The transcript from this week’s, MiB: Christopher Whalen on Banks & the Fed, is below.
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MALE VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week in the podcast, Chris Whalen, Chairman of Whalen Global Advisors and an old fishing buddy and friend. Chris knows more about the details and back offices of banking and mortgages and credit than just about anybody I know who’s not currently running the Federal Reserve.
He has a fascinating background and family history. It was through Chris that I got to meet Paul Volcker. It was through Chris that I really learned a lot about how the Federal Reserve works, how the mortgage market works, how the securitization market works decades ago.
In fact, when I was researching Bailout Nation, a lot of his work found its way into some of the endnotes in that book. He is, really, a wealth of knowledge when it comes to this area of finance. And if you are remotely interested in securitized products, mortgages, banking and banking analysis, you’re going to really enjoy this conversation.
So, with no further ado, my conversation with Christopher Whalen.
MALE VOICEOVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: It is still a shelter and home edition. And for this week, I brought a very special guest, Christopher Whalen. He is the chairman of Whalen Global Advisors and has a long and deep background in the financial sector working at such firms as Bear Stearns and as a researcher for the Federal Reserve.
Chris Whalen, welcome to Bloomberg.
CHRISTOPHER WHALEN, CHAIRMAN, WHALEN GLOBAL ADVISORS: Hey, Barry. What a pleasure.
RITHOLTZ: So, let’s start out with a little bit of your background. I know you as a bank analyst and M&A specialist, but let’s go back to when you were at Bear Stearns. What were you doing at Bear and how is that related to your work at the Federal Reserve?
WHALEN: Well, I grew up in Washington. My parents, Joan and Richard Whalen were some of the most interesting Republicans operating in the town. It was a Democratic town in those days, Barry. The Democrats still ran everything.
But that’s how I got to know Fed Chairman, people like Paul Volcker, Arthur Burns, Allen Greenspan. They all came to mom’s parties. In fact, if you didn’t get an invitation to Joan’s Christmas party, there was something seriously wrong with you.
So, I grew up in this very political household, went to college, went to Villanova, and then when I got out, I worked for Jack Kemp for a couple of years on Capitol Hill, really learned to write, two brilliant editors who used to just pound us because we had to report on different committees.
And I eventually ended up moving to New York and I was management trainee at the Fed in New York. I worked in bank supervision first for Gerry Minehan (ph) and Bill Rowledge (ph) and then I went across the street and worked in foreign exchange for Gretchen Greene and Terry Checki, one of the great Fed officers of his age.
He was responsible for foreign. So, all the other central banks would talk to Terry. In fact, he was probably the only person in the building that he would talk to. So, that’s the kind of where I got my start and then I went to Bear in London, fixed income trading and sales, worked with David Setchim and Joey Calvo and a whole bunch of great people who are now at R.W. Pressprich, special situation fixed income shop here in New York.
So, that’s really where I started in credit and I’d learned about banks. Obviously, I went to night school for accounting. It was very funny in those days because New York was empty, Barry. In the ’80s, there was no one here. Especially …
RITHOLTZ: The early ’80s, for sure.
WHALEN: God. We used to go to the Raccoon Lodge and there would be bikers parked up and down the street, two blocks off City Hall, middle of the night, and there’d be no one there. No one.
RITHOLTZ: That’s amazing. That’s amazing. You mentioned Joan’s parties. I recall a party of yours, I believe it was election night in 2008 and that was the only time in my life I got to meet Paul Volcker. He was sitting in your kitchen, telling jokes about the Bush administration with Tall Paul.
That fact that I got Paul to laugh is one of the highlights of that decade for me.
WHALEN: Yes. He was a great, great guy and he did have quite a sense of humor. He was a member of the Lotus Club, so I did get to see him a couple of times there before his passing. But he was just a lovely man.
There were times we disagreed on things but I always came around to his point of view because he was such a real guy and he was grounded in reality. He reminds me a lot of what my dad said to me years ago. He said, Chris, the task of this generation is to pass the bubble on to the next generation intact.
And that’s what Paul Volcker did. I asked him once about the bank, so I said, Paul, why did you let this in 2017 which is where that picture I put on Twitter came from. And we’ve gone to lunch in this cafeteria right there in Rockefeller Center where he used to go and get his lunch every day. It was very modest, very nice.
And we’re sitting there and I said, look, why did you let the banks do off balance sheet finance? All these bad things happened subsequently, right? And he said, well, they were broke. What else was I got to do?
So, he was just such a sweet, and I think very committed public servant and I always respected that about him. But he was a family friend which is why I never asked him for anything.
RITHOLTZ: What about some of the other Fed chairman that you had relationships with, what can you tell us about Arthur Burns or Alan Greenspan or anybody else on the FOMC that stands out in your mind?
WHALEN: Arthur Burns was a very sweet self-effacing man who my dad got to know because pop was a speech writer for Richard Nixon and he left the Nixon campaign just as Nixon was going to the White House.
So, because of my father’s press credentials and connections and everything else and also because of the fact that he was a Republican, again, in a democratic-dominated town, he quickly got to know people like Burns and Greenspan and became kind of their political counselor in a sense because the decision by both men to get into the Fed and get deeply involved in national and economic policy was a very momentous one because it meant a lot of compromises for both.
I don’t remember Burns as well because I was so young, but Greenspan was always a long family friend and he had got to know my pop when pop was working with Ronald Raegan when — during the 76 cycle when Ford eventually got the nomination. Greenspan was trying to figure out when he was going to go to the Council of Economic Advisers and then end up at the Fed, of course.
And that was also a very political decision, Barry, because the Fed is the most political entity in Washington, by far.
RITHOLTZ: To say the very least.
WHALEN: And Greenspan was very astute political analyst, not a great economist but really, really sharp judge of politics. So, it was a fascinating thing for a young man to have access to. I would sit on the stairs our house in Fort Sumner, Maryland, up on — off of Massachusetts Avenue, just listen to these parties and meet the people sometimes because we were all very little.
But as we grew up, these people were part of our lives and we were kind of Washington insiders. That’s what Washington was like in the ’80s and the ’90s. You could actually get stuff done. People would talk to one another. They would have little drinks, smoke …
RITHOLTZ: A little different than today.
WHALEN: Yes. I think we have to restore civility and thereby communication in our public life, Barry.
RITHOLTZ: That would go a long way. That would go a long way.
I have to follow up with one question. You mentioned Fed chairman making compromises. Were you talking philosophically or politically or across the board?
RITHOLTZ: I think it’s across the board. You cannot survive as Fed chairman without the — at least the acquiescence of the White House. And Trump berates Powell and says things in public, but as Judy Shelton said, I think, so wonderfully, at least he does it in public.
What Richard Nixon did to Arthur Burns was criminal. His antisemitism and his just nastiness was awful. And (inaudible) 0:09:17.6 on the other hand was very affable. My dad thought Paul Volcker reappointed and it was a little cabal between him and Paul Laxalt, the great senator.
One weekend, the Laxalts and the Reagans, were at Camp David and my dad gave Paul the, Paul Laxalt, the phone number and said have Reagan call Volcker and it happened. And then my dad said to me later, I put this inflated, this is how stuff gets done in Washington.
RITHOLTZ: Just a phone call from a gathering at Camp David.
WHALEN: Yes. And Bery Sprinkel was being pushed very, very hard by Don Reagan, the former chairman of Merrill Lynch and dad won. So, kudos to Paul Laxalt.
RITHOLTZ: Let’s talk a little bit about debt and building the American dream. So, how have mortgages overtime helped to build the American dream?
WHALEN: Mortgages are frequently cited as evidence of the American dream, the ownership of a home, the homestead, right? But the actual market place goes back to the depression when the government got involved in the mid and late 1930s and created Fannie Mae which was an agency that would go out and buy loans, long-term loans and hold them and they funded these operations by issuing government-guaranteed debt.
And before that, you couldn’t get a 30-year mortgage, you couldn’t get a 10-year mortgage, Barry. My grandmother, Vera (ph), actually lost her house in the early part of last century because they had to balloon. IN other words, you had small payments initially and then you owed everything. And that didn’t work very well.
RITHOLTZ: That’s right. There was no such thing as a 30-year fixed mortgage. It was interest-only payments and then you would — if you were a borrower in good standing at the end of the loan period, you would roll it over into a new one and start all over if you weren’t making principal payments, you still owed exactly what you owed when you began.
WHALEN: That’s right. Correct.
And, really, if you work in a mortgage business and in the world of fixed income, you understand that we don’t really have 30-year mortgages. We have 30-day mortgages with an option to renew which is held by the homeowner.
And so, every month, the investor has to try and figure out how many of the loans in a given pool which is how they do bond — mortgage bond issuance are going to prepay, refinance, sell the house, default, whatever.
And it’s that optionality that makes mortgages so interesting and also so treacherous. It’s a huge asset class, it’s almost $12 trillion now.
WHALEN: But interestingly, it didn’t grow for 10 years after the crisis. It was flat.
RITHOLTZ: No surprise there.
WHALEN: Yes. But it’s interesting, Barry, because sociologically and in terms of the baby boom and everything else, when you study how the mortgage industry has behaved overtime, in the ’80s, crushed and burned, destroyed all the savings and loans, the ’90s was kind of flat. Now, there were fringe products there specifically our friends at Citibank who decided they could do no doc, no income verification mortgages for self-employed, right? That’s where subprime mortgages came from within the ’90s.
But then they got out because the results were so horrific and they did this in the U.S. and other countries, too. When I was working at the Fed, I was in charge of overseeing Citibank’s foreign adventures in places like Japan. Japan, they have no credit information on individuals. So, someone could default and just disappear and they did.
So, despite …
RITHOLTZ: What’s the length of mortgages in Japan, Chris?
WHALEN: God. They can be quite long. They can be multi-generational.
RITHOLTZ: Like 100-year mortgages or not unheard of?
WHALEN: No. No. Because the rates are very low and so what happens is if a young couple is getting married, the family will typically pull their resources, go buy him a house and if they need that, they’ll pay it off as fast as they can. You may have heard of a stated income loans …
WHALEN: … the very popular out on the West Coast (inaudible) 0:13:40.0 community, Koreans, Chinese, and very typically, these loans performed great even though they don’t fit in the box for Fannie Mae, Freddie Mac, Ginnie Mae kind of loans, they’re typically private.
The community take that. So, if a young couple starts a family, they’ll pay it down five years.
WHALEN: So, all of that has to be factored in to your analysis as an investor if you’re buying these loans, right? Like in the last few years, because of the bond market volatility, all of the mortgage loans that were made in ’18 and ’19 are prepaid because they’re all in the money now. They got all refinanced.
And I think over the next year or two, you’re going to see the Fed gently step on the bottom of the yield curve and force that front coupon down for both government loans and Fannie and Freddie loans and we’ll see a 3% mortgages in this country, I think, by the end of the year which means …
RITHOLTZ: So, let’s talk …
WHALEN: … you could have a Ginnie Mae 2 out there. You could have a 2% coupon.
RITHOLTZ: Wow. Let’s talk about that a second because if I remember pre-crisis, the average length of a mortgage was about seven years. Meaning people typically would move into a house, they start their home, have the first kid, outgrow the house, and by year seven, they’re selling and trading up to the three-bedroom split and that was fairly typical.
Are those numbers about what you recall? And what does that look like today?
WHALEN: Yes. It would be seven-years or even shorter during period of very high labor market mobility, for example. You also have the speculative component back in the 2000s, a lot of second homes which would flip quite fast.
Today, average lives are 10 plus years. In fact, the servicing portfolios that are being created right now, Barry, with refinancings are going to be worth a lot of money because they’re going to have average lives over 10 years whereas the older strips, like I said, bonds were sold one and two years ago with much higher coupons, they’re going to prepay.
And so, the average life of those pools, it already has. It’s shrinking down to, like, three years. And if you (inaudible) 0:15:53.9 and you paid 104 for the bond and you’re getting redemptions back at par, that’s kind of painful.
RITHOLTZ: That’s a loss.
RITHOLTZ: So, we don’t really love predictions here. We kind of frown on predictions around these parts but what I’m hearing from you is that you think as part of the coronavirus pandemic response, the Fed is going to encourage another wave of refinancing by keeping part of the curve low, not inverted by low and flat, so that it becomes attractive for homeowners to refinance. Did I hear that right?
WHALEN: Yes. I think you’re going to see what we call streamline refis but don’t require appraisals. In other words, you have an existing borrower. You already know who they are, right?
You’re lowering their cost. You’re typically doing a rate refi rather than having them take cash out. But that’s OK. If you lower the household’s expenses, you’re improving the credit, it’s going to have a lower probability of default and then overall, what you want is to get cash into the economy right now. Right?
WHALEN: So, yes. I think the Fed would love to see a gradual surge in refis because you know what? They have to buy the paper, Barry. Their mortgage portfolio’s going to prepay in the next six months. It’s like a trillion dollars.
So, just to replace that and keep their balance sheet stable in terms of monetary policy purposes, they’re going to have to buy a lot of paper. And I think the predominant source will be the government market, Ginnie Mae.
We’ve had some problems with the Fannie/Freddie component for the last couple of weeks while their regulator, Mark Calabria has figured out what to do, but I think the good news this week is he’s figuring it out. We’re helping him.
So, hopefully, the whole mortgage complex is going to have a solution to both the forbearance with the COVID-19 and then the resulting to qualify (ph). I think a third or more of the people who look for forbearance on their mortgages, Barry, are going to ultimately default.
RITHOLTZ: Let’s talk a little bit about something that is in the news today, namely the government’s paycheck protection program, better known as PPP. How are banks handling this? Who’s doing this well and who is not?
WHALEN: The banks, like all of us in the world of finance, had this CARES Act legislation thrown at us. There was no guidance on how we were to implement it. And in many cases, it was unfunded.
So, for example, you’d hire mortgage space, whether it’s government guaranteed or private has to figure out how to deal with consumers who’d been told they don’t have to pay their loans.
And this really only applies to government guaranteed loans but everything, autos (ph), you name it, the rent, whatever. So, everybody thinks they got a free pass, but it’s not.
Now, with small businesses, there was a window there where you could go to your bank, typically the bank you use for the business and payroll, and you could get a loan from them. And if you agreed to keep your people on, it would eventually be forgiven.
There’s all so much money now. So, most of the small business people I know who have tried to access these credits have found out that the banks have already run through the money and I think what’s important to realize is that for a lot of small business, it’s better to just put your people on employment and keep their healthcare active.
Because in many cases …
WHALEN: … especially, the lower level employees, it’s a raise. So, they could stay home with their families and keep their health insurance intact and you just basically wait. And I think that’s what a lot of small business have decided to do.
RITHOLTZ: So, we’ve heard about a lot of smaller community banks that were very effective at processing these PPP applications, but less so for the big money center banks, is that simply a function of employee-to-client ratio? I mean, if you’re Wells Fargo, or Bank of America, you have a bajillion clients. But if you’re a smaller community bank somewhere in the Midwest, I got to think it’s pretty easy for them to process those applications quickly.
WHALEN: That’s correct, Barry. The larger institutions have trouble with processing anything out of the ordinary. There are no economies at scale in banking, right? So, the little community bank, even the regionals are typically more flexible, they can handle increase at the branch level and they can make decisions because they have a flatter organization.
The big banks are pyramids and they do this intentionally to keep them from causing trouble. So, essentially, the largest banks are very inefficient, by design. And that’s why when you call them, they have this very narrow bottleneck of capacity, for example, to take calls because you have to actually talk to someone if you want to get one of these loans.
And they h ad some online presence. But remember, they had to put all this up in a matter of days. And banks don’t …
RITHOLTZ: That’s amazing.
WHALEN: … move that quickly.
See, non-bank companies, because they’re flat, they move very quickly. And smaller banks tend to be much more nimble than larger institutions.
RITHOLTZ: So, for these banks, how does participating in the PPP plan benefit them? It certainly doesn’t hurt if your clients can survive, but is there any …
WHALEN: No, it’s …
RITHOLTZ: … incentive for the banks to do something?
WHALEN: Yes. They make a couple points upfront on sale and the loan. No credit risk. It works.
RITHOLTZ: Yes, that sounds …
WHALEN: … they’re all covered credits. It’s like a small business administration loan. The banks have a nice little bump in the front because it typically will sell those loans.
WHALEN: (Inaudible) 0:21:56.4 portfolio if they want but they have a number of incentives to do the business, believe me.
RITHOLTZ: What kind of bank was best positioned for this COVID-19 crisis? Was it the big money center banks, was it the investment banks? Was it the regional banks or the smaller community banks? Who do you believe is going to come out of this as having not only survived but thrived?
WHALEN: I think first and foremost, you look at JPMorgan simply because of the size, a trillion plus in core deposits on one side of the business and a pretty robust capital markets business and also derivatives on the other side. It’s about half and half. Wells, Bank of America, likewise, big IOMs (ph) of liquidity. More in a trillion dollars of core deposits.
The ones with more consumer exposure like Capital One, Citi, they’ve been getting beaten up just for that reason. Credit is the concern. And in the investment banks, interestingly, Morgan Stanley, during the sell-off has the outlier in the whole group. Their credit default swaps were trading more than 200 basis points over the curve which is a lot.
I’ll give you an example. Before the crisis in the selloff, kind of beginning of February, most of these banks were at 40, 50 BPS over the curve for five-year credit default swap insurance. So, they all widened and Goldman, Morgan Stanley, American Express, they got beat up.
Today, AmEx is still trading the three-times buck. It’s a premium property because it’s the best performing large bank in the United States even though it’s small. It’s only about 200 billion in assets.
So, I would tell you the consumer exposure is the real pain point. But you’re going to see pain on the institutional and the commercial side, too.
RITHOLTZ: And if I …
WHALEN: I think low losses for banks — it’s going to be across the board, Barry.
RITHOLTZ: If I recall correctly, Capital One is now the largest credit card issuer in the country. Is that right?
WHALEN: Yes. They rolled up several model lines, 10, 15 years ago. And it’s primarily a credit card issuer, pretty high cost of funds, but they’re very efficient. They’ve gotten into some other areas. It got them in trouble, like oil which was kind of surprising. I think people are taken aback by that.
But the reality is these model lines don’t do so well. They need to broaden their business and Capital One has not been very good at Main Street banking. They bought a couple of retail banks for — basically, for the funding but they haven’t developed those businesses.
In fact, if anything, they’ve shrunk them down so they have consumer which is very nice, very high spreads, and then they have a capital markets business that unfortunately has been in the headlines recently.
RITHOLTZ: So, you mentioned rollups and some M&A activity. I have to assume that in 2020, that’s completely dried up or is these still things happening behind the scenes?
WHALEN: Well, I think for now, yes, because valuations are going to be difficult until we get through the peak of credit costs. It’s hard to value a bank if you don’t know what the next three to four quarter worth of credit looks like.
So, we got to get through that and there are other assets on bank balance sheets that are also big question marks right now. And I think …
RITHOLTZ: Such as?
WHALEN: … once we get through that — well, think about servicing portfolios for all kinds of loans. Typically, those are annuities, right? You get paid a little fee every month, it’s pretty nice. But because of the …
WHALEN: … because of the uncertainty regarding all this forbearance whether it was legally authorized or not, right, the regulators are forcing all lenders, even private lenders to give forbearance.
Allied has reported earnings (inaudible) 0:25:51.5 lender. They basically had to extend 120 days of loan forbearance with our private loans. The bonds …
RITHOLTZ: Four months.
WHALEN: … will pay for this. Yes.
WHALEN: So, the regulators essentially threatened all of these non-bank lenders who operate outside of the government guaranteed space and said you must provide forbearance. So, it’s just coercion on a national scale.
And they’ll get through it. We have to figure out what those loan portfolios are worth now. How many of the people who asked for help are going to get back on track? That’s the key question.
Because then you can value the portfolio.
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RITHOLTZ: So, what do you think will end up happening with all these lenders who suddenly have a four-month hold in their revenue or at least their cash flows, they’re still owed that money, it’s just kicked down the road a little bit.
WHALEN: In theory, yes. If the consumer cures, and for example, and this is private, by the way, there’s no government mandate here as to how you fix this, could say, well, we’ll push those missed payments to the end of the loan and we’ll modify the loan, OK, just contractually.
RITHOLTZ: That’s reasonable.
WHALEN: We won’t buy the loan back from the bond investor, we just leave it because that makes live a little easier.
RITHOLTZ: Same thing with the mortgages. They would ideallylike to leave those mortgage notes in these pools, to back all these securities because when you buy it out, you have to buy it out at par. It’s a lot of money. If you’re talking about a couple months interest payments, given how low rates are right now, Barry, that’s manageable.
And in fact, the regulator for Fannie and Freddie just came out and said you guys have to advance for four months and then we’ll come and reimburse you.
So, we’re starting to get some clarity on this, right? But for private investors, private mortgages, commercial mortgages, multi-family, all of this stuff. So, if it doesn’t have a government guarantee, then the bondholders will pay. The servicers get reimbursed first. By the way, if there’s missed payments, they get their fee, the bondholders basically have to wait. So, that’s how it will work.
RITHOLTZ: Back at the line.
WHALEN: Back to the line. The AAAs are in front and then the lower tranches in these deals tend to be several, those are the ones who will take the pay (ph).
RITHOLTZ: So, Chris, let’s talk a little bit about the current state of the economy. I don’t think many people would deny that we are in a recession today. How bad is it and how deep and long can this last for?
WHALEN: Well, I was on a call yesterday with a bunch of my mortgage buddies, a lot of economists, Sam Khater from Freddie Mac and people like this and they really do excellent research on the demographics, if you will, of housing.
And then, you looked at bank earnings. What were those provision numbers from JPMorgan and Wells Fargo telling us? And it’s telling you that the bankers expect a pretty large way of losses in the next couple of quarters.
So, when I look at GDP estimates are down 30 in the second quarter which is what I was hearing yesterday, I kind of step back as a bank analyst and I think to myself, this is going to be worse than 2008. To me, I think we will have destroyed a lot of the small business service sector that was so important as a source of marginal employment in the United States, people — look at New York, Barry, the entire entertainment industry is gone.
Hospitality, restaurants, all of these areas that were important for — not just for people generally, if they needed to find a job or younger people who came to the city who were trying to get in involved in some career, that was the first place they would look for a job and these people have left.
I think it’s going to be very interesting to see the numbers for New York City in the next couple of quarters because I suspect a lot of people went to live with mom and dad.
RITHOLTZ: Anecdotally, we’re hearing a lot of people who have a second place to live, either a beach house or a second property or if they’re younger with their parents or siblings, they’ve fled large parts of Brooklyn, half of the Upper East Side and Upper West Side are supposedly empty. I haven’t been back to the city since this started, but from what I’m hearing from people who either live or lived in the city, they are sheltering outside of Manhattan, are you implying that that might become a permanent situation?
Because people talked about that post 9/11 but we really didn’t see — whoever left was very quickly replaced by a younger person. Do you think this changes the dynamics or urban density and people living in cities?
WHALEN: Well, I think it’s going to change the business dynamics in New York for a while. Because in 2008 and after 9/11, yes, we had to hunker down. But then the economy restarted. We didn’t have the distance from ourselves physically. We didn’t have to deal with all of the aspects that that implies.
So, I think when you’re still worried about vulnerable populations and you have to protect them, that means that you’re going to try and let the economy restart to a degree but I don’t think you regrow these service businesses back overnight, Barry. They’ve been decapitalized.
And even if they were helping their employees with the federal money, they still may not survive because they’re going to be facing a diminished revenue stream coming back. What if we have to take half the table inside of the restaurants, right?
WHALEN: If people …
RITHOLTZ: What you do in a Broadway theater where you’re shoulder to shoulder …
RITHOLTZ: Front and back. Are they going to sell Hamilton tickets with 25% of the audience, 75% missing?
WHALEN: We just went through Passover and Easter, right, these were typically times where Europeans, Latin Americans would all go to New York for a week with their families.
WHALEN: They’re not here now. There’s only New Yorkers in central park right now and it’s a different scene. In fact, I’ve been riding my bike around the city. I go all the way down to South Ferry and back. There’s just no traffic.
RITHOLTZ: How empty is the city compared to what it was like post 9/11?
WHALEN: It’s more empty than that. Very little traffic. Although it is slowly, slowly starting to increase. You can see that there’s more people moving around. I think this is going to be a profound economic shock to a lot of big cities that are used to trying to attract people to come in. That’s going to be …
RITHOLTZ: Quite interesting.
WHALEN: So, we’ve had this enormous monetary response from the Fed. They took rates to zero. They announced they were going to add $2 trillion more in lawn furniture and various high-yield paper, whatever they can buy, they’re going to put on the balance sheets.
We’ve also had a — at least not over the short term, $2 trillion fiscal stimulus, how does this response compare to what we’ve seen from crisis in the past?
WHALEN: Well, the federal response in the 30s was large. But it didn’t really do much. In fact, it faltered and then World War II kind of saved us.
In 2008, you had the financial response, obviously, to catch some of the banks. But the industry, more or less, cleaned up its own mess and the economy healed itself. I mean, the thing I always remind people, Barry, is the fact that we still have a private bond market in this country and we have a market for different types of assets is so important because it restarted by itself. The auto sector restarted by itself in 2009 because it was for fully secured deals.
But today, given the hit to global auto has taken for example, and you look at sales volume, estimates and everything else going forward, I think the whole credit of this industry has changed even the exemplars like the Toyotas and the Daimlers, they’ve taken a hit.
I think you’ll see consolidation, by the way, back to your point about M&A, definitely. Because we have too many automakers …
RITHOLTZ: In the auto sector?
WHALEN: Yes. If we’re doing 11, 12 million units next year, you’re going to see M&A.
RITHOLTZ: That’s way down from the post crisis peak of about 17 — what were we? At 17 million …
WHALEN: … went down in 11.
RITHOLTZ: … cars in the U.S.?
WHALEN: Yes. It went down to 11. And it was goosed by the Fed. We were talking before about different phases. In the period after the ’08 crisis, you had a lot of fringe (ph) products. You had autos, you had market place loans, to all sorts of nonbank lending to business individuals, et cetera, et cetera.
All gone. Poof. Gone. In fact, the subprime auto sector is going to go through the ringer now because, again, the bondholders are going to pay for the forbearance.
So, I think — it’s going to take some time to get people back in the game. You’re going to see spreads stake (ph) kind of wide for a while on high-yield securities, compare the treasuries, and it’s just a matter getting everybody focused. But I’ll tell you this, Barry, I think people are much better conditioned this time than they were in ’08.
I think people are coming back to the markets much faster than they did in ’08 and ’09 when nothing was happening. You remember that.
RITHOLTZ: Do you mean …
WHALEN: Nothing was happening.
RITHOLTZ: Do you mean investors or consumers or both?
WHALEN: Institutional investors, vultures, others. I mean, we’ve got an MBS fund we’re getting ready to launch as soon as we have a little more clarity from Washington playing vanilla stuff, right? But still, there’s opportunities out there because the markets are disrupted.
People are looking to buy commercial real estates off the stress sales. They’re looking to buy multifamily off the stress sales. So, though, perhaps not New York because of the rent control loss, but around the country, yes. Definitely.
RITHOLTZ: I’m thinking too small. I’m looking to buy distressed sheet metal off the auto sites between bring a trailer in classic cars, I’ve seen prices fall about 10%, 15% over the past month and I love the idea of buying something at a discount but that’s just me.
So, your first book was inflated that looked at how debt helped build out the American dream especially houses, I was kind of surprised by the topic of your recent book, “Ford Men: From Inspiration to Enterprise.” What motivated you to pivot from debt and housing to automobiles and Ford?
WHALEN: I had always been a student of Henry Ford, like many Americans. But particularly his role in the great depression. And so, one of the things I focused on in the book was how Henry basically started the banking crisis in 1933, before FDR took office in March of that year it’s an extraordinary story because he was such a character.
And quite …
RITHOLTZ: Wait. Did you say — did you say started the banking crisis?
WHALEN: He initiated it. Yes. He said that he was going to take his money out of the Detroit banks and when the government of Michigan found out about this, he declared the bank holiday in Michigan in February of 1933.
This event then rippled through the rest of the country. So, by the time FDR takes office, every bank in the United States is closed and had been.
WHALEN: The Detroit banks are really important in those days. Henry Ford was the biggest cash depositor in the country and he ran the whole company on cash. Out of his pocket. It was like a plantation.
So, I got into Ford, first and foremost, because I am student of that ear and then I had been a contributor to the “Washington Times” magazine inside on the news and I had written the whole series of articles about the Explorer rollover which was quite a mess. It was really the beginnings of giving teeth to consumer regulation in the United States. If that happened today, a lot of people at Ford would have gotten to jail for what happened …
WHALEN: … those vehicles. Yes.
RITHOLTZ: What? This is the single vehicle rollovers with some of the SUVs? Yes, I recall that.
WHALEN: The Explorer …
RITHOLTZ: Well …
WHALEN: The Rangers and …
WHALEN: … the Bridgestones and Firestone tires.
WHALEN: It was quite a mess.
RITHOLTZ: Take a big vehicle, raise it, give a short wheelbase, and that is not a recipe for stability at high speed. If you have to suddenly cut the wheel.
WHALEN: No. It didn’t work. And there — it’s an interesting episode. But what I tried to do with “Ford Men,” just in terms of the overall book, Barry, was remind people of the rich literature around Ford and people like John Kenneth Galbraith and many others who wrote about the family and they were such a remarkable family. It was really the first transformational business fortune in American history, mor than steel, more than these other types of fortunes that had been made in the past, they made things — they made cars.
But interestingly, the first (inaudible) 0:39:47.1 were built by the Dodge Brothers because they were the first great parts makers in the United States.
Both of them died in 1921 of the Spanish Flu. Had the Dodge Brothers survived, the auto industry would have been dominated by them, and not by General Motors and a number of other players, history would have been quite different.
RITHOLTZ: So, by the time we get to something like Ford vs. Ferrari, that’s 30 years later?
WHALEN: Yes. Henry the deuce, Henry Ford II had taken over and they were still and also ran compared to GM. They were typically compared to Chevrolet. That’s how small Ford was.
WHALEN: But they still had a lot of staying power and as I’ve always said, God clearly love the Fords despite their many sins, because somehow they avoided the fault.
WHALEN: All this time.
RITHOLTZ: In ’09 and ’10, they were the only U.S. automaker, didn’t get to need to be restructured.
WHALEN: Well, they couldn’t be restructured. As I talk about in the book, Goldman Sachs had already helped the family take money out of the company and if they had been restructured in the special voting stock held by the family would have gone and they would lost control.
So, there’s all these little nuances and Goldman Sachs is a very important part of the Ford story. It was their design of the Ford Foundation when the Ford Family gave most of the economics in the company to that entity and retain most of the vote in this asymmetrical share transaction that’s Sidney Weinberg created along with the lawyers for Edsel Ford that saved the company from the taxman.
Because FDR hated Henry Ford and he had passed legislation in Washington, specifically, to kill the Ford fortune. And so, Goldman thwarted that intention.
RITHOLTZ: And now the Ford Foundation is a couple of billion dollars and still …
RITHOLTZ: … still active?
WHALEN: Well, when they did the IPO for Ford after World War II, the foundation was the only seller of shares. They didn’t have to raise money for the company because they had plenty of money.
RITHOLTZ: These are the work-at-home abbreviated version of our favorite podcast questions and let’s just start with streaming. What are you streaming these days? What are you watching on Netflix? What do you listen to in podcast? What’s keeping you entertained?
WHALEN: I am watching old movies with my beautiful wife, Nicole, who’s a recent naturalized American citizen. So, we’re filling in some of the blanks with her.
And I stream a lot of music. I spend my time reading, Barry. Like you, I basically have to consumer stuff all day. I watch “Westworld.” I watch a lot of things on TV. But …
RITHOLTZ: Give us a couple of old movie titles for the youngsters who may not be familiar with it.
WHALEN: Well, yes. We just watched “Volver” with Penelope Cruz, which is stunning. I love that movie.
RITHOLTZ: So, when you say old, you’re — that’s not really old.
WHALEN: No, “Ben Hur” …
RITHOLTZ: That’s old.
WHALEN: “Agony and the Ecstasy.”
WHALEN: “The Ten Commandments,” we just did. So, we’re having a lot of fun.
RITHOLTZ: So, you’re working your way through the ’30s and the ’40s along with the Ford and the post-Depression era in your …
WHALEN: I have to pick buff guys. The girls want buff, right? So, they like Charlton. Charlton was a good-looking guy.
RITHOLTZ: Who are your early mentors? Who helped to shape your career?
WHALEN: Well, my father, first and foremost, who thought me how to write with a yellow pad and pencil. And I think a number of editors over the years, Terry Houser (ph) and Carl Flock (ph) at the legislative digest, the folks at Barron’s, all the editors at Barron’s, Tommy Donlan. I wrote many editorials for him.
So, as a writer, those are the people who really pounded on me and said, editing building character, right? You know all about that working with Bloomberg as much as you have.
RITHOLTZ: I have to tell you, I wrote one editorial for Barron’s called “A Memo Found on the Street” that I felt was brilliant when I handed in to Tom Donlan. It was 1,600 words and he showed me how to take a scalpel and remove everything that wasn’t lean sinew and what came out of that was 700 tight words and he blew me away as to how strong a good editor can make it right.
WHALEN: No, that’s quite right. That’s quite right.
And you know, there are other people in the financial markets, I’ve had so many teachers, Alan Boyce (ph) who thought me about mortgage servicing rights, the guys at Bear who thought me how to do deals, who learned how to do deals by working on deals late at night.
RITHOLTZ: You mentioned reading. Let’s talk about your favorite books, what books have you been staying occupied with during this lockdown?
WHALEN: I just finished “Dark Towers” about Deutsche Bank, as you can imagine, David Enrich …
WHALEN: … fabulous book.
RITHOLTZ: He wrote the book on the LIBOR scandal.
WHALEN: The LIBOR scandal talks a lot about President Trump and how he survived. The guys’ got amazing grit, the fact that he was able to bluff his way through all those situations. You got to hand it to him.
RITHOLTZ: Nine lives, for sure.
WHALEN: My God.
RITHOLTZ: Give us another title.
WHALEN: There are a lot of books I want to read, I just don’t have time. I’ve been reading legal documents for the past three weeks, trying to get a liquidity facility in place for the independent mortgage banks in Washington, so that’s taken a lot of my time.
And then …
RITHOLTZ: What’s the book on the top of you wish list?
WHALEN: My, well, I want to go through George Moore’s book on banking. I desperately want to go back and reread some of my George Orwell (ph) because it’s very timely now.
RITHOLTZ: To say the least.
WHALEN: And then there are a couple of other things that I have on the pile. I did go through “Red Notice,” Bill Browder’s book about Russia …
RITHOLTZ: I heard that was really interesting.
WHALEN: My God. You’d never go to Russia, Barry, after you read that book.
RITHOLTZ: My brother-in-law used to be general counsel for Amoco, that little BP-Amoco deal was his doing.
RITHOLTZ: And Amoco had relationships with many of the Russian oil companies and the Russian government. And that was pretty much his response. So, what’s your take on Russia? He goes, don’t ever go there. I’m, like, OK.
RITHOLTZ: Although, I’ve been to St. Petersburg, so I really — I guess, I violated that.
What sort of advice would you give a millennial who is interested in a career in banking?
WHALEN: Go work for a small bank, learn as much as you can about how the bank operates, particularly the back. You want to learn how do they do everything from an operations perspective and then you’re going t have a lot of value.
RITHOLTZ: And our final question, what do you know about the world of banking today that you wish you knew 30 years or so ago when you were first getting started?
WHALEN: I think the evolution of banks in United States away from business lending to focusing on mostly housing related, two-thirds of U.S. banks today, Barry, have housing exposure one way or another commercial real estate. So, it’s become really, really heavy on the real estate side. And I guess that’s it, as you would expect because most companies just go to the capital markets, they don’t have to go to a bank. So, that’s a big change.
RITHOLTZ: We have been speaking with Christopher Whalen. He is the Chairman of Whalen Global Advisors and author of several books, most recently, “Ford Men: From Inspiration to Enterprise.”
If you enjoy this conversation, well, look up or down an inch on Apple iTunes, Spotify, Overcast, wherever your finer podcasts are found and you could see any of the previous 300 and something conversations we’ve had over the past five and half years.
We love your comments, feedback, and suggestions. Write to us at email@example.com. You can follow me on Twitter @ritholtz. Check out my daily column on ritholtz.com or see my weekly Bloomberg column at Bloomberg.com/opinion.
I would be remiss if I did not thank the crack staff that helps put this conversation together each week. Atika Valburn is our product supervisor, Michael Boyle is our producer, Charlie Vollmer is my audio engineer, and Michael Batnick is my head of research.
I’m Barry Ritholtz, you’ve been listening to Masters in Business on Bloomberg Radio.
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