tv The David Rubenstein Show Peer to Peer Conversations Bloomberg November 20, 2021 1:00pm-1:30pm EST
david: this is my kitchen table and also my filing system. over much of the past three decades, i have been an investor. the highest calling of mankind, i often thought, is private equity, and then i started interviewing. i have learned in doing my interviews how leaders make it to the top. >> i asked him how much he wanted, he said 250. i said fine. i did not negotiate. i did no due diligence. david: and how they stay there.
you do not feel inadequate being only the second wealthiest men in the world, is that right? the current chairman of the fcc is gary gensler. he is a former partner at goldman sachs, former professor at m.i.t., and a well recognized expert on the financial markets. i had a chance to sit down with him recently to talk about some of the issues facing them, and how to deal with new new technologies affecting our markets. your main principal at the sec is fairness and disclosure and equity. everybody is treated the same. everything is fair. everything is disclosed, and do not rate the relative merits of investments. that is the principal, right? gary: we talk about is as a three-part mission. investor protection, which embodies much of what you just said. facilitating capital formation. companies that are raising money.
entrepreneurs, but also those of us who are homeowners who take out a mortgage, we are issuers as well. we are raising money. and that which is in the middle, fair, orderly, efficient markets. investors, capital formation, and the markets in the middle. david: since the great market recession of 2008 and 2009, you were then the head of the cftc, which regulates commodities, futures, since that time, the markets have changed dramatically because of technology developments. are you thinking that the sec and other regulators have been able to keep up with the technological changes? gary: it is a real challenge. across our government to stay up with remarkable innovations. the last time we updated our rules for the stock markets, the equity markets in a significant way was in 2005.
16 years later, those rules that may have been fit then, are they really ready for the 2020s? nearly half of our stockmarket does not trade in the transparent lit exchanges, like nasdaq or the new york stock exchange, but there are dark holes or wholesalers. i asked them, what can we do to update these markets given their rapid change of technology? david: let's talk about that particular change. you have said and others have said that the markets are supposed to be equitable and fair to everybody. but so much of the markets are now controlled, some say, by a limited number of market makers who may not give everyone the fairest price. that is the argument some make. how are you going to do with that? is that a big concern or modest concern? gary: it is important for an agency like ours to constantly bring up to date our rule set. i would say it is a central concern. if i could use a different word than you did.
our regular investors, and we have seen an increase in retail participation, but the regular investors as well as big institutions are having efficient markets, and are they getting best execution? we said you are supposed to get the best execution out of your broker. is that happening when a few wholesalers are buying the order flow and a lot of that is getting concentrated around a few wholesalers? david: let's talk about other technology changes since you were last in government. one is called a spac. it is a new device that enables someone to go public without going through the normal ipo process. does that offend you that people are going around the ipo process you have at the sec, or do you say, ok, as long as some disclosure occurs? gary: i think we at the sec are committed to being technology neutral, and innovations like special-purpose acquisition companies, which have been around for quite some time, they
took off in the last two years, and there has been hundreds of them, as you know, and well over $100 billion raised through these fundamentally blank check companies. what we are looking at is how do we guard the public disclosure, but there are also significant fees, they take 20% as it promotes, and we have two years to invest the money, they are encouraged to invest the money because they want to get that 20%, and then what sort of conflicts does that set up? what due diligence are they doing when they buy those target companies? having said that, we are looking at how we can bring greater disclosure, transparency, and deal with inherent conflicts. david: there is another issue called gameification. which is to say people are making a game out of trying to
buy stocks, very young people are caught up in it. you have young day traders. are you worried about this phenomenon? gary: if i could take a step back, we live in the 20 20's, in a new digital age, where applications on our phones can use massive amounts of data and predict our behavior. this is true outside of finance and inside of finance. outside, streaming apps figured out a while ago that i am a romcom type of guy. that is figured out. in this space, whether a robo advisor or brokerage app, if they figure out by giving you, david rubenstein, a certain signal, color, or behavioral prompt that you might trade more or you might buy a higher revenue product for them, therein lies a potential conflict. what do we do when digital algorithms are maximizing for
companies' revenues rather than our returns? we are trying to think that through. it is not just gamification. it is a little more than that. it is whether there is a conflict between the app and our investment returns. ♪ david: ceos today are more outspoken about public policy issues. is that something the sec things as a good thing or should ceos worry about the share price, earnings, things like that, or should they comment on voting rights, climate change things, what do you think ceos should do? gary: we hear from market participants, that helps us be better at what we do. we hear from advocates all across the markets and all across the political spectrum.
that helps the five of us in the commission to hear from the public. whether it is a chief executive officer or someone buying their first 50 shares of stock in a company, do we benefit from hearing from folks. and my call lists are made public on a monthly basis. you will see that some ceos get in touch, they want to say something about -- maybe it is about equity market structure, maybe it is about climate risk disclosure, maybe it is about spacs or crypto, and we do not have to necessarily agree. when we disagree to disagree agreeably, as my uncle norman used to say, but it is helpful to hear from people in the markets. david: today, what would you like most people who are not knowledgeable about the sec, who are watching this interview and want to learn a little bit, what would you like them to most know about the sec? gary: markets work best when we
david: they are not subject to accounting oversight in the same way that american companies are. are you worried about that? is there anything you can do about that? gary: we are both baltimore boys. we remember our senator in maryland for 30 years. paul and mike came together in 2002. president george w. bush worked with them on something called the act. there was another basic bargain. if you wanted to raise money from the public, not only did you have to provide financials, your auditor had to be subject to inspection. basic bargain. nearly 20 years later, companies from 50 jurisdictions have allowed their books and records to be looked at. in essence, the auditors to be audited. two jurisdictions have not. china and hong kong. last year, congress said, enough is enough.
they set a three year clock in place. 2021 is year one. that if we cannot work this out, if the auditing firms of these china related companies don't open up their workpapers, then what congress said is, we have to suspend trading. these companies should not be able to access u.s. markets through our stock exchanges. david: you are too modest to point this out, but a senator's principal staff person drafting this was gary gensler. so you know this pretty well. gary: there were others involved as well. i learned working for a senator, it was all there. if it went well, it was theirs. if it went pear-shaped, it was the staff's. but yes, i do know it. it was after enron failed. congress stepped in and said they had to change this and up the game, up the rigor with
regard to auditing in the united states. david: as you pointed out, both of us are from baltimore. we did not know each other growing up. i am 10 years plus older than you. you grew up in baltimore. were you in a very wealthy family? or was it a blue-collar family? what kind of family was it? gary: neither of my parents went to college. in fact, my grand folks didn't even go to high school. my dad started a small business with his mustering out pay after world war ii. while he never had more than three dozen employees, it sent all of us kids to college. it helped pay down the mortgage over the years. we lived a good life around this small business, and through the community where i grew up in. david: you had four other siblings. one of whom is your twin brother.
gary: i have an identical twin brother. watch out if he goes on tv. david: who is smarter? you or your twin brother? gary: rob is. david: you went to pikesville high school, a very well-known high school. i assume you are near the top of your class. you went to the university of pennsylvania undergrad. gary: yeah, rob went there as well. we both went to warden. he got in a little earlier than i. i was accepted. we were both kind of math kids. i was accepted to m.i.t. my twin brother had gone to wharton, already accepted, and i decided to go the same place. it worked out for me. i ended up at m.i.t. many years later. david: you graduated after wharton and then went right to goldman sachs? gary: i joined a group called the merger and acquisition area. it was about a dozen people. then it grew. it was throughout the 1980's. it grew rapidly.
david: you become one of the earliest and youngest partners at goldman, is that right? gary: i was honored to make it into the partnership while i was in the merger and acquisition area, that is right. david: you are making a great deal of money. why did you leave goldman sachs? gary: i spent 18 years there. i did a number of things. not just the merger and acquisition area, but i went to the trading side and helped run part of the back office. it was really just a remarkable experience and opportunity. i felt some connection to public service, maybe as a kid that was a class treasurer and lost for senior class president. i always had this connection. i felt public service was something, if i had the opportunity, i wanted to be part of. one of my mentors and bosses at
goldman sachs, bob rubin, had been chosen by president clinton to be his national academic -- economic advisor and later treasury secretary. secretary rubin knew i would be a soft touch for service. when president clinton won a second term, an opportunity arose. i guess i competed for it. an opportunity arose, and i went down to the clinton treasury as an assistant secretary for financial markets and i have not looked back. it has been a terrific 24 years. david: after you left the clinton administration, did you decide to go back in the investment world? what did you do? gary: no. the first thing i did along with a colleague from the treasury department is we wrote a book. we thought of it is a common sense book on investing. which really was promoting the use of low-cost index funds for people who have their retirement
savings and saving for their futures. that was the first thing. then i started working on this accounting law. david: ultimately, president obama is elected and he asks you to be the head of the cftc, is that right? gary: yeah, i had been working on then senator clinton's campaign, the 2008 campaign, as a senior advisor. i was particularly honored that he reached out and gave me the opportunity to serve once again. david: when you headed the cftc, we were going through a recession, so you had to pick up a lot of pieces of failed investments. was that a more challenging position than the one you have now? gary: they are both remarkable organizations. the cftc is smaller. and the cftc is interesting. it was set up to oversee commodity futures.
or derivatives for corn, wheat, and then in the 1970's, it was expanded to energy products. yes, interest-rate products, and even the s&p 500 stock futures. so these derivative products -- an innovation had come up called squabs, which are similar to futures, another form of derivatives, had not been regulated. and in the middle of that 2008 crisis, swaps led to some of the instability in our markets. working with some other people at the sec, working with all the members of congress across the aisle, we cobbled together reforms for this swap market. david: you had a very impressive career. it is still very impressive. at one point, you had a tragedy, your wife passed away. you had to raise your three daughters essentially by
yourself. how did you do all that while you were doing these other things? gary: i am not sure i did it all that well. i was actually off the grid. we lost francesca in 2006. she had first had cancer when we were kids. she was not but 30 when she first had cancer when we were dating. we were blessed to go on and get married and have three wonderful daughters. but we did lose francesca to cancer in 2006. i was off the grid for three or four years, pretty much a stay-at-home dad. david: have any of your daughters been influenced to go into financial services? gary: no. one is a remarkable artist, a political cartoonist, one has a phd in cultural anthropology, and one is working in immigration law.
david: so president biden asked you to head up the sec. were you interested at the time? you were at m.i.t., you finally got your taste of m.i.t., so why did you decide to leave and run the sec? gary: when a president asks you to do something, it is really hard to say now. let me just say that. it is also an incredible privilege and honor. i had been around capital markets my whole adult life, starting as a 21-year-old at goldman sachs. and here, some four decades later, i was asked once again to serve. it is a hard thing to say no to. i will say this, being a professor at m.i.t. is an incredible experience.
the vibrancy of the student body, the faculty, the staff. but even there, i was studying the intersection of finance and technology. i was spending a fair amount of time on that intersection and the new innovations around fintech and more precisely around artificial intelligence and also cryptocurrency. it started with the white paper 13 years ago. david: let's talk about that. you did teach at m.i.t. about things -- you don't like to use the word cryptocurrency -- but essentially cryptocurrencies. what is the sec doing about that? our cryptocurrencies a security or not a security? is it a currency? what is it? gary: it is clear that if you are using this new technology to raise money from others, and those other people, the public, are anticipating profits based
on the efforts, that brings it into an investment contract. congress backed it back in 1933 and 1934. congress painted with a very broad brush. they painted with a broad brush to protect the public from fraud when people were raising money from the public and the public is anticipating a profit based on those individuals raising the money. it depends on the facts and circumstances. it depends obviously on each individual token. but many of these, maybe even the majority, are tokens raising money from the public where the public anticipates profits based on the efforts of the others , the promoters. david: should we anticipate that you will have regulations clarifying what the sec is going to do on cryptocurrencies and related kinds of things in the near future? gary: i think it is pretty clear
-- my predecessor said this more than once, that many of these tokens, and his words were that he had not seen many that were not securities. what we have asked the trading and lending platforms and other various venues to come in, to work without's, to get registered under the securities laws. because if a platform has 50 or some of them 500 tokens on their platform, the probability is that they're not all not securities. david: how do you get ideas from the white house? you were appointed by the president. you are the head of an independence agency. if the white house has policies, do they call you up? or once you are appointed, you don't see the president again? gary: we work very closely with the department of treasury, the other financial regulators. of course, the cftc, the federal reserve.
i am a member of the financial stability oversight council. something congress set up after the 2008 crisis. yet, we are an independent agency where if we write a rule and certainly if we do enforcement actions, we do not check in with the white house. that is by congress' will. congress wrote the law that way. there is a certain independence from that daily back and forth. david: so president biden is not calling you saing, -- saying good job, gary? gary: i probably wouldn't want to disclose any of that. that would be a pretty unusual precedent. i know my predecessor may have played golf, but that is not happening here. david: how do you stay in shape? you look like you are pretty fit.
how do you exercise or state and fit -- or stay fit when you are chairman of the sec? gary: you are kind to say that. i have been a lifelong runner. i learned a little bit about athleticism. that fateful decision to go to the university of pennsylvania, because my twin brother was there, i ended up being a coxswain and i learned from my coach this incredible sense of -- he was an olympic gold medalist -- this incredible sense that it is important to think about our bodies. even to this day, i still try to get out and run. i am not as good a runner as i once was. i have done a fair amount of biking and mountain climbing. my eldest daughter, youngest daughter, and i also trekked together. my middle daughter, the anthropologist, does not like that bit but these are some of , the things i tried to do. david: the pleasure of being the chairman of the sec, why do you enjoy doing this? it is a 24 hour day kind of job. you are always going to have critics. why do you enjoy this job?
i assume you enjoy it. gary: i do enjoy it. everybody is going to find their passion. i was intrigued and interested in finance. my brother and i, we got this gift of math and numbers. i always felt like what we could do to leave our world a better place. when we get to the end of our lives and look back, it is family, loved ones, and friends. to me, can we leave the world a little bit better off? that is what motivates me. can we do something that is better for working families? or people starting out in their lives, saving and investing for their future? and tip the scales a little bit in their favor away from the folks in the middle. david: does your twin brother ever say you did a better job than he did in your career?
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