WILLIAM COHAN: When you have 12 years of artificially low interest rates, you have 12 years of people taking risks for which they're not getting properly compensated. I don't see how you can invest in the bond market. It's a longer period of time. It's lower interest rates. It's a variety of asset classes. It's not just mortgage related securities, everything is overpriced. All of these debt securities are overpriced, and I think it's an absolute disaster waiting to happen.
ED HARRISON: Hi, I'm Ed Harrison for Real Vision and I'm talking to William Cohan, who is a bestselling author and journalist. Bill, great to have you here at Real Vision.
WILLIAM COHAN: Great to be here, Ed. Thank you.
ED HARRISON: Before we, were going to talk about a little bit about debt markets, I thought it was interesting before we started filming, we were talking about Columbia Business School, which we both went to and our years there, and both of us when we graduated, graduated into financial crises. I think it's that somehow reminds me that joke Jamie Dimon told when he was like, there's always a crisis on Wall Street every four or five years. It seems that that's the case. The question now is, are the debt markets going to be part of the next crisis that we're having coming up?
WILLIAM COHAN: Well, of course, the short answer is yes. Because as you said, it's inevitable. One thing that-- I wrote this book called, Why Wall Street Matters, after I'd written History of Lazard, the History of Bear Stearns, the History of Goldman Sachs. One thing I learned through the writing of these histories, is that in this country, there's a financial crisis approximately every 10 to 15 years.
ED HARRISON: Even less sometimes it seems.
WILLIAM COHAN: Even less sometimes it seems. The country was born in a financial crisis because we couldn't pay for the Revolutionary War. Sometimes, the federal government would foment the crisis, sometimes Wall Street would foment or exacerbate the crisis. Now, it's been literally 12 years since the last. We're certainly, in my view, long overdue-- and not because of the historical demand that we have a financial crisis, but just because of, which I'm sure we'll talk about, the various aspects of what's going on in the market which to me, leads to the inevitable conclusion that a financial crisis of major proportions is on the way.
ED HARRISON: There are two things I thought were interesting there. Let me hit on one of them. You mentioned Lazard in particular and I think one of the important things in terms of this interview, even though I said bestselling author and journalist as your title, the reality is that you are a former practitioner. When we talk about you as a journalist coming and you can talk the talk and walk the walk because you've actually been there. I think that's important. Wouldn't you say that your career on Wall Street actually informs you as to the mindset that we might have right now at this particular point in the business cycle?
WILLIAM COHAN: I'd been a journalist. Before I went to Columbia Business School, I went to Columbia Journalism School, I was a practicing journalist on a daily paper in Raleigh, North Carolina. Then I came back to Columbia Business School. After I graduated, I went to Wall Street, 17 years. First at GE Capital, then at Lazard, and Merrill Lynch and what became JPMorgan Chase. I was head of the media and telecom practice in the M&A group at JPMorgan Chase until 2004. Then went back to writing, wrote my first book about Lazard.
Obviously, when you spend 17 years doing something like working on Wall Street, not only do you understand the language, as you say, you can talk the talk, I have the scars on my back from the experience, but I have a lot of knowledge and I think nuance and understanding of the way markets work, the way Wall Street works, what motivates people on Wall Street. It's not nearly as black and white as people want us to think especially politicians. That's why I wrote Why Wall Street Matters because I thought the rhetoric was really getting out of control as we were heading into the 2016 election, where everybody was bashing Wall Street without really understanding the central role that Wall Street plays in not only our economy, but the world economy.
I thought it was worthwhile to tone down the rhetoric, tone down the blame game, and explore the good things that Wall Street does and let's celebrate them, but also let's point out the things that Wall Street doesn't do well, and try to fix them. Of course, that all gets drowned out all the time because Wall Street's an easy target and fun to victimize and make them into the bad guy. I think my background on Wall Street brings allows me to have a unique perspective in writing about Wall Street and writing about the economy.
ED HARRISON: Thinking about debt market. As you talk about that, Wall Street incentives and where we are in the business cycle comes to mind in terms of interest rates. I guess the macro view that I have is that the Federal Reserve has a mandate, a dual mandate, to keep inflation low and to keep unemployment also low. They used interest rates to do that, but by leaving interest rates at zero percent for so long, they have fueled animal spirits on Wall Street and a lot of companies that wouldn't normally be financed have been financed. How do you see that?
WILLIAM COHAN: Obviously, I completely agree with that. I think again, there's some subtleties and nuances in the argument. After the financial crisis, I have to give Ben Bernanke, the then Fed Chairman, a lot of credit for-- no pun intended-- for structuring a way to revive the economy after 2008 by intentionally lowering interest rates, both short term and then through this quantitative easing program, one, two and three, which led to a huge expansion of the Fed's balance sheet from about 800 billion of assets to about 4.5 trillion of assets.
In effect, going into the market and buying all these debt securities, whether they're treasuries or mortgage securities or Fannie and Freddie backed securities that in effect created a huge source of demand in the bond market, which of course, raised the price bonds and lowered their yield across the board for a very long time, bought any number trillions, in fact, of these securities from the market, from Wall Street firms that had them on their balance sheets that didn't want them and couldn't sell them and essentially created a big foot of demand where there hadn't been before.
That was a very interesting way and a very creative way. They've been done, tried once before during the Great Depression briefly, under Roosevelt, which people forget, and of course, Bernanke had been a student of the Great Depression and so was determined not to repeat those mistakes and I think he deserves a lot of credit for that and for getting the economy revved up again.
ED HARRISON: I see a but coming.
WILLIAM COHAN: There's a but coming because at some point, you have to say enough's enough. When you keep interest rates-- there's zero interest rate policies, so-called zero policy, so low for so long, well, then strange things begin to happen. In my view, the strange things that begin to happen and there's evidence strewn all over the landscape is that people begin to take risks in search of higher yield, what are called the Yield Hunger Games, people engage in the Yield Hunger Games trying to find higher rewards than they can get in presumably safer security. They begin taking more and more risk and not getting compensated for that risk, so-called mispricing of risk.
That has gone on now. I don't know what the dividing line should have been when the economy was recovered sufficiently to start reducing the zero interest rate policy, but it's certainly now, it's been going on-- with exception of parts of 2018, it's been going on for 12 years, and that is absolutely too long. You see evidence of this all over, you see whether it's covenant light loans that are in the trillions of dollars that that are unfavorable to lenders.
You see the explosion of BBB credit, near junk bond like credit that is-- people talking about the BBB cliff, the concern that once the markets slow down, once the economy slows down, a lot of these bonds are going to go into junk credit and have to be sold or potentially would be defaulting and that's money that is very hard to recover. You see what's happening in the junk bond market where once upon a time, to get compensated for the risk that people were taking by lending money to less credit worthy companies, they should be getting 10% or 11% or 12% yield on their money. Instead, the bond market is yielding 5.50%, which is ridiculous because that people just are not getting compensated for the risk they're taking.
Whether you see auto loans have exploded and defaults on auto loans have exploded. We have huge trillions of dollars of student debt. We're literally a world awash in debt, something like $235 trillion. Once AAA rated companies, of which there are very, very few now. GE has 100 billion of debt. AT&T has 180 billion of debt. Companies have been rewarded because of the zero interest rate policy, a combination of low interest rates and tax deductibility of interest to issue debt. Of course, that's what they've done.
The Fed has pushed companies to issue as much debt as they possibly can, which is great for them, but horrible for investors, horrible for lenders. Eventually this is going-- this is just one of the asset bubbles. The debt market is this huge asset bubble which, in my mind, is going to explode. If I could just give you one example of how you can see that there are smart people who completely understand this, one of my favorite examples is this merger that recently took place between Gatehouse Media and Gannett to create the largest owner of newspapers in this country now.
Why? We all know that the newspaper industry has been struggling and this merger is in part a result of that struggle to try to cut costs. As far as mergers goes relatively small, about $2 billion, $2.5 billion deal, and it just closed in November, but the lender, the consideration that the Gatehouse paid to Gannett was half for stock in cash. To fund the cash portion of that consideration, the company got a loan from Apollo, which is Leon Black, the big private equity firm.
ED HARRISON: He knows what he's doing.
WILLIAM COHAN: He knows what he's doing. He knows how to price risk. This is a senior loan. I'm not sure exactly whether it was secured, but I assume it was secured. Instead of getting 5.5%, which would have been a junk bond rate in this market, he got 11.5%. He's getting paid 11.5% a year on a $1.8 billion loan. At closing, he got a 6% fee. He got another $120 million at closing. That's pricing risk correctly.
Leon Black knows how to price risk correctly. Unfortunately, institutional investors all over the world-- because they have to show returns to beat the market or whatever, they get sucked into this vortex of trying to get higher and higher yields, bidding up the price of these securities lowering their yields and they just completely-- it hasn't shown up yet. Some people think that I'm like a broken clock that I'm like, twice a day. You can't, it's not sustainable. By the way--
ED HARRISON: Hold on. Let me play the devil's advocate here with regard to what could the Fed have done. Because I mentioned the beginning, they have the dual mandate, Congress has told them specifically that they must look toward inflation and unemployment being low. We had this massive increase in unemployment. Every single time they try to take the punchbowl away, so to speak, take the economy off of QE, we will lapse into this malaise and the banks were still fragile. What else can they do? What could the Fed have done in that situation?
WILLIAM COHAN: I completely dismiss that argument in the sense that if you look at it now, if we believe Donald Trump, unemployment is as low as it's been in 50 years, there's basically zero inflation in this economy and there hasn't been for a long time. As I said, a few years and I don't know how many of those few, I don't know whether QE1, QE2, was QE three really necessary? Now by the way, if you look at the Fed's balance sheet, we've started on a shadow quiet QE 4, maybe part because of that disruption in the repo market. The Fed's balance sheet is actually expanding again.
Jerome Powell, the new Fed Chairman, in 2008 was teen, was absolutely on the right track. He started taking the punchbowl away. He raised interest rates, short term interest rates, four times. He started, in effect, selling off the assets, or letting the assets on the balance sheet roll off and not replacing them. The balance sheet was beginning to shrink. Interest rates were beginning to rise. The yield on high yield bonds was almost 8%. That was the beginning of the correction that was, in my view, long overdue and entirely healthy.
That happened in 2018. That was a beautiful thing. The markets didn't like it, of course, the market's going no, no. Nobody like it when you take the morphine out of your arm, everybody loves the morphine. Everybody likes that feeling but sometimes, tough love is what's required. The, as you were pointing out, the job of the Fed Chairman, according to William McChesney Martin was to pull the punchbowl away as the party's getting started. Well, that's what Powell was doing to his credit.
What happened? Of course, Donald Trump didn't like that. I guess the markets didn't like that. The markets didn't like higher-- why doesn't Donald Trump like higher interest rates? Well, first of all, he's the former king of debt. He's defaulted on loans throughout his professional career. The federal government is the largest, one of the largest borrowers in the world and he promised to reduce the federal debt. He promised to eliminate the federal debt.
It's only expanded $3 trillion in the last two years from $20 to $23 trillion. Of course, and budget deficits are now, annual budget deficits, are running it around a trillion dollars, and they'll run even higher and hotter if interest rates rise because you have to service that $23 trillion of debt. He doesn't want interest rates to rise. He started jawboning Powell, I thought power would have the backbone to stand up to him. After all, he can't be fired by the President. He was managing the economy very well and yet he caved and cut interest rates.
ED HARRISON: Let's go back to that. 2018 begins, the Fed says, you know what, we're going to raise interest rates three times. No, they said we're going to raise the interest rate three times. If you remember, the market was only pricing in two times at the beginning of 2018.
WILLIAM COHAN: I don't care what the market prices in. It's not about the market and what traders want, of course traders want more morphine? They're addicted.
ED HARRISON: They say two times, the Fed saying three times and he actually accelerated the pace, went to four times.
WILLIAM COHAN: Which I say, bravo.
ED HARRISON: Then suddenly in December 2018, the Powell pivot, and this was a massive, I would call it, 180-degree turn that he made. That's the question I'm asking. What was it that caused him to do that?
WILLIAM COHAN: If you could get me a transcript of what Trump said to him at their White House dinner in February of 2019, then we might have some idea. Obviously, he was putting pressure on Powell, Trump was putting pressure on power to do this and Powell, for whatever reason, caved. I don't know what he said to him. I don't know why he did it. Trump goes around talking about this is the greatest economy ever. Well, if it's the greatest economy ever, you don't need to lower interest rates after a decade of zero interest rate policy.
That pivot, the Powell pivot, will prove to be the undoing. My view at this point is, well, then it's going to happen anyway, let's just bring it on. Let's bring it on before November of 2020 so that we can add that to the quiver of problems that Donald Trump will have to face in November. To me, the worst thing would be for this inevitable financial crisis, to have it happen after November 2020.
ED HARRISON: Two things on that. I'm going to give you another devil's advocate question in a second. The first thing on this that I want to ask is about the consensus within the Fed. We're going to move toward where this is all heading and the crisis you're talking about, but let's look at how we got to where we are because 2018 December, the only guy who I can think of who-- there are two guys, Neel Kashkari and Jim Bullard, who were against going that path. At some point, it flipped. All the other fed governors got into line. It wasn't just Powell who was panicked as a result of the market selloff, as a result of Trump jawboning the Fed and so forth. There has to have been a consensus within the Fed that basically the US economy couldn't handle their medicine and so they were forced to backpedal.
WILLIAM COHAN: Obviously, I'm not privy to the inner workings of the dynamics inside the Fed that led to the Powell pivot. It's a pretty sad commentary when it's supposed to be the strongest economy ever, and we can't handle 325 basis point increases in the short term Fed Funds Rate. When we can't handle junk bond yields at 8%. They used to be 11%, 12%. Somebody's handling Leon Black getting 11.5% for a senior loan, a $1.8 billion senior loan now. Maybe they're never going to pay that back. Maybe that's a loan to own situation, I don't know, but some people are able to get the pricing of risk correct whereas the vast majority are being stuffed by these low interest rates, because the Fed is continuing to bigfoot the market and that's-- the price of money is no different in my view.
Look, I'm not a Nobel Prize winning economist. I'm just a former M&A guy who's studied the financial world for close to 30 years now, written six books about it, and was a practitioner. My view is that this is all-- that the price of money is like any other commodity. Should reflect supply and demand. Should refresh the risks associated with borrowing money or lending money. When you have somebody bigfooting it and it's not just-- the Fed started the conflagration around the world, of central banks around the world.
ED HARRISON: That was now you got into my next question.
WILLIAM COHAN: The Fed was an intellectual leader of this, the Fed led the charge. It made sense after the 2008 Great Recession, but for how long do we have to play the quantitative easing game? Unfortunately, the markets got addicted to low interest rates, cheap money, and it never ends well. How did we get to 2008 in the first place? We got to 2008 in the first place, because after 9/11, Alan Greenspan lowered interest rates from 6% to 1% very rapidly. That was 1%.