Welcome Anat Admati (Stanford), Martin Hellwig (Max Planck Institute), and Host Neil Barofsky (NYU Law) (Twitter)

The Bankers’ New Clothes: What’s Wrong With Banking and What To Do About It

It has been four-and-a half years since the largest banks that were largely responsible for causing the global financial crisis were rescued from their own self-inflicted wounds by a government that deemed each one so large and so systemically significant that its failure would bring down the entire system. In the aftermath of the financial crisis, which cost millions their jobs and resulted in trillions of dollars of lost wealth, surely our regulators would have addressed the root causes of the crisis and lived up to their promises to reform our financial system so that it never again would be subject to the dangerous practices of executives at giant banking institutions. Right?

Think again. As we will learn in today’s book salon, our financial system remains sick. Our banks remain unnecessarily fragile, built on a foundation of borrowed money that helps create momentous private profits when times are good but causes massive social losses when they are not. The necessary and common sense reforms that could have provided a safer financial system have been soundly defeated, with the voices calling for reform drowned out by the hysterical warbling that any type of meaningful reform would have devastating consequences for growth and the real economy by the banks, their lobbyists, and the others whom they pay off.

In their groundbreaking new book, The Bankers’ New Clothes, Anat Admati and Martin Hellwig, two of the world’s most prominent and respected academics in finance and economics, expose the lies propagated by those who fight so dramatically to preserve the broken status quo. Argument by argument, scare tactic by scare tactic, they take on the bankers’ arguments and shred them, one by one, exposing them as nothing more than self-serving justifications for preserving a system that serves only the banks, not the general public. And most importantly, they do so in plain English with real world examples that are familiar to anyone who has ever had a bank account, a credit card, or a mortgage. They make the complex simple, and in so doing, reveal that as taxpayers we have been on the wrong side of a decades-long con that has enriched a handful of bankers while the rest of us suffer for their excesses.

But Admati and Hellwig do not stop there. In addition to exposing the falsity of the bankers’ arguments, they offer simple solutions on how we can greatly improve our banking system by providing for stable banks that are incentivized to support the broader economy through sensible lending, and describe a path to such reforms that will encourage economic growth for everyone, not just the entitled few on Wall Street.

The Bankers’ New Clothes is essential reading. Whether you are new to these topics or are intimately familiar with them, this book will quickly make you an expert capable of piercing the veil of deceptive complexity that the bankers and their supplicants so deftly hide behind.

Please join us for what will be a fascinating discussion at the intersection of politics, business and finance.

 

[As a courtesy to our guests, please keep comments to the book and be respectful of dissenting opinions.  Please take other conversations to a previous thread. - bev]

106 Responses to “FDL Book Salon Welcomes Anat Admati and Martin Hellwig, The Bankers’ New Clothes: What’s Wrong With Banking and What To Do About It”

BevW April 20th, 2013 at 1:50 pm

Anat, Martin, Welcome to the Lake.

Neil, Welcome back to the Lake, thank you for Hosting today’s Book Salon.

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Neil Barofsky April 20th, 2013 at 1:59 pm

Martin & Anat: Welcome! As host, I get the first question, then everyone else can jump in.

In your book, you warn that we shouldn’t believe those who say that things are better now than they were before the crisis. We constantly here from the banks, the Secretary of the Treasury, the Chair of the Fed that things are much safer, that the banks have far more capital than what they had in 2008 and that the system is far safer? Why are they all wrong?

dakine01 April 20th, 2013 at 2:01 pm

Good afternoon Anat and Martin and welcome to Firedoglake this afternoon. Neil, welcome back to FDL.

Anat or Martin, I have not had an opportunity to read your book but based on Neil’s intro, I do have a comment/question. I think most aware folks know there are significant problems within the banking system. But how do we overcome the entrenched interest groups where the Beltway politicians and pundits come down on the side of their owners cocktail party guests big money campaign donors instead of voters and the rest of the citizenry?

We see it in the coddling of the banks where there are no-fault judgements against them and even if there is a criminal prosecution it is amazing how there is never a person behind the criminal acts but things just magically seem to happen that break the laws, no one to blame and the lobbyists fight (and stop) the few sanctions and controls that are proposed for implementation

eCAHNomics April 20th, 2013 at 2:04 pm

U.S. had a reasonably functioning financial system after 1930s laws were passed until deregulation.

Anat Admati April 20th, 2013 at 2:04 pm
In response to Neil Barofsky @ 2

I am here, thanks Neil for hosting!

Anat Admati April 20th, 2013 at 2:05 pm
In response to BevW @ 1

Thanks, Bev! Happy to be here,

Anat

Anat Admati April 20th, 2013 at 2:07 pm
In response to Neil Barofsky @ 2

We say this, because in fact when you see where we are so long after the crisis, very little has actually changed. Saying we are better now does not speak to where we CAN or SHOULD be, it misses the point that we can be a lot safer AND have a better system. But the same policymakers are failing to protect us as much as they can, and give excuses and flawed narratives.

Anat Admati April 20th, 2013 at 2:10 pm
In response to dakine01 @ 3

The political problem is daunting indeed. As Senator Durbin said in 2009, Wall Street “still owns the place.” We wrote the book to create more pressure on politicians and regulators. It appears there is some momentum because when it comes to being above the law and bailouts, right and left will have trouble protecting this system if the public gets upset enough. I agree it is very challenging. But at least there might be fewer nonsense that folks can say, that’s our hope…

kafka April 20th, 2013 at 2:11 pm
In response to eCAHNomics @ 4

Yeah, thanks to barf bags like Clinton, Rubin, Summers…..But hey, that’s the purpose of the Neoliberal Democratic Party, to dismantle the work of the New Deal Democratic Party. Up next, SS & Medicare.

Neil Barofsky April 20th, 2013 at 2:11 pm

So, what can be done to make the system safer, and in a way that can bring lasting stability to the system (like the decades of relative stability that we had after the Great Depression)?

Elliott April 20th, 2013 at 2:11 pm

Welcome to the Lake everybody

May this book do well – Thank you for publishing a way to do something about the TBTF banks

rapier51 April 20th, 2013 at 2:12 pm

What was the exact law change in early 09 which allowed the banks to forgo Mark To Market accounting? Replaced by Mark To Make Believe accounting. Could you or someone suggest to Senator Warren or someone to introduce a law to roll back that and establish real accounting.

We know it won’t pass but seeing the banks twist in knots explaining why 400 years of accounting principals shouldn’t apply to them might be fun. Also Bernanke should be and Diamon should have been raked over the coals on this.

RevBev April 20th, 2013 at 2:13 pm

Would you please comment on Obama? Do you think the Pres. is doing what he believes is correct or do you think he has surrounded himself with the
wrong people? Or something else?

Anat Admati April 20th, 2013 at 2:13 pm
In response to eCAHNomics @ 4

As we explain in the book, the nostalgia for the post 1930 years must be seen in context. The years in question were relatively stable in terms of interest rate and exchange rate changes, and there were no significant housing declined. The period of 1940-1970 was an anomaly in banking. Banking has been a fragile industry for as long as anyone can remember, but it does not follow that it was ever very efficient. The circumstances have changed over the years but some of the forces are similar. We explain those in the book.

Anat Admati April 20th, 2013 at 2:16 pm
In response to Neil Barofsky @ 10

Our key recommendation is to insist, no matter what else is done (and more might be needed) that banks use a funding mix that relies much less on borrowed money and much more on retained earnings and shareholder equity or owners’ money. Even under proposed regulation, banks borrow way more than is necessary or efficient, and it is greatly distortive even to their ability to lend. When banks are highly indebted and there is a downturn, and given that they are all so interconnected, they stop functioning and there is much collateral damage to the rest of the economy. The risk of excessive borrowing is entirely unnecessary and benefits few bankers at the expense of many others, who are endangered, sort of like pollution or reckless driving.

Neil Barofsky April 20th, 2013 at 2:17 pm
In response to RevBev @ 13

Does it really matter? Whether he truly believes in the positions or truly believes in the people (like Geithner) who have advanced them (and in so doing, fought so successfully to protect the interests of the largest banks), aren’t we in the same sorry place?

Anat Admati April 20th, 2013 at 2:17 pm
In response to RevBev @ 13

It appears Obama surrounded himself with the wrong people on this subject.

BevW April 20th, 2013 at 2:18 pm

Note – Martin Hellwig will be joining us shortly – bev

Martin Hellwig April 20th, 2013 at 2:19 pm
In response to Neil Barofsky @ 10

I am now here as well. Thanks for hosting this. Session on financial sector taxation went longer than anticipated.

To make the system safer, we need better ways of dealing with banks in trouble so TBTF problems are reduced, and we need to make them less likely to get into trouble. This is why we recommend that banks must have much more “capital” or equity as other firms call it.

Anat Admati April 20th, 2013 at 2:19 pm
In response to Neil Barofsky @ 16

Indeed, it does not matter much, he may believe the folks he surrounded himself with but they are not giving him sound advice.

Neil Barofsky April 20th, 2013 at 2:19 pm
In response to Anat Admati @ 15

OK, and you guys give the clearest explanation imaginable in your book as to why this is the case. But still, one of the most common critiques of your position is that if you increase the equity requirements, the banks will lend less. Do see any validity to these arguments, and if not, why not?

hpschd April 20th, 2013 at 2:21 pm

QE4 amounts to as much as 85 billion a month. To what effect?

The Sequester cut 85 Billion for the year starting 2013.
The effects of the sequester are far from trivial.

I am disturbed that the banks get so much at the same time that the people lose.

Where is the justification for this?

I`m also piqued at the fancy lingo (Sequester, quantitative easing, etc.)
The people get cuts, the banks get money.

Anat Admati April 20th, 2013 at 2:22 pm
In response to rapier51 @ 12

You hit on a bit can of worms that we flag in the book (while trying to stay nontechnical): bank accounting is a mess and allows a lot of hiding of losses. The banks like mark to market accounting on the upside, and then when they lose, they prefer the old book value that are higher. The issue is what is used for regulation and how regulation that depends on someone’s valuations is structured. (We comment on this in Chapter 11 of the book.)

eCAHNomics April 20th, 2013 at 2:23 pm
In response to Anat Admati @ 14

The years after 1933 were stable? Double-dip depression, WWII, Korea, VN, etc. If that’s stability….

There were plenty of large housing cycles.

Fixed xrates created appearance of stability, though pressures underneath them built up.

Banking is a lazy work-a-day biz, nothing esoteric, unless you allow them to leverage out the wazoo. Deposits come in one door & loans go out another. What could be more mundane.

Anat Admati April 20th, 2013 at 2:27 pm
In response to Neil Barofsky @ 21

The big issue on what would happen to lending is whether we are talking about transitions or the “steady state” situation. Here is the first step that MUST be taken but is, incredibly, not taken as we speak: ban payouts to shareholders such as dividends. The profits of the banks belong to shareholders and shareholders are entitled to the profits from any investments made with them, including worthy loans, as long as debts are paid. If banks retain their earnings, they immediately become stronger AND able to lend, and build up their equity funding and their ability to continue lending. Same if they are directed by regulators to raise equity by selling shares. Any bank that cannot raise equity at ANY price shows that it may be too weak and nonviable, maybe insolvent. We need to know this because zombie banks are highly inefficient. We need to deal with them NOW and then strengthen the viable ones so they are more resilient. When banks have more equity and less debt in the mix of funding, they are able to make BETTER lending decisions, and have more money to make loans consistently. The entire narrative is flawed. In any case, right now the problem is not that banks have no funds to lend. JP Morgan does not even lend all the money it has from DEPOSITORS, some of this “excess deposit” money was used to invest in derivatives in London!

Anat Admati April 20th, 2013 at 2:30 pm
In response to eCAHNomics @ 24

Bankers are compensated on the basis of return on equity and thus want to live on the edge and use as much as possible borrowed money (such as deposits). Even when they “just” make loans, they are subject to significant risks, as we explain in Chapter 4. Enter more exciting businesses where more risk can be taken and scaled up, and the dangers become more significant.

Martin Hellwig April 20th, 2013 at 2:30 pm
In response to eCAHNomics @ 24

Most of what you mention is not about banking but about politics. With all that happened there, the financial stability was the more remarkable. In the book we actually describe the “3-6-3 model” of savings institutions under that regime: take deposits at 3 percent, make loans at 6 percent and make it to th egolfcourse by 3 p.m. All this disappeared in the eighties. With inflation and market rates of interest over ten percent, you don’t get deposits at 3 percent any more….

hpschd April 20th, 2013 at 2:31 pm

Do you consider the `Chicago Plan` in the book?

https://en.wikipedia.org/wiki/The_Chicago_Plan_Revisited

Anat Admati April 20th, 2013 at 2:34 pm
In response to Martin Hellwig @ 27

The Fed is trying to get more investment through lower interest rates, but it ends up punishing savers.

eCAHNomics April 20th, 2013 at 2:35 pm
In response to Anat Admati @ 26

One of the hidden (at least from me) benefits of 1930s’ banking rules, wh Yves Smith points out in her book, was that they bribed bankers. That is, they made banking, esp investment banking, so profitable while bankers did nothing, that the bankers weren’t tempted to misbehave. Would have been cheap at double the price.

Deregulation made banking more cutthroat, wh both encouraged and allowed for ever increasing leverage.

Neil Barofsky April 20th, 2013 at 2:36 pm
In response to Anat Admati @ 26

Is the exec comp explanation in this response the only reason why the big banks hate equity requirements so much. Jamie Dimon suggested that they were “anti-american,” and your book was not, shall we say, “embraced” by the big banks and their supporters. Why do the big banks treat equity capital (and those who espouse its virtues) as if it were kryptonite?

Martin Hellwig April 20th, 2013 at 2:36 pm
In response to Neil Barofsky @ 21

The biggest downturn in lending occurred in the fourth quarter of 2008.

Why? Because banks were vulnerable. Why? Because previously they had worked with so very little equity that the losses from subprime and subsequent market downturn put their solvency on the line.

A higher equity requirement may prevent me from borrowing a bit more and then lending a bit more. But this high equity also means that if I make losses, I will b ein better shape tomorrow and then be able to lend MORE than if I was on the brink of insolvency. High equity smoothes fluctuations.

Empirical studies show that, except for a transition period there is no long-term effect of higher equity (or lower equity) on the level of lending.

BevW April 20th, 2013 at 2:36 pm

Anat, Martin, Neil -
The foreclosure checks bouncing and the non-responsiveness of Rust Consulting are part of the Banking problems. Who has oversight for this situation? Banks? Treasury? Congress? From the comments there is a lot of anger about the settlements of $300.

More Foreclosure Review Fiasco: Paying Agent Rust Consulting Sends Letters to Different Addresses Than on Borrower Letters, Refuses to Make Corrections

eCAHNomics April 20th, 2013 at 2:38 pm
In response to Martin Hellwig @ 27

Some small amount of deregulation, like Carter started, i.e. removing some caps on interest rates allowed to be paid, would probably have taken care of the 1980s, the only decade of inflation in the post-WWII period.

As you say, the stability of financing the economy in the presence of external volatility was remarkable. And I didn’t even mention the large steel & auto & other strikes.

marymccurnin April 20th, 2013 at 2:39 pm
In response to BevW @ 33

I saw that today. What a bunch of jerks. Did they not allocate enough money to administer the plan?

rapier51 April 20th, 2013 at 2:39 pm

Statement. Agree or disagree. The banking/financial/monetary system is so corrupt it is beyond reform. Or rather reform cannot be done without massive asset deflation.

Martin Hellwig April 20th, 2013 at 2:42 pm
In response to hpschd @ 28

We mention it in a note but do not discuss it extensively. I believe that it would not solve the problem. (For those who do not know it: TheChicago plan proposed that banks must hold 100 percent reserves of central bank money.)

If you have banks under this regulation, you will get other institutions working like banks that do other things.

Remember than money market funds were created as a way of getting arounc banking regulation. Not regulated, not insured and when in September 2998 they were run upon they were bailed out by the government anyway because the alternatives seemed even worse.

Anat Admati April 20th, 2013 at 2:44 pm
In response to Neil Barofsky @ 31

The hatred of equity in banking is due to a number of forces that we explain in the book. One is that borrowing, in general, and especially at high levels of indebtedness, can become “addictive.” Once heavily indebted, borrowers prefer to take actions that benefit themselves even if they harm others such as creditors (or taxpayers), such as taking excessive risk or continuing to borrow, and may avoid taking actions (such as making good but boring business loans or raising more equity) that benefit the creditors at the borrowers’ expense. For most borrowers, the great inefficiencies of heavy borrowing are mitigated by creditors refusing to lend or changing the terms and conditions of the loans they make, so non banks do not get so heavily indebted even though we do not regulate their funding. For banks, the various explicit and implicit guarantees end up ENABLING and FEEDING the addiction to borrowing and risk in a perverse kind of way. There are also incentives for them to grow inefficiently because of the subsidies, and to take the same risks so they all fail at the same time and thus have to be bailed out as the alternatives are considered worse.

Neil Barofsky April 20th, 2013 at 2:44 pm
In response to BevW @ 33

Should there be any surprise? In the run up to the crisis, the profit incentives led to the underfunding and then the complete gutting of underwriting. Lack of resources and distorted incentives led to predatory lending, liar loans, etc., until it created a massive bubble that exploded.

Then, the same broken incentives led to underfunding the servicing of distressed mortgages while government programs encouraged predatory behavior driving borrowers into needless foreclosures.

Then a settlement process that was inefficient at best, and predatory in its own right, given the small measure of compensation given to those victimized by the practices.

Is it really any surprise that even the payout of these miniscule payments is done in an incompetent manner that will inevitably lead to people giving up (that is not redepositing the checks). The banks’ victimization of Main Street continues.

Mauimom April 20th, 2013 at 2:45 pm
In response to Neil Barofsky @ 10

Welcome, Anat.

As an off-shoot of Neil’s question, what can we do to MAKE THE PEOPLE AWARE of the things that need to be done to make the system safer, so that they will pressure politicians to do them?

Obviously, your book is a good start.

Martin Hellwig April 20th, 2013 at 2:46 pm
In response to eCAHNomics @ 34

I disagree. The S&Ls were basically insolvent. The deregulation allowed them to pay high interest on deposits. But if you are sitting on 6 percent fixed-rate mortgages from the sixties with twenty or thirts years to go and you must pay 15 percent on deposits you are in trouble. Deregulation solved their funding problem but did not clean them up. The cleanup came only ten years later and was very expensive

rapier51 April 20th, 2013 at 2:46 pm

Today self identified liberals and progressives all seem to be fans of Modern Monetary Theory. My take on this is that the central principal is that the Feds assets should no longer be considered as assets. In other words the money is truely ‘backed’ by nothing. Isn’t this a huge error?

Anat Admati April 20th, 2013 at 2:47 pm
In response to BevW @ 33

I am not sure who is responsible for the total mess in the foreclosures. One thing is quite clear: the banks drag their feet and the regulators and policymakers are forgetting about the public. Among the reasons for banks being so inefficient about this is the accounting problems — by not restructuring loans, the banks can avoid recognizing losses and admitting, for example, that they may have lost the entire amount lend on many second mortgages.

hpschd April 20th, 2013 at 2:48 pm

Public banks, like the Bank of North Dakota,
(http://en.wikipedia.org/wiki/Bank_of_North_Dakota)
would seem to be a good alternative to commercial banking.

Do you discuss this, and similar plans being considered by some states.?

Martin Hellwig April 20th, 2013 at 2:50 pm
In response to rapier51 @ 36

To deal with this you need to take in the political system. Eisenhower once referred to the military-industrial complex. Perhaps we should begin to talk about the financial-political complex.

But then it is up to the public to challenge politicians.

Martin Hellwig April 20th, 2013 at 2:52 pm
In response to hpschd @ 44

Coming from Germany, with a banking sector dominated by public banks, I disagree. The crisis cost German taxpayer some 70 bn. euros, or 100 bn. dollars. Two thirds of that was due to the Landesbanken, government – owned and guaranteed, but gambling like any investment bank.

Anat Admati April 20th, 2013 at 2:52 pm
In response to Mauimom @ 40

Please do spread the word about the book, write a letter to the paper, talk to your representative… There is about to be a bipartisan proposal by Senators Sherrod Brown (D) and David Vitter (R) that would increase equity requirements, especially for the largest banks. Tell your representative to support such efforts.

See from Ted Kaufman yesterday http://www.huffingtonpost.com/sen-ted-kaufman/obamas-big-bank-opportuni_b_3109801.html

and a smart editorial from Bloomberg, who have been really great on the topic http://www.bloomberg.com/news/2013-04-09/what-s-so-radical-about-a-safer-financial-system-.html

Neil Barofsky April 20th, 2013 at 2:53 pm

Amen. As long people continue to vote for those who champion the status quo, the status quo will not get changed.

But also, write/call/email you Congressman/Senator. Many of them do pay attention to constituent complaints, particularly if they reach a critical mass. And even if they do not, at least you can derive some pleasure in being annoying.

Neil Barofsky April 20th, 2013 at 2:56 pm
In response to Anat Admati @ 47

Brown-Vitter is a big move forward, and I anticipate strongly supporting it,but do you think it goes far enough? I believe that the equity capital numbers it discusses are below those advocated in your book.

Martin Hellwig April 20th, 2013 at 2:56 pm
In response to rapier51 @ 42

The idea that central bank money is “backed” by anything is an anachronism. Once upon a time, the central bank promised to pay gold for the money. Nowadays, there is no promise at all. For a greenback, you can get only another greenback or ten dimes or…

The central bank has assets but these are for the central bank to manage and any profit goes to the Treasury. Being able to print money and invest in assets is a profitable business.

Anat Admati April 20th, 2013 at 2:56 pm
In response to hpschd @ 44

We are not familiar with these state plans so this comment is not directly about this effort. We discuss in the book the politics of banking. Banks and governments have a very unhealthy symbiosis in Europe right now.

hpschd April 20th, 2013 at 2:56 pm
In response to Martin Hellwig @ 46

But the Bank of North Dakota must have been much more `conservative` in their investments and did not suffer the problems hitting commercial banks.
Surely it is a question of management and oversight.

Mauimom April 20th, 2013 at 2:57 pm
In response to Anat Admati @ 43

Esteemed FDL alum David Dayen ["DDay"] had an excellent recent article in Salon, citing efforts by him and others to expose the full extent of foreclosure fraud, and the role of the crappy OCC and Fed.

http://www.salon.com/2013/04/15/fed_messed_with_the_wrong_senator/?source=newsletter

He also observed:

Indeed, despite OCC and the Fed’s best efforts to protect banks from harm, they’ve actually exposed them like never before. If I didn’t know better, I’d think there were moles among this gang-that-couldn’t-regulate-straight.

I’m curious what your reaction is to this.

eCAHNomics April 20th, 2013 at 2:57 pm
In response to Martin Hellwig @ 41

The S&L crisis came later in the 1980s, and stemmed more from other dereg, like allowing them to go into biz that they were incompetent at. Not to mention, ahem, criminal activity.

You’re right. Nostalgia for the quaint days when a few bankers used to get called on the carpet.

Martin Hellwig April 20th, 2013 at 2:59 pm
In response to Neil Barofsky @ 49

This goes back to the early point about the need for th epublic to challenge politicians. As a foreigner I admire a political system in which senators are independent enough to bring forward such a bill. Even if it does not come to a vote, it keeps the discussion alive and forces the lobby to air their arguments and have them criticized.

In Germany, the political system is more closed and I not experienced anything like this initiative.

Anat Admati April 20th, 2013 at 3:00 pm
In response to Neil Barofsky @ 49

Yes, Brown Vitter is not enough, and it may be diluted further in response to community bankers, who are everyone’s favorite even though they too may be quite inefficient (and too numerous, actually). The regulators actually have all the authority to do as much or more, but traditionally, they are pushed by politicians to be easy on the banks. This is very bad and helps regulatory capture that is already a problem (e.g., revolving doors).

At least it starts a discussion, which is more than the deafening silence on the issues.

Mauimom April 20th, 2013 at 3:00 pm
In response to Anat Admati @ 47

Thanks and will do.

Have you explored a “book salon” at the Politics & Prose bookstore in DC? All of those Very Smart People — and quite a few actually smart people — do tend to come listen to [and buy the books of] authors who appear there. The owners have a wide e-mail/publicity list. It would be a great forum for you.

Phoenix Woman April 20th, 2013 at 3:01 pm
In response to hpschd @ 52

What’s interesting is that the Bank of North Dakota’s “conservative” investment and loan strategy was confined to an avoidance of the dipsey-doodle “creative” finance that even now is fashionable on Wall Street, six years into the Great Recession. They were and are quite willing to make straightforward loans to people in need.

Martin Hellwig April 20th, 2013 at 3:02 pm
In response to hpschd @ 52

Precisely. There is one Landesbank that has not been burnt in this crisis because their controls were good. They had been burnt before.

The question is who oversees them and who expects to be footing th ebill when things go wrong. It is not just a question of public vs. private, or of commercial vs. investment.

In many cases, oversight does not work because everybody thinks of the bank as a source of money and does want to impose constraints on their lending. This atmosphere affects regulators as well.

Martin Hellwig April 20th, 2013 at 3:04 pm
In response to Phoenix Woman @ 58

By the way, th epeople from the Landesbank that was conservative because they had been burnt before tell me that in 2005 and 2006 they got ver ybad press from analysts and journalists all around because they were less “profitable” than their colleagues and this surely must be because they were so old-fashioned and did not buy mortgage-backed securities.

Neil Barofsky April 20th, 2013 at 3:05 pm

Martin and Anat — One of the most persistent items of “new clothes” trotted out by the banks is the argument that if the United States unilaterally upped its capital requirementsit would put our banks at a competitive disadvantage with other country’s universal banks. Isn’t this one just a little bit true, though?

Phoenix Woman April 20th, 2013 at 3:06 pm
In response to Martin Hellwig @ 55

As a German, do you feel competent to address the question of Angela Merkel’s somewhat odd attitude towards austerity — wherein the German bankers are protected by making the Greeks, Spaniards and Cypriots (among others) suffer?

Mauimom April 20th, 2013 at 3:07 pm
In response to Neil Barofsky @ 48

I second your suggestion [re writing to Congresscritters], Neil.

While such action is often derided, I used to work in a Congressional office, and I can tell you they DO count the mail. In this day & age, folks can increase their impact [get counted multiple times on the issue] by writing a snail-mail letter, sending an e-mail via the Critter’s website, AND making a phone call. You can even write to the “district office(s)” in the home state, as well as Washington.

You don’t need to write a long tome believing that you will somehow sway the Senator or Rep. A few short lines showing that you follow the issue, recommending the appropriate action, and indicating that you will be watching to see what he/she does should be sufficient.

Anticipate, however, a canned response written by a lowly staffer like what I used to be. But your correspondence will go in the tally.

BTW, if you’re not in the Critter’s state or district, they won’t give a damn, unless you happened to contribute to their campaign. If you did, mention it.

Anat Admati April 20th, 2013 at 3:07 pm
In response to Mauimom @ 53

My observations of the OCC and the Fed lead me to be highly skeptical that they remember who they are supposed to protect when regulating the banks. As Sheila Bair said in her book (and, as Neil, she is also critical of Treasury especially under Geithner), they often behave as if the banks are their children and their job is to care for the banks, even when what benefits the banks (or bankers) is in direct conflict with the public interest.

Anat Admati April 20th, 2013 at 3:11 pm
In response to Neil Barofsky @ 61

We take on this issue heads on in Chapter 12 of the book. It is simply NOT a priority for us as citizens that our banks win in global competition if by doing so they expose us to risk and on the back our taxpayer subsidies. Here is an op ed we wrote on the subject http://www.gsb.stanford.edu/news/research/admati-battle-begun.html

We explain more fully in the book. Also see this op ed I wrote in March of last year that focuses on dividends but also mentions the “anti american” line of Dimon http://blogs.reuters.com/great-debate/2012/03/14/why-the-bank-dividends-are-a-bad-idea/

Martin Hellwig April 20th, 2013 at 3:13 pm
In response to Neil Barofsky @ 61

This question contains several questions in one:

1. Should the US do anything unilaterally? By all means if this is good for financial stability in the US. I do not want my government to listen to a chemical company saying it can’t compete with other companies from other countries unless it can pollute the river in fron of my apartment. Similarly I do not want them to listen to a bank that can’t compete with banks elsewhere unless it exposes me to risk. These Landesbanken used taxpayer guarantees to get cheap funding and our public budgets suffer the consequences. There is no merit in international competitive success if it is paid for by others.

2. Do capital requirements affect competition between specialized and universal banks? I see no reason why they should. In any case, some of the major banks in the US are also universal.

Anat Admati April 20th, 2013 at 3:14 pm
In response to Mauimom @ 57

We try to engage wherever we can, and this forum in DC seems interesting. As we explain in the preface, we wrote the book after realizing that those involved in the debate had no interest in engaging on the issues, and appeared unlikely to develop such an interest unless they are pressured into doing so (or maybe after another damaging crisis).

Martin Hellwig April 20th, 2013 at 3:17 pm
In response to Phoenix Woman @ 62

The euro crisis is a topic of its own. I believe that it would have been much better if there had been private sector involvement from the very start, in 2010. This would have required writedowns on Greek debt at that time. It would also have required Greece to come to terms with the fact that the standard of living was not support by productivity. They would have had to go for auterity, like Latvia, but they would have had to do so on their own, without a Diktat from the Troika. Perhaps that would have given them more of a sense of ownership about moving forward.

Neil Barofsky April 20th, 2013 at 3:17 pm
In response to Martin Hellwig @ 66

I have no idea why the “international competitiveness” argument still has currency in Washington, but somehow it does. I think that there is a germ of truth in the argument — if you raise capital requirements, the banks won’t be able to enjoy as much profits from the implicit and explicit subsidy for debt, so therefore will be at some incremental disadvantage as compared to its still fully-subsidized European or Asian counterpart.

But, of course, that is the cry of any subsidized industry when you threaten to take away even a portion of its subsidy. But hey, as a capitalist at heart, I’d bet that over time the unsubsidized bank will eventually eat the subsidized bank’s lunch.

rapier51 April 20th, 2013 at 3:18 pm

If as citizens our banks winning global competition isn’t a priority it is priority one of our political elites. Banking and financial power are political power internationally. Thus the banks are not simply beneficiaries of partnership with power but actors used to advance US power in absolute and relative terms. Getting back to my reform statement, this makes it impossible for citizens to enter the picture. Particularly because the natural enemy of concentrated banking power, the populist right, always puts that aside in favor of the giants of finance who advance the power of The Nation.

Martin Hellwig April 20th, 2013 at 3:22 pm
In response to Phoenix Woman @ 62

Continuing on the euro crisis: In Cyprus banks were offering investors from all offer 4 percent or more on deposits. In Germany right now, I get zero percent on a savings deposit and 1 percent on a government bond. Cypriot banks used to invest the funds in, for example, Greek sovereign debt at 10 percent and more. They went into this in a big way after the Greek debt crisis had already broken out. This was gambling on all sides. But as long as it lasted, it made for a nice busines smodel and contributed to the standard of living. Without the banking problems, the Cypriot government would not be in such bad shape.

Anat Admati April 20th, 2013 at 3:22 pm
In response to rapier51 @ 70

If the way for our banks to win in global banking competition is to take risks and create a fragile system that is prone to crises, whatever international success they might have is short lived. See Ireland, Iceland, Cyprus.

Neil Barofsky April 20th, 2013 at 3:23 pm

This week, yet another senior Treasury official, this time Mary Miller, echoed the line pushed by Secretary Treasury Jack Lew that Too Big To Fail is over, apparently solved by Dodd-Frank. Do you agree?

Martin Hellwig April 20th, 2013 at 3:26 pm
In response to Neil Barofsky @ 69

I just heard the argument this afternoon from the Luxembourg finance minister in a discussion about the financial transactions tax. I hear it all the time in European regulatory discussions on whether banks should have equity to back their holdings of sovereign debt. If nothing else works, you say we need “level playing fields” and since the others are not doing anything, we should not. Capture with such arguments is complete.

spocko April 20th, 2013 at 3:26 pm

So often we hear, ‘And no one has been prosecuted” for the financial disaster in 2008.
I’m always struck by that comment. What does it really mean?
Were the reasons:
1) They technically didn’t break any laws, since they fixed the laws first so they wouldn’t be breaking them?
2) There were actual laws broken, but nobody is willing to be a whistle blower to provide evidence?
3) Everyone in the DOJ is afraid to wade into the mess because of a) Lawyers by the train load b)Washington say, “not a priority” c)It just too massive and there isn’t enough staff, so they focus on the edges or small individuals whose case can be won since they don’t the same resources as the big banks.

Anat Admati April 20th, 2013 at 3:27 pm
In response to Neil Barofsky @ 73

We definitely DO NOT agree that Too Big To Fail is over. There is plenty of evidence that this statement is simply false. Under pressure (finally), even Ben Bernanke said he “agrees 100% with Senator Warren” that there is a problem. But then what is he actually doing about it? The narratives are always: “We are making progress but there is a lot more to be done” and “it will take a long time.” Meanwhile, denying the issues, being evasive, and stamping the banks “safe enough” on the basis of flawed stress tests is entirely counterproductive and shows they are NOT doing all they can. Let’s also remember Eric Holder saying that some banks are too big to prosecute. Right there, if the economy cannot stand the risk of prosecution of a bank, they fail a critical “stress test.”

Anat Admati April 20th, 2013 at 3:32 pm
In response to spocko @ 75

On why folks are not prosecuted, it’s probably a combination of reasons. Proving such cases can be difficult, often there is “small print” or some other defense that individuals or even banks can use. Their lawyers might be better than those working for the regulators, etc etc… we end the book with the story of a trial in which a mid level Citi person was found not guilty but the jury felt SEC and other regulators should do more to contain the dangerous system. See on this http://dealbook.nytimes.com/2012/08/03/s-e-c-gets-encouragement-from-jury-that-ruled-against-it/

Martin Hellwig April 20th, 2013 at 3:32 pm
In response to Neil Barofsky @ 73

No. Two issues are completely unresolved:

1. Funding. Dodd-Frank has the fiction that everything is paid for by deposit insurance funds and by clawbacks from creditors. In a situation where one very large institution or many small institutions are failing, this will not be enough. So Dodd-Frank allows Treasury loans. There is no guarantee that they will be paid off even if you impose a twenty year levy on the industry. There are after all limits to what the industry can pay.

2. The international side. When a bank has legally independent subsidiaries in other countries, under current law, each legally independent subsidiary has its own resolution authority. But these subsidiaries are operationally integrated with the parent: cash management, IT etc. In the case of Lehman Brothers, the UK authorities found that, when they entered they couldn’t even pay anybody’s salary because all cash had been sent to New York after close of business the preceding Friday in London.

Neil Barofsky April 20th, 2013 at 3:32 pm

Will equity levels at the level that you advocate (20-30%) do the job on TBTF, or is more required? If you think that more would need to be done, what path would you chose? Systemic Risk Tax? Modified Glass-Steagall? Size caps? A Kotlikoff Limited Purpose Banking Model? Something else? Some mix or match?

Martin Hellwig April 20th, 2013 at 3:34 pm
In response to spocko @ 75

It isn’t just criminal prosecution that has been missing. Civil liabilities also have not played much of a role. Yet, there have been many instances where people in charge were at least grossly negligent of their duties towards owners, investors, creditors, and other counterparties.

CTuttle April 20th, 2013 at 3:38 pm

Aloha, Anat, Martin, and Neil…! Mahalo for being here today…!

With the Reinhart-Rogoff affair, is there now a new-found impetus to at least examine the fact that Jamie is bare-assed naked…?

Martin Hellwig April 20th, 2013 at 3:39 pm
In response to Neil Barofsky @ 79

No systemic risk tax: you get into a mess trying to “measure” systemic risk.

Kotlikoff’s limited purpose banking is essentially a combination the Chicago plan, with 100 pecent cash or treasuries, and a system of open-end mutual funds for everything else. Imagine lending to small and medium enterprises being done through open-end mutual funds. With no public markets for these loans, these funds would be subject to runs. In Germany, we have a tradition of open-end real estate funds. Becaus eof problems with pricing the fund shares at times when real estate markets were illiquid, they have been subject to runs, and at this point ar enot paying money out.

I could see some virtue in a modified Glass Steagall which would separate proprietary trading from other activities in order to impose even higher capital requirements and in order to reduce conflicts of interest between client activities and trading.

Anat Admati April 20th, 2013 at 3:41 pm
In response to Neil Barofsky @ 79

Some size caps might be helpful, there is no way it is efficient for any corporation to become as large as JP Morgan (over $4 trillion under European accounting rules, even $2.2 trillion, under our accounting rules). (Note that Lehman was less than $650 billion.) Limited Purpose Banking is problematic in subtle ways, we have a footnote on this in the book.

Our “more to do” goes to governance and control, which we think is the big source of problems in the banks. I would put a representative of FDIC on the board of all banks, for example. Just someone representing the “downside risk” who is not focused entirely on earnings and returns. Managers and boards currently fixate on returns and earnings that managers benefit from (while shareholders get a piece of in good days but may be bearing risks they are not properly compensated for), while ignoring the creditors, FDIC, taxpayers also impacted by decisions. With current governance, banks do not have incentives to control risks, because enough folks involved benefit from them at the expense of others who have no control.

spocko April 20th, 2013 at 3:44 pm
In response to Martin Hellwig @ 80

I’ve often wondered about civil liabilities. I believe that one of the things that was proven was that Goldman Sachs actively lied to their customers and used this knowledge to make money for Goldman Sachs.

I’m guessing that one of Goldman’s defenses is, “Hey they are big boys, they knew the risks. We stated on page 937 that these assets might not be good.”

And for the company to sue Goldman they would have to say, “We didn’t read page 937.”

Personally I like the idea if using a big customer of Goldman to go after them, say a huge pension fund. They were an injured party, they have standing and they have the resources to go after them. Is the reason they don’t is they don’t want to expose how bad their own due diligence was? How risky their investments were?

Neil Barofsky April 20th, 2013 at 3:45 pm
In response to Martin Hellwig @ 80

If you were a banker and had even the slightest inclination to gain an advantage by breaking the law, what would constrain you? You would look around, and see that not only has not a single banker gone to jail in the aftermath of a crisis built on fraud (they were called liar loans for a reason), but that our Attorney General has declared a handful of large institutions immune from prosecution, no matter how many dollars they launder for narcotics cartels and terrorists, because of a fear that criminal indictment could bring down the financial system.

And you would see that even where the government did act, it did not take money out of any individual’s pocket, just some fines paid out by the shareholders.

And you would then commit the crime.

Martin Hellwig April 20th, 2013 at 3:48 pm
In response to spocko @ 84

I don’t know about the courts and th elaw in the US. In the German context, the courts are very restrictive. The highest court for these matters has a reputation of taking the banks’ side. There was an exception recently involving a case where Deutsche Bank had sold a complex derivative to someone without really explaining what the risk were.

spocko April 20th, 2013 at 3:49 pm
In response to CTuttle @ 81

Yes I want to know the answer to this. I don’t to be mad at a spreadsheet cell, but that incident makes me pissed at the people who produced it and all the people who used it to attack SocSecurity, the olds and the poor.

I’m sick and tired of a focus on the deficit but no focus on the damage massive unemployment has on the country.

Anat Admati April 20th, 2013 at 3:50 pm
In response to CTuttle @ 81

The Reinhart-Rogoff debate is mainly on government debt. Our book focuses on private debt and especially on banks as borrowers and lenders. There are a few points of overlap. First, banks lend to governments and governments often default and cause banking crises… Second, recessions following banking crises tend to be more prolonged and harder to recover from than other recessions. The controversy over a mistake in calculation does not appear to be related to the fact that the banking system is unhealthy and dangerous and that there is too much borrowing by private banks. Independently, it is important to expose the ways in which banking emperors such as Dimon have no clothes, i.e., make flawed arguments in lobbying against every bit of reform, particularly reform meant to unambiguously improve the system for the public such as better regulation of the banks’ funding mix.

Martin Hellwig April 20th, 2013 at 3:52 pm
In response to Neil Barofsky @ 85

This isn’t just about bankers. I first began to think about liability when I observed politicians who were sitting on the supervisory boards of Landesbanken and said: “I could not prevent these guys from investing in this toxic stuff. I am a politician.” They like to use their influence on the board to direct money to whatever they like, but without taking responsibility. In discussions about this I usually translate the losses these public banks have made into equivalent numbers of schools.

dakine01 April 20th, 2013 at 3:53 pm

Do either of you Anat or Martin care to offer any speculation on whether the Cyprus actions (taking depositor funds) is really just a one-off action or a dry run for doing the same for larger banks in the US/Europe?

CTuttle April 20th, 2013 at 3:53 pm
In response to spocko @ 87

I want the ‘serious’ people to examine all their shorts, as Yves(or somebody) says; ‘If Goldman shorts, run for the hills’…! 8-(

Neil Barofsky April 20th, 2013 at 3:53 pm

I think I get the last question.

The book has deservedly received amazing reviews, and I strongly encourage anyone following this conversation to go out and buy it. Not only will it make you smarter, but you can become a real know-it-all and torment any bankers that you may occasionally run into at cocktail parties or where ever one runs into bankers.

But I’d like to ask a different question. There is occasionally a price to pay for taking such a public position against such an entrenched and powerful elite in a book (at least that is what I have heard :)), was it worth it? How has the reception been to the book in the corridors of power that I assume that you hope to influence in writing this book? Do you have hope for the future?

Anat Admati April 20th, 2013 at 3:53 pm
In response to spocko @ 84

Often, indeed, the issue is that both sides, and in fact the regulators as well, would not come off all that well in a trial that exposes everyone’s prior behavior. The legal challenges and the costs create a situation where settlements that are often very inadequate, without admission of guilt, are so common. There end up being little consequences for much misconduct.

BevW April 20th, 2013 at 3:54 pm

As we come to the end of this great Book Salon discussion,

Anat, Martin, Thank you for stopping by the Lake and spending the afternoon with us discussing your new book and how the Banking System can be reformed.

Neil, Thank you very much for Hosting this great Book Salon.

Everyone, if you would like more information:

Anat (Stanford Univ) and Martin’s (Max Planck Institute) website(s) and book (The Bankers’ New Clothes)

Neil’s website (NYU Law) and book (Bailout)

Thanks all, Have a great weekend.

Tomorrow: Robert W. McChesney / Digital Disconnect: How Capitalism is Turning the Internet Against Democracy; Hosted by John Nichols

If you would like to contact the FDL Book Salon: FiredoglakeBookSalon@gmail.com

FDL Book Salon has a Facebook page too

spocko April 20th, 2013 at 3:55 pm
In response to CTuttle @ 91

Yeah, and I want a High frequency Trading tax, but I’m not going to get it, it makes too much sense.

Martin Hellwig April 20th, 2013 at 3:58 pm
In response to spocko @ 87

I don’t think the flaw makes that much of a difference.

I have on occasion pointed to the R&R study and suggested that for the euro area, with sovereign debt on the order of 87 % of GDP, the problem might be not only one of distribution north-south but also one of excessive debt overall. In that context I have always added that, of course, with interest at 1 percent, the meaning of that 87 percent may be different from R&R. In working with such numbers one always needs judgement. What is clear is that countries with debt above 100 percent of GDP and with no recourse to the central bank have in th epast had a hard time getting out of the difficulty.

hpschd April 20th, 2013 at 3:58 pm

Thanks to all for a very interesting book salon.

The Toronto Library system does not have this book yet, so I will put in a request and suggest multiple copies. They ask for reviews, do you have a favorite?

Anat Admati April 20th, 2013 at 3:58 pm
In response to dakine01 @ 90

In the case of IndyMac in the US, uninsured depositors lost, I think even 50% of their uninsured deposit amount. One of the big problems is that in many of these banks, the assets are “encumbered” in the sense that they are committed as collateral on various loans (such as so-called “repos”) or derivatives. Should a bank fail, a whole lot of its assets would just “walk off” because they actually have an exemption from the standard freeze of assets in bankruptcy. If there are significant losses, the issue becomes who bears them. Of course, in the crisis, the government ended up guaranteeing or paying off just about all the banks’ debts, and also supporting money market funds that are technically not banks.

(The fact that money market funds are still not regulated effectively is outrageous. Supposedly something is going to happen there, but it’s not clear how good it would be.)

CTuttle April 20th, 2013 at 3:58 pm
In response to BevW @ 94

Mahalo, Bev, Anat, Martin, and Neil for an excellent Book Salon…! Sorry that I was late to the party…!

Elliott April 20th, 2013 at 3:59 pm

Thank you all so much, a very interesting discussion.

Good luck with the book and the effort to set our banking system right.

Martin Hellwig April 20th, 2013 at 3:59 pm
In response to dakine01 @ 90

I hope that bail-ins are becoming more of th erule.

Martin Hellwig April 20th, 2013 at 4:00 pm
In response to spocko @ 95

This is what the discussion today was about. I have great sympathy.

Anat Admati April 20th, 2013 at 4:01 pm
In response to hpschd @ 97

Please everyone check out the book’s website http://bankersnewclothes.com/, which lists many reviews under “media”. There are excerpts on Amazon, we should start excerpting as well. A number of good ones, Martin Wolf, Financial World, Bloomberg…

Thank you all.

BevW April 20th, 2013 at 4:01 pm
Martin Hellwig April 20th, 2013 at 4:02 pm
In response to BevW @ 94

Thank you Bev, and thank you, Neil, for hosting and giving us this opportunity. Thank you all for your questions and comments.

karenjj2 April 20th, 2013 at 4:12 pm
In response to spocko @ 95

yeah, and using the words “banking” and “public interest” in the same sentence, paragraph or book is a fallacy these days.

Public interest left the station long ago as evidenced by the fact that no corporate charter has been revoked despite money laundering and other criminal activities that are ongoing.

The only cure is bank owners/investors should have their assets as first resource taken before FDIC and gov’t bailout.

Sorry but the comments are closed on this post