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David Enrich Discusses the Libor Scandal · Masters in Business

0:02
Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
0:09
Speaker 1: This week on the podcast, I have a special guest.
0:12
Speaker 1: His name is David en Rich, and he is a
0:14
Speaker 1: reporter for The New York Times. But more importantly, he
0:18
Speaker 1: is the author of The Spider Network, The wild story
0:22
Speaker 1: of a math genius, a gang of backstabbing bankers, and
0:27
Speaker 1: one of the greatest scams in financial history. It is
0:31
Speaker 1: all about libor and how that scandal, which is not
0:36
Speaker 1: even a decade old, unfolded. Uh. We are talking about
0:42
Speaker 1: not just millions of dollars, not just billions of dollars,
0:46
Speaker 1: but hundreds of trillions of dollars that were manipulated in
0:50
Speaker 1: different directions for people two capture some trading profits. And
0:57
Speaker 1: when you stop and think about all the assets that
1:01
Speaker 1: trade based on LIEB or UH, if you have a
1:06
Speaker 1: variable mortgage, or a car loan, or credit card loans
1:09
Speaker 1: or student loans, you may have been paying more for
1:13
Speaker 1: those interest payments due to some of these manipulations by
1:18
Speaker 1: various bankers. Arguably occasionally you were paying less because they
1:23
Speaker 1: manipulated it in the other direction. Um. The book is
1:26
Speaker 1: really quite fascinating. I'm not finished with it yet. I'm
1:29
Speaker 1: working my way through it, but it really reads like, uh,
1:32
Speaker 1: you know, an Ian Fleming novel. It's it's a spy tail.
1:36
Speaker 1: There are some fascinating characters in it. Uh. It really
1:39
Speaker 1: is a great narrative, and David does a wonderful job
1:43
Speaker 1: bringing some really arcane uh minutia to life in a
1:48
Speaker 1: way that's fascinating and understandable. Uh. I think that if
1:52
Speaker 1: you're remotely interested in the world of fixed income or
1:57
Speaker 1: borrowing or derivatives, this is a must read and it's
2:01
Speaker 1: gonna enter the pantheon of great financial narratives. So, with
2:06
Speaker 1: no further ado, here is my conversation with David Enrich.
2:12
Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
2:20
Speaker 1: My guest today is David Enrich. He is a New
2:23
Speaker 1: York Times reporter and editor UH since the summer ofen
2:28
Speaker 1: Prior to that, he worked for The Wall Street Journal
2:31
Speaker 1: for a decade, writing about banking and finance in the
2:35
Speaker 1: United States. UH. He has won numerous journalism awards, including
2:41
Speaker 1: the Overseas Press Club Award for his coverage of the
2:44
Speaker 1: European debt crisis, the George Polk Award for coverage on
2:48
Speaker 1: Instarter Trading. He won two Society of American Business Editors
2:53
Speaker 1: and Writers Awards. David was part of two teams of
2:57
Speaker 1: journal reporters who were finalists for Pool Surprises in both
3:01
Speaker 1: two thousand and nine and two thousand and eleven. He
3:04
Speaker 1: won the prestigious Gerald Loebe Award for Feature Writing for
3:09
Speaker 1: his coverage on the unraveling of Tom Hayes, the expos
3:13
Speaker 1: about the Libor scandal that eventually led to him writing
3:18
Speaker 1: a book on it titled The Spider Network. How a
3:21
Speaker 1: math genius and a gang of scheming bankers pulled off
3:25
Speaker 1: one of the greatest scams in history. David Enrich, Welcome
3:30
Speaker 1: to Bloomberg. Thank you. I'm fascinated by the library scandal.
3:34
Speaker 1: Folks like you and I who cover this are pretty
3:37
Speaker 1: familiar with some of the minutia and details about Libor.
3:42
Speaker 1: But for the lay person listening to this, what exactly
3:47
Speaker 1: is liebar and why is it so important? It's an acronym.
3:50
Speaker 1: It stands for the London Interbank Offered Grade and it
3:54
Speaker 1: is the world's most important number. The world's most important number.
3:58
Speaker 1: That's quite a claim, it is. Explain why it's it's
4:02
Speaker 1: such an important number? What what is it used for.
4:05
Speaker 1: It sets interest rates on all sorts of debt all
4:08
Speaker 1: over the world. So if you have an adjustable rate mortgage,
4:11
Speaker 1: the interest rate is based on libor. If you have
4:13
Speaker 1: a credit card, a student loan, and auto loan, it's
4:16
Speaker 1: likely based on libor. If you are a big company
4:19
Speaker 1: and are issuing debt, the interest rate might be based
4:21
Speaker 1: on librar. Same if you're a town or city. They're
4:23
Speaker 1: trillions and trillions of dollars of this stuff, trillions, trillions,
4:26
Speaker 1: And the biggest part is not the just normal debt,
4:29
Speaker 1: it's derivatives that are that you know. Originally companies or
4:33
Speaker 1: investors were using them to protect themselves to hedge the
4:38
Speaker 1: against possible fluctuations and interest rates, and later, as you
4:42
Speaker 1: know often happens in the financial world, they became a
4:45
Speaker 1: playground for speculators and traders. So I learned a lot
4:50
Speaker 1: of different things from the book, one of which was
4:53
Speaker 1: that essentially decades ago, a Greek BANKO was trying to
4:58
Speaker 1: arrange an eighty milli million dollar loan for the shav
5:02
Speaker 1: I Ran and the syndication process lead to a question
5:06
Speaker 1: how are you going to set rates? And that effectively
5:09
Speaker 1: is the origin of live or is is that right? Yeah,
5:11
Speaker 1: that is right, and this is I really like history,
5:14
Speaker 1: and so researching this is just fascinating for me, and
5:18
Speaker 1: they're Uh. Originally, you know, if you think about how
5:22
Speaker 1: does an interst rate come into being when a bank
5:24
Speaker 1: offers a loan to someone, how do they determine what
5:26
Speaker 1: they're going to pay? And the general rule of thumb
5:29
Speaker 1: was that they are going to base the interest rate
5:31
Speaker 1: they're putting on a loan based on how much it
5:34
Speaker 1: costs the bank to borrow money. So it's it's the
5:37
Speaker 1: borrowing rate plus some margin, which becomes a profit. Yeah, exactly,
5:41
Speaker 1: And so obviously the banks need to have a profit,
5:44
Speaker 1: and so they eventually normally that would be simple if
5:47
Speaker 1: it's just one bank making a loan. But the history
5:49
Speaker 1: of this is that at the kind of dawn of
5:51
Speaker 1: the era where loans, big loans are being syndicated, you
5:54
Speaker 1: had a big group of banks getting together to team
5:57
Speaker 1: up on to make big loans. In this case, it
5:59
Speaker 1: was a loan in eighty million dollar loan to the
6:01
Speaker 1: Shah of Iran at the time. And uh, how do
6:05
Speaker 1: you have different banks of different funding costs, how do
6:07
Speaker 1: you determine the interest rate? And so the innovation here
6:09
Speaker 1: was that you can have you can come up with
6:12
Speaker 1: an average basically, and you can look at how much
6:14
Speaker 1: does it if you've got ten banks on it, you
6:16
Speaker 1: take their average funding cost and that can be the
6:19
Speaker 1: interest rate plus a little bit. And the challenge though,
6:22
Speaker 1: is that funding costs change and what you're if you're
6:25
Speaker 1: making a twenty year loan, your funding costs at year
6:28
Speaker 1: one could be very different from your funding costs at
6:31
Speaker 1: year ten or twenty. And that is a very scary
6:33
Speaker 1: thing for the banks because you know, if their funding
6:35
Speaker 1: costs go up, you could be locked into a loan
6:39
Speaker 1: that is deeply unprofitable for the bank. And so the
6:41
Speaker 1: innovation here that they would have a mechanism where the
6:45
Speaker 1: interest rate would fluctuate over time based on the bank's
6:47
Speaker 1: funding costs. So so, given those kind of murky origins,
6:50
Speaker 1: the Greek bankers syndicated loan to the shaw of Iran.
6:57
Speaker 1: How did this become the most important number in the world.
7:00
Speaker 1: How did this become so widely accepted everywhere? Yeah, So
7:04
Speaker 1: in the mid nineteen eighties, the British Bankers Association, which
7:07
Speaker 1: was a trade organization basically lobbying group b v A yeah,
7:10
Speaker 1: the b b A for not only the big British banks,
7:14
Speaker 1: but for many of the biggest banks in the world
7:15
Speaker 1: that had set up shop in London. They got together
7:18
Speaker 1: with the Bank of England, the central bank there, and
7:21
Speaker 1: they decided the use of derivatives was really booming and
7:23
Speaker 1: they need figured they needed a standardized way. Instead of
7:26
Speaker 1: every time there's a loan or any type of financial
7:29
Speaker 1: contract cobbling together this kind of ad hoc system for
7:32
Speaker 1: determining interest rates, they figured it would be a much
7:34
Speaker 1: better way to standardize or much better idea to standardize this,
7:37
Speaker 1: and so live work came into existence as something that
7:40
Speaker 1: was every day around lunch time in London, a group
7:43
Speaker 1: of the world's biggest banks would estimate how much it
7:45
Speaker 1: costs them to borrow money from each other. And you know,
7:48
Speaker 1: you could do it in different currencies, so and pound,
7:51
Speaker 1: sterling and dollars and euros, in Japanese yen, and you
7:56
Speaker 1: can do it over a different time period. So you
7:58
Speaker 1: know it's going to cost a bank for an amount
8:00
Speaker 1: to borrow money for one day or a week, or
8:03
Speaker 1: a month or a year, and the longer the duration
8:06
Speaker 1: of that loan to hire, the interest rate generally and
8:09
Speaker 1: you can every day. So every day, at lunchtime, a
8:11
Speaker 1: group of the world's biggest banks gets together, someone comes
8:14
Speaker 1: up with an estimate for theoretically how much it would
8:16
Speaker 1: cost them to borrow money in a specific currency over
8:19
Speaker 1: a specific time period. All those numbers get smushed together,
8:22
Speaker 1: the high estimates and the lowest mints get booted out,
8:25
Speaker 1: and the rest are averaged in presto, you've got labor.
8:28
Speaker 1: That's quite fascinating. You raised a couple of really interesting
8:33
Speaker 1: points I have to follow up on. The first is
8:36
Speaker 1: why lunchtime almost everything else is set at the close
8:40
Speaker 1: of business during the end of the day. Why the
8:44
Speaker 1: middle of the banking day, the trading day would you
8:47
Speaker 1: want to set interest rates? What what is that about?
8:49
Speaker 1: Because this was this was developed in a pre computer era,
8:52
Speaker 1: was the mid nineties, and to determine how much a
8:55
Speaker 1: bank it cost a bank to borrow money, you needed
8:58
Speaker 1: to check with various parts of the bank. So someone
9:00
Speaker 1: this is usually a pretty low level person with kind
9:02
Speaker 1: of the bowels of the bank, and he would come
9:05
Speaker 1: in the morning and start making phone calls to different
9:07
Speaker 1: parts of the bank to try and assess how much
9:10
Speaker 1: it costs them to borrow money. And remember this isn't
9:12
Speaker 1: one phone call, because this is most of these banks
9:14
Speaker 1: are global at this point and they have operations all
9:19
Speaker 1: over the world. And you know, so he has this
9:21
Speaker 1: guy has to call the treasury desk in Tokyo, Singapore,
9:25
Speaker 1: in New York. It's actually a full time job determining
9:28
Speaker 1: live boards. Well it was kind of a halftime, let's say.
9:31
Speaker 1: And it was again, this is someone who is usually
9:34
Speaker 1: a clerk and entry level job, an aspiring trader. So
9:38
Speaker 1: the most important number, to quote you, in the world.
9:42
Speaker 1: A bunch of lowly clerks are running around or or
9:44
Speaker 1: sending up their desks in London making calls everywhere. And
9:48
Speaker 1: that's how this number gets a sound that well, and
9:50
Speaker 1: the joke is that and the reason I wrote a
9:53
Speaker 1: book on this, and there's been so much media coverage
9:55
Speaker 1: on this is because it was just they were They
9:58
Speaker 1: got to the point where they weren't even really make
10:00
Speaker 1: and calls. This became a number that was being pulled
10:03
Speaker 1: more or less out of thin air by bankers at
10:06
Speaker 1: a low level. And why were they pulling it out
10:08
Speaker 1: of thin air? They're doing it because their traders asked
10:11
Speaker 1: them too. Because the traders had especially by the nine
10:14
Speaker 1: nineties and early oughts, had huge amounts of money that
10:18
Speaker 1: they were wagering on whether lib or was going to
10:21
Speaker 1: go up or down by very tiny increment. And we're
10:24
Speaker 1: talking about positions that are trillions of notational value, trillions,
10:31
Speaker 1: hundreds of trillions, of hundreds of these. This is kind
10:34
Speaker 1: of like asking how hot is the sun? Right the
10:36
Speaker 1: the actual temperature degrees fahrenheit or celsius doesn't make any differences.
10:40
Speaker 1: The numbers so astronomically largely it literally so, So all
10:45
Speaker 1: of this raises the obvious question. On the one hand,
10:48
Speaker 1: the banks are collectively setting the number. On the other hands,
10:53
Speaker 1: they're totally interested parties who have enormous amounts of capital
10:59
Speaker 1: running on the outcome of those numbers. How could that
11:03
Speaker 1: ever possibly go wrong? How could there be a conflict
11:06
Speaker 1: of interest in the banking industry. Yeah, I mean, it's
11:09
Speaker 1: it's funny because I've been covering this at this point
11:11
Speaker 1: for eight years, I would say, and it's that is
11:14
Speaker 1: such a fundamental question, And it's true, it's such a
11:17
Speaker 1: deeply embedded conflict of interest, that is, it's just completely inappropriate.
11:22
Speaker 1: So so who who is to blame for that conflict?
11:26
Speaker 1: Was it just happenstance the way it developed and where
11:29
Speaker 1: were the regulators when yeah, you guys deal with hundreds
11:33
Speaker 1: of trillions of dollars bet on the direction of libor
11:36
Speaker 1: set yourselves, that's fine with us. Yeah, And this is
11:39
Speaker 1: like so many other problems in the financial arena, this
11:42
Speaker 1: is something that had fairly benign origin. And this is
11:46
Speaker 1: something that was it really was meant to be to
11:49
Speaker 1: simplify and increase the efficiency of very complicated and cumbersome
11:54
Speaker 1: lending process. And gradually, over a period of a decade
11:58
Speaker 1: or two, this rate, first of all, be came embedded
12:00
Speaker 1: in hundreds of billions of dollars worth of American mortgages.
12:04
Speaker 1: And it didn't start out the hundreds of billions. Yeah,
12:06
Speaker 1: they's because way back in the day it was either
12:09
Speaker 1: fed funds rate or some other US based number. When
12:13
Speaker 1: did libor infiltrate there mortgages in the early nineties, and
12:17
Speaker 1: that was partly a product of library at the time
12:21
Speaker 1: was viewed as a very reliable way for banks to
12:23
Speaker 1: estimate their funding costs. And it was. And and again
12:27
Speaker 1: that's something that in theory, if it works properly, is
12:29
Speaker 1: very good for everyone. It's good for the banks. It's
12:31
Speaker 1: also good for the consumers because it's an efficient way.
12:34
Speaker 1: It relieves the banks of any anxiety they might have
12:37
Speaker 1: that if they price alone at a low interest rate,
12:40
Speaker 1: that they're going to get burned a year or five
12:43
Speaker 1: years later. This allows them to relieves them of all
12:45
Speaker 1: that anxiety. And that's that allows them theoretically to loan
12:48
Speaker 1: money at a lower interest rate. And and those loans
12:50
Speaker 1: typically look like libor plus two percent libor plus three,
12:55
Speaker 1: so that's their markup, that's the cost of the loan
12:59
Speaker 1: to the borrow or it's the profit theoretically to the bank.
13:03
Speaker 1: But it seems kind of funny that they get to
13:05
Speaker 1: set what. Yeah, it does seem kind of funny. Did
13:08
Speaker 1: anybody question that arrangement? Originally? Not really, And originally this
13:11
Speaker 1: was seen as and keep in mind that the alternative
13:14
Speaker 1: to this is that just banks are arbitrarily setting loans.
13:16
Speaker 1: It's not something that is it's not like this is
13:19
Speaker 1: replacing a heavily regulated kind of government imposed rates. Previously,
13:24
Speaker 1: it was just market forces. You negotiate the best you
13:26
Speaker 1: can for the loan, and that's it. As opposed to
13:29
Speaker 1: libord plus or maybe it was the Fed funds rate
13:31
Speaker 1: or something like that that was. But then again, since
13:34
Speaker 1: that is going to change less frequently than libra wood you,
13:37
Speaker 1: then the banks were then adding an additional buffer. So
13:40
Speaker 1: instead of maybe libor plus two per point would be
13:43
Speaker 1: fed funds plus three points, so the loans more expensive. Yeah, exactly,
13:47
Speaker 1: And so this is something the big problem that wasn't
13:51
Speaker 1: the introduction of liborar into the mortgage market. It was
13:53
Speaker 1: the introduction of library into the derivatives market, and that
13:56
Speaker 1: happened in the mid nineties, and that was something that
13:59
Speaker 1: at the time the Commodity Futures Trading Commission had to
14:02
Speaker 1: approve this because it was the Chicago Mercantile Exchange that
14:05
Speaker 1: was looking to kind of have lib welar embedded as
14:09
Speaker 1: a mechanism and interest rate swaps, and that was it
14:13
Speaker 1: was seen as a way to make swap the swaps
14:15
Speaker 1: market much more accessible and much more efficient and much
14:18
Speaker 1: more liquid. But at the time a number of traders
14:21
Speaker 1: warned the CFTC that if you do this, you are
14:24
Speaker 1: inviting disaster because traders at the big banks know how
14:27
Speaker 1: library works. There's completely unregulated by central banks or by
14:32
Speaker 1: financial regulators, and they it's very easy if you give
14:36
Speaker 1: banks a huge profit incentive to manipulate something. Guess what
14:39
Speaker 1: they're going to manipulate it. So, so let's stay on
14:41
Speaker 1: that point in the book you discussed Gary Gainsler. You
14:44
Speaker 1: just mentioned the Commodity Futures Training Commission. Gainsler is the
14:48
Speaker 1: person who pretty much defang the the CFTC and then
14:56
Speaker 1: he ends up running it as the library scandal is unfolding,
15:00
Speaker 1: and for reasons I still don't understand, falsely takes claim
15:05
Speaker 1: for initiating an investigation into Libar. It actually predated his
15:09
Speaker 1: tenure by year. Explain this mania because this is crazy. Also, well,
15:14
Speaker 1: this is the regulatory pendulum has swung so wildly, and
15:18
Speaker 1: I think it's a common misconception right now in to
15:22
Speaker 1: look at this as a product of Democrats versus Republicans
15:25
Speaker 1: and Democrats or Barack Obama versus Donald Trump, and that's
15:28
Speaker 1: just not what it is. And well, and this started
15:30
Speaker 1: in the Clinton administration. The Clinton administration oversaw one of
15:35
Speaker 1: the great regulatory rollbacks in the of the twentieth century,
15:39
Speaker 1: and it was Bob Reubin and Gary Gensler who are
15:42
Speaker 1: leading that charge. Well, let me let me push back
15:45
Speaker 1: a little bit. So so you have Um, a number
15:49
Speaker 1: of significant Republicans in the Senate pushing pushing for this. Um,
15:56
Speaker 1: I'm drown a blank on somebody's name. I mean Phil
15:58
Speaker 1: Graham is so Phil Graham is really the ring leader
16:02
Speaker 1: of all this. Uh. Reuben so so behind Graham, we
16:07
Speaker 1: basically overturned under Clinton and Robert Reuben and Larry Summers.
16:12
Speaker 1: I'm not gonna disagree with you. They kind of went along,
16:15
Speaker 1: get went along to get along. We we overturned Glass Stiegel.
16:19
Speaker 1: We passed the Commodity Futures Modernization Act, which basically said, yeah,
16:23
Speaker 1: derivatives free for all. And we basically took the Commodity
16:27
Speaker 1: Futures Trading Commission and turned it into a toothless tiger.
16:31
Speaker 1: Clinton signed all these things. Some of these passed uh
16:35
Speaker 1: the House like three to one. Right now, that s
16:39
Speaker 1: there was a consensus in both parties at the time
16:41
Speaker 1: that the key or one of the keys to economic
16:46
Speaker 1: growth and too uh kind of economic growth spreading globally
16:50
Speaker 1: in the US maintaining its competitive advantage when came to
16:53
Speaker 1: financial services was to embrace a really aggressive leisay fair
16:58
Speaker 1: attitude towards all walks of financial life. And look, it's
17:02
Speaker 1: clearly not only the Clinton administration. They but you know,
17:05
Speaker 1: the the administration and power in any given year wields
17:08
Speaker 1: a tremendous amount of clout on these things. And if
17:10
Speaker 1: if Bob Reuben, a guy who is coming from the
17:14
Speaker 1: upper echelons of Goldman Sax, wasn't uh cheerleader of this,
17:18
Speaker 1: it wouldn't have happened. And the and Gary Gensler as well,
17:21
Speaker 1: another Goldwen Sax guy. So there ends up the city.
17:25
Speaker 1: So he he oversaw the repeal of um Glass Steagle,
17:31
Speaker 1: which paved the way for the creation of the modern
17:33
Speaker 1: city Group, which was travelers and travelers and city corps.
17:36
Speaker 1: And it then lo and behold. After leaving immediately gets
17:39
Speaker 1: hired in a very lucrative contract to do not a
17:42
Speaker 1: whole lot at city Group. So in any case, the
17:47
Speaker 1: Gensler at the Gensler in the Treasure Derment in the
17:49
Speaker 1: Clinton administration was one of the proponents of essentially neutering
17:53
Speaker 1: the CFDC, not having it the powerful force for the
17:56
Speaker 1: regulation of derivatives. He then in the Obama era, is
18:01
Speaker 1: eager too. He sees the winds shifting, We've just had
18:06
Speaker 1: the financial crisis. He's eager for a senior administration position
18:10
Speaker 1: and the opposition to him on Capitol Hill was intense
18:13
Speaker 1: because he was so deeply embedded with the Rubin wing
18:16
Speaker 1: of the Democratic Party. And he underwent a remarkable makeover.
18:21
Speaker 1: And Bernie Sanders was one guy on the on the
18:23
Speaker 1: Hill who had been a vigorous opponent of Gensler getting
18:26
Speaker 1: any powerful position, and Gensler just pulled this remarkable about face,
18:30
Speaker 1: and to his credit, unlike most politicians, he admitted that
18:34
Speaker 1: he had been catastrophically wrong in the Clinton administration, in
18:37
Speaker 1: the Clinton era, and he had just gotten it wrong.
18:39
Speaker 1: He and he said he had learned a lesson and
18:41
Speaker 1: was embracing very enthusiastically this pro regulation, pro government view
18:47
Speaker 1: of the financial world. And so he came into the CFDC,
18:50
Speaker 1: which at the time was this kind of scrappy, underfunded
18:54
Speaker 1: backwater of an agency in Washington, and did everything he
18:58
Speaker 1: could to he he wants scalps. He wanted to he
19:02
Speaker 1: wanted to see the CFDC developing a reputation for being
19:06
Speaker 1: one of the uh toughest, scariest gun slingers on Wall Street.
19:10
Speaker 1: And what became this investigation into Library that became the
19:13
Speaker 1: perfect vehicle for him. What what's so astonishing is a
19:17
Speaker 1: lot of the people who set up the financial crisis,
19:22
Speaker 1: uh during the Clinton administration. And let's hold the Republicans aside,
19:26
Speaker 1: guys like Phil Graham. But when you look at the Democrats,
19:30
Speaker 1: you have you have Laurence Somers eventually goes on to
19:34
Speaker 1: get a Chairman of the c e A for Obama.
19:37
Speaker 1: Tim Geithner, who was New York Fed Chief, eventually becomes
19:40
Speaker 1: Treasury Secretary. Gensler gets appointed to the agency that he
19:45
Speaker 1: helped to dismantle. It's really pretty astonishing if you look
19:50
Speaker 1: at the fields of of aviation or medicine. When a
19:53
Speaker 1: plane crashes or there's a surgical problem, you don't send
19:56
Speaker 1: the same pilot back to tell you what went wrong.
19:58
Speaker 1: You don't send the same s rgin to do a
20:01
Speaker 1: post mortem. Someone else with fresh eyes comes in. That
20:04
Speaker 1: is not what we saw take place during the financial crisis. No,
20:09
Speaker 1: it's totally true. You had a lot of the same
20:11
Speaker 1: old characters coming in, and a lot of them Geitner
20:13
Speaker 1: is an exception to this, I think, but a lot
20:15
Speaker 1: of them hailed from All Street and those are these
20:17
Speaker 1: are the same guys who had not only not stocked
20:19
Speaker 1: the financial crisis, but in a number of cases either
20:22
Speaker 1: worsened it or profited from it, and take your pick.
20:24
Speaker 1: I don't know which of those is worse. And uh, Again,
20:29
Speaker 1: in fairness to people like Summers and Getzler, I think
20:32
Speaker 1: there is a human capacity to learn from one's mistakes.
20:35
Speaker 1: And arguably the experience of having screwed up royally and
20:41
Speaker 1: watching the financial world burn as a result in part
20:44
Speaker 1: of youuter mistakes is probably a pretty sobering educational moment.
20:49
Speaker 1: And look that everyone got it wrong. It's not just
20:51
Speaker 1: these guys, right, the media got it wrong. Everybody got
20:53
Speaker 1: it wrong. Lots of people, a lot of people got
20:55
Speaker 1: it wrong. You know, there were plenty of people who
20:57
Speaker 1: were complaining about it and warning about it. I just
21:02
Speaker 1: I've always found it fascinating that, wait, there aren't people
21:05
Speaker 1: who weren't major contributors to the crisis to take the
21:09
Speaker 1: role of C. E. H A or Treasury secretary. I've
21:13
Speaker 1: always learned when you really screw up, hey, you know
21:16
Speaker 1: you're not going to get that promotion. Apparently DC in
21:20
Speaker 1: Wall Street that that doesn't seem to Yeah. I mean,
21:22
Speaker 1: one of the revelations to me in writing this book
21:25
Speaker 1: is that most of the things on Wall Street and
21:28
Speaker 1: in the financial world, and I think in politics too,
21:30
Speaker 1: it boils down to incentives. And of course people's people
21:33
Speaker 1: are actually pretty rational actors if you can figure out
21:37
Speaker 1: what's motivating them to do what they're doing. And so
21:41
Speaker 1: you see this any awhere, from kind of a low
21:43
Speaker 1: level trader starting out in Wall Street to someone at
21:46
Speaker 1: the upper echelons of a bank like Gary Ginsler, Bob Rubin,
21:49
Speaker 1: or or if you put them in government service, the
21:51
Speaker 1: same thing. So if they they're responding to the incentives,
21:54
Speaker 1: whether it's compensation incentives or feedback or just approval ratings
22:00
Speaker 1: or things like that, and they they have everyone incentives matter,
22:04
Speaker 1: and they explained that we see and I think that's
22:06
Speaker 1: why to me, when the next crisis inevitably happens in
22:10
Speaker 1: the next scandal inevitably and will it will. It's a
22:13
Speaker 1: question of when and where. But when it does, I
22:15
Speaker 1: think we're going to look back and see that a
22:17
Speaker 1: lot of the lessons we should have learned from the
22:19
Speaker 1: financial crisis in terms of shaping incentives in a way
22:22
Speaker 1: to encourage sober, careful, prudent behavior, we're not really heated.
22:28
Speaker 1: We instead just imposed erected all these new regulations that
22:31
Speaker 1: are just designed for the sake of regulations, they're not
22:34
Speaker 1: actually looking very closely at what motivates people to behave
22:37
Speaker 1: the way that they do. So let's talk a little
22:39
Speaker 1: bit about Tom Hayes, the man in the middle of this. Uh,
22:43
Speaker 1: you actually won a Globe Award for your coverage of
22:46
Speaker 1: the unraveling of Tom Hayes. Who was Tom Hayes And
22:51
Speaker 1: how did he find himself in the middle of the
22:53
Speaker 1: library scandal? So? Tom Hayes is mildly autistic mathematician. He
23:00
Speaker 1: was a trader at some of the world's biggest banks.
23:02
Speaker 1: He was a guy who, like most mathematicians who are
23:05
Speaker 1: mildly autistic and gett into banking, was very good at
23:08
Speaker 1: creating models, detecting patterns, things like that. Not very not
23:12
Speaker 1: just very good at detecting patterns. People described him as
23:15
Speaker 1: just he was a genius, all right, just brilliant at this.
23:17
Speaker 1: He was a genius, and he was one of the
23:19
Speaker 1: best traders that a lot of his colleagues had ever seen.
23:23
Speaker 1: He also was someone who was very well trained to
23:29
Speaker 1: do what traders do best, especially in a decade ago,
23:32
Speaker 1: which was to look for tiny, little inefficiencies and find
23:36
Speaker 1: ways to exploit them. And that could mean having a
23:39
Speaker 1: faster trading system, it could mean having better intelligence, It
23:43
Speaker 1: could mean having stupider clients. It could mean finding ways
23:47
Speaker 1: to manipulate something that you are betting on the outcome of.
23:52
Speaker 1: And so so let's talk about stupider clients for a second,
23:55
Speaker 1: because this comes up in the book with there's a
23:59
Speaker 1: whole list of characters, and there are really some very
24:02
Speaker 1: colorful characters. What is the relationship of the brokers who
24:07
Speaker 1: are working with the traders and how do people identify
24:11
Speaker 1: smarter and dumber clients. Yeah, so the brokers serve this
24:15
Speaker 1: role as the great middleman in the banking industry. And
24:19
Speaker 1: when two traders, when bank a trader bank A and
24:22
Speaker 1: a trader bank B both want to do a transaction,
24:25
Speaker 1: they're often not talking to each other. They're talking to
24:27
Speaker 1: a broker who's in the middle and realizes that trader
24:30
Speaker 1: bank A wants to buy something and trader bank B
24:33
Speaker 1: is looking to sell the same thing, and so they'll
24:34
Speaker 1: serve as the middleman for that service. They take a
24:37
Speaker 1: cut of the the value of the transaction, and that's fine.
24:41
Speaker 1: The broker serve another role though, which is uh information
24:45
Speaker 1: brokers essentially, and they pedal gossip and they are paid
24:50
Speaker 1: in large part to develop relationships with these traders. And
24:54
Speaker 1: the way they do that. I love this thing. It's
24:56
Speaker 1: that they have. There's a ratio of how or a
25:00
Speaker 1: percentage of the revenue that each trader generates you are
25:04
Speaker 1: supposed to as a broker recycle that back to the trader.
25:08
Speaker 1: Define define recycle in real life? What is entertainment? It's
25:12
Speaker 1: called which is just a giant teeny budget ranks, food,
25:17
Speaker 1: strip clubs, and and and if you've got some of
25:21
Speaker 1: these traders who are generating uh millions and millions of
25:25
Speaker 1: dollars a year in brokerage fees, spending ten of that
25:31
Speaker 1: on steak dinners and nice drinks is very hard. But
25:34
Speaker 1: it's not just steak dinners and nice draders. You tell
25:37
Speaker 1: some stories. This is g rated, but you tell some
25:40
Speaker 1: stories in the book. These guys are animals. Now they
25:43
Speaker 1: get creative, They get very creative about ways to spend
25:46
Speaker 1: hundreds of thousands of dollars a year on a particular person.
25:49
Speaker 1: And so what does that mean? That means drugs, it
25:51
Speaker 1: means women, it means trips to various places, it means
25:55
Speaker 1: just all sorts of ludicrous misbehavior. And this is something
26:00
Speaker 1: him that again is the book singles out a number
26:02
Speaker 1: of individuals for being involved in this, but this is
26:05
Speaker 1: widespread industry practice at the time. And Hayes, Tom Hayes
26:09
Speaker 1: was not a guy who liked going to strip clubs.
26:11
Speaker 1: He was not a big drinker. His idea of a
26:13
Speaker 1: fun night out was going to KFC, getting a bucket
26:17
Speaker 1: of fried chicken, sitting at home eating it while watching
26:20
Speaker 1: Steinfeld reruns. And so this is not a guy who
26:22
Speaker 1: you can easily. He's a huge trader, but it was
26:26
Speaker 1: very hard, and the brokers were dying to do business
26:28
Speaker 1: with him because of the huge volumes he was doing.
26:30
Speaker 1: But this is not someone who is very easy to
26:31
Speaker 1: spend your ten percent of the commissions on. And so
26:35
Speaker 1: the brokers found another way to reward him, which was
26:38
Speaker 1: that Tom Hayes was making huge, huge bets on the
26:43
Speaker 1: direction of interest rates, which meant that he had a huge,
26:46
Speaker 1: huge steak in the direction of library every day. And
26:49
Speaker 1: Tom Hayes on a given day would have millions and
26:52
Speaker 1: millions of dollars riding on whether libra or went up
26:56
Speaker 1: or down by a basis point, which is a one
27:00
Speaker 1: percentage point. So a tiny, little move that no one
27:03
Speaker 1: would ever notice. Tom Hayes not only would notice, but
27:06
Speaker 1: cared deeply about live were moving in these tiny little increments.
27:10
Speaker 1: And so that's where the brokers came in For Tom Hayes.
27:13
Speaker 1: He realized and the brokers realized that libras set not
27:17
Speaker 1: Tom Hayes at this time worked at UBSA. Was not
27:19
Speaker 1: set by the market, but it's set by the by
27:21
Speaker 1: the Tom Hayes works at one bank. And so Tom Hayes,
27:24
Speaker 1: as with standard industry practice at the time, the traders
27:26
Speaker 1: who were making wagers based on the direction of interest
27:29
Speaker 1: rates would call up the little clerk in the bowels
27:32
Speaker 1: of the bank and say, hey, mate, I need libor
27:35
Speaker 1: up today. Can you please move UBS submission up by
27:38
Speaker 1: as much as you can or move it down by
27:39
Speaker 1: as much as you can. Depend it was that. It
27:41
Speaker 1: was that, It was that. Yeah, it's very explicit. People
27:45
Speaker 1: are very open about it. They were encouraged to do it.
27:47
Speaker 1: This was under the under the umbrella at the time
27:49
Speaker 1: of banks trying to improve the coordination of different parts
27:53
Speaker 1: of the bank working together, all playing in the same direction.
27:56
Speaker 1: And what role does the broker's play with these clerks?
27:59
Speaker 1: So the broker's the broker's role is that they Tom
28:02
Speaker 1: Hayes can tell the guy at UBS his colleague, to
28:04
Speaker 1: move lib Rar uper down. What Tom Hayes can't do
28:06
Speaker 1: quite as easily is called City Group or JP Morrigan,
28:10
Speaker 1: a royal bank of the other ten banks. And because
28:13
Speaker 1: he doesn't know these guys and why would they listen
28:14
Speaker 1: to him anyway, but he can call in a favorite
28:16
Speaker 1: with the brokers. And so that he had brokers at
28:19
Speaker 1: eye Cap which is the biggest, and some other firms
28:21
Speaker 1: as well, just every single day routinely going out into
28:26
Speaker 1: the market and telling all of their context that all
28:29
Speaker 1: these other banks move live or upper down. And it
28:32
Speaker 1: was basically to benefit Tom Hayes's trading positions and the
28:35
Speaker 1: trading positions of Tom Hayes's colleagues. Was this unique to
28:37
Speaker 1: Hayes and and Ubs was the standard practice, well, it
28:40
Speaker 1: was standard practice to be manipulating lib Or. Hayes was
28:44
Speaker 1: a really clever guy and a really relentless guy and
28:47
Speaker 1: took this to a new level. So the introduction of
28:49
Speaker 1: the brokers was something that Hayes. Hayes pioneered and that
28:53
Speaker 1: was really his innovation. That was the way that he
28:55
Speaker 1: got an edge and Everyone always talked about getting an
28:58
Speaker 1: edge on the trading floor, and heyesn't found one. You
29:01
Speaker 1: were in London in the mid two thousand's. How did
29:05
Speaker 1: you find your way to London? How how does a
29:07
Speaker 1: Wall Street General reporter based in New York ends up
29:10
Speaker 1: in London. It was actually the late two thousands and
29:12
Speaker 1: the financial crisis here in the US had ended. Banks
29:16
Speaker 1: are getting back to normal more or less boring stuff,
29:19
Speaker 1: but a financial crisis was just dawning in Europe. I
29:22
Speaker 1: had never lived overseas and was eager for an adventure,
29:25
Speaker 1: and London seemed like an adventure. So so in late
29:28
Speaker 1: twenties at this point, it's a decade ago. I think
29:31
Speaker 1: it was early early thirties. So now you're in London
29:34
Speaker 1: for a couple of years. You're covering finance, You're covering
29:37
Speaker 1: the banks. The middle of the night, you get a
29:40
Speaker 1: text from a phone that you don't recognize. The number
29:44
Speaker 1: of comes in tell us about that. So I was covering.
29:48
Speaker 1: I had been covering the library or what it was
29:50
Speaker 1: now known as the Library scandal. And government had investigated
29:53
Speaker 1: all these banks and in a couple of cases, including
29:57
Speaker 1: with UBS, which was Tom Hayes's former employer had reached
30:00
Speaker 1: these huge settlements where the banks had to pay hundreds
30:02
Speaker 1: of millions, if not billions of dollars and penalties and
30:05
Speaker 1: admitted that they had been part of this global scheme
30:07
Speaker 1: to manipulate interest. How many banks wrote? How much money?
30:10
Speaker 1: And well, ultimately it was more than a dozen banks
30:13
Speaker 1: and probably five or six or seven or eight or
30:16
Speaker 1: nine or ten billion dollars in penalties, A lot huge,
30:19
Speaker 1: widespread is this? This is in at the very end
30:25
Speaker 1: of For the first time, a guy was actually a guy,
30:30
Speaker 1: an individual, a person was held accountable for this, and
30:33
Speaker 1: that guy was Tom Hayes. He was arrested in the
30:35
Speaker 1: UK and he was criminally charged here in the un
30:38
Speaker 1: Remember he was the first person to be charged. And
30:42
Speaker 1: my boss at the time, a guy named Bruce or
30:45
Speaker 1: While who was a great editor at the Wall Street
30:46
Speaker 1: Journal UH wanted me to write a profile Tom Hayes.
30:50
Speaker 1: And of course that seemed like a thankless task. Hayes
30:53
Speaker 1: had been you know, he'd been criminally charged. This guy's
30:55
Speaker 1: not going to talk. And so after much toing and frowing,
30:58
Speaker 1: I agreed to do this and found a woman who
31:03
Speaker 1: was his former business school classmate and got her to
31:05
Speaker 1: talk to me, and it started painting this picture. Nothing
31:08
Speaker 1: was known about Tom Hayes at this point he other
31:10
Speaker 1: than that he was a very successful trader who had
31:13
Speaker 1: said some really stupid, uh seemingly damning stuff in againstant messages.
31:19
Speaker 1: And this woman, though, painted a much more interesting, nuanced
31:22
Speaker 1: picture of Tom as someone who was mildly autistic. He
31:25
Speaker 1: was a nerd. He was just doing what everyone else
31:27
Speaker 1: was doing, it seemed like uh. And I convinced her
31:30
Speaker 1: to pass on my phone number to Tom Hayes and
31:33
Speaker 1: she said, of course, there's no way he's gonna call you.
31:35
Speaker 1: There's his lawyers won't let him, blah blah blah. And
31:37
Speaker 1: I was sitting at home that night on the sofa
31:40
Speaker 1: watching TV with my wife and I got a text
31:42
Speaker 1: message from an unknown number and it said this goes
31:45
Speaker 1: much much higher than me. Not even the Justice Department
31:48
Speaker 1: knows the full story. And it was Tom Hayes, and
31:50
Speaker 1: I could not believe it. He agreed then to meet
31:53
Speaker 1: me the next day. Uh. He said, I'll meebe if
31:56
Speaker 1: I can trust you, And I said, of course you
31:57
Speaker 1: can trust me. I'm a journalist and it and he
32:01
Speaker 1: told me he'd be standing in Victoria station, which is
32:04
Speaker 1: a big busy train station in London outside the Burger
32:06
Speaker 1: King were in a brown leather jacket, and of course
32:08
Speaker 1: no one who knows what this guy looks like at
32:10
Speaker 1: this point, and I, as you can imagine, was pretty
32:14
Speaker 1: excited about that. I kind of pictured myself as Bob Woodward.
32:20
Speaker 1: And unfortunately he canceled the next morning because his wife
32:22
Speaker 1: had found his phone and realized he was off to
32:24
Speaker 1: meet a journalist and his wife is a lawyer, and
32:27
Speaker 1: uh decided that was not a wise thing to do.
32:31
Speaker 1: But that was the start of what became a year's
32:33
Speaker 1: long relationship I had with Tom Hayes. That and this
32:36
Speaker 1: initially started over text messages, but ultimately and I was
32:40
Speaker 1: spending what seemed like the majority of my waking hours
32:43
Speaker 1: either with him or on the phone with him, and
32:45
Speaker 1: eventually his wife as well, and they just let me
32:47
Speaker 1: inside their life for uh, pretty substantial period of time
32:51
Speaker 1: from early until mid when Tom Hayes eventually went on
32:56
Speaker 1: trial for manipulating live board. And so that was the
32:59
Speaker 1: bag for this Walser journal series. The unraveling of Tom
33:03
Speaker 1: Hayes is that I watched this guy who had become
33:06
Speaker 1: kind of this unlikely public face of financial crime. Uh
33:10
Speaker 1: and I watched him his life disintegrate. It was fascinating
33:13
Speaker 1: and kind of upsetting. So Hayes eventually loses the case,
33:17
Speaker 1: gets what was it, a fourteen year sentence. So there's
33:21
Speaker 1: a section in the book it's jaw dropping his former bosses,
33:25
Speaker 1: his associates, all the traders he worked with, all the
33:27
Speaker 1: brokers he worked with. Nobody else gets into trouble. How
33:31
Speaker 1: is that not only do they not get into trouble,
33:33
Speaker 1: they're all doing fine, They're all still working in the industry,
33:36
Speaker 1: they're all still making millions of dollars. How did this
33:38
Speaker 1: one guy become the full guy and everybody else skates
33:43
Speaker 1: away scott free? I mean, there are two basic reasons,
33:46
Speaker 1: too literal reasons. That one is that Hayes was stupid
33:50
Speaker 1: and naive, and he did everything in writing. So there's
33:52
Speaker 1: this rich trove of documentary evidence that showed Hayes in
33:56
Speaker 1: text messages or chat rooms or sometimes unrecorded phone lines.
34:00
Speaker 1: Please move lie War up from me. I have a
34:02
Speaker 1: lot of money riding over and over and over again,
34:04
Speaker 1: thousands of times. Well, and the second reason is that
34:08
Speaker 1: prosecutors and regulators are a little bit lazy. They wanted
34:13
Speaker 1: to nail some people, but you know, they don't really
34:16
Speaker 1: want to take risks. They want to go after the
34:17
Speaker 1: sure thing, and the sure thing in this case was
34:20
Speaker 1: Tom Hayes. This isn't, i think, probably an unlosable case
34:23
Speaker 1: for them, and they went after him. And what's mystifying
34:26
Speaker 1: to me is what happened next, which is that they
34:28
Speaker 1: did they criminally charged a small handful of other people
34:32
Speaker 1: of his confederates, all of whom got acquitted, but they
34:35
Speaker 1: really didn't go after anyone higher us. And you know,
34:39
Speaker 1: this is mystifying a little bit frustrating to me because
34:43
Speaker 1: there's as much evidence that there's against Tom Hayes, there's
34:46
Speaker 1: also a lot of evidence that shows Hayes's bosses and
34:50
Speaker 1: his boss's bosses and his boss's boss's bosses not only
34:53
Speaker 1: knowing about and condoning what he was doing at the time,
34:56
Speaker 1: but in some cases participating alongside him. And were they
34:59
Speaker 1: doing it as extensively and as aggressively as Hays and
35:02
Speaker 1: as blatantly as He's absolutely not, but these are people
35:05
Speaker 1: who should have known better, and the regulation prosecutors, I
35:09
Speaker 1: think most of these are smart, ambitious people and they
35:13
Speaker 1: should recognize how the actions that they take going after
35:17
Speaker 1: certain people in the industry. Those are have the potential
35:19
Speaker 1: be very powerful deterrent messages, and this is a huge
35:22
Speaker 1: missed opportunity there they could have. I think they could
35:25
Speaker 1: have brought a lot more cases than they did. So
35:27
Speaker 1: Jesse Eisinger's book, which I can't say the title on
35:29
Speaker 1: of on the air the Chicken Blank Club talks about
35:33
Speaker 1: the comby That phrase comes from the Kobe speech about
35:35
Speaker 1: the prosecutors who are chickens lazy and only take easy cases.
35:42
Speaker 1: But it didn't sound like a lot in your book,
35:44
Speaker 1: the picture you paint, it doesn't sound like these are
35:47
Speaker 1: all that different. Maybe the Hayes case was a lay down,
35:51
Speaker 1: but there seemed like a huge paper trail for another
35:54
Speaker 1: dozen people, maybe another fifty people. Yeah, there are a
35:57
Speaker 1: lot of people who have of who are caught up
36:01
Speaker 1: in this, and they're to me. At first of all,
36:04
Speaker 1: I love Jesse Eisinger's book. Everyone should read it. I
36:06
Speaker 1: think it's a perfect compliment to the Spider Network in
36:08
Speaker 1: the sense that the Spider Network show is one of
36:10
Speaker 1: these cases where there was all this evidence and most
36:12
Speaker 1: of it just didn't get used. In Jesse's book, does
36:15
Speaker 1: a really good job of explaining some of the dynamics
36:17
Speaker 1: inside the Justice department for why prosecutors are sometimes kind
36:21
Speaker 1: of cowardly and um in this case. And I think
36:25
Speaker 1: part of the issue is that these are complicated cases.
36:29
Speaker 1: It takes a lot to bring a case, and but
36:33
Speaker 1: there's enormous resistance in the financial world, and a lot
36:36
Speaker 1: of these prosecutors are they really don't want to lose.
36:40
Speaker 1: And to me, the power of the prosecutors have here
36:45
Speaker 1: is the simple act of staging a perp walk, of
36:48
Speaker 1: going and arresting a senior executive at a bank or
36:51
Speaker 1: another big yeah, that would have in parading them in
36:55
Speaker 1: front of the TV cameras and making them go into
36:58
Speaker 1: court and face the jury of appears, and how the
37:01
Speaker 1: fear of God put in them that they might not
37:03
Speaker 1: lose some money or might lose some reputation, might lose
37:06
Speaker 1: their job, but might lose their freedom. That's scary. And
37:10
Speaker 1: if that prospect of the possibility of actually going to
37:13
Speaker 1: jail was hanging over people's heads, I think that would
37:17
Speaker 1: do a lot to change behavior. And we talked earlier
37:19
Speaker 1: about incentives and how people respond to the incentives are given.
37:23
Speaker 1: Both positivetives exactly, both positive and negatives. So money is
37:27
Speaker 1: a positive incentive, but prospect of serious, life changing personal
37:33
Speaker 1: consequences is another incentive, to say the least. Uh. Let
37:39
Speaker 1: me let me sum up this conversation with the quote
37:42
Speaker 1: from the book, and I want you to respond to it.
37:45
Speaker 1: There is a tension between quote long term effective functioning
37:50
Speaker 1: of the financial markets on one hands, I'm now paraphrasing you, uh,
37:55
Speaker 1: and on the other hand, optimizing the current value of
37:59
Speaker 1: your securities portfolio. How do you uh square that circle?
38:04
Speaker 1: How do you resolve the tension between those two clearly
38:09
Speaker 1: potentially conflicting motivations. So between just long term and short term, well,
38:14
Speaker 1: it's it's long term functioning of the financial markets. You know,
38:19
Speaker 1: during the subprime crisis, there were these bonuses that people
38:22
Speaker 1: called I'll be gone, You'll be gone, bonuses that by
38:25
Speaker 1: the time it blew up, hey will be three jobs away.
38:28
Speaker 1: It seemed that the short term totally trump the long term.
38:33
Speaker 1: But that's not what I'm asking about here. This is
38:37
Speaker 1: the actual functioning of the finance markets. So we don't
38:42
Speaker 1: have a situation where the crepent markets just freeze. How
38:45
Speaker 1: can that inherent tension between functioning markets and optimizing portfolios.
38:52
Speaker 1: Can that be resolved? Probably not. And the one of
38:56
Speaker 1: the things I found interesting recently though, is that there
38:58
Speaker 1: are a lot of banks out there these days. Banks
39:00
Speaker 1: used to be the model that was in vogue was
39:03
Speaker 1: to be this financial supermarket, and that included, you know,
39:05
Speaker 1: you have a retail bank, a credit card business, a
39:07
Speaker 1: mortgage business, a wealth management business, but most of all,
39:10
Speaker 1: the big revenue driver were these investment banks that a
39:13
Speaker 1: lot of it not just prop trading, although that was
39:15
Speaker 1: part of it. It was, but there was a huge
39:18
Speaker 1: business that sprung up around serving or making trades uh
39:25
Speaker 1: in the wake of or around the business of servicing
39:28
Speaker 1: big clients and big, big institutions. And one of the
39:31
Speaker 1: things I found interest in recently that that turned into
39:33
Speaker 1: a very risky business, by the way, because you know
39:35
Speaker 1: that a lot of the there's a tremendous amount of
39:38
Speaker 1: volatility in the markets, and yes, you can make huge profits,
39:40
Speaker 1: but you can also make huge losses when the markets
39:42
Speaker 1: turn if you don't handle it perfectly. And one of
39:45
Speaker 1: the things I found very interesting now is that if
39:48
Speaker 1: you look at the banks that investors think are the
39:51
Speaker 1: best deals, those are not banks that bear any resemblance
39:55
Speaker 1: to what was in vogue ten years ago. You're looking
39:58
Speaker 1: at banks, and the UK has some really interesting examples
40:01
Speaker 1: of these banks like Lloyd's and Royal Bank of Scotland
40:03
Speaker 1: that are these just there as boring as can be.
40:07
Speaker 1: They're just banks that do what banks used to do
40:09
Speaker 1: in the nineteen fifties, which is they take deposits, they
40:13
Speaker 1: make loans, and it's that simple. And it turns out
40:16
Speaker 1: that if you do that properly in an economy that's
40:19
Speaker 1: pretty strong, that's an enormously profitable business and it's safe,
40:23
Speaker 1: and it's uh conservative, and it also is valuable to
40:27
Speaker 1: not just the the shareholders and executives, but to an
40:31
Speaker 1: economy as a whole. And I think, to me, this
40:34
Speaker 1: is gonna sound old fashioned, and I think a lot
40:35
Speaker 1: of people in the banking industry probably will view this
40:38
Speaker 1: as naive and just a little too quaint for their taste.
40:41
Speaker 1: But looking at things through the prism of is there
40:46
Speaker 1: some value social economic value to what you're doing? To
40:51
Speaker 1: me that would have that's a pretty good filter for
40:55
Speaker 1: activity that is not really good for shareholders either. The
41:00
Speaker 1: huge risks the banks are customed to taking those turn
41:03
Speaker 1: out badly way too often. So how did RBS run
41:08
Speaker 1: into trouble because they are in deep trouble. RBS is
41:12
Speaker 1: actually doing pretty well right now with the reality and
41:15
Speaker 1: they they were with the world's worst bank for up
41:19
Speaker 1: until a couple of years ago, and they managed. They
41:22
Speaker 1: had been on this acquisition spree. They were every single
41:26
Speaker 1: crisis there was RBS steps in the middle everything. When
41:29
Speaker 1: there are a lot of banks that fit that mold right.
41:31
Speaker 1: UBS is another good example, City Group, Deutschebank unbelievable, and
41:36
Speaker 1: all these banks and and and well it's far ago.
41:39
Speaker 1: I mean, we can it's hard to name banks that
41:42
Speaker 1: haven't made these catastrophic mistakes. Chase JP Morgan is really
41:46
Speaker 1: the exception. Yeah, and Goldman too to a certain extent.
41:49
Speaker 1: I think, um, they've certainly had their blunders, but they
41:54
Speaker 1: they're not. Those are banks that have been much more
41:57
Speaker 1: conservative and I think better. Manager Stanley arguably sidestep much
42:02
Speaker 1: of the debacle. We have been speaking to David Enrich
42:06
Speaker 1: about the Spider Network. If you enjoy this conversation, be
42:10
Speaker 1: sure and check out our podcast extras, where we keep
42:12
Speaker 1: the tapes rolling and continued discussing all things Liebor. We
42:17
Speaker 1: love your comments, feedback and suggestions right to us. At
42:22
Speaker 1: m IB podcast at Bloomberg dot net, where we keep
42:25
Speaker 1: the tape rolling and continue discussing all things lie Bar.
42:28
Speaker 1: You can find that wherever finer podcasts are sold SoundCloud, Overcast,
42:34
Speaker 1: Apple iTunes, and of course Bloomberg dot com. You can
42:37
Speaker 1: check out my daily column on Bloomberg View dot com.
42:41
Speaker 1: Follow me on Twitter at Rid Halts. I'm Barry Rit Halts.
42:45
Speaker 1: You're listening to Masters in Business on Bloomberg Radio. Welcome
43:02
Speaker 1: to the podcast, David. Thank you so much for doing this.
43:05
Speaker 1: I found I'm only halfway through the book, but I
43:08
Speaker 1: found it to be absolutely fascinating, and it unfolds like
43:14
Speaker 1: a spy novel. It's it's really amazing characters and all
43:18
Speaker 1: these things going on, and you're kind of astonished along
43:22
Speaker 1: the way that wait, can they really do that? That?
43:25
Speaker 1: That seems like that doesn't make any sense? How much
43:28
Speaker 1: fun was this to research and write? So much fun
43:32
Speaker 1: it was. It was the most fun I've ever had
43:35
Speaker 1: as a journalist. Honestly, I found I found getting to
43:39
Speaker 1: know these characters fascinating. I found the historical research fascinating.
43:44
Speaker 1: I actually really enjoyed the writing part two. I felt
43:46
Speaker 1: like I got h It was a peaceful, creative process
43:52
Speaker 1: for me, and I just was happy as a clam.
43:57
Speaker 1: So you you get to know the hay his family,
44:01
Speaker 1: you spend almost a year with them, than from to
44:07
Speaker 1: that early through middle of so and close to two
44:12
Speaker 1: and a half years. Are you surprised that he's the
44:15
Speaker 1: only person who ended up going to jail for this. I'm,
44:19
Speaker 1: on the one hand, surprised because that doesn't seem right
44:23
Speaker 1: or fair. There were a few other people who got
44:25
Speaker 1: very small jail sentence is not not part of his ring,
44:28
Speaker 1: but part of other people at other banks that were
44:31
Speaker 1: engaged and have similar behavior, but the jail sentences were
44:35
Speaker 1: tiny fractions of what he received. On the other hand, though,
44:38
Speaker 1: I'm not that surprised. And one of the things that
44:41
Speaker 1: I think has fueled the current populace movement, certainly fueled
44:45
Speaker 1: the rises of Bernie Sanders and Donald Trump in is
44:48
Speaker 1: the sense that Wall Street got away with murder and
44:51
Speaker 1: no one was held no no individuals were held accountable,
44:54
Speaker 1: while so many people in the public lost their jobs,
44:58
Speaker 1: or their homes or their savings as a result of this.
45:01
Speaker 1: And I think there's that's that feeling that's been out
45:03
Speaker 1: there since the financial crisis that's it lends itself to demagoguery,
45:08
Speaker 1: and it's often oversimplified and not very nuanced, but there's
45:12
Speaker 1: a big kernel of truth that behind that, And drain
45:16
Speaker 1: the swamp is an effective slogan. Drain the swamps and
45:19
Speaker 1: effective slogan. And the fear that Wall Street is taking
45:24
Speaker 1: advantage and people are everyone is in the pocket of
45:26
Speaker 1: Wall Street, whether it's politicians or proseutors. That's again, it's
45:29
Speaker 1: not that simple, but there is some truth to that,
45:32
Speaker 1: and there's no to me, there's no more powerful manifestation
45:36
Speaker 1: of that than looking at the almost uniformly low level,
45:43
Speaker 1: slightly dysfunctional, almost autistic guys who bear the brunt of
45:49
Speaker 1: the criminal accountability for actions committed during the financial crisis.
45:53
Speaker 1: It's not just haz And there's people involved in London
45:55
Speaker 1: Whale that are kind of like a little on the spectrum.
45:58
Speaker 1: I don't know them, but that's just the sense I get.
46:00
Speaker 1: The guy who has been account held accountable for the
46:03
Speaker 1: flash crash in is a guy who is like a
46:06
Speaker 1: little bit on the spectrum. There's this is a pattern.
46:10
Speaker 1: So what was the most shocking thing you discovered while
46:13
Speaker 1: you were researching this? To me, that it was not
46:16
Speaker 1: it is not something it's going to make a sexy headline,
46:18
Speaker 1: but it was really the degree to which culture at
46:23
Speaker 1: banks matters and has real world impacts. As someone who's
46:27
Speaker 1: been covering the banking industry in the U S and
46:29
Speaker 1: the UK for many years, I'd kind of dismissed as
46:32
Speaker 1: hogwash this notion of culture that consultants and banking executives
46:36
Speaker 1: pay lip service too. But I actually realized that it's true,
46:39
Speaker 1: and there's the culture at the institutions where Tom Hayes
46:42
Speaker 1: worked was one where envelope pushing was not just acceptable,
46:47
Speaker 1: but it was explicitly encouraged, explicitly and explicitly encouraged. And
46:52
Speaker 1: the senior executives at a number of these institutions, not
46:55
Speaker 1: just where Hayes worked, but across the industry were doing
46:58
Speaker 1: things not just with their trading but also just what
47:01
Speaker 1: their socialized doing things that are just out of controlled drinking, womanizing, drugs,
47:07
Speaker 1: things like that that we that you can't help. But
47:10
Speaker 1: look at the behavior of a top executive as a
47:13
Speaker 1: as an underling in an organization and take a cue
47:16
Speaker 1: from that person. If that person is doing stuff that
47:18
Speaker 1: is just nuts, you're gonna get the message that it's
47:22
Speaker 1: okay to be nuts. So so you can identify a
47:26
Speaker 1: distinct cultural difference from bank to bank, executive to executive,
47:31
Speaker 1: even if not pushing the envelope means our profit level
47:35
Speaker 1: is going to be a little less. That that works
47:37
Speaker 1: its way through the entire troops. Absolutely, And I think
47:40
Speaker 1: that we're talking earlier about how some some of the
47:42
Speaker 1: banks have survived whethered crasies pretty well. Are the like
47:46
Speaker 1: and JP Morgan is a good example, and it's an
47:48
Speaker 1: enormously profitable institution. It's made many, many mistakes, of course,
47:52
Speaker 1: but that's an institution where it's okay to leave some
47:56
Speaker 1: money on the table sometimes. But they don't. They don't
47:58
Speaker 1: seem to make existent mistakes like like Lehman did, like
48:02
Speaker 1: There did, like City Bank there. Apparently the list of
48:06
Speaker 1: banks that have made existential mistakes is much longer than
48:11
Speaker 1: a list of banks that have it. And I can
48:13
Speaker 1: I really can't think and not all of them, not
48:16
Speaker 1: all of the mistakes became existential because thanks largely taxpayers,
48:22
Speaker 1: but there was I mean, it's it's really hard for
48:25
Speaker 1: me to think of a bank that really managed risks
48:30
Speaker 1: well and would have been fine without government intervention. And
48:33
Speaker 1: that's that's again there's a lot of external circumstances to play,
48:36
Speaker 1: and there's good luck and bad luck. But the reality
48:39
Speaker 1: is these banks were financial institutions in general, were responding
48:44
Speaker 1: to press again, incentives from shareholders too, and uh the
48:49
Speaker 1: analyst community to amp up profits as quickly as possible
48:52
Speaker 1: quarter after quarter, and the best way to do that
48:54
Speaker 1: is to take more risks. And that works really well
48:57
Speaker 1: until it doesn't. So before I get to my favorite questions,
49:00
Speaker 1: I have to ask you a little bit about um,
49:03
Speaker 1: your writing process, because it really is kind of fascinating.
49:08
Speaker 1: How did you find your way to the Wall Street
49:10
Speaker 1: Journal that was back in oh seven before the crisis?
49:12
Speaker 1: Is that right? It was? I started at the journal
49:15
Speaker 1: in December of two thousand seven, so the crisis was
49:18
Speaker 1: right as the recession was started. Yeah, right, is saying
49:21
Speaker 1: that was right? I started right after Chuck Princeton Standard
49:24
Speaker 1: Neial lost their jobs at the Maryland City Group. And
49:28
Speaker 1: I've been working at down John's News Wires, which is
49:30
Speaker 1: uh same same parent company for a few years in
49:34
Speaker 1: Washington and in New York, and prior to that had
49:38
Speaker 1: been doing other journalisms. And you were in Washington covering
49:42
Speaker 1: not banks. What were you covering? I was covering politics.
49:46
Speaker 1: My first job out of college was working for this
49:48
Speaker 1: little wire service. It was kind of Washington d C
49:51
Speaker 1: bureau for a bunch of regional newspapers. So I was
49:53
Speaker 1: I was covering d C for a newspaper in Wisconsin.
49:58
Speaker 1: One in Amarillo, Texas where they which is home to,
50:01
Speaker 1: uh the manufacturer of the V twenty two osprey. You
50:04
Speaker 1: know there's plane. At the time they were this is
50:08
Speaker 1: in the early two thousands, they were they kept crashing
50:10
Speaker 1: and they kept inviting me to go down there and
50:11
Speaker 1: write on one, and I thought they were They were crazy.
50:15
Speaker 1: They fly now you see them around actually in the
50:18
Speaker 1: UK uses them all the time there. You see them
50:20
Speaker 1: flying around London. They were really considered wildly over priced,
50:24
Speaker 1: bone dog one of that. I don't remember the price.
50:26
Speaker 1: I just remember the fact that they kept crashing. They
50:28
Speaker 1: weren't safe at all. They would like they would crash
50:31
Speaker 1: like ten at the time. That's not a good ratio,
50:34
Speaker 1: that's a bad number. So so you find your way
50:37
Speaker 1: to the journal, you stop covering politics, do you immediately
50:41
Speaker 1: start covering banks out of that work? Yeah, I started
50:44
Speaker 1: covering finance at Dow Jones at news Wires, and I
50:47
Speaker 1: had no idea. I had fallen asleep for most my
50:50
Speaker 1: icon classes in college finance experience. Uh. But my first
50:55
Speaker 1: job at Dow Jones was actually, uh, my primary goal
50:59
Speaker 1: was to I had to read all these SEC filings
51:02
Speaker 1: and so I kind of taught myself what a balanced
51:04
Speaker 1: she is when income statement is how companies make disclosures,
51:07
Speaker 1: and that proved to be a really useful skill. Um,
51:11
Speaker 1: and I learned a lot about the industries, but more important,
51:13
Speaker 1: I learned how to do research, which is kind of
51:15
Speaker 1: the lifeblood of any good business reporter. So you're covering
51:20
Speaker 1: Tom Hayes for the Journal. You're you're one of five.
51:24
Speaker 1: You know, you're one of the journalists responsible for the
51:26
Speaker 1: five part series that led to the lobe A ward.
51:29
Speaker 1: What made you say, um, let's turn this into a book.
51:34
Speaker 1: It was, you know what it was? It was that
51:36
Speaker 1: in that five part series, and that was I don't know,
51:39
Speaker 1: it's like seven or eight thousand words, which is really
51:41
Speaker 1: long by newspaper journalist standards, manning journalist standards. And I
51:46
Speaker 1: looked at what I had as I wrote that, and
51:48
Speaker 1: there was just I had so much more material and
51:50
Speaker 1: I felt like I was having to really leave so
51:53
Speaker 1: much on the cutting room floor, And that was the
51:57
Speaker 1: narrative in that story to me, and I think a
51:59
Speaker 1: lot of readers as well, with really powerful and it
52:01
Speaker 1: was putting a human face on someone who had been
52:05
Speaker 1: caricatured as a villain and it you know, it turns
52:07
Speaker 1: out we all have a lot in common, and you know,
52:10
Speaker 1: once you get to know someone, you can really relate
52:12
Speaker 1: to them more. And to me, that was this is
52:14
Speaker 1: a great character, a great narrative arc, and a great
52:17
Speaker 1: opportunity to bring some of this finance stuff to a
52:22
Speaker 1: mass audience, because the finance industry over the past twenty
52:25
Speaker 1: years has done a really good job at kind of
52:27
Speaker 1: cloaking itself in opacity and making it seem like the
52:31
Speaker 1: stuff they're doing is so complicated and so important that
52:35
Speaker 1: no mere mortal can actually understand it. And you know what,
52:37
Speaker 1: that's nonsense. There by the way, that is a feature,
52:40
Speaker 1: not a bug. When things are simple and transparent, you
52:43
Speaker 1: can't charge know that, that's completely right. They they have
52:47
Speaker 1: thrived on this lack of transparency and this kind of
52:49
Speaker 1: the mystification of the banking industry. They've thrived on it,
52:53
Speaker 1: and that drives me crazy, and it so to me
52:56
Speaker 1: this was how do you get people to actually read
52:59
Speaker 1: a book about finance. A One way is to make
53:01
Speaker 1: it read like a spy miss spin and it does
53:05
Speaker 1: and and that's gratified theories. That was the goal. And
53:09
Speaker 1: at the same time, you can get people to eat
53:11
Speaker 1: some of their like carrots and spinach sneak sneaking in
53:14
Speaker 1: And I feel like there's I used my parents, who
53:18
Speaker 1: don't know what's tremends amount about finance as kind of
53:20
Speaker 1: guinea pigs, and uh, that was a laborious process that
53:26
Speaker 1: might not have been great for my relationship with my parents,
53:28
Speaker 1: But so funny you say that my wife is an
53:31
Speaker 1: art teacher, my mother is a real estate agent. And
53:33
Speaker 1: when I'm trying to explain anything in finance, if I
53:36
Speaker 1: can get if I could create an explanation that both
53:41
Speaker 1: of them easily get, I know you're in business, I
53:43
Speaker 1: know I understand it, and I know I can explain.
53:46
Speaker 1: That was one of the interesting things for me is
53:47
Speaker 1: that that act of trying to explain things, either trying
53:51
Speaker 1: to write them in really simple terms or explain them
53:55
Speaker 1: to human beings like my book editor, for example. The
53:57
Speaker 1: act of doing that, I I had at this point
53:59
Speaker 1: been covering banks for since like two thousand and four,
54:02
Speaker 1: I think, so this is more than a decade. And uh,
54:06
Speaker 1: I thought I did know the industry quite well. But
54:08
Speaker 1: the act of trying to explain to someone what an
54:09
Speaker 1: interest rate swap is, what a derivative is, what does
54:12
Speaker 1: the bank actually do that that was a sobering moment
54:14
Speaker 1: for me because I realized that as well as I
54:16
Speaker 1: knew this industry and as many you know, hundreds if
54:19
Speaker 1: not thousands of stories had written about it, I it
54:22
Speaker 1: was very hard to explain these things, and I don't
54:25
Speaker 1: think I understood them fully. So I was gonna say
54:27
Speaker 1: the old line is, if you really want to understand something,
54:31
Speaker 1: teach it, because if you could teach it, then you really,
54:34
Speaker 1: you really get it. So I found myself in writing
54:36
Speaker 1: this book. There's a section on what a derivative is
54:38
Speaker 1: and what an interest rate swap is, and I remember
54:41
Speaker 1: sitting down to write writing it. Sitting down to write it,
54:44
Speaker 1: and I realized I was writing just nonsense. It was gibberish,
54:47
Speaker 1: and it was a very obvious reflection of my lack
54:49
Speaker 1: of nuanced understanding of it. So I had to go
54:51
Speaker 1: back and I found a bunch of professors who had
54:54
Speaker 1: were former traders to kind of walk me through it,
54:58
Speaker 1: and I just read a hot and arrived at a
55:01
Speaker 1: point where I did understand. And honestly, a lot of
55:04
Speaker 1: this stuff is not that complicated when you boil it
55:07
Speaker 1: down to its essence. It's that Wall Street does a
55:09
Speaker 1: very good job of cloaking everything and acronyms and jargon
55:14
Speaker 1: and you know, just doubling the complexity for the sake
55:17
Speaker 1: of complexity itself. So augusteen, you leave the Wall Street Journal,
55:21
Speaker 1: you go to the New York Times. What motivated that change?
55:25
Speaker 1: And and what is it like working at the Gray Lady? Um?
55:28
Speaker 1: What motivated that changes? I've been at the Journal for
55:30
Speaker 1: a long time. I love the water. Yeah, and I've
55:33
Speaker 1: been there for at the Journal for a decade, And
55:35
Speaker 1: if you count my time at DOWD John's before that,
55:37
Speaker 1: it was closer to fifth and that was a that
55:38
Speaker 1: was a decade where a lot of stuff was happening. Yeah,
55:43
Speaker 1: I mean a lot of stuff externally, was the entire
55:45
Speaker 1: financial crisis, a lot of stuff internally. Murdoch bought the place,
55:48
Speaker 1: and look, I love the Wall Street Journal day day
55:50
Speaker 1: in and day out, do great stuff. In fact, this
55:53
Speaker 1: may or may not be a coincidence, but since I left,
55:55
Speaker 1: they've just been on this tear, one awesome scoop after another.
55:59
Speaker 1: So I'm not sure that's because I left her despite me,
56:02
Speaker 1: but there's but the time, I hope not. The times
56:08
Speaker 1: is great. We are um in the midst of trying
56:11
Speaker 1: to kind of expand and revitalize our business and finance
56:15
Speaker 1: do so I'm the finance editor, so I run a
56:17
Speaker 1: team of I think nine or ten reporters and we're hiring,
56:22
Speaker 1: uh so, everything from banking and Wall Street and markets
56:27
Speaker 1: to UM, insurance, business, public pensions, um, the whole range
56:35
Speaker 1: of everything. So it's fun, it's busy, it's uh you know,
56:40
Speaker 1: this is I think we might be entering a new
56:41
Speaker 1: turbulent era. So there'll be lots more to write about.
56:43
Speaker 1: So let's get to my favorite questions. I asked these
56:46
Speaker 1: of all my guests, tell me the most important thing
56:50
Speaker 1: that people don't know about you. I have been bald
56:56
Speaker 1: since I was fifteen years old. Fifteen Mikey here that
57:00
Speaker 1: so my head of research a couple of years ago
57:03
Speaker 1: and he's early thirties, just said, the hell with it.
57:06
Speaker 1: I'm just gonna start shaving. Well, that's smart. He gave
57:09
Speaker 1: up on it, Dave, as early as and often as
57:11
Speaker 1: you can. There's nothing is? So what was that like
57:14
Speaker 1: in high school? I can't the words. I'd get bleeped out.
57:18
Speaker 1: It's awful kidding me? So not? And and you were
57:21
Speaker 1: just at the edge of the Michael Jordan era. So
57:24
Speaker 1: you wanted to be like Mike or it? You just said,
57:28
Speaker 1: is there is? Well, I yeah, shaved my head, but
57:30
Speaker 1: that was not because I wanted to be like Mike.
57:32
Speaker 1: That's because I was going bald, isn't. Wow? That's amazing.
57:38
Speaker 1: Um Who were some of your early mentors who influenced
57:42
Speaker 1: your research and writing styles? Um My dad certainly did.
57:47
Speaker 1: He's a professor and was he teaching What does he teach?
57:50
Speaker 1: He teaches law at Northeastern University in Boston. Um My,
57:55
Speaker 1: and my mom actually was a mentor, and not in
57:57
Speaker 1: terms of writing, but in terms she's a psychologist. And
58:00
Speaker 1: I've found that the one of the most important things
58:04
Speaker 1: about being a successful journalist is the inability to get
58:07
Speaker 1: people to talk to you, people who often aren't supposed
58:10
Speaker 1: to talk to you, get them to think that it's
58:12
Speaker 1: in their best interests to do so, and the best
58:13
Speaker 1: way to do that is to kind of understand where
58:15
Speaker 1: they're coming from and show empathy and listen. Well, and
58:18
Speaker 1: those are traits that my mom really taught me. But uh,
58:21
Speaker 1: I mean there's throughout college. And I said a number
58:25
Speaker 1: of great professors who taught me that, you know, don't
58:29
Speaker 1: use adverbs, don't write passive sentences, use action verbs, things
58:35
Speaker 1: like that. Don't okay, don't use adverbs, no passive action words,
58:40
Speaker 1: short sentences, direct use you know, don't use a three
58:45
Speaker 1: syllable word when a one syllable word, we'll do. There's
58:48
Speaker 1: a one syllable word for syllable beat. Oh, I like
58:53
Speaker 1: that very good. Um tell us the journalists who influenced
58:58
Speaker 1: the way you approach covering a topic, Um, the kind
59:02
Speaker 1: of great inspirations And for me, at least in business
59:05
Speaker 1: journalism or this is not gonna surprise. I mean, Michael
59:08
Speaker 1: Lewis is one of the great. Uh, nobody focuses on
59:12
Speaker 1: characters in finance the way he does. Absolutely, he's easily
59:17
Speaker 1: the best there is at that and it's just inspiring.
59:20
Speaker 1: And to me, actually, my favorite writing of his is
59:22
Speaker 1: actually not in the finance basaying Moneyball is a book
59:26
Speaker 1: that and change I'm a huge baseball fan, and change
59:30
Speaker 1: the way I watched baseball and thinking about baseball, which
59:33
Speaker 1: is saying a lot because I at that point, I
59:35
Speaker 1: can't remember when that came out, early two thousand's probably,
59:37
Speaker 1: and I at that point it's spent my entire life
59:41
Speaker 1: obsessing over the Boston Red sucks. And to then see
59:44
Speaker 1: to view it through this entirely different prison, it's something
59:47
Speaker 1: really exceptionally powerful. And that's essentially a book about stats, right,
59:51
Speaker 1: I was gonna I was gonna push back and say
59:54
Speaker 1: it shares a tremendous amount with the rise of quants
59:58
Speaker 1: and finance and rise and quants. It's, oh, we have
1:00:01
Speaker 1: computers and we understand math. Here's how to make the
1:00:04
Speaker 1: segment better. It just doesn't matter which the subject is.
1:00:07
Speaker 1: And he does a masterful job. Have you ever read
1:00:09
Speaker 1: The blind Side of Him? I love The blind Side
1:00:11
Speaker 1: as well. It's actually his funniest book. I think is
1:00:15
Speaker 1: just laugh out loud segments and it's obviously a very
1:00:19
Speaker 1: personal book. Without spoiling any of it for anyone. Um,
1:00:22
Speaker 1: since we're talking about books, well before we talk about books,
1:00:25
Speaker 1: anyone else in the media you want to reference, Yeah,
1:00:27
Speaker 1: there are two others. One is Jim Stewart, who is
1:00:29
Speaker 1: now a columnist Thieves, Thieves, Den of Thieves and like
1:00:33
Speaker 1: a zillion other books, but that was the one that
1:00:35
Speaker 1: really Yeah, that was an amazing book and he's I'm
1:00:39
Speaker 1: really proud. That's why my one of the many great
1:00:41
Speaker 1: things about working at the Times these days is he's
1:00:43
Speaker 1: a colleague of mine and I get to bounce ideas
1:00:46
Speaker 1: off him and sometimes the same with me. And that's saying.
1:00:49
Speaker 1: And the one other personal mention is not a journalist
1:00:52
Speaker 1: is but it used to be is Karrik Mullencamp, who
1:00:54
Speaker 1: is uh, the guy who when he was a Wall
1:00:57
Speaker 1: Street journal reporter basically uncovered the lie Worlar scandal and
1:01:01
Speaker 1: real not like he uncovered like there was an investigation
1:01:04
Speaker 1: going on, but he did the number crunction in the
1:01:07
Speaker 1: analysis and something sourcing and yeah, blew the whistle on
1:01:11
Speaker 1: it essentially, And that, to me is the most profound
1:01:14
Speaker 1: example I've seen in business journalism in a really long
1:01:17
Speaker 1: time of a newspaper story or a news story changing
1:01:22
Speaker 1: the world. So, since we mentioned uh, money ball, what
1:01:27
Speaker 1: are some of your favorite books finance, nonfinance, fiction, nonfiction?
1:01:32
Speaker 1: What what do you really like Um, I really like
1:01:34
Speaker 1: the business genre. Actually, and there's We've mentioned Michael Lewis,
1:01:38
Speaker 1: We've mentioned Denil Thus by Jim Stewart, When Genius Failed
1:01:41
Speaker 1: by Roger Lonstein is uh is a great one. The
1:01:46
Speaker 1: thing I like about I like books that have a
1:01:49
Speaker 1: narrative arc, so whether that's fiction or nonfiction. And Um,
1:01:53
Speaker 1: to me, that's it's really I mean, I got out.
1:01:56
Speaker 1: I have no idea how to write a write a novel,
1:01:58
Speaker 1: but there's in in think that's a lot of way
1:02:00
Speaker 1: is harder than writing nonfiction, but nonfiction doing in a
1:02:03
Speaker 1: compelling way. I mean, I've done this one tonight. It's hard,
1:02:06
Speaker 1: and it's really hard. And being able to find character
1:02:09
Speaker 1: and get them to open up to you, and being
1:02:11
Speaker 1: able to tell their stories in a way that not
1:02:14
Speaker 1: only engages readers, but it's also honest and it really
1:02:17
Speaker 1: reflects what's going on in a non superficial way. That's
1:02:20
Speaker 1: hard and it's so powerful when you can get it right.
1:02:23
Speaker 1: Give us one more. Another recent one is I'm gonna
1:02:26
Speaker 1: butcher her name, but Sheila from The New York Or
1:02:29
Speaker 1: her book Black Edge on Stevie is a great one. Yeah. Um,
1:02:32
Speaker 1: that's that's a really interesting title. Alright, let's uh, let's
1:02:36
Speaker 1: talk a bit about financial journalism. What excites you right
1:02:41
Speaker 1: now that's going on in the world of financial media.
1:02:45
Speaker 1: We're just finding new ways to tell stories. I mean,
1:02:47
Speaker 1: the notion of a story as something with a lead
1:02:51
Speaker 1: and a nutgraph and uh, just all sort of garbage
1:02:56
Speaker 1: in the middle that runs eight words. That's gone, I mean,
1:03:00
Speaker 1: is not gone. It needs to be gone. It's going away,
1:03:02
Speaker 1: and we're trying to And again, the New York Times
1:03:05
Speaker 1: is not at all alone. As the journal is doing this,
1:03:07
Speaker 1: Bloomberg does is everyone is doing this, but trying to
1:03:10
Speaker 1: find creative ways to engage readers who are increasingly reading
1:03:13
Speaker 1: everything on their phone is hard and really disruptive, but
1:03:16
Speaker 1: it's actually a lot of fun. And you can be
1:03:19
Speaker 1: at the big media organizations that are investing a lot
1:03:21
Speaker 1: and hiring really talented people that are not just writers
1:03:25
Speaker 1: but are also graphics people or computer programmers or audio
1:03:29
Speaker 1: people or video people and doing clever, creative stuff. It's
1:03:33
Speaker 1: this whole new world that is not what I grew
1:03:36
Speaker 1: up in, And as long as you have tolerance for
1:03:40
Speaker 1: experimentation and occasional failure, it's a lot of fun. The
1:03:44
Speaker 1: so let's go down the list of these big interactive
1:03:48
Speaker 1: digital stories, The New York Times, the Wall Street Journal, Bloomberg,
1:03:52
Speaker 1: Washington Post. There have been some amazing things, and if
1:03:58
Speaker 1: that's the future of journalism, you have to be encouraged, right, Yeah,
1:04:01
Speaker 1: I think the future of journalism is really bright right now.
1:04:03
Speaker 1: I mean there's uh, look, what doesn't work is giving
1:04:06
Speaker 1: away commoditized content for free. That's like, that's not a
1:04:10
Speaker 1: business model. So but I think everyone gets that at
1:04:13
Speaker 1: this point. There's not There's plenty of commoditized stuff out
1:04:15
Speaker 1: there that will be free, but that's not a business
1:04:18
Speaker 1: model that that's not sustainable. Well, it doesn't generate revenue, right, No,
1:04:21
Speaker 1: I don't want I'm not going to pay for that,
1:04:23
Speaker 1: are you? Probably not? Like you need to pay for
1:04:26
Speaker 1: The New York Times, the Washington Post, the Wall Street Journal,
1:04:29
Speaker 1: the Financial Times, and a handful of magazines like The
1:04:33
Speaker 1: New York are in the Atlantic. But it's high quality,
1:04:37
Speaker 1: expensive content, and I think that's something. I mean, I
1:04:40
Speaker 1: think that's probably much more media than the average person
1:04:44
Speaker 1: is going to consume. But there's I think people do
1:04:47
Speaker 1: in this day and age. I think there's the notion
1:04:51
Speaker 1: of fake news has resonated a lot, and people are
1:04:54
Speaker 1: they want to know what's really going on in the world.
1:04:55
Speaker 1: These are like dangerous times, regardless of your ideology, and
1:04:59
Speaker 1: people are willing to pay. And it's not just news,
1:05:02
Speaker 1: by the way, and sports coverage is going through this
1:05:03
Speaker 1: renaissance where there's all these kind of localized businesses, localized
1:05:07
Speaker 1: business models that are popping up all over the country
1:05:09
Speaker 1: where people that's something people really care about. I care
1:05:11
Speaker 1: about that, and I subscribe to the Boston Globe for
1:05:14
Speaker 1: the sole reason that I want their sports coverage. And
1:05:17
Speaker 1: that's something that that's very valuable to me, and I
1:05:19
Speaker 1: think a lot of people. You just need to do
1:05:21
Speaker 1: things that are valuable and not commoditized and people will
1:05:24
Speaker 1: pay for tell us about a time you failed and
1:05:27
Speaker 1: what you learned from the experience. Man, I fail almost
1:05:31
Speaker 1: every day. It's something really yeah, don't. I mean, I
1:05:34
Speaker 1: make mistakes all the time. There's uh, seriously, I make
1:05:39
Speaker 1: decisions that turn out not to be very good. I
1:05:43
Speaker 1: I mean, I have two little kids also, so that
1:05:45
Speaker 1: is just a huge recipe for one failure after another
1:05:48
Speaker 1: as a new parent. That's uh, you know, I I
1:05:52
Speaker 1: do it all the time. I think the key is
1:05:54
Speaker 1: to just be able to yeah, own their mistake and
1:05:58
Speaker 1: move on. All right. That makes a lot of sense
1:06:00
Speaker 1: to me. What do you do for fun? What do
1:06:02
Speaker 1: you do out of the office to kick back, relax,
1:06:05
Speaker 1: stay physically or mentally sharp. I have two little kids,
1:06:11
Speaker 1: so I play with them, I take them outside, I
1:06:15
Speaker 1: ride a bike, I read a lot, listen to music,
1:06:19
Speaker 1: go on vacation. I'd love to travel. Um. Yeah, I
1:06:23
Speaker 1: just was down in Georgia, which we've never been to,
1:06:26
Speaker 1: and as a work of vacation, vacation we just stay
1:06:31
Speaker 1: in Georgia. We were in Savannah and then Jekyll Island
1:06:35
Speaker 1: of Lovely Places. Jacki Island is where the fed the
1:06:38
Speaker 1: idea from Jacki Island, very favorite famous book. Um, if
1:06:44
Speaker 1: a millennial came to you and said they were thinking
1:06:47
Speaker 1: about a career in journalism or writing, what sort of
1:06:50
Speaker 1: advice would you give them. Develop a skill that sets
1:06:53
Speaker 1: you apart, whether that is being really good at game
1:06:57
Speaker 1: people to talk to you, or being really good at writing,
1:07:00
Speaker 1: or learning some uh some element of computer programming, or
1:07:05
Speaker 1: developing expertise in audio or video stuff. Don't go the
1:07:10
Speaker 1: route of just aiming to be at the Wall Street
1:07:12
Speaker 1: Journal or the New York Times, go develop some specialization.
1:07:17
Speaker 1: And our final question, uh, tell us what you wish
1:07:20
Speaker 1: you knew about the world of banking and finance and
1:07:23
Speaker 1: libor fifteen years ago, I wish someone had told me
1:07:27
Speaker 1: that everyone is going to try and make it seem
1:07:30
Speaker 1: much more complicated than it really is. When you boiled
1:07:32
Speaker 1: down to the essence, it's pretty understandable for someone with
1:07:36
Speaker 1: a brain. That's as good an answers as I've ever heard.
1:07:40
Speaker 1: We have been speaking with David Enrich of The New
1:07:43
Speaker 1: York Times. If you enjoy this conversation, be sure and
1:07:47
Speaker 1: look up an inch or down an inch on Apple
1:07:49
Speaker 1: iTunes and you could see any of the other hundred
1:07:51
Speaker 1: and ninety three or so such conversations we've had previously.
1:07:57
Speaker 1: We love your comments, feedback and suggest Jen's right to
1:08:01
Speaker 1: us at m IB podcast at Bloomberg dot Net. I
1:08:05
Speaker 1: would be remiss if I did not thank my crack
1:08:08
Speaker 1: staff who helped put together the show every week. Medita
1:08:12
Speaker 1: Parwana is our producer slash audio engineer. Taylor Riggs is
1:08:18
Speaker 1: our booker slash producer. Michael bat Nick Bolts and Slate
1:08:23
Speaker 1: twenties not quite not quite so he had twelve good
1:08:27
Speaker 1: years on you um is our head of research who
1:08:30
Speaker 1: helps me assemble a lot of the details and questions
1:08:33
Speaker 1: and really makes these shows what they are. I'm Barry Ridholtz.
1:08:38
Speaker 1: You're listening to Masters in Business on Bloomberg Radio.