Transcript: Peter Conti-Brown, Wharton



The transcript from this week’s MIB: Peter Conti-Brown, Financial Historian at Wharton is below.

You can stream/download the full conversation, including the podcast extras on iTunesBloombergOvercast, and Stitcher. Our earlier podcasts can all be found at iTunesStitcherOvercast, and Bloomberg.


This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

BARRY RITHOLTZ, HOST MASTERS IN BUSINESS: This week on the podcast, I have a – a special guest, his name is Peter Conti-Brown, and he is an expert on central banks financial history and the Federal Reserve. And if you are interested in those sorts of things as I am and many of you are, well then, sit back and get ready to walk out on some really interesting stuff.

He even really has an in depth grasp on not just central-bank operations but on the history of finance and the history Federal Reserve in a way that most people simply can’t do more than scratch the surface.

So if you are at all interested in modern banking regulations, the politics at the Fed, what Greenspan and Bernanke did or should have done or didn’t do and how the history of the Fed squares up with the modern era, you are in for a treat.

So sit back, with no further ado, my conversation with Peter Conti-Brown.

My guest this week is Peter Conti-Brown, he is a professor at the Wharton School at University of Pennsylvania and he is the author of the power and independence of the Federal Reserve. He comes to us by Harvard where he was undergraduate, he got his Juris Doctor degree at Stanford Law School and then he earned a PhD at Princeton in, am I remembering this correctly? Legal history, is that right?


RITHOLTZ: Financial history, even better for our purposes.

Peter Conti-Brown, welcome to Bloomberg.

CONTI-BROWN: Such a pleasure to be here. Thanks, Barry.

RITHOLTZ: So I read one of your columns some time ago and I kind of cracked up by a line within it which we’re all somewhat guilty of to some degree or another, you note something remarkable in the shelves of an old-fashioned library, which uses the Dewey decimal system, go to HG 2500 section and you write the shelves variably grown under the weight of the conspiratorial tomes about the Federal Reserve. Why? Why are we so conspiracy minded about America’s Central Bank?

CONTI-BROWN: On some sense, it’s the founding crisis ideologically, right? Militarily and certainly politically, and that is what is money and who gets to decide, right?

The British said money has to consist of such and such and so and so with tariffs and stamps in this much silver associated with it while starving the colonies with the resources to deliver on that promise or so asserts the Declaration of Independence, right? Well, fast forward a few years, the revolutionary war is over but then we get the in the Washington administration, Alexander Hamilton on one hand, Thomas Jefferson on the other, Lin-Manuel Miranda in the middle, right?


CONTI-BROWN: And the reason I think the Hamilton musical has succeeded so spectacularly, Lin-Manuel Miranda is a genius, but his other musicals like “In the Heights” right? Also fabulous, but how the musical gets to this question, what is money, who gets to decide? We fought about that forever and we fought about it in ways where that become extremely technical very quickly, Alexander Hamilton certainly very technical expert on these issues, but unlike other areas of technical expertise, like you know hey how do you get a satellite into orbit, right? You don’t have a lot of ideology around that, you just say, well…

RITHOLTZ: It’s physics.

CONTI-BROWN: Either it works or it doesn’t.

RITHOLTZ: Give you trajectory as accurate or it’s not in which case, crash and burn.

CONTI-BROWN: Now with all respect to the Flat Earth Society and the moon landing was staged and that sort of thing, there are conspiracy theorists there too but the difference is that you don’t use satellites to buy groceries, right? You do use money to buy groceries and so that intuition about what money should be and who gets to decide is shared by a lot of different people and so there’s a gap between what experts, who themselves don’t agree say should be of proper financial system or proper monetary system.

And what we in all kinds of identitarian factions whether they are religious or political or geographic or whatever else, you say, you know that’s wrong and so I think the Fed is just this great collision of expertise of ideology, of history, of politics, of economics, of law and that just produces a really pungent potion that attracts conspiratorial thinkers and experts alike.

RITHOLTZ: So let’s talk about that explicitly, because it comes up so often. “The Creature from Jekyll Island” that book which is now decades-old…

CONTI-BROWN: And it goes through a new edition every few years.

RITHOLTZ: That seems to be the source amongst the people I see as the conspiracy theorist says, hey this was doomed from the start, but you are a historian of financial markets we could go back to the first Federal Reserve or the second Federal Reserve, in each case there was a tremendous fear and skepticism in the 1800s about those banks and each of them were now — I’ll ask the question to you, each of those were imbued with a finite lifespan. So why did it take so long before America said “Hey we can’t be the only major country that doesn’t have a central bank.”

CONTI-BROWN: Yes, you know, you asked the separately one of the questions that you asked me was what are some unnoted periods in financial history that people don’t think about that matter a lot and there’s one of them, in 1927, Congress passed a statute just on right before the Great Depression, look at the Federal Reserve Act and said the Federal Reserve was created just like the first and Second Banks of United States with a 20 year charter, and so let’s do some quick math and the Federal Reserve Act of 1913 plus 20.

RITHOLTZ: 23, 33.

CONTI-BROWN: 1933, 1933. In the midst of the Great Depression, right? At a time when Franklin Roosevelt was not you know representing these — what his cousin Theodore called the malefactors of great wealth, right?

Would the Fed have been renewed in 1933? I think that is a really fascinating question, we didn’t have to ask it, because in 1927…

RITHOLTZ: Five years in advance.

CONTI-BROWN: Five years in advance, slipped in, you know, slipped in to as a writer, as a — to a much controversial banking bill. They said you know what, were going to — we’re going to eliminate the need for charter extension, this is going to be in perpetuity. What’s so intriguing about that is in the Second Bank of the United States, that’s exactly what the Second Bank’s President, Nicholas Biddle, tried to do, his charter wasn’t up until 1836 and he slipped it in early because he thought, you know what? The bank is so popular that we can do this and we should do it early as opposed to letting them be, a bit controversial I think, that was one of the biggest miscalculations in the 19th century because Andrew Jackson was able to harness his own popularity against the bank.

But we sometimes forget, when the Second Bank of the United States failed, it failed because Congress came just short of overriding Jackson’s veto. It was still massively popular just wasn’t so popular that could override a presidential veto.

RITHOLTZ: What were the politics of President Andrew Jackson that he was against renewing or turning that into a perpetual money machine?

CONTI-BROWN: This is a great question and should remind our listeners a lot about our present political situation. There are two stories that one tells about Andrew Jackson, so one is as this fierce pugilistic populist right? He wanted to take power and tear it down and push it down into the states and away from the federal government. That’s certainly the vision that the Jacksonian Democrats carried with them to the rest the 19th century and in the 20th, and certainly at some points, what Jackson saw himself to be as is representing those had been disenfranchised, disempowered by Wall Street and the like.

RITHOLTZ: Even that far ago, even 150, 200 years ago…



RITHOLTZ: It was still the same conversation.

CONTI-BROWN: Same conversation, very similar, and I think that’s a bit of revisionism by Jackson and his descendents politically who want to make a more coherent narrative than actually existed at the time. At the time, Jackson was much more like other politicians that we are probably going to come up in this conversation and just didn’t like to have other power bases that threatened his control, right?

So there were times when he would say — Andrew Jackson would say two different things that were together incoherent about his own monetary vision, thing where he hated the idea of paper money while simultaneously saying let’s send the economy awash in paper money but issued by state banks, right? Where he’d show real hostility to a gold-backed currency while simultaneously saying it’s the only mechanism that he would approve of.

So I don’t think you can put an economic ideology on Andrew Jackson. I think efforts to do so failed to realize that Andrew Jackson, like Donald Trump frankly, say I am the source of decision-making, the idea that it would be another power base that could threaten my control over this system that I can abide and so he went to war with Nicholas Biddle and the I think that’s the source of that conflict.

RITHOLTZ: Fascinating. Your students, grad students or undergrads?


RITHOLTZ: Both, everything.

CONTI-BROWN: And executives and Ph.D students and so we really teach them all.

RITHOLTZ: So, so much has been going on in the world of banks since the financial crisis, I have to ask you about Dodd-Frank and the changes to that but before we get there, we now live in an era of megabanks all the banks are really relatively giant compared to before the financial crisis, a number of pretty substantial banks were either required or were moved over, you have Washington Mutual and Wachovia and look at all these different banks, Bank of America and Merrill Lynch, all these giant conglomerations, how is the modern era banking different then the way it existed prior to the financial crisis?

CONTI-BROWN: You know, we’ve seen after the financial crisis essentially an unrivaled concentration in the financial system, financial services, the you know, just looking at commercial deposits for example, which include personal and commercial deposits, that is $17 trillion right in the American.

RITHOLTZ: That is just checking and savings.

CONTI-BROWN: Checking and savings accounts for individuals and businesses and organizations, megabanks which will call above $250 billion, right?

RITHOLTZ: So that’s things like J.P. Morgan Chase, Bank of America, Wells Fargo.

CONTI-BROWN: And much further down, it goes down to U.S. Bank and you know P&C and FifthThird and other banks that you might think of as regional but really have, you know…

RITHOLTZ: Grown to size.

CONTI-BROWN: Grown into great size. Right?

Because J.P. Morgan Chase, is — its balance sheet is trillions of dollars.


CONTI-BROWN: Wells Fargo is above a trillion dollars.

So were taking down on the order of magnitude smaller than that, but they are just very, very large banks and they control about $13 trillion, right? $13 trillion of the $16 trillion in these deposits, that’s an extraordinary concentration especially given that the number of institutions we’re talking about is a couple of dozen, right? This changes these banks balance sheets — change in size at the margin but we’re seeing financial services dominated by a handful of institutions and we have not seen that really ever before in our history, including the great merger era of the late 19th century or you saw trusts around sugar, oil, corn, harvesting machines, right, and fill in the blank, there — this is the great trust era, a great consolidation era.

But interestingly enough, because of the structure of the US political economy, banks were extremely decentralized by law, each bank that for a very, very long time, a bank couldn’t have more than one branch and even after that was changed in the late 1920s, they couldn’t have branching across states, and that wasn’t finally abolished where you would have a bank doing business as its own institution across state lines until after 1980.

RITHOLTZ: What about the repeal of Glass-Steagall, what did that contribute towards banks bulking up?

CONTI-BROWN: And so it contributed a lot, I mean this is a point of some debate among economic historians, it’s correlated, right? With banks bulking up in pretty breathtaking fashion. What some economic historians will say, well, that is correlated but it wasn’t caused by this and Glass-Steagall was essentially unrelated to the size. Now, that’s hard to swallow at least in the short run after around Glass-Steagall’s final legislative demise because of course Citigroup becomes Citigroup after its acquisition…

RITHOLTZ: Travelers, Citi, it becomes the first megabank.

CONTI-BROWN: Yes, and so, but then again, you know, a few years after that, that was a pretty disastrous merger, they sold most of their insurance business because the synergies weren’t present and then what becomes really the shining example of a megabank, J.P. Morgan Chase, and if we list all of the names of the banks that they were acquired along the way…

RITHOLTZ: Right, Manufacturers Hanover, Chemical, it’s a…


CONTI-BROWN: Absolutely, the bank, the first, what was Jamie Dimon’s bank in Chicago, First National is that what it’s called?

RITHOLTZ: And I believe he was at Smith Barney before that.

CONTI-BROWN: And when he was at Citi, he was Sandy Weill’s right hand man in designing the spread the mega banking strategy, he loses in a power struggle goes to manage his bank in Chicago, comes back in J.P. Morgan Chase’s acquisition which was essentially an employment contract acquisition, Jamie Dimon becomes CEO and J.P. Morgan Chase with help from the federal government embarks on the strategy of becoming as big as it can be.

And so we are truly in an unprecedented era in terms of a banking consolidation in the United States.

RITHOLTZ: So everybody used to talk about too big to fail, I like to raise the question, have these banks become too big to succeed? Are they even manageable when you’re running trillions of dollars in deposits? Can these things be managed and that’ll segue right into our discussion of Wells Fargo.

CONTI-BROWN: Such a great question, too big to manage, too big to jail…

RITHOLTZ: Too big to succeed.

CONTI-BROWN: Too big to succeed, and that — the you the way the phrase that too big to succeed is so fascinating because it calls into question the time horizon in the short and medium-term, I say that we’re on a on leading into a medium-term from the financial crisis, man, it has been good to be Jamie Dimon, right? That is the — that balance sheet is that is an extremely successful…

RITHOLTZ: Right, Fortress Dimon is just — it is unassailable, they were very fortunate, you’re a financial historian, you will appreciate this, most people don’t realize J.P. Morgan Chase had their own derivatives crisis but they were, let’s call it lucky enough or smart enough to have it years before everybody else so they cleaned up their balance sheet what it was still a bid to hit it, when it hit everybody else, they had nowhere to go.

CONTI-BROWN: This is another occasion in financial history that a lot of people don’t recognize and I think this is Tim Geithner’s signal contribution to finance in his career and happened before he was secretary of the treasury. And that was in 2005, 2007, noting on a spectacular back office problem in derivatives trading, so these were all bespoke derivatives, right? Even though they are not very fancy, it is pretty plain-vanilla but they all are bespoke because there’s no…


RITHOLTZ: No marketplace for them to train on, no exchange for them.

CONTI-BROWN: So you would think sophisticated folks in 2005, we are not talking about 1995, right? So the IT revolution has already taken pretty deep root, that you have some sort of Oracle-based software system where traders with two headsets on you know talking to different people, really punching into a computer that would clear it and would be universally accessed. You think that and you’d be wrong, right? What they’re doing instead is on scraps of paper with little golf pencils writing down the nature of the trade as though they were signing — they are a doctor signing a prescription handing it back to a runner who take that piece of paper and put it in a stack, right?

And what Tim Geithner realized, even though he — the New York Fed had no supervisory authority over these broker-dealers, that is a very important point, realized that the back-office backlog was about nine months.


CONTI-BROWN: And so if there’s a triggering event, like in the International Swaps and Derivatives Association Master Agreement, there is a default event within the nine months, you had traders said “hey, you owe me money.”

“Wait, do I?” I had to go literally back into nine months worth of scraps of paper to find where’s this trade, right? Huge mess. Tim Geithner realizes it and he does a tremendous effort coordinating the banks to clean up and modernize their back-office, he succeeded right before the crisis.

RITHOLTZ: Amazing, absolutely amazing. So let’s jump into a fascinating topic that has been in the news for the past year or more and that’s been this ongoing scandal at Wells Fargo. We first learned about it all when it was revealed the management of Wells Fargo greatly incentivized the staff to open new accounts create new accounts, but they simultaneously penalized people who didn’t do it, they would literally fire people and it turned out the levels at which they were subsequent and significant consequences were exorbitantly high, 95 percent or so of the staff were not meeting the targets.

And so when you incentivize people they do what you ask and the staff started creating fake accounts, not one or two here but literally I think we’re up to 3 1/2 million is that about right?


RITHOLTZ: So tell us how this came about and who should’ve been overseeing this. How does something as absurd as 3 million fake accounts come from a major bank like Wells Fargo?

CONTI-BROWN: Well you framed this in a in a very particular way and I completely…

RITHOLTZ: A little hostile? Ami too hostile?

CONTI-BROWN: No, I completely with your framing…

RITHOLTZ: Oh okay.

CONTI-BROWN: But John Stumpf, the former CEO of Wells would absolutely reject it, right? So you framed it as a compensation structure and cultural problem and a supervisory one.


CONTI-BROWN: Right? And what Stumpf and Wells Fargo, they initially said is no, what you’re seeing is less than two percent of our employees engaging in some bad practices, that would happen in any organization.

RITHOLTZ: Two percent of bank employees, that’s a bank that employs — what was that at their peak? 100, some ungodly number, 90,000.

CONTI-BROWN: 150,000 employees.

RITHOLTZ: Right, so two percent is okay, so only 3,000 of our employees are engaging in criminal fraud, it can happen to anybody.


CONTI-BROWN: Yes, and what’s hilarious about that is that that statistic is just completely made up.

RITHOLTZ: Even worse.

CONTI-BROWN: Who cares about if your denominator includes janitors, right and the…

RITHOLTZ: Right, what percentage of the people…

CONTI-BROWN: Our personal bankers are exposed to individuals who were engaging in this kind of illegal activity and that what you’re framing it where I completely agree with you is that’s not all we care about it also aggressive behavior. So John Stumpf built this model, Wells Fargo was — with J.P. Morgan Chase, these were the two banks that nailed it, right? These were the ones, this is not Citigroup, this is certainly not Washington Mutual.


CONTI-BROWN: And it’s not Bank of America, right? This is Wells Fargo, built its brand on being a phenomenal consumer and commercial bank as opposed to a investment bank…

RITHOLTZ: Hundreds of years old, the stagecoach is not a coincidence that it’s their corporate logo, they’ve been around for centuries.

CONTI-BROWN: They’ve been around for a very long time and they’ve been very good at the work that they’ve — that they’ve done or so it was reported, but that compensation structure and that culture is so massively important because it created not only the incentives to engage in bad behavior, but to engage in practices that I think most people would say, that is zero-sum and you are robbing your customers.


CONTI-BROWN: You are not creating value here.

RITHOLTZ: You are just transferring it from your customers to yourself.

CONTI-BROWN: To yourself, and you’re doing in a way that’s trying to deceive your customers as to what value proposition is here. So I’m going to give you the example, right? This is mantra, eight is great, right?

And the idea here is that cross-selling is distinct from upselling, upselling is you know you go in, you want to buy a Toyota Corolla, you walk out with a Lexus. That is upselling. Cross-selling is “Do you want fries with that?” Right? So you come and you want something they say you want that thing but you also want all this other stuff too.

RITHOLTZ: So that was auto insurance, checking accounts, credit cards…

CONTI-BROWN: Let’s count to eight, and I invite our listeners do the same thing.


CONTI-BROWN: What are the eight products or services that you need to have in the same financial institution?

RITHOLTZ: Let me see if I can guess. So will start with saving and checking’s account.

CONTI-BROWN: Two, that would be two.

RITHOLTZ: Right. Mortgage.

CONTI-BROWN: Yes, so again, we are going to re-examine why you want your mortgage to be the same place you have a checking and savings account, but yes, mortgage certainly counts.

RITHOLTZ: Credit cards.

CONTI-BROWN: Credit card counts.

RITHOLTZ: Bank loans.

CONTI-BROWN: Bank loans, personal loans, we are up to five.

RITHOLTZ: Insurance, they were doing some insurance products.

CONTI-BROWN: They had some insurance products including gap insurance, including auto insurance, on your insurance, so meaning if you…

RITHOLTZ: Homeowners insurance as well.

CONTI-BROWN: Homeowners insurance as well, so now it is up to seven.

RITHOLTZ: And the only other thing I guess is 401(k) retirement accounts.

CONTI-BROWN: That absolutely would be one, so that would be you — you would be a very good Wells Fargo banker and being able to say, all right I got to eight, now I got to go sell these, right? Now let me give you an example…

RITHOLTZ: Eight is great, okay, that is hilarious.

CONTI-BROWN: That is their mantra. And let me tell you the story of a of a company that engages in massive cross-selling to my utter delight as a customer and that is Amazon.



RITHOLTZ: If you like X, you will love Y.

CONTI-BROWN: I buy in the same day, purchased books and chainsaws from right? And I’ve seen myself going to this thing and they say, oh if you want that, then you are going to need this other thing, too, and I’ll think about it say “Yes, please, and thank you, Jeff Bezos. I would want that.”


RITHOLTZ: But they offer that to you, they don’t send it to your house and say by the way we sent this to you whether you asked for it or not.

CONTI-BROWN: Right, so there’s no fraud here. My point is that Wells Fargo’s problem is so much worse than the fraud, right? Because what Amazon is offering to me sometimes these other things that I already want for less money or even if it’s more money than I would get at Lowe’s or somewhere else, the sheer convenience of having it all in a single system is extremely high.

Now, let me ask you and our listeners if you are shopping for financial services whether we’re talking about a credit card, a savings account or mortgage, what do you care about?

RITHOLTZ: I care about the best cost and the highest level of service — highest quality of service.

CONTI-BROWN: So the best cost first, right? That’s an interest rate phenomenon. What service do you need for your mortgage?

RITHOLTZ: Well, I want to know that I could set up an auto pay I want to know that I’ll get credited on a timely basis and that things like insurance isn’t going to be forced down my throat and that I could prepay my real estate taxes, add that to the monthly, little things like that to just make our financial life a little easier.

CONTI-BROWN: Absolutely, and almost all that is standardized across the industry, almost everything…


RITHOLTZ: So then you are talking costs.

CONTI-BROWN: So you are just talking cost, talking interest rates, so credit card, absolutely, if you carry consumer debt, absolutely, there are going to be issues of service. For most people, what they want is the lowest interest rate and the most benefits of a credit card.

For a savings account, what people are looking for are you know, a suite of bells and whistles, can I deposit a check using my phone, can I do this or can I do that? But again…


CONTI-BROWN: ATMs, location, all of this ends up mattering but by far the most important thing is going to be the price point, and that’s where Wells Fargo, I think stepped into an extremely aggressive territory, well short of fraudulently manufacturing services that you never wanted, never asked for, right? That’s the fake account scandal.

And my point is how do we get here? We got here from a rotten culture that decided we’re going to make price point which is the one thing that most consumers really care about the secondary consideration and we’re going to try and convince them that while there are economies of scale to be had for Wells Fargo in consolidating customers, those economies are not really shared with the customers themselves, that’s what makes me uncomfortable about Wells Fargo.

And that’s why think I feel a little bit more encouraged in the post-Wells era not only Wells but other banks too are dialing way back on this kind of aggressive marketing, because I think that it’s pretty hard to justify when the thing that people want is are you going to beat this by a few basis points, because we are talking about a 30 year mortgage, a few basis points matters a lot.

RITHOLTZ: Huge, huge difference. So it is 2018, we’re in the middle of the summer, has Wells Fargo cleaned up their act? Because we still see these little eruptions every now and then of more things leaking out that all date back to the same era but we hadn’t previously heard about this.

CONTI-BROWN: To those who were in PR crisis management, even the financial institutions itself, I mean Wells Fargo has literally become the textbook case, I teach it to my MBAs…

RITHOLTZ: Of what not to do.

CONTI-BROWN: Of what not to do. It was death by 1000 cuts.

RITHOLTZ: So they didn’t get out in front of it, you want to disclose stuff yourself so you are beating everybody else from revealing it, and then there was never really a believable apology and then on top of that, at a certain — so I’ve never had a Wells Fargo account, they could be great, they could be terrible, I’ve never experienced it personally but seeing the run of news at a certain point, I was saying to a friend, hey at this point, if you have a Wells Fargo account still, you’ve tacitly given them permission to do whatever the hell they want because if they haven’t scared you away — what do they have to do to chase you away?

And it doesn’t look like that many people hit the eject button with them.

CONTI-BROWN: So they did — yes, that’s what has been so interesting to me and I am not n active investor for a lot of different reasons not least because I comment on these things and I don’t want conflict of interest.

RITHOLTZ: Well, if you are talking about cost, I’m going to assume you’re like many other financial professors in your low-cost index Vanguard et cetera.

CONTI-BROWN: That’s right that’s exactly right.

Not that I’m — I don’t take that as an absolute dogma like some of my colleagues do, there been times where I’ve been tempted into markets and one of them was to short Wells Fargo, I didn’t do it, but I always thought…


RITHOLTZ: How long ago was this.

CONTI-BROWN: In 2014 or something, this is about a year, the LA Times broke the story in 2013, we didn’t get the settlement with the CFPB and the Comptroller of the Currency until 2015. So in these two years, that is another very important question about supervisors what was taking so long? The journalists knew this.


CONTI-BROWN: Right, but it was not — we didn’t get a good sense of it not just by 2015 but we’re still getting the news later. But if I had shorted Wells Fargo stock, I would have lost money, all right.

Their stock has done well, this has been a boom time, right? I might have been able to hedge it and still short the stock relative to places like J.P. Morgan or Goldman and maybe I would’ve made some money then, but it’s been extraordinary how much of their brand equity in their business has not been compromised by what has been a stunning turn of headlines week after week…


RITHOLTZ: The old joke is news is old by the time it’s in the papers, lots of people already figured out and probably made their bets based on that.

CONTI-BROWN: I think that tells us a few different things, number one, there is a good version and a bad version of how we can interpret those events. The good version for Wells is that it does have an extremely robust balance sheet and business such that this scandal although lots of people are reading about it and talking about it ends up not mattering that much for the overall value of the franchise.

RITHOLTZ: Inertia just keeps people where they are, and listen I got everything on auto pay to move my account is a big pain in the butt, I’m not going to bother.

CONTI-BROWN: I’m not going to bother, right.

The bad version, in other words, saying that the size and diversification of their businesses and on whatever parameters you want to choose, geography, business lines, other things has protected them from scandal, that’s the version that is good for Wells. The version that is bad for Wells is that the sheer complexity and size of these financial institutions make them totally unaccountable even when the facts are breathtakingly damning. All right?

You will never see a clear-cut example of abject criminality in consumer banking that is as widespread as this, right? This was absolute fraud.

RITHOLTZ: I think you’re not cynical enough if you think nothing is going to be worse than this.


RITHOLTZ: Because every time I’ve said that throughout my professional career, what could ever be worse than fill in the blank, where — go from Enron to WorldCom to you pick it, every time I think I become too cynical, the rejoinder comes back at me just wait.

CONTI-BROWN: That’s pretty great. For me to find another example would have to be Citigroup’s predecessor, National City in the run up to the Great Depression which motivated the original passage of Glass-Steagall where you would get these salesmen coming from the banking side, or sorry, from the capital market side looking at bank customers and you see, okay, we got a retired couple, their nest egg is $10,000 they got in their savings account, go to their house, swindle them out of it and make them invest in Latin American mining operations, that is a real example.

RITHOLTZ: That’s a perfect thing for a young couple’s retirement account.

CONTI-BROWN: Yes, right, they are going to live another 10 years speculating.


CONTI-BROWN: And of course, that goes bust, all their money is gone right and there’s there these letters that you can read in Library of Congress where people were just writing to their members of Congress during Glass-Steagall hearings that the Pecora hearings that preceded Glass-Steagall, saying please ask Charlie Mitchell why he would target us, I’m sitting down next to my wife’s coffin, she died early because of the stress of realizing our nest egg was gone.

So that was a big scandal, I see Wells Fargo as being pretty similar in scope but now compare the difference in the reactions to them, right.

RITHOLTZ: I think we’ve become immune to these sort of things, that was the take away from the great financial crisis, my cynicism is whatever you think, it’s much worse.

Let’s talk a little bit about the Federal Reserve and central bankers and I’m good to begin with something from Lombard Street, a description of the money market, a very famous quote is “Lend freely at a penalty rate against good collateral” that comes supposedly been called Bagehot’s dictum, the first question is — by the way, the whole purpose of that is an articulation of how central banks should respond to a panic to avoid a full-blown crisis. First, who is really the author of that rule? You suggest that it wasn’t Bagehot.

CONTI-BROWN: Not, it’s not Walter Bagehot, you can read the entire book you may times as you’d like and never find Bagehot’s dictum…


RITHOLTZ: He hints around it, he talks about lending freely and liquefying…

CONTI-BROWN: He’s got two chapters that are basically about lending freely, he does talk a little bit about what was good collateral but mostly as a set of shared assumptions that everyone would have about what constituted good collateral which were essentially no good collateral was well going to be on these commerce bills which is basically, here we got a contract already set up, their first real business that has been done is not speculative, right?

That’s good collateral…


CONTI-BROWN: And that is not our definition of good collateral, good collateral can beat securities, right, today and it would not of been his definition, he mentions that just in passing.

Penalty rate there’s a sentence about the idea that like — you want to make it hurt a little.

RITHOLTZ: Right, charge a premium above what you could get if there wasn’t a (panic) in order to discourage this behavior in the future.

CONTI-BROWN: But interestingly enough, the rest of the book is about not doing that very thing, right? Because if you make it, if you stigmatize the lending by a central bank which a penalty rate would do, and then you’ve created a very scenario that Bagehot is saying you shouldn’t do.

So there is no Bagehot’s dictum, he never said that, his book is not about that and indeed it’s ironic because you know, one of the things that he writes in that book is that there are people are so eager for you to say, all right, well central banks good things or bad things? And you say, well, it’s complicated and they go, well I don’t care. Right?

RITHOLTZ: Welcome to the modern world of politics.

CONTI-BROWN: And he is writing this scene in the late 1860,this is published 1873 ,and he also said you know, people just don’t have appetite for long books, they want short sentences, and what’s hilarious for me now is that the thing that Bagehot’s book is remembered for his short sentence that he never wrote.

RITHOLTZ: So who did write that?

CONTI-BROWN: You know, it’s hard, I would be interested if our listeners can track this down, I haven’t succeeded, I can tell you two people who popularized it, one is Paul Tucker who is a great scholar and practitioner of central banking, he’s got a new book that just come out somebody might consider for your podcast and – and for this radio show, he was the Deputy Governor at the Bank of England during the crisis and he has written a lot about this idea and he is the one that is quoted most often for Bagehot’s dictum.

RITHOLTZ: It’s never Bagehot being quoted, it’s always somebody.

CONTI-BROWN: Quoting Paul Tucker.


CONTI-BROWN: Creating Bagehot’s dictum, but again, he did it, Paul didn’t create this, right? He’s referring to something that came before.

Ben Bernanke is the other one who has really popularized this only two thirds of Bagehot’s dictum, lend freely or maybe one and a half of it, lend freely against…


CONTI-BROWN: So-so collateral but don’t do a penalty rate, and but you know Bernanke’s book, his memoir the crisis he talks…

RITHOLTZ: The courage to act. Do I remember that correctly?


CONTI-BROWN: The courage to act, yes, and he notes and when he became Fed chair in 2006 and the chair has a personal library and in his office and he said I brought Bagehot’s Lombard Street and put it there, now Ben Bernanke is a very sophisticated financial historian and I assume he’s read Lombard Street, but — his book would not give you evidence that…

RITHOLTZ: Did you overlap with Bernanke when you were at Princeton, he was the head of the economics department.

CONTI-BROWN: No, I have met him a couple of times before and we’ve exchanged views on a variety of topics, I think that he is a remarkable public servant, a terrific scholar. And I always leave reading any paper or even blog post he has written feeling smarter.

But we’ve also had our differences, we had an argument about an assertion that he makes that I think is false which is that the reason the Fed didn’t bail out Lehman Brothers is that they lack the legal authority to do so.

RITHOLTZ: That’s been the claim, I have a pet theory on that, I’m curious as to what yours is.

CONTI-BROWN: Well, legally it’s false, that is not correct, they did have the legal authority to do it.

RITHOLTZ: To bailout a broker dealer.

CONTI-BROWN: Oh, absolutely. I mean the statute is in unusual and exigent circumstances, a term which is — sounds very heavy but is not defined.

RITHOLTZ: Right, unusual and exigent is Tuesday.

CONTI-BROWN: Yes, it could be.

So long as five members of the board of governors vote in favor, which he had and the Federal Reserve Bank whose district the institution exists…


CONTI-BROWN: New York and is that the loan is secured to the satisfaction of the Federal Reserve Bank, “secured to the satisfaction” what does that mean? Well, it’s not defined.

RITHOLTZ: Right, although quite bluntly we know there was a ton of fraudulent shenanigans going on at Lehman Brothers with the famous repo 105…

CONTI-BROWN: All of that, so you might say, well then, we’re not satisfied by that, but that’s a discretionary determination. Still, we lack legal authority to do so is false, it says we were not satisfied by the collateral presented…

RITHOLTZ: Is different.


CONTI-BROWN: Is a different thing which of course raises the question…

RITHOLTZ: Then why did they really let it hit the pavement?

CONTI-BROWN: And why is AIG different. The answer is well, because they have a good insurance…

RITHOLTZ: Business.

CONTI-BROWN: Business going on, Lehman had all kinds of profitable businesses within their 20,000 corporations under their parent company. So again was that the right decision or the wrong decision is a separate set of questions, was it politically motivated or not? Should it have been subset of questions, did they have the legal authority to do so? Well, yes of course they did in this isn’t just me being an obnoxious lawyer saying, well look at this, the idea that they lack the legal authority to do so was the single defining idea that motivated the passage of Dodd Frank.

RITHOLTZ: That’s fascinating.

CONTI-BROWN: And so I think that that ends up mattering a huge amount just isn’t correct.

RITHOLTZ: So I wish I was a fly in the wall when they were having this internal debate, but my pet thesis is simply at one point early in the spiral of Lehman Brothers, Warren Buffet of Berkshire Hathaway had the conversation with Dick Fuld, made a lowball offer because he’s a value investor and to everybody who was an employee at Lehman Brothers’ lasting regret, Dick Fuld said this guy’s trying to steal the company for $3 billion.

It was only a small percentage ownership and he rejected Buffet and I can’t help but think from a moral hazard perspective the debate going on with Bernanke and Geithner and hey, how could we bailout this guy when he turns down Warren Buffett who by the way later made a much more advantageous loan to a much better bank, Goldman Sachs.


RITHOLTZ: So Fuld’s folly…


RITHOLTZ: …turned out to benefit Goldman and Buffet.

CONTI-BROWN: Here’s my friendly amendment to your theory, I would call it Fuld’s follies because Buffett was one in a series of suitors who came knocking and Dick Fuld was trying to value the company as though it were 2005, not 2007 or 2008 and so I think it was a spectacular hubris yes that’s I think the regulators including Tim Geithner and Hank Paulson couldn’t fathom, so one of the conspiracy theories a lot of people I think are — pretty sophisticated people.

RITHOLTZ: Payback, it was payback.

CONTI-BROWN: Payback, it’s the Goldman versus Lehman thing, I just don’t buy it. I think to the extent that that mattered at all…

RITHOLTZ: By the way, remember that if anybody was payback there was Bear Stearns, go back to long-term capital management…

CONTI-BROWN: A perfect example.

RITHOLTZ: They didn’t want to be part of the consortium that rescued who they were the prime broker for, so when Bear hit the deck earlier than Lehman the deal that was actually Jamie Dimon stole it right out from under a — I think it was Wachovia who was looking at it then, and then to get the Fed to say we will commit to backstop if this goes over to $29 billion worth of junk.

CONTI-BROWN: You saw some great dealmakers in the crisis…

RITHOLTZ: And some terrible….

CONTI-BROWN: Dick Fuld was spectacularly not one of them.


CONTI-BROWN: And so I think that that ends up having a lot to do with it, I think the biggest explanation of all does come from Hank Paulson, he’s the source for Wall Street Journal editorial, this after conservatorships, this is after the first week in September for Fannie and Freddie.

Senior administration officials assures us and quote “There will be no political solution for Lehman” meaning there’s going to be no public money for Lehman. And I think at that point given the bipartisan furor over Bear Stearns and Fannie and Freddie that they had to find someone to say no to, and they just didn’t recognize that this was going to be the financial cataclysm that ended up happening.

RITHOLTZ: See, let me push back a little bit from bailout nation and I look at Lehman Brothers as merely the first trailer in the trailer park, when the tornado came through, everybody who was leveraged up with bad paper that was relying on either subprime or alt-day mortgages and derivatives, now they were one of the worst, Bear Stearns was pretty bad, AIG was terrible, Lehman was one of the worst but whether Lehman was rescued or not, the tornado was going through, you had home prices one up so much and now were collapsing that that whole derivative unwind was going to take place even if now if you want to argue Lehman Brothers precipitated the conflagration spreading faster…


RITHOLTZ: Well, you know, who knows? It’s hard to argue against that.

CONTI-BROWN: So let me ask you just to put you on the hotseat then, even though I’m the guest and you are the host.


CONTI-BROWN: Good decision or bad decision on Lehman Brothers? Assuming they have the authority to do which I’m telling you they did.

RITHOLTZ: I’m the wrong person to ask that, I’ll give you the answer but the reason on the wrong person is I believe that see that sort of a dork building with the columns over there called the bankruptcy court, that’s there for a reason now if you want to say we are going to take all these banks and have Uncle Sam be debtor-in-possession, so my favorite example is Bank of America Merrill Lynch, that whole countrywide, let’s go over there, we take all the debts, stick it into, sell it, there is no such thing as toxic assets, there is only toxic prices, so this is at a dollar, a hundred cents on the dollar is a disaster but 20 cents on the dollar for something worth 37 is a winner.

So you sell that stuff off, you cleanup Merrill Lynch, you spin them out, you clean up Bank of America, you spin it out, you clean up Countrywide, you spin — you go through this whole process you do one after another. Wow maybe the Dow doesn’t stop at 6000, maybe it goes to 4000, maybe unemployment gets worse, but you end up on the other end with a much healthier financial system. So I’m in favor of following the law, having people suffer the consequences of their actions, by the way I would clawback all the stock-option that all these executives would get, but tear the band-aid off, it’s really painful in 07, 08, 09 but in 2010, you have a healthy economy, even though what we did ended up saving the system, we’re still dealing with the ramifications of that.

And so my answer is you the reason nobody would come in and buy Lehman Brothers is I think their liabilities vastly outweighed their debt, the fact that I’m drawing a blank on his name, the game who came in and took over AIG, he did a wonderful job, passed away from cancer…


RITHOLTZ: AIG had a real business, it had real cash flow, the 400 people in the AIG financial products group were debacle, but you could’ve carved that out and they ultimately did and that’s why AIG is now a functional business.

CONTI-BROWN: Yes. I mean that is intriguing.

I mean the counterfactual you’re telling us about I think is pretty persuasive on the following assumptions and that is that the depths that we would’ve reached in 2007, 2008 and 2009.

RITHOLTZ: Cleansing.

CONTI-BROWN: Would’ve been cleansing.


CONTI-BROWN: Rather than fatal. Right? Because we’ve seen national systems the collapse not to stand up again.


CONTI-BROWN: Right. Argentina is a great example.


CONTI-BROWN: If you and I were having a conversation in 1890 and we’re in Buenos Aires right? And we say, let’s make a bet, America or Argentina hundred years from now? I think both of us would have said, we can’t find a counterparty right? We would have both bet on Argentina as — just on much more secure…

RITHOLTZ: More Republic — go down the list of whenever there is a crisis and that was if you like the book “Lords of Finance” that was imposed from the outside but still…

CONTI-BROWN: It’s a great examples, so the question really for us in evaluating these counterfactuals is where is that threshold where under which the US doesn’t recover ever? Right? Or it recovers in something that we don’t recognize.

RITHOLTZ: That is the $4 trillion question.

Can you stick around a bit? I’ve got a bunch more questions.

CONTI-BROWN: Yes we can do that.

RITHOLTZ: We’ve been speaking with Professor Peter Brown of Wharton. If you enjoyed this conversation, well be sure and come back to the podcast extras where we keep the tape rolling and continue to wonk out over all things central banks.

We love your comments, feedback, and suggestions, write to us at, you can check out my daily column on, follow me on Twitter @Ritholtz.

I’m Barry Ritholtz. You’re listening to Masters in Business on Bloomberg Radio.

Welcome to the podcast.

Peter, thank you so much for doing this and I’m really enjoying walking out on fed stuff and have of — a ton of questions for you that we didn’t get to. The Wells Fargo stuff is just fascinating, I mean….

CONTI-BROWN: We barely are scratching the surface.

RITHOLTZ: That’s just astonishing.


CONTI-BROWN: Here’s the thing, the one thing I’ll say about Wells Fargo, I think, that our listeners might want to know is that they made a choice in hiring a new chairman of the board, a chairwoman of the board, Betsy Duke, former governor the Federal Reserve Board.

RITHOLTZ: Oh sure.

CONTI-BROWN: And this news was the first thing out of Wells Fargo including the independent directors report about what happened that maybe think this entire thing isn’t just a smoldering pile…

RITHOLTZ: They are finally on top of it.

CONTI-BROWN: They have finally done something — they have finally done something real. And so I have high hopes for Duke and I think that she is a really first-rate banker, intellect, she understands the government, so I — she understands crisis so I’m — I think that they might’ve turned the corner but again grab your popcorn, the story is not over

RITHOLTZ: So we really didn’t talk about any of your books, the book that’s out that came out last year the power and independence of the Federal Reserve, what motivated you to write that? How much of that is you pushing back at all the crazy conspiracy stuff that we see about the Federal Reserve?

CONTI-BROWN: You know it’s me it’s me trying to stay in the middle of the conspiracists and the fed apologists who see the fed as this great temple of reason right that is just doing the same thing NASA does when it sends you know the Voyager out to Mars.

RITHOLTZ: By the way I call that economists all have physics penis envy.

CONTI-BROWN: It is exactly that and the problem is that we were talking about an uncertain present with the past that we’ve not fully understood making projections about an unknowable future, right? We’re not talking about physics, right? We are talking about something else.

And it’s not that there is no technical content to what the Fed does, and that is where the conspiracists are wrong, right? It’s not being taken over by different ideologues, there is technical, there is a technical apparatus, it’s just that inside the Fed, that technical apparatus isn’t enough and can never be enough to answer some of these big questions, should Lehman live or die? Should we take interest rates into negative territory? Right? And all these other kinds of questions.

RITHOLTZ: The unknown unknowns nobody can answer because humans are involved and who knows what we are going to do.

CONTI-BROWN: So I saw my role as a lawyer and as a financial historian, not an economists, a little conversant in monetary economics and finance to be the guy who says it’s I’m going to draw the curtain back, right? We’re going to look at the man, not the wizard.


CONTI-BROWN: And it’s going to be okay, right? We’re going to do and we’re going to see that this extremely interesting, fascinating, important, powerful, central bank is not held hostage by a bunch of greedy bankers, right? But it’s not the wizard.

RITHOLTZ: So let’s talk about the wizard. I think some people blame Bernanke for the financial crisis which I think is sort of really misunderstanding the timeline but the question I’ll ask you is how responsible do you think Alan Greenspan is for the great financial crisis?

CONTI-BROWN: That’s great. There’s — Alan Greenspan has the unfortunate status of being pilloried on the left and the right for totally different things.


CONTI-BROWN: The left sees him as giving away the store from regulatory and supervisory perspective, right?

RITHOLTZ: Well, he said a couple of things where you hey you know the banks will take care of themselves, they have their reputation to worry about or in California where the Democratic Congress the Democratic state assembly purposely did not regulate any of the private lenders, Greenspan said hey these are the innovators, why do we want to get in their way?

CONTI-BROWN: So it absolutely is consistent with his ideology. Greenspan also had the misfortune of publishing an extremely candid memoir where he admits completely that “yes, I had no appetite for regulation” and he said that he took care of that by saying “Well I’m just going to recuse myself because ideologically, I am opposed to this.” what happens in any organization where the boss says, “look you can do what you want, here’s my vision but you make your decision.”

Do people say “Okay great, well, I disagree with your vision so I’m going to do mine.” or they say “Let’s guess what his vision is and implement it” and of course it’s the latter and that’s what happens with the Fed. So the left sees the Fed as the only governmental institution with both the credibility and the perspective on the economy to do anything about the underwriting crisis.

RITHOLTZ: Fair enough.

CONTI-BROWN: And then does nothing about it.

RITHOLTZ: And the right, what’s the right’s criticism?

CONTI-BROWN: The right’s criticism is that he played god and he rather than having a monetary policy rule that would have increased interest rates much more rapidly after 9/11 and the tech bubble implosion, he didn’t, he felt like he knew what was better than the monetary policy rules and as a result, he started blowing bubbles.

RITHOLTZ: So the thing I love about that, I totally agree with your observation but there’s something deliciously ironic about an Ayn Rand libertarian who says “We should not have government intervention in anything unless I have my hands on the wheel and then, hey, watch, hold my beer, watch this.”

CONTI-BROWN: Yes, right.

RITHOLTZ: It’s an amazing contradiction and in real time, very few people pointed it out.

CONTI-BROWN: Milton Friedman was one who did, right? And so he was as consistent a libertarian as you will ever find with only a couple of exceptions in his youth when he helped create the payroll deduction system for example something he regretted the rest of his life that taxes should be voluntarily given.

RITHOLTZ: That’s adorable.

CONTI-BROWN: Yes, right, that’s the libertarian fervor right there but Milton Friedman is a very smart guy and he was asked in the 1990s, I mean Greenspan made a decision, is credited or is credited with adding you know $1 trillion of wealth and countless jobs to the economy and that is by saying in the 1990s we should not raise interest rates too early because what we are seeing in part because the technology in part because of other factors in the economy, a dramatic expansion in productivity, rather than an overheating inflationary economy, and so he convinced the other members of the Federal open market committee 1990s to hold tight.

And one of the hawks on the other side of that was Janet Yellen, right? Not the dove on the other side of his hawkishness but the opposite. And he was right in the sense that the economy continued to expand even after him, you know, that the stock — as the stock — tech stocks fell apart where they bottomed out was substantially higher and of course, they went right up again then where others were calling the top of the market.

And so that idea was that he’s the wizard, right? He’s the maestro.

And I think that that ends up defeating this idea when it’s good, it’s great, right? But when it’s bad, you have a villain, and again it’s bipartisan villainy there.

RITHOLTZ: I think that’s a fair assessment, right? He one — as long as everything is going well, hey listen, when the party’s in full swing, everybody loves an easy bartender but the next morning when you’re hung over and sick to your stomach “I can’t believe what sort of junk this guy was pouring into my glass.”

CONTI-BROWN: Exactly. And I think from the perspective, I mean there’s a lot to say in favor and against both of those narratives in the left and the right so some of those who critique the critique on the left say there is — that there was no appetite in America for taking a hard line on bankers and if Greenspan had done it, he would’ve been pilloried just as anyone else was.

RITHOLTZ: What about either the Taylor rule or any other assessment that when you play it out to the last step says, “Hey, we should have rates a little higher than these” you know that’s where the Greenspan put more or less came from.

CONTI-BROWN: Exactly right and Taylor himself although not at the time very much, you know, John has made a big career since the crisis and in really raking the Fed over the coals, but he wasn’t doing at the time and even the original papers that created the Taylor rule were much more tentative than his certainty today, which makes me much less sure about the Taylor rule. I’m opposed to writing the Taylor rule into legislation.

But that is the critique, the Taylor rule would’ve said in 2001,2004, interest rates should’ve been higher.

RITHOLTZ: Right, or 1996, 1997, 1998.

CONTI-BROWN: The same situation right? They should’ve been higher by not just 25 basis points but by 200 basis points.


CONTI-BROWN: Right. Or more. And so the problem with that narrative though and Ben Bernanke has pointed this out is that the real estate bubble started, it predated the initial departure, it predated the monetary policy phenomenon.

RITHOLTZ: I disagree with Bernanke on this. Years ago, when he was leaving the Fed, there was a lunch — a luncheon that I got to attend and the conference table was about 3 miles long, he’s in the middle of it, I’m in the opposite corner so I had to scream my question to and that came up and the pushback I gave and I’ll repeat it now was “Go back to 1987.”


RITHOLTZ: Right? You have the crash, Greenspan comes in like many new bankers, they are tested immediately and you pretty much had the peak in real estate at least in New York and other metropolitan areas in that 87 to 89 era, if you bought a condo in 89 in Manhattan or a co-op, you didn’t can get back to breakeven until like ’96 ’97, the whole concept that real state never goes down, that’s before — we are not even talking about the great depression.

CONTI-BROWN: Yes, yes, yes.

RITHOLTZ: But if you look at a chart, you’ll see we peaked, took a while to get back over and my personal experience has been that in the mid to late 90s, remember the bull market really began in ’82, in the mid to late ’90s a lot of people and this is an anecdote, it’s not data, but I saw so much of it, that I can’t believe there isn’t a good data source on this.

A lot of people said, hey I’m going to roll out a little bit of my equities and trade up in real estate. I’m in a three-bedroom, I want to be a four-bedroom on an acre. I’m on an acre, I want to be waterfront, I’m waterfront, I want to be a bigger house, whatever it was and that’s what it was a combination of all this wealth that was created in the 80s and 90s, rates were still relatively attractive and it just was the demographic cycle that people started to roll up and out and then what could have sort of faded in most cycles, the economy drives real estate, following the combination of the dot com crash and 9/11 when rates dropped, I want to say they were below two percent for about three years and they were about one percent for a year, that’s what started that giant spiral.

And following, there was no refractory period post dotcom collapse, you had real estate then driving the economy for the next well, five, six, seven years and that’s when everything kind of went vertical and then add to that, you start running out of people to buy houses and you moved to subprime and alt A and you bring in another 10 million or 20 million potential homebuyers.

CONTI-BROWN: Sure, sure.

RITHOLTZ: You know, a buddy of mine used to call that on renters with an option to default, people who really my favorite scene in the Big Short is Steve Carell is talking to the stripper who owns a rental property, she’s renting out, he goes “You own a house that you rent out?” She goes, “no, I own six.”

CONTI-BROWN: Yes, right.

RITHOLTZ: And the light goes off, oh, this is a disaster that is going to collapse.

So when I look at — when Bernanke says that, you know, yes you were in a huge booming economy for a decade plus and you still, a good chunk of that real estate was upside down for a while, once you crossed, I want to say 96 97, yes, real estate start to move but you look at ’02, ’03, ’04, ’05, ’06,’ 07…

CONTI-BROWN: Yes, it’s explosion.

RITHOLTZ: It went vertical, so it’s kind — I find he is the same thing with the excess cash looking for a home, I always thought that argument was a little you tell me how disingenuous is this too much savings, that’s our problem around the world.

CONTI-BROWN: Well, this gets to my own ideology which is that I am a radical uncertaintist.


RITHOLTZ: I love that. So I don’t have a strong view on these questions but I love doing is structuring those arguments and understanding what would I have to know in order to endorse one or another.

CONTI-BROWN: So here’s what I would have to know, I would have to know more about the relative availability of credit, right? That securitization, the explosion securitization and the demand that securitization, I’m talking about second, third generation, in the CDOs and beyond, that downward interest rate pressure was putting on the system and how we would look at that if the federal funds rate was higher.

Because one view that Taylor and others assert is that these move in absolute lockstep. Right? So federal funds in 2001 to 2004, if it had been raised 200 basis points or 300 basis points, then we would’ve seen such a dramatic break on the expansion of the housing system.

RITHOLTZ: I think there’s some truth to that.

CONTI-BROWN: And I want to know why how did you reach that conclusion? I don’t have a view on that.

RITHOLTZ: So I will give you short answer.

CONTI-BROWN: Against the counterfactual that interest rates were higher and we still had that breathtaking enthusiasm that you can make this back on capital gains alone and it will be swift and swifter than stockmarkets, right? And under other equities or other asset classes.

RITHOLTZ: So here’s the mechanism for that specific thing and I’m literally talking my book again.


RITHOLTZ: So if you’re running a pension fund, a foundation anything that a charitable trust — anything that has a 5 percent bogey, we are going to give away 5 percent of our corpus each year in order to maintain our tax exempt status. I think if you are a public pension fund, that’s not a technical issue.

But any of the giant foundations and charities and what have you have to do that when rates go to and it’s easy to do that, you’re expected returns for equities are six percent, seven percent, eight percent, your expected return for bonds at three, four, five percent, a blended portfolio, hey five percent is a no-brainer, how hard is that?

Now, you take rates down, you have a dot com crash so whoops there’s that then you take rates down to one percent, now my bonds aren’t giving me anything, I think a lot of bond — a lot of fund managers went to their bonds either traders or salespeople whatever, say listen, I can’t live on two percent, I have to get me something that will generate a better return or I have to find somebody who will.

And so out at the same time, we have a small bit of securitized subprime and suddenly, “hey just as safe as treasuries.” I remember being pitched in ’03, but look at yields 150, 250 basis points more, there is your five percent bogey and then all the sudden, these mushrooms start to sprout after rain that the business model was not lends in order to get a yield on a mortgage but lend in order to sell the papers to securitizers.


RITHOLTZ: And now that’s what’s feeding the beast and that process now I’m taking some liberties with the timelines and I’m sure I’m skipping some steps but I think that is what led to that massive upswing in the…


CONTI-BROWN: And again, I think it’s a coherent view, this isn’t something I would call incoherent or — and it’s not a place where I’ve resolved these uncertainties for myself and here’s one of the reasons why I’m not locking out saying “Barry, you’re right, Bernanke is wrong, I buy in the to the Taylor critique, I think it’s exactly right.” And part of it is rights we got the soup of factors that contributed to the financial crisis easy money is certainly one, right?

And now let’s talk about the five or six others that are contributing to and explain to me why the fed’s easy money is the factor that we call causal as opposed to just simply part of the soup.

RITHOLTZ: But it is — I agree, it is part of the soup, it’s that, take the Commodity Futures Modernization Act that said derivatives don’t have to be regulated like other insurance products.

CONTI-BROWN: Absolutely, so that is a big part of it.


RITHOLTZ: Is AIG for you…


CONTI-BROWN: The global savings glut is a massive factor, right, so got things that…

RITHOLTZ: I’m less convinced of that.

CONTI-BROWN: You are not convinced that there is a massive amount of money floating around…

RITHOLTZ: No, I’m less convinced that that is a factor causing the great financial crisis, it might have…


CONTI-BROWN: Money seeking yield.


RITHOLTZ: Yes, well money is seeking return, not necessarily yield.

CONTI-BROWN: So in coming up so with the structure of collateralized debt obligations, right? The financial innovation which I still think is a pretty breathtaking piece of financial engineering in a sense, right?


CONTI-BROWN: Being able, it’s not financial alchemy to say we can actually — traditional mortgage-backed securities are already tranched, but they are tranched in a way that isn’t about diversification risk, right? It is just about pooling rates on geography.

RITHOLTZ: How much risk you want to take for how much reward?

CONTI-BROWN: Yes, and CDOs are saying, well, we are going to mix this in first in first out and we’re just going — if you had drawn the lines of CDOs differently, right? So that the equity tranche was much larger and the triple A tranche will go smaller, right?

RITHOLTZ: That is one option, the other option is garbage in garbage out if what was going so want to again I’m talking my book, one of my most stunning things I discovered on the standardized documents for purchases, mortgages to be securitized, there is a 90 day warranty, a toaster, you buy a toaster, you get a 90 day warranty. If the 30 day mortgages that go on to the CDOs if they default within 90 days, you can put it back to…


RITHOLTZ: Now stop and think about that. This is a 30 year obligation, right? How many months is that? That’s 360 months. If it defaults in the first three months you can put it back.

Now if that would’ve been a 24 month put which is hey after two years we’ve done our due diligence, it’s on you, that would’ve been a big difference but because of this was so complicated, in real time nobody understood…


RITHOLTZ: the details you could say by the way even that 90 put, I think there was a great website called mortgage, that tracked all of the mortgage underwriters who went belly up and was 400 of them because even with that short 90 day, there were people who they were doing that the piggyback loans, they were doing the underlying mortgage and a home equity at the same time so you are lending 120 percent and they never made a payment, they lived rent free for five years before they were eventually evicted.

How could that ever go wrong?

CONTI-BROWN: Let me take a giant step back and tell you why our conversation right now will prove out this truth about which I don’t have uncertainty. The 2008 crisis is going to continue to be a master class in financial history for decades to come…

RITHOLTZ: I agree.

CONTI-BROWN: Just as the Great Depression has, you and I can have in identically structured conversation about what caused the great depression and we’ve had so many factors to discuss and you would say was thing mattered more than that thing, and said well, I think that thing is more complicated than that.

And the reason why — for some people, that is just massively frustrating.


CONTI-BROWN: Give me an answer to identify the problem, give me an answer that identifies the solution and let’s move on.

RITHOLTZ: So I will admit I’m ignorant as to what caused the Great Depression, was it tariffs and trade, was it was it Herbert Hoover, was it income inequality — I have no idea.

CONTI-BROWN: And I think that those conversations which we could have if you’d like, tell us a huge amount why I call that a master class rather than you know just as a circular track where we just chase each other endlessly. It is because by really digging deep, isolating the mechanisms, ask yourself what you don’t know, what you’d need to know in order to answer that question, that’s how we learn about the mechanics of finance and I think that’s much — not to dismiss my finance colleagues but I would take that approach to things or have taken that approach things as a financial historian, as a lawyer, than you know learning the basics of Black Scholes or a Kaplan or whatever else.

RITHOLTZ: Right, well that works.

So let’s jump into our speed round, our favorite questions.


RITHOLTZ: Let’s run right through these. Tell us the most important thing that people don’t know about you.

CONTI-BROWN: I’m a poor scrappy kid from Moore, Oklahoma, I’m the sixth of seven kids to a single mom my dad died when I was nine but most of my life, most of his life, he just wasn’t good at life — wasn’t good at being a human.

RITHOLTZ: So how did you go from a poor kid in Oklahoma to Harvard, Stanford, Princeton?

CONTI-BROWN: So the first is my brother who is on nine years older than me was approached, he did well on the SATs he was approached by an alum of Harvard saying “Hey, a kid like you shouldn’t go to the local state school, you should go to Harvard” which just didn’t compute for anyone in my family and so he applied, he got in, and he went.

And then nine years later none of my other siblings did, everybody else went to the state schools and then nine years later, I was just like, you know what? I’m going to be like my big brother. And so I did well on the SATs, and I just from the time I was a kid I was like I saw what happened to Sam, right? The way the people reacted to him, whatever Harvard meant, it meant something big. And so I applied, I got in, and I went, and then I would love to say that from there it was just all sunshine and buttercups, but it wasn’t. The cultural misfit between Moore, Oklahoma is just so massive, it was harder for me than my friends who are from — who have gone to elite private schools in Singapore or London or Johannesburg or Jamaica, whatever else.

RITHOLTZ: So let me — your brother is clearly a mentor, who were some of your other early mentors?

CONTI-BROWN: One of my very favorite mentors is a professor — a sociology professor named Mary Waters, I ended up not studying literally anything close to what she does, she do studies immigration, natural disasters, things like that, but she at Harvard University was the only professor I ever had that’s took a keen personal interest in me, and that as a as a teacher, so not you know, as a scholar, I’ve gone in a different direction, but as a teacher Mary has had a huge influence on me.

Another one is Anat Admati, if you know her.

RITHOLTZ: Sure, “The Bankers New Clothes” is that right?

CONTI-BROWN: Yes, that’s her. She had a big — has and still has a huge impact on me as a scholar because of how fearless she is, right? So I’m this poor kid from Oklahoma, what business do I have talking about trillions of dollars?

RITHOLTZ: When you say fearless, in what way? She will say something whether is popular or not?

CONTI-BROWN: She just goes to war against people whose resources vastly outstrip her own on something that seems as arcane as bank balance sheets, right?



CONTI-BROWN: But potentially have much more equity, much less debt. And she’s just tireless. We don’t agree on everything, sometimes we’ll bicker and argue but she is been just a profound mentor.

RITHOLTZ: Let’s talk about books, we just mentioned “The Bankers New Clothes” what are some of your favorite books?

CONTI-BROWN: When I was a kid, the only book that ever made me physically weep was Victor Hugo’s “Les Miserables” and I remember reading the unabridged version is feeling like I’d been it was the first time I thought I don’t have to actually have these experiences to experience it. So that was — that had a big impact, more recently and perhaps less saccharine than that, Sebastian Mallaby is probably my favorite financial journalist, I’ve read everything he’s written.

RITHOLTZ: So “More Money Than God” is one book.

CONTI-BROWN: “More Money Than God” is a marvelous one.

RITHOLTZ: And what was the one on Central Banks?

CONTI-BROWN: He wrote “The Man Who Knew” which is a biography of Alan Greenspan. I disagree with a lot of it in terms of the overall framing, but it’s just a superb product of exposition and research and you know the framing he puts the policy questions where he intervenes you can agree or disagree but that’s not the main contribution of the book, it’s just terrific history. So if you like biography, Alan Greenspan’s bio, it should’ve won a Pulitzer Prize in my view.


CONTI-BROWN: It’s so good.

RITHOLTZ: Wow, that’s impressive. Tell us about a time you failed and what you learned from the experience?

CONTI-BROWN: So I — when I started as an undergraduate at Harvard I was the president of the math club in my little Oklahoma high school and I just could not do the math and economics at the time…

RITHOLTZ: That is so funny you say that because in high school, I was a mathlete, and then I go to Stony Brook for applied mathematics and physics thinking that I’m the shiznit and I know the stuff, like I didn’t have to study for Cal classes, I’m going to get A’s and then you show up with people who are really serious and suddenly it’s like,oh,I’m not as good at this is a thought, these guys who actually put in the heavy lifting and do the work, they would run in circles.

CONTI-BROWN: That was — Barry, you and I had exactly the same circumstance.

And so what I did in the face of that difficulty as I sprinted in the other direction…

RITHOLTZ: Away from economics.

CONTI-BROWN: Away from things that were challenging at least initially, I was like I have to do something immediately validates my natural strengths, I tell my students, I tell my children that that is just one of the worst sins that you can commit against yourself. And so it took me I was in graduate school for 10 years during which I’d — do I pay for all of my sins and neglect that I took a lot of economics classes and now I’m no brilliant mathematician but there’s nothing in basic economics that’s outside of my argument, I’m not an economist, I paid for that, I’m glad I did, but that failure that failure was so signal and that is I ran away from what was hard, and I wish I’d run in the other direction and I eventually did run in the other direction, it took a long time for me to make up for that.

RITHOLTZ: Tell us what you do for fun.

CONTI-BROWN: I love racquetball and squash, I love my children I have three children and have a wonderful marriage with my wife, their mother, Nikki, I — Nikki was traveling this week and so it was daddy owns the solo parenting thing and we had a terrific time but my two-year-old is — he’s an angel 90 percent of the time, a terrorist the other 10 percent, I was very happy to see Nikki come home last night.

RITHOLTZ: That was a — that’s a good 90-10 balance.

So you deal with a lot of millennials and kids in college, any of them come up you and say I’m interested in a career in finance, what sort of advice would you give them?

CONTI-BROWN: Yes, I do that all the time, I teach financial regulation financial history course, I always — I say the same thing, right? So FINTECH is not a creature of post 2008, FINTECH is as old as finance.


CONTI-BROWN: Look for ways in which rules have clumped when it should’ve been more evenly distributed, right? So that treats like things unlike so maybe it’s that there’s a FICA credit score that treats people very differently and you see a big difference in interest rates and doing arbitrage. So that would be things like (SOPHI), right? That would be things like you are looking at underwriting standards that might be different.

So that is one thing, so that in where law has clumped people and where the margins are basically identical, build a bridge, I think that’s a really effective business strategy.

Second is we are all going to terrible at calling bubbles up their peak and at their trough but take the Wells Fargo model, 19th century version which is, yes, we are not going to be in the gold-mining business, we are going to sell stuff to people who are in the gold-mining business, so w whatever your view of Bitcoin or crypto currency, if you can design a system that provides services that are portable but that could cater to that, that’s a good business to be in just a long as it’s not so catered that you can’t — that it’s not portable.

RITHOLTZ: And our final question, what is it that you know about the world of central banks and Federal Reserve today that you wish you knew 20 years ago?

CONTI-BROWN: That there is no wizard there are women and men behind that curtain of substantial intellect, talent, technique, ideology, judgment, values, they are people and to humanize the central banks is not to disparage them, it is to say they are people and I am too, and I can engage in that debate and I can do it intelligently or I can do it stupidly, so let’s do it intelligently and let’s not to say, “All right, we will just trust the wizards know what they’re doing.”

RITHOLTZ: Fascinating we have been speaking with Peter Conti-Brown, he is an assistant professor at Wharton School of Business both grad and undergrad at the University of Pennsylvania.

If you enjoyed this conversation, then be sure to look up an inch or down an inch on Apple iTunes, Bloomberg, Stitcher, Overcast wherever finer podcasts are sold and you can see any of the other 200 or so such podcasts that we’ve had.

We love your comments, feedback, and suggestions ,write to us at

I would be remiss if I did not thank the crack staff that helps us put together these conversations each week. Madena Parwana is my audio engineer/producer, Taylor Riggs is our Booker, Michael Batnick is our head of research.

I’m Barry Ritholtz, you’ve been listening to Masters in Business on Bloomberg Radio.



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