friend referred to as credit policy distinct from monetary policy. i share this concern -- and i have to confess but i have to common fess that i generally thought about it in a mackerel monetary policy context rather than in the context of the letter of last reare sort role. scott's book challenges me but demonstrate convincingly that the financial crisis largely old fashioned run. in a new costume portion me to ask myself whether it would be feasible to deal with a similar crisis to involve a credit policy risk. i need to think about this because you have me thinking, and asking the fundamental question here is. i feel compelled to offer at least one nitpick if i may. i feel like i have to do it. i found reasoning in a few sections a little on the tense side. one section of chapter 21 is discusses the possibility that this current reverse repo

program might be used to or result in some way a crowding out of a significant portion of the economy short-term private credit liability. and then it goes on to consider this is where i got into trouble. such a development might conflict with the fifth monetary policy octave i got confused i will tell you i was on an amtrak south of washington behind a freight train when i read that section. that had something to do with it. but ting that section and one or two others could have been simplified a little bit and then clarified. i probably said enough by now to signal my -- high regard for this book, i can do it. >> i can do it. [laughter] but in closing let me salute that the very strength of the book for me actually highlights if the fed and the fdsc needs strong and essentially discretionary emergency powers to prevent or confront o runs

how do we reck are sile such powers with legitimacy requirements of a democratic society. this is a critical condition in today political environment with this populous element. that dot frank requirement of secretary approval and we've discussed launched to nonbanks and the requirement, company requirement that the secretary consulted with the elected president in making such decisions is presumably a recognition of this issue although we have seen i would argue a problematic one. resolving this fundamental tension in our political economy if that's possible at all is beyond the scope of this particular book although there's no question that hal is aware of the issue. yods believe some of the contribution of paul tucker former deputy governor of the bank of england regarding the legitimate city of central bank independents not only in the emergency legending arena but in

the arena looking at them as a regime taking them together some of the his work and i haven't finished it yet but what had i've seen i think that's a good place to start thinking more about these issues. >> thank you very much. >> thank you. [applause] >> this is a really interesting book. he's got three -- scott has three c's one of them is called connectedness, finance professors and microeconomists often use term to describe what he's talking about with connectedness or o networks but put a huge amount of by young professor on network theory and application and networks to finance. and how scott comes along and tells us in a lot of his research is pretty useless or o

not really relevant to plaining what happened° the financial crisis for some good reason i'll talk about in a minute. you've got the second c that's not in the title of the book, but the title of the book is connectedness in contagion. the second c is scott called the correlation. i like to think of correlation as capitol associated with a big shock in this case it was the decline in real estate prices. hits the economy, and it turns out that the real estate assets that are affected a lot of them are in the banking system. their mortgage loans of various times and learn to ratio are high and legending has been relaxed so result when housing prices fell many banks simultaneously or in a car related manner suffered hits to their capital and there's financial research that swhais

that happens, these financial institutions are going to deleverage. and that the reason they have to deleverage is they were holding these mortgages with leverage. you know, they're capital leverage ten or 20 to 1 whatever ratio ising that regulators allow them to hold it. expwn there's the third c, that's in the title contagion, and contagion is what i call panic and i think what david calls panic and what a lot of people would call panic. now, how scott book's gives us a different view on the financial crisis and its relationship with the dot frank act than the view that i've had before i read the book. so lead me tell you the view i had before the book and changed my view. the way i used to summarize the dot frank act is to to think of

a decline of the real estate prices and problem that need to bics ifed was banks needed more capital and the sooner they got it, and more capitol they got, the more rapidly the financial system would resolve. and my summary of the dot frank act was -- that while the dot frank act did encourage policies to make banks have more capital, mainly what it did is impose a lot of regulation on the financial system so that the authors of the dot frank act had faced a tradeoff between simply man dating more capital and man ditting more regulation. and they chose to mandate more redges than more capital. but how scott's book has changed my view on that and as he points out, is if you have a capital problem or even if you don't have a capital problem you can have a panic but charles good heart and ricardo and other people will tell you if you have a capital problem that keeps getting worse, before the financial institutions collapse, or declare bankruptcy from lack

of capital, people are going to try to pull their money out. and when that map happens you are going to have a panic and not only going to hit the bank that maybe it was truly under capitalized on verge of insolvency but hit banks regardless whether they're well capitalized or not but it is going to create a crisis. an the crisis requires immediate response. and the immediate response that is necessary to fight this contagion or this panic is last resort facility or other credits work facility and they pretty much have to be provided by the fed. and so how scott's book comes in and sayses you at the dot frank act what you're going to find is not just -- imposing regulation on regulations for regulations sake. but there's a misguided theory behind it. and misguided theory behind it

is that feds render eve last resort facility need to be curtailed harder for the feds to provide liquidity support to financial institutions that may well need to be recontaminate liesed but in the meantime you have a panic going on, and you need to address that panic with some very strong immediate action. so he spells out this scenario in great detail an changed the way i think about the financial crisis and makes me worry our fed has tools that it will need to fight the next financial crisis especially if might well happen is next financial crisis originates outside of the banking system that the fed is itself is most capable of making of resort loans to. so that's the big picture. there's some very interesting chapters in the book that describe the more details about what i just said.

so let me mention a few of them. first of all in talking about connectedness. he paints a beautiful picture of lehman brothers. and lehman brothers itself is an incredibly fragile institution. they're a huge important connection between the company and the subsidiary and cross guarantee and so forth, and the result of that is that if problems start within lehman brothers there's a connectedness problem. these problems are going to spread throughout lehman brothers. and so lehman brothers itself as he paints a detailed picture lehman brothers itsz collapse in a very connected way. but the sense he's saying connectedness not so important for financial crisis is when you look to see how the financial crisis spread from lehman brothers to the rest of the economy, it didn't spread through connections it denied

spread lehman was defaulting to another goldman sachs and then default to the next one and next one default to the next one and economy blew up that way. instead lehman brother kind of collapsed wrath arer need t neatly through its own internal but didn't spread to the rest of the system through the connections but through the rest of the system through panic to reserve fund and access and decline in value and that market fund lost the money so what happened? the investors who invested in other market fund panic, and pull their money out of the funds even though funds didn't invest in lehman asset is at all so paints an interesting picture of how fragile it was within itself, and also how that -- that was not what made things spread to the financial system indeed if you look at the collapse that happened months before, it collapsed in a way that was similar to lehman and

you didn't have the panic at that time. the panic waited until it could occur later. so interesting thoughts about connectedness let me talk about cor or what i like to call capitol. crisis 2008 was capital and book has interesting chapters oz a way they're a way to deal with this. it also has chapters on a resolution and a resolution and other ways to bailout and tarp and how that happen haded. but i'll end my comments with just one note, one area where i slightly disagree with. contingent capital is not a long-term of the bank but could be key term, that it has to be replaced that it the bank, bank let's say one year maturity

matures, but the bank can't replace it with new capitol then right then and there that capital is not replaced but converted into equity. so it doesn't have to be long-term and second thing about it that i slightly disagree with -- he says that one trigger mechanism for capital which is securities that will convert into i equity when bank gets ino trouble is one version proposal to look at dex of bank stocks that decline than the capital gets converted. house scotty book says that happen hads that can amplify panic, and i think that's not quite right because one interesting thing about con it makes it not roll over capital so that it converts. all of a sudden there's in massive inflow of new equity that banking system gotten from

conversion of the capital and i think that's going to stop panic not make them divorce. so mechanisms and capitalizing or something, we should think about and we should certainly think about, worry about the ability of the fed to exercise the powers that it needs after the winner of last resort next time a financial crisis occurs. >> thank you. [applause] >> in his new book connectedness and contagion al scott reminds using that hicksly the first and most important function of a central bank is the provision of lender of last resorts liquidity to stand for crisis. llr for short was reason that most central banks were originally created.

and yet dot frank comes along and it sort of cuts off the federal reserve's ability affectively do wonder of last resort landing for the economy. i'm going to focus on legender of last resort in a book he does a job of distinguishing between connectedness and contagion all large financials institutions but contagion is a property by well being of one firm can impact well being of many separate firms that are not necessarily connected to firm in question. for example welcome the reserve primary fund breaks the buck and soon other institution only money funds without exposure to either the reserve primary fund or lehman brothers need liquidity assistance from their parents to meet redeemses. classic example of contagion run on one bank creates general panic and deposit run healthy unconnected banks.

the federal reserve's wide range use of llr power in recent financial crisis has been unfavorably portrayed as a taxpayer bailout of the financial sector. ... >> everybody can be made better off if the government can prevent panic redemption, but the fed's llr policies were discretionary. if rub, of course, is in the

midst of a run, you can't tell the difference between -- and the judgment call can always be open to criticism. this discretionary policy created a lot of problems. and if you think about it, the need for llr is somewhat ironic given regulatory rhetoric. financial regulators are quick to highlight the disciplining effects of market forces. while almost never described as such, a bank run is perhaps the most fundamental of all market discipline forces. many scholarly papers are written to explain how banks' fragile business model, borrowing short and investing long-term in opaque loans, is a market innovation, not a mistake. it's before government safety nets. investors required banks to fund themselves using short-term liabilities and demandable deposits precisely because this fragility imposed restrictions on the banks' investment

decisions. unlikely to be successful, at least not for very long. and so while regulators espoused the enthusiasm for market disciplining, they simultaneously argue they need lots of tools and discretions to prevent bank runs and and fire sales. hal scott rightly suggests that post-crisis politics are stacked against new discretionary fed lender of last resort powers. however, i think the political sticking point may be not lender of last resort so much as free, the free and discretionary nature of the prior fed llr arrangements. the congress and the federal reserve, in my opinion, should work together to develop a new approach for lender of last resort that relies on a market where institutions pay the taxpayers to purchase liquidity insurance coverage before it's needed. indeed, hal discusses such a proposal in his book, but i want go a little bit farther in the next few minutes i have. the federal reserve should be

required to sellly liquidity options. now, liquidity options are once a firm owns, can be exercised as long as they have appropriate collateral, and they would receive a loan from are the fed. i believe the fed should sell two al qaeda of liquidity -- two kinds of liquidity options. one that allows the exchange of collateral and one that allows acceptable specified collateral to be exchanged for reserve or balances for a fixed term. so there's a securities lend liquidity option and a repo kind of lending option. the instrument i believe should be sold at regular fed auctions, and they should be traded in secondary markets thereafter. the options should have specified exchange terms, haircuts and implicit rate, that are less generous than those prevailing in the lending and repo markets. the price of these liquidity options would reflect the shadow price of emergency liquidity. if bank liquidity coverage

ratios and net stable funding ratios -- these new rules we put on systemically important financial institutions, if they were amended to satisfy this requirement, we could create a natural market for these options. banks would buy them. this arraigningment would drastically improve -- arrangement would drastically improve the current self-insurance approach for liquidity insurance which hal mentioned. if we did something like this with market terms, emergency liquidity access would no longer be a special privilege, but merely the exercise ofly -- of liquidity -- [inaudible] terms that firms pay for for the right to exercise liquidity option. the pressure of these options and their use should be open to all financial institutions, not just depositories. so nonbanks as well should have access. if a liquidity crisis were to develop, the terms of the insurance contracts could be adjust ared to allow the fed to

provide all the emergency liquidity the economy needed. so they could lower the rate over the market rate, change the collateral terms, they could adapt the options and still sell them and meet the liquidity demands of the economy. this approach would remove the need for the federal reserve to determine whether or not an institution is solvent, to seek liquidity support. if they have the option and the collateral, the fed would honor contract. and taxpayer losses could be prevented by appropriate be haircuts and setting the federal reserve priority on any borrowing institutions that sub subsequently entered bankruptcy and posted losses on the fed. i think a market-based solution would stem a lot of the llr issues, and hal brings up this and talks about a proposal in his book. and i would like to see, i would like to see folks take that up in a little more detail, because i think it solves many of the problems that we discuss in the book.

i think the book discusses a very, very important issue, and it gives you, gives us a lot of food for thought about the right, the right way forward. llr in particular, i find to be the most distressing problems created by dodd-frank. thank you very much. [applause] >> thank you, paul. and thank you to all the commenters we're going to give hal some time to respond in any way he likes to those comments. while he's thinking, al mentioned musical chairs. and when challenged after the crisis to come up with a metaphor for a panic, musical chairs is a natural one. and i invoked this one. imagine a game of musical chills that has 500 -- for a financial system, you've got a lot of them. you've got 500 people playing musical chairs, but there's 700

chairs. and the music that's playing is a charming mozart serenade. and when it stops, everybody easily finds a chair. we call that high liquidity. suddenly, the music shifts to raucous, obnoxious music and 400 chairs are removed. and i think that's a great picture of what happens in the panic. hal, comments on the comments. >> yes. so, al, you ended with the reference to -- [inaudible] and the legitimacy to central bank dependence. to me, i remember an aei person, peter wallison, and i discussed co-authoring a piece on contagion along the lines i developed, and peter said to me, well, i don't have any problem with that, but it's all the rest of the powers that the fed's exercising over supervision and

regulation. so if you're critical of that, i'll join you on the contagion. [laughter] but what i guess i would say is that i think the fed, the central bank independence of the fed is being more undermined, in my view, by all these other powers that they're exercising, regulation and supervision, maybe than being lender of last resort. it's a bigger pick you -- pictu. on contingent capital, you know, we're willing to think more. i guess my central point is that i wouldn't think that having a good system of contingent capital says to abolish the fire department. i don't think you would say that. so my central point, my resolution is even if it works, we still need to worry about contagion. now, imagine jamie dimon calling up secretary lew and saying, oh, heads up, we're going to bankruptcy tomorrow. is the response of the

secretary, oh, no problem, we've got resolution procedures? i don't think so. [laughter] the first thing he's going to think about is the proto verb y'all s -- proverb y'all s hitting the fan and total panic, okay, on the world's financial system. we need to be prepared for that. as paul pointed out, i did actually hold out this idea going back to y2k. it was actually peter fisher, when he was undersecretary, created this kind of procedure in advance of y2k so it would be very clear to the market, okay, that people have liquidity. and now it's interesting because that idea runs in the face of, you know, 25 years ago and the fed would talk about systemic race ambiguity. now, we needed ambiguity about whether the fed was going to lend. and jerry corrigan was really big on that. and chips and, you know, the

payment system which was the earlier manifestation of systemic risk. and be i think your point fundamentally says, no, just the opposite, okay? we immediate to know in advance. you know -- we need to know in advance. you know, the beauty of lender of last resort if it's strong, however it's engineered by options or otherwise, if you know it exists, you're not going to have the problem. that's when draghi says i do what it takes, and nobody uses his facility, okay? because as long as the power is there, people aren't going to run. it's when you have ambiguity and people are uncertain is when they are going to do it. i guess the other thing i would say, and i haven't thought through this about the proposal, which i think is very worth exploring, is if you don't require people to have these options, then what happens? you go into a situation, lehman doesn't have the option. so lehman fails. now, what you can say is that everybody else has got that option if they're run on, they've got a way to protect themselves.

but i think you have to have a critical mass of acceptance of the options and the obtaining of these options in order to solve the problem. so, and paul might want to -- >> yeah. >> thank you. >> the idea that you change the liquidity coverage ratio and the net stable funding ratio rules to allow the use of options in replacing actual instruments means the banks will have some, and you have a secondary market so if lehman didn't buy any, they could buy them from the banks that don't need them. and and would you observe the secondary market price liquidity option going up, the fed has the right to step up, open up the auction, sell more. you have a monitoring vice in the secondary market. so you would expect dealer banks to purchase -- or dealer financial institutions to purchase and stockpile these liquidity options and sell them to people when they needed them. and they'd charge for them, sure, and you'd know the price, and you'd see the demand for liquidity.

i think, i think you would have -- the fed wouldn't be caught flat-footed like it was in the summer when the commercial paper market blew up, and they were wondering what was going on. you would see it on bloomberg. the market price of liquidity skyrocketed, and they couldn't deny there's a liquidity problem. and they'd sell more options. and make adjustments. >> that -- i think provocative thought, and we could have a lot of fun talking to each other, i do want to fit in one or two questions. paul, i would just say the fed, of course, could lend money. i'm kidding. we have time for one or two questions. we have one in the back here. >> andrew -- [inaudible] i'm a lawyer. >> i'm sorry, will you wait for the microphone to come to you, please? thank you. >> andrew, i'm a lawyer in new york. hi, scott. i hate to say this about a harvard law school professor, but i think this is terrific, and this is -- i went to harvard law school. [laughter] it's excellent. i've had the same issues and

same concerns during this whole dodd-frank development. part of dodd-frank is fine, capital enhancement, trying to eliminate incentives, bad incentives, moral hazard, not very successful there. but the key thing i think that you've focused on is tying the hands of the fed and the treasury. i think they really are very wrapped up, and this is made worse by the aig case where the fed has said that they didn't have 13.3 authority in the case of lending to aig and taking back stock. that was considered not to be a security interest or collateralized by the judge. judge was totally wrong. but if you are an executive -- >> you're going to have -- i'm sorry, you'll have to come to a

question if you have one. >> okay. [laughter] here's my question. why does the fed -- my friends at the fed also think that section 13.3 as amended does not tie their hands very much. i think it's wishful thinking. i don't understand this, and i think also the resolution authority is totally useless. when citi goes down, they don't have time to resolve it. so i'd also agree with you heavily. >> i think that's a question to you, hal. why would the fed think -- >> well, i don't think they do. if i were at the fed, i would be saying what the fed is saying. we don't have a problem here. >> yeah. >> do we want to undermine confidence in our own institution? no. i can tell you from my private conversations, okay, i think the fed is extremely concerned about this. but, and the first fed official who raise ares his hand publicly and says we need to do something about professor scott's book --

[laughter] oh! you want to bail out wall street again. this is toxic. >> it's going to take time. >> it's going to take a lot of time. >> okay. >> i think we have come to our adjournment. i want to give any member of the panel one more minute if you have a parting thought. >> i would just say i'm very intrigued by paul's proposal. i think it's worthy of some additional thought and investigation. one thing, you know, in dealing with the crisis, an issue that was -- that bernanke thinks is one of the most difficult to deal with was stigma, getting banks to borrow. >> right. >> well, that would be one benefit of it, you know? you get around that problem. that's why they had to start the auction procedure to begin with. >> i would just -- >> that way we'd be built in right up front. >> i would just -- >> hal? >> just one thing about paul's -- i think if the fed proposed, oh!

you want to give them advance protection! you want to give them a promise to bail them out. >> i've been on the fed for 12 years. >> no, i mean, within the political system today, i think that -- >> i think -- >> -- would be a problem. >> i agree. occasionally ill-tested, but i completely agree. i think you sell people on the fact that they're paying for the right to have protection. they're paying the taxpayers for this, and it's not free any longer. >> yeah. >> i agree there are political issues. but i think that we could get around it. >> okay. >> i think we got the sense of the panel, hal, that you have raised serious and deep problems in the book which need addressing, and we thank you very much for coming to present it. thank you very much to the members of the panel. if you have more questions, we'll all be at the reception, and just ask us in the informal setting w. that, thanks to the panel -- with that, thanks to the panel. [applause]

[inaudible conversations] >> when i tune into it on the weekends, usually it's authors sharing their new releases. >> watching the nonfiction authors on booktv is the best television for serious readers. >> on c-span they can have a longer conversation and delve into their subjects. >> booktv weekends, they bring you author after author after author that spotlight the work of fascinating people. >> i love booktv and i'm a c-span fan. >> now on to tonight's main event. i'm excited to host dan slater

here to share his new book, "wolf boys: two american teenagers and mexico's most dangerous drug cartel." the book has been getting some rave reviews, including praise from author michael connolly who said if the truth is stranger than fiction, sometimes it's much more harrowing. wolf boys is one of those times. dan slater has put together a riveting story that take us us on an unforgettable descent into the dark heart of the drug trade. a former reporter for "the wall street journal," dan has written for "the new york times," the new yorker, the washington post, "the boston globe," new york magazine, the atlantic, gq and fast company. he's the author of love in the time of algorithms, a graduate of colgate university and brooklyn law school. he lives in new england. and tonight he's in conversation with david samuel. david is the author of "the

runner" and only loss can break your heart. his articles about dog tracks, nuclear weapons, spies, blimp pilots, rock stars, presidents and other subjects have appeared in harper's, the new yorker and in "the new york times" magazine. without further ado, please give them a warm welcome. [applause] >> i just want to start off by saying that i rarely leave my house. [laughter] and i never endorse the work of fellow writers because, you know, why give them a leg up? it's the competition. [laughter] but i made an exception to both those, you know, professional practices tonight because this book is an extraordinary piece

of reporting. it's an incredibly gripping story, and it's a story that on so many levels is about where america is at right now in 2016. we are a country that has lost the ability to look in the mirror and see ourselves clearly in part because the mirror that we had for is a century finish for a century which was -- for a century which was the familiar craft of newspapers, magazines and the rest of it has been shatteredded over the last ten years. it's collapsed. it's been replaced by a flood of images and impressions that exist outside of, you know, any

editorial guidance or control. and while there's a lot of good to be said for the energy that was released, i think that certainly in the short run we're just looking at something that's broken instead of staring into a mirror, we see the chards. and then we're baffled when things come back at us in the form of political candidates or social crises. and we say this' not -- that's not america. except it is america. [laughter] and we're all in it together. and dan has done the thing that twitter doesn't do and facebook doesn't do which is that he

actually went somewhere. he went on a journey not just to a place, but emotionally and was able to connect with people that i'm sure once he started, he couldn't imagine at all, he couldn't imagine would be people whose lives he'd have an intimate feel for. and as someone who's been doing this kind of work for, you know, 20-odd years now, i think you know it when you see it. the proof that someone actually succeeded in learning something, in getting people true to life and understanding what it was that shaped them, you feel that on the page. it's there or it's not there. it's never there in a tweet, and it's not there in the things that pass for news most of the

time. but it's in this book. and so, you know, kudos to dan for writing it and doing the extraordinary amount of work both in terms of time and in terms of putting yourself out there emotionally and being able to connect with people that this type of project entails and also to the people who published this book and who, you know, made it happen. because it's rare, and it's a hugely important thing for, that it exists at all. that people can read it. which they should. [laughter] and can that done, why don't you tell people -- i'm sure some of you have read the book. the rest of you should go home and read it tonight. you won't be able to put it down. i couldn't. and tell me a bit about these

two characters at the heart or two of the characters at the heart of in this book, gabriel and bart, two american kids. >> yeah. wow, it'll be hard to top that, david, thank you. i learned about gabriel and bart, i guess it was nearly seven years ago. in a new york times article. so as much as we rip on the press, had it not been for the times, had it not been for the times, i won't have known about this story. "the new york times" is a great newspaper. [laughter] i'm grateful for their support. >> facebook is not a newspaper. and so i read this article in june of 2009, and i had just been laid off from my job as a reporter at "the wall street journal" and was kind of at that point in your life when you've been cut down and are wondering what you're going to do with your future and where you're

going to go. when you're a writer, as you know and a lot of people in this room know, it's often hard because the avenue forward is not obvious. but i read this story in the times while i was collecting unemployment insurance, and it was this, you know, the sort of story you just don't forget. it was a story about two american boys who'd become assassins, who had become, essentially, contract killers for a big international drug organization in mexico. and i couldn't stop thinking about them. i didn't know what they meant at the time, i didn't know to what extent they were anomalies or to what extent they represented something larger. but a few months later i went to sinaloa which is a state on the

pacific side, and it's been getting a lot of press lately because the sinaloa cartel and its leader, "el chapo" guzman, and his antics, escaping from prison. i went to sun low what, and -- sinaloa, and outside the capital city there's a is cemetery, unofficially the cartel's cemetery. and so i visited the cemetery, and there are a bunch of kind of gaudy mausoleums around the outside where a lot of the mid-level and the high-level men in the cartel are buried, their families had a lot of money and bought them sort of these big houses that look almost like a cheesy condominium in miami or something. but then in the middle of the cemetery is just this open field where the plain headstones are. and when i walked around the middle, i started noting the birth dates on the headstones. and, you know, this was -- i was

there in 2010. most of the birth dates were after 1990. i had sort of averaged out a dozen or 30 of the headstones, the average age was 17 or 18, and it wasn't unusual to see a headstone for someone who died as young as 14. so i thought back to gabriel and bart, and it struck me they weren't anomalies, they were part of a huge trend, and, you know, everything i'd been reading about the drug war, "el chapo" guzman, pack lowers cobar -- pablo escobar, the cartel wars had nothing to do with those sort of mythic stories of the cartel bosses, but the war in mexico and the war along the border was really about young men and boys slaughtering one another. that was, essentially, what it came down to. >> now, break it down for people. >> yeah. >> you've lost your job and decide to go to mexico.

you go to sinaloa, you're wearing your glasses. you're looking at these headstones. what comes next in your reportorial odyssey? be hey, could someone introduce me to one of the people that own these really gaudy houses? >> that would have been the dream if i had spoken fluent spanish and felt comfortable in sinaloa, but i actually went home. and i spent the next several years reading everything i could find on the history of the drug cartel and actually wrote another book called love in the time of algorithms about the online dating business. totally different story, but i kept on reading about the drug world. and then in the summer of 2013, shortly after the online dating book was published, i saw that a man by the name of miguel had been arrested in mexico, and miguel was the boss of the

zetas, and he was the person who had recruited these boys in south texas in laredo and really trained them to essentially be like him. >> now, who were the datas? >> so -- zetas? >> so the zetas were a cartel, they are a cartel that originated from the mexican military. we hear a lot about, you know, the corruption in mexico, police being on the payroll. but it's sort of hard or to grasp the true extent of it. here was a cartel that actually originated in the central force division of the mexican military. equivalent to someone like the green berets here in the states. they decided all of a sudden that it would be much more lucrative to go work for a cartel. so that's how the zetas started, and they evolved from there. but that sort of militaristic, take-no-prisoners ethos, you know, remained with them as they evolved. and that was the culture into

which these boys were inducted. >> now, where did these cartels come from? >> the cartels can come from many different eras and sources. there are some cartels like the gulf cartel which they were associated with the zetas. they're a very old cartel in mexico. they've been around since, really, since the 1940s. but these days as the cartel world fractures in mexico, you see a lot of smaller ones attempt to pop up, and it starts with, say, a family living in a village somewhere that decides we're going to take over a village, or we're going to take over our town, and then we're going to take over that town. ask sometimes even starts with -- and sometimes even starts with people who want to be good, who want to be the vigilantes who want to get rid of the cartel, and then they get some power, and then there's often a drift that happens. >> one of the things that

interested me, because there's a wonderful -- in addition to the story of these two boys, gabriel and bart, which can we'll return to in a second, the book has a very sort of offhanded but deeply informed take on the political and social structure of mexican society that a sort of enabled these networks to flourish. or at least formed them. shaped them. and you show how the cartels are really -- [inaudible] bound up with the structure of the ruling revolutionary part of mexico for 75-odd years, the pri. could you describe that a bit? >> yeah. so the pri was the dominant political party in mexico for about 70 years.

and some people call it a dick dictatorship, some people call it the perfect dictatorship. others call it one-party rule, and sort of the division there is unclear. just a definitional thing. but they emerged after the mexican revolution around, in the 1920s. and it was one-party rule. and so the cartels started to emerge during that time when it was possible to go to mexico city and, essentially, pay off one entity. as -- ands this is sort of what's ironic about this story of the cartels -- as democracy started to come to mexico and this fracturing of the political environment happened, the cartel wars became much worse because it was no longer clear who to bribe. >> in the old day, the cartel -- in the old day, the cartel could pay a high-up official in the pri for a specific territory,

and they would write their check, and then they'd receive, you know, the list of what they could do and couldn't do -- >> yeah. >> and had a kind of control -- >> and everyone undermete that official fell in -- underneath that official fell in line, and it bought you the right to do certain things. after a while, it was no longer clear who to bribe. do you bribe the local law enforcement? the federal police in mexico city? so that was a factor, as was nafta. nafta really accelerated things because -- >> talk about, talk about that. >> so as many of you know, nafta was implemented in 1994. it was really a centerpiece of clintonian prosperity. it was going to be what remade the american economy. and one of the things it was going to achieve and really did achieve meant that we here in america could get things for a lot cheaper. those sunglasses at wal-mart and such could now be manufactured

in mexico and imported back without a tax. now we were able to use the cheap labor. so that was a good thing. the less good thing is that it made smuggling a lot easier. it really opened up the border in a city like laredo, texas, you know, at the time and now even it's the biggest overland port in the western hemisphere. so all of a sudden by the late '90s, laredo was seeing something like 50 or 60,000 trucks come north per week. and if -- it became impossible to monitor all that traffic if it ever was before. now it just became harder and a lot easier. >> and into thisty, laredo, the -- this city, laredo, the two boys are born, gabriel and bart. >> right. shortly before nafta was implemented in the late '80s.

>> we could call them almost nafta babies. they certainly grow up in a world that nafta helps to shape. and the reality of where money comes from in the communities that they grow up in is what? how do you make money if you are live anything laredo and you're -- living in laredo and you're born in 1986, 1987? >> if you're born on the south side of laredo in many of those neighborhoods, the way to make more than $15-$20,000 a year appears to be the wholesale narcotics market and the underworld generally. we think of it as the drug market, the drugs go north and the money goes south, but there's a vast economy that involves moving guns, that involves moving vehicles, and those actually go to mexico. and they're sold to the cartels. and so there's market for the currency, there's market for the drugs. and that's a very buoyant,

frothy market. and so when you're growing up in these neighborhoods, your examples of people who have really made it are often people who have made their money in that market. and so that's the direction a lot of kids in laredo, you know, aspire to. >> tell us about gabriel, because it's an amazing story. for some reason, he was the character of the two of them who really made an impression on me. >> uh-huh. >> what kind of family did he grow up in? what was his mom like? how did he get, how did his life as an american kid living north of the border become intertwined with the dynamic south of the border? >> gabriel was a fairly promising kid, and he grew up in a pretty typical family.

he's from a ghetto on the south side of laredo right on the border. and it's been a smuggling community for, pretty much for 250 years. he was a football player, he was very charismatic, he did well in school. he attended sunday school every weekend. and for a period in his life, he appeared to be one of those kids who might leave the ghetto and do something more. it does occasionally happen. and instead, he -- around his freshman year of high school -- started getting involved in the street gangs in laredo, and be his descent from there was very, very fast. >> by descent, you mean what? >> well, it actually began, ironically, with him buying guns from a laredo cop and smuggling them across the border and selling them in mexico.

>> this was a cop who, if i remember correctly, used to show the kids catalogs of the stuff that was available. there was a cop that used to do that. >> yeah. there was actually a cop who would bring these kids law enforcement magazines for them to page through. and so that was how to e -- how he got his start in the underworld, yeah. >> did he have family south of the border? how did he make those connections? >> he did have family south of the border. in fact, his mother had a family house in nuevo laredo, the sister city, and he had lots of aunts and cousins. so he grew up from the time he was a baby going across every weekend. and he took pride in being an american because he knew how many more opportunities he had. and when he eventually joined the cartel later, he was really

a prized recruit, you know, because of his americanness and the fact that he could go back and forth, you know, between the cultures. spoke english. >> there's a familiar and kind after a tired -- kind of a tired litany of explanations that probably dates back to the 1950s from what was then quaintly we called juvenile delinquency or something. where people would say, well, you know, it's all economics, or it's the absence of a father in the household, blah, blah, blah, blah, blah, and everyone's supposed to put on a pious face as we hear these explanations recycled over and over and over again. there's another set of explanations that we all know to be true which is that young men really like feeling powerful,

don't know necessarily how to get that power. having a weapon and the power of life or death over people at the age of 7 is a more -- age of 17 is a more powerful drug than any that i've ever mainlined. so -- >> i don't believe that. [laughter] >> so they say. how would you, when you look at the trajectory of a gabriel or a bart, would you say, you know, well, if we only made families stayed together and made divorce harder, or if the economy was better, do you have a pious explanation for how gabriel could have been turned away from a life of crime? or do you believe that there is, there was something evil but alluring that drew him in? >> i don't think it was one thing.

i do, certainly, i am a champion of the pious explanation. and, you know, if we stopped talking about drug policy for a minute and stepped back and talk about policies -- and, again here, you know, pious -- fighting poverty, helping families stay together, providing more job opportunities, yes, absolutely. because i do believe that once the family breaks up, once the father is gone, once you no longer have that role model and at the same time you're in a family with no resources and you're in an environment where even's becoming a smug her and that -- everyone's becoming a smuggler and that's the cool thing, yeah, at that point your chances look very grim. so i do think that the pious explanation holds. but also what you said is huge. the advantage of a boy is that he doesn't have a fully developed conscience yet, and he also has very little concept of consequence.

because when he falls, he bounces. and he'll bounce for a little while. so i think that's partly what drove these boys. now, if you talk to law enforcement people in laredo, one of them that's here tonight or if you talk to the u.s. attorney who handled the case, they all have their own explanations, and it just shows that it isn't really one thing. i mean, here in the u.s. i feel like the pious route is to focus on policies. nafta or marijuana legalization or the opioid problem. as if these things can be dealt with in a vacuum. i don't think they can be dealt with in a vacuum. >> being an occasional drug user at different points in my life, i was especially fascinated by your reference on and off throughout the book to something called roaches. what are they?

>> roaches used to be known to an earlier generation as spanish fly. they're known to our generation as roofies, and they are a very powerful tranquilizer that, if it was ever legal in the u.s., it's not legal here anymore. but very easy to get in mexico. >> and how did they get this name? >> well, they are produced by a swiss pharmaceutical company called hoffman laroche, and so the pills say laroche, and so kids in laredo call them roaches. and they're very popular as a party sale. they're very, very strong, and they had varied effects. and what they did with gabriel is, essentially, render him inseven sate. it was under the influence of roaches that he was able to engage in a lot of the brutality and the violation that he did for the cartel -- violence that he did for the cartel. >> now, describe the process by

which gabriel was turned from a promising yet delinquent child in the american city of laredo, texas, to a trained city car owe -- sicarri oh,o killer in mexico. >> it seems like it happened slowly for a while, and then it happened all at once. he started living a life of violence around the age of 14 or 15. that's kind of when he got into his first fight. he shot someone when he was 15, shot hem in the -- shot them in the leg. that was retaliation for when he'd been shot. and at 17 he met miguel, the leader of finish at that point, the zetas. and he was sent to a training

camp in mexico, and that's when he really learned thousand kill in a professional and industrial fashion. >> when you say the training camp in mexico, could you describe that a little? >> yeah. so it's, it's a camp where they would send anywhere from 350-100 -- 50-100 recruits at a time. most of these were mexican young men or boys, but some of them were americans. he was one of the first to attend the camp, certainly one of the first americans. and you go there, is and it's run by a team of mercenaries. some of them are original zeta members, they also were hiring people from israel, they were hiring mercenaries from colombia to come and to teach. and the purpose of the training camp from the perspective of the people running the cartel is can you kill. is it in, is it in your blood? and they can find that out pretty quickly.

and the ones who are able to do it are known as the frios, the old -- the cold ones. so they get kind of weeded out and set aside, or i guess the other ones get weeded out and set aside, and you become an assassin. >> now, as i was reading this and the details are alternatively gruesome and heartbreaking and, you know, mind-blowing, i kept asking myself how does he know this shit? how was he able to get up inside these people's heads in this kind of intimate way? as a reporter, i know how hard that is, and i know how grounded that has to be for it to feel right especially over the course of a book. so how, you know, did you ever

meet gabriel? >> i met him twice. i visited him in prison twice. at the start of the project and then near the end of the project. and between those visits and after those visits we exchanged close to a thousand pages of letters. so that was really the basis for the book. in addition to my trips to laredo, meeting robert garcia who's here, he's the lead law enforcement character in the book. he was, he was the homicide detective who really was the leader in pursuing these boys when they started to commit murders on behalf of the cartel -- >> stand up, you're a no-bullshit hero in the book. [applause] so you actually were pen pals with this guy. >> yeah. we were, we were -- it was the most bizarre and one of the most, and probably the most interesting reporting experiences of my life,

exchanging letters with gabriel over such a period of time. the relationship was up and down. [laughter] >> how'd it go from dating apps to -- >> yes. [laughter] >> pen pals with a zeta killer. >> yep. >> i see the line now. [laughter] >> love and war. [laughter] so he's a very smart guy. i think people can tell that from reading the book. he is very intelligent. and this is how he decided to use his intelligence and his intellect. but he was able to explain so much to me, and be he has this very detailed memory. and be so i was able to combine that with letter-writing relationships that i had with a bunch of other boys who are also now in prison who worked with him, who are from the same neighborhoods that he's from and who knew him since he was a kid. and also talking to his girlfriend, talking to his mother.

i spent a lot of time in laredo with his brothers, you know? going to the clubs and the bars that they used to go to and the restaurants that they used to go to. >> and, i mean, that's one of the things that's great about it. as you're describing their lives growing up and what it's like, i'm like i don't know why, but i feel like i'm there. and it's because you were there. >> yeah. >> which you don't bring in until the very end. but it really, it drew me in in a very effective way. i was just like, yeah, this is right. you don't know why it's right, but i know that these descriptions are right, that they were true. you actually bothered to go there. >> yeah. so if i could just get on sort of my book-writing/publishing soap box for a minute, as a writer, you could probably tell that last chapter where i finally bring myself in and talk about the reporting process, at an earlier stage in the book project, that was more like an introduction. >> i liked where it was.

>> and i read a book by katherine boo that came out in 2012 called behind beautiful forevers, and it's one of my favorite books. one of my favorite nonfiction books. and she didn't have an introduction. she did like an after word where she talked about the reporting, and i thought that was the coolest thing, because i hate introductions in nonfiction books. i feel like if you have to tell people what you're trying to say, you probably haven't said it properly. so i really wanted to force myself to focus on the body of the book and not the presentation of the book, not on sort of convincing readers of what i wanted it to be, but actually making the thing. and so all along i was hoping to be able to move that section to the back and make it a chapter, make it an after word, and it became the final chapter or. >> now, here's a question that people ask me, you know, off and on with stuff i write, and i always he