Drive customers away. Microsoft unveils a new version of its tablet. Epic fail. A newlds unveils character to promote healthy food items to kids. One problem, it is totally scary. Welcome to Market Makers. I am stephanie ruhle. I am at alec still, in a four Erik Schatzker and was on i am alix steel, wh in for a chapter, who was on assignment this morning. Credit suisse agreed yesterday to you the guilty to charges that help americans illegally invade that it evade americans illegally taxes. This case shows that no Financial Institution is above the law. When the department of justice conducts investigations, we will always the always follow the law on the facts, wherever they may lead us. Profitability or market share can never and will never be used as a shield from prosecution or penalty. There were concerns that a guilty plea could prevent clients from doing business with Credit Suisse, but those concerns seem to be unfounded. Shares are up on the day. The markets seem to be feeling positive, which is extraordinary. We have a Bloomberg News backing reporter, a Bloomberg View columnist, and an attorney with paul hastings. Break down exactly what happened and the ramifications. Credit suisse pleaded guilty to criminal charges and they have to take 2. 6 billion to the fed, the new york state banking regulator, and the department of justice. Pleaded guilty is a subsidiary of the parent company, and we thought that might happen at some point, and that is a way to shield larger banks from collateral fallout. Change iny is a game terms of how the department of justice is going to be going after banks in the future. The question is what this is going to do to Credit Suisses business and what kind of impact will that have. Clients are reevaluating their relationships but that does not mean clients will be leaving the bank. Credit suisse can still operate in the u. S. And abroad. We are in a way and see what this what impact this has on the bank. I dont think it is different in the final analysis from what happened to ubs, except it was elevated slightly to a criminal charge, but it was a criminal charge that was contained, so that the form of that would be limited. If you look at the Market Reaction to the stock, it has been limited. It was done this way principally to allow the Justice Department bit that talk back a walk the dog back of it. If you are brady dougan you have 2 choices not the guilty, give up the name, truly lose customers. They are not going to protect the lot s are on not going to protect you when things are on the line. A guilty plea yet preserving your reputation, that will line up. There are 2 aspects to this. Since we mentioned ubs, when did they settle their claims . 100 years ago . They have to move forward without this hanging over their head. Thing. Ubs did the smart it is better to get these things out of the way sooner rather than later. Goldman sachs learned that less learned a, didnt ubs lesson . In the Global Markets business they are practically dead. No, not at all. Ubs is kicking it where . They are still one of the biggest ones in the world. Done remarkably well. Does a guilty plea actually matter . We have Credit Suisse going over and saying we will make sure this doesnt impact their business, then whats the point . You make a very good point. If you are an individual doing a guilty plea on a criminal charge, it is fatal to your career in finance. If you can contain this a dirty word from the subprime crisis if you can contain this to a subsidiary and not have this spill over but the other aspect is fascinating. Wasnt holder the administrative person who said we really dont want to mess with these banks, hey are too big to jail . This is a full 180 from the adc we heard out of is office a couple years back that did not allow prosecutions to the place. Thats not true, they were never too big to jail. That is his quote. You had every prosecutor on the state and federal level dying to get a conviction of a bank or Senior Executive at a bank in order to show that they really did make them pay for 2000. Its nonsense. Let me point out where you could have been like the s l crisis where there were literally thousands of convictions. People were reviewing mortgages and then or not reviewing them signing affidavit attesting that they spent, review the documents, verified everything. These people sign off on it 200 or 300 lowlevel. Someone gave it been that order, between jamie dimon it could be laziness. They could have been instructed to actually do that but decided they would rather go to mcdonalds that day for lunch. I have to red flag you can do 8 to 10 of these a day. Cie indicia ofa actual fraud. That is a business practice. That is a felony perjury. You cannot do that, and there should have been hundreds of people, they shouldve rolled them over like lowlevel drug deals to find out who is the senior person he said dont worry about centers of property law, just process this like it is a factory, just crank it out. Theyey have had 5 years thought they could get to a Senior Executive, believe me, they would be doing the rolling. They have been trying for five years and they havent done it because i believe the criminal conduct just wasnt there at the highlevel. Dougan at Credit Suisse lose his job . If he doesnt, who is going to take his place . What do we know about Credit Suisse who is next in line to o this . Second, some of the criticism is coming from the fact, as we touched on before, where are the individual charges . It has less to do with charging the bank and more about going after individuals. We didnt get that in this case and several people were terminated over this that were already under indictment. We have not seen major reservations are people charged. That is what people want to see at this point. And capital strategy and Bank Strategy irrespective of this this is going to hit capital ratios as well. 2,000,000,000 is not already less than i think that has already been taken into account. That plan is only under white. Thatwill not be a real plan is already underway. That is not a reward issue. Real world issue. Lets pretend i am a Hedge Fund Client and today is the day i decide who my prime broker is going to be. Suissen, ubs, or credit does this guilty plea affect the decision i make . Probably not. We have seen this happen with Deutsche Bank, goldman sachs, j. P. Morgan. The easter neither admit nor deny. Now they are forcing the admission. If it hurts them for couple of what maybe, but after is jpmorgan up to, almost 20 billion in fines . It hasnt hurt them. Going forward, this will be very quickly forgotten. Wall street people are notorious for remembering almost nothing. You have to remember the nature of the crime, and for the , anstor class, by and Large Institution that maybe went over the line in saving taxes is not considered to be a hanging offense. Aay disagree with that crime is a crime is a crime but it is a different crime from hsbc, which was the bank of choice for terrorists and drug lords. What does this mean for bnp paribas and the potential settlement . You have to look at it individually. You also have percolating with that the issue of the french government, and we have heard rumblings that it has gotten involved in the process and say that we will make sure our institutions get fairly. Same has been true when we look at Deutsche Bank and what they did with their capital raise. The German Government monster keep them whole. Wants to keep them whole. We saw a little bit of that with ups and switzerland. Lets be blunt, citigroup and bank of america were bailed out because the United States government did not want to see them go belly up. Isnt this the case where the United States government is coming out guns a blazing . Good investors mind could investors mind . Really goingder is after these guys, maybe i dont want to invest in financials right now, maybe i wanted to back bush want to step back . Maybe i want to step back . I hate the whole uncertainty meme. This removes some of that, removes the ambiguity of what the future might hold. One is once it is behind you the stock goes up . My best guess, yes. We know what the settlement is and we dont after worry about fines in the future related to this transgression. Thank you all for helping us break this down. Geiger, and the one and barryloomberg views ritholtz. Microsoft tries to get it right when it comes to tablets. We will see if it really is an improvement or just another swing and a miss. This is Market Makers on bloomberg tv, streaming on your phone, tablet, bloomberg. Com, live on amazon fire tv and apple tv. Welcome back to Market Makers. I am stephanie ruhle, and im excited about our next guest. Investors seem to be getting behind carson blocks thesis on mobile. D nq shares of fallen over 40 over the last month and 70 since mr. Block called the company a massive fraud back in october right here on Market Makers. Carson block is right here with his reaction in his first interview since the Company Announced the filing delay. Remind us, what is your thesis . Who is this company . It is a Chinese Company that made a security app for mobile phones and it claimed to have about 6 million paying users of the time we wrote on it will stop it is no more than 250,000 paying users. 2012. E of over 90 in we think the real revenue is fraction of that. We think it is a substantial fraud. Between october and today what happened . The company benefited from this rally in Internet Companies and online companies. The stock sold off on the theany it vehemently denied allegations, with ad hominem attacks on us, our committee will investigate. The q4ey announced numbers, which were impacted because their auditor was likely very present at the Company Looking at things closely, the Company Reported a surprise loss. That is when the recent selloff really started. Company delayed its annual report twice. They said that we wanted to wait for the independent investigation to become fluted to be concluded before filing the report. The Company Making these statements, the u. S. Side, quasimanagement, they have no idea what is going on with the audit. How do you know that . Well, because theyve missed the deadline twice. They were promising the company would complete its audit on time. On april 30 this is something where i think the u. S. Side managements conduct recently is reprehensible, if not potentially illegal. On april 30, the first deadline , theyhey missed for 20f put out this bullish press release talking about how the Directors Committee investigation so far has not found any wrongdoing. Now buried in there was, oh, by the way, we cant file our 20f today. The stock closed up 11 . Investors paying over 12 a share that they to own this, and it is now 7 in change. Why isnt it fair for them to say that so far they havent found anything . Pwc has not issued an audit opinion. I question what is holding up the independent committees results. The Companies Said initially before it missed the deadline in early april that the independent committees results would be reported in the 20f. Pwc wont issue the audit opinion and they cant file the 20f. Why arent they releasing the independent committees results . What this pretty clearly says to me is that whatever the directors on the independent committee say, it is being driven by the audit opinion. If it comes back are qualified, they issued the whitewash statement. If it does not come back unqualified, it changes. Why arent legit Business Partners stepping up . Would lookt sprint at Something Like i would guess that sprint looks Something Like this and says i want to get the f out. The company has released numerous press releases the past 2 years about partnerships on the u. S. Side, yet it hasnt materialized into any meaningful revenue. On the flipside, whenever we asked and since our report from others investors have asked, you have all this international revenue, roughly 40 outside china, but it is not u. S. Who are the partners overseas in the middle east . They refused to answer have you reached out to see the details of the partnership . No, we have not reached out to sprint. We are concerned about doing that for legal reasons. We will Like Companies such as sprint and other socalled partners and makes me think that i should really stop i have a starwood credit card and it makes me think i should release a press release saying that muddy waters is partnered with starwood. We dont know if this will be in any way material how far are you going to take this trade . You could actually take the money and run at this point. Why wait for the report to be released . You have already made a ton of money on this trade. Why not get out now . Well, i dont know if it is 5050. You have no idea. It is impossible to know and youve made a ton of money already. It is impossible to know. However, things like this dont happen to cocacola, ok . Clearly there is an issue with the audit. The company is telling investors that peta bc is going through extra compliance that pwc is going through extra compliance layers. I dont believe that. I think pwc is not going to communicate to the company if they are considering resigning. It is impossible to say what is going on. But i do feel that it is probable that the company does not get an unqualified audit opinion. For youthis a take to say i was wrong, this didnt work out, i believe what they are saying . There are 2 things. That is being wrong in your thesis that the company is a fraud, or that it is incapable of generating cash. And then there is the stock going up. In the case of focus media, it is a fraud, it was a fraud. Acquired at a premium to where we sure did shorted it. Bizarree acquisition is. And a lot of people in singapore have questioned it. What is it a rally where i am out . There are times where we certainly can look at a stock and say we can reenter. Hedge. Imes we will nq andrelation between his other China Internet stocks that is really on the holcomb of the thesis on these companies has never changed. Are you looking at other Chinese Companies . Everybody is focused on alibaba. What should they be looking at . With respect ali baba . Or in general . You always hear a lot of numbers. We know you cant have a site visit because they are not letting you off the plane. [laughter] i do know ali baba is a real business, i will confirm that. But for people in china to commit fraud in the Capital Markets is completely asymmetrical trade. Nobody has been materially, meaningfully punished for defrauding u. S. Investors. As an investor you have to ask yourself, why wouldnt they lie to make the numbers better . In general should there be fear for u. S. Investors looking at any Chinese Company because they cannot trust the numbers . I think they should trade at a discount to their western peers, because of the issues with the numbers and also with these Internet Companies you dont own the underlying company. You own a derivative of the company. Beyond the scope of this show, but that is something passionately they wont understand vie . Is that what you are saying . Im just kidding. More than whats they should be selling for given the risks. What is your next target . Could be china, could the u. S. , could be european. It is definitely on this planet. Is definitely on this planet. Yesterday, when you heard the u. S. Government naming names and going after Chinese People as it relates to cyber security, what is your take . Are you finally saying, great, people have woken up . U. S. Stomach or job on being skeptical of the security risks the u. S. Has done a good job of being skeptical of the security risks china poses. In europe and the eu they have not done that. The u. S. Government is doing very well in that regard relative to the rest of the world. Hose email has w been hacked, likely by the chinese come im sitting there aboutng, yeah, it is time. By the same token, we are doing the same things to them. We will see how the chinese react, but im sure this will be an escalating situation for some period of time until we both pullback. Carson, always great to get your insights. Carson block director of research at muddy waters. This guys never afraid to go short in a big way. You have to give microsoft points for persistence. I guess. Lets see whether it will fail in the upgraded tablet. Live from bloomberg headquarters in new york, this is Market Makers, with Erik Schatzker and stephanie ruhle. Welcome back to Market Makers. I am stephanie ruhle. I am alix steel, in a four Erik Schatzker. I dont have a matching suit and tie combo. Today microsoft is introducing a new smaller version of its tablet, the first generation of which failed to get much market share from Industry Leaders like apple and samsung. Will these new versions do any better . East wen has come love that. He is outside the event in downtown manhattan. Microsoft already took nearly 1 billion writedown of its surface tablet. Why do they think this will do any better . Look, they have got to do something in the tablet and mobile business. T