WEBVTT - Admati: Deutsche Bank Has Made Itself More Systemic

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<v Speaker 1>Taking it backiste you one is the only major county

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<v Speaker 1>that is still over valued. The end is very far

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<v Speaker 1>from being over valued. The steed A girls and the

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<v Speaker 1>Banking Union rules suggests that we'll have to have balance

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<v Speaker 1>for banks that are failing. That means that investors will

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<v Speaker 1>take classes. Bloomberg Surveillance your link to the world of economics, finance,

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<v Speaker 1>and investment on Bloomberg Radio. Good morning, everybody, Tom Keane

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<v Speaker 1>and Michael McKay. Tom at the I m F meetings

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<v Speaker 1>in Washington. I'm here in our New York studios and

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<v Speaker 1>we are looking at kind of an off day in markets.

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<v Speaker 1>We're waiting for Christine Leguard, who will be speaking with

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<v Speaker 1>Tom a little later in the program. Maybe she can

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<v Speaker 1>turn things around. But right now, SMP futures off by three,

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<v Speaker 1>down futures by twenty four. The stock six D is

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<v Speaker 1>a point lower in Europe. Interestingly, uh FED fears have

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<v Speaker 1>still got the U S YELD curve elevated. We're at

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<v Speaker 1>eighty four basis points of a two year to h

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<v Speaker 1>one point seven on the ten years. So we'll keep

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<v Speaker 1>an eye on that oil prices. UH the hurricane, and

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<v Speaker 1>we should mention this is the forecast has gotten worse

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<v Speaker 1>for Florida and it definitely looks like it's going to

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<v Speaker 1>come in with Category four strength along the whole coast,

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<v Speaker 1>which is not a good thing. West Texas at eighty

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<v Speaker 1>three unchanged. Brent crude is up on the day by

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<v Speaker 1>about a tenth, neither of those really being affected by

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<v Speaker 1>the storms, and of course Tom has been pointing out

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<v Speaker 1>the breakdown in the British currency cable going for one

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<v Speaker 1>fifty eight down three quarters of a percentage point, still

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<v Speaker 1>concerns about what the potential for a hard Brexit might mean.

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<v Speaker 1>We are joined now by one of our favorite people,

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<v Speaker 1>because we've been talking all morning about the impact of

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<v Speaker 1>the banking system in Europe on the rest of the world,

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<v Speaker 1>a not At Mandi, finance professor from UH Stanford University

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<v Speaker 1>and the author of the Banker's New Clothes, which explains

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<v Speaker 1>everything you need to know about banking, in debt and

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<v Speaker 1>capital at all, things like that. So if you're confused

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<v Speaker 1>by what Tom and I are talking about, pick up

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<v Speaker 1>that book. We we urge you. Um. And the timing

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<v Speaker 1>is perfect because yet again today more revelations about Deutsche Bank,

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<v Speaker 1>and this time UH some cooking the books on some

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<v Speaker 1>deals with Blanka Banti depasti um. What kind of is

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<v Speaker 1>fascinating to me is that we went through the financial crisis.

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<v Speaker 1>We put in all kinds of regulations. Not granted these

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<v Speaker 1>are European banks, but they can see what's happening in

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<v Speaker 1>the United States. We've raised capital levels and they're still

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<v Speaker 1>doing this stuff. When we raise capital levels, but with

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<v Speaker 1>these accounting tricks, the capital levels become meaningless. So that's

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<v Speaker 1>a problem right there, and that connects to all kinds

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<v Speaker 1>of other Friday issue consumer issues. We had been was

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<v Speaker 1>far ago and all of that. So good morning Deutsche

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<v Speaker 1>Bank now, and I don't think it's in a vacuum.

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<v Speaker 1>How do you perceive the decades of management of Deutsche

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<v Speaker 1>Bank and the business strategy and the mergers that they've

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<v Speaker 1>been through, including Alex Brown of Baltimore and the rest.

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<v Speaker 1>How do you fold the history of Deutsche Bank into

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<v Speaker 1>the immediate process a prospect of contagion. Well, Deutsche Bank

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<v Speaker 1>has made itself more and more and more systemic in

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<v Speaker 1>chasing returns, in becoming a champion of investment banking. In

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<v Speaker 1>the book, we take Ackerman, one of the previous CEOs,

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<v Speaker 1>for saying he thinks, Oh, he's sort of appropriate. For

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<v Speaker 1>when I show this to a finance mentor of mine

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<v Speaker 1>is like, huh, they don't listen to what the seal say.

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<v Speaker 1>Is that what he really said? That's unconscionable. How do

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<v Speaker 1>you get You got to take enormous amount of risk,

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<v Speaker 1>obviously and be good at it. So the history of

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<v Speaker 1>Deutsche Bank is is one of basically taking a lot

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<v Speaker 1>of risk expansion, you know, the ultimate of becoming too

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<v Speaker 1>big to faith system. From New York in Washington this morning,

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<v Speaker 1>Bloomberg Surveillance Folks, Michael McKinnon, New York on Tom King

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<v Speaker 1>and Washington. Later on our conversation with Christine Lagard. Bloomberg

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<v Speaker 1>Surveillance this Morning brought to you by Colna Residec Accounting,

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<v Speaker 1>Tax Advisory, look Ahead, Gain Insight, Imagine more of the

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<v Speaker 1>professionals at Colne Resnick can help your business breakthrough. Find

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<v Speaker 1>out more at Coln resnec dot com. Michael, we did,

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<v Speaker 1>uh see a lot of additional regulation put in place

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<v Speaker 1>after the financial crisis, and banks are better capitalized now,

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<v Speaker 1>maybe not as much as you would like, but certainly

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<v Speaker 1>better capitalized than they were. And yet when you look

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<v Speaker 1>at share prices and I'm not just talking Deutsche banker

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<v Speaker 1>Wells Fargo, which have had been in the news, but

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<v Speaker 1>for all banks, you know, I states in Europe. There

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<v Speaker 1>their shares are lower, they've never really recovered, and it

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<v Speaker 1>seems like investors still consider them extremely risk. While they

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<v Speaker 1>are risk, he didn't Larry Summer recently say that as well,

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<v Speaker 1>they're very risk in this thing is that they're very

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<v Speaker 1>highly leverage still in real measures, not in these capital measures.

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<v Speaker 1>They added a lot of regulations, but not cleverly so,

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<v Speaker 1>so their regulations very complex, more complex than they need

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<v Speaker 1>to be, and of course that raises compliance costs and

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<v Speaker 1>other things like that. So between the fines and and

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<v Speaker 1>all the regulatory compliance and and and of course because

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<v Speaker 1>of risk that investors of having a lot of trouble

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<v Speaker 1>assessing because of disclosures are so poor. You see that

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<v Speaker 1>in the stock crisis. So when you have so much leverage,

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<v Speaker 1>price fluctuates a lot. So a tiny bit on the

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<v Speaker 1>downside is a lot on the downside. And the way

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<v Speaker 1>this way it works on the app side, this is

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<v Speaker 1>basic leverage. Everything gets magnified. Well. John Cryan, CEO of

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<v Speaker 1>Joutche Bank, suggests this is deliberate on the part the

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<v Speaker 1>volatilities delivered on the part of investors hedge funds who

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<v Speaker 1>are trying to manipulate the price. People can't see your face,

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<v Speaker 1>but but that that was that was an interesting face

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<v Speaker 1>you just made, didn't anyone see? Also blame short sellers.

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<v Speaker 1>It's deliberate on his part that he stuck is so

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<v Speaker 1>risky and so poorly say there's some poor such more

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<v Speaker 1>information about it, that investors are scared about. What the

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<v Speaker 1>skeleton that he has in the closet and the risk

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<v Speaker 1>of of of Deutsche Bank. So that's what's the deliberate part,

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<v Speaker 1>the deliberate parties their conduct. Is there the type of

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<v Speaker 1>business model that they have, that's the part that that

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<v Speaker 1>that he should look at instead of blaming investors an automotive.

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<v Speaker 1>How do you look at negative interest? Rich You've always

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<v Speaker 1>had a different prism, a different filter. How do you

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<v Speaker 1>look at where we are with chronic negative race? Well,

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<v Speaker 1>I right not to talk about things that I don't

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<v Speaker 1>fully understand. And if most of your guests are saying

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<v Speaker 1>that they really understand all these monetary policy things, I

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<v Speaker 1>think you know to take it with a grain of salt,

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<v Speaker 1>but I'll say it's clear that it's harder in some

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<v Speaker 1>respect to to to make money. It's certainly harder on

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<v Speaker 1>on on many institutions that need returns, like pension funds, endowments, UH,

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<v Speaker 1>insurance companies. It's very difficult and it's such a long

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<v Speaker 1>period of time to have these liabilities, so that I

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<v Speaker 1>think it introduces a lot of fragilities, and uh, it's

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<v Speaker 1>problematic when it goes on so long. I understand that

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<v Speaker 1>you know, there might be really negative really interest right

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<v Speaker 1>to understand that the need to stimulate, But it gets

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<v Speaker 1>to a point where I think, you know it really

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<v Speaker 1>is the overall impact is beginning to not quite do

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<v Speaker 1>what you wanted to do. Well, is the risk risk

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<v Speaker 1>reward calculation tilting now towards too much risk? And are

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<v Speaker 1>central banks working against them selves by keeping rates so

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<v Speaker 1>low or using negative rates so that banks can't earn

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<v Speaker 1>their way out of trouble. Well, I think that some banks,

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<v Speaker 1>you know, shouldn't earn their way out of trouble, should

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<v Speaker 1>just be put out to rest. So I think there

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<v Speaker 1>are a lot of zombie banks in Europe. I think

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<v Speaker 1>there's excessive excess capacity in this industry and that if

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<v Speaker 1>it shrinks some it's Okay, the fact that you need

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<v Speaker 1>to gamble in order to survive all the time. It's

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<v Speaker 1>not a healthy industry that way. So I'm not the

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<v Speaker 1>you know, the banks die with such such little frequency

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<v Speaker 1>despite their conduct and despite living so dangerously that it's

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<v Speaker 1>something's wrong there. So I'm not I'm not shedding too

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<v Speaker 1>many tears on if if some banks are unwound, not

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<v Speaker 1>in a crisis like like you know, in these kinds

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<v Speaker 1>of day, and if they can't make it. But um,

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<v Speaker 1>what do our banks do? What do our banks do

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<v Speaker 1>given sustaining type of GDP if we believe we're not

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<v Speaker 1>going to get back to three percent real GDP? Does

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<v Speaker 1>that just demand consolidation nationwide? Well, the issue with banking

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<v Speaker 1>is the issue of the need for intermediation. What's the

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<v Speaker 1>business of intermediation because the banks are not you know,

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<v Speaker 1>producing you know, realist if they're just allocating the savings

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<v Speaker 1>and all of that. So, you know, there have been

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<v Speaker 1>questions in in finance, even finance academics are beginning to

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<v Speaker 1>wonder just how much given that we have, you know,

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<v Speaker 1>certain technological capabilities, but they still need for for that

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<v Speaker 1>human uh intervention in intermediation, how much of it we

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<v Speaker 1>need so. Yes, if if the economy is smaller than

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<v Speaker 1>maybe the banking sector needs to be smaller as well.

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<v Speaker 1>But I don't you know, I don't think I think

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<v Speaker 1>it should be more natural. My problem continues to be

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<v Speaker 1>that there are so many distortions in this in this

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<v Speaker 1>system that it's bloated because it can be because it

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<v Speaker 1>wants to be. Well. Let's come back with an automotive

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<v Speaker 1>from Stanford University and continue our conversation about the banks.

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<v Speaker 1>Wells Fargo shares right now are off just a few

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<v Speaker 1>sets in early morning trading. We're looking at the Banco

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<v Speaker 1>de Monte de Pasky off three percent today on these

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<v Speaker 1>revelations of uh some book cooking with the Deutsche Bank.

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<v Speaker 1>Deutsche Bank shares up three tenths twelve eleven euros right

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<v Speaker 1>now twelve twelve euros, eleven cents s andp features off

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<v Speaker 1>by four down features by thirty four. The stock six

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<v Speaker 1>hundred is down a point. This is Bloomberg Tom Keene

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<v Speaker 1>in Washington for the I m F meetings. Michael McKee

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<v Speaker 1>here in the studio in New York, along with a

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<v Speaker 1>not at Madi, Stanford finance professor and noted banking analysts.

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<v Speaker 1>Shall we say the other of the book The Banker's

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<v Speaker 1>New Clothes, along with Martin Hollick uh in Germany and

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<v Speaker 1>uh she and we are have been talking about the

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<v Speaker 1>troubles of the banking system lately and how they have

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<v Speaker 1>impact did Um the rest of the world. And I

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<v Speaker 1>want to go back to what we were, what you

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<v Speaker 1>and Tom were talking about just before the break, when

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<v Speaker 1>you were mentioning net interest margins and how that is

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<v Speaker 1>hurting their ability to earn higher regulatory costs also take

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<v Speaker 1>a toll Um. The markets for investment banking are shrinking.

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<v Speaker 1>You've got the shadow banking system getting bigger all the time.

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<v Speaker 1>Are we seeing a a sea change, a secular change

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<v Speaker 1>in banking? Are we going to get the utility model

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<v Speaker 1>that people have talked about for so long because you

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<v Speaker 1>just can't make money in the traditional banking sense. I don't.

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<v Speaker 1>I think that there's a lot of business that is

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<v Speaker 1>not quite net interest margin. When you invest in derivatives

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<v Speaker 1>and you start how you can still do a lot

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<v Speaker 1>of you know, merchant banking and private equity and hedge funds,

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<v Speaker 1>and when you you you start buying up all these

0:11:58.640 --> 0:12:02.120
<v Speaker 1>fintech companies and the shadow banking system is just sort

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<v Speaker 1>of owned or directly related to the regular banking industry.

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<v Speaker 1>So it's not like that there's no bright light there

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<v Speaker 1>at all, right line there at all between you know,

0:12:09.920 --> 0:12:12.320
<v Speaker 1>this banking and that banking. They're all the same. So

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<v Speaker 1>I don't think we're headed to a utility model in

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<v Speaker 1>the sense that I don't think the banks will voluntarily

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<v Speaker 1>become utilities. Whether regulations are going well, you know, my view,

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<v Speaker 1>my views that the regulation is unfocused. I'd like to

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<v Speaker 1>remove complicated regulation that doesn't bring as much as benefit

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<v Speaker 1>for the cost that on everybody that it takes, and

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<v Speaker 1>bring in straightforward regulation that's going to keep viable banks

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<v Speaker 1>kind of healthier and get rid of some unhealthy banks

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<v Speaker 1>that are just kind of trying to stay in And

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<v Speaker 1>in my view, I you know, the banks are showing

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<v Speaker 1>symptoms of kind of the way in solvent of highly

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<v Speaker 1>distressed companies behave. They just are able to stay that

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<v Speaker 1>way because I don't have the creditors to push to

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<v Speaker 1>sort of tell them that they're sick. So anyway, regulators,

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<v Speaker 1>unless they flex muscles and insist at the banking system's

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<v Speaker 1>got to be healthy and stable. We're going to continue

0:13:05.120 --> 0:13:08.679
<v Speaker 1>a man, a little long, a lot of body with

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<v Speaker 1>us of Stanford University, Bloomberg Surveillance this morning from Washington

0:13:13.520 --> 0:13:18.040
<v Speaker 1>and the offices of the International Monetary Fund their annual meetings,

0:13:18.160 --> 0:13:20.880
<v Speaker 1>and from New York, brought to you by Investco to

0:13:20.920 --> 0:13:24.200
<v Speaker 1>the day's headlines. Have you searching for more investment views?

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<v Speaker 1>Investcos high conviction portfolio managers can help find the latest

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<v Speaker 1>at the investco blog. Visit investco dot com slash us

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<v Speaker 1>to subscribe an a body give us an update on

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<v Speaker 1>almost some microeconomics of financial repression and the enthusiasm for

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<v Speaker 1>loan demand. I think there's a lot of ambiguities within

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<v Speaker 1>the certitude of the media and the coverage of this.

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<v Speaker 1>If we're financially repressed, we're gonna stay financially impressed. How

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<v Speaker 1>does that full back into the air almost spirit of

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<v Speaker 1>our middle loan? Well, when people need loans, if you

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<v Speaker 1>talk about micros, you know, foundations of all of this,

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<v Speaker 1>the question is what are they need a loan for?

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<v Speaker 1>And so you can get people too. You can dangle

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<v Speaker 1>alone in front of somebody and they might take it

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<v Speaker 1>and they can't pay it back. So we've seen a

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<v Speaker 1>lot of that in the UH sub prime, you know,

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<v Speaker 1>liar loans and all of that. So you know, demand

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<v Speaker 1>for loans is you know, there's sort of the good

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<v Speaker 1>demand for loans for productive things, for investing in you know,

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<v Speaker 1>good education, small businesses that will do stuff. If the

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<v Speaker 1>economy is not not working, then you don't have the

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<v Speaker 1>kind of good demand for loans. And then if you

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<v Speaker 1>have a lot of credit or credit boom, then it

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<v Speaker 1>doesn't end well usually. So you know, there is landing

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<v Speaker 1>and there's landing, there's credit and there's credit. I make

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<v Speaker 1>a distinction there. If it's very cheap to to borrow,

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<v Speaker 1>then maybe people will, but it's the it alone and

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<v Speaker 1>it still is money that that somebody gets today and

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<v Speaker 1>promises to pay later. We can't let you go without

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<v Speaker 1>asking you. Should you come from Stanford out in the

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<v Speaker 1>San Francisco Bay area about the San Francisco Bay areas,

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<v Speaker 1>Big Bank, wells Fargo. Uh, what happens next with it? Well,

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<v Speaker 1>what's interesting about What's Fargo is that among the numerous scandals,

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<v Speaker 1>this one resonates with people because it's a simple consumer

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<v Speaker 1>issue and so the magnitude of it is like people

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<v Speaker 1>are wowed. A lot of there were there have been

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<v Speaker 1>a lot of scandals here. You mentioned, you know, disclosures

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<v Speaker 1>of well of the bank, and every single day there

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<v Speaker 1>is something credits with now is still dealing with the

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<v Speaker 1>sec Well. This is interesting because it got a lot

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<v Speaker 1>of attention from a lot of stakeholders. For example, the

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<v Speaker 1>treasurer of my state's California has gotten piste off it

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<v Speaker 1>was Fargo and pulled aways business, which a few other

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<v Speaker 1>states treasurers have uh done. And so you ask yourself, Okay,

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<v Speaker 1>can the state of California do something about was Fargo?

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<v Speaker 1>And I think that there's some feeling in my state

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<v Speaker 1>that they want to do something about it, like you know,

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<v Speaker 1>putting a state law something or whatever. We'll have to

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<v Speaker 1>watch for that and unfortunately have to leave it here,

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<v Speaker 1>but come back again because it just seems like these

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<v Speaker 1>thanks stories never end. Keeps anat mighty employed, right, that's

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<v Speaker 1>professor at Stanford University. Thanks for joining us today here

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<v Speaker 1>on surveillance. This is Bloomberg