1 00:00:03,480 --> 00:00:07,560 Speaker 1: Welcome to the Bloomberg Law Podcast. I'm June Grosso. Every 2 00:00:07,640 --> 00:00:10,440 Speaker 1: day we bring you insight and analysis into the most 3 00:00:10,480 --> 00:00:13,399 Speaker 1: important legal news of the day. You can find more 4 00:00:13,480 --> 00:00:18,040 Speaker 1: episodes of the Bloomberg Law Podcast on Apple Podcasts, SoundCloud 5 00:00:18,320 --> 00:00:22,119 Speaker 1: and on Bloomberg dot com Slash podcasts. A victory for 6 00:00:22,200 --> 00:00:25,239 Speaker 1: privacy advocates at the Supreme Court today in a five 7 00:00:25,320 --> 00:00:28,240 Speaker 1: to four decision, the Court rule that states can start Oh, 8 00:00:28,280 --> 00:00:33,240 Speaker 1: I'm uh. We're talking about the victory where the Supreme 9 00:00:33,280 --> 00:00:37,879 Speaker 1: Court has rule that cell phone carriers are going to 10 00:00:37,960 --> 00:00:41,800 Speaker 1: need a warrant to um to get the records from 11 00:00:41,800 --> 00:00:44,680 Speaker 1: their customers. Joining us is Bloomberg New Supreme Court reporter 12 00:00:44,760 --> 00:00:47,559 Speaker 1: Greg Store. Hi, Greg, I had yesterday's opinion. There are 13 00:00:47,560 --> 00:00:50,720 Speaker 1: just too many opinions coming down. Let's talk about this. 14 00:00:50,760 --> 00:00:53,120 Speaker 1: The chief wrote the opinion, and he really seemed to 15 00:00:53,159 --> 00:00:56,720 Speaker 1: have a bead on our compulsive carrying of cell phones. 16 00:00:56,760 --> 00:01:01,200 Speaker 1: Tell us more about his reasoning. Yeah, So his reasoning is, uh, 17 00:01:01,240 --> 00:01:04,160 Speaker 1: you know, the ubiquity of cell phones. We all had them, 18 00:01:04,160 --> 00:01:07,840 Speaker 1: we all carry them, and they provide an incredible amount 19 00:01:07,840 --> 00:01:11,720 Speaker 1: of information to our cell phone company. Even if we're 20 00:01:11,720 --> 00:01:14,479 Speaker 1: not necessarily thinking we're we're getting information to our cell 21 00:01:14,480 --> 00:01:17,120 Speaker 1: phone company. And in particular, UH, this case is about 22 00:01:17,120 --> 00:01:20,760 Speaker 1: the fact that UH cell phone companies, when we make 23 00:01:20,800 --> 00:01:24,839 Speaker 1: a call or or end a call, they in their 24 00:01:24,880 --> 00:01:28,160 Speaker 1: in their towers keep the information about where that call 25 00:01:28,280 --> 00:01:32,120 Speaker 1: began an end ended, and that information can be used 26 00:01:32,120 --> 00:01:36,080 Speaker 1: and with increasing accuracy, to show where a person is. 27 00:01:36,480 --> 00:01:39,480 Speaker 1: And so in this case, where the question was whether 28 00:01:39,520 --> 00:01:42,720 Speaker 1: the government UH could get about four months worth of 29 00:01:42,840 --> 00:01:46,760 Speaker 1: data showing the location of a of a robbery suspects phone, 30 00:01:47,560 --> 00:01:52,040 Speaker 1: whether that was was such, whether he had a privacy 31 00:01:52,080 --> 00:01:55,000 Speaker 1: interest in that information that was protected by the Fourth Amendment, 32 00:01:55,160 --> 00:01:58,440 Speaker 1: and that required the the government to get a warrant. 33 00:01:58,440 --> 00:02:00,960 Speaker 1: In the Supreme Court said, yes, the government does have 34 00:02:01,000 --> 00:02:03,640 Speaker 1: to get a warrant. The records are collected and held 35 00:02:03,640 --> 00:02:07,160 Speaker 1: by a private company, not the government. Did the Chief 36 00:02:07,200 --> 00:02:10,679 Speaker 1: adjust that address that in his opinion? Yeah, so, so 37 00:02:10,880 --> 00:02:13,880 Speaker 1: the Court in a few cases from several decades ago, 38 00:02:14,240 --> 00:02:18,400 Speaker 1: established what people call the third party doctrine. UH. That says, 39 00:02:18,440 --> 00:02:23,080 Speaker 1: if you UM provide information to a third party, like 40 00:02:23,240 --> 00:02:26,160 Speaker 1: your bank records, you're you're giving information to your bank. 41 00:02:26,320 --> 00:02:29,399 Speaker 1: They're in the hands of a third party, UM that 42 00:02:29,520 --> 00:02:33,440 Speaker 1: you are giving up your privacy interest in them to 43 00:02:33,639 --> 00:02:36,040 Speaker 1: a at least a large degree. You don't have the 44 00:02:36,080 --> 00:02:38,640 Speaker 1: same interest you would have if you, uh, you know, 45 00:02:38,760 --> 00:02:42,359 Speaker 1: kept all your money under your mattress. Uh. And the 46 00:02:43,200 --> 00:02:48,680 Speaker 1: court in this case, um said, in part location information 47 00:02:48,919 --> 00:02:51,280 Speaker 1: is different because there's so much of it, as we 48 00:02:51,280 --> 00:02:54,480 Speaker 1: were discussing before, and it tells you so much about 49 00:02:55,520 --> 00:02:59,760 Speaker 1: a person. It can reveal you know things about you know, 50 00:03:00,280 --> 00:03:04,320 Speaker 1: you know the he said, revealing not only your particular movements, 51 00:03:04,320 --> 00:03:09,360 Speaker 1: but through them from familiar familial, political, professional, religious, and 52 00:03:09,400 --> 00:03:12,800 Speaker 1: sexual associations. Just a wealth of information. And the Court 53 00:03:12,840 --> 00:03:14,480 Speaker 1: has been in the past and was in this case, 54 00:03:14,840 --> 00:03:17,840 Speaker 1: very protective of that information. Yeah, the Chief joined with 55 00:03:18,120 --> 00:03:21,120 Speaker 1: the four liberal justices to make up the majority. Here, 56 00:03:21,600 --> 00:03:24,359 Speaker 1: Why the split in this case when the Court, as 57 00:03:24,400 --> 00:03:28,000 Speaker 1: you said, has leaned towards protecting privacy in tech cases 58 00:03:28,080 --> 00:03:31,399 Speaker 1: for some time now. Yeah, and the Chief has really 59 00:03:31,440 --> 00:03:34,440 Speaker 1: been in the vanguard of that. So one interesting aspect 60 00:03:34,440 --> 00:03:38,560 Speaker 1: of the split. So Justice course was a dissenter, But 61 00:03:39,120 --> 00:03:42,280 Speaker 1: when you start looking at his his opinion, Um, he 62 00:03:42,360 --> 00:03:45,720 Speaker 1: could very well have been concurring. He said, he doesn't 63 00:03:45,760 --> 00:03:47,720 Speaker 1: like the way the Court has analyzed all these cases 64 00:03:47,720 --> 00:03:49,800 Speaker 1: in the past. He would sort of blow everything up, 65 00:03:50,000 --> 00:03:53,840 Speaker 1: but he would focus on a notion of of property rights, 66 00:03:53,960 --> 00:03:56,080 Speaker 1: and in his mind, the way he expressed it in 67 00:03:56,120 --> 00:03:59,280 Speaker 1: his is the sensing opinion was that, um, have they 68 00:03:59,320 --> 00:04:01,320 Speaker 1: only argued this was a matter of property rights, that 69 00:04:01,360 --> 00:04:03,440 Speaker 1: you still have a property right in this information about 70 00:04:03,880 --> 00:04:08,080 Speaker 1: uh where your uh cell phone has been. I might 71 00:04:08,160 --> 00:04:10,800 Speaker 1: have sided with the defendant in this case, but since 72 00:04:10,800 --> 00:04:13,200 Speaker 1: he didn't raise that issue, I'm going to dissent. So 73 00:04:14,040 --> 00:04:16,040 Speaker 1: in the future case it could actually be a six 74 00:04:16,120 --> 00:04:18,919 Speaker 1: three split instead of a five four split. So Robert's 75 00:04:18,960 --> 00:04:21,279 Speaker 1: called the ruling a narrow one. But does it have 76 00:04:21,320 --> 00:04:25,240 Speaker 1: any implications for digital privacy rights, for example, information that's 77 00:04:25,240 --> 00:04:29,440 Speaker 1: stored in the cloud. Yeah, it certainly could so. Uh 78 00:04:29,720 --> 00:04:31,680 Speaker 1: there's an aspect of this ruling that that makes it 79 00:04:32,400 --> 00:04:36,359 Speaker 1: suggests that location information is different than anything else. But 80 00:04:37,000 --> 00:04:41,239 Speaker 1: no question. Uh the idea that this third party doctrine 81 00:04:41,279 --> 00:04:46,040 Speaker 1: is an absolute rule. Uh, that idea is out the window, 82 00:04:46,040 --> 00:04:47,760 Speaker 1: at least as an absolute rule when it comes to 83 00:04:47,760 --> 00:04:50,320 Speaker 1: digital data. So we will probably in the future have 84 00:04:50,440 --> 00:04:53,520 Speaker 1: more cases that determine. Uh. Well, you know, what about 85 00:04:53,520 --> 00:04:57,120 Speaker 1: the information your smart thermostat provides to your electric company? 86 00:04:57,279 --> 00:05:01,640 Speaker 1: What about information your fitness tracker uh vibes to to 87 00:05:02,120 --> 00:05:04,440 Speaker 1: the company that made the app or or something like that. 88 00:05:04,800 --> 00:05:06,600 Speaker 1: All those will be dealt with on a case by 89 00:05:06,600 --> 00:05:10,000 Speaker 1: case basis, it seems going forward, and the Court's reasoning 90 00:05:10,120 --> 00:05:13,440 Speaker 1: reasoning in this case, and it's it's broad protections for 91 00:05:13,480 --> 00:05:16,280 Speaker 1: privacy rights, no doubt will come into play. One thing 92 00:05:16,320 --> 00:05:19,200 Speaker 1: that question I had in my mind after seeing this, 93 00:05:19,720 --> 00:05:23,360 Speaker 1: what about the telephone numbers that you dial that police 94 00:05:23,600 --> 00:05:26,720 Speaker 1: can get access to very easily? You know, the all 95 00:05:26,760 --> 00:05:30,159 Speaker 1: the phone calls that people make on their cell phone 96 00:05:30,480 --> 00:05:34,560 Speaker 1: or that is that protected? Um? That that has always 97 00:05:34,560 --> 00:05:36,920 Speaker 1: been the case. So so one of these decades old 98 00:05:36,960 --> 00:05:40,560 Speaker 1: decision one nine said that the numbers you dial are 99 00:05:40,600 --> 00:05:45,400 Speaker 1: not constitutionally protected. That decision stands that that is viewed 100 00:05:45,440 --> 00:05:50,000 Speaker 1: differently than this information about where you are. Okay, so 101 00:05:50,120 --> 00:05:52,880 Speaker 1: it's it seems to cross a line there, but there 102 00:05:52,960 --> 00:05:56,160 Speaker 1: are a lot of distinctions. Now. Um, what's interesting is 103 00:05:56,200 --> 00:06:00,400 Speaker 1: that this Supreme Court ruling won't necessarily overturn earned the 104 00:06:00,440 --> 00:06:04,520 Speaker 1: conviction of the plaintiff here. Yeah, so the case goes 105 00:06:04,600 --> 00:06:06,760 Speaker 1: back there and and you know that the government had 106 00:06:06,800 --> 00:06:08,919 Speaker 1: a lot of evidence in this case. So this is 107 00:06:09,839 --> 00:06:11,800 Speaker 1: Mr Carpenter was accused of taking part in a string 108 00:06:11,839 --> 00:06:15,200 Speaker 1: of robberies of radio shacks and of all things a 109 00:06:15,320 --> 00:06:18,560 Speaker 1: T Mobile stores, and um that the government had a 110 00:06:18,600 --> 00:06:23,120 Speaker 1: lot of other evidence about him. Uh, there is a 111 00:06:23,200 --> 00:06:25,800 Speaker 1: question as to whether he would have the conviction. He 112 00:06:25,800 --> 00:06:28,920 Speaker 1: would have been convicted even without this location data. So 113 00:06:28,960 --> 00:06:32,080 Speaker 1: it's going back to the lower court to consider those issues. 114 00:06:32,080 --> 00:06:36,160 Speaker 1: And it's entirely possible that his conviction will stand notwithstanding 115 00:06:36,200 --> 00:06:40,320 Speaker 1: this very important ruling. So let's look forward to the 116 00:06:40,480 --> 00:06:44,880 Speaker 1: end of the term. Next week's I know this is 117 00:06:44,920 --> 00:06:47,680 Speaker 1: the toughest week for you all year, but and you 118 00:06:47,760 --> 00:06:50,800 Speaker 1: deserve a vacation after it. But so, how they're going 119 00:06:50,839 --> 00:06:54,200 Speaker 1: to get out all these opinions in a week? Yeah, 120 00:06:54,240 --> 00:06:56,120 Speaker 1: we have six more opinions. We don't know how many 121 00:06:56,120 --> 00:07:00,880 Speaker 1: more opinion days. Biggest one of art least, uh, the 122 00:07:00,880 --> 00:07:04,200 Speaker 1: one has most closely watches the Trump travel ban. There's 123 00:07:04,200 --> 00:07:07,360 Speaker 1: this case that's been sitting out there seemingly forever, involving 124 00:07:07,640 --> 00:07:11,920 Speaker 1: mandatory fees paid by two unions by public sector workers. 125 00:07:12,160 --> 00:07:15,200 Speaker 1: Second time that's been argued to the second time that 126 00:07:15,240 --> 00:07:18,520 Speaker 1: one has been argued. The conventional wisdom has always been 127 00:07:19,520 --> 00:07:23,200 Speaker 1: that UM, the court was poised to say that workers 128 00:07:23,200 --> 00:07:27,120 Speaker 1: have a First Amendment right to not pay those fees. Um. 129 00:07:27,240 --> 00:07:29,720 Speaker 1: And then a couple of years ago Justice Scully had 130 00:07:29,800 --> 00:07:34,320 Speaker 1: died and took away the fifth vote for that that ruling. Um, 131 00:07:34,360 --> 00:07:37,080 Speaker 1: and now it's back Justice Course, it seems to be 132 00:07:37,120 --> 00:07:40,160 Speaker 1: poised to cast the pivotal vote. He didn't ask any 133 00:07:40,240 --> 00:07:44,760 Speaker 1: questions during argument, but um, the conventional wisdom, which is 134 00:07:44,800 --> 00:07:46,720 Speaker 1: sometimes wrong, and the conventional wisdom is that he will 135 00:07:46,760 --> 00:07:48,960 Speaker 1: side with the fellow conservatives and say there is a 136 00:07:49,000 --> 00:07:53,040 Speaker 1: first Amendment right. Um. But obviously it's it's an opinion 137 00:07:53,080 --> 00:07:55,960 Speaker 1: that's taking some time. So we'll just have to see 138 00:07:56,160 --> 00:07:59,040 Speaker 1: next week exactly. We'll get some rest this weekend. Greg. 139 00:08:00,000 --> 00:08:02,640 Speaker 1: That's Bloomberg News Supreme Court reporter Greg Stir will have 140 00:08:02,680 --> 00:08:09,840 Speaker 1: all those decisions for you next week. It's a stressing 141 00:08:09,880 --> 00:08:12,280 Speaker 1: time of year for the largest US banks. They're being 142 00:08:12,320 --> 00:08:15,120 Speaker 1: tested by the Federal Reserve. But all thirty five big 143 00:08:15,160 --> 00:08:17,760 Speaker 1: banks cleared the first hurdle of this year's stress tests, 144 00:08:17,920 --> 00:08:21,800 Speaker 1: showing they could withstand a severe economic downturn, although not 145 00:08:21,960 --> 00:08:25,000 Speaker 1: each one cleared the bar by a comfortable margin. Former 146 00:08:25,000 --> 00:08:28,320 Speaker 1: Federal Reserve Governor Daniel Tarullo said on Bloomberg TV this 147 00:08:28,360 --> 00:08:32,040 Speaker 1: morning that the stress tests are working. If you compare 148 00:08:32,080 --> 00:08:35,920 Speaker 1: where the US banks are today with where European banks 149 00:08:35,920 --> 00:08:41,400 Speaker 1: are today, I think the strategy of making them recapitalized 150 00:08:41,480 --> 00:08:45,280 Speaker 1: quickly and then getting capital up further has really paid off. 151 00:08:45,600 --> 00:08:48,440 Speaker 1: Joining me is Robert Howcket, a professor at Cornell Law School. 152 00:08:48,720 --> 00:08:53,360 Speaker 1: Bob tell us how the stress tests actually work, Hi June, Yeah, 153 00:08:53,360 --> 00:08:56,199 Speaker 1: sure so. Basically, the idea is to see how a 154 00:08:56,320 --> 00:09:01,680 Speaker 1: bank's capital levels and its liquidity performance would fare under 155 00:09:01,800 --> 00:09:05,439 Speaker 1: a stressful scenario, sort of system wide scenario that would 156 00:09:05,559 --> 00:09:08,920 Speaker 1: ordinarily imperil the banks. The way the way they think 157 00:09:08,920 --> 00:09:11,000 Speaker 1: about this, I think is is basically as followers think 158 00:09:11,000 --> 00:09:12,880 Speaker 1: of a bank is having liabilities on the one handed, 159 00:09:12,920 --> 00:09:15,120 Speaker 1: assets on the other. What you want to do is 160 00:09:15,160 --> 00:09:18,160 Speaker 1: to minimize the likelihood that any losses on the asset 161 00:09:18,200 --> 00:09:21,120 Speaker 1: side of the balance sheet would ever be transmitted to 162 00:09:21,720 --> 00:09:24,720 Speaker 1: those were the beneficiaries of the liability side of the 163 00:09:24,720 --> 00:09:26,720 Speaker 1: balance sheet. In other words, you don't want it to 164 00:09:26,720 --> 00:09:29,040 Speaker 1: be the case that if the bank loses some of 165 00:09:29,080 --> 00:09:32,560 Speaker 1: what it owns, that it somehow loses its capacity to 166 00:09:32,640 --> 00:09:35,160 Speaker 1: pay what it owes. Right, And the way you do 167 00:09:35,200 --> 00:09:38,080 Speaker 1: that is, basically by imposing a so called capital buffer 168 00:09:38,120 --> 00:09:41,560 Speaker 1: of one kind or another and imposing liquidity buffers as well, 169 00:09:41,840 --> 00:09:45,600 Speaker 1: which basically minimize the likelihood that losses on the asset 170 00:09:45,640 --> 00:09:47,400 Speaker 1: side of the balance sheet would be transmitted over to 171 00:09:47,400 --> 00:09:49,760 Speaker 1: the liability side. Now, the reason the way the stress 172 00:09:49,800 --> 00:09:53,000 Speaker 1: tests fit into this as they basically put together scenarios 173 00:09:53,080 --> 00:09:55,400 Speaker 1: under which there might be a system wide problem that 174 00:09:55,440 --> 00:09:57,720 Speaker 1: would result in some of the assets on the bank's 175 00:09:57,880 --> 00:10:01,440 Speaker 1: asset portfolios going bad. That could be defaulting loans, it 176 00:10:01,440 --> 00:10:04,120 Speaker 1: could be underperforming loans, it could be underperforming assets of 177 00:10:04,120 --> 00:10:06,840 Speaker 1: other times. Basically, the idea is that the bank's assets 178 00:10:06,840 --> 00:10:09,120 Speaker 1: are going to underperform the economy as a whole space 179 00:10:09,200 --> 00:10:11,240 Speaker 1: is some sort of severe turbulence, and so you want 180 00:10:11,280 --> 00:10:13,760 Speaker 1: to see how they would fare in the scenario like that, 181 00:10:14,000 --> 00:10:16,480 Speaker 1: basically with a view to minimizing the likelihood that any 182 00:10:16,480 --> 00:10:19,480 Speaker 1: of those losses would go to those of the banks. Oh, 183 00:10:19,920 --> 00:10:22,800 Speaker 1: what's your opinion of how the stress tests are working? 184 00:10:22,800 --> 00:10:26,600 Speaker 1: Do you agree with Tarulo that they're working well? Yeah, 185 00:10:26,600 --> 00:10:28,720 Speaker 1: I mean I agree with then that they're working well 186 00:10:28,760 --> 00:10:31,400 Speaker 1: and that they were a good idea. That being said, 187 00:10:31,440 --> 00:10:34,719 Speaker 1: I think that they could work even better if they 188 00:10:34,720 --> 00:10:37,079 Speaker 1: weren't fraught with a particular danger. And this is a 189 00:10:37,160 --> 00:10:39,880 Speaker 1: danger that inheres less in the tests, I think, than 190 00:10:39,960 --> 00:10:42,680 Speaker 1: in the sort of culture around the tests. What I 191 00:10:42,679 --> 00:10:45,880 Speaker 1: mean by that is that when a bank actually does 192 00:10:46,080 --> 00:10:49,199 Speaker 1: farewell under the tests, there's a tendency to think, well, 193 00:10:49,240 --> 00:10:51,480 Speaker 1: everything is fine now, right, We're not going to have 194 00:10:51,559 --> 00:10:54,240 Speaker 1: a repeat of what happened in two thousand eight. Therefore, 195 00:10:54,440 --> 00:10:56,160 Speaker 1: let the banks pay out more in the way of 196 00:10:56,240 --> 00:10:58,480 Speaker 1: duvid ends, let them engage in more stock buybacks, let 197 00:10:58,559 --> 00:11:01,120 Speaker 1: them think of themselves as more profitable, and so forth. 198 00:11:01,640 --> 00:11:04,440 Speaker 1: That's exactly the wrong way to think. I think it's 199 00:11:04,520 --> 00:11:07,080 Speaker 1: good to feel a certain sense of relief when they passed, 200 00:11:07,120 --> 00:11:10,199 Speaker 1: because remember, passing these is the bare minimum. That doesn't 201 00:11:10,200 --> 00:11:12,240 Speaker 1: mean that everything is great and everything is kind of 202 00:11:12,280 --> 00:11:15,800 Speaker 1: smelling or coming up roses. It just means that, well, 203 00:11:15,840 --> 00:11:18,000 Speaker 1: at least it doesn't look, as far as we can tell, 204 00:11:18,000 --> 00:11:19,640 Speaker 1: like we're gonna have a repeat of two thousand and eight. 205 00:11:19,800 --> 00:11:22,040 Speaker 1: But that's a pretty down lovar, if you think about it. 206 00:11:22,360 --> 00:11:24,280 Speaker 1: Um So, what we really ought to be thinking about it, 207 00:11:24,320 --> 00:11:27,160 Speaker 1: seems to me, is when they passed the stress tests, 208 00:11:27,440 --> 00:11:30,000 Speaker 1: we say, good, that's great. But now what do we 209 00:11:30,080 --> 00:11:33,400 Speaker 1: do to prevent a false sense of securities setting in 210 00:11:33,760 --> 00:11:36,680 Speaker 1: as a result of that actual passing up a test, 211 00:11:36,720 --> 00:11:39,320 Speaker 1: because that's what tends to happen in the financial cycle. 212 00:11:39,760 --> 00:11:42,440 Speaker 1: So then do you agree with regular or do you 213 00:11:42,480 --> 00:11:45,640 Speaker 1: disagree with regulators who are working for Trump that has 214 00:11:45,679 --> 00:11:48,680 Speaker 1: suggested that in June that the tests be cut back 215 00:11:48,720 --> 00:11:52,320 Speaker 1: to every two years, and that lenders with sufficient capital 216 00:11:52,400 --> 00:11:57,080 Speaker 1: cushions be dropped out altogether. I couldn't disagree more with 217 00:11:57,120 --> 00:11:59,400 Speaker 1: those who suggest that. I think this is exactly the 218 00:11:59,480 --> 00:12:02,480 Speaker 1: kind of thing, exactly the kind of complacency that tends 219 00:12:02,480 --> 00:12:05,320 Speaker 1: to set in as soon as things look a little 220 00:12:05,320 --> 00:12:08,199 Speaker 1: bit better than they were, and that's exactly what sets 221 00:12:08,240 --> 00:12:10,640 Speaker 1: us up for the next fall. You know, the great 222 00:12:10,800 --> 00:12:13,240 Speaker 1: financial economist time and Minsky is sort of well known 223 00:12:13,360 --> 00:12:15,680 Speaker 1: for a lot of quips that he made, but one 224 00:12:15,840 --> 00:12:18,800 Speaker 1: is that he set stability breeds instability. This is the 225 00:12:18,840 --> 00:12:21,560 Speaker 1: classic case and point. As soon as you do relatively 226 00:12:21,600 --> 00:12:23,560 Speaker 1: well on a test, everybody gets complace and they say, oh, 227 00:12:23,600 --> 00:12:25,199 Speaker 1: now we can just kind of run around and how 228 00:12:25,240 --> 00:12:27,600 Speaker 1: we want um, And that's exactly what sets you up 229 00:12:27,600 --> 00:12:29,800 Speaker 1: for the next crisis. So I think it's precisely the 230 00:12:29,840 --> 00:12:32,079 Speaker 1: wrong lesson to be drawn from what happens or what 231 00:12:32,440 --> 00:12:34,600 Speaker 1: turned up yesterday. And my guess is that things will 232 00:12:34,640 --> 00:12:36,560 Speaker 1: probably look pretty good next week in the second round 233 00:12:36,559 --> 00:12:38,480 Speaker 1: as well, and the end the dangers is going to 234 00:12:38,559 --> 00:12:42,120 Speaker 1: be increased or a heightened complacency, more stock buybacks, more 235 00:12:42,160 --> 00:12:44,760 Speaker 1: dividends for shareholders, and all of that is very, very 236 00:12:44,840 --> 00:12:46,679 Speaker 1: dangerous because we're really at the top I think of 237 00:12:46,880 --> 00:12:48,760 Speaker 1: of a sort of or the peak of a sort 238 00:12:48,800 --> 00:12:51,600 Speaker 1: of boom cycle at the moment. I think there's probably 239 00:12:51,640 --> 00:12:53,760 Speaker 1: more turbulence down the road, and this is not the 240 00:12:53,800 --> 00:12:58,320 Speaker 1: time then for banks to be depleting their not reserved sacks. 241 00:12:58,360 --> 00:13:01,760 Speaker 1: And Morgan Stanley had the two alwayest capital levels on 242 00:13:01,760 --> 00:13:06,920 Speaker 1: one key measure yesterday. Do you buy their explanations or 243 00:13:06,920 --> 00:13:10,160 Speaker 1: excuses for that, No, I think they're kind of comical, 244 00:13:10,200 --> 00:13:11,400 Speaker 1: to tell you the truth with I mean, I don't 245 00:13:11,440 --> 00:13:12,800 Speaker 1: want to be too much of an assary here, But 246 00:13:13,080 --> 00:13:15,000 Speaker 1: if you think about it, the stress tests are not 247 00:13:15,120 --> 00:13:18,160 Speaker 1: only about how would the bank fair in the systemic 248 00:13:18,320 --> 00:13:21,560 Speaker 1: crisis or in the midst of some sort of systemic turbulence. 249 00:13:21,720 --> 00:13:24,640 Speaker 1: They're also about well, how good are the banks own 250 00:13:24,880 --> 00:13:29,200 Speaker 1: internal risk measures? And if Goldman and more. If Morgan 251 00:13:29,280 --> 00:13:31,560 Speaker 1: Stanley came up with different results in that that and 252 00:13:31,559 --> 00:13:34,800 Speaker 1: then theed rosier results in the that, that suggests to 253 00:13:34,880 --> 00:13:37,720 Speaker 1: me that their stress tests um their own sort of 254 00:13:37,760 --> 00:13:41,560 Speaker 1: internal models, I should say, are innatic that they're overly optimistic, 255 00:13:41,800 --> 00:13:44,520 Speaker 1: and as we all know, that's something that bank models 256 00:13:44,520 --> 00:13:46,480 Speaker 1: are prone to be. That's exactly what they were in 257 00:13:46,480 --> 00:13:48,640 Speaker 1: the lead up to two thousand eight. That's exactly what 258 00:13:48,679 --> 00:13:50,720 Speaker 1: they're likely to be now because think about what the 259 00:13:50,720 --> 00:13:52,760 Speaker 1: incentives are for the bank. Of course, the bank wants 260 00:13:52,800 --> 00:13:54,000 Speaker 1: to be able to say it's going to do well 261 00:13:54,000 --> 00:13:56,559 Speaker 1: in the crisis. That encourages more people to invest in 262 00:13:56,600 --> 00:13:58,520 Speaker 1: those banks, and more people to deposit in those banks 263 00:13:58,600 --> 00:14:00,719 Speaker 1: or make use of their services or whatever. So it's 264 00:14:00,720 --> 00:14:03,080 Speaker 1: actually kind of disturbing if the FED, with all the 265 00:14:03,080 --> 00:14:05,040 Speaker 1: expertise that it has, in all the stress testing it 266 00:14:05,080 --> 00:14:08,200 Speaker 1: does of multiple institutions, comes up with one result and 267 00:14:08,240 --> 00:14:11,800 Speaker 1: then two banks come up with much rosier results for themselves. 268 00:14:12,600 --> 00:14:16,160 Speaker 1: That's a pretty bad sign about their risk cultures internally. 269 00:14:16,240 --> 00:14:18,920 Speaker 1: And I think that the fact that they're sort of 270 00:14:18,920 --> 00:14:21,840 Speaker 1: finding fault with the FEDS measures and that they're disagreeing 271 00:14:22,320 --> 00:14:24,400 Speaker 1: is at least prima facia evidence that they're a bit 272 00:14:24,480 --> 00:14:27,160 Speaker 1: too cavalier and auto be looked that more carefully. Always 273 00:14:27,160 --> 00:14:29,920 Speaker 1: great to have your insights, Bob. That's Robert Hockett, professor 274 00:14:29,920 --> 00:14:33,320 Speaker 1: at Cornell Law School. Thanks for listening to the Bloomberg 275 00:14:33,400 --> 00:14:36,440 Speaker 1: Law Podcast. You can subscribe and listen to the show 276 00:14:36,520 --> 00:14:41,240 Speaker 1: on Apple Podcasts, SoundCloud, and on Bloomberg dot com slash podcasts. 277 00:14:41,640 --> 00:14:47,920 Speaker 1: I'm June Brasso. This is Bloomberg Ye.