gillian tett new books be sex -- "fool's gold" caris devising a new -- a quote revolution in banking in the market event of 2008. financial times hosted this event at their headquarters at the new york city, it is about 50 minutes. >> thank you all very much for coming along this morning. i realize it is an ungodly hour and have busy lives of thank you. what i'm going to do is talk about what i went to write this book and give you a rough sketch of how the book is instructive have a story and an open to questions because i'm sure some of you may have questions and feel free to chaka at me whatever you want. the origins of this book really started by five years ago when i was working on the column of the financial times which some of you in the room were there as well. at one stage i was asked to try

to report sketch of what i thought were going to be the key themes going forward to cover so i started off listing things like banks etc. and then i said let's take a step back and try and look at how it is covering the financial and corporate world in general. and how that matches up to have a financial and corporate world looks so i tried to draw a map of the city of london and compare to what the stories we were covering and was struck amazingly by the fact there is a discrepancy that pretty much all the media was focusing obsessively on equity markets and writing about share price movements and foreign-exchange but there is this great big wave of debt and derivatives which is pretty important for the city of london than and wall street but by and large not covered. so i thought i would make noise about that and one thing led to another and i moved across to

the capital market team in early 2005. and at this stage that wasn't viewed as a particular glory move and have been writing capital market pages and covering the debt markets for many years in a very sordid manner. but the glory positions of the banking editors and things like that, it wasn't the capital markets as that in attics and most of the capital markets coverage was on page 423 and, in fact, one person pointed out to me i had just gotten pregnant i'm going to the capital markets would be great for a new mother because it would be also quiet. nothing ever happened, i kid not. but i arrive at capital markets and of the first things i decided to do was the jpmorgan

group came into being and we attended a conference of a body called the european securitization form that they held once a year. i went down and walked into the acropolis center in nice, a bit of french architecture planning and into a plush velvet ceded to conference room to find out what was going on in the credit world and that scene that i walked into a remember clearly today felt almost immediately like walking into a strange new alien jungle if you like. there were a bunch of people walking around, lots of low ferrous and things, lots of people talking about very large sums of money by doing so in a language that i even though i have been working on the financial paper for the best part of the year did not have the foggiest idea what they were talking about. it was suddenly hearing a strange new dialect or dialogue

going on that frankly was very alienating. and a strange kind of light it almost felt familiar to because before i became a journalist i worked as a social anthropologist and i did a ph.d. in the himalayas or the western end of it in a place called the soviet disease done and when i was doing my fieldwork up in the mountains i stated in particular wedding rituals and i used to go into these large alienating weddings and not have the foggiest idea what was going on and everybody would be speaking a strange language. these people would run around as a discrete tri and would be clear that these rituals played a key role in assembling the tribe and perpetuating the ideology that bound them together. but trying to unpick that language and work at what was going on was a huge challenge. but there's something about me that as an ex anthropologist that may be very intrigued by

the tribe down in nice at the year securitization form and on the basis if i could learn another language and learn the language of cbo's and i set about trying to and piqua was going on. so as i sat and all i did what most journalists often do and i haven't got the hottest idea what is happening and i flipped through the brochure materials and started reading biographies of the people from the tribe who were up on the podium and i noticed something strange which was almost all of them seemed to work at jpmorgan which back in 2005 it was kind of weird because in those days everyone seemed it kept popping up everywhere but suddenly the a llama so i asked my neighbor what is going on and why they're working at jpmorgan and why they used to work at jpmorgan and he said a sentence which later is up if you like changing my life

or leased shaping the last year, you've got to understand there is one thing about the credit world that is a key, it is a more in a mafia. they are everywhere and they created it. like many quickly shays that was not entirely true and i was just that they were not the only ones who created the modern world of structure credit by any means, but it turned out to have a lot of veracity as i later discovered. so i left to that conference in nice went back to the financial times determined to try and unpick the strange new credit john go in, on the other hand, to try and keep an eye on why and how the morgan alumni played a key role in building this credit world. and for the next two or three years we labored away in the capital markets team and i was just we because it was a group of us, not just myself, trying to make sense of this vast shadow debt and derivatives world that was growing apace.

and in the last year or two and became fashionable to try and unpick or work out who predicted this crisis and who didn't. i ever wanted or not claim to have predicted the scale of the horrible financial cataclysm that has overwhelmed us, but what was clear to us back in 2005 and 2006 was that not only was there an extra nearly -- external revolution going on in the credit world but the only thing more is trenary about this revolution going on in the financial system was of the fact it was going almost entirely unnoticed. i mean, there were a few papers like the ft were writing about this stuff, it's pretty few, but for the most part politicians or extremely and interested in asking questions about how the financial system were two or asking about why credit was so cheap. in fact, the only politician who ever volunteered the word securitization to me before the summer of 2007 was barney frank.

in over in the u.k. there was absolutely no interest among mainstream parliament and for the most part not in washington either. and i became increasingly concerned because it was clear to me that the scale of activity was not merely occurring or standing very rapidly and doing so with little oversight and doing so in a condition or there was almost nobody who was able to understand how the minutia of the credit world worked let alone add up how it all fit together who was not in some way entirely behold into the system or did not have a vested interest in preserving it either because being paid by the system or because they were a regulator and a word if they started rocking the boat it might start coming -- come crumbling down. so then, of course, this summer of 2007 happened and our were as concerns about the excesses building and the financial system that came only too true. in and in subsequent months in

between the sheer maelstrom of trying to cover what was happening as this world fell apart and many were also scoring around like a list chicken's trying to work out what has happened and going to happen and what happened i was very keen to try and find some kind of vehicle to tell a story about how the financial system has gone so badly out of control and perhaps make points about what could be done to try to avoid that in the future and so i returned back to the original morgan caveat idea that had been bubbling with me ever since i had gone to the conference in nice. and the reason why i decided to focus on them was partly because they did, indeed, play critical roles in developing the credit world but also because i thought strongly i wanted to tell the story to the prism of real live human beings through natural story because as the financial system has imploded over the last couple of years it had been

far too easy for politicians and consumers and journalists at times to simply resort to clich and stereotypes to put everything in black-and-white terms to try and make start judgments and sometimes have the impression the financial implosion has happened because a team of evil marcion's have invaded the world and taken over the system with some kind of on bass and a plot to bring down the line and show system. and this idea there were actual human beings inside the financial system who are taking decisions for but it -- good and bad and like every human being had complicated motives wasn't about. so i picked up on the jpmorgan group and essentially the book the rise into three parts. the first part is called innovation because i try and tell the story about how this group developed a set of ideas starting in the early 1990's

which proved absolutely crucial in terms of taking credit risk which were traditionally treated as something which stuck to the banks and slicing and dicing it in a way that could be sold across the system and parceled out to investors all over the world. they initially did that with credit risk and, in fact, stuck with corporate credit resco and they did that partly to the derivatives. and as they develop these ideas and came out as a much longer stream of international development occurring in finance in the late '70s which was all about trying to find ways to try and fill rest between banks and banks and investors amid the financial system more efficient and effectively they hoped less risky, that was the theory. so there was this body of experimentation and development

that took place in the '90s which was pioneered in the corporate derivatives world. in and then this part of the decade collided with another strain of intellectual development that was occurring in finance and mortgage arena and that was with a slicing and dicing and bundling of mortgages to try to create structures of the whole ritual alphabet soup. and the middle part of the book traces of the ideas developed by the credit world collided with the mortgage ids i then called perversion because in essence what happened was you had these concepts being fed into the era when credit was very cheap and in a sense tremendous bounce of regulation in the financial system and these two great intellectual screams -- streams collided to tear will affect the following essentially a crazy

credit bubble and the last third of the book is called a disaster where i tell a story of how that began to fall apart and in the sense of consequences of the over reaching excesses', but within the structure of i follow the story of the jpmorgan group and there is an irony in that because although the group will i originally talked about the well to many ideas pioneered the idea is and a spotted at very early stage the risk attached to some of those and when they developed credit derivatives and about synthetic cbo's they were doing that because they were hoping to blow the system up. on the contrary they have a technology that they generally thought was going to make the system safer and many generally thought was going to make a safer. one of the regulators tells me that when he first found out about credit derivatives he sought a presentation of one of

the characters in the book had put together on this and 1995 and was very excited, he called her up and said this is going to transform the face of banking. there's a sense of having discovered amazing technology that can only be good like the guys who'd first bit the adam and it did it medical genetic dna. you've actually had the technology that can only bring back good things and, of course, these are bankers. they had an eye for this and a word angels and their two, they were cheered workers but the jpmorgan group were not in any way driven by the sense of us try and get a big pm el this year, was try and be as good as we can. they like a lot of young people bring excited by their ideas and swept away by it. it was a very heady time and then they were in a sense, up by the sense of being pioneers.

so of the initial impetus behind these ideas were not bad, the problem became in this part of the decade in the persian time when in a sense there were a series of hard choices may not just by bankers but regulators and one of the ideas of the story is in the jpmorgan group actually spotted at an early stage some of the dangers inherent of putting them into the structures an experiment and a couple of times with the doing of mortgage cbo's and backed away from it because it felt it wasn't there. fibre six years later as the bubble became crazier other banks with two similar experiments and took a different position. similarly the jpmorgan group realizes they invented the idea of super senior was piling up in the balance sheet and tried to get rid of it. fess board to citigroup and merrill lynch with a different position taken. similarly jpmorgan basically quds its credit line in 2002 and

2003 because the thought the structure didn't make much sense. again a very different decision was made by other banks. i say that not because i think that jpmorgan was somehow superior alien beings who have wonderful insight in geniuses who dodged a bullet, nothing could be farther from the truth, they make plenty of mistakes true but is become far too easy to see that all bankers are stupid and risky and somehow happened was inevitable. that was not the case. one of the things that became clear by doing research is just how different the different banks or in terms of their treatment of the risks and analysis which brings me to my third point and the crucial point and this is where we come toward the disaster section of the book. which is when we are faced with a tremendous joy is clearly the financial system has imploded to a terrifying degree and many of the ideologies and principles on which finances have been based in the last three decades stand

very discredited. right now we're in a kind of a patching and mending pays more the government are trying to keep the bank saliva, keep some kind of functioning credit system going and to ensure that we're going to defend another collapse, but further ahead we have some hard choices to make. meaning all of us about how we are going to actually shape the financial system and it is tempting to say let's try and talk all innovation out a bit like people say when one is jock was trying and switch in and stop entire project. but if we are going to do that we will face the world with the banking system operating at a much lower capacity where credit is much more rationed where it is going to be much slower world so the question i was a gallegly

be with is as we look back at the story of the jpmorgan group, the story of credit innovation which part of the innovation can we actually preserve and which part can we check out? is there a way that we can actually take some of the original ideas of that innovation that would develop in the '90s and actually keep them for the good or is it the case that all complex finance is bad? i think looking back at the stories and how they have i should try to develop the ideas offers one way of showing it didn't have to be like this and so i hope that for the future it would also provide a pointer of not just a terrible mistake that the banking industry has made but also perhaps some ways we can try and control the risk from going forward. so thank you and i will take any questions you'd like to throw at me.

>> there has been a new complacency it seems to me in the private derivatives market, it is going to be exchanged traded, it will become more transparent. do you think that all the problems have gone away, are there rules that you think should be adopted the? >> in terms of making credit derivatives more transparent blacks? >> are there elements that still trouble you about the market? >> i don't think that a clearing house is an easy purvis solution. .1. i think that there are good places for extending a clearing platform be on the credit derivatives world. it is being discussed by some academics in the u.s. but simply having cbs on a clearing house living in a way of other derivatives offer clearinghouse creates problems. i think that there needs to be

more transparency still of how cbs is being used and the degree to which, there are arrived credit derivatives changing the way that it has behaved in a company goes into bankruptcy in quite a radical and potentially untested manner. out and i think there needs to be a lot more discussion about how that is changing the way prejudice be heading towards other companies, but to think that somehow we have had the clearing house and that is the end of the story i don't think is true at all. >> the other part of your book -- >> she is sitting behind you [laughter] maybe you should turn. >> jpmorgan worked very hard and to prevent it from being

regulated. you think he was right? >> i will say when i think and then we will let him say, the dominant intellectual framework if i understand it that drove the derivatives industry from the late 75 onwards was basically the debt hammer of the state would stifle innovation excessive regulation and that if you lack the industry with problems and natural market mechanisms that the ebb and flow of the markets and competition pressures would provide a self correcting mechanism and that you might have success but that would correct itself naturally and would find their own with them. and the problem with that was really twofold. which is one that when you have the credit derivatives role was a big part of the overall financial system perhaps you could afford to have a few ads

and flows even if they went to the extreme without stabilizing all of it and initially when derivatives were developing in their late eighties you are talking about numbers which at the time seem big but are now relatively small. the problem came when they expansions became so explosive that in a sense suddenly it stopped being a small part of the financial system and began to percolate through out the system and a way that meant if you had dybbuks and flows back and potentially be destabilizing but the other problem was that she never really had a free markets in a sense of having to information any confirmation neagle competition appear in your voice had that big banks were distorting it matters and the voice had a very murky information flows so i would argue it never really had a proper free markets even in a free-market system. it is quite ridiculous we've had

a financial system built on free market ideology with the vast majority of complex products that on the balance sheets and ever traded and they're all basically a figment of accounting imagination. in. >> do you think should be regulated? >> i think it should be regulated. >> what? [laughter] >> you are definitely putting me on the spot. [laughter] when we set out to design a framework for the private derivatives we were building a framework where it lives easily from a place where it should not be in the mind of a holder and reflecting in the risk preferences of the tanker of the risk allowing him to shifted to someplace else to someone else would rather hold at risk and we want to set up a framework or market discipline would be a guide to good behavior. now, you can look at the financial difficulties that we have around the globe today and

ascribing them to a particular product credit defaults swaps and some have done that but i'm not sure gillian has done that in her book. she stalks about cbs but she talks about ceos, these collateralized debt obligations are securities heavily regulated as part of the securities remark so both of those things are involved in some ways here. i would test the hypothesis that cbs have some special role to play in this problem by doing this. ask yourself of we would have this problem every american was current on his mortgage payments and i think the answer is clearly no. ask yourself if we would have these problems in the financial system and prevent the fall swaps had been outlawed on the date they were invented and had never come into existence. the answer is definitely, yes,. the problem we have is a housing

finance problem, it's not a credit to fall this what problem. if there were no credit defaults swabs would still have this housing a finance crisis and it would just be harder to manage because it would be harder to move the risks from one place to another. so it doesn't seem to me that there is a clear case to make that a lack of regulation of credit to all the swaps could tibbets to the problem and they have been outlawed we would still have this problem today. >> well, i have two things i want to say about that. one is actually i think that credit defaults swabs did exacerbate the problem for three reasons -- firstly, that the main people confident about lending more than they would have in the past. because people thought they could shift the risk and capt. lending and lending in the volume of lending expanded quite dramatically. secondly, because the option of writing credit defaults contracts was there and provides

another mechanism for investors to basically place my bets on the housing market. in 2005 as i describe in the book when i actually started to run out of subprime loans simply pumping out subprime loans as fast as they can all over america and at a round out of loans and there weren't enough for prime loans to put into cbo's, that was a point when the collision of these to intellectual streams really happened and became so deadly because essentially they started trading derivatives contracts using credit to all swaps and limit exposure of subprime mortgages which allowed investment to keep rolling the dice more on the subprime world. and thirdly, the share up cassidy -- opacity of the credit world meant a leverage went undetected for a long time and it wasn't just cds that did that but you basically have a situation where people are going to in the spring of 2007 everyone could feel by then that

something was going badly wrong in the credit world and regulators were getting together and saying something is wrong, what should we do, is there a way we can get a sense of how the world thinks of us. quite apart from the fact that you had the groups like the germans who were insisting on talking about hedge funds and nothing else which was not particularly helpful, one of the problems was that it was very hard to pinpoint the scale of leverage and the scale of the risk being taken in the system because there wasn't data and people were looking in the right places so for example, the scale of super senior risk build on the balance sheets such as merrill lynch and ubs which have such utterly disastrous implications toward the end of 2007, that was not being debated but it wasn't on the agenda and there was very little way to detract back. and on the regulation issue, this is critical and something i think the new york vetted grapples with about the cbs

market in 2005 and 2006 and i talk about this in the book relating to some of the initiatives that geithner was involved with and the creditor this market. the theory that somehow in a market all the actors have a self-interest in behaving in a sensible way for the long term and in the pressures will somehow lead the system of the whole beginning rationally has just not turn out to be true in the credit world and you can see that in a very tangible way in the issue of settlements in the cdl space because if you had a pretty rational free-market you'd have a situation where every bank would say i have an incentive of making sure i don't have a huge backlog of paper building up in my office because of that is a rational, maybe we will have the legal limbo. it's not rational to have an efficient market and, of course, the buzzword for the free-market group was efficiency. the problem was