Former SEC Chairman Arthur Levitt: Masters in Business (Audio)

Then with former SEC Chairman Arthur Lovitt. Uh, there are few people who know as much about the ins and outs of the stock market and the regulatory apparatus that sit on top of it, as well as the politics and all of the various nuances that go with regulating one of the largest, most robust financial systems in the world. And so Arthur and I had a wide ranging conversation.

We covered every thing from Dodd Frank to the vocal rule, to the fiduciary standard, to whether or not your IRA and four oh one case should be governed by the same sets of regulations or whether there should be different rules for each. We talked about a lot of different things, and I find Arthur to be a fascinating guy. Be sure and check out our podcast extras, which if you're

listening to this now hang around till the ends. The last fifteen twenty minutes of our conversation was really Arthur talking about how he finds technology in general and fintech specifically to be absolutely fascinating and why it makes him so confident about the future of the United States. Really

very interesting conversation. I know regulation may not be the sort of thing that you think, uh, really is exciting, um, but it's important part of of markets and it's certainly something that's interesting, uh and significant to what goes on to the day to day workings of the markets. So who better than a conversation with Arthur Levitt about regulation in America. This is Master's in Business with Barry Ridholts on Bloomberg Radio. Welcome to Masters in Business on Bloomberg Radio.

Today we have a very special guest. Our show today is all about regulation, as we just passed the fifth anniversary of the Dodd Frank Legislation. My guest today is the and longest serving chairman of the SEC, Arthur Levitt. He ran the agency from to two thousand and one. I'm sure you're familiar with his works. He is our first returning guest on Masters in Business. Arthur welcome back

to the show. Glad to be with you, Barry. So for those of you who somehow may not be familiar with Chairman Levitt Um, he ran a brokerage firm back in the early sixties, Old Carter Berlin and while with a young whipper snapper named Sandy. While in nine seventy eight, he was chairman of the American Stock Exchange. In nine he became chairman of the New York City Economic Development Corporation, and he was appointed chairman of the sec UH by

President Clinton. UH. And I recall you once telling me that you found out you were up for the position, Um, that you had gotten the position by reading about it in the Wall Street Journal. The first I had heard about it was a rumor reported in the Wall Street Journal of it. I was the choice. I think that they had probably somebody else in mind that didn't pass through the various traps, and they ran around the White House and said, gee, who who can we choose now

to fill that job? And someone said, hey, what about guy that ran the stock Exchange? And that's how it happened. Wow, fascinating. And Um, you come from a family of people who have served the finance industry. Your dad was also one of the longest serving New York State controllers, Right, he was in a job for four years, and um he was sole trustee of the at the time, what was the largest pension fund in America. Yes, that's fascinating. So so we have Finance Royalty. So we're here. It's the

fifth anniversary of Dodd Frank. There have been lots of things happening in the world of financial regulation, all sorts of interesting things, and I thought you would be the perfect person to have a conversation UM about this with. So, so let's begin with what came before this era. When we look at the period before you became SEC chair and after, we were really in a period of fairly

robust deregulation. We saw the repeal of Glass Stiegel. We saw the passage of the Commodities um Modernization Act, which really allowed derivatives to be freely um traded without any sort of regulatory oversight. In fact, the general sense of that era of the nine eighties and nineties was less

regulation was better. Is that a fair assessment. I think it is a fair assessment, And I think that Sandy Wild had a good deal to do with that in terms of lobbying the Congress, with whom he had been particularly close in terms of reducing eliminating the strictures of the Glass Stiegel Act. Subsequently, he said that he wasn't

sure that that was a good move. Glass Stiegel's removal may have created unintended consequences, and I certainly agree with that, although at the time, the general feeling in the financial community was that we were an overregulated body and that we needed relief, and the most likely area of relief would have been to allow the banks to do much

more than they had ever done before. And then came two thousand and eight, and if I recall correctly, the Travelers City Court merger was sort of presented to Congress as a fatal complete and either you repeal Glass Steagle or we have to unwind this big merger. Exactly put put a gun to Congress's head. So so we have the Commodity Futures Modernization Act, we have the repeal of Glass Stiegel. And then you said, comes two thousand and eight.

Now did it take a full blown financial crisis to make people rethink regulation or was this something that was just eventually going to bite us in the behind? And we had to do something. Well, a lot of regulation that occurs at times of market exuberance, market highs uh generally goes towards deregulatory steps. Nobody has hurt, nobody has bothered, everybody's a winner. Why not relieve the regulatory pressures and

really let the animal spirits prevail. Well, two thousand and eight came along, and a lot of people were hurt, and a lot of members of Congress began to have second thoughts about the deregulatory moves of the past, and that gave birth to a whole host of rules and ideas and ultimately the Dodd Frank Rule. Personally, I believe that the lessons of the market of two thousand and eight did more to curb the exuberance of banking interests

than any possible regulation that we could have put through. Nevertheless, the Congress fell all over themselves to come up with ways to punish the markets and the people who operated in those markets for bringing about what they regarded to be the horrors of two thousand and eight. You're listening to Masters in Business on Bloomberg Radio. My special guest for the special episode about the pros and cons of financial regulation is Arthur Lovitt, former chairman of the SEC.

And I want to take the other side of an argument from you. You said earlier the crash and OH eight taught everybody that write lessons and and people will would learn from that. But but isn't the history of Wall Street, in the history of finance that they burn their hand and they go out for a little while, and then a few years later it's all forgotten. Think back to the nifty fifty, what took place in the sixties and seventies, Think back to the dot com collapse

in two thousand. None of these episodes are hidden, It's all there. No one seems to want to learn from history. Well, I agree with you, Barry. The lessons learned as a result of an event such as the crash don't last forever, but they do last long enough to change behavior for a period of years, not just a period of weeks or months. Believe me, Uh, Jamie Diamond is very much aware of what happened to OH eight, along with every other head of major banking institutions. They're paying the price

for it even today. Litigation has yet to be settled. So I think that in many ways that's more effective than rules and regulations, which invariably have a perverse and unexpected results. Dodd Frank certainly has a battery of facets of that ruling that UH are misunderstood or are not doing the job that they expected them to do. So let's let's talk about that exactly. This month is the fifth year anniversary of the legislation being passed. It's still

a work in progress. There are still things that have to be put into effect. What has been the positive consequences of Dodd Frank and what are what are some of the negatives? Well, I think in the first place, Dodd Frank represents the abdication on the part of the Congress two regulators to fulfill a myriad of requirements in a limited period of time which is long since gone, and still various regulatory agencies having fulfilled all the mandates of god Frank. I think God Frank has been useful

in terms of setting certain ground rules of behavior. I think it incorporated the Vulcan rule, for instance, which I think was constructive that banks that were insured by the federal government could not gamble with those funds. I think that was the principle behind the Vulcan rule, and Dodd Frank tried to convert that principle into UH specific actionable steps.

And here we are five years after Dodd Frank was put into effects, and literally this week that you and I are sitting here having this conversation was the rollout of the Vocal Rule. Why did it take five years for something as obvious as hey, if you're federally insured, if if the fd i C guarantees your depositors, you can't speculate with with insured capital. Why did take so

long for that to take place? Well, financial UH entities can't shift on a dime, and it took them a certain number of years to close down UH these operations such as hedge funds or private equity funds or real estate ventures. It took them a number of years. We could argue whether it should be five or should be three, but they certainly couldn't do it in six months or a year. And the net effect of it has been an orderly liquidation of many of the programs that the

Vocal Rule contemplated as being risky. I think there are many others that weren't included, nor should be included. We're in a a risk business and to squeeze all the risk out of our markets, I think would destroy the market. So I think this was a reasonable step. The banks would argue and certainly did argue against it, but it was a reasonable step. It took the agency's much too much time to deal with it because they simply didn't

have the resources. There were hundreds of pages of regulations left to the CFTC and the SEC to define in terms of specific regulations, exposed for public comment and vetted and litigated, and finally they've come up with a semblance of what the expectations were for the original Dodd Frank. So so here we are. We we have Dodd Frank in place, it's not quite fully in place. We have the volcal rule taking effects if we didn't pass legislation

such as Dodd Frank. What sort of alternatives do we have? And do you want to address? You raised an interesting point I shouldn't let slip. How significant isn't that Congress didn't pass this themselves the rules, but handed it off to a committee rather than do what used to be

considered their jobs. Well, Congress doesn't understand the business. And to have a group of congressmen, no matter how smart they are and senators deal with the complexity of our markets in a finite period of time with an election pending, you're going to get a result something like this. They're going to say, here are the problems we've defined as a result of many hearings, now SEC and CFTC, here are the broad outlines of what we think should be fixed.

Fix it. And then they unleashed upon these same agencies, the the lobbyists on behalf of the banks and the brokerage firms who fought every line that went into Dodd Frank and didn't fund the agencies appropriately to deal with these issues. They needed staffs that were almost fifty larger than the market read staffs that they already had to deal with the complexity of the issues presented by Dodd Frank.

This wasn't clear, lucid efficient writing. This was broad generalizations out of which the regulators had to create something which was politically approved and acceptable in terms of public basic public understanding. So so, Arthur, in the last minute, we have what is the alternative to something like Dodd Frank?

What could have Congress done in its stead? You know, I think that at a time of such economic travail, the best thing Congress could have done was to study the issue longer and work with existing regulators on coming up with a plan that had a finite objective, uh,

and implement that plan step by step. You're listening to Masters in Business on Bloomberg Radio, a special edition focusing on regulation during the fifth year anniversary of the Dodd Frank legislation, and and who better to speak to about this than my guest, former SEC Chairman Arthur Levitt. Before the break, we were talking a little bit about the Volca rule, and for people who are not familiar with the vocal rule, it bans taxpayer ensured banks from making

speculative bets with their own money. And I think we both agree that's a reasonable thing to do. Yes, it is. So the alternative is, hey, you don't have to have FDIC insurance if if you're that confident that your reputation is that good, see how far it goes, or spin out those separate hedge funds and other entities. And it seems all the banks actually have done that. You know, it's interesting, Barry, that only one person in America could have stood behind a rule and gotten it past as

seamlessly as Paul Vulker. There probably is no other American with the reputation for probity and integrity that gave him the power to create a rule which had a profound change in the way American banking business is being done. What what does that say about us and what as a nation? And what does it say about Congress that it took one of the people with the most amount

of credibility after the crisis to get something like this done. Well, it says that there is an international crisis of leadership. That I would defy almost anyone in our audience to name three people that they think are outstanding leaders known to the general public for integrity and probity. Nobody comes close to Paul Wulker. In a former era, we had the Irving Shapiro's, the Walter Riston's, the DuPonts, the John Whiteheads. You couldn't come up with a cluster of people of

that caliber today. What why is that that? That's kind of a telling observation. Well, I think our society has become h a millisecond by millisecond society and sound bites and television bits have defined people in ways which are less profound and deep than the era which spawned the white Heads and the Vulcars. And uh, I'm not certain that in a society of sound bites you can really develop the sort of leadership skills that took Vulcar many years working at the Federal Reserve and the rest of

his career. But we certainly don't have that in politics. We don't have it in business, we don't have it in religion. We simply lack that core of leadership that was part of our society for a long time. So so let me push back a little bit um the pope. This Pope seems to be very out there, generating all sorts of interesting taking positions not typical. I totally agree with you. I think there no generalizations are applicable to total society. But I'm talking about well dership in the

business and political communities. That's where we need it the most. And he seems to be an exception. You know, the changes that have taken place in Vatican City seems to be very significant. We're not seeing that in the rest of the business or political community. We never really saw it before either. Yeah, this is this is really a fascinating situation. So so let's move back to the SEC.

There was a big New York Times article over criticism about the SEC use of in house judges, and I heard you on your radio show describe why the SEC has practically been forced into this because of their budget situation. What is first of all, what is an in house SEC judge? The in house judge is appointed by the Commission itself to hear a number of cases and to supplement the general judicial system, which is so crowded with cases that it takes many years for a case to

be heard. The judges within the SEC or any other agency that also has administrative judges, are familiar with the Securities laws in ways that the other levels of judiciary perhaps are not so starved for resources. The only way the Commission can meet the case load of cases that are brought before them is to supplement the use of the federal judiciary with in house judges that our experience, that are independent of the Commission except for the appointing

power of the commission author. How much of the use of these judges is driven by budget concerns? I think it is probably driven by budget concerns. That that's fascinating. You're listening to Masters in Business on Bloomberg Radio. Today we have a special edition Financial Regulation during the fifth year of Dodd Frank, and I have a very special guest,

former SEC Chairman Arthur Levitt. One of the things that has been fascinating over the past couple of years has been the debate about the standard of care owed two investors. In fact, as part of Dodd Frank, the SEC how to issue a set of suggested guidelines, and effectively the SEC said everybody should have to adhere to the fiduciary standard, but that was not put into place. What what are

your thoughts on that. I think that there is no earthly reason why a broker should live by different standards than an investment advisor. Now, the argument made, of course, is that brokers don't give advice, they simply execute orders. Having been a broker for nearly twenty years, I don't think there was ever a transaction that I ever didn't have some comment to make about. So I reject the notion that a broker doesn't talk to a customer. He

or she certainly does. And I personally believe that the standards of accountability should apply equally to brokers and to investment advisors, and and for those people who may not be familiar. The fiduciary standard is a much higher standard which says you can only do what is in the best interest of the client. It makes for a very simple UH compliance decision making process. Hey, is this in the best interest of the client or is this in

the best interest of some but he else? And if the answer is it's not the client's best interest, you you can't do it. But there certainly has been a lot of pushback on that from from the brokerage industry and and from FINRA as well. I think the pushback is understandable. Not only is it UH private interests that are involved here, but the various suggestions have been drafted in such a complex way that neither the opponents are proponents of this proposal have really defined what it means,

I think, and it's simplest form. If you could create a rule which level the compensation that didn't incentivize a broker to go to product A because he or she was being paid more for product A than product B, there's your rule. That's all you really need. It's the disparities and compensation that create a complexity. Where the industry is opening is arguing that they're opening themselves up to private rights of action now that they never experienced before

because of this indefinite complex rule. And there's something to that argument. The rule is presented by the Department of Labor. I certainly support, but it certainly could have been more efficiently effectively worded. So so let's talk a little bit about that. So the SEC says, where the entity that governs brokers and markets, and we suggest a fiduciary standard for everybody, but it doesn't go anywhere either with the Commission itself or Congress. And then the Department of Labor says,

you guys have your own conversation about that rule. But we, as the Labor Department, we regulate four oh one case and four oh three B ease and other tax deferred savings for retirement because these are considered wages. These are considered part of compensation, and so we get to regulate. And while you guys are diddling around with that, we're gonna state you must follow the fiduciary standard for this. It's too important to people's retirements. Marry you have it

absolutely right. The likelihood of the SEC getting a fiduciary standard was extraordinarily remote. The Commission is split. The Congress, which oversees the Commission, doesn't want to see a fiduciary standard, and it never could have been done. That's why Congress is now pressuring take it away from the Department of Labor give it to the sec because they know that's burying the fiduciary standard. And I don't really see that happening anytime soon because it's all stop and think about this.

It's all part of the compensation package, is all part of wages. And why would you want to remove that fiduciary standard over somebody's wage package and give it to somebody who may be offering conflicted advice. It doesn't make any sense to proceed that way. Well, I think it goes to the issue of inducements, and are we hurting investors by offering greater inducements to handle product AID than

product B. It's as simple as that. That clearly creates a conflict of interest, or at least so the broker has an incentive to go to the highest commission product that's not in the investor's best interests. Absolutely, Barry. So So let's think about this a little further. When we look at the overall um alternative standards. So on the one hand, the brokerage industry has suitability, UM, when you look at the fiduciary standards, it's much higher. Suitability is vague. UM.

I've always said suitability is don't sell Grandma Facebook. I p oh. I mean you can take it to an extreme. I'm saying that if you have the same level of compensation for whatever product you're selling, that's fine. That's simple,

that's easy. So when you look at around the world, one of the things that in the United Kingdom did a few years ago was basically mandate a lower fee on all of their retirement accounts and a full disclosure and transparency, because the Brits basically said, hey, if if people aren't making money, if these fees are high and not disclosed, if they're hidden, that's ultimately going to impact

years down the road our retirees. And if there's a shortfall, we the government are going to have to make that up, which means you, the taxpayer, are gonna have to make that up. I thought that would be an argument that would carry the day, even amongst conservatives, but it seems that I was too optimistic. Politicians tend to have tactical responses and the strategy of long term investing is just beyond their ability to deal with because they're not long

term players. There two year players in the next election. So we've been talking about four oh one ks and other tax deferred compensation packages. There's another tax deferd entity called the individual retirement account the i r A that doesn't get covered by the Department of Labor fiduciary standard. Should it? Yes? Uh, I wish that it was covered by some sort of fiduciary standard. Whether it's to be the Department of Labor or the SEC, I'm not sure,

but these are people who really need the protection. Much smaller accounts four oh one ks can scale up to be fairly substantial. The maximum contribution to iras or it's it's indexed in um inflation indexed, but it's not. It's five six thousand dollars a year. It's not that much money compared to what you can A four oh one K is eighteen thousand if you're under fifty thousand, if you're over fifty, it's a huge juge difference between the two.

And if the abuses of a runaway market can ever be felt, it's in the area of these small investors who tend to be more emotional, tend not to focus on the impact of fees on their portfolios, tend to have a herd mentality and buying when others are selling and certainly being victimized at markets that uh, go up

and they're buying, and go down and they're selling. You know, Vanguard put out a um white paper a couple of years ago that showed the impact of a one percentage additional fee above some low modest level and over the course of twenty or thirty years, enormous. It's compounding. It's amazing, amazing impact, and it's so difficult to get investors to focus on that rather than on the advice that they heard from someone at the Bridge Club. It's it's an

ongoing issue. I'm fond of saying the best advisors are behavioral counselors as well as financial advisors, because the biggest impediment to success seems to be investors own behavior. Well, I'm kind of a Jack Bogel acolyte in terms of small investors should be involved in funds rather than picking stocks. And there's a reason that Vanguard has risen to over three trillion with the t trillion dollars. Over the past few years, a lot of people have come to that

same real as issue. They've stayed faithful to the Bogel rule. We've been speaking with Arthur Levite, the former Chairman of the Securities Exchange Commission, during this fifth anniversary of Dodd Frank, talking about regulation. If you enjoy this conversation, be sure and listen to our podcast Extras, where the discussion continues for as long as as our guests have time for Be sure and check out my daily column on Bloomberg

View dot com. Follow me on Twitter at rid Halts Arthur, I know you tweet your Your Twitter handle is at A Levitt. I'm Barry Rihults. You've been listening to Masters in Business on Bloomberg Radio. Welcome to the podcast Extras. I'm Barry Rihults. My special guest today is Arthur Levitt. He is the former chairman of the Securities and Exchange Commission, and indeed you were the longest serving chairman, weren't you. Yes? And Arthur is for those of you who know your

way around a radio dial. Arthur is a regular rum Bloomberg Radio has his own shows where he voices his opinion and chats with various guests on on weekends. Uh, it's always a fascinating conversation. There were a number of subjects we didn't get to in the earlier part of our conversation, and before I get too far, let's let's click through those and get to the rest of our

of questions. First, A lot of people may not realize we're here in New York City, which is part of the great State of New York, and after the financial crisis, it looked like New York State really beefed up their own state financial regulatory apparatus because hey, we're here in New York and all of these big banks are are located here as well. What does the New York State Department of Financial Services have to say about regulation of

of big financial brokers and big banks. Well, they took over the responsibility of the Banking Commission and added to that the banks and brokerage firms. So just pretend you're a financial institution in New York. You're regulated by the Attorney General, by the New Department of Financial Services, by the SEC, by the United States Department of Justice, and the New York City UH District attorney. That's quite a mouthful of regulation. You would think that would keep people

on the straight and narrow. I think that the state probably looks upon regulators as a source of revenue, and I think that creates unintended consequences. Couldn't couldn't we say the same thing about the Look at all the massive fines we've seen. Isn't that the same true about Treasury? It wasn't even Justice, it was Treasure Department and sec issuing these giant fight. I don't think the federal regulators look upon it so much as a source of revenue

as they do a measure of punishment. But nevertheless, I think financial institutions in the State of New York are probably overregulated, overregulated and spend a massive amount of money on defending themselves and fending off the various competing interests that seek to regulate them. Because regulators are there to take action, to extract fines, to punish, They're not there to praise good behavior, not a pat on the top of the head and then keep doing what you're doing.

Regulators want to be recognized by scalps, and I think doing business in the State of New York is a pretty punishing experience for people in financial services. So we went from radical deregulation and the shedding of all these prophylactic measures to the opposite extreme. Now there's too much regulation. Ironical, isn't it? And so what is will Will the pendulum swing back to a balanced middle? Or we compel to

always be at one absurd extreme or the other? Well, look at the pressures that are pro regulation and the pressures that oppose regulation. In the state of New York. Regulation is a source of revenue, and it's cloaked in the garb of protecting investors. And that's suggesting that the regulatory agencies aren't capable of doing the job. The SEC, the CFTC, or the New York Attorney General or even the New York State District Attorney or even the New

York State Attorney General. Uh, let's kill that ask the question against what was it? What was the question? I had asked? Oh, the extreme? We've gone from one extreme to another. So are we compelled to always swing from one ridiculous extreme to the other? Can we ever get a balance in the middle. Well, we're certainly not compelled, Barry, But why do we have a new state agency regulating financial services if we already have the district attorney, the

State Attorney General, the U S Attorney, and the sec. Well, the argument that the state made was during periods of exuberance, everybody seems to forget their regulatory responsibility and back away and not getting the way of a happy market. Well why stop here? Why not say this new financial regulator won't do the same thing when the next blow up occurs? No reason the things they want, no, of course not. But the point is the coordination between these various agencies

I think is not what it should be. And to look upon regulation as a source of revenue, I think is a mistake and hurts our markets and we'll drive business out of the state of New York. So let's my personal view. So let's talk about another new regulatory entity, the Consumer Financial Protection Board. This was Elizabeth Warren's brainchild while she was still a professor at Harvard Law School, and UM ultimately was passed. What are your thoughts on on that new agency. I think that new agency has

had a positive impact on our markets. I think that so much of an agency is determined by its leadership. If you get a bad leader and inept leader, or a politicized leader, Uh, you'll run into problems. I think Richard Cordray has been a balanced leader that has been able to determine the difference between unre unreasonable regulation and investor protection. I think he's implemented a number of changes with respect to banking, the relationship between banks and consumers

that have been constructive. And I think the very dialogue that he has created his healthy and makes our financial institutions more sensitive to the small investor in supportive of the agent. There was a lot of abuses that took place beforehand that I thought it was a very obvious set of circumstances. Forty pages of boilerplate for a credit card, nobody knew what they were really signing, all sorts of fees hidden and banking and checking accounts. And then my

favorite was the last. Even though they're all these disclosure documents on mortgages, when they got when they got crazy, when they got created of during the sub prime I don't think people realize what they were really getting into. I think that was the singular event that probably brought about the creation of this agency, which was fought and maligned by many in the Congress and Elizabeth Warren, to her credit, stayed the course and really was useful in

bringing this about. But they do have a competent and fair minded leader. If that changes, I think the rationale for the agency becomes questionable. So many of these agencies are a function of sound, effective, balanced regulation, not runaway punitive regulation. So you mentioned Senator Warren, who has grown in popularity for quite a while. Some people think in subsegments of the population. There was a number of people who thought she was going to run for presidents, or

at least for the nomination and against Hillary Clinton. She said she wasn't running, and so far it um seems like she's not running. But she recently raised some objections to some nominees for the commission for the SEC Commission. What's going on with with that? What? Why is she objecting to some people? And we could talk a little bit more how the commission has changed. This is a very good issue because the responsibility for naming commissioners of

the SEC, which constitutionally is the President's responsibility. President nominates the commission and the Senate approves. It is that the process, okay, that has morphed into the Senate taking over the nominating process. Wait, the Senate is nominating commissioners and then the Senator proves it. That's uh, that's not what I learned in law school.

In effect, that's what's happening because commissioners of the SEC now are coming from Congress staffs or certainly ideologically they must coincide with the views of the leading party in the Senate. Let me interrupt you there, because and again I haven't been in grad school for many a decade, but I learned that most when I studied securities regulation, when I studied corporate law, it was always people who were market structure experts, accounting experts, legal professors with a

background in securities law. That was when you were chairman. That was certainly the case. And you're telling you're saying, this is not how it is any longer. I'm saying that the tension and friction and animosity that has colored our political process in the past twelve to fifteen years has transferred itself into the process of appointing not just SEC commissioners but to every regulatory agency, so that those agencies have now become far more ideological than ever before.

And I think the consumer in our markets are the victims of this kind of polarization. A three to vote is the norm. When I was at the commission, a unanimous vote was the norm. So let me push back against you a little bit. I'm gonna I'm gonna play Devil's advocate and say, look, we elect presidents, and he's either Let's look at the past two presidents. We elected George W. Bush use of fiscal concern, a fairly conservative guy.

I'm gonna redo that. Um, Charlie just added it forward to this, So let's look at at the politics of this. We elect somebody who's conservative, like George Bush, isn't he entitled to fill um, these appointees with conservative ideologies to various commissions? And fast forward, we elect somebody who's more left of center, like Barack Obama. Isn't he entitled to have his political ideology represented on these commissions? Well? Remember the law says that at least three members must be

from the party in power. But what is happening very often is that you get Democratic Republicans and Republican Democrats in these positions. Certainly ideologically they have to pass a test. Now, you asked me before about Elizabeth Warren objecting to a Democratic nominee. That's unusual when a senator from the same party objects to a nominee of her president. And she's certainly entitled to do that, and it's happened before. I wish that it hadn't gone out to the media and

that this is something discussed. A president will undoubtedly consult with his party members to decide whether a particular appointee meets the test of fidelity to party principles. But why why did Warren object to a nominee from her own party? I mean, I understand she is a former Harvard law professor and understands the legalities of the Commission as well as anybody, but that's kind of unusual. Why why would

she raise an objection. I have not discussed this with her, but what I read in the press was she objected to the history of this appointee being one who represented corporate interests and she felt that CONSU reported that she felt that we needed commissioners who were more aligned with consumer interests than corporate interests. And I understand that, so that's that's not an unfair objection, But to me, it's more fascinating she's objecting to the Democrat but happens to

the Republican. Having it emblazoned on the business pages just fuels the continuing fight over commissioners and the determination of Republican members of the Senate to get their candidates selected rather for their ideological fidelity than for their knowledge of

our security laws. I just wish that Congress could take a step backwards and appoint individuals who may be ideologically aligned with their beliefs, but are experts in the security laws and are balanced in their judgments so that the Commission isn't perpetually locked in an ideologic uh blockage. So it's three to Republican Democrat when it's a Republican in the White House, and three to Democrat Republican when there's a when there's a Democrat in the White House. So,

so how do you get past that log jam? Is it really just finding structural experts and accounting experts and and sec law experts or what's the alternative? I would hope that the Senators, in approving the nominees of the President, would take greater consideration of the individual's experience with securities matters and the individual's balance. I think for any regulator, balance is the key word, the ability to determine what

is overregulation and what is fair and reasonable regulation. That probably is the most important critical characteristic of any regulator in any regulatory body, rather than having them chosen for party loyalty. So it's got to be expertise and pragmatism, not balance, balance, not merely being ideologically pure. Yes, you

seem to be very very enthusiastic about this, Summle. I've I've lived with a commission that had at one point three Republicans and two Democrats and at one point three Democrats and two Republicans, and we worked in a cooperative way for eight years. Not one single time was a recommendation overruled in eight years that worked. Were they three two votes? You know? There were? They were almost always five?

Oh so, how much of that is a reflection of of how the world has changed since the late nineties, how the United States has changed, and how much of it is just, you know, politics has become coarser and more divisive and extended everywhere. Barry, I think that's probably true. I think part of it is a function of leadership, whether the head of an agency is the kind of person that and make common cause with the commissioners that work with him. I think part of it is luck.

If you run into commissioners who are looking for political gain, they will try to harass the leadership, whoever the opposition. Maybe there are a variety of factors that bring this about. But I would ask the Congress and the administration again to choose experts for these agencies rather than ideologues. So politics is fine for Congress, but when it comes to something as important as the SEC, put the ideology aside

and be pragmatic and get the job done. I would be hopeful for this, which I think is probably unrealistic in the political environment we are now experiencing. Okay, so that seems um unrealistic. Hope, all right, we can we

can work with that. It seems that this has been an ongoing problem, not just as SEC, but it's been an issue across all the various regulatory entities from NASA, even things like NASA and the e p A, as well as the Department of Education and and other Maybe just this at a certain point we have to get beyond politics and just focus on doing the job. That would be the goal. All right, So let me shift gears um with you. We've talked about We've talked about

Dodd Frank. We've talked about the vulcal rule. We've talked about who should be overseeing four oh one ks and iras and the difference between the fiduciary standard and the suitability standard. UM, We've we've talked about the commission itself. I consider you're obviously an expert. I know very little about this, so I hope I asked you good questions about that subject. But let's let's shift gears a little bit.

One of the things I really enjoyed about our first conversation the first time you were on it was almost a year ago, as last summer, was how optimistic you were about the future and how much you were hopeful that this generation was going to find their way into the labor market and start doing good things. Are you still as optimistic as you were a year ago? Probably

more so, Barry. Where the political system may be broken, where there may be a disharmony at that level, and where we may look back and say, boy, this is the most poisonous, the most corrupt environment that I've ever seen. It really isn't. So if you look back in history, we've had many periods in history much worse than the period that we're in. And I'm involved in my personal life.

You know, broad variety of high tech companies on both the East and the West Coast, and what I see there in terms of the intelligence and commitment and dedication of people involved in new technologies, in taking enormous risks, in developing educational backgrounds that are far better than anything that we experienced in our years. I'm very hopeful that America will be leading, not following, in terms of business and in terms of morality. I'm extremely optimistic about the future.

So I don't really think of you as a tech sort of guy. But here you are that looks like an Apple Watch on your wrist. How much of a tech gadgethead are you? Oh? I'm total. I'm absolutely consumed by it. Uh. I know we're charging your iPhone right outside of the studio. How do you like the Apple Watch? Uh? I like the Apple Watch, but it took me nearly eight hours to learn how to use it, and I think most consumers are not going to invest eight hours

in it. So I think we're going to have to see iterations of the watch if it's really going to take off. It's too complicated now for most people. The rule, the good rule of thumb is, unless you're willing to put the time and effort in, don't never, never, never by the first one point oh of anything. You always have to wait to subsequent iterations. It always becomes look at Tesla. The first Tesla car was kinda yeah. The new one is it looks spectacular right zero to sixty

and two point eight seconds. That's those are crazy. Those are Bugatti viron one point six million dollar numbers are the most visible of technology. Think about those aspects of technology. One company that I'm involved with is developing a derivatives contract which will enable banks to layoff consumer loan risks, which are capital intensive risks. Another company is an online

um It's called motif. Oh, I'm familiar with them. Sure, you can create your own composite basket of stocks following any given theme you want, and you push one button and you buy all the stocks at a very inexpensive transaction costs. Another one is bit pay, which uses bitcoin as a transaction to buy merchandise. Microsoft is among companies that will accept bitcoin for merchandise. So the gentleman who

runs motif, what is his name are Deep Walley. He and I are on a board together of another technolog algy company, and since it's private, I don't want to talk about it. But what they do is it's not peer to peer like you see where people are making small loans. It's a more commercial peer to peer lending for real estate, where a buyer and a seller of real estate loans big commercial loans are able to get

together and actually be much more productive efficient. Um. It's really fascinating and I both are on their board of advisors. The changes that technology and it's the phrase these days is called fintech, the financial technology world that's changing. It's fascinating what's taking place in that space. It really is, and as a source of lending, not not just one company, but there are dozens and dozens of companies that are taking the banks on directly, and the banks themselves are

looking at some of these services. They're examining bitcoin rather than rejecting it, and I think the consumer is the beneficiary. There are I'm on I'm an advisor to another remarkable company called a firm, which provides alternative lending for millennials

who really reject the notion of credit cards. And bank loans, and a firm has developed the technology of approving credit within seconds after the consumer goes online to make a purchase, and the consumer then is able to take a loan from a firm that they'd have to fill out lots of forms and papers to do it in more conventional ways. So a friend of mine used to work for a firm. They got bought by Yahoo. He moved out to California. He's a serial entrepreneur's built and sold. This is his

third or fourth company. What this company did? You mentioned bit pay. So there's a huge issue with entity fraud and the ability to know who's really who and what underlines bitcoin is something called the blockchain, which is how the mathematical way that you can tell this is really

this person's transaction and this coin was sold to this person. Well, they're in the midst of creating this technology that allows banks to instantly authenticate a person by this blockchain, and in theory, it's gonna do wonders for stopping identity theft, stopping those sorts of frauds, allowing banks and brokerage firms and other large financial institutions. Sounds like life Masters, which is which life Masters. Now I know that name. She was at JP Morgan and now has formed a company

that sounds like it's doing the very thing you're talking about. Okay, that's where I know the name from JP Morgan. What's the name of our company? Okay, I'll look that up. That's really interesting. But when you stop and think about that underlying chain, which you know you couldn't issue coins if there wasn't a way to to validate and verify it mathematically, turning that into a form of identity is

really quite fascinating. Yes, it is, and I think that it's been rejected by the banks for years, but I think they now regard it quite seriously, so that Goldman Sachs made an investment in several of these companies, And I know every major banking institution is aware of the implications of bitcoin and is studying its applicability to all financial services. You know, there's a conference I go to

every couple of years. I don't want to go every year because it's overwhelming, but I go every two or three years, and it's out in San Diego, and it's a run of either college students or recent college grads. Uh, most technology, some fin tech some actual tech, and you see the creativity and the innovation and the drive that these kids have. And it's hard not to be optimistic about the future when that generation that, you know, when I grew up, the Internet was not really fully formed

until many years later. These kids not only grew up with the Internet, but they've you know, the most of their adult life. There's always been smartphones there, there's laptops were ubiquitous. It wasn't what's this computer thing, I should really learn how to use use this. It's second nature. It's like the telephone to the rest of us. And starting from that base, their outlook and their creativity really

quite amazing. If we're thinking about a new form of currency, whether it's bitcoin or some iteration of that, I'm not sure. If we're thinking about space travel, if we're thinking about automated transportation in the form of driverless cars, and these are all being done by people in their forties and fifties, that says something about Americans. It says something about the future, and I find it enormously exciting. It's so hard to know what fifty years hence is going to look like.

Someone showed me this article about from the New York Times from like thirty years ago, and it was one of these early looks at self driving cars. And the funniest part about the self driving cars the little cartoon graphic with it a little um animated, I don't want to say animated, but just just illustration. And there's a person sitting in the self driving car reading an open paper like a New York Times on on print matter. It's it's they got the self driving car part right.

But the idea that all these things are going to flat screens and kindles and things like that was so far beyond the comprehension of people just twenty years ago. So the question I have to ask you is what is beyond our comprehension twenty years Hence, oh, travel to the moon, travel to other other planets. Uh, I'll tell you what is ahead? T plus zero? How about that? In terms of settling transactions, like you do a trade and it settles instantly. We're fighting now about T plus two? Right?

Why not plus one the next day? Listen, you deposit a check. It's clear. I remember depositing checks and it would take forever, days and days and days. That's what the bitcoin is. So so now you deposit a check in the bank and the money shows up the next day. It's it's amazing, it's such People don't realize how much of a huge improvement that is over what we saw ten twenty years ago. Barry. We've seen more in the past twelve years and probably the past fifty years have

experienced in terms of dramatic technological change. And I think we've got the people, the brain power, the dedication to deliver on it. I'm really uh surprised, amazed and enthusiastic about the quality of people being turned out by our educational institutions and involving themselves not just in trading pieces of paper, but coming up with applications that will change

lives and change society. You change the world. A couple of years ago, we we talked earlier about Paul Volke and and what a man of integrity um he is. He had given a speech where he jokingly said, the only financial innovation there has been in the past fifty years has been the A T M. And that was a little tongue in cheek, but the truth is, in the intervening five years we've seen a run of financial technology.

He's it's almost like he shot the starting gun, and all these little things that were kind of in development before they all came running out very very quickly. I think he's surprised when he here's about a bitcoin, when he hears about various payment systems and transfer systems. I think even he's amazed by what's happening on the software side, whether it's the automated algorithmic um asset managers derisively called robo advisors, to the variety of different ways that funding can.

You look at the crowdsource fundings for something like Oculus Rift. This is a company that you know, was putting together a handful of of virtual reality headsets and just scraping by. They do a uh Kickstarter campaign, and the next thing you know, they're bought by Facebook for billions of dollars. That sort of thing was not possible ten years ago. That's true, and there are some downsides to that as well.

The protections that kept uh, this kind of thing from happening in the past were intended to protect investors from scamsters, and there's certainly are plenty of scammers all over the place these days. They don't they don't go away. They're like roaches. You flick on the light. They just find

a different crevice to to hide in. But I think in balancing those interests with the benefits of having greater employment, greater technological advancement, I think the kickstarter campaigns probably are a net benefit and acknowledging the risks that are involved, I think our society is still better off with more people doing more things than they ever did before. So so let's sum up our conversation, because I know you

have places to go and people to see. UM. On the one hand, we went from a regulatory extreme of radical deregulation to excess of regulation. We really need to be somewhere in the middle. You seem frustrated by the political politicalization of the process of nominating commissioners and indeed how divisive politics has become across many regulatory entities. But clearly you are very optimistic about the future of finance and the future of America given given where we are today.

Is that a fair fair assessment? That's a fair assessment, Arthur. I can't thank you enough for for your time and your insight and your ability to really flesh out a discussion UM on regulations. I hope our listeners have enjoyed listening to our conversation about regulation. If you enjoy these sorts of discussions, be sure and look up an intro Down an Inch on Apple iTunes. You can see all fifty two of our previous conversations. You're actually the first

um Masters in Business of our second year. The show has now been on a year and a week, so thank you so much for being our inaugural guest for our second year. Be sure and check out my daily column on Bloomberg View dot com. Follow me on Twitter her at rid Halts Uh special thanks to my researcher Mike Batnick, to our engineer Matt and to our producer Charlie Valmer. I'm Barry Rid Halts. You've been listening to Masters in Business on Bloomberg Radio.