WEBVTT - David Enrich Discusses the Libor Scandal 0:00:02.279 --> 0:00:06.880 This is Masters in Business with Barry Ridholts on Bloomberg Radio. 0:00:09.720 --> 0:00:12.160 This week on the podcast, I have a special guest. 0:00:12.320 --> 0:00:14.160 His name is David en Rich, and he is a 0:00:14.200 --> 0:00:17.959 reporter for The New York Times. But more importantly, he 0:00:18.120 --> 0:00:22.239 is the author of The Spider Network, The wild story 0:00:22.360 --> 0:00:26.920 of a math genius, a gang of backstabbing bankers, and 0:00:27.040 --> 0:00:31.680 one of the greatest scams in financial history. It is 0:00:31.840 --> 0:00:36.720 all about libor and how that scandal, which is not 0:00:36.840 --> 0:00:41.760 even a decade old, unfolded. Uh. We are talking about 0:00:42.280 --> 0:00:45.839 not just millions of dollars, not just billions of dollars, 0:00:46.320 --> 0:00:50.800 but hundreds of trillions of dollars that were manipulated in 0:00:50.840 --> 0:00:57.800 different directions for people two capture some trading profits. And 0:00:57.840 --> 0:01:01.720 when you stop and think about all the assets that 0:01:01.960 --> 0:01:06.240 trade based on LIEB or UH, if you have a 0:01:06.600 --> 0:01:09.560 variable mortgage, or a car loan, or credit card loans 0:01:09.680 --> 0:01:13.240 or student loans, you may have been paying more for 0:01:13.280 --> 0:01:18.320 those interest payments due to some of these manipulations by 0:01:18.480 --> 0:01:23.440 various bankers. Arguably occasionally you were paying less because they 0:01:23.520 --> 0:01:26.920 manipulated it in the other direction. Um. The book is 0:01:26.959 --> 0:01:29.600 really quite fascinating. I'm not finished with it yet. I'm 0:01:29.600 --> 0:01:32.920 working my way through it, but it really reads like, uh, 0:01:32.959 --> 0:01:36.480 you know, an Ian Fleming novel. It's it's a spy tail. 0:01:36.600 --> 0:01:39.759 There are some fascinating characters in it. Uh. It really 0:01:39.840 --> 0:01:42.840 is a great narrative, and David does a wonderful job 0:01:43.400 --> 0:01:48.600 bringing some really arcane uh minutia to life in a 0:01:48.640 --> 0:01:52.880 way that's fascinating and understandable. Uh. I think that if 0:01:52.920 --> 0:01:56.720 you're remotely interested in the world of fixed income or 0:01:57.280 --> 0:02:01.120 borrowing or derivatives, this is a must read and it's 0:02:01.160 --> 0:02:06.600 gonna enter the pantheon of great financial narratives. So, with 0:02:06.640 --> 0:02:10.560 no further ado, here is my conversation with David Enrich. 0:02:12.919 --> 0:02:17.519 This is Masters in Business with Barry Ridholts on Bloomberg Radio. 0:02:20.440 --> 0:02:23.359 My guest today is David Enrich. He is a New 0:02:23.440 --> 0:02:28.040 York Times reporter and editor UH since the summer ofen 0:02:28.320 --> 0:02:31.120 Prior to that, he worked for The Wall Street Journal 0:02:31.200 --> 0:02:35.120 for a decade, writing about banking and finance in the 0:02:35.200 --> 0:02:41.200 United States. UH. He has won numerous journalism awards, including 0:02:41.639 --> 0:02:44.680 the Overseas Press Club Award for his coverage of the 0:02:44.720 --> 0:02:48.800 European debt crisis, the George Polk Award for coverage on 0:02:48.880 --> 0:02:53.560 Instarter Trading. He won two Society of American Business Editors 0:02:53.600 --> 0:02:57.760 and Writers Awards. David was part of two teams of 0:02:57.880 --> 0:03:01.119 journal reporters who were finalists for Pool Surprises in both 0:03:01.160 --> 0:03:04.600 two thousand and nine and two thousand and eleven. He 0:03:04.760 --> 0:03:09.160 won the prestigious Gerald Loebe Award for Feature Writing for 0:03:09.240 --> 0:03:13.480 his coverage on the unraveling of Tom Hayes, the expos 0:03:13.520 --> 0:03:18.000 about the Libor scandal that eventually led to him writing 0:03:18.040 --> 0:03:21.800 a book on it titled The Spider Network. How a 0:03:21.919 --> 0:03:25.600 math genius and a gang of scheming bankers pulled off 0:03:25.720 --> 0:03:30.120 one of the greatest scams in history. David Enrich, Welcome 0:03:30.120 --> 0:03:33.800 to Bloomberg. Thank you. I'm fascinated by the library scandal. 0:03:34.480 --> 0:03:37.680 Folks like you and I who cover this are pretty 0:03:37.720 --> 0:03:42.360 familiar with some of the minutia and details about Libor. 0:03:42.800 --> 0:03:46.680 But for the lay person listening to this, what exactly 0:03:47.000 --> 0:03:50.760 is liebar and why is it so important? It's an acronym. 0:03:50.800 --> 0:03:54.720 It stands for the London Interbank Offered Grade and it 0:03:54.920 --> 0:03:58.480 is the world's most important number. The world's most important number. 0:03:58.920 --> 0:04:02.119 That's quite a claim, it is. Explain why it's it's 0:04:02.160 --> 0:04:05.280 such an important number? What what is it used for. 0:04:05.640 --> 0:04:08.640 It sets interest rates on all sorts of debt all 0:04:08.680 --> 0:04:11.840 over the world. So if you have an adjustable rate mortgage, 0:04:11.880 --> 0:04:13.440 the interest rate is based on libor. If you have 0:04:13.440 --> 0:04:16.000 a credit card, a student loan, and auto loan, it's 0:04:16.040 --> 0:04:18.960 likely based on libor. If you are a big company 0:04:19.200 --> 0:04:21.520 and are issuing debt, the interest rate might be based 0:04:21.520 --> 0:04:23.400 on librar. Same if you're a town or city. They're 0:04:23.440 --> 0:04:26.640 trillions and trillions of dollars of this stuff, trillions, trillions, 0:04:26.680 --> 0:04:29.240 And the biggest part is not the just normal debt, 0:04:29.240 --> 0:04:33.719 it's derivatives that are that you know. Originally companies or 0:04:33.839 --> 0:04:37.640 investors were using them to protect themselves to hedge the 0:04:38.279 --> 0:04:42.960 against possible fluctuations and interest rates, and later, as you 0:04:42.960 --> 0:04:45.880 know often happens in the financial world, they became a 0:04:45.920 --> 0:04:49.960 playground for speculators and traders. So I learned a lot 0:04:50.000 --> 0:04:53.640 of different things from the book, one of which was 0:04:53.760 --> 0:04:58.640 that essentially decades ago, a Greek BANKO was trying to 0:04:58.880 --> 0:05:02.440 arrange an eighty milli million dollar loan for the shav 0:05:02.560 --> 0:05:05.960 I Ran and the syndication process lead to a question 0:05:06.000 --> 0:05:09.120 how are you going to set rates? And that effectively 0:05:09.200 --> 0:05:11.640 is the origin of live or is is that right? Yeah, 0:05:11.720 --> 0:05:14.520 that is right, and this is I really like history, 0:05:14.760 --> 0:05:17.960 and so researching this is just fascinating for me, and 0:05:18.040 --> 0:05:21.839 they're Uh. Originally, you know, if you think about how 0:05:22.040 --> 0:05:24.480 does an interst rate come into being when a bank 0:05:24.560 --> 0:05:26.760 offers a loan to someone, how do they determine what 0:05:26.800 --> 0:05:28.960 they're going to pay? And the general rule of thumb 0:05:29.000 --> 0:05:31.440 was that they are going to base the interest rate 0:05:31.440 --> 0:05:34.120 they're putting on a loan based on how much it 0:05:34.160 --> 0:05:37.480 costs the bank to borrow money. So it's it's the 0:05:37.600 --> 0:05:41.520 borrowing rate plus some margin, which becomes a profit. Yeah, exactly, 0:05:41.560 --> 0:05:44.760 And so obviously the banks need to have a profit, 0:05:44.800 --> 0:05:47.360 and so they eventually normally that would be simple if 0:05:47.360 --> 0:05:49.640 it's just one bank making a loan. But the history 0:05:49.680 --> 0:05:51.600 of this is that at the kind of dawn of 0:05:51.640 --> 0:05:54.240 the era where loans, big loans are being syndicated, you 0:05:54.279 --> 0:05:57.239 had a big group of banks getting together to team 0:05:57.320 --> 0:05:59.680 up on to make big loans. In this case, it 0:05:59.760 --> 0:06:01.880 was a loan in eighty million dollar loan to the 0:06:01.880 --> 0:06:04.960 Shah of Iran at the time. And uh, how do 0:06:05.040 --> 0:06:07.000 you have different banks of different funding costs, how do 0:06:07.000 --> 0:06:09.360 you determine the interest rate? And so the innovation here 0:06:09.920 --> 0:06:12.240 was that you can have you can come up with 0:06:12.279 --> 0:06:14.880 an average basically, and you can look at how much 0:06:14.920 --> 0:06:16.479 does it if you've got ten banks on it, you 0:06:16.640 --> 0:06:19.479 take their average funding cost and that can be the 0:06:19.480 --> 0:06:22.560 interest rate plus a little bit. And the challenge though, 0:06:22.640 --> 0:06:25.479 is that funding costs change and what you're if you're 0:06:25.520 --> 0:06:28.279 making a twenty year loan, your funding costs at year 0:06:28.320 --> 0:06:31.159 one could be very different from your funding costs at 0:06:31.200 --> 0:06:33.520 year ten or twenty. And that is a very scary 0:06:33.520 --> 0:06:35.480 thing for the banks because you know, if their funding 0:06:35.520 --> 0:06:38.839 costs go up, you could be locked into a loan 0:06:39.040 --> 0:06:41.359 that is deeply unprofitable for the bank. And so the 0:06:41.400 --> 0:06:44.960 innovation here that they would have a mechanism where the 0:06:45.000 --> 0:06:47.320 interest rate would fluctuate over time based on the bank's 0:06:47.320 --> 0:06:50.680 funding costs. So so, given those kind of murky origins, 0:06:50.800 --> 0:06:56.520 the Greek bankers syndicated loan to the shaw of Iran. 0:06:57.000 --> 0:07:00.279 How did this become the most important number in the world. 0:07:00.320 --> 0:07:04.039 How did this become so widely accepted everywhere? Yeah, So 0:07:04.080 --> 0:07:07.400 in the mid nineteen eighties, the British Bankers Association, which 0:07:07.400 --> 0:07:10.720 was a trade organization basically lobbying group b v A yeah, 0:07:10.760 --> 0:07:13.960 the b b A for not only the big British banks, 0:07:14.000 --> 0:07:15.560 but for many of the biggest banks in the world 0:07:15.560 --> 0:07:18.880 that had set up shop in London. They got together 0:07:18.960 --> 0:07:21.120 with the Bank of England, the central bank there, and 0:07:21.160 --> 0:07:23.840 they decided the use of derivatives was really booming and 0:07:23.840 --> 0:07:26.760 they need figured they needed a standardized way. Instead of 0:07:26.800 --> 0:07:29.000 every time there's a loan or any type of financial 0:07:29.040 --> 0:07:32.160 contract cobbling together this kind of ad hoc system for 0:07:32.600 --> 0:07:34.760 determining interest rates, they figured it would be a much 0:07:34.840 --> 0:07:37.640 better way to standardize or much better idea to standardize this, 0:07:37.720 --> 0:07:40.360 and so live work came into existence as something that 0:07:40.480 --> 0:07:43.080 was every day around lunch time in London, a group 0:07:43.120 --> 0:07:45.640 of the world's biggest banks would estimate how much it 0:07:45.720 --> 0:07:48.720 costs them to borrow money from each other. And you know, 0:07:48.760 --> 0:07:51.560 you could do it in different currencies, so and pound, 0:07:51.640 --> 0:07:56.200 sterling and dollars and euros, in Japanese yen, and you 0:07:56.200 --> 0:07:58.320 can do it over a different time period. So you 0:07:58.360 --> 0:08:00.640 know it's going to cost a bank for an amount 0:08:00.720 --> 0:08:03.520 to borrow money for one day or a week, or 0:08:03.560 --> 0:08:06.080 a month or a year, and the longer the duration 0:08:06.120 --> 0:08:09.040 of that loan to hire, the interest rate generally and 0:08:09.200 --> 0:08:11.640 you can every day. So every day, at lunchtime, a 0:08:11.640 --> 0:08:14.480 group of the world's biggest banks gets together, someone comes 0:08:14.520 --> 0:08:16.720 up with an estimate for theoretically how much it would 0:08:16.720 --> 0:08:19.520 cost them to borrow money in a specific currency over 0:08:19.520 --> 0:08:22.400 a specific time period. All those numbers get smushed together, 0:08:22.480 --> 0:08:24.560 the high estimates and the lowest mints get booted out, 0:08:25.160 --> 0:08:27.960 and the rest are averaged in presto, you've got labor. 0:08:28.520 --> 0:08:33.439 That's quite fascinating. You raised a couple of really interesting 0:08:33.480 --> 0:08:36.200 points I have to follow up on. The first is 0:08:36.720 --> 0:08:40.760 why lunchtime almost everything else is set at the close 0:08:40.800 --> 0:08:43.960 of business during the end of the day. Why the 0:08:44.000 --> 0:08:46.960 middle of the banking day, the trading day would you 0:08:47.000 --> 0:08:49.520 want to set interest rates? What what is that about? 0:08:49.600 --> 0:08:52.400 Because this was this was developed in a pre computer era, 0:08:52.559 --> 0:08:55.480 was the mid nineties, and to determine how much a 0:08:55.559 --> 0:08:58.120 bank it cost a bank to borrow money, you needed 0:08:58.120 --> 0:09:00.360 to check with various parts of the bank. So someone 0:09:00.559 --> 0:09:02.640 this is usually a pretty low level person with kind 0:09:02.640 --> 0:09:05.320 of the bowels of the bank, and he would come 0:09:05.360 --> 0:09:07.679 in the morning and start making phone calls to different 0:09:07.679 --> 0:09:10.000 parts of the bank to try and assess how much 0:09:10.120 --> 0:09:12.280 it costs them to borrow money. And remember this isn't 0:09:12.360 --> 0:09:14.920 one phone call, because this is most of these banks 0:09:14.920 --> 0:09:19.000 are global at this point and they have operations all 0:09:19.040 --> 0:09:21.360 over the world. And you know, so he has this 0:09:21.360 --> 0:09:25.360 guy has to call the treasury desk in Tokyo, Singapore, 0:09:25.600 --> 0:09:28.200 in New York. It's actually a full time job determining 0:09:28.240 --> 0:09:31.200 live boards. Well it was kind of a halftime, let's say. 0:09:31.200 --> 0:09:34.400 And it was again, this is someone who is usually 0:09:34.440 --> 0:09:37.800 a clerk and entry level job, an aspiring trader. So 0:09:38.160 --> 0:09:41.640 the most important number, to quote you, in the world. 0:09:42.120 --> 0:09:44.640 A bunch of lowly clerks are running around or or 0:09:44.679 --> 0:09:48.040 sending up their desks in London making calls everywhere. And 0:09:48.120 --> 0:09:50.520 that's how this number gets a sound that well, and 0:09:50.640 --> 0:09:53.640 the joke is that and the reason I wrote a 0:09:53.640 --> 0:09:55.520 book on this, and there's been so much media coverage 0:09:55.559 --> 0:09:58.400 on this is because it was just they were They 0:09:58.480 --> 0:09:59.960 got to the point where they weren't even really make 0:10:00.000 --> 0:10:03.600 and calls. This became a number that was being pulled 0:10:03.640 --> 0:10:06.760 more or less out of thin air by bankers at 0:10:06.760 --> 0:10:08.640 a low level. And why were they pulling it out 0:10:08.679 --> 0:10:11.319 of thin air? They're doing it because their traders asked 0:10:11.320 --> 0:10:13.800 them too. Because the traders had especially by the nine 0:10:14.080 --> 0:10:18.360 nineties and early oughts, had huge amounts of money that 0:10:18.400 --> 0:10:21.640 they were wagering on whether lib or was going to 0:10:21.679 --> 0:10:24.760 go up or down by very tiny increment. And we're 0:10:24.800 --> 0:10:30.760 talking about positions that are trillions of notational value, trillions, 0:10:31.120 --> 0:10:34.000 hundreds of trillions, of hundreds of these. This is kind 0:10:34.040 --> 0:10:36.680 of like asking how hot is the sun? Right the 0:10:36.679 --> 0:10:40.360 the actual temperature degrees fahrenheit or celsius doesn't make any differences. 0:10:40.640 --> 0:10:45.400 The numbers so astronomically largely it literally so, So all 0:10:45.440 --> 0:10:48.320 of this raises the obvious question. On the one hand, 0:10:48.440 --> 0:10:52.760 the banks are collectively setting the number. On the other hands, 0:10:53.160 --> 0:10:59.440 they're totally interested parties who have enormous amounts of capital 0:10:59.520 --> 0:11:03.400 running on the outcome of those numbers. How could that 0:11:03.480 --> 0:11:06.600 ever possibly go wrong? How could there be a conflict 0:11:06.600 --> 0:11:09.800 of interest in the banking industry. Yeah, I mean, it's 0:11:09.800 --> 0:11:11.600 it's funny because I've been covering this at this point 0:11:11.600 --> 0:11:14.920 for eight years, I would say, and it's that is 0:11:14.960 --> 0:11:17.400 such a fundamental question, And it's true, it's such a 0:11:17.480 --> 0:11:22.480 deeply embedded conflict of interest, that is, it's just completely inappropriate. 0:11:22.640 --> 0:11:25.800 So so who who is to blame for that conflict? 0:11:26.200 --> 0:11:29.319 Was it just happenstance the way it developed and where 0:11:29.320 --> 0:11:33.000 were the regulators when yeah, you guys deal with hundreds 0:11:33.000 --> 0:11:36.080 of trillions of dollars bet on the direction of libor 0:11:36.440 --> 0:11:39.679 set yourselves, that's fine with us. Yeah, And this is 0:11:39.800 --> 0:11:42.880 like so many other problems in the financial arena, this 0:11:42.960 --> 0:11:46.760 is something that had fairly benign origin. And this is 0:11:46.800 --> 0:11:49.280 something that was it really was meant to be to 0:11:49.400 --> 0:11:53.920 simplify and increase the efficiency of very complicated and cumbersome 0:11:54.000 --> 0:11:57.960 lending process. And gradually, over a period of a decade 0:11:58.040 --> 0:12:00.720 or two, this rate, first of all, be came embedded 0:12:00.920 --> 0:12:04.280 in hundreds of billions of dollars worth of American mortgages. 0:12:04.480 --> 0:12:06.760 And it didn't start out the hundreds of billions. Yeah, 0:12:06.960 --> 0:12:09.360 they's because way back in the day it was either 0:12:09.480 --> 0:12:13.400 fed funds rate or some other US based number. When 0:12:13.440 --> 0:12:17.840 did libor infiltrate there mortgages in the early nineties, and 0:12:17.840 --> 0:12:21.120 that was partly a product of library at the time 0:12:21.160 --> 0:12:23.440 was viewed as a very reliable way for banks to 0:12:23.600 --> 0:12:27.120 estimate their funding costs. And it was. And and again 0:12:27.160 --> 0:12:29.600 that's something that in theory, if it works properly, is 0:12:29.679 --> 0:12:31.559 very good for everyone. It's good for the banks. It's 0:12:31.559 --> 0:12:33.839 also good for the consumers because it's an efficient way. 0:12:34.160 --> 0:12:37.160 It relieves the banks of any anxiety they might have 0:12:37.480 --> 0:12:40.520 that if they price alone at a low interest rate, 0:12:40.559 --> 0:12:42.920 that they're going to get burned a year or five 0:12:43.000 --> 0:12:45.200 years later. This allows them to relieves them of all 0:12:45.280 --> 0:12:48.680 that anxiety. And that's that allows them theoretically to loan 0:12:48.760 --> 0:12:50.800 money at a lower interest rate. And and those loans 0:12:50.840 --> 0:12:54.440 typically look like libor plus two percent libor plus three, 0:12:55.080 --> 0:12:58.720 so that's their markup, that's the cost of the loan 0:12:59.200 --> 0:13:02.400 to the borrow or it's the profit theoretically to the bank. 0:13:03.360 --> 0:13:05.880 But it seems kind of funny that they get to 0:13:05.920 --> 0:13:08.200 set what. Yeah, it does seem kind of funny. Did 0:13:08.200 --> 0:13:11.760 anybody question that arrangement? Originally? Not really, And originally this 0:13:11.840 --> 0:13:14.559 was seen as and keep in mind that the alternative 0:13:14.600 --> 0:13:16.920 to this is that just banks are arbitrarily setting loans. 0:13:16.920 --> 0:13:19.800 It's not something that is it's not like this is 0:13:19.840 --> 0:13:24.160 replacing a heavily regulated kind of government imposed rates. Previously, 0:13:24.160 --> 0:13:26.400 it was just market forces. You negotiate the best you 0:13:26.440 --> 0:13:28.679 can for the loan, and that's it. As opposed to 0:13:29.320 --> 0:13:31.600 libord plus or maybe it was the Fed funds rate 0:13:31.679 --> 0:13:34.720 or something like that that was. But then again, since 0:13:34.800 --> 0:13:37.520 that is going to change less frequently than libra wood you, 0:13:37.640 --> 0:13:40.800 then the banks were then adding an additional buffer. So 0:13:40.920 --> 0:13:43.079 instead of maybe libor plus two per point would be 0:13:43.160 --> 0:13:47.640 fed funds plus three points, so the loans more expensive. Yeah, exactly, 0:13:47.679 --> 0:13:51.000 And so this is something the big problem that wasn't 0:13:51.080 --> 0:13:53.240 the introduction of liborar into the mortgage market. It was 0:13:53.280 --> 0:13:56.320 the introduction of library into the derivatives market, and that 0:13:56.400 --> 0:13:59.720 happened in the mid nineties, and that was something that 0:13:59.760 --> 0:14:02.920 at the time the Commodity Futures Trading Commission had to 0:14:02.920 --> 0:14:05.600 approve this because it was the Chicago Mercantile Exchange that 0:14:05.760 --> 0:14:09.560 was looking to kind of have lib welar embedded as 0:14:09.559 --> 0:14:12.920 a mechanism and interest rate swaps, and that was it 0:14:13.000 --> 0:14:15.319 was seen as a way to make swap the swaps 0:14:15.360 --> 0:14:18.400 market much more accessible and much more efficient and much 0:14:18.440 --> 0:14:21.040 more liquid. But at the time a number of traders 0:14:21.040 --> 0:14:24.040 warned the CFTC that if you do this, you are 0:14:24.080 --> 0:14:27.680 inviting disaster because traders at the big banks know how 0:14:27.760 --> 0:14:32.880 library works. There's completely unregulated by central banks or by 0:14:32.920 --> 0:14:36.080 financial regulators, and they it's very easy if you give 0:14:36.080 --> 0:14:39.680 banks a huge profit incentive to manipulate something. Guess what 0:14:39.800 --> 0:14:41.800 they're going to manipulate it. So, so let's stay on 0:14:41.840 --> 0:14:44.600 that point in the book you discussed Gary Gainsler. You 0:14:44.680 --> 0:14:48.920 just mentioned the Commodity Futures Training Commission. Gainsler is the 0:14:48.960 --> 0:14:55.680 person who pretty much defang the the CFTC and then 0:14:56.160 --> 0:14:59.920 he ends up running it as the library scandal is unfolding, 0:15:00.400 --> 0:15:05.200 and for reasons I still don't understand, falsely takes claim 0:15:05.360 --> 0:15:09.880 for initiating an investigation into Libar. It actually predated his 0:15:09.960 --> 0:15:14.600 tenure by year. Explain this mania because this is crazy. Also, well, 0:15:14.640 --> 0:15:18.200 this is the regulatory pendulum has swung so wildly, and 0:15:18.200 --> 0:15:21.960 I think it's a common misconception right now in to 0:15:22.040 --> 0:15:25.240 look at this as a product of Democrats versus Republicans 0:15:25.280 --> 0:15:28.200 and Democrats or Barack Obama versus Donald Trump, and that's 0:15:28.200 --> 0:15:30.920 just not what it is. And well, and this started 0:15:30.920 --> 0:15:35.400 in the Clinton administration. The Clinton administration oversaw one of 0:15:35.440 --> 0:15:39.000 the great regulatory rollbacks in the of the twentieth century, 0:15:39.160 --> 0:15:42.160 and it was Bob Reubin and Gary Gensler who are 0:15:42.200 --> 0:15:45.240 leading that charge. Well, let me let me push back 0:15:45.240 --> 0:15:49.840 a little bit. So so you have Um, a number 0:15:49.960 --> 0:15:56.200 of significant Republicans in the Senate pushing pushing for this. Um, 0:15:56.240 --> 0:15:58.360 I'm drown a blank on somebody's name. I mean Phil 0:15:58.400 --> 0:16:02.080 Graham is so Phil Graham is really the ring leader 0:16:02.120 --> 0:16:07.000 of all this. Uh. Reuben so so behind Graham, we 0:16:07.120 --> 0:16:12.280 basically overturned under Clinton and Robert Reuben and Larry Summers. 0:16:12.280 --> 0:16:15.640 I'm not gonna disagree with you. They kind of went along, 0:16:15.760 --> 0:16:19.240 get went along to get along. We we overturned Glass Stiegel. 0:16:19.720 --> 0:16:23.600 We passed the Commodity Futures Modernization Act, which basically said, yeah, 0:16:23.680 --> 0:16:27.760 derivatives free for all. And we basically took the Commodity 0:16:27.760 --> 0:16:30.960 Futures Trading Commission and turned it into a toothless tiger. 0:16:31.760 --> 0:16:35.160 Clinton signed all these things. Some of these passed uh 0:16:35.280 --> 0:16:38.040 the House like three to one. Right now, that s 0:16:39.080 --> 0:16:41.400 there was a consensus in both parties at the time 0:16:41.880 --> 0:16:46.080 that the key or one of the keys to economic 0:16:46.120 --> 0:16:50.800 growth and too uh kind of economic growth spreading globally 0:16:50.840 --> 0:16:53.120 in the US maintaining its competitive advantage when came to 0:16:53.120 --> 0:16:57.800 financial services was to embrace a really aggressive leisay fair 0:16:58.160 --> 0:17:02.200 attitude towards all walks of financial life. And look, it's 0:17:02.240 --> 0:17:05.040 clearly not only the Clinton administration. They but you know, 0:17:05.119 --> 0:17:08.600 the the administration and power in any given year wields 0:17:08.640 --> 0:17:10.720 a tremendous amount of clout on these things. And if 0:17:10.920 --> 0:17:14.000 if Bob Reuben, a guy who is coming from the 0:17:14.040 --> 0:17:18.159 upper echelons of Goldman Sax, wasn't uh cheerleader of this, 0:17:18.240 --> 0:17:21.560 it wouldn't have happened. And the and Gary Gensler as well, 0:17:21.600 --> 0:17:25.639 another Goldwen Sax guy. So there ends up the city. 0:17:25.920 --> 0:17:31.159 So he he oversaw the repeal of um Glass Steagle, 0:17:31.320 --> 0:17:33.320 which paved the way for the creation of the modern 0:17:33.320 --> 0:17:36.440 city Group, which was travelers and travelers and city corps. 0:17:36.520 --> 0:17:39.840 And it then lo and behold. After leaving immediately gets 0:17:39.880 --> 0:17:42.399 hired in a very lucrative contract to do not a 0:17:42.400 --> 0:17:47.040 whole lot at city Group. So in any case, the 0:17:47.119 --> 0:17:49.440 Gensler at the Gensler in the Treasure Derment in the 0:17:49.440 --> 0:17:53.040 Clinton administration was one of the proponents of essentially neutering 0:17:53.080 --> 0:17:56.960 the CFDC, not having it the powerful force for the 0:17:56.960 --> 0:18:01.600 regulation of derivatives. He then in the Obama era, is 0:18:01.720 --> 0:18:06.239 eager too. He sees the winds shifting, We've just had 0:18:06.240 --> 0:18:09.680 the financial crisis. He's eager for a senior administration position 0:18:10.119 --> 0:18:13.320 and the opposition to him on Capitol Hill was intense 0:18:13.359 --> 0:18:16.800 because he was so deeply embedded with the Rubin wing 0:18:16.800 --> 0:18:21.240 of the Democratic Party. And he underwent a remarkable makeover. 0:18:21.320 --> 0:18:23.240 And Bernie Sanders was one guy on the on the 0:18:23.280 --> 0:18:26.160 Hill who had been a vigorous opponent of Gensler getting 0:18:26.160 --> 0:18:30.560 any powerful position, and Gensler just pulled this remarkable about face, 0:18:30.600 --> 0:18:34.000 and to his credit, unlike most politicians, he admitted that 0:18:34.040 --> 0:18:37.520 he had been catastrophically wrong in the Clinton administration, in 0:18:37.560 --> 0:18:39.680 the Clinton era, and he had just gotten it wrong. 0:18:39.720 --> 0:18:41.600 He and he said he had learned a lesson and 0:18:41.720 --> 0:18:47.200 was embracing very enthusiastically this pro regulation, pro government view 0:18:47.280 --> 0:18:50.040 of the financial world. And so he came into the CFDC, 0:18:50.200 --> 0:18:54.119 which at the time was this kind of scrappy, underfunded 0:18:54.640 --> 0:18:58.280 backwater of an agency in Washington, and did everything he 0:18:58.320 --> 0:19:02.119 could to he he wants scalps. He wanted to he 0:19:02.160 --> 0:19:06.280 wanted to see the CFDC developing a reputation for being 0:19:06.400 --> 0:19:10.359 one of the uh toughest, scariest gun slingers on Wall Street. 0:19:10.480 --> 0:19:13.879 And what became this investigation into Library that became the 0:19:13.880 --> 0:19:17.000 perfect vehicle for him. What what's so astonishing is a 0:19:17.080 --> 0:19:21.199 lot of the people who set up the financial crisis, 0:19:22.040 --> 0:19:26.720 uh during the Clinton administration. And let's hold the Republicans aside, 0:19:26.840 --> 0:19:29.760 guys like Phil Graham. But when you look at the Democrats, 0:19:30.280 --> 0:19:34.159 you have you have Laurence Somers eventually goes on to 0:19:34.200 --> 0:19:36.959 get a Chairman of the c e A for Obama. 0:19:37.320 --> 0:19:40.879 Tim Geithner, who was New York Fed Chief, eventually becomes 0:19:40.920 --> 0:19:45.800 Treasury Secretary. Gensler gets appointed to the agency that he 0:19:45.800 --> 0:19:50.120 helped to dismantle. It's really pretty astonishing if you look 0:19:50.160 --> 0:19:53.560 at the fields of of aviation or medicine. When a 0:19:53.600 --> 0:19:56.760 plane crashes or there's a surgical problem, you don't send 0:19:56.840 --> 0:19:58.840 the same pilot back to tell you what went wrong. 0:19:58.840 --> 0:20:01.280 You don't send the same s rgin to do a 0:20:01.320 --> 0:20:04.760 post mortem. Someone else with fresh eyes comes in. That 0:20:04.880 --> 0:20:09.320 is not what we saw take place during the financial crisis. No, 0:20:09.440 --> 0:20:11.120 it's totally true. You had a lot of the same 0:20:11.119 --> 0:20:13.520 old characters coming in, and a lot of them Geitner 0:20:13.560 --> 0:20:15.280 is an exception to this, I think, but a lot 0:20:15.320 --> 0:20:17.200 of them hailed from All Street and those are these 0:20:17.200 --> 0:20:19.800 are the same guys who had not only not stocked 0:20:19.800 --> 0:20:22.000 the financial crisis, but in a number of cases either 0:20:22.119 --> 0:20:24.680 worsened it or profited from it, and take your pick. 0:20:24.720 --> 0:20:28.560 I don't know which of those is worse. And uh, Again, 0:20:29.160 --> 0:20:32.600 in fairness to people like Summers and Getzler, I think 0:20:32.680 --> 0:20:35.680 there is a human capacity to learn from one's mistakes. 0:20:35.920 --> 0:20:41.240 And arguably the experience of having screwed up royally and 0:20:41.800 --> 0:20:44.560 watching the financial world burn as a result in part 0:20:44.680 --> 0:20:48.240 of youuter mistakes is probably a pretty sobering educational moment. 0:20:49.160 --> 0:20:51.119 And look that everyone got it wrong. It's not just 0:20:51.200 --> 0:20:53.840 these guys, right, the media got it wrong. Everybody got 0:20:53.840 --> 0:20:55.399 it wrong. Lots of people, a lot of people got 0:20:55.440 --> 0:20:57.639 it wrong. You know, there were plenty of people who 0:20:57.720 --> 0:21:01.760 were complaining about it and warning about it. I just 0:21:02.040 --> 0:21:05.800 I've always found it fascinating that, wait, there aren't people 0:21:05.880 --> 0:21:09.600 who weren't major contributors to the crisis to take the 0:21:09.720 --> 0:21:13.400 role of C. E. H A or Treasury secretary. I've 0:21:13.440 --> 0:21:16.480 always learned when you really screw up, hey, you know 0:21:16.600 --> 0:21:20.080 you're not going to get that promotion. Apparently DC in 0:21:20.080 --> 0:21:22.840 Wall Street that that doesn't seem to Yeah. I mean, 0:21:22.960 --> 0:21:25.080 one of the revelations to me in writing this book 0:21:25.160 --> 0:21:28.399 is that most of the things on Wall Street and 0:21:28.440 --> 0:21:30.400 in the financial world, and I think in politics too, 0:21:30.920 --> 0:21:33.879 it boils down to incentives. And of course people's people 0:21:33.920 --> 0:21:37.280 are actually pretty rational actors if you can figure out 0:21:37.320 --> 0:21:40.440 what's motivating them to do what they're doing. And so 0:21:41.000 --> 0:21:43.120 you see this any awhere, from kind of a low 0:21:43.200 --> 0:21:46.320 level trader starting out in Wall Street to someone at 0:21:46.320 --> 0:21:49.480 the upper echelons of a bank like Gary Ginsler, Bob Rubin, 0:21:49.600 --> 0:21:51.359 or or if you put them in government service, the 0:21:51.400 --> 0:21:54.280 same thing. So if they they're responding to the incentives, 0:21:54.280 --> 0:22:00.120 whether it's compensation incentives or feedback or just approval ratings 0:22:00.240 --> 0:22:04.480 or things like that, and they they have everyone incentives matter, 0:22:04.720 --> 0:22:06.560 and they explained that we see and I think that's 0:22:06.560 --> 0:22:10.280 why to me, when the next crisis inevitably happens in 0:22:10.320 --> 0:22:13.000 the next scandal inevitably and will it will. It's a 0:22:13.080 --> 0:22:15.399 question of when and where. But when it does, I 0:22:15.400 --> 0:22:17.359 think we're going to look back and see that a 0:22:17.400 --> 0:22:19.159 lot of the lessons we should have learned from the 0:22:19.160 --> 0:22:22.000 financial crisis in terms of shaping incentives in a way 0:22:22.000 --> 0:22:28.080 to encourage sober, careful, prudent behavior, we're not really heated. 0:22:28.119 --> 0:22:31.800 We instead just imposed erected all these new regulations that 0:22:31.880 --> 0:22:34.399 are just designed for the sake of regulations, they're not 0:22:34.440 --> 0:22:37.119 actually looking very closely at what motivates people to behave 0:22:37.160 --> 0:22:39.600 the way that they do. So let's talk a little 0:22:39.600 --> 0:22:42.919 bit about Tom Hayes, the man in the middle of this. Uh, 0:22:43.040 --> 0:22:45.879