Transcripts For CNBC Squawk Box 20140716

He has a near perfect record. At 7 30 eastern time, Marathon Asset Management Bruce Richards is betting big on europe. Coming up at 8 00 eastern time, well get political with former obama chief of staff bill daley. Hes now working for a swiss hedge fund. A lot of them will be talking to what weve been talking about this morning. First, lets get you up to speed on todays headlines. Are you ready for this . Im gary owens. Ive got one of these things on. Its like youre madonna, only i need yes. That wont look at good on me. You already hear some of the buzz . I realize again why we have these on. Theres a huge thing going on behind us. Not yet because its early. But today, tech is the dominant. That was the dominant theme of this mornings stocks to watch. Lets start with apple and ibm. The two teaming up on a Partnership Starting this fall. Ibm will sell iphones and ipads loaded with applications geared at business users. Shares of both companies did rise after hours. I took a look last night. Ive already talked about it with andrew. I immediately said ibm, apple, apple has to be getting the better side of the deal. To lend the right now, ibm needs apple sort of mojo. And i just i dont know if im going to get a deal. People want apps and iphones to be more business friendly. Is that how you do it, though . Cloud. It is interesting because this could have never happened 10, 20, 30 years ago. I dont think it could have happened five years ago. It was such a rivalry and we know kind of when somebody did more or less displace the other, at least in common culture. I think you have to give ibm some credit for being around at all. I think ibm gets a lot of credit for the business side of things, when it comes to consumers, yeah. Shares of blackberry are under pressure, again, as the once dominant player in enterprise mobile faces more competition. Josh lipton sat down with the ceos of apple and ibm yesterday. Hell join us with some of that exclusive information in a minute. Intel shares getting a boost after earnings and revenue beat the street. And the company offered, wow, 33. Upbeat guidance. That should be, if i recall, a new multi year high. Intel says the worst is over for the battered pc industry and just when you thought pcs were going away and it was going to take intel along with it, it finally breaks out from that 22 to 25 range and suddenly were back to 33. That makes one of the analysts were talking to very nervous. The one thats coming up at 6 20 eastern time. Did you read about what the guy has to say . Yes, i did. Hes nervous about where it is that hes happy with what theyve seen and who gave you this information . Our producers. Theres a packet that has all of this . Theres a packet with information in it. That would be a big help. And then theres yahoo earnings missed by a penny in its Current Quarter revenue. Guidance fell short of consensus. Yahoo says its going to pay shareholders at least half the proceeds coming from the allibaa ceo. And it plans to keep a larger stake in the china Ecommerce Company than first expected. Are you squared away . I am. Do you like the madonna thing . The mike . Its okay. You both have your jackets on today. We do. I dont know how long its going to last. Im warping you right now. Its hot in here. I feel kind of formal. Getting an itch . Yeah. This is formal news, my favorite topic. A letter that treasury secretary jack lew has sent to the leaders of the congressional tax writing committee. In it, he call owes lawmakers to enact legislation immediately to shut down this abuse of our tax system. He writes, what we need as a nation is a new sense of economic patriotism where we all rise or fall together. We should not be providing support for corporations that seek to shift their profits overseas to avoid paying their fair share of taxes. In the letter, the Obama Administration backs making inversion rules retroactivity and that would do that starting in may. When they say abuse or whats abusive, is the territorial system in the prohibitively hard rates. Obama and his friends dont want to do the hard work, actually have to compromise, talk on the other side to get Corporate Tax reform done, so theyre going to treat the symptoms which is not going to help. Jack lew is advocating complete tax hes advocating that, but he wants this temporary measure. But weve got two years left and no one in their right mind things its going to happen. I dont disagree with you that we need tax reform. But the more i think about it, im a taxpayer, youre a taxpayer. Wire paying medicare and medica medicaid. People in the other countries are if you want to move to the netherlands, you can sell your drugs to us at the same price you sell your drugs to the netherlands. Theres all sorts of things that we do in the United States that these Companies Benefit from and i do think there has to be some level of economic i think this word patriotism does make some sense. But do you then close the gates on other companies . Can Companies Based in the netherlands no longer do business at the same time . So when druggen miller today proposes zero as a Corporate Tax rate, does that mean no company can ever be patriotic again . No. How could it be patriotic if it doesnt pay any taxes at all . If we decide as a country that we want to have companies in this country and we dont want taxes, thats a rule, thats fine. But the idea that somehow by the way, if you want to tell me the ceo has to move to the netherlands and hold their headquarters there, fine. But the idea is that you can sit here in this country, take advantage of every rule and thats it. You just said if you want to have a rule where we go to zero the rule right now is that its territorial and that you can move it to avoid this prohibitively high tax rate and do better as a business, compete better globally. Reward shareholders. I want everybody to compete globally. You want to change the rules and say no, you cant do it any more, were going to stop the flow of capital, stop the flow of i think theres a true danger that were going to see not just this little trickle, but youll see a dozen, two dozen, Major Companies that that is going to happen in this cup. Why cant you look at that as a leverage point to make politicians change the tax code . Instead of just saying no, you cant do it, thats like treating and once theyre gone, theyre never coming back. Thats like packing someone in ice that has a 106 temperature and not treating the underlying cause. Its not going to pep do you think the patriotism and taxation i dont think theyre synonymous at all. And whether you say pay their fair share, isnt they didnt build the companies themselves, so you need to live in the netherlands. If youre headquartered here, too, and you get then have them move there. Force the ceos and boards to move to the other countries. I dont understand. I agree we should change the law. But im saying in the meantime, when whole thing seems crazy. Have you seen a movement in the white house to put this on the front burner . Yeah. Just happened. Jack lew is saying he wont protect the firms. Then we wont need to do that. So youre fine with 20 , no more territorial, no more tax in both places . Correct. On the 20 , so his operates at 28 and nonmanufacturing 25 . Thats too high. Were not going to split up manufacturing versus the other problem, though, you look at a mylan, theres a large question whether 20 gets you where you want to go. And be the way, youll see what happens with that this summer. Its a chicagobusinessed company. Well see what happens. Competing it globally, can we tax shape holders . I agree with you on revenue. The job creation you could do it. You could do it. But i dont think it would free up the private sector. I dont agree with going to taxes to zero. Why not . Because i think corporations should pay something. Because they drive around on roads . They are people. They are people. They are composed of people. I also think its unreasonable to think year going to get from 35 to zero. I think if you can bring it down to 24 , sure. Its not about these desks and these computers, its about you, andrew. Wed better go on. I think im going to have to take this off. It is warm. It is hot in here. Now back to the big tech story of the morning, oh, did i catch my brazier . Mr. Rogers over here. Yeah, thats right. Im not going to wear a sweater. The big tech story of the morning. Dominating business, josh lipton sat down with the ceos of both companies. He joins us from our silicone valley bureau. Hes not even wearing a tie. Anyway, josh, how was that . Was there a lot of rapport . Well, joe, as you mentioned earlier, becoming friends, apple and ibm used to be great competitors. Now theyre allies. Apple and ibm announcing a partnership to create new business apps. Bring ibms Data Analytics to apples tablets. It is a shot across the bow in the Corporate Market that could have a big impact on other players such as blackberry. I did speak with apples ceo tim cook and ibms jenny remetti. And hes clearly excited to have an impact in the commercial market as it does in the consumer market. We started investing back in 02 in the enterprise features. Through that period of time, from where we are today, were in over 90 of the fortune 500. But the reality is that the penetration in these businesses and in commercial in general from ability is still low. So where we are very good market share, the penetration suggested a huge opportunity here. And i think if we can bring the transformation weve argued that brought to consumers, to enterprise, i think theres a huge opportunity here. I am so happy we did. Now, apple is already expanding into the Business Market by giving away productivity software, ramping up its devices. Apple will have access to boots on the ground. Analysts say this partnership is also a win for ibm. Its one more solution that big blue can offer its clients. Ibm searching for growth opportunities. The companys revenues declined for eight consecutive quarters. Apple and ibm are the winners of this partnership, who is the potential loser . More competition in the enterprise global space certainly some matter. The blackberry, its the only pure play less for investors in this space. They reacted sending blackberry stocks down after the apple ibm news broke. Becky. Josh, thank you very much for. Right now, lets bring in an analyst that covers both apple and ibm. Brian, first of all, what do you think about the deal . I think its a great deal for both companies because they compliment each other in a great way. We call it a yin yang relationship. Is this almost a story about the death of the pc . People arent going to be buying those, they can tie these two together . Yeah. Theres no really really no overlap. And you think about ibm with the great analytics and great cloud and Great Security that they have. And then you think of apple with the software and the hardware. We dont completely trust apple. I think this will away field of approval on how they penetrate the market. I think its Something Like 96 or 98 of fortune 500 companies are using apple information. Is that because people have come in and demanded that they be allowed to do their corporate email on their iphone . Yeah. So the penetration might be low per company, but its essentially most companies allow someone to use an iphone somewhere is in the organization. How is this going to change things . What will happen as a result . You know, number one, at least with most companies today, youre still given a device. And its not the greatest experience. So i think the efficiency improves significantly. We can use an iphone or an ipad. We said, look, 25 of the Smartphone Market is an enormous opportunity. That could be 250, 300 units a year. What you think about ibm overall . Its interesting. We like ibm. Because . Well, number one, we believe in the longterm strategy. Number two, the profit cycle has bottomed or is bottoming. Some of it on the street has the lowest in ten years. 15 have buy ratings. And i think theres a lot under the hood here. Unlike other companies, in the i. T. World, theres a lot under the hood. Its going the take them a little while to realize it. This will help. Who is the big winner in that . In terms of how you think this will happen who is getting in bed with the other person . Who feels like theyre marrying way above their means . I guess thats sort of obvious. I think its politically correct. I see the way youre starting. They both benefit, for sure. This enterprise is another leg to the story. I think its another leg to the story. If 250 to 300 million business smoeps out there and they have a small percentage whats the halo value to ibm, then . Its significant. Ibm is kind of an old world company. They definitely struggle with revenue. So being attached to the core pm on campus is if you change your rating for either company as a result of this deal . We have buy ratings on both. But i think it provides some new opportunities for those companies. And i think thats whats exciting about this. Sorkin, thank you. So you stopped the inversion, right . But with your Law Companies still build plants over there, they still invest, they still are domiciled here, but they still are induced to move operations over there and hire foreigners and build plants over there. Why not fix the whole thing . Im trying to fix the whole thing. No, youre not. It doesnt nothing to it needs to be in the larger contexts of if you do that, youre most solving any of the expansion overseas. It is still going to be happening. Now you make another loss to let them do that. If you fix it, facilities get built here, jobs get added here. I want everything added here. Why this patchwork . My anxiety is nothing is going happen and well lose these fortune 500 companies and its like 110 . But the problem of Corporate Tax reform. But the problem is going to become so acute and i almost think you should let the problem because it puts pressure on lawmakers to deal with the underlying the problem with green jobs here all the expansion here. I would do it. Thats the patriotic effort president. Paying taxes and taking it out of the incorporate cofferes and out of shareholders doesnt help anyone by putting it in a lessificive place where capital is treated. Its not good to take money out of the private sector and put it in it seems backward and somewhat unpatriotic for a u. S. Company thats benefited from you didnt read hands. To then all of a sudden its your patriotic duty. The Supreme Court says its your patriotic duty to pay as low as tax rate as you can to look at our forefathers. Their entire mentality its to leave the country. Its not Encouraging Companies to leave the country. But thats what weve done. We are. And i would agree with that. But youre arguing for a piecemeal fix, hes arguing for a broader one. No, im arguing for a broader fix, but a shortterm deal, too, until and you cant even sell stuff abroad. If youre going to leave the profits over there and or dont even sell anything over there. That will solve all your problem down there in texas. Brian, thank you for coming in. Coming up, writing big checks to uncle sam. When is the last time you wrote one . Just recently, as it happened. Dragging and screaming. Meet the Pension Fund Manager that every hedge funds wants as their investor. But before we do that, tech giants with different game plans. Theyre rolling out Quarterly Results. Yahoo and intel, how many is alibaba helping yahoo s fortunes. And is this worst over for the pc industry . Thats next here on cnbc. Were doing it all from new york city, delivering alpha, the big conference coming up today. Developers are all about speeds and feeds. Its all about latency. Its all about how fast does it run. I often sit with enterprises who ask me about how Mission Critical and hows the performance of the cloud. And i tell them, if you can make gamers happy, you can make anybody happy. Speed is made with the ibm cloud. The ibm cloud is the cloud for business. Welcome back to squawk box. A number of tech stories out this morning, it has been two years since Marissa Mayer took over yahoo . She says shes not happy with the companys latest results. Jon fortt is joining us on set to discuss these earnings. Lets talk about yahoo and intel because we have these cool mikes on. I feel like were in a boy band except becky, obviously is it in sync . What kind of boy band are we talking about . Yeah. I think so. I said madonna. Why didnt you think of the guy that changed your life . M. J. Well figure out who is the best dancer later, but yahoo bad results with an asterisk. Intel, good results with an asterisk. Starting off with yahoo . They had a penny short on eps. A little light on revenue. Two things that Marissa Mayer pointed out that didnt go right for them. One was premium advertising. They werent selling it. The other was the ad manager platform which is supposed to help them get advertisers borrowing in a big way. And in a way, yahoo is wanting to stand still. Theres a pc display ad situation isnt looking good because overall, pcs are still eroding, particularly consumer. This as pcs are doing okay. But those arent the people who are really using yahoo . The amount of advertisement was up 24 , but the money they brought in from that advertising was down 24 . What happened . Theyre selling more ads, but people arent clicking on them or they cant get the same prices they were . Thats a big part of it. Theres a couple different types of advertising, generally speaking theres programmatic, which is the machine selling the ads and those prices get driven lower and lower. The premium ads are what really bring in the high margin dollars. Those are what yahoo isnt selling, as well. You need strong relationship toes fail. They need a failed leader who is a little more established. Those are some of the areas where they need some strength, not just machines. Shares were up, though, because of what they said about alibaba . Yeah, shares are up. They were going to have to sell 208 million shares. Operationally, how long does Marissa Mayer have in the Actual Company . How long do you think she has to get the operational side of the company around . The honeymoon is over, but she has the board configured in a way thats better for her. Dan loeb is off the board. She has a pot of money now to work with. Steve jobs didnt turn that around in two years. Theyre going to stream concerts on their live stream, theyve hired katie couric, theres all sorts of media pieces on one side and then theres the advertising piece on the other side. Some people would argue its spaghetti against the wall. I dont know if its spaghetti against the wall. I keep looking back at appear apple as an example. What steve jobs did with mac, that was nice. But it was laying the important groundwork in that core business of maces versus pcs. But that didnt ultimately move the needle for them. Its not the transform yagz move they have yet to make. Okay. Spaghetti against the wall. You gist flick it against the wall and it sticks against the wall. I know the expression. Thats not spaghetti. Lets check in on intel shares this morning. The bigger story, what does intel say about the future of the pc market . Pcs arent gone and intel makes the cuts of so many other things now at this point. I guess we saw people that were bearish at 23 missed that, right, cody . Well, yes and no. Right now, intel is benefiting from a temporary blip in growth in the pc market. Youre getting the benefit from the expiration of windows xp support thats driving enterprise upgrade. But we think that lasts a couple of three, four quarters. So intel is debt prattly trying to get into smartphones or tablets. What was it sounds to me like youre trying to justify missing this move. Were you long from what was your rating at 22 . No. Weve been short intel. From 22 to 34 . Youre begging right now. My point was theres been all these upgrade cycles and reasons to like pcs over the last five years and nothing has ever moved intel above 25. Suddenly its above 25 and youre attributing it to the most recent upgrades. You dont think theres anything more going on here that youve missed . So youre getting it goes back to 24 then . I definitely say that. It would be one thing if it were 25, 26. We havent seen intel at this level since the tech bubble. And if youre pricing intel at levels we havent seen since the tech bubbles and you have to say that its base market is strong and healthy and it simply isnt. The market its trying to get into are dominated by Companies Like qualcomm. Everything youre saying is right, but the challenge is its in a pc market. First of all, intel said that they see the enterprise refresh continuing at least through the end of the year. They havent forecasted the last year yet so it might continue. Then theres the question, yes, the pc market is deteriorating. They have this business theyre trying to build up, a number of other things theyre trying to get going. If they can build those and do a little Financial Engineering for long enough, then they could perhaps end up avoiding the decline that you would expect based on the weakness in the consumer pc market. And i think its too soon to say quite yet whether that happens. If they hit all of those things, they could avoid. Theres one scenario where they actually maintain a higher margin, fill the fab space and return to some level of growth. Yet the stock is pricing in the absolute positive scenario. We believe theres a multitude of scenarios playing out. A small piece of revenue buying their way into smartphones and tablets. Theyre spending 1 billion. Theyve got 51 million of revenue for that billion dollars theyre spending in smartphones and tablets are simply not the Growth Market it was a year ago. So you have all of these things that have to replace a pc market that is in decline and right now the stock is pricing in a very, very temporary blip but recovery from the Enterprise Market that is simply not sustainable. Having watched the stock for so many years, its had reasons to pass. Theres a lot of outstanding shares. Its hard to move it and there were times when they boosted revenue guidance. I just cant believe all that money is so dumb. Im not looking at fundamentals, just the way these things work consensuswise. Its weird that its suddenly in the stock at 33 all because theyre being fooled by whats obvious to you. Well see. And fundamentals never jive with or jive with either one. Not in the shortterm, but they do in the longterm, joe. All right. If you knew nothing else that this company was going from a monopolistic system to question of qualcomm, is it worth more or less . Its worth less in a competitive environment based on the system of its history. Qualcomm must be a much bigger market cap than intel at this point, right . Theyre about equal. Not yet, but theyre very, very close. All right. All right, guys, jon, thank you. Cody, thank you. Coming up, following the peaks and valleys of the wall street industry. Plenty to discuss next. But first, Quarterly Results from blackrock. Earnings up 4. 89 a share. Handily beating the street by 43 cents. Revenue topping consensus. Were back with a lot more in just a moment. Of the services yr vehicle needs. So prepare your car for any road trip by taking it to an expert ford technician. Because no matter your destination good maintenance helps you save at the pump. 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And there are no networks. You do your pushups today . Prepare to be amazed. [ male announcer ] dont wait. Call today to request your free decision guide and find the aarp Medicare Supplement plan to go the distance with you. Go long. Welcome back to squawk box. In global news, israel targeting the homes of senior hamas leaders. Martin joins us from tel aviv. Israel announced it attacked the homes of four Palestinian Hamas leaders in dpaz, destroying them while the leaders themselves are in hiding in gaza. The israel has had no success in targeting the leaders of hamas. Theyre so deep underground that theyre unreachable, so theyve chosen their homes instead to attack. At the same time, israel dropped leaflets and flyers to towns in northern gaza saying evacuate your homes by this morning because otherwise youre putting your lives in danger. We intend to bomb those areas because thats where rocket launchers are being fired from. But unlike the first round of warnings, when about 17,000 palestinians did indeed flee their home, in this latest round of warnings last night, today very few palestinians have left their homes. Hamas is calling on the them to stay in their homes, saying its more difficult for israel to attack the area and to attack your homes if youre in them. So thats in a sense challenging hamas, challenging the israelis, saying you go ahead if you want to kill people, that would be the price of attacking those areas. Palestinians have launched about 25 rockets at israeli targets today. Theres been no significant damage and nobody hurt and theres been a continuation of israels heavy rockets fight into gaza. All this to a background of a question whats happening with that ceasefire proposal . So which is a bit yesterday, hamas rejected. Apparently there is some activity going on. The british Prime Minister tony blair was rushed to cairo. The Palestinian Leader from the west bank will also go to cairo, maybe to turkey where he may meet the political leader. So there is a lot going on in the diplomatic world to try and resurrect the possibility of a ceasefire here. Yet again, i have to repeat that tired phrase, what will come first . A ceasefire or an Israeli Ground invasion . Because israels army is on the board were gaza, is waiting for the order to go in. Its clear the Israeli Government is not one to do that because it would involve significant increase in loss of life in gaza in addition to the threat it poses to the israeli army. But that does seem to be the choice at the moment. A Ground Invasion or a significant increase in israels attacks on gaza or a ceasefire. Were just waiting to see what will happen in the next day or two. Martin, thank you very much. We appreciate it. Getting back to our delivering alpha conference this morning, our next guest says Corporate Pension funds and endowment funds have been looking at the wrong places to deliver investors and essential essentially lost a great opportunity. We get to get into all those issues, but before we do that, you have been sort of the lead guy at the journal on everything pimco related. Including that big story yesterday. Can you tell us what the heck is going on inside that firm. So its a big firm, manages about 2 trillion. And the return has been down. And its always been a difficult guy to work with and work for. That didnt matter when returns were good and inflows were pretty strong. Now inflows were strong, people flying because reference having been so great. And the tension is really rising and impacting things. Now it continues to be a strain on the firm. We had Paul Macaulay join us yesterday and we talked with him about the story. His point was when you look at the outflows, theyre measured differently than performance and maybe with the performance turning around, that will catch up when things turn around. That could be. So far, people have continued to pull money out and part of it is because they were worried about bonds and, you know, maybe Interest Rates go up next year. But part of it is bill gross hes the heir apparent and theres still conflict in the firm. What is this Company Going to look like in the next six months to ten years . Are we going to continue to hear stories like this . On the trading floor, the morale is much better because bill gross has been better to traders, hasnt been screaming at them as much and has been delegating a little bit. Hes never given them all the ability to invest like you could have. So on the trading floors, things are better. Between bill and the business side, report sg suggesting theres still a lot of tension. He has to find an heir apparent. Hes 70 years of age. His clients want to see that, if its internal or not. Getting back to the hedge funds, Pension Funds, hedge funds have clearly not outperformed the market. They have not outperformed the s p. Private equity has. Where does that put the world of hedge funds . Its a weird place because, on one hand, money continues to flow into the business and it doesnt show any sign of stopping. On the other hand, theyre producing less alpha or value added than i can remember in a decade or so. My argument is that they manage much too much mope. As a result, they dont feel much pressure to outperform. Theyre like mutual funds now where if you get close to the index, management and are so high, they dont have to outperform. The top managers tell me they have to push their guys to take on more risk because they dont need to. They get paid so much. Im looking at the distinction between the numbers you provide, 114 on the s p versus 75 in the hedge fund world. Maybe you could say thats protecting you on the down side to some degree, but are you really . Its worse than that. Over the last kind of since 2009, thats just when stocks got cheap. Thats when institutions, Pension Funds, endowments start shipping to other alternatives at the very worst time. You could argue it now with stocks more expensive, its not a bad idea to be in alternatives. But they got in at the worst time. It used to be investing in a Big Risk Fund was seen as risky. Today, thats how you keep your job. Im going to be in a Big Hedge Fund and not u. S. Equities. The u. S. Endowment has 16 of its portfolio. Private equity, thats the place to be inspect. A little better performance. Right now, stocks are more expensive. Its the place to be. Thank you. How about the lineup . Strong, very strong as always. Even europe . Yes. You should who should be impressed, whats his name . The consumable, allen murray. Yeah. He just you want to hear some good ideas, hopefully well get some good ideas today. Thank you, greg. Sure. Im going to throw spaghetti up against the wall. I do that to see if its done, andrew. Its not the same. Its a different one. Coming up, the man responsible for investing floridas pension money. Dont forget, treasury secretary jack lew is going to kick off our delivering alpha conference at 8 30 eastern. Its going to preempt squawk box. Hes the only guy we allow to do that. Dont miss his speech on Cyber Security and his thoughts on inversions, right here on squawk box. Still to come this morning, the headlines about the nations pension crisis overblown . We put that question to the man who runs floridas program. And at the top of the hour, lee cooperman, delivering alpha rock star. More squawk box right after this. First day of my life by bright eyes youre not just looking for a house. Youre looking for a place for your life to happen. 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And the majority of people were clear or almost clear in just 4 months. Humira can lower your ability to fight infections, including tuberculosis. Serious, sometimes fatal events, such as infections, lymphoma, or other types of cancer have happened. Blood, liver and nervous system problems, serious allergic reactions, and new or worsening Heart Failure have occurred. Before starting humira, your doctor should test you for tb. Ask your doctor if you live in or have been to a region where certain fungal infections are common. Tell your doctor if you have had tb, hepatitis b, are prone to infections, or have symptoms such as fever, fatigue, cough, or sores. You should not start humira if you have any kind of infection. Make the most of every moment. Ask your dermatologist about humira, today. Clearer skin is possible. Welcome back, everybody, while many states are facing a looming pension crisis, florida has been dubbed the poster child when it comes to doing things right. The funds assets are up from 177 billion in april. It is 86 funded, it is well above state and local averages. So what is florida doing right and what could other Pension Funds learn from doing their management right now the Florida State board and director and chief investment officer, ash, we hear this again and again that there is a looming pension crisis in this country. Is that right . Is it overstated or not . Well, think of it in terms of a mortgage crisis. There is a mortgage crisis if you owe too much money and you cant pay it back. If you have a reasonable morning and good funds. Some Pension Funds have been responsible with benefits, with paying for the cost of their systems and making prudent investments. Others havent. Those who havent, the errors have been made primarily in two areas. First, having benefits that are excessively rich and in many case were put in place during good times and second not properly funding those benefits over time and its that area, the not funding that has been the most extreme source of problems. Are we going to see a wave of detroits . A wave of detroits . Detroits is a very unique situation. Fortunately and unfortunately. Fortunately for detroit. Unfortunately for the rest of the company like detroit. There will be a lot of handful of states that have serious issues as well. Im assuming you are talking about new jersey and ill toy. The usual suspects. Do you think this is a situation that can still get come under control if it was taken into account . Yeah. Its not a complicated form louisiana it requires three things, first of all, reasonable benefits. Many states have done benefit reforms. Oddly enough, tear benefits afterwards came to levels that florida has had since the 70s. We did additional benefit reform on top of what we had before if 2011 to reduce costs. What does that mean . What does somebody get in new jersey or illinois they dont get in florida . One huge example is a number of pension systems include Postretirement Health care benefits, florida does not do that, we provide a modest subsidy for retiring insurance premiums. We dont have a separate health care. What a concept. That might work country wide. They dont want to try it. Let me ask you. There is about florida, no income texas. Where the hel does money come for everything to fund down there . From the good people of new york and new jersey that visit us and pay sales tax. The sales tax. We constantly argue when there is no evidence that if you lower taxes that you get more revenue because people come there. Would you say the verdict is unequivocal or is it just your weather . Why are people moving to florida . I think we offer a number things. A, we got a great tax environment, b, we are business friendly. Do you make up for what you are not losing because more people come and pay other taxes . I think we can if we structure it smartly and historically we have done pretty well. Bus that could be a blueprint for more national discussions. Take a look at job growth. Florida is right out front. Leading the witness. Thats what im driving florida has no income tax and they have, youve got less budget problems than most other states. Right . Its good to be a growth state. Thats not supposed to work. In texas, they say, well, texas, but they have oil. So they always write off its not policy, its not low taxes that cause companies to move there. The left will say thats not why it is. But it is. Its a lot of things. Thats a part of it. Its education, et cetera. Maybe you can come guest host soon. Id be happy to do. If you get up to 200 become. Quarterly results of bank of perk coming up, the number. Stay for a second. You go to the take your mic off. The numbers and instant analysis. The man of the morning the hottest of the hot hands taking part in todays conference. Leon coopermans delivering alpha stock picks has been fear perfect. Next when squawk box returns. [ music playing ]. Welcome back to squawk box this morning, we are coming to you no frrk city. We have an exclusive deal news for you this morning. Time warner, not Time Warner Cable, time warner has initially rejected the 80 billion formal offer that they received last month. What from 21st century fox, rupert mur docks murdocks company. This has been going on the past month. What we can tell you is time warner received an offer last month from Rupert Murdocks 21st century fox for 80 billion and has now formally rejected that offer. A couple tlengs to tell you about whats going on. The offer for 85 a share in cash and stock. Thats what the sources are telling me. We can also tell you that as part of this, a formal letter went out with the offer if late june as part of that and said at 21st century fox to get the deal through would sell cnn to appease regulators, given they own fox news. The rupert would not be the boss of cnn . Rupert would not be the boss of cnn. 21st century fox met with jeff bukus if early june. They had some conversations. Then 21st century fox approached with this new offer at the end of the month and received a terse letter in july. All of this putting time warner in play. There has been a lot of speculation that time warner would remain an independent company. Despite the rejection, i am told by people familiar with the matter that Rupert Murdock is determined to buy the company repeatedly pushing to do it. A couple things specific to the transaction, itself, 85 a share in cash and stock, currently, given the way the stock has traded, that deal worth 8630. At the time the deal was proposed, it was worth about a 25 premium. A 60 in stock. 40 in cash t. Company would raise about 24 billion in financing to pay for the transaction. In its letter to time warner, i am told that fox seld they could ring at least a billion dollars of synergys from the company, if not more. Also, one potential Sticking Point and i have been told that this could be an issue. The stock that fox is offering nonvoting stock, time warner, of course, not controlled by any particular family or majority holder fox is accepting if they accept a deal like this nonvoting stock t. Shareholders, very similar. 70 of time warners Shareholder Base overlaps with foxs so you will be seeing potentially even just the disclosure of the fact that theyre talking about this, you could see pressure. Andrew, i want to point out one thing, while you have been talking, the stock has been reacting to it. It was trading well below 72, can you see right now, its already up 14 on that news, but what you have said that was key is runner murdock is determined to own this company. Soitati so theyve shut it down. To be clear i am not told he is planning to launch a proxy fight just yet. I am not told there is anything more to. This whether he will raise his bid, with eden know. I am told they did get this letter in late june. Thats the board of time warner. They discussed it. Then they rejected it. What i am told is literally a several sentence letter back saying no thank you. We should also tell you just last week jeff bukus the ceo of time warner was asked about speculation he could one day merge with actually google or in this case 21st century fox. His response, i know nothing about it. Whats the he told variety magazine. When you think of the combination of these two companies, its remarkable the colossas. Fox news the cable channel, tnt, premium Cable Service at hbo, which is very attractive to fox. All the movie studios. What would they make them sell, you think . Your father is an antitrust lawyer. Everything goes . I dont know. What i am told is in the letter the Board Members that time warner received, they said they wanted to keep all the brands, all of the creative people and the talented managers. They said all the cuts that they were thinking about pursuing in come off back sales distribution. So theyre trying to say we want to keep Warner Brothers and fox, fox search lights, all the different studios and by the way you think of the sports. The end piece of this. Is it weird they specifically said we wont keep cnn . I think by putting that up front. I am told the Board Members of time warner received that letter and that was right if that letter that said up front we will di vest and try to tell cnn. Did they not have a central buyer . Arguably, cbs has been long time rumored as somebody interested in that. Disney could want to have cnn. Univision is out there. The dominos of this type of transaction could put into play would be remarkable. One issue on the sports, time warner through tnt, nbs. They have the nba, some major league baseball. A bit of the ncaa. Fox trying to build out fox 1. You think comcast trying to buy cable. Content may be very powerful. The same thing with directv, at t. All of a sudden it throws everything into relief. There is as exciting as time warner aol. Time Warner Google makes sense, you need a new age, a new Media Company to converge time warner with. Thats going to work. This all in part is related to fed policy. We have our guest host here. Valuations in the market are extremely low relative to Interest Rates. Whereas after today borrow money at 2, 3, 4, 5 . Can you buy stocks back. Those are overvalued, according to if we get her on to do a buy or sell segment. She will tell us which stocks to buy. Do you think jeff bukus at this point regretz spinning off time inc. . A spinoff makes this possible . I mean, look, there are two things that happen, 21st century break up their news for print division. This clearly makes this business much more attractive. I should tell you both sides have hired advisers. Citigroup is now sources tell me working for time warner. I am told that fox is being advised by goldman sacks. Where its been, it happened a month ago . So the original approach in early june. They had a meeting there were talks back and forth. They received a letter late june. Then i believe that the board of time warner in early july, i think before july 4th. But i dont want to say that that date is accurate. But its been pretty quiet. I will say this, you know, just last week, there was speculation around google21st century fox, there have been names around what happens to the future of time warner. And all of these people were out in sun valley. All of them were at sun valley. Thats when they approached jeff bukus about the rumors and speculation on that issue. So i dont think you can change it arbitrarily. Really . You dont want to do that. You got to move. We have a slowly growing economy. Companies want to grow. Theyre acquiring growth. The synergys they get to improve the bottom like. This isnt your little merger, i felt the earth move when you started. I hope you are right. I know you are. I felt this sec move in new york city. Didnt you feel it . Lets take another look at the stock chart again. Okay. So its up more than 12 . We dont have it. We can generally cat. Figure out 9 afternoon the outstanding. Is that a date . Is there is possibility about another brond . Would somebody else jump in. Somebody who has unlimited pockets and say we want to do this. Its interesting. From those shareholders. If you bring out synergys and you have to admit. You have to think, there will be pressure to do some type of transaction. What percentage of run Rupert Murdock thinks they reowe politically, when he bought the journal, people that dont want to agree, they write it off to Rupert Murdock. Thats what cnn was thinking. That might move them somewhere close to down the middle. I dont know about that part. Well see. I do think by coming to the table up front saying we will di vest cnn. I think that will at least make it more palatable from a regulatory perspective. I dont know if anyone makes their final best offer. The conversation is just beginning. The best way to sell yourself is say you have interest. Right . So how different is the company as it stands right now from getting back to the what was time warner . There were a couple other pieces back then it was valued at what . Do you remember . Oh, geeze, thats a great question. Because it was 100. It was like aol is inflated beyond belief. The destruction at shareholder value, the greatest destruction at all in the history of a shareholder value. Its a different time warner now. Totally different. Completely different. Warner brothers, turner from the turner broadcasting days and aol. Aol was a different business from time warner. Its a different kind of deal. It makes a lot of sense. No question about. That its a business he knows and understands. Hes done a great job of the things he acquired. I would look at it differently. Anybody leading a panel today, will you email them that this is happening . Dont you think, its a good topic . Zbe. We are in new york city. Where is the time warner . Its that way. Walked agree cross. Columbia circle. Right down there. You can get a horse and charnlg. They can throw, almost hit each other from where they are. Go have lunch in the whole foods downstairs at time warner center. Guys, lets bring in another voice on us on the squawk fuse line is larry haverty. You heard what they have been reporting. What do you think . I think, becky the industry is ripe for consolidation. There is a lot of Free Cash Flow here. There are a number of people producing content. These are at the end of the day increasing concentration and probably the most attractive major media business, which is Cable Networks. I doubt that there would be antitrust considerations and we actually thought internally that things would happen in this sector. Mario has talked about it quite a bit on your network and this is not what we thought. This is the two elephants playing in the jungle. But i think this is the first salvo in basically a wave of media consolidation and i dont think the fact that its happening is a surprise. I think the fact that its happening to companies of this scale and time warner, which has been a very high performing company. Its made our clients tens of millions of dollars. So this is not a loaded laggert, if you will. This is a high performing company. The bid indicates the value of content i think now and Going Forward and again i think the bid pay reflect the transitory nature of the low Interest Rates that inevitably will finance the transaction. So this is very, very good news for the media sector. Talk to us from a pricing perspective, though. The offer on the table has been rejected. 85 a share. We should say as of yesterday when i was doing the math this morning, based on yesterdays prices, the deal would have actually been worth close to 86. 30 a share. Is that the right price . What type of premium do you want . Thats about a 20 premium, 25 apparently at the time they made the offer. I think if you look at it sim plistically, you are dealing with top tier Cable Networks and my view is the top tier Cable Network is espn which is worth somewhere in the neighborhood of 18 times running rate cash flow. This would value these networks, which i think are a notches below espn because of the immediate value of the espn content and the contract kris. I think the you are looking at it as private market value, we tell you these networks are worth in the area of 14, 15. I think we are in the area of 12. 5, 13. I think the price, this is likely to happen, its going to go to 14, 15. Now, thats private market value. Do you see somebody else jumping in . Pardon . Is there another company you could imagine jumping into this. I really dont think the disney company, which would be the only company to scale to do this is likely to do that. The disney company, as you know had a little affair a number of years ago with the hostile tender offer and i just dont see that culturally being likely. Its not the way bob eiger what do you think of the regulatory issues . I dont think there is likely to be a rec latory issue. There is a lot of money available, andrew, to finance films right now. You see a film in the theater and before the credits start rolling, there are four or five symbols up there. The money is coming from out of the woodwork, landscape has established a new studio. I think there will be four or five major competitors there, depending on how you keep score after this and heaven only knows how many can get started overnight with the technology. You dont need the physical studio and the cable noivgs. Its a very, very fragmented business. These are two large firms. But there is no dominant mark power and with the distribution part of the world consolidateing, at t, direct tv, its scale verse scale. Do you think thats a part of the reason, larry . You need monsters to fight monsters. Larry, let me ask you, are they owners of both these companies . Yeah, were very large owners of both. Were large owners of the media industry. We like industries, becky that are consolidating. We like businesses selling below market value. I told you what we think the private market value of these businesses are. These businesses have been in the last few years radically enabled to the Positive Side by tech following. The ability, you know, this hbo anywhere, which jeff bukus coined the term is a very powerful mechanism and, you know, i find myself and everyone else watching content. You see words like Binge Viewing viewed by the oxford dictionary as one of the most important new words in the last few years, so the world has come around to appreciating content and these are large content owners. Larry, andrew made the point the shareholders of these two companies is very similar. Would gamco, gambelli funds be the ones to push them aside on the deal . We are past investors in this, becky. I think marios view has been there should be consolidation in this industry. Hes had other people he thought were more likely to go to the dance, but, you know, we think these companies are very well managed. We think the board of directors would probably do the right thing for the shareholders t. Board of directors and these companies should understand the favorite consolidation. I think they will eventually win. Its like a 9 billion move. The stock on and rues. So you are sure . I get nervous. Congrats. This is a huge deal. No word on whether the kind companies are moving to australia as an inversion . I believe Rupert Murdock is now a citizen of the United States. It clearly said in the memo, cnn is gone, bill mahr goes to the home and Garden Network as well. Well, there will be a lot of material for samberg val in this, andrew, its very clear and im looking forward to listening to john olivers comments as well. These people are much more worth. Rupert murdock is one of the finest men on the planet. He agrees with everything rupert said. Do you see any type of economics . You know, when people have tried, when Rupert Murdock tried to buy some companies in the past, im thinking the wall street journal, others at least initially have almost virtually always pushed back. Right. I think that i cant really speak for rupert. Obviously, there are a number of things that can be conject closured from a political standpoint in terms of what people will or will not do. Thinkty esend end of the day, this is about economics, scale in Cable Networks and this is about Technology Everyone ableing this industry and making assets worth more than the stockmarket afforded the value. Whether this will be the transaction thats allow politically. We have to obviously. Is it possible that three months from now, we could be talking about time warner as a stand alone company . I should say i am told repeatedly by the way by people involved in this process time warner and its boards determine they would do better on a stand alone basis, they can do better . I dont know if you think thats true. Thats what they have determined at least internally within that force. You know i think thats a noticeable. If you think outside the box. Here is sony sitting in, in japan and the entire market value of the company is in the neighborhood of 17 billion and they own a very successful video company, a very successful Music Company and film company and if time warner, which is basically a collection of Cable Networks and the studio is worth 85 a share, there is a little value sitting in tokyo and then have you the situation of and via com and cbs and what is going to happen there we are very fortunate i think coming. We have a lot of seats at the table. But you are just in an industry where there is going to be consolidation and how it plays out is in my opinion at this point unnoticeable. That will play out i think is imminently noticeable. Actually, with rates where they are. All right. Stay with us, larry, one thing we do know rupert is 83. Life begins at 80. 83 is the new 53. Getting it done. Did cnbc break through . I was doing work. You can call it yours. Its all of yourself toget r together. Coming up, more on the news ought morning. Andrew ross sorkin and cnbc reporting they made an 80 billion takeover bid for time warner. It was rejected first, banc of america just out with earnings, Second Quarter profit came to 41 cents a share. That was well above stills revenue beat slightly. Well have more squawk box live from the delivering alpha conference next. Welcome back. We have breaking news, time warner accepting a bid from Rupert Murdocks business. There were meetings between both kansas in june we can report on. Now a formal offer that went in in late june as part of that transaction, 21st century proposed selling cnn to appease regulators. We will talk about all of this and a lot more coming up on squawk box we will talk to media analyst in just a moment and leon cooperman is here. We will be delivering live on delivering alpha in just a moment. From 2000 to 2011, on average 17 manufacturers a day shut down in america. Theres no reason we cant manufacture in the United States. Here at timbuk2, we make more than 70,000 custom bags a year, right here in san francisco. We knew we needed to grow internationally, we also knew that it was much more complicated to deal with. I cant imagine having executed what weve executed without having citi side by side with us. Their global expertise was critical to our International Expansion into asia, into europe and into canada. So today, a customer can walk into our store in singapore, will design a custom bag and that customer will have that American Made bag within a few days in singapore. Citi has helped us expand our manufacturing facility; the company has doubled in size since 2007. If it can be done here in san francisco, it can be done anywhere in america. Welcome back to squawk box. 21st century fox making an unsolicited takeover bid for time warner and that transaction and deal has been rejected by the board of tomb warner, sources telling us that came in late june and rejected in early july in a terse letter. We have an analyst with us. We will talk to him on the phone right now. 85 a share. Does that make sense to you, tony wible. You bring 21st century on the tevent to hbo content to hbo, the Turner Network and all the other core Cable Networks there. So this is one of two deals we slagged about two noneths ago in a note we did. Etwhi there is a huge benefit here. What is the right number for you . I think you got to go to at least 100. Lets talk through the regulatory issues. My understanding is in the letter time warner Board Members read in late june. They said they would sell cnn or not . I do. I dont think there is anything that says you cant own two networks. I think there is a point of politicians being uncomfortable with two out of three being owned by one company but getting rid of the dynamics, changing around the news and fox being the stronger of the two networks. In terms of saving, i am told that letter suggests that they believe they can ring about a billion dollars possibly more does that number seem right to you . They stressed in the better they sell brands, they wouldnt get rid of networks. They want to keep them. They were going to keep, you know, fox search lights and Warner Brothers and all of the different pieces, does that make sense . Yes. This is going to be more about revenue an top line synergy. The story about a retransmission. That is kind of the fox local new yorker going into your cable operator, asking for more money to keep that access to prime time content. Thats where you will see the upset. Those turner has to talk about. They will get an analysis. There will be a big stepup in 2017. Should it be an issue . I am told one of the issues the time warner board raised is this idea the stock portion of this transaction will be paid in nonvoting stock. Okay, there are two classes or shares when it comes to 21st century fox . Yeah, im sure thats one of the considerations. I think the beggar one is the amount of conversation theyre getting for the value they bring to the table. And when you think about the split, 24 billion theyd have to raise in financing, do you bat an eyelash . Do you say its fine . I am told there would be no financing contingency. I think from a financial standpoint, if your stock is going down that route. But i can understand why youd want to have a little bit of a m mix. I think we would be better off using the instruments. On the analysis on 144 media merge you are combinations using stock or all cash transactions, what you end up finding is the transparty and trading multiples leads to these two companies. This is a remind in terms of i make two observation, one is Rupert Murdock is a visionary. He operates on a view. Price is not going to stop him. This is his opening salvo. Look at what he did in terms of the ultimate phase. I think you can rely on him to come back. Price would be relevant to his vision in terms of a billion or two. Hes not blowing it. The other point i will make, remember on this program, i forget the year, maybe 94 or 5, martin davis, who was running paramount and redstone raised their hands in unison and said the marriage of paramount and viacom was made in heaven and would not put us under. I said, bull. I bought a lot of parra mount sure enough Barry Dillard slowed up. The three were overbid. This is a crown jewel. This can very well be contested in the opening salvo. Let me ask, are there interloeppers that would be interested . The other zwe sort of the media dominos, what would happen after this . Would others feel forced to do something similar . Let me go back to that note on consolidation. I think if you are looking for the incremental trade, you will get more on the front. Time warner, i look to say, who is possibly next there are two flagged. One viacom the other discovery. I think there is a Strategic Value looking at the discovery. I this i the strategic and financial value of having a pbs merge with the viacom, the reality of these distributors, whether it be at t, directv or comcast, time warner are getting beggar. You will just be a continued Chain Reaction and balance of purchasing power on both sides. Okay. Tony, we want to thank you for helping us through this, this morning. We will be continuing to cover this story all day. I saw a 20th century fox movie yesterday. Dawn of the apes planet of the apes have you seen this yet . I have not. I am focused on law and order reruns. Nbc property. Thank you. The eight movies before guys if rubber masks. This is like real animals ceasar won andsome ape to tell you the lead ape and koba the bad guy is scary looking but awesome. All right. When we come back, one of the rock stars of the delivering alpha leon cooperman, he is giving us this two years now running every stock he gave has gone up. Plus, finding some big Time Opportunities in europe Bruce Richards of marathon as assets will be our special guest. Squawk box will be right back. . Our guest host has been investing for over 45 years him he has one of the best records in the business. Joining us is legendary investor leon cooper man. He is chairman of 11. 5 advisers. He has participated in this conference, delivering alpha, every year since inception. Its safe to say you have delivered as much or moral fa as anyone that comes to the conference. You havent had a stock you put down, have you . I would say dont confuse the bull market with brains. We have been a strongly rising park. In 2011, i had ten pick, ten went up in 2012 and 13 the same. But do you have new ones . Are you waiting for your presentation . Im on this morning, i have sten more picks. They wont do as well. The market has gotten itself into a zone of fair and reasonably number valuations. So its been very hard to find big alpha generation. Earlier the first thing you said about the news with fox and time warner, you immediately mentioned the feds. I would imagine the feds is in your thinking in a lot of what you are thinking. I would say, look the fed has created the environment, in my opinion, the common stocks, in other words, just think in terms of financial assets. We can sit in cash. You will earn half of 1 . Thats it. Can you put the money into government bonds and i have been saying this i still feel this way, its an inappropriate investment. Where unemployment is going up, automobile sales are back to where they were in the 2000 to 2007 zone, i said as to myself, fed funds at 0 . Makes no sense. You see the time warner transaction, allergan and bed, bath, beyond, raidsing a billionandahalf to buy back 10 percent of their company. Clearly, Interest Rates are lower than they ought to be given whats going on in the company. I think if you have a bond, twoandahalf heading to a loss on a total return basis. High yield is isnt high yeel the bloom bernanke index is down to 3. 5 . Stocks, slightly risk. Sten times earnings. 25 of the s p today yields more, the mark is fairly valued. I dont think its overvalued and the conditions that normally lead to a peak, those seem to be present. The one thing he said is because were going to be talking about this a lot today. You said if someone were to come and look at those things you said about the underlying economy and you were to ask someone where fed funds are, they would say probably not zero. Do you look at that as a positive for the stockmarket. Is it conjuring up negative payback in the future for the way that. Yeah, i would say that this speempl and Monetary Policy has great risks associated with it. What are the risks . Inflation or a quick rise if rates or . A bubble we dont foe about . You can get into a bubble environment, which i dont think we are in at the present time. I want to make it clear. While the market is fully valued. Okay well, you know, there are conditions that normally exist when marks peak out. Typical bear markets occur because the market discounts are coming recession. There is nothing in the exec data indicating. Where are you, mna animal spirits always happen at the peak of the market. Today the news around time warner and fox would that suggest we are anywhere . I think its a part of the market. Bull market grow in september michigan. They die in you for ra all im saying is were in the third stage, where basically when were patureing in optimism. There are not many signs of euphoria. This is not crazy deal time warner 21st century. Its a rational deal. We understands the business. He has a view of value he can finance it. I dont look at it as a crazy move at all. Janet yellin made some comments yesterday. It seemed to me it was almost and i rational exuberance moment where she was saying some areas of the market junk bonds, technology stocks, biotech, it looked look theyre overvalued. What do you think when you hear that . What i think is what does janet yellin know about valuation . There are pockets of overvaluation, but in the broad market we are talking about a 16 multiple, a 2 yield, fed funds, as evidenceing that. If i said to you the economy is growing 2, 2. 5 . You wouldnt think the market multiple would be 16. Im not exuberantly bullish. I think the market is basically in a zone of okay. What would make me negative is one that if we start to see evidence of recessionary conditions and we are seeing quite the reverse. I have 18 partners and associates covering a thousand companies, im bound, things are getting a little better in the economy. So recession would make me bearish, fiwas smart enough to see one coming. Second, i think it would make you bearish. If we went up clearly 10 , wed be taken away from the future. Id have to be selling. We do see my exposure. Third is if growth desell rates to 1 or less. That would threaten corporate profits or fourth if we got into an animal skirts took over, the fed comes in to play. I think that would be a negative for the market. I threw out a statistic which i find interesting. When is the last time the fed raised rates . I asked people that question, most people dont know, 2006, i would bet you a quarter of the. Managers if 2006 were still playing little league, baseball. So theyre going to go crazy when the fed starts to change, even though the early stages of riseing rates are constructive for the market, which is indicative of improving rising earnings him im not exuberantly bullish. I have to admit i was on in december, the forecast we gave was if everything went the way we thought, you could be 2 thoumt the end of the year. They were knocking the door 2000 in july. So is the market a bit ahead of itself . Yes, but the conditions they would normally turn it down. How long could it run . It can run as long as the economy runs, the postwar period has been 60 months. Wooer in the 61st month. There have been two busy cycles that last over ten years. We look at gdp gap fblgs the surplus in the economy, inflation, the yield curve, employment, who knows. Its poetic. Because the severity of the 2008 cycle turned peel off on taking risk and it had been very, very slow in coming back. So you got to see, i dont see exuberant behavior by the investor, whats happened is the person that boat those rick reverse. They said i cant survive on zero. I will go into tbonds. The tbond buyers said 2. 5 doesnt impress me. I will buy industrial credits. I will boy high yield. The high yield buyer says i dont like 530 anymore i will buy structured credit. The structured credit person says i got to put money into equities because thats the gain. Its all a part of the process, judgmentally the process isnt over. We had five years of equity liquidation, 2008, 9, 10 12. We had win year of accumulation if 2013. Common sense tells me one year of accumulation doesnt offset five years of deaccumulation. We have to watch it. Who knows. You are a great stock picker as we have already said you will give us more today. Then when i called you a great stock pecker and you said you were right. You said the market was up. With is it. All you care about the market going up overall and you are lucky with your stock picks . No, no. You do make great stock picks . I say i work harder. You cant tell us any of the new ones yet. What were the ones you were buying the 13 and the 10 you talked about. Can you give us something you will not do in your some we still owe, im looking at this list, last year we said again there is no guarantee of the future. We have lawyers. We recommend thermo fisher. It went up. We own it. Qualcomm, i would not put new money in qualcomm. We still own qualcomm ahead of a category phoenix and quality corps, Brazilian Health care provider, went up 80 . Sand wedge we own and recommend to five and 6. 5, 6 and threequarters. I remember friday cfa days, which was 45 years ago that i forget the number, 50 or 60 what a stock does, the market does. Entwt, 30 has to do with what the group is a part of does. Some small residual percentage has to do with what the company does fundamentally. Im not a fool. I see a reseeding tied lowers all the ships. The thing we did wright is we hung in there for 2008 and we said basically economic recession so the seas recovery, it sews the seas recession. We got five years of growth ahead of us. Thats exactly whats happened. Id say judgmentally, we see the conditions that lead. Forgive me. What normally precedes exception, accelerating recession, we dont have it. Rising inventory sales ratios, we dont have it. Declineing employment, we dont have it. Rising initial jobless claims we dont have it. All the conditions that normally lead to recession are unvisible. So now we are arguing how high is high. And, you know at the end of the day we get to euphoria most likely. Things leak time warner moved closer. You can learn from him. Hes a florida resident. I lived in. Fla. I have a home there. I got to be careful. American patriot, maybe not in new jersey. He doesnt talk bad about jersey. Its a fine real estate. I give a lot of money to charities in new jersey. Yes, you do. Lets add another voice into our conversation this morning about time warner and this potential deal, 21st century fox making an 80 billion offer for that company. That offer rejected by the board. Lets get to george zali is that how you pronounce it . Szalal on our squawk fuse line. What do you make of this . Well, a lot of people have is up of late suggested time warner could become a takeover starting if its not controlled. One of the new conglomerates thats not controlled. He thinks the management so far has said if you see much upside as an independent company that most people have said, well, they seem happy going long, Rupert Murdock seems interested in going back to his old field days. Can you speak to the cultural issues, theyre planning on putting all these studios sidebyside the channels sidebyside . I think the one thing people would see working well toke is all the work except for fox news and cnn. It will probably be a political backlash in the reporting in the times said that fox would want to sell cnn. The other big calgary would be the studios. Its not clear how they would put the two biggest ones together. It would probably raise some questions with doing away with the management structures, maybe two separate studios. Py understanding from the sources that have seen this letter. The sukt suggestion is they would run the studios, let them run separately and independently as they do now. Effectively, they would try to hold on as much of that top talent that runs things like an hbo, like a Warner Brothers on the film side and the tv side. The question becomes if you are jeff bukus, do you want to remain independent for the sake of remaining independent . Its nice to be the ceo of time warner. The thing is jessica, a successful buy, you could probably say, hey, you know what, maybe i want to ride into the sun set, get out, let somebody else do this. On the other hand, you could arc you, you know, he finally gets the Magazine Division has spun off and probably would want to run the remaining assets, for a couple more years. Probably, if the price tag is right, he cannot go against an offer. What are you making . Jeff bukus is doing exactly what he wants to do. He says this is owned by the shareholdersle. I was surprised a little bit. Im sure he didnt have to, why did he disclose the original offer in june . They were sitting on confidential information that would have affected the stock price. So he will play hard to get. Run effort will bump the price. These are crown jewel assets. You will see it break out. Since you broke your story, its gone from 79 and change to 84, 85. Getting closer. This is you see the beginning process. George, thank you. Dont underestimate Rupert Murdock. At 83 years of age the pan operates with a vision. He has vision. Price is secondary to controlling these crown jewel assets. Im saying, i dont own it. If i was offset, i would have bought the stock when it was trading 70. You cant file the New York Times. Id like to buy the New York Times. Thank you, joe. I would like to buy the New York Times and change the editorial consent e tent. Close it down. Please. Thank you for being here. We appreciate you being here. People will be watching it, delivering alpha. We appreciate you spending the morning. Delivering alpha presentation will be a little later this morning. Also, we want to tell you about whats coming up when squawk box returns. In a little while. Media analyst anthony decl declemente will be joining us. Jack lew, dont miss his speech on cybersecurity. Squawk box will be right back. Oh, this chair, welcome back. Arent they horrible . Welcome back to sidewalks on cnbc, first in Business World wide. Let me do this. Can we do it . Im joe kernan with Andrew Ross Sorkin and becky quick. Stop, we are live in the hotel site of the delivering alpha conference. Can i match you move for move in just 30 minutes the treasury secretary jack lew will be making his key note speech. He will then have a question and answer session with our own jim cramer. We will be bringing you the newsmaking event live on squawk box. If irs the star reporter of the entire world this morning, Andrew Ross Sorkin who broke this story on cnbc. Like its earth shattering. I felt the earth move. Its about inter13 billion in time warner Stock Movement today alone on your report. You sure you are right . I feel very confident i am right. I have been working on this literally all night heres whats going on, everybody, time warner has officially rejected what was a former 80 billion offer, it came from 20th century fox a part of the entertainment giant. Heres what happened. That offer, 85 a share. Thats in cash and stock. The transaction will be for 60 stock, 40 cash. Let me go through it with you and tell you whats happened over the past month. The original approach, my sources tell me, chase carried the president of that network with runner murdock approached jeff bukus in early june. They talked about a potential transaction. Then fox came back with a formal offer in the form of a letter, which the board of time warner read. That offer for 85 a share, as we said earlier, in that letter, the fox made a couple of interesting points. Within they said would be about a billion dollars of savings, suggesting possibly there could be more. I am also told there will be no financing contingency, they would be raising money to finance this transaction. We talk about janet yellin and how cheap it is to finance things now. Perhaps most interestingly the letter suggested they would sell cnn as a part of this deal, which will put together so many brands to appease what they think could be regulatory hurdles if fox news and cnn were under the same umbrella. Thats what the deal is on the table. Time warner has officially rejected they came back in early july and rejected that in what i am told is a very terse letter, only a couple sentences. Now we will see where all of this goes. I am told that Rupert Murdock is quote determined according to people close to him. And weve seen it before. Look. Weve seen the playbook before. Hes made offers. Ese got rejections. I am thinking now of the wall street journal, in particular. Hopefully, reporters have, reporters like myself, these things eventually sort of come out. Then he was able to capitalize on them real quick. Weve talked about a lot of the different things. A 14 move today its 13 million in stock appreciation. We talk about, there are different corporate cultures. Ruperts culture is one him time warner is a little different. We have not, i dont think bill mahr commented publicly or im watching his twitter feed to see if he starts sucking up to rupert in anyway but stan his ground. Its amazing, you think you have the fox network sidebyside with hbo, becks, tnt. We havent talked about the sports element of this. Fox trying to build out fox 1 tnt, cbs. They already have the rights to major league maybe, ncaa, pieces i believe. They have the ncaa playoffs. Cbs has the other piece of that. If you think about mempbling all of that together, its quite remarkable. Fox fuse, you better call that one back, the last tweet with the zombie lies of the gop and fox news. Oh. It just disappeared. No it didnt. We also had talked about this wouldnt be possible if time warner didnt spin off time inc. , that spinoff just taking place. This is what allows it to happen. We mentioned it seems clear to me if time warner emerges, it should be with a new Media Company, google or aol. They already tried that. Remember time warner did this before one other time, didnt they . It was a different company, a different assets. Here we are talking about time wasnter again and a uj hoo, we should say variety a magazine and jeff bukus last week about the possibility of a tie with google or 21st century fox. He told them, quote, i dont have it in front of me, i believe the quote said he knew nothing about it. So. The one you sort of have greater, i mean, youd be more excited i guess if you were in the future if you talk about google and time warner. But in a practical way. It makes so much sense with the way these assets would be put together. This makes a lot of sense. Im excited because rupert is 83. Hes going to do it now and run it for ten years probably at 83, which you dont foe yet, but you whether want to see guys in their 80s doing well when you are a little older. Go ahead. Lets bring in an analyst on this. Joining us on the squawk news line is media analyst from capital markets, julia boresen is on the line. Business is sound and a rational deal as far as he is concerned. We talked to other analysts that think they would have to pay much more than 85 a share. What do you think . I think there are two few kind of considerations in terms of synergys, financial and strategic. The financial ones are really obvious. I would have to highlight the Warner Brothers and fox studios, theover head there is obvious. The content cost synergy, you are negotiating to buy across a massive portfolio of channels. You will probably get better in a pricing there. But the negotiations, think of a world where you are seeing consolidating, distribution now, you know, if you can consolidate the content side, its more difficult to figure out who will blink first and, obviously, have sales. Right. You got more to sell. You can cross sell. You can probably raise pricing. I think strategically, see the financial stuff is always there. Strategically, and you guys talked about it a little earlier. The scale in sports, thats this complimentary, you know, fox is trying to roll out fs 1. It rolls in ncaa, the mlb. I also like the fact that time warner doesnt have a broadcast new yorker. They have one of the most prolific successful studios in the world. So if you parry the time warner tv studio with the Fox Broadcast Network you kind of own the entire value chain. So i also think adding the platform for hbo the foxs, thats something fox doesnt have. I thinking look, you know, i would probably be negotiating for the best price i could get if i were the time warner board. I think you rarely take the first one thats offered, especially in a hostile situation. I think the combination intellectually makes sense and money is cheap. Both these companies are relatively under leveraged. Thats one of the unique things going on in this period of time. We rarely seen that real pristine balance sheet, low leverage, keep capital. So one gets the sense that some of this stuff is really going to happen. David i was going to say, andrew only broke this news an hour and eight minutes ago. It sounds like you think its an inevitable partnership at some point . I think you will see more mna in the state. Andrew is reporting i guess rupert is determined. So im going to take his word for it. If he really thinks rupert is determined, i think there is a rational. I think it will be hard to put the toothpaste back in the tube, though, you know, leak it feels like time warner is essentially in play. The offer has been delivered. So, you know, there will be a lot of mna discussion around the space right now. Its going to be a super interesting summer for me. Can you tell us, do you think, andrew . Comcast, time warner, that was a sort of the big one. And directv. Those two little mini mergers, those are done now compared to this thing. But do you think that it all sort of, its happening as were watching and what if the justice or someone did try to stop one of them . I mean you cant, right . It becomes much more complicated. Whats to happen . Obviously, the people that run the Company Think these things need to happen. I think it makes it more likely also. I think it becomes whether there are more deals. Cbs decides they need to doing. An early discovery. Discovery. People are talking a long time about discovery, time warner, potentially discovery at 21st century fox, there have been other names floated before, this, obviously, a true formal offer that potentially puts the company in play. I think the billing cap guys, i think im a pretty firm believer, you have seen it play out in the way the stock versus behaved over the past three or four years, the content generally wins these battles. Right . I think the consolidation on the tariff side is not optimal for the contemplation. I dont actually think if this happens, right, i dont think fox and time warner would be coming from a place of real weakness, i think the other thing thats interesting about this deal. I dont think these guy versus to do this deal. You know, so i dont think it has to happen. Look, i can see 21st century, fox clearly doesnt are to do this deal. You are arguing, you think time warner doesnt have to do it either . Three months from now, we can be talking about two different independent companies . I dont think theyre forced to it because of consolidation distribution landscape. I dont think time warner is forced to do this deal i think strategically it will come down to the obligation of the board whether or not the offer makes sense, can time warner exist as an independent company in the media landscape in 2014 . You know through the end of the decade . Absolutely. I think its a viable independent company. It comes down to price. Your thoughts on this . I think its really interested this comes on the heels of so much consolidation and distribution of content. Because these companies would be so much more powerful if they were negotiating with the comcasts Time Warner Cables of the world as one united front and i think if you look at yet they dont have to look, do this el do you. But what the advantages would be, its pretty substantial. Here they are negotiating with much bigger distributors. They want to get better terms for their content. Also the deal would come on the heels of both 21st century fox and time warner, both sliming down and becoming really focus as content companies. It wasnt so long ago that murdock spun off news corp and really made fox a pure play effectively largely driven by its cable assets and the same is true of time warner. I mean, this is really about cable at the end of the day and what their cable is in terms of the premium cable value of hbo and the value of the sports right. So i think, yes, it would be really interesting to see how the public pieces fit together and what the different ones add, fox has the broadcast network. But this is about tele56. The movie studios i think are secondary. All right. Julia, david, thank you both for joining us. Folks, if you are just waking up, andrew broke this story at 7 00 east coast time. You at the pop in the stock of almost 20 at this point. That stock is trading just above the 85 that andrew is reporting. Actually, when i was doing the math this morning before the show, trying to figure this out. Its actually closer to 8630 because of the stock of where 21st century fox was yesterday. We should take a look, if we could, guys, lets lock at fox, if fox is up, then this would actually blow through that. 21st century. Theyre up in sun valley i definitely so you a still shot at chase. Bukus was there . He was there. We need theme following those guys around. Did anyone follow chase where he went . We got the story. Thats how you got it. There is jeff bukus. I saw you in that bush. I look like the guy on laugh in. Remember artie shaw . Very interesting. Coming up, we will talk. There he s. I dont know if hes that happy. Probably not considering the terse language the deal was rejected with. I think the real company is way out there. You think this is a political. I do. I know, rippert is like darth vader coming in to take over. There would be a lot of people. Anyway, alove it. Coming up, tax inversionings and business with white house chief of staff bill daly. Then its the moment that many people have been waiting for. Treasury secretary jack lew. We are excited. We always have the treasury kick off our delivering alpha conference. We have very excited. They are giving us a key note speech right here at the delivering alpha conference. Well be back and carry a live conference. Jim kram ler have a q a session. Check out banc of america. Rortd reporting profits of 41 sent per share. That excluded Legal Expenses and was 12 cents above estimates. B of a reached a deal with aig to settle mit galgs involving mortgage back security. [bell ri] time and sales data. Splitsecond stats. Its so close to the options floor, youll bust your brainbox. All on thinkorswim, from td ameritrade. In a we believe outshining the competition tomorrow quires challenging your Business Inside and out today. At cognizant, we help forwardlooking Companies Run better and run different to give your customers every reason to keep looking for you. So if youre ready to see opportunities and see them through, we say lets get to work. Because the future belongs to those who challenge the present. I voted for culture. With a k. how are you . I voted for plausible deniability. I didnt kill her, david. And i voted for decisive military action. Xfinity presents the peoples hotlist where you choose this summers top 100 shows and movies. And all you have to do is watch with xfinity on demand. Now through july 23rd. Vote welcome back to squawk box this morning. The story of the morning, time warner rejecting an unsolicited 80 billion offer from 21st century fox, who reported this first at 7 00 a. M. This, mo. They had been in talks. Time warner rejecting that offer and fox just coming out with a statement literally as were going on the air during the commercial break saying 21st century can confirm we made a former proposal to combine the two companies, the time warner board of directors declined to pursue our proposal wind chill renot currently in any discussions with time warner. Having saying all that, we will bring vanity fair into the conversation. They say they were not in discussions with time warner now but does simply the disclosure they were in talks put all of this back on the front burner . Sarah . Reporter absolutely. This is the kind of thing that murdock does, people say, no, then eventually a lot of the time they come around. I think this is just the very beginning of a really deal time that were headed into. This is history. You know jeff bukus as well as rupert very well. You wrote the book on rupert. He seen his play b. C. Before with the wall street journal which you wrote so eloquently about. When you think of jeff bukus on the other side on that board, can you imagine the pressure build to the point where they sell like the bancroft family . Obviously, a very different company. I do think that just the fact that what we are hearing is they were balking at the fact they were going to be offered nonvoting shares. Thats a Pressure Point murdock can come back to i think when an offer like this gets out into the Public Market and into peoples minds, it comes, it adds a lot of pressure to stress by their own strategy and where they are going in the future. These are obviously two old media businesses that are facing great, great challenges from Big Technology giants and i think theyre going to have to really justify their reason for being. Does 2003 century fox have to do this . Pardon me . Does 21st century fox have to do this . Im sorry, i cant hear you. The question is does 21st century have to do this . One of the things we were talking earlier is the Shareholder Base of time warner, 70 of their shareholders happen to be fox shareholders. I do think there is a tremendous amount of pressure on 21st century fox. They have come away from the phone hacking crisis, splitting the company, they lost a deal for diabetes that they had been working on a long time. They are looking for a big strategic move. They had a lot of cash. They used some in a buyback to bolster their own stocks. When you look at the companies and the trajectories they are facing. I bring out the big tech companies, being in a context business, there is a lot of pressure on you. I think dofx they have to do it . People can continue on for a long time in their own Little Corner of the sandbox. So i think this could be a trnz formtive deal for them. Sarah. We imagine to be continuing to talk to you over the next couple of days as we sort this out. Thank you. We are continuing our live coverage from the delivering alpha conference in new york. Our next guest returns to high finance. Bill daly is ahead of argentina capital. She a former white house staff for the president obama. Its great to have you here. First of all, congratulations, we saw when you made the move. Congratulations. I appreciate it. Its a great opportunity. Its the first time i have been a part of a startup basically. Its been in existence a yearandahalf. My previous career was j. P. Morgan, sbt or the government, which cant get any bigger than that and so this is a great opportunity. We have a more efficient, mow effective. No, no. Im watching it get beggar. So its a great group of people. People have been toke ten years. Our ceo had a great career in trading. Its a fun thing for me to get involved with a grownup of young people really trying to build something, grow something. Lets talk about where you think the marks stand right now. We have been watching this mna activity. Im trying to get a feel, where are we in the cycle . My sense is that there is obviously a friend city going on. We will see in a couple deals if they paid sense. They may make sense today. As we all know today in history, a lot of deals when a banker brings them into a ceo either as the acquirer or the being acquired, the target, dont end up being what people thought. There is a frenzy going on. We are at the ail end of this frenzy. The uncertainty and the feds ending their q3 is a qui i think will play out. We have the treasury secretary jack lew about to week. One of the things he will be talking about is cyber terrorism u. S. Companies deciding to change their tax domicile to another country. What do you come down on this . First of all, theyre taking advantage of the law. So you cant blame them for. That on the other hand, there does seem to be something inappropriate in the way its being done so quickly out of fear that i think they think its going to change. I differ with joe. I think paying your taxes is a patriotic thing. I think we do do a lot of good in this country. Is it tax avoidance or tax evasion . I agree with you. Its also patriotic to not you should follow the law and pay what you owe. Money over time is treated better in the private sector. Creates more jobs, more efficient, the government needs to do it and pay for it. The emergence is allowed by the law. The rush to change it, is it to punish companies doing this or to correct the code . There is an easy way to do it. Not easy politically. The fact is change and lower the rates and get us more competitive goals. You agree, you dont gas agree . He wants to make sure these Companies Make a law they cant move. I mean, we need to. We need to get more, now, we may have to do that because of the political dysfunction of washington to honestly see a reform bill moving in this congress. They have difficulty with a happy birthday resolution much less a tax reform. But you were there. Yes. You could have gotten the president , maybe you tried. Maybe thats why you left. The president can get a bully pulpit. This could be his first priority. Corporate tax reform. It doesnt look leak it will happen in the next years. You could talk politically, right . Lots of people try to talk both congress and the white house into getting a serious tax reform plan put forward. It is not easy. The president has the lead. The president has tried repeatedly to get the discussion going. Few look at it, it is a very difficult thing to do and get support for it. On both sides. We got Small Business people who fight it. Because they arent exactly the benefit fisheries of real Corporate Tax reform in the fall. They all want to protect it. Bill, we got to thank you. We continue our conversation about time warner. You wont believe who we have on the phone right now, jerry levin the former ce of of time warner. Jerry, its great talk to you. What do you make of the news this morning . Caller well let me step back and say its a digital disruption that even though content is normally king, you know, the new age of googles, the amazons, the apples, the netflixs all suggest that you have to be very big, very entrepreneurial and postimportantly try to redefine your company. So i think we will see everyone more consolidation as everybody gets ready for whats the next step . You know, time warner has been managed i think beautifully, conservati conservatively but were in a new age now, probably the more consolidation not like we lad in the late 80s and early 90s, but consolidation is driven by the need to stand up in this environment. Jerry, you know jeff bukus. You no at the board of time warner. They, thus far, are rejecting this proposal. Do you believe this is a negotiation . Do you believe they really want to remain independent . What are the cultural issues they have to get through if this were to happen . Caller well, i cant really commented on the current management and the current board. I just think that time warner has constitute d wantings to bea premier content company. The only issue is were in an age where maybe that isnt sufficient because there is so much. What do you mean, because of the other deals, comcast, Time Warner Cable and at t, direct tv . Caller no, its also, what is google and what is apple combined with other companies in i just think were in a new ball game nowed on the layers are not going to be the traditional three or five content companies. The players will be those with the most entrepreneurial spark. I suggest having lived through something leak this in the, you know, 1990s, that the board of time warner will fight for their independence. But i think thats not the issue. The issue is really about what is the company in this new digital age . And to the extent that you are right about this new digital age, does that think we will see an interloepper get involved . Obviously, they can pay basically whatever they wanted to pay for a business like there . But the question really becomes, is it a fox dell forward looking . Or are you suggesting fox would be backwards looking . I dont want to disparage anything, but i think its backward looking. Because i think the real issue is how do you create ent fewership to redefine the company . And you are talking about a legacy congretent company as opposed to a new age company. What are you saying, joe . I dont know, jerry. I mean, it made sense back when you did it last time, too. But this, you know, that didnt quite work out as planned either in terms of shareholder value and everything else. I dont know just to hang your hat on that its new age and it seems to be going that way. We actually talked about it early whyi earlier around practically putting these two companies together bus of the crown jhoulys and massive synergies in a way that might be Old Fashioned and makes sense maybe you make up with not a piaa in the sky deal. You know what im saying, it didnt quite work out last time with the old age company and few age Media Company. Caller i understand, but, ultimately, its about the ability to manage a combination. Its not just about a blue chip asset. And thats another lesson from aol and time warner. I bet you that stock would get crushed if google traded in its currency for old line assets, dont you think . Well the question is, who can best match the Creative Process in is this period . We are not back in the 90s. Were in a different era and what management capabilities do you need . I think thats the issue. And its not just about assets. Okay. Jerry levin, thank you for calling in this morning, we appreciate it on a busy morning, on this big topic. We are going to introduce david faber to the table. Who always has views and news on all things media. Well, you had the news this morning, andrew. This is potentially could reshape the landscape in media as we all know. A few things here having made a lot of phone calls over the last hourandahalf sense we first heard about the news. I think the 70 overlap in the share basis is going to be a key thing that fox is going to push here. And having spoken to a number of those shareholders who the top five are the same top five. Thats going to be a very powerful weapon. Who are the top five . I believe its wellington, dodge and cox, t. Rowe price and now i got close. And then you get to hedge funds and some of these other active players who will own significant stakes and their feelings are certainly going to be important here, what time warners response is going to be to that Shareholder Base. If this ting does get hostile, i think its what 15 by evening. There is no staggered board. Its not clear we will get that far. That being said you do have at least if they want to play tough defense the idea, andrew, of you are giving voting control to a family. Right. And to the children of mr. Murdock eventually whenever that day comes. Do you want to do that . That certainly could be one effective weapon time warner refuses to use. In terms of the logics, strategically, i have not spoken to anybody who disagree there is is a combination that makes sense. Okay. That was unbelievable. When you hearding didnt you go, oh, it was crazy . Yep. Big news. F haveing time warner again. I heard. As you can see, folks, we are here at the delivering alpha conference. We are awaiting treasury secretary jack lew. Hes going to be speaking here him we know he will be speaking about cyberspace. Obviously, there are a lot of other things he will be asked afterwards. Jim cramer will be quebec him after that speech. We know he will get into inversions and other stories. You are watching Tyler Mathisen on stage right now introducing jack lew, setting him up tore in. Is that the moderator sports coat going too with the slacks. You started out with the jacket. No, its not a suit. Thats a more casual, i mean, i would do that, too, if i was moderating. You could pull it off. I can ul it off. Hes very smooth and. Do we think the opening question will be about time warner, 20 . Its not what do you think about this cnn piece by the way . Cnn is a divestiture because of the antitrust. [ applause ] 12k3w4r6r7b89s. Thank you, tyler, for that very gracious introduction and thank you all for having me here today. Without a doubt, the internet has revolutionized the way we conduct our lives and the way we do business. From making a bank deposit, buying a book and providing a medical diagnosis to restocking the shelf of a grocery store, filing tacks, and trading stock. But this transformation, which has spun incredible waves of innovation and entrepreneurship spun new waves. We have to fortify against these dangers. It will be a central test Going Forward how well we do that. Everyone in this room knows cyber intrusions are not some hypothetical event on the horizon. They were real. And theyre happening every single day. These incidents represent a direct threat to our economic and national security, perpetrated by state and nonstate actors around the world with growing intensity and increasing sophistication. And while many are just gearing up their defense, some banks are already spending as much as 250 million a year to strengthen their Cyber Security. The consequences of Cyber Incidents are serious. When credit card data is stolen, it disturbs lives and damages consumer confidence. When trade secrets are robbed, it undercuts americas businesses and underpines u. S. Competitiveness. And successful attacks on our Financial System would compromise market confidence, jeopardize the integrity of data and pose a threat to financial stability. Cyber intrusion is far reaching consequences, recently, cyber criminals stole credit cards from retailers like target, Neiman Marcus and michaels affected more than 100 million customer accounts. Hackerings accessed a. P. s twitter account and announce as false alert saying there had been an attack on the white house, which drove down the dow down three minutes temporarily erasing roughly 130 billion of value from u. S. Stockmarkets. Since 2011, we have seen more than 250 distributed denial of service attacks against u. S. Banks and Credit Unions overwhelming systems, and forcing some websites to go offline. The United Nations government assesses these denial of service attacks represent a sophisticated threat, almost certainly intended to disrupt the u. S. Financial system. It does not take much to imagine the impact of those attacks on u. S. Banks, if they have penetrated core operational functions rather than temporarily disrupting websites and examiner login pages. Cyber attacks on our Financial System represent a real threat to our economic and national security. But a ma leshs cyber actor can cause psychological damage to our Financial System without wage attacking a bank. Risks to the system can be found at the vendors, suppliers and contractors who keep our Financial System running. They can be found in industries that underpin the marks like telecommunications and energy and they can be found across the physical infrastructure that supports the economy like our Entertainment System and water supply. These related companies, industries and utilities rely on a network of Computer Systems and an incursion at a Strategic Point along the network could lead to market disruption and massive harm. From our experience with accidental failures, we know the stakes are high. For instance, the largest power disruption in person history occurred in 2003 after a Computer System malfunctioned in the control room of an ohio based electric utility company. 50 Million People were plunged into dark ness as cascading power overloads caused the shut down to spread from toledo, loichlt to new york city. The outage contributed to the death of 11 people. It shut down trading and exchanges and it cost workers and investors more than 4 billion in wages and income. While this blackout was not the result of a cyber attack. It demonstrates our exposure and the importance of strengthen computer defenses. One back door is all a malicious actor needs to transmit large scale damage. Look at the target incident. Criminals intent e entered a refrigeration Expert Company if pittsburgh. They reached in store computer networks, stole credit card information from millions of americans and sold that on the black market. As many of you in this room know all too well, super storm sandy damaged new yorks Telecommunications Infrastructure and that damage rippled across wall street. Again, highlighting how Critical Third Party providers are to our Financial Institutions and we know that when it comes to cyberrelated risks, our Financial Institutions are only as strong as the protection put in place by Third Party Service providers. I visited a Verizon Network Operation Center in virginia yesterday and saw first hand how cyber intruders are trying to infiltrate these vital systems and what verizon is doing to combat this threat him telecombine indications companies are taking important steps to protect vital infrastructure and improve cyber safe guards. Its essential that all critical third parties have protection for physical infrastructure and Cyber Security. From the outset, the president directed his administration to improve our digital defenses as a matter of national and economic security. We have forged strong partnerships across Government Agencies with very different missions. The treasury, were working handinhand with the intelligence community. The department of Homeland Security as well as Law Enforcement and financial regulators to billionster our nations resilience to cyber attacks. Soon after i became treasury secretary last year, i convened more than 50 ceos across a range of Service Companies to underscore the urgency of making Cyber Security a priority. The obamaed a pin strax strategy is to collaborate with the private sector, who established Cyber Security best practices and improved information sharing. While companies have the primary responsibility to protect themselves from Cyber Threats, government also has an Important Role in helping companies enhance their protections. Its a public responsibility to prosecute cyber criminals, hold state sponsored attackers accountable. Provide critical intelligence about specific threats and to share best practices. Last year, president obama issued an executive order establishing a new Cyber Security framework that provides a blue print that firms of all size can use to evaluate, pain tain and improve the resiliency of tear Computer Systems. Let me be clear, every Financial Services firm should use this framework to reduce Cyber Security threats. Its not enough for firms themselves to adhere these bake practices. Outside vendors, including the businesses that provide the hardware and software for your Technology Systems and the Service Providers that handle your Payment Processing and other back Office Functions should also use this framework. Just as you can consider your counter parties when you take on financial risks, you could consider your counterparties in the area of cyber risk. Our cyber defenses are not where they need to be. Far too many hedge funds, asset managers, insurance providers, eggs changes, financial markets, utilities and banks should and could be doing more. In particular, its imperative that firms collaborate with Government Agencies and with other firms. Disclosing Security Breaches is often perceived as something that could harm a firms reputation. This has made many businesses reluctant to reveal information about Cyber Incidents. But this reluctance has to be put aside. There cannot be a code of either silence or secrecy about the steps necessary to protect our basic security. Sharing information is far too essential. Even as we have been moving forward to create Cyber Security standards, we are making it easier for the government to share ampb clafrd threat information and for companies to share similar information with Government Agencies. The goal of information sharing is to raise awareness about specific attacks and attackers. Sharing information about malicious cyber activity helps reduce vulnerabilities because with information, firms can better protect themselves against possible attack. The increase in information sharing across the Financial Services industry treasury created and information sharing and Analysis Unit known as the Financial Sector Cyber Intelligence group. This team is delivering timely and actionable information that Financial Institutions can use to protect themselves. This unit consists of cyber experts and security analysts who scour Law Enforcement and intelligence reports. Constantly, to try and find relevant active analyze and connect the dots between events and issue information bulletins for Security Professionals in the Financial Sector. Given the Global Nature of the cyber threat, this administration has made Cyber Security a global undertaking. We coordinate with International Partners to share threat information, improve our responses and locate malicious cyber actors. And in my bilateral meetings with foreign leaders, Cyber Security is often a major point of discussion. I just returned from the strategic and economic dialogue in beijing where, once again, we explained to our chinese counterparts in no Uncertain Terms that government sponsored cyber enabled theft for commercial gain is illegal and onu unacceptable. More broadly, our discussions also focused on the dangers of cyber crimes and the importance of strong cooperation on cyber issues so we can combat this international epidemic. Digital attacks are not just a threat to the u. S. Companies and competitiveness, theyre a threat to chinas growth and prosperity as well. To safe guard the Financial System and the broader economy from Cyber Threats, improving communication has to be a greater priority for firms and that does not only mean sharing information with other companies and the government i. It also means firm versus to do a better job of sharing information pence their organizations. While ceos, Top Company Executives and Board Members have been getting more involved in Cyber Risk Management and Cyber Security, Cyber Security cannot be the concern of only the Information Technology and security departments. It should be the responsibility of management at all levels. If are you the leader of a business, you should know how strong your companys defenses are, you should know if there are response plans in place, in case of significant Security Breach occurs and you should be getting regular reports on Cyber Security threats and what your company is doing to respond to those threats. No one depends on secure electronic infrastructure more than electronic businesses. Now, given how interchecked our economy is, we can the more to coordinate Cyber Security across sectors. Thats why the administration is also going to be bringing together leaders of the Treasury Department, the energy department, Homeland Security department, so we can increase our effectiveness across sectors and make our economy more resilient to Cyber Threats. In addition, my deputy secretary sarah raskin will be working with federal, state regulatory agencies to introduce cyberists to the Financial System. She is looking beyond traditional Financial Services to explore the regulatory security and Consumer Protection aspects of financial technology. Finally, its time for congress to pass cyber legislation. As it stands, our laws to do not do enough to foster information sharing and defend the public from digital threats. We feed legislation to deal with clear rules to encourage collaboration and provide important liability protection. It must be save for companies to collaborate responsibly, without providing immunity for reckless, nejts or harmful behavior. We need legislation that protects individual privacy and civil liberties, which have so essential to making the United States a free and open society. We appreciate the bipartisan interest in addressing this important issue and the administration will continue to work with key stake holders on the various bills that are developing in congress. The perils of cyber space are not insurmountable. We know we need to remain focused on these challenges because these threats will continue to evolve. Cyber security must be ongoing and by working together, all of us, we will meet this test. We will deploy the progress of todays technology to fulfill tomorrows promise. Coening will flow and marks will flourish. Communities will prosper, workers will thrive and opportunities will abound and by moving forward without fear or illusion, we will realize the heap and expectation of the information age. Thank you very much. I look forward to the discussion we are going to have. [ applause ] its good to have you. Thank you so much. Im listening to your speech t. First thing i think of is i have an account and money in a major bank i know has not spent the doctor 250 million. Im thinking, you do we prevent a run on the money . If my money is not in my account tomorrow, i will tell everybody the money is not there. How quickly can a run occur . Jim, obviously, we have protections in our systems to deal with institutions. We have the best insurance system in the world for our banks. I think the real challenge is how do we get institutions of all size to take seriously the challenge that i have described in my remarks this morning . I think its actually harder for smaller and medium size institutions. Theyre much more relinet on 3rd Party Vendors for many operational functions. Its much more important for them to be in this space where collaboration and new information sharing issive sa. Its one of the reasons why i think its so important we have legislation and why its important for government and industry organizations like in the securities industry to work across institutions because the solutions probably dont lie strictly within your bank. Absolutely. Now, i thought it was very interesting along you used in the speech. You said you went to coin and you told them that this, that hacking basically was illegal and unacceptable. Number one, why do you have to tell them that . Is it accepted . Second, july 9th when i started speaking there, the Personnel Management was hacked by china. How do we reconcile these . Jim, i think we made clear when that incident happened, our systems are designed to detect intrusion, to share individual information. Im not going to comment on attribu attributeion him we can protect it and stop damage from occurring. We have a lot of work to do, just like the private sector has. I made sure in the Treasury Department our guard is very high. How high, did you use your cell phone while you were in carolina . Well, i did use my cell phone. I always use my cell phone carefully. Okay. You talked about the idea of a bank, but im thinking the idea of the internet of things, someone here is short tesla, can you hack in tesla. You could hack in tesla and crash tesla literally from your cell phone. Do we have to worry about the internet of things being too vulnerable . Look, i think the exposures we have to Cyber Threats are much broader than the Financial System. Look at how much of our life we conduct through our ipad, our iphone, smart device ory computer. Its our banking, our basic utilities. Its a lot of our personal information, hour health records. There is a very high level of concern that we should all have that cyber securities,security, hygiene is taken seriously by all providers we do business with. I think in a world where we were doing this kind of at the best level, everyone would adhere to the highest practices, consumers and businesses, demand firms adhere to the highest standards in order to transact business. Your twitter, mentioned in the speech, and you want an open equipped free system, and youre a bad guy, open state or organized crime, shorted heavily, put a bad tweet out, market goes down because twitter is trying not to filter thing. How is that stoppen . You know, jim, thats one of the reasons we have to make sure there is no taboo about acknowledging exposures. If something is not correct and put out there, theres somebody who knows right away its not correct. Okay. You have to be there, whether its a business or government function and say, it isnt true. You have to push back on whatever the malign tweet is. I think that we are going to see more and more activity where theres things that are fabricated put out there, and we cant afford to have it take days or hours even for individuals or firms to push back on it. That means admitting there was something done and getting out of the space where youre worried its going to hurt the reputation if you Say Something was put out about my firm. Fair enough. Mr. Secretary, while i prepared the remarks and questions on cyber, i got a letter from your office to senators wyden and, of course, to the whole committee talking inversion, something everyone in the office cares about. You used the following language saying, congress should enact legislation immediately, retroactive to may 14th, to shut down the abuse of the tax system. I regard this as a wratratchet o nip this in the bud by your office, true . We made it clear for years we want our tax code to have ins t incentives for investing in the u. S. And disincentives for investing outside the United States. I made it strong that we need economic patriotism here. Its not right to take an american firm, benefit there all the things we do in the United States to make it a safe place to do business, but i dont want to pay taxes here, ship your corporate address overseas to pay no taxes. What my letter says is the best way to deal with this is comprehensive Business Tax Reform. We have a plan out there to accomplish multiple goals as discussed that we do Business Tax Reform, lower the statutory business tax rate, provide resources to pay for Infrastructure Investment and fix the problem that is causing inversions. What my letter yesterday, and i said, was that we can want afford to wait. We need to send a signal that if we cant get comprehensive Business Tax Reform done, we need to act on the question of inversions, and we need to do it now and retroactively so that businesses do not rush to do these transactions. The other day, actually, july 14th, your assistant secretary of legislative affairs sent a letter to Charles Grassley saying you cant use the irs because you talk about obscure provision 7874, grassley, the closed loophole, why cant there with a rule making posture that says to the general counsels out there like chris cox, advising general counselors, yes, you must do what you can to do inversion right now. Why cant you say, were looking at the substantial interest provision. Every Company Thinking of inverting now is a mail drop, switzerland or dublin. Just a mail drop, nothing else. Many in the same building. We have looked at the tax code. There are a lot of obscure provisions in the tax code. We do not believe we have the authority to address this inversion question through administrative action. If we did, we would be doing more. Thats why legislation is needed. Thats why we proposed it in our budget. Its why i wrote the letter last night. I think that there are limits to what we can do without legislative action. It is important that this issue be addressed because were seeing an uptick in activity of greater interest of Companies Moving overseas. We have to raise the bar and make it more difficult. I thought it was interesting in the medtronic deal. Theres a clause. Theres disputing clauses in many deals that say, look, if they change the law, obviously, retroactive, the deal could be off. What worries me is that theres a lot of companies that want to game washington and think washingtons dysfunctional that its worth taking the risk on comprehensive tax reform. Jim, i think if you look at the letter i wrote, it has very much the case for bipartisan Business Tax Reform, recognizes we might not get it dope quickly. This is the issue that there ought to be bipartisan consensus on. I dont know anyone who wants to defend the idea of u. S. Companies moving their nominal ownership in a way to avoid u. S. Tax laws, and we ought to be able to get bipartisan consensus on that. Theres been a range of issues where you can still in the difficult circumstances in washington get things done. My letter was to the democrats and republicans who lead the finance of the ways and means committee, and i look forward to working with them and think we can get this done. You used specific language on protection of intellectual property rights, research and development. If im at one of the companies, do i have thats doing inversion do i worry they will not get the support of the u. S. Government because of their actions . You know, our support in the areas do not go directly to the companies. When we do basic biomedical research, what were great at in the United States is creating knowledge. We create the basic ingreepdien for innovation. The private sector does what it does best, and it invo vnovatei. Were not going to cut back on spending in basic biomedical research. The argument that i make in the letters is that if you benefit from that, you ought to be willing to pay taxes in the United States to pay for that. What should be the tax rate because youre dealing with regimes that are 8, 10, 12 , you cannot bet them until you get down to the levels. I dont agree with that, jim. I think i had many discussions with finance ministers around the world. If we get to a tax rate in the 20s, youd see world rates start to normalize. Right now, we have kind of a nominal situation. We have a very high statutory tax rate, but we have loopholes and deductions so the effective tax rate is aarp the world normer low r the rate to the effective rate or closer to it, and you get do 28 by eliminating deductions in loopholes, a lot better, a lot of companies would be making the right decision. I talk to business leer, they certainly believe that lowering the Corporate Taxes like as low as it could get, but lowering creates a situation that takes away the incentive for this, plus, we have provisions in our plan which would create a differential for domestic and International Income to make it more attractive, you know, for, you know, income to come home. Okay. Its a kind of hybrid system, you know, which we believe reflects a bipartisan consensus. A pos sieitive story i quest why you dont talk about. Treasury funding. Fannie may pays 126 billion. The only obligation was 116 billion. Does this continue . Do you recommend i know its congressional the prefer be made good and common stock be made good . Treasury got all its money back. Jim, if you look at the most recent exposure reports, stress test reports on the gses on fannie and freddie, it shows in a crisis the expore sure is to the taxpayer and vastly outweighs what current profits are. As long as u. S. Taxpayers are on the hook, it is appropriate for us to stay in the structure of c conservatorship that were on. We have to get on with housing reform, a clear plan for future that circumscribes exposure in a limited way, and the sooner we do that, the better. Immediately thump the 25 billion of common that you own, maybe keep the preferred. I dont think so. Treasury, 70. 5 billion surplus last month. 8 above, spending down 1 . Does this mean as we project this were not going to have a debt ceiling rangel even if it party wants it . Jim, two questions. One, will we hit the debt ceiling at some point . Yes, we will. Congress extended it to a specific number. When we hit that number, you know, it will depend, you know, kind of what the flows are, how quickly that comes. I hope everyone learned in last fall and 2011 it does terrible things to the u. S. Economy to use our ability to pay our debt as a tool to gain leverage in a political debate. It hurt confidence. It hurt in the United States. It hurt internationally. It hurt the whole economy. Its wrong for congress to go back there. I hope we never go back to what we saw last october with a threat to cause the u. S. Government to default so that you could try to get your way in a legislative battle. How about doing Something Like this. In objecctober is supposed to s the bond buying program. Theres nothing we can do to Fund Treasury while they do that on the long term basis. Once they are done, you know what the market is looking for, mr. Secretary . 30year paper and 50year paper. What about a 300 billion 50year once the fed is done buying . We have the deepest, most liquid bond market in the world. We worked over a long time to develop that, and part of it is that we keep our maturities spread in a pretty normal way, dont make Big Decisions to move radically and dramatically and stay abreast of what the market is interested in it terms of maturities. Weve seen a gradual lengthening of maturities in recent years, which is a good thing in terms