Transcripts For BLOOMBERG Market Makers 20141208 : vimarsana

BLOOMBERG Market Makers December 8, 2014

I will start you off with a bulletin mark for oil,s the price of brent crude fell to a five year low in the United States also dropped and hedge funds and other Money Managers i have that too much on rising prices. Merck is taking aim at superbugs per the drugmaker has of debt has agreed to buy cubist pharmaceuticals. Developing products to fight drugresistant bacteria. Has increased the target price of its ipo. The Company Plans to offer per ofto 14 these. In india whereer they had been banned and accused in uber driver of rape. The company will do everything to support the woman. Today withbama meets the duke of cambridge, Prince William who is taking a break from a visit to new york to visit the white house. He and his wife arrived yesterday and they will have a reception with Hillary Clinton and an nba game featuring the brooklyn nets. Its a, 14 years but citigroup the longer holds the record for the most valuable bank of america. That distinction now belongs to wells fargo was closed friday with a market cap of 285 billion. With me is the responsible for the remarkable ascent, the wells fargo ceo, good morning. Nice to be here. Else but the economy . You like to say that wells fargo is all in on the u. S. Economy and you have 97 of your assets here. If you look at the jobs number we saw on friday, 321,000 plus revisions to the previous two months, what do you see . Not all that is surprising. Since we are so involved in the real economy, we actually have been hearing from our customers about more hiring. Our Small Business survey shows more optimism now by them than any time since 2008. While we do not expect next year to be a breakout year, we are probably on the upper end of the consensus of economist for next year. Where his demand strongest in the economy . Automobiles obviously. Commercial real estate come as you travel around the country, look at the number of trains. Cranes. Lots of stuff is going on in energy, some manufacturing, technology so this is a very diverse economy in the United States. We are happy to be all in with it. What about the Housing Market and housing prices . Why took a look this morning, it sawkind of random because i a fiveyear chart of wells fargo stock price against the s p 500 caseshiller and they almost match perfectly. I know you Pay Attention to housing prices because you are the nations largest home lender. Perhaps prices matter. They do matter and in this from housing has led to behind in this economy were normally it leads in front. Student debt is a part of it and availability of housing. On the coast, some housing is not available and not enough loans available. There has been some credit overlays by the originators. All of those things individually are not that big but in aggregate it makes a difference. The originators includes wells fargo. These are supplementary standards to what fannie mae and freddie mac require . Will not lend, we to everybody they will lend to because of the putback risk. What that means in laymans terms as if we made a loan 10 has been paying for 10 years and all of a sudden, it goes bad, the guarantor, fannie mae or freddie mac will put it back to us for a reason perhaps unrelated to the mortgage debt itself. Today we are working closely with them and making progress on clarifying some of that so we know where the risk transfers. I think that will help open the credit box. People think we will go back to the old days but, no. They are fully underwritten and documented but it helps provide clarity when risk does transfer to the agency that guarantees it. Fhfa would like more Mortgage Loans to be available and you are doing your part by the sound of a to increase mortgage lending. Are the other big originators being too conservative question mark i dont know what they are doing. They still maintain the overlay and you dont. In some cases they do. This will be good for borrowers. Im not saying it will change the whole mortgage business. Purchasedy much in a money business but its important for certain customers. Lets see how this goes in is more clarity comes, i expect you will see more Companies Responding to that providing credit where its needed. When you say housing is leading from behind and set out front, does that suggest that housing prices have a good way to go yet before increases run out of room . I would say this Housing Affordability is still very attractive for most customers. Back at the prices in many cases where we were. It is more regional but its still a good time to buy a home. What about oil . Crude oil can close to a severe drop. What does it means for the economy oil stays this low . United states is still a net importer of oil. Is net good for the economy. Secondly, think of all of the things that we use energy for. Agriculture, manufacturing, think of the extra money in the pockets of consumers who can now spend on other things so thats a good thing. What will it do to production in the United States . Even at these prices, you will still see a very high level of production area i think we are on our way to being the Largest Oil Producer in the world the next couple of years. A lot of the financing for drilling in shale was done in the junk bond market but banks remain a large lender to oil and gas. We are a very large provider of financing to this industry. Loans are in our the production side for the rest is in the midstream and other parts of it. For the most part, lenders in our industry, its almost an assetbased loan where you have a price less than what the going prices for the borrowing events. I dont see a lot of disruption from a lending or credit perspective at least in our book. At what price does that become an issue . It depends on the bank or the lender and the kind of company were dealing with. If you as the ceo of wells fargo feel ok about your energy loan book at 65, that says something. We are obviously conservative and we are obviously conservative and were looking at our portfolio all the time. , its notr customers only the asset we are lending against. We are looking at the history of the company, their capacity and ,he character of the borrowing not just the assetbased side. What about Credit Conditions generally . There is credit available and it is competitive in certain markets. Commercial loans are very competitive. Responsively competitive . I think for the most part. You always hear stories about i cannot believe this lender did this. For the most part, i think there is responsible lending going on. On the margins, you can always have examples, i know there is some concern by regulators on leverage lending. There is also a lot of other players in the industry these days. Funds,e nonbanks, hedge different crowdfunding so there is other places that credit is available. Is the fed scrutiny having any ability in in financing deals . We dont know all the final rules. Are you being more conservative in anticipation . No, we think we do the right thing for our customers. Our lending is how we have always done it. We have a conservative bias. Wells fargo has always been that way and i think thats one of our strengths. Sure, but the Banking Industry is the weakest link that breaks the chain. Maylls fargo does not not upend the Banking Industry, its what the most irresponsible lender does. What happens to the irresponsible loans on the credit cycle turns . First, but yout are right, the weakest link of the problem but not everybody always follows the weakest link. Mid2000 two timeframe, we were the largest mortgage originator. Another lender went out and said we want to do more and we thought it was crazy. We walked away. Thats part of our history. How about the Mortgage Market . We talked about housing prices rising and you are working to make more loans available to more people. About the reform of fannie mae and freddie mac . They are essentially the market. 40 of the market with private capital. I think thats an important question. There is lots of people who think now that maybe fannie mae and freddie mac incrementally modernizes and changes and a couple of years down the road, way, blesses the changes taking place. You think they reform themselves . It could happen. Is that happening . We are starting to see some reforms like rich just risk chance for a. Just risk transfer. Imagine anything like fannie mae and freddie mac question mark have people on extremes of the two parties saying that government should be the total market. Others say government should be totally out of the market. Even others say they sure there should be some blend. If youre going to have private capital, we have to get paid for that. Today, credit is pretty attractive in the pricing. To make a 30 year fixedrate mortgage around 4 , that is a bargain. That is a bargain . I think so. My first loan in 1975 was a. 5 . For the borrower. Right, for the borrower. If its good for the borrower, what business does private capital being in that market . If you put private capital income it could increase prices. Is lots of puts and takes here. Private capital meets its return. Whether its in mortgages or leveraged loans, both are subject to a lot of regulation. How would you describe the state of regulation we now have . There may be another one coming from the fed any day now. What happenedl, after the downturn should not be unexpected. You look back to 1929 and the great depression, there was a body of legislation and regulation that came as part of that. With this downturn, we had all of that. Its a question of balance. No question. Are we in a state now six years after the financial crisis where you would say the pendulum is still swinging too far in one direction . I would say its probably permanently stuck too far in one direction. Some of that has come back. Oni look at the initial read remittance business activity, that was too restrictive and that came back. On the mortgage site, we are starting to see moderation. It is hard to connect capital to real customers. Some of those cases, the pendulum is swinging back. To wheret will swing the pendulum is. We will return momentarily with the ceo of wells fargo, john stumpf and talk about what wells fargo is not your typical bank. You are watching market and we have the ceo and chairman of wells fargo, john stumpf. I want to ask you a question about culture. Bill dudley, the president of the new york fed was speaking and spent time talking about bank culture. Here is a direct quotation do you take him at his word that he and other regulators, if they believe that banks do not reforms are culture to make the banks more simple, they will go ahead and break them up . I cannot speak for bill but i do agree that you have to worry about it. I worry about culture. I think it is probably our singular most important asset. I think my primary job is to is the keeper of the culture. The culture and wells fargo is an and by things likeus you said earlierd we about 265 employees, we would not use that word. They are team members. Their assets we invest in, not expenses being managed. Intend to play a team role. We have customers, not counterparties. Personal responsibility and these are things that are important to culture. Go back to Something Else which is a bit about the weak link breaking the chain. If yours is among the stronger links in the Banking Industry, what about the weaker links . If other banking cultures are not strong enough, do they still to fail risk in the Financial System . I do want to call out anybody else and i dont know their cultures well. You see how they operate as a competitor. Yes, but i dont know whats happening inside the house. I respect bill and if he has concerns, that should be listened to. I know the culture matters. Our investors, when i talk with them, they uniquely know our culture and have been with us a long time and culture comes up a lot. One way to preserve and perpetuate culture is to hire the right way. How much of a challenge is hiring people today question mark its always been a challenge. We like to so we dont care much you know until we know how much you care. That is how important caring is to our culture. We can teach the technical parts. We cannot teach caring. How do you persuade a highquality graduate to come and work for wells fargo as opposed to taking his remote bridges in Silicon Valley or chasing riches in Silicon Valley . Do they like working together . Would they put team goals ahead of personal goals . Nothing wrong with me. Never at the expense of the us, we and ours. If they want to Work Together on a team, adding value, longterm relationships if that fits into the lexicon, they will have a wonderful career at wells fargo. Its all about me, they should probably go summer else to begin with. What about technology . I see it as disrupting the payments business like apple pay. Icy technology disrupting the lending business Like Lending Club about to go business. Companies are trying to intermediate the bank. How does wells fargo fight back and use technology as a weapon . We participate with many of an investories as in lending club or in other cases, we are the machinery or engine behind what other companies are doing. We look at a lot of other companies. People ask me who we are most impressed with in the industry. I say apple and google and amazon. They estimate about banks. To the extent they are teaching customers have to think and behave differently, they have a huge influence. We have 24 million online customers. 14 million of them are mobile. We did not have that five years ago. We have an Incubation Center now and we are using things to help our customers like click to service or make an appointment or we are using a new technology with begin to understand where our customers are and we can treat them individually. There are lots of things going on there but i like our chances. Its great to have you here, thank you very much. John stumpf is the ceo and chairman of wells fargo. They are the most invaluable bank by market cap in the world. When we come back, index investing with a twist and we will talk with a billionaire behind the index fund. Up, are americans ready for their golden years . We will hear from someone who manages billions in retirement savings. The last few days has been aboutart in miami. Live from bloomberg headquarters in new york, this is Market Makers with Erik Schatzker and stephanie ruhle. You are watching Market Makers. Stephanie ruhle is on assignment. For ate has ranged raged for decades. Here is an answer. Our next guest helped lead the index fund revolution. 380 booth is the ceo of billion. You might recognize his name as the booth behind the university of Chicago Booth School of business. I think you need to grab that. It appears as though we have a small technical problem. We will sort that out for you. Some active manager is probably discouraged. The reason you are a big fan of indexes is you are among those who subscribe closely to the market theory. Argument about the efficient market theory, now that we are in the sixth year of a bull market, what can we say about the theory . Connect thed downturn with the efficient market theory. It says that markets go up and down and its difficult to forecast changes. In the financial downturn but the active managers that werent able to protect their clients very well. They are not doing well on the rebound either. Financial Services Industry did change slowly. Withked in the first index wells fargo in 1971. Years and its40 worked better than people thought it would. Are they universally good things . Anytime you have a category, there are opportunities to do things poorly. I think they are terrific. Thats why i asked the question. Example, one could use his investing internationally. Its difficult to invest sometimes internationally. Make it easyetfs for Foreign Investors to invest. Etfs are becoming more popular with institutional investors. They have been the equity markets and follow the index strategy very well. They have done very well. We are getting there. Over time, things are going to have to moderate. Expect equity returns at 12 year in and year out. What is that going to mean for the Retirement Assets out there . Whether it is done by a pension plan or individually, it is still fixed income. You have low returns on fixed income. We talk about the risk of equity. That is the problem. What people need are good, stable retirement incomes. The benefit plan is what you needed. People could not afford it. 7. 5 am thinking about the anticipated return rate in many of these Pension Funds. Either pull out of thin air or target because seven point 5 is the way its always been. 7. 5 is the way its always been. What is a more reasonable number . Rate is similar to the risk of your liability growth. The growth and liabilities of these Pension Funds is reasonably predictable just like you can predict High School Seniors from the can garden class. Its an actuarial. Are growing. The growth in liability grows, but the discount rate is a very high when. Sense,. 5 doesnt make knowing what you know about the patterns of returns over time, we live in a zero Interest Rate , what is a more sensible number . Take Something Like the 30 year bond rate and add basis points. 4 would be a sensible rate. Every Single Pension Fund would be underfunded at that rate. I dont think i am the first person to think of that. The answer that matters is what we do about that . We have got to be honest with people. That is a good place to start. We need to be more transparent. Planslly few of these have to be at risk. Is in liquidess markets, mostly equities. What about ill liquid investments

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