How I Invest with David Weisburd
00:02:22 · David Weisburd, Christopher Donahue
[00:02:22] S0: And why cash? Why not just liquid securities or other highly liquid instruments? [00:02:29] S1: Back in the day, I was a salesman for Federated Hermes selling bank trust departments on using money funds. And over here in Newark, there was a bank that did modern cash management in the seventies, and it consisted of a stolen shopping cart, passbooks for the local S and L, and a plastic sheet. They would wheel the whole thing down to the S and L to post the interest. Well, it was so easy to do a money fund, and it took care of all of that problem. Another bank across the street was rolling T bills, and they had people. They had rolled T bills, that's in there for when they were coming due, whether to sell them or not. And it was a lot of operational difficulty, and you had to figure it out. A money fund solves that almost instantly and without a variation in NAV because what they want is a dollar in dollar out liquidity at par. [00:03:30] S0: And you invest a staggering $700,000,000,000 worth of cash in treasuries. Why is it that Federated Hermes have amassed this amount of cash? Isn't that more or less a commodity?
00:03:30 · David Weisburd, Christopher Donahue
[00:03:30] S0: And you invest a staggering $700,000,000,000 worth of cash in treasuries. Why is it that Federated Hermes have amassed this amount of cash? Isn't that more or less a commodity? [00:03:45] S1: Well, first of all, it's about 400 of the 700 is in govies. The rest is in munis and in prime securities as well. So... With that difference. But the same question obtained. Why do we have a of cash? Do you could go buy all those things? Absolutely. But the whole thing about a money market fund and the liquidity is it's as much a cash management service as it is an investment. That means it's gotta have good governance around it so that you know where's the money, how's it gonna work, how have you worked, have you worked for fifty years, what is the size of the operation that you have? If you have a big pot of money, dollars 100,000,000, are you going to put it somewhere where you have a challenge in liquidity, or you blow up the fund by asking for your money? Do you have a diversification of clientele such that all those clients, broker dealers, individuals, corporations, pension plans, endowments? They're all moving at different paces with different amounts, which adds a strength to the money fund. What's the regulation look like? Well, you've got to have regulation, and that's good. We have very good relationships with the SEC. But I think the thing you need the most is trust. And the trust is a combination of all of those things, plus Federated Hermes tradition of knowing the people and what we've done for over fifty years of doing this business. Maybe you
00:03:45 · Christopher Donahue, David Weisburd
[00:03:45] S1: Well, first of all, it's about 400 of the 700 is in govies. The rest is in munis and in prime securities as well. So... With that difference. But the same question obtained. Why do we have a of cash? Do you could go buy all those things? Absolutely. But the whole thing about a money market fund and the liquidity is it's as much a cash management service as it is an investment. That means it's gotta have good governance around it so that you know where's the money, how's it gonna work, how have you worked, have you worked for fifty years, what is the size of the operation that you have? If you have a big pot of money, dollars 100,000,000, are you going to put it somewhere where you have a challenge in liquidity, or you blow up the fund by asking for your money? Do you have a diversification of clientele such that all those clients, broker dealers, individuals, corporations, pension plans, endowments? They're all moving at different paces with different amounts, which adds a strength to the money fund. What's the regulation look like? Well, you've got to have regulation, and that's good. We have very good relationships with the SEC. But I think the thing you need the most is trust. And the trust is a combination of all of those things, plus Federated Hermes tradition of knowing the people and what we've done for over fifty years of doing this business. Maybe you [00:05:13] S0: could double click on why there's only a couple entities that manage so much cash. There's a number
00:05:13 · David Weisburd, Christopher Donahue, S2
[00:05:13] S0: could double click on why there's only a couple entities that manage so much cash. There's a number [00:05:22] S1: of reasons for that. The oligopolization, if you will, of the cash management money market fund industry occurred for several reasons. One, a minor... Or a secondary reason is regulation. All regulation oligopolizes by definition because they put up barriers, moats, whatever you want to [00:05:43] S0: call it. It's what Bellagolet calls regulatory capture. [00:05:45] S2: This episode is presented by Juniper Square, the operations partner for private markets.
00:05:45 · S2, Christopher Donahue, David Weisburd
[00:05:45] S2: This episode is presented by Juniper Square, the operations partner for private markets. [00:05:52] S1: That's what's called regulatory capture. Exactly correct. And whatever regulation there is, that's its effect. I don't exactly like it, but I think it is a given. That score, yes. Next thing you need is size. Don't use the word scale, use the word size. Because size alone oligopolizes the business. Because someone won't go into a $500,000,000 money fund if they have $100,000,000 They go, Holy cats. If I redeemed, that place is shut down. And you say, Okay, well, what if I have tons of money and decide I want to do one? Well, that's really nice, except that you don't have the ability to get other customers and start moving like a calliope among your clients so that not everybody is doing the same thing at the same time. So it is a combination of regulation, of size, and of experience, and how long you've been in it. So when we came out with the... We were made effective in January of 'seventy two. There was one money fund out ahead of the three of us, and then there were three of us made effective that day. Well, we're still three of the top money funds from the seventies. It hasn't changed. Those guys are still big competitors just like always. [00:07:13] S0: It's wild. It really makes me think about in the stablecoin market because a lot of people are trying to figure out in the stablecoin market how many competitors are there gonna be because it's it's a similar model. What do you think about the stablecoin market market?
00:07:13 · David Weisburd, Christopher Donahue
[00:07:13] S0: It's wild. It really makes me think about in the stablecoin market because a lot of people are trying to figure out in the stablecoin market how many competitors are there gonna be because it's it's a similar model. What do you think about the stablecoin market market? [00:07:26] S1: Talk about it on the money funds first, then get into that. So there used to be over 200 firms offering money market funds. Today, it's less than 50. Now only 20 of them are really competitively getting big amounts of money from big customers. So over time, you've seen that happen. I think you will see a similar thing happen. I don't think the stablecoins are going anywhere. The key to them will be, will they offer a dollar in and out? And then there were some of them that came out that didn't exactly work out that way, and they went the way of the dodo birds. So, you've got to be able to have daily liquidity at par. You cannot take undue risk with what you're having behind the curtain in terms of the security of those funds. And that's where the big mistakes occur. They go, well, we... You know, it's 90% just like you do your money funds. But this 10%, yeah, that's sport fishing. We won't do it. And that's where you run the risk of not being able to... So if they do it right, then they'll they'll be good, [00:08:33] S0: and they'll have winners and losers. And we welcome them to the foray. And Federated Hermes has made a decision, a very strategic decision, not to compete with your customers. Talk to me about that decision. And are you guys leaving a lot of money on