WEBVTT - Anat Admati on How to Never Bail Out Banks Again 0:00:02.440 --> 0:00:15.720 Bloomberg Audio Studios, Podcasts, Radio News. 0:00:17.800 --> 0:00:21.160 Hello and welcome to another episode of the Odd Thoughts podcast. 0:00:21.239 --> 0:00:22.680 I'm Tracy Alloway. 0:00:22.400 --> 0:00:24.360 And I'm Joe. Wasn't all Joe. 0:00:24.440 --> 0:00:27.600 It is coming up to the one year anniversary of 0:00:27.720 --> 0:00:30.120 last year's banking drama. I'm still not sure if we 0:00:30.120 --> 0:00:33.400 can call it at crisis or not. Uh, it kind 0:00:33.400 --> 0:00:35.680 of felt crisis at the time, but. 0:00:35.600 --> 0:00:37.880 It went away so fast. You know what the funny 0:00:37.920 --> 0:00:40.919 thing was, and I've mentioned it is it is that 0:00:41.080 --> 0:00:43.199 cliche or I don't know a thing that people say 0:00:43.400 --> 0:00:45.760 the FED is going to keep hiking rates until something breaks. 0:00:46.159 --> 0:00:48.600 He's like, here's the break. It happened, and then it 0:00:48.680 --> 0:00:50.400 was like a blip. It's like nothing. And then the 0:00:50.440 --> 0:00:52.760 Fed kept hiking and stocks kept going up, and everyone 0:00:52.800 --> 0:00:55.280 forgot about it. So it's kind of weird that something 0:00:55.360 --> 0:00:58.320 that dramatic could happen and seemingly then just sort of 0:00:58.320 --> 0:00:59.680 get forgotten about kind of quickly. 0:00:59.840 --> 0:01:03.000 Well, one of the most dramatic things that happened out 0:01:03.040 --> 0:01:05.080 of all of that, I thought, was when they basically 0:01:05.160 --> 0:01:10.160 just guaranteed everyone's deposits, right, So we know at this 0:01:10.280 --> 0:01:12.600 point that you are supposed to have up to two 0:01:12.680 --> 0:01:16.360 hundred and fifty thousand dollars of your deposits at any 0:01:16.400 --> 0:01:21.320 bank or any bank that's FDIC guaranteed. Basically those are safe. 0:01:21.319 --> 0:01:23.960 If the bank goes under, you get that money back. 0:01:24.360 --> 0:01:27.119 But then we saw that Silicon Valley Bank went under 0:01:27.319 --> 0:01:30.240 and people had more than two hundred and fifty thousand 0:01:30.240 --> 0:01:34.399 dollars in their accounts and they got bailed out, which 0:01:34.400 --> 0:01:36.880 is kind of phenomenal. I don't think we talk about 0:01:36.880 --> 0:01:39.920 the deposit guarantee the aspect of that whole thing enough. 0:01:40.040 --> 0:01:42.400 We talked about it at the time, and I think 0:01:42.440 --> 0:01:44.880 this was the interesting thing, and you're right, this is 0:01:44.920 --> 0:01:47.600 the sort of the bigger thing that has been swipped 0:01:47.640 --> 0:01:50.400 under the rug, which is if all deposits and all 0:01:50.560 --> 0:01:54.360 US banks are implicitly federally backed, then do we need 0:01:54.400 --> 0:01:57.360 to rethink the business of banking? If this huge source 0:01:57.400 --> 0:02:00.280 of finance, if it's all guaranteed in the end, then 0:02:00.320 --> 0:02:02.880 it's like, why do we allow these banks to operate 0:02:02.880 --> 0:02:05.360 as there? That was a big question. We talked about 0:02:05.360 --> 0:02:08.640 it in March and April and May, and that's still unresolved. 0:02:08.639 --> 0:02:10.720 But people have really moved on from that question. But 0:02:10.760 --> 0:02:12.560 it really is fundamental. 0:02:12.200 --> 0:02:12.800 Not us. 0:02:12.919 --> 0:02:15.799 We are still living in spring of twenty twenty three, 0:02:15.960 --> 0:02:18.160 so I'm very pleased to say we do, in fact 0:02:18.320 --> 0:02:21.160 have the perfect guest to discuss this. You might remember 0:02:21.200 --> 0:02:24.040 we spoke with Stephen Kelly a couple weeks ago about 0:02:24.040 --> 0:02:27.799 how the way we're bailing out banks or supporting them 0:02:27.840 --> 0:02:31.760 with various liquidity facilities is changing. In this episode, we 0:02:31.800 --> 0:02:33.840 are going to be focusing on getting to a point 0:02:33.880 --> 0:02:36.920 where you don't actually have to bail out the banks. 0:02:37.160 --> 0:02:40.079 Let's just avoid this problem altogether. And I'm very pleased 0:02:40.080 --> 0:02:42.920 to say with us now we have a not at Madie. 0:02:43.080 --> 0:02:45.800 She is, of course an economist and professor at the 0:02:45.919 --> 0:02:50.399 Stanford Graduate School of Business. She has written prolifically on 0:02:50.440 --> 0:02:53.160 this topic for at least as long as I can 0:02:53.240 --> 0:02:55.679 remember at this point, certainly since the two thousand and 0:02:55.720 --> 0:02:58.919 eight financial crisis. And thank you so much for coming 0:02:58.919 --> 0:02:59.320 on all. 0:02:59.240 --> 0:03:00.920 Thoughts, Thank you so much for having me. 0:03:01.520 --> 0:03:04.280 You know, we needled Stephen a little bit when he 0:03:04.440 --> 0:03:07.920 was on the show by just throwing out the yes. 0:03:08.280 --> 0:03:11.360 So I'm going to do the equivalent for you and say, 0:03:12.240 --> 0:03:13.799 how do banks hold capital? 0:03:15.200 --> 0:03:18.880 Oh my god, that word is a trigger because because 0:03:19.160 --> 0:03:21.639 that word leads to so much confusion. So I'm glad 0:03:21.639 --> 0:03:24.800 you started with that. A senator would say it's money 0:03:24.800 --> 0:03:29.359 on the sideline. Newspaper articles explain it as cash like asset, 0:03:30.680 --> 0:03:34.000 and it's not true. What we're talking about this hold 0:03:34.080 --> 0:03:37.560 capital is not something that actually the banks hold. It's 0:03:37.600 --> 0:03:40.400 something that investors hold. In fact, what they do hold 0:03:40.720 --> 0:03:42.760 is those reserves in the Central Bank on which they 0:03:42.800 --> 0:03:45.640 get five point four percent. That's what they hold. That's 0:03:45.640 --> 0:03:48.880 what's out of the economy set aside. What we're talking 0:03:48.920 --> 0:03:52.280 about is just like deposits. On the funding side, we're 0:03:52.320 --> 0:03:56.240 talking about equity funding for banks, an amazing idea in 0:03:56.320 --> 0:03:58.920 banking that you would actually need any of it. And 0:03:59.000 --> 0:04:03.080 guess what they live like no corporation lives, and no 0:04:03.200 --> 0:04:07.040 corporation needs to live. But they're there because you know, 0:04:07.240 --> 0:04:09.720 I have a lot of research on leverage and leverage addiction, 0:04:10.080 --> 0:04:13.240 and it's just there at the point of such heavy 0:04:13.280 --> 0:04:15.960 indebtedness that they hate coming out. 0:04:16.200 --> 0:04:19.680 So when people think banks need to have more capital 0:04:19.760 --> 0:04:22.560 or hold more capital, in their mind, what they hear is, well, 0:04:22.640 --> 0:04:24.880 banks just need to have more cash set aside. 0:04:25.520 --> 0:04:26.200 That's what they say. 0:04:26.320 --> 0:04:29.520 But in the actual people who understand bank the idea 0:04:29.560 --> 0:04:32.599 of having more capital means that more of their funding 0:04:32.640 --> 0:04:34.200 needs to come from equity exactly. 0:04:34.240 --> 0:04:36.160 So it's all about whether you get your money by 0:04:36.200 --> 0:04:40.400 promising to pay back or not and your equity investors. 0:04:40.480 --> 0:04:42.560 I mean, I come from Silicon Valley, so you know 0:04:42.640 --> 0:04:45.440 who needs to borrow to have a thriving business. Lots 0:04:45.480 --> 0:04:48.600 of companies don't pay dividends, just grow and grow and 0:04:48.640 --> 0:04:51.160 grow and market value. And you know you don't need 0:04:51.200 --> 0:04:53.880 to borrow as much. And in banking, if you just say, hey, 0:04:54.240 --> 0:04:57.279 why don't you do something good with your earnings, such 0:04:57.279 --> 0:05:00.479 as you know, make loans instead, they're I want to 0:05:00.480 --> 0:05:03.279 take the money out, and they will threaten not to 0:05:03.320 --> 0:05:07.040 make a loan in the ridiculous campaign they're making right 0:05:07.080 --> 0:05:11.520 now about this buzzle endgame, where in fact, what they're displaying, 0:05:11.640 --> 0:05:13.599 and I like to talk about it that way, is 0:05:13.760 --> 0:05:18.599 every single symptom of extraordinary overhang or even insolvency at 0:05:18.640 --> 0:05:22.039 all times. In other words, these are the classic zombie 0:05:22.240 --> 0:05:25.240 symptoms that in another sector would lead you to a 0:05:25.560 --> 0:05:28.240 fraudulent conveyance in bankruptcy or something. You know that you're 0:05:28.240 --> 0:05:30.920 taking the money out, that you're always taking a risk. 0:05:31.080 --> 0:05:33.520 Maybe that's a good point to back up a little 0:05:33.520 --> 0:05:38.320 bit and talk about how you understand the banking business, 0:05:38.440 --> 0:05:40.880 because a lot of people will hear a statement like, oh, 0:05:41.000 --> 0:05:44.080 banks should hold more equity, they should have less leverage, 0:05:44.200 --> 0:05:47.320 and they would think, well, that's what a bank is. 0:05:47.440 --> 0:05:50.040 You borrow and then you leverage a business. Right, it's 0:05:50.040 --> 0:05:52.559 a leverage business. So like, what exactly are we talking 0:05:52.560 --> 0:05:54.760 about if it doesn't look like that. 0:05:54.920 --> 0:05:58.280 Okay, So banks are leverage business in the sense if 0:05:58.279 --> 0:06:01.600 we start from the basics that deposits put them in 0:06:01.640 --> 0:06:03.880 a leverage position right away. So by the time you 0:06:03.880 --> 0:06:06.320 take the positis, if we're talking about the posit taking banks, 0:06:06.839 --> 0:06:10.720 they already start with that, unlike a company, like in 0:06:10.760 --> 0:06:12.720 a corporate finance course, where we stuck with their own 0:06:12.760 --> 0:06:15.719 equity firm as a kind of a starting point where 0:06:15.760 --> 0:06:17.479 you're kind of investing your own money or your own 0:06:17.480 --> 0:06:21.800 shareholders money. So now you're already in an area in 0:06:21.839 --> 0:06:25.120 which the people managing the bank, so the extent or not, 0:06:25.160 --> 0:06:28.440 depositors are immediately conflicted with depositors over how much equity 0:06:28.440 --> 0:06:30.440 they would have, how much risk they would take. Because 0:06:30.440 --> 0:06:33.480 of the fact that the positors, ultimately if the bank 0:06:33.520 --> 0:06:35.880 defaults or if the bank goes into resolution or whatever, 0:06:36.240 --> 0:06:38.440 you know, they might get paid or not, but the 0:06:38.520 --> 0:06:41.800 bank walked away with the upside in any case. So 0:06:42.000 --> 0:06:45.359 from that point on, the banks hate equity. The bank 0:06:45.480 --> 0:06:49.320 er hates equity. So any leveraged equity holder has a 0:06:49.400 --> 0:06:52.560 resistance to leverage reduction. That's a pervasive phenomenon. And in fact, 0:06:52.560 --> 0:06:54.919 if you let them adjust leverage just once, it's not 0:06:54.960 --> 0:06:57.760 like we go to an optimal capital structure. Always up, 0:06:57.960 --> 0:07:02.479 always up. So that's the addictiveness of boring. Now, what's 0:07:02.520 --> 0:07:06.000 the business of bank There isn't a basic conservation in 0:07:06.040 --> 0:07:09.400 the world. It's not an irrelevancy. It's not that it's irrelevant, 0:07:09.480 --> 0:07:12.360 it's just relevant in different ways to society and to 0:07:12.400 --> 0:07:15.720 the banker. The banker hates equity. From their perspective, any 0:07:15.760 --> 0:07:19.680 bit of it, you know, is too much. From society's perspective, 0:07:20.040 --> 0:07:24.760 having a huge more equity funding is only good and 0:07:24.800 --> 0:07:27.119 not bad. And in fifteen years of asking the question, 0:07:27.520 --> 0:07:30.000 why are we even here? Why do they have single 0:07:30.040 --> 0:07:31.960 digit you know, depending on all their risk or its, 0:07:31.960 --> 0:07:34.600 we can get into that. Why are we here? You know, 0:07:34.640 --> 0:07:37.440 they didn't in the history of banking, and certainly relative 0:07:37.480 --> 0:07:39.720 to other corporations that are not regulated for leverage. Even 0:07:39.760 --> 0:07:42.280 though we subsidize that in the tax code, you don't 0:07:42.320 --> 0:07:44.640 see corporations like that. How do they ever get away 0:07:44.680 --> 0:07:47.920 with that? Oh? How they get away with it is 0:07:48.400 --> 0:07:51.120 the safety nets all these bailouts all the time and 0:07:51.160 --> 0:07:53.160 place it an explicity. And that's really it, because the 0:07:53.200 --> 0:07:56.520 conservation physics of finance that I'm talking about, of physics 0:07:56.520 --> 0:08:00.160 of money is there is risk to be born and 0:08:00.280 --> 0:08:03.320 taxes to be paid, and if you bear less of it, 0:08:03.400 --> 0:08:05.520 somebody else bears more of it. If you pay less 0:08:05.520 --> 0:08:07.520 of it, somebody else pays more of it. So the 0:08:07.560 --> 0:08:11.160 whole thing we're talking about is whether banks are subsidized 0:08:11.440 --> 0:08:14.360 to be leveraged, not just want to be leveraged, but 0:08:14.640 --> 0:08:18.520 encouraged to be leveraged by the system of taxes and subsidence. 0:08:19.040 --> 0:08:22.160 And therefore they're telling us that they should be getting 0:08:22.200 --> 0:08:25.320 all these subsidies blanket to their funding and then they'll 0:08:25.360 --> 0:08:26.280 do something good with it. 0:08:26.440 --> 0:08:31.160 So sometimes bailouts are explicit, like such as what we 0:08:31.240 --> 0:08:33.240 saw in two and eight, two thousand and nine with 0:08:33.440 --> 0:08:36.760 TARP and various programs. Sometimes I guess they're sort of 0:08:36.800 --> 0:08:39.520 implicit or the idea that well, we just sort of 0:08:39.559 --> 0:08:42.960 expect that something like that will come. What else, other 0:08:43.080 --> 0:08:46.880 than what we call bailouts, you say, through taxes, et cetera. 0:08:46.960 --> 0:08:51.000 What else encourages the demand for further leverage or the 0:08:51.040 --> 0:08:54.559 prioritization of debt financing versus equity financing. 0:08:54.679 --> 0:08:57.520 It's the compensation of the bankers. It's any this fixation 0:08:57.640 --> 0:09:01.040 with return on equity, which is only return on the upside, 0:09:01.080 --> 0:09:03.480 because on the downslide, when you have less leverage, you're protected, 0:09:03.520 --> 0:09:06.320 you're less negative. So if your actual realize returns are 0:09:06.360 --> 0:09:08.040 below your funding costs. 0:09:07.880 --> 0:09:10.600 Where does the fixation of return on equity come from? 0:09:10.679 --> 0:09:13.280 That? You know, I think that it's a proxy for subsidies. 0:09:13.360 --> 0:09:16.120 I think it basically means that if you compensate somebody 0:09:16.559 --> 0:09:19.800 based on return on equity metrics where you know it's 0:09:19.840 --> 0:09:23.200 always on the upside where its juices up returns, then 0:09:23.440 --> 0:09:26.800 by doing that, by going after the return on equity, 0:09:27.280 --> 0:09:30.920 they are basically doing what you know, maybe sharelders one 0:09:31.040 --> 0:09:33.760 to some extent, but certainly works well for the bankers, 0:09:34.640 --> 0:09:37.160 which is to maximize the subsidy, to maximize the leverage, 0:09:37.200 --> 0:09:41.280 because through the leverage you get more subsidies. That's part 0:09:41.320 --> 0:09:44.000 of that. The bailouts, by the way, is a really 0:09:44.240 --> 0:09:47.480 complicated system, and you even touched on the flobs on 0:09:47.520 --> 0:09:50.520 the federal home loan banks. It's basically an interlocking set 0:09:50.520 --> 0:09:55.280 of institutions that are either providing guarantees or investing lending. 0:09:55.559 --> 0:09:57.959 So it's either the central banks that would make these 0:09:57.960 --> 0:10:00.840 excessive loans that we should get into the bank lending 0:10:00.840 --> 0:10:04.480 programs and at the same time, you know, giving for 0:10:04.559 --> 0:10:08.640 a while higher interest on reserves, which is crazy, as 0:10:08.640 --> 0:10:11.800 well as the FDIC, which has started guaranteeing all deposits 0:10:12.080 --> 0:10:16.480 with extraordinarly dangerous situation and sometimes guaranteeing other debt. After 0:10:16.480 --> 0:10:20.360 the financial crisis, they let even newly created bank holding 0:10:20.360 --> 0:10:23.120 companies that were investment banks the previous day, like Goldman 0:10:23.160 --> 0:10:26.800 Sachs and Morgan Stanley guarantees on all debt. Now, of 0:10:26.840 --> 0:10:30.160 course they could go and raise money from investors guaranteed 0:10:30.200 --> 0:10:34.040 by the FDIC, which they can do cheaply, no strings attached, 0:10:34.080 --> 0:10:37.160 and return the top money the Treasury gave them with 0:10:37.559 --> 0:10:41.240 tiny bit of strengths attached. So it's basically a system 0:10:41.320 --> 0:10:44.920 between the FED, the FDIC and Treasury and fhlbs where 0:10:45.160 --> 0:10:47.880 there are sort of investments made in the so basically 0:10:47.960 --> 0:10:50.520 the prevention of default, that's a bailout. The third party 0:10:50.559 --> 0:10:53.559 comes in. You made a promise and somebody comes in 0:10:53.600 --> 0:10:55.800 and swoops in and prevents your default. 0:10:56.400 --> 0:10:59.200 I want to talk a little bit more specifically about 0:10:59.240 --> 0:11:01.640 the events of last year, because I think they're a 0:11:01.679 --> 0:11:03.880 good prism to view some of the things you were 0:11:03.880 --> 0:11:06.720 talking about through. But one of the interesting things is 0:11:07.080 --> 0:11:10.199 Silicon Valley Bank got in trouble. I don't want to 0:11:10.240 --> 0:11:13.480 say for doing the right thing, but they did go 0:11:13.600 --> 0:11:16.400 out into the market and say we're raising equity, and 0:11:16.960 --> 0:11:19.280 as you put it, you know, there's a reason why 0:11:19.320 --> 0:11:21.880 banks typically don't like to do that. 0:11:22.360 --> 0:11:24.520 So this is a great question, and it's a great 0:11:24.520 --> 0:11:27.160 way in fact to see what I'm saying. So what 0:11:27.400 --> 0:11:31.239 happens is they have definitions these days in the regulatory 0:11:31.240 --> 0:11:33.880 community of what a well capitalized bank is. It just 0:11:33.920 --> 0:11:36.640 so happened that both in the financial crisis and last 0:11:36.679 --> 0:11:40.839 spring and now banks are considered well capitalized by a 0:11:40.880 --> 0:11:43.400 lot of the banks that failed, including First Republic, got 0:11:43.520 --> 0:11:46.520 great camel ratings just before they failed, so they can 0:11:46.559 --> 0:11:49.160 say it's well capitalized. Now, why is that because the 0:11:49.320 --> 0:11:53.199 metrics are so bad, and the metrics include not recognizing 0:11:53.200 --> 0:11:56.680 fair market value on hultimaturity assets. So the bank is 0:11:56.720 --> 0:11:59.680 pretending to have these assets that they bought at power 0:11:59.720 --> 0:12:02.840 value even though they're losing value like treasuries. In addition, 0:12:03.120 --> 0:12:06.200 capital ratios depend on risk weights, and the risk weights 0:12:06.200 --> 0:12:09.960 ignore interest rate risk entirely, only credit risk. So a 0:12:10.000 --> 0:12:13.360 treasury needs no equity backing. So even if you buy 0:12:13.360 --> 0:12:15.480 you buy a treasury and you can do it, and 0:12:15.520 --> 0:12:18.120 one hundred percent of deposit money, well, the treasury can 0:12:18.160 --> 0:12:21.079 lose in value. What happened in Silicon Valley Bank was 0:12:21.120 --> 0:12:25.240 the following in banking in general. You know, being a zombie, 0:12:25.280 --> 0:12:30.800 being insolvent is Monday morning, Okay. What they're showing is 0:12:30.840 --> 0:12:34.280 symptoms to a corporate doctor like myself is every day, 0:12:34.400 --> 0:12:37.400 the symptoms of the more they hate equity with the 0:12:37.440 --> 0:12:39.920 passion they hate equity, the more things they have way 0:12:39.960 --> 0:12:42.080 too little of it. So that's that. Now, what happened 0:12:42.080 --> 0:12:45.040 in Silicon Valley Bank two things. First of all, they 0:12:45.040 --> 0:12:47.480 had to sell some assets, so this whole two maturity 0:12:47.559 --> 0:12:50.160 might not actually work out for you, and the assets 0:12:50.160 --> 0:12:52.400 are worth less as you have to pay more on deposits. 0:12:52.440 --> 0:12:54.680 The assets are worth less because their long term have 0:12:54.800 --> 0:12:57.920 big duration risks, and interest rates went down, so when 0:12:57.960 --> 0:13:00.679 they sold, they had to realize the losses. Sudden accounting 0:13:00.720 --> 0:13:03.160 rules that usually can allow you to hide the losses 0:13:03.520 --> 0:13:05.920 are forcing you to recognize the losses. So that was 0:13:05.920 --> 0:13:09.800 the first thing. Then basically, how would they survive. They 0:13:09.920 --> 0:13:14.439 were beginning to be more obviously more visibly insolvent. So 0:13:14.480 --> 0:13:16.680 the next thing that happens is they try to raise equity, 0:13:16.720 --> 0:13:19.199 as you said, and they couldn't. Now, if you can 0:13:19.360 --> 0:13:21.720 raise equity, if somebody not at the price you like, 0:13:21.800 --> 0:13:25.600 but at the price a penny a dime for your equity, 0:13:25.720 --> 0:13:28.480 then you might still be insolvent because there's only the upside. 0:13:28.520 --> 0:13:30.480 It's just an option on the upside because you can 0:13:30.520 --> 0:13:33.600 always walk away as equity. But if you cannot raise equity, 0:13:33.800 --> 0:13:36.600 then you're really deep in the water. So they're not 0:13:36.679 --> 0:13:40.520 raising equities like the ultimate nail in the coffin. In 0:13:40.559 --> 0:13:44.640 other words, you're definitely sold. At that point, the run 0:13:44.800 --> 0:13:48.240 was unavoidable because you know, of course, maybe by now 0:13:48.280 --> 0:13:51.720 that they've guaranteed effectively everything, maybe people won't run. And 0:13:51.760 --> 0:13:54.360 maybe we consider that kicking the can down the road 0:13:54.520 --> 0:13:57.560 as a good financial stability measures. But that is extraordinary 0:13:57.679 --> 0:14:00.600 dangerous because in the eighties we allowed all these zombie 0:14:00.600 --> 0:14:04.760 savings and loans to persist and raise money guaranteed by 0:14:04.760 --> 0:14:07.360 the taxpayers until you know, we have to pay for it. 0:14:22.360 --> 0:14:26.160 One of the arguments obviously against higher capital ratios or 0:14:26.200 --> 0:14:28.320 more equity is like, oh, this will be lead to 0:14:28.360 --> 0:14:30.560 an austerity of credit, that banks won't be able to 0:14:30.600 --> 0:14:32.040 do lending. And this is a big part of the 0:14:32.080 --> 0:14:34.320 push again to some of these rules that there's going 0:14:34.400 --> 0:14:37.160 to be less lending, etcetera. Why is that wrong? Interview? 0:14:37.520 --> 0:14:40.600 Well, first of all, they can make any loan. My 0:14:40.760 --> 0:14:44.560 first measure and my first emergency measure since the financial crisis, 0:14:44.600 --> 0:14:47.360 and you know I said this with twenty academics and 0:14:47.400 --> 0:14:50.800 lots of people is to retain them earnings and use 0:14:50.840 --> 0:14:53.000 them for loans. So what's the problem now? So I've 0:14:53.040 --> 0:14:55.360 been asking for fifteen years, tell me again what would 0:14:55.360 --> 0:14:58.000 go wrong if they retain their earnings? Just go take 0:14:58.040 --> 0:15:00.480 me through an argument and economic argument of how the 0:15:00.520 --> 0:15:04.040 economy would suffer. In other words, is their subsidies so 0:15:04.160 --> 0:15:07.920 big that God forbid, you know, they'll die? You know, 0:15:08.080 --> 0:15:10.880 if they'll die, you know, or they can't survive. I 0:15:11.000 --> 0:15:13.720 question their business model. If the busy, if the entire 0:15:13.920 --> 0:15:17.240 charter value that you like to talk about subsidies, then 0:15:17.280 --> 0:15:19.640 we have to question the business model. Just you started 0:15:20.160 --> 0:15:22.880 by saying, so my point is the following. If you 0:15:23.000 --> 0:15:26.240 tell them not a ratio, Actually I am against giving 0:15:26.280 --> 0:15:28.480 them ratios from where we are right now. You take 0:15:28.520 --> 0:15:31.800 them by the hand through issuance and retentions, because then 0:15:32.040 --> 0:15:35.240 they won't shrink inefficiently. Because a paper I wrote called 0:15:35.320 --> 0:15:38.760 leverg Bratchet actually shows the ways of deleveraging, and we 0:15:38.920 --> 0:15:42.040 show that there is a tendency to level as it 0:15:42.120 --> 0:15:45.280 saves or stopping to lend or whatever to through shrinkage 0:15:45.520 --> 0:15:49.160 versus expansion. Well, I will expand. These are monstrous banks, 0:15:49.360 --> 0:15:51.920 which I'm saying to expand only because I believe that 0:15:52.000 --> 0:15:54.720 once they live in markets, once they're in equity markets, 0:15:55.160 --> 0:15:58.040 they will break up on their own inefficient weight, because 0:15:58.080 --> 0:16:01.760 as conglomerates broke up in the AD, because we don't 0:16:01.840 --> 0:16:05.520 need such complicated institutions. I was, you know, back in 0:16:05.600 --> 0:16:09.080 doubles in twenty fourteen with Paul Singer of Everybody, and 0:16:09.120 --> 0:16:12.360 he says these are two opake. I cannot put my 0:16:12.400 --> 0:16:15.520 analysts on it and understand their risk. They would not 0:16:15.840 --> 0:16:18.680 exist in market as they are right now. Once you 0:16:18.760 --> 0:16:20.960 push them more and more into equity markets, it's equity 0:16:21.000 --> 0:16:23.880 marketer will give them the stress test. That's my stress test. 0:16:24.240 --> 0:16:27.040 My stress test is raised equity. Let's see at what price? 0:16:27.320 --> 0:16:30.000 What will investors say when they have to bear the downside? 0:16:30.040 --> 0:16:30.080 Is? 0:16:30.120 --> 0:16:32.160 Where is the upside? If you don't like that price, 0:16:32.200 --> 0:16:33.440 maybe that's telling us something. 0:16:34.680 --> 0:16:37.480 Since you mentioned twenty fourteen, I think that was the 0:16:37.600 --> 0:16:40.280 year when there was a New York Times profile about you, 0:16:40.320 --> 0:16:44.080 and I cannot remember the exact headline, but why is 0:16:44.120 --> 0:16:45.440 it in? 0:16:45.480 --> 0:16:47.560 This said? The whole story behind it, which I won't 0:16:47.600 --> 0:16:48.920 tell you all of it, but it was by ben 0:16:48.960 --> 0:16:51.520 in Minneapplebaum, who used to be a feder reporter who 0:16:51.520 --> 0:16:54.240 I first met when he was a federal reporter, and 0:16:54.240 --> 0:16:56.400 I won't go through all the details, but when he 0:16:56.520 --> 0:16:59.480 ended up writing the profile, it was entitled when she 0:16:59.600 --> 0:17:03.920 talks banks shutter Yeah, and what I say, So, I've 0:17:03.960 --> 0:17:07.639 asked a few times about that with people who've noticed 0:17:07.640 --> 0:17:11.639 the headline, and I say, oh, Jamie Damon slips like 0:17:11.640 --> 0:17:17.479 a baby. In other words, the headline is cute but false. 0:17:19.160 --> 0:17:21.479 But this leads into something I wanted to ask you. 0:17:21.520 --> 0:17:24.040 And I'm trying to think how to phrase this question 0:17:24.200 --> 0:17:29.239 without sounding hokey. But you know, you've been criticizing the 0:17:29.280 --> 0:17:31.280 banks and the regulators, models. 0:17:31.000 --> 0:17:33.800 And the regulators, especially for the banks do what they 0:17:33.800 --> 0:17:34.440 get away with. 0:17:34.440 --> 0:17:37.560 Yeah, for decades now, basically, and I guess it I 0:17:37.640 --> 0:17:40.520 have yet what motivates you to do this? 0:17:40.680 --> 0:17:42.879 Oh? Good, Such a good question because I often wonder 0:17:42.920 --> 0:17:48.520 that myself. Okay, so what motivated me in the beginning 0:17:48.720 --> 0:17:50.240 was you know, I sort of fell in a rabbit 0:17:50.280 --> 0:17:51.920 hole when I started looking into banking. I'm not just 0:17:51.960 --> 0:17:54.159 a corporate finance corporate governance person. And I look at 0:17:54.200 --> 0:17:57.439 those corporations which I was teaching my students for you know, 0:17:57.480 --> 0:18:00.320 twenty five years, what a wonderful market we have, and 0:18:00.359 --> 0:18:02.640 all of a sudden that market like what just happened? 0:18:02.840 --> 0:18:04.160 And then I look at them and I say, okay, 0:18:04.200 --> 0:18:06.960 I understand about corporations. We don't talk specifically about banks 0:18:07.000 --> 0:18:10.320 because that's something some other silo in economics, but if 0:18:10.320 --> 0:18:12.159 I look at them as a corporate finance person, and 0:18:12.200 --> 0:18:14.440 I say, what's the same and what's different about them, 0:18:14.760 --> 0:18:16.520 And all of a sudden, what's different about them is 0:18:16.560 --> 0:18:19.000 all bad. And what's different about them is what they 0:18:19.000 --> 0:18:22.880 get away with more than anything, you know, the specialness 0:18:22.880 --> 0:18:25.280 of banks is literally what they get away with. And 0:18:25.280 --> 0:18:28.520 then the politics of banking, that's what's special. And then 0:18:28.680 --> 0:18:31.040 I all of a sudden realized, you know, if nobody 0:18:31.119 --> 0:18:33.840 understands what the word means, if the regulators are standing by, 0:18:34.359 --> 0:18:37.760 if the politicians want banks to make some loans or 0:18:37.800 --> 0:18:42.240 some campaign donations or whatever else, and nobody is exposing 0:18:42.280 --> 0:18:45.640 the nonsense that we have in this space that pervades 0:18:45.720 --> 0:18:49.280 this space, that maintains and enables this to continue. So 0:18:49.320 --> 0:18:53.800 I was basically alarmed by people inside the FED that 0:18:54.320 --> 0:18:57.399 terrible things are happening in Basil when they were negotiating 0:18:57.400 --> 0:19:01.720 that agreement. And I was encouraged by people both inside 0:19:01.760 --> 0:19:03.720 some places in the FED and in the Bank of 0:19:03.720 --> 0:19:05.760 England at the time where I had most of my 0:19:05.840 --> 0:19:08.240 friends at the time when Mervin King was there, to 0:19:08.320 --> 0:19:11.159 get involved. And I truly didn't know what I was 0:19:11.200 --> 0:19:14.399 getting into when I agreed to do this. I was 0:19:14.480 --> 0:19:16.320 joking that I'm working for and the hell dying, you know, 0:19:16.400 --> 0:19:18.560 that kind of thing. So he was at the Bank 0:19:18.600 --> 0:19:21.040 of England at the time, and so was Mervin King, 0:19:21.320 --> 0:19:23.680 who gave us a blurb for the book, and while 0:19:23.720 --> 0:19:26.560 the governor of the bank. So there were big, fierce 0:19:26.760 --> 0:19:30.399 battles at the time post financial crisis about the topic, 0:19:30.520 --> 0:19:33.320 and I felt and I mobilized a lot of academics 0:19:33.359 --> 0:19:36.480 to help me, but it was very difficult work. You 0:19:36.600 --> 0:19:39.480 were at Financial Times at the time, Tracy, and getting 0:19:39.560 --> 0:19:43.280 through even the opinion pages against bankers is impossible, and 0:19:43.320 --> 0:19:46.639 that's the opinion pages now in the politics like forget it. 0:19:46.760 --> 0:19:50.080 So I began to really see the politics something I 0:19:50.240 --> 0:19:52.679 was not aware is so important in finance and how 0:19:52.720 --> 0:19:55.639 much it plays in banking. So I stayed in this 0:19:55.880 --> 0:19:59.560 debate just basically hating to be worn out more than anything, 0:20:00.480 --> 0:20:03.919 just not wanting for them, with the resources that they have, 0:20:04.040 --> 0:20:05.960 with the amount of lobbying and the amount of money 0:20:06.480 --> 0:20:10.320 that they spend across the political system and the regulation 0:20:10.440 --> 0:20:13.159 system and global institutions and all that, to kind of 0:20:13.160 --> 0:20:15.600 give up because I felt a sense of duty basically 0:20:15.960 --> 0:20:19.080 to society that I actually know something that's useful and 0:20:19.119 --> 0:20:21.320 it's my job to say. But anyway, I worked on 0:20:21.400 --> 0:20:24.040 it for five six years, and then I essentially wrote 0:20:24.080 --> 0:20:26.399 a few essays that were kind of putting it to 0:20:26.520 --> 0:20:30.520 bed around twenty fifteen sixteen, and that I'm back here 0:20:30.640 --> 0:20:33.440 is kind of almost didn't happen. It was a decade 0:20:33.480 --> 0:20:34.800 since the book was published. 0:20:34.800 --> 0:20:36.320 This book, the book, by the way, I should have 0:20:36.359 --> 0:20:39.119 said in the intro, it's the Banker's New Clothes, and 0:20:39.160 --> 0:20:41.000