Bloomberg Audio Studios, podcasts, radio, news.
With that question, this is the interview of the day for Global at Wall Street. Paul, can I dare say it's the interview of the month?
We'll go with that. Gary Gensler has a sterling effort of hard work and academic excellence across his career spanning from a look at media and mergers and acquisitions with Goldman Sachs onto his public service wearing numerous hats for the United States of America, recently a chairman of the Securities and Exchange Commission, and he joins us in studio. Thank you for joining Bloomberg today.
Tom, Paul, it's wonderful to be with you. You're a little exaggerating about me, but I'll take it.
We'll take it. Well, we do that as we can. You have the privilege of a podcast with one of my favorite people. Simon Johnson was my book of the summer 2008, 2009. His little monograph, 13 Bankers, distilled your chaos. It was your fault we had the crash of '07. And Simon Johnson, Nobel laureate, did it. Here is Simon Johnson in 13 Bankers. And I will take credit for really making this public. The SEC final rule, alternative net capital requirements for broker dealers, August 20, 2004, and three years later, that third week of August '07, LIBOR-OIS went out for standard deviations. Are we doing it again with private credit?
Look, I, one, thank you so much. And it's wonderful to be partnered up with Simon Johnson on our new podcast, Power and Consequences. A little audacious because in the world of economic minstrels, do we need another two folks, you know, out there doing podcasts, but we're going to have some fun with it and speak about that. Look, in terms of private credit, I think that there's some risk there. But it's a small part of our overall capital markets. Don't forget US capital markets, what, 150 trillion or so, and this is a $2 trillion corner. But there are some risks, and I'm sure we'll get into it, particularly because they've offered to retail investors, high net worth individuals, what's called the wealth channel to be part of this. And the wealth channel is turning on it. They're saying we don't want to be in here as much. Can we redeem out? And that's a little hard.
How do you respond to people that blame you as SEC chairman for opening up the door to this retail investment in esoteric things like Bitcoin and others, but also Paul, how would you phrase it? Illiquid private credit?
They blame Gary Gensler, Chairman Gensler. It's your fault. How do you respond to that?
That's a new one. I hadn't heard that, Tom. It's in the zeitgeist. It's like Gensler and Biden let this happen. How do you respond to that? I look, firms, alternative asset managers and private equity and private credit and hedge funds, real estate and so forth have been around, you know, really for 50 years in the direct lending space that started in 2008 to 2012. Mark Rowan started Apollo, Steve Schwarzman with Blackstone. They were building big engines and it was already probably when I got there at least approaching a trillion dollars. So I just think that that was something that was already...
Well, it wasn't you, you have it in your 401k, right?
Of course. Of course. One of the things I noticed, Rob, is when we do go out and talk to registered investment advisors, and we do that a lot at Bloomberg Radio. We go out to our sponsors. I'm shocked at the RIAs at the allocation to alternative investments. I would have thought it was 5%, 6%. They're talking 20, 30, 40%. They're talking like they're in an endowment.
Look, I think that's where we have the risk. It's a structural risk. Alternative asset managers, private credit amongst them are bringing in institutions, sovereign wealth funds like insurance companies, and then about a third of private credit, the investors are everyday investors. Lloyd Blankfein said it well. He was asked recently about it. He says, 'I don't get why they're doing this. It's when this goes down, the institutions, Washington, know who, I don't care about, but when it goes down for private individuals, it's going to be bad.'
Have you with the celebration of Mr. Blankfein's book? How many book parties is he having? You've been to them all, right?
No, but Lloyd and I, we were at Goldman Sachs and we were honored to make partner together. So he's a very clever and funny individual.
Tom, I just referred to Gary as Rob. You know why I did that? His twin brother's Rob. That's the real... I do that. He's a buddy of mine. You're hanging out with me. My identical twin brother Rob Price. He's the...
Across America with this Gary Gensler, the former chairman of the SEC in celebration of his podcast with the laureate Simon Johnson at Sloan. Paul Sweeney.
So Gary, the investors have been dealing over the last three, four weeks with all these issues going on in Iran, whipping around energy markets, whipping around all kinds of risk markets. How do you view that? When you talk to investors, I'm sure they come up to you and say, 'What do I do here?' Because it's so much stuff I don't understand perhaps.
Look, it's a multiple shocks. It's a shock to the energy markets as we know. And I would look in energy markets, not at the current price. I'd look at the September and December prices for both oil and for natural gas. I'd look at fertilizer pricing. And right now probably we're going to have higher prices for agriculture in the fall because the fertilizer pricing has gone up, doubled in the last few weeks and this is spring planting time.
I think it's also going to hollow out some of our longer-term growth. Look, we've a remarkably resilient economy. Jason Furman just wrote about this in the New York Times, but I do think that our longer-term growth rate is now clinked down a little bit more. And so I'd be worried about multiples in the equity markets when you have lower growth.
If you were back at the SEC, what would be your primary issue, worry, to-do item maybe?
So I would be getting the team together and say what do we know and can you pulse the various large banks, the JP Morgans and Goldmans, about what's called prime brokerage where they have trillions of dollars loaned out to hedge funds and then also I'd ask the bank regulators how does it look about their loans to private credit. We recently saw JP Morgan remarking those loans to private credit. I'd want those interconnections to prime brokerage, hedge funds, and the banks to the private credit space.
Tell me about the hedging risk here. I brought it up the last couple days and all of this works off at New York University. Professor Rohan Grey has been wonderful. There's a hedging and Greenspan would speak about this in celebration folks of his 100th birthday. We have hedging. There's a price to hedging always and then oops things go bad and within a hedge or out there a rehedge or dare I say out again. What is our risk right now of there's a point where you have to rehedge, you have to restructure all these derivative instruments?
Well, that is always a risk particularly if a firm fails and that's what we would look at when I was at the US Treasury many years ago and Long-Term Capital Management failed. So, everybody has to rehedge. So, when there's breakage in the system, it's as you just said, the rehedge. For the listeners, a bank is counting on its counterparty to be there tomorrow, but when the counterparty disappears, then they have to take that whole position, right, and rehedge.
The certitude of the street, Gary Gensler, is we fixed this in '07-'08. The big banks are not exposed, but then there the others. What are the shadows of the others that you're focused on?
I do think that the big banks have better capital position or more resilient 2026 than 2007. But I do look at the significant leverage that's the borrowing in the hedge fund community and yes the interconnection between the banks and the alternative investors of the private credit space. And now back to just private credit. We are going to see some disruptions. I mean AI is changing the world right now, right? And if it's a fast change, that means valuations are going to change a lot. This is like a barbell economy. If AI goes really well, that means some valuations, whether it's in software or other fields, have to decline.
Crypto. Have we gained more any clarity on who is regulating it, who should regulate it, to what degree should it be regulated? Where are we on that?
I think those are going to be questions that you'll have for my honored successor Paul Atkins and others. But the American public, you know, they seem to be even more focused on prediction markets than crypto right now. So the investing public, I'm not saying they've moved on, but there's been a new darling at this little casino.
One of our colleagues at Bloomberg Television was just interviewing the CEO of one of these prediction markets and adamant that it is not gambling in this town.
Yeah, there's no gambling in this town, right? No. No.
Come on. And I'm not going to blame this on you, but I'm sorry. There's this huge... I got to make some news this morning. Do you look at these prediction markets as gambling, Mr. Gensler?
Well, parts of it are sure. Look, there's parts of it that is just hedging, right? Economic risk, but now you go all the way over to the sports world. And the sports world, that's just gaming. It is.
I'm going to go mental here. Rafael Hour at the Bank of International Settlements has written the smartest stuff I've seen on a broader statement of Bitcoin. They did a paper, eight single sentence, single spaces, eight pages of detail on the speculation within these markets. I mean, it's basically a casino like people voting against Duke in basketball. I don't see Penn in the... Did you see the University of Pennsylvania in the bracket?
Wait, wait, wait. That's my alma mater.
