Speaker 1: This is Mesters in Business with Very Results on Bloomberg Radio.
Speaker 1: This week on the podcast, I have yet another extra
Speaker 1: special guest. Professor at Mahdi teaches at the Stanford Graduate
Speaker 1: School of Business. She is an expert in so many
Speaker 1: fascinating areas that you wouldn't think are related, but they
Speaker 1: really are. Why has technology developed the way it has
Speaker 1: and more or less exempt from from a lot of
Speaker 1: government regulations or protected by regulations. Turns out their business
Speaker 1: model is a little similar to the way the banking
Speaker 1: industry has managed to capture a lot of regulators and
Speaker 1: UH continue to operate fairly freely without the sort of
Speaker 1: regulation and capital requirements and equity requirements UH that would
Speaker 1: make banking safer. Really fascinating conversation about everything from misinformation
Speaker 1: to technology, to banking and financial fragility. I found the
Speaker 1: discussion to be quite fascinating, and I think you will
Speaker 1: also with no further ado. My interview with Professor are
Speaker 1: not at Mahdi of the Stanford Graduate School of Business.
Speaker 1: So let's talk a little bit about your background. You
Speaker 1: have a lot of degrees. You you have a bachelor's
Speaker 1: from Hebrew University, then a master's in arts, a master's
Speaker 1: in philosophy and a PhD from Yale University. Tell us
Speaker 1: a little bit about your academic journey. So my journey
Speaker 1: starts where I took a lot of math. I was
Speaker 1: good in math, and I loved math. That was very pretty,
Speaker 1: it was all. But I decided I probably won't be
Speaker 1: good enough to be a mathematician. So it was kind
Speaker 1: of in my romantic mind when I was, you know,
Speaker 1: in my early twenties, I was gonna take but not
Speaker 1: to give back to math, you know, that kind of thing.
Speaker 1: And and so I had to find something. And at
Speaker 1: first it was going to be sort of applied math,
Speaker 1: like operations research, which was the worst kind of math,
Speaker 1: that optimization, and it's kind of boring. And but I
Speaker 1: got an opportunity to go to Yale, and these degrees
Speaker 1: were just kind of simultaneously gotten. I mean, I was
Speaker 1: out of Yale in three and a half years with
Speaker 1: all these degrees um and I just an opportunity landed
Speaker 1: on my lap to go to uh this program in
Speaker 1: operations research at Yale. And I was promised that Yale
Speaker 1: is very interdisciplinary and once you pass your qualifying exams,
Speaker 1: you can do whatever you want. And had never taken
Speaker 1: an economics course before that. But when I got to Yale,
Speaker 1: my advisor said, whyn't you take microeconomics and take you know,
Speaker 1: mathematical economics, and take some economics. And by the end
Speaker 1: of the first year I kind of knew a new
Speaker 1: language like and it was all much more interesting because
Speaker 1: there was interactions between people and equilibrium and you know,
Speaker 1: all of that. And by second year I took the
Speaker 1: course that was absolutely a mustake in the crowd that
Speaker 1: I was hanging with, which was Steve Ross financial economics.
Speaker 1: Yale didn't even have a program in finance. The School
Speaker 1: of Management was just created. This was back in the
Speaker 1: late seventies early eighties, and he was just teaching people
Speaker 1: all they needed to know about finance, which was just
Speaker 1: coming up. It had become professionalized, when before it was
Speaker 1: just a bunch of disparate theories. So you find your
Speaker 1: calling in in economics, but you really take some of
Speaker 1: your background and dig pretty deep into financial regulations and technology.
Speaker 1: We did the tech background come from, I'll tell you
Speaker 1: so that all I was totally in the sort of
Speaker 1: financial bubble first, kind of you know market microstructure, you know,
Speaker 1: trading mechanisms, this is the coint seven little black Monday,
Speaker 1: you know, small black Monday, not just that little one
Speaker 1: day glitch decline in one day something. Yeah. Yeah. So
Speaker 1: it was programmed trading and insurance insurance and all its replications,
Speaker 1: strategies and all this stuff. Um, and so that was
Speaker 1: kind of the little crisis of the day, right in
Speaker 1: the little details. And that's before high frequency trading and
Speaker 1: all the rest of it. But then I worked on
Speaker 1: trading mechanisms and information get into prices, and informed and
Speaker 1: uninformed trading, and markets for information and newsletters and managed
Speaker 1: money portfolio theory. And then and then I got more
Speaker 1: interested in in kind of governance, but governance in the
Speaker 1: narrow sense corporate governance and contract which was all about
Speaker 1: the problems between shareholders and managers. So that was that,
Speaker 1: and then comes the financial crisis. So until the financial
Speaker 1: crisis of two thousand seventy nine or however you go,
Speaker 1: actually you know time it, I was in this financial bubble.
Speaker 1: I was teaching corporate finance. I did research, theoretical research,
Speaker 1: so I built little mathematical models and analyzed them and uh,
Speaker 1: and I lived in that little little bubble thinking all
Speaker 1: is well, Uh, until this crisis was like what just happened?
Speaker 1: And so I I never was interested in banking particularly.
Speaker 1: We have a lot of silos, you know, even within economics,
Speaker 1: lest and alone in all the social sciences and law
Speaker 1: and all of that. So we're eaching our little silo
Speaker 1: with our little journals all this stuff. So I just
Speaker 1: got curious. Wait a minute. I teach corporate finance. The
Speaker 1: bank is also a corporation. Now why does it have
Speaker 1: like almost no equity funding? What's going on there? I
Speaker 1: teach people capital structure theory, and how are banks so different?
Speaker 1: Why are they so different? They hate equity with this passion,
Speaker 1: and so the more doug the weirder it got. It
Speaker 1: really like a fell in a rabbit hole. It totally
Speaker 1: was a rabbit hole, like curious or and curious, or
Speaker 1: you know that kind of thing. Well, well, tell me
Speaker 1: if I'm oversimplifying banking, because what we've seen over the
Speaker 1: past half century before the financial crisis was simply banks
Speaker 1: figured out that the less capital they keep on the books,
Speaker 1: the better their profit margins appear, even though they're essentially
Speaker 1: just assuming more risk. And the better the profit margins are,
Speaker 1: the richer everybody got. And so we've seen a half
Speaker 1: century of first deregulation, then fairly radical deregulation, all of
Speaker 1: which worked to the bank's advantages until suddenly it no
Speaker 1: longer dead. So in the book we go through a
Speaker 1: lot of the history of banking, including the basic banking model,
Speaker 1: which is sort of it's a wonderful life kind of
Speaker 1: three six three boring banking model, and that too had
Speaker 1: a crisis in savings and loan and in many other
Speaker 1: banking crisis. So it's not like banking. Banking is inherently
Speaker 1: risking because inherently the bank's taking risk with uh with
Speaker 1: depositors money, and the depositors are unable to really behave
Speaker 1: like normal creditor. And that's really sort of the beginning
Speaker 1: of the sort of original sin in banking, that they're
Speaker 1: always over leveled all the way. They are never efficient
Speaker 1: in in providing any of the services on both sides
Speaker 1: of the balance sheet, because they always have the temptation
Speaker 1: and the ability to take just a little bit more
Speaker 1: risk on both sides of the balances. The nature of
Speaker 1: fractional reserve landing well. But but but it's their incentives.
Speaker 1: So the key to understand it is it's not like
Speaker 1: essential or efficient. It's just that that's how they want it.
Speaker 1: So so the thing is that banking is sort of
Speaker 1: inherently fragile because banking is inherently in efficient that way
Speaker 1: or forever poorly regulator, poorly controlled by their investors, including
Speaker 1: the depositors. So to that you add expansion in the
Speaker 1: business model that allows taking more risk, hiding more risk
Speaker 1: with derivatives, with universal banking, all of that, and the
Speaker 1: increase in safety net implicit and explicit, with the positive insurance.
Speaker 1: With all of that, they became able and obviously interested
Speaker 1: in living more and more and more in debt. Now,
Speaker 1: in my research, even after the first after the book,
Speaker 1: we were already beginning to do this research, I understood
Speaker 1: a lot better. Stuff that we teach in basic courses
Speaker 1: is very static theory of how companies fund. And it's
Speaker 1: like one round of funding debt and equity and then
Speaker 1: the world is over. But for real living, you know, breathing. Uh. Companies,
Speaker 1: any company, the funding decision as well as investment decisions
Speaker 1: are always made by shareholders or people managers on behalf
Speaker 1: of shareholders, maybe in light of previous commitment. So in
Speaker 1: the dynamics of it, once you took debt, your preferences
Speaker 1: changed completely. You're no longer maximizing in total value of
Speaker 1: the firm. You're maximizing the value of equity in the firm.
Speaker 1: And from that perspective, equity seems expensive to all to
Speaker 1: all heavily indebted corporations. Banks in particular because for other corporations,
Speaker 1: if they take on more and more debt, the creditors
Speaker 1: will start pushing, the creditors will start putting covenants, the
Speaker 1: creditors will will will jack up the rates because the
Speaker 1: creditors will worry about all the distorted incentives of the
Speaker 1: border lender that happen gamble the money in Las Vegas,
Speaker 1: or under investing things because there's not enough upside all
Speaker 1: of those things that characterize sort of the frictions that
Speaker 1: characterized heavy indebtedness. So that makes the finance sector very
Speaker 1: different than the rest of the well, the banking, especially
Speaker 1: because the creditors in banking are particularly passive and and
Speaker 1: so therefore the the usual market forces that push against
Speaker 1: high leverage in other companies that just naturally, with no
Speaker 1: regulation would limit. There's no corporation that lives it's healthy
Speaker 1: unless they're on their way to bankruptcy that lives with
Speaker 1: single digit equity numbers. Of course, it depends how you
Speaker 1: measure it, and there's book market all kinds of other
Speaker 1: things that we can discuss. But the bank's basically got
Speaker 1: used to and got stuck, and it's very addictive to
Speaker 1: be there, especial really at this extremely low equity level.
Speaker 1: From that vantage, with the overhang of debt being so
Speaker 1: so heavy that you're effectively insolvent all the time, but
Speaker 1: you just not recognize as such. Then you hate equity,
Speaker 1: you want to take money out. So so let's stay
Speaker 1: with that point, because that's pretty fascinating. Uh. It was
Speaker 1: pretty clear to observers that the reason Lehman Brothers didn't
Speaker 1: get bailed out is they were not just a little insolvent,
Speaker 1: but deeply insolving. The Rest of the banks that were
Speaker 1: out there that survived seemed to recapitalize. They sold equity,
Speaker 1: They brought more money in Goldman Sachs, took a big
Speaker 1: chunk of money from more in Buffett, uh JP, Morgan Chase,
Speaker 1: Sport Washington Mutual. They did more capital reserves and they
Speaker 1: ended up bear Stearns as well. When you say capital
Speaker 1: reserve again, I mean people get very confused about what
Speaker 1: that is that you mean more Actually, no, no, no,
Speaker 1: cash not cash is not equity. Capital is not cash.
Speaker 1: It's on the other side of the balance sheet. Capital
Speaker 1: is about how you fund It's not cash reserve. Okay,
Speaker 1: so it's it's it's really important. It's let's delve into that,
Speaker 1: because it's very, very confusing. To this day you can
Speaker 1: find people saying, set aside cash, that's not what capital
Speaker 1: is about. Capitalist about Obviously there is the measurements of
Speaker 1: it at a given point of time. But when you
Speaker 1: when you take a snapshot and you say talk about
Speaker 1: capital ratios or risk graded capital ratios and all of that,
Speaker 1: they are entirely on the funding side. So you've got
Speaker 1: your assets, whatever they are, they have some risk and whatever.
Speaker 1: However you put numbers on the on that accounting or
Speaker 1: and what's allowed and not allowed, and all of that
Speaker 1: is like a big can of worms. Actually, but you know,
Speaker 1: a netting of derivatives and all of that. But then
Speaker 1: the question is how do you fund those assets? And
Speaker 1: so the question is how much gets funded by making
Speaker 1: promises to investors, by debt any kind collateral, non collaoral
Speaker 1: no deposits are very unique because deposits are unsecured debt
Speaker 1: to the bank, but to the depositors. To the depositors,
Speaker 1: they don't have collateral. Okay, so it's the fda SEE
Speaker 1: that's holding the bag there. Now does the FDA SEE
Speaker 1: even know how much rache they're bearing when all the
Speaker 1: assets are so encumbered that they're all pleased collateral? Do they?
Speaker 1: Because well, they don'tsume they have a very vivid recollection.
Speaker 1: During the financial crisis of the f d I C
Speaker 1: talking about their reserves dropping from nine d to sixty
Speaker 1: I think it dropped as low as forty billion dollars
Speaker 1: and hey, if we get a bunch more disasters, well
Speaker 1: we're not gonna be able to cover the depositors exactly
Speaker 1: because they stopped charging. Also because there were no defaults
Speaker 1: before the crisis, they stopped charging deposit insurance. And all
Speaker 1: of a sudden there was a lot of bank failures,
Speaker 1: not the big ones except for Lehman. But Lehman wasn't
Speaker 1: an FDS in short bank and so but when other banks,
Speaker 1: small banks started failing, what do they What can the
Speaker 1: fda C do in general, Well, they can go back
Speaker 1: to the large banks and just assess them more because
Speaker 1: they have no way and I can assert this to you,
Speaker 1: no good way to risk adjust their their deposit insurance fees.
Speaker 1: They're supposed to be self financing the fda C through fees,
Speaker 1: but you know, they really are taking a huge leap
Speaker 1: for the posits for ensuring what by now must be like,
Speaker 1: I don't know, thirteen trillion dollars and more will come
Speaker 1: if there were tremors because money moves back in deposits
Speaker 1: for money market funds and all of that. So they
Speaker 1: ensure exactly. And so the f d a C, which
Speaker 1: is a cease for corporation, is totally backed by the government. However,
Speaker 1: in practice they can They have a line to Treasury
Speaker 1: for I think five billion or something, but if should
Speaker 1: something actually happen, so we're all on trust with the system.
Speaker 1: They tell us don't run, don't rush, your money is safe,
Speaker 1: and I that no bank runs, so we solve the problem.
Speaker 1: When you say that they stopped charging fees, I've been
Speaker 1: under the impression that the banks that have that nice
Speaker 1: little logo, the emblem FDURED aren't those banks paying some
Speaker 1: small Usually they do, And basically I once asked a
Speaker 1: forty year veteran of banking in all the biggest banks,
Speaker 1: you know, through the sixties, seventies, eighties, ninety who was
Speaker 1: basically came out of retirement to be in a private
Speaker 1: equity firm that was buying distressed banks from the f
Speaker 1: d i C. And he said to me, oh or not,
Speaker 1: you're looking at the big banks. Let me tell you
Speaker 1: what goes on in the small banks. And then I
Speaker 1: asked him the following simple question, because there are thousands
Speaker 1: of small banks in this country. I said, what's the
Speaker 1: business model of a small bank? And the answer the
Speaker 1: answer was three words. The business model in other words,
Speaker 1: the positive Knight present value of the bank, he said, subsidized,
Speaker 1: the positive insurance subsidized. That's it. In other ways, their
Speaker 1: entire funding. So what they do on the asset side,
Speaker 1: anybody can do zero and pivot, commercial realist or whatever.
Speaker 1: And how they fund is where they where they are privileged. Now,
Speaker 1: what happens my model of banking, you know, safety basic
Speaker 1: safety nets, is that the big banks may well be
Speaker 1: overpaying for the past insurance part to the f d
Speaker 1: C and the f d i C, and they pass
Speaker 1: on some subsidies down to the small bank, so they
Speaker 1: keep happy enough and because the big banks have implicit
Speaker 1: guarantees that are priceless because they have access to the FED,
Speaker 1: and that is worth a ton. In the financial crisis,
Speaker 1: Let's remember Goldman, Sachs and Morgan Stanley became bank holding companies.
Speaker 1: They were farms, they were investment banks are delated by
Speaker 1: the SEC, which which also Lehman was. And at that
Speaker 1: time the commercial banks, so City Bank within City Group,
Speaker 1: were regulated, among others, by the f d i C
Speaker 1: and the fda C had Sheila Beart, and Sheila Beart
Speaker 1: refused to implement this buzzle too, that had fancy schmancy
Speaker 1: risk weights, manipulable ways, model based ways to uh to
Speaker 1: to allow the banks to tell us how risky they
Speaker 1: are and therefore determined their equity requirements, in other words,
Speaker 1: mislead regulators. And there is the research that showed that
Speaker 1: banks in Germany that were allowed to use this advanced
Speaker 1: approach to this, you know, fancy scientific approach to regulation,
Speaker 1: were you know, misrepresenting their own risk and making more
Speaker 1: loans with less risk weights, in other words, inappropriately low
Speaker 1: risk weights. And then and then yes, and of course
Speaker 1: the epitome of of the failure of this regulation is
Speaker 1: assets that had zero risk weights. But we're risky like
Speaker 1: triple A rated security, like Greek government lending to Greek
Speaker 1: government in Europe. I mean the banks in Europe basically
Speaker 1: fed this, you know, subprime lending to to to the
Speaker 1: Greek government. Why should Greece pay more in interest rates
Speaker 1: than another country like Germany. That doesn't make any Well,
Speaker 1: they paid a teeny sliver, but the French banks just
Speaker 1: went and lent them a ton. And when they couldn't pay,
Speaker 1: the European Union and all these other countries and the
Speaker 1: regulators that who allowed these banks to make this reckless loans,
Speaker 1: who had just bail out these banks from investing in
Speaker 1: our real estate bubble, uh couldn't admit to their citizens
Speaker 1: that they would bail out their banks again if Greece default,
Speaker 1: so that they blame all the things on the lazy Greeks,
Speaker 1: and they kept bailing out Greece so Greece could pay
Speaker 1: the banks until the banks got out. So that was
Speaker 1: the zero risk rate for sovereign landing in Europe. And
Speaker 1: it's just one example of how awful awful the regulation
Speaker 1: was pre crisis. And then you tell me that, oh,
Speaker 1: they were capitalized and did all of that. I'm not
Speaker 1: so impressed. Yes, you know, first of all, Bank of
Speaker 1: America and the City were zombies coming out of the crisis,
Speaker 1: despite multiple bailouts, both of them by almor and zombie banks.
Speaker 1: I mean, I believe that they were the examples where
Speaker 1: if you wanted to have this systemic resolution through the
Speaker 1: f d i C, we could have tried it in
Speaker 1: a you know, not in a crisis, into a package.
Speaker 1: Show me that it works. Show me that it works. Uh,
Speaker 1: you know, outside the crisis where everybody is failing. You know,
Speaker 1: I was on this FDA S Systemic Resolution Advisory Committee,
Speaker 1: was part of Dodd Frank was saying, oh, if Lehman
Speaker 1: Brothers was sent to the f d i C for resolution,
Speaker 1: because FDC knows so well how to do the small
Speaker 1: bank resolution. Just come over the weekend, take over a
Speaker 1: small bank, and the people don't even know because the
Speaker 1: exactly one oh five where they were moving all of
Speaker 1: this risk thousands of city areas, right, just just hundreds
Speaker 1: of billions of dollars and misrepresents. Do you know to
Speaker 1: the regulators and to the do you know that the
Speaker 1: Leman bankruptcy is not even over yet every year I
Speaker 1: go back and check still going on. So this is
Speaker 1: how unresolvable these now. In the first affair, it was
Speaker 1: only fifteen years ago, so it was a small but
Speaker 1: it was a small one by compared. I mean, this
Speaker 1: was the biggest bankruptcy at the time, but there were
Speaker 1: there were a fraction of JP Morgan, Chase, so City
Speaker 1: or all of these that they tell you now can
Speaker 1: fail with without and they have them do living with
Speaker 1: an all kind of stupid things. No way, no, because
Speaker 1: we don't. Even if they did, it would just be
Speaker 1: incredibly exactly So I'm not even blaming for bailing out.
Speaker 1: I am blaming for not for not doing basic prevention.
Speaker 1: So so that raises a really interesting point. You mentioned
Speaker 1: the French banks and the lazy Greeks. When you offer
Speaker 1: people free money or dramatically discounted money, we shouldn't blame
Speaker 1: the Greeks who took Hey, this is a great deal.
Speaker 1: We're gonna take this. You have to look at the
Speaker 1: banks that lent it to them and said, why are
Speaker 1: these banks being so irresponsible and reckless to make such
Speaker 1: cheap loans to under the eyes of their regulators, Under
Speaker 1: their eyes of their regulators so their regulators are not
Speaker 1: being called too. Why they allowed these loans to be
Speaker 1: made for two by two week to fail, you know,
Speaker 1: French and German banks. French banks had in two thousand
Speaker 1: and ten Greek band government yes, and and and and
Speaker 1: Greece only did a little bit of restructuring after the
Speaker 1: banks pretty much got out, left the TROYKA creditors to
Speaker 1: be a bailout fund of European nations E c B
Speaker 1: and I m F. Those were the TROYKA. Now why
Speaker 1: did I am F invest? Oh, because I am was
Speaker 1: led by some French because I AM should not have
Speaker 1: intervened in a European uh, into European thing. You know,
Speaker 1: Europe had enough to be able to resolve that. They
Speaker 1: just didn't want to. So I am F being led
Speaker 1: by you know French people, uh, you know, Dominique class
Speaker 1: Can and then by the later by Le Guard who
Speaker 1: had to deal with it later in two thousand and fifteen,
Speaker 1: when they were kind of the adult in the room
Speaker 1: if you want to go. So let's dwar the ranch
Speaker 1: banks and the Greek borrowers. There's a lot of people
Speaker 1: criticizing in the two thousands the U S homeowners who
Speaker 1: were taking helocks and refinancing and taking loans. And I
Speaker 1: looked at it as it's not the responsibility of the consumers.
Speaker 1: When when an institution like a large bank says we're
Speaker 1: gonna loan you money and we're not going to charge
Speaker 1: you interest for three years and then we'll reset, but
Speaker 1: don't worry about it, the individual consumer doesn't understand that, Wait,
Speaker 1: free cash, where do I sign? It's the banks and
Speaker 1: their regulations. It's the lady in the come in the
Speaker 1: big short saying she's got five houses. You know, you
Speaker 1: know exactly so so the question no, exactly so degree.
Speaker 1: That's why I used subprime to kind of as a parley. Yes,
Speaker 1: so reckless loans were made to people who couldn't pay, liars,
Speaker 1: loans who were clearly couldn't pay because of the commissions
Speaker 1: of the mortgage, and you know the whole structure, and
Speaker 1: you still had the FED assuring us everything was fine there,
Speaker 1: and you had a system incredibly levered and interconnected create
Speaker 1: through all these contagient mechanisms that we explained in the book,
Speaker 1: a perfect storm from a small decline in housing prices.
Speaker 1: I mean, this should the correction. The price correction itself
Speaker 1: was you know, much smaller than then. Then then the
Speaker 1: Internet bubble burst, you know, which wiped out a lot
Speaker 1: of you know, paper wealth. And to put some numbers
Speaker 1: on that, the Internet peak to trough was about decline
Speaker 1: in the Nasdack camp, whereas I think houses fell about
Speaker 1: some sectors something and then there was some of the faults. Okay,
Speaker 1: but I mean the amounts were trivial, really, And how
Speaker 1: do they create a global financial crisis from a little
Speaker 1: housing bubble bursts in the US? Securitization spread it through
Speaker 1: and and and so per duper triple securitization that our
Speaker 1: side beats basically on on on the mortgages and only
Speaker 1: the you know, the big short they made money. Quite amazing.
Speaker 1: One of your research pieces really caught my eye. I
Speaker 1: love this title, is the Internet Broken? Tell us about
Speaker 1: That was actually the title of course that I taught
Speaker 1: with one of the producers of h M HBO Silicon Valley.
Speaker 1: Well we'll talk more about later, which, yeah, which I
Speaker 1: got to be involved in in the last season only
Speaker 1: uh and and and and therefore it was you know,
Speaker 1: it was one of the one of the ones I
Speaker 1: streamed kind of had to bench stream sort of, but
Speaker 1: to see also the season I ended up at also
Speaker 1: being a cameo in the last last show with middle
Speaker 1: Ditch the whole thing and being there in the Stanford
Speaker 1: graduation and decorating his office and all that stuff. Anyway,
Speaker 1: banking is super regulated but poorly regulated. But it's like
Speaker 1: born kind of born tided the hip with the the state,
Speaker 1: with the government because the central banks because of you know,
Speaker 1: so they're just because they are about money, they're kind
Speaker 1: of intertwined with government in why is it not everybody
Speaker 1: understands because there's still private corporations, but they are super
Speaker 1: duper connected. And just to put a little context about that.
Speaker 1: In the in the first I don't know century of
Speaker 1: American history, they weren't They were completely independent, and they
Speaker 1: failed with shocking regularly because they were all because we
Speaker 1: had regulations that also prevented them from from diversifying, so
Speaker 1: they were very subject to local, you know, calamities, and
Speaker 1: they just kept failing. And they're privately issued. Money was
Speaker 1: good as long as it was good, and then it wasn't.
Speaker 1: So then we decided to have a currency, and the
Speaker 1: whole history of banking, etcetera, until we got to have
Speaker 1: you know, national banks and these mammoth banks that consolidated
Speaker 1: and consolidated, and and and and still thousands of other
Speaker 1: of other banks. So just the bloated, huge system. But anyway,
Speaker 1: so I was basically I've seen banking since I started
Speaker 1: looking at it in two thousand and nine, and then
Speaker 1: becoming involved in that, consumed with that, lobbying for policy.
Speaker 1: You know, how I get from banking to technology and internet.
Speaker 1: So here's what happened. So then it's two thousand and fifteen,
Speaker 1: I'm kind of I've already spent like literally five years
Speaker 1: of my life full time on banking where I just
Speaker 1: came to look, you know, and and here I was,
Speaker 1: you know, just just and and it's just kind of,
Speaker 1: you know, it's a bit sickening to kind of be
Speaker 1: in that environment. I'm like, wait a minute, I'm in
Speaker 1: Silicon Valley. And now at that point, there was already
Speaker 1: the first round of what's called tech lash. You know,
Speaker 1: that was Canbrae Analytic Care. That was you know, that
Speaker 1: was when all these tech companies stopped being you know,
Speaker 1: the ones we love the most, and we started being
Speaker 1: a little bit suspicious. You started having the people saying
Speaker 1: it's addictive, and you know, that was the restaurant, not
Speaker 1: Francis Hogan, which is more there, you know, the more
Speaker 1: recent after you know, the election or whatever. But this
Speaker 1: was kind of after two sixteen, you know, and into seventeen. So, um,
Speaker 1: I became curious about this sector as a sector just
Speaker 1: two because I come from my original interests in corporate governance.
Speaker 1: Generally corporations run on behalf of shareholders and what's the implication,
Speaker 1: which in banking I saw were disastrous, you know, because
Speaker 1: they could get away with all this stuff they got
Speaker 1: away with which was extremely inefficient and and included all
Speaker 1: kinds of bad policies, tax subsidies of debt, all kinds
Speaker 1: of things that I saw no reason for and just
Speaker 1: somehow stuck bad bankruptcy any better. Well, so I wanted
Speaker 1: to check. So I'm like, here is a sector that
Speaker 1: has an sort of an origin that's completely different. In
Speaker 1: other words, born free, born free in the sense that
Speaker 1: you know, they got started in the private sector. A
Speaker 1: lot of the even the innovations, the things that are
Speaker 1: unful that we take for granted, the fact that our
Speaker 1: email goes for free, that all of a sudden we
Speaker 1: have all these all these communication technologies and Let's remember though,
Speaker 1: that the Internet itself started with you know, with the
Speaker 1: government started with dark bar and all of that set
Speaker 1: began with NASA, right exactly. So let's remember that that
Speaker 1: the government got it sort of started. And then obviously
Speaker 1: there were a lot of innovations. There was a mouse,
Speaker 1: and there was there of course, the browser, the first
Speaker 1: search engines, all of that in the nineties. So it's
Speaker 1: very young sector, uh, the Internet, and now we're all
Speaker 1: digital now, all the way to mobile. So first it's
Speaker 1: desktops and internet. When I sort of in the eighties,
Speaker 1: we were writing emails in the eighties already, but it
Speaker 1: was then there was laptop, and then there was mobile,
Speaker 1: and so this whole move to you know, we got
Speaker 1: our digital everywhere and we're so connected in the Worldwide Web,
Speaker 1: which was pretty recent innovation sort of, you know, two
Speaker 1: thousand early two thousand's UM was fascinating to me in
Speaker 1: terms of how it interacts or not with with government
Speaker 1: because people were beginning to think something's wrong with it.
Speaker 1: Privacy issues, you know, net neutrality, I mean, there were
Speaker 1: all these topics. I had no clue what the policy was.
Speaker 1: I ended up taking a dip into banking regulation and
Speaker 1: now what is there any what is the regulation of
Speaker 1: How is it different from telephone? How is it different
Speaker 1: from newspaper? How is it different from TV? You know what?
Speaker 1: What sector does it disrupt? So let me jump in
Speaker 1: and ask a question about that. Section to thirty is
Speaker 1: a big regulation that tech companies get to use to say,
Speaker 1: we're not a media company and we're not responsible for misinformation.
Speaker 1: We're a platform. Tell us about section two thirty and
Speaker 1: what we should know. Yeah, so I didn't know about
Speaker 1: section to thirty until I started delving into this section
Speaker 1: to thirty. What is it? There's a whole book about
Speaker 1: the nineteen words that inched the Internet, and they are
Speaker 1: and they are the government cannot you know, regulate, uh,
Speaker 1: you know, cannot tell these companies they are immune from
Speaker 1: any litigation on content now proceeding this, there were a
Speaker 1: lot of lawsuits that were targeted at companies that actually
Speaker 1: tried to moderate content, like compus that so you had,
Speaker 1: you had, you had these servers, these platforms, and the
Speaker 1: ones that claimed to do some moderation like to keep
Speaker 1: it you know, family friendly or this, or that we're
Speaker 1: getting sued for content that was left up you know,
Speaker 1: some enemy of mind posted something that you know that
Speaker 1: I was related to Columbine or some nude pictures of
Speaker 1: me or whatever, and they constantly had to deal with
Speaker 1: with being sued and so they wanted, uh, but the government.
Speaker 1: So there was this sort of a bargain made with
Speaker 1: them that we will give your immunity from lawsuits. And
Speaker 1: the idea was that they would enable you to moderate.
Speaker 1: In other words, you're a platform, not a creator of
Speaker 1: original because people just post, okay, so you're not responsible
Speaker 1: for that content. But of course then comes the slippery slope,
Speaker 1: which is news feed, which is the data gathering that happens.
Speaker 1: You know that that you know that that Facebook, for example,
Speaker 1: collects and then ultimately misinformation and disinformation. Exactly are these
Speaker 1: companies being responsible members of society or they hiding behind
Speaker 1: when they they they're obviously for profit. I mean when
Speaker 1: Google started, you know, and in that class we dug
Speaker 1: into it. When Google started, the creators of Google where
Speaker 1: at Stanford, uh, and they said at the time they
Speaker 1: didn't like advertisements. They thought search should be run as
Speaker 1: a nonprofit in the academic domain. And the Google started
Speaker 1: with a Stanford Google search and then a web search,
Speaker 1: so it started right at standard, just like you know
Speaker 1: Facebook was was for you know, for college students to
Speaker 1: meet people. And so then you know, Internet bubble bursts,
Speaker 1: and they wanted to you know, get funding and go
Speaker 1: public and all kinds of things like that. And then
Speaker 1: investors who tried to buy them for a million dollars
Speaker 1: and they said, let us think about it, and it didn't.
Speaker 1: The deal never went down, and it turned out to
Speaker 1: be quite financially remunerative to them, to the Google yes,
Speaker 1: And so then they have their venture capitalists and they
Speaker 1: have the people breathing down their necks to produce, uh,
Speaker 1: and all of a sudden, all their nice words about
Speaker 1: how they're against advertisers, then they were sort of you know,
Speaker 1: uh they they that was then, and then they found
Speaker 1: more and more and more ways to monetize the predictiveness
Speaker 1: of where people are going and sell that to advertisers
Speaker 1: and targeted ad and all of that by then also
Speaker 1: destroying NewSpace papers, especially local newspapers, and therefore becoming and
Speaker 1: then of course the way they curate. So now you're
Speaker 1: gonna say, I didn't create this content. It's not my content.
Speaker 1: You know, I will have some filters to remove you know,
Speaker 1: naked people or whatever else and um, but but now
Speaker 1: I'm gonna I'm going to curate a news feed to
Speaker 1: you that I think is what you want to see. Now,
Speaker 1: maybe what you want to see is the things that
Speaker 1: you know you're gonna get aroused by that create engagement,
Speaker 1: which became sort of the mantra for what they were
Speaker 1: looking for is to get you to spend more time
Speaker 1: and therefore give them more information. So you kind of
Speaker 1: trace the business models and you step back and ask
Speaker 1: what has that working out for us? And uh and
Speaker 1: this surveillance capitalism, what will do with calls, etcetera? You know,
Speaker 1: was beginning to not not work very well already in
Speaker 1: two thousand, seventeen eighteen, and and the Silicon Valley HBO
Speaker 1: series in the last season was sort of seeing that trend,
Speaker 1: and they wanted to kind of capture the fact that
Speaker 1: all of a sudden, Zuckerberg is in front of you know,
Speaker 1: of congressional committees and and they're the sort of beginning
Speaker 1: rumbling about what's going on there. So so let's break
Speaker 1: this down to a couple of different topics, because there's
Speaker 1: a lot of things going on, especially when we're talking
Speaker 1: about Google and Facebook. So hold a side. Local newspapers
Speaker 1: and others that were hurt by Google, Facebook, Craigslist, eBay,
Speaker 1: go down all the lists of things that they used
Speaker 1: to generate revenue from and a lot Zillo is another
Speaker 1: one thing. All the ad revenue streams. For now, it's
Speaker 1: pretty much subscription and a little bit of advertising. Um.
Speaker 1: But let's talk about some of the big things you
Speaker 1: you've brought up. Um. One is misinformation. The other is
Speaker 1: the engagement that the algorithms are driving outrage not information.
Speaker 1: What are the responsibilities of of these companies and what
Speaker 1: are the responsibilities of regulators to to look over these
Speaker 1: companies and say are they doing a good job or
Speaker 1: are they causing societal damage? So I deve deeply into it,
Speaker 1: and I'll give you just the brief answers. First of all,
Speaker 1: you know, there is some debate about whether you know
Speaker 1: why our ecosystem of sort of just engagement, you know,
Speaker 1: with each other has gotten so toxic. And you know,
Speaker 1: you can you know it doesn't It's not all from
Speaker 1: the Internet. I mean you can talk about you know,
Speaker 1: cable television and you know Rush, Limbo and and Fox
Speaker 1: News or whatever whoever is your your you know, uh
Speaker 1: channel that you think is is America's news network news Max.
Speaker 1: So some of it is extremists have really got extreme.
Speaker 1: So so exactly so, we had a certain polarization with
Speaker 1: all the proliferation of of of of media outlets and
Speaker 1: people choosing you know, their silos. So it's no longer
Speaker 1: the evening news you know that gives you the truth anymore.
Speaker 1: Everybody has their own truth and the Internet is just
Speaker 1: one place where that happens. Now, the problem with with
Speaker 1: the internet, and I think what what needs to happen.
Speaker 1: So first of all, this country has a First Amendment,
Speaker 1: which means that the government can't do much, can't stop
Speaker 1: you from criticizing the government or engaging in political speech.
Speaker 1: There are areas that can be restricted, but very little.
Speaker 1: Well yeah, we're we're at the mercy of these private companies. Now.
Speaker 1: The what we can do and what we can regulate
Speaker 1: is just, first of all, what happens behind you know,
Speaker 1: what is actually going on? What are people seeing? Let's see,
Speaker 1: let's you have researchers unable to access the data to
Speaker 1: even know how much misinformation? What are people reading? I mean,
Speaker 1: you don't you know even in companies, yes, because they
Speaker 1: don't release it because they do not they are not
Speaker 1: forced to disclose relevant information to to the public, to researchers,
Speaker 1: anonymized at all, but just so we can understand what
Speaker 1: their impact on our lives. That seems like a pretty
Speaker 1: fair trade for the government to say, we're going to
Speaker 1: continue giving you Section to thirty protections, but in order
Speaker 1: to qualify you have to release all this data. A
Speaker 1: lot of data is the absolute starting point of that.
Speaker 1: That seems like a fair amendment to keeping all these
Speaker 1: So there are a few there are people more involved
Speaker 1: in that policy debate. I basically became conversant enough at
Speaker 1: least to teach a course. I haven't done a lot
Speaker 1: of writing on it. I basically took it into my
Speaker 1: examples of two sectors banking and the Internet that sort
Speaker 1: of seemed to have some kind of a clash with
Speaker 1: democracy basically because of the the need for government exemptions
Speaker 1: and regulation and support in some way versus just the
Speaker 1: wild West unfettered, because because you know, the government is
Speaker 1: always there. It's what it does and what it doesn't
Speaker 1: do for all sectors. It's the rules of the game
Speaker 1: for the economy, and they affect all companies. That's labor
Speaker 1: law environmental laws, you know, all kinds of consumer protection laws,
Speaker 1: you know, and some specific regulations you know, airline regulation
Speaker 1: or you know in others the rules, the speed limits,
Speaker 1: that the rules of the road for for companies and
Speaker 1: for people. Okay, you know, are you allowed to do
Speaker 1: mandator arbitration or not? You know, there's just thousands of
Speaker 1: things that were the law in general, not specialized to
Speaker 1: a sector, but just the laws that exist, interdiscrimination or
Speaker 1: you name it. I mean Facebook got in trouble for
Speaker 1: allowing people to to mark race as as as a
Speaker 1: as a thing in and put housing ads in front
Speaker 1: of the people from certain race that was there. Was
Speaker 1: against its supposed to be. Yeah, so they got against
Speaker 1: basic civil rights law. Uh. That so they have to
Speaker 1: interact with all laws. They have to obey all laws,
Speaker 1: minimum wage, you know, all kinds of laws. And so
Speaker 1: now that's my current interest, which is the corporation as
Speaker 1: a legal person. They are not a set of assets
Speaker 1: owned by shareholders. They are a separate thing, right, Twitter
Speaker 1: is a thing. They have a board, they have shareholders,
Speaker 1: They have various stakeholders. Everybody has some claim or some
Speaker 1: control in some cases. How do they how does the
Speaker 1: corporation as a legal person interact with the rule of
Speaker 1: law in general, they have rights, they have responsibilities. Whose
Speaker 1: home to get more and more rights? They send the
Speaker 1: lawyers to get more and more rights in the courts,
Speaker 1: political speech rights, religious rights. You know, they get more
Speaker 1: and more rights in the courts, and responsibilities. There's kind
Speaker 1: of nobody home when you come for you know, you
Speaker 1: caused harm when you come for say Bowing or Purdue
Speaker 1: or you know, p Jenny, all these companies. You know,
Speaker 1: that's where I'm interested in now, a corporation living in
Speaker 1: a legal environment. Who are they? What if they harm?
Speaker 1: What happens? What can we do? Well? You name some
Speaker 1: companies that have run a foul of the government because
Speaker 1: they engaged in some pretty bad and sometimes reckless or
Speaker 1: even illegal activity. So you mentioned Boeing, Um, they didn't
Speaker 1: do a great job with their seven X right that
Speaker 1: that was problematic. They took a bunch of shortcuts. Arguably
Speaker 1: they did not follow their own internal when they were
Speaker 1: competing with air Bus. Right. Um, you mentioned Purdue engaged
Speaker 1: in all sorts of behavior where it was pretty clear,
Speaker 1: hey we can't ship this much now that ship that
Speaker 1: that was all the enablers around them the McKesson and
Speaker 1: all the pharmacies and all of that Purdue other internal
Speaker 1: This is a town of people. Why are they get
Speaker 1: that was a distribution. They were marketing it through the
Speaker 1: doctors and to the public, using false claims and misleading
Speaker 1: deceptive marketing. Now what happened, No individual in Purdue was
Speaker 1: you know, the three were criminally charged a couple of library.
Speaker 1: So so you got that that's a problem. But yeah,
Speaker 1: but you know, the Sacklers took away a whole bunch
Speaker 1: of money to a private company, and then they sought
Speaker 1: release from the bankruptcy of Purdue, not themselves, released from
Speaker 1: all civiliabilities, which a court above bankruptcy court, you know,
Speaker 1: struck down and now where we were nowhere. It's a mess.
Speaker 1: That company, you know, cannot possibly make up for all
Speaker 1: the harm they cost and what the Sackler's name is
Speaker 1: obviously not as prestigious as it used to be. There
Speaker 1: should be some claw back of the billions of dollars
Speaker 1: that were extracted. This is like fraudulent conveyance. I mean,
Speaker 1: you know, in bancruptcy usually you say you took money out,
Speaker 1: you diverted money, you know, knowing that this thing is
Speaker 1: gonna collapse. Yeah, so ahead of bankruptcy they can look
Speaker 1: back acting on behalf of the but they were the owners,
Speaker 1: I mean so exactly, so the creditors can. But now
Speaker 1: the creditors of Purdue are, you know, mostly victims and
Speaker 1: insurance companies and the government. And you know, so in
Speaker 1: the bankruptcy court all these stort victims, including people whose
Speaker 1: family members died, people who are addicted, you know, Medicare,
Speaker 1: all the insurance companies that had to pay, all the municipalities,
Speaker 1: all the states. I mean, you've got claimants from here
Speaker 1: to and and the Department of Justice comes and says, well,
Speaker 1: you you call Medicare fraud. You know, we want billions
Speaker 1: of dollars. Who gets the little pie that that's for
Speaker 1: the judge to assess. But you can't assess those damages
Speaker 1: without having access to the capital. They said, we'll throw
Speaker 1: in four billion dollars and give us a release and
Speaker 1: we're out of here. And where is that right now?
Speaker 1: It's it's nowhere. I mean, the bankruptcy court is back
Speaker 1: to They had this sort of an agreement and it
Speaker 1: was thrown out, which is very rare, and it tells
Speaker 1: you how agreed. Just the behavior was. It's really rare.
Speaker 1: You have to really go out of your way to
Speaker 1: mess up for a bankruptcy court to say that, No,
Speaker 1: it wasn't the bankrupt st they chose. They chose a
Speaker 1: particular bankruptcy court, a particular bankruptcy judge. This is shopping
Speaker 1: exactly form shopping. And then that judge was favorable to
Speaker 1: these master agreements and and gave them that, and the
Speaker 1: other courts said that doesn't make and so now it
Speaker 1: got the bankruptcy agreement is back at the bankruptcy court.
Speaker 1: And the victims, by the way, I'm not sure, but
Speaker 1: the victims anyway, we're publishing saying, well, I wasn't going
Speaker 1: to get very much. Maybe I was going to get,
Speaker 1: you know, three thousand dollars or one thousand dollars, and
Speaker 1: now I may not get anything. So they were even
Speaker 1: they signed because it was so little they were going
Speaker 1: to get anyway. Uh so it's it's all full speed ahead, litigated,
Speaker 1: and well the question is so, so here's the question
Speaker 1: for the victims. You know, can they actually go after
Speaker 1: the sacklers? The sackler's money is abroad, how can you
Speaker 1: actually find it? This is like the discussion we have today.
Speaker 1: You could track that down and claude back if if
Speaker 1: it's complicated, it's complicated. I mean that's like how we's
Speaker 1: now say, Well, you know, can Delaware you know, chancery
Speaker 1: court make Elon Musk you know by Twitter? It's like, okay,
Speaker 1: the court can decide, but what muscle does the court
Speaker 1: even happen? I want to talk about Elon Musk and
Speaker 1: Twitter because the question becomes our contracts enforceable? When when
Speaker 1: someone says can they make him do this? I don't
Speaker 1: know his ascess from in the United States. He signed
Speaker 1: a binding agreement. It's up to the court to just
Speaker 1: to either enforce that agreement. You know how these things
Speaker 1: happen in the eleventh hour, there'll be a deal cut
Speaker 1: because no one wants to take a risk of finding
Speaker 1: that out. Well, the question is what actual you know,
Speaker 1: literal power does that Delaware chord have. Uh, you know
Speaker 1: on Ellen Musk, he's known for you for saying the
Speaker 1: rules don't apply to me and mocking SEC and making
Speaker 1: a joke out of SEC. Whatever Delaware courts want to
Speaker 1: continue people incorporating in Delaware and enforcing contract law, then
Speaker 1: they have to really think about how they're gonna enforce
Speaker 1: this because if he walks away Scott free from this,
Speaker 1: then Delaware just lost. Yeah. I mean, you know, among
Speaker 1: the books, there's a book called what's the Matter with Delaware?
Speaker 1: And uh, and so that's quite I mean the fact,
Speaker 1: you know, if you start going back to the origins
Speaker 1: of incorporation and why we even have corporate law in
Speaker 1: this eight and why Delaware you know, is sort of
Speaker 1: the state that matters to the whole world on an
Speaker 1: uncorporate law. That's that's the only business model it has
Speaker 1: for the state is these fees. You can become a
Speaker 1: corporation ten minutes if you if you paid it's not
Speaker 1: that very much without even identifying yourself. And that's like
Speaker 1: a whole other kind of warms. Why is the US
Speaker 1: so slow in in in you know, basic basic transparencies
Speaker 1: that you have more transparency in China. You know, David
Speaker 1: Barboza was able to track the wealth of the top
Speaker 1: Chinese people through chains of corporate ownerships because for it's
Speaker 1: a little bit of money, you can find out the
Speaker 1: actual beneficial owners of every private corporation. And that's another
Speaker 1: corporation that you can pay a little bit more in
Speaker 1: pain until you get to a person not in the US.
Speaker 1: In the US, you know, because Delaware likes it, and
Speaker 1: because other states to compete with Delaware like it, and
Speaker 1: because the legal professional likes it, we somehow sign on
Speaker 1: all kinds of agreements that are sort of you know,
Speaker 1: for transparency. After all the scandals, the Pandora paper, the
Speaker 1: Panama paper and all of that, and then and where
Speaker 1: the laggards in the world. So right now, finally because
Speaker 1: of sanctions on on Ukraine, etcetera, we have a law
Speaker 1: going through the Enablers Act, and that is expansion of
Speaker 1: the bank Secrecy Law, which is basically your know your customers.
Speaker 1: But we had you know, Finns and uh. You know
Speaker 1: that the Department and Treasury that gets all these suspicious
Speaker 1: activity report you know, leak and we saw what happens
Speaker 1: to all these banks that file suspicious activity report and
Speaker 1: still process the transaction and nobody has enough resources in
Speaker 1: the Party and Treasury go over and the money laundering
Speaker 1: is just pervasive. So dirty money. When we talk about
Speaker 1: jurisdictions taking dirty money, you know, it's a competition between
Speaker 1: US and UK. You have American cryptocracy on one hand,
Speaker 1: you have you know, Butler to the World and all
Speaker 1: kinds of other books money, land and and cliptalk see
Speaker 1: um Lecto Mania saying that the UK is the winner
Speaker 1: on this. You know which one is more um over
Speaker 1: Home to dirty money but Ler to the world is like,
Speaker 1: you know, we were no longer an empire. But also
Speaker 1: if you want something hidden, you want something taken care of,
Speaker 1: the butler will take care of it. Quite quite fascinating.
Speaker 1: So we already talked about borrowing and how that magnifies risk,
Speaker 1: tell us some of the dark side of borrowing and
Speaker 1: what we should be doing about that. So the use
Speaker 1: of debt to fund things, meaning I give you money,
Speaker 1: then I get an IOU from you, okay, uh is
Speaker 1: pervasive throughout the economy. I mean it's sort of a
Speaker 1: particular contract that that gets signed all the time, and
Speaker 1: a lot happens by using that funding, okay. And we
Speaker 1: seem to encourage it unnecessarily for buying houses or for
Speaker 1: funding corporations against other forms of funding. Well, when you
Speaker 1: say for buying housing, how else can you buy, Well,
Speaker 1: it depends if you want to subsidize it or not.
Speaker 1: In this country, we subsidize homeownership only if you borrow
Speaker 1: through taxes. So we don't need, we don't need that deduction.
Speaker 1: That deduction has got doing nothing good. If you want
Speaker 1: to subsidize homeownership, choose the people you want to subsidize,
Speaker 1: and then for example, you can give them a little
Speaker 1: tax credit for their down payment. So in other words,
Speaker 1: instead of making the interest you pay on your mortgage deductible,
Speaker 1: you can make the down payment deductible. And that would
Speaker 1: encourage for homeownership. But but specific people, not the rich,
Speaker 1: because right now housing subsidies, even with poor people, specific
Speaker 1: housing subsidies and vouchers that nobody takes, and all of that,
Speaker 1: the most of the subsidies for housing go to rich people.
Speaker 1: I mean that makes sense. The more the bigger the
Speaker 1: house to be bigger the deduction. It's a regressive places
Speaker 1: it's been capped, but it should be canceled, and many
Speaker 1: countries don't have it now. For corporations across the world,
Speaker 1: the historical mistake was made to allow tax doctibility of interest.
Speaker 1: Where you know that funding is a funding expense not
Speaker 1: a business expense, should not be considered a business expense.
Speaker 1: We should not favor that over equity funding for corporations
Speaker 1: because they can always have access to their own profits
Speaker 1: and two investors. Because that's global, that's pretty global. Some
Speaker 1: countries try to fix that. So there are some papers
Speaker 1: about that tax bias. Well, I think that, you know,
Speaker 1: I think Belgium's tried to have some there were other
Speaker 1: countries that were giving impure, you know, something to dividends
Speaker 1: and try to fix that bias, that tax bias. It
Speaker 1: is well known that the tax bias, UH of that
Speaker 1: over equity is a distortion and the economy, the economies
Speaker 1: had periodically starts and even Bloomberg here Bloomberg view UH
Speaker 1: screams every so often to stop that, uh, and somehow
Speaker 1: nobody is listening. So it's just this persistent distortion that
Speaker 1: we never fixed. In the United States, the bias towards
Speaker 1: debt over equity is distorting capital structures in corporate America
Speaker 1: because debt has a dark side, precisely for that reason,
Speaker 1: they're the dark side of that. I mean, I already
Speaker 1: mentioned the sort of addictiveness of debt at high levels, okay,
Speaker 1: which is especially true for banking because they are heavily
Speaker 1: indebted fundamentally and because they have all the safety nets
Speaker 1: that make their creditors more passive. UM, and that allow
Speaker 1: them to wratch it up the debt. So I have
Speaker 1: a theory paper that I learned a lot from called
Speaker 1: leverage ratchet effect and Jona Fanesce two has an eighteen. Anyway,
Speaker 1: so what's a dark side? You know? When I teach
Speaker 1: this and I also teach undergraduates. And by the way,
Speaker 1: I'm not even teaching finance and economics anymore. I'm teaching
Speaker 1: so interdisciplinary that it's it's listed in political science and
Speaker 1: it sort of has a lot of law. It's it's
Speaker 1: very out of silo, it's very very crost disciplinary. Um So,
Speaker 1: I took my class out of the financial listing. It's
Speaker 1: kind of a general kind of class. Let's call power
Speaker 1: in finance or business and government, power and engagement, those
Speaker 1: kinds of courses where I start with like human rights
Speaker 1: and I talk about corruption and all kinds of words
Speaker 1: that usually are not to be heard in the business
Speaker 1: courl But anyway, there uh back to the dark side
Speaker 1: of borrowing of that. Um So, you know, as long
Speaker 1: as you keep your promise, everybody is happy. Okay, what if? So? So,
Speaker 1: there are different terminologies that are important to distinguish. There's
Speaker 1: the issue of default. What if you just don't pay
Speaker 1: you promise, and you don't keep your promise. Now you know,
Speaker 1: stuff can happen. You might end up filing for bankruptcy.
Speaker 1: But bankruptcy is a legal process, so it has to
Speaker 1: be separated from default. It can happen before default. You know,
Speaker 1: Pigeon I filed for bankruptcy. Companies filed for bankruptcy without
Speaker 1: defaulting to seek protection from their creditors. Okay, So bankruptcy
Speaker 1: is like an legal option that is for for you know,
Speaker 1: to to kind of get from from all the overhangs
Speaker 1: of that that prevent you from breathing. Okay. It's more
Speaker 1: of a full repreemptive restructure. It's supposed to be. It's
Speaker 1: supposed to be sort of forgiving, not for an individual. Again,
Speaker 1: it's like a fresh restart or forgiving of taking too
Speaker 1: much that. But if you use it as a shield
Speaker 1: like we discussed the Sacklers, etcetera. Or if you start
Speaker 1: spinning off a subsidiary, is it's going to take off
Speaker 1: your talcoum liability. If you're Johnson and Johnson using some
Speaker 1: to Texas to step track or whatever, or your visor
Speaker 1: and you know, and they found you guilty of some
Speaker 1: fraud and you just put it, yes, Fiser, Yeah, we
Speaker 1: asked Jode drake Off about that. Well, uh, and he'll
Speaker 1: take you their own recidivist. In the Southern district, there
Speaker 1: are a cidivice corporation. He loves to give the example
Speaker 1: of Viser even after the after the COVID and and
Speaker 1: he says they would keep coming back. They would be
Speaker 1: a deferred persecution, So why we keep deferring it? And
Speaker 1: then once I insisted they admit guilt, they send the liability,
Speaker 1: the criminal ability to a subsidiary and they failed that
Speaker 1: subsidiary and go and completely continue. And does that shield
Speaker 1: the company from liability? They managed to find tricks to
Speaker 1: shield from liability all the time, or two to just
Speaker 1: sort of shift the liabilities around kind of in between
Speaker 1: all the contracts and the covenants and all of that.
Speaker 1: So there's a lot of shielding, uh going on. But
Speaker 1: in any case, that's if you're clever, if you're an
Speaker 1: individual or small business, you know it's hard, it's it's harder,
Speaker 1: it's harder for you to play those games of liability
Speaker 1: shifting anyway. So you know the dark side is that
Speaker 1: you have that your decisions once indebted are very different
Speaker 1: and potentially very inefficient relative to if you're just doing
Speaker 1: things on your in your own money versus that that
Speaker 1: board money and a little bit of your own money,
Speaker 1: because you're gonna take excessive risk, You're gonna gamble for insurrection,
Speaker 1: take excessive risks. So you're based in favor of risks,
Speaker 1: in favor of more boring, and against certain boring investments
Speaker 1: because they benefit from those, and that present value of
Speaker 1: those kind of first goes to the creditor because you're
Speaker 1: after So you might be based again making a boring
Speaker 1: business loan if you're a bank, because you want to
Speaker 1: go play derivative instead. So so you talk about the
Speaker 1: problem of working with other people's money, meaning whether it's banks,
Speaker 1: funds or private actually it doesn't matter. They get to
Speaker 1: speculate with op M, keep the gains, but if there
Speaker 1: are losses, it goes to rights. So how do we
Speaker 1: how do we deal with that in our financial system?
Speaker 1: How do we make our system less fragile than it
Speaker 1: appears to be, the first thing to do is to
Speaker 1: counter the forces of that intense desire to keep leveraging,
Speaker 1: which you know, I sometimes say the more they hate equity,
Speaker 1: the more I know they have too little of it.
Speaker 1: You know, it's like their intense hate of it says,
Speaker 1: I can't live unless you give me cheap debt to
Speaker 1: keep rolling my my debt. You know all default, terrible
Speaker 1: things will happen or whatever. So they have always access
Speaker 1: to funding, especially if you're a two big to fail bank.
Speaker 1: The creditors will just not think, especially if they lend
Speaker 1: to you with collateral in short term, that that they
Speaker 1: will be harmed. You know, once they think they are harmed,
Speaker 1: you know, they'll start running off, etcetera. So you have
Speaker 1: fragile funding. The only counter to that is not you know,
Speaker 1: clever death that converts to equity that nobody's going to
Speaker 1: ever trigger, which because we've seen that is playing old equity.
Speaker 1: Your earnings, you know what I mean, You have profits
Speaker 1: that you pay out. How will the world be harmed?
Speaker 1: You know, for ten years now, the book is almost
Speaker 1: ten years old, we've been asking every so often, you know,
Speaker 1: macro economies. All kinds of people speak in this space,
Speaker 1: even academics, saying, just tell me one thing, as an economist,
Speaker 1: how will the world society be harmed? If the banks
Speaker 1: retain their earnings, there's still their money, never played. But
Speaker 1: they but you put the money to good used, don't
Speaker 1: burn it, you know, invested. You know, if you're invested
Speaker 1: something safe, the risks of the shareholders will go down
Speaker 1: and they require return accordingly, because we know financiers can
Speaker 1: return our into two wind risk and required return. Why
Speaker 1: is Warren Buffet never paying dividends because he's investing the
Speaker 1: money on behalf of his shaholders. So are we not
Speaker 1: so one Buffet himself when he invested in paying I
Speaker 1: know when he well, yeah, because that's a more texted
Speaker 1: advantageous and comes back. You know, it's funny, you keep
Speaker 1: it keeps circling around. It often comes back to what's
Speaker 1: most tax advantaged. How you can to somebody else, If
Speaker 1: you can shift the downside to somebody and you can
Speaker 1: beat the upside. That's the bright side of leverage for
Speaker 1: those who take it, if they can avoid the downside.
Speaker 1: So the homeowner may or may not, you know, be
Speaker 1: able to avoid the downside. But homeowners levered up took
Speaker 1: you know, cash at refinancing and re levered and basically
Speaker 1: cash a refinancing when the housing prices when the house
Speaker 1: price goes up, is the same as paying dividends when
Speaker 1: you make profit. It's the same. I ask my students,
Speaker 1: what's the equivalent of cash our refinancing? Bethany McLean wrote,
Speaker 1: the house is not a credit card. But that was
Speaker 1: the ads, you know, take him, take your home on vacation,
Speaker 1: you know, before the financial crisis. So this is like
Speaker 1: the dividends that their regulators are allowing banks to keep
Speaker 1: paying even though they live on pathetically low equity meaningful
Speaker 1: equity levels. Now they don't default, so you don't see
Speaker 1: that they may well be insolvent. We just don't know
Speaker 1: it because the accounting disclosures don't really show you. How
Speaker 1: should we fix this? What should banks and financial institutions
Speaker 1: be doing differently? How should we change the task code
Speaker 1: and the regulatory You know, first of all, you have
Speaker 1: to ease out of that of that tax preferences, and
Speaker 1: and secondly you just against what their incentives are. You know,
Speaker 1: if it's a tax subsidy, it comes out of somewhere.
Speaker 1: I'm even willing to settle on the tax bill as
Speaker 1: an amount of cash that they owe, that's a function
Speaker 1: or that's the same as right now, except if they
Speaker 1: didn't level as much in order to get that same
Speaker 1: tax bill in other ways to lower their tax bill,
Speaker 1: because it's the fragility of that overhang, the inefficiency of
Speaker 1: that overhang, that is making the entire system fragile because
Speaker 1: in the dynamics of contagion, which we explained the banking dominoes,
Speaker 1: you know, one default on another like we're seeing in
Speaker 1: crypto right now, and and um. And then there's the
Speaker 1: information contagion where you know, I'm now worried that this
Speaker 1: whole sector or is going to fail. You know, Leman fails,
Speaker 1: and the next thing to fall is some other banks
Speaker 1: in the same business. And that was, by the way,
Speaker 1: a concern of some people in the FED, even like
Speaker 1: Kevin Walsh Uh after Bear Sterns was bailed out of
Speaker 1: that's because they all owned, they all own the same thing.
Speaker 1: They were to one another exactly. So people talk about
Speaker 1: Lehman like it's a domino that sent it off. I
Speaker 1: love to describe Lehman Brothers as the first house in
Speaker 1: the trailer park that the tornadoes. I have visuals in
Speaker 1: my ted X talk that basically have tall buildings and
Speaker 1: a color code them red for that grain for equity
Speaker 1: very little, and then the green disappears and they top
Speaker 1: along one another, and then there's Uncle Sam kind of
Speaker 1: trying to trying to kind of uh so it all
Speaker 1: comes back to insufficient equity relative to way too much that.
Speaker 1: Oh yeah, that's that's just the most obvious thing. That's
Speaker 1: like the no brainer thing. So when you look at it,
Speaker 1: as I came and looked at it, I'm like, why
Speaker 1: are we here. There's a simple, like costless fix. You
Speaker 1: just rearrange the financial claims in the economy so where
Speaker 1: the upside, the people with the upside also bear the downside.
Speaker 1: That's the way it's supposed to be. It's not supposed
Speaker 1: to be, you know, it's privatized gain socialized losses. It's
Speaker 1: supposed to be. And this is a basic thing, bipartisan
Speaker 1: and everything. Didn't DoD Frank fix some of this, or
Speaker 1: it was reputed to have fixed some of this, or
Speaker 1: was it watered down that much so dot Frank. So
Speaker 1: let's just be clear on what dot Frank was. Dot
Speaker 1: Frank was a massive law with you know, a thousand pages.
Speaker 1: Dodd Frank gave authority to regulators. DoD Frank gave in
Speaker 1: Title one to the FED to solve the too big
Speaker 1: to fail problem, to do whatever they need for financial stability,
Speaker 1: and the FED is still failing to do that. Really, yes,
Speaker 1: so why have the bank's been relatively stable for it?
Speaker 1: Just because they don't It doesn't mean they're healthy, I guess,
Speaker 1: I guess, just doesn't mean if you if you're bloated
Speaker 1: and inefficient and taking up much of more of the
Speaker 1: economy than we need because you can. And meanwhile, you
Speaker 1: know you you're paying yourself and all these people, all
Speaker 1: these salaries where we should have a more efficient financial
Speaker 1: sector and instead it's so bloated and so profitable it
Speaker 1: comes out of somewhere. So you know, to to me,
Speaker 1: the banking sector is not healthy just because it exists
Speaker 1: in profitable. It doesn't necessarily mean yeah, you're you're you know,
Speaker 1: you're you're you're overweight and unhealthy, but you have the
Speaker 1: feeding tube, you know what I mean? Whatever analogy, what
Speaker 1: do you think is going to happen? So not I'm
Speaker 1: not gonna ask you for rate for casked or what
Speaker 1: the Fed's going to do the era of cheap capital
Speaker 1: and free money and zero interest rate clearly is coming
Speaker 1: to an end, are we is the tide going out
Speaker 1: and we're going to find out who's been swimming naked
Speaker 1: in banking? I don't think so for banks. Actually, you know,
Speaker 1: higher interest rates could be very profitable. Yeah, more spreads.
Speaker 1: So they're actually having some trouble with squeezed you know, yields.
Speaker 1: Uh So the pushback to that, Hey, they weren't making
Speaker 1: big spreads on lending and they still managed to not implode.
Speaker 1: If they could survive zero, they should do well at
Speaker 1: two or three. But these but these banks have so much,
Speaker 1: so many ways to make money. I mean, look at
Speaker 1: look at you know, look at the COVID. Okay, look
Speaker 1: at how how they made money through COVID with the
Speaker 1: supports to everybody, I mean banks, with the vehicle through
Speaker 1: which we gave p P longs and what was But
Speaker 1: it went fall for the banks they were given. I
Speaker 1: think they they took the money at the quarter percent
Speaker 1: and were paid one percent. So that's the spread right
Speaker 1: there on hundreds of billions of dollars. And then there
Speaker 1: was fees, and it was riskless, it was guaranteed and forgiven,
Speaker 1: and so they took no rice. They did hardly any
Speaker 1: credit worthiness because we were rushing to give the money
Speaker 1: out and and they were not liable for for for
Speaker 1: checking the papers because it was also rushed, they gave
Speaker 1: a lot of it to their favorite clients and then
Speaker 1: we needed to give more of it. Was a lot
Speaker 1: of fraud also built in that too, and uh and
Speaker 1: a lot of companies that shouldn't have it wasn't meant
Speaker 1: to God. And then the Fed was standing ready and
Speaker 1: started buying corporate bonds and that was a huge that
Speaker 1: spray for the entire corporate sector, which again the investment
Speaker 1: banks benefited from from all this. That party that went on,
Speaker 1: and so you know, it was it was wonderful life.
Speaker 1: And during COVID in the in the banking section. You know,
Speaker 1: it's funny you you brought that up because in the
Speaker 1: United States, we have a tendency to ask the corporate
Speaker 1: side to do things that should be government business. So
Speaker 1: if the whole idea behind PPP was to keep people
Speaker 1: employed in small and medium businesses, why get the business involved.
Speaker 1: Why isn't that directly from the government. And the same
Speaker 1: thing with healthcare. Why is so much healthcare through businesses
Speaker 1: instead of directly through some government entity. Please leave businesses
Speaker 1: out of it. Do let the government do its responsibility
Speaker 1: directly with the citizens. So around at the start of
Speaker 1: the finite of the COVID crisis, there were there was
Speaker 1: a letter organized a few hundred academics and law, finance,
Speaker 1: economics signed it telling the government before the right around
Speaker 1: the time of the Cares Act, first one, to not
Speaker 1: give money to corporations, to give it to people who
Speaker 1: needed so. In other and part of it was logistical
Speaker 1: in this country because you know, you basically you have
Speaker 1: the data in i RS and everything, you on social security,
Speaker 1: every you get a wtube, so you take over and
Speaker 1: that's what governments did in Europe, you take over the payroll.
Speaker 1: So this way it's not that their discretion to kind
Speaker 1: of their good will to to now they can't hire
Speaker 1: again in the airlines, etcetera. So you know, they came
Speaker 1: for bailouts. And the airlines are a classic example, after
Speaker 1: having paid every virtually everything in dividends right before that
Speaker 1: and now have if they were airlines in particular, bankruptcy
Speaker 1: has traditionally worked great. You don't ground the planes you
Speaker 1: want them, and you just renegotiate some contracts. We have
Speaker 1: plenty of time to do that. During the crisis, why
Speaker 1: are we you know, why are we bailing out the
Speaker 1: investors have just got a huge reward. We're not like
Speaker 1: effectively you know, at least zeroing them, if not, you know,
Speaker 1: clowing back some of this money. Right. They old joke
Speaker 1: about airlines as they haven't been profitable since Kittie Hawk.
Speaker 1: But let's stick with government payments to co operations. We
Speaker 1: saw something very similar in the financial crisis, where the
Speaker 1: banks who were bad lenders were bailed out, but really
Speaker 1: the borrowers didn't see there was some release, but not
Speaker 1: a lot. Yes, so so there was clearly a huge
Speaker 1: bias towards bailing out the banks, you know, forming the
Speaker 1: runway all of that. And you know the person who
Speaker 1: wrote most eloquently about this is Nil Browski, of course bailout.
Speaker 1: More specific, Nil Borowski wrote a book about bailout. He
Speaker 1: was Inspector General of the TARP trouble that said, uh,
Speaker 1: you know, relief of program and um he was complaining
Speaker 1: and describing and other people did too. How little uh
Speaker 1: the programs did? I mean remember from that they bailed
Speaker 1: out a g they bailed out the auto manufacturers, but
Speaker 1: homeowners didn't get relief and it had collateral harm. Uh
Speaker 1: So the programs for homeowners were voluntary to the lenders.
Speaker 1: Now the loans were securitized, so now you you know,
Speaker 1: there's no lender to negotiate with, and it's much more
Speaker 1: efficient to renegotiate the loan than to uh, to foreclose. Instead,
Speaker 1: you had a massive housing crisis in which there were
Speaker 1: a lot of foreclosures, a lot of people misplaced, very
Speaker 1: traumatic experience for a lot of people whose mortgages should
Speaker 1: have been restructured basically, and again it was the lenders
Speaker 1: that were doing it. And then the lenders that just
Speaker 1: didn't choose. I mean you had you had in the
Speaker 1: accounting of say City Group, you had them not want
Speaker 1: to you know, not want to restructure you know, second
Speaker 1: mortgages which were clearly in a to declare on their accounting,
Speaker 1: which were clearly total loss because there were second junior votyages. Uh.
Speaker 1: Even so they were rescued, they were bailed out of
Speaker 1: this exactly, and so they were not even acknowledging their losses.
Speaker 1: I mean you could see this on their book to market.
Speaker 1: I mean you could see that they were exaggerating their
Speaker 1: books hugely. And for for people who not may not
Speaker 1: remember Neil Barowski, he was the n y U law
Speaker 1: professor for the Special Inspector General for the troubled asset
Speaker 1: and he wrote this book about how they bail out
Speaker 1: Wall Street and left Main Street and now on the show. Yeah,
Speaker 1: he's a partner in a law firm. And one of
Speaker 1: the things he did afterwards was Ben Lowsky, who was
Speaker 1: the regulator in New York. Uh employed him, Yeah, dinner, yes,
Speaker 1: and employed him for a few years. He was a
Speaker 1: full time monitor of Credit Swiss, Credit Swiss being now
Speaker 1: one of the poster childs. I mean, you know, if
Speaker 1: you want to talk about reckless banks, you know you
Speaker 1: had the bid image. I think you know credit you
Speaker 1: know Credit Swiss right now, but Deutsche Bank being the
Speaker 1: poster child, and you know, they all seemed to be
Speaker 1: slowly recovering um from their original online your zombie, your zombie,
Speaker 1: and we feed you enough and we give your time,
Speaker 1: and you come out from years ten years absolutely so
Speaker 1: if you never can die, you know you come back.
Speaker 1: Well that that's no, that's no surprise. And and they've
Speaker 1: all essentially come back. So one last piece of research
Speaker 1: of yours I have to ask about, Uh, it takes
Speaker 1: a village to maintain a dangerous financial system. Why does
Speaker 1: it take a village, how many entities have to be
Speaker 1: involved to keep financed dangerous. So I will talk a
Speaker 1: little bit about this was This was my kind of, uh,
Speaker 1: my own summary of my experience over the five years
Speaker 1: in which I really was devoted entirely to this little
Speaker 1: policy battle where the book and and and writings that
Speaker 1: we did afterwards, we're sort of debunking a whole set
Speaker 1: of flawed claims what we call we call them bankers
Speaker 1: new clothes. But it's not just bankers, it's policy makers.
Speaker 1: It's even academics who say things that fall under the
Speaker 1: category of uh, fallacious, false or than kind of true
Speaker 1: but false, or just ignorant. But I don't know what
Speaker 1: goes on in people's head. I I can say, I
Speaker 1: can say, you know, this person should know better than
Speaker 1: other that nonsense. Sometimes I'm told people whispering in my
Speaker 1: ear they don't understand and I'm like, wait a minute,
Speaker 1: bread and butter finance. They don't understand leverage and risk
Speaker 1: ris can return. They don't understand. That doesn't make any
Speaker 1: sense to me. You know, uh, you know, I write,
Speaker 1: you know, open letter to JPMorgan Chase, you know, reading
Speaker 1: this letter to shareholders. I write all these different beds.
Speaker 1: I just did this for five years straight, including the
Speaker 1: year and a half in the bunker writing the book.
Speaker 1: And in two thousand and fifteen I decided, Okay, what
Speaker 1: happened to me here? Why is it so difficult? And um,
Speaker 1: you know who didn't meet along the way? Who kind
Speaker 1: of led to this situation that I encountered. And so
Speaker 1: at the time two two movies came out, I was
Speaker 1: actually in New York for for a month or two,
Speaker 1: staying at n y U and uh, and it was
Speaker 1: kind of you know, in town for various things. There
Speaker 1: are many stories I can tell you about that period.
Speaker 1: And uh. The two movies that came out and competed
Speaker 1: for the Oscar that year were the big short and
Speaker 1: I came to see it with Adam McKay and some
Speaker 1: of you know, pre showing because he wanted to see
Speaker 1: what financed people, academics will say to the movie. And
Speaker 1: later he recorded a session with us because people were
Speaker 1: asking him what to do. Of course, he finished the
Speaker 1: book right now now nobody goes to jail, which was
Speaker 1: kind of most of what he showed was legal, So
Speaker 1: it was kind of not the end that Michael Lewis
Speaker 1: had in the book Michael Lewis by the way in
Speaker 1: the book The Big Short ends by saying the problem
Speaker 1: was not that Lehman was allowed to fail. The problem
Speaker 1: was that Lehman was allowed to succeed for as long
Speaker 1: as it is yes, so he will. He went back
Speaker 1: to partnerships, moving to limited liability co operations, and becoming
Speaker 1: correct less with other people's money. But anyway, So I
Speaker 1: was asked to write an essay for a book that
Speaker 1: was edited by a philosopher that was called Just Financial
Speaker 1: Market Finance in a Just Society. So it was about justice,
Speaker 1: and so I had to connect what I've seen in
Speaker 1: finance in the banking area to some sense of justice,
Speaker 1: of who inflicts injustice and so and so the way
Speaker 1: in which people cause harm is sort of by doing
Speaker 1: and by not doing is by being willfully blind by
Speaker 1: all these terms from psychology about how you can cause
Speaker 1: harm and sleep overnight, you know. So it was basically
Speaker 1: I started asking why has it been hard to get
Speaker 1: through with my simple message? Uh? Who were all the
Speaker 1: people who were trying to be on the other side
Speaker 1: of this? So you start with the bankers, they benefit,
Speaker 1: you know. You then go to all the different private
Speaker 1: sector gatekeepers, accountants, the credit rating agencies, you know, consulting
Speaker 1: companies that you know, a lot of people that want
Speaker 1: their relation to be very complicated because it creates a
Speaker 1: lot of jobs, you know, doing stresses and all kinds
Speaker 1: of fancy things, even if they're not really good on
Speaker 1: and on the people who are enabling the situation. So
Speaker 1: the keyword is enablers. Okay. Now, the title came from
Speaker 1: the movie Spotlight, which was the other movie that came out.
Speaker 1: Spotlight was a movie about sexual harassment in the church,
Speaker 1: Catholic church, and it was about journalists in Boston uncovering
Speaker 1: how sexual harassment in the church persisted and how once
Speaker 1: they investigated the abusers moving around the systems, they were
Speaker 1: able to see the problem as much more systemic than
Speaker 1: then the one one at a time. Little story in
Speaker 1: the story in the movie Spotlight, the lawyer to some
Speaker 1: of the victims, who, of course, even if there was
Speaker 1: a settlement, they were told to shut up just like
Speaker 1: a lot of settle meants that I've been looking at
Speaker 1: all the NBA. The lawyer says to the journalist, if
Speaker 1: it takes a village to raise a child, it takes
Speaker 1: a village to abuse a child. Yes, and it takes
Speaker 1: a village to raise the child is the title of Hills,
Speaker 1: an African saying that hillarically intern adopted for a title
Speaker 1: of her book. Takes a village to abuse the child
Speaker 1: is all the enablers who look away, all the people
Speaker 1: who kind of make the situation a wrong persist, and
Speaker 1: you know, go to all kinds of things, go to Weinstein,
Speaker 1: go to a lot of wrongdoings that persist. There were
Speaker 1: enablers along the way. So I wanted to see the
Speaker 1: enablers in my world, in which may maybe not even
Speaker 1: crimes were committed, but there were sort of legal deceptions. Uh,
Speaker 1: there was a you know, capturing of the regulators. There
Speaker 1: was sort of you know capturing of the politicians. There
Speaker 1: was confusing the politicians, There was confusing the public who
Speaker 1: all did that? And so I went all the way
Speaker 1: to academics, all the way to people whose job is
Speaker 1: to to the regulators and their narratives, and basically said,
Speaker 1: here is what they're saying, and here is why it's
Speaker 1: flawed and wrong and misleading, and this this enables this
Speaker 1: system to persist. At the same time, there was a
Speaker 1: book by a Dutch journalist who did uh called yours
Speaker 1: something called swimming with sharks. It was a bad banking culture.
Speaker 1: And all he did was he interviewed a bunch of
Speaker 1: people in the city of London about their jobs anonymously.
Speaker 1: And he was just trying to map out how people
Speaker 1: felt about their jobs and who's getting paid, and who's
Speaker 1: getting fired, and and and and whether they think it's
Speaker 1: a fair relative to their high school friends or whatever.
Speaker 1: And he became so alarmed with the financial system that
Speaker 1: he started having these analogies of an empty cockpit. You know,
Speaker 1: Oh my god, you know all these people, nobody is taken.
Speaker 1: I told him. We took a walk in London along
Speaker 1: the river, and I said, you know what, it's worse.
Speaker 1: I mean, he's an anthropologist by training. I come from
Speaker 1: the Ivory Tower and finance down to the ground and
Speaker 1: we meet in the same place. This is crazy, okay.
Speaker 1: And I said to him, it's worse than a you know,
Speaker 1: an empty cockpit. He has a nightmare where he walks
Speaker 1: in the cockpit and it's empty. I said, you know what.
Speaker 1: The pilots of the airplane are paid to do flips
Speaker 1: and to fly low, and they have their own parachutes,
Speaker 1: so they don't care about the passengers, So it's it's
Speaker 1: it's kind of worse. The people who control this system
Speaker 1: are benefit from its fragility, and so you can't fix
Speaker 1: it until you you know. That's what the book tries
Speaker 1: to do is educate the public. So right now, it's
Speaker 1: gonna be ten years since the book. In February two,
Speaker 1: twenty three will be ten years and we're considering right
Speaker 1: now republishing this book with a sort of one epilogue chapter,
Speaker 1: maybe a preface explaining how the book still relevant to COVID,
Speaker 1: bailout to Crypto, which we didn't get to discuss. Okay,
Speaker 1: we I'm happy to talk about it, and uh and
Speaker 1: to the frame of democracy is so so before we
Speaker 1: get my favorite questions, I have to ask you my
Speaker 1: curveball question, which is you're an advisor to HBO Silicon Valley,
Speaker 1: a show I just adored. Tell us about that experience.
Speaker 1: How did they find you other than the fact that
Speaker 1: you're at Stanford and what you do for them? So
Speaker 1: how they found me was that they originally found my neighbor,
Speaker 1: who is an electrical engineering professor, and he is his
Speaker 1: last name is Wiseman, so he is the one after
Speaker 1: which the Wiseman score, uh compression score is and on
Speaker 1: the show. And this was research because this co producer,
Speaker 1: Jonathan dutton Um was was sort of scouting the Silicon
Speaker 1: Valley to kind of find a believable story to capture
Speaker 1: the spirit of Silicon Valley and you know, the looking
Speaker 1: for storylines and concepts. And then he came across this
Speaker 1: and then this professor and a couple of other professors
Speaker 1: from computer science and engineering helped the show be as
Speaker 1: believable as it as it was now as it went
Speaker 1: through and it was all out there in the garage
Speaker 1: and all this stuff. Uh, it got to the sixth season. Now,
Speaker 1: my neighbor said to me, knowing what I was doing about,
Speaker 1: you know, financial system and my general interests in corporations
Speaker 1: in society, you got to meet this guy Ponytail, and
Speaker 1: we're sitting around coffee and later he says, you know,
Speaker 1: you ought to teach a course with him. And that
Speaker 1: was when I became I said, you know, I'm curious
Speaker 1: about this sector. Guy knows everybody, okay, because everybody was
Speaker 1: a cameo in in uh, in Silicon Valley, and he
Speaker 1: knows about the history of the Internet. And all of
Speaker 1: those things. And he's not an economists, you know, an
Speaker 1: anthropologist by training on the sort of a producer a writer.
Speaker 1: And uh, so we embark on this NBA course and
Speaker 1: and while they were writing the sixth season, so they
Speaker 1: end up putting me as as an advisor. I mean,
Speaker 1: they didn't pay me anything. I just signed a bunch
Speaker 1: of paper and they gave me two hundred hours, which
Speaker 1: is like a bottle of wine for all of this,
Speaker 1: just because they didn't want me to later claim that,
Speaker 1: you know, I gave them some idea copyright because they
Speaker 1: it was impacting their coverage of pul of governance issues,
Speaker 1: mission statements. They mocked mission statement and plagiarism of mission statement,
Speaker 1: these kinds of things because it's like, you know, mission statement.
Speaker 1: So so talk is cheap, as as I said. And
Speaker 1: so we taught this course to NBA entitled the Internet
Speaker 1: Broken and uh and then this was the spring quarter
Speaker 1: of two thousand eighteen something like that. And then so
Speaker 1: as they were doing and they fall, they finished, they
Speaker 1: were showing the thing, and they were filming, like early
Speaker 1: in the fall, they were filming the last episode. And
Speaker 1: so he caused and says, okay, you guys. I got
Speaker 1: them to fly four of you down to l A
Speaker 1: and be cameo in the very last episode and hang
Speaker 1: out here for the day and see how we film it.
Speaker 1: See all the scenes, see the prison scene, and see
Speaker 1: this all these different things. It was a it was
Speaker 1: an abandoned uh kind of car manufacturing of some sort.
Speaker 1: It was just like a bunch of like warehouses where
Speaker 1: they had it. I've never seen a show, you know,
Speaker 1: non fictional show uh being filmed. Cameras there all the
Speaker 1: room and never wrapped up in right. That was exactly
Speaker 1: so this. So so this is two thousand spring into fall,
Speaker 1: and so we were there. We flew down to l
Speaker 1: A and we we had to bring our cap and
Speaker 1: gown if we had it, or they would put on us.
Speaker 1: They had a whole thing of cap and gowns for
Speaker 1: this graduation uh thing event that we were sort of
Speaker 1: part of. So we they had all these people that
Speaker 1: recruited for the day to be just sitting there and
Speaker 1: then uh. And you know, as long as you don't
Speaker 1: utter a word. So if we uttered one word in
Speaker 1: the movie, we would have to be unionized. But if
Speaker 1: we were just silent, then they could film us and
Speaker 1: we could be there. So they had another scene that
Speaker 1: they filmed in the hallways of the sort of standard
Speaker 1: university offices, and we got white boards to decorate, so
Speaker 1: I have certain corner in the white board behind middle
Speaker 1: diach when he was kind of you know, reflecting at
Speaker 1: the very final scene and we saw it being filmed
Speaker 1: and then we hung out with him. So it was
Speaker 1: kind of my reward. I'm like, you know, when I
Speaker 1: teach banking, I don't get to have so much fun.
Speaker 1: But when I thought about the Internet, I actually got
Speaker 1: to see. And my point there was only here in
Speaker 1: this whole discussion is I have come to appreciate how
Speaker 1: important media is, all forms of media. So even a movie,
Speaker 1: it shapes how people think. There was a scene there
Speaker 1: where the guys in front of Congress and then he
Speaker 1: rips the mic and you know, this whole thing, and
Speaker 1: that was modeled after Marcus Zuckerberg going through Congress. It
Speaker 1: kind of looks like him. So much fun. So let
Speaker 1: me jump to our speed round our favorite questions, which
Speaker 1: will blow through pretty quickly, starting with aside from Silicon Valley,
Speaker 1: what have you been streaming? Tell us what's kept you entertained?
Speaker 1: So I'm a little bit of a latecomer to finish it.
Speaker 1: But I've loved the Succession, which I finally finished very recently,
Speaker 1: and now I'm intent on finishing boorgan because I had
Speaker 1: borgan Ism about Danish. It's like the It's like the
Speaker 1: West Wing for Denmark, and I had this female for
Speaker 1: a minister, etcetera. Anyway, it's kind of a few seasons
Speaker 1: of a Netflix serious borgan and um so it's very good.
Speaker 1: I mean, I know there's you know, We Crush and
Speaker 1: other things, so but that's that's enough for for I
Speaker 1: just started We Crashed. It's actually very good. I heard
Speaker 1: that my coach tells me, and I love that. I
Speaker 1: read read so much about we work. I'm kind of
Speaker 1: sick of it, especially being Israeli and the Washing h
Speaker 1: very true. And there was podcast Yeah yeah, tell us
Speaker 1: about your mentors who helped to shape your career. So
Speaker 1: this advisor, Steve Rossity Yale, was very important to getting
Speaker 1: me interested in finance and in some respect in this
Speaker 1: sort of cosmic view of where I am today and
Speaker 1: my transformation of my where he was there. Unfortunately he
Speaker 1: died a few years ago, but he was there to
Speaker 1: sign my editions and encourage me all the way to
Speaker 1: to take the village. Um was there to kind of
Speaker 1: tell me I'm not going mad when I hear all
Speaker 1: this nonsense, and to and to approve of what I
Speaker 1: was doing, even though in some of my criticism of academics,
Speaker 1: I criticized some of my academic brothers who are also
Speaker 1: his students. But he sided with me. So that was
Speaker 1: very meaningful to me. Uh yeah, so he was my
Speaker 1: main advisor. Got me because right now, for knowing all
Speaker 1: the finances I know, I'm able to call the book.
Speaker 1: That's great. Um, tell us about some of your favorite books.
Speaker 1: What are you reading now and what are your all
Speaker 1: time favorites? Oh my god, so my all time favorite
Speaker 1: is a Little Prince. That's just the book. Uh. I'm
Speaker 1: reading a lot and now I'm listening, so that makes
Speaker 1: it faster because I don't read as fast as I
Speaker 1: would like to, but I have read lots of books.
Speaker 1: Right at the moment, I sort of finished direct and
Speaker 1: I was like the World for sale and freezing order
Speaker 1: to discuss flying Blind on Boeing. You know, Sickening is
Speaker 1: a book on the healthcare sector and how we know
Speaker 1: all our health courses. Very scary Porson and banking into
Speaker 1: some extent American clyptocracy. Right now, I'm reading a book
Speaker 1: very close to home called Who Killed Jane James Stanford,
Speaker 1: which is like whoa. I mean, all the stories we
Speaker 1: tell that Stanford and that history of Stanford going back
Speaker 1: to the nineteenth century and Gilded Age and the Stanford's whoa.
Speaker 1: So that's a history professor at Stanford who wrote a
Speaker 1: book Who Killed James Stanford. James Stanford was very important
Speaker 1: to the creation of Stanford. But right now, of course
Speaker 1: Stanford is way off from what she wanted. And yesterday
Speaker 1: I got the bonking from Mary Child. So that's my
Speaker 1: next Um. That's a bunch. Yeah, that's a that's a
Speaker 1: really good list. What sort of advice would you give
Speaker 1: to a recent college grad who was interested in a
Speaker 1: career in either investing, finance, academia, or technology. My first advice,
Speaker 1: because I've learned it kind of the hard way, is
Speaker 1: watch out for the assumptions are making and other people
Speaker 1: are making. So when people say things, there's often implicit
Speaker 1: assumptions that are making, and there's some bad assumptions can
Speaker 1: take you down. Even LTCM with all the brilliant pictures
Speaker 1: went down on bad assumptions, So bad assumptions are very dangerous.
Speaker 1: And then of course you know you have to kind
Speaker 1: of be careful not to uh, to maintain the big picture,
Speaker 1: to to be aware of losing yourself in in in
Speaker 1: certain certain activities. So so maintained a big picture and
Speaker 1: check for assumption is kind of my main advice. Good
Speaker 1: good advice. And our final question, what do you know
Speaker 1: about the world of banking and finance and regulations today
Speaker 1: that you wish you knew thirty or so years ago
Speaker 1: when you were first getting started. I had no idea
Speaker 1: but how much politics, laws, and law enforcement matter to
Speaker 1: economic outcomes. I just lived in the little bubble of
Speaker 1: economics where we make assumptions. And when I sort of
Speaker 1: realized what was going on in banking, I started questioning
Speaker 1: all the assumptions that I made before. And it's been
Speaker 1: my sort of journey ever since. It's like, huh, that's
Speaker 1: sort of interesting, is this true? And you know what's
Speaker 1: actually going on? So I've become a sort of real
Speaker 1: explorer of of what happens when I don't make the
Speaker 1: assumptions that I may go When I question people's assumptions,
Speaker 1: did you spend any time researching the Canadian banking regulation,
Speaker 1: because when I was writing Bailout Nation, that was my
Speaker 1: compare and contrast. It's so different from the U S system.
Speaker 1: It is, and I know a little bit about it,
Speaker 1: but you know, it is a very different system because
Speaker 1: the US is very fragmented system and the Canadian system
Speaker 1: is basically a system of five banks or something like that,
Speaker 1: all pretty tightly regulated but also very profitable. So essentially,
Speaker 1: the way, one of the ways I formulate the difference
Speaker 1: is that we we subsidize debt for banking, and they
Speaker 1: essentially subsidize equity by giving them a big charter value
Speaker 1: because they're because they're so you know, entrenched, their oligopoli
Speaker 1: quite quite fascinating. We have been speaking with professor are
Speaker 1: Not at Mahdi. Thank you, professor for being so generous
Speaker 1: with your time. If you enjoy this podcast, well be
Speaker 1: sure and check out any of our previous four hundred
Speaker 1: or so. You can find those at Spotify, iTunes, wherever
Speaker 1: you get your favorite podcast from. We love your comments,
Speaker 1: feedback and suggestions right to us at m IB podcast
Speaker 1: at Bloomberg dot net. Sign up from my Daily Reads
Speaker 1: at rid Holts dot com. Uh follow me on Twitter
Speaker 1: at rit Halts. I would be remiss if I did
Speaker 1: not thank the crack team that helps us put these
Speaker 1: conversations together each week. My audio engineer is Justin Milliner.
Speaker 1: Paris Wald is my producer. Sean Russo is my head
Speaker 1: of research. Attica val Bron is my project manager. I'm
Speaker 1: Barry rid Holts. You've been listening to Masters and Business
Speaker 1: on Bloomberg Radio.