We're here today with Jeff Sprecher, who's the founder and CEO of Intercontinental Exchange. We will not call it ICE because that used to be a cute nickname. Not so much anymore, but Jeff over more than a quarter of a century has built an amazing set of companies here. He approaches things in a very different kind of way. He brings an engineer's thoughtfulness and structure to very complicated ideas and he's built an enormous and very successful and very beneficial to our economy company. And it's a treat having known you now for many years and have a chance to spend time together. It's a great opportunity to sit down and chat about all the things that are going on in your world and get some insights into what you see to help us think about how the world's changing and how we might be prepared for it. So, thanks for spending time with me here today, Jeff.
I'm thrilled to be here and always enjoy being with you.
So, it seems to me that your series of successes, and we won't talk about any of the failures, but your successes are all entwined in that you look at things, and it seems to me that you're able to make the calculus that it's hairy and it's complicated and it's a mess, but then there's an opportunity and you say, how can I use technology to make it simpler, transparent, reliable, therefore very very trustworthy. It seems to be the ingredients that you look for and have had success with.
That's exactly right. I mean, you've distilled it. It's messier in real life than that, but when I was a kid, I was the kid that my parents would buy me something and rather than play with it, I would take it apart and then see how it worked.
And that was in Madison, Wisconsin.
Yes, in Madison, Wisconsin. And so, my leadership style is to look for things that feel messy. They feel broken. I also have acquired a lot of things. I'm not Elon Musk trying to figure out how to take us to Mars. I'm glad there are Elon Musks in the world that are really driving goodness and innovation. I'm much more about here's a great brand or here's something that is iconic. It seems a little messed up and maybe we can go in and reorient it. So I tend to do well with things that other smart people have invented and maybe they've just lost their way or they've kind of scratch and dent merchandise. New York Stock Exchange was an unloved company for example when we bought it. People ask me all the time, how the heck did you buy the New York Stock Exchange?
It was a for-profit at one time.
It was not for-profit. It was owned by the members and you had to buy a membership. So it was a club.
And at one point before I arrived here, they decided to monetize it basically and turn those memberships into public shares and take the company public. And once it became a public company, it was loved and then became unloved. And I remember when we bought this company, investors were saying, 'Why would you want to own that?' And I just said, 'It's the New York Stock Exchange.' The answer is in the name. This company was started in 1792.
Like it's been through everything.
Yes. You know the invention of everything and its life has been threatened many times by changes in technology or world events or what have you. Like surely it's just a little scratched and dented and we can come in here and figure out how to do it. And so I tend to look for those opportunities. And it's interesting in life they're often iconic businesses and opportunities that fall out of favor. And those are always kind of interesting to me to say, could it be fixed and saved?
What had to be fixed to you?
The New York Stock Exchange was actually a merger of a number of exchanges. They bought the American Stock Exchange and the Pacific Stock Exchange and a few others and each of those had their own technology, their own infrastructure. And rather than pick the best one and move everybody to the best one, they sort of put a wrapper around all the technology so that to the outside world it looked like it was a unified whole. But under the covers it was a whole bunch of hamsters on little wheels. And so we said to ourselves, well certainly we'll just go in there and pick the best technologies and we'll move everything on to that and we'll get rid of all the rest. And when we got in there and finally bought the company and then looked at the technology hard, we said, 'They're all terrible.' And so, unfortunately, we're going to have to start over. And we didn't exactly know how to start over. So, I found a little company that had some really smart entrepreneurs that were building technology for trading of stocks and bonds. And we went to these entrepreneurs and we said, 'Look, you can build your company or we can buy your company and you can build the New York Stock Exchange.' And so we bought this company and we basically shut down what they were doing. Brought all the people in here and said, 'Have at it. We trust you.'
How long did it... it's never done, but how long...
It's never done. It took honestly about 10 years. But it was one of those cases where we were building a bridge and the cars were driving on it. And also every major financial institution is worked into the New York Stock Exchange and we couldn't ask all of Wall Street and broader international finance to rewrite their connectivity. So we had to build something that the puzzle piece plugged into them and their legacy systems while we were modern. So a really interesting challenge. So we did it in bits and bobs behind the scenes, insulated our customers and today I mean we do billions of transactions a day on the stock exchange. I don't think people realize it's probably bigger than Google search in terms of technology and because it's so highly regulated we have to save every transaction for seven years. What we've really become is massive database and networking specialists of dealing gobs of data, organizing it and storing it and making it searchable so that you can go back and doing that in a way that has 100% knock on wood reliability.
Wow. That 10-year build, that takes fortitude.
It was cool. You know, it's above my knowledge base and we just put these smart young people in there and said, 'We trust you. Do your best. We're here, let us know.' And they did a great job.
Yeah. You started out in the energy exchange business.
And what drew you to that? Same thing? Complex, out of favor. I think we can do something special here.
You know, I got my master's degree at Pepperdine University, which is in Malibu, California.
Pretty good-looking place.
That's why I went there, honestly. I wanted to meet girls on roller skates that skated up and down the boardwalk in Venice, California. That was one of the allures as a young person. And the weather's a little different than Madison. Beautiful campus. There was everything about it. The last thing I cared about was its rating in the world. And so, anyway, I met a guy in college that had this idea to start a company to do alternative energy. And at that time, Jerry Brown was the governor. He was governor multiple times, but this is his first time. He wanted to pioneer alternative energy. And there was a company, an investment bank known as Drexel Burnham Lambert that was based in California, and a guy named Michael Milken who invented the junk bond. And it turns out that what we were doing, which was trying to build alternative energy, the world was saying, 'We're going to take California tax credits, strip them off, and sell them to people on Wall Street.' So, we were able to raise a lot of capital as young people using these sophisticated techniques. And so I started to learn the ways of finance and Wall Street. I started to actually realize over time while our altruistic goal was to do alternative energy the world was looking at us as if we were creating financial products. And I think that helped me to acquire... I've probably done at least 50 acquisitions in my life and I understand that process very well.
Did you work with Michael?
I had one of those meetings where I was the number two. It was my friend had the idea, so I was his number two. And we were invited to meet Michael at his home in Beverly Hills at 4:30 in the morning.
And we got up at like three. And dressed as best we could. And we got in a car and we pulled up to this mansion that had a big wall around it and a gate and the whole neighborhood was dark and there was a call box there and we sat in the car and said, 'Are we sure we have the right address? I don't want to wake somebody else up.' And we debated who's going to go push the button, me because I'm number two and I'm in the passenger seat or should my colleague who was driving and number one push the button. And we pushed the button and an answer came back yes and we said is this the Milken residence we're here to see Mr. Milken and they said pull in. And I'll never forget that and it was symbolic in that there were no business hours. These were serious people that were working around the clock and that 4:30 experience sort of elevated this idea that what is work if we're going to be here working with these people.
Got to put your big boy pants on.
Exactly. So, it was good. It was a good early lesson. So, yes, I met him one time, in his house at 4:30 in the morning.
I've had the opportunity to spend some time with him in the recent few years. I had the opportunity to say hello to him a few times, but Worth Media Group is his media partner for the Milken Conference years. And I was out there a couple years ago now for other business. And Rich DeMartino, who is the CEO of the Milken Institute, is a wonderful guy, originally a New York, Long Islander, and I was going to visit Rich and he said, 'Michael, I'd like you to stop in and say hello.' So, I figured we'd stop in his office and say hello. And I was hosting a dinner that night back where I was at Marina Del Rey. And we sat down. I thought, you know, 5 minutes maybe. Well, an hour and 48 minutes later, I didn't want it to end. I wanted to hear everything he had to say and I'm looking at my... I have to go but I so enjoyed that and we've had a chance to connect. I think he's really really special.
Yes. Well, it's interesting. You know, he has a second phase in life where he has really become more influential than a guy with money.
Yeah, really has. And the breadth of the things they're doing at the Milken Institute are just amazing.
Yeah. He started out when he was diagnosed with prostate cancer and changed how... he just came from a hospital board meeting and his influence is present all the time when you're looking at research and coordination. He's trying to do the same thing in philanthropy now. So much is wasted in philanthropy and it makes him nuts.
Right. Interesting man. So as you look at the landscape now, when we chatted I remember it was during COVID, I was out for a walk during the height of the lockdown and I listened to you on a podcast and you talked about the next big hairy crazy business that you thought a different vision, a different approach could make simpler, more transparent and better for all of us in the country and that was the home industry, home buying, home financing in particular. And now you've been in that a couple of years, is it what you expected and how's it going?
It's harder than I thought it would be.
But I'm more confident that we have the right vision if that makes sense. You know, buying a house is so complicated. It's the largest transaction most families ever make. During COVID, we were all at home on our computers and if we were buying stuff, we were buying on Amazon or some web-based or 1-800-Flowers. And I noticed that there were all these opportunities when you checked out to say, 'Do you want to buy now and pay later?' Like you could literally buy a box of chocolates and it would ask you, 'Do you want to buy now and pay later?' And it would immediately underwrite you and figure out your creditworthiness or whatever, however they did it. And I thought, 'Okay, well, when those chocolates arrive, you're going to eat them and there's no collateral.' But it was like when you buy a house that has a foundation, it's attached to the earth. You can see it on Google Earth. It's going to be there. It's part of Maslow's hierarchy of needs. Like it's your safety and security. It's one of the last things you'll give up. Why does it take 60 days to lend people in a house? That was the simple question I had that came about because of my home shopping. And the answer when you scratch the surface of it was well it's a complicated transaction. There's lots of documents. There's a lot of paper. There's a lot of things that have to come together at the end of that process. And it was mostly paper-based. And prior to COVID most states which regulate mortgages required that you have a wet signature on a piece of paper. And COVID got some states, but not all states to say, 'Well, maybe you can sign with a click on an iPad or with your mouse or from the comfort of your kitchen.' And so we started to say, why can't we put together a network since we run networks and since we're attached to most major financial institutions because of the exchanges we owned, why can't we put together a network where we get everybody using a common language and data set so that we can ship this data around and build an infrastructure that a young couple buying their first house can do that quickly and easily and click a button and close on the mortgage. And so I bought seven leading software companies that range from very current cloud-based state-of-the-art technology to COBOL-based mainframes buried in some anonymous data center.
And you bought these companies for this purpose? To string them together.
Yes. So, I bought a CRM company. I bought a loan underwriting company. I bought a closing company. I bought a network that sends the completed documents to the county recorder. And we bought a...
So, these are all companies that fill some gap in that chain.
Correct. And if you were a lender, you would have strung a bunch of this stuff together all cobbled and tried to make it all talk within your ecosystem. And I thought this is all... Do you remember when word processing came around? A lot of your audience is probably younger than me. But when word processing came around, we all had a different word processor and we would type a document and you would email it to somebody and the word processor had an import export button and you would import somebody else's document and when you looked at it the pagination was wrong, the spacing was screwy, things weren't centered but you could read it. And then somehow over time we all ended up on Microsoft Word.
When I started my company here, I wrote the first business plan with WordPerfect and I did the first budget in Lotus 1-2-3.
I mean, those don't even really exist today.
But why is that? We all kind of migrated. We all said, I know if I attach this Excel spreadsheet or this word document to my email, somebody becomes a standard. And it was organic. And I also realized like every time I buy a new computer I buy those software packages and they're... I just bought a new laptop not too long ago and I think it was $299 or something for the home and student package or so it was relative to the cost of the computer was pretty minor. I was happy to buy it. It's kind of a utility. And I said to myself, why isn't this software to underwrite a mortgage that everybody's going through, you know, 70 to 80% of mortgages go through Fannie or Freddie conforming loans? It's like why? I also had this view with technology, which is as you're the young couple filling out the application and you type in the address of the house, why can't the computer go out and learn everything that it can about the house? And when you type in your employer's name, why can't it go pull information that exists about who you are and what you're doing? And so that by the time you finished filling out the application that the lender would have a high... It's a little bit like the buy now pay later concept. So anyway, that was...
And they can do that in seconds.
Yeah. And it seems like all these hyperscalers know everything about us. You know, I'm sure you, in selling flowers and candy and celebrations and balloons and everything you do, there's all kind of data that you know about your consumers that exist. So, why can't we pull that together around a mortgage platform? Now there are laws and rules that we have to conform to but the reality is this up until... but we're used to dealing in very very regulated environments.
Correct. So that was something that you didn't have a fear of.
No. In fact, I kind of embrace your core competency. I kind of embrace it in the sense that it's one more thing that makes it hard to do what we do. But if you can crack that nut, it cements your standing with your customers. It's just if you can insulate your customers from that. So, we go, for example, because mortgage is highly regulated and we have 3,500 banks and lenders now that are on this network, instead of saying to the regulators, 'Hey, you could go audit 3,500 individuals,' why don't you just come to us and audit us once? And we'll show you everything that everybody does. And in a way, we volunteered to be regulated. You know, banks are regulated. Software generally is not. But we said to the regulators, let's just cut out the middleman and get to the root of the matter. Well, now we go to our customers and we say, if you use this software, the regulator is already here. They know it. They've seen it. If there's an issue, if there's a new law, a new rule, we'll conform to it. You don't have to worry about it. Like, we've got so many people that are doing so many things.
Now, at one level, those bank customers of yours are saying at the senior-most level are saying, 'Yeah, that's Nirvana.'
But then there's a whole bunch of people who say, 'No, no, my job is to take this, put it over there.'
Oh, yeah. And that's why your initial question was how's it going? We see the same thing with AI.
But you've been in AI for 15 years.
We have and didn't call it that.
Machine learning. We had in fact after the financial crisis of 2009-2010 if you recall there was a period that everybody said there are toxic assets on the books of the banks and it could bring down the banking system and there are all these things called credit default swaps that are tying up the financial system.
That weren't on anybody's exchange.
Correct. I never even heard of a credit default swap. I didn't even know what it was. I went to the then Treasury Secretary Geithner and said, 'I think we could build something to help you.' And he was lovely. He said to me, 'Jeff, I'm with government. I can't tell banks and financial institutions what to do, but if you build a barn and open those doors, I'll run those damn horses right in front of you.' And so we did. Anyway, it was another one of those things in life where I don't know, you've seen this as an entrepreneur. Nobody rings a bell when opportunity knocks. You just kind of have to say, 'Well, maybe I'll stick my nose in it and see if it's something.' So anyway, we went and we took I think 16 trillion dollars worth of credit default swaps off the books of the banks, stuck them in a subsidiary that we created, cut deals with all the major lenders, got the government involved early on as a... early on. Yeah. To free up the financial system. I went and I literally bought a company, a brokerage firm that specialized in credit default swaps just to buy domain knowledge because we didn't know exactly what they were and we said these guys know what they are and would you be willing to help us build something.
So kind of a common theme where if we don't understand it, we try to find somebody and hire it or buy it or...
Whether it was the team who built the technology that runs all the exchanges now. So anyway, that business, the bill that's called Dodd-Frank which is a financial services bill that passed a couple years later was basically designed to regulate credit default swaps and to prevent this from happening again.
And by that time you'd already become the clearing house.
Yes. And so I give you that anecdote just because you want to talk about regulation. I mean no regulator wants the world to be impacted the way that happened in 2009 and '10. That is very highly regulated, highly scrutinized. But the business opportunity was to take that burden off your customers. And centralize it and then bring experts around it and make government comfortable and regulators comfortable. And in a way you're regulated but there's a bit of a partnership there which is nobody wants the world to blow up. We don't. The regulators don't. We just need to convince each other every day that we're heading the right direction.
Jeff, tell me this though. Fannie and Freddie, you mentioned Fannie and Sally...
I bought a company called Ellie Mae which was a technology company. But today, Fannie and Freddie are the two guarantors. Yeah, true. Along with Ginnie Mae, which does military, but they had their own regulator.
