WEBVTT - Anat Admati on Banking Regulations and Techlash 0:00:02.000 --> 0:00:07.160 This is Mesters in Business with Very Results on Bloomberg Radio. 0:00:09.720 --> 0:00:13.000 This week on the podcast, I have yet another extra 0:00:13.039 --> 0:00:17.520 special guest. Professor at Mahdi teaches at the Stanford Graduate 0:00:17.560 --> 0:00:21.239 School of Business. She is an expert in so many 0:00:21.280 --> 0:00:25.720 fascinating areas that you wouldn't think are related, but they 0:00:25.760 --> 0:00:29.840 really are. Why has technology developed the way it has 0:00:30.320 --> 0:00:34.519 and more or less exempt from from a lot of 0:00:34.560 --> 0:00:39.800 government regulations or protected by regulations. Turns out their business 0:00:39.840 --> 0:00:42.120 model is a little similar to the way the banking 0:00:42.159 --> 0:00:45.800 industry has managed to capture a lot of regulators and 0:00:46.400 --> 0:00:51.479 UH continue to operate fairly freely without the sort of 0:00:52.800 --> 0:00:57.920 regulation and capital requirements and equity requirements UH that would 0:00:57.920 --> 0:01:03.800 make banking safer. Really fascinating conversation about everything from misinformation 0:01:04.319 --> 0:01:10.520 to technology, to banking and financial fragility. I found the 0:01:10.520 --> 0:01:13.119 discussion to be quite fascinating, and I think you will 0:01:13.160 --> 0:01:17.679 also with no further ado. My interview with Professor are 0:01:17.680 --> 0:01:21.320 not at Mahdi of the Stanford Graduate School of Business. 0:01:21.640 --> 0:01:24.319 So let's talk a little bit about your background. You 0:01:24.360 --> 0:01:26.679 have a lot of degrees. You you have a bachelor's 0:01:26.720 --> 0:01:30.200 from Hebrew University, then a master's in arts, a master's 0:01:30.240 --> 0:01:34.200 in philosophy and a PhD from Yale University. Tell us 0:01:34.240 --> 0:01:37.520 a little bit about your academic journey. So my journey 0:01:37.520 --> 0:01:41.440 starts where I took a lot of math. I was 0:01:41.560 --> 0:01:44.600 good in math, and I loved math. That was very pretty, 0:01:44.840 --> 0:01:47.080 it was all. But I decided I probably won't be 0:01:47.560 --> 0:01:49.920 good enough to be a mathematician. So it was kind 0:01:49.920 --> 0:01:52.560 of in my romantic mind when I was, you know, 0:01:52.720 --> 0:01:55.680 in my early twenties, I was gonna take but not 0:01:55.760 --> 0:01:57.920 to give back to math, you know, that kind of thing. 0:01:58.200 --> 0:02:00.600 And and so I had to find something. And at 0:02:00.640 --> 0:02:02.320 first it was going to be sort of applied math, 0:02:02.360 --> 0:02:05.080 like operations research, which was the worst kind of math, 0:02:05.240 --> 0:02:09.720 that optimization, and it's kind of boring. And but I 0:02:09.760 --> 0:02:12.200 got an opportunity to go to Yale, and these degrees 0:02:12.200 --> 0:02:14.440 were just kind of simultaneously gotten. I mean, I was 0:02:14.440 --> 0:02:16.520 out of Yale in three and a half years with 0:02:16.560 --> 0:02:20.480 all these degrees um and I just an opportunity landed 0:02:20.520 --> 0:02:23.919 on my lap to go to uh this program in 0:02:23.960 --> 0:02:26.400 operations research at Yale. And I was promised that Yale 0:02:26.520 --> 0:02:29.840 is very interdisciplinary and once you pass your qualifying exams, 0:02:29.840 --> 0:02:32.519 you can do whatever you want. And had never taken 0:02:32.560 --> 0:02:35.760 an economics course before that. But when I got to Yale, 0:02:36.160 --> 0:02:39.200 my advisor said, whyn't you take microeconomics and take you know, 0:02:39.280 --> 0:02:41.840 mathematical economics, and take some economics. And by the end 0:02:41.840 --> 0:02:43.799 of the first year I kind of knew a new 0:02:43.919 --> 0:02:47.360 language like and it was all much more interesting because 0:02:47.360 --> 0:02:52.000 there was interactions between people and equilibrium and you know, 0:02:52.639 --> 0:02:55.360 all of that. And by second year I took the 0:02:55.440 --> 0:02:58.920 course that was absolutely a mustake in the crowd that 0:02:58.960 --> 0:03:02.680 I was hanging with, which was Steve Ross financial economics. 0:03:03.240 --> 0:03:06.120 Yale didn't even have a program in finance. The School 0:03:06.120 --> 0:03:08.440 of Management was just created. This was back in the 0:03:08.520 --> 0:03:12.600 late seventies early eighties, and he was just teaching people 0:03:12.639 --> 0:03:14.560 all they needed to know about finance, which was just 0:03:14.680 --> 0:03:18.280 coming up. It had become professionalized, when before it was 0:03:18.360 --> 0:03:21.720 just a bunch of disparate theories. So you find your 0:03:21.720 --> 0:03:25.360 calling in in economics, but you really take some of 0:03:25.400 --> 0:03:31.799 your background and dig pretty deep into financial regulations and technology. 0:03:31.800 --> 0:03:33.760 We did the tech background come from, I'll tell you 0:03:34.000 --> 0:03:37.440 so that all I was totally in the sort of 0:03:37.480 --> 0:03:41.600 financial bubble first, kind of you know market microstructure, you know, 0:03:41.640 --> 0:03:47.560 trading mechanisms, this is the coint seven little black Monday, 0:03:47.600 --> 0:03:50.320 you know, small black Monday, not just that little one 0:03:50.440 --> 0:03:56.400 day glitch decline in one day something. Yeah. Yeah. So 0:03:56.440 --> 0:04:00.680 it was programmed trading and insurance insurance and all its replications, 0:04:00.680 --> 0:04:04.360 strategies and all this stuff. Um, and so that was 0:04:04.440 --> 0:04:06.880 kind of the little crisis of the day, right in 0:04:06.920 --> 0:04:10.000 the little details. And that's before high frequency trading and 0:04:10.040 --> 0:04:12.080 all the rest of it. But then I worked on 0:04:12.120 --> 0:04:15.360 trading mechanisms and information get into prices, and informed and 0:04:15.400 --> 0:04:19.320 uninformed trading, and markets for information and newsletters and managed 0:04:19.400 --> 0:04:23.600 money portfolio theory. And then and then I got more 0:04:23.600 --> 0:04:26.479 interested in in kind of governance, but governance in the 0:04:26.600 --> 0:04:30.720 narrow sense corporate governance and contract which was all about 0:04:30.720 --> 0:04:33.760 the problems between shareholders and managers. So that was that, 0:04:33.880 --> 0:04:36.279 and then comes the financial crisis. So until the financial 0:04:36.320 --> 0:04:38.640 crisis of two thousand seventy nine or however you go, 0:04:39.240 --> 0:04:43.839 actually you know time it, I was in this financial bubble. 0:04:43.839 --> 0:04:48.880 I was teaching corporate finance. I did research, theoretical research, 0:04:49.000 --> 0:04:53.120 so I built little mathematical models and analyzed them and uh, 0:04:53.120 --> 0:04:55.440 and I lived in that little little bubble thinking all 0:04:55.560 --> 0:04:59.839 is well, Uh, until this crisis was like what just happened? 0:05:00.160 --> 0:05:03.599 And so I I never was interested in banking particularly. 0:05:03.680 --> 0:05:07.080 We have a lot of silos, you know, even within economics, 0:05:07.200 --> 0:05:09.600 lest and alone in all the social sciences and law 0:05:09.640 --> 0:05:11.520 and all of that. So we're eaching our little silo 0:05:11.560 --> 0:05:14.240 with our little journals all this stuff. So I just 0:05:14.279 --> 0:05:16.880 got curious. Wait a minute. I teach corporate finance. The 0:05:16.920 --> 0:05:19.240 bank is also a corporation. Now why does it have 0:05:19.400 --> 0:05:22.760 like almost no equity funding? What's going on there? I 0:05:22.880 --> 0:05:27.640 teach people capital structure theory, and how are banks so different? 0:05:27.880 --> 0:05:31.360 Why are they so different? They hate equity with this passion, 0:05:32.120 --> 0:05:35.880 and so the more doug the weirder it got. It 0:05:36.040 --> 0:05:38.760 really like a fell in a rabbit hole. It totally 0:05:38.839 --> 0:05:42.080 was a rabbit hole, like curious or and curious, or 0:05:42.160 --> 0:05:44.200 you know that kind of thing. Well, well, tell me 0:05:44.240 --> 0:05:50.120 if I'm oversimplifying banking, because what we've seen over the 0:05:50.160 --> 0:05:55.880 past half century before the financial crisis was simply banks 0:05:55.880 --> 0:05:59.080 figured out that the less capital they keep on the books, 0:05:59.800 --> 0:06:04.680 the better their profit margins appear, even though they're essentially 0:06:04.800 --> 0:06:08.880 just assuming more risk. And the better the profit margins are, 0:06:09.000 --> 0:06:12.359 the richer everybody got. And so we've seen a half 0:06:12.520 --> 0:06:19.599 century of first deregulation, then fairly radical deregulation, all of 0:06:19.640 --> 0:06:24.520 which worked to the bank's advantages until suddenly it no 0:06:24.600 --> 0:06:27.400 longer dead. So in the book we go through a 0:06:27.440 --> 0:06:31.080 lot of the history of banking, including the basic banking model, 0:06:31.279 --> 0:06:33.720 which is sort of it's a wonderful life kind of 0:06:33.760 --> 0:06:37.080 three six three boring banking model, and that too had 0:06:37.080 --> 0:06:39.320 a crisis in savings and loan and in many other 0:06:39.360 --> 0:06:42.760 banking crisis. So it's not like banking. Banking is inherently 0:06:43.120 --> 0:06:47.720 risking because inherently the bank's taking risk with uh with 0:06:48.040 --> 0:06:52.680 depositors money, and the depositors are unable to really behave 0:06:52.800 --> 0:06:55.320 like normal creditor. And that's really sort of the beginning 0:06:55.360 --> 0:06:57.720 of the sort of original sin in banking, that they're 0:06:57.800 --> 0:07:01.280 always over leveled all the way. They are never efficient 0:07:01.440 --> 0:07:04.520 in in providing any of the services on both sides 0:07:04.520 --> 0:07:07.120 of the balance sheet, because they always have the temptation 0:07:07.279 --> 0:07:10.000 and the ability to take just a little bit more 0:07:10.200 --> 0:07:12.880 risk on both sides of the balances. The nature of 0:07:13.160 --> 0:07:16.680 fractional reserve landing well. But but but it's their incentives. 0:07:16.680 --> 0:07:18.840 So the key to understand it is it's not like 0:07:19.000 --> 0:07:22.360 essential or efficient. It's just that that's how they want it. 0:07:22.800 --> 0:07:24.840 So so the thing is that banking is sort of 0:07:24.880 --> 0:07:28.360 inherently fragile because banking is inherently in efficient that way 0:07:28.720 --> 0:07:34.239 or forever poorly regulator, poorly controlled by their investors, including 0:07:34.280 --> 0:07:38.040 the depositors. So to that you add expansion in the 0:07:38.080 --> 0:07:42.040 business model that allows taking more risk, hiding more risk 0:07:42.120 --> 0:07:45.320 with derivatives, with universal banking, all of that, and the 0:07:45.920 --> 0:07:51.080 increase in safety net implicit and explicit, with the positive insurance. 0:07:51.200 --> 0:07:56.480 With all of that, they became able and obviously interested 0:07:56.880 --> 0:07:59.560 in living more and more and more in debt. Now, 0:07:59.760 --> 0:08:03.920 in my research, even after the first after the book, 0:08:04.080 --> 0:08:07.160 we were already beginning to do this research, I understood 0:08:07.200 --> 0:08:10.200 a lot better. Stuff that we teach in basic courses 0:08:10.520 --> 0:08:14.640 is very static theory of how companies fund. And it's 0:08:14.680 --> 0:08:18.240 like one round of funding debt and equity and then 0:08:18.280 --> 0:08:25.160 the world is over. But for real living, you know, breathing. Uh. Companies, 0:08:25.600 --> 0:08:29.320 any company, the funding decision as well as investment decisions 0:08:29.360 --> 0:08:33.240 are always made by shareholders or people managers on behalf 0:08:33.280 --> 0:08:37.120 of shareholders, maybe in light of previous commitment. So in 0:08:37.160 --> 0:08:41.120 the dynamics of it, once you took debt, your preferences 0:08:41.200 --> 0:08:44.000 changed completely. You're no longer maximizing in total value of 0:08:44.040 --> 0:08:46.520 the firm. You're maximizing the value of equity in the firm. 0:08:46.880 --> 0:08:50.559 And from that perspective, equity seems expensive to all to 0:08:50.840 --> 0:08:56.000 all heavily indebted corporations. Banks in particular because for other corporations, 0:08:56.040 --> 0:08:59.160 if they take on more and more debt, the creditors 0:08:59.200 --> 0:09:02.720 will start pushing, the creditors will start putting covenants, the 0:09:02.760 --> 0:09:05.400 creditors will will will jack up the rates because the 0:09:05.440 --> 0:09:08.440 creditors will worry about all the distorted incentives of the 0:09:08.480 --> 0:09:11.680 border lender that happen gamble the money in Las Vegas, 0:09:11.800 --> 0:09:14.480 or under investing things because there's not enough upside all 0:09:14.520 --> 0:09:18.520 of those things that characterize sort of the frictions that 0:09:19.280 --> 0:09:23.240 characterized heavy indebtedness. So that makes the finance sector very 0:09:23.280 --> 0:09:25.960 different than the rest of the well, the banking, especially 0:09:26.000 --> 0:09:32.120 because the creditors in banking are particularly passive and and 0:09:32.240 --> 0:09:35.439 so therefore the the usual market forces that push against 0:09:35.559 --> 0:09:39.080 high leverage in other companies that just naturally, with no 0:09:39.200 --> 0:09:44.560 regulation would limit. There's no corporation that lives it's healthy 0:09:44.679 --> 0:09:47.160 unless they're on their way to bankruptcy that lives with 0:09:47.200 --> 0:09:49.720 single digit equity numbers. Of course, it depends how you 0:09:49.760 --> 0:09:52.000 measure it, and there's book market all kinds of other 0:09:52.040 --> 0:09:55.640 things that we can discuss. But the bank's basically got 0:09:55.800 --> 0:09:58.960 used to and got stuck, and it's very addictive to 0:09:59.080 --> 0:10:02.560 be there, especial really at this extremely low equity level. 0:10:02.840 --> 0:10:06.559 From that vantage, with the overhang of debt being so 0:10:06.559 --> 0:10:11.080 so heavy that you're effectively insolvent all the time, but 0:10:11.160 --> 0:10:15.160 you just not recognize as such. Then you hate equity, 0:10:15.240 --> 0:10:17.360 you want to take money out. So so let's stay 0:10:17.360 --> 0:10:20.160 with that point, because that's pretty fascinating. Uh. It was 0:10:20.200 --> 0:10:24.720 pretty clear to observers that the reason Lehman Brothers didn't 0:10:24.800 --> 0:10:29.040 get bailed out is they were not just a little insolvent, 0:10:29.120 --> 0:10:33.000 but deeply insolving. The Rest of the banks that were 0:10:33.000 --> 0:10:37.520 out there that survived seemed to recapitalize. They sold equity, 0:10:37.559 --> 0:10:40.160 They brought more money in Goldman Sachs, took a big 0:10:40.240 --> 0:10:44.160 chunk of money from more in Buffett, uh JP, Morgan Chase, 0:10:44.200 --> 0:10:47.880 Sport Washington Mutual. They did more capital reserves and they 0:10:47.960 --> 0:10:50.440 ended up bear Stearns as well. When you say capital 0:10:50.520 --> 0:10:53.280 reserve again, I mean people get very confused about what 0:10:53.360 --> 0:10:56.840 that is that you mean more Actually, no, no, no, 0:10:56.960 --> 0:11:00.720 cash not cash is not equity. Capital is not cash. 0:11:00.720 --> 0:11:02.200 It's on the other side of the balance sheet. Capital 0:11:02.280 --> 0:11:04.720 is about how you fund It's not cash reserve. Okay, 0:11:04.720 --> 0:11:08.960 so it's it's it's really important. It's let's delve into that, 0:11:09.000 --> 0:11:11.440 because it's very, very confusing. To this day you can 0:11:11.480 --> 0:11:14.480 find people saying, set aside cash, that's not what capital 0:11:14.559 --> 0:11:18.120 is about. Capitalist about Obviously there is the measurements of 0:11:18.160 --> 0:11:20.360 it at a given point of time. But when you 0:11:20.480 --> 0:11:22.640 when you take a snapshot and you say talk about 0:11:22.640 --> 0:11:25.160 capital ratios or risk graded capital ratios and all of that, 0:11:25.280 --> 0:11:27.520 they are entirely on the funding side. So you've got 0:11:27.520 --> 0:11:30.840 your assets, whatever they are, they have some risk and whatever. 0:11:31.120 --> 0:11:35.000 However you put numbers on the on that accounting or 0:11:35.120 --> 0:11:36.920 and what's allowed and not allowed, and all of that 0:11:37.080 --> 0:11:39.960 is like a big can of worms. Actually, but you know, 0:11:40.000 --> 0:11:42.880 a netting of derivatives and all of that. But then 0:11:42.880 --> 0:11:45.440 the question is how do you fund those assets? And 0:11:45.480 --> 0:11:47.679 so the question is how much gets funded by making 0:11:47.800 --> 0:11:52.360 promises to investors, by debt any kind collateral, non collaoral 0:11:52.440 --> 0:11:56.559 no deposits are very unique because deposits are unsecured debt 0:11:56.679 --> 0:12:00.679 to the bank, but to the depositors. To the depositors, 0:12:00.679 --> 0:12:03.880 they don't have collateral. Okay, so it's the fda SEE 0:12:03.920 --> 0:12:07.040 that's holding the bag there. Now does the FDA SEE 0:12:07.040 --> 0:12:09.199 even know how much rache they're bearing when all the 0:12:09.240 --> 0:12:12.160 assets are so encumbered that they're all pleased collateral? Do they? 0:12:12.200 --> 0:12:16.120 Because well, they don'tsume they have a very vivid recollection. 0:12:16.559 --> 0:12:19.360 During the financial crisis of the f d I C 0:12:19.559 --> 0:12:23.679 talking about their reserves dropping from nine d to sixty 0:12:23.920 --> 0:12:26.320 I think it dropped as low as forty billion dollars 0:12:26.760 --> 0:12:30.000 and hey, if we get a bunch more disasters, well 0:12:30.080 --> 0:12:32.360 we're not gonna be able to cover the depositors exactly 0:12:32.400 --> 0:12:34.959 because they stopped charging. Also because there were no defaults 0:12:35.000 --> 0:12:38.920 before the crisis, they stopped charging deposit insurance. And all 0:12:38.960 --> 0:12:40.640 of a sudden there was a lot of bank failures, 0:12:40.720 --> 0:12:43.400 not the big ones except for Lehman. But Lehman wasn't 0:12:43.600 --> 0:12:47.360 an FDS in short bank and so but when other banks, 0:12:47.400 --> 0:12:50.680 small banks started failing, what do they What can the 0:12:50.880 --> 0:12:53.120 fda C do in general, Well, they can go back 0:12:53.120 --> 0:12:56.080 to the large banks and just assess them more because 0:12:56.080 --> 0:12:58.360 they have no way and I can assert this to you, 0:12:58.880 --> 0:13:02.440 no good way to risk adjust their their deposit insurance fees. 0:13:02.440 --> 0:13:05.680 They're supposed to be self financing the fda C through fees, 0:13:06.200 --> 0:13:10.840 but you know, they really are taking a huge leap 0:13:10.960 --> 0:13:14.320 for the posits for ensuring what by now must be like, 0:13:14.360 --> 0:13:17.880 I don't know, thirteen trillion dollars and more will come 0:13:18.000 --> 0:13:20.800 if there were tremors because money moves back in deposits 0:13:20.800 --> 0:13:22.920 for money market funds and all of that. So they 0:13:24.200 --> 0:13:27.680 ensure exactly. And so the f d a C, which 0:13:27.720 --> 0:13:32.600 is a cease for corporation, is totally backed by the government. However, 0:13:32.679 --> 0:13:37.119 in practice they can They have a line to Treasury 0:13:37.240 --> 0:13:40.679 for I think five billion or something, but if should 0:13:40.760 --> 0:13:44.280 something actually happen, so we're all on trust with the system. 0:13:44.360 --> 0:13:47.680 They tell us don't run, don't rush, your money is safe, 0:13:47.880 --> 0:13:51.800 and I that no bank runs, so we solve the problem. 0:13:51.960 --> 0:13:54.880 When you say that they stopped charging fees, I've been 0:13:55.000 --> 0:13:58.000 under the impression that the banks that have that nice 0:13:58.000 --> 0:14:03.199 little logo, the emblem FDURED aren't those banks paying some 0:14:03.240 --> 0:14:08.119 small Usually they do, And basically I once asked a 0:14:08.240 --> 0:14:11.920 forty year veteran of banking in all the biggest banks, 0:14:12.000 --> 0:14:15.560 you know, through the sixties, seventies, eighties, ninety who was 0:14:15.880 --> 0:14:19.160 basically came out of retirement to be in a private 0:14:19.360 --> 0:14:22.120 equity firm that was buying distressed banks from the f 0:14:22.240 --> 0:14:24.280 d i C. And he said to me, oh or not, 0:14:24.360 --> 0:14:26.920 you're looking at the big banks. Let me tell you 0:14:26.960 --> 0:14:28.600 what goes on in the small banks. And then I 0:14:28.640 --> 0:14:31.360 asked him the following simple question, because there are thousands 0:14:31.360 --> 0:14:34.080 of small banks in this country. I said, what's the 0:14:34.120 --> 0:14:38.480 business model of a small bank? And the answer the 0:14:38.520 --> 0:14:41.480 answer was three words. The business model in other words, 0:14:41.480 --> 0:14:44.920 the positive Knight present value of the bank, he said, subsidized, 0:14:44.960 --> 0:14:48.400 the positive insurance subsidized. That's it. In other ways, their 0:14:48.560 --> 0:14:50.840 entire funding. So what they do on the asset side, 0:14:51.080 --> 0:14:53.800 anybody can do zero and pivot, commercial realist or whatever. 0:14:54.720 --> 0:14:58.080 And how they fund is where they where they are privileged. Now, 0:14:58.160 --> 0:15:02.280 what happens my model of banking, you know, safety basic 0:15:02.320 --> 0:15:06.280 safety nets, is that the big banks may well be 0:15:06.800 --> 0:15:10.960 overpaying for the past insurance part to the f d 0:15:11.080 --> 0:15:13.080 C and the f d i C, and they pass 0:15:13.160 --> 0:15:15.240 on some subsidies down to the small bank, so they 0:15:15.320 --> 0:15:20.080 keep happy enough and because the big banks have implicit 0:15:20.080 --> 0:15:25.200 guarantees that are priceless because they have access to the FED, 0:15:25.600 --> 0:15:28.480 and that is worth a ton. In the financial crisis, 0:15:28.520 --> 0:15:33.400 Let's remember Goldman, Sachs and Morgan Stanley became bank holding companies. 0:15:34.440 --> 0:15:38.560 They were farms, they were investment banks are delated by 0:15:38.560 --> 0:15:44.400 the SEC, which which also Lehman was. And at that 0:15:44.440 --> 0:15:48.200 time the commercial banks, so City Bank within City Group, 0:15:48.640 --> 0:15:51.280 were regulated, among others, by the f d i C 0:15:51.520 --> 0:15:54.440 and the fda C had Sheila Beart, and Sheila Beart 0:15:54.480 --> 0:15:59.280 refused to implement this buzzle too, that had fancy schmancy 0:15:59.640 --> 0:16:06.080 risk weights, manipulable ways, model based ways to uh to 0:16:06.080 --> 0:16:07.960 to allow the banks to tell us how risky they 0:16:08.040 --> 0:16:11.480 are and therefore determined their equity requirements, in other words, 0:16:11.480 --> 0:16:14.920 mislead regulators. And there is the research that showed that 0:16:15.040 --> 0:16:18.600 banks in Germany that were allowed to use this advanced 0:16:18.600 --> 0:16:22.920 approach to this, you know, fancy scientific approach to regulation, 0:16:23.320 --> 0:16:27.040 were you know, misrepresenting their own risk and making more 0:16:27.160 --> 0:16:31.600 loans with less risk weights, in other words, inappropriately low 0:16:31.800 --> 0:16:35.680 risk weights. And then and then yes, and of course 0:16:35.800 --> 0:16:39.640 the epitome of of the failure of this regulation is 0:16:39.720 --> 0:16:42.720 assets that had zero risk weights. But we're risky like 0:16:42.760 --> 0:16:46.760 triple A rated security, like Greek government lending to Greek 0:16:46.800 --> 0:16:50.680 government in Europe. I mean the banks in Europe basically 0:16:51.040 --> 0:16:55.600 fed this, you know, subprime lending to to to the 0:16:55.640 --> 0:16:59.360 Greek government. Why should Greece pay more in interest rates 0:16:59.360 --> 0:17:02.600 than another country like Germany. That doesn't make any Well, 0:17:02.640 --> 0:17:06.120 they paid a teeny sliver, but the French banks just 0:17:06.280 --> 0:17:09.639 went and lent them a ton. And when they couldn't pay, 0:17:09.800 --> 0:17:13.000 the European Union and all these other countries and the 0:17:13.040 --> 0:17:17.120 regulators that who allowed these banks to make this reckless loans, 0:17:17.240 --> 0:17:19.919 who had just bail out these banks from investing in 0:17:19.960 --> 0:17:24.359 our real estate bubble, uh couldn't admit to their citizens 0:17:24.400 --> 0:17:27.320 that they would bail out their banks again if Greece default, 0:17:27.480 --> 0:17:30.400 so that they blame all the things on the lazy Greeks, 0:17:30.680 --> 0:17:32.840 and they kept bailing out Greece so Greece could pay 0:17:32.840 --> 0:17:35.159 the banks until the banks got out. So that was 0:17:35.359 --> 0:17:38.080 the zero risk rate for sovereign landing in Europe. And 0:17:38.080 --> 0:17:42.040 it's just one example of how awful awful the regulation 0:17:42.200 --> 0:17:46.080 was pre crisis. And then you tell me that, oh, 0:17:46.119 --> 0:17:48.679 they were capitalized and did all of that. I'm not 0:17:48.760 --> 0:17:51.800 so impressed. Yes, you know, first of all, Bank of 0:17:51.840 --> 0:17:55.520 America and the City were zombies coming out of the crisis, 0:17:55.560 --> 0:18:01.440 despite multiple bailouts, both of them by almor and zombie banks. 0:18:01.560 --> 0:18:04.560 I mean, I believe that they were the examples where 0:18:04.560 --> 0:18:07.520 if you wanted to have this systemic resolution through the 0:18:07.560 --> 0:18:09.480 f d i C, we could have tried it in 0:18:09.520 --> 0:18:12.880 a you know, not in a crisis, into a package. 0:18:13.080 --> 0:18:16.480 Show me that it works. Show me that it works. Uh, 0:18:16.520 --> 0:18:19.280 you know, outside the crisis where everybody is failing. You know, 0:18:19.320 --> 0:18:22.120 I was on this FDA S Systemic Resolution Advisory Committee, 0:18:22.160 --> 0:18:24.720 was part of Dodd Frank was saying, oh, if Lehman 0:18:24.840 --> 0:18:28.200 Brothers was sent to the f d i C for resolution, 0:18:28.240 --> 0:18:30.800 because FDC knows so well how to do the small 0:18:30.800 --> 0:18:33.320 bank resolution. Just come over the weekend, take over a 0:18:33.320 --> 0:18:35.840 small bank, and the people don't even know because the 0:18:37.160 --> 0:18:41.439 exactly one oh five where they were moving all of 0:18:41.480 --> 0:18:45.600 this risk thousands of city areas, right, just just hundreds 0:18:45.600 --> 0:18:49.119 of billions of dollars and misrepresents. Do you know to 0:18:49.200 --> 0:18:51.119 the regulators and to the do you know that the 0:18:51.200 --> 0:18:53.359 Leman bankruptcy is not even over yet every year I 0:18:53.400 --> 0:18:56.280 go back and check still going on. So this is 0:18:56.320 --> 0:18:59.800 how unresolvable these now. In the first affair, it was 0:19:00.040 --> 0:19:03.440 only fifteen years ago, so it was a small but 0:19:03.560 --> 0:19:05.159 it was a small one by compared. I mean, this 0:19:05.200 --> 0:19:07.520 was the biggest bankruptcy at the time, but there were 0:19:07.560 --> 0:19:09.680 there were a fraction of JP Morgan, Chase, so City 0:19:09.760 --> 0:19:11.439 or all of these that they tell you now can 0:19:11.520 --> 0:19:14.159 fail with without and they have them do living with 0:19:14.280 --> 0:19:17.480 an all kind of stupid things. No way, no, because 0:19:17.560 --> 0:19:19.400 we don't. Even if they did, it would just be 0:19:19.600 --> 0:19:23.520 incredibly exactly So I'm not even blaming for bailing out. 0:19:23.640 --> 0:19:27.200 I am blaming for not for not doing basic prevention. 0:19:27.440 --> 0:19:31.120 So so that raises a really interesting point. You mentioned 0:19:31.160 --> 0:19:35.119 the French banks and the lazy Greeks. When you offer 0:19:35.200 --> 0:19:40.800 people free money or dramatically discounted money, we shouldn't blame 0:19:40.920 --> 0:19:43.560 the Greeks who took Hey, this is a great deal. 0:19:43.560 --> 0:19:45.840 We're gonna take this. You have to look at the 0:19:45.880 --> 0:19:48.199 banks that lent it to them and said, why are 0:19:48.200 --> 0:19:51.919 these banks being so irresponsible and reckless to make such 0:19:52.560 --> 0:19:57.440 cheap loans to under the eyes of their regulators, Under 0:19:57.480 --> 0:19:59.840 their eyes of their regulators so their regulators are not 0:20:00.080 --> 0:20:04.240 being called too. Why they allowed these loans to be 0:20:04.400 --> 0:20:06.639 made for two by two week to fail, you know, 0:20:06.680 --> 0:20:09.320 French and German banks. French banks had in two thousand 0:20:09.359 --> 0:20:15.000 and ten Greek band government yes, and and and and 0:20:15.080 --> 0:20:18.200 Greece only did a little bit of restructuring after the 0:20:18.240 --> 0:20:22.200 banks pretty much got out, left the TROYKA creditors to 0:20:22.359 --> 0:20:26.000 be a bailout fund of European nations E c B 0:20:26.160 --> 0:20:28.720 and I m F. Those were the TROYKA. Now why 0:20:28.720 --> 0:20:30.879 did I am F invest? Oh, because I am was 0:20:30.960 --> 0:20:34.399 led by some French because I AM should not have 0:20:34.560 --> 0:20:39.679 intervened in a European uh, into European thing. You know, 0:20:39.960 --> 0:20:42.920 Europe had enough to be able to resolve that. They 0:20:42.920 --> 0:20:45.560 just didn't want to. So I am F being led 0:20:45.680 --> 0:20:49.639 by you know French people, uh, you know, Dominique class 0:20:49.680 --> 0:20:52.479 Can and then by the later by Le Guard who 0:20:52.600 --> 0:20:55.480 had to deal with it later in two thousand and fifteen, 0:20:55.720 --> 0:20:57.480 when they were kind of the adult in the room 0:20:57.560 --> 0:21:00.240 if you want to go. So let's dwar the ranch 0:21:00.280 --> 0:21:03.800 banks and the Greek borrowers. There's a lot of people 0:21:04.119 --> 0:21:09.960 criticizing in the two thousands the U S homeowners who 0:21:10.000 --> 0:21:16.000 were taking helocks and refinancing and taking loans. And I 0:21:16.080 --> 0:21:20.480 looked at it as it's not the responsibility of the consumers. 0:21:20.560 --> 0:21:24.240 When when an institution like a large bank says we're 0:21:24.280 --> 0:21:26.200 gonna loan you money and we're not going to charge 0:21:26.200 --> 0:21:28.919 you interest for three years and then we'll reset, but 0:21:28.960 --> 0:21:33.560 don't worry about it, the individual consumer doesn't understand that, Wait, 0:21:33.720 --> 0:21:36.879 free cash, where do I sign? It's the banks and 0:21:36.960 --> 0:21:39.320 their regulations. It's the lady in the come in the 0:21:39.320 --> 0:21:43.439 big short saying she's got five houses. You know, you 0:21:43.480 --> 0:21:48.240 know exactly so so the question no, exactly so degree. 0:21:48.320 --> 0:21:51.120 That's why I used subprime to kind of as a parley. Yes, 0:21:51.320 --> 0:21:54.960 so reckless loans were made to people who couldn't pay, liars, 0:21:55.000 --> 0:21:58.000 loans who were clearly couldn't pay because of the commissions 0:21:58.000 --> 0:22:02.800 of the mortgage, and you know the whole structure, and 0:22:02.840 --> 0:22:06.960 you still had the FED assuring us everything was fine there, 0:22:07.200 --> 0:22:13.200 and you had a system incredibly levered and interconnected create 0:22:13.520 --> 0:22:16.200 through all these contagient mechanisms that we explained in the book, 0:22:17.119 --> 0:22:20.200 a perfect storm from a small decline in housing prices. 0:22:20.240 --> 0:22:23.680 I mean, this should the correction. The price correction itself 0:22:23.760 --> 0:22:27.840 was you know, much smaller than then. Then then the 0:22:28.040 --> 0:22:32.000 Internet bubble burst, you know, which wiped out a lot 0:22:32.160 --> 0:22:35.119 of you know, paper wealth. And to put some numbers 0:22:35.119 --> 0:22:39.440 on that, the Internet peak to trough was about decline 0:22:39.440 --> 0:22:44.200 in the Nasdack camp, whereas I think houses fell about 0:22:45.720 --> 0:22:48.320 some sectors something and then there was some of the faults. Okay, 0:22:48.320 --> 0:22:51.639 but I mean the amounts were trivial, really, And how 0:22:51.680 --> 0:22:54.800 do they create a global financial crisis from a little 0:22:54.800 --> 0:22:59.040 housing bubble bursts in the US? Securitization spread it through 0:22:59.320 --> 0:23:02.800 and and and so per duper triple securitization that our 0:23:02.880 --> 0:23:07.280 side beats basically on on on the mortgages and only 0:23:07.320 --> 0:23:10.320 the you know, the big short they made money. Quite amazing. 0:23:10.560 --> 0:23:13.520 One of your research pieces really caught my eye. I 0:23:13.560 --> 0:23:17.600 love this title, is the Internet Broken? Tell us about 0:23:17.880 --> 0:23:20.880 That was actually the title of course that I taught 0:23:21.400 --> 0:23:27.240 with one of the producers of h M HBO Silicon Valley. 0:23:27.560 --> 0:23:29.919 Well we'll talk more about later, which, yeah, which I 0:23:29.960 --> 0:23:32.720 got to be involved in in the last season only 0:23:33.400 --> 0:23:35.720 uh and and and and therefore it was you know, 0:23:35.720 --> 0:23:37.119 it was one of the one of the ones I 0:23:37.200 --> 0:23:39.879 streamed kind of had to bench stream sort of, but 0:23:40.000 --> 0:23:43.080 to see also the season I ended up at also 0:23:43.200 --> 0:23:47.399