June 19, 2025 • 47 mins
After the GFC, there was a lot of angst over the fact that so much effort and brainpower went into designing complex derivatives, and other financial instruments. Not only was this seen as wasteful, the complexity was deemed to be the heart of the crisis, and therefore bad. But all these years later, looking back, how bad is financial complexity really? What do things look like from the perspective of 2025. On this episode we're joined by Gillian Tett, a columnist at the Financial Times, and also the author of several books including Fool's Gold: The Inside Story of J.P. Morgan and How Wall St. Greed Corrupted Its Bold Dream and Created a Financial Catastrophe. We talked about her reporting on the evolution of financial derivatives, their legacy, what she is concerned about now, and why she sees the world entering into a new, post-neoliberal, fifth stage of capitalism.
Only Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox — now delivered every weekday — plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlots
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Odd Lots podcast.
I'm Tracy Alloway.
Speaker 3 (00:22):
And I'm Joe Wisenthal. Joe Yes.
Speaker 2 (00:26):
In the recent episode with Kaiser Quo, you dropped at
the very end because you said you were hoping that
no one was listening. You dropped that you are coming
round to complex financial products.
Speaker 4 (00:38):
You know what, I did drop a little bomb there
at the very end of the episode because it's something
I've been thinking about more and more, and I'll just
lay it out very quickly what I think about, which
is the one of the most influential episodes we've done
in a long time in my mind, was episode we
did with Ricardo Houseman, who were either recently talked to
or about to talk to depending on when this episode
(00:59):
comes out, et cetera. About complexity is a good thing.
That's a sign of when wealthy economies are capable of
producing complex products. That's usually signed they get wealthier. That's
mostly discussed in the manufacturing sense. And then lately I've
been thinking, you know what, there are some wealthy countries
that produce really complex stuff that aren't manufacturing. The UK,
(01:19):
the US, et cetera. Mostly much of it is sort
of complex financial products. Maybe we need to rethink and
maybe we need to sort of take a fresh light
about why the market is willing to pay the creators
of complex financial products so much. And maybe they're not
as bad as sort of some of us thought, or
maybe we maybe we should be more proud of our
(01:40):
financial creations, lean into them a little bit more, lean
into you.
Speaker 2 (01:44):
Know, complex financial products.
Speaker 3 (01:47):
Because if there was this.
Speaker 4 (01:48):
Other thing too, like in like early twenty tens, where
people are like all the great minds were working on,
you know, building derivatives when they should have been doing
something else, and then they went and built like social
media and like products to hack our attention to sell ed.
Was that so much better?
Speaker 3 (02:03):
Anyway?
Speaker 4 (02:03):
I don't know, Like maybe it's like time to rethink
the positives of finance in the world great financial crisis
that was history. Let's remember the good at parts. Anyway,
it's just been on my mind lately, all Right. I
didn't know you were gonna, like to her say, like, Okay,
now you have to do a whole episode defending this position.
Speaker 2 (02:19):
Je, Well, I'm being nice. I brought this, I brought
you the perfect guest to discuss all of this, and
I mean, really the perfect guest. So this is actually
someone I've wanted to get on the podcast for a
very very long time. I used to work with her
at the Financial Times. I worked for her at the
Financial Times for a while. We're going to be speaking
with Gillian Tet. She is, of course a columnist for
(02:41):
the Ft and head of King's College at Cambridge. Jillian,
welcome to the show.
Speaker 5 (02:45):
Well, it's great to be on the show. And I
think Tracy, I often felt like I was working for
you at the time. You were so much smarter than
the rest of us, and you really blaze into trail
in many of these discussions.
Speaker 2 (02:57):
Well, thank you so much for saying that. I hope
my boss is a Bloomberg. Are listening, Yeah, I give
a bonus straight away. You, of course basically wrote the
book on derivatives, Fool's Gold, which came out at a
very fortuitous time two thousand and nine, So right after
the two thousand and eight financial crisis. Talk to us
about the genesis of that book, because I think a
(03:17):
couple years before when you started working on it, I
don't think a lot of people were thinking, oh, we
need to write an entire book on how we got
these things called credit default swaps.
Speaker 5 (03:28):
No, well, most people aren't quite as weird as me.
But the reality is I'm trained as a cultural anthropologist,
which might sound like it's got nothing to do with
Wall Street, And in fact my PhD was based on
field work looking at marriage rituals in Tajikistan, so that's
not your obvious starting point. But one thing that cultural
anthropology teaches you is so as human beings, we all
(03:51):
wrap ourselves up in assumptions and ideas we inherit from
our cultural surroundings, and those often make us very blind
to things that we ignore in our world. Social silence
really matters. It's what we don't talk about that really matters.
And starting back in about two thousand and five, when
I was running the lex column at the Financial Times,
(04:12):
I noticed that newspapers and politicians talked obsessively about equity
markets and sometimes credit markets and bomb markets. But actually
when you looked at what was driving revenues in the
city of London, whereas based at the time, it was
actually things like derivatives and credit derivatives, which no one
talked about because they seemed to be geeky and technical
(04:34):
and incredibly dull. But the reality is that things that
look dull and boring to a point we don't discuss
them are often the most important things in the world.
So I became kind of fascinated by this underbelly of
the city of London and Wall Street. I used to
say that they looked like icebergs, in that you had
a bit poking above the surface that people talked about,
(04:56):
which was the equity markets, and a shadowy chunk than
everyone and ignored. So I dived in really, starting in
two thousand and five, into the world of credit derivatives,
initially to try and almost do a tourist guide to
what was happening there for the wider Financial Times readership.
This was a few years after the dot com boom,
and in the same way that my colleagues had gone
(05:18):
around explaining the Internet, I thought I could explain financial
innovation and see what was really going on. But of
course it turned out to be considerably more deceptive and
challenging and ultimately more dramatic than I ever imagined.
Speaker 4 (05:33):
It really is extraordinary vindication on your part, because the
book came out in May two thousand and nine, so
at that point, like people were just getting up to
speed and it was all anyone to talk about. And
here you were years ahead and you already are like,
here's the book then you all have to read now,
which is just, I mean, an extraordinary vindication of your
(05:53):
choice to like begin down this path of looking into them.
Tracy and I were both in London in a and
I loved it. It wasn't my first time there.
Speaker 3 (06:03):
I loved it.
Speaker 4 (06:04):
Extraordinary wealthy society. I know there's all this anxiety in
the UK is like, oh, you can't like build stealed
anymore economically all this, I get it. There are some issues,
et cetera. But people are willing to pay a lot
of money for the services that the city provides all
around the world and make it one of the richest
richest societies ever to exist on Earth.
Speaker 5 (06:24):
Well, I have to be honest and say that I
did not originally expect to be writing a disaster book.
What actually happened was I spent the summer of two
thousand and seven writing the book and finished it in
September two thousand and seven, went back to work, thought
the whole thing was done and dusted, and at that
point It was simply an account of how this tribal
(06:45):
group at JP Morgan had dreamt up the idea of
credit derivatives and taken it to extremes. And literally the
day after I came back to work, Lihma Brothers collapsed
and the book had to be dramatically rewritten very fast,
because by then, of course, it was clear that credit
derivatives had the potential to destabilize very wide swaths of
(07:07):
the financial markets. And they weren't the source of the
crisis that was the subprime mortgage lending, but they amplified
the crisis dramatically. And of course, with the city of London,
a lot of its growth in the preceding years had
been due to its activities in the financial sector, and
particularly the fact that London was a home of much
(07:27):
of this creativity, and once the crisis hit, London not
only became an epicenter of the things that were going wrong,
but of course ultimately saw some of its own financial
fortunes suffer as a result.
Speaker 4 (07:41):
First of all, the fact that you didn't go into
the book expecting to write a disaster book still in
my mind, vindicated the choice, because there was obviously.
Speaker 5 (07:50):
I should say by the way, actually, you know, I
was predicting back in two thousand and five that credit
derivatives were a house of cards is going to come
at some point.
Speaker 2 (07:59):
You wrote a lot about it in the Ft repeatedly,
but I want.
Speaker 4 (08:02):
To press further on this point that people are clearly
willing to pay a lot of money for these financial
services for the service of creating these derivatives. There are
not many places they're not. You know, there's shen Zen
for manufacturing electronics, there's a few places I don't know
for manufacturing whatever else. And then there's like London in
(08:24):
New York for manufacturing complex derivatives. And they're worth a
lot of money, and people are willing to pay a
lot of money for them, like you mentioned that their
house at cards, et cetera. Yet around the world, clearly
don't customers think there's a value in all these services.
Speaker 5 (08:39):
Well, credit derivatives and other derivatives and complex financial products
exist for a reason, which is that people want to
use them and buy them. And they want to use
them and buy them because essentially they offer a way
of expressing ideas in finance, taking bets, making investments that
are dramatically more flexible, more subtle, more multifaceted, and sometimes
(09:05):
cheaper than using other financial instruments. And the image I
sometimes use to explain what they do is a bit like,
you know, photoshopping a picture. You know, you can have
a picture of something, you can have the actual something,
or you can take a photograph and then photoshop it
according to your own desires, and that, in a sense
(09:26):
is a bit like what a derivative does. Or, to
use another analogy, if you want to invest in the
equity market, you can either go and buy an ETF
which is like a box of chocolates. It's pre selected.
Or you can go to an expensive equivalent of a
chocolette where you pick a mixed chocolates you want, but
(09:46):
that takes more money in time. Or you can just
take a photograph of all the chocolates you like in
the world and just a photoshop it to whichever ones
you want, and that essentially is a derivative.
Speaker 2 (09:57):
I'm not sure how much I personally would value a
photo of a bunch of chocolates, but point taken, Okay,
So maybe, just as an example, let's use CDs and
the invention of credit default swaps, and then how I
guess they transformed during the financial crisis or running up
until the financial crisis, because as you pointed out, you
(10:18):
made the point that CDs is not necessarily the proximate
cause of the crisis, but definitely amplified it. So talk
us through what CDs were originally intended to do and
what they ended up doing.
Speaker 5 (10:32):
Well. At the most basic, credit fault swaps were a
way of taking out a bet on whether or not
you thought alone or a bond would go into default,
and they were originally created for corporate bonds, and essentially,
people who thought that a company looked a bit dodgy
(10:53):
could take out a credit a fault swap as a
form of insurance or as a way to bet the
company would actually default, depending on which side of the
trade they were on, And that was a much more
flexible way of trading that risk than actually buying the bond,
because of course corporate bonds are often pretty liquid, they
(11:14):
may not exist in the size you want, and if
you'd think a company's going to default, historically the only
way to express that belief in an investment trade was
simply not to buy the bond. But the credit defaults
what that you can actually be much more active in
betting that it will default. Now, these were initially single instruments,
usually attached to single companies, and they were created partly
(11:38):
as a way of running rules around regulations, and in
particular banking regulations, and it was also created as a
way for banks to lessen the risk on their own
books of having exposure to any particular corporate name. However,
the initial group that created these instruments, which in many
ways were very very clever and really clever innovation, saw
(12:00):
the business grow and they began to bundle different credit
default swats together, and then the idea got transplanted into
the mortgage market. And then what happened was that masses
of mortgages from different parts of America were bundled together,
and then credit defaults were written onto the actual bundles
(12:23):
of mortgages, and on top of that, the original credit
default swats linked those mortgages were sometimes pulled together, chopped
up into new pieces, and sometimes used to reissue entirely
brand new instruments all over again. And the problem that
happened at that point was that although when the original
(12:44):
idea popped up, people could look at a company like
IBM and say, yeah, you know what, I think it's
got quite a high default risk or not a high
default risk, and they kind of knew what they were
betting on. By the time you're dealing with mortgages from
gazillions of different homeowners all over the and by the
time they've been chopped up and then repackaged and then
(13:05):
repackaged again, it's very hard, indeed, to actually look through
to what the underlying risks are except by taking it
on trust, either from the issuer or from a credit
rating agency. And at the core of what happened in
two thousand and eight was that all of that complexity
and opacity meant that you had the equivalent of a
(13:28):
world where people were buying these instruments on trust, and
yet that trust wasn't justified because some of them were
turning bad. And when some of the underlying mortgages started
to turn bad, what happened was the equivalent of a
food poisoning scare. And I promise you, Tracy, I'm not
going to just talk about food, but the best number
I know is a food poisoning scare where essentially you
(13:50):
had some of the bits of underlying loans and debts
and the mortgage bundles went badly wrong. They dasically defaulted.
The problem was that, as with say sausages in a supermarket,
if you hear that one or two cows in the
food chain have got toxic problems and they're creating food
(14:11):
poisoning problems, if you don't know which sausages that meat
has gone into, you're probably going to refuse to buy
any sausages. And if your parents at a school where
kids are being fed sausage stew, you're probably going to
tell your kids to stop eating school lunches, period. And
what happened in two thousand and seven two thousand and
eight was the financial equivalent of that, because it became
(14:32):
clear that some of the mortgages had gone bad, nobody
knew which bundles of default swaps and the rivages had
gone into, and so essentially consumers aka investors fled the
market completely. And it throws up.
Speaker 4 (15:02):
I love the analogy of food poisoning scare. I had
never really thought of it in that particular terms before,
but I think it sounds very apt. But it also
seems like when something like a food poisoning scare happens
in financial markets, you know we just call it a
bank run, right, And bank runs happen every you know,
(15:24):
several decades, or you know, big one, maybe happened once
a century, and they usually take a different form, et cetera.
But going back to the metaphor of the food poisoning
scare in retrospect, and I'm curious your take on this
now in twenty twenty five or maybe twenty fifteen or
two thousand and nine when the book came out, like
how much food was actually gone bad? And how much
(15:46):
was it that a little bit had gone bad? And
yet people were afraid that everything had gone bad.
Speaker 5 (15:52):
Well, even to this day, the actual numbers are still contested.
Speaker 3 (15:57):
Yeah, it's interesting, isn't it.
Speaker 5 (15:59):
Yes, whether it was twenty five billion, whether it was
two hundred and fifty billion, we still don't know exactly
how the mortgagees defaulted. And of course, one of the
difficulties about trying to measure that in America, like any
other financial crisis, is that when you have an initial
property market bust, prices collapsed dramatically and for period of
(16:21):
time it looks like everything's gone bad, and then subsequently
some of those loans actually recover because property prices go
back up again. So it's very hard, indeed to measure
what the actual losses were. But what we do know
was that in the run up to two thousand and eight,
not only had vast amounts of derivities been written linked
(16:41):
to the mortgage market that was going bad, but a
lot of those products had been built with a huge
amount of leverage, which meant that even a small loss
made them extremely problematic. You had a problem of tranching,
which was very, very complicated in many of these products.
The credit rating agencies were for a long time, the
(17:02):
only way of actually judging whether or not a product
was good or bad, and it turned out their ratings
were completely wrong. And you also had a lot of
these products held by investors who had no tolerance for
these kind of risks. So you put that all together
and frankly, you had the makings of a perfect storm.
And you know, it was very, very painful indeed, And
(17:25):
what made it doubly painful was that, in the course
of slicing and dicing all of these different mortgages and
news and derivatives, many of the products had been labeled
triple A, and so people thought they were safe and
it paid them no attention they sat on their balance sheet.
And the other problem was that people ironically had bought
these products because they said they wanted to diversify and
(17:48):
hedge their risks. And the theory was that in the
old days, a bank had a bunch of loans to
say a mortgage company, or a bunch of properties, and
that was very concentrated on their books. If they then
repackaged them as derivatives and sold them to everyone else,
then you basically had a problem shared, and a problem
shared the problem halved. So people thought, well, right, this
(18:09):
stuff has been scattered across the markets. If something defaults,
it might hit a lot of people to a tiny amount,
but it won't wipe anybody out because it's diversified. The
critical misunderstanding people made was that because the system was
so opaque and complex, no one saw that all the
risks were actually reconcentrating themselves back on a couple of
(18:33):
big institutions books, because the same institution was writing credit
the false wats to everybody, and in particular, AIG Financial
Products was at the center of most of these trades.
So instead of diversifizing and spreading risk credit, the falsewats
were doing the very opposite and reconcentrating.
Speaker 4 (18:51):
It tracy, the idea that it's really even still impossible
to know how much of these assets had properly gone bad.
This has always been my frustrat with badiod dictum of
lending against good collateral. Yeah, but I've never I've always
hated there because like, what's good collateral. It's like it's
good collateral contingent upon reflation of the economy anyway, But
(19:11):
that's always bothered me. It's a possibility of knowing what's
good or bad collateral even years after any keep going.
Speaker 2 (19:16):
I enjoy your badget rants for sure. Okay, well, actually
this feeds into what I was going to ask. So
the solution to the crisis proposed eventually by regulators was
more transparency of derivatives and complex financial instruments, so people
would have to report their positions to the DTCC and
(19:37):
also central clearing for derivatives. Do you get any sense, Jillian,
of how big a difference that's made, because when I
look at the CDs market, parts of it still seem
very very opaque to me. I mean things like CDX
index options, swaptions. I don't think those get reported well.
Speaker 5 (19:56):
I think it's basically, as often been, a case of
two steps forward, one back. So the progress is that
when I started covering this in two thousand and eight,
I couldn't get the price for a CDs on anything
without calling up the brokers individually, one by one and
getting a quote. I couldn't work out how the market was,
and it was so opaque that at one stage officials
(20:19):
at the BIS, a Bank for International Settlements that was
one of the few institutions that was trying to monitor
this and raise the alarm. They called me up and said,
do I have any data? And I went, well, hang,
you're supposed to have the data. This is the wrong
way around, and they said, yeah, The problem was we
just don't know.
Speaker 3 (20:35):
Now.
Speaker 5 (20:35):
The good news is today one you can get CDs
prices for most instruments that are traded, you know, even slightly.
You know, in the markets, you can get CDs prices
relatively easily. Two we do have macro figures about what's
going on. And three the very fact that you can
get those prices in the chart form changes how people
(20:58):
look at the financial sector. I mean, I remember very
clearly the first time that I actually pushed for the
ft to publish something called the ABX index, which was
showing mortgage defaults. It was transformational because suddenly people could
actually see it and imagine it, and that changed how
people imagined finance. The same thing happened when axel Weber,
not axel Weber, one of the other analysts, coined the
(21:21):
phrase shadow banking for the first time, and suddenly everyone
realized that what they thought was the financial system dominated
by banks was dead wrong. In fact, the shadow banking
world was huge and swelling. So then, in some ways
it's a lot more transparency than there was fifteen years ago,
and that's a very good thing. What is troubling is that, firstly,
(21:43):
the transparency doesn't extend to all instruments. Secondly, the level
of leverage and above all embedded leverage isn't apparent, and
that really matters, particularly right now. And thirdly, I'm a
strong believer that to have effective financial markets, you need
to have markets where assets can actually be traded properly
(22:04):
and people can have easy access to that quickly. That
wasn't the case before two thousand and eight, because people
who are creating CDOs were doing so ironically in the
name of creating perfectly liquid markets, and the great buzzword
back then was liquefication. We're going to use financial innovation
to liquefy everything, and then we'll have the perfect nirvana
(22:24):
where all risks surprised properly, and risks end up in
the hands of people who were best suited to hold them.
That was a justification for this innovation, And what people
fell to notice was that the complex instruments they were
creating were so darn complicated. In fact, they were barely
being traded at all. I mean, the bundles of so
called CDOs collateral defaultigations, which were essentially created often through
(22:46):
synthetic derivatives, were so difficult to trade that most institutions
just bought them and stuck them on the balance sheet
and ended up valuing them not with market prices because
they didn't really exist. There wasn't enough trading, but they
ended up value in them in the so called marked
and market system using implied prices from often rating agency models.
(23:08):
And if you have that situation, all the red lights
in the dashboard should be flashing, because that shows that
even if you have a so called marked and market
accounting system, you don't have enough markets to get proper
market prices, and you don't really know what the value
is of things.
Speaker 4 (23:24):
You know, you mentioned that, suddenly you know, someone coins
the term shadow banking, and then you sort of rethink
all these different elements of how you see the financial system.
We talk a lot on the podcast about these days
about non bank financial institutions in two forms. Primarily we
talk a lot about private credit. So the post DoD
Frank emergence of these non bank entities that do a
(23:46):
lot of lending, and the emergence of multi strategy hedge funds,
that the post DoD Frank emergence of a lot of
these funds that do a lot of what used to
be called prop trading. And of course banks still have
their role in the ecosystem. And so then the question
of all, do these risks ultimately redound back to the
banks who as these outside entities pursue leverage. But I'm curious,
(24:07):
putting back on the head of these sort of anthropologist perspective,
how would you go about, like, you know, try to
see if there are real risks here in the new model,
Because I don't know, like I've said on the podcast before,
some of the post dot Frank changes of separating this
risk taking from deposit taking seems like it maybe was
a good idea, But like, where might you explore in
(24:29):
terms of like trying to figure out where these new
risks emerge?
Speaker 5 (24:33):
Well, I think one of the constant themes from financial
history is that new risks never emerge where the last
risks were. Yeah, so I think the parts of another
crisis with mortgage derivatives right now is about zero. How
does a crisis tend to emerge as a result of
three things? One is an overreaction last time round by
(24:54):
a bunch of regulators that end up introducing changes to
try and contain the last crisis. That does stort the
financial system so much that they create the next crisis.
Because one of the reasons why Crode Dedrivet is popped
up was partly because in reaction to what had happened
during the savings and loans crisis in America in the
nineteen eighties, when there was too much concentration of lending
(25:16):
exposures on banks books. So one justification for growth derivatives was, well,
let's create a tool that spreads that exposure around and
the problem will be solved, which it did, but then
it created new problems. So first point is look for
where excessively ham fitted regulation last time around has created
new distortions. The second key thing is look for what
(25:40):
people aren't talking about, so social silence is always critical
in any field. Third point is look for activity that's
occurring outside silos or between silos. And by that I
mean that one of the constant problems in finance is
that institutions and regulators create structures set up to monitor
(26:03):
and handle the world that existed a couple of years ago,
and then the outside world moves on and the institutions
are left with structures which have hardened into bureaucratic organizations.
So to give you an example of what I mean, UBS,
which I wrote about in my second to last book
called the Sido Effect, had a massive risk management department
(26:26):
and it spent a huge amount of time back in
two thousand and five sixty seven looking at the risks
that have blown up financed in the past, which were
basically hedge funds and leverage loans, and it's massive risk
management departments spent a huge amount of time examining every
single possible danger to UBS that might come from that.
What they did not do was look at this new
(26:49):
class of activity credit derivatives and mortgage backed securities because
they were label as triple A ultra safe inside the
bank's accounting system, so they were ignored, but also they
cut across different areas of activities inside the bank. So
a mortgage back default swap was basically both a tradable
(27:11):
security and something linked to credit and also something linked
to the operational risk inside the bank as well. And
UBS risk management department was split into three separate silos
credit trading and liquidity or logistical risk, and they didn't
talk to each other. And so on top of the
fat you had geographical splits in UBS, between the New
(27:33):
York desk and the zero desk and the London desk.
You had this completely fragmented system and the new products
felt in the cracks, and UBS ended up running enormous
risks that almost looked up even though it had a
massive risk management department. So I would say look for silos,
look for what's happening between the silos, and then also
(27:54):
look for new hidden concentrations of risk. And if I
extrapolate that to the current world today, you know one
area where you have a lot of activity falling between
regulatory silos and institutional silos is in fintech and in
additional finance, because the skills you need to understand cyberspace
are very different from the skills you've historically needed to
(28:17):
understand the world of money. And you've also got all
kinds of activity happening on the edge of regulatory perimeters
which are often not properly policed or understood at all.
So a classic example of this is the fact that
the big banks all use cloud computing a lot. They
all use the same two three four cloud computing providers.
(28:39):
There's a massive reconcentration of risks there, but groups like
the Bank for International Settlements and other banking regulators can't
really track that because it's outside their regulatory perimeter. The
tech regulators don't track it either, and so you have
a classic example of a potential risk of the future
(29:00):
falling between the crafts.
Speaker 2 (29:17):
So I want to bring us up to speed even more,
I guess, and talk about current events. You've been writing
a lot about geonomics, which I guess is this idea
that I guess economic policy is becoming more intermingled with
state craft, and the idea that you're going to have
more activist measures from governments when it comes to solving
particular choke points in the economy. So obviously we have
(29:41):
Trump and the tariffs as one example, but we also
had industrial policy on the rise in the US under
the Biden administration even before that. And I guess I'm
curious what the rise of geonomics, or maybe the progress
of protectionism or the slow retreat from globalization. That's a
(30:03):
big assumption that it's all happening, but I'm curious what
it means for a financial industry, which, as we've discussed
on previous episodes, has very much grown in concert with
globalization and liberalized financial flows and things like that.
Speaker 5 (30:19):
Well, in some ways, genomics is just a posh word
for political science or political economy, or if you like
life beyond the balance sheet. And by that I mean
that most of your listeners grew up in the late
twentieth century in the West in an era, or if
they didn't grow up in the West, they want to
grown up if they're listening to Bloomberg podcast in parts
(30:42):
of the world which were subject to the missionary zeal
of the CFA exams, and that essentially implied a certain
mindset and the mindset arose from a combination of three factors.
One was the growth of neoliberal free market ideas after
the nineteen seventies and eighties. The second was the explosion
(31:06):
in computing power, and the third was explosion in the
financial industry. And those three things came together to create
a voracious demand to use the new digital tools in
computing to model finance and free markets supposedly free markets
to create a set of instruments that the fast expanding
(31:27):
ranks of financial professionals could use to price securities, predict
the future, place trading bets, etc.
Speaker 3 (31:34):
Etc.
Speaker 5 (31:34):
Around the world, backed by groups like the CFA, which
were a bit like the American financial equivalent of the
Catholic Church in that they went around the world evangelizing
and spreading the creed right around the world. Now, that mindset,
which we all grew up with, and as an anthropologist
would say, we're all creatures of our own cultural environment,
(31:55):
seems to us to be normal, natural, and inevitable, and
it doesn't just useting pan to predict the future. It's
also marked by a certain amount of tunnel vision, because
it assumes that if you put the right inputs into
an economic model or put the information that matters onto
a balance sheet of a company, you've basically got the
key to model and forecast what's going to happen next.
(32:18):
And in some ways that worked really well. But the
problem is that there are always things that you leave
out of your economic model. There are always things that
you leave out of your balance sheet or just footnotes,
and those things tend to be things like politics, social conflict,
tech change, environmental risk, medical risk, or what groups like
(32:41):
the World Economic Forum coily call interstate conflict better known
as war. And the story of the last two decades
is that everything that wasn't on the balance sheet or
in the model is what's really blown up everyone's forecasts
and become increasingly important. So what we're seeing now, in
my view, is really the fifth big swing in the
(33:03):
intellectual zeitgeist since nineteen hundred, and by that I mean
that between up until nineteen fourteen, you really had imperialist
free market capitalism in the world. Then between the wars
you had protectionist, populist nationalist visions of the economy. Then
after World War II you essentially had Canesianism took root
(33:26):
the idea the state could jump in and direct things
for the good of all, and that was really sort
of international Knesianism. Then you had the neoliberal age really
start in the nineteen eighties, and now you've got a
swing of the pendulum back towards effectively geoeconomics, where there
was woken up and discovered what they always knew back
in the nineteen twenties, and they also sort of knew
(33:47):
back in the canes In period, which is that power matters,
politics matters. It's not all about free markets, and free
markets are often something of a canard or a falsehood,
and that actually, well, when you want to make sense
of the world, you have to combine economics and political analysis,
social analysis, tech analysis, look at a much wider range
(34:09):
of things. Get lateral vision, not tunnel vision. And I'm
not saying in any way, shape or form that that
means economic doesn't work anymore. But what I say is
you have to look at your economic models and all
the lovely tools that the financial industry has developed as
being a bit like a compass. And if you're stuck
in the dark wood at night, you don't want to
(34:30):
throw away your compass because it's incredibly useful. But if
you only stare down at the face of that compass
and walk through that wood at night, you're probably going
to walk into a tree or trip over a tree
root because you have to look up and around beyond
your compass to see what's actually happening. And that's really
what geo economics is trying to do.
Speaker 3 (34:51):
I love that.
Speaker 4 (34:52):
I love the compass forest analogy. You know, it's easy,
and I've engaged in it myself. But it's easy to
look back at the nine these and the sort of
the end of history optimism, you know, and some of
the predictions of you know, mid nineties, which is kind
of where the where their story much of it starts
in your book Fool's Gold with some of the early
(35:12):
iterations on this stuff, and it's easy to look back
and it's like talk about the naive take, but I
get it. I mean, like we the West had just
won the Cold War in like really decisive fashion, and
this is something you talk about in your book and
you just mentioned it. Now it's like we really did
suddenly also have this emergence of really powerful tools to
price risk and price.
Speaker 3 (35:32):
Various events in the future.
Speaker 4 (35:34):
So at the same time that like everyone sort of said, okay,
liberalism and capitalism, democracy are vindicated, and suddenly like we
have these incredible calculators or computers that can do a
reasonably good job pricing risk. Outside of the emergence of
some of these trees that you run into, like I
have a lot of sympathy for the characters of that time,
(35:55):
thinking like, oh this is things are going.
Speaker 3 (35:57):
To be really good.
Speaker 5 (35:58):
Well, I completely ad sympathy. And the reality is that
humans basically move in pendulance wings and whenever it's a
new innovation, we're all dazzled by it until we see
the downside. And just as we learned about the upside
of derivatives and then learned about the downside, we've all
learned about the upside of economic models, and there are
huge economic advantages to using them, and now we see
(36:20):
the downsides. And I should say, the other thing that
makes it dangerous to use this kind of neoliberal mindset
is that you've got governments in the world moving away
from a liberal mindset themselves. And Donald Trump epitomizes that.
But he's as much a symptom as a cause of this,
in that for the Trump administration, economics doesn't sit in
(36:44):
a separate box, which is distinct from tech, trade policy,
military stuff anymore as far as the Donald Trump administration
is concerned. And you can see this in the way
they approach negotiations of other countries. Tech issues, tree issues,
cultural issues, finance issues, trade issues are all jumbled up
(37:05):
together as part of a whole, and it's horrifying to
most governments read in that near liberal mindset. But I
suspect it's probably going to be the trend for quite
a while.
Speaker 3 (37:16):
Yeah.
Speaker 4 (37:16):
I joked on Twitter the other day that in every
foreign election, I just like, just tell me which one
is the Trump and which one is the Liberal. Then
I figured there's I don't really see the world that flatly,
but kind of. But you know, going back to anthropology
and back to the nineties and back to these new
tools and the internet and computers, etc. You say in
your book that the incoming cohort of bankers who are
(37:40):
really like, you know, native to this new technology, did
they sneer? Did they look down to some extent at
the older generation that might have been more inclined towards
conservatism about banking because they didn't have the sort of
skills of the natural inclination to sort of use the
wonders of technology.
Speaker 5 (37:59):
Well, almost every big innovation that we've seen in the
last one hundred and fifty years has been driven by
a bunch of kids. And since I'm sitting in king
smolishing Cambridge, anyone under the age of who know, thirty
looks like a kid to me. But a bunch of
you know, young kids coming in having the mastery of
knowledge of a new technology that often the older generation
(38:22):
doesn't understand, full of excitement about how they can innovate
and break all the rules. And they essentially usually get
together and do exactly that very rapidly, and you know,
bring about great benefits, but often end up bringing about
great harm too. And they often have a messianic zeal
and belief, although they tell themselves that they are somehow
(38:44):
saving the world or bringing good for humanity. We've seen
that happen in life science, We've seen that happening computing,
in AI, in social media when that was first created.
The same thing happened with finance and a generation of
kids who I profile in my book at JP Morgan,
but not just JP Morgan, who stumbled on the idea
(39:05):
of creating credit derivatives, did so very fast, did so
in a way that their bosses often didn't understand and
let rip. And that's the pattern we've seen over and
over again. And the reality is that every single innovation
in history has a good side and a bad side,
and the older generation can often see the bad side,
(39:27):
the younger generation can see the good side. Without the
enthusiasm of the younger generation, nothing will change, but they
still need the older generation. Oldie is like me now
to basically point out the previous risks.
Speaker 2 (39:39):
So since we're on the topic of financial products and
very big changes in the financial system and the way
people are thinking of trade and things like that, there
was something that caught my eye and certainly caught your
eye recently, and that is something called Section eight nine
nine that basically opens the door to the US taxing
(40:00):
foreign holders of treasuries, which would be an enormous, enormous
change to how they've previously been treated. How big a
deal is that.
Speaker 3 (40:09):
Well.
Speaker 5 (40:09):
One of the other hallmarks of the neoliberal economic mindset
that we all grew up with and assumed was normal
and inevitable and unchanging is this idea that capital should
move freely, and that was seen in the prescriptions of
the IMF. It was seen in the way that Wall
Street worked and operated and in pronouncements of politicians, and
(40:32):
so Section eight ninety nine reverse to the idea that
there might be taxes, new taxes imposed on non American
holders of American assets. Now, some people might say, well,
that's kind of fair enough, because guess what Americans pay
taxes on capital gains, Why should non Americans be any different.
But the reality is there's been quite a few tax
(40:53):
breaks in the past for non Americans to encourage them
to bring their money to America, and there's been such
a desire to unleash that flood of money foreign capital
that back in nineteen eighty four, the American government actually
removed a pre existing tax on Chinese investors say that
bought treasuries securities, and so one of the reasons why
(41:16):
you've seen in China parlia in such big time into
the American treasures market is because of those kind of incentives.
Now we've all got used to this idea, is that
there should be encouragements so foreigners to come and invest
in countries we give a granted as normal. The reality is, though,
that Trump administration has a very different perspective on this,
and so not only are they thinking reversing the nineteen
(41:39):
eighty four ruling, which means that in fact, Chinese and
others would face the taxes if they bought treasuries. But
they're also thinking of using this so called Section eight
ninet nine to impose taxes on non American holders of
American assets. And they're doing that partly because they want
to get lots of revenue. There's a think tank allied
with Jdvans that suggests you could get two trillion dollars
(42:01):
worth of revenue from this. But there's also a desire
to slow the amount of money flooding into America, to
weaken the dollar, and to ensure that American industry can
become more competitive. So it's quite a different mindset again
that I think most people are not prepared for.
Speaker 2 (42:18):
Yeah, a very big change, Jillian. We're going to have
to leave it there. Honestly, we could talk to you
for hours about many, many different things. But that was
so much fun to catch up on derivatives and talk
about maybe where risks are lurking in the financial system. Now,
really appreciate you coming on our thoughts for the first time.
We have to have you back.
Speaker 5 (42:37):
Well, thank you. I really enjoyed chatting to you. And
the last thought I'll leave you with is that the
period of time that we all grew up with when
free market ideals were taken for granted, is actually a
historical aberration, and if you look across the societies and
most points of history, it's not the case that the
world we're moving into now it's weird. We were the
weird ones for the last forty years.
Speaker 3 (42:59):
I love that.
Speaker 2 (43:00):
Okay, Jillian, thank you so much, thank you.
Speaker 3 (43:02):
Thanks by.
Speaker 2 (43:16):
Joe, we were the weird ones.
Speaker 3 (43:18):
Yeah, I think about this all the time. Actually.
Speaker 4 (43:21):
The thing so many, so many things in that conversation
I think about all the time actually, but one thing
I think about, like we are the weird ones, which
is probably true, but the idea that we would have
any conception of what normal is or like you know,
things are getting weird, Like it's so weird in its
premise because like in some sense, I think that the
modern economy or the modern world has roughly existed since
(43:43):
the end of World War two, and so basically eighty
years are a little more and so like literally like
the entire like one person's lifetime, Like that's nothing. Yeah,
that's literally nothing that we're barely getting. It's day one
around here in terms of what the modern So when
you think about all these changes AI et cetera, like,
we have no normal index against really because we're just
(44:03):
getting started.
Speaker 2 (44:04):
Yeah, timelines are very very long. The other thing I
was thinking is just on the sort of geonomics revival
of industrial policy point. I wonder if we will get
financial products that are like tailored at targeting those particular risks. So,
for instance, could you come up with like a tariff
hedge of some sort just in case Trump is going
(44:25):
to announce something one day and then maybe take it
back the next day. I wonder if that's a risk
that companies could offload in some way.
Speaker 4 (44:33):
It would be really interesting to think about like very
specific measurable risks. Yeah, you could build on them in
this new society. But I'm glad you asked that question.
Also about the sort of geonomics and what that means
for financial institutions, because you know, I really started thinking
about this after a recent episode with Scott Bock, and
I've thought about this in the derivative sense. So much
(44:55):
of the growth of finance is very specifically about solving,
not justres of problems of complexity, but problems of a
cross border complexity. And you know, even the fact that
Jillian talks about this in her book, the fact London
emerging as a source of this in part due to
US regulations and pre Glass Deegal repeal, stuff like that.
(45:17):
Lots of interesting themes right there, right, And.
Speaker 2 (45:20):
If you have something like section eight nine to nine
that is calculated to just incentivize investors from holding US treasuries,
then that would decrease demand for a bunch of financial
products such as treasury futures and things like that.
Speaker 4 (45:33):
I still want to push forward on my project to
vindicate the existence of high finance, and I suspect that
there's a reason that. And you know, like as Julian said,
like you know, there's still derivatives, but the next crisis
is probably not going to be in the derivatives that
were sort of vilified or people were anxious about fifteen
years ago.
Speaker 3 (45:53):
Right, It's gonna be something.
Speaker 2 (45:55):
It always changed.
Speaker 4 (45:55):
But you know, people still get paid a lot of
money to create and trade these instruments. And I still
have this intuition is because they're providing a valuable service,
and so I want to you know, do more episodes
on vindicating the status of finance and society.
Speaker 2 (46:10):
We got to get Dalio back on to do a
deep dive into hedging the chicken McNugget totally.
Speaker 3 (46:15):
That's all kinds of these things that we will discover.
Speaker 2 (46:17):
All right, shall we leave it there for now?
Speaker 3 (46:19):
Let's leave it there.
Speaker 2 (46:20):
This has been another episode of the aud Loots podcast.
I'm Tracy Aalloway. You can follow me at Tracy Alloway.
Speaker 4 (46:25):
And I'm Joe Wysenthal. You can follow me at the Stalwart.
Follow Jillian Tet. She's at Jillian Tet. Follow our producers Carman,
Rodriguez at Kerman Erman dash Ol Bennett at Dashbot, and
Kilbrooks at Kelbrooks. More odd Lots content go to Bloomberg
dot com slash odd Lots, where we have a daily
newsletter and all of our episodes, and you can chout
about all of these topics twenty four to seven in
(46:46):
our discord Discord dot gg slash odd Lots.
Speaker 2 (46:49):
And if you enjoy odd Lots, if you like it
when we talk about the value of complex financial products,
then please leave us a positive review on your favorite
podcast platform. And remember, if you are a Bloomberg subscriber,
you can listen to all of our episodes absolutely ad free.
All you need to do is find the Bloomberg channel
on Apple Podcasts and follow the instructions there. Thanks for listening.
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:18):
Hello and welcome to another episode of the Odd Lots podcast.
I'm Tracy Alloway.
Speaker 3 (00:22):
And I'm Joe Wisenthal. Joe Yes.
Speaker 2 (00:26):
In the recent episode with Kaiser Quo, you dropped at
the very end because you said you were hoping that
no one was listening. You dropped that you are coming
round to complex financial products.
Speaker 4 (00:38):
You know what, I did drop a little bomb there
at the very end of the episode because it's something
I've been thinking about more and more, and I'll just
lay it out very quickly what I think about, which
is the one of the most influential episodes we've done
in a long time in my mind, was episode we
did with Ricardo Houseman, who were either recently talked to
or about to talk to depending on when this episode
(00:59):
comes out, et cetera. About complexity is a good thing.
That's a sign of when wealthy economies are capable of
producing complex products. That's usually signed they get wealthier. That's
mostly discussed in the manufacturing sense. And then lately I've
been thinking, you know what, there are some wealthy countries
that produce really complex stuff that aren't manufacturing. The UK,
(01:19):
the US, et cetera. Mostly much of it is sort
of complex financial products. Maybe we need to rethink and
maybe we need to sort of take a fresh light
about why the market is willing to pay the creators
of complex financial products so much. And maybe they're not
as bad as sort of some of us thought, or
maybe we maybe we should be more proud of our
(01:40):
financial creations, lean into them a little bit more, lean
into you.
Speaker 2 (01:44):
Know, complex financial products.
Speaker 3 (01:47):
Because if there was this.
Speaker 4 (01:48):
Other thing too, like in like early twenty tens, where
people are like all the great minds were working on,
you know, building derivatives when they should have been doing
something else, and then they went and built like social
media and like products to hack our attention to sell ed.
Was that so much better?
Speaker 3 (02:03):
Anyway?
Speaker 4 (02:03):
I don't know, Like maybe it's like time to rethink
the positives of finance in the world great financial crisis
that was history. Let's remember the good at parts. Anyway,
it's just been on my mind lately, all Right. I
didn't know you were gonna, like to her say, like, Okay,
now you have to do a whole episode defending this position.
Speaker 2 (02:19):
Je, Well, I'm being nice. I brought this, I brought
you the perfect guest to discuss all of this, and
I mean, really the perfect guest. So this is actually
someone I've wanted to get on the podcast for a
very very long time. I used to work with her
at the Financial Times. I worked for her at the
Financial Times for a while. We're going to be speaking
with Gillian Tet. She is, of course a columnist for
(02:41):
the Ft and head of King's College at Cambridge. Jillian,
welcome to the show.
Speaker 5 (02:45):
Well, it's great to be on the show. And I
think Tracy, I often felt like I was working for
you at the time. You were so much smarter than
the rest of us, and you really blaze into trail
in many of these discussions.
Speaker 2 (02:57):
Well, thank you so much for saying that. I hope
my boss is a Bloomberg. Are listening, Yeah, I give
a bonus straight away. You, of course basically wrote the
book on derivatives, Fool's Gold, which came out at a
very fortuitous time two thousand and nine, So right after
the two thousand and eight financial crisis. Talk to us
about the genesis of that book, because I think a
(03:17):
couple years before when you started working on it, I
don't think a lot of people were thinking, oh, we
need to write an entire book on how we got
these things called credit default swaps.
Speaker 5 (03:28):
No, well, most people aren't quite as weird as me.
But the reality is I'm trained as a cultural anthropologist,
which might sound like it's got nothing to do with
Wall Street, And in fact my PhD was based on
field work looking at marriage rituals in Tajikistan, so that's
not your obvious starting point. But one thing that cultural
anthropology teaches you is so as human beings, we all
(03:51):
wrap ourselves up in assumptions and ideas we inherit from
our cultural surroundings, and those often make us very blind
to things that we ignore in our world. Social silence
really matters. It's what we don't talk about that really matters.
And starting back in about two thousand and five, when
I was running the lex column at the Financial Times,
(04:12):
I noticed that newspapers and politicians talked obsessively about equity
markets and sometimes credit markets and bomb markets. But actually
when you looked at what was driving revenues in the
city of London, whereas based at the time, it was
actually things like derivatives and credit derivatives, which no one
talked about because they seemed to be geeky and technical
(04:34):
and incredibly dull. But the reality is that things that
look dull and boring to a point we don't discuss
them are often the most important things in the world.
So I became kind of fascinated by this underbelly of
the city of London and Wall Street. I used to
say that they looked like icebergs, in that you had
a bit poking above the surface that people talked about,
(04:56):
which was the equity markets, and a shadowy chunk than
everyone and ignored. So I dived in really, starting in
two thousand and five, into the world of credit derivatives,
initially to try and almost do a tourist guide to
what was happening there for the wider Financial Times readership.
This was a few years after the dot com boom,
and in the same way that my colleagues had gone
(05:18):
around explaining the Internet, I thought I could explain financial
innovation and see what was really going on. But of
course it turned out to be considerably more deceptive and
challenging and ultimately more dramatic than I ever imagined.
Speaker 4 (05:33):
It really is extraordinary vindication on your part, because the
book came out in May two thousand and nine, so
at that point, like people were just getting up to
speed and it was all anyone to talk about. And
here you were years ahead and you already are like,
here's the book then you all have to read now,
which is just, I mean, an extraordinary vindication of your
(05:53):
choice to like begin down this path of looking into them.
Tracy and I were both in London in a and
I loved it. It wasn't my first time there.
Speaker 3 (06:03):
I loved it.
Speaker 4 (06:04):
Extraordinary wealthy society. I know there's all this anxiety in
the UK is like, oh, you can't like build stealed
anymore economically all this, I get it. There are some issues,
et cetera. But people are willing to pay a lot
of money for the services that the city provides all
around the world and make it one of the richest
richest societies ever to exist on Earth.
Speaker 5 (06:24):
Well, I have to be honest and say that I
did not originally expect to be writing a disaster book.
What actually happened was I spent the summer of two
thousand and seven writing the book and finished it in
September two thousand and seven, went back to work, thought
the whole thing was done and dusted, and at that
point It was simply an account of how this tribal
(06:45):
group at JP Morgan had dreamt up the idea of
credit derivatives and taken it to extremes. And literally the
day after I came back to work, Lihma Brothers collapsed
and the book had to be dramatically rewritten very fast,
because by then, of course, it was clear that credit
derivatives had the potential to destabilize very wide swaths of
(07:07):
the financial markets. And they weren't the source of the
crisis that was the subprime mortgage lending, but they amplified
the crisis dramatically. And of course, with the city of London,
a lot of its growth in the preceding years had
been due to its activities in the financial sector, and
particularly the fact that London was a home of much
(07:27):
of this creativity, and once the crisis hit, London not
only became an epicenter of the things that were going wrong,
but of course ultimately saw some of its own financial
fortunes suffer as a result.
Speaker 4 (07:41):
First of all, the fact that you didn't go into
the book expecting to write a disaster book still in
my mind, vindicated the choice, because there was obviously.
Speaker 5 (07:50):
I should say by the way, actually, you know, I
was predicting back in two thousand and five that credit
derivatives were a house of cards is going to come
at some point.
Speaker 2 (07:59):
You wrote a lot about it in the Ft repeatedly,
but I want.
Speaker 4 (08:02):
To press further on this point that people are clearly
willing to pay a lot of money for these financial
services for the service of creating these derivatives. There are
not many places they're not. You know, there's shen Zen
for manufacturing electronics, there's a few places I don't know
for manufacturing whatever else. And then there's like London in
(08:24):
New York for manufacturing complex derivatives. And they're worth a
lot of money, and people are willing to pay a
lot of money for them, like you mentioned that their
house at cards, et cetera. Yet around the world, clearly
don't customers think there's a value in all these services.
Speaker 5 (08:39):
Well, credit derivatives and other derivatives and complex financial products
exist for a reason, which is that people want to
use them and buy them. And they want to use
them and buy them because essentially they offer a way
of expressing ideas in finance, taking bets, making investments that
are dramatically more flexible, more subtle, more multifaceted, and sometimes
(09:05):
cheaper than using other financial instruments. And the image I
sometimes use to explain what they do is a bit like,
you know, photoshopping a picture. You know, you can have
a picture of something, you can have the actual something,
or you can take a photograph and then photoshop it
according to your own desires, and that, in a sense
(09:26):
is a bit like what a derivative does. Or, to
use another analogy, if you want to invest in the
equity market, you can either go and buy an ETF
which is like a box of chocolates. It's pre selected.
Or you can go to an expensive equivalent of a
chocolette where you pick a mixed chocolates you want, but
(09:46):
that takes more money in time. Or you can just
take a photograph of all the chocolates you like in
the world and just a photoshop it to whichever ones
you want, and that essentially is a derivative.
Speaker 2 (09:57):
I'm not sure how much I personally would value a
photo of a bunch of chocolates, but point taken, Okay,
So maybe, just as an example, let's use CDs and
the invention of credit default swaps, and then how I
guess they transformed during the financial crisis or running up
until the financial crisis, because as you pointed out, you
(10:18):
made the point that CDs is not necessarily the proximate
cause of the crisis, but definitely amplified it. So talk
us through what CDs were originally intended to do and
what they ended up doing.
Speaker 5 (10:32):
Well. At the most basic, credit fault swaps were a
way of taking out a bet on whether or not
you thought alone or a bond would go into default,
and they were originally created for corporate bonds, and essentially,
people who thought that a company looked a bit dodgy
(10:53):
could take out a credit a fault swap as a
form of insurance or as a way to bet the
company would actually default, depending on which side of the
trade they were on, And that was a much more
flexible way of trading that risk than actually buying the bond,
because of course corporate bonds are often pretty liquid, they
(11:14):
may not exist in the size you want, and if
you'd think a company's going to default, historically the only
way to express that belief in an investment trade was
simply not to buy the bond. But the credit defaults
what that you can actually be much more active in
betting that it will default. Now, these were initially single instruments,
usually attached to single companies, and they were created partly
(11:38):
as a way of running rules around regulations, and in
particular banking regulations, and it was also created as a
way for banks to lessen the risk on their own
books of having exposure to any particular corporate name. However,
the initial group that created these instruments, which in many
ways were very very clever and really clever innovation, saw
(12:00):
the business grow and they began to bundle different credit
default swats together, and then the idea got transplanted into
the mortgage market. And then what happened was that masses
of mortgages from different parts of America were bundled together,
and then credit defaults were written onto the actual bundles
(12:23):
of mortgages, and on top of that, the original credit
default swats linked those mortgages were sometimes pulled together, chopped
up into new pieces, and sometimes used to reissue entirely
brand new instruments all over again. And the problem that
happened at that point was that although when the original
(12:44):
idea popped up, people could look at a company like
IBM and say, yeah, you know what, I think it's
got quite a high default risk or not a high
default risk, and they kind of knew what they were
betting on. By the time you're dealing with mortgages from
gazillions of different homeowners all over the and by the
time they've been chopped up and then repackaged and then
(13:05):
repackaged again, it's very hard, indeed, to actually look through
to what the underlying risks are except by taking it
on trust, either from the issuer or from a credit
rating agency. And at the core of what happened in
two thousand and eight was that all of that complexity
and opacity meant that you had the equivalent of a
(13:28):
world where people were buying these instruments on trust, and
yet that trust wasn't justified because some of them were
turning bad. And when some of the underlying mortgages started
to turn bad, what happened was the equivalent of a
food poisoning scare. And I promise you, Tracy, I'm not
going to just talk about food, but the best number
I know is a food poisoning scare where essentially you
(13:50):
had some of the bits of underlying loans and debts
and the mortgage bundles went badly wrong. They dasically defaulted.
The problem was that, as with say sausages in a supermarket,
if you hear that one or two cows in the
food chain have got toxic problems and they're creating food
(14:11):
poisoning problems, if you don't know which sausages that meat
has gone into, you're probably going to refuse to buy
any sausages. And if your parents at a school where
kids are being fed sausage stew, you're probably going to
tell your kids to stop eating school lunches, period. And
what happened in two thousand and seven two thousand and
eight was the financial equivalent of that, because it became
(14:32):
clear that some of the mortgages had gone bad, nobody
knew which bundles of default swaps and the rivages had
gone into, and so essentially consumers aka investors fled the
market completely. And it throws up.
Speaker 4 (15:02):
I love the analogy of food poisoning scare. I had
never really thought of it in that particular terms before,
but I think it sounds very apt. But it also
seems like when something like a food poisoning scare happens
in financial markets, you know we just call it a
bank run, right, And bank runs happen every you know,
(15:24):
several decades, or you know, big one, maybe happened once
a century, and they usually take a different form, et cetera.
But going back to the metaphor of the food poisoning
scare in retrospect, and I'm curious your take on this
now in twenty twenty five or maybe twenty fifteen or
two thousand and nine when the book came out, like
how much food was actually gone bad? And how much
(15:46):
was it that a little bit had gone bad? And
yet people were afraid that everything had gone bad.
Speaker 5 (15:52):
Well, even to this day, the actual numbers are still contested.
Speaker 3 (15:57):
Yeah, it's interesting, isn't it.
Speaker 5 (15:59):
Yes, whether it was twenty five billion, whether it was
two hundred and fifty billion, we still don't know exactly
how the mortgagees defaulted. And of course, one of the
difficulties about trying to measure that in America, like any
other financial crisis, is that when you have an initial
property market bust, prices collapsed dramatically and for period of
(16:21):
time it looks like everything's gone bad, and then subsequently
some of those loans actually recover because property prices go
back up again. So it's very hard, indeed to measure
what the actual losses were. But what we do know
was that in the run up to two thousand and eight,
not only had vast amounts of derivities been written linked
(16:41):
to the mortgage market that was going bad, but a
lot of those products had been built with a huge
amount of leverage, which meant that even a small loss
made them extremely problematic. You had a problem of tranching,
which was very, very complicated in many of these products.
The credit rating agencies were for a long time, the
(17:02):
only way of actually judging whether or not a product
was good or bad, and it turned out their ratings
were completely wrong. And you also had a lot of
these products held by investors who had no tolerance for
these kind of risks. So you put that all together
and frankly, you had the makings of a perfect storm.
And you know, it was very, very painful indeed, And
(17:25):
what made it doubly painful was that, in the course
of slicing and dicing all of these different mortgages and
news and derivatives, many of the products had been labeled
triple A, and so people thought they were safe and
it paid them no attention they sat on their balance sheet.
And the other problem was that people ironically had bought
these products because they said they wanted to diversify and
(17:48):
hedge their risks. And the theory was that in the
old days, a bank had a bunch of loans to
say a mortgage company, or a bunch of properties, and
that was very concentrated on their books. If they then
repackaged them as derivatives and sold them to everyone else,
then you basically had a problem shared, and a problem
shared the problem halved. So people thought, well, right, this
(18:09):
stuff has been scattered across the markets. If something defaults,
it might hit a lot of people to a tiny amount,
but it won't wipe anybody out because it's diversified. The
critical misunderstanding people made was that because the system was
so opaque and complex, no one saw that all the
risks were actually reconcentrating themselves back on a couple of
(18:33):
big institutions books, because the same institution was writing credit
the false wats to everybody, and in particular, AIG Financial
Products was at the center of most of these trades.
So instead of diversifizing and spreading risk credit, the falsewats
were doing the very opposite and reconcentrating.
Speaker 4 (18:51):
It tracy, the idea that it's really even still impossible
to know how much of these assets had properly gone bad.
This has always been my frustrat with badiod dictum of
lending against good collateral. Yeah, but I've never I've always
hated there because like, what's good collateral. It's like it's
good collateral contingent upon reflation of the economy anyway, But
(19:11):
that's always bothered me. It's a possibility of knowing what's
good or bad collateral even years after any keep going.
Speaker 2 (19:16):
I enjoy your badget rants for sure. Okay, well, actually
this feeds into what I was going to ask. So
the solution to the crisis proposed eventually by regulators was
more transparency of derivatives and complex financial instruments, so people
would have to report their positions to the DTCC and
(19:37):
also central clearing for derivatives. Do you get any sense, Jillian,
of how big a difference that's made, because when I
look at the CDs market, parts of it still seem
very very opaque to me. I mean things like CDX
index options, swaptions. I don't think those get reported well.
Speaker 5 (19:56):
I think it's basically, as often been, a case of
two steps forward, one back. So the progress is that
when I started covering this in two thousand and eight,
I couldn't get the price for a CDs on anything
without calling up the brokers individually, one by one and
getting a quote. I couldn't work out how the market was,
and it was so opaque that at one stage officials
(20:19):
at the BIS, a Bank for International Settlements that was
one of the few institutions that was trying to monitor
this and raise the alarm. They called me up and said,
do I have any data? And I went, well, hang,
you're supposed to have the data. This is the wrong
way around, and they said, yeah, The problem was we
just don't know.
Speaker 3 (20:35):
Now.
Speaker 5 (20:35):
The good news is today one you can get CDs
prices for most instruments that are traded, you know, even slightly.
You know, in the markets, you can get CDs prices
relatively easily. Two we do have macro figures about what's
going on. And three the very fact that you can
get those prices in the chart form changes how people
(20:58):
look at the financial sector. I mean, I remember very
clearly the first time that I actually pushed for the
ft to publish something called the ABX index, which was
showing mortgage defaults. It was transformational because suddenly people could
actually see it and imagine it, and that changed how
people imagined finance. The same thing happened when axel Weber,
not axel Weber, one of the other analysts, coined the
(21:21):
phrase shadow banking for the first time, and suddenly everyone
realized that what they thought was the financial system dominated
by banks was dead wrong. In fact, the shadow banking
world was huge and swelling. So then, in some ways
it's a lot more transparency than there was fifteen years ago,
and that's a very good thing. What is troubling is that, firstly,
(21:43):
the transparency doesn't extend to all instruments. Secondly, the level
of leverage and above all embedded leverage isn't apparent, and
that really matters, particularly right now. And thirdly, I'm a
strong believer that to have effective financial markets, you need
to have markets where assets can actually be traded properly
(22:04):
and people can have easy access to that quickly. That
wasn't the case before two thousand and eight, because people
who are creating CDOs were doing so ironically in the
name of creating perfectly liquid markets, and the great buzzword
back then was liquefication. We're going to use financial innovation
to liquefy everything, and then we'll have the perfect nirvana
(22:24):
where all risks surprised properly, and risks end up in
the hands of people who were best suited to hold them.
That was a justification for this innovation, And what people
fell to notice was that the complex instruments they were
creating were so darn complicated. In fact, they were barely
being traded at all. I mean, the bundles of so
called CDOs collateral defaultigations, which were essentially created often through
(22:46):
synthetic derivatives, were so difficult to trade that most institutions
just bought them and stuck them on the balance sheet
and ended up valuing them not with market prices because
they didn't really exist. There wasn't enough trading, but they
ended up value in them in the so called marked
and market system using implied prices from often rating agency models.
(23:08):
And if you have that situation, all the red lights
in the dashboard should be flashing, because that shows that
even if you have a so called marked and market
accounting system, you don't have enough markets to get proper
market prices, and you don't really know what the value
is of things.
Speaker 4 (23:24):
You know, you mentioned that, suddenly you know, someone coins
the term shadow banking, and then you sort of rethink
all these different elements of how you see the financial system.
We talk a lot on the podcast about these days
about non bank financial institutions in two forms. Primarily we
talk a lot about private credit. So the post DoD
Frank emergence of these non bank entities that do a
(23:46):
lot of lending, and the emergence of multi strategy hedge funds,
that the post DoD Frank emergence of a lot of
these funds that do a lot of what used to
be called prop trading. And of course banks still have
their role in the ecosystem. And so then the question
of all, do these risks ultimately redound back to the
banks who as these outside entities pursue leverage. But I'm curious,
(24:07):
putting back on the head of these sort of anthropologist perspective,
how would you go about, like, you know, try to
see if there are real risks here in the new model,
Because I don't know, like I've said on the podcast before,
some of the post dot Frank changes of separating this
risk taking from deposit taking seems like it maybe was
a good idea, But like, where might you explore in
(24:29):
terms of like trying to figure out where these new
risks emerge?
Speaker 5 (24:33):
Well, I think one of the constant themes from financial
history is that new risks never emerge where the last
risks were. Yeah, so I think the parts of another
crisis with mortgage derivatives right now is about zero. How
does a crisis tend to emerge as a result of
three things? One is an overreaction last time round by
(24:54):
a bunch of regulators that end up introducing changes to
try and contain the last crisis. That does stort the
financial system so much that they create the next crisis.
Because one of the reasons why Crode Dedrivet is popped
up was partly because in reaction to what had happened
during the savings and loans crisis in America in the
nineteen eighties, when there was too much concentration of lending
(25:16):
exposures on banks books. So one justification for growth derivatives was, well,
let's create a tool that spreads that exposure around and
the problem will be solved, which it did, but then
it created new problems. So first point is look for
where excessively ham fitted regulation last time around has created
new distortions. The second key thing is look for what
(25:40):
people aren't talking about, so social silence is always critical
in any field. Third point is look for activity that's
occurring outside silos or between silos. And by that I
mean that one of the constant problems in finance is
that institutions and regulators create structures set up to monitor
(26:03):
and handle the world that existed a couple of years ago,
and then the outside world moves on and the institutions
are left with structures which have hardened into bureaucratic organizations.
So to give you an example of what I mean, UBS,
which I wrote about in my second to last book
called the Sido Effect, had a massive risk management department
(26:26):
and it spent a huge amount of time back in
two thousand and five sixty seven looking at the risks
that have blown up financed in the past, which were
basically hedge funds and leverage loans, and it's massive risk
management departments spent a huge amount of time examining every
single possible danger to UBS that might come from that.
What they did not do was look at this new
(26:49):
class of activity credit derivatives and mortgage backed securities because
they were label as triple A ultra safe inside the
bank's accounting system, so they were ignored, but also they
cut across different areas of activities inside the bank. So
a mortgage back default swap was basically both a tradable
(27:11):
security and something linked to credit and also something linked
to the operational risk inside the bank as well. And
UBS risk management department was split into three separate silos
credit trading and liquidity or logistical risk, and they didn't
talk to each other. And so on top of the
fat you had geographical splits in UBS, between the New
(27:33):
York desk and the zero desk and the London desk.
You had this completely fragmented system and the new products
felt in the cracks, and UBS ended up running enormous
risks that almost looked up even though it had a
massive risk management department. So I would say look for silos,
look for what's happening between the silos, and then also
(27:54):
look for new hidden concentrations of risk. And if I
extrapolate that to the current world today, you know one
area where you have a lot of activity falling between
regulatory silos and institutional silos is in fintech and in
additional finance, because the skills you need to understand cyberspace
are very different from the skills you've historically needed to
(28:17):
understand the world of money. And you've also got all
kinds of activity happening on the edge of regulatory perimeters
which are often not properly policed or understood at all.
So a classic example of this is the fact that
the big banks all use cloud computing a lot. They
all use the same two three four cloud computing providers.
(28:39):
There's a massive reconcentration of risks there, but groups like
the Bank for International Settlements and other banking regulators can't
really track that because it's outside their regulatory perimeter. The
tech regulators don't track it either, and so you have
a classic example of a potential risk of the future
(29:00):
falling between the crafts.
Speaker 2 (29:17):
So I want to bring us up to speed even more,
I guess, and talk about current events. You've been writing
a lot about geonomics, which I guess is this idea
that I guess economic policy is becoming more intermingled with
state craft, and the idea that you're going to have
more activist measures from governments when it comes to solving
particular choke points in the economy. So obviously we have
(29:41):
Trump and the tariffs as one example, but we also
had industrial policy on the rise in the US under
the Biden administration even before that. And I guess I'm
curious what the rise of geonomics, or maybe the progress
of protectionism or the slow retreat from globalization. That's a
(30:03):
big assumption that it's all happening, but I'm curious what
it means for a financial industry, which, as we've discussed
on previous episodes, has very much grown in concert with
globalization and liberalized financial flows and things like that.
Speaker 5 (30:19):
Well, in some ways, genomics is just a posh word
for political science or political economy, or if you like
life beyond the balance sheet. And by that I mean
that most of your listeners grew up in the late
twentieth century in the West in an era, or if
they didn't grow up in the West, they want to
grown up if they're listening to Bloomberg podcast in parts
(30:42):
of the world which were subject to the missionary zeal
of the CFA exams, and that essentially implied a certain
mindset and the mindset arose from a combination of three factors.
One was the growth of neoliberal free market ideas after
the nineteen seventies and eighties. The second was the explosion
(31:06):
in computing power, and the third was explosion in the
financial industry. And those three things came together to create
a voracious demand to use the new digital tools in
computing to model finance and free markets supposedly free markets
to create a set of instruments that the fast expanding
(31:27):
ranks of financial professionals could use to price securities, predict
the future, place trading bets, etc.
Speaker 3 (31:34):
Etc.
Speaker 5 (31:34):
Around the world, backed by groups like the CFA, which
were a bit like the American financial equivalent of the
Catholic Church in that they went around the world evangelizing
and spreading the creed right around the world. Now, that mindset,
which we all grew up with, and as an anthropologist
would say, we're all creatures of our own cultural environment,
(31:55):
seems to us to be normal, natural, and inevitable, and
it doesn't just useting pan to predict the future. It's
also marked by a certain amount of tunnel vision, because
it assumes that if you put the right inputs into
an economic model or put the information that matters onto
a balance sheet of a company, you've basically got the
key to model and forecast what's going to happen next.
(32:18):
And in some ways that worked really well. But the
problem is that there are always things that you leave
out of your economic model. There are always things that
you leave out of your balance sheet or just footnotes,
and those things tend to be things like politics, social conflict,
tech change, environmental risk, medical risk, or what groups like
(32:41):
the World Economic Forum coily call interstate conflict better known
as war. And the story of the last two decades
is that everything that wasn't on the balance sheet or
in the model is what's really blown up everyone's forecasts
and become increasingly important. So what we're seeing now, in
my view, is really the fifth big swing in the
(33:03):
intellectual zeitgeist since nineteen hundred, and by that I mean
that between up until nineteen fourteen, you really had imperialist
free market capitalism in the world. Then between the wars
you had protectionist, populist nationalist visions of the economy. Then
after World War II you essentially had Canesianism took root
(33:26):
the idea the state could jump in and direct things
for the good of all, and that was really sort
of international Knesianism. Then you had the neoliberal age really
start in the nineteen eighties, and now you've got a
swing of the pendulum back towards effectively geoeconomics, where there
was woken up and discovered what they always knew back
in the nineteen twenties, and they also sort of knew
(33:47):
back in the canes In period, which is that power matters,
politics matters. It's not all about free markets, and free
markets are often something of a canard or a falsehood,
and that actually, well, when you want to make sense
of the world, you have to combine economics and political analysis,
social analysis, tech analysis, look at a much wider range
(34:09):
of things. Get lateral vision, not tunnel vision. And I'm
not saying in any way, shape or form that that
means economic doesn't work anymore. But what I say is
you have to look at your economic models and all
the lovely tools that the financial industry has developed as
being a bit like a compass. And if you're stuck
in the dark wood at night, you don't want to
(34:30):
throw away your compass because it's incredibly useful. But if
you only stare down at the face of that compass
and walk through that wood at night, you're probably going
to walk into a tree or trip over a tree
root because you have to look up and around beyond
your compass to see what's actually happening. And that's really
what geo economics is trying to do.
Speaker 3 (34:51):
I love that.
Speaker 4 (34:52):
I love the compass forest analogy. You know, it's easy,
and I've engaged in it myself. But it's easy to
look back at the nine these and the sort of
the end of history optimism, you know, and some of
the predictions of you know, mid nineties, which is kind
of where the where their story much of it starts
in your book Fool's Gold with some of the early
(35:12):
iterations on this stuff, and it's easy to look back
and it's like talk about the naive take, but I
get it. I mean, like we the West had just
won the Cold War in like really decisive fashion, and
this is something you talk about in your book and
you just mentioned it. Now it's like we really did
suddenly also have this emergence of really powerful tools to
price risk and price.
Speaker 3 (35:32):
Various events in the future.
Speaker 4 (35:34):
So at the same time that like everyone sort of said, okay,
liberalism and capitalism, democracy are vindicated, and suddenly like we
have these incredible calculators or computers that can do a
reasonably good job pricing risk. Outside of the emergence of
some of these trees that you run into, like I
have a lot of sympathy for the characters of that time,
(35:55):
thinking like, oh this is things are going.
Speaker 3 (35:57):
To be really good.
Speaker 5 (35:58):
Well, I completely ad sympathy. And the reality is that
humans basically move in pendulance wings and whenever it's a
new innovation, we're all dazzled by it until we see
the downside. And just as we learned about the upside
of derivatives and then learned about the downside, we've all
learned about the upside of economic models, and there are
huge economic advantages to using them, and now we see
(36:20):
the downsides. And I should say, the other thing that
makes it dangerous to use this kind of neoliberal mindset
is that you've got governments in the world moving away
from a liberal mindset themselves. And Donald Trump epitomizes that.
But he's as much a symptom as a cause of this,
in that for the Trump administration, economics doesn't sit in
(36:44):
a separate box, which is distinct from tech, trade policy,
military stuff anymore as far as the Donald Trump administration
is concerned. And you can see this in the way
they approach negotiations of other countries. Tech issues, tree issues,
cultural issues, finance issues, trade issues are all jumbled up
(37:05):
together as part of a whole, and it's horrifying to
most governments read in that near liberal mindset. But I
suspect it's probably going to be the trend for quite
a while.
Speaker 3 (37:16):
Yeah.
Speaker 4 (37:16):
I joked on Twitter the other day that in every
foreign election, I just like, just tell me which one
is the Trump and which one is the Liberal. Then
I figured there's I don't really see the world that flatly,
but kind of. But you know, going back to anthropology
and back to the nineties and back to these new
tools and the internet and computers, etc. You say in
your book that the incoming cohort of bankers who are
(37:40):
really like, you know, native to this new technology, did
they sneer? Did they look down to some extent at
the older generation that might have been more inclined towards
conservatism about banking because they didn't have the sort of
skills of the natural inclination to sort of use the
wonders of technology.
Speaker 5 (37:59):
Well, almost every big innovation that we've seen in the
last one hundred and fifty years has been driven by
a bunch of kids. And since I'm sitting in king
smolishing Cambridge, anyone under the age of who know, thirty
looks like a kid to me. But a bunch of
you know, young kids coming in having the mastery of
knowledge of a new technology that often the older generation
(38:22):
doesn't understand, full of excitement about how they can innovate
and break all the rules. And they essentially usually get
together and do exactly that very rapidly, and you know,
bring about great benefits, but often end up bringing about
great harm too. And they often have a messianic zeal
and belief, although they tell themselves that they are somehow
(38:44):
saving the world or bringing good for humanity. We've seen
that happen in life science, We've seen that happening computing,
in AI, in social media when that was first created.
The same thing happened with finance and a generation of
kids who I profile in my book at JP Morgan,
but not just JP Morgan, who stumbled on the idea
(39:05):
of creating credit derivatives, did so very fast, did so
in a way that their bosses often didn't understand and
let rip. And that's the pattern we've seen over and
over again. And the reality is that every single innovation
in history has a good side and a bad side,
and the older generation can often see the bad side,
(39:27):
the younger generation can see the good side. Without the
enthusiasm of the younger generation, nothing will change, but they
still need the older generation. Oldie is like me now
to basically point out the previous risks.
Speaker 2 (39:39):
So since we're on the topic of financial products and
very big changes in the financial system and the way
people are thinking of trade and things like that, there
was something that caught my eye and certainly caught your
eye recently, and that is something called Section eight nine
nine that basically opens the door to the US taxing
(40:00):
foreign holders of treasuries, which would be an enormous, enormous
change to how they've previously been treated. How big a
deal is that.
Speaker 3 (40:09):
Well.
Speaker 5 (40:09):
One of the other hallmarks of the neoliberal economic mindset
that we all grew up with and assumed was normal
and inevitable and unchanging is this idea that capital should
move freely, and that was seen in the prescriptions of
the IMF. It was seen in the way that Wall
Street worked and operated and in pronouncements of politicians, and
(40:32):
so Section eight ninety nine reverse to the idea that
there might be taxes, new taxes imposed on non American
holders of American assets. Now, some people might say, well,
that's kind of fair enough, because guess what Americans pay
taxes on capital gains, Why should non Americans be any different.
But the reality is there's been quite a few tax
(40:53):
breaks in the past for non Americans to encourage them
to bring their money to America, and there's been such
a desire to unleash that flood of money foreign capital
that back in nineteen eighty four, the American government actually
removed a pre existing tax on Chinese investors say that
bought treasuries securities, and so one of the reasons why
(41:16):
you've seen in China parlia in such big time into
the American treasures market is because of those kind of incentives.
Now we've all got used to this idea, is that
there should be encouragements so foreigners to come and invest
in countries we give a granted as normal. The reality is, though,
that Trump administration has a very different perspective on this,
and so not only are they thinking reversing the nineteen
(41:39):
eighty four ruling, which means that in fact, Chinese and
others would face the taxes if they bought treasuries. But
they're also thinking of using this so called Section eight
ninet nine to impose taxes on non American holders of
American assets. And they're doing that partly because they want
to get lots of revenue. There's a think tank allied
with Jdvans that suggests you could get two trillion dollars
(42:01):
worth of revenue from this. But there's also a desire
to slow the amount of money flooding into America, to
weaken the dollar, and to ensure that American industry can
become more competitive. So it's quite a different mindset again
that I think most people are not prepared for.
Speaker 2 (42:18):
Yeah, a very big change, Jillian. We're going to have
to leave it there. Honestly, we could talk to you
for hours about many, many different things. But that was
so much fun to catch up on derivatives and talk
about maybe where risks are lurking in the financial system. Now,
really appreciate you coming on our thoughts for the first time.
We have to have you back.
Speaker 5 (42:37):
Well, thank you. I really enjoyed chatting to you. And
the last thought I'll leave you with is that the
period of time that we all grew up with when
free market ideals were taken for granted, is actually a
historical aberration, and if you look across the societies and
most points of history, it's not the case that the
world we're moving into now it's weird. We were the
weird ones for the last forty years.
Speaker 3 (42:59):
I love that.
Speaker 2 (43:00):
Okay, Jillian, thank you so much, thank you.
Speaker 3 (43:02):
Thanks by.
Speaker 2 (43:16):
Joe, we were the weird ones.
Speaker 3 (43:18):
Yeah, I think about this all the time. Actually.
Speaker 4 (43:21):
The thing so many, so many things in that conversation
I think about all the time actually, but one thing
I think about, like we are the weird ones, which
is probably true, but the idea that we would have
any conception of what normal is or like you know,
things are getting weird, Like it's so weird in its
premise because like in some sense, I think that the
modern economy or the modern world has roughly existed since
(43:43):
the end of World War two, and so basically eighty
years are a little more and so like literally like
the entire like one person's lifetime, Like that's nothing. Yeah,
that's literally nothing that we're barely getting. It's day one
around here in terms of what the modern So when
you think about all these changes AI et cetera, like,
we have no normal index against really because we're just
(44:03):
getting started.
Speaker 2 (44:04):
Yeah, timelines are very very long. The other thing I
was thinking is just on the sort of geonomics revival
of industrial policy point. I wonder if we will get
financial products that are like tailored at targeting those particular risks. So,
for instance, could you come up with like a tariff
hedge of some sort just in case Trump is going
(44:25):
to announce something one day and then maybe take it
back the next day. I wonder if that's a risk
that companies could offload in some way.
Speaker 4 (44:33):
It would be really interesting to think about like very
specific measurable risks. Yeah, you could build on them in
this new society. But I'm glad you asked that question.
Also about the sort of geonomics and what that means
for financial institutions, because you know, I really started thinking
about this after a recent episode with Scott Bock, and
I've thought about this in the derivative sense. So much
(44:55):
of the growth of finance is very specifically about solving,
not justres of problems of complexity, but problems of a
cross border complexity. And you know, even the fact that
Jillian talks about this in her book, the fact London
emerging as a source of this in part due to
US regulations and pre Glass Deegal repeal, stuff like that.
(45:17):
Lots of interesting themes right there, right, And.
Speaker 2 (45:20):
If you have something like section eight nine to nine
that is calculated to just incentivize investors from holding US treasuries,
then that would decrease demand for a bunch of financial
products such as treasury futures and things like that.
Speaker 4 (45:33):
I still want to push forward on my project to
vindicate the existence of high finance, and I suspect that
there's a reason that. And you know, like as Julian said,
like you know, there's still derivatives, but the next crisis
is probably not going to be in the derivatives that
were sort of vilified or people were anxious about fifteen
years ago.
Speaker 3 (45:53):
Right, It's gonna be something.
Speaker 2 (45:55):
It always changed.
Speaker 4 (45:55):
But you know, people still get paid a lot of
money to create and trade these instruments. And I still
have this intuition is because they're providing a valuable service,
and so I want to you know, do more episodes
on vindicating the status of finance and society.
Speaker 2 (46:10):
We got to get Dalio back on to do a
deep dive into hedging the chicken McNugget totally.
Speaker 3 (46:15):
That's all kinds of these things that we will discover.
Speaker 2 (46:17):
All right, shall we leave it there for now?
Speaker 3 (46:19):
Let's leave it there.
Speaker 2 (46:20):
This has been another episode of the aud Loots podcast.
I'm Tracy Aalloway. You can follow me at Tracy Alloway.
Speaker 4 (46:25):
And I'm Joe Wysenthal. You can follow me at the Stalwart.
Follow Jillian Tet. She's at Jillian Tet. Follow our producers Carman,
Rodriguez at Kerman Erman dash Ol Bennett at Dashbot, and
Kilbrooks at Kelbrooks. More odd Lots content go to Bloomberg
dot com slash odd Lots, where we have a daily
newsletter and all of our episodes, and you can chout
about all of these topics twenty four to seven in
(46:46):
our discord Discord dot gg slash odd Lots.
Speaker 2 (46:49):
And if you enjoy odd Lots, if you like it
when we talk about the value of complex financial products,
then please leave us a positive review on your favorite
podcast platform. And remember, if you are a Bloomberg subscriber,
you can listen to all of our episodes absolutely ad free.
All you need to do is find the Bloomberg channel
on Apple Podcasts and follow the instructions there. Thanks for listening.
Hosts And Creators
Joe Weisenthal
Tracy Alloway
Popular Podcasts
On Purpose with Jay Shetty
I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!
The Breakfast Club
The World's Most Dangerous Morning Show, The Breakfast Club, With DJ Envy And Charlamagne Tha God!
The Joe Rogan Experience
The official podcast of comedian Joe Rogan.