Good afternoon. Thank you everyone for gathering together with us and it's an absolute honor to be with our distinguished guests today. I have connections with each of them as I was thinking about this privilege. I have had a less successful hedge fund than anything Kyle Bass has ever touched, but I can relate to him there. And I've admired Administrator Leler for about 25 years. And I absolutely love Uber among many other things that the honorable Mr. Michael has done in his distinguished career. I'll give brief bios and then we'll try to jump in because this is going to be really brief. Okay. Everyone, there's no reason they're informal because everyone knows you, your reputations precede you.
Administrator Kelly Leler at the SBA. She's brought a clear focus to expanding opportunity for small business owners, helping them access capital and customers, reducing unnecessary barriers to growth, and restoring the agency's central role in supporting productive capacity and industrial strength in the United States.
The Honorable Emil Michael currently serves as Under Secretary of War for Research and Engineering and is the Chief Technology Officer leading the Department of War's effort on innovation and technological superiority.
And Kyle Bass is the founder of Haymon Capital Management, a global investment firm he built from the ground up and co-founder of Rocher Investments as well, which is an SBIC fund, SBICCT fund, which is a commonality between all three of them. And we can talk more about that. And since then, he has built a career studying geopolitical risk, capital markets, and the strategic vulnerabilities facing the United States. He's become one of the most respected voices on how private capital can be mobilized to strengthen our industrial base and help the United States prepare for risks and the opportunities ahead. They're a rare combination, the three of them, of public leadership, financial insight, entrepreneurial experience, and firsthand knowledge of how to translate innovation into real capability.
So I wanted to talk about just two quick ground rules if I can take this privilege. So we've all sort of watched the Fed throughout our careers and we know there's some meetings that are kind of fake meetings and then there's some meetings that are live meetings where they may actually change interface. So we're hoping that this can be a live meeting that you will, you know, you'll share anything that you feel passionate about. Don't feel obligated to answer every question, but we'd like for you guys to be able to engage in conversation with us on these topics that you have such unique perspectives on. So with that, we'll get started.
Thank you. Administrator Leler, let me start with you. President Trump has made rebuilding the industrial base through manufacturing, securing supply chains, central priorities for this administration. Talk a little bit about that in your mind. Talk about the mission and why small businesses are so essential to it at this time and how you've thought about it.
Well, thank you, Josh. I think we can all see that thanks to President Trump, this is a nation of builders again. This is an interesting statistic that I think is underappreciated. 98% of America's manufacturing and production base is comprised of small and medium-sized businesses. And that's our builders. That is the strength of the supply chain. That is the root of the Small Business Administration, the Smaller War Plants Corporation and the Small Defense Plants Administration. We'll hopefully talk more about that. But why did we have that back in the 1950s during wartime? Because the presidents at that time understood that our strength at home and abroad depended on strong industrial capability and know-how. And that started with our smallest machining operations, those producers that the primes all relied upon and can't do their jobs without it. It's why it takes 400 small businesses to make a Patriot missile. It takes 3,400 small businesses to get Artemis 2 to the moon. And when I visited Sig Sauer, they talked about the 1,200 small suppliers that they need to equip every member of our military with three sidearms. So that is why I am so passionate about walking factory floors every single week across this country, talking to the men and women who are machining the components that go into everything and increasingly drones. I've seen so many companies that I've already visited here. Hattie, Compotech, some others. I got to walk the factory floor of Albaore, y'all may be familiar with. And just talking to them about the know-how required.
That's one aspect. The other is the capital, speeding access to capital and making those connections whether it's with venture capital, private credit, SBA backed lending, SBIC investors who we have here who have put 1.23 billion into 111 drone companies already out of the SBA. Our SBER program, I hope we have some folks here involved with SBER, but it's not just getting them funding. The last piece I'd say is getting the regulatory burden out of the way. It's why we were so pleased to work very closely with Department of War in leading the changes that we've made in CMMC and I've just been grateful to work with Emil on so many of these initiatives whether it's CBER or CMMC, James Mismatch and his team, the honorable Duffy, honorable Dodd, so many folks at Department of War have been so welcoming of the SBA's efforts because they know that we are all aligned with President Trump's leadership on not just drone dominance but really industrial dominance as a nation and I think today's a great example of it.
Thank you. Mr. Michael, you oversee innovation as a chief technology officer and the head of R&E is an incredible vantage point. Would love for you to just talk about the innovation ecosystem and things that are important to you right now.
Our innovation ecosystem prior to President Trump was all over the place. We had, you know, some programs that sat over here. We had DIU was over there. They were all over the place. And the problem that causes for these young companies, I'm not going to call them only small businesses, young companies that want to participate in the re-industrialization of America, is that they would knock on 20 different doors and depending on their funding cycle, where they were, they would get left hanging. And I hate using this valley of death thing, but it was true. They were just sort of falling through the cracks. And so we unified that at Department of War. So, Cyber, Sitter, Appit, DIU, Office of Strategic Capital. If you think about the dollars, they get bigger as you go down that chain. So, now any company comes in, I know where to place them to give them a fair shot and we give them a fast yes and a fast or a fast no. And then when we do things like drone dominance, it's competitive, right? So, they get a chance, I say here's a criteria. We'll give you objective feedback on how you're doing because small businesses and young companies, they just want to know how they're doing. If they're not doing well, they want to change direction. They're small enough to be able to do that. So, we've created competitive sort of dynamics where they get money at every stage, so they're not doing it for naught. And combining all that together sort of gives companies a more clear set of objectives and clear things to attack. And doing this with SBA that's focused on doing the defense industrial base and small businesses which is beyond sort of just for drones or just for anything. Really it's been a great partnership and I'm excited about it and we've there's no way we'd have made this kind of progress in just a year and a half without the commitment of Kelly and SBA. So I'm excited about that.
It's terrific. Thank you. Any follow-ups on that? Okay. Kyle, you've been very thoughtful in framing out the nature of our global competitive environment and would love to hear what you think are the most urgent priorities for us as a country and any reflections you'd have on what we should be doing at the government level.
Hello. Hello. Okay, there we go. I'll key on something that Kelly said and Emil followed up on. If you take a few steps back and you look at what's happening, right? We have a ground war in Europe between Russia and Ukraine that doesn't have an off-ramp and now Putin's threatening the Baltics and potentially Europe at large. And you've got Iran and their illegitimate proxies against Israel, the US and the West. And now we're staring down the barrel of China, Taiwan. I see what's happening here. It's kind of a mini Manhattan project. Emil is getting, let's say, Department of War put together from an acquisition procurement perspective and doing a hell of a job because it's a daunting task. But if you look at what the SBA has done, they've really just leveled up. When you look at the average loan size, the SBA since 1953, our analysis shows it to be about 340,000. Our average loan size on our program with the Department of War is 35 million. And so they have stepped into a void that is absolutely necessary and it's working in an amazing way. And our work with the government, you know, I know Art Spivey's in here. He was our entree into the SBA. You know, normally when you deal with the government, it's a very long process and it's awful. Our on-ramp here was like a red carpet. I've never gone through anything so great. And he calls me on a Sunday, on a Saturday. I mean, you're a government employee with your cell phone number and we have a proper relationship. So, what you've done here, Kelly and Josh, is truly spectacular coming from the private sector and having a public private partnership. So, we have a mini Manhattan project going on and we're a force multiplier for the Department of War. We do the smaller things. Emil does things that are more direct and large and that's how we need to be operating. And we I think we have a great partnership. Look, are there some disagreements? Of course there are. But that's what this is all about. And so I really appreciate what's happening here, how our country is thinking about it, how the president has decided to put us all together and make it work, and now we just need to make it bigger, faster. That's my opinion, but I really appreciate how it's gone so far.
That's a nice entree back to the administrator to just talk about the tools and talk about some of the changes that you've been making at the SBA that relate very specifically to that.
Yeah. So, I mentioned that our predecessor agencies were the Smaller War Plants Corporation and the Defense Plants Administration and why do we care about that? When President Eisenhower came home from World War II and Korea and saw the effectiveness of those agencies, he wanted there to be an SBA specifically to make sure that our supply chains were in place. And that really won wars for us to have a strong supply chain, dual use, the mobilization capability that I know everyone up here is working on and I just find it fascinating and tragic that we got away from that. And only under President Trump's leadership have we been able to bring that back and bring it to the fore as a top priority. It's drone dominance, it's drone tariffs, it's airspace superiority, it's all of the pieces in place that we need to compete. And what is the SBA like, how could I make us a force multiplier for the private sector and for what the Department of War is doing? Is to ask Secretary Hegseth, how can we help? Can we reassemble the Smaller War Plants concept? And we did. We signed an agreement last month almost within a month of envisioning it and bringing that to bear. And we have some exciting announcements coming up. Can't make them today, but to make sure that we're not just saying, 'Oh, here's some government capital. If you're too small, come to SBA. If you're big, go to OSC.' We're leaving a desert in the middle. And we want to make sure we're providing the connectivity for those middle market growth companies that we don't penalize you for being a growth company. You don't outgrow the SBA and you're in no man's land, Valley of Death, until you get a bigger CBER contractor. An SBA like we're trying to make sure that we're using all of government and all of private sector and I think that's the thing about this administration we understand that we need to return the power to the private sector and that's what they've done with cutting tax burdens, cutting or putting the incentive and the signals out there that we're going to give you 100% depreciation, give you the cash flow you need to invest but the Smaller War Plants Commission is also helping the Department of War map the supply chain and any bottlenecks that are out there. In the NDAA that was passed last year, we created the Civil Reserve Manufacturing Network, which is an important roadmap for looking at the supply chain. So, we're helping them map that through the LINKS program. If you haven't looked into LINKS, that's an important database for supporting that initiative. Really important. You heard Trevor this morning. I thought it was really inspiring talking about how Ukraine is building millions of drones in bunkers underground and that's, you know, if they can do that, I'm confident that we can far surpass the goals we've set. But we can't do it without us being accountable for delivering what we said we're going to do. And I think that's the transparency. We're going to provide reporting on our initiatives here. And then just finally getting the regulatory burdens out of the way. And now that we all know each other, you can contact us and say, 'Hey, this isn't working.' I mean, that's how it worked with CMMC. And we're going to continue to stay in the field and do those visits where we need to understand something better. So, I'm just really honored to be able to work with these type of gentlemen and aid organizations and especially the private sector. I am as a daughter of a veteran and granddaughter of a veteran and my dad started a trucking company based on what he learned hauling jet fuel in the military in addition to our family farm. But I know the blood, sweat, and tears that goes into a small business, the unseen hard work. This administration understands it and that's why we're always going to put the private sector first and we are here to listen to you. And I know it's a paradigm change from dealing with past administrations where they'd nod and say, 'Okay, bye. We got you.' And then they never did. We are working really hard to do that. So hold us accountable for that and let us know where the pain points are.
I want to key on something you said that was powerful and let's expand upon it. You talked about signaling and how important are the demand signals that USG and in particular, you know, the largest budget in the world, Department of War can provide to the private sector both to the companies, the corporates and the investors. And so Under Secretary Michael, could you talk a little bit about how you think about demand signals, how do we increase the quality of demand signals so that investors and companies can effectively and over longer periods of time act upon those signals?
Yeah, I mean, it is, that's our job and that's on Kelly and I to do that. And I'd say that the reason I know it's working although we still have some way to go is people like Kyle and other investors that there is the largest amount of private capital for defense related sort of companies that's ever existed maybe since the 1950s or 40s and these funds, not yours, they had prohibitions on investing in defense companies, you know, before this president. In some ways, they were not interested in this sector. And now you're having mainstream VCs and private equity companies sort of be interested in this because they're behind this re-industrialization notion. And so we have to give demand signals because we need that capital to keep flowing because we want everyone to win, the investors, the entrepreneurs and the small businesses and ultimately the Department of War. So we have to give signals. So when I go to Congress, I talk about this a lot. And it's hard because Congress works on one-year cycles. Here's one budget thing for this one item. So we've tried a department, for example, say, I need a multi-year order. I need to be able to give this company or set of companies a five-year order so they can plan ahead and then they could go down their supply chain and give those orders downstream. And that's great for the small businesses that you were talking about building the Patriot or so on because they can have visibility, they can make more money because they could plan ahead. So those are the kinds of things we're trying to break so that we're giving clearer demand signals so that we have a robust industrial base that could surge capacity when we need it because that's really what Kelly's talking about. It's like how do you surge when you need it? You can't do that if you have no base. So we have to have the base so we could surge.
I was as you were talking I was thinking about a very very tangible example we have among the three of you here which is that your office determines the critical technology areas that are then used in our investment policy statements for the SBICCT program that Kyle's fund commits to invest 60% of their portfolio into these areas. So you're creating a clarion demand signal. They're investing it and then we at the SBA are maintaining compliance to make sure that you're doing that and that we've got discipline in our program. It's a very powerful system that is being multiplied across many dimensions. Do you want to add to that in any way Kyle from your perspective as representing the private sector? What would you look for from us?
Yeah sure. So to key a little bit more on what Emil just said, the demand signal, you know, we think about the primes which have been there, you know, it's like a centrally planned Soviet system right on how they operate and getting into, you know, our innovators and our call it startups or, you know, smaller private companies. One of the things that has to happen, I was with Secretary Hegseth a couple weeks ago and we talked about this, if we can just shorten that qualification certification timeline from three plus years and get some people to own some risk. We in the financial markets understand owning risk and having rewards. If you're in the government job, you only have negative convexity. If you do something that blows up or hurts somebody, you're going to get fired. And so if we can shorten that cycle of qualification certification, not jump the shark and not do it, but just shorten it, that capital formation will move faster and that valley of death will be shorter. And I think that's what we need to do right now. We need to get there now. Secretary Hegseth agrees. I think the service heads of the services are going to get calls from the SEC War and I think this is going to happen. But what's happening with Emil, you know, trying to get some money into the private sector away from the primes and encourage innovation in America is happening. Of course, we all want it to happen faster. And there are bureaucracies that are difficult, but you guys are doing, I mean, look at the quality of the people we have in the administration like Emil doing things like this. And Kelly, you know, they don't have to do these things. They have plenty of other things I'm sure they'd rather be doing. But we're all here together on this mission and it's, you know, a bunch of people that are currently serving the military, ex-military, finance people. We've all come together and I've never had more fun in my life than the last two years. I mean this has been a great thing and I don't want to say war is coming for certain but our view is that the financial architecture of the world today has never been as bad as it is. We took our Fed balance sheet from a trillion to nine trillion and now around six and a half. Like we pushed 50% inflation of the world and a bunch of places in the world broke and there are a bunch of places in the sandbox that will not be fixed. And so war, I think the conditions for war are all right in front of us and we'll look back at this and say we should have gone faster. So I think behind the scenes we are going as fast as we can go. In front of the scenes, I don't think people understand that we're on wartime footing. And so I think we just need to move a little quicker and get that qualification certification timeline down. I'd love to hear your response to that, Emil.
I mean qualifications and certifications, what those are is, okay, you have a new gunpowder, energetics, you have to go to the army and say, well, how do I qualify this? Well, here's a 55-page document with all the steps and it was written 20, 30 years ago for an older time and the steps don't make sense anymore. And so you put a company through that that's innovated on something and they still have to wait that time frame on. So, it's more taking that and modernizing it. And you have to do that like once at a time. And that's sort of a reform project that you kind of hit the bureaucracy and you got to keep driving at it until you get these things reformed. And again, you're not trying to reform them necessarily to take unreasonable risk. You're just trying to modernize them. But they exist in all parts of what's the biggest bureaucracy in the world, which is where I work. And so, you got to keep at it. So, every day I wake up and try to take two or three of them down, and the boss does, Secretary Hegseth does. But we're going to, it's going to take us four years to knock enough of them down to make a difference, but we're on wartime footing. So, the message is I have people call me all the time and Secretary's like, 'You have a problem. I'll see if I can solve it.' So we're trying to be responsive. And your comment about, you know, being on the phone and being on communications with government officials, that's never happened. I don't know how you probably take a ton of calls from business people all the time. Last administration was allergic to business people. They did not want to talk to them. And that's a little political, but it's true. And you can't make progress without talking to people in business. It doesn't work. So, that's what I'd say.
Well, I would just add that in 1970, Lockheed was the biggest employer in Silicon Valley, and today it's like fifth. And when you think about the convergence of defense and tech, it's here and I'm glad we're tearing down those barriers between defense and technology because it had been unnecessarily stigmatized and we all saw that play out over the last 20 years and then also in banking. I still talk to people that have challenges and we're still fighting those challenges whether it's on the defense or 2A side, you know. So at the SBA, we want to hear from you. Think of us as maybe we can be helpful in working with the Department of War since we are partners in this effort and helping you get in and that's part of the mission of the Smaller War Plants but also to just be out talking about it, get our muscle memory back not just talking about building mobilization. I mean part of this is deterrence, I mean we've for a moment almost lost our deterrence, we're getting that back but it's also how do we get banks thinking about lending to manufacturing again. For 50 years, we hollowed out this country of not just manufacturing facilities, 90,000 of them, and told 5 million Americans, you're not needed here anymore. Your skill set, your pipe fitter, a steam fitter, electrician, welder, HVAC, it's going to be over. The expertise is going overseas. That was wrong. The president knew that. And so to reinvest in these capabilities for these students wherever you can make an impact in getting young people back into these real trades. We call it the new collar boom because it's a convergence of physical and digital and I've seen young people at these machining jobs where they're on a path to an engineering degree part-time because they learned being a machinist then they got an associates and now they're at Rutgers getting an engineering degree. I mean that is the American dream and this industry is a huge pathway for it that we can no longer leave behind and to me that's the ultimate demand signal is our economic and national security depends on it.
Please, I'd love to make one more quick comment. As we sit here in DC and something that Emil said earlier about people's ability to invest in things like defense and defense tech. Last time I was here, I was sitting at a place for lunch with the head of an endowment of a prominent university. They said, 'We love what you're doing. We want to invest with you, but we have this ESG policy and can you just carve out anything that blows up?' And I said, 'No, we're not.' And then we talk with other institutional investors, pensions, and they say, they've asked, you know, 'Can you please carve out anything that explodes?' And because we have these ESG and DEI and whatever these other policies are that have weakened America, they just still can't get there. Even though they want to do it, they can't go to their board. They're still too afraid to do it, Emil. And so out there in the weeds, I still keep running into things that are just hilarious that these people can't, you know, figure out where the world is actually headed. It's like the feckless Europeans, right? They keep doubling down on the instant replay. We talked about this behind the scenes. These people can't do it, but they're going to have to do it at some point in time.
