Surveillance Special: 10 Years After the Crisis

and central banking and the regulatory state. Still with us Rupert Harrison of Black Rock and John Norman of JP Morgan. Where are your books? I need? I need books from everyone on set. Paul Talker, thank you for joining us. Congratulations on the book. First of all, when you look back to Lehman's when you look back at just you know that oh eight period, when did you first realize about the scale of how enormous it was what we were going through. I think when best Earns failed and

was rescued. I recall a meeting at the Bank of England where I said that had it not been rescued, there would have been mayhem, And a month later one of the directors came back to me and said, that was quite a thing to say. Defend it, and so I did. I think the tragedy and I don't think anyone has said anything intelligent about this, and I'm not going to is the wasted six months between bes Starns

and Lehman. Why on both sides of the Atlantic, weren't the big dealers, the big banks forced to deleverage in the wholesale market commitments in a controlled way rather than in their lending to the real economy. Why wasn't Lehman is reputed to have been debating an equity injection from Korea. Why didn't that happen? Why didn't the US authorities push

them to do it? And there's too much discussion about all the liquidity measures that were taken, some of which I devised, and of course central bankers think they were quite good, and not enough discussion about out missed opportunities by supervisors and regulators. But why because they didn't understand the interconnected it or they didn't want to see it. I don't know why. I think it's implausible to say people didn't understand the interconnectedness. Loretta Mesta just said, um,

that we learned things about the interconnectedness. I don't think we learned a great deal. If you go back and look at things that the FED, the b I S, the Bank of England said in the years before the crisis, people knew the system was so horribly interconnected that they wouldn't be able to understand how it would unravel. The mystery and it is a mystery, um is why people if you provide liquidity, you don't solve the ultimate problem, but you buy time. How was the time used by

regulators and supervisors? I still I don't think we have a good answer to that question on either side of the Atlantic. Well, and the wonderful voices set that we heard before you came on. We had Loretta Master of the Cleveland FED, who is truly one of our best myth maticians, and all this, and I go to a chapter in your book the limits of design? Are we

asking too much of central banking? If the system lacks up, as Lauretta talked about in at ten back look back, If the system locks up, is the correlations become so tight? Is there a limit to the design? Yes? Is the simple answer if you expect central banks and agencies like central banks to make the world a perfect place. UM, this is doomed to fail. If you ask them to deliver stable and low inflation over time, ensure that the core of the banking system is resilient, they can do that.

They can't manage the credit cycle, they can't manage asset prices. They can do those simple things. And in the years during the crisis and since UM a lot of countries have fallen into the trap of of expecting the central banks too much. And that's not only the central banks fault. It's because Paul Auditions, it's convenient for politicians to vacate the space and leave the central banks as the US cavalry,

and it is very tempting central banks to occupy that. Actually, it's terribly difficult for them not to try to do something when the politicians don't step up to the plate. In the United States, of course, this is centers around the difficulty of fiscal policy of any kind. And Toto, all three of you, John Norman jump in here if you would please, and I think it's a question for all three of you. Francy lead this discussion, which is the solution is more capital on the bank's balance sheets.

That just seems too simplistic to me, John is it? I think that is too simplistic. I think the underlying problem at the end of every business cycle is a leverage build up somewhere, and it is helpful to have banks will capitalized. That's one less source of leverage. But it's very difficult to keep households and corporates from building up leverage doing a long business cycle with low interest rates.

And that's why you can always, i think, act some kind of high volatility decline in asset prices when we eventually go into a downturn, and there's only so much that central bankers can do to try to manage their their deleveraging process. I'd agree with that. I think that you know, more capital obviously is a big part of the solution, but that's never going to prevent failures or um. The next crisis is going to going to be different in some sets. I mean, I think Paul's point is

a very interesting one. I mean, I think the UK is a good interesting example. Actually have a country where we've probably gone further than almost any other country and explicitly giving the bank of England now a remit to not just protect the banks from the cycle, but to

try and protect the cycle from the bank. So you have the kind of financial policy committee that is tasked to try and step in and has already done that in areas like Vitlet in the UK is increasingly getting active in sort of counter cyclical capital measures to the banks, and so far I think that I think that the politics of that has been acceptable. I think the public

are willing to allow central banks to step in. Whether that's politicians trying to push the responsibility away from themselves towards the central banks, so you know, will only find out the next time it really gets bad. Tucker, where are we more vulnerable today than we were on the eve of Leaming Brothers um shadow banking UM in China or worldwide? Probably a bit in the United States as well.

I don't want to say more vulnerable in the United States than before two thousand and seven eight, But I think there's been a woefullly weak appetite to address shadow banking in the in the States, and a policy of will monitor it, spot the problems and then reform policy to catch up is doomed to failure. By By the time something is big enough to be a systemic threat, it has a real lobbying power in Congress and and elsewhere. I think the policy makers have have ducked this. It's

it's difficult, but they've ducked it. And I think that's been a mistake. Another one which I know preoccupies some people in the Senate UM is so my generation of policy makers have pushed forced a lot of the derivatives markets to go our central counterparties. That's good. I still support that policy. But what happens of a central counterparty fails. We are ten years on um No one in the

United States has said anything compelling about that. It isn't even clear that there are legal powers to address it. In Europe, more has been said and done, but the truth is that Europe is waiting to try to do something jointly with the United States. This will be imagine one of these things fails. I'm one of the few people on the planet that have dealt with the failed um CCP. This will be inexcusable. Well, there were one

of the lessons that we've learned here. We've got I guess Phillips, Curb and DSG All the fancy phrases back to the martiall and cross, where's behavioral economics and all this? Are you guys still ignoring Robert Schiller? Are you still ignoring failor of Chicago? I don't think actually that was the problem before the crisis. I think it was partly a problem in the FED. The Greenspan doctrine meant that

supervision and regulation was neglected in the FED. It wasn't a um an enticing or sexy place to to work. I think the difficulty is I think people have embraced the importance of behavior economics, I'm not sure that they know how to operationalize it. How do you how do you make a part of day to day policy? It's over value and I um sitting on television talking about it if you actually had the job. How do you

How do you spot irrational exuberances from harmless exuberance? How do you spot the telco debt bubble which nearly did bring down banks in the early zeros, from the dot com equity bubble which didn't. Frankly, Paul the heart of this, and I go back to Merwyn King's historic speech in Scotland, which I thought was an early financial crisis landmark. But Paul, what is so important here is the theory of a central bank somehow getting out front of being expost or

being ex anti. Are we delusional that we think central banks can get out front of economic trends, economic data, in the behavior of an economic system. We'd be delusional to put all our chips on that. Yeah, sometimes they

can do that. I mean, I've just criticized Alan Greenspan, but Alan Greenspan did a good job in spotting the uplifting productivity in the late nineties and the early zero Sometimes you get that right, but you can't rely on it, Which comes back to me, we are not going to spot, or we cannot rely on spotting where the next crisis will come from and how bad it will be. All we can do is make the system more resilient, and

that includes vitally being able to cope with failure. So there should be much more attention um in all of these programs on how are plans going to make the big banks and dealers resolvable so that we can wind them down or recapitalize them in a crisis, rather than turning to the taxpayer. And I think it's your responsibility both of you to sometimes make that sexy. People might be aren't going to be good at making that sexy. People like you are good at making at sexy, and

you should try. Then. Well, I can tell you that the foreign years that I've done this show, nobody has told me that baky gets sexy. Joining us, Christmas Santi of Casanti Investments, yellmen, I own I renew this as well from Bloomberg, who wrote so many of our important stories on banking, on shadow banking, and she is timeless. She has not aged a moment since two thousand and eight.

Susan Latt joins us from Washington with Mackenzie. Susan, congratulations on your fourteen page jewel on what happened and what didn't change? Tell us from Mackenzie Global Institute what is not changed, Well, what's not changed is that the world still has a lot of debt. It's a different kind of debt. It's taken out by governments and corporations as

time instead of households. But after all of the tumult of two thousand and eight, we really expected that there would be what we call deleveraging or debt reduction, and instead we've got seventy two trillion dollars more debt than we had back then within this So this goes back, of course to one of the great books of this era, the Reinhardt and Rogoff effort. This time is different. The two professors don't make a distinction. They say, you've got

to add private debt to public debt. When you add those two together, how ugly is the picture. Well, it's debt is higher in the United States, in the UK and Ireland and Spain than it was on the eve of the crisis. And I think of those as sort of the core crisis countries that had very over indebted household sectors and real estate bubbles that ended very badly. Um in the rest of the world that was not at the epicenter of the crisis, all forms of debt

have continued to grow. Um. In Canada, our neighbors to the north, the land of very sound banking, their household debt is now at the same level as the US was back in two thousand and seven. When you look at developing countries, the change has been even more dramatic.

And this is why now we're having problems in Turkey and Argentina, UM and other countries that were able to borrow because interest rates were so incredibly low, investors were willing to take a little bit higher risk to get returns, and so emerging markets, both companies and governments were able to borrow UM at unprecedented levels. Now as we look forward to rising interest rates UM and combined with in some countries unsound macroeconomic policies, we're going to see some problems. Yeah,

where are we going to see problems? Susan? If you look at the spaces which may be more more vulnerable today than they were on the eve of the Lehman collapse, where is it well, in developing countries, it's always a combination of too much dead and then combined with some

macroeconomic shocks. So in Turkey we've seen the lira plunge nearly fift since the start of the year, and a lot of their debt is in foreign currency, So a company that was paying a certain amount on debt service now is paying nearly double what they were if they're earning local currency revenues. Same problem in Argentina, which just asked for an I m F bailout. So we will

see some tremors. Um, I think in emerging markets as we look ahead beyond that in the US and in Europe, I think that the troubles are more specific pockets, for instance US retail, But overall the picture doesn't look so bad. Um Yamen. Three, your your reporting. So Tom and I

have been asking a lot of guests. You know, first of all, what the consequences have been from the financial crisis, And I've heard everything from you know, this was actually the stepping stone of populism because of the central bank action to banks being overregulated. What do you see as as the kind of definitive consequence of the financial crisis and the living collapse? I mean, the banks have definitely been regulated more and overregulated. That's a debate. You know

that the banks say they're overregulated. Some critics say they're still not regulated enough, but they're definitely more regulated, which means they have their they're safer. After the crisis, you know a lot of regulation worldwide, not just US, Europe but everybody. Bossil Committee in Switzerland they did increase cap requirements, could it requirements, all kinds of things that make the banking systems safer, which meant things shifted to shadow banks

a little bit. Shadow banks, they're everything that is not a bank, but that's still you know, is involved in the landing, So that that's that's an area that's harder to monitor. Regulators known less about it. They pay more attention to it. They didn't before. They pay more attention to it. But you know, and there have been political

and economic repercussions as well, inequality rising everybody. A lot of analysts has say that's because of what happened after the crisis, which is the easy monitary policy that lowered interest rates and and and bought trillions of dollars of bonds by the FEDS and and other central banks European, Asian, and so all these things. You know, it has changed the world. We have we have risks shift from from the maybe the banking system to other corners of the

financial system. You know, so the dangers are still there as as don't want saying there's so much more debt that it's clearly not safe enough in the world. And then you and Mark Pittman let our coverage on this what was going on at the time, it was hugely forensic reporting as well. And part of that forensic reporting

is whether the banks from where you sit. Do we need greater bank concentration in America or do we need to diffuse the two big defails that great Andrew Ross Sorkin phrase, Do we need to diffuse the two big defails to the regional banks? I felt, you know that when I came to the US five years ago, I thought there were too many little banks around the country. And because there were, there were one my bank, my first bank in the US, Wayne County National Bank, had

one branch, even if it didn't have to um. But then, you know, as I've covered banking in this country and around the world, I've looked at banking systems around the world. I've realized that, of course smaller banks. The biggest advantage of having all those smaller banks is that risk is spread out. You know, one bank fails, we have FD if they see if they takes care of him. But so the big banks are threatening, and it's always tough to to make sure that their risks are not too

much and when they fail. Can I got to make some money out of Chris? Can you buy the banks in which flavor of banks is where the value is? I think it can time, But but I get an overall feeling in this conversation that we're talking about the last crisis almost like talking about would imagine old line. That's the theme today, Chris get But but where is the weak point? It's probably not going to be the

big US banks. I I look at emerging markets, I look at where the stress points are today, and yeah, we have more debt, but their GDP is a little higher. It's it's China that's really levered up. So that's a big concern, and we've nationalized that. They're taking it from the private sector moving into the public sector, which is exactly what we wanted to do. Frins, right, Yeah, Susan.

So one of the you know, we had Paul Tucker, deputy former Deputy Governor of the Bank of England, and he was saying, what we should really be watching out for is shadow banking in the US and China. What do we do? What should we do with shadow banking? Well, shadow banking by a definition is always a bit of a troublesome area because we just don't know a lot

about it. So at this point in the United States, half of all new mortgages are coming from non bank entities UM and those mortgages are going largely into Ginny May, which is the third government owned mortgage securitizer that you don't hear a lot about. So that's definitely an area worth watching in the US. But I'll tell you what's different, and maybe I'm just always an optimist, but there are

some positive changes in the financial system. For one, we don't have the trillions and trillions of dollars of derivatives and collateralized dead obligations CDEO squares credit default swaps that were built on the U S subprime mortgages, and that's what allowed UM, a small corner of the U S mortgage market, uh to then create this global damage and you know, throw the world into a global recession. All

of that has disappeared, so that's very good news. So the risks that are out there could create losses, but it's not gonna have the ripple effects that we saw UM. In China, they've got a different story altogether. Talking to me about China season quickly sorry. Uh. So, China has levered up, as was mentioned. The good news for at least the US of the world is that all of that debt is coming from Chinese investors in Chinese banks, So if there were to be a crisis, it's going

to be a domestic financial crisis within China. Now it doesn't have obvious international repercussions through financial channels. Of course, it's the world's second largest economy, so if China's growth were to slow down, that would affect lots of countries around the world. We're thrilled to develop that conversation this morning with Jean call Is, a former president of European Central Bank. Were honor that Mr Tuche could join in US and joining us as well the great euro optimist

Eric Nielsen of unic Credit. When Europe was flat on its back. Nielsen was pounding the table next to Francine in London, saying, no, Tom, it's not that grim. Let's start with Mr Nielsen. We're supposed to start with Mr Triche, but Eric, I'm gonna start with you. Brief Mr Triche on the state of Europe right now. Is at euro sclerosis or Eric Nielsen? Is it a Europe of growth? I think it's uh, it's by far closer to the

latter point you made Europe of growth. We have had years of one and a half to two percent growth not as much as you kind of would wish. But but if you look at it in per capita terms, we're doing basically as well as the US, and certainly if you look at for ninety of the population, because in America the growth really sits for the top ten and and we don't have the same income distribution issues as they have. Mr Trouchet, where us through this half far?

And yes we'll talk about brutal moves in the m but Mr Trichet on Lehman, one of the great observations interview to interview is that the europe banking system is behind the United States system. What does European banking need to do to modernize to catch up with what the giants of the United States are doing. Of course, you're

absolutely right. There is a big domination of the investment bank in New York and banks in the US in particular, which is very part toxical, because after all, the crisis was born in Wall Street. The epicenter of the crisis, of the big big crisis, which is as gray, wasn't as gray as the twenty nine thirties in the twentieth century, is really born in the US. But what you have to get in mind, is that there is a big

structural difference between the US and Europe. In the US, at the moment of the birst of the crisis, the financing of the U S economy was made through banks with only twenty five of the final SINGE and through markets with seventy five. It is it was exactly the reverse in Europe, twenty five for the markets, seventy five

percent of the financing for the banks. And that, of course is the first explanation because the recapitalization of banks in Europe was much more costly in terms of percentage of GDP than it was the case in the United States of America. There are many reasons for those differences.

One important reason is the existence of Freddie mac and Fannie May, which we are mentioned previously in On Your Skin, and that explains why a very large part of the financing of the U. S economy comes out of I would say, see my public institution, and not through the banks.

But that being said, of course, the European have a lot of hard work to do, and as you know, structural reforms of first importance have been decided, including the Single Supervision Authority, with the ultimate decision taken by the central banks, so the European where at I would say

disadvantage in terms of structural difference with the US. It took a number of decisions, and I'm very much on the side of the optimism that was explaced by the previous speaker, Mrs the concern at the time when Lehman collapses, and actually market participants overall, regulators, even central bankers to some extent, did not realize the intercondectedness of the banking system. What do we know about the banking system now? Is there a danger that actually we could go back to

that oh eight financial crisis. Well, what we know is that we have decided to reinforce considerably the resilience of the banks at a global level and through appropriate institutions in Basil, in particular with the backing of the G twenty. So a lot has been done to reinforce resilience. But that does not that does not suggest that if we

had a big new shock, we wouldn't have contation. And I thing that this is one of the emerging property which comes out of what you just said, the generalized interconnectedness not only between institutions, but between markets and between economies. At a global level. So that is that is suggesting that we must be very prudent, very cautious in all respect. And I must confess I am not that toron kill myself when I look at the overall global indebtedness which

continues to grow. When we know that the crisis came from many many causes. In particular, of course, one of the main cause was the indebtedness public and private at a global levels. This is an important point. Indebtness, where is it globally and are you talking about shadow banking? To two I would say, go to the bottom line. From two thousand up to two two eight, we had a very big augmentation of overall indebtedness public and private coming from the advanced economy ten pc for the em

from the emerging economy. After the crisis, we continue to grow leverage at a global level, public and private, not not exactly the same in various countries. And the big difference is that it's this global leverage augments because of the advanced economy and because of the emerging economy. So that makes an enormous difference. Still, if there is something like a global economy, if the global indebtedness as a percentage of global GDP is a good indicator of vulnerability.

Then we are in a very vulnerable situation. Mr. And I want to go to your engineering background here and talk about leakages, which is Newtonian physics. But let's go leakages within the financial system. Jean Collatricia, one of the great themes of our lookback of ten years has been the price in the cost of quantitative easy. What is the impact of these balance sheets that Draggy Powell and others have to face. What is the impact of those

balance sheets, and particularly Mr Tricia on emerging markets. Well, first of all, it seems to me that the central banks did what they had to do. They were in a crisis, which had not the central banks been bold and swift, we would have had a great depression and we would have been in a dramatic situation for all our fellow citizens in all advanced economy. So the banks, the central banks did what they had to do because

the situation was absolutely dramatic. And of course when the situation is much less dramatic, they have to withdraw progressively, which is being done successively because the sequence of events we are not the same in the US and in Europe. But we you see that they are progressively withdrawing so that there is nothing to say about that. It seems to me that the central bank did their job, and in any case, the counter factual would have been much

more dramatic. That's absolutely obvious. Now it's true that there is not on these central banks. They are not the only game in town. You also have, of course, all the other partners, private sector, the other institutions, the governments under parliament, and there I have to say things we

are not are not done as they should. In my opinion, structural reforms are lagging, and the most of the advanced economy and also the emerging economy uh not doing a good job in terms of fiscal policies, in terms of precisely augmentation of leverage in the public data and so forth. So we really have to mobilize old partners to be much more aware of the fact that if we want to avoid the repetition of the drama which took place ten years ago, we have to step in. This is

a special moment for us in economics. We've done that with Milton Freeman and Robert Lucas, we did that with Stiglets and Rogoff Otabos and now joining Professor Rogoff of Harvard University. Marianna Masakado. She is at the University College London and a very very important and controversial book out The Value of Everything. I'm gonna make it as clear as I can. The first forty pages of this book should be read by every single economic student worldwide. Ken Rogoff,

as it traces the history of economics. Mariana, I want to go to Ken on the Value of Everything. What she leads with here Ken is history, matters and economics from mercantilism, not the neo mercantilism of Trump, the mercantilism to Jevons and onto the modern age. Are we teaching enough Massicado history in our economics? No, we're not. I say we're not. That you'd be people now think economic

history was something before two thousands. EXCEP trying to tell them, you know that, you know what people thought about these issues for a long time. Our ancestors weren't so full. Uh. The rap, Marian is the idea here that you are touting some form of a Marxist agenda, and yet a careful read of your book is no, that's not the case. Give us the nuance here of inequality as you see it. So what I argue is basically that value used to

be hotly debated between economists. Today we have basically one theory of value that passes for econ one oh one and the value debates. Angeley has actually just gone to business school. So the word is talked about in terms of shareholder value, value chains, shared value. But we have a problem in economics that we actually have this tautology. We measure value by basically prices, which are supposed to

reveal value. But that's actually what allows someone like Lloyd Blankfeed, one year after Layman that we were just talking about two, with a straight face, say that Goldman sax workers are the most productive in the world. Because that's a Harvard faculty, we won't go there. Um. And so this is also why, by the way, yesterday the head of Nostrom Pharmaceuticals, again with a straight face, said that he had the moral imperative to increase the price of the antibiotic that his

company is producing by right to please the shareholders. So when we focus so much on, you know, maximizing shareholder value, which many people have criticized, but they haven't, I think on the full way to really debunk the underlying period of value that maximizeholder value assumes. Yeah, good morning from London. It's frenzy. How would you measure it then? I mean, you know, forget shareholder value. It's a price that you

can measure with minimum wage, with everything. So if it's not a price that you want to fixate on, how do you measure everything that's around us. Well, it's funny because Tom just mentioned up marks. But you know, we could also go back to Adam Smith and David Ricardo. They actually did something that in some ways is in the popular debate today. They really worried about production, the division of labor, mechanization and the fact that this had

on the profit wage relationships. So they had an understanding of value that was tied to the objective conditions of production. Forget whether it was the labor theory value or something else, but it had a fundamental connection to how we actually produce goods, how we organized production itself again through the division of labor. Adam Smith pin factory, and their understanding

of value actually then determined their understanding of price. Today we have the reverse logic, we start with price and we assume that reveals value. So it's not that we should throw prices away, that's not the point, but that's that that's very different from thinking that prices themselves, um are are or what value is? I we just think

of how we measure GDP. You know, it doesn't actually include all sorts of things that we know we're valuable, from care work to you know, if you marry, you're cleaner. GDP goes down um because something that was being paid for all of a sudden perhaps isn't. When we pollute, GDP goes up because we have to clean that pollution. So but you know, this problem is somehow has actually been talked about by feminists and environmentalists. What we haven't

talked about is how GDP is full of rent. There's a difference between rents and profits and when when we have a subjective theory of value, and by that I mean really based on preferences again, so it's preferences and prices that are revealing value, then it becomes really easy for rent extraction and I would call value extraction activities to present themselves as value creation activities simply because they have prices and so on a concrete level, what does

that change? So if we measure it differently, does it mean that we talk more about redistribution. Does it mean that actually would help with inequality and therefore with populism. Well, first, and I'd say the first most, foremost, we should admit that value is created collectively. So just coming back to the pharmaceutical drugs, which is really concrete, because people do die when they can't afford the drugs for such essential

medicines like antibiotics. You know, in the United States, the National Institutes of Health spend over thirty two billion a year on the research that actually leads to these drugs. Now, the prices of these drugs should obviously reflect the contribution of the taxpayer, which is enormal in the higher risk stage. A few years ago, there were a set of doctors at Strong Memorial Hospital in Rochester, New York, including your father, who had the government support of medicine. She's saying in

her book it's evaporated. I mean, essentially, we're not using government like we used to use government in the days when Strong, where your father was, was a massive research center. Is that true? First, honestly, congratulations on a wonderful book, and I agree people people should read it. Um you know,

there are two separate issues here. One, I think is the rise of monopoly in the economy, which is producing the rents that Marianna is talking about the failure of economists to define antitrust policy in this new wage of ideas. How do you define whether Amazon's monopoly Google to monopoly They obviously are an economists haven't figured out a good

way to say it. A separate issue is the size of government in a world where trade, where technology is producing things that always has but faster, and taxes and transfers need to compensate for that, or payments and kind in the case of health care, schooling is our next guest poses that this question was the financial crisis wasted writing a project syndicates him and how would say these

shares these thoughts. While financial regulation has been materially strengthened, which is clearly the most important thing, it's implementation remains in the hands of a patchwork quilt of national agencies. And that's how Davis joins us now here on set in London. Very good morning to you and thanks for joining us. So when you refer to this patchwork quilt.

Can we talk about the world in one conversation here or do we have to break this conversation up into two, Because of course the US did its thing on regulation, the UK did something different. I mean in the UK a lot of the power was put into the Bank of England, wasn't it. Yes? And the main point that I was making, well, I think there are two two main points. One is about the United States specifically, and there I think people should pay more attention to what

Paul Volca has been saying. Paul Boker, in my long experience of financial markets, is usually right, and he has pointed out that all of the analyzes of the crisis points to the fact that the US regulatory system was vulcanized and it was very hard to produce one coherent view. And that remains the case. The US remains the one country on the planet which regulates cash, equities and derivatives

by different regulators. It's the one country where there is a multiplicity of banking agencies, the Federal Reserve, the o c C, the fd i C, the state regulators, and where almost nothing has been done since the financial crisis

to rationalize that system. There's a second point at global level, and I think the two dimensions of that one that Gordon Brown has made today, which is, at the time of the crisis in two thousand and eight nine, there was a coming together globally of people who saw the world in the same way, who understood each other's problems,

and who acted decisively. Can we say that the basis of international trust is there at the moment with the war of words between Donald Trump and the EU, the UK splitting from the EU, not exactly warm relationships with Russia and China on these rants, and so would there be the basis for common agreements internationally if there was another crisis? And is this a real fear then within

financial services? Because I saw those words from Gordon Brown today, I also spoke to Sir John give X of the Bank of England, of course, was there during the crisis, and he made the same point. He said, George Bush Junior at the time was President President George Bush, and he was the one who approved some of the fed's action, even though he said Congress stood in the way and could we rely on the President of the United States to allow the FED to do what was needed in

terms of cooperation? How deep seated. Is this fear then in financial services here, I think people are concerned and they're also concerned about what weapons the authorities now have because interest rates remain extremely low. At the time, if you remember, there was quite a lot of headroom for the Federal Reserve and the Bank of England the ECB to bang interest rately quick down and to engage in

a large amount of QI. Well, they're still all over the financial markets through QUI and in the straight so hey they have started to go up in a bit more in the US than here in Europe. Nonetheless, there's not much weaponry left in that arsenal, so I think those two concerns are linked to Sir Howard, good morning. I want to talk here a little bit about Lehman, and then we're gonna have to migrate to Turkey. With the movement and lira that we see in Turkish lear. Right,

let's bring up the interdaan Leer. I really want to keep up to date on this worldwide Mr Arijuana speaking, and we've got a real explosion in Turkish lear as six thirty six out to sixty two. Howard, back to Lehman. If we could you took a commanding heights position as ahead of the f s A before the crisis more than anyone else. I know, you were the one that was supposed to maybe see it coming. By no means all right, were you wrong in your insight at the time.

But to me, it was the amplitude that surprised Howard Davies, the amplitude that surprised Noil Rabini and others. What did we get wrong at the time about scope and scale? Well, look, I don't want this to be an exercise and self justification, but just to be clear, I did leave the regulator in two thousand and three, and if you look at the explosion of leverage, it took place between two thousand

and three. Johnson has nailed this. You're absolutely right in June, in June of oh four, we saw this, So, sir Howard very clearly or tell us about that moment when leverage exploded. Well, what was surprising, and I think we did see the beginning of it in two thousand and three, was the arrival on the scene of derivatives like CDs in particular, but also the tranching of securities which allowed

people to magnify credit. And as you know, the these c d os and CDOs squares had just started to come on the scene, and I did comment at the time that I was concerned about the toxic waste, which I've described a rather vivid phrase. I guess at the bottom of this system, whereby the lower tranches of the securitizations were nonetheless being traded as if they were fairly solid assets. Indeed through some magical process though some of them were given triple A status by the rating agencies.

So I think we did see the germs of that, but the way in which it exploded over the next three or four years was a surprise to everyone. And I think looking back, you have to say, well, should monetary policy have been tougher, because monetary policy is, after all the most effective thing, And I think that in retrospect, interest rates in the U S should have risen more, and should regulators also have started to embrace these derivatives.

And I think that actually goes back to my Balkanized regulation point, because as we know now, there were lively debates in the S between the FED and the o SEC and the CFTC and the SEC who couldn't agree on quite how these derivative products should be regulated. And I think that's the point, like coming back to my first point that Paul Volkers making. Has that changed and you say, he's right, we should to him, we are

honored to have a morning with Brad Hints. I think who's stayed with us through TV and staying with us through radio as well, Brad Hints the former Lehman CFO and n Y you professor joint us now can monitor Brad, good morning. Let's look back ten years solvency crisis or aquidity crisis? What did that bank actually face liquidity, no question about it. You lost repo which you lost commercial paper. Your clients were selling back long term debt. Your counterparties

were asking for more collateral um. Typically, financial institutions don't die for lack of equity, They die because of a funding run. What is the response ten his on look like? Because what strikes me is amazing ten years on is there's still huge debate about whether the response was the right response from regulators, from government officials to allow this bank to fail. There was a mistake to to let

the let it fail. The you you scared the market, and in scaring the market, it was that uncertainty which led to the next thing, right, which was everybody pulls in their lending, everyone pulls in their counterparty risk, and you have a global credit reduction. Did it fail because there wasn't a Jamie Diamond there to write the check because he was preoccupied with a previous failure bear Stearns?

Was it just somebody? There wasn't somebody else equivalent? In other words, there weren't there There wasn't There was a marriage partner, Yeah, there was all or a divorce partner, whatever you want to call it. But I don't know where I got that. But but but Brad Mr Diamond was exhausted from bailing out bear Stearns, and there was no obvious candidate to take out Lehman. Is that right? Well, you you had Barclay's at one point, right, you had UM and and and certainly you had Bank of America

as another name. We we've all read the history on this that there were a number of things going on. I think the the issue you have as a management team at Lehman that was looking at this versus the history of other liquidity events. Right. As a result, their balance she continued to rise through nineteen through two thousand eight. Right, you said earlier, this was an opportunity for Mr. Full That's how they looked at it. Well, in terms of

liquidity events are an opportunity in fixed income. In essence, you're buying good assets at a troubled price. If you have enough funding to make it through the crisis, you're fine. Lehman had twelve months in their liquidity plan. And who would have guessed that a liquidity event in mortgage backs would swing across the entire credit market ultimately into the government mark. So you know, there was the the issue.

I think we have an example. I mean, there's an example of Solomon Brothers um facing a liquidity event in the ninety nineties and their CFO put their raised their internal costs to fund to put their balance sheet into a nose dot shed assets and that bought hom time and they made it through that liquidity crisis. Had Lehman done the same thing, I think of what Goldman did. Goldman not only did they made a bet against it, but they also did not grow their balanche. Goldman pulled

in their horns. Lehman did not. Leman and and and that was that that really set the stage as the as the markets became ever ill liquid. Lehman was stuck with a concrete side of its balanche. Its assets side froze, its liability side ran off, and you know, the end of the you know, the end of Lehman occurred. That the surprise was the FED right. Because the FED had taken action with Bear, and the FED had taken action by allowing the broker dealers to have excess to the

to the discount window. The assumption among observers was the FED was going to make sure that this was orderly, and the Lehman balance failure was not orderly, and there was the problem. So let's pick up on that, and

a final question, use the word panic. Officials now believe they have the structures, the regulations to allow for an orderly failure of a bank when it actually comes to it, if we ever have to face a crisis like this again, whether it's in ten years, twenty thirty years, wherever it is, do you actually see the government and officials applying the rules that they currently have to allow for an orderly

failure of a bank? Ever? Again, in the United States, the the FED needs to be able to lend wherever they wherever there is a need they're they're tied up too much at this point. In essence, we've established a set of rules that will be just perfect in the last crisis, and they we don't know what the next crisis will be. I mean, what this It goes back to Badget, folks. For those of you are not keeping score.

Badget was a London banker that uh in journalists who decided we have to be the lender of the last resort. If Mr Paulson was sitting here and Mr Guitner, they would state to you that they had a lender of last resort responsibility to bail out the system. Obviously they did that with an expanded balance sheet. In all that, in hindsight, how do we get forward as we look back, all with the luxury of hindsight, what's the key lesson ten years from now? What is the key lesson? What

do we learn from ten years ago? It's going to be the key lesson when this happens ten years forward. You need you need a strong team like we had those uh the three gentlemen who who who ran the crisis, step up and put their own careers on the on the line. Had they sucked their head in the sand, this, you know we would have had it faced a depression.

They didn't. They moved very very quickly. We can argue about whether Lehman was a mistake or an under resumation, but they clearly moved which and you can see it right to US economy. US economy has come back better than others. Red Hits, thank you so much, honor to have you with us New York University. If you are in Paris, you have to send someone to America b

MP Perry, but three decades ago sent Jean eve Fion. Critically, he was involved in the b MP for this transaction and has done tours of duty in Los Angeles where he worked on his tennis game, in Chicago, where on Lake Michigan he went sailing a lot, and wandered over to New York to command the b MP Perry BA flagship in America. Johnny Fion joins us this morning. We are thrilled to have you here at this tumultuous time

for banking. Much to talk about in the hour. First of all, what was a single lesson you've learned from the lemon tobacco? Well, by the way, thank you for having me. It's a pleasure to be here, and you're very well informed by the way my tennis game. Um. I think the first lesson was not all the crisis are predictable, and it was very well said before the world got a little bit caught by surprise, even though

some signals were already there. I think the second dimension we all learned was I don't think we had collectively to reassessed the interconnectivity between the various uh you know, entities and countries, and the world was already very interconnected. Otherwise, I believe that the world today is so different from ten years ago. It was already said, um, you know, the banking industry specifically, it's better capitalized, as more liquid, uh.

The stress the stress testing being implemented here in the United States now in Europe. I think I've provided a lot of improvements as well as all the work that has been done around living well resolution planning. I'm not saying this is a risk less I'm just saying it's a it's it's a very different governance at well. Up for American artists want to make their BNP very well. It's the dominant bank of France and with a huge European platform, a retail platform, but also an expanse of

and early vision to Asia as well. And the message this week Jane has been that Lehman was opportunistic in trying to get out front and to do do do Your bank is the polar opposite. Are do you worry now that in other banks we're seeing too much opportunistic tone that could get them into trouble. You know, Tom, it's an excellent point. At the end of the day,

it's sunny about sides, it's donny about business model. It's really about risk management, risk capitide, and risk identification, which I think the banking industry as a whole has made a significant progress to your point as it relates to be in PRIBA. What has worked well of the many

years is UH diversification. Diversification in terms of geographical diversification Europe, European leader, America's were deeply involved here in Asia, but diversification as well in terms of product mixed and in terms of activity. If if I go to our platform here in the United States, UM, it's a diversified platform. As you just said. You know, we have retail, we have wholesale, retail is Bank of the West, UM, we

have two and a half million clients. We do lending consumer finance wholesale based in New York is serving corporates UH domestically internationally sixteen thousand people and six billions sixteen thousand dependent the United I don't know that in the United experiencing Yeah, ivelean talk to me a little bit about whether the French bank differently to the Americans and so do you need to speak to your customer differently in terms of uh, you know, UH sixteen thousand people

in the United States UH six billion of revenues. This is the largest balanciet a location uh for the bank after France. Then in terms of speaking to clients here, we we feel very part of the fabric of the U S. Having said that, UH or I think one of our differentiating factors here is we can serve clients domestically UH probably as well as any other banks in

the product suite we have. But when it's time to cover them outside of the United States, let's say do capturizing acquisition financing for logeate log reates corporates in the urban market where we lead. This is where we probably can add even more contribution to the client base here. But to your point. From seeing UH based in London,

I'm sure you see that. Conversely, we've been very active in taking US European clients into the deep US market, leveraging or large distribution capabilities, particularly that distribution capabilities in the United States and having an ability to raise you know, US or or capital here and and euro UH in on the other side of the Atlantic has has worked pretty well, while the Transatlantic flow and dynamic has been quite active over the last few years. But how will

finance change over the next ten years? Is it to five ten years? Is it digitalization? Is it the way we work or is it the way that banks actually learn to each other? You mean you mean looking forward over exactly in the next ten years, how will finance change? Well, it's I love the question from seeing Think. At times I feel one year is a really long term for me. But I think said that, I believe that the the

future of banking here. Obviously it's around business model, it's around serving clients, but it's I think it's around other dimensions that maybe we don't speak enough. I think, for instance, obviously the first UH dimension is a technology. It's automatization, it's electronification, artificial intelligence. I believe that technology, if it's well done, is going to provide a safer world. And the concept of low touch and high uch to serve

clients more efficiently is happening. But this is part of the future. There is another dimension which I believe is very connected with what you do here at Bloomberg. This is sustainability. The banking industry as the real world to play in this field, to support the planet and the future of the planet better and I think to be really even closer to our clients value. This is really important.

Because I was in Paris with Francine for the parents of Reeman and Courseworks, we should state that Michael Bloomberg, the owner Bloomberg and these radio and TV properties, was very much part of that agreement. Does the Paris agreement still stand? Even as President Trump says no, I believe the Paris agreement, you know, Cup twenty one, Cup twenty two still stands more than ever as you know, actually in a few days here there was going to be

the sustainable a week from the United Nations. I think Michael Bloomberg, with his forearm, is going to be extremely active. My group CEO jama Fe will be in New York and we will be very proactive here. Listen, you love statistics and metrics, Tom and Francine. If you look at the world today, you have over twenty trillions of savings every year, new savings to reach the United Nations as as DJs you between quotes only need five to seven

trallion a year to reach the objectives. That's very doable. But the finance industry as a real world to play here. This bank BNDPIE has been one of the very first global financial institutions to actually commit to the u n to provide over ten billion off financing. Links to sustainability seems to talk about here of BNP parabout Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer.

I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.