00:05:07.620look anything that's resolved nobody ever remembers not knowing it so everybody knows
00:05:12.080that the that the mortgage you know that the mortgages were you know junk securities were
00:05:16.760bad and you know a lot of them never you know you know turned out to be worth zero at the time
00:05:21.960some people thought it and other people thought the opposite but nobody nobody really knew it's
00:05:27.060only in hindsight the people who by the way every time somebody tells me they know something i ask
00:05:30.260them about something that's current how much are you betting on that something right now you say
00:05:34.040current. And so in that particular thing, you know, at those times we had somebody who wanted
00:05:39.880to go short the mortgage market and we had plenty of people who wanted to go because at that point
00:05:45.600they were very high yielding securities. And by the way, there was not widows and orphans on either
00:05:49.940side of the transactions. It was a big institution on both on either side of it. And it was, and it
00:05:55.500was, you know, plucked up as an example of some of the things that we did. So there was a very
00:05:59.560well-informed institution that was dedicated to holding mortgage obligations by the mortgages are
00:06:05.120securities like it's like a security that's a version of a bank holding a mortgage so it's
00:06:11.240just only a people's homes and if people are going to default on paying off their home mortgage
00:06:15.260those securities become could become worthless so people were betting that those securities would
00:06:20.320go back up in value and other people were go were betting that they would go down in value
00:06:24.560and what we, you know, our role in this is a market maker. People come to us and say,
00:06:30.000I would like this, I would like this risk. And then we sell it to them and we principle and we
00:06:35.980take that risk until we can scurry and find the other side or something that that's like it enough
00:06:41.300so that we could be reasonably hedged. And, you know, we've been doing that for about 150 years.
00:06:46.640Right. Right. By the way, that's what makes the economy and the market go, go on, go on.
00:06:51.720This is the one thing that's sort of surprising and difficult to understand in reading about your experience during the financial crisis, because you guys were seemingly alone among financial institutions, well hedged and actually fairly impervious to what was going on until you weren't.
00:07:07.340I mean, you, you had not, you were not exposed to these, these toxic assets in the way that
00:07:13.480many other big names were, and you were actually making money through the, the crisis, but
00:07:19.680then at a certain point, even you being totally profitable and not actually exposed to these
00:07:26.520toxic assets were at risk of going under.
00:07:32.740Yeah, so explain how you go from, your house is totally in order, from your house could be the next to burn down.
00:07:41.520What actually was, what actually almost happened during 2007?
00:07:44.660Look, when somebody, you know, when James Bond defuses the bomb, no one ever appreciates how close to destruction it was, because it was defused, it never happened.
00:07:54.080This was a situation in which everybody, all companies, especially but not limited to financial institutions, every company has to finance itself, has commitments, it has to honor, it's receiving revenue and it's paying out revenue all the time.
00:08:11.460And during a crisis like this, everyone was suspect about the solvency of everyone else they were dealing with.
00:08:19.880right and so what happens at that it's what that happens is if you have an obligation to pay someone
00:08:26.280and he's going to pay you you want to see your you want to see the money from him come into you
00:08:31.260first before you pay and you get a whole daisy chain effect or the or the money from somebody
00:08:36.440else somebody you're not going to pay anyone until somebody's paying so this is a market so
00:08:41.300even if you're an industrial company i'm getting i'm selling cars i was you know to a to a wholesale
00:08:47.020deal or the money has to come in so I could pay the cost of my raw materials. Everybody's waiting
00:08:52.980to get paid first before they'll pay. And then it freezes up. And so what happens in a situation
00:08:58.740like that, which has happened periodically in history, which is why we have central banks and
00:09:03.280they're, you know, one of the roles of a central bank and not just the US central bank, which is
00:09:08.080called the Fed, is to be the lender of last resort. If the world gets into a position where
00:09:13.720everybody becomes distrustful. And we're talking about sentiment. We're not necessarily talking
00:09:17.720about reality. We're talking about, remember the movie, It's a Wonderful Life. If there's a bank
00:09:22.220run, you think of the depression, some of the institutions could have been solvent, but nobody
00:09:27.200could survive a loss of confidence. If people are unwilling to take your credit, then they make you
00:09:34.100have to pay before they'll pay you. And eventually everybody is left with an obligation they have to
00:09:40.020meet, but no money with which to do it, no liquidity with which to do it. And that's the
00:09:44.960situation that almost everybody could have been in eventually. And it would have been, to me,
00:09:50.020it would have been like dominoes. It would have been over time. And that was the crisis.
00:09:53.860Was it certain that that would have happened? No, but it was a much higher likelihood than
00:09:58.960anybody should reasonably want to go to bed worrying about. How do you think, in hindsight,
00:10:03.580how do you think the government performed during that crisis? Did we cut a large enough check or
00:10:08.760should certain institutions have been allowed to fail that were propped up? Or how do you look at
00:10:15.180the moral hazard question? You know, I think at the time, again, there's two ways of answering
00:10:19.140the question, what would you, you know, what would you've done? What would you've done differently
00:10:22.980with after acquired information? Yeah. And what would you've done differently at the time that
00:10:27.040the other, with your, you know, with your greater wisdom and competence that the people on the site
00:10:31.920at the time didn't do? Yeah. I would say the people at the time with what was available did
00:10:36.380very well because it was unknown and unknowable. And again, we're dealing with the risk of a
00:10:42.160problem and not necessarily the certainty. And so they went into some wrong directions. They
00:10:47.560dealt with things in a gross way. Just let's bring it to something where that's more current
00:10:53.080in people's experience, let's say the start of COVID. And you want to go and you're worried
00:10:58.020about the economy getting wrecked. And so you come out with a stimulus plan and you're going
00:11:03.620to mail checks to people. If you had a few years to do that, you might design it so that you were
00:11:08.380only sending checks to people who really needed the money. Better, there would have been less
00:11:13.740fraud. It would have been better targeted, but you didn't have the time and you didn't have the
00:11:18.880tools to be able to do that. So you say, you know something, we're sitting here, we'll do a
00:11:23.480retroactive examination about it, and we'll find 50 things that were done wrong. But really, can
00:11:27.720you say that the people at the time, the decision makers performed badly given what they had to
00:11:33.880work with and the speed with which they had to execute. No. So I would say looking back,
00:11:38.620things could have been done much differently, but at the time, uh, and you know, I was present
00:11:44.020and watching, I think they did a very good job with, uh, you know, with what was available at
00:11:48.280the moment. And again, the exigencies of the moment. Is there anything we learned from that
00:11:53.020experience that is setting us up to respond better next time? The analogy to COVID I find
00:12:00.640pretty depressing because my sense is that COVID was a dress rehearsal for something much worse,
00:12:06.080and we performed quite badly. Much of the culture drew the wrong lessons from the experience of
00:12:12.740COVID, and I feel like in the presence of a scarier pandemic now, we have a society that
00:12:19.040will be less trustful of any public health messaging coming from institutions uh harder to
00:12:25.360wrangle to solve various coordination problems i mean this is just my view of it i but i just i
00:12:29.920just i feel like we're somehow less fit for the next pandemic than we were before covid what do
00:12:35.440you think what do you think we did for you know these are parallel fields of human endeavor they're
00:12:40.560not the same thing but they rhyme i mean basically it's fundamental we're dealing with uh human
00:12:45.520in nature. The first reaction, an early reaction, was the economy should never have these risks
00:12:52.180again. And so regulation was stiffened. Capital requirements for financial institutions were
00:12:57.860stiffened. What's the consequence of that? It means that some of the financial institutions
00:13:01.200can't do their job as well because they can't lend as much. They have to husband capital
00:13:05.540instead of lending it out and supply it. And over time, there was such an antipathy towards what
00:13:13.260some of the regulators did at the time, again, with the benefit of hindsight, that they curtailed
00:13:18.400some of the powers of the people, of the regulators, some of the powers that they
00:13:22.260exercised to make judgments about who to save, how to give money, you know, how to distribute money
00:13:26.840into the economy and the financial institutions. And by the way, all of this is quite understandable
00:13:30.560that the reaction would be this way. But the effect of it is to make it possibly harder the
00:13:36.720next time there's a problem. Now, one would say, why would there be a problem the next time if
00:13:42.040you've put in all these instruments because over time the stark discipline starts to erode
00:13:49.080also you don't want to turn the country into into the returns of a treasury bill you you want it you
00:13:57.080want animal spirits you want people to take risk so if you have if you if you prepare the world
00:14:02.400or the country to avoid the crisis of the century or the crisis that you have 80 years you'll lose
00:14:08.40079 years of growth in between sometimes there just is going to be there's a there's a cycle to these
00:14:14.280things and that will happen and we could talk about the current you know environment of what
00:14:18.420the cycle is but one of the things is it might be harder the next time but there's a certain
00:14:24.380inevitability that risk will get taken and we will get uh and we will uh and we will not see
00:14:31.580it coming risk is risk well how do you perceive the current situation with the market and its
00:14:36.680connection, however tenuous, to the real economy and the level of risk we're all running,
00:14:42.020the possibility of a bubble, AI or otherwise. I mean, you can take any strand of this ghastly
00:14:49.100object of the level of corruption in the government. I mean, there's definitely a lot
00:14:54.060of animal spirits of a certain sort to be seen. Right. And it's been quite growthy out there.
00:14:58.060And again, we can talk about the economy and the polarization and the fact that people with
00:15:03.580that asset values are inflating. And so people with assets are getting richer and people without
00:15:08.060assets aren't getting richer. So the gap between rich and poor. I definitely want to focus on
00:15:12.500wealth inequality. It's very hard to talk about a good economy when you know for more than half
00:15:16.120the people, it's not a good economy. And if you talk about the bad economy, you're missing the
00:15:19.580point because on a macro basis, the economy is doing well. Right. Okay. So let's take it piece
00:15:24.000by piece. What most concerns you about the state of the economy now? Well, obviously we're sitting
00:15:31.980here and uh you know 15 minutes from now it might be resolved but right now the all eyes of people
00:15:37.500who are thinking about the economy going forward are on uh the straits of hormuz and the price of
00:15:44.020oil as a consequence of that and that's that's that affects the price of oil but affects a lot
00:15:49.200of other things as well because energy is an ingredient for almost everything yeah and i'd say
00:15:54.080the market is assuming um that this will be temporary by the way even down to the price of
00:16:01.460oil. So the price of oil as we sit here is over a hundred dollars a barrel. And if you want to
00:16:07.120take delivery of your oil in the future, it's a lot less. It's cheaper because everyone's assuming
00:16:10.960that in the future, the price is going to go down because it's a temporary situation. The longer it
00:16:14.920goes on, the less temporary people will see they'll get used to this happening and they'll know that
00:16:19.440there's not a rapid end. So that's a focus. If you pluck that away. So in other words, before we
00:16:26.180found ourselves in this situation or assuming that this gets resolved quickly, the economy has a lot
00:16:32.120of tailwinds to it. A lot of tailwinds. You know, the equity markets have been very high.
00:16:38.800Interest rates are likely to come down. There's a lot of stimulus coming in terms of the tax bill
00:16:44.620that was passed. You could see people are already witnessing the fact that people's refunds from
00:16:51.660the government, from their tax refunds are higher. All that is pumping, is going to pump money into
00:16:56.060the economy. That's already going pretty well. And again, growth is a little bit lower than we'd
00:17:04.240like it to be in the last reading, but still pretty high. Unemployment ticked up in the last
00:17:08.660reading, but employment and payrolls are still very good. So you can find kind of problems. But
00:17:14.600I would say, looking at the situation, we were in a pretty good economy from a macro