Trump. Tariffs. Trade. And oh, M&A with Tom Michaud, President and CEO of Keefe, Bruyette & Woods
Willy Walker: Good afternoon and welcome to another Walker Webcast. It is my great joy, privilege, and honor to have my friend, Tom. I should say long friend rather than old friend, but my old friend Tom showed up to join me. Let me do a quick bio, Tom, and then we will dive in. There is no lack of topics for you and me to talk about. When I asked you to come on several weeks ago, I thought we were gonna be talking about M&A activity and where the M&A markets are today. Obviously, there's a lot more for us to talk about than just the M&A markets and what's happened to the M&A markets in the new Trump administration. So as I sat around earlier this week, I was sitting there saying, gosh, we are really lucky that we've got Tom's schedule to come this week, because there are few people with as good insight into the markets as you and your firm. So let me do a quick bio, Tom is the President and Chief Executive Officer of Keefe, Bruyette & Woods, KBW, an investment bank focused on the financial services and fintech sectors. Since joining the firm in 1986, Tom has spent his entire career building KBW into an industry leader. Tom co-led the firm's rebuilding efforts following 9/11, where he and his colleagues tragically lost 67 of their fellow KBWers, and was instrumental in launching the firm's IPO in 2006 and then their eventual merger with Stiefel Financial in 2013. Tom is a member of the board of 9/11 Day, which works to remember and commemorate those that we lost on 9/11. He's a graduate of Middlebury College and the NYU Stern School of Business where he got an MBA, and KBW is as important a firm to W&D as I can actually list in the sense that it was my old friend Chauncey Dewey who I played youth hockey with in Washington, DC, who came to me when Walker & Dunlop was kind of growing at leaps and bounds. And I was thinking about either bringing in an investor in the private equity world or other things. Chauncey looked at me and said, why don't you take the company public? And I think I was both ignorant enough and arrogant enough to think that the world needed a micro-cap publicly traded mortgage company after the great financial crisis. But it was thanks to Chauncey and the KBW team that worked on our IPO, along with Credit Suisse and Morgan Stanley, and those three firms. But I will say KBW did the majority of the writing of the S1 for anybody who knows that process. There's one bank that controls the pen, if you will. And Chauncey and the KBW team controlled the pen on our S1 and helped us get public, which obviously has been a great run for us as a publicly traded company. We're deeply thankful to the entire KBDW team for that. Tom, let me start here. There's a lot going on in the world. I want us to back up to some things from the regulatory front and things of that nature. But the thousands of people who've joined us this morning really want to get a take on what's going on in these markets. So if we just back up and look from a macro standpoint of the tariff fight that's going on, the sell-off that's happened in the equity markets, the surge in treasury yields that has happened over the last 48 hours, make a little bit of sense for all this for us or say put down your head and hang on because right now it's impossible to tell where this whole thing ends up.
Tom Michaud: Well, Chauncey, that's a great first question. Let's come out with a fastball and get right to it. It's great to be with you. And by the way, we loved working on Walker & Dunlop's IPO, but it's always best when the management team delivers a great future, which you and your team have been doing since the IPO. So it's been a great partnership and friendship and relationship for a while. Thank you for having me here. The way I would describe it is that right after the election, the financial system and banks were all teed up for what we now describe as the blue sky scenario. We had a yield curve that was no longer inverted. We had kind of put all the dramatic measures post-COVID behind us. The banking industry had just finished two years of down earnings, which was really the leftover effect of the inverted yield curve and zero interest rates and we were looking to go into a pro-business economy with a bunch of deregulation and there is really good momentum in the financial stocks as well as in the outlook for the banking industry. I would describe now as one where there's a lot of caution, and there's almost when you look at the securities, it makes it feel like we're in a late cycle moment, meaning on the verge of recession in terms of how many of the stocks are currently trading. Just to give you some goalposts to that comment. We look at historical valuation, we stress test the earnings of the banking industry, and we look at valuation troughs during COVID, during the March 23 bank failures. When you look at all that, the stocks are down 30% from their recent peaks. We think they're embedding a lot of bad news. The economy was beginning to slow before we got the tariff proposals, but right now, we are in a heap of uncertainty. What we saw even this morning, you've got Walmart suspending earnings guidance, you've got Delta suspending earnings guidance. There's a lot that we just don't know. When you're in that perspective, it means the earnings are less predictable. It means those who could be bearish in their thinking about a recession. You want to stress-test balance sheets, and you want a stress test of earnings if you're an investor before you find a comfort level to buy stocks. So I would say of all the things going on right now, it's the uncertainty that's driving the bus because there's no clear vision as to where this is gonna go in the near intermediate term.
Willy Walker: So I was with Howard Lutnick yesterday morning; he spoke to us at the Real Estate Roundtable. Howard, having run Cantor and been the chairman of the board of Newmark, understands markets; he understands clarity on strategy, understands what volatility and a lack of clarity does to investor sentiment and to investment. And yet, I heard nothing in what he said to us yesterday morning at the real estate roundtable that said that he or President Trump most importantly, we're gonna back off of this brinksmanship, which is, per them, countries like Japan are flying to Washington to sit down and try and strike a trade deal. But in the midst of trying to put together, I don't know whether they think that an accomplishment would be five trade deals or 50 trade deals, but that in the midst of all that, the global capital markets are in balance. Do you think that there gets to be a pressure point, Tom, where they say kind of mercy, that yesterday morning, Kramer was on CNBC talking about the S&P getting down to about 4,000, which would be another 20% off of where it was yesterday. Those kinds of numbers are, I mean everything that you and I have experienced in our life, even GFC, those are sell-off numbers that are rivaling the GFC where we really couldn't see the bottom of the barrel as it relates to how bad the credit crisis was gonna be. This is 100% self-imposed. So I guess my question to you, in your channel checks, as you all at KBW reach out to people in Washington and on Wall Street and on trading desks amongst your own, is there anyone sitting there saying, “Hang tight for a couple more days, but this whole thing has to wrap back around because the pressure is going to get so insurmountable that they're going to have to blink.”
Tom Michaud: I think what we're doing, first of all, is we're doing, we've got our base case, and we haven't changed estimates since tariffs were announced. And frankly, on Friday is when bank earnings start coming out, and the banking industry is the first industry to report earnings. So we're going to start learning a lot, but that's all rear view mirror, right?
Willy Walker: Yeah, I was just going to say that.
Tom Michaud: But honestly, we had it to the point.
Willy Walker: Go ahead. But I was just going to say, we had an earnings prep call on Monday. Basically, we're running through everything that we did in Q1. And I said, our Q1 is completely different from the world we're living in today. So let's spend two seconds on that, and we're going to be all about what we're seeing four weeks from now. with it.
Tom Michaud: I'll tell you what, the channel checks into that moment, okay, what the channel check said is that credit's pristine. The banks really can't give us any hard data now that the quarter's over. But our feeling is that we're going to hear the message that credit right now is pristine but in the banking industry. And what we're doing is we're giving sensitivity analysis because I don't think we can tell the market exactly what's going to happen. It's all about what happens to the economy. What we can do is reference everything. Is this going to be as bad as the global financial crisis? Is it going to be like March of 23? Is that going to be like COVID? These are some recent data points where we can stress-test it. Earlier this week, Sanjay Sakhrani, who I think is one of the best consumer finance and payment analysts on the street, said that he believes that if he were to backtest his models for the consumer stocks that he follows, a 7% unemployment rate is embedded into the stock prices. Unemployment is 4.3%-ish right now. That's pretty bad. My gut, if you were to say, Tom, what do you think? I don't think it's going to be as bad as these worst-case scenarios because I think some dynamic is going to change. Remember, earlier this week, there was a comment, I think, that was attributed to Hassett. where he said, oh, maybe we'll pause things for 90 days. Now, well, they didn't, and they actually went the different way, and they doubled down out of the administration. But the rally that ensued right after that was extraordinary. My view would be if stocks keep going down, look, we're all, I think a lot of it, you and I were talking before this, now's not a fun time to watch your portfolio, right? To the extent that you have the ability to consider adding to equities. If these sell off more, the trophies being on sale, which is already happening, is the best investment strategy I've seen in my 39 years. Because if you buy the trophies, you're buying the best management teams who are working for you. There are some great banking companies that have 6% dividend yields. Comerica Bank is a 150-plus-year-old bank. They do better with lower interest rates. They're a great credit underwriter. I think that's good money. I think that dividend is probably gonna be safe, is my bet, with all the stress tests. So, that's my view. But then we should also get into relative differences because everyone doesn't have the same dance card. So, we should talk about that when we get there.
Willy Walker: So, two things on that. One is if it was just to sell off in the equity markets and the debt markets were responding as they typically would have, which is that yields go down as capital flows out of the equity market into the fixed income markets. We were looking at a 4% tenure or a 3.75% tenure. That's fantastic for consumers of capital and in the commercial real estate space, which, as you well know, we are in. That's a great day for everybody. I think you would have seen massive refinancing activity. As the treasury secretary of percent has said a number of times, his real focus is on getting the 10-year treasury down so he can go and refi $6 trillion of debt. Unfortunately, we've seen the opposite happen over the last two days over, it's hard to tell Tom whether it's actually, China dumping their treasuries, whether it's people thinking, if I'm gonna show up and buy a treasury today, if China decides that they wanna dump, they might go ahead and dump. It's also whether the United States of America and the Treasury Department and the Commerce Department use some type of restructuring of our foreign debt in their negotiations on tariffs to try and say, “Hey, you know what? We'll drop your tariff rate to X, but as long as we can take your 30-year or 10-year US treasuries from whatever the number is 4.5% down to 2.5%”, and that's part of the negotiation. So I think there's this brinksmanship going on that has the debt markets extremely concerned. You said a moment ago that as you look at the bank's balance sheets, their fortress, they're strong. We're not thinking about another credit crisis in the banks. But on that, what about a hedge fund blowing up because they bought a lot of stock on leverage as they started seeing values coming down, and all of a sudden, they get margin calls and we have another long-term capital management on our hands. I mean, is that a side to the quote-unquote credit view that we ought to keep our eyes on and potentially be braced for?
Tom Michaud: There are a whole host of topics that you just covered right there. I think with regards to rates and the bonds, there is concern that foreigners are going to stop buying American debt. I've been hearing that on my desk. Frankly, there's a chance the concern has a bigger impact than what actually happens. Just the nervousness of that happening could be enough to move markets. That's number one. Number two is that I think every day as we go forward without resolution, the world is generally going to de-risk. De-risk means you do less, you get more conservative, you hold more cash, the leverage just keeps coming out of the system, and everything just keeps slowing down and probably gets a little bit clunkier. Also, there are a lot of arbitrage trades that have been put on the yield curve, which is usually the case that I was hearing on my desk that hasn't been working recently. The volatility has taken some of these typical basis trades that were out there and made them money losers and that they've been unwound, we believe, by some of the macro funds. Not on my desks, because we don't trade that. But that's a concern in the marketplace. And when I say concern, it's creating some volatility. But it gets to the point, which is that the economic outlook is not driving bonds. It's the technicals and the psychology that's moving the bonds around like they've been moving around more recently. I believe some of the good news, and I heard Secretary Bessent say this over the weekend on one of the new shows, the plumbing has been working great. I mean, I wouldn't wake up every morning saying, I hope the financial services plumbing works today, and that's a win. It's not really, we should have higher expectations than that. But to date, everything seems to be working. There's tremendous capability out of the Fed to stand ready if there was a shock, but on another point that you said that I'd like to address is we had the sense that a lot of the hedge fund community had been deleveraging even going into the tariff announcement and that that's been happening as the year it started to unfold. And you can see it in some of the stocks. So our view is that of course, that risk is always there. But my sense is that risk management has come a long way. I wanna address another topic, though, as you went through. This is my 39th year of focusing on financials. The number one place to go, I started as a credit analyst. If you're looking for trouble going into a downturn, who grows the fastest going into the downturn when there's an unexpected downturn? By the way, three of the fastest-growing banks in America in 2023 were Silicon Valley, Signature Bank, and First Republic. That was part of the issue. They did it with bulky funding that became more transient than they would have liked. But the fastest-growing financials today have been the non-banks. It has really not been the banks. The nonbanks have really stood up in terms of size since interest rates went to zero at the beginning of COVID. They're bigger than they've ever been, and they haven't been through a cycle yet. So I think that, and that's part of the reason why I think those stocks, some of them are down 20% in a couple of days, is because the market is nervous about what's gonna happen with all those marks that you mentioned. But that doesn't mean that that's a financial crisis because that's not on the bank's balance sheets, but it just means that investors in the coming months are gonna get a new view of what their investments are valued at. I think it's gonna play towards that wealth and value effect as well. I don't believe a lot of those credit funds were highly levered, but nonetheless, I think that's an area that the market has greatest concern for.
Willy Walker: So on that, I think it's a good segway for us to back up for a moment, and then we'll get back to the current day because obviously there's a lot to talk about in the current date. But you mentioned the SVB First Republic, PacWest.
Tom Michaud: Signature.
Willy Walker: Signature, PacWest was acquired in the process of that. But we clearly felt that the banking crisis was in the rearview mirror. But after the banking crisis, Tom, you went to Capitol Hill and testified and talked a lot about some regulatory reform that would be very helpful as it relates to FDIC insurance and trying to make sure that the banking system had the proper regulation, not necessarily more regulation, but proper regulation to allow the banking system to function and be able to absorb the type of shock that it took in the spring of 2023. Have any of those changes been implemented to your view? And are we still running the risk that without them being implemented, we could find ourselves in a similar situation as to what we found ourselves in in Q2 of 2023?
Tom Michaud: All banks generally fail for the same reason, which is liquidity, and also the danger they put to the confidence of the deposit system. Typically, when you have a bank run, it doesn't always stop with one bank and that's why you saw the extraordinary measures out of the White House, which was to guarantee all the deposits of the two of the banks that weekend when Silicon Valley bank failed. After the bank failures, the FDIC wrote a really good report about how deposit insurance could be modernized. What's happened is, the industry has grown, but $250,000 for FDAC insurance is not enough that needs to be modified. What's happened is that the banking industry has barbelled. You've got the biggest banks; remember, 90 percent of the number of banks in America are below $10 billion in assets. But the big four banks have 40% of the market share in deposits, and it's these mid-size banks that are the ones in between those two that do a lot of small business lending. And what we saw during that period was the stress that the bank failures put on small businesses with their payroll accounts. Payroll accounts are usually bigger than $250,000. The danger is that the next time we go into a stress market, small businesses are gonna believe that they have to take their deposits to banks that are too big to fail. They're going to need to feel a fiduciary concern, they need to move to those banks. If you want an example of that, when Silicon Valley bank failed in the middle of the day, the FDIC said, if you have more than $250,000 in the bank, you don't get your money back till we're done liquidating it. About 10 days later, Credit Suisse failed and when it failed over the weekend, legally failed, but it sold to a 100-year competitor over the week, and it essentially failed; the Central Bank did it over the weekend, and no depositors were threatened because that bank was too big to fail. It was too for that to happen. So we saw an illustration. What we need is to raise deposit insurance for operating accounts so that small businesses can leave their payroll accounts safely in their local bank and not worry about banking industry stress. That's what the FDIC report said, and nothing's been done about it. Instead, the policy response was to tighten capital restrictions, even though the banks that failed had met their capital requirements. That wasn't why they failed. They failed because the deposits ran out. Stop the deposits from running with deposit insurance, modernize it, which is what they need to do. That was, I hope that wasn't too long an answer, Willy.
Willy Walker: Then let's take that to the bank world and the non-bank world and to the conversation we were just having as it relates to I mean many people listening to this are too young to remember long-term capital management failing in the late 1990s. You and I are not, unfortunately. The interesting thing about long-term capital management is that all qualified investors who were investors in long-term capital management. I think one of the big arguments, Tom, has been that the shadow banking world or the private equity world has gotten so big into private credit. Aries and Blue Owl and Blackstone and all the others that have built up these massive private credit businesses, and hats off to them on it. My comment is not in any way a criticism of that, but they are in the shadow banking world. They are not FDIC-insured deposits, but they're also taking money from qualified investors. So there's this sense that the federal government needs to protect the small depositors in the bank, but that the Federal Government can kind of take a hall pass on protecting the large, qualified investor because they're “sophisticated” enough to invest in these vehicles. But it's gotten to such a massive amount of capital that my concern is that the fundamentals of the system, forget about the fact that they have to worry about you or me being an investor in one of those credit funds. They clearly have said, you're qualified, you can make the decision, Tom and Willy, you lose your money, that's on you, not on us. but the impact that a failure of one of those credit funds or one of the big PE firms would have on the system is almost incomprehensible to me about the damage it would create. So I guess the question to you is, A, is that fear a legitimate fear? Then two, would you think that they need to be under more regulation, or is your thought that they stay out there unregulated because the system can absorb it.
Tom Michaud: I think the key thing that needs to happen, so I would say there are three things that I think Washington ought to do. One is what they're doing, which is review the current rules to see which ones have gone too far and been too politicized. You're seeing those actions being taken right now. So I would say that's underway; I checked that box. I believe deposit insurance reform should be put out in the public again and spoken about because the next time there is a banking crisis, which I don't feel is around the corner, but we're gonna see deposits run to too big to fail banks again, because the deposit insurance hasn't kept up with the current shape of the banking industry. The third thing that needs to be done is I would call for a president's working group, to study where is the playing field unlevel between banks and non-banks? Because the way to fix what you just said, I think, is to level the playing field, and then you will have more activity stay inside the regulated world, which means that policymakers will have better vision into it. So let me give you two examples. One example is the pre-global financial crisis. Banks were eight of the top 10 mortgage originators for residential mortgages in America. Today, it's three. What happened? Banks didn't forget how to make mortgages. They just don't because of a couple of policy changes that happened post-global financial crisis. The capital charges on servicing, which is a very valuable aspect of originating a mortgage, has become too burdensome for banks. Then, the number and the layers of regulators that regulate that business on banks, which doesn't happen outside the banking industry, makes it far more costly. Plus, there's also, frankly, more legal liability being in the business with some of the restrictions that have been put in place. So for those reasons, banks don't do it. Are we in a better place because banks don't do it? I think not. I mean, most banks started to make home mortgages. And then I'll give you one other example because there is a bill moving through Congress on stable coins, which I think is a great idea. If you and I own Bitcoin today and we wanted to leave it with a blue chip institution, we could pick up the phone and Fidelity, and we could go to Fidelity Digital Assets, and we could leave our Bitcoin there. We couldn't do that at J.P. Morgan because J.P. Morgan hasn't been allowed to do it. There was really a choke point on all crypto activities. Now, I'm not saying all crypto activities are a great idea, but I do know the answer is somewhere between where it's been and where it is. So you should know that custody, and Bitcoin doesn't seem a terribly risky thing to me. If Fidelity can do it, that's a pretty big, well-known blue chip company. I'm surprised that someone like J.P. Morgan couldn't do it. So those are areas, for example, and then I have to give you one more because it's so powerful. There was a proposal after the bank failures to put in place a 6% TLAC charge, total loss absorbing capital, for banks at 100 billion. That means if Willy Walker is running a bank, and it's 101 billion, and you make a small business loan, you have to issue debt at 6% of the asset you just generated. Essentially, that's what that is. Meanwhile, if you're a non-bank, you don't have to do that. Imagine what's gone into your cost of goods sold and generating that loan when you have to do it in a fintech or a private credit fund doesn't. I mean, that is right at the heart of small business lending. My view is, it’s gone too far, and we need to look at the entire financial services system and figure out what we want the regulation to be for the whole system for the future instead of solely focusing on the banks.
Willy Walker: Yeah, your comment on stablecoin, though, Tom, let me try and riff down another path on that one for a second. I listened to the chairman of the House Financial Services Committee, French Hill, who I think is doing a fantastic job in that role, and by the way, is a community banker by training. Before he went into the U.S. House of Representatives, Congressman or Chairman Hill actually worked for a regional bank down in Arkansas, so he understands banking, which is great. To have someone as the chair of the Financial Services Committee who is actually in the banking sector is a massive home run. But he's introduced that stable coin legislation. My question to you is this: at a time when, I mean, the value of the dollar last week went down precipitously, Tom, as we got into this tariff battle, which I don't think that the Trump administration was thinking about. And a weak dollar and a sell-off in our bonds does start to look like putting the U.S. dollar as the reserve currency, not tomorrow, but at some point at risk. My question to you is, why would we be pushing crypto and stablecoin at a time when what we really need to do is push the US dollar as the reserve currency of the world to get people to continue to trade in dollars, invest in dollars and invest in our bonds, to do what Secretary Bessent has hoped we could do, which is refinance our $37 trillion of U.S. debt at much, much lower rates. Isn't the crypto strategy of the Trump administration completely backwards to where we ought to be going today?
Tom Michaud: Well, first of all, I support and think it's a great idea, and I would share your emphasis on the dollar being the world's reserve currency. Stablecoins, remember, what they are is an exchangeable token for a dollar. So in a sense, as stablecoins grow, there needs to be dollars behind it. And there really is a rather powerful use case for stablecoins. I'll just use an extreme example, if someone wanted to wire money to a family member outside the country, by the time you pay for all the wire funds and all the other transfers, it's pretty expensive, and it shouldn't have to be that way. There should be less friction in being able to move money. Now, it also has to be safe, by the way. It needs to be safe. And as someone you had mentioned earlier, as someone who's part of the 9/11 community, there's no bill that I support more than the Patriot Act, which created the bank secrecy and anti-money laundering laws. I would give an A rating to regulators for protecting the payment system, which I think they've done a good job since that bill was passed. So, by all means, safety and security first. But, but, and I'm not necessarily all in and thinking we need a Wild West approach to crypto. I actually think Washington's gonna walk before they run. I think stable coins is a pretty safe place to start, and I think that's where Chairman Hill is starting. But I also think things like custody, that to me doesn't look a terribly risky activity. So I would say walk before you run, but I would agree with you which is, better be thoughtful because it could have unintended consequences. I agree with that point that you made.
Willy Walker: And your point about stable coins being backed by dollars obviously is very different from crypto, which is, if you will, disintermediating dollars. I guess the one other point to that is just that as we try and keep the U.S. and the U.S. dollar as the reserve currency, all of the, the thing that scares me right now in this trade war, Tom, is that we're, we're sort of forcing the world to kind of reconsider all the flows that came through the United States. And if we don't quickly go back to some of our allies and make them feel that they are allies of ours, we do have the very real, I think, threat of people circumnavigating the U.S. financial system, which obviously is the bedrock of our economy and the bed rock of the value in the dollar. I was listening to someone the other day talking about intellectual property, which was another sort of derivative effect of what's going on right now, where the Chinese have already copied Microsoft Office. They've got copies of Microsoft Office that they could sell to the Italians for 10 bucks a copy, and you'd get everything that's in Microsoft Office. Up until now, the Italians won't buy it from the Chinese because they know that we have intellectual property rights over that Microsoft Office and therefore, we will do something to them from a trade standpoint if they went and bought pirated copies of Microsoft office from the Chinese. As we turn a cold shoulder to all of our allies, I just wonder whether the Italians sit there and say, “Wow, I can buy Microsoft Office at 10 bucks a copy rather than whatever Microsoft charges you for it. And I'm sure my CTO knows exactly what we pay for our copies of Microsoft Office.” But the point is that if we turn the cold shoulder to all of those allies, what allows us to continue to enforce our intellectual property rights over things like movies, over things like Microsoft Office? That's one of the big concerns I have is this sort of brinksmanship that's coming out of Washington right now.
Tom Michaud: I mean, I think there are two powerful things at work right now. One is that we're playing the game of unintended consequences at a high level here, right? I'm hopeful that it doesn't come to what you just said. And I'm hopeful that we reach some type of accommodation before it gets that bad. And my instincts are, as you had asked me earlier, it was a question actually we didn't get a chance to talk more about. But I do believe at some point, current circumstances matter in terms of what the policy is, meaning there probably comes a point where enough is enough, and it's time to make a deal of some type, right? But so that would be the first. The second is, and I get this in a lot of conversations with investors and managers that I'm speaking with, CEOs, is the country has had some great issues that need to be dealt with. There is a high degree of frustration that something needs to be done. Now, it could have been done in different ways, but the nation does have a tremendous number of imbalances that need to be addressed. I hear, keep hearing a lot, well, yes, we do have some trade imbalances that we should be looking at. And some of the other issues that have been popular macro issues and fiscal issues at the moment. But the question is, is this the best way to go about it and what are the unintended consequences of it? But some of these issues do need to be dealt with, I think, for the long term.
Willy Walker: It feels everyone has nothing but sort of bad reviews so far as the way that the Trump administration has gone about doing this, what's happened in the equity markets, $11 trillion, $12 trillion, and $13 trillion of lost value in the equity markets and a bond market that is dislocating as you and I speak, which, by the way, you mentioned before we went live on this time that there is an auction today that's happening right now, which will tell us a lot as it relates to where the treasury market is. I would put out to anyone listening to this that if that is a failed auction, hang on tight because we're going to see yields go in a manner that we have no sense of.
Tom Michaud: Ten years, 439 right now.
Willy Walker: So we're 39, so we're, we're good. I'm glad you've got your boomerang monitor up next to you.
Tom Michaud: Okay, as a matter of fact, that's why I'm sitting at my desk for this interview. I didn't want to be too far.
Willy Walker: Tom, you're not allowed to multitask on me here. I hope my questions are engaging enough that I don't have you multitasking on me. But let me spin a scenario here that actually says what President Trump is up to is going to make a huge positive impact on a lot of different things. He continues to say, hang with us, hang with us. Let's say that we're all getting impatient for him to strike a deal, but Japan flies into Washington, and we put a deal together with Japan that's kind of the framework for everyone else to fall in behind and a week's time from now, we've got 10 deals with 10 big partners and in the process of that, we have lowered their tariffs on U.S. goods dramatically, which if you do go country by country, that chart that the President held up, which was convoluted in the way they calculated it. I still haven't heard. I mean, Howard Lutnick spoke to us yesterday morning and there was no real clarity on what the actual math was behind those things. But what we know is that when the US tries to sell a car to Japan, do you know how many US cars are sold to Japan? Zero. Zero, because they have huge tariffs on US cars going into Japan, yet we have very low tariffs on Japanese cars coming into the United States. So, let's say, hypothetically we get that done, and that actually allows Ford Motor Company and GM to actually export US cars to Japan because those tariffs have come down. That obviously would be very stimulating to US GDP and US manufacturing growth. The one other piece to this that I do think is important, and this is one of the reasons why I'm curious about your thoughts on the bonds and why bond yields have gone up so much. is that if you look at where oil has gone, oil is at 60 bucks a barrel. Oil has fallen like a stone. And you think about the input of that oil into CPI. And obviously the Fed has been focused on CPI net energy, but still energy flows through everything else. And you'll think about what a big contributing factor it is to the CPI, I have had an economist say to me yesterday that it could be as much as a full point of CPI that oil has gone from $74 a barrel down to $60 a barrel. If that flows through all these numbers, the iPhone going from being $1,800 an iPhone to, I don't know, I mean, I've seen some projections that it goes to $4,000 if you took everything back here. But let's just say that the tariffs come on the Chinese goods that are coming in here and the iPhone goes from $1,800 to $2,200. The oil going from $74 to $60 is such a bigger play into CPI. Are we getting ahead of ourselves on thinking that the CPI is gonna spike so dramatically is question one and then question two is this: Could Jerome Powell actually look through those one-time bumps? Because a tariff is a one-time charge. The moment that tariff is paid, the cost of goods goes up, and you don't get that continued inflationary impact. So could Powell come out and say, “You know what? We know all these tariffs have gone up. The cost of good is gonna do a one-time up.” But just as he said leading into the great tightening that all of those costs from the pandemic were transitory. Could he not go back and say, “You know what, this is transitory. It's a one-time tariff hit, and we're gonna get on the other side of it. We're gonna either cut or not raise rates because it's a transitory moment.”
Tom Michaud: I am well understanding of the stress in the economy and in individuals and corporations' portfolio and all the stress of the uncertainty, but I do think trade imbalance is a worthy idea and I'm hopeful that we get to a point where we do start to see some of these trade deals getting announced and that it is, it does take us a better place. and that we are able to look back in the rearview mirror at this moment, seeing that we've set ourselves up to be on a better path, having gone through this uncertainty at this time. So it's being handled, obviously, in a very different and unusual basis. There's a lot of bad news in the markets. I personally, am not willing to accept that's the case that the case is going to be. I feel that the underlying strength in the economy is stronger. I do listen to what Delta said this morning, which is that their core flyers are flying, but the occasional flyers or not, and they're seeing that starting to trail off. That's real. And by the way, the economy was slowing before the tariffs. There wasn't much loan growth in the United States. At some point we would come off the stimulus spending off of COVID. And we have a fiscal imbalance that is gonna be difficult on the economy. But I'm still willing to see how this ultimately plays out, and I'm not willing to reach a conclusion yet. I still think there are some cards left to be played, and there are important cards that could still be played.
Willy Walker: Given you're in a wait and see attitude, you spoke on CNBC coming post-election about the potential for a significant uptick in M&A activity, not only in the financial services sector, but kind of across industry in America that the deregulatory push by the Trump administration would make it so that deals could get done more easily. I think a little bit of that, Tom, was sort of reversed early in Trump too by some comments that came out of the DOJ as it relates to antitrust, where it really wasn't appealing back from a regulatory standpoint, but actually a kind of business as usual out of the DOJ of kind of a Lina Kahn overview of some major antitrust issues on M&A activity. And then now we are where we are with significant uncertainty in the markets as it relates to what's your financing cost gonna be, what's the pro forma. I mean, if Delta pulls guidance. Very difficult for anyone to sit there and say, we ought to merge with Delta. Obviously, they're huge, and no one's going to merge with Delta, but if they can't even project what their guidance is going to be, and let's just say hypothetically, they and some other airline were thinking about merging, tough for you to go do an M&A transaction. Do you think M&A just completely peters out here, or do you think that the bankers in your shop and other shops are still just as busy as they have been for the last month trying to put together deals?
Tom Michaud: Let me jump on this because there are a couple of things I'd love to talk about. Number one is that there was open, I'd say, hostility or anti-feeling in the prior administration. In July of 2021, the President issued an executive order, which pretty much laid out to all the agencies to review all the merger guidelines. You can see it in the length of time, for example, in the banking industry that it took. Something that typically took six months was taking, at times, a year and a half to even get an answer from the FDIC, for example. So there really was a choke point on M&A, and you saw it in a variety of industries. So I think we can say that's been removed. And even already, you've seen the Fed acting much more traditional or even faster than traditional in terms of how they've been chasing applications or reviewing applications. So assume you no longer have that political headwind, OK? Now, you get to the point where my view is that economics always matters and will always prevail. So the economics here are, we've had this huge burst of private equity, and there's a tremendous amount of exiting that needs to happen. Exits happen by IPOs or by selling companies and I think traditionally there are more company sales than there are IPOs out of those portfolios. It's inevitable that something's gonna happen. I also believe, like you said earlier, disorderly is sort of the enemy of M&A activity. We don't necessarily need higher levels of assets. We just need to be orderly. I think when we get back to orderly, you're gonna see a ramp keep coming. So I still believe it's coming. It's a matter of when; we just haven't had orderly. As far as banks go, my firm was an advisor on four bank mergers last week. It's not often we announce four mergers in a week. The power of the economics of consolidation and banking is strong. For the median bank, scale works doesn't mean that every bank and every asset size, it's worked for them individually, but when you look at the median bank by asset size scale absolutely works. So there's tremendous economics to merge. And I think conversations in what I'm hearing across the platform is participants are still working on M&A deals. The question is, what's the timing of the announcement? But I don't think that there's still; I'm sure there are some deals where there's pencil down. But for now, I think they are still working on them with the idea that's wait and see what plays out because things could change fast, and let's be ready if that happens.
Willy Walker: Do you think, you were talking, we have a similar type of thing in the commercial real estate industry as it relates to fund life as well as refinancing needs, right? Anything that someone kicked from 23, let's say a refinancing on an apartment building, that they were able to get an extension, it matured in 23, they kicked it to 24. 24 came about, the bank said, let's just kick it to 25, and now sort of the clock is running out on some of that, kick the can down the road. Banks are saying, you pay me off, I want this refi-ed into a new loan, or you go somewhere else with it. To your point, as it relates to private equity firms, there's a need for liquidations and for either IPO or sale activity from one fund to another fund that might have more fund life to it, or they think the basis now is good. Do you think that the reset, Tom, as it relates to valuations, I mean, there's not a person who has a portfolio that hasn't seen its value come down dramatically. Does that reset in returns in the public markets allow for the private markets to sit there and say, we were holding on for that last dollar, we look like a star given if we'd been in the market up until now, and they can then go and start moving that product at a low return because on a relative basis, it looks great versus public holdings?
Tom Michaud: I think what you'll see is a real ramping of something called continuation vehicles, which is a lot of times these funds have a fund life expectations and then typically they might have an ability to extend it and then they get to the end where they can't even extend it anymore once they've used their allowable extensions. What we see happening, and frankly my firms worked on a bunch of these are continuation vehicles where the investors are given a chance to get liquidity, maybe not at a price that they love entirely, but presumably by that time, the funds are quite small because they've distributed most of the capital back. So you could decide to re-up in this continuation vehicle with the remaining investments, and then they find new investors to come in, or the GP itself of the fund invests in one way or another to keep those assets going. That is a viable option, one being used more and more, and one which could be used more and more. So if you were to think of what an exit is, an exit could include a continuation vehicle, an outright sale, or an IPO, but sometimes you hit a hard stop in these funds. But another point you were saying is, yes, investors, a lot of those investors, I've heard it in meetings recently, they don't like the prices, and they don't want to transact here. If they've got a good company and a good management team, they'll let it keep going. Maybe they delay what they're thinking until they get a better valuation. So companies that can wait probably will. Some who are right on the end of their fund will consider other alternatives, maybe a continuation view.
Willy Walker: On that as it relates to raising a continuation vehicle or just going out and capital raising to private equity firms, some of our clients who are big real estate private equity funds have found over the last month to two months that sort of the international flows have basically been shut off, that the rhetoric and now the actual negotiations from a trade standpoint. have made it so that going out to Adidas and the Saudis for capital has basically been a door shut for right now. Do you think that A, that continues and B, if we can get these trade deals put together, that the spigot might open back up? Or do you think that all of this has made it so that there's gonna be some hangover effect, if you will, as it relates to US private equity firms both in just straight out PE as well as in real estate are gonna have a difficult time raising capital from foreign investors.
Tom Michaud: I think it became a difficult time to raise capital even before the tariff talk. And I think it’s because some of the biggest asset classes out there were returning capital at a slower rate than their investors thought. And a popular theme that I've heard around the sector is, “Hey, I'll consider your next fund when you give me the money back from your prior fund.” And so while I think maybe there's some of this cross border now, but I don't think that's the major issue. I think if you and I did this webinar four weeks ago, I would have given the same answer, which is it's a hard fundraising environment, difficult, especially in the real estate class where I think a lot of investors feel they're not looking to take their exposure up and they're eager to get money back from their prior investments. I hear that in multiple asset classes. Then, even in the growth vertical, where a lot of those valuations had already come down, the return of capital in some of those funds had slowed down. So I think there's an adjustment going on in a variety of asset classes, and it had already started before the tariff moment, in my opinion. And it will sort itself out, that's what markets do.
Willy Walker: So Tom, you and I have both managed through challenging times. We both were in the financial services sector during the great financial crisis and saw credit spreads gap out. I distinctly remember talking to my friend, Kevin Warsh, who at that time was at the Fed saying, we can't, we were looking into the abyss and we can see how far down it goes. You had a unique experience and a wildly unfortunate one of having lost so many of your colleagues in 9/11 and having to rebuild KBW during what was at that time the aftermath of the dot-com bust, an economy that was very fearful that global trade was going to come back, a country that was at war. You had to go and start to get the team at KBW focused on rebuilding the firm. Can you give any piece of advice to people who are leading enterprises, leading teams, leading themselves at this time where the world seems to have a lot of shakiness to it? It's very difficult to have a whole lot of conviction about what's going on. What's your advice to someone who's sitting in a seat that has to make a decision today that is either a go-no-go on a hire, a go-no-go on an investment, or a go-no-go on holding onto something versus riding through or selling it to wait for a better day.
Tom Michaud: Well, thank you for the question. We've been having that conversation. I've had that conversation with clients as well. I'm really bullish on what happens on the backside of this. The underlying power of our economy is very strong. But what you need to do is suffer no career-ending injuries in the meantime. You need to get to the other side. That means just doing the incremental right thing, one step at a time, and I would say that means don't take unusual risks. Keep making yourself more, your balance sheet more conservative. Keep focusing on the core of what you do, and keep making sure that your firm is ready and able to act and offer all your valuable services when activity picks up, and don't take your eye off the ball because when the turn comes, it'll come quickly. So, going into 2023, which was the slowest bank M&A environment since the 1990s for myself. Going into that moment, we were fortunate enough to have the number one market share in the nation in bank M& A. When there were no bank mergers for 18 months, I said to the team we've got the most to lose. We're the number-one player. Let's make sure when the market comes back, not only have we maintained our market-leading position but that we hopefully enhance our position while others may have taken their eye off the ball due to the lack of activity, which means keep the team focused together and on the mission and just get to the other side and don't really worry too much about your results while you're in the middle of that process. Then you mentioned 9/11 because when that comes up and some folks say, Tom, can you tell me about the key elements of that? I went to night school, like he said, at NYU. There was no chapter textbook on what to do when terrorists fly planes into your building. That was new. It was horrible, awful. I wish it hadn't happened, but it was real. What you do is you focus on your values. You focus on your mission. You work on doing the right thing to do, which is always the right thing to do. And then my view was we had a really big rock, and we had a steep hill in front of us, and you just pushed it up a little bit more every day. That's really what you do. There's no magical solution. I also believe at times of turmoil like this, the gap between the sort of the winning competitors and the competitors that are losing or falling behind widens. Usually, there's more opportunity for the firms that have their act together that does speak back to that 2023 example that I gave. So, I mean, I think those would be the elements of how we are operating today and what I think is the wisest way to proceed.
Willy Walker: So, on that one final question for you, I heard you talk about the golden rule at Stiefel, which is treating others as you'd like to be treated yourself. We're in a world that feels quite polarized. We're also in a word with rhetoric that is somewhat shocking to all of us at various times from both sides, from both sides. That is a flat-out statement or accusation to both sides of the aisle and to what's coming out of Washington. But how can we all, Tom, and how do you maintain the KBW people who live by that golden rule that has been established at Stiefel as it relates to how you treat others?
Tom Michaud: Boy, I'll tell you, the first thing is we're a we firm, not an I firm. I'm CEO of KBW, I'm a senior officer at Stiefel. I don't go running around saying, everything here is we, and the leaders ahead of me who led our firm did the same thing. So we're a “we” firm not an “I” firm. We have tremendous clarity of mission. There's no confusion about what we do. and everybody knows the job where they are in the value chain. And so we work together with clarity of what it is we're trying to do, which is to be extraordinarily helpful to our clients, be effective in how we execute, and know that every time we do something for somebody, it's a tryout for the next time. That's why I'm really fortunate and respectful of the fact that, at least at our firm, we've had essentially zero turnover for a long time, and it's because people think while we're willing to compete at a moment's notice, we're really trying to win the marathon. I think if you take that, then you get an owner-operator feeling about yourself, and you can really make a difference. I think that businesses, when I'm with folks and we talk about what it is we're trying to do, I believe so much of business is a short answer exam back in college, which is my firm or my division or my group is good at blank. We want to win at providing this service. Keep it very clear, simplicity, not complexity works best and make sure you set the mission. Then also as a leader, and I know you do this, Willy, you lead from the front, not the back. I think everybody appreciates that.
Willy Walker: Well, I greatly appreciate you joining me today and giving all of us your insights on the markets and the world that we're living in today. I would be remiss if I didn't thank Bose George and Jade Rahmani, two incredible analysts at KBW who have covered Walker & Dunlop over the years for the fantastic work that they do. And Tom, thank you so much, and good luck to you and the rest of the KBW team as we all navigate an increasingly complex world, which hopefully at some point stabilizes a little bit and we can all start making some really big decisions on growth and where we're going in the future.
Tom Michaud: Willy, thank you so much. You've got a great series here. I'm honored to be with you, and congratulations to all the great work you do with your company as well as I know you do in the community, which absolutely matters. So thank you.
Willy Walker: Thanks, Tom. Thanks, everyone for joining us today. Have a great one.
