How To Create The Safest Bank In America

and I think, come on, we relive our glory days. No, I don't really like reliving it and everyone telling their stories over and over again. And I think the a lot of the lessons from that time are important and we should still talk about them. But I'm just kind of a little bit over, like, oh, this is what happened that day and all the details from them. Are you telling me that we are not going to do a Lehman Brothers anniversary podcast. We we are skipping over

that one. Plus by the time it would even come out, because we're talking about this, it would be too late. So that I think there are interesting lessons and all that from the crisis and the collapse of banks and stuff, but I'm just sort of glad that the tenth anniversary is over. Do you know what people forget about? That was actually arguably scarier than Lehman Brothers collapsing at that time, and it happened like I think it was the day after Lehman Brothers, or maybe a couple of days after.

Are you going to say the reserve fund, the money market Yes, yes, the money market fund that broke the buck. That was huge. People forgot about that right there, and that's also the thing that probably got um well every ball the mainstream remembers Lehman or Lehman the sort of to know people talk about the money market fund that

broke the book. Anyway. I bring this up because one thing that I do think is very relevant, um in terms of ten years after, is this general frustration that after the financial system was rebuilt post crisis, it basically looks the same as it did pre crisis. Like there might be less risk and bank balance sheets might be healthier, and uh, households aren't. Um so is leveraged to their homes as they were in two thousand five, two thousand

and six. But by and large, we rebuilt the same financial system we had before, right, I think you could say, there's been some tinkering around the edges, like, for instance, you did have money market reform, but certainly when it comes to the banks, a lot of the criticism that you hear nowadays is that not only did we not reform the banks, but the biggest banks have gotten even bigger. Right.

We definitely didn't as a country, as a regulatory system, as a financial system, did not use the crisis of two thousand a, two thousand nine to think about whether there are different models that could be fundamentally safer. We essentially just put the you know, the sort of humpty dumpty and put it all back together again. Yeah, pretty much. Anyway. I bring that up because our guest today, I think is is someone who is trying to still push forward

with a different model of banking. And we're going to be talking to Jamie mc andrews. He was a longtime veteran of the New York FED and he is the founder and CEO of what he hoped will be a new type of bank that is much safer for retail customers than any currently existing bank. Right. So I'm really excited about this conversation because this idea comes up every once in a while. As you say, it hasn't really

gotten much traction just yet. But the notion of a narrow banking or full reserve banking, or it's sometimes called the Chicago Plan, I think it's a really interesting one, and this company is probably the one that's gotten furthest along with that idea, although as we're about to discuss, there have also been some roadblocks, right, so I don't want to get too into the business model of it before we bring Jamie on, because of course he'll describe

it best himself. We should note at the outset of this that the bank, which is called the Narrow Bank, and we'll listeners will discover why, is not up and running yet it doesn't actually exist. It's still getting off the ground, and there's currently a lawsuit happening. Narrow Bank is suing essentially to have the right to exist currently it hasn't been approved to exist, and we can't really get into the details of the lawsuit too much because

it's ongoing. But in our just in our conversation, listeners will discover what the goal of the Narrow Bank is and the sort of opportunities that it presents as a safer model of banking. Yeah, it's going to be good. All right, let's bring in Jamie. So Jamie mc andrews. Thank thank you very much for joining us. Thanks Joe and Tracy. It's it's great to be on odd Lots. Thank you. So, what do you describe what the Narrow Bank is? Okay, I'll be happy to and just to there.

There are a couple of things you said in your intro that I'd like to clarify. The Narrow Bank does exist. It has received what's called it's temporary certificate of authority from the Department of Banking in Connecticut, so it's a chartered state bank. The dispute with the Federals or Bank New York is not about its UH regulatory status or anything. It's about whether the Federers or Bank of New York

will provide TND with an account. So we're simply looking for account services from the Felt Reserve, not any regulatory approval of any sort. And the other thing is T and B is not ensured by the Federal Deposit Insurance Corporations, so it won't be dealing directly with retail customers. It's it's for institutional investors and so it's just those are just a couple, since I wanted to make sure your

listeners understood. But yes, getting back to the basic question, what is t n B. T and B is designed to provide institutional investors with very high, are competitive, but safe deposit rates. It's specifically designed to perform this function because what we've seen since the crisis is that the interest on reserves that the FED pays to banks has not been passed through very well to bank customers, bank depositors.

And we designed, my colleagues and I have founded TMB designed the bank two perform this specific service, and its design features are intended exactly to to get higher deposit rates safely two institutional investors. So Jamie, could you maybe in a nutshell describe how traditional banking actually works because I think that's going to help our listeners kind of understand what's different about your bank. So, you know, the commercial banks, they get a bunch of interests that's paid

on the reserves they have at the FED. I think it's currently like one point nine something percent. Why did they get paid that interest and why are they unable to pass most of it onto their customers? Right? Let me let me answer that in two steps First, how to ordinary banks work. Ordinary banks raise money by issuing deposits to customers, and so customers come in, they put money into the bank and receive a claim on the bank, which is called a deposit, and it's they're able to

withdraw cents on the dollar at any time. That's the unique feature of deposits. And banks have capital as well from their founders and perhaps external investors. There's capital on the balance sheet, so typically the money in the bank

comes from depositors and the equity from investors. On the other side of the balance sheet, banks keep some funds in what are called reserve deposits, and those are usually at the central bank or they can take the form of currency and evolved and those allow the bank to honor their depositors withdrawal requests very quickly, and with other investments, the bank makes loans to households and businesses. So that's

a typical bank. And so in the conventional bank there's only a fraction of their deposits that are held in these reserves. And consequently banks have a instability built into them, which is that if all depositors withdraw their funds at the same time, the bank may have difficulty sourcing enough reserves to honor all their depositors withdraw all requests. That would be a run on the bank. And if they can't borrow against the loans that they've made, they would

be in difficulty. Now, historically, the Federal Reserve, throughout its history has not paid any interest on reserves. The deposits of the Federal Reserve were non interest sparing. But in two thousand six, the Congress of the United States authorized the Federal Reserve to pay interest on reserves. And the basic idea behind this was that the Federal Reserve was requiring banks to hold reserves and they weren't paying any

interest on the reserves. So that can be considered the type of tax because it was required for the people to hold it and they didn't earn any money on it. Of course, the Federal Reserve could invest those funds in government securities and earn money on it. So the lost earnings that people suffered by holding required reserves is the

type of tax. So Congress agreed with the Federal Reserve and the banking industry that there should be payment of interest on reserves, just like banks pay interest on deposits, and that authority was granted in two thousand six. It it was first used in two thousand eight in October two thousand eight, where the Federal Reserves paid interest on reserves. The other aspect of paying interest on reserves is it's a way to for the Federal Reserve to implement its

monetary policy. It's interest rate target. Again, prior to the financial crisis and prior to two thousand and eight, the Federal Reserve affected the money market interest rates, the rates for example that banks lend to one another called the Federal funds rate, by affecting the supply of reserves in the market. So if they provide a lot of reserves to banks, many banks would have excess reserves and wish to lend in that market. That would drive the overnight

rate down. And on the other hand, if they put only few reserves in the market and had a scarcity, there would be very few lenders of reserves and other banks would be short of reserves and that would drive the overnight interest rate up. But with the financial crisis, the Federal Reserve had many excess reserves in the market and so the interest rate would be zero on those except for the fact that the Federal reserve achieved the

ability to pay interest on them. Once they were paying interest on reserves, then banks had a new source of demand for reserves because the reserves would earn this interest rate, and so banks, theoretically in a competitive market, would be happy to pay depositors to put funds into their bank and then earn the interest at the Federal Reserve. That would tend to drive deposit rates and overnight interest rates

up towards the interest on access reserves. So it's become a monetary policy tool in the wake of the very large levels of reserves that the FIT has held, that

the FED has created since the crisis. So I'm mentioned at the beginning that you, prior to having founded the Narrow Bank, you were at the New York Federal Reserve, and this idea of launching a new bank, if I've read properly, came out of research that you did while at the New York Fed about essentially this question, which is why aren't depositors at retail facing banks getting higher rates when the banks are able to collect higher rates

from their reserves. That's that's about right, Joe. The there was a lot of concern um throughout the whole financial system that after two thousand eight, when banks were earning interest on reserves, the overnight rate was not very close to the interest on reserves. It was lying well below the interston reserves ten or fifteen basis points are a tenth more than a tenth of a percent, which is

prisingly large amount. Things are little bit better today, but for several years the banks were paying rates on overnight funds that were very low compared to what they could earn on reserves, and it was a puzzle for economists to determine why isn't the competition for large deposits driving the interest rate up towards the interest on reserves, And

there have been several economic explanations for that. Darryl Duffy and colleagues have explained that there's the market for UH federal funds and other overnight loans is the search um model. It's and over the counter market where people have to go out and find a counterparty, and that is less

than perfect competition. With colleagues, I did research that pointed out that there's monitoring and credit exposure risks and for that reason, lenders one to expose themselves only to a few banks, and that grants those banks essentially a monopsony power over the lenders, and Morton Beck can bethically have another theory having to do with the bargaining. The nature of the bargaining between two parties over time leads to

less than perfect competition. So it was recognized that there was less than perfect competition for these large deposits to banks, and so the Federal Reserve undertook a lot of work to improve the competition in the market. Ultimately, the Federal Reserve chose to create its own narrow bank, you might say, the overnight reverse from Purchase Agreement facility that serves about

a hundred and sixty non banks. It's designed as a open market operation, and it legally fits that description, but it was designed to the economically element to an account.

Essentially that these hundred and sixty money market mutual funds, broker dealers, federal home loan banks can deposit money at the Federal Reserve overnight and receive an interest rate the It's designed as a as a repo transaction, but the proffering of this collateral really doesn't improve the credit quality that the participants in that facility received because the Federal Reserve Bank is already extremely highly credit worthy, and the

participants don't rehapomplicate the securities in the in the program. So it's essentially an account that those people, those those

hundred and sixty institutions have at the Federal Reserve. And that was the way that the FED was able to narrow the range of interest rates overnight so that those large participants in the money market would surely be able to enjoy an interest rate at least as high as what the FED was paying, and they could go to their private counterparties and say, hey, I'm getting this interest rate at the Fed. You have to pay me more if you'd like my lending into into your institution. And

that has um from the feeds point of view. There's a lot of work on that that has been uh successful in the sense that the overnight interest rate has remained above that level in the that they pay in the overnight reverse repurchase agreement facility. Right, So we're talking about a couple of things here. One of them is how commercial banks operate. One of them is how money market funds operate, and the other one is how they all sort of interconnect with the Federal Reserve and the

FEDS monetary policy. Where would the narrow bank sit in that ecosystem and what would its relationship be like with the Fed? And UM, I guess large institutional depositors because you said you're not really targeting retail, that's right. So my colleagues and I at TNB have felt that there was a market opportunity to create a special purpose um ultra safe, low cost and focus competitor to inner that

market for large deposits. And we asked ourselves what would be required to enter that market because we're hoping to attract very large deposits. And the first answer that we came to is the bank would have to be very very safe because we're competing with the largest banks in the world, many of whom are perceived to be too big to fail. So in other words, those banks are considered to have a government guaranteed by by many depositors.

And so the only way to create a DiNovo bank that is very very safe is to designed the bank on a hundred reserve basis, and that is possible now in contrast to back in historical times, because reserves pay interest. And so it was the change by the Congress in two thousand and six that allow the fellow reserved to pay interest. That created this market opportunity. A bank could be designed on a hundred percent reserve basis and there therefore would be extremely safe and it would have the

hope of attracting depositors. And then because it was a percent reserves, it would be a very low cost bank in terms of operating costs. The assets carry no financial risks, costly insurance from the fdi C is not needed, and so the bank would be a low cost competitor in that market. It's important to note that foreign banking organizations that take in wholesale deposits also do not carry the insurance of the fdi C, so in essence, the bank

had to match that competition. But by designing the bank this way, then we would have a low cost operation that could pass on the interest on reserves earned from the federal reserve to large institutional depositors. And we thought that would be a market opportunity that would be able to compete with those very largest banks in the nation who enjoy the ability to attract deposits at very low

rates because of their perceived safety. I think this is really the key thing here that we've got to which is your business model, And I just want to make sure people understand it. If right now I'm an institution, and let's say I have, uh, you know, a bunch of money, ten million dollars in cash I want to put somewhere right now, I would probably go to some big, two big to fail bank, and their assets would be a mix of things including, uh, some things that are

very safe and other things which are riskier. And they wouldn't feel particularly compelled to pass on a competitive rate to me because they know I don't have any options, and I would just be choosing from other too big to fail banks. But your argument is you can create the safest possible bank in the world. Because I give

you my ten million dollars I deposited with you. You will automatically that turns into ten million dollars worth of assets for you, because you put that ten million dollars in a FED account and that's the safest money in the world. And you don't have any other costs because you don't have a bunch of loan officers and credit people because that's not your business, and you don't have the fdi C fees, and you just pass that straight

onto me. And even though you're not un too big to fail, I don't have to worry about any of your asset quality because it's the highest quality money in

the world. Weld Joe. That's that's a good description. So, um, how does that differ from a money market fund, Because, of course, if I am a large institutional customer, one of the things that I would do if I have a bunch of extra money is maybe park it in a fund that invests in things that are usually considered quite safe, like US treasuries or commercial paper or something like that. So how is this difference. Well, for the government only funds, H. Tracy, I think you're. I think you're.

There is a lot of similarity between the two types of institutions. Some of the differences are the TNB has capital, and it will have capital to help support the re payment of depositors claims. Money market mutual funds don't have any capital. The second thing is the nature of the assets that are being invested in by the two types of institutions. Government only money market funds invest in US obligations T and B will invest in Federal Reserve deposits.

There's a difference in the liquidity of those two types of assets. There are bid ask spreads, and there's maturity transformation that's going on in money market mutual funds. Of course, that maturity transformation caused extraordinary problems, as you pointed out at the outset of your of this podcast, when the Reserve Primary Fund, which was was a prime fund not a government only fund, um broke the buck because they

were engaging in both credit and maturity transformation. Uh, there was a huge run on money market funds, showing the the fragility of that particular financial model. The narrow bank does not have that fragility because you can always meet its depositors demands, and even government only money market funds engage in maturity transformation in order to boost the returns and that's a potential of fragility there. So T and

B is simply a safer alternative. And because of the different assets, there are different interest rates that would be earned by, on the one hand, shareholders in the money market mutual fund and depositors at TNB, and it would depend on market conditions who had the higher interest rate. As we've seen recently, market conditions have changed in the money market. Many people believe it's the very large issuance

of treasury bills by the U. S. Treasury. But in recent months, the treasury bill rate and the repo rate has moved up very close to the one that the subtle reserve is paying on uh it's on reserves. So UM market conditions have um, you know, moved somewhat against the narrowbank model. But we believe that there's a a

business there. It may not be a huge business in present circumstances, but we believed could be an important component to the you know, to the financial system and I and a new and very safe alternative for institutional depositors. So I'm glad you said that about the business opportunity because that's exactly what I was going to ask you next. A. Have you estimated what how big of a business you

think that it could be? And B. I don't want to phrase this in a way that might be sort of condescending or missing the points, but I am curious how much of this endeavor is about a business money making opportunity for you and your partners versus to some stent an implementation of an academic theory that's sort of a kind of a quasi academic project. Well, let me answer the the second question. First, this is a business opportunity.

This is uh a very unique business opportunity and one that I think is inevitable given the payment of interest on reserves. I fully believe that narrow banks are something for the you know, for the future of our financial system, not not the past, not the sort of academic exercises that have been drawn on paper in the past. This is a living, breathing business opportunity that we believe is

very important for depositors. And the reason again is the the see change that occurred in October two thousand eight when the subtle Reserve began paying interest on reserves. That's really a very important change in our financial system. But I don't believe even ten years later that it's been fully incorporated into the structure of the financial system. But let me um also distinguish T and B from the

sort of historical plans and proposals for narrow banks. The famous example is the Chicago Plan, which was proposed in the wake of the banking crisis. Of the T and B proposal is very distinct from that plan, which was purely to make banking perfectly safe and it was also to outlaw conventional banks, very radical sort of proposal. T and B has no such interest in disrupting the business

of conventional banks. We believe conventional banks are complementary to T and B, and the T and B would complement our financial system. And you know retail banking. Retail customers enjoy federal deposit insurance, they have safe deposits. This is for the large depositors. So let me talk a little bit about the social benefits of TNB. First of all, there is the benefit of to the customers directly of

TMB that they would get higher deposit rates. But the first thing that would happen if TMB came into the business, and this is why it's hard to estimate how big TMB might be it might be very small, is other banks, the banks with whom TMB would compete, would raise their deposit rates. And that's because TNB represents a new competitive force in banking. So, as economists would tell you, increasing that competition would lead to lead to improve deficiency in banking.

It also would lead to better implementation of monetary policy. The Federal Reserve, as I mentioned earlier, created this their own narrow bank but I consider to be equivalent to a narrow bank the overnight reverse Repurchase Agreement facility, and they did that to have better implementation of monetary policy, and in its documents, the Federal Open Market Committee repeatedly claims that the o E n r RP is necessary

for the implementation of monetary policy. T and B would be accomplishing a similar goal of getting deposit rates higher and closer to IOE r um, something that the Federal Reserve leads is necessary to its implementation of monetary policy. It also would lead to better efficiency and government spending and better distributional effects, as this government expenditure of io we are is passed on two depositors and doesn't stay

solely with banks. A second social benefit of TNB is the um effect it would have on the market for these large wholesale funds but are sometimes called large cash pools. There's a lot of research that has been done by economists pointing out that when the Treasury Department issues a lot of Treasury bills, that tends to crowd out the issuance of systemically risky short term liabilities by private firms, such as the issuance prior to the crisis of A B, C, P C, P, V R, D O S A R S,

S repost and so on. All these panically of the seemingly safe but ultimately very risky UH short term liabilities. So when the again, when the Treasury issues a lot of Treasury bills, there's less issuance of those systemically risky short term liabilities. T and B could have that beneficial

effect as well. If it were accepted in the market, then that would be an alternative to those investors who are looking for safe, safe haven and rather than go into some risky v R G O or something like that, they could go to T and B, and that would be beneficial to society, would reduce UH systemic risks. The third one is one that the great economist James Tobin

pointed out in two papers. Paper was called the Case for Preserving Regulatory Distinctions and was presented at the Jackson the Whole Conference, and in those papers he recommended that there'd be narrow banks. His reason from narrow banks was again distinct from the Chicago Plan or anything. He again did not suggest that conventional banks be outlawed or anything

like that. He thought the narrow banks would be complementary to the banking system, and what he saw at the benefit of neuro banks at that time was that there would be a less reliance placed on deposit insurance. As a society, we have placed essentially, we put all our eggs in the deposit insurance basket. And that's reflected in the fact that the f d i C in April two thou eleven changed its assessment formula on banks to charge its assessment on all the liabilities issued by bank

holding companies. And that made sense because during the crisis, not to go back ten years ago, Joe that you're done with that, You're so done with that. But the the f d i C issued, you know, extraordinary guarantees on all transaction accounts and also um guaranteed and insured the debt issued by participating large bank holding companies. So it's clear that the f d i C has enormous exposure to the US banking system. And what James Tobin he foresaw that and he said, we're replacing so much

emphasis on deposit insurance. It's so difficult to uh supervise these firms and actually uh control the amount of risks that they're taking. We could provide safety alternatively through technological means, not through government guarantees. And the technological means is to create safe UH deposits through narrow banks, and T and B has that flavor as well, So that would be another potential social benefit from TMB. But those are the social benefits. T and B is organized as a business,

and it it's not created for some other reason. It's primarily a business opportunity that we see. So Jamie, you're obviously talking about a lot of the positives that come from narrow banking. And I have to say, as as a depositor who currently earns you know, zero points something on my deposit in the US, the idea of my bank being forced to offer me a higher rate is

very attractive. However, there are some people who wonder about whether or not narrow banking could maybe have some negative consequences in the event that we have another Lehman like situation, so in other words, whether it might not end up increasing financial instability, because what might happen is if you have the hint of a run on UM, you know, certain money like assets like you mentioned commercial paper or ABCP asset backed commercial paper UM, which is what we

saw in September two thousand eight, that the depositors will just flee all of those and move into narrow banking, and so you're effectively potentially worsening a run on the sort of interbank system. How would you respond to those sorts of concerns, Well, let me first say that in

normal times. Some people have said in normal times, even narrow banks might think gain to gain a market share at the expense of conventional banks, and I'd like to say I don't believe that's that's really a concern, both because the vast majority of deposits in conventional banks are covered by deposit insurance, so they're perfectly safe, and those depositors would not have a reason to leave their banks, and their banks could, again in normal times, respond by

raising their deposit interest rate and retaining their depositors. So there should be no UH large disruptions of banking in normal times as a result of UH a narrow bank or many narrow banks existing. Then the question is, as you described, Tracy, if there were a stressful situation UH in the marketplace, and if there were a run into

narrow banks. Currently, if there's stress in the marketplace, people often find refuge in the government only money market mutual funds, as as was seen in the prime fund money market run in two thousand eight. So I think that people would still take advantage of going into money market mutual funds.

Government only money market mutual funds, the narrow bank would require many days, if not a couple of weeks to acquire a new customers, so the one could not run into the narrow bank, uh, you know, immediately, And the narrow bank would have the ability to request current customers to slow down deposit inflows if if that were at all a concern, So there are natural breaks on the

narrow bank. The narrow bank T and B would not want to be associated with any you know, distress in a market, and would not necessarily want to be the the recipient of flows that were causing some sort of problem for the US financial system. The other aspect is if there were a situation like this, the Federal Reserve

would have many tools to address the situation. If there were a public necessity, Federal Reserve could choose to pay a lower interest rate to narrow banks relative to conventional banks, and that would thereby for the ability of people to run into narrow banks. So I again, that's sort of like a theoretical academic concern that in the real world

would never occur. Jamie. In theory you mentioned worthy narrow bank to get off the ground and start collecting big deposits, it will likely or could certainly put pressure on the existing banks to offer higher interest rates. Would it be possible theoretically at some point for existing banks to offer segregated narrow bank like accounts where they basically tell people that if they want, they can have an account that

backed up with reserves central bank reserves. I I think that that is a potential um direction that banks could go. They would probably need the Federal Reserve to to change their policies to allow banks to have a you know, a segregated account at the Federal Reserve. And I've I've recommended this and written a paper about the possibility of

doing that. So I think that would be healthy again for a financial system, if if any bank could essentially form a narrow bank arm And that's again also something that James Tobin recommended in his but I think it would require a change in policy and operations by the Federal Reserve to to accommodate that that alternative for banks UH. And then another thing is, so let's say this became big and your narrow bank launched, and there were other

narrow banks. The narrow bank or your bank isn't going to do things that get involved in loans and real estate and all that. What do you see is the future for that aspect of business banking, which is here, you know, the lending side. If more of the world's deposits were to opt for UH fully backed reserve deposits, I don't see any interruption in the business of conventional

banks as a result of the creation of narrow banks. Again, the the point of narrow banks UH in the current world, and the reason T ANDB was created is to compete the interest on reserves more towards depositors, to provide competition so that the interest on reserves gets two depositors. That does not in any way affect the conventional banks ability

to make real estate loans or anything else. All it does is it removes a little bit of rent that banks are currently earning between the amount that they earn on reserves and the amount the pay depositors. If you consider a bank today and as suppose a borrower comes up to the bank and proves to the bank that it is it's a perfectly risk free borrower, and they say, what will you lend at? What interest rate will you

lend to me? The bank is not going to lend to that person at a rate below one point nine, even if they're perfectly risk free, because they can earn one point nine at the federal reserve. That's going to be the same before and after the narrow bank. The narrow bank does not restrict the bank's hurdle rate or change the bank's hurdle rate on lending at all, so

the bank. All it does is the bank may have to pay a higher interest rate on their liabilities, and so they may be affected in that they have a lower level of rent. I would not even call this a lower level of profit, because I believe that the earnings that banks get between the interests that are paid to banks on reserves versus what they paid to depositors is really a rent. They get that for being there

and for being perceived as safe. Um, they're not out competing for that, and so uh, that's really the effect. It would improve efficiency in banking if any banks are actually making a living on that part of their business. They would have their activity curtailed, but it's not going to interrupt in any way the profitable businesses lending to households and businesses. So, Jamie, you have the banking charter, you applied for an actual reserve account at the FED,

which was rejected. Um, and hence the lawsuit. What next for you and what sort of argument are you going to be making about the Fed's decision. Well, we have not been just to clarify, Tracy, We've not been rejected on a reserve account. It's just that the Federal Reserve back in New York has not been willing to ye the reserve account. Uh, they've not said no. So we hope that the Felleral Reserve will provide us a reserve account.

And we hope, um, they will do this quickly. And uh, we think it's in the interests of the Fettle Reserve and the interests of the U S taxpayers, as well as the interests of our financial system well as journalists who find this to be a fascinating story. We hope that it goes forward, if only because we'd really like to see how this evolves and how this plays out in the financial system and the banking system. So, Jamie McAndrews, thank you so much for joining us. That was a

fascinating conversation. Great, thank you so much, Joe and Trying. I appreciate it. Tracy, I really loved that conversation. I feel like, um, just getting into the mechanics of banking is one of those things that it kind of makes your head hurt a lot, but it is really worth it to actually understand how our system really works. Oh yeah, totally. And the best way to understand, you know, the traditional banking model is probably to talk about a new banking model,

which we just did in detail. You know, I sort of feel bad that I started that thing. The thing I didn't like, um the anniversary of Lehman, because oh yeah, you should feel like I do. Kind of feel bad now. But one point that I think Jamie made that I thought was extremely interesting, and something that people often forget about the crisis is how much of it was a result of the manufacture of safe assets for things that

weren't from things that weren't safe. And so investors set out to take a bunch of crazy risks, but what they really wanted was extremely safe assets, and then the industry complied by essentially fabricating safe assets out of risky assets.

And then he listed off, Jamie listed off this alphabet soup of things like, you know, the auction rate securities and asset back, commercial deposits and all that stuff, which were all examples of things that were more or less seen as triple A money like, but the underlying foundations of which were actually pretty risky. Yeah, and that's really the whole conversation that we just had was about how to manufacture more safe assets, but in a way where

they are actually safe. And I realized the irony of me saying that, but that's always what we're trying to do. Um. But and in this case they actually would be. I mean, if they were in this case, I think it's safe to say that if the funds were in fact deposited right at the FED, they would literally be the safest

kind of money imaginable. Yeah, it's sort of like the magic of banking intermediation in reverse, right, Like, normally banks take your money and invest it in a bunch of risky things, but your money is considered safe because it's a deposit. But in this case, your risky money would kind of be put at the FED and turned into something safe automatically, so financial engineering in reverse. You're going

to say something else though before I interrupted you. Oh yeah, Well, the other thing I was thinking about is, you know, you mentioned banking reform at the beginning of the conversation, and um, I was just thinking, like, you know, here we have an idea to create basically the world's safest bank. And of course you know, the notion that the FED

hasn't said yes just yet is very ironic. But I also wonder it's kind of hard to create something new once you have the existing infrastructure, right, and that might be the difficulty here. I think like the FEDS a little bit unwilling to try something new because they're worried about the knock on effect for existing financial institutions and you can't really start from scratch. Yeah, it is really difficult. And momentum and inertia, I always say, is like the

most powerful, the most powerful force in the world. Right, Well, speaking of inertia, shall we wrap this up? At speaking of inertia, I don't really get that seg but yeah, let's wrap it up. Well I tried. Okay, this has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway. And

I'm Joe Wisenthal. You can follow me on Twitter at The Stalwart, and you should follow our producer on Twitter tofor Foreheads at Forehast, and you should follow the Bloomberg head of podcast, Francesco Levy on Twitter at Francesca Today. Thanks for listening to