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GRANT WILLIAMS: The second leg of our journey will take us through the Tuscan countryside from Florence to Siena, home of the world’s oldest and possibly most troubled bank– Banca Monte dei Paschi STEVE DIGGLE: So Siena– where we’re about to arrive, when this traffic lets up– GRANT WILLIAMS: Hopefully STEVE DIGGLE: –not a hugely important city, though a very beautiful one– but in medieval Italy, one of the great trading centers and Florence’s great rival for hundreds of years as a destination for merchants, and business, and political influence So they fought each other for centuries– 2 and 1/2 centuries, at least, on and off– in this very medieval way, which was– you don’t actually do any of the fighting yourself GRANT WILLIAMS: No STEVE DIGGLE: You hire a mercenary– GRANT WILLIAMS: Mercenary Yep STEVE DIGGLE: –made up of the scum of Europe– English– –German, Swiss, Belgians– to do the fighting for you And these are, really, quite small armies but Siena didn’t actually formally come under the control of Florence until the 16th century, when it was actually controlled by the Hapsburg Spanish And they owed a great deal of money to the Medici banking house GRANT WILLIAMS: Didn’t everybody? STEVE DIGGLE: So the Medici acquired Siena in a debt-for-equity swap 2 and 1/2 centuries of fighting, but they’re actually acquired in a financial transaction And Florence having aborted, essentially, in a debt-for-equity swap, then controlled the growth and development of Siena in the traditional way– by imposing punitive taxes on the place, so that Florence was a much better place to do business than Siena And so Siena never grew, which has turned out to be a great blessing for it Everything’s still intact Why is everything intact? Because no growth However, despite being only 55,000 people these days, they still have to have their own divisions, which they do And you will find an interesting story about the subdivisions of Siena, which I’ll tell you when we arrive GRANT WILLIAMS: This is beautiful Look at this STEVE DIGGLE: Look at this Look at this Here’s a place with a population of, when they built this, 80,000, 100,000 I mean, it’s a small town most anywhere else in the world, but they thought they needed this The scale of the ambition is amazing So we’re in Florence, and now we’re in Siena, only a few miles apart– mortal enemies To this day, people in Siena still don’t like Florentines But when Sienese get together, they’re not united They’re part of these 17 contrada– 17 contrada So the population of Siena these days is like 55,000 people– GRANT WILLIAMS: Is that all– 55,000? STEVE DIGGLE: Yeah Florence ensured that this place would never flourish, by having differential tax rates, which is interesting, right? Because you can fight someone for 2 and 1/2 centuries but if you really want to restrict it, you impose taxes on it– so drove all the business to Florence Florence flourished Siena stopped developing But when they’re together– they’re not united, the Sienese, unless they’re fighting someone else When they’re together they’re down to 17 different districts, or the contrada, and that’s erasing the Palio– well, nine of the 17 qualify to race here And once again, this isn’t an affectation These contrada– they really dislike each other GRANT WILLIAMS: Right So let’s do the math There’s what?– 3,000-odd people in each contrada And I’m sure when the contrada get together, they probably don’t like each other, either– probably family disputes, or something But anyway– Giuseppe– we’re not talking to him STEVE DIGGLE: It’s a perfect and beautiful representation of this Italian genius for division and internal fighting So the contrada get together to fight the Florentines And then, I suppose, at some level, the Tuscans get together to fight the Neapolitans– GRANT WILLIAMS: The — STEVE DIGGLE: The Milanese– and then, rarely, rarely, do the Italians get together to fight someone else Well, I mean almost never, because it wasn’t a country that was reunited until 1870

GRANT WILLIAMS: Well, you see, I remember when I first read that And I had to go back and read it again So I’m thinking, Italy has been a country for less time than the United States, as we understand it– STEVE DIGGLE: About half the time GRANT WILLIAMS: Half the time– and yet, there’s so much history here So it’s such a contradiction We’re in a place that feels like it’s just stopped in time STEVE DIGGLE: Yes GRANT WILLIAMS: Just, I mean, if you look around, it’s remarkable Take away the awnings and the plate glass in the front of the store– I mean, we’re centuries past STEVE DIGGLE: Think about the wealth of this place though Population– let’s say 100,000 in the 14th century They built this I mean, look at it– the ambition, the wealth, the scale of the audacity Most towns of 50,000 to 100,000 people do not need a square this big or a municipal premises this big So you go from a situation of enormous confidence, optimism, wealth, to a place that really doesn’t grow for 600 years GRANT WILLIAMS: Right But when we talk about growth, which is a big part of the debate about Europe and Italy, this idea that the Italian economy is smaller, still, than it was in ’08, whereas other economies have grown– we think of this in a small way But we’re sitting in the middle of somewhere that hasn’t really grown for centuries So that’s a possibility It can happen STEVE DIGGLE: But radical ecologists would say, this is a great example of what happens when you stop growing and you preserve things And they remain pristine and beautiful GRANT WILLIAMS: But we get this idea of growth on a world scale, where we’ve seen there was always either a country– a significant country or region that was growing at a decent clip– 6%, 7%, 8%, 10%, 12% in Italy or China– and the fact you’ve had that one significant– STEVE DIGGLE: Well, the reason you and I were in Asia was because that was where the growth was Right? I mean, you had half the world’s people, and it was growing rapidly– first of all, Southeast Asia, then North Asia, then China– series of huge boosts to global growth from hundreds of millions of people entering the global workforce– becoming consumers– GRANT WILLIAMS: –and sucking in resources, sucking in labor– We don’t seem to have that now With China at 6 and 1/2% now– STEVE DIGGLE: They say GRANT WILLIAMS: They say They say STEVE DIGGLE: I think it’s probably more like 4 and 1/2% GRANT WILLIAMS: Even so– but without that engine of growth, are we entering a world where 2% to 3% is good– which it feels to me we are, certainly in the West And if so, what does that mean? What does that lower for longer mean? Because here, it means nothing It means life goes on And it means– this place is a moment in time that people from all over the world want to come see, including the massive group behind us that’s just emptied out of a coat somewhere But what happens? Is that where the world is going to be now? STEVE DIGGLE: There’s no problem with growing with 3% a year Right? I mean, if you grow at 3% a year, it means your economy doubles every generation That’s not bad GRANT WILLIAMS: No It’s not STEVE DIGGLE: On long-term historical perspective, that’s pretty good, as long as you don’t have a massive war, or famine, or disease that– GRANT WILLIAMS: Or– STEVE DIGGLE: –wipes you out GRANT WILLIAMS: –unsupportable debt STEVE DIGGLE: Ah, yes Well that’s another matter I mean, the only way that that sort of growth becomes problematic is for two reasons One, if you’re already very poor, that’s going to be bad Right? So if you’re stuck in a poverty trap, and you’re growing slowly, then that’s going to cause a real level of dissent The other thing is, if you enter a period of low growth– and Italy is a great example of this– with too much debt– because the only way you really ever truly dissolve debt is inflation or growth– GRANT WILLIAMS: Correct STEVE DIGGLE: –neither of which we have GRANT WILLIAMS: Right So what does that mean for Italy? STEVE DIGGLE: So if you enter a period of time where your demography is not constructive– Italian demography is not constructive– clearly, immigration is highly problematic What does that mean? It means that Italy and Japan obviously have the worst– some of the worst– demographics in the world And they both have huge levels of sovereign debt Right? In Japan, it’s now over– what? 200% and– GRANT WILLIAMS: 240%, I think it is STEVE DIGGLE: 240% Italy’s– what? GRANT WILLIAMS: Here, it’s 130%? STEVE DIGGLE: 130%, yeah So you’ve got an economy that’s still stuck around $2 trillion Sovereign debt’s around 2.4 And growth is, well, nil, for a decade GRANT WILLIAMS: Yeah Right And that’s problematic And– STEVE DIGGLE: That’s the problem GRANT WILLIAMS: Exactly STEVE DIGGLE: That’s the problem– servicing and eventually maybe even possibly paying down the debt– that’s not likely to happen any time soon– becomes increasingly problematic That debt is what traps Italy inside this box with the EU, because Italy needs to be a member of the European Union in order to have low rates in order to service– it’s

unserviceably high debt Right? That’s why Quitaly is not going to happen They can’t afford to because rates would double That would mean, effectively, the entire Italian budget would go to service of the debt GRANT WILLIAMS: But if they do that, and they go back to the lira, is there a possibility of a reset of some sort? I mean, obviously, it’s going to ripple There’s going to be– STEVE DIGGLE: This is not– GRANT WILLIAMS: — STEVE DIGGLE: –something that Italy hasn’t been through before Not without a default GRANT WILLIAMS: Right No STEVE DIGGLE: Not without a default GRANT WILLIAMS: Exactly right STEVE DIGGLE: But that’s happened before– GRANT WILLIAMS: Sure For it to happen to a G7 country would be astonishing, but is that a way out for Italy? STEVE DIGGLE: It’s a way out, but it’s a bit like dropping the H bomb, isn’t it? GRANT WILLIAMS: Yeah But if you’re prepared– if we are getting down to the negotiation stage of this– if you’re prepared to put that on the table– which, let’s face it The Greeks were The Greeks put that on the table– fudged it, obviously We don’t know what kind of backroom deals were made with the Greeks or backroom pressure put on them So there’s no– didn’t seem any deal made But they got the bailout they needed If you’re prepared, which the League and 5Star claim to be– to go to any lengths to stick it to the Europeans– could we see that as some kind of standoff, do you think? STEVE DIGGLE: I think the fact that, as you mentioned, Italy is a G7 country– maybe it’s someone in Congress, it is The pride that Italy has in itself is on a different level to the Greeks, I think I mean, there are certain similarities, but there’s some very important differences I mean, this place is a testament to the pride the Italians feel– GRANT WILLIAMS: Sure STEVE DIGGLE: –in themselves and their achievements So I think it’s unlikely to end up there But in a sufficiently antagonistic situation, given the domestic situation in Italy and the increasing frustration of Italians with Brussels, I don’t think it’s impossible So if they want to have more fiscal stimulus and some way to break out– if they break out, the monetary rates go higher So that’s the trap GRANT WILLIAMS: Well, this is why sitting here is so apposite to talking about this– because at that point, they necessarily, I guess, all become Italians again And Italy becomes one contrada inside Europe And the Grillos and the Northern Leagues of the world are fighting for their contrada in amongst this wider scope And if you galvanize Italians into that kind of frame of mind, who knows what you can achieve? STEVE DIGGLE: Yes Possibly I mean, clearly, that’s a possibility It strikes me as pretty unlikely I mean, one of the other Achilles’ heels that Italy has is not just its sovereign debt– it’s this banking crisis, which is one the reasons we should come here to Siena– because the banks are in a very poor state and have remained in a poor state They never really recovered since 2007 They’ve been in a state of either denial or denying how bad the problem is, but against total borrowings of $2.2 trillion– about one times GDP– approximately 11% to 12% of that is nonperforming GRANT WILLIAMS: Well, I mean, as you said, the beauty of being here in Siena, just up that hill, is one of the oldest banks in the world STEVE DIGGLE: I think it’s the world’s oldest continuously operating bank, established in 1472 GRANT WILLIAMS: So it feels rude for us to talk about Italian banks without– can we go and take a look at Monte dei Paschi? So maybe we’ll just get the check, finish our coffees, and go and take a look up there What do you reckon? STEVE DIGGLE: Good GRANT WILLIAMS: Alright The fate of Italy’s banking system, for better or worse, seems inexorably tied to its place at the heart of the European Union The fragility of Italy’s banks mirrors that of the country as a whole, and their reliance upon state aid and low interest rates have placed them in increasingly perilous situation STEVE DIGGLE: Here we are– Monte Paschi Monte dei Paschi– world’s oldest continuously operating bank and pretty nice building GRANT WILLIAMS: Beautiful STEVE DIGGLE: Here’s a guy who’s just seen the balance sheet of the current Monte Paschi He’s not looking very happy about this GRANT WILLIAMS: It’s just reason STEVE DIGGLE: So formed in 1472– Monte dei Paschi– Mound of Piety So it was formed as a charitable organization whose profits all went to charity in the local area, and that’s carried on even to this day 1472– continuously operated GRANT WILLIAMS: Yeah So six– almost six centuries STEVE DIGGLE: Almost six centuries 400– no 572 years as a private enterprise continuously operated– went public in 1999

Since then, in the last 18 years, it’s had three government bailouts GRANT WILLIAMS: It’s extraordinary, isn’t it? I mean, it’s truly extraordinary And it speaks volumes about what we spoke about– incentives, responsibilities– right here I mean, it’s writ large STEVE DIGGLE: After they IPO’d in 1999, they trebled the balance sheet in seven years Stock hit an all time high of current money– because it’s been recapitalized several times now– EUR 9,300 in the summer of ’07– GRANT WILLIAMS: Perfect STEVE DIGGLE: –current price around EUR 1.6– so you really want to meet the guy who paid 9,300 GRANT WILLIAMS: Right STEVE DIGGLE: –and find out what his strategy is for breaking even GRANT WILLIAMS: Well, yeah I average down, obviously GRANT WILLIAMS: You’re in at 4 and 1/2 grand, and things are looking better STEVE DIGGLE: It may be a lesson to people on averaging down No So what happened here? They trebled the balance sheet And then when ’08 came, and everything got really bad really quickly, ultimately, 45% of their entire debt base was considered to be non-performing GRANT WILLIAMS: 45%– I mean, how do you find that many bad credits? STEVE DIGGLE: And a third of it is still essentially non-performing So a third of the $150 billion that they created– or $100 billion they created anew When you actually look into what happened, I mean, this is obviously the worst But UniCredit was 207 euros in the summer of ’07– 11 right now So it wasn’t that Monte Paschi was unusual, right? Keynes’s famous rule, right? If you’re a banker, the one thing you must never do is fail idiosyncratically Right? GRANT WILLIAMS: Right STEVE DIGGLE: Always fail together And they all did the same thing It’s just, these guys did it more and more aggressively and from a smaller capital base And they were trying to catch up GRANT WILLIAMS: But that mindset change from a 500-year-old institution– how does that happen so fast? Because new guys come in– OK We’ve got a great idea because we need to grow– how about we list– It’ll be great We get access to more capital I mean, it’s– STEVE DIGGLE: And we’ll be able to create an incentive to attract real talent, because then we’ll have a currency So then we’ll be able to offer incentives We’ll be able to offer bonuses And what did the bank want to do? Wanted to expand its balance sheet So what were the managers being incentivized to do? Expand the balance sheet– not make a profit– not make a– GRANT WILLIAMS: Lend more money STEVE DIGGLE: –but make a solid, long-term financial organization expand the balance sheet That’s what we’re going to incentivize you to do And you’ve got to say, they did it 300% increase GRANT WILLIAMS: Well, they did, but– STEVE DIGGLE: –in seven years That’s pretty good GRANT WILLIAMS: Everybody watching it uses that as their metric to evaluate The whole thing is so circuitous, that we’re going to expand the balance sheet We’re going to lend more money And the people watching it go, they’re lending more money This is great for the business The business is growing It’s– I mean, it’s ludicrous– STEVE DIGGLE: Why would you ever value a business on revenues? Why would you ever value a business on revenues? I can sell you $1 at 99 cents all day My revenues are going to look spectacular GRANT WILLIAMS: Sure STEVE DIGGLE: I have no idea Why would anyone want a business with lots of revenues? You actually want, just, a business that makes a profit Now, banking does make a profit Look at this They built this with profits GRANT WILLIAMS: From a bench over there– STEVE DIGGLE: From a bench– GRANT WILLIAMS: –to this STEVE DIGGLE: It’s a profitable business, if you do it right But if you do it badly, you can run out of money extremely quickly GRANT WILLIAMS: And go out of business But that’s the whole point, right? It’s a really simple business to grow steadily If you want to start growing exponentially, the only way to do it is to take unnecessary risks Right? That’s the way STEVE DIGGLE: So why is the Italian banking situation so much worse than most other places? It wasn’t that they did anything extraordinary Monte Paschi had a specific derivatives catastrophe, and the lending was reckless But all the other banks are somewhat similar I mean, they’re obviously better– GRANT WILLIAMS: In all the other countries, this is a common or garden banking problem STEVE DIGGLE: It’s 68% owned by the government, by the way, now So the IPO has been 2/3 reversed anyway GRANT WILLIAMS: Sure STEVE DIGGLE: It used to be owned by a mound of piety Now– It’s 68% owned by the Italian taxpayer, who’s really underwater as well So what went wrong here is just another chapter in the story, which is– this is what banks do when credit conditions are eased and they’re under an incentive to expand their balance sheet It’s not really fundamentally different to what happened in America GRANT WILLIAMS: No STEVE DIGGLE: But there is one major difference, which is that, since 2008 the American economy has expanded It’s now significantly bigger than it was in 2008 That means, even those bad debts, eventually, they get dissolved Right? I mean, eventually, economic growth solves all your problems You haven’t had economic growth in Italy for 10 years You’ve got 55 million people– most of them employed– most of them doing a good job And you’ve seen zero economic growth And that’s what makes the Italian problem so serious, because without growth, you can’t

grow your way out of your problems And you’re stuck You’re not lending Well, we know they’re not lending because we have this huge credit problem in Italy in 2013, 2014, where no one could get credit We haven’t been able to get credit on anything we’ve tried to do here So credit’s effectively dried up So what’s your plan? Your plan is to work out of your way out your bad debts? Well, guess what? For that, you need rising asset prices for that You need– GRANT WILLIAMS: Correct STEVE DIGGLE: –economic growth So it’s a huge problem And it’s not getting any better In fact, you can see the fact that the share prices have all collapsed I mean, there was a reasonable banks in them Monte Paschi got back to, like, 1,100 in the summer of 2014 GRANT WILLIAMS: One last chance to lose all your money, if you’re a trader STEVE DIGGLE: You’re only down 90% at that point GRANT WILLIAMS: Yeah Right Exactly But this is the thing– all these bounces If you look at the underlying business, no one’s buying this stuff because the business is getting it They’re buying it because it’s gone from 9,000 to whatever There’s a bounce here And so these things just become trading vehicles You’ve got all the debt– the sovereign debt of Italy is now littered across the balance sheets across Europe– the banks here– the banks of France There’s 9 billion Italian sovereign debt on French balance sheets German banks are stuffed to the gills with this stuff It just keeps going around, and around, and around STEVE DIGGLE: Well, France and Spain together have pretty much the same level of bad bank non-performing loans as Italy, but Italy is concentrated It’s larger And there’s no economic growth So that really ties the current banks into the political crisis GRANT WILLIAMS: Right Of course STEVE DIGGLE: Because the Italian government owes the world EUR $2.4 trillion The bans have lent about a similar amount, and at least 10%– probably more like 12%, 13% of it– is bad That means they need the EU to continue to support them So that makes things a bit more difficult But one thing that I keep coming back to is, why isn’t the Italian economy growing? Look around Right? It’s the fifth most visited country in the world for a reason It’s beautiful It’s fecund It exports things all around the world They make things that people want, unlike Greece I mean, they make furniture They make clothes They design beautiful buildings GRANT WILLIAMS: Cars STEVE DIGGLE: Make good cars, right? So what the hell is going on? Why aren’t they growing? And yes, consistently, the message from Italian politics is, we’ve got to blame Brussels And I say, yeah OK I see that And I have a lot of sympathy for it But look at the situation in Italy that stops the economy growing What is it? It’s not the people It’s not the geography It’s not the talent What is stopping this place growing is the suffocating bureaucracy And have a look at yourself, right? As one Italian says to another in one of Shakespeare’s plays, “It is not the fault, dear Brutus, lies not in our stars, but in– GRANT WILLIAMS AND STEVE DIGGLE: –ourselves– STEVE DIGGLE: –that we are underlings.” This country is 75th in the World League of ease of starting a business GRANT WILLIAMS: Right STEVE DIGGLE: It’s below the Democratic Republic of Congo That’s not Brussels GRANT WILLIAMS: No STEVE DIGGLE: That’s Italy GRANT WILLIAMS: That’s true STEVE DIGGLE: It ranks 111th in getting credit– well, partly, thanks to these guys having no more money GRANT WILLIAMS: It’s just remarkable, right? Exactly STEVE DIGGLE: It ranks 112th in paying taxes 112th It’s a G7 country It ranks 112th It’s behind another 111 countries There’s only 175 in the entire index GRANT WILLIAMS: Right STEVE DIGGLE: It’s not just about Brussels It’s about this system that you’ve created that suffocates entrepreneurial flair– and deters people from coming here, and starting businesses, and growing businesses And these guys are a classic example of that because you’ve got to have a functioning banking system So for a window of about four years, these guys– Boba Monte, as they’re known, Father Monte– Anyone could just rock up with a stupid business plan and walk away on a check, right? Particularly if they were local And then all of a sudden, that doesn’t work out And now you can’t have a penny, even if you’ve got a great business plan It’s a terrible way of running things And then, probably most depressing of all, it continues to rank really badly on this global perception of corruption– about 54th, I think GRANT WILLIAMS: Right STEVE DIGGLE: –just behind Namibia GRANT WILLIAMS: Right STEVE DIGGLE: –one ahead of Saudi Arabia– G7 country GRANT WILLIAMS: So in terms of coming out of this– the one thing you can rely on is that, at some point, credit will be extended willy-nilly again We have to get through the phase where they shut the doors and go right, we can’t extend credit to anybody So if there is some hope, it’s that we all get crazy again, at some point, when the all-clear is sounded STEVE DIGGLE: Yeah I mean, that’s fine Right? I mean, to a certain extent, that will alleviate some of the symptoms But the underlying cause remains that in a country that ought to be one of the most prosperous

in Europe, a system that is weighing this place down and stopping it growing continues to be in place– and is hardly being challenged I mean, Macron, to a degree, in France, is talking about some of these issues We need to work harder We need to remove impediments to incentives We need to find a way of encouraging growth That debate’s not happening in Italy Right? I mean, the 5Star Movement are talking about massive subsidies for everyone We’ve suffered enough Let’s open the spigot The League, actually, for all of their populism– somewhat crazy nonsense and sometimes racism– do have a strong platform of support for small businesses At least fair enough for that But really, the debate is all about immigrants It’s all about bad Brussels– throwing off the shackles of these people who’ve oppressed us Well, you know who’s really oppressing you? This ridiculously oppressive system of red tape, regulation, rules, inflexible, local bureaucrats, too much regulation, too much corruption– everything’s hard– hard getting a permit, hard paying your taxes, hard establishing anything And so on, and so on, and so on And these guys just represent a monumental failure to support business That’s what banks are supposed to do– to equity and debt Debt can be syndicated through a bond market or it can come from banks It’s not hard GRANT WILLIAMS: No It’s not STEVE DIGGLE: It’s not hard GRANT WILLIAMS: And when I look at this, that’s the thing that I find so disappointing in the whole thing– because it’s the same mistake that gets made over, and over, and over again This is nothing new under the sun It’s a common or garden banking crisis Well, I mean, what an awful thing to be in existence STEVE DIGGLE: Well, if you really want a lesson on why a stock that is falling a lot is not cheap, this is the one GRANT WILLIAMS: Yeah Exactly right STEVE DIGGLE: Right? Stock down 90% can still fall another 99% if it has a bad business– even if it’s a big business GRANT WILLIAMS: The catastrophic destruction of a 500-year-old banking institution through misaligned incentives, aided by access to artificially cheap capital, is emblematic of all that ails not just Italy, but the world in 2019 And the interconnectedness of Europe’s bank and government debt ties them all together in the worst way imaginable But it’s not all the fault of Brussels bureaucrats When you see Monte dei Paschi, it kind of crystallizes what an absurd situation the whole thing is I mean, this institution’s been around for centuries STEVE DIGGLE: 6 and 1/2, right? I mean, you’d think they would have managed to have spotted a few pitfalls in the road over 6 and 1/2– GRANT WILLIAMS: Well, and they probably did What they didn’t spot what a currency union, and the pressures that all this massive securitization, and that chase for profits– that hunger for just turning another dollar instead of being bankers I mean, it’s criminal, frankly It’s a shame Really is STEVE DIGGLE: Well, whether it’s criminal or not, I guess, needs to be made to be seen But it’s a testament to how fragile things become when everyone chases the next quarter GRANT WILLIAMS: Exactly Exactly STEVE DIGGLE: And I think this is something that you and Tony Deden covered GRANT WILLIAMS: Yeah We did STEVE DIGGLE: –in quite a lot of detail And I think, for a lot of people, that was an interesting perspective on things because, clearly, a lot of investors spend an awful lot of time looking for the next quarterly results Early traders live and die by those things But ultimately, what happens over the next 90 days doesn’t really matter And I think one of the history teaches you is that, if you want to survive long-term, you need to be looking further down the road than the next 90 days And you need to be planning for further than the next 90 days And there’s a lot of criticism of short-term-ism in banking, in finance, and the way companies are run But this comes back to the whole nature of– capitalism rests on the proposition that people respond to incentives And if you have company executives that are being incentivized or banking executives that are being incentivized to make money every 90 days or every 180 days, they’re going to do that GRANT WILLIAMS: Of course Yeah of course STEVE DIGGLE: They’re going to do that There’s probably no greater example in American banking history than the transformation of Goldman Sachs from the private partnership to a limited company GRANT WILLIAMS: And then on to a listed company– STEVE DIGGLE: A listed company

GRANT WILLIAMS: –and into a bank holding company, right? STEVE DIGGLE: Well, yes But a listed company– and quite a lot of people were like, when did Goldman Sachs change from this organization of bankers who were looking after an organization that had lasted a long time and planning for the next generation, to be one that was just looking forward to the next earnings date? And the answer is– the IPO– Fundamental change in the way the organization ran itself and behaved And it’s just the same here I mean, you’ve got Italian executives– but all people under tremendous short-term pressure to produce constantly good results And of course, it’s nonsense– businesses, economies, life is cyclical You’re going to have downturns You can’t just turf everyone out because you’ve just had a weak quarter But it’s the way people respond And to a certain extent, I’ve got some sympathy for the executives because, having run a hedge fund– which I was trying to run for a cycle, because we were long volatility, and you don’t always get volatility But eventually you do And you’re under tremendous pressure to make money every month I’m like, it’s really hard to run a fund for an economic cycle when investors are tapping you on the shoulder to make money for every 30 days GRANT WILLIAMS: Well, I mean, that’s just gotten worse And this year, this thing about listing is, obviously, everyone that is, then, involved in running the company, sadly, can check and does check their net worth– GRANT WILLIAMS AND STEVE DIGGLE: –every five minutes GRANT WILLIAMS: And so you can’t help but take your eye off the ball because, suddenly, you have a bad day You can crystallize that and go, oh my god This cost me x today And it freaks people out I mean, it’s backwards– STEVE DIGGLE: So what does that mean? Listing’s a bad idea? GRANT WILLIAMS: No I’m not saying listing’s a bad idea But I think if your remuneration is so tightly tied up to the share price, I understand– STEVE DIGGLE: So it’s an alignment GRANT WILLIAMS: It’s poor incentive STEVE DIGGLE: It’s an alignment It’s poor incentives GRANT WILLIAMS: It’s always an alignment You said this to me so many times when we worked together You have to get the incentives right If you get the incentives right, the results will go the way you want If you get the alignment– the incentives– wrong, you’re going to get bad results I mean, it’s been proven time and time again STEVE DIGGLE: What do you think of this idea that you shouldn’t get a vote in a company until you’ve held the shares for a certain period of time? You can’t just turn up two minutes before the vote and– GRANT WILLIAMS: I think it’s a great idea, frankly I really do I mean, I understand– so if you got a share, you deserve a vote But if we want to try and create stability– and even though there’s an illusion right now that we don’t need to, because everything’s fine– we do I mean, this is a very fragile economic system That’s a great way to go about it STEVE DIGGLE: So what would the curing period be? 30 days? 90 days? 180 days? GRANT WILLIAMS: For me, I would rather it be longer– STEVE DIGGLE: Really? GRANT WILLIAMS: –than shorter Yeah I do, because I think if what you really want people voting who have a long-term interest in the company– not who are trying to make a change to effect some kind of short-term outcome– that’s dangerous to me STEVE DIGGLE: Isn’t that somewhat going to change the way stock markets work? GRANT WILLIAMS: But how do they work right now? I mean, do they work right now? I would argue that perhaps they don’t because the idea of price discovery, and the idea of markets reacting to news the way they’ve always reacted to news, is completely gone They just don’t do that any more STEVE DIGGLE: Well, I mean, between the algos, and the computers, and the ETFs, you’ve got a big chunk of company ownership being held by computers who don’t have a view– and ETFs, who are essentially passive GRANT WILLIAMS: Exactly right And for me, seeing Monte dei Paschi– seeing this 5-centuryold– STEVE DIGGLE: 6 and 1/2 GRANT WILLIAMS: 6-and-1/2-century-old institution that has been brought to its knees by this change and this renewed focus on short-term profits– it speaks so loud to me It’s almost deafening STEVE DIGGLE: Yeah GRANT WILLIAMS: Before we headed back to Steve’s to discuss the investment implications of what we’ve seen, we had one more stop to make– the wall town of Cortona, where we would discuss, perhaps, the thorniest issue facing Italy– immigration STEVE DIGGLE: Italians are looking for a European solution But when it comes to allowing immigrants in, everyone gets very nationalistic I think your point is exactly right, which is that, back in the status quo– and that Europe always winning and everything holding together has been a reasonably good trade– Brexit excepted I think that level of complacency is very dangerous

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