Felix Salmon (2:23)

And then at the end of this year, either that limbo gets extended in.

Isabella Kaminska (2:28)

What I'm the new extension controversy, no doubt. Yeah.

Felix Salmon (2:33)

In. In what's. What some people have been calling Brino, Brexit in name only. Or if you believe Boris Johnson, all of the deals will be done by December 31, and then it will be a proper Brexit at that point. Now, the next big obvious question is, is. Is there any reason to believe Boris Johnson?

Isabella Kaminska (2:52)

Well, he did get Brexit done It.

Felix Salmon (2:55)

Took him a few months longer than.

Anna Shymansky (2:56)

He said it would. And I'm kind of curious in terms of what exactly is the ideal situation here for Britain in terms of the.

Felix Salmon (3:05)

Yeah, what's the best case scenario here?

Isabella Kaminska (3:08)

So I think it really depends what sort of Brexiteer you are because.

Felix Salmon (3:12)

Okay, let's just give you a Boris Johnson.

Isabella Kaminska (3:15)

Okay, well it's unknown what kind of pricks he really is. I mean one, one might call him a sort of libertarian style Brexiteer Bringing in. Well, he wants to bring about some sort of independence. Singapore on Thames possibly. Some people perceive it but then there's, you know, the indications that he's much more, you know, he has made promises that he will keep the good rules out of Europe. When it comes to climate and all these other things. It's not like we're shedding everything. People are concerned that some sort of financially focused rules might go away. But again that's going to be much harder than what people like the sort of Singaporean Thames lobby would be making out because there is an issue of equivalence. You need to have the rules anyway to be able to trade in it.

Felix Salmon (4:04)

Okay, so let's rewind a bit.

Isabella Kaminska (4:07)

We're getting a little bit obscure terms. Sorry.

Felix Salmon (4:10)

So yeah, this is the problem trying to talk to anyone English about Brexit is they assume you know everything. In fact, as an American we know nothing. So let's rewind a little bit and say Britain is famous as a financial services center and financial services are a big international thing. And to what degree, like what does Boris Johnson need to do between now and the end of December in order for financial services to continue to be able to financially service in London.

Isabella Kaminska (4:40)

So basically the background is that I remember being at a BBA banking panel thingy in the City and just before Brexit and taking a poll like a, a hand, a straw poll about who was in and who is anti Brexit. And basically all the bankers in the room were remain. They were all pro remain which kind of tells you the issue in banking. So banks, the UK banks really need access to the European market. They can't get that. If we pull out and start making our own rules and regulations, the EU will just not let us passport into their market. That's the big passporting in being able to sell our services because we are such a major financial center. That's really important because quite frankly, you know, without the ability to service Europe, you know, some people might say oh well, the future is markets in, in Asia or markets you know, elsewhere in the world. But the reality is, is that our core financial sensors really need that access into the uk, into the European Union now.

Felix Salmon (5:41)

And they're not going to get it, right?

Isabella Kaminska (5:43)

Well, they're not. It doesn't look like they're going to get it, but there's been this long standing argument from the pro Brexit bankers that I, I do know that, you know, it doesn't matter whether we get it or not because there's some sort of legal, you know, logic that if we have equivalence, which means that we match the, the rules of the Europeans regardless of whether, you know, essentially we, we are bonded to their rulemaking anyway and we keep going with the rules that they establish, then they have to give us access, that they can't discriminate against us because there's no reason to discriminate against us.

Anna Shymansky (6:17)

This is something I find kind of interesting because it seems like a big part of Brexit was the idea of the UK being able to kind of take back control and make its own rules. But because it is just so tied to the EU through trade of goods and services, it seems like that's impossible and it's going to end up being controlled by the EU rules regardless.

Felix Salmon (6:39)

Yeah, if it wants access to the EU market, it's going to practically have to abide by EU rules, you know, on pain of not having access to the EU market. So in what sense is that taking back control?

Isabella Kaminska (6:52)

So I think you have to look at the mix of the economy though. So in terms of the uk, you know, from an exporter's point of view, we're not a really big exporting country compared to the European countries themselves who export into us. So we are a net importer from Europe anyway. Our main export is financial services. That's one of our really big ones. So that's why the passporting issue is so huge. If you speak to Brexiteers, they would say, well, this was the problem all along the way Europe was set up. It sort of killed all our other industries. We had no choice but to be entirely sort of concentrated in financial services. And that's a kind of rentier, elitist industry that has massively led to inequality in the uk. And quite frankly, if the banks have to move to Frankfurt, why not let them go though?

Anna Shymansky (7:39)

Right? But that's kind of a, probably not the greatest argument though, right? If you're thinking of like, what, what other industries did the Brexiteers think that the UK was going to all of a sudden become dominant in if you're looking at labor costs in the UK versus in the strength of the pound. Comparing this to like say Germany, I mean, is that really the greatest argument that they're making there?

Isabella Kaminska (7:58)

Well, I mean it really, you have to look at the big picture. I think if you, if you are looking at it from a Brexit point of view, you have this long standing rhetoric about how we had the Commonwealth, you know, before the eu, we were, we were bo of our interests in, in the larger sort of former British Empire. And so back in the day, back in like in the 70s, you would find sort of New Zealand lamb and all these sort of Commonwealth products everywhere, not so much the Danish bacon. And then, you know, as we joined the eu, my dad always goes on it with my dad is a Bruxeteer, talks, you know, about how. And you could see the transition. We all had Danish bacon after that. So the, the point being though, that there was a sort of legacy commitment that we had to the Commonwealth and we sort of let go of that in favor of, of preferential treatment to.

Felix Salmon (8:52)

Which, which may or may not be true, but either way, like it, there's no particular reason to believe that doing trade deals with New Zealand or Uganda or anyone else is going to be particularly easier than doing trade deals with the EU and especially not the big one, which is the United States.

Emily Peck (9:11)

One question like pull back from the difficulty of trade negotiations is what has happened to the UK over the past three years? I see a lot of headlines and I admit to not reading most of the articles about how the British economy is struggling under the uncertainty that certainly surrounds it and has surrounded it for three years and will continue to surround it because people still don't know how this is all shaking out. How are things going over there?

Felix Salmon (9:40)

Right there was that famous estimate that the British economy has already lost like 200 billion pounds due to businesses holding off on investment thanks to uncertainty.

Isabella Kaminska (9:51)

Yeah, I think uncertainty has been the issue and but the brics would say, well that's not our fault because we would have got it done years ago if not for all these horrifically obstructionist Remainers. So I mean, how is the economy doing business obviously hates uncertainty. And I think that was my, you know, interestingly enough when, when Trump was elected, I was at web summit and I remember the day before going around all these high tech companies and sort of saying, you know, who, who do you support? And they were like, oh, definitely Hillary, Hillary, Hillary. And what I found really interesting was the next day I went round and I started talking to Them. And they were. And I was like, so isn't. Is it awful? You all wanted Hillary to win and ah. And they were like, yeah, but you know, we can make work, we can make Trump work. And that's what I found really interesting about business people, is that they tend to be quite pragmatic and so they go for the easiest option, but then they try to make the best out of a terrible situation. So I kind of suspect business, once they have the certainty they can work around it, there's going to be major.

Felix Salmon (10:55)

Challenges, but it's going to be years. Right. Certainty isn't going to grow for a long time. Is there anything other than trade that we should be worried about or is Brexit basically 100% a trade thing?

Isabella Kaminska (11:06)

No, I mean, there's a lot to worry about. I think, you know, if you are a foreign national in the uk, there's been lots of assurances that everything's going to be okay. But in terms of, you know, we, we really don't know what the immigration picture is going to look like post transition period. I mean, there's talk of an Australian point system where we let in sort of highly skilled people and not so much unskilled people and that we rank them, but we don't really know. We don't really have clarity on how that's going to look as yet. That's concerning to anyone who has ambitions working in Europe, if you're British, because theoretically there's going to be reciprocity. Reciprocity, exactly. So I think that is quite limiting my, you know, I have a lot of friends who live in France and they're concerned about whether they will continue to have their access to sort of French schooling systems or French healthcare, that sort of stuff. One would think that reciprocity is in everyone's best interest. So.

Felix Salmon (12:05)

But it does kind of defeat the purpose on some level, because that was a large part of the reason why people voted for Brexit in the first place is they said there are too many bloody foreigners in this.

Isabella Kaminska (12:15)

Well, some people would have voted for that. But yes, I think, I think generally speaking, immigration was one of the key policy areas. So they're going to have to move on this otherwise, you know, for the benefit of the US listeners, who I'm sure know that Boris Johnson, like, completely sort of surprised everyone by getting a foothold of these former very Labour strongholds in the uk, the sort of what I would call our equivalent rust belt, who have historically always voted Labour. And this was a really unexpected turn in the election and to continue to carry favor in those areas, he's going to have to live up to some of their expectations, which a lot of them were based around immigration. So he's going to have to look tough or lose his base. So I'm not. I'm not a political strategist, so I have no idea how that's going to be achieved. But, you know, he's. He's really, you know, Boris is the buffoon PM who likes to play. You know, he's. He wants to see himself as a man of the people. He's already reducing himself to sort of funny little publicity stunts. I mean, he famously impersonated that scene. I don't know which act it was from Love, actually. You know, I mean, he's not. He's the sort of man who will do very strange things to get attention. I mean, there's an entire, like, array of memorabilia, Brexit tea towels that you can get. I mean, that's. That's coming straight from Conservative hq. So they're really thinking outside of the box how to. How to continue to appeal. And you can. You can become. You can now buy. There's a commemorative coin coming out. There's all sorts of strange ways that.

Felix Salmon (13:54)

He's a pot changing color.

Isabella Kaminska (13:55)

Oh, yeah, the pot. People are very upset about the past. I actually, I found my old blue passport. I was going to bring it in, but I forgot. Yes, but back in the day, before we were in the European Union, the passports were blue, and now. And then they went red and now they are famously going to go blue again.

Emily Peck (14:12)

So here in the us, after Trump was elected, in the past few years, I think culturally, the country has gone through some things. There's white nationalism has sort of gotten stronger, there's more hostility, open hostility towards minorities, that kind of thing. Has there been kind of a similar situation in UK in terms of, like, a cultural shift and, like, more open hostility towards foreigners?

Isabella Kaminska (14:41)

Yeah, I think it depends what side of the debate you're on. But, like, I think if you're on the remainder side of the debate. Absolutely. People have lost friends and family over this debate. Like, people. I don't know so much if in the US there would be so much whether families would be divided over Trump versus Hillary. For sure.

Anna Shymansky (15:01)

Yeah.

Isabella Kaminska (15:02)

Yeah. Okay. So the same thing here, like remain, remain, leave, defines who you are. And that's kind of been my main issue with it, because I find it absolutely absurd that people who have had, like, really good relations for, like, 30 years or so, you know, not. Not friends anymore because of how they voted in the referendum. So that there has been a lot of hostility. It's got very factional. And, and I don't think. I think both sides suffer from the fact that neither side is really listening to each other. Still.

Felix Salmon (15:33)

The one thing that we're absolutely, that seems absolutely certain in US Politics going forwards, no matter who wins the presidential election, is that there isn't. It's not going to be a globalist, it's not going to be an internationalist, it's not going to be someone who's like, let's have more free trade and more immigration. Like, it's. It. That ship has sailed, you know, and I feel like we're on the backswing now, and Brexit is a symptom of that, and Trump is a symptom of that. And it remains to be seen how long this backswing lasts, but it could last for a very long time.

Isabella Kaminska (16:12)

Yeah, I mean, how, what, what do you think in terms of how globalization can move forward in this, in this context at all?

Felix Salmon (16:20)

Yeah, I think it goes backwards.

Isabella Kaminska (16:21)

Just, just. I mean, but do you think that is going to be economically very damaging then?

Felix Salmon (16:28)

Yeah, because. Yeah, by definition.

Anna Shymansky (16:31)

But do you think we see a decline in global trade? I mean, it's. And the only times when we've seen this, this, these types of drops in global trade, we've seen these types of increase in factionalism have been, you know, in, in periods of history where we've had very bad things happen afterwards. I mean, and just the reality is, you know, you're not going to see economic conditions improving throughout the world if you're seeing less trade. I don't think that's happening.

Isabella Kaminska (16:56)

You know, I will play devil's advocate as usual, because that's just what I do. But the counter argument would be, well, there are lots of things we do that hurt ourselves for the sake of what might be perceived a greater good. And in the UK at least, there's a. There's a feeling that, that globalization has shifted a lot of employment to either outsourced it to other, other countries in Europe, or it has sort of undercut domestic workers in favor of foreign workers, et cetera. And it's undermined the cohesion of our local communities. And the high street has suffered everything from the sort of phenomenon of the abandoned cities like Grimsby, et cetera, to a rise in. We've had a lot of crime go up in the UK as well. We've had the emergence of sort of really violent drug gang phenomenon here in London. So people would link all of that together and they would say, well, if we have to, to suffer a little bit economically just to get the return of our communities, it might be a price that's worth paying. And then I would also counter it with the argument of like, well, ESG and us being very environmentally friendly, mindful these days. We all know that's going to be a cost to our economy in some ways. There's no way we can achieve the kind of Greta targets without cutting our growth in some shape or form. I mean, Greta herself famously said that the fairy tale of, of economic growth is something we have to abandon if we want to save the planet. So I think the other perspective is that sometimes it's not just about economic growth at any cost. And yes, we are, we can measure it in financial terms, in purely pecuniary sort of terms or gni, what is it, Gini? Coefficiency numbers. But the reality is that there are some things that are not financialized that are worth a greater sacrifice for. That would be the counter argument. But I'm sure you all tell me I'm an idiot.

Felix Salmon (18:59)

No, I think, I think that's the perfect segue for us to move on to the whole question of esg, which.

Isabella Kaminska (19:08)

Stands for Environment, Society and Governance.

Felix Salmon (19:12)

Isn't it something like that? Yeah, it's this, this big buzzword which the buy side loves to throw around. The buy side being investors, people who buy stocks and bonds. And everyone and their mother these days is claiming to be hyper conscious of ESG issues and wanting to invest in companies which are good on the ESG front and wanting to disinvest from companies that are bad on the ESG front. And we've had lots of high minded letters from the likes of Larry Fink, who controls $7 trillion of assets or something enormous like that. And somewhere the implication is that all of this activity by fund managers of investing in this and not investing in that is going to make a positive difference to the planet. Emily, as the resident bleeding heart liberal, like presumably you are all in favor of this.

Emily Peck (20:09)

I mean, in theory it sounds great, but in practice, the idea that these funds can somehow change the world or make us go green or make us more socially conscious I think has been and is a failure. I don't think that social change comes, is going to come at us by, you know, me deciding to put my retirement savings into a socially conscious index fund or even giving it to Al Gore to, or giving it to Al Gore. I just, I mean, it just seems like with so many things that companies do. It seems maybe well intentioned, maybe just pr and at the end of the day it sort of doesn't matter all that much.

Anna Shymansky (21:03)

So, you know, I think that I agree with you to a certain extent and I think I used to agree with you maybe a little bit more. But I will say I do think some things are shifting here and I agree with you that, that I just think like an individual saying, okay, I'm going to invest in this ESG fund is probably not going to make a lot of difference. But how much ESG is becoming part of the conversation when you talk to CEOs and CFOs, like this is something people are thinking about and it is actually affecting change. You talk about people who are working at energy companies and they are actually doing things because this is something that the people who, who are investing in them, their clients are asking about. You have.

Felix Salmon (21:38)

Hang on a sec. But when you say change, Anna, let's be really clear about this. This. Let's assume for the sake of argument that it is actually changing asset allocations and it is, you know, decreasing the amounts of money that people are putting towards this and increasing the amount of money that people are putting towards that. Is there any evidence that, that those kind of decisions, insofar as they're being made by investors are having any actual effect on the planet?

Anna Shymansky (22:06)

So two things. On the one hand, I will agree with you that I think because we're still in early stages, that obviously I don't think you could say that you could point to numbers and be like, oh, because this amount of money has moved from this fund to this fund, that's going to change someone's behavior. I agree with you. I don't think that is, that is happening. I'm more talking about the conversation and the fact that you have clients talking to fund managers who are then talking to these companies. And I do think that is changing behavior. You're seeing mining companies who are actually starting to deal with, with their tailings, dams, after a bunch of people dying. But you know, you, but because also you have now a lot of pressure. You have a large fund saying, well, you know, we're going to be moving money out if you're not making these changes. And while individuals, an individual investor, yeah, that's probably not the biggest deal in the world. But if you're talking about large institutional investors moving forward, I do think they can have an impact.

Felix Salmon (23:03)

Okay, wait, so you've kind of changed a little bit. It, I think you said like you started off saying there has been an impact and you now you've moved to I think there might be an impact. Which one is it? Has there been an impact or do you think there might be an impact?

Anna Shymansky (23:17)

I would say like a little bit of both. So more the latter. Yeah. I mean, I think, as I said, we're in relatively early stages.

Felix Salmon (23:25)

Let's. Let's stop it there. So Anna thinks there might be an impact and presumably when you're saying an impact, you mean the positive impact. Isabella Kaminska is the world's greatest contrarian. So you are now going to tell me that there has been an impact and it has been negative.

Isabella Kaminska (23:43)

Well, so ESG is definitely a thing. It's going to be impacting the markets for sure. We're going to see a huge shift. The portfolio reallocation is going to be massive. It's already started. I was kind of involved in a little bit of this because I got to moderate a climate finance panel back at the Paris summit thing. They did the before the main Paris thing, there was a special climate finance thing a few months before that. So I got to speak to like a bunch of asset managers and interview them on stage. And at the time there was a, there was already a perception that divestment might not be the best way forward. Because the problem with divestment, of course, is that someone still has to buy it.

Felix Salmon (24:28)

Someone's going to wind up owning it. And you know, I think there is a case for divesting from capital intensive industries because if you're not pumping capital into them, then they will produce less bad stuff. But if you're talking about inherently profitable industries like coal, divesting from coal does no good at all.

Isabella Kaminska (24:48)

Yes. So here's the issue is that, look at tobacco. Tobacco has been a vice sort of stock for a very long time and it's been a great performer. And dividends are like hugely wonderful. So if you want to sit back and take very little risk and just feed off nice dividends, then high dividend, these, these stocks that people are divesting are very likely to turn into that, especially as if their cash flows remain high, which is very likely because the transition to renewables is going to take a while and in the interim we're still going to have like, fossil fuel consumption is still growing. Right. Let's not forget it. There is an annual increase every year in terms of how much we're consuming. And if you take away the financing meanwhile, you could argue, well, they will naturally have to like adjust or they won't get financing. But then if you take that, like chest, chest wise, a little bit forward, well, what happens? Then you have assets that either get shut down and make. Which makes countries like the UK at least increasingly dependent on imports from other, other, less say, democratic countries like Russia or China. Not, not that China's an oil exporter, but essentially Russia mainly. Or you end up with a situation where if the Western banks or pension funds are not going to be financing these assets, there's no reason why the Russians or the Chinese or countries that are less inclined to worry about these things might, might, you know, they might come in and swoop in and buy all those assets.

Emily Peck (26:13)

Anyway, I had a thought. Regardless of whether divesting works or doesn't work, and practically speaking, it seems like there is a big symbolic and real effect just in the fact that these massive financial companies are taking environmental issues seriously. And that could have an effect politically that I think is actually pretty important.

Felix Salmon (26:40)

Like, okay, I'm going to, I'm going to ask you what your evidence is that financial companies are taking environmental issues seriously. Because, because you have, like, you have big companies, you know, saying, you know, oh, yeah, we take environmental issues seriously. And then at the same time they underwrite the Saudi Aramco ipo.

Isabella Kaminska (26:59)

Right.

Emily Peck (26:59)

I mean, it's kind of like this. It's like, it's like all things dialectical, Felix. Like, you say that you believe a thing with one hand, like Larry Fink or whoever, saying, like, the environment's super important, and then with the other hand you do, like, some nasty stuff. But at some point you get held to account for the thing that you say and don't mean.

Felix Salmon (27:21)

And what is the mechanism by which these financial companies are being held to account?

Emily Peck (27:27)

So far there is none. But. Well, I mean, but I think that's where this, like, little thing called democracy might come in handy. And sort of like once the rhetoric starts going, you can't really control what happens politically as much.

Felix Salmon (27:43)

So that's exactly where I agree with you. And this is, as far as I'm concerned, the beginning and the end of this discussion is that real change when it comes to the environment has to be political change. It can never come from the financial sector. The financial sector sector is always going to lag. Political economy. If you look at the question about, say, like, how do the big index funds vote their shares? Because they have to own these companies. And then if they're going to own these companies, they may as well vote their shares in an environmentally responsible way. And they're not even doing that and the reason they're not doing that is because big financial institutions are always going to be much more cowardly than even the most cowardly and ineffective government. Anything that is actually going to, to happen to change the planet or to make the planet better is going to come from governments. And the governments are going to have to drag the financial institutions along behind them to a greater or lesser degree of willingness. I just don't believe that the causality works the other way and that Jamie Dimon making some noises about environmental friendliness is going to, you know, suddenly going to get Donald Trump to resign onto the Paris.

Emily Peck (28:55)

I think that reflecting back, I think popular sentiment, they're reflecting back like not the Gretas, but like most people now who want at least to feel like we're doing something about climate. I think that corporate America, these financial institutions are very sensitive to that. And I think that's where their rhetoric is coming from.

Felix Salmon (29:14)

And that's the bit where I worry that ESG concerns are actually counterproductive is that they make people think that they're doing something. And we are so far from making the, from making even the beginnings of the necessary degree of adjustment. And if you look at how much adjustment is needed to the world's carbon emissions in order to keep the global temperature rise to within a catastrophic 2 degrees Celsius over pre industrial levels, like we need to slash these things. And what we're doing right now is we're talking about tiny little tinkering at the margin. And if people think that tiny little tinkering at the margin is like a step in the right direction or helpful, that's actually bad, like inoculates you against the massive changes that the world needs to make on pain of catastrophe.

Anna Shymansky (30:11)

I think you're mostly true, but I do think that the fact that it's such a conversation is also going to affect politics. Yes, of course governments are going to have to take the lead in this. I mean, I think that's obviously true. But the financial system is an incredibly important part of how a country runs. So if changes are going to be made, it's going to be probably yes from the government, but then it's going to have to work itself through the financial system.

Isabella Kaminska (30:39)

But I again, being the resident contrarian, I would just caution that, you know, I agree with you, Felix, entirely. It has to be government led. But, but I don't know how familiar Americans are with extinction rebellion movement here in the uk so it's a sort of militant environmental movement being led by sort of, I would say Mainly middle class white people who like to live in the counties. But the, but they've come, they've paralyzed London. They've, they've really kind of become a really evident sort of political force. But one of the things they're advocating is, is basically the suspension of democracy because their belief is that to get anything done to reach those targets, we can't do it in a democracy. And then you just have to look to France and the Gilets Jaunes and the sort of general reaction to any sort of carbon emission reduction focused policy that they're not going to be popular policies and in a democracy it's very unlikely they're going to get voted in. So you either have, in my opinion you need to either educate mass masses like in a wartime sense and this has to be market led so people are happy to make the sacrifices needed to get to the point that we need to get to. And that's kind of what extinction rebellion is also trying to campaign for in terms of awareness. But on the other hand you also have to in that well they just, they just want to get rid of the political process as it stands and bring in these citizens assemblies where, which are appointed with experts who decide things and then random sort of lottery based system of like having someone from the regions represented every now and. But it's a complete suspension of democracy as it is. And so I think that is what we have to realistically be talking about. And I do think ESG as a result is not compatible with free markets and with unless we have the market led reaction. So it not only has to be a political response, it has to be a complete suspension of the politics we have had today. And the other little pet hate I have about the whole phenomenon at the moment is that we are so focused about lowering emissions here in the west but that's not really the area that we have to worry about. It's the China's that we and Asia that's the really, you know, the big polluting factor. And there has been a bit of forward progress from China but you know, Greta needs to get herself over to China. I don't know if she would do that currently. But with respect to the slight virus at hand but, but that's really where she's, that's the people she's got to be you know, speaking to in terms of the western sort of areas. We've done a lot already in terms of our waste like the UK has not been adding to its was profile for a while now. The more developed you are, the More likely you're going to be environmental, ironically.

Felix Salmon (33:28)

Enough, with the obvious and massive exception of the United States which has had this massive fracking boom and has contributed significantly to carbon emissions.

Isabella Kaminska (33:37)

Right, but that is, we're talking about emissions. But even then, one of the other things that I think in Europe when we look at, even if emissions are slowing, we have outsourced so much of our productivity and production manufacturing to China that we're of kind, kind of. You know, it's not fair to just blame China here because we're importing all those products that they make with coal fired plants via Amazon, are we not?

Felix Salmon (34:00)

We are.

Isabella Kaminska (34:03)

That's just my little point.

Felix Salmon (34:06)

Okay, let's have a final segment on. Come on, you can remember Libor. Libor because you know if you're going to have Isabella Kaminska come on your show, it is going to get nerdy. And there is a major change that is happening to the global financial system and absolutely no one knows what is going to happen and it is completely chaotic. And is he help me out here. But has any progress been made?

Isabella Kaminska (34:41)

No, I don't think so. Everyone is, everyone I speak to is still completely.

Emily Peck (34:45)

Felix, can you back up and explain what you're talking about?

Felix Salmon (34:48)

Yes, yes, thank you. You may or may not recall that there was a big scandal about this thing called Libor, which is this floating interest rate which goes up or down according to how much it cost banks to borrow money. And it turns out that banks were quite good at manipulating this rate to make money for themselves. And people got very upset about this. And also no one really cares how much it costs banks to borrow money in terms of how much much they pay. They just want to know what prevailing interest rates are rather than just interest rates for banks. And LIBOR just didn't make sense on a bunch of different levels. And it had obviously been gamed and abused. And so a big international census consensus rather emerged pretty quickly that we were going to get rid of Libor and everyone agreed, yes, let's get rid of Libor. It's out of date, it's anachronistic. And we can all agree that Libor is out of date and it's anachronistic and we'll replace it with something better. And we all agreed on this very quickly and now we're like, oh shit, now we have have to come up with something better. And the best that we've come up with, Anna, is something called sofa.

Anna Shymansky (35:52)

Yes.

Felix Salmon (35:54)

Sitting on to watch Netflix.

Anna Shymansky (35:55)

Yes. So for the secured overnight financing right in the US there's also Sonia in the UK, right.

Isabella Kaminska (36:03)

She was also very big in the 80s. So that's a joke that only Felix is going to get. Sorry.

Anna Shymansky (36:09)

So, so basically, and also just explain why Libor, why these rates are important, is that you have, you know, somewhere near, you know, what, 400 trillion doll derivatives in bonds, in loans that are tied to this rate, all of these contracts that are tied to this rate. So it's, it's not a small thing to switch from run rate to another. And I think.

Felix Salmon (36:30)

And all of these contracts are written down on pieces of paper and the pieces of paper don't automatically update themselves. Well, so when Libor goes away and someone pulls out the piece of paper to work out how much interest they're supposed to pay, the piece of paper says Libor. And then they go out, they tootle along to the markets and they say, what's Libor? And the markets say libor, we haven't had Libor in years. And then what do you do? And well, that's actually.

Isabella Kaminska (36:54)

And the lawyers are having a field day because they're gonna be like, oh, lots of business for us representing all these upset investors when they don't get libel.

Anna Shymansky (37:02)

Well, because this is interesting because like, I mean, especially if you're talking about loans and bonds, because I mean technically, like if you're, if you have a bond that has that written in, you don't have some other clause about what happens if there's no Libor, then it would basically you, you'd be changing a floating rate into a fixed rate. All of a sudden you'd be like, okay, it's whatever Libor was, which, so you would actually have to get like your bondholders to vote to change a rate. So I mean like, it's not an incredibly simple thing. It's a little bit easier with derivatives, but it's gets a little complicated with bonds. But the one other thing, I just want to take a step back because I think sometimes when people talk about this too, there's this sense of like, oh well, we'll just exchange one rate for the other. And it's like, okay, but these rates are not the same thing. You're talking about Libor, which factored in the credit risk of bank, banks. Whereas the SOFR or Sonia, that's a, that's a, it's a risk free rate. Right? It's a risk free rate.

Felix Salmon (37:51)

So all of these new rates are on some sort of deeply fundamental, a priori level going to be lower in terms of interest rate than libel. And so if you are a borrower, you're really happy if you just switch one for the other because you wouldn't invest, you're unhappy, you wouldn't do that.

Anna Shymansky (38:07)

What you would do is you'd have to figure out some other way to factor in, in what that credit risk had been. You can't just say like, oh well, we're just switching rates. That's not how it would work. You would.

Felix Salmon (38:16)

But no one knows, right? No one knows how it's going to work. And the fact is this change is meant to happen in 2021. Am I right?

Anna Shymansky (38:24)

22.

Isabella Kaminska (38:24)

Yes. And one of the problems is also that you would think that by now we wouldn't have this contractual problem, this tsunami of contracts that will have to be somehow rewritten because we do. Because currently people are still using Libor because there's no alternative. So new contracts are still being struck under Libor definition, which, which is problematic for that reason alone because you would have thought, oh well, we haven't used Libor for 10 years and, and people are trying slowly to do new contracts, but you just don't. Because it's a, it's a networking thing as well. So you don't want to like tie yourself to software when the go to rate is going to be something else. So. And, and, and I think one of the issues of Libor is that you're going from an unsecured rate. And, and, and it's been decided that those unsecured systems were very hard to assess in terms of, you know, they were very easy to game. This was the problem. So in before the Cris Club together and try and push the rates up as possible, they'd structured Libor supposedly to be game resistant, but by eliminating the, the most extreme ends of the sort of the.

Felix Salmon (39:26)

But, but it was gamed, but it was gone to prison for gaming it.

Isabella Kaminska (39:29)

Yeah, one like, well, Mr. Hayes is still in some. He's there, he's gone for 10 years.

Anna Shymansky (39:35)

Right? Yeah.

Isabella Kaminska (39:36)

But these were assessments essentially based on like what the bank banks were saying themselves was their cost of borrowing. But going to a transactional like AKA we will set the rate based on an average of how many transactions are actually done in a day or in a week is a really problematic step because a lot of the time there was, there's just not enough float so there's like one transaction that actually makes the system more gamble.

Felix Salmon (40:02)

Libor famously had these things like there was like, you know, one year yen Libor or something and no bank had borrowed from another bank in yen for one year, like for months. And yet one year yen Libor was still a thing that existed. And all of these things are going to have to get structured. There's going to have to be a replacement for all of them. And the thing which is, is really confusing to me is are we going to do this or are we going to reach 20, 21? Everyone's still going to be using Libor. No one can agree on how to transition. And, and somehow we'll all just like, kick the can down the road and we'll never actually leave label.

Isabella Kaminska (40:46)

At which point Boris Johnson will come in with a solution.

Felix Salmon (40:49)

Get so far done. No ifs, ands or buts. I would rather die in a ditch.

Isabella Kaminska (40:56)

Exactly.

Anna Shymansky (40:58)

So I think you'll definitely get it done. I mean, I think you'll definitely transition. I mean, I think there is a lot of will on both sides of the Atlantic. I mean, like, I definitely think you're going to switch to these other rates, but I don't think it's going to be an easy process. And I think you'll be seeing a lot of, like, weirdly what's happening now, which is a lot of the contracts that are written with like, sofr, they actually end up like, hedging back into Libor. So I mean, I think you're going to end up with this kind of very long transition process as the system kind of moves over to a, to a new rate. But I do think it'll eventually get done.

Isabella Kaminska (41:25)

But the problem with that, I was told by some, you know, people watching the space, is that as you transition, the less people that use Libor, the more gamble.

Anna Shymansky (41:33)

Of course.

Isabella Kaminska (41:34)

Of course, yeah. So there's this, like, weird paradox where in, during the transition period is going to be a real sort of opportunity for, for, for manipulating rates.

Felix Salmon (41:46)

What's your base case expectation for how long this, like, painful transition is going to take?

Anna Shymansky (41:51)

I mean, I think you could easily see something taking a decade. I mean, I don't think this is gonna be a something quick.

Felix Salmon (41:59)

Emily.

Emily Peck (42:00)

So the first time I heard about Libor was because Jamie Dimon was involved and shady things were happening. So it actually seemed interesting for a second. My question is, why would anyone outside of the people who use this rate care about it? How does it affect the normals?

Isabella Kaminska (42:18)

That's a very good question.

Felix Salmon (42:19)

Yeah, I think that's an extremely good question because my base case answer to that, as with most hyphenate stuff, is it doesn't. But then again, my answer to like, how does Libor Manipulate affect the normals is it doesn't. One of the interesting things about Libor manipulation is that the banks were happy to manipulate Libor up and they were happy to manipulate Libor down down. And depending on whether you're a borrower or a lender, and depending on like, you know, whether they were manipulating it up or down, you might have made an extra couple bucks or lost an extra couple bucks. Probably it all kind of came out in the wash. I don't think that libel manipulation actually made any difference to normals. I think on some level it really was a victimless crime. All of this intense effort to move away from libel and towards some something more honest. You can totally understand why you're doing it and you shouldn't commit crimes even if they're victimless. But it's a huge amount of effort to make up for something where there was almost no harm done.

Isabella Kaminska (43:21)

My father in law would say, you know, I tend to agree with your assessment, but my father in law would, would probably assess it the same way he assesses ppi, which was another scandal here in the UK to do with selling useless insurance to people. His point is, well, it's, it's just going to make everything more expensive for us because the banks have to pay for it and therefore everything's going to be more expensive for. But with a Scouse accent.

Felix Salmon (43:47)

And do you, do you believe there were victims to the labor scandal?

Anna Shymansky (43:50)

I mean, I mostly kind of agree with you there. I don't think. And if there were, they were very sophisticated investors. I wasn't exactly like mom and Pops. I mean, look, yeah, of course, nothing, it was good. It wasn't good. No one should be committing crimes or, you know, manipulating rates. But no, I don't think it was probably the world's biggest deal. And I do think that this is going to be a lot of effort to fix a system that I don't think was that broken in the grand scheme of things.

Emily Peck (44:15)

It's interesting how the financial industry kind of rallies to fix things that don't matter and all the bigger broken things.

Anna Shymansky (44:21)

Are like, well, but this was also interesting because the Libor scandal happened at a period after the financial crisis. I think also where in both the US and the UK where this happened, that they wanted somebody to like be angry about finance, that they could be like you, we're sending you to prison. And I actually think that it then became this big deal and because it was also just in the news so much that I honestly think that's also part of the Reason that you're right.

Isabella Kaminska (44:43)

Because we needed a scalp at that point and Tom Hayes was basically the full guy. No, I mean he was. I'm not in any shape or form defending him, but he was like the definitive sort of fall guy that we needed in terms of like some bank has got to go to prison because none of the them have.

Emily Peck (45:03)

So like they, they screwed up everyone's mortgages but the guy that goes to jail manipulated a rate no one understands or probably cares about. That doesn't really affect anyone.

Anna Shymansky (45:13)

Well, it does.

Isabella Kaminska (45:14)

It does affect people.

Anna Shymansky (45:15)

It affects people like if you have loans or. I mean like it's, it's not a. It's a very important. Right.

Isabella Kaminska (45:20)

Just.

Anna Shymansky (45:21)

Just to be clear. Just to be clear.

Isabella Kaminska (45:23)

I just think in terms of relativity, like he's got a really long sentence. Ten years is a very long time to go to prison for. Considering didn't nothing happened to them. Right?

Anna Shymansky (45:34)

Yeah, no, I think that's completely true.

Felix Salmon (45:38)

Okay, it's time for a numbers round. I'm going to start with something which is not wonky at all, but just jumped out at me from a story which has been doing the rounds from Texas Monthly. My number is $19,064 which is the annual per capita income. Come in, Martha. Texas. And there are two types of people listening to Slate money. There are the people who are like, duh, of course I know what Martha Texas is. And then there are people like why on earth should I know what Martha Texas is? And Isabella is definitely in the latter group. Martha, Texas is this tiny little town and its population is falling. It was 3000 in 1999 and it is now just 1700. And it's this tiny little town in the middle of the Sonoran Desert in, in West Texas which is this art mecca. And there's this wonderful Texas Monthly article about it. But the point is that it is famous on the tourist trail. A million like super rich tourists from all over the world go there every year to go up a beautiful minimalist art by Donald Judd. And they stay in expensive hotels like the Hotel St. George and the Hotel Pisano. And there are, are, you know, cool coffee shops and bars and restaurants and it feels like a really thriving place. And then you realize the annual per capita income is $19,000. And that shows you just how limited tourism is as a force of economic development.

Isabella Kaminska (47:07)

Really interesting.

Felix Salmon (47:08)

Anna, do you have a number?

Anna Shymansky (47:09)

I do. It's 127,000 tons. That is the amount of avocados from Mexico that will be coming to the US for the Suit, super bowl and I.

Emily Peck (47:23)

They won't actually be sitting in the stadium.

Isabella Kaminska (47:24)

No, they won't.

Anna Shymansky (47:25)

They won't. Yeah, exactly.

Felix Salmon (47:26)

I mean, do they get the cheap seats?

Anna Shymansky (47:28)

Oh, there are no cheap seats. Especially not this Super Bowl. But I thought that. So is this actually a little interesting? For multiple reasons. A, with the super bowl, but B, because now avocados have become part of like crime in Mexico and it used to be.

Felix Salmon (47:43)

So just to be clear, the avocados, not football. The avocados is something to do with guacamole.

Anna Shymansky (47:49)

Yes, it is, in fact, because people eat guacamole while they're watching the Super Bowl. And so avocados have. They are part of like there was like a avocado. Growers had to like pay protection money because Americans are eating so much more avocados. But then a number of other things have happened. But avocados are a very complex fruit and a lot of them are coming to the United States. And I will be eating them on Sunday while rooting for.

Felix Salmon (48:15)

Apparently there's a football game on Sunday. Emily, you're going to be watching it probably.

Emily Peck (48:19)

Yeah.

Isabella Kaminska (48:20)

Yeah, I think.

Felix Salmon (48:20)

Hey, pizza.

Emily Peck (48:21)

We're going to eat pizza and watch football. Maybe no guacamole this year. Sadly, you're the only one.

Felix Salmon (48:26)

What's your number?

Emily Peck (48:27)

My number is 150 million. That is the number of households worldwide that have Amazon prime members. And it's been a huge increase from less than two years ago. I think it was, I didn't write it down, but I think less than two years ago it was about 100 million.

Felix Salmon (48:45)

Well, Amazon was famously always very reluctant to reveal this number for many years and they only just started saying what it was.

Emily Peck (48:51)

Yeah, they said they had earnings yesterday and earnings were very good. And one of the reasons is because now if you're a Prime member, they switched this year to giving you to doing more one day show shipping, making that standard for prime. And like, it's just so convenient. It's so seductive.

Anna Shymansky (49:07)

It's the greatest thing ever.

Emily Peck (49:08)

It's really incredible.

Isabella Kaminska (49:09)

Just think of all those Chinese goods made with coal fired plants, shipped in.

Emily Peck (49:14)

The wasteful packaging, delivered to you by a car emitting more CO2. I mean, it's no bueno, but it's really an amazing service. And it's interesting that everyone, everyone's a subscriber. It's interesting.

Felix Salmon (49:28)

Is he thinking a number kind of related?

Isabella Kaminska (49:30)

So I'll be contrarian. I'm going to give you a negative number.

Felix Salmon (49:32)

I like that.

Isabella Kaminska (49:33)

I'm going to give you minus five, minus five. So it's minus five pounds per ton at the moment. In the UK that's the price for recycled paper.

Felix Salmon (49:46)

Wow.

Isabella Kaminska (49:46)

Because this price used to be very much positive but we are basically in the midst of a paper glut. There's a paper, paper, recycled paper, cardboard tsunami. Basically because we are recycling everyone's, you know, being very good, separating their recyclables, but there isn't any demand for that recycled paper anymore. Not least because China has closed its doors to recycled imports which has upset the entire market. So we've got negative rates on, on in German bonds, but we've also got negative rates in waste paper paper. And I'm going to be doing a story about that soon.

Felix Salmon (50:22)

Wow. So should we just give up on recycling in Australia?

Isabella Kaminska (50:26)

Apparently they're asking people because it's not just a UK thing, it's a global thing. Apparently they're asking people to stop segregating some areas. I've heard, I mean rumor, trash, I haven't confirmed it. Apparently they're stopping people segregating their, their paper because it's. And, and the funny thing is where they're not all the paper is just accumulating because it costs so much to store it in internal conditions. You know, warehouses cost money. They're burning it.

Emily Peck (50:50)

I watched with my own eyes the sanitation people that come pick up my garbage, take the recycling that we put out in the plastic, clear plastic bag and throw it in with the other garbage. And yet we still in my house, separate out the recyclables. Why?

Isabella Kaminska (51:06)

Why? Well, having got into waste recently, I can tell you that actually waste is, the waste processing plants are really sophisticated these days and they can see segregates things quite easily. So we used to have to segregate things very meticulously. Whereas now in the UK at least we can put like paper and tins and aluminum and everything together in the same one because they go to a plant and they've got magnets and clever sort of color focused lasers that figure all this stuff out. So it's. And I always thought that was a myth. I thought it would just go and end up in China or in Malaysia, shipped elsewhere. It was all big conspiracy. But no, apparently, apparently these, these plants are actually very sophisticated. The problem isn't the sorting. The problem is the lack of demand for the recyclable. The recyclables, yeah.

Felix Salmon (51:51)

Okay, I think that's it for us this week. Thank you Isabella Kaminska for coming on Slate Money and explaining everything. Brexit and everything else to us. You're welcome back anytime. Thank you, Jessamine Molly, for producing this transatlantic edition of of Sleep Money. Thank you for listening. The email, as ever, is sleepmoney at sleep. Com. And we will talk to you next week on Sleep Money.