0:00:00.948,0:00:02.325 Zermatt Summit 0:00:02.325,0:00:04.033 Changing hearts and minds 0:00:04.033,0:00:05.857 Humanizing Globalisation 0:00:08.057,0:00:11.092 Now Paul Jorion will come up and speak. 0:00:11.092,0:00:16.231 Paul is by initial training a social anthropologist, 0:00:16.231,0:00:20.194 but he moved from social anthropology to finance. 0:00:20.194,0:00:23.252 and he tells me that there was no great transition, 0:00:23.252,0:00:25.388 because at the time he made the transition 0:00:25.388,0:00:28.615 he was working on artificial intelligence. 0:00:29.015,0:00:32.545 So perhaps we will have a bit of natural intelligence, 0:00:32.545,0:00:34.566 as well as artificial intelligence, 0:00:34.566,0:00:36.711 as we got through your presentation. 0:00:36.972,0:00:39.629 May I ask you please to welcome Paul Jorion 0:00:39.629,0:00:44.302 [applause] 0:00:45.286,0:00:50.055 I was blessed by the most inspirational introduction. 0:00:50.055,0:00:53.120 Preparing my little presentation, 0:00:53.120,0:00:55.978 I though Let's try to make something good. 0:00:55.978,0:01:00.572 But after having watched Malika, and listened to Elisabeth, 0:01:00.572,0:01:02.548 what crosses my mind is: 0:01:02.548,0:01:05.575 Let's try and make it even better. 0:01:07.175,0:01:13.369 I worked from 1999 to 2002 for a company called Indymac. 0:01:13.369,0:01:17.245 Indymac had a specialty of homeloans, as we call them, 0:01:17.245,0:01:22.945 and it's more usually called mortgages. 0:01:22.945,0:01:24.674 Indymac had 2 specialties: 0:01:24.674,0:01:28.711 Reverse Mortgages where the person who has the mortgage 0:01:28.711,0:01:30.525 is the owner of the house 0:01:30.525,0:01:35.826 and little by little, the house goes back to the bank. 0:01:35.826,0:01:40.920 The other one was called Alt A (Alternative A). 0:01:40.920,0:01:44.742 I won't be going into any details, 0:01:44.742,0:01:49.348 but Alt A is just one notch above Subprime. 0:01:49.348,0:01:53.569 Indymac was the third major bank run 0:01:53.569,0:01:56.222 in the history of American finance. 0:01:56.222,0:01:59.203 A bank run is when people start lining up in the streets 0:01:59.203,0:02:03.138 asking for their money to be returned to them. 0:02:03.138,0:02:07.218 That happened all in July 2008, on a Thursday. 0:02:07.218,0:02:11.243 Things got worse on the Friday. 0:02:11.243,0:02:14.710 On the Monday, the bank re-opened. 0:02:14.710,0:02:18.388 It was previously called Indymac bank, 0:02:18.388,0:02:22.385 and on the main entrance, 0:02:22.385,0:02:25.151 there was a banner now between the two words, 0:02:25.151,0:02:27.521 It was Indymac Federal Bank. 0:02:27.521,0:02:31.717 The FDIC had taken over the bank in the name of the American government, 0:02:31.717,0:02:36.702 and it was from now belonging to the American government. 0:02:37.979,0:02:41.932 From 2002 to 2004, I worked for Wells Fargo. 0:02:41.932,0:02:45.182 Wells Fargo is a well-known bank in San Francisco. 0:02:45.182,0:02:46.898 And it's doing well, 0:02:46.898,0:02:50.012 fortunately for its business, it's doing very well. 0:02:50.012,0:02:53.788 I was working in what was called "Consumer Credit". 0:02:53.788,0:02:56.902 And what was Consumer Credit was doing was essentially... 0:02:57.240,0:03:00.582 [A microphone issue needs to be fixed.] 0:03:01.935,0:03:04.474 - Just give me a second. 0:03:05.074,0:03:06.122 Try it on. 0:03:08.706,0:03:09.815 - Louder? 0:03:10.277,0:03:13.111 Alright ok. 0:03:15.080,0:03:19.606 In 2002, I moved working for Wells Fargo, 0:03:19.606,0:03:22.683 which as I said is still a major bank. 0:03:22.683,0:03:26.892 I was working in a division which is called 'Consumer Credit'. 0:03:26.892,0:03:29.413 and our specialty was called HELOC. 0:03:29.413,0:03:33.649 HELOC stands for Home Equity Line Of Credit. 0:03:33.649,0:03:36.557 And essentially, on home, if you're not familiar with that, 0:03:36.557,0:03:38.905 it's a second lean as we called it, 0:03:38.905,0:03:41.914 a second mortgage that you can get on a house. 0:03:41.914,0:03:44.782 The difficulty with the second mortgage is that 0:03:44.782,0:03:46.677 the first one comes first, 0:03:46.677,0:03:48.017 that's why it's called the first lean. 0:03:48.017,0:03:51.818 So when things turned sorer, in 2008, 0:03:51.818,0:03:56.966 what happened is that HELOC had no value whatever. 0:03:57.258,0:04:03.345 People hired up on HELOC as I was had lost rapidely their jobs. 0:04:03.852,0:04:08.763 From 2005 to 2007, I worked for CountryWide. 0:04:08.763,0:04:12.695 CountryWide as you know is the major corporate 0:04:12.695,0:04:16.154 in the disaster of the subprime industry. 0:04:16.154,0:04:23.141 A number of companies did worse and they fell earlier than did CountryWide, 0:04:23.141,0:04:25.320 but CountryWide is the main corporate. 0:04:25.689,0:04:30.012 In 2008 it was taken over by Bank of America. 0:04:30.705,0:04:35.231 So these 3 experiences made me think about finance. 0:04:35.231,0:04:39.686 I imagine that you think that justifies to have come to some thoughts. 0:04:39.686,0:04:45.982 It was not just on my own. We had conversations at lunchtime, between colleagues. 0:04:45.982,0:04:49.544 And we though: We are running into some major disaster 0:04:49.544,0:04:51.142 but what can we do? 0:04:51.142,0:04:53.203 M. Greenspan, who was, as you know, 0:04:53.203,0:04:56.243 Head of the Federal Reserve (the central bank of US) 0:04:56.243,0:05:00.526 for nearly 20 years from 1986 to 2006, 0:05:00.526,0:05:02.292 said at that time: 0:05:02.292,0:05:08.477 "The head of these companies did not think of their self interest, and did not work towards it." 0:05:08.477,0:05:12.778 assuming that if the head of these companies had worked for their self interest, 0:05:12.778,0:05:18.295 that would have produced "auto-regulation" 0:05:18.295,0:05:21.083 meaning that the system would go bad 0:05:21.083,0:05:23.643 and then would recover on its own. 0:05:23.643,0:05:26.625 And as you know from what you have seen in the news 0:05:26.625,0:05:30.458 there's been a lot of discussions lately in 2010 and 2011 0:05:30.458,0:05:32.818 about what some companies, 0:05:32.818,0:05:38.794 and particularly highlighed in that respect Goldman Sachs and Deutsche Bank, 0:05:38.794,0:05:44.006 that when it came to saving the whole mortgage industry 0:05:44.006,0:05:46.575 or try to save their own bank, 0:05:46.575,0:05:49.062 these companies chose to save their own bank 0:05:49.062,0:05:52.892 even at the detriment of the whole industry. 0:05:53.262,0:05:56.492 So what I started thinking at that time, 0:05:56.492,0:05:58.542 and as I said, in discussions with colleagues, 0:05:58.542,0:06:03.231 what can we do to prevent from within finance 0:06:03.231,0:06:06.588 that such a disaster happens again. 0:06:06.588,0:06:11.225 And I started thinking about different ideas. 0:06:11.225,0:06:15.723 In September 2008, which is just literally 0:06:15.723,0:06:20.425 one month before I got dismissed by CountryWide, 0:06:20.425,0:06:25.280 I was part of the first load, the first batch of people that were let go. 0:06:25.280,0:06:29.997 At that point I think about 30% of the people in the company were let go. 0:06:29.997,0:06:36.178 And maybe 4 or 5 months later, the company was simply taken over by Bank of America. 0:06:36.178,0:06:39.323 And I though at that time: 0:06:39.323,0:06:41.695 What should we do? 0:06:41.695,0:06:46.600 And one month before I was let go, I wrote a piece, 0:06:46.600,0:06:49.797 an opinion piece for the French daily "Le Monde". 0:06:49.797,0:06:53.692 I called that piece "A Constitution for the Economy". 0:06:53.692,0:06:59.532 My idea was that we needed to find an exit out of the situation. 0:06:59.532,0:07:03.400 Let say at the highest possible level. 0:07:03.400,0:07:05.483 Let me here pause a little 0:07:05.483,0:07:09.234 to tell you exactly what I started thinking about. 0:07:10.526,0:07:13.400 A long time ago, 0:07:13.400,0:07:16.814 a person who is historical, 0:07:16.814,0:07:20.674 or maybe he's not... but anyway, the stories are beautiful, 0:07:20.674,0:07:24.123 a person called Moses came down from the Mount, 0:07:24.123,0:07:27.825 and he was holding the Tables of the Law. 0:07:27.825,0:07:33.620 And I'll just take one of the 10 commandments of these Tables of the Law: 0:07:33.620,0:07:35.049 “Thou shalt not kill" 0:07:35.865,0:07:37.351 To hook up what I'm saying 0:07:37.351,0:07:40.028 with some earlier discussions today, 0:07:40.028,0:07:43.102 there was an alternative here: 0:07:43.102,0:07:48.999 The first alternative was to wait patiently for people to reform themselves, 0:07:48.999,0:07:53.452 unless there was no danger anymore that anybody would ever be tempted 0:07:53.452,0:07:58.126 to murder his neighbour or part of his family or whatever... 0:07:58.126,0:08:03.317 Or, there was the alternative of maybe having a prohibition about it. 0:08:03.317,0:08:05.865 Personally I think that the idea of Moses, 0:08:05.865,0:08:09.000 or God if he was directly inspired by God, 0:08:09.000,0:08:10.575 I think it was a great idea. 0:08:10.575,0:08:13.732 I think we really saved a lot of time. 0:08:14.040,0:08:17.158 A little other historical anecdote, 0:08:17.158,0:08:21.080 during the French revolution in 1792, 0:08:21.080,0:08:23.185 a person called Saint-Just, 0:08:23.185,0:08:26.400 one historical figure in the French revolution, 0:08:26.400,0:08:28.912 came up with the idea at some point. 0:08:28.912,0:08:32.520 In 1792, it was the worse of the French revolution, 0:08:32.520,0:08:36.163 there was a civil war in France, nearly everywhere, 0:08:36.163,0:08:37.920 in Nantes, in Lyon. 0:08:37.920,0:08:42.680 There were external wars on all the borders of the country. 0:08:42.680,0:08:46.609 And Saint-Just had prepared a speech, where he said: 0:08:46.609,0:08:50.031 "What we need to do is to reform the individuals 0:08:50.031,0:08:54.813 (which was essentially the line that had been taken by the French revolution until then), 0:08:54.813,0:09:00.178 but at the same time, we have to do that in parallel with changing the institutions". 0:09:00.178,0:09:01.320 He started speaking. 0:09:01.320,0:09:02.662 He was booed. 0:09:02.662,0:09:05.649 It was the end of Robespierre, who was his friend, 0:09:05.649,0:09:08.197 it was finished: he never read this particular piece. 0:09:08.197,0:09:09.951 He was arrested on the following day, 0:09:09.951,0:09:12.538 and he was decapitated a couple of days later. 0:09:12.538,0:09:16.083 The idea was essential but it came pretty late. 0:09:16.452,0:09:18.881 So what I was thinking was the following: 0:09:18.881,0:09:22.280 Finance is extremely useful. 0:09:22.280,0:09:25.997 It provides the bloodstream of the economy. 0:09:25.997,0:09:29.025 It has 2 functions which are essential: 0:09:29.025,0:09:33.161 one that we call 'Price Discovery' which is essentially 0:09:33.161,0:09:38.775 finding people who need money in order to start a business, do something, 0:09:38.775,0:09:42.662 or even sometimes just to consume, and bring these people together 0:09:42.662,0:09:48.511 with other people who have some capital they can dispense of for a period of time, 0:09:48.511,0:09:50.920 make these people meet, 0:09:50.920,0:09:52.603 make it possible to work that way. 0:09:52.603,0:09:59.070 Another function which is essential for finance is the insurance principle. 0:09:59.070,0:10:03.760 A large institution like a bank can actually dump 0:10:03.760,0:10:06.767 the individual shocks of some little drama 0:10:06.767,0:10:09.160 happening here and there, 0:10:09.160,0:10:11.200 and paying a premium, 0:10:11.200,0:10:14.744 you can actually spread that risk over the whole system. 0:10:14.744,0:10:16.009 These are essential. 0:10:16.009,0:10:20.329 But there are other parts in finance that went really wrong. 0:10:20.329,0:10:24.399 So what I was thinking is not like some people say: 0:10:24.399,0:10:26.403 "Let's close all stock exchanges." 0:10:26.403,0:10:33.164 or "Let's eliminate all derivatives." (which are particularly useful financial instruments). 0:10:33.164,0:10:37.517 or "Let's tax every possible financial transaction". 0:10:37.517,0:10:39.520 I was thinking of something more specific. 0:10:39.520,0:10:42.720 Let's find a way to carve out very delicately, 0:10:42.720,0:10:45.996 Let's carve out exactly the part which is 0:10:45.996,0:10:49.240 useless and dangerous 0:10:49.240,0:10:51.692 and remove that part from the rest. 0:10:51.692,0:10:54.488 What makes this part in finance dangerous? 0:10:54.488,0:10:57.480 One is what we call systemic risk. 0:10:57.480,0:11:01.857 Systemic risk is the fragility of the whole system. 0:11:01.857,0:11:05.788 Making the contagion effects multiplied 0:11:05.788,0:11:12.272 and not enhanced by the whole way the system works. 0:11:12.272,0:11:16.028 The other danger is the following 0:11:16.028,0:11:18.840 and here I'll give you an example. 0:11:18.840,0:11:25.280 This example will explain exactly what I've got in mind. 0:11:25.280,0:11:30.012 In 2008 in the first half of the year, 0:11:30.012,0:11:32.338 at the very beginning of the period, 0:11:32.354,0:11:37.762 the price of a barrel of oil was $45. 0:11:37.762,0:11:43.723 On the 1st of July, it hit during one particular day, $147. 0:11:43.723,0:11:46.951 That was more than treble the price. 0:11:46.966,0:11:49.726 There was a major crisis. 0:11:49.726,0:11:53.409 Nobody much in American Government bothered except one party. 0:11:53.409,0:11:56.526 And that party asked for an investigation to be started. 0:11:56.526,0:11:59.145 That party, and it's a bit surprising if I tell you, 0:11:59.145,0:12:01.720 it was the Pentagone. Why was it the Pentagone? 0:12:01.720,0:12:04.372 Because the Pentagone had to make reserves of fuel 0:12:04.372,0:12:06.905 for the boats, for the planes, etc. 0:12:06.905,0:12:10.533 and the Pentagone wanted to find out what happened. 0:12:10.533,0:12:13.172 Investigation found out who were the corporates. 0:12:13.172,0:12:16.988 The corporates were not dark people in dark clothes... 0:12:16.988,0:12:19.034 They were pension funds. 0:12:19.034,0:12:21.742 They were deans from universities. 0:12:21.742,0:12:23.649 They were hospitals. 0:12:23.665,0:12:25.397 They were museums. 0:12:25.397,0:12:30.022 Why did they go into that business of going into the market 0:12:30.022,0:12:32.754 and making all these price being lifted? 0:12:32.754,0:12:34.748 Because they feared for the dollar. 0:12:34.748,0:12:36.477 They had some assets, 0:12:36.477,0:12:39.705 they feared that the value of these assets would depreciate. 0:12:39.705,0:12:42.634 So they moved in massively into the markets. 0:12:42.634,0:12:46.763 And the instruments which helped them doing that were of a special nature. 0:12:46.763,0:12:48.302 They are called baskets. 0:12:48.302,0:12:49.452 Baskets why? 0:12:49.452,0:12:51.845 Because it's not only oil you find 0:12:51.845,0:12:54.609 that you can buy in that particular perspective. 0:12:54.609,0:12:56.757 They make baskets, meaning that they add: 0:12:56.757,0:12:58.655 metals, like copper, 0:12:58.655,0:13:00.400 there's some food, 0:13:00.400,0:13:03.840 there are cereals like wheat, 0:13:03.840,0:13:04.999 there's coco, 0:13:04.999,0:13:06.325 there's coffee, 0:13:06.325,0:13:07.158 there's cotton, 0:13:07.158,0:13:09.806 whatever you want to think of. 0:13:09.806,0:13:12.075 And when the price of oil was lifted, 0:13:12.075,0:13:15.843 the price of all these commodities was going up simultaneously. 0:13:15.843,0:13:18.843 Why? Because people would buy these baskets. 0:13:18.843,0:13:21.311 What did it lead to in summer 2008? 0:13:21.311,0:13:25.354 That lead to some anger driven riots 0:13:25.354,0:13:28.366 in some countries in the world: 0:13:28.366,0:13:33.443 in Indonesia, in Haiti, in some parts of Africa, and so on. 0:13:34.628,0:13:39.058 When the Senate Commitee hold these people to explain what was going on, 0:13:39.058,0:13:41.010 they moved out of these markets. Why? 0:13:41.010,0:13:42.258 Because of the stigma. 0:13:42.258,0:13:44.289 They didn't want to be in the limelight. 0:13:44.289,0:13:47.946 They didn't want to be called there to testify about what was going on. 0:13:47.946,0:13:49.649 They all moved out. What happened? 0:13:49.649,0:13:53.086 All the prices dropped suddenly. 0:13:53.086,0:13:55.680 They dropped so low, 0:13:55.680,0:14:00.687 that in the process, the producers in Africa, of coco, 0:14:00.687,0:14:02.938 the producers of coffee all over the world, etc. 0:14:02.938,0:14:06.188 were hit by that. Why? 0:14:06.188,0:14:09.455 Because the prices at that point were going too low. 0:14:09.455,0:14:10.585 So what does that mean? 0:14:10.585,0:14:14.182 It means that prices going up were killing the consumers 0:14:14.182,0:14:16.785 because you and I at the filling station who were paying 0:14:16.785,0:14:19.334 for the price of the fuel going up. 0:14:19.334,0:14:24.135 When it comes down, it's the producers who are being hit 0:14:24.135,0:14:25.960 by the process of going down. 0:14:25.960,0:14:28.898 There was something even more I would say tragic 0:14:28.898,0:14:31.280 in terms of what we are concerned with today 0:14:31.280,0:14:33.088 in the process of coming down. 0:14:33.088,0:14:37.215 When the prices of oil comes up, it's interesting financially 0:14:37.215,0:14:41.000 to have startups on renewal energy. 0:14:41.000,0:14:44.920 The price of oil goes up, and it becomes more interesting 0:14:44.920,0:14:48.120 to go into research to see how to replace oil. 0:14:48.120,0:14:52.928 When the price of oil drops suddenly back to the level of $45 from $147, 0:14:52.928,0:14:57.212 a lot of these startups who were working on renewal energy were eliminated. 0:14:57.212,0:15:01.889 I hope you understand what I've got in mind when I'm talking about this. 0:15:01.889,0:15:07.188 What I though about what would be one of the essential, major, central principle 0:15:07.188,0:15:09.552 of the idea of a Constitution of Economy. 0:15:09.552,0:15:11.463 When I say Constitution of Economy, 0:15:11.463,0:15:14.979 I mean indeed something that applies to the world as a whole. 0:15:14.979,0:15:17.500 I think that's where we need to go. 0:15:17.500,0:15:19.345 You can call it Tables of the Law, 0:15:19.345,0:15:22.289 and you can think of adding an eleventh commandment 0:15:22.289,0:15:24.215 or maybe a twelfth and so on... 0:15:24.215,0:15:27.111 What I thought is one thing you need to do is to 0:15:27.603,0:15:34.345 prohibit these wagers on the evolution of price. 0:15:34.345,0:15:36.111 It is one part of finance, 0:15:36.111,0:15:39.837 it is a very essential part of finance nowadays. 0:15:39.837,0:15:53.025 In 2007, 47% of the GDP in the US was constituted of financial operations. 0:15:53.025,0:15:59.560 Out of these financial operations, on the commodities markets, the proportion varies: 0:15:59.560,0:16:05.091 it varies between 80% and 90% of the activity on these commodities markets 0:16:05.091,0:16:11.494 currently being done in the perspective of these wagers about fluctuations of prices, 0:16:11.494,0:16:15.492 which is one aspect of what we call speculation. 0:16:15.492,0:16:20.960 So what I was thinking is the part to carve out from finance 0:16:20.960,0:16:24.594 to go back to a financial market which serves the economy, 0:16:24.594,0:16:29.280 The part to carve is that part which is useless, dangerous, 0:16:29.280,0:16:32.551 which takes a lot of money out of the economy. 0:16:32.551,0:16:33.929 Just one remark: 0:16:33.929,0:16:37.240 some people criticize this idea I've been expressing, 0:16:37.240,0:16:39.575 saying "If you do what you say, 0:16:39.575,0:16:44.251 too much money will go back into the economy, maybe leading to inflation." 0:16:44.251,0:16:47.583 I think that it's a risk we can take. 0:16:47.583,0:16:50.197 The objection to what I propose as that 0:16:50.197,0:16:54.991 prohibition of bets, wagers on the evolution of prices, 0:16:54.991,0:16:58.686 the main objection is saying "it's impossible to implement, 0:16:58.686,0:17:02.895 it's too complicated, not everybody will agree to do it at the same time." 0:17:02.895,0:17:07.338 The main response is the following: 0:17:07.954,0:17:17.609 FASB 133 (Financial Accounting Standards Board of the United Nations, rule 133) 0:17:17.609,0:17:22.726 is doing that curving out that I'm telling you about right now. 0:17:22.726,0:17:25.080 It is there in that particular text. 0:17:25.080,0:17:26.449 What's the purpose there? 0:17:26.449,0:17:29.625 To make a difference between people that are useful to the economy 0:17:29.625,0:17:31.388 and people that are detrimental. 0:17:31.388,0:17:32.807 What is the purpose of the rule? 0:17:32.807,0:17:34.929 To make a difference in taxation. 0:17:34.929,0:17:37.901 People who are doing those parts 0:17:37.901,0:17:40.040 (that I suggest to be removed all together) 0:17:40.040,0:17:41.543 are taxed more. 0:17:41.543,0:17:45.858 When I'm being told it's impossible just to define what needs to be done, 0:17:45.858,0:17:49.523 it's already there, it's already in FASB133. 0:17:49.523,0:17:52.560 And something more: 0:17:52.560,0:17:56.126 A prohibition of wagers on the evolution of prices 0:17:56.126,0:18:02.320 was part of the law of the majority of countries in the world in the 19th century. 0:18:02.320,0:18:03.785 It was removed. 0:18:03.785,0:18:08.138 The article in Penal Law in France is article 421. 0:18:08.138,0:18:10.120 And it says exactly what I'm saying. 0:18:10.120,0:18:15.652 It's forbidden to make wagers on the evolution of prices. 0:18:15.652,0:18:18.376 It's been removed in 1885. 0:18:18.376,0:18:23.012 I've been going into the History of this evolution. 0:18:23.012,0:18:24.856 It's always the same explanation. 0:18:24.856,0:18:29.815 Under the pressure of the business community, these rules were removed. 0:18:29.815,0:18:33.840 And at some point when some countries started removing it, 0:18:33.840,0:18:37.738 business communities in the other countries said: 0:18:37.738,0:18:41.363 "we have a disadvantage now, we can't do this anymore." 0:18:42.394,0:18:43.778 I'll close on that. 0:18:43.778,0:18:46.720 I think it's not only possible, 0:18:46.720,0:18:48.658 it's already in the text in some way. 0:18:48.658,0:18:50.231 Some articles in the Law were there, 0:18:50.231,0:18:53.345 they have been removed, they can be reinstituted. 0:18:53.345,0:18:55.044 What I'm suggesting, what we need to do, 0:18:55.044,0:18:57.683 and that doesn't mean that we shouldn't reform individuals. 0:18:57.683,0:19:00.200 It needs to go together. 0:19:00.200,0:19:02.631 What I'm suggesting is only possible 0:19:02.631,0:19:05.800 if a large number of individuals reform themselves enough 0:19:05.800,0:19:09.847 in order to say we need to take a measure like that. 0:19:09.847,0:19:11.484 What I'm suggesting is: 0:19:11.484,0:19:16.428 "Thou shalt not wager on the evolution of prices." 0:19:16.428,99:59:59.000 Thank you.