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tv   The David Rubenstein Show Peer to Peer Conversations  Bloomberg  May 12, 2019 10:00am-10:30am EDT

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david: how do you pick up insider trading? jay: we do use computer algorithms. and we catch people. david: what is the biggest investment mistake? jay: diversify, keep costs low, that they need to diversify -- they need to diversify keep , costs low, and not panic. david: the sec pays government salaries, which are modest, to say the least. jay: i think they have the respect of wall street. david: well, they are respected. i was trying to get them a raise. [laughter] >> would you fix your tie, please? david: well, people wouldn't recognize me if my tie was fixed, but ok. just leave it this way. alright.
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david: i don't consider myself a journalist. and nobody else would consider myself a journalist. i began to take on the life of being an interviewer even though i have a day job of running a private equity firm. how do you define leadership? what is it that makes somebody tick? let's talk about the sec and the job of being chairman of the fcc. you were a lawyer in private practice. what is the biggest change in your life now that you are doing this? jay: i think the biggest change is my client is different. and my client is the american investor. that is a change from a single client to having a group of clients. david: it can't be that stressful. i see you have no gray hair. is that genetics or good fortune? or the job is not that stressful? jay: good makeup.
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david: ok. [laughter] david: when people say to you i want to invest in security a or security b, you say, i can give you general principles, is that what you say? jay: that is what i say. david: maybe i should be chairman of the sec. you said smaller investors through 401(k)s or iras should be able to invest in liquid securities. is there any progress towards that? jay: we are studying it. our private investment market has grown substantially in the last 20 years. you know this. in fact, last year, more capital was raised in the private markets than in the public markets. and our retail investors are not having access to those investment opportunities. over some periods, those investment opportunities performed better than the public capital markets. so we are looking at this. we want to make sure retail is not left behind. david: in the investment world
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for the last four or five years, people have been worried another recession is going to come. no one is predicting recession tomorrow that i am aware of, but you said leveraged loans are relatively high and it reminded you of 2008. what is your concern about the leveraged loan market? jay: let me clarify. i'm not saying the leveraged loan market reminds me of 2008. what i said about 2008 was there were mismatches in expectations and economic realities. in 2008, we thought not all mortgages would move in the same direction. they did. we thought a guarantee fee of 25 basis points was right for all mortgages. it wasn't. then you look at my job, you look around and say where are expectations and realities out of whack? and one place they may be is that leveraged loans don't settle like bonds. it takes a while to settle.
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-- it takes a while to transfer. if you want to settle a bond, you would settle three days later. if you want to sell me a leverage loan, maybe 15 days later, maybe 30 days later. if people think those loans are as liquid as bonds, they may be wrong, so you don't want a high concentration of those leveraged loans in a liquidity product like a mutual fund. that is what i was saying. david: is there anything else you are worried about right now? jay: i have been worried about a hard brexit. a hard brexit would have significant economic effects. we have asked our public companies to describe what a brexit or hard brexit would do to their operations. there will be some significant changes in people's operations. david: you have written that you are worried about cyber risks. jay: we have a ways to go on preparation. there are a number of what i would call single points of failure in our information economy that we need to make sure are resilient. the ones we worry about, exchanges, clearing houses, large banks, if there is a cyber
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problem, are they able to get up and running quickly? and that, we need to move to where we are more comfortable that that is happening. david: 1997, roughly 20 years ago or so, there were about twice as many companies that were public as today, maybe 7200 then, and half that now. is that because the sec is too tough on companies. they don't want to go public because of the constraints or because of other factors in the market? jay: i think there are a number of factors. one is regulation. another one is the emergence of private investment opportunities, private equity, credit for private equity. another is consolidation. but each of those three has contributed to that reduction. what i don't like is that companies are not choosing to go public early in their life cycle. we are seeing companies with
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high valuations going public, but not nearly as many in the $500 million to $2 billion. david: why do you care? why do you not like that? jay: because i want our retail investors to get a chance to invest in those companies when they are growing. it is great to invest in a $20 billion company. it is really nice when it was $2 billion two years ago. david: many are confused about one thing about the sec. i would say nonprofessionals. they think the sec says this is a good investment, not a good investment. what your mission has really been is to make sure people are adequately getting information. full disclosure, is that fair? jay: that is true. two principles. transparency, you have to be transparent and honest. in trading securities, we can
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not have unfair practices manipulation. those are the sec's core missions. david: so when somebody files to go public, some people say you have to put so much information in it that it discourages people from wanting to go public. is it possible you could say we don't need all this information, or you think what you are doing now is working? jay: i think the approach is the right approach, which is give us all the material information about your company when you are going public. that is the right approach. should we have the same amount of disclosure for our largest companies that we do for smaller and medium-sized companies? probably not. i mean the mega-global companies need to provide us more information than the startup biotech does. and what we are trying to do at the sec now is say, can we scale our disclosure requirements in a way that makes it accessible for those medium and small-size companies. david: if you were a publicly traded company, every quarter you file quarterly information with the sec. what about doing it every six months as opposed to every quarter?
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i know that has been debated. do you have a view on whether that is a good or bad idea? jay: well, quarterly -- markets thirst for information. investors thirst for information. they want information on a regular basis. i don't expect that quarterly reporting will go away anytime soon. if you borrow money from a bank at the same time as you are selling stock, that bank will want quarterly information. i don't know many loan documents that have semiannual information. but the real question for us is do you need to do something as extensive every quarter as we require today? you know what happens? people take this quarterly report and say, the one that will be filed in june and compare it to the march quarterly report. and all they really want to know is what is in the press release, the earnings press release, and what are the changes. and yet we make people file a very large document. so we might be able to do something that is more
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streamlined on a quarterly basis. david: when you were a lawyer, you had very highly-compensated associates, partners working with you on behalf of the companies. the sec pays government salaries, which are modest to say the least. i wonder can you really get good people to stay there because you don't pay them that much? jay: yes, we have terrific people. we really do. david: ok. and they can keep up with the private sector bar and things like that that are filing information all the time with investment banks? jay: you tell me. i think our people have the respect of wall street. david: well, they are respected. if they are watching this and the sec is looking at anything i might be filing, they are terrific people and do a job. they are so under compensated. -- they do a great job. they are so under compensated. i was trying to get them a raise. [laughter] jay: you know what, if you can help me get them a raise, let's do it. [laughter] david: let's suppose i am sitting in the emergency room of a hospital and somebody wheels
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in the chairman of the federal reserve board, can i call my broker and say i think the markets are going to go down because he is a popular person? can i trade on that? jay: it is a great question. that shows the line. where do we draw the fairness line? ♪
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david: let's go through insider trading for a moment. the supreme court has ruled in a couple of cases against the sec, arguing you were too tough on enforcing the law. is that a fair reading? jay: we just won one the other day, which felt pretty good. david: ok, but have you not lost a few in the supreme court? jay: there are a few we have lost. david: the question is the courts have misinterpreted the law when you lose? or how do you -- jay: look, insider trading is actually a very delicate enforcement issue.
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because you could have a rule that said any time you have information that everyone else doesn't, you can't trade. you know, anytime you have material nonpublic information, you can trade. well, that would discourage people from finding things out about companies. and one of the policing mechanisms in our market is private investors go in and looking at companies and whether they are telling the truth or not. we want to encourage that behavior. we want to encourage people to investigate companies. david: the theory is everybody should have access to the same information. if you are a corporate ceo and you tell me, a private citizen, you are about to buy a company at a big premium, i'm not supposed to buy stock because it is unfair to the market? jay: correct. david: let's suppose i'm sitting in the emergency room of a hospital waiting to have something looked at by an emergency room person, i am not really that ill, and somebody wheels in the chairman of the federal reserve board and the person says this person has had a fatal heart attack or
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potentially fatal heart attack, very serious, if i see the person being wheeled in, can i go and call my broker and say i think the markets are going to go down because he is a popular person? can i trade on that? jay: well, it is a great question. that does show the line. where do we draw the fairness line? if you are a doctor, we would say you have a duty to keep information about the fed person confidential and no one would expect you to trade on information you obtained by being a doctor, but if you happen to be standing there at the emergency room when he or she gets wheeled in, that information, you did not acquire in a nefarious way or any trust and you shoulday be able to trade on that just like if you saw people loading bricks instead of computers in
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the back of a truck. david: suppose somebody is a corporate ceo and they mentioned to me that he or she is a big company, they are going to pull out of britain because of brexit. they are not happy with -- and that will have a deleterious effect on the british economy. is it ok to take that information and short the pound, is that a problem? it is not a security. you can buy and trade dollar bills or pounds. is that a problem for the sec if i did that? jay: no, we don't police non-securities transactions like that. so a currency transaction would be outside our jurisdiction. david: you would say if i did that, that is ok? [laughter] jay: the answer is it depends. david: ok. all right. all right. jay: check with your lawyer. [laughter] david: ok. what about cryptocurrencies? you said they are not securities, is that right? like bitcoin? jay: just because you call something a cryptocurrency doesn't mean it is not a security. we have seen things people call
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cryptocurrency that are securities. you referenced one, bitcoin, which we have looked at and is not a security. david: for the average person, explain how many members of the sec are there? jay: we have 4500, 4600 employees. david: and how many commissioners? jay: there are five commissioners. david: appointed by the president of the united states? jay: and confirmed by the senate. i believe the way the rule reads , you cannot have more than three from the same party. david: let's talk about how you came to be chairman of the sec. you grew up in pennsylvania, hershey, pennsylvania, initially? jay: initially, hershey, pennsylvania. david: your father worked for hershey? jay: we were outside of hershey. david: did you get chocolate for free? jay: so much that we got sick of it. david: you didn't like it after a while. jay: but i like it now. david: you went to lafayette college and played soccer. you transferred to the
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university of pennsylvania. and it did you play soccer anymore? jay: a little bit. i was a marginal college soccer player. david: then you graduated summa cum laude, pretty good, then you went to cambridge, and then you play basketball at cambridge? you came back and went to law school. you did very well, near the top of your class. you clerked for a federal judge. then you went to one of the most successful law firms in the united states. and then all of a sudden you become chairman of the sec. were you known to the president? did you know president trump? jay: no. it is actually an interesting story. a client of mine asked me to go to trump tower to brief some people on the transition and how capital markets were functioning and areas for improvement. and one thing led to another and after a few days we did some interviews, then i interviewed with the president. david: ok. did he have any tough questions?
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tougher than mine? jay: you are pretty good. [laughter] david: ok. but so, i am told he was very impressed with you and said this person looks like he should be chairman of the sec. were you surprised he offered you the job? jay: we had a really good discussion. david: ok. jay: i think you are always surprised when offered a job like this. david: ok, so the president proposed you become chairman of sec. you had to sell your securities. you had to give up your partnerships. jay: they didn't tell me that. david: does the congress bother you on a day-to-day basis? they say go regulate this, do that? jay: every minute i spend up there is valuable, because it is really good to hear from members and senators from both parties what they think we should be doing. it is good to know how someone looks at you when they -- they are my board of directors. david: does the white house or president call you with advice or suggestions or not that much? jay: not so much.
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david: so would you like them to call you more or not so much? jay: i like things the way they are. [laughter] david: when you are relaxing, what are you doing? jay: i played soccer yesterday with my kids and i couldn't walk. david: not a golfer? jay: i was more of a golfer before i took this job. david: if you played now you would find that people gave you putts more than before. have you ever thought about that? jay: i must be playing with the wrong people. david: ok. ♪
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david: today when you look at the economy, you are not an economist, but are there any signs you see in the economy that people should be worried about if they are an investor, or you don't get into whether the economy is weakening and
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therefore maybe they should be cautious on their investments? jay: macro investment advice, steady, long-term investing in america and our economy has proven to be a good thing. i continue to want our markets to be a place where people invest steadily over time. their retirement will be a much more comfortable one. that is the number one question people ask me. is, will i have enough money in retirement? when we go to these roundtables, it is the number one thing on
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-- the number one reason jay: the people who wrote the laws did not expect we would have markets that were almost entirely electronic trading. even if you and i make a small stock order, it gets put into an algorithm and is executed electronically. we need to update to take account of developments in technology. but the bedrock principles, transparency and fair trading, we should not do anything to touch those. david: ok, computerized trading where you have very fast trading, faster than anything anticipated when the sec was set up, do you think that is good or bad for markets? jay: it is good over time. adding technology to our trading markets has made trading more efficient, and as a retail investor, what you pay to trade today is much less than it was
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20 years ago, but we have to recognize that with that comes new risks. we talked about one of them, if you have a cyber problem, that is a much bigger risk today than if the telephones went out. david: how do you pick up insider trading? what do you do without giving away your innermost secrets to kind of catch or figure out whether there has been insider trading? jay: we do use computer algorithms to analyze trading to see if there's trading that doesn't make sense. and we do catch people. david: so from your current position, what do you think is the biggest investment mistake that you think investors make? jay: i will give you a couple. they need to diversify. they need to keep costs low. and they need to not panic. one of the big mistakes people make is that when they see their investments go down, they sell, which is often the best time to buy. you need a long-term plan. you need to keep your costs down.
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and you need to stay diversified. david: sometimes people at the sec say fees being charged by investment managers are too high. is that a general view of yours or the sec or you are not worried about that? jay: i think that, i believe in the power of shopping. i think that when fees are transparent and people get a chance to shop around, everyone benefits. david: today as you look at the job you have, are you glad you took the job? and what is the best thing about being chairman of the sec and serving your country in this way? and what is the worst thing about it, other than an interview like this? [laughter] jay: i am very glad i took the job. i am very glad i took the job. i believe in our markets. they are the best markets in the world. we need to keep updating them. we need to keep current. we need to keep that competitive advantage for america. and our markets, the participation in our markets is incredible. 50 million households participate in our markets.
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you know, the best part about it is trying to make a difference for those 50 million households every day. david: now you have three children who are in school now. they are in the new york area, where you are from. you commute down and go back on the weekends. i assume a lot of your friends are in the investment business or legal business. do they come up to you and say have you got any good insights i can get from u.s. chairman of the sec? or you can't talk to your friends about anything you do anymore? jay: i used to not talk to my friends about what i did before. david: now that you have served in the government for a number of years, do you like it so much you might consider, suppose the president called and said you have done a great job. i would like you to do another job. is there another job or you are happy where you are? jay: i decided to do this job and i'm really not thinking about what is next. i think, i got some good advice from my wife. she said do the job. don't think about what is next,
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because then you won't have your mind on the job. david: your wife was in the investment business. and when you took this position she had to get out of that? jay: she had to -- yes. she wasn't forced to. david: you thought it was a good idea? jay: we thought it was the right thing to do. david: the biggest surprise in the job is what? jay: how much ground the 4500 women and men at the sec cover. it is $72 trillion a year in transactions. a million people in our country work in the securities industry. they are counting on us to set the rules in the right way and enforce them, then they just cover a lot of ground. david: when you are relaxing, what are you doing these days? golf, basketball, soccer? what do you do? jay: i played soccer the other day with my kids and i could not walk, so we are going to slow down on that. david: not a golfer? jay: i was more of a golfer
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before i took this job. david: but if you played now you would find that people give you the putts more than before. haven't you ever thought about that? jay: i must be playing with the wrong people. david: thank you for an interesting conversation. thank you, jay, for doing this. jay: thank you. i really enjoyed it. [applause] ♪
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