Christopher Whalen, Institutional Risk Analytics

NOVEMBER 7, 2011

SPEAKERS: TOM KEENE, BLOOMBERG SURVEILLANCE HOST

KEN PREWITT, BLOOMBERG SURVEILLANCE CO-HOST

CHRISTOPHER WHALEN, MANAGING DIRECTOR, INSTITUTIONAL RISK ANALYTICS

7:36

TOM KEENE, BLOOMBERG SURVEILLANCE HOST: Christopher Whalen with us, Institutional Risk Analytics. Chris, good morning.

CHRISTOPHER WHALEN, MANAGING DIRECTOR, INSTITUTIONAL RISK ANALYTICS: Good morning, gentlemen. Good morning, Miss Quinn.

KEENE: What is going to be the fallout of M.F. Global in terms of how Washington will address those too big to fail? Will they cast a wider net?

WHALEN: No, I don't think it really has anything to do with that. You know, this reminds me a lot of Marty Mayer and his work on the Salomon debacle. But I think the key thing to say about M.F. was why did they want to be a primary dealer in the first place? That is not a business any sane organization wants to get into right now.

KEN PREWITT, BLOOMBERG SURVEILLANCE CO-HOST: Why not, Chris?

WHALEN: It is not very profitable, Ken. It is a loss leader. You do it for the prestige and the supposed information you get from servicing all those big clients around the world.

But, you know, look at Wells Fargo. They have been invited several times and they have said no. And I think that is the right choice.

So I think this is a regulatory issue to some degree. This shop was obviously taking an awful lot of risk and doing so with derivatives. Read David Kotok's great piece yesterday that I posted up on Zero Hedge last night. I think it is very clear that there were, once again, issues of competency at fed in New York.

But it just reminds me that Gerry Corrigan, on his way out the door in 1993, closed down dealer surveillance. So the problem goes back that far, Tom.

KEENE: When you look, Chris, where we are - you know, Greece blowing up, Italy blowing up, how far are we in clearing the financial markets in the United States? Fannie and Freddie still hang over everyone, don't they?

WHALEN: Yes, nobody wants to talk about that until after the election, as we discussed last time. There are tens, hundreds of billions of dollars in unrealized losses inside Fannie and Freddie. And this is one reason they don't want to let a lot of those older, high couponed mid to lower income borrowers prepay through refinancing because the losses would increase and the Treasury would have to right a bigger check every quarter.

So there is a game being played here and ultimately I think Barney Frank and Chris Dodd will be rhetorically hung from the lamp post because they stood by and did nothing. And they made this problem worse. We could have privatized this agency but for Larry Summers, who had least begun the wind down. And he blocked it. You know, it is very well documented in Gretchen Morgenson and Josh Rosner's book.

PREWITT: Chris, the Volcker Rule, which as I recall started out with something like a three page letter from Paul Volcker and now it is about 300 pages.

WHALEN: Oh, it's more than that, Ken. It is obscene what we are doing with these regulations. It's crazy.

PREWITT: I wanted an update from you. How many pages is it now? And we still don't know exactly what it is supposed to do.

WHALEN: Well, what has happened is it has turned into an iterative discussion between the banks and the regulators. So they go out for comment, they get the comments, and the comments go on for hundreds, thousands of pages. And it is all very interesting and useful.

But I think there are a lot of ways to get around the Volcker Rule bottom line. I don't think it will be effective in terms of stopping firms like Goldman Sachs investing directly in other companies and doing so in concert with clients, which was the key stylistic issue for people like Goldman.

It is hurting the banks in the short run because it has caused them to change their business model. But they will change, as you know. They will be paid and they will get done what they need to get done.

KEENE: Right. Chris, Mike Mayo was in last week.

WHALEN: I know, great interview by the way.

KEENE: Thank you.

WHALEN: I love Michael. We worked at [Pru] in different parts of the organization.

KEENE: Mike Mayo in, and really talking about how nothing has changed in terms of the sell side ballet and the sell side pressures. Do you agree with that? I mean can we be so cynical as to say nothing has changed since the time of Jack Grubman?

WHALEN: Well, no. I think that is right. Reg FD has been a failure. If anything, it has hurt research and hurt investors.