Welcome to the podcast. Very exciting show today
we're talking about Wall Street and perhaps some of its excesses and we have with us, Rob
Jackson is going to be joining us. Jackson was a commissioner
at the United States Securities and Exchange Commission 2017. Thank you, Jon. I had spoken to you earlier
about the SEC and enforcement because, you know, there's a long adage in American culture
that says, "Crime doesn't pay." I believe it might have been Batman
who may have first proffered this incredible old saw crime doesn't pay. But as I watch the shenanigans
unfold on Wall Street, it looks like it pays very well. And it's as though Wall Street doesn't follow the same ethical standards
as everyone else. And when they get
caught doing illegal things, the government basically says, “Listen, you cannot launder money for drug cartels...” “unless you give us like 5% of it.” It's Las Vegas, right? The only difference between Wall Street
and Las Vegas is Las Vegas is incredibly
well regulated. Like you can't- If you cheat there, they will fucking
throw you out. With Wall Street, they cannot keep up. And so the question is, how do you create accountability when over the past few years It's almost as though the SEC,
they haven't given up, but they've acquiesced to the way of we're not going to really send
too much to the DOJ. We're just going to see
if we can collect a few fines, continue along our way and go along to get along. So Jon, I think to be fair to the SEC, - as you pointed out-
- Alright. these are folks who who are underfunded and undermanned. - I mean listen Jon, as Gensler pointed out to you-
- Yes. - during the Trump administration-
- Yes. they had a decrease
in their workforce of 5% - while the stock market exploded.
- Right. Right? So asking these guys- getting mad at the SEC because they don't
have enough money to do the job of holding people accountable in
my mind is a mistake. Well, but let me- so you bring up an excellent point. They don't have the money
or the resources. But if you are tasked with a certain job, you can either raise holy hell that
it's money or you can change your model. And the thing that struck me with Mr. Gensler no offense to him is institutional thinking at its core that was rigid and not willing to step outside. I brought up this idea of the apes. They have discovered
a lot of the inequities and unfairness and outright cheating within this Wall
Street system that's not very transparent - and is not very open to, especially to the retail investor.
- That's right. When I brought up this idea of like, let them be a crowdsourced way of identifying things that can help
you target them more easily. He was like, "We have a
whistleblower program." "The whistleblower program
has given out $7 million -" like it was all very by the book. You're getting your ass kicked. Throw out the book,
and let's come up with some interesting and novel ways -- you're analog, they're digital, like... You got to figure it out. So listen, I think that's very fair, and there's a whole host of things
that they can and should be trying. And one of them, by
the way, is using social media and trying to understand
what investors are seeing and making sure that
they have investigators who are thinking through
those alternatives. But Jon, I want to say something else,
which is the regulated entities. They have lawyers. Good ones. And if you go outside the box, they'll sue you and win. One of the things I tried to do- now, your episode’s about the stock market, right? - It's about payment for order flow.
- Right. It's about the exchanges
being for profit businesses - when it's not how they start. OK.
-That's right. So we tried to make some rules about that. And a couple of days after we announced them, op-ed in the Wall Street Journal from the chief executive officer of the New York Stock Exchange. "Why we are suing the SEC." Why were they suing the SEC? Because we wanted to make some
changes to the transparency and the governance of exactly the issues
you were discussing on the show. - Right.
- So we decided we wanted to make some changes. We made those changes into a rule and they took us to court and beat us. And I got to say, Jon, whatever you want to say about the SEC,
when they go outside those lines, the regulated finance industry has really good lawyers and by the way,
not for nothing, but some of their lawyers used to work at the SEC
and many of them. - And- absolutely.
- Many of them. And these guys go into court and and they often are able
to keep the SEC from doing its job. - I think it's a huge problem.
- So that's what I'm saying. It's very clear right now that the sheriff is like one of those Wild West towns
and the one sheriff. But the sheriff changes every day because like, they keep
chasing out the old sheriff. And then there's a new guy in there. There's a revolving door
between corporate America and the SEC. It's- It’s self-regulating in a large extent, but they don't have any incentive to control, especially not even the front room casino of the stock exchange,
which is the most transparent part of it. It's the part that we see, the part
that the stock ticker on is the most transparent part
of the stock market and that functions with,
as Citadel themselves wrote in a memo, payment for order flow is rife
with conflict of interest. It is not an effective way. It's - there's all kinds of non-transparent fund transfers that don't go on. The retail investor has difficulty seeing how much of the market is shorted. You know, with GameStop, they were holding I think, a short position of 140% of the entirety of the company. So within all those parameters, the sheriff in that
town has to come up with another way of approaching things because it's very clear
what they have decided is we're going to neuter the SEC to the point
where we're comfortable paying whatever tariff they impose on us to give us the patina
of a well-regulated industry. It is not, well regulated. Absolutely. It is not well regulated. And you're absolutely right
that the fines that these companies pay just the cost of doing business for them. Right. That's absolutely right. And what I would say,
Jon, is if we want to have a conversation about how to fix that problem,
that conversation's got to include doing something about the amount of money
the finance industry gives to Congress. The amount of money that's spent
by these sort of the Chamber of Commerce and the Business Roundtable on these
congressional races is so astonishing and completely nontransparent that what we end up with is a system where members of Congress don’t want to fund the SEC to do its job. It's a capture. They've been captured. It's worse. Listen Jon, when I was at the SEC. Every day I have like a calendar
that tells me what I'm doing that day. Half those conversation, half
my calendar is meetings with industry, their lawyers or their lobbyist. And by the way, I was a guy
who spent more time than most actually meeting with investors
rather than the industry or the lobbyists. So that was interesting. So Gensler brought up, you know, you've
got you've got these two polarities. one is capital formation, where you're trying to create a system
where there's enough trust in it that people will invest their money
into businesses. And those businesses can use that capital to make investments in infrastructure
and hire people and all those things. But the other is investor protection. But it seems very clear that investor protection is again a facade to really help lubricate and facilitate capital formation... for these companies. Well, I’ll say something else about that. You know what I don't understand? What I don’t understand when people talk about those two goals being intentional with each other. Why is it intention with capital formation to protect investors? - To my mind, if you keep people-
- Rob, preach! Preach! To my mind if you keep people from getting screwed
over, that will help capital formation. If you make people believe that the market actually works and isn't a casino, that will help capital formation, but unfortunately, I think the way people are thinking about it in Washington is you have to choose. Either you make things inexpensive and easy to rip people off or you make them expensive and companies
can't get money. And I always thought this was a false choice, man. But here's it’s- I think it's even more sinister than that. I think if you look at monetary policy
where they keep interest rates near zero so that you really have no other choice
in terms of savings other than to flood the money into the market, which inflates all the assests of the market you have pension funds that are allowed to gamble
with hedge fund operators. So the money that people are saving
for their retirement gets flooded into the return that those people get on the games that they’re playing in the backroom casino far dwarf what they're giving
to the pension holders. And what it says to me is not only are they
not protecting investors, they are actually lubricating the chutes to get investor money
to help them play their casino games. And they refer to it as dumb money. And it's very, again, it looks like a scheme to get dumb money so that their system of stocks
gets overinflated, not to mention the whole derivatives and and other nonsense that goes on behind the scenes that's really not transparent. So a few things about that. First of all, I think I noticed in your episode that some of your staff asked you
what it must have been like to earn 5% on a savings account. - Yes.
- Like, that's like a relic of the past. - Yes.
- And you made a point to the panel that I thought was important which is it's no longer politically tenable to govern while the stock market falls. - No question.
- And- - No question.
- I think that's a problem, Jon- because the truth is Gary Gensler shouldn't be in favor of the market
going up or down. Gary Gensler should be in favor
of the market being fair and protecting the people who are trying
to save for their retirement. And I think at a human level, he does feel that way. But the political reality is that if the market goes down, he's
going to be blamed for that. And that's not a tenable
way to to be the sheriff. That's not a that's not a way
that a regulator can do their job. And I think that it's one of those situations where the people that are the insiders of the market resent
the retail investors, they really resent this GameStop, you know that they got a little taste
of their own shorting medicine and they got put in a short squeeze
by the retail investors. They really hate that. But it was, I thought, interesting
that the reason that they were upset with the retail investors
is that they weren't playing fair and they weren't paying attention
to the fundamentals of the market and the balls of the insiders of Wall
Street to say that they play by the fundamentals of the market... is stunning, it's either... I think either completely dishonest or completely divorced
from the reality of what exactly is going on in the stock market,
and I think you hit it on the head. It's untenable for monetary policy
to drop the value of the stock market. It's untenable for the government to have any control over how the casino in the back room operates. We're at the mercy. Of greed. Like flat out greed. Presented as free market capitalism. It is not a free market. I don't even know if it's capitalism. It's certainly “crony something.” The good news about that is that anybody who's serious about a free market about actual like sort of a libertarian way of thinking about this knows that the stock market system we have is broken. I'll tell you something else. When I went, when I was on the SEC and we made rules to rein in the stock exchanges, I had bipartisan support for that. We lost in the courts. But even members of Congress would say, "You guys are doing the right thing,"
because this is not a free market- It's not a free market, Jon, when one side is paying another side to get dumb money order flows into a particular place where you can
trade against them for profit. - That's not a free market that's-
- And hyper inflating the volume- and making their money skimming each trade. I think that's right. And I want to note something that
you didn't point out on the show, but I think it's worth noting because
payment for order flow is a real problem. But you talked about it with stocks. - Yes.
- Now on stocks- that market has been very, very well developed over years and we can debate it. I'm not saying it's a perfect market, but it's a market that works reasonably well. The market where Robinhood really
makes its money. The market where payment for order flow is a great
source of profit is the options market. There you really make money. Why would the options market be more lucrative? Is that because there's even less
transparency or regulation? - Yes.
- OK. There's more room in between the the bid and the price for an option
in which they can make money. - There's more options than there is for stocks.
- Right. To explain to people when you order up a stock or something. They have like price discovery
and they create a market and there's a certain price
that you go in there and you might say, - “Buy this at 25.”
- Right. Right. - And they might know that they have a buyer at 27.
- Right. Now why is the option give them more leeway on price? A short way to put this is that dumb money is dumb
when it comes to stocks, but it's even dumber
when it comes to options. - Jesus.
- That is they have more room- on options because they're going to have to turn around and find another order that’s even wider apart, and they'll be able to make the difference. - And they'll get that difference.
- That's right. And it's not illegal for them to take that difference. Not at all- and not only that it's called price improvement. Because you see the- No, Jon. - Wow
- They're doing you a favor. You seem ungrateful. - I'm-
- Fucking Orwellian. So it's called price improvement because what they're saying is there's a- there's a price on the- there's a bid on the ask on the exchange. Here's what it looks like. And as long as we get you something inside here, we did better for you. So- So they’ll- when do they establish that range and is the range different
for options or for stocks? - Like will they give you for an option, a bigger range?
- Yes. - OK, so that's where they get their money.
- Yes. And just to say a little more about that, I think one of the things you pointed out in the show but didn't go into detail on is that you might ask, “Hey Rob, where does the range even come from?" for stocks, say. And the answer is the stock exchanges have what’s called a sort of public data feed. They're required by law to maintain it. It's got a bid and an ask, and it tells everybody here’s what the bid and the ask are for stocks during the day. So that public feed is, as I say, it's run by the exchanges. Over time, the exchanges became
for profit vehicles and they figured out, you know, that public feed. Maybe we should have a private feed that's better. - Oh, for fuck's sake.
- That's faster. And they do, and they charge fees for it to Wall Street. So is that when these companies put up a microwave tower or they move their servers closer - are they trying to jump that feed?
- Yes. Also, what they what they'll do is they'll- the New York Stock Exchange itself will make updated feeds, quicker, faster data or better information, and the brokers will pay for that. for that data so that they can trade ahead of the feed as well. So if you're a retail investor, the feed that you're getting
is almost like a glimpse into the past. It's a bit of a time machine, like when you're seeing that stock ticker on the television it's like seeing the light of a different distant star. It's the light you're seeing isn't the light of now. - It's light from some time ago.
- In a way that's right. And not only that, Jon, but you might say to me, “Hey, Rob, who runs the public feed?” Boom, who runs a public feed, Rob? The New York Stock Exchange. - Motherfucker!
- That also- - And they're for profit.
- And they are selling a better private feed. When I was in office,
I gave a speech where I said, “This is sort of like letting Barnes and Noble run the public library. And then being surprised that the library sucks." Right. Because they're trying to sell a different -- So then the question becomes,
can the retail investor get the private feed? Or is that something that is only attainable to the large bore investors and hedge funds and things like that? It's so expensive that it's almost always the latter. And not only that, but the SEC has done a relatively poor job in getting transparency as to why these prices are what they are and how they get set. And by the way, we tried to change that on the SEC, too. And what do you think the New York Stock Exchange did, Jon? I believe they might have sued. - They sued us.
- And won. Well- that one’s still in court. That one is still in court. By the way, while we're talking about this, - here's something else that is true-
- Yes. we said the New York Stock Exchange and other exchanges
like it, they’re for profit now. When they make mistakes, they get sued. - And-
- You’re talking about flash crashes- - And things like that.
- All kinds of situations- They get sued and when they get sued, what they do is they tell the court, “We're immune from suit.” “Because we're a regulator, you see.” So, they get the benefit of being for profit, but also get to claim being a government like entity when they get sued. They’re a utility when they need to be a utility and a private company when they need to be a private company. That’s right. So this brings us to another area of accountability that we didn't really get into in the episode with just, other than random shots. You have financial news networks that are 24 hours a day, seven days a week. Which have tremendous resources, a ton of financial journalists, certainly people that absolutely understand to a T the things that you're saying and the criticisms that you're raising, but you never hear it on air.
The things that you’re saying seem like scandals that can be addressed through good journalism and through tenacious kinds of muckraking. But those financial networks, they remind me of like, if you ever go to a- you're staying in a casino and like, they have that TV channel that's the casino channel. And Suzanne Somers is always on it like, “Blackjack is fun and easy and you can make millions.” You know? The financial news networks are abdicating what would appear to be their primary function, which is to hold to account these enormous financial institutions. I think that's absolutely right. I think we saw that in ‘08 and ’09 and I think there was somebody who asked some pretty hard questions of Jim Cramer on that subject. I don't recall that because I was, I was pretty drunk during that time, but I’ve since sobered up. I see, and I think that's a big part of what creates that conflict in financial journalism today. There are some very good journalists who are prepared to hold Wall Street to account, but not as many as we need. That's for sure. That strikes me as the lowest bar of entry to somebody that would call themselves a financial news network. That they- it’s very clear that the apes have uncovered all kinds of shenanigans and inequities and a two tiered system that they don’t have access to. And I don’t think any of it would come as a surprise to the financial journalists who work in those, who work in those networks, and yet they don’t seem to have an interest in exposing them and correcting them. In general, I think that's the way they report it, and we see that in the, in market behavior. I don’t see a lot of hard-hitting interviews there where people are coming on and getting asked really hard questions about, “Is this the right system?” and “How do you make your money?” and “Do you feel good about the way you make your money?” The journalists that cover finance should be asking the same questions that the SEC is asking. They should- their interests should be aligned. I think that's right. And by the way, you know, there are folks out there who are taking who- who do that kind of work. But they're not the folks who have the biggest microphone. And I have to be honest, Jon. I think that's why if you look at something like ‘08, that’s why it took so long for the journalists to accept that that's what was happening because everybody was on the phone telling them it's going to be fine. I think that the markets we've created are increasingly volatile and increasingly fragile. We learned that the hard way at the start of this pandemic, Jon, because at the beginning of the pandemic, before it became clear that Congress and the Federal Reserve were prepared to act aggressively, the stock market was, went on a terrible, terrible ride and it was only the existence of these policies you just described that led it back to the market we have now. I think people who aren’t in the day to day Wall Street game see that and think it's bullshit and they’re right. It's not been the American experience or system that the government sits back with a cannon of money and bails out investors who made mistakes. But that's the world we have now. Twice, Jon. Twice in 10 years, the U.S. government has intervened in private enterprise and bailed them out from their mistakes while inequality has risen. I'll give you an example. When I was on the SEC: 2018, 2019, 2020. Airlines, which were doing very well at the time, did huge amount of stock buybacks. What they decided was, look, we think the stock’s cheap. We've got extra cash. We’ll buy back some shares. Then a pandemic happens. Bad for travel, Jon. Now they have a problem. Now, in my view, what’s the solution to that? Well, maybe you shouldn't have been buying back stock last year, and maybe we need to have a bankruptcy process where the executives and everybody else who made those decisions actually lose some money because of what just happened. - And what happens instead?
- Right. What happens instead is the U.S. government gives them a cannon full of money and bails them out. And I got to tell you, Jon, if you know you’re gonna get bailed out, I don’t blame you for doing stock buybacks when times are good. Right. No, they're acting in their own best interest, - which, which makes sense.
- That’s right. I mean, it's not as though they're not. But that stock buy- the stock buyback issue for the airlines was an enormous one. They were so flush with cash based on the monetary policy and things like that. And when they did all those stock buybacks and when they got hit again, what did we do? - We, I think we bailed them out again, right?
- That’s right. And yet, you know, the individual traveler or those kind of things can never do it. And the reason they always give you is moral hazard. For apparently if you bail out an individual, it is moral hazard. But if you bail out a corporation, it’s the free market at work. And that's why it's so frustrating to hear people say, you know, “We can't help retail and we can’t help the worker because that’s socialism.” "And that’s the government picking winners and losers." But we pick winners and losers all the time. And we feed those winners cannons filled with money. That's absolutely right. And this is why when I was on the SEC and people would come in to me and make a free market argument, I mean, I have to say I admire the chutzpah in being JPMorgan and coming into my office and saying free markets. Because I’m like, listen man, I was there in ‘09. You got a $25 billion dollar check. Yeah. Ain’t nothing, ain't nothing close to it. And that's the thing that also strikes me is there's no strings attached, for the most part, to any of this money. And so in a pandemic, the Fed can say, “We're not going to collect any kinds of drawdown fees from the banks, in terms of bounced checks or overdraft fees or any of that shit. We're not going to collect any of it.” And the banks can go, “Great, because we’re gonna keep doing that.” “And just keep it.” “We're not going to pass those savings onto the consumer.” “We're just going to use that as a business model.” It's funny you say that. So I- there's sort of two ways to think about this. - Number one.
- Right. The government should get out of the business of handing bags of cash to corporations. But if they can't get out of that business, they should at least drive a better bargain. When they gave all that money, I don’t understand why they didn't have some kind of, “and 20% of this has to be low interest loans to small businesses.” Right, now, to be fair, they did do the Paycheck Protection Program, which had some features that were like that and small business- That- but that was much later. That was in the pandemic. I'm talking about the 2000s, listen, I thought the pandemic relief was much more geared on a Keynesian level and stimulated family. It made much more sense to me - a lot of what they did, I think.
- Me too. It may have been poorly constructed and there might have been some fraud with it, but it made much more sense. But you saw immediately the narrative was, if you give people $600, they’ll never come to work again. You lazy fucking Americans, you essential workers, that have been pounding it out on the front lines of a deadly respiratory virus just to make sure that everybody's avocados come in. But if I give you $600, like all of a sudden, you're going to be like, “Hello easy street. I’m never working again.” Like, it's a bonkers narrative that money corrupts the worker, but it only elevates the corporation. It's only it's the fair thing to do, but it's also the economically sane thing to do to understand that money is equally capable, if not more so, of corrupting a corporation. And to the degree that you keep handing them this money, when there's trouble, they’re going to keep acting like people who are going to get money when there’s trouble. - And that’s unlikely...
- And take that short term gain. So in the future, where do you see the the future of accountability, the future of regulation, and and maybe even the movement of retail investors as a powerful force to recalibrate this market. So first of all, if you want more accountability on Wall Street from the SEC, the first thing you have to do is get some transparency around the money finance gives to Congress. Job one, job one Because you looked at Gary Gensler and you said, “You’re taking coffee donations. And you're up against Jamie Dimon. I don't like your chances.” And of course you're right, Jon. I walked into your coffee room today. There's a little sign that says, “Coffee donations welcome.” We're at the SEC. - Yeah.
- Holy shit. Now we could use some more resources, that is for sure. Congress makes sure that he doesn't get money that he needs to do that job. So I think we should, we should sort of point our attention where it belongs, which is to the degree that you can, you can give money in secret to support political campaigns. Corporations are going to do that and it's going to influence policy. So the first thing I would do would be to say the SEC can and should have a rule that says if you spend money on politics, you've got to disclose that to your investors. Now, as I pointed out to you before, Congress has written the law saying the SEC can't make that rule. Because they like the money they're getting from corporations. But if it were up to me, if I were in this administration, it would be my first, second, and third priority to get rid of that rule and to let the SEC do its job. This is purposefully obtuse. Our financial system is designed to be a labyrinth that is impenetrable by anybody that is not a part of it. That’s right. So, the first thing you have to do, in my view, is get that money out of the system so Congress can make laws that are designed to not allow that to happen. That's first. Second, I think once you get these resources into the SEC and Jon, this is gonna — this is not a sexy answer, but I think it's the right answer. It's a technology issue. Like you heard Gensler say that they’re spending $2-$300 million a year on technology I was at the SEC. I saw some of that technology at work and it's great and the people work very hard. But that's what Citadel and JP spend on technology in a month. That's not a serious technology spend. So you'll have to have the SEC catch up on things like that. If you want to get those — And then I think you're right. I think there is some degree to which the American public and retail investors need to be able to talk to the SEC and help them figure out how to move forward on these things. I know the SEC is learning from the GameStop and AMC experiences. But if I'm being honest I think if we don't get money out of the system. political money out of the system, we are unlikely to be able to do any of that because it'll continue to be Congress's view that the SEC shouldn't get the budget they need for the kind of accountability you want. And maybe it's also a shift that the stock market is not the heartbeat and pulse of the American economy. Our economy is 70% consumer spending and a ton of small businesses. And the truth is these publicly traded companies are a portion of it, but a distorted view of what the health of the real American economy is. And yet it's the ticker that you see on TV all day long. And it gives the false impression that the stock market is our country's economy. And I think that skewed picture is what makes it so politically difficult to change anything. I think that's right because as we said earlier, you know it's just not politically feasible as a strategy for someone to come out and say, you know, the stock market's kind of high. We've been on a bull run for like ten years. Maybe that's not a thing. - Yeah
- it's set up to be that complicated so that it's very, very difficult to understand and fix. I really appreciate you kind of coming by and giving us that inside perspective on the SEC and your experiences there and in terms of your optimism of any of those things changing what would you say is the most likely to be put into place, if any of them? When I was on the SEC the first meeting you have when you get that job is here are the ethical rules. And they sat down with it and I'm a guy who only owns mutual funds. I don't trade stocks. They sit down with me and they say, “Just so you know you can trade stocks whenever you want. You just have to disclose it to us after you're done." And I remember saying, to the lawyer, “Are you fucking crazy? What?” I'm a commissioner of the SEC. You want to let me trade stocks? Are you insane? Right. Like, I'm not going to trade stocks just because I don't want to, like, look like the guy that you would be if you were trading stocks as an SEC Commissioner. Guys that run the regional Fed, the very organization whose monetary policy is been inflating stock assets, those guys can trade stocks. So in my view, that is bad for everybody because never will it be the case where guys like you and me are going to look at those trades and be like, “Oh, I'm sure it's a coincidence.” It’s a coincidnece that they divested all of their funds of pandemic stocks just as this thing was cracking. Yeah and that's bad for everybody. It doesn't make any sense at all to let Fed officials, members of Congress, their staff It doesn't make any sense at all to allow them to trade like this. It's bad for — it was bad for me that they let me trade and I didn't and they shouldn't. So that's a law that I think could pass and will actually because even members of Congress know that being in a position where people are asking you a year later about trades during a pandemic is bad. Excellent. All right, my friend. Well, thank you so much, Rob, for joining us. We very much appreciate the conversation. I'm sure it'll be
a continuing conversation and should get fixed
somewhere around April. From what I understand, so we should be in good shape. So we'll check back in after that. - But thank you very much for joining us.
- Thanks again, Jon
