monday in new york city and you are watching a special edition of market makers. erik chapter. >> i am stephanie ruhle. -- eriklready been schatzker. >> i am stephanie ruhle and already been a morning. mount bridgwater, -- two men who had no companies and we had a great conversation is more that throughout the day. founder of omega. i had a good weekend in vegas. it. not think i could on nicki minaj jim langevin bloomberg, you have gone full circle and it is a win. >> a lot coming up on the show today. heaven, as are financials is here in the date. he is remaking the department. >> out of doubt. you're also sneaking with the man of the hour. and it clearly the winner. but that is coming up later in the afternoon. her aailed to win conviction in one case. every other case, mess. insider trading -- charges. as goes on. i am very interested to know, you behind flock a holding institutions accountable? you people, guns do not help people. the same kind of thing applies when you consider the philosophy behind criminal prosecution. who wins when you get bmp to pay it quite billion dollars and they go to jail? i see still have top executives at the bank having paid or leaving the bank said going to hedge funds where they make more money and who is being punished? is it shareholders? advice in terms of going after criminals from some of our other guest today there it we had head -- we have hedge fund titans. >> chris will be here at 11:00 this morning, right here. .> a big morning >> so much stuff, we forgot about already. >> we need for you to give us the newsfeed. >> let's start with a huge acquisition overnight. agreed to country has buy for $17 billion sigma-aldrich. the company is based in missouri. a record raking performance for apple. more than 10 million of the new iphones were still -- stolen over the weekend. iphones account for more than half of apple's annual revenue. alibaba is now the largest ipo ever. alibaba ended up raising $25 billion. scarlet fu. >> is a point news on the home front. declined.ly the first decline in five months . had is from july when we $5.1 million. this is a report from the national association of realtors. those steppingg away from the market. to the chiefding economist, lawrence yoon. in terms of prices, the median price of an existing home rose to 219,000 dollars. this is an unexpected drop in the month of august, $5.05 million annual pace. stock indexes are pretty much where they are when they came out. but we're looking at softness in the stock market at the moment. back thank you so much very chairs hitting back you little bit and all and more than 2% on trading day. ons is after massive gains friday. 38% on his debut. cory johnson has been digging into what is next for alibaba and what investors need to know. he joins us from san francisco. >> $92 is a very different investment. a different expectation around the country. stock,ey look at this may have got so mentioned, you have got to think about the growth and think about what the company is. it isou see the price right in line with growth profile. if you look at it on a year-over-year basis for the last few quarters, you can see the business is really slowing down. concern.got to be a more like 20, 30, pick a number. when you pay 55 times operating earnings and it is not anywhere near if you times, it is going to raise concerns. >> still huge growth. it is slowing. what happens if alibaba is slowing in the u.s.? is it already too crowded? >> one of the interesting things of -- aboutn alibaba. international, as a percentage of revenue, has been shrinking quite a bit for the company. a couple years ago, it was 20%. 18 months ago, 12%. it is down to 9% of revenues last quarter. to some degree, it is about fantastic growth in china. they're growing internationally. but the international as a percent of the business is shrinking and not growing. that would have to turn around massively in a way that it really has not. down for an international percentage of their business. investors who own the stock have got to imagine different business than alibaba has exhibited. >> certainly, there is something else in mind. help us try to understand what else it might be? the other bold scenarios yet to unfold? i heard rumors they might by snapchat. >> when he is looking at is more macro trends with the company. more than 68. clearly, the market is telling us that today. one of the interesting numbers alibaba brought to the attention of buyers is how chinese consumers are very miserly in their spending. they have been thus far. the percentage of gdp, chinese people just to spend a lot less money than people in the u.s.. chinese customers are buying more and more on alibaba where three years ago, they were buying 35 times, 35 purchases a year. nowaverage chinese customer spending 32 per week. that, they really expect the chinese consumer spending 30% of gdp on these 67%s of consumer purchases, of real consumption has a percentage of gdp. that could be a big change or alibaba would be a big beneficiary. require a change of the very nature of commerce. >> a little more spending. thank you so much for breaking it down for us. coming up, we will go back to the most influential summit. with us is the president of the new york fed and many more. stay tuned. >> that is right. after the break, bill dudley and we will have so much more. >> quick questions to bill dudley. the president of new york fed cannot help to answer like, how will the economy generate its own momentum if the fed ends its garment with quantitative easing? >> we'll find out that and more would we come back. stay with us. ♪ >> welcome back. here we are at the most influential summit. i am stephanie ruhle with my partner. >> erik schatzker. bill dudley. >> relatively subdued. there is not that pressure on supply that would actually generate price pressures. >> right now, i think the world seems exceptionally chaotic. writing aboute world disorder everywhere, almost unprecedented. and yet, we have low volatility in financial markets, which includes the people here in this room. they are suggesting investors are not worried. how do you account for this? >> the ukraine and russian, what is going on with the middle east and what is going on with the region, all the things that majorturn out to be events in the financial markets. there are verbal for the people involved. there is not a lot of connectivity in terms of economic mess back to the economic world. as long as things are contained in those areas, financial markets, they are aware of them, but it does not actually lead to a lot of volatility in stock and bond prices. there is risk there to the global economy. >> there is considerable discussion to keep interest rates for a considerable time. how much more will though be -- will there be to keep guidance and how do you measure it? let's guidance is basically going to be driven by the economic data and how the economic outlook involves. -- involves. it is not an ironclad commitment. if you read the statement, it basically says, this is how we think the economy will evolve. if it evolves that way, we think there is a considerable time before we left off. if the economy evolves in a different way, i would imagine guidance would change. saysst week, chair yellen they will be booking on the feds forecast on interest rates and the economy and proposed changes. what does -- what needs to change? >> we communicate quite a bit of information already. the question is whether the summary of economic rejections, which is when the fed communicates its views about inflation, gdp growth, and the path of short-term interest rates, whether we communicate in the best way possible to the market, one thing we have right now is the. plot. there is interest rate inections for persistence 2014, 15, 16, 17. people are interested in those numbers as a guide to when the fed is actually likely to liftoff. my own personal opinion, i think people should not overrate the value of the dots, especially as you get out further. 416, and 17, but if i told you what my confidence was, you would probably not put a lot dot isht on where the precisely located. the subcommittee i think will look at the issue, are there improvements that can be made in how we communicate the projections information. obviously, if it was obvious there were a better way to do it, we would be doing it already. i do not think people should be waiting for big changes. but if we could find ways to improve that process, we will certainly go forward with at. >> like at the fed show investors a baseline path of interest rates? according to various scenarios? faster than expected growth, slower than expected growth. when that help avoid vague phrases like considerable time? >> yes, you could try to prevent baseline alternative forecast. is it overstates the degree of certainty about the path relative to the forecast. the reality is one of the problems with the economic projections is it is really is on modes, what is people's modal outlook on interest rates. the reality is is highly likely modes are realized. the second problem you have is we have 17 members right now of participants of the fomc. a lot of are a lover country. the ability to get all the group precise to agree on paths of interest rates under the baseline versus other forecast, i think that would be actually quite difficult to do in a timely way. is a stretch.unum >> central banks around the world who have actually published forecast, typically, they have a monetary policy committee that is quite small and usually located in one place. the fed can maintain inflation expectations at 50%, rates of employment, unemployment, to help strengthen the compensation for the pores workers? -- poorest workers? >> i could imagine a scenario where the unemployment rate dips below what we view as maximal sustainable employment. i would be the mechanism to push it back up to 15% objective. right now, with inflation running below 2%, we need the economy to run hot for some time to actually push inflation up to our objectives. it is possible. with the objections released last week, they show that for , theparticipants unemployment rate forecast for 2000 and he and is slightly what they think is the long-run unemployment rate. we can do that actually in those are cast. >> he talked about the need for flexibility, to restore flexibility and a monetary policy by raising interest rates . why is that important? >> being at the zero lower bound is not a comfortable place to be. one, the tools of monetary policy are more limited. you also have consequences for the economy. one of the things that makes me less happy is the fact that the crisis was about debtors and the policies font -- response has been hard. on savers. i want to get off zero lower bound as soon as i think it is a bit. i think the there is uncomfortable and it would be nice for savers to get positive return. >> which is the greater risk? raising interest rates, potentially derailing the economy? >> it is something we are evaluating at every meeting. there are reasons we should try to be patient. the first reason is you want to make sure when we do liftoff, you're actually successful, that you do not liftoff and then it turns out the economy weakens and you have to reverse course. we have seen a number of episodes where people have lifted off prematurely. the example would be japan in the 1990's. and a 2000's. united states and the great depression, the u.s. monetary policy in 1936 leading into 1937, that turned out to be a horrible mistake. it is characterized as the mistake of 1937. we have got to make sure when you raise interest rates, the economy can take it. the second reason to be patient is you really do want to push the unemployment rate down toward your objective. people valuable because will be employed who otherwise might not be employed. we have a lot of long-term unemployed. getting those people back in the workforce actively employed is not just good for them, but also good for -- it actually expands the production of the economy. those long-term employee stay unemployed for much longer. they will lose their employability. that will be bad for them but bad for the country also. >> five-year bond yields adjusted, positive for the first time in more than three years. is the fed ready to accept this tightening of financial positions? >> we do not control financial visions. it is also what happens in the financial economy. we take this on board. the dollar has depreciated a bit over the last few months, not by a significantly larger amount. if the dollar would strengthen a lot, it would have consequences for growth. we would have a poor trade performance, less exports and more imports. it would make it hard to achieve our objectives. >> speaking of the dollar, we have the bloomberg dollar index now, close to a 14 month high. the outlook is for further gains in the ecb. geopolitical risks increase. anybody who owns dollar assets right now is looking pretty good. as you said, if this keeps going, it will be a deterrent, not an enhancement. >> the dollar partly reflects the relative performance of the u.s. economy. understand what we're seeing here we do not care about the dollar, per se. that is not an independent goal of policy. the gulf policy as maximal sustainable unemployment and 2% inflation. as the dollar moves, that affects the appropriateness of the given monetary policy. taken on board, just like we take on board what is happening in the stock market and the bond market and the edit spread, for credit availability. all those factors drive our conception of financial and that influences our economic outlook, which in turn influences our monetary policy. >> vice chairman fisher. should we take this as a sign that bubbles will increasingly figure montt -- monetary policy decisions? >> i think the federal reserve has already had a sea change in terms of how they think about the risk of financial stability and asset levels. crisis, i think the view could be characterized by alan greenspan's views on the subject, which is that bubbles are hard to identify and real-time. policy not so effective in responding to asset bubbles. let's wait for the bubble to burst and we will clean up after the fact. well in not work out so financial crisis. it is a position i did not agree with even prior to the financial crisis. view, one i shared for a long time, you do need to try to identify asset bubbles in real-time and then look around and see what tools you have, even motte -- monetary policy were just the pulpit to try to address emerging imbalances. i think financial stability is on the fed'sly radar. it has been so for quite a while. the reason is simple. you cannot have an effective policy if you have a financial instability. it rendered monetary policy pretty potent for a while. financial stability is a anessary condition to have effective monetary policy. the fact that the board of governors set up the committee, it is just a lodge: . we've looked at this for several years very carefully. we've had briefings on financial issues. the presence of the 12 federal reserve banks have their own committee on financial stability. there is an office of financial stability at the board of governors, staffed by a lot of very talented people looking at it. i do not think you should think of the new committee as a big misstep. it is just the next step in evolution. forcing us to stick -- to think a lot more clearly and harder on financial situations. in hisas experience previous role as head of the central bank in israel. challenge in the u.s. in terms of financial stability, what things are available and how you get those tools implemented. in the u.s., it is more countriesg than other . .ifferent agencies we have an oversight council that can be informed for taking these things out. we have to figure out how to do financial tools to respond to bubbles. we will have to see if we can do that well or not. >> capacity and financial markets was among the major contributors to the 2008-2009 crisis. even sophisticated investors did not understand the dangers inherent. do you think the federal reserve and other regulators have done enough to increase transparency? >> i think they're transparency has gone up a lot here the federal reserve is much more transparent than we were before. 1990's, wee early did not even explain the monetary policy moves, let alone have a statement in a press conference. as far as the fed is concerned, we are more transparent. of market prices, there have been advancements. a lot more than before. there are still areas of that are stillts more opaque than i would personally like. we are not a market regulator at the federal reserve. this is more other people's value, but i do think increasing transparency of financial markets is a good thing. during the financial crisis, i asked a person a question, the ceo you're talking about, how long would it take someone to decide what a fair rice was, and they said, we can come back in for the price. not a good situation to be in. >> now more than $4 trillion. the fed has said in the long run, it has been reduced to the smallest level consistent with efficient if the mentation of monetary policy. what is the new normal for the balance she in the crisis. not know what monetary policy regime for sure will be the right policy machine it -- regime in the long run. the next few years, conducting monetary policy relying on reserves as the main tool of monetary policy. if that turns out to be fabulously successful, it is possible we could run monetary policy with the four system, were beside interest-rate that has a magnet rates more broadly. we want to go back to the system we had before the crisis, a small amount of reserves with the federal funds rate adding and subtracting the balance. in my own view, it is too soon to make that call. the call will be made by future committees. my personal opinion is, let's see how things go and learn and then we can figure out what regime is right. that will determine the size of the bounce sheet. what they're basically saying, whatever -- whatever regime we pick, we want to keep it as small as possible. >> would you say what is -- what you are describing is unprecedented? that we have not seen from the central bank do what has been done anywhere and anytime? i've certainly conducted monetary policy with large bounce sheets. the swiss national bank and others. think the balance sheet is quite so novel. got, the fed had the authority. more concernedot about our ability to conduct monetary policy of we do not have that authority. >> you have talked about this in various contexts in light of the financial crisis, considering requirement for the financial banks to add their bonds to the compensation for the top executives. the idea is to align more closely executive competition with financial stability. what is going on? can you give us an update? come a very simple one, if i am compensated in stock options, i am given incentive to take a lot of risk relative to debt holders in the company. i would argue in the form of deferred debt, so the company is in trouble, senior management actually they're the consequences. this leads to more conservatism in terms of how people run these countries. worthan interesting idea import -- exploring. we're having a conference and we will talk a little bit more about this going forward. >> this has made you very popular, i am sure. >> i do not see why this is problematic. we are talking about the form of the compensation. we can go back and look at the old partnership forms. i think if you look at the history of the partnerships, most partnerships were quite successful and quite stable. wouldk using the lessons be useful. think realistic do you this will be? >> it will not just depend on my opinion. we will have to get a lot of other people to agree. i think the logic makes sense. that should beng evaluated. >> the last three federal reserve chairs have been innovators, sometimes breaking with accepted views on how things should be done. how will janet yellen innovate? >> that remains to be seen. is the transition from ben bernanke and jenny on it has whath and revolutionary janet was the vice-chairman of the fmc during a good chunk of tenure. meaningful differences. how much he innovates will depend on what needs to be done. if things go smoothly, there probably will not be much innovation. but if things become a little more death cult, i am absolutely convinced that janet will do what she has to do to get us through it. >> a final question. fed officials have talked about the labor market slack and studies have shown it is there. i just wonder, what happens next? terms of the economy? >> if you look at consensus -- consensus, they generally look at 3% growth through the remainder of the year and also in 2015, that actually materializes and the unemployment rate should continue to come down. as the unemployment rate comes down, if the economy does better, that will set the stage for liftoff hopefully sometime in 2000 15. i will not do interest rates just for the sake of doing some before interest rates, but it would be nice to see sufficient economy.in terms of that would make me happy. [applause] >> that was bill dudley, president of the new york fed talking to bloomberg's editor in chief. i am here to review some of what he said. he ended on the most important point, which is when will the fed raise interest rates, bill dudley said what you might expect, which is, if everything is good enough next year, i will be happy. the economy is good enough to expand higher interest rates and he said, i guess this is true, he has never voted for an interest rate increase. >> unbelievable. as president of the new york fed, dudley concerned himself of something more than other members. >> much of the appearance today was not about monetary policy, but regulatory policy. the fed regulates the bank. the new york fed regulates most of the major banks. he was asked a lot about macro prudential policy and financial stability, the idea that they will use tools in terms of legal requirements, capital requirements, liquidity requirements, to try to keep banks from going too far. that is something a lot of bankers will keep an eye on. >> a hidden third mandate of the fed after job creation and price stability. >> the financial bubble blowup the economy in 2008 and 2009. he was asked about bubbles. does not see any developing right now. >> he said clearly there are risks there. >> the fed has changed the way he looks at it. to try tos, they want make sure they do not happen in the first place. >> so many people say that is a. >> it is hard to know. >> if the fed could not see the financial crisis forming, have a possibly see the other question mark >> now this -- now they are thinking maybe they could have seen it. late governor said, the subprime business is getting out of hand but they did not do anything because they do not understand possibilities. they now understand a lot more about these things. they are keeping anionic. there are things they could do short of raising interest rates. it will be at the bank level, probably. >> there is the problem of the next crisis never looking like the last. >> you're always fighting the last war, when there is something new coming along. that is why they set up the financial stability council, the idea that all these regular readers are talking to each other and may be able to find things. is morell dudley worried about what is going on in financial markets, how much more difficult of his job become now that the ecb is beginning to pop more liquidity into the european banking system? >> a tough job because liquidity role -- will remain in the global markets. it is really his markets he has to worry about and his bank yes ray about. he will focus on that. they will keep an eye on european banks that have operations here. >> what is the sense going forward, if you were to look at 2015 and 2000 asking, if the fed withnded its experiment quantitative easing, which it will in short order him and possibly will raise interest rates, how much does the job become a situation in europe remains dire if druggie and others are trying to resuscitate the economy? does that become a favor or and in -- or a hindrance to the fed question mark >> it becomes a favor to the fed because it helps our economy and helps growth here. whether or not it is something he could do anything about is another question. you cannot really affect that and still keep an eye on what is going out here. the question is, how do you manage the exit? >> he good conversation. thank you for putting it into perspective with us. right now, i am about to show you that stephanie is talking to howard marks and leon cooperman. it is a conversation you could see right now on bloomberg.com while we take a quick break on market makers. stick a round. >> i think if i look at the gdp --ph -- the gdp gap ♪ >> what would john rockefeller say? they say they will sell their investments in fossil fuels, moving in time for this week's start on climate change. you must have seen hundreds of thousands of people in the streets on the weekend protesting climate change. -- for climate change. us is corollary, president of outlooks and opinions. good morning and thank you for joining us. obviouslyellers are making the move as an environmental one but also an investment standpoint, this makes plenty of business sense. >> good morning. yes it does. we are starting to see a lot of these oil companies and gas companies, fossil fuels right now, making a nice peak. we are fighting margins hitting a high. u.s. to mastic crude oil pushing higher and higher. oil.s. domestic crude pushing higher and higher. obviously for the markets counties see a lot more people getting out of the commodity sector now. this is not a big surprise. also a good move for them. >> talk to us about why oil makers are divesting these assets right now. you mentioned commodity fund managers, hedge funds are getting out of commodities. news last week the california state pension also getting out of hedge funds that fuel commodities. thesee they investing assets right now? >> everything is cyclical. we are seeing oil and energy hitting its peak. we could probably see it go .ideways for a while we are not see a lot of volatility here. in america is stuck between 90 and $100. above and a little bit below, that is where is that. -- it is at. so that, we have a few more years where we will step is level. it is better for investment companies and investors to get out now and wait until we see the next big boom. >> why are we not seeing more onrcity on the supply side the crisis why? strive for.hat we we'll see a lot more divestitures out of oil and energy. it is too important in america right now. but it is a really big stack of growth. we see job growth exploded oil and gas industry that we see manufacturing costs go down and margins go up. we can afford our own and -- our own energy supply now. it is important we see this continued. that is a lot of reason we're seeing the prices not so much affected by geopolitics but more macroeconomic. >> if oil majors are divesting assets and selling things as refineries to of the individuals and philanthropic organizations are all getting out of these energy assets, who is buying them? more of aning american sport. it is really about people buying into it right now, or american investors, not so much the big fancy players like endowment funds or hedge funds were philanthropists. we have americans investing in america. that is a good thing. it is interesting we're not seeing a lot of foreign investment here anymore. america right now is simply about america. are getting more people here involved in it's not just from a work side but an investment side. much speculative play anymore but a growth play. theis becoming similar to mcdonald's of america. we are seeing more money put into what we use. >> can the largest investors really impact the price of these assets? to what extent have you seen to all these hit major oil companies selling off? >> there is a height. it is like everything, like alibaba. find a -- i do not think there is a big move on the downside. we are seeing energy plays here as well. levels, we are finding values here. >> the energy sector is is off in the winter. i think we will see the bottoms as well maybe for the next couple of weeks and definitely the next month or so. there will be a rebound. >> thanks to kara larry -- carl larry. later on, valerie rockefeller will join street smart for more on fund investments. in the meantime, coming up, we will hear from the hedge fund manager whose firm is one of the world's largest and -- most successful. from the most influential summit, next in two. ♪ >> good morning once again. i am erik schatzker live. it is a special edition of market makers. mike bloomberg and radel a.l., the founder and ceo of bridgewater, the world's is largest alternative asset-management. mike said down with stephanie ruhle earlier this morning and talked about the unique culture you will find. he had to answer questions about whether bridgewater is a cold. -- cult. >> there is a difference between a culture and a cold. and culturelture means we have clear values we are living out every day. a cold means people who are blindly following. in our places, it is the opposite of a cold. it is everybody being able to have their own points of view and being able to work through that with thoughtful disagreement. you have to have a system and that means you have to have a culture. in united states, it is a democracy with things we believe in. does that make it a cold? no. you attract people with similar values. if you do not have people with similar -- similar values, then you have no values and you will be at odds. people work for different reasons. some people work just to make a certain amount of money people -- money. if you are not clear when those things come at odds, you were going to have important disagreements. being clear about your culture is important. >> i do not know anything about the automobile business and i do not work in it but i bet anything crisis and gm have different values if you work for them. and yet they do the same thing. whatever. sometimes, the culture works for an environment sometimes, the culture does not work when the site dice are different. clearly google would have a different culture than ibm. they are both new companies so it is hard to see and people go back and forth. eventually, those two companies, they do not fundamentally attract the same kind of employee. very different cultures and very different politics internally and we will have different levels of success. >> that happened right here this morning. when we come back, you'll be hearing from bruce richards, the cofounder and ceo of marathon asset management, one of the world's most successful ventures and a man whom he might consider a mentor. also be here and he got started way back in 1978, investing in distressed assets and high yields in the shadow of mike milken. amazing stories to come. a quick break and we will be right back with you. ♪ this is a special edition of "market makers." we are live from bloomberg's most influential summit. >> without a doubt. >> where should we begin? the most influential guys, bruce and ceo of cofounder marathon asset management, one of the world's largest investors in distressed assets and global investments. >> is there such a thing as a distressed asset what -- right now? >> most of the economy is doing well. lessg out two makes it than 1%, below is that we had over the. of one year. $42 billion get to the default, and puerto rico is looking to restructure its debt. and you can't take out what is going on in the retail industry right now, with very stressed retailers. there are pockets of distress, but i'm with you, not a lot right now. >> what do you do? your job is the first $12.5 billion of investors money. buy,f there isn't much to do you look elsewhere or just compete with everybody else for the few opportunities that exist? of individualket distressed situations. we are finding our opportunities by surfing the world. -- theatreal fear that we invest in, the number one place we are finding assets is europe. are distressed energy companies, distressed retailers, distressed newness of pahlavi's. we are involved in these. we just have to edition the indiana toll route -- toll roads from a spanish bank. we are in the process of announcing now the restructuring across the northern part of indiana into chicago. swap that they put in place, there was too much debt outstanding, to roughly $5 billion or $6 billion in debt. so, there are a lot of special situations in the u.s. and a lot of special situations in europe, despite the fact. >> you mentioned puerto rico. what is your view? >> puerto rico is the second-biggest state when it comes to municipalities. not a state, obviously, it is a little island. toifornia has roughly 250 $300 billion in debt, $70 billion per acre. of debt for municipality. we are involved in certain segments. the constitutional amendment that was passed, we believe it will stand up in the courts and it allows for potentially certain creditor positions into things like power bonds, highways, storage, and different elements. we are positioned in certain parts of the capital structure and certain parts of the newness of pahlavi issuance, such as the power bonds and other income producing entities that are municipalities within puerto rico. >> these types of investments take a huge amount of manpower and resources, which you have the benefit of through experience. is it possible at a time with 11,000 hedge funds out there for these smaller funds to make it happen? difficult for smaller fund. we have restructuring lawyers and bankers at work internally with industry analysts and they go as deep as we are able with the company itself or with the legal entities and capital to putres, they are able our personnel in the field, talking to the various courts and restructuring advisers. >> what happened to the guy that put a shingle outside last year -- >> hold on, earlier it was stephanie ruhle capital. >> that's not going to win. >> what happens to those guys? >> it is tough for small managers to really make an impact. to do need critical mass accumulate the position to have a meaningful impact on the outcome according to the outcome you would like to try to negotiate. also, the team in place to do the work. without that, it is difficult. >> critical mass allows you to other things, too, does it not? i can knew shadow banking fund you are starting? you might call it something else, but you are raising what, $500 million to fill the void left by banks under strict capital requirements? breakinge already banks already, now you are making it worse. >> the share of banks is a big issue, obviously, as risk capital requirements for making certain loans make it very difficult. >> and problematic in many cases. >> to your earlier point, we just purchased, for instance, a couple of aircraft that we have leased to american airlines. this is a continued secure loan least two americans earning 8.5% when they're floating rate is trading at around 3.5% or 4% when they just started a 5% unsecured bond in the marketplace last week. we were able to add some term leverage to that against the return. how do the smaller firms secure such assets? how do small investors typeslize off of certain of investments that certain distressed managers make? is difficult. >> it's not between two and 20? >> we ask for less than two and 20. >> how come? >> because the market is probably less. i think it is 1.5 and 20. if you are large institution and you are negotiating lower fees than that, you have the buying power to do so. >> beyond leasing aircraft, what else can you do at marathon that once upon a time was done by banks? >> for instance, we are buying out of the banks in europe. millions of formula loans. we have just concluded the restructuring of the biggest european banks capitalized here. obviously a german rate, $4.6 billion in debt. our debts became the new equity on the upside from here going forward. ,n the heels of that in germany the rates have fallen from 3% to 1%, cap rates have gone up, we are capitalizing on other loans in germany that are outperforming and secured by real estate. we have purchased right now 240 shopping centers. we are purchasing the first senior mortgage debt for restructuring those loans with equity upside. the past, the first banks that made those loans provided us with the opportunity to buy it? no. the flipside of that is -- in the u.s. we are making real estate loans that banks would have made. >> and you are originating now? is that new? >> we have been doing it for years, but we are stepping up activity now because of the capital in place. >> knowing what you know about banks based on the businesses you have created and what you are buying from them, would you invest in financials? >> i would. i think that lending rates will be going up. i think that one of the cheaper financials in the world are the european banks that have underperformed for so long. they will have a zero interest rate policy for a long. of time going forward. they will perform well because of the ecb activities. in the united states i think it is a dead part of the value. >> we both want to talk to you about the decision made last week about calpers. i know you have spoken to a couple of people about it this morning. from your perspective, what does it mean? running marathon, calpers, and enormous pension fund saying we have had it, what does it mean? >> number one, it is the right decision for calpers. 40% of all capital incursion hedge funds comes from pension plans, public and private. it means that calpers is a ,eader and a large plan sponsor making a decision to exit. but they only have one toe in. most plans have 10% allocation of hedge funds. they should have 30 billion. if they had 30 billion they would have had more purchasing power to negotiate lower. they should not be paying two and 20. they should be paying a lot less. they only had four. they should have had much more. if they had had much more they would be able to do two things that were important. number one, negotiate substantially lower fees. number two, set up an account with the fund manager for full transparency, understanding the risk in the book and selecting to be able toers implement those strategies. i think they would have done well. >> the answer should have been going all in or folding, but they folded. >> they folded for now. was it arnold that said this? we will be back. be back?ink they will >> i don't think they have a choice. listen, they are yielding 2.5% to 3%. they will need opportunistic fixed income. they will need it distressed. just last week they were paying those kinds of fees to private equity managers. it is not the fees that got them. it is performance and lack of transparency. if they weren't big enough for the 1% position to really focus on, when they come back i think they will come back in a different way, a smart way by picking the best managers at 30 billion. 30 managers for $1 billion each. for that they can manage a lot lower fees with full transparency. is aboute question more money. >> every manager looking at this situation is asking themselves -- when is the right time? look, the markets going to turn at some point. situations that look great now will become tomorrow's -- >> here is a fact. jpmorgan just released on friday something that i had the pleasure of reading over the weekend, and they say that despite calpers pulling out they think they can be more powerful pulling out, despite five straight years of every quarter, public and corporate plans allocating more dollars every quarter for five straight years. this trend is firmly in place and i think the hedge fund allocations are important allocations at this time, particularly in this low rate environment. tory plan needs 7.5% to 8% charge fixed income and will be harward -- harder on the going forward basis. like the jpmorgan hedge fund report. now you know. thank you so, so much. we love having you. >> bruce richards is the cofounder and ceo of american asset management. always a treat to have him here. when we come back, the man that provided bruce richards with a little bit of inspiration. howard marks will be here as well, talking about distressed opportunities. >> howard's master class, when we come back. >> that was great. ♪ a barely's --k to to a very special edition of "market makers. howard, welcome. i love sitting and speaking with you, you are one of the most experienced guys out there. we have to talk about calpers for a minute. not literally what it means for you, but in a bigger sense. >> look, hedge fund is nothing special. there's nothing in the name. nothing is good because it is called a hedge fund. a hedge fund that operates well can get a superior risk-adjusted return relative volatility. if it is the right one, run by someone with a lot of ability. calpers said they were getting out of hedge funds, but they also said it was not because of performance, that it was because of intellect city. hedge funds are complex. ifan understand doing that it doesn't fit what the organization is trying to accomplish. >> why are mutual funds now interesting to you? traditionally i would not think you and mutual funds. >> number one, i have been in this business for 45 years and our main client has always been the defined-benefit engine plan. a plan like -- i get a benefit now from city that says that when you retire we will give you a certain percentage of your terminal salary. and inhings are closed decline. takee need clients to their place. >> is that going to change the way that oaktree invests? >> know, the funds will be available to someone who invests the way that we do. yous there a risk that could get too big? earlier you and i were speaking on a panel and the smartest investors out there limit the amount of investments they can have because if you are too big you lose the ability to be nimble. do you run that risk? >> everyone runs that risk. i think we are very conscious of the limitations on our assets. we don't take all that we can get. we close strategies and funds for a. of time. i think that we would be much larger today if we had taken all that we could have had. >> is it harder today to be so disciplined? a market continues to run higher. when we look at deals like alibaba going to the roof, how does one maintain the kind of discipline that you preach? >> it helps to have been in the business for a long time, it helps to have the experience, and it helps to know that life is cyclical and if, you know, enthusiasm takes the cycle higher, participate in that enthusiasm and you will also participate in the correction. we don't want to do that. as the environment becomes more enthusiastic, we have become more precautionary, trying to clip the top of the cycle rather than participating. >> is the and to z as a like a drug for the industry? example,t alibaba, for is it all a flustered set? >> i think that the enthusiasm comes from human emotion, which drives people. charlie monger, the philosopher, said that for that which a man wishes, he will believe. >> one more time? >> that which a man wishes for, he will believe. what do people want most of all? rich. if they believe that some manager or some tact it will make them rich, they will do that without knowledge, without awareness of the risk, maybe without the safety this time. this is what causes the fevered among usthat the sober must watch out for. are ine do you think we the cycle? enthusiasm last week made many people concerned, but while concerned they also wanted to your more. >> well, i think that the fervor that surrounded alibaba, i think that that was the unique thing. i think the markets are fully priced. my panel made this morning said fairly priced. i said on the high side affair. but still within the weather affair, as we say on the golf course. i don't think we are in a bubble. certainly not in the stock market. and i don't think the psychology is too heated, generally speaking. the thing that you have to watch out for is in order to get away from money market rates of zero, most people have moved out of the risk curve and are doing things that are perhaps more risky than they traditionally have done. when they do that, they often forget to be cautious. when they are not cautious, we have to be cautious. in today's market, smart deals can get done and done deals in get one. it is more important in that environment to be selective. so, in this environment we are being selective. our mantra has been to move forward with caution. make investments, be fully invested, but only on things we have carefully selected. >> it has clearly worked for you. howard, always great to speak to you. when we come back, we will be speaking about regulation. aay with us, you are watching special edition of "market makers." ♪ >> welcome back to this special edition of "market makers." i am going to take you right now to a live panel, where erik schatzker is speaking to one of the most senior new york banking regulators. the question is, how far behind are you? one mile or 100 yards? that is something that we think about a lot. we have a team where all they do is monitor what is happening in the markets right now. what's new, what's good, what's bad, what might be changing and how we as regulators should be thinking about those changes. >> your department has played a central role in some of the most important and high profile cases on wall street over the last year. curious, of all the bad behavior that you have seen at tanks, what surprised you the most? >> i think that what has surprised me the most, at least since i have been there, is that it doesn't really go away. i have often felt like we and other regulators, especially on the enforcement side, tried to do a good job of addressing problems, yet they seem to be repeating themselves often. i think that for a regulator, if you are a regulator who thinks a lot about self-improvement, that causes you to look into the mirror and say -- are we doing something wrong here? why are we not making more progress at making things better? the more that we've thought about that, i don't know if you want to talk about it today, but i think a lot of it has to do with coming up with ways to deter bad conduct on wall street. >> how do you deter bad conduct? >> i think a lot of it is about individual accountability. at the end of the day we are dealing with large companies that are trying to do it right. often there are just a few bad apples in that bunch who are willing to get involved with certain types of conduct that i think everyone in this room would agree is wrong, inappropriate, sometimes even the legal. the question is -- how do you keep those people from making those kinds of decisions in the future? one thing that we always remind ourselves is -- if something went wrong at the company, if there was bad conduct that accompany or affirm, some individual, somebody did it. an individualind at the company who is responsible, or individuals who are responsible for that conduct, stop looking. holding the individual accountable, exposing their conduct to the light of day and finding a way to appropriately address that individual, i think that causes people in the future might engage in similar types of bad conduct to think twice. just the firm paying a huge fine? i don't think that does it. huge fines can have their place, but individuals can make decisions based on consequences for them, for their career, for their family and future. if we hold individuals accountable -- it sounds harsh and it is hard to do as a regulator or a prosecutor, but i think we will make a lot more progress in terms of deterrence and i think we will make progress in making the system better. saidmoment ago when you you looked at yourself in the mere and asked -- why am i not more effective as a regulator, at that point you realize that the $8.9 billion that bmp paribas paidbnp was not enough? you have to call out individuals? >> i don't know about the timeline on that, as i remember it sort -- sort of more before the ibs case we held more of and -- more individuals accountable, but i think that we realized, you know, just damming the entire firm is actually often counterproductive. it puts you in the position of making it look like the whole firm is to blame. often, by the way, i huge fine is picked up i shareholders, customers, or whoever the cost are passed along to. is there a lace for it sometimes because they do deter especially systemic conduct? let's say that the firm and management was involved and structured in such a way that allowed bad conduct to exist for a long time, sure, but if you don't hold individuals accountable, you won't get the full effect of the deterrent. we tried to be as focused on moving into the future. if you aren't getting that at times, you might be getting your pound of flesh, but you won't be improving the system over time. individual say accountability, what do you have the power to do? >> we don't have grand jury indictment power. but in working with the firms, which often jump at this -- they will say that if you have identified, mr. regulator, individuals who did this, that, and the other thing that were clearly wrong, it should often -- one is just exposing it to the light of day. itending on the conduct, could be loss of job, he could be clawbacks, it could be other kinds of sanctions. there are obviously civil sanctions for us, we leave it to the prosecutors we are sometimes working with in order to decide whether criminal penalties should be enacted. >> what about you process? criminalse of prosecution, if you want to you are entitled to your day in court. that does not apply at the department of financial services. >> it is something you often work out with the firm in an agreement. that is an important point that should cause regulators to hesitate and think carefully about what they are doing. if you are going to hold individuals accountable, you are the prosecuting judge and jury at the same time. the reason that is effective from a deterrent standpoint is because the consequences are very dire for the individuals you hold accountable. if you realize that you have to take a deep rest and make very sure that you have the facts right, because it would be terrible to make a mistake and have someone's career impacted in a very negative way over something you were wrong about. i think we try to be very careful in working it out with firms and individual lawyers as well. someone who says that you just have it wrong, that they didn't do what you thought they did, or you need to understand it within the context of these different things, that something that we take very seriously and spend a lot of time on. it is why holding individuals accountable the so hard. >> you have been doing this for several months. if you look at those cases, ibs, credit suisse, i don't know if there was individual accountability there. >> the first one there was not, not particularly. >> if you look at the cases you have built over the course of the past year, what does that tell you about how you will handle the issues in the future? do you feel more emboldened by the results that you obtained? you were able to put quite a few names on the list of the bnp case.s >> as soon as a regulator or prosecutor ins to feel personally emboldened, they should start looking for another job. i think it is important to be humble, careful, and cautious. at the same time, going to the future i think there are more of these cases to come and i think that holding individuals accountable is just a central, key aspect of what we are doing. >> there are more cases to come because you are developing the cases right now? or because the bad behavior doesn't go away? >> more of the former. we have cases the we are working on now that are in the pipeline that we think will result in similar outcomes to what you have seen before. will there be future cases? it wouldn't surprise me. but i don't want to guess. >> when you say similar outcomes, i think everyone in this room is asking themselves -- another bnp paribas? is that possible? >> we will see. that was a very large case. the scale and magnitude were tremendous. the cases i'm thinking of probably don't rise to that level, but they are also serious. be an equallyhere serious case in the future? i don't want to rule that out. >> just last month you find standard and charters a second time. this is effectively for violating the terms of its agreement. is recidivism a bigger problem on wall street than many of us might realize? >> maybe. i don't think about it so much as recidivism. i think about it again from the regulators standpoint, which is that we are often in a situation where we settle the matter with a financial institution and we think we have solve the problem, but if you are really doing their job -- your job, we call it stick to it of this -- stick ivness, if you stick to your job after you finish the case, you've got a monitor and a settlement, you have to work to make monitor closely sure that the reforms you have tried to impose are actually having an impact and being effectuated. i think too often regulators just move on to the next case. the monitors left inside the bank are being paid by the bank, they are spending all of their time with nice people in the firm and, too often, you see the result is less than satisfying. >> i want to ask you about cyber terrorism. are we taking that threat seriously enough? >> it's impossible to take it seriously enough. to me it is the most significant issue that i think we will work on in the next year. just one or two of the problems that keep me up at night as a financial regulator. that there is a lot of chatter about it and from all over the political spectrum, policymakers and regulators are all talking about what a threat it is. but i think there is a real difference between talking about a threat in dealing with the threat. >> too much talking, not enough doing? >> maybe. i worry that we are going to major cyberrt of event in the financial system that will cause us all to shutter. and armageddon type cyber event. like something that causes a blip in the financial system. >> causing it to break down. >> in some way, or some aspect of it that can be very damaging. that's my fear. we like to say that to some extent the failures to detect the 9/11 plot were a failure of imagination. >> and communication. >> i worry about the same thing here. that an event will happen and we will all look back at it and say -- how did we not you more? similar to have your 9/11 everyone looked at it and said the same thing -- how were we not doing this, that, and the other thing? the question is -- what do we do? it's well and good to say that, but all i can tell you is that we are spending a lot of time with other regulators trying to come up with concrete actions to take. one thing that i think we should also think about, it's not just regulators, but we need to think of ways to incentivize market participants to do more to protect themselves from cyber attacks. >> how do you do that? how do you incentivize them to make those investments, make those decisions? >> i think part of it is just job owning, which is what we are doing today. thinking about smart things to do, like cyber insurance. there is a small market for insurers for cyber events. if we can regulate the insurance market in new york, if we can come up with ways to incentivize or push the companies that we regulate to offer more of this, it could create a situation where as a firm you will be able to get insurance for cyber attack, but you will have to raise your standards in terms of the protection you have in place. from her regulators standpoint that is a great outcome. it is the markets distancing themselves and working it out, which is always a very positive thing. many years ago when insurance first got going, fire insurance was one of the first forms of insurance and you saw companies being willing to ensure for fires if people brought their code standards up so that there was less risk of a fire happening. i think that we can start thinking about -- i didn't make this up -- on this subject, if we can start thinking about raising those standards i think it will be quite effective. >> when you say you stay up at night worrying about and armageddon like event in the financial markets, is that because of what we have all seen take place at jpmorgan, for example, or home depot, or target, or google? or have you seen things that we haven't seen that make you worry? >> you know, i think that it's some of both. i think that part of it is that when you sit around with the smartest people out there on cyber security and cyber threats , people like dick clark and will tellmidt, they you that when they get in a room with a bunch of ceos to talk about this, there are only two types of people they meet. people who know that they have been hacked -- people who have been hacked and know it and people who have been hacked and don't know it. the sophistication of the hackers is so great that they are breaking into everything. feels to a lot of people like only a matter of time before we have something more systemic, problematic, and coordinated. >> who pays to fix it? the shareholders are the customers? >> i think it will be all of us. it is probably worth it, frankly , for all of us to pay for it. shareholders will have to bear it. taxpayers will have to bear it. it is going to be a huge concerted effort to pay for this. by the way, it is a bargain. if we harden the system is now to protect against something more catastrophic, it is a great deal, in my view, because once there is a major event, shareholders suffer, customers suffer, taxpayers suffer. we will pay for it now or then. >> and later it will be much bigger? >> much bigger. >> before we run out of time, i want to ask you about bitcoin. you have been active in attempting to establish a regulatory framework for this virtual currency. why? what is it that you are trying to achieve that bitcoin requires? >> look, i think the hope is that we have studied virtual currencies quite a bit as regulators. the more we look at it, the more we realize that there was some very powerful technology underlying this alternative currency. as it becomes more mainstream, it could become a powerful way for people in certain circumstances to engage in certain types of transactions. it could also cause the rest of the payment system world to improve things. me, right now. i have an account with a large bank and when i put in money to pay my credit hard, with the same bank, when i do that transaction online, it takes three days. to me that's crazy. it's all within the same bank, i'm doing it online, but there is still this three-day lag. there is a lot of room for improvement across the system, but the fear with virtual currencies is that the pseudonymity that people have can lead to a lot of bad things as well, like monitor -- like money laundering, drug deals, and we don't want it to be the dark corner where all the bad stuff happens. the question is, you have this used to innovation not regulation colliding with the tightly regulated for good reasons bank world. i think that what we would like to do is have regulation that is the lightest touch possible to promote innovation and new technological improvements, but not so light that you allow or per ration's to use a money laundering, etc.. it's getting that balance right that is difficult. when does the regulation get finalized? >> we have thousands of comments we are going through. working oneam is them. end of the year, early next year , we will continue to work on the book. >> of all the comments to chew are aware of, what is the one concern that is most frequently raised? >> we have a lot of good comments about how part of the regulation can be read to broadly to stifle innovation and that the more we can narrowly tailor those so that we don't, for example, stifle the development of new software developers and their work, i think that that would be useful. a common comment that i think is a good one. >> thank you very much. pleasure to have the opportunity to speak with you. >> benjamin lough ski, thank you. >> thank you. we need to go to break, but when sitting downill be with terry duffy. we have him with us here on bloomberg television. ♪ >> welcome back to a special edition of "market makers." where do you think we are in terms of market confidence? >> i think it is at an all-time low and you can probably see why. a lot of people missed the equity market and are blaming something else because of it, rightly or wrongly. whether it was bad actors like bernie made off and others in the marketplace, or they have been scared away as of the execution of trade during high-frequency trading. it is kind of a shame. when you look at good companies, like ibm, procter & gamble, when you go through this list of wonderful companies in the fortune 500 or s&p 500, those are good companies worth investing in. it shouldn't be the execution venue that keeps you out. just do your research. >> when we look at all of the ipos that are happening right it, like alibaba, doesn't seem like investors are flooding back into the market? >> you would think so, but they are flooding into the markets were couple of reasons. they are chasing some markets right now and they are chasing yields. everyone's trying to get a return on their money. as long as the fed keeps his zero interest rate policy where people cannot earn anything by purchasing treasuries, they are going to have to eventually going -- going to something like that. tothey are going to have chase the highfliers like alibaba. i guess the market will tell us, but it does concern me at these levels that people are chasing to get yields out of returns. >> are you concerned that current monetary policy actions are causing asset bubbles? >> there's no question about it. willyou look at it, people be out and spending on a host of different issues. new car sales were at record levels, auto sales going up dramatically in the month of july, not a traditional car sale month. stocken looking at the market, as we just spoke about, going up. people are chasing a lot of large ticket items right now. >> what will bring back confidence? smart regulation? is smart regulation even possible? >> radio laois and that makes sense that you can operate in a global market lace. we aren't just operating in the united states. to disagree going with that statement, but cannot actually be executed? now, someone is always looking for an advantage. whether it is asia, europe, or the united states. they were the first ones to pass the dodd-frank act. number two in the u.k. did not take effect until 2016. asia has done nothing. they don't even report of the law. it is hard to say we have a that -- global framework made sense. >> isn't that the way the market always works? someone's always trying to find a loophole. that's kind of how the capital markets have been set up. >> if you do that in the market, i am a big believer in the flight to quality as far as markets go. the flight to quality, as it has always been, will be in the united dates of america. they will put something in place, a problem will happen, and they are going to wish they were back in the united states. there is a lot of managed money out there. >> what did that accomplish? just shining a light for smart regulations? >> it scared people when they didn't need to be scared. to say at $23 trillion market is rigged is a big statement. i think that what is important here is that people need to have confidence in the market structure where the transparency is not enough for the investor. when 40% of the equity market isn't dark, there's no transparency on how the price got there. you need price discovery for the individual investor. highlight that. runninge are front orders, that is against the law. we are looking at how they can beef things up, but it was a reckless statement. >> take it back to before nevernce, was the system truly transparent? those guys on the phone could have been hoarding information or getting in ahead of you. pools whening dark it has never been a perfect system? >> it has never been a perfect system, you are absolutely right. >> thank you. webut with the technology have been able to have over the last several years financial only agencythe getting punished. if you are ever going to get a better system, maybe not perfect, but you need to have technology to level the playing field. example, your otc clearing has doubled this year. why is that? >> a lot of reasons. from, the mandate dodd-frank. second, we can clear the hearing house. today we are at $20 tree and in interest rates. billions on their portfolio against the futures contract. sitting there with $50 trillion in open interest at record levels, so that these .hysicians cmeust last week restructure their entire leadership team. why? >> we didn't do the whole team. last i checked. >> i was going to say, use the have a job there. [laughter] >> we streamlined a few responsibilities. it is such a big organization. we got more people involved in the decision-making process. we gave a lot more responsibility out within the organization. remember it is a 160-year-old institution. prior to that it was run by members for the benefit of its members. >> for those people that you elevated and gave bigger jobs too, were any of them women? x yes, there are. kim taylor, the former president of the clearing house, now has a major role within the organization. >> i will have to take you to lunch for that. thank you so much. that is going to be it for "market makers." i will be back for an exclusive sitdown. for now, my friend olivia sterns is taking you on the markets. >> great interviews, looking forward to the afternoon at the summit. in the meantime it is 56 minutes past the hour. let's get you caught up with where stocks are trading right now. are moving lower after comments came out of the g-20 over the weekend, warning that the global recovery is coming at an uneven pace. we are also here from and km, helping us to track what is going on in the options market. during the interview we talked about how this might down to seasonality, picking up a little bit. what does that mean? seasonal affective disorder? there is much, academic work on that, more specifically and historically the vicks heats for the year a round the third week of october. what is behind it is up for debate. behind it is the peak, even when it got above 80 or so you see the trend in place. there are certainly reasons to be cautious over the next couple of months. >> the vicks is supposed to be a sentiment index, hard to believe it is trading on technicals. >> if you want to call that technical. it really represents the psychology of the market, which is there to represent the angst that is building in in the walk-up into october, spiking somewhere in october that is something that history would tell us is very possible. >> aronoff. one that we are watching today is ebay, which took a big hit last week after apple pay was debuted. what is happening there today? mike ebay is down 10% from august to september. mostly out of november. what that means is the downside risk is relatively removed compared to the upside calls. with the stock really range bound since 2013, you could interpret that to mean that investors are saying, broadly with downside risk what the catalyst is. an october with implied volatility. that would be one way to capture upside on the breakout. >> looking at the bloomberg terminal, a record high with , hitting a 52-week high last week. view thating with the investors will be well served for being cautious over the next couple of months, this is still a bull market. how do we do that? optimizing is a good example. reporting the third quarter and october, volatility was relatively low. the last quarter was a beating raise, we think we will see something similar here with the stock breaking out above the 63 level last week. to january of 2015, we were 65 or 75 with call spreads, you can do that for two dollars and $.30 or so. get that long directional exposure to mitigate the risk relative to buying the stock. >> interesting. a called trade on actualizing figures. in the meantime, money clip is up next. ♪ >> welcome to "my click, where we tie together the stories, interviews, and videos in business news. i am adam johnson. a run down today, the most influential bankers and investors are all under one roof. we will take you to bloomberg's special summit right here at the big apple. the second largest retailer in trouble. tesco says a quarter of its profit does not actually exist. world, the ukraine tries a cease-fire attack. we will go underground. in sports, the nfl holds a friday night news conference