Glencore Rout Blamed on Short Sellers Playing With CDS
Companies / Metals & Mining Oct 08, 2015 - 07:57 PM GMTBy: Bloomberg
John Mack, director at Glencore and former CEO of Morgan Stanley, joined hosts Stephanie Ruhle and David Westin on Bloomberg TV's new flagship morning program, Bloomberg <GO>. He spoke about the stability of Glencore amid the global selloff in commodities. He also discussed why he is bullish on China, 2008 and responsibility for malfeasance at financial firms, and Hillary Clinton's presidential campaign.
Mack said fund managers shorting shares of Glencore and playing with credit-default swaps were responsible for recent volatility: “You have fund managers who short the stock, play with the CDS; that’s exactly what happened during the crisis. I mean, that’s fine for them to do that. That creates a lot of volatility."
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MACK ON GLENCORE:
RUHLE: There is one company we have been talking about for weeks that maybe needs a little capital, maybe needs a little credit. And it’s Glencore. Obviously the metals and mining company has been on a roller coaster ride. Volatility in commodities is shaking this company to its core.
You sit on the board of Glencore. This organization has been the one to watch -- the smartest, the sharpest, the best. Did they get too close to the sun?
MACK: No. They are the sharpest and I know all of them. I’ve never --
RUHLE: Long term capital on (ph) the sharpest too.
MACK: Well, maybe they were too sharp.
RUHLE: There you go.
MACK: Listen, they have real assets. They have a balance sheet that had too much debt on it. We went out and raised a rise (ph) offering and brought in $2.5 billion. We have begun to cut back on some of our mines and shutter them. You’ve seen what’s happened to the stock in the last few days, how about just come back from where it sold off.
And then you have -- you have fund managers who short the stock, play with the CDS; that’s exactly what happened during the crisis. I mean, that’s fine for them to do that. That creates a lot of volatility.
RUHLE: But not real investment.
MACK: It’s not real investing, no.
GREELEY: It’s -- let me offer a counterpoint here. I’m actually looking at Bank of America Merrill Lynch from Alastair Ryan. We estimate the global financial systems’ gross exposure to Glencore at over $100 billion and believe a significant majority is unsecured. The recent widening in debt spreads, in the case of the exposures, now coming into investor focus and paid attention now
Now they’re paying attention. Is that true? $100 billion mostly unsecured?
MACK: I don’t know the exact number. The real point is are they paying attention? And the answer is absolutely yes. What they’ve done in cutting back on some of their mines and closing them.
But the other thing you’ve got to think about is the real reason this has got so much focus is this is the commodity market sold off for dramatically. China is not the big buyer of copper as it was. And the other thing is, and this is changing for the industry, not just for Glencore, it looks to me when you own a mine, you feel like the number one thing you need to do is just produce. Sometimes you ought to cut that back, whether it’s oil or copper or whatever it may be.
*******
DAVID WESTIN: Thanks very much, Matt. Still with us Ben Bernanke, former Fed Chair. Now, we're joined by John Mack.
STEPHANIE RUHLE: John, welcome!
JOHN MACK: Thanks for having me.
WESTIN: Known worldwide by former CEO of Morgan Stanley during the financial crisis of 2008. I think what most impresses me about him, he not only played football for Duke but he was on a scholarship for football to Duke. I mean that's impressive.
MACK: I wasn't very good at either.
(LAUGHTER)
MACK: Either the scholarship or football.
WESTIN: So I would love to come back to you Ben for a moment and it's out of the book actually. Monetary versus regulatory functions.
BEN BERNANKE: Mm-hmm.
WESTIN: For the Fed, and you talk, page 92, I noted, you talked about the fact that monetary wasn't really the approach that needed to be taken when it came to the bubble in mortgages.
BERNANKE: Right.
WESTIN: And you say "In a 2002 speech I'd said that financial regulation and supervision should be the first line of defense against asset price bubbles and other risks to financial stability." Has that been corrected now? There was a regulatory fail wasn't there?
BERNANKE: Yes, absolutely.
WESTIN: And has it been corrected? And has it been overcorrected?
BERNANKE: That's an awful lot to chew on here. So I think the critique of the Fed prior to the crisis I mean a lot of it is focused on monetary policy. People who looked at it carefully generally agree that monetary policy was not the main reason for the housing. One way the Fed was responsible was along with other regulators, it didn't do enough to prevent the bad mortgage lending. And there's a lot of reasons for that.
You know, one reason was that there was this very strong political support for sub-prime lending because it was creating home ownership so broadly.
RUHLE: So hold on a minute. I'd love to just back that up.
BERNANKE: Yeah.
RUHLE: A strong political support. So Barney Frank for example who has been so critical of bad bank behavior during the financial crisis, specifically around mortgages. Would you say it was Barney Frank who was promoting this, it's part of the American Dream, your birthright here to own a home?
BERNANKE: Well, it wasn't Barney alone. I mean the people, the regulators were saying, you know, we want to take care of predatory lending. We want to get rid of that. But sub-prime lending is positive because it improves home ownership. So it was a goal that a lot of people were pursing. And in doing so, some bad practices were not taken care of.
WESTIN: I think if you look at it it goes well back into the '90s and the HUD policies and things to really encourage home ownership particularly by lower income people, it was thought of as good.
BERNANKE: And to answer your question, at least those specific things have been addressed pretty significantly. In fact I've had a lot of complaints about mortgages being too hard to get now. The other thing that we've done, we, the regulators, the country has done, is made the system a lot strong. So capital in the banks is way higher. You know and generally the system is much more resilient than it was.
WESTIN: And, John, I think you've said that you thought that there was not enough regulation as well going into the--
MACK: There's no question about it. I think Ben has hit it right on the head. It was political, it got out of control. It got too easy. Securitization became almost a machine running securitized products out. And there wasn't enough oversight and there was a lot of fraud. When everyone's happy and the market's going up. I think it actually gets worse in being sloppy in how things are done. It's totally changed now. And that's what we need.
But again politics had a lot to do with it. And look it's great that people own homes. But it's got to be a situation where they can afford the home. There's no lying, cheating. You can't have 4 or 5 homes which some people did.
WESTIN: Right.
MACK: Playing the mortgage game.
WESTIN: And they were flipping them.
MACK: Absolutely.
WESTIN: Yeah but politics don't go away.
MACK: They never go away.
WESTIN: Politics are always with us.
MACK: Sure.
WESTIN: So politics plays some role I suspect in the regulation now that's come to bear.
MACK: Yeah, but much more so let's make sure this doesn't happen again. You're not getting the big push you go back 8 or 9, 10 years ago that they were getting. So it's gotten a lot better in my view.
RUHLE: Is there any risk that the rescue, intervention in 2008, could we possibly look at it, because we're not in that much better of a situation today, that really maybe we just kicked the can down the road and it wasn't necessarily an absolute rescue?
WESTIN: Well, that's a good question--
MACK: I disagree with that.
RUHLE: All right, hold on.
MACK: I disagree with it. I mean, Ben mentioned it earlier, the amount of liquidity in the banks, lower leverage ratios in the banks, I really don't see how this could happen again. Unless that changes. The speculation that's going on in the Street is dramatically lower than what it was back in '06, '07, and the beginning of '08. I just don't see that.
RUHLE: But do you see our economy doing that much better today?
MACK: Well, look it takes a long time to get out of the hole we were in. But yeah I do think, look at our economy vis-a-vis the rest of the world. I think we're doing pretty well.
WESTIN: So Matt, we want to go the Bloomberg to see some data.
RUHLE: Ben, you want to weigh in?
WESTIN: So, Ben, weigh in, exactly on Stephanie's contretemps with John.
BERNANKE: Well, I just look at that picture; the stress in '08 was unbelievable. And our economy was at great risk. And as John was saying, the US has done much better than any other industrial country. We're about 10% above the highest peak of our GDP before the crisis. Europe is not yet back to the pre-crisis level.
WESTIN: But there's I think there's a sense across a lot America, just regular working Americans, that we're not doing as well as we should be. Is that wrong? Should we just get used to 1.5, 2% growth?
BERNANKE: Well, there's a couple of issues. One is the distributional issue. And that's something that the Fed really can't do much about. But it's certainly a broader issue for our society and our politics.
The other is the reason that growth is so slow is not because the recession is still persisting. What's causing the growth to be slow is that productivity gains are very slow. And that requires a broader set of responses.
RUHLE: When you say the distribution, meaning the rich are simply getting richer?
BERNANKE: Rich versus the poor ,yeah.
RUHLE: But could one make the argument QE was extraordinary the first time around. But we've had rates so low for so long it's been great for the financial industry. So one could possibly point to the Fed.
BERNANKE: Again, no, you can't. Again I would say there's a huge difference between the US recovery and other countries. What's the main difference between the US and Europe? It took them six years longer to do QE. I think that's the main difference.
In terms of the income distribution, you know, we can go in this at any length you want. But basically this is a long-term trend. This has been going on for 30, 30 years or more. And it's related to things like globalization, technology, things that are not going to reverse in a few days or a few weeks.
WESTIN: So I want to take advantage of I think a special moment. We have Ben Bernanke, former Chair of the Fed. John Mack former CEO of Morgan Stanley, who were on opposite ends of some phone calls on a Sunday in the fall of 2008. When you were facing a pretty dire situation that affected all the financial markets basically. You had bank after bank, institution, AIG, other financial institution after institution, look like they were going to go belly up frankly. And you were worried about a meltdown. You were fighting to keep Morgan Stanley afloat basically. I'd like to go back because you actually talked with each other at a time when Ben you were saying, we've got to do something, and really perhaps you should think about selling your company John.
Take me back through what you were thinking about it. You talk about it some in the book but only sort of a glancing blow. You thought they were going to get the Chinese to bail them out perhaps.
BERNANKE: Well, after Lehman and John can talk more about it, a lot of pressure turned on the remaining investment banks. On Morgan Stanley and Goldman Sachs. And one of the things that the Fed did was to make the two companies bank holding companies which were mostly symbolic. It was mostly essentially assuring the market the Fed would now be overseeing those companies from a supervisory point of view.
But Morgan Stanley and Goldman Sachs both went out and got investors, private investors and that was really key to strengthening those firms.
WESTIN: But it didn't happen right away.
BERNANKE: It was a couple weeks, yeah.
MACK: Well, it didn't happen right away but it was in the works, working it the whole time. And the conversation that Ben and Hank Paulson and Geithner and I had was a very forceful conversation on what they wanted Morgan Stanley to do. Which as he remembers, I was not going to do that.
WESTIN: And what did they want you to do?
MACK: They wanted us to sell the firm for $2 a share.
WESTIN: And sell it to?
MACK: JPMorgan. In all fairness, it was Tim who wanted that. I don't know where Ben stood.
BERNANKE: Yeah, I wasn't on that conversation. It was Tim.
MACK: In all fairness.
WESTIN: And was Jamie Dimon interested? Would he have bought it at that?
MACK: He was not interested. And he said all I would pay is $2 a share. We had 3 or 4 conversations that Tim kept saying call Jamie. And Jamie didn't want to do it and I didn't want to do it. But when the Head of the New York Fed is pushing you to make those calls, you make the calls.
RUHLE: So after the fact, when we look at the last few years and the problems banks have faced since these acquisitions, is it fair because when we look and say it was the Fed who pushed the banks into these trades one would say.
MACK: No, that's not fair. You're talking about to get us into this position? No the Street, when you just make money and the market's going your way and you can borrow low, sell high. You can securitize and people are making 20, 30% in ROE with their stock. Someone's got to blow the whistle. It got carried away. And leverage was wild. I mean when you think about the leverage these firms had including Morgan Stanley, it was absurd.
But when everything's going up, everyone wants to play. And I remember calling Tim on a leveraged loan deal that we were trying to make. We were uncomfortable with it. We kept passing and finally our guy said look, we have to be involved, we passed on the last three deals.
We get involved at let's say 6 times leverage which is ridiculous and then once the sponsor had the leverage they turned it again to 7 times leverage. We dropped out. I called the Head of the New York Fed and said we're out of control. I said I can say no to 1, 2, maybe 3 deals. On the 4th deal I have to play.
WESTIN: So you knew Morgan Stanley was overleveraged and the banks were (INAUDIBLE).
MACK: Only a fool would not know that we were all overleveraged.
WESTIN: But the Fed must have seen that.
BERNANKE: Well, it was becoming increasingly obvious you know as we got into the crisis. But part of it that was happening with the fear and the panic people were dumping securities you know as quickly as possible. That was driving down the prices. And that was making the situation a lot worse.
MACK: Yep.
RUHLE: OK, but today when you look at what Corporate America is doing, we are seeing corporations borrow trillions of dollars to buy back stock. We're seeing M&A at record levels. Is that helping the economy?
BERNANKE: It can help. It can help.
RUHLE: It can?
BERNANKE: Sure of course it can. First of all buy backs--
RUHLE: How do buy backs help?
BERNANKE: Buy backs put money in the economy. It gives the shareholders money. The M&A if it's good M&A it will improve efficiency and rationalize markets.
RUHLE: And you think that's what we have right now?
BERNANKE: In some cases. I don't know.
WESTIN: Where is leverage today compared to where it was in 2007?
BERNANKE: It's not even close.
WESTIN: That was my sense.
MACK: Not even close.
(CROSSTALK)
MACK: There has been but also you've got to remember the regulators now are much more proactive. Not just with the CFO or the CEO, with boards. Regulators come in, into board meetings and talking about risk, talking about leverage. That didn't happen 8 years ago, 7 years ago. It's happening now.
WESTIN: This is a fascinating thing that I had not realized, that we actually have representatives of the Fed who are sitting in board meetings in banks now.
MACK: Well, more than that you actually have representatives of the Fed sitting in the building. I'm going to guess Morgan Stanley has 150-200 people there.
WESTIN: Who live there?
MACK: Yeah, absolutely.
RUHLE: And you're not concerned, as we're seeing, like in the leveraged loan market for example, covenant-light coming back in the universe. Like this makes me feel a little bit anxious when you look at high yield and distress again.
MACK: Sure.
RUHLE: Again unsophisticated investors being pushed into those markets.
MACK: Right.
RUHLE: What happens when rates normalize?
MACK: Well look, I think again you need to look at their balance sheet. And the balance sheets today are conservative. They can handle that kind of stress right now.
RUHLE: The banks can?
MACK: Yes.
RUHLE: But can investors? You've got insurance companies now being pushed because of where rates are, into riskier assets. What happens when we have this rate hike? It's not going to be banks holding the bag, it could be investors.
BERNANKE: Well, investors have to; the Fed is not in charge of making sure investors make money. The Fed is in charge of making sure the financial stability is preserved. So the Fed is looking at all these financial conditions and trying to think about, what could happen? What are the risks?
And the concern the Fed has is not that somebody loses money. The concern the Fed has is that because of leverage or other reasons, the loss of money leads to instability in the system. And that's the concern.
RUHLE: But those investors for example, are insurance companies, those are state pensions who are being pushed--
BERNANKE: Well, they have regulators too. They have regulators too.
RUHLE: And given where rates are they have been pushed into further and riskier assets. And while banks can't take on risk anymore, the high yield market has frozen. It makes me very concerned for those investors. We're just moving where the risk is sitting.
MACK: I think you're overly concerned. I really do. And I don’t know what the timeframe on this discussion is. I want to say something very clearly. I've said it to Hank, I've said it to him, I want to say it on air.
The two heroes is this gentleman and Hank Paulson. Their leadership, and look, I didn't agree with them. And I was really upset with them when they were trying to break my arm to sell the firm. That's all right. We got through it. They did their job. We did our job. Their leadership, that's what saved us.
BERNANKE: Thank you.
WESTIN: It's interesting, I referred to this earlier in the program. This book one of the points that comes across powerfully is that everyone, the President, Congress, everybody else basically said to Ben Bernanke and Hank Paulson it's up to you. We trust you. But on the other hand it's on your head.
MACK: And they did.
WESTIN: If it doesn't go well. And they stepped up and that really takes me to a broader question and that is, leading in crisis. I mean you were leading in a crisis from your end. You were very much leading in a crisis from your end.
BERNANKE: Right.
WESTIN: How do you put together a structure, a team, you know, how do you do that? And what did you learn from this experience or what did you know already about how you lead people? Because people around you often are panicked. And they're looking to you to say, are we going to make it or are we not going to make it?
They can't see whatever else you have.
BERNANKE: I remember John was on Columbus Day, almost exactly, what is it? Seven years ago when the Treasury said to the big firms, you have to demonstrate; even the strong firms are willing to take capital. Because we've got to make sure that it's not stigmatized. And John said we'll take it. We understand the need. And we're going to need to deliver the financial system.
WESTIN: In the book, you said he wrote something on a piece of paper in the meeting. He was the first one.
BERNANKE: He wrote on a piece of paper, he handed it across.
MACK: Well, the first one I handed it to. Well there was some push back in the meeting.
WESTIN: Some of the other banks didn't want to take it.
MACK: No. Especially the guys on the West Coast. And Hank Paulson said, if you don't take this money and then you get in trouble, I'm going to punish you. When he said that I signed it. I don't want to be punished.
(LAUGHTER)
WESTIN: So, John, how did you lead through this crisis? Looking back on it, reflecting on it, what did other people learn from this?
MACK: Well, number one, you've got to communicate with employees and we did that a lot. I walked the floors, I talked to people. While each of my James Gorman, Colm Kelleher they were all out, Tom Nods, talking to employees. And they got a sense; I'd go down and have lunch with the traders. I'd sit in the financing room and try to keep it light and make sure they knew, God if Mack feels pretty good about it, we should feel pretty good.
WESTIN: You bought pizzas for people.
MACK: I did everything for people. Look it's, when I got in the business the Vietnam War had just finished. I'll never forget sitting across from a Captain in the Marine Corps and he was always stressed about his family and financials and how is going to make with a new baby. And I said to him, I said Dick, how do you live with this stress? He says this is not stress. Stress is when someone's trying to kill you. No one was trying to kill me. Matter of fact people were trying to help us. We just needed to keep people calm. I gave employees all the information I had, I passed on to them. And we pulled together and the Japanese were the most honorable group of people I've ever worked with. And what they did. And it's paid off for them in spades.
WESTIN: Well, they stepped up with what $8.4 billion or something?
MACK: Yeah let's call it $9 billion.
WESTIN: Let's call it $9 billion. But on the other hand as you say, they did all right on that investment.
MACK: Well, they should.
WESTIN: They trusted you.
MACK: They took risk. They trusted us. I have the utmost respect for what they've done.
WESTIN: So Ben, so you've written this book. You're on a book tour now. My experience is when you write a book actually you take a new look at things.
BERNANKE: Yeah.
WESTIN: And you come away with conclusions you wouldn't necessarily have gone into it with. What did you learn from writing the book? What do you think differently about this experience? About the institutions, then when you started out to write the book?
BERNANKE: Well, you now, in general I went back and I had all my emails and so on. I was trying to go through day-by-day. Trying to understand what was happening. And I think the thing we all have to appreciate about an episode like this is that, in retrospect it all seems really straight forward. This happened, that happened. In real-time there's so much happening. You're trying to balance various risk. You're trying to understand what's going on. You know, it's a much more fog of war situation.
WESTIN: You don't know how it's going to come out.
BERNANKE: You don't know the end of the story. So you know it was that sense that real-time decision making is a lot more difficult than after the fact, second guessing. So that was certainly something I felt as I was going through this. But it was really helpful for me to do this. It helped me think about a lot of the decisions we made. Not all of them were right but at least we did stabilize the system and set the economy on the path towards economic recovery.
RUHLE: Where'd you get the name of the book?
BERNANKE: My wife suggested it. But actually--
WESTIN: That's good judgment.
BERNANKE: That's a good judgement. But as I said, I do think that around the world, that a lot of policy makers, Central Bankers, Finance Ministers, got together and said, look we've got to do these things. They may not be popular. There may be a lot of blowback but it needs to be done. That was in the United States the Fed and the Treasury. I really felt that was an important part of what we were doing was taking unpopular decisions as well as difficult decisions.
RUHLE: All right, we know Duke beat Boston College last weekend in football. We're going to ask you play ball right now. A little game of up or down. Where we ask which way key benchmarks are headed in the direction in the next year?
Ready? Up or down US dollar?
MACK: Up.
BERNANKE: I don't think I'm going to play this game.
WESTIN: No?
RUHLE: No?
BERNANKE: I don't pretend to know.
RUHLE: Not playing? Come on now.
WESTIN: He's passing.
BERNANKE: The dollar, all these things already have been incorporated what people know. If there's new information that will affect the dollar. But the dollar is already reflecting what people think about the US economy.
RUHLE: All right, John's given us up. All right crude prices? You're not playing.
BERNANKE: That's the right answer.
RUHLE: John? Crude up or down?
MACK: Up.
RUHLE: Up. S&P?
MACK: Flat.
RUHLE: Flat!
WESTIN: Oh interesting.
RUHLE: Ten-Year Treasury yield?
MACK: Up slightly.
RUHLE: Up slightly. Oh wait, you got it, US employment? Come on now.
WESTIN: Unemployment.
BERNANKE: Unemployment? Down.
WESTIN: Down.
RUHLE: Down.
WESTIN: There you go, there's a bold prediction.
RUHLE: All right, how about a little year book before we go. Take a quick look at this shot. No? I guess we don't have the shot. There it is.
(CROSSTALK)
BERNANKE: I wish I had that much hair now.
RUHLE: That mop was hot. "Bloomberg Go."
WESTIN: Stay with us.
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