Interview With Sebastian Mallaby: Masters in Business (Audio)

this to be an absolutely fascinating conversation. We definitely sort of go off into the weeds on some wonky um history and biography of who Alan Greenspan was and why he had such an outsized uh influence. If if you're a Federal Reserve watcher or econo geek, you will find a lot of this stuff fascinating, and we talked about

it extensively. I prob belie could have spent another hour just on Alan Greenspan, but if I did that, I wouldn't have been able to get some more money than God, which is a delightful book on hedge fund managers, highly recommended. I could babble about this stuff endlessly, but instead of me doing that without any further Ado my conversation with Sebastian Mallaby. This is Masters in Business with Barry Ridholts on Bloomberg Radio. My special guest today is Sebastian Mallaby.

He is an author and the paul A. Vulgar Fellow for International Economics at the Council on Foreign Relations. He has contributed to The Washington Post and The Economist, and he is the author of More Money Than God Hedge Funds in the Making of the New Elite, that won the two thousand and eleven Lobe Prize and was a New York Times bestseller. His most recent book, The Man Who Knew, The Life and Times of Alan Greenspan. Uh

Sebastian Mallaby. Welcome to Bloomberg. Great to pay with you, Parry, So I'm fascinated by both your process and the topics you cover. Let's start with The Man Who Knew, a title I perhaps might choose to argue with you over, but I can't argue with this quote. This sex up from the book. No post war figure has loomed over global finance as imposingly as Alan Greenspan, America's FED Chairman became FED Chairman the month of the crash, and no

figure has been more paradoxical. A man who preached the virtue of the gold standard yet came to embody paper money. A man who posed as a dry technocrat yet was political to his core. Let's discuss that. Well, he is a man of paradox this and I didn't quite understand before I began writing quite how deep those paradox has went. But he was a person who had lectured in the nineteen sixties that the creation of the Federal Reserve was and historic disaster. So the man who later embodied the

Federal Reserve personified the central bank. He didn't believe there should be a central bank, which which is which is ironic? I always found it fascinating that he was such a Fed chairman, interventionist, and yet he very much argued for learning the marketplace work things out themselves. Yes, he had begun in his earlier life, in his thirties and forties, as a very determined libertarian. I mean this idea that there shouldn't be a central bank was because he believed

in a goal standard. Why because he didn't want the government to be in the business of making money. He thought that that was too much government power. And yet when he was FED chairman, of course, not only did he move interest rates around quite a lot to try to micromanage the level of inflation, but also he was willing to intervene when there was a crisis repeatedly and

bail things out. Literally within his first few weeks of joining the FED, the seven Crash occurs down in a single day, lots of panic, and he stepped in and provided liquidity. Really that set the tone for the rest of his his career. It did, so you know, when there was the Mexico crisis in the beginning of nineteen five, the FED helped to bail out Mexico. When there was, you know, the East Asian crisis, green Span was involved

long term capital management. The hedge fund goes down in and the FED, in my view, that's really where they really go overboard and cut interest rates no fewer than three times to try to stabilize the markets. After that hedge fund went down. Then, of course, after the Nasdaq bubble bus, you know, another round of super loose policy.

So yes, repeated interventions to stabilize finance, and and of most famously after nine eleven there were fairly radical interest rate cuts, the Greenspan FED took rates down to level they really hadn't been on, especially for as long as

they were kept there right now. As I remember, they were down at one on the federal funds rate in the summer of two thousand three and stuck there for a whole year to two thousand four, right below two percent for three years, at one percent for a single year, and subsequent to that, a number of assets that are priced in either dollars or credit, housing, oil, all the commodities, gold, they all took off right And I think what that points to is the difficulty for the FED on the

one hand of targeting inflation. So if you're looking at consumer price in fashion or however, you measure that that can be stable, while asset prices are not a tool stable. They're going crazy. And the central dilemma, which still remains for the FED and maybe quite relevant actually in the next twelve months, is that you can be thinking, Okay, I'm doing a good job because inflation is low and stable, but you're not getting a good job because all these

asset prices are bubbling away uncontrollably. The thing that stood out to me from another book that takes A similar look was Roger Lonstein's Origins of the crash, and he talks about the opportunity the Federal Reserve had after long term capital management to impose some discipline on market participants and say, hey, we don't want to engage in moral hazard. You guys mess this up, you figure it out. It's

not systemic, it's not threatening. And maybe there's a lesson to be learned there that that might be asking a little too much of the Federal Reserve to think along those lines. But do you agree with that assessment that this intervention, amongst many help set the stage for the future crisis. Definitely. I mean, I think that the expression used on wall streets after the long term capital management

experience was Uncle Allan will take care of us. That is not a good way for traders to be feeling, because then they're gonna take too much risk. And I think it was really ascerbated by the way in the two thousand four or five period when the Fed started to do a forward guidance that further exacerbated this feeling

that Uncle Allan was there. He was pretty much telling you how quickly interest rates we're going to be raised, and therefore you could take a ton of risk because you knew you wouldn't be ambushed by a sudden rate hike of seventy five basis points. I'm Barry Rihults. You're listening to Master's in Business on Bloomberg Radio. My special guest today is Sebastian Mallaby. He is the author of the highly regarded The Man Who Knew The Life and Times of Alan greenspan. Uh. The reviews on this book

have been wonderful. I've been working my way through it. You spent so at first, I have to talk a little bit about your process. You spent about five years researching and writing. This is that right? Yeah? My kids make fun of me that every time I write a book it seems to take longer than the last one. And this did take a bit over five years. And it wasn't that was my plan. But it was so

fascinating once I got into it. I discovered so much new stuff that people didn't know about this very public figure, and yet there were private things to be discovered. Give us an example, well, you know we remember the sort of bursuited sober, pinstriped fed chairman going on about trucking

capacity utilization in the Midwest. You don't remember that he was the guy who bought the Buick Electra convertible automobile, you know, and drove it so fast up and down Manhattan that, as his girlfriend said, um, you know, it wasn't a moderate pace and he got he got plenty of speeding tickets. You know. He was not against marriage. He did it twice, but he was single between twenty seven and seventy one. You describe him as a ladies man.

Is that an exaggeration or is that a fair description. Well, he had a succession of remarkably beautiful girlfriends in this as he said, you know, there was this little interim between twenty seven and seventy one, and in this period and these are his words, not mine, you know, he dated news anchors, beauty queens and much in between. So there was quite a list there. That's quite that's quite fascinating. Look, we were referencing earlier, um, the forward guidance that the

FED began in two thousand and four. So this was with green Spans still as FED chairman, but the new kid in town coming in as vice chairman, Ben Bernanke, and you argue more or less in the book that forward guidance helped set the stage for the financial crisis. So let's talk a little bit about this. Why was this such a break from past policy and how did

it impact um the future crisis. Well, in terms of the difference from past policy, if you go back to the nineteen eighties and you look at the big moments in monetary policy, they were remarkably untelegraphed. So Paul volca in two gave up monetary targets, big change in the

Fed's policy. He didn't even announce it when he did that, and then he showed up a bit later at a conference of bankers and said something like him, well, we made a little adjustment and how we approached this stuff, but we might go back, and we're not sure if we're going to stick with it. I mean, the level of communication was very, very low, to the point where people didn't know that the Fed wouldn't come out and announced, hey,

we raised interest rates. It would show up in in their actual open market activity, not from a missive And that all changed under Greenspan, didn't it exactly? So bit by bit there was more openness, and the Fed did announce the policy change once it decided it. And then in the two thousands you get to this period where not only does the Fed announce what it's just decided, it also guides the markets about what it's going to be doing in the future. And that's the crucial change.

And to me, what that did to Wall Street was that Wall Street suddenly felt it wouldn't be ambushed by a sudden jump in the short term interest rate. So this change took normally conservative bond managers and traders and gave them a little more carde blanche to take more risk and embrace a trade that was fraught with the

potential of the Fed suddenly and unexpectedly raising rates. If you compare the two thousand four kind of period to four when the FED was in a tightening cycle, and at one point it did twenty five basis points, sometimes fifty basis points. There was one meeting where they raised by seventy five basis points. That cause what one bond trader at the time called Hurricane Greenspan. Right, people got blown up if they were leveraged. You know, there was

real market discipline being imposed. Market discipline meaning people weren't leveraging up. The carry trades because you never knew when a sudden rate increase would come along, and the guys who were leveraged, like Michael Steinhardt, the hedge fund trader, for example, blew up. You know, he was done enormously in punished by the FED for taking too much risk. And you've got to do that in markets a bit

to to remind people that it's risky. So removing that potential of the unexpected increase pretty much allowed allowed traders to embrace more risk, embrace more leverage, get much further out over their skis than they previously had been doing. Yeah, and I think it's worth just trying to encapsulate this for your listeners in the following way, because it's it's it's a misunderstanding and a disagreement that persists even today

in the debates that I have with policy makers. So sometimes there people say to me, look, if you raise the short term industrates the FED was raising rates in two thousand five, then you know the short term rate is more expensive to borrow, so you're gonna have less carry trade. And I say, yeah, you have to think about the risk adjusted return, not just the return. If the sharp ratio, the risk adjusted return on a carry

trade improves, then Wall Street will do more. One of the things that I was aware of and and you reference was in the early nineties is when a few days before an f O m C meeting, green Span on his own decides to cut rates and the governors went berserk and subsequently remove the ability of the Federal Reserve to act that independently outside of a real emergency. Tell us a little bit about that moment. Well, you know,

Greenspan was always known as the Imperial Fed Chairman. He massed massive power unto himself, and if you know, all through this period he really dominated the system. And in the early period he had this particular device that you're talking about, where basically they would have a meeting, they wouldn't quite come to a decision about what they should do, and so they would end the meeting saying that the Fed Chairman had the authority to move into straits in

between meeting, just on his own authority. And Greenspan of course like that because it gave him the power, and he used to do that a lot in the first few years, until finally his committee had enough of that and stopped him. I mean, it was just days before a meeting. It seemed like he was snubbing his nose at them and they weren't happy with it. Let's let's talk about some of the other things. Ben BERNANKEI gave you a wonderful He said, it wasn't a review, but

it was a write up of the book. He disagrees with you about green SPAN's role uh in leading up to the crisis. Um, let's let's discuss that. What do you think about the former Fair chairman's discussion of the book. Well, you know, I'm very grateful to Ben Bernankey because he did write a very gracious, long response. He said, it's highly recommended, So how can I complain. Um. At the same time, we we do have a disagreement, and you're right.

Part of the disagreement is about the interpretation of Greenspan's motivation for not raising interest rates more aggressively. I say in my book that some of it had to do with personality, that green Span didn't like to confront people directly and aggressively. I'm Barry Ridholts. You're listening to Master's in Business on Bloomberg Radio. My special guest today is

Sebastian Mallaby. He is the author of More Money Than God Hedge Funds and the Making of the New Elite, as well as, most recently The Man Who Knew the Life and Times of Alan Greenspan. Let's talk a little bit about your writing process. You you referenced that it took you five years to write this. Is that the research that's so time consuming or is it physically the process of getting words on paper, um, and then editing and re editing that that's so time consuming. It's mostly

the research. I mean, this was a huge project of going to presidential archives and you know, going through what the Nixon Library might have about Nixon's involvements with green Span, etcetera, etcetera, And and the big I think what really makes this kind of book worth doing is you've got to put

on the table information that people didn't have before. And that's not easy with a guy who is literally in the public eye and financial television is showing the thickness of his briefcase on the way to one f M f m C meeting as indication of what might happen. He's that closely watched. Yeah, but so you really have to go down every moss hole and really hope you

find something, and sometimes you just get lucky. So, for example, I went to see the guy who operated green Spans computers when you know, like the technician who was working for green Spans consulting company in the nine sixties. And I went there on the theory that this is a person who would have some color about the culture of green SPAN's little company. And so I show up and um, it's in the middle of nowhere in the woods in Virginia.

There's a clearing in the words, a cabin, this guy living by himself, and I start talking with him, and it turns out he's an Iron Rand follower, and he was the person who in his basement had this store of green Spans speeches when he was close to Iron Rand come on three page transcript on it was called the Economics of a Free Society, green SPAN's worldview when he was thirty eight years old. So you know, I didn't go there expecting to find it there, but I did.

And you just have to go everywhere and hope you find stuff that that's amazing. So did this guy ever publish that or did he allow you full access to it? He gave me a full three page print out of the whole thing a photocopy, and it would have taken me five years to read three hundred pages of Queen spans ran speeches. Now you get a feeling of why it does take a while to do this this work. You know. I went to see Pat buchannan on the theory that Bricannon was a Nixon speech writer and green

Span had been involved in the same Nixon campaign. So I thought Pat mcannon would tell me if his stories. It turns out he didn't just tell me stories. He also said, now in my basement, you should come down and have a look. And in Pat mcanna's basement there's two things, right, there's a fantastic collection of antique firearms, and there are all the memos that people wrote to Nixon in the sixties seven sixty eight campaign, including green

Spans memos. So that doesn't go to a presidential library. I would assume the law was that has to be archived, or maybe that's a ladder piece of legislation. Well, I think that the campaign stuff. Yeah, right, So this is when green Span was in the war room during Nixon's campaign. He begins by writing pure economic advice, then he starts to do political advice. He starts to analyze polls for

Nixon and then he does spin. I mean literally is telling Nixon, you know you believe this, but you shouldn't emphasize it too much because it won't go over well with the with the public um. So you know, how about phrasing it this way? That's fascinating. It reveals the political side of Alan Greenspan. I need to get some more stuff in my basement. So in the description of the book, it says you have unlimited You had unlimited access to Alan Greenspan. Define unlimited access? Did you really

spend that much time with him? And how forthcoming was he about the writing you were doing. When I would go over to his office every week or two, I'd spent a couple of hours talking to him. After doing this for seventy hours, I stopped counting. I think for me it was research and for him it was therapy. So it was very open access. And for example, one other document that nobody had been able to find before was Alan Greenspan's PhD thesis, and I heard about that.

He gave it to me. Now he gave it to me partly because I think, you know, I was asking him so many questions about his early intellectual development. And after a while he kept on glancing up at a shelf and I looked up there and I saw this big binder, and I kind of I figured he had it there, so he gave it to me. And you know, that was fascinating because it was really about how the central bank must fight bubbles. So it's one of these

enormous ironies. Wow, that's amazing. Now. The also famously he never got his PhD in economics. What why did he not complete his PhD? THEASI, Well, what happened was actually that he began the PhD when he was young, in the nineteen fift and never completed it. Then he went into business. He was a guy who grew up with not much money. He wanted to start making money, and so he did very well as a paid consultant and

economics and that was more attractive. But then way later, in fact, when he was in his early fifties, he'd by this time being President Ford's chairman of the Council of Economic Advices, and his old friends at New York University said, um, you know, you should really get a PhD since you're an economist, and why don't you come back and take some classes. So he went back, took the classes, did the coursework, and they assembled a collection of papers that he'd written over the years, and then

he did get a PhD. Then I'm Barry Ridholtz. You're listening to Master's in Business on Bloomberg Radio. My guest today is Sebastian Mallaby. He is the author, amongst other things, More Money than God, which won the Lobe Award in two thousand eleven. It was a New York Times best seller. Let's talk a little bit about this book, um, which is really quite fast. And first I have to ask explain from whence the title comes. Well, it's a bit of a funny one. But the U nickname for JP Morgan,

the famous banker, was Jupiter. And I looked up how much money JP Morgan had when he died um in an inflation adjusted dollars, and it came to something like, I think one point three billion is a piker exactly. I realized that modern hedge fund managers in a single year occasionally make more money than Jupiter. Jim sound Simon's Ray Dalio. They have two and three billion dollar years on a regular basis, right, So I went for the title.

A lot of people hate the title. They say, oh, I love the title it because you know, you're describing a very very distinct class of of asset managers who have been there's no other way to describe it, wildly compensated. And you know, nothing is more expressive than than their phrase. So so let's let's discuss this group a little bit. Explaining the most secretive subculture of our economy posed an irresistible investigative challenge. Uh. You also say the common view

of hedge funds seemed ripe for correction. So let's let's talk about both of those. What was the investigative challenge here reviewing a variety of different hedge fund managers. Well, I mean, a lot of aspects of the U S economy are very transparent. You can look stuff up on

the Internet and so forth. Hedge fund managers are typically quite secretive, and they didn't want to talk about their methods because some of it is proprietary, and they just want to be discreet because they figured most public attention they get is negative, and so persuading people to talk to me was quite a challenge, and it took me four years but in the end I did get a huge amount of access. So, and let's talk about the second part of that statement. Common view of hedge funds

seemed right for a correction. What do you think people misunderstands? What is the public perception that's that's erroneous. Well, I think people view hedge funds as the wild West of finance, the people to take the most leverage, the most risk, and they're the craziest and therefore, in some ways the scariest and and the opposite is true, isn't I think that what you can definitely say all the hedge funds do blow up. They do take a risk, of course

they do. Whereas a lot of banks are too big to fail and taxpayers on the hook, hedge funds is small enough to fail, and they can fail without getting any taxpayer help. And I think that's way more healthy for the system. And in fact, hedge funds had nothing to do with the financial crisis of oh eight or nine. They were a participant, they were an actor, but they weren't the players who had completely leveraged up. And and the few that crashed, namely the bear Sterns one, the

losses were limited to their own investors. It didn't become systemic, right. I mean, as we were discussing earlier, this Greenspan put existed and that encouraged too much risk. But I think that encouragement applied especially to the big banks that felt they were kind of inviolable. They felt they were so big, so powerful, that they could take all this risk and be okay. Hedge funds always knew that they were driving along rapidly in a rickety car that could just fall

apart in him, and so they were more careful. I love that description. So you have access so not just like you had a wonderful access to Alan Greenspan, you you received access to a number of legendary hedge fund managers who who do you wish you could have gotten a conversation with that either was unavailable or unwilling to

chat with you. Well, you know, the first character in my book is Alfred Winslow Jones, who started the hedged Fund, as he called it, And you know, he was a fascinating guy who in his early life had fallen in love with a Marxist beauty in Berlin, and he himself enrolled in the Marxist Workers School, which is a funny place for the you know, father of hyper capitalist hedge funds, or all the best hedge fund managers go through the

Marxist point. Anyway, he was dead by the time that I read the book, so I had to go speak to his portfolio managers who told me stories. But I never met him in my office. There's an internal debate as to whether Winslow or ed Thorpe was the first true quant we we've been we've been arguing that, um internally. So we know hedge funds have been under performing the past decade or so, UM, what what's your your take on that? Why do why do we see hedge funds

as a group under performance? You know? I think one point is that yields have been compressed, so risky bonds are not paying you much more in interest than unrisky bonds. And that's a general point that if the expertise of a hedge fund is to finally manage risk and figure out, you know, which risk is mispriced. If all of these risks are priced very low, you're just not being compensated very much for that expertise anymore. So I think that's

one point. And now the point is that in an environment of low returns overall, in in at least in fixed income low yields UM. You know, the two and two and twenty fee structure is taking a big nut, an insane bite right out of the return to the final investor. And I think that's the second reason we've seen that compressed. We've seen you know, one point five and fifteen or one in ten that's coming wrong. You know,

I'm reminded of UM Jim Chainos's comment. He said thirty years ago when when he launched his hedge funds, can A Coach Partners, can Coast Associates, there were a few hundred hedge funds and they all created alpha. Now there's eleven thousand hedge funds and those same two hundred edge ones or the alpha generators. How much do we suspect the lack of performance is a function of a ton of entrance into the space, some of which probably shouldn't

be in there. I think there's some truth in that UM, but I also think that you know, the notion that there's a finite amount of alpha maybe understates the way that you know, financial markets are being globalized, that there's new opportunities of trade, frontier markets that didn't exist before. It may understate the way that there are new financial

instruments being created and you can trade those. There's also a new kinds of data and all the kind of world of big data and online intelligence that we're getting. So I think the world is constantly changing creating new opportunities. So I didn't put so much emphasis on the idea that there's a natural limit to how many hedge funds there ought to be that that that's quite quite interesting.

And the other data point that I find so fascinating since hedge fund assets are up twenty five fold and recently crossed the three trillion dollar mark for the first time. So what does that tell us about this form of investment. Well, I think it shows you that allocators in other ways, the professionals who worked for university and diamonds or pension funds or what have you, recognize that the incentive structure

and hedge funds is attractive. So you know, in a normal state of the world where returns and not being messed around by quantitative easing, you've got hedge funds which have a few characteristics. One is that the manager has his own money in the fund, so he's incentivised not to blow it up. So there's downside risk protection because it's you know, some of his own money, the infamous

skin in the game. Right. The second thing is that because he's being paid two and twenty, he wants the twenty, he wants to do the research necessary to drive a return quite high. Because of that carry the profit share. Uh. Then there's the freedom of action. There's the fact that you know you can go long and short, you can use leverage, and that enables you to kind of combine those two things in clever ways to target particular risks that you want to take and then screen out other

risks you don't want to take. So I think there's a bunch of freedoms and a bunch of incentives that come with the hedge fund structure that ought in normal states of the world to make for good returns. So there's a famous quip that I tracked down the source, and I couldn't find the original source, but I did trace the first publication in The Economist, which I'm paraphrasing. Hedge funds are a compensation scheme disguised as an asset class.

You're familiar with that. I don't know if you know who originally penned that, But I definitely could go back no further than I want to say, oh three or oh four in the Economist what what should take on that? I'm familiar with that phrase. It's a compensation scheme, not an asset class. I didn't know where it came from originally.

I think, um this truth in that, in the sense that there are so many different styles of hedge fund one of the fascinations about writing my book was that you could explain to the reader what event driven funds do, what long short equity to what statistical albertrage funds do. There's all these different styles of macro trading and so forth, so there's no one style. So in that sense, it's

not one asset class. So of the various hedge fund managers, you spoke with, and you spoke to a large number of them, who surprised you the most, Who who either in what they said or their personas caused an arched eyebrow. Well, I think the character of George Soros is fascinating, and I spoke to him, But more importantly, I spoke to a ton of people who worked for him, and that's often the best way when you're doing a book to really get a view of a person is to speak

to those who interacted and have an outside views. You construct a set of many perspectives in one person. We have been speaking with Sebastian Mallaby. He is the author of More Money Than God and more recently, the Man Who Knew the life and times of Alan Greenspan. Be sure and check out our podcast extras, where we keep the tape rolling and continue discussing all things green Span and hedge funds. Be sure to check out my daily column on Bloomberg View dot com. You can follow me

on Twitter at rid Halts. We love your comments and feedback. Be sure and write to us at m IB podcast at Bloomberg dot net. I'm Barry rid Halts. You've been listening to Masters in Business on Bloomberg Radio. If you're having a business dispute, the process can be slow and drawn out, especially if you rely on litigation in the courts. You can wait for years before your case is resolved, and the longer your case proceeds, the more your case

can cost. Not with the American Arbitration Association arbitration or mediation with the American Arbitration Association is faster. In fact, nearly fifty of our cases settled prior to hearings a d r dot org resolve Faster. Welcome to the podcast, Sebastian. Thank you so much for for doing this. This has really been fascinating stuff. I know some of the Greenspan stuff is a little um wonkie for some people, but there is a audience for that that absolutely is gonna

eat that up. And my head of research, Mike Patnick in the office loves More Money than God. It's one of his favorite books that it helps him on some research he's doing on a on another project. There's so many questions I didn't get to. I really want to um before we get to our standard questions, I have to I have to come back back to let's start a little bit. We didn't really talk about your time

at The Economist. You're working in London as a as a journalist, as a writer, you're covering international finance, and then out of left field, you get a sign to South Africa. How does that happen? It was the other way around. Actually I went first to South Africa and then I came back from London. So you're working in London, you and was that where you were first started with

the economist. I joined the economist, I joined the Foreign Department and they put the new kid on the block to do Africa because I guess it was the poorest part of the world. And so the youngest guy got it. And I did that a bit in London, and then I insisted on moving there. So I went to live in Zimpa. So this this was your choice. This wasn't them saying, all right, sent the kids to South Africa. Now I wanted to go live there. I was sick of being in London after a couple of years and

trying to follow Africa but not being in Africa. So I said, okay, I actually quit, and they kind of persuaded me not to quit by persuaded by giving me the option of where did you want to go in Africa?

Where do you want to live? So I picked Zimbabwe, which was kind of next to South Africa but not in it at the time with apartheid still being there, there were travel restrictions if you lived in South Africa, and I think it also South Africa was was in a boring political phase where they were not going to release Mandela, nothing was going to happen, and and of

course I was totally wrong. So as soon as I got to Zimbabwe, political change began in South Africa, and I wound out spending a lot of time living out of a suitcase, traveling around. And when Mandela came out of jail in there, I was twenty five years old outside waiting for him to come out, and I knew my career would be downhill thereafter because nothing could be as exciting. So a UK citizen living in Zimbabwe has greater travel freedom than a UK citizen living in South Africa?

Was that the thinking? Yeah, at the time, that was the case, because if you had visa stamps from South Africa all over your passport and then you tried to go to another country, like I don't know, Tanzania, the Tanzanian government as a kind of protest against apartheid might give you a hard time. That makes a lot of sense. So you're you're you're covering now some Mandela, what was that experience, like, did you get to interview him? How

was your South African experiences? The South African experience was amazing. It was an incredible time of political change, and I wrote a book called After Apartite, which kind of laid down what I thought the future would be like after white minority rule ended, and I draw on a lot of my travels in the rest of Africa to try to understand how post white rule society has tended to develop. And all of that was just a great experience in my twenties to to have that adventure. Did you did

you ever get to interview Mandela? I didn't interview Mandela unfortunately. That that and then from there you end up getting assigned to Japan. Yes, well, I came back to London for a couple of years and that's when I started to write about finance and it was a total learning experience. I remember just asking questions, just going to see fund managers, traders whoever. Would see me and say, you know, I've

got some questions. I'm sorry, and then I would just quiz them and quiz them and quiz them until they threw me out of their offices because you know, an Arab gone by. But by using the name of the economist, I got into a lot of offices and I am and I abused a lot of people's time to get my sort of education in finance. I'll let you in on a little secret. I use the name Bloomberg to be able to sit with people like Sebastian Maloby and talk about stuff like this. So that had to be

a culture shock. I'm thinking the UK, South Africa, Japan. If I asked someone picked three of the most wildly disparate cultures and societies, I don't think you can find three more different societies around the planet than those three, right, And going to Japan in the early nineties was fascinating because that was a time when people still believed that the Japanese economic model might be superior to the Western one.

The Japanese miracle absolutely, and although the market had crashed in Um, it took a bit of you know that one of those cartoon characters that runs off the edge of the right and then keeps running, doesn't actually fall until he looks down and notices it exactly. And so we were in that moment where in Japan is kind of off the edge of the cliff but still levitating somehow, and some people believe that it would be able to scoot right back onto terra firma um and not fall.

And so there was a fascinating debate about the nature of capitalism, which model worked best, and so forth, and and so that was a great education. I know I missed pronouncing this. Kuritsu is the Japanese model of you. You're stacking all these different industries and one vertically integrated company. My favorite example Mitsubishi Bank of Mitsubishi, Mitsubishi Heavy Industries,

Mitsubishi real Estate, and Subisi Aviation. They were building these giant companies made it challenging for Japan to allow their banks to to go into bankruptcy. It's a whole house of cards on top of it. Yes, And I think what's fascinating though, is that the kretsu system in Japan is sort of cross shareholding banks lending on the basis

of a relationship. It's not arms length stock market capitalism where people are trading bits of paper securities without having much direct contact with the companies or the entities that issued those securities. So it's a much more kind of hands on um. People said long termist version of capitalism, and when Japan collapsed, people thought, oh, well, that's obviously

not a good model. But if you if you substituted the word Japan and you said instead Northern California, And you think about the way that venture capital has been so important in the technology stuff, and when it's venture capital, it's long termist. It is direct provision of capital to companies. It is not about trading secondary claims and markets. And it's been fabulously successful. Yeah, but you those are new

technologies and small startups. In Japan, it's almost dynastic in terms of the giant entities, these giant conglomerates, including many of the biggest companies in Japan and in the world. It's a fascinating comparison. Um, I think it works better with small companies than it does with the big conglomerates. Yeah. I think that's a good insight. And I think that um, you know, I'm not ready to say that markets and

financial trading are a bad thing. I mean, I read about hedge funds and I believe that they're often a good thing. Um. But it is interesting the way that venture capital is finance, but without finance, I mean, people don't use mathematical models. It's very much based on looking at the entrepreneur in the eyes and saying, does this person have the stuff it takes to set up a

company and make it work. So it's a very different kind of provision of capital that you get instead of con Valley, and it clearly has worked, not to say the least. So so we covered um, South Africa. You were in Japan for how many years? Three years? Did you learn Japanese? I did? Yeah? Are you still fluent or or very rapidly after I left Japan? In that whole world kind of fed off my mental map. Have you been back since I haven't? It's terrible. I should

go back. It's one of the places on my list. It looks like an absolutely fascinating country that that is truly so different from from my experiences. It looks utally fascinating. Let's talk about something a little closer to home, um, the U k And and Brexit. You know, to an outside observer, Britain looks spectacularly calm, considering there's a whole bunch of big economic changes coming their way. What what's your take on this? I know you've written about it

for the Washington Post. In fact, Brexit Britain seems shockingly calm. Is your your headline? So? What is going on in in Great Britain? Well? I think the main thing that happened is that I had assumed, and most people assumed that if the Brexit vote succeeded, everybody would be terrified that the uncertainty of leaving Europe would cause consumers to quit spending, and in fact, consumers did the opposite. They went out and borrowed. Household debt ratios have actually, you know, risen,

and so people just refused to be scared. And I think that it's kind of a behavioral insight that when there's a political development that's very complex and it seems to be you know, yak yak yak, all those politicians talking to each other, the average person just kind of zones it out and goes off on a spending spree,

just ignoring what's coming down the pike. And I think when the reality of Brexit hits and you suddenly find that, you know, your company cannot export without a customs check, or that you yourself cannot travel and work in Spain or whatever, I think when the reality hits, then consumers will start to reign in their spending and then we'll

see the cost of Brexit. The expectation is if if ah Brexit goes through the way, it's reasonably expected to go through, meaning all the things we're referencing actually a car. This is a pretty big hit to g d P, isn't it. Yes, I mean, you know, Britain joined the European Union in the nine three so it's been a long time of progressive integration into those markets of British exports go to the rest of the European Union, so losing full market access in those economies as a big deal.

And it's arguable that the Great Britain had the best of both worlds. They were a full member, but they still had their own currency. What I'm perplexed as to why they would want to exit a situation that's so advantageous to them. Well, I'm perplexed too, and I you know, I helped to set up a website that did fact checking to point out the lies frankly of the side

they wanted to get out. Well, you don't. You don't think we're gonna get the UK is going to see four hundred million pounds a week for the National Institute of Health. That's not going to happen. This is one of those myths, right that they put out there on the side of a bus that they read the post truth campaign style. We try to say that truth mattered. Unfortunately, not enough people listen to us it. I mean when you look at the opinion polls and you say, well,

why do people vote for exit? The first thing was a sort of nebulous belief that you'd get sovereignty back. What does sovereignty mean? We live in a globalized world. We are dependent on what happens in other countries is banned to affect us, And so I think that's a shaimira. What about the control of borders. We have an open border policy. We want to control, we want to keep bad elements out. Yes, so that is a politically potent line, both here in the United States as we've seen, and

in and in Britain um. And you know, if you really, really really want to keep foreigners out, I guess that's your choice and people can vote like that. But if was economically migrants positive, very positive, And I would say even culturally. You know, the diversity that you have in London, a very melting pot kind of city. You walk on the street, you get in the subway, people are speaking French,

Arabic whatever. I like that. Plus the food is so much better between the pizza, the Indian food and the sushi. London is now a city you can actually enjoy your meal, and that wasn't necessarily true thirty years ago. Yeah. I left London to go live in Japan in nineteen two, and it was not with that much regret. But when I came back to live there in it's a fantastic place.

It's completely changed, and it's it's far more international and cosmopolitan, and um, you would always oh, you would have always assumed that about London, given the history of of the UK, but that really wasn't necessarily the case for a long time. And now you're a UK resident or US resident, I now have this funny split existence. My wife annoyingly got promoted so much that she has a great job in London, editor in chief of the Economist magazine, and so we

live in London for that very good reason. But my writing and my professional interests are mostly in the US. So I'm here kind of half the time and in London half the New York or d c B alright, because I keep him in the phrase Nylon, which is the New York London. Um um swap, let's um all right, So let's leave the economists behind. But the only other thing I have to ask, since you're in London so often, I have to ask you about um Europe. How much

trouble is Europe in? Are we overstating the damage here? We look at the banks in Europe, they're selling for half of book in the U S it's one to two times book. How much trouble is Europe really in going forward? Or will they be able to resolve everything? I think that the euro Zone um is still a

disaster waiting to happen. That is huge amounts of debt uh and they still haven't gotten to a position where, although growth has picked up a little bit, even nominal growth is lower than the deficit in some of these countries. So public borrowing is adding to the debt um. And we're talking to southern Europe. Yeah, I mean in Greece is the obvious one is true? Italy? I think Italy

more than Spain. But you know, I do think those countries have a fundamental problem, which is that they are locked into a monetary policy that is partly designed to suit Germany and um, well, it certainly has helped Germany over the past few decades, right, And I think that there is no obvious if you just think about the debt sustainability dynamics in a place like Italy with negative demographics, I'm not sure how they're going to stabilize that, and I would be remiss if I did not ask you.

I've been reading about the increasing chatter that hey, maybe when everybody figures out how expensive it's going to be for the UK to actually exit um the EU, and maybe Scotland reconsiders their vote and is there any realistic possibility that they suddenly um get religion and decide to stay in the EU with some some minor accommodations or is that just a pipe dream? It's a pipe dream.

If you look at the political line up in Britain right now, you have a Labor Party opposition which is in total disarray, with a very left wing leader who's extremely uncharismatic says it's not gonna come from him. Um. Then you've got a bunch of regional parties um, including mostly the Scottish National Party, that would like to stay

in Europe. But they're regional, they're not gonna, you know, have much influence in in the heart of Britain, which is England and then you're left with the governing Conservative Party, and Theresa May is a of rather dug it, not terribly imaginative or flexible leader, and she is doggedly proceeding towards leaving the European Union, and she's not going to

be put off. Quite fascinating. There's a ton of questions that I still want to get to, but I have to get to my favorite questions, UM that I asked all of my guests in the remaining fifteen twenty minutes we have Before I hit those questions. There's there's one other comment I had to ask you about. So your father was the United Kingdom ambassador to Germany and later an ambassador to France. That's a fascinating UM background. Did you spend a lot of time growing up in Germany

or France? What was what? How did that impact um? Your childhood? Well, when I was a kid, there were two countries where I remember going on vacation from boarding school even living there. In fact, one with New York. My dad was in New York when I was between the age of seven and ten, So I was a Central park baseball playing gum chewing kid. Um. You can tell by my accident that it really stuck a lot now and so you can't you can't tell where I'm from at all. I do such a good job hiding.

I know you grew up in London. The other thing that happened was that we then moved from New York to to Russia, to Moscow, and so I have these weird memories of communist Russia. And so when when was your father ambassador of Germany? Was that before your time or or after? You're already out of the household by

that point, I was the economist correspondent in Africa. I remember a funny experience actually sitting with a bunch of reporters in Namibia right next to next to South Africa, which was having a sort of historic election of independence. And every single senior Africa reporter in the world had come to Namibia and they were looking forward to getting on the front page the next day, and on the front page the next day. All there was was the

collapse of the Berlin Wall. And so Malaby Sor and otherwise my dad, who was a master in Germany, was in the middle of the biggest story in the world of a generation. And Mallaby Jr. That's me was Offen Maybia and I'm afraid we're on page seventeen. Oh that's very, very funny. So so let's um, let's jump into our our favorite questions. Um, So, did you always know you wanted to be a writer? Was that something that that was in your future or or how did that come about?

Actually I was asked when I was at high school around the age of sixteen to fill in some questionnaire saying what would I like to do in the future, and I wrote journalism and writing, So I've known it's something. It's a combination of being fascinated with the craftsmanship of the written word. I actually like fiddling around with semi colons and sentences and and language. I just love language.

Um maybe that comes from having a French mother and having grown up with a couple of languages in the house, and then learning German and other languages later. So I loved language. But I also love discovery. I love going out talking to people, figuring out what makes them tick, what their ideas are, and so that whole world of understanding making sense of current events has been my passion. Sounds sounds quite fascinating. Let's talk about some of your

early mentors who who guided your career when you were younger. Well, when I joined the Economist magazine right out of college, first as a sort of temporary intern position, and then they kept me. Um, there were several older journalists who were really terrific in terms of helping me to learn how to write, how not to waste the reader's time

by really getting to the point quickly. I remember one exercise where, um, you know, I was terrified when I first joined the Economist, and I didn't know if I could write stories that they would actually use. So I would I would stay late and write a draft and give myself basically a full all morning the next day to crunch this small piece into an even smaller space by taking out every piece of fat in the pros. And I would spend four or five hours just taking

out redundant words. If I said in spite of I would say, ah huh. If I changed that despite, I can cut it from three words to one word. So this obsessive polishing of language or something I learned from my colleagues of the Economist. So so was the man who knew originally eight words and now it's down to six forty or how did that history affect You're writing a book like this, so you're talking pages, they're not words,

But yes, did I say words pages? Yes? This was originally so this is six How how large was this? Because it's a giant topic and you covered decades in the book, I did cut out two hundred pages. Really is it painful? Because I know it's the worst thing in the world to have to exercise your your precious words. You see. The funny thing about me is it's not painful. I actually love sitting there with ages at pros and figuring out how to make it more beautiful by cutting

out the ugly bits. Less is more, to say the least. Let's let's talk about writers who may have influenced you. Who who do you admire? What writing or writers affected your approach and your style? Well, I love reading, and I'm a bit of a slow reader because I'm always trying to learn from the book, both about the style and about the content. I mean, Roger Lonstein is somebody who when I started to write about hedge funds, you know, I read both his Warren Buffett biography and I read

When Genius Failed. I thought those were both fantastic books about and he gave you a delightful blurb for the man who knew. He's been good about that. And so i've I am getting a blurb from Summer writer that you really admire. Sure, it's fantastic. Sure, and um so so who else anybody else influence your approach? By the way, for those of you who haven't read When Genius Failed, it may be one of the all time great financial narratives.

It's just a wonderful, a fascinating tale, wonderfully told. A long time ago, Joe lily Felt, the who became editor of The New York Times, wrote a book called Move Your Shadow. And this was based on his experience as the South Africa correspondent. And that was a model of taking a mixture of history analysis but also personal experience, you know, describing himself in South Africa and putting himself

into the book. And I thought that the kind of the range of um voices he could blend was a lesson in how when you write a book, you've got to change gears, right. You You shouldn't just write in the same voice and at the same pace all the time. You've got to have passages of analysis that you switch up. With passages of narrative. Sometimes you cover three years and three paragraphs. At the times you have thirty pages about

one day. It's that, you know, if you think about making a movie, sometimes you use a wide angle lens, other times it's a telephoto. You've got to think like that with a book, to various variety and structure, and that's what ultimately impacts what the final book looks like. So so let's talk about books. What what are some of your favorite books, be they finance or nonfinance fiction or nonfinance nonfiction. You said you'd like to read. Tell me what you're reading now and what have you enjoyed

in the past. Actually, I've I've become interested recently in Silicon Valley and I read just now a book by David Horowitz, who is the co founder with Mark Andres and about recent Horowitz, And what's striking about that book is how he describes the experience of being an entrepreneur setting up companies. The sheer terror when you think you're going to go bankrupt and you're gonna lose all your investors money and all your friends who have sweated blood

working late working weekends for you. Um, you I'd have to lay them off. And the kind of you know, the visceral experience of being an entrepreneur in Silicon Valley is something that came across to me very vividly reading David Herbert's books called The Hard Thing About Hard Things. It's pretty good. Anything else, what else? What else stands out to you? Let's see. I read recently a study

offbeat book by the Austrian writer stefansk Um. I think it's called the World of Yesterday, and it's essentially about how cosmopolitan Europe of descended into the nightmare of Nazism. And of course it's a book which today has a certain resonance as you see these political trends appear to threaten globalization, and this is about the unraveling of that early globalization of the nineteenth century. That seems to be a narrower slice than what lie quad Ahmed wrote about

in Lords of Finance. And he's another person who gave you a fantastic blurb. Yes, I mean, Nakamen is a fantastic writer, and that was a wonderful, wonderful book, wonderful one if I totally agree, you know, brilliantly combining um, substantive economic explanation with the color of the zeitgeist, you know, the feeling of um, what that belly park was like in the nineteen twenties. You know, there's a there's a

little vignette there. I think of some French socialite arriving furious with a French statesman and shooting him with a pistol that was disguised in her scarf wrapped around the gun. I mean, it's just amazing sort of evocative writing and the concept of telling the story of of the post war era through four central bankers. I just thought it

was a brilliant conception and and so well executed. But before we leave books, any other any other books you want to reference anything, what are you reading right now? So I just got done with this David Harrowitz Silicon Valley book. I'm a bit of a Silicon Valley kick, and I'm going to read. You know, one of the famous venture capitalists is William Draper. He's written a memoir about his time in the valley. So I'm really trying to understand that very dynamic section of the American economy

and and what was the road of financing that. Have you read The New New Thing Michael Lewis. Of course I've read The New New Thing. It's an amazing but Michael Lewis is the ultimate storyteller, and I have enormous respect for his craft. Um. Yeah, I really enjoyed that that book as well. UM. So we're down to our last two questions, and and let me put both of these to you. The first question is, so someone who just graduates college or a millennial comes to you and says,

I'm thinking about becoming a writer or a journalist. What sort of a career advice might you give them? I would say, don't do it, um, and then I would be secretly pleased if they ignored my advice. So I think you have to if you're going to be a writer or a journalist, you have to really, really really want to do it, because it's not the most compensate, best compensated form of activity. Um. And you know, sometimes if you write a book, it's lonely, you're stuck there

for a long period by yourself. You have to really like it, um. And you know, there are a lot of things you can do in life which are more, you know, better paid for that amount of Given a certain amount of education and skill, you can certainly make more money elsewhere, so you have to really want to do it. But if you do really want to do it, then I think it's a wonderful way to spend your life because you're out there understanding things, going off, speaking

to people, making discoveries. And our final question, what is it that you know today about writing and journalism that you wish you knew twenty five years ago when you were first starting out. I think the main thing is that there's no substitute for discovering new stuff. That investigation really really matters, because if you're just taking what is generally known already and putting your own spin on it, then there's you know, a hundred other guys also doing

that and it's not distinctive. You've got to go find I think I wish the profession as a whole had more resources to put into investigative reporting. Well, we're starting to see things like pro Publica and other forms of privately supported nonprofit um support for that, but at one point in time it was a thriving business that seems to be under assault by both the Internet and and alternative facts. Apparently it's too bad that you know, it's

it's happening that way. I have UM in my Greenspan research, I had some young researchers who helped me and they went did the work in the archives. And you know, one of them, called John Hill, was such an amazing researcher that I thought he would immediately be snapped up by a news organization after he moved on, and he he did work at The Economist a bit. But he's telling me that finding a job as an investigative reporter, even though he is the best investigator I've ever met,

is tough. Wow, that that's amazing. We thank you so much for being so generous with your your time. Sebastian. We have been speaking with Sebastian Mallaby. He is the author of The Man Who Knew and More Money Than God. He is also UM a pole Vulcer scholar at the Council on Foreign Relations. If people want to find your work, I know they can access not just the books, but you you still contribute to the Washington Post and any

place else they can find your writings. Well. There's always a good collection on the Counsel and Form Relations website CFL dot org. But you know, Google is normally the to these questions These days, Google is always the answer. UH. If you have enjoyed this conversation, be sure and looked up an inch or down an inch at any of the other hundred and twenty five or so such conversations we've had in the past. UM, I would be remiss

if I did not thank my recording engineer, Medina. UH. Taylor Riggs is my booker, and Michael Batnick is our head of research. We love your feedback, comments and suggestions. Be sure to write to us at m IB podcast at Bloomberg dot net. I'm Barry Hults. You've been listening to Masters in Business on Bloomberg Radio. Masters in Business

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