The Weak Are Getting Found Out in Banking

And we could have tried to get someone from Switzer on this, but actually, who do we get in the end is someone we've been trying to get on this podcast since we started last year, I think. And it's like the perfect moment to have. I think Jim O'Neill, didn't you. Yeah, So when we started talking about the podcast about eight months ago, you and I Dave, we're talking about, Okay, who's the ideal economist who usually doesn't

pull any punches, talks freely. And of course it was Jim O'Neil, former Gorman Sax economist who coined the acronym brick exactly. And you know he was right at the centry things in the last in the big financial crisis of two thousand and eight. He has been a policy advisor, has been in the government. Of course he's a Manchester Uniceed deal expert. All these things are sort of converging at the moment. So finally he said yes, that he had come in and talk to us. I'm Francie Laquas

and I'm David Merritt. This is In the City, Bloomberg's podcast, connecting you to the conversations at the heart of the City of London, and this week we speak with former Conservative minister and Goldman Sachs chief economist Jim O'Neill. Jim O'Neill, the world famous economist who coined bricks Now the House of Lords? Is that me who ex Treasury minister was

what else do you have on your TV? I'm the chair of Northern Guitztone, which is a actually probably the most fun thing I currently do, which is relatively new, and to do that invests in startups coming out of Northern universities. Do you miss being in banking? No, not in the slightest, particularly now right, I mean the sort of analytical bit about how the hell do we get out of this situation? I'd enjoy, in fact one of the great things about my time and it is because

there were so many of those events. I often say one of the sort of few things I think I learned is how individuals. I think it's probably true bilder in life, but certainly in that world, how individuals responded during a crisis, and how the leadership of an institution responded would be the mark of how they did in the next era. In my view, I think it's true as certainly the best investors, but it's probably true of

an organization as well. What do you mean, Jim, So if they accessed public money then they're in a better shape now or I mean it more in sort of culture and leadership and sort of thoughtfulness about how you respond, and I guess below it what are we in? I mean is you know crises will always happen despite the best intentions of policymakers, because at the end of the day, I think there were consequence of the at one end greed and at the other end fear and whatever. You know,

And it's just human nature. But we all have these strange minds where we forget things, so nobody ever really thinks about that, although it's the reality. Then a crisis happens and most people kind of panic a bit. Typically people aren't being through them before and frequently don't make rational decisions about, you know, what's the right thing to do and what's going to happen. So ubs have had to bring back therefore Joe Motty, right, I saw that when I was walking in So if the all phone

rang somebody saying we need would you would you? Would you take up the mental again? No, I have too much fun doing things I do. It's actually ten years ago in a pullet when I left Gorman, I promised myself that that I was leaving because it was a nice time to leave for me, and nobody really expects me to leave. And I sort of dreamt up this mantra, if it can't be better, it's got to be different about what I'd do, and I've kind of stuck to it. Really,

But how would you fix banks right now? What's going on in the banking system right now? I mean to me, and I'm obviously I'm not in at twenty four seven like I used to be. But for my forty thousand feet I think it's revealed. One thing again that we always know is that whenever interest rates our eyes sharply, the week get found out. It is quite simple and quite remarkable how that theme just does repeat what's the great phrase history and never repeats itself, but it rhymes.

I mean, in that instance it is I'm really reminded of my days at SBC before I went to government. We're in ninety four, the gang I was with him, just the research guys, but also some of the traders there. We were very confident that FED was going to start raising rights, and we thought we were such geniuses and blah blah blah, blah blah, and we got completely hosed because of the broader things with the bank's exposure to

your bonds it was at the time. And it's just so difficult when that's happening, and that's at the core of this. And then but secondly, it's just so difficult for the regulators to treat every financial entity with the right approach. I think what seems to famous last words seems to be robust, which as a consequence of last time, is what the broadly put in place for big banks

seems to be robust enough. But what they made a huge error on and for what I vaguely read, I think the Silicon Valley Bank guys played a bit of a naughty game. Is they deliberately kept their equity size below the number of where they become subjects a full serious regulatory focus. And that's obviously an hour of the regulators. So I think I'm assuming all of that will get changed.

I think the Credit Swiss thing is slightly unique because obviously that is one of the thirty banks that was supposedly too big to fail, and it had the regulatory

net and that, But I don't know. I mean, another oddity about this, which is a contrast to eight eight, is that because short rates are so high on government debt in the US and the UK, you know, for any rational person that has a bit of cash exposed in the bank that they don't need, you can basically get the same rate of return in two years or

less government money. So what is the incentive right now to do anything other than put it in a government And that means that particularly for banks that aren't so strong in terms of deposit base, it's quite a lot of them are probably under the cosh as we speak. So we're going to see more in trouble or is this now contained? I mean, we have seen this mega deal in Switzerland try to contain the bleeding of the

system there but an SEB obviously has been resolved. But then, I mean, the interest rate situation is what it is, right, So is there more to come? You know? I think if you if you go back over the whole of my career, you know, I don't. I don't think there's a magic solution. Monetary policy can't solve everything. It's a blunt instrument in that sense. And what is the prime

job of the central banks? We've lived at for much of our generation, thinking it's to fight inflation, but every time there's a huge financial crisis, actually what their prime job is to ensure financial stability. And I think of what we've seen from them in the past three weeks, I think is actually pretty impressive in terms of the speed which they be outside, which of course is driven

by what happened in OA, and it's very impressive. And I think that tells you that in the event of some further big problems that especially starts to threaten some of the big guys, you know, there'll be more hints of border deposit support that Janet Yellen clearly flirted with and then she backed off. But the interesting thing is because of the tricky to measure but probably important mechanism

from those weekend banks that then curtail the lending. This might start doing some of the Fed's job and the Bank of England's job, another central banks job for them, right, so it stops the need for other eight acts. Yes, ortainly, if there's a credit crisis. When you look at our mobile apps, does it encourage bank runs? We had the City Group chief executives saying like, look, maybe regulation needs to look at this. So you have a lot of

online fakes. We had the you know, I don't know if you the pope with a big puffer jacket that was a fake, you head. There's so much fakes and there's so much mobile app I think this is a

perfect concoction. I think mobile phones have got a lot to answer for right for banks more broadly, so I'm still waiting for somebody to tell me why Facebook and Twitter or serve any useful purpose to society and more, you know more, if you look at it from a true macroeconomics perspective, We've we've had this staggering and I'm on the damn thing all day long as well. By the way, and we've had this stagging rise of this

during a collapse of productivity in the Western world. And I think it's a quite relevant issue to focus on about the rise of AI, because what is the point of all these things? If they don't boost productiviously, why are they useful things for society? Please allowed banks to have runs in false circumstances, then clearly it's not. It also runs a record. See people to queue around the block, you have to get your place in the queue. Right in England it was a day, yeah, exactly, which we're

very peace today, but so so. And you mentioned the speed of the regulators. But if everyone can pull their cash out in hours, you know, what can the regulators do to sort of catch That adds to the problems facing them. I mean, it's of course always so easy for people to criticize regulators, but that's one of the core things as to why it's so hard for them, because you know, quite rightly they've always got them all

has an issue at the back of the minds. And if they certainly wouldn't have supported Silicon Bank as quickly as they did, that could have been a catastrophe for you know, normal human beings. Never mind all of us closeted people who have been in the world of finance. And in Britain there was some praise for the government about how they responded on the on the SVB situation.

Over the weekend. They they brokered the deal with HSBC, and every one on Monday morning thought, look, Britain's regulators are working quite well. It's all quite neat. Is that

something you listen? I managed people I know in the policy world myself saying exactly that I thought, And you know this has not been I'm a cross bencher by the way, so I'm at liberty to critical neutrals, so I can criticize or compliment anybody on the political side, and this government or this colum of government has not been that difficult to criticize in the past few years. But on this I thought that it was very impressive policy.

The speed in which they reacted was very impressive, and I think they kind of you know, HSBC, it's probably a very very difficult thing to not do given the price to god it form. But is this the government or resist some woods at the Bank of England with

Andrew Bailey the regulator. I think I think it's almost definitely all of them, and I think it's a flat it's a to doncal reflection of the character of this Prime Minister and that in that sense, I think we have a couple of adults in the room for the

first time in a few years. You know, they might not be the most exciting personalities to lead a country in our chancellor as well, but I think it's a reflection of how they are as thinkers, because they wouldn't particularly wish because you know it was in finance, so

it knows straight away. But I do something pretty sharp, but I think the Bank of England guys played a big welty And as you said, Jim, it's been years, hasn't it, since it's been possible or since I've heard people you know in your position experience for lavishing praise on the British government doesn't become so easy these days, sort of through clenched teeth. So so are you a bit more optimistic then for the reputation of Britain or at the City of London in general with this administration.

I mean, it's such a subjective topic to talk about and so easy for the kind of crazy decisions this country has made in recent years to think that you know, the city's in trouble, but I'm sure from you and I over the years talks about this, we have some really basic, forty thousand feet unique advantages that are hard

to get rid of. And because of the sheer history of financial markets and therefore the depth of what might loosely be called the talent pool, and our regulatory system and our legal system, it's pretty hard for anybody else in this time zone to get even close to the role that London can play in global finance. But you know we're we're chipping away at the edges, that's for sure.

So what should the government do? And what if you had to give a report card to this government and regulators, what would it be Well on a tangential close tangent

part of it. I am partly involved in aspects of this now because I was asked by Rachel Reeves to lead this so called Startup Review into the future of small businesses and new startups becoming successful, because it's a huge seeming dilemma in this country that we have all these brilliant universities and lots of great ideas, but we fail to develop seemingly too many lasting successful businesses out of them in the UK and so that was quite

fun doing that. And I'm a big fan of those aspects of the so called Edinburgh reforms and they need to go further. It is bizarre how many assets are big pension fund and insurance companies hold and how little they invest in domestic risk assets. And we made a number of proposals which I think under a different government would be adopted. But as is the nature of parts of the Odd Way how politics seems to be conducted here, the incumbent government is also on the case about many

of those same ideas. Now, whether it's because they thought of them themselves or they're like, as they've done with other things, just pinch what the opposition is saying. But so I think there's quite a lot of momentum to use the freedoms away from being in the EU, and to play around with solvency too, to allow, if not force, some more long term domestic investment, whether it be an infrastructure or scale ups, or to empower the British business.

But that would be protectionism. Is that protectionism? If you force investment domestically, call it what you want. I mean, it's kind of what goes on in many parts of the world, and the US has always, from my experience, being so brilliant at this as being the leader of free markets, but being pretty clever subsidizing a lot of its technology businesses through homeland security for example, or through

the defense spending. I mean, would Google and others have actually ever been what they are if it wouldn't have been for support from the US early government, early on. And to be honest, and I think it is necessary because if you look, you know, and again I spend lots of time on this because of all the stuff

I'm doing around the North. But more broadly, if you look at Britain's biggest problem, which is low productivity and with it extremely persistently weak investment spending, we've got to do something about boosting investment spending, both from the governments itself but also on the incensives for the private sector.

It does entail if you do that, and I'm sure some regulators now because of the banking issue, will try to It may raise fresh risk about the mark to market issues of how you know, because it's long term investing in risk assets is risky, but no risk, no return. How can you persuade the big pots money to invest or will take on more risk that sit in the

city of London. I mean, you know, there's solvency two is one angle of this, of course, but how can we create more of an investment in risk culture in the city. I spend endless time on this, and it was it's the core feature of the Startup Review. But because of proposed and because the psychology of businesses will

labor might win. So a lot of big business people, especially risk takers in the space, have been in touch with me, and so I'm thinking I'm spending a lot of time on this every week, and I think the real answer is because of the culture we have and how long some of these things have been going wrong.

It's probably not that easy, you know. For the big, big institutional investment managers, particularly ones of a somewhat younger generation than me, they've been brought in a culture where dividend, dividend yields and guilts is all that they need to do. We've got to change the risk reward culture on that, and it will involve some possible cost, because who the hell is going to buy all these guilts if they're not buying as many, but we need to change the

way their incentives work. So one way links to solvency too, which I think is going to happen, is you change the rule in which they account for long term liabilities to have it more sensitive to anything other than guilt yields, because when you're real it's more of the US model.

I think it's more like the US model because when you certainly think back to it, and following the mad few weeks of Liz Trusts, you know, from my advantage point that disaster ended up being as bad as it was because we discovered that a large section of that crowd basically for the best part of a decade being taking hugely leveraged bets on guilts. And is that the

right thing for our long term institutions to do? And I think the answer is no. We need people to be investing in things that will boost the country's long term growth performance and whether that including, by the way, more of them holding publicly quoted equities listed in the UK, because that's partly why nobody ever listed in the UK anymore, because there's no domestic investors and it becomes a bit

of a vicious circle. In the days of when Maggie was first around, and we began to privatize some the endless state entities of the time before your time, I might suggest many many decades only the beginning of mine.

It became known as cool sid where you would basically have a huge campaign aimed at, you know, anybody in the country about how good it was for the country for them to buy shares in BP or BP so one thing you could do in that you could have you know, on the I don't know what the pension schemes are here, but on many of these days you asked to you want to invest in? Do you want your pension to go into equity or dividend or you can add two more. You say, these are all ideas.

Will they push it through? I mean, Dave and I spent a lot of time in saying, look, there's also the cost of living crisis. The government wants to be reelected like this could be low hanging fruit, but will they actually get it done if they have so much else to worry about. It seems to me that both mainstream political parties are working quite seriously on this stuff. And you know, the real answer to the cyclical, intense challenges with guys, we need to be able to grow

boost the growth rate in a non inflationary way. But if you just put sticking plaster on solving the cost of living crisis in the way that generally is trying to be done, all that means is when you try and boost the growth rate again, you're going to go straight back into it. So you've got to be able to boost the capacity of the country to grow without generating inflation. And again it goes back to adults being

in the room. If I look at some of the things they said in the budget, it's probably the most serious supply side boosting budget I've seen, certainly since the days of Osborne, and maybe a bit sorry George, maybe even a bit before, you know, on things to do again that I'm heavily involved in, on devolution and giving more powers to English regions, certainly the most serious stuff

we've since since Osborne. You know, we might be just a year away from an election, and it sounds like you feel that the other side of the aisle and Rachel Reeves they're not going to be radically different in their approach to this. I mean, I think that's part of the intriguing thing here. If you you did one of those games where you sort of dubbed Rachel's voice with somebody else's in the Tory side and otherwise with the current chancellor, would you know the difference on a

number of issues. Well, of course you would, because you're so savvy. But I think that I think in that sense, maybe we're coming a little bit about like towards the early nineces, and maybe there's a hint of board of things. You can see it a bit in other countries that some of the sort of lunatic fringe people of the past decade don't seem to be quite in the middle of the game anymore. But and so in that sense, I kind of quite welcome it. But you know, I don't.

I've got to know the opposition leaders pretty well and I think they're quite credible. People have united yet, oh god, I knew? And for how married? What we want to ask? What do you mean? I don't know what you're talking about? Who's united? Yeah? What? What? I don't get about the core issue of that. So many people don't seem to understand that one billion pounds it's like an enormous amount of money. There's you know, never mind four or five. You know, so there is literally very as as this

rather public That's a fascinating part of it. I've never come across a publicly quoted company having such such this game going on via in this get sports media to effectively try and boost the value of the asset. There must be some pretty fine issues about the whether the New York Stock Exchange should be having a look at that, because it's it's literally three months of this madness. But what it's revealed that there's only two entities for what

I can see that how do I put it? Seem to think it is possible for them to afford to buy this thing because it's a huge amount of money that they seem to be asking for. Can a football ever be worth that match five? Imp? I mean, I think early on when I was maybe last on with Francie annoyingly dragged some of this out of me. Then just play the tape on that. I don't think that the next twenty years for the commercialization of football is

going to be anything like the last twenty. So anybody that's spending that kind of money on the basis that they're going to get every turn on it probably needs to go and visit their GP unless the super League is back, but that wouldn't do it. But that's not

that's not enough that would help. But I think unless the Super League idea is proposed in a very different way and in particular to have relegation and promote promotion, there's no way famous last words, there's no way that the fans and for that reason, the regulators would allow him to do it in the foreseeable future. But is this all because of Chelsea? I think the United thing is United is unique again, going back to my deep,

deep obsession with that and my own history. It's somebody that used to travel around the world as much as I did. You know, as soon as I breathe Manchester And unless it was Japan where the cab drivers can't speak English or seem to preterm, they can't. They can't everywhere else, literally, Manchester United anywhere anywhere it is. It is a staggering, staggering brand. So United is quite unique.

But just you know, it's not impossible that the Chelsea guys put in peak football price because they paid a crazy price for it, and look at the mess that's going on there. According to my info, there wasn't a single buyer trying to get hold of Liverpool because it's a huge amount of money, and so you're really talking at somebody that has some sort of philanthropic type purpose. But even you know what person is going to devote billions of pounds to that unless it's part of some

border strategy they've got. Hence why there's only two, although the sellers seem to keep trying to create the idea that there's another six that nobody just knows about yet, which, come on, who do you think it'll go to get in trouble? I don't know. I don't know. I mean, I don't don't I don't know what I really hope, and they both know this because I chat with them.

I hope if the owners actually sell it, I hope the new owners treat it as the brand that it is, but have a real purpose and bring a connection back to where it's from and actually link it into Manchester's development and Manchester's role in the Northern Powerhouse, et etcetera, etcetera. Because if they don't, whoever buys it, they will find out a few months later that they might not be the most popular guys in the planet either, although of course the fans right now, desperate for it to be

anybody other than the Corent guys. Oil. Thank you so much, pleasure, Thank you, thanks for listening to this week's in the City. We'll be back next week. If you like our show, please head on over to Apple Podcasts or wherever you listen to podcasts and rate review on Subscribe. Yes, it helps people find our show, so please take a second and leave a racing. This episode was hosted by Me Francy Laqua and Me David Merritt. It was produced by Summersadi.

Additional editing was by Blake Maple's Special thanks to Jim O'Neil.