never actually know which products are going to be successful and which aren't and which ones worth investing in infrastructure and which ones are not. until several months after the product is launched. now if it took several years before you became clear which products will grow and if they grew slowly and then you could basically have h. pinkberry, and rationally building up infrastructure to process or settle dealing with the prospects. in credit derivatives they grow to explosion and that no single bank had time once it realized it was going to be successful to invest in infrastructure and the trading desk inside banks certainly had time or incentive to impasse because that was also a problem and the back of the skies in the bank so you have all these reasons why you are behaving rationally, structural incentives and distortions and then you have a situation where all the banks are competing to try and grab a new market and

none of them want to stop to build up their infrastructure but nor do they want to spend any money because that will have their pm el and bonuses nor do they want to lose investors. so there isn't in that situation in case with there is a rational selling mechanism to get everyone to invest collectively. it wasn't until geithner said it was try and get everyone and around a table and worked as some had a solution and began to do that. now they can do that and they did it with a degree of success but it was actually in some ways pretty late in the day, they can do that in the case of the private derivatives for the settlement problem because it was tangible and there was data and if you like there was an issue where everyone agreed it was a problem, no one knew quite how to act. it was clear that free-market forces alone was installing it but to get in on the table. at the terrible tragedy that gripped their budget in 2007 was although in the credit

derivative settlement area in the paper backlogs' it was clear there was a problem you can identify and there was data showing how big the problem was, how many backlogs' there were. in the general question of how big is the leverage there was and data so you could not get all the g8 countries to say the system is spinning out of control, it is not self dealing, free-market forces alone are not fixing the problem out because it was going too fast and it was very hard to touch or feel how big this had become partly because of the opacity of the system. >> can you talk a little bit about how jpmorgan and reduced its exposure to risk what it did? was there something about the institution i, sir, -- and they're tending to do with its culture or its management process or simply a lucky coincidence? >> there was actually a lucky collision that happen and jpmorgan. basically the old jpmorgan had a

pretty conservative attitude toward risk in some senses and that they had a fairly back in the '90s partly because they're less commercial than some of their rivals and never less book is on the short-term p and l because they had a rather bizarre internal corporate culture where the people joined jpmorgan and stayed for a long time like joining a diplomatic corps, they weren't bouncing bank to bank of the time. most of them joined and stayed there for 10 or 20 or 30 years and decorated a quite strong sense of team spirits. the luxury of being able to share ideas and an unusually collegiate manner. as a the broader attitude toward a risk and is very interesting in terms of the way that internal corporate cultures can actually change between banks but affect the outcomes so the older jpmorgan actually had quite a conservative attitude toward risk.

but then they change disastrously and i treated disasters like enron. then one diamond ever i'm he brought with him a set of attitudes toward risk. in a strange kind of way or lucky can avoid the time the very well when there was a lot of existing risk management culture that was there amongst the old jpmorgan guys and from 2005 onwards they do appear to have taken as far as i can tell having talked at length to the jpmorgan guys and other banks, it took an attitude toward risk that was a different from their competitors, they were much more systematic in terms of trying to model its and analyze it, they were just relying on a few models. the case of ubs for example where eventually they were looking at the super senior products primarily through models with disastrous effect in using a very one dimensional way

wasn't the case in jpmorgan even though ironically jpmorgan had invented it. they said it is kind of use will but it is only useful as part of the set of techniques measuring risk. so i think that contributed to the stand it. the other key thing about diamond it was he was prepared to face up to the analysts on wall street and say no and that is critically important because from 2005 onwards at chile's jpmorgan worked brilliantly and there was a huge chorus of criticism from equity analysts saying why are you lagging behind? we thought diamond was this wonder kid he was going to come in and solve the problems, in fact, it revenues ain't that great. now there were other banks who were responding to that intense shareholder stock market pressure and saying, yes, we have got to try and start chasing after credits revenues as fast as we can and there was this real what people used to call goldman and become everyone

wanted to be like goldman sachs. diamond on a number of occasions actually said it no we aren't going to go down that route and beat everyone a purely to chasing after the quick and easy pm el. but again it doesn't mean they made mistakes and i do want to paint these guys as somehow provide angels because they have made mistakes but there were decisions taken which i think was a very instructive lesson. >> [inaudible] >> in terms of what was going wrong? >> yes. >> well, for example, when the bank started going hell for leather and what was called business which was taking chunks of mortgage debt and slicing and dicing into ceos, the tangible loans or increasingly torn it in the end of the derivatives. there was a number of occasions where internally the jpmorgan investment bank tried to work out why they were competitive in making more money than them and as a huge debate on a number of

occasions about whether they can do the same and -- down at that and copy that and they kept running the numbers and cannot work out how to make it pay unless you took crazy risks and so they said no. and to say no was quiet in balls a position of the time because everyone else was dashing down that route. other people were dashing down that route even as late as 2006 when there was already evidence that the u.s. housing market -- that is one of the most astonishing things that's so much of a crazy risk-taking and praise the bridges of normal controls occurred in even when there was evidence that the subprime mortgage market was starting to turn sour and mortgage lenders are starting to give up -- of mortgage brokers anyway. >> as an armchair and economic theorist there is a schism developing in the economic

sphere and there are those people who think the problem was a male design of a incentives within the institutions leading to excessive short-term as some and then there is another group, in economics, who think that the problem was and failure to recognize the market doesn't have any magic, that there is hardly any way to put prices on these exotic newfangled assets, the future is highly uncertain and if you can't do your own due diligence to figure out what the risk is a holding an asset but it doesn't i'm really make any sense from a social point of view and two console to someone else who is not even not to take on the risk because he doesn't know any better what the risks are and anybody else so there is

a huge amount of ignorance of darkness impenetrable future that was sort of a daunting the market without any awareness. sounds like your book is more toward the latter view than the first. >> yes, that would be fair. >> my question you are describing a very well in the book the way people kept looking at what else was going on in the market and somehow through some combination of it smarts resisted going but is there something about the financial sector that competitive pressure especially have is publicly traded companies sort of inevitably leads not to some optimal results like you think competition does in most markets but when you have a myopic investors and also people within the companies dealing with short-term investors in short-term incentives i guess

the question is what you do about it? clearly there is one place jpmorgan in a few others who are resistant but this seems like the logic of these marketplaces is to move to the point where everybody x release stupid. in and what is -- to go back to partnerships for these firms? and regulation to it? all the regulators get caught up in the crazy logic. >> have been do think when it comes to risk taking partnerships would be a good idea simply because you need to create an incentive inside banks or brokers to try and monitor other departments and then used to be a sense of collective scrutiny and it think it is important that one of the banks seems to be better in this where they're actually more of a sense of one apartment looking over the shoulder and there are not operating as silos which are in competition with each other and a secretive with each other as

with the outside world and i think that is largely because of goldman sachs partnership history which is still managing to abuse some of the corporate culture even today so i think partnerships are one way to go down and i think unfortunately although people with it disagree i think that regulators need to get much more hands-on and involved and having a system whereby a group of financiers and bankers are essentially free to develop as fast as they want to whatever degree they want with very little oversight to the journalists and regulators and politicians and somehow hope that they will through sheer bigness of spirits and fly to rationality will keep their activities in check and they don't go mad is an idea. banking is two important and i would say is the people who run

you get power plants pay per kilowatt of energy they pump out so you have to pump out whenever you can and the more they pump out the more successful the look. i think they would have blown up on the subprime loan by now. but need to look in banking to other spheres of activity that the industry and pharmaceuticals asked what lessons we can learn about risk control because one of the areas everyone talks about financial, if you are actually in engineer you are talking about things like safety margins and rest and taught to debate and talk to think about the wider context and you might even be taught about things like ethics. and again some of the lessons outside finance need to be brought in to finance as well. >> one regulation would be most helpful going for it?

>> i could talk for another hour about that but i would say joined up regulation is critical because one of the key reasons why these problems developed was we live in a silo world. as the world around us becomes more complex there is a great tendency for everyone to keep staring around a specialist silos but the tension is for the one hand we need specialists on the details of a silo, we also need to see how they fit together the it inside banks of between banks and house banking for its and the rest of the economy so i am very strongly in favor of moving toward a more unified systems of regulation or regulatory oversight for starters. >> [inaudible] >> we need to go door that as well but in the u.s. would be a good start to actually have not have a dozen fragmented regulators that actually reflect the silo pattern inside the banking system and basically you have a bunch of a stylized private-sector structures, and started to talk like an

anthropologist here, but you have warring factions between banks and lack of information disclosure. everyone is competing curiously and you have regulators reply to you the patterns. they wonder there was nobody able to take a joint up picture of how the system puts together a habit excesses were building over all. >> what do you think given the financial journalist did it really discover what was going on? adducing that is a problem on the journalistic side of experts, lack of expertise or about incentives or what? mack i think it is a combination. on the one hand, they lack regulators tend to be set up for the crisis and certainly in the early part of this decade and the sexy parts of the markets were the equity market and things like that because that was sexy at the start of the the decade and credit and debt which has been quite sleepy the

previous decade and with regard to a bit of a backwater and so you did not have the kind of high status label attached to that area of activity. and so that was one problem. another problem was actually not having journalist poor all over the creditworthiness to the bankers just fine and i'm not saying there was a deliberate plot by the bankers of us go into a corner and how we're doing but it was one of the situations that just suited everyone rather well. and the bankers became like the financial priest if you like this book financial latin and the confirmation sat there. they were quite happy that they were speaking latin and doing what they did also, as long as the bus everyone from time to time and the financial priests did need to talk about anything other than financial latin so they were feeling this is rather complicated. let's get on with it.

in, of course, politicians didn't have much incentive either because it was a fantastic credit boom and so everyone was enjoying the party. it was also a problem that almost anyone who understood what was going on in private as is intended to work in the credit world because they got paid in 10 or 20 times more than journalists of the structure inside the media and relative to finance reflected the bigger patterns in society. >> [inaudible] [laughter] >> i get the feeling that you are a little too easy on jpmorgan. you actually highlight some of the underlining and perhaps maybe i am wrong but this is what i'm trying to figure out.

the sort of say the model line insurers are not good enough because they don't have enough capital so they can block so they're not there when we need them, but they get their cbo's or cbs issued by aig. well, we found out that aig was no different. different but yet a two blow up as well so a giant -- aig wasn't there when a big if all that happened in that wasn't supposed to happen but could happen happened so what is the difference which merrill lynch didn't with a id and jpmorgan? >> in a word, scale. jpmorgan use aig a bit but not much partly because they have internal lines of women. so yes back in 1998 the cut first on aig as discovered this super senior was back in 1998 when they went to see this wacky weird thing called super senior, are you interested in the san yes brianna on because due to

regulatory arbitrage they basically do whatever they wanted and angie was super senior and had the capital. so yes jpmorgan did deal with aig quite a bit and the very beginning and, yes, it dealt with them throughout the decade, but two or three years ago far less impact jpmorgan did not lose a lot of money? >> not to the skill of many of the investors and you can see that in the figures. if you look at the breakdown of who aig was exposed to it is pretty stark. jpmorgan is really not up there in the top half-dozen from memory. you can actually see the breakdown of who benefited most from the rescue but i think jpmorgan was somewhere around 10 or 11 but i can get those to you if you want. >> but what about their -- >> and they thought the model line situation was not, i mean,

back in '98 in 99 the discussion, one of a fascinating things about telling the story is so many of the mistakes, the terrible things and egregious things done in 2005 and to the as and six were discovered by the original jpmorgan team and back in 1919 and 99. and, in fact, one of the things that they used to do was travel as many shorts on the model line because he thought it was stupid back in 99. and in 2005 and 2006 when they're having discussion of shall we do cbo and cds, what should we do a super senior, there was a discussion about shall we basically do what is called a negative basis trade with model line and wrap everything with model line and recognized if you use a model line you can exploit all the accounting rules and make it seem as if the risk of mass had disappeared which was basically what ubs and merrill lynch were doing but actually the genuine risk having disappeared because if there was ever a situation bad enough to blow up the super

senior it probably would have blown up the model lines to which was in touch with stupid to use model lines to protect yourself from super senior rest. >> what about the bear stearns funds? that was again done similar to a way how the cbo's were talking about buying cbs from all kinds of banks including jpmorgan and that is why jpmorgan was one of the biggest to have the hedge funds because they have the cbo's. but it. >> to them because they had a loan of 90% of the money that was to pay them. >> steve black and a diamond would say over and over like a cracked record we made mistakes and they're scared of people thinking they did too well because it's been like japan, no one wants to stick up by now and look as though they're doing well because they are getting too much retraction so, in fact, in the course of my interviewing the kept saying we have made

mistakes. i mention them were in the buck but you can look at the results and who made the big write-offs in the last two or three years there in the scale of mistakes jpmorgan have made so far and i think there's still plenty of things that can go wrong in the future. they've got consumer credit-card exposure, they have got mistakes there but the scale of write-offs that jpmorgan made are nowhere near the scale of a city, marolt, ubs, morgan stanley and there was one reason why. guess what? they are not being enforced by capital now. you probably have more questions. thank you for coming along. [applause] >> gillian tett was named business journalist of the year for coverage of the market decline in 2008, she was also awarded the wincott prize for

financial journalism in 2007. right now she runs a global market coverage for financial times newspaper. to find out more on the author please go to f t.com.

the c-span 2 booktv civics bus is visiting libraries, bookstores, festivals and authors. here are some of the people and places we visited. >> we are with mark bauerlein, author of a "the dumbest generation". you also have a a title that says or don't trust anyone under 30. you put a lot of statistics in your book. a pull out the one statistic you

like the most when you have to talk to groups about this particular book. >> i think one thing that happened was the speech i gave at the university of maryland a few years ago, there were about to and 50 students in the audience and i cited a statistic for them that came out of a civic knowledge of young adults and the statistic was that roughly 18 to 26 year olds were six times more likely to know who the american -- the latest "american idol" winner was then there were to know who the speaker of the house was just 2 miles away from the university of maryland. and what i can add to that statistic is that a young woman in the back yelled out, it is more important to know who the "american idol" is. and the thing that was important to me was in her social world it certainly is more important to know that so there you have a good balance between the civic ignorance and social pressures among young adults.

>> what is the justification for considering that these young adults are on a wrong path from the knowledge that they are either not gaining the knowledge they are gaining? >> short, we have to recognize first that the internet is a wondrous miraculous thing and you can go on there and look at masterpieces in the metropolitan museum of art, you can look at laws, find out facts of history, go to wikipedia and get a quick date or title or a name. as of the internet offers the great records of civilization of history, civics, laws, foreign affairs, current events. however, we have to add to this the dispositions of 15 year-old, what do 15 year-old care about -- other 15 year olds -- then what happened -- they don't care about what happened on omaha beach, they care about what happened that week in the cafeteria. what happened between the

captain of a football team and the cheerleader counts more than anything that happened between anthony and cleopatra long ago and that is just the nature of adolescence. what the internet does is empowered adolescence to increase those peer contacts, those in group fixations, the social life of one another, peer pressure 24/7. 24 hours a day they can be in touch with one another seven days a week. and they can improve their lives to contacts with themselves and shut out more and more the voices of adults, not to mention the tax of history and civics and foreign affairs. this is unprecedented. to be able to sit in your bedroom at midnight and have chats with six buddies and down the block in your city and another state, around the world. so that there is no and to

appear to appear contact. that is a unique condition of our time. >> but how is this a bad thing? >> sure, kids will be kids and when i was 15 in years old i could have gone home and sat there at the dinner table and text message and i would have gone upstairs to my room and flip open the laptop in order to maintain the social life that i had at school during the day and a few hours after school. the problem is you do not grow, you do not mature when you only have contact with your own peer group. when you are an adolescent. for one thing you don't build your vocabulary. i tell students, what would happen if he went to a luncheon monday in the middle of conversation you tossed out a big word -- what if instead of saying that guy is such a jerk, you said what an obstreperous and for that guy is.

well, jobs would drop, people would drop their spoons in their soup. and this is an example of how social pressures, the norms of adolescence will actually hinder your intellectual development. that is why it has always been so important for social life among the young to have a limit. i would have to go home at night and over here walter cronkite talking about vietnam or watergate. i did not want to do that. and i could have checked out i would have. i could have text message all night, i could have found out what was going on at the party last weekend instead of having to be exposed to adult matters, having to listen to my parents talk about the household of money, current events. i did not like them into not want to talk with them, but i did not have another place to go. and i am better for it for just having to be exposed to adult matters, it helps to grow up. >> what worries you most about this generation getting older?

>> i think that we have to remember that high school and college our precious years. this is the only time when you are going to for the most have the opportunity to read a great works, difficult works, to encounter great ideas and great art and have a circumstance where you can talk with people about them, you can talk with experts. and that during those years in your leisure time that is when you go to museums, that is when you go to art galleries and browse around bookstores because knowledge is so much a part of your life at this time and we need to complement the school hours with it out of school hours to doing some of the things that reading books, listening to c-span, watching c-span, listening to npr and things like this are forms of induction into the adult world and the responsibilities of being a citizen in a democracy. if you pass through those years wiou