Speaker 1: This is Masters in Business with Barry Ridholts on Boomberg Radio.
Speaker 1: This week on the podcast, I have an extra special guest.
Speaker 1: His name is Peter Conti Brown, and he is an
Speaker 1: expert on central banks, financial history, and the Federal Reserve.
Speaker 1: And if you are interested in those sorts of things,
Speaker 1: as I am and many of you are well, then
Speaker 1: sit back and get ready to walk out on some
Speaker 1: really interesting um stuff. He he really has a in
Speaker 1: depth grasp on not just central bank operations, but on
Speaker 1: the history of finance and the history of Federal Reserve
Speaker 1: in a way that most people simply can't do more
Speaker 1: than scratch the surface. So if you are at all
Speaker 1: interested in modern banking regulations, the politics at the FED,
Speaker 1: what Greenspan and bernanke he did or should have done
Speaker 1: or didn't do, and how the history of the Fed
Speaker 1: squares up with the modern era, you're in for a treat.
Speaker 1: So sit back with no further ado. My conversation with
Speaker 1: Peter Conti Brown. My guest this week is Peter Conty Brown.
Speaker 1: He is a professor at the Wharton School at University
Speaker 1: of Pennsylvania and he is the author of the Power
Speaker 1: and Independence of the Federal Reserve. He comes to us
Speaker 1: by Harvard, where he was undergraduate. He got his juris
Speaker 1: doctor degree at Stanford Law School, and then he earned
Speaker 1: a PhD at Princeton in am. I remembering this correctly
Speaker 1: legal history is that it's a financial history. Financial history
Speaker 1: even better for our purposes. Peter Conti Brown, Welcome to Bloomberg's.
Speaker 1: Such a pleasure to be here. Thanks Barry So. I
Speaker 1: read one of your columns some time ago, and I
Speaker 1: kind of cracked up by a line within it which
Speaker 1: we're all somewhat guilty of to some degree or another.
Speaker 1: You note something remarkable in the shelves of an old
Speaker 1: fashioned library which uses the Dewey decimal system. Go to
Speaker 1: h G section and you right, the shelves variably grown
Speaker 1: under the weight of the conspiratorial tomes about the Federal Reserve.
Speaker 1: Why why are we so conspiracy minded about America's Central Bank?
Speaker 1: In some sense, it's the founding crisis ideologically, right, militarily,
Speaker 1: certainly politically, and that is what is money? And who
Speaker 1: gets to decide? Right? The British said money has to
Speaker 1: consist of such and such and so and so, with
Speaker 1: tariffs and stamps and this much silver associated with it
Speaker 1: while starving the colonies of the resources to deliver on
Speaker 1: that promise, or so asserts the Declaration of Independence. Right, Well,
Speaker 1: fast forward a few years, the Revolutionary War is over.
Speaker 1: But then we get the in the Washington administration Alexander
Speaker 1: Hamilton's one hand, Thomas Jefferson on the other, Lin Manuel
Speaker 1: Miranda in the middle, right. Uh, And and the reason
Speaker 1: I think that Hamilton's musical has succeeded to spectacular lin
Speaker 1: Manuel Miranda is a genius um but his other musicals
Speaker 1: like In the Heights right, also fabulous. But hamilton musical
Speaker 1: gets to this question, what is money? Who gets to decide?
Speaker 1: We thought about that forever, and we fought about it
Speaker 1: in ways where that become extremely technical very quickly. Alexander
Speaker 1: Hamilton's certainly very technical expert on these issues, but on
Speaker 1: like other areas of technical expertise, like you know, hey,
Speaker 1: how do you get a satellite into orbit? Right? You
Speaker 1: don't have a lot of ideology around that. You just say, well,
Speaker 1: either works or it doesn't. Either your trajectory is accurate
Speaker 1: or it's not, in which case, now, with all respect
Speaker 1: to the Flat Earth society, and you know, moon Landing
Speaker 1: was staged and that sort of thing. They're conspiracy theorists
Speaker 1: there too. But the difference is is that you don't
Speaker 1: use satellites to buy groceries, right, You do use money
Speaker 1: to buy groceries. And so that intuition about what money
Speaker 1: should be and who gets to decide is shared by
Speaker 1: a lot of different people. And so there's a gap
Speaker 1: between what experts who themselves don't agree say should be
Speaker 1: a proper financial system, a proper monetary system, and what
Speaker 1: we in all kinds of identitarian factions, whether they're religious
Speaker 1: or political, or or geographical or or whatever else, you say, well, no,
Speaker 1: that's wrong. And so I think the FED is just
Speaker 1: this great collision of expertise, of ideology, of history, of politics,
Speaker 1: of economics, of law, and that just produces a really
Speaker 1: pungent potion that attracts conspiratorial thinkers and uh and experts alike.
Speaker 1: So let's talk about that explicitly because it comes so often. Um,
Speaker 1: the creature from jack All Islands, that book which is
Speaker 1: now decades old and it goes through a new edition
Speaker 1: every few years. That seems to be the source amongst
Speaker 1: the people I see as the conspiracy theorists. Says, hey,
Speaker 1: this was doomed from the start. But you're a historian
Speaker 1: of of financial markets. We could go back to the
Speaker 1: first Federal Reserve or the second Federal Reserve. In each case,
Speaker 1: there was a tremendous fear and skepticism in the eighteen
Speaker 1: hundreds about those banks, and each of them were and
Speaker 1: I'll ask the question to you, each of those were
Speaker 1: imbued with a finite lifespan. So why did it take
Speaker 1: so long before America said, Hey, we can't be the
Speaker 1: only major country that doesn't have a central man. You know,
Speaker 1: you asked you know, separately. One of the questions that
Speaker 1: you asked me was, you know, what are some un
Speaker 1: unnoted periods in financial histor three that people don't think
Speaker 1: about that matter a lot, And there's one of them.
Speaker 1: In NTE Congress passed a statue just on uh right
Speaker 1: before a Great Depression, look at the Federal Reserve Act
Speaker 1: and said, the Federal Reserve was created just like the
Speaker 1: first and second Banks the United States, with a twenty
Speaker 1: year charter. And so let's do some quick math. Federals
Speaker 1: are BacT nineteen plus twenty ninety three nineteen thirty three
Speaker 1: in the midst of the Great Depression, right at a
Speaker 1: time when Franklin Roosevelt was not uh, you know, representing
Speaker 1: these uh, these what his cousin Theodore had called the
Speaker 1: malefactors of great wealth. Right, Um, would the FED have
Speaker 1: been renewed in nineteen thirty three, I think that's a
Speaker 1: really fascinating question. We didn't have to ask it because
Speaker 1: seven uh slipped five years in advance, five years in advance,
Speaker 1: slipped in you know, uh slipped in two As a
Speaker 1: writer as a to a much more controversial banking bill,
Speaker 1: they said, you know what we're going to We're going
Speaker 1: to eliminate the need for a charter extension. This is
Speaker 1: going to be in perpetuity. Um. What's so intriguing about
Speaker 1: that is in the Second Bank of the United States,
Speaker 1: that's exactly what the Second Bank's president, Nicholas Biddle, tried
Speaker 1: to do. His charter wasn't up until eighteen thirty six,
Speaker 1: and he slipped it in early because he thought, you
Speaker 1: know what, the bank is so popular that we can
Speaker 1: do this, and we should do it early, as opposed
Speaker 1: to letting it be a big controversial thing. That was
Speaker 1: one of the best biggest miscalculations right in the nineteenth
Speaker 1: century because Andrew Jackson was able to harness his own
Speaker 1: popularity against the bank. But we sometimes forget when the
Speaker 1: Second Bank of the United States failed. It failed because
Speaker 1: the Congress came just short at overwriting Jackson's veto. It
Speaker 1: was still massively popular, just wasn't so popular that could
Speaker 1: override a presidential vito. What were the politics of President
Speaker 1: Andrew Jackson that he was against renewing or turning that
Speaker 1: into a perpetual money machine. This is this is a
Speaker 1: great question and should remind our listeners a lot about
Speaker 1: our present political situation. There are two stories that one
Speaker 1: tells about Andrew Jackson. So one is as this fierce
Speaker 1: pugilistic populist right. He wanted to take power and tear
Speaker 1: it down and push it down into the states and
Speaker 1: away from the federal government. That's certainly the vision that
Speaker 1: the Jacksonian Democrats carried with them through the rest of
Speaker 1: the nineteenth century and into the twentie At certainly, at
Speaker 1: some points what Andrew Jackson saw himself as is representing
Speaker 1: those who had been disenfranchised, disempowered by Wall Street and
Speaker 1: the like. Um, I don't even that that far ago,
Speaker 1: even still the same conversation, same conversation very similar, and
Speaker 1: I think that that's, uh, that's a bit of of
Speaker 1: revisionism by Jackson and his descendants politically, who wanted to
Speaker 1: make a more coherent narrative than actually existed at the time.
Speaker 1: At the time, Jackson was much more like other politicians
Speaker 1: that we are probably going to come up in this
Speaker 1: conversation and just didn't like to have other power bases
Speaker 1: that threatened his control. Right, So there were times when
Speaker 1: he would say, uh, Andrew Jackson would say two different
Speaker 1: things that were were together incoherent about his own monetary vision,
Speaker 1: sayings very he hated the idea of paper money, while
Speaker 1: simultaneously saying, let's uh send the economy a wash in
Speaker 1: paper money but issued by state banks, right, um, where
Speaker 1: you'd show real hostility to a gold backed currency, while
Speaker 1: simultaneously saying it's the only mechanism that he would approve of.
Speaker 1: So I don't think you can put an economic ideology
Speaker 1: on Andrew Jackson. I think efforts to do so, uh
Speaker 1: failed to realize that Andrew Jackson, like Donald Trump, frankly
Speaker 1: UH say you know, I am the source of decision
Speaker 1: making the idea that there would be another power base
Speaker 1: that could threaten my control over the UH system that
Speaker 1: I can't abide, and so he went to war with
Speaker 1: Nicholas Biddle and UH. And I think that's the that's
Speaker 1: the source of that conflict. Fascinating. Um, your your students,
Speaker 1: grad students or undergrads are both everything and executives and
Speaker 1: PC students, and so we really teach them all. So
Speaker 1: so much has been going on in the worlds of
Speaker 1: banks since the financial crisis. I have to ask you
Speaker 1: about Dodd frank and and the changes to that. But
Speaker 1: before we get there, we now live in an era
Speaker 1: of mega banks. All the banks are really relatively giant
Speaker 1: compared to before the Financial crisis, a number of pretty
Speaker 1: substantial banks were either required or or moved over. You
Speaker 1: you have Washington Mutual and WA Kobe, and you know,
Speaker 1: look at all these different banks, Bank America and Merrill Lynch, um,
Speaker 1: all these giant conglomerations. How is the modern ear of
Speaker 1: banking different then the way it existed prior to the
Speaker 1: financial crisis? You know, Um, we've seen after the financial
Speaker 1: crisis essentially an unrivaled concentration in the financial system, financial services,
Speaker 1: the you know, just looking at commercial deposits, for example,
Speaker 1: which include personal and commercial deposits about seventeen trillion dollars
Speaker 1: right in the American that's just checking and savings, checking
Speaker 1: and saving accounts for individuals and businesses and organizations. Um.
Speaker 1: Megabanks which will call above two fifty billion dollars, right,
Speaker 1: So that's things like JP Morgan Chase, Bank America, will Fargo,
Speaker 1: and and much further down. It goes down to you
Speaker 1: know US Bank, and uh, you know PNC, and you
Speaker 1: know Fifth Third and other banks that you might think
Speaker 1: of as regional, but really, have you know a grown
Speaker 1: grown in into into great size, right, um, because JP
Speaker 1: Morgan Chase isn't. It's balanced as trillions of dollars right
Speaker 1: well as far agoes above trillion dollars. So we're taking
Speaker 1: down almost a more order of magnitude smaller than that.
Speaker 1: But these are still very very large banks. And they
Speaker 1: controlled about thirteen trillion dollars, right, thirteen of the sixteen
Speaker 1: trillion dollars, and in these deposits. That's an extraordinary concentration,
Speaker 1: especially given that the number of institutions we're talking about
Speaker 1: as a couple dozen. Right. This changes as banks balance,
Speaker 1: she exchange in size at the margin. But we are
Speaker 1: seeing financial services dominated by a handful of institutions. And
Speaker 1: and we have not seen that really ever before in
Speaker 1: our history, um, including the great mergery era of the
Speaker 1: late nineteenth century where you saw trusts around sugar oil, uh,
Speaker 1: corn harvesting machines, right and fill in the blank. There
Speaker 1: are these This is the great trust era. Have a
Speaker 1: great consolidation era. But interestingly enough, because of the structure
Speaker 1: of the US political economy, banks were extremely decentralist by law,
Speaker 1: UM each bank that for a very very long time,
Speaker 1: a bank couldn't have more than one branch. And even
Speaker 1: after that was changed in the late nineteen twenties, they
Speaker 1: couldn't have branching across states. Uh. And that wasn't finally
Speaker 1: abolished where you would have a bank doing business as
Speaker 1: its own institution across state lines until after nineteen eighty.
Speaker 1: What about the repeal of Glass de Eagle, What did
Speaker 1: that contribute towards banks bulking up? It's a contributed a
Speaker 1: lot so UM. I mean this is this is a
Speaker 1: point of some debate among economic historians. It's correlated right
Speaker 1: with banks uh bulking up in in in pretty breathtaking fashion.
Speaker 1: What some economic historians say, well, that's correlated, but it
Speaker 1: wasn't caused by this, and we were Glass Eagle was
Speaker 1: essentially unrelated to this size. Now that's hard to swallow,
Speaker 1: at least in the short run after around Glass Eagle's
Speaker 1: final legislative demise, because of course City Group becomes city
Speaker 1: Group after exact issue of a city comes the first
Speaker 1: mega back. Uh. And so but then again, you know,
Speaker 1: a few years after that that was a pretty disastrous merger.
Speaker 1: They sold most of their insurance business because the synergies
Speaker 1: weren't present. And then what becomes really the shining example
Speaker 1: of a mega bank, JP Morgan Chase. And if we
Speaker 1: were list all of the names of the banks that
Speaker 1: they acquired along the way, chemical absolutely you know the
Speaker 1: bank First Um, what was Jamie Diamonds Bank that in Chicago,
Speaker 1: First Nationals, that what it's called. And he I believe
Speaker 1: he was at Smith Barney before that. When he was
Speaker 1: at City, he was Sandy Wild's right hand man in
Speaker 1: designing the strata, the mega banking strategy. He loses in
Speaker 1: a power struggle, goes to manage his bank in Chicago,
Speaker 1: comes back in UH. JP Morgan Chase's acquisition, which was
Speaker 1: essentially an employment contract acquisition, Jamie Diamond become CEO, and
Speaker 1: JP Morgan Chase, with help from the federal government, embarks
Speaker 1: on this strategy of just becoming as big as it
Speaker 1: can be. And so we are truly in an unprecedented
Speaker 1: era in terms of banking consolidation the United States. So
Speaker 1: everybody used to talk about too big to fail. I
Speaker 1: like to raise the question, have these banks become too
Speaker 1: big to succeed? Are they even manageable? When you're running
Speaker 1: trillions of dollars in deposits? Can these things be managed?
Speaker 1: And that will segue right into our discussion of Wells Fargo.
Speaker 1: Such a great question, too big to manage, too big
Speaker 1: to jail to, too big to succeed, And that the
Speaker 1: way that you phrase that too big to succeed is
Speaker 1: so fascinating because it calls into question the time horizon
Speaker 1: and the short and medium term. I say that we're
Speaker 1: on on leading into a medium term from the financial crisis. Man,
Speaker 1: has it been good to be Jamie Diamond? Right? That
Speaker 1: is that balance sheet is that has been an extremely successful? Right?
Speaker 1: Fortress Diamond is just it's it's an unassailable They were
Speaker 1: very fortunate. You're a financial historian, you'll appreciate this. Most
Speaker 1: people don't realize JP. Moore and Chase had their own
Speaker 1: derivatives crisis. But they were let's call it lucky enough,
Speaker 1: were smart enough to have it years before everybody else.
Speaker 1: So they cleaned up their balance sheet while there was
Speaker 1: still a bid to hit. When it did everybody else,
Speaker 1: they had no way to go. Yeah, you know there
Speaker 1: is This is another occasion in financial history that a
Speaker 1: lot of people don't recognize. And I think this is
Speaker 1: Tim Geitner's signal contribution to h to finance in his
Speaker 1: career and happened before he was Secretary of the Treasury.
Speaker 1: Uh and that was in two thousand seven, noting on
Speaker 1: a spectacular back up office problem in derivatives trading. Right,
Speaker 1: So these are all bespoke derivatives, right, even even though
Speaker 1: they're not very fancy, these are pretty plain vanilla, but
Speaker 1: they all are bespoke because there's no you know, there's
Speaker 1: no market place for them to trade on. It's no
Speaker 1: exchange age for them. And so you would think sophisticated
Speaker 1: folks in two thousand five we're not talking about, right,
Speaker 1: So the I T Revolution has already taken pretty deep root. Um,
Speaker 1: you'd have some sort of oracle based software system where
Speaker 1: traders with two headsets on, you know, talking to two
Speaker 1: different people, or at least punging it into a computer
Speaker 1: that would clear it and would be universally access And
Speaker 1: you think that and you'd be wrong, right, And what
Speaker 1: they were doing instead is on scraps of paper with
Speaker 1: little golf pencils writing down the nature of the trade
Speaker 1: as though they were signing. There were doctors signing a prescription,
Speaker 1: handing it back to a runner who would take that
Speaker 1: piece of paper and put it in a stack. Right.
Speaker 1: And what Tim Geitner realized, even though he that the
Speaker 1: New York had had no supervisory authority over these broker dealers,
Speaker 1: that's a very important point, realized that the back office
Speaker 1: back log was about nine months. And so if there's
Speaker 1: a triggering event is a you know, the International Swaps
Speaker 1: and Drives Association master agreement, there's a default event within
Speaker 1: that nine months your trader said, hey, you owe me money?
Speaker 1: Like do I? They had to go literally back into
Speaker 1: nine months worth of scraps of paper to find where's
Speaker 1: this trade? Right? Huge mess. Tim Gotton realizes it, and
Speaker 1: he does a tremendous effort coordinating the banks to clean
Speaker 1: up modernize their back office. He succeeded right before the crisis. Amazing,
Speaker 1: absolutely amazing. So let's jump into a fascinating topic that
Speaker 1: has been in the news for the past year or
Speaker 1: or more, and that's been this ongoing scandal at Will's Fargo.
Speaker 1: We we first learned about it when it was revealed
Speaker 1: the managements of Wills Fargo greatly incentivized the staff to
Speaker 1: open new accounts, creating new accounts, but they simultaneously penalized
Speaker 1: people who didn't do it. They would literally fire people,
Speaker 1: and it turned out the levels at which they were
Speaker 1: subsequent and significant consequences were exorbitantly high. Any five or
Speaker 1: so of the staff, we're not meeting the targets. And
Speaker 1: so when you incentivize people, they do what you ask.
Speaker 1: And the staff started creating fake accounts. Not one or
Speaker 1: two here, but literally I think we're up to three
Speaker 1: and a half million, is that about right? So so
Speaker 1: tell us how this came about and who should have
Speaker 1: been overseeing this. How does something as absurd as three
Speaker 1: million fake accounts come from a major bank like Wells Fargo?
Speaker 1: And where you framed this in a in a in
Speaker 1: a very particular way, and I come a little hostile
Speaker 1: and my two house. I completely agree with your framing.
Speaker 1: But John Stump, for the former CEO of Wells, would
Speaker 1: absolutely reject it. Right. So you flame framed it as
Speaker 1: a compensation structure and cultural problem and a supervisory one. Right.
Speaker 1: And what Stump and Wells Fargo they initially said is, no,
Speaker 1: what you're seeing is less than two percent of our
Speaker 1: employees engaging in some bad practices. That would be that
Speaker 1: would happen in any organization of banking eployees. That's a
Speaker 1: bank that employees what was there at their peak a
Speaker 1: hundred someone godling them? So two is okay? So only
Speaker 1: three thousand of our employees are engaging in criminal for
Speaker 1: can happen to anybody? Yeah? No, And that's what's hilarious
Speaker 1: about that is that that that statistic is just completely
Speaker 1: made up. Right? Who who cares about if your denominator
Speaker 1: includes janitors? Right? And what percentage of the personal bankers
Speaker 1: who are exposed to individuals were engaging in this kind
Speaker 1: of a legal activity. And what you you're framing where
Speaker 1: I completely agree with you, is that's not all we
Speaker 1: care about, but also aggressive behavior a right. So John
Speaker 1: Stump built this model. Well's far Ago was with with
Speaker 1: JP Morgan Chase. These were the two banks that nailed
Speaker 1: it right. These were the ones. This is not City Group,
Speaker 1: this is certainly not Washington Mutual, and it's not Bank
Speaker 1: of America. All right, this is Wells Fargo built its
Speaker 1: brand on being a phenomenal consumer and commercial bank as
Speaker 1: opposed to investor hundreds of years old. The stage coach
Speaker 1: is not a coincidence that it's their corporate logo. They've
Speaker 1: been around for centuries. They've been around for a very
Speaker 1: long time, and they've been very good at the work
Speaker 1: that they've that they've done, or so it was was reported.
Speaker 1: But that compensation structure and that culture, it's so massively
Speaker 1: important because it created not only the incentives to engage
Speaker 1: in bad behavior um, but engaged to engage in in
Speaker 1: practices that I think most people would say, that's zero
Speaker 1: sum and you're robbing your customers. You're not creating value here.
Speaker 1: You're just transferring it from your customers to yourself to yourself,
Speaker 1: and you're doing it in a way that's trying to
Speaker 1: deceive your customers as to what the value proposition is here.
Speaker 1: So let me give you the example, right, This was
Speaker 1: the Mantra eight is great, right, And the idea here
Speaker 1: is that cross selling it's distinct from up selling. Up
Speaker 1: Selling is you know, you go in you want to
Speaker 1: buy a Toyota Corolla and you walk out with alexis.
Speaker 1: That's that's upselling. Cross Selling is do you want fries
Speaker 1: with that? Right? So you come in you want something
Speaker 1: and they say you want that thing, but you also
Speaker 1: want all this other stuff too. So that was auto insurance,
Speaker 1: checking accounts, credit cards. Let's count to eight and I'd
Speaker 1: invite our listeners do the same thing. What are the
Speaker 1: eight products or services that you need to have in
Speaker 1: the same financial institution? All right, let me see if
Speaker 1: I could guess. So we'll start with saving and checking
Speaker 1: his account to mortgage. Yeah, so again we're gonna reexamine
Speaker 1: a why you would want your mortgage to be in
Speaker 1: the same place you have a checking in staving account.
Speaker 1: But yes, mortgage certainly count credit cards, credit card counts,
Speaker 1: bank loans, bank loans, personal loans. There we're up to five.
Speaker 1: Um insurance. They were doing some insurance products. They had
Speaker 1: some insurance products, including gap insurance, including auto insurance on
Speaker 1: your insurance. So meaning if you homeowners insurances, motors insurance
Speaker 1: as well. So now up to seven and uh, the
Speaker 1: only other thing I could guess is four o one
Speaker 1: K retirement accounts. That absolutely would be one. So that
Speaker 1: would be you would be a very good Wells far
Speaker 1: Ago banker and being able to say, all right, I
Speaker 1: got to eight. Now I gotta go sell these right now,
Speaker 1: let me give you an example. Now, let me tell
Speaker 1: you the story of a of a company that engages
Speaker 1: in massive cross selling to my utter delight as a customer,
Speaker 1: and that's Amazon, right, I have if you like X,
Speaker 1: you will love why I buy in the same day.
Speaker 1: I've purchased books and chainsaws from Amazon dot com, right,
Speaker 1: and I've seen myself going to this thing, and they say, oh,
Speaker 1: if you want that, then you're gonna need this other
Speaker 1: thing too, And I'll think about and say yes, please
Speaker 1: and thank you Jeff Bezos, I will want that thing.
Speaker 1: But they offer that to you, they don't send it
Speaker 1: to your house and say, by the way, we sent
Speaker 1: to you, whether you ask for it or not. Right,
Speaker 1: So there's no fraud here. My point is that, well,
Speaker 1: this problem is so much worse than the fraud, right,
Speaker 1: because what Amazon is offering to me is sometimes these
Speaker 1: other things that I already wanted less for less money,
Speaker 1: or even if it's more money than I would get
Speaker 1: it lows or somewhere else. Uh, the sheer convenience of
Speaker 1: having it all in a single citys them is extremely high. Now,
Speaker 1: let me ask you and our listeners, if you are
Speaker 1: shopping for financial services, whether we're talking about a credit card,
Speaker 1: a savings account, or a mortgage, what do you care about?
Speaker 1: Care about the best cost and the highest level of service,
Speaker 1: highest quality of service. So the best cost first, right,
Speaker 1: that's an interest rate phenomenon. What service do you need
Speaker 1: for your mortgage? Well, I I want to know that
Speaker 1: I could set up an auto pay. I want to
Speaker 1: know that I'll get credited on a timely basis, and
Speaker 1: that things like insurance isn't going to be forced down
Speaker 1: my throat, and that I could prepay my real estate taxes,
Speaker 1: add that to the monthly little things like that to
Speaker 1: just make our financial life a little easier. Absolutely, and
Speaker 1: almost all of that is standardized across the industry, almost everything.
Speaker 1: Then you're talking costs, so you just you're talking cost
Speaker 1: interest rates. So credit card absolutely, if you carry consumer debt, absolutely,
Speaker 1: they're going to be issues of service. For most people,
Speaker 1: what they want is the lowest in trust rate and
Speaker 1: the most benefits of a credit card for a savings account.
Speaker 1: What people are looking for are you know, a suite
Speaker 1: of bells and whistles? Can I deposit a check using
Speaker 1: my phone? Can I do this? Sort? Can I do that?
Speaker 1: But again, t a T M S location. All of
Speaker 1: this ends up mattering, but by far the most important
Speaker 1: thing is going to be the price point. And that's
Speaker 1: where Wells Fargo, I think, stepped into an extremely aggressive territory,
Speaker 1: well short of fraudulently manufacturing services that you never wanted,
Speaker 1: never asked for, right, that's the fake account scandal. And
Speaker 1: my point is how do we get here? We got
Speaker 1: here from a rotten culture that decided we're going to
Speaker 1: make price point, which is the only thing that most
Speaker 1: consumers really care about, to be a secondary consideration, and
Speaker 1: we're going to try and convince them that while they
Speaker 1: are economies of scale to be had for Wells Fargo
Speaker 1: and consolidating customers, those economies are not really shared with
Speaker 1: the customers themselves. That's what makes me uncomfortable about Wells Fargo,
Speaker 1: and that's why I think I feel a little bit
Speaker 1: more encouraged. And the post Wells era, there not only Wells,
Speaker 1: but other banks too are dialing way back on this
Speaker 1: kind of aggressive marketing because I think that it's pretty
Speaker 1: hard to justify when the thing that people want is
Speaker 1: are you going to beat this by a few basis points,
Speaker 1: Because we're talking about a thirty year mortgage. A few
Speaker 1: basis points matters a lot of huge, huge difference. So
Speaker 1: it'sen we're in the middle of the summer. Has Wells
Speaker 1: Fargo cleaned up their acts because we still see these
Speaker 1: little eruptions every now and then of more things leaking
Speaker 1: out that all date back to the same era, but
Speaker 1: we hadn't previously heard about this to those who are
Speaker 1: in PR crisis management driven the financial institutions itself, I mean,
Speaker 1: Wells Fargo has literally become the textbook case. I teach
Speaker 1: it to my MBA's not to do, What not to do?
Speaker 1: It was death by a thousand cuts. So they didn't
Speaker 1: get out in front of it. You want to disclose
Speaker 1: stuff yourself, so you're beating everybody else from revealing it,
Speaker 1: and then it would there is never really a believable apology.
Speaker 1: And then on top of that, at a certain so
Speaker 1: I've never had a Wells Fargo account. They could be great,
Speaker 1: they could be terrible. I've never experienced it personally, but
Speaker 1: seeing the run of news at a certain point, I
Speaker 1: was saying to a friend, Hey, at this point, if
Speaker 1: you have a Wells Fargo account, still, you've tacitly given
Speaker 1: them permission to do whatever the hell they want. Because
Speaker 1: if they haven't scared you, what what do they have
Speaker 1: to do to chase your way? And it doesn't look
Speaker 1: like that many people hit the eject button with them,
Speaker 1: so they did. Yeah, That's that's what's been so interesting
Speaker 1: to me. I mean, I am not I'm not an
Speaker 1: active investor UM for a lot of different reasons, not
Speaker 1: least because I comment on these things and I want
Speaker 1: conflicts of interest. Well, if you're talking about cost, I'm
Speaker 1: gonna assume you're like many other financial professors and your
Speaker 1: low cost index, Vanguard, et cetera. That's right, that's exactly right.
Speaker 1: Not that I'm UM. I don't take that as an
Speaker 1: absolute dogma like some of my colleagues do. UM. There
Speaker 1: have been time somewhere I've been tempted into markets UM,
Speaker 1: and one of them was to short Wells Fargo. I
Speaker 1: didn't do it, but been in two thousand fourteen or
Speaker 1: some things. It's about a year. The l A Times
Speaker 1: broke the story in two thousand thirteen. We didn't get
Speaker 1: the settlement with a CFPB and the control of the
Speaker 1: currency until two thousand fifteen. So in these two years,
Speaker 1: that's another very important question about supervisors. What was taking
Speaker 1: So along with the journalists, knew this right, but it
Speaker 1: was not. Uh, we didn't get a good sense of it,
Speaker 1: not just by two fifteen, but we're still getting the
Speaker 1: news later. But if I had shorted Wells Fargo stock,
Speaker 1: I would have lost money. Right, Their stock has done well.
Speaker 1: This has been a boom time. Right. I might have
Speaker 1: been able to hedge it and still short of the
Speaker 1: stock relative to places like JP morgan Um or Goldman,
Speaker 1: and maybe I would have made some money then. But
Speaker 1: it's been extraordinary how much of their brand, equity and
Speaker 1: their business has not been compromised by what has been
Speaker 1: a stunning turn of headlines week after week. The old
Speaker 1: joke is news as old. By the time it's in
Speaker 1: the papers, lots of people already figured out and probably
Speaker 1: made their bets based on that. I think that tells
Speaker 1: us a few different things. Number One, there's a good
Speaker 1: version and bad version of what we can how we
Speaker 1: can interpret those events. The good version for Wells is
Speaker 1: that it does have an extremely robust balance sheet and
Speaker 1: business such that this scandal, although lots of people are
Speaker 1: reading about and talking about it, ends up not mattering
Speaker 1: that much for the overall value of the franchise. You know,
Speaker 1: she just keeps people where they are. It's listen, I
Speaker 1: got everything on auto pay to move my account as
Speaker 1: a big pan in the butt. I'm not gonna bother.
Speaker 1: I'm not gonna bother. Right. The bad version, in other words,
Speaker 1: saying that the size and diversification of their businesses and
Speaker 1: on whatever parameters you want to choose, geography, business lines,
Speaker 1: other things, has protected them from scandal. That's the version
Speaker 1: that's good for Wells. The version is bad for Wells
Speaker 1: is that the sheer complexity and size of these financials
Speaker 1: two tions make them totally unaccountable even when the facts
Speaker 1: are breathtaking. Lee damning right. You will never see a
Speaker 1: clearer cut example of abject criminality in consumer banking that
Speaker 1: is as widespread as this. Right, this was absolute fraud.
Speaker 1: I think You're not cynical enough if you think nothing
Speaker 1: is going to be worse than this, Because every time
Speaker 1: I've said that throughout my professional career, what could ever
Speaker 1: be worse than fill in the blank? Where go from
Speaker 1: Enron's world? Calm too? You pick it there, seeing every
Speaker 1: time I I think I'm become too cynical, the rejoinder
Speaker 1: comes back at me. Just wait, that's pretty great, um,
Speaker 1: you know to for me to find another example, it
Speaker 1: would have to be city Groups predecessor National City during
Speaker 1: the run up to the Great Depression, which which motivated
Speaker 1: the original passage of Glass Stiegel, where you would get
Speaker 1: these salesman coming from the banking so or sorry, from
Speaker 1: the capital market side, looking at bank customers. You see, Okay,
Speaker 1: I've got a retired couple and their nest ex ten dollars.
Speaker 1: I've got it in a savings account. Go to their house,
Speaker 1: swindle them out of it, and make them invest in
Speaker 1: Latin American mining operations. That's a that's a really exact
Speaker 1: that's a perfect thing for a young couple's retirement. Yeah
Speaker 1: right there in there, they're they're gonna live another ten years.
Speaker 1: And now you're speculating, and of course that goes bust,
Speaker 1: all their money is gone, right, um. And there's there
Speaker 1: are these letters that you can read in uh, in
Speaker 1: the Library of Congress where people just writing to their
Speaker 1: members of Congress during the Glass Eagle hearings, the Pecora
Speaker 1: hearings that proceeded Glass Seagull saying please ask Charlie Mitchell
Speaker 1: why he would target us my I'm sitting now next
Speaker 1: to my wife's coffin. She died early because of the
Speaker 1: stress of realizing our nest egg was gone. So that
Speaker 1: was a big scandal. I see, wells Fargo is being
Speaker 1: pretty similar in scope. But now compare the difference in
Speaker 1: the reactions to them, right. I think we've become inured
Speaker 1: to these sort of things. That was the takeaway from
Speaker 1: the Great Financial Crisis. My cynicism is whatever you think,
Speaker 1: it's much worse. Let's talk a little bit about the
Speaker 1: Federal Reserve and central bankers. And I'm gonna begin with
Speaker 1: something from Lombard Street, a description of the money market. Uh.
Speaker 1: A very famous quote is lend freely at a penalty
Speaker 1: rate against good collateral. That that comes supposedly been called
Speaker 1: Badget's dictum. The first question is, by the way, the
Speaker 1: whole purpose of that is an articulation of how central
Speaker 1: banks should respond to a panic to avoid a full
Speaker 1: blown crisis. First, who is really the author of that rule?
Speaker 1: You suggest that it wasn't Badget. No, it's it's it's
Speaker 1: not Walter Badget. You can read the entire book, uh,
Speaker 1: you know, because many times you'd like Hill never find
Speaker 1: Badget's Dictum. He hints around it. He talks about lending
Speaker 1: freely in liquefying. Yeah, he's got two chapters that are
Speaker 1: basically about lending freely. Um. He does talk a little
Speaker 1: bit about what was good collateral, but mostly as a
Speaker 1: set of shared assumptions that everyone would have about what
Speaker 1: constituted good collateral, um, which were essentially, you know, uh,
Speaker 1: good collateral was going to be on these commerce bills,
Speaker 1: which is basically, here, we've got a contract already set
Speaker 1: up that refers to real business that's been done. It's
Speaker 1: not speculative. Right, that's good collateral, and that is not
Speaker 1: our definition of good collateral. Good collateral can be securities,
Speaker 1: right good uh today, And that would not have been
Speaker 1: his definition. He mentioned that just in passing penalty rate,
Speaker 1: there's a sentence about the idea that you're like, well,
Speaker 1: you want to you want to make it hurt a
Speaker 1: little Georgia premium above what you could get if there
Speaker 1: wasn't a panic, in order to discourage this behavior in
Speaker 1: the future. But interestingly enough, the rest of the book
Speaker 1: is about not doing that very thing right because if
Speaker 1: you make it, if you stigmatize the lending um by
Speaker 1: a central bank, which a penalty rate would do um,
Speaker 1: then you've created the very scenario that Badget saying you
Speaker 1: shouldn't do. So there's no Badget's didictive. He never said that.
Speaker 1: His book is not about that, and indeed it's ironic
Speaker 1: because you know, one of the things that he writes
Speaker 1: in that book is that there are people are so
Speaker 1: eager for you to say, all right, well, our central
Speaker 1: banks good things are bad things, and if you say,
Speaker 1: well it's complicated, they're like, well, I don't care, right,
Speaker 1: Welcome to the modern world of politics. And he's writing this,
Speaker 1: you know, in the late eighteen sixties. This is published
Speaker 1: in eighteen seventy three. And then he also said, you know,
Speaker 1: people just don't have appetite for long books. They want
Speaker 1: short sentences. And what's hilarious to me about this is
Speaker 1: the thing that Badget's book is remembered for is a
Speaker 1: short sentence that he never wrote. So who did write that?
Speaker 1: You know, it's it's hard that I would be interested
Speaker 1: if our if our listeners can track this down. I
Speaker 1: haven't succeeded. I can tell you to people who have
Speaker 1: popularized it. Um. One is Paul Tucker, who is a
Speaker 1: great scholar and practitioner of central banking. He's got a
Speaker 1: new book, let's just come out. Somebody might consider for
Speaker 1: for your own, for your podcast, and and uh and
Speaker 1: for this radio show. He was the Deputy governor at
Speaker 1: the Bank of England during the crisis, and he has
Speaker 1: has written a lot about this idea. And he's the
Speaker 1: one who quoted most often for Badget's victim. It's never
Speaker 1: Badge being quoted, it's always somebody else quoting Paul Tucker
Speaker 1: creating Badget's sictam. But again he did Paul didn't create this, right,
Speaker 1: He's referring to something that came before. Um. Ben Bernanke
Speaker 1: is the other one who's really popularized that's but only
Speaker 1: two thirds of Badgett's victim rent free when freely uh, well,
Speaker 1: maybe one and a half of it when freely against
Speaker 1: So so so collateral, but don't do a penalty rate. Right. Uh.
Speaker 1: But you know Brankie's book, his memoir of the crisis,
Speaker 1: he talks courage to accourage to act. Yeah, right, And
Speaker 1: he notes when he game FED chair in two thousand six,
Speaker 1: and the chair has a personal library and uh in
Speaker 1: his office, and he said, I brought Badget's Lombard Street
Speaker 1: and put it there. Now. Now, ben BURNANKI is a
Speaker 1: very sophisticated financial historian. I assume he's read Lombard Street,
Speaker 1: but I have his book. Would not give you evidence
Speaker 1: that at the end, did you overlap with Bernanke When
Speaker 1: you were a princeton, he was the head of the
Speaker 1: economics department. No, No, I have met him a couple
Speaker 1: of times before. Um, and you know, we've exchanged views
Speaker 1: on a variety of topics. I think that he's a
Speaker 1: remarkable public servant, a terrific scholar. Um. And I always
Speaker 1: leave reading any paper or even blog post. He's written
Speaker 1: feelings smarter Um. But we've also had our differences. We've
Speaker 1: got into an argument about an assertion that he makes
Speaker 1: that I think is false, which is that the reason
Speaker 1: that FED didn't bail out Lehman Brothers. Is that it
Speaker 1: lacked the legal authority to do so. That's been the claim.
Speaker 1: I have a pet theory on that. I'm curious as
Speaker 1: to what yours is. Well, it's legally it's false. That's
Speaker 1: not correct. They did have a legal authority to do it,
Speaker 1: to bail out a dealer. Oh absolutely. I mean the
Speaker 1: statute is unusual and exigent circumstances, a term which is
Speaker 1: sounds very heavy, but it is not defined. Unusual and
Speaker 1: exigent is Tuesday? Okay, yeah, it could. It could be
Speaker 1: so long as five members of the Board of Governor's
Speaker 1: vote in favor, which he had, and the Federal Reserve
Speaker 1: Bank who's in whose district? Uh? The institution exists in
Speaker 1: New York is that the loan is secured to the
Speaker 1: satisfaction of the Federal Reserve Bank. Secured to the satisfaction
Speaker 1: Does that mean, well, it's not defined. Although quite bluntly,
Speaker 1: we know there was a ton of fraudulent uh shenanigans
Speaker 1: going on at Leman Brothers with the famous REPO one
Speaker 1: oh five and all of that. So you might say, well,
Speaker 1: then we're not satisfied by that. But that's a discretionary determination.
Speaker 1: Say we lack legal authority to do so as false.
Speaker 1: It says we were not satisfied by the collateral presented
Speaker 1: a different, different, serferent thing, which of course raised the question,
Speaker 1: then why did they really let it hit the pavement? Well,
Speaker 1: then why is a I G. Different? Their answer is, well,
Speaker 1: because they had a good insurance business going, had all
Speaker 1: kinds of profitable businesses within their twenty thousand corporations under
Speaker 1: their uh their parent company. So again, was that the
Speaker 1: right decision or the wrong decision? As a separate set
Speaker 1: of questions, was it politically motivated or not? Should it
Speaker 1: have been? Step set of questions. Did they have a
Speaker 1: legal authority to do so? Well, yes, of course they did.
Speaker 1: And this isn't just me being an obnoxious lawyer saying,
Speaker 1: well look at this. The idea that they lacked the
Speaker 1: legal authority to do so was the single defining idea
Speaker 1: that motivated the passage of Dodd Frank. That's fascinated And
Speaker 1: so I think that that ends up mattering a huge amount.
Speaker 1: It just isn't isn't correct. So I wish I was
Speaker 1: a fly in the wall when they were having this
Speaker 1: internal debate. But my pet thesis is simply um at
Speaker 1: one point. Early in the spiral of Lehman Brothers, Warren
Speaker 1: Buffett of Berkshire Hathaway had the conversation with Dick Fuld
Speaker 1: made a low ball offer because he's a value investor,
Speaker 1: and to everybody who was an employee of Lahman Brothers
Speaker 1: lasting regret, Dick Folds said, this guy's trying to steal
Speaker 1: the company for three billion dollars. It was only a
Speaker 1: small percentage ownership, and he rejected Buffett. And I can't
Speaker 1: help but think from a moral hazard perspective the debate
Speaker 1: going on with Bernankee and Guthner, and hey, how could
Speaker 1: we bail out this guy when he turns down Warren Buffett, who,
Speaker 1: by the way, later made a much more advantageous um
Speaker 1: loan to a much better bank, Golden So Folds folly
Speaker 1: turned out to uh benefit Goldman and and Buffett. Here's
Speaker 1: my friendly amendment to your your theory. I would call
Speaker 1: it Folds follies because Buffett was one in a series
Speaker 1: of suitors who came knocking, and Dick Fold was trying
Speaker 1: to value the company as though it were two thousand five,
Speaker 1: not two thousand seven or eight, And so I think
Speaker 1: it was just spectacle ular Hubris that I think the regulators,
Speaker 1: including Tim Geitner and Hank Paulson couldn't fathom. So one
Speaker 1: of the one of the conspiracy theories that a lot
Speaker 1: of people I think are pretty sophisticated people, and back
Speaker 1: it was paid payback. It's the Goldman versus Lehman thing.
Speaker 1: I just don't buy it. I think to the extent
Speaker 1: that that mattered at all. And by the way, remember
Speaker 1: that if anybody was payback, there was Bear Stearns go
Speaker 1: back to long Term Capital Management. They didn't want to.
Speaker 1: They didn't want to be part of the consortium that
Speaker 1: rescued who they were the prime broker for. So when
Speaker 1: when Bear hit the deck earlier than Lehman, the deal
Speaker 1: that was actually Jamie Diamond stole it right out from under.
Speaker 1: I think it was with Covia was looking at it,
Speaker 1: then Um and then to get the Fed to say
Speaker 1: we'll commit to backstop if this goes over billion dollars
Speaker 1: worth of junk. You saw some great dealmakers in the
Speaker 1: crisis and some terrible. Dick was spectacularly not one of UM,
Speaker 1: and so I think that that ends up having a
Speaker 1: lot to do with it. But I think the biggest
Speaker 1: explanation of all does come from Hank Paulson. He's the
Speaker 1: source for a Wall Street Journal editorial. This is after conservatorships,
Speaker 1: is after the first weekend September for Fanily Freddie, Senior
Speaker 1: administration officials assures us, huh, and it's finding quote, there
Speaker 1: will be no political solution for Lehman, meaning there's going
Speaker 1: to be no public money for Lehman, all right. And
Speaker 1: I think at that point, given the bipartisan furor over
Speaker 1: bear Sterns and Fannie and Freddie, that they had to
Speaker 1: find someone to say no to and they just didn't
Speaker 1: recognize that this was going to be the financial cataclysm
Speaker 1: uh that that ended up happening. See uh, let me
Speaker 1: let me push back a little bit from fail Out Nation,
Speaker 1: and I look at Lehman Brothers as merely the first
Speaker 1: trailer in the trailer park when the tornado came through.
Speaker 1: Everybody who was leveraged up with bad paper that was
Speaker 1: relying on either sub prime or alt A mortgages and drivetives.
Speaker 1: Now they were one of the worst. Bear Stearns was
Speaker 1: pretty bad, ai g was terrible. Lehman was one of
Speaker 1: the worst. But whether Lehman was rescued or not that
Speaker 1: tornado was going through. You had home prices run up
Speaker 1: so much and now we're collapsing. That that whole derivative
Speaker 1: unwined was going to take place. Even if, now, if
Speaker 1: you want to argue Lehman Brothers precipitated the conflagration spreading faster,
Speaker 1: well you know who knows. It's hard to argue against that.
Speaker 1: So let me ask you to put you put you
Speaker 1: on the hot seat. Then, even though I'm the guests
Speaker 1: and you're the host. Good decision, bad decision on Lehman Brothers,
Speaker 1: assume they had authority to do so, which I'm telling
Speaker 1: you they did. I'm the wrong person to ask that.
Speaker 1: I'll give you the answer. But the reason I'm the
Speaker 1: wrong person is I believe that see that sort of
Speaker 1: doric building with the columns over there, called the bankruptcy Court,
Speaker 1: that's there for a reason. Now, if you want to say,
Speaker 1: we're gonna take all these banks and have Uncle Sam
Speaker 1: be dead or in possession. So my favorite example was
Speaker 1: Bank America, all lynch that whole countrywide. Let's go over there,
Speaker 1: we take all the debts sticking in to sell it. Um.
Speaker 1: There's no such thing as toxic assets. There's only toxic prices.
Speaker 1: So this at a dollar a hundred cents on the
Speaker 1: dollar as a disaster, but twenty cents on the dollar
Speaker 1: for something worth thirty seven is is a winner. So
Speaker 1: you sell that stuff off, you clean up Marylanch, you
Speaker 1: spin them out, you clean up Bank American, spin it out,
Speaker 1: you clean up country wide, just spin. You go through
Speaker 1: this whole process. You do it one after another. Now,
Speaker 1: maybe the doubt doesn't stop at six thousand, maybe it
Speaker 1: goes to four thousand, Maybe unemployment gets worse, but you
Speaker 1: end up on the other end with a much healthier
Speaker 1: financial system. So I'm in favor of following the law
Speaker 1: having people suffer the consequences of their actions. By the way,
Speaker 1: I would claw back all the stock options that all
Speaker 1: these executives would get, but tear the band aid off.
Speaker 1: It's really painful in oh seven, oh eight, oh nine,
Speaker 1: but in you have a healthy economy. Even though what
Speaker 1: we did ended up saving the system, we're still dealing
Speaker 1: with ramifications of that. And so my answer is you
Speaker 1: the reason nobody would come in and buy Lehman Brothers
Speaker 1: is I think their liabilities vastly out outweighed um their death.
Speaker 1: The fact that I'm drawing a blank on his name.
Speaker 1: The guy came in and took over A I G.
Speaker 1: He did a wonderful job, passed away from cancer. Not
Speaker 1: A I G had a real business. It had a
Speaker 1: real cash flow. The four people on the A I G.
Speaker 1: Financial Product Group were a debacle, but you could have
Speaker 1: carved that out, and they ultimately did, and that's why
Speaker 1: I G is now a functional business. Yeah, I mean
Speaker 1: that's interesting. I mean, the the counterfactual you're you're at
Speaker 1: you're telling us about, I think is pretty persuasive on
Speaker 1: the following assumption, and that is that the depths that
Speaker 1: we would have reached in two thousands of any and
Speaker 1: nine cleansing would have been cleansing, yes, ra than fatal, right,
Speaker 1: because we've seen national systems that collapse not to stand
Speaker 1: up again. Right. Argentina is a great example. If you
Speaker 1: and I were having this conversation in eighteen ninety, we
Speaker 1: were in Buenos Aires, right, and we said, hey, let's
Speaker 1: make a bet America or Argentina hundred years from now,
Speaker 1: I think both of us would have said, we can't
Speaker 1: find a counterparty, right, We would have both bet on
Speaker 1: Argentina as just on much more secure some republic go
Speaker 1: down the list of whenever there's a crisis, and that
Speaker 1: was if you like the book The Lords of Finance,
Speaker 1: that was imposed from the outside, but still it's a great,
Speaker 1: great example. So my the question really for us in
Speaker 1: evaluating these counterfactuals is where is that threshold where under
Speaker 1: which the US doesn't recover ever right where it recovers
Speaker 1: in something that we don't recognize. That is the four
Speaker 1: trillion dollar question? Can you stick around a bit? I
Speaker 1: have a bunch of more questions. We've been speaking with
Speaker 1: Professor Peter Brown of Wharton. If you enjoy this conversation,
Speaker 1: we'll be sure come back for the podcast extras. Will
Speaker 1: we keep the tape rolling and continue to walk out
Speaker 1: over all things Central Banks. We love your comments, feedback
Speaker 1: and suggestions right to us at m IB podcast at
Speaker 1: Bloomberg dot net. You can check out my daily column
Speaker 1: on Bloomberg dot com. Follow me on Twitter at rid Holts.
Speaker 1: I'm Barry Ridholts. You're listening to Masters in Business on
Speaker 1: Bloomberg Radio. Welcome to the podcast, Peter, Thank you so
Speaker 1: much for doing this. I'm I'm really enjoying walking out
Speaker 1: on FED stuff and I have a ton of a
Speaker 1: ton of questions for you that we didn't get to.
Speaker 1: The Wells Fargo stuff is just fascinating, I mean, and
Speaker 1: we barely scratching the service. I mean, that's just astonishing
Speaker 1: to here's here's the thing. The one thing I'll say
Speaker 1: about What's Fargo, I think that our listeners might want
Speaker 1: to know is that they made a choice in hiring
Speaker 1: a new chairman of the board, a chairwoman of the board,
Speaker 1: Betsy Duke, former governor of the Federal Reserve Board. And
Speaker 1: this news was the first thing out of Wells Fargo,
Speaker 1: including their independent directors report about what had happened that
Speaker 1: made me think this entire thing isn't just a smoldering pile.
Speaker 1: They finally on top of it. They finally done something.
Speaker 1: They finally done something real. And so I have high
Speaker 1: hopes for for Duke. And I think that she's a
Speaker 1: really first rate banker intellect She understands the government, so
Speaker 1: I act, she understands crisis. So i'm i'm I think
Speaker 1: that they might have turned a corner. But again, grab
Speaker 1: your popcorn. The story is not ever So we we
Speaker 1: really didn't talk about any of your books. The book
Speaker 1: that's out, um that came out last year, the power
Speaker 1: and independence of the Federal Reserve. What motivated you to
Speaker 1: write that? How much of that is you pushing back
Speaker 1: at all the crazy conspiracy stuff that we see about
Speaker 1: the Federals. You know, it's it's me trying to stand
Speaker 1: in the middle of the conspiracists and the FED apologists
Speaker 1: who see the FEDS this great temple of reason. Right,
Speaker 1: that is just doing the same thing NASA does when
Speaker 1: it sends, you know, the voyager out to Mars. By
Speaker 1: the way, I call that um economists all have physics
Speaker 1: penis envy. Yeah, that's this, It's exactly that. And and
Speaker 1: the problem is that we're talking about an uncertain present
Speaker 1: with a past that we've not fully understood, making projections
Speaker 1: about an unknowable future. Right. We're not talking about physics, right,
Speaker 1: We're talking about something else. And it's not that there's
Speaker 1: no technical content in what the FED does. And that's
Speaker 1: where the conspiracists are wrong, right, It's not being taken
Speaker 1: over by different ideologues. There is technical There is a
Speaker 1: technical apparatus. It's just that inside the FED that technical
Speaker 1: apparatus isn't enough and can never be enough to answer
Speaker 1: some of these big questions, should Lehman live or die?
Speaker 1: Should we take into straits into negative territory? Right? And
Speaker 1: all these other kinds of questions, the unknown unknowns nobody
Speaker 1: can answer because humans are involved, and who knows what
Speaker 1: we're gonna do. So I saw my role, you know,
Speaker 1: as a lawyer and as a financial historian, not an economist,
Speaker 1: although conversant in in monetary economics and finance, to be
Speaker 1: the guy who says it's I'm going to draw the
Speaker 1: curtain back. Right, We're gonna look at the man, not
Speaker 1: the wizard, and it's gonna be okay, Alright, we're gonna
Speaker 1: do and we're gonna see that this extremely interesting, fascinating, important,
Speaker 1: powerful central bank is not held hostage by a bunch
Speaker 1: of greedy bankers. Right, But it's not the wizard. So
Speaker 1: let's talk about the wizard. Um. I think some people
Speaker 1: um blame Bernanke for the financial crisis, which I think
Speaker 1: is sort of um really misunderstanding the timeline. But the
Speaker 1: question I'll ask you is how responsible do you think
Speaker 1: Alan Greenspan is for the great financial crisis? That's great, Um,
Speaker 1: there's a there's Alan Greenspan has the unfortunate status of
Speaker 1: being pilloried on the left and the right for totally
Speaker 1: different things. So left sees him as giving away the
Speaker 1: store from a regulatory and supervisory perspective. Right, well, he
Speaker 1: said a couple of things where, um, hey, you know,
Speaker 1: the banks will take care of themselves. They have their
Speaker 1: reputation to worry about. Or um. In California, where the
Speaker 1: Democratic Congress Democratic State Assembly purposefully did not regulate any
Speaker 1: of the private lenders, Greenspan said, hey, these are the innovators.
Speaker 1: Why do we want to get in their way? So
Speaker 1: it absolutely is consistent with his ideology. Greenspan also had
Speaker 1: the misfortune of publishing an extremely candid memoir where he
Speaker 1: admits completely that yeah, I had no appetite for regulation,
Speaker 1: and he said that he took care of it by saying, well,
Speaker 1: I'm as and recuse myself because I ideologically I'm opposed
Speaker 1: to this. What happens in any organization where the boss says, look,
Speaker 1: you can do what you want. Here's my vision, but
Speaker 1: you make your decision. Do people say, okay, great, well
Speaker 1: I disagree with your vision, so I'm gonna do mine.
Speaker 1: Or do they say, oh, well, let's guess what his
Speaker 1: vision isn't implement it? And of course it's the latter,
Speaker 1: and that's what happens at the FED. So the left
Speaker 1: sees the FED as the only governmental institution with both
Speaker 1: the credibility and the perspective on the economy to do
Speaker 1: anything about the underwriting crisis fair enough, and then does
Speaker 1: nothing about it. And the right what's the rights criticism?
Speaker 1: The rights criticism is that he played God and he
Speaker 1: rather than having a monetary policy rule that would have
Speaker 1: increased interest rates much more rapidly after nine eleven and
Speaker 1: the tech bubble implosion, he didn't. He felt like that
Speaker 1: he knew what was better than uh than monetary policy rules,
Speaker 1: and as results, he started blowing bubbles. So the thing
Speaker 1: I love about that, I totally agree with your observation.
Speaker 1: But there's something deliciously ironic about an iron rand libertarian
Speaker 1: who says we should not have government intervention in anything
Speaker 1: unless I have my hands on the wheel, and then hey,
Speaker 1: watch the whole my beer. Watch this. It's an amazing contradiction,
Speaker 1: and in real time very few people pointed it out.
Speaker 1: Milton Friedman was one who did right. So he was
Speaker 1: as consistent libertarian as you ever find um, with only
Speaker 1: a couple of exceptions. In his youth wing he helped
Speaker 1: create the payroll deduction system, for example. It was something
Speaker 1: that he regretted the rest of his life. Thought taxes
Speaker 1: should be voluntarily given. Um. That's adorable. Yeah, right, that's
Speaker 1: that's the libertarian fervor right there. But but Milton Freed
Speaker 1: was a very smart guy, and he was asked in
Speaker 1: the ninety nineties, I mean, Greenspan made a decision that
Speaker 1: is credited um, that is credited with adding you know,
Speaker 1: a trillion dollars of wealth and countless jobs to the economy.
Speaker 1: And that is by saying in the nineteen nineties, we
Speaker 1: should not raise interest rates too early because what we're seeing,
Speaker 1: in part because the technology, uh, in part because of
Speaker 1: other factors in the economy, dramatic expansion in productivity, rather
Speaker 1: than an overheating inflationary economy. And so he convinced the
Speaker 1: other members of the Federal Open Market Committee in nineteen
Speaker 1: nineties to hold tight. And one of the hawks on
Speaker 1: the other side of that was Janet Yellen, right, not
Speaker 1: the dove on the other side of his funnishness, but
Speaker 1: the opposite and uh. And he was right in the
Speaker 1: sense that the economy continued to expand even after him,
Speaker 1: you know, the stock as stock, the tech stocks fell apart.
Speaker 1: Where they bottomed out was substantially higher, and of course
Speaker 1: they went right up again than where others were calling
Speaker 1: the Um the top of the market. And so that
Speaker 1: idea was that he's the wizard, right, he's the maestro um.
Speaker 1: And I think that that ends up be feeding this idea.
Speaker 1: When it's good, it's great, right, But when it's bad,
Speaker 1: you have a villain. And again it's a bipartisan villainy there.
Speaker 1: I think that's a fair assessment, right, he when as
Speaker 1: long as everything's going well, hey listen, when the party
Speaker 1: is in full swing, everybody loves an easy bartender. But
Speaker 1: the next morning, when you hungover in sick to your stomach,
Speaker 1: it's can't believe what sort of jumped this guy was
Speaker 1: pouring into my glasses. And I think from the perspective,
Speaker 1: I mean, there's a lot to say in favor and
Speaker 1: against both of those narratives on the left and the right.
Speaker 1: So some of those who critique the critique on the
Speaker 1: left say, um, there's there was no appetite in America
Speaker 1: for taking a hard line on bankers. And if Greenspan
Speaker 1: had done it, he would have been pilloried just as
Speaker 1: anyone else was. What what about either the tale of
Speaker 1: rule or any other assessment that, when you play it
Speaker 1: out to the last steps, says, hey, we should have
Speaker 1: rates a little higher than these. You know, that's where
Speaker 1: the Greenspan put more or less can exactly right. And
Speaker 1: and Taylor himself, although not at the time very much.
Speaker 1: You know, John has made a big career since the crisis,
Speaker 1: and uh and really raking the Fed over the coals,
Speaker 1: but he wasn't doing it at the time. And even
Speaker 1: the original papers that created the Tailor rule were much
Speaker 1: more tentative than his certainty today, which makes me uh
Speaker 1: much less sure about the Taylor rule. I'm opposed to
Speaker 1: writing the Tailor rule into into legislation. Um. But that
Speaker 1: is the critique the Taylor rule would have said in
Speaker 1: two thousand four interest rate should have been higher by
Speaker 1: same same situation, right, they should have been higher by
Speaker 1: not just twenty five basins points, but by two hundred
Speaker 1: basis points, right, um or more. And so the problem
Speaker 1: with that narrative, though Ben murnike um has pointed this out,
Speaker 1: is that the real estate bubble started. It predated you know,
Speaker 1: the initial departure. It predated the monetary policy phenomenon. I
Speaker 1: disagree with um Bernankee on this. Years ago, when he
Speaker 1: was leaving the FED, there was a lunch a luncheon
Speaker 1: that I got to intend, and the conference table was,
Speaker 1: you know, three miles long. He's in the middle of it.
Speaker 1: I'm in the opposite corner. So I had to scream
Speaker 1: my question too, and that came up. And the pushback
Speaker 1: I gave, and I'll repeat it now, was go back
Speaker 1: to right. You have the crash, Greenspan comes in like
Speaker 1: many new bankers, they're tested immediately, and you pretty much
Speaker 1: had the peak in real estate, at least in New
Speaker 1: York and other metropolitan areas in that seven to eighty
Speaker 1: nine air If you bought a condo in eighty nine
Speaker 1: in Manhattan or a co op, you didn't get back
Speaker 1: to break even until like the whole concept that real
Speaker 1: estate never goes down. That's before we're not even talking
Speaker 1: about the Great Depression. But if you look at a chart,
Speaker 1: you'll see we peaked, took a while to get back over,
Speaker 1: and my personal experience has been that in the mid
Speaker 1: to late nineties. Remember the bullmarket really began in eighty
Speaker 1: two in the mid to late nineties, a lot of
Speaker 1: people and this is an anecdote, it's not data, but
Speaker 1: I saw so much of it that I can't believe
Speaker 1: there isn't a good data source on this. A lot
Speaker 1: of people said, Hey, I'm gonna roll out a little
Speaker 1: bit of my equities and trade up in real estate.
Speaker 1: I'm in a three bedroom, I want to be a
Speaker 1: four bedroom on an acre. I'm I'm on an acre.
Speaker 1: I want to be waterfront, I'm waterfront. I want to
Speaker 1: be at a bigger house. Whatever it was, And that's
Speaker 1: what it was, a combination of all this wealth that
Speaker 1: was created in the eighties and nineties, rates were still
Speaker 1: relatively attractive, and it it just was the demographic cycle
Speaker 1: that people started to to roll up and out and
Speaker 1: then what could have sort of faded in most most cycles,
Speaker 1: the economy drives real estate. Following the nomination of the
Speaker 1: dot com crash and nine eleven, when rates dropped, I
Speaker 1: want to say they were below two percent for about
Speaker 1: three years, and they were about one percent for a year.
Speaker 1: That's what started that giant spiral. And following there was
Speaker 1: no refractory period post uh dot com collapse. You had
Speaker 1: real estate then driving the economy for the next well
Speaker 1: five six seven years, and that's when everything kind of
Speaker 1: went vertical. And then add to that, you start running
Speaker 1: out of people to buy houses, and you moved to
Speaker 1: sub prime and all day and you bring in another
Speaker 1: ten or twenty million potential homebuyers. You know, A buddy
Speaker 1: of mine used to call that um renters with an
Speaker 1: option to default, people who really My favorite scene in
Speaker 1: The Big Short is Steve Correll is talking to the
Speaker 1: stripper who owns a rental property she's renting out. He goes,
Speaker 1: you own a house that you rent out? She goes, no,
Speaker 1: I owned six. And the light goes off. Oh this
Speaker 1: is a disaster. This is going to collapse. So when
Speaker 1: I look at when bernanke says that, you know, yeah,
Speaker 1: you were cut. You had a huge booming economy for
Speaker 1: a decade plus and you still a good chunk of
Speaker 1: that real estate was upside down for a while. Once
Speaker 1: you crossed I want to say nine seven, Yeah, real
Speaker 1: estate started to move. But you look at O two
Speaker 1: oh three or four or five or six oh seven,
Speaker 1: it's exclusion. It went vertical. So it's kind of I
Speaker 1: find he's the same thing with the excess cash looking
Speaker 1: for a home. I always thought that argument was a
Speaker 1: little You tell me how disingenuous is is the there's
Speaker 1: too much savings, that's our problem around the world gets
Speaker 1: to um my own ideology, which is that I am
Speaker 1: a radical uncertain tist. So I love that I don't
Speaker 1: have a strong view on these questions, but I love
Speaker 1: doing and structuring those arguments and understanding what would I
Speaker 1: have to know in order to horse one or another?
Speaker 1: And so here's what I would have to know. I
Speaker 1: would have to know more about the relative availability of credit,
Speaker 1: right that securitization, the explosion of securitization, and then demand
Speaker 1: that securitization I'm talking about second third generated into c
Speaker 1: d O s and beyond that downward interest rate pressure
Speaker 1: was putting on the system. Uh, And how we would
Speaker 1: look at that if the federal funds rate was higher,
Speaker 1: because one view, uh that Taylor and others assert is
Speaker 1: that these move an absolute lockstep. Right, So federal funds
Speaker 1: in two thousand and one to two thousand four, if
Speaker 1: it had been raised two d basis points or three
Speaker 1: hundred basis points, and then we would have seen such
Speaker 1: a dramatic break on the expansion of the housing system.
Speaker 1: I think there's some truth to that, and I want
Speaker 1: to know why, how did you reach that conclusion. I
Speaker 1: don't have a view on that, So I'll give you
Speaker 1: short against the counter factual that interstates were higher and
Speaker 1: we still had that breathtaking enthusiasm that you can make
Speaker 1: this back on capital gains alone, and it will be
Speaker 1: swift and swifter than stock markets right under other equities
Speaker 1: or other asset classes. So so here's the mechanism for
Speaker 1: that specific thing. And I'm literally talking my book again.
Speaker 1: So if you're running a pension fund and foundation, anything
Speaker 1: that a charitable trust, um, anything that has a five
Speaker 1: percent bogu, We're gonna give away five percent of our
Speaker 1: corpus each year in order to maintain our tax exempt status.
Speaker 1: I think if you're a public pension fund, that's not
Speaker 1: a technical issue. But any of the giant foundations and
Speaker 1: charities and what have you have to do that when
Speaker 1: when rates go to and it's easy to do that.
Speaker 1: You expected returns for equities or six percent you're expect
Speaker 1: to return for bonds a three five percent a blended portfolio, Hey,
Speaker 1: five percent is a no brainer. How hard is that? Now?
Speaker 1: You take rates down you have a dot com crash,
Speaker 1: so oops, there's that. Then you take rates down to
Speaker 1: one percent. Now my bond aren't giving me anything. I
Speaker 1: think a lot of bond a lot of fund managers
Speaker 1: went to their bonds, either traders or salespeople whatever, say listen,
Speaker 1: I can't live on two percent. I have to get
Speaker 1: me something that will generate a better return, or I
Speaker 1: have to find somebody who will and so out. At
Speaker 1: the same time, we have a small bit of securitized
Speaker 1: sub prime and suddenly, hey, just as safe as treasuries.
Speaker 1: I remember being pitched in oh three, but look at
Speaker 1: yields a hundred fifty two fifty basis points. Mare, there's
Speaker 1: your five percent but bogey. And then all of a sudden,
Speaker 1: these mushrooms start to pop sprout after rain that the
Speaker 1: business model was not lends in order to get a
Speaker 1: yield on a mortgage, but lend in order to sell
Speaker 1: the papers to securitizers. And now that's what's feeding the
Speaker 1: beast and that process. Now I'm taking some liberties with
Speaker 1: the timelines, and I'm sure skipping some steps, but I
Speaker 1: think that is what led to that massive upswing in
Speaker 1: the I think, and again, I think it's a coherent view.
Speaker 1: This isn't This isn't something i'd call incoherent or or,
Speaker 1: and it's not a place where I've resolved these uncertainties
Speaker 1: for myself. And here's one of the reasons why I'm
Speaker 1: not walking out saying Barry, You're right, bernanke is wrong.
Speaker 1: I buy in the to the Taylor critique. I think
Speaker 1: it's exactly right, and part of it is all right.
Speaker 1: So we've got the soup of factors that contribute the
Speaker 1: financial crisis. Easy money is certainly one, right, and now
Speaker 1: let's talk about the five or six others that are
Speaker 1: contributing to and explain to me why the FEDS easy
Speaker 1: money is the factor that we call causal as opposed
Speaker 1: to just simply part of the soup. Is I agree,
Speaker 1: it is part of the soup. It's that take the
Speaker 1: Commodity Futures Modernization Act that said derivatives don't have to
Speaker 1: be regulated like other insurance products. Absolutely, that's a big
Speaker 1: part of the global The global savings glut is a
Speaker 1: massive factor. Right, So we've got things that unless convinced
Speaker 1: to that, you're like, you don't, you're not convinced that
Speaker 1: there's a massive amount of money flowing unless convinced that
Speaker 1: that is a factor causing a great financial crisis. It
Speaker 1: might have money yield. Yeah, well money seeking return not
Speaker 1: necessarily yield. So in in coming up so with the
Speaker 1: structure of collateralized that obligations. Right, the financial innovation, which
Speaker 1: I still think is a pretty breath taking piece of
Speaker 1: financial engineering in the sense right, being able And it's
Speaker 1: not financial alchemy to say we can actually traditional mortgage
Speaker 1: backed securities are already tranched, but they're trenched in a
Speaker 1: way that isn't about diversification risk, right, it's just about
Speaker 1: pooling rice on geography. How much risk do you want
Speaker 1: to take for how much reward? Yeah, and now cd
Speaker 1: as are saying, well, we're gonna make this in first in, uh,
Speaker 1: first out, and we're just going to If you had
Speaker 1: drawn the lines of c d O S differently, right,
Speaker 1: so that the equity tranch was much larger and the
Speaker 1: trip lay transferable smaller, right, that's one option. The other
Speaker 1: option is is garbage and garbage out? If what was
Speaker 1: going so when again I'm talking to my book, One
Speaker 1: of my most stunning things I discovered on the standardized
Speaker 1: documents for purchases of mortgages to be securitized. There is
Speaker 1: a nine day warranty a toaster. By a toast, you
Speaker 1: get warranty if the thirty day mortgages that go into
Speaker 1: these c d O s, if they default within ninety day,
Speaker 1: you can put it back to it. Now, stop and
Speaker 1: think about that. This is a thirty year obligation, right,
Speaker 1: how many months is that that's that's sixty months. If
Speaker 1: it defaults in the first three months, you can put
Speaker 1: it back now. If that would have been a twenty
Speaker 1: four month put which is hey, after two years, we've
Speaker 1: done our due diligence, it's on you, that would have
Speaker 1: been a big difference. But because of this was so
Speaker 1: complicated in real time, nobody understood the details. You could
Speaker 1: say night by the way, even that put. I think
Speaker 1: there was a great website called mortgage implode dot com
Speaker 1: that tracked all of the mortgage ender waters who went
Speaker 1: belly up, and it was four hundred of them. Because
Speaker 1: even with that short ninety day there were people who
Speaker 1: who they were doing the piggyback loans, they were doing
Speaker 1: the underlying mortgage and the whole equity at the same time.
Speaker 1: So you're lending a d and they never made a payment,
Speaker 1: They lived rent free for five years before they were
Speaker 1: eventually evicted. How could that ever go this? Let me
Speaker 1: take a giant step back and tell you why our
Speaker 1: conversation right now, oh will prove out this truth about
Speaker 1: which I don't have uncertainty. The two thousand eight crisis
Speaker 1: is going to continue to be a master class in
Speaker 1: financial history for decades to come, just as the Great
Speaker 1: Depression has. You and I could have an identically structured
Speaker 1: conversation about what caused the Great Depression, and we'd have
Speaker 1: so many factors to discuss, and you would say, well,
Speaker 1: this thing mattered more than that thing, And I said, well,
Speaker 1: I think that thing is Lewis. It's more complicated than that.
Speaker 1: And the reason why for some people that's just massively frustrating.
Speaker 1: Give me an answer, give me the to identify the problem,
Speaker 1: give me an answer that identifize the solution. Let's move on.
Speaker 1: So I will admit I'm ignorantous to what was the
Speaker 1: Great Depression? Was it was it tariffs and trade? Was
Speaker 1: it was it Herbert Hoover? Was it income in equality?
Speaker 1: I have no idea, and I think that those conversations
Speaker 1: which we can have if you'd like tell us a
Speaker 1: huge amount. And why they call that a master classes
Speaker 1: rather than you know, uh, just a circular track where
Speaker 1: we just chase each other endlessly, is because by really
Speaker 1: digging deep, isolating the mechanisms, ask yourself what you don't know,
Speaker 1: what you'd need to know in order to answer that question.
Speaker 1: That's how we learn about the mechanics of finance. And
Speaker 1: I think that's much. It's not not to dismiss my
Speaker 1: finance colleagues, but I would take that approach to things.
Speaker 1: I have taken that approach to things as a financial historian,
Speaker 1: as a lawyer. Then you know, learning the basics of
Speaker 1: black shouls or a cap emma or whatever else. Well,
Speaker 1: that works. So let's jump into our speed round our
Speaker 1: favorite questions. Let's uh, let's let's run right through these.
Speaker 1: Tell us the most important thing that people don't know
Speaker 1: about you. I'm I'm a poor, scrappy kid from More, Oklahoma,
Speaker 1: and I'm the I'm the sixth of seven kids to
Speaker 1: a single mom. My dad died when I was nine,
Speaker 1: but most of my life, most of his life, uh,
Speaker 1: he just wasn't good at life, wasn't good at being
Speaker 1: a human. Um, So, how do you go from a
Speaker 1: poor kid in Oklahoma to Harvard, Stanford Princeton, and so Um.
Speaker 1: The first was my brother, who is nine years older
Speaker 1: than me. Um was approached. He did well on the
Speaker 1: s A t S. And he was approached by an
Speaker 1: alum of Harvard saying, hey, kid like you shouldn't go
Speaker 1: to the local state school, should go to Harvard, which
Speaker 1: just didn't compute for anyone in my family. And so
Speaker 1: he applied, he got in, he went, and then nine
Speaker 1: years later, none of my other siblings did right well.
Speaker 1: Everybody else went to UH, to the state schools UM.
Speaker 1: And then night years later, I was just like, you
Speaker 1: know what I'm gonna I'm gonna be like my big brother.
Speaker 1: And so I did well in the s A t S.
Speaker 1: And I just from the time I was a kid,
Speaker 1: I was like, I saw what happened to Sam right
Speaker 1: the way that people reacted to him. Whatever Harvard meant,
Speaker 1: it meant something big. And so I applied, I got in,
Speaker 1: and I went, And then I would love to say
Speaker 1: that from there it was just all UH sunshine and buttercups,
Speaker 1: but the but it wasn't the cultural misfit between more
Speaker 1: Oklahomagetitus is so massive. It was harder for me than
Speaker 1: some my friends were from you know, gone to lead
Speaker 1: pipe private schools in Singapore or London, or or Johannesburger,
Speaker 1: Jennie or whatever else. So let me your brother is
Speaker 1: clearly a mentor. Who were some of your other early mentors.
Speaker 1: One of my very favorite mentors is a professor sociology
Speaker 1: professor named Mary Waters. I ended up not studying really
Speaker 1: anything close to what she does. She does studies immigration,
Speaker 1: natural asters, things like that, but she at Harvard University
Speaker 1: was the only professor I ever had that just took
Speaker 1: a keen personal interest in me. And as a as
Speaker 1: a teacher, so not you know, as as a scholar,
Speaker 1: I've gone in a different direction, but as a as
Speaker 1: a teacher, Mary has had a huge influence on me.
Speaker 1: Another one is and not ed Maddi. If you know
Speaker 1: the banker's new clothes, that's her. Um. She had a
Speaker 1: big has and still has a huge impact on me
Speaker 1: as a scholar, because how fearless she is? All right, son,
Speaker 1: this poor kid from Oklahoma, What business do I have
Speaker 1: talking about trillions of dollars? When you say fearless? In
Speaker 1: what way she'll say something? Whether it's popular or not
Speaker 1: well man, she just goes to war against people whose
Speaker 1: resources vastly outstripped her own on something that seems as
Speaker 1: our kane as bank balance sheets. Right, but banks should
Speaker 1: have much more equity, much less debt and uh and
Speaker 1: she's just tireless. We don't agree on everything. Sometimes we'll
Speaker 1: bicker and argue, but she has been just a profound
Speaker 1: Mentor's let's talk about books, because we we just mentioned
Speaker 1: the Banker's New Clothes. What are some of your favorite books.
Speaker 1: When I was a kid, the only book that ever
Speaker 1: made me physically weep was Victor Hugo's Lay miserab Um,
Speaker 1: and I remember reading the unabridged version and just feeling
Speaker 1: like I had been. It was the first time I
Speaker 1: thought I don't have to actually have these experiences to
Speaker 1: experience them. So that was that had a big impact.
Speaker 1: More more recently and perhaps less uh less Sacraine than that.
Speaker 1: Sebastian Malaby is probably my favorite financial journalists. I've read
Speaker 1: everything he's written, so more Money than God and what
Speaker 1: was the one on central banks? He wrote? The Man
Speaker 1: Who Knew, which is the biography of Alan Greenspan. I
Speaker 1: disagree with a lot of it in terms of the
Speaker 1: overall framing. Um, but it's it's just a superb product
Speaker 1: of exposition and research and you know the framing he puts,
Speaker 1: the policy questions where he intervenes. Uh, you can agree
Speaker 1: or disagree, but that's not the main country from the book.
Speaker 1: It's just terrific history. So if you like biography, Alan
Speaker 1: Green's fans biot it should have won a Pulitzer Prize
Speaker 1: in my view. Really, Oh it's so good. Wow, that's impressive. UM,
Speaker 1: tell us about a time you failed and what you
Speaker 1: learned from the experience. So UM, I when I started
Speaker 1: as an undergraduate at Harvard, UM, I was the president
Speaker 1: of the math club in my little Oklahoma high school
Speaker 1: and I just could not do the math in economics.
Speaker 1: And that's so funny you say that because in high
Speaker 1: school I was a mathlete and I then I go
Speaker 1: to Stony Brook for applied mathematics and physics, thinking that
Speaker 1: I'm the sh isnt and I know the stuff, like
Speaker 1: I didn't have to study for cow classes and I
Speaker 1: would get a's. And then you show up with people
Speaker 1: who are really serious and suddenly it's like, oh, I'm
Speaker 1: not as good at this as I thought. These guys
Speaker 1: who actually put in the heavy lefting do the work.
Speaker 1: They're running circles, and that was the barry. You and
Speaker 1: I had exactly the same circumstance. And so what I
Speaker 1: did in the face of that difficulty is I sprinted
Speaker 1: in the other direction and way from economics, away from
Speaker 1: things that were challenging. At least initially, I was like,
Speaker 1: I have to do something that immediately validates my natural strengths.
Speaker 1: I tell my students, I tell my children that that
Speaker 1: is just one of the worst sins that you can
Speaker 1: commit against yourself. Um And so it took me. I
Speaker 1: was in graduate school for ten years, during which I
Speaker 1: I paid for all of my sins and neglect. I
Speaker 1: took a lot of economics classes. Now I'm no brilliant mathematician,
Speaker 1: but there's nothing in in basic economics that's outside of
Speaker 1: my Again, I'm not an economist. I paid for that.
Speaker 1: I'm glad I did. But that failure, that failure was
Speaker 1: so signal, and that is I ran away from what
Speaker 1: was hard, and I wish I'd run in the other direction.
Speaker 1: And I eventually did run in that other direction, but
Speaker 1: took a long time for me to make up for
Speaker 1: that tell us what you do for fun. I love
Speaker 1: racquetball and squash. Um. I love my children. I have
Speaker 1: three children and have a wonderful marriage with their with
Speaker 1: my wife, their mother, Nikki Um. I think he was
Speaker 1: just traveling this week, and so it was daddy owns
Speaker 1: the owns, the solo parenting thing and we had a
Speaker 1: terrific time. But my two year old is h he's
Speaker 1: an angel ninety at the time a terrorist the other time. Percent.
Speaker 1: I was very happy to see Nicky come home last night.
Speaker 1: That was the nine. That's a good So you deal
Speaker 1: with a lot of millennials and kids in college. Any
Speaker 1: of them come up to you and say, I'm interested
Speaker 1: in a career in finance. What sort of advice would
Speaker 1: you give that? Yeah? They I do that all the time.
Speaker 1: I teach a financial regulation financial history course, and I
Speaker 1: always as I say, the same thing. Right, So fintech
Speaker 1: is not a creature of post two thousand eight. Fintech
Speaker 1: is as old as finance. Look for ways in which
Speaker 1: rules have clumped when that should have been more evenly distributed. Right,
Speaker 1: So that's that treats like things unlike. So maybe it's
Speaker 1: that there's a phyco At score that treats people very differently,
Speaker 1: and you see a big difference in interest rates and
Speaker 1: do an arbitrage. So that would be things like so
Speaker 1: far right, that would be things like, um, you know,
Speaker 1: looking at underwriting standards that might be different. Um. So
Speaker 1: that's one thing. So it's where law has clumped people,
Speaker 1: where the margins are basically identical. Build a bridge, right.
Speaker 1: I think that's a really effective business strategy. Second is
Speaker 1: we're all going to be terrible at at calling uh
Speaker 1: bubbles at their at their peak and at their trough.
Speaker 1: But take the Wells Fargo model, nineteenth century version, which is, yeah,
Speaker 1: we're not going to be in the gold mining business.
Speaker 1: We're going to sell stuff to people or in the
Speaker 1: gold mining business. So whether whatever your view a bitcoin
Speaker 1: or cryptocurrency, if you can design system that provides services
Speaker 1: that are portable but that could cater to that, that's
Speaker 1: a good business to be in, just so long as
Speaker 1: it's not so catered that you can't that it's not
Speaker 1: not portable. And our final question, what is it that
Speaker 1: you know about the world of central banks and Federal
Speaker 1: Reserve today that you wish you knew twenty years ago?
Speaker 1: That that's there's no wizard that there are women and
Speaker 1: men behind that curtain of substantial and intellect, talent, technique, ideology,
Speaker 1: judgment values to their people and the humanized Central Banks
Speaker 1: is not to disparage them. Has to say the people,
Speaker 1: and I am too, and I can engage in that debate,
Speaker 1: and I can do it intelligently or I can do
Speaker 1: it stupidly. Um, so let's do it intelligently, and let's
Speaker 1: not just say all right, I'll just trust the wizards
Speaker 1: know what they're doing. Fascinating. We have been speaking with
Speaker 1: Peter Conti Brown. He is an assistant professor at Wharton
Speaker 1: School of Business, both grad and undergrad at the University
Speaker 1: of Pennsylvania. If you enjoy this conversation, then be sure
Speaker 1: and look up an Inch or down an inch on Apple, iTunes, Bloomberg, Stitcher, Overcast,
Speaker 1: wherever finer podcasts are sold, and you can see any
Speaker 1: of the other two hundred or so such podcasts that
Speaker 1: we've had. We love your ammens, feedback and suggestions right
Speaker 1: to us at m IB podcast at Bloomberg dot net.
Speaker 1: I would be remiss if I did not thank the
Speaker 1: crack staff that helps us put together these conversations each week. Uh,
Speaker 1: Medina Parwana is my audio engineer. Producer Taylor Riggs is
Speaker 1: our booker. Michael Batnick is our head of research. I'm
Speaker 1: Barry Retults. You've been listening to Masters in Business on
Speaker 1: Bloomberg Radio.