When Geopolitics Moves the Stock Markets (w/ David Metzner)
ED HARRISON: David Metzner, it's a pleasure to have you here, because your expertise is exactly what's going on and driving markets right now. I'm going to have a round house discussion with you about public policy, what we can learn from? What are the right levers to pull, et cetera. Most importantly, I want to start off with this is, what is Donald Trump driving at in terms of his policy initiatives? Where is he coming from? And where is he going? That's really what I want to know. Let's start out with-- we were talking about this a little bit off camera before, Donald Trump, what's his vision of the world? Where is he coming from in terms of how he's thinking about public policy? DAVID METZNER: Well, first of all, I thank you for having me here. I appreciate it. I think it's hard for people that are interested in the economy, investors, to understand or even believe that Washington is the epicenter of worldwide risk. It roils markets worldwide and a lot of that is perceived to originate in the White House with the President itself. I think what people forget, there's certainly a lot of noise with the President's tweeting, but what's different is, what people are missing, journalists are missing is that he's really a New Yorker. He grew up in Queens, son of a successful Queens real estate developer who first came to New York so he tends to look at the world as a developer. ED HARRISON: A real estate developer. DAVID METZNER: Real estate developer. He wants to play with the big boys, so he looks at China perhaps as Vornado. He would like to do a deal with Vornado, rather than, say, the European Union, which he probably looks at as relatively undercapitalized Nassau County developers. On top of that, he's been a Democrat most of his life, so he brings whether it could be called New York Republicanism, going back to the Nelson Rockefeller era, but he's a moderate in the social sense, what we've seen coming out of the Republican Party in the past few years. He's a pro private sector person. His view is probably formulated in the late 50s, early 60s, went to New York Military Academy. That's who he is, and its core. ED HARRISON: It's interesting. You mentioned Nelson Rockefeller, I wrote a post-- I think it was right after he got elected, about Rockefeller Republicanism and the potential for Donald Trump to go in that direction. Of course, we have Wilbur Ross, who's also a Democrat who's in his administration, but it seems to me that he's moved in a different direction, creating a noise channel that is making it seem that in fact, he's much more to the right than you might believe. DAVID METZNER: Well, Richard Nixon once said the actor who run to the right in a republican primary have to run to the middle to win the general election. I think, though, at the end of the day, the president truly brings a New Yorker's feel to politics. I don't think he's an isolationist. I think he's inclusive, his daughter converted to Judaism. He grew up in Queens. This is a person that is used to seeing a complicated world and not a traditional one-dimensional America. ED HARRISON: When you talk about complicated world, we're living in a complicated world and public policy is a big part of that, and especially on the foreign perspective. There's so many ways that we can start this conversation. I think I was talking to you about this before, I really want to get into China in particular, because that's where a lot of the complication is. I think a lot of the people that we talked to here on Real Vision have said it's 100% true. The Europeans would probably say the same thing as well, that China has been engaging in IP theft and they've been gaming the system so to speak, and that they're very happy that Trump is doing something about it. The question is, how is he doing it and is this the right way? How would you frame that? Where is Trump coming from on this issue with China and where is it going to lead in terms of an actual solution for the United States? DAVID METZNER: My China background goes back to when I was the vice-chairman of Woodrow Wilson Center, which is part of the Smithsonian. There, I was able to create the Kissinger Institute on China in the United States. I was a guest to the Chinese government, this is around '08, '09 many times in China, the height of when we would believe in China was going to be more like us. That's changed. I think what you're pointing out is that essential fact which I find it hard to believe that the Chinese haven't picked this up-- is the Trump's China policy is fairly bipartisan. The Europeans are cheering us on Protect IP. I heard Cecilia Malmstrom, who's heard of GG Comp in the EU speak in DC. She said the WTO is there to protect market economies. China needs to be more of a market economy. I think what's changed is-- the big first change was the militarization of the South China Sea. President Xi stood at the Rose Garden with President Obama and said they would militarize it, and they did. That began the process of reevaluation of the US-China relationship. I've had the opportunity listen to a few US senators speak. Those that have access to high intelligence briefing would tell you that China is a national security threat to United States. They're convinced of that. This gentleman said to me, I disagree with the President's solution to it of trade, but it is a real problem and it is something that we're going to have to deal with for the next 20 to 30 years. ED HARRISON: How do you do that? If he disagrees with where Trump is going, because I think the Europeans would also say the same thing that we agree that intellectual property is a problem and we want to crack down on that with regard to the Chinese, especially the Germans, because a lot of their middle stunt has seen their intellectual property being co-opted as a result of joint ventures that they've done in China. The reality is that we're seeing trade have a very outsized impact on what people think is going to happen in the economy going forward. As a result of that, people are not enamored with the way that Trump is going about it. What's the alternative to this? What's the endgame for Donald Trump? DAVID METZNER: Listen, I think we have to accept that there's a fundamental realignment at the whatever outcome, and I love to share with you my view of where we're going on the US-China trade. There is a realignment that that is taking place. If you speak with CEOs across the United States, they will tell you, they are changing their supply chains. They do not want to rely on China. It's not about Donald Trump. What about the next president? They want to have a diversified supply chain, as you probably saw in Mexico and Canada are now one and two trading partners, China's dropped to three. I spoke to a CEO that made a product, they were on the original tariff list, they're now making in Malaysia. It's interesting, they're making it from the same Chinese company, but they moved production in Malaysia, those Chinese workers are out of work. That's happening across China and Chinese leadership knows that. They're worried about it, and takes me to the point that both sides I believe are incentivized to do a deal. ED HARRISON: You still think a deal is possible in this climate where we've had de-escalation to a certain degree recently. You know what, at the time that we're taping this, we've seen that Donald Trump has backed off in certain tariffs. We've seen that the Chinese have backed off in terms of their peg, but it seems that the momentum has shifted somewhat, and a lot of people are saying that we're in a new Cold War, so to speak. DAVID METZNER: Listen, first of all, let me say the Chinese have been copying things for hundreds of years. They had export rugs that look like Persian rugs. They had export china, export silver. That's part of their DNA going back. I think the original problem with the approach to China on the Trump administration, you're not going to try and change the Chinese business model. The PRC and the Communist Party of China were created to end what they perceived as 100 years of humiliation. If Xi is seen as backing down and being a weak leader, he's gone. That's the foundational philosophy of the Communist Party of China. Getting the colonists out, defeating the Japanese. It's possible in negotiations and some of the rhetoric went too far in that direction. I think Trump will look for a deal that reflects the deal he did was Korea, the Korus deal, the deal he did with the New NAFTA 2.0, USMCA. These are not monumental redress. Are they better for American workers? Absolutely. Are they fundamentally radically different? No. I think you'll see a deal done where the Chinese will purchase more goods, they've done that in the past. I think Trump will remove some tariffs, but not all tariffs. The Chinese can always re-trade Trump, but their fundamental, as I said earlier, perhaps misunderstanding is, is the Democratic Party is aligned with Donald Trump on this and that he's stolen their thunder on this. Chuck Schumer's asked for China be called a currency manipulator for a decade, and it happened to the last two weeks. It has no impact on anything, but it's certainly probably noise to the Chinese. ED HARRISON: What timeframe are you thinking about for this, especially from a political perspective? DAVID METZNER: What we like to tell clients is what should you look for? There are things that guide us to our analysis. One of the things we've said is, will there be conversations this August? Both sides have talked. They talked yesterday. Will Xi and Trump speak? That's a big question. Every time they speak, they have a positive meeting. When Trump went to Buenos Aires for the G20, everyone want to know what would happen. And again, this is classic DC mosaic. I'm out one night, so I'm actually at the Trump Hotel, I see a Senior Advisor to the President. I said, hey, what's going to happen in Buenos Aires? He says, I don't know, but let me tell you something, David. Remember that Trump like Xi. It gets back to my-- he's a big man, he runs a big country, Donald Trump's runs a big country. He likes to sit down and do deals with his equal. I think if they sit down and talk, it's in both countries interest to get what I call a skinny deal. It's not going to change the world. It's not going to change the Chinese, the way they do business. They'll pledge to protect some IP. They'll pass some legislation that gets about 20 pages long. They'll make some pledges, which they can retrade. They'll buy some more AG. They'll open their market, they've done some opening as it is in the financial services space. There'll be some things. And hopefully, the world trading system can calm down a little bit. ED HARRISON: When you were talking about that, I noticed you were talking about some of the inside, the beltway DC talk, and off camera, we were talking about this. You had a story where you were talking to someone in DC, which is a ghost town, I live in DC, but that he was working late at night. Give me a little sense of how that all plays out. DAVID METZNER: It's interesting, because there's so much going on, whether on trade, mortgage finance or form with the GSEs that if I'm invited to a reception, normally, they'll really want to go home. But every time I'm out, I learned something. I'll give you an interesting GSE story. Literally I had an event, again at the Trump Hotel, nonprofit, and a senior member of the administration's economic team. I said good work on the presidential memo. That was roughly end of March. This gentleman grabbed my arm and said, David, don't you know that POTUS wants to privatize this? I'm like, he thought he didn't say anything important to me. I was like, shocked, because privatization of Fannie and Freddie means two things. It means you have to build capital through retained earnings and you have to settle the litigation. That's what the President wants. That means all his advisors that were rumored to be fighting have to do what the President wants, and they will do it. ED HARRISON: That's something that you had told me earlier is, is that really, this is a thing if the President wants it, he's going to get it-- forget about what all these other guys are saying? DAVID METZNER: Absolutely. There's no dissent in the White House among these advisors. They know they worked for the President. I've known Mick Mulvaney, who's the chief of staff. He's an interesting person, because he's chief of staff acting, he's the Prime Minister of the United States, he was supposed to run the government. As you know, a budget director, he's the CFO of the United States. He could be the most powerful person in the government since Kissinger was both Secretary of State and as the advisor. Mick brings a lot to the table. He brings math and he brings politics, something the White House was missing. What I mean by math, his family ran the largest residential construction business in North Carolina, so he understands finance. He understands federal budgets. He understands mortgages. And he brings a great sense of humor to TV, and I understand he's a scratch golfer, that's a plus to the Trump White House. ED HARRISON: There are two ways that we can go in this conversation based upon what we've been talking about the GSEs which you just brought up, and I definitely want to talk about that at some point. You also mentioned USMCA, and since we're talking about trade in general, I think it's a very good pivot to go from when we're talking about China to where these supply chains are potentially moving. You talked about Canada and Mexico has been number one and number two trade partners for the United States. China going down in number three. USMCA has been signed. It hasn't been ratified, so to speak by Congress. Where is this going to go, and how do you think it's going to play out in terms of our trade relations with China as well as Mexico and Canada? DAVID METZNER: Well, what's interesting about USMCA, yesterday, I had the opportunity to go to breakfast with the Atlanta Council, with the new US Ambassador to Mexico. A very impressive guy, speaks Spanish. In that room were every association in Washington you can imagine. They all were talking about the importance of getting USMCA passed. What I learned yesterday is that Nancy Pelosi really wants to do it. Secondly, I learned that the labor demands are considered by the Democrats hard for US to sell to the Mexicans because the Mexico passed a new labor law when they ratified USMCA, so getting over that final hurdle is going to be a challenge. When you look at the pure math of USMCA and the automobile area, 75% North American content, significant percentage of that has to be done in high wage countries-- Canada and the US and just the integrated supply chains. I think someone quoted every $5 spent on manufacturing in the US, $1 goes to Mexico and to Canada. We can't ignore that. It's not radically better than NAFTA. Certainly the labor protections in Mexico are a huge victory. They're looking for a little bit more in the dispute resolution area, but Bob Lighthiser, the USTR trade rep spent a lot of time with the Democrats in the house and I think they have a good rapport and I think they'll figure it out. ED HARRISON: The China part of that, for me, is when you talked about the Democrats and even the Europeans are aligned with Donald Trump on China. It does suggest that USMCA is where things are headed from a trade perspective versus China. Talk to me a little bit about that. DAVID METZNER: Well, listen, as I said, Mexico's our largest trading partner. We're trying to integrate our fuel systems to together. They have huge challenges where they need American capital. I think CEOs have realized that doing manufacturing in roughly the same time zone has its advantages. Transportation, Port of Long Beach is backed up. There is this, again, it's not all going to go to Mexico. Lot of it's going to end up in Indonesia, Thailand, Malaysia. The legacy of Donald Trump will be changing the supply chains for manufacturing in North America. It's happening as we speak. It's accelerating. Certain countries are benefiting-- Vietnam in textiles, machinery, electronics in Mexico, and equipment, and then across Thailand, chemicals and other products are diversifying. ED HARRISON: Way back, when we were talking earlier, you mentioned Mexico or sorry, Europe as being like the Nassau County developers to China's Vornado. But Europe is still-- no one's talking about that in terms of trade with Europe, but that's still out there. Tell me where is Trump on this and where do you think that's headed? DAVID METZNER: Well, the problem with negotiating with Europe is twofold. Number one is, the Chinese are used to negotiating Trump style. What does that mean? Let's get six guys in a room and listen, they had 150-page document, seven chapters that was supposed to be wrapped up in April. That's how the Chinese work. Europeans, based in Brussels, are used to a two-year negotiating process by committee, and that's just not the trumping approach. What I would like to say is that the process is broken. Then secondly, the substance is broken, because the US government believes that agriculture should be in the negotiations. We do run an ag deficit with Europe, it's our largest export. It is Trump's base, and so process and substance makes it very, very difficult. The second thing is Trump's view of the world. I think there's a map of the United States, which places every European country to GDP within a US state. You can say the only country that doesn't fit inside one US state is Germany. Afterall Russia is only half the size the GDP of California. Again, when you look at it that way, to this White House, it does not look like where you want to start or stop your negotiations. The second part is Germany. There's huge frustration in the White House as a Senior Advisor to the President said to me, said, David, this is what we say to our German friends. Why do we pay for your defense, and you send Putin a $2 billion check every year? And he takes natural gas out of the earth in the most violent, dirty fashion? And that's a rhetorical question to ask. The Germans are somewhat-- ED HARRISON: What's their answer? DAVID METZNER: Their answer is they're frustrated. They're anti-Trumpism. Stylistically, he's caught up what they know as good public policy, that relying on Russia for gas, circumventing Ukraine and Poland, and many other countries, roughly 12 or 13 have signed a letter to Germany of the EU saying, don't build Nord Stream-2, but we could spend a whole another session discussing German energy policy. ED HARRISON: Gerhard Schroder, he's part of that. DAVID METZNER: He's on the board of Gazprom. That's an embarrassment to the Germans. I talked to them about it, they know that. They are caught up in the coalition government, and they're caught up in really their frustration with the President's style, which is a shame. ED HARRISON: In terms of where I want to go with this, we can move a little bit away from trade. And we can talk perhaps about another subject that I think a lot of people are concerned about. I would call it the retirement crisis. We're going to talk about in terms of Puerto Rico. The way I'd preface it is the way I'm thinking about this is that US states, in the next downturn, they're going to have a big problem with regard to their pension liabilities, their budget deficits, et cetera. What we're seeing in Puerto Rico right now is a foreshadowing of the things that you might see in Illinois, or New Jersey, or wherever it might be going forward. I want to get a sense from you, because I know your company deals a lot with the vagaries that are going on there, both from a political perspective, and also in terms of the bonds and the bonds versus the pension holders. Could you give us an overview of where we came from and Puerto Rico and what are the issues that are at stake right now? DAVID METZNER: Well, listen, municipal finance is a I believe governors and mayors should be protective of their ability to sell debt to investors, because when investors don't trust the bonds that you buy, are you going to buy a city of Chicago bonds for 4%? No, you can buy them at 12%. We have a tradition in this country going back to Alexander Hamilton, which said that you paid your debts, the government would honor the debt and the states that honor their debts were industrialized faster. Puerto Rico is unique. It's not a state. It was. They felt they couldn't put it through bankruptcy. Investors like to trust judges. Judges in America are unique. They call balls and strikes. They don't care what color your eyes are. They don't care what language you speak, and so they created a political process in Puerto Rico. Again, that's the [inaudible] to Americans. We don't have politicians, restructuring companies and they shouldn't be restructuring territories, commonwealths or states. They made a decision in Puerto Rico, the general obligation bonds are the first in seniority in the Constitution. They've made a decision that they should be crammed down the most. ED HARRISON: Which is not how it normally would be? DAVID METZNER: Well, first of all, it is a constitutional guarantee. Now, investors bought those bonds thinking they would be honored first. They should be honored, in fact, before even pensions are honored. Instead of working with the general obligation bondholders, they restructured other bonds earlier, and the GOs have not settled with the government. There's still doubt as to where they're going. The question is, will bondholders be in the market? Will they be there for future Puerto Rican debt? That's a great question that's not secured by some tangible asset or cash flow. That, I think, is an experiment that's unhealthy. The Virgin Islands have had a hard time issuing debt and I've heard some of the Pacific territories have also. If we take this, there are some proposals that Illinois and Chicago should be able to do this. At the end of the day, capital is free to go wherever it wants. Capital does not have to finance Illinois or City of Chicago debt, that we can leave that to the taxpayers of those states, already have astronomically high taxes. Municipal finance is a gift. It often benefits retirees. It's mutual funds because it's tax efficient, and we should realize that this is the bedrock really of a strong, unique US financial system. ED HARRISON: Now, what we're seeing is a shift in the government. Is that change in government- first of all, tell us about the change in the government. And what I'd like to know is the personnel changes that we're seeing, does it have any impact on positions about both the bonds and also the pensions? DAVID METZNER: Well, we have a new governor. She came in, she is a little bit more of a technocrat, same party. Obviously, it's the former governor. Little early to tell, she has said that she wants to honor providing assistance to the cities for their pensions. The political control board has fought with the previous governor about that. They're trying to, again, their mandate was twofold. Their mandate was A, to restructure the debt, but also restructure the government. All right, less expenses, no Christmas bonuses, merge agencies, that part of restructuring Puerto Rico's government has not happened. You need to enter a 21st century government business model, and they're probably mid-20th century. This experiment in a political control board, they can only did that, and the governor that's not cooperating-- ED HARRISON: It can only go so far. DAVID METZNER: It can only go so far, because they need to be competitive. They need to be competitive with other tourist destinations. They need to be competitive as a manufacturing site. It's something to worry about that if they can't reduce the costs of Puerto Rican government, does the Puerto Rican economy have a future? ED HARRISON: When we talk about Puerto Rico, the first thing that comes to mind for me, especially because I know you at ACG Analytics look at this is Argentina, because we're looking at the same dynamics there. I think that people have been burned multiple times in Argentina. I'm actually surprised that they were able to issue 100-year bond in 2017. That was three times oversubscribed, but now, we're seeing the chickens are coming home to roost, so to speak, and we've seen huge calamity there. First of all, what's going on and from a political perspective for Macri? What are his chances actually of remaining in government? Then secondly, if he does not remain in government, what does that mean from a public policy perspective? DAVID METZNER: Great question. There was a joke, you should have bought the 100-year Austrian bond. That's came out at the same time, because the Austrians pay their debts. I think it puts the Argentine bond paid a lot more because there's a lot more risk and investors who make wrong decisions should not be bailed out, you don't have to take their risks, and they decided, people analyze that. I would disagree. Everybody's been rooting for Macri's success. They're in the midst of a bad recession. He's got a severe austerity program that was part of his-- I'm not sure the number is at $50 billion, $60 billion IMF Assistance Program. They usually come in with conditions. Macri's actually a friend of President Trump's, have known each other before he's president. There's a lot of people that have stakes in Macri's success. Nevertheless, there were elections this week where former president Christina Kirchner's party, she's running as vice-president, did surprisingly well in the polls. Created a huge drop in both the Argentine markets and in the Argentine currency, and we are definitely in a downward spiral there that's going to make the situation can he win October. This weekend sounds like he can't. I'm an optimist. Argentina having access to international capital and to come in and develop their shale oil and other industries is the only future. If they go back to not paying their debts and high tariffs and isolationism in the world economy, I am worried. ED HARRISON: Do you think that Fernandez-Fernandez-- I had to call her Fernandez, because that's her maiden name. Do you think that that pairing is-- because Fernandez, the guy who is running at the top of that ticket, he says, actually, we will pay our debts. We want to pay our debt. Don't worry, we'll be good. Do you believe that? DAVID METZNER: Well, I could tell you this. Let's look at the history of Peronism. I think there's a museum in Buenos Aires about not paying your debts. I'd be worried as an investor. The Krishna years were not good for foreign capital, so I would be worried. I think Macri's got the right economic philosophy, the IMF gave him their biggest loan, I think, in history. That's a vote of confidence. The US is trying to get capital down there, but ultimately, it'll be up to the Argentine people whether they feel they want to put up with the austerity that is imposed. ED HARRISON: If you go to the next country over, it's a completely different story there, Bolsonaro in Brazil, how do you see that playing out? Because I think that people look at him as being similar to Macri in certain ways, but it seems that it's worked out better. He's obviously not as far along in terms of his administration, but he has a very big connection to Trump. What can you say about the comparisons and contrasts between him and say, Donald Trump as an example? DAVID METZNER: Interesting, and we've actually spent some time with a member of Bolsonaro's inner circle. We helped arrange some visits here to the United States before the President was inaugurated last year, open channels of communication. Look, I think the Bolsonaro circle is trying to-- look at Chile and see what had happened in Chile over the last 20 years. The economic growth, the stability, the democracy, the respect for the rule of law. They brought in the gentleman from the University Chicago School who's resilient to oversee that process of privatization. They got off to a slow start again, and he's a little bit like Trump. He has never been in government. He was an army officer. The pension reform bill, very key to stabilize the nation's finances is moving through the Congress. It's going to pass. There is excitement in Bolsonaro circle. They're getting their feet wet. They've only been there since January 1st. I look at it. I don't think he has the economic. He's hired good people. He's hired people that done it, hired people that are pledged to be anti-corrupt. They're looking at merging ministries, making the government more efficient, bringing their development banks resources back to Brazil, away from Venezuela and other places, taking the politics out of aid. ED HARRISON: You're basically optimistic, but you think it's a little bit too early to make a call as to how- - DAVID METZNER: I think the passage of the pension reform bill is the ultimate litmus test. I'm not 100% it could pass the lower house, it's not going to pass the Senate, but the expectations of it is that it will pass. I think that is the first movement in restructuring the economy. ED HARRISON: I want to bring it home, actually, to the United States here. We started out talking about the GSEs. I think that's a big thing, because when you look back 10 years ago, that was the epicenter of the financial crisis, Fannie and Freddie. Now, they've been basically government organizations. You said that Donald Trump wants to privatize the GSEs, but my question about that is, what's the process? How much money do they need in order to have enough capital to be privatized and what are the other extenuating circumstances to make that happen? DAVID METZNER: Privatization means lots of different things to different people. First of all, Fannie and Freddie have been in conservatorship. They missed, they were short capital, mainly because they were competing in subprime loans being run as a giant hedge fund, and pay the price for that. Over the last 10 years, they've been running the most pristine book of business in their history, and they've been turning out huge profits, and turning them over-- the profits over to the US Treasury. They've paid an excess of loans that they borrowed from the Treasury back. The question is that we have a really fundamental public policy question here, and that is, is the housing market healthy in the United States? I would make the claim it's not. It is 15% of GDP. First time homebuyers are largely shut out. Cost of housing has gone up for variety of reasons. Supplies down, builders are making more money and expensive houses. A part of it is let's go through the housing supply chain. There are tariffs in the Canadian soft wood lumber, raises the cost of housing. There were fewer construction workers, raises the costs. Zoning problems reduces availability. We have a switch and then it's difficult to get a loan if your credit's not perfect. ED HARRISON: You have to put 20% down. DAVID METZNER: You have to put 20% down. The idea that you can get down payment assistance, I never put 20% down on a house in my life. One of the worst statistics on African-American housing, homeownership low as in 50%, and that's been a phenomenon since declining, since '08. To me, that's a national embarrassment. I believe getting mortgage finance correct is a national imperative. It's important for the GDP, it's important that this country does not become a country of renters. It can be done partially through recapitalizing Fannie and Freddie. ED HARRISON: Well, the first thing I will say-- just to interrupt you, the obvious devil's advocate responses, Fannie and Freddie are part of the problem because that's the government interfering in an important sector of the-- DAVID METZNER: Well, we made a policy-- first of all, I don't look at it that way. You have to remember that the banks settled with the US government for billions of dollars for selling Fannie and Freddie fraudulent loans. They have reps and warranties in the bonds that say people's income is X and Y and that they own their house and they don't, and so huge settlements and they were not-- and they were the banks securitizing through Fannie and Freddie. Fannie Freddie were created so the government had an ability to be countercyclical in recession. You want to expand mortgage credit as the economy slows down to make the trough in the economy less severe. Fannie and Freddie can't form that rule today, because they have no capital. The idea that you run large financial institutions with no capital, to me, is a lesson we should have learned from '08. One of the lessons from '08, and I think it's an American lesson, is that private capital should protect taxpayer capital. Taxpayer capital is not a substitute for private capital, put people there and let them take the risk. ED HARRISON: How much capital are you talking about? DAVID METZNER: We're talking about roughly 150 billion between both entities. You'd first start off with-- its 135, 150. They could shrink that a little bit through credit risk transfers in other devices, but again, they need to retain earnings, and begin a path to issue new shares and raise capital. FICO scores can come down, let them take more risk in a responsible way. That protects the taxpayer. That's what they were created by Congress do. They're still privately owned, even though they're in conservatorship, they're not owned by the government. The government has warrants for roughly 80% of shares that are worth 125 to 250 billion. The government, I think President Trump want to see that money going to the Treasury. There's wins across the spectrum of interests, but the biggest winner would be the US GDP and people being able to get access to mortgage credit at a lower FICO score. ED HARRISON: Give me a scenario of how that would work in terms of the privatization, especially with regard to the warrants that you were talking about. What kind of capital structure are we talking about in terms of overall leverage ratios? Is this an IPO? How much does the government still retain? Do they still have these warrants? What do you think Donald Trump, in particular, is thinking? DAVID METZNER: Let me take you through what we think is going to happen in the next 6 months because it gets to answer some of those questions. The new director of FHFA, Mark Calabria, who wrote the hero statute that created his agency when he worked on the Senate Banking Committee, is the new administrator succeeding Mel Watt. It's little short period when Joe Adina of the OCC ran it. Mark is committed publicly to take them out of conservatorship. In order to do that, there's a process. The President, as I talked earlier, issued this memo which said to HUD, you tell us how we can reform FHA. How do we protect the taxpayers there. Send those recommendations to the National Economic Council. Treasury, you give us your advice on GSEs. This memo was supposed to come out the end of June. For variety of reasons, we now expect it to come out in early September. That memo is built around some core principles. What can administration do on its own, and what do they need Congress for? Changing the charters, getting rid of the charters, which some conservatives would like, or changing the-- right now, they have an entity guarantee going to a security guarantee, those changes would take Congress's involvement. I believe with Elizabeth Warren running for president on the Senate Banking Committee, there is not going to be a GSE bill through Congress for sure. I think we all can go to Vegas and make that bet. The second thing, there's a capital retention rule that Mel Watt, the former director started. Mark came in, he wanted to take another look at it, it's in this central part of the process. How much capital do they need? Because we don't know. What do you need in good times? What do you need in bad times? They're getting their hands when they have that number or those numbers. Then they're going to be ready to go forward and negotiate with Treasury to end the sweep. I think that will happen. Former advisor to Mnuchin, Craig Phillips, said publicly, and I think it's widely accepted in Washington, the government's been paid back. What we will see at that point, we'll look for the sweep ending, retention to capital, retention rule to be out, possibly hiring financial advisors, you can't do complex financial transactions without the best brains in New York helping you and getting paid good fees. Then a series of IPOs, probably not one, maybe one or two, to build up the rest of the capital. I don't think Washington's afraid to do that. I think people feel it's the best process for consumers, taxpayers to move the process forward. ED HARRISON: The way I would sum up what you're saying is, is that very eminently, we're going to see a paper that's going to back what Donald Trump wants, which is a privatization of Fannie and Freddie, and then we'll start the political process. DAVID METZNER: The recommendations of HUD and Treasury, they've already gone to the NEC once, they sent back their comments, the two departments are working on them as we speak, they'll go back to the NEC, then the NEC is supposed to send them to OMB, which has the final say in the government's organization. Whether they're published between NEC and OMB is unknown, a lot of people expect them to be but again, memo is important, unified. All people in the housing space and the government to follow the President's lead. We think the process will accelerate, and I think it'll be an exciting fall on the mortgage finance space. ED HARRISON: Well, good. I think we can leave it there because when this process is over, I think, let's say starting the New Year, we're going to come and take a look, see at that particular item, because I think that's going to be a big thing, and look back at some of the other things we've talked about on trade, and in particular with USMCA. I really appreciate your taking the time to talk to us. Hopefully, we can revisit this in a few months. DAVID METZNER: Enjoyed it very much. As I said, it's amazing that worldwide risk emanates out of Washington, but happy to be here to talk about it. ED HARRISON: Thanks, David. Appreciate it. DAVID METZNER: Thank you very much.