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

0:03
Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
0:08
Speaker 1: This week on Masters in Business on Bloomberg Radio, I
0:11
Speaker 1: have a very special edition. It is the fifth anniversary
0:15
Speaker 1: of Dodd Frank and I thought what better time than
0:18
Speaker 1: right now to have a thoughtful conversation about regulation and
0:24
Speaker 1: the perils of deregulation and the perils of excess regulation.
0:28
Speaker 1: Then with former SEC Chairman Arthur Lovitt. Uh, there are
0:33
Speaker 1: few people who know as much about the ins and
0:36
Speaker 1: outs of the stock market and the regulatory apparatus that
0:41
Speaker 1: sit on top of it, as well as the politics
0:45
Speaker 1: and all of the various nuances that go with regulating
0:50
Speaker 1: one of the largest, most robust financial systems in the world.
0:55
Speaker 1: And so Arthur and I had a wide ranging conversation.
0:59
Speaker 1: We covered every thing from Dodd Frank to the vocal rule,
1:03
Speaker 1: to the fiduciary standard, to whether or not your IRA
1:07
Speaker 1: and four oh one case should be governed by the
1:09
Speaker 1: same sets of regulations or whether there should be different
1:12
Speaker 1: rules for each. We talked about a lot of different things,
1:16
Speaker 1: and I find Arthur to be a fascinating guy. Be
1:19
Speaker 1: sure and check out our podcast extras, which if you're
1:23
Speaker 1: listening to this now hang around till the ends. The
1:26
Speaker 1: last fifteen twenty minutes of our conversation was really Arthur
1:30
Speaker 1: talking about how he finds technology in general and fintech
1:36
Speaker 1: specifically to be absolutely fascinating and why it makes him
1:40
Speaker 1: so confident about the future of the United States. Really
1:44
Speaker 1: very interesting conversation. I know regulation may not be the
1:48
Speaker 1: sort of thing that you think, uh, really is exciting, um,
1:52
Speaker 1: but it's important part of of markets and it's certainly
1:56
Speaker 1: something that's interesting, uh and significant to what goes on
2:01
Speaker 1: to the day to day workings of the markets. So
2:04
Speaker 1: who better than a conversation with Arthur Levitt about regulation
2:09
Speaker 1: in America. This is Master's in Business with Barry Ridholts
2:16
Speaker 1: on Bloomberg Radio. Welcome to Masters in Business on Bloomberg Radio.
2:21
Speaker 1: Today we have a very special guest. Our show today
2:25
Speaker 1: is all about regulation, as we just passed the fifth
2:30
Speaker 1: anniversary of the Dodd Frank Legislation. My guest today is
2:34
Speaker 1: the and longest serving chairman of the SEC, Arthur Levitt.
2:39
Speaker 1: He ran the agency from to two thousand and one.
2:44
Speaker 1: I'm sure you're familiar with his works. He is our
2:46
Speaker 1: first returning guest on Masters in Business. Arthur welcome back
2:51
Speaker 1: to the show. Glad to be with you, Barry. So
2:54
Speaker 1: for those of you who somehow may not be familiar
2:57
Speaker 1: with Chairman Levitt Um, he ran a brokerage firm back
3:03
Speaker 1: in the early sixties, Old Carter Berlin and while with
3:07
Speaker 1: a young whipper snapper named Sandy. While in nine seventy eight,
3:11
Speaker 1: he was chairman of the American Stock Exchange. In nine
3:16
Speaker 1: he became chairman of the New York City Economic Development Corporation,
3:20
Speaker 1: and he was appointed chairman of the sec UH by
3:25
Speaker 1: President Clinton. UH. And I recall you once telling me
3:29
Speaker 1: that you found out you were up for the position, Um,
3:33
Speaker 1: that you had gotten the position by reading about it
3:35
Speaker 1: in the Wall Street Journal. The first I had heard
3:38
Speaker 1: about it was a rumor reported in the Wall Street
3:42
Speaker 1: Journal of it. I was the choice. I think that
3:46
Speaker 1: they had probably somebody else in mind that didn't pass
3:50
Speaker 1: through the various traps, and they ran around the White
3:53
Speaker 1: House and said, gee, who who can we choose now
3:56
Speaker 1: to fill that job? And someone said, hey, what about
4:00
Speaker 1: guy that ran the stock Exchange? And that's how it happened. Wow, fascinating.
4:06
Speaker 1: And Um, you come from a family of people who
4:09
Speaker 1: have served the finance industry. Your dad was also one
4:13
Speaker 1: of the longest serving New York State controllers, Right, he
4:16
Speaker 1: was in a job for four years, and um he
4:21
Speaker 1: was sole trustee of the at the time, what was
4:23
Speaker 1: the largest pension fund in America. Yes, that's fascinating. So
4:28
Speaker 1: so we have Finance Royalty. So we're here. It's the
4:32
Speaker 1: fifth anniversary of Dodd Frank. There have been lots of
4:35
Speaker 1: things happening in the world of financial regulation, all sorts
4:41
Speaker 1: of interesting things, and I thought you would be the
4:43
Speaker 1: perfect person to have a conversation UM about this with. So,
4:49
Speaker 1: so let's begin with what came before this era. When
4:53
Speaker 1: we look at the period before you became SEC chair
4:58
Speaker 1: and after, we were really in a period of fairly
5:03
Speaker 1: robust deregulation. We saw the repeal of Glass Stiegel. We
5:08
Speaker 1: saw the passage of the Commodities um Modernization Act, which
5:14
Speaker 1: really allowed derivatives to be freely um traded without any
5:19
Speaker 1: sort of regulatory oversight. In fact, the general sense of
5:24
Speaker 1: that era of the nine eighties and nineties was less
5:28
Speaker 1: regulation was better. Is that a fair assessment. I think
5:33
Speaker 1: it is a fair assessment, And I think that Sandy
5:36
Speaker 1: Wild had a good deal to do with that in
5:39
Speaker 1: terms of lobbying the Congress, with whom he had been
5:43
Speaker 1: particularly close in terms of reducing eliminating the strictures of
5:51
Speaker 1: the Glass Stiegel Act. Subsequently, he said that he wasn't
5:57
Speaker 1: sure that that was a good move. Glass Stiegel's removal
6:02
Speaker 1: may have created unintended consequences, and I certainly agree with that,
6:07
Speaker 1: although at the time, the general feeling in the financial
6:11
Speaker 1: community was that we were an overregulated body and that
6:16
Speaker 1: we needed relief, and the most likely area of relief
6:21
Speaker 1: would have been to allow the banks to do much
6:23
Speaker 1: more than they had ever done before. And then came
6:26
Speaker 1: two thousand and eight, and if I recall correctly, the
6:30
Speaker 1: Travelers City Court merger was sort of presented to Congress
6:34
Speaker 1: as a fatal complete and either you repeal Glass Steagle
6:37
Speaker 1: or we have to unwind this big merger. Exactly put
6:40
Speaker 1: put a gun to Congress's head. So so we have
6:44
Speaker 1: the Commodity Futures Modernization Act, we have the repeal of
6:47
Speaker 1: Glass Stiegel. And then you said, comes two thousand and eight.
6:51
Speaker 1: Now did it take a full blown financial crisis to
6:55
Speaker 1: make people rethink regulation or was this something that was
7:00
Speaker 1: just eventually going to bite us in the behind? And
7:03
Speaker 1: we had to do something. Well, a lot of regulation
7:07
Speaker 1: that occurs at times of market exuberance, market highs uh
7:13
Speaker 1: generally goes towards deregulatory steps. Nobody has hurt, nobody has bothered,
7:20
Speaker 1: everybody's a winner. Why not relieve the regulatory pressures and
7:27
Speaker 1: really let the animal spirits prevail. Well, two thousand and
7:31
Speaker 1: eight came along, and a lot of people were hurt,
7:35
Speaker 1: and a lot of members of Congress began to have
7:39
Speaker 1: second thoughts about the deregulatory moves of the past, and
7:45
Speaker 1: that gave birth to a whole host of rules and
7:50
Speaker 1: ideas and ultimately the Dodd Frank Rule. Personally, I believe
7:57
Speaker 1: that the lessons of the market of two thousand and
7:59
Speaker 1: eight did more to curb the exuberance of banking interests
8:08
Speaker 1: than any possible regulation that we could have put through. Nevertheless,
8:14
Speaker 1: the Congress fell all over themselves to come up with
8:18
Speaker 1: ways to punish the markets and the people who operated
8:22
Speaker 1: in those markets for bringing about what they regarded to
8:26
Speaker 1: be the horrors of two thousand and eight. You're listening
8:30
Speaker 1: to Masters in Business on Bloomberg Radio. My special guest
8:33
Speaker 1: for the special episode about the pros and cons of
8:37
Speaker 1: financial regulation is Arthur Lovitt, former chairman of the SEC.
8:42
Speaker 1: And I want to take the other side of an
8:44
Speaker 1: argument from you. You said earlier the crash and OH
8:48
Speaker 1: eight taught everybody that write lessons and and people will
8:52
Speaker 1: would learn from that. But but isn't the history of
8:55
Speaker 1: Wall Street, in the history of finance that they burn
8:58
Speaker 1: their hand and they go out for a little while,
9:00
Speaker 1: and then a few years later it's all forgotten. Think
9:03
Speaker 1: back to the nifty fifty, what took place in the
9:06
Speaker 1: sixties and seventies, Think back to the dot com collapse
9:10
Speaker 1: in two thousand. None of these episodes are hidden, It's
9:13
Speaker 1: all there. No one seems to want to learn from history. Well,
9:17
Speaker 1: I agree with you, Barry. The lessons learned as a
9:21
Speaker 1: result of an event such as the crash don't last forever,
9:26
Speaker 1: but they do last long enough to change behavior for
9:31
Speaker 1: a period of years, not just a period of weeks
9:34
Speaker 1: or months. Believe me, Uh, Jamie Diamond is very much
9:39
Speaker 1: aware of what happened to OH eight, along with every
9:43
Speaker 1: other head of major banking institutions. They're paying the price
9:47
Speaker 1: for it even today. Litigation has yet to be settled.
9:51
Speaker 1: So I think that in many ways that's more effective
9:56
Speaker 1: than rules and regulations, which invariably have a perverse and
10:01
Speaker 1: unexpected results. Dodd Frank certainly has a battery of facets
10:07
Speaker 1: of that ruling that UH are misunderstood or are not
10:14
Speaker 1: doing the job that they expected them to do. So
10:16
Speaker 1: let's let's talk about that exactly. This month is the
10:20
Speaker 1: fifth year anniversary of the legislation being passed. It's still
10:24
Speaker 1: a work in progress. There are still things that have
10:27
Speaker 1: to be put into effect. What has been the positive
10:31
Speaker 1: consequences of Dodd Frank and what are what are some
10:34
Speaker 1: of the negatives? Well, I think in the first place,
10:37
Speaker 1: Dodd Frank represents the abdication on the part of the
10:42
Speaker 1: Congress two regulators to fulfill a myriad of requirements in
10:49
Speaker 1: a limited period of time which is long since gone,
10:54
Speaker 1: and still various regulatory agencies having fulfilled all the mandates
11:00
Speaker 1: of god Frank. I think God Frank has been useful
11:05
Speaker 1: in terms of setting certain ground rules of behavior. I
11:11
Speaker 1: think it incorporated the Vulcan rule, for instance, which I
11:15
Speaker 1: think was constructive that banks that were insured by the
11:20
Speaker 1: federal government could not gamble with those funds. I think
11:24
Speaker 1: that was the principle behind the Vulcan rule, and Dodd
11:29
Speaker 1: Frank tried to convert that principle into UH specific actionable steps.
11:36
Speaker 1: And here we are five years after Dodd Frank was
11:39
Speaker 1: put into effects, and literally this week that you and
11:43
Speaker 1: I are sitting here having this conversation was the rollout
11:47
Speaker 1: of the Vocal Rule. Why did it take five years
11:50
Speaker 1: for something as obvious as hey, if you're federally insured,
11:53
Speaker 1: if if the fd i C guarantees your depositors, you
11:56
Speaker 1: can't speculate with with insured capital. Why did take so
12:00
Speaker 1: long for that to take place? Well, financial UH entities
12:04
Speaker 1: can't shift on a dime, and it took them a
12:08
Speaker 1: certain number of years to close down UH these operations
12:13
Speaker 1: such as hedge funds or private equity funds or real
12:18
Speaker 1: estate ventures. It took them a number of years. We
12:22
Speaker 1: could argue whether it should be five or should be three,
12:25
Speaker 1: but they certainly couldn't do it in six months or
12:28
Speaker 1: a year. And the net effect of it has been
12:31
Speaker 1: an orderly liquidation of many of the programs that the
12:36
Speaker 1: Vocal Rule contemplated as being risky. I think there are
12:41
Speaker 1: many others that weren't included, nor should be included. We're
12:45
Speaker 1: in a a risk business and to squeeze all the
12:49
Speaker 1: risk out of our markets, I think would destroy the market.
12:52
Speaker 1: So I think this was a reasonable step. The banks
12:56
Speaker 1: would argue and certainly did argue against it, but it
13:00
Speaker 1: was a reasonable step. It took the agency's much too
13:04
Speaker 1: much time to deal with it because they simply didn't
13:07
Speaker 1: have the resources. There were hundreds of pages of regulations
13:12
Speaker 1: left to the CFTC and the SEC to define in
13:17
Speaker 1: terms of specific regulations, exposed for public comment and vetted
13:23
Speaker 1: and litigated, and finally they've come up with a semblance
13:27
Speaker 1: of what the expectations were for the original Dodd Frank.
13:32
Speaker 1: So so here we are. We we have Dodd Frank
13:36
Speaker 1: in place, it's not quite fully in place. We have
13:40
Speaker 1: the volcal rule taking effects if we didn't pass legislation
13:45
Speaker 1: such as Dodd Frank. What sort of alternatives do we have?
13:50
Speaker 1: And do you want to address? You raised an interesting
13:53
Speaker 1: point I shouldn't let slip. How significant isn't that Congress
13:57
Speaker 1: didn't pass this themselves the rules, but handed it off
14:02
Speaker 1: to a committee rather than do what used to be
14:05
Speaker 1: considered their jobs. Well, Congress doesn't understand the business. And
14:12
Speaker 1: to have a group of congressmen, no matter how smart
14:16
Speaker 1: they are and senators deal with the complexity of our
14:21
Speaker 1: markets in a finite period of time with an election pending,
14:26
Speaker 1: you're going to get a result something like this. They're
14:29
Speaker 1: going to say, here are the problems we've defined as
14:32
Speaker 1: a result of many hearings, now SEC and CFTC, here
14:39
Speaker 1: are the broad outlines of what we think should be fixed.
14:42
Speaker 1: Fix it. And then they unleashed upon these same agencies,
14:46
Speaker 1: the the lobbyists on behalf of the banks and the
14:52
Speaker 1: brokerage firms who fought every line that went into Dodd
14:58
Speaker 1: Frank and didn't fund the agencies appropriately to deal with
15:04
Speaker 1: these issues. They needed staffs that were almost fifty larger
15:09
Speaker 1: than the market read staffs that they already had to
15:13
Speaker 1: deal with the complexity of the issues presented by Dodd Frank.
15:17
Speaker 1: This wasn't clear, lucid efficient writing. This was broad generalizations
15:23
Speaker 1: out of which the regulators had to create something which
15:26
Speaker 1: was politically approved and acceptable in terms of public basic
15:33
Speaker 1: public understanding. So so, Arthur, in the last minute, we
15:37
Speaker 1: have what is the alternative to something like Dodd Frank?
15:41
Speaker 1: What could have Congress done in its stead? You know,
15:46
Speaker 1: I think that at a time of such economic travail,
15:53
Speaker 1: the best thing Congress could have done was to study
15:57
Speaker 1: the issue longer and work with existing regulators on coming
16:05
Speaker 1: up with a plan that had a finite objective, uh,
16:12
Speaker 1: and implement that plan step by step. You're listening to
16:16
Speaker 1: Masters in Business on Bloomberg Radio, a special edition focusing
16:21
Speaker 1: on regulation during the fifth year anniversary of the Dodd
16:25
Speaker 1: Frank legislation, and and who better to speak to about
16:29
Speaker 1: this than my guest, former SEC Chairman Arthur Levitt. Before
16:34
Speaker 1: the break, we were talking a little bit about the
16:37
Speaker 1: Volca rule, and for people who are not familiar with
16:40
Speaker 1: the vocal rule, it bans taxpayer ensured banks from making
16:46
Speaker 1: speculative bets with their own money. And I think we
16:50
Speaker 1: both agree that's a reasonable thing to do. Yes, it is.
16:54
Speaker 1: So the alternative is, hey, you don't have to have
16:58
Speaker 1: FDIC insurance if if you're that confident that your reputation
17:02
Speaker 1: is that good, see how far it goes, or spin
17:05
Speaker 1: out those separate hedge funds and other entities. And it
17:08
Speaker 1: seems all the banks actually have done that. You know,
17:11
Speaker 1: it's interesting, Barry, that only one person in America could
17:16
Speaker 1: have stood behind a rule and gotten it past as
17:20
Speaker 1: seamlessly as Paul Vulker. There probably is no other American
17:26
Speaker 1: with the reputation for probity and integrity that gave him
17:31
Speaker 1: the power to create a rule which had a profound
17:36
Speaker 1: change in the way American banking business is being done.
17:40
Speaker 1: What what does that say about us and what as
17:43
Speaker 1: a nation? And what does it say about Congress that
17:46
Speaker 1: it took one of the people with the most amount
17:49
Speaker 1: of credibility after the crisis to get something like this done. Well,
17:54
Speaker 1: it says that there is an international crisis of leadership.
17:59
Speaker 1: That I would defy almost anyone in our audience to
18:04
Speaker 1: name three people that they think are outstanding leaders known
18:12
Speaker 1: to the general public for integrity and probity. Nobody comes
18:16
Speaker 1: close to Paul Wulker. In a former era, we had
18:20
Speaker 1: the Irving Shapiro's, the Walter Riston's, the DuPonts, the John Whiteheads.
18:26
Speaker 1: You couldn't come up with a cluster of people of
18:29
Speaker 1: that caliber today. What why is that that? That's kind
18:33
Speaker 1: of a telling observation. Well, I think our society has
18:39
Speaker 1: become h a millisecond by millisecond society and sound bites
18:47
Speaker 1: and television bits have defined people in ways which are
18:53
Speaker 1: less profound and deep than the era which spawned the
18:58
Speaker 1: white Heads and the Vulcars. And uh, I'm not certain
19:06
Speaker 1: that in a society of sound bites you can really
19:10
Speaker 1: develop the sort of leadership skills that took Vulcar many
19:16
Speaker 1: years working at the Federal Reserve and the rest of
19:22
Speaker 1: his career. But we certainly don't have that in politics.
19:26
Speaker 1: We don't have it in business, we don't have it
19:30
Speaker 1: in religion. We simply lack that core of leadership that
19:34
Speaker 1: was part of our society for a long time. So
19:38
Speaker 1: so let me push back a little bit um the pope.
19:42
Speaker 1: This Pope seems to be very out there, generating all
19:46
Speaker 1: sorts of interesting taking positions not typical. I totally agree
19:51
Speaker 1: with you. I think there no generalizations are applicable to
19:56
Speaker 1: total society. But I'm talking about well dership in the
20:00
Speaker 1: business and political communities. That's where we need it the most.
20:04
Speaker 1: And he seems to be an exception. You know, the
20:08
Speaker 1: changes that have taken place in Vatican City seems to
20:10
Speaker 1: be very significant. We're not seeing that in the rest
20:14
Speaker 1: of the business or political community. We never really saw
20:17
Speaker 1: it before either. Yeah, this is this is really a
20:20
Speaker 1: fascinating situation. So so let's move back to the SEC.
20:24
Speaker 1: There was a big New York Times article over criticism
20:28
Speaker 1: about the SEC use of in house judges, and I
20:32
Speaker 1: heard you on your radio show describe why the SEC
20:36
Speaker 1: has practically been forced into this because of their budget situation.
20:42
Speaker 1: What is first of all, what is an in house
20:45
Speaker 1: SEC judge? The in house judge is appointed by the
20:51
Speaker 1: Commission itself to hear a number of cases and to
20:58
Speaker 1: supplement the general judicial system, which is so crowded with
21:05
Speaker 1: cases that it takes many years for a case to
21:09
Speaker 1: be heard. The judges within the SEC or any other
21:14
Speaker 1: agency that also has administrative judges, are familiar with the
21:19
Speaker 1: Securities laws in ways that the other levels of judiciary
21:25
Speaker 1: perhaps are not so starved for resources. The only way
21:32
Speaker 1: the Commission can meet the case load of cases that
21:38
Speaker 1: are brought before them is to supplement the use of
21:42
Speaker 1: the federal judiciary with in house judges that our experience,
21:48
Speaker 1: that are independent of the Commission except for the appointing
21:53
Speaker 1: power of the commission author. How much of the use
21:55
Speaker 1: of these judges is driven by budget concerns? I think
22:00
Speaker 1: it is probably driven by budget concerns. That that's fascinating.
22:04
Speaker 1: You're listening to Masters in Business on Bloomberg Radio. Today
22:07
Speaker 1: we have a special edition Financial Regulation during the fifth
22:11
Speaker 1: year of Dodd Frank, and I have a very special guest,
22:15
Speaker 1: former SEC Chairman Arthur Levitt. One of the things that
22:19
Speaker 1: has been fascinating over the past couple of years has
22:23
Speaker 1: been the debate about the standard of care owed two investors.
22:28
Speaker 1: In fact, as part of Dodd Frank, the SEC how
22:31
Speaker 1: to issue a set of suggested guidelines, and effectively the
22:37
Speaker 1: SEC said everybody should have to adhere to the fiduciary standard,
22:42
Speaker 1: but that was not put into place. What what are
22:46
Speaker 1: your thoughts on that. I think that there is no
22:51
Speaker 1: earthly reason why a broker should live by different standards
22:58
Speaker 1: than an investment advisor. Now, the argument made, of course,
23:02
Speaker 1: is that brokers don't give advice, they simply execute orders.
23:07
Speaker 1: Having been a broker for nearly twenty years, I don't
23:11
Speaker 1: think there was ever a transaction that I ever didn't
23:14
Speaker 1: have some comment to make about. So I reject the
23:18
Speaker 1: notion that a broker doesn't talk to a customer. He
23:23
Speaker 1: or she certainly does. And I personally believe that the
23:30
Speaker 1: standards of accountability should apply equally to brokers and to
23:37
Speaker 1: investment advisors, and and for those people who may not
23:41
Speaker 1: be familiar. The fiduciary standard is a much higher standard
23:45
Speaker 1: which says you can only do what is in the
23:48
Speaker 1: best interest of the client. It makes for a very
23:51
Speaker 1: simple UH compliance decision making process. Hey, is this in
23:56
Speaker 1: the best interest of the client or is this in
23:58
Speaker 1: the best interest of some but he else? And if
24:00
Speaker 1: the answer is it's not the client's best interest, you
24:04
Speaker 1: you can't do it. But there certainly has been a
24:06
Speaker 1: lot of pushback on that from from the brokerage industry
24:10
Speaker 1: and and from FINRA as well. I think the pushback
24:14
Speaker 1: is understandable. Not only is it UH private interests that
24:19
Speaker 1: are involved here, but the various suggestions have been drafted
24:25
Speaker 1: in such a complex way that neither the opponents are
24:28
Speaker 1: proponents of this proposal have really defined what it means,
24:36
Speaker 1: I think, and it's simplest form. If you could create
24:41
Speaker 1: a rule which level the compensation that didn't incentivize a
24:48
Speaker 1: broker to go to product A because he or she
24:52
Speaker 1: was being paid more for product A than product B,
24:56
Speaker 1: there's your rule. That's all you really need. It's the
25:00
Speaker 1: disparities and compensation that create a complexity. Where the industry
25:06
Speaker 1: is opening is arguing that they're opening themselves up to
25:11
Speaker 1: private rights of action now that they never experienced before
25:15
Speaker 1: because of this indefinite complex rule. And there's something to
25:20
Speaker 1: that argument. The rule is presented by the Department of Labor.
25:24
Speaker 1: I certainly support, but it certainly could have been more
25:27
Speaker 1: efficiently effectively worded. So so let's talk a little bit
25:31
Speaker 1: about that. So the SEC says, where the entity that
25:36
Speaker 1: governs brokers and markets, and we suggest a fiduciary standard
25:41
Speaker 1: for everybody, but it doesn't go anywhere either with the
25:45
Speaker 1: Commission itself or Congress. And then the Department of Labor says,
25:50
Speaker 1: you guys have your own conversation about that rule. But we,
25:55
Speaker 1: as the Labor Department, we regulate four oh one case
25:59
Speaker 1: and four oh three B ease and other tax deferred
26:01
Speaker 1: savings for retirement because these are considered wages. These are
26:05
Speaker 1: considered part of compensation, and so we get to regulate.
26:08
Speaker 1: And while you guys are diddling around with that, we're
26:11
Speaker 1: gonna state you must follow the fiduciary standard for this.
26:15
Speaker 1: It's too important to people's retirements. Marry you have it
26:19
Speaker 1: absolutely right. The likelihood of the SEC getting a fiduciary
26:24
Speaker 1: standard was extraordinarily remote. The Commission is split. The Congress,
26:31
Speaker 1: which oversees the Commission, doesn't want to see a fiduciary standard,
26:37
Speaker 1: and it never could have been done. That's why Congress
26:41
Speaker 1: is now pressuring take it away from the Department of
26:44
Speaker 1: Labor give it to the sec because they know that's
26:48
Speaker 1: burying the fiduciary standard. And I don't really see that
26:51
Speaker 1: happening anytime soon because it's all stop and think about this.
26:56
Speaker 1: It's all part of the compensation package, is all part
27:00
Speaker 1: of wages. And why would you want to remove that
27:03
Speaker 1: fiduciary standard over somebody's wage package and give it to
27:07
Speaker 1: somebody who may be offering conflicted advice. It doesn't make
27:12
Speaker 1: any sense to proceed that way. Well, I think it
27:14
Speaker 1: goes to the issue of inducements, and are we hurting
27:19
Speaker 1: investors by offering greater inducements to handle product AID than
27:24
Speaker 1: product B. It's as simple as that. That clearly creates
27:29
Speaker 1: a conflict of interest, or at least so the broker
27:34
Speaker 1: has an incentive to go to the highest commission product
27:37
Speaker 1: that's not in the investor's best interests. Absolutely, Barry. So
27:42
Speaker 1: So let's think about this a little further. When we
27:45
Speaker 1: look at the overall um alternative standards. So on the
27:50
Speaker 1: one hand, the brokerage industry has suitability, UM, when you
27:54
Speaker 1: look at the fiduciary standards, it's much higher. Suitability is vague. UM.
28:01
Speaker 1: I've always said suitability is don't sell Grandma Facebook. I
28:04
Speaker 1: p oh. I mean you can take it to an extreme.
28:08
Speaker 1: I'm saying that if you have the same level of
28:12
Speaker 1: compensation for whatever product you're selling, that's fine. That's simple,
28:18
Speaker 1: that's easy. So when you look at around the world,
28:22
Speaker 1: one of the things that in the United Kingdom did
28:24
Speaker 1: a few years ago was basically mandate a lower fee
28:29
Speaker 1: on all of their retirement accounts and a full disclosure
28:33
Speaker 1: and transparency, because the Brits basically said, hey, if if
28:38
Speaker 1: people aren't making money, if these fees are high and
28:41
Speaker 1: not disclosed, if they're hidden, that's ultimately going to impact
28:47
Speaker 1: years down the road our retirees. And if there's a shortfall,
28:52
Speaker 1: we the government are going to have to make that up,
28:54
Speaker 1: which means you, the taxpayer, are gonna have to make
28:56
Speaker 1: that up. I thought that would be an argument that
29:00
Speaker 1: would carry the day, even amongst conservatives, but it seems
29:04
Speaker 1: that I was too optimistic. Politicians tend to have tactical
29:09
Speaker 1: responses and the strategy of long term investing is just
29:15
Speaker 1: beyond their ability to deal with because they're not long
29:20
Speaker 1: term players. There two year players in the next election.
29:24
Speaker 1: So we've been talking about four oh one ks and
29:27
Speaker 1: other tax deferred compensation packages. There's another tax deferd entity
29:33
Speaker 1: called the individual retirement account the i r A that
29:38
Speaker 1: doesn't get covered by the Department of Labor fiduciary standard.
29:42
Speaker 1: Should it? Yes? Uh, I wish that it was covered
29:48
Speaker 1: by some sort of fiduciary standard. Whether it's to be
29:51
Speaker 1: the Department of Labor or the SEC, I'm not sure,
29:56
Speaker 1: but these are people who really need the protection. Much
30:01
Speaker 1: smaller accounts four oh one ks can scale up to
30:04
Speaker 1: be fairly substantial. The maximum contribution to iras or it's
30:10
Speaker 1: it's indexed in um inflation indexed, but it's not. It's
30:14
Speaker 1: five six thousand dollars a year. It's not that much
30:16
Speaker 1: money compared to what you can A four oh one
30:19
Speaker 1: K is eighteen thousand if you're under fifty thousand, if
30:23
Speaker 1: you're over fifty, it's a huge juge difference between the two.
30:27
Speaker 1: And if the abuses of a runaway market can ever
30:31
Speaker 1: be felt, it's in the area of these small investors
30:35
Speaker 1: who tend to be more emotional, tend not to focus
30:39
Speaker 1: on the impact of fees on their portfolios, tend to
30:44
Speaker 1: have a herd mentality and buying when others are selling
30:48
Speaker 1: and certainly being victimized at markets that uh, go up
30:55
Speaker 1: and they're buying, and go down and they're selling. You know,
30:58
Speaker 1: Vanguard put out a um white paper a couple of
31:01
Speaker 1: years ago that showed the impact of a one percentage
31:05
Speaker 1: additional fee above some low modest level and over the
31:09
Speaker 1: course of twenty or thirty years, enormous. It's compounding. It's amazing,
31:14
Speaker 1: amazing impact, and it's so difficult to get investors to
31:17
Speaker 1: focus on that rather than on the advice that they
31:21
Speaker 1: heard from someone at the Bridge Club. It's it's an
31:25
Speaker 1: ongoing issue. I'm fond of saying the best advisors are
31:29
Speaker 1: behavioral counselors as well as financial advisors, because the biggest
31:34
Speaker 1: impediment to success seems to be investors own behavior. Well,
31:38
Speaker 1: I'm kind of a Jack Bogel acolyte in terms of
31:42
Speaker 1: small investors should be involved in funds rather than picking stocks.
31:49
Speaker 1: And there's a reason that Vanguard has risen to over
31:53
Speaker 1: three trillion with the t trillion dollars. Over the past
31:57
Speaker 1: few years, a lot of people have come to that
31:59
Speaker 1: same real as issue. They've stayed faithful to the Bogel rule.
32:03
Speaker 1: We've been speaking with Arthur Levite, the former Chairman of
32:06
Speaker 1: the Securities Exchange Commission, during this fifth anniversary of Dodd Frank,
32:10
Speaker 1: talking about regulation. If you enjoy this conversation, be sure
32:14
Speaker 1: and listen to our podcast Extras, where the discussion continues
32:18
Speaker 1: for as long as as our guests have time for
32:21
Speaker 1: Be sure and check out my daily column on Bloomberg
32:24
Speaker 1: View dot com. Follow me on Twitter at rid Halts Arthur,
32:28
Speaker 1: I know you tweet your Your Twitter handle is at
32:34
Speaker 1: A Levitt. I'm Barry Rihults. You've been listening to Masters
32:37
Speaker 1: in Business on Bloomberg Radio. Welcome to the podcast Extras.
32:41
Speaker 1: I'm Barry Rihults. My special guest today is Arthur Levitt.
32:46
Speaker 1: He is the former chairman of the Securities and Exchange Commission,
32:50
Speaker 1: and indeed you were the longest serving chairman, weren't you. Yes?
32:54
Speaker 1: And Arthur is for those of you who know your
32:58
Speaker 1: way around a radio dial. Arthur is a regular rum
33:01
Speaker 1: Bloomberg Radio has his own shows where he voices his
33:04
Speaker 1: opinion and chats with various guests on on weekends. Uh,
33:09
Speaker 1: it's always a fascinating conversation. There were a number of
33:13
Speaker 1: subjects we didn't get to in the earlier part of
33:16
Speaker 1: our conversation, and before I get too far, let's let's
33:20
Speaker 1: click through those and get to the rest of our
33:24
Speaker 1: of questions. First, A lot of people may not realize
33:28
Speaker 1: we're here in New York City, which is part of
33:30
Speaker 1: the great State of New York, and after the financial crisis,
33:35
Speaker 1: it looked like New York State really beefed up their
33:38
Speaker 1: own state financial regulatory apparatus because hey, we're here in
33:46
Speaker 1: New York and all of these big banks are are
33:49
Speaker 1: located here as well. What does the New York State
33:52
Speaker 1: Department of Financial Services have to say about regulation of
33:58
Speaker 1: of big financial brokers and big banks. Well, they took
34:02
Speaker 1: over the responsibility of the Banking Commission and added to
34:06
Speaker 1: that the banks and brokerage firms. So just pretend you're
34:12
Speaker 1: a financial institution in New York. You're regulated by the
34:16
Speaker 1: Attorney General, by the New Department of Financial Services, by
34:21
Speaker 1: the SEC, by the United States Department of Justice, and
34:25
Speaker 1: the New York City UH District attorney. That's quite a
34:32
Speaker 1: mouthful of regulation. You would think that would keep people
34:35
Speaker 1: on the straight and narrow. I think that the state
34:39
Speaker 1: probably looks upon regulators as a source of revenue, and
34:45
Speaker 1: I think that creates unintended consequences. Couldn't couldn't we say
34:50
Speaker 1: the same thing about the Look at all the massive
34:53
Speaker 1: fines we've seen. Isn't that the same true about Treasury?
34:56
Speaker 1: It wasn't even Justice, it was Treasure Department and sec
34:59
Speaker 1: issuing these giant fight. I don't think the federal regulators
35:03
Speaker 1: look upon it so much as a source of revenue
35:07
Speaker 1: as they do a measure of punishment. But nevertheless, I
35:12
Speaker 1: think financial institutions in the State of New York are
35:16
Speaker 1: probably overregulated, overregulated and spend a massive amount of money
35:22
Speaker 1: on defending themselves and fending off the various competing interests
35:29
Speaker 1: that seek to regulate them. Because regulators are there to
35:34
Speaker 1: take action, to extract fines, to punish, They're not there
35:38
Speaker 1: to praise good behavior, not a pat on the top
35:41
Speaker 1: of the head and then keep doing what you're doing.
35:43
Speaker 1: Regulators want to be recognized by scalps, and I think
35:47
Speaker 1: doing business in the State of New York is a
35:50
Speaker 1: pretty punishing experience for people in financial services. So we
35:55
Speaker 1: went from radical deregulation and the shedding of all these
36:01
Speaker 1: prophylactic measures to the opposite extreme. Now there's too much regulation. Ironical,
36:06
Speaker 1: isn't it? And so what is will Will the pendulum
36:09
Speaker 1: swing back to a balanced middle? Or we compel to
36:13
Speaker 1: always be at one absurd extreme or the other? Well,
36:16
Speaker 1: look at the pressures that are pro regulation and the
36:20
Speaker 1: pressures that oppose regulation. In the state of New York.
36:25
Speaker 1: Regulation is a source of revenue, and it's cloaked in
36:30
Speaker 1: the garb of protecting investors. And that's suggesting that the
36:36
Speaker 1: regulatory agencies aren't capable of doing the job. The SEC,
36:41
Speaker 1: the CFTC, or the New York Attorney General or even
36:45
Speaker 1: the New York State District Attorney or even the New
36:49
Speaker 1: York State Attorney General. Uh, let's kill that ask the
36:56
Speaker 1: question against what was it? What was the question? I
36:58
Speaker 1: had asked? Oh, the extreme? We've gone from one extreme
37:02
Speaker 1: to another. So are we compelled to always swing from
37:07
Speaker 1: one ridiculous extreme to the other? Can we ever get
37:10
Speaker 1: a balance in the middle. Well, we're certainly not compelled, Barry,
37:15
Speaker 1: But why do we have a new state agency regulating
37:21
Speaker 1: financial services if we already have the district attorney, the
37:25
Speaker 1: State Attorney General, the U S Attorney, and the sec. Well,
37:30
Speaker 1: the argument that the state made was during periods of exuberance,
37:36
Speaker 1: everybody seems to forget their regulatory responsibility and back away
37:41
Speaker 1: and not getting the way of a happy market. Well
37:44
Speaker 1: why stop here? Why not say this new financial regulator
37:48
Speaker 1: won't do the same thing when the next blow up occurs?
37:52
Speaker 1: No reason the things they want, no, of course not.
37:55
Speaker 1: But the point is the coordination between these various agencies
38:00
Speaker 1: I think is not what it should be. And to
38:03
Speaker 1: look upon regulation as a source of revenue, I think
38:07
Speaker 1: is a mistake and hurts our markets and we'll drive
38:11
Speaker 1: business out of the state of New York. So let's
38:14
Speaker 1: my personal view. So let's talk about another new regulatory entity,
38:19
Speaker 1: the Consumer Financial Protection Board. This was Elizabeth Warren's brainchild
38:25
Speaker 1: while she was still a professor at Harvard Law School,
38:28
Speaker 1: and UM ultimately was passed. What are your thoughts on
38:32
Speaker 1: on that new agency. I think that new agency has
38:37
Speaker 1: had a positive impact on our markets. I think that
38:43
Speaker 1: so much of an agency is determined by its leadership.
38:47
Speaker 1: If you get a bad leader and inept leader, or
38:50
Speaker 1: a politicized leader, Uh, you'll run into problems. I think
38:55
Speaker 1: Richard Cordray has been a balanced leader that has been
39:01
Speaker 1: able to determine the difference between unre unreasonable regulation and
39:10
Speaker 1: investor protection. I think he's implemented a number of changes
39:14
Speaker 1: with respect to banking, the relationship between banks and consumers
39:20
Speaker 1: that have been constructive. And I think the very dialogue
39:23
Speaker 1: that he has created his healthy and makes our financial
39:27
Speaker 1: institutions more sensitive to the small investor in supportive of
39:32
Speaker 1: the agent. There was a lot of abuses that took
39:35
Speaker 1: place beforehand that I thought it was a very obvious
39:41
Speaker 1: set of circumstances. Forty pages of boilerplate for a credit card,
39:45
Speaker 1: nobody knew what they were really signing, all sorts of
39:48
Speaker 1: fees hidden and banking and checking accounts. And then my
39:51
Speaker 1: favorite was the last. Even though they're all these disclosure
39:54
Speaker 1: documents on mortgages, when they got when they got crazy,
39:59
Speaker 1: when they got created of during the sub prime I
40:02
Speaker 1: don't think people realize what they were really getting into.
40:04
Speaker 1: I think that was the singular event that probably brought
40:07
Speaker 1: about the creation of this agency, which was fought and
40:12
Speaker 1: maligned by many in the Congress and Elizabeth Warren, to
40:17
Speaker 1: her credit, stayed the course and really was useful in
40:22
Speaker 1: bringing this about. But they do have a competent and
40:26
Speaker 1: fair minded leader. If that changes, I think the rationale
40:30
Speaker 1: for the agency becomes questionable. So many of these agencies
40:35
Speaker 1: are a function of sound, effective, balanced regulation, not runaway
40:41
Speaker 1: punitive regulation. So you mentioned Senator Warren, who has grown
40:48
Speaker 1: in popularity for quite a while. Some people think in
40:52
Speaker 1: subsegments of the population. There was a number of people
40:55
Speaker 1: who thought she was going to run for presidents, or
40:58
Speaker 1: at least for the nomination and against Hillary Clinton. She
41:01
Speaker 1: said she wasn't running, and so far it um seems
41:04
Speaker 1: like she's not running. But she recently raised some objections
41:09
Speaker 1: to some nominees for the commission for the SEC Commission.
41:15
Speaker 1: What's going on with with that? What? Why is she
41:18
Speaker 1: objecting to some people? And we could talk a little
41:21
Speaker 1: bit more how the commission has changed. This is a
41:24
Speaker 1: very good issue because the responsibility for naming commissioners of
41:29
Speaker 1: the SEC, which constitutionally is the President's responsibility. President nominates
41:35
Speaker 1: the commission and the Senate approves. It is that the process, okay,
41:39
Speaker 1: that has morphed into the Senate taking over the nominating process. Wait,
41:46
Speaker 1: the Senate is nominating commissioners and then the Senator proves it.
41:49
Speaker 1: That's uh, that's not what I learned in law school.
41:52
Speaker 1: In effect, that's what's happening because commissioners of the SEC
41:57
Speaker 1: now are coming from Congress staffs or certainly ideologically they
42:04
Speaker 1: must coincide with the views of the leading party in
42:09
Speaker 1: the Senate. Let me interrupt you there, because and again
42:13
Speaker 1: I haven't been in grad school for many a decade,
42:16
Speaker 1: but I learned that most when I studied securities regulation,
42:22
Speaker 1: when I studied corporate law, it was always people who
42:27
Speaker 1: were market structure experts, accounting experts, legal professors with a
42:33
Speaker 1: background in securities law. That was when you were chairman.
42:38
Speaker 1: That was certainly the case. And you're telling you're saying,
42:41
Speaker 1: this is not how it is any longer. I'm saying
42:43
Speaker 1: that the tension and friction and animosity that has colored
42:48
Speaker 1: our political process in the past twelve to fifteen years
42:53
Speaker 1: has transferred itself into the process of appointing not just
42:58
Speaker 1: SEC commissioners but to every regulatory agency, so that those
43:04
Speaker 1: agencies have now become far more ideological than ever before.
43:09
Speaker 1: And I think the consumer in our markets are the
43:14
Speaker 1: victims of this kind of polarization. A three to vote
43:19
Speaker 1: is the norm. When I was at the commission, a
43:22
Speaker 1: unanimous vote was the norm. So let me push back
43:24
Speaker 1: against you a little bit. I'm gonna I'm gonna play
43:26
Speaker 1: Devil's advocate and say, look, we elect presidents, and he's
43:32
Speaker 1: either Let's look at the past two presidents. We elected
43:35
Speaker 1: George W. Bush use of fiscal concern, a fairly conservative guy.
43:40
Speaker 1: I'm gonna redo that. Um, Charlie just added it forward
43:44
Speaker 1: to this, So let's look at at the politics of this.
43:49
Speaker 1: We elect somebody who's conservative, like George Bush, isn't he
43:54
Speaker 1: entitled to fill um, these appointees with conservative ideologies to
43:59
Speaker 1: various commissions? And fast forward, we elect somebody who's more
44:03
Speaker 1: left of center, like Barack Obama. Isn't he entitled to
44:07
Speaker 1: have his political ideology represented on these commissions? Well? Remember
44:12
Speaker 1: the law says that at least three members must be
44:16
Speaker 1: from the party in power. But what is happening very
44:22
Speaker 1: often is that you get Democratic Republicans and Republican Democrats
44:28
Speaker 1: in these positions. Certainly ideologically they have to pass a test. Now,
44:35
Speaker 1: you asked me before about Elizabeth Warren objecting to a
44:39
Speaker 1: Democratic nominee. That's unusual when a senator from the same
44:43
Speaker 1: party objects to a nominee of her president. And she's
44:49
Speaker 1: certainly entitled to do that, and it's happened before. I
44:52
Speaker 1: wish that it hadn't gone out to the media and
44:55
Speaker 1: that this is something discussed. A president will undoubtedly consult
45:00
Speaker 1: with his party members to decide whether a particular appointee
45:08
Speaker 1: meets the test of fidelity to party principles. But why
45:12
Speaker 1: why did Warren object to a nominee from her own party?
45:15
Speaker 1: I mean, I understand she is a former Harvard law
45:19
Speaker 1: professor and understands the legalities of the Commission as well
45:23
Speaker 1: as anybody, but that's kind of unusual. Why why would
45:27
Speaker 1: she raise an objection. I have not discussed this with her,
45:30
Speaker 1: but what I read in the press was she objected
45:33
Speaker 1: to the history of this appointee being one who represented
45:38
Speaker 1: corporate interests and she felt that CONSU reported that she
45:43
Speaker 1: felt that we needed commissioners who were more aligned with
45:47
Speaker 1: consumer interests than corporate interests. And I understand that, so
45:52
Speaker 1: that's that's not an unfair objection, But to me, it's
45:55
Speaker 1: more fascinating she's objecting to the Democrat but happens to
45:59
Speaker 1: the Republican. Having it emblazoned on the business pages just
46:03
Speaker 1: fuels the continuing fight over commissioners and the determination of
46:09
Speaker 1: Republican members of the Senate to get their candidates selected
46:16
Speaker 1: rather for their ideological fidelity than for their knowledge of
46:21
Speaker 1: our security laws. I just wish that Congress could take
46:25
Speaker 1: a step backwards and appoint individuals who may be ideologically
46:31
Speaker 1: aligned with their beliefs, but are experts in the security
46:37
Speaker 1: laws and are balanced in their judgments so that the
46:40
Speaker 1: Commission isn't perpetually locked in an ideologic uh blockage. So
46:47
Speaker 1: it's three to Republican Democrat when it's a Republican in
46:51
Speaker 1: the White House, and three to Democrat Republican when there's
46:54
Speaker 1: a when there's a Democrat in the White House. So,
46:57
Speaker 1: so how do you get past that log jam? Is
47:00
Speaker 1: it really just finding structural experts and accounting experts and
47:05
Speaker 1: and sec law experts or what's the alternative? I would
47:09
Speaker 1: hope that the Senators, in approving the nominees of the President,
47:16
Speaker 1: would take greater consideration of the individual's experience with securities
47:22
Speaker 1: matters and the individual's balance. I think for any regulator,
47:28
Speaker 1: balance is the key word, the ability to determine what
47:31
Speaker 1: is overregulation and what is fair and reasonable regulation. That
47:37
Speaker 1: probably is the most important critical characteristic of any regulator
47:42
Speaker 1: in any regulatory body, rather than having them chosen for
47:47
Speaker 1: party loyalty. So it's got to be expertise and pragmatism,
47:52
Speaker 1: not balance, balance, not merely being ideologically pure. Yes, you
47:59
Speaker 1: seem to be very very enthusiastic about this, Summle. I've
48:03
Speaker 1: I've lived with a commission that had at one point
48:07
Speaker 1: three Republicans and two Democrats and at one point three
48:12
Speaker 1: Democrats and two Republicans, and we worked in a cooperative
48:16
Speaker 1: way for eight years. Not one single time was a
48:21
Speaker 1: recommendation overruled in eight years that worked. Were they three
48:26
Speaker 1: two votes? You know? There were? They were almost always five?
48:32
Speaker 1: Oh so, how much of that is a reflection of
48:35
Speaker 1: of how the world has changed since the late nineties,
48:38
Speaker 1: how the United States has changed, and how much of
48:41
Speaker 1: it is just, you know, politics has become coarser and
48:45
Speaker 1: more divisive and extended everywhere. Barry, I think that's probably true.
48:52
Speaker 1: I think part of it is a function of leadership,
48:55
Speaker 1: whether the head of an agency is the kind of
48:58
Speaker 1: person that and make common cause with the commissioners that
49:03
Speaker 1: work with him. I think part of it is luck.
49:05
Speaker 1: If you run into commissioners who are looking for political gain,
49:09
Speaker 1: they will try to harass the leadership, whoever the opposition.
49:14
Speaker 1: Maybe there are a variety of factors that bring this about.
49:18
Speaker 1: But I would ask the Congress and the administration again
49:23
Speaker 1: to choose experts for these agencies rather than ideologues. So
49:29
Speaker 1: politics is fine for Congress, but when it comes to
49:32
Speaker 1: something as important as the SEC, put the ideology aside
49:36
Speaker 1: and be pragmatic and get the job done. I would
49:39
Speaker 1: be hopeful for this, which I think is probably unrealistic
49:44
Speaker 1: in the political environment we are now experiencing. Okay, so
49:50
Speaker 1: that seems um unrealistic. Hope, all right, we can we
49:54
Speaker 1: can work with that. It seems that this has been
49:57
Speaker 1: an ongoing problem, not just as SEC, but it's been
50:01
Speaker 1: an issue across all the various regulatory entities from NASA,
50:06
Speaker 1: even things like NASA and the e p A, as
50:09
Speaker 1: well as the Department of Education and and other Maybe
50:14
Speaker 1: just this at a certain point we have to get
50:16
Speaker 1: beyond politics and just focus on doing the job. That
50:21
Speaker 1: would be the goal. All right, So let me shift
50:24
Speaker 1: gears um with you. We've talked about We've talked about
50:29
Speaker 1: Dodd Frank. We've talked about the vulcal rule. We've talked
50:32
Speaker 1: about who should be overseeing four oh one ks and
50:36
Speaker 1: iras and the difference between the fiduciary standard and the
50:40
Speaker 1: suitability standard. UM, We've we've talked about the commission itself.
50:46
Speaker 1: I consider you're obviously an expert. I know very little
50:49
Speaker 1: about this, so I hope I asked you good questions
50:53
Speaker 1: about that subject. But let's let's shift gears a little bit.
50:56
Speaker 1: One of the things I really enjoyed about our first
51:00
Speaker 1: conversation the first time you were on it was almost
51:03
Speaker 1: a year ago, as last summer, was how optimistic you
51:07
Speaker 1: were about the future and how much you were hopeful
51:13
Speaker 1: that this generation was going to find their way into
51:17
Speaker 1: the labor market and start doing good things. Are you
51:21
Speaker 1: still as optimistic as you were a year ago? Probably
51:24
Speaker 1: more so, Barry. Where the political system may be broken,
51:31
Speaker 1: where there may be a disharmony at that level, and
51:37
Speaker 1: where we may look back and say, boy, this is
51:40
Speaker 1: the most poisonous, the most corrupt environment that I've ever seen.
51:46
Speaker 1: It really isn't. So if you look back in history,
51:49
Speaker 1: we've had many periods in history much worse than the
51:54
Speaker 1: period that we're in. And I'm involved in my personal life.
51:59
Speaker 1: You know, broad variety of high tech companies on both
52:03
Speaker 1: the East and the West Coast, and what I see
52:06
Speaker 1: there in terms of the intelligence and commitment and dedication
52:13
Speaker 1: of people involved in new technologies, in taking enormous risks,
52:20
Speaker 1: in developing educational backgrounds that are far better than anything
52:27
Speaker 1: that we experienced in our years. I'm very hopeful that
52:33
Speaker 1: America will be leading, not following, in terms of business
52:37
Speaker 1: and in terms of morality. I'm extremely optimistic about the future.
52:44
Speaker 1: So I don't really think of you as a tech
52:48
Speaker 1: sort of guy. But here you are that looks like
52:51
Speaker 1: an Apple Watch on your wrist. How much of a
52:55
Speaker 1: tech gadgethead are you? Oh? I'm total. I'm absolutely consumed
52:59
Speaker 1: by it. Uh. I know we're charging your iPhone right
53:02
Speaker 1: outside of the studio. How do you like the Apple Watch? Uh?
53:07
Speaker 1: I like the Apple Watch, but it took me nearly
53:09
Speaker 1: eight hours to learn how to use it, and I
53:12
Speaker 1: think most consumers are not going to invest eight hours
53:16
Speaker 1: in it. So I think we're going to have to
53:18
Speaker 1: see iterations of the watch if it's really going to
53:21
Speaker 1: take off. It's too complicated now for most people. The rule,
53:27
Speaker 1: the good rule of thumb is, unless you're willing to
53:29
Speaker 1: put the time and effort in, don't never, never, never
53:32
Speaker 1: by the first one point oh of anything. You always
53:36
Speaker 1: have to wait to subsequent iterations. It always becomes look
53:39
Speaker 1: at Tesla. The first Tesla car was kinda yeah. The
53:43
Speaker 1: new one is it looks spectacular right zero to sixty
53:47
Speaker 1: and two point eight seconds. That's those are crazy. Those
53:50
Speaker 1: are Bugatti viron one point six million dollar numbers are
53:55
Speaker 1: the most visible of technology. Think about those aspects of technology.
54:02
Speaker 1: One company that I'm involved with is developing a derivatives
54:07
Speaker 1: contract which will enable banks to layoff consumer loan risks,
54:13
Speaker 1: which are capital intensive risks. Another company is an online
54:22
Speaker 1: um It's called motif. Oh, I'm familiar with them. Sure,
54:26
Speaker 1: you can create your own composite basket of stocks following
54:31
Speaker 1: any given theme you want, and you push one button
54:33
Speaker 1: and you buy all the stocks at a very inexpensive
54:36
Speaker 1: transaction costs. Another one is bit pay, which uses bitcoin
54:41
Speaker 1: as a transaction to buy merchandise. Microsoft is among companies
54:48
Speaker 1: that will accept bitcoin for merchandise. So the gentleman who
54:52
Speaker 1: runs motif, what is his name are Deep Walley. He
54:56
Speaker 1: and I are on a board together of another technolog
55:00
Speaker 1: algy company, and since it's private, I don't want to
55:03
Speaker 1: talk about it. But what they do is it's not
55:06
Speaker 1: peer to peer like you see where people are making
55:09
Speaker 1: small loans. It's a more commercial peer to peer lending
55:13
Speaker 1: for real estate, where a buyer and a seller of
55:17
Speaker 1: real estate loans big commercial loans are able to get
55:20
Speaker 1: together and actually be much more productive efficient. Um. It's
55:25
Speaker 1: really fascinating and I both are on their board of advisors.
55:29
Speaker 1: The changes that technology and it's the phrase these days
55:34
Speaker 1: is called fintech, the financial technology world that's changing. It's
55:40
Speaker 1: fascinating what's taking place in that space. It really is,
55:43
Speaker 1: and as a source of lending, not not just one company,
55:48
Speaker 1: but there are dozens and dozens of companies that are
55:52
Speaker 1: taking the banks on directly, and the banks themselves are
55:56
Speaker 1: looking at some of these services. They're examining bitcoin rather
56:00
Speaker 1: than rejecting it, and I think the consumer is the beneficiary.
56:05
Speaker 1: There are I'm on I'm an advisor to another remarkable
56:11
Speaker 1: company called a firm, which provides alternative lending for millennials
56:18
Speaker 1: who really reject the notion of credit cards. And bank loans,
56:23
Speaker 1: and a firm has developed the technology of approving credit
56:27
Speaker 1: within seconds after the consumer goes online to make a purchase,
56:33
Speaker 1: and the consumer then is able to take a loan
56:37
Speaker 1: from a firm that they'd have to fill out lots
56:40
Speaker 1: of forms and papers to do it in more conventional ways.
56:44
Speaker 1: So a friend of mine used to work for a firm.
56:46
Speaker 1: They got bought by Yahoo. He moved out to California.
56:49
Speaker 1: He's a serial entrepreneur's built and sold. This is his
56:53
Speaker 1: third or fourth company. What this company did? You mentioned
56:57
Speaker 1: bit pay. So there's a huge issue with entity fraud
57:01
Speaker 1: and the ability to know who's really who and what
57:05
Speaker 1: underlines bitcoin is something called the blockchain, which is how
57:10
Speaker 1: the mathematical way that you can tell this is really
57:13
Speaker 1: this person's transaction and this coin was sold to this person. Well,
57:18
Speaker 1: they're in the midst of creating this technology that allows
57:23
Speaker 1: banks to instantly authenticate a person by this blockchain, and
57:28
Speaker 1: in theory, it's gonna do wonders for stopping identity theft,
57:33
Speaker 1: stopping those sorts of frauds, allowing banks and brokerage firms
57:37
Speaker 1: and other large financial institutions. Sounds like life Masters, which
57:42
Speaker 1: is which life Masters. Now I know that name. She
57:46
Speaker 1: was at JP Morgan and now has formed a company
57:49
Speaker 1: that sounds like it's doing the very thing you're talking about. Okay,
57:53
Speaker 1: that's where I know the name from JP Morgan. What's
57:55
Speaker 1: the name of our company? Okay, I'll look that up.
57:59
Speaker 1: That's really interesting. But when you stop and think about
58:02
Speaker 1: that underlying chain, which you know you couldn't issue coins
58:07
Speaker 1: if there wasn't a way to to validate and verify
58:10
Speaker 1: it mathematically, turning that into a form of identity is
58:15
Speaker 1: really quite fascinating. Yes, it is, and I think that
58:19
Speaker 1: it's been rejected by the banks for years, but I
58:22
Speaker 1: think they now regard it quite seriously, so that Goldman
58:27
Speaker 1: Sachs made an investment in several of these companies, And
58:30
Speaker 1: I know every major banking institution is aware of the
58:35
Speaker 1: implications of bitcoin and is studying its applicability to all
58:41
Speaker 1: financial services. You know, there's a conference I go to
58:45
Speaker 1: every couple of years. I don't want to go every
58:47
Speaker 1: year because it's overwhelming, but I go every two or
58:50
Speaker 1: three years, and it's out in San Diego, and it's
58:52
Speaker 1: a run of either college students or recent college grads. Uh,
58:59
Speaker 1: most technology, some fin tech some actual tech, and you
59:05
Speaker 1: see the creativity and the innovation and the drive that
59:10
Speaker 1: these kids have. And it's hard not to be optimistic
59:14
Speaker 1: about the future when that generation that, you know, when
59:19
Speaker 1: I grew up, the Internet was not really fully formed
59:23
Speaker 1: until many years later. These kids not only grew up
59:27
Speaker 1: with the Internet, but they've you know, the most of
59:31
Speaker 1: their adult life. There's always been smartphones there, there's laptops
59:36
Speaker 1: were ubiquitous. It wasn't what's this computer thing, I should
59:40
Speaker 1: really learn how to use use this. It's second nature.
59:43
Speaker 1: It's like the telephone to the rest of us. And
59:46
Speaker 1: starting from that base, their outlook and their creativity really
59:52
Speaker 1: quite amazing. If we're thinking about a new form of currency,
59:56
Speaker 1: whether it's bitcoin or some iteration of that, I'm not sure.
1:00:02
Speaker 1: If we're thinking about space travel, if we're thinking about
1:00:07
Speaker 1: automated transportation in the form of driverless cars, and these
1:00:13
Speaker 1: are all being done by people in their forties and fifties,
1:00:19
Speaker 1: that says something about Americans. It says something about the future,
1:00:25
Speaker 1: and I find it enormously exciting. It's so hard to
1:00:30
Speaker 1: know what fifty years hence is going to look like.
1:00:33
Speaker 1: Someone showed me this article about from the New York
1:00:37
Speaker 1: Times from like thirty years ago, and it was one
1:00:40
Speaker 1: of these early looks at self driving cars. And the
1:00:44
Speaker 1: funniest part about the self driving cars the little cartoon
1:00:48
Speaker 1: graphic with it a little um animated, I don't want
1:00:50
Speaker 1: to say animated, but just just illustration. And there's a
1:00:54
Speaker 1: person sitting in the self driving car reading an open
1:00:57
Speaker 1: paper like a New York Times on on print matter.
1:01:02
Speaker 1: It's it's they got the self driving car part right.
1:01:05
Speaker 1: But the idea that all these things are going to
1:01:08
Speaker 1: flat screens and kindles and things like that was so
1:01:11
Speaker 1: far beyond the comprehension of people just twenty years ago.
1:01:15
Speaker 1: So the question I have to ask you is what
1:01:17
Speaker 1: is beyond our comprehension twenty years Hence, oh, travel to
1:01:22
Speaker 1: the moon, travel to other other planets. Uh, I'll tell
1:01:31
Speaker 1: you what is ahead? T plus zero? How about that?
1:01:36
Speaker 1: In terms of settling transactions, like you do a trade
1:01:39
Speaker 1: and it settles instantly. We're fighting now about T plus two? Right?
1:01:43
Speaker 1: Why not plus one the next day? Listen, you deposit
1:01:48
Speaker 1: a check. It's clear. I remember depositing checks and it
1:01:52
Speaker 1: would take forever, days and days and days. That's what
1:01:55
Speaker 1: the bitcoin is. So so now you deposit a check
1:01:58
Speaker 1: in the bank and the money shows up the next day.
1:02:02
Speaker 1: It's it's amazing, it's such People don't realize how much
1:02:07
Speaker 1: of a huge improvement that is over what we saw
1:02:11
Speaker 1: ten twenty years ago. Barry. We've seen more in the
1:02:14
Speaker 1: past twelve years and probably the past fifty years have
1:02:19
Speaker 1: experienced in terms of dramatic technological change. And I think
1:02:25
Speaker 1: we've got the people, the brain power, the dedication to
1:02:31
Speaker 1: deliver on it. I'm really uh surprised, amazed and enthusiastic
1:02:40
Speaker 1: about the quality of people being turned out by our
1:02:44
Speaker 1: educational institutions and involving themselves not just in trading pieces
1:02:49
Speaker 1: of paper, but coming up with applications that will change
1:02:54
Speaker 1: lives and change society. You change the world. A couple
1:02:57
Speaker 1: of years ago, we we talked earlier about Paul Volke
1:03:00
Speaker 1: and and what a man of integrity um he is.
1:03:04
Speaker 1: He had given a speech where he jokingly said, the
1:03:08
Speaker 1: only financial innovation there has been in the past fifty
1:03:11
Speaker 1: years has been the A T M. And that was
1:03:14
Speaker 1: a little tongue in cheek, but the truth is, in
1:03:18
Speaker 1: the intervening five years we've seen a run of financial technology.
1:03:23
Speaker 1: He's it's almost like he shot the starting gun, and
1:03:27
Speaker 1: all these little things that were kind of in development
1:03:31
Speaker 1: before they all came running out very very quickly. I
1:03:34
Speaker 1: think he's surprised when he here's about a bitcoin, when
1:03:39
Speaker 1: he hears about various payment systems and transfer systems. I
1:03:44
Speaker 1: think even he's amazed by what's happening on the software side,
1:03:51
Speaker 1: whether it's the automated algorithmic um asset managers derisively called
1:03:56
Speaker 1: robo advisors, to the variety of different ways that funding can.
1:04:02
Speaker 1: You look at the crowdsource fundings for something like Oculus Rift.
1:04:07
Speaker 1: This is a company that you know, was putting together
1:04:10
Speaker 1: a handful of of virtual reality headsets and just scraping by.
1:04:15
Speaker 1: They do a uh Kickstarter campaign, and the next thing
1:04:19
Speaker 1: you know, they're bought by Facebook for billions of dollars.
1:04:22
Speaker 1: That sort of thing was not possible ten years ago.
1:04:27
Speaker 1: That's true, and there are some downsides to that as well.
1:04:30
Speaker 1: The protections that kept uh, this kind of thing from
1:04:36
Speaker 1: happening in the past were intended to protect investors from scamsters,
1:04:43
Speaker 1: and there's certainly are plenty of scammers all over the
1:04:46
Speaker 1: place these days. They don't they don't go away. They're
1:04:48
Speaker 1: like roaches. You flick on the light. They just find
1:04:51
Speaker 1: a different crevice to to hide in. But I think
1:04:55
Speaker 1: in balancing those interests with the benefits of having greater employment,
1:05:01
Speaker 1: greater technological advancement, I think the kickstarter campaigns probably are
1:05:10
Speaker 1: a net benefit and acknowledging the risks that are involved,
1:05:16
Speaker 1: I think our society is still better off with more
1:05:21
Speaker 1: people doing more things than they ever did before. So
1:05:24
Speaker 1: so let's sum up our conversation, because I know you
1:05:27
Speaker 1: have places to go and people to see. UM. On
1:05:32
Speaker 1: the one hand, we went from a regulatory extreme of
1:05:35
Speaker 1: radical deregulation to excess of regulation. We really need to
1:05:40
Speaker 1: be somewhere in the middle. You seem frustrated by the
1:05:44
Speaker 1: political politicalization of the process of nominating commissioners and indeed
1:05:52
Speaker 1: how divisive politics has become across many regulatory entities. But
1:05:58
Speaker 1: clearly you are very optimistic about the future of finance
1:06:03
Speaker 1: and the future of America given given where we are today.
1:06:07
Speaker 1: Is that a fair fair assessment? That's a fair assessment, Arthur.
1:06:11
Speaker 1: I can't thank you enough for for your time and
1:06:15
Speaker 1: your insight and your ability to really flesh out a
1:06:20
Speaker 1: discussion UM on regulations. I hope our listeners have enjoyed
1:06:26
Speaker 1: listening to our conversation about regulation. If you enjoy these
1:06:30
Speaker 1: sorts of discussions, be sure and look up an intro
1:06:33
Speaker 1: Down an Inch on Apple iTunes. You can see all
1:06:37
Speaker 1: fifty two of our previous conversations. You're actually the first
1:06:42
Speaker 1: um Masters in Business of our second year. The show
1:06:46
Speaker 1: has now been on a year and a week, so
1:06:49
Speaker 1: thank you so much for being our inaugural guest for
1:06:52
Speaker 1: our second year. Be sure and check out my daily
1:06:55
Speaker 1: column on Bloomberg View dot com. Follow me on Twitter
1:07:00
Speaker 1: her at rid Halts Uh special thanks to my researcher
1:07:03
Speaker 1: Mike Batnick, to our engineer Matt and to our producer
1:07:09
Speaker 1: Charlie Valmer. I'm Barry Rid Halts. You've been listening to
1:07:12
Speaker 1: Masters in Business on Bloomberg Radio.