Voluntary Nudge Nudge: IEEPA, TROW, FX

Summary

Money Stuff: The Podcast

Episode: Voluntary Nudge Nudge: IEEPA, TROW, FX
Date: September 5, 2025
Hosts: Matt Levine (Bloomberg Opinion, Money Stuff author) & Katie Greifeld (Bloomberg News/TV)

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Episode Overview

This episode dives into three main topics shaping Wall Street and the wider financial landscape:

• The legal saga of Trump-era tariffs imposed under IEEPA (International Emergency Economic Powers Act)
• The unconventional partnership between Goldman Sachs and T. Rowe Price, emblematic of shifting strategies among asset managers
• The growing sophistication—and disruption—around deal-contingent hedging, with hedge funds edging into banking territory

As always, Matt and Katie mix deep technical knowledge with wry, deadpan humor—making “money stuff” accessible (and frequently cynical) for listeners.

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1. The Trump Tariffs, IEEPA, and Constitutional Crisis

Segment start: 02:02

Key Points & Insights

• Illegality of Tariffs: The US Court of Appeals for the Federal Circuit affirmed that Trump-era broad tariffs, imposed via IEEPA, are illegal. However, these remain in effect pending Supreme Court review.
  • Matt: “We live in a weird world where… the government does a lot of stuff that's illegal and the courts are like, well, this is illegal, but we can't stop you.” [02:15]
• IEEPA (International Emergency Economic Powers Act): The government has argued this act allows the president to regulate imports (and thus impose tariffs) in the event of foreign threats. Courts have pushed back, stating “regulate” doesn’t mean “tax.”
  • Matt compares this to the SEC's inability to invent financial market taxes just because it regulates them. [03:13]
• Constitutional Power: The US Constitution places the authority to impose taxes and tariffs with Congress, not the president.
  • “It's a really core part of the Constitution… when the president announces sweeping new taxes without any legislation, it does seem very illegal.” —Matt Levine [02:56]
• What If the Supreme Court Invalidates the Tariffs?
  • Uncertainty whether importers will get refunds on tariffs already paid. The knock-on effects, such as consumer price changes, are nearly impossible to untangle.
    • “The downstream tariff effect is hard to unscramble even if you refund the actual tariffs.” —Matt Levine [08:13]
  • Supreme Court outcomes are uncertain: lower courts tend to follow precedent and rule against presidential overreach, but “the Supreme Court is a more flexible view of precedents.” —Matt Levine [04:28]
• Economic and Budget Repercussions:
  • Tariffs bring in huge sums; rolling them back would create a fiscal “hole.”
  • But most economists believe tariffs hurt economic growth, which ultimately worsens fiscal sustainability.
    • "Not Scott Bessant, not Donald Trump, but most economists think that tariffs are not really helping economic growth." —Matt Levine [09:51]

Notable Quotes

• On the legal limbo:
  “The government is collecting tens of billions of dollars a month from lots of boats coming in… if those tariffs are all illegal, do they have to pay the money back?” —Matt Levine [07:06]
• On the challenge of refunds:
  “If you're just a company that raised prices to consumers because of tariffs and then you got all the tariffs back, are consumers going to be mad? ...It's an interesting… effect that's hard to unscramble.” —Matt Levine [07:57]
• On constitutional questions:
  “For the Supreme Court to say it's too important for the president to be able to impose whatever taxes he wants is really a shocking change in the constitutional structure. But here we are.” —Matt Levine [11:26]

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2. Goldman and T. Rowe Price: Strategic Partnerships in Asset Management

Segment start: 15:16

Key Points & Insights

• Goldman's Stake in T. Rowe Price: Goldman is buying up to 3.5% of T. Rowe Price stock (approx. $1 billion), making it a top-five shareholder, as part of a broader asset management partnership.
  • Katie: “Why do they have to go through all that? Why can't they just do a little JV, a partnership?” [15:59]
  • Matt: The purchase gives Goldman "skin in the game," aligning incentives for a real partnership rather than a superficial product placement. [19:04]
• Industry Context:
  • “Alts managers” (private credit, private equity) are in vogue. Large, traditional managers want better distribution (especially to retirement savers), while classic fund firms are trying to pivot to alts due to fee pressure and outflows.
  • T. Rowe has lost $200B in client assets and its stock is down ~50% since 2021—it's a tough market for traditional active managers. [18:10]
• Win-win Dynamics:
  • T. Rowe sits atop huge 401k/retirement fund distribution—ideal for channeling Goldman's alternatives products to retail and retirement savers.
  • This move is emblematic of the scramble among fund houses to join the alternatives/retail pipeline, given rising fee pressures in traditional funds.

Notable Quotes

• On why Goldman buys TROW, not just a partnership:
  “What does a real partnership mean? …It means giving Goldman some incentive to have some upside in T Rowe’s stock so that Goldman has some incentive to… actually not just use T Rowe as a dumping ground for its products, but try to be a real partnership.” —Matt Levine [19:04]
• On the struggle for traditional fund firms:
  “Everyone… is looking around and being like, how can we get into privates? Because the fees are better.” —Matt Levine [18:10]

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3. Deal-Contingent Hedging: Hedge Funds Muscle into Wall Street’s Traditional Turf

Segment start: 21:49

Key Points & Insights

• What Is This?
  • In cross-border M&A, deal-contingent hedges allow acquirers to lock in FX (or rate) terms that only activate if the deal closes.
    • Katie: “Spiritually similar [to other hedges]. …It’s mostly currency and occasionally rates.” [21:53]
• Risks & Rewards:
  • For banks, these were classic offerings but tough to hedge—if a deal collapses, the balance sheet exposure is hard to lay off.
  • Hedge funds are now providing these services, sometimes via the banks, and increasingly directly to private equity firms.
    • Matt: “Hedge funds are taking the next logical step and just going directly to the clients and saying, hey, we’ll do the hedge for you.” [24:34]
• Why the Shift?
  • Banks have vast, diversified corporate relationships; hedge funds can establish direct, focused ties to the handful of dominant private equity firms doing these deals.
    • “If you’re a hedge fund... why don’t I just call those three private equity firms myself? Why do I need the bank at all?” —Matt Levine [25:22]
• Considerations for Clients:
  • Concerns about counterparty risk when hedging with a non-bank, and about confidential deal information leaking.
  • Potential benefit of client diversifying counterparties and perhaps negotiating better terms.

Notable Quotes

• On deal-contingent hedge innovation:
  “I always thought of this as a really niche, unusual business and now it’s a thing. That’s weird.” —Matt Levine [27:17]
• On the changing financial landscape:
  “Banks don’t have the risk appetite and balance sheet that they used to and the big hedge funds… are becoming the source of risk capital.” —Matt Levine [24:04]

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4. Notable Quotes & Moments (with Timestamps)

• “If you can't refund the tariffs, it's kind of hard to unscramble that egg.” —Matt Levine [07:20]
• “If you replace the tariffs with voluntary tariffs, how much revenue would you collect? Not none. If it's voluntary, nudge nudge.” —Matt Levine [13:12]
• On Goldman's alts move:
  “They raise a lot of money to invest in alts… from institutions and from their private wealth clients… The story is trying to find true retail distribution, trying to sell through financial advisors, and… to 401k plans.” —Matt Levine [17:01]
• On the paradigm shift in deal hedges:
  “The nice thing of doing this trade with a big bank is you're facing the big bank and they probably won't default. Whereas if you're facing a hedge fund, you have… some diligence on how viable the hedge fund is.” —Matt Levine [26:39]

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Conclusion

This episode frames major 2025 market stories as a clash between constitutional law, institutional legacy, and the relentless evolution of financial capitalism. Whether unpacking the “grim” state of US tariff policy, the asset management industry’s pivot to “alts,” or the rise of hedge funds as direct partners to giant PE shops, Matt and Katie thread sharp technical insight with their signature dry wit.
For financial professionals or curious lay people, this episode is a tour through the legal, economic, and competitive cross-currents in global markets—by two of the best in the business.

Transcript

[Nathan Hager]

Bloomberg Screen Time is where creators and capital connect with entertainment experts from Netflix, Twitch, and Meta. Step behind the screen to shape the strategies, stories, and innovations that power what the world watches next. Join Managing Editor of Media and Entertainment Lucas Shaw live in Los Angeles October 8th and 9th. Get your tickets now at bloomberglive.com screentime that's bloomberglive.com screenTime.

[Katie Greifeld]

Bloomberg Audio Studios Podcasts.

[Matt Levine]

Radio news if you watched our video podcast, you saw us in the fancy studio, but now we're in the other studio.

[Katie Greifeld]

Yeah, we're in the little box on the fourth floor of Bloomberg. The women's wardrobe room is right there. And I often play music to myself because I usually have time alone in there, and sometimes I think there's probably people recording a podcast right next door.

[Matt Levine]

Yeah, we're definitely in the partially soundproofed recording studio.

[Katie Greifeld]

It could be. You would think being soundproof is binary.

[Matt Levine]

Oh, I would never think that.

[Katie Greifeld]

I would. I mean, ideally it would be. This room is not soundproofish.

[Matt Levine]

No. It has a lot of padding on the walls, but a lot of sirens in the background. Hello and welcome to the Money Stuff podcast, your weekly podcast where we talk about stuff related to money. I'm Matt Le and I write the Money Stuff column for Bloomberg Opinion.

[Katie Greifeld]

And I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.

[Matt Levine]

I feel like people get mad at me because I am not very good at, like, sitting at the right distance from the mic and I end up like, yo yoing around. And so I get closer and further from the mic, but this mic is really vibrating toward and away from me. So this one time, it's not entirely my fault.

[Katie Greifeld]

Yeah, we're not familiar with these mics.

[Matt Levine]

This mic is on a pendulum.

[Katie Greifeld]

Yeah, it does feel like it is shaking a little bit, but that's fine. You know, maybe it'll add a little vibrato. Maybe the audience will appreciate that.

[Matt Levine]

They do love vibrato.

[Katie Greifeld]

But you know what the US Court of Appeals for the Federal Circuit on Friday does not necessarily love?

[Matt Levine]

Yeah, tariffs.

[Katie Greifeld]

They're still illegal, as you laid out. They're staying in place, though, right?

[Matt Levine]

We live in a weird world where, like, the government does a lot of stuff that's illegal and the courts are like, well, this is illegal, but we can't stop you. So I don't know. It's very depressing. The district court a while back ruled that the broad Trump tariffs are illegal because as I've written a number of times, the US Constitution is really clear that Congress has the power to impose taxes, for sure. Doesn't like. That's, like, a really core part of the Constitution. And so when the president announces sweeping new taxes without any legislation, it does seem very illegal. And the court found it illegal, and the government appealed. And this week, the appeals court, the court for the Federal Circuit, agreed that those tariffs remain illegal. And the way it works is that the government's position is that there's a statute called iipa, the International Emergency Economic Powers Act.

[Katie Greifeld]

Yes. Nailed it.

[Matt Levine]

Got it. And AIPA gives the president some powers to deal with unusual and extraordinary threats from abroad by doing any number of things, including regulate importation. The government argued, well, if the president can regulate importation, that means he can impose tariffs on imports, and because trade deficits are an emergency, he can declare an emergency and impose tariffs to stop trade deficits. And there are a lot of holes in that argument, one of which is that, as the appeals court wrote, saying that you can regulate importation does not actually mean that you can impose taxes. And as they point out, the sec, the securities and Exchange Commission, has the power to regulate financial market activity, but that doesn't give it the power to make up new taxes, because that's part of financial markets. The SEC has regulatory power, but not tax inventing power. And so similarly here, the president doesn't have the power to invent new taxes, or so the appeals court held. But it also stayed its ruling because it's going to get appealed to the Supreme Court, and nobody knows what'll happen there.

[Katie Greifeld]

Yeah, I mean, President Trump did say this week that they're going to ask the Supreme Court for an expedited ruling. So we'll see there.

[Matt Levine]

There's a pretty consistent situation where the president loses in lower courts because the lower courts follow precedent and say this is illegal, and then he gets to the Supreme Court. And the Supreme Court is a more flexible view of precedents, so they tend to let him do what he wants. So we'll see.

[Katie Greifeld]

We'll see. Anyway, the scope here, this covers most of President Trump's tariffs. There are some specific sections that he's used which are a little bit more cumbersome.

[Matt Levine]

Yeah, Congress has a long history of delegating tariff power to the president. There are specific statutes doing that, saying for particular industries or particular reasons, you can impose tariffs. And usually there's an administrative process where they have to go through some sort of review and fact finding before imposing tariffs. And so the Trump administration has done a little of that, and that stuff is fine, but most of their Tariffs, what they call reciprocal tariffs, which are not reciprocal tariffs, but whatever. Most of that is opposed with no kind of fact finding or review based on IPA and ieapa pretty clearly doesn't give them the power to impose tariffs.

[Katie Greifeld]

Yeah, yeah. So the tariffs are staying in place now. We'll see what the Supreme Court does. But it is fun to game plan. What would happen if the majority of the tariffs had to be rolled back? I mean, you think about where that would leave the U.S. first of all, when it comes to negotiating trade deals, et cetera. Obviously that would put the US in a worse position, sort of.

[Matt Levine]

Right. I mean, like it depends on what you think is worse or better.

[Katie Greifeld]

Right. It should stick. If you can't, you don't need a.

[Matt Levine]

Stick to negotiate trade, free trade, like we did a year ago.

[Katie Greifeld]

I don't think that that's necessarily the goal of this administration. I agree.

[Matt Levine]

It's not the goal of this administration.

[Katie Greifeld]

If they're trying to pursue, you know, their worldview.

[Matt Levine]

If you're trying to pursue no free trade. And by the way, like there's still some, you know, as you said, there's other statutes that'll give him some tariffing credit. And frankly there's, you know, but those require. But there's the possibility of going to Congress and asking for tariffs.

[Katie Greifeld]

That's true.

[Matt Levine]

Like it's a Republican controlled Congress and like you could imagine Trump saying tariffs are good and getting Congress to fulfill its constitutional role of passing tariffs.

[Katie Greifeld]

Right, yeah. The problem that probably the Oval Office sees with all of that is that it would just take more time. It's not as easy as sending a truth social post.

[Matt Levine]

No, of course, of course.

[Katie Greifeld]

Yeah, right.

[Matt Levine]

That's the problem that the Oval Office sees with it. Many people would say it's good to have the rule of law.

[Katie Greifeld]

But anyway, whatever, anyway, anyway, we'll see what the Supreme Court does.

[Matt Levine]

Yeah, there's a lot of stuff like to me, the interesting gaming out what would happen is if they agree with the lower courts that the tariffs are illegal, does that make them refundable? Because they're in place now. The government is collecting tens of billions of dollars a month from lots of boats coming in.

[Katie Greifeld]

$30 billion in July, actually.

[Matt Levine]

And what happens if those tariffs are all illegal? Do they have to pay the money back?

[Katie Greifeld]

Yeah, that's a good question.

[Matt Levine]

Right. It seems very hard. And in fact I wrote about this on Thursday. You can go to the prediction markets, you can go to Calshear Poly market and they give odds for the Supreme Court upholding the tariffs. The odds are like 50, 50, which seems right, but the odds of the chances of the tariffs being refunded are lower than that. They're lower than 50, 50, because there's some sense that even if the tariffs are illegal, it's kind of hard to unscramble that egg. And so you might just say, okay, going forward, no more tariffs, but you don't have to refund them. But if you do have to refund them, to me, one of the really interesting questions is if you are an importer who paid tariffs and you somehow pass those tariffs along, you charged your customers, or you didn't explicitly charge them, but you raised prices, do you have to refund them? If you're just a company that raised prices to consumers because of tariffs and then you got all the tariffs back, are consum going to be mad? You're going to have to refund them the money. It's an interesting. The downstream tariff effect is hard to unscramble even if you refund the actual tariffs.

[Katie Greifeld]

Yeah. I mean, you could say, I've already raised my prices, I might as well just keep them here. Oh, yeah, right.

[Matt Levine]

Yeah, right.

[Katie Greifeld]

It is interesting to think about some of that. There was an interesting column from former New York Fed President Bill Dudley on the terminal sometime this week saying that if you do game plan out this scenario, the tariffs are illegal, et cetera. What does that mean for companies? His view is that companies are going to be slower to pass on their cost increases if we do have this wildly swinging pendulum. And what that means for the Federal Reserve is a fun thought exercise. Is inflation transitory once again? Seems like a difficult environment to make policy in, but probably not any more difficult than it is right now.

[Matt Levine]

I was going to say there's a really distinct lack of clarity on tariffs, both in terms of their legality and in terms of what the negotiated rates will be. Yeah, And I was going to say that if the Supreme Court definitively rules that the IIPA tariffs are illegal, then you get more clarity. But that's not really true. Right. Because then they go back and use other statutes and it's like it just takes more. It's a longer, more drawn out, more complicated process with further legal challenges and. Yeah, yeah, talk myself out of that.

[Katie Greifeld]

Sounds.

[Matt Levine]

It's all pretty grim.

[Katie Greifeld]

Yeah, it is pretty grim. It's also grim just for the US Government and the fiscal outlook, sort of. Well, Scott Bessant, Treasury Secretary Scott Besant has projected that tariffs are supposed to bring in like $500 billion in a year in annual income, they would have a hole there.

[Matt Levine]

Yeah, but like, the US Fiscal outlook is a long term outlook. And if you think, as most economists still seem to think, that tariffs are bad for the US Economy, which is separate from the legality question. But again, most economists think that. Not Scott Bessant, not Donald Trump, but most economists think that tariffs are not really helping economic growth. If you think that, then getting rid of the tariffs is good for fiscal sustainability, because in the long run, fiscal sustainability is driven by the economy's capacity rather than like the particular tax rate on imports.

[Katie Greifeld]

Just in terms of, though, bringing down the budget deficit. Yeah, it does hurt there.

[Matt Levine]

Yeah.

[Katie Greifeld]

This was part of the pillars that U.S. treasury Secretary Scott Bessen put in place. Like, yeah, plants have been built around this revenue coming in to the government's coffers and taking that out would, I don't know.

[Matt Levine]

Oh, yeah, no, it's. It's like super disruptive.

[Katie Greifeld]

Yeah. Right.

[Matt Levine]

Like, on the one hand, you could imagine a court, somewhat unconstrained by precedent and law, saying it would be so disruptive to the government to take away this $30 billion a month revenue source that we're just going to bend over backwards not to do it. The other hand is really, is what the Constitution says is that Congress has to impose taxes. It's a really important part of the constitutional structure. And it's like there's hundreds of years of history of kings and executives wanting to raise taxes, and the only constraint on them being the legislature's power to raise taxes. And so for the Supreme Court to say it's like too important for the president to be able to impose whatever taxes he wants, it's like really a shocking change in the constitutional structure. But here we are.

[Katie Greifeld]

Maybe the government can make up what they're not making in tariff revenue from their stakes in US Companies. Maybe that's the future we're rattling towards.

[Matt Levine]

How did this get more depressing? It is true that the Trump administration has found many new revenue sources, like owning 10% of Intel. This is a real tangent, but I do think that one model that people have is that the US government has a 20% stake in every because it taxes 20% of their earnings. If you take an additional 10% thick at intel, then that's kind of an additional tax. But whatever, that's not really a tax. It's fine, but. Right. I mean, the other truly novel revenue source that the Trump administration has found, not for the government, but for Trump personally, is crypto shenanigans. And you could probably make $30 billion a month selling US government crypto.

[Katie Greifeld]

That's true. I thought you were going to bring up the revenue share that has been floated with AMD and Nvidia. But that's, you know, the crypto shenanigans is probably a much more sure thing. I don't think that the Trump family.

[Matt Levine]

Is giving that to, like, intel and AMD and Nvidia.

[Katie Greifeld]

It's like, we talked about this on the podcast.

[Matt Levine]

I don't write about it. It's not that fun. But like, these are all like, voluntary taxes. They're like voluntary taxes, right? They're like, yeah, Donald Trump goes to like, Nvidia and is like, hey, you want to give me 10% of your revenue?

[Katie Greifeld]

No.

[Matt Levine]

And they're like, yes.

[Katie Greifeld]

No.

[Matt Levine]

Well, no. I mean, right? They're thinking, no, I don't want to give you 10% of my revenue. But like, there's a certain nice chip company here. Shame if anything were to happen to it, right? If you replace the tariffs with voluntary tariffs, how much revenue would you collect? Not none.

[Katie Greifeld]

Yeah.

[Matt Levine]

If it's like voluntary, nudge, nudge.

[Katie Greifeld]

I don't know enough about AMD's situation to opine on it too confidently, but at least Nvidia. Bloomberg had an interview with Nvidia CFO last week and she said something along the lines of, I haven't seen anything, I haven't signed anything. We're not giving up 15% of our Chinese chip revenue yet. So, yeah, I might be editorializing. I don't know if she said it with that much passion.

[Matt Levine]

We have. Shame if anything were to happen to that Chinese chip revenue. I don't know.

[Katie Greifeld]

Well, I don't know even if Chinese companies are going to be able to continue buying it. Apparently, the Chinese government reportedly has encouraged companies not to buy American chips. But anyway, shall we move swiftly along? Let's do it.

[Lisa Mateo]

Hi, I'm Lisa Mateo, introducing you to the new Stock Movers report from Bloomberg. These are short audio reports, five minutes or less, delivered right to your podcast feed. Throughout the day, Stock Movers fills you in on the day's winners and losers on Wall street and tells you about the news and data that's driving those gains and losses. If you want to stay plugged into the stock market, but don't want to spend all day watching tickers scroll across your screen, then Stock Movers is a place for you to get informed. Listen a couple times throughout the day to find out what's moving equities and why. Search for Stock Movers on Apple podcasts, Spotify or anywhere else you listen. Get the latest stock news and data backed by reporting from Bloomberg's 3,000 journalists and analysts across the globe. Subscribe to Stock Movers wherever you get your podcasts.

[Katie Greifeld]

What tickles your fancy to talk about.

[Matt Levine]

Second this week, my old haunts, Goldman, Goldman are.

[Katie Greifeld]

I am excited to talk about this. This is a weird one.

[Matt Levine]

Yeah, sort of. It's not that weird.

[Katie Greifeld]

It seems weird.

[Matt Levine]

It's weird in detail. But effectively, every week on this podcast, we talk about some sort of deal where a big traditional asset manager is buying, like an alternative asset manager, like a private market or just partnering, or a private manager is buying a traditional manager, or a private manager and a traditional manager are partnering to do like an ETF or whatever. And this week it is Goldman partnering with T. Rowe Price. And no one's buying each other. Goldman's buying a little T row. Yeah, they're buying a billion dollars of T. Rowe in the open market.

[Katie Greifeld]

To be clear, the weird part, at least from where I'm sitting, is that Goldman will make a series of open market purchases to amass up to 3.5% of T. Rowe's stock. That's as much as 1 billion DOL. That would make them, I think, one of the top five biggest shareholders in T row. Why do they have to go through all that? Why can't they just do a little jv a partnership?

[Matt Levine]

I don't know. We are in a moment where there's a lot of momentum behind Alts managers. By Alts managers, I mean, you know, kkr, Apollo, Blackstone. But also, and I think we've talked about this on the pod and I've certainly written about it, Goldman very much wants to be an Alts manager.

[Katie Greifeld]

Oh, we've talked about it and you.

[Matt Levine]

Know, look, it is, right? It runs alternative assets. It manages assets.

[Katie Greifeld]

Well, didn't it use that to justify the pay packages for David Solomon and John Waldron?

[Matt Levine]

Goldman is an investment bank and it manages a lot of money for institutions that it invests in alternative assets. And it's been a big alts business for a long time. It's not quite the same as kkr, but it's like they think that they can be.

[Katie Greifeld]

Well, I was going to ask who is the Alts manager in this scenario? That's Goldman, but.

[Matt Levine]

And it's funny, right, because like, T. Rowe actually owns a private credit manager, Golk Hill. But if you read the press release on this deal, it's like it kind of says, we're bringing Goldman's Alts assets to Tiro's retail and retirement distribution. And then Oak Hill is like, we're here too. Is I think how I read that.

[Katie Greifeld]

But.

[Matt Levine]

Right, so Goldman is, I think, the Alt manager here and that they do, you know, they raise a lot of money to invest in alts. And you know, they do that from institutions and they do that from their private wealth clients.

[Katie Greifeld]

Yeah.

[Matt Levine]

The story in private credit and private equity these days is like trying to find like true retail distribution, trying to sell through financial advisors, and in particular trying to sell to 401k plans.

[Katie Greifeld]

Yeah.

[Matt Levine]

And T Rowe has a lot of 401k business and like they do target dated funds for 401ks. Right. And if you can put private assets into target date funds, like that's a no brainer. Right. It's like it's exactly the liquidity profile you want and you're selling Alt's assets to your giant pool of retirement savers.

[Katie Greifeld]

Yeah.

[Matt Levine]

And then Tiro is very much classic. Okay, they have some alts, but they are very much a classic, traditional, long only actively managed mutual fund manager. And that is a tough business. The Bloomberg article about this tie up mentions that TRO has had $200 billion of client outflows. Their stock is down 50% from where it was in 2021. It's a tough business to be in. And everyone business is looking around and being like, how can we get into privates? Because the fees are better.

[Katie Greifeld]

Yeah, well, that's the thing, I guess I'm surprised that this search led them to T. Rowe, which isn't entirely fair. The Bloomberg news article does also point out that 2/3 of T. Rowe's assets are in retirement funds. They're one of the largest firms in that part of the market.

[Matt Levine]

Everyone in privates wants retail distribution. This gets back to your question about why do they have to buy 3.5%.

[Katie Greifeld]

Yeah. Is it just because the stock was on sale? To your point, I think it's the.

[Matt Levine]

Stock was on sale, but I think a lot of it is like if you're T Row, you're like every alts manager wants to distribute through every 401k channel and we want a real partnership with Goldman rather than just letting them stuff their funds into our clients. Right. And what does a real partnership mean? Well, I think it means giving Goldman some incentive to have some upside in T Rows stock so that Goldman has some incentive to actually skin in the game. Yeah. Actually not just use Tiro as a dumping ground for its products, but try to be a real partnership. So I think that Makes sense to say you should buy some stock.

[Katie Greifeld]

Yeah. It is interesting because you think about some of the other partnerships that we've talked about on the show. You have Vanguard and Wellington with Blackstone. That's just partnering on funds. State street has partnered with Apollo, by the way.

[Matt Levine]

Vanguard and State street are not in the same position as the traditional active management firms.

[Katie Greifeld]

Wellington, Wellington.

[Matt Levine]

Fair. Fair, Fair.

[Katie Greifeld]

Yeah. Come on, man.

[Matt Levine]

I was saying Vanguard and State Street.

[Katie Greifeld]

Yeah, but.

[Matt Levine]

Right. I mean, I think of it as like the investment world now is focused on alts and index funds. And if you're a traditional active manager, it's really hard. And so you can get into indexing, but that's like, that's tough business to get into. And so you get into alts.

[Katie Greifeld]

Yeah. I'm interested to see how this turns out, to see this sort of transaction, too. Caught my eye.

[Matt Levine]

Foreign.

[Lisa Mateo]

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[Matt Levine]

Deal contingent hedges.

[Katie Greifeld]

Are we only talking about currency hedges here?

[Matt Levine]

You can do deal contingent rates hedges.

[Katie Greifeld]

Okay.

[Matt Levine]

Yeah.

[Katie Greifeld]

Spiritually similar.

[Matt Levine]

It's possible that someone somewhere has done a deal Contingent oil hedge. Yeah, maybe.

[Katie Greifeld]

I don't know. Yeah.

[Matt Levine]

But no, I mean, it's mostly currency and occasionally rates. You're a company, you're buying another company.

[Katie Greifeld]

I'm a businessman.

[Matt Levine]

You're buying another company. You sign a deal to buy the company and it's closing in like six months. And if it's in a foreign country, you might have to get a lot of foreign currency and you want to lock in your currency rate today. But if the deal doesn't close, you don't want to have liability for that currency. Similarly, you might lock in your borrowing costs today. You might hedge with Treasuries to hedge your interest rates in six months. But if the deal doesn't close, you don't need that interest rate hedge anymore. There's a longtime banking product of deal contingent hedges where you go to your investment bank that did the merger for you and you say, I would like to hedge my currency risk or my rates risk or whatever, but I want to lock in my rate today and if the deal doesn't close, I want to tear up the contract and not owe you anything for some price, the bank will do that. Historically, this was what banks did. Banks had big balance sheets and they were good at pricing complicated risks. They were in a client service business. So as their merger client, if you wanted that sort of hedge, that was a nice thing for them to sell. You help them win merger business. But it's also very risky because it's easy to do a foreign currency hedge. You just buy the right delta in the spot market.

[Katie Greifeld]

I could do that right now.

[Matt Levine]

Right. But a foreign currency hedge that is torn up when a deal falls apart is very difficult to hedge. And banks sometimes get it wrong or get surprised by deals falling apart and lose $100 million on a deal. There's been a series of IFR articles like international Financing Review articles about how hedge funds are getting into the deal contingent hedge business, where there's an article last year that I wrote about where basically a number of banks will do these deals with their clients. They'll do a deal with a corporate client saying we'll hedge your foreign currency risk and tear it up if the deal falls apart. And then they'll go to a big hedge fund and buy the offsetting trade. And the hedge fund will price the merger risk and give them the trade. And the bank will collect a little fee for setting up the deal, but the hedge fund will take the risk. I thought of this as an interesting story about how like banks don't have the risk appetite and balance sheet that they used to and the big hedge funds are becoming that they're becoming the source of risk capital. But then this last month there was an IFR article about how hedge funds are taking the next logical step and just going directly to the clients and saying, hey, we'll do the hedge for you. You don't need to go to your bank at all. Yeah, one thing that's interesting, when I was a banker, I thought of bankers as covering companies, large corporates related deals. But increasingly the main client of investment banking is private equity. A lot of deals are done by private equity, particularly deal contingent hedges. It's a lot of private equity firms saying, we're going to buy this foreign company, the deal's going to close in six to nine months. We want to hedge our currency risk today and we're interested in structure. So we're happy to do a deal contingent hedge. The good and bad thing with private equity firms as a client for a bank is there's 12 of them instead of thousands. If you're a hedge fund and banks are constantly coming to you to do deal contingent hedges and they're all for three private equity firms, you're like, why don't I just call those three private equity firms myself? Why don't you? The bank at all. If banks have thousands of corporate clients, their client relationships are important and hard to replicate. The hedge fund is not going to get into that business. But if they have 12 private equity clients, you could do that. You can cover those 12.

[Katie Greifeld]

My first thought reading this was wouldn't it be inefficient to try to take a guess of which of the private equity clients are bound to do cross border deal? But putting it like that, well, they know, right?

[Matt Levine]

Because they've done the deals. If you do a deal contingent hedge, regardless of whether the bank tells you who's on the other side of it, it's contingent on a particular merger. So you can tell who's doing the merger, right?

[Katie Greifeld]

Yeah.

[Matt Levine]

If you do three deals for one private equity firm, you're like, hey, I should get to know them.

[Katie Greifeld]

Yeah, I understand. I can put myself in the shoes of the banks being upset about this. I can put myself in the shoes of the hedge funds who are doing this. But I think it's also interesting to think about the private equity firms. And the article does ask the question, should it really matter to the client who is the back end? It raises good points that you could get worried about the possibility of leaks surrounding M and A. There's potential conflicts of interest here. It'd be interesting to hear from the perspective of the private equity clients how they feel about this.

[Matt Levine]

Yeah, I always assume you could do these hedges the day after you sign the deal rather than the day before. Maybe that's wrong, but if you do it the day after, you don't have to care about leaks. Yeah, I guess you'd worry about credit. The nice thing of doing this trade with a big bank is you're facing the big bank and they probably won't default. Whereas if you're facing a hedge fund, you have to have some counterparty risk awareness, some diligence on how viable the hedge fund is. But I don't know. If I were a big private equity firm, I would find it cool to diversify my pool of counterparties and do some deals with Deja or whatever instead of with a bank.

[Katie Greifeld]

It seems fun. Well, that's actually all I have to say, I guess. There's more deals happening, so this will.

[Matt Levine]

I always thought of this as a really niche, unusual business and now it's a thing. That's weird. But yeah, there's more deals happening, sort of. There's no more private equity, actual acquisitions.

[Katie Greifeld]

That's true, though apparently August was the best month for dealmaking since 2021 or something along those lines. Yeah, good news, good luck.

[Matt Levine]

We're back everyone.

[Katie Greifeld]

We're back.

[Matt Levine]

And that was the Money Stuff Podcast. I'm Matt Levine.

[Katie Greifeld]

And I'm Katie Greifeld.

[Matt Levine]

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[Katie Greifeld]

And you can find me on Bloomberg TV every day on the close between 3 and 5pm Eastern.

[Matt Levine]

We'd love to hear from you. You can send an email to moneypodlumberg.net Ask us a question and we might answer it on air.

[Katie Greifeld]

You can also subscribe to our show wherever you're listening right now and leave us a review. It helps more people find the show.

[Matt Levine]

The Money Stuff Podcast is produced by Anna Mazarakis and Moses Andam, and special thanks this week to Julia Press.

[Katie Greifeld]

Our theme music was composed by Blake Maples and Sage Bauman is Bloomberg's head of Podcasts.

[Matt Levine]

Thanks for listening to the Money Stuff Podcast. We'll be back next week with more stuff.

[Lisa Mateo]

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[Nathan Hager]

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