1 00:00:02,440 --> 00:00:15,720 Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News. 2 00:00:17,800 --> 00:00:21,160 Speaker 2: Hello and welcome to another episode of the Odd Thoughts podcast. 3 00:00:21,239 --> 00:00:22,680 Speaker 2: I'm Tracy Alloway. 4 00:00:22,400 --> 00:00:24,360 Speaker 3: And I'm Joe. Wasn't all Joe. 5 00:00:24,440 --> 00:00:27,600 Speaker 2: It is coming up to the one year anniversary of 6 00:00:27,720 --> 00:00:30,120 Speaker 2: last year's banking drama. I'm still not sure if we 7 00:00:30,120 --> 00:00:33,400 Speaker 2: can call it at crisis or not. Uh, it kind 8 00:00:33,400 --> 00:00:35,680 Speaker 2: of felt crisis at the time, but. 9 00:00:35,600 --> 00:00:37,880 Speaker 3: It went away so fast. You know what the funny 10 00:00:37,920 --> 00:00:40,919 Speaker 3: thing was, and I've mentioned it is it is that 11 00:00:41,080 --> 00:00:43,199 Speaker 3: cliche or I don't know a thing that people say 12 00:00:43,400 --> 00:00:45,760 Speaker 3: the FED is going to keep hiking rates until something breaks. 13 00:00:46,159 --> 00:00:48,600 Speaker 3: He's like, here's the break. It happened, and then it 14 00:00:48,680 --> 00:00:50,400 Speaker 3: was like a blip. It's like nothing. And then the 15 00:00:50,440 --> 00:00:52,760 Speaker 3: Fed kept hiking and stocks kept going up, and everyone 16 00:00:52,800 --> 00:00:55,280 Speaker 3: forgot about it. So it's kind of weird that something 17 00:00:55,360 --> 00:00:58,320 Speaker 3: that dramatic could happen and seemingly then just sort of 18 00:00:58,320 --> 00:00:59,680 Speaker 3: get forgotten about kind of quickly. 19 00:00:59,840 --> 00:01:03,000 Speaker 2: Well, one of the most dramatic things that happened out 20 00:01:03,040 --> 00:01:05,080 Speaker 2: of all of that, I thought, was when they basically 21 00:01:05,160 --> 00:01:10,160 Speaker 2: just guaranteed everyone's deposits, right, So we know at this 22 00:01:10,280 --> 00:01:12,600 Speaker 2: point that you are supposed to have up to two 23 00:01:12,680 --> 00:01:16,360 Speaker 2: hundred and fifty thousand dollars of your deposits at any 24 00:01:16,400 --> 00:01:21,320 Speaker 2: bank or any bank that's FDIC guaranteed. Basically those are safe. 25 00:01:21,319 --> 00:01:23,960 Speaker 2: If the bank goes under, you get that money back. 26 00:01:24,360 --> 00:01:27,119 Speaker 2: But then we saw that Silicon Valley Bank went under 27 00:01:27,319 --> 00:01:30,240 Speaker 2: and people had more than two hundred and fifty thousand 28 00:01:30,240 --> 00:01:34,399 Speaker 2: dollars in their accounts and they got bailed out, which 29 00:01:34,400 --> 00:01:36,880 Speaker 2: is kind of phenomenal. I don't think we talk about 30 00:01:36,880 --> 00:01:39,920 Speaker 2: the deposit guarantee the aspect of that whole thing enough. 31 00:01:40,040 --> 00:01:42,400 Speaker 3: We talked about it at the time, and I think 32 00:01:42,440 --> 00:01:44,880 Speaker 3: this was the interesting thing, and you're right, this is 33 00:01:44,920 --> 00:01:47,600 Speaker 3: the sort of the bigger thing that has been swipped 34 00:01:47,640 --> 00:01:50,400 Speaker 3: under the rug, which is if all deposits and all 35 00:01:50,560 --> 00:01:54,360 Speaker 3: US banks are implicitly federally backed, then do we need 36 00:01:54,400 --> 00:01:57,360 Speaker 3: to rethink the business of banking? If this huge source 37 00:01:57,400 --> 00:02:00,280 Speaker 3: of finance, if it's all guaranteed in the end, then 38 00:02:00,320 --> 00:02:02,880 Speaker 3: it's like, why do we allow these banks to operate 39 00:02:02,880 --> 00:02:05,360 Speaker 3: as there? That was a big question. We talked about 40 00:02:05,360 --> 00:02:08,640 Speaker 3: it in March and April and May, and that's still unresolved. 41 00:02:08,639 --> 00:02:10,720 Speaker 3: But people have really moved on from that question. But 42 00:02:10,760 --> 00:02:12,560 Speaker 3: it really is fundamental. 43 00:02:12,200 --> 00:02:12,800 Speaker 4: Not us. 44 00:02:12,919 --> 00:02:15,799 Speaker 2: We are still living in spring of twenty twenty three, 45 00:02:15,960 --> 00:02:18,160 Speaker 2: so I'm very pleased to say we do, in fact 46 00:02:18,320 --> 00:02:21,160 Speaker 2: have the perfect guest to discuss this. You might remember 47 00:02:21,200 --> 00:02:24,040 Speaker 2: we spoke with Stephen Kelly a couple weeks ago about 48 00:02:24,040 --> 00:02:27,799 Speaker 2: how the way we're bailing out banks or supporting them 49 00:02:27,840 --> 00:02:31,760 Speaker 2: with various liquidity facilities is changing. In this episode, we 50 00:02:31,800 --> 00:02:33,840 Speaker 2: are going to be focusing on getting to a point 51 00:02:33,880 --> 00:02:36,920 Speaker 2: where you don't actually have to bail out the banks. 52 00:02:37,160 --> 00:02:40,079 Speaker 2: Let's just avoid this problem altogether. And I'm very pleased 53 00:02:40,080 --> 00:02:42,920 Speaker 2: to say with us now we have a not at Madie. 54 00:02:43,080 --> 00:02:45,800 Speaker 2: She is, of course an economist and professor at the 55 00:02:45,919 --> 00:02:50,399 Speaker 2: Stanford Graduate School of Business. She has written prolifically on 56 00:02:50,440 --> 00:02:53,160 Speaker 2: this topic for at least as long as I can 57 00:02:53,240 --> 00:02:55,679 Speaker 2: remember at this point, certainly since the two thousand and 58 00:02:55,720 --> 00:02:58,919 Speaker 2: eight financial crisis. And thank you so much for coming 59 00:02:58,919 --> 00:02:59,320 Speaker 2: on all. 60 00:02:59,240 --> 00:03:00,920 Speaker 4: Thoughts, Thank you so much for having me. 61 00:03:01,520 --> 00:03:04,280 Speaker 2: You know, we needled Stephen a little bit when he 62 00:03:04,440 --> 00:03:07,920 Speaker 2: was on the show by just throwing out the yes. 63 00:03:08,280 --> 00:03:11,360 Speaker 2: So I'm going to do the equivalent for you and say, 64 00:03:12,240 --> 00:03:13,799 Speaker 2: how do banks hold capital? 65 00:03:15,200 --> 00:03:18,880 Speaker 4: Oh my god, that word is a trigger because because 66 00:03:19,160 --> 00:03:21,639 Speaker 4: that word leads to so much confusion. So I'm glad 67 00:03:21,639 --> 00:03:24,800 Speaker 4: you started with that. A senator would say it's money 68 00:03:24,800 --> 00:03:29,359 Speaker 4: on the sideline. Newspaper articles explain it as cash like asset, 69 00:03:30,680 --> 00:03:34,000 Speaker 4: and it's not true. What we're talking about this hold 70 00:03:34,080 --> 00:03:37,560 Speaker 4: capital is not something that actually the banks hold. It's 71 00:03:37,600 --> 00:03:40,400 Speaker 4: something that investors hold. In fact, what they do hold 72 00:03:40,720 --> 00:03:42,760 Speaker 4: is those reserves in the Central Bank on which they 73 00:03:42,800 --> 00:03:45,640 Speaker 4: get five point four percent. That's what they hold. That's 74 00:03:45,640 --> 00:03:48,880 Speaker 4: what's out of the economy set aside. What we're talking 75 00:03:48,920 --> 00:03:52,280 Speaker 4: about is just like deposits. On the funding side, we're 76 00:03:52,320 --> 00:03:56,240 Speaker 4: talking about equity funding for banks, an amazing idea in 77 00:03:56,320 --> 00:03:58,920 Speaker 4: banking that you would actually need any of it. And 78 00:03:59,000 --> 00:04:03,080 Speaker 4: guess what they live like no corporation lives, and no 79 00:04:03,200 --> 00:04:07,040 Speaker 4: corporation needs to live. But they're there because you know, 80 00:04:07,240 --> 00:04:09,720 Speaker 4: I have a lot of research on leverage and leverage addiction, 81 00:04:10,080 --> 00:04:13,240 Speaker 4: and it's just there at the point of such heavy 82 00:04:13,280 --> 00:04:15,960 Speaker 4: indebtedness that they hate coming out. 83 00:04:16,200 --> 00:04:19,680 Speaker 3: So when people think banks need to have more capital 84 00:04:19,760 --> 00:04:22,560 Speaker 3: or hold more capital, in their mind, what they hear is, well, 85 00:04:22,640 --> 00:04:24,880 Speaker 3: banks just need to have more cash set aside. 86 00:04:25,520 --> 00:04:26,200 Speaker 4: That's what they say. 87 00:04:26,320 --> 00:04:29,520 Speaker 3: But in the actual people who understand bank the idea 88 00:04:29,560 --> 00:04:32,599 Speaker 3: of having more capital means that more of their funding 89 00:04:32,640 --> 00:04:34,200 Speaker 3: needs to come from equity exactly. 90 00:04:34,240 --> 00:04:36,160 Speaker 4: So it's all about whether you get your money by 91 00:04:36,200 --> 00:04:40,400 Speaker 4: promising to pay back or not and your equity investors. 92 00:04:40,480 --> 00:04:42,560 Speaker 4: I mean, I come from Silicon Valley, so you know 93 00:04:42,640 --> 00:04:45,440 Speaker 4: who needs to borrow to have a thriving business. Lots 94 00:04:45,480 --> 00:04:48,600 Speaker 4: of companies don't pay dividends, just grow and grow and 95 00:04:48,640 --> 00:04:51,160 Speaker 4: grow and market value. And you know you don't need 96 00:04:51,200 --> 00:04:53,880 Speaker 4: to borrow as much. And in banking, if you just say, hey, 97 00:04:54,240 --> 00:04:57,279 Speaker 4: why don't you do something good with your earnings, such 98 00:04:57,279 --> 00:05:00,479 Speaker 4: as you know, make loans instead, they're I want to 99 00:05:00,480 --> 00:05:03,279 Speaker 4: take the money out, and they will threaten not to 100 00:05:03,320 --> 00:05:07,040 Speaker 4: make a loan in the ridiculous campaign they're making right 101 00:05:07,080 --> 00:05:11,520 Speaker 4: now about this buzzle endgame, where in fact, what they're displaying, 102 00:05:11,640 --> 00:05:13,599 Speaker 4: and I like to talk about it that way, is 103 00:05:13,760 --> 00:05:18,599 Speaker 4: every single symptom of extraordinary overhang or even insolvency at 104 00:05:18,640 --> 00:05:22,039 Speaker 4: all times. In other words, these are the classic zombie 105 00:05:22,240 --> 00:05:25,240 Speaker 4: symptoms that in another sector would lead you to a 106 00:05:25,560 --> 00:05:28,240 Speaker 4: fraudulent conveyance in bankruptcy or something. You know that you're 107 00:05:28,240 --> 00:05:30,920 Speaker 4: taking the money out, that you're always taking a risk. 108 00:05:31,080 --> 00:05:33,520 Speaker 2: Maybe that's a good point to back up a little 109 00:05:33,520 --> 00:05:38,320 Speaker 2: bit and talk about how you understand the banking business, 110 00:05:38,440 --> 00:05:40,880 Speaker 2: because a lot of people will hear a statement like, oh, 111 00:05:41,000 --> 00:05:44,080 Speaker 2: banks should hold more equity, they should have less leverage, 112 00:05:44,200 --> 00:05:47,320 Speaker 2: and they would think, well, that's what a bank is. 113 00:05:47,440 --> 00:05:50,040 Speaker 2: You borrow and then you leverage a business. Right, it's 114 00:05:50,040 --> 00:05:52,559 Speaker 2: a leverage business. So like, what exactly are we talking 115 00:05:52,560 --> 00:05:54,760 Speaker 2: about if it doesn't look like that. 116 00:05:54,920 --> 00:05:58,280 Speaker 4: Okay, So banks are leverage business in the sense if 117 00:05:58,279 --> 00:06:01,600 Speaker 4: we start from the basics that deposits put them in 118 00:06:01,640 --> 00:06:03,880 Speaker 4: a leverage position right away. So by the time you 119 00:06:03,880 --> 00:06:06,320 Speaker 4: take the positis, if we're talking about the posit taking banks, 120 00:06:06,839 --> 00:06:10,720 Speaker 4: they already start with that, unlike a company, like in 121 00:06:10,760 --> 00:06:12,720 Speaker 4: a corporate finance course, where we stuck with their own 122 00:06:12,760 --> 00:06:15,719 Speaker 4: equity firm as a kind of a starting point where 123 00:06:15,760 --> 00:06:17,479 Speaker 4: you're kind of investing your own money or your own 124 00:06:17,480 --> 00:06:21,800 Speaker 4: shareholders money. So now you're already in an area in 125 00:06:21,839 --> 00:06:25,120 Speaker 4: which the people managing the bank, so the extent or not, 126 00:06:25,160 --> 00:06:28,440 Speaker 4: depositors are immediately conflicted with depositors over how much equity 127 00:06:28,440 --> 00:06:30,440 Speaker 4: they would have, how much risk they would take. Because 128 00:06:30,440 --> 00:06:33,480 Speaker 4: of the fact that the positors, ultimately if the bank 129 00:06:33,520 --> 00:06:35,880 Speaker 4: defaults or if the bank goes into resolution or whatever, 130 00:06:36,240 --> 00:06:38,440 Speaker 4: you know, they might get paid or not, but the 131 00:06:38,520 --> 00:06:41,800 Speaker 4: bank walked away with the upside in any case. So 132 00:06:42,000 --> 00:06:45,359 Speaker 4: from that point on, the banks hate equity. The bank 133 00:06:45,480 --> 00:06:49,320 Speaker 4: er hates equity. So any leveraged equity holder has a 134 00:06:49,400 --> 00:06:52,560 Speaker 4: resistance to leverage reduction. That's a pervasive phenomenon. And in fact, 135 00:06:52,560 --> 00:06:54,919 Speaker 4: if you let them adjust leverage just once, it's not 136 00:06:54,960 --> 00:06:57,760 Speaker 4: like we go to an optimal capital structure. Always up, 137 00:06:57,960 --> 00:07:02,479 Speaker 4: always up. So that's the addictiveness of boring. Now, what's 138 00:07:02,520 --> 00:07:06,000 Speaker 4: the business of bank There isn't a basic conservation in 139 00:07:06,040 --> 00:07:09,400 Speaker 4: the world. It's not an irrelevancy. It's not that it's irrelevant, 140 00:07:09,480 --> 00:07:12,360 Speaker 4: it's just relevant in different ways to society and to 141 00:07:12,400 --> 00:07:15,720 Speaker 4: the banker. The banker hates equity. From their perspective, any 142 00:07:15,760 --> 00:07:19,680 Speaker 4: bit of it, you know, is too much. From society's perspective, 143 00:07:20,040 --> 00:07:24,760 Speaker 4: having a huge more equity funding is only good and 144 00:07:24,800 --> 00:07:27,119 Speaker 4: not bad. And in fifteen years of asking the question, 145 00:07:27,520 --> 00:07:30,000 Speaker 4: why are we even here? Why do they have single 146 00:07:30,040 --> 00:07:31,960 Speaker 4: digit you know, depending on all their risk or its, 147 00:07:31,960 --> 00:07:34,600 Speaker 4: we can get into that. Why are we here? You know, 148 00:07:34,640 --> 00:07:37,440 Speaker 4: they didn't in the history of banking, and certainly relative 149 00:07:37,480 --> 00:07:39,720 Speaker 4: to other corporations that are not regulated for leverage. Even 150 00:07:39,760 --> 00:07:42,280 Speaker 4: though we subsidize that in the tax code, you don't 151 00:07:42,320 --> 00:07:44,640 Speaker 4: see corporations like that. How do they ever get away 152 00:07:44,680 --> 00:07:47,920 Speaker 4: with that? Oh? How they get away with it is 153 00:07:48,400 --> 00:07:51,120 Speaker 4: the safety nets all these bailouts all the time and 154 00:07:51,160 --> 00:07:53,160 Speaker 4: place it an explicity. And that's really it, because the 155 00:07:53,200 --> 00:07:56,520 Speaker 4: conservation physics of finance that I'm talking about, of physics 156 00:07:56,520 --> 00:08:00,160 Speaker 4: of money is there is risk to be born and 157 00:08:00,280 --> 00:08:03,320 Speaker 4: taxes to be paid, and if you bear less of it, 158 00:08:03,400 --> 00:08:05,520 Speaker 4: somebody else bears more of it. If you pay less 159 00:08:05,520 --> 00:08:07,520 Speaker 4: of it, somebody else pays more of it. So the 160 00:08:07,560 --> 00:08:11,160 Speaker 4: whole thing we're talking about is whether banks are subsidized 161 00:08:11,440 --> 00:08:14,360 Speaker 4: to be leveraged, not just want to be leveraged, but 162 00:08:14,640 --> 00:08:18,520 Speaker 4: encouraged to be leveraged by the system of taxes and subsidence. 163 00:08:19,040 --> 00:08:22,160 Speaker 4: And therefore they're telling us that they should be getting 164 00:08:22,200 --> 00:08:25,320 Speaker 4: all these subsidies blanket to their funding and then they'll 165 00:08:25,360 --> 00:08:26,280 Speaker 4: do something good with it. 166 00:08:26,440 --> 00:08:31,160 Speaker 3: So sometimes bailouts are explicit, like such as what we 167 00:08:31,240 --> 00:08:33,240 Speaker 3: saw in two and eight, two thousand and nine with 168 00:08:33,440 --> 00:08:36,760 Speaker 3: TARP and various programs. Sometimes I guess they're sort of 169 00:08:36,800 --> 00:08:39,520 Speaker 3: implicit or the idea that well, we just sort of 170 00:08:39,559 --> 00:08:42,960 Speaker 3: expect that something like that will come. What else, other 171 00:08:43,080 --> 00:08:46,880 Speaker 3: than what we call bailouts, you say, through taxes, et cetera. 172 00:08:46,960 --> 00:08:51,000 Speaker 3: What else encourages the demand for further leverage or the 173 00:08:51,040 --> 00:08:54,559 Speaker 3: prioritization of debt financing versus equity financing. 174 00:08:54,679 --> 00:08:57,520 Speaker 4: It's the compensation of the bankers. It's any this fixation 175 00:08:57,640 --> 00:09:01,040 Speaker 4: with return on equity, which is only return on the upside, 176 00:09:01,080 --> 00:09:03,480 Speaker 4: because on the downslide, when you have less leverage, you're protected, 177 00:09:03,520 --> 00:09:06,320 Speaker 4: you're less negative. So if your actual realize returns are 178 00:09:06,360 --> 00:09:08,040 Speaker 4: below your funding costs. 179 00:09:07,880 --> 00:09:10,600 Speaker 3: Where does the fixation of return on equity come from? 180 00:09:10,679 --> 00:09:13,280 Speaker 4: That? You know, I think that it's a proxy for subsidies. 181 00:09:13,360 --> 00:09:16,120 Speaker 4: I think it basically means that if you compensate somebody 182 00:09:16,559 --> 00:09:19,800 Speaker 4: based on return on equity metrics where you know it's 183 00:09:19,840 --> 00:09:23,200 Speaker 4: always on the upside where its juices up returns, then 184 00:09:23,440 --> 00:09:26,800 Speaker 4: by doing that, by going after the return on equity, 185 00:09:27,280 --> 00:09:30,920 Speaker 4: they are basically doing what you know, maybe sharelders one 186 00:09:31,040 --> 00:09:33,760 Speaker 4: to some extent, but certainly works well for the bankers, 187 00:09:34,640 --> 00:09:37,160 Speaker 4: which is to maximize the subsidy, to maximize the leverage, 188 00:09:37,200 --> 00:09:41,280 Speaker 4: because through the leverage you get more subsidies. That's part 189 00:09:41,320 --> 00:09:44,000 Speaker 4: of that. The bailouts, by the way, is a really 190 00:09:44,240 --> 00:09:47,480 Speaker 4: complicated system, and you even touched on the flobs on 191 00:09:47,520 --> 00:09:50,520 Speaker 4: the federal home loan banks. It's basically an interlocking set 192 00:09:50,520 --> 00:09:55,280 Speaker 4: of institutions that are either providing guarantees or investing lending. 193 00:09:55,559 --> 00:09:57,959 Speaker 4: So it's either the central banks that would make these 194 00:09:57,960 --> 00:10:00,840 Speaker 4: excessive loans that we should get into the bank lending 195 00:10:00,840 --> 00:10:04,480 Speaker 4: programs and at the same time, you know, giving for 196 00:10:04,559 --> 00:10:08,640 Speaker 4: a while higher interest on reserves, which is crazy, as 197 00:10:08,640 --> 00:10:11,800 Speaker 4: well as the FDIC, which has started guaranteeing all deposits 198 00:10:12,080 --> 00:10:16,480 Speaker 4: with extraordinarly dangerous situation and sometimes guaranteeing other debt. After 199 00:10:16,480 --> 00:10:20,360 Speaker 4: the financial crisis, they let even newly created bank holding 200 00:10:20,360 --> 00:10:23,120 Speaker 4: companies that were investment banks the previous day, like Goldman 201 00:10:23,160 --> 00:10:26,800 Speaker 4: Sachs and Morgan Stanley guarantees on all debt. Now, of 202 00:10:26,840 --> 00:10:30,160 Speaker 4: course they could go and raise money from investors guaranteed 203 00:10:30,200 --> 00:10:34,040 Speaker 4: by the FDIC, which they can do cheaply, no strings attached, 204 00:10:34,080 --> 00:10:37,160 Speaker 4: and return the top money the Treasury gave them with 205 00:10:37,559 --> 00:10:41,240 Speaker 4: tiny bit of strengths attached. So it's basically a system 206 00:10:41,320 --> 00:10:44,920 Speaker 4: between the FED, the FDIC and Treasury and fhlbs where 207 00:10:45,160 --> 00:10:47,880 Speaker 4: there are sort of investments made in the so basically 208 00:10:47,960 --> 00:10:50,520 Speaker 4: the prevention of default, that's a bailout. The third party 209 00:10:50,559 --> 00:10:53,559 Speaker 4: comes in. You made a promise and somebody comes in 210 00:10:53,600 --> 00:10:55,800 Speaker 4: and swoops in and prevents your default. 211 00:10:56,400 --> 00:10:59,200 Speaker 2: I want to talk a little bit more specifically about 212 00:10:59,240 --> 00:11:01,640 Speaker 2: the events of last year, because I think they're a 213 00:11:01,679 --> 00:11:03,880 Speaker 2: good prism to view some of the things you were 214 00:11:03,880 --> 00:11:06,720 Speaker 2: talking about through. But one of the interesting things is 215 00:11:07,080 --> 00:11:10,199 Speaker 2: Silicon Valley Bank got in trouble. I don't want to 216 00:11:10,240 --> 00:11:13,480 Speaker 2: say for doing the right thing, but they did go 217 00:11:13,600 --> 00:11:16,400 Speaker 2: out into the market and say we're raising equity, and 218 00:11:16,960 --> 00:11:19,280 Speaker 2: as you put it, you know, there's a reason why 219 00:11:19,320 --> 00:11:21,880 Speaker 2: banks typically don't like to do that. 220 00:11:22,360 --> 00:11:24,520 Speaker 4: So this is a great question, and it's a great 221 00:11:24,520 --> 00:11:27,160 Speaker 4: way in fact to see what I'm saying. So what 222 00:11:27,400 --> 00:11:31,239 Speaker 4: happens is they have definitions these days in the regulatory 223 00:11:31,240 --> 00:11:33,880 Speaker 4: community of what a well capitalized bank is. It just 224 00:11:33,920 --> 00:11:36,640 Speaker 4: so happened that both in the financial crisis and last 225 00:11:36,679 --> 00:11:40,839 Speaker 4: spring and now banks are considered well capitalized by a 226 00:11:40,880 --> 00:11:43,400 Speaker 4: lot of the banks that failed, including First Republic, got 227 00:11:43,520 --> 00:11:46,520 Speaker 4: great camel ratings just before they failed, so they can 228 00:11:46,559 --> 00:11:49,160 Speaker 4: say it's well capitalized. Now, why is that because the 229 00:11:49,320 --> 00:11:53,199 Speaker 4: metrics are so bad, and the metrics include not recognizing 230 00:11:53,200 --> 00:11:56,680 Speaker 4: fair market value on hultimaturity assets. So the bank is 231 00:11:56,720 --> 00:11:59,680 Speaker 4: pretending to have these assets that they bought at power 232 00:11:59,720 --> 00:12:02,840 Speaker 4: value even though they're losing value like treasuries. In addition, 233 00:12:03,120 --> 00:12:06,200 Speaker 4: capital ratios depend on risk weights, and the risk weights 234 00:12:06,200 --> 00:12:09,960 Speaker 4: ignore interest rate risk entirely, only credit risk. So a 235 00:12:10,000 --> 00:12:13,360 Speaker 4: treasury needs no equity backing. So even if you buy 236 00:12:13,360 --> 00:12:15,480 Speaker 4: you buy a treasury and you can do it, and 237 00:12:15,520 --> 00:12:18,120 Speaker 4: one hundred percent of deposit money, well, the treasury can 238 00:12:18,160 --> 00:12:21,079 Speaker 4: lose in value. What happened in Silicon Valley Bank was 239 00:12:21,120 --> 00:12:25,240 Speaker 4: the following in banking in general. You know, being a zombie, 240 00:12:25,280 --> 00:12:30,800 Speaker 4: being insolvent is Monday morning, Okay. What they're showing is 241 00:12:30,840 --> 00:12:34,280 Speaker 4: symptoms to a corporate doctor like myself is every day, 242 00:12:34,400 --> 00:12:37,400 Speaker 4: the symptoms of the more they hate equity with the 243 00:12:37,440 --> 00:12:39,920 Speaker 4: passion they hate equity, the more things they have way 244 00:12:39,960 --> 00:12:42,080 Speaker 4: too little of it. So that's that. Now, what happened 245 00:12:42,080 --> 00:12:45,040 Speaker 4: in Silicon Valley Bank two things. First of all, they 246 00:12:45,040 --> 00:12:47,480 Speaker 4: had to sell some assets, so this whole two maturity 247 00:12:47,559 --> 00:12:50,160 Speaker 4: might not actually work out for you, and the assets 248 00:12:50,160 --> 00:12:52,400 Speaker 4: are worth less as you have to pay more on deposits. 249 00:12:52,440 --> 00:12:54,680 Speaker 4: The assets are worth less because their long term have 250 00:12:54,800 --> 00:12:57,920 Speaker 4: big duration risks, and interest rates went down, so when 251 00:12:57,960 --> 00:13:00,679 Speaker 4: they sold, they had to realize the losses. Sudden accounting 252 00:13:00,720 --> 00:13:03,160 Speaker 4: rules that usually can allow you to hide the losses 253 00:13:03,520 --> 00:13:05,920 Speaker 4: are forcing you to recognize the losses. So that was 254 00:13:05,920 --> 00:13:09,800 Speaker 4: the first thing. Then basically, how would they survive. They 255 00:13:09,920 --> 00:13:14,439 Speaker 4: were beginning to be more obviously more visibly insolvent. So 256 00:13:14,480 --> 00:13:16,680 Speaker 4: the next thing that happens is they try to raise equity, 257 00:13:16,720 --> 00:13:19,199 Speaker 4: as you said, and they couldn't. Now, if you can 258 00:13:19,360 --> 00:13:21,720 Speaker 4: raise equity, if somebody not at the price you like, 259 00:13:21,800 --> 00:13:25,600 Speaker 4: but at the price a penny a dime for your equity, 260 00:13:25,720 --> 00:13:28,480 Speaker 4: then you might still be insolvent because there's only the upside. 261 00:13:28,520 --> 00:13:30,480 Speaker 4: It's just an option on the upside because you can 262 00:13:30,520 --> 00:13:33,600 Speaker 4: always walk away as equity. But if you cannot raise equity, 263 00:13:33,800 --> 00:13:36,600 Speaker 4: then you're really deep in the water. So they're not 264 00:13:36,679 --> 00:13:40,520 Speaker 4: raising equities like the ultimate nail in the coffin. In 265 00:13:40,559 --> 00:13:44,640 Speaker 4: other words, you're definitely sold. At that point, the run 266 00:13:44,800 --> 00:13:48,240 Speaker 4: was unavoidable because you know, of course, maybe by now 267 00:13:48,280 --> 00:13:51,720 Speaker 4: that they've guaranteed effectively everything, maybe people won't run. And 268 00:13:51,760 --> 00:13:54,360 Speaker 4: maybe we consider that kicking the can down the road 269 00:13:54,520 --> 00:13:57,560 Speaker 4: as a good financial stability measures. But that is extraordinary 270 00:13:57,679 --> 00:14:00,600 Speaker 4: dangerous because in the eighties we allowed all these zombie 271 00:14:00,600 --> 00:14:04,760 Speaker 4: savings and loans to persist and raise money guaranteed by 272 00:14:04,760 --> 00:14:07,360 Speaker 4: the taxpayers until you know, we have to pay for it. 273 00:14:22,360 --> 00:14:26,160 Speaker 3: One of the arguments obviously against higher capital ratios or 274 00:14:26,200 --> 00:14:28,320 Speaker 3: more equity is like, oh, this will be lead to 275 00:14:28,360 --> 00:14:30,560 Speaker 3: an austerity of credit, that banks won't be able to 276 00:14:30,600 --> 00:14:32,040 Speaker 3: do lending. And this is a big part of the 277 00:14:32,080 --> 00:14:34,320 Speaker 3: push again to some of these rules that there's going 278 00:14:34,400 --> 00:14:37,160 Speaker 3: to be less lending, etcetera. Why is that wrong? Interview? 279 00:14:37,520 --> 00:14:40,600 Speaker 4: Well, first of all, they can make any loan. My 280 00:14:40,760 --> 00:14:44,560 Speaker 4: first measure and my first emergency measure since the financial crisis, 281 00:14:44,600 --> 00:14:47,360 Speaker 4: and you know I said this with twenty academics and 282 00:14:47,400 --> 00:14:50,800 Speaker 4: lots of people is to retain them earnings and use 283 00:14:50,840 --> 00:14:53,000 Speaker 4: them for loans. So what's the problem now? So I've 284 00:14:53,040 --> 00:14:55,360 Speaker 4: been asking for fifteen years, tell me again what would 285 00:14:55,360 --> 00:14:58,000 Speaker 4: go wrong if they retain their earnings? Just go take 286 00:14:58,040 --> 00:15:00,480 Speaker 4: me through an argument and economic argument of how the 287 00:15:00,520 --> 00:15:04,040 Speaker 4: economy would suffer. In other words, is their subsidies so 288 00:15:04,160 --> 00:15:07,920 Speaker 4: big that God forbid, you know, they'll die? You know, 289 00:15:08,080 --> 00:15:10,880 Speaker 4: if they'll die, you know, or they can't survive. I 290 00:15:11,000 --> 00:15:13,720 Speaker 4: question their business model. If the busy, if the entire 291 00:15:13,920 --> 00:15:17,240 Speaker 4: charter value that you like to talk about subsidies, then 292 00:15:17,280 --> 00:15:19,640 Speaker 4: we have to question the business model. Just you started 293 00:15:20,160 --> 00:15:22,880 Speaker 4: by saying, so my point is the following. If you 294 00:15:23,000 --> 00:15:26,240 Speaker 4: tell them not a ratio, Actually I am against giving 295 00:15:26,280 --> 00:15:28,480 Speaker 4: them ratios from where we are right now. You take 296 00:15:28,520 --> 00:15:31,800 Speaker 4: them by the hand through issuance and retentions, because then 297 00:15:32,040 --> 00:15:35,240 Speaker 4: they won't shrink inefficiently. Because a paper I wrote called 298 00:15:35,320 --> 00:15:38,760 Speaker 4: leverg Bratchet actually shows the ways of deleveraging, and we 299 00:15:38,920 --> 00:15:42,040 Speaker 4: show that there is a tendency to level as it 300 00:15:42,120 --> 00:15:45,280 Speaker 4: saves or stopping to lend or whatever to through shrinkage 301 00:15:45,520 --> 00:15:49,160 Speaker 4: versus expansion. Well, I will expand. These are monstrous banks, 302 00:15:49,360 --> 00:15:51,920 Speaker 4: which I'm saying to expand only because I believe that 303 00:15:52,000 --> 00:15:54,720 Speaker 4: once they live in markets, once they're in equity markets, 304 00:15:55,160 --> 00:15:58,040 Speaker 4: they will break up on their own inefficient weight, because 305 00:15:58,080 --> 00:16:01,760 Speaker 4: as conglomerates broke up in the AD, because we don't 306 00:16:01,840 --> 00:16:05,520 Speaker 4: need such complicated institutions. I was, you know, back in 307 00:16:05,600 --> 00:16:09,080 Speaker 4: doubles in twenty fourteen with Paul Singer of Everybody, and 308 00:16:09,120 --> 00:16:12,360 Speaker 4: he says these are two opake. I cannot put my 309 00:16:12,400 --> 00:16:15,520 Speaker 4: analysts on it and understand their risk. They would not 310 00:16:15,840 --> 00:16:18,680 Speaker 4: exist in market as they are right now. Once you 311 00:16:18,760 --> 00:16:20,960 Speaker 4: push them more and more into equity markets, it's equity 312 00:16:21,000 --> 00:16:23,880 Speaker 4: marketer will give them the stress test. That's my stress test. 313 00:16:24,240 --> 00:16:27,040 Speaker 4: My stress test is raised equity. Let's see at what price? 314 00:16:27,320 --> 00:16:30,000 Speaker 4: What will investors say when they have to bear the downside? 315 00:16:30,040 --> 00:16:30,080 Speaker 2: Is? 316 00:16:30,120 --> 00:16:32,160 Speaker 4: Where is the upside? If you don't like that price, 317 00:16:32,200 --> 00:16:33,440 Speaker 4: maybe that's telling us something. 318 00:16:34,680 --> 00:16:37,480 Speaker 2: Since you mentioned twenty fourteen, I think that was the 319 00:16:37,600 --> 00:16:40,280 Speaker 2: year when there was a New York Times profile about you, 320 00:16:40,320 --> 00:16:44,080 Speaker 2: and I cannot remember the exact headline, but why is 321 00:16:44,120 --> 00:16:45,440 Speaker 2: it in? 322 00:16:45,480 --> 00:16:47,560 Speaker 4: This said? The whole story behind it, which I won't 323 00:16:47,600 --> 00:16:48,920 Speaker 4: tell you all of it, but it was by ben 324 00:16:48,960 --> 00:16:51,520 Speaker 4: in Minneapplebaum, who used to be a feder reporter who 325 00:16:51,520 --> 00:16:54,240 Speaker 4: I first met when he was a federal reporter, and 326 00:16:54,240 --> 00:16:56,400 Speaker 4: I won't go through all the details, but when he 327 00:16:56,520 --> 00:16:59,480 Speaker 4: ended up writing the profile, it was entitled when she 328 00:16:59,600 --> 00:17:03,920 Speaker 4: talks banks shutter Yeah, and what I say, So, I've 329 00:17:03,960 --> 00:17:07,639 Speaker 4: asked a few times about that with people who've noticed 330 00:17:07,640 --> 00:17:11,639 Speaker 4: the headline, and I say, oh, Jamie Damon slips like 331 00:17:11,640 --> 00:17:17,479 Speaker 4: a baby. In other words, the headline is cute but false. 332 00:17:19,160 --> 00:17:21,479 Speaker 2: But this leads into something I wanted to ask you. 333 00:17:21,520 --> 00:17:24,040 Speaker 2: And I'm trying to think how to phrase this question 334 00:17:24,200 --> 00:17:29,239 Speaker 2: without sounding hokey. But you know, you've been criticizing the 335 00:17:29,280 --> 00:17:31,280 Speaker 2: banks and the regulators, models. 336 00:17:31,000 --> 00:17:33,800 Speaker 4: And the regulators, especially for the banks do what they 337 00:17:33,800 --> 00:17:34,440 Speaker 4: get away with. 338 00:17:34,440 --> 00:17:37,560 Speaker 2: Yeah, for decades now, basically, and I guess it I 339 00:17:37,640 --> 00:17:40,520 Speaker 2: have yet what motivates you to do this? 340 00:17:40,680 --> 00:17:42,879 Speaker 4: Oh? Good, Such a good question because I often wonder 341 00:17:42,920 --> 00:17:48,520 Speaker 4: that myself. Okay, so what motivated me in the beginning 342 00:17:48,720 --> 00:17:50,240 Speaker 4: was you know, I sort of fell in a rabbit 343 00:17:50,280 --> 00:17:51,920 Speaker 4: hole when I started looking into banking. I'm not just 344 00:17:51,960 --> 00:17:54,159 Speaker 4: a corporate finance corporate governance person. And I look at 345 00:17:54,200 --> 00:17:57,439 Speaker 4: those corporations which I was teaching my students for you know, 346 00:17:57,480 --> 00:18:00,320 Speaker 4: twenty five years, what a wonderful market we have, and 347 00:18:00,359 --> 00:18:02,640 Speaker 4: all of a sudden that market like what just happened? 348 00:18:02,840 --> 00:18:04,160 Speaker 4: And then I look at them and I say, okay, 349 00:18:04,200 --> 00:18:06,960 Speaker 4: I understand about corporations. We don't talk specifically about banks 350 00:18:07,000 --> 00:18:10,320 Speaker 4: because that's something some other silo in economics, but if 351 00:18:10,320 --> 00:18:12,159 Speaker 4: I look at them as a corporate finance person, and 352 00:18:12,200 --> 00:18:14,440 Speaker 4: I say, what's the same and what's different about them, 353 00:18:14,760 --> 00:18:16,520 Speaker 4: And all of a sudden, what's different about them is 354 00:18:16,560 --> 00:18:19,000 Speaker 4: all bad. And what's different about them is what they 355 00:18:19,000 --> 00:18:22,880 Speaker 4: get away with more than anything, you know, the specialness 356 00:18:22,880 --> 00:18:25,280 Speaker 4: of banks is literally what they get away with. And 357 00:18:25,280 --> 00:18:28,520 Speaker 4: then the politics of banking, that's what's special. And then 358 00:18:28,680 --> 00:18:31,040 Speaker 4: I all of a sudden realized, you know, if nobody 359 00:18:31,119 --> 00:18:33,840 Speaker 4: understands what the word means, if the regulators are standing by, 360 00:18:34,359 --> 00:18:37,760 Speaker 4: if the politicians want banks to make some loans or 361 00:18:37,800 --> 00:18:42,240 Speaker 4: some campaign donations or whatever else, and nobody is exposing 362 00:18:42,280 --> 00:18:45,640 Speaker 4: the nonsense that we have in this space that pervades 363 00:18:45,720 --> 00:18:49,280 Speaker 4: this space, that maintains and enables this to continue. So 364 00:18:49,320 --> 00:18:53,800 Speaker 4: I was basically alarmed by people inside the FED that 365 00:18:54,320 --> 00:18:57,399 Speaker 4: terrible things are happening in Basil when they were negotiating 366 00:18:57,400 --> 00:19:01,720 Speaker 4: that agreement. And I was encouraged by people both inside 367 00:19:01,760 --> 00:19:03,720 Speaker 4: some places in the FED and in the Bank of 368 00:19:03,720 --> 00:19:05,760 Speaker 4: England at the time where I had most of my 369 00:19:05,840 --> 00:19:08,240 Speaker 4: friends at the time when Mervin King was there, to 370 00:19:08,320 --> 00:19:11,159 Speaker 4: get involved. And I truly didn't know what I was 371 00:19:11,200 --> 00:19:14,399 Speaker 4: getting into when I agreed to do this. I was 372 00:19:14,480 --> 00:19:16,320 Speaker 4: joking that I'm working for and the hell dying, you know, 373 00:19:16,400 --> 00:19:18,560 Speaker 4: that kind of thing. So he was at the Bank 374 00:19:18,600 --> 00:19:21,040 Speaker 4: of England at the time, and so was Mervin King, 375 00:19:21,320 --> 00:19:23,680 Speaker 4: who gave us a blurb for the book, and while 376 00:19:23,720 --> 00:19:26,560 Speaker 4: the governor of the bank. So there were big, fierce 377 00:19:26,760 --> 00:19:30,399 Speaker 4: battles at the time post financial crisis about the topic, 378 00:19:30,520 --> 00:19:33,320 Speaker 4: and I felt and I mobilized a lot of academics 379 00:19:33,359 --> 00:19:36,480 Speaker 4: to help me, but it was very difficult work. You 380 00:19:36,600 --> 00:19:39,480 Speaker 4: were at Financial Times at the time, Tracy, and getting 381 00:19:39,560 --> 00:19:43,280 Speaker 4: through even the opinion pages against bankers is impossible, and 382 00:19:43,320 --> 00:19:46,639 Speaker 4: that's the opinion pages now in the politics like forget it. 383 00:19:46,760 --> 00:19:50,080 Speaker 4: So I began to really see the politics something I 384 00:19:50,240 --> 00:19:52,679 Speaker 4: was not aware is so important in finance and how 385 00:19:52,720 --> 00:19:55,639 Speaker 4: much it plays in banking. So I stayed in this 386 00:19:55,880 --> 00:19:59,560 Speaker 4: debate just basically hating to be worn out more than anything, 387 00:20:00,480 --> 00:20:03,919 Speaker 4: just not wanting for them, with the resources that they have, 388 00:20:04,040 --> 00:20:05,960 Speaker 4: with the amount of lobbying and the amount of money 389 00:20:06,480 --> 00:20:10,320 Speaker 4: that they spend across the political system and the regulation 390 00:20:10,440 --> 00:20:13,159 Speaker 4: system and global institutions and all that, to kind of 391 00:20:13,160 --> 00:20:15,600 Speaker 4: give up because I felt a sense of duty basically 392 00:20:15,960 --> 00:20:19,080 Speaker 4: to society that I actually know something that's useful and 393 00:20:19,119 --> 00:20:21,320 Speaker 4: it's my job to say. But anyway, I worked on 394 00:20:21,400 --> 00:20:24,040 Speaker 4: it for five six years, and then I essentially wrote 395 00:20:24,080 --> 00:20:26,399 Speaker 4: a few essays that were kind of putting it to 396 00:20:26,520 --> 00:20:30,520 Speaker 4: bed around twenty fifteen sixteen, and that I'm back here 397 00:20:30,640 --> 00:20:33,440 Speaker 4: is kind of almost didn't happen. It was a decade 398 00:20:33,480 --> 00:20:34,800 Speaker 4: since the book was published. 399 00:20:34,800 --> 00:20:36,320 Speaker 2: This book, the book, by the way, I should have 400 00:20:36,359 --> 00:20:39,119 Speaker 2: said in the intro, it's the Banker's New Clothes, and 401 00:20:39,160 --> 00:20:41,000 Speaker 2: you have a new edition coming up exactly. 402 00:20:41,000 --> 00:20:43,399 Speaker 4: So the book edition just came out in January in 403 00:20:43,400 --> 00:20:48,760 Speaker 4: the US, and the book got fat because of because 404 00:20:48,800 --> 00:20:51,680 Speaker 4: we had to vamp a lot of stuff and take 405 00:20:51,720 --> 00:20:53,760 Speaker 4: a lot of stuff out of the editing floor to 406 00:20:53,840 --> 00:20:56,320 Speaker 4: explain more about central banks. So there are a few 407 00:20:56,359 --> 00:20:58,760 Speaker 4: expansions of the material. The book is called The Banker's 408 00:20:58,800 --> 00:21:00,520 Speaker 4: New Clothes. Was wrong with banking to do about it? 409 00:21:00,520 --> 00:21:04,720 Speaker 4: The Banker's New Clothes refers to flood claims. So that's 410 00:21:04,760 --> 00:21:07,520 Speaker 4: the list of which we now have forty four. But 411 00:21:07,680 --> 00:21:10,199 Speaker 4: somebody just pointed me out to an add that was 412 00:21:10,240 --> 00:21:14,600 Speaker 4: apparently in the football games, saying that grocery prices will 413 00:21:14,640 --> 00:21:17,000 Speaker 4: go up and their mother won't be able to buy 414 00:21:17,119 --> 00:21:19,120 Speaker 4: lollipop if you increase capital requirements. 415 00:21:19,200 --> 00:21:22,320 Speaker 3: So I take it just an increase in capital requirement 416 00:21:22,560 --> 00:21:25,480 Speaker 3: is probably in your view, necessary but not sufficient to 417 00:21:25,560 --> 00:21:26,359 Speaker 3: a stable financy. 418 00:21:26,359 --> 00:21:27,920 Speaker 4: It is the most no brainer thing. 419 00:21:28,040 --> 00:21:30,320 Speaker 3: But what is an actual you know, we sort of 420 00:21:30,400 --> 00:21:33,280 Speaker 3: tease Tracy said in the beginning, well, could we ever 421 00:21:33,320 --> 00:21:35,160 Speaker 3: have a world where we don't have to have bailouts? 422 00:21:35,160 --> 00:21:37,440 Speaker 3: And I'm kind of skeptical that that'll have? What would 423 00:21:37,520 --> 00:21:39,439 Speaker 3: what would it take? Or what is the what is 424 00:21:39,480 --> 00:21:40,760 Speaker 3: the basics of your prescription? 425 00:21:40,960 --> 00:21:43,320 Speaker 4: So the basics of our prescriptions and we go through 426 00:21:43,359 --> 00:21:46,480 Speaker 4: them extensively in the book. What to aim for, What 427 00:21:46,520 --> 00:21:48,639 Speaker 4: to watch for as you do this, you know, is 428 00:21:48,680 --> 00:21:52,760 Speaker 4: basically to maintain to aim at equity ratios that fluctuate 429 00:21:52,800 --> 00:21:56,479 Speaker 4: between twenty and thirty percent of total assets. It's important 430 00:21:56,480 --> 00:21:59,200 Speaker 4: because the risk weights are really the ones that reduce 431 00:21:59,240 --> 00:22:01,760 Speaker 4: their assets by like a half or more in our 432 00:22:02,080 --> 00:22:05,640 Speaker 4: gamed continuously and actually add to fragility because you give 433 00:22:05,720 --> 00:22:08,800 Speaker 4: zero weight to government bond, you give zero risk wed it. 434 00:22:08,800 --> 00:22:12,320 Speaker 4: They're actually anti lending the risk weights themselves. So that's 435 00:22:12,359 --> 00:22:14,480 Speaker 4: a whole other can of worms. But we're against the 436 00:22:14,560 --> 00:22:17,120 Speaker 4: risk weights, except maybe as a backup right now, it's 437 00:22:17,160 --> 00:22:19,760 Speaker 4: the leverage ratio that is a three percent or maybe 438 00:22:19,840 --> 00:22:23,520 Speaker 4: five percent ridiculous numbers that are missing a digit is 439 00:22:23,680 --> 00:22:26,280 Speaker 4: we're not there, We're not close to where we need 440 00:22:26,320 --> 00:22:29,200 Speaker 4: to be. And if people say the industry will shrink, 441 00:22:29,320 --> 00:22:32,080 Speaker 4: I say, fine, that's maybe a feature not a bug. 442 00:22:32,119 --> 00:22:34,840 Speaker 4: In other words, maybe the industry is two bloaded and 443 00:22:34,880 --> 00:22:35,800 Speaker 4: two big. 444 00:22:36,080 --> 00:22:37,719 Speaker 3: I mean, we talk about it on the show all 445 00:22:37,760 --> 00:22:39,679 Speaker 3: the time. What if it's not a matter of the 446 00:22:39,720 --> 00:22:45,040 Speaker 3: industry shrinking but migrating to what people call shadow Okay. 447 00:22:45,840 --> 00:22:47,920 Speaker 4: And the forty four flood claims, all of it is there. 448 00:22:47,960 --> 00:22:49,959 Speaker 4: You'll find the grab bag of them that they use. 449 00:22:50,080 --> 00:22:52,840 Speaker 4: So what sort of not just people a little bit 450 00:22:52,920 --> 00:22:55,400 Speaker 4: is the fact that all along two things are true 451 00:22:55,400 --> 00:22:58,560 Speaker 4: about the shadow banking system. Number One, institutions in the 452 00:22:58,560 --> 00:23:00,720 Speaker 4: shadow bankings that are not connected as much to the 453 00:23:01,359 --> 00:23:04,200 Speaker 4: or not as obviously to the safety net to those 454 00:23:04,240 --> 00:23:07,400 Speaker 4: bailout system actually fund with more equity. That was true 455 00:23:07,440 --> 00:23:09,440 Speaker 4: for reads, and that was true for like thirty percent 456 00:23:09,560 --> 00:23:12,200 Speaker 4: is common sometimes. And then now one colleague and a 457 00:23:12,200 --> 00:23:16,400 Speaker 4: few other people have a paper about mortgage lenders which 458 00:23:16,440 --> 00:23:19,679 Speaker 4: have to disclose some things in some states, and they 459 00:23:19,760 --> 00:23:23,399 Speaker 4: analyze it and they show that lenders for mortgages that 460 00:23:23,480 --> 00:23:26,000 Speaker 4: are not in the banking sector and are not regulated 461 00:23:26,119 --> 00:23:28,720 Speaker 4: like banks have twice as much equity as the banks, 462 00:23:28,760 --> 00:23:32,640 Speaker 4: So what's the problem lending with money that's raised however 463 00:23:32,800 --> 00:23:36,560 Speaker 4: in markets? So and then the second point about shadow 464 00:23:36,560 --> 00:23:38,760 Speaker 4: banking is most of the time, I mean, the ultimately 465 00:23:38,800 --> 00:23:41,359 Speaker 4: the first incarnation of a shadow bank is money market 466 00:23:41,400 --> 00:23:46,080 Speaker 4: fund right, So what ends up happening with shadow banking 467 00:23:46,200 --> 00:23:48,560 Speaker 4: is most of it if you follow the money, is 468 00:23:49,119 --> 00:23:53,320 Speaker 4: connected funded by et cetera, the banks in the end, 469 00:23:53,440 --> 00:23:55,879 Speaker 4: So when you follow the money, you'll find the safety 470 00:23:55,920 --> 00:23:58,959 Speaker 4: net someplace along the way. So money market funds are 471 00:23:59,000 --> 00:24:02,840 Speaker 4: just creating another leg of intermediation. And then they can 472 00:24:02,920 --> 00:24:05,520 Speaker 4: run on the banks, their investors can run on them, 473 00:24:05,720 --> 00:24:08,080 Speaker 4: and then we couldn't you know, we opened up this 474 00:24:08,160 --> 00:24:11,800 Speaker 4: bigot on them in COVID again because their reforms didn't work. 475 00:24:12,800 --> 00:24:16,040 Speaker 2: You mentioned the initial round of Basil rules sort of 476 00:24:16,119 --> 00:24:18,359 Speaker 2: posts two thousand and eight, and of course you've already 477 00:24:18,840 --> 00:24:21,480 Speaker 2: touched on this as well. But we do have another effort, 478 00:24:21,680 --> 00:24:25,200 Speaker 2: the Basil endgame proposal. Now, when we talked to Steve 479 00:24:25,280 --> 00:24:27,760 Speaker 2: Kelly about this, he was like, well, why even bother 480 00:24:27,880 --> 00:24:30,000 Speaker 2: talking about it, because like, for sure it's going to 481 00:24:30,119 --> 00:24:35,720 Speaker 2: change from its current proposed form, but maybe with that caveat, 482 00:24:35,760 --> 00:24:38,600 Speaker 2: can you talk a little bit about whether you think 483 00:24:38,680 --> 00:24:41,160 Speaker 2: that's a useful revision of the rules. 484 00:24:41,560 --> 00:24:45,919 Speaker 4: Well, I signed two comment letters on basil endgame and 485 00:24:45,960 --> 00:24:49,000 Speaker 4: one on the long term debt proposal, which also kind 486 00:24:49,040 --> 00:24:52,639 Speaker 4: of triggered me a lot. And I signed one letter 487 00:24:52,680 --> 00:24:55,159 Speaker 4: by thirty academics who are kind of you know, friends 488 00:24:55,160 --> 00:24:58,480 Speaker 4: of the FED supporting it, saying it's a step in 489 00:24:58,520 --> 00:25:00,560 Speaker 4: the right the right And then in my own letter 490 00:25:01,119 --> 00:25:04,119 Speaker 4: on it, to which I attached the previous version of 491 00:25:04,160 --> 00:25:07,679 Speaker 4: these forty four flood claims and other writings and testimonies 492 00:25:07,680 --> 00:25:10,600 Speaker 4: from the last fifteen years, I said, well, you know, 493 00:25:10,680 --> 00:25:14,040 Speaker 4: I hope it's not endgame, because we will come back 494 00:25:14,080 --> 00:25:17,439 Speaker 4: to it after another financial crisis, if not a bigger 495 00:25:17,520 --> 00:25:19,800 Speaker 4: you know, it has to be very spectacular because obviously 496 00:25:19,880 --> 00:25:23,719 Speaker 4: the last one didn't you know, affect it enough. In 497 00:25:23,760 --> 00:25:26,480 Speaker 4: other words, it's really depressing how they always have these 498 00:25:26,560 --> 00:25:29,920 Speaker 4: liquidity narratives and other things and focus on bailouts again 499 00:25:30,200 --> 00:25:32,920 Speaker 4: instead of actually going and you know, DoD Frank said 500 00:25:32,960 --> 00:25:37,000 Speaker 4: no more bailouts, and there's plenty of authority to do anything, 501 00:25:37,080 --> 00:25:40,720 Speaker 4: certainly to do even a lot more here both the provision, 502 00:25:41,119 --> 00:25:44,440 Speaker 4: which completely failed in this case, and on the target 503 00:25:44,560 --> 00:25:47,080 Speaker 4: numbers and on making them more meaningful, because they're still 504 00:25:47,119 --> 00:25:49,879 Speaker 4: not meaningful. So why are we talking about it? I 505 00:25:49,920 --> 00:25:53,040 Speaker 4: would say, yes, these are kind of useless. Are they good? 506 00:25:53,320 --> 00:25:56,080 Speaker 4: It depends how you enforce them. All of these rules 507 00:25:56,560 --> 00:25:58,600 Speaker 4: end up not you know, if you look just at 508 00:25:58,640 --> 00:26:00,760 Speaker 4: the radar that shows you these issues, you won't even 509 00:26:00,760 --> 00:26:03,200 Speaker 4: know there was a financial crisis. The banks that needed 510 00:26:03,200 --> 00:26:06,439 Speaker 4: the most bailout looked good all through the crisis, you know. 511 00:26:06,880 --> 00:26:09,640 Speaker 4: And that's a study that was also done after the crisis. 512 00:26:09,640 --> 00:26:13,159 Speaker 4: So the bottom line is, we don't like the metrics, 513 00:26:13,480 --> 00:26:16,600 Speaker 4: we don't like the numbers, the range of numbers. And 514 00:26:16,680 --> 00:26:19,320 Speaker 4: so I'm coming at it from completely the other side. 515 00:26:19,560 --> 00:26:23,119 Speaker 4: I'm saying this continues to be poorly designed and inadequate. 516 00:26:23,600 --> 00:26:26,800 Speaker 4: And in addition to this, I am not a hawk 517 00:26:26,880 --> 00:26:29,800 Speaker 4: or other regulations. It's just this one is just correcting 518 00:26:29,840 --> 00:26:33,040 Speaker 4: a huge distortion. It's only on the funding side. It's 519 00:26:33,119 --> 00:26:36,199 Speaker 4: liquidity regulations that put money on the sidelines. It's the 520 00:26:36,240 --> 00:26:39,440 Speaker 4: liquidity regulations that are costly in good times and useless 521 00:26:39,440 --> 00:26:42,240 Speaker 4: in Iran, you know. So that's the problem. So a 522 00:26:42,240 --> 00:26:46,720 Speaker 4: lot of living wills, complicated risk weits, stress tests like 523 00:26:46,840 --> 00:26:50,120 Speaker 4: ever my stress test market stress test. So I'm totally 524 00:26:50,359 --> 00:26:54,040 Speaker 4: into just bringing the funding into markets, and especially into 525 00:26:54,040 --> 00:26:57,840 Speaker 4: equity markets. Start with that and the rest might look 526 00:26:57,880 --> 00:26:58,680 Speaker 4: a little bit better. 527 00:27:14,200 --> 00:27:16,399 Speaker 2: So one of the things that comes up when talking 528 00:27:16,440 --> 00:27:19,840 Speaker 2: about the endgame proposal is the idea of you know, well, 529 00:27:20,040 --> 00:27:23,720 Speaker 2: poor Michael Barr needs to build consensus. He has to 530 00:27:23,760 --> 00:27:26,560 Speaker 2: talk to all these different stakeholders about like very technical 531 00:27:26,680 --> 00:27:29,560 Speaker 2: and complicated things. Can you give us a little bit 532 00:27:29,560 --> 00:27:33,520 Speaker 2: of color on your experience about how new banking rules 533 00:27:33,560 --> 00:27:35,560 Speaker 2: actually come into being. I'm always curious. 534 00:27:35,640 --> 00:27:38,119 Speaker 4: Oh, you know, the sausage making is amazing. So I 535 00:27:38,240 --> 00:27:40,199 Speaker 4: was actually in DC and I met a few of 536 00:27:40,200 --> 00:27:42,480 Speaker 4: the regulars, including Mike Barr. I think it's on his 537 00:27:42,560 --> 00:27:45,560 Speaker 4: official calendar, so I can tell you that. And yes, 538 00:27:45,600 --> 00:27:48,480 Speaker 4: and everybody was feeling very sorry for Michael Barr. I 539 00:27:48,680 --> 00:27:52,440 Speaker 4: of course was feeling frustrated that he, you know, didn't 540 00:27:52,480 --> 00:27:56,720 Speaker 4: speak more strongly. His first speech was okay, but afterwards, oh, 541 00:27:56,800 --> 00:27:59,840 Speaker 4: we'll change it, will change it whatever. So anyway, I mean, 542 00:27:59,880 --> 00:28:02,080 Speaker 4: I told him this to his face, you know, and 543 00:28:02,200 --> 00:28:05,920 Speaker 4: offered my help to argue against all these flood claims. 544 00:28:05,960 --> 00:28:08,639 Speaker 4: There's a manual of how to respond to all these. 545 00:28:08,960 --> 00:28:11,880 Speaker 4: So here's the interesting things for monitory policy. The FED 546 00:28:12,040 --> 00:28:15,879 Speaker 4: Board is always unanimous. Like you know, when Kevin Warsh 547 00:28:15,960 --> 00:28:19,600 Speaker 4: objected to QAES, he basically had to leave. Honig would 548 00:28:19,600 --> 00:28:24,119 Speaker 4: object from the Regional Reserve Bank on monitoring on regulation, 549 00:28:24,600 --> 00:28:28,000 Speaker 4: they don't have to be consensus, so he needs four 550 00:28:28,520 --> 00:28:31,520 Speaker 4: out of seven. And you know, some of the support 551 00:28:31,640 --> 00:28:35,480 Speaker 4: was tentative. Some of the statements that the governors made 552 00:28:35,800 --> 00:28:39,760 Speaker 4: were full of flood claims, and I didn't get a 553 00:28:39,800 --> 00:28:42,280 Speaker 4: chance to meet all of them, but I would welcome that. 554 00:28:42,800 --> 00:28:45,080 Speaker 4: So I just think there's a great confusion and a 555 00:28:45,120 --> 00:28:47,240 Speaker 4: lot of politics and sort of ways of thinking and 556 00:28:47,280 --> 00:28:49,880 Speaker 4: banking that are very entrenched, and so I don't know. 557 00:28:49,920 --> 00:28:52,800 Speaker 4: I think you know, what this proposal ultimately is doing 558 00:28:52,920 --> 00:28:56,280 Speaker 4: is not changing the top head numbers, but tweaking risk. 559 00:28:56,320 --> 00:28:58,640 Speaker 4: Weits a little bit. And by increasing the risk, wait 560 00:28:58,680 --> 00:29:00,600 Speaker 4: a little bit, that's a little bit or equity you 561 00:29:00,640 --> 00:29:03,480 Speaker 4: have to have against a particular edset out of millions. 562 00:29:03,520 --> 00:29:06,400 Speaker 4: Never mind that they don't take care of correlations and 563 00:29:06,480 --> 00:29:08,200 Speaker 4: interest rate risk and other things, but just on the 564 00:29:08,240 --> 00:29:13,600 Speaker 4: credit risk part. And so the banks are weaponizing this 565 00:29:14,040 --> 00:29:17,360 Speaker 4: extremely disingenuously to make threats that you and you and 566 00:29:17,400 --> 00:29:19,520 Speaker 4: you and you won't make it loan, which, of course, 567 00:29:19,560 --> 00:29:21,840 Speaker 4: once they get the cheap funding, they'll do what they'll do, 568 00:29:21,840 --> 00:29:25,160 Speaker 4: they'll maximize our e whatever. So the politics of it 569 00:29:25,200 --> 00:29:27,920 Speaker 4: is really ugly. When I was in DC a couple 570 00:29:28,000 --> 00:29:32,080 Speaker 4: of weeks ago, it was oozing from everywhere. The bombardment 571 00:29:32,160 --> 00:29:35,320 Speaker 4: of lobbying was really shocking. It was never in the 572 00:29:35,480 --> 00:29:40,080 Speaker 4: popular you know, on billboards and ads on your podcast. 573 00:29:40,320 --> 00:29:43,719 Speaker 4: I mean, you know, I heard the ads on your podcast, 574 00:29:43,920 --> 00:29:48,520 Speaker 4: Stop Basile Endgame. They have explainers on that website that 575 00:29:48,760 --> 00:29:51,760 Speaker 4: are wrong. You know, students coming into my course just 576 00:29:51,800 --> 00:29:54,520 Speaker 4: out of the corporate finance course, it's like you're saying 577 00:29:54,520 --> 00:29:57,720 Speaker 4: that equity is expensive because it's risky. What's wrong with 578 00:29:57,760 --> 00:30:00,080 Speaker 4: all these companies that have plenty of equity and I 579 00:30:00,120 --> 00:30:02,640 Speaker 4: don't choose to borrow even though there's no regulation. What 580 00:30:02,720 --> 00:30:05,840 Speaker 4: are you talking about? This is absolute bread and butter finance. 581 00:30:06,120 --> 00:30:09,920 Speaker 4: Leverage and risk risk and return required return is completely 582 00:30:10,320 --> 00:30:12,760 Speaker 4: bread and butter. And so that's when you're even in 583 00:30:12,800 --> 00:30:14,240 Speaker 4: the right side of the balance sheet and not on 584 00:30:14,280 --> 00:30:16,440 Speaker 4: the cash reserve thing. It's crazy stuff. 585 00:30:17,400 --> 00:30:20,360 Speaker 3: So we could say, okay, banks could be safer in 586 00:30:20,400 --> 00:30:24,120 Speaker 3: a world in which they're much more equity finance. What 587 00:30:24,240 --> 00:30:27,520 Speaker 3: about coming from the perspective of creditors to the bank. 588 00:30:27,600 --> 00:30:30,800 Speaker 3: So there's certain capital that exists in the world that 589 00:30:30,960 --> 00:30:34,960 Speaker 3: seeks out bank ponds, insurance companies, pensions, things like that 590 00:30:35,080 --> 00:30:38,920 Speaker 3: may have a lot of demand for bank credit assets. 591 00:30:39,320 --> 00:30:41,520 Speaker 3: Where does that money go in different world? 592 00:30:41,560 --> 00:30:43,480 Speaker 4: So are you talking now about the people who are 593 00:30:43,560 --> 00:30:49,080 Speaker 4: customers who are boring front them? Okay, great, great subject. Okay, 594 00:30:49,200 --> 00:30:51,360 Speaker 4: So here's the thing. Here's what's amazing about banks, and 595 00:30:51,400 --> 00:30:54,720 Speaker 4: here's the real abnormality of the bank the deposits of which, 596 00:30:54,760 --> 00:30:56,840 Speaker 4: by the way, JP Morgan Chase now has two and 597 00:30:56,920 --> 00:31:01,280 Speaker 4: a half trillion dollars. Okay, that is money that is 598 00:31:01,320 --> 00:31:06,080 Speaker 4: a very unusual debt because it has no collateral. This 599 00:31:06,160 --> 00:31:10,440 Speaker 4: is important to understand, no collateral, but has insurance, which 600 00:31:10,440 --> 00:31:14,200 Speaker 4: effectively is now almost unbounded. So what happens is that 601 00:31:14,200 --> 00:31:17,719 Speaker 4: the depositors are almost all the time completely passive. I mean, 602 00:31:17,760 --> 00:31:20,080 Speaker 4: if they'll panic one day, but they are always just 603 00:31:20,600 --> 00:31:23,000 Speaker 4: telling them not to panic and just go about their business. 604 00:31:23,320 --> 00:31:27,680 Speaker 4: So they sit there. Now, once you have this funding, 605 00:31:28,080 --> 00:31:31,000 Speaker 4: it's a good time. It's a good life because you 606 00:31:31,040 --> 00:31:34,160 Speaker 4: can use the assets collateral for the other lenders. And 607 00:31:34,200 --> 00:31:37,960 Speaker 4: the other lenders come in and they have collateral to 608 00:31:38,000 --> 00:31:40,600 Speaker 4: their name short term lending, so they feel they can 609 00:31:40,680 --> 00:31:43,400 Speaker 4: almost like depositors, take the money out with droid and 610 00:31:43,480 --> 00:31:46,680 Speaker 4: they have safe harbor laws that in a bankruptcy they 611 00:31:46,680 --> 00:31:49,240 Speaker 4: can actually walk away with a collateral. So if they 612 00:31:49,440 --> 00:31:52,560 Speaker 4: including the federal home loan banks, including even if they've fed, 613 00:31:53,280 --> 00:31:57,520 Speaker 4: they are safe. So in the ratcheting of leverage and 614 00:31:57,680 --> 00:32:01,440 Speaker 4: in the sort of race toy. So there's another related 615 00:32:01,480 --> 00:32:04,520 Speaker 4: paper saying that there's a race to shorten maturity, and 616 00:32:04,560 --> 00:32:07,920 Speaker 4: then of course there's collateral races. What you have is 617 00:32:07,960 --> 00:32:11,280 Speaker 4: the ability to keep shortening maturity and to keep giving 618 00:32:11,320 --> 00:32:15,520 Speaker 4: collateral as a way to favor new lenders over old lenders. 619 00:32:15,760 --> 00:32:18,960 Speaker 4: And the most passive lenders to take advantage of are 620 00:32:18,960 --> 00:32:21,480 Speaker 4: the depositors and those who back them. So that's what 621 00:32:21,600 --> 00:32:24,640 Speaker 4: actually happens in the economics of it. Your ability to 622 00:32:24,720 --> 00:32:27,760 Speaker 4: ratchet up your boring and the ability of your lenders 623 00:32:27,960 --> 00:32:30,520 Speaker 4: to both chase their own returns, and we can talk 624 00:32:30,520 --> 00:32:33,560 Speaker 4: about you know, returns offered on cocoas and all of 625 00:32:33,600 --> 00:32:36,320 Speaker 4: that which in the end wink wink not and not 626 00:32:36,640 --> 00:32:39,880 Speaker 4: actually absorbing lostsses. And we didn't mention credit twists in 627 00:32:40,000 --> 00:32:42,760 Speaker 4: last year's events in the spring, which happened a week 628 00:32:43,080 --> 00:32:46,560 Speaker 4: or nine days after Silicon Valley Bank, and that was 629 00:32:46,600 --> 00:32:49,520 Speaker 4: a spectacular event in the world of banking of big 630 00:32:49,560 --> 00:32:53,440 Speaker 4: systemic institutions, that requires a lot of a whole discussion, 631 00:32:53,440 --> 00:32:55,600 Speaker 4: and we might not have time for. But all the 632 00:32:55,760 --> 00:32:58,520 Speaker 4: talk in the same you know a couple of years 633 00:32:58,520 --> 00:33:00,320 Speaker 4: that I went to Davos about how we and have 634 00:33:00,320 --> 00:33:02,720 Speaker 4: bail ins instead of bailouts and all these teal action 635 00:33:02,840 --> 00:33:06,080 Speaker 4: long term debt proposal, which completely triggered me over the 636 00:33:06,560 --> 00:33:09,000 Speaker 4: Martin Luther King Weiken when I was preparing these comment 637 00:33:09,080 --> 00:33:12,280 Speaker 4: letters once again extraordinarily exacerbated that I even have to 638 00:33:12,320 --> 00:33:16,360 Speaker 4: do this totally groundhog They they don't, they don't. As 639 00:33:16,440 --> 00:33:18,160 Speaker 4: Tom Honing likes to say, why are we solving a 640 00:33:18,160 --> 00:33:20,280 Speaker 4: problem of too much debt with more debt? If you 641 00:33:20,320 --> 00:33:23,000 Speaker 4: have equity instead of the long term debt, instead of 642 00:33:23,000 --> 00:33:27,320 Speaker 4: this title loss absorbing capacity, you would not get to 643 00:33:27,400 --> 00:33:29,840 Speaker 4: that level. If Silicon Valley Bank had twenty percent equity, 644 00:33:29,880 --> 00:33:33,240 Speaker 4: would absorb those losses from interest rate decreases. If credits wiss, 645 00:33:33,280 --> 00:33:37,320 Speaker 4: you know, more meaningful, I'm saying, better measured equity, we 646 00:33:37,360 --> 00:33:38,200 Speaker 4: wouldn't be here. 647 00:33:38,640 --> 00:33:40,560 Speaker 2: I just remember in the first time I ever wrote 648 00:33:40,560 --> 00:33:43,920 Speaker 2: about contingent capital, it was on FT alphavel and even that, 649 00:33:44,280 --> 00:33:46,840 Speaker 2: you're right, there was this discussion about like whether or 650 00:33:46,920 --> 00:33:49,880 Speaker 2: not it would actually get used in an emergency. But 651 00:33:50,440 --> 00:33:53,120 Speaker 2: maybe just to help us understand the argument, you know, 652 00:33:53,160 --> 00:33:56,959 Speaker 2: it's so hard even for me and I've been covering 653 00:33:57,000 --> 00:34:01,640 Speaker 2: financials for a long time, to imagine a banking business 654 00:34:01,640 --> 00:34:05,600 Speaker 2: model where they're not borrowing and lending and highly leveraged. 655 00:34:05,840 --> 00:34:07,040 Speaker 2: So I want to ask, like, is. 656 00:34:07,040 --> 00:34:10,400 Speaker 4: Heaven twenty percent equity and seven seventy or eighty percent 657 00:34:10,520 --> 00:34:13,000 Speaker 4: debt allows you to do all the boring and lending 658 00:34:13,040 --> 00:34:15,480 Speaker 4: you need to do. Is it allows you to take 659 00:34:15,520 --> 00:34:17,120 Speaker 4: all the deposits, allow you to make all the loans 660 00:34:17,160 --> 00:34:17,400 Speaker 4: you make? 661 00:34:17,680 --> 00:34:19,239 Speaker 2: I take the point, But what I want to ask 662 00:34:19,400 --> 00:34:23,800 Speaker 2: is like, if you think about your ideal banking system, 663 00:34:24,320 --> 00:34:27,200 Speaker 2: what does it look like. Does it exist somewhere in 664 00:34:27,239 --> 00:34:30,040 Speaker 2: the world already or has it existed in the past. 665 00:34:30,239 --> 00:34:32,920 Speaker 4: Has it existed in the past. Definitely before safety in 666 00:34:32,960 --> 00:34:36,040 Speaker 4: it first of all, when banks were partnerships, not even 667 00:34:36,080 --> 00:34:39,520 Speaker 4: limited ability corporations. They had fifty percent equity and unlimited 668 00:34:39,560 --> 00:34:42,160 Speaker 4: liability for the Jamie Diamonds the of the world. In 669 00:34:42,200 --> 00:34:43,839 Speaker 4: other words, there was the all money and they had 670 00:34:44,239 --> 00:34:47,640 Speaker 4: to be the ones ensuring depositors. Back in the nineteenth century. 671 00:34:47,760 --> 00:34:51,279 Speaker 4: You know, the depositors won't trust them, otherwise somebody had 672 00:34:51,280 --> 00:34:53,440 Speaker 4: to back it up. We go into a world in 673 00:34:53,480 --> 00:34:57,200 Speaker 4: which we introduce after runs and panics and all of that, 674 00:34:57,600 --> 00:34:59,879 Speaker 4: we introduce the posit insurance, we introduce its central banks 675 00:35:00,120 --> 00:35:02,960 Speaker 4: for that so so equity for example, you know when 676 00:35:03,000 --> 00:35:06,439 Speaker 4: they started FDAC banks in Kansas, for example, they didn't 677 00:35:06,480 --> 00:35:09,000 Speaker 4: want FDS insurance and they had twenty percent equity. So 678 00:35:09,000 --> 00:35:11,080 Speaker 4: in the history of banking, you know, in the start 679 00:35:11,080 --> 00:35:13,640 Speaker 4: of the twentieth century banks that twenty thirty percent equity. 680 00:35:13,880 --> 00:35:17,440 Speaker 4: So it's not unheard of. The equity markets are more developed. 681 00:35:17,600 --> 00:35:19,799 Speaker 4: If they have a business model, there are investors who 682 00:35:19,800 --> 00:35:22,040 Speaker 4: will give to them at their appropriate prices. They just 683 00:35:22,080 --> 00:35:25,800 Speaker 4: don't like those prices because what they're telling equity investors 684 00:35:25,880 --> 00:35:28,480 Speaker 4: is to take on risks right now on other people, 685 00:35:28,560 --> 00:35:31,880 Speaker 4: including governments and taxpayers. So the point is, you know, 686 00:35:32,200 --> 00:35:34,840 Speaker 4: my banking system would look a lot safer, and all 687 00:35:34,920 --> 00:35:37,200 Speaker 4: the de leveraging that would happen would happen much lower. 688 00:35:37,239 --> 00:35:39,360 Speaker 4: You'd have a lot more time to intervene as you 689 00:35:39,400 --> 00:35:42,640 Speaker 4: see losses mountop. If you're looking, somebody should look. If 690 00:35:42,640 --> 00:35:44,560 Speaker 4: it's not going to be the investors, it's going to 691 00:35:44,560 --> 00:35:47,080 Speaker 4: have to be the regulators. And that's all these to it. 692 00:35:47,080 --> 00:35:50,399 Speaker 4: It's not rocket science, so you know, and on on 693 00:35:50,600 --> 00:35:53,560 Speaker 4: contingent capital. There has never been an argument why at 694 00:35:53,560 --> 00:35:55,600 Speaker 4: the point of the you force them to issue those 695 00:35:55,600 --> 00:35:58,280 Speaker 4: because they also don't like those because maybe the long term, 696 00:35:58,520 --> 00:36:00,680 Speaker 4: you know, unsecuredy investors might ask a question or two 697 00:36:00,680 --> 00:36:03,319 Speaker 4: about the off chance that they would lose they you know. 698 00:36:03,600 --> 00:36:08,439 Speaker 4: In an interview in twenty thirteen, Stump, the SEAO of 699 00:36:08,520 --> 00:36:11,920 Speaker 4: Wells Fargo, said, we have a lot of retail deposits 700 00:36:11,920 --> 00:36:13,440 Speaker 4: and therefore we don't have a lot of death And 701 00:36:13,520 --> 00:36:15,840 Speaker 4: I had a deposit with him, so he even forgot, Like, 702 00:36:15,880 --> 00:36:19,200 Speaker 4: you can't make up the nonsense they say. So bottom 703 00:36:19,200 --> 00:36:22,440 Speaker 4: line is, you know, get the equity, retain the earnings, 704 00:36:22,640 --> 00:36:24,560 Speaker 4: and come back you know later. 705 00:36:25,080 --> 00:36:27,439 Speaker 2: All right, and not at MADI. It was so great 706 00:36:27,760 --> 00:36:29,920 Speaker 2: to finally speak to you on this podcast and the 707 00:36:29,960 --> 00:36:33,719 Speaker 2: new edition of the book, The Banker's New Clothes is 708 00:36:33,760 --> 00:36:35,440 Speaker 2: out now, So thank you so much. 709 00:36:35,640 --> 00:36:36,480 Speaker 3: Thank you, thank you. 710 00:36:36,560 --> 00:36:36,960 Speaker 4: That was great. 711 00:36:37,000 --> 00:36:50,879 Speaker 3: It was a lot of fun. Thank you so much, Joe. 712 00:36:50,960 --> 00:36:53,759 Speaker 2: I'm glad we did that conversation. Yeah, obviously there is 713 00:36:53,840 --> 00:36:57,160 Speaker 2: still a lot more to say about banks, not just 714 00:36:57,200 --> 00:36:59,440 Speaker 2: about how we bail them out, but maybe getting to 715 00:36:59,520 --> 00:37:01,880 Speaker 2: that place, as a not mentioned, where they don't need 716 00:37:01,920 --> 00:37:03,800 Speaker 2: to be bailed out on a regular basis. 717 00:37:04,080 --> 00:37:06,040 Speaker 3: I thought that was really interesting. I mean, there are 718 00:37:06,040 --> 00:37:07,920 Speaker 3: a few things that stuck out to me. One is 719 00:37:08,040 --> 00:37:10,640 Speaker 3: just sort of this idea of examining banks is if 720 00:37:10,680 --> 00:37:14,000 Speaker 3: the regular businesses is starting from the premise that, okay, 721 00:37:14,000 --> 00:37:16,520 Speaker 3: this is a business, and we have all these successful 722 00:37:16,560 --> 00:37:19,279 Speaker 3: businesses in the world that do not especially you know 723 00:37:19,320 --> 00:37:23,040 Speaker 3: in Silicon Valley, that do not have particularly much credit financing, 724 00:37:23,080 --> 00:37:25,319 Speaker 3: and yet they work, and so the question is like, 725 00:37:25,360 --> 00:37:28,440 Speaker 3: starting from that standpoint, wire bank so much different, and 726 00:37:28,480 --> 00:37:30,600 Speaker 3: how does that contribute to the risks? I also thought 727 00:37:30,600 --> 00:37:33,839 Speaker 3: it was interesting her point that actually shadow banks are 728 00:37:33,920 --> 00:37:37,040 Speaker 3: things that we call shadow banks, lenders that aren't necessarily 729 00:37:37,120 --> 00:37:40,280 Speaker 3: part of the regulated bank system, in fact do hold 730 00:37:40,440 --> 00:37:43,000 Speaker 3: more equity was very intriguing to me and to the 731 00:37:43,040 --> 00:37:45,600 Speaker 3: idea that not only did they naturally hold more equity, 732 00:37:45,680 --> 00:37:48,800 Speaker 3: but also presumably they wouldn't be as systemically important because 733 00:37:48,800 --> 00:37:53,760 Speaker 3: of the lack of depositors. That's an interesting observation about 734 00:37:53,840 --> 00:37:58,839 Speaker 3: how banks or financial institutions outside the regulated system work well. 735 00:37:58,840 --> 00:38:01,319 Speaker 2: And they seem to be doing reasonably well right now. 736 00:38:01,400 --> 00:38:01,480 Speaker 4: Right. 737 00:38:01,560 --> 00:38:04,400 Speaker 2: I haven't looked at like a publicly traded BDC share 738 00:38:04,440 --> 00:38:07,520 Speaker 2: price lately, so you know, don't at me if this 739 00:38:07,560 --> 00:38:10,320 Speaker 2: is completely untrue. But we talk about the golden age 740 00:38:10,320 --> 00:38:13,160 Speaker 2: of private credit all the time and how quickly that 741 00:38:13,320 --> 00:38:16,320 Speaker 2: industry is expanding, and in many ways they're doing the 742 00:38:16,360 --> 00:38:19,960 Speaker 2: same thing that banks are, just without I guess the 743 00:38:20,239 --> 00:38:24,600 Speaker 2: regulatory requirements attached to that, but also the funding benefits. 744 00:38:25,080 --> 00:38:28,319 Speaker 3: This idea of the obsession with return on equity, it 745 00:38:28,360 --> 00:38:32,560 Speaker 3: almost sounds like, you know, a conspiracy between bank executives 746 00:38:32,560 --> 00:38:35,640 Speaker 3: and the shareholders, right, which is obviously the shareholders don't 747 00:38:35,640 --> 00:38:38,880 Speaker 3: want to get diluted by having more equity, and the 748 00:38:38,960 --> 00:38:42,080 Speaker 3: executives want their salary to be tied to how much 749 00:38:42,120 --> 00:38:44,920 Speaker 3: can they how much profits can they make on the equity, 750 00:38:45,040 --> 00:38:48,160 Speaker 3: et cetera, but not necessarily being in the best interests 751 00:38:48,280 --> 00:38:49,759 Speaker 3: of society and. 752 00:38:49,840 --> 00:38:51,960 Speaker 2: Techpositors who just want their money back. 753 00:38:52,040 --> 00:38:54,279 Speaker 3: Yeah, exactly, Now, a lot of interesting ideas there. I'm 754 00:38:54,320 --> 00:38:55,040 Speaker 3: glad we had her on. 755 00:38:55,440 --> 00:38:56,759 Speaker 2: All right, shall we leave it there? 756 00:38:56,840 --> 00:38:57,560 Speaker 3: Let's leave it there. 757 00:38:57,640 --> 00:39:00,400 Speaker 2: This has been another episode of the Odd Thoughts Post podcast. 758 00:39:00,480 --> 00:39:03,640 Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway. 759 00:39:03,640 --> 00:39:06,440 Speaker 3: And I'm Jill Wisenthal. You can follow me at The Stalwart. 760 00:39:06,640 --> 00:39:09,960 Speaker 3: Follow our guest ant Admodi at a not Admati, and 761 00:39:10,080 --> 00:39:12,320 Speaker 3: check out the new edition of her book, The Banker's 762 00:39:12,320 --> 00:39:16,080 Speaker 3: New Clothes. Follow our producers Kerman Rodriguez at Kerman Erman, 763 00:39:16,440 --> 00:39:19,960 Speaker 3: Dashel Bennett at Dashbot and Kilbrooks at Keilbrooks. And for 764 00:39:20,040 --> 00:39:22,800 Speaker 3: more odd Laws content go to Bloomberg dot com slash 765 00:39:22,840 --> 00:39:25,840 Speaker 3: odd Lots. We have transcripts a blog in a newsletter, 766 00:39:26,120 --> 00:39:29,279 Speaker 3: and check out the discord Discord dot gg slash od 767 00:39:29,320 --> 00:39:30,040 Speaker 3: lots And. 768 00:39:30,160 --> 00:39:32,279 Speaker 2: If you enjoy odd Lots, if you like it when 769 00:39:32,320 --> 00:39:35,280 Speaker 2: we do deep dives into the business of being a bank, 770 00:39:35,360 --> 00:39:38,200 Speaker 2: then please leave us a positive review on your favorite 771 00:39:38,200 --> 00:39:41,799 Speaker 2: podcast platform. And remember, if you are a Bloomberg subscriber, 772 00:39:41,880 --> 00:39:45,120 Speaker 2: you can listen to all of our episodes absolutely ad free. 773 00:39:45,160 --> 00:39:47,880 Speaker 2: All you need to do is connect your Bloomberg account 774 00:39:48,160 --> 00:40:08,560 Speaker 2: to Apple podcasts. Thanks for listening in in