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Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.

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Speaker 2: Hello and welcome to another episode of the All Thoughts podcast.

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Speaker 2: I'm Tracy Alloway.

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Speaker 1: And I'm Joe Wasenthal.

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Speaker 2: Joe, if I had said to you a few years

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Speaker 2: ago that there's a bank and the bank is taking deposits,

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Speaker 2: you know, checking accounts, and it's putting that money into

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Speaker 2: US treasuries, and that business model is going to completely fail.

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Speaker 2: The bank is going to collapse, what would you have said?

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Speaker 1: I said, let's short the stock. That's what I would

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Speaker 1: have said. I said, if you told me that and

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Speaker 1: you knew the only insight, the only actionable thing there,

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Speaker 1: I said, all right, let's short it.

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Speaker 2: All right, that's the right answer.

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Speaker 3: Clearly.

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Speaker 2: If you were a banking regulator, what would you have done?

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Speaker 1: Well, I don't know anything about big a banking regular

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Speaker 1: It seems really hard. And regulators in general often get

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Speaker 1: criticized in various ways, and they're like, oh, you busted

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Speaker 1: this really small time tiki tech insider trading ring. It's

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Speaker 1: not that big of a deal. Or oh, here's this

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Speaker 1: thing that collapsed and why didn't you catch it before?

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Speaker 1: They're always going to get upset about that. But I

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Speaker 1: have to say, I have a lot of sympathy for

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Speaker 1: the regulators because for the most part, my impression is

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Speaker 1: that the US has one of the most robust, transparent,

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Speaker 1: high depth capital markets and financial systems in the entire world,

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Speaker 1: which for the most part does not collapse. And so

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Speaker 1: I feel like when it comes to regulatory issues, there's

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Speaker 1: a lot of unseen where what we see is like,

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Speaker 1: if they're in the news, it's not good. But most

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Speaker 1: of the time things aren't the news.

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Speaker 2: That should be the tagline for America's financial system most

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Speaker 2: of the time does not collapse. Yeah, and ironically, well

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Speaker 2: I'm talking of course, or I was talking about Silicon

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Speaker 2: Valley Bank. Yeah, and the collapse there, And I think

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Speaker 2: it's still very surprising to me. In one sense it

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Speaker 2: was an old fashioned bank run, But in another sense,

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Speaker 2: it's very surprising that here's a bank that's basically buying

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Speaker 2: a bunch of ultra safe assets US treasuries and still

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Speaker 2: it ran into trouble. And banks, of course are mandated

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Speaker 2: to buy treasuries as well. We've talked about this on

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Speaker 2: the show any number of times now, but I want

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Speaker 2: to talk more about it.

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Speaker 1: Sure, you know. The one thing I'll say too, that

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Speaker 1: I've been thinking a lot with SVB is. I think

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Speaker 1: in the wake of the two thousand and eight two

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Speaker 1: thousand and nine financial crisis, we got very focused on

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Speaker 1: the asset side of the balance, right, and so it's like,

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Speaker 1: what they hit, what kind of subprime loans do they have,

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Speaker 1: and how good are there all of that, et cetera.

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Speaker 1: But one of the things, you know, like Josh Younger

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Speaker 1: talked about recently in others. Stephen Kelly had a note

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Speaker 1: in our newsletter, you know, a lot of it is

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Speaker 1: the difficulty in modeling the liability side and the slipperiness

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Speaker 1: of the deposit base and how hard that is to

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Speaker 1: know because you can have long duration deposits that suddenly

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Speaker 1: become overnight deposits. It's really tricky, and I still think

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Speaker 1: these are difficult things to understand.

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Speaker 2: Yeah, it feels like we're always fighting the last bank

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Speaker 2: battle or the last bond battle. Okay, Well, on that note,

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Speaker 2: we do, in fact have the perfect guest. We are

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Speaker 2: going to be speaking with ro Hit Chopra. He is,

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Speaker 2: of course the former director of the Consumer Financial Protection Bureau,

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Speaker 2: also a former FTC commissioner, so really the perfect person

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Speaker 2: to talk to. If we want to dig into what

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Speaker 2: happened to SVB, what it means for bank regulation, and

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Speaker 2: then also what banks are doing right now. Hit Thank

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Speaker 2: you so much.

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Speaker 4: For coming on all thoughts, Thanks for having me.

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Speaker 2: Here's my first question. Maybe it's a little pointed, but

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Speaker 2: does the CFPB still exist? So we just got the

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Speaker 2: one big beautiful bill that's been passed and it looks

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Speaker 2: like it slashes funding for the bureau, And of course

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Speaker 2: we know that Trump isn't exactly a fan of federal agencies,

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Speaker 2: so I'm curious is it still functioning?

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Speaker 1: There's already kind of good at it.

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Speaker 4: Yeah, anyway, it's a good question, and it seems by

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Speaker 4: every single piece of evidence that it's just maybe there

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Speaker 4: technically but not doing a damn thing. We are hearing

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Speaker 4: nearly every day about another financial institution that is being

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Speaker 4: released from obligations. It has been months since there has

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Speaker 4: been an enforcement action, and many are estimating that this

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Speaker 4: means billions and billions of dollars that consumers are not

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Speaker 4: getting back in refunds and frankly a big disadvantage to

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Speaker 4: all of those financial companies that follow the rules.

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Speaker 1: When it was working, when or when it was operating,

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Speaker 1: describe to me what the remit of the CFPB is.

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Speaker 1: And one of the criticisms of the people leveled is

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Speaker 1: they didn't know what the scope was, etc. What is

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Speaker 1: the formal scope of the CFPP.

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Speaker 4: Well, essentially, we saw decades ago that there weren't just

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Speaker 4: banks in the business of offering consumer loans and products.

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Speaker 4: It was all sorts of other companies heyday lenders, auto lenders,

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Speaker 4: and in fact now the bulk of mortgages are originated

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Speaker 4: outside of banks, the bulk of auto loans, and so

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Speaker 4: after the subprime mortgage crisis, there was broad agreement that

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Speaker 4: the Federal Reserve Board and other agencies just didn't focus

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Speaker 4: and have the attention on making sure that existing consumer

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Speaker 4: law was being followed. So the CFPB is responsible for

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Speaker 4: inspecting the largest financial institutions and taking them to court

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Speaker 4: when they break the law. Of course, also administering all

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Speaker 4: sorts of rules that keep the mortgage markets, the credit report,

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Speaker 4: credit reporting companies, and so many others in line.

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Speaker 2: How does the CFPB interact with all the other bank

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Speaker 2: policy stakeholders, because there seems to be quite a few.

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Speaker 4: You mean, the other regulators. The CFPB is the only

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Speaker 4: regulate that oversees that gigantic non bank consumer lending apparatus,

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Speaker 4: and also it has primary and exclusive jurisdiction overall banks

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Speaker 4: and credit unions over ten billion in assets. That means

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Speaker 4: every credit card company, every big player in the market

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Speaker 4: is primarily overseen by the CFPB. So the fact that

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Speaker 4: it is now functionally a dead fish is leaving a

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Speaker 4: very very big gap that no one can even legally

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Speaker 4: fill in.

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Speaker 1: Where do you see the biggest gap manifesting right now

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Speaker 1: when you look at the consumer financial landscape, What isn't

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Speaker 1: being enforced or what isn't being examined that in your

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Speaker 1: view merite enforcement or examination.

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Speaker 4: Well, I think the top priority is always trying to

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Speaker 4: understand the linkage between the biggest markets and the broader economy.

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Speaker 4: We saw that that linkage with the mortgage market was

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Speaker 4: pretty damn big, and its failure really crashed not just

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Speaker 4: the US financial system but the entire global marketplace. So,

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Speaker 4: of course, making sure that mortgages are fair and transparent,

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Speaker 4: that key rules like the qualified Mortgage Rule, which sets

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Speaker 4: some of the core standards to make sure there is

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Speaker 4: not predatory mortgage lending, but also the nuts and bolts

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Speaker 4: most of the issues that come in are people who

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Speaker 4: have errors on their credit report they say, that's not

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Speaker 4: even my name, or people whose bank accounts were illegally

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Speaker 4: debited or cleaned out due to fraud. There's all sorts

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Speaker 4: of issues that protect specific populations, military members, and so

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Speaker 4: many other pieces that keep the markets working. So I

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Speaker 4: don't want to pinpoint anything other than to say that

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Speaker 4: when I took office, it was after another few years

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Speaker 4: where there really wasn't much going on there, and we

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Speaker 4: saw how financial firms not just push the envelope, but

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Speaker 4: sometimes outright took advantage of people without any accountability.

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Speaker 2: Well, speaking of accountability, you know, we mentioned SVB at

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Speaker 2: the top of the show, and one thing I've heard

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Speaker 2: there's a little bit of a chicken and egg situation

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Speaker 2: when people are analyzing the root cause of that particular

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Speaker 2: bank collapse. So some people say, well, interest rates went

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Speaker 2: up and that led to paper losses on the bank's

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Speaker 2: bond holdings, and so people got nervous and started pulling

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Speaker 2: their money. And then other people say, well, people started

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Speaker 2: pulling their money even though the bond losses didn't necessarily

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Speaker 2: need to be crystallized anytime soon. So I'm curious, can

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Speaker 2: you pinpoint the spark that set off the latest bank crisis.

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Speaker 4: Well for me, it really was March eighth, twenty twenty three.

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Speaker 4: Two things happened that day. One was the wind down

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Speaker 4: of a bank called Silvergate Bank, which was heavily involved

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Speaker 4: in banking some of the major crypto trading platforms. There

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Speaker 4: was a flight of deposits out of that bank after

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Speaker 4: the crypto winter and the collapse of FTX. We had

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Speaker 4: been tracking I Serve on the FDIC board and we

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Speaker 4: were tracking Silvergate Bank, and on that day they announced

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Speaker 4: that they were not going to need to be put

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Speaker 4: into receivership, they would be self liquidating. And simultaneously, on

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Speaker 4: that same day, we had an announcement by Silicon Valley Bank,

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Speaker 4: which was a little bit of a goofy press release

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Speaker 4: they issued saying they're experiencing some real losses on their

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Speaker 4: securities portfolio and they're going to be looking for capital.

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Speaker 4: It raised a lot of red flags and suspicions about

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Speaker 4: whether they were viable. And this is something that is

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Speaker 4: just so fundamental about banking and deposit taking is that

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Speaker 4: it really is based on a belief that your money

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Speaker 4: is going to be there. And the truth is is

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Speaker 4: with federal deposit insurance and Federal Reserve discount window lending.

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Speaker 4: It always is, except when you have a bank that

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Speaker 4: is over ninety percent uninsured deposits. This is something that

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Speaker 4: is really unusual, and some would argue as not even

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Speaker 4: really a bank when you are that dependent on very

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Speaker 4: very large depositors that you grew so quickly, and so

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Speaker 4: then the run began.

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Speaker 1: How much would you ascribe it to the high percentage

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Speaker 1: of non insured deposits versus the concentration so in very

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Speaker 1: specific industries. So you mentioned the crypto one, but also

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Speaker 1: here are all of these startups. It had raised a

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Speaker 1: ton of money in twenty twenty and twenty twenty one.

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Speaker 1: A bunch of them apparently just put their money on

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Speaker 1: a bank, which is kind of weird to me, non insured,

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Speaker 1: and then we had the stock market plunge in twenty

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Speaker 1: twenty two. Funding dried up. There was no very little

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Speaker 1: new VC fundraising, so new dry powder to be put

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Speaker 1: into the bank. Startups drawing down their own deposits just

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Speaker 1: to make payroll or whatever else. And so you have

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Speaker 1: two things going on. One is the high level of

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Speaker 1: uninsured deposits, but also the concentration, so that there was

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Speaker 1: this one specific sector that was all going through the

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Speaker 1: cycle at the same time.

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Speaker 4: So let me just push on that because even though

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Speaker 4: it is one sector, and I agree with you, the

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Speaker 4: concentration was an important factor in this. But let's remember

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Speaker 4: that the individual firms that were funded by venture capital,

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Speaker 4: many of them were doing fine. There was not necessarily

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Speaker 4: something specifically or systemically wrong with those businesses. But I think,

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Speaker 4: and I agree with every small and mid sized business

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Speaker 4: out there. If I am launching a startup, whether it

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Speaker 4: is an AI company or a dry cleaner, it doesn't

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Speaker 4: rank in the top twenty reasons of my business failing

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Speaker 4: that my bank is going to fail. Sure, And so

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Speaker 4: what you start hearing is that these businesses, which are

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Speaker 4: highly networked as well as much faster communication, you get

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Speaker 4: the advice from your funders and others that you need

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Speaker 4: to run. And it was very clear that it was

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Speaker 4: not just happening at SVB, it then was happening all

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Speaker 4: over the system.

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Speaker 2: I was on a train to Connecticut around that time

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Speaker 2: and someone was sitting kind of close to me, and

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Speaker 2: it turned out they were banking with SVB. Their company was,

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Speaker 2: and I could hear the panic and their voice as

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Speaker 2: they tried to digest the news of what was happening.

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Speaker 2: But on that note, why did corporate treasurers, why did

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Speaker 2: they put all their deposits in a single bank when

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Speaker 2: presumably they know that there's a cap on FDIC insurance.

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Speaker 4: Yeah, it's a good question. I think there are some

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Speaker 4: practical issues for some small and mid sized businesses about

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Speaker 4: when you're running payroll or when you're getting in a

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Speaker 4: lot of receipts. I don't have as much sympathy for

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Speaker 4: some of the very large companies that we have learned

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Speaker 4: through public reporting put a whole lot of funds in

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Speaker 4: that bank, including really their entire cash reserves. So at

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Speaker 4: the end of the day, though the regulators had, we

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Speaker 4: saw an active run that was occurring, and of course

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Speaker 4: those insured depositors, the insured depositors really through the entire crisis,

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Speaker 4: did not really run. It was those uninsured started at

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Speaker 4: Silicon Valley Bank after that Wednesday release. By fry Day morning,

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Speaker 4: they were dead. We had actually voted the night before

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Speaker 4: or maybe at the pre dawn hours to accept it

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Speaker 4: into receivership, and I believe by the time it was

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Speaker 4: closed it had roughly one hundred billion dollars queued up

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Speaker 4: of outbound wires. So this was an enormous and fast run.

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Speaker 4: And many of those techno libertarians that we often hear

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Speaker 4: about who want no regulation, they were actively beating the

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Speaker 4: drum online asking for a Baila.

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Speaker 1: Well, this is actually interesting point. I was going to

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Speaker 1: go there next. And I think again it was a

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Speaker 1: thing that Stephen Kelly wrote for us. But one of

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Speaker 1: the things about twenty twenty three, I think it said

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Speaker 1: it wasn't a crisis of regional banks. It was a

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Speaker 1: regional bank crisis, as in specifically the region of California,

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Speaker 1: because then there were other parts of there were other

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Speaker 1: banks that got into a lot of trouble, and the

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Speaker 1: all thing they had in common was that they were

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Speaker 1: all sort of in some way connected to California. I

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Speaker 1: think I remember like people were going out looking for

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Speaker 1: any bank that had California in the title in some

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Speaker 1: way and betting against them. But talk to us about

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Speaker 1: regulating banks and monitoring runs in the world of these networks,

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Speaker 1: whether the the public networks on social media or just

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Speaker 1: the sort of networks of like mind individuals who are

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Speaker 1: all in the same WhatsApp group.

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Speaker 4: Yeah, I'm a believer that we can never fight and

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Speaker 4: We shouldn't want to fight the speed of communication. We

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Speaker 4: want markets to have live information. I will say this,

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Speaker 4: we saw the run start first at Silicon Valley Bank,

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Speaker 4: and then I think because of the confluence of factors

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Speaker 4: with Silvergate, it wasn't just California as anything that seemed

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Speaker 4: to have any crypto or tech adjacency. Of course, the

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Speaker 4: second bank that we closed that Sunday was Signature Bank,

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Speaker 4: which operated a crypto network but also had a very

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Speaker 4: real business. It is a New York City bank that

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Speaker 4: was deeply involved in New York City multifamily real estate.

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Speaker 4: You at the same time, Joe had people worried about

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Speaker 4: commercial real estate. But what we were seeing was that

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Speaker 4: the banks with the highest percentage of uninsured deposits, they

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Speaker 4: were being badly battered almost immediately.

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Speaker 2: So ultimately a decision was made to expand the deposit

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Speaker 2: insurance net and basically bail out SVB customers and others.

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Speaker 2: What was the decision making process like building up to

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Speaker 2: that and how big a deal is that? Is there

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Speaker 2: like a legacy from that decision.

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Speaker 4: It's a very big deal, and it's one that in

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Speaker 4: many ways is still hard to live with the decision,

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Speaker 4: even though it was the right decision, I think. Here's

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Speaker 4: how it works. The federal law basically directs the Federal

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Speaker 4: Deposit Insurance Corporation the FDIC, to resolve a failed bank

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Speaker 4: at the least cost to the Deposit Insurance Fund. That's

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Speaker 4: the fund that everyone pays into with their bank deposits,

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Speaker 4: and it builds up a fund to pay for certain

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Speaker 4: bank failures and make sure deposits are made whole. And

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Speaker 4: here's what was interesting about Silicon Valley Bank and Signature

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Speaker 4: Bank and then later First Republic. It was a super

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Speaker 4: majority of uninsured deposits. That means a bank failure is

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Speaker 4: not that expensive to resolve. The cost to the Deposit

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Speaker 4: Insurance Fund for a bank that is ninety percent plus

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Speaker 4: uninsured is going to be pretty low. And if the

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Speaker 4: law says resolve it at the least cost, in many ways,

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Speaker 4: the best case is sometimes to liquidate it, make as

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Speaker 4: many people whole as possible, and top them up with

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Speaker 4: the deposit Insurance Fund. But there is a proviso in

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Speaker 4: the law which says that if a failure is likely

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Speaker 4: to lead to systemic effects or to threaten the viability

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Speaker 4: of the US financial system, there's a process of key

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Speaker 4: turning that a series of regulators must go through to

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Speaker 4: recommend to the Treasury Secretary, who must consult with the

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Speaker 4: President to authorize the FDIC to take a different path.

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Speaker 4: So over the weekend the Sunday after the failure of

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Speaker 4: Silicon Valley Bank, and Sunday morning, roughly Signature Bank was

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Speaker 4: taken into receivership. First Republic was a zombie and basically

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Speaker 4: dead already. There was a decision where the FDIC board

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Speaker 4: we voted to turn that key, and the Federal Reserve

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Speaker 4: Board had voted to turn that key, and ultimately the

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Speaker 4: Treasury Secretary discussed it with the President and activated that authority.

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Speaker 4: The authority essentially led to the backstopping of all uninsured deposits.

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Speaker 4: That meant that everyone would be made whole in the

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Speaker 4: case of the failure, and it was a tough decision.

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Speaker 4: I think there was a question I was arguing and questioning,

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Speaker 4: should we be maybe raising the limit dramatically, perhaps to

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Speaker 4: twenty five or fifty million dollars. What we were seeing

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Speaker 4: in the system was active movement of uninsured deposits everywhere,

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Speaker 4: and ultimately the decision to invoke that exception really did

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Speaker 4: calm the system for the most part with the big

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Speaker 4: exception of First Republic Bank.

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Speaker 2: So the other thing that happened other than the expanded

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Speaker 2: deposit insurance was the creation of a new FED Lending

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Speaker 2: facility another acronym, the BTFP. How big a deal was

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Speaker 2: that one?

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Speaker 4: That one was weird. All banks have the ability to

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Speaker 4: access the discount window through the Federal Reserve, but the

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Speaker 4: Federal Reserve used some bailout authorities to launch this bank

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Speaker 4: term funding program. This allowed banks to pledge their treasury

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Speaker 4: securities at par and draw funds from the Federal Reserve.

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Speaker 4: I think there were a lot of us who raised

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Speaker 4: our eyebrows at this. If the banks already had access

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Speaker 4: to the discount window, why did they need this special program.

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Speaker 4: I worried about the precedent setting of this. It was

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Speaker 4: justified on the basis that there is stigma of going

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Speaker 4: to the discount window. Ultimately, we saw some financial institutions

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Speaker 4: game and arbitrage the program by drawing on it but

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Speaker 4: then earning interest on reserves. I think we just have

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Speaker 4: to be really careful when the Fed engages in lots

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Speaker 4: of bailout programs, because it sends a signal to the

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Speaker 4: market that they can expect it the next time.

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Speaker 1: Around as a regulator. There are many people who say this,

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Speaker 1: and you had a high level of scrutiny towards companies

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Speaker 1: that banked crypto companies, and many of them claimed that

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Speaker 1: they were treated unfairly. What is it just from a

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Speaker 1: high level, let's start there. From a high level, what

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Speaker 1: issues emerge when, if any issues emerge from a bank

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Speaker 1: that tries to build up a business among crypto companies.

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Speaker 4: I think this is a bit of a conspiracy theory. Yeah.

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Speaker 1: No, look, I'm but I'm just from a regulatory person.

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Speaker 4: Okay, go on, because because the truth is is that

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Speaker 4: the issues with Silicon Valley Bank, as you know and

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Speaker 4: described earlier, was really about being so deeply underwater on

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Speaker 4: their treasure securities.

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Speaker 1: But there's sure whether we're talking about Signature Bank, which

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Speaker 1: did have a pretty big crypto book. But also you

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Speaker 1: just get all these crypto companies like, oh, we don't

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Speaker 1: have it's so difficult for us to find a bank account.

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Speaker 1: Is it difficult for them to do banking?

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Speaker 4: Yeah, so let's see what we mean about banking for

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Speaker 4: crypto lending. Certainly there are going to be some banks

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Speaker 4: who feel they have no expertise in this, I think

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Speaker 4: the really interesting question is about deposit taking.

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Speaker 1: Yes, definitely, I'm not talking about crypto. I'm talking about

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Speaker 1: the deposit taking from crypto, native com cryptic company deposit taking.

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Speaker 4: There are a set of issues that banks always are

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Speaker 4: going to want to look at when it comes to

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Speaker 4: taking very very large deposits with a lot of in

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Speaker 4: and out activity, and much of that is related to

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Speaker 4: their own obligations for money laundering as well as what

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Speaker 4: was mentioned before, deposit concentration. So when you are a

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Speaker 4: bank that has a couple of depositors who are the

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Speaker 4: super majority of your deposit base, you're obviously going to

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Speaker 4: take some steps to be careful around that. And I

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Speaker 4: would say that the crypto issues in this run were

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Speaker 4: fairly muted. It was really the perception about the potential

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Speaker 4: exposures that we saw through the market, though I feel

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Speaker 4: that within a few days the fixation again was on

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Speaker 4: uninsured deposits.

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Speaker 2: When it comes to the bond losses, it strikes me

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Speaker 2: that the FED is kind of in a difficult position because,

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Speaker 2: on the one hand, it has to conduct monetary policy.

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Speaker 2: If inflation is high, it has to raise benchmark rates,

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Speaker 2: But on the other hand, it also has a financial

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Speaker 2: stability mandate. It's not part of the dual mandate, but

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Speaker 2: it is a regulator, and raising interest rates in this

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Speaker 2: case sparked a bank run. It seems how is the

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Speaker 2: Fed supposed to balance these two goals.

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Speaker 4: I don't see that as a balance at all. Okay,

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Speaker 4: I think there is a lot that the Federal Reserve

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Speaker 4: has really missed in many of the situations involving financial

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Speaker 4: stability around Lehman Brothers, as well as even including COVID,

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Speaker 4: But certainly this one was a more clear linkage where

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Speaker 4: when you have high concentrations of bond portfolios that are underwater,

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Speaker 4: you need to be extra careful to not make sure

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Speaker 4: that they are under capitalized, that they lack liquidity, and frankly,

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Speaker 4: that you are not turning upnd I when you are

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Speaker 4: supervising that institution. The warning signs with Silicon Valley Bank

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Speaker 4: were there for months, and I do think there was

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Speaker 4: a bit of a culture at the Federal Reserve of

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Speaker 4: really taking a light touch in the years leading up

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Speaker 4: to the crisis that I think has proven to be costing.

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Speaker 1: I want to go back to crypto because I want

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Speaker 1: to talk, not just I understand the obligations that a

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Speaker 1: bank has in terms of money laundering, in terms of

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Speaker 1: lots of in and out transactions, et cetera. However, from

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Speaker 1: a regulatory perspective, were banks that built up a crypto

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Speaker 1: book of business? Did they get extra scrutiny in somewhere

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Speaker 1: does that man extra scrutiny?

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Speaker 4: I think you always want to make sure that rules

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Speaker 4: are as clear as possible, and I do think bank

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Speaker 4: regulation has turned into really a messy set of rules. Frankly,

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Speaker 4: I think to accommodate the largest players rather than simple,

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Speaker 4: bright line rules when it comes to new types of activities.

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Speaker 4: There's no question that novel activities are going to need

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Speaker 4: a little bit more look than say a straightforward mortgage

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Speaker 4: or a straightforward small business loan. So when you have,

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Speaker 4: particularly a bank that doesn't have experience in a product,

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Speaker 4: that may pose some real risks to them, I don't

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Speaker 4: think it's unreasonable for a bank regulator to kick the

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Speaker 4: tires in what.

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Speaker 1: Is kicking the tires look like? Specifically?

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Speaker 4: I think it can take a wide range of activities.

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Speaker 4: It really depends on what type of new business that

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Speaker 4: that bank is offering. But at the core, making sure

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Speaker 4: that that bank is well capitalized and liquid is always

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Speaker 4: the top priority. But if you know, banks play a

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Speaker 4: major role in the financial state craft of America and

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Speaker 4: one of the big reasons and benefits of the reserve

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Speaker 4: currency is the role in detecting and deterring terrorism, finance,

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Speaker 4: drug cartels, and more. And federal law puts some real obligations.

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Speaker 2: On them for that. Okay, So speaking of novel businesses,

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Speaker 2: I want to widen the net a little bit and

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Speaker 2: maybe talk about fintech and what banks are doing right now.

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Speaker 2: And here I have to issue a disclaimer, which is

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Speaker 2: I'm very jaded about fintech in general. I used to

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Speaker 2: cover it at the FT and I heard the same stories,

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Speaker 2: the same themes over and over again, like big tech

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Speaker 2: is coming for the banks, or retail is coming for

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Speaker 2: the banks, like Walmart starting a financial product, and things

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Speaker 2: like that. Fast forward to today, I mean, it does

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Speaker 2: seem like this is something that is actually happening. What's

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Speaker 2: the ultimate ambition there in the payment space?

439
00:28:11,560 --> 00:28:16,680
Speaker 4: Well, payments is really something that has so rapidly changed.

440
00:28:17,359 --> 00:28:20,679
Speaker 4: Many of it is very good. It's easier to move money,

441
00:28:20,720 --> 00:28:25,520
Speaker 4: particularly with mobile devices. It's faster than it used to be.

442
00:28:26,320 --> 00:28:29,879
Speaker 4: I do think that we have some real concerns about

443
00:28:29,920 --> 00:28:34,439
Speaker 4: the playbook that many of the firms who are moving money,

444
00:28:34,680 --> 00:28:38,520
Speaker 4: how are they monetizing it. A lot of our payments

445
00:28:38,640 --> 00:28:42,280
Speaker 4: companies and big tech companies, I think are really drooling

446
00:28:42,800 --> 00:28:46,320
Speaker 4: over what they see in China where Ali pay and

447
00:28:46,400 --> 00:28:51,520
Speaker 4: we Chat pay are trafficking almost all of the consumer

448
00:28:51,640 --> 00:28:55,040
Speaker 4: payments non cash payments in pay.

449
00:28:54,880 --> 00:28:57,560
Speaker 2: In cash at a Starbucks in Beijing. I know from

450
00:28:57,600 --> 00:28:59,160
Speaker 2: personal experience.

451
00:28:59,040 --> 00:28:59,640
Speaker 3: And we happen.

452
00:29:00,360 --> 00:29:04,840
Speaker 4: There's a lot of questions about what is the monetization

453
00:29:05,000 --> 00:29:08,040
Speaker 4: scheme there. When I was at the CPPB, we led

454
00:29:08,080 --> 00:29:11,920
Speaker 4: a study that looked at all of these major payment platforms,

455
00:29:12,600 --> 00:29:17,320
Speaker 4: and I think there was a desire to monetize a

456
00:29:17,360 --> 00:29:22,280
Speaker 4: lot of that payment's information through surveillance, being able to

457
00:29:22,360 --> 00:29:26,200
Speaker 4: know exactly not just the amount someone is paying, but

458
00:29:26,280 --> 00:29:31,400
Speaker 4: the skew level data in their basket, ultimately feeding a

459
00:29:31,480 --> 00:29:38,800
Speaker 4: foundational algorithm that ultimately could serve up personalized prices. There

460
00:29:38,880 --> 00:29:41,640
Speaker 4: was lots of issues we dealt with when it comes

461
00:29:41,640 --> 00:29:45,960
Speaker 4: to fraud and identity theft. There were certainly issues when

462
00:29:46,000 --> 00:29:50,280
Speaker 4: it comes to the shift of where money was being stored.

463
00:29:50,880 --> 00:29:54,320
Speaker 4: Many people believed that the app they were using to

464
00:29:54,440 --> 00:29:58,120
Speaker 4: send money had money in a bank account somewhere, but

465
00:29:58,240 --> 00:30:02,040
Speaker 4: in fact maybe it was in an uninsured account. So

466
00:30:02,080 --> 00:30:05,840
Speaker 4: I think that we should be looking at payments in

467
00:30:05,920 --> 00:30:09,800
Speaker 4: terms of what is the ambitions of those companies and

468
00:30:09,840 --> 00:30:13,600
Speaker 4: why do they want it. We worked hard with global

469
00:30:13,640 --> 00:30:19,920
Speaker 4: central banks and regulators to inject more competition. Apple, for example,

470
00:30:20,040 --> 00:30:24,800
Speaker 4: had a real choke hold over iOS devices, only allowing

471
00:30:24,920 --> 00:30:28,800
Speaker 4: Apple Pay to be used. Europe has banned that practice.

472
00:30:28,960 --> 00:30:32,480
Speaker 4: Other countries are looking to restrict it as well. So

473
00:30:33,160 --> 00:30:38,080
Speaker 4: I think that stable coin, and once stable coin becomes

474
00:30:38,320 --> 00:30:43,440
Speaker 4: part of the broader ecosystem, which it may, it will

475
00:30:43,480 --> 00:30:48,080
Speaker 4: open up some additional issues about how payments in America

476
00:30:48,120 --> 00:30:49,240
Speaker 4: will ultimately work.

477
00:30:49,400 --> 00:30:52,000
Speaker 1: Yeah, I was just gonna ask about that, actually, because

478
00:30:52,000 --> 00:30:56,720
Speaker 1: to some extent that seems like a potentially good thing.

479
00:30:56,800 --> 00:30:59,920
Speaker 1: If I'm worried about Okay, there's a handful of Internet giants,

480
00:31:00,320 --> 00:31:02,880
Speaker 1: a handful of commerce giants who want to have more

481
00:31:02,960 --> 00:31:07,080
Speaker 1: and more skew level data about myself and what I buy.

482
00:31:07,880 --> 00:31:11,680
Speaker 1: To my mind, it seems possible that stable coins and

483
00:31:11,800 --> 00:31:15,120
Speaker 1: having your own distributed wallet on your phone or something

484
00:31:15,200 --> 00:31:18,800
Speaker 1: like that could change the architecture of the Internet such

485
00:31:18,840 --> 00:31:23,880
Speaker 1: that there isn't such a information bottleneck that only a

486
00:31:23,920 --> 00:31:25,480
Speaker 1: few giant companies have access to.

487
00:31:25,760 --> 00:31:28,320
Speaker 4: Yeah, it depends on who's issuing them. When I was

488
00:31:28,360 --> 00:31:32,400
Speaker 4: at the Federal Trade Commission, Mark Zuckerberg, Cheryl Sandberg others

489
00:31:33,200 --> 00:31:38,520
Speaker 4: announced the Libra project, which I think was completely a

490
00:31:38,520 --> 00:31:42,480
Speaker 4: way to cement more of a mode of Facebook and

491
00:31:42,840 --> 00:31:46,480
Speaker 4: now Meta's empire of being able to track and trace

492
00:31:46,640 --> 00:31:50,080
Speaker 4: the flow of money and ultimately to be able to

493
00:31:50,280 --> 00:31:55,800
Speaker 4: ensure that merchants operating in their ecosystem would use their

494
00:31:55,880 --> 00:32:01,120
Speaker 4: currency of choice. So I think it's really important that

495
00:32:01,520 --> 00:32:06,920
Speaker 4: we do not have payments and money controlled by any

496
00:32:06,960 --> 00:32:11,240
Speaker 4: real big commercial player. It is if there is a

497
00:32:11,320 --> 00:32:16,120
Speaker 4: stable coin that is issued completely separately that is not

498
00:32:16,280 --> 00:32:20,960
Speaker 4: affiliated with one of those companies. But I worry that

499
00:32:21,000 --> 00:32:26,000
Speaker 4: the market could easily tip to award an existing big

500
00:32:26,040 --> 00:32:30,440
Speaker 4: tech network, and ultimately that might provide huge advantages to

501
00:32:30,520 --> 00:32:33,560
Speaker 4: that firm, but not necessarily the whole economy.

502
00:32:34,040 --> 00:32:36,480
Speaker 1: Tracy, you know it's funny to me, is you know,

503
00:32:36,520 --> 00:32:38,520
Speaker 1: you have all the crypto people and a lot of

504
00:32:38,560 --> 00:32:40,840
Speaker 1: them got really upset about Libra again and how that

505
00:32:41,280 --> 00:32:44,560
Speaker 1: thing holl failed. But to my mind, if you think

506
00:32:44,640 --> 00:32:48,200
Speaker 1: about it, many of those same tech people hated the

507
00:32:48,280 --> 00:32:52,440
Speaker 1: speech regulations that it existed on the big social networks

508
00:32:52,480 --> 00:32:54,440
Speaker 1: in the early twenty twenties and the late tens, and

509
00:32:54,440 --> 00:32:56,440
Speaker 1: the idea of shadow banning and all of this stuff.

510
00:32:56,760 --> 00:32:59,520
Speaker 1: And it's like, imagine if they did that to payments, right, Like,

511
00:32:59,600 --> 00:33:02,760
Speaker 1: do you really want to invest that same power that

512
00:33:02,840 --> 00:33:05,480
Speaker 1: they have to decide what is appropriate speech and not

513
00:33:05,600 --> 00:33:09,080
Speaker 1: appropriate speech into the realm of Okay, Now they also

514
00:33:09,160 --> 00:33:11,920
Speaker 1: have the ability to regulate what is appropriate payments and

515
00:33:11,920 --> 00:33:14,480
Speaker 1: inappropriate payments. That's a lot of investiture of power.

516
00:33:14,600 --> 00:33:16,400
Speaker 2: This is the issue that came up in the UK,

517
00:33:16,720 --> 00:33:19,600
Speaker 2: right there was already some drama about who was it

518
00:33:19,760 --> 00:33:23,360
Speaker 2: Nigel Frage's bank account being taken away because of his politics,

519
00:33:23,400 --> 00:33:25,640
Speaker 2: So yeah, that concern is definitely there.

520
00:33:25,960 --> 00:33:30,640
Speaker 4: And we have that here where PayPal had sent out

521
00:33:31,240 --> 00:33:38,160
Speaker 4: some terms and conditions that allowed PayPal to find people

522
00:33:39,160 --> 00:33:44,800
Speaker 4: for their speech, presumably off platform. And I think we

523
00:33:44,920 --> 00:33:49,760
Speaker 4: need to be really careful about giving any of those

524
00:33:49,920 --> 00:33:55,320
Speaker 4: firms the ability to really have a big footprint, either

525
00:33:55,400 --> 00:33:58,120
Speaker 4: on speech or on commerce. And that is part of

526
00:33:58,160 --> 00:34:04,080
Speaker 4: the reason why developed countries have separated banking and commerce.

527
00:34:04,680 --> 00:34:07,680
Speaker 4: But we are now potentially in a new era and

528
00:34:07,720 --> 00:34:11,280
Speaker 4: I would argue stable coin is not really about crypto.

529
00:34:11,400 --> 00:34:15,360
Speaker 4: That might certainly be the technology, but it is essentially

530
00:34:15,400 --> 00:34:17,400
Speaker 4: a new type of payments and banking.

531
00:34:17,480 --> 00:34:20,759
Speaker 2: Charter wait talk more about that, because most people when

532
00:34:20,880 --> 00:34:22,840
Speaker 2: they think of stable coins, they probably think of a

533
00:34:22,880 --> 00:34:25,680
Speaker 2: money market fund. But as you point out, there's a

534
00:34:25,760 --> 00:34:28,719
Speaker 2: huge overlap with banking in the sense that stable coin

535
00:34:28,760 --> 00:34:31,840
Speaker 2: issuers are taking in people's money and for the most

536
00:34:31,880 --> 00:34:37,040
Speaker 2: part supposedly putting it into things like US treasuries, maybe gold,

537
00:34:37,360 --> 00:34:40,799
Speaker 2: ultra safe assets, and the whole business is built on

538
00:34:40,840 --> 00:34:43,960
Speaker 2: the premise that depositors are always going to get their

539
00:34:44,000 --> 00:34:48,000
Speaker 2: money back, right. That seems like an echo of a bank.

540
00:34:48,520 --> 00:34:52,200
Speaker 4: That's right, and I think over time we have seen

541
00:34:52,440 --> 00:34:57,919
Speaker 4: how the line has blurred between a bank and other

542
00:34:58,080 --> 00:35:06,040
Speaker 4: types of deposit instruments. Essentially, the Federal Reserve has multiple

543
00:35:06,120 --> 00:35:10,320
Speaker 4: times needed to stabilize money market funds, and in fact

544
00:35:10,760 --> 00:35:14,040
Speaker 4: has a facility at the New York Federal Reserve, the

545
00:35:14,200 --> 00:35:17,919
Speaker 4: Overnight Reverse Repo program that one could consider a sort

546
00:35:17,920 --> 00:35:21,919
Speaker 4: of daily bailout program to keep it stable and transmit

547
00:35:22,080 --> 00:35:26,560
Speaker 4: monetary policy. I really worry that if we keep having

548
00:35:26,880 --> 00:35:32,520
Speaker 4: enormous flows from banks to these money funds, we are

549
00:35:32,719 --> 00:35:37,719
Speaker 4: essentially going to create problems with how we transmit and

550
00:35:37,800 --> 00:35:41,400
Speaker 4: intermediate credit to the real economy. I would argue that

551
00:35:41,480 --> 00:35:44,800
Speaker 4: a stable coin, if it was a tokenized bank deposit

552
00:35:45,840 --> 00:35:48,719
Speaker 4: versus a tokenized money market fund, has a lot of

553
00:35:48,880 --> 00:35:54,480
Speaker 4: different effects. Long term, most of us know that banks

554
00:35:54,480 --> 00:35:58,040
Speaker 4: are still the key to lend to small businesses, to

555
00:35:58,200 --> 00:36:01,879
Speaker 4: lend to farms, and to lend to the real economy.

556
00:36:01,960 --> 00:36:05,080
Speaker 4: If you are essentially putting a thumb on the scale

557
00:36:05,800 --> 00:36:09,480
Speaker 4: toward money market funds or tokenized money market funds, the

558
00:36:09,520 --> 00:36:14,680
Speaker 4: beneficiaries are very large firms, sovereigns, and others who can

559
00:36:14,760 --> 00:36:18,480
Speaker 4: access those money markets. So we should really want to

560
00:36:18,520 --> 00:36:22,719
Speaker 4: make sure that banks or there is some something that

561
00:36:22,840 --> 00:36:28,080
Speaker 4: takes the place of filling in the gap for small businesses, farmers,

562
00:36:28,120 --> 00:36:29,880
Speaker 4: and others who depend on bank credit.

563
00:36:30,120 --> 00:36:34,239
Speaker 1: So the Senate in June passed the Genius Act to

564
00:36:34,239 --> 00:36:37,640
Speaker 1: start creating a more robust set of stable coin regulations,

565
00:36:37,840 --> 00:36:41,520
Speaker 1: but it did not allow for yield bearing stable coins.

566
00:36:41,560 --> 00:36:44,120
Speaker 1: So it's a great business if you're in the stable

567
00:36:44,160 --> 00:36:46,040
Speaker 1: coin business collect all that yield, but you don't have

568
00:36:46,080 --> 00:36:48,880
Speaker 1: to pass it out unlike a bank. What's your perspective

569
00:36:48,920 --> 00:36:53,440
Speaker 1: on that Is this about preserving the importance of deposit

570
00:36:53,480 --> 00:36:57,359
Speaker 1: taking bank institutions so that they're not disremediated into this way,

571
00:36:57,520 --> 00:37:00,680
Speaker 1: or is this just a stop to the bank so

572
00:37:00,719 --> 00:37:03,240
Speaker 1: that normal ol deposits are still a good business.

573
00:37:03,600 --> 00:37:07,839
Speaker 4: It's a very messy piece of legislation. I think there

574
00:37:07,920 --> 00:37:13,280
Speaker 4: is some arguments that yield chasing of a uninsured product

575
00:37:13,360 --> 00:37:16,600
Speaker 4: is probably a recipe for more bailouts and more mess.

576
00:37:17,320 --> 00:37:20,920
Speaker 4: On the other hand, we can't be setting federal laws

577
00:37:20,960 --> 00:37:25,240
Speaker 4: to advantage banks. They often get what they want anyway.

578
00:37:25,880 --> 00:37:29,800
Speaker 4: I would argue that one of the best ways to

579
00:37:29,840 --> 00:37:36,319
Speaker 4: pursue some tokenized payment systems that could potentially disintermediate the

580
00:37:36,360 --> 00:37:40,960
Speaker 4: incumbent payment networks would be to use tokenized bank deposits,

581
00:37:41,440 --> 00:37:45,200
Speaker 4: and just like we could have paper cash, each issued

582
00:37:45,280 --> 00:37:50,200
Speaker 4: by a different regional federal Reserve bank, our digital wallets

583
00:37:50,280 --> 00:37:55,080
Speaker 4: could host tokenized bank deposits that are sitting in banks

584
00:37:55,160 --> 00:38:00,840
Speaker 4: across the country and being intermediated into credit to the

585
00:38:00,880 --> 00:38:04,719
Speaker 4: real economy. I think what we see is largely a

586
00:38:04,840 --> 00:38:09,600
Speaker 4: legislative framework that is going to benefit the big crypto incumbents. Well.

587
00:38:09,640 --> 00:38:14,120
Speaker 2: Speaking of benefiting the big another large ish trend in

588
00:38:14,160 --> 00:38:17,680
Speaker 2: the banking system is consolidation, of course, and post the

589
00:38:17,719 --> 00:38:21,400
Speaker 2: financial crisis, I think we saw the number of small banks,

590
00:38:21,520 --> 00:38:24,840
Speaker 2: regional banks out there absolutely plunge, and I think it

591
00:38:24,880 --> 00:38:27,719
Speaker 2: took a few years before we actually got a new

592
00:38:27,760 --> 00:38:30,680
Speaker 2: bank set up, a Denovo Bank, and it was I

593
00:38:30,719 --> 00:38:33,840
Speaker 2: think in Pennsylvania Amish Country, which was kind of funny.

594
00:38:34,520 --> 00:38:37,680
Speaker 2: I guess my question is, like, presumably you want a

595
00:38:37,760 --> 00:38:40,400
Speaker 2: diverse network of lenders out there because you want to

596
00:38:40,440 --> 00:38:43,040
Speaker 2: avoid the too big to fail problem and you want

597
00:38:43,040 --> 00:38:45,720
Speaker 2: people to have access to credit. To your point earlier,

598
00:38:46,280 --> 00:38:50,160
Speaker 2: how do you encourage a more diverse or dynamic banking

599
00:38:50,200 --> 00:38:54,120
Speaker 2: system and avoid the outcome where Joe and I always

600
00:38:54,200 --> 00:38:56,640
Speaker 2: like to throw up the charts of how JP Morgan

601
00:38:56,760 --> 00:38:59,360
Speaker 2: or Wells Fargo came into being, and it's just a

602
00:38:59,480 --> 00:39:03,560
Speaker 2: story of them snapping up lots and lots of companies.

603
00:39:04,040 --> 00:39:06,759
Speaker 4: Decades ago, there was a Supreme Court case that was

604
00:39:06,880 --> 00:39:12,480
Speaker 4: very precient that warned that consolidation in the banking system

605
00:39:12,520 --> 00:39:16,960
Speaker 4: would ultimately contribute to mass consolidation in the real economy.

606
00:39:17,440 --> 00:39:22,160
Speaker 4: And you're right, the number of small community banks has dwindled,

607
00:39:22,200 --> 00:39:27,280
Speaker 4: and there's all sorts of reasons for this, including changing technology,

608
00:39:27,719 --> 00:39:31,400
Speaker 4: consumer preferences, so much more. But I think one of

609
00:39:31,440 --> 00:39:35,279
Speaker 4: the real big reasons is that there is a perception

610
00:39:36,480 --> 00:39:41,319
Speaker 4: that the very largest banks, as you mentioned, will be protected.

611
00:39:42,080 --> 00:39:45,759
Speaker 4: When Silicon Valley Bank was failing, where was all the

612
00:39:45,840 --> 00:39:50,520
Speaker 4: money flowing to? They were taking their money out of

613
00:39:50,600 --> 00:39:54,680
Speaker 4: Silicon Valley Banks, Signature Bank and others. It went to

614
00:39:54,800 --> 00:40:02,040
Speaker 4: the very big guys. Because every investor leaves that these

615
00:40:02,160 --> 00:40:07,560
Speaker 4: banks are essentially always going to be protected, they are

616
00:40:07,640 --> 00:40:13,000
Speaker 4: able to raise money with that implicit guarantee, and that

617
00:40:13,080 --> 00:40:16,640
Speaker 4: means they are able to out compete on so many

618
00:40:16,680 --> 00:40:23,200
Speaker 4: dimensions unfairly. I think they're smaller counterparts. So I really

619
00:40:23,239 --> 00:40:27,960
Speaker 4: think we need to be careful about giving benefits and

620
00:40:28,040 --> 00:40:31,640
Speaker 4: picking winners and losers, and that's what we have been doing,

621
00:40:31,840 --> 00:40:35,840
Speaker 4: is essentially picking the very largest banks as the winners

622
00:40:36,640 --> 00:40:50,239
Speaker 4: and others as the losers.

623
00:40:54,719 --> 00:40:58,040
Speaker 1: We recently had the Robin Hood CEO on the podcast,

624
00:40:58,440 --> 00:41:01,760
Speaker 1: and they're very excited about tokenization of all kinds of things,

625
00:41:01,840 --> 00:41:05,799
Speaker 1: including a tokenization of stock for that matter. And due

626
00:41:05,840 --> 00:41:11,600
Speaker 1: to crypto technology of some sorts, there's enforcing borders in

627
00:41:11,680 --> 00:41:15,359
Speaker 1: terms of defining what a regulatory perimeter even is from

628
00:41:15,360 --> 00:41:20,040
Speaker 1: a geographical standpoint is really hard. And due to smart

629
00:41:20,080 --> 00:41:24,600
Speaker 1: contracts and stable coins, et cetera, it's very plausible that

630
00:41:24,680 --> 00:41:27,200
Speaker 1: you could somewhere in the world, maybe in an offshore

631
00:41:27,400 --> 00:41:31,640
Speaker 1: or a lightly regulated country, create some token that tracks

632
00:41:31,640 --> 00:41:35,320
Speaker 1: some regulated instrument and it trades like a regulated instrument

633
00:41:35,400 --> 00:41:38,560
Speaker 1: up until maybe something goes bust. Is there a danger

634
00:41:38,840 --> 00:41:43,680
Speaker 1: that regulating consumer facing financial products, that law won't be

635
00:41:43,680 --> 00:41:45,880
Speaker 1: able to keep up, that there's this sort of like

636
00:41:45,960 --> 00:41:50,320
Speaker 1: technological explosion of things, and that to some extent, because

637
00:41:50,360 --> 00:41:52,799
Speaker 1: anyone who has access to a stable coin wallet and

638
00:41:52,840 --> 00:41:55,600
Speaker 1: access to the internet can theoretically trade it anything anywhere

639
00:41:55,800 --> 00:41:58,600
Speaker 1: that it would just be a crisis from the regulatory

640
00:41:58,680 --> 00:42:01,080
Speaker 1: perspective and keeping a hand on everything that's going on.

641
00:42:01,160 --> 00:42:03,160
Speaker 4: Well, I think we do have a jump ball right

642
00:42:03,200 --> 00:42:07,279
Speaker 4: now on the future of the dollar. We do see

643
00:42:07,480 --> 00:42:13,800
Speaker 4: the Trump administration very interested I think in fundamentally rethinking

644
00:42:13,800 --> 00:42:17,040
Speaker 4: the role of the dollar in the system. You raise

645
00:42:17,600 --> 00:42:21,760
Speaker 4: this example of technology, but for years we have seen

646
00:42:21,840 --> 00:42:25,719
Speaker 4: I believe it's a fourteen trillion dollar market of offshore

647
00:42:25,880 --> 00:42:31,600
Speaker 4: dollars euro dollars, which poses very serious and significant issues

648
00:42:32,120 --> 00:42:33,200
Speaker 4: for the entire.

649
00:42:33,000 --> 00:42:37,799
Speaker 1: Regulars of eurostocks, like literally not the Eurostocks index, but

650
00:42:38,160 --> 00:42:44,120
Speaker 1: something that resembles in trading a US listed regulated stock,

651
00:42:44,760 --> 00:42:48,680
Speaker 1: except it's on some digital exchange. It's a decentralized exchange,

652
00:42:48,680 --> 00:42:51,400
Speaker 1: but it moves in the same way. And how do

653
00:42:51,440 --> 00:42:53,000
Speaker 1: you even begin to wrap your head around here?

654
00:42:53,080 --> 00:42:56,240
Speaker 4: Yeah? Well, I think the way in which you want

655
00:42:56,280 --> 00:43:01,960
Speaker 4: to is constantly to figure out how do we solve

656
00:43:02,040 --> 00:43:05,440
Speaker 4: real problems in the economy and how do you build

657
00:43:05,480 --> 00:43:09,479
Speaker 4: for that, rather than allowing for product services to create

658
00:43:09,520 --> 00:43:13,760
Speaker 4: it purely based on arbitrage. I also think we want

659
00:43:13,800 --> 00:43:18,680
Speaker 4: to make sure that we don't try and create something

660
00:43:18,840 --> 00:43:23,600
Speaker 4: so complex that it will always be arbitraged around. And

661
00:43:23,640 --> 00:43:28,400
Speaker 4: we need a lot more simple bright lines that investors, consumers,

662
00:43:28,440 --> 00:43:33,799
Speaker 4: everyone can really easily understand and easily follow. Ultimately, the

663
00:43:34,000 --> 00:43:37,600
Speaker 4: US is going to be the place where people want

664
00:43:37,640 --> 00:43:41,200
Speaker 4: to do business because of strong rule of law and

665
00:43:41,800 --> 00:43:45,239
Speaker 4: a good legal system and all of those things, and

666
00:43:45,280 --> 00:43:47,960
Speaker 4: that's one of the most important things to safeguard.

667
00:43:48,200 --> 00:43:51,080
Speaker 2: Speaking of novel businesses, and I guess the idea of

668
00:43:51,160 --> 00:43:55,160
Speaker 2: policy kind of chasing after new tech, I'm just going

669
00:43:55,239 --> 00:43:59,400
Speaker 2: to go all Seinfeld on this question and ask what's

670
00:43:59,480 --> 00:44:02,640
Speaker 2: the deal with buy now, pay later? Because that is

671
00:44:02,920 --> 00:44:07,440
Speaker 2: everywhere nowadays. And obviously the question. The wider question it

672
00:44:07,480 --> 00:44:10,120
Speaker 2: poses is whether or not consumers are just taking on

673
00:44:10,520 --> 00:44:13,120
Speaker 2: a load of credit in a new way that possibly

674
00:44:13,239 --> 00:44:15,000
Speaker 2: isn't accounted for very well.

675
00:44:15,440 --> 00:44:18,319
Speaker 4: Well, it's always interesting. There's a table published by the

676
00:44:18,320 --> 00:44:22,640
Speaker 4: Federal Reserve about consumer credit outstanding, and it is always

677
00:44:22,680 --> 00:44:26,560
Speaker 4: missing many things, including by Now Pay Later, which we

678
00:44:26,640 --> 00:44:32,000
Speaker 4: have seen surge through the pandemic, growing more than ten x.

679
00:44:33,560 --> 00:44:37,080
Speaker 4: It has really changed quite a bit. Tracy by Now

680
00:44:37,120 --> 00:44:42,359
Speaker 4: pay Later, strangely was not really homegrown in America. It

681
00:44:42,440 --> 00:44:48,680
Speaker 4: came from other jurisdictions. It was popular in Sweden, Australia,

682
00:44:48,840 --> 00:44:52,400
Speaker 4: and now it is a major form of credit. Just

683
00:44:52,440 --> 00:44:56,760
Speaker 4: so everyone understands what it is. You take out alone

684
00:44:56,880 --> 00:45:01,200
Speaker 4: often pay in four. It does not have an interest rate,

685
00:45:01,520 --> 00:45:04,600
Speaker 4: but the buy now, Pay later lender takes a cut

686
00:45:04,640 --> 00:45:07,759
Speaker 4: from the merchant, just like a credit card company does.

687
00:45:08,480 --> 00:45:12,719
Speaker 4: So you have seen a lot of consumers believe that

688
00:45:12,800 --> 00:45:15,719
Speaker 4: this is a better way because it is no interest.

689
00:45:16,040 --> 00:45:20,480
Speaker 4: But the CFPB did extensive study on it and found

690
00:45:20,520 --> 00:45:24,400
Speaker 4: that there's very significant issues when it comes to people

691
00:45:24,480 --> 00:45:28,400
Speaker 4: returning goods and not necessarily getting it credited. There's issues

692
00:45:28,440 --> 00:45:32,160
Speaker 4: of people having multiple buy now, pay later loans, across

693
00:45:32,200 --> 00:45:36,120
Speaker 4: different lenders and are levered up. I would hear actually

694
00:45:36,160 --> 00:45:39,440
Speaker 4: complains from auto lenders who would say to me, how

695
00:45:39,480 --> 00:45:41,640
Speaker 4: am I supposed to write this auto loan if I

696
00:45:41,760 --> 00:45:44,759
Speaker 4: don't know what the buy and now pay later loans

697
00:45:44,800 --> 00:45:46,760
Speaker 4: are because they're not on the credit report.

698
00:45:46,880 --> 00:45:50,480
Speaker 1: Yeah, this strikes me as super interesting. I mean, just

699
00:45:50,520 --> 00:45:54,360
Speaker 1: like how inadequate right now is our tracking, both in

700
00:45:54,440 --> 00:45:57,719
Speaker 1: terms of the scale of it, just when we think about, okay,

701
00:45:57,719 --> 00:46:01,560
Speaker 1: we want to have aggregate sense of consumer consumer indebtedness,

702
00:46:02,000 --> 00:46:04,799
Speaker 1: and then how much of a struggle is it for

703
00:46:04,960 --> 00:46:09,320
Speaker 1: actual lenders to judge the credit worthiness of consumers because

704
00:46:09,360 --> 00:46:11,839
Speaker 1: of the lack of visibility and to be npl.

705
00:46:11,719 --> 00:46:14,640
Speaker 4: The faster it grows, the more difficult it will be.

706
00:46:15,040 --> 00:46:17,680
Speaker 4: And I think a key piece of this is we

707
00:46:17,800 --> 00:46:21,279
Speaker 4: are seeing all sorts of buy now, pay later like

708
00:46:21,360 --> 00:46:26,799
Speaker 4: products go beyond the traditional lenders. We're seeing banks and

709
00:46:26,880 --> 00:46:29,799
Speaker 4: credit card companies say, use my card and then go

710
00:46:29,840 --> 00:46:32,479
Speaker 4: online and you can convert it to buy now, pay later,

711
00:46:32,960 --> 00:46:36,640
Speaker 4: or some people thinking about how to connect it to

712
00:46:36,760 --> 00:46:40,759
Speaker 4: community bank debit cards. So I do believe it is

713
00:46:40,840 --> 00:46:47,160
Speaker 4: a big blind spot about consumer credit outstanding right now.

714
00:46:47,200 --> 00:46:52,960
Speaker 4: Obviously it is a relatively modest piece of the overall

715
00:46:53,160 --> 00:46:57,680
Speaker 4: unsecured debt. But if it continues its trajectory, even if

716
00:46:57,680 --> 00:46:59,839
Speaker 4: it slows its growth, it will be a big piece

717
00:46:59,840 --> 00:47:00,680
Speaker 4: of that pie.

718
00:47:01,080 --> 00:47:05,440
Speaker 2: I mean, presumably by now pay later would fall or

719
00:47:05,440 --> 00:47:09,480
Speaker 2: could fall under the remit of the CFPB. But well,

720
00:47:09,480 --> 00:47:13,239
Speaker 2: it does, it does, But I mean the CFPB is

721
00:47:13,719 --> 00:47:17,080
Speaker 2: not really functioning anymore. That seems like an issue.

722
00:47:17,239 --> 00:47:21,839
Speaker 4: Well, what we are seeing is that the protections that

723
00:47:21,880 --> 00:47:24,600
Speaker 4: the CFPB tried to put in place for buy now,

724
00:47:24,640 --> 00:47:27,960
Speaker 4: pay later borrows some basic ones. You can get some

725
00:47:28,000 --> 00:47:31,920
Speaker 4: statements that you're able to return goods and get it credited.

726
00:47:32,680 --> 00:47:34,680
Speaker 4: It looks like a lot of that is just being

727
00:47:35,120 --> 00:47:39,360
Speaker 4: thrown into trash or just not enforced. We are seeing

728
00:47:39,480 --> 00:47:42,759
Speaker 4: states all over the country though, looking to beef up

729
00:47:42,800 --> 00:47:47,200
Speaker 4: protections because they see how this could create a treadmill

730
00:47:47,320 --> 00:47:48,920
Speaker 4: of debt for people.

731
00:47:49,680 --> 00:47:52,759
Speaker 2: Just one more question for me. So you were head

732
00:47:52,760 --> 00:47:55,799
Speaker 2: of the CFPB under the Bien administration, and you were

733
00:47:56,200 --> 00:48:00,400
Speaker 2: at the FTC under the first Trump administration, and you

734
00:48:00,480 --> 00:48:05,479
Speaker 2: got to experience some of the second Trump administration. What's

735
00:48:05,520 --> 00:48:09,840
Speaker 2: your sense of the difference between Trump one and Trump

736
00:48:10,000 --> 00:48:13,520
Speaker 2: two point zero and how that administration is operating and

737
00:48:13,600 --> 00:48:15,880
Speaker 2: thinking about things like regulation.

738
00:48:16,280 --> 00:48:19,960
Speaker 4: Yeah, I think that there is when it comes to finance,

739
00:48:20,600 --> 00:48:26,880
Speaker 4: a real sense of concern about how they want to

740
00:48:26,920 --> 00:48:29,000
Speaker 4: think about the dollar and how they want to think

741
00:48:29,000 --> 00:48:32,280
Speaker 4: of the future of treasury securities. I see Secretary Beson

742
00:48:32,480 --> 00:48:37,759
Speaker 4: talk very deliberately about wanting stable coin, for example, to

743
00:48:37,840 --> 00:48:41,600
Speaker 4: be a way to boost demand for treasuries. Of course,

744
00:48:41,880 --> 00:48:45,799
Speaker 4: there's lots of issues with that, but I think more broadly,

745
00:48:46,640 --> 00:48:51,879
Speaker 4: the first Trump administration was a lot less organized, and

746
00:48:52,239 --> 00:48:55,600
Speaker 4: now there is a clearly a plan that they are

747
00:48:56,040 --> 00:49:01,040
Speaker 4: executing on, even if it seems chaotic. So I think

748
00:49:01,600 --> 00:49:04,640
Speaker 4: for those who have concerns about it, I don't think

749
00:49:04,760 --> 00:49:09,759
Speaker 4: they should write it off as just chaos or craziness.

750
00:49:10,360 --> 00:49:12,520
Speaker 4: I think there is a lot of things that are

751
00:49:12,600 --> 00:49:18,120
Speaker 4: being done that will have lasting effects on the financial system.

752
00:49:18,200 --> 00:49:20,799
Speaker 2: All right, ro hit Chopra, thank you so much for

753
00:49:20,880 --> 00:49:23,680
Speaker 2: coming on all thoughts. That was so interesting and really

754
00:49:23,719 --> 00:49:26,520
Speaker 2: good to get a regulator's actually perspective.

755
00:49:27,040 --> 00:49:41,960
Speaker 3: Thanks for having Thank you so much, Joe.

756
00:49:42,000 --> 00:49:44,120
Speaker 2: That was really interesting and I'm so glad we could

757
00:49:44,120 --> 00:49:45,920
Speaker 2: have ro hit On to give a sort of fly

758
00:49:46,040 --> 00:49:49,279
Speaker 2: on the wall perspective of a regulator. Dearing you know

759
00:49:49,320 --> 00:49:51,120
Speaker 2: what was a pretty dramatic time.

760
00:49:51,560 --> 00:49:56,160
Speaker 1: There's so many interesting things happening in Finnrag right now

761
00:49:56,800 --> 00:50:00,120
Speaker 1: in general, just obviously the sort of like turning of

762
00:50:00,239 --> 00:50:02,120
Speaker 1: the dial, you know, I think, like a really big

763
00:50:02,160 --> 00:50:05,320
Speaker 1: picture story that doesn't get a lot of attention because

764
00:50:05,320 --> 00:50:08,880
Speaker 1: we focus a lot on the changing administrations because the

765
00:50:08,920 --> 00:50:12,479
Speaker 1: financial crisis was a really long time ago. These things

766
00:50:12,520 --> 00:50:15,000
Speaker 1: always ebb and flow, right, So you have a crisis

767
00:50:15,040 --> 00:50:17,640
Speaker 1: and everyone cracks down and you sort of you know,

768
00:50:17,760 --> 00:50:20,120
Speaker 1: you do the max and then memories fade. You're like,

769
00:50:20,120 --> 00:50:22,560
Speaker 1: why do we have the Like this is I feel

770
00:50:22,560 --> 00:50:24,839
Speaker 1: like it's human nature. As the two thousand and nine

771
00:50:24,840 --> 00:50:28,680
Speaker 1: twenty ten reforms go further into the past, we're just

772
00:50:28,719 --> 00:50:30,759
Speaker 1: going to have this sort of natural loosening until the

773
00:50:30,800 --> 00:50:33,759
Speaker 1: financial crisis of twenty forty five or whatever it is.

774
00:50:34,000 --> 00:50:36,600
Speaker 2: Well, I mean, why do we have the CFPP. The

775
00:50:36,640 --> 00:50:38,880
Speaker 2: whole answer is it was created after the two thousand

776
00:50:38,880 --> 00:50:41,200
Speaker 2: and eight financial crisis. The other thing I thought was

777
00:50:41,200 --> 00:50:44,719
Speaker 2: really interesting, and this gets to the consolidation point, which

778
00:50:44,719 --> 00:50:48,200
Speaker 2: I think is a massive, massive story in the US

779
00:50:48,320 --> 00:50:51,719
Speaker 2: financial industry. But it's just that idea of Okay, if

780
00:50:51,719 --> 00:50:54,680
Speaker 2: you're worried about your deposit at a smaller bank, the

781
00:50:54,800 --> 00:50:56,839
Speaker 2: natural thing is to move it into a too big

782
00:50:56,880 --> 00:50:59,960
Speaker 2: to fail bank because you know that the US government,

783
00:51:00,000 --> 00:51:02,359
Speaker 2: based on precedent, is not going to let them go.

784
00:51:02,760 --> 00:51:05,120
Speaker 2: And so that again seems to give the big banks

785
00:51:05,120 --> 00:51:09,760
Speaker 2: a sort of unnatural edge perhaps in terms of deposit taking.

786
00:51:09,880 --> 00:51:13,160
Speaker 1: I mean, I I know, we talked about this after

787
00:51:13,560 --> 00:51:17,280
Speaker 1: SVB in multiple episodes, but the sheer number of banks

788
00:51:17,280 --> 00:51:20,520
Speaker 1: in the United States that still exist like boggles the mind.

789
00:51:20,840 --> 00:51:23,600
Speaker 1: There's no other country in the world that has as

790
00:51:23,719 --> 00:51:27,759
Speaker 1: many Canada's like six banks. We're so heavily banked in

791
00:51:27,800 --> 00:51:31,160
Speaker 1: this country. It's still today the random.

792
00:51:31,000 --> 00:51:33,759
Speaker 2: There used to be a lot more, a lot more, Yeah.

793
00:51:33,520 --> 00:51:37,520
Speaker 1: But I mean, it's staggering the number of community banks

794
00:51:37,560 --> 00:51:40,600
Speaker 1: and regional banks that exist in the United States, even

795
00:51:40,600 --> 00:51:41,560
Speaker 1: with all the consulidations.

796
00:51:41,640 --> 00:51:44,160
Speaker 2: Do you want to be like Canada, Joe, that's the question.

797
00:51:44,440 --> 00:51:47,040
Speaker 1: No, I don't know. I mean, I like genuinely don't

798
00:51:47,040 --> 00:51:51,000
Speaker 1: know what the optimal distribution is or anything. But given

799
00:51:51,080 --> 00:51:54,680
Speaker 1: the advantages that the big banks have, the perception of safety,

800
00:51:54,880 --> 00:51:57,799
Speaker 1: they're technological capabilities that they can invest in that a

801
00:51:57,800 --> 00:52:01,680
Speaker 1: community bank will never be able to replicate. Brand et cetera.

802
00:52:02,360 --> 00:52:04,759
Speaker 1: The proliferation of banks is still like a sort of

803
00:52:04,960 --> 00:52:07,360
Speaker 1: interesting phenomenon of our financial system.

804
00:52:07,480 --> 00:52:10,040
Speaker 2: The other thing that struck me from that conversation was

805
00:52:10,239 --> 00:52:12,719
Speaker 2: the buy now, pay later stuff, which you know.

806
00:52:12,719 --> 00:52:13,920
Speaker 1: Got to do more on that period.

807
00:52:13,960 --> 00:52:16,680
Speaker 2: Absolutely, it's becoming a really interesting story. But it just

808
00:52:16,760 --> 00:52:18,640
Speaker 2: kind of blows my mind that no one is actually

809
00:52:18,680 --> 00:52:21,759
Speaker 2: tracking that credit because the whole thing is supposed to

810
00:52:21,760 --> 00:52:26,719
Speaker 2: be technology driven. It's plugged into the checkout process of

811
00:52:26,760 --> 00:52:30,160
Speaker 2: a website, it's really easy to do. It seems insane

812
00:52:30,200 --> 00:52:33,040
Speaker 2: to me that like the credit bureaus can't track it

813
00:52:33,280 --> 00:52:35,080
Speaker 2: at the same time, and it seems like a huge,

814
00:52:35,120 --> 00:52:37,200
Speaker 2: huge data hole for the US economy.

815
00:52:37,360 --> 00:52:40,759
Speaker 1: That's a huge story. I completely agree. And then you know,

816
00:52:40,800 --> 00:52:42,440
Speaker 1: we sort of talked about at the end. I mean,

817
00:52:42,480 --> 00:52:46,400
Speaker 1: I think it's such an interesting question the degree to which,

818
00:52:46,800 --> 00:52:49,880
Speaker 1: if it happens, we'll see stable coins become part of

819
00:52:49,880 --> 00:52:52,759
Speaker 1: the payment's landscape in a meaningful way rather than just

820
00:52:52,840 --> 00:52:56,480
Speaker 1: a way to get money onto cryptocurrency trading websites, which

821
00:52:56,520 --> 00:52:59,919
Speaker 1: is where they began. And then all of the things

822
00:53:00,120 --> 00:53:03,320
Speaker 1: around tokenization of equity. I mean, it's just a fact

823
00:53:04,080 --> 00:53:09,120
Speaker 1: that Robin Hood, whose CEO we had on unilaterally announced

824
00:53:09,160 --> 00:53:11,640
Speaker 1: that at some point there's going to be some version

825
00:53:11,680 --> 00:53:17,920
Speaker 1: of tokenized equity or tokens that correspond to equity in

826
00:53:18,000 --> 00:53:22,200
Speaker 1: private companies doing it unilatterly. How regulators are going to

827
00:53:22,320 --> 00:53:25,480
Speaker 1: actually get their handle on this? I have no idea.

828
00:53:25,640 --> 00:53:29,000
Speaker 2: Yeah, tokens, tokens everywhere, and not a bank to lend.

829
00:53:29,120 --> 00:53:31,040
Speaker 2: I think that was ro HiT's point, right, All right,

830
00:53:31,080 --> 00:53:31,799
Speaker 2: shall we leave it there?

831
00:53:31,880 --> 00:53:32,560
Speaker 1: Let's leave it there.

832
00:53:32,719 --> 00:53:35,120
Speaker 2: This has been another episode of the Odd Lots podcast.

833
00:53:35,200 --> 00:53:37,879
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy.

834
00:53:37,600 --> 00:53:40,279
Speaker 1: Alloway and I'm Joe Wisenthal. You can follow me at

835
00:53:40,280 --> 00:53:43,600
Speaker 1: the Stalwart. Follow our guest Roe Hit Chopra. He's at

836
00:53:43,680 --> 00:53:47,439
Speaker 1: Chopra USA. Follow our producers Carmen Rodriguez at Carmen Arman,

837
00:53:47,520 --> 00:53:50,440
Speaker 1: dash Ol Bennett at Dashbock and kel Brooks at Keil Brooks.

838
00:53:50,840 --> 00:53:53,480
Speaker 1: More Odd Lots content go to Bloomberg dot com slash

839
00:53:53,480 --> 00:53:55,920
Speaker 1: odd Lots. We have a daily newsletter and all of

840
00:53:55,960 --> 00:53:58,040
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841
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842
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843
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844
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845
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846
00:54:11,600 --> 00:54:14,359
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847
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848
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849
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850
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