Jordan Weissmann (2:19)

Law in New York, zoning law, which is like the most important thing that bores most people to tears, at least in New York City.

Felix Salmon (2:25)

This is not a boring episode. This is an important episode.

Cathy O'Neill (2:27)

Yeah, but. And you have to stay through to the end, because I'm going to. We're going to talk even more about the most awesome story in financial everything right now, which is Credit Suisse, which is the gift that just keeps on.

Jordan Weissmann (2:39)

Giving, is Credit Suisse officially a hot mess. Like, is there like a. Is there an SEC designation at some point? Like, you are a turn up to 11.

Cathy O'Neill (2:47)

It's a system important hot mess.

Jordan Weissmann (2:50)

Yes, that was what I was.

Cathy O'Neill (2:53)

But, yeah, let's start Eeny meenie miny moe with Kathy, because why not?

Felix Salmon (3:00)

Yeah, let's talk. Let's talk free trade. Look, this is not a boring topic. This is the thing that is, is winning Trump voters this, this election.

Cathy O'Neill (3:08)

This is absolutely true. If you go to a Trump rally, besides the racism, count up how many side minutes. No, but I'm even including the racism that if you count up how many minutes he spends bashing Mexicans and how many minutes he spends being rude about women and how many. Like all of those put together is dwarfed by the amount of time that he spends on trade. Trade is really his number one issue.

Felix Salmon (3:31)

It is, and it's there for a reason. And I'm gonna, I'm gonna. There's a news hook and then there's like this incredible academic study which we have to talk about. But the news hook is that this week the New York Times featured a story about 1400 jobs moving from Indianapolis to Mexico.

Cathy O'Neill (3:46)

And this is not just the New York Times. This is the number one image that Donald Trump himself has been using in all of his campaigns. This is the carrier air conditioner factory, which just. The entire factory closed down pretty much overnight. And they said all of your jobs are moving to next.

Jordan Weissmann (4:03)

They didn't say it didn't overnight. They talked.

Cathy O'Neill (4:05)

It took two months.

Felix Salmon (4:07)

They announced it recently.

Jordan Weissmann (4:08)

Yeah, they announced it.

Felix Salmon (4:08)

They announced that people who now work in Indianapolis make typically 20 bucks an hour or so, and they're moving it to Mexico, where the average worker makes $19 per day. Now, keep in mind, like, obviously that's a cost saving, but the parent company, which is called United Technologies, is not losing money whatsoever on this company. It's actually making tons of money. So this isn't like a business incest.

Cathy O'Neill (4:32)

This is a profitable air conditioning company which is now going to become an even more profitable air conditioning company.

Felix Salmon (4:38)

Exactly. And their argument is that their shareholders insist that they do this.

Cathy O'Neill (4:41)

Well, I mean, it's not just that. It's just the job of business is to make more money. If you have the choice between something which makes X and something which makes 2x, you're going to choose the thing which makes 2x, right?

Jordan Weissmann (4:51)

Yeah. So what Trump's candidacy is sort of forcing a lot of people to do now is kind of wrestle with the reality of free Trade, which for years was sort of pitched to the public as this unalloyed good. You know, it's every, it's a win win for everybody. Everyone's economy gets more efficient. You know, we do the things we're best at, they do the things they're best at.

Cathy O'Neill (5:12)

I feel like you're half right. Well, I feel like it was pitched to the, pitched as net. Net a good thing. I don't think anyone ever said it was unalloyed. I didn't think anyone ever, I don't think anyone ever said the U.S. manufacturing center sector is going to benefit.

Jordan Weissmann (5:31)

Well, no, no, no, no.

Felix Salmon (5:32)

Well, even so, though, even this week, Miriam Sapiro, who like is, was a trade representative for the United States until very recently, like wrote an op ed in the New York Times talking about, oh, you know what, everyone should appreciate free trade because we have a surplus mostly in the financial services and intellectual property sector of $200 billion in free trade per year. And it's like even those people aren't really talking about who's getting screwed by free trade.

Jordan Weissmann (5:57)

So I want to finish my point, Felix, which is that, you know, back in, when Bill Clinton was pitching nafta, he wasn't, he certainly wasn't emphasizing the jobs that might go to Mexico. He was, you know, he was emphasizing the new markets that would be opened to the U.S. same thing with, you know, China joining the WTO is, you know, the pitch was never that, oh yeah, a lot of our, you know, screw and screw factories and electronics factories are going to head over to China. It was opening brave new markets to the world. And so, you know, what economists have always sort of known though, as you're hinting at, is that there are winners and there are losers and that there's supposed to be an adjustment period where, you know, the losers, the people who lose their factory jobs, have to then go into a new industry that's supposedly gaining from trade. And some recent studies have been showing that that adjustment doesn't necessarily happen quickly. It doesn't necessarily happen at all in certain regions of the country. So what happens is a town that loses its factory may never ever recover.

Cathy O'Neill (6:56)

So there are two big things going on here in terms of economics. We can more or less concede, I think everyone can concede that $20 an hour heavy industry manufacturing jobs are not globally optimal for a global company like United Technologies, which can get just as good Mexican workers to do the same thing for a tenth of the price. So those jobs disappear and then the question is, what happens to those workers and there are two answers in the sort of economic literature. One is they move into the services sector. So you move from manufacturing into services. 70% of the US economy is already services and it's only rising. The problem with that is that service industry jobs don't pay as well as manufacturing jobs, especially not if they're union jobs, which a lot of these jobs were. And then the second answer to the question of what happens to these workers is they move to where the jobs are. They've gone, they're in some town which was a big manufacturing center. And then eventually what happens is those formerly big manufacturing centers start shrinking and the people move to other places where there are more jobs, again probably in the services industry. And again, what seems to be happening is that especially once you reach kind of middle age, people don't really move to where jobs are.

Felix Salmon (8:30)

Yeah, to put a couple of numbers on it, like about a third of the manufacturing jobs have been lost since 1990 in this country. So that's just a massive, millions of jobs have been lost. The study that Jordan was referring to by Otter, Dorn and Hanson argued that actually if you just consider the effect of China, of the jobs lost to China, about a fifth of those manufacturing factoring jobs were lost directly to China. So we have these Chinese workers who are willing to work for less. And yes, you're right, Felix, that of course the manufacturing jobs that are left, 2/3 of them also pay less in general. And I want to add one more wrinkle to this, which is that the people that are hit the hardest, that are like have the hardest time getting another job, getting a good paying job or moving are all the people that typically haven't actually had any college, didn't even necessarily finish high school.

Cathy O'Neill (9:21)

And so these people are voting for Trump.

Felix Salmon (9:23)

Yes, they are.

Jordan Weissmann (9:24)

Well, it's.

Felix Salmon (9:25)

And they're dying from overdoses too. There's the same group of people talking about it.

Jordan Weissmann (9:28)

It's not, you know, whether or not they're actually voting for Trump in areas that have been hit hard by trade is like, is not entirely clear. I don't want to dive too deep into the weeds on this because we're not a politics show. But I like when you actually look at the counties that Trump is winning, it's not clear he's winning places that were especially decimated because of trade and any more so these winning other counties.

Cathy O'Neill (9:50)

Okay.

Jordan Weissmann (9:50)

But I want, I want to start, I kind of want to step back here because we're coming down very hard on free.

Cathy O'Neill (9:56)

I'm not well I'm all in favor of free trade. Okay.

Jordan Weissmann (9:58)

So yeah, I want to make the point.

Felix Salmon (9:59)

Let's get to that.

Jordan Weissmann (10:00)

Actually, I want to make the point is like one of the problems with the politics of free trade is that the downsides are extremely, extremely evident to the people who suffer from them, the people who lose their jobs. It's very, very obvious when your factory has been shut down and sent to, and the jobs have been sent to China, the benefits you get from free trade are a little bit harder to notice. One thing is cheaper prices. You know, how have has America really, I mean, is the typical American better off because of trade with China? Possibly. Because it's probably kept inflation really low on certain kinds of consumers.

Cathy O'Neill (10:34)

And it's not just inflation. I mean, look at your iPhone.

Jordan Weissmann (10:37)

Yeah.

Cathy O'Neill (10:37)

You know, you couldn't have that if you had to make it all in.

Jordan Weissmann (10:41)

Yeah. I mean it would be significantly more expensive.

Felix Salmon (10:44)

This is not a story about net benefit because as, as the country we've benefited from free trade, the question is, who has lost? Yeah. And how are they going to be compensated, if at all?

Jordan Weissmann (10:52)

And that's the thing. We've done a really shitty job compensating people.

Cathy O'Neill (10:55)

And what's more, the frame, especially in an election year in the United States of America where the only people who are allowed to vote are United States citizens, is relentlessly domestic. And so what happens is that no one talks about all of these great jobs which are being created in Monterey. Right. No one thinks that the people who are managing to move from impoverished lives in Chiapas to good manufacturing industry, you know, middle class Mexican lives in northern Mexico, like, that's really good for Mexico and Mexicans. But somehow because Mexico and Mexicans aren't allowed to vote, we can kind of just consider them to be the enemy and we don't care about them.

Felix Salmon (11:35)

Yes, that's a great point. I mean, how much this benefits China has been absolutely massive and much larger than the amount of suffering going on in the United States. Although it's hard to say that to someone who's actually going through that suffering. But yeah, it makes me question whether I'm a citizen of the United States or whether I'm a citizen of the world. Like, how do we decide whether free trade is something we want or do? Or is it that too simplistic? Should we contextualize that with saying what should America do? Why is, by the way, I think that it's true that the Americans have suffered more. Like college uneducated Americans have suffered more than in other Countries with free trade.

Cathy O'Neill (12:10)

There's a famous graph which gets does the round on Twitter every so often showing basically the increase in earnings for various percentiles of the global earnings distribution over the past 20 years or so. And everyone has seen substantial increase in earnings except for the very, very poorest. But if you start in about the 15th percentile of global earnings all the way through to like the 85th percentile or the 90th percentile, there's massive increases in earnings. And then the top 1%, as we know, have done really well as well. And then the weird thing is there's this dip between about 90 and 96% where the earnings growth has been zero or even negative. And that is the Western middle classes, the Western working classes, basically. And those are the losers of, from free trade.

Felix Salmon (13:07)

And going back to Jordan's point, like we're not. I wouldn't argue against free trade really because, and people say this a lot and it's true, like you wouldn't want these jobs necessarily to come back to the United States. The question is, and by the way, it's not the only thing that's decimating jobs. Like just the robots doing jobs is another huge factor that's harder to point at, but it's there.

Cathy O'Neill (13:26)

Yeah. And plus we have no idea whether those jobs would still exist if NAFTA and the WTO and all of those things had not been signed. But, but probably they wouldn't. I mean, jobs are like water. They kind of manage to flow around to where they're cheapest, regardless of what agreements.

Jordan Weissmann (13:45)

Just to illustrate that point, one of the reasons people don't think there are two major trade deals and two really huge trade deals in the past 30 years. There's NAFTA and there's China entering the WTO. And most economists don't think NAFTA actually made that much of a difference when it comes to jobs specifically. It may have affected wages. But part of the reason is that, Felix, as you're hinting, they think about 80% of that increase in trade between China and Mexico, I mean, the United States and Mexico, excuse me, would have happened anyway. So it's not as if these trade deals alone are facilitating globalization. There are other factors at play.

Cathy O'Neill (14:15)

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Felix Salmon (14:39)

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Cathy O'Neill (14:41)

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Felix Salmon (14:55)

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Felix Salmon (15:54)

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Cathy O'Neill (15:54)

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Jordan Weissmann (16:06)

Yes?

Cathy O'Neill (16:07)

Can you explain? Because intuitively I feel like this is exactly the same conversation, but I'm not entirely sure I can really articulate why. What is the. I feel. I feel like gentrification and like, the US Mexico thing, it's kind of the same conversation. Just ontogeny. Recapit. Phylogeny.

Jordan Weissmann (16:26)

Yeah, I think so. I think.

Felix Salmon (16:28)

I think you're actually.

Jordan Weissmann (16:29)

You're onto something here, because free trade, we talk about how it might be good overall, but there are certainly losers who we have to figure out how to compensate. Gentrification, it certainly makes a city richer overall. It seems to make cities richer overall. There's actually.

Cathy O'Neill (16:46)

In terms of money or in terms of more than just money, actually, money.

Jordan Weissmann (16:49)

Money does make it richer in terms of money. In terms of, you know, culture. In terms of, you know, I mean, reviving.

Felix Salmon (16:56)

That's.

Jordan Weissmann (16:56)

No, no. I. Some neighborhoods. Yeah. Revive some neighborhoods. Like. And I. And we'll get to this argument later. But. And also, frankly, it actually benefits A lot of the studies have found it actually benefits a lot of residents in those neighborhoods. Previously, some people. A lot of people are not displaced by gentrification. And they reap the benefits of.

Cathy O'Neill (17:16)

They just see their rents go up a little bit.

Jordan Weissmann (17:17)

But they also see possibly they may be in a rent controlled building. It's. There are a lot of factors.

Cathy O'Neill (17:23)

They might own their apartments, in which case they become millionaires.

Jordan Weissmann (17:25)

Yeah, but. Or, you know, they have to deal with higher taxes, but, you know, they still get the new restaurants and bars down the street. However, I don't think there's anybody who would try to argue that there are no losers from gentrification. Some people are displaced, and we have to figure out, how do we help those people? What do we do for them? So why are we talking about this? Well, this week, Mayor Bill de Blasio in New York finally managed to push his major affordable housing initiative through the city council. And this is actually pretty controversial because there were protesters showing up. When he first tried to get this idea through, it was shot down by all the community boards in the city.

Cathy O'Neill (18:04)

Okay, so I'm gonna stop you right there, because this is the weird. This is the first weird thing which you need to explain to me.

Jordan Weissmann (18:10)

Yeah.

Cathy O'Neill (18:12)

In my sort of model of New York City, you have Bill de Blasio, who comes in on hard left, kind of. We are going, I'm sort of anti gentrification. I'm gonna stand up for the people who hurt by gentrification. He comes in with his Bill de Blasio redistricting rezoning plan, which is presumably meant to address all this. And then you get protesters. And when I think of protesters, I think of community activists. I don't think of, you know, big developers who want to gentrify. But wouldn't it be the gentrifiers who would be opposed to Bill de Blasio's rezoning plan?

Jordan Weissmann (18:57)

No, gentrifiers are okay with it.

Felix Salmon (18:59)

So, I mean, developers worked with de Blasio. That's the reason people project.

Jordan Weissmann (19:04)

So de Blasio has always been very friendly with developers, more so than a lot of people realized when he was running. So what does this plan consist of? Well, basically, what he wants to do is rezone large swathes of New York City, a neighborhood, for instance, in Brooklyn called East New York, parts of Harlem, parts of the South Bronx, so that you can build denser and basically you can build luxury towers. Let's be real. That's what they're doing. They want to make it look like parts of Williamsburg, but without getting too.

Cathy O'Neill (19:30)

Like, you know, gnarly about various different New York city neighborhoods, which 90% of.

Jordan Weissmann (19:34)

The Williamsburg, I think is a byword for most people. But anyway, the trade off is that in order to build these towers, you have to set aside a certain amount of the units for affordable housing.

Felix Salmon (19:46)

Okay, now here's where I'm going to jump in, because this is actually math.

Jordan Weissmann (19:49)

Yeah.

Felix Salmon (19:50)

And it's, it's a sleight of hand that de Blasio has used. I'm, I'm one of the protesters. Just to be, to be, to be clear, it's. It's all based on what's called the median income for the family of four. If we think about. Just let's fix a family of four, the median income of the city versus of the neighborhood. So the critical thing is that when new development is made there, there's some, some amount of that apartment building that's going to be set aside to be so, so called affordable. But the affordability benchmark is the median income of 86,000 for a family of four. For the whole city.

Jordan Weissmann (20:23)

Yeah. And so it's like 60% of that is like, what. So it has to be someone who's making a family that's making like $46,000.

Felix Salmon (20:29)

46,000 and great. $46,000. That's what it's supposed to be affordable for. But if you look at East New York, which is where it's actually happening right now, the median income in East New York is $35,000. So what you.

Cathy O'Neill (20:40)

So, so everyone there is eligible. Great.

Felix Salmon (20:43)

Well, but the point is that if you replace what they have now with something like this luxury tower, they're only going to be able to afford part of that luxury tower. And the rest of it is going to be actual gentrification.

Jordan Weissmann (20:53)

Well, they're not even going to be able afford that luxury tower because it's supposed to be affordable for the family making 46,000, not 35.

Cathy O'Neill (20:59)

Let me just. I'm still being really slow here.

Jordan Weissmann (21:01)

Yeah.

Cathy O'Neill (21:03)

Is this some weird kind of Nixon in China thing? Like after we had Rudy Giuliani and Mike Bloomberg, the gentrifier extraordinaire. Why are we now protesting Bill de Blasio, who one would think would be the least gentrification?

Felix Salmon (21:20)

Well, you know, his plan would actually be a good thing if it happened in Manhattan in a, like, Upper east side. If the Upper east side replaced one of their really tony apartment buildings with one that has affordable housing based on this $46,000 figure, that would be an improvement. But what he's doing instead, so far, we'll see. So we'll see. But so far, what he's doing is way below expectations, given that he came in as an Occupy mayor and he's actually gentrifying East New York.

Jordan Weissmann (21:47)

You know, I. Yes, he's gentrifying. Yes, East New York is going to gentrify. Here's the thing. New York City is at, has been adding about 75,000 people per year and has to somehow keep up with that housing demand. You can talk about keeping it, like these neighborhoods affordable for people already in the neighborhoods. However, there's this greater issue of just keeping New York City affordable, period, for the middle class and lower middle class of New York City. And once you're getting to people making $46,000 a year, those are people who need affordable, who need apartments, who are right now being priced out.

Cathy O'Neill (22:22)

What we have in the really big picture here put all questions of affordable housing and median incomes and all of that to one side is a very simple question of supply and demand. As Jordan says, we have an increasing population of New York City because it's an awesome place to live. And we have a housing stock which is not, which is not increasing as fast. And we also have a demand for bigger and bigger apartments. So the number of like square feet per apartment is going up. If you put all of that together, you naturally just very simple supply and demand get house prices, housing prices, rents, all going up. And the only, the only way that you can really address that issue is by building more. And the main thing that any zoning change does, the main thing that this zoning change does, is to encourage people to build more square footage. And in more square footage and more apartments is the only way that you're going to allow people to be able to afford to stay in New York. And the whole question of median income and affordable housing and affordable rents and gentrification of, I feel, is kind of a slight sideshow to the big picture, which is supply and demand and we need more supply.

Jordan Weissmann (23:40)

Well, I totally agree. I think, I think that's half true because, yes, we need more supply. We need more supply. We need more supply. However, there's. Are we ever. Is New York ever going to start looking like a city such as Chicago where they actually managed to overbuild partly because the population just wasn't growing while these condos were going up all over downtown? I find that a little bit unlikely. And so if you do just build and you don't have some set asides to affordability you're probably not ever going to get to like the Matte Iglesian dreamscape where you just have so much housing that everyone can afford a place. It's just not going to happen realistically, unless there's a bizarre building binge. I'll also say what often gets left out of this conversation is the alternative to a plan like de Blasios. People talk about the problems with it, but they don't necessarily say what you should do. Instead. One take is that you should have a, you should have more stringent limits for affordability. And then you get the developers saying, well, we can't make money and blah, blah, blah, blah, blah, gets really arcane quickly. The other approach, which I haven't never really seen a great analysis of this, but would be for New York to try to act more like other cities around the globe and actually build decent public housing. That would be almost like Stuy Town, you know, a big, almost like middle class, little lower middle class public housing. And that's just an idea that never really gets much of a hearing anymore for, I think because it's so unfashionable. But it's something might be interesting to talk about in the future because it's not necessarily incompatible with what de Blasio is doing now. That might be a step down the line.

Felix Salmon (25:06)

Listen, I'm going to, I'm going to step back even further. I totally agree that the supply isn't there, but I just want to talk about, you know, very abstractly, why do we want affordable housing in a city? Why do we want anything but rich people in a city? Like, you look at a place like San Francisco. There was an article this week that said they're going to redefine who is, who qualifies for affordable housing benefits as people who make up to $250,000.

Cathy O'Neill (25:32)

That was Palo Alto. Palo Alto is its own, like, little universe of crazy. There's this wonderful letter in the local paper a few years ago in Palo Alto, where. Which literally finished with, you know, when will someone stand up for normal millionaires like us against these billionaires?

Felix Salmon (25:50)

Yeah, I mean, so it goes back to the question of cultural richness too. I mean, we can have an argument about exactly what that means. But I do think that if we, if we went straight to, hey, we don't care, like, poor people just move out. And by the way, I should mention that there's been an amazing WNYC thing about gentrification in Brooklyn, which we'll put put on the webpage, which illustrates it's not just about new development. It's also about just literally evicting people, selling the house from underneath them because they can resell it for more money. It's a crazy thing. It's happening right now. Is this a bad thing? I mean, it seems bad to the people that have that it happens to.

Cathy O'Neill (26:27)

But it means there's more artisanal coffee shops and you can never have too many artisanal coffee shops.

Felix Salmon (26:32)

It makes the question of like, you know, if we don't have an. If we don't have housing that's affordable to poets and artists, then we will not have culture in our city.

Jordan Weissmann (26:39)

Well, it's also just fairness, right? I mean, you don't want to kick all the poor people out of your city because that's where they have to work. If you have, if you have any sense of economic, if you have.

Felix Salmon (26:47)

No, it's not just for the servants though.

Jordan Weissmann (26:48)

No, no, it's not about servants. It's just like if you're, you know, cities are job centers. Like if you want to have a thriving and like it show, you know.

Felix Salmon (26:55)

But we don't move here because of that. We move here because it's a great place to be.

Jordan Weissmann (26:59)

But I mean, in terms of why we care about this, I mean, you know, studies have shown that when low income families have longer commutes, you have, when there are longer commutes in general, you have less intergenerational mobility. People have a harder time moving up in the world.

Felix Salmon (27:10)

And that's true in rural areas too.

Jordan Weissmann (27:12)

No, no, but exactly. But in general you want to keep people. You want to give working class people easy access to jobs and be able to live a normal life. And that's why we do care about keeping them a city. It just. How is the best way to do that? It's not just about cultural richness. I think that's almost a little bit. It's almost like a self serving way of putting it, if you think about it. Because it's saying, oh, I care about the aesthetics of my city. It's not just a sex. It's about making, giving everyone opportunity.

Cathy O'Neill (27:35)

All right, on which note, we are going to move on to the millionaire bankers because they are losing their jobs as well.

Felix Salmon (27:46)

Very sad.

Cathy O'Neill (27:46)

It's very sad. 6,000 of them. I do need to mention first that this podcast is also sponsored by Carbonite. You know who Carbonite are. They're the best backup system for your computer. And so it's very simple. You install Carbonite on your computer, it automatically backs up Everything you need in your entire life to the cloud so that when your computer, you know, suddenly falls into a vat of artisanal coffee, you're fine. You just buy a new computer and download all of your stuff onto your new computer. And like, what is the problem here? I mean, people get so upset about this.

Felix Salmon (28:27)

No, seriously.

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Jordan Weissmann (29:00)

The hotness.

Felix Salmon (29:01)

I have to admit, I don't know really what happened. I didn't do my homework. What is going on with Credit Suisse? You guys seem so excited about it that I was like, I'm going to.

Jordan Weissmann (29:07)

Let them, to be honest, not clear that the CEO even really knows what was going on.

Cathy O'Neill (29:11)

So the CEO of Credit Suisse is this guy Tijan Tiam, who is. He was this sort of high flying McKinsey consultant type who then became the CEO of Prudential, which is this sort of retail kind of insurer in the uk, and then became the CEO of Credit Suisse, which is one of the biggest financial institutions in the world. And every step people were saying kind of, are you sure you can do this? And he's like, yes, yes, I'm sure I can do this. But he came out in October and had this huge plan for Credit Suisse and then he came out last week and had a whole other plan for Credit Suisse based on the fact that what he thought was going on in October was not actually what was going on. He's like, they never told me that they had this massive position in Illiquid Distress Securities. Basically, he is screwed up this thing enormously. The big picture, and we've talked about this before, oh, Credit Suisse is that he wants to stop being an investment bank and start being a wealth manager in Asia and the Pacific for all.

Felix Salmon (30:25)

Those Chinese people, for all those rich.

Jordan Weissmann (30:27)

Chinese people who are now like fleeing.

Cathy O'Neill (30:29)

And he's investing a huge amount of money in trying to persuade the rich Chinese people to sign up with Credit Suisse with no obvious great success. The wealth management division of Credit Suisse is actually weirdly losing money sometimes in some areas as it tries to expand and recently had this crazy scandal where there was this sort of Russian Georgian billionaire called Bidzene Ivanishvili, who asked Credit Suisse to move. In 2009, he asked Credit Suisse to move his safe U.S. treasury bonds into, like, the risky stock market because he reckoned that he was smart and he got it right. And he's like, I want more risk now. And Credit Suisse didn't do that. And they kept him in treasury bonds. And then he got really angry justifiably and said, look how the only thing.

Felix Salmon (31:22)

They'Re supposed to do as wealth managers is do what wealthy people tell them to do.

Cathy O'Neill (31:25)

Pretty much. And so. But. But so what they did instead was they secretly, without telling him, started making a bunch of ultra ultra risky trades in his account in, like, the Russian stock market to make up for the losses.

Felix Salmon (31:41)

Wow.

Cathy O'Neill (31:41)

And then they started doing that for. Well, yeah, then they started doing that for other clients.

Felix Salmon (31:46)

Wow.

Cathy O'Neill (31:47)

And they started doing all of this unauthorized trading in these client accounts. And then, of course, as unauthorized trading always does wind up. Wound up blowing up in their faces and they lost money. And the whole thing is just a.

Felix Salmon (31:57)

Matter of why their wealth management division isn't doing well.

Jordan Weissmann (32:00)

So there are two specific stories out. First, can we go back to the illiquid securities? Because this is so this is the.

Felix Salmon (32:04)

Stuff he had to get out of in order to.

Jordan Weissmann (32:06)

I want to understand this. So let me. Here's my. I saw this news story and a few other. Me and a few other people on Twitter who aren't like, uber finance geeks were kind of like, what? Like, can you actually manage this bank? Which he basically, he said, we have to write down, like, $250 million because we just have these securities on our books that we can't really trade, and they're losing money and I didn't know about them.

Cathy O'Neill (32:29)

They were selling them. This is. Okay, this is the craziest story.

Jordan Weissmann (32:33)

Yeah. So what the hell happened here that he supposedly did not even know about? Now he's losing all these millions.

Cathy O'Neill (32:38)

So back in October, he was like, we have this awesome Distress desk. We have this amazing business in CLO's. We're the world beaters on this and we love these people. And those are one of the few bits of the investment that we're not going to cull. And everyone goes, okay. And then fast forward about six months and he's saying, oh, no one told me that we had this awesome Distress desk and this huge position in Clos. And it turns out that sometimes these positions go up in value. And sometimes they go down in value. And these ones went down in value. And that freaked me out. And no one told me. And really, how could they not tell me that these things could go down in value? And so what I did was I panicked and I just told them to liquidate the entire position. And I told them that in like a public press conference basically, so that the entire rest, so that the entire rest of the world knew that Credit Suisse had to liquidate its entire position. So then that just meant everyone else just marked down their prices because they knew there was a force seller out there. And then I lost hundreds of millions of dollars. And wait, this is my fault?

Felix Salmon (33:50)

Okay, so in either case it's his fault, right? Because either he knew about these positions and he's now saying he didn't.

Cathy O'Neill (33:56)

Oh, he didn't know about them. But the problem was that the minute that these positions, which he was saying were a really good thing back in October, started losing money, he panicked. And the last thing you want to do in that situation is panic. You go, oh, well, if I'm serious about investing in this business, then I have to treat these illiquid positions as long term and you know, things on my balance sheet. And if you're not serious about it, then you should never have committed to it in the first place.

Jordan Weissmann (34:22)

So that's story one. So this guy. So right now you have a company where the CEO is apparently like doing the most damage of anyone. But at the same time I saw that they're now investing in or they're now starting a new business with Palantir, meant to. Which is the kind of data spying company?

Felix Salmon (34:40)

Yes. Palantir is the company that helps unite the federal government choose targets for drones, among other things.

Jordan Weissmann (34:46)

And also they help sort through when they're trying to collect data and you know, for espionage activities or for national security monitoring, all sorts of shadowy stuff. Anyway, they're now working with Credit Suisse for on a project to identify rogue traders. And this brings up the question in my mind of are they going to.

Felix Salmon (35:02)

Take them out with drones?

Jordan Weissmann (35:05)

That would be amazing. But. So I guess this whole thing with Credit Suisse's CEO makes me wonder, A, is this an example of megabanks being too big to manage or is it just kind of the quirks and sort of failings of this one dude? And B, could there be a. I mean, could this actually result in some innovation? His, his inadequacies result in some innovations here that make it easier to manage.

Cathy O'Neill (35:30)

Giant banks using big data so there's the most wonderful, awesome, brilliant answer to this. Okay, you're going to love this so much.

Jordan Weissmann (35:39)

Am I going to be happy or sad about the answer?

Cathy O'Neill (35:41)

Okay, number one, Credit Suisse, like all systemically important financial institutions, is too big to manage. And we have learned that. And you can blame the current guy, but ultimately it's not at all obvious that anyone is really capable of managing an institution of this kind of complexity and size and geographic disbursement. That's the first thing. The second thing is that, yes, they've managed to get Palantir to come in to try and prevent rogue trader losses which may or may not work. Might well work, actually, because most of these losses can be, you know, you look back with hindsight and go, how on earth did we miss that? So you should be able to pick.

Felix Salmon (36:25)

The very fact that like, the rogue traders typically never leave the office.

Cathy O'Neill (36:29)

Yeah, I mean, so they. So there's been, in most financial institutions, you have mandatory vacations for precisely this reason. So that people notice when a trader goes and then they have to be managing their positions. There have to be better ways of noticing this kind of behavior than just mandatory vacation or just waiting for the explosion. Or just waiting for the explosion. But Credit Suisse has found an even better way still. And from another Swiss institution, and this is my favorite bit of the entire story, which is they've gone along to Zurich Re, which is another huge financial institution in Switzerland. It's a reinsurance company, and they've bought 700 million Swiss francs of, get this operational risk insurance.

Jordan Weissmann (37:19)

Oh, no, wait a second. So it's like we can't.

Felix Salmon (37:21)

They're insuring their own stupidity.

Cathy O'Neill (37:23)

Yeah, they're basically. But they're buying insurance against rogue traders.

Felix Salmon (37:28)

Holy crap. Doesn't that mean that, like, now that they have insurance, they can be even more careless?

Cathy O'Neill (37:33)

Yeah, I mean, there is a certain amount of moral hazard. But they do, they do have like a three and a half billion Swiss franc first lost tranche. But this is the most amazing thing. They are literally buying insurance against their own incompetence.

Felix Salmon (37:45)

And they're selling it to their customers, I assume.

Cathy O'Neill (37:47)

And yes, they are. Yes, they genuinely are selling it to, to their own customers. This is where it just gets so wonderful. Zurich Re is keeping a certain amount of like the second loss tranche and then like the third lost tranche is now being packaged up by Zurich Re and then sold back to Credit Suisse's customers as a security.

Jordan Weissmann (38:08)

That's people, People. Such little faith.

Felix Salmon (38:11)

Anybody who, like, defends finance as being a useful industry is going to have to listen to me talk about this.

Jordan Weissmann (38:17)

This is. That's amazing.

Cathy O'Neill (38:19)

It's the most wonderful story in the world.

Jordan Weissmann (38:20)

That's just like throwing up your hands and saying fuck it all.

Felix Salmon (38:24)

That's crazy.

Cathy O'Neill (38:25)

So Credit Suisse, may you always just innovate like this because it's, it's amazing.

Jordan Weissmann (38:30)

To behold the systemically important hot mess that is.

Felix Salmon (38:33)

Are there credit default swaps on that stuff?

Cathy O'Neill (38:35)

They might. They basically are these, these operational risk insurance securities are a little bit like binary default options on rogue traders.

Felix Salmon (38:43)

Wow.

Cathy O'Neill (38:45)

Okay, enough credit sweeps. Because like, this is the story which is just going to run and run. We can tell numbers round next. But first, we are also sponsored this week by Mileiq. You will like Mileiq because you drive a lot. You listeners out there, we love you in your Listening to Slate Money in your cars. And what you want to be doing in your car is listening to Slate Money and other amazing panoply podcasts. And what you don't want to be doing in your car is spending a bunch of mental effort totting up how many miles you've been driving, how many of those were personal, how many of those were business, multiplying the business miles by $0.54 per mile, filing reimbursement claims, putting them on your tax forms, and all of that kind of random crappy paperwork. Which is the worst. Am I right?

Felix Salmon (39:33)

It's so wrong. It's so bad.

Cathy O'Neill (39:35)

So what you do instead is you just install Mileiq on your phone and it does all of that for you, and it just does it in the background automatically. And I don't, I can't talk about you, but I can say the average mileiq user logs $547 a month in drive. That's over $6,000 a year. This is an app which pays for itself like no app you've ever used. So text slate money to 31996. You'll get a free trial and you'll also get 20% off the price of an annual plan. So 31996, text slate money to 31996. 20% off. Mile IQ. Save money, make money. It's awesome pants.

Felix Salmon (40:24)

Yes, it is.

Cathy O'Neill (40:25)

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Felix Salmon (40:27)

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Cathy O'Neill (40:29)

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Jordan Weissmann (40:29)

Okay.

Felix Salmon (40:30)

Awesome sauce.

Cathy O'Neill (40:30)

Yes. Kathy, what's your number?

Felix Salmon (40:33)

100.

Cathy O'Neill (40:34)

What does that mean?

Felix Salmon (40:35)

That's the number of mysteriously missing concussions. Did you guys read about this?

Cathy O'Neill (40:40)

Oh, yeah.

Felix Salmon (40:41)

I have like, I have a bet on with my friends that the NFL will be gone. In 10 years.

Cathy O'Neill (40:48)

Because the NFL and the New York Times actually had this whole thing where they talked about how the NFL is explicitly taking moves out of the tobacco industry playbook, which you've got to say is not a good lie.

Felix Salmon (41:00)

The lobbyists from the tobacco industry are helping the lobbyist from the NFL concoct studies on concussions and their, and their effects and what they had, what they found. The New York Times did this, studied the studies and found that they were missing 100 concussions from teams where they were counting the team's games as concussion free. So it's not like they weren't just missing the data. They were actually saying, oh, these. For whatever reason, for many, many years, these teams had no concussions at all.

Cathy O'Neill (41:29)

So this is, this is the most amazing thing. The NFL was trying to work out how frequent concussions were. And so they looked at the total number of concussions and divided it by the total number of games. And they just conveniently forgot to mention that a whole bunch of these games were played by teams which simply didn't report concussions. They said, well, if you didn't report concussions, obviously there were no concussions.

Felix Salmon (41:54)

Right. So the numerator was much smaller than it should have been. The denominator was the right size. And so it's a real underreporting. As a data scientist, this is a very offensive to me especially I'm going to figure that these concussions were available in public injury reports. So it's not like they were. It's unavailable data. They just simply didn't collect the data.

Jordan Weissmann (42:12)

Yeah. I will say I'm pretty sure Trump voters will keep the NFL around for at least 10 years, more, if not longer.

Felix Salmon (42:18)

If the NFL is still here. At least I think that the number of high school football teams are going to go down.

Jordan Weissmann (42:23)

That I think is actually the biggest crisis for football is parents should be. Felix, you're looking at me as if you want me to share, go share your number. I'm giving you that number.

Cathy O'Neill (42:32)

I'm all in favor of Jordan numbers.

Jordan Weissmann (42:34)

Yeah. So My number is 25.6 billion. That is the size of Yale's endowment. And the reason I'm bringing that up is because right now the state of Connecticut is. There are some legislators who are talking about trying to tax it. It's kind of a roundabout tax where they would not have to pay it if they instead invested some of their returns in, quote, like job creation and education. It's. I don't want to get too far into the specifics. What I'M interested in here is the idea of an individual state trying to tax something like a college endowment and what sort of weird tax avoidance that would try. Like if that could ever be effective, essentially.

Cathy O'Neill (43:10)

So, I mean, it is quite funny. It's the state of Connecticut passing a law which applies to any Connecticut university with over $10 billion in endowments.

Felix Salmon (43:18)

Right. Which applies only to Yale. But listen, there's been a lot of discussion which, which we should actually have, I think at some point of the university endowment funds or universities are just hedge funds with little bit of academic institution attached.

Jordan Weissmann (43:32)

Felix and I have both written about this. We're among like 20 million other people. And I feel like we keep promising to have an episode where we discuss this.

Cathy O'Neill (43:38)

We will have an episode about this. To answer your question, Jordan, I feel that this particular piece of legislation would probably just create effectively shadow endowments.

Jordan Weissmann (43:50)

That's kind of what I was thinking too.

Cathy O'Neill (43:51)

And if I wanted to give $400 million to Y, I wouldn't give it to Yale. I would give it to a non profit foundation I created whose sole purpose was to give 5% of.

Jordan Weissmann (44:01)

It's kind of a super pack. And that endowment, it's like an academic super.

Felix Salmon (44:05)

No, seriously, you're working for things that Yale cares about.

Jordan Weissmann (44:08)

Yeah. That foundation would be in the Cayman Islands and it would, it would be able to invest in all sorts of interesting things. Yeah.

Cathy O'Neill (44:15)

Which the Yale endowment already does. But yes, we will, we will talk about endowments because it's a fascinating subject. Maybe we will wait for Mohamed El Erian to come back.

Felix Salmon (44:25)

Yeah, he knows that stuff.

Cathy O'Neill (44:26)

He knows that stuff.

Jordan Weissmann (44:27)

Oh my God. Wait, that would be. Wait, that would be an amazing episode. We have to get Muhammad back for that.

Cathy O'Neill (44:31)

We'll ask if Muhammad will come back to talk about endowments. My number. Because if there's one thing we like to talk about on this show, even more than Credit Suisse Argentina is Valiant.

Felix Salmon (44:41)

Oh, Valiant.

Jordan Weissmann (44:42)

Okay, we got.

Cathy O'Neill (44:43)

My number is 1.5 million. One of the biggest shareholders in Valiant was this fund called the Sequoia Fund. And My number is 1.5 million. 1.5 million is the number of shares that the Sequoia Fund sold at the absolute low of Valiant's share price just after it completely imploded.

Felix Salmon (45:06)

The CEO of Credit Suisse told them to sell.

Cathy O'Neill (45:08)

At that moment, after holding onto this stake forever and ever and ever and ever, they finally unloaded one and a half million of their shares. But my, the reason, I'm. The reason that I'm picking on this as a number is not to pick on Sequoia so much as to pick on the wonderful double speak of finance. Because if you ask Sequoia why on earth did you sell these shares at the absolute low, they will tell you, oh, it's because we made a really stupid investment. We sold way too late. No, they won't tell you that. What they will tell you is, quote, this was an effort to reduce investors taxes by booking capital losses.

Jordan Weissmann (45:48)

Oh, my God. Oh, just some tax harvesting.

Felix Salmon (45:51)

Oh, my God.

Jordan Weissmann (45:51)

Just a little bit of tax harvesting, that's all. Nothing to see here, folks.

Felix Salmon (45:54)

That's the nicest way of saying we lost money I've ever heard.

Jordan Weissmann (45:56)

Don't worry, don't worry. It's gonna reduce your bill.

Felix Salmon (45:58)

That is awesome.

Cathy O'Neill (45:59)

We're not losing money for you, we're reducing your taxes.

Felix Salmon (46:02)

You can't everybody, it's like tax season. So everybody's like, oh, that sounds good, let's reduce our taxes.

Jordan Weissmann (46:07)

I mean, no, tax harvesting is a thing. It's just not that kind.

Felix Salmon (46:11)

Oh, my God, that's awesome.

Cathy O'Neill (46:13)

Anyway, that is it for us this week. Thank you for listening to Slate Money. Subscribe to us because from here on in it's going to probably sound different. It's not going to sound like 95 Morton street anymore, right? There's going to be a whole new. It's going to be a whole new sound of Slate Money, which we will all discover what that is next week. Keep on writing to us. The email address is sleep money@sleep.com thanks to the producer Audrey Quinn, the executive producers Andy Bowers and Steve Lichti. Check out all of the Panoply podcasts@itunes.com Panoply and somehow from some studio or some location somewhere in New York City, we will talk to you next week on Slate Money. Sam.