy to pay it. Maybe fewer people into the future. Thats neither here nor there. Kate, thank you so much. Sorry, but im going to jump back to the market story because of whats happening on wall street as you have a bird ece eye view from your stance on the floor of the new york stock exchange. Dow jones industrial average is now down by 163 points. Were at the lows of the day across the board. About ten hedge funds pulling out of the Deutsche Bank. Concerns which seem b to be rising by the day. We need to follow this story closely. Its having an impact on the psyche of investors here. Thats the headline we need to be most focused on ch. The other scary thing, if you, when lehman went down, some of hedge funds that have assets there werent able to get them out for a year or two years. So thats the last thing the investor wants. If im running a hedge fund and have money in Deutsche Bank, theres no upside for me keeping my asset there is. Ironically, these are the type of headlines that could push berlin to get serious and act. So, thats, i mean thats the silver lining. Have no choice. Right. The issue is when. Nobody wants a run or you know, even a portion of it. Part of the issue here, too, is that yes, the crisis happened, but the u. S. Regulators and the leaders of u. S. Finance and of the Financial System, were quick to act. They acted in ways that europe was slow to react to. And i wonder if were going to be having that same conversation yet again that were only in this situation because of things that havent happened. Within the european Banking System that are so long in the Rearview Mirror in the United States because of the swift and strong action taken by folks here whose decisions were directly involved and required to help the Financial System here. Also no Warren Buffett of europe. There probably should be. When you look at what he did at aig, goldman, ge capital. Bank of america. Coming in and stabilizing. You may not like how much he made as a result. Im happy to be buffett in europe. The headline of the story thats making the rounds and making people nervous is the following. A number of funds that clear derivatives trades with Deutsche Bank have withdrawn excess sh cash and positions held at the lender. That x, the obvious sign of counterparty a concerns. It is important to note and this goes to kate kellys point about what you report and the way you r report it, the way we discuss it you think about it is that the vast majority of the more than 200 derivatives clients have made no changes a at all. Its the few that bring the headline that causes the stock sale, that private schoiles on becomes the snowball. Derivatives are highly leveraged products. Thats an issue as well. But look, Deutsche Bank is having constant cause with their clients. When i was at lehman in 98 and 2000, we had issues. Nowhere near where it was going to put us out of business. We were constantly on the phone talking about regular business because we were in the penalty box. Even after september 11th, same thing. They get very nervous. They want the make sure you can clear trades. Some ultra conservative put you in the penalty box. I think youre right. We dont need to extrapolate too much here because we dont know why the client took the money out. Maybe they need liquidity. Dont extrapolate to the rest of the market. Sure, but there is an issue of confidence, whether talking about counterparties are pure investors sitting here watching the stock, listening to the way the story is discussed and just the headlines in and of themselves. They do themselves no favor by not going out there and doing a Rights Offering or talking about bringing additional capital. So what if its diluted. Just go out and do it. Tlheres the Dow Jones Industrial average down by 159 points. 18,182. Just off the lowest levels o f the day. Theres the s p down 17. Im pulling up Deutsche Bank as we speak so r forgive me for looking away from the screen at my computer. Shares are down about five and three quarters percent. Did you say we have bob or no . Okay. Its a good time to sell debt. If youre going to do some kind of an offering, its not there arent Insurance Companies and pensions from japan to europe to the u. S. Its not like the chinese arent looking for you know some kind of a yield. I know its an after ma to sell a large bank to a county oty like germmy or part of it. Cant sell because of Balance Sheet. This has been sucker punched repeatly. It gets up, r does a standing eight count. The fed doesnt raise rates. We were talk iing about this great run weve seen in the chips. Its been an increde bable run. Off today and suddenly, they are pulling back with the market that just looks like the market itself. They arent xlf. In the in that regard, but maybe theyve made such a Swift Movement to the upside, they are looking for those kind of pullbacks to occur. I think theres a little more. This is just the beginning. The xlf has not sold off more than the overall market. As a group. Youre not getting one sector getting kill ed. You guys need to put the chart back up of whats happen ng the bond market. The tenyear n a flight to safety, if you will. Certainly, bonds are capping a bid. Theres the tenyear note yield at 1. 55 . Right about at the lowest levels of the day. As well. Sort of reflecting and theres across the picture of bond market reflecting. You get anywhere out of germany. Thats the danger of what steve weiss just said. If the market goes down far enough related to these headl e headlines, hes a buyer. Right. But can you trust zwl. Got some unusual activity banging around. Zpl can you trust, to your point, i agree the Market Reaction could be sharp, but can we trust it . Remember all the he said she said of 2011 like you would get something from a belgian finance minister, the guy from spain would contradict it two hours later and we lived through that. Hopefully, were not going back into that zone. Gl that would not be a good thing. Biggest issue is there really is no central body in europe. No Central Bank Even though they say there are. They put it out there. You dont listen. And thats one of the biggest issues. There are reelection issues to be dealt with in germany for chancellor merkel as well. Those banks, too, have been at the focal point. Just dont seem to be as important after a deutsch is. Zwl minor players. Theres the issue, too, which we havent discussed, the potential exposure that u. S. Institutions have to a Deutsche Bank. Those questions are the ones that are going to be asked in hours, the days and the shows ahead, but lets show you the market picture. There it is on cue. Deutsche bank really the cause here for a market sell off on wall street. Dow jones industrial average down 160 points. Power lunch is going to pick up that story. Theyll have all the headlines there. Clearly, that show begins right now. And welcome to power lunch. We start off with two huge stories on the banks. Wells fargo and Deutsche Bank, wells fargo right now, down about one and three quarters percent. The ceo testifying on the hill and Deutsche Bank down 6 and a quarter percent. Straight to bob pisani with the latest on these stories. Bob. And this story came out of sort of nowhere just about 45 minutes or so ago. Deutsche bank here, this is the abr, the trade here in the United States. Theres a report that a number of funds that cleared derivative trades with Deutsche Bank have withdrawn some excess cash i