Warsh heads to Jackson Hole as economic worries mount

0:01Good morning from the Financial Times. Today is Monday, August 24th, and this is your FT News Briefing. Fed Chair Kevin Warsh looks to soothe worries about the U.S. economy at Jackson Hole this week, and Britain's Prime Minister makes his first overseas visit today. Plus, a deep dive on an unraveling Wall Street empire. This is probably the most significant crisis yet we've seen for insurers with billions invested in private credit. I'm Victoria Craig, and here's the news you need to start your day.

0:46All eyes, ears and camera lenses will be trained on picturesque Jackson Hole, Wyoming this week. It's where, on Thursday, the Kansas City Federal Reserve will kick off its annual Economic Policy Symposium. Beneath the majestic mountains, global central bankers, academics, and economists will discuss this year's theme, financial innovation and the implications for payments and policy. But it's Fed Chief Kevin Warsh's turn at the podium that will steal the show, and economists are hungry for an update from him. The FT's U.S. economics editor, Claire Jones, will be at the event and joins me now to chat about what we can expect.

1:21Hi, Claire. Hi, Victoria. So we don't hear much from the Fed chair as part of an intentional change in his communication style. So what are we expecting from his turn at the microphone this week? So this is his first big public address at Jackson Hole. And it's the first time he's going to be speaking in public since the press conference for the July meeting that led to a lot of criticism from economists that he's not doing enough to explain how he views the U.S. economy right now and how the Fed should respond to that. What I think we're expecting him to address in Jackson Hole is why he's taking this approach to communications, where he's saying a lot less than his predecessors, and to provide some justification for it and to maybe explain a little bit where his approach so far has gone wrong.

2:15Investors, Claire, have been a bit more jittery about U.S. inflation and record high debt levels here in the U.S. And they've been selling long-term U.S. Treasury bonds. Last week, we saw Treasury Secretary Scott Besant get involved in the market to try and soothe some of those concerns. I wonder if that possibly makes Warsh's job a bit more complicated. I think it adds to the sense that there's a lot of pressure on Walsh to really, you know, nail it in Jackson Hole this week. This was already quite a big moment for him. And the tensions that we've seen in the bond market, I think, add to that.

2:54And we've also seen over the last few days the collapse of a trade deal between the US and Canada. So you just get this sense that this speech is happening at a moment of quite a lot of general concerns about U.S. finance and economics. And to what extent are economists concerned about the Fed's ability to contain inflation? Because, of course, it's been made worse by the war in Iran, and it's now been well above the central bank's 2 % target for quite some time. So the FT conducted a poll last week with academic economists in conjunction with the University of Chicago's Booth School of Business.

3:35What we found is that more than 60 % of respondents thought it would now take longer than they thought a few months ago for inflation to fall back to the Fed's 2 % goal. A lot of the reasons for that are about the Iran war, which we're seeing in markets too, is raising concerns that U.S. inflation is going to remain high. In the poll, we also saw that most respondents thought Walsh was performing in line with expectations. 75 percent said his actions so far had been broadly in line with what they expected. The Fed's rate-setting committee meets in the middle of next month, Claire. So how likely is it that we could see an interest rate rise then?

4:21I think that's still very much open for debate. Before the September meeting, we'll see quite a lot more data. At the moment, the markets are pricing in roughly a 60-40 % chance that the Fed holds rates. So it really seems in the balance right now. I wouldn't expect any big clues from Walsh as to what he's going to do in September. But I think on that, it's going to be pretty much wait and see in terms of how the data evolves over the coming weeks. Claire Jones, our U.S. economics editor, thanks so much for your time. Thanks, Victoria.

5:04Andy Burnham is traveling to Ukraine's capital, Kiev, today in his first overseas trip as Britain's prime minister. In a speech marking Ukraine's 35th anniversary of independence, Burnham will pledge to back Kiev in the years-long war with Moscow for, quote, as long as it takes. That will include a promise to support building long-range missiles in Ukraine that can hit Russian targets. Burnham's visit, though, is likely to inflame his own country's tensions with Russia. Last week, Moscow warned of unspecified consequences after reports that Ukraine hit targets with British-made drones.

5:47Mark Walter started life as a shy Midwesterner and over the past several decades has taken Wall Street by storm. He's the CEO of investment titan Guggenheim Partners and presides over a business empire. But that empire is now unraveling. It's come under intense scrutiny after two insurance companies he controls disclosed that they were being investigated by federal prosecutors. As a result of that probe, the insurers revealed they provided more than$20 billion in financing for dealmaking by other parts of Walter's sprawling business. Lee Harris is the FT's insurance correspondent. She joins me now to discuss this saga.

6:26Hi, Lee. Hi, Victoria. So let's just start at the beginning here. How did Mark Walter build Guggenheim into the titan that it is today? What was so unique about what he was doing? Well, Walter was kind of one of the first guys to come up with what is now a really successful trade on Wall Street. He had the idea of buying up kind of sleepy life insurance companies that were invested in boring government and corporate bonds and instead investing them into actually a much more profitable private investment. It helped him and his business partners make a number of enormously profitable acquisitions, including of sports teams like the L.A.

7:10Dodgers. But it also became controversial because that ends up meaning that hundreds of thousands of policyholders at his firms, ordinary retirees, the investments that were backing up their policies were kind of unconventional, like the TV rights to the Dodgers baseball team, which he also owned. And it started to raise questions about risks associated with these investments. Regulators require insurers to say when they're lending to entities that have ties to their parent companies. And regulators want to know that because that kind of lending can present conflicts of interest. So when and how did all of this begin to unravel?

7:54Some of our reporting has shown that the problems at his firm, Guggenheim, go back at least a decade. There have been power struggles between senior executives that have triggered whistleblower complaints and concerns raised by the company's own compliance staff, leading to various disputes. But it's only really recently that the unraveling has apparently started to accelerate. In September, the FBI seized Walter's phone and his laptop as part of this wider probe that was being conducted. And we've learned that federal prosecutors are investigating his business practices. They've actually revealed that two of his insurance companies were lending to other parts of his business while misclassifying those investments as, quote unquote, unaffiliated.

8:55And we should say, Lee, that spokespeople for Walter have not responded to the FT's requests for comment on the story. And a spokesperson for Guggenheim declined to comment at the time of this recording. So, Lee, I just wonder, what is the risk here to both Walter and Guggenheim, but possibly more importantly, to those half a million policyholders who you mentioned earlier, who depend on the returns from these insurance companies that Walter controls? Yes. Walter's businesses now have a problem on their hands. They suddenly have more than$20 billion of investments that they've disclosed or affiliated, and they need to bring that down in order to avoid downgrades from credit rating agencies and in order to meet plans that they've laid out to their regulator.

9:44Our colleagues reported that on Thursday, a loan to Guggenheim's asset management division has fallen into distressed territory as executives in the firm have kind of struggled to reassure investors about the turmoil facing his insurers. In recent weeks, we've already seen Welter sell the Lakers basketball team as well as put a stake in Chelsea Football Club up for sale. Walter and his businesses have come under quite a bit of pressure before from these prior whistleblower complaints. But this is kind of the highest profile, probably the most significant crisis yet we've seen for insurers with billions invested in private credit.

10:33Lee Harris, who covers insurance for the FT, thank you so much for your time. Thanks for having me on.

10:44Before we go, one more story to tell you about. Canada's Prime Minister Mark Carney says that his country is now, quote, at war with the U.S. over trade. That's after U.S. President Donald Trump escalated his tariff attack with Ottawa. America has imposed a 50 percent tariff on about$20 billion worth of Canadian goods. Carney's remarks came in an address to the nation over the weekend after he suspended trade talks entirely with Washington. He also said he would match any tariffs from the U.S., quote, dollar for dollar. His retaliatory levies will kick in on September 8th. You can follow the twists and turns of this conflict at FT.com and head to our show notes for free-to-read links on all of the other stories in today's podcast.

11:29This has been your daily FT News Briefing. Check back tomorrow for the latest business news.

11:40Thank you.

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