Steve Rattner on the investing landscape after the election

Published Tue, Nov 1 20162:11 PM EDT

Steven Rattner, chairman of Willett Advisors, the investment arm for former New York Mayor Michael Bloomberg's personal and philanthropic assets, sat down with CNBC's Mike Santoli to discuss the investing landscape after the U.S. presidential election. "I think if I were the market, what I might want would be some form of divided government, but one in which stuff actually gets done, as opposed to a divided government in which nothing gets done. I think in terms of investing around it, the market has made it clear that it prefers Hillary Clinton to Donald Trump , which is an unusual choice for the market. But as you watch the market go up and down with the polls, I think that's relatively clear," said Rattner. "So if Mr. Trump were to win, I think you would see a massive downturn in the market the next day, at this point. If Hillary Clinton wins, probably not that much of an upturn," he added. In this wide-ranging conversation, Rattner, who previously served as counselor to the secretary of the Treasury and led the Obama administration's effort to restructure the automobile industry, also discusses: The fiscal priorities of a new administration. Whether Democrats are the new party for business. His outlook for General Motors , Ford and the auto industry. How to generate long-term returns. PRO subscribers can also read the entire transcript of the exclusive interview below. (Editor's note: The content below is from a third-party service and there may be some minor transcription errors. Watch the video for the exact quotes.) MIKE SANTOLI: Steven Rattner is the chairman of Willett Advisors, the investment arm for former New York Mayor Michael Bloomberg's personal and philanthropic assets. Previously, he served as counselor to the secretary of the treasury and led the Obama administration's successful effort to restructure the automobile industry, which he chronicled in his book Overhaul: An Insider's Account of the Obama Administration's Emergency Rec-- Rescue of the Auto Industry. And he joins us now. Of course, before that, had a long career in investment banking. And-- Steve, thank you very much for being here with us-- STEVEN RATTNER: My pleasure, happy to be here. MIKE SANTOLI: So-- you know, we'll talk about the auto industry. Maybe we'll talk about some markets. But we're in a political season. And if we can just stipulate that Hillary Clinton wins as the probabilities now seem to suggest. This is a preferred outcome of yours. You've been on the record certainly about that. What are the economic stakes, I think? I mean, is it just about more of the same if we have a Clinton administration as a continuation of what we've had here for economic policies? Or is there more to be done or will be done? STEVEN RATTNER: I-- certainly philosophically in tune with what the Obama administration has tried to do. And obviously, very distinct from what Donald Trump or the Republicans would want to do. But she has a long-- and you can read it on her website. She has a long list of things that she would like to do that essentially (not to oversimplify or-- or minimize them) involve taxing wealthy people more and using that money to pay for infrastructure, education, training of workers, social programs to try to get people to be better off. Basically, what she's been-- what she's been campaigning on. MIKE SANTOLI: And, of course, the premise there is that this has been something lacking in the economy, right? The amount of sort of government investment utilizing-- you know, the ability of the government to borrow cheaply and maybe tax a little bit more-- to get parts of the economy or at least kind of-- get money to parts of the economy that maybe have lacked it for now? STEVEN RATTNER: Well, as a matter of fact we have cut our spending on things like infrastructure by roughly in half as a percent of G.D.P. over the last 20 or 30 years. We've been kind of starving the beast. And I think even Republicans agree that you have to invest. Now we disagree about how you do it and how much and all that. But-- but there's no question that-- that we have-- we have left a lot of important-- programs-- to languish. Same is true of R & D. We've massively cut our R & D spending at the federal level. And that's really what gets innovation going. MIKE SANTOLI: I guess the-- the-- this related question is always going to be how much can get done. And we don't know exactly what the makeup of Congress is going to be. A couple of times when you've had a little bit of-- talk of a Democratic sweep maybe of the House and Senate-- markets at lea-- it's hard to figure out what markets are wanting or are expecting. But they've kind of gotten a little bit nervous. There's a sense on Wall Street anyway that-- full Democratic control could be somehow market unfriendly. Is there any of this that you would invest around or think has implications for the market? STEVEN RATTNER: I think if I were the market, what I-- what I might want would be some form of divided government, but one in which stuff actually gets done, as opposed to a divided government in which nothing gets done. I think in terms of investing around it, the market has made clear that it prefers Hillary Clinton to Donald Trump, which is an unusual choice for the market. But as you watch the market go up and down with the polls, I think that's relatively clear. So if Mr. Trump were to win, I think you would see a massive downturn in the market the next day, at this point. If Hillary Clinton wins, probably not that much of an upturn. If there's a sweep by the Democrats, yeah, I think the markets could be a little troubled by that for all the reasons you suggested. MIKE SANTOLI: Yeah. And-- and so I-- I guess, you know, it's an interesting-- proposition. Because the markets have done quite well. Not just with divided government-- since 2000 and-- and 10 really-- but since Congress essentially tied its own hands, in terms of discretionary spending and things like that a few years ago. So-- I-- I guess the question is would this kind of fiscal help be even welcomed, if not even-- if not by the-- by the economy, then by the markets? STEVEN RATTNER: The mar-- the markets should welcome it. As I said-- the Clinton plan is budget neutral that her tax increases offset her spending increases. Obviously, the rich get taxed. The markets may not-- may not particularly like that. But I think the main-- frankly, personally, I think the main driver of the markets at the moment is the Fed and interest rates. And you can literally, again, watch the markets move based on how people feel interest rates are going to move. And so that's what I would-- if I were an investor, that's-- that's the thing I would mostly have my eye on in trying to assess whether to be more invested or less invested. MIKE SANTOLI: And-- and where do you come down on that in the sense of how the Fed is currently communicating its intentions, right? Maybe a interest rate increase in December and then going slow if not kind of taking a pause after that. STEVEN RATTNER: No, the irony of the F-- of the Fed is that the Fe-- I believe the Fed actually tells you exactly what's on its mind at any point in time. People keep saying, "Well, what is Janet Yellen thinking?" She's telling you what she's thinking. They put out their dot plots. They put out their-- their statements. They-- she does press conferences. I think she's telling you exactly what she's thinking. So far, as you know, the Fed has been much more-- aggressive, if you will, in its interest rate expectations on the markets. The markets have been right. The Fed has been wrong. But I think the conventional wisdom is probably right. December and then maybe one or two next year. MIKE SANTOLI: Yeah, people do complain about the-- the communication strategies and what they will say is conflicting signals. But, I mean-- I mean, I know I go back to when the Fed didn't tell you anything. STEVEN RATTNER: Well-- MIKE SANTOLI: Even whether they changed interest rates. (LAUGH) STEVEN RATTNER: As-- as-- as do I. I was-- I covered the Fed back in the '70s. MIKE SANTOLI: Sure. STEVEN RATTNER: And the only way to know whether the Fed had changed interest rates was whether the treasury market started to move. Because they never announced anything. MIKE SANTOLI: Sure. Exactly. So-- you know, it's interesting too that-- that the Fed-- gets criticized from both sides, which maybe does say that they've-- they've struck a balance here in a sense. People say, "Well, they should have been raising rates for a long time by now." Others are saying, "What's the hurry?" So it seems like they're kind of, you know, in the middle path. And-- and maybe, you know, that's all we can expect, at this point. STEVEN RATTNER: I think the Fed has done a remarkably good job. I think the idea of Donald Trump criticizing them as being political is pretty ludicrous. I don't think you could name or I could name which president appointed which governor. Because they-- and you contrast that to the Supreme Court with all their five to four, now four to four decisions is very-- it is very fact driven. It is very non-- ideological. And I think they saved the economy-- because Congress wasn't prepared to do very much. MIKE SANTOLI: If we could talk a little bit about the auto business, which you obviously track very closely. Just this week-- General Motors had really nice-- earnings reports. Their market share is holding up. Really the U.S. auto industry's been on-- a pretty good run for awhile now, even if the cycle who knows has peaked for-- for now. What are the main takeaways from your experience and, of course, the government's experience in supporting the auto industry? STEVEN RATTNER: Well, of course, one main takeaway is we need better corporate governance to be sure companies don't get in that kind of trouble. I think another takeaway is that when markets fail as they did in 2008 and '09, there is a role for government. That if we had stayed on the sidelines, the companies would have closed their doors and liquidated. Instead, as you say, we have-- a very healthy auto industry. And so I'm a great believer in markets. I made my living in markets. But I also recognize that markets can fail. And in those unusual cases, government should step in. And I think those are-- and I think-- I think we put in place a-- the government should also then get out, as we did, and let the private sector take over. And that's also worked well. I think there are some questions around future of autos, which we can talk about if you want. But-- MIKE SANTOLI: Well, exactly. I-- I think th-- I wonder if that's something that-- helps to explain why at least from-- a stock investor's point of view they haven't gotten excited about-- about these good results for now from GM, Ford, or Fiat Chrysler-- simply because maybe there's a little bit of haziness about the future of autos. STEVEN RATTNER: I think that's exactly right. I think that-- first of all, of course, it's a cyclical business. Secondly, it's a tough, competitive business, you know, with a lot of global competition and so on. And thirdly, ironically, when we did the-- the rescue, we weren't talking-- we talked a little bit about electric cars. The idea of f-- self-driving cars, the idea of Uber-- n-- none of this was in the picture. And so I do think you've got an a-- you've got-- you've got a business where the consumer uses it 4% of the time. That's the average amount of time a car is driven. And so ride sharing, autonomous driving, all these ideas, I think, could well, at some point-- Uber sooner, other things later, have a real impact on the number of cars we-- we buy in this country. MIKE SANTOLI: Do we think that the-- that the major players-- I mean, they certainly talk about it, but that they are-- either hedging or investing enough in that-- possibility that they can-- they can find a way to-- to do all right there? STEVEN RATTNER: I think they're certainly-- tryin' to be on top of the-- of the technology. And-- the in-- the in-- General Motors acquisition of Cruise-- the investment in Lyft, which is on the ride sharing side, all were showing that. I think the-- I think there are two things. One, can a big public company, you know, traditional company actually really innovate the way-- a Tesla can? Whatever their challenges may be. And secondly, the fact is that if people find ways to use their cars more efficiently, fewer cars will be sold. And that's no-- there's no way to make that better for business. MIKE SANTOLI: Sure. I guess the oth-- you-- you mentioned that-- one of the lessons is m-- let's make sure we have the kind of corporate governance that doesn't let some companies get into that position. In what respect? I mean, you did have GM and-- and Chrysler have trouble-- obviously, with-- with their balance sheets and other things. Ford had spent the prior few years kind of shoring up its balance sheet. I mean, do you mean that distinction in terms of policy of-- on capital allocation? STEVEN RATTNER: That-- well, that-- that's precisely the example I give a lot of people that you take two companies-- leave Chrysler out. They were-- headed on a leverage buyout. It was a little more complicated. But you take Ford and GM, they were almost identical companies in terms of their footprint and how they operated, their history. They faced the same challenges, whether it's the Japanese or oil prices or the credit crisis. And yet, Ford got through it and GM didn't. Well, why? Because Ford had-- had good-- good governance in the form of Bill Ford, who basically said to himself, "I need another guy to run this company." Went, got Alan Mulally. Put over $20 billion of cash on the balance sheet by hawking everything. Was very humble about the challenges they faced. GM was incredibly arrogant. The board was-- was not in charge really. Rick Wagoner, who's a good guy, just missed the whole thing. MIKE SANTOLI: At GM, yeah. STEVEN RATTNER: At GM. Missed the whole thing. And there was nobody there to stop him or to-- to change direction. And so they literally drove off the proverbial cliff. And so that's a great example of why governance matters and why management matters. MIKE SANTOLI: Sure. You know-- to t-- actually, knit these-- these two big issues together, the-- the policy-- discussion and-- and autos, what do you make of just how much-- Donald Trump has focused on this-- these sort of individual decisions of a Ford to-- to make parts and cars in Mexico and things like that? And-- is there-- a role for an administration to try and-- and sway U.S. companies one way or the other in that regard? STEVEN RATTNER: Donald Trump-- as badly as I believe he's (LAUGH) approached many things, he's got his finger on a legitimate issue, which is that globalization-- whether it's with Mexico or anywhere else has been good for the country as a whole. The cars you buy are cheaper because some of them do get made in Mexico. The clothes you wear are cheaper, because they get made in Asia somewhere, and so on and so forth. But there are a lot of losers. And among the losers have been people in the manufacturing sector whose jobs have left. And Ford is acting completely rationally. You cannot-- as they've said very clearly, "We cannot afford to make a small car in the U.S. with the cost of U.S. labor and still make a profit." So they're moving them to-- to Mexico. And that's just-- that-- that is part of an-- of-- normal evolution of business. The mistake we made as a country was not helping the-- helping the los-- the losers to get on with their lives, either by retraining them for other jobs, giving them more support, things like that. We just kind of shrugged our shoulders and said, you know, "Kind of not our problem." And that-- that was really where we made our mistake. MIKE SANTOLI: Sure. There, of course, is an irony there, which is-- as many people were watching the-- the value of the Mexican peso go up and down with Donald Trump's poll numbers is, you know, the-- the-- the takeaway there is if, in fact, he won, and the peso was depressed even more, it becomes that much cheaper to invest in Mexico-- STEVEN RATTNER: That's actually-- MIKE SANTOLI: --and buy. STEVEN RATTNER: That's a great point. I hadn't thought about that. MIKE SANTOLI: I mean, who knows if it would ever get to that stage. STEVEN RATTNER: Right, right. That's pretty funny-- (OVERTALK) MIKE SANTOLI: But there-- you know, the-- the market's gonna-- STEVEN RATTNER: But on the other hand, he would-- MIKE SANTOLI: --try to-- STEVEN RATTNER: On the other hand, he was gonna close the border and put a-- MIKE SANTOLI: That's true. STEVEN RATTNER: --35% tariff on. So that would have offset the peso. But-- MIKE SANTOLI: Wouldn't-- no b-- no beneficiaries-- probably in that-- STEVEN RATTNER: We'll-- we'll probably never know. MIKE SANTOLI: --in that sense. Yeah. So as somebody now who-- who has to oversee-- you know, a pool of capital that's supposed to survive and thrive long-term-- how do you navigate markets like-- like they are right now? I mean, obviously-- things look expensive in general. People would say-- "Are there-- are there opportunities or are there ways that you need-- feel like you need to steward-- that kind of capital that's-- that's different now?" STEVEN RATTNER: Well, first, we're not very good market timers. And frankly, I don't think anybody else is either. I think that's a fool's game. Warren Buffett has said that many times. I believe it. We're long-term investors. We have the benefit of having almost permanent capital so that we can look out on the long term. That said, obviously, we try to not make mistakes. And markets are quite pricey. So we have reduced our exposures here and there. We, in the U.S. particularly, try to avoid-- and we invest mostly through managers, as you may know. In the U.S., we-- we think, for example, that the consumer-- staple companies are-- you know, that you have reasonably high dividend yields are unbelievably expensive. We try to avoid companies like that and stick to think where we think there's more value. We think there's more value in parts of the emerging markets. We have some money in Europe, in-- in fairly targeted strategies. We want to be careful about that too. So you try to pick and choose. MIKE SANTOLI: Uh-huh (AFFIRM). You mention it's-- it's almost permanent capital. I mean, clearly, it's-- it's not-- for anyone's retirements, you know? In a couple of decades, this-- this amount of money. Do you then take-- something akin to an endowment approach, where, you know, you want to have some kind of-- yield off of it, but just basically spread your bets and-- and take advantage of the fact that you don't need to have liquidity tomorrow? STEVEN RATTNER: We-- it-- it is an-- it's exactly an endowment approach. But we don't feel like we have to have yield in the sense of dividends and things. 'Cause-- and what the endowments learned over several dec-- last few decades is you can create yield by simply selling a few shares of stock or-- or liquidating a small investment. So we do need capital, obviously-- for Mayor Bloomberg to give away. MIKE SANTOLI: Sure. STEVEN RATTNER: But we can access-- we don't need to invest in-- in dividend paying or interest paying. And we are very much equity investors. We think in the long run-- you make money by making solid equity investments in real companies that are doing real things. MIKE SANTOLI: Uh-huh (AFFIRM). Yeah, I would say the-- a long career on Wall Street as well. I mean, in the-- and the business has kind of been in this constant sort of low-grade turmoil, right? I mean, the-- the-- the banks tryin' to figure out exactly how they can-- kind of reorient themselves-- to this new world, both in terms of regulation and-- and-- and competition, I guess. Do they have the right formula, do you think, in terms of how the banks right now, the big surviving ones-- are doing things? And do they have to fear for what might happen in terms of regulation, in addition to what's already there? STEVEN RATTNER: It's a very tough business. And quite frankly, I'm glad I'm not in it. Because-- because we have as a country essentially, slightly exaggerating, turned the banks into utilities. And that may be the right thing to do for risk purposes. But that's what's been done. That essentially we put them in a position, especially in a low interest rate environment, where it's very, very hard for them to make an adequate return on capital. And so it is-- it's a very different business than the business-- I used to be in. I do think we've taken much if not all of the risk out of it. I don't feel we need-- we certainly should be tweaking Dodd-Frank. You should always be tuning things up, both for the help-- sake of the banks, as well as the sake of the country. I don't think we need to-- I certainly don't think we need to break up the banks. I don't think we need major new layers of regulation. We've got plenty of regulation. I think we just need to do it a little better. MIKE SANTOLI: And-- and if, in fact, we've taken most of the risk out and-- and these banks really can't-- very well earn that good a return-- does the economy suffer for that? I guess that's the bigger question. I mean, as a source of-- of credit and that fuel for growth. STEVEN RATTNER: I think there is ample credit available. What I would-- what I would caution my fellow countrymen about is our banking industry is one of our great strengths. If you talk to a banker or a businessman in Europe, our-- they-- they envy our banking system and its ability to-- you know, to earn a return, to lend money, to do all the things that banks do. We're global leaders in finance. And the worst thing we could do would be to destroy an industry that does still employ millions of people and create a lot of jobs and provide functioning capital markets. So that would be my caution. MIKE SANTOLI: And-- and do you think-- I-- of course, no way to predict this in any-- in any specific way. But do you think that-- just the leftover-- disgust with what happened in the financial crisis is gonna color the debate for a long time to come? Not just around banks, but just around the government's treatment of business and-- and hedge funds, and anything-- that seems as if it's-- it's kind of gotten the better part of the deal? STEVEN RATTNER: Yeah. No-- no one who-- has done well the last eight or nine years, you know, the wealthy people who've done so well, should feel that great about it. Because-- because-- because there is this risk that this all-- this-- that this backlash that has fueled Donald Trump that is real and to some degree fueled Bernie Sanders-- that this backlash continues. And you end up going too far in the other direction, whether it's tax policy, whether it's regulatory-- regulatory policy, whatever, to punish business, to punish banks, to punish rich people. So I would-- I would say to wealthy people, "You should want the government to be doing stuff to help the people who got left behind, even if it costs you a little bit of money. Because in-- you'll-- in the long run, that will be better for you." MIKE SANTOLI: All right, Steve. We'll see if that argument wins out. Appreciate your time. STEVEN RATTNER: Thanks so much. MIKE SANTOLI: Thank you. For CNBC Pro Talks, I'm Mike Santoli. * * *END OF TRANSCRIPT* * *

"I think if I were the market, what I might want would be some form of divided government, but one in which stuff actually gets done, as opposed to a divided government in which nothing gets done. I think in terms of investing around it, the market has made it clear that it prefers Hillary Clinton to Donald Trump, which is an unusual choice for the market. But as you watch the market go up and down with the polls, I think that's relatively clear," said Rattner.

"So if Mr. Trump were to win, I think you would see a massive downturn in the market the next day, at this point. If Hillary Clinton wins, probably not that much of an upturn," he added.

In this wide-ranging conversation, Rattner, who previously served as counselor to the secretary of the Treasury and led the Obama administration's effort to restructure the automobile industry, also discusses:

The fiscal priorities of a new administration.
Whether Democrats are the new party for business.
His outlook for General Motors, Ford and the auto industry.
How to generate long-term returns.

PRO subscribers can also read the entire transcript of the exclusive interview below.

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