Then with former SEC chairman Arthur Levitt there are few people who know as much about the ins and outs of the stock market and the regulatory apparatus that sit on top of it as well as the politics and all of the various nuances that go with regulating one of the largest most robust financial systems in the world. And so Arthur and I had a wide ranging conversation. We covered everything from Dodd Frank to the Volcker rule to the fiduciary standard to whether or not your IRA and four in one case should be governed by the same sets of regulations or whether there should be different rules for each. We talked about a lot of different things and I find that to be a fascinating guy. Be sure and check out our pod cast extras which if you’re listening to this now hang around till the ends the last fifteen twenty minutes of our conversation was really Arthur talking about how he finds technology in general and if in tech specifically to be absolutely fascinating and why it makes him so confident about the future of the United States. Really very interesting conversation. I know regulation may not be the sort of thing that you think really is exciting but it’s an important part of markets and it’s certainly something that’s interesting and significant. What goes on to the day to day workings of the markets. So who better than a conversation with Arthur Levitt about regulation in America.

This is masters in business with Barry Ritholtz on Bloomberg Radio welcomes a master’s in business on Bloomberg Radio today we have a very special guest on our show today is all about regulation as we just passed the fifth anniversary of the Dodd Frank legislation. My guest today is the twenty fifth and longest serving chairman of the SEC Arthur Levitt. He ran the agency from the 1993 to 2001. I’m sure you’re familiar with his works. He is our first returning guest on master’s in business author. Welcome back to the show play had to be with you Barry.

So for those of you who somehow may not be familiar with Chairman Leavitt she ran a brokerage firm back in the early sixty’s called Carter Berlin. And while with a young whippersnapper named Sandy Weill in 1978 he was chairman of the American Stock Exchange in 1989 he became chairman of the New York City Economic Development Corporation and in 1993 he was appointed chairman of the SEC by President Clinton. And I recall you once telling me that you found out you were up for the position that you had gotten the position by reading about it in the Wall Street Journal.

That’s right. First I’d heard about it was a rumor reported in The Wall Street Journal that I was the choice. I think that they had probably somebody else in mind that didn’t pass through various traps and they ran around the White House and said Gee who who can we choose now to fill that job and someone said hey what about that. Guys that ran the stock exchange and that’s how it happened.

Wow fascinating. And you come from a family of people who have served the finance industry. Your dad was also one of the longest serving New York State controller’s right he was in the UK for twenty four years. Wow. And he was sole trustee of the at the time. What was the largest pension fund in America.

Yes that’s true.

Fastening so. So we have finance royalty. So we’re here it’s the fifth anniversary of Dodd Frank. There have been lots of things happening in the world of financial regulation all sorts of interesting things and I thought you would be the perfect person to to have a conversation about this with so. So let’s begin with what came before this era. When we look at the period before you became SEC chair and after we were really in a period of fairly robust deregulation we saw the repeal of Glass Steagall. We saw the passage of the commodities Modernization Act which really allowed derivatives to be freely traded without any sort of regulatory oversight. In fact the general sense of that era of the 1980s and 1990s was less regulation was better. Is that a fair assessment.

I think it is a fair assessment. And I think that Sandy Weill had a good deal to do with that in terms of lobbying the Congress with whom he had been particularly close in terms of reducing or eliminating the strictures of the Glass Steagall Act subsequently he said that he wasn’t sure that that was a good move. A Glass Steagall removal may have created unintended consequences and I certainly agree with that although at the time the general feeling in the financial community was that we were an overregulated body and that we needed relief and the most likely area of relief would have been to allow the banks to do much more than they had ever done before. And then came two thousand and eight. And if I recall correctly the traveller’s Citicorp merger was sort of presented to Congress as a fait accompli and either you repealed less deal or we have to unwind this big merger. Exactly. Put put a gun to Congress’s head.

So so we have the Commodity Futures Modernization Act We have the repeal of Glass Steagall and then you said comes 2008 now. Did it take a full blown financial crisis to make people rethink regulation or was this something that was just a vengefully going to bite us in the behind and we had to do something.

Well a lot of regulation that occurs at times of market exuberance market highs generally goes towards the regulatory steps nobody is hurt nobody is bothered. Everybody’s a winner. I want to not relieve the regulatory pressures and really let the animal spirits prevail. Well 2008 came along and a lot of people were hurt and a lot of members of Congress began to have second thoughts about the deregulatory moves of the past and that gave birth to a whole host of rules and ideas and ultimately the Dodd Frank rule. Personally I believe that the lessons of the market of 2008 Did more to curb the exuberance of banking interests than any possible regulation that we could have put through. Nevertheless the Congress fell all over themselves to come up with ways to punish the markets and the people who operated in those markets for bringing about what they were guarded to be the horrors of two thousand and eight.

You’re listening to masters in business on Bloomberg Radio. My special guest for this special episode about the pros and cons of financial regulation is Arthur Lovett former chairman of the SEC and I want to take the other side of an argument from you you said earlier the crash in no way taught everybody the right lessons and and people would learn from that. But but isn’t the history of Wall Street in the history of finance that they burn their hand then they go out for a little while and then a few years later it’s all forgotten. Think back to the nifty fifty. What took place in the sixty’s and seventy’s. Think back to the dot com collapse in two thousand. None of these episodes are hidden it’s all there. No one seems to want to learn from history.

Well I agree with you Barry. Lessons learned as a result of an event such as the crash don’t last forever but they do last long enough to change behavior for a period of years not just a period of weeks or months. Believe me. Jamie Diamond is very much aware of what happened in No eight along with every other head of major banking institutions. They’re paying the price for it even today. Litigation has yet to be settled. So I think that in many ways that’s more effective than rules and regulations which invariably have. Perverse an unexpected results. Dodd Frank certainly has a battery of facets of that ruling that are misunderstood or are not doing the job that they expected them to do.

So let’s talk about that exactly. This month is the fifth year anniversary of the legislation being passed. It’s still a work in progress there are still things that have to be put into effect. What has been the positive consequences of Dodd Frank and what are what are some of the negatives.

Well I think in the first place Dodd Frank represents the abdication on the part of the Congress to regulators to fulfill a myriad of requirements in a limited period of time which is long since gone and still the various regulatory agencies haven’t fulfilled all the mandates of Dod Frank. I think Dod Frank has been useful in terms of setting certain ground rules of behavior. I think it incorporated the Volcker rule for instance which I think was constructive that banks that were insured by the federal government could not gamble with those funds. I think that was the principle behind the Volcker rule when Dodd Frank tried to convert that principle into specific actionable steps and here we are five years after Dodd Frank was put into effect.

And literally this week that you and I sitting here having this conversation was the rollout of the Volcker Rule. Why did it take five years for something as obvious as hey if you’re federally insured if if the f.d.i.c guarantees your depositors you can speculate with within short capital Why do you.

So long for that’s what financial and it is can’t shift on a dime and it took them a certain number of years to close down these operations such as hedge funds or private equity funds or real estate ventures it took them a number of years. We could argue whether it should be five or should be three but they certainly couldn’t do it in six months or a year. And the net effect of it has been an orderly liquidation of many of the programs that the Volcker Rule contemplated as being risky. I think there are many others that weren’t included nor should be included were in a risk business and to squeeze all the risk out of our markets I think it would destroy the market so I think that this was a reasonable step. The banks would argue and certainly did are you were against it but it was a reasonable step. It took the agencies much too much time to deal with it because they simply didn’t have the resources. There were hundreds of pages of regulations left to the see F.T.C. and the SEC to define in serums of specific regulations exposed for public comment and vetted and litigated and finally they’ve come up with a semblance of what the expectations were for the original Dodd Frank.

So so here we are we have Dodd Frank eighty percent in place it’s not quite fully in place. We have the Volcker Rule taking effect. If we didn’t pass legislation such as Dodd Frank what sort of alternatives do we have. And do you want to address you raised an interesting point I shouldn’t let slip how significant is it that Congress didn’t pass this themselves. The rules but handed it off to a committee rather then do what used to be considered their jobs.

Well Congress doesn’t understand the business. OK. And to have a group of congressmen no matter how smart they are and senators and deal with the complexity of our markets in a finite period of time with an election pending you’re going to get a result something like this they’re going to say here are the problems we’ve defined as a result of the many hearings now and C C N C F T C. Here are the broad outlines of what we think should be fixed. Fix it and then they unleashed upon the same agencies the regs the lobbyists the half of the banks and the brokerage firms who fought every line that went in to god Frank and didn’t find the agencies appropriately to deal with these issues. They needed staffs that were almost fifty percent larger than the market Reg staffs that they already had to deal with the complexity of the issues presented by Dodd Frank this wasn’t clear lucid official writing this was broad generalizations out of which the regulators had to create something which was politically approved and acceptable in terms of public basic public understanding. So. So Arthur in the last minute we have what is the alternative to something like Dodd Frank what could have Congress done in its stead. You know I think that at a time of such economic travail the best thing Congress could have done was to study the issue longer. And work with existing regulators on coming up with a plan that had a finite objective and implement that plan. Step by step.

You’re listening to masters in business on Bloomberg Radio a special edition focusing on regulation during the fifth year anniversary of the Dodd Frank legislation and who better to speak to about this then my guest former S.E.C. chairman Arthur Levitt.

Before the break we were talking a little bit about the Volcker Rule and for people who are not familiar with the Volcker rule it bans taxpayer insured banks from making speculative bets with their own money. And I think we both agree that’s a reasonable thing to do.

Yes it is. So the alternative is hey you don’t have to have f.d.i.c insurance if if you’re that confident that your reputation is that good. See how far it goes or spin out those separate hedge funds and other entities and it seems all the banks actually have done that.

You know it’s interesting Barry that only one person in America could have stood behind a rule and gotten it passed as seamlessly as Paul Volcker. There probably is no other American with the reputation for probity and integrity that gave him the power to create a rule which had a profound change in the way American banking business is being done. What what does that say about us and what as a nation and what does it say about Congress that it took one of the people with the most amount of credibility after the crisis to get something like this done. Well it says that there is an international crisis of leadership that. I would defy almost anyone in our audience to name three people that they think are outstanding leaders known to the general public for integrity and probity. Nobody comes close to Paul Volcker in a former era we had the Irving Shapiro’s the Walter wrist and the Du Ponts the John Whitehead you couldn’t come up with a cluster of people of that caliber today.

Well why is that. That’s kind of a telling observation.

Well I think our society has become a millisecond by millisecond society and soundbites and television bits have defined people in ways which are less profound and deep than the era which spawned the whiteheads in the Volkers and. I’m not certain that in a society of sound bites you can really develop the sort of leadership skills that took Volcker many years working at the Federal Reserve and the rest of his career. But we certainly don’t have that in politics we don’t have it in business. We don’t have it in religion. We simply lack that core of leadership that was part of our society for a long time.

So so let me push back a little bit. The pope this pope seems to be very out there. Sure. Generating all sorts of interesting taking positions not typical I totally agree with you I think they’re you know generalizations are applicable to tribal society but I’m talking about. Your ship in the business and political communities that’s where we need it the most. He seems to be an exception. The changes that have taken place in Vatican City seem to be very significant and we’re not seeing that in the rest of the business or political community. We never really saw it before either. Yet this is this is really a fascinating situation so.

So let’s move back to the S.E.C.. There was a big New York Times article over criticism about the S.E.C. use of in-house judges and I heard you on your radio show describe why the SEC has practically been forced into this because of their budget situation. What is first of all what is an in-house SEC judge the in-house judges appointed by the commission itself to hear.

A number of cases and to supplement the general judicial system which is so crowded with cases that it takes many year for a case to be heard. The judges within the SEC or any other agency that also has administrative judges are familiar with the securities laws in ways that the other levels of judiciary perhaps are not so starved for resources. The only way the commission can meet the caseload of cases that are brought before them is to supplement the use of the federal judiciary with in-house judges that are experience that are independent of the commission except for the appointing power the commission.

Arthur how much of the use of these judges is driven by budget concerns.

I think eighty percent of. It’s reliably driven by budget concerns.

That’s fascinating.

You’re listening to masters in business on Bloomberg Radio today we have a special edition of financial regulation during the fifth year of Dodd Frank and I have a very special guest former chairman Arthur Levitt one of the things that has been fascinating over the past couple years has been the debate about the standard of care over to investors in fact as part of Dodd Frank the SEC had to issue a set of suggested guidelines and effectively the SEC said everybody should have to adhere to the fiduciary standard. But that was not put into place. What what are your thoughts on that.

I think that there is no earthly reason why a broker should live by different standards than an investment advisor. Now the argument made of course is that brokers don’t give advice they simply execute orders. Having been a broker for nearly twenty years I don’t think there was ever a transaction that I ever didn’t have some comment to make about. So I reject the notion that a broker doesn’t talk to a customer he or she certainly does. And I personally believe that the standards of accountability should apply equally to brokers and to investment advisors. And for those people who may not be familiar with the fiduciary standard is a much higher standard which says you can only do what is in the best interest of the client. It makes for a very simple compliance decision making process. Hey is this in the best interest of the client or is this in the best interest of some. Yes and if the answer is it’s not the client’s best interest. You you can’t do it. But there certainly has been a lot of pushback on that from from the brokerage industry and from FINRA as well. I think the pushback is understandable. Not only is it private interests that are involved here but the various suggestions have been drafted in such a complex way that neither the opponents are pro ponens of this proposal have really defined what it means. I think at its simplest form if you could create a rule which leveled the compensation that didn’t incentivize a broker to go to product A because he or she was being paid more for Product A than Product B. there’s a rule that’s all you really need. It’s the disparities in compensation that create a complexity where the industry is opening is arguing that they’re opening themselves up to private rights of action now that they never experienced before because of this indefinite complex rule. And there’s something to that argument the rule as presented by the Department of Labor I certainly support. But it certainly could have been more efficiently effectively worded.

So let’s talk a little bit about that. So the SEC says we’re the entity that governs brokers and markets and we suggest a fiduciary standard for everybody. But it doesn’t go anywhere either with the commission itself or Congress and then the Department of Labor says you guys have your own conversation about that rule. But we as the Labor Department we regulate 401K.’s and 403B.. These and other tax deferred savings for retirement because these are considered wages these are considered part of compensation. And so we get to regulate. And while you guys are diddling around with that we’re going to stay you must follow the fiduciary standard for this. It’s too important to people’s retirement.

Barry you have it absolutely right. The likelihood of the SEC getting a fiduciary standard was extraordinarily remote. The commission is split. The Congress which oversees the commission doesn’t want to see a fiduciary standard and it never could have been done. That’s why Congress is now pressuring take it away from the Department of Labor. Give it to the I.C.C. because they know that’s burying the fiduciary standard. And I don’t really see that happening any time soon because it’s all saw them think about this. It’s all part of the compensation package. It’s all part of wages. And why would you want to remove that fiduciary standard over somebodies wage package and give it to somebody who may be offering conflicted advice. It doesn’t make any sense to proceed that way. Well I think it goes to the issue of inducements and are we hurting investors by offering greater inducements to handle product and product B. This is simple as that.

That clearly creates a conflict of interest or at least so the broker has an incentive to go to the highest commission product that’s not in the investor’s best interest.

Absolutely Barry. So so let’s think about this a little further. When we look at the overall alternative standards so on the one hand the brokerage industry has suitability when you look at the fiduciary standards it’s much more vague suitability is a kiss.

I’ve always said suitability is don’t sell grandma Facebook I.P.O. You know I mean you can take it to an extreme. I’m saying that if you have the same level of compensation for whatever product you’re selling that’s fine that’s simple That’s easy. So when you look at it all around the world one of the things the United Kingdom did a few years ago was basically mandate a lower fee on all of their retirement accounts and a full disclosure and transparency because the Brits basically said hey if if people aren’t making money if these fees are high and not disclosed if they’re hidden that’s ultimately going to impact ten twenty thirty years down the road. Our retiree’s and if there’s a shortfall we the government are going to have to make that up which means you the taxpayer going to have to make that up. I thought that would be an argument that would carry the day even amongst conservatives but it seems that I was too optimistic. Politicians tend to have tactical responses and the strategy of long term investing is just beyond their ability to deal with because they’re not long term players they’re two year players in next election.

You know so we’ve been talking about 401K.’s and other tax deferred compensation packages. There’s another tax deferred entity called the individual retirement account the IRA that doesn’t get covered by the Department of Labor to do Sherri standard should it.

Yes I wish that it was covered by some sort of fiduciary standard whether it’s to be the Department of Labor or the SEC I’m not sure. But these are people who really need the protections.

But much smaller accounts. Yeah for one case can scale up to be fairly substantial the maximum contribution to IRAs or it’s it’s indexed in inflation indexed but it’s not it’s five six thousand dollars a year it’s not that much money compared to what you can 401K. is eight hundred thousand if you’re under fifty twenty three thousand if you’re over fifty. The huge huge difference between the two and the abuses of a runaway market can ever be felt. It’s in the area of the small investors who tend to be more emotional and tend not to focus on the impact of fees on their portfolios tend to have a herd mentality in buying when others are selling and certainly being victimized in markets that go up and they’re buying and go down and they’re selling you know Vanguard put out a white paper a couple years ago that showed the impact of one percentage additional fee above some low modest level and over the course of twenty or thirty years enormous it’s compounding it’s amazing mazing and that it’s so difficult to get investors to focus on that rather than on the advice that they heard from someone at the bridge club.

It’s it’s an ongoing issue I’m fond of saying the best advisors are behavioral counselors as well as financial advisors because the biggest impediment to success seems to be investors own behavior. Well I’m kind of a Jack Bogle acolyte in terms of small investor should be involved in funds rather than picking stocks and there’s a reason that their guard has risen to over three trillion with a T trillion dollars over the past few years a lot of people of come to that same realism.

Faithful to the BOGO rule.

We’ve been speaking with Arthur Levitt the former chairman of the Securities Exchange Commission during this fifth anniversary of Dodd Frank talking about regulation. If you enjoy this conversation be sure and listen to our podcast extras where the discussion continues for as long as as our guests have time for. Be sure and check out my daily column on Bloomberg View dot com Follow me on Twitter at results.

Arthur I know you tweet your your Twitter handle is. I know you have it @aLevitt. I’m Barry Ritholtz You’ve been listening to masters in business on Bloomberg Radio. Welcome to the podcast extras. I’m Barry Ritholtz my special guest today is Arthur Levitt. He is the former chairman of the Securities and Exchange Commission. And indeed you were the longest serving chairman weren’t you. Yes And Arthur is for those of you who know your way around the radio dial. Arthur is a regular on Bloomberg Radio has his own shows where he voices his opinion and chats with various guests on weekends. It’s always a fascinating conversation.

There were a number of subjects we didn’t get to in the earlier part of our conversation and before I get too far left let’s click through those and get to the rest of our questions. First a lot of people may not realize we’re here in New York City which is part of the great state of New York. And after the financial crisis it looked like New York State really beefed up their own state financial regulatory apparatus because they were here in New York and all of these big banks are located here as well. What does the New York State Department of Financial Services have to say about regulation of big. Brokers and big banks.

Well they took over the responsibility of the Banking Commission and added to that the banks and brokerage firm so just pretend you are a financial institution in New York. You’re regulated by the attorney general by the new Department of Financial Services by the SEC by the United States Department of Justice and The New York City district attorney. That’s quite a mouthful of regulation.

You would think that would keep people on the straight now. I think that the state probably looks upon regulators as a source of revenue and I think that creates unintended consequences. Can we say the same thing about the look at all the massive fines we’ve seen isn’t that the same true about Treasury was even Justice it was Treasury Department and F.T.C. issuing these giant.

I don’t think the federal regulators look upon it so much as a source of revenue as they do a measure of punishment.

OK. But nevertheless I think financial institutions in the state of New York are probably over regulated and overregulated and spend a massive amount of money on defending themselves and fending off the various competing interests that seek to regulate them because regulators are there to take action to extract fines to punish they’re not there to praise good behavior not a pat on the top of the head and then doing what you do.

Regulators want to be recognized by scalps. And I think doing business in the state of New York is a pretty punishing experience for people in financial services. So we went from radical deregulation and shutting of all. All these prophylactic measures to the opposite extreme now there’s too much regulation ironical is and so what is Will. Will the pendulum swing back to a balanced middle are we compelled to always be at one absurd extreme or the other.

Well look at the pressures that are pro regulation and the pressures that oppose regulation in the state of New York. Regulation is a source of revenue and it’s cloaked in the garbage of protecting investors and that suggesting that the regulatory agencies aren’t capable of doing the job. The S.E.C. the c F.T.C. or the New York attorney general or even The New York state district attorney or even The New York state attorney general.

Let’s kill that ask the question what was what was the question I had asked of the stream we’ve gone from one extreme to another. So are we compelled to always swing from one ridiculous extreme to the other. Can we ever get a balance in the middle.

Well we’re certainly not compelled Barry.

But why do we have a new state agency regulating financial services if we already have the district attorney the state attorney general the U.S. attorney and the SEC.

Well the argument that the state made was during periods of exuberance. Everybody seems to forget the regulatory responsibility and back away and not get in the way of a happy market. Well why stop here why not say this new financial regulator will do the same thing when the next blow up occurs.

No I mean no reason to think they want no. Of course not. But the point is the coordination between these various agencies. As I think is not what it should be and to look upon regulation as a source of revenue I think is a mistake and hurts our markets and will drive business out of the state of New York. So look I saw my personal view.

So let’s talk about another new regulatory entity the Consumer Financial Protection Board this was Elizabeth one’s brainchild while she was still a professor at Harvard Law School and ultimately was passed. What do you thoughts on on that new agency.

I think that new agency has had a positive impact on our markets. I think that so much of an agency is determined by its leadership. If you get a bad leader an inept leader or a politicized leader you will run into problems I think Richard Cordray has been a balanced leader that has been able to determine the difference between unreal and unreasonable regulation and investor protection and I think he’s implemented a number of changes with respect to banking and the relationship between banks and consumers that have been constructive and I think the very dialogue that he has created is healthy and makes our financial institutions more sensitive to the small investor that I do. Part of the age there was a lot of abuses that took place beforehand that I thought it was a very obvious set of circumstances forty pages of boilerplate for a credit card nobody knew what they were really signing. All sorts of fees hidden and banking and checking accounts. And then my favorite was the lack even though there are all these disclosure documents on mortgages. When I when they got crazy when they got creator. Of doing the subprime. I don’t think people realize what they were really getting into. I think that was the singular event that probably brought about the creation of this agency which was fought and maligned by many in the Congress and it was a bit foreign to or credit stayed the course and really was useful in bringing this about but they do have a competent and fair minded leader. If that changes I think the rationale for the agency becomes questionable.

So many of these agencies are a function of sound effect of balanced regulation not runaway punitive regulation. So you mentioned Senator warren who has grown in popularity for quite a while. Some people and sub segments of the population there was a number of people who thought she was going to run for president or at least for the nomination against Hillary Clinton. She said she wasn’t running and so far it seems like she’s not running. But she recently raised some objections to some nominees for the commission for the SEC commission. What’s going on with with that.

Why is she objecting to some people and we could talk a little bit more how that mission has changed since I was there. This is a very good issue because the responsibility for naming commissioners of the I.C.C. which constitutional way is the president’s responsibility. President nominates a commission and the Senate approves it is correct. Process OK and that has morphed into the Senate taking over the nominating process which the Senate is nominating commissioners and then the Senate approves it. That’s enough. Now what I learn in law school in effect that’s what’s happening because commissions are seeing now are coming from. No staffs or certainly India logically they must coincide with the views of the leading party in the Senate.

Let me let me interrupt you there because and again I haven’t been in grad school for many a decade but I learned that most when I studied securities regulation when I studied corporate law it was always people who were market structure experts accounting experts legal professors with a background in securities law. That was when you were chairman. Certainly the case and you tell your saying this is not how it is any longer.

I’m saying that the tension and friction and animosity that has colored our political process in the past twelve to fifteen years has transferred itself into the process of appointing not just S.E.C. commissioners but to every regulatory agency so that those agencies have now become far more ideological than ever before. And I think the consumer and our markets are the victims of this kind of polarization a three two vote is the norm when I was at the commission a unanimous vote was the norm.

So let me push back against you a little bit on Ana play devil’s advocate and say look we elect presidents and he’s either Let’s look at the past two presidents we elected George W. Bush is a fiscal conservative fairly conservative guy. I’m going to redo that. Charlie just said it forward to this. So let’s look at the politics of this. We elect somebody who’s conservative like George Bush. Isn’t he entitled to fill these appointees with conservative ideologies to various. comissions and fast forward we elect somebody who’s more left of center like Barack Obama. Isn’t he entitled to have his political ideology represented on these commissions.

Well remember the law says that at least three members must be from the party in power. But what is happening very often is that you get Democratic Republicans and Republican Democrats in these positions certainly illogically they have to pass a test now. You asked me before about Elizabeth Warren objecting to a Democratic nominee. That’s unusual when a senator from the same party objects to a nominee of her president. And she certainly entitled to do that and it’s happened before.

I wish that it hadn’t gone out to the media and that this is something discussed that a president will undoubtedly consult with his party members to decide whether a particular appointee meets the test of fidelity to party principles but what why did one object to a nominee from her own party I mean I understand she’s a former Harvard law professor and understands the legalities of the commission as well as anybody. But that’s kind of unusual. What why would she not raise an objection.

I have not discussed this with her but what I read in the press was she objected to the history of this appointee being one who represented corporate interests and she felt that concise reported that she felt that we needed commissioners who were more aligned with consumer interests and corporate interests. On I understand that. So that’s that’s not an unfair objection but it’s more fascinating She’s objecting to the Democrat but have most of the Republican. Having it emblazoned on the business pages just fuels the continuing fight over commissioners and the determination of Republican members of the Senate to get their candidates selected rather for their ideological fidelity than for their knowledge of our security laws I just wish that Congress could take a step backwards and appoint individuals who may be ideologically aligned with their beliefs but are experts in the security laws and are balanced in their judgment so that the commission isn’t perpetually locked in an area logic blockage. So it’s three to Republican Democrat when it’s a Republican in the White House and three two Democrat Republican one is when there’s a Democrat in the White House.

So. So how do you get past that logjam. Is it really just finding structural experts and accounting experts and an SEC law experts or I want what’s the alternative.

I would hope that the senators and approving the nominees of the president would take greater consideration of the individual’s experience with securities matters and the individual’s balance. I think for any regulator balance is the key word the ability to determine what is overregulation and what is fair and reasonable regulation. That probably is the most important critical characteristic of any regulator and any regulatory body rather than having them chosen for party loyalty. So it’s got to be expertise and pragmatism not balance balance not merely being ideologically pure.

Yes you seem to be very. Yes Think about this.

I’ve I’ve lived with a commission that had at one point three Republicans and two Democrats. And at one point three Democrats and two Republicans and we worked in a cooperative way for eight years not one single time was a recommendation overruled in eight years that worked with a three two votes they were one. You know there were five oh they were almost always five. So how much of that is a reflection of how the world has changed since the late ninety’s how the United States has changed and how much of it is just you know politics has become coarser and more divisive than battery to extended everywhere. PERRY I think that’s probably true. I think part of it is a function of leadership whether the head of an agency is the kind of person that can make common cause with the commissioners that work with them. I think part of it is luck if you run in new commissioners who are looking for political gain they will try to harass the leadership or whatever the opposition may be there are a variety of factors that bring this about. But I would ask the Congress and the administration again to choose experts for these agencies rather than idiot logs. So politics is fine for Congress but when it comes to something as important as the SEC put the ideology aside and be pragmatic and get the job done I would be hopeful for this which I think is probably unrealistic in the political environment. We are now experiencing.

OK So that seems unrealistic of all right we can we can work with that. It seems that this is been an ongoing problem not just that. Yes SE.C. but it’s been an issue across all the various regulatory and video from NASA. Even things like NASA and the E.P.A. and as well as the Department of Education and other postal the department just at a certain point we have to get beyond politics and just focus on doing the job. That would be the goal.

All right so let me shift gears with you we’ve talked about we’ve talked about Dodd Frank we’ve talked about the Volcker Rule we’ve talked about who should be overseen 401K.’s and IRAs and the difference between the fiduciary standard and the suitability standard. We’ve we’ve talked about the commission itself. I consider you are obviously an expert I know very little about this so I hope I asked you good questions about that subject but let’s let’s shift gears a little bit. One of the things I really enjoyed about our first conversation the first time you were on it was almost a year ago as last summer was how optimistic you were about the future and how much you were hopeful that this generation was going to find their way into the labor market and start doing good things. Are you still as optimistic as you were a year ago.

Probably more so. Very wary of the political system may be broken and where there may be a disharmony at that level and where we may look back and say boy this is the most poisonous and most corrupt environment I’ve ever seen really isn’t so. If you look back in history we’ve had many periods in history much worse than the period that we’re in. You know I’m involved in my personal life going abroad. Variety of high tech companies on both east and the West Coast and what I see there in terms of the intelligence and commitment and dedication of people involved in new technologies and taking an enormous risks in developing educational backgrounds that are far better than anything that we experienced in our years. I am very hopeful that America will be leading not following in terms of business and in terms of morality. I’m extremely optimistic about the future.

So I don’t really think of you as a tech sort of guy but here you are that looks like an apple watch on your wrist. How much of a tech gadget head are you.

Oh I’m total I absolutely consumed by

I know we’re charging your i Phone right outside right. So how do you like the Apple Watch.

I like the Apple Watch but it took me nearly eight hours to learn how to use it. And I think most consumers are not going to invest eight hours in it so I think we’re going to have to see iterations of the watch if it’s really going to take off. It’s too complicated now for most people. The rule the good rule of thumb is unless you’re willing to put the time and effort in don’t ever but never buy the first one point know of anything you always have to wait to subsequent iterations it always becomes look at Tesler the first Tesla car was kind and the new one is. It looks spectacular right. Or to sixty in two point eight seconds that’s those are crazy. Those are Buganda fire on one point six million dollar numbers the grazer the most visible of technology. Think about those. A specks of technology.

One company that I am involved with is developing a derivatives contract which will enable banks to lay off consumer loan risks which are capital intensive risks. Another company is an online it’s called motif.

Oh I’m familiar with them you know if you could create your own composite basket of stocks following any given theme you want and you push one button and you buy all the stocks at a very inexpensive transaction costs

another one is that PE which uses Bitcoin as a transaction to buy merchandise Microsoft is among companies that will accept Bitcoin for merchandise.

So the gentleman who runs motif What is his name Hardeep Walia. He and I are on a board together of another technology company and since it’s private I don’t want to talk about it but what they do is it’s not peer to peer like you see where people are making small loans. It’s a more commercial peer to peer lending for real estate where a buyer and a seller of real estate loans big commercial loans are able to get together and actually be much more productive offish and it’s really fascinating he and I both are are on their board of advisors. The changes that technology and the phrase these days is called synthetic the financial technology world that’s changing. It’s fascinating what’s taking place in that space.

It really is and has a source of lending and not just one company but there are dozens and dozens of companies that are taking the banks on directly in the banks themselves are looking at some of these services they’re examining Bitcoin rather. Then rejecting it. And I think the consumer is the beneficiary there are now.

I’m on an advisor to another remarkable company called a firm which provides alternative lending for millennia those who really reject the notion of credit cards and bank loans and a firm has developed the technology of approving credit within seconds after the consumer goes online to make a purchase and the consumer then is able to take a loan from a firm that they’d have to fill out lots of forms and papers to do it and more out of the conventional ways. So a friend of mine used to work for a farm. They got bought by Yahoo we moved out to California. He’s a serial entrepreneur he’s built and sold in his third or fourth company what this company did you mentioned that pay.

So there’s a huge issue with identity fraud and the ability to know who’s really who and what underlines Bitcoin is something called the block chain.

Yes which is how the mathematical way that you can tell this is really this person’s transaction and this point was sold to this person.

Well they’re in the midst of creating this technology that allows banks to instantly authenticate a person by this block chain. And in theory it’s going to do wonders for stopping identity theft stopping those sorts of frauds allowing banks and brokerage firms and other large financial institutions whose like Blythe Masters which is which Blythe Masters.

Now I know that name. She was it. J.P. Morgan and now has formed a company that sounds like it’s doing the very thing you’re talking a lot of. That’s why I know the name from J.P. Morgan what’s the name of our company. I don’t require OK I’ll look that up. That’s really interesting.

Just think. But when you stop and think about that underlying Jane which you know you couldn’t issue coins if there wasn’t a way to validate and verify it mathematically turning that into a form of identity is really quite fascinating. Yes it is and I think that it’s been rejected by the banks for years but I think they no regard it quite seriously. You saw that Goldman Sachs made an investment in several of these companies and I know every major banking institution is aware of the implications of Bitcoin and is studying its applicability to all financial services.

You know there’s a conference I go to every couple of years and I want to go every year because it’s overwhelming. But I go every two or three years and it’s out in San Diego and it’s a run of either college students or recent college grads mostly technology something tech some natural tact and you see the creativity in the innovation and the drive that these kids have and it’s hard not to be optimistic about the future when that generation that you know when I grew up the Internet was not really fully formed until many years later. These kids not only grew up with the Internet but they’ve you know the most of their adult life there’s always been smart phones their laptops were ubiquitous it wasn’t this computer thing I should really learn how to use this is this it’s second nature it’s like the telephone to the rest of us and starting from that base their outlook and their creativity really quite amazing.

If we’re thinking about a new form of currency whether it’s Bitcoin or some iteration. That I’m not sure if we’re thinking about space travel if we’re thinking about automated transportation in the form of driverless cars. And these are all being done by people in their forty’s and fifty’s. That’s says something about Americans. It says something about the future and I find it enormously exciting it’s so hard to know what fifty years hence is going to look like someone showed me this article about from the New York Times from like thirty years ago and it was one of these early looks at self driving cars and the funniest part about the self driving cars. The little cartoon graphic with a little animal. I don’t see animated but just illustration and there’s a person sitting in the self driving car reading an open paper like a New York Times on on print matter it’s it’s they got the self drive and car part right. But the idea that all of these things are going to flat screens and candles and things like that was so far beyond the comprehension of people just twenty years ago.

So the question I have to ask you is what is beyond our comprehension. Twenty years hence or travel to the moon or travel to other planets.

I’ll tell you what is ahead. Key players Iran how about that in terms of settling trends. Yes like to trade and it settles instantly we’re fighting now about T+2 right. Why not keep on. Yeah. T. play a little the next day listen you deposit a check. It’s cliff. I remember depositing checks and it would take forever days and days and days. That’s what the Bitcoin is so so now you deposited me Jack in the bank. The money shows up the next day it’s amazing. Now such people don’t realize how much of a huge improvement that is over what we saw or ten twenty years ago. Barry we’ve seen more in the past twelve years and probably the past fifty years have experienced in terms of dramatic technological change. And I think we’ve got the people the brainpower the dedication to deliver on it. I’m really surprised amazed and enthusiastic about the quality of people being turned out by our educational institutions and involving themselves not just in trading pieces of paper but coming up with applications that will change lives and change society you know against the world.

A couple of years ago we we talked earlier about Paul Volcker and what a man of integrity he is. He had given a speech where he jokingly said the only financial innovation there has been in the past fifty years has been the A.T.M. and that was a little tongue in cheek. But the truth is in the intervening five years we’ve seen a run of financial technology. It’s almost like he shot the starting gun and all these little things that were kind of in development before they all came running out very very quickly. I think he’s surprised when he hears about a bit Korean when he hears about various payment systems and transfers systems. I think even he’s amazed by what’s happening on the software side whether it’s the automated algorithmic asset managers derisively called robo advisors to the variety of different.

Always that funding. Look at the crowd source funding was for something like Oculus Rift. This is a company that you know was putting together a handful of virtual reality headsets and just scraping by. They do a Kickstarter campaign and the next thing you know they’re bought by Facebook for billions of dollars that sort of thing was not possible ten years ago. That’s true and there are some downsides to that as well the protections that kept this kind of thing from happening in the past were intended to protect investors from scam Stirrers. And there certainly are plenty of scammers all over the place these days they don’t they don’t go away they’re like roaches you click on the light. They just find a different crevice to hide in. But I think in balancing those interests with the benefits of having greater employment greater technological advancement. I think the Kickstarter campaigns probably are a net benefit and a knowledge in the risks that are involved. I think our society is still better off with more people doing more things than we ever did before.

So so let’s sum up our conversation because I know you have places to go and people to say. On the one hand we went from a regulatory extreme of radical deregulation to excess of regulation and we really need to be somewhere in the middle. You seem frustrated by the political politicalization of the process of nominating commissioners and indeed how divisive politics has become across many regulatory entities but clearly you were very. Optimistic about the future of finance and the future of America. Given given where we are today is that a fair fair assessment.

You know it’s a fair assessment.

Arthur I can’t thank you enough for for your time and your insight and your ability to really flesh out a discussion on regulations. I hope our listeners have enjoyed listening to our conversation about regulation. If you enjoy these sorts of discussions be sure to look up uninsured down an inch on Apple i Tunes You can see all fifty two of our previous conversations you’re actually the first Masters in Business of our second year the show is now going on a year and a week. So thank you so much for being our inaugural guest for our second year. Be sure and check out my daily column on Bloomberg View dot com Follow me on Twitter at results. Special thanks to my researcher Mike that Nick to our engineer Matt and to our producer Charlie Vollmer. I’m Barry Ritholtz. You’ve been listening to masters in business on Bloomberg Radio.