Anat Admati on Banking Regulations and Techlash

government regulations or protected by regulations. Turns out their business model is a little similar to the way the banking industry has managed to capture a lot of regulators and UH continue to operate fairly freely without the sort of regulation and capital requirements and equity requirements UH that would make banking safer. Really fascinating conversation about everything from misinformation

to technology, to banking and financial fragility. I found the discussion to be quite fascinating, and I think you will also with no further ado. My interview with Professor are not at Mahdi of the Stanford Graduate School of Business. So let's talk a little bit about your background. You have a lot of degrees. You you have a bachelor's from Hebrew University, then a master's in arts, a master's in philosophy and a PhD from Yale University. Tell us

a little bit about your academic journey. So my journey starts where I took a lot of math. I was good in math, and I loved math. That was very pretty, it was all. But I decided I probably won't be good enough to be a mathematician. So it was kind of in my romantic mind when I was, you know, in my early twenties, I was gonna take but not to give back to math, you know, that kind of thing.

And and so I had to find something. And at first it was going to be sort of applied math, like operations research, which was the worst kind of math, that optimization, and it's kind of boring. And but I got an opportunity to go to Yale, and these degrees were just kind of simultaneously gotten. I mean, I was out of Yale in three and a half years with all these degrees um and I just an opportunity landed on my lap to go to uh this program in

operations research at Yale. And I was promised that Yale is very interdisciplinary and once you pass your qualifying exams, you can do whatever you want. And had never taken an economics course before that. But when I got to Yale, my advisor said, whyn't you take microeconomics and take you know,

mathematical economics, and take some economics. And by the end of the first year I kind of knew a new language like and it was all much more interesting because there was interactions between people and equilibrium and you know, all of that. And by second year I took the course that was absolutely a mustake in the crowd that I was hanging with, which was Steve Ross financial economics. Yale didn't even have a program in finance. The School

of Management was just created. This was back in the late seventies early eighties, and he was just teaching people all they needed to know about finance, which was just coming up. It had become professionalized, when before it was just a bunch of disparate theories. So you find your calling in in economics, but you really take some of your background and dig pretty deep into financial regulations and technology.

We did the tech background come from, I'll tell you so that all I was totally in the sort of financial bubble first, kind of you know market microstructure, you know, trading mechanisms, this is the coint seven little black Monday, you know, small black Monday, not just that little one day glitch decline in one day something. Yeah. Yeah. So it was programmed trading and insurance insurance and all its replications,

strategies and all this stuff. Um, and so that was kind of the little crisis of the day, right in the little details. And that's before high frequency trading and all the rest of it. But then I worked on trading mechanisms and information get into prices, and informed and uninformed trading, and markets for information and newsletters and managed

money portfolio theory. And then and then I got more interested in in kind of governance, but governance in the narrow sense corporate governance and contract which was all about the problems between shareholders and managers. So that was that, and then comes the financial crisis. So until the financial crisis of two thousand seventy nine or however you go, actually you know time it, I was in this financial bubble.

I was teaching corporate finance. I did research, theoretical research, so I built little mathematical models and analyzed them and uh, and I lived in that little little bubble thinking all is well, Uh, until this crisis was like what just happened? And so I I never was interested in banking particularly. We have a lot of silos, you know, even within economics, lest and alone in all the social sciences and law and all of that. So we're eaching our little silo

with our little journals all this stuff. So I just got curious. Wait a minute. I teach corporate finance. The bank is also a corporation. Now why does it have like almost no equity funding? What's going on there? I teach people capital structure theory, and how are banks so different? Why are they so different? They hate equity with this passion, and so the more doug the weirder it got. It really like a fell in a rabbit hole. It totally was a rabbit hole, like curious or and curious, or

you know that kind of thing. Well, well, tell me if I'm oversimplifying banking, because what we've seen over the past half century before the financial crisis was simply banks figured out that the less capital they keep on the books, the better their profit margins appear, even though they're essentially just assuming more risk. And the better the profit margins are,

the richer everybody got. And so we've seen a half century of first deregulation, then fairly radical deregulation, all of which worked to the bank's advantages until suddenly it no longer dead. So in the book we go through a lot of the history of banking, including the basic banking model, which is sort of it's a wonderful life kind of three six three boring banking model, and that too had a crisis in savings and loan and in many other

banking crisis. So it's not like banking. Banking is inherently risking because inherently the bank's taking risk with uh with depositors money, and the depositors are unable to really behave like normal creditor. And that's really sort of the beginning of the sort of original sin in banking, that they're

always over leveled all the way. They are never efficient in in providing any of the services on both sides of the balance sheet, because they always have the temptation and the ability to take just a little bit more risk on both sides of the balances. The nature of fractional reserve landing well. But but but it's their incentives. So the key to understand it is it's not like essential or efficient. It's just that that's how they want it.

So so the thing is that banking is sort of inherently fragile because banking is inherently in efficient that way or forever poorly regulator, poorly controlled by their investors, including the depositors. So to that you add expansion in the business model that allows taking more risk, hiding more risk with derivatives, with universal banking, all of that, and the increase in safety net implicit and explicit, with the positive insurance.

With all of that, they became able and obviously interested in living more and more and more in debt. Now, in my research, even after the first after the book, we were already beginning to do this research, I understood a lot better. Stuff that we teach in basic courses is very static theory of how companies fund. And it's like one round of funding debt and equity and then

the world is over. But for real living, you know, breathing. Uh. Companies, any company, the funding decision as well as investment decisions are always made by shareholders or people managers on behalf of shareholders, maybe in light of previous commitment. So in the dynamics of it, once you took debt, your preferences changed completely. You're no longer maximizing in total value of the firm. You're maximizing the value of equity in the firm.

And from that perspective, equity seems expensive to all to

all heavily indebted corporations. Banks in particular because for other corporations, if they take on more and more debt, the creditors will start pushing, the creditors will start putting covenants, the creditors will will will jack up the rates because the creditors will worry about all the distorted incentives of the border lender that happen gamble the money in Las Vegas, or under investing things because there's not enough upside all

of those things that characterize sort of the frictions that characterized heavy indebtedness. So that makes the finance sector very different than the rest of the well, the banking, especially because the creditors in banking are particularly passive and and so therefore the the usual market forces that push against high leverage in other companies that just naturally, with no

regulation would limit. There's no corporation that lives it's healthy unless they're on their way to bankruptcy that lives with single digit equity numbers. Of course, it depends how you measure it, and there's book market all kinds of other things that we can discuss. But the bank's basically got used to and got stuck, and it's very addictive to be there, especial really at this extremely low equity level.

From that vantage, with the overhang of debt being so so heavy that you're effectively insolvent all the time, but you just not recognize as such. Then you hate equity, you want to take money out. So so let's stay with that point, because that's pretty fascinating. Uh. It was pretty clear to observers that the reason Lehman Brothers didn't get bailed out is they were not just a little insolvent, but deeply insolving. The Rest of the banks that were

out there that survived seemed to recapitalize. They sold equity, They brought more money in Goldman Sachs, took a big chunk of money from more in Buffett, uh JP, Morgan Chase, Sport Washington Mutual. They did more capital reserves and they ended up bear Stearns as well. When you say capital reserve again, I mean people get very confused about what that is that you mean more Actually, no, no, no, cash not cash is not equity. Capital is not cash.

It's on the other side of the balance sheet. Capital is about how you fund It's not cash reserve. Okay, so it's it's it's really important. It's let's delve into that, because it's very, very confusing. To this day you can find people saying, set aside cash, that's not what capital is about. Capitalist about Obviously there is the measurements of it at a given point of time. But when you when you take a snapshot and you say talk about capital ratios or risk graded capital ratios and all of that,

they are entirely on the funding side. So you've got your assets, whatever they are, they have some risk and whatever. However you put numbers on the on that accounting or and what's allowed and not allowed, and all of that is like a big can of worms. Actually, but you know, a netting of derivatives and all of that. But then

the question is how do you fund those assets? And so the question is how much gets funded by making promises to investors, by debt any kind collateral, non collaoral no deposits are very unique because deposits are unsecured debt to the bank, but to the depositors. To the depositors, they don't have collateral. Okay, so it's the fda SEE that's holding the bag there. Now does the FDA SEE even know how much rache they're bearing when all the

assets are so encumbered that they're all pleased collateral? Do they? Because well, they don'tsume they have a very vivid recollection. During the financial crisis of the f d I C talking about their reserves dropping from nine d to sixty I think it dropped as low as forty billion dollars and hey, if we get a bunch more disasters, well we're not gonna be able to cover the depositors exactly because they stopped charging. Also because there were no defaults

before the crisis, they stopped charging deposit insurance. And all of a sudden there was a lot of bank failures, not the big ones except for Lehman. But Lehman wasn't an FDS in short bank and so but when other banks, small banks started failing, what do they What can the fda C do in general, Well, they can go back to the large banks and just assess them more because they have no way and I can assert this to you, no good way to risk adjust their their deposit insurance fees.

They're supposed to be self financing the fda C through fees, but you know, they really are taking a huge leap for the posits for ensuring what by now must be like, I don't know, thirteen trillion dollars and more will come if there were tremors because money moves back in deposits for money market funds and all of that. So they ensure exactly. And so the f d a C, which

is a cease for corporation, is totally backed by the government. However, in practice they can They have a line to Treasury for I think five billion or something, but if should something actually happen, so we're all on trust with the system. They tell us don't run, don't rush, your money is safe, and I that no bank runs, so we solve the problem.

When you say that they stopped charging fees, I've been under the impression that the banks that have that nice little logo, the emblem FDURED aren't those banks paying some small Usually they do, And basically I once asked a forty year veteran of banking in all the biggest banks, you know, through the sixties, seventies, eighties, ninety who was basically came out of retirement to be in a private equity firm that was buying distressed banks from the f d i C. And he said to me, oh or not,

you're looking at the big banks. Let me tell you what goes on in the small banks. And then I asked him the following simple question, because there are thousands of small banks in this country. I said, what's the business model of a small bank? And the answer the answer was three words. The business model in other words, the positive Knight present value of the bank, he said, subsidized, the positive insurance subsidized. That's it. In other ways, their

entire funding. So what they do on the asset side, anybody can do zero and pivot, commercial realist or whatever.

And how they fund is where they where they are privileged. Now, what happens my model of banking, you know, safety basic safety nets, is that the big banks may well be overpaying for the past insurance part to the f d C and the f d i C, and they pass on some subsidies down to the small bank, so they keep happy enough and because the big banks have implicit guarantees that are priceless because they have access to the FED,

and that is worth a ton. In the financial crisis, Let's remember Goldman, Sachs and Morgan Stanley became bank holding companies. They were farms, they were investment banks are delated by

the SEC, which which also Lehman was. And at that time the commercial banks, so City Bank within City Group, were regulated, among others, by the f d i C and the fda C had Sheila Beart, and Sheila Beart refused to implement this buzzle too, that had fancy schmancy risk weights, manipulable ways, model based ways to uh to to allow the banks to tell us how risky they are and therefore determined their equity requirements, in other words,

mislead regulators. And there is the research that showed that banks in Germany that were allowed to use this advanced approach to this, you know, fancy scientific approach to regulation, were you know, misrepresenting their own risk and making more loans with less risk weights, in other words, inappropriately low risk weights. And then and then yes, and of course the epitome of of the failure of this regulation is

assets that had zero risk weights. But we're risky like triple A rated security, like Greek government lending to Greek government in Europe. I mean the banks in Europe basically fed this, you know, subprime lending to to to the Greek government. Why should Greece pay more in interest rates than another country like Germany. That doesn't make any Well, they paid a teeny sliver, but the French banks just

went and lent them a ton. And when they couldn't pay, the European Union and all these other countries and the regulators that who allowed these banks to make this reckless loans, who had just bail out these banks from investing in our real estate bubble, uh couldn't admit to their citizens that they would bail out their banks again if Greece default, so that they blame all the things on the lazy Greeks, and they kept bailing out Greece so Greece could pay

the banks until the banks got out. So that was the zero risk rate for sovereign landing in Europe. And it's just one example of how awful awful the regulation was pre crisis. And then you tell me that, oh, they were capitalized and did all of that. I'm not so impressed. Yes, you know, first of all, Bank of America and the City were zombies coming out of the crisis, despite multiple bailouts, both of them by almor and zombie banks.

I mean, I believe that they were the examples where if you wanted to have this systemic resolution through the f d i C, we could have tried it in a you know, not in a crisis, into a package. Show me that it works. Show me that it works. Uh,

you know, outside the crisis where everybody is failing. You know, I was on this FDA S Systemic Resolution Advisory Committee, was part of Dodd Frank was saying, oh, if Lehman Brothers was sent to the f d i C for resolution, because FDC knows so well how to do the small bank resolution. Just come over the weekend, take over a small bank, and the people don't even know because the exactly one oh five where they were moving all of this risk thousands of city areas, right, just just hundreds

of billions of dollars and misrepresents. Do you know to the regulators and to the do you know that the Leman bankruptcy is not even over yet every year I go back and check still going on. So this is how unresolvable these now. In the first affair, it was only fifteen years ago, so it was a small but

it was a small one by compared. I mean, this was the biggest bankruptcy at the time, but there were there were a fraction of JP Morgan, Chase, so City or all of these that they tell you now can fail with without and they have them do living with an all kind of stupid things. No way, no, because we don't. Even if they did, it would just be incredibly exactly So I'm not even blaming for bailing out. I am blaming for not for not doing basic prevention.

So so that raises a really interesting point. You mentioned the French banks and the lazy Greeks. When you offer people free money or dramatically discounted money, we shouldn't blame the Greeks who took Hey, this is a great deal. We're gonna take this. You have to look at the banks that lent it to them and said, why are these banks being so irresponsible and reckless to make such cheap loans to under the eyes of their regulators, Under their eyes of their regulators so their regulators are not

being called too. Why they allowed these loans to be made for two by two week to fail, you know, French and German banks. French banks had in two thousand and ten Greek band government yes, and and and and Greece only did a little bit of restructuring after the banks pretty much got out, left the TROYKA creditors to be a bailout fund of European nations E c B and I m F. Those were the TROYKA. Now why did I am F invest? Oh, because I am was led by some French because I AM should not have

intervened in a European uh, into European thing. You know, Europe had enough to be able to resolve that. They just didn't want to. So I am F being led by you know French people, uh, you know, Dominique class Can and then by the later by Le Guard who had to deal with it later in two thousand and fifteen, when they were kind of the adult in the room if you want to go. So let's dwar the ranch

banks and the Greek borrowers. There's a lot of people criticizing in the two thousands the U S homeowners who were taking helocks and refinancing and taking loans. And I looked at it as it's not the responsibility of the consumers. When when an institution like a large bank says we're gonna loan you money and we're not going to charge you interest for three years and then we'll reset, but don't worry about it, the individual consumer doesn't understand that, Wait,

free cash, where do I sign? It's the banks and their regulations. It's the lady in the come in the big short saying she's got five houses. You know, you know exactly so so the question no, exactly so degree.

That's why I used subprime to kind of as a parley. Yes, so reckless loans were made to people who couldn't pay, liars, loans who were clearly couldn't pay because of the commissions of the mortgage, and you know the whole structure, and you still had the FED assuring us everything was fine there, and you had a system incredibly levered and interconnected create through all these contagient mechanisms that we explained in the book, a perfect storm from a small decline in housing prices.

I mean, this should the correction. The price correction itself was you know, much smaller than then. Then then the Internet bubble burst, you know, which wiped out a lot of you know, paper wealth. And to put some numbers on that, the Internet peak to trough was about decline in the Nasdack camp, whereas I think houses fell about

some sectors something and then there was some of the faults. Okay, but I mean the amounts were trivial, really, And how do they create a global financial crisis from a little housing bubble bursts in the US? Securitization spread it through and and and so per duper triple securitization that our side beats basically on on on the mortgages and only the you know, the big short they made money. Quite amazing. One of your research pieces really caught my eye. I

love this title, is the Internet Broken? Tell us about That was actually the title of course that I taught with one of the producers of h M HBO Silicon Valley.

Well we'll talk more about later, which, yeah, which I got to be involved in in the last season only uh and and and and therefore it was you know, it was one of the one of the ones I streamed kind of had to bench stream sort of, but to see also the season I ended up at also being a cameo in the last last show with middle Ditch the whole thing and being there in the Stanford graduation and decorating his office and all that stuff. Anyway,

banking is super regulated but poorly regulated. But it's like born kind of born tided the hip with the the state, with the government because the central banks because of you know, so they're just because they are about money, they're kind of intertwined with government in why is it not everybody understands because there's still private corporations, but they are super duper connected. And just to put a little context about that.

In the in the first I don't know century of American history, they weren't They were completely independent, and they failed with shocking regularly because they were all because we had regulations that also prevented them from from diversifying, so they were very subject to local, you know, calamities, and they just kept failing. And they're privately issued. Money was good as long as it was good, and then it wasn't.

So then we decided to have a currency, and the whole history of banking, etcetera, until we got to have you know, national banks and these mammoth banks that consolidated and consolidated, and and and and still thousands of other of other banks. So just the bloated, huge system. But anyway, so I was basically I've seen banking since I started looking at it in two thousand and nine, and then becoming involved in that, consumed with that, lobbying for policy.

You know, how I get from banking to technology and internet. So here's what happened. So then it's two thousand and fifteen, I'm kind of I've already spent like literally five years of my life full time on banking where I just came to look, you know, and and here I was, you know, just just and and it's just kind of, you know, it's a bit sickening to kind of be in that environment. I'm like, wait a minute, I'm in Silicon Valley. And now at that point, there was already

the first round of what's called tech lash. You know, that was Canbrae Analytic Care. That was you know, that was when all these tech companies stopped being you know, the ones we love the most, and we started being a little bit suspicious. You started having the people saying it's addictive, and you know, that was the restaurant, not Francis Hogan, which is more there, you know, the more recent after you know, the election or whatever. But this

was kind of after two sixteen, you know, and into seventeen. So, um, I became curious about this sector as a sector just two because I come from my original interests in corporate governance.

Generally corporations run on behalf of shareholders and what's the implication, which in banking I saw were disastrous, you know, because they could get away with all this stuff they got away with which was extremely inefficient and and included all kinds of bad policies, tax subsidies of debt, all kinds of things that I saw no reason for and just somehow stuck bad bankruptcy any better. Well, so I wanted to check. So I'm like, here is a sector that

has an sort of an origin that's completely different. In other words, born free, born free in the sense that you know, they got started in the private sector. A lot of the even the innovations, the things that are unful that we take for granted, the fact that our email goes for free, that all of a sudden we have all these all these communication technologies and Let's remember though, that the Internet itself started with you know, with the government started with dark bar and all of that set

began with NASA, right exactly. So let's remember that that the government got it sort of started. And then obviously there were a lot of innovations. There was a mouse, and there was there of course, the browser, the first search engines, all of that in the nineties. So it's very young sector, uh, the Internet, and now we're all digital now, all the way to mobile. So first it's

desktops and internet. When I sort of in the eighties, we were writing emails in the eighties already, but it was then there was laptop, and then there was mobile, and so this whole move to you know, we got our digital everywhere and we're so connected in the Worldwide Web, which was pretty recent innovation sort of, you know, two thousand early two thousand's UM was fascinating to me in terms of how it interacts or not with with government

because people were beginning to think something's wrong with it. Privacy issues, you know, net neutrality, I mean, there were all these topics. I had no clue what the policy was. I ended up taking a dip into banking regulation and now what is there any what is the regulation of How is it different from telephone? How is it different from newspaper? How is it different from TV? You know what? What sector does it disrupt? So let me jump in

and ask a question about that. Section to thirty is a big regulation that tech companies get to use to say, we're not a media company and we're not responsible for misinformation. We're a platform. Tell us about section two thirty and what we should know. Yeah, so I didn't know about section to thirty until I started delving into this section

to thirty. What is it? There's a whole book about the nineteen words that inched the Internet, and they are and they are the government cannot you know, regulate, uh, you know, cannot tell these companies they are immune from any litigation on content now proceeding this, there were a lot of lawsuits that were targeted at companies that actually tried to moderate content, like compus that so you had, you had, you had these servers, these platforms, and the

ones that claimed to do some moderation like to keep it you know, family friendly or this, or that we're getting sued for content that was left up you know, some enemy of mind posted something that you know that I was related to Columbine or some nude pictures of me or whatever, and they constantly had to deal with with being sued and so they wanted, uh, but the government. So there was this sort of a bargain made with

them that we will give your immunity from lawsuits. And the idea was that they would enable you to moderate. In other words, you're a platform, not a creator of original because people just post, okay, so you're not responsible for that content. But of course then comes the slippery slope, which is news feed, which is the data gathering that happens. You know that that you know that that Facebook, for example,

collects and then ultimately misinformation and disinformation. Exactly are these companies being responsible members of society or they hiding behind when they they they're obviously for profit. I mean when Google started, you know, and in that class we dug into it. When Google started, the creators of Google where at Stanford, uh, and they said at the time they didn't like advertisements. They thought search should be run as

a nonprofit in the academic domain. And the Google started with a Stanford Google search and then a web search, so it started right at standard, just like you know Facebook was was for you know, for college students to meet people. And so then you know, Internet bubble bursts, and they wanted to you know, get funding and go public and all kinds of things like that. And then investors who tried to buy them for a million dollars and they said, let us think about it, and it didn't.

The deal never went down, and it turned out to be quite financially remunerative to them, to the Google yes, And so then they have their venture capitalists and they have the people breathing down their necks to produce, uh, and all of a sudden, all their nice words about how they're against advertisers, then they were sort of you know, uh they they that was then, and then they found more and more and more ways to monetize the predictiveness of where people are going and sell that to advertisers

and targeted ad and all of that by then also destroying NewSpace papers, especially local newspapers, and therefore becoming and then of course the way they curate. So now you're gonna say, I didn't create this content. It's not my content. You know, I will have some filters to remove you know, naked people or whatever else and um, but but now I'm gonna I'm going to curate a news feed to

you that I think is what you want to see. Now, maybe what you want to see is the things that you know you're gonna get aroused by that create engagement, which became sort of the mantra for what they were looking for is to get you to spend more time and therefore give them more information. So you kind of trace the business models and you step back and ask what has that working out for us? And uh and

this surveillance capitalism, what will do with calls, etcetera? You know, was beginning to not not work very well already in two thousand, seventeen eighteen, and and the Silicon Valley HBO series in the last season was sort of seeing that trend, and they wanted to kind of capture the fact that all of a sudden, Zuckerberg is in front of you know, of congressional committees and and they're the sort of beginning

rumbling about what's going on there. So so let's break this down to a couple of different topics, because there's a lot of things going on, especially when we're talking about Google and Facebook. So hold a side. Local newspapers and others that were hurt by Google, Facebook, Craigslist, eBay, go down all the lists of things that they used to generate revenue from and a lot Zillo is another one thing. All the ad revenue streams. For now, it's

pretty much subscription and a little bit of advertising. Um. But let's talk about some of the big things you you've brought up. Um. One is misinformation. The other is the engagement that the algorithms are driving outrage not information. What are the responsibilities of of these companies and what are the responsibilities of regulators to to look over these companies and say are they doing a good job or are they causing societal damage? So I deve deeply into it,

and I'll give you just the brief answers. First of all, you know, there is some debate about whether you know why our ecosystem of sort of just engagement, you know, with each other has gotten so toxic. And you know, you can you know it doesn't It's not all from the Internet. I mean you can talk about you know, cable television and you know Rush, Limbo and and Fox News or whatever whoever is your your you know, uh channel that you think is is America's news network news Max.

So some of it is extremists have really got extreme. So so exactly so, we had a certain polarization with all the proliferation of of of of media outlets and people choosing you know, their silos. So it's no longer the evening news you know that gives you the truth anymore. Everybody has their own truth and the Internet is just one place where that happens. Now, the problem with with the internet, and I think what what needs to happen.

So first of all, this country has a First Amendment, which means that the government can't do much, can't stop you from criticizing the government or engaging in political speech. There are areas that can be restricted, but very little. Well yeah, we're we're at the mercy of these private companies. Now. The what we can do and what we can regulate is just, first of all, what happens behind you know,

what is actually going on? What are people seeing? Let's see, let's you have researchers unable to access the data to even know how much misinformation? What are people reading? I mean, you don't you know even in companies, yes, because they don't release it because they do not they are not forced to disclose relevant information to to the public, to researchers, anonymized at all, but just so we can understand what

their impact on our lives. That seems like a pretty fair trade for the government to say, we're going to continue giving you Section to thirty protections, but in order to qualify you have to release all this data. A lot of data is the absolute starting point of that. That seems like a fair amendment to keeping all these So there are a few there are people more involved in that policy debate. I basically became conversant enough at least to teach a course. I haven't done a lot

of writing on it. I basically took it into my examples of two sectors banking and the Internet that sort of seemed to have some kind of a clash with democracy basically because of the the need for government exemptions and regulation and support in some way versus just the wild West unfettered, because because you know, the government is always there. It's what it does and what it doesn't do for all sectors. It's the rules of the game

for the economy, and they affect all companies. That's labor law environmental laws, you know, all kinds of consumer protection laws, you know, and some specific regulations you know, airline regulation or you know in others the rules, the speed limits, that the rules of the road for for companies and for people. Okay, you know, are you allowed to do

mandator arbitration or not? You know, there's just thousands of things that were the law in general, not specialized to a sector, but just the laws that exist, interdiscrimination or you name it. I mean Facebook got in trouble for allowing people to to mark race as as as a as a thing in and put housing ads in front of the people from certain race that was there. Was against its supposed to be. Yeah, so they got against basic civil rights law. Uh. That so they have to

interact with all laws. They have to obey all laws, minimum wage, you know, all kinds of laws. And so now that's my current interest, which is the corporation as a legal person. They are not a set of assets owned by shareholders. They are a separate thing, right, Twitter is a thing. They have a board, they have shareholders, They have various stakeholders. Everybody has some claim or some control in some cases. How do they how does the corporation as a legal person interact with the rule of

law in general, they have rights, they have responsibilities. Whose home to get more and more rights? They send the lawyers to get more and more rights in the courts, political speech rights, religious rights. You know, they get more and more rights in the courts, and responsibilities. There's kind of nobody home when you come for you know, you caused harm when you come for say Bowing or Purdue

or you know, p Jenny, all these companies. You know, that's where I'm interested in now, a corporation living in a legal environment. Who are they? What if they harm? What happens? What can we do? Well? You name some companies that have run a foul of the government because they engaged in some pretty bad and sometimes reckless or even illegal activity. So you mentioned Boeing, Um, they didn't do a great job with their seven X right that

that was problematic. They took a bunch of shortcuts. Arguably they did not follow their own internal when they were competing with air Bus. Right. Um, you mentioned Purdue engaged in all sorts of behavior where it was pretty clear, hey we can't ship this much now that ship that that was all the enablers around them the McKesson and all the pharmacies and all of that Purdue other internal This is a town of people. Why are they get

that was a distribution. They were marketing it through the doctors and to the public, using false claims and misleading deceptive marketing. Now what happened, No individual in Purdue was you know, the three were criminally charged a couple of library.

So so you got that that's a problem. But yeah, but you know, the Sacklers took away a whole bunch of money to a private company, and then they sought release from the bankruptcy of Purdue, not themselves, released from all civiliabilities, which a court above bankruptcy court, you know, struck down and now where we were nowhere. It's a mess. That company, you know, cannot possibly make up for all the harm they cost and what the Sackler's name is

obviously not as prestigious as it used to be. There should be some claw back of the billions of dollars that were extracted. This is like fraudulent conveyance. I mean, you know, in bancruptcy usually you say you took money out, you diverted money, you know, knowing that this thing is gonna collapse. Yeah, so ahead of bankruptcy they can look back acting on behalf of the but they were the owners,

I mean so exactly, so the creditors can. But now the creditors of Purdue are, you know, mostly victims and insurance companies and the government. And you know, so in the bankruptcy court all these stort victims, including people whose family members died, people who are addicted, you know, Medicare, all the insurance companies that had to pay, all the municipalities, all the states. I mean, you've got claimants from here to and and the Department of Justice comes and says, well,

you you call Medicare fraud. You know, we want billions of dollars. Who gets the little pie that that's for the judge to assess. But you can't assess those damages without having access to the capital. They said, we'll throw in four billion dollars and give us a release and we're out of here. And where is that right now? It's it's nowhere. I mean, the bankruptcy court is back to They had this sort of an agreement and it was thrown out, which is very rare, and it tells

you how agreed. Just the behavior was. It's really rare. You have to really go out of your way to mess up for a bankruptcy court to say that, No, it wasn't the bankrupt st they chose. They chose a particular bankruptcy court, a particular bankruptcy judge. This is shopping

exactly form shopping. And then that judge was favorable to these master agreements and and gave them that, and the other courts said that doesn't make and so now it got the bankruptcy agreement is back at the bankruptcy court. And the victims, by the way, I'm not sure, but the victims anyway, we're publishing saying, well, I wasn't going to get very much. Maybe I was going to get, you know, three thousand dollars or one thousand dollars, and

now I may not get anything. So they were even they signed because it was so little they were going to get anyway. Uh so it's it's all full speed ahead, litigated, and well the question is so, so here's the question for the victims. You know, can they actually go after the sacklers? The sackler's money is abroad, how can you actually find it? This is like the discussion we have today. You could track that down and claude back if if

it's complicated, it's complicated. I mean that's like how we's now say, Well, you know, can Delaware you know, chancery court make Elon Musk you know by Twitter? It's like, okay, the court can decide, but what muscle does the court even happen? I want to talk about Elon Musk and Twitter because the question becomes our contracts enforceable? When when someone says can they make him do this? I don't know his ascess from in the United States. He signed

a binding agreement. It's up to the court to just to either enforce that agreement. You know how these things happen in the eleventh hour, there'll be a deal cut because no one wants to take a risk of finding that out. Well, the question is what actual you know, literal power does that Delaware chord have. Uh, you know on Ellen Musk, he's known for you for saying the rules don't apply to me and mocking SEC and making

a joke out of SEC. Whatever Delaware courts want to continue people incorporating in Delaware and enforcing contract law, then they have to really think about how they're gonna enforce this because if he walks away Scott free from this, then Delaware just lost. Yeah. I mean, you know, among the books, there's a book called what's the Matter with Delaware?

And uh, and so that's quite I mean the fact, you know, if you start going back to the origins of incorporation and why we even have corporate law in this eight and why Delaware you know, is sort of the state that matters to the whole world on an uncorporate law. That's that's the only business model it has for the state is these fees. You can become a corporation ten minutes if you if you paid it's not that very much without even identifying yourself. And that's like

a whole other kind of warms. Why is the US so slow in in in you know, basic basic transparencies that you have more transparency in China. You know, David Barboza was able to track the wealth of the top Chinese people through chains of corporate ownerships because for it's a little bit of money, you can find out the actual beneficial owners of every private corporation. And that's another corporation that you can pay a little bit more in pain until you get to a person not in the US.

In the US, you know, because Delaware likes it, and because other states to compete with Delaware like it, and because the legal professional likes it, we somehow sign on all kinds of agreements that are sort of you know, for transparency. After all the scandals, the Pandora paper, the Panama paper and all of that, and then and where

the laggards in the world. So right now, finally because of sanctions on on Ukraine, etcetera, we have a law going through the Enablers Act, and that is expansion of the bank Secrecy Law, which is basically your know your customers.

But we had you know, Finns and uh. You know that the Department and Treasury that gets all these suspicious activity report you know, leak and we saw what happens to all these banks that file suspicious activity report and still process the transaction and nobody has enough resources in the Party and Treasury go over and the money laundering is just pervasive. So dirty money. When we talk about jurisdictions taking dirty money, you know, it's a competition between

US and UK. You have American cryptocracy on one hand, you have you know, Butler to the World and all kinds of other books money, land and and cliptalk see um Lecto Mania saying that the UK is the winner on this. You know which one is more um over Home to dirty money but Ler to the world is like, you know, we were no longer an empire. But also if you want something hidden, you want something taken care of, the butler will take care of it. Quite quite fascinating.

So we already talked about borrowing and how that magnifies risk, tell us some of the dark side of borrowing and what we should be doing about that. So the use of debt to fund things, meaning I give you money, then I get an IOU from you, okay, uh is pervasive throughout the economy. I mean it's sort of a particular contract that that gets signed all the time, and a lot happens by using that funding, okay. And we seem to encourage it unnecessarily for buying houses or for

funding corporations against other forms of funding. Well, when you say for buying housing, how else can you buy, Well, it depends if you want to subsidize it or not. In this country, we subsidize homeownership only if you borrow through taxes. So we don't need, we don't need that deduction. That deduction has got doing nothing good. If you want to subsidize homeownership, choose the people you want to subsidize, and then for example, you can give them a little

tax credit for their down payment. So in other words, instead of making the interest you pay on your mortgage deductible, you can make the down payment deductible. And that would encourage for homeownership. But but specific people, not the rich, because right now housing subsidies, even with poor people, specific housing subsidies and vouchers that nobody takes, and all of that, the most of the subsidies for housing go to rich people. I mean that makes sense. The more the bigger the

house to be bigger the deduction. It's a regressive places it's been capped, but it should be canceled, and many countries don't have it now. For corporations across the world, the historical mistake was made to allow tax doctibility of interest. Where you know that funding is a funding expense not a business expense, should not be considered a business expense. We should not favor that over equity funding for corporations because they can always have access to their own profits

and two investors. Because that's global, that's pretty global. Some countries try to fix that. So there are some papers about that tax bias. Well, I think that, you know, I think Belgium's tried to have some there were other countries that were giving impure, you know, something to dividends

and try to fix that bias, that tax bias. It is well known that the tax bias, UH of that over equity is a distortion and the economy, the economies had periodically starts and even Bloomberg here Bloomberg view UH screams every so often to stop that, uh, and somehow nobody is listening. So it's just this persistent distortion that

we never fixed. In the United States, the bias towards debt over equity is distorting capital structures in corporate America because debt has a dark side, precisely for that reason, they're the dark side of that. I mean, I already mentioned the sort of addictiveness of debt at high levels, okay, which is especially true for banking because they are heavily indebted fundamentally and because they have all the safety nets that make their creditors more passive. UM, and that allow

them to wratch it up the debt. So I have a theory paper that I learned a lot from called leverage ratchet effect and Jona Fanesce two has an eighteen. Anyway, so what's a dark side? You know? When I teach this and I also teach undergraduates. And by the way, I'm not even teaching finance and economics anymore. I'm teaching so interdisciplinary that it's it's listed in political science and it sort of has a lot of law. It's it's very out of silo, it's very very crost disciplinary. Um So,

I took my class out of the financial listing. It's kind of a general kind of class. Let's call power in finance or business and government, power and engagement, those kinds of courses where I start with like human rights and I talk about corruption and all kinds of words that usually are not to be heard in the business courl But anyway, there uh back to the dark side of borrowing of that. Um So, you know, as long as you keep your promise, everybody is happy. Okay, what if? So? So,

there are different terminologies that are important to distinguish. There's the issue of default. What if you just don't pay you promise, and you don't keep your promise. Now you know, stuff can happen. You might end up filing for bankruptcy. But bankruptcy is a legal process, so it has to be separated from default. It can happen before default. You know, Pigeon I filed for bankruptcy. Companies filed for bankruptcy without

defaulting to seek protection from their creditors. Okay, So bankruptcy is like an legal option that is for for you know, to to kind of get from from all the overhangs of that that prevent you from breathing. Okay. It's more of a full repreemptive restructure. It's supposed to be. It's supposed to be sort of forgiving, not for an individual. Again, it's like a fresh restart or forgiving of taking too much that. But if you use it as a shield

like we discussed the Sacklers, etcetera. Or if you start spinning off a subsidiary, is it's going to take off your talcoum liability. If you're Johnson and Johnson using some to Texas to step track or whatever, or your visor and you know, and they found you guilty of some fraud and you just put it, yes, Fiser, Yeah, we asked Jode drake Off about that. Well, uh, and he'll take you their own recidivist. In the Southern district, there

are a cidivice corporation. He loves to give the example of Viser even after the after the COVID and and he says they would keep coming back. They would be a deferred persecution, So why we keep deferring it? And then once I insisted they admit guilt, they send the liability, the criminal ability to a subsidiary and they failed that subsidiary and go and completely continue. And does that shield

the company from liability? They managed to find tricks to shield from liability all the time, or two to just sort of shift the liabilities around kind of in between all the contracts and the covenants and all of that. So there's a lot of shielding, uh going on. But in any case, that's if you're clever, if you're an individual or small business, you know it's hard, it's it's harder, it's harder for you to play those games of liability

shifting anyway. So you know the dark side is that you have that your decisions once indebted are very different and potentially very inefficient relative to if you're just doing things on your in your own money versus that that board money and a little bit of your own money, because you're gonna take excessive risk, You're gonna gamble for insurrection,

take excessive risks. So you're based in favor of risks, in favor of more boring, and against certain boring investments because they benefit from those, and that present value of those kind of first goes to the creditor because you're after So you might be based again making a boring business loan if you're a bank, because you want to go play derivative instead. So so you talk about the problem of working with other people's money, meaning whether it's banks,

funds or private actually it doesn't matter. They get to speculate with op M, keep the gains, but if there are losses, it goes to rights. So how do we how do we deal with that in our financial system? How do we make our system less fragile than it appears to be, the first thing to do is to counter the forces of that intense desire to keep leveraging, which you know, I sometimes say the more they hate equity, the more I know they have too little of it.

You know, it's like their intense hate of it says, I can't live unless you give me cheap debt to keep rolling my my debt. You know all default, terrible things will happen or whatever. So they have always access to funding, especially if you're a two big to fail bank. The creditors will just not think, especially if they lend to you with collateral in short term, that that they will be harmed. You know, once they think they are harmed, you know, they'll start running off, etcetera. So you have

fragile funding. The only counter to that is not you know, clever death that converts to equity that nobody's going to ever trigger, which because we've seen that is playing old equity. Your earnings, you know what I mean, You have profits that you pay out. How will the world be harmed? You know, for ten years now, the book is almost ten years old, we've been asking every so often, you know,

macro economies. All kinds of people speak in this space, even academics, saying, just tell me one thing, as an economist, how will the world society be harmed? If the banks retain their earnings, there's still their money, never played. But they but you put the money to good used, don't burn it, you know, invested. You know, if you're invested something safe, the risks of the shareholders will go down and they require return accordingly, because we know financiers can

return our into two wind risk and required return. Why is Warren Buffet never paying dividends because he's investing the money on behalf of his shaholders. So are we not so one Buffet himself when he invested in paying I know when he well, yeah, because that's a more texted advantageous and comes back. You know, it's funny, you keep it keeps circling around. It often comes back to what's most tax advantaged. How you can to somebody else, If you can shift the downside to somebody and you can

beat the upside. That's the bright side of leverage for those who take it, if they can avoid the downside. So the homeowner may or may not, you know, be able to avoid the downside. But homeowners levered up took you know, cash at refinancing and re levered and basically cash a refinancing when the housing prices when the house price goes up, is the same as paying dividends when you make profit. It's the same. I ask my students, what's the equivalent of cash our refinancing? Bethany McLean wrote,

the house is not a credit card. But that was the ads, you know, take him, take your home on vacation, you know, before the financial crisis. So this is like the dividends that their regulators are allowing banks to keep paying even though they live on pathetically low equity meaningful equity levels. Now they don't default, so you don't see that they may well be insolvent. We just don't know it because the accounting disclosures don't really show you. How

should we fix this? What should banks and financial institutions be doing differently? How should we change the task code and the regulatory You know, first of all, you have to ease out of that of that tax preferences, and and secondly you just against what their incentives are. You know, if it's a tax subsidy, it comes out of somewhere.

I'm even willing to settle on the tax bill as an amount of cash that they owe, that's a function or that's the same as right now, except if they didn't level as much in order to get that same tax bill in other ways to lower their tax bill, because it's the fragility of that overhang, the inefficiency of that overhang, that is making the entire system fragile because in the dynamics of contagion, which we explained the banking dominoes, you know, one default on another like we're seeing in

crypto right now, and and um. And then there's the information contagion where you know, I'm now worried that this whole sector or is going to fail. You know, Leman fails, and the next thing to fall is some other banks in the same business. And that was, by the way, a concern of some people in the FED, even like Kevin Walsh Uh after Bear Sterns was bailed out of that's because they all owned, they all own the same thing. They were to one another exactly. So people talk about

Lehman like it's a domino that sent it off. I love to describe Lehman Brothers as the first house in the trailer park that the tornadoes. I have visuals in my ted X talk that basically have tall buildings and a color code them red for that grain for equity very little, and then the green disappears and they top along one another, and then there's Uncle Sam kind of trying to trying to kind of uh so it all comes back to insufficient equity relative to way too much that.

Oh yeah, that's that's just the most obvious thing. That's like the no brainer thing. So when you look at it, as I came and looked at it, I'm like, why are we here. There's a simple, like costless fix. You just rearrange the financial claims in the economy so where the upside, the people with the upside also bear the downside. That's the way it's supposed to be. It's not supposed to be, you know, it's privatized gain socialized losses. It's supposed to be. And this is a basic thing, bipartisan

and everything. Didn't DoD Frank fix some of this, or it was reputed to have fixed some of this, or was it watered down that much so dot Frank. So let's just be clear on what dot Frank was. Dot Frank was a massive law with you know, a thousand pages. Dodd Frank gave authority to regulators. DoD Frank gave in Title one to the FED to solve the too big to fail problem, to do whatever they need for financial stability,

and the FED is still failing to do that. Really, yes, so why have the bank's been relatively stable for it? Just because they don't It doesn't mean they're healthy, I guess, I guess, just doesn't mean if you if you're bloated and inefficient and taking up much of more of the

economy than we need because you can. And meanwhile, you know you you're paying yourself and all these people, all these salaries where we should have a more efficient financial sector and instead it's so bloated and so profitable it comes out of somewhere. So you know, to to me, the banking sector is not healthy just because it exists in profitable. It doesn't necessarily mean yeah, you're you're you know, you're you're you're overweight and unhealthy, but you have the

feeding tube, you know what I mean? Whatever analogy, what do you think is going to happen? So not I'm not gonna ask you for rate for casked or what the Fed's going to do the era of cheap capital and free money and zero interest rate clearly is coming to an end, are we is the tide going out and we're going to find out who's been swimming naked in banking? I don't think so for banks. Actually, you know, higher interest rates could be very profitable. Yeah, more spreads.

So they're actually having some trouble with squeezed you know, yields. Uh So the pushback to that, Hey, they weren't making big spreads on lending and they still managed to not implode. If they could survive zero, they should do well at two or three. But these but these banks have so much, so many ways to make money. I mean, look at

look at you know, look at the COVID. Okay, look at how how they made money through COVID with the supports to everybody, I mean banks, with the vehicle through which we gave p P longs and what was But it went fall for the banks they were given. I think they they took the money at the quarter percent and were paid one percent. So that's the spread right there on hundreds of billions of dollars. And then there was fees, and it was riskless, it was guaranteed and forgiven,

and so they took no rice. They did hardly any credit worthiness because we were rushing to give the money out and and they were not liable for for for checking the papers because it was also rushed, they gave a lot of it to their favorite clients and then we needed to give more of it. Was a lot of fraud also built in that too, and uh and a lot of companies that shouldn't have it wasn't meant

to God. And then the Fed was standing ready and started buying corporate bonds and that was a huge that spray for the entire corporate sector, which again the investment banks benefited from from all this. That party that went on, and so you know, it was it was wonderful life. And during COVID in the in the banking section. You know, it's funny you you brought that up because in the United States, we have a tendency to ask the corporate

side to do things that should be government business. So if the whole idea behind PPP was to keep people employed in small and medium businesses, why get the business involved. Why isn't that directly from the government. And the same thing with healthcare. Why is so much healthcare through businesses instead of directly through some government entity. Please leave businesses out of it. Do let the government do its responsibility

directly with the citizens. So around at the start of the finite of the COVID crisis, there were there was a letter organized a few hundred academics and law, finance, economics signed it telling the government before the right around the time of the Cares Act, first one, to not give money to corporations, to give it to people who

needed so. In other and part of it was logistical in this country because you know, you basically you have the data in i RS and everything, you on social security, every you get a wtube, so you take over and that's what governments did in Europe, you take over the payroll. So this way it's not that their discretion to kind of their good will to to now they can't hire again in the airlines, etcetera. So you know, they came

for bailouts. And the airlines are a classic example, after having paid every virtually everything in dividends right before that and now have if they were airlines in particular, bankruptcy has traditionally worked great. You don't ground the planes you want them, and you just renegotiate some contracts. We have plenty of time to do that. During the crisis, why are we you know, why are we bailing out the

investors have just got a huge reward. We're not like effectively you know, at least zeroing them, if not, you know, clowing back some of this money. Right. They old joke about airlines as they haven't been profitable since Kittie Hawk. But let's stick with government payments to co operations. We saw something very similar in the financial crisis, where the banks who were bad lenders were bailed out, but really the borrowers didn't see there was some release, but not

a lot. Yes, so so there was clearly a huge bias towards bailing out the banks, you know, forming the runway all of that. And you know the person who wrote most eloquently about this is Nil Browski, of course bailout. More specific, Nil Borowski wrote a book about bailout. He was Inspector General of the TARP trouble that said, uh, you know, relief of program and um he was complaining and describing and other people did too. How little uh

the programs did? I mean remember from that they bailed out a g they bailed out the auto manufacturers, but homeowners didn't get relief and it had collateral harm. Uh So the programs for homeowners were voluntary to the lenders. Now the loans were securitized, so now you you know, there's no lender to negotiate with, and it's much more

efficient to renegotiate the loan than to uh, to foreclose. Instead, you had a massive housing crisis in which there were a lot of foreclosures, a lot of people misplaced, very traumatic experience for a lot of people whose mortgages should have been restructured basically, and again it was the lenders that were doing it. And then the lenders that just

didn't choose. I mean you had you had in the accounting of say City Group, you had them not want to you know, not want to restructure you know, second mortgages which were clearly in a to declare on their accounting, which were clearly total loss because there were second junior votyages. Uh. Even so they were rescued, they were bailed out of this exactly, and so they were not even acknowledging their losses. I mean you could see this on their book to market.

I mean you could see that they were exaggerating their books hugely. And for for people who not may not remember Neil Barowski, he was the n y U law professor for the Special Inspector General for the troubled asset and he wrote this book about how they bail out Wall Street and left Main Street and now on the show. Yeah, he's a partner in a law firm. And one of the things he did afterwards was Ben Lowsky, who was the regulator in New York. Uh employed him, Yeah, dinner, yes,

and employed him for a few years. He was a full time monitor of Credit Swiss, Credit Swiss being now one of the poster childs. I mean, you know, if you want to talk about reckless banks, you know you

had the bid image. I think you know credit you know Credit Swiss right now, but Deutsche Bank being the poster child, and you know, they all seemed to be slowly recovering um from their original online your zombie, your zombie, and we feed you enough and we give your time, and you come out from years ten years absolutely so if you never can die, you know you come back. Well that that's no, that's no surprise. And and they've

all essentially come back. So one last piece of research of yours I have to ask about, Uh, it takes a village to maintain a dangerous financial system. Why does it take a village, how many entities have to be

involved to keep financed dangerous. So I will talk a little bit about this was This was my kind of, uh, my own summary of my experience over the five years in which I really was devoted entirely to this little policy battle where the book and and and writings that we did afterwards, we're sort of debunking a whole set of flawed claims what we call we call them bankers new clothes. But it's not just bankers, it's policy makers.

It's even academics who say things that fall under the category of uh, fallacious, false or than kind of true but false, or just ignorant. But I don't know what goes on in people's head. I I can say, I can say, you know, this person should know better than other that nonsense. Sometimes I'm told people whispering in my ear they don't understand and I'm like, wait a minute, bread and butter finance. They don't understand leverage and risk

ris can return. They don't understand. That doesn't make any sense to me. You know, uh, you know, I write, you know, open letter to JPMorgan Chase, you know, reading this letter to shareholders. I write all these different beds. I just did this for five years straight, including the year and a half in the bunker writing the book. And in two thousand and fifteen I decided, Okay, what happened to me here? Why is it so difficult? And um, you know who didn't meet along the way? Who kind

of led to this situation that I encountered. And so at the time two two movies came out, I was actually in New York for for a month or two, staying at n y U and uh, and it was kind of you know, in town for various things. There are many stories I can tell you about that period. And uh. The two movies that came out and competed for the Oscar that year were the big short and I came to see it with Adam McKay and some of you know, pre showing because he wanted to see

what financed people, academics will say to the movie. And later he recorded a session with us because people were asking him what to do. Of course, he finished the book right now now nobody goes to jail, which was kind of most of what he showed was legal, So it was kind of not the end that Michael Lewis had in the book Michael Lewis by the way in the book The Big Short ends by saying the problem

was not that Lehman was allowed to fail. The problem was that Lehman was allowed to succeed for as long as it is yes, so he will. He went back to partnerships, moving to limited liability co operations, and becoming correct less with other people's money. But anyway, So I was asked to write an essay for a book that was edited by a philosopher that was called Just Financial

Market Finance in a Just Society. So it was about justice, and so I had to connect what I've seen in finance in the banking area to some sense of justice, of who inflicts injustice and so and so the way in which people cause harm is sort of by doing and by not doing is by being willfully blind by all these terms from psychology about how you can cause harm and sleep overnight, you know. So it was basically I started asking why has it been hard to get

through with my simple message? Uh? Who were all the people who were trying to be on the other side of this? So you start with the bankers, they benefit, you know. You then go to all the different private sector gatekeepers, accountants, the credit rating agencies, you know, consulting companies that you know, a lot of people that want their relation to be very complicated because it creates a lot of jobs, you know, doing stresses and all kinds of fancy things, even if they're not really good on

and on the people who are enabling the situation. So the keyword is enablers. Okay. Now, the title came from the movie Spotlight, which was the other movie that came out. Spotlight was a movie about sexual harassment in the church, Catholic church, and it was about journalists in Boston uncovering how sexual harassment in the church persisted and how once they investigated the abusers moving around the systems, they were able to see the problem as much more systemic than

then the one one at a time. Little story in the story in the movie Spotlight, the lawyer to some of the victims, who, of course, even if there was a settlement, they were told to shut up just like a lot of settle meants that I've been looking at all the NBA. The lawyer says to the journalist, if it takes a village to raise a child, it takes

a village to abuse a child. Yes, and it takes a village to raise the child is the title of Hills, an African saying that hillarically intern adopted for a title of her book. Takes a village to abuse the child is all the enablers who look away, all the people who kind of make the situation a wrong persist, and you know, go to all kinds of things, go to Weinstein, go to a lot of wrongdoings that persist. There were

enablers along the way. So I wanted to see the enablers in my world, in which may maybe not even crimes were committed, but there were sort of legal deceptions. Uh, there was a you know, capturing of the regulators. There was sort of you know capturing of the politicians. There was confusing the politicians, There was confusing the public who

all did that? And so I went all the way to academics, all the way to people whose job is to to the regulators and their narratives, and basically said, here is what they're saying, and here is why it's flawed and wrong and misleading, and this this enables this system to persist. At the same time, there was a book by a Dutch journalist who did uh called yours something called swimming with sharks. It was a bad banking culture.

And all he did was he interviewed a bunch of people in the city of London about their jobs anonymously. And he was just trying to map out how people felt about their jobs and who's getting paid, and who's getting fired, and and and and whether they think it's a fair relative to their high school friends or whatever. And he became so alarmed with the financial system that he started having these analogies of an empty cockpit. You know, Oh my god, you know all these people, nobody is taken.

I told him. We took a walk in London along the river, and I said, you know what, it's worse. I mean, he's an anthropologist by training. I come from the Ivory Tower and finance down to the ground and we meet in the same place. This is crazy, okay. And I said to him, it's worse than a you know, an empty cockpit. He has a nightmare where he walks in the cockpit and it's empty. I said, you know what.

The pilots of the airplane are paid to do flips and to fly low, and they have their own parachutes, so they don't care about the passengers, So it's it's it's kind of worse. The people who control this system are benefit from its fragility, and so you can't fix it until you you know. That's what the book tries to do is educate the public. So right now, it's

gonna be ten years since the book. In February two, twenty three will be ten years and we're considering right now republishing this book with a sort of one epilogue chapter, maybe a preface explaining how the book still relevant to COVID,

bailout to Crypto, which we didn't get to discuss. Okay, we I'm happy to talk about it, and uh and to the frame of democracy is so so before we get my favorite questions, I have to ask you my curveball question, which is you're an advisor to HBO Silicon Valley, a show I just adored. Tell us about that experience. How did they find you other than the fact that

you're at Stanford and what you do for them? So how they found me was that they originally found my neighbor, who is an electrical engineering professor, and he is his last name is Wiseman, so he is the one after which the Wiseman score, uh compression score is and on the show. And this was research because this co producer, Jonathan dutton Um was was sort of scouting the Silicon Valley to kind of find a believable story to capture the spirit of Silicon Valley and you know, the looking

for storylines and concepts. And then he came across this and then this professor and a couple of other professors from computer science and engineering helped the show be as believable as it as it was now as it went through and it was all out there in the garage

and all this stuff. Uh, it got to the sixth season. Now, my neighbor said to me, knowing what I was doing about, you know, financial system and my general interests in corporations in society, you got to meet this guy Ponytail, and we're sitting around coffee and later he says, you know, you ought to teach a course with him. And that was when I became I said, you know, I'm curious about this sector. Guy knows everybody, okay, because everybody was a cameo in in uh, in Silicon Valley, and he

knows about the history of the Internet. And all of those things. And he's not an economists, you know, an anthropologist by training on the sort of a producer a writer. And uh, so we embark on this NBA course and and while they were writing the sixth season, so they end up putting me as as an advisor. I mean,

they didn't pay me anything. I just signed a bunch of paper and they gave me two hundred hours, which is like a bottle of wine for all of this, just because they didn't want me to later claim that, you know, I gave them some idea copyright because they it was impacting their coverage of pul of governance issues, mission statements. They mocked mission statement and plagiarism of mission statement, these kinds of things because it's like, you know, mission statement.

So so talk is cheap, as as I said. And so we taught this course to NBA entitled the Internet Broken and uh and then this was the spring quarter of two thousand eighteen something like that. And then so as they were doing and they fall, they finished, they were showing the thing, and they were filming, like early in the fall, they were filming the last episode. And

so he caused and says, okay, you guys. I got them to fly four of you down to l A and be cameo in the very last episode and hang out here for the day and see how we film it. See all the scenes, see the prison scene, and see this all these different things. It was a it was an abandoned uh kind of car manufacturing of some sort. It was just like a bunch of like warehouses where they had it. I've never seen a show, you know, non fictional show uh being filmed. Cameras there all the

room and never wrapped up in right. That was exactly so this. So so this is two thousand spring into fall, and so we were there. We flew down to l A and we we had to bring our cap and gown if we had it, or they would put on us. They had a whole thing of cap and gowns for this graduation uh thing event that we were sort of part of. So we they had all these people that recruited for the day to be just sitting there and then uh. And you know, as long as you don't

utter a word. So if we uttered one word in the movie, we would have to be unionized. But if we were just silent, then they could film us and we could be there. So they had another scene that they filmed in the hallways of the sort of standard university offices, and we got white boards to decorate, so I have certain corner in the white board behind middle diach when he was kind of you know, reflecting at the very final scene and we saw it being filmed and then we hung out with him. So it was

kind of my reward. I'm like, you know, when I teach banking, I don't get to have so much fun. But when I thought about the Internet, I actually got to see. And my point there was only here in this whole discussion is I have come to appreciate how important media is, all forms of media. So even a movie, it shapes how people think. There was a scene there where the guys in front of Congress and then he rips the mic and you know, this whole thing, and

that was modeled after Marcus Zuckerberg going through Congress. It kind of looks like him. So much fun. So let me jump to our speed round our favorite questions, which will blow through pretty quickly, starting with aside from Silicon Valley, what have you been streaming? Tell us what's kept you entertained? So I'm a little bit of a latecomer to finish it. But I've loved the Succession, which I finally finished very recently, and now I'm intent on finishing boorgan because I had

borgan Ism about Danish. It's like the It's like the West Wing for Denmark, and I had this female for a minister, etcetera. Anyway, it's kind of a few seasons of a Netflix serious borgan and um so it's very good. I mean, I know there's you know, We Crush and other things, so but that's that's enough for for I just started We Crashed. It's actually very good. I heard that my coach tells me, and I love that. I

read read so much about we work. I'm kind of sick of it, especially being Israeli and the Washing h very true. And there was podcast Yeah yeah, tell us about your mentors who helped to shape your career. So this advisor, Steve Rossity Yale, was very important to getting me interested in finance and in some respect in this sort of cosmic view of where I am today and

my transformation of my where he was there. Unfortunately he died a few years ago, but he was there to sign my editions and encourage me all the way to to take the village. Um was there to kind of tell me I'm not going mad when I hear all this nonsense, and to and to approve of what I was doing, even though in some of my criticism of academics, I criticized some of my academic brothers who are also his students. But he sided with me. So that was very meaningful to me. Uh yeah, so he was my

main advisor. Got me because right now, for knowing all the finances I know, I'm able to call the book. That's great. Um, tell us about some of your favorite books. What are you reading now and what are your all time favorites? Oh my god, so my all time favorite is a Little Prince. That's just the book. Uh. I'm reading a lot and now I'm listening, so that makes it faster because I don't read as fast as I would like to, but I have read lots of books.

Right at the moment, I sort of finished direct and I was like the World for sale and freezing order to discuss flying Blind on Boeing. You know, Sickening is a book on the healthcare sector and how we know all our health courses. Very scary Porson and banking into some extent American clyptocracy. Right now, I'm reading a book very close to home called Who Killed Jane James Stanford,

which is like whoa. I mean, all the stories we tell that Stanford and that history of Stanford going back to the nineteenth century and Gilded Age and the Stanford's whoa. So that's a history professor at Stanford who wrote a book Who Killed James Stanford. James Stanford was very important to the creation of Stanford. But right now, of course Stanford is way off from what she wanted. And yesterday I got the bonking from Mary Child. So that's my next Um. That's a bunch. Yeah, that's a that's a

really good list. What sort of advice would you give to a recent college grad who was interested in a career in either investing, finance, academia, or technology. My first advice, because I've learned it kind of the hard way, is watch out for the assumptions are making and other people are making. So when people say things, there's often implicit assumptions that are making, and there's some bad assumptions can

take you down. Even LTCM with all the brilliant pictures went down on bad assumptions, So bad assumptions are very dangerous. And then of course you know you have to kind of be careful not to uh, to maintain the big picture, to to be aware of losing yourself in in in certain certain activities. So so maintained a big picture and check for assumption is kind of my main advice. Good

good advice. And our final question, what do you know about the world of banking and finance and regulations today that you wish you knew thirty or so years ago when you were first getting started. I had no idea but how much politics, laws, and law enforcement matter to economic outcomes. I just lived in the little bubble of economics where we make assumptions. And when I sort of realized what was going on in banking, I started questioning all the assumptions that I made before. And it's been

my sort of journey ever since. It's like, huh, that's sort of interesting, is this true? And you know what's actually going on? So I've become a sort of real explorer of of what happens when I don't make the assumptions that I may go When I question people's assumptions, did you spend any time researching the Canadian banking regulation, because when I was writing Bailout Nation, that was my compare and contrast. It's so different from the U S system.

It is, and I know a little bit about it, but you know, it is a very different system because the US is very fragmented system and the Canadian system is basically a system of five banks or something like that,

all pretty tightly regulated but also very profitable. So essentially, the way, one of the ways I formulate the difference is that we we subsidize debt for banking, and they essentially subsidize equity by giving them a big charter value because they're because they're so you know, entrenched, their oligopoli quite quite fascinating. We have been speaking with professor are Not at Mahdi. Thank you, professor for being so generous

with your time. If you enjoy this podcast, well be sure and check out any of our previous four hundred or so. You can find those at Spotify, iTunes, wherever you get your favorite podcast from. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. Sign up from my Daily Reads at rid Holts dot com. Uh follow me on Twitter at rit Halts. I would be remiss if I did not thank the crack team that helps us put these

conversations together each week. My audio engineer is Justin Milliner. Paris Wald is my producer. Sean Russo is my head of research. Attica val Bron is my project manager. I'm Barry rid Holts. You've been listening to Masters and Business on Bloomberg Radio.