Podcast Transcript: Jay Newman on the Hidden Story of How Money is Moved Around the World

This is an edited transcript of our podcast episode with Jay Newman, published 20 May 2022. Jay spent 40 years in international finance, including at Elliot Management and Lehmans. His primary focus was on distressed EM sovereign debt. He was central to the historic 15-year fight to recover billions of dollars in defaulted Argentine debt. In the podcast, how to sue a country, how countries like Russia evade sanctions, the untraceable legal structure used by the rich to move money around, and much more. While we have tried to make the transcript as accurate as possible, if you do notice any errors, let me know by email.

Introduction

Bilal Hafeez (00:00):

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Now, onto this episode’s guest, Jay Newman. Jay has spent over 40 years in international finance. Most notably at Elliot Management. There he focused on distressed EM sovereign debt, and he was central to the historic 15-year fight to recover billions of dollars in defaulted Argentine debt. That campaign which included the court approved seizure of an Argentine Navy ship in Ghana with 200 people aboard in 2012, reached a successful conclusion in 2016. The Wall Street Journal reported that the settlement was worth 2.4 billion. The FT said the settlement is seen as one of the greatest hedge fund trades in history. Jay has now switched to writing and his debut novel about dark money and global politics is called Undermoney. Now onto the podcast. Greetings Jay, it’s great to have you on the podcast show. I’m really enjoying the book that you’ve written, Undermoney, which I’m sure we’ll talk about in our conversation, but welcome to the podcast show.

Jay Newman (02:41):

Thank you. It’s such a pleasure to be here Bilal. Thank you for having me.

Bilal Hafeez (02:46):

Now I always like to start my conversation with guests to learn about their backgrounds, their origin story. Where did you go to university? What did you study? Was it inevitable you would end up in finance and then later writing books? So, tell us a bit about your origin story and how you ended up where you are today.

Jay Newman (03:02):

Yes, it’s origin stories. Of course, in the book I write about origin stories because I’m fascinated by them and the mythology that we all build around ourselves. But I think if I’m starting to tell my story, my parents believed in travel and my mother was an extreme traveller in the sixties. This would have been about ’67, 1967, 1968. She had read about the Pan-American Highway, which was a highway that was meant to enable people to drive from Canada all the way to Panama City. And she decided that she was going to do that. So, we set out with my dad and my younger brother and I in a, in fact it was a Mercedes because she figured that Mercedes was something that’s going to get service anywhere in the world. So we set out and my father and my mother drove us to Mexico city and my dad then flew back to New Jersey to go back to work.

And my mother, a single woman with two preteen boys in the backseat drove us from Mexico city to San Jose, Costa Rica. In retrospect it was audacious and breathtaking. At the time you do what your parents tell you to do. But along the way, I do remember particularly Guatemala which was in the midst of one of its incessant civil wars, we were stopped all along the way by bandits, some by gorillas, some by army troops. Basically, kids with guns. It was such a different time. Nothing bad happened to us. They were confused by us. There were no real tourists in Central America at the time. But if you think about today, you couldn’t drive from the US to Mexico City and survive. So it’s such a different world we’re living in from the world that I grew up in. But that really wedded my appetite for things international and for travel.

So, a bit of a fast forward. I went to public school in New Jersey. I ended up going to Yale for college. I studied history of art and economics. More history of art than economics. And after college I went right to law school, which for me was a terrible mistake because I ended up practising law for five years which were quite long. Although in my career I’ve used law a lot. So the knowledge was certainly not wasted on me. But after five years of practising law, I got recruited to go to Lehman Brothers to work on new product development. And the first product area that I worked on there was whether Lehman could develop a market for defaulted sovereign debt. This would’ve been 1983, 1984, just in the midst of the first big wave of sovereign defaults. And I was very fortunate because I did the business plan, I had visited 50 banks in 10 countries and everybody said, this would be great. It’d be great to have a market in these instruments.

Ignoring the fact that to that point in time there was no market in bank debt, no market in defaulted bank debt, and basically no market in even high yield bonds which are just being developed. So the decision of the new product committee was to go ahead and start this business. The boss looked around and said, “Who wants to…” And by the way, this is classic Lehman, classic Wall Street in the eighties. It was a breakfast meeting. Everybody was smoking cigars. So in between puffs and my boss Francis Anfor said, “Okay, who wants to run this business?” And everybody looked down at their sausage because everybody had a business. They didn’t want to take a chance on something that was completely new and unproven. So I raised my hand and said, “Well, I’ll do it.” And they said, “But you don’t know anything about running a business. You’ve been a lawyer until about six months ago. How could we give this to you?” I said, “Well, why not? Nobody else wants to do it.” And that’s how I got started with sovereign debt.

Bilal Hafeez (06:48):

And then I guess later we had the Brady bond restructuring, which you matured that market I suppose.

Jay Newman (06:54):

Yes. Well for a couple of years. And this was a strange period in the world of money centre banks and in finance, because the banks were unable to recognise losses on their portfolios because they would have gone belly up. So, during this whole period, the loans, and by the way there are other whole categories of loans, oil and gas loans and real estate loans that the American money centre banks were stuffed with, stuffed to the gills. So, there was a lot of extend and pretend in the restructurings and nobody really wanted to engage in any sort of restructuring that would result in banks having a provision for the assets.

So, for two to three years, Lehman and Bear Stearns pretty much had this nascent market to ourselves. Then all of a sudden Citibank started writing down its portfolio. Everyone else started writing down their portfolios and JP Morgan and American Express Bank and Marine Midland, Chemical Bank, all these names that no longer exist. But people started writing them down and then the market really started roaring to life, with a lot of competitors trading desks at the major banks like JP Morgan and like Citibank.

Bilal Hafeez (08:03):

And then later you went on to work for Elliott Management. Can you talk a bit about what their focus was and what your role was there?

Jay Newman (08:11):

I don’t know, you’ve probably heard the story, but I’ll tell it anyway because it’s part of my mythology. Between the two world wars there was a massive inflation in Germany. And as a result, people didn’t want the local currency. They wanted assets. So, it was a barter economy. People would trade shoes and sardines and furniture and whatever they could that was movable. And one day one guy traded a can of sardines for a pair of shoes. And a week later he went back to the guy that had taken his shoes and given the sardines and said, “Those sardines were rotten.” And the guy with the shoes said, “Why did you open the can?” He said, “Well, I was hungry. That’s why I took the sardines. I wanted to eat them.” And the guy said, “No, no, no, those were not eating sardines. Those were trading sardines.”

And for the better part of a decade, defaulted sovereign bank debt were trading sardines. One day I was sitting at my desk and at that point I had left Lehman, I was at Morgan Stanley. I was reading about somebody who had sued the Republic of Paraguay and had actually collected and seized assets of the Central Bank. And shame on me, no one I think at that point in the market had thought about the idea that you could actually enforce sovereign debt in court. But at that point, being a reformed lawyer, I actually read the contracts. I looked at the few other cases that were out there and I realised that under the right circumstances if you had a debtor that could actually afford to pay, that the loans were enforceable.

So, I developed a business plan and I went to my boss at Morgan Stanley, John Mack, and I said, “John, I’ve got a great business for us. We’re not going to go into these restructurings where people are writing down the assets, 10%, 15%, 20%, 50% for no reason, just because it’s a social thing to do. We’re going to buy the loans. We’re going to try to negotiate our own deal or improve the deal for everybody. And if it fails, we’ll hold out and we’ll go to court.” And John said, “Whoa, whoa, whoa, wait a second. Morgan Stanley is going to go to court and sue countries?” I said, “Yes, exactly.” And he said, “Exactly not, that is never going to happen.” So, I built a business plan and then I looked for people who might be interested in that sort of an activity. And I met Paul Sanger at Elliott Management and basically did sovereign investing and enforcement work for 22 years.

Bilal Hafeez (10:36):

So, the analogy with the sardines was that people were trading it as an item to trade, but nobody actually looked inside what the asset was and that the same thing was happening to EM debt, where people were trading the paper so to speak, but not actually looking what the paper was attached to or what it reflected.

Jay Newman (10:53):

Exactly. And of course, you’ve seen many categories of assets that fit that description, right? Including a lot of the coins that are out there.

Bilal Hafeez (11:01):

And you are famous for the work you did with Argentina, Elliott’s action against Argentina. So can you tell us a bit more about what was going on with Argentina, what the default situation was and what investors’ approaches were to the defaulted debt?

Jay Newman (11:16):

So, I lived with the Argentina default for the better part of 15 years. And everything that could go wrong and ultimately could go right in sovereign debt I think is embodied in Argentina, its behaviour and its restructurings. But Argentina, and Bilal, I’m telling you nothing you don’t know because you know the place well, you know the people well, but Argentina is an amazing country. It is wealthy in natural resources, it’s wealthy in human capital, but it has just this one little problem, running its country in a sound way. And part of that, the ancillary to that problem is that Argentina doesn’t have any problem defaulting on its debt. I think now with the most recent default of 18 months ago, I think we’re up to about seven sovereign defaults and there will be more. I think I can predict that with some logic and certainty. But the thinking with Argentina as an investment thesis is that Argentina would have been much better off paying more than it wanted to which was as little as possible.

Settling with its creditors and obtaining access to international capital markets. And now we’re talking about the period 2002, 2003, 2004. And I know you were there for part of that period, and I’d love to hear your story about the thinking at the time in Argentina, because at that point it wasn’t the litigation case. It was just a matter of Argentina and ultimately the Kershners, husband and wife deciding that they were going to use the default as a populist meme and screw foreign capitalists. So it was a process that began in 2002 and went on for 15 years.

How to sue a country and the problem with EM debt today

Bilal Hafeez (13:00):

So international investors who held Argentine debt, what were the different approaches to dealing with that? Presumably some thought they’d just write it off. Others decided like yourself I suppose to take ultimate action and try to retrieve assets. What was the general way people were approaching the default?

Jay Newman (13:18):

In the initial round, and it’s the usual suspects owning the debt and buying it at par, which were the real money investors. So, the real money investors buy sovereign debt, they put them in funds and Argentina is whatever allocation it is. Then when it defaults, typically real money regurgitates the assets, and it gets purchased by hedge funds or other opportunistic investors. Well and people have different strategies. So many people who were able to buy Argentine debt in single digit, some in the teens, some in the twenties were able to benefit from various price movements and sell out along the way and there was a lot of rotation in Argentine debt over that period of time.

But there were a few investors, ourselves included, but a core group of I would say five investment funds that stuck with it. And for a very long period of time, kept trying to find a partner to negotiate with within the Argentine government. And unfortunately, notwithstanding many, many efforts over the years, that didn’t happen until there was a regime change from the Kershner to Mauricio Macri. And it was only at that point when you had a real shift in the political dynamics there that it was possible to actually achieve a settlement.

Bilal Hafeez (14:33):

Then in terms of settlement and doing an enforcement against the country and how does that work? You go to court and then the other side is some representative of the country and you’re talking about assets of the country that could be used to pay back the debt.

Jay Newman (14:48):

Yeah. No, I’m glad you asked that. I did a piece two, three weeks ago for the financial times and I basically referred to sovereign debt as an asset class that’s unsafe at any price. And there’s been a real shift in the quality of the documentation for sovereign debt. The debt was created back in the seventies and early eighties by the banks. Had very strong covenants. Those covenants carried over into bond contracts which were issued up until around 2002, 2005. And those contracts had provisions in them that enabled creditors to actually go to court and enforce.

And notably the provision that some of us relied upon was a pari passu clause which required that certain classes of Argentine bonds be treated equally in terms of right of repayment, not ranking, but right of repayment with every other class. But since 2002, there has been a concerted effort on the part of the official sector, by which the EU, US government, US treasury, IMF, World Bank to change the terms of the bond contract. And almost every term that enhanced the ability of creditors to enforce has been diluted to the point where what happened in Argentina in terms of enforcement is virtually impossible today. Because the terms of the contract are so weak.

Bilal Hafeez (16:13):

Why would the rich Western countries agree to that? Because surely, they’d lose out if they’re the ones investing in these emerging markets who would potentially default.

Jay Newman (16:21):

Well, it’s a country club. So, a country is signed with countries. And actually, my suggestion and which I’ve written about is that I think we should really change the whole enforcement regime. We should repeal the State Immunities Act, we should repeal the Foreign Sovereign Immunities Act, which is the State Immunities Act is the UK statute. The Foreign Sovereign Immunities Act is the US statute, which enable countries to wave immunity, wave their absolute immunity and be sued in local courts in New York or in London. The premise is great, but it implies some things that are problematic, like sovereigns borrowing in currencies that aren’t their own, which is a complicated decision because particularly in a country like Argentina which has weak institutions, the idea that they’re going to be able to ensure to creditors that they’re going to be able to come by the dollars at a price that they’re willing to pay at a later point in time is implausible.

So, I think that the better approach would be to essentially cancel the experiment that’s been running in emerging market debt since 1976 and go back to absolute immunity. And if countries can borrow under local law in their own currency, great. If they can borrow under local law in someone else’s currency, euros or dollars, great, but we shouldn’t give them and pretend to investors that if you run into trouble you can go to court in New York or in London and the courts are going to bail you out. Because that’s just not the reality today.

Bilal Hafeez (17:55):

This brings us nicely onto the world today. We have Russia being sanctioned in different ways. And we’ll talk more about the here and now but in your book Undermoney which I’m almost finished to have to recommend to all the listeners to read, which is this action-packed novel about a hedge fund guy and some of the characters, a group of people that are trying to move a very large sum of money into the financial system. But what I liked about the book was that while it’s fiction, it seemed, correct me if I’m wrong to reveal how money gets transferred around the world. Even between sanctioned entities to non-sanctioned entities. I’ve been in finance for 25 years and I’ve worked with really big institutions, but even then you don’t really know where the source of the money is and you open up, you remove the veil and you see all the ways that money that’s attached to criminal activities, bad actors, bad state actors, how that just enters the system. And there’s an incentive system with everybody from major banks in the west to the military in the west to allow this all happen. So first of all, well done for writing the book. But then also in the book, when you talk about the ways people transfer money through central banks of smaller countries to US military dumping cash somewhere and retrieving it somewhere else and putting it back into the system, how much based on fact is that. Do these types of things happen?

Jay Newman (19:18):

There’s not that much fiction in Undermoney. I want to plug the word Undermoney for a second and I’m going to dive right into your question and your thoughts because they really are seen today. Undermoney I define as money that’s not visible to the public but which controls people and events. And it’s the money that we all know is out there bubbling beneath the surface, but we don’t know who controls it and where it’s come from and where it’s going, but we know it’s there. We feel its effects all the time.

Bilal Hafeez (19:46):

And you didn’t want to use the word black money or something like that or illegal money or…

Jay Newman (19:49):

Black is value laden. So, a lot of undermoney is not ill-gotten gains. Take the example of the American political system. Where huge sums of money from basically billionaire donors wars to action committees and issue committees which can accept unlimited amounts of money quite anonymously. So you have legally gotten gains that are hurled like thunderbolts from Olympus, from the left and from the right and they’re devoted to supposedly issues but they’re all supporting candidates in the end. So that’s the idea behind Undermoney is that it’s hidden, but not necessarily illegal. But here your point and your question about the relevance to flows today.

There are some things in the book that I adapted from… Like for example, I’m morally certain that few years ago when the Saudis and the Russians were gauging in Punch and Judy show about whether somebody’s going to increase production or reduce production, whether prices go up, should go down and they went through that, you recall. Went through this in the same period when oil a point in time went negative because the markets were so confused. I am morally certain that the Russians and the Saudis were trading on their own behaviour. They knew it was going to happen. They knew the impact on the market and they were taking advantage of that at every stage of the game. So I think that for me is classic undermoney. It’s people controlling events and actually trading on them.

Bilal Hafeez (21:23):

You allude to that number of times in the books basically, where how come certain funds are so, so successful and it turns out there in the know about these state actors are able to cause events to happen and so they can position around that all. And what you’re saying here is that the state actors themselves are also trading. So, it’s not just the political action. There’s actually a financial gain that they have as well.

Jay Newman (21:45):

Yes, it’s on both levels. It’s political and it’s economic. There’s an inherent logic to it. These institutions and these actors know how markets work. Why would we believe that they’re not using them?

How illicit money is moved through central banks

Bilal Hafeez (21:56):

Another thing you had in the book was this thing about the Latvian Central Bank. I’m not sure if it’s to do with Latvia specifically or you’re just saying smaller central banks. But you’re saying that if you wanted to… Let’s say you had a billion dollars of cash, the ill-gotten cash in this case, you wanted to somehow get that into the financial system. I would have thought before I read your book that the way you do that is to use that to buy property in London or buy art in auctions and play that whole game of trying to clean the money. But you posited that and actually you can use a central bank to do that, where you transfer in some way to a smaller compromise central bank, and they could actually bring it into the system.

Jay Newman (22:39):

Yeah. I do pick on poor Latvia. I could have picked and in the sequel to Undermoney I’ll expand the net to cast blame on a lot more people. But as you say there, if you have illicit funds, you need to get them into the system somehow. So you need a bank or a central bank, you need some sort of a mechanism to move them into the mainstream economy. And again to your point, art and real estate are prime asset classes for ill-gotten gains. I think we’ve now seen this in London and New York, other European cities to a lesser extent.

The dramatic rise in asset prices over the years because people are looking for safety. They don’t really care about price. So if you pay 2000 a foot or 3000 a foot, it doesn’t matter if you’re moving your money from drug cartels or in the current day avocado cartels out of Mexico into a central bank and pick your country, Honduras, Costa Rica, Lavia, Lithuania, but moving it through institutions where the controls are not as sophisticated and rigorous as they are in many other countries.

Drug cartels and sanctions

Bilal Hafeez (23:44):

You mentioned with Mexico avocado cartels. I wasn’t aware there were cartels in avocados. Can you elaborate a bit more on that? I know avocado prices are very high, but…

Jay Newman (23:53):

Well now we’re getting into the theory and practise of sanctions. Do you eat Mexican avocados?

Bilal Hafeez (24:01):

I eat avocados. I’m not sure the origin though.

Jay Newman (24:03):

You drink Mexican tequila.

Bilal Hafeez (24:05):

I’m teetotal.

Jay Newman (24:07):

Okay. So, you don’t do that. So, let’s see, something Mexican that you would buy or eat.

Bilal Hafeez (24:12):

Let’s say avocados.

Jay Newman (24:14):

So, the drug cartels in Mexico now control the avocado industry. They control the tequila industry. They essentially control every industry of any import in Mexico. Mexico to my mind is a failed state and no democratically elected living politician lives without the imprimatur of the New Jalisco Cartel or the Solo Cartel, or whoever is controlling different parts of the country at that point in time. But it’s a classic problem for ill-gotten gains. You pile up more and more money and what do you do with it? You invest it in things you know, and in this case it’s terrorising avocado farmers. But what it leads to is that as a buyer of avocados, you are putting money into the pocket of the cartel, and the cartels are sanctioned and you and I by buying those avocados are. It’s like somebody buying a yacht from Vladmir Putin. It’s really no different except in scale. And the fact that the US treasury hasn’t focused on it yet. But everybody who buys an avocado from Mexico is essentially sanction busting. Crazy idea.

Bilal Hafeez (25:21):

I had no idea about this. It’s interesting. Then in terms of monitoring of this, does the US or does the EU monitor these types of flows. Is it that they’re aware of it and they don’t do anything about it or is it that they’re not aware of it? How do international institutions respond to this?

Jay Newman (25:40):

Well, do they do anything about it? Yes. At the margin. Do they know about it? Yes. Can they track everything? No. It’s impossible to track everything. And the industry of facilitators moving money around either for theftocrats in a particular country or drug dealers or cartels or anyone else who wants to move their money around illicitly. The industry is huge. We’ve all followed the so-called London laundromat story, how the very tony solicitors and barristers and bankers and trust companies are all part of helping oligarchs, not just Russian oligarchs, but oligarch’s writ-large move, hide, and protect their assets. And I think that since post February with this very aggressive round of sanctions, I think that industry is now working overtime. I think probably those folks have not gotten much sleep. So, it’s such a big part of the world economy that it’s actually impossible to shut it down in my view.

How countries like Russia evade sanctions

Bilal Hafeez (26:41):

And actually, you make a good example about the London laundromat issue. The UK in general, where there’s a recognition by most people that this huge amount of this type of money is going through the economy here yet nothing is really done about in a true sense. So that implies that people in positions of power are complicit in some way, maybe because it’s funding certain activities of theirs, maybe they get to fly on private jets with these people. Is it that simple that the money is so large you end up coming complicit in it? Or is there something else that allows this to still happen in a country like the UK?

Jay Newman (27:14):

As you say, it’s the money is just so large. And we could take the case the Russian oligarchs, just as current events, current example. So, the Russian oligarchs were great guys until 90 days ago. Great guys. I don’t know the details of all the investments they made in the UK, but I know in the US at every major university, there are buildings named after them and they wine and dined, their children went to Harvard, Yale, Princeton, they funded institutes. Now, all of a sudden, we don’t like them anymore. Well, they haven’t changed. And our knowledge about how they made their money hasn’t changed. But somehow the attitudes have shifted a bit. My question is how long it’s going to take them to shift back so they’re good guys again.

Bilal Hafeez (28:03):

Now that we’re talking about Russia. What is your view on the sanctions that have been imposed in Russia? So there’s sanctions on the oligarchs, the central bank assets were frozen, there’s restrictions in trade outside the energy sector. What’s your general view on the sanctions that are imposed on Russia?

Jay Newman (28:17):

Sanctions don’t work. Think about the countries that we’ve sanctioned aggressively for decades. North Korea, that regime is still there. Iran, that regime is still there. Cuba, still there. Venezuela, still there. Nicaragua, still there. So you have all these people that are defined as bad actors by relatively small number of countries. If you look at the countries that have signed on to even the Russian sanctions, it’s maybe a third of the members of the UN. Not a majority, not a plurality. So I think that sanctions are a stunt. They’re extremely inconvenient. As a transmission mechanism, what they transmit and I think we’re seeing this, and this is part of what’s problematic about them is that the Russian grain, Ukrainian grain, oil, gas, palladium, neon, gold, they’re all going to find their way out.

They’re going to cost more. And part of this is a feedback loop into inflation. So in a way the sanctions have been extremely costly to the west at a time when we’re facing inflationary pressures anyway. I don’t think that the assets and the money is still flowing. But it’s flowing via other mechanisms. So whatever mechanism the Iranians have used. The Chinese. The Chinese are very active in sanction busting. India. Are we prepared to sanction India and China the same way we sanction Russia. It’s as big as the front door.

Bilal Hafeez (29:41):

We recently published a literature review in academic papers on sanctions. And what we found was that you’re right. It doesn’t help. The situation if anything, what it tends to, it hurts the general population and it solidifies the authority in power. So, it just doesn’t work. In some ways it can often be worse than the military intervention.

Jay Newman (30:01):

I’m glad you raised that. Because that’s a very important point. And Putin said this early on, and I think he’s right. The West declared war on Russia by imposing these sanctions. And all you have to do is look at how the Chinese approach. Their declared war against the West, which is win without fighting. That’s been their policy. They broadcast it for decades. It’s no secret. It’s only a secret to people who have bought into Western liberal ideals and hope that you get autocratic countries like China adopting our values. Well, they haven’t adopted our values. In fact they’ve used our markets and our rule based international order to their own advantage.

How the US military mishandles billions of dollars

Bilal Hafeez (30:42):

Coming back to some of the Western institutions. What I did find interest in your book was how you show the US military cooperates as well, because we get the impression that the US military is this pristine organisation, obviously that’s propaganda they present to us in many different ways. But you give some examples of the large cash drops that were seen during the various Middle East wars. Where was it almost hundreds of millions if not billions of dollars were dropped into the desert with the intention of, I assume bribing different groups to do things, but often that money could potentially have gone back to certain parts of the US military and brought back into the US for use in other ways. That was in your book, but do you think that actually did happen?

Jay Newman (31:25):

Yes. It certainly did happen. The money drops were, and for all we know are a major feature of US foreign policy. It’s not a spoiler because it happens in the first chapter. So, we can talk about it. But in the first chapter of Undermoney, the US government drops 24 pallets that contain 2.4 billion out of the back of a C130 and is picked up by a group of American patriots that essentially steal it in order to get one of their members elected to higher office and essentially change the world with stolen US money. But the point is, and their rationale for doing that, their self-justification is that that money was going to get stolen and wasted anyway. It was just what the Arabs call green rain. It just comes down from the sky. Afghanistan’s a great example. There was an expose in the Washington Post six-to-eight months ago about how the US military knew for years and years that the activities we were engaged in Afghanistan were completely implausible and impossible and we couldn’t change anything on the ground.

And yet they persisted in essentially lying to Congress about prospects for success in Afghanistan. And what we’re left with today. We were living with it is that have the US not done anything in Afghanistan. Not spent trillions of dollars and not spent thousands of lives. Both American and Afghani lives. We’d be in the same place. So it’s not a problem with the military. The military I think are people who are patriotic, but they want to use their toys. It’s just no fun to have all these toys and you actually can’t justify the toys unless you’ve got problems to solve. So there’s an inherent conflict in the military’s view and its assessment of situations. And what people might otherwise decide had they not been influenced in that way.

The untraceable legal structure used by the rich to move money around

Bilal Hafeez (33:16):

I thought it was a great revelation in the book too, the way you described it all. It feels very visceral, and you really become aware of that dynamic. Another thing I noticed in your book because you mentioned this Dutch legal structure called shtick tings or something like that, which is this strange amorphous legal entity that allows a large amount of capital to be held, but it’s hard to account who’s in control of it and it gets passed down generations. I’d never heard of that structure before, but can you talk a bit more about that?

Jay Newman (33:46):

Yeah. So shtick tings are disconnected vehicles that are not owned by anybody or controlled by people. But they’re structured in a way that made the determining actually who controls them almost impossible to determine. And they’ve existed in the European law for centuries. The Dutch really pioneered them. They’re I guess you could say an early form of corporations, limited liability company. They’re not necessarily a limited liability. They don’t need to be. If I’m going to analogize it to a conventional vehicle that we all see and use all the time, it’s the trust. But it’s a trust that exists in a way that is self perpetuating and beyond time and beyond the control. With control it’s impossible to penetrate. So you’ve got self-perpetuating trustees that are able to act on behalf of ultimate beneficiaries, but no one knows quite who they are and they’re not regulated by anybody. And these vehicles exist to this day.

Bilal Hafeez (34:51):

So, these vehicles could contain billions of dollars of capital of some form and they could be investing in different markets, but nobody really is quite sure who’s the beneficial owner or who’s controlling it. And it’s a legal structure, it’s all allowed.

Jay Newman (35:05):

Completely legal and in different jurisdictions. And as we were talking before, the industry, if you think about how much money is involved, it’s historical legacy wealth of families. It’s the wealth of criminal organisations. It’s the wealth of in the case of a country like Russia. It’s a wealth of a country like Russia, that’s been syphoned off by the Solovki, by Putin’s cronies, but we can’t really just blame the Russians. It happens in many, many countries. It happens in most African countries where you have this tribalism that results in assets being diverted from the state to avid interest. So you have the industry surrounding protecting, hiding, and managing these assets. It’s massive. It’s a natural phenomenon. It’s hard to even imagine how big it is.

London as a money laundering centre

Bilal Hafeez (35:53):

Is there any way of finding information on these entities or not? It sounds like it’s almost impossible to, yet it’s there.

Jay Newman (36:01):

If our London solicitors, the managers of London laundromat are doing their job properly, we’ll never find it. We’ll find things to the margin. We’ll find odd $400 million yacht or a few planes but we’re not going to find the big stuff.

Bilal Hafeez (36:17):

So, if you were a policy maker then, or you were in government in some form, people are always talking about how they want to reform the financial system and clamp down offshore centres and things like that. What would you propose?

Jay Newman (36:30):

I think that you want fewer enemies and more friends and let’s just think about the sanction regime as an example. In the US 10,000 entities and individuals are subject to sanctions. 10,000. That’s crazy. So we’ve created 10,000 enemies in dozens of countries. Why are they, our enemies? So it’s very difficult to export morality. And I think that certainly the American view and to some extent the Western European view that you can export morality is a flawed idea. And it’s upsetting. It’s upsetting to think that you might be forced to deal with entities, institutions and countries that are engaging in reprehensible behaviour. But I just like to use China as the classic example. China, not only is it corrupt, it engages in genocide. The stories coming out about concentration camps and about organ harvesting are horrific.

And this has again been going on for a very long period of time, but do we decide we’re going to sanction China the way we sanctioned Russia or the way we sanctioned Iran? No, because it’s inconvenient. And the same is true in a country like India where Modi is on a campaign to suppress Muslims. It’s a horrific situation that he’s abetted. And yet we choose not to recognise moral failings of the Modi administration. And certainly not of Xi Jinping. So I think the whole way the West thinks about the world has been problematic. It makes things much more dangerous for us.

What Is Undermoney?

Bilal Hafeez (38:14):

Makes sense. Now to move it to the more mundane so to speak. You obviously had this finance background and legal background as well. What made you want to write a book, go into fiction, become a writer. What was the motivation for that?

Jay Newman (38:28):

I’ve always enjoyed writing. And over the years I’ve written op-eds relating to things that I was doing professionally. I’m still doing that. But when I retired, many of my friends said you should really write about your activity because you had this fascinating career involving enforcement of sovereign claims and cases involving many countries and visiting many countries, witnessing corruption, close hand, successfully trying to avoid it. But when I started to actually write I realised it would be a snooze. So maybe my family would read it. Maybe you would read it.

I say maybe, but because it’s just not that much fun. So, I thought if I want to deal with some of these bigger ideas, the way to do it might be to combine them with an entertainment. And that’s where I hit on fiction. And the two kernels for the book that really got me started were one the term undermoney. By the way I’ve written to the Oxford English dictionary, because I want them to accept undermoney as a new word and give me credit for it. But it really, it’s Japanese slang. It’s Japanese restauranteur who’s a friend of one of my sons visited us in New York. And I asked him whether it’s different opening a restaurant in New York or in Tokyo.

And he said no, he rubbed his fingers together and shoved the money to the table and said undermoney. And that’s where undermoney comes from. But the other is I have a great friend who’s a model for the one heroic character in the book. And he was in the military. He came back to Wall Street to make some money. Then he went back into the military, and he just retired from cyber command at West Point. But over the years we would talk about what we would do to fix things. Like how would we fix the world if we had the opportunity?

And he would always tell me stories about things he was doing in his special forces activities and his various stuff he couldn’t tell me about. So I started with this idea of what would I do if I could explain things. And as you said, open the veil to how things really work in the world of money and introduced some conversation about some of these ideas. So that’s really how I got started. But it was really done. My friend Don Carmel, who became the model for Don Carter that got me started writing.

Book recommendations from Jay

The Painted Word (Wolfe), Harlot’s Ghost (Mailer), Special Topics in Calamity Physics (Pessl), The Goldfinch (Tartt), A Gentleman in Moscow (Towles)

Bilal Hafeez (40:49):

And I always have this sort of battery of questions I ask my guests as well, but I’ll start with actually books given that we’re talking about books. What are some of the books that have influenced you of your career in life in general?

Jay Newman (41:00):

Tom Wolfe for sure. And not just Bonfire of Vanities, but he wrote a wonderful book. We didn’t have time to talk about this, but the art market. He wrote a book called Painted Words. It’s a little book. It’s quite fabulous about how intellectuals took over and corrupted the art market. I’m going to deal with this in the sequel to Undermoney. So that was one. Norman Mailer, Harlot’s Ghost. Wonderful, wonderful book about the Cuban missile crisis according to Norman Mailer. That was a big influence on me. Contemporary fiction Marisha Pessl who is a marvellous writer and Donna Tartt, thinking now of novelist Armor Towles. These are people that really influenced me in terms of my thinking about writing and structure who I admire deeply.

Bilal Hafeez (41:44):

And then in terms of your time management and productivity, do you have a system?

Jay Newman (41:49):

I am such a slob. I am terrible at time management. I wish I could be better. I know some people have real systems where they get up in the morning, they get a coffee, and they work for three hours or same at night. I don’t have that. I sit down whenever I can. What’s interesting to me is that as you’re writing something, especially in the long form, I find I’m always thinking about the ideas and the themes. And the most daunting part is keeping track of everything. And I’m now better than I was. In Undermoney it was quite organic. I didn’t really have an outline for the book. I now have an outline for a sequel, which sounds stupid, but it’s amazingly helpful.

Bilal Hafeez (42:34):

And a few more questions. One is you’ve got lots of experience in finance and so on. What’s the best investment advice you’ve ever received from anyone?

Jay Newman (42:43):

When I was at Lehman, Alan Kaplan was the head of risk management. And he was a great old man in the firm. He wasn’t that old that time. He was probably in his fifties. And I had just started this brand-new trading desk. And to give you a sense of how lax things were or how different things were on Wall Street. We had a few guys sitting on a desk and we would pick up phones. We call one bank, we call another bank, we’d put a deal together. We would then write the documentation. We would send it out. We would write the wire transfer instructions ourselves. So, from a risk management and from controls perspective it was completely absurd. But this was maybe a function of Lehman or a function of a new business or less. A different world, because this was the eighties.

We were less mindful of all these things, know your client and controls and everything. But one day we actually had a very successful transaction. We made half a million dollars and it popped up on Alan Kaplan’s list and he called me and he said. So, sitting on the trading desk, young kid called up to senior partner of the firm. He sits me down. He says, “Sonny, how did you make the half a million?” So I told him the whole story. Said we called this bank, we called that bank, we put them together. We signed documentation. We wired the money and half a million dollars fell out into Lehman’s pocket. And then I said, “And there was no risk.”

And he said, “Sonny, there is always risk. And if you don’t think there is risk, you’re just not thinking straight.” I was completely furious with him. I thought what kind of a jerk is this? Here I am starting a business, making the firm money, just trying to do a good job. And of course, he was absolutely right. And obviously I’ve never forgotten that story. And I think about it pretty much every day.

Bilal Hafeez (44:43):

Yeah. It’s something we all should remember. Then the last question I wanted to ask; we have many young people who listen to our podcast. So, what advice would you give to youngsters who are just starting their careers or leaving university?

Jay Newman (44:55):

I would say don’t treat anything as a trading sardine. Really dig into no matter what you’re doing, and it doesn’t have to be finance, but I’ll use finance because it’s the world that I knew, and I grew up in. It was shameful on my part that for six or seven years I was trading these instruments and I had never bothered to read them. I didn’t know what the contracts said. So, my advice would be that whatever you’re doing, really dig into the details and the history and become an expert on the gory detail of how things work. Whether it’s trading systems or whether God help you it’s cryptocurrency. Cryptocurrency is a perfect case in point.

Who can audit the software? Who really knows what’s going on under the hood of crypto. And I think until, and that’s just the most recent example of crypto. I’m not negative on crypto at all, but I think that people trade without understanding what it is and what it means and what it implies. And a lot of people are going to and are losing money because they haven’t understood that and haven’t taken the time to figure it out. So I would say figure it out, become an expert in whatever it is you are working in.

Bilal Hafeez (46:10):

And what’s the best way for people to get a hold of your book Undermoney, which I thoroughly recommend everyone to read as an easy read, as a page turner. So, I keep wanting to go back every moment I have to finish the book off. Where can they find the book?

Jay Newman (46:24):

Thank you. It’s on Amazon, it’s on Barnes & Noble. I’m on Twitter from time to time, but I would thank you for your kind words about the book and I hope more people will read it.

Bilal Hafeez (46:35):

That’s great. So with that thanks a lot and good luck with the next book as well.

Jay Newman (46:39):

Thank you very much. Such a pleasure.

Bilal Hafeez (46:42):

Thanks for listening to the episode. Please subscribe to the podcast show on Apple, Spotify, or wherever you listen to podcasts. Leave a five-star rating, a nice comment and let other people know about the show. We’ll be super grateful. Finally, sign up to become a member at Macro Hive at macrohive.com. We’ll be back soon. So, tune in then.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)