Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.
Speaker 2: Hello and welcome to another episode of the All Thoughts podcast.
Speaker 2: I'm Tracy Alloway.
Speaker 1: And I'm Joe Wasenthal.
Speaker 2: Joe, if I had said to you a few years
Speaker 2: ago that there's a bank and the bank is taking deposits,
Speaker 2: you know, checking accounts, and it's putting that money into
Speaker 2: US treasuries, and that business model is going to completely fail.
Speaker 2: The bank is going to collapse, what would you have said?
Speaker 1: I said, let's short the stock. That's what I would
Speaker 1: have said. I said, if you told me that and
Speaker 1: you knew the only insight, the only actionable thing there,
Speaker 1: I said, all right, let's short it.
Speaker 2: All right, that's the right answer.
Speaker 3: Clearly.
Speaker 2: If you were a banking regulator, what would you have done?
Speaker 1: Well, I don't know anything about big a banking regular
Speaker 1: It seems really hard. And regulators in general often get
Speaker 1: criticized in various ways, and they're like, oh, you busted
Speaker 1: this really small time tiki tech insider trading ring. It's
Speaker 1: not that big of a deal. Or oh, here's this
Speaker 1: thing that collapsed and why didn't you catch it before?
Speaker 1: They're always going to get upset about that. But I
Speaker 1: have to say, I have a lot of sympathy for
Speaker 1: the regulators because for the most part, my impression is
Speaker 1: that the US has one of the most robust, transparent,
Speaker 1: high depth capital markets and financial systems in the entire world,
Speaker 1: which for the most part does not collapse. And so
Speaker 1: I feel like when it comes to regulatory issues, there's
Speaker 1: a lot of unseen where what we see is like,
Speaker 1: if they're in the news, it's not good. But most
Speaker 1: of the time things aren't the news.
Speaker 2: That should be the tagline for America's financial system most
Speaker 2: of the time does not collapse. Yeah, and ironically, well
Speaker 2: I'm talking of course, or I was talking about Silicon
Speaker 2: Valley Bank. Yeah, and the collapse there, And I think
Speaker 2: it's still very surprising to me. In one sense it
Speaker 2: was an old fashioned bank run, But in another sense,
Speaker 2: it's very surprising that here's a bank that's basically buying
Speaker 2: a bunch of ultra safe assets US treasuries and still
Speaker 2: it ran into trouble. And banks, of course are mandated
Speaker 2: to buy treasuries as well. We've talked about this on
Speaker 2: the show any number of times now, but I want
Speaker 2: to talk more about it.
Speaker 1: Sure, you know. The one thing I'll say too, that
Speaker 1: I've been thinking a lot with SVB is. I think
Speaker 1: in the wake of the two thousand and eight two
Speaker 1: thousand and nine financial crisis, we got very focused on
Speaker 1: the asset side of the balance, right, and so it's like,
Speaker 1: what they hit, what kind of subprime loans do they have,
Speaker 1: and how good are there all of that, et cetera.
Speaker 1: But one of the things, you know, like Josh Younger
Speaker 1: talked about recently in others. Stephen Kelly had a note
Speaker 1: in our newsletter, you know, a lot of it is
Speaker 1: the difficulty in modeling the liability side and the slipperiness
Speaker 1: of the deposit base and how hard that is to
Speaker 1: know because you can have long duration deposits that suddenly
Speaker 1: become overnight deposits. It's really tricky, and I still think
Speaker 1: these are difficult things to understand.
Speaker 2: Yeah, it feels like we're always fighting the last bank
Speaker 2: battle or the last bond battle. Okay, Well, on that note,
Speaker 2: we do, in fact have the perfect guest. We are
Speaker 2: going to be speaking with ro Hit Chopra. He is,
Speaker 2: of course the former director of the Consumer Financial Protection Bureau,
Speaker 2: also a former FTC commissioner, so really the perfect person
Speaker 2: to talk to. If we want to dig into what
Speaker 2: happened to SVB, what it means for bank regulation, and
Speaker 2: then also what banks are doing right now. Hit Thank
Speaker 2: you so much.
Speaker 4: For coming on all thoughts, Thanks for having me.
Speaker 2: Here's my first question. Maybe it's a little pointed, but
Speaker 2: does the CFPB still exist? So we just got the
Speaker 2: one big beautiful bill that's been passed and it looks
Speaker 2: like it slashes funding for the bureau, And of course
Speaker 2: we know that Trump isn't exactly a fan of federal agencies,
Speaker 2: so I'm curious is it still functioning?
Speaker 1: There's already kind of good at it.
Speaker 4: Yeah, anyway, it's a good question, and it seems by
Speaker 4: every single piece of evidence that it's just maybe there
Speaker 4: technically but not doing a damn thing. We are hearing
Speaker 4: nearly every day about another financial institution that is being
Speaker 4: released from obligations. It has been months since there has
Speaker 4: been an enforcement action, and many are estimating that this
Speaker 4: means billions and billions of dollars that consumers are not
Speaker 4: getting back in refunds and frankly a big disadvantage to
Speaker 4: all of those financial companies that follow the rules.
Speaker 1: When it was working, when or when it was operating,
Speaker 1: describe to me what the remit of the CFPB is.
Speaker 1: And one of the criticisms of the people leveled is
Speaker 1: they didn't know what the scope was, etc. What is
Speaker 1: the formal scope of the CFPP.
Speaker 4: Well, essentially, we saw decades ago that there weren't just
Speaker 4: banks in the business of offering consumer loans and products.
Speaker 4: It was all sorts of other companies heyday lenders, auto lenders,
Speaker 4: and in fact now the bulk of mortgages are originated
Speaker 4: outside of banks, the bulk of auto loans, and so
Speaker 4: after the subprime mortgage crisis, there was broad agreement that
Speaker 4: the Federal Reserve Board and other agencies just didn't focus
Speaker 4: and have the attention on making sure that existing consumer
Speaker 4: law was being followed. So the CFPB is responsible for
Speaker 4: inspecting the largest financial institutions and taking them to court
Speaker 4: when they break the law. Of course, also administering all
Speaker 4: sorts of rules that keep the mortgage markets, the credit report,
Speaker 4: credit reporting companies, and so many others in line.
Speaker 2: How does the CFPB interact with all the other bank
Speaker 2: policy stakeholders, because there seems to be quite a few.
Speaker 4: You mean, the other regulators. The CFPB is the only
Speaker 4: regulate that oversees that gigantic non bank consumer lending apparatus,
Speaker 4: and also it has primary and exclusive jurisdiction overall banks
Speaker 4: and credit unions over ten billion in assets. That means
Speaker 4: every credit card company, every big player in the market
Speaker 4: is primarily overseen by the CFPB. So the fact that
Speaker 4: it is now functionally a dead fish is leaving a
Speaker 4: very very big gap that no one can even legally
Speaker 4: fill in.
Speaker 1: Where do you see the biggest gap manifesting right now
Speaker 1: when you look at the consumer financial landscape, What isn't
Speaker 1: being enforced or what isn't being examined that in your
Speaker 1: view merite enforcement or examination.
Speaker 4: Well, I think the top priority is always trying to
Speaker 4: understand the linkage between the biggest markets and the broader economy.
Speaker 4: We saw that that linkage with the mortgage market was
Speaker 4: pretty damn big, and its failure really crashed not just
Speaker 4: the US financial system but the entire global marketplace. So,
Speaker 4: of course, making sure that mortgages are fair and transparent,
Speaker 4: that key rules like the qualified Mortgage Rule, which sets
Speaker 4: some of the core standards to make sure there is
Speaker 4: not predatory mortgage lending, but also the nuts and bolts
Speaker 4: most of the issues that come in are people who
Speaker 4: have errors on their credit report they say, that's not
Speaker 4: even my name, or people whose bank accounts were illegally
Speaker 4: debited or cleaned out due to fraud. There's all sorts
Speaker 4: of issues that protect specific populations, military members, and so
Speaker 4: many other pieces that keep the markets working. So I
Speaker 4: don't want to pinpoint anything other than to say that
Speaker 4: when I took office, it was after another few years
Speaker 4: where there really wasn't much going on there, and we
Speaker 4: saw how financial firms not just push the envelope, but
Speaker 4: sometimes outright took advantage of people without any accountability.
Speaker 2: Well, speaking of accountability, you know, we mentioned SVB at
Speaker 2: the top of the show, and one thing I've heard
Speaker 2: there's a little bit of a chicken and egg situation
Speaker 2: when people are analyzing the root cause of that particular
Speaker 2: bank collapse. So some people say, well, interest rates went
Speaker 2: up and that led to paper losses on the bank's
Speaker 2: bond holdings, and so people got nervous and started pulling
Speaker 2: their money. And then other people say, well, people started
Speaker 2: pulling their money even though the bond losses didn't necessarily
Speaker 2: need to be crystallized anytime soon. So I'm curious, can
Speaker 2: you pinpoint the spark that set off the latest bank crisis.
Speaker 4: Well for me, it really was March eighth, twenty twenty three.
Speaker 4: Two things happened that day. One was the wind down
Speaker 4: of a bank called Silvergate Bank, which was heavily involved
Speaker 4: in banking some of the major crypto trading platforms. There
Speaker 4: was a flight of deposits out of that bank after
Speaker 4: the crypto winter and the collapse of FTX. We had
Speaker 4: been tracking I Serve on the FDIC board and we
Speaker 4: were tracking Silvergate Bank, and on that day they announced
Speaker 4: that they were not going to need to be put
Speaker 4: into receivership, they would be self liquidating. And simultaneously, on
Speaker 4: that same day, we had an announcement by Silicon Valley Bank,
Speaker 4: which was a little bit of a goofy press release
Speaker 4: they issued saying they're experiencing some real losses on their
Speaker 4: securities portfolio and they're going to be looking for capital.
Speaker 4: It raised a lot of red flags and suspicions about
Speaker 4: whether they were viable. And this is something that is
Speaker 4: just so fundamental about banking and deposit taking is that
Speaker 4: it really is based on a belief that your money
Speaker 4: is going to be there. And the truth is is
Speaker 4: with federal deposit insurance and Federal Reserve discount window lending.
Speaker 4: It always is, except when you have a bank that
Speaker 4: is over ninety percent uninsured deposits. This is something that
Speaker 4: is really unusual, and some would argue as not even
Speaker 4: really a bank when you are that dependent on very
Speaker 4: very large depositors that you grew so quickly, and so
Speaker 4: then the run began.
Speaker 1: How much would you ascribe it to the high percentage
Speaker 1: of non insured deposits versus the concentration so in very
Speaker 1: specific industries. So you mentioned the crypto one, but also
Speaker 1: here are all of these startups. It had raised a
Speaker 1: ton of money in twenty twenty and twenty twenty one.
Speaker 1: A bunch of them apparently just put their money on
Speaker 1: a bank, which is kind of weird to me, non insured,
Speaker 1: and then we had the stock market plunge in twenty
Speaker 1: twenty two. Funding dried up. There was no very little
Speaker 1: new VC fundraising, so new dry powder to be put
Speaker 1: into the bank. Startups drawing down their own deposits just
Speaker 1: to make payroll or whatever else. And so you have
Speaker 1: two things going on. One is the high level of
Speaker 1: uninsured deposits, but also the concentration, so that there was
Speaker 1: this one specific sector that was all going through the
Speaker 1: cycle at the same time.
Speaker 4: So let me just push on that because even though
Speaker 4: it is one sector, and I agree with you, the
Speaker 4: concentration was an important factor in this. But let's remember
Speaker 4: that the individual firms that were funded by venture capital,
Speaker 4: many of them were doing fine. There was not necessarily
Speaker 4: something specifically or systemically wrong with those businesses. But I think,
Speaker 4: and I agree with every small and mid sized business
Speaker 4: out there. If I am launching a startup, whether it
Speaker 4: is an AI company or a dry cleaner, it doesn't
Speaker 4: rank in the top twenty reasons of my business failing
Speaker 4: that my bank is going to fail. Sure, And so
Speaker 4: what you start hearing is that these businesses, which are
Speaker 4: highly networked as well as much faster communication, you get
Speaker 4: the advice from your funders and others that you need
Speaker 4: to run. And it was very clear that it was
Speaker 4: not just happening at SVB, it then was happening all
Speaker 4: over the system.
Speaker 2: I was on a train to Connecticut around that time
Speaker 2: and someone was sitting kind of close to me, and
Speaker 2: it turned out they were banking with SVB. Their company was,
Speaker 2: and I could hear the panic and their voice as
Speaker 2: they tried to digest the news of what was happening.
Speaker 2: But on that note, why did corporate treasurers, why did
Speaker 2: they put all their deposits in a single bank when
Speaker 2: presumably they know that there's a cap on FDIC insurance.
Speaker 4: Yeah, it's a good question. I think there are some
Speaker 4: practical issues for some small and mid sized businesses about
Speaker 4: when you're running payroll or when you're getting in a
Speaker 4: lot of receipts. I don't have as much sympathy for
Speaker 4: some of the very large companies that we have learned
Speaker 4: through public reporting put a whole lot of funds in
Speaker 4: that bank, including really their entire cash reserves. So at
Speaker 4: the end of the day, though the regulators had, we
Speaker 4: saw an active run that was occurring, and of course
Speaker 4: those insured depositors, the insured depositors really through the entire crisis,
Speaker 4: did not really run. It was those uninsured started at
Speaker 4: Silicon Valley Bank after that Wednesday release. By fry Day morning,
Speaker 4: they were dead. We had actually voted the night before
Speaker 4: or maybe at the pre dawn hours to accept it
Speaker 4: into receivership, and I believe by the time it was
Speaker 4: closed it had roughly one hundred billion dollars queued up
Speaker 4: of outbound wires. So this was an enormous and fast run.
Speaker 4: And many of those techno libertarians that we often hear
Speaker 4: about who want no regulation, they were actively beating the
Speaker 4: drum online asking for a Baila.
Speaker 1: Well, this is actually interesting point. I was going to
Speaker 1: go there next. And I think again it was a
Speaker 1: thing that Stephen Kelly wrote for us. But one of
Speaker 1: the things about twenty twenty three, I think it said
Speaker 1: it wasn't a crisis of regional banks. It was a
Speaker 1: regional bank crisis, as in specifically the region of California,
Speaker 1: because then there were other parts of there were other
Speaker 1: banks that got into a lot of trouble, and the
Speaker 1: all thing they had in common was that they were
Speaker 1: all sort of in some way connected to California. I
Speaker 1: think I remember like people were going out looking for
Speaker 1: any bank that had California in the title in some
Speaker 1: way and betting against them. But talk to us about
Speaker 1: regulating banks and monitoring runs in the world of these networks,
Speaker 1: whether the the public networks on social media or just
Speaker 1: the sort of networks of like mind individuals who are
Speaker 1: all in the same WhatsApp group.
Speaker 4: Yeah, I'm a believer that we can never fight and
Speaker 4: We shouldn't want to fight the speed of communication. We
Speaker 4: want markets to have live information. I will say this,
Speaker 4: we saw the run start first at Silicon Valley Bank,
Speaker 4: and then I think because of the confluence of factors
Speaker 4: with Silvergate, it wasn't just California as anything that seemed
Speaker 4: to have any crypto or tech adjacency. Of course, the
Speaker 4: second bank that we closed that Sunday was Signature Bank,
Speaker 4: which operated a crypto network but also had a very
Speaker 4: real business. It is a New York City bank that
Speaker 4: was deeply involved in New York City multifamily real estate.
Speaker 4: You at the same time, Joe had people worried about
Speaker 4: commercial real estate. But what we were seeing was that
Speaker 4: the banks with the highest percentage of uninsured deposits, they
Speaker 4: were being badly battered almost immediately.
Speaker 2: So ultimately a decision was made to expand the deposit
Speaker 2: insurance net and basically bail out SVB customers and others.
Speaker 2: What was the decision making process like building up to
Speaker 2: that and how big a deal is that? Is there
Speaker 2: like a legacy from that decision.
Speaker 4: It's a very big deal, and it's one that in
Speaker 4: many ways is still hard to live with the decision,
Speaker 4: even though it was the right decision, I think. Here's
Speaker 4: how it works. The federal law basically directs the Federal
Speaker 4: Deposit Insurance Corporation the FDIC, to resolve a failed bank
Speaker 4: at the least cost to the Deposit Insurance Fund. That's
Speaker 4: the fund that everyone pays into with their bank deposits,
Speaker 4: and it builds up a fund to pay for certain
Speaker 4: bank failures and make sure deposits are made whole. And
Speaker 4: here's what was interesting about Silicon Valley Bank and Signature
Speaker 4: Bank and then later First Republic. It was a super
Speaker 4: majority of uninsured deposits. That means a bank failure is
Speaker 4: not that expensive to resolve. The cost to the Deposit
Speaker 4: Insurance Fund for a bank that is ninety percent plus
Speaker 4: uninsured is going to be pretty low. And if the
Speaker 4: law says resolve it at the least cost, in many ways,
Speaker 4: the best case is sometimes to liquidate it, make as
Speaker 4: many people whole as possible, and top them up with
Speaker 4: the deposit Insurance Fund. But there is a proviso in
Speaker 4: the law which says that if a failure is likely
Speaker 4: to lead to systemic effects or to threaten the viability
Speaker 4: of the US financial system, there's a process of key
Speaker 4: turning that a series of regulators must go through to
Speaker 4: recommend to the Treasury Secretary, who must consult with the
Speaker 4: President to authorize the FDIC to take a different path.
Speaker 4: So over the weekend the Sunday after the failure of
Speaker 4: Silicon Valley Bank, and Sunday morning, roughly Signature Bank was
Speaker 4: taken into receivership. First Republic was a zombie and basically
Speaker 4: dead already. There was a decision where the FDIC board
Speaker 4: we voted to turn that key, and the Federal Reserve
Speaker 4: Board had voted to turn that key, and ultimately the
Speaker 4: Treasury Secretary discussed it with the President and activated that authority.
Speaker 4: The authority essentially led to the backstopping of all uninsured deposits.
Speaker 4: That meant that everyone would be made whole in the
Speaker 4: case of the failure, and it was a tough decision.
Speaker 4: I think there was a question I was arguing and questioning,
Speaker 4: should we be maybe raising the limit dramatically, perhaps to
Speaker 4: twenty five or fifty million dollars. What we were seeing
Speaker 4: in the system was active movement of uninsured deposits everywhere,
Speaker 4: and ultimately the decision to invoke that exception really did
Speaker 4: calm the system for the most part with the big
Speaker 4: exception of First Republic Bank.
Speaker 2: So the other thing that happened other than the expanded
Speaker 2: deposit insurance was the creation of a new FED Lending
Speaker 2: facility another acronym, the BTFP. How big a deal was
Speaker 2: that one?
Speaker 4: That one was weird. All banks have the ability to
Speaker 4: access the discount window through the Federal Reserve, but the
Speaker 4: Federal Reserve used some bailout authorities to launch this bank
Speaker 4: term funding program. This allowed banks to pledge their treasury
Speaker 4: securities at par and draw funds from the Federal Reserve.
Speaker 4: I think there were a lot of us who raised
Speaker 4: our eyebrows at this. If the banks already had access
Speaker 4: to the discount window, why did they need this special program.
Speaker 4: I worried about the precedent setting of this. It was
Speaker 4: justified on the basis that there is stigma of going
Speaker 4: to the discount window. Ultimately, we saw some financial institutions
Speaker 4: game and arbitrage the program by drawing on it but
Speaker 4: then earning interest on reserves. I think we just have
Speaker 4: to be really careful when the Fed engages in lots
Speaker 4: of bailout programs, because it sends a signal to the
Speaker 4: market that they can expect it the next time.
Speaker 1: Around as a regulator. There are many people who say this,
Speaker 1: and you had a high level of scrutiny towards companies
Speaker 1: that banked crypto companies, and many of them claimed that
Speaker 1: they were treated unfairly. What is it just from a
Speaker 1: high level, let's start there. From a high level, what
Speaker 1: issues emerge when, if any issues emerge from a bank
Speaker 1: that tries to build up a business among crypto companies.
Speaker 4: I think this is a bit of a conspiracy theory. Yeah.
Speaker 1: No, look, I'm but I'm just from a regulatory person.
Speaker 4: Okay, go on, because because the truth is is that
Speaker 4: the issues with Silicon Valley Bank, as you know and
Speaker 4: described earlier, was really about being so deeply underwater on
Speaker 4: their treasure securities.
Speaker 1: But there's sure whether we're talking about Signature Bank, which
Speaker 1: did have a pretty big crypto book. But also you
Speaker 1: just get all these crypto companies like, oh, we don't
Speaker 1: have it's so difficult for us to find a bank account.
Speaker 1: Is it difficult for them to do banking?
Speaker 4: Yeah, so let's see what we mean about banking for
Speaker 4: crypto lending. Certainly there are going to be some banks
Speaker 4: who feel they have no expertise in this, I think
Speaker 4: the really interesting question is about deposit taking.
Speaker 1: Yes, definitely, I'm not talking about crypto. I'm talking about
Speaker 1: the deposit taking from crypto, native com cryptic company deposit taking.
Speaker 4: There are a set of issues that banks always are
Speaker 4: going to want to look at when it comes to
Speaker 4: taking very very large deposits with a lot of in
Speaker 4: and out activity, and much of that is related to
Speaker 4: their own obligations for money laundering as well as what
Speaker 4: was mentioned before, deposit concentration. So when you are a
Speaker 4: bank that has a couple of depositors who are the
Speaker 4: super majority of your deposit base, you're obviously going to
Speaker 4: take some steps to be careful around that. And I
Speaker 4: would say that the crypto issues in this run were
Speaker 4: fairly muted. It was really the perception about the potential
Speaker 4: exposures that we saw through the market, though I feel
Speaker 4: that within a few days the fixation again was on
Speaker 4: uninsured deposits.
Speaker 2: When it comes to the bond losses, it strikes me
Speaker 2: that the FED is kind of in a difficult position because,
Speaker 2: on the one hand, it has to conduct monetary policy.
Speaker 2: If inflation is high, it has to raise benchmark rates,
Speaker 2: But on the other hand, it also has a financial
Speaker 2: stability mandate. It's not part of the dual mandate, but
Speaker 2: it is a regulator, and raising interest rates in this
Speaker 2: case sparked a bank run. It seems how is the
Speaker 2: Fed supposed to balance these two goals.
Speaker 4: I don't see that as a balance at all. Okay,
Speaker 4: I think there is a lot that the Federal Reserve
Speaker 4: has really missed in many of the situations involving financial
Speaker 4: stability around Lehman Brothers, as well as even including COVID,
Speaker 4: But certainly this one was a more clear linkage where
Speaker 4: when you have high concentrations of bond portfolios that are underwater,
Speaker 4: you need to be extra careful to not make sure
Speaker 4: that they are under capitalized, that they lack liquidity, and frankly,
Speaker 4: that you are not turning upnd I when you are
Speaker 4: supervising that institution. The warning signs with Silicon Valley Bank
Speaker 4: were there for months, and I do think there was
Speaker 4: a bit of a culture at the Federal Reserve of
Speaker 4: really taking a light touch in the years leading up
Speaker 4: to the crisis that I think has proven to be costing.
Speaker 1: I want to go back to crypto because I want
Speaker 1: to talk, not just I understand the obligations that a
Speaker 1: bank has in terms of money laundering, in terms of
Speaker 1: lots of in and out transactions, et cetera. However, from
Speaker 1: a regulatory perspective, were banks that built up a crypto
Speaker 1: book of business? Did they get extra scrutiny in somewhere
Speaker 1: does that man extra scrutiny?
Speaker 4: I think you always want to make sure that rules
Speaker 4: are as clear as possible, and I do think bank
Speaker 4: regulation has turned into really a messy set of rules. Frankly,
Speaker 4: I think to accommodate the largest players rather than simple,
Speaker 4: bright line rules when it comes to new types of activities.
Speaker 4: There's no question that novel activities are going to need
Speaker 4: a little bit more look than say a straightforward mortgage
Speaker 4: or a straightforward small business loan. So when you have,
Speaker 4: particularly a bank that doesn't have experience in a product,
Speaker 4: that may pose some real risks to them, I don't
Speaker 4: think it's unreasonable for a bank regulator to kick the
Speaker 4: tires in what.
Speaker 1: Is kicking the tires look like? Specifically?
Speaker 4: I think it can take a wide range of activities.
Speaker 4: It really depends on what type of new business that
Speaker 4: that bank is offering. But at the core, making sure
Speaker 4: that that bank is well capitalized and liquid is always
Speaker 4: the top priority. But if you know, banks play a
Speaker 4: major role in the financial state craft of America and
Speaker 4: one of the big reasons and benefits of the reserve
Speaker 4: currency is the role in detecting and deterring terrorism, finance,
Speaker 4: drug cartels, and more. And federal law puts some real obligations.
Speaker 2: On them for that. Okay, So speaking of novel businesses,
Speaker 2: I want to widen the net a little bit and
Speaker 2: maybe talk about fintech and what banks are doing right now.
Speaker 2: And here I have to issue a disclaimer, which is
Speaker 2: I'm very jaded about fintech in general. I used to
Speaker 2: cover it at the FT and I heard the same stories,
Speaker 2: the same themes over and over again, like big tech
Speaker 2: is coming for the banks, or retail is coming for
Speaker 2: the banks, like Walmart starting a financial product, and things
Speaker 2: like that. Fast forward to today, I mean, it does
Speaker 2: seem like this is something that is actually happening. What's
Speaker 2: the ultimate ambition there in the payment space?
Speaker 4: Well, payments is really something that has so rapidly changed.
Speaker 4: Many of it is very good. It's easier to move money,
Speaker 4: particularly with mobile devices. It's faster than it used to be.
Speaker 4: I do think that we have some real concerns about
Speaker 4: the playbook that many of the firms who are moving money,
Speaker 4: how are they monetizing it. A lot of our payments
Speaker 4: companies and big tech companies, I think are really drooling
Speaker 4: over what they see in China where Ali pay and
Speaker 4: we Chat pay are trafficking almost all of the consumer
Speaker 4: payments non cash payments in pay.
Speaker 2: In cash at a Starbucks in Beijing. I know from
Speaker 2: personal experience.
Speaker 3: And we happen.
Speaker 4: There's a lot of questions about what is the monetization
Speaker 4: scheme there. When I was at the CPPB, we led
Speaker 4: a study that looked at all of these major payment platforms,
Speaker 4: and I think there was a desire to monetize a
Speaker 4: lot of that payment's information through surveillance, being able to
Speaker 4: know exactly not just the amount someone is paying, but
Speaker 4: the skew level data in their basket, ultimately feeding a
Speaker 4: foundational algorithm that ultimately could serve up personalized prices. There
Speaker 4: was lots of issues we dealt with when it comes
Speaker 4: to fraud and identity theft. There were certainly issues when
Speaker 4: it comes to the shift of where money was being stored.
Speaker 4: Many people believed that the app they were using to
Speaker 4: send money had money in a bank account somewhere, but
Speaker 4: in fact maybe it was in an uninsured account. So
Speaker 4: I think that we should be looking at payments in
Speaker 4: terms of what is the ambitions of those companies and
Speaker 4: why do they want it. We worked hard with global
Speaker 4: central banks and regulators to inject more competition. Apple, for example,
Speaker 4: had a real choke hold over iOS devices, only allowing
Speaker 4: Apple Pay to be used. Europe has banned that practice.
Speaker 4: Other countries are looking to restrict it as well. So
Speaker 4: I think that stable coin, and once stable coin becomes
Speaker 4: part of the broader ecosystem, which it may, it will
Speaker 4: open up some additional issues about how payments in America
Speaker 4: will ultimately work.
Speaker 1: Yeah, I was just gonna ask about that, actually, because
Speaker 1: to some extent that seems like a potentially good thing.
Speaker 1: If I'm worried about Okay, there's a handful of Internet giants,
Speaker 1: a handful of commerce giants who want to have more
Speaker 1: and more skew level data about myself and what I buy.
Speaker 1: To my mind, it seems possible that stable coins and
Speaker 1: having your own distributed wallet on your phone or something
Speaker 1: like that could change the architecture of the Internet such
Speaker 1: that there isn't such a information bottleneck that only a
Speaker 1: few giant companies have access to.
Speaker 4: Yeah, it depends on who's issuing them. When I was
Speaker 4: at the Federal Trade Commission, Mark Zuckerberg, Cheryl Sandberg others
Speaker 4: announced the Libra project, which I think was completely a
Speaker 4: way to cement more of a mode of Facebook and
Speaker 4: now Meta's empire of being able to track and trace
Speaker 4: the flow of money and ultimately to be able to
Speaker 4: ensure that merchants operating in their ecosystem would use their
Speaker 4: currency of choice. So I think it's really important that
Speaker 4: we do not have payments and money controlled by any
Speaker 4: real big commercial player. It is if there is a
Speaker 4: stable coin that is issued completely separately that is not
Speaker 4: affiliated with one of those companies. But I worry that
Speaker 4: the market could easily tip to award an existing big
Speaker 4: tech network, and ultimately that might provide huge advantages to
Speaker 4: that firm, but not necessarily the whole economy.
Speaker 1: Tracy, you know it's funny to me, is you know,
Speaker 1: you have all the crypto people and a lot of
Speaker 1: them got really upset about Libra again and how that
Speaker 1: thing holl failed. But to my mind, if you think
Speaker 1: about it, many of those same tech people hated the
Speaker 1: speech regulations that it existed on the big social networks
Speaker 1: in the early twenty twenties and the late tens, and
Speaker 1: the idea of shadow banning and all of this stuff.
Speaker 1: And it's like, imagine if they did that to payments, right, Like,
Speaker 1: do you really want to invest that same power that
Speaker 1: they have to decide what is appropriate speech and not
Speaker 1: appropriate speech into the realm of Okay, Now they also
Speaker 1: have the ability to regulate what is appropriate payments and
Speaker 1: inappropriate payments. That's a lot of investiture of power.
Speaker 2: This is the issue that came up in the UK,
Speaker 2: right there was already some drama about who was it
Speaker 2: Nigel Frage's bank account being taken away because of his politics,
Speaker 2: So yeah, that concern is definitely there.
Speaker 4: And we have that here where PayPal had sent out
Speaker 4: some terms and conditions that allowed PayPal to find people
Speaker 4: for their speech, presumably off platform. And I think we
Speaker 4: need to be really careful about giving any of those
Speaker 4: firms the ability to really have a big footprint, either
Speaker 4: on speech or on commerce. And that is part of
Speaker 4: the reason why developed countries have separated banking and commerce.
Speaker 4: But we are now potentially in a new era and
Speaker 4: I would argue stable coin is not really about crypto.
Speaker 4: That might certainly be the technology, but it is essentially
Speaker 4: a new type of payments and banking.
Speaker 2: Charter wait talk more about that, because most people when
Speaker 2: they think of stable coins, they probably think of a
Speaker 2: money market fund. But as you point out, there's a
Speaker 2: huge overlap with banking in the sense that stable coin
Speaker 2: issuers are taking in people's money and for the most
Speaker 2: part supposedly putting it into things like US treasuries, maybe gold,
Speaker 2: ultra safe assets, and the whole business is built on
Speaker 2: the premise that depositors are always going to get their
Speaker 2: money back, right. That seems like an echo of a bank.
Speaker 4: That's right, and I think over time we have seen
Speaker 4: how the line has blurred between a bank and other
Speaker 4: types of deposit instruments. Essentially, the Federal Reserve has multiple
Speaker 4: times needed to stabilize money market funds, and in fact
Speaker 4: has a facility at the New York Federal Reserve, the
Speaker 4: Overnight Reverse Repo program that one could consider a sort
Speaker 4: of daily bailout program to keep it stable and transmit
Speaker 4: monetary policy. I really worry that if we keep having
Speaker 4: enormous flows from banks to these money funds, we are
Speaker 4: essentially going to create problems with how we transmit and
Speaker 4: intermediate credit to the real economy. I would argue that
Speaker 4: a stable coin, if it was a tokenized bank deposit
Speaker 4: versus a tokenized money market fund, has a lot of
Speaker 4: different effects. Long term, most of us know that banks
Speaker 4: are still the key to lend to small businesses, to
Speaker 4: lend to farms, and to lend to the real economy.
Speaker 4: If you are essentially putting a thumb on the scale
Speaker 4: toward money market funds or tokenized money market funds, the
Speaker 4: beneficiaries are very large firms, sovereigns, and others who can
Speaker 4: access those money markets. So we should really want to
Speaker 4: make sure that banks or there is some something that
Speaker 4: takes the place of filling in the gap for small businesses, farmers,
Speaker 4: and others who depend on bank credit.
Speaker 1: So the Senate in June passed the Genius Act to
Speaker 1: start creating a more robust set of stable coin regulations,
Speaker 1: but it did not allow for yield bearing stable coins.
Speaker 1: So it's a great business if you're in the stable
Speaker 1: coin business collect all that yield, but you don't have
Speaker 1: to pass it out unlike a bank. What's your perspective
Speaker 1: on that Is this about preserving the importance of deposit
Speaker 1: taking bank institutions so that they're not disremediated into this way,
Speaker 1: or is this just a stop to the bank so
Speaker 1: that normal ol deposits are still a good business.
Speaker 4: It's a very messy piece of legislation. I think there
Speaker 4: is some arguments that yield chasing of a uninsured product
Speaker 4: is probably a recipe for more bailouts and more mess.
Speaker 4: On the other hand, we can't be setting federal laws
Speaker 4: to advantage banks. They often get what they want anyway.
Speaker 4: I would argue that one of the best ways to
Speaker 4: pursue some tokenized payment systems that could potentially disintermediate the
Speaker 4: incumbent payment networks would be to use tokenized bank deposits,
Speaker 4: and just like we could have paper cash, each issued
Speaker 4: by a different regional federal Reserve bank, our digital wallets
Speaker 4: could host tokenized bank deposits that are sitting in banks
Speaker 4: across the country and being intermediated into credit to the
Speaker 4: real economy. I think what we see is largely a
Speaker 4: legislative framework that is going to benefit the big crypto incumbents. Well.
Speaker 2: Speaking of benefiting the big another large ish trend in
Speaker 2: the banking system is consolidation, of course, and post the
Speaker 2: financial crisis, I think we saw the number of small banks,
Speaker 2: regional banks out there absolutely plunge, and I think it
Speaker 2: took a few years before we actually got a new
Speaker 2: bank set up, a Denovo Bank, and it was I
Speaker 2: think in Pennsylvania Amish Country, which was kind of funny.
Speaker 2: I guess my question is, like, presumably you want a
Speaker 2: diverse network of lenders out there because you want to
Speaker 2: avoid the too big to fail problem and you want
Speaker 2: people to have access to credit. To your point earlier,
Speaker 2: how do you encourage a more diverse or dynamic banking
Speaker 2: system and avoid the outcome where Joe and I always
Speaker 2: like to throw up the charts of how JP Morgan
Speaker 2: or Wells Fargo came into being, and it's just a
Speaker 2: story of them snapping up lots and lots of companies.
Speaker 4: Decades ago, there was a Supreme Court case that was
Speaker 4: very precient that warned that consolidation in the banking system
Speaker 4: would ultimately contribute to mass consolidation in the real economy.
Speaker 4: And you're right, the number of small community banks has dwindled,
Speaker 4: and there's all sorts of reasons for this, including changing technology,
Speaker 4: consumer preferences, so much more. But I think one of
Speaker 4: the real big reasons is that there is a perception
Speaker 4: that the very largest banks, as you mentioned, will be protected.
Speaker 4: When Silicon Valley Bank was failing, where was all the
Speaker 4: money flowing to? They were taking their money out of
Speaker 4: Silicon Valley Banks, Signature Bank and others. It went to
Speaker 4: the very big guys. Because every investor leaves that these
Speaker 4: banks are essentially always going to be protected, they are
Speaker 4: able to raise money with that implicit guarantee, and that
Speaker 4: means they are able to out compete on so many
Speaker 4: dimensions unfairly. I think they're smaller counterparts. So I really
Speaker 4: think we need to be careful about giving benefits and
Speaker 4: picking winners and losers, and that's what we have been doing,
Speaker 4: is essentially picking the very largest banks as the winners
Speaker 4: and others as the losers.
Speaker 1: We recently had the Robin Hood CEO on the podcast,
Speaker 1: and they're very excited about tokenization of all kinds of things,
Speaker 1: including a tokenization of stock for that matter. And due
Speaker 1: to crypto technology of some sorts, there's enforcing borders in
Speaker 1: terms of defining what a regulatory perimeter even is from
Speaker 1: a geographical standpoint is really hard. And due to smart
Speaker 1: contracts and stable coins, et cetera, it's very plausible that
Speaker 1: you could somewhere in the world, maybe in an offshore
Speaker 1: or a lightly regulated country, create some token that tracks
Speaker 1: some regulated instrument and it trades like a regulated instrument
Speaker 1: up until maybe something goes bust. Is there a danger
Speaker 1: that regulating consumer facing financial products, that law won't be
Speaker 1: able to keep up, that there's this sort of like
Speaker 1: technological explosion of things, and that to some extent, because
Speaker 1: anyone who has access to a stable coin wallet and
Speaker 1: access to the internet can theoretically trade it anything anywhere
Speaker 1: that it would just be a crisis from the regulatory
Speaker 1: perspective and keeping a hand on everything that's going on.
Speaker 4: Well, I think we do have a jump ball right
Speaker 4: now on the future of the dollar. We do see
Speaker 4: the Trump administration very interested I think in fundamentally rethinking
Speaker 4: the role of the dollar in the system. You raise
Speaker 4: this example of technology, but for years we have seen
Speaker 4: I believe it's a fourteen trillion dollar market of offshore
Speaker 4: dollars euro dollars, which poses very serious and significant issues
Speaker 4: for the entire.
Speaker 1: Regulars of eurostocks, like literally not the Eurostocks index, but
Speaker 1: something that resembles in trading a US listed regulated stock,
Speaker 1: except it's on some digital exchange. It's a decentralized exchange,
Speaker 1: but it moves in the same way. And how do
Speaker 1: you even begin to wrap your head around here?
Speaker 4: Yeah? Well, I think the way in which you want
Speaker 4: to is constantly to figure out how do we solve
Speaker 4: real problems in the economy and how do you build
Speaker 4: for that, rather than allowing for product services to create
Speaker 4: it purely based on arbitrage. I also think we want
Speaker 4: to make sure that we don't try and create something
Speaker 4: so complex that it will always be arbitraged around. And
Speaker 4: we need a lot more simple bright lines that investors, consumers,
Speaker 4: everyone can really easily understand and easily follow. Ultimately, the
Speaker 4: US is going to be the place where people want
Speaker 4: to do business because of strong rule of law and
Speaker 4: a good legal system and all of those things, and
Speaker 4: that's one of the most important things to safeguard.
Speaker 2: Speaking of novel businesses, and I guess the idea of
Speaker 2: policy kind of chasing after new tech, I'm just going
Speaker 2: to go all Seinfeld on this question and ask what's
Speaker 2: the deal with buy now, pay later? Because that is
Speaker 2: everywhere nowadays. And obviously the question. The wider question it
Speaker 2: poses is whether or not consumers are just taking on
Speaker 2: a load of credit in a new way that possibly
Speaker 2: isn't accounted for very well.
Speaker 4: Well, it's always interesting. There's a table published by the
Speaker 4: Federal Reserve about consumer credit outstanding, and it is always
Speaker 4: missing many things, including by Now Pay Later, which we
Speaker 4: have seen surge through the pandemic, growing more than ten x.
Speaker 4: It has really changed quite a bit. Tracy by Now
Speaker 4: pay Later, strangely was not really homegrown in America. It
Speaker 4: came from other jurisdictions. It was popular in Sweden, Australia,
Speaker 4: and now it is a major form of credit. Just
Speaker 4: so everyone understands what it is. You take out alone
Speaker 4: often pay in four. It does not have an interest rate,
Speaker 4: but the buy now, Pay later lender takes a cut
Speaker 4: from the merchant, just like a credit card company does.
Speaker 4: So you have seen a lot of consumers believe that
Speaker 4: this is a better way because it is no interest.
Speaker 4: But the CFPB did extensive study on it and found
Speaker 4: that there's very significant issues when it comes to people
Speaker 4: returning goods and not necessarily getting it credited. There's issues
Speaker 4: of people having multiple buy now, pay later loans, across
Speaker 4: different lenders and are levered up. I would hear actually
Speaker 4: complains from auto lenders who would say to me, how
Speaker 4: am I supposed to write this auto loan if I
Speaker 4: don't know what the buy and now pay later loans
Speaker 4: are because they're not on the credit report.
Speaker 1: Yeah, this strikes me as super interesting. I mean, just
Speaker 1: like how inadequate right now is our tracking, both in
Speaker 1: terms of the scale of it, just when we think about, okay,
Speaker 1: we want to have aggregate sense of consumer consumer indebtedness,
Speaker 1: and then how much of a struggle is it for
Speaker 1: actual lenders to judge the credit worthiness of consumers because
Speaker 1: of the lack of visibility and to be npl.
Speaker 4: The faster it grows, the more difficult it will be.
Speaker 4: And I think a key piece of this is we
Speaker 4: are seeing all sorts of buy now, pay later like
Speaker 4: products go beyond the traditional lenders. We're seeing banks and
Speaker 4: credit card companies say, use my card and then go
Speaker 4: online and you can convert it to buy now, pay later,
Speaker 4: or some people thinking about how to connect it to
Speaker 4: community bank debit cards. So I do believe it is
Speaker 4: a big blind spot about consumer credit outstanding right now.
Speaker 4: Obviously it is a relatively modest piece of the overall
Speaker 4: unsecured debt. But if it continues its trajectory, even if
Speaker 4: it slows its growth, it will be a big piece
Speaker 4: of that pie.
Speaker 2: I mean, presumably by now pay later would fall or
Speaker 2: could fall under the remit of the CFPB. But well,
Speaker 2: it does, it does, But I mean the CFPB is
Speaker 2: not really functioning anymore. That seems like an issue.
Speaker 4: Well, what we are seeing is that the protections that
Speaker 4: the CFPB tried to put in place for buy now,
Speaker 4: pay later borrows some basic ones. You can get some
Speaker 4: statements that you're able to return goods and get it credited.
Speaker 4: It looks like a lot of that is just being
Speaker 4: thrown into trash or just not enforced. We are seeing
Speaker 4: states all over the country though, looking to beef up
Speaker 4: protections because they see how this could create a treadmill
Speaker 4: of debt for people.
Speaker 2: Just one more question for me. So you were head
Speaker 2: of the CFPB under the Bien administration, and you were
Speaker 2: at the FTC under the first Trump administration, and you
Speaker 2: got to experience some of the second Trump administration. What's
Speaker 2: your sense of the difference between Trump one and Trump
Speaker 2: two point zero and how that administration is operating and
Speaker 2: thinking about things like regulation.
Speaker 4: Yeah, I think that there is when it comes to finance,
Speaker 4: a real sense of concern about how they want to
Speaker 4: think about the dollar and how they want to think
Speaker 4: of the future of treasury securities. I see Secretary Beson
Speaker 4: talk very deliberately about wanting stable coin, for example, to
Speaker 4: be a way to boost demand for treasuries. Of course,
Speaker 4: there's lots of issues with that, but I think more broadly,
Speaker 4: the first Trump administration was a lot less organized, and
Speaker 4: now there is a clearly a plan that they are
Speaker 4: executing on, even if it seems chaotic. So I think
Speaker 4: for those who have concerns about it, I don't think
Speaker 4: they should write it off as just chaos or craziness.
Speaker 4: I think there is a lot of things that are
Speaker 4: being done that will have lasting effects on the financial system.
Speaker 2: All right, ro hit Chopra, thank you so much for
Speaker 2: coming on all thoughts. That was so interesting and really
Speaker 2: good to get a regulator's actually perspective.
Speaker 3: Thanks for having Thank you so much, Joe.
Speaker 2: That was really interesting and I'm so glad we could
Speaker 2: have ro hit On to give a sort of fly
Speaker 2: on the wall perspective of a regulator. Dearing you know
Speaker 2: what was a pretty dramatic time.
Speaker 1: There's so many interesting things happening in Finnrag right now
Speaker 1: in general, just obviously the sort of like turning of
Speaker 1: the dial, you know, I think, like a really big
Speaker 1: picture story that doesn't get a lot of attention because
Speaker 1: we focus a lot on the changing administrations because the
Speaker 1: financial crisis was a really long time ago. These things
Speaker 1: always ebb and flow, right, So you have a crisis
Speaker 1: and everyone cracks down and you sort of you know,
Speaker 1: you do the max and then memories fade. You're like,
Speaker 1: why do we have the Like this is I feel
Speaker 1: like it's human nature. As the two thousand and nine
Speaker 1: twenty ten reforms go further into the past, we're just
Speaker 1: going to have this sort of natural loosening until the
Speaker 1: financial crisis of twenty forty five or whatever it is.
Speaker 2: Well, I mean, why do we have the CFPP. The
Speaker 2: whole answer is it was created after the two thousand
Speaker 2: and eight financial crisis. The other thing I thought was
Speaker 2: really interesting, and this gets to the consolidation point, which
Speaker 2: I think is a massive, massive story in the US
Speaker 2: financial industry. But it's just that idea of Okay, if
Speaker 2: you're worried about your deposit at a smaller bank, the
Speaker 2: natural thing is to move it into a too big
Speaker 2: to fail bank because you know that the US government,
Speaker 2: based on precedent, is not going to let them go.
Speaker 2: And so that again seems to give the big banks
Speaker 2: a sort of unnatural edge perhaps in terms of deposit taking.
Speaker 1: I mean, I I know, we talked about this after
Speaker 1: SVB in multiple episodes, but the sheer number of banks
Speaker 1: in the United States that still exist like boggles the mind.
Speaker 1: There's no other country in the world that has as
Speaker 1: many Canada's like six banks. We're so heavily banked in
Speaker 1: this country. It's still today the random.
Speaker 2: There used to be a lot more, a lot more, Yeah.
Speaker 1: But I mean, it's staggering the number of community banks
Speaker 1: and regional banks that exist in the United States, even
Speaker 1: with all the consulidations.
Speaker 2: Do you want to be like Canada, Joe, that's the question.
Speaker 1: No, I don't know. I mean, I like genuinely don't
Speaker 1: know what the optimal distribution is or anything. But given
Speaker 1: the advantages that the big banks have, the perception of safety,
Speaker 1: they're technological capabilities that they can invest in that a
Speaker 1: community bank will never be able to replicate. Brand et cetera.
Speaker 1: The proliferation of banks is still like a sort of
Speaker 1: interesting phenomenon of our financial system.
Speaker 2: The other thing that struck me from that conversation was
Speaker 2: the buy now, pay later stuff, which you know.
Speaker 1: Got to do more on that period.
Speaker 2: Absolutely, it's becoming a really interesting story. But it just
Speaker 2: kind of blows my mind that no one is actually
Speaker 2: tracking that credit because the whole thing is supposed to
Speaker 2: be technology driven. It's plugged into the checkout process of
Speaker 2: a website, it's really easy to do. It seems insane
Speaker 2: to me that like the credit bureaus can't track it
Speaker 2: at the same time, and it seems like a huge,
Speaker 2: huge data hole for the US economy.
Speaker 1: That's a huge story. I completely agree. And then you know,
Speaker 1: we sort of talked about at the end. I mean,
Speaker 1: I think it's such an interesting question the degree to which,
Speaker 1: if it happens, we'll see stable coins become part of
Speaker 1: the payment's landscape in a meaningful way rather than just
Speaker 1: a way to get money onto cryptocurrency trading websites, which
Speaker 1: is where they began. And then all of the things
Speaker 1: around tokenization of equity. I mean, it's just a fact
Speaker 1: that Robin Hood, whose CEO we had on unilaterally announced
Speaker 1: that at some point there's going to be some version
Speaker 1: of tokenized equity or tokens that correspond to equity in
Speaker 1: private companies doing it unilatterly. How regulators are going to
Speaker 1: actually get their handle on this? I have no idea.
Speaker 2: Yeah, tokens, tokens everywhere, and not a bank to lend.
Speaker 2: I think that was ro HiT's point, right, All right,
Speaker 2: shall we leave it there?
Speaker 1: Let's leave it there.
Speaker 2: This has been another episode of the Odd Lots podcast.
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy.
Speaker 1: Alloway and I'm Joe Wisenthal. You can follow me at
Speaker 1: the Stalwart. Follow our guest Roe Hit Chopra. He's at
Speaker 1: Chopra USA. Follow our producers Carmen Rodriguez at Carmen Arman,
Speaker 1: dash Ol Bennett at Dashbock and kel Brooks at Keil Brooks.
Speaker 1: More Odd Lots content go to Bloomberg dot com slash
Speaker 1: odd Lots. We have a daily newsletter and all of
Speaker 1: our episodes, and you can chat about all of these
Speaker 1: topics twenty four to seven in our disc discord do
Speaker 1: Gg slashlins.
Speaker 2: And if you enjoy Odlots, if you like it when
Speaker 2: we do autopsies of failed banks with regulators. Then please
Speaker 2: leave us a positive review on your favorite podcast platform.
Speaker 2: And remember, if you are a Bloomberg subscriber, you can
Speaker 2: listen to all of our episodes absolutely a free All
Speaker 2: you need to do is find the Bloomberg channel on
Speaker 2: Apple Podcasts and follow the instructions there.
Speaker 3: Thanks for listening.