P&G Goes to Milan: Surveillance (09/18)

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Sept. 18 (Bloomberg) -- Full episode of "Bloomberg Surveillance." Guests: Robert Kaplan, William Cohan, Steve Miller, David Blanchflower, and Lee Klaskow. (Source: Bloomberg)

Chairman bernanke is set to taper, new economics.

What will it mean for america?

Yields are up, bond rices down.

Jeffries crushed by a brutal move in bonds.

Mccartney in bed with procter and gamble.

Png goes to milan.

-- good morning, everyone.

This is bloomberg "surveillance ." tom keene live from new york.

Joining me, sara eisen and scarlet fu.

This is exciting.

Very exciting.

We cannot get to 2:00 p.m. fast enough.

Overnight news from the bank of england.

Policymakers voted unanimously to keep policy unchanged this month, improving economic backdrop in great britain.

We have minutes from the bank of england meeting, showing that no change was called for.

Open market committee, the fed committee, released its statement after a meeting in washington -- it will provide its forecast, including the fed fund rate projection outlook for 2016. then fed chairman ben bernanke speak at 2:30 p.m. eastern time.

Tom and i will provide analysis and we have a great guest lineup.

Are you excited?

Very excited.

This is the first time we get 2016 forecast, and there is a different between quantitative easing and tapering back some of it and what the interest rate outlook is.

Can we lose the word "taper" taper -- can we lose that word?

No, it is the word du jour.

Some events to watch -- 7:30 eastern time, the global shipping behemoth, good benchmark of the economy.

Scarlet will have those.

The president will be speaking at the business roundtable.

Also, oracle earnings come out after the bell.

Its earnings call takes place at the same time as the america's cup sailing race.

We will talk about this on front page.

Interesting to see if the president addresses it today.

Let me do a data check here.

We will blow through this , nothing going on as everybody waits.

Futures are up two.

Euro-dollar, 1.3 355. weaker u.s. dollar, the nymex has gone nowhere in 24 hours.

The volatility index, the vix -- gold, down seven dollars.

A new retreat there.

And the dow, it's not forget where we are.

The equity markets love ben bernanke, and i put the aussies there as a litmus paper for china.

A strong australian dollar.

A record high.

Time for frontpage, we have scoured the papers and the web this morning for the most important stories.

We have to lead off with the fed.

Asia, europe, north america on watch for the decision at 2:00 p.m., where they will probably announce a slowdown.

Wall street banks are eagerly awaiting the news after facing a drop in their quarterly revenue.

Today's announcement will put some kind of end to the uncertainty to spark a surge in volume.

One bank, jeffries, reporting up lunch.

That house -- reporting a plunge.

They cited the rising rate environment.

And jpmorgan has indicated that trading revenue will probably be down from the same time one year ago.

Jpmorgan -- the ceo jamie dimon saying to brace for more legal woes because banks are taking unprecedented effort to comply with regulation.

This was in a company-wide e- mail to its employees.

The bank increased spending on internal controls by about $1 billion.

3000 people to work on compliance.

Jamie dimon also said that i will simplify its products.

What a shock.

I am glad i have handles on my chair.

They are going to streamline, look for synergy.

It is a paradigmatic -- it is a paradigm shift.

We will talk about this with robert kaplan, but we want to get to our third front-page story, on the cover of "the wall street journal." companies are making changes to health care programs.

Wall street -- walgreens becoming one of the biggest to make changes.

It will announce a plan requiring 160,000 employees to shop for coverage on a private health insurance exchange marketplace.

The idea is that employees and individuals will have to choose their own health care plans.

It is retirees as well.

Frankly, this is a bigger story than said day because it touches so many of our viewers.

Front-page, and of course fed coverage through the morning.

Our guest host is robert kaplan from hbs, his latest book, "what you are really meant to do." former vice chairman of goldman sachs, so much banking and management.

As well with us, william cohan , author of "money and power: how goldman sachs came to rule the world." terrific perspective as well.

Are we doing company news?

Yes, and then we can talk about the banks.

Let's talk about a drama free dreamliner for boeing.

The next-generation 787 completed its first flight with no problem.

The 787-9 is larger and more streamlined than the original.

The new one sells for almost $215 million per plane.

The first one is scheduled to be delivered to air new zealand by the middle of next year.

Sharp is selling shares in an effort to raise $1.7 billion.

The moves comes -- the move comes after annual losses.

It is already sold one re: stakes to samsung and qualcomm.

And siemens is promoting a new ceo.

Watch to keep track of, and that is today's company news.

Jeffries, 80% slide, fixed income trading.

How does that happen?

They guessed wrong about the direction of interest rates, which seems hard to believe because the fed has been telegraphing what it was going to do about interest rates for some time.

This is your world, robert kaplan of goldman sachs.

Jeffries was seen as a preview of what we expect from other -- from other big bank earnings.

This is not pretty.

You will see other fixed income numbers from these banks.

They should have been able to position for it.

We have seen this a zillion times, a given firm, they screw it up.

Brought -- what are the ramifications this morning for jeffries?

The head of jeffries took over leucadia.

The people who exited the head of leucadia probably feeling pretty good right now that they are not running the firm anymore, but this is not pretty.

It is not good.

It is going to hit the stock.

This will not jeopardize the firm, from what you have read, so it is not i -- it is a one quarter bonds grew up.

What happens?

As fold tear road, it is important to -- he will be on the show next wednesday.

Takeouts and generals and shoot them.

People should lose their jobs for this.

I think a little bit differently.

These firms have a culture of risk-taking.

The one thing you do not want to do is second-guess or overreact will stop there will be more chatter outside the firm.

Inside the firm they are passive, and they have to have a culture where they move forward.

I know being on at the same time was fully approved by the goldman sachs brass.

That have nothing to do with it.

They would not even know.

He is not there anymore.

The cio of goldman sachs was just replaced as a result of a trading glitch, so i think there is more ramifications for these kinds of losses.

80% job -- 80% drop in fixed income is significant.

Specifically fixed income to dry their profits, that is not the way forward if you want to simplify your bank's operations, as jamie dimon thanks.

The reality is if you are a trading firm like jeffries, they are not a bank.

They are a trading firm, and this is part of their business, and the history of these broker- dealers with this business is volatility.

I want to highlight a quote from the bloomberg article from charles peabody.

He says this quarter this shows us it will be about differentiation a risk management between the banks.

There was heightened volatility because of the central bank activity, so what's the names and the distinction.

When you are on a bond -- when you say rates are going higher and we cannot manage this, what do you do?

Go to cash, sell the bonds?

What do you do at jefferies, jpmorgan, goldman sachs?

I was in m&a guy.

I do not know what they would say on a bonds desk, but goldman -- and i wrote this article this past week about craig broderick, the chief risk officer at goldman sachs through the crisis.

They get paid to manage the risk.

Strategies to protect themselves.

I would be shocked if goldman had the problems jeffries had.

William cohan and robert kaplan with us on this fed day.

We will also talk about potential deals, five billion dollars.

That is how much at&t could fetch in the sale of its cell phone towers.

We will tell you about the potential suitors.

That is coming up on bloomberg "surveillance." streaming on your tablet, your phone, and bloomberg.com.

Coming up on bloomberg "surveillance," way out front in the housing crisis, jen had cs of goldman sachs, an interesting nuance to of the american economy.

11:00 a.m. this morning, hatzi us of goldman sachs.

Sara eisen here as always with tom and scarlet.

The potential $5 billion sale, that certainly gets your attention.

The latest on at&t, what is it putting up for sale?

Its wireless towers.

At&t was looking to unload these.

The company has hired cap advisers from jpmorgan on this sale, according to people familiar with the situation.

At&t has been looking to get rid of peripheral assets to raise cash.

What is the strategy?

Why would it need to do this?

It comes down to bolstering the balance sheet.

Deutsche bank saying that in the meetings with at&t, the cfo talked about the dividend policy as sacred.

They want to maintain policy, raising it for 29 straight years and they want to make sure that does not get jeopardized.

They need cash to fund their buybacks as well.

And also perhaps acquisitions in the future, maybe europe.

Five-year dividend growth, three percent.

That does not get it done in the new world.

At&t needs to make sure it can fund the dividend properly.

With us is robert n -- robert kaplan of harvard business school.

You will see companies do this.

The tower business is a very high pe business.

What do you mean by that?

That was a massive jargon alert.

The comparables like crown castle international traded at 60, 70 times earnings.

One of the other things they look at is, can you sell an asset that trades a much higher price to earnings multiple than your stock, and if they are interested in dividends and improving the balance sheet, this is logical.

What fascinates me is top of the market.

We saw the giant enormous -- dj -- maybe the u.s. markets mature, and maybe there glidepath are changing and ebbing.

Maybe it is a strategic concern over where revenue stream is going.

I think this is different than that in that they were two similar businesses, geographically different.

This is about getting rid of the business that has a dramatically different valuation parameter, and that is why they are doing it.

It raises the question of who could be a buyer.

Robert kaplan mentioned crown capital, one potential buyer.

The reason i bring this up is because there has been consolidation in the industry lately.

American tower and crown capital increasing their role.

They buy the tower and lease the space back to the carrier.

Air is a member on at&t, it has 10,000 towers at jpmorgan generates 326 million dollars in annual revenue.

The idea of the company leasing it back to free up some cash -- maybe they will sell it -- not in my back yard.

Bill cohan is with us.

First of all, lots of telecom companies have sold their tower businesses.

At&t may be one of the last, people have been pushing them to sell these towers when it was sbc.

What i think you are seeing is these prices are high.

Why did verizon ultimately do this deal?

Verizon was willing to pay $130 billion to vodafone to get it done, and vodafone could figure out a way to pay -- to avoid $500 billion in taxes.

Prices are high, so why not redeployed that cash into other purposes?

Like your network upgrade, for instance.

Coming up, we are going to look at some high-tech sector jobs and the low-tech jobs they are creating.

That is coming up on bloomberg "surveillance," bloomberg television, streaming on your phone, tablet, and bloomberg.com this is bloomberg "surveillance." sara eisen joined by tom keene and scarlet fu.

New home prices in china soared on the government's efforts to slow the run-up.

It rose the most in two years last month, beijing and shanghai up 15% as the government tries to work to prevent a real estate bubble.

Russia is standing by syria.

The foreign minister there were serious grounds for believing that the chemical attack was done by syrian rebels.

Clearing customs at the busiest airports can take up to five hours.

This is according to a new study by the new -- by the u.s. travel association.

The increase way time -- wait time being brought on by staffing shortages.

The trick is not coming at certain times when all of the international flights arrive at the same time, like noon or 11:00 a.m. let's get to scarlet fu on a fed day.

One of the central bank's mandates is full employment.

Silicon valley is a -- rico moretti, an economist at uc berkeley, writing for "the wall street journal." there are five new burress does, personal trainers, as taxi drivers.

This is a really important.

We are frilled that -- thrilled that robert kaplan is with us this morning from harvard business school.

We have a manufacturing multiplier.

This is a service sector multiplier or even a high tech multiplier, isn't it?

Innovation is more than ever the new thing.

When you go out to san francisco, you might as well be in another country.

But is a starbucks barista -- is that what you call it?

Is that a part-time america job that is not as good as a full- time america job?

Probably that is correct, yeah.

The person is hoping -- maybe they are at school on the side and they are wanting to move up to a better job.

That may be true.

We are already making distinctions between san jose, seattle, and highly educated workers , -- listen, when i say san francisco and menlo park, like a different country, also the cost of living is high as a result, these places are growing, very optimistic.

If you get depressed being somewhere in this country, visit san francisco and menlo park and you will see what innovation, the impact innovation can have on a city, a state, and even the country.

In honor of bill cohan being here, the intersection of wall street and washington, coming from "the washington post" opinion writer harold meyerson, that democrats are moving farther to the left , the abject failures of the market economy are pushing the party leftward here coke he points to larry summers, the end of the love affair with robert rubin and his proteges like gene sperling, who will be out, and he points to the rise of elizabeth warren, more stringent on fighting the banks.

I would expect you would agree with this.

That is very perceptive.

We have been in the thrall of the reubenites since bob rubin left goldman and went to washington.

That is a 20-year reign , and like it or not, i think elizabeth warren is signaling a shift.

Did the pendulum come over?

It is not going all the way to -- the upshot is perhaps that is something hillary clinton will think about as we look to 2016 and appointments.

Fashion week starts today in milan.

Gucci, product, armani, and procter & gamble?

? here with tom keene and scarlet fu.

When it comes to the data screens, looks like steady as she goes for the fed.

Sara and i getting ready for the 2:00 p.m. meeting.

This is must watch this afternoon.

We'll make you smarter.

Michael mckee joining with us choice guests as well.

The market right now is very boring.

One screen, 2.85. euro-dollar, 1.33. i'm nodding off.

Sara, help me.

It's calm.

It's a fed data check.

I'm nodding off.

We thought the indexes might not be so exciting, but there's good company movers to highlight.

Safeway up almost 10%. the grocery chain adopted a shareholder rights plan to thwart any unfriendly takeovers, because it said an unidentified investor accumulated a significant amount of stock.

Everywhere you look, companies seem to be facing the threat of activist investors pushing them around telling them what to do next.

Pandora is another big gainer, up by 5%. of course, we know that it announced plans to raise about $231 million in a new stock sale.

There's still a lot of excitement over the new c.e.o. it named, a microsoft veteran.

Sprint down about 4%. news from earlier this week about the lenders agreeing to wave a test until the end of the year because sprint is looking to sell debt this month that could trigger a lone default.

Something else that should object your radar, fashion week starts today in milan.

You'd expect to see prada and ferrigamo and armani, but procter & gamble?

The cincinnati-based consumer product is expanding its luxury brands.

This is a huge push right now.

It's adding fragrances from stella mccartney and alexander mcqueen to its collection of dolce & gabanna.

It's not growing fast enough, and so they are pushing into new venues like fashion week.

I had a chance to speak with p&g's vice president about the intense competition and the uphill battle they have to climb in this industry.

We face formidable competitors in our industry.

We just tried to do things that we do best, and i will just name our consumer, our understanding of the luxury consumer all around the world.

Our innovation.

We have also our portfolio, and frankly, we have behind us procter & gamble, which has 175 years of experience in building a brand.

So they're really taking that brand identity, p&g, the tide, the pampers that we all know and we all use, and we're moving it into luxury.

This is a strategy put forward by the former c.e.o., who has come back as c.e.o., pushing into -- so tide is the official soap of the new york fashion week?

Not exactly.

They're putting luxury fragrances, about $80 to $100 a bottle.

It's interesting you mention beauty and grooming makes up a third of their sales.

More than half of revenue for the 2013, that idea that p&g is branching into luxury, it makes more sense where things are more subjective and you can really parlay that sense of prestige and high-end product to a consumer who really wants it versus needs it.

Yeah, it's a good point.

Rob kaplan is here from harvard business school.

He's studied company management and leadership, and that includes procter & gamble.

What do you think about this move to push into luxury and beauty?

It is not growing as fast.

Well, this is a part of their strategy, and it has been for a while to move up market, luxury beauty, premium price products.

At the same time, they've got a very strategy to cut costs and make their products in developed countries, particularly the united states, more affordable because the consumers are more price sensitive.

They're doing both.

True.

On the low end, they're doing a cheaper tide as well.

It speaks to the carved owl middle class.

Yeah, i'll go with that.

You know a.g. lafley.

I love how his strategy really works t. has an entire pen pant on microeconomics, must read.

Anyways, you've got lafley doing his thing.

Is he going to climb on board the previous c.e.o.'s idea?

He's going to continue that part of it, and he's all about the customer.

They have 25 different brands over a billion dollars, so they have a lot of different types of customers.

He realizes why they go into premium, and he will continue that.

They've got to make their core products more affordable.

Out of play do they have beer?

This beauty line, they're branding prestige, which is what they're pushing.

It's a segment of their beauty line.

Do they make a bronzer?

They make lots of bronzer.

Remember, most of their products are under a sub brand that they promote.

They have 25 different brands, again, which we said that are over a billion dollars, so they are good at promoting sub brands that don't use the name other than in the little corner.

Interesting.

When you look at this, who makes the decisions?

Who decides to go to the milan?

Is this the boardroom or some 28-year-old m.b.a. -- but it has four divisions that he's divided the company into, and each one of them is so man.

But one of his chief missions right now is to choose a successor because he wasn't supposed to be there for very long.

This is critical.

We love stella mccartney.

Let's go to milan.

How do you teach an h.b.f. how to delegate?

Well, you have to empower people.

They attract and retain and develop superb people, and they give them authority, and you've got to run this company in a decentralized way, and they do.

With that, how do you teach people to fail and not get hit over the head?

It starts with the tone at the top.

He you treat people like owners.

When they make mistakes, you support them, teach them, and keep moving on.

Whoever the c.e.o. is, whether it's going to be a.q. lafley, they are dealing with an effort to really boost organic sales.

If you look at the charts, whether it's fabric and home care or beauty or grooming, we're talking low single digit organic growth.

The chart is a little bit messy here, but the idea is that you're not looking at very big organic sales growth.

So when you talk about the activist investors coming in, rob kaplan, can they really make that much of a difference and move those 3% rates to somewhere in the neighborhood of 10%? no, i think activism has its place, but more likely on corporate restructuring, governance issues, maybe balance sheet issues.

Day-to-day operating management, they're not going to add a lot of value.

And so if you want to do that, you should buy the company.

P&g has bill ackman.

So you can have influence at that level, even though you can't booths sales 3% to 4%. that's the big problem ultimately.

He fond he could not have the same kind of influence at jcpenney, so it varies from situation to situation.

And that raises the question about a.g. lafley.

He has a good reputation.

He was transform active at p&g in the early years.

What is he going to bring to this company now, and is it enough, to scarlet's chart, to turn it around?

He's going back to what the basics.

Innovation, customer orientation, and in particular, he's got to continue the cost cutting and find a successor.

Let's tie this into fed day right now.

9% dividend growth, 3% dividend.

Over the last 10 years, procter & gamble has been a single-digit performer.

Granted, they're doing better.

Now, are they a slave to no, ma'am natural g.d.p. like any other big company where they need a better economy as their first order of solution?

Interestingly, this stock and this company looks more attractive in a sluggish economy, because it's a very -- these brands are very defensive.

What they have to do is innovate and keep driving costs.

And so i don't think -- they can do well in a weak economy also, but they're very sensitive to the health of the consumer, which is right now a little bit strapped.

Let's turn to sara eisen.

Would you buy a prestige shampoo from procter & gamble, or do you need some high-end -- of course i would.

Actually, it's interesting.

They own high-end brands, too, like frederick fekkai.

I use it.

I have a separate management question for you, rob, and that is, a.q. lafley had retired briefly.

He went to sarasota, florida, to live.

Cincinnati is the company's headquarters.

This company is cincinnati.

It's part of the identity and the fabric.

I can speak to that with authority.

Where is this leading to?

He's commuting.

He's living there temporarily and commuting.

And other c.e.o.'s have done this too.

Ed whitacre, for instance, lived temporarily in detroit.

Is that effective as a c.e.o.? do you need to live in the city?

I think it helps to live in the city, but a.g. lafley is not in this job for -- i don't think he's in this job for more than 24, 36 months.

Next week we're going to do an entire hour on procter & gamble.

That was really interesting.

We thank our producer, courtney.

She tried 14 procter & gamble shampoos to prepare us.

Tide pods.

That's the new innovation.

Tide what?

Pods.

You throw it into the washing machine and everything comes clean, but it costs a lot more than the powder detergent.

Oh, ok.

And you use the right amount.

All right, and don't miss our special at 2:00 p.m. on the federal reserve.

Ben bernanke, tom keene, me, we'll all be there.

Aum rape smart conversation, yeah.

2:00 p.m., along with the decision, perhaps some tapering, 2:30 p.m. eastern time, ben bernanke speaks to the press.

Coming up in the next hour of "bloomberg surveillance" -- a king of turnaround.

Steve miller, the chairman of a.i.g., will be our guest host on "bloomberg surveillance." this is "bloomberg surveillance." i'm sara eisen, here as always with tom keene and scarlet fu.

Brazil's president cancels her trip to washington over charges the u.s. spied on her.

She called off her october visit despite efforts by president obama to keep the meeting on track.

The tension following reports that the n.s.a. monitored her email and telephone calls.

It would have been brazil's first state visit to the u.s. in almost 20 years.

The number of americans living in poverty is stuck at close to a two-decade high.

About 15% of the u.s. population lives in poverty, according to the census bureau.

The latest report also found that median household income has stabilized, but it is still 8% below the pre-financial crisis levels.

And former major leaguer, barry bonds, has been ordered to start serving his sentence for obstructing a grand jury investigation into steroids.

The sentence of 30 davis home confinement was placed on hold initially, but a federal appeals court upheld the conviction last week.

Baseball's home run leader was told by a judge yesterday to make arrangement toss serve that sentence.

And those are your top issues.

Can i get 30 days of home confine snment i would love that.

I don't think so.

I have so many books to read.

You would miss fed meetings.

Just cell phone and text in.

Ok, who's john moeller?

You don't care?

I don't care.

He's a c.f.o., chief financial officer here at bloomberg.

He's the c.f.o. of procter & gamble.

This is a big deal.

I love this concept of a c.f.o. week.

It's a c.f.o. single best chart.

What do you have?

This is something c.f.o.'s are paying attention to.

This tracks the performance of companies in the s&p 500 that have the highest ratios.

Theny outperformed the s&p 500 by over 100 basis points.

So far this year, that held up, because buyback stocks outperform the s&p 500 by 13%. i find this very interesting, especial until life microsoft's announcement yesterday.

Absolutely.

I was actually looking lieu some numbers here.

Microsoft announcing a $40 billion stock buyback program.

Of course, it has a ton of cash, right?

$76 billion.

If it wants to bring home the cash to buy these shares, it would have to pay about $19 billion in taxes, so it can't do it that way.

They lever up in order to buy back shares.

Robert kaplan with us.

It's net debt, so, sure, if that's the most tax-fsht way to do it, i think it is.

What is the present research on this, the choice between do more projects, do nothing for cash for a rainy day, dividends or buybacks?

This is the product of the environment we're in, slow economy, so not as attractive to invest in new projects.

And so that chart you just showed, i think any company that had financial flexibility, it would be unusual not to do share repurchase during this.

I'm going to get a little mathy here, folks.

It's called convexity or quadratic curve.

As rates go up, the emotion is bigger to get on board.

Would you predict a greater pace of buybacks in a non nonlinear way?

No, not necessarily.

It's a function of valuation.

So companies look at two things when they buy back stocks.

They look at price earnings russia yope of the stock and the cost to borrow.

Right now, p/e's are improving, but thee been relatively historically reasonably low, and interest rates are very low.

So they have to look at both when rates go up, and we'll each well, does this apply to the financials as well?

Should jamie dimon be perhaps selling bonds in order to buy back shares?

It's in the mid 50's, so i think anything he can do to get the stock up.

Got his work cut out.

Well, he's getting there.

The stocks are getting there.

Yeah, it's halfway there, tom, that's true.

But when you buy back stock, you're signaling you don't have a better use for that capital internal.

That's one of the things that apple has resisted doing, because they would rather signal to the market that they're still innovating, still have all these new products, and have better returns on that capital.

Absolutely.

I'm glad he mentions apple ios7. it's out today, right?

Go home and download it.

Yeah.

Today is the day.

Tom, you're an apple user?

I'm an apple user.

Coming up, we're going to talk more about the banks and the impact of the federal reserve in light of that jeffries news, stunning 88% slide in fixed income trading profits.

How will the other banks react if ben bernanke changes up the policy today?

That's coming up on "bloomberg surveillance." ?? this is "bloomberg surveillance." i'm sara eisen with tom keene and scarlet fu.

Looks like u.s. equity futures are set to open a little higher, near a record high ahead of the fed.

Scarlet has some company news now from the files of "bloomberg west." we start with tesla.

It jones the race to build a driverless car.

Elon musk telling the "financial times" that he will have a robot car ready to go within three years.

The car will be able to handle 90% of miles driven.

Musk that says creating a fully autonomous car is just too ambitious for now.

Google is the number one company to work for in a survey of college business and engineering grads.

A survey from universal global found that job seekers are attracted by the fast-paced virmente and the chance to work at the forefront of technology.

And apple unveiling the makeover of its ios operating system today.

It has predicted the changes will be the biggest to the iphone software isn't smartphone was launched six years ago.

Apple's design chief says the software will be completely new, but instantly familiar.

And that is today's company news from the files of "bloomberg west." those are three really stories.

I can't see a robot car going down 59th street in central park south.

They're going to hit a horse.

They're going to hit a horse or a bicycle, taxicab.

I just don't get it.

It's like a pedicure.

I don't get it.

I also think the google news is very interesting.

I know i'm not supposed to interject here.

But once upon a time, it used to be microsoft competing with goldman sachs.

That was the competition, because that's where the best minds wanted to go, and now google is there.

Second place is the "bloomberg surveillance" control room, 4:00 a.m. in the morning.

That's second to google.

Let's talk about jeffries.

What a headline.

Profit plunging 83% over the past three months.

That came out as trading revenue fell to the lowest since the financial crisis.

The fall is led by fixed income trading.

That unit plunged 88% slide, and it really goes to show you the changing interest rate environment led by ben bernanke and the impact it can have.

In to take a word from trichet, the former e.c.b. president, brutal move, brutal move in bonds.

Once again, wall street takes significant losses as yields rise.

The chairman not only has caused jeffries more than modest indigestion, but william cohan joins us, as well as robert kaplan of harvard business school to sort this out.

Mr.

kaplan noted the stock really hasn't moved all that much after an 80% decline.

No, he's looking at the others this morning.

The comparables, the other names.

Why sent there more panic off this announcement?

Well, first of all, jeffries is not comparable to these big banks.

It actually is a boutique bank, and i think, by the way, this happened before jeffries, i wanted to say, like a year or two ago, when they surprised the market on the down side, and people thought, you know, the end was near, and then they eventually sold themselves to -- or took over.

I think other firms have very different risk management.

I mean, goldman sachs has a very different risk management profile, and success record than jeffries.

You know, trading is just not that -- it's big in other banks, but not as important.

Well, this is perfect.

William cohan has written on this vooms, and robert kaplan, formerly with goldman sachs, really working in the trenches on this.

When mr.

Cohan says risk management, what does that actually mean in a shop like goldman sachs?

It means you monitor, you have a clear grip on all your positions and do analysis about moves and rates, moves and other factors in the market, and you manage to protect against drastic.

Is it a 24-hour mission, or do you come in every new york morning and reposition your risk?

It's just a way of life, a way of thinking, and you're watching this every single day.

And it's incredibly sophisticated software to monitor this on a real-time basis.

The nightmare scenario is 1994, what happened when rates snapped and certainly banks were very very hard.

Is that what they're worried about, especially goldman?

Of course they're worried about that.

That's why they're so vigilant about it.

That's why risk management has become as important as goldman sachs as, you know, as the c.e.o. -- but rising rate environment should be beneficial for the banks.

Shouldn't it?

If a company buys a stronger economy, yes.

It raises their net interest margins, no?

It depends what they have in their inventory.

It depends if they're caught short out.

Jeffries obviously did not foresee this.

I find that hard to believe.

And i would be shocked if goldman dent foresee it.

Remember what happened since the crisis, these banks have all deleveraged.

They have a lot of capital, so losing money is one thing, it's not going to have a significant effect on it.

Jeffries, on the other hand, you just got to look at their capital, and after that, they've got plenty of capital too.

Who's the best risk manager you've ever studied, met, had drinks with?

Well, you know, don't have drinks with me, but who i wrote about last week in "business week," he's the only risk manager on wall street who was there before the crash and who's still there.

Who is craig broader rick, for our viewers?

He's the chief risk officer at goldman sachs.

He's part of the team that devised the strategy to go short the mortgage market and make a killing in 2006 and 2007. this is brilliant.

See this interview in its entirety out of bloomberg tv plus on the ipad.

William cohan and robert kaplan, thank you so much.

Hobb a forex report?

Please.

Aussie dollar, please.

Actually, the movement has happened in the u.s. dollar.

It's been weakening into this decision on the idea that perhaps the fed won't taper or pull back too much stimulus, maybe only $5 billion to $10 billion.

Right now it's pretty much flat awaiting that decision and to see what ben bernanke has to say about interest rate guidance beyond that.

Remember, dollar weakens if the fed takes away the punch bowl or starts to scale back on stimulus, and we have a dollar strengthening if it's bigger than expected, weakens if it's less than expected.

Very good.

It's an important day.

It's our twitter question of the day -- who are the winners and the loser of today's fed decision?

Again, at 2:00 p.m. this afternoon, sara eisen and i with our extensive fed coverage with michael mckee at 2:00 p.m. this afternoon.

?? chairman bernanke is set to taper.

It's our new economics.

What will it mean for america?

Federal express, they report this hour.

Federal express, a key barometer of the economy.

And a.i.g., back from its death bed, up nearly 50% this year.

We speak with the chairman of turnarounds.

Good morning, everyone.

This is "bloomberg surveillance." i'm tom keene live from our world headquarters in new york.

It's fed day, september 18. joining me, as always, sarah icen and scarlet fu.

Our guest host this hour, truly the king of american turn arounds, steve miller.

He is the chairman of a.i.g. this is a big day.

Big fed day morning.

Overnight, we did get minutes from the bank of england meeting, and it turns out policy makers voted nab mussly to keep policy unchanged this month.

The agreement there that no more stem husband was needed.

And then it goes on to 2:00 p.m. eastern time again when the fed releases its statement and its decision, 2:00 p.m., after two-day meeting in washington.

The panel will provide its economic forecast, including the first time we get a rate projection for the year of 2016. and then chairman ben bernanke will speak to the rest at :30 p.m. eastern time.

We'll be with you providing all the analysis.

That will be live on a special edition of bloomberg television, 2:00 p.m. eastern time for the fed.

We've also got some economic data out today, and that includes at this hour the weekly mortgage applications number, and then 8:30 a.m., housing starts.

Housing starts will be interesting.

Especial until light of the fed decision, because the fed is trying to stimulate the housing market.

But the question is, when it scales back, it will go into the mortgage backed securities or the treasuries, just one of the unknowns leading into an exciting day.

7:30 a.m., we'll get fedex earnings.

Scarlet will be all over that behemoth.

And then president obama speaks at the business roundtable.

And oracle earnings come out after the bell.

It's a very busy morning briefing.

Now, scarlet, you got some other company news for us to watch today.

We do.

Jamie dimon is telling j.p. morgan employees to brace themselves for even more legal battles.

In an email to the workers, dimon says the bank is undertaking an unprecedented effort to comply with regulations.

He also said jpjp will eliminate products -- j.p. morgan will eliminate products and services that aren't central to operations.

A plunge in profit at jeffries.

The investment bank posting an 83% drop in third-quarter profit.

The decline came ads trading ref now at jeffries sank to the lowest since the financial crisis.

Revenue from fixed income trading tumbled 88%. and big changes to healthcare benefits at walgreens.

The drugstore chain will announce a plan requiring 150,000 employees to shop for coverage on a private health insurance marketplace.

This is according to "the wall street journal." i.b.m. and time warner also recently said they'll move retirees to health exchanges as they prepare for the president's healthcare laws to take effect.

That is today's company news.

Sara?

Certainly, scarlet, the fed decision on tapering, or scaling back quantity teaverb easing, 2:00 p.m. eastern time, there is no bigger story right now.

It will have a huge impact on the markets, the economy, and on companies, this as investors nervously anticipate president obama's choice to replace the fed chairman, ben bernanke.

We call that david blanchflow they are morning.

He was formerly a central banker at the bank of england, now dartmouth professor, joining us by phone from maine.

Danny, you have been a fan of ben bernanke policies.

You are a fan of quantitative easing and stimulus.

Is now the time to start reining it in?

Well, i think the fed has said that's what it's going to do, and i think that's probably going to drive things.

But i certainly think it's a pretty close decision, and there are clearly voices that are actually saying we shouldn't tarpe.

So i think aths a close one.

The story i have from within the fed is if it was left to bernanke, he wouldn't be doing this.

So we'll see.

It's a close call.

It's a committee.

I think the markets have kind of decided that perhaps they'll just taper by less than people thought before.

But it's a close one.

And the data over the last week or so has not actually been great.

Retail sales, we're going to see mortgage numbers coming, consumer confidence numbers, but i think the big deal is the bond yield, and that would be the big thing i think that's worrying people.

It will impact the forecast.

Danny, is any of this in the lined walls of textbooks you have up in dartmouth, or is this truly original territory?

This is completely original territory.

I mean, it was original territory in a way when we went in, but i remember sitting in a meeting, how are we going to do this?

How much are we going to do?

How many offices are we going to have?

It's not in the textbook.

So literally on the way in, that wasn't in the textbook.

On the way out, it's also not in the textbook.

This is really about trying to think of an exit strategy so that you don't have to say i'm going to stop on a certain date?

You say, this is going to be -- depends on the data, and obviously the data has moved around quite a lot so.

This is completely new territory.

We've never seen it before.

But it's going to have an huge impact on the world, and i suspect what the fed actually does is going to impact what the bank of england does.

You heard in the minutes come out this morning, in a way they look more forward than the fed.

You mention exit strategy.

It's not quantitative easing, it's also an exit strategy for the fed chairman who steps down in january 2014. that uncertainty of a new fed chairman, does that factor into these policy decisions in some way?

Obviously there's a decision right now which actually bernanke is still there, but he no honger pays on the way out, but this is very tough, because the fed is trying to get forward guidance.

It's trying to tell the people what it's going to do in the fed, the role of the governor is so important, so there's hugen certainty.

Two weeks ago everybody thought it was going to be larry summers.

Today everybody thinks it will be yellen, but maybe it will be robert ferguson.

So this uncertainty is really hurting folks.

I think it's important that obama makes that decision, but hard to say this is what we're going to do going forward when we have no idea what the leader, who's very powerful, is going to be.

It's a huge question mark.

Danny, thanks for joining us by phone this morning, bloomberg contributing editor, former editor of the bank of england.

Do not miss our special coverage of the fed decision.

It's an historic announcement, 2:00 p.m. eastern time, tom keene and i will take you through the policy statement, those forecasts, potential taper announcement, and then ben bernanke's news conference at 2:30 p.m. ok.

He has led the turnaround of bankrupt america.

That barely describes 44 years ago as lee iaccocca called, and with delphi for years, and steven miller's latest challenge is the ultimate crisis turnaround, a.i.g. we are thrilled to have steve miller with us today.

Your book is "turnaround." you literally invented a cottage industry.

I love from your book the turnaround.

Who's in charge sneer who's in charge at a.i.g.? well, the board in charge at a.i.g. these days.

Earlier we had a majority shareholder with the treasury, so i would say they were in charge, although they left it to the board to make all the important decisions, and bob is just a terrific executive carrying out the strategic direction from the board.

You are the ultimate hard ass in corporate america.

What do you do every morning at a.i.g.? do you get on the phone and scream at people?

Do you send miller grams?

Absolutely not.

First off, bob is the day-to-day -- he's the day-to-day tactical guy?

As the chairman of the board, i talk to other board members.

I talk to bob.

I talk to the senior members of management.

Just make sure we stay on track and meeting the obligations we undertook when we -- right after the bailout.

On that note, who manages the relationship between a.i.g. and washington?

No, i happen to be in washington when you were yesterday, but the manager of that relationship is the management.

And how is that going?

Extremely well.

Right now, our principal interface with washington would be the fed, who is a regulator under the significant financial institution ruling.

And that's a very healthy relationship.

We have welcomed the fed, and we have worked closely with them to make us the best we can be.

I would be derelict if i didn't ask abouten had are you paulson.

It's lehman, lehman, lehman, and i keep going, would somebody talk about a.i.g. your interpretation of the lehman anniversary and critically your interpretation of mr.

Paulson's book.

Well, i read mr.

Paulson's book.

I think he's both a wonderful human being and thank god he was there at a time when our company needed decision makers who could take a decision.

It took one weekend, a critical weekend when nobody knew if the world was falling apart or not, what to do about it.

They had to make rapid decisions on lehman and on a.i.g., on bear stearns, and on others.

And a.i.g., basic on the a weekend, got $182 billion of support.

We paid it all back, plus a big profit to the government on top of that.

But think of the incredible pressure on our public servants in uncharted waters, what to do about the crisis that had evolved.

I'm just thank goodness there were responsible adults on the scene, making those decisions.

I love scarlet, the different opinions we get on this,en had are you miller, hank paulson, or amazing.

I wonder what the stigma is from customers, from investors, quickly.

Well, first off, the stigma, in 2009, when i joined the board, we were in liquidation mode.

We said we can't survive.

And we got to change the name of everything.

We changed it to sun america.

They took the a.i.g. letters off the building in los angeles where sun was herded.

Are you going to put them back on?

We can't find them.

The important thing is, after a couple of years with those strange names, our brokers told us put a.i.g. back on as the brand.

We're going to come back with steve miller.

Chairman of a.i.g., a turnaround artist orkt manufacturing renaissance in this country.

?? this is "bloomberg surveillance." good morning.

I'm tom keene.

It's fed day.

This is what matters now to our guest, steven miller.

It is fed day.

Corporations are adapting to the new normal of a more restrictive fed.

Verizon and apple issued joy norms debt.

It's a new race to outflank the central bank of the united states.

Of course, steve miller is executive chairman, helping them turn around another big affair.

Does the fed change the game of use of cash?

Well, no, i would say the fed is trying to deal with the enormous deficits our country is running, and in the short term, their moves are very important, very important to the traders and debt.

It's created a time of low interest rates, a lot of corporations have financed up.

I looked at a chart yesterday on what's called the maturity wall, when are the big -- and all the corporations have basically moved out the maturity of their debt so they don't have to worry about it for the next few years, and have done it at very low rates.

So it's going to be a while before the problem of higher rates comes to roost.

You are so well known for being plain spoken.

Explain to america why financial repression benefits verizon or apple, they issue debt and do what they do, and yet retirees are flat on their back.

What do you say so those retirees that are enjoying razor-thin low rates?

Well, for retirees, it is an issue.

It's an issue for many businesses that rely on increased rates to put their -- like insurance companies.

What they do, in order to pay your life insurance, put the money that they've demrect premium toss work so as to be able to make good on the promise.

And it's tougher these days with low interest rates and very low paying investments, and that's true for retirees and for a big sector of america.

But it's not going to last for long.

In 30 seconds, you are known as detroit lee iaccocca, major career.

Detroit flat on its back.

What is your optimism about detroit working out their bankruptcy?

Well, it is a bankruptcy.

It's not hard.

There's not enough tax revenue to go around, and detroit is -- they've got the problem that the city limits of detroit, the tax base of the city of detroit is limited to the poorest part of the whole detroit metropolitan area.

And it cannot be -- there's no magic going to happen here.

Somebody's going to have to pay, and it may come from bond holders, retirees, and from the city i was.

Steve miller, thank you so much.

We're going to come back.

It's fed day, and a fed decision at 2:00 p.m. this is "bloomberg surveillance." ?? this is "bloomberg surveillance." i'm sara eisen, here with tom keene and scarlet fu.

Our guest host for the hour, steve miller.

In top headlines this morning -- new home prices in china soar despite the government's efforts to slow down the runup.

Prices in china's four major cities rose the most in 2 1/2 years last month.

Beijing and shanghai posted property gains of 15%. the rise coming as government works to try to keep prices in check, to try to prevent another real estate bubble.

Russia is standing by its ally, syria.

The country's foreign minister saying there were serious grounds for actually believing last month's attack was carried out by syrian rebels.

Those claims coming a day after the united nations presented evidence that pointed to the syrian government as being responsible for the attack.

And the wait to clear customs at the nation's busiest airports can take close to five hours.

New york's j.f.k., miami's airport had some of the longest waits.

The increased wait time blamed on staffing shortages from customs brought on by the budget cuts, sequestration.

I've been so lucky at that.

You got nailed once, right?

I did.

I had to wait for hours, and i think that was before sequestration.

Yeah, i've been incredibly lucky on this.

I hear it's terrible.

I flew in once at 11:00 p.m., and it was great.

The line bfs 10 people.

That's because you came in on the gulfstream.

You get extra service am it was this week, five years and two days ago, a.i.g. received a bailout from the u.s. taxpayers.

Now that it's repaid the government, it is rewarding shareholders in the form of a dividend.

What is the future?

Steve miller focuses on the insurance business.

He's the chairman of a.i.g., helped lead the bankruptcy of delphi and other american corporate turnarounds.

Is a.i.g. functioning leak a normal company?

Totally normal.

We managed to pay off the treasury department when they sold their last share last december, and we're operating like a normal business today.

What about in terms of bonuses, in terms of compensation structure for the executives?

Well, we had to retool our compensation structure, because when we were -- as long as we had treasury and we were under tarp regulations, everything had to be approved by the government.

We were still able to pay adequate pay, but now we're able to reward the people for the incredible work they've done.

I find it interesting with j.p. morgan, for example, they're saying enough, move o. others say move on.

There are people that want to look back on j.p. morgan.

I would suggest that mr.

Greenberg, the legend of a.i.g., would like to look back.

Is hank greenberg a distraction to your ability to move forward?

Absolutely not.

There is the litigation he's engaged in.

It's not a distraction.

And we hope it gets resolved.

But we are locking forward, not backward.

That weekend, you were sweating bullets because obligations of european banks wrapped around a.i.g. has your relationship changed with institutional clients in europe?

No, we have excellent relationships.

Everything is right back to normal.

When it comes to the insurance business, reading about this talent, you've got a battle going on over top-notch insurance employees.

Well, berkshire hathaway has decided that this would be a good business for them to expand, and therefore, they're looking for the best talent in the world, and guess what, four years ago, nobody wanted to pay an a.i.g. executive anything.

Today they are the most sought after executives in the industry.

I'm going to rip up the script here.

I just put up an article on math.

Actuary science is the backbone of an insurance company.

Do you have a hard time finding smart, smart, young troops?

Are they a shortage?

Witness berkshire hathaway's effort to go after your experienced executives.

Well, we have been building up the scientific part of our back office to try and make sure that when we make bets, which is -- which is what do you.

We take risk and collect premiums, make sure we're collecting the right amount and aimed at the right kinds of risk.

You're trying to think of what 100-year cycles for weather and hurricanes and volcanos and other things.

You got and there, scarlet?

I'm fascinated to hear your thoughts on that car maker it's renaissance, because some big news from the company this week says that it's getting the company for an i.p.o. i wonder, what's the case for keeping chrysler a part of fiat versus making it public like the ford and like general motors and the other big car makers?

Well, my short answer would be that to be an automaker these days, you need to be global.

Ford and general motors have a long history of big presence in asia and in europe and the united states, where as chrysler was mostly a domestic united states company.

It needed global reach.

20 years ago, i tried to merge fiat and chrysler, by the way, for just that reason.

Then they merged with daimlerchrysler.

You were ahead of your time.

They couldn't get along, so now it's -- i think it's a good thing to have a multicontinental base.

Your comments on this phrase of nonpros like you say, a manufacturing renaissance.

Is there one?

Yes, there is one.

But also also coming with this manufacturing renaissance is a big change.

We can no longer compete globally in unskilled labor.

It's just far cheaperer.

And so labor-intensive process realize going overeast.

That's just the way it is.

What we need to do in this country is a much better job of educating our people, giving them the mathematic skirblings the engineering skills, whatever, because that's what can succeed in this country.

Ok.

steve miller with us.

We're going to continue.

Let's talk fed.

Let's talk about -- are you calling me fed is now?

That's a good nick nasme this is exciting, 2:00 p.m., bond market reaction.

And it could be a historic move from the federal reserve, if they actually start to taper or pare back some of their stimulus.

What's also interesting is we've got an economic indicator of sorts, fedex reports earnings momentarily, a barometer of the economy, or just how many iphones were shipped.

That's coming up.

?? this is "bloomberg surveillance." i'm sara eisen, here with tom keene and scarlet fu on this fed date.

Futures pointing to a higher start.

S&p near a record high.

Scarlet fu has company news for us.

A drama-free dreamliner for boeing.

The 787-9 is larger and more streamlined than the original dreamliner.

The new one sells for almost $215 million per plane.

The first one is scheduled to be delivered to air new zealand by the middle of next year.

Microsoft will expand its television programming beyond the show it has planned for its game.

The tv offerings will be part of an xbox.

They want to merge tv watching with video game playing.

It will announce the new tv shows sortly.

And sharp tries to rebuild its balance sheet.

The japanese television and l.c.d. screen maker is selling shares in an effort to raise $1.7 billion.

The move comes after sharp posted record annual losses.

The company has already sold minority stakes to samsung and qualcomm.

And that is today's company news.

Sara?

As we await results from fedex, we're going to talk about the other event of the day, the one and only, really, the federal reserve.

The fed is deciding the tapering talk will come to a head as the fed considers will weather it will cut back on some of the bond buying or stimulus programs that everyone calls qe-3. our economics editor, michael mckee, is here in his serious suit with some insight on how the decision will play out.

There are some unknowns going into this decision, even though ben bernanke and crew have been very careful in trying to telegraph what's going to happen.

You pretty much have to say that everything is unknown.

There's a general belief that they are going to do some tapering today.

But no guarantees, and the fed is certainly divided over what they should do and how much they should do, and speaking of that, we don't fn they do something, how much they'll do, and we don't know what other announce ams they've made.

Great.

We haven't had a meeting like this in a very long time why now do they have to taper, if the economic data, jobs, which we know here targeting very closely, hasn't exactly been

This text has been automatically generated. It may not be 100% accurate.

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