Market Recalibration: Taxes, Trade, and the Future of Finance with Jim Millstein, Co-Chairman, Guggenheim Securities
Willy Walker: Good afternoon, and welcome to another Walker Webcast. It is my great pleasure to have my friend Jim Millstein join me today. We were originally going to have Mark Zandi and Jim Parrott also join us, but due to Moody's downgrade of US sovereign debt, as well as a small but not huge family emergency on the side of Jim, it is just Millstein and Walker today, which I'm very excited about. Actually, Jim, I think I was thinking about this ahead of time, and we were originally going to talk about Fannie Freddie privatization and furthering our conversation that the four of us had two months ago. There isn't a whole lot for us to comment on there, although we will talk about it during this conversation. But I will say, given your background, Jim, in law, in banking, in the public sector at Treasury, and then in academia, I know few people who can provide as much in-depth perspective on the world we live in today and all the question marks that people might have than you. So let me do a quick bio on you, Jim, and then we will dive into our conversation. Jim Millstein currently serves as co-chairman of Guggenheim Securities, the investment banking and capital markets arm of Guggenheim Partners. His career spans significant roles in law, investment banking, and public service, notably as the Chief Restructuring Officer at the U.S. Department of the Treasury from 2009 to 2011, where he was instrumental in managing the government's largest financial sector investments during the 2008 financial crisis. Prior to this, he was the Managing Director and Global Head of Corporate Restructurings at Lazard, and before that, a partner and head of the corporate restructuring practice at Cleary Gottlieb. In 2018, Guggenheim acquired Millstein & Company, the firm he founded, integrating it into Guggenheim Securities. Jim's expertise includes advising on high-profile restructurings, such as the Commonwealth of Puerto Rico's $75 billion debt restructuring, U.S. Airways' acquisition of American Airlines out of Chapter 11, and Caesar's Chapter 11 proceedings. Additionally, he's a lecturer at Columbia Law School and an adjunct professor at Georgetown University, teaching courses on private capital and financial regulation, respectively. Jim went to Berkeley undergrad, has a BA in politics from Princeton, and a law degree from Columbia. Jim, when I went on to Guggenheim's website and listened to your bio, which I actually thought was really neat and interesting, they had you actually talk about your role rather than just listing all the things that I just listed. What you say there, Jim, I thought was very interesting because you say, what we do, what we are doing as bankers, is help people think through change. And I think that's exactly what bankers are supposed to do: think through change. The entire world right now feels like it is changing at a pace that we have rarely seen before. So as you sit there and look at the changes that we're going under politically, economically, and technologically today, what is either the most exciting or the most threatening/challenging that you see on the landscape today, given that you're the one who's advising clients through change?
Jim Millstein: Well, first, thanks for having me. I'm sorry that Jim and Mark couldn't join us, but we'll try and make do. Technologically, I think the generative AI developments, which are, I don't know about you, Willy, but I've been over the last two years hanging around with ChatGPT, and we now have a relationship. I mean, it can anticipate what I'm actually looking for when I'm using it as a research tool. And it has a memory of all the research I've done with it over the last two years. The result of which is that when I finish one session, it'll ask me, “Do you want to see the links between what you just asked about and what you asked about three weeks ago?” It's like having the best graduate student research assistant one could have. And at the trajectory on which it is moving, it's going to be like having 10 MIT physicists working for you, in a relatively short time. So I think this is going to have a revolutionary impact, particularly in professional services, but also in government and manufacturing, and across the board. In my view, this technology, as it starts to be applied to specific sectors and problems to be solved, is probably more important than the steam engine was in the 1800s in terms of the transformation of what were then agricultural societies into industrial societies.
Willy Walker: If I can, let me jump in there for one second. You and I are both old enough to remember the advent of Excel. And you and I both have worked on Wall Street. And when Excel came into Wall Street, you were much younger and therefore, we were the ones who were able to use Excel and do things that people who are much more senior than the two of us were doing at that point. But everyone thought, oh, Excel is going to, make the analyst obsolete because anyone can now run these great financial models, and we're going to have less people on Wall Street rather than more people on Wall Street. What we ended up getting was not only more people on Wall Street, but more people on Wall Street by an order of magnitude. As you sit there and think about banking and law, given your time at Cleary and Lazard, and now at Guggenheim, what's that outlook? As you started talking about that, I thought about, well, when you were at Cleary, you had a paralegal who was supposed to be following all the cases that you were working on and all the clients you were advising who would make that connection between the work you did three weeks ago and the case you're working on today. You're now saying ChatGPT is doing that for you. Does that mean, necessarily, that paralegal/entry-level associate at Cleary no longer has a job? Or do you think that the work that you and that associate are going to do just goes to a whole different level?
Jim Millstein: I'll tell you the advice I give to the incoming analysts at Guggenheim, which is, “You better become extremely familiar with these tools because it will distinguish your performance.” Ultimately, I think it's a productivity tool in the professional services arena, and is going to restructure the hierarchies on which law and banking are built. And I think it's going to have profound impacts across the board in the services and the economy as a whole. What economists would say is that every technological revolution, to the extent that a productivity tool reduces or increases the value per unit of hour worked and therefore eliminates labor as a factor of production, reduces the relative value of labor as a factor of production. The economists would say yes, but as many jobs, multiples of the jobs that are lost to higher productivity with technological innovation, are the new jobs that were created from the new industries and the new forms of social and economic organization. Let's hope that's true with this revolution. I think it will be. But these are really, really powerful tools. And I think we're just beginning to scratch the surface of how they're going to be employed and the impact they're going to have on the way the economy is organized, the financial markets are organized, and the society organizes itself.
Willy Walker: Do you think the differentiator, Jim, on this, as far as service firms are concerned, is the use of the technology or owning the technology? So, clearly, there are some large firms that are making big investments in creating their own AI. And then there are others, like Walker & Dunlop, that are going to sit there and basically surf off the backs of the investments that Grok is making and ChatGPT is making, and others, for that matter. Do you think that it's going to get down to the point that the services firms have to have their own AI, or do you think it's really the use of it and implementation of it?
Jim Millstein: I think it's the use of and implementation. And I think if you think about it as a professional service firm, what's your advantage? It's your embedded precedence. It's the experience of your lawyers in the case of a law firm, your bankers, in the cases of your firm, your real estate professionals. It's their experience, which is basically the accumulated wisdom of the various transactions on which you've worked. That's a database. And you have a unique style and way of doing what you do, implementing the transactions you're involved in. Applying these tools to that data will make you way more productive and smarter because you'll be able to see. The tools allow you to see the patterns that distinguish your way of doing business from others. And presumably, those patterns are what create your competitive advantage. And so I think this is a question of implementation. You've got to take your accumulated data as a firm and create the database on which these tools can help you become more productive.
Willy Walker: Jumping to when you went into Treasury, Jim, just because given the backdrop of where we are today and you and I are going to dive into, well, the downgrade by Moody's and U.S. Debt and things of that nature. When you went into the Treasury, you were the chief restructuring officer. Had there ever been a chief restructuring officer at the U.S. Treasury before you took that job?
Jim Millstein: Not that I'm aware. This was such an unusual time. The entire financial system was paralyzed and frozen. The Federal Reserve provided an enormous alphabet soup of liquidity programs. But at the end of the day, the widespread perception in the financial markets was that major financial institutions might be insolvent. And capital was required. And thankfully. Congress in its infinite wisdom, at the request of then Secretary Paulson, provided the Treasury Department with $700 billion of firepower to recapitalize the banks. As it turned out, one or two were close calls as a capitalization, as an adequately capitalized matter, but no one was sure. And so the fact of the government putting $25 billion into Goldman Sachs or JP Morgan, two of the finest institutions and probably not insolvent at the time, but putting the government's and perimeter in the equity account of those companies that 125 other large financial institutions eventually gave markets and investors’ confidence that they could transact with these banks. And for the banks, it gave confidence to the banks that the banks could transact with each other, and the markets came unfrozen. So when I got to the Treasury, Secretary Geithner was like, “Well, what do we call you?” I was like, “I don't know. Just call me the Chief Restructuring Officer.” Because that's a title that is used routinely in corporate and sovereign restructuring. Thankfully, I wasn't there to restructure the debts of the United States, although some future chief restructuring officer may have to do that.
Willy Walker: So you did spend a lot of time on AIG, Jim, and I got a couple of quick questions on that. The first is, what was the lesson that we should take away from the AIG failure that we shouldn't repeat again?
Jim Millstein: Well, the epicenter of AIG's failure was a trading operation in Wilton, Connecticut called AIG Financial Products. And AIG's financial Products, by the time it got to September of 2008, had written $2.4 trillion worth of derivatives on a very thin capital base, largely dependent on the capital of the parent company, which is a collection of the largest life insurance companies in the world and the largest property and casualty insurer in the world, as well as a host of other interesting businesses. But AIGFP had huge derivatives exposures, and they were relying on the credit rating of the counterparties of AIGFP on the other side of AIGFP on a credit default swap, on an interest rate swap, on an exotic structured trade that they provided credit insurance to support. Their counterparties relied on the fact that AIG itself, the parent, had a double-A-plus at some point earlier, had a triple-A rating, and, therefore, would cover the capital needs of AIGFP if and when they actually arose. What happened is all of those, as everybody who was alive then can recall, you know the derivative markets and the financial markets generally just traded off, equities traded off, and debt securities traded off. And as a result, AIGFP was required to post cash collateral because of the downgrade of the parent's credit rating. So at some point, the credit rating of the parents at some points, September 15th, 2008, the parent was downgraded. And as a result, FP had to post cash collateral, and it just didn't have the cash. And AIG's parent didn't have the cash. This is the interesting thing when you're a highly rated investment-grade company, a little bit like the United States is still today, you raise your hand. Secretary Bessent raises his hand and says, “I have $25 billion worth of debt today that is maturing. I need to refinance it.” He raises his hand, holds an auction, and money shows up from various investors through the primary dealers quickly because it's a highly rated sovereign, as AIG was a highly-rated company. Liquidity comes very easy in ordinary times to highly rated corporates and sovereigns because most investors are relying on the credit rating as assurance that the debt that's being raised will be repaid. In September of 2008, there was just panic after Lehman Brothers filed, and a whole swath of securities in the real estate, as you know, markets had sold off, and liquidity was hard to come by. And at the end of the day, for large companies, for large governments, liquidity is easy to come by.
Willy Walker: Until it's not.
Jim Millstein: Yeah, until it's not, right? It's sort of like Hemingway, one of the characters. One of my favorite lines of a Hemingway character is, he's asked, “How did you go bankrupt?” And he said, “Gradually, and then suddenly.”
Willy Walker: The one thing that AIG didn't have out in Connecticut at their AIG SPG, Specialty Products Group, was a printing press. They didn't have the ability to print dollars. And so when they did have that liquidity crunch, they couldn't get it. Talk for a moment about the parallel between the U.S. and Puerto Rico, because you worked extensively on the restructuring of Puerto Rico. And Puerto Rico did have a printing press for all matters of purposes. And so I think a lot of people sort of look…
Jim Millstein: Actually not. Puerto Rico is more like a state, correct?
Willy Walker: So maybe not Puerto Rico is a good example, but Argentina, for instance. Argentina had the ability to print its way out of its debt crisis, if you will, except for the fact that it had rampant inflation as it printed dollars (well, pesos) which were backed by the dollar, which then took off the dollar and ended up with 20 years of spiraling downwards now. The U.S. is no Argentina or better said, probably Argentina is no United States. But at the same time, why is it a fool's errand or not in your mind for us to sit there and say, “Well, what happened to AIG or what happened to Argentina won't happen to the United States because at the end of the day, we are the reserve currency. And today we are the most influential economy in the world. And we do have big printing presses in Washington that can print unlimited numbers of dollars.”
Jim Millstein: Yeah, so one truth about the sovereign debt market is, as long as you're borrowing money in your own currency, you shouldn't default unless you have a dispute in Congress and you can't raise the debt limit and the Congress forces you to default, which they almost did in 2011. In August of 2011, they got up right to the last day before they cut a deal to raise the debt ceiling. And that was the cause of S&P's downgrade of the Triple-A rating back in 2011, because they looked and said, “This is not a responsible government. These people think playing with the possibility of default is like a game.” And so S&Ps said, that's not a Triple-A rated borrower. And we have a similar problem now, which led to the Moody's downgrade and the Fitch downgrade two years ago, which is, we're just running massive budget deficits, evincing an inability to tax ourselves to pay for the things that we are spending money on that are allegedly priorities of our government, whether it's defense, social security, health care, or roads, bridges, education, and energy. So we, the United States of America, now have a problem because we're running deficits. Last year, we spent $6.75 trillion, and we taxed ourselves and collected $4.2 trillion, creating a $2.5 trillion budget deficit that we funded with debt. We've been doing this for 25 years, making up the difference between what we want to spend and what we're prepared to tax ourselves to pay for that spending with debt. And so now our debt is the size of, is equal as a matter of stock to the size of our economy. And it's growing ever bigger. We run a two-and-a-half trillion dollar deficit. We're adding two trillion dollars to the debt this year. As a result of the increase in interest rates to fight inflation, as well as investors starting to get a little nervous about the credit risk of the federal government. And so not only have interest rates moved up behind the Fed’s raising the short-term rates, but the longer-term rates are now spreading out and going up where the 10-year treasury bond is now four and a half percent. And many of us think it's going to five as the Congress continues to refuse to address the budget deficits. Interest expense is going to be the largest spending category on the federal budget in 2025. Bigger than what we spend on social security, bigger than what we spend on healthcare, bigger than what we spend on defense. And bigger than what the other side of the so-called discretionary budget, which is all the stuff we do to invest in our future, not pay retirees a stipend or pay retirees their healthcare costs and not build war machines and pay military retirees because they're in the military budget, their stipends. The so-called discretionary budget, which is all the investments we make in the next generation of Americans in terms of building roads and bridges and airports and developing new energy resources, funding new research and development technology, subsidizing education to make sure we have a trained and well-educated workforce. Those investments have been flatlined over the last 15 years, while social security is increasing because of the increase in demographics. We're an aging population. And Congress in its infinite wisdom is constantly adding to the benefit. This is what politicians throw at the electorate because old people vote so they keep increasing the social security benefits. But now more of us are on social security. The trends are really bad. We have, just let me finish this one thought. Why do we have this problem? For the last, really since the turn of the century, since 2000, the Republican party has refused to raise taxes. They will not raise taxes; it's like a religious belief. And so you had 2001 George Bush cut taxes, 2003 George Bush cut them again. Donald Trump cut them in 2017. As a result, we have lost through those three successive tax cuts a trillion and a half of revenue that would otherwise be here on an annual basis. Therefore, the deficit would be much smaller and our interest rates would be much lower. So you could say, this is a relatively simple fix. Let's just raise some taxes so as to close the budget deficit; you don't have to close it all in one day and all in a year. You can do it over time, but you have to raise revenue because unless the Congress of the United States is prepared to cut social security benefits or cut Medicare benefits, or cut defense, they can't cut interest without defaulting, right? Then it's just accumulated. We've accumulated all this debt. So unless they're prepared to cut the big three things we spend money on, healthcare, social security, and defense, they have to raise taxes. So this country is going to be in big trouble because there's just not enough. And this is what Elon Musk learned, right? He came in with great fanfare. I'm going to find $2 trillion to cut out of the $6.75 trillion. And it turns out there isn't that much waste, fraud, and abuse, one. And two, once you get past social security, Medicare, which Trump took off the table, defense, which Trump is increasing, interest, which you can't cut without defaulting, what's left is like $800 billion of that $6.75 trillion. And maybe Elon and the Doge crowd claim he found $160. Most analysts think he may have found $60 billion of savings in that $800 billion. So, you know, he went home with his tail between his legs, not having found two trillion of cuts, not having found a trillion of cuts. Not having found half a trillion of cuts, but having found, you know, maybe $60 billion of cuts.
Willy Walker: Which, as you and I discussed previously, in the 11 basis point move in treasuries after the Moody's downgrade last week that the market started trading on Monday, just to refi the $8 trillion of debt that is up for refinancing in 2025, which the treasury has to refi, that 11 basis points is an extra $80 billion over the next 10 years as it relates to borrowing costs.
Jim Millstein: Even worse, even worse because the average interest cost of the debt that's being refinanced is 3.5 percent. So unless Bessent funds everything on the short end of the curve, which he's been doing, he criticized Yellen for doing it, but now he's doing it himself because the interest rates are lower on the shorter end of the curve. But if he tried to push it out to the 10-year and 30-year, where 10-year’s at four and a half, 30-year’s at five today, the interest cost isn't going up 11 basis points. It's going up a point to a point and a half. So the trillion dollars we're paying in interest this year would be, you're refinancing eight trillion. You're going to add another $300 billion to the interest expense. It will become the largest category of federal spending next year.
Willy Walker: Jim, clearly the tax cuts that have been put in place have hurt on the revenue side of things. There also hasn't been a spending program that the Democrats haven't supported over the last 20 years, and so as a result of that, we've gotten ourselves into a real pickle. And the big ones, as you rightly underscore, that we really need to tackle have been sort of taken off the table by both parties. It's not as if the Democrats are saying, “Let's tackle Medicare and Social Security.” That's one of the few things that both parties can agree on, is that they don't want to touch any of the entitlement spending.
Jim Millstein: Yeah, we have two parties. We have a tax and spend party and we have cut taxes and spent the party.
Willy Walker: Yeah, so the one thing that I want to just back up to on the S&P downgrade, though, because I do think this is important. The S&P ground downgrade was done in 2011, as you accurately state. If you'd taken that as a bad sign, I don't like US sovereign debt anymore, in 2011, we've issued $22 trillion of debt since 2011, and you've missed the opportunity to go buy those bonds, and up until now, the United States hasn't defaulted on any of them. So if you took that as a,” hold it, this is not creditworthy anymore, it's not a triple-A security, I'm going to back off of it,” well, you missed an opportunity to invest in it. And oh, by the way, the US GDP has grown. I didn't go back and look at where it was in 2011, but I'm going to swag it and say the US GDP in 2011 was like $19 trillion and today it's $28 trillion. So the economy continued to grow. The U.S. Government has met all of its obligations. So the fact that Moody's is sort of the last to sort of say, “Now it's gotten really, really bad.” The doubting Tom voice says, “Well, in 2011, you could have taken it as really bad from S&P and if you'd done it, you would have missed that 14 years of extraordinary growth in the U.S. Equity markets, in the US paying all of its debt, and U.S. GDP growth.” Why, now, should we step back and all of a sudden say, “This time we really need to re-rate it?”
Jim Millstein: Yeah, because now the debt stock is so high, right? So the economy, we can go and talk about tariffs and the impact that tariffs are going to have on economic growth. But let's assume for the moment the economy continues to grow at 2%. The debt is now growing at a higher rate because of the size of the deficit. So every year, like from 2011, to now, right? So over the last 14 years, the economy actually grew faster than the debt. The debt was growing a lot, but the economy grew faster than the debt, but nonetheless, the debt is now caught up. We're now at a hundred percent debt to GDP. So if the economy is only growing at 2%, that means tax revenues are growing very limitedly and the debt is now growing at 6 to 7% a year. This is just unsustainable. Powell said at one of his press conferences a couple of months ago when he was asked this question, “Is the debt sustainable?” He said the “debt's sustainable, but the deficits are not.”
Willy Walker: And I think that what you just framed there, Jim, is a really important thing for people to remember. You've gone in and restructured corporations, you've restructured balance sheets, you've gone and sort of sat there, and if you look at the, and pick your number, let's just call it 36 trillion of total outstandings on treasuries. Still, you also know that the Fed owns a bunch of that, and there's a lot of intergovernmental debt. So the actual number of Treasuries outstanding that the U.S. government needs to pay back, either to US citizens or to foreign holders of that, is actually lower than 20 trillion.
Jim Millstein: $28 trillion.
Willy Walker: 28. Okay. So, but if you looked at our economy as a $29 trillion annual GDP engine and you did a discounted cash flow on what the NPV of that economy is, or you sat there and said, “What are the assets on the balance sheet?” I thought that Interior Secretary Burgum had a really interesting conversation on the All In podcast a couple of weeks ago, Jim, that you might've heard, where he said, “Yeah, we all focus on the $36 trillion of liabilities and debt, but we don't focus on the assets that the United States of America actually holds. And the timber rights and the mineral rights and the…”
Jim Millstein: Wait, wait, wait. So you're telling me we're going to sell Alaska back to the Russians? Is that what we're doing?
Willy Walker: No, but you certainly can sell off leasing rights and take in revenue off of selling those drilling rights.
Jim Millstein: We can. We can burn the furniture to heat the house. We could sell the national parks. We could convert them. We couldn't sell the mineral rights to 60 percent of the land. Yes, we could be like a third-world country that allows mining companies to come in and we charge them for the privilege of extracting oil, gas, minerals from our land. Yes, we could do that. We could do that.
Willy Walker: You say that in a reasonably extreme way in the sense that if you took forests and you actually allowed them to be logged and replanted because they are a renewable resource, you're not raping and pillaging the landscape of America for future generations.
Jim Millstein: My point is that this is all a question of degree, right? Yes, there are sensible timber management procedures that would allow us to harvest some cash from the land, the timber that we own, and the national forests. There are sensible mineral rights agreements we could enter into and generate more revenue to the federal government from the minerals and oil and gas under federal lands for sure. There isn't enough of that that's going to go on to avoid the need to balance, to bring the budget into better balance. We could sell the equity of Fannie and Freddie for $300 billion, right? That would take, you know, 1% off, less than 1% of the total debt. We could sell TVA. We actually did this when I was in the Treasury Department. One of the last things that we worked on was to do an inventory of all of the marketable assets of the federal government, particularly the financial assets to try with the thought that maybe we should consolidate their management under one roof, have a chief investment officer of the United States government to manage the agriculture department's enormous portfolio of loans to farmers. To manage those student loan portfolios, to manage the TARP portfolio. On and on and on, and on. Yeah, the federal government has a lot of assets, but you don't really want to be running a fire sale. You don't want to be in a position to have to run a fire or sale. And that's what these Congresses, these successive Congresses over the last 25 years are pointing us toward: selling back Alaska. In 2011, a group of us got together, a bunch of scholars and sovereign debt restructuring types got together and asked the question in a seminar, and wrote a book. Is U.S. debt different? Is there something really different about U.S. debt, the federal government's debt, than Argentine debt, than Germany's debt, than Japan's debt? And the answer to that question was, “Yeah, there are some significant ways in which it's different, not least among which is the fact that 60 percent of all transactions in international trade are conducted in the dollar.” So the reserve currency is interesting, but the fact is it's a global transaction media. And so people end up with dollars. What do you do with it? You buy U.S. assets, and now our international balance of what we own abroad, American corporations, and individuals abroad, versus what foreigners own in the United States, is negative. Foreigners own more of our securities, more of debt, more of land, more businesses than we collectively own of theirs. So we have been selling off the family jewels to run this economy. And you could say, that sounds pejorative. No, we've been attracting foreign investment is what the positive spin would be. But Americans own less of their own country today than they did 25 years ago. This is a pretty sad case. We're becoming a very sad place because our politics are so dysfunctional.
Willy Walker: Yeah, but I guess the thing about that, Jim, is that I mean, it's interesting your reaction to the Burgum activate the balance sheet and focus on the assets and only that, and it appears that, you put-
Jim Millstein: It's an excuse.
Willy Walker: Hang on a second.
Jim Millstein: They don't want to raise taxes.
Willy Walker: Hang on.
Jim Millstein: That's what this is about.
Willy Walker: But what you've clearly outlined is a political dynamic that has been going on for years and years and years with no accountability back to the American taxpayer that has continued to spend because people want the services and the benefits that they get and no ability to understand that this debt wall is a real issue. So, as the Trump administration tries to take another tack at it, and I want to get into Mar-a-Lago, and I want to get into the dollar and all that kind of stuff in two seconds. But as they take another tack at it, what I find to be interesting is the immediate dismissal of a different “let's activate the balance sheet and see whether we could do something there,” rather than, well, if we can't get this protracted political framework changed. Because as you clearly said, one is lower taxes and spending, and the other one is higher taxes and spending. So we're on spend, nobody wants to change on the spend side of it. The idea to go, I mean, we may not have a choice. I mean I guess to the point as it relates to leasing rights and things of that nature, we may not have a choice if we can't get the protracted political dialog in DC to actually get some accountability in the Republicans budget that they just put forth is trying to take the top Trump tax breaks and basically say, well, those are already in place so we're not going to account for the 4.4 trillion if we extend those forward. That's just an accounting gimmick. To try and sit there and say actually it's only one to two trillion of additional spending and we're going to get offsets against that but don't forget about the extension of the tax cuts because that's 4.4 trillion that we don't want to actually be accounted for. If we've got those types of games going on with a Republican-controlled House and Senate, not by the way I don't think that if the Democrats were controlling it, we'd be in a much better situation. We've got to look for alternatives, do we not?
Jim Millstein: Yeah, the reason I'm skeptical is the best way to say it is, that standing up those programs is going to take years. And so the revenue that could be generated is even further off from these kinds of things. And it's really not a path to closing the budget deficit in the short term. Maybe five, or ten years from now, this could generate significant revenue if well-managed. But unless we do one big trade, like I'm guessing, if we put Alaska up for sale with all of its mineral rights, we would have an active auction between the Chinese and some other countries. And we'd probably get more than we paid for it.
Willy Walker: Back in 1860. Yeah, I was just going to say, there's no doubt we'd get more for it than that. Let's roll this into the Mar-a-Lago Accord, because I've heard you talk about it, and I think that it's a framework that talks to a number of the things that the Trump administration is trying to achieve right now. And sort of, I think what I find to be so interesting about it, Jim, is that there are five parts to it, as you well know. So one is to devalue the dollar. And since Trump took office, we've seen the dollar fall about 10% in value since he took office. Using tariffs as leverage to try and work out negotiations to open up markets to U.S. goods and to try and change the trade imbalance we have. Restructuring the debt, which up until now has not been a part, to my understanding, and correct me if I'm wrong on this, has not been a part of any of the trade deals. So one of the things that I had thought that Howard Lutnick was going to do when sitting down with the Australians to negotiate our bilateral trade agreement with them was going to say, “Hey, by the way, you own, and I don't know how many U.S. treasuries the Australians own, but let's swag it and say that they own 100 billion dollars of US treasuries. And they all have an average coupon of 3 percent. We're going to cram that down and say it's 2 percent, and you need to hold them for the next 10 years. And if you do that, the tariff is only going to be 8 percent rather than 10 percent.” Haven't heard that happening yet, but thought that that debt restructuring was going to be part of these programs. Geopolitical leverage to try and get countries to step up for their own defense. Jim, I had David Petraeus, General David Petraeus on the webcast a couple of weeks ago, and I asked him about what had changed most dramatically between when he and I spoke in November of last year and two weeks ago. And his number one issue was the degree to which members of NATO have stepped up to fund their own defense. So I thought that was interesting because of all the different things that General Petraeus watches and sees. His reaction to that being the most significant thing was really quite something. And then the final one is Federal Reserve support to step in as we're trying to devalue the dollar, we're trying to restructure the debt, we're doing all the things they're trying to do that you would get support from the Federal Reserve to step in and lower interest rates, which we very clearly have not seen happen. So let me set the table with those five elements of the Mar-a-Lago Accord and then have you now dive in on why it is so troubling to you where we sit today.
Jim Millstein: Oh, first, let's start with who owns U.S. debt, right? So if one of the game plans here is to term out the maturity of our debt so that we don't have these huge refinancing hurdles to get through on the one hand, and on the other hand, to lower the interest burden on the federal government of the outstanding stock of debt. So you want to, this is a classic debt restructuring move, right? You want to move out the maturity of your debt, and you want to reduce the interest expense associated with it so that you can invest in economic growth rather than in just paying your creditors. So, who would we make this proposal to? The Chinese.
Willy Walker: The Japanese, they own $800 billion and a trillion.
Jim Millstein: Okay, just that we talked about the $37 trillion of outstanding debt of that, only about $7 trillion is held abroad and of the $7 billion only about four is held in the central banks, in government banks. The rest of its owned by private investors abroad. So they're not going to play this game with us because they can't, the tariffs are not going to, all the defense umbrella and the tariffs up and down.
Willy Walker: Samsung might actually play with you, but other than Samsung, nobody else probably plays with you.
Jim Millstein: Yeah, I mean, state-owned enterprises might play with you if they owned the bonds. So there's a very small fraction of the outstanding debt for which you can play this game. Now just imagine with me that your Howard Lutnick actually made a proposal to the Australians along those lines. And he said, “You want to trade with me, buddy? You've got to take the debt that's in your central bank and term it out for 30 years at a discounted interest rate.” Well, from my world, that's a default; he's threatening not to pay his debts when due. So if you think what Moody's did last week was significant and monumental, wait till Howard has that conversation with his counterparts. And, you know,
Willy Walker: But Jim, Howard Marks has said that that is exactly what's going to happen. And so I guess my question to you is, just how-
Jim Millstein: Oh, Marks says that's going to happen.
Willy Walker: Yeah, Howard Marks has clearly said that that's going to happen, but my point on that is...
Jim Millstein: The oak tree must be short in the U.S., I would imagine they are.
Willy Walker: I would imagine they are, but the reason I jump in on that is this. So first of all, it is a negotiation, and I'm certain that anyone in the West Wing would say to you, “It's a negotiation.” That wasn't Scott Bessent coming out and saying that we are going to default on the holdings that they have.
Jim Millstein: Willy, Willy, this is like selling the mineral rights. You're talking about 10 percent of the outstanding debt. It just doesn't move the needle. It's not going to. Terming out 10 percent of the $37 trillion worth of debt is just not going to change the debt dynamics that we're in. Nice to have if you could pick it up without dislocations. In your other markets, but it's just not going to move the needle. So this is all more magical thinking to avoid facing the hard reality that we've really got to do some fiscal consolidation.
Willy Walker: So, okay, so let's just say, though, at the same time as they get a deal or two done, that is a trade deal, that includes some restructuring. All right, let's just hypothetically, let me just do this. The two largest holders, China and Japan, both decide that's $1.8 trillion of debt. And it may only be $1.8 trillion on your stated $28 trillion of outstanding that's outside of the United States government. So not even 10 percent of the outstandings. But at the same time, it is something that talks about pushing out. Both pushing out the maturities as well as lowering the cost. At the same time, they make a change to the bank capital rules and the supplemental leverage ratio where, as you very well know, they removed the supplemental rate. Well, they didn't remove it. They changed the denominator in COVID to allow banks to not have to put into the supplemental average ratio in the denominator their holding of U.S. Treasuries, as well as reserves at the Federal Reserve, to allow them to go and lend more. They do that simultaneously. Do you not think that that then puts a different light on U.S. Treasuries and gets some tightening of the tenure?
Jim Millstein: So again, there are sleights of hand going on here that it's important to recognize our ways to avoid the hard truth. So. You're exactly right that during the pandemic and after the pandemic, the SLR was temporarily relieved so as to allow banks to buy more treasuries. And then we had this little hiccup with a bunch of banks that were stuffed with treasuries as interest rates went up and had huge mark-to-market losses, called Silicon Valley Bank. First Republic Bank, Signature Bank, right? So is this how we're going to grow our economy? Freeing the banking system to invest in our debt as opposed to our businesses, our communities, and our entrepreneurs? Is this really the path to juicing the economic growth of the United States? No, it's just doing what Lincoln and Chase did during the Civil War when they created the National Banking Act and said, “You got to buy, you want to be a national bank, you've got to go buy the bonds to finance the Civil War.” This is what Bessent is trying to do in order to deal with the fact that he's proposed a budget that requires two and a half trillion dollars of new debt to be issued. He's got to find a buyer. So he's going to stuff the banking system with this stuff, with federal debt. I mean, really. This is not a path to economic growth. Sure, it might take some pressure off interest rates on the federal debt, but it's not going to juice the growth rate of the economy because whatever they put on bank balance sheets, however much of the balance sheet capacity of the banks that's consumed by buying federal debt is balance sheet that's not investing in new businesses.
Willy Walker: Well, the idea here is just that the reserves that they would hold against those treasuries are now available to be lent. So actually, it's just a capital treatment issue, Jim. They're not out actually, I mean, I would think that if you remove the capital rule, they would go out and buy 10-years, but that's their decision from a treasury management standpoint, not necessarily that now that they've had that liquidity release, that they're not going to go out and make a loan to Walker & Dunlop.
Jim Millstein: So we can sell assets, we can lease assets, we can stuff bank balance sheets with federal debt, we can try and twist the arms of foreign governments that own 5 to 6 percent of the federal debt. We can do all that stuff, but it's still not going to move the needle on the fact that we're running two and a half trillion dollar deficits, and the debt is growing faster than the economy. We're in a debt spiral. It's not, and really the most troubling thing about Liberation Day and the way the financial markets reacted to it was that the dollar went down, the stock market went down, bonds sold off, yields increased, and suddenly institutional investors were no longer talking about U.S. exceptionalism. Which was what they were talking about for the last five years, that the U.S. was different, that we were on a growth trajectory. Different, that we were bringing inflation down faster. Our economy came out of the pandemic stronger than any other economy in the world. And suddenly, other institutional investors are saying, “This is time to diversify away from the United States.” It's time to allocate back to Europe and to Asia. And so the dollar went down, its capital is leaving. The country exchanges dollars for yen and euro, and other local domestic currencies. There's a sea change going on right now. This trade and tariff policy, this new mercantilism that Trump is applying may work, but it's a big change. By the way, the United States has positioned itself in the world since 1945. It could work. You could build high tariff barriers, and investment comes in over the barriers to create domestic businesses with the advantage of a tariff to compete against foreign businesses with that tariff wall. But it might not. It just might raise prices, slow growth, and lead to the outflow of foreign capital. All that net investment in the United States might just say, “You know what? A really dysfunctional place. These people, the politics are extremely partisan and contentious, and we have a party that taxes and spends, and we have a party that doesn't tax and spend, and they're just not willing to talk truth to their populace about how to bring their house in order. See ya.”
Willy Walker: I'm trying to find some green shoots here, Jim, and you're pulling out your head shears and cutting them all down.
Jim Millstein: I'm good.
Willy Walker: The president did go to the Middle East last week and signed what is purported to be two trillion dollars of trade deals with a $132 billion order to buy Boeing jets. And so, as we sit here and talk about trade barriers, going and getting Middle Eastern countries to buy $132 billion of Boeing jets, I would assume from a manufacturing standpoint, from a trade balance standpoint, from a job growth standpoint, and GDP growth in the United States, that is welcome news. You may take issue with the way that the Trump administration is going about crafting those deals, but that is clearly a distinct trade policy from what we've had in the past, as it relates to striking those types of deals on a week's trip to the Middle East.
Jim Millstein: The president's clearly having a great time. There's no doubt about it. He's enjoying himself thoroughly. Because he's through the tariffs, he's made himself the pressure point, the point of entry into the United States. And, you know, so he is the focus of everyone's attention, who's doing business in the United States, wants to do business in the United States. It's the most intrusive federal government intervention in the domestic economy and the world economy in my lifetime, right? Universal tariffs across the board, as opposed to, you know, Reagan negotiating quotas with the Japanese on car imports when they were flooding our market. These blanket tariffs have put the president of the United States at the center of the universe because he's doing it all without congressional authorization under emergency powers that were created under three different trade acts over the last 40 years. The pretext of, what was the emergency? My own view is that the various industries that have been adversely affected, domestic industries that have been adversely affected and are suing him, the administration, they're going to win. He doesn't have the authority to put universal tariffs on any one country, let alone all the countries in the world. No president has used his emergency authority under these trade acts in the past to do this kind of radical action.
Willy Walker: And yet, on that, as you well know, neither Congress nor the courts are, right now, going to step in and stop him from doing so, even though.
Jim Millstein: No, no, no. The courts are coming. The courts are coming. You'll remember that when President Biden and the Roberts court said, “Wait a second. Yeah, you're allowed to do waivers and modifications, but not forgiveness.” That's a major question that Congress has to decide. So there are people moving through the district courts and the appellate courts challenging the president's authority on these tariffs. It's going to get to the Supreme Court. And the Supreme Court, unless they twist themselves in knots, is going to say, “Yeah, no, universal tariffs are not authorized under this emergency.” That's a major question that Congress must address.
Willy Walker: So then once that happens, though, Jim, if that does happen, what then happens? Because they're out. I mean, do you, what do you do to go back? Do you revert back to the existing policy?
Jim Millstein: So my only point about this is the uncertainty that's overhanging our economy right now as a result of these executive actions on universal tariffs. This is not going away anytime soon. The other point that your listeners need to know is, take Britain, where we have allegedly the framework of a trade deal. There are 400 different items that go back and forth between the United States and Britain of material size.
Willy Walker: Yeah, right.
Jim Millstein: Right, right? So negotiating tariff levels for each of those takes time. The average trade deal in history, the post-war history of the United States, has taken 18 months to negotiate. He could announce frameworks with five different countries. It'll be 18 months from now before we know actually what the details of those are. And he's going to get frustrated. We all know Donald Trump. He's going to get frustrated with that. And he's just going to go right back to flapping on whatever tariffs he thinks are appropriate and his infinite wisdom. So we're not done. We're not done here.
Willy Walker: I know we're not done here. So a couple of other things real quick because we're about to run out of time, and I could keep on going on this for a while. First is that the 90-day extension, if you will, or pause on tariffs, ends right after the 4th of July. And then shortly thereafter, we have the debt ceiling, which we will hit sometime in early August. And I think a lot of people are forgetting about the fact that we not only have what's going to happen on trade policy, but then very soon thereafter, you're going to have the debt ceiling. Our friend Mark Zandi was talking about credit default swaps and how credit default swaps have gapped out tremendously since Liberation Day. It's actually only, and when I say only, this is all obviously relative, but credit default swaps, depending on whether you're on a three-month or on a year, credit default swaps have blown out somewhere between 5 and 12 percent, which is plenty, but not 50 percent. But actually in looking at that, Jim, the last time the credit default swaps really blew out was when we had the debt ceiling negotiations of 2021, where they exploded and went off the charts in the debt-ceiling negotiations. And so if you think that Liberation Day caused movement in the debt markets and real question marks as it relates to what the pricing of debt is going to be, wait until we get more brinksmanship around the debt ceiling and the extension of the debt ceiling and oh, by the way, we all take it as a given that all they're going to do is extend it and push it out. But there is always political maneuvering ahead of time, and, as you rightly pointed out, the last time we almost shut down the government really, really was in 2011 when John Boehner was Speaker of the House. Basically, he lost his speakership over the debt ceiling negotiations that took place back in 2011. So that's yet another issue out there that people need to be concerned with, and I've heard you talk about. We've gone for an hour without touching on Fannie Freddie, which was supposed to be the premise of the entire discussion. So, before I let you go, give listeners your current take on conservatorship, privatization, or I'm going to throw out one other, which we didn't talk about last time, Jim, which was that Fannie and Freddie are the cornerstone of a U.S. Sovereign wealth fund.
Jim Millstein: OK, well, so clearly, in terms of priorities for this administration, one big, beautiful bill. Many of us joke about that, the BBB, the Big Beautiful Bill, because you'll recall from the Biden administration his first legislative foray was the Build Back Better BBB bill, which failed. And so if I had been in this White House, I wouldn't have named it the Big Beautiful Bill, the three Bs. That doesn't seem to work on the Hill these days, the three Bs, but that's clearly their highest priority. The second priority is tariffs. And as I think, as I laid out 10 minutes ago, I think the tariff thing is going to be unresolved for a long time, even if they get this Big Beautiful Bill passed. So the issues, the Fannie and Freddie, end of the conservatorship, create a sovereign wealth fund with the equity, whatever—that's way down the line. You know, at least.
Willy Walker: Down the line as it relates to importance, or down the line is it relates to the timing?
Jim Millstein: I still think they're going to do it. I mean, Scott Turner in his confirmation hearings talked about doing it. The president has said from time to time during the campaign that he would do it. I think right now there's a new domestic finance chief, the Treasury, who's got experience with the GSEs. He could run point on it where they want to do it. But I don't think we're going to get visibility on that for, you know, months.
Willy Walker: Even if there's an executive order that says recap and release.
Jim Millstein: Oh, well, they're all waiting for, you know, nothing happens in this administration without Donald Trump in the perimeter. And so, yes, I mean, there will, there is an executive order. It hasn't been signed. And you know once it's signed, that'll ring the bell, and they'll start trying to get this done.
Willy Walker: Our bell was rung about four minutes ago, so we're a little bit over on our hour. Jim, I'm greatly appreciative of all your insight and all your thoughts. Thank you. I hope the world isn't quite as dire as you make it out to be in your comments, but I'm extremely thankful for the insight and, if you will, to everyone who listened in today and those who will listen to this. Going forward, buyer beware is what I would say after listening to Jim for the last 65 minutes.
Jim Millstein: In closing, let me just say this, having done restructuring for 42 years. You get a sense of what the tipping point is in every troubled borrower. There's always a tipping point, and it's usually when the debt service burden exceeds the cash flows available. Now, the great thing for the United States is the charging markets are deep, and, you know, at a price, people are willing to buy them at a yield. People are willing to buy them. The problem we now face is that yields are so high against the debt stock that it is so great that interest is becoming the largest category of spending on the federal budget. Neil Ferguson would say that when you're in the history of the world, when an empire’s debt service exceeds their military spending, it is the tipping point for the fate of those empires. And the singular power in the post-war period, and our interest expense now exceeds our defense spending. It's a warning bell.
Willy Walker: Jim Millstein, thanks for taking the time. I really appreciate it. Hope everyone has a great day and we'll see you again next week. Have a great one.
