Transcripts For BLOOMBERG Market Makers 20140129

Schatzker. Im Stephanie Ruhle, a cosco member actually. Are you . Im. I dont get there very often. Maybe i am not getting my 50 bucks worth. Our guest host for the hour, greg fleming, the president of Morgan Stanleys wealth and Investment Management businesses. No question we need to start with the markets. Clearly there was a lot of volatility last week. Yesterday seen aims seemed a little better but the dow today atdown 106, it was down 150 one point. This is volatility. What does it say to you . One thing i will say is in the Fourth Quarter in particular in 2013, really throughout the year, it was a very strong year in equity markets and volatility was down significantly from 2012, down from 2011. 2013 was a very benign year. May be abnormally benign. There are a few things on the horizon, including the fed and taper and topics we will talk more about. And markets are a little more antsy. When you look at a morning like today, specifically why did features turn as negative as they did, carter to specify specific thats harder to specify specific thrusts, what the environment. More and investor anxiety issue rather than the turkish running to the rescue of the lira, doubling Interest Rates, or, say, the South Africans unexpectedly raising the Interest Rates . Less of that and more the general, i dont know what to do . I think some of the things can have a shortterm impact it over the medium term the key for the u. S. Equity market is what happens to the u. S. Economy, and is the growth in the economy going to start moving forward. That will really drive what happens in the equity market. That doe more blips occur. People forget, you go through the Fourth Quarter but the s p was up almost 10 in one quarter , and it was almost on a straightline basis. This is more typically what you are going to see. You have to separate that from the medium term, which is, what will the u. S. Economy do . That will have a big genvec overtime. What does a spike in volatility due to a private wealth business . Momandpop, even if they have the money, they are not really comfortable with volatility. Do they take money off the table . Areur Financial Advisors working with their clients and we have 16,000 advisers working with 4 million clients and they are working on plans and asset allocation. One of the great things for momandpop working with a financial of visor, when you have shortterm volatility coming into the market, you dont want to overreact to that. You want to stick to your mediumterm clan. Anxiety on a weekly or monthly things happening on a weekly or monthly basis to not drive major changes in what Financial Advisers are doing with their clients. What becomes the norm in the shortterm and mediumterm . Larry think im up larry fink said last week, get used to it. The ceo of Deutsche Bank spoke morning andols this said volatility will anticipate the end of monetary policy. Easing monetary policy. Everybody knows the end of money is coming so volatility is normal. I do agree. I just heard it for the first time here. One of the things that is different from where we are at this point of the cycle is monetary policy, and the fact that fed took very extraordinary measures over the last five years, and they are now in the process of beginning to unwind that. Nobody has seen them do this before. They have never done this before. And it will have a continuous impact on the shortterm and mediumterm in terms of how well will play out on markets. Is this volatility good for super sophisticated investors . We spent the past year and a half dogging on Hedge Fund Managers, just by the market. Is it a great moment for the managers so they can outperform . Because you simply cant buy the s p and win. In a volatile market does favor those who can stand back and figure out what is shortterm and what is not going to last versus what is going to have an impact from a mediumterm standpoint. If it is a specific Hedge Fund Manager or a Financial Advisor working with their clients, whoever can do that can benefit over the mediumterm. It does put more of a premium on a device and how that advice plays out over time. You and your colleagues at Morgan Stanley spend a lot of time talking to your clients, trying to understand what they are thinking. You brought with you the results of the latest Morgan Stanley poll and i cant think of a better place to start then with politics, because last night the president in the state of the union. Government registers high on the client populist the concerns. And they dont like government officials more than bankers. A Huge Positive for bankers. Budget deficit, foreign conflicts, trade deficit. Those are all things to a large degree within the control of congress, or in control of the white house, government in general. What does that say about the future of the nation . You saw it in the state of the union last night. Some commentators have said that there is a little bit of reaching across the aisle on both sides. Did you feel that . I did not see a lot of that and we have not seen a lot of that in a long time. I think investors register that when they talk about the budget deficit being at the top of the list of concerns. There is an unease on the part of investors and americans more broadly with the levels of budget deficits and the concern of are we mortgaging our future, as a nation. I want to bring in julianna goldman, White House Correspondent. It is a sense, down in d. C. , what was the take away from the state of the union . One of the things we saw from the president s speech are the limits is the limits of his time in office is on display. He will go kicking and screaming before he is deemed a lame duck president. He is going to try to work with congress where he can. Where he cant, he is going to try to flex his political and president ial muscle to see what he can get Via Executive orders and convening power of the oval office. E is on his way to cosco i am a proud member as well. Companyan example of a that has acted on its own to raise the minimum wage. He is pushing congress to raise the minimum wage to 10. 10 an hour. But that is really unlikely to happen. The president is going and doing what he can, which is raising the minimum wage for federal contractors. I had a question i heard feedback from commentators that fits into one of two buckets. One, that the president specifically was trying not to strike as partisan a tone and was more up the in reaching and reaching across the isle of little bit, and then you heard some of the specific statements around, i will go it alone, i dont need the legislature to get things done which, by the way, is mostly not true. The constitution sets it up where they will have to agree to get anything really significant them. Which is it . Was the administration trying to strike a note of compromise, or were they basically saying we are not going to get the republicans on board and we will do whatever we can without them . What you usually see with this president is pretty nuanced, and a little bit of both. When you look at immigration, that is a really interesting example where the president only spent about a paragraph of that whole hour and five minutes speech talking about immigration reform. Because they didnt want to be too confrontational. They dont want to jim that done republicans throats because they think theres actually room for compromise and they want to give john boehner the space to navigate the internal politics of the Republican Party. There they saw, as an example, if they were to try to hammer republicans over immigration reform, that could doom chances of getting some sort of legislation before the end of this year. To gregs point, the idea that the president and the white house is doing an end run around congress, reading some of the nost state of the union commentary, it gives the Republican Party ammunition all 14 y through the money november 2014 election, he is jumping dumping on the constitution. Clearly the white house does not see a lot of risk in that rough he would not said what he said. Clearly the white house knows the limits and he is not going to risk some sort of constitutional crisis. I think when you talk to republicans they would private school privately acknowledge that as well. It will be a talking point when it comes to environmental regulation, Climate Change, implementing the president s Climate Change initiative. So i do think that is something you will hear from republicans. You heard House Speaker john boehner in the runup to the state of the union saying, hey, there is something called the constitution. That isnt think something it could end up being a distraction, but i dont think it will have the legs and that the white house will risk having this crisis of confidence in the constitution. I appreciate that reminder. Our own White House Correspondent julianna goldman. Be back fleming will with us in a moment. This guy ran the new York City Marathon in three hours and 27 minutes, that you did another fun fact. He is also going to be sharing more from Morgan Stanleys Wealth Management survey. President obama heading to cost code today, but he is not there for the discounts, like the rest of us heading to cosco today. His latest campaign to raise the minimum wage. We are streaming on your smart phone, tablet, bloomberg. Com, and watch all of our interviews that you can see streaming live and also on demand. Apple tv is the place. You are watching Market Makers. The president of the United States getting ready to make remarks that he costco. We expect him to talk about the minimum wage. Lets listen in. Is good to be here with all of you. A championcknowledge for working families right here in maryland, governor markell malley. Omalley. Senator ben cardin is here. Congresswoman Donna Edwards is here. And all of you are here. [applause] [laughter] teresas story proves that treating workers well is not just the right thing to do, it is an investment. And her 27 years of hard work at a costco proves that investment pays off. I talked a little bit about this last night in my state of the union address. Now, i only finished 12 hours ago, so these remarks will be quicker. [laughter] need some time to pick up a snow shovel and one of those 50 found 50 pound bags of dog food. [laughter] i was told i could get a big screen tv, too. The 80inch. 60 is not enough. You have to go 80. It is sunny. I was looking you can buy a sofa, chocolate chip cookies and a snorkel set all in the same [laughter] [applause] the sofa did not surprise me but the snorkel set, that was impressive. Although i do want to ask, who is snorkeling right now . How many of those are you guys are selling . You never know. [laughter] but what i talked about last night was a simple but profound idea, and it is an idea that is at the heart of who we are as americans. Opportunity for everybody. Giving everybody a fair chance. If they are willing to work hard and take responsibility, give them a shot. The idea that no matter who you are, where you come from, what you look like some await your last name is, if you work hard and you live up to your responsibilities, you can succeed and support a family. [applause] that is what america should be about. Nobody is looking for a free lunch. But give people a chance. And if they are working hard, make sure they can support a family. Are at a moment where businesses all across the country businesses like costco have created 8 million new jobs over the last four years. Our Unemployment Rate is the lowest it has been an over five years and our deficits have been cut in half, housing is rebounding, manufacturing is adding jobs for the First Time Since the 1990s. We sell more of what we may here in america to other places them ever before. His Nurse Leaders are deciding that china is not the best place to invest and create jobs Business Leaders are deciding that china is not the best place to invest and create jobs, america is. This could be a breakthrough year for america. After five years of hard work, overcoming the worst recession in our lifetimes, we are better positioned for this young century than anybody else. But the question for folks in washington is whether they are going to help that progress or hinder that progress. Whether they are going to waste time creating new crises for people and new uncertainty among like the shutdown uncertainty, like the shutdown, were spent time creating new jobs and opportunities. I know what i am choosing to do, because what is what it is what you do. I am choosing this to be a year of action. [applause] because too Many Americans are working harder just to get by. Arescars of the recession real. The middleclass has been taking it on the chin cents before the recession. Before the recession. Corporate profits and stock prices have also ordered soared but the wages and incomes of ordinary people have not gone up in over a decade. Thats why last night i laid out some steps that we can take, concrete, commonsense proposals to speed up Economic Growth, strengthen the middle class, and build new ladders of opportunity. And this opportunity agenda has four parts. Number one, we need more new jobs. Number two, we need to train more americans with the skills they need to get those jobs. Shouldthree, we guarantee every child access to a worldclass education. [applause] four, lets make sure hard work pays off. [applause] will meet ideas congress, but america need congress but america cant just ban still if congress isnt doing anything. Im not going to stand still either. Take steps to expand opportunity for more families, im going to do it, with or without congress. Project of defining our time, of our generation, is to restore opportunity for everybody. So i am here at costco today to talk about the fourth part of the opportunity agenda, and that is making hard work pay off for every single american. Five years ago i signed my first bill into law. I did not have any gray hair. [laughter] and you think it is distinguished. [laughter] that is the guy with a gray beard. [laughter] so, this first bill that i signed was called the lowly ledbetter fair pay act Lily Ledbetter fair pay act. That is the president of the United States making the case for a raise in the minimum wage. You heard it in the state of the union last night and he is repeating his call today at cost roll in maryland. Is one ofut costco the companies that pays employees considerably more than the minimum wage. You can keep watching the president s remarks on our website, bloomberg. Com tv. We continue our conversation now with the president of Morgan Stanleys Wealth Management and Investment Management businesses , greg fleming. I also want to shift gears and talk about Morgan Stanley. That is one of the reasons why we have you here. Many people dont know the fact that you came from Merrill Lynch once upon a time, and you were an Investment Banker and you the Investment Banking and Trading Division at Merrill Lynch, no small job. What is a like amount to manage and supervise brokers and Asset Managers relative to what it was like to oversee Investment Bankers and traders . That in the final analysis, people who are in jobs working with clients mother clients, there are a lot of similarities. The daytoday pressure of the client and with the client wants , and you want to do the best possible job. When you look at Morgan Stanley, the businesses did together nicely in many ways. What do you mean . All of the businesses and Morgan Stanley this is the vision set out in 20092010 for Morgan Stanley and the company is significantly different than much of its history, with the institutional securities business, run by my partner, and then Wealth Management and Investment Management which focuses in the Wealth Management case on a retail client and Investment Management mostly institutional clients, but it is all client facing. There are similarities across what everything Morgan Stanley is doing. There is change happening before our very eyes. Once upon a time it was predominantly an institution business. Some people say kind of a downmarket Retail Business in dean witter. That has changed. But how much has your success, reaching your target, say, for the Wealth Management is ms. , it penned in the cultural change, renewable renewal . Culturenk a successful renewal is very important for the organization is able. A lot of what we are doing and Wealth Management in driving better and better performance as you know the fourthquarter pretax margin was 20 for the first time after many years of building toward it. But a lot of what we are doing is continuing in the business, but my colleague that i mentioned, we have a number of initiatives that work across Wealth Management and Investment Bank you say it. I dont buy that one. I was in the Securities Division my whole life. This whole weve got synergies what is the big synergies between Investment Banking and private wealth . When you take the Company Public and you really want to give allocation to private wealth giants . The lonely. Like a rock may want the whole allocation if it is a great deal, but having a part of your distribution go to Wealth Management clients who, by the way, many are very good longterm investors, many of our corporate clients look at it as an attractive part of what you can bring to the Investment Banking business and they are happy to have a significant Wealth Management application on an ipo. Isnt it one of the reasons they face be A Facebook Ipo got tripped up because they were Retail Investors trying to work their way in and it wouldve been cleaner if it had just gone into institutional hands . Facebook was a typical ,typical for a lot of reasons including technology on the exchange. What my boss talk about a lot of times, there were a lot of people looking at facebook and trying to judge the quality of the ipl and with the company was in the days and weeks following that and 15 months later or whatever it is, the company is doing well and the market is reflecting that. Manyconfident there are investors, institutional and retail, who were in at the ipo who are still in today. What is the difference working with gorman . James and i have had a lot of history, working together for 15 years ago and john came from Goldman Sachs and i did not know him before them, so i have a longer relationship with james. And did they run the organization in a different way . John and i overlapped only a brief time. James is focused at Morgan Stanley on the businesses that are in place. Having Wealth Management as a significant pillar of Morgan Stanley, alongside institutional securities and Wealth Management. That division for Morgan Stanley and the fact that james was the boss was one of the big reasons i came to Morgan Stanley in 2010. The business he was building and the fact he was in charge. We are going to continue the conversation. Lots more to talk about recruiting, retention, cultural incentives on wall street. Sit tight. We are going to take a quick commercial break. Coming back with greg fleming. In a moment, we are going to be speaking to greg and we will also speak to the woman who runs the idw group and she knows where all the big jobs are. Live from bloomberg headquarters in new york, this is Market Makers with Erik Schatzker and Stephanie Ruhle. Welcome back. Im Stephanie Ruhle. It is a problem in every industry but it is magnified on wall street because of the money involved. How do you keep your best performers . Morgan stanleys greg fleming is back and i want to bring in a dear friend, ilana weinstein, the top headlines are headhunter and ceo of idw group. In the last two years you said here with eric and i and you talk about people leaving the bank and going to the buy side. What is the trend right now . The chasm between compensation on the sell side on the buy side and by that, i mean the hedge funds that thats ahe majority of very small percent of the hedge funds but 80 of assets under management in industry, it is enormous and compensation. It has never been bigger, that divide. If you think about all the , horrible 2013, a huge number and those are walking home with zero. The guys who matter, so to speak, are the guys who control most of the money in the hedge fund world, and that is the top five percent and they for the most part had a great year. And most of the money flows to the bigger funds, so they had a lot of capital. And when you are a Hedge Fund Manager managing 10 billion with a 2 20 structure and there fundamental strategy that generated a 30 return, you are looking at a a hundred million lar profit for the year 800 million profit. The prop desks are gone and the heavy hitters have gone to these hedge funds that she is describing. Now that wall street is not competing with those firms and funds, are we in a better place . I dont know. As stephanie said, the slice of the Hedge Fund Industry you are talking about is a very small part of the Financial Services industry. And the number of individuals you are talking about across the firms, even if he added up, or these are not even tens of thousands of people. It depends on the number of hedge funds. But it is a very small slice of the securities industry and Financial Services industry. Morgan stanley has a lot of people. Weve got 55,000 employees and weve got a lot of people working with clients doing a good job for the clients and they are well compensated. It is apples and oranges. Let me just say, it is a small percent, but the chasm is great. Within the sell side and maybe it is time to stop comparing the sell side to the within the sell side i think the mix of businesses has really changed. How so . , we talked about this at 9 p. M. , the biggest slice of revenue on the sell side has been in decline because of automation and the new Capital Requirements and are firms like Morgan Stanley that i think have wisely chosen to deemphasize that business and instead emphasize things like equities and Wealth Management. And that is kind of the thing. If you run an Investment Bank these days, you need to adopt a subset strategy. You cannot compete and all things. Have the capital the Capital Requirements are too onerous. You have to figure out what is your core dna and emphasize those businesses. Why do you even want to be in the Leveraged Finance business anymore . If the top talent and Leveraged Finance says i want to sit i dont want to sit at Morgan Stanley, i want to sit at millennium or go to any other still even want to have that business question mark just to come back to the point you are making, business mix is incredibly important in the Financial Services industry today. The mix of business that Morgan Stanley has in place, in a world of basil three basel ii, we ii, we are very comfortable with the three businesses in the way they work together. Staying in Leveraged Finance the street and Morgan Stanley still employ traders that are very good in specific areas, and the reason we are in Leveraged Finance and the reason it remains important to cserve clients front to back. If you are going to have firstclass m a and raise capital and fixed income for corporate clients, you are going to need to provide a market in those securities after you bring the market, so you have sales and trading around that. You dont want to say for a client if you want to raise equity do that, but if you want to raise highheeled bonds, you can do that. I can guess why Morgan Stanley will want to be in the business, but if ive was a traitor by what i do it at Morgan Stanley if you are going to go to Blue Mountain to do it, you will go to Blue Mountain to do it. But they need a different skill set. Down to where eri once erik want to take conversation. If you want more income in the next year too, you can make a decision but if you want a career at a great firm and it is not just about income but the work you are doing and the clients, and you are a key part of a Financial Services of the Financial Services industry, you might very well say i am going to spend 20 or 30 years doing this at Morgan Stanley as opposed to i dont buy that. Today hedge funds, first of all, the bigger ones like the ones you talked about, they are many institutions. They are not a bunch of guys, cowboys they are also clients. That going to a hedge fund is sort of a oneyear trade, it is not. There are real cultures in these places. Institutional clients are toocating where they want see an entity where it is not just an individual Hedge Fund Manager but it is about a team, a brand, infrastructure, it is about an entity that knows how to manage assets that deal with multiply multiple jurisdictions. It is still and eat what you kill business. Ofhave seen lots Institutional Hedge Fund blowup in 2007, 2008, with a billion dollars in aum and have been around for some time. And there were many funds, at least for a long. Of time, they have not gotten back to their high water mark. People were not getting paid. And you were saying you would leave for more money. I was referring to that. There is no question that there are a lot of hedge funds and a lot are our clients and a run by people i have enormous respect for a are institutionalized in their approach it may have been around for a long time and are likely to be around so you can have a career. But i am talking about with somebody leaves simply for more money, and i think in a lot of cases it is just not going to happen because there are a broader set of things that factor into that decision. The fact that there is a broader set of things is one of the things that will make the Financial Services industry more highly regarded by americans and the general public. Think a lot of things to factor into the decision. I think whether you sit on the sell side or a hedge fund, money is usually paramount to that decision. And the reality is, the bigger and better hedge funds and that is what were talking about, not the two big players those are the ones who also have a very strong culture, and they do take care of people, and they did in tough years, even 2008, not necessarily in and they paid people. So i dont think going to a hedge fund just means it is just about how does the regulatory involvement environment weigh in . When you speak to people at a bank right now, height how concerned are they about the longterm outlook for their position as they are sitting in a bank . I think the problem is, within a bank, you have such emerge Enormous Technology costs and look at the litigation costs that basically wiped out profitability, or at least had had a big cut in profitability. Those things are not going away. That is a big concern for people let banks. Those are things they dont have control over. Whereas, if you are sitting at a hedge fund, it is a cleaner construct in terms of your ability to get paid. I dont know. I just work in tv. The debate to be continued. Ilana weinstein, the ceo of idw group, wall street headhunter. And greg fleming for Morgan Stanley will be with us. We will talk about the fed. We will get a decision this afternoon. Tapering, is it still on . When we come back on Market Makers. Hour for Ben Bernankes, moving up the Chairmans Office of the Federal Reserve and today he is running his last federal open Market Committee meeting. Economist at bloomberg expect policymakers to reduce the feds monthly bond buying by an additional 10 billion. A great topic for greg fleming, a resident of wealth Investment Management at Morgan Stanley. Economics editor Michael Mckee with us as well. Michael, tell us more about what economists expect and maybe why they could be wrong, because we have seen them wrong before. Wronghave seen them before but the added element is this is Ben Bernankes last meeting and there is no press conference, so no real incentive watersm to roil the unless they have to. The u. S. Economy has a little slope has lately but the numbers have still been pretty good and most of them have been better than previous months. With the exception of the labor market report, there is no reason for them to deviate. If you are going to look for reasons for them to get off track, it might be the Mortgage Market because morgan rates Mortgage Rates have gone up in home sales have gone down. What is happening in emerging markets, not that job to fix them. Earlier you but talking about the importance of seeing evidence the American Economy is rebounding. The fed has a tricky job, but wall street has a tricky job, too. Monetary anddrawal the list the the end of easy money present the greatest risk . I think it is a big risk and a unique risk. We have never been where we are before. Weve never had a situation where the fed did this kind of quantitative easing and they have to pull it back before they get to the point where they start taking rates up. I think what happened and how it happens over the next 1824 months will be the most important impact on the American Economy and potentially global economy. You have to set prices for assets that have not had real prices in five years. And try to do it in a way where you dont disrupt sentiment and markets. Which is why i believe they will stay on track. They will go from 75 to 65 because they dont want to move it around so much every time they meet that people are reading and wondering why thats why they went from 75 to 70 and not to 65. Is this the moment investors stop leaving Central Banks will do whatever it takes . Greg probably has a better perspective than i do, but one would think that would not be the case in the United States because the sentiment is the United States economy is Getting Better and you dont need whatever it takes anymore. The real question in the u. S. Is, does janet yellen and those who are going to be remaining with her at the fed the do they have credibility on the inflation front because now you turn to the exit strategy and whether or not all those excess reserves get out there. I do think janet yellen and the fed will continue to be more focused on making sure would pull out of what happened in 2007 and 2008 and more focused on deflation until they are certain they are out of that problem and then move to the next one. This isood point still stimulus. Just a little bit less. But they are still adding to the Balance Sheet. And continuing to reinvest. Eventually when it tapers off the fed will reinvest. Maturation and Interest Payments on the bonds back into additional bond buying. Not like the Balance Sheet goes to zero overnight. Is thember, the trick u. S. Economy. It is not what the fed is doing, it is the impact on sentiment in the u. S. Economy. If the u. S. Economy continues to pull out and growth starts to accelerate and we start moving forward on that, then they can pull back on a continuous basis and they can get this done,. It is abig focus and big potential risk but it does not have to turn into a problem. The relationship between economic fundamentals and asset values . Because people have ignored them the last year and a half. Two things going on. It is a fair point, but remember there is an underlying Business Cycle which you are in a better place to talk about than me. Over the last five years he underlying cycle has been running its course. While you have it in one lane and the other lane you have these extraordinary fed policies, and for a while, extraordinary fiscal policy in washington, and if these things than to get out of the way, is the Business Cycle taking off . But this is what happens. If there is enough evidence of that and if it really starts to become a reality, then they can get this done. See theesting to reaction in emerging markets and reaction in our markets to what is happening, because in the last four or five years we always had something coming up. Always something to make people nervous. Now everybody is nervous about what is happening overseas. It doesnt carry over into sentiment about the economy . Fed cant something the address but can investors fullback where do americans pull back because they see the Dow Jones Industrials go down . Was a bull market run without confidence and conviction. People were buying into it but they did not necessarily believe it. Is this a correction that people want and is healthy and then you go back up again or did people sit on the sidelines . Icahndo you pull a carl and by apple stock on a dip. , debt, final thoughts from gregs letting greg fleming with Morgan Stanley. Welcome back to Market Makers. Im here with Stephanie Ruhle and greg fleming from Morgan Stanley. Before we finish up with you this hour, lets talk about the one thing i know matters to you and matters deeply to stephanie and me and too many people out there trust and banking. I let has trained since the crisis. Clawbacks are in place. Capital levels are up, but we still have scandal after scandal. And ceos e taking home, in some takingend to ceos he home in some cases tens of millions of dollars. Which they do in other industries. But we are talking about banking. Why should people trust thanks again . It will take time. Industry forn the a long time i started over 20 years ago now and went into work for companies. Were Great American companies where you were looking to study korean the Financial Sector which, by the way, is the lubricant of the American Economy. There may be this notion out there that this industry is something that is usually problematic. If the economy is going to work, we need a strong Financial Sector. I think what needs to happen and this is what you are focusing on at Morgan Stanley is to create a culture that goes back to days is where you are covering clients, trying to do the right thing by clients every day, were ethical institutional or corporate. Exactly. The Investment Banker would say to the corporation or ceo, we is a goodk no answer. Even though it may mean there is not revenue that comes to the firm that year or in the nearterm, no is a good answer. When a Financial Advisor says to assetlient, your alan allocation works, leave it here, we are comfortable where you are. It creates culture is focused around doing the right thing for clients. That will bleed its way out and i think it will change. How much time . I think we still have a ways to go. Because of the nature of what happened in the credit crisis and then, by the way, after the credit crisis, many leaders vilifying the Financial Sector, and the Financial Sector did a lot to add to the financial crisis to make it bigger and worse, but i said this before the credit crisis was built over a 25 year period across all american society. The that banks bear the blame of it all. Of the story that was going to be written once the credit crisis happened was a lot of the problem was was what these with these institutions. It will take time to reverse that. But we are going to run the business day today with a lot of people focused on doing the right thing by the client and focused on ethical attitudes, and that is going to make a difference. I know you believe it. James gorman persuaded me hes believe it, your boss. He believes it. It is easy to incentivize somebody to take huge risks with somebody elses capital to generate a lot of revenue and to take a lot of that home for himself. How do you do the reverse . Wall street is driven by incentives, but i would argue most of humanity is driven by it. Incentives are not enough. You have to create a culture thathas certain values, puts paramount importance on doing the right thing by the client. I say things like this, james is constantly on this theme. The leadership is collectively saying the same thing. You and sure that you employ people who agree with that. Evidence that Morgan Stanley today is a different firm than eight years ago . Whartons family today, in the business it is in and the focus on clients, is different from most companies seven or eight years ago Morgan Stanley today. Less fun. It is not true. If you want to come to work and do good jobs for clients real americans. We have 4 million clients and our wealth and is meant business. Saving foreal people retirement, vacation, to build a business. Good things. We are helping with that. I know you are trying to reach out with the Great American banking story. Thank you so much good greg fleming is president of wealth and Investment Management at Morgan Stanley. He has been with us for the hour. We look forward to having him back. Approaching 56 past the hour, which means bloomberg is taking you on the markets. Lets look at u. S. Markets, u. S. Docs are thinking, erasing yesterday gains. Investors continue to be concerned about the earnings forecast and the fed is preparing for the policy decision. What is going on in emerging markets really has investors spooked. No longer are people just searching for yields and buying in, they are scared. They looked under the hood, and it aint good. Turkey just rate overnight. It looked like it would save the turkish currency but it turned tail. Volatility is with us. Lots to talk about. Market makers continues to minutes from now. Coming up, it could change the whole meaning of being a football fan. You could own a piece of an nfl star. We will talk to the head of a firm taking one player public. Sounds crazy. Judge for yourself. Stay tuned. Live from bloomberg headquarters in new york, this is Market Makers with Erik Schatzker and Stephanie Ruhle. Once again, president obama zeroes in on income inequality and he was not even in doubt those in davos. It raises the question. Does wealth trickle down to the 99 . Up inh machines caught the mess. Invest in future earnings of an nfl star. Whoill be speaking to a guy has taken the idea public. Welcome to Market Makers. Ruhle. Phanie and im Erik Schatzker. We just image the great hour fleming. Time for news around the world. The top fed policymakers are wrapping up a twodate meeting and we will hear from them at 2 p. M. Eastern today. They are forecasting a cut in the bond buying for graham. Ben bernankes last day is friday. And stocks are lower, falling after i weaker than expected forecast from yahoo and at t. The Dow Jones Industrial average also down. There is not a market in the green. A couple inches of snow and ice brought serious misery to the deep south. Erik schatzker, a canadian, cannot believe it. Are you ready for this . 16atures in atlanta jams, sleepingc in cbs and whole foods. Many kids spent the night in their classrooms. The National Guard is helping school buses and drivers. To weigh in. Ve this is crazy. I finally understand why. People in the south im not an expert on the south. I have been asking questions all day long. How can a situation goes so wrong . I do not have snow tires down there. They are having people stay overnight, because they cannot get home. I spoke to the owner for the jets who said this is an opportunity this is what you should have the super bowl in new jersey. I went to the super bowl in dallas when they had a little bit of snow. Withent through christmas no heat. That is true. Lets move onto something else. Inequality. The buzzword of the week. We are going to take a look at how unequal things are right now, or perhaps not. The one percent better off than the 99 and whether making the one percent better off makes the 99 better off. We have three outstanding people to talk about it. Three great minds, great friends of Market Makers. We have a top policy adviser to and aomney, al hunt, senior economist for bloomberg government. Great to see you all. Gentlemen and lady, i want to begin by presenting two views that could not be further apart. On one hand, tom perkin. This has been viral all week long. One of the most legendary venture capitalist firms in silicon valley. And of course the president of United States and the state of the union last night. Have a look. It is absurd to demonize the rich for being rich and doing what the rich do, which is get richer by creating opportunities for others. Oftoday after four years Economic Growth, corporate prices and stock prices have rarely been higher and those of the top have never done better. But average wages have barely dodged. Budged. Inequality has deepened. Upward mobility has stalled. Let me begin with you. In america contrast right now . Is that the state of the union . Oh, my god, obama would cheer for that if he could have tom perkins as a foil every day. He should go back and listen to some fdr speeches. He did not gimp not the rich lastthe night. What the president could have done last night is what perkins accuses people off, socalled class warfare. He really did not. He laid out the facts. I do not think he attacked the rich. Right, what do you think . I think the president has a tough task, because under his watch, some of these problems have gotten worse. At think what he was trying to do was to lay out his solutions. Unfortunately, it was groundhog day a few days early. It was the same speech he gave last year. It will not fix the problems of upward mobility we have right now. All right, Small Solutions will not fix anything big, but what were talking about here is this notion that tom perkins introduced, the idea that so many people cling to that helping the rich get richer, the rising tide lifts all boats. Is there anything to trickle down economics that was so in fashion 25 years ago . Few think there are supporters of trickle down economics in its current form. If you look at the median Household Incomes during the will seeession, you they were declining or stagnating. This at a time when the average tax rates were falling. Yes, maybe 20 years ago we could cut taxes and see growth across spectrums. The middle class was growing. The top one percent, the top 20 . We do not find that situation now. What we see instead is middle class incomes are stagnating at the time that the top one percent are growing leaps and bounds, and in fact the majority of their Income Growth is post great resource great recession. That is a problem in a country with this in mobility. We do not have the tools to increase mobility to the entire rungs on the ladder. One thing that is fascinating is a study from harvardberkeley and the last couple of months. It said that mobility is better in some areas of the United States than others. San jose, for example. We should have a discussion, and debate, a dialogue. Why is that . Is it the industries . I think that is part of it. I think some of it is education. I think some of it is racial integration. I think there are a whole lot of things. That is the dialogue we are to begin. You are absolutely right. You will not your income inequality over the next couple of months. That is why we should have a discussion. Point, lonnie, if the evidence suggests that cutting the tax rate does not make the average american better off, first of all, what do you say . As a republican, i suppose, how do you respond . Is part oftax reform the puzzle. It is one piece of it. We have to get beyond inking about what we can do with the tax code, although that is important. We need to think about how we. An enhance our global trade these opportunities are crucial in creating the kinds of jobs that will get people into a situation where they can rise up. And you cannot forget the education system. We really have not addressed that since president bushs overall in the early 2000s. In order to address you have to spend money, and who wants to do that . You do have to spend money. I do not agree with my friend. I think the Obama Administration has actually made some strides on this very difficult education issue. Semple hold on. In order to create education standards now you have raised the bar. How can political officials elected if they are telling to their constituents, you have got to spend . Are spending on unpopular on popular measures, people are all for it. Nela . Issuephanie, i think the is that companies are not doing the same things that they did 20 years ago. Companies used to train workers. Now president obama has laid out a plan to train workers for the jobs of tomorrow. We are not seeing the same great deal policies. We have to figure out what policies will lead to mobility. Ishink the key issue here our trade, our tax system does not support income mobility. This is not a partisan issue. Issue. An economic an issue Larry Summers talked about when he talked about secular stagnation. How do we increase growth . Then how do we distribute the pie . We had some fascinating statistics last week that in some respects, this proved that inequality is worsening. However it is predicated on one notion, that there is redistribution going on. Or whatever to soften the blow of inequality. Yes, the rich are getting richer, but people on the bottom are not doing so bad. Is that something that republicans in general are scared to maintain . Here is the problem. These Government Programs were talking about the extension of Unemployment Insurance these programs mask the reality of what is going on in our economy. Incredible polarization. We are not making the durable changes to create an economy that, in the president s words, is built to last. When you talk about raising the 40 , you are 30 , using Government Action to mask the reality of what the economy is doing. Is it doing . If we do not get the economy right, we will not have mobility. Ofi would say instead masking the problems, what we are actually doing is treading water. Things like minimum wage, extending the earned income tax credit, they are useful. They could help people, that they do not do enough to kickstart an Economic Growth regime. So, we are treading water right now instead of growing, and i think that is the significant serious issue i would agree with. Al . This is not one problem, erik. Is one issue. Ity wage stagnation is another issue. Education, which stephanie mentioned earlier some it is clearly important. Extension of the earned income tax credit, a republican idea, is a good idea. It would be hard to pull together all of these disparate thoughts into one thing. It seems everyone agrees talk to each other . No more bandaid solutions. If we agree that inequality is a problem, the longterm fix requires real action. Hen, nilo richardson, al hunt, we thank you all. Enla richardson nela richardson. When we come back, the clock is ticking for 1000 atms. Time is running out for the owners to upgrade the software, or else. Fornd how long will it take microsoft to find a new ceo . Are you wondering . Or are roadblocks. We are streaming on your phone, your tablet, and bloomberg. Com. And do not forget about apple tv. Welcome back to Market Makers. Im Stephanie Ruhle. After april 8, your atm maybe a lot less secure. Just what you want to hear. On that date, microsoft will begin support for an operating system and the atms will be more attractive to hackers. For more on this looming deadline and what it means to the industry, i want to bring in the ceo of tremont capital, a Consulting Firm that specializes in the industry. Explained it was, exactly what is this issue going on, sam . Thanks. Its a pleasure to be here. To put it in context, about 95 of the worlds bank atms run on operating system. An atm is essentially at its co a regular computer. It has different peripherals. It hasnt been bad rather than at this right. Its essentially it has a pin pad rather than a disk drive. It is essentially a computer running on windows xp. Ending itsill be support of windows xp, which means 95 of the worlds bank atms will no longer receive important security patches and updates, which does create vulnerabilities starting april 9. On earthan i ask, why are so many atms running on software that came out in 2001 . A time when microsoft is ending support . This reminds me of the millenial bob. Were going toasse stop working. It did not, because there was publicity and panic about it that companies around the world and individual users updated, installed the patch. Its this not happening in the atm world is this not happening in the atm world . Is a great question. There are two parts to the answer. Not been has public for a long time. Large businesses still run xp. Ands currently running xp 30 of the market. A lot of people have not upgraded. I think the real commentary here is microsoft is really struggled to develop products that people want. Was considered an extremely successful operating system. It was very stable. Years later, about seven years ago, vista came out, which really struggled to get anyone confident it was stable enough. Windows 7, which came out nearly five years ago, has been good, but usually people wait a couple years before trusting it. Now we have windows eight. I think the reality is the next change will be upgrading to windows 7, but people have not really bought into the notion that they need windows 7. They still feel that xp for ,heir purposes, running atms does the job. What steps should security for the atms be doing running up to april . All the Bank Institutions around the world need to step up their game. I think we have seen in recent weeks in recent months, financial fraud is getting increasingly sophisticated. The im the reality as it is extremely disruptive to the u. S. And worldwide financial system. Doingk banks should be two things. Number one, they need to make sure they are up to date with any possible security procedures that they can possibly come up with. And number two, they really should be running fire drills. Possibleith every scenario that could go wrong in regards to fraud, and be ready to jump on it as soon as there are any, even early indications brought has transpired. Evidence the any banks are doing this . Candidly, i think there is a mixed bag. There are a few different camps of Financial Institutions relative to their atms. Almost no one has upgraded to windows 7 as of yet. 95 of the worlds bank atms are still running windows xp. Im just thinking to myself, why doesnt ncr or a company like that step in with software that does not present the challenges that windows vista and just,s 8 does, you know, keep it , stupid. Why does someone not right a program in lynn asked that tries linux that tries to accomplish it . Its been a point of debate for over a decade. You bring up a great point. There are a lot of smart people out there who have said that maybe Something Like linux should be used for atms. Years ago before everyone move to windows xp, everyone was operatingold os2 system at the atms, which work very well for a long time. Ibm shutdown support. The benefits for Something Like older system is it offered more functionality and opportunity. For example, more sophisticated advertising opportunities. Also, some of the advanced functionality that you see it atms today can be loaded and managed remotely, unlike some of the older atms were you had to physically go out to an atm to make any changes. All right, sam. Another reminder. I am going to keep all my money under my bed. Thank you, sam. The ceo of tremont capital group. You know what it is like about buying shares of a football player. By now, we thought we had the answer to the question who is owing to replace Steve Ballmer . Now another question. What is taking microsoft so long . I would like to raise my hand for the job. I like the civic northwest. We are going to talk about investing in pro athletes. This is Market Makers. You are watching bloomberg tv, streaming on your phone, your tablet, and bloomberg. Com. Now of course you can watch us on apple tv. We have breaking news. At t is reportedly still interested in making a bid for vodafone. This is according to people familiar with the situation. Remember at t has given up officially the option to make a bid for vodafone for six months. It has to make a case for new market regulations. There is was a discussion in u. K. Officeed the to seek information about whether the two were in talks are not. Vodafone shares spiking higher on the news. Higher. Res also moving it is not an announcement by the company so much, as reporting by bloomberg at t is still interested. Vodafone determined yesterday declined to comment on in on at ts interest. Thank you so much. It has been nearly six months since microsofts Steve Ballmer announced he would be stepping down as ceo. Since then, a number of candidates have been floated as potential replacements. Some are already highprofile ceos. So, what to make of this very public recruitment in the Business World . We will turn to peter criss, the a firm from chicago. I feel like we talk about the ceo search every day and nothing is happening. What is the issue . You have this insatiable appetite from the media do not be offended by this for the names of people on the list. When a search like this was public, you get into a disadvantaged position because peoples names are being put on the list. People have to respond to enter queries about whether they are interested or not, whether they allow their names to be on the list are not. Remember, these projects run six months on average and they are clearly trending to longer than six months. We are in the fivemonth mark. Yes, there has been a lot of chatter about this. It has been a noisy search. Theably has added to process. You are making news about a process. Sooner or later they have to pick an insider or an outsider and that to me is where the news is. I do not think it is the medias fall. Shareholders want to know who the next ceo is going to be. It is microsofts fall. Steve ballmer was the one who all the world i am going to be out of here in 12 months. It is microsofts fault. Maybe it is bill gates or Steve Ballmers fault. It is certainly not the fault of the shareholders or for that matter the media who cover, who is it going to be . They want to know who will replace Steve Ballmer. In the meantime, he is a lame duck ceo. Sure. Lets not lay fault on anyone. Lets talk about process. Youe is a question when have a 200 billion Market Cap Company that does not do succession appropriately ok, that is a question. The issue is the search process. That is not in question, i believe, but cause because youre talking about a multi enterprise that looks at qualified internal and external candidates. In the end, the issue becomes how do you come to a successful conclusion, and you can make all the noisy you want about it, but this happens every day. Or 50 ceoat least 40 changes of publicly traded companies in me s p 500, fortune 500 every year. Dozens of companies change ceos every year. Importanties, companies. Why do they seem to be doing it elegantly than microsoft ask . You have to look at the bench first. Then you have to look at the circumstances. Handicap the microsoft search, you have several variables. You have an iconic person involved with the company. The founder. You have an activist involved with the company. Candidates look at that. You have an issue issues that are probably embedded in the direct embedded or is when you talk about the names that have been floated. There are contracts, conflict issues to be involved in this. If you think of the search is a bullseye, you may have to go outside the first or second concentric circles to find candidates who are qualified and interested. Iconic you talk about persons, are you talking about bill gates or Steve Ballmer . Gates. Microsoft says you will get to be under bill gatess wing for a year, he will show you the path. Wouldnt that be an incentive . I would like to meet the guy. I would like to meet him, too. Pokerd like to play against him. If i am a prospective ceo candidate, im more concerned with control of the enterprise. So having looming big brother overhead is too much . If you are going to replace bill gates, michael bell, warren buffett, i think any perspective candidate is more interested in the situation, the board, the enterprise, and the team than they are in the elephant in the room. Not upper jordan statement. But someone like that who can control the situation. Would it be easier for microsoft to find the ceo if bill gates said, you know what . I am going to step back and we will name an independent nonexecutive chairman who will not only supervise the search process, but give comfort to those who worry about reporting, effectively, to bill gates . At some juncture during the process of the search, you have to ask the question. I do not have an answer for that. Im not that close to the board. When you think about this, there has to be a point when the board says, ok, we are five months into a search. We are seeing certain outsiders. Our one or twod insiders. We have a Decision Point as to whether we can continue the search. Changing the dynamics might have an impact. I do not see that as a practical outcome. I am in microsoft, in senior management, watching this not beingd out and am tapped, is this a message i should leave the company . At the beginning of a search like this, the message to the insiders is clear. This will take time. 5, 6, seven months. Do not be discouraged. What is important is you are included in the process. Insiders are the beneficiaries of a long search process. The longer the search, the more it gets a chance to see the insiders in action and a chance to assess them against external candidates to come to a conclusion about whether they are right or not. All right, insiders, we are saying there is still a change. Thank you so much. Peter crist. When we come back, millions of athletes on display at the super bowl. What if you could invest in one of them . That is next on Market Makers. Welcome back, everyone. I am Erik Schatzker. Stock in wants to sell the future earnings of nfl players. The first set for an ipo is the San Francisco 49ers tight end vernon davis. Ere to talk with us that is a great handle. Appreciate that. Ok, talk about this. This was brought up a few months ago. Arian foster was the one who wanted to sell shares first. Got injured. Kind of makes it tough. Isnt that a huge cautionary tale for a guy like vernon davis . Absolutely, injuries are a risk for anyone in the National Football league. At the end of the day, there are different degrees of injury, catastrophic versus normal normal wear and tear on an nfl player. Are rg iii, say you because we were just talking about the redskins and the tigers him some husband loves rg iii. Lets say you are talking about future income. You want him to play the way he did, but he was taken out. Up the that mess incentives in football to do the right thing . I do not think so. Apparently not. One way i am working with rg iii. He got paid either which way. You are really not investing directly in a human being obviously. You are investing in the contract signed with the player that is tied to their future income stream. So, the question from an investor standpoint is rg iii still being paid . In this case, he was. Your revenue stream would still be coming in. Anyone playing in the super bowl . How would they work out . There were two players, arian an injury so we postponed his entry. And vernon davis. How does this work . Is something every prospective investor can understand. You are going to sell 4. 2 million worth of stock in vernon. Is he going to get most of that money . Correct. You are going to get how much . There is a five percent trade. So he pretty much gets right. Does the investor gets 4 million. Is it like a literary advance . No, what the investor is investing in is a tracking stock linked to the value and performance of the contract signed with vernon davis. Gets 4 million bucks and those investors nothing . He owes 10 of every one dollar he earns in the future based on the definition of his brand demo which in turn be security the investors are buying is linked to that cash flow stream. What it is a tracking stock. The investors never see that go that dough. No, they absolutely have dividends. So it is more than just a tracking stock then . Any tracking stock and pay dividends. Asset accrues value, whether it is through accumulation of cash on a Balance Sheet with black Balance Sheet it like a bond . It is not a bond. Tracking stocks were more popular in the late 1990s. It is not as popular now. It tracks a specific assets of a business. So, its more than just their salary, correct . Correct. It is more than what they are paid for being on the field. Endorsements income . Endorsement income as well as potential income post career. When we looked at pantex , there was not a relationship, but where do you stand . We have spent time with the nfl. We have not spoken to anyone directly at the nfl that is hard for me to get my head around. I am not saying they need to endorse this or get up cuts. Get a cut. Why do you not need to talk to the nfl . Why . We are talking directly with the Players Association that works with the players. If this works out, if vernon davis works out, the tracking stock. He does not have a career ending injury and his endorsements evaporate overnight obviously that is what youre hoping for. Where does it go from there . Nfl players . Other sports, baseball, basketball, hockey, golf . Where does it go . All of the above. Our goal is to work with all these brands across the world of sports. Golf announced that jack joined our advisory board. John elway. John elway is on our board of directors. Our goal is to work across the sports world and the entertainment world as well. I like it. One thing. Sure. Allegiances. There is a rule in life that it is hard to work for two masters. If you have shareholders to who you are kind of responsible and first . M, who comes the athletes responsibility is to the contract, not to shareholders. My responsibility is to the shareholders of fantex. Trackingy into the stock, my job is to make sure they are taking care of. In life, you cannot have two masters. I hope that my children are not watching. That is buck french, the ceo of fantex. The fun continues. Do not go away. s you have got to watch this you have got to watch this. A reporter and had just finished an interview with Michael Grimm of staten island. He asked a question about camp finance,ce campaign which he declined to answer. Back to you. [indiscernible] there you go. He did eventually call the reported this morning to apologize, but that was after that, after he said i was doing a guy a favor, you cant fault me. Guyhreatened to throw the over the ledge. Give me a break. Indeed, give me a break. I hope his constituents are watching. Maybe this is not in the category of Anthony Weiner or elliot spitzer, but that is bad judgment. Very bad judgment. We will be back with more into. That is going to do it for Market Makers today, everybody. Great show. About it out. We will be talking fashion. And david beckham. It is 56 past the hour. That means that bloomberg tv is taking you on the markets. To the send you out newsroom where alix steel has more. Thanks, guys. We are driving straight into derivatives with todays options inside. We start with the company that has three ms. Dividend boosta and increased buyback. The strategy here you think sold off with the emerging markets over the last couple of weeks, right . 30 of business in the emerging markets. How does that shakeout . More than that. The stock was up 51 last year. It was an alltime high around 140 and change. See, there is a value component to outperform the market like that. That is what we call in the options world a parabolic move. As youvery strong mentioned, the analyst data from the middle of last year. A lot of forecasts came out on that. Now the question is, what is next . Beyond the fundamentals of 3m, i was curious how much of the state is left in the u. S. . 3m has about 20 exposure to emerging markets. Thats significant exposure. We are only seeing the beginning , even today, with emerging struggling. Ncies what we are looking for is a smart play to continue to expect or believe the emerging markets might have issues. Ok. And tomorrow morning, it may insight into what they see in emerging markets. How can we position ourselves to benefit if there are further negative consequences for the company . Considering they had a huge s plast year, beating the at 51 . Analyst passed target is 145 dollars, then it becomes 160. Valuing today, i know. Are at a premium for other consumer fields as well. I think we we think a lot of upside is already priced in. We are looking at four percent sales growth over the last quarter. What is the trade . My trade is a contrarian view. By the put spread this week. Spread expires friday. I started out with the winter 28 put spread. Andthe spread is cheaper you could raise the strike higher and get the same trade 129 put spread. You can move one dollar higher. You only need to have about 2. 5 selloff in the stock for us to break even, and about five percent selloff in the stock to make a max payout, which is almost around five times. You do not have a lot of time to recover if you want to update long though. I know it is an earnings play, but why not go further out and give yourself more breathing not . If the stock does move to the downside on earning, i do not think the stock moves to the downside later on, so i would like to have this play and stick with it. What about the longerterm options . Almost 145. Of 15 from where it is sitting right now. Is that a longerterm trade . Thinkgerterm trade i the outlook for emerging markets is reasonably good. Yeah. Thank you so much. We appreciate your options take on 3m. We are on the markets in 30 minutes. Lunch money is up next. Money, wento lunch tied together the best stories, it interviews, and business in business news. In company, the unsuper mario. Nintendo profit lunches. Tisch shows us how to make a super bowl symbol. Super. The u. S. Grounds drone. In wild card, how to build a subway. 11 stories beneath new yorks 2nd avenue. Game