Outtro:
From the library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, you're Inside the ICE House, our podcast from Intercontinental Exchange on markets, leadership and vision and global business. The dream drivers that have made the NYSE and indispensable institution of global growth for over 225 years. Each week we feature stories of those who hatch plans, create jobs, and harness the engine of capitalism right here, right now at the NYSE and at ICIS exchanges and clearing houses around the world. And now welcome, Inside the ICE House.
Amanda Hindlian:
For our regular listeners, my name is Amanda Hindlian, President of Fixed Income and Data Services at ICE. I will be your host for this week's episode of Inside the ICE House. Prior to joining ICE, I spent nearly two decades at Goldman Sachs, which is where I met our guest today, Gary Cohn. Gary is an American business leader, investor, and former Director of the US National Economic Council. He is an internationally recognized expert on the financial markets, global economy and economic policy, and someone I have the privilege of calling a friend and mentor. Gary currently serves as Vice Chairman of IBM. Prior to that, Gary served as director of the US Economic Council and Economic Advisor to the President. Before then, Gary was President and Chief Operating Officer of Goldman Sachs. He held several other leadership positions in the firm, including Global Co-head of the Equities and Fixed Income currency and Commodities Division. He was also a member of the firm's Board of Directors and Management Committee, and served as chair of the firm-wide Client and Business Standards Committee. Welcome Gary, Inside the ICE House.
Gary Cohn:
Thank you, Amanda. Thanks for having me.
Amanda Hindlian:
It's our pleasure to have you today. So Gary, I just gave an overview of your resume, but that's certainly not everything. In fact, I felt as though I skimmed the surface. So the first question for you is, of all your professional accomplishments, which are you most proud of and why?
Gary Cohn:
So as you said, Amanda, I've had a really interesting career, and look, I would say a lucky career. I graduated college typically in the early '80s and had 100% of no job offers when I graduated. It was a tough economic time and I took a very short-term job at United States Steel in their home building products division. That's probably a little trivia answer somewhere. Lasted less than a year there, got myself to the floor of the Commodities Exchange, where it's heartwarming to walk into an exchange building one that still exists where I took my first job as a runner, literally moving paper from point A to point B for, I think, $125 a week. But it was a way into the industry. Spent time on that floor, working my way up to ultimately trading my own account. And then as you said, in late '90s, went to Goldman Sachs where I spent 27 years. Then the White House, and then running my family office and now running my family office in IBM. So I've had a unique set of experiences. And I think-
Amanda Hindlian:
And we're going to cover those in a lot more detail.
Gary Cohn:
Yeah, okay. And I think each one of these experiences, there's lots to be proud of in each of them. So it's hard to talk about one in specific, but I was at Goldman during the mega growth years. I was a partner in a private partnership. I watched the company go public in this building. And I looked back at the S-1, I looked back at the filing papers to when Goldman went public to what the size of the company was. The company's revenue and earnings for the year, they do in eight to 10 weeks a year now. And you look at the size of the company and how much it grew over that tenure that we were both there.
Amanda Hindlian:
How many employees when you first started?
Gary Cohn:
When I first started, we are about a little bit less than 4,000.
Amanda Hindlian:
Wow.
Gary Cohn:
Yeah. It was a small company. It was a real partnership. And so, you think about those opportunities, you think about businesses that you built. We're sitting here at ICE. ICE was created by some ideas of some silly energy traders who, at the time were being disintermediated by some other corporate entities. And the traders in New York said, this is a silly thing for us to do. We're basically making prices and people are putting them on a screen and selling them back to us. We shouldn't be in that business. We should actually capture our own market. And there was a consortium of market makers created and we went in partnership with Jeff Sprecher at the time and created ICE. So you think about that, really interesting. And at the time, it just seemed like the natural thing to do. No one could have predicted it would've led to what ICE has become.
I think about building a commodity index business, the GSCI, and the fact that prior to the early '90s, no one had a benchmark indice of which to measure themselves against for trading commodities. If you go back to the late '80s, people would talk about they made 80% trading commodities. Well, the truth is, you could have bought one or two commodities and held them made over 100% for the year.
Amanda Hindlian:
Exactly.
Gary Cohn:
Yeah. So there was no benchmark. Then I think about having started that index business, it led us into the LME market or the base metals market. A market that I had never traded, no one at Goldman had really traded. It wasn't a big market for US participants. It was really a British market.
Amanda Hindlian:
Was that J. Aron that was now part of Goldman, or was that prior to J. Aron being purchased by Goldman?
Gary Cohn:
J. Aron is now part of Goldman, or let's put it this way, we are owned 100% by Goldman. Goldman has yet to accept that there are a bunch of commodity traders sitting inside a building.
Amanda Hindlian:
I wonder why.
Gary Cohn:
Yeah, that actually have a coffee tasting room on the fifth floor with spittoons and very-
Amanda Hindlian:
We still have that in our midtown office.
Gary Cohn:
Yes, very plebeian, things like that. The important bankers of Goldman Sachs, it was hard for them to understand that. So building a big base metals trading business in the United States and being the first big broker house there and changing the dynamics of the LME market completely. We got into the LME market when it was all of the, I would say, small regional broker dealers in the UK. No one really had a balance sheet. We came in with a balance sheet and we reinvented the way the market was traded. So I can go through my career and give you different highlights at different moments. All of it's to say is, I've had an unbelievably lucky career. I've been able to do enormous amount of different things, all of which have been fun and interesting. I've learned an enormous amount from each one.
Amanda Hindlian:
It's interesting that you define it as lucky, because I wouldn't say that. I would say you've brought a tremendous amount of hard work and skill to the table. But let's go back to the start. Okay, so you grew up in Shaker Heights, Ohio. Your parents owned a local business, correct?
Gary Cohn:
Yes. It was a family business. My grandfather had started a family business and my dad went right from high school, into the family business, yes.
Amanda Hindlian:
And it was you and your two sisters?
Gary Cohn:
Correct.
Amanda Hindlian:
What was the early Cohn household like?
Gary Cohn:
Oh, I would say organized chaos. As you said, we lived in Shaker Heights, which is a suburb of Cleveland. My dad being in a family business, was out of the house by 6:30 AM. He was not home before 7:00 at night, which in Wall Street financial terms is ordinary course of business. In Midwestern Ohio term,. That's really unusual that your father's not around that much. So it was really my mom and me and my two sisters around the house most of the time.
Amanda Hindlian:
Now, your father is turning 90 this summer.
Gary Cohn:
My dad is turning 90 this summer, yes.
Amanda Hindlian:
And you unfortunately lost your mom right around-
Gary Cohn:
Yes, a little bit over a year, about a year and a half ago.
Amanda Hindlian:
Yeah. A little bit after I lost mine. I also know your grandmother was a very important part of your upbringing, in addition of course, to your parents.
Gary Cohn:
She was, yeah.
Amanda Hindlian:
So can you talk a little bit about her?
Gary Cohn:
Yeah. So my grandmother lived first of all, to 106. So she just died a few years ago as well. So I've gone on a little bit of a tough stretch here, but I was not a great academic student growing up. Let's call it that. Let's go further, I was a poor student.
Amanda Hindlian:
Gary used to tell me, C's get degrees.
Gary Cohn:
Well, I told you C's got degrees, because my kids changed it. I used to say D's got degrees, because in my day and age, D's did get degrees, but my kids have told me, D's no longer get degrees. Which I don't think is fair, because I was a D student, I got a degree. So it's now, C's get degrees. And I was lucky to get D's. I got D's because I was very good at talking to professors and making sure that I could move on, I could keep matriculating through the system. This is not a secret to anyone. I was born pretty dyslexic, severely dyslexic. I was born in the early, early '60s, as early as you can get in 1960. And in the early 1960s, dyslexia was not as well understood, known, diagnosed as it is today.
Amanda Hindlian:
And even now, there's still a lot to learn about dyslexia.
Gary Cohn:
I was severely dyslexic and it affected my entire attitude towards the educational process, because I was a student suffering, couldn't really make school work. Numbers, I was pretty good with. Numbers, I could make work. My only risk is I would transpose a number here or transpose a number there, but I could show my work, so I could get 95% credit at least even if I transposed a number. And because I was having so much difficulty in school, kids are mean, and kids were mean before social media. They're a lot meaner today. But even before social media, kids were mean. And when you're the kid that can't pass an exam or you're the kid that's getting D's, trying to get to the next grade with D's, you become a little bit on the social outcast of the classroom. I'm not saying I was a social outcast, but you have to find a way to bring yourself back to the norm or back to the middle. So I became a little bit of the jokester in the classroom.
Amanda Hindlian:
But I also can't imagine you not trying, because such a hard worker. So would any teacher recognize that you were trying, even though you weren't necessarily meeting their definition of the goal?
Gary Cohn:
So Amanda, you hit an interesting nerve, not that we're going down the whole child psychology. I was trying so hard. I would go home at night, I would spend six or eight or nine hours on work that would take someone else 10 minutes. To the point where I was literally sitting in my room crying, but it wouldn't get recognized because I would turn in work that would look horrible. It wasn't right. So the natural reaction is, your son's not trying or your kid's not trying. And then of course, it's the 1960s, so they give you an IQ test. Because now they think, "Okay, maybe he's got bigger problems than dyslexia. Maybe he's just never going to learn." So then you take an IQ test and you score off the charts and they go, "Oh, now it's really simple. He's just the laziest guy around."
So it just continued to get worse and worse and worse, where teachers believed I was lazier and lazier and lazier, because the more they would find out that I had-
Amanda Hindlian:
You weren't actually.
Gary Cohn:
Natural intelligence.
Amanda Hindlian:
Yes.
Gary Cohn:
But I just couldn't connect two dots. It compounded. So to protect myself as a human and to fit in socially, which I think is important when you're a kid growing up, you find another way to fit in socially. So I became the fun guy in the class and-
Amanda Hindlian:
I'm so shocked.
Gary Cohn:
I knew how to have a lot of fun. So I normalized my relationships and I had a great group of friends, because okay, he's not the guy who's going to... Don't ask him for homework help. Don't ask him to look at his notes, he doesn't have any. But if you want to go out and have a good time or you want to go do something, he's the guy you want to go with.
Amanda Hindlian:
Well, I remember you telling me once that your grandmother noticed your ability for memory recall.
Gary Cohn:
Right. So you've got a very good memory. I was close to my grandparents for many reasons, but the family business that my grandfather had started was an electrical contracting business. And the way electrical contracting business is, you win jobs, you send electricians out to the job and at the end of every day, around 4:00, they would call into the office or the warehouse what materials they needed delivered to the job tomorrow. They would call them in, you'd fill the orders at night, you'd load them on the truck, and the next morning they get delivered out to the job so the guys could keep doing the work. I worked in the warehouse after school. I worked in the warehouse on weekends. I worked there summers. And my grandfather used to say to everyone, "I could fill an order faster than anyone in the warehouse and more efficiently and better than anyone who worked there for 20 or 30 years."
And there were probably 2000 or 3000 different items in the warehouse, in different places. So my grandfather said, "Look, Gary's the smartest guy in that warehouse. He knows where everything is." It's a huge warehouse. He knows where everything is. He knows what everything is. He knows if we don't have A, what can be substituted for A. And so, this is not a guy that can't learn. But to me that was just a logic exercise. That was a logic exercise of someone saying, and sometimes I couldn't read what was on the order, like, "Hey, what are they asking for?" And they'd tell me, I go get them. So my grandfather was the one when my parents were getting very frustrated and saying, "Okay, you're not trying. You're lazy. Let's send you to military school." My grandfather said, "No, you're not sending them anywhere. He'll be fine."
Amanda Hindlian:
It's really interesting. I thought it was your grandmother.
Gary Cohn:
Well, it was really my grandfather and my grandmother. It is hard to differentiate. They both sat in the office and ran the business.
Amanda Hindlian:
I'm going to go back to the dyslexia element for a second, and I want to quote Malcolm Gladwell. He authored David and Goliath: Underdogs, Misfits and the Art of Battling Giants, and he featured you in his work. I'm going to read you an excerpt from that book that references you specifically. And you've touched on it a little bit at the outset, but I would like you to share more with our listeners about this now infamous cab ride. So what Malcolm Gladwell wrote was, "Most of us wouldn't have jumped in that cab, because we would've worried about the potential social consequences. The Wall Street guy could have seen right through us and told everyone else on Wall Street that there's a kid out there posing as an options trader. Where would we be then? We could get tossed out of the cab. We could go home and realize that options trading is over our heads.
We could show up on Monday morning and make fools of ourselves. We could get found out a week or a month later and get fired. Jumping in the cab was a disagreeable act and most of us are inclined to be agreeable. But Cohn, he was selling aluminum siding. His mother thought that he would be lucky to end up a truck driver. He had been kicked out of schools and dismissed as an idiot. And even as an adult, it took him six hours to read 22 pages, because he had to work his way word-by-word, to make sure he understood what he was reading. He had nothing to lose."
Gary Cohn:
Okay, so let's go back to the "Famous cab ride." As I said, I was working for United States Steel in the home building products division, which was only because my dad forced me one day to take a job. So I humored him and took a local job that I knew I would have for days or weeks. I got myself to the Long Island distributor for a couple weeks, and after I made very good friends with the guy who ran the office and I said, "Look, I'm going to work really hard this week. I'm going to work really hard next week for the first three or four days, and then you're not going to see me, but I'm going to be here." And he said, "Yeah, no problem." So I came in from Garden City on first thing Friday morning, and I went over to what was then, 4 World Trade Center, that unfortunately doesn't exist today.
And somehow I just thought I was going to saunter on the floor of the New York Stock Exchange, I'm sorry, New York Commodities Exchange. I don't know why I thought that. I went to the floor of the exchange that day. I spent the entire day there, literally, I think I've got a 5:00 flight. The market closes at 2:30, it's 2:35, and I finally get myself to the turnstile to enter the trading floor and off comes running this guy, pretty well-dressed, seems rational, says, "Hey, I got to run to the airport. I'll call you when I get there." Remind your audience, pre-cell phone days. "I'll call you when I get there." I jump in the elevator with him and I say, "Hey, you happen to be going to LaGuardia?" "He goes, "Yeah, I am." I go, "Can we share a taxi?" He goes, "Great." Ran outside, got a taxi.
In the taxi I start talking to him, he tells me what he's doing, I tell him what I'm doing. And it just so happens, he was a number three or four or five guy at one of the big brokerage houses on the floor. And that next week, they were going to start trading Options on Futures for the first time ever. He was chosen by that firm to go be the broker in the Options pit there. So it came along that, "Hey, do you know options?" I go, "Sure, of course I do." I didn't know anything about them. He said, "Well, I'd love you to come in next week and interview, and if you can help me in the Options, we're happy to hire you. We got a great opportunity for you." I said, "No problem."
Amanda Hindlian:
This was sort of an act of God, to have this, well, your will coupled with, as you had said at the outset, a little bit of luck.
Gary Cohn:
Yeah. Look, clearly a little bit of luck, clearly that he came walking off the floor. Clearly he let me in the cab with him. Clearly that he was starting to trade at Options. Clearly, that-
Amanda Hindlian:
He must've been very tired.
Gary Cohn:
He was open, and clearly that I was smart enough to agree or stupid enough and naively enough to agree that I could help him. So as the story goes, he flew somewhere, I forgot. I flew to Cleveland, I went to Barnes & Noble. I got off the plane, went to Barnes & Noble, went to the business section and started looking at Options books. Luckily, here's another Luck.
Amanda Hindlian:
You dated yourself with Barnes & Noble too, by the way.
Gary Cohn:
By the way, this is all in the early '80s. So there's no Amazon, believe me, we weren't smart enough to figure that out yet. Went to Barnes & Noble and picked up an Options Trading book. Now that I know, I happened to pick up the very best one in the world, Options as the Strategic Investment, the McMillan book. And one of my very good friends gave me an original copy for my 50th birthday.
Amanda Hindlian:
Really nice.
Gary Cohn:
It's framed in my office. So I went home and started reading it. And it's like every typical book, it's three, four or 500 pages. So I made a strategic decision. I said, "I'm going to learn four strategies and they better work and they better get me through the interview." So I basically read four different chapters and I had a week that's like I said, "Okay, take a day and memorize a strategy. Day and memorize strategy." And the good news is, there were lots of pictures in there, Option payouts have nice little graphs. So pictures, pictures are good. Pictures are really good. So I learned the four Option strategies. Came back in for an interview on Tuesday. So I met him on Friday. I came back into New York, interviewed on Tuesday. I moved to New York on Sunday and started working the next Monday.
Amanda Hindlian:
That's wild. All right, I'm going to pivot for a second to your leadership style, and I'm going to embarrass you or at least attempt to. I wonder whether you remember the first time you and I ever met. I bet you don't.
Gary Cohn:
Okay. I'm going to say I don't.
Amanda Hindlian:
Okay. So here's the first time I met you. I was joining you on a flight to the West Coast to see firm clients. There were probably four to six other Goldman employees who were on the charter. And we had to take a helicopter to get to the plane, because your schedule was so tight. And I was probably 26 or 27 years old and I was terrified. I had never been on a helicopter before in my life. And you actually noticed that I was terrified and stopped all of the chaos going on around you to say, "Are you okay?" And it wasn't lost on me as a junior employee, that you took the time to not only notice amidst all of the chaos that I was clearly very nervous, but you stopped everything to say, "Are you okay?" So then I get on the plane with you and there are different folks prepping you for client meetings.
You've got different regulatory issues that you've got to understand. You handed me a really dense paper on the Commodities markets that no one had reviewed for you, but it was something you needed to do. And you looked at me and you said, "Here, go tackle this." And unlike you, I love tests. And I thought, "Yes, I love tests. I'm going to ace this test. This is amazing. I'm going to have so much fun doing this." So I speed read the entire document, then I went back to you and I summarized it for you and you debated me. You didn't let me off the hook. You really hotly debated me on the flight around some of the content, but I held my own. And you smiled, you looked away. And then over time, you gave me more work.
And the reason why I think that's important as a story, is because it reflects one of the things that I think you really embody as a leader, which is someone who wants input, who wants guidance from others, someone who wants the feedback, who wants the ideas. You never ever made me feel that you were too powerful for me to speak the truth to you. You didn't have to agree. In fact, many times we didn't. You didn't always like what I had to say, but you always listened and you never penalized me for speaking my mind, never. And for me, that served as a blueprint for my own leadership style. That's my early impression and those are my words. But how do you think of yourself as a leader?
Gary Cohn:
I did remember that helicopter. I wasn't sure if that was the first trip or not, but I did remember that one.
Amanda Hindlian:
You do?
Gary Cohn:
I do remember. I remember it clearly.
Amanda Hindlian:
That I was terrified.
Gary Cohn:
Yes, that you were white as a ghost.
Amanda Hindlian:
And you now know my proclivity towards motion sickness.
Gary Cohn:
Yes, I do now.
Amanda Hindlian:
So I was motion sick as well.
Gary Cohn:
I knew you were frightened. I didn't realize how frightened you were. Now that I know you well, I know how frightened you were.
Amanda Hindlian:
Yeah.
Gary Cohn:
Okay, so thank you for all those observations. They make me feel good. They really do. They're accurate. That is what I try to be. There are different leadership styles that work. No one should think that their leadership style is better than anyone else's, because I've seen lots of different styles work. The style that I emulated at Goldman and I still try and do today is, I feel like if you go out and you hire the best people in the world, they are entitled to at least be part of or make the decision themselves. If you didn't want them to be part of the decision-making process, you shouldn't have gone out and spent money to hire the best people or retain the best people or attract the best people.
And that's what our special sauce was at Goldman, was attracting and retaining the best people in the world. So my key, or maybe even my key to success was, I'm never ever going to make a decision. I'm going to convene groups of people, get them together, allow them to talk, and just about every time, they will come to a conclusion. And I have to live with the outcome. It may not be the conclusion I would've made, but you know what? If they get together and I convene and I sit there and I say very little, and they walk out of the room agreeing, it's going to be a much better decision because they own the decision. It's not like they're going to execute my vision. And so to me, that's how you run an organization. That's really where your greatest asset is, human capital.
Amanda Hindlian:
All right, well we're going to take a brief break. After the break, we'll talk with Gary Cohn about his time working in DC and dive deeper into his views on the markets and financial crises. That's coming up right after this.
Imtermission:
And now a word from Genpact, NYSE ticker G.
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Amanda Hindlian:
Welcome back. Before the break, Gary and I were discussing his beginnings on Wall Street and how his upbringing has shaped his professional success. From overcoming obstacles to leadership styles, Gary has a lot of insights to share, but there's plenty more to touch on now. So Gary, one of the things I appreciate most about you is your ability to call markets from a mile away. And I'd love to, with that market acumen that you have, get a sense from you not only of where you think the economy is likely headed, the Federal Reserve from a rates perspective is likely headed, and what you think the potential market implications may be.
Gary Cohn:
Let me start it where we are now, and what I think has been so perplexing for everyone, is that everyone gets tied up in the analysis paralysis. And I think the Fed is the ultimate analysis paralysis victim right now.
Amanda Hindlian:
Well, they're data dependent.
Gary Cohn:
They're data dependent, but they're data dependent on their data library, which is a couple hundred years old. And they try and equate everything going on today, to what has happened in the past. We are in a scenario today that they can't find in any of their data in the past.
Amanda Hindlian:
It's unprecedented.
Gary Cohn:
It is beyond unprecedented. And so to me, this is what's causing all the anxiety in the world. So maybe you should throw those statistics out the window and actually listen to what's going on in the economy. So my basic view right now is, you've got this push-pull going on in the economy. You've got the Federal Reserve trying to tighten financial conditions, trying to raise interest rates, trying to slow down the economy, trying to create unemployment. At the exact same time, the Federal Government is desperate to find ways to spend money.
And they're spending money by creating projects, putting people to work, creating demand. And the Federal Reserve is going to lose. And they have been losing, they've been losing for the last year, because the Federal Government's really good at spending money. They may not be as effective as consumers, but they also allow that multiplier effect to take effect as long as they can. Now, we'll see what happens when student loans have to start being paid, but the Federal Government has gone out of their way to create multiplier effects on spending both at the personal level, and at the federal level. And they're not anywhere close to done. So we are raising rates, trying to slow the economy down on one side, and we're spending money like crazy, trying to create demand for commodities, create demand for labor, trying to build infrastructure on the other side. And it may just be that we end up in this okay economy for a fairly long period of time
Amanda Hindlian:
But with high rates.
Gary Cohn:
With high rates.
Amanda Hindlian:
But what do you think that means in particular for the housing market? Because that's the clearest, most direct mechanism by which rates will affect the economy.
Gary Cohn:
Historically, it has. We know that the vast majority of homeowners have mortgage rates locked in below 5% right now. We were at such low rates for so long that you had more than ample opportunity to lock in long duration mortgage rates at four and 5%. I think it's over 75% of mortgages in the United States are 5% or less. So it does mean that trading up in houses is hard. It probably means that there's more capital investment going into existing houses, because you're going to stay there longer, because you've got a interest rate on your mortgage that can't be replaced. It does mean that we see some more shortages of supply, because for new people to build houses, it's very expensive. Construction loans are very expensive and new permanent mortgages are very expensive. So we're seeing this phenomenon where the supply side of the equation is not what we would like to see. But on the other hand, the demand side is tamped down by higher interest rates. So we're seeing all the variability in the multifamily space.
Amanda Hindlian:
But by the way, the demand side is still also being fueled by the government spending and consumer demand still remains robust.
Gary Cohn:
Yes. And I don't see this coming to a screeching halt anytime soon. I think if you actually want to peel back yet another layer, sounds like you do. It feels to me that actual real time inflation, we're in a disinflationary cycle. If you look at real time inflation right now, we're probably below 2%. So the Fed has probably achieved what they needed to achieve.
Amanda Hindlian:
But they won't stop yet.
Gary Cohn:
And by the way, I'm not even sure they achieved it or the cycle has run its course, but we'll give them credit. Let's give the Fed credit that by raising interest rates, we are running at a real time spot inflation below 2%. The market has absorbed higher interest rates relatively painlessly. The consumer had enough savings and was in a good enough position coming out of COVID, that the immediate impacts of higher consumer credit costs did not slow the economy down. And we are now starting to see prices come back down to more rational, reasonable levels. And so, this to me is a bit of a muddly growing economy with full employment, with higher interest rates, with consumer driven, consumer driven because the government continues to put people to work.
Amanda Hindlian:
And wages, right?
Gary Cohn:
Wages, yeah.
Amanda Hindlian:
And that also affects the inflationary side of the equation. So it's a very interesting dynamic.
Gary Cohn:
Most interesting thing about the dynamic, is they don't have any history. So when they look back, when the analysis paralysis people get involved, they can't find these pages in the books. And so therefore, they look at everything that looks like this, inverted yield curve means X. Okay, interest rates going up means Y. This means Q. Oh, this has to happen. But there's another side of the equation, where they just don't understand the other side of the equation.
Amanda Hindlian:
What do you think about fixed income markets now? They've certainly evolved rapidly. We've seen, I think when you and I were both at Goldman, we were talking about electronification in a pretty significant way, but that has rapidly sped up in the recent past. And this REIT environment is creating more investor demand and interest in certain parts of the fixed income market. Some of the dealers though, have exited and are not as active in the market as they were previously. And so, it's been a interesting and challenging time in some respects, in the fixed income markets. I wonder whether you think that trend persists.
Gary Cohn:
But on the other side of this equation, we've seen more managed money come into the fixed income markets.
Amanda Hindlian:
You mean via SMAs and ETFs and-
Gary Cohn:
And even hedge funds and even BDCs, hedge funds, other structured vehicles. So it's no longer-
Amanda Hindlian:
Because the yields are there. And so, you want the 60/40 portfolio balance again.
Gary Cohn:
Exactly. So you may be seeing the historic players come out with balance sheet, but the overall capital invested in the fixed income markets is actually going up. It's just going up in different places. You're just seeing new people create, let's call them more institutional retail type products, or quasi retail products, because it's BDCs, ETFs, places where there's natural demand for product. Product can be bought and held for longer duration. It's not in trading portfolios. And those businesses then can take the leverage that banks used to use for their own fixed income business and they can leverage their structured portfolio. So the businesses just, the chairs are still there. They've just moved them around a little bit.
Amanda Hindlian:
Yeah, and it's interesting because actually one of the other trends you see is that as that 60/40 portfolio rebalance occurs, you're starting to see smaller trade lot sizes and that's also shaping the market in a unique way.
Gary Cohn:
Well, I resemble that remark. For the first time in my 60 plus year life, I bought a treasury bill.
Amanda Hindlian:
You did?
Gary Cohn:
I did.
Amanda Hindlian:
Did you do it?
Gary Cohn:
I didn't even know to.
Amanda Hindlian:
How did you do it?
Gary Cohn:
I picked up the phone and called my broker and said-
Amanda Hindlian:
But see, that's the problem. You got to be able to click it, click the-
Gary Cohn:
No, I did. I agree with you. And I paid one and a half or two basis points for someone to do it for me, where I should be able to go direct because there's really no risk in buying a treasury bill. But it was a profound moment when I said, "I'm buying a treasury bill." But you're getting six month yield at over close to 5.5%-
Amanda Hindlian:
Why wouldn't you?
Gary Cohn:
On a preferred tax basis.
Amanda Hindlian:
Why wouldn't you?
Gary Cohn:
I agree, why wouldn't I?
Amanda Hindlian:
I think it's going to be a really fascinating market to come. It sounds like you agree.
Gary Cohn:
No, I totally agree. And you look at what's going on in the banking market and some of the middle size and small banks withdrawing credit origination, that credit origination void is being filled. Yes, it's being filled at a higher all in spread, a dramatically higher all in spread, but credit is starting to become more available again. It's just expensive. People have filled that void relatively quickly.
Amanda Hindlian:
Well, let's go there for a second. I would love to chat with you a little bit about the recent regional banking crisis. And we saw news last night with PACWest, so this continues to be an ongoing theme. Back in March, you tweeted the following quote, "This is not 2008. Then every bank had a similar portfolio. Mortgages and home prices were falling. Silicon Valley Bank had a very unique balance sheet. And unlike 2008, banks today are highly capitalized and operate with significant regulations. The SVB matter is a classic run on the bank." Can you explain, I think it would be helpful for our listeners for you to explain your view of the recent regional banking crisis in layman's terms and what precisely you think happened?
Gary Cohn:
Well, in layman's terms is, banks were in a war for deposits and only the first $250,000 of a deposit is an insured deposit. And banks were paying up to also attract uninsured deposits.
Amanda Hindlian:
And by the way, just for clarity, that's for a single account owner.
Gary Cohn:
It's per name, it's basically per entity. We could play games. You can have an account, your husband can have an account, that's two. You and him can have a joint account, that's joint account, that's three. You can have an entrust account, that's four. You can play a lot of games to get your $250s. But what ended up happening is, deposits became really important for banks. Banks wanted to build up their lending capabilities. We were in a very low interest rate for decades. I always remind people where we were a few years ago. We were having a debate not that many years ago, will we ever have inflation again?
Amanda Hindlian:
I remember.
Gary Cohn:
We were in a zero interest rate environment. We were doing QE all over the world. And so banks were saying, "Look, in a QE zero interest rate environment, I should attract deposits and try and make spread because my spreads are small, so I need to do it on more size." Not an irrational thought, but the uninsured deposits can leave the banking system relatively quickly. Because when people are fearful, they don't want to lose their hard-earned deposits. They take the uninsured out very quickly.
And we now have to add to that something that we all knew. In the old history of Mary Poppins, when people wanted to have a bank run, they stood outside and they had to walk to the teller's window and they had to withdraw their money or they had to send a check in and the bank could slowly cash the checks, slowly move them through the system. They could let three customers in the door at a time and then let three more in at a time-
Amanda Hindlian:
They could try to talk to them and say they please don't withdraw-
Gary Cohn:
But today, with digital banking and everyone having a cell phone, everyone can click on their deposits instantaneously in real time, move them. So you've got another really huge risk in the banking system when people can digitally move their deposits real time. And so, we got to a position relatively quickly where people said, "Look, I have uninsured deposits in a bank. I can just go on my iPhone or I can go on my laptop and I can click, and in 30 seconds I can move them somewhere else. And you know what? If I'm wrong, I'll move them back tomorrow. Better safe than sorry." So the prudent thing to do was to move your deposits. As you move your deposits, banks had those deposits invested in some interest-bearing asset, because they had to pay you interest, and all of a sudden they had to sell the interest-bearing asset they had. Unfortunately, there was no risk of that interest-bearing asset redeeming at par plus interest. But if you had to sell it before maturity, you were going to take a loss.
That's the definition of a treasury bill. And the banks bought exactly what their regulators told them they're supposed to buy. They bought something that's called a zero risk weighted asset. Meaning that we will charge you no capital to own this asset because there's no chance you don't get repaid in full. But if you have to sell that asset because your deposits are pulling all their money out, you will have a market-to-market loss.
Amanda Hindlian:
And a rising rate environment, yes.
Gary Cohn:
Rising rate environment, yes. Unless you had your interest rates, but we're not going to go down those rabbits.
Amanda Hindlian:
Well, we should.
Gary Cohn:
We can. We can go down [inaudible 00:41:17].
Amanda Hindlian:
Hedging's important to us.
Gary Cohn:
So we saw the classic run on the bank. We saw basically people saying, "I'll be prudent. I'll get my money out of the bank. And by the way, I'm going to tell everyone else I got my money out of the bank. I'm going to probably go on Twitter and tell people I got my money out of the bank. I want all my friends to know how smart I am."
Amanda Hindlian:
It's Called X now.
Gary Cohn:
Yeah, X. Oh, you're right. I'm dating myself by a day. Go on X. And so, therefore you create what's a classic run on a bank. Bank has to sell its securities and the bank has to take the market-to-market loss. The only place to for the market-to-market loss to go is in the equity account of a bank. Lo and behold, the bank becomes insolvent, relatively quickly. No bank is designed to have the vast majority of its deposits leave within a 72-hour window or even a one-week window. Banks have enormous data on how quickly deposits should or could leave. And banks are pretty good if 10, 20% of their deposits leave over the course of a week. But when 90% of your deposits leave in a day, there's no bank in the world that can withstand that, because you would go out of business.
Amanda Hindlian:
Right. And they're accustomed to payroll cycle timing and outflows that peak at certain times in the payroll cycle. I think one of the key questions for you is, do you think what happened is in any way a reflection of a regulatory failure
Gary Cohn:
Directly, no. I think directly, there was no regulatory failure. You can't regulate for a bank run. The only way to regulate for a bank run is to make a bank a public utility. And then there would be no credit origination. Our country is completely dependent on credit origination. We use credit to drive our entire GDP. We use credit to buy a house. We use credit to go to school. We use credit to consume products. Everything we do is credit driven in the United States. We need the credit origination machine to exist and be vibrant. The way the credit origination machine is vibrant is because banks are allowed to charge a spread on excess deposits. And if we now mandate what banks can do with excess deposits, you are going to change the cost of credit dramatically. You are going to therefore crimp the growth of the US economy.
You're going to change GDP relatively dramatically in the United States. So directly, there's no issue. Now indirectly, and I've written on this recently, you're probably going to read from that op-ed too. Recently, I've written a piece where the question is, are there just so many rules and regulations in the banks that the banks can't really manage all the rules and regulations? In fact, there was a famous piece by two guys from the War College. They wrote a piece called Lying to Ourselves, and it talks about the military. And it talks about the military and the fact that it says we lie to ourselves-
Amanda Hindlian:
And I'm sorry, where is the piece from? I don't know-
Gary Cohn:
It's from the War College.
Amanda Hindlian:
Okay.
Gary Cohn:
It talks about, we lie to ourselves in the military because we have all these rules and protocols. We have so many rules and protocols that we just say, "Yes, we did them every day", even though we know we didn't because we could never do them every day, because we do nothing else. So I think in the banking world, we're a little bit lying to ourselves. We're lying to ourselves, because you put so many rules and so many requirements on a bank that you're forcing banks to decide which of the rules they're going to enforce today are not enforce and which ones they're going to ignore until tomorrow, because you can't practically do everything they have to do every moment of the day.
Amanda Hindlian:
And I think that's especially true for smaller banks.
Gary Cohn:
Yes, it is.
Amanda Hindlian:
I think one of the things we should talk about as well is the response to what we saw in the recent regional banking collapse. And I'll quote you from Squawk Box instead of one of your op-eds. You said, and I think this is really critical, you said, "The question is, have we created a new moral hazard? The moral hazard we have now is never by a bank until it goes into receivership." Can you explain what you meant? Y
Gary Cohn:
Yeah. So I think I was on with Jay Clayton, the former head of the SEC, the morning after the SVB deal. Well, I was on the night of-
Amanda Hindlian:
I think that was after [inaudible 00:45:58]-
Gary Cohn:
I was on the night of the SVB deal or the next day or whatever. So what I'm saying is, if you buy a bank the day before they have gone to receivership, and they were trying to sell SVB and they were trying to sell many other banks prior to the inevitability of a FDIC takeover, you would assume lots of liabilities. You would have to assume the whole balance sheet, you'd have to fund the whole balance sheet. You'd have to put up equity, you'd have to do all the normal things you would do in a normal bank-to-bank merger transaction. What has happened is, if you wait for the bank to go into an FDIC generated auction, the FDIC feels pressure to get these banks sold very quickly. They have been very agreeable to providing enormous amount of incentives to take the troubled bank off their balance sheet, including guaranteeing loan performance, including lending you money, including giving you waivers on capital adequacy or capital charges.
Amanda Hindlian:
Purchasing bad loans.
Gary Cohn:
Purchasing bad loans, being able to reject loans back. So no matter how badly you want a bank, you're still better off to wait for it to go into receivership, and then put a bid in for it and see what you can get in addition to just buying it. So I think we have created a moral hazard, because to the extent that I really wanted or someone really wanted to buy a bank, they would still wait for it to go into the receivership public auction.
Amanda Hindlian:
I agree. I also think it's really fascinating for all of the work that we did together over the years and trying to address the issue of too big to fail. We've gone and run in the opposite direction.
Gary Cohn:
Well, and remember in too big to fail, it was the big banks could never get bigger again. But of course when they really need one of the big banks to buy someone, they're going to allow it to happen.
Amanda Hindlian:
That's right.
Gary Cohn:
So we've seen all these things turned on their head, and it proves to me that you can regulate to death. You can't foresee everything that's going to happen and you're going to have to be adaptive. To me, it would make more sense to get back to good sound, fundamental banking regulation, regulate the 10 things that really matter, and stop forcing banks to spend literally millions of people hours and billions of dollars on things that may not matter. But the regulators just feel like, "Okay, we're going to do it just because we want to put more and more restrictions on."
Amanda Hindlian:
So I'm going to pivot to Washington for a bit. After your time on Wall Street, and as I mentioned at the outset of the podcast, you served the country as Director of the National Economic Council. What are you most proud of accomplishing while you were in DC?
Gary Cohn:
I think there's two things that I look back on DC. So going in, we as a team, set an economic agenda, and it was a pro-growth, pro-business, pro-US agenda. And I think we had executed that pretty well. We had come out of an environment in the prior administrations where getting GDP over 2% was not able to be done. And there was always this discussion, are we ever going to have inflation? Are we ever going to have interest rates over zero? And are we ever going to be able to grow GDP over 2%? We got to an environment where we basically had 3% GDP growth, we had 3% wage growth and we had 3% unemployment. And so, when you look at those factors we created, we felt like we created a friendly environment where everyone won, companies won, employees won, consumers won.
Our global competitive position won. And the data was pretty compelling. We were picking up more and more wealth and more and more wages in the bottom third of the income producers in the United States, than the top. The top was losing wages, the bottom were gaining wages. We had done a lot of things to try and make the economy as fair as we could make it. Now, look, we were pro-smart regulation. We weren't deregulators per se, but we were pro-smart regulation. But on the other hand, we were in favor of mergers that made sense. We didn't have an adversity to bigger is better. That said, some mergers were turned down during the period we were in the White House, and we just tried to run a economy that made sense. So that's on the big picture. On the specific policy. One of the big reasons I went to Washington was tax reform. And it is something that hadn't been done for over three decades in the United States, and I felt like we needed a major overhaul of our tax system.
Amanda Hindlian:
I recall at the time, that being a key decision for you in leaving Wall Street to go to DC.
Gary Cohn:
I think it was probably the 90% factor, is that I felt like I had a shot to really do something seismic in tax reform. And I'll tell you what was motivating me. What was motivating me is, it pained me as a advisor to our corporate clients to walk into a boardroom and say, "Hey, I've got a really amazing idea for you. You don't need to do anything different. And I can raise your EPS and your ROE significantly." And they look at you like you're the stupidest person they've ever seen. I go, "No, no, I can do this for you."
And they go, "It's impossible. If you can do it, we'll do it." I say, "Okay. You need to read domicile to Ireland. We're just going to move your corporate headquarters. We're going to take you to a different tax jurisdiction and invert you out of the United States, and you'll save the difference in tax spread. And by the way, you do nothing else different. You move your corporate headquarters, you have your four board meetings a year over there, and that's all you have to do." And I would go make that pitch, and I would come out of there and go, "I can't believe I just did that."
Amanda Hindlian:
I don't feel good about myself.
Gary Cohn:
No, I don't feel good at all. I love America. How can this be? "Oh, and by the way, if you leave your money offshore, you'll never pay US taxes." There's so many loopholes in there that were just the wrong motivation. So I was highly motivated to fix a bunch of these fundamental problems in the system, and literally from the day I accepted the job, I started working on a tax reform with a bunch of other people. The good news is, there were a bunch of like-minded people in the House and the Senate and the administration. We didn't all agree initially on what the optimal plan was, but we got there relatively quickly. And over the course of a year, we executed what I still think today, and it'll be interesting as history goes on, I think we executed a really interesting US pro-growth tax plan.
Amanda Hindlian:
What surprised you most about Washington?
Gary Cohn:
I think the quality of the people in the government. You leave a place like Goldman Sachs and you're surrounded by the most talented people in the world. You get into the House Ways and Means Committee, and we're sitting there in a room, 2:00 in the morning. We say, "Hey, we want it so X, Y, Z happens." And some woman who's been on the House Ways and Means staff for 20 years says, "Go to page 2018, paragraph six, and changed those three words." I go, "Really?" She goes, "Yeah, then you can do what you want. That will allow it to happen." People in Washington that work in these committees and know these laws, they know these laws and they've worked there and it is their life and they're really good.
Amanda Hindlian:
And we're lucky to have them.
Gary Cohn:
We're really lucky to have them.
Amanda Hindlian:
So after you left DC, you actually found yourself in the tech sphere. So now as Vice Chairman of IBM, I've had this conversation with you before, so I'm curious to see what your answer is, but where do you spend most of your time?
Gary Cohn:
I spend quite a bit of time with IBM. I spend the other part of my time on my family office, which is I would say a venture techy, tech-ish portfolio and just managing my portfolio. So I would say it's about 50/50 at this point.
Amanda Hindlian:
Are you engaged on the IBM side and some of the dialogue on AI?
Gary Cohn:
Completely engaged.
Amanda Hindlian:
What do you think?
Gary Cohn:
I'm spending a lot of time in Washington with the regulatory environment. I'm spending a lot of time helping IBM think about what smart regulation looks like in AI. And I think that there's really interesting opportunities in AI. I'm not in the doom and gloom AI camp. I'm in the very positive, very pro-AI. But on the other hand, I think that there does have to be some guardrails around what AI is used for, where it gets its data, how you test your models.
Amanda Hindlian:
And how you train your models.
Gary Cohn:
And how you train your models. So I think it's got to be something that's confined. I don't want to be prescriptive, but I think it's a business that needs guardrails around it.
Amanda Hindlian:
But it's not entirely new. We've certainly seen an acceleration.
Gary Cohn:
So from an IBM perspective, AI was first used in 1959. So IBM has been in the AI business since 1959. I always remind people that Watson won in Jeopardy in 2011, it beat Kasparov off in chess in 2012.
Amanda Hindlian:
I remember that.
Gary Cohn:
Okay. Yeah. So that was Watson playing Jeopardy. So that was in itself, 12 years ago. Now that AI is different than the AI today, but that was a foundation to build on where we are today. So this idea of AI and machine learning has been in progress for decades. IBM just announced a huge new library of software products, Watson X, three years in the making. It's been a long period of time to how you get to these AI models.
Amanda Hindlian:
Well, in the data business here, it's quite similar. We've leveraged AI forever, as long back as Legacy Interactive Data Corporation. It's just the question now becomes, how do we think about generative AI? How do we think about LLMs in practice? And how do we ensure the safety and integrity of information too? Which I think is another important element of the dialogue.
Gary Cohn:
I agree with that. Look, the reason we're all sitting here talking about AI today, is because we've had two big retail products come out, whether it be BARD or ChatGBT
Amanda Hindlian:
ChatGBT, yeah.
Gary Cohn:
Until we had BARD or ChatGBT, we all knew there was some AI going on in the back. When you put in driving directions and it says their best route is this, your alternate route this and it keeps changing, that's not person in the back. There's a machine. There's a machine changing your directions. That's all AI. That's all machine data. So we've been using AI, whether we knew it or not. We've all been calling call centers, as frustrating as some of them are. Some are much better than others. So it's been in our lives. The reason it's become this big topic in Washington, is because of these large language models, because of the ChatGBTs, because of the BARDs making it a very retail product. And the fear, and by the way, the justifiable fear of where's the data coming from? Is the data bias? What are the copyright implications? What does this have to do with educational processes? Are kids writing the papers? So these are all legitimate questions.
Amanda Hindlian:
But there's an argument that actually, you have to be better and smarter, because if the machine can produce the basics, then you better be able to produce a lot more on-
Gary Cohn:
Well, and then the machine can catch that the machine did it.
Amanda Hindlian:
Exactly.
Gary Cohn:
Right. So my kids graduated from college a few years ago, but even years ago their papers were being run through machines to see if they were plagiarizing anywhere, and they've been out of school for five to 10 years. So this idea of the machine can catch the machine. It's been around for a while. On the flip side, which I don't think we talk enough about, is in my career for sure, I've lived through these potential big growth GDP enhancing changes. And if you go back to the Alan Greenspan's of the world and talk about, what do we need? We need more productivity in the United States. And the only way to grow the economy is productivity.
So we go back to the personal computer, the pc, that was a great leg up in personal productivity. And then the internet clearly helped personal productivity, and then the smartphone. So when we got each and every one of those, there again was a little bit of an initial thought, "Oh my god, what's going to happen to people that write memos and print memos and deliver mail inside an office building? Those jobs are going to be eliminated." Well, those jobs were eliminated, but I don't know of a company today that is smaller because of the internet or because of a personal computer or because of a smartphone. Every company I know is dramatically bigger over the last decade.
Amanda Hindlian:
No, it just required people to retool their own skillsets.
Gary Cohn:
It did, but in a much more fulfilling way, in a higher job satisfaction way, in a more productive way. And it allowed companies to get bigger and broader, cover more clients, cover more geography, offer more products, because they could take the existing headcount and instead of data inputting data all day long, they could start analyzing the data. They could understand what products we should sell, what products we shouldn't sell, how to market products, how not to market product. It made companies smarter based on the same amount of headcount, made the headcount more valuable, made the margins higher. It allowed people to get paid more. This is what-
Amanda Hindlian:
And do more interesting work.
Gary Cohn:
Right. This is what productivity growth is all about.
Amanda Hindlian:
Yep. I agree. All right, we're going to wrap here. Are there any questions that we didn't ask? Any final points you want to make to our listeners?
Gary Cohn:
No, I think you've gone around the world and you gone around the life of Gary Cohn pretty well.
Amanda Hindlian:
Okay. Well thanks, Gary, for joining us inside The ICE House. We look forward to seeing all of the many things you will accomplish. Next.
Gary Cohn:
Thank you for having me.
Josh King:
That's our conversation for this week. If you like what you heard, please rate us on iTunes so other folks know where to find us. And if you've got a comment or a question you'd like one of our experts to tackle on a future show, email us at [email protected] or tweet at us @ICEHousePodcast. Our show is produced by Isabella Bazzone, production assistance from Pete Ash. I'm Josh King, your host, signing off from the Library of the New York Stock Exchange. Thanks for listening. We'll talk to you next week.
Outtro:
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