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GARY GENSLER: Thanking
everybody to coming back.

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00:00:25,870 --> 00:00:28,990
I think there'll be a few
people coming in late,

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00:00:28,990 --> 00:00:31,675
still hitting the send
button on the papers.

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00:00:34,460 --> 00:00:38,230
I want to thank everybody
that submitted papers

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00:00:38,230 --> 00:00:41,860
before the ninth class,
because I actually

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00:00:41,860 --> 00:00:46,210
had a chance to read those 26.

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Since there are actually
officially 84 or 85 people

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registered for this
class, I'm intrigued

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00:00:50,890 --> 00:00:54,805
to see if 59 papers
came in a minute ago.

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00:00:58,120 --> 00:01:00,340
Human nature being human
nature, these are just

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00:01:00,340 --> 00:01:03,250
the statistics on this class.

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00:01:03,250 --> 00:01:07,450
And as far as those of
you who may have seen,

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00:01:07,450 --> 00:01:10,780
I chose that part
of the experience

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00:01:10,780 --> 00:01:12,730
here is actually eyes on--

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00:01:12,730 --> 00:01:15,310
meaning my eyes on your papers--

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00:01:15,310 --> 00:01:16,870
and giving comments.

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00:01:16,870 --> 00:01:19,120
If you don't want the comments,
you just want a grade,

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00:01:19,120 --> 00:01:21,970
you can always give me a
heads up and send me an email,

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00:01:21,970 --> 00:01:24,590
and I will take less time.

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00:01:24,590 --> 00:01:26,230
I want to compliment everybody.

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00:01:26,230 --> 00:01:27,130
They're good.

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00:01:27,130 --> 00:01:29,620
I mean, there is a good
engagement, a good dialogue.

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00:01:29,620 --> 00:01:31,720
You will see occasionally
that I don't give you

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00:01:31,720 --> 00:01:34,120
everything you want back.

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00:01:34,120 --> 00:01:37,540
But a couple observations.

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00:01:37,540 --> 00:01:40,810
It's really an
opportunity, on any topic

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00:01:40,810 --> 00:01:44,590
you want to choose in the
second half of the semester up

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00:01:44,590 --> 00:01:50,230
to maybe the 23rd class,
please, if 70 of you

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00:01:50,230 --> 00:01:53,620
hand it in on the 23rd class,
that is your right, that

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00:01:53,620 --> 00:01:55,170
is your option, it's just--

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00:01:55,170 --> 00:01:58,900
it's just going to be
harder on Sabrina, Thalita,

39
00:01:58,900 --> 00:02:00,730
and me to grade.

40
00:02:00,730 --> 00:02:03,280
But it's to use
critical reasoning

41
00:02:03,280 --> 00:02:05,120
about that week's topic.

42
00:02:05,120 --> 00:02:07,923
So let me just mention two or
three things some of you did--

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00:02:07,923 --> 00:02:10,090
I'm not going to be harsh
about it-- but some of you

44
00:02:10,090 --> 00:02:12,100
did that's not what
I'm looking for.

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00:02:12,100 --> 00:02:15,190
I'm not looking for just
addressing the three study

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00:02:15,190 --> 00:02:15,850
questions.

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00:02:15,850 --> 00:02:19,510
The three study questions
are about us together here.

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And just to sort of talk.

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Secondly, I'm not
looking for you

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00:02:22,990 --> 00:02:25,510
to take a reading
from six weeks earlier

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00:02:25,510 --> 00:02:29,530
and describe that reading,
or three weeks earlier.

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00:02:29,530 --> 00:02:36,070
So if you choose, in the
future, to take November 15th--

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00:02:36,070 --> 00:02:38,240
I know November 15th,
because we're going to--

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it's going to be our second
time with outside speakers,

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and it's a really
important time,

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if you look at that class, to
write something on that class

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00:02:49,480 --> 00:02:51,693
when it's--

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we're fortunate enough
that Jeff Sprecher, who

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is the Chief Executive Officer
of the Intercontinental

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Exchange, and Kelly Loeffler,
who is the Chief Executive

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00:03:00,580 --> 00:03:04,630
Officer of Bakkt, are going
to come and do a class with us

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about payment systems and what
ICE and the New York Stock

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Exchange is trying to
do in payment systems.

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I'm just using that.

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If you write about that,
it's really about that, not

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about everything earlier.

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And when we get
earlier, I'll probably

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say more about that class.

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And we were
fortunate to have one

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of America's true
great entrepreneurs

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join us in Jeff
Sprecher that week.

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Who has, from scratch,
created a $50 billion

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market cap company in 20 years.

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So those were my comments.

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The papers were generally good.

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Really looking for critical
reasoning, ground truths.

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Where did you take something?

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Some of you brought a great
narrative voice, by the way.

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I have to compliment.

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There were a couple--
a handful that I really

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found you're really good
writers and in addition to

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being good business students.

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So those are my thoughts today.

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I'm going to go through--

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00:04:00,450 --> 00:04:03,048
oh, and we have we have an
interesting guest next Tuesday,

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but I'm not going to say
anything more than that.

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You'll find it fun.

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00:04:06,790 --> 00:04:08,050
Tuesday the 16th.

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00:04:08,050 --> 00:04:08,890
STUDENT: Nakamoto?

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00:04:08,890 --> 00:04:09,973
GARY GENSLER: What's that?

91
00:04:09,973 --> 00:04:10,900
STUDENT: Nakamoto?

92
00:04:10,900 --> 00:04:12,340
GARY GENSLER: Nakamoto!

93
00:04:12,340 --> 00:04:13,720
Satoshi Nakamoto.

94
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No, no.

95
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Any other guesses?

96
00:04:17,260 --> 00:04:19,610
I'm not giving any clues,
but I will tell you you

97
00:04:19,610 --> 00:04:22,550
will have fun next
Tuesday the 16th.

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00:04:24,913 --> 00:04:27,205
It will be a guest you will
not see at any other class.

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00:04:30,050 --> 00:04:31,410
So today, I want to talk about--

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00:04:31,410 --> 00:04:33,990
Ah, Tom's thinking
about it, right?

101
00:04:33,990 --> 00:04:36,160
Intrigued.

102
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We're going to talk a
little bit about finance.

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Now, just as a
way of background,

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I've spent 39 years in finance.

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So this is just my chance
to take 80 minutes to talk

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about finance with all of you.

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We did have readings
that will tie into it.

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So overview, we're going
to talk a little bit

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00:04:52,390 --> 00:04:55,230
about the readings, of
course, as we always do.

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00:04:55,230 --> 00:04:58,720
Three slices of finance
for a moment-- finance

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and financial institutions.

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00:05:00,300 --> 00:05:02,050
What is a financial institution?

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00:05:02,050 --> 00:05:05,110
What does that word mean,
and how do we think about it?

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00:05:05,110 --> 00:05:07,610
Finance and regulation,
finance and technology.

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00:05:07,610 --> 00:05:11,080
So three quick
slices of finance.

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What is credit?

117
00:05:12,400 --> 00:05:13,750
What's capital markets?

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00:05:13,750 --> 00:05:17,160
Again, a broad sort of
Gensler's view of it,

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maybe, but still I
think you could--

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it's grounded in
academic literature.

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Then what are the risks?

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00:05:25,690 --> 00:05:28,010
I spent a bunch of
time at Goldman Sachs.

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One of the last things I did as
kind of the cofinance officer

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00:05:31,210 --> 00:05:34,150
was also sit on the
firm-wide risk committee.

125
00:05:34,150 --> 00:05:37,120
And so sort of
bringing insight into,

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00:05:37,120 --> 00:05:39,380
what is risk
management in finance?

127
00:05:39,380 --> 00:05:42,430
Or at least in the capital
market side of finance.

128
00:05:42,430 --> 00:05:43,240
And crises.

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00:05:43,240 --> 00:05:47,200
I'm going to spend a couple
of minutes on the OA crisis.

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00:05:47,200 --> 00:05:50,900
Some perspective from a
guy who lived through it.

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And then some of
the opportunities

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00:05:52,330 --> 00:05:53,830
in the blockchain world.

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We'll try to wrap and be out
of here at 3:55, as usual.

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So this study questions--

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00:06:01,480 --> 00:06:04,900
which, now I know there's
probably 58 papers on this

136
00:06:04,900 --> 00:06:11,140
in the inbox, I think.

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00:06:11,140 --> 00:06:14,170
But does anybody
want to lend a hand?

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00:06:14,170 --> 00:06:15,880
I mean, it's getting shorter.

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00:06:15,880 --> 00:06:17,800
It's only 20 people
on this list now.

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But that means
that 25% of you are

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00:06:22,510 --> 00:06:25,330
thinking that class
participation is not

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00:06:25,330 --> 00:06:26,500
that important.

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We're going to have to find a
way that if somebody's still

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00:06:29,200 --> 00:06:31,480
on this list in a while
that I don't give somebody

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00:06:31,480 --> 00:06:32,620
a terrible grade.

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Because 30% of the grade
is class participation.

147
00:06:37,420 --> 00:06:38,350
I just say that.

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00:06:38,350 --> 00:06:40,000
I'm humorous about it.

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00:06:40,000 --> 00:06:41,610
I'm willing to work
with people that,

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00:06:41,610 --> 00:06:45,250
if your language skills aren't
there and you're just shy,

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00:06:45,250 --> 00:06:46,830
or you have an issue.

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00:06:46,830 --> 00:06:51,377
But does Monica want
to help me out at all?

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STUDENT: Yeah.

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So, I'm back here.

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So one of the trade offs that
I talked about in my paper

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was that we saw from
one of the articles

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00:07:00,520 --> 00:07:04,210
that, as bankers were
making more money,

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00:07:04,210 --> 00:07:08,080
there is a greater
income disparity that we

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00:07:08,080 --> 00:07:11,260
saw in the entire sector.

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00:07:11,260 --> 00:07:13,420
And then one of the other
things I talked about,

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00:07:13,420 --> 00:07:18,210
as some of these
institutions combined,

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00:07:18,210 --> 00:07:22,220
they created like these huge
conglomerates and the act

163
00:07:22,220 --> 00:07:24,970
kind of deregulated
the space that

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allowed for that to happen.

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GARY GENSLER: So Monica's
raising two things, probably

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00:07:29,200 --> 00:07:33,910
from the Harvard paper, but
two things that about income

167
00:07:33,910 --> 00:07:36,520
disparities and also
the concentration.

168
00:07:36,520 --> 00:07:39,010
Anything else that people
took from that Harvard--

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00:07:39,010 --> 00:07:42,940
I know it was a little
dense, but the paper?

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Is that a hand up?

171
00:07:43,810 --> 00:07:44,890
Is that-- no?

172
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You sure?

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00:07:45,510 --> 00:07:46,720
Oh, come on.

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00:07:46,720 --> 00:07:49,077
What's your first name?

175
00:07:49,077 --> 00:07:50,160
STUDENT: Cece [INAUDIBLE].

176
00:07:50,160 --> 00:07:52,430
Sorry, I'm not in
the class list.

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00:07:52,430 --> 00:07:55,897
[INAUDIBLE] visiting
MIT and hoping I

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00:07:55,897 --> 00:07:57,475
can audit this class today.

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GARY GENSLER: All
right. [? Cece ?]

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00:07:58,300 --> 00:07:59,350
is here as a listener.

181
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Thank you.

182
00:08:01,390 --> 00:08:02,018
Do you want--

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00:08:02,018 --> 00:08:02,560
STUDENT: Dan.

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00:08:02,560 --> 00:08:04,395
GARY GENSLER: Dan.

185
00:08:04,395 --> 00:08:06,520
STUDENT: Yeah, in the
Harvard paper, I just thought

186
00:08:06,520 --> 00:08:07,990
was interesting.

187
00:08:07,990 --> 00:08:12,200
It was that that act in 1994
that essentially caused--

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it was the catalyst for
just massive consolidation

189
00:08:14,740 --> 00:08:17,710
of the financial
services industry.

190
00:08:17,710 --> 00:08:23,670
And so that's what ultimately
led to disproportionate wages,

191
00:08:23,670 --> 00:08:27,460
or disproportionate
economic rents,

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00:08:27,460 --> 00:08:28,882
when related to productivity.

193
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GARY GENSLER: OK.

194
00:08:29,590 --> 00:08:31,030
So can you remind me which act?

195
00:08:31,030 --> 00:08:33,970
Because '94 isn't
ringing a bell.

196
00:08:33,970 --> 00:08:37,450
I mean, the
Gramm-Leach-Bliley was 1999,

197
00:08:37,450 --> 00:08:40,582
and I don't know if there
was something in '94 that--

198
00:08:40,582 --> 00:08:43,120
[INTERPOSING VOICES]

199
00:08:43,120 --> 00:08:44,274
GARY GENSLER: What's that?

200
00:08:44,274 --> 00:08:45,320
STUDENT: Riegle-Neal.

201
00:08:45,320 --> 00:08:46,900
GARY GENSLER: Riegle-Neal.

202
00:08:46,900 --> 00:08:49,150
OK.

203
00:08:49,150 --> 00:08:53,380
So Dan's raising that it's
also regulation and law

204
00:08:53,380 --> 00:08:54,940
has a lot of effect on it.

205
00:08:54,940 --> 00:08:57,520
Consolidation is happening
in many industries.

206
00:08:57,520 --> 00:09:01,420
Finance is not separate
from those industries.

207
00:09:01,420 --> 00:09:04,660
50, 60 years ago, you
had the local drugstores,

208
00:09:04,660 --> 00:09:08,420
now we have the big chains
like CVS and the like.

209
00:09:08,420 --> 00:09:12,620
So I just mention that the
consolidation happens a lot.

210
00:09:12,620 --> 00:09:15,370
One thing that I would say
on the other side of that,

211
00:09:15,370 --> 00:09:18,610
having actually watched
and observed some of it,

212
00:09:18,610 --> 00:09:21,340
is there was the desire
to merge a lot of banking.

213
00:09:21,340 --> 00:09:25,240
But the US, in contrast
to other countries,

214
00:09:25,240 --> 00:09:28,000
didn't have interstate banking.

215
00:09:28,000 --> 00:09:30,190
All the way into
the 1970s, banks

216
00:09:30,190 --> 00:09:32,830
had to be within their own--

217
00:09:32,830 --> 00:09:35,230
one of the 50 states, literally.

218
00:09:35,230 --> 00:09:38,230
That started to break
down in the late '70s.

219
00:09:38,230 --> 00:09:42,820
It started-- Riegle Neal in
'94, pretty much then it was,

220
00:09:42,820 --> 00:09:46,360
Katie bar the door, we
could have national banking.

221
00:09:46,360 --> 00:09:49,090
And then by 1999,
we also could have

222
00:09:49,090 --> 00:09:51,950
commercial banking and
investment banking together,

223
00:09:51,950 --> 00:09:53,230
which is Gramm-Leach-Bliley.

224
00:09:53,230 --> 00:09:53,730
I'm sorry.

225
00:09:53,730 --> 00:09:57,770
I want to come back
here, but next to Dan.

226
00:09:57,770 --> 00:10:01,745
STUDENT: I was going to say that
basically, the paper basically

227
00:10:01,745 --> 00:10:03,620
went through a process
of elimination of what

228
00:10:03,620 --> 00:10:05,990
could explain the
higher economic rents,

229
00:10:05,990 --> 00:10:08,290
and basically checked
everything off the list.

230
00:10:08,290 --> 00:10:10,780
It said it was basically
a bit of manipulation,

231
00:10:10,780 --> 00:10:14,455
because there was more
power by the banks that

232
00:10:14,455 --> 00:10:15,290
had consolidated.

233
00:10:15,290 --> 00:10:16,360
GARY GENSLER: Right.

234
00:10:16,360 --> 00:10:19,960
Erin, do you see that
as manipulation or just

235
00:10:19,960 --> 00:10:24,730
an opportunity to get some
oligopolistic or monopolistic

236
00:10:24,730 --> 00:10:25,645
rents?

237
00:10:25,645 --> 00:10:30,734
And I'm just discerning
the word manipulation--

238
00:10:30,734 --> 00:10:32,730
STUDENT: Yeah.

239
00:10:32,730 --> 00:10:33,970
I guess what they were--

240
00:10:33,970 --> 00:10:36,720
yeah, I mean I think it's--

241
00:10:36,720 --> 00:10:40,150
I mean manipulation in
the sense that, higher--

242
00:10:40,150 --> 00:10:41,740
maybe taking advantage
in a way that

243
00:10:41,740 --> 00:10:44,680
wouldn't exist in a market
that wasn't so consolidated

244
00:10:44,680 --> 00:10:47,380
compared to other markets
that were consolidated

245
00:10:47,380 --> 00:10:49,012
and regulated, such as Canada.

246
00:10:49,012 --> 00:10:50,470
Because he made a
lot [INAUDIBLE]..

247
00:10:50,470 --> 00:10:54,760
GARY GENSLER: I would note that
every entrepreneur's desire,

248
00:10:54,760 --> 00:10:57,880
in a business context,
maybe not in a moral sense,

249
00:10:57,880 --> 00:11:01,120
is to be able to
collect economic rents.

250
00:11:01,120 --> 00:11:03,520
Like you start out
as a disruptor,

251
00:11:03,520 --> 00:11:05,740
and along the journey,
you would actually

252
00:11:05,740 --> 00:11:09,910
wish to become somebody
who collects excess profits

253
00:11:09,910 --> 00:11:11,890
or becomes the monopolist.

254
00:11:11,890 --> 00:11:15,130
I'm not speaking
that you literally

255
00:11:15,130 --> 00:11:17,170
want to take
advantage of people,

256
00:11:17,170 --> 00:11:19,650
but you do want to sort
of collect excess rents.

257
00:11:19,650 --> 00:11:23,550
And so it's a sort of
natural transformation.

258
00:11:23,550 --> 00:11:26,310
I'm sorry, there
was a hand here.

259
00:11:26,310 --> 00:11:31,200
STUDENT: Yeah, similar to what
Eric said last, compare also--

260
00:11:31,200 --> 00:11:33,900
concentration by
regulation, or concentration

261
00:11:33,900 --> 00:11:39,210
by deregulating the market,
and by regulating it,

262
00:11:39,210 --> 00:11:41,720
incumbents are able
to take more risks.

263
00:11:41,720 --> 00:11:44,140
And that is bad for
financial systems.

264
00:11:44,140 --> 00:11:45,500
GARY GENSLER: Right.

265
00:11:45,500 --> 00:11:48,020
Brotish?

266
00:11:48,020 --> 00:11:50,560
STUDENT: Not from the paper,
more from personal experience.

267
00:11:50,560 --> 00:11:54,090
So the way I see it is
the financial institutions

268
00:11:54,090 --> 00:11:57,250
are increasingly trying
to be at the center

269
00:11:57,250 --> 00:11:59,160
of a lot of
different [INAUDIBLE]

270
00:11:59,160 --> 00:12:00,900
of different business.

271
00:12:00,900 --> 00:12:02,635
And with many
innovative products,

272
00:12:02,635 --> 00:12:06,950
they are kind of connected
like people across the industry

273
00:12:06,950 --> 00:12:07,890
chain.

274
00:12:07,890 --> 00:12:13,270
So they kind of [INAUDIBLE]
some sort of accountability

275
00:12:13,270 --> 00:12:17,190
with [INAUDIBLE] valuations.

276
00:12:17,190 --> 00:12:19,780
And when a financial
institution is at risk,

277
00:12:19,780 --> 00:12:22,520
it connects all the different
players in the value chain.

278
00:12:22,520 --> 00:12:23,353
GARY GENSLER: Right.

279
00:12:23,353 --> 00:12:26,910
So Brotish is raising also
that finance, partly because

280
00:12:26,910 --> 00:12:30,030
of its centrality
in the economy,

281
00:12:30,030 --> 00:12:33,570
tries to add other products
or add other things

282
00:12:33,570 --> 00:12:37,410
and be at the center of the
value proposition or chain.

283
00:12:37,410 --> 00:12:40,050
I would contend there is
also non-financial firms that

284
00:12:40,050 --> 00:12:42,670
try to do the same
thing into finance.

285
00:12:42,670 --> 00:12:45,100
So big tech right now--

286
00:12:45,100 --> 00:12:51,270
you think about Apple Pay,
or think of Alibaba in China.

287
00:12:51,270 --> 00:12:56,700
But then Ant Financial is
one of the most significant.

288
00:12:56,700 --> 00:12:58,820
So sometimes it
comes the other way.

289
00:12:58,820 --> 00:13:03,630
If you can leverage a network,
leverage your centrality

290
00:13:03,630 --> 00:13:06,960
to a market and add products.

291
00:13:06,960 --> 00:13:10,020
But I agree with you, it
goes both ways, though.

292
00:13:10,020 --> 00:13:11,830
Other comments
from the readings?

293
00:13:11,830 --> 00:13:12,450
Isabella?

294
00:13:12,450 --> 00:13:14,460
STUDENT: [INAUDIBLE]
articles also

295
00:13:14,460 --> 00:13:17,062
was sort of the idea of
innovation ahead of regulation.

296
00:13:17,062 --> 00:13:19,020
The nice thing about
bringing in new technology

297
00:13:19,020 --> 00:13:20,853
is that it does take
time for the government

298
00:13:20,853 --> 00:13:22,420
to actually regulate it.

299
00:13:22,420 --> 00:13:24,450
And I know one of the
articles, or the interview

300
00:13:24,450 --> 00:13:27,420
talked about needing to further
regulate and restructure

301
00:13:27,420 --> 00:13:28,170
the banks.

302
00:13:28,170 --> 00:13:30,462
That's not something that's
going to happen, especially

303
00:13:30,462 --> 00:13:35,020
with people trying to overturn--
is it the Dodd-Frank act?

304
00:13:35,020 --> 00:13:35,520
Yes.

305
00:13:35,520 --> 00:13:37,673
So it's not really
going in that direction,

306
00:13:37,673 --> 00:13:39,590
but it's something people
talk about it a lot.

307
00:13:39,590 --> 00:13:40,560
GARY GENSLER: Right.

308
00:13:40,560 --> 00:13:43,180
So there is an ebb and
flow of regulation,

309
00:13:43,180 --> 00:13:45,150
and we'll chat in
a couple minutes.

310
00:13:45,150 --> 00:13:50,070
Regulation in finance has been
around for thousands of years.

311
00:13:50,070 --> 00:13:54,660
I mean, literally,
back when the Hammurabi

312
00:13:54,660 --> 00:13:58,650
code was being written, there
were regulated interest rates.

313
00:13:58,650 --> 00:14:00,450
We went through a
long period in Europe

314
00:14:00,450 --> 00:14:04,290
where actually it was illegal
to charge an interest rate,

315
00:14:04,290 --> 00:14:06,660
for hundreds of years
in different societies.

316
00:14:06,660 --> 00:14:09,650
So there is an ebb and flow.

317
00:14:09,650 --> 00:14:11,430
Now it's much more
complicated today.

318
00:14:11,430 --> 00:14:12,870
In a sense.

319
00:14:12,870 --> 00:14:15,090
And Isabel was just
mentioning that Dodd-Frank,

320
00:14:15,090 --> 00:14:19,860
passed in the US, was
a post crisis reform.

321
00:14:19,860 --> 00:14:22,170
That would be a time, a
period you would think, well,

322
00:14:22,170 --> 00:14:25,140
maybe the public, through
its legislative body,

323
00:14:25,140 --> 00:14:27,600
will lean into doing
more regulation.

324
00:14:27,600 --> 00:14:31,110
And then as you move away
from a crisis moment,

325
00:14:31,110 --> 00:14:32,500
you see some easing up.

326
00:14:32,500 --> 00:14:38,895
And there is always sort of an
oscillation over the decades.

327
00:14:38,895 --> 00:14:40,020
Why don't we take one more?

328
00:14:42,965 --> 00:14:45,540
STUDENT: So I think one of
the other interesting things

329
00:14:45,540 --> 00:14:48,000
that the article brought up
was the case of Citigroup,

330
00:14:48,000 --> 00:14:50,470
which basically highlights
the tradeoff perfectly.

331
00:14:50,470 --> 00:14:52,350
So on the positive
side, if you look

332
00:14:52,350 --> 00:14:54,250
at Citigroup, what
it's trying to do

333
00:14:54,250 --> 00:14:56,160
is it's trying to provide
universal services.

334
00:14:56,160 --> 00:14:58,810
So it's a one stop shop for
all your financial services.

335
00:14:58,810 --> 00:15:02,043
Whereas [INAUDIBLE]
argued that one

336
00:15:02,043 --> 00:15:03,710
of the things that
should have been done

337
00:15:03,710 --> 00:15:05,220
post crisis was to break it up.

338
00:15:05,220 --> 00:15:08,610
Because the problem with having
the universal one-stop shop

339
00:15:08,610 --> 00:15:12,390
is that, if it fails, then
it's an obligation on the fed

340
00:15:12,390 --> 00:15:13,310
actually prevent it.

341
00:15:13,310 --> 00:15:15,360
GARY GENSLER: So [INAUDIBLE]
raising something

342
00:15:15,360 --> 00:15:20,850
about Citigroup or
Citicorp that became,

343
00:15:20,850 --> 00:15:25,110
in a sense, a one
stop shop, a shopping

344
00:15:25,110 --> 00:15:26,940
center of financial
products, so maybe it

345
00:15:26,940 --> 00:15:28,080
should've been broken up.

346
00:15:28,080 --> 00:15:31,500
But who wants to tell
me what Sheila Bair, who

347
00:15:31,500 --> 00:15:35,550
was the head of the Federal
Deposit Insurance Corporation,

348
00:15:35,550 --> 00:15:36,240
said?

349
00:15:36,240 --> 00:15:41,400
Because in that interview with
Sheila, she talked about Citi.

350
00:15:41,400 --> 00:15:42,140
Alpha?

351
00:15:42,140 --> 00:15:44,550
STUDENT: She said
she almost, I guess,

352
00:15:44,550 --> 00:15:46,600
regrets not letting
them restructure

353
00:15:46,600 --> 00:15:48,345
and letting them fail,
because it created

354
00:15:48,345 --> 00:15:51,100
this sort of a moral
protection that people

355
00:15:51,100 --> 00:15:55,358
thought that [INAUDIBLE] large
[INAUDIBLE] shouldn't survive.

356
00:15:55,358 --> 00:15:57,900
GARY GENSLER: Kelly, were you
going to add something to that?

357
00:15:57,900 --> 00:15:58,775
STUDENT: Yeah, I was.

358
00:15:58,775 --> 00:16:00,700
I thought her interview was--

359
00:16:00,700 --> 00:16:03,990
it's kind of hard to weed
out what she's really saying,

360
00:16:03,990 --> 00:16:08,230
because it's toned with
little strings of bias.

361
00:16:08,230 --> 00:16:10,680
Obviously, one, because she's
been through that crisis

362
00:16:10,680 --> 00:16:13,560
and pretty much brokered
that deal, and two

363
00:16:13,560 --> 00:16:16,980
because she throws in
political maneuvers.

364
00:16:16,980 --> 00:16:19,550
So it's hard to
tell what she thinks

365
00:16:19,550 --> 00:16:22,696
is necessarily best for the
health of the financial system.

366
00:16:22,696 --> 00:16:27,080
Like she says, bank profits
are good, dividends are robust.

367
00:16:27,080 --> 00:16:28,890
They've got big tax
cuts, they should be

368
00:16:28,890 --> 00:16:30,732
building their capital bunkers.

369
00:16:30,732 --> 00:16:32,487
So--

370
00:16:32,487 --> 00:16:33,320
GARY GENSLER: Right.

371
00:16:33,320 --> 00:16:35,520
But you mean it's hard
to tell where Sheila

372
00:16:35,520 --> 00:16:37,948
is on Citicorp, for instance?

373
00:16:37,948 --> 00:16:39,490
STUDENT: Well, and
also the state of,

374
00:16:39,490 --> 00:16:45,930
like, how a lot of what she says
is the banks too big to fail.

375
00:16:45,930 --> 00:16:51,780
GARY GENSLER: So Sheila
Bair, who was to her core

376
00:16:51,780 --> 00:16:54,300
as a Kansas Republican,
who worked for Senator Bob

377
00:16:54,300 --> 00:16:58,230
Dole, who was then, when
she worked for him, majority

378
00:16:58,230 --> 00:17:01,860
leader in the US Senate
on the Republican side,

379
00:17:01,860 --> 00:17:04,190
is kind of a bit of
a prairie populist,

380
00:17:04,190 --> 00:17:07,170
if those terms mean
something to the class.

381
00:17:07,170 --> 00:17:10,890
And she got into the
role of running the FDIC

382
00:17:10,890 --> 00:17:12,780
and saw early--

383
00:17:12,780 --> 00:17:14,460
frankly a little
earlier than most--

384
00:17:14,460 --> 00:17:16,140
that there was a
problem going on

385
00:17:16,140 --> 00:17:21,300
in mortgage financing and credit
lending and the ease of credit

386
00:17:21,300 --> 00:17:22,770
in the US.

387
00:17:22,770 --> 00:17:25,859
When the crisis
really hit hard, she

388
00:17:25,859 --> 00:17:28,230
was part ultimately of the team.

389
00:17:28,230 --> 00:17:30,450
Not the head,
usually the Chairman

390
00:17:30,450 --> 00:17:33,390
of the Federal Reserve, and
the Secretary of the Treasury.

391
00:17:33,390 --> 00:17:36,030
Or in any country, it's
usually the finance minister

392
00:17:36,030 --> 00:17:38,100
and the head of the
central bank who

393
00:17:38,100 --> 00:17:41,850
is somewhere in a war
room sort of setting,

394
00:17:41,850 --> 00:17:45,270
literally, in crisis and rolling
conference calls and meetings

395
00:17:45,270 --> 00:17:46,660
trying to sort through things.

396
00:17:46,660 --> 00:17:49,500
But Sheila was certainly
at that next level

397
00:17:49,500 --> 00:17:53,340
in our multifaceted
regulatory system in the US.

398
00:17:53,340 --> 00:17:57,510
And I read her reading, and also
just knowing her personally--

399
00:17:57,510 --> 00:18:00,850
I was with her last
Friday at a conference,

400
00:18:00,850 --> 00:18:05,910
which I guess she arranged in
Washington about the crisis.

401
00:18:05,910 --> 00:18:09,000
I think her reading was
what Alpha's saying.

402
00:18:09,000 --> 00:18:11,490
I think it's-- but
you're correct,

403
00:18:11,490 --> 00:18:14,910
she is a political actor
and is proud of that.

404
00:18:14,910 --> 00:18:19,350
I mean, that's her lifeblood and
where she's been for 30 years.

405
00:18:19,350 --> 00:18:22,860
But she's also deeply
a policy person

406
00:18:22,860 --> 00:18:27,060
and tied to a sort of
populist vein in her--

407
00:18:27,060 --> 00:18:28,830
she would have
probably preferred

408
00:18:28,830 --> 00:18:33,420
to see Citi restructured or
taken over because of what

409
00:18:33,420 --> 00:18:36,080
Alpha said, that there is
a quote "moral hazard,"

410
00:18:36,080 --> 00:18:38,520
that the markets
might think, well

411
00:18:38,520 --> 00:18:41,280
there's always going
to be a bailout waiting

412
00:18:41,280 --> 00:18:44,990
for the largest of the banks.

413
00:18:44,990 --> 00:18:49,200
That would be the translation
of what she said there.

414
00:18:49,200 --> 00:18:53,910
Let me let me hit upon, so
what is the role of finance?

415
00:18:53,910 --> 00:18:57,120
What's the central role
when we simplify all down

416
00:18:57,120 --> 00:18:59,220
to its essence?

417
00:18:59,220 --> 00:19:02,210
We have a dozen masters
of finance in here.

418
00:19:02,210 --> 00:19:04,880
So what are they teaching?

419
00:19:04,880 --> 00:19:06,780
And what's Andy Lowe teaching?

420
00:19:06,780 --> 00:19:07,960
I don't know.

421
00:19:07,960 --> 00:19:12,870
Is anybody taking Andy's
intro class or no?

422
00:19:12,870 --> 00:19:16,140
Nobody wants to tell
me the role of finance?

423
00:19:16,140 --> 00:19:17,560
Here, here we go.

424
00:19:17,560 --> 00:19:19,492
Are you a master
of finance student?

425
00:19:19,492 --> 00:19:20,200
STUDENT: No, MBA.

426
00:19:20,200 --> 00:19:21,367
GARY GENSLER: You're an MBA.

427
00:19:21,367 --> 00:19:24,540
Who's a master of finance?

428
00:19:24,540 --> 00:19:26,640
Oh no!

429
00:19:26,640 --> 00:19:27,810
All right.

430
00:19:27,810 --> 00:19:29,100
What's the role of finance?

431
00:19:29,100 --> 00:19:30,310
Very simple.

432
00:19:30,310 --> 00:19:32,920
It's like elevator stuff.

433
00:19:32,920 --> 00:19:34,510
STUDENT: I guess
it's [INAUDIBLE]

434
00:19:34,510 --> 00:19:41,940
like different
functions of [INAUDIBLE]

435
00:19:41,940 --> 00:19:44,880
GARY GENSLER: All right, so
intermediary, helps society.

436
00:19:44,880 --> 00:19:46,020
What's it intermediating?

437
00:19:46,020 --> 00:19:50,306
The two things it intermediates?
[? M ?] finance students?

438
00:19:50,306 --> 00:19:54,060
STUDENT: They allocate
resources and also risk.

439
00:19:54,060 --> 00:19:55,620
GARY GENSLER:
Resources and risk.

440
00:19:55,620 --> 00:19:57,900
So they move,
allocate and price.

441
00:19:57,900 --> 00:20:01,770
Really importantly,
price allocate and move

442
00:20:01,770 --> 00:20:03,650
money and risk.

443
00:20:03,650 --> 00:20:05,010
Just easy pictures.

444
00:20:05,010 --> 00:20:09,980
Money is something
of value and risk.

445
00:20:09,980 --> 00:20:14,230
And you will see this hourglass
on a whole bunch of slides

446
00:20:14,230 --> 00:20:17,240
because I've thought about
finance for the whole 40 years

447
00:20:17,240 --> 00:20:19,130
I've been around
it as an hourglass.

448
00:20:19,130 --> 00:20:24,070
Wall Street is sitting right
at the neck of the hourglass.

449
00:20:24,070 --> 00:20:25,720
Intermediaries.

450
00:20:25,720 --> 00:20:29,500
I thank-- what's your name?

451
00:20:29,500 --> 00:20:30,620
What's that?

452
00:20:30,620 --> 00:20:32,410
Joey.

453
00:20:32,410 --> 00:20:35,750
Intermediaries of financial
assets and liabilities.

454
00:20:35,750 --> 00:20:37,750
Because there's both sides
of the balance sheet.

455
00:20:37,750 --> 00:20:39,460
They can move around
assets or they

456
00:20:39,460 --> 00:20:41,960
can move around
liabilities, again

457
00:20:41,960 --> 00:20:43,900
at the neck of the hourglass.

458
00:20:43,900 --> 00:20:46,580
So what are the key
functions of finance?

459
00:20:46,580 --> 00:20:53,100
I'm going to list four, but what
are the functions of finance?

460
00:20:53,100 --> 00:20:54,450
As opposed to a role?

461
00:20:54,450 --> 00:20:55,110
Anybody else?

462
00:20:55,110 --> 00:20:56,220
There were other hands up.

463
00:20:56,220 --> 00:20:56,905
Sure.

464
00:20:56,905 --> 00:20:58,080
STUDENT: Capital allocation.

465
00:20:58,080 --> 00:20:59,940
GARY GENSLER:
Capital allocation.

466
00:20:59,940 --> 00:21:00,998
I'll take that.

467
00:21:00,998 --> 00:21:02,915
It's not what I was
looking for but it's good.

468
00:21:02,915 --> 00:21:04,200
STUDENT: Market making.

469
00:21:04,200 --> 00:21:05,700
GARY GENSLER: Market making.

470
00:21:05,700 --> 00:21:07,570
Capital allocation,
market making.

471
00:21:07,570 --> 00:21:08,070
[INAUDIBLE]?

472
00:21:08,070 --> 00:21:08,850
STUDENT: Payment.

473
00:21:08,850 --> 00:21:10,820
GARY GENSLER: Payment.

474
00:21:10,820 --> 00:21:12,350
STUDENT: Providing liquidity.

475
00:21:12,350 --> 00:21:13,860
GARY GENSLER:
Providing liquidity.

476
00:21:13,860 --> 00:21:15,110
I'm agreeing with all of them.

477
00:21:15,110 --> 00:21:16,527
You should have
written my slides.

478
00:21:16,527 --> 00:21:18,290
I should revise the slides.

479
00:21:18,290 --> 00:21:21,680
So I say it's
basically investments,

480
00:21:21,680 --> 00:21:25,370
basically the store
of value, and credit--

481
00:21:25,370 --> 00:21:28,390
in essence, borrowing value.

482
00:21:28,390 --> 00:21:29,630
Remember what money is.

483
00:21:29,630 --> 00:21:31,750
I know Ross is
looking at me like--

484
00:21:31,750 --> 00:21:34,690
it's the two sides of--

485
00:21:34,690 --> 00:21:37,420
we have this social
concept of money

486
00:21:37,420 --> 00:21:39,380
that goes back
thousands of years.

487
00:21:39,380 --> 00:21:43,060
And at some point in time, what
if I want to store the value

488
00:21:43,060 --> 00:21:44,410
or borrow the value?

489
00:21:44,410 --> 00:21:47,500
It's the two sides of the--

490
00:21:47,500 --> 00:21:52,030
it's, again, centered
on a social construct.

491
00:21:52,030 --> 00:21:54,970
And thus, financial
intermediaries

492
00:21:54,970 --> 00:21:58,180
sit right at the
neck of the hourglass

493
00:21:58,180 --> 00:22:01,580
and transform risk as well.

494
00:22:01,580 --> 00:22:04,580
It could be a bank
that's transforming risk,

495
00:22:04,580 --> 00:22:10,550
short term deposits are then
lent or loaned out long.

496
00:22:10,550 --> 00:22:12,770
So right at the center
of the banking system,

497
00:22:12,770 --> 00:22:14,630
the commercial banking system.

498
00:22:14,630 --> 00:22:18,540
Is what's called
maturity transformation--

499
00:22:18,540 --> 00:22:22,620
short term deposits
versus long term lending.

500
00:22:22,620 --> 00:22:24,810
And it's not something
we're going to do away with.

501
00:22:24,810 --> 00:22:26,910
In fact, we should say,
that's a good thing.

502
00:22:26,910 --> 00:22:29,190
But because there's
maturity transformation,

503
00:22:29,190 --> 00:22:33,480
you can also have what's
known a run on the bank.

504
00:22:33,480 --> 00:22:35,070
What are the key sectors?

505
00:22:35,070 --> 00:22:38,610
I'm going to throw a bit up
here, six or seven sectors.

506
00:22:38,610 --> 00:22:41,130
But what are the sectors
you think about as--

507
00:22:41,130 --> 00:22:44,700
maybe some of you worked in?

508
00:22:44,700 --> 00:22:45,718
This is easy.

509
00:22:45,718 --> 00:22:46,510
STUDENT: Insurance.

510
00:22:46,510 --> 00:22:49,350
GARY GENSLER: Insurance, one.

511
00:22:49,350 --> 00:22:50,850
I don't remember your name.

512
00:22:50,850 --> 00:22:51,450
STUDENT: Ross.

513
00:22:51,450 --> 00:22:51,960
GARY GENSLER: Ross.

514
00:22:51,960 --> 00:22:53,280
STUDENT: Asset management.

515
00:22:53,280 --> 00:22:54,150
GARY GENSLER: Asset management.

516
00:22:54,150 --> 00:22:55,380
Insurance, asset management.

517
00:22:55,380 --> 00:22:56,450
Anton?

518
00:22:56,450 --> 00:22:58,620
STUDENT: Banking broker.

519
00:22:58,620 --> 00:23:01,050
GARY GENSLER: Oh, that's two
sectors-- commercial banking

520
00:23:01,050 --> 00:23:01,550
and brokers.

521
00:23:02,240 --> 00:23:03,240
STUDENT: Private equity.

522
00:23:03,240 --> 00:23:04,448
GARY GENSLER: Private equity.

523
00:23:04,448 --> 00:23:06,430
I would call that
asset management.

524
00:23:06,430 --> 00:23:06,930
All right.

525
00:23:06,930 --> 00:23:08,550
So I put commercial banks.

526
00:23:08,550 --> 00:23:13,170
Sometimes in the US we have
7,000 or 8,000 credit unions

527
00:23:13,170 --> 00:23:15,250
and 9,000 commercial banks.

528
00:23:15,250 --> 00:23:17,100
Investment banks
and brokerage firms.

529
00:23:17,100 --> 00:23:20,280
In Europe and many countries,
there are universal banks

530
00:23:20,280 --> 00:23:22,530
and there are inside
commercial banks.

531
00:23:22,530 --> 00:23:25,590
But they perform a little
bit different function.

532
00:23:25,590 --> 00:23:29,580
Commercial banks think about
taking depositors' money

533
00:23:29,580 --> 00:23:30,450
and then lending.

534
00:23:30,450 --> 00:23:32,580
The central thing
about commercial banks

535
00:23:32,580 --> 00:23:37,620
is a credit allocation,
pricing of credit,

536
00:23:37,620 --> 00:23:39,300
underwriting of credit.

537
00:23:39,300 --> 00:23:43,140
The center thing about
investment banks is about--

538
00:23:43,140 --> 00:23:45,660
it still has underwriting,
but it's usually

539
00:23:45,660 --> 00:23:50,250
related to market based, rather
than using their own balance

540
00:23:50,250 --> 00:23:53,910
sheet, but market based
securities and brokerage.

541
00:23:53,910 --> 00:23:57,450
Insurance is a risk
transformation.

542
00:23:57,450 --> 00:24:00,870
I need to be covered if I
get into an auto accident.

543
00:24:00,870 --> 00:24:03,930
I need to be covered
if my house burns down.

544
00:24:03,930 --> 00:24:09,780
So thus I buy that insurance,
classic forms of insurance.

545
00:24:09,780 --> 00:24:12,060
And then all forms
of asset management

546
00:24:12,060 --> 00:24:13,710
and collective
investment vehicles.

547
00:24:13,710 --> 00:24:15,210
I make it as two
different buckets,

548
00:24:15,210 --> 00:24:18,630
because a collective investment
vehicle is when you actually

549
00:24:18,630 --> 00:24:21,420
put something into a
shared balance sheet,

550
00:24:21,420 --> 00:24:23,190
like a mutual fund.

551
00:24:23,190 --> 00:24:26,010
Asset managers are really
just getting paid a fee,

552
00:24:26,010 --> 00:24:28,910
but the two overlap.

553
00:24:28,910 --> 00:24:31,450
And of course all the
infrastructure of exchanges

554
00:24:31,450 --> 00:24:32,810
and clearinghouses.

555
00:24:32,810 --> 00:24:35,820
It might end up employing a
quarter of you in one day,

556
00:24:35,820 --> 00:24:38,130
but I think about the
different sectors.

557
00:24:38,130 --> 00:24:40,650
When you're thinking about
use cases for blockchain,

558
00:24:40,650 --> 00:24:42,390
it could be an any
one of these sectors,

559
00:24:42,390 --> 00:24:45,780
in any one of these functions.

560
00:24:45,780 --> 00:24:50,980
Financial markets
or capital markets.

561
00:24:50,980 --> 00:24:54,035
What's the difference between
primary markets and secondary

562
00:24:54,035 --> 00:24:54,535
markets?

563
00:24:57,620 --> 00:24:58,378
STUDENT: Kyle.

564
00:24:58,378 --> 00:24:59,170
GARY GENSLER: Kyle.

565
00:24:59,170 --> 00:25:01,060
STUDENT: Primary
markets was when

566
00:25:01,060 --> 00:25:04,900
you issue a share
that's new to the world,

567
00:25:04,900 --> 00:25:06,280
like you bring a company public.

568
00:25:06,280 --> 00:25:06,520
GARY GENSLER: All right.

569
00:25:06,520 --> 00:25:08,230
I'm going to pause you there.

570
00:25:08,230 --> 00:25:08,890
Good answer.

571
00:25:08,890 --> 00:25:11,860
So Kyle says primary
market is when an issuer--

572
00:25:11,860 --> 00:25:13,320
if I can add a word--

573
00:25:13,320 --> 00:25:17,260
an issuer is issuing a
security for the first time

574
00:25:17,260 --> 00:25:20,530
and receiving something of
value which we call money.

575
00:25:20,530 --> 00:25:21,474
That's primary.

576
00:25:21,474 --> 00:25:23,470
Primary because it's
the first issuance.

577
00:25:23,470 --> 00:25:26,250
What's the secondary market?

578
00:25:26,250 --> 00:25:28,090
Hugo?

579
00:25:28,090 --> 00:25:29,440
STUDENT: [INAUDIBLE]

580
00:25:29,440 --> 00:25:31,870
GARY GENSLER: Training
of those later.

581
00:25:31,870 --> 00:25:36,460
So primary markets,
secondary markets.

582
00:25:36,460 --> 00:25:39,370
It's relevant not only because
they have different market

583
00:25:39,370 --> 00:25:43,078
structures and
different ecosystems,

584
00:25:43,078 --> 00:25:45,370
but they tend to have a little
bit different regulation

585
00:25:45,370 --> 00:25:47,470
as well.

586
00:25:47,470 --> 00:25:51,040
Which has the higher
volume in the--

587
00:25:51,040 --> 00:25:52,150
STUDENT: Secondary market.

588
00:25:52,150 --> 00:25:53,483
GARY GENSLER: Secondary markets.

589
00:25:53,483 --> 00:25:57,960
STUDENT: There are too many
issues [INAUDIBLE] the market.

590
00:25:57,960 --> 00:26:04,010
[INAUDIBLE] maybe
some interval issue.

591
00:26:04,010 --> 00:26:07,157
But [INAUDIBLE] it's [INAUDIBLE]

592
00:26:07,157 --> 00:26:08,740
GARY GENSLER: Well,
what's interesting

593
00:26:08,740 --> 00:26:11,860
though, the secondary
markets have much more volume

594
00:26:11,860 --> 00:26:13,120
than the primary markets.

595
00:26:13,120 --> 00:26:16,040
The ratio is not the
same market to market.

596
00:26:16,040 --> 00:26:18,270
Some markets, there's
a lot of profitability.

597
00:26:18,270 --> 00:26:20,020
If you're thinking
about finance and where

598
00:26:20,020 --> 00:26:23,160
you can make your own
businesses and money,

599
00:26:23,160 --> 00:26:25,520
there's a lot of juice
in the primary market.

600
00:26:25,520 --> 00:26:28,630
There's a lot of activity
and various illiquid

601
00:26:28,630 --> 00:26:33,000
or not tradable
secondary markets.

602
00:26:33,000 --> 00:26:38,940
Whereas like equity markets,
highly liquid equity markets,

603
00:26:38,940 --> 00:26:40,950
all the action is in
the secondary market.

604
00:26:40,950 --> 00:26:44,460
Apple I don't think has
done any primary issuance

605
00:26:44,460 --> 00:26:48,060
in well over a decade, maybe a
couple of decades in the equity

606
00:26:48,060 --> 00:26:49,270
markets.

607
00:26:49,270 --> 00:26:51,870
But certainly the secondary
market for Apple stock

608
00:26:51,870 --> 00:26:54,290
is quite robust.

609
00:26:54,290 --> 00:26:56,450
Whereas there's some
things that it's only

610
00:26:56,450 --> 00:26:58,740
about the primary market.

611
00:26:58,740 --> 00:27:01,700
Alone, syndication is
really a primary market,

612
00:27:01,700 --> 00:27:05,360
and there's not a lot of
trading of secondary loans.

613
00:27:05,360 --> 00:27:08,567
So it's not all in one place.

614
00:27:08,567 --> 00:27:11,150
And again, when you're thinking
about use cases, that matters.

615
00:27:11,150 --> 00:27:14,270
Because is it high
volume or low volume?

616
00:27:14,270 --> 00:27:15,620
Is there a lot of juice?

617
00:27:15,620 --> 00:27:19,600
Juice is the margin of
profits to earnings.

618
00:27:19,600 --> 00:27:22,750
Non-technical term, sorry.

619
00:27:22,750 --> 00:27:25,570
I include in capital
markets the asset managers

620
00:27:25,570 --> 00:27:28,510
that earn fees, the
BlackRocks and Fidelitys

621
00:27:28,510 --> 00:27:30,530
or the small asset
managers, as well.

622
00:27:30,530 --> 00:27:33,190
And then all the
infrastructure-- the exchanges,

623
00:27:33,190 --> 00:27:37,020
the clearinghouses and the like.

624
00:27:37,020 --> 00:27:41,090
So again, finance,
to sort of drill

625
00:27:41,090 --> 00:27:44,600
back to where we were earlier,
have ledgers and payment

626
00:27:44,600 --> 00:27:45,140
systems.

627
00:27:45,140 --> 00:27:48,980
Who's going to remind
me what a ledger is?

628
00:27:48,980 --> 00:27:50,720
It's easy stuff.

629
00:27:50,720 --> 00:27:51,870
No.

630
00:27:51,870 --> 00:27:52,370
Ledgers.

631
00:27:54,960 --> 00:27:57,070
Wait, wait, no.

632
00:27:57,070 --> 00:27:58,990
STUDENT: It can
record transactions.

633
00:27:58,990 --> 00:27:59,607
Priya.

634
00:27:59,607 --> 00:28:00,440
GARY GENSLER: Priya.

635
00:28:00,440 --> 00:28:02,250
STUDENT: Record transactions.

636
00:28:02,250 --> 00:28:06,020
GARY GENSLER: A record
of transactions.

637
00:28:06,020 --> 00:28:07,730
I know you're tired
and you're quiet,

638
00:28:07,730 --> 00:28:10,280
but if I were to
give you an exam,

639
00:28:10,280 --> 00:28:14,260
one of the 20 questions I
would give you on vocabulary

640
00:28:14,260 --> 00:28:15,260
is ledgers.

641
00:28:15,260 --> 00:28:17,720
Because ledgers matter to
blockchain, and blockchain

642
00:28:17,720 --> 00:28:20,380
matters to ledgers.

643
00:28:20,380 --> 00:28:24,590
I'm not saying that there is no
use for blockchain technology

644
00:28:24,590 --> 00:28:27,240
absent ledgers, but
I'm hard pressed

645
00:28:27,240 --> 00:28:33,380
to think of a really good
use case within finance,

646
00:28:33,380 --> 00:28:37,310
at least, unless you have
some ledger, some recordation

647
00:28:37,310 --> 00:28:39,560
of things of value.

648
00:28:39,560 --> 00:28:42,290
If you're keeping a
record of things of value,

649
00:28:42,290 --> 00:28:44,373
then the immutable
nature of blockchain

650
00:28:44,373 --> 00:28:45,290
becomes more relevant.

651
00:28:48,670 --> 00:28:51,823
If it's not things
of value, I'm just

652
00:28:51,823 --> 00:28:53,740
saying I'm a little bit
harder pressed to say,

653
00:28:53,740 --> 00:28:56,620
well, you need the complexity
of this database structure.

654
00:28:56,620 --> 00:29:00,010
You could use other database
structures to keep it,

655
00:29:00,010 --> 00:29:03,190
even though Stuart Haber has
that wonderful blockchain

656
00:29:03,190 --> 00:29:06,010
that's published in The New
York Times for notaries.

657
00:29:08,590 --> 00:29:10,990
So ledgers are records
of economic activity

658
00:29:10,990 --> 00:29:12,290
and financial relationships.

659
00:29:12,290 --> 00:29:14,890
They are embedded in
every part of finance.

660
00:29:14,890 --> 00:29:16,690
Insurance companies
have ledgers,

661
00:29:16,690 --> 00:29:19,480
investment banks have ledgers,
central banks have ledgers.

662
00:29:19,480 --> 00:29:22,810
They are embedded in every
part and they have been around

663
00:29:22,810 --> 00:29:24,940
for thousands of
years, and they're

664
00:29:24,940 --> 00:29:27,010
right at the center
of blockchain

665
00:29:27,010 --> 00:29:32,240
because the UTXO set in
Bitcoin is a form of a ledger.

666
00:29:32,240 --> 00:29:36,400
And there's an account
based ledger in Etherium.

667
00:29:36,400 --> 00:29:40,150
What is a payment and
settlement system?

668
00:29:40,150 --> 00:29:41,770
Anybody want to give it a shot?

669
00:29:45,010 --> 00:29:47,530
Alpha I'm going to
move money to you.

670
00:29:47,530 --> 00:29:51,100
A payment system is moving
money from Gary to Alpha.

671
00:29:51,100 --> 00:29:53,230
You don't have to
answer this question.

672
00:29:53,230 --> 00:29:58,202
[? Kiera. ?] Payment system is
moving money from me to Alpha.

673
00:29:58,202 --> 00:29:58,910
What is it doing?

674
00:30:03,435 --> 00:30:04,950
It's transferring?

675
00:30:04,950 --> 00:30:05,620
Good.

676
00:30:05,620 --> 00:30:06,330
Kelly?

677
00:30:06,330 --> 00:30:09,150
STUDENT: I'm just going back to
our second class, but a method

678
00:30:09,150 --> 00:30:11,470
to amend and report
the changes to letters?

679
00:30:11,470 --> 00:30:13,770
GARY GENSLER: Right.

680
00:30:13,770 --> 00:30:14,880
I'm breaking it down.

681
00:30:14,880 --> 00:30:15,730
It is a transfer.

682
00:30:15,730 --> 00:30:17,230
But [? Keira ?] is
absolutely right.

683
00:30:17,230 --> 00:30:19,620
It's transferring
value from Gary--

684
00:30:19,620 --> 00:30:21,480
from me to Alpha.

685
00:30:21,480 --> 00:30:22,470
But Kelly's right.

686
00:30:22,470 --> 00:30:24,570
It's amending two ledgers.

687
00:30:24,570 --> 00:30:28,140
It's going to amend the
ledger on my side negative

688
00:30:28,140 --> 00:30:31,810
and hopefully amend
Alpha's positive.

689
00:30:31,810 --> 00:30:34,620
So it's amending and
recording ledgers.

690
00:30:34,620 --> 00:30:38,930
It's also-- these
systems, they have

691
00:30:38,930 --> 00:30:41,450
to first authorize something.

692
00:30:41,450 --> 00:30:43,860
They have to do something
called clearing.

693
00:30:43,860 --> 00:30:46,940
And we're going to get to all
of these later in the semester.

694
00:30:46,940 --> 00:30:49,850
You might think, oh, that's
the boring stuff about finance.

695
00:30:49,850 --> 00:30:51,740
It's the back office.

696
00:30:51,740 --> 00:30:55,010
But authorizing,
clearing, recording.

697
00:30:55,010 --> 00:30:59,360
And the key word for
blockchain is final transfer.

698
00:30:59,360 --> 00:31:02,300
The reason blockchain
might have application

699
00:31:02,300 --> 00:31:08,760
is it is a way to
finally move money.

700
00:31:08,760 --> 00:31:10,860
I don't mean finally
like over the centuries.

701
00:31:10,860 --> 00:31:14,520
I mean, if I were to move money
to Alpha through the US banking

702
00:31:14,520 --> 00:31:17,760
system, it might not
move for several days.

703
00:31:17,760 --> 00:31:22,770
Blockchain is an application
that could have more immediacy.

704
00:31:22,770 --> 00:31:26,570
Final settlement.

705
00:31:26,570 --> 00:31:27,815
Finance and regulation.

706
00:31:27,815 --> 00:31:29,190
We talked a little
bit about this

707
00:31:29,190 --> 00:31:31,290
when we were talking
about the readings,

708
00:31:31,290 --> 00:31:34,170
but it's long been part
of public policy debates.

709
00:31:34,170 --> 00:31:35,320
This is not new.

710
00:31:35,320 --> 00:31:37,810
It's not just a post
financial crisis.

711
00:31:37,810 --> 00:31:42,660
It's not part of like the
post-industrial economies

712
00:31:42,660 --> 00:31:43,600
of the globe.

713
00:31:43,600 --> 00:31:47,620
It has been true for
thousands of years.

714
00:31:47,620 --> 00:31:50,593
Sometime to the point that
people went to prison.

715
00:31:50,593 --> 00:31:52,260
Does anybody know
what debtor prison is?

716
00:31:56,290 --> 00:31:58,725
Kyle or Priya?

717
00:31:58,725 --> 00:32:00,100
STUDENT: You would
basically have

718
00:32:00,100 --> 00:32:01,980
to go to jail if you
didn't pay your debts off

719
00:32:01,980 --> 00:32:04,563
in a certain amount of time, to
work off your debt [INAUDIBLE]

720
00:32:04,563 --> 00:32:05,692
be there.

721
00:32:05,692 --> 00:32:07,150
GARY GENSLER: So
Kyle is mentioning

722
00:32:07,150 --> 00:32:08,925
that debtor prison
was that you literally

723
00:32:08,925 --> 00:32:11,050
had to go to jail if you
didn't pay off your debts.

724
00:32:11,050 --> 00:32:13,330
Do you know when that
went away in the US

725
00:32:13,330 --> 00:32:16,900
or in Europe or in
China, in any country?

726
00:32:16,900 --> 00:32:18,700
STUDENT: Disturbingly recently.

727
00:32:18,700 --> 00:32:21,682
GARY GENSLER:
Disturbingly recently?

728
00:32:21,682 --> 00:32:22,840
STUDENT: [INAUDIBLE]

729
00:32:22,840 --> 00:32:25,300
GARY GENSLER: No, I thought
it was 18th century.

730
00:32:25,300 --> 00:32:27,820
But you're saying you
think was 19th century.

731
00:32:27,820 --> 00:32:31,120
I haven't researched when
debtor prison finally went away.

732
00:32:31,120 --> 00:32:34,690
But so regulation also
is this horrible thought.

733
00:32:34,690 --> 00:32:37,540
What did we do when people
didn't pay their debts,

734
00:32:37,540 --> 00:32:40,300
and how bankruptcy
laws reflect--

735
00:32:40,300 --> 00:32:42,070
because bankruptcy
laws are a social

736
00:32:42,070 --> 00:32:45,880
construct, in essence,
that you don't go to jail,

737
00:32:45,880 --> 00:32:50,080
but you have an opportunity
to work through those debts.

738
00:32:50,080 --> 00:32:52,420
I just highlight this
that it's not a new thing.

739
00:32:52,420 --> 00:32:55,330
Blockchain isn't the-- we
don't have regulation because

740
00:32:55,330 --> 00:32:57,670
of blockchain, and
we don't necessarily

741
00:32:57,670 --> 00:33:00,700
need a new set of regulations.

742
00:33:00,700 --> 00:33:03,340
Because finance is so
central to economies,

743
00:33:03,340 --> 00:33:06,520
we've been grappling with
regulation for a long time.

744
00:33:06,520 --> 00:33:09,430
Now you saw this little
framework before,

745
00:33:09,430 --> 00:33:11,150
but I restacked it.

746
00:33:11,150 --> 00:33:13,810
This is now the stack
I think of in terms

747
00:33:13,810 --> 00:33:17,230
of financial regulation.

748
00:33:17,230 --> 00:33:19,120
Financial stability is first.

749
00:33:19,120 --> 00:33:20,980
And while you can't
see closely, this

750
00:33:20,980 --> 00:33:23,770
is a bank run and
a wonderful picture

751
00:33:23,770 --> 00:33:27,700
by Dorothea Lange called
"White Angel Bread Line."

752
00:33:27,700 --> 00:33:31,030
But this is basically
financial stability

753
00:33:31,030 --> 00:33:35,890
is probably the first and
foremost thing that regulation

754
00:33:35,890 --> 00:33:39,040
around finance has been
for a couple of centuries.

755
00:33:39,040 --> 00:33:43,550
It's how do we make sure that
the banks have backing when

756
00:33:43,550 --> 00:33:47,180
they take the money in house?

757
00:33:47,180 --> 00:33:51,050
And how do we make sure that we
don't have a calamitous thing?

758
00:33:51,050 --> 00:33:55,820
And even before Fiat currency,
well before Fiat currencies,

759
00:33:55,820 --> 00:34:02,360
we had economic cycles
that had boom and bust.

760
00:34:02,360 --> 00:34:06,185
Like in the 17th century,
the tulip bulb craze--

761
00:34:09,070 --> 00:34:13,550
the tulip bulbs in
Holland, I guess.

762
00:34:13,550 --> 00:34:17,750
But we also had incredible
boom and bust periods

763
00:34:17,750 --> 00:34:22,250
around the South Sea,
the stock companies that

764
00:34:22,250 --> 00:34:26,870
were being created over
exploration and so forth.

765
00:34:26,870 --> 00:34:28,760
Protecting the
public, just as we've

766
00:34:28,760 --> 00:34:34,489
talked about in blockchain, I
would say that non-blockchain,

767
00:34:34,489 --> 00:34:37,653
there's a lot more emphasis
on consumer protection,

768
00:34:37,653 --> 00:34:41,429
a tremendous amount of emphasis
on consumer protection.

769
00:34:41,429 --> 00:34:44,100
Of course, we've talked
about investor protection

770
00:34:44,100 --> 00:34:45,210
and so forth.

771
00:34:45,210 --> 00:34:47,489
The illicit activity
conversation

772
00:34:47,489 --> 00:34:51,780
we've had all around blockchain
is important around finance,

773
00:34:51,780 --> 00:34:53,250
but it's not the leading--

774
00:34:53,250 --> 00:34:54,820
it's not the tip of the spear.

775
00:34:54,820 --> 00:34:57,360
It's not where this
debate has been

776
00:34:57,360 --> 00:35:00,690
over the decades or centuries.

777
00:35:00,690 --> 00:35:05,310
It's frankly more something
in the last 30 or 40 years.

778
00:35:05,310 --> 00:35:09,510
As money has moved to
digitized electronic means,

779
00:35:09,510 --> 00:35:14,060
governments have
stood up more emphasis

780
00:35:14,060 --> 00:35:17,730
on any money laundering
laws, Bank Secrecy Act

781
00:35:17,730 --> 00:35:19,260
laws and the like.

782
00:35:19,260 --> 00:35:23,160
But if you look at the
history of like 19th century

783
00:35:23,160 --> 00:35:28,068
or early 20th century
financial regulation,

784
00:35:28,068 --> 00:35:29,610
there was a little
bit about guarding

785
00:35:29,610 --> 00:35:31,680
against illicit activity.

786
00:35:31,680 --> 00:35:35,590
But by and large, most of
the regulatory regimes--

787
00:35:35,590 --> 00:35:40,830
even in the 1930s, during the
financial crisis of its time,

788
00:35:40,830 --> 00:35:45,630
the Great Depression, most
of it was about bank runs,

789
00:35:45,630 --> 00:35:50,490
shoring up the banking system,
standing up deposit insurance

790
00:35:50,490 --> 00:35:53,450
and protecting the investors.

791
00:35:53,450 --> 00:35:58,450
And it was this concept of money
laundering and so forth was--

792
00:35:58,450 --> 00:36:02,770
it's when we move
from physical forms

793
00:36:02,770 --> 00:36:08,210
of cash to electronic forms
that you found more of that.

794
00:36:08,210 --> 00:36:08,810
Yes, please.

795
00:36:08,810 --> 00:36:11,000
STUDENT: In a public
policy discussion,

796
00:36:11,000 --> 00:36:13,780
how is financial
stability defined?

797
00:36:13,780 --> 00:36:15,620
Is it like more inflation?

798
00:36:15,620 --> 00:36:17,370
GARY GENSLER: That's
a very good question.

799
00:36:17,370 --> 00:36:18,412
Remember your first name?

800
00:36:18,412 --> 00:36:19,356
Jihee.

801
00:36:19,356 --> 00:36:21,860
Jihee is asking, is
financial stability

802
00:36:21,860 --> 00:36:25,070
about inflation or otherwise?

803
00:36:25,070 --> 00:36:29,030
It does include inflation, but
financial stability is broader.

804
00:36:29,030 --> 00:36:37,580
In essence, it's the thought
of, does the financial system

805
00:36:37,580 --> 00:36:39,960
lead to instability
in the economy?

806
00:36:39,960 --> 00:36:44,110
And what is true, again,
for probably a couple

807
00:36:44,110 --> 00:36:47,420
of thousand years, but the
research that you can read--

808
00:36:47,420 --> 00:36:48,920
Ken Rogoff's book.

809
00:36:48,920 --> 00:36:51,490
I don't know if any of you have
ever read Ken Rogoff's book.

810
00:36:51,490 --> 00:36:55,220
It was a wonderful book
about the history of crises

811
00:36:55,220 --> 00:37:00,050
and economic cycles that
came out 4 to 6 years ago,

812
00:37:00,050 --> 00:37:01,820
and I could get
you the name of it.

813
00:37:01,820 --> 00:37:12,140
But finance adds to and
leads to booms and busts.

814
00:37:12,140 --> 00:37:15,410
Booms and busts existed
well before Fiat currency

815
00:37:15,410 --> 00:37:18,500
and banking, but there's
booms and busts in the cycle.

816
00:37:18,500 --> 00:37:20,240
And so financial
stability, in essence,

817
00:37:20,240 --> 00:37:24,320
is trying to smooth out
the cycles you would say.

818
00:37:24,320 --> 00:37:27,200
Central banks came
along initially

819
00:37:27,200 --> 00:37:30,870
in the late 17th century.

820
00:37:30,870 --> 00:37:32,930
But then, by the
early 20th century,

821
00:37:32,930 --> 00:37:36,950
most nations had central banks
as a check on the sovereign

822
00:37:36,950 --> 00:37:38,930
in terms of currency.

823
00:37:38,930 --> 00:37:41,300
And that's where, Jihee your
question about inflation.

824
00:37:43,950 --> 00:37:46,380
So if the sovereign
can deflate--

825
00:37:46,380 --> 00:37:50,130
if the currency could be
devalued through inflation,

826
00:37:50,130 --> 00:37:52,140
that can lead to instability.

827
00:37:52,140 --> 00:37:55,620
But it's all forms
of instability,

828
00:37:55,620 --> 00:37:59,220
particularly because leverage
is at the center of finance.

829
00:37:59,220 --> 00:38:02,910
Leverage meaning that a
financial institution's assets

830
00:38:02,910 --> 00:38:03,896
are what?

831
00:38:03,896 --> 00:38:06,120
What are financial
intermediaries' assets?

832
00:38:09,480 --> 00:38:11,842
If you look at a balance sheet--

833
00:38:11,842 --> 00:38:12,820
Eilon?

834
00:38:13,425 --> 00:38:14,050
STUDENT: Loans.

835
00:38:14,050 --> 00:38:15,450
GARY GENSLER: Loans.

836
00:38:15,450 --> 00:38:18,180
Brotish?

837
00:38:18,180 --> 00:38:19,435
STUDENT: Deposits?

838
00:38:19,435 --> 00:38:22,060
GARY GENSLER: Well, deposits are
usually on the liability side.

839
00:38:22,060 --> 00:38:23,875
But [INAUDIBLE]?

840
00:38:23,875 --> 00:38:24,645
STUDENT: Capital?

841
00:38:24,645 --> 00:38:26,140
GARY GENSLER: Capital.

842
00:38:26,140 --> 00:38:27,980
You mean capital
and somebody else?

843
00:38:27,980 --> 00:38:28,683
STUDENT: Yeah.

844
00:38:28,683 --> 00:38:30,100
GARY GENSLER: All
right, one more.

845
00:38:30,100 --> 00:38:31,892
I mean, loans-- these
are all good answers.

846
00:38:31,892 --> 00:38:32,462
Anton?

847
00:38:32,462 --> 00:38:34,347
STUDENT: [INAUDIBLE]

848
00:38:34,347 --> 00:38:35,430
GARY GENSLER: What's that?

849
00:38:35,430 --> 00:38:37,426
STUDENT: The security
they're investing in.

850
00:38:37,426 --> 00:38:40,360
GARY GENSLER: The
securities-- investments.

851
00:38:40,360 --> 00:38:42,820
The difference between a
commercial balance sheet,

852
00:38:42,820 --> 00:38:45,550
or a non-financial balance sheet
and a financial balance sheet,

853
00:38:45,550 --> 00:38:47,680
easy to figure this out.

854
00:38:47,680 --> 00:38:52,120
Commercial balance sheets
have physical assets.

855
00:38:52,120 --> 00:38:53,620
They own plants, equipment.

856
00:38:53,620 --> 00:38:54,580
In the old days--

857
00:38:54,580 --> 00:38:56,650
I mean, now it's
intangible assets,

858
00:38:56,650 --> 00:39:01,180
like movies and
software development.

859
00:39:01,180 --> 00:39:03,640
But and a financial
balance sheet,

860
00:39:03,640 --> 00:39:05,920
almost all financial
balance sheets you look at,

861
00:39:05,920 --> 00:39:09,990
all their assets are
other financial assets.

862
00:39:09,990 --> 00:39:13,440
A loan is a financial asset, a
security is a financial asset,

863
00:39:13,440 --> 00:39:17,370
a deposit is a security--
they're assets.

864
00:39:17,370 --> 00:39:20,800
They have a little bricks and
mortar, maybe a little bit

865
00:39:20,800 --> 00:39:23,830
of goodwill or
intellectual property,

866
00:39:23,830 --> 00:39:26,830
and a lot of other
financial assets.

867
00:39:26,830 --> 00:39:29,830
And they're-- the right hand
side of the balance sheet is

868
00:39:29,830 --> 00:39:32,455
a bunch of liabilities and
a little bit of capital.

869
00:39:35,800 --> 00:39:36,895
And so they're levered.

870
00:39:40,000 --> 00:39:43,930
And that leads to instability.

871
00:39:43,930 --> 00:39:45,430
Finance and technology.

872
00:39:45,430 --> 00:39:49,540
I contend finance has long been
in a symbiotic relationship

873
00:39:49,540 --> 00:39:50,270
with technology.

874
00:39:50,270 --> 00:39:53,020
It just depends on the
technology of its time.

875
00:39:53,020 --> 00:39:55,600
Blockchain is just
in that long history.

876
00:39:58,137 --> 00:39:59,220
And we've talked about it.

877
00:39:59,220 --> 00:40:02,280
Money started looking like this.

878
00:40:02,280 --> 00:40:06,060
We've sort of gone
down this path.

879
00:40:06,060 --> 00:40:11,070
Then technology came along,
and it could look like this.

880
00:40:11,070 --> 00:40:14,520
But it's all technological
evolution, or at times

881
00:40:14,520 --> 00:40:21,210
revolution, that we went
from that to paper money.

882
00:40:21,210 --> 00:40:23,520
Now sometimes
technology veers off

883
00:40:23,520 --> 00:40:27,360
and we have private bank
notes instead of Fiat notes

884
00:40:27,360 --> 00:40:28,120
and so forth.

885
00:40:28,120 --> 00:40:31,960
But it's just forms
of technology.

886
00:40:31,960 --> 00:40:36,440
And the modern
money, Fiat currency,

887
00:40:36,440 --> 00:40:41,060
is just another evolution in
technology and regulation.

888
00:40:41,060 --> 00:40:42,920
So that's why I'm
saying it's sort of--

889
00:40:42,920 --> 00:40:45,230
finance, regulation,
and technology all

890
00:40:45,230 --> 00:40:48,200
have this symbiotic
bit together,

891
00:40:48,200 --> 00:40:52,810
from debtor prison
to where we are now.

892
00:40:52,810 --> 00:40:54,800
And thankfully, we don't
have debtor prison.

893
00:40:54,800 --> 00:40:55,378
Yes?

894
00:40:55,378 --> 00:40:55,920
STUDENT: Yes.

895
00:40:55,920 --> 00:40:57,940
[INAUDIBLE] a
consequence of reading

896
00:40:57,940 --> 00:41:00,230
the readings for today's class.

897
00:41:00,230 --> 00:41:04,030
I was kind of thinking
that maybe it's

898
00:41:04,030 --> 00:41:09,190
the very nature of the financial
market and its configuration.

899
00:41:09,190 --> 00:41:13,280
Big companies with very
high barriers of entry,

900
00:41:13,280 --> 00:41:17,390
because of the regulation
and the substantial capital

901
00:41:17,390 --> 00:41:21,680
requirements, that their
relationship with technology

902
00:41:21,680 --> 00:41:26,240
innovation has been that
fluid in the recent years up

903
00:41:26,240 --> 00:41:31,550
until the recent showing
of FinTech startups.

904
00:41:31,550 --> 00:41:35,110
Because there's a certain
sense of complacency,

905
00:41:35,110 --> 00:41:36,860
in the sense that
they've been approaching

906
00:41:36,860 --> 00:41:37,880
technology innovation.

907
00:41:37,880 --> 00:41:40,840
You see current incumbents--

908
00:41:40,840 --> 00:41:44,720
and I was surprised by kind of
noticing the same [INAUDIBLE]

909
00:41:44,720 --> 00:41:46,740
here in the United States.

910
00:41:46,740 --> 00:41:51,740
Big banks still use
really old legacy systems.

911
00:41:51,740 --> 00:41:53,840
And they can innovate,
but incrementally.

912
00:41:53,840 --> 00:41:56,260
They put the brand new
mobile application--

913
00:41:56,260 --> 00:41:58,190
GARY GENSLER: So Eric--

914
00:41:58,190 --> 00:42:01,100
I think Eric's raising
at least three points,

915
00:42:01,100 --> 00:42:05,270
but maybe there's four or
five and I missed some.

916
00:42:05,270 --> 00:42:10,220
That concept that,
yes, finance has always

917
00:42:10,220 --> 00:42:14,030
been about
technology, but do you

918
00:42:14,030 --> 00:42:17,570
think something's accelerated
in the last period of time?

919
00:42:17,570 --> 00:42:20,270
That it's even more
about technology?

920
00:42:20,270 --> 00:42:21,290
That's Point 1.

921
00:42:21,290 --> 00:42:26,060
Point 2 is, they seem to
be slow at adaptation,

922
00:42:26,060 --> 00:42:27,980
that the really
kind of lumbering

923
00:42:27,980 --> 00:42:32,600
of the bunch of legacy systems.

924
00:42:32,600 --> 00:42:33,950
And they're slow.

925
00:42:33,950 --> 00:42:35,420
Those were the two main points.

926
00:42:35,420 --> 00:42:37,190
Maybe there's a third or fourth.

927
00:42:37,190 --> 00:42:41,120
I would concur,
though I wouldn't

928
00:42:41,120 --> 00:42:43,690
overemphasize the first.

929
00:42:43,690 --> 00:42:48,890
They had to grapple with what it
meant when the telegraph wires

930
00:42:48,890 --> 00:42:50,780
came and the telephones came.

931
00:42:50,780 --> 00:42:53,240
I mean, maybe not in the same--

932
00:42:53,240 --> 00:42:57,990
maybe it has accelerated,
but there's still--

933
00:42:57,990 --> 00:43:01,010
and it's said that--

934
00:43:01,010 --> 00:43:03,530
they said that the people that
did the best in the London

935
00:43:03,530 --> 00:43:08,990
Stock Exchange about 200 years
ago, the Battle of Waterloo

936
00:43:08,990 --> 00:43:09,510
happened.

937
00:43:09,510 --> 00:43:11,510
Does anybody know where
the Battle of Waterloo--

938
00:43:11,510 --> 00:43:12,980
I mean, it's before me too.

939
00:43:12,980 --> 00:43:15,290
I wasn't around then.

940
00:43:15,290 --> 00:43:15,830
Thank you.

941
00:43:15,830 --> 00:43:17,110
Is that good?

942
00:43:17,110 --> 00:43:17,807
What's that?

943
00:43:17,807 --> 00:43:19,140
STUDENT: [INAUDIBLE] in Belgium.

944
00:43:19,140 --> 00:43:20,210
GARY GENSLER: In Belgium.

945
00:43:20,210 --> 00:43:21,770
But who was the great general?

946
00:43:22,505 --> 00:43:25,320
STUDENT: Washington?

947
00:43:25,320 --> 00:43:26,600
GARY GENSLER: Wellington.

948
00:43:26,600 --> 00:43:30,290
So it's said that Lord
Wellington sent carrier pigeons

949
00:43:30,290 --> 00:43:31,160
back to London.

950
00:43:31,160 --> 00:43:33,470
This is supposedly a real story.

951
00:43:33,470 --> 00:43:35,930
Those carrier pigeons
carried the information,

952
00:43:35,930 --> 00:43:38,900
and the traders in London
who got the carrier pigeons

953
00:43:38,900 --> 00:43:41,720
traded before others
knew the results.

954
00:43:41,720 --> 00:43:44,190
The carrier pigeons, in a
sense, were the technology

955
00:43:44,190 --> 00:43:44,690
at the time.

956
00:43:47,420 --> 00:43:49,970
So I'm just saying the
intersection of technology

957
00:43:49,970 --> 00:43:55,430
and finance, particularly for
those who have the best carrier

958
00:43:55,430 --> 00:43:58,850
pigeon, it works.

959
00:43:58,850 --> 00:44:00,590
Now I used to use
this story sometimes

960
00:44:00,590 --> 00:44:02,635
at hearings, when high
frequency traders would

961
00:44:02,635 --> 00:44:04,760
be coming in front of the
Commodity Futures Trading

962
00:44:04,760 --> 00:44:05,520
Commission.

963
00:44:05,520 --> 00:44:07,760
And they'd go, oh, the
chairman is going to pull out

964
00:44:07,760 --> 00:44:09,890
his carrier pigeon story again.

965
00:44:09,890 --> 00:44:12,620
And they said, please don't
call a high frequency trader

966
00:44:12,620 --> 00:44:13,940
a carrier pigeon company.

967
00:44:13,940 --> 00:44:17,420
But my point is is, I
think you're right, Eric.

968
00:44:17,420 --> 00:44:20,990
I think it's accelerated, but
it's not that it wasn't-- and I

969
00:44:20,990 --> 00:44:25,760
do think that the big incumbents
are sometimes slow to adapt,

970
00:44:25,760 --> 00:44:32,160
and that's part of the
opportunity of blockchain.

971
00:44:32,160 --> 00:44:34,590
Blockchain may not be better
than what they're doing,

972
00:44:34,590 --> 00:44:38,010
but blockchain might be
the tool of a disruptor

973
00:44:38,010 --> 00:44:41,820
to get someplace that
the incumbents are too

974
00:44:41,820 --> 00:44:45,520
invested in their current
legacy system to get there.

975
00:44:45,520 --> 00:44:47,280
So it might be that
opportunity to get

976
00:44:47,280 --> 00:44:49,040
underneath what they're doing.

977
00:44:49,040 --> 00:44:49,540
Eilon.

978
00:44:49,540 --> 00:44:52,600
STUDENT: Are you talking
about building a bank that's

979
00:44:52,600 --> 00:44:54,600
built on blockchain as
an opportunity to disrupt

980
00:44:54,600 --> 00:44:55,475
the banking industry?

981
00:44:55,475 --> 00:44:59,130
Or using the blockchain within
the activities [INAUDIBLE]..

982
00:44:59,130 --> 00:45:01,138
GARY GENSLER: Well,
see, that's not

983
00:45:01,138 --> 00:45:02,430
a question I'm going to answer.

984
00:45:02,430 --> 00:45:05,430
You all get to answer that
in your final projects.

985
00:45:05,430 --> 00:45:09,150
And I suspect you're
going to be narrower--

986
00:45:09,150 --> 00:45:12,300
if your project is, disrupt
and build a whole bank,

987
00:45:12,300 --> 00:45:14,490
I look forward to
reading the project.

988
00:45:14,490 --> 00:45:18,160
But I suspect you're going to
be a little bit more targeted,

989
00:45:18,160 --> 00:45:21,780
and that the most
successful opportunities,

990
00:45:21,780 --> 00:45:23,730
to the extent any
will be successful--

991
00:45:23,730 --> 00:45:25,830
and most will fail--

992
00:45:25,830 --> 00:45:28,470
but to the extent
any are successful,

993
00:45:28,470 --> 00:45:31,620
my hunch will be more
targeted than that.

994
00:45:31,620 --> 00:45:35,970
But I leave it to the
creative minds in this class.

995
00:45:35,970 --> 00:45:37,890
Fiat currency
we've talked about.

996
00:45:37,890 --> 00:45:39,750
It's a liability of
commercial banks.

997
00:45:39,750 --> 00:45:40,710
It's central banks.

998
00:45:40,710 --> 00:45:43,320
It's accepted for
taxes and legal tender.

999
00:45:43,320 --> 00:45:46,830
I do this in terms
for repetition.

1000
00:45:46,830 --> 00:45:49,390
Because if this is a
class today about finance,

1001
00:45:49,390 --> 00:45:53,640
I can't do it without
talking about Fiat currency.

1002
00:45:53,640 --> 00:45:57,180
And yes, it relies on
a system of ledgers.

1003
00:45:57,180 --> 00:45:57,908
Sorry.

1004
00:45:57,908 --> 00:45:58,950
Had to get that in there.

1005
00:45:58,950 --> 00:46:02,130
But ledgers at the
central bank, that

1006
00:46:02,130 --> 00:46:05,370
has an entry that-- there's
9,000 commercial banks

1007
00:46:05,370 --> 00:46:05,980
in the US.

1008
00:46:05,980 --> 00:46:07,813
I don't mean to leave
out any other country,

1009
00:46:07,813 --> 00:46:10,140
but the form and
fashion is the same.

1010
00:46:10,140 --> 00:46:13,230
If there's 600 commercial
banks in the UK,

1011
00:46:13,230 --> 00:46:16,530
and I don't know the number,
or there's 1,000 in China,

1012
00:46:16,530 --> 00:46:18,750
it's always sort
of that same thing.

1013
00:46:18,750 --> 00:46:22,890
One big ledger at the central
bank and then every bank,

1014
00:46:22,890 --> 00:46:25,800
commercial bank, has
a reserve account,

1015
00:46:25,800 --> 00:46:28,290
and that reserve account
is on the master ledger

1016
00:46:28,290 --> 00:46:29,820
at the central bank in essence.

1017
00:46:33,090 --> 00:46:35,400
So this is just some of
the technology of ledgers,

1018
00:46:35,400 --> 00:46:37,680
from the proto cuneiform.

1019
00:46:37,680 --> 00:46:42,870
The IBM 360 in 1961
revolutionized finance.

1020
00:46:42,870 --> 00:46:49,050
And IBM was not only the
best disruptor company,

1021
00:46:49,050 --> 00:46:52,050
but it was
revolutionizing finance.

1022
00:46:52,050 --> 00:46:56,310
That IBM 360 really started to
get adopted in a lot of finance

1023
00:46:56,310 --> 00:46:57,450
in the 1970s.

1024
00:46:57,450 --> 00:47:00,117
In the 1960s, there was
the paperwork problem.

1025
00:47:00,117 --> 00:47:01,950
The New York Stock
Exchange had to shut down

1026
00:47:01,950 --> 00:47:04,710
for a couple of days in the late
'60s, because they basically

1027
00:47:04,710 --> 00:47:06,690
had too much paper.

1028
00:47:06,690 --> 00:47:10,530
Physical limitations
for finance.

1029
00:47:10,530 --> 00:47:12,930
Payment and settlement
systems have come a long way.

1030
00:47:12,930 --> 00:47:16,080
That's Thomas Jefferson
writing a check to himself.

1031
00:47:16,080 --> 00:47:20,280
But a check from Thomas
Jefferson to himself in 1809

1032
00:47:20,280 --> 00:47:24,490
was a form to change
two ledger accounts.

1033
00:47:24,490 --> 00:47:27,510
Telex, believe it or
not, there was still

1034
00:47:27,510 --> 00:47:30,150
some telex machines when
I started at Goldman Sachs

1035
00:47:30,150 --> 00:47:32,560
in 1979.

1036
00:47:32,560 --> 00:47:33,200
I was 6.

1037
00:47:36,090 --> 00:47:38,380
I was 21.

1038
00:47:38,380 --> 00:47:43,470
But telex machines were
a very big innovation

1039
00:47:43,470 --> 00:47:45,990
in the 1950s that allowed
for the communication

1040
00:47:45,990 --> 00:47:46,830
and sending around.

1041
00:47:46,830 --> 00:47:52,230
Now they're overcome by the
important technologies later.

1042
00:47:52,230 --> 00:47:56,010
All of these technologies
were before the big boom

1043
00:47:56,010 --> 00:47:59,010
and what I'll call
encryptography,

1044
00:47:59,010 --> 00:48:01,140
and how to secure
communications,

1045
00:48:01,140 --> 00:48:05,140
and the whole form of public
key and private key cryptography

1046
00:48:05,140 --> 00:48:08,700
and other forms of
cryptography, all of which

1047
00:48:08,700 --> 00:48:11,498
are used in banking
today pre blockchain.

1048
00:48:11,498 --> 00:48:13,290
Almost everything that's
done in blockchain

1049
00:48:13,290 --> 00:48:15,210
has some form of
cryptography that's

1050
00:48:15,210 --> 00:48:18,490
being used for it and with it.

1051
00:48:18,490 --> 00:48:22,410
So blockchain, in a sense, is
just possibly a new technology

1052
00:48:22,410 --> 00:48:26,010
using cryptography and
using databases and doing it

1053
00:48:26,010 --> 00:48:28,010
in a different way.

1054
00:48:28,010 --> 00:48:32,160
And the question is, can we can
we find use cases in finance

1055
00:48:32,160 --> 00:48:34,210
through that?

1056
00:48:34,210 --> 00:48:37,000
So what are some of
the technologies today?

1057
00:48:37,000 --> 00:48:38,670
And this is not
a fintech course.

1058
00:48:38,670 --> 00:48:40,320
If it was a fintech
course, every one

1059
00:48:40,320 --> 00:48:42,870
of the things that are
going to go on this slide

1060
00:48:42,870 --> 00:48:43,940
would be talked about.

1061
00:48:43,940 --> 00:48:46,440
But does anybody want to just
have some fun and name what's

1062
00:48:46,440 --> 00:48:48,540
going on in fintech world?

1063
00:48:48,540 --> 00:48:51,970
Blockchain is one of the eight
things I'm going to list.

1064
00:48:51,970 --> 00:48:54,210
Anybody want to do
some guesses here?

1065
00:48:54,850 --> 00:48:55,386
STUDENT: AI.

1066
00:48:55,386 --> 00:48:56,553
GARY GENSLER: All right, AI.

1067
00:48:56,553 --> 00:48:57,767
Jihee.

1068
00:48:57,767 --> 00:48:58,600
STUDENT: Biometrics.

1069
00:48:58,600 --> 00:48:59,642
GARY GENSLER: Biometrics.

1070
00:48:59,642 --> 00:49:01,470
We've got two of the eight.

1071
00:49:01,470 --> 00:49:02,900
STUDENT: [INAUDIBLE]
open banking.

1072
00:49:02,900 --> 00:49:04,140
GARY GENSLER: Oh good, banking.

1073
00:49:04,140 --> 00:49:04,380
Good.

1074
00:49:04,380 --> 00:49:05,340
We have three of the eight.

1075
00:49:05,340 --> 00:49:06,030
This is good.

1076
00:49:06,030 --> 00:49:07,280
I want to see how we're going.

1077
00:49:07,280 --> 00:49:08,220
Daniel, thank you.

1078
00:49:08,220 --> 00:49:09,390
STUDENT: Big data.

1079
00:49:09,390 --> 00:49:10,540
GARY GENSLER: Big data.

1080
00:49:10,540 --> 00:49:11,040
All right.

1081
00:49:11,040 --> 00:49:12,615
That's not-- yes, yes.

1082
00:49:12,615 --> 00:49:13,490
I'm agreeing with it.

1083
00:49:13,490 --> 00:49:14,680
I didn't put it up there.

1084
00:49:14,680 --> 00:49:16,050
What's that?

1085
00:49:16,050 --> 00:49:16,700
RPI?

1086
00:49:16,700 --> 00:49:18,060
STUDENT: RPA.

1087
00:49:18,060 --> 00:49:18,810
GARY GENSLER: RPA.

1088
00:49:18,810 --> 00:49:20,435
You want to tell the
class what RPA is?

1089
00:49:20,435 --> 00:49:22,170
STUDENT: Robotic
Processing Automation.

1090
00:49:22,170 --> 00:49:24,460
GARY GENSLER: Yes, Robotic
Processing Automation.

1091
00:49:24,460 --> 00:49:25,650
Hugo?

1092
00:49:25,650 --> 00:49:26,310
No?

1093
00:49:26,310 --> 00:49:29,577
Oh, [INAUDIBLE] taken.

1094
00:49:29,577 --> 00:49:30,660
STUDENT: Machine learning.

1095
00:49:30,660 --> 00:49:33,510
GARY GENSLER: Machine
learning, yes.

1096
00:49:33,510 --> 00:49:36,180
All right, so AI, machine
learning, blockchain.

1097
00:49:36,180 --> 00:49:39,480
Nobody said cloud, because
now you all sort of take cloud

1098
00:49:39,480 --> 00:49:41,490
for granted.

1099
00:49:41,490 --> 00:49:43,940
And so maybe cloud shouldn't
even be on this page.

1100
00:49:43,940 --> 00:49:46,500
But it's still sort of
changing some, open API.

1101
00:49:46,500 --> 00:49:47,175
I'm sorry?

1102
00:49:47,175 --> 00:49:50,370
STUDENT: [INAUDIBLE] we
have a lot of revelations

1103
00:49:50,370 --> 00:49:52,500
about putting data on the cloud.

1104
00:49:52,500 --> 00:49:58,350
At least in Brazil, we
cancel any data [INAUDIBLE]..

1105
00:49:58,350 --> 00:50:00,120
And we just can't put--

1106
00:50:00,120 --> 00:50:02,130
GARY GENSLER: So
you're saying that--

1107
00:50:02,545 --> 00:50:03,420
STUDENT: [INAUDIBLE].

1108
00:50:03,420 --> 00:50:04,878
We do have a cloud,
a private cloud

1109
00:50:04,878 --> 00:50:08,512
that we use, but it's
not not the same as--

1110
00:50:08,512 --> 00:50:10,470
GARY GENSLER: So Leonardo
is saying, in Brazil,

1111
00:50:10,470 --> 00:50:13,195
you can't put certain
information on the cloud.

1112
00:50:13,195 --> 00:50:14,820
That's probably true
of many countries.

1113
00:50:14,820 --> 00:50:16,480
It's certain information.

1114
00:50:16,480 --> 00:50:18,870
But a lot of bank
information, a lot

1115
00:50:18,870 --> 00:50:20,910
of financial information
in most countries

1116
00:50:20,910 --> 00:50:23,130
are now up in the cloud.

1117
00:50:23,130 --> 00:50:24,630
10 years ago it wasn't.

1118
00:50:24,630 --> 00:50:27,600
So it's still sort of
shifting, and probably but

1119
00:50:27,600 --> 00:50:31,050
country by country,
jurisdiction by jurisdiction.

1120
00:50:31,050 --> 00:50:33,070
And I suspect, in
a lot of countries,

1121
00:50:33,070 --> 00:50:36,660
the official sector doesn't
even know what's in the cloud.

1122
00:50:36,660 --> 00:50:38,950
And then the other,
biometrics are mentioned.

1123
00:50:38,950 --> 00:50:41,970
Interestingly, nobody mentioned
chat bots, one of my favorites.

1124
00:50:41,970 --> 00:50:44,970
But chat bots is a
big piece of what's

1125
00:50:44,970 --> 00:50:48,490
going on in finance
and so forth.

1126
00:50:48,490 --> 00:50:50,640
You don't like chat bots, Hugo?

1127
00:50:50,640 --> 00:50:52,320
How many people like chat bots?

1128
00:50:52,320 --> 00:50:55,550
Can I see a show of hands?

1129
00:50:55,550 --> 00:50:57,490
So what is it that
you like about--

1130
00:50:57,490 --> 00:51:00,895
Tom, what do you
like about chat bots?

1131
00:51:00,895 --> 00:51:03,910
STUDENT: If I'm going to go
through a robotic system,

1132
00:51:03,910 --> 00:51:05,890
whether it's like an
automated press button,

1133
00:51:05,890 --> 00:51:08,015
I would rather go through
the automated system that

1134
00:51:08,015 --> 00:51:09,120
gives me the answer.

1135
00:51:09,120 --> 00:51:13,640
[INAUDIBLE] until I
end up [INAUDIBLE]..

1136
00:51:13,640 --> 00:51:15,640
GARY GENSLER: Eric, you
said you like chat bots?

1137
00:51:15,640 --> 00:51:17,557
STUDENT: Yeah, but not
from the customer side,

1138
00:51:17,557 --> 00:51:18,907
but from the other side.

1139
00:51:18,907 --> 00:51:19,530
[LAUGHTER]

1140
00:51:19,530 --> 00:51:20,530
GARY GENSLER: All right.

1141
00:51:20,530 --> 00:51:22,660
From the customer
side, how many people

1142
00:51:22,660 --> 00:51:25,990
really kind of don't
like chat bots?

1143
00:51:25,990 --> 00:51:26,490
Right?

1144
00:51:26,490 --> 00:51:28,850
I mean, it's not a great
customer experience.

1145
00:51:28,850 --> 00:51:31,610
But maybe that's
where somebody is

1146
00:51:31,610 --> 00:51:33,770
going to spend a lot
of technology and money

1147
00:51:33,770 --> 00:51:37,340
and ingenuity and
some Sloan MIT group

1148
00:51:37,340 --> 00:51:40,880
will solve that, that it's a
better customer experience.

1149
00:51:40,880 --> 00:51:43,070
Just an observation
for anybody listening

1150
00:51:43,070 --> 00:51:46,540
if this film is ever seen.

1151
00:51:46,540 --> 00:51:47,550
Credit.

1152
00:51:47,550 --> 00:51:48,770
Let me just [INAUDIBLE] say.

1153
00:51:48,770 --> 00:51:49,960
What's credit?

1154
00:51:49,960 --> 00:51:51,600
I earlier already defined this.

1155
00:51:51,600 --> 00:51:53,180
But what is credit?

1156
00:51:53,180 --> 00:51:55,910
It's basically borrowing
something of value,

1157
00:51:55,910 --> 00:51:57,710
but importantly,
with an agreement

1158
00:51:57,710 --> 00:52:00,640
to give it back later.

1159
00:52:00,640 --> 00:52:02,020
As old as time can be.

1160
00:52:02,020 --> 00:52:05,280
It probably goes back
20,000, 30,000 years.

1161
00:52:05,280 --> 00:52:08,140
Some of the earliest
writing is about what it is.

1162
00:52:08,140 --> 00:52:12,760
But here's a chart about
US private and public debt

1163
00:52:12,760 --> 00:52:14,380
as a percentage of GDP.

1164
00:52:14,380 --> 00:52:18,650
It's based on the
Federal Reserve numbers.

1165
00:52:18,650 --> 00:52:19,780
I got a chart--

1166
00:52:19,780 --> 00:52:20,830
I looked hard for this--

1167
00:52:20,830 --> 00:52:22,450
140 year chart.

1168
00:52:22,450 --> 00:52:26,770
And if you can't see it, we are
currently-- the debt in the US

1169
00:52:26,770 --> 00:52:29,620
is about 350% of our economy.

1170
00:52:29,620 --> 00:52:32,980
Our economy is $20
trillion, and debt totals

1171
00:52:32,980 --> 00:52:34,570
around $70 trillion.

1172
00:52:34,570 --> 00:52:38,530
Just easy, easy
math for these days.

1173
00:52:38,530 --> 00:52:39,340
When did it peak?

1174
00:52:39,340 --> 00:52:45,880
The last time was
in 1929 at 300%.

1175
00:52:45,880 --> 00:52:49,580
We zipped past 300%.

1176
00:52:49,580 --> 00:52:51,590
We had the 2008 crisis.

1177
00:52:51,590 --> 00:52:54,403
It's sort of been
coming back down.

1178
00:52:54,403 --> 00:52:56,570
I'm not suggesting we're
going come all the way back

1179
00:52:56,570 --> 00:52:58,700
down 140%.

1180
00:52:58,700 --> 00:53:02,990
But I raise this chart to
say, debt in modern economies

1181
00:53:02,990 --> 00:53:06,830
is a big part of
how economies work.

1182
00:53:06,830 --> 00:53:09,470
The US total credit market--

1183
00:53:09,470 --> 00:53:10,970
now those are the slices.

1184
00:53:10,970 --> 00:53:14,540
Government, commercial,
financial, household.

1185
00:53:14,540 --> 00:53:16,978
Each about one fourth in the US.

1186
00:53:16,978 --> 00:53:19,520
It would break out a little bit
different in other countries,

1187
00:53:19,520 --> 00:53:22,130
of course.

1188
00:53:22,130 --> 00:53:24,320
And then here's
the US bond market.

1189
00:53:24,320 --> 00:53:28,550
Now, the US bond market
is only about $40 trillion

1190
00:53:28,550 --> 00:53:30,350
and the debt market is $67.

1191
00:53:30,350 --> 00:53:33,440
What's the difference
between those two?

1192
00:53:33,440 --> 00:53:35,330
What's that?

1193
00:53:35,330 --> 00:53:36,840
So this the bond market.

1194
00:53:36,840 --> 00:53:38,550
That's the credit market.

1195
00:53:38,550 --> 00:53:42,830
So all of that government
debt is in the bond market,

1196
00:53:42,830 --> 00:53:46,700
but a lot of the commercial
debt is bank loans.

1197
00:53:46,700 --> 00:53:47,510
And you're right.

1198
00:53:47,510 --> 00:53:51,840
A lot of the household paper
is also then securitized.

1199
00:53:51,840 --> 00:53:54,840
So you've got to get rid of
some of the double counting.

1200
00:53:54,840 --> 00:53:57,110
And there's all sorts of
questions of double counting

1201
00:53:57,110 --> 00:53:58,740
and so forth.

1202
00:53:58,740 --> 00:54:00,890
$40 trillion bond market.

1203
00:54:00,890 --> 00:54:04,140
But the total is
closer to $70 trillion

1204
00:54:04,140 --> 00:54:07,130
by Federal Reserve statistics.

1205
00:54:07,130 --> 00:54:08,880
I thought it'd be just
interesting to say,

1206
00:54:08,880 --> 00:54:12,870
what's the bond and equity
markets around the globe?

1207
00:54:12,870 --> 00:54:18,810
Our bond and equity markets
combined are about 360%

1208
00:54:18,810 --> 00:54:20,370
of our economy.

1209
00:54:20,370 --> 00:54:22,660
The EU and China, you can see--

1210
00:54:22,660 --> 00:54:25,040
now, that might mean that
we have an overvalued stock

1211
00:54:25,040 --> 00:54:25,590
market.

1212
00:54:25,590 --> 00:54:27,450
Our stock market right
now is about 30--

1213
00:54:27,450 --> 00:54:30,540
well, today it might
not be as good.

1214
00:54:30,540 --> 00:54:33,300
But it's hovering
around $30 trillion.

1215
00:54:33,300 --> 00:54:36,510
I think it was up to
$32 or $33 trillion.

1216
00:54:36,510 --> 00:54:39,590
Has is it done
poorly today again?

1217
00:54:39,590 --> 00:54:40,090
Yeah.

1218
00:54:42,878 --> 00:54:43,920
But it gives you a sense.

1219
00:54:43,920 --> 00:54:47,800
It's not just the US that
are about these numbers.

1220
00:54:47,800 --> 00:54:51,580
This is how financing of
non-financial corporations

1221
00:54:51,580 --> 00:54:54,000
in the four big jurisdictions.

1222
00:54:54,000 --> 00:54:58,020
The US is far more
securities-focused,

1223
00:54:58,020 --> 00:55:01,320
meaning we have very
well-developed bond and equity

1224
00:55:01,320 --> 00:55:02,610
markets.

1225
00:55:02,610 --> 00:55:06,480
And loans, as you can see,
only provide about 11% or 12%

1226
00:55:06,480 --> 00:55:09,810
of funding for commercial--

1227
00:55:09,810 --> 00:55:12,630
if you're a small company,
you get your borrowings

1228
00:55:12,630 --> 00:55:13,260
from a bank.

1229
00:55:13,260 --> 00:55:16,120
If you're a big company, you go
out in the securities market.

1230
00:55:16,120 --> 00:55:16,620
James?

1231
00:55:16,620 --> 00:55:18,453
STUDENT: Are these
publicly traded companies

1232
00:55:18,453 --> 00:55:20,110
or just any company?

1233
00:55:20,110 --> 00:55:21,920
GARY GENSLER: I didn't
do the research.

1234
00:55:21,920 --> 00:55:24,960
SIFMA, which is a securities
industry association,

1235
00:55:24,960 --> 00:55:27,090
puts out a report
annually and I grabbed

1236
00:55:27,090 --> 00:55:29,740
these from the SIFMA report
that came out two weeks ago.

1237
00:55:29,740 --> 00:55:33,763
So I could look at the
report, but I don't know.

1238
00:55:33,763 --> 00:55:35,430
I think it's more
than public companies.

1239
00:55:35,430 --> 00:55:40,575
I think this is
broadly the economy--

1240
00:55:40,575 --> 00:55:41,950
I'm not going to
go through this.

1241
00:55:41,950 --> 00:55:44,760
But I have two slides here--
one is the equity market, one

1242
00:55:44,760 --> 00:55:50,230
the bond market-- to say,
the holders of US bonds,

1243
00:55:50,230 --> 00:55:51,160
pretty diverse.

1244
00:55:51,160 --> 00:55:54,220
But it's a lot of other
financial companies.

1245
00:55:54,220 --> 00:55:56,500
Who holds bonds?

1246
00:55:56,500 --> 00:55:58,840
It's a lot of other
financial companies.

1247
00:55:58,840 --> 00:56:01,450
Whereas equities is households.

1248
00:56:01,450 --> 00:56:03,400
It's either household--
directly a household

1249
00:56:03,400 --> 00:56:05,110
through a mutual
fund or a household

1250
00:56:05,110 --> 00:56:07,830
through their pension.

1251
00:56:07,830 --> 00:56:10,750
Now only 40% is direct.

1252
00:56:10,750 --> 00:56:15,580
About 1/3 is through mutual
funds and about 12% or 15%

1253
00:56:15,580 --> 00:56:17,720
is through pension funds.

1254
00:56:17,720 --> 00:56:23,360
But it's kind of households own
a lot of the equity and finance

1255
00:56:23,360 --> 00:56:26,760
firms own a bunch of the debt.

1256
00:56:26,760 --> 00:56:29,330
Rough, rough guidance.

1257
00:56:29,330 --> 00:56:31,070
Any of you masters
of finance, you

1258
00:56:31,070 --> 00:56:33,530
can tell me if I'm
going off the rails.

1259
00:56:36,220 --> 00:56:41,420
And also, a household debt-- and
then I'll stop with the slides.

1260
00:56:41,420 --> 00:56:45,040
Household debt is
primarily mortgage debt.

1261
00:56:45,040 --> 00:56:47,030
The orange on here is
all the mortgage debt.

1262
00:56:47,030 --> 00:56:50,240
We're out about $9
trillion in mortgage debt.

1263
00:56:50,240 --> 00:56:56,360
But red-- red is what you
all probably identify with.

1264
00:56:56,360 --> 00:56:58,640
You don't have to self tell
me, but you're probably

1265
00:56:58,640 --> 00:57:00,450
all in the red.

1266
00:57:00,450 --> 00:57:02,040
That's the student debt.

1267
00:57:02,040 --> 00:57:05,290
Student debt in the US is
now $1.5 trillion dollars.

1268
00:57:05,290 --> 00:57:08,270
And I'm just expressing my
own public policy perspective,

1269
00:57:08,270 --> 00:57:09,770
but it's not--

1270
00:57:09,770 --> 00:57:14,210
I don't think it's good to
mortgage everybody who's

1271
00:57:14,210 --> 00:57:17,690
just going through college
and graduate school.

1272
00:57:17,690 --> 00:57:19,610
But that's a bigger
public policy debate,

1273
00:57:19,610 --> 00:57:23,330
and I'm just expressing
a point of view.

1274
00:57:23,330 --> 00:57:26,165
It did not used to be like this.

1275
00:57:30,700 --> 00:57:33,250
Here's an interesting chart to
me is the number of accounts.

1276
00:57:33,250 --> 00:57:36,670
Again, US, we could have
gotten broader countries.

1277
00:57:36,670 --> 00:57:42,100
There's 500 million
credit cards in the US.

1278
00:57:42,100 --> 00:57:46,420
There's 328 million
Americans, and about 1 and--

1279
00:57:46,420 --> 00:57:50,860
1.6, 1.7 per population.

1280
00:57:50,860 --> 00:57:56,260
But auto loans and mortgages,
which are the left access,

1281
00:57:56,260 --> 00:57:58,310
are 70 or 80 million.

1282
00:57:58,310 --> 00:57:59,600
So these are big markets.

1283
00:57:59,600 --> 00:58:02,050
These are just numbers of
people who have an auto

1284
00:58:02,050 --> 00:58:04,000
loan or a number of auto loans.

1285
00:58:04,000 --> 00:58:07,060
These are numbers of mortgages.

1286
00:58:07,060 --> 00:58:10,510
And then HE is Home
Equity, revolving.

1287
00:58:10,510 --> 00:58:16,400
These are the four big slip
streams of household debt.

1288
00:58:16,400 --> 00:58:18,980
Mortgage is number one.

1289
00:58:18,980 --> 00:58:22,340
Student debt, number
two, unfortunately.

1290
00:58:22,340 --> 00:58:26,840
Credit cards and
then home equity.

1291
00:58:26,840 --> 00:58:28,190
And auto loans are--

1292
00:58:28,190 --> 00:58:33,090
I can't see on this chart, but
auto loans are behind them.

1293
00:58:33,090 --> 00:58:34,110
Let's talk about risk.

1294
00:58:34,110 --> 00:58:39,210
This is a couple of ideas from
my time in risk management.

1295
00:58:39,210 --> 00:58:41,760
Anybody want to give me the
three big risks, if you were

1296
00:58:41,760 --> 00:58:45,390
managing Goldman Sachs, you'd be
worried about on a daily basis?

1297
00:58:45,390 --> 00:58:49,830
Not whether the euro is going to
crash, but broad topical risk.

1298
00:58:49,830 --> 00:58:52,820
What are the three
or four big risks?

1299
00:58:52,820 --> 00:58:54,000
Addy?

1300
00:58:54,000 --> 00:58:55,000
STUDENT: Market risk.

1301
00:58:55,000 --> 00:58:57,503
GARY GENSLER: Market risk.

1302
00:58:57,503 --> 00:58:59,170
STUDENT: Credit risk
and operating risk.

1303
00:58:59,170 --> 00:59:00,170
GARY GENSLER: All right.

1304
00:59:00,170 --> 00:59:02,490
Market risk, credit
risk, operations.

1305
00:59:02,490 --> 00:59:03,955
Any others?

1306
00:59:03,955 --> 00:59:05,080
STUDENT: Counterparty risk.

1307
00:59:05,080 --> 00:59:06,910
GARY GENSLER: Counterparty risk.

1308
00:59:06,910 --> 00:59:07,960
STUDENT: Human capital.

1309
00:59:07,960 --> 00:59:09,127
GARY GENSLER: Human capital.

1310
00:59:09,127 --> 00:59:09,920
That's a good one.

1311
00:59:09,920 --> 00:59:10,420
I like it.

1312
00:59:10,420 --> 00:59:13,450
It's usually not taken up
in a risk committee though.

1313
00:59:13,450 --> 00:59:16,600
It's an important risk though,
but it's not usually taken up.

1314
00:59:16,600 --> 00:59:17,350
So what do I have?

1315
00:59:17,350 --> 00:59:18,502
Market risk.

1316
00:59:18,502 --> 00:59:19,960
All sorts of
different market risk.

1317
00:59:19,960 --> 00:59:22,390
Credit and underwriting.

1318
00:59:22,390 --> 00:59:24,610
Credit is, will
somebody pay me back?

1319
00:59:24,610 --> 00:59:27,580
Underwriting is usually,
have I judged the risk well?

1320
00:59:27,580 --> 00:59:29,710
So it could be an
insurance risk as well as

1321
00:59:29,710 --> 00:59:33,360
underwriting securities.

1322
00:59:33,360 --> 00:59:36,670
Three things I didn't
hear from you all.

1323
00:59:36,670 --> 00:59:39,870
I'm not surprised I
didn't hear, but these are

1324
00:59:39,870 --> 00:59:43,110
the three that lead to crises.

1325
00:59:43,110 --> 00:59:45,960
Market risk, credit risk
and underwriting risk.

1326
00:59:45,960 --> 00:59:50,510
Even if firms blow it,
they usually do it.

1327
00:59:50,510 --> 00:59:53,450
And usually the board of
directors understands it.

1328
00:59:53,450 --> 00:59:56,690
My experience in
looking at failed firms,

1329
00:59:56,690 --> 00:59:59,090
it's liquidity funding
and settlement risk.

1330
00:59:59,090 --> 01:00:02,690
Liquidity means,
can I sell something

1331
01:00:02,690 --> 01:00:05,540
when I want to sell it?

1332
01:00:05,540 --> 01:00:09,560
Or can I buy a hedge or
cover when I want to cover?

1333
01:00:09,560 --> 01:00:11,930
Funding is, can I
roll over my funding?

1334
01:00:11,930 --> 01:00:14,810
Because so much of finance
is about short term funding

1335
01:00:14,810 --> 01:00:17,270
and long term assets.

1336
01:00:17,270 --> 01:00:19,490
And it's usually
misunderstanding

1337
01:00:19,490 --> 01:00:23,150
liquidity in a crisis.

1338
01:00:23,150 --> 01:00:26,660
You can sell things all day
long when things are good.

1339
01:00:26,660 --> 01:00:32,210
But when markets start
to get frail and thin,

1340
01:00:32,210 --> 01:00:34,730
your liquidity dries up.

1341
01:00:34,730 --> 01:00:36,800
So it's a crazy thing to model.

1342
01:00:36,800 --> 01:00:38,030
It's a very tough thing.

1343
01:00:38,030 --> 01:00:42,113
I mean, great economists, great
finance academics can model it.

1344
01:00:42,113 --> 01:00:44,030
But at the end of the
day, it's a little tough

1345
01:00:44,030 --> 01:00:47,130
because it goes away fast.

1346
01:00:47,130 --> 01:00:49,630
And it's kind of a funny
mathematical formula when

1347
01:00:49,630 --> 01:00:52,843
you see something just go away.

1348
01:00:52,843 --> 01:00:54,010
And the math doesn't matter.

1349
01:00:54,010 --> 01:00:57,850
When you can't sell something,
and you think it was worth $98,

1350
01:00:57,850 --> 01:00:59,290
and you can't sell it for $88.

1351
01:01:02,180 --> 01:01:06,530
And the other big one is
model risk or correlations.

1352
01:01:06,530 --> 01:01:08,790
And you can build a
correlation matrix

1353
01:01:08,790 --> 01:01:11,850
around all sorts of
financial assets,

1354
01:01:11,850 --> 01:01:14,310
and it can work in most markets.

1355
01:01:14,310 --> 01:01:17,640
It can work in a market which
I'll say out to two or three

1356
01:01:17,640 --> 01:01:19,500
standard deviations
from the norm.

1357
01:01:19,500 --> 01:01:21,232
But will your
correlation matrix still

1358
01:01:21,232 --> 01:01:23,190
work when you're in a
market environment that's

1359
01:01:23,190 --> 01:01:26,080
four or five standard
deviations out from the norm?

1360
01:01:26,080 --> 01:01:26,580
I'm sorry.

1361
01:01:26,580 --> 01:01:30,270
Think of a bell shaped
curve, and just think of--

1362
01:01:30,270 --> 01:01:32,280
some people call it tail risk.

1363
01:01:32,280 --> 01:01:33,930
But I'm not talking
about the price.

1364
01:01:33,930 --> 01:01:37,110
I'm talking about all your
correlations in your model,

1365
01:01:37,110 --> 01:01:40,440
just throw them out the window.

1366
01:01:40,440 --> 01:01:43,560
And those four-- liquidity,
funding, and settlement

1367
01:01:43,560 --> 01:01:45,490
and correlation,
in my experience

1368
01:01:45,490 --> 01:01:50,100
is kind of where firms get
into a bunch of trouble.

1369
01:01:50,100 --> 01:01:50,730
Or they're not.

1370
01:01:50,730 --> 01:01:53,190
Maybe it's not actually
a bug but it's a feature.

1371
01:01:53,190 --> 01:01:55,500
It's sort of saying, I'm
embedding all this risk.

1372
01:01:55,500 --> 01:01:59,640
This is why I'm earning excess
returns when I'm in finance.

1373
01:01:59,640 --> 01:02:03,460
And 1 in 100 times, my
firm's going to go bankrupt.

1374
01:02:03,460 --> 01:02:06,190
But that's just--
that's the risk I take.

1375
01:02:06,190 --> 01:02:06,690
Kelly?

1376
01:02:06,690 --> 01:02:08,184
STUDENT: I know we're
going to talk about this

1377
01:02:08,184 --> 01:02:10,142
in the next unit, but
can you talk a little bit

1378
01:02:10,142 --> 01:02:15,492
about how well stress testing
within banks addresses these?

1379
01:02:15,492 --> 01:02:16,200
GARY GENSLER: OK.

1380
01:02:16,200 --> 01:02:18,870
So I've got operation
and cyber risk.

1381
01:02:18,870 --> 01:02:21,180
It would have been
operational in the past,

1382
01:02:21,180 --> 01:02:23,400
and now everybody's
all focused on cyber.

1383
01:02:23,400 --> 01:02:24,570
And it's the right thing.

1384
01:02:24,570 --> 01:02:27,570
It's a big risk the banks and
insurance companies are all

1385
01:02:27,570 --> 01:02:28,740
focused on.

1386
01:02:28,740 --> 01:02:31,140
Legal and compliance
and reputational risk.

1387
01:02:31,140 --> 01:02:34,110
Literally, if you went
back 30 years ago,

1388
01:02:34,110 --> 01:02:36,930
people would not be managing
reputational, legal risk

1389
01:02:36,930 --> 01:02:38,730
at their risk committee.

1390
01:02:38,730 --> 01:02:40,980
But a well-run risk
committee at a big bank

1391
01:02:40,980 --> 01:02:43,313
takes all these things--
every one of these categories

1392
01:02:43,313 --> 01:02:44,730
should go up to
the risk committee

1393
01:02:44,730 --> 01:02:46,680
in some way or another.

1394
01:02:46,680 --> 01:02:48,985
Dan and then I'm going to
try to do Kelly's question.

1395
01:02:48,985 --> 01:02:50,610
STUDENT: Of course
this isn't something

1396
01:02:50,610 --> 01:02:52,860
that a company could
control, but can you

1397
01:02:52,860 --> 01:02:56,280
talk about political
risks in kind of context?

1398
01:02:56,280 --> 01:02:58,793
It might impact--

1399
01:02:58,793 --> 01:03:00,210
GARY GENSLER:
Generally speaking--

1400
01:03:00,210 --> 01:03:01,752
Dan just asked about
political risk--

1401
01:03:04,910 --> 01:03:08,037
classic sort of thinking is
that you don't manage that

1402
01:03:08,037 --> 01:03:08,870
at a risk committee.

1403
01:03:08,870 --> 01:03:12,620
You might manage it in
your Washington or Brussels

1404
01:03:12,620 --> 01:03:15,470
or London office dealing with--

1405
01:03:15,470 --> 01:03:18,740
and there's policy risk,
that the policies can change,

1406
01:03:18,740 --> 01:03:20,450
the regulations can change.

1407
01:03:20,450 --> 01:03:25,850
You try to influence it
and get ahead of changes

1408
01:03:25,850 --> 01:03:28,097
that lower your profit margins.

1409
01:03:28,097 --> 01:03:30,680
But you usually aren't going to
be managing it in the same way

1410
01:03:30,680 --> 01:03:30,920
here.

1411
01:03:30,920 --> 01:03:31,972
So Dan, you're right.

1412
01:03:31,972 --> 01:03:32,930
There's political risk.

1413
01:03:32,930 --> 01:03:37,460
There's a second thing,
which is expropriation risk.

1414
01:03:37,460 --> 01:03:41,030
In many countries, it's
no longer a big challenge.

1415
01:03:41,030 --> 01:03:42,410
But it is.

1416
01:03:42,410 --> 01:03:44,900
And certainly, for
big banks, there

1417
01:03:44,900 --> 01:03:50,030
is a lot of expropriation
risk in earlier decades.

1418
01:03:50,030 --> 01:03:50,660
Crises.

1419
01:03:50,660 --> 01:03:53,510
You can see the hourglass
is kind of broken,

1420
01:03:53,510 --> 01:03:57,830
and it's broken right at
the neck where finance is.

1421
01:03:57,830 --> 01:03:59,900
Here's some just--

1422
01:03:59,900 --> 01:04:04,890
I hate to say it, but in my
memory, I hope all of you

1423
01:04:04,890 --> 01:04:08,370
have such a rich career
that in 30 or 40 years

1424
01:04:08,370 --> 01:04:10,740
you can be teaching
somewhere like MIT

1425
01:04:10,740 --> 01:04:12,480
but you will have this.

1426
01:04:12,480 --> 01:04:15,000
No matter what
country you live in,

1427
01:04:15,000 --> 01:04:17,670
you will have some
list that you can--

1428
01:04:17,670 --> 01:04:19,380
I didn't go to Wikipedia.

1429
01:04:19,380 --> 01:04:22,230
I just said, oh, yeah, there
was that Latin debt crisis.

1430
01:04:22,230 --> 01:04:24,720
I did go to the internet to
remind myself what years.

1431
01:04:24,720 --> 01:04:27,150
And in the 1970s, I
was in high school.

1432
01:04:27,150 --> 01:04:30,060
But I'm just saying
that, I actually

1433
01:04:30,060 --> 01:04:31,980
remember all of these crises.

1434
01:04:31,980 --> 01:04:32,850
They happen.

1435
01:04:32,850 --> 01:04:36,485
They come, they go,
they're part of it.

1436
01:04:36,485 --> 01:04:38,860
Let me just mention something
about the subprime mortgage

1437
01:04:38,860 --> 01:04:41,110
crisis 2008.

1438
01:04:41,110 --> 01:04:44,020
So what's my quick take on it?

1439
01:04:44,020 --> 01:04:46,210
Like what happened?

1440
01:04:46,210 --> 01:04:49,200
You know, in 10 minutes or less.

1441
01:04:49,200 --> 01:04:51,050
But I'll take any questions.

1442
01:04:51,050 --> 01:04:57,220
One, I think at the core were
weak underwriting practices,

1443
01:04:57,220 --> 01:05:01,870
mostly in the real estate
sector for housing.

1444
01:05:01,870 --> 01:05:03,780
Underwriting is the word--

1445
01:05:03,780 --> 01:05:06,790
a bank is making a loan,
or an insurance company

1446
01:05:06,790 --> 01:05:07,870
is taking a risk.

1447
01:05:07,870 --> 01:05:10,820
It's whenever
somebody takes a risk,

1448
01:05:10,820 --> 01:05:15,730
you have to sort of make
some probability weighting.

1449
01:05:15,730 --> 01:05:17,110
What's that risk like?

1450
01:05:17,110 --> 01:05:18,470
Let's take a bank.

1451
01:05:18,470 --> 01:05:20,020
Will I get repaid?

1452
01:05:20,020 --> 01:05:22,690
You're not going to get
repaid 100% of the loans,

1453
01:05:22,690 --> 01:05:26,410
but underwriting is this concept
of sort of sorting that out.

1454
01:05:26,410 --> 01:05:28,060
Or in insurance,
the underwriting

1455
01:05:28,060 --> 01:05:32,360
risk of a house burning
down and so forth.

1456
01:05:32,360 --> 01:05:34,580
There were weak
underwriting standards.

1457
01:05:34,580 --> 01:05:37,950
And, on top of it, a lot of
bad practices and predatory

1458
01:05:37,950 --> 01:05:38,450
lending.

1459
01:05:38,450 --> 01:05:39,118
Kyle?

1460
01:05:39,118 --> 01:05:40,160
STUDENT: Just a question.

1461
01:05:40,160 --> 01:05:43,687
Do you think that the
predatory lending and accepting

1462
01:05:43,687 --> 01:05:45,770
loans when maybe you won't
be able to pay it back,

1463
01:05:45,770 --> 01:05:49,970
as well as extending
loans, is a symptom

1464
01:05:49,970 --> 01:05:53,600
of willingness to
take on more risk

1465
01:05:53,600 --> 01:05:57,440
or being unaware of the
risk that you're taking?

1466
01:05:57,440 --> 01:06:00,200
GARY GENSLER: So Kyle
raises sort of a-- whatever

1467
01:06:00,200 --> 01:06:03,590
you want to call it-- the
$64,000 question in the middle

1468
01:06:03,590 --> 01:06:07,550
of bad risk management.

1469
01:06:07,550 --> 01:06:11,300
I mean, because we could
go back to this page.

1470
01:06:11,300 --> 01:06:15,420
Every one of these
pieces of risk management

1471
01:06:15,420 --> 01:06:17,730
you can't do perfectly.

1472
01:06:17,730 --> 01:06:21,000
It's only so susceptible
to higher math.

1473
01:06:21,000 --> 01:06:24,270
Every one of these,
there's math around.

1474
01:06:24,270 --> 01:06:29,620
But poor risk management
can be just not even

1475
01:06:29,620 --> 01:06:32,050
being aware that
the risk is there.

1476
01:06:32,050 --> 01:06:34,420
I think that's what
your question was like.

1477
01:06:34,420 --> 01:06:39,280
Was there just an unawareness
that there were such bad things

1478
01:06:39,280 --> 01:06:41,830
going on in the street?

1479
01:06:41,830 --> 01:06:44,680
Or was it-- well,
we're aware of it

1480
01:06:44,680 --> 01:06:48,230
but we're willing
to take that risk?

1481
01:06:48,230 --> 01:06:49,970
I think it was a bit of both.

1482
01:06:49,970 --> 01:06:54,078
I think that the major
investment banks--

1483
01:06:54,078 --> 01:06:55,870
the Lehman Brothers
and some of the others,

1484
01:06:55,870 --> 01:07:00,460
they were underwriting a lot
of the subprime mortgages--

1485
01:07:00,460 --> 01:07:05,590
were aware that there
were no doc loans.

1486
01:07:05,590 --> 01:07:06,640
No document loans.

1487
01:07:06,640 --> 01:07:08,320
It was called no doc loans.

1488
01:07:08,320 --> 01:07:12,760
That the down payments
were shrinking.

1489
01:07:12,760 --> 01:07:15,220
Because that was susceptible
to math, that you could see

1490
01:07:15,220 --> 01:07:18,110
there was lower and
lower down payments.

1491
01:07:18,110 --> 01:07:20,410
But I don't think that
they knew everything

1492
01:07:20,410 --> 01:07:23,950
that was going on the street,
the really bad action.

1493
01:07:23,950 --> 01:07:28,090
I testified in the US Congress
in the spring of 2000,

1494
01:07:28,090 --> 01:07:32,320
as the Secretary,
Undersecretary, about predatory

1495
01:07:32,320 --> 01:07:33,760
lending.

1496
01:07:33,760 --> 01:07:35,350
It wasn't that I was prescient.

1497
01:07:35,350 --> 01:07:38,230
I was asked to testify.

1498
01:07:38,230 --> 01:07:40,958
And we did a big study between
the Department of Housing

1499
01:07:40,958 --> 01:07:42,250
and the Department of Treasury.

1500
01:07:42,250 --> 01:07:42,917
And we went out.

1501
01:07:42,917 --> 01:07:46,120
We had public hearings
in a bunch of cities,

1502
01:07:46,120 --> 01:07:48,490
and we wrote a report
and made recommendations.

1503
01:07:48,490 --> 01:07:52,060
And Ned Gramlich over
at the Federal Reserve

1504
01:07:52,060 --> 01:07:53,350
was very helpful.

1505
01:07:53,350 --> 01:07:56,070
Andrew Cuomo at the
Department of Housing,

1506
01:07:56,070 --> 01:07:58,540
who is now governor
of New York, and I

1507
01:07:58,540 --> 01:08:01,960
was running point at Treasury.

1508
01:08:01,960 --> 01:08:04,960
So it was known, in a sense.

1509
01:08:04,960 --> 01:08:09,660
But I think a lot of the broad
community, the policy community

1510
01:08:09,660 --> 01:08:13,660
and the banking community,
tended to look the other way.

1511
01:08:13,660 --> 01:08:15,430
Partly because there
were so much profits

1512
01:08:15,430 --> 01:08:19,899
and partly because, in
the upside of a boom,

1513
01:08:19,899 --> 01:08:24,270
it feels like it's
never going to turn,

1514
01:08:24,270 --> 01:08:27,029
and that that even
a small report like

1515
01:08:27,029 --> 01:08:30,630
we did in the spring of 2000--

1516
01:08:30,630 --> 01:08:35,220
in fairness, we didn't bang
the table enough maybe.

1517
01:08:35,220 --> 01:08:39,819
There I was testifying, and
I left, and that was that.

1518
01:08:39,819 --> 01:08:40,319
You know?

1519
01:08:40,319 --> 01:08:44,819
Al Gore is running to
succeed Bill Clinton.

1520
01:08:44,819 --> 01:08:49,470
The administration couldn't
have gotten a law changed,

1521
01:08:49,470 --> 01:08:51,420
even if we tried at that time.

1522
01:08:51,420 --> 01:08:54,540
But nonetheless, that's-- so
I think sometimes it's a bit

1523
01:08:54,540 --> 01:08:58,700
of both, from
personal experience.

1524
01:08:58,700 --> 01:09:02,310
But back to the crisis.

1525
01:09:02,310 --> 01:09:04,760
So I think that weak
underwriting and predatory

1526
01:09:04,760 --> 01:09:08,810
lending mixed in to have
a subprime mortgage crisis

1527
01:09:08,810 --> 01:09:12,319
and then a big housing bubble.

1528
01:09:12,319 --> 01:09:14,300
But also beyond that--

1529
01:09:14,300 --> 01:09:16,399
beyond that, easy credit.

1530
01:09:16,399 --> 01:09:19,170
Easy credit partly because
interest rates were so low.

1531
01:09:19,170 --> 01:09:22,870
We came out of the
late part, the 1990s.

1532
01:09:22,870 --> 01:09:25,450
We went from an asset
bubble in the stock market,

1533
01:09:25,450 --> 01:09:27,729
the internet bubble
burst, and we kind of

1534
01:09:27,729 --> 01:09:34,120
moved that bubble valuation
into the housing market.

1535
01:09:34,120 --> 01:09:36,010
The Federal Reserve
lowered interest rates,

1536
01:09:36,010 --> 01:09:39,700
kept interest rates low for a
very long time to kind of keep

1537
01:09:39,700 --> 01:09:41,620
the economy going.

1538
01:09:41,620 --> 01:09:47,890
And we even see now President
Trump and Fed chair Powell

1539
01:09:47,890 --> 01:09:51,970
a little bit at odds about
where should interest rates go.

1540
01:09:51,970 --> 01:09:54,279
And the Federal Reserve
is moving interest rates

1541
01:09:54,279 --> 01:09:56,960
up in the US now.

1542
01:09:56,960 --> 01:10:00,070
But there's always that sort of
dynamic, a little back pressure

1543
01:10:00,070 --> 01:10:01,600
in every country.

1544
01:10:01,600 --> 01:10:03,760
We like to think we have
independent central banks.

1545
01:10:03,760 --> 01:10:06,580
But in some countries,
it's a tug of war

1546
01:10:06,580 --> 01:10:09,100
and we're seeing that
play out a little now.

1547
01:10:09,100 --> 01:10:11,200
So we have easy credit
for a long time,

1548
01:10:11,200 --> 01:10:16,660
partly supplied by
foreign governments.

1549
01:10:16,660 --> 01:10:18,250
Even China, in a sense.

1550
01:10:18,250 --> 01:10:21,530
I mean, people were willing
to buy the US paper.

1551
01:10:21,530 --> 01:10:23,740
But also financial derivatives.

1552
01:10:23,740 --> 01:10:26,500
Credit default swaps in
particular led to a lot

1553
01:10:26,500 --> 01:10:30,370
more leverage and also
the interconnectedness.

1554
01:10:30,370 --> 01:10:35,500
The derivatives tied
everybody together a lot more.

1555
01:10:35,500 --> 01:10:39,910
Part of the leverage
was also accepting model

1556
01:10:39,910 --> 01:10:43,185
based capital rules at banks.

1557
01:10:43,185 --> 01:10:44,560
The other thing
is I think we had

1558
01:10:44,560 --> 01:10:46,990
a lot of poor risk management,
back to Kyle's point.

1559
01:10:46,990 --> 01:10:51,250
So poor risk management
incentive structures.

1560
01:10:51,250 --> 01:10:55,840
The basic incentive structure
at banks have a lot of bonuses.

1561
01:10:55,840 --> 01:10:57,250
And some of you worked at banks.

1562
01:10:57,250 --> 01:11:02,830
But on some level, it's sort
of heads I win, tails you lose.

1563
01:11:02,830 --> 01:11:06,130
I mean, if you put a big
position on and it pays off,

1564
01:11:06,130 --> 01:11:08,770
and you're a trader, and
you're managing the mortgage

1565
01:11:08,770 --> 01:11:11,530
desk at Lehman and it pays off,
you say, all right, where's

1566
01:11:11,530 --> 01:11:13,930
my $5 or $10 million bonus?

1567
01:11:13,930 --> 01:11:16,470
I'm saying if you're
running the department.

1568
01:11:16,470 --> 01:11:21,410
I mean, hopefully some
of you will do that.

1569
01:11:21,410 --> 01:11:25,370
But if you're on the other
side, and the firm fails,

1570
01:11:25,370 --> 01:11:28,720
they don't say, please give me
back that $5 or $10 million.

1571
01:11:28,720 --> 01:11:32,320
So there's asymmetric
incentive structures.

1572
01:11:32,320 --> 01:11:35,020
And those have been written
about widely, academically.

1573
01:11:35,020 --> 01:11:37,990
I mean, we do have a lot
of asymmetric incentive

1574
01:11:37,990 --> 01:11:39,580
structures in banking.

1575
01:11:39,580 --> 01:11:40,375
Brotish?

1576
01:11:40,375 --> 01:11:44,845
STUDENT: [INAUDIBLE]

1577
01:11:44,845 --> 01:11:47,470
GARY GENSLER: So Brotish asked,
what about the rating agencies?

1578
01:11:47,470 --> 01:11:49,480
So I was absolutely
say, their incentive

1579
01:11:49,480 --> 01:11:51,970
structures-- within those
two words, a lot's packed.

1580
01:11:51,970 --> 01:11:53,080
Thank you.

1581
01:11:53,080 --> 01:11:56,600
Rating agencies got paid
for issuing ratings,

1582
01:11:56,600 --> 01:11:58,600
but they're not-- you
know, give some money back

1583
01:11:58,600 --> 01:11:59,870
if you got it wrong.

1584
01:11:59,870 --> 01:12:02,350
So it's perverse
incentive structures,

1585
01:12:02,350 --> 01:12:06,100
both in terms of
the bonus structure,

1586
01:12:06,100 --> 01:12:11,680
employment, payment structure,
rating agencies, fees.

1587
01:12:11,680 --> 01:12:14,620
Inherently, finance has a
lot of conflicts of interest.

1588
01:12:14,620 --> 01:12:17,920
We're not going to get rid of
that, conflicts of interest.

1589
01:12:17,920 --> 01:12:20,170
There's always
somebody in finance

1590
01:12:20,170 --> 01:12:24,950
who wants to separate their
customer from their money.

1591
01:12:24,950 --> 01:12:26,280
It's the nature of things.

1592
01:12:26,280 --> 01:12:28,740
But in a sense, Starbucks
wants to separate you

1593
01:12:28,740 --> 01:12:30,800
when they say, do you
want the large cup--

1594
01:12:30,800 --> 01:12:33,240
or the grande
instead of the large.

1595
01:12:33,240 --> 01:12:35,910
So that's the
nature of commerce.

1596
01:12:35,910 --> 01:12:38,670
And it's just that,
you want some market

1597
01:12:38,670 --> 01:12:42,150
base and regulatory
things to [INAUDIBLE]..

1598
01:12:42,150 --> 01:12:44,250
So multiple failures
started to happen.

1599
01:12:44,250 --> 01:12:48,440
In the US, Bear Stearns
started to fail in 2007.

1600
01:12:48,440 --> 01:12:52,080
So well before the epicenter
of all of this, you had--

1601
01:12:52,080 --> 01:12:53,410
in the UK--

1602
01:12:53,410 --> 01:12:53,910
James?

1603
01:12:53,910 --> 01:12:56,390
What was the first one that
failed in your country?

1604
01:12:56,390 --> 01:12:56,890
What's that?

1605
01:12:57,390 --> 01:12:59,013
STUDENT: [INAUDIBLE]

1606
01:12:59,013 --> 01:13:00,180
GARY GENSLER: So where did--

1607
01:13:00,180 --> 01:13:03,570
where did-- but
the timber was dry.

1608
01:13:03,570 --> 01:13:06,720
It was like the fire
was going to go,

1609
01:13:06,720 --> 01:13:10,860
but the system could maybe
withstand one failure, Northern

1610
01:13:10,860 --> 01:13:12,210
Rock or Bear Stearns.

1611
01:13:12,210 --> 01:13:17,370
But by the summer of '08, in
this country when the large

1612
01:13:17,370 --> 01:13:21,780
financial mortgage companies,
Fannie Mae and Freddie Mac,

1613
01:13:21,780 --> 01:13:28,470
had to go into receivership
around Labor Day of 2008,

1614
01:13:28,470 --> 01:13:29,820
it was teetering.

1615
01:13:29,820 --> 01:13:31,890
And then, of course,
if anybody remembers,

1616
01:13:31,890 --> 01:13:36,990
by September 15th or
something, it was just--

1617
01:13:36,990 --> 01:13:38,640
the system would have collapsed.

1618
01:13:38,640 --> 01:13:42,450
Without government intervention,
the system would have fully--

1619
01:13:42,450 --> 01:13:44,013
we were kind of--

1620
01:13:44,013 --> 01:13:45,930
And we would have been
in one of those moments

1621
01:13:45,930 --> 01:13:49,830
from the 18th or 19th
century where we--

1622
01:13:49,830 --> 01:13:52,260
or even the 1930s,
where it's likely we

1623
01:13:52,260 --> 01:13:54,660
would have blown
out the 20% or 30%

1624
01:13:54,660 --> 01:13:57,150
unemployment in this country.

1625
01:13:57,150 --> 01:14:00,210
And some of your countries,
that is the case.

1626
01:14:00,210 --> 01:14:02,760
You saw it happen.

1627
01:14:02,760 --> 01:14:06,420
I don't know all the
countries represented here.

1628
01:14:06,420 --> 01:14:10,360
So that's my little quick
read of the financial crisis.

1629
01:14:10,360 --> 01:14:13,170
But this wasn't meant
to be a lecture on it,

1630
01:14:13,170 --> 01:14:15,160
but I thought, well,
why not throw it in?

1631
01:14:15,160 --> 01:14:15,870
It's finance.

1632
01:14:15,870 --> 01:14:16,980
Any questions on that?

1633
01:14:16,980 --> 01:14:17,480
Hugo?

1634
01:14:17,480 --> 01:14:19,040
STUDENT: Not exactly
on the crisis.

1635
01:14:19,040 --> 01:14:22,450
But if you have to gauge
the state of the financial--

1636
01:14:22,450 --> 01:14:25,625
like of US finances right
now, what do you think?

1637
01:14:25,625 --> 01:14:27,750
Are we in a better place
than we were 10 years ago?

1638
01:14:27,750 --> 01:14:29,480
GARY GENSLER: So Hugo is asking
if we're in a better place

1639
01:14:29,480 --> 01:14:30,750
than we were 10 years ago.

1640
01:14:30,750 --> 01:14:33,120
Yes, in a number of ways.

1641
01:14:33,120 --> 01:14:35,430
But as Sheila Bair's
writing said, in other ways,

1642
01:14:35,430 --> 01:14:37,320
it's not all that different.

1643
01:14:37,320 --> 01:14:49,430
So I think that we have high
valuations in the stock market.

1644
01:14:49,430 --> 01:14:52,040
But it's not a
levered asset class.

1645
01:14:52,040 --> 01:14:56,780
So real estate bubbles
usually are very--

1646
01:14:56,780 --> 01:14:58,990
higher probability that
a real estate bubble

1647
01:14:58,990 --> 01:15:01,390
will lead to
calamitous outcomes,

1648
01:15:01,390 --> 01:15:04,720
because there's a lot of
borrowing against the asset

1649
01:15:04,720 --> 01:15:05,540
bubble.

1650
01:15:05,540 --> 01:15:08,950
So when we had no
aid, and you had--

1651
01:15:08,950 --> 01:15:12,620
in Iceland, when
the banks failed.

1652
01:15:12,620 --> 01:15:16,430
In many countries, when
you see huge failures,

1653
01:15:16,430 --> 01:15:19,240
it's when you have a real estate
bubble with a lot of borrowings

1654
01:15:19,240 --> 01:15:20,290
against it.

1655
01:15:20,290 --> 01:15:25,630
When the revaluation comes,
the debt on that asset class

1656
01:15:25,630 --> 01:15:29,530
is higher than the valuation
on the asset class.

1657
01:15:29,530 --> 01:15:36,090
And that usually leads to
some either calamitous outcome

1658
01:15:36,090 --> 01:15:42,060
or government bailouts,
and it takes a while.

1659
01:15:42,060 --> 01:15:44,130
Debt bubbles.

1660
01:15:44,130 --> 01:15:46,180
A debt [INAUDIBLE]
bubble is much harder.

1661
01:15:46,180 --> 01:15:48,990
So back to today, I think
we have a bit of a bubble.

1662
01:15:48,990 --> 01:15:51,780
We've had low interest
rates for a long time.

1663
01:15:51,780 --> 01:15:54,120
We've had pretty
good economic growth,

1664
01:15:54,120 --> 01:15:57,530
even though it's not
fully and equally shared.

1665
01:15:57,530 --> 01:15:59,175
But a lot of economic growth.

1666
01:16:02,930 --> 01:16:06,480
I think the banking
sector is stronger.

1667
01:16:06,480 --> 01:16:07,820
It's more Capital.

1668
01:16:07,820 --> 01:16:10,580
One of the results of the
reforms in Europe and the US,

1669
01:16:10,580 --> 01:16:12,890
there's a lot more
capital in the system,

1670
01:16:12,890 --> 01:16:14,570
meaning less leverage.

1671
01:16:17,150 --> 01:16:18,890
But on the other hand,
the banking sector

1672
01:16:18,890 --> 01:16:21,200
is a bit more concentrated.

1673
01:16:21,200 --> 01:16:25,363
And concentration leads
to additional risk.

1674
01:16:25,363 --> 01:16:26,780
The other thing,
and this is maybe

1675
01:16:26,780 --> 01:16:31,490
my feeling is, as we're not
sharing the economic well-being

1676
01:16:31,490 --> 01:16:34,610
broadly in the economy,
that middle income

1677
01:16:34,610 --> 01:16:38,990
America, middle income
of Europe in particular

1678
01:16:38,990 --> 01:16:44,370
is not sharing as much, I think
that hurts us in two ways.

1679
01:16:44,370 --> 01:16:50,120
One is, if we have the
downturn, there's not as much--

1680
01:16:50,120 --> 01:16:52,790
all economies these days
are led by consumption.

1681
01:16:52,790 --> 01:16:57,320
There's not as much ability
to respond with consumption.

1682
01:16:57,320 --> 01:17:00,955
And two, I think it also
tears at our social fabric.

1683
01:17:00,955 --> 01:17:02,830
And now I'm talking more
about the political,

1684
01:17:02,830 --> 01:17:05,690
but it's sort of-- there's
less of a social fabric

1685
01:17:05,690 --> 01:17:08,590
for consensus when things hit.

1686
01:17:08,590 --> 01:17:10,125
Sorry.

1687
01:17:10,125 --> 01:17:12,490
STUDENT: Going and touching
on the consumption aspect,

1688
01:17:12,490 --> 01:17:16,300
I think Sheila mentioned
that consumer spending was

1689
01:17:16,300 --> 01:17:17,990
a part of the financial crisis.

1690
01:17:17,990 --> 01:17:20,700
And she suggested that
instead of providing relief

1691
01:17:20,700 --> 01:17:23,095
to the banks, what the
government should have done

1692
01:17:23,095 --> 01:17:26,420
is provide relief to
consumers instead.

1693
01:17:26,420 --> 01:17:28,500
I was wondering what
your take on that is.

1694
01:17:28,500 --> 01:17:31,220
GARY GENSLER: So Sheila
Bair's point was, we

1695
01:17:31,220 --> 01:17:33,680
did a bunch of things
bailing out big institutions.

1696
01:17:33,680 --> 01:17:37,280
We didn't help
home owners enough.

1697
01:17:37,280 --> 01:17:39,690
I think factually she's correct.

1698
01:17:39,690 --> 01:17:42,570
And then you have to say,
are the adjectives correct?

1699
01:17:42,570 --> 01:17:45,890
Like we did provide trillions
of dollars of support

1700
01:17:45,890 --> 01:17:50,140
for big institutions
and not for individuals.

1701
01:17:50,140 --> 01:17:55,710
And there is where the debate
is and all the challenge is.

1702
01:17:55,710 --> 01:17:56,720
I think it's correct--

1703
01:17:56,720 --> 01:17:57,980
Tim Geithner wrote a book.

1704
01:17:57,980 --> 01:17:59,480
If you ever get a
chance to read it,

1705
01:17:59,480 --> 01:18:01,710
it's a very lively and
easy read about the crisis.

1706
01:18:01,710 --> 01:18:03,740
And he said, sometimes,
it's like, you

1707
01:18:03,740 --> 01:18:08,780
know, bailing out the arsonist.

1708
01:18:08,780 --> 01:18:11,600
I think those were Tim's
exact words in his book,

1709
01:18:11,600 --> 01:18:15,950
but if I'm wrong, sorry
Tim for misquoting you.

1710
01:18:15,950 --> 01:18:18,940
But it's a hard public
policy challenge

1711
01:18:18,940 --> 01:18:21,710
that Ben Bernanke
and Tim and others

1712
01:18:21,710 --> 01:18:23,340
were facing at that point.

1713
01:18:23,340 --> 01:18:26,150
But I think Sheila
is right factually.

1714
01:18:26,150 --> 01:18:29,460
And then I leave for
you the policy debate.

1715
01:18:29,460 --> 01:18:30,650
Let me just mention.

1716
01:18:30,650 --> 01:18:31,910
The financial sector--

1717
01:18:31,910 --> 01:18:33,530
I'm closing on this--

1718
01:18:33,530 --> 01:18:35,150
legacy customer interface.

1719
01:18:35,150 --> 01:18:39,470
When you're thinking about
any blockchain solutions,

1720
01:18:39,470 --> 01:18:41,270
as Eric said, it's legacy.

1721
01:18:41,270 --> 01:18:42,020
Are they slow?

1722
01:18:42,020 --> 01:18:43,570
Are they moving slow?

1723
01:18:43,570 --> 01:18:45,740
It's got to be data
intensive at some point.

1724
01:18:45,740 --> 01:18:47,870
I don't think blockchain
has a lot of use

1725
01:18:47,870 --> 01:18:49,520
if it's not data intensive.

1726
01:18:49,520 --> 01:18:51,020
Are there economic rents?

1727
01:18:51,020 --> 01:18:52,640
If there aren't
economic rents, it's

1728
01:18:52,640 --> 01:18:54,973
probably less likely you're
going to be able to tuck in.

1729
01:18:54,973 --> 01:18:57,210
But if there's big
economic rents,

1730
01:18:57,210 --> 01:19:01,820
like 2.7% on payments and the
like, that might be a place

1731
01:19:01,820 --> 01:19:05,720
you can tuck in with a
new disruptor strategy.

1732
01:19:05,720 --> 01:19:07,520
Sometimes there's
concentrated risk.

1733
01:19:07,520 --> 01:19:09,590
We talked about that.

1734
01:19:09,590 --> 01:19:11,030
Or the infrastructure costs.

1735
01:19:11,030 --> 01:19:13,910
I know there was earlier
talk about counterparty risk

1736
01:19:13,910 --> 01:19:16,400
and so forth.

1737
01:19:16,400 --> 01:19:18,740
The good news is there's
a wide acceptance

1738
01:19:18,740 --> 01:19:20,030
of adoption of new tech.

1739
01:19:20,030 --> 01:19:22,820
I'm not going to say it's going
to bail out a bad blockchain

1740
01:19:22,820 --> 01:19:25,760
idea, and I'm not looking
for a bunch of ideas

1741
01:19:25,760 --> 01:19:27,810
about scams and frauds.

1742
01:19:27,810 --> 01:19:30,050
But there are wide acceptance.

1743
01:19:30,050 --> 01:19:33,170
And there's 7.5%
of the US economy,

1744
01:19:33,170 --> 01:19:36,680
and similar numbers-- probably
5% to 7% of most economies

1745
01:19:36,680 --> 01:19:39,110
are in finance.

1746
01:19:39,110 --> 01:19:42,230
By the way, because the capital
markets and the equity markets

1747
01:19:42,230 --> 01:19:46,040
are about 500% of the economy--
it's about $100 trillion when

1748
01:19:46,040 --> 01:19:49,640
you add up all
those other slides--

1749
01:19:49,640 --> 01:19:51,680
finance earns 7.5%.

1750
01:19:51,680 --> 01:19:55,490
So that's about 1.5% vig.

1751
01:19:55,490 --> 01:19:59,030
That's an old term
from a gambling house.

1752
01:19:59,030 --> 01:20:00,290
What's the vig?

1753
01:20:00,290 --> 01:20:01,880
What's the take?

1754
01:20:01,880 --> 01:20:07,160
Finance takes about 7.5%
divided by over about 500%.

1755
01:20:07,160 --> 01:20:08,870
Or it's about 1 and 1/2%.

1756
01:20:08,870 --> 01:20:11,360
That's not true everywhere,
but asset management

1757
01:20:11,360 --> 01:20:13,340
might take 50 or
80 basis points.

1758
01:20:13,340 --> 01:20:15,440
Banking might take wider.

1759
01:20:15,440 --> 01:20:18,380
But largely, that's
the opportunity

1760
01:20:18,380 --> 01:20:20,000
that I keep mentioning.

1761
01:20:20,000 --> 01:20:21,590
Let me just mention
one more thing.

1762
01:20:21,590 --> 01:20:23,510
I'm going to skip through this.

1763
01:20:23,510 --> 01:20:25,130
Next week's readings.

1764
01:20:25,130 --> 01:20:27,425
October 16th, you'll
have a surprise guest.

1765
01:20:27,425 --> 01:20:29,300
You'll have some fun
with the surprise guest.

1766
01:20:29,300 --> 01:20:30,233
I guarantee you.

1767
01:20:30,233 --> 01:20:32,150
I guarantee if you just
want to have some fun,

1768
01:20:32,150 --> 01:20:35,090
you'll remember next
Tuesday for a while.

1769
01:20:35,090 --> 01:20:39,050
But I added an additional
reading that's from today.

1770
01:20:39,050 --> 01:20:43,250
Nouriel Roubini testified in
front of the Senate Banking

1771
01:20:43,250 --> 01:20:44,540
Committee today.

1772
01:20:44,540 --> 01:20:46,940
I read it before
I came to class.

1773
01:20:46,940 --> 01:20:49,760
I can't say it's required,
it's just additional.

1774
01:20:49,760 --> 01:20:51,470
But it is lively.

1775
01:20:51,470 --> 01:20:56,120
And he just does a slap down
on blockchain technology.

1776
01:20:56,120 --> 01:20:58,100
But for those of
you who read it,

1777
01:20:58,100 --> 01:21:00,200
that will be part of our
discussion next Tuesday

1778
01:21:00,200 --> 01:21:00,530
as well.

1779
01:21:00,530 --> 01:21:01,910
Because we're going to
talk about the economics

1780
01:21:01,910 --> 01:21:02,930
of blockchain.

1781
01:21:02,930 --> 01:21:05,600
I'm going to focus more on
Christian Catalini's paper.

1782
01:21:05,600 --> 01:21:10,130
But Paul Krugman, his
is a two-page slap down.

1783
01:21:10,130 --> 01:21:14,240
These are kind of the Bitcoin
and blockchain minimalists.

1784
01:21:14,240 --> 01:21:17,630
And next Thursday is a little
bit towards the maximalists.

1785
01:21:17,630 --> 01:21:19,730
But I want to talk about
the economics, what

1786
01:21:19,730 --> 01:21:21,830
I'll call Act 2.

1787
01:21:21,830 --> 01:21:22,660
So I thank you.

1788
01:21:22,660 --> 01:21:23,785
I'm supposed to let you go.

1789
01:21:23,785 --> 01:21:25,010
I've gone two minutes over.

1790
01:21:25,010 --> 01:21:25,610
So--

1791
01:21:25,610 --> 01:21:29,560
[APPLAUSE]