to the disaster if you like of the book which is when we are faced with a tremendous choice clearly the financial system has in bloated to a terrifying degree and many ideologies and principles on which finances have been based in the last three decades stand very discredited. right now we are in a kind of patching and mending phase where the government is desperately try and to keep the banks alive and keep some kind of the functioning credit system going and to ensure we are not going into another collapse. but further ahead we have hard choices to make. we meaning all the fuss in the u.k. and america but how are we going to actively shape the financial system? and it's tempting now to say let's try to chop all innovation out like people sometimes say when one goes wrong let's try to ban all drugs and stop the

entire product. but if we are going to do that we will face a world where the banking system operates on a much slower to much lower capacity where credit is much more rationed and it's going to be a much slower. so the question i would leave you with is as we look back at the story of jpmorgan, the story of credit innovation which parts of the innovation can we actually preserve and which parts can we throw out. is there a way we can actually take the original ideas about financial innovation that were developed in the 1990's and keep them for the good or is it the case all complex finances bad. i think looking back at real-life human beings and how they've tried to develop those ideas offers one way of showing that it didn't have to be like this. and so i hope that for the future it will provide a pointer of not just a terrible mistakes

that the banking industry's made but also some ways we can, try to control going forward. thank you and i would like to take any questions that you can speak eight at me. >> there have been a new complacency it seems to me in the credit derivatives markets. it's going to be exchanged trade, it will become more transparent. do you think there are rules that should be adopted? >> in terms of making rules more transparent? >> are there elements of the market that still trouble you? >> i don't think that the clearing house is an easy and perfect solution will, for one. i think there are good cases for extending a clearing platform

beyond the credit derivatives world. simply having clearing house and leaving elsewhere the derivatives of the clearinghouse creates problems. i think that there needs to be transparency still of how cbs are being used and the degree -- the credit derivatives are changing the way the creditors be a funny company goes into bankruptcy and quite a radical potentially untested manner and i think their needs to be more discussion how that is changing the way that creditors are behaving. but to think we have the clearing house and then take that is the end of the story i don't think it is true at all. >> gillian, you have the character in your book and martin --

>> who is actually sitting behind you. [laughter] >> so maybe you should turn it around. [laughter] >> and he worked very hard, did you not, to prevent -- [inaudible] do you think that he was right? >> i will say what i would like to say and then maybe we should let him. the dominant intellectual framework as on a understand as an outsider that drove the derivatives industry from the late 1970's onward is basically the debt would stifle innovation , excessive regulation and a few let the industry sort out its own problems through the natural market mechanisms that the edna and flow of the market's and competition combat pressured would provide a self

correcting mechanism and you might have periods of access but would correct itself naturally and they would find their own rhythm and the problem with that was twofold. one, when you have, the credit derivatives world as part of the overall financial system perhaps you could afford to have a few edna and flow even without a stabilizing all of it. and initially, when derivatives were developing in the 1980's and 1990s they seem now small the problem came when the expansions became so explosive that in a sense suddenly it stopped being just a small part of the financial system and began to populate throughout the system in a way the suddenly met with tv comment if you had eb and flow that could be potentially sterilizing. but the other problem was you never really had a free market and a sense of having true information flow, equal access

to information, and competition. you always had big banks distorting matters and so you always had a very murky information flows and i would argue never had proper free markets even in this supposedly free market system. it's quite less we have a system based on ideology where the majority of products never treated and it was all basically a figment of accountings imagination. >> so you think it should be -- [inaudible] >> i think it should be regulated. >> why? [laughter] >> i would say, and you're definitely putting me on the spot. [laughter] that when we set out to design a framework for the credit derivatives we could shift easily from a place, the mind of

the holder, to the rest preference allowing him to shift some place else, to someone else that would rather hold that risk and wanted to set up a framework where market discipline would be the guide to good behavior. now, you can look at the financial difficulties that we have around the globe today and ascribe them to in particular products, credit stifel swaps, and i am not sure that gillian has done that in her book. she talks about ceos, collateralized debt obligations are securities, they had none as a securities offering work. so they are involved in some ways. i would test the hypothesis thus nces have a special role to play in this problem by doing this and ask yourself if we would have this problem, if every american was current on his

mortgage payments i think the answer is clearly no. ask yourself if we would have these problems in the financial system if credit-default swaps had been outlawed on the date they were invented and never had come into existence. the answer is definitely hentges. the problem we have is a housing finance problem, it's not a credit to default swap problem. if there were no credit defaults swaps we would still have the housing finance crisis but would be harder to move the risks one place to another. succumb it doesn't seem to me that there is a clear case to make that a lack of regulation of credit diesels was contribute if they had been outlawed we would still have this problem today. >> i have two things i want to say to that. one is actually i think credit-default swaps did exacerbate the problem three reasons. first, that they made people

confident about lending more when they would have in the past because people felt they could shift the risk they kept lending in the lending and the volume of lending expanded quite dramatically. second, because the option of writing credit default contracts was there it provided another mechanism for investors to basically place more banks on the housing supply market in 2005 as i described in the book when they actually started to run out of the subprimal loans and were pumping out as fast as they could out all over america and actually ran out of some prime loans there simply were not enough to actually put into the ceos that was the point when the collision of two intellectual streams happened and became so deadly because essentially started credit derivatives contracts that were mimicked by the subprime mortgages which allowed investors to keep rolling the dice more and more on the

subprimal world. and third, the sheer capacity of the credit world meant the skill of leverage building up went undetected for a long time and it wasn't just cds baghdad but you basically had a situation where, again i describe this in my book in the spring of 27 everyone could feel biden that something was going badly wrong in the credit world and in fact regulators were meeting to get together to say we know something is wrong, what should we do. is there a way we can get the sense of how bad things are and quite apart from the fact that he had groups like the germans insisting talking about hedge funds and nothing else which wasn't particularly helpful, one of the problems was it was hard to pinpoint the scale of leverage and skills of risks being taken in the system because there wasn't the data and people were all looking in the right places so for example the scales built up on the balance sheets on groups such as city and merrill lynch that had utterly disastrous implications

towards the end of 27, that wasn't being debated but it wasn't on the agenda. there was little way for people to track that. and of the regulation issue with this is critical and something i think the new york fed grappled with at great length in 2005, 26 and a talk about this in the book in relation to some of the initiatives timothy geithner was involved with and period of the credit derivatives market. the theory somehow in a market all of the actors have a self-interest in the way of long-term and the basic pressures are somehow leading to the system of the whole be giving rationally has not turned out to be true in the credit world. and you can see that in a very tangible way on the issue of settlement in the cbs base because if you had a perfect rational free-market, you have a situation where everything but say i have an incentive to make

sure that i have huge backlogs of paper building up in my back office because guess what, that is irrational. maybe we are losing peepers and will have a limbo land. and of course the market group worked with efficiency. the problem was though that when innovation occurs in finance you never actually know which products are going to be successful and which are not and which ones are worth investing in infrastructure and which ones are not until several months after the product is launched. it took several years before it became clear which products are going to grow and they grew slowly than you could basically at each bank, and rationally basically build the infrastructure to process and settle or deal with these new products. in credit to derivatives the growth was so explosive no single bank had the time once they realized it was going to be successful to actually invest in the infrastructure and the

trading inside certainly had time or incentive to invest because that was someone else's problem, the back office guys in the back so you had all these reasons why you were not be heading rationally and there were structural distortions and incentives and then you get in the situation of the banks are furiously trying to grab a slice of the markets and none of them and to stop to build up infrastructure nor do they actually want to spend any money because guess what that's when to hit their bonuses, nor do they want to lose to their competitors so there isn't in that situation it isn't the case there's actually a rational self polemic and as an to get everyone to invest collectively it actually wasn't until timothy geithner when the new york fed stepped in and said let's try to get every one around the table to work out a solution that they began to do that. now, they could do that and they did with a degree of success but it was actually in some ways late in the day, they could do that in the case of credit

derivatives with the settlement problems because it was tangible and there was data and if you like there was an issue everyone agreed and was a problem but no one quite knew how to act. it was clear the free-market forces alone were of solving the you could get back on the table. terrible tragedy and the bank relators back in 2007 is also in the credit derivatives settlement area in the paper backlogs' it was clear there was a problem you could identify and there was data showing how big the problem was partly because they were counting hundred backlogs' their work. the general question how big is the leverage there was no data so you couldn't get all of the countries to get together and say listen this is out of control, it's mad, it's not self healing to read the free-market forces are not fixing the problem because it was amorphous moving too fast and it was hard to touch how big they had become partly because of the system >> could you talk a little bit about how jpmorgan exposed the

risk when it did? is their something about the institution, either having to do with its culture or its management process or was it simply a lucky coincidence? >> i think there was actually a lucky collision that happened at jpmorgan. basically the old jpmorgan had a pretty conservative attitude towards risk in some senses. and that back in the 1990's the had partly because they were less commercial than some of their rivals and they were less focused on the short term p.m. now partly because they had a rather bizarre internal corporate culture where people were going to stay there for a long time like joining the corps by and large when they were not bouncing bank to bank of the time. most joined straight off graduation and state ten, 20, 30 years and that created a strong sense of team and the spirit and the luxury be able to share

ideas in this unusual collegial manner and to give broad attitude towards risk. it's interesting in terms of the ways that the internal corporate cultures can change. not many between the banks that affect the outcomes. sold jpmorgan had a conservative attitude towards risk. but then they merged with chase somewhat sastre -- disastrously. then when he arrived he brought a set of attitude towards risk that in a strange kind of way time very well with a lot of the culture that was there among the jpmorgan guys and so from 2005 and all words they appear to have taken as far as i can tell having talked at length to the jpmorgan guys and other banks they talk a lot to words risk from some of their competitors. they were more systematic in terms of trying to model and

analyze and they were not just rely on a few models. the case for example where they were looking at the super senior product primarily through disastrous effects and using a unidimensional measuring risk wasn't the case with jpmorgan even though ironically jpmorgan -- having invented the said yes to this kind of useful but only as part of this set of techniques measuring risk. so i think that contributed. the other key thing was about j.p. dimond he was prepared to say something to the analysts on wall street and say no and that is critically important because from 2005 and all the words actually jpmorgan wasn't doing that brilliantly compared to his peers and there was a huge criticism from equity analyst saying why are you guys lagging behind? we thought that diamond was this wonder kid who was going to

basically solve all problems and in fact the revenues are not that great. now there are other banks responding to that intense pressure saying yes, we've got to try to start chasing after the credit revenues as fast as we can and there was a real kind of what people used to call goldman envy. everyone wanted to be like goldman sachs three diamond on a number of occasions actually said you know, we are not going down that road trying to beat everyone else purely through chasing after, you know, the quick and easy bnl, which again, doesn't mean it didn't make mistakes and i don't want to pay these guys as somehow perfect angels because they have made mistakes but there were decisions taken which i think it very instructive lesson. >> [inaudible] >> in terms of what was going wrong? >> yes. >> well, for example, when the bank started going in what was called the cbo basically taking

chunks of mortgage debt and slicing and dicing either through the actual tangible loans are increasingly towards the end through the derivatives of the loans there was a number of occasions where internally the jpmorgan investment bank tried to work out what the competitors were making more money than then and there was a huge debate on an number of occasions whether they should do the same, should they dashed on the root of the atf and copy that and the kept running of the numbers and couldn't work out how to make it pay on the seat crazy, crazy risks. and to say no was quite a balls a position that time because everyone else was dashing down the route pretty fast and other people were negative and on the rich even in late 2006 when there was already evidence that the u.s. housing market was starting to turn. that is one of the astonishing things that so much of the crazy risk-taking and crazy breaches of normal control occurred even

when there was evidence that the subprime mortgages market was starting to turn sour and mortgage lenders were starting to go bust, mortgage brokers any way. >> [inaudible] >> i'm sorry. >> i.c.e. a kind of cism developing and economics. the people think that it was a maladies find incentive within the institutions leading to excessive short-termism and others in economics fail to recognize the market doesn't have magic, that there is hardly any way to put prices on these exotic new assets. the future is highly uncertain, and if you can't do your own and do diligence to figure what the risk is of holding an asset it

doesn't really make any sense from the social point of view that you can still lead to someone else who is my ev enough to take on the risk because he won't know any better with the risks are than anybody else, so there is a huge amount of ignorance of darkness in the future the was blogging the market without awareness. it sounds like your book is toward the latter view than the first. >> yes? [laughter] >> my question is when you were describing very well in the book the way jpmorgan, people edna jpmorgan kept looking at what was going on in the market and some health or combination of luck and smarts going for it. but is their something about the financial sector that

competitive pressure especially when you have copies publicly traded companies sort of inevitably leads like competition does in most markets but when you have myopic investors and also people within the companies dealing with short-term investors and short-term incentives i guess the question is what do you do? clearly there's one place, jpmorgan and others who were smart and resistant but it seems like the logic of these marketplaces is to move to the point everybody acts really stupid. do we go back to partnerships? can regulation do it although the regulators get caught up in the logic. >> i happen to think when it comes to risk-taking partnerships would be a good idea simply because you need to create incentives inside banks or brokers to actually try to monitor each department to monitor the other department

with this sense of collective scrutiny and i think it is interesting but the banks appears to be better at docking of the bullet is goldman sachs where there is actually more sense of one department looking over the shoulder of the other departments, they are not all operating as silos and fierce competition with each other and actually secretive with each other as they are with the outside world and i think that is largely because or partly because goldman sachs partnership history still managed to view some of the corporate culture even today's wedding the partnership is one way to go down. i think unfortunately though that although people would disagree i think regulators need to get much more hands-on and involved and, you know, having a system whereby eckert finance years, bankers are essentially free to develop and innovate as fast as they want to whatever degree they want with very little extra oversight be it from journalists, regulators,

politicians, and somehow hope that they will through sheer spirits and collective rationality will keep their activities and check. they don't go mad is minute. it's not bring to happen. and the analogy i draw is if the people that run the nuclear power plants were paid per kilowatt of energy they pump out so you have to pump out as much as you can and the more they pump out the more successful they look i think they would have blown themselves over several times and they are not. we need to look in banking to other spheres of activity in the nuclear or pharmaceutical industries and ask what can we learn about risk country because one of the ironies everyone's talked about financial engineering until they are blue in the face. the directly and engineered building bridges you talk about things like safety margins, risks, talk to debate with other in juniors and scientists to think about the context of what

dredging you might even be taught occasionally about things like ethics and again some of those lessons outside need to be brought in as well. >> what sort of regulation would be the most helpful going forward? >> i could talk for another hour about that but i would say the regulation is critical because of the key reasons these problems developed is we live in a silo world. as the world around becomes complex there's a tendency for everyone to keep stirring around their special silo, but the tension is the one hand we need them to understand each silo and we often meet to see how they fit together be it inside banks, between banks, d.c. how banking sits in the rest of the economy so i am strongly in favor of moving towards more unified system of regulation or regulation oversight status. >> [inaudible] >> i think we need to move

towards that as well but in the u.s. it would be a good start to not have half a dozen feuding fragmented regulators that actually reflect the silo pattern inside the banking system. basically you have a bunch of silo private sector structures, you basically have them inside banks and between banks and complete lack of information disclosure and everyone is suspicious of everyone else and guess what, you have regulators reflecting no wonder there was nobody able to take a joined up picture how the system fit together or how they were building overall. >> what do you think this has given the financial journalists to discover what was going on? on the journalistic side of experts lack of expertise or bad incentives or what? >> i think it is a combination. on the one hand, the newspapers

like regulators tend to be sent out to cover the latest crisis and certainly in a lot of the press, in the early part of this decade that sexy parts of the markets were the equity market and things like that because guess what, that was sexy at the beginning. and the credit that has been sweeping the previous decade was regarded as a bit of a backwater and so you didn't have the kind of high status, you know, label attached to that area of activity. so that was one problem. another problem was actually not having lots of journalists were all over the eckert the world suited the bankers just find and i'm not saying there was a deliberate plot by the bankers of let's go into hide what we are doing but it was one situation that kind of fit to everyone will and in first became like the financial priest if you like to spoke financial latin and the congregation just sat there by and large they were

happy to let the priest speak in the latin jindal they did in the altar as long as they pressed everyone else from time to time and the financial priest felt no need to talk about anything other than financial latin so there was the feeling that actually this is rather complicated, let them go on with it. and of course politicians didn't have much incentive to rock the boat either because it was a fantastic credit boom so everyone was coming along and enjoying the party. there was also the symbol problem that almost anyone that understood what was going on in the credit as i say tended to work because guess what, they got paid ten, 20, 15 times more than journalists and the media reflected a bigger pattern in this society, too. [inaudible] [laughter] >> or bankers less. [laughter]

>> i get the feeling you are a little too easy on jpmorgan iraq jolie highlight some mistakes they made without really underlining the mistakes perhaps or maybe i am wrong but this is i'm trying to figure out. they sort of say insurers are not good enough because they don't have enough capital so they can blow up and they are not there when we need them but they get their cbo's insured by aig. well, we found out aig was no different. aig wasn't really there when the big devolve that happened that wasn't supposed to happen but happened. so what's the difference between what merrill lynch did or jpmorgan? >> jpmorgan joost a ing of it, not that much partly because they have