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The Dread Pirate Trump Edition
00:59:07
Slate Money on Gary Cohn, South African land, and Dodd-Frank
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The following podcast contains explicit language.
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Hello and welcome to the Dread Pirate Trump edition of Slate Money, your guide to the business and finance news of the week. I'm Felix Salmon. I'm joined by Anna Shymansky and Jordan Weissman. And this is going to be the second week of vaguely tariff related talks, most mostly the defenestrations associated there with or the auto defenestrations.
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C
Associated auto defenestrations.
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A
It's like sort of like an auto defay. Sort of like a defenestration.
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Anyway, sorry, we are going to talk about South Africa again, but this time we're going to talk about whether and how they are going to start seizing various bits of land from white people. We're going to talk about Dodd Frank. Do you remember Dodd Frank? That was a thing in 2009 or thereabouts when we decided to reform the banking sector. Apparently now we're having second thoughts about that. So we're going to talk about that with Jordan Weissman who's been caring about such things. But first, it's unlike us, I will admit, to basically do the same thing twice in a row. Last week we were talking all about steel terrorists. So this week we're going to try not to talk about steel tariffs. But we do need to talk about the fact that the most financially literate person in the Trump administration has now resigned.
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A
You don't think Steve Mnuchin is like as financially literate as Gary Cohn?
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I'm quite sure that he's not, yeah. So we have a Treasury secretary who did work at Goldman Sachs at one point, but then basically became a movie producer.
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A
He ran a regional bank too.
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The head of the nec, the National Economic Council is a genuine heavyweight in more ways than one. Mr. Gary Cohn, who is this big old fashioned bruiser of a Wall street trader type who would walk around Goldman Sachs and basically beat people up for breakfast and thrust his leg on his.
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C
Very well regarded.
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Yeah, he was president of Goldman Sachs and then he joined the administration and.
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For reasons which no one entirely understood, he left Goldman Sachs mainly because it became obvious that he wasn't ever going to take over as the CEO and did that thing that Goldman Sachs people do, which is go into a senior level government position to become a sort of graybeard. It then he then became sort of known as globalist. Gary, of course he's. He's a Jew.
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Yeah.
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Which doesn't go down well in the sort of.
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We could have a very long conversation about the Trump administration's use of globalist and whether or not Trump. I actually have this theory that Trump may be draining the anti Semitism from the phrase because he just doesn't understand anyway.
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C
Yeah, it's like America first. He has no idea.
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He has no idea where it comes from. It's almost like he's doing us all a favor with it. But that's another thing altogether. Anyway, so he became globalist Gary.
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He became globalist Gary. His main achievement in life was tax reform. And then having done tax reform, the only job he really had left was to be the little angel sitting on Donald Trump's shoulder and telling him not to start a trade war. And then he clearly lost that war.
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Yeah, he lost that pretty good.
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Donald Trump comes out in the photo op as we talked about last week, and announced these steel tariffs. And so Gary Cohn, in a fit of high dudgeon, decides that now is the best possible time for him to pick up his toys and throw them out the plant cram and leave.
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A
Yeah, and do you blame him? I mean, he kind of did what he. I feel like he's going on a bit of a low note in that he just lost a battle over steel tariffs. But he came, he got his tax cut. Tax cut that's going to vastly benefit the financial sector. Goldman Sachs is going to, it's going to have a lot more money for its shareholders as a result of that. He's leaving. I'm sure he's going to be welcomed back as a hero on Wall street because everyone else is going to be making bigger gobs of money as a result partly of his good work. You know, what more does he have to accomplish in the administration?
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C
He really came in for tax reform and infrastructure. And I think it's becoming increasingly unlikely that the type of infrastructure plan he wants is ever going to get passed.
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I don't think any infrastructure plans. But yeah, he, he wanted to kind of push this private public partnership version of infrastructure, which would give the banks a bigger cut, essentially. You know, if you were in infrastructure financing, that would, and it would create more business opportunities here. He doesn't seem to have done that, but he did the bigger thing. And so, or you know, he played an important role in making sure the bigger thing happened and that, you know, the administration's priorities reflected the priorities of people on Wall Street.
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C
And so, yeah, at this point, it seems like there's not a lot of upside left for him and there's a lot of downside.
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A
Yeah. And so I guess at this point, if you're gonna go back, this is the moment to leave to be like, to also to leave in protest of steel tariffs is going to, if anything increases your, you know, is going to increase your standing once you're going back. I guess my question is what kind of bank wants him now?
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C
Like who let me start his own.
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Fund, you think, do the Jon Corzine thing? I don't know. I feel like he. You think he's going to go back to a bank?
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C
I don't think so.
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A
I think so. The way I see it is if he really has always wanted that CEO job, he could probably get one at a bank that wants some, that wants a regulatory, essentially wants a regulatory end with the administration. Like that would be the problem is what happens after the Trump administration has gone. Do you still want Gary Cohn, who's a symbol of, you know, a much hated White House, to be sitting atop your financial institution?
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C
But yeah, and he's, he's kind of, from what I've heard, he's a little bit more of kind of like a company guy as opposed to kind of a visionary.
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Okay.
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There's a lot of priority examples of senior Goldman Sachs types leaving Goldman Sachs to run other banks and not doing very well.
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Like who?
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Like John Thain and people like that. And he was Goldman, wasn't he? I think so, yeah. He wound up, he was like at Merrill lynch for a hot minute.
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And that went poorly.
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That, that didn't go well. Goldman Sachs has a very unique culture on Wall street and it makes certain types of people look good who, when they leave Goldman Sachs and they're no longer supported by that unique culture, stop looking quite as good. I mean, the other prime example is Bob Rubin who leaves Goldman Sachs and winds up at Citigroup and basically assumes that the risk management culture of Goldman Sachs somehow exists in the fixed income department of Citigroup. And so he encourages the fixed income department of Citigroup to take on lots of risk because that's how you make money. And that's the kind of thing which works at Goldman and doesn't work at Citi and it proves to be disastrous for Citi. So, you know, I, I'm not sure that hiring someone at Goldman Sachs and expecting like the Goldman Sachs magic fairy dust to rub off on your bank as a result is realistic.
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What about the just, you know, pure crony capitalist fairy dust to rub off? Like I, this is the guy who's closest to Donald Trump and regulators who are in power right now that could.
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So that, so that's, I really think.
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You need Gary Cohn for that.
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No, but you know who, you know who's managed to capture that fairy dust is Goldman Sachs, because they've now brought Dina Powell back onto their management committee. Dina Powell was the other major Goldman Sachs executive who left Goldman to join the Trump administration. She was there also for one year and then she left and is now returning with a much bigger role and much more responsibility. And she is the prime example of the revolving door where you take this kind of one year tour of duty in the White House and it winds up being incredibly profitable for you.
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I wonder if she had stayed at Goldman, if this trajectory would have been that different because she moved up very quickly at Goldman. She is very well regarded by management. And Goldman also really wants to increase gender diversity at the company and they really want to increase gender diversity on their management committee. So I think she was probably well positioned even before this.
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Yeah. Dina Powell also had a kind of odd role in the administration and that she was like solidly of like, she was like a member of the quote, globalist camp. Right. Like she, she played a role in that. But she didn't have the same connection to the President that Gary Cohn had. I mean, for a hot second, Trump seemed to be considering him for Fed Chair until Cohn pissed him off by with the whole, his response to Charlottesville. And you know, Dina Powell, as far as I know, didn't also really have the same connection to Congress that Gary Cohn had. I mean, Cohn played a fairly central role in a lot and just knows a lot of players in Washington now in a way that is typically considered pretty valuable. But I don't know, maybe, maybe less.
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So now she's much more of a foreign policy person. And that's why it makes sense that the role she's being brought back on for at Goldman is basically client relations with sovereign wealth clients.
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Yeah. For which what she did in the administration is perfect.
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Yeah.
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So it was still a good career move for her to go join the Trump administration. And that kind of is upsetting to me as someone who thinks it should not be a good career move to go join the Trump administration. But it seems that as far as Dina Powell is concerned, at least it was. And you can probably say the same thing for Hope Hicks, who I'm sure is incredibly employable right now in a bunch of different ways and quite a few of the other Trumpists.
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Yeah, I think that's very true. I think you're gonna see that also in the legal field. I am pretty sure that going to work in the Trump White House or the Trump Justice Department is going to pay off the same way working in the Obama or Bush White House did.
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It seems unfortunate that that is the case because it justifies this administration in a way I think it shouldn't. But.
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Well, it just doesn't. You know, you would hope that certain professions or certain industries would try to create some sort of, you know, disincentive for people to collaborate with, would be fascists. Like, it's sort of, it's sort of what it comes down to, you know, but it's especially in the Justice Department that's, you know, I mean, where they're really trying to come up with leg justification to do awful things. But it doesn't seem like anyone in the private sector has decided to take that route. Everyone is just kind of going, it's the revolving door as usual.
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So I need to just ask about Gary Cohn. He loses the fight on tariffs. He, although it's unclear how bad he's in the dudgeon. And then after he submits his resignation, after he's a complete hazbin and no one's listening to him in the White House anymore, he then manages to pull this rabbit out of a hat and get both Canada and Mexico and quite possibly other countries, too, exempted from the steel tariffs. When, you know, Canada, for one, is the single largest exporter of steel to the United States. So what Like, I mean, that's. You were the one, Jordan, who last week was telling me that, you know, there was at this point no chance that the tariffs would get watered down. And they seem to have watered down a lot.
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I didn't say that. I didn't think they would be watered down at all. I said I thought they implemented in some capacity. I didn't think we were talking about all smoke, no fire to some extent. I guess Gary Cohn may have managed to push back. I know Mnuchin also pushed back pretty hard as well. It probably helped that most of the Republican leadership was also trying to get Trump to walk this back a little. And frankly, I think that there, you know, I think that maybe Robert Lighthizer, who is the trade rep, probably saw this as an opportunity to hold it over Canada and Mexico and. Yeah. Try to bludgeon them, which Trump seems to be doing.
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B
Wait, so wait, who's bludgeoning whom with this?
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Yeah. So essentially the idea right now is that they're not going to implement the tariffs as long as we're renegotiating nafta. So it's getting treated as sort of.
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Like they could use it as leverage in the nafta.
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Yeah. They're sort of trying to treat it as a blackmail thing.
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But see, the thing which it reminds me of is Dread Pirate Roberts in the Princess Bride.
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Okay.
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Who, like, you remember when, like, Wesley winds up on the pirate boat, and then Dread Pirate Roberts says, I think I'll leave you alive today, but I'll probably kill you in the morning.
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Yeah.
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And then. And then it seems like Donald Trump is saying that to Canada, like, every day. Like, I think, I'll leave you alive. I'll keep NAFTA alive today, but I'll probably kill it in the morning.
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That's sort of the administration's negotiation strategy, and we'll see if that it might work. I mean, I don't know. There have been parts about the nafta. There have been murmurs about the NAFTA renegotiations that have made me feel vaguely positive about it. But that's, like, what. At one point, I haven't kept too close to track of this one specific thing, but they're talking about maybe unraveling ISDs, which was. If that were to happen.
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We had a whole episode on that at some point.
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If that actually were to become part of it in the end, that would make the whole thing worth it, as far as I'm concerned.
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But anyway, for the time being, Canadian steel exporters are doing a little dance. They're very happy because they get to raise their prices because they don't have to be hit with tariffs while everyone else does.
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Yeah, it's great for Canada for the moment. I mean, as far as Cohen's role here and the administration's, you know, the direction it's heading in after him, you know, it's anyone's guess, right? If. If Peter Navarro, his really jingoistic trade advisor, takes over Cohen's role, then, yeah, we can probably expect more trade war if.
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Yeah. I mean, Navarro had a memo that he blamed NAFTA for increased infertility and abortion.
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Yeah. It's not. I know. It's. Yeah. Anyway. Yeah.
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I'm just saying this guy's. If this guy's taking over the role that Gary Cohen was in, that's not a fantastic film.
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Is that likely?
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He's considered one of, I think, like, three candidates at the moment. I don't think it's super likely. I think in the end, there's gonna be enough. I think, in the end, Steven Mnuchin is gonna, like, throw himself on the tracks to prevent that from happening, basically. And there have been threats, apparently. There are a lot of threats that other people will resign the administration if it were to happen.
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B
So who are the globalists who are left in the White House? Who would care about this?
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That's interesting because Porter's gone. I mean, it really is minutian. And like, the bigger question is, who's left? Period? I think that sort of who will.
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Be here next week?
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It seems to be that the only globalists who are left are, you know, Javanka.
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Yeah, No, I think. I mean, it is minutiae, but, like, you don't have a lot of other people. And so you've got. But you've got Wilbur Ross and Lighthizer sort of. And Navarre. You've got that three amigos, or that's really the wrong name for that group. Like, absolutely. You got the three musketeers over there trying to end trade with the rest of the world, and then you got the Treasury Department pushing back. So I don't know what the internal dynamics the administration are going to be. And the crazy thing about it is just like the President himself has these sort of vague inclinations, but he has no real ideas. And so really, it's impossible to tell which way things are going to go. I mean, even with these tariffs at this point, he's going to go country by country and try to decide who's playing nice with us and then set the tariff based on that. And what counts as playing nice has everything to do with, like, trade to military stuff. So there's no one knows how any of this is going to go.
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I think what counts as playing nice is just like the President being nice to Donald Trump on the telephone.
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That's. That's not even. Yeah, I don't even think that's an exaggeration. Like, if, if you do a military parade for Donald Trump, I mean, this is the same people. This is the same people. Reason. People are worried about him negotiating with North Korea because it's like, well, they can do a military parade at. Military parade.
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Yeah, we know the market.
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They are so good at that. I mean, so without Cohen's influence, is the administration going to become more protectionist? Does it become more Trumpian? Maybe, But I was saying last week I was convinced that he was going all in on these. So who knows?
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B
Anna Szymansky.
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C
Yes.
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What is going on in South Africa?
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C
Well, in the Western media, there's been a lot of reporting that this proposal has been adopted. And now the South African government is going to begin expropriating land from white farmers without compensation. This is not actually exactly what has happened.
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B
Okay, so what is going on in South Africa?
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C
So what has happened is that a proposal that was put forward by this kind of far leftist group in Parliament, the Economic Freedom Fighters, which are an offshoot of the anc, they put forward this proposal to expropriate land without compensation. It has been adopted by the anc. As a result, they're now creating a committee that is going to look into how they could amend the constitution to allow them to take land without compensation.
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Yeah.
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So basically the constitution still bans it, and the constitution hasn't been changed. And they started to think, hmm, maybe this is a good idea and maybe we should change the constitution to allow it. But if I know anything about constitutions, they're not the easiest things in the.
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World to change, although they only need 2/3. And if you put both the ANC and the economic Freedom Fighters together, they actually have the numbers.
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And the. I mean, Cyril Ramaphosa, the new leader of South Africa, is in favor of this to some extent.
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It is, although I think this is important, important to put in the context of current South African politics, because in the past, he has used the same language of radical economic transformation that Zuma did, but he meant very different things. He is a very different figure. He is, yeah. He's a moderate. He's a technocrat. He's been very market friendly, which is why the markets reacted very positively.
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B
Okay, so let's. Let's slow down a minute here. Can you explain how a moderate, technocratic, market friendly president would ever want to start seizing land without compensation?
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C
It's a good question. So, two things. One, I think it's important to remember that we're talking about the context of South Africa where land has a lot of symbolic weight because of the history of the fact that frankly, land was just stolen from the black farmers in South Africa. They certainly did not receive compensation. They received generations and generations of terror and economic deprivation. But that does not mean that land should be seized now. But what also is happening is that in the last elections, the ANC lost a lot of voters on both their right and left flanks. Now, Ramaphosa, because of who he is, because he's a technocrat, already has more credibility with the voters that went to the Democratic alliance on the right, but he doesn't have as much credibility with the voters who went to the Economic Freedom Fighters on the left. So it is not surprising to me that he will at least rhetorically support this. At the same time, he has been going to Moody's saying That look, if this is done, it's only going to be on unproductive land. So it's not as though they're going to be seizing like really well run farms. He's also saying it's only going to be done in such a way that it won't hurt the economy and that it won't put the food in the country in danger.
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So basically the idea is that if you're a white, if you're a white person who's ostensibly a farmer, but you have a bunch of land which you're not doing anything with, then the government wants the ability to seize that land and do something with it.
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C
In theory. I first wonder how likely it is that this is really going to happen. Even if this committee comes back and they say, okay, this is how we change the constitution, they changed the constitution, will they actually do this or will they only do it in a basically symbolic manner? Because this isn't what is. I think if you look at South African economy today, what is needed to reduce the massive amount of inequality is not really land redistribution. Agriculture is a pretty small percentage of the South African economy. It's important because it's a big employer, it's connected to other industries. But what you really need are either, frankly, you know, just wealth answers and wealth transfers in terms of cash payments. You need spending on infrastructure, you need spending on education, you need all of that. So I wonder that even if this is, does go forward, it will actually have any real effect. I don't think we're going to get into a Zimbabwe type situation.
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B
Okay, so Zimbabwe is obviously the thing which no one wants to repeat, which is where the government just seizes a bunch of land, breaks it up into tiny pieces, gives it to people who destroy all kind of agricultural productivity in the nation. No one wants that. I'm sure against that in the back of my head I have what happened in Peru under the first Alan Garcia administration where they seized a bunch of land not without compensation. They did compensate the people with land bonds and then they paid the land bonds for I think one or two coupons and then they defaulted on the land bonds. And I believe we might have even had an episode of Peruvian land bonds, which you can go back and listen to because Peruvian land bonds are awesome. But the, but the effect of that was very much to bring the ownership of the land in the country much more sort of demographically in line with the makeup of the country, rather than having it all owned by, you know, a small number of very rich white people. And you can see how some, on some grand level, you don't really want most of South Africa being owned by.
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C
White people, of course, and you don't want so much of the wealth in the country being controlled by white people. And so I think land redistribution is a. Is important and it is something that recently the ANC had been getting slightly better at.
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A
I was gonna say, part of the context here is that they've been trying to do some form of land redistribution since 1994. The original program was very much a product of its time. The idea was it was going to be based on, they called willing buyers and willing sellers, where essentially the government was buying land and then redistributing it to people who had been dispossessed could show that they'd been dispossessed. And it just took forever and was administratively not very smooth. It was just very, very, very painstaking. And on top of that, they found, as you often do with these kinds of projects, that the people who were these small farmers who were getting these lots weren't necessarily farming them very well because they were not, you know, essentially, they were not professional farmers and they were. Or they were not professional commercial farmers.
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B
And they didn't have economies of scale.
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A
Exactly. They didn't have economies of scale. Even when they had sort of.
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B
They.
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A
Even when they gave them sort of the equivalent of co ops. It didn't necessarily. Hasn't. Doesn't seem to have worked out that well. Part of the issue is here they don't have great data to really track it. But, you know, they. They didn't give these people much support. You know, they didn't really. You know, if you go to these parts of South Africa, the rural infrastructure is not great. You can give someone land, but if they. You don't have great roads, great water, great electricity, it's hard to farm it well, especially when you're just like a solo operator. Yeah.
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C
So much of the land that has been redistributed is lying fallow. It's not being used productively. Yeah.
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A
And so that' they tried to sort of. So then they've tried to kind of speed this up and improve the process. They went from willing buyer, willing seller, I think, to sort of something. They were going just like fair compensation. They weren't going to pay market value anymore. They were just going to pay some value. So this is an evolution more than. I think it is sort of a radical step. And like you were saying about Ramaphosa, I doubt he's not a radical by nature. I don't think you're going to see or repeat of Mugabe. It's just, you know, to me, in the end, it does kind of speak to how a lot of South African politics is just still trapped in the old battles and symbolism of the post apartheid era and sort of trying to fix the mistakes that were made in the mid-90s, rather than trying to say, you know, just tax the fucking land and use the money to build out urban infrastructure.
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C
I think this is actually really important because I think why this is happening is because after apartheid, there was a fear of spooking markets. You didn't want there to be retaliation. You didn't want anything that the government was doing to appear like you were retaliating against the white minority. And as a result, the government did engage, did not engage in the type of active economic measures that they really probably should have.
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A
I would take that even a step further. It wasn't just the markets. I mean, that was part of the negotiations that led to the transfer of power. It was sort of, and this is a sore point, and this is why it's so symbolic, powerful, is that, you know, there was sort of a active choice on the part of the South Africa of sort of the anti apartheid movement that they were going to, you know, they were going to win their. They were going to take political freedoms, they were going to take political dominance of the country, but essentially allow whites to continue the economic dominance of the country. Like, it's more complicated than that. But that's really sort of the trade off that got made and they knew it.
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B
So wait, let me just jump in here and. But if that was what happened, and if we are now seeing the pendulum swinging back against that, and we're now seeing a move to say, well, no, we can't have this economic apartheid going on indefinitely, and we are going to amend the constitution to allow us to seize land without compensation from white people. How reassuring is it to say, well, Cyril Ramfosa is a moderate when, you know, he is not president for life, Someone will replace him. The pendulum is swinging towards this more kind of economically aggressive stance, and his successor, or his successor's successor will now have a constitution which will allow them to do very, very kind of, like, dubious things?
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A
I don't think it's reassuring. I think, like, I would say that the process that we're going to see going forward is like, I don't think we're going to see a rapid devolution of South African civil society. But, yeah, for the future, I don't think It's a good thing.
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C
Right. And I think that. I think this is probably going to be symbolic more than anything else. I do not think this is going to affect the type of change you actually need in South Africa. And my concern is that the political consequences in the global, kind of global markets are going to offset any benefits. So I think there are other ways to try to achieve these goals.
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B
So you're saying, like, the bond vigilantes are going to come in and make it more expensive for South Africa to borrow and that will offset any domestic gains?
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C
Well, it's just like at a moment when Ramaphosa is, you know, wants to set up special economic zones, he wants to really increase foreign investment. It's going to be slightly harder to do that if you're being seen to erode property rights. Even if people can understand why this is being done, it doesn't change the reality that property rights are important.
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A
Yeah. And that's part of why, again, I just feel like if you want to redistribute wealth, tax the wealth, like, that's sort of, like, that's, that's something. I mean, that spooks foreign investors, too, to some extent, but it doesn't have the same psychological effect as outright expropriation, which is sort of the worst nightmare that, you know, globalists have.
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C
They've actually talked about instituting a wealth tax, although part of the problem is that it's on such a small base.
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A
Yeah, I know it's. It's really difficult to do when you're still in developing country, essentially. But it. There, it just, it seems to me that if you want the money, take the money. And I know that there's symbolic value to the land, but it's, it's just, you're. You are taking that step in a direction that could be. You are. You are creating a mechanism that could be abused in the future.
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C
I completely agree with you.
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A
And I think it also. That's what you're saying, Felix.
- [29:06]
C
Yeah. And it plays also into the rhetoric of the far left in South Africa, which I don't think is helpful. And then the far left of South Africa really helps the far right of South Africa, because when you have Julius Maleme, who's the head of the economic freedom fighters out there, saying, you know, we're gonna take your land back, you know, we don't care that that does not help South Africa. It does not help South Africa within the African context. It does not help South Africa within the global context.
- [29:34]
B
Okay, Jordan Weissman.
- [29:35]
A
Yeah, we, we're Gonna talk a little bit about Dodd Frank, but also community banks.
- [29:42]
B
Okay, so we talk about custody banks.
- [29:44]
A
Yeah, we talk about custody banks too.
- [29:45]
B
Yeah, custody banks. So custody banks are where you put your money when it's in jail, right?
- [29:50]
A
Basically, yeah.
- [29:51]
B
So custody banks are.
- [29:53]
C
Custody banks are banks that you pay to do all the things that you already do yourself.
- [29:57]
B
There's this wonderful thing called clearing and settlement and trusteeship. And like it's always the most boring bit.
- [30:05]
A
So this is important.
- [30:07]
C
This is important though.
- [30:08]
A
Okay, so here's the broad thing. So you may remember that 10 years ago we had a financial crisis, a little blip in the economy. Anyway, Congress has decided it wants to start deregulating the banks again, sort of loosening the reins on Dodd Frank, which was passed in 2010 to try and prevent another meltdown on Wall Street. And the excuse for this is that they feel that Congress went a little too far in regulating small and mid sized banks. That they really put the screws to community banks and to regional banks with like, you know, 100 billion in assets or whatever. And the thing is that if you look there are, you know, it's a complicated build. There are a lot of different aspects to it. It seems like some of the provisions could end up actually benefiting banks like JP Morgan and Citibank if you're not careful. But I guess the thing to me that strikes me about all the fact that the big, too big to fail banks might end up the beneficiaries of this is one thing that's freaking out a lot of progressives. But to me, the thing that's striking is that there's this sort of consensus that community banks, small banks really need help right now. And I guess, do you guys. Is there any sign that a, that you're aware of that really small banks are in trouble at this point, other than that they've been disappearing for decades because the entire industry has been consolidating. And B, what good do small banks do? Is there a reason we should be actually stepping out to help community banks versus everyone else at this moment?
- [31:41]
C
Community banks tend to have more conservative balance sheets. They tend to not have the same types of losses that you see at larger banks. They tend to be much more specialized. So they're better at underwriting a lot of loans, especially residential mortgages. They tend to actually have higher net interest margins as a result, but they tend to not be profitable even because of that, because they do have higher capital costs because they're smaller and because they do have some of these compliance issues. That these compliance laws were never really designed for banks of this size.
- [32:12]
B
And so. Yeah, so my. I completely agree with Anna. The thing about community banks is there a very peculiarly American creature. You don't really find these things in many other countries. America, as we have discussed many times on this show, has way, way, way more banks than any other country you want to mention. And there are positive aspects to that. The bigger banks do tend to be more profitable, largely because they're international, they take in deposits and they have assets and they can lend out anywhere on the planet. Big multinational companies. They're not rooted in their communities in the way that community banks are. Community banks are constrained geographically and in terms of how they act, what kind of products they have. And what that means is they do perform that crucial banking function of recycling money within the community to where it can best be used.
- [33:19]
C
And I do agree with you that I think some of the hue and cry about how poorly community banks are doing is not really supported by a tremendous amount of data.
- [33:28]
A
I mean, they're profitable, right?
- [33:30]
C
No, they're certainly profitable. But if you look at their balance sheets and consider how profitable they probably should be, they are still taking a hit because of these compliance regulations. I don't think that they're disappearing just because of compliance.
- [33:41]
B
No, I mean, the reason they're disappearing is obvious, right? Which is that if you are one of the big four banks in the U.S. if you're JP Morgan or Wells Fargo or someone and you, you know, and you buy one of these community banks, then immediately you can start putting those assets to much more sophisticated use in your big multinational banky kind of way that you have. You know, you can use those assets anywhere on the planet and so your return on those assets, it's likely to go up. So it kind of makes sense economically speaking. You're going to continue to get merger activity, consolidation, fewer banks. And so legislation isn't going to change that.
- [34:25]
A
So we're talking about how they're better at like underwriting mortgages. Right. But the regulations that they're talking about loosening have to do with things like reporting your mortgage lending behavior to the government so they can make sure you're not discriminating. And I just don't like if these banks are supposed to specialize in this sort of this really high touch consumer stuff, that there is a lot of room for discrimination and foul play and kind of why we wouldn't want to watch after them closely.
- [34:57]
C
I don't disagree with you that I think there are a lot of Things in this bill that I don't like. There are some things I do like, I'll be perfectly honest, but there are some things I don't. And one of the things I don't like is the fact that they are reducing some of these reporting requirements. And I agree with you, actually. I think because a lot of these banks are dealing more with retail customers, we should not be reducing the requirements on what they have to report in relation to discriminatory lending practices.
- [35:21]
A
Yeah, I mean, that seems like the small bank in a rural community is absolutely the one you're worried about. Because if the one black farmer in town can't get a loan because his community bank happens to not like lending to minorities, kind of want to know that. Right. That's the sort of scenario that these laws are designed to prevent. So I guess it just seems like if anyone. I understand why you wouldn't want rules that are meant to prevent JP Morgan from collapsing to apply to these tiny banks. Maybe their capital requirements don't have to work exactly the same way. Although, you know, after the savings and loan crisis, the problem was you have tons of small banks falling apart. So there is something to be said for, you know, safety, you know, watching over the safety and security of these institutions. But.
- [36:10]
C
Right, but what happens when you have higher capital requirements? I mean, like, you're less, probably. Yeah, I mean, like, that is, I mean, that is like the point of finance is the allocation of capital. So I don't think having regulations that don't necessarily make the system that much safer, I don't think it makes sense to just keep those in place because maybe down the line these banks could fail, though we have no evidence that they would.
- [36:37]
B
No, I 100% think that higher capital requirements at the expense of profitability is a trade off I'm happy to make all day long. I don't see a problem with that. I don't think you should have 40% capital requirements like Admati would like. But just keeping the Dodd Frank levels, I think is entirely reasonable. I think basically the question which we're kind of struggling with here, which a lot of people are struggling with here, is if you are a bank with somewhere between $50 billion and $250 billion worth of assets, the regional assets, are you enormous or are you tiny? And by the standards of any kind of normal human being, you're huge. If you have $100 billion of assets, you should totally have regulators reading down your neck making sure that you're not discriminating. You should totally have the government worried about you collapsing. You know, you're, that's $100 billion. It's a lot of assets. On the other hand, compared to the big global banks, you are small and you feel like you have no real ability to compete with them, with them. And, and they will kind of out compete you every day of the week, especially when, you know, on things like technology and derivatives where you just can't compete with that. So I think what's happening is that the, the impetus behind the bill is to try and make it easier for these medium sized banks to compete with the big guys. Although, frankly, I'm not sure they'll ever successfully do that.
- [38:19]
A
Yeah, I mean, just to clarify. So there's the community bank aspects of this which are supposed to again, kind of give more freedom to the really small. We're talking like less than $10 billion institutions. Then there's the big change that applies to these, you know, regional mid sized banks. Originally, essentially they said that you are a, you know, systematically important financial institution. If you had assets above $50 billion, that was the cutoff in Dodd Frank. And some people think maybe that was a little low. Now they're moving up.
- [38:45]
C
Pretty much everybody thinks that was a little.
- [38:47]
A
Yeah, but now they're moving up to 250 billion.
- [38:48]
C
Probably too high.
- [38:49]
A
Yeah.
- [38:49]
C
And like every, most people think it's.
- [38:51]
A
Like, I guess again I look at this and I wrote this a couple of days ago, but just like, if you just step back and look at like the macro issues. Right. Is there any shortage of Credit in the U.S. no, there's no sign that there's a shortage of credit. Is there a sign that the community banks themselves are actually really having problems or the midsize banks are having problems? No, not really. It seems like they're actually. The return on equity is fine. Even like just straight profitability. We're not even talking about net interest margins. Are rural areas having trouble getting credit? I actually went and looked at farm lending data. Farm lending has actually done better. It shot up after Dodd Frank. All the things that you would look for if you had problems in the banking sector right now don't seem to actually be issues to me. It's like maybe we have verged a little too far in the direction of caution. If you care deeply about bank profitability. But to me it seems like everything's fine, why mess with it?
- [39:49]
C
Right? But all of those credit numbers you're just quoting are all during a period of historically low interest rates.
- [39:56]
A
Okay.
- [39:57]
C
Which, and we're now in a period of increasing interest rates. So it's not surprising that when you have rates essentially as low as they can go, you're going to have more credit growth. But the idea is that if you start to normalize rates and you aren't doing anything to limit some of the regulations that may not be necessary, you could start to see more compression in access to credit.
- [40:24]
A
That's really hypothetical to me. Right, like, that's like maybe or maybe not. We'll see. Also, we're going for a period of like historically low interest rates to like.
- [40:33]
C
A little bit higher.
- [40:34]
A
Yeah, still historically low, but low.
- [40:38]
B
I really don't think it's the job of Congress to sort of front run the Fed in that way and sort of say, well, we're worried that the Fed is going to do this, so we're going to sort of preemptively retaliate by doing that.
- [40:50]
C
No, but it's just the idea that when the Dodd Frank regulations were instituted, they were obviously very, very necessary, but it was a pretty blunt instrument. It also was often tied with kind of global banking regulations, which didn't take into account some of the kind of unique aspects of the American banking system. We've now had 10 years. And I do think there are aspects of the regulations which aren't working particularly well or don't make a lot of sense. And I don't think that you should just keep regulation that don't make sense because also very kind of hypothetically, maybe down the line, something that we don't foresee could cause greater financial chaos. I think that if a regulation has been shown to not be super useful, why are you keeping it?
- [41:40]
A
So what regulation would you, if you were pruning, you know, the federal code right now, what regulation do you think they should get rid of?
- [41:48]
C
I think increasing the SIFI limit to 100 billion probably would have made sense. I think the changing the rules around how municipal bonds are considered in terms of high quality liquid assets. Yeah, I think the way that was actually done in this bill, I actually think it makes sense. It was a bit of a compromise. Yeah, I think that makes sense. I think that we can get it to talking about custody banks.
- [42:10]
A
Okay, yeah. So this is, this is the thing that like everyone is just tearing their hair out because.
- [42:15]
C
But yeah, I know I'm going to have, I'm going to say something that you are all going to very much disagree with.
- [42:19]
A
Okay, so basically, here's the deal. There is so basically, as part of Dodd Frank, they created these things called supplemental leverage requirements, which basically said it was just limits on how much your business you can fund with debt, in addition to the other limits that already exist in the bill. And they were supposed to apply to, like, the really big financial institutions. This new bill tries to water down these leverage requirements for custody banks. Custody banks. These banks that give Felix a headache because they are so, so boring. And they are paper brochures.
- [42:51]
B
There are two of these banks.
- [42:53]
C
There are three. Although Northern Trust is really small.
- [42:55]
B
Yeah, yeah. There are two of these banks. One of them is State street, the other one is bank of New York Mellon, and they do all of the sitting on paper for you, which is an incredibly crucial and incredibly boring part of the bank system.
- [43:09]
A
They make money off of fees for just like, looking after your assets and like, someone needs to hold on to your bond. Right.
- [43:16]
C
And when. So if you are an asset manager, you have your money at a. At your custodian. When you trade, the trading is actually happening through your custodian. If a coupon payments are made, that goes to your custodian in theory. They're also dealing with like, cash management and accounting. Although as an asset manager, you do that yourself as well.
- [43:32]
A
I don't. You know, I am not an expert on custody banks. My understanding of them is that because of the role they play, they are very important to the function of the financial system. But also they're probably not going to get into a lot of trouble often. No.
- [43:47]
C
Because they're not doing the normal things that a bank does. You're taking your customers deposits. The customers are always going to have some cash there, usually for a number of reasons. That cash, they're then just parking at either the central bank or they're putting it in really liquid securities. Treasuries, they're not take. It's not like a normal bank where you're taking customers deposits and potentially making really risky loans. It's a completely different business. You're not making money through margin, you're making money through fees.
- [44:15]
A
Yeah. So I. The idea of maybe letting them off the hook a little bit doesn't strike me as crazy. But the way the law is written right now, there's a big question of whether or not it would also let JP Morgan and Citibank off the hook because they also do a lot of custody business. And just again, it's in the language a lot. It's unclear. The CBO and they Congressional Budget Office, they looked at this. They said, we think there's like a 50% chance regulators would interpret the law to think this also applies to JP Morgan. And so they will also have smaller leverage requirements.
- [44:43]
C
This is going to be my unpopular opinion that I think that, and I'll tell you why, that if you're going to lift this requirement for custody banks and saying that these assets in custody are not included in this leverage ratio, that other banks that offer these custody services, I think it makes sense that their assets that they are just holding in custody should be treated the same way as the banks that all they do are custody banks. Because the reason that they're doing this is not just an issue of cost, it's the fact that this, the way that the law is currently set up, can actually make the system riskier. Because what you do is you can deincentivize in a moment of crisis a custody bank from taking on deposits because if they took on additional deposits in a moment of crisis, they could end up having to. They could think they're going to breach their leverage ratio. And so then they would have to sell assets or raise equity and that could actually reduce liquidity in the banking system. So that's a problem. Now, if you only lift this requirement on custody banks that what we talked about, there are mainly two, two big ones. That means all of that very systemically important activity is now being concentrated in two institutions potentially. So to me, if you're going to lift it on custody assets, you should lift it for the custody assets, for everyone who's doing that.
- [46:05]
A
Well, I mean, I guess I'd have two things, two ways to respond. One is that seems like an argument for just not lifting them at all in that case and just let them keep operating the way they are so you don't concentrate that activity and everyone's still playing by the same rules as before. And then I guess the second part is you're talking about in the end. Yeah, maybe. Okay, so maybe there's a way you can see how it might make the system a little riskier if the crisis ever shows up. But the rules that we have now, if anything, just mean that these two massive financial institutions, Citi and JP Morgan, can't make as many, can't fund as much of their business with debt. They have to be a little safer. So you're essentially, what you're doing is I think the.
- [46:51]
B
Can I just settle this debate quite easily because I really feel like you are talking across purposes from each other that Anna is saying to the extent that Citi and JP Morgan are acting as custodians, those assets and only those assets should be covered by these new rules. And, and Jordan you're saying we can't apply these, these new leverage requirements to the entire assets of Citi and JP Morgan.
- [47:19]
A
And you both agree, but what you're doing is you're effectively lowering their whole leverage requirement by taking, by taking that cash out of the way. It's calculated. You're, you're giving. You're allowing them to play with more debt than they can now. That's sort of how it's working. That's how it's going to work out in the end. And even if it's, even if, like, that seems fair because that cash just shouldn't be part of the calculation, it's still, essentially, if you've accidentally put stricter limits on JP Morgan than you thought you originally needed, that's fine by me. Because the original limits they thought they needed to put on these banks during Dodd Frank, frankly, didn't seem strict enough.
- [47:53]
C
I would just say that I do agree with you. I think either don't lift these requirements for any bank, whether it's a custody bank or not, or lift them for all of them. I do think lifting them makes the system safer, because right now, the way the system is set up, you're essentially deincentivizing institutions to hold lower risk assets because they end up having a higher cost of capital, because they're being. I won't explain. We can go into Slate Plus. I can explain why that is, but it's because of the way the risk. Because you're not risk weighting the assets.
- [48:29]
A
Yeah.
- [48:30]
C
So I think that this change can actually make the system safer. And so that's why I think in a. Doing it at the larger custody banks and then just only doing it at that, like 5% of JPM that's involved in custodian services, I don't think that's going to make the system riskier.
- [48:46]
B
All right, okay. Enough of Dodd Frank. Let's have a numbers round. I'm going to start this week with 79.3% because it's been a while since we had a payrolls number. The latest payrolls report came out. It was very good. It was a positive report. We had lots of new jobs and continuing low unemployment. But the number which jumped out at me is 79.3%, which is the prime age employment to population ratio. That's the.
- [49:21]
A
You're stealing my favorite number.
- [49:23]
B
Ah, there you go. It's a Jordan favorite as well. That's the number of people in America between 24 and 55, something like that.
- [49:31]
A
Who 25 and 54.
- [49:33]
B
25 and 54 who are working compared to like the total number of people of that age. And it is up a lot. It is up four and a half percentage points from December 2009. It was 74.8 back then. It's now up to 79.3. It's very close to the all time high of 81.9, which was in the dot com boom in 2000. And it's looking healthy. I have to say that in terms of like getting America working, a lot of those people who left the workforce because they were just, they just couldn't imagine that they would be able to find work. They're really coming back now.
- [50:18]
A
So I want to talk a little bit about prime epop, because this is one of my pet topics.
- [50:25]
B
Can I make it short? This is the lightning numbers.
- [50:29]
A
Look, you're going to be free of me soon enough. I'm going to take this nice and slow. As far as I'm concerned, this is the most important labor market indicator that you can, that you can look at because it just eliminates a lot of the problems with the unemployment rate, which is actually not the most intuitive figure. The way it's calculated, what we've seen with the prime age employment rate is just, it's been gradually getting better over time. If it keeps moving up at the pace it is now in maybe if it were to continue its current rate of growth, we'd see it get back to completely normal in about a year, maybe two years. Right. Like, which is, you know, it's not immediate, but it's a good thing. And the fact that it's just sort of been gradually just, you know, crawling back to normal, regardless of what any administration has been doing, regardless of what the Fed's been doing recently, just says to me that this, the economy has just sort of been going through this natural healing process and that we should just continue to let it run that like it's not going to, like we're not suddenly in some crazy spurt of growth, that we're not suddenly, you know, see inflation take off.
- [51:40]
C
Is this your justification for why we shouldn't raise rates?
- [51:42]
A
Yeah, basically this is what I'm getting to. It's like if you just watch this indicator and watch it's just completely just chugging along for eight years now, just moving up little by little by little, ticking up that there's just no reason to think that we're suddenly gonna have an uncontrollable crisis on our hands if we don't raise rates enough tomorrow. And if you look, also, if you match it with how wages have been rising to get a little technical, basically the Phillips Curve comes back to life if you match it with. If you. If you use the prime age employment rate instead of the unemployment rate. The Phillips Curve is the traditional relationship between either inflation or wages and unemployment. With unemployment, it does not work anymore. With prime age employment, it does. So you are seeing this gradual improvement and wages going up gradually along with this number. And so just leave shit alone. That is, if you just watch. All the Fed has to do is watch that indicator and say, okay, now it's back to normal. Now we should think about taking away the punch bowl. But it's not back to normal yet. It's almost there. Give it another fucking year. Anyway, that was. That was.
- [52:42]
C
Leave things alone is your motto for the day.
- [52:45]
A
Leave all this shit alone.
- [52:46]
B
Don't touch Dodd Frank. Don't touch interest rates. Don't touch anything. I'm just going to go on holiday. Don't touch a thing until I come back.
- [52:53]
A
I want there to be. I want you guys to have nothing to talk about while I'm away.
- [52:58]
B
Anna, what's your number?
- [52:59]
C
So my number is $100 million. That was the gift that the Pearson family made to the University of Chicago.
- [53:08]
A
Oh, this is a good number for.
- [53:10]
C
To fund this research of this research institute on public policy. Now they are suing the University of Chicago to get their money back. So they've already given about a little over $22 million, and they're suing to get that money back and to not give any more money.
- [53:28]
B
My favorite part of. And this is, this is a classic example of a family trying to sort of micromanage where their money goes and how it gets spent. Rather than saying, this is a really good institution, we support the institution, we want to give it money. They say, we want to create a school of this, that, and the other. And you need to spend our money in exactly that way. And that's just a really bad way to do philanthropy.
- [53:55]
C
So I mostly agree with you. I will say, the more I read into the story, though, I do think they have a little bit of a point.
- [54:03]
B
Okay, so one of their points, I have to say this, is that one of the conditions for the grant was that they had to hire a couple of superstar professors to staff up this new institution. And the University of Chicago hires Chris Blattman to be one of these new professors. And the Pearsons come along and say, who the fuck is Chris Blackman? Chris Blackman is a superstar, like. And they're trying. And if they are really going around sort of like poo pooing Chris Blackman and saying, like, yeah, I don't really think that that's good enough. I don't have a huge amount of sympathy with him.
- [54:44]
C
I would just say we're going long today. But they've also were upset because the institute was used for this conference of, like, Catholic Bishops that was supporting, you know, quote unquote, traditional marriage as opposed to. Which is something that they do not support. And so that was another thing that they were upset about.
- [55:02]
B
Okay, so that was. But that was. That was an artifact of litigation. Is that one of the other things that they needed as part of the contract was that the institute would run a conference. And the institute got up to speed a bit too slowly, and it couldn't. Didn't have the time or the resources to create a conference of its own. And so in a desperate attempt to sort of check that box, they said, oh, fuck, we're gonna like, make. We're gonna say that this Conference of Bishops is checking the box. It wasn't that they were, you know, they cared much about the Conference of Bishops, but that was all basically their way of trying to react to the lawsuit rather than being an actual act of the Institute.
- [55:44]
C
Okay, fair enough.
- [55:46]
A
I have a number. Yes, I found one.
- [55:47]
B
You found a number?
- [55:48]
A
Yeah. This is a story. It's been so 52 billion. That is how much Cigna is paying to acquire Express Scripts. Yet another merger between a giant insurer and giant pharmacy benefits manager. We saw this previously with cvs. Attempt to buy Aetna. So I had a moment there, but no. So it's interesting. You're just seeing the kind of entire healthcare industry turn into just like, just, you know, concentrate into the hands of these huge conglomerates, which I don't know if it's a good thing or bad thing. Like, there are some people who are convinced this is absolutely terrible. I sort of have mixed feelings about it. I don't think it's actually gonna help patients because nothing does. But I don't know if it's gonna make things any much worse. But you're just, again, you're just seeing the kind of. These enormous freaking companies just evolve before our eyes. It's like we've entered the Jurassic period of American health care or something.
- [56:53]
B
Okay, that was a long one, people. Thank you for sticking with us. If you really want to listen to even more Slate money, there's going to be a Slate plus segment on this question of should I share my wi Fi with my neighbors. Dan Schrader is super happy about this because he has opinions on this. We will answer this important question in Slate Plus. Meanwhile, thank you for listening to the show. And in case you were expecting this show to be the great Jordan Weissman, the call in show, it's not, mainly because Dan can't count to 200. But send in your questions to slate money@slate.com or alternatively to 929-266-8195.
- [57:39]
A
They don't even have to be about economics. They can really be about anything. Real estate, personal life issues.
- [57:45]
B
Ask Jordan about McDonald's.
- [57:47]
A
McDonald's, whatever.
- [57:48]
B
We've already had a McDonald's question.
- [57:50]
A
Yeah, but we can come back. Yo, that's true. Someone asked me if I can't. I do not. We can get into that later anyway. But yeah, whatever you want.
- [57:57]
B
But in any case, the main thing that you should do if you are someone who writes words and knows jurisprudence, is to come work for Slate because we are, we are hiring a legal journalist who will be writing and editing and conceiving and generally communicating matters jurisprudential to this late audience. And if that is you, find out more@slate.com legalwriter okay, with that, it falls to me only to thank Dan Schrader for cutting down our bank wonkery to a reasonable amount of time. And we will come back talking Hollywood next week on Sleep Money. Sam.