Reuters Insider - Breakingviews: Predictions Panel 2014

Great American Financial

15/01/2014 21:22

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 Description:        Rob Cox is joined by Kevin Warsh, Tony James, and 
                     Paul Taubman to discuss what to expect in the year 
                     ahead from global markets, economies and corporate 
                     finance.                                          
 
 
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Transcript (May be auto-generated)

 Good morning. I'm Steve Adler editor in chief of Reuters and like to -- commute 
this morning programs celebrating breaking news 2014. Predictions. You'll have 
the predictions look at your table as many -- greatly through it and then you --
but in. Some suggestions of a trait to like make this morning that's appropriate
that is public. Public reports this morning program because the breaking news 
team is really good at making predictions. And it is not that familiar with 
breaking news it's a group of about thirty correspondents all over the world. 
Who provide expert agenda setting commentary on what's going on in the financial
industry based -- the most important financial news stories. Every day. This 
morning's program will look ahead and will take a peek at what's going on them 
in a stock market. What's going on corporations what's going on with 
governments. We have an expert panel to. Talk about all of this with you today. 
Our host that he knows rob Cox. Editor in chief of breaking news -- the 
co-founder breaking news of pounding it in London 2000. And dropped in -- year 
and develop the US. Part of breaking news in 2004. In US editor. Reuters 
purchase. -- -- Reuters purchase very confusing at nine and drop in energy. In 
December 2000 well. -- -- doing a terrific job in the wonderful hosts and the 
reports this morning's program so that any further introduction. If erupt Cox. 
If it. Hurt everybody coming out today on this rainy. This rainy January day. 
When people ask. Great news editors what how our predictions have performed 
everybody does ask that question. I have a simple response is basically that we 
that we nailed a few we missed a couple but they were all interest. I think this
year you know that guiding philosophy I think we we we hit that that mission. 
Last year we argue that US stocks would best. The world that was indeed correct 
we said central banks need to fight to retain their independence from 
politicians and you can look no further than this summer's tussle over who would
lead the Federal Reserve. For evidence of that we predict the Japanese yen would
crest above three digit mark against the dollar and we have who wrote a sign 
that the Bank of Japan -- dollar views hit the mark. I think we said that the 
CEOs Goldman Sachs is important Credit Suisse. Might see their ten years 
abruptly come to an end. That of course did not happen. George Osborne still 
reigns as the British chancellor of Exchequer despite skepticism a year ago. And
while we predicted a great American newspaper we changed hands and when he 
thirteen we should have opted for the Washington Post. Which was sold to -- -- 

We chose the New York Times. This year our views which you'll find in the books 
in front of you which I hope you'll take home and chair. Forever. I've been 
divvied up into about in six broad sections of money and markets people in power
buys and sells. Fees and fortunes mergers and mania is -- odds and ends. I 
thought -- structure conversation a bit around. Six broad themes. Today and I 
have -- us I'm really delighted to have them here three of the most states. 
Practitioners of the dark arts of finance. It whose skill sets. And experiences 
offers extraordinary range tackles topics to my right is Kevin -- Kevin. Albany,
New York native. 

Who worked at Morgan Stanley for many years before taking a job in the bush 
administration's National Economic Council. In 2006 he became the youngest 
appointment the Fed board history. Where he looked worked alongside Ben Bernanke
to fight. All sorts of fires during the crisis he left in 2011 is now -- 
civilian life. Teaching at Stanford helping. -- -- -- mile and best money and I 
believe truly doing. Tony the middle I believe I first met Tony Gwynn he was a 
corporate finance -- at the most entrepreneurial Wall Street firm that state 
Donaldson Lufkin and Jen and after it's -- Credit Suisse. Tony ran its global 
investment banking business and eventually moved to Blackstone today the largest
alternative asset manager and world. Paul Taubman was the co head of 
institutional securities business of Morgan Stanley until November 2012. And 
he's been very busy since last year Paul managed the extraordinary feat of 
becoming one of the top ten -- advisors in the world I think if you look at our.
Another plug for Thompson Reuters the tables you'll see Paul probably in the 
list of options for his. 

Work on Verizon's buyout. Vodafone's stake in its wireless. So without further 
ado let's get to work. Start with a story on Sunday. I installed a nest 
thermostat in my. Actually didn't -- had a friend and how to operate schools do 
-- and in -- I offered him a man which -- -- with. Maker's mark -- We went 
upstairs and then watch the football game on Time Warner Cable. Yesterday. -- 
Time Warner Cable and and the owner of maker's mark beaming all acquired. It was
a big day I think sixteen billion for being 3.2 billion for Nast. Time Warner 
Cable was sixty billion dollar deal. So either like consumer habits are highly 
predictive. In which case we shall see what happens today when maker of I don't 
know. I won't say guys acquired depending what I ate for dinner. 

Or there's something going on and -- -- I thought well start with you on this 
we've had four light years pretty much of them. We've got a pretty good. Start 
to January is. Are you prepared to predict. That I say that like many people in 
your industry you predicted every year that we'll see -- uptick. That this year 
will be different -- -- me -- Well couple things. Every year it seems that 
there's a flurry of deal activity in the everybody wants to jump on the 
bandwagon and the reality is -- Islam. Many of the transactions. That you read 
about had been in the works for a significant period of time. And I don't rushed
to extrapolate from that. Having said that you do start to get a little bit more
momentum. Given how the market has traded the stocks of U core hours and what 
I'm most focused on is the fact that the stocks that require wars. Have gone up 
graciously. Upon announcement and that does create a virtuous circle that does 
yet. Others into the market so you think about Internet trying to look at it top
down and -- if you look at it top down. And its thirty years of history for an 
activity I think you need to throw out the -- people. 

And the credit all and sort ask yourself where there's a steady state. And if 
you look at it on that basis I'd argue we're probably 30% below. Where a steady 
state emanate environment should he. And I think the reason we haven't gotten 
there in large part is that there is a risk aversion. On the part of many CEOs. 
And the fact is that. If they're not -- transactions it's very hard to create. 
Activity and I would argue that ten or fifteen years ago. You have CEOs leading 
the charge and boards of directors holding you back. Today it seems to some 
extent the boards of directors of pushing management to move forward. -- 
management teams that are holding back and I do think. That. That's starting to 
change as we get further and further from the dark days of 20082009. Reversals. 
Shipped in the sense that you -- in the boom years it was mentions pushing war. 
Always -- I think I think I think managements were much more comfortable sort of
daring to be great and I think there was boards that were. Trying to provide 
some oversight I think today and management's -- exactly the opposite position 
which is that I wanna stick there necks out. They wanna make sure that the 
transactions are thinking about. Haven't properly vetted that the marketplace is
wait and that the very comfortable there's a path to a real value creation. 
That's looked at not just whether its earnings accretive on day one whether it's
sustainable whether. The transaction acquisition to be appropriately integrated 
they're looking at it with a form more filters today which I think is a good 
night. And that's one of the reasons why when these transactions do happen 
they're much better architect -- today they're better thought out and that's why
the market. Is reacting positively so from the bottom up I think increasingly 
CEOs are getting more comfortable. Looking at emanate as a growth tool today 
than they were before that's important. I think the market is validating that 
which will hopes others out. And an interesting way I think. As interest rates 
move higher. I think that's actually good thing for a minute and I know it 
sounds counter intuitive. But the reality is hurdle rates for management teams 
are very -- And we knew. You know the Fed. Pushing rates down hurdle rates have 
not come down and as a result there's a little bit of a mismatch between the 
prices of companies in the stock market. And how long term buyers are prepared 
to value of those assets. As you get more into equilibrium actually think that 
will create. A bit -- catalyst so. If you would have asked -- the last three 
years I would've been reasonably negative on him and a gross lighten up and 
surprised. Today I think if I had a -- I think you probably closed that 30%. You
know long term gap over you know 22 and a half years so it's good counter to. 
Intuitive what you're saying because when we think that is cheap money. Flowing 
from central banks. 

Would would increase animal spirits to some degree I mean -- using this as well 
I mean Buxton is a very big Yemeni businesses well. Well I think Paul's point I 
think the risk of version history. A lot of what drove the cheap money was our 
problems. And as those economic problems he'll cheap money goes away. People get
more confident. Economy's better I do think there's a little bit of a sense of 
the train leaving the station. So. On the one hand if your equipment horror. 
Your stock is up you can still haven't used a lot access to a lot of fairly 
cheap money -- a little bit but so what. And yet yet you're watching that target
stock move up to so there's a bit of a sense of train leaving the station I'm 
feeling pretty good my stocks up. Be more factors -- I think it's thought -- and
and Kevin I mean as someone -- was involved in. In the policy that the monetary 
policy at the Federal Reserve I mean how do you see this mean do you think that 
this we are starting gate at this point where. Cheap money is sort of as you 
said it -- in an op Ed piece it was pretty distorted. Benchmark. So it's a 
couple things first full disclosure always mild loss at Morgan Stanley many 
years ago so. 

I hesitate to disagree with them unless -- on TV's. So so -- cables that can 
actually so so a couple things first I would say in the old days. We think it 
from an economic standpoint about it growth and mergers pipelines is being 
really good for confidence. Is at some level what we're looking to help the real
economy in 2014. Is C capital expenditures take off. Business fixed investment 
has been chronically low during last four -- five years. Most forecasters 
including the Federal Reserve predicted that the economy stronger each of these 
years in part because animal spirits. The Tony in all about work but every day 
would come back. 

Let's say in the old days -- easy merger pipelines are good proxy for -- CEO 
would ask -- question in my going to build literally going to buy it. So this is
on the margin good news but if you look at the underlying fundamentals on -- 
acts. I would still say it's more hope than -- some modest improvement in my 
sense of what. Fortune 500 executives are doing going into this year capex is 
likely to be up some. But whether this turns out to be a breakout year monetary 
policy aside is still. I'd say more of -- hope -- born around the data over the 
course of the next few months. I can't help but think. And again these two are 
more expert witness. That the world's biggest CEOs have been asking themselves a
question about their share performance. Fortune 500 companies are doing well 
their share prices are high. At some level they've got to be asking themselves 
how much of that is because of me and what I've done that drive productivity 
take out cost you more competitive which is extraordinary. How much of it is 
because of the world's central banks how much of the increase in risk assets is 
because of free money that you spoke to rob. My senses as we get through some of
tapering of QB. The world CEOs we'll have a better sense about what they're 
unaffected share prices. What's the share price they can count on over the 
course of the next several years. In between now that moment may be with these 
guys will find will be more stock for stock mergers that is our prices might not
be we might not know where they are. But relatively -- our peers if we're gonna 
stock for stock deal we ask -- that -- -- forty for someone of my company. Think
those -- the challenges. And Yemeni son is a good sign but I wouldn't we get to 
carry. Of course we've also seen big spike in stock buybacks by companies -- 
this us we've seen this story before where. Stock prices go up people get 
excited that violence -- of course. Over time what it does look like that's what
changes. Larry did you did you estimate activity of course the cheapest thing 
people about their own stopped. That's changing. It to look inward. We'll have 
more hours but there's still a lot of buybacks I think if you look yes 
appearances that he. That's earnings per share growth and yes. PX. Actually Tony
me what you think about -- you you're you have these private private equity firm
and in the world. And you have behind you buying companies not stock -- stock 
but waited for cash. Are you. Wary. Stock prices today as a result in your part 
well. You know and when it comes to buying public companies are selling public 
company from one sells right now. It's it's a it's a good time to exit. You can 
take big companies public. The markets receiving them well they're treated well 
in the aftermarket. So that he -- that virtuous circle that Paula talk about 
what their reaction to the Yemeni. You know I was stocks going up so we're. That
much more so on assets I'd say publicly buying public companies it's hard now 
prices in public private matter high. 

It's still too much debt out there that's cheap. There there isn't much in the 
way of merchandise for sale. Is it private equity would -- DelHomme private 
equity benefits because there's a lot of ancillary deals that are hitters 
respond off of that. We're not seeing that so there's a lot of money I prices a 
lot of sellers. Tough department put money now. Interest and yet I saw a report 
last week that said that private equity firms raised 431 billion dollars in 
coupons. Which was the most since the global financial crisis so -- and it. I --
gonna spend all -- that money if prices are so I have yet to find new ways of. 
We're investing and spending it. It's. Well in the industry hasn't raised much 
at all though for five years so it ebbs and flows we have six years typically in
typical fund to invest the capital. And one of the things just seeing where 
they'll pieces they're starting to get so much money back now. That you have you
not only have the reverse denominator effect of public. Securities values debt 
and equity from him talk about gone up so they're becoming under way to private 
equity but now all of a sudden they're getting all the private equity. But. 
We're capital return for their managers most of -- Are having net inflows from 
her privately so. They're becoming less and less invested private equity and 
that causes of the -- put out that they need to get application -- get that's 
you know that's pendulum swings very fast -- you have those -- -- the facts I 
mean we have seen. Of course I mean public surprise it. Public and private 
equity investments in public companies is that something we'll see more of as a 
result let's say management's her words not wanting to sell their businesses for
long. I don't think that's going to be a big part of the industry. Prices are 
too high. Companies -- too well managed. There's usually cheaper sources of 
capital particularly in the securities markets. Why go to private accurately 
could get fifteen point 0%. Returns when he goes public. Where most studies. 
Returns five to 8%. Let's turn do the banking industry that so I thought. What's
been and and particularly Wall Street business models -- all of you have got to 
a point of view on. I noticed for instance that routine Vista talking in the 
name market boutiques took 30% and market on the five biggest banks grabbing a 
bigger share the investment in people this year. Is this trend. Is this that the
kind of thing that makes those big I don't know that sort of other banks 
obsolete those who aren't huge and those who want me and -- here. You look at 
the boutique. Obama has been around forever and have always been. Smaller firms 
I think what has changed is that the degree to which boards of directors. And 
CEOs are prepared to rely. On boutiques. Has changed meaningfully from ten years
ago and I think can't help but conclude that it isn't part. A reflection of the 
financial crisis and how -- how bank's view so I think there's there's a bit of 
a tipping point. As for as the frequencies. And reach of these smaller firms you
you pick up the paper and you see that there are. Three advisors on a 
transaction and you may well see now that two -- are small firms -- one. Very 
large firm that is bringing in the capital. There are some deals that are quite 
notable where it's all a smaller firms now I don't think that makes a large 
firms. 

Extinct I think it's really just there's a new equilibrium. That is being formed
we're increasingly clients are wanting. A broader array of services and they're 
going and creating a team. Which can give them all the they want they're getting
market intelligence they're getting capital getting. -- -- they're getting. All 
sorts of services packaged. In a different way to meet the more interest in 
question is not whether that model you know continues -- I think it will. The 
question is. At some point do these smaller firms if they can create real 
traction. 

Try and build out more capabilities. Or do they want to just remain very small 
niche players and I think none of this is gonna be a revolutionary. It's all 
going to be evolutionary but if you ask me does look different ten years hence. 
You have to believe that some of these smaller firms try and build out not all 
of the capabilities. But some of the more specialized capabilities. And try and 
pair up with a capital providers to essentially. Dis intermediate the banks in 
some part I don't think it will be massive. But I think you'll see some some 
refinement and. But that Tony Hayward DOJ which was I think it was the first 
Wall Street from the Republican you quite ahead and in many respects real. So 
ownership culture and the place merchant banking business shared and do you 
think we're gonna see another round where. Banks by these middle or smaller size
what I would call diligently but. Do you think we're gonna see you know history 
repeat itself. -- -- Tennessee did do that of course. But I think there's some 
there's a secular trend one when I came on Wall Street. -- major firms or it 
will get old and done it dozens and dozens and dozens of minutes to slowly 
shrinking gap like 45. And that's you know of the financial crisis accelerated 
that -- so in that way you get so relatively few large firms expect. Expect. A 
number boutiques to pop up just conflict. There. -- thing is I think with the 
the pressures on the big banks to push up the return equities -- -- -- they have
to. They kept pressure compensation now the government could do that markets do 
over time talent drain. -- -- evidence that. From the kickbacks. To boutiques 
where they can do their -- god and not be constrained by the regulatory. Europe 
bureaucratic. Stuff come back today. And that will create more robust who seeks 
to -- -- -- For a long time how -- the banks and now I think it's coming one 
way. Do it I think that when that happens. Inevitably you'll have to come back 
here question you have some big banks with Agee you know there's a lot of there.
Kind of struggling a little bit. Leo so two weeks and I think you'll see some of
that. But usually takes them bloom for sir -- one do that. Could have a -- for 
awhile what's the point two years. You might see you might see. Things that are 
trying to fill in weaknesses. -- If -- international banks. And real. Estate 
market. Well about the Chinese thing but you can get the German bank you know 
there's obviously it's you know it's quite difficult to get acquired. A people 
business. But it's even harder to build one. It is their business is real 
franchises it's he does start trash -- -- Very very few. Institutions have come 
from outside of state successfully built a good time. Effect I can't. And Kevin 
you've written a lot about how the impact that regulation a lot of banking 
regulation on. Let's say in that's not the entrepreneurial. Part of that. So 
you've worried about the creating utilities out of banks and that and banks 
being engines of credit in the economy. Being a bad thing I mean how do you see 
that shaping out this year. So I think the merger advisory businesses probably 
one of the few businesses that Washington isn't prepared to show up until -- on 
the business of those businesses -- I would say broadly -- I'm concerned that 
coming out of Washington coming out of a lot of national capitals. There's a 
brand new financial architecture that is just finding its shape as we get 
through 2014. And it's likely to have very few firms -- these guys describe at 
the top of the pyramid. That I worry very much overtime minutes probably 
happening in real time become public utilities. What do you call firms where 
compensation. And returns on capital and those businesses -- permitted to be in 
and not be yen and a continued regulation by a dozen institutions that are 
poorly coordinated -- -- public utilities. And in the business that Tony and -- 
and talent doesn't often Wallace today that the low and it levels are sending in
a public utility. So this matters for Wall Street but I'm afraid it also matters
for the real economy we've had 9000 banks in the US. For most of the post war 
era there's been some consolidation. That is in stark contrast the economy is 
virtually everywhere else in the world. Where they have had a public utility 
model think about the German banks the French banks Japanese and Chinese. I 
worry that we are moving in that direction. And in so doing credit innovation. 
Competing for products competing for customers is less what marks public 
utilities. So I'm not afraid of having big banks will we wanna have mature 
little small businesses and small banks be able to grow up and become big ones. 
And big banks that can fail. And all the sudden disappeared -- lose their market
share. I wonder whether the banks of the top now decided and the government has 
decided. So they're going to be there for a very long time what the consequences
are for credit to the real -- coming. They say that it's easier to manage and 
keep yours yours yours yours your foot on the neck of a few very big banks and 
-- It's an easier regulatory structure to some degree then allowing. Great 
competition. Where you have socialized losses but it but maybe if we fix that 
too big to fail problem of course you know they've fixed it but. There are some 
signs resolution and things like that. Will have an effect and what do you think
those. A lot of the reforms that are part of our friend that that you address 
that issue some others will have an effect. So in a word no. What would happen 
today. If one of the largest banks words you call to their favorite regulator 
Washington and say. Met him a hard time opening for business tomorrow what do we
think would happen all the market participants think what happened. Do we think 
under Dodd-Frank and thousands of pages of new rules and new regulators -- new 
responsibility. And a new financial stability oversight council. The government 
say okay we've got to cover it we'll just let them disappear and move on 
tomorrow. I don't think so more important I don't think markets thanks so. So if
you look at market prices and looks to me as though whole set of creditors and 
other folks that are in the capital structure of our largest banks. -- to some 
significant degree still relying on the government on a dark day an anonymous 
can anticipate the stand behind these institutions and I had a and unnecessary 
that. These markets sort of bond pricing. That the pricing of credit from backs 
for instance does not traded at great premium to. To which should relative to 
risk involved. One career. Yeah and you see that in deposit rates as well would 
serve and big banks and in an extraordinary. It extremely cheap money. -- 
deposits. That's existing. But let's talk a little bit about government -- a 
little bit here people in power -- the marker in the book. Let me ask -- also a 
simple question. 

Actually give you all crime. He -- king for a day. And give you an opportunity 
to. To sort of set out your policy agenda what would what would you do in this 
economic security social whatever it is. What what would you do. This year it's 
in the -- -- The first thing I would do is Tony said this before he made a 
distinction between investment and spending. There is no distinction. In 
government between investment and spending. You spend a hundred billion dollars 
four bridge. That's a forty year investment it shows up spending this year 
relates to deficits today and I think as a result. Because we confuse investment
and spending. We are doing harm to the economy. A significant way. You would 
think that in a world where rates are close to zero where the government can 
borrow at the cheapest rates it's seen you know almost in its history. And where
there is such an infrastructure gap. And where we have such high unemployment. 
That just to simply move forward that investment. To be here now. Should pay 
remarkable dividends but it all gets caught up in its not investment that 
spending deficits and the life so. To me one of the things I would do is to 
change the way. In which everyone talks about it and think about it as a 
business but also we wanna run government more like a business how much we wanna
run it exactly like -- business. But there are certain things so in General 
Electric spends money. That has they've long useful life of twenty to forty 
years they don't think about it has all just one year one day that to me would 
be the first place that story. You. I think I think infrastructure is going to 
be airline's first place because it it puts people were right away and pays long
term competitiveness both. And and and I I gotta think that's that's a place to 
start but beyond that -- we have to you have to cut. 

Get some progress in Washington gets -- is gone. I think we need immigration 
reform. I do think we have to. With with which I think would be what we'll get 
we'll get these pieces may become house but we'll get it. I do think we need to 
worry about the inequality gap. I think that's kind of thing that whole 
societies apart and he can't he can't this franchise a substantial majority of 
people. There -- various ways to do that but what am I think has to be. -- 
higher minimum wage I think we'll get that too although the Republicans are 
probably damage themselves politically wildly while they lose that battle. I do 
think we have to do you know enhance our long term education I think that means 
more teachers better teachers in the schools and -- some easy ways to do that. 
-- So after ten years and nothing is easy. 

If you really think about the contrast between our government and the private 
sector where these guys spend their time. Private sector of the fortune 1000. 
The next million small businesses. From the crisis of this moment have made 
tough choices. Households have made tough choices about what to do with the 
mortgage what to do with a second job -- -- think about whether we need the 
second car. All of their companies and clients from the darkest days and tough 
even brutal choices drove productivity. So that we corporate sector that is 
really poised if the economy can actually turn this higher level. Take huge 
advantage US multinationals are better shape and artistically. Coming out of 
this crisis that any of us -- anticipated. Contrast that with the lack of tough 
choices and Washington. And I worry very much that the financial crisis and the 
reaction of government even necessary action -- -- serve in the darkest days. 
Have needed so that the tough choices can be put off till tomorrow. So broadly 
speaking I would say there is a critically important role for executive branch 
for the congress. 

On things that Tony talked about. Costs serious trade agenda. Where the US goes 
to G1 pounds the table on the virtues of free trade. Instead of stepping back 
and losing its voice and giving some licence for others to turn inward protector
industries. We have -- robust free trade agenda for a dozen years and we needed.
And I'm afraid that Washington politicians Democrats Republicans and it doesn't 
matter. -- columns of the view that the Federal Reserve could pull a rabbit out 
of hat in the financial crisis and just figure out how to turn this economy 
around. So I'm afraid the Federal Reserve continues to be on the front pages 
when in the Federal Reserve needs to be back on page C twelve of the business 
section. The Federal Reserve met today and it raised rates are cut rates by 
quarter. But the Federal Reserve has been playing more than its fair share of 
roles and responsibilities are afraid the rest of the political actors. Excuse 
me have been standing back we cannot grow unless they stepped into the role of 
him. Monetary policies has done everything fiscal policies fail. -- yours on 
monetary policy has stepped in to try to it is yeah. So monetary policy is not a
very good substitute for real religions are real regulatory agenda real growth 
agenda for real tax reform. But it can pretend to do things it can pretend to 
move massive prices up on a sustainable basis. -- can move asset prices up for a
time. But only if the rest of Washington allows there to the dynamic private 
sector. The Federal Reserve Tuesday night it is not a very good repair shop for 
broken tax policy. And licenses the world's central banks have been asked to do 
too much and when they look around at their alternatives. And they see the rest 
of the politicians standing back. They have continued to fill that vacuum. And 
our powers to stop -- well this. Probably its way to do it more about or talk a 
bit more about monetary policy. You recently said in your former colleague that 
-- 

-- you marsh reports are strong intellect meticulous preparation ample 
experience to lead back successfully. But you also called quantitative easing. 
Which is obviously supported quite heavily untested and an incomplete. 
Experiment. How to we reconcile those statements and how would you what would 
you expect from this change. We -- reconcile those statements delicately. But. 
And and -- sites so it's it must work for five years she spends. Time together 
she and I spent about two weeks in China and Asia every year so we've spent a 
lot of time. 

She has got all the background in the world news she has seen the Fed from all 
angles and most important she's seen the -- And Washington at different points 
in the business. Times weren't right for policy to be elusive common it is time 
words right from policy to be restricted and pulling back pulling people out. So
she's got all the background do the job she -- taking over what I think it is 
critical moment both for the US economy in the global economy. And I got every 
hope and optimism -- in the team that will be able to. In some sense allow the 
economy. 

If not drag. Out become the next level. On the question of the substance of 
policy. Guess my judgment on mrs. Hasn't changed for awhile which is if you go 
to the darkest days of the financial crisis. You know even a guy like races 
we've got a few -- askew in that moment was to try to get. Asset prices that we 
try to get in and asks it at least look at each other. So that original 
motivation of Huey. Was quite different than what it's being thought to be used 
for today. So while a big supporter of QE in the darkest days I think it's 
quickly outlived its usefulness and my sense of my former colleagues is. They've
come to that view was well. They are now trying to pull back on. 

The purchases of treasuries and mortgage backed securities. And substitute 
something which is quite popular in the academy forward guidance. The Federal 
Reserve doesn't have to buy stuff we're just gonna tell we're gonna try to 
convince market participants. That we will keep interest rates very low and 
here's our intellectual structure for doing it. And in the open question is 
whether markets think that forward guidance what we used to call open -- 
operations. Is equivalent. And to actual 85 billion -- purchases quiet tricky 
test for a new chairman but she's got the background to -- often see. Yet. What 
we we -- in -- book that everybody knows that monitors that tapering that word 
is going to be the this story when he fourteen. But I am this -- people of 
really thought what -- higher cost of capital will do that market for companies 
Tony. What would. If we had ten year treasuries 4% say. 

How would that affect your portfolio companies ordered us. Well we think we're 
going to. First of all and I and I think with what drives markets is reality vs 
expectations. -- things go. And a and a inquiries that. Should get away with -- 
because people have the expectation. There's going to be take. So it so I think 
that would give. Economy in our view has a huge amount on now I mean it's 
absorbed in the last year or. Sequestration. And some sort payroll taxes -- one 
another kind of ground gone through. So what if anything it's the -- team I 
think again you just beginning to see I think early stage -- dividends and 
subsidies economy. And the beginning stages of residential and commercial real 
estate construction them that. The big pocket on employment. So I think he I 
think he got a lot of strength economy. I think in that context. Higher interest
rates -- percent treasuries and goes with that. Which could have narrower 
spreads by the way over treasuries. So it doesn't all that passed through 
corporate cost of capital. But I don't think his problem. One -- -- -- very 
liquid on fees for any any trade partner right line has pushed up financing that
is much much that. It. One equipment errors than what treasury did you or that 
-- corporate trade issue all the time. So they have very strong balance sheets 
they've got it all financed. There expecting. Higher rates and expected higher 
rates in the context of the stronger. All that happens. I think it will be 
positive. Bankruptcies. You think -- see -- spike or I think bankruptcy code 
now. You got the combination -- -- -- market -- the troubled companies can 
finance out their problems and you got better fundamental business coming so. 
Should there. All you've mentioned. Reticence. He has to do deals a wonder to 
what extent. 

Activism plays a -- that and just broadly. Like some shift to that topic is 
certainly one of them predictions we have so it will. We'll see more of it 
that's not exactly -- startling prediction but we did name water to. Companies 
including General Electric which have been immune from such. Cage rattling we 
saw apple -- up the biggest companies in the world basically. Were taken on by 
activists. How do you think out of shape corporate. Well it comes back to this 
risk aversion that I was talking about before if you look at the ten years of C 
as they've gotten shorter. 

Not longer and the fact is that more CEOs get in trouble or lose their position 
because of deals that they did. Acts of commission not acts of -- And that I 
think has heavily -- On a lot of corporate executives and that's why when Tony 
talked before about the increase in share buybacks. To me it's the natural 
healing process which is okay. I'm no longer just -- in my liquidity have ample 
liquidity. Next step is I wanted to point -- I wanna take advantage of low cost 
capital. And today may be a bridge too far this is kind of low risk -- you keep 
moving out and there's no doubt. That shareholders. Have points of view and 
shareholders have made deals were difficult to get done. To some extent you've 
created one way option now it is a lot of deals if you think about it. The way 
our construct is corporation enters into merger agreement and they're locked up.
And they really have no outs. And they typically have no financing announced 
they very narrow regulatory outs therein. And it goes to a shareholder vote. For
six months later. And the world changes the world is a dynamic place. And to the
extent the deal becomes less favorable for the buyer more often than not they're
-- it's their deal they can't renegotiated. All of a sudden the market continues
to move and there's another bite at the apple you just saw that with the 
McKesson deals I think. I think that also adds to all of this and my view that 
activism there generally is it's a wonderful tool. Used. By the right 
individuals in the right way. If what it is our shareholders in a democracy 
making sure that managements are doing the right thing. And keeping them honest 
and being constructive. I think there's no doubt. That value gets creative if 
you just look at the deal yesterday. What's on -- and then you go back to bill 
Blackman being a catalyst. There's no doubt that he unlock significant value and
that was constructive. If you look at what -- little bit and Yahoo! if you look 
at the ability to. Changed management and create value it works but there are 
times when it just seems sometimes that it's not a very well founded platform. 
But you just need to spend just as much time defending. In that instance and you
do elsewhere so. I expect that you know activism and the desire to really 
oppressive corporations and boards to unlock value and to do the right thing to 
be disciplined. That's not going away that is just gonna continue what's 
happened is increasingly. That's just in other discipline. Fit boards and 
corporate executives are using to try and get ahead of the curve. But -- you 
would argue that. Private equity has always been an activist shareholder is just
a totally different kind. Rattling cages you know like privately. Control 
shareholder. So it is fundamentally different but but but but affecting change 
would drive private who turns 80% returns. So effective change in fact we can 
effect change. We don't try to buy something we can't buy it cheap enough. 
Companies to well advised prices are too high friction costs of buying -- him 
coming out. I -- at a discount curious what you have to -- you actually change 
but I just want commonly activism and and a it used to be in the old days -- -- 
worried about the hostile takeover. Now they worry about the activist it is the 
dominant concern on the boards today. And and as you point out whether it's 
apple or Microsoft. PNG no company's too. And so. So Boortz in my view. 
Sometimes to excess worry about activism disruption comes. They don't worry 
about hostile takeovers so that that fear has changed and I think that activism 
will continue because the that the successful activist investors. The pretty 
good returns. And and their returns are uncorrelated with markets so that they 
continue attract capital flaws that happens you -- growing capital there. 
They'll be active. It sounds like lucrative. Business -- -- our investment bank.
Firms. Advising us. You hostile takeover activism before we close and open to 
questions had a couple of it's a big what for you can. 

That's just what you know passes to Alter it just what does it softball question
what is the the biggest opportunity. Come here for growth whether -- duster or 
the kinds of things you counseled students at Stanford. That -- -- -- Was face 
down that piece. History at least. Most of the big business schools is they all 
tentative change chasing jobs late in cycles. So I know that's the history at 
least that Stanford right do some teaching is that the last several years you 
only want to start of the newest and sexiest accent truck. And -- happened 
actually think for business school graduates being late cycles not so bad you 
show up. It ends poorly but you learn a lot in that period -- twelve for twenty.

And you're pretty well positioned for the next bubble. If the world's central 
banks keep interest rates. Far lower than Tony suggests where they are. I think 
unnecessarily figuring. On normalization of the treasury -- -- normalization. Of
sovereign yields. You can continue to see. The possibility for capital -- -- 
Asian and now investment. But again I think her for younger folks there's 
nothing wrong -- that secondly and make an advertisement actually for some of 
the big banks. 

I think there's very few places that are good places to train. When you're 
coming out of school as these. Programs that are still these big institutions 
might have described as public utilities early but but the for the right part of
your career probably not a bad thing. And for the more broadly in terms of 
opportunity. In spite of the challenges the three of us have talked about it US.
Ups the US looks like it is they continued chronic relative outperformer around 
the world. At some level I would say our government across administrations is on
its level best to -- this economy but it has -- Despite their best efforts to 
have myopic policies that lasts for three months they're trying to fool people 
want to buying a car before a subsidy for clunker ends. The underlying dynamism 
of this come -- economy exists not just in New York again and Silicon Valley. 
But you see -- on factory lines seen all across the last. -- of the US in spite 
of I think immediate difference of opinion on how strong -- the 2014 growth 
passes. The US to me it looks relative basis like a pretty easy call as likely 
outperform our big trading partners around the world. -- happen -- not think the
US can decouple from the rest the world. You'll -- called a commonality. For 
many years from sell side firms stuck in a decoupling of the bricks. Very 
advanced economies are gonna do so great but not to worry Brazil Russia India 
and China are going to do well. We'll let him work out so well we have one 
integrated global economy I'm convinced that the US ten chronically and 
relatively outperform. But we won't get to fundamentalist state velocity until 
the rest of the global economy gets with it. And if I look on either side of the
US across oceans it looks to me as the 2014. Will be. Another reasonably 
disappointing year for growth. So lead the US is for reasons Tony and others 
have described today likely perform in this environment. Time where you 
investing very allocating capital globally. We're into opportunity. Well first 
like I used Kevin that the US's best place to be. And that fact if you look over
just about any holding period in our business which is alternatives. You've 
always made money more money you listen and market and the further you get from 
the US the less you make. And partly that's because you don't eat a lot of 
growth to make a lot of money this week we. Use leverage so we get very high 
returns. Obviously growing economy. As long as stable. Problem -- of course 
leverages he needs stability. Tower toppled over. So anyway but in general 
anyway thank -- -- that's -- put money. For me you know I I sort of like real 
assets that thank you get equity markets are reasonably valued that it had a 
pretty good run. 

But. We do very well real estate do very well in it actually owning 
hydrocarbons. Like that. And so. And and frankly if you if you talk her relapses
and could clear real estate. Your superiors to have to nation here right now 
that are that are actually -- US. Not that the economy's better general because 
it's worse. And because credit constraints there and -- distressed sellers 
that's what we live on so that's what were -- the winners to specific nations 
India over. These in India China both are at stake right now Indian causes the 
government's -- on all things go -- it. China has Iraq back credits you've got a
lot of developers have to hopefully. Go both are very good for someone with 
capital. And in Europe got a lot of again. Distressed sellers are real estate 
based process and built that curiosity. Brazil. Brazil is that interest in 
market I think you have to think about personal not as the growth markets and 
like another version markets. But is protected market where if you invest in the
national champions causes so protected you can make very high returns cap on 
capitol. So for the right. For the right entity in Brazil. It's excellent. 
You're not playing necessarily result in growth. What we. Open these four. 

Questions. I think we have microphones around if you raise your hand a 
microphone will be deposited. In the palm of your hand. We have a very polarized
political environment in. In this country at the moment you see any respectful. 
Some kind of sensible compromise on. Tax. Well on immigration Coleman. 
Desperately needed -- finished. Who wants to. And most recently. So this will 
take too much time to answer. You have to be even more optimistic or -- and not 
having spent ten years in government to say yes this is the year. 

But there's going to be reaching across the -- on both sides they'll do sensible
long term. Programs this is an even numbered year in Washington even numbered 
years. Tend to be bad years for good long term policy. Even numbered years 
divisible by four tend to be worse so perhaps 2014 is better than 2016 for this.
It does not look as though there is going to be much incentive for either side 
as they perceive their electoral interest. To be focused on long term sensible 
structural reforms of the four of us up here might be able to -- -- I'm a little
I have a slightly different views that then then many -- actually think that the
real economy has been paying as much attention to Washington. As most commentary
suggests. Real folks that -- real businesses and real households have sort of 
given up on these guys along time ago. There are focused on their daily. So we 
look at morass that was Washington in the fall going into winter and the 
breathless headlines. In the newspapers and on television. Look at the 
underlying real economy yeah it's really hard to find too much change in what 
was happening. So I think the American people and businesses have more or less 
decided to move on and they have figured out quite rationally. 

That perhaps someday these challenges will be dealt with an -- time soon. And 
it's not easy to place blame on on these things on either side there's plenty of
reasons to doubt. What I'm hopeful for is the president in his state of the 
union needs to sort of grabbed his hands around. Not just issues that 
exacerbated polarized country and it polarized congress but things that we're as
prepared to spend political capital. Washington needs to be led the same way 
that their businesses need to be led. We have one leader is the president he's 
got three years in office and I am hopeful. 

Don't know whether it's for good reason or not that he decides that he wants a 
second term legacy around tax reform robust trade agenda and real immigration 
reform. It won't be easy form to do they'll be fights in his own party. It may 
or may not be good politics I know would be good policy. What do you think Tony 
and to what the message is this what I basically agree with -- that long term. 
Structural and things and Democrat and Republican. So this won't happen that we 
it's time to happen that time when -- had to make painful changes when the 
pressure was huge when you had it. Had this secret station that's doing 
everything coming together. They didn't do it that. Now that his top 10% to 4% 
honestly 2% there's no pressure system. This you know in a democracy like 
America you can't make really hard painful decisions without. Massive pressure 
so that won't have however I'm a bit more optimistic maybe -- -- -- even come on
this I think you'll have some. More small things that get done than we're used 
to. I think the I think. Very Ryan. This budget agreement was one I think that 
that -- an immigration agreement do think minimum wage I do think we'll do some 
things like that. Hey I don't think who is any chance we'll have a major tax 
files. So I think we'll have small stuff -- somewhat better I think politicians 
will be reward for that approval ratings. Going election but now who have made 
hard decisions. Well you're you're I think we're involved in the Obama 
reelection committee here in New York. Where would you be putting your best for 
the mid term election this year. I like I think it's an eternity away and I 
think given conventional wisdom you know it's gone back and forth and I'm not. 
I'm not sure I still maintain that this country wants to -- government hurtful 
stuff they want dividing government that seemed to enjoy it and complain about 
it. But they consistently vote forward dividing government and I think they're 
not all -- thoughts. When nothing gets done I think where they do get upset is 
when they -- necessarily take us to the break and they really. Create damage and
I think issues like the debt ceiling and all that's where. Where you do get some
push -- -- Tony's point I see some green shoots of bipartisanship but it's the 
small stuff. That's gonna get done and even something like minimum wage I 
suspect there's going to be you know one heck of you know tussle on that and had
me get moved you know popular or something a lot of this is gonna go back to the
states. And something like tax reform is just so difficult. To imagine. That it 
can get done that you can somehow. Thread the needle with out they're being a 
much different. Working relationship. In Washington so if I had to that I don't 
think. There's going to be any change we're gonna end up with the same dividing 
government. -- November as we sit here with tonight. 

-- Like these. We have a lot of revealed after an. Average -- about an eleven 
years old. In the journal -- you know the average corporate -- -- twenty years 
old. Consumers are have been breaking down and saying you know I got to replace 
my -- cars they'll start to rise. But capital expenditures business investment 
have been. 

Pretty weak even though companies. Record profits. Record cash can borrow 
essentially. The question is this the so progress is what is holding. Back the 
replacement. Old equipment stuff buildings factories in the country. And is this
the years that you know that starts troopers. -- Cabinet capital expenditures as
well. The problem with expecting a lot of capital -- as Americans we don't need 
capacity. You know if you look at the capacity utilization America's in the low 
eighties. And usually don't get a lot of capital expenditures and because of the
nineties we don't have the fundamental unit growth in America. To the capacity 
where most companies wanna go where they -- capacities and is an emerging 
markets -- rapidly growing markets so I don't know why they go do you know 
spending boom. 

And -- -- not not pleased with our company's they have gone up and -- upgrade 
their technology one of the great things about zero interest rates for five 
years. Is companies have the money is free. So I think I think a lot of 
companies certain companies we work with have significantly upgraded their plant
where you got any kind of economic return on that at all. And -- and and I think
it's yeah. -- talked about. -- we having so funny effects. I think when you get.
And I think this is one of them what you've really done you substituted. Capital
for labor and American business so a lot of them have gone through it a labor 
saving devices and they think that's. You know to and I think that's less the --
of the economy that perhaps the lost jobs. That the public that so. And I think 
when when Japan got here with history for a long time to it didn't work that -- 
get down to zero interest rates in the whole stimulus is good it drives economic
activities is questionable. But. So I don't expect them there to be a capital 
expenditure bill. Alas there's -- but the man boom. 

And less capacity of those nations get higher and I'll see that happening for a 
long time -- that kind of 3% growth that world. Maybe three after that -- -- -- 
So microphone here. And justice study that. Serving studios and found that vast 
majorities he has. Feel as if their companies would be much or successful or 
operable if they invest long term. Perspective but also. Every large majorities 
the news. That it it would be enormous quarterly pressure from new reports that 
the results and and the efforts deal lasts about three years now. All their 
incentives looked very short term. You agree that -- to be more successful. 
They're looking longer term and is there some way for them to get open that. 

-- -- -- -- -- -- You know what I run the businesses that are involved -- that 
run. If you make an investment doesn't pay off for five years six years if they 
can no -- will be ten years from now forget about it. The world changes. And so 
whatever premise. Is based on some investment that will pay off ten years. 
There's too much of a chance something intervenes that's very different -- I 
also think that you know being slave -- quarterly earnings is destructive. And I
actually think. One of the one of the things that actually makes private -- 
successful it has medium term. Her investment horizon. Typically private equity 
investment by companies they have to make them but they can't make investments 
without regard to the near term quarterly impact. But they also will only make 
investments that in all probably pay off and holding provisions viruses years. 
So that ability to make. -- to both both make those kinds of decisions but not 
be too. Not too long term focus was raised the industry's successful. And just 
just a follow up. On that it -- plug Tony and and the private equity world if 
you look at private equity portfolio companies. That are taken private and then 
come public. And they're still is a public. Company but you have a significant 
shareholding. From the private equity investors those companies tend to 
outperform. Their peers and market indices as public companies. And if what 
you're striving for is something that isn't just quarter to quarter we -- 
careening from guardrail to guardrail. Which are not so -- down the road in 
terms of your your vision that your your missing everything in between. You're 
looking for that sweet spot and I do think having more concentrated share 
ownership. Where you sort of the best of both worlds the disciplines of the 
public markets. But a significant value added partner who can insulate you from 
the -- quarter quarter. Enabled you perhaps to get a little bit more to the 
sweet spot. One loss -- -- question for you guys so. Will we will we see you 
return to government Kevin at some point. 

I hope -- So. So I did ten years. You know you get use -- I got finally allowed 
to be on probation and go to halfway house for awhile and he refused from 
government for a couple years. -- quite like the private sector elected when I 
was a banker many many years ago and if Washington keeps going on the path that 
it isn't doesn't seem to be all that attractive. -- use your name has come upon 
a few occasions. It's potentially being cast member. Of this administration. 
What wouldn't get government supporters Kevin's warning. I don't agree with -- 
-- I'd like to private sector to. And and I think Washington's history I had not
been spoiled and used to into treatment do what I want oil 1211. Washington's 
the opposite of that even the president United States doesn't have the control 
over his -- that I. And -- we gonna see that Taubman company. The new merger and
corporate advisory boutique in 2014 retirement -- fonts I'm not sure there's a 
reason that. Thank you guys very much thank you all for coming. Do you read the 
the predictions -- here but read it of course in the spirit that it was 
intended. Have a great -- fourteen