The Compound and Friends - Yes, This Is a Bailout of Credit Suisse

Starting point is 00:00:00 We are here. Welcome. Welcome to the live audience. Welcome, ladies and gentlemen, to the precipice of America's second Civil War. I am your host, downtown Josh Brown, here with my co-host, Michael Batnick. As always, Michael, wave hello to the people. My bad. I'm like, where's that? I had YouTube out in the background. I apologize. I was about to freak out. That's my bad. Hello, people. Don't interrupt. This week, we'll witness a

Starting point is 00:00:40 rapid succession of bank failures and rescues around the world. The Federal Reserve will hike into a full-scale financial system meltdown and the broad daylight arrest of a former U.S. president on felony charges. So not that much going on right now, but we are very, very fortunate to be joined tonight by Jesse Isinger. And Jesse, we wrote like a fancy introduction for you. Can I do the intro? The fancier, the better. Yeah, absolutely.

Starting point is 00:01:09 It's super fancy. You are somebody I've been reading, I don't know, probably since I started my blog. I mean, you're- Since the last banking crisis. Since the last- All right. Jesse Isinger is an American journalist and author, winner of the Pulitzer Prize for National Reporting in 2011. He currently works as a senior editor and reporter for ProPublica.

Starting point is 00:01:35 He is also the author of the book, The Chicken Shit Club, Why the Justice Department Fails to Prosecute Executives. Jesse, we are so thrilled to have you on the show tonight. Thank you very much for joining us. Much appreciated. Yeah, thanks for having me. It's great. And I've been reading you since the last financial crisis, although I've been writing since many, many financial crises ago. So yeah, I'm getting old now. I am aware. Is this the most fun one so far? Well, you know, in 2008, I really thought we were, I got, you know, cash out of the, that's my children in the background. I apologize.

Starting point is 00:02:20 I'm going to send them signs to keep quiet in a second. But yeah, I got thousands and thousands of dollars out of my bank account. I thought that the banking system was going to stop working. So that was not fun. But this is less serious, I would say. I think so far it's less serious. And let's hope it stays. I mean, it's serious if you are, I suppose, an employee of one of the affected institutions. And I definitely don't want to make light of what that must be like to wake up and have that uncertainty. You probably have been compensated by stock options over the years. You're probably not an employee who's in a position to be doing interest rate hedging. And you're just sitting there. Credit Suisse probably will have more than 9,000 people let go, according to the last thing I read.

Starting point is 00:03:06 So that's obviously not fun for anyone involved. But wait, before we get to this one, the big differences between this time and the last time, and there are a number of them, is that right now it's limited to regional banks for now, which is a good thing. I mean, it's obviously not good, but it's good that it's not JP Morgan that we're questioning, which is a good thing. I mean, it's obviously not good, but it's good that it's not JP Morgan that we're questioning, number one. Number two, what was in question or what drove the asset liability mismatch was treasuries, right? It's not toxic shit that you have no idea what exactly is going on. That'll be the next shoe to drop. So let's just start with the big news of the day. And Jesse, I want to get your reaction to this.

Starting point is 00:03:40 The big news of the day. And Jesse, I want to get your reaction to this. UBS's official announcement slash victory lap over the weekend on the merger, the shotgun merger that the Swiss government cooked up, basically a forced merger for Credit Suisse. And it looks like a giveaway to me, to UBS. This is the chairman, Colm Kelleher. Quote, this acquisition is attractive to UBS shareholders, but let us be clear. As far as Credit Suisse is concerned, this is an emergency rescue. We have structured a transaction which will preserve the value left in the business, limit

Starting point is 00:04:19 our downside exposure. Acquiring Credit Suisse's capabilities in wealth asset management, Swiss Universal Banking will augment UBS's strategy of growing its capital-like businesses. The transaction will bring benefits to clients and create long-term sustainable value for our investors. Not bad as far as corporate comms go. What was your reaction when you first heard about the terms of the deal and how quickly it had to come together? Yeah, I would say, of course, he's going to say that now. And Credit Suisse has been a basket case since the financial crisis. And it's kind of the slowest moving bank failure we've seen in our recent years. And so I would say that there are probably a bunch of

Starting point is 00:05:08 big problems there. What they would like to do is get paid for all the assets under management, let go the duplicative operations. And then they very nicely had the Swiss government and the Swiss taxpayer take care of all the real problems there. So I think it's probably going to work out for UBS in the medium and long term, but there are going to be many more headaches for UBS than they're anticipating now because Credit Suisse has just stumbled from one problem to the other in recent years. I think that's probably one of the reasons why the sticker price seems so low. People are comparing $3 billion to a small cap company. Of course, it's a lot more complicated than that, and it's not really $3 billion. We really don't know what the liabilities are.

Starting point is 00:06:06 Today, Matt Levine said the upshot of this for UBS is not that it paid 3 billion francs to buy its historic competitor. The upshot of this is that it has assumed hundreds of billions of francs of liabilities and taken on a bunch of assets that are probably worth more than that. But it's hard to tell over a weekend or ever really. Yeah. Right. And I think that the big problem looming in all of this is, and it's really kind of starting to affect bank stocks here, is that they're sitting on portfolios that have disastrous loans. And we just don't know how disastrous they are. But in a rising interest rate environment where people have been lending like maniacs for the last 12 years, we're going to have big haven't cared about for a while, which is commercial real estate.

Starting point is 00:07:10 And commercial real estate is going to be a huge problem for lots and lots of banks, particularly regional banks. You'd imagine that the cities outside of the main big cities are not going to recover very well, and that's going to really hit regional banks. So Credit Suisse is the same similar kind of problem where they're going to be sitting on lots of unknown liabilities and a rising interest rate, slow growth environment, and that's going to be a problem. I think one of the interesting takeaways from looking at how this was structured is how much bad will they're getting, like in terms of what their capacity is to be able to do write-offs. It's a huge line of credit with the Swiss National Bank, I think $100 billion or so

Starting point is 00:07:58 if they need to tap it, not to mention a $9 billion government backstop. not to mention a $9 billion government backstop. So they kind of like sat there and said, okay, we're the only acceptable buyer. Here are our conditions. This is very different from 2008 and the stuff that you were reporting on then where the government was trying to put all kinds of conditions on the buyers.

Starting point is 00:08:20 And as a result, you had like JP Morgan, for example, have to not just assume liabilities, but assume court cases on behalf of Bear Stearns. And that does not appear to be what this negotiation looks like. Do you think I have that right? Bad will. Is that your coinage? No, I read it today too. I've seen it all over the place.

Starting point is 00:08:45 It's, I think it's, it's a way to think about the negative stuff that comes along with this and how much of that you can write down without, uh, without a penalty. I love, uh, I love that. I hadn't heard that one before. Um, well, I don't know if I agree with your characterization of, uh, 2008, uh, particularly, characterization of 2008 particularly, there were shotgun marriages. And Jamie Dimon feels very resentful about not being hailed as a hero for having taken over Bear Stearns and Wamuu. But in Bear, the Fed took care of tens of billions of bad loans. I feel like it was 30. That's the number that I recall. And yes, there were some legal liabilities there, but they essentially came through scot-free. And then Jamie Dimon was able to stay in his position.

Starting point is 00:09:53 He's become a billionaire. He has been the steward of this essentially public trust of J.P. Morgan that he didn't found. He's not an entrepreneur. He's not a founder. You sit there and you didn't lose your job and you become a billionaire. I don't think he has much to complain about. Same with Lloyd Blankfein. Somebody like that became, I think, a billionaire. Again, public steward, a steward of a franchise that was totally backstopped by the government, saved by the

Starting point is 00:10:26 government. So I don't think that there was really onerous conditions placed on most of those guys. So it was just more complaining than it was the reality. Yeah, I think that they wanted to be hailed as heroes of the Republic. And then when anybody complained about them, they were extremely petulant. I mean, if you remember, there was a kind of abrasive Wall Street of Obama in the election. And then Obama once said that they were fat cats. And he lost Wall Street because their feelings were hurt. I mean, it was mostly peak. And he criticized their bonuses. He criticized Wall Street getting paid bonuses in 2008 when everybody blew up the entire world.

Starting point is 00:11:17 Right. I used to think that Jamie Dimon was overpaid until I saw what happened at SUV. And now I'm not so sure anymore. until I saw what happened at SUV. And now I'm not so sure anymore. So other weird, weird things that happened over the weekend is that, first of all, there's no shareholder approval. The government basically forced this thing through. So there will be lawsuits, Josh.

Starting point is 00:11:34 You mentioned liabilities court. There will be lawsuits. The other thing is there's this funky dynamic that they have over in Europe that has been in the news. These AT1s, the additional tiered capital, the contingent convertibles. And so there was a quote in the Financial Times today from this guy, David Serra, who is the founder and CEO of a company that apparently held a lot of these. He said, quote, they've changed the law and they have basically stolen $16 billion worth of bonds.

Starting point is 00:12:04 This has been a big policy mistake and they will regret it. Switzerland will be the new pariah in this loss-absorbing bond market. They asked for it. They will have it. So in other words, I think there was $17 billion worth of these bonds outstanding that went to zero. And the equity holders, while they didn't get very much, they got a little bit. And so it's this weird dynamic where the bondholders were wiped out. The stockholders got a little bit and there was no shareholder approval.

Starting point is 00:12:25 So it was a very odd thing that happened. Yeah. The theory is that, not the theory, the reality is that what those bonds were at risk for is pretty explicit in the terms. You just never think it's going to happen. And it rarely does happen. The second part of that is I think the equity holders had to get something maybe to prevent this from being some sort of another phase and an uprising and court battles. It's like, all right, it's not zero. You're getting 3 billion or whatever. Pick a number. It's an immaterial number to UBS given the 500 billion in assets and liabilities and the much bigger numbers they have to deal with. Maybe the Saudis had to get something to shut up. I'm just like my working theory would be the number couldn't actually be zero, even though it's as close to zero as

Starting point is 00:13:18 possible. I don't know, Jesse, how do you think that went down? Well, I would say that these kind of crocodile tears from these guys is all too predictable. We saw a very similar dynamic with the GM bondholders, if you recall, and the GSEs, Fannie and Freddie. GSEs, Fannie and Freddie, when those were taken over, we saw lawsuits and a lot of complaining and people saying that the government acted unlawfully. And I don't know, I can't predict Swiss litigation at all or the way that would play out. But in the U.S., what happened was the government essentially said we had an emergency and we invoked emergency powers and these investors can go pound sand. And two things happened. One, the investors lost those lawsuits. And two, they all came back.

Starting point is 00:14:14 They all – it wasn't like – they have all come back to Argentina. They came back to the United States. They came back to the bond market. They bought the GSEs. They've come back. They came back to the bond market. They bought the GSEs. They've come back. They went back to Argentina. And so, you know, I give them six months, eight months, 12 months at the outset to come back to both the Swiss market and these convertibles that they knew were going to be wiped out. They're not going to become Marxists as a result of this.

Starting point is 00:14:47 What they're going to do is become anti-government libertarians until they need the next bailout. That's what they're going to become, just like our friends in Silicon Valley. The combined entity here is going to have $5 trillion in assets or six times the annual GDP of Switzerland. Does this get to a point where UBS is more powerful than the Swiss government? Certainly, it'll be larger if you want to measure by just the sheer size of the goings-on under the umbrella of the bank. But is there some sort of risk for Swiss society to have an entity this large with no actual native competitor?

Starting point is 00:15:31 I think that's a very astute point. And it goes to your first point that who was actually who had the leverage here in the negotiations. And Adam Tooze, the economist out of Columbia, made this point today as well, that who really bailed out who and who was in charge of this. And it sort of superficially looks like the government was the handmaiden, but really UBS was driving this, it seems. And that's why we think, you know, that's why I would think that over time, it's going to be very profitable for UBS and very good, but it leaves this really disconcerting aspect to that UBS is a more powerful entity than the Swiss government and dwarfs the Swiss government. And it doesn't look that way. Yeah, I think that's absolutely the right thing to understand about this. And going forward, I think it means only bad things for Swiss society.

Starting point is 00:16:35 You know, a country, we should say, with a great history of independence, but you need states now, it seems, to rival the power of these great financial conglomerates and corporate, international corporate conglomerates. And the US does and the EU does. But whether the Swiss government can really rein in its corporate giants, I'm skeptical. Can we jump back across the pond, back to our shores and talk about what

Starting point is 00:17:06 happened over the past weeks with our banks? There was an article in the Washington Post, excuse me, talking about what the politicians were discussing. And somebody said anonymously, quote, they were becoming increasingly concerned about a bloodbath on Monday. And I think everybody agreed. I made the point that if they didn't panic on Sunday, they probably would have panicked by Monday. Charlie Munger was talking to Jason Zweig in the Wall Street Journal over the weekend. He had a great quote that said, the way the world is, the government had no alternative but to back all the deposits, or we would have had the biggest bunch of bank runs you ever saw. Yeah, well, Yeah, well, I sort of feel like I'm very confused about what happened on fear and panic and actually being fearful and panicking are maybe it became irrelevant for policymakers.

Starting point is 00:18:14 Like on Sunday, you couldn't tell whether it really was that regional bank investors were going to sell off because of SVB's collapse. And you took action. And by taking action, you kind of validated the fear and the panic, which strikes me as bad policy. But that policy that's born of the downside, maybe it was a mild downside, maybe a 10% or 15% kind of scenario that there really was going to be a genuine panic, as Munger was saying. that SVB is a relatively small operation. It was concentrated in one area of the economy, an important area, but not remotely that significant for the economy. The estimates I saw was that if 30% of the companies that, you know, that SVB had about 40,000 clients, that, you know, that SVB had about 40,000 clients, companies, and that, you know, all told that that meant if 30% of those couldn't make payroll, we're talking about 120,000 jobs. And that's a big number and important for those people, of course, but that's not systemic for the country.

Starting point is 00:19:40 I think what made it systemic was the reaction in the other regional banks. And one of the things that I think one of my lessons from 2008 is that it doesn't have to be fire. When the market is in this mode, smoke is good enough. And ultimately, smoke can become fire the longer that things remain unaddressed. And I'm not like a bailout queen where I think, you know, just fix it, just fix it, just fix it. We'll worry about the moral hazard later. That's not my mindset, but these aren't investment banks. They're not hedge funds.

Starting point is 00:20:17 They're not private equity funds. They're literally institutions that are housing regular people's bank accounts. And so I think – and these are small – many of these banks that are seeing their share prices get cut in half I wouldn't say are completely blameless because I haven't looked at all their balance sheets. I'm not an expert. But it seems like whatever they were doing, it's not the reason why they're getting caught up in this. It just seems like they're in the wrong segment of the industry. And there could absolutely have been follow-on bank runs. I think there was like no good option here, Jesse, I think is what I'm trying to say. Do you see it that way?

Starting point is 00:21:01 Yeah, I mean, I feel like we need to really understand what the government was seeing. But basically, the government saw a possibility of regional bank rents. That's obviously what they were convinced could happen on Sunday. What you're saying is that traders, stock market traders were going to shoot every regional bank on Monday. They were in the process of it, yeah. And so depositors would have done the same. That's the question that we'll never really be able to answer or resolve. But would small businesses in Georgia be pulling their money out of their regional bank? If they watch the news? Yes.

Starting point is 00:21:54 I think so. I think so. Yeah. I think we certainly have a national media and we have, um, uh, an incentive to panic, um, and incentive and we have, you know, markets panic, markets are prone to panic. But, um, but my view is that if you had a, if you had had a regional, I mean, sort of a focus specific type of rescue for Silicon Valley Bank that was regionally focused and private sector driven that you wouldn't necessarily have had to do the bailout that we saw. Now, let's, and the bailout came in two forms, right? So the FDIC expansion of insurance and then the Fed window opened up for regional banks. And I'm not actually against Fed 100% guarantee in principle. That's been an argument on the left for a long time, and I'm kind of sympathetic to it.

Starting point is 00:22:57 But this was done when policymakers had a gun to their heads, and they had a gun to their heads by some of the wealthiest people in America, who happened to be libertarians, many of them, but that's sort of just hypocrisy. That's not particularly important. But what I thought was that there could be a private sector solution to save Silicon Valley, that venture capitalists could make payroll at the companies that they had backed, that to, in in order in, you know, enlightened self-interest to preserve the equity value of those companies and shore up the payroll until Silicon Valley Bank was worked out by the FDIC. That would have been my preferred solution. And I think that would have assuaged the panic if this if this had started i wanted to ask you if this whole thing had to your point if this whole thing had started

Starting point is 00:23:51 at a regional bank in the state of maine or um somewhere somewhere in industrial ohio and the deposit base was not a twitter uh like they didn't have this social media savvy, some would say addicted deposit base, it probably would have bought that bank more time to find a private market solution. But the fact that this happens to be a bank that banks Twitter psychopaths, I think, accelerated the timeline of this whole thing. What do you think about that? That's totally, totally right. If this was the, as I've been saying, if this is the first bank of, well, I guess I won't say bum, if it was the first bank of podunk, yeah, I don't know if you're allowed to swear.

Starting point is 00:24:44 You can do anything. We don't really care you're allowed to swear. You can do anything. We don't really care. Yeah. I'm just kidding. Um, uh, the, uh, we wouldn't be having this discussion. The bank would have gone under the FDIC would be in there. Um, the, uh, depositors would, uh, be waiting for their money and they would get 90 to a hundred cents on the dollar.

Starting point is 00:25:02 The way most banks work out, it just would have taken a little bit of time. This happened because two things. One is that they're on Twitter, and Twitter can be mistaken for real life by the kind of chattering classes, which include journalists and venture capitalists. And the other thing is they could get Janet Yellen and Janet Yellen's aides on the phone that weekend instantly. And so and so they they got those people on the phone and they told them that there was a panic and they had to do something. from, I think, Oklahoma, who asked her very pointed questions about, so let me get this straight. Does this mean that a bank failing in my state of Oklahoma, automatically the depositors are not at risk and will be made whole by the government? And she acted like it was the strangest question in the world.

Starting point is 00:25:59 And she acted like she didn't have any idea that that would be asked of her. I was blown away by that. This woman has been in government for, what, 50 years? I don't even know, 40 years? She stumbled over the most obvious question that could have come out. Yeah, that's interesting. I didn't see that exchange. And she's extremely smart, thoughtful, thoughtful and capable person. So obviously she's thought about

Starting point is 00:26:27 this and thought through the implications. And even when you're doing something in an emergency like this, you've thought through the implications of what it means to expand FDIC insurance for these depositors. And what that's going to mean is we're going to have a policy in the next X number of years, sooner rather than later, that guarantees 100% for depositors. No choice now, right? Yeah. I don't see how you don't do that. And so if that's not accompanied by a whole series of reforms and oversight, regulatory reforms, Fed accounts, things like that, then we're going to have given a huge gift to the banking sector for very little. I'm so glad you brought that up because this is the second order effect. So now you say to the banks, okay, we're actually going to fully backstop all depositors, secured and unsecured, no such distinction anymore.

Starting point is 00:27:29 But here is the new cost of FDIC insurance for all of the banks in the system. And here are the new restrictions we're putting on what kind of deposits you can take, how much oversight we're doing of the risk that you're taking in your asset management, et cetera, et cetera, et cetera, et cetera. The end result of all of that, the second order effect is probably less lending to less people and maybe more lending to the people that don't actually need to borrow. But so a further expansion of income inequality and a less effective banking system for the every man or the every woman. That's like me just gaming this out over the next three years. What do you think about that? Yeah, that's probably true unless you have a series of public options that make loans available to people with lower incomes from the government, which, of course, will be deeply

Starting point is 00:28:27 resisted by Republicans. Direct lending from the Treasury or the Fed? Yeah, no one's going to want that. You know, Fed accounts, direct lending from the Fed, direct, you know, the post office doing some of this kind of stuff. There have been proposals on the left floating around for a while. The Biden administration is, you know, the most progressive presidency of my lifetime. And the economic advisors are well aware of these things. Of course, they, you know, in these possibilities and these proposals, of course, they're not, they don't have the house, um, right now. And so, uh, and the Republicans are not going to be constructive about this remotely, even though they'll try to score political points because this is kind of, um, you know, was done in the heart of Nancy Pelosi land

Starting point is 00:29:20 and they like to score points against California. But so it'll be very interesting to see how this plays out because we are probably not going to get those reforms, but we have an expectation of a guarantee now. And that's probably the worst world to be in. In the aftermath of all this, people were looking to point fingers, understandably so, at who's to blame. And there is a lot of blame to go around. You wrote a post a couple of days ago, Regulatory Failure 101, What the Collapse of Silicon Valley Bank Reveals. And I thought it was interesting that you didn't necessarily take the Fed to task in terms of them leaving interest rates at zero forever and then jacking them up to 450 basis points in 12

Starting point is 00:30:06 months, but rather on the regulatory side. So you said bank regulators have awesome powers. They can go into a bank, examine its operations and demand changes. The problem is they rarely do. Why is this always the case? It never seems to happen beforehand. It's always where were the regulators every time? Yeah. Well, we have a really poor regulatory culture. And what I was, this essential argument there in the piece is that it's not just about tools and laws. It's about regulatory culture and the regulators have to understand that we have an extremely fragile banking system. And they have to understand that bankers are extraordinarily reckless and greedy. And you saw SVB's management be extremely reckless and greedy. For a few pennies per share, they didn't hedge their exposure. They didn't

Starting point is 00:31:07 change their interest rate exposure. And Fed monetary policy is Fed monetary policy. And I think that's a separate issue that you could debate. And I think that the Fed has been raising too aggressively. But they've signaled it very clearly. No one a year ago or six months ago could have mistaken what Fed policy was. But SVB didn't want to hear it. They're extraordinarily reckless. Now, the Fed supervisors should have seen this coming. ask you, do you think in the inevitable hearings that will follow this episode that it's likely to come out that there were people keeping abnormally large unsecured balances at Silicon Valley Bank because of other things the bank was giving to executives of these companies, not necessarily in the best interest of the companies themselves? Do you think that there will be conflicts, whether explicit or implicit? And do you think this is an area where you're going to see some liability on the part of the depositors and or the companies that they had money on deposit for?

Starting point is 00:32:26 Yeah, that's a great question. I think if I were in charge of a team of investigative reporters at the Wall Street Journal, this is the main question that I would focus on right now. And I think that it's highly likely. My instinct is that there were all sorts of concierge banking services that were being offered and sweetheart deals. You've seen a few glimmers of this, hints of this coming out already. And there was a lot of tying, tying of different kinds of business together and tying of loans and deposits. That's basically almost of, that's basically almost what banking is.

Starting point is 00:33:08 That's banking. So that's, that, that's legal. And that's kind of endemic to, to, it doesn't have to be, but it's basically they're intertwined, but there are all sorts of things that wouldn't necessarily be intertwined or typical that SVB may have been doing. Sweetheart mortgages, personal loans of all kinds. You can imagine a lot of stuff.

Starting point is 00:33:38 I think that's going to be a very big deal in the investigations. I wonder if that's why it's taken so long to find a buyer is they're like, wait a second, what sort of loans are on the books that we have to like comb through to figure out what shit might hit the fan six months from now, 12 months from now? Yeah, I think that's right. And maybe the franchise wasn't big enough and important enough to take over. So you just feel like I can swoop in and get these startups. Why do I need to take on this kind of liability? And to your point earlier about how the heart of the 2008 financial crisis was what we didn't

Starting point is 00:34:17 know on balance sheets, that's basically why we had a financial crisis. Here, there's like a small balance sheet of a lot of shit that we don't know about. And one of them is legal liabilities. And Jamie Dimon went around the country saying that he wasn't hailed as a hero, that he had to take all this opprobrium and be shamed about being a banker. And so he's saying, don't do what I did there. Don't take over SVB. And so the government's going to have to midwife that in some way. That's going to be, I would suspect, a little bit ugly.

Starting point is 00:34:55 And it's going to be annoying to us as taxpayers to look at what they do. John, we have some charts. Put up this Nick Timorea's tweet. This is showing the net increase in emergency lending from the Fed last week. And obviously, San Francisco is the big standout. I think the New York thing is related to Signature Bank and First Republic, which are pretty large presences in our market. Of the net $297 billion increase in Reserve Bank assets, $233 billion come from the San Francisco district. $55 is from New York.

Starting point is 00:35:34 Does the rest of the country look at the – chart off, please, John. Does the rest of the country look at this shit and say, the coastal elites are at it again, and why – like, does this become another focal point in the culture wars? That's what I'm saying. Well, I mean, there's a lot to say about that. One is that to my point earlier about whether this was a genuinely systemic crisis, it's concentrated in those two areas where the news spread and you would talk to your buddy who was a CFO at another company.

Starting point is 00:36:09 They say, well, I'm pulling out – you pulled out – you got fucked in Silicon Valley Bank. Well, I'm pulling out of my small bank and putting it with B of A. And so you see those channels there. And, yes, of course, everything is fodder for the from the South and the Midwest who had no big banks and no investment banks, and in fact, had regional banks and small banks as constituents and why they didn't line up for real banking reform, structural banking reform. And I kept waiting and waiting for that. I think the answer is Barack Obama in the White House.

Starting point is 00:37:15 You mean he cut off that, he cut the Republicans off? I think that was a bigger issue for the right than anything worth cooperating with the leftover right they said it they said our mission is to make him a one-term president they didn't yeah there was no appetite to do anything other than disrupt the possibility of him doing anything and yeah that was the agenda right i want to move along just so i make sure we cover um the the other stuff that you've been working on, Jesse, because I think it's fascinating. This is the latest case that your team at ProPublico put out, I think over the last week or so. Basically, you guys have a trove of IRS documents. And for the

Starting point is 00:37:58 first time ever, you can see what the 1% are trading in and out of. And you guys have uncovered a situation where some executives at large companies are trading the stock of their competitor companies rather than their own. And it almost looks as though it's a legal form of insider trading. They obviously know a lot about what's going on in their industry. And by not trading their own stock, I guess they're insulating themselves from the traditional definition of what insider trading is. Do I have that explanation right? Yeah, you got the story exactly. So this was done by two of my reporters, Robert Federici and Ellis Samani. And we were looking at this tax data and you tell the IRS what stocks you've traded and what you've sold in the given year. And the were looking at this tax data and you tell the IRS what stocks you've traded,

Starting point is 00:38:46 what you've sold in the given year. And the IRS doesn't look at this for securities law violations. They only care about taxes and they don't share it with the SEC. So the SEC has never seen this data. So we did something unprecedented is a overused word, but this is literally unprecedented. No one's ever seen this data. And what we found is dozens and dozens of executives who do this kind of trading. They're trading in competitors, in partners, in customers, and they're doing it with very good timing. And we found lots and lots of guys who were like, you know, a company was, they were bidding on a contract for something, somebody else won it. And the CEO

Starting point is 00:39:25 bought the stock of the guy who won the contract, the mortgage contract right before they won. And the stock went up and he sold him, made a lot of money. Here's a tweet from Ellis Amani. This is incredible. There was a pharma CEO who dumped about $1 million worth of shares of his rival stocks the day before the company's largest one-day drop in share price. How is that not illegal? Right. Well, so it's a gray area. One thing is that the SEC basically doesn't look at this or police this. This is called shadow trading. And let me be clear that it's not always insider trading, illegal insider trading. And we did not argue that any of these instances

Starting point is 00:40:13 were illegal insider trading. We were saying that this is basically worth starting to investigate in many cases because it's simply not looked at. Well, where's the line? What do you mean exactly? The line is, one, you need to have material non-public information. And then two, you have to have a duty not to disclose it. To your own shareholders though, but to your own, the duty is to your shareholders. It's mostly to your own shareholders, although you can have a duty to not disclose aspects of litigation. You can have duties to other stakeholders in certain scenarios, but mostly it's to your own shareholders. And then sometimes companies have policies against this, even if it wasn't necessarily. so it's not always illegal and it's complicated. And of course, all these things are fact intensive, but that guy that you were

Starting point is 00:41:12 referring, that Ellis was tweeting about, you know, he was our lead example and he traded when, you know, the, it was, he avoided a massive loss and then he picked the stock up and wrote it all the way up and then traded. Yeah, bought it back and then traded it again. How hard would it be for a pharmaceutical company to have an executive sign a piece of paper that says, I will not speculate in the stocks of our competitors in the oncology field? Like it seems like you wouldn't want them doing that even if it were totally legal. It seems like antithetical to what the mission of the company is.

Starting point is 00:41:52 Well, some of these companies have policies that say exactly that. Some don't. And this is just yet another example of the overweening greed of our executive class. They're paid to deliver for shareholders, and then they just want a little bit extra. And they want to take the information that really is the company's information and just make a little bit more money. I mean, one of the examples was not a guy who's got a lot of shareholders at a privately held company, not clear what percentage he owns of it.

Starting point is 00:42:25 a lot of shareholders is a privately held company not clear how what percentage he owns of it um but the guy uh isaac larian who makes uh uh the toy maker makes bratz dolls and he's traded in mattel hundreds of millions of dollars hundreds of millions he's traded he's traded hundreds and hundreds of times he shorts the company he goes long the company. He's obsessed. And it's incredible. And he trades it very well. So the stock in the period that we looked at had fallen something like 57% and he'd made 11% on the stock. Jesse, last question. Does he have a newsletter we could sign up for? Yeah, seriously. When you put pieces like this out of ProPublica, do you hear from people in the government? You must. Well, we send them to the government.

Starting point is 00:43:10 I heard from some people in the government who just said, thank you. They saw it. The SEC saw this story. Whether they're going to do anything about it is a different question. Jesse, let's finish by talking about your book, which is a very provocative title. And I remember when it came out a couple of years ago. And let's tell everybody why you wrote The Chicken Shit Club. And I've heard you on several podcasts talking about your frustration with how many shenanigans are out there in plain sight and why very little ends up getting done about it. What is the takeaway? So rather than go through the whole thing, I think most people conceptually understand,

Starting point is 00:43:49 what is the takeaway for our audience of investors, traders, professionals who work in asset management, financial services? What do you think we should know about what you discovered? Yeah, they should know it's a great time to be a white collar criminal, maybe the best time ever. I work the elite impunity beat. That's what I cover, which is powerful people taking advantage of systems and of laws and doing it with impunity. laws and doing it with impunity. And I think it's a moral crisis in the country because I think that people have realized that they need to get theirs. There's a lot of bubble thinking and there's a lot of thinking that there is no accountability and this they can get away with it. I think things are mildly changing a little bit with the Biden administration. I think they've actually internalized some of the lessons from the chicken shit club. I know a lot of people.

Starting point is 00:44:49 We seem to have two extremes. We seem to have two extremes in the country about this issue. On the far left, it seems they almost look at anyone in business as automatically suspect. And maybe they don't look at it that way, but that's how their rhetoric makes it sound. And then on the far right, specifically in Trump country, there seems to be this overarching pessimism where they just say, well, everyone's doing it. Look at the Clintons. They do it too. And he got away with it. So that makes him smart. And then I think like probably the middle two thirds of the country doesn't feel very strongly in one direction or the other. Do you think that that's like a, a mischaracterization? Is it, is it, is it too far, uh, that I'm going or what,

Starting point is 00:45:36 what would your thoughts be on that? What feels very pervasive to me? I mean, I think that that's right. I would just say that the left that you're describing doesn't have much political power in this country. I don't think that there needs to be stronger regulation of corporations and stronger accountability. Whether they can execute that is a different thing. But I think that's sort of the fundamental belief. And I think it's a little bit more, I would say even say it was significantly more aggressive than the Obama administration on that. But on the right and even on the left, and I would say in the middle, there's deep cynicism about corporations. I think my pet theory is that people are very angry at companies, corporations. They actually have these infuriating daily interactions with companies where they're on hold with customer

Starting point is 00:46:46 service for an hour or they can't return a defective product. These kind of humiliating, infuriating interactions, but they don't really have an outlet for expressing it. And so they get angry at their government for it. And so a lot of this is focused on government, which doesn't actually have much, federal government doesn't have much daily presence in most people's lives, but is the object of huge amount of anger. And I think that's sort of Trump world writ large, you know, where the economy has not gone right for many people in that they are, to some extent, a forgotten class. And they're deeply resentful about it. And they're angry at the federal government. They're angry at minorities. It's basically my diagnosis.

Starting point is 00:47:36 Well, listen, we want to say thank you so much for appearing live with us tonight. John, let's put Jesse's book up on screen so people know what it looks like. Go to Amazon and check this out. It's probably the most well-written and well-researched take on this particular topic. Thank you so much to Jesse. And we can find your work on ProPublica. How frequently are you guys putting out stuff? I know these are very big pieces. Yeah, I'm an editor, so I'm not writing as much as I used

Starting point is 00:48:07 to. But we'll have a series of stories about the shadow insider trading all throughout the year. So I hope people check it out and definitely buy the book. You don't have to read it, but definitely buy it. We will. We will absolutely link to that. And we'll make sure to follow up when the new stuff hits ProPublica. Jesse, thank you so much for joining us and educating us. We appreciate it. Good night, everybody. Good night.

Starting point is 00:48:31 Good night. Bye.

The Compound and Friends - Yes, This Is a Bailout of Credit Suisse

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