Gillian Tett on Complex Derivatives and the Fifth Stage of Capitalism

SPEAKER_2 (0:02)

Bloomberg Audio Studios, podcasts, radio, news.

Tracy Alloway (0:18)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:22)

And I'm Joe Weisenthal.

Tracy Alloway (0:24)

Joe.

Joe Weisenthal (0:25)

Yes.

Tracy Alloway (0:25)

In the recent episode with Kaiser Quo, you dropped at the very end, because you said you were hoping that no one was listening, you dropped that you are coming round to complex financial products.

Joe Weisenthal (0:38)

You know, I did drop a little bomb there at the very end of the episode, because it's something I've been thinking about more and more. And I'll just lay it out very quickly, what I think about. Which is that one of the most influential episodes we've done in a long time in my mind was episode we did with Ricardo Hausman, who we either recently talked to or about to talk to, depending on when this episode comes out, et cetera, about complexity is a good thing. That's a sign of when wealthy economies are capable of producing complex products. That's usually a sign they get wealthier. That's mostly discussed in the manufacturing sense. And then lately I've been thinking, you know what? There are some wealthy countries that produce really complex stuff that aren't manufacturing, the UK, the US, et cetera. Mostly, much of it is sort of complex financial products. Maybe we need to rethink and maybe we need to sort of take a fresh light about why the market is willing to pay the creators of complex financial products so much. And maybe they're not as bad as sort of some of us thought. Or maybe we should be more proud of our financial creations. Lean into them a little bit more.

Tracy Alloway (1:44)

Justice for complex financial products.

Joe Weisenthal (1:47)

Yeah, because there was this other thing too, like in early 2010s, where people were like, oh, all the great minds were working on building derivatives when they should have been doing something else. And then they went and built social media and products to hack our attention to sell ads. Was that so much better? Anyway, I don't know. Maybe it's time to rethink the positives of finance in the world. Great financial crisis, that was history. Let's remember the good at parts. Anyway, it's just been on my mind lately. I didn't know you were going to say like, okay, now you have to do a whole episode defending this position, Joe.

Tracy Alloway (2:19)

Well, I'm being nice.

I brought you the perfect guest to discuss all of this. And I mean really the perfect guest. So this is actually someone I've wanted to get on the podcast for a very, very long time. I used to work with her at the Financial Times. I worked for her at the Financial Times for a while. We are going to be speaking with Gillian Tett. She is, of course, a columnist for the FT and head of King's College at Cambridge. Gillian, welcome to the show.

Gillian Tett (2:45)

Well, it's great to be on the show. And I think, Tracy, I often felt like I was working for you at the Financial Times. You were so much smarter than the rest of us, and you really blazoned a trail in many of these discussions.

Tracy Alloway (2:57)

Well, thank you so much for saying that. I hope my bosses at Bloomberg are listening.

Gillian Tett (3:01)

Yeah, give that bonus straight away.

Tracy Alloway (3:04)

You, of course, basically wrote the book on derivatives, Fool's Gold, which came out at a very fortuitous time, 2009, so right after the 2008 financial crisis. Talk to us about the genesis of that book, because I think a couple years before when you started working on it, I don't think a lot of people were thinking, oh, we need to write an entire book on how we got these things called credit default swaps.

Gillian Tett (3:28)

No, well, most people aren't quite as weird as me, but the reality is that I'm trained as a cultural anthropologist, which might sound like it's got nothing to do with Wall Street. And in fact, my PhD was based on fieldwork looking at marriage rituals in Tajikistan. So that's not your obvious starting point. But one thing that cultural anthropology teaches you is that as human beings, we all wrap ourselves up in assumptions and ideas we inherit from our cultural surroundings. And those often make us very blind to things that we ignore in our world. Social silence really matters. It's what we don't talk about that really matters. And starting back in about 2005, when I was running the Lex column at the Financial Times, I noticed that newspapers and politicians talked obsessively about equity markets, and sometimes credit markets and bond markets. But actually, when you look to what was driving revenues in the city of London, where I was based at the time, it was actually things like derivatives and credit derivatives, which no one talked about because they seemed to be geeky and technical and incredibly dull. But the reality is that things that look dull and boring, to a point we don't discuss them, are often the most important things in the world. So I became kind of fascinated by this underbelly of the city of London and Wall Street. I used to say that they looked like icebergs in that you had a bit poking above the surface that people talked about, which was the equity markets and a shadowy chunk than everyone ignored. So I dived in really starting in 2005 into the world of credit derivatives, initially to try and almost do a tourist guide to what was happening there for the wider Financial Times readership. This was a few years after the.com boom. And in the same way that my colleagues had gone around explaining the internet, I thought I could explain financial innovation and see what was really going on. But of course, it turned out to be considerably more deceptive and challenging and ultimately more dramatic than I ever imagined.