Wall Street
Visionaries Provide Chilling Views on Next Big Risk
We asked three executives who’ve spent their careers on the
cutting edge of the financial industry what they see coming in 5 to 10 years.
Here are their answers.
By Sonali Basak
January 12, 2021, 5:00 AM EST
Few predicted—and most were unprepared for—the enormous
challenges that have kicked off this decade: pandemic, economic collapse,
social unrest, and political divisions around the world. Yet it’s the job of a
Wall Street executive to factor in all the unknowns. So Bloomberg Markets asked
three of the wisest and most visionary people in the industry about their
worries for the next 5 to 10 years: R. Martin Chavez, who helped build Goldman
Sachs Group Inc.’s trading and technology departments before he became a senior
director in 2019; Eileen Murray, a Morgan Stanley veteran who was co-chief
executive officer at Bridgewater Associates LP before stepping down in March
2020; and David Siegel, co-founder and co-chairman of quant trading giant Two
Sigma Investments LLC. Their comments have been edited for length and clarity.
Safeguarding Systems
R. MARTIN CHAVEZ
Senior director and former global head of securities,
Goldman Sachs
If I lie awake thinking about bad things that can happen, my
concerns—and this may say more about me than anything else—are almost all about
cybersecurity. Can we actually rely on, for instance, the integrity of core systems?
Here’s a scenario that is not contemplated in CCAR [the
Federal Reserve’s Comprehensive Capital Analysis and Review, an annual
assessment of the largest U.S. banks]: What about the Fedwire? The Fedwire is
the definitive central book that says, “Who’s the beneficial owner of which
Treasury security?” We rely intensely on that infrastructure. And of course,
the Fed has done a very great deal to have hot backups and warm backups and
cold backups. I don’t know that we’re putting enough time and energy into
modeling what a disruption of banking systems—core banking systems, payment
systems such as the Fedwire—what that would do to our economy.
You remember from a few years back that some hackers managed
to get a hold of the Swift [Society for Worldwide Interbank Financial
Telecommunication] credentials of Bangladesh Bank, the central bank of
Bangladesh, and caused several tens of millions of dollars to disappear from
Bangladesh Bank’s master account at the Federal Reserve Bank of New York. Some
of the money was recovered, but some of it seems to have disappeared into
casinos in Macau—walked out the door and was never recovered. In this case it
was not a failure of the Federal Reserve. Someone managed to get access to the
Swift credentials of a bank that had an account at the Federal Reserve, and
they drained that bank’s master account.
Next Big Risk
The whole point of being a risk manager is not to say that
something’s going to happen and to be an alarmist, it’s just to open your mind
to a lot of possibilities of things that could happen—and then get yourself
comfortable that they’re really unlikely. So I just don’t know about all of the
security arrangements of the Federal Reserve, for instance, or of the ECB
[European Central Bank]. I have confidence that they take these matters with
extreme seriousness, but I personally don’t know exactly what they are doing,
what kinds of technologies they’re using, to safeguard the system.
Almost all U.S. Treasuries do not exist in the form of a
paper certificate—over 99.9% of them exist purely in electronic form. And
Treasuries are the beating heart of the global financial system. Every country
has its inventory of U.S. Treasuries. Treasuries are used as collateral for
everything.
“I worry more about nonfinancial companies than I do about
financial companies”
And yet, if you ponder that they exist entirely in
electronic form, you’ve got to really start worrying about that electronic
form. I am actually less worried that [these systems] could be hacked and
simply halted. The thing that I think worries me more is, could it
systematically be corrupted by a hacker? So instead of having confidence in who
is the beneficial owner of every Treasury, [you might wonder] in whose
possession is that Treasury at every moment in time? Because that’s the core of
the financial system: moving Treasuries around. But when you think about it,
the Treasuries are electronic—they’re not actually being moved in physical
space; there’s just a computer somewhere that’s keeping track of who owns them.
And if someone could get into that record and cause us to lose confidence in
who owns the Treasuries, that would be, I mean—it’s so hard to even think about
that outcome—it would be so extreme and so dire.
However, I worry more about nonfinancial companies than I do
about financial companies. If you looked at the pandemic, there was very little
concern about the integrity and stability of banks. Think of how startling that
is, right? Compare that to the financial crisis, which was all about concerns
about participants in the financial ecosystem. In the current crisis, the
concern has been about everybody except banks, and I would say an important
reason for that is CCAR.
Should there be a CCAR equivalent for systemically important
nonbanks? As we discovered in the pandemic, there’s a lot of systemically
important companies. It suddenly became obvious to everybody. Without Amazon or
Google or our internet service provider, our problems would become even
greater. And so, do we want to have some kind of framework so that we can have
confidence in nonfinancial companies in a crisis?
There’s been a lot of concern over the past few years about
artificial intelligence. Will some AI take over, and then we become the AI’s
pets? Well, I’m actually more worried about something that I think has already
happened.
We already have massive AIs in the form of these tech
companies. Their data centers are running software on those millions of
computers, and collectively they are artificial intelligences. And they’re
artificial intelligences that are systematically exploiting weaknesses in human
psychology: our tribalism, our gullibility, or wanting to be told what to
believe, our wanting to be liked, our wanting to be told that we’re right. And
they’re exploiting it to the end of maximizing advertising revenue. So, yes, I
think we have to ask ourselves: Should we even allow this model of targeted
digital ads? I worry a lot less about subscription services. If I’m paying
someone a subscription like Netflix, their job is to keep me happy so I keep
paying that subscription. But you know that old saying: “If you are not paying
for some product or service, then you are the product or service.” So, yeah, I
spend a lot of nights lying awake thinking about the extent to which we have
become the product of artificial intelligences that are selling our attention
and our behavior to advertisers. I think that core business model is extremely
problematic in a way that untrammeled, undercapitalized trading and inventory
of risk was a problem that was part of the financial crisis.
Mass Unemployment
EILEEN MURRAY
Former co-CEO Bridgewater Associates
I think the next pandemic that’s coming is the displacement
of the workforce [that’s] not being trained to participate in the economy.
Dealing with that will take a lot more than a vaccine. The unskilled worker is
the next pandemic.
Let me just step back. First of all, I think that it’s
pretty clear if you have high degrees of unemployment, there are basic economic
impacts that are not good for the nation. It puts an incredible strain on the
economy. It usually only gets addressed through higher taxes on a smaller and
smaller tax base. It increases the gaps between the haves and have-nots, which
historically has caused more social unrest if it goes on for a period of time.
We saw high levels of unemployment like in the Depression create hopelessness
and despair in individuals, in families, and their communities.
I think [unemployment] happens as quickly as automation
displaces people from work without concurrently retraining them and retooling
them for other types of work. Does that make sense?
Look at the amount of money the U.S. spends on education per
capita, and look at where it places in terms of education among developed
countries. There’s a mismatch there. Throughout history, education has proven
to be the vaccine for poverty and for the gaps between the haves and have-nots.
What I’m seeing is a growing gap between the haves and
have-nots. The rich are getting richer, the poor are getting poorer, and we’re
losing the middle class. To the extent that you have rising unemployment, you
have people who can buy fewer goods and services, and you also have a need for
the government to increase the tax base, including corporate taxes. The better
way is for business, government, and educators to get together and say, a) “Do
we all agree there’s a looming problem ahead of us?” and b) “What are the
things that we can jointly do to start working on that problem?”
I’ve been talking about the issue for the last 10 years.
McKinsey did a 2013 study and found that up to $9 trillion in global wage cost
can be eliminated by automating a wide range of knowledge-intensive tasks such
as analyzing customer credit ratings and providing financial advice. That’s
2013. I don’t know what the numbers would be today. There was also a study by
the Oxford Martin program on technology and employment: Only 0.5% of the U.S.
workforce is employed in industries [associated with new technologies] today
that didn’t exist at the turn of the century. And it’s not just that these
people aren’t a significant part of these new industries—it might be the nature
of the industry—but we need to find ways of getting people more involved and
better trained. And I don’t mean just college training. It might be training in
different types of work such as working on rebuilding infrastructure. I think
it’s a function of government, education, and business getting together.
In other words, this problem isn’t going to be solved by a
vaccine. It’s not going to be solved by more military force or more security.
It’s not going to be solved by those kind of things that happen more quickly. It’s
going to be solved by retraining or retooling.
“When you take away from people the hope to realize their
potential, that is the epitome of despair”
Let me give you an example. Companies may have to put up
capital for future litigation costs. They might have to put up capital for
certain regulatory things, so should regulators give companies that retrain
their people a break vs. companies that don’t retrain and retool?
There’s been a lot of college graduates. And a lot of them
didn’t find jobs. Did we produce more college graduates than the economy
needed? But I also know that we don’t have enough electricians; we don’t have
enough plumbers. Are there other skills beyond a four-year college diploma or
an MBA that could be alternative ways of training or developing people for the
future economy?
I don’t think companies will keep unproductive people around
for very long. Here’s what I think is hopeless: If you tell someone this is
your life for the next 40 years, and you’ll be doing the same thing over and
over again, when you take away from people the hope to realize their potential,
that is the epitome of despair.
Is this the best we can do societally? Is this the world
we’re going to leave for our children?
Devaluing Humans
DAVID SIEGEL
Co-founder and co-chairman Two Sigma Investments
One thing that I worry about, which may not necessarily be
something that people talk about all the time—remember, I’m a tech guy—is that
we may be building a world that is not particularly designed for humans.
Henry Ford talked about it long ago. He wanted to produce
cars, but he wanted to make sure that the people producing the cars could earn
enough money that they could buy the cars. And you get this wonderful effect
where the growth in economic output produces good jobs, which then will help
grow the economic output. It becomes a virtuous cycle.
What we’re doing today is finding more and more ways to
essentially reduce the need to have humans involved with work. So much of the
investment in business in America is to essentially automate away human labor
or, even more curiously, to devalue human labor.
The nature of work is changing. For some people it’s getting
a lot better. But for probably the majority of people, it’s not really getting
better. If you can’t fix this problem, what could occur is that we end up with
this sort of barbell economy where a lot of people aren’t really doing all that
well. Not only is that just not a good thing, but also they’ll have less money
to spend to make the economy get bigger, so the Henry Ford thing won’t occur. I
think this is being overlooked. And it’s happening kind of slowly.
I am not at all concerned that there’ll be a shortage of
work. There will be plenty of things for people to do. The problem is, they may
be things that we don’t want to pay much money for.
Are we truly building a better world for ourselves? Or are
we trying to essentially optimize some number like GDP, which in the end
doesn’t have all that much to do with whether or not we’re happy and fulfilled
and it’s a good stable society? So we’re having more and more focus just purely
on automating stuff away, trying to make things more efficient, that may not
actually make your life and my life and everyone else’s lives feel better. It
may not be like a human-centered society.
I don’t think people are reflecting enough, in America
anyway, as to whether or not this is precisely what we want. It’s different in
other countries. In Japan, for example, I think people have put more emphasis
on upgrading experiences because they understand that when you go out—walking
down the street, going into stores, and all that—if you make it appealing,
people not only will want to go to your store, but it’s an experience, you
enjoy it. So what will the modern experiences be? Are we going to all be
sitting at home, wearing VR goggles, and clicking away all the time?
“Do you really care about GDP? Is that how you’re gauging
the quality of your life?”
Social networks like Facebook, people talk about all the
problems, but you know one thing that it does is it makes socializing very
efficient. So you can have your 100 friends or 500 friends, and you don’t have
to waste time calling people up telling them what happened. You go click,
click, click, and then everyone knows about your life. It’s the most efficient
way to socialize, right? Something doesn’t sound right. You know that. Do you really
want these levels of efficiency?
I’m not nearly the first one to say this, but at least at a
very high level, GDP is the thing everyone looks at. And, you know, quite
frankly, I’m not sure that that matters all that much. Because it’s literally
such a crude number. Do you really care about GDP? Is that how you’re gauging
the quality of your life? No? OK. We don’t spend very much time thinking about
the quality of life more broadly. You could in some sense create an
ever-growing GDP but have most people saying this is pretty bad. We could end
up with a lot of unhappy people. Maybe we’re there already.
A lot of people talk about, is AI dangerous? Some people
have been out there saying it’s more dangerous than nuclear weapons. I think
that that’s very silly. AI is a very useful tool. But the question is, how do
you use it?
Basak covers finance in New York.
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