WEBVTT - Episode 12: How a Consultant Foresaw the 2015 Commodities Crash 0:00:05.360 --> 0:00:08.520 Welcome to another episode of Odd Lots. I'm Tracy Alloway, 0:00:08.600 --> 0:00:12.639 executive editor at Bloomberg Markets, and listeners, you're going to 0:00:12.680 --> 0:00:15.640 be sad to hear that we've lost my co host, 0:00:15.720 --> 0:00:19.040 Joe Eisenthal to the global elite. That is, as a 0:00:19.120 --> 0:00:21.960 recording time. Joe is still at the World Economic Forum 0:00:22.000 --> 0:00:25.320 meeting in Davos, mingling with people like Kevin Spacey and 0:00:25.440 --> 0:00:29.280 Joe Biden and whoever else. But I'm happy to say 0:00:29.320 --> 0:00:31.440 that here with me now is Luke Kawa, who is 0:00:31.480 --> 0:00:36.520 Bloomberg Markets reporter and semi famous Canadian. Luke, we're both 0:00:36.640 --> 0:00:39.920 Davos rejects today, right, Yes, Tracy, they tend not to 0:00:40.000 --> 0:00:42.440 let riff raff like us in there. Yes, this is 0:00:42.600 --> 0:00:45.919 very sad. Well, on that note, look, I thought for 0:00:45.960 --> 0:00:48.800 this week's podcast it might be fun to go back 0:00:48.840 --> 0:00:51.639 to five Davos is ago, by which I mean two 0:00:51.640 --> 0:00:55.520 thousand eleven, when an analyst at a consultancy called Oliver 0:00:55.640 --> 0:00:59.880 Wyman published a report while at the meeting in Switzerland, 0:01:00.160 --> 0:01:02.920 and the report was called the Financial Crisis of two 0:01:02.920 --> 0:01:07.800 thousand fifteen and Avoidable History. Oh what I miss? I 0:01:07.800 --> 0:01:12.039 don't think we had a banking crisis in we definitely didn't, 0:01:12.160 --> 0:01:15.480 and we're gonna talk some more about that. But I 0:01:15.480 --> 0:01:18.160 think what the report was really really good at was 0:01:18.840 --> 0:01:22.760 kind of predicting the commodities crash and the idea that 0:01:23.120 --> 0:01:26.760 banks could have losses from bad energy loans, and in fact, 0:01:26.959 --> 0:01:29.000 we just got through a bank earning season where we 0:01:29.080 --> 0:01:31.400 did see a whole bunch of them setting aside more 0:01:31.440 --> 0:01:34.800 money to cover these sorts of things. Can you what 0:01:34.959 --> 0:01:36.760 my appetite a little give me a little sample of that? 0:01:36.880 --> 0:01:41.119 Hop Yeah, I've got the report right here. Um, bear 0:01:41.160 --> 0:01:43.520 in mind, once again, this is five years old. Now 0:01:44.120 --> 0:01:47.280 here's a here's one thing it said. Based on favorable 0:01:47.360 --> 0:01:51.960 demographic trends and continued liberalization, the growth story for emerging 0:01:51.960 --> 0:01:55.520 markets was accepted by almost everyone. However, much of the 0:01:55.560 --> 0:01:58.720 economic activity in these markets was buoyed by cheap money 0:01:58.720 --> 0:02:02.360 being pumped into the system by Western central banks. Commodities 0:02:02.360 --> 0:02:04.880 prices had acted as a sponge to soak up the 0:02:04.920 --> 0:02:08.840 excess money supply, and commodities rich emerging economies were the 0:02:08.880 --> 0:02:13.640 main beneficiaries. So pretty prescient, right, This was written in 0:02:13.639 --> 0:02:16.400 two thousand eleven and not a week ago. Yeah. Yeah, 0:02:16.480 --> 0:02:18.600 So I don't want to give the impression that everything 0:02:18.600 --> 0:02:21.320 in this report has happened. There are some things that 0:02:21.360 --> 0:02:24.800 it does get wrong, but it's looking pretty good. And 0:02:25.120 --> 0:02:26.960 I want to bring in the author of the report, 0:02:27.080 --> 0:02:29.800 who is a partner at Oliver Wyman. His name is 0:02:29.840 --> 0:02:33.280 Barry Wilkinson, and he is the one who wrote this 0:02:34.160 --> 0:02:37.560 very prescient thing some five years ago in another Snowy 0:02:37.639 --> 0:02:43.880 Davos meeting. Hi, Berry, welcome to the show. Just give 0:02:43.960 --> 0:02:46.000 us a bit of background about who you are and 0:02:46.080 --> 0:02:48.760 what you do at Oliver Wyman. But I'm currently the 0:02:48.960 --> 0:02:51.840 co head of Oliver Wyman's Finance and respractice. So I 0:02:51.840 --> 0:02:55.920 guess my specialty is risk managements. I've been working at 0:02:55.919 --> 0:02:58.200 the company twenty two years, so I got I've kind 0:02:58.200 --> 0:03:00.919 of got deep specialties in a number of risk management topics, 0:03:00.960 --> 0:03:05.160 credit risk, market risk. I work mainly with the big 0:03:05.200 --> 0:03:07.079 investment banks at the moment, so I've kind of got 0:03:07.120 --> 0:03:10.160 a specialties around the trading risk management side of things 0:03:10.160 --> 0:03:13.440 as well. All right, So take us back to January 0:03:13.720 --> 0:03:18.200 two thousand eleven and you publish this report to coincide 0:03:18.200 --> 0:03:22.399 with Dabos. What made you decide to do this? Yeah, well, 0:03:22.440 --> 0:03:25.000 I think I guess the main purpose of the report 0:03:25.040 --> 0:03:28.680 was to encourage banks to focus more on stress testing, 0:03:28.800 --> 0:03:31.480 and I think we've you know, we've seen since then, Um, 0:03:32.200 --> 0:03:34.200 you know, a large wave of work around you know 0:03:34.280 --> 0:03:37.320 CECR e B a e c B type stress testing. 0:03:38.440 --> 0:03:40.400 I actually have that background in you know, go back 0:03:40.400 --> 0:03:42.520 to my university days. I used to be sitting in 0:03:42.560 --> 0:03:47.920 the lab building bridges testing stress testing heavy load latteral 0:03:48.000 --> 0:03:50.320 in you know, trying to twist twist the bridge and 0:03:50.320 --> 0:03:53.320 it basically boiled down to you know, could be could 0:03:53.320 --> 0:03:55.720 the bridge with with strand you know a certain level 0:03:55.760 --> 0:03:57.960 of stress. That was kind of what the whole points 0:03:57.960 --> 0:04:01.520 of the exposs was. And was there any special reason 0:04:01.560 --> 0:04:05.200 why you chose to release it at Davos. Yeah, well, 0:04:05.240 --> 0:04:07.320 I mean I guess, um, we we we write these 0:04:07.320 --> 0:04:09.680 annual reports. You may have seen we just released another 0:04:09.680 --> 0:04:13.040 report more account around the fintech one this year. I 0:04:13.080 --> 0:04:15.040 think it was a you know, we're in the post 0:04:15.120 --> 0:04:17.520 crisis environment. The feeling I had at the time was, 0:04:18.360 --> 0:04:20.600 you know, there were still lessons to be learned from 0:04:20.600 --> 0:04:24.560 the from the previous crisis, and you know my sentiment was, 0:04:24.720 --> 0:04:27.600 you know, I being in risponagement for such a long cude. 0:04:27.600 --> 0:04:30.279 I've seen lots of crises come and go, and my 0:04:30.360 --> 0:04:33.039 worry was that we were very quickly going to lose 0:04:33.040 --> 0:04:35.240 the lessons learned from the previous crisis. And I wanted 0:04:35.279 --> 0:04:37.960 to really get out there this idea that we should 0:04:38.000 --> 0:04:40.960 constantly thinking ahead. It's not about thinking about chances of 0:04:41.040 --> 0:04:43.720 being another crisis. Actually, there will be another crisis, you know, 0:04:43.880 --> 0:04:46.159 in the next three or four or five years, and 0:04:46.200 --> 0:04:49.440 therefore we should move to a mode of banning and quantifying, 0:04:49.560 --> 0:04:53.120 quantifying the impact of potential crisis. Can you take us 0:04:53.120 --> 0:04:56.120 back to two thousand eleven and for the uninitiated, just 0:04:56.200 --> 0:05:00.120 you know, explain the basic thrust of your thesis. Yes, So, 0:05:00.440 --> 0:05:02.599 I mean, I guess I was trying to get across 0:05:02.640 --> 0:05:06.039 the idea of um, you know, so moving more towards 0:05:06.400 --> 0:05:08.880 you know, stress testing as a risk management philosophy. And 0:05:08.920 --> 0:05:13.320 then I I used a particular scenario as a way 0:05:13.320 --> 0:05:15.280 of bringing the whole topic for life. So I thought 0:05:15.320 --> 0:05:17.120 that I just you know, focused on the mechanics of 0:05:17.160 --> 0:05:19.080 stress testing, it would have been acquired dry read. So 0:05:19.200 --> 0:05:22.799 I I wrote a virtual history which was basically laying 0:05:22.839 --> 0:05:25.400 out the scenario, taking us from two thousand eleven to 0:05:25.520 --> 0:05:28.080 two thousand and fifteen, where I was talking about, you know, 0:05:28.760 --> 0:05:33.120 the commodity price price bubble getting you further inflated by 0:05:33.200 --> 0:05:38.560 loose monetary policy coming from you know, the western central banks. Um, 0:05:38.600 --> 0:05:42.160 you know, the emerging markets countries, particularly the commodities producers, 0:05:42.480 --> 0:05:44.840 feeling the benefit to that. And then at some point, 0:05:45.000 --> 0:05:47.480 you know, people realizing that the narrative around you know, 0:05:47.600 --> 0:05:51.599 China growing growing forever. Uh, you know, as China slowed, 0:05:51.600 --> 0:05:54.000 we'd see the whole bubble burst. And I guess the 0:05:54.040 --> 0:05:57.200 timing turned out to be quite um timely in terms 0:05:57.200 --> 0:06:00.279 of last year that really started to happen. Well, So 0:06:00.320 --> 0:06:01.839 I want to set the scene a little bit. So 0:06:01.880 --> 0:06:04.480 this is early two thousand eleven or two years out 0:06:04.480 --> 0:06:07.840 of the financial crisis. Markets have gone up, people are 0:06:07.839 --> 0:06:11.640 feeling pretty good. You have all these politicians, executives, bankers 0:06:11.880 --> 0:06:16.159 partying at Davos, and you're sat in a hotel room 0:06:16.279 --> 0:06:21.280 predicting another financial crisis. What was the response. Yeah, I mean, 0:06:21.320 --> 0:06:24.839 I wasn't the most popular person at the time with everyone. Actually, 0:06:24.880 --> 0:06:26.719 I mean I'd say there were two camps. So I 0:06:27.040 --> 0:06:30.600 give you two extreme examples. So, um, In one example, 0:06:30.640 --> 0:06:32.800 I had a risk manager in a bank, you know, 0:06:32.839 --> 0:06:34.960 coming with with her reports and saying, you know, asked 0:06:35.000 --> 0:06:36.760 me to autograph it. So I think amongst the risk 0:06:36.800 --> 0:06:39.400 management community it was a feeling that I was kind 0:06:39.400 --> 0:06:41.880 of standing up for their you know, the need to 0:06:41.960 --> 0:06:45.040 kind of point out potential risks, etcetera. At the other 0:06:45.120 --> 0:06:47.280 end of the spectrum, I hear in Um, you know, 0:06:47.640 --> 0:06:50.839 amongst commodity traders, people were talking about you know that 0:06:50.880 --> 0:06:54.000 Bloody Wilkinson reports. So I think, you know that that 0:06:54.120 --> 0:06:56.800 kind of naturally shows the tension you have in a bank, 0:06:56.880 --> 0:07:00.640 that the risk managers are really focusing more on protecting 0:07:00.760 --> 0:07:04.520 downside risks, worrying about the interests of depositors, of you know, 0:07:04.680 --> 0:07:07.960 death holders, whereas the front office are more aligned with 0:07:08.000 --> 0:07:10.960 the kind of shareholder interested in thinking more about upside potential. 0:07:11.480 --> 0:07:13.800 I think that's a natural tension, which is good. I 0:07:13.880 --> 0:07:16.040 just think the problem is sometimes it gets out of balance. 0:07:16.080 --> 0:07:17.880 It can actually get out of balance in either direction. 0:07:17.920 --> 0:07:20.240 You know, I guess pre crisis it was out of 0:07:20.280 --> 0:07:24.080 balance in the direction of short term upside. Post crisis, 0:07:24.120 --> 0:07:26.720 you might argue sometimes you know, the regulators are pulling 0:07:26.720 --> 0:07:28.840 it too far in the other direction. But you know 0:07:28.880 --> 0:07:31.320 that's that's I think that's a natural tension that needs 0:07:31.360 --> 0:07:35.960 to be explored. Well, let's talk about commodities for a second, because, 0:07:36.560 --> 0:07:39.600 as you've mentioned already, this is kind of um a 0:07:39.640 --> 0:07:42.360 centerpiece of your report. And back in two thousand eleven, 0:07:42.480 --> 0:07:45.640 the commodity space was booming. I mean, I think we 0:07:45.760 --> 0:07:48.640 forget that now, but it was just going sort of 0:07:48.680 --> 0:07:51.720 game busters. Why did you decide to focus on the 0:07:51.880 --> 0:07:55.440 risks in the commodity space. Well, I think that's the 0:07:55.480 --> 0:07:58.600 whole point. You know, whenever you're looking at the next crisis, 0:07:58.640 --> 0:08:01.680 you should be looking at the current bubble. When any 0:08:01.720 --> 0:08:04.040 time asset prices are rising a you know, a hundred 0:08:04.040 --> 0:08:06.480 percent per anum or you know, I think oil prices 0:08:06.600 --> 0:08:09.800 rose something like eight between you know, the low of 0:08:09.880 --> 0:08:13.000 seventeen up two hundred and twenty bowls about or whatever. 0:08:13.080 --> 0:08:15.800 So you know, when you start seeing that kind of 0:08:15.840 --> 0:08:20.560 asset price appreciation, you know there may well be speculation underlying, 0:08:20.680 --> 0:08:23.880 but there's normally an asset financing bubble behind it, and 0:08:24.400 --> 0:08:28.040 you know, anything any kind of financing supporting the assumption 0:08:28.040 --> 0:08:31.320 of ever increasing prices as always you know a recipe 0:08:31.360 --> 0:08:34.720 for for debt problems later. So that was the you know, 0:08:35.080 --> 0:08:37.959 if I was looking at potential issues. Now i'd be 0:08:38.000 --> 0:08:40.240 looking at you know, London property, which is also seeing 0:08:40.280 --> 0:08:43.200 you know, a lots of rapid increases, so predicting the 0:08:43.200 --> 0:08:45.720 next prices. It's really looking at where people are making 0:08:45.720 --> 0:08:47.880 a lot of money. Now really it's obviously a very 0:08:47.920 --> 0:08:52.080 contrarian perspective, but it's there's no I think the idea 0:08:52.120 --> 0:08:54.880 of you know, there'll be no point focusing on the 0:08:54.920 --> 0:08:57.920 subprime market now as you're you know, just because that 0:08:57.960 --> 0:08:59.840 was the previous crisis, you'd always been looking at the 0:08:59.840 --> 0:09:02.680 net the next bubble. So we've we've brought up the 0:09:02.720 --> 0:09:05.319 big thing that you really nailed in this report, that's 0:09:05.320 --> 0:09:08.560 the commodity's downturn and that that whole bust. So but 0:09:08.640 --> 0:09:11.120 give the opportunity to critique yourself a little. What do 0:09:11.160 --> 0:09:13.520 you think you missed or what hasn't really played out 0:09:13.640 --> 0:09:16.679 the way you expected it to? Yeah, so that's that's right. 0:09:16.720 --> 0:09:18.800 So I think we've got to the stage now wherey 0:09:19.000 --> 0:09:22.000 you know, China is sload. There is a talk of 0:09:22.040 --> 0:09:25.040 a crisis centered around you know, the mining companies, commodities 0:09:25.080 --> 0:09:27.360 producing nations. As we said in the poor what what 0:09:27.360 --> 0:09:30.000 what we haven't seen or is a full blewn debt crisis, 0:09:30.040 --> 0:09:31.400 and you know, I don't think we can call it 0:09:31.440 --> 0:09:33.400 a financial crisis, which was the term we used in 0:09:33.400 --> 0:09:36.720 the report. And so we see a you know, debt 0:09:36.880 --> 0:09:39.320 coming into the equation. We've seen equity market corrections, we've 0:09:39.320 --> 0:09:42.679 seen commodity prices corrections, that we haven't seen massive debt 0:09:42.679 --> 0:09:47.520 restructuring or or bad loans. So so from my from 0:09:47.520 --> 0:09:49.640 my view, I think it's only a matter of time 0:09:49.840 --> 0:09:52.360 before that happens. You know, I think it's already coming 0:09:52.400 --> 0:09:54.360 to light that there was a their amount of financing 0:09:54.559 --> 0:09:58.160 you know, behind that. And the next next step for me, 0:09:58.200 --> 0:10:00.800 I think is is to take it from macro level 0:10:00.840 --> 0:10:04.200 of Brazil, Russia and you know, the commodities producing countries 0:10:04.240 --> 0:10:07.559 having problems to the micro level of well, which countries, 0:10:07.640 --> 0:10:11.320 companies and you know are most vulnerable and you know 0:10:11.360 --> 0:10:15.320 which banks are ultimately holding which banks are exposed to 0:10:15.360 --> 0:10:17.559 those threats, and you know, if there is any toxic 0:10:18.760 --> 0:10:21.720 lending out there, who's holding it and are they well capitalized? 0:10:22.360 --> 0:10:26.280 And I think that's um that really calls to, you know, 0:10:26.440 --> 0:10:29.840 coming back full circle to as recommending more stress testing. 0:10:29.880 --> 0:10:33.360 I think the US and European systems have now adopted 0:10:33.360 --> 0:10:35.560 stress testing as a kind of institutional thing that they 0:10:35.559 --> 0:10:39.439 were in every year. I think the emerging markets regulators, 0:10:39.720 --> 0:10:43.319 you know, having had a less severe crisis this time around, 0:10:44.000 --> 0:10:46.600 haven't really pushed through the same measures. So I think, 0:10:46.600 --> 0:10:49.280 you know, I would be calling now for you know, 0:10:49.280 --> 0:10:51.760 the emerging markets regulators to start taking a look at 0:10:51.760 --> 0:10:54.120 their individual banking systems and you know, and looking at 0:10:54.120 --> 0:10:57.160 individual institutions and running running stress tests along the lines 0:10:57.200 --> 0:11:01.720 of further deterioration. Well, just on the banking point. One 0:11:01.760 --> 0:11:04.439 other thing you kind of point out in the report 0:11:04.640 --> 0:11:06.800 is this idea that a lot of risk has actually 0:11:06.800 --> 0:11:09.600 been squeezed from the banking system into what's known as 0:11:09.679 --> 0:11:14.559 the shadow banking system. So non deposit taking institutions, I 0:11:14.559 --> 0:11:17.120 guess might be the standard definition, although some people would 0:11:17.840 --> 0:11:20.280 disagree with me. Can you talk a little bit about 0:11:20.280 --> 0:11:25.280 that thesis. Yeah, so I think that, you know, I 0:11:25.320 --> 0:11:27.600 think broadly that hypothesis is played out. I think it's 0:11:27.679 --> 0:11:30.760 quite difficult to buy back test, you know, some of 0:11:30.760 --> 0:11:32.920 the cooking of the specific things we said, because it's 0:11:33.440 --> 0:11:36.240 by its very nature, it's kind of lurking in the shadows, 0:11:36.240 --> 0:11:40.199 and as we saw with the previous round, of shadow banking, 0:11:40.240 --> 0:11:42.439 all these kind of siev light vehicles that were hidden 0:11:42.480 --> 0:11:44.920 off balance sheet. Not a lot of people know about 0:11:44.960 --> 0:11:47.960 these things until the crisis hits and then suddenly, you know, 0:11:48.160 --> 0:11:51.880 bank has to reconsolidate this balance shee's activity. So there 0:11:51.920 --> 0:11:55.240 may well be a new phase of that where it 0:11:55.280 --> 0:11:58.000 could be the Chinese banks this time having to reconsolidate 0:11:58.040 --> 0:11:59.959 you know, all of these trusts back onto their balance 0:12:00.040 --> 0:12:03.240 sheet to you know, to save face or whatever. But um, yeah, 0:12:03.800 --> 0:12:06.280 it's very difficult to say where where all that stuff 0:12:06.320 --> 0:12:09.000 is currently lurking, but it's pretty clear, you know, the 0:12:09.080 --> 0:12:13.120 banks have definitely been feeling the squeeze. So you know, 0:12:13.320 --> 0:12:15.080 a lot of the big banks have gone from having 0:12:15.120 --> 0:12:17.120 a you know, a two or three trillion dollar balance 0:12:17.200 --> 0:12:18.760 sheet down to now you know, one and a half 0:12:18.800 --> 0:12:21.800 trillion dollars. And at the same time, you know that 0:12:21.840 --> 0:12:23.679 if you look at it's it's difficult to put numbers 0:12:23.679 --> 0:12:25.760 around it. But any any report you look at that 0:12:25.840 --> 0:12:28.800 you tend to see, you know, kind of growing shadow 0:12:28.800 --> 0:12:33.280 banking liabilities at the same time, So I suspect there's 0:12:33.280 --> 0:12:36.319 there's quite a lot out there. So it's five years 0:12:36.360 --> 0:12:38.559 after you publish this report, have you been back to 0:12:38.679 --> 0:12:42.880 DAVERS since then? I haven't. We go there every year. 0:12:42.920 --> 0:12:46.120 It's usually the the author of of that year's report 0:12:46.200 --> 0:12:49.080 who who goes in attends alongside you know, a couple 0:12:49.120 --> 0:12:53.720 of our more senior guys. So, um, it's uh, I 0:12:53.760 --> 0:12:56.160 haven't been back. I mean I have been thinking of 0:12:56.240 --> 0:12:59.040 doing a kind of you know, a victory lab and 0:12:59.040 --> 0:13:02.640 you report that you know I could do, but just 0:13:02.760 --> 0:13:06.040 more of a you know, you know what maybe next 0:13:06.160 --> 0:13:08.640 year is that some more more forward looking views on 0:13:08.640 --> 0:13:11.840 on risk management and finance and all that. So what 0:13:11.920 --> 0:13:16.760 are you looking at right now? What's next on the horizon? Yeah? Well, actually, 0:13:16.800 --> 0:13:19.559 as I said, I think, you know, looking back um 0:13:20.400 --> 0:13:23.439 on prior on the previous crisis is often not the 0:13:23.480 --> 0:13:25.080 way to think. So if I'm it was looking at 0:13:25.080 --> 0:13:28.080 the financial service industry. Now, what we've been focusing on 0:13:28.120 --> 0:13:31.040 this in this new report is really that disruptive forces. 0:13:31.120 --> 0:13:33.680 So you know, rather than it being a crisis that 0:13:33.760 --> 0:13:36.280 hits the banking system next time, maybe it's the you know, 0:13:36.920 --> 0:13:39.439 somebody coming in and completely disrupting the cost you know, 0:13:39.480 --> 0:13:42.280 the cost structures of the banking system, and that could 0:13:42.280 --> 0:13:44.600 be equally you know, equally deadly for some of the 0:13:44.600 --> 0:13:46.439 banks if they're if they're not able to adapt that. 0:13:46.559 --> 0:13:48.920 I think some of the things you mentioned in this 0:13:49.000 --> 0:13:52.880 year's report is more around, um, you know, it's actually 0:13:52.880 --> 0:13:56.400 the regulators are are actually helping the banks that create 0:13:56.520 --> 0:14:00.360 you know, barriers at barriers of entry for for new players. 0:14:00.480 --> 0:14:03.200 And if those barriers to entry were not there, you know, 0:14:04.760 --> 0:14:07.760 finances the ultimate commodity in many ways, so you know, 0:14:08.160 --> 0:14:10.200 it would all ultimately just be about who's got the 0:14:10.200 --> 0:14:13.920 best technology and the best cost cost structure to deliver 0:14:14.000 --> 0:14:17.880 that commodity. Um. But at the moment, having access to 0:14:17.920 --> 0:14:22.400 the central bank, having access to deposit insurance just gives 0:14:23.000 --> 0:14:26.000 you know, banks a massive, a massive advantage that they 0:14:26.000 --> 0:14:29.760 will I think we'll preserve their positions for quite a while. Um. 0:14:30.000 --> 0:14:32.080 But I think at some point, you know, we've seen 0:14:32.080 --> 0:14:34.200 the payments part of things getting picked off. I think 0:14:34.880 --> 0:14:37.120 at some point different parts of the value chain will 0:14:37.120 --> 0:14:39.520 start to get eroded by these new players. I think 0:14:39.520 --> 0:14:42.040 that's a big threat for the banks. Yeah. On that note, 0:14:42.040 --> 0:14:44.040 I mean I have to say we have seen at 0:14:44.080 --> 0:14:49.640 least one disruptive of fintech player, Lending Club, ask for 0:14:49.680 --> 0:14:53.880 access to central bank facilities, which would it's pretty amazing 0:14:54.080 --> 0:14:56.600 and would potentially put them on a more even footing 0:14:56.680 --> 0:15:01.280 with banking competitors exactly. W I mean one way, one 0:15:01.280 --> 0:15:03.360 direction you can take it is in the direction of 0:15:04.440 --> 0:15:06.560 I think the most difficult bit to disrupt is that 0:15:06.680 --> 0:15:09.640 there is a maturity transformation side of things. So in 0:15:09.720 --> 0:15:13.360 order to play the maturity transformation trick, when you get 0:15:13.360 --> 0:15:15.640 the run on your liabilities because you're playing the maturity 0:15:15.680 --> 0:15:17.880 transformation trick, you know, if you can sayn into the 0:15:17.880 --> 0:15:20.840 Central Bank access you you obviously can then weather a 0:15:20.840 --> 0:15:23.080 few a few cycles and if you don't have access, 0:15:23.840 --> 0:15:26.920 you can't. So we've been thinking about whether you could, 0:15:27.080 --> 0:15:29.040 you know, the central Bank could set up some kind 0:15:29.040 --> 0:15:33.840 of utility which kind of centralizes the maturity transformation aspect 0:15:33.880 --> 0:15:37.800 of things and then allows people to tap into long 0:15:37.920 --> 0:15:41.320 term sources of funding and then lending then just becomes 0:15:41.320 --> 0:15:44.520 a commodity. And similarly, you know, investing in short term 0:15:44.560 --> 0:15:47.920 liabilities as another commodity. So you'd have kind of the 0:15:47.960 --> 0:15:51.800 money market funds type part of the value chain. You'd 0:15:51.840 --> 0:15:54.840 have the pure lender, and then you'd have this money 0:15:55.120 --> 0:15:59.640 money market money transformation utility sitting in the center. So 0:16:00.040 --> 0:16:03.040 charity transformation comes back on the central bank anyway, you know, 0:16:03.200 --> 0:16:05.320 during the crisis that maybe they should be managing it in 0:16:05.280 --> 0:16:07.280 in the first place. So it's just a certainly it's 0:16:07.360 --> 0:16:10.760 kind of a you know, utopian source of this poem, 0:16:10.760 --> 0:16:13.480 But I think that's where you need to get to 0:16:13.640 --> 0:16:16.400 if you really want to open up competition across you know, 0:16:16.520 --> 0:16:20.360 the you know, the the core products of banking. And 0:16:20.440 --> 0:16:23.040 to go back to two thousand eleven, one of the 0:16:23.120 --> 0:16:24.920 lines from your report that really stood out to me 0:16:25.160 --> 0:16:28.600 was the market was once again rewarding the riskiest strategies 0:16:28.640 --> 0:16:32.000 in reference to to investors treatment of banks and the 0:16:32.200 --> 0:16:34.880 around the two thousand and eleven period. And I want 0:16:34.960 --> 0:16:37.240 to know, the market seem doesn't seem to be rewarding 0:16:37.320 --> 0:16:40.240 much right now. What are the risky strategies out there 0:16:40.320 --> 0:16:42.880 right now that you think the market's rewarding that it 0:16:42.960 --> 0:16:46.720 might not be. Well, it's it's a lot more complicated now. 0:16:46.760 --> 0:16:50.000 And I think in the days where you know, you 0:16:50.000 --> 0:16:53.640 could basically create ahold of value just by increasing leverage 0:16:53.640 --> 0:16:56.920 in your bank, um, you know, increasing leverages multiplies your 0:16:56.920 --> 0:16:59.680 return on assets by your leverage and creates return on equity. 0:16:59.720 --> 0:17:02.480 And then it was it was an actually and also 0:17:02.560 --> 0:17:05.639 that leverage also gives makes it look like you're growing 0:17:05.680 --> 0:17:08.680 as well, so you get all these massive p multiple. 0:17:08.960 --> 0:17:12.159 In today's context, you have you know, regulators looking at 0:17:12.200 --> 0:17:15.080 you thinking that you're two leverage and then suddenly forcing 0:17:15.119 --> 0:17:18.480 you to raise capital, which it's never great for share prices. 0:17:18.480 --> 0:17:22.439 So it's it's a lot more complicated. Um. I guess 0:17:22.440 --> 0:17:26.000 the you know, the most successful strategies, which I wouldn't 0:17:26.040 --> 0:17:29.159 necessarily condone, would be the ones where you can basically 0:17:29.240 --> 0:17:32.199 take on more risk and more leverage and then you know, 0:17:32.520 --> 0:17:36.040 but you know, outside of the purview of the regulators 0:17:36.080 --> 0:17:38.119 who are coming in and trying to climb down on it. 0:17:38.200 --> 0:17:41.520 So you know, I guess the risky strategies that might 0:17:41.520 --> 0:17:43.520 be successful in the short term might be the ones 0:17:43.560 --> 0:17:45.600 that are linked to the kind of the shadow banking 0:17:45.680 --> 0:17:49.320 activities where you can actually take you know, take risk 0:17:49.400 --> 0:17:53.919 off outside the radar of the regulators. But you know 0:17:53.920 --> 0:17:56.560 again that that's a very short term as approach which 0:17:56.560 --> 0:17:59.920 will unravel at some point. So yeah, I mean, I 0:18:00.359 --> 0:18:02.600 think I think in general banks it's all about it's 0:18:02.640 --> 0:18:05.560 all about costs at this point. I think the risk 0:18:05.800 --> 0:18:07.920 is generally a commodity. You know, you generally get paid 0:18:07.920 --> 0:18:11.080 for the risks risk. The more risk you take, more 0:18:11.080 --> 0:18:14.359 return you gets pretty old cliche, but the I think 0:18:14.400 --> 0:18:17.080 banks really need to differentiate themselves on costs at this point. 0:18:17.160 --> 0:18:19.800 I think the trying to get back to the old 0:18:19.880 --> 0:18:22.600 days of fifty two one leverage just isn't going to happen. 0:18:22.600 --> 0:18:24.679 So that's not going to be the way of boosting 0:18:24.680 --> 0:18:26.960 return and extually going forward. It's got to be, you know, 0:18:26.960 --> 0:18:32.800 a leaner operation, alright, barrier. Last question, are you um 0:18:32.920 --> 0:18:34.840 when you go back and look at this report, which 0:18:35.400 --> 0:18:38.520 you know, does seem fairly prescient five years later, are 0:18:38.560 --> 0:18:41.480 you proud of what you've done? Are you happy? Or 0:18:41.600 --> 0:18:44.840 do you feel frustration that some of these eventualities are 0:18:44.840 --> 0:18:47.240 actually playing out in the market even though there were 0:18:47.320 --> 0:18:51.840 warnings about them. How do you actually feel about it now? Yeah? Well, 0:18:52.040 --> 0:18:55.119 our I think the last line and the report was 0:18:55.200 --> 0:18:58.840 that the you know this, the crisis are not avoidable. 0:18:58.840 --> 0:19:00.760 We call it an avoidable his you, But the reality 0:19:00.880 --> 0:19:04.760 is crises are not avoidable. You basically will get you 0:19:05.160 --> 0:19:08.840 a business cycle continuing forever, and we'll we'll see financial 0:19:08.880 --> 0:19:12.120 crisis every five or ten years. I think what we 0:19:12.440 --> 0:19:14.680 what I would be proud of would be if I 0:19:14.720 --> 0:19:18.840 had helped any any banks avoid being the victims of 0:19:18.880 --> 0:19:21.399 the of the crisis, or whether we've helped you know, 0:19:21.480 --> 0:19:24.359 regulators better prepare for the crisis this time around, and 0:19:24.440 --> 0:19:26.359 you know, we will see the result of that, you know, 0:19:26.440 --> 0:19:29.040 this time as effectively, what when I'm seeing is a 0:19:29.080 --> 0:19:31.879 real stress test where there's an emerging markets crisis and 0:19:31.920 --> 0:19:35.199 we're seeing we will see you know, who withstands that well. 0:19:35.320 --> 0:19:38.119 And I guess the regulators that have helped their banks 0:19:38.200 --> 0:19:40.960 prepare well and recapitalized, we'll see that those banks whether 0:19:41.000 --> 0:19:43.879 the storm quite well are the ones that haven't you 0:19:44.320 --> 0:19:47.240 may see some problems. So you know, as I was mentioned, 0:19:47.280 --> 0:19:50.679 I think, you know, it wasn't popular with the commodities traders, 0:19:50.680 --> 0:19:53.320 and I think a lot of banks withdrew quite heavily 0:19:53.359 --> 0:19:56.600 out of commodities over the last few years prior to 0:19:56.640 --> 0:19:59.560 the product quality crisis. So hopefully there have been some 0:19:59.600 --> 0:20:03.200 aspect of those helping you know, banks um avoid some 0:20:03.240 --> 0:20:05.359 of the losses that that that would wed otherwise be 0:20:05.400 --> 0:20:09.320 happening now. So yeah, I guess I'm happy with with 0:20:09.359 --> 0:20:11.040 the results. But you know, as I said, we haven't 0:20:11.080 --> 0:20:13.040 we haven't seen this play out yet, so it'll be 0:20:13.080 --> 0:20:15.399 interesting to see who the winners and losers are in 0:20:15.400 --> 0:20:18.679 the actual, the actual crisis that happens now. All right, 0:20:18.760 --> 0:20:22.200 on that cheerful note, Barry, thank you so much, Thanks guys, 0:20:22.320 --> 0:20:26.680 Just all right, Luke, Well, I have a feeling that 0:20:26.800 --> 0:20:28.800 Joe is going to be mad at us for going 0:20:28.880 --> 0:20:31.720 really wonky in that discussion. But I enjoyed it. I 0:20:31.720 --> 0:20:34.120 found it really interesting. What do you think I mean, 0:20:34.160 --> 0:20:37.399 I certainly did to. One thing that would have been 0:20:37.480 --> 0:20:41.760 nice to get to was Barry was really worried about 0:20:41.760 --> 0:20:44.480 the treatment of of sovereigns. And you know, there's a 0:20:44.480 --> 0:20:47.479 certain point to be made that financial crazies, and especially 0:20:47.520 --> 0:20:50.639 the last one, it's it's a product of banks having 0:20:50.960 --> 0:20:52.760 a lot of assets on their balance sheet that they 0:20:52.760 --> 0:20:56.320