Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: This week on the podcast, I have a special guest.
Speaker 1: His name is David en Rich, and he is a
Speaker 1: reporter for The New York Times. But more importantly, he
Speaker 1: is the author of The Spider Network, The wild story
Speaker 1: of a math genius, a gang of backstabbing bankers, and
Speaker 1: one of the greatest scams in financial history. It is
Speaker 1: all about libor and how that scandal, which is not
Speaker 1: even a decade old, unfolded. Uh. We are talking about
Speaker 1: not just millions of dollars, not just billions of dollars,
Speaker 1: but hundreds of trillions of dollars that were manipulated in
Speaker 1: different directions for people two capture some trading profits. And
Speaker 1: when you stop and think about all the assets that
Speaker 1: trade based on LIEB or UH, if you have a
Speaker 1: variable mortgage, or a car loan, or credit card loans
Speaker 1: or student loans, you may have been paying more for
Speaker 1: those interest payments due to some of these manipulations by
Speaker 1: various bankers. Arguably occasionally you were paying less because they
Speaker 1: manipulated it in the other direction. Um. The book is
Speaker 1: really quite fascinating. I'm not finished with it yet. I'm
Speaker 1: working my way through it, but it really reads like, uh,
Speaker 1: you know, an Ian Fleming novel. It's it's a spy tail.
Speaker 1: There are some fascinating characters in it. Uh. It really
Speaker 1: is a great narrative, and David does a wonderful job
Speaker 1: bringing some really arcane uh minutia to life in a
Speaker 1: way that's fascinating and understandable. Uh. I think that if
Speaker 1: you're remotely interested in the world of fixed income or
Speaker 1: borrowing or derivatives, this is a must read and it's
Speaker 1: gonna enter the pantheon of great financial narratives. So, with
Speaker 1: no further ado, here is my conversation with David Enrich.
Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: My guest today is David Enrich. He is a New
Speaker 1: York Times reporter and editor UH since the summer ofen
Speaker 1: Prior to that, he worked for The Wall Street Journal
Speaker 1: for a decade, writing about banking and finance in the
Speaker 1: United States. UH. He has won numerous journalism awards, including
Speaker 1: the Overseas Press Club Award for his coverage of the
Speaker 1: European debt crisis, the George Polk Award for coverage on
Speaker 1: Instarter Trading. He won two Society of American Business Editors
Speaker 1: and Writers Awards. David was part of two teams of
Speaker 1: journal reporters who were finalists for Pool Surprises in both
Speaker 1: two thousand and nine and two thousand and eleven. He
Speaker 1: won the prestigious Gerald Loebe Award for Feature Writing for
Speaker 1: his coverage on the unraveling of Tom Hayes, the expos
Speaker 1: about the Libor scandal that eventually led to him writing
Speaker 1: a book on it titled The Spider Network. How a
Speaker 1: math genius and a gang of scheming bankers pulled off
Speaker 1: one of the greatest scams in history. David Enrich, Welcome
Speaker 1: to Bloomberg. Thank you. I'm fascinated by the library scandal.
Speaker 1: Folks like you and I who cover this are pretty
Speaker 1: familiar with some of the minutia and details about Libor.
Speaker 1: But for the lay person listening to this, what exactly
Speaker 1: is liebar and why is it so important? It's an acronym.
Speaker 1: It stands for the London Interbank Offered Grade and it
Speaker 1: is the world's most important number. The world's most important number.
Speaker 1: That's quite a claim, it is. Explain why it's it's
Speaker 1: such an important number? What what is it used for.
Speaker 1: It sets interest rates on all sorts of debt all
Speaker 1: over the world. So if you have an adjustable rate mortgage,
Speaker 1: the interest rate is based on libor. If you have
Speaker 1: a credit card, a student loan, and auto loan, it's
Speaker 1: likely based on libor. If you are a big company
Speaker 1: and are issuing debt, the interest rate might be based
Speaker 1: on librar. Same if you're a town or city. They're
Speaker 1: trillions and trillions of dollars of this stuff, trillions, trillions,
Speaker 1: And the biggest part is not the just normal debt,
Speaker 1: it's derivatives that are that you know. Originally companies or
Speaker 1: investors were using them to protect themselves to hedge the
Speaker 1: against possible fluctuations and interest rates, and later, as you
Speaker 1: know often happens in the financial world, they became a
Speaker 1: playground for speculators and traders. So I learned a lot
Speaker 1: of different things from the book, one of which was
Speaker 1: that essentially decades ago, a Greek BANKO was trying to
Speaker 1: arrange an eighty milli million dollar loan for the shav
Speaker 1: I Ran and the syndication process lead to a question
Speaker 1: how are you going to set rates? And that effectively
Speaker 1: is the origin of live or is is that right? Yeah,
Speaker 1: that is right, and this is I really like history,
Speaker 1: and so researching this is just fascinating for me, and
Speaker 1: they're Uh. Originally, you know, if you think about how
Speaker 1: does an interst rate come into being when a bank
Speaker 1: offers a loan to someone, how do they determine what
Speaker 1: they're going to pay? And the general rule of thumb
Speaker 1: was that they are going to base the interest rate
Speaker 1: they're putting on a loan based on how much it
Speaker 1: costs the bank to borrow money. So it's it's the
Speaker 1: borrowing rate plus some margin, which becomes a profit. Yeah, exactly,
Speaker 1: And so obviously the banks need to have a profit,
Speaker 1: and so they eventually normally that would be simple if
Speaker 1: it's just one bank making a loan. But the history
Speaker 1: of this is that at the kind of dawn of
Speaker 1: the era where loans, big loans are being syndicated, you
Speaker 1: had a big group of banks getting together to team
Speaker 1: up on to make big loans. In this case, it
Speaker 1: was a loan in eighty million dollar loan to the
Speaker 1: Shah of Iran at the time. And uh, how do
Speaker 1: you have different banks of different funding costs, how do
Speaker 1: you determine the interest rate? And so the innovation here
Speaker 1: was that you can have you can come up with
Speaker 1: an average basically, and you can look at how much
Speaker 1: does it if you've got ten banks on it, you
Speaker 1: take their average funding cost and that can be the
Speaker 1: interest rate plus a little bit. And the challenge though,
Speaker 1: is that funding costs change and what you're if you're
Speaker 1: making a twenty year loan, your funding costs at year
Speaker 1: one could be very different from your funding costs at
Speaker 1: year ten or twenty. And that is a very scary
Speaker 1: thing for the banks because you know, if their funding
Speaker 1: costs go up, you could be locked into a loan
Speaker 1: that is deeply unprofitable for the bank. And so the
Speaker 1: innovation here that they would have a mechanism where the
Speaker 1: interest rate would fluctuate over time based on the bank's
Speaker 1: funding costs. So so, given those kind of murky origins,
Speaker 1: the Greek bankers syndicated loan to the shaw of Iran.
Speaker 1: How did this become the most important number in the world.
Speaker 1: How did this become so widely accepted everywhere? Yeah, So
Speaker 1: in the mid nineteen eighties, the British Bankers Association, which
Speaker 1: was a trade organization basically lobbying group b v A yeah,
Speaker 1: the b b A for not only the big British banks,
Speaker 1: but for many of the biggest banks in the world
Speaker 1: that had set up shop in London. They got together
Speaker 1: with the Bank of England, the central bank there, and
Speaker 1: they decided the use of derivatives was really booming and
Speaker 1: they need figured they needed a standardized way. Instead of
Speaker 1: every time there's a loan or any type of financial
Speaker 1: contract cobbling together this kind of ad hoc system for
Speaker 1: determining interest rates, they figured it would be a much
Speaker 1: better way to standardize or much better idea to standardize this,
Speaker 1: and so live work came into existence as something that
Speaker 1: was every day around lunch time in London, a group
Speaker 1: of the world's biggest banks would estimate how much it
Speaker 1: costs them to borrow money from each other. And you know,
Speaker 1: you could do it in different currencies, so and pound,
Speaker 1: sterling and dollars and euros, in Japanese yen, and you
Speaker 1: can do it over a different time period. So you
Speaker 1: know it's going to cost a bank for an amount
Speaker 1: to borrow money for one day or a week, or
Speaker 1: a month or a year, and the longer the duration
Speaker 1: of that loan to hire, the interest rate generally and
Speaker 1: you can every day. So every day, at lunchtime, a
Speaker 1: group of the world's biggest banks gets together, someone comes
Speaker 1: up with an estimate for theoretically how much it would
Speaker 1: cost them to borrow money in a specific currency over
Speaker 1: a specific time period. All those numbers get smushed together,
Speaker 1: the high estimates and the lowest mints get booted out,
Speaker 1: and the rest are averaged in presto, you've got labor.
Speaker 1: That's quite fascinating. You raised a couple of really interesting
Speaker 1: points I have to follow up on. The first is
Speaker 1: why lunchtime almost everything else is set at the close
Speaker 1: of business during the end of the day. Why the
Speaker 1: middle of the banking day, the trading day would you
Speaker 1: want to set interest rates? What what is that about?
Speaker 1: Because this was this was developed in a pre computer era,
Speaker 1: was the mid nineties, and to determine how much a
Speaker 1: bank it cost a bank to borrow money, you needed
Speaker 1: to check with various parts of the bank. So someone
Speaker 1: this is usually a pretty low level person with kind
Speaker 1: of the bowels of the bank, and he would come
Speaker 1: in the morning and start making phone calls to different
Speaker 1: parts of the bank to try and assess how much
Speaker 1: it costs them to borrow money. And remember this isn't
Speaker 1: one phone call, because this is most of these banks
Speaker 1: are global at this point and they have operations all
Speaker 1: over the world. And you know, so he has this
Speaker 1: guy has to call the treasury desk in Tokyo, Singapore,
Speaker 1: in New York. It's actually a full time job determining
Speaker 1: live boards. Well it was kind of a halftime, let's say.
Speaker 1: And it was again, this is someone who is usually
Speaker 1: a clerk and entry level job, an aspiring trader. So
Speaker 1: the most important number, to quote you, in the world.
Speaker 1: A bunch of lowly clerks are running around or or
Speaker 1: sending up their desks in London making calls everywhere. And
Speaker 1: that's how this number gets a sound that well, and
Speaker 1: the joke is that and the reason I wrote a
Speaker 1: book on this, and there's been so much media coverage
Speaker 1: on this is because it was just they were They
Speaker 1: got to the point where they weren't even really make
Speaker 1: and calls. This became a number that was being pulled
Speaker 1: more or less out of thin air by bankers at
Speaker 1: a low level. And why were they pulling it out
Speaker 1: of thin air? They're doing it because their traders asked
Speaker 1: them too. Because the traders had especially by the nine
Speaker 1: nineties and early oughts, had huge amounts of money that
Speaker 1: they were wagering on whether lib or was going to
Speaker 1: go up or down by very tiny increment. And we're
Speaker 1: talking about positions that are trillions of notational value, trillions,
Speaker 1: hundreds of trillions, of hundreds of these. This is kind
Speaker 1: of like asking how hot is the sun? Right the
Speaker 1: the actual temperature degrees fahrenheit or celsius doesn't make any differences.
Speaker 1: The numbers so astronomically largely it literally so, So all
Speaker 1: of this raises the obvious question. On the one hand,
Speaker 1: the banks are collectively setting the number. On the other hands,
Speaker 1: they're totally interested parties who have enormous amounts of capital
Speaker 1: running on the outcome of those numbers. How could that
Speaker 1: ever possibly go wrong? How could there be a conflict
Speaker 1: of interest in the banking industry. Yeah, I mean, it's
Speaker 1: it's funny because I've been covering this at this point
Speaker 1: for eight years, I would say, and it's that is
Speaker 1: such a fundamental question, And it's true, it's such a
Speaker 1: deeply embedded conflict of interest, that is, it's just completely inappropriate.
Speaker 1: So so who who is to blame for that conflict?
Speaker 1: Was it just happenstance the way it developed and where
Speaker 1: were the regulators when yeah, you guys deal with hundreds
Speaker 1: of trillions of dollars bet on the direction of libor
Speaker 1: set yourselves, that's fine with us. Yeah, And this is
Speaker 1: like so many other problems in the financial arena, this
Speaker 1: is something that had fairly benign origin. And this is
Speaker 1: something that was it really was meant to be to
Speaker 1: simplify and increase the efficiency of very complicated and cumbersome
Speaker 1: lending process. And gradually, over a period of a decade
Speaker 1: or two, this rate, first of all, be came embedded
Speaker 1: in hundreds of billions of dollars worth of American mortgages.
Speaker 1: And it didn't start out the hundreds of billions. Yeah,
Speaker 1: they's because way back in the day it was either
Speaker 1: fed funds rate or some other US based number. When
Speaker 1: did libor infiltrate there mortgages in the early nineties, and
Speaker 1: that was partly a product of library at the time
Speaker 1: was viewed as a very reliable way for banks to
Speaker 1: estimate their funding costs. And it was. And and again
Speaker 1: that's something that in theory, if it works properly, is
Speaker 1: very good for everyone. It's good for the banks. It's
Speaker 1: also good for the consumers because it's an efficient way.
Speaker 1: It relieves the banks of any anxiety they might have
Speaker 1: that if they price alone at a low interest rate,
Speaker 1: that they're going to get burned a year or five
Speaker 1: years later. This allows them to relieves them of all
Speaker 1: that anxiety. And that's that allows them theoretically to loan
Speaker 1: money at a lower interest rate. And and those loans
Speaker 1: typically look like libor plus two percent libor plus three,
Speaker 1: so that's their markup, that's the cost of the loan
Speaker 1: to the borrow or it's the profit theoretically to the bank.
Speaker 1: But it seems kind of funny that they get to
Speaker 1: set what. Yeah, it does seem kind of funny. Did
Speaker 1: anybody question that arrangement? Originally? Not really, And originally this
Speaker 1: was seen as and keep in mind that the alternative
Speaker 1: to this is that just banks are arbitrarily setting loans.
Speaker 1: It's not something that is it's not like this is
Speaker 1: replacing a heavily regulated kind of government imposed rates. Previously,
Speaker 1: it was just market forces. You negotiate the best you
Speaker 1: can for the loan, and that's it. As opposed to
Speaker 1: libord plus or maybe it was the Fed funds rate
Speaker 1: or something like that that was. But then again, since
Speaker 1: that is going to change less frequently than libra wood you,
Speaker 1: then the banks were then adding an additional buffer. So
Speaker 1: instead of maybe libor plus two per point would be
Speaker 1: fed funds plus three points, so the loans more expensive. Yeah, exactly,
Speaker 1: And so this is something the big problem that wasn't
Speaker 1: the introduction of liborar into the mortgage market. It was
Speaker 1: the introduction of library into the derivatives market, and that
Speaker 1: happened in the mid nineties, and that was something that
Speaker 1: at the time the Commodity Futures Trading Commission had to
Speaker 1: approve this because it was the Chicago Mercantile Exchange that
Speaker 1: was looking to kind of have lib welar embedded as
Speaker 1: a mechanism and interest rate swaps, and that was it
Speaker 1: was seen as a way to make swap the swaps
Speaker 1: market much more accessible and much more efficient and much
Speaker 1: more liquid. But at the time a number of traders
Speaker 1: warned the CFTC that if you do this, you are
Speaker 1: inviting disaster because traders at the big banks know how
Speaker 1: library works. There's completely unregulated by central banks or by
Speaker 1: financial regulators, and they it's very easy if you give
Speaker 1: banks a huge profit incentive to manipulate something. Guess what
Speaker 1: they're going to manipulate it. So, so let's stay on
Speaker 1: that point in the book you discussed Gary Gainsler. You
Speaker 1: just mentioned the Commodity Futures Training Commission. Gainsler is the
Speaker 1: person who pretty much defang the the CFTC and then
Speaker 1: he ends up running it as the library scandal is unfolding,
Speaker 1: and for reasons I still don't understand, falsely takes claim
Speaker 1: for initiating an investigation into Libar. It actually predated his
Speaker 1: tenure by year. Explain this mania because this is crazy. Also, well,
Speaker 1: this is the regulatory pendulum has swung so wildly, and
Speaker 1: I think it's a common misconception right now in to
Speaker 1: look at this as a product of Democrats versus Republicans
Speaker 1: and Democrats or Barack Obama versus Donald Trump, and that's
Speaker 1: just not what it is. And well, and this started
Speaker 1: in the Clinton administration. The Clinton administration oversaw one of
Speaker 1: the great regulatory rollbacks in the of the twentieth century,
Speaker 1: and it was Bob Reubin and Gary Gensler who are
Speaker 1: leading that charge. Well, let me let me push back
Speaker 1: a little bit. So so you have Um, a number
Speaker 1: of significant Republicans in the Senate pushing pushing for this. Um,
Speaker 1: I'm drown a blank on somebody's name. I mean Phil
Speaker 1: Graham is so Phil Graham is really the ring leader
Speaker 1: of all this. Uh. Reuben so so behind Graham, we
Speaker 1: basically overturned under Clinton and Robert Reuben and Larry Summers.
Speaker 1: I'm not gonna disagree with you. They kind of went along,
Speaker 1: get went along to get along. We we overturned Glass Stiegel.
Speaker 1: We passed the Commodity Futures Modernization Act, which basically said, yeah,
Speaker 1: derivatives free for all. And we basically took the Commodity
Speaker 1: Futures Trading Commission and turned it into a toothless tiger.
Speaker 1: Clinton signed all these things. Some of these passed uh
Speaker 1: the House like three to one. Right now, that s
Speaker 1: there was a consensus in both parties at the time
Speaker 1: that the key or one of the keys to economic
Speaker 1: growth and too uh kind of economic growth spreading globally
Speaker 1: in the US maintaining its competitive advantage when came to
Speaker 1: financial services was to embrace a really aggressive leisay fair
Speaker 1: attitude towards all walks of financial life. And look, it's
Speaker 1: clearly not only the Clinton administration. They but you know,
Speaker 1: the the administration and power in any given year wields
Speaker 1: a tremendous amount of clout on these things. And if
Speaker 1: if Bob Reuben, a guy who is coming from the
Speaker 1: upper echelons of Goldman Sax, wasn't uh cheerleader of this,
Speaker 1: it wouldn't have happened. And the and Gary Gensler as well,
Speaker 1: another Goldwen Sax guy. So there ends up the city.
Speaker 1: So he he oversaw the repeal of um Glass Steagle,
Speaker 1: which paved the way for the creation of the modern
Speaker 1: city Group, which was travelers and travelers and city corps.
Speaker 1: And it then lo and behold. After leaving immediately gets
Speaker 1: hired in a very lucrative contract to do not a
Speaker 1: whole lot at city Group. So in any case, the
Speaker 1: Gensler at the Gensler in the Treasure Derment in the
Speaker 1: Clinton administration was one of the proponents of essentially neutering
Speaker 1: the CFDC, not having it the powerful force for the
Speaker 1: regulation of derivatives. He then in the Obama era, is
Speaker 1: eager too. He sees the winds shifting, We've just had
Speaker 1: the financial crisis. He's eager for a senior administration position
Speaker 1: and the opposition to him on Capitol Hill was intense
Speaker 1: because he was so deeply embedded with the Rubin wing
Speaker 1: of the Democratic Party. And he underwent a remarkable makeover.
Speaker 1: And Bernie Sanders was one guy on the on the
Speaker 1: Hill who had been a vigorous opponent of Gensler getting
Speaker 1: any powerful position, and Gensler just pulled this remarkable about face,
Speaker 1: and to his credit, unlike most politicians, he admitted that
Speaker 1: he had been catastrophically wrong in the Clinton administration, in
Speaker 1: the Clinton era, and he had just gotten it wrong.
Speaker 1: He and he said he had learned a lesson and
Speaker 1: was embracing very enthusiastically this pro regulation, pro government view
Speaker 1: of the financial world. And so he came into the CFDC,
Speaker 1: which at the time was this kind of scrappy, underfunded
Speaker 1: backwater of an agency in Washington, and did everything he
Speaker 1: could to he he wants scalps. He wanted to he
Speaker 1: wanted to see the CFDC developing a reputation for being
Speaker 1: one of the uh toughest, scariest gun slingers on Wall Street.
Speaker 1: And what became this investigation into Library that became the
Speaker 1: perfect vehicle for him. What what's so astonishing is a
Speaker 1: lot of the people who set up the financial crisis,
Speaker 1: uh during the Clinton administration. And let's hold the Republicans aside,
Speaker 1: guys like Phil Graham. But when you look at the Democrats,
Speaker 1: you have you have Laurence Somers eventually goes on to
Speaker 1: get a Chairman of the c e A for Obama.
Speaker 1: Tim Geithner, who was New York Fed Chief, eventually becomes
Speaker 1: Treasury Secretary. Gensler gets appointed to the agency that he
Speaker 1: helped to dismantle. It's really pretty astonishing if you look
Speaker 1: at the fields of of aviation or medicine. When a
Speaker 1: plane crashes or there's a surgical problem, you don't send
Speaker 1: the same pilot back to tell you what went wrong.
Speaker 1: You don't send the same s rgin to do a
Speaker 1: post mortem. Someone else with fresh eyes comes in. That
Speaker 1: is not what we saw take place during the financial crisis. No,
Speaker 1: it's totally true. You had a lot of the same
Speaker 1: old characters coming in, and a lot of them Geitner
Speaker 1: is an exception to this, I think, but a lot
Speaker 1: of them hailed from All Street and those are these
Speaker 1: are the same guys who had not only not stocked
Speaker 1: the financial crisis, but in a number of cases either
Speaker 1: worsened it or profited from it, and take your pick.
Speaker 1: I don't know which of those is worse. And uh, Again,
Speaker 1: in fairness to people like Summers and Getzler, I think
Speaker 1: there is a human capacity to learn from one's mistakes.
Speaker 1: And arguably the experience of having screwed up royally and
Speaker 1: watching the financial world burn as a result in part
Speaker 1: of youuter mistakes is probably a pretty sobering educational moment.
Speaker 1: And look that everyone got it wrong. It's not just
Speaker 1: these guys, right, the media got it wrong. Everybody got
Speaker 1: it wrong. Lots of people, a lot of people got
Speaker 1: it wrong. You know, there were plenty of people who
Speaker 1: were complaining about it and warning about it. I just
Speaker 1: I've always found it fascinating that, wait, there aren't people
Speaker 1: who weren't major contributors to the crisis to take the
Speaker 1: role of C. E. H A or Treasury secretary. I've
Speaker 1: always learned when you really screw up, hey, you know
Speaker 1: you're not going to get that promotion. Apparently DC in
Speaker 1: Wall Street that that doesn't seem to Yeah. I mean,
Speaker 1: one of the revelations to me in writing this book
Speaker 1: is that most of the things on Wall Street and
Speaker 1: in the financial world, and I think in politics too,
Speaker 1: it boils down to incentives. And of course people's people
Speaker 1: are actually pretty rational actors if you can figure out
Speaker 1: what's motivating them to do what they're doing. And so
Speaker 1: you see this any awhere, from kind of a low
Speaker 1: level trader starting out in Wall Street to someone at
Speaker 1: the upper echelons of a bank like Gary Ginsler, Bob Rubin,
Speaker 1: or or if you put them in government service, the
Speaker 1: same thing. So if they they're responding to the incentives,
Speaker 1: whether it's compensation incentives or feedback or just approval ratings
Speaker 1: or things like that, and they they have everyone incentives matter,
Speaker 1: and they explained that we see and I think that's
Speaker 1: why to me, when the next crisis inevitably happens in
Speaker 1: the next scandal inevitably and will it will. It's a
Speaker 1: question of when and where. But when it does, I
Speaker 1: think we're going to look back and see that a
Speaker 1: lot of the lessons we should have learned from the
Speaker 1: financial crisis in terms of shaping incentives in a way
Speaker 1: to encourage sober, careful, prudent behavior, we're not really heated.
Speaker 1: We instead just imposed erected all these new regulations that
Speaker 1: are just designed for the sake of regulations, they're not
Speaker 1: actually looking very closely at what motivates people to behave
Speaker 1: the way that they do. So let's talk a little
Speaker 1: bit about Tom Hayes, the man in the middle of this. Uh,
Speaker 1: you actually won a Globe Award for your coverage of
Speaker 1: the unraveling of Tom Hayes. Who was Tom Hayes And
Speaker 1: how did he find himself in the middle of the
Speaker 1: library scandal? So? Tom Hayes is mildly autistic mathematician. He
Speaker 1: was a trader at some of the world's biggest banks.
Speaker 1: He was a guy who, like most mathematicians who are
Speaker 1: mildly autistic and gett into banking, was very good at
Speaker 1: creating models, detecting patterns, things like that. Not very not
Speaker 1: just very good at detecting patterns. People described him as
Speaker 1: just he was a genius, all right, just brilliant at this.
Speaker 1: He was a genius, and he was one of the
Speaker 1: best traders that a lot of his colleagues had ever seen.
Speaker 1: He also was someone who was very well trained to
Speaker 1: do what traders do best, especially in a decade ago,
Speaker 1: which was to look for tiny, little inefficiencies and find
Speaker 1: ways to exploit them. And that could mean having a
Speaker 1: faster trading system, it could mean having better intelligence, It
Speaker 1: could mean having stupider clients. It could mean finding ways
Speaker 1: to manipulate something that you are betting on the outcome of.
Speaker 1: And so so let's talk about stupider clients for a second,
Speaker 1: because this comes up in the book with there's a
Speaker 1: whole list of characters, and there are really some very
Speaker 1: colorful characters. What is the relationship of the brokers who
Speaker 1: are working with the traders and how do people identify
Speaker 1: smarter and dumber clients. Yeah, so the brokers serve this
Speaker 1: role as the great middleman in the banking industry. And
Speaker 1: when two traders, when bank a trader bank A and
Speaker 1: a trader bank B both want to do a transaction,
Speaker 1: they're often not talking to each other. They're talking to
Speaker 1: a broker who's in the middle and realizes that trader
Speaker 1: bank A wants to buy something and trader bank B
Speaker 1: is looking to sell the same thing, and so they'll
Speaker 1: serve as the middleman for that service. They take a
Speaker 1: cut of the the value of the transaction, and that's fine.
Speaker 1: The broker serve another role though, which is uh information
Speaker 1: brokers essentially, and they pedal gossip and they are paid
Speaker 1: in large part to develop relationships with these traders. And
Speaker 1: the way they do that. I love this thing. It's
Speaker 1: that they have. There's a ratio of how or a
Speaker 1: percentage of the revenue that each trader generates you are
Speaker 1: supposed to as a broker recycle that back to the trader.
Speaker 1: Define define recycle in real life? What is entertainment? It's
Speaker 1: called which is just a giant teeny budget ranks, food,
Speaker 1: strip clubs, and and and if you've got some of
Speaker 1: these traders who are generating uh millions and millions of
Speaker 1: dollars a year in brokerage fees, spending ten of that
Speaker 1: on steak dinners and nice drinks is very hard. But
Speaker 1: it's not just steak dinners and nice draders. You tell
Speaker 1: some stories. This is g rated, but you tell some
Speaker 1: stories in the book. These guys are animals. Now they
Speaker 1: get creative, They get very creative about ways to spend
Speaker 1: hundreds of thousands of dollars a year on a particular person.
Speaker 1: And so what does that mean? That means drugs, it
Speaker 1: means women, it means trips to various places, it means
Speaker 1: just all sorts of ludicrous misbehavior. And this is something
Speaker 1: him that again is the book singles out a number
Speaker 1: of individuals for being involved in this, but this is
Speaker 1: widespread industry practice at the time. And Hayes, Tom Hayes
Speaker 1: was not a guy who liked going to strip clubs.
Speaker 1: He was not a big drinker. His idea of a
Speaker 1: fun night out was going to KFC, getting a bucket
Speaker 1: of fried chicken, sitting at home eating it while watching
Speaker 1: Steinfeld reruns. And so this is not a guy who
Speaker 1: you can easily. He's a huge trader, but it was
Speaker 1: very hard, and the brokers were dying to do business
Speaker 1: with him because of the huge volumes he was doing.
Speaker 1: But this is not someone who is very easy to
Speaker 1: spend your ten percent of the commissions on. And so
Speaker 1: the brokers found another way to reward him, which was
Speaker 1: that Tom Hayes was making huge, huge bets on the
Speaker 1: direction of interest rates, which meant that he had a huge,
Speaker 1: huge steak in the direction of library every day. And
Speaker 1: Tom Hayes on a given day would have millions and
Speaker 1: millions of dollars riding on whether libra or went up
Speaker 1: or down by a basis point, which is a one
Speaker 1: percentage point. So a tiny, little move that no one
Speaker 1: would ever notice. Tom Hayes not only would notice, but
Speaker 1: cared deeply about live were moving in these tiny little increments.
Speaker 1: And so that's where the brokers came in For Tom Hayes.
Speaker 1: He realized and the brokers realized that libras set not
Speaker 1: Tom Hayes at this time worked at UBSA. Was not
Speaker 1: set by the market, but it's set by the by
Speaker 1: the Tom Hayes works at one bank. And so Tom Hayes,
Speaker 1: as with standard industry practice at the time, the traders
Speaker 1: who were making wagers based on the direction of interest
Speaker 1: rates would call up the little clerk in the bowels
Speaker 1: of the bank and say, hey, mate, I need libor
Speaker 1: up today. Can you please move UBS submission up by
Speaker 1: as much as you can or move it down by
Speaker 1: as much as you can. Depend it was that. It
Speaker 1: was that, It was that. Yeah, it's very explicit. People
Speaker 1: are very open about it. They were encouraged to do it.
Speaker 1: This was under the under the umbrella at the time
Speaker 1: of banks trying to improve the coordination of different parts
Speaker 1: of the bank working together, all playing in the same direction.
Speaker 1: And what role does the broker's play with these clerks?
Speaker 1: So the broker's the broker's role is that they Tom
Speaker 1: Hayes can tell the guy at UBS his colleague, to
Speaker 1: move lib Rar uper down. What Tom Hayes can't do
Speaker 1: quite as easily is called City Group or JP Morrigan,
Speaker 1: a royal bank of the other ten banks. And because
Speaker 1: he doesn't know these guys and why would they listen
Speaker 1: to him anyway, but he can call in a favorite
Speaker 1: with the brokers. And so that he had brokers at
Speaker 1: eye Cap which is the biggest, and some other firms
Speaker 1: as well, just every single day routinely going out into
Speaker 1: the market and telling all of their context that all
Speaker 1: these other banks move live or upper down. And it
Speaker 1: was basically to benefit Tom Hayes's trading positions and the
Speaker 1: trading positions of Tom Hayes's colleagues. Was this unique to
Speaker 1: Hayes and and Ubs was the standard practice, well, it
Speaker 1: was standard practice to be manipulating lib Or. Hayes was
Speaker 1: a really clever guy and a really relentless guy and
Speaker 1: took this to a new level. So the introduction of
Speaker 1: the brokers was something that Hayes. Hayes pioneered and that
Speaker 1: was really his innovation. That was the way that he
Speaker 1: got an edge and Everyone always talked about getting an
Speaker 1: edge on the trading floor, and heyesn't found one. You
Speaker 1: were in London in the mid two thousand's. How did
Speaker 1: you find your way to London? How how does a
Speaker 1: Wall Street General reporter based in New York ends up
Speaker 1: in London. It was actually the late two thousands and
Speaker 1: the financial crisis here in the US had ended. Banks
Speaker 1: are getting back to normal more or less boring stuff,
Speaker 1: but a financial crisis was just dawning in Europe. I
Speaker 1: had never lived overseas and was eager for an adventure,
Speaker 1: and London seemed like an adventure. So so in late
Speaker 1: twenties at this point, it's a decade ago. I think
Speaker 1: it was early early thirties. So now you're in London
Speaker 1: for a couple of years. You're covering finance, You're covering
Speaker 1: the banks. The middle of the night, you get a
Speaker 1: text from a phone that you don't recognize. The number
Speaker 1: of comes in tell us about that. So I was covering.
Speaker 1: I had been covering the library or what it was
Speaker 1: now known as the Library scandal. And government had investigated
Speaker 1: all these banks and in a couple of cases, including
Speaker 1: with UBS, which was Tom Hayes's former employer had reached
Speaker 1: these huge settlements where the banks had to pay hundreds
Speaker 1: of millions, if not billions of dollars and penalties and
Speaker 1: admitted that they had been part of this global scheme
Speaker 1: to manipulate interest. How many banks wrote? How much money?
Speaker 1: And well, ultimately it was more than a dozen banks
Speaker 1: and probably five or six or seven or eight or
Speaker 1: nine or ten billion dollars in penalties, A lot huge,
Speaker 1: widespread is this? This is in at the very end
Speaker 1: of For the first time, a guy was actually a guy,
Speaker 1: an individual, a person was held accountable for this, and
Speaker 1: that guy was Tom Hayes. He was arrested in the
Speaker 1: UK and he was criminally charged here in the un
Speaker 1: Remember he was the first person to be charged. And
Speaker 1: my boss at the time, a guy named Bruce or
Speaker 1: While who was a great editor at the Wall Street
Speaker 1: Journal UH wanted me to write a profile Tom Hayes.
Speaker 1: And of course that seemed like a thankless task. Hayes
Speaker 1: had been you know, he'd been criminally charged. This guy's
Speaker 1: not going to talk. And so after much toing and frowing,
Speaker 1: I agreed to do this and found a woman who
Speaker 1: was his former business school classmate and got her to
Speaker 1: talk to me, and it started painting this picture. Nothing
Speaker 1: was known about Tom Hayes at this point he other
Speaker 1: than that he was a very successful trader who had
Speaker 1: said some really stupid, uh seemingly damning stuff in againstant messages.
Speaker 1: And this woman, though, painted a much more interesting, nuanced
Speaker 1: picture of Tom as someone who was mildly autistic. He
Speaker 1: was a nerd. He was just doing what everyone else
Speaker 1: was doing, it seemed like uh. And I convinced her
Speaker 1: to pass on my phone number to Tom Hayes and
Speaker 1: she said, of course, there's no way he's gonna call you.
Speaker 1: There's his lawyers won't let him, blah blah blah. And
Speaker 1: I was sitting at home that night on the sofa
Speaker 1: watching TV with my wife and I got a text
Speaker 1: message from an unknown number and it said this goes
Speaker 1: much much higher than me. Not even the Justice Department
Speaker 1: knows the full story. And it was Tom Hayes, and
Speaker 1: I could not believe it. He agreed then to meet
Speaker 1: me the next day. Uh. He said, I'll meebe if
Speaker 1: I can trust you, And I said, of course you
Speaker 1: can trust me. I'm a journalist and it and he
Speaker 1: told me he'd be standing in Victoria station, which is
Speaker 1: a big busy train station in London outside the Burger
Speaker 1: King were in a brown leather jacket, and of course
Speaker 1: no one who knows what this guy looks like at
Speaker 1: this point, and I, as you can imagine, was pretty
Speaker 1: excited about that. I kind of pictured myself as Bob Woodward.
Speaker 1: And unfortunately he canceled the next morning because his wife
Speaker 1: had found his phone and realized he was off to
Speaker 1: meet a journalist and his wife is a lawyer, and
Speaker 1: uh decided that was not a wise thing to do.
Speaker 1: But that was the start of what became a year's
Speaker 1: long relationship I had with Tom Hayes. That and this
Speaker 1: initially started over text messages, but ultimately and I was
Speaker 1: spending what seemed like the majority of my waking hours
Speaker 1: either with him or on the phone with him, and
Speaker 1: eventually his wife as well, and they just let me
Speaker 1: inside their life for uh, pretty substantial period of time
Speaker 1: from early until mid when Tom Hayes eventually went on
Speaker 1: trial for manipulating live board. And so that was the
Speaker 1: bag for this Walser journal series. The unraveling of Tom
Speaker 1: Hayes is that I watched this guy who had become
Speaker 1: kind of this unlikely public face of financial crime. Uh
Speaker 1: and I watched him his life disintegrate. It was fascinating
Speaker 1: and kind of upsetting. So Hayes eventually loses the case,
Speaker 1: gets what was it, a fourteen year sentence. So there's
Speaker 1: a section in the book it's jaw dropping his former bosses,
Speaker 1: his associates, all the traders he worked with, all the
Speaker 1: brokers he worked with. Nobody else gets into trouble. How
Speaker 1: is that not only do they not get into trouble,
Speaker 1: they're all doing fine, They're all still working in the industry,
Speaker 1: they're all still making millions of dollars. How did this
Speaker 1: one guy become the full guy and everybody else skates
Speaker 1: away scott free? I mean, there are two basic reasons,
Speaker 1: too literal reasons. That one is that Hayes was stupid
Speaker 1: and naive, and he did everything in writing. So there's
Speaker 1: this rich trove of documentary evidence that showed Hayes in
Speaker 1: text messages or chat rooms or sometimes unrecorded phone lines.
Speaker 1: Please move lie War up from me. I have a
Speaker 1: lot of money riding over and over and over again,
Speaker 1: thousands of times. Well, and the second reason is that
Speaker 1: prosecutors and regulators are a little bit lazy. They wanted
Speaker 1: to nail some people, but you know, they don't really
Speaker 1: want to take risks. They want to go after the
Speaker 1: sure thing, and the sure thing in this case was
Speaker 1: Tom Hayes. This isn't, i think, probably an unlosable case
Speaker 1: for them, and they went after him. And what's mystifying
Speaker 1: to me is what happened next, which is that they
Speaker 1: did they criminally charged a small handful of other people
Speaker 1: of his confederates, all of whom got acquitted, but they
Speaker 1: really didn't go after anyone higher us. And you know,
Speaker 1: this is mystifying a little bit frustrating to me because
Speaker 1: there's as much evidence that there's against Tom Hayes, there's
Speaker 1: also a lot of evidence that shows Hayes's bosses and
Speaker 1: his boss's bosses and his boss's boss's bosses not only
Speaker 1: knowing about and condoning what he was doing at the time,
Speaker 1: but in some cases participating alongside him. And were they
Speaker 1: doing it as extensively and as aggressively as Hays and
Speaker 1: as blatantly as He's absolutely not, but these are people
Speaker 1: who should have known better, and the regulation prosecutors, I
Speaker 1: think most of these are smart, ambitious people and they
Speaker 1: should recognize how the actions that they take going after
Speaker 1: certain people in the industry. Those are have the potential
Speaker 1: be very powerful deterrent messages, and this is a huge
Speaker 1: missed opportunity there they could have. I think they could
Speaker 1: have brought a lot more cases than they did. So
Speaker 1: Jesse Eisinger's book, which I can't say the title on
Speaker 1: of on the air the Chicken Blank Club talks about
Speaker 1: the comby That phrase comes from the Kobe speech about
Speaker 1: the prosecutors who are chickens lazy and only take easy cases.
Speaker 1: But it didn't sound like a lot in your book,
Speaker 1: the picture you paint, it doesn't sound like these are
Speaker 1: all that different. Maybe the Hayes case was a lay down,
Speaker 1: but there seemed like a huge paper trail for another
Speaker 1: dozen people, maybe another fifty people. Yeah, there are a
Speaker 1: lot of people who have of who are caught up
Speaker 1: in this, and they're to me. At first of all,
Speaker 1: I love Jesse Eisinger's book. Everyone should read it. I
Speaker 1: think it's a perfect compliment to the Spider Network in
Speaker 1: the sense that the Spider Network show is one of
Speaker 1: these cases where there was all this evidence and most
Speaker 1: of it just didn't get used. In Jesse's book, does
Speaker 1: a really good job of explaining some of the dynamics
Speaker 1: inside the Justice department for why prosecutors are sometimes kind
Speaker 1: of cowardly and um in this case. And I think
Speaker 1: part of the issue is that these are complicated cases.
Speaker 1: It takes a lot to bring a case, and but
Speaker 1: there's enormous resistance in the financial world, and a lot
Speaker 1: of these prosecutors are they really don't want to lose.
Speaker 1: And to me, the power of the prosecutors have here
Speaker 1: is the simple act of staging a perp walk, of
Speaker 1: going and arresting a senior executive at a bank or
Speaker 1: another big yeah, that would have in parading them in
Speaker 1: front of the TV cameras and making them go into
Speaker 1: court and face the jury of appears, and how the
Speaker 1: fear of God put in them that they might not
Speaker 1: lose some money or might lose some reputation, might lose
Speaker 1: their job, but might lose their freedom. That's scary. And
Speaker 1: if that prospect of the possibility of actually going to
Speaker 1: jail was hanging over people's heads, I think that would
Speaker 1: do a lot to change behavior. And we talked earlier
Speaker 1: about incentives and how people respond to the incentives are given.
Speaker 1: Both positivetives exactly, both positive and negatives. So money is
Speaker 1: a positive incentive, but prospect of serious, life changing personal
Speaker 1: consequences is another incentive, to say the least. Uh. Let
Speaker 1: me let me sum up this conversation with the quote
Speaker 1: from the book, and I want you to respond to it.
Speaker 1: There is a tension between quote long term effective functioning
Speaker 1: of the financial markets on one hands, I'm now paraphrasing you, uh,
Speaker 1: and on the other hand, optimizing the current value of
Speaker 1: your securities portfolio. How do you uh square that circle?
Speaker 1: How do you resolve the tension between those two clearly
Speaker 1: potentially conflicting motivations. So between just long term and short term, well,
Speaker 1: it's it's long term functioning of the financial markets. You know,
Speaker 1: during the subprime crisis, there were these bonuses that people
Speaker 1: called I'll be gone, You'll be gone, bonuses that by
Speaker 1: the time it blew up, hey will be three jobs away.
Speaker 1: It seemed that the short term totally trump the long term.
Speaker 1: But that's not what I'm asking about here. This is
Speaker 1: the actual functioning of the finance markets. So we don't
Speaker 1: have a situation where the crepent markets just freeze. How
Speaker 1: can that inherent tension between functioning markets and optimizing portfolios.
Speaker 1: Can that be resolved? Probably not. And the one of
Speaker 1: the things I found interesting recently though, is that there
Speaker 1: are a lot of banks out there these days. Banks
Speaker 1: used to be the model that was in vogue was
Speaker 1: to be this financial supermarket, and that included, you know,
Speaker 1: you have a retail bank, a credit card business, a
Speaker 1: mortgage business, a wealth management business, but most of all,
Speaker 1: the big revenue driver were these investment banks that a
Speaker 1: lot of it not just prop trading, although that was
Speaker 1: part of it. It was, but there was a huge
Speaker 1: business that sprung up around serving or making trades uh
Speaker 1: in the wake of or around the business of servicing
Speaker 1: big clients and big, big institutions. And one of the
Speaker 1: things I found interest in recently that that turned into
Speaker 1: a very risky business, by the way, because you know
Speaker 1: that a lot of the there's a tremendous amount of
Speaker 1: volatility in the markets, and yes, you can make huge profits,
Speaker 1: but you can also make huge losses when the markets
Speaker 1: turn if you don't handle it perfectly. And one of
Speaker 1: the things I found very interesting now is that if
Speaker 1: you look at the banks that investors think are the
Speaker 1: best deals, those are not banks that bear any resemblance
Speaker 1: to what was in vogue ten years ago. You're looking
Speaker 1: at banks, and the UK has some really interesting examples
Speaker 1: of these banks like Lloyd's and Royal Bank of Scotland
Speaker 1: that are these just there as boring as can be.
Speaker 1: They're just banks that do what banks used to do
Speaker 1: in the nineteen fifties, which is they take deposits, they
Speaker 1: make loans, and it's that simple. And it turns out
Speaker 1: that if you do that properly in an economy that's
Speaker 1: pretty strong, that's an enormously profitable business and it's safe,
Speaker 1: and it's uh conservative, and it also is valuable to
Speaker 1: not just the the shareholders and executives, but to an
Speaker 1: economy as a whole. And I think, to me, this
Speaker 1: is gonna sound old fashioned, and I think a lot
Speaker 1: of people in the banking industry probably will view this
Speaker 1: as naive and just a little too quaint for their taste.
Speaker 1: But looking at things through the prism of is there
Speaker 1: some value social economic value to what you're doing? To
Speaker 1: me that would have that's a pretty good filter for
Speaker 1: activity that is not really good for shareholders either. The
Speaker 1: huge risks the banks are customed to taking those turn
Speaker 1: out badly way too often. So how did RBS run
Speaker 1: into trouble because they are in deep trouble. RBS is
Speaker 1: actually doing pretty well right now with the reality and
Speaker 1: they they were with the world's worst bank for up
Speaker 1: until a couple of years ago, and they managed. They
Speaker 1: had been on this acquisition spree. They were every single
Speaker 1: crisis there was RBS steps in the middle everything. When
Speaker 1: there are a lot of banks that fit that mold right.
Speaker 1: UBS is another good example, City Group, Deutschebank unbelievable, and
Speaker 1: all these banks and and and well it's far ago.
Speaker 1: I mean, we can it's hard to name banks that
Speaker 1: haven't made these catastrophic mistakes. Chase JP Morgan is really
Speaker 1: the exception. Yeah, and Goldman too to a certain extent.
Speaker 1: I think, um, they've certainly had their blunders, but they
Speaker 1: they're not. Those are banks that have been much more
Speaker 1: conservative and I think better. Manager Stanley arguably sidestep much
Speaker 1: of the debacle. We have been speaking to David Enrich
Speaker 1: about the Spider Network. If you enjoy this conversation, be
Speaker 1: sure and check out our podcast extras, where we keep
Speaker 1: the tapes rolling and continued discussing all things Liebor. We
Speaker 1: love your comments, feedback and suggestions right to us. At
Speaker 1: m IB podcast at Bloomberg dot net, where we keep
Speaker 1: the tape rolling and continue discussing all things lie Bar.
Speaker 1: You can find that wherever finer podcasts are sold SoundCloud, Overcast,
Speaker 1: Apple iTunes, and of course Bloomberg dot com. You can
Speaker 1: check out my daily column on Bloomberg View dot com.
Speaker 1: Follow me on Twitter at Rid Halts. I'm Barry Rit Halts.
Speaker 1: You're listening to Masters in Business on Bloomberg Radio. Welcome
Speaker 1: to the podcast, David. Thank you so much for doing this.
Speaker 1: I found I'm only halfway through the book, but I
Speaker 1: found it to be absolutely fascinating, and it unfolds like
Speaker 1: a spy novel. It's it's really amazing characters and all
Speaker 1: these things going on, and you're kind of astonished along
Speaker 1: the way that wait, can they really do that? That?
Speaker 1: That seems like that doesn't make any sense? How much
Speaker 1: fun was this to research and write? So much fun
Speaker 1: it was. It was the most fun I've ever had
Speaker 1: as a journalist. Honestly, I found I found getting to
Speaker 1: know these characters fascinating. I found the historical research fascinating.
Speaker 1: I actually really enjoyed the writing part two. I felt
Speaker 1: like I got h It was a peaceful, creative process
Speaker 1: for me, and I just was happy as a clam.
Speaker 1: So you you get to know the hay his family,
Speaker 1: you spend almost a year with them, than from to
Speaker 1: that early through middle of so and close to two
Speaker 1: and a half years. Are you surprised that he's the
Speaker 1: only person who ended up going to jail for this. I'm,
Speaker 1: on the one hand, surprised because that doesn't seem right
Speaker 1: or fair. There were a few other people who got
Speaker 1: very small jail sentence is not not part of his ring,
Speaker 1: but part of other people at other banks that were
Speaker 1: engaged and have similar behavior, but the jail sentences were
Speaker 1: tiny fractions of what he received. On the other hand, though,
Speaker 1: I'm not that surprised. And one of the things that
Speaker 1: I think has fueled the current populace movement, certainly fueled
Speaker 1: the rises of Bernie Sanders and Donald Trump in is
Speaker 1: the sense that Wall Street got away with murder and
Speaker 1: no one was held no no individuals were held accountable,
Speaker 1: while so many people in the public lost their jobs,
Speaker 1: or their homes or their savings as a result of this.
Speaker 1: And I think there's that's that feeling that's been out
Speaker 1: there since the financial crisis that's it lends itself to demagoguery,
Speaker 1: and it's often oversimplified and not very nuanced, but there's
Speaker 1: a big kernel of truth that behind that, And drain
Speaker 1: the swamp is an effective slogan. Drain the swamps and
Speaker 1: effective slogan. And the fear that Wall Street is taking
Speaker 1: advantage and people are everyone is in the pocket of
Speaker 1: Wall Street, whether it's politicians or proseutors. That's again, it's
Speaker 1: not that simple, but there is some truth to that,
Speaker 1: and there's no to me, there's no more powerful manifestation
Speaker 1: of that than looking at the almost uniformly low level,
Speaker 1: slightly dysfunctional, almost autistic guys who bear the brunt of
Speaker 1: the criminal accountability for actions committed during the financial crisis.
Speaker 1: It's not just haz And there's people involved in London
Speaker 1: Whale that are kind of like a little on the spectrum.
Speaker 1: I don't know them, but that's just the sense I get.
Speaker 1: The guy who has been account held accountable for the
Speaker 1: flash crash in is a guy who is like a
Speaker 1: little bit on the spectrum. There's this is a pattern.
Speaker 1: So what was the most shocking thing you discovered while
Speaker 1: you were researching this? To me, that it was not
Speaker 1: it is not something it's going to make a sexy headline,
Speaker 1: but it was really the degree to which culture at
Speaker 1: banks matters and has real world impacts. As someone who's
Speaker 1: been covering the banking industry in the U S and
Speaker 1: the UK for many years, I'd kind of dismissed as
Speaker 1: hogwash this notion of culture that consultants and banking executives
Speaker 1: pay lip service too. But I actually realized that it's true,
Speaker 1: and there's the culture at the institutions where Tom Hayes
Speaker 1: worked was one where envelope pushing was not just acceptable,
Speaker 1: but it was explicitly encouraged, explicitly and explicitly encouraged. And
Speaker 1: the senior executives at a number of these institutions, not
Speaker 1: just where Hayes worked, but across the industry were doing
Speaker 1: things not just with their trading but also just what
Speaker 1: their socialized doing things that are just out of controlled drinking, womanizing, drugs,
Speaker 1: things like that that we that you can't help. But
Speaker 1: look at the behavior of a top executive as a
Speaker 1: as an underling in an organization and take a cue
Speaker 1: from that person. If that person is doing stuff that
Speaker 1: is just nuts, you're gonna get the message that it's
Speaker 1: okay to be nuts. So so you can identify a
Speaker 1: distinct cultural difference from bank to bank, executive to executive,
Speaker 1: even if not pushing the envelope means our profit level
Speaker 1: is going to be a little less. That that works
Speaker 1: its way through the entire troops. Absolutely, And I think
Speaker 1: that we're talking earlier about how some some of the
Speaker 1: banks have survived whethered crasies pretty well. Are the like
Speaker 1: and JP Morgan is a good example, and it's an
Speaker 1: enormously profitable institution. It's made many, many mistakes, of course,
Speaker 1: but that's an institution where it's okay to leave some
Speaker 1: money on the table sometimes. But they don't. They don't
Speaker 1: seem to make existent mistakes like like Lehman did, like
Speaker 1: There did, like City Bank there. Apparently the list of
Speaker 1: banks that have made existential mistakes is much longer than
Speaker 1: a list of banks that have it. And I can
Speaker 1: I really can't think and not all of them, not
Speaker 1: all of the mistakes became existential because thanks largely taxpayers,
Speaker 1: but there was I mean, it's it's really hard for
Speaker 1: me to think of a bank that really managed risks
Speaker 1: well and would have been fine without government intervention. And
Speaker 1: that's that's again there's a lot of external circumstances to play,
Speaker 1: and there's good luck and bad luck. But the reality
Speaker 1: is these banks were financial institutions in general, were responding
Speaker 1: to press again, incentives from shareholders too, and uh the
Speaker 1: analyst community to amp up profits as quickly as possible
Speaker 1: quarter after quarter, and the best way to do that
Speaker 1: is to take more risks. And that works really well
Speaker 1: until it doesn't. So before I get to my favorite questions,
Speaker 1: I have to ask you a little bit about um,
Speaker 1: your writing process, because it really is kind of fascinating.
Speaker 1: How did you find your way to the Wall Street
Speaker 1: Journal that was back in oh seven before the crisis?
Speaker 1: Is that right? It was? I started at the journal
Speaker 1: in December of two thousand seven, so the crisis was
Speaker 1: right as the recession was started. Yeah, right, is saying
Speaker 1: that was right? I started right after Chuck Princeton Standard
Speaker 1: Neial lost their jobs at the Maryland City Group. And
Speaker 1: I've been working at down John's News Wires, which is
Speaker 1: uh same same parent company for a few years in
Speaker 1: Washington and in New York, and prior to that had
Speaker 1: been doing other journalisms. And you were in Washington covering
Speaker 1: not banks. What were you covering? I was covering politics.
Speaker 1: My first job out of college was working for this
Speaker 1: little wire service. It was kind of Washington d C
Speaker 1: bureau for a bunch of regional newspapers. So I was
Speaker 1: I was covering d C for a newspaper in Wisconsin.
Speaker 1: One in Amarillo, Texas where they which is home to,
Speaker 1: uh the manufacturer of the V twenty two osprey. You
Speaker 1: know there's plane. At the time they were this is
Speaker 1: in the early two thousands, they were they kept crashing
Speaker 1: and they kept inviting me to go down there and
Speaker 1: write on one, and I thought they were They were crazy.
Speaker 1: They fly now you see them around actually in the
Speaker 1: UK uses them all the time there. You see them
Speaker 1: flying around London. They were really considered wildly over priced,
Speaker 1: bone dog one of that. I don't remember the price.
Speaker 1: I just remember the fact that they kept crashing. They
Speaker 1: weren't safe at all. They would like they would crash
Speaker 1: like ten at the time. That's not a good ratio,
Speaker 1: that's a bad number. So so you find your way
Speaker 1: to the journal, you stop covering politics, do you immediately
Speaker 1: start covering banks out of that work? Yeah, I started
Speaker 1: covering finance at Dow Jones at news Wires, and I
Speaker 1: had no idea. I had fallen asleep for most my
Speaker 1: icon classes in college finance experience. Uh. But my first
Speaker 1: job at Dow Jones was actually, uh, my primary goal
Speaker 1: was to I had to read all these SEC filings
Speaker 1: and so I kind of taught myself what a balanced
Speaker 1: she is when income statement is how companies make disclosures,
Speaker 1: and that proved to be a really useful skill. Um,
Speaker 1: and I learned a lot about the industries, but more important,
Speaker 1: I learned how to do research, which is kind of
Speaker 1: the lifeblood of any good business reporter. So you're covering
Speaker 1: Tom Hayes for the Journal. You're you're one of five.
Speaker 1: You know, you're one of the journalists responsible for the
Speaker 1: five part series that led to the lobe A ward.
Speaker 1: What made you say, um, let's turn this into a book.
Speaker 1: It was, you know what it was? It was that
Speaker 1: in that five part series, and that was I don't know,
Speaker 1: it's like seven or eight thousand words, which is really
Speaker 1: long by newspaper journalist standards, manning journalist standards. And I
Speaker 1: looked at what I had as I wrote that, and
Speaker 1: there was just I had so much more material and
Speaker 1: I felt like I was having to really leave so
Speaker 1: much on the cutting room floor, And that was the
Speaker 1: narrative in that story to me, and I think a
Speaker 1: lot of readers as well, with really powerful and it
Speaker 1: was putting a human face on someone who had been
Speaker 1: caricatured as a villain and it you know, it turns
Speaker 1: out we all have a lot in common, and you know,
Speaker 1: once you get to know someone, you can really relate
Speaker 1: to them more. And to me, that was this is
Speaker 1: a great character, a great narrative arc, and a great
Speaker 1: opportunity to bring some of this finance stuff to a
Speaker 1: mass audience, because the finance industry over the past twenty
Speaker 1: years has done a really good job at kind of
Speaker 1: cloaking itself in opacity and making it seem like the
Speaker 1: stuff they're doing is so complicated and so important that
Speaker 1: no mere mortal can actually understand it. And you know what,
Speaker 1: that's nonsense. There by the way, that is a feature,
Speaker 1: not a bug. When things are simple and transparent, you
Speaker 1: can't charge know that, that's completely right. They they have
Speaker 1: thrived on this lack of transparency and this kind of
Speaker 1: the mystification of the banking industry. They've thrived on it,
Speaker 1: and that drives me crazy, and it so to me
Speaker 1: this was how do you get people to actually read
Speaker 1: a book about finance. A One way is to make
Speaker 1: it read like a spy miss spin and it does
Speaker 1: and and that's gratified theories. That was the goal. And
Speaker 1: at the same time, you can get people to eat
Speaker 1: some of their like carrots and spinach sneak sneaking in
Speaker 1: And I feel like there's I used my parents, who
Speaker 1: don't know what's tremends amount about finance as kind of
Speaker 1: guinea pigs, and uh, that was a laborious process that
Speaker 1: might not have been great for my relationship with my parents,
Speaker 1: But so funny you say that my wife is an
Speaker 1: art teacher, my mother is a real estate agent. And
Speaker 1: when I'm trying to explain anything in finance, if I
Speaker 1: can get if I could create an explanation that both
Speaker 1: of them easily get, I know you're in business, I
Speaker 1: know I understand it, and I know I can explain.
Speaker 1: That was one of the interesting things for me is
Speaker 1: that that act of trying to explain things, either trying
Speaker 1: to write them in really simple terms or explain them
Speaker 1: to human beings like my book editor, for example. The
Speaker 1: act of doing that, I I had at this point
Speaker 1: been covering banks for since like two thousand and four,
Speaker 1: I think, so this is more than a decade. And uh,
Speaker 1: I thought I did know the industry quite well. But
Speaker 1: the act of trying to explain to someone what an
Speaker 1: interest rate swap is, what a derivative is, what does
Speaker 1: the bank actually do that that was a sobering moment
Speaker 1: for me because I realized that as well as I
Speaker 1: knew this industry and as many you know, hundreds if
Speaker 1: not thousands of stories had written about it, I it
Speaker 1: was very hard to explain these things, and I don't
Speaker 1: think I understood them fully. So I was gonna say
Speaker 1: the old line is, if you really want to understand something,
Speaker 1: teach it, because if you could teach it, then you really,
Speaker 1: you really get it. So I found myself in writing
Speaker 1: this book. There's a section on what a derivative is
Speaker 1: and what an interest rate swap is, and I remember
Speaker 1: sitting down to write writing it. Sitting down to write it,
Speaker 1: and I realized I was writing just nonsense. It was gibberish,
Speaker 1: and it was a very obvious reflection of my lack
Speaker 1: of nuanced understanding of it. So I had to go
Speaker 1: back and I found a bunch of professors who had
Speaker 1: were former traders to kind of walk me through it,
Speaker 1: and I just read a hot and arrived at a
Speaker 1: point where I did understand. And honestly, a lot of
Speaker 1: this stuff is not that complicated when you boil it
Speaker 1: down to its essence. It's that Wall Street does a
Speaker 1: very good job of cloaking everything and acronyms and jargon
Speaker 1: and you know, just doubling the complexity for the sake
Speaker 1: of complexity itself. So augusteen, you leave the Wall Street Journal,
Speaker 1: you go to the New York Times. What motivated that change?
Speaker 1: And and what is it like working at the Gray Lady? Um?
Speaker 1: What motivated that changes? I've been at the Journal for
Speaker 1: a long time. I love the water. Yeah, and I've
Speaker 1: been there for at the Journal for a decade, And
Speaker 1: if you count my time at DOWD John's before that,
Speaker 1: it was closer to fifth and that was a that
Speaker 1: was a decade where a lot of stuff was happening. Yeah,
Speaker 1: I mean a lot of stuff externally, was the entire
Speaker 1: financial crisis, a lot of stuff internally. Murdoch bought the place,
Speaker 1: and look, I love the Wall Street Journal day day
Speaker 1: in and day out, do great stuff. In fact, this
Speaker 1: may or may not be a coincidence, but since I left,
Speaker 1: they've just been on this tear, one awesome scoop after another.
Speaker 1: So I'm not sure that's because I left her despite me,
Speaker 1: but there's but the time, I hope not. The times
Speaker 1: is great. We are um in the midst of trying
Speaker 1: to kind of expand and revitalize our business and finance
Speaker 1: do so I'm the finance editor, so I run a
Speaker 1: team of I think nine or ten reporters and we're hiring,
Speaker 1: uh so, everything from banking and Wall Street and markets
Speaker 1: to UM, insurance, business, public pensions, um, the whole range
Speaker 1: of everything. So it's fun, it's busy, it's uh you know,
Speaker 1: this is I think we might be entering a new
Speaker 1: turbulent era. So there'll be lots more to write about.
Speaker 1: So let's get to my favorite questions. I asked these
Speaker 1: of all my guests, tell me the most important thing
Speaker 1: that people don't know about you. I have been bald
Speaker 1: since I was fifteen years old. Fifteen Mikey here that
Speaker 1: so my head of research a couple of years ago
Speaker 1: and he's early thirties, just said, the hell with it.
Speaker 1: I'm just gonna start shaving. Well, that's smart. He gave
Speaker 1: up on it, Dave, as early as and often as
Speaker 1: you can. There's nothing is? So what was that like
Speaker 1: in high school? I can't the words. I'd get bleeped out.
Speaker 1: It's awful kidding me? So not? And and you were
Speaker 1: just at the edge of the Michael Jordan era. So
Speaker 1: you wanted to be like Mike or it? You just said,
Speaker 1: is there is? Well, I yeah, shaved my head, but
Speaker 1: that was not because I wanted to be like Mike.
Speaker 1: That's because I was going bald, isn't. Wow? That's amazing.
Speaker 1: Um Who were some of your early mentors who influenced
Speaker 1: your research and writing styles? Um My dad certainly did.
Speaker 1: He's a professor and was he teaching What does he teach?
Speaker 1: He teaches law at Northeastern University in Boston. Um My,
Speaker 1: and my mom actually was a mentor, and not in
Speaker 1: terms of writing, but in terms she's a psychologist. And
Speaker 1: I've found that the one of the most important things
Speaker 1: about being a successful journalist is the inability to get
Speaker 1: people to talk to you, people who often aren't supposed
Speaker 1: to talk to you, get them to think that it's
Speaker 1: in their best interests to do so, and the best
Speaker 1: way to do that is to kind of understand where
Speaker 1: they're coming from and show empathy and listen. Well, and
Speaker 1: those are traits that my mom really taught me. But uh,
Speaker 1: I mean there's throughout college. And I said a number
Speaker 1: of great professors who taught me that, you know, don't
Speaker 1: use adverbs, don't write passive sentences, use action verbs, things
Speaker 1: like that. Don't okay, don't use adverbs, no passive action words,
Speaker 1: short sentences, direct use you know, don't use a three
Speaker 1: syllable word when a one syllable word, we'll do. There's
Speaker 1: a one syllable word for syllable beat. Oh, I like
Speaker 1: that very good. Um tell us the journalists who influenced
Speaker 1: the way you approach covering a topic, Um, the kind
Speaker 1: of great inspirations And for me, at least in business
Speaker 1: journalism or this is not gonna surprise. I mean, Michael
Speaker 1: Lewis is one of the great. Uh, nobody focuses on
Speaker 1: characters in finance the way he does. Absolutely, he's easily
Speaker 1: the best there is at that and it's just inspiring.
Speaker 1: And to me, actually, my favorite writing of his is
Speaker 1: actually not in the finance basaying Moneyball is a book
Speaker 1: that and change I'm a huge baseball fan, and change
Speaker 1: the way I watched baseball and thinking about baseball, which
Speaker 1: is saying a lot because I at that point, I
Speaker 1: can't remember when that came out, early two thousand's probably,
Speaker 1: and I at that point it's spent my entire life
Speaker 1: obsessing over the Boston Red sucks. And to then see
Speaker 1: to view it through this entirely different prison, it's something
Speaker 1: really exceptionally powerful. And that's essentially a book about stats, right,
Speaker 1: I was gonna I was gonna push back and say
Speaker 1: it shares a tremendous amount with the rise of quants
Speaker 1: and finance and rise and quants. It's, oh, we have
Speaker 1: computers and we understand math. Here's how to make the
Speaker 1: segment better. It just doesn't matter which the subject is.
Speaker 1: And he does a masterful job. Have you ever read
Speaker 1: The blind Side of Him? I love The blind Side
Speaker 1: as well. It's actually his funniest book. I think is
Speaker 1: just laugh out loud segments and it's obviously a very
Speaker 1: personal book. Without spoiling any of it for anyone. Um,
Speaker 1: since we're talking about books, well before we talk about books,
Speaker 1: anyone else in the media you want to reference, Yeah,
Speaker 1: there are two others. One is Jim Stewart, who is
Speaker 1: now a columnist Thieves, Thieves, Den of Thieves and like
Speaker 1: a zillion other books, but that was the one that
Speaker 1: really Yeah, that was an amazing book and he's I'm
Speaker 1: really proud. That's why my one of the many great
Speaker 1: things about working at the Times these days is he's
Speaker 1: a colleague of mine and I get to bounce ideas
Speaker 1: off him and sometimes the same with me. And that's saying.
Speaker 1: And the one other personal mention is not a journalist
Speaker 1: is but it used to be is Karrik Mullencamp, who
Speaker 1: is uh, the guy who when he was a Wall
Speaker 1: Street journal reporter basically uncovered the lie Worlar scandal and
Speaker 1: real not like he uncovered like there was an investigation
Speaker 1: going on, but he did the number crunction in the
Speaker 1: analysis and something sourcing and yeah, blew the whistle on
Speaker 1: it essentially, And that, to me is the most profound
Speaker 1: example I've seen in business journalism in a really long
Speaker 1: time of a newspaper story or a news story changing
Speaker 1: the world. So, since we mentioned uh, money ball, what
Speaker 1: are some of your favorite books finance, nonfinance, fiction, nonfiction?
Speaker 1: What what do you really like Um, I really like
Speaker 1: the business genre. Actually, and there's We've mentioned Michael Lewis,
Speaker 1: We've mentioned Denil Thus by Jim Stewart, When Genius Failed
Speaker 1: by Roger Lonstein is uh is a great one. The
Speaker 1: thing I like about I like books that have a
Speaker 1: narrative arc, so whether that's fiction or nonfiction. And Um,
Speaker 1: to me, that's it's really I mean, I got out.
Speaker 1: I have no idea how to write a write a novel,
Speaker 1: but there's in in think that's a lot of way
Speaker 1: is harder than writing nonfiction, but nonfiction doing in a
Speaker 1: compelling way. I mean, I've done this one tonight. It's hard,
Speaker 1: and it's really hard. And being able to find character
Speaker 1: and get them to open up to you, and being
Speaker 1: able to tell their stories in a way that not
Speaker 1: only engages readers, but it's also honest and it really
Speaker 1: reflects what's going on in a non superficial way. That's
Speaker 1: hard and it's so powerful when you can get it right.
Speaker 1: Give us one more. Another recent one is I'm gonna
Speaker 1: butcher her name, but Sheila from The New York Or
Speaker 1: her book Black Edge on Stevie is a great one. Yeah. Um,
Speaker 1: that's that's a really interesting title. Alright, let's uh, let's
Speaker 1: talk a bit about financial journalism. What excites you right
Speaker 1: now that's going on in the world of financial media.
Speaker 1: We're just finding new ways to tell stories. I mean,
Speaker 1: the notion of a story as something with a lead
Speaker 1: and a nutgraph and uh, just all sort of garbage
Speaker 1: in the middle that runs eight words. That's gone, I mean,
Speaker 1: is not gone. It needs to be gone. It's going away,
Speaker 1: and we're trying to And again, the New York Times
Speaker 1: is not at all alone. As the journal is doing this,
Speaker 1: Bloomberg does is everyone is doing this, but trying to
Speaker 1: find creative ways to engage readers who are increasingly reading
Speaker 1: everything on their phone is hard and really disruptive, but
Speaker 1: it's actually a lot of fun. And you can be
Speaker 1: at the big media organizations that are investing a lot
Speaker 1: and hiring really talented people that are not just writers
Speaker 1: but are also graphics people or computer programmers or audio
Speaker 1: people or video people and doing clever, creative stuff. It's
Speaker 1: this whole new world that is not what I grew
Speaker 1: up in, And as long as you have tolerance for
Speaker 1: experimentation and occasional failure, it's a lot of fun. The
Speaker 1: so let's go down the list of these big interactive
Speaker 1: digital stories, The New York Times, the Wall Street Journal, Bloomberg,
Speaker 1: Washington Post. There have been some amazing things, and if
Speaker 1: that's the future of journalism, you have to be encouraged, right, Yeah,
Speaker 1: I think the future of journalism is really bright right now.
Speaker 1: I mean there's uh, look, what doesn't work is giving
Speaker 1: away commoditized content for free. That's like, that's not a
Speaker 1: business model. So but I think everyone gets that at
Speaker 1: this point. There's not There's plenty of commoditized stuff out
Speaker 1: there that will be free, but that's not a business
Speaker 1: model that that's not sustainable. Well, it doesn't generate revenue, right, No,
Speaker 1: I don't want I'm not going to pay for that,
Speaker 1: are you? Probably not? Like you need to pay for
Speaker 1: The New York Times, the Washington Post, the Wall Street Journal,
Speaker 1: the Financial Times, and a handful of magazines like The
Speaker 1: New York are in the Atlantic. But it's high quality,
Speaker 1: expensive content, and I think that's something. I mean, I
Speaker 1: think that's probably much more media than the average person
Speaker 1: is going to consume. But there's I think people do
Speaker 1: in this day and age. I think there's the notion
Speaker 1: of fake news has resonated a lot, and people are
Speaker 1: they want to know what's really going on in the world.
Speaker 1: These are like dangerous times, regardless of your ideology, and
Speaker 1: people are willing to pay. And it's not just news,
Speaker 1: by the way, and sports coverage is going through this
Speaker 1: renaissance where there's all these kind of localized businesses, localized
Speaker 1: business models that are popping up all over the country
Speaker 1: where people that's something people really care about. I care
Speaker 1: about that, and I subscribe to the Boston Globe for
Speaker 1: the sole reason that I want their sports coverage. And
Speaker 1: that's something that that's very valuable to me, and I
Speaker 1: think a lot of people. You just need to do
Speaker 1: things that are valuable and not commoditized and people will
Speaker 1: pay for tell us about a time you failed and
Speaker 1: what you learned from the experience. Man, I fail almost
Speaker 1: every day. It's something really yeah, don't. I mean, I
Speaker 1: make mistakes all the time. There's uh, seriously, I make
Speaker 1: decisions that turn out not to be very good. I
Speaker 1: I mean, I have two little kids also, so that
Speaker 1: is just a huge recipe for one failure after another
Speaker 1: as a new parent. That's uh, you know, I I
Speaker 1: do it all the time. I think the key is
Speaker 1: to just be able to yeah, own their mistake and
Speaker 1: move on. All right. That makes a lot of sense
Speaker 1: to me. What do you do for fun? What do
Speaker 1: you do out of the office to kick back, relax,
Speaker 1: stay physically or mentally sharp. I have two little kids,
Speaker 1: so I play with them, I take them outside, I
Speaker 1: ride a bike, I read a lot, listen to music,
Speaker 1: go on vacation. I'd love to travel. Um. Yeah, I
Speaker 1: just was down in Georgia, which we've never been to,
Speaker 1: and as a work of vacation, vacation we just stay
Speaker 1: in Georgia. We were in Savannah and then Jekyll Island
Speaker 1: of Lovely Places. Jacki Island is where the fed the
Speaker 1: idea from Jacki Island, very favorite famous book. Um, if
Speaker 1: a millennial came to you and said they were thinking
Speaker 1: about a career in journalism or writing, what sort of
Speaker 1: advice would you give them. Develop a skill that sets
Speaker 1: you apart, whether that is being really good at game
Speaker 1: people to talk to you, or being really good at writing,
Speaker 1: or learning some uh some element of computer programming, or
Speaker 1: developing expertise in audio or video stuff. Don't go the
Speaker 1: route of just aiming to be at the Wall Street
Speaker 1: Journal or the New York Times, go develop some specialization.
Speaker 1: And our final question, uh, tell us what you wish
Speaker 1: you knew about the world of banking and finance and
Speaker 1: libor fifteen years ago, I wish someone had told me
Speaker 1: that everyone is going to try and make it seem
Speaker 1: much more complicated than it really is. When you boiled
Speaker 1: down to the essence, it's pretty understandable for someone with
Speaker 1: a brain. That's as good an answers as I've ever heard.
Speaker 1: We have been speaking with David Enrich of The New
Speaker 1: York Times. If you enjoy this conversation, be sure and
Speaker 1: look up an inch or down an inch on Apple
Speaker 1: iTunes and you could see any of the other hundred
Speaker 1: and ninety three or so such conversations we've had previously.
Speaker 1: We love your comments, feedback and suggest Jen's right to
Speaker 1: us at m IB podcast at Bloomberg dot Net. I
Speaker 1: would be remiss if I did not thank my crack
Speaker 1: staff who helped put together the show every week. Medita
Speaker 1: Parwana is our producer slash audio engineer. Taylor Riggs is
Speaker 1: our booker slash producer. Michael bat Nick Bolts and Slate
Speaker 1: twenties not quite not quite so he had twelve good
Speaker 1: years on you um is our head of research who
Speaker 1: helps me assemble a lot of the details and questions
Speaker 1: and really makes these shows what they are. I'm Barry Ridholtz.
Speaker 1: You're listening to Masters in Business on Bloomberg Radio.