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Former Goldman Sachs CFO Marty Chavez on how to regulate big tech like big banks

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Marty Chavez, Former Goldman Sachs CFO and Sixth Street Partners Senior Advisor, joined Yahoo Finance Live to talk big tech regulation.

Video Transcript

[MUSIC PLAYING]

SEANA SMITH: Welcome back to Yahoo Finance Live. We want to get over to our correspondent, Julia La Roche, who is joined by a very special guest. Julia?

JULIA LA ROCHE: Thanks so much, Seana. And I'm pleased to bring into the stream Marty Chavez. Marty has a lot of different titles, including former CFO of Goldman Sachs, former CIO of Goldman Sachs, former co-head of the securities division. He's also an entrepreneur, computer scientist, investor, many different titles. He's now a senior advisor at Sixth Street Partners.

And Marty, you wrote an op-ed in "The Economist" that is garnering quite a bit of attention, especially in Silicon Valley, about regulating big tech, similar to how big banks are regulated. So let's talk about that. How would that work?

MARTY CHAVEZ: Well, I suppose, Julia, I just would start with banking regulation because it's what I know. And I also happen to be a computer scientist. And the-- so I can see the parallels. And they're not exactly the same, of course, not by a long shot. But there are analogies. And so you could start with, for instance, some of the banking regulations that require banks, broker-dealers, to attest that a deal that they're about to enter into is suitable for the customer.

In other words, it's the bank's obligation to demonstrate that and to test that. And then the bank also is obliged to attest that it's disclosed everything that the customer would need to know to make an investment. So you could map that over to, for instance, what big tech is doing with the customer's data. If you put the burden of proof and attestation on big tech that the customer understands exactly what's happening with the data and the customer understands exactly how the platforms are electing to show the customer content-- and put that burden on big tech-- that would change things.

JULIA LA ROCHE: You know, I should also mention you're a well-known risk manager as well. We should talk about the risk and the consequences here.

As we kind of head into the big tech hearings, what is the risk if there isn't some sort of framework that comes from this? What is the risk that big tech might pose to society broadly?

MARTY CHAVEZ: Well, Julia, I think it's a question of how bad does a calamity or crisis need to be before we collectively recognize that there's something that needs to happen. And so for many years, it was certainly the trend in financial services to say we will self-regulate and to not wish for regulation. Let's put it that way.

And then after the financial crisis, it was a universal and nearly instantaneous recognition that regulation was coming and it needed to come. And so let's get busy. And let's build some credibility with regulators. And let's come up with something that, you know, is not what the banks would want left to their own devices, but recognizing that these negative externalities are important and we all need to work together to eliminate it.

And so I think for big tech, I-- we would ask questions such as, what would happen if there are these kind of untrammeled incentives to virally propagate content because it maximizes engagement and emotional resonance and time on site and, therefore, more advertising imprints and, therefore, more advertising revenues? There is an exact analogy to derivatives where the bigger the derivatives and the more the leverage, the more profits you could make. And there were no constraints on it. And now there are constraints on it.

And similarly, I would say we need constraints on that advertising-led, targeted advertising-led, loop for big tech. You could extrapolate from things that have already happened. And of course, causality is difficult to demonstrate, impossible to pin the blame exactly. But you could look at genocide and the insurrections and all kinds of things that have already happened-- election hacking-- and wonder, well, what's next? And when you extrapolate out that way, you can think of some pretty dire things.

JULIA LA ROCHE: You know, you were part of the stress test during your time at Goldman. I would be curious how you think about stress tests for big tech. And some people feel like the banking regulation was quite onerous. How do you think that might be received in Silicon Valley? And what might a stress test for a big tech company look like?

MARTY CHAVEZ: It's a fantastic question. And that is the critical question, Julia. So let's just say that the stress tests that, in my view, have been so important in stabilizing the financial system and pushing very far away the boundary at which the financial system destabilizes, as evidenced by the fact that the banking sector continues lending and making markets essentially uninterrupted-- during the pandemic, the greatest dislocation any of us has known, right-- so you can see that that has worked. And there was a lot of regulation. But I would say it's the CCAR stress tests that are really the heart of it, the super important part.

There were only a couple of sentences in the statute. And then the regulators very astutely and prudently created this infrastructure. And when it first showed up, like, we're going to require banks to simulate their entire business, their balance sheet, income statement, cash flows, nine quarters in the future in an adverse and a severely adverse scenario, the reaction was, are you kidding? This is impossible.

Like, who can do that? Who can even imagine that? How many computers is it going to take? How many people is it going to take? You know, that's going to be the similar reaction.

On the other hand, one of the things that the regulators did that worked very well from the point of view of systemic stability and soundness that was costly for the banks is the regulator said, well, you banks already have sophisticated models and risk reports and scenario analyses of things that can go wrong. And if they're not that great, you better upgrade them right now. And we will use those systems as the foundation.

So if you go over to tech, the social platforms of various kinds, media and trading, already have algorithms that are maximizing engagement, emotional resonance, time on site, and, therefore, advertising revenues and trading revenues. And so those algorithms are exactly the basis for doing this kind of simulation. And the goal would be the same, which is that the big tech firms can internalize the negative externalities as opposed to just leaving them for society or for the taxpayer to absorb.

JULIA LA ROCHE: Marty Chavez is a senior advisor for Sixth Street Partners and former CIO and former CFO of Goldman Sachs. Marty, thank you so much for your time today. Seana, back to you.