October 3, 2023 • 26 mins
Bloomberg Sound On Co-Host Kailey Leinz and Bloomberg News Editor Tom Maloney break down day one of the FTX fraud trial of Sam Bankman-Fried. Ken Kencel, President & CEO at Churchill Asset Management, discusses the important role private capital plays with investors from Greenwich Economic Forum. And we Drive to the Close with Aaron Kennon, Chief Executive Officer at Clear Harbor Asset Management.
Hosts: Carol Massar and Simone Foxman. Producer: Paul Brennan.
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Speaker 1 (00:01):
This is Bloomberg Business Wait inside from the reporters and
editors who bring you America's most trusted business magazine, plus
global business finance and tech news the Bloomberg Business Week
podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
Speaker 2 (00:20):
And we're also keeping track of some activity in Lower Manhattan.
This has to do with jury selection beginning in the
case against Sam bankmin freed and outside Manhattan Federal Courthouse
in downtown New York. Is Bloomberg Sound on Bloomberg Cryptoca
host Kaylee Lines. We also welcome with us Bloomberg News
editor Tom Maloney, who's here in our Bloomberg Interactive Brokers
student and a great read and write on the Bloomberg
(00:43):
terminal about SBF and FTX. Kaylee, I want to start
with you, set the mood, set the scene. What has
gone on so far far in Downtown New York.
Speaker 3 (00:54):
Well, so far it's just been jury selection. There's been
a number of jurors who have been ruled out of
the juror pool because they've been vetted and either had conflicts.
Once said that he already had a preconceived negative feeling
about crypto, So that's really the process that is underway
today trying to put this jury together. That process could
include until early tomorrow, and then we will enter the
(01:15):
argument sphase of the trial. Prosecutors will make their case
on these allegations that Sam Bankman Free perpetrated one of
the greatest financial frauds in US history, that he misused
customer funds, co mingled them between FTX, the exchange he
ran in Alameda, his hedge fund that he founded that
he said was operating separately from FTX, and prosecutors will
allege that essentially this scheme allowed him to use customer
(01:36):
funds to make risky investments in real estate. Ultimately, the
proceeds of this fraud were able to power his political donations.
That's all what the prosecution will say. But of course
the defense will say that this was not intentional. He
did not intentionally commit fraud. This is something Bagman Freed
himself has said repeatedly leading up to this trial, and
we should note he has pleaded not guilty to all
(01:57):
seven of the charges he's facing.
Speaker 4 (01:59):
Yeah, Kaylee, can you talk about the expected duration of
this trial and then what the penalties could be for
SBF if he is found guilty.
Speaker 3 (02:11):
Well, it's going to be a long process. This trial
could take up to six weeks, so this really is
just the very beginning. There's going to be several weeks
of both the prosecution and the defense making their cases.
But if at the end he is found guilty of
one or all of the charges he's facing, he could potentially,
if given the maximum sentence, spend the rest of his
life in prison. Five of the counts that he is
facing come with a maximum sentence of twenty years, so
(02:33):
if found guilty on all charges and you add it
all together, he very well could be looking at a
sentence of one hundred years plus.
Speaker 2 (02:39):
Tom It may be a long duration and that's all interesting,
but it's like the details that will ultimately come out
because there's some really interesting witnesses and all of us
who have already pled guilty.
Speaker 5 (02:49):
Yeah.
Speaker 6 (02:50):
Absolutely, he's kind of on again, off again gilfriend Caroline Wilson,
I think she has pled guilty. You have his He
was co CEO Ryan Salami, So there's going to be
some very interesting witnesses. For sure. Gary Wang, he's childhood
best friend, right and one of the sort of technical
(03:10):
people at FTX. I think he's testimony is going to
be critical in terms of how much Maakeman Freed knew
about what was actually going on in the code and
all of the kind of backdoor stuff that was going
on at FTX.
Speaker 2 (03:22):
Before we go back to Keiley, I mean, as you
guys laid out on the terminal, a great read through
of like kind of from start to finish. We're not
actually finished, but from the rise to the fall of
SBF what strikes you most as we go through this process.
Speaker 6 (03:35):
You know, look, I think looking back, what's most surprising
when we were chatting about this before is how many
red flags people were kind of ignoring or even sort
of celebrating in this guy. You know, back in twenty
twenty two when he's net worth peaked, you know, people
were investing in him and looking at him as a
real kind of savant. You know, he was talking to
(03:55):
investors while playing video games, doing interviews while playing video games,
just you know, kind of getting in and talking to
as many journalists as he could, and really things that
you know, in hindsight look like pretty unusual behavior, but
at the time was sort of seen as you know,
this guy's different. This guy's obviously your genius because he
is kind of strange.
Speaker 2 (04:15):
We've seen it before, right, We've seen money investor money,
especially on the West Coast, roll into people who are
just a little bit different. Because it sounds like maybe
they figured something out.
Speaker 7 (04:24):
Yeah, Kaylee, I mean he I guess he sort of
had this almost at least at some points cocky persona
before this really came about. I mean, do we know
anything about what SBF state of mind or is going
into this trial? What these people are around him are saying, Yeah.
Speaker 3 (04:43):
Well, we do know based on his appearance at the
courthouse today. Granted, cameras can't be in the room, so
we don't actually have photos or videos we can show.
We just have sketches. He cut the hair. Remember he's
been really well known for this wild knob of curly
hair that he has that is now short. He is
wearing a suit that by all appearances looks too big
for him. It looks like he may have lost a
certain substantial amount of weight while he has been in
(05:06):
jail in Brooklyn, because of course, he was on a
house arrest at his parents' house in California, was found
by a judge to be trying to tamper with witnesses.
So he got put into this detention facility, has been
there for two months, despite repeated attempts by his defense
team to try to get him out of it, and
there's been a lot of complaints about the food that
he isn't able to eat, that he's basically been subsisting
(05:26):
of bread and water and some peanut butter, and so
in theory, maybe that is all weighing on his state
of mind. But the reporting we have from inside the
courthouse at this time is to this point, he's sitting
there pretty calmly taking notes on a computer that isn't
connected to the internet, and so far seems relatively sanguine
about the whole thing. But of course we'll have to
see how things change as the trial plays out.
Speaker 2 (05:47):
Got Tom, I do you feel like when you know,
in terms of what might come out in the courtroom,
is just what sbf knew, what were his responsibilities ultimately?
And I also thought it was interesting in the story
that you guys have had on the terminal about SPF
maybe arguing that that lawyers at FTX were involved in
key business decisions and he acted in good faith. So
it's just interesting maybe the different strategies he may ultimately
(06:08):
take to fight this one.
Speaker 6 (06:10):
Yeah, And I think one of the really interesting things
that came out in the past couple of weeks was
that great story we had at Bloomberg about his relationship
with his parents. You know, his dad was one of
those lawyers who was often in the room in those negotiations.
So how does that kind of come out in the trial,
I think will be really interesting.
Speaker 8 (06:26):
Kaylee, Do we know if he'll testify in his own defense, Well,
this is going to be one of the major questions
is whether Sam Bankminfried is going to testify himself.
Speaker 3 (06:38):
He has been kind of an unusual white crawler collar
crime defendant in that he's been very vocal. He's spoken
about this in media. He has kind of tried to
make his own case in the public rather than having
his defense attorneys speak for him. So it'll be interesting
to see if he does take the stand. He was
asked in court earlier if he understood that he cannot
be compelled to testify. He said, yes, but we're kind
of going to have to wait and see on that one.
(07:00):
It would certainly be unusual if he is a white
collar crime defendant did decide to testify on his own behalf.
But there's a lot that's unusual about this case.
Speaker 2 (07:09):
No, nothing unusual, Kaylee, nothing at all. It's been pretty remarkable,
all right, Kaylee Line, So appreciate your insight what you're seeing.
And Tom, thank you so much as well. Bloomberg News
Editor Tom Maloney, I highly recommend you check out the
reporting on SBF on the terminal, and we'll be checking
in with Kaylee throughout the day, of course, co host
of Bloomberg Crypto and Bloomberg Sound On as well.
Speaker 1 (07:31):
You're listening to the Bloomberg Business Week podcast. Catch us
live weekday afternoons from three to six Eastern Listen on
Bloomberg dot com, the iHeartRadio app, and the Bloomberg Business app,
or watch us live on YouTube. Welcome, all right.
Speaker 2 (07:57):
I'm so grateful when we have a voice that has
seen a lot of cycles on Wall Street, has seen
different trends on Wall Street, has seen different cycles in
our government and has to make sense of it. He
is really has a front seat to what has been
going on when it comes to private credit and private lending.
So delighted to have back with us. Can can Sell,
President and CEO Churchill Asset Management forty seven billion dollar
(08:18):
private capital affiliate of nuv Nuveen, you know, the more
than trillion dollar asset manager of the Teachers Insurance at
Annuity Association of America. Ken is joining us on Zoom
from the Greenwich Economic FORUMA in Greenwich, Connecticut. Ken, So
great to have you back with us. How are you.
Speaker 5 (08:34):
Great? Great, great to speak with you again, Carol, And
always enjoy our conversation.
Speaker 9 (08:39):
I do too.
Speaker 2 (08:39):
I feel like I always learn a lot. You give
me some great perspective. You give our listeners and viewers
a great perspectives. So what we were talking about with
our TV colleagues is how much does an investment professional
like you and your investors, how much do they care
about dysfunction lack thereof a house speaker maybe being voted
out in Washington.
Speaker 5 (09:03):
Well, certainly, uncertainty is generally not a good thing, and
certainly we've had a lot of that over the last year.
The current environment that we've been you know, living through,
has you know, certainly created a very challenging dynamic overall,
and and of course the banking termail in the spring,
and of course now some of the dynamics playing out
(09:24):
of Washington. But but I would say that out of
those dynamics has come one of the most attractive opportunities
that that I've certainly seen in my career in direct lending,
in in private credit. So I guess in that sense,
you know, I never wanted to wish for for dysfunction
and uncertainty, but but I will say that in many respects,
(09:48):
you know, private credit and direct lending, you know, unlike
the GFC Carrol you know, has been here if you will,
to kind of come to the rescue a bit by
providing the financing capital and lending capital and ultimately growth
capital to the companies that need that capital. And have
you done and have performed well through the current environment.
(10:09):
So in that sense, we're super busy and hoping that
if things settle down a bit, we were certainly hoping
for that post labor day that you know, we get
even busier.
Speaker 7 (10:19):
Well, interesting that you talk about private credit like this,
because Bank of America actually put out a note they
said that private debt defaults are going to reach five
percent by early twenty twenty four because a lot of
deals one third of deals come due in the next
two and a half years.
Speaker 4 (10:37):
Is that bad for private credit?
Speaker 2 (10:39):
Though?
Speaker 5 (10:41):
Well, first of all, I'm not sure I agree with
those numbers. You know, the reality is if you look
at our portfolio or the portfolio of any number of
you know what are arguably high quality, you know, the
top tier, you know, private credit managers, you know, some
of which are publicly traded, I think what you would
see is generally portfolios have held up extremely well. So,
(11:05):
you know, I think that the prediction that default rates
would reach five percent is not supported by what we're
seeing today. Now, now that doesn't mean that it won't
won't play out, but I would say that just because
there's a maturity wall doesn't necessarily mean that those companies
are going to ultimately default. I mean, I think what
(11:26):
you may very well see, and you're already see it today,
is that you know, a lot of those companies are
going back to their lendings lenders and say, look, this
is a good business, it has strong cash flow, it's
performed well, and we need to extend And the frankly,
the reality is that to the extent that the businesses
have performed, the odds are very good that they can
(11:48):
work something out with their lenders and extend the maturity.
So I wouldn't necessarily equate maturities to defaults, because you know,
as a direct lender is a private credit lender, you know,
we have the ability to sit down with the company
and if it's private equity owned, with the private equity
for the own and work out the dynamics if in
(12:12):
fact those need need to be done. Now it's a
totally different story if the company is performing poorly or
underperforming and or you know, is otherwise not able to
make its payments. But I would not attribute just maturity
to necessarily creating that problem, and certainly we are not
seeing evidence of that today, so you know, it'll be
interesting to see how that plays out.
Speaker 2 (12:33):
Ken Right, Defaults can tell one story, and you're saying
you're not necessarily seeing that, But in terms of rewriting
terms and working with your borrowers, are you doing a
lot more of that in this environment?
Speaker 5 (12:44):
Frankly not right now. I would tell you that. Our
portfolio today, so we have investments in over five hundred
US mid market companies in in areas like healthcare and
software and business services. These are all backed or owned
by private equity investment firms, which is largely the case
(13:05):
for many of our peers and I think, you know,
I've certainly had an opportunity to talk to my peers
here in Grandish Economic Forum. Number of them are here.
You know, we trade notes, and I can tell you
that our portfolios overall are holding up quite well. So
you know, our quote unquote workout person is frankly not
that busy. Surprisingly, I think to some and our new
(13:28):
deal people, you know, the folks that are underwriting new
transactions are actually quite busy. In fact, we had a
very strong we had a record quarter for a third
quarter last quarter. And you know, to the extent that
you know, we do get some clarity regarding the dynamics
(13:49):
in and around interest rates, and maybe a bit more
certainty regarding potential increases and interest rates and inflation. You know,
I think we could very well find ourselves in a
relatively soft landing. And if we do, you know, I
think we'll see M and A activity and transaction activity
pick up, right because I mean it's really you know,
the market's are really waiting for some stability regarding rate.
(14:12):
So I'm not you know, I would say, in what
obviously has been a tough day in the markets, I
would say what you'll hear from me is that you know,
there's there's a lot of liquidity in private credit. Institutional
investors are allocating significantly to the space yields Obviously, conditions
are quite attractive right now. And and we're busy, you know,
(14:34):
so you know, I you know, I hate to be
they've the the positive story here, but but I will say,
you know, we're busy and institution throughout game for sure.
Speaker 2 (14:45):
But Roman Bustic just said, Carol, you're the optimist always
and all of this stuff. I do see the glass halfle,
but I want to make sure I'm eyes wide open.
So I do wonder where you are seeing any cracks
because I do wonder in this higher rate environment and
we are going to be higher for longer, there's gone
there's going to be some problems and we know that.
Speaker 5 (15:04):
Where absolutely absolutely, And I would say that, you know,
in many respects, this is the kind of period where
you know, the the lenders that maybe were a bit
more aggressive and looked really good, you know, and getting
higher returns but maybe taking on more risk. I think,
are those dynamics are coming home to roost? But I
(15:24):
would say overall, yes, and I would say that where
we see cracks, if you will uh, and they're you know,
certainly in our portfolio. There are not many, but where
we see them, they're very episodic and they're not tied
to a broad you know, pullback in an economic condition.
(15:46):
So for example, you know a deal it was done
a year ago where uh, you know, they embarked upon
an acquisition strategy and those acquisitions did not play out
as expected, or where there was a fundamental premise regarding
healthcare reimbursement rates and some shifts in the way that
they oriented the business that maybe didn't play out as well.
(16:07):
So there are certainly situations that have not gone as
well as planned, but not a fundamental pullback of the
type that we would have seen, for example in the GFC,
in any way, shape or form.
Speaker 2 (16:21):
So can I ask one last question because we're run
out of time. I wish you know, when I speak
with you, I always want like an hour thirty seconds
quick because we keep talking about you know, treasury levels.
Pick your duration back to levels of two thousand and seven,
two thousand and eight, anything today reminds you of the
Great Financial Crisis very quickly, like thirty seconds.
Speaker 5 (16:42):
Yeah, So I would stay the pullback into syndicated loan
markets in many respects as a carbon copy in that sense, right,
So colo markets go dormant, Liquid loan markets go dormant,
no real activity in the underwritten large cap in syndication
loan market. The difference this time direct lending is there
(17:04):
lots of liquidity lending capital to really go and support
private aquity. So nice similar in the liquid markets, but
different in the sense that there are direct lenders there
now to provide that capital.
Speaker 2 (17:14):
Well, certainly a highlight of our day. Ken be Well
can can Sell, President CEO of Churchill Asset Management, joining
us from the Greenwich Economic Forum in Greenwich. Many people
argue that these private credit guys is why the regional
banking crisis maybe wasn't so bad earlier this year. Carol Master,
Simone Foxman. This is Bloomberg Radio.
Speaker 1 (17:33):
You're listening to the Bloomberg Business Week podcast. Catch us
live weekday afternoons from three to six Easter on Bloomberg Radio,
the Bloomberg Business app and YouTube. You can also listen
live on Amazon Alexa from our flagship New York station,
Just Say Alexa, play Bloomberg eleven thirty, Blomarco.
Speaker 5 (17:57):
Journal.
Speaker 9 (17:59):
Now bet you let me.
Speaker 1 (18:00):
No no, no, no, who's going to drug honey? Please?
Speaker 5 (18:04):
I'll do the riding gravel.
Speaker 4 (18:06):
Let's mate, I want to try it.
Speaker 1 (18:10):
It's a good question time. This is good drive to
the Globe.
Speaker 5 (18:16):
Dot com for me. I think we'll buy around jog Don.
Speaker 2 (18:19):
I'm on Bloomberg Radio, all right, everybody, just about eighteen
seventeen and a half minutes to be exact, until the
closing bell rings on this Tuesday, October third. This is
one of those days, Simone Carol Master along with Simone Foxman.
Simone in for my co host Tim Stanoek. But Simone,
it's one of those days where I don't have enough
screens on the Bloomberg because there's just SBF, there's DC,
(18:40):
there's the market. There's a lot going on.
Speaker 7 (18:41):
I've got two big screens and they are crazy right now,
watching for McCarthy headlines, watching for sam pegmin free, and
also watching the FED.
Speaker 2 (18:51):
I mean we'll see, yeah, right, all the FED speak
and chatter.
Speaker 4 (18:55):
So let's get to it.
Speaker 2 (18:56):
Let's see what our next guest has to say. He's
got to keep a watcher on the trade and the markets.
Joining us once again is Aaron Kennon. He is co
founder and chief executive officer of Clear Harbor Asset Management,
A little Clear Harbor Asset Management. They've got over a
billion dollars in assets under management. And he is joining
us once again on Zoom from Stanford, Connecticut. I'm rushing
(19:16):
to get to you because I feel like there's a
lot to talk about. Aaron.
Speaker 6 (19:20):
Good to have you back.
Speaker 2 (19:21):
Hope you're well. I got to start with the DC
news and what's going on in terms of the US
House Speaker Kevin McCarthy got to ask, how does it
factor in to how you think about the investment climate
or what's going on more broadly, does it affect decision
making at all?
Speaker 9 (19:38):
Well, Carol, thanks for having me back. It certainly doesn't
instill confidence in markets at a time when markets seem
to be lacking sort of clear footing on the way forward.
You know, we've been a country that has really advanced
due to you know, finding compromise and common ground, you know,
from Benjamin Franklin to the present, and that's how we
(20:00):
have moved the ball down the field for the American people.
And to see what's happening in Congress, not just today
but generally sort of general strife and polarization on key issues,
whether it's the deficit and how that may impact treasuries
or the border and how that impacts even the health
of our children. So it's sort of a sad moment
in my opinion.
Speaker 4 (20:21):
Do you see that having any impact on the market.
Speaker 9 (20:26):
Well, certainly, I think that there have been incremental shifts occurring.
This is just one of them in the sort of
slow fracturing, fracturing of sort of the foundation of faith
that America is a force that can be relied upon.
(20:48):
And I'm a big patriot, but I think if you
look at sort of our country over the last fifty years,
you know, sort of prefall the Berlin Wall, we were
very much a bipolar world, and post Berlin Wall following
we were really the sole superpower. And today we have
(21:11):
multiple forces at work, you know, whether it's the war
in Ukraine in Russia, but also the stripe between China
and the US, and how key economies in the world
like India are sort of functioning in a way that
maybe they hadn't thought of before. It changes the way
trade occurs, it changes the way the currency in which
(21:32):
trade is taking place. You know, China can sell product
and rupees to India. India can buy oil from Russia
in rupees today, just as an example, and that on
the margin can have a negative impact on the need
for these economies, these countries to hold those reserves and
US dollars, which is just one incremental point of pressure
(21:55):
perhaps occurring here in the US treasury market. So that's
a very long winded way, some amount of meat saying yes, no, but.
Speaker 2 (22:02):
It's relevant and it makes sense within this environment.
Speaker 5 (22:04):
Aaron.
Speaker 2 (22:05):
So, having said that, you can right suggest to your
investors to invest anywhere in the world. So is it
time to increasingly look outside the United States in your view?
Speaker 9 (22:15):
Well, I think that you know, the diversification is one
of the last free lunches, as they say in investing,
and certainly there are opportunities both here in the United
States and abroad. And the regulatory environment here historically has
been has been very strong. Our laws are very strong
for those for owners of capital, and so that has
been one principal reason why there's been a natural tendency
(22:41):
to want to overweight the United States on a on
a go forward basis, not to mention that we tend
to consume in dollars, and these companies are trade trade
in dollars, and so you know, with that said, we
we see opportunities in Europe, We see opportunities uh, in
in South America and in Asia ticular in Japan right now,
(23:01):
we think that there's an interesting shift in sentiment and
regulatory environment in Japan where investors are essentially forcing companies
to think about return on investing capital, return on equity, buybacks,
mergers and acquisitions, if you want to stay listed on
the topics. They're sort of nudging companies to think of
these new variables. So there are opportunities everywhere. And it's
(23:23):
not just equities right now. In fact, with the rise
of interest rates, particularly treasuries, treasuries are really competing in
a way with equities they haven't in such a long time,
perhaps in the last fifteen twenty years, where real rates
on the ten year treasury just as an example, with
ten year treasuries at four point eight percent today in
the ten year break even inflation at two point three
(23:45):
five percent, which is quite low. You know, we haven't
seen the difference between those two numbers two point four
five percent. We haven't seen that in about twenty years
or so. And so yes, it feels like we're catching
a falling knife when we're buying treasuries today in this market,
get where the long bonds down two percent, but certainly
look a lot more attractive today than having a long time.
Speaker 7 (24:06):
So where do you put your incremental dollar right now?
Speaker 9 (24:09):
Well, that's one area, you know, it's it's thinking about
our targets. You know that we think that the high
grade mortgage backed securities US Agency mortgor BAT and mortgage
backed securities in US treasuries are an interesting place to
think about allocating, whether it's incremental fixed income dollars or
(24:32):
dollars from the sideline or possibly depending on the mandate
of course, dollars even from the equity asset class. We
still believe in equities for the long front here at
Clear Harbor. You know, it's central to how we think
about investing for many of our families, many of our
non for profit organizations that that that we manage a
capital for. But but we do think you know, also therefore,
(24:56):
moving out the duration curve, Yes, treasury bills are really
attractive at five point four five point five percent, but
now you can buy a ten year, four eighty, a
twenty year at about what was it today I'm looking
at the Bloomberg screen at five thirteen. We haven't seen
this sort of environment for a long time, and we
think it's worthy of nudging further out the curve. The
(25:19):
Bloomberg Aggregate Bond Index, the primary bench mark, has an
average maturity of about eight and a half years. You
don't have to do it at eight and a half years,
but if you're at two now, I recommend moving out
to three or four. If you're at three, move out
to four to five. So that's how we're thinking about it.
Incremental moves, not major tactical shifts.
Speaker 2 (25:35):
Yeah. No, we talk about that right. You know, if
you think about equity versus the fixed income, fixed income
can give you certainly returns and kind of lock it
in with less risk, especially when there's a lot of
questions going forward. Hey Aerin, Thank you. Aeron Kennon, co
founder CEO at Clear Harbor Asset Management.
Speaker 1 (25:54):
This is the Bloomberg Business Week Podcast. I'll a Apple,
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Speaker 2 (00:20):
And we're also keeping track of some activity in Lower Manhattan.
This has to do with jury selection beginning in the
case against Sam bankmin freed and outside Manhattan Federal Courthouse
in downtown New York. Is Bloomberg Sound on Bloomberg Cryptoca
host Kaylee Lines. We also welcome with us Bloomberg News
editor Tom Maloney, who's here in our Bloomberg Interactive Brokers
student and a great read and write on the Bloomberg
(00:43):
terminal about SBF and FTX. Kaylee, I want to start
with you, set the mood, set the scene. What has
gone on so far far in Downtown New York.
Speaker 3 (00:54):
Well, so far it's just been jury selection. There's been
a number of jurors who have been ruled out of
the juror pool because they've been vetted and either had conflicts.
Once said that he already had a preconceived negative feeling
about crypto, So that's really the process that is underway
today trying to put this jury together. That process could
include until early tomorrow, and then we will enter the
(01:15):
argument sphase of the trial. Prosecutors will make their case
on these allegations that Sam Bankman Free perpetrated one of
the greatest financial frauds in US history, that he misused
customer funds, co mingled them between FTX, the exchange he
ran in Alameda, his hedge fund that he founded that
he said was operating separately from FTX, and prosecutors will
allege that essentially this scheme allowed him to use customer
(01:36):
funds to make risky investments in real estate. Ultimately, the
proceeds of this fraud were able to power his political donations.
That's all what the prosecution will say. But of course
the defense will say that this was not intentional. He
did not intentionally commit fraud. This is something Bagman Freed
himself has said repeatedly leading up to this trial, and
we should note he has pleaded not guilty to all
(01:57):
seven of the charges he's facing.
Speaker 4 (01:59):
Yeah, Kaylee, can you talk about the expected duration of
this trial and then what the penalties could be for
SBF if he is found guilty.
Speaker 3 (02:11):
Well, it's going to be a long process. This trial
could take up to six weeks, so this really is
just the very beginning. There's going to be several weeks
of both the prosecution and the defense making their cases.
But if at the end he is found guilty of
one or all of the charges he's facing, he could potentially,
if given the maximum sentence, spend the rest of his
life in prison. Five of the counts that he is
facing come with a maximum sentence of twenty years, so
(02:33):
if found guilty on all charges and you add it
all together, he very well could be looking at a
sentence of one hundred years plus.
Speaker 2 (02:39):
Tom It may be a long duration and that's all interesting,
but it's like the details that will ultimately come out
because there's some really interesting witnesses and all of us
who have already pled guilty.
Speaker 5 (02:49):
Yeah.
Speaker 6 (02:50):
Absolutely, he's kind of on again, off again gilfriend Caroline Wilson,
I think she has pled guilty. You have his He
was co CEO Ryan Salami, So there's going to be
some very interesting witnesses. For sure. Gary Wang, he's childhood
best friend, right and one of the sort of technical
(03:10):
people at FTX. I think he's testimony is going to
be critical in terms of how much Maakeman Freed knew
about what was actually going on in the code and
all of the kind of backdoor stuff that was going
on at FTX.
Speaker 2 (03:22):
Before we go back to Keiley, I mean, as you
guys laid out on the terminal, a great read through
of like kind of from start to finish. We're not
actually finished, but from the rise to the fall of
SBF what strikes you most as we go through this process.
Speaker 6 (03:35):
You know, look, I think looking back, what's most surprising
when we were chatting about this before is how many
red flags people were kind of ignoring or even sort
of celebrating in this guy. You know, back in twenty
twenty two when he's net worth peaked, you know, people
were investing in him and looking at him as a
real kind of savant. You know, he was talking to
(03:55):
investors while playing video games, doing interviews while playing video games,
just you know, kind of getting in and talking to
as many journalists as he could, and really things that
you know, in hindsight look like pretty unusual behavior, but
at the time was sort of seen as you know,
this guy's different. This guy's obviously your genius because he
is kind of strange.
Speaker 2 (04:15):
We've seen it before, right, We've seen money investor money,
especially on the West Coast, roll into people who are
just a little bit different. Because it sounds like maybe
they figured something out.
Speaker 7 (04:24):
Yeah, Kaylee, I mean he I guess he sort of
had this almost at least at some points cocky persona
before this really came about. I mean, do we know
anything about what SBF state of mind or is going
into this trial? What these people are around him are saying, Yeah.
Speaker 3 (04:43):
Well, we do know based on his appearance at the
courthouse today. Granted, cameras can't be in the room, so
we don't actually have photos or videos we can show.
We just have sketches. He cut the hair. Remember he's
been really well known for this wild knob of curly
hair that he has that is now short. He is
wearing a suit that by all appearances looks too big
for him. It looks like he may have lost a
certain substantial amount of weight while he has been in
(05:06):
jail in Brooklyn, because of course, he was on a
house arrest at his parents' house in California, was found
by a judge to be trying to tamper with witnesses.
So he got put into this detention facility, has been
there for two months, despite repeated attempts by his defense
team to try to get him out of it, and
there's been a lot of complaints about the food that
he isn't able to eat, that he's basically been subsisting
(05:26):
of bread and water and some peanut butter, and so
in theory, maybe that is all weighing on his state
of mind. But the reporting we have from inside the
courthouse at this time is to this point, he's sitting
there pretty calmly taking notes on a computer that isn't
connected to the internet, and so far seems relatively sanguine
about the whole thing. But of course we'll have to
see how things change as the trial plays out.
Speaker 2 (05:47):
Got Tom, I do you feel like when you know,
in terms of what might come out in the courtroom,
is just what sbf knew, what were his responsibilities ultimately?
And I also thought it was interesting in the story
that you guys have had on the terminal about SPF
maybe arguing that that lawyers at FTX were involved in
key business decisions and he acted in good faith. So
it's just interesting maybe the different strategies he may ultimately
(06:08):
take to fight this one.
Speaker 6 (06:10):
Yeah, And I think one of the really interesting things
that came out in the past couple of weeks was
that great story we had at Bloomberg about his relationship
with his parents. You know, his dad was one of
those lawyers who was often in the room in those negotiations.
So how does that kind of come out in the trial,
I think will be really interesting.
Speaker 8 (06:26):
Kaylee, Do we know if he'll testify in his own defense, Well,
this is going to be one of the major questions
is whether Sam Bankminfried is going to testify himself.
Speaker 3 (06:38):
He has been kind of an unusual white crawler collar
crime defendant in that he's been very vocal. He's spoken
about this in media. He has kind of tried to
make his own case in the public rather than having
his defense attorneys speak for him. So it'll be interesting
to see if he does take the stand. He was
asked in court earlier if he understood that he cannot
be compelled to testify. He said, yes, but we're kind
of going to have to wait and see on that one.
(07:00):
It would certainly be unusual if he is a white
collar crime defendant did decide to testify on his own behalf.
But there's a lot that's unusual about this case.
Speaker 2 (07:09):
No, nothing unusual, Kaylee, nothing at all. It's been pretty remarkable,
all right, Kaylee Line, So appreciate your insight what you're seeing.
And Tom, thank you so much as well. Bloomberg News
Editor Tom Maloney, I highly recommend you check out the
reporting on SBF on the terminal, and we'll be checking
in with Kaylee throughout the day, of course, co host
of Bloomberg Crypto and Bloomberg Sound On as well.
Speaker 1 (07:31):
You're listening to the Bloomberg Business Week podcast. Catch us
live weekday afternoons from three to six Eastern Listen on
Bloomberg dot com, the iHeartRadio app, and the Bloomberg Business app,
or watch us live on YouTube. Welcome, all right.
Speaker 2 (07:57):
I'm so grateful when we have a voice that has
seen a lot of cycles on Wall Street, has seen
different trends on Wall Street, has seen different cycles in
our government and has to make sense of it. He
is really has a front seat to what has been
going on when it comes to private credit and private lending.
So delighted to have back with us. Can can Sell,
President and CEO Churchill Asset Management forty seven billion dollar
(08:18):
private capital affiliate of nuv Nuveen, you know, the more
than trillion dollar asset manager of the Teachers Insurance at
Annuity Association of America. Ken is joining us on Zoom
from the Greenwich Economic FORUMA in Greenwich, Connecticut. Ken, So
great to have you back with us. How are you.
Speaker 5 (08:34):
Great? Great, great to speak with you again, Carol, And
always enjoy our conversation.
Speaker 9 (08:39):
I do too.
Speaker 2 (08:39):
I feel like I always learn a lot. You give
me some great perspective. You give our listeners and viewers
a great perspectives. So what we were talking about with
our TV colleagues is how much does an investment professional
like you and your investors, how much do they care
about dysfunction lack thereof a house speaker maybe being voted
out in Washington.
Speaker 5 (09:03):
Well, certainly, uncertainty is generally not a good thing, and
certainly we've had a lot of that over the last year.
The current environment that we've been you know, living through,
has you know, certainly created a very challenging dynamic overall,
and and of course the banking termail in the spring,
and of course now some of the dynamics playing out
(09:24):
of Washington. But but I would say that out of
those dynamics has come one of the most attractive opportunities
that that I've certainly seen in my career in direct lending,
in in private credit. So I guess in that sense,
you know, I never wanted to wish for for dysfunction
and uncertainty, but but I will say that in many respects,
(09:48):
you know, private credit and direct lending, you know, unlike
the GFC Carrol you know, has been here if you will,
to kind of come to the rescue a bit by
providing the financing capital and lending capital and ultimately growth
capital to the companies that need that capital. And have
you done and have performed well through the current environment.
(10:09):
So in that sense, we're super busy and hoping that
if things settle down a bit, we were certainly hoping
for that post labor day that you know, we get
even busier.
Speaker 7 (10:19):
Well, interesting that you talk about private credit like this,
because Bank of America actually put out a note they
said that private debt defaults are going to reach five
percent by early twenty twenty four because a lot of
deals one third of deals come due in the next
two and a half years.
Speaker 4 (10:37):
Is that bad for private credit?
Speaker 2 (10:39):
Though?
Speaker 5 (10:41):
Well, first of all, I'm not sure I agree with
those numbers. You know, the reality is if you look
at our portfolio or the portfolio of any number of
you know what are arguably high quality, you know, the
top tier, you know, private credit managers, you know, some
of which are publicly traded, I think what you would
see is generally portfolios have held up extremely well. So,
(11:05):
you know, I think that the prediction that default rates
would reach five percent is not supported by what we're
seeing today. Now, now that doesn't mean that it won't
won't play out, but I would say that just because
there's a maturity wall doesn't necessarily mean that those companies
are going to ultimately default. I mean, I think what
(11:26):
you may very well see, and you're already see it today,
is that you know, a lot of those companies are
going back to their lendings lenders and say, look, this
is a good business, it has strong cash flow, it's
performed well, and we need to extend And the frankly,
the reality is that to the extent that the businesses
have performed, the odds are very good that they can
(11:48):
work something out with their lenders and extend the maturity.
So I wouldn't necessarily equate maturities to defaults, because you know,
as a direct lender is a private credit lender, you know,
we have the ability to sit down with the company
and if it's private equity owned, with the private equity
for the own and work out the dynamics if in
(12:12):
fact those need need to be done. Now it's a
totally different story if the company is performing poorly or
underperforming and or you know, is otherwise not able to
make its payments. But I would not attribute just maturity
to necessarily creating that problem, and certainly we are not
seeing evidence of that today, so you know, it'll be
interesting to see how that plays out.
Speaker 2 (12:33):
Ken Right, Defaults can tell one story, and you're saying
you're not necessarily seeing that, But in terms of rewriting
terms and working with your borrowers, are you doing a
lot more of that in this environment?
Speaker 5 (12:44):
Frankly not right now. I would tell you that. Our
portfolio today, so we have investments in over five hundred
US mid market companies in in areas like healthcare and
software and business services. These are all backed or owned
by private equity investment firms, which is largely the case
(13:05):
for many of our peers and I think, you know,
I've certainly had an opportunity to talk to my peers
here in Grandish Economic Forum. Number of them are here.
You know, we trade notes, and I can tell you
that our portfolios overall are holding up quite well. So
you know, our quote unquote workout person is frankly not
that busy. Surprisingly, I think to some and our new
(13:28):
deal people, you know, the folks that are underwriting new
transactions are actually quite busy. In fact, we had a
very strong we had a record quarter for a third
quarter last quarter. And you know, to the extent that
you know, we do get some clarity regarding the dynamics
(13:49):
in and around interest rates, and maybe a bit more
certainty regarding potential increases and interest rates and inflation. You know,
I think we could very well find ourselves in a
relatively soft landing. And if we do, you know, I
think we'll see M and A activity and transaction activity
pick up, right because I mean it's really you know,
the market's are really waiting for some stability regarding rate.
(14:12):
So I'm not you know, I would say, in what
obviously has been a tough day in the markets, I
would say what you'll hear from me is that you know,
there's there's a lot of liquidity in private credit. Institutional
investors are allocating significantly to the space yields Obviously, conditions
are quite attractive right now. And and we're busy, you know,
(14:34):
so you know, I you know, I hate to be
they've the the positive story here, but but I will say,
you know, we're busy and institution throughout game for sure.
Speaker 2 (14:45):
But Roman Bustic just said, Carol, you're the optimist always
and all of this stuff. I do see the glass halfle,
but I want to make sure I'm eyes wide open.
So I do wonder where you are seeing any cracks
because I do wonder in this higher rate environment and
we are going to be higher for longer, there's gone
there's going to be some problems and we know that.
Speaker 5 (15:04):
Where absolutely absolutely, And I would say that, you know,
in many respects, this is the kind of period where
you know, the the lenders that maybe were a bit
more aggressive and looked really good, you know, and getting
higher returns but maybe taking on more risk. I think,
are those dynamics are coming home to roost? But I
(15:24):
would say overall, yes, and I would say that where
we see cracks, if you will uh, and they're you know,
certainly in our portfolio. There are not many, but where
we see them, they're very episodic and they're not tied
to a broad you know, pullback in an economic condition.
(15:46):
So for example, you know a deal it was done
a year ago where uh, you know, they embarked upon
an acquisition strategy and those acquisitions did not play out
as expected, or where there was a fundamental premise regarding
healthcare reimbursement rates and some shifts in the way that
they oriented the business that maybe didn't play out as well.
(16:07):
So there are certainly situations that have not gone as
well as planned, but not a fundamental pullback of the
type that we would have seen, for example in the GFC,
in any way, shape or form.
Speaker 2 (16:21):
So can I ask one last question because we're run
out of time. I wish you know, when I speak
with you, I always want like an hour thirty seconds
quick because we keep talking about you know, treasury levels.
Pick your duration back to levels of two thousand and seven,
two thousand and eight, anything today reminds you of the
Great Financial Crisis very quickly, like thirty seconds.
Speaker 5 (16:42):
Yeah, So I would stay the pullback into syndicated loan
markets in many respects as a carbon copy in that sense, right,
So colo markets go dormant, Liquid loan markets go dormant,
no real activity in the underwritten large cap in syndication
loan market. The difference this time direct lending is there
(17:04):
lots of liquidity lending capital to really go and support
private aquity. So nice similar in the liquid markets, but
different in the sense that there are direct lenders there
now to provide that capital.
Speaker 2 (17:14):
Well, certainly a highlight of our day. Ken be Well
can can Sell, President CEO of Churchill Asset Management, joining
us from the Greenwich Economic Forum in Greenwich. Many people
argue that these private credit guys is why the regional
banking crisis maybe wasn't so bad earlier this year. Carol Master,
Simone Foxman. This is Bloomberg Radio.
Speaker 1 (17:33):
You're listening to the Bloomberg Business Week podcast. Catch us
live weekday afternoons from three to six Easter on Bloomberg Radio,
the Bloomberg Business app and YouTube. You can also listen
live on Amazon Alexa from our flagship New York station,
Just Say Alexa, play Bloomberg eleven thirty, Blomarco.
Speaker 5 (17:57):
Journal.
Speaker 9 (17:59):
Now bet you let me.
Speaker 1 (18:00):
No no, no, no, who's going to drug honey? Please?
Speaker 5 (18:04):
I'll do the riding gravel.
Speaker 4 (18:06):
Let's mate, I want to try it.
Speaker 1 (18:10):
It's a good question time. This is good drive to
the Globe.
Speaker 5 (18:16):
Dot com for me. I think we'll buy around jog Don.
Speaker 2 (18:19):
I'm on Bloomberg Radio, all right, everybody, just about eighteen
seventeen and a half minutes to be exact, until the
closing bell rings on this Tuesday, October third. This is
one of those days, Simone Carol Master along with Simone Foxman.
Simone in for my co host Tim Stanoek. But Simone,
it's one of those days where I don't have enough
screens on the Bloomberg because there's just SBF, there's DC,
(18:40):
there's the market. There's a lot going on.
Speaker 7 (18:41):
I've got two big screens and they are crazy right now,
watching for McCarthy headlines, watching for sam pegmin free, and
also watching the FED.
Speaker 2 (18:51):
I mean we'll see, yeah, right, all the FED speak
and chatter.
Speaker 4 (18:55):
So let's get to it.
Speaker 2 (18:56):
Let's see what our next guest has to say. He's
got to keep a watcher on the trade and the markets.
Joining us once again is Aaron Kennon. He is co
founder and chief executive officer of Clear Harbor Asset Management,
A little Clear Harbor Asset Management. They've got over a
billion dollars in assets under management. And he is joining
us once again on Zoom from Stanford, Connecticut. I'm rushing
(19:16):
to get to you because I feel like there's a
lot to talk about. Aaron.
Speaker 6 (19:20):
Good to have you back.
Speaker 2 (19:21):
Hope you're well. I got to start with the DC
news and what's going on in terms of the US
House Speaker Kevin McCarthy got to ask, how does it
factor in to how you think about the investment climate
or what's going on more broadly, does it affect decision
making at all?
Speaker 9 (19:38):
Well, Carol, thanks for having me back. It certainly doesn't
instill confidence in markets at a time when markets seem
to be lacking sort of clear footing on the way forward.
You know, we've been a country that has really advanced
due to you know, finding compromise and common ground, you know,
from Benjamin Franklin to the present, and that's how we
(20:00):
have moved the ball down the field for the American people.
And to see what's happening in Congress, not just today
but generally sort of general strife and polarization on key issues,
whether it's the deficit and how that may impact treasuries
or the border and how that impacts even the health
of our children. So it's sort of a sad moment
in my opinion.
Speaker 4 (20:21):
Do you see that having any impact on the market.
Speaker 9 (20:26):
Well, certainly, I think that there have been incremental shifts occurring.
This is just one of them in the sort of
slow fracturing, fracturing of sort of the foundation of faith
that America is a force that can be relied upon.
(20:48):
And I'm a big patriot, but I think if you
look at sort of our country over the last fifty years,
you know, sort of prefall the Berlin Wall, we were
very much a bipolar world, and post Berlin Wall following
we were really the sole superpower. And today we have
(21:11):
multiple forces at work, you know, whether it's the war
in Ukraine in Russia, but also the stripe between China
and the US, and how key economies in the world
like India are sort of functioning in a way that
maybe they hadn't thought of before. It changes the way
trade occurs, it changes the way the currency in which
(21:32):
trade is taking place. You know, China can sell product
and rupees to India. India can buy oil from Russia
in rupees today, just as an example, and that on
the margin can have a negative impact on the need
for these economies, these countries to hold those reserves and
US dollars, which is just one incremental point of pressure
(21:55):
perhaps occurring here in the US treasury market. So that's
a very long winded way, some amount of meat saying yes, no, but.
Speaker 2 (22:02):
It's relevant and it makes sense within this environment.
Speaker 5 (22:04):
Aaron.
Speaker 2 (22:05):
So, having said that, you can right suggest to your
investors to invest anywhere in the world. So is it
time to increasingly look outside the United States in your view?
Speaker 9 (22:15):
Well, I think that you know, the diversification is one
of the last free lunches, as they say in investing,
and certainly there are opportunities both here in the United
States and abroad. And the regulatory environment here historically has
been has been very strong. Our laws are very strong
for those for owners of capital, and so that has
been one principal reason why there's been a natural tendency
(22:41):
to want to overweight the United States on a on
a go forward basis, not to mention that we tend
to consume in dollars, and these companies are trade trade
in dollars, and so you know, with that said, we
we see opportunities in Europe, We see opportunities uh, in
in South America and in Asia ticular in Japan right now,
(23:01):
we think that there's an interesting shift in sentiment and
regulatory environment in Japan where investors are essentially forcing companies
to think about return on investing capital, return on equity, buybacks,
mergers and acquisitions, if you want to stay listed on
the topics. They're sort of nudging companies to think of
these new variables. So there are opportunities everywhere. And it's
(23:23):
not just equities right now. In fact, with the rise
of interest rates, particularly treasuries, treasuries are really competing in
a way with equities they haven't in such a long time,
perhaps in the last fifteen twenty years, where real rates
on the ten year treasury just as an example, with
ten year treasuries at four point eight percent today in
the ten year break even inflation at two point three
(23:45):
five percent, which is quite low. You know, we haven't
seen the difference between those two numbers two point four
five percent. We haven't seen that in about twenty years
or so. And so yes, it feels like we're catching
a falling knife when we're buying treasuries today in this market,
get where the long bonds down two percent, but certainly
look a lot more attractive today than having a long time.
Speaker 7 (24:06):
So where do you put your incremental dollar right now?
Speaker 9 (24:09):
Well, that's one area, you know, it's it's thinking about
our targets. You know that we think that the high
grade mortgage backed securities US Agency mortgor BAT and mortgage
backed securities in US treasuries are an interesting place to
think about allocating, whether it's incremental fixed income dollars or
(24:32):
dollars from the sideline or possibly depending on the mandate
of course, dollars even from the equity asset class. We
still believe in equities for the long front here at
Clear Harbor. You know, it's central to how we think
about investing for many of our families, many of our
non for profit organizations that that that we manage a
capital for. But but we do think you know, also therefore,
(24:56):
moving out the duration curve, Yes, treasury bills are really
attractive at five point four five point five percent, but
now you can buy a ten year, four eighty, a
twenty year at about what was it today I'm looking
at the Bloomberg screen at five thirteen. We haven't seen
this sort of environment for a long time, and we
think it's worthy of nudging further out the curve. The
(25:19):
Bloomberg Aggregate Bond Index, the primary bench mark, has an
average maturity of about eight and a half years. You
don't have to do it at eight and a half years,
but if you're at two now, I recommend moving out
to three or four. If you're at three, move out
to four to five. So that's how we're thinking about it.
Incremental moves, not major tactical shifts.
Speaker 2 (25:35):
Yeah. No, we talk about that right. You know, if
you think about equity versus the fixed income, fixed income
can give you certainly returns and kind of lock it
in with less risk, especially when there's a lot of
questions going forward. Hey Aerin, Thank you. Aeron Kennon, co
founder CEO at Clear Harbor Asset Management.
Speaker 1 (25:54):
This is the Bloomberg Business Week Podcast. I'll a Apple,
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weekday afternoons from three to six Eastern on Bloomberg dot com,
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