[applause] [inaudible conversations] the government was shut down for 16 days in october as republicans unsuccessfully tried to debunk the president S Health Care law. Tonight on our companion network cspan a look back at the congressional debate and president obamas actions during the shutdown. Thats tonight on cspan at 8 p. M. Eastern. I think radio is the longest and the best form of media that is left but we are doing right now is long conversation unprecedented. Unprecedented. Only cspan does long form conversation. Its tremendously revealing when an authors other book read these days because they dont get many people have read the books and know what theyre talking about with page notes. Its so rewarding for them to i get a great deal of satisfacti satisfaction, the highest conflict, thats the best interview ive had on this book to. Loved the interview on things that matter, his new collection of essays. Some of which are old. That makes my day. I like radio. Three hours is an abundance of time. More with radio talk host hugh hewitt sunday night at 8 p. M. On cspans q a. A professor of finance and economics at Stanford University. And author of the bankers new clothes, whats wrong with banking and what to do about it. She argues week regulation and ineffective enforcement has allowed the financial industry to put the entire economy at risk. Booktv spoke with her earlier this year. The bankers new clothes is a new book by stanford professor anat admati. Professor, whats this cartoon on the front of the book . Well, it shows a few naked bankers just wearing ties and this mother and son staring at them. It represents some of the content of the book, unfortunately. You open the book with the emperors new clothes store, why . It has a certain when people Say Something with a straight face and address nicely and they appear like they know what theyre talking about, people think they might be missing something or they might not understand or its just not Good Business to Say Something. Its just more convenient not to challenge what they say. But we try to actually do the opposite and expose arguments. So the bankers new clothes refers to the whole connection to arguments that are made to actually sometimes nonsense doesnt matter but this nonsense does matter. A major reason for the success of Bank Lobbying is that banking has a certain mystique. Theres a pervasive myth that banks and bankers are special and different from all of the companies and industry in economy. Anyone who questioned the mystique of the claims that are made are at risk of being declared incompetent to participate in the discussion. Thats true. How strong is the banking lobby in the u. S. . Very strong. After the crisis in 2009 it was senator ben who said frankly wall street owns the banks. In new york the politics is different, but theres a big problem, political problem thats what i learn more and more as i became involved. Its not about making valid arguments. Its not necessary or sufficient to be successful in the policy debate. Because there are convenient narratives that people prefer to have, and there seems to be some and changed real misunderstanding, shockingly held by all kinds of people who you think should know better. And so its hard to sort out sometimes why people say what they say. Some people say to me they just dont understand these subtle things. But i think thats really weird, it is the bread and butter of finance sometimes. Somehow when you go into banking you suspend all judgment. Its all different. So here are the rest of economy of a lot of companies and corporations, they do think, they fund what they do. Thanks somehow are different. They are allowed to say things that you wouldnt think make any sense in the context of other corporations and they just behave differently somehow thats okay spent one of the arc that you make in your book is about equity and capital. And personal you define those four people. What are the arguments you make about those . One of the most insidious things going on is everybody uses this word capital, capital organizations, capital, capital, capital. It turns out most people to understand what this words what this word means in the context of baking. Because of the way the words are used around and way it is framed you are sent off to an entirely different debate. Its not a debate that is relevant. You would read often times that capital, the banks are required to hold capital, set aside capital. The analogy is often made or the implications made this is like a rainy day fund. But thats not what were talking about. Were only talking about how the banks fund what they do. The fact what they do with board money or with money that most Companies Use which they retained profits with the owners money or the shareholders money, which is happily used by the rest of the economy. We dont force anybody to find, not to avoid borrowing but the banks, people they find almost everything to do with borrowed money. Going to take risk with borrowed money, sometimes investments dont work out and it he comes distressed. That is fundamentally whats wrong with banking is it a sickness of essentially a fundamental conflict between a borrower and a creditor. In this case a borrower and taxpayers. Well, try to come to you right into that bank debt is often 90 plus of a banks assets. Is that too much . Thats way too much. We dont see Companies Fund that way, and theres a reason for it. Its a very healthy unhealthy funding mix. Corporations that borrow so much, in fact any borrower, private barber, government barber is a little bit different. They have other ways maybe to try to find their debt. But, of course, were not going to go into that in this discussion but any part of borrower make it so highly indebted starts being constrained in what did you are just distorted in the way to make decisions about what they do later about the risk they take, about whats attractive are not attracted. Distorted decision because some of the downside of the decisions is borne by the creditors, and if they are a borrower like a corporation can walk away from those debts, or might have the public or the government pay for the Central Bank System or whatever, then the creditors are nicer to them than they would have been two other borrowers, and thats how the bank get to borrowers much as they do, that other people kind of wouldnt be able to our wouldnt choose to. Said the banks get into this position and fundamental whats pushing them is a basic tendency for borrowers to be a big give. And the fact that we feed on the addiction and allow and encourage it perversely to keep doing it by so doing encouraging harmful things, as if we were to subsidize somebody polluting the river. Its a really perverse system. Anat admati teaches finance and economics at the graduate school of business here at Stanford University. Professor admati, what role in your view did the banks played in the 2008 crisis . A major view. And they are other financial institutions, so its not just what you might call a bank, but whatever, investment bank, holding companies, even Insurance Companies like aig, they were all connected to one another. Another. I explained in the book how to set of dominoes are very for interconnected. Got themselves to take risk in all of these various different ways to fool the regulators about what was actually going on, and the meanwhile, do very well for themselves and put the rest of us at great risk. The regulators, and the politicians, they like the good days when it lasted and allowed the risk to build up in the way that really was harmful, ended up being very harmful. The reason we wrote this book is because they get doing this, because the crisis didnt resolve in appropriate lessons and regulations. So we are still in danger. So we wrote this book with great urgency and great concern that we have the system thats just about as bad. Even though times look good now, they looked better now. In europe, not even out of that crisis. When you borrow so much, even if you do a little bit, okay, it looks great because leveraged borrowing tends to magnify the upside and the downside. Thats because the risk, thats the nature of risk. When we discover it doesnt work, its often too late. Who is Martin Hellwig . Martin hellwig is likely someone who i met first was a graduate student and on a completely different topic he was a little bit ahead of me. My research had to do with some research it done in the early 80s. Our paths parted sometime in the late 80s and he went on, he is from germany originally, he was at a research institute, institute for research on the public or to Something Like that for what were trying to do here, and what happened was after the crisis i started wondering what was going on in the financial system, why, what created all these problems and which is something to do about our was it an earthquake would have to live through it, or a storm. I started reading the policy proposals, and the more i looked, the more kind of disturbed i was. It started off in academics and theres a whole part there that i dont know if we will get into, but i didnt like heard and they didnt like what i didnt hear. The fact that i wasnt doing certain things that seemed obvious to me, and i just started asking questions. I came across a lecture that martin gave, Martin Hellwig, about the crisis. And that made sense to me. So as i entered this and started writing, i got in contact with martin in early 2010. And we started exchanging views and ideas. I wrote something, and what he said made sense to me, where as a lot of other people said did not. And use more involved in banking for 20, 25 years, so its like im a newcomer, i come from harper governance looking into banks and saying, that is a really strange industry. Very strange. And so its like, to the point that i would open a textbook and said, wait, this is the same as my students in my class, what they said. Take the gamble. It was shocking, shocking. Anyway, and so the spring of 2010, towards the summer, i decided that basically ive heard enough nonsense. I was not going to just, you know, Say Something any office and kind of complaint to my friends and go out there. Fortunately, i was scared into, into, you know, keeping silent. I was going to go into it and then i called martin, and i was alerted actually that there were some flawed things going on in boston where negotiations were going, taking place when the financial agreement on the capital regulation. Basel. I was alerted by people involved once i start speaking up and asking questions that somebody needed to kind of write out what the issues are around the debate and why were people saying it was wrong. So i decided to discuss with martin because he knew what more was being said. So we wrote a little manifesto in the summer and put it out there. That was sort of the start. The book was the result of after that, tried for a year with 24 7, to enter the debate and impacted. Even for somebody from stanford, some difficulty feeling any impact when people didnt want you to have an impact. So the book is basically going into a broader audience to say, heres what the story is, you judge whether what your doing is right over the something more needs to be done. Here is our story, how we want to teach it. Professor admati, who is this book written for . Is this an academic textbook . Part of it is an academic textbook. It is written on multiple levels at the same time. This is pretty much a serious book about banking, and yet you dont have to read it that way. You can read it as a layperson. You dont need to do anything. To answer your point, a lot of how to enter into mortgage. Everybody is familiar with that and we needed a certain language terms. People needs to understand what it means, what you do with that, what happens when you dont pay your debt. The notion of insolvency, liquidity problems, what all these words mean. We unpack a lot of the legal around it but we avoid the jargon as much a possible. Everything is in terms that you know pretty much or whatever is new we explain. The footnotes are extensive but everything that is not essential for just reading through and really getting an understanding of the Underlying Forces that are at play here. Why are people wanting to do this is what of the motivations of different people involved . We kind of goes to the heart of it and its not a question. I want to really avoid, it was to start with the crisis because of had to read a lot of crisis books, im so sick of it i cant even stand. Its not about this crisis. Its really about financial crisis but also not about crisis. Its about a system, because it was not a healthy system. Every day, it can be muddling along or even looking okay and still its not a functional system. It still doesnt have its right place in economy. So i think banks, a lot of things are wrong with banking and there is a lot we can do about it but theres a lot of nonsense to prevent. Prevent. Historically in your view has banking ever been right size or rightly position in our economy . Theres inefficiency in banking. I think its basically fundamental. Sometimes people say, oh, banking was always fragile. If its not this, its not that. You can understand that and we tried to give a flavor for why that is. But it does not follow because that it was ever really efficient as an industry, or because really what happens if you want me to start with teaching, is deposits are like a road system, like infrastructure. We want a Payment System and want to not carry around cash or gold or Something Like that, so thats how it started. We have given the money to the bank or. In the trade shows in new york, and the banker, theres not a suitcase that you have for safekeeping. You just want your money back at some point so we depositors linda the banks money. So from that point on bankers had this money. They thought, the are also people needing loans so lets also make loans. Lets invest, lets play a little bit. The question is when they make loans or whatever it is they do with the money, some risk is taking. All kinds of risk which we do over, what could go wrong, what could go wrong . Well, things can go wrong, and the question is, what happens then . Whose problem is it then . And so the word bankruptcy actually has the word bank any. Bankrupt means broken bench. So when the deposit impostors came and the money wasnt there, all they could do was break the bench or the banker. That shows you the control problem between the borrower and the lender. Because the borrower takes you outside, doesnt come with the lender. The deposit as. And on the downside, its everybodys problem. Now scale that problem. Now move forward. Lots and lots of things have. Sometimes banks are told by politicians, theres always some agenda or other because banks are where the money is, as the robert said. So they sometimes my to fragile because theyre not diversified. Sometimes other reasons. But if you look at the history of banking, first of all, there werent even ever for a long, long time, 100 figures that were the kind of corporations were shareholders can only lose what they invested, and too bad for anybody who lends money. This is no 19t now 19 century. They werent corporations, and then in the 19 century developed more corporations took place, banks were actually not last. If banks a limited liability they could walk away, then deposits wouldnt be safe and it wouldnt serve as well. But then still banking crisis, shareholders were broke. Not the depositors. The shareholders had to cover. Even in the u. S. Going into the 20th century, there was, depending on the state, double, triple liability for banks owners, even shareholders. So you could actually lose as much as you invested, or double that or even just be reliable if the bank lost money coming couldnt pay the notes. In any case, then we have the depression and there were a lot of big, huge problems in banking. Bank holidays, banks didnt open, lots of runs in the banks. All the moodys, its a wonderful life, mary poppins, rumors start. Everybody is standing in line, all that. Like in cyprus recently. And so the banks then we established deposit insurance. So the depositors kind of felt secure, and over the years, going back to the development of the banking, they stopped putting their own money for the owners money and. But our view, the original question, is that the banker never wanted to put enough of their own money. And the way we could tell the story sorted with the guarantees is that somebody else, you can show them the downside they want to leave a low more on the edge. In other words, it becomes biased towards risktaking and first to say this. Because once it is in place, the country, theres a downside disproportionate from the outside and the outside gets magnified even more. To all that said, had we put him reform since the 08 crisis . And what would you like to see primarily as a reform . Our analysis here is that the system is fundamentally very fragile. One thing that people talk about in this country is too big to fail. We explain how this comes about. It comes about because institutions would have a lot systemic, in other words, drop a lot of dominoes and spill over to the rest of the economy. Failurfamily was irrevocably sml bank compared to the banks we have today. To answer your question, no. There was this effort that the banks would tell you, a triple of the capital requirements. My favorite line on the tripling of cap or requirements, they always like to say how much bigger it is. Is it so ridiculously low that tripling means almost nothing. And so it was coming in, 2 of something called risk weighted effort. Now its up between 4. 5 and seven. These numbers just dont begin to have the right number of digits. The backstop that is new is 3 , 3 . You do not find any healthy corporation in any industry i can live like that. If they did what Warren Buffett does they could retain earnings and double up their equity. What do you mean . What i mean is if you take a second mortgage on your house, you deplete your equity on the house. If you keep investing in your house barely goes up and you do not take any money out, as a corporation if you retain all you earnings then you build up your equity. The borrower from depositors and its part of what they do. But that was not safe, they can ask back off their liabilities without needing deposit interest. They cant be more normalized like other corporations. They cant even have a minimum they would demand from their borrowers. Instead it allows three, four times these kind of numbers. They are so fragile. Just a small loss would start getting people nervous arent getting them to be less able to land as well as pay their debts. They get into a situation where we see credit crunches and thats when we have to start investing in them and saving and all of that. The reason they dont win is when they lost from previous investment. Why dont we make them better prepared to when they lose next time, its not somebody elses problem but the people who got the upside spent are not banks suddenly different than other corporations . There you go. They would like you to think that. They are not that different actually. They respond to the things they are given and they behave in understand the way given what we allow them to do. The problem is that on this issue of risk and on the issue of investment, they are corporations actually who are different from other people in that we need them to be safe. And, therefore, we end up providing them safety nets that make them more risky because we give them incentives to take the risk and to borrow more so that they can get more of the upside and leave the downside to others. Our job or the regulations job is to counter that a kitchen instead of feeding it. Unfortunately, this is being missed and so were putting ourselves in the box, if you think financial crisis unlike some disaster that happened, nina, slowly, by having a business, resolution and living wage, and all that. An ounce of prevention is worth a pound of cure. You can go in and tell them what to do with all of that but the first and foremost, no matter what we do, you have to straighten out their funding mix which is unhealthy. In other words, fixing that, get to london to do everything more consistently. The reason were not doing it is because it somehow confused a decisionmaker. Its just wrong. Anat admati also serves on the fdics systemic resolution advisory committee, which is what . This is part of the doddfrank act. This is called title ii of doddfrank, and what it does is it creates an alternative to bankruptcy for more corporations corporations. Right now, for more institutions that are called systemic. Right now, all along since the very creation of the fdic, the fdic knows how to take over failed small banks. The biggest they did was maybe washington mutual, 50 billion or whatever. Now the fdic is in charge of, in theory, taking down bank of america is needed. We are asked to trust that in a crisis, or not in a crisis, the fdic which now has authority to do this, and its probably the best around to have this authority, will actually resolve basically, you know, create some kind of a process by which credit is will somehow be paid, essential functions will be maintained somehow. And likely to for the small banks they can sell off pieces, but they will create a better mechanism than say, the lehman bankruptcy which has dragged on for four years and we wasted almost everything that was there. And so whoever is being systemic and we are not there yet, but it can be any time, the fdic is charged with results. So im on the committee that is meant to advise on the process but in this committee are people like paul volcker, john reed of new york city, a number of other people. And so we meet not that frequently but we have folding beauties in which we are presented with progress on this issue. Its very good to be there because it lets us ask a bunch of questions and work with basically what i consider right now the best regulator in d. C. Right now, and the one most concerned with the public, which is the fdic. And so we asked the question, could we eliminate the problems just by being able to allow these companies to go into bankruptcy, which is the normal thing, or Something Like a great satan. If you take on too much debt and you cant pay your debt, you go into bankruptcy. Can we create something equivalent to the bank that will have Collateral Damage . Thats the issue. Its a very problematic. They have some things in title i that was supposed to help like determine how i would result under bankruptcy but i wont go into bankruptcy so there are all kinds of issues there. Supposedly they would be great supervision and preparation. Let me just say the fdic is to a great job trying to do this, like it is not a point you want to get too. Just a trigger by itself is already too late. When you get to that point, as paul volcker said at our first meeting when we are presented, what fdic wouldve done if it had authority to resolve Lehman Brothers instead of sending Lehman Brothers to bankruptcy, it would have done great, Paul Volckers question was, what would you do on day two, three, fofour after you do this the fit day . Of course we had months to sort of reduces and, of course, in a crisis they all came at the same time. The policymakers would be tempted to whatever law they made yesterday, change it because of the crisis last time. We dont want to get the. The question is, if this is the earthquake or not, the book, this is not an earthquake. This is not a Natural Disaster but this is something that can do a huge amount to avoid and prevent. And while you do that also get a better, safer system, less bloated with subsidy system. Just about everything you can think about is good. Hardly anything to think about is bad unless youre a banker. We have been talking with anat admati whos a professor of finance and economics at the graduate school of business here at Stanford University and a coauthor of this new book, the bankers new clothes whats wrong with banking and what do do about it. You are watching tv on cspan2. The government was shut down for 16 days in october as republicans unsuccessfully tried to defund the president S Health Care law. The night on our companion network cspan a look back at the congressional debate and president obamas actions during the shutdown. Thats tonight on cspan at eight eastern. With the dawn of the television age, Jacqueline Kennedys time as first lady was defined by images. Her young family entering the white house, International Fame and the tragedy of a grieving widow all within three years. Join us for a look at the life of Jacqueline Kennedy on first ladies influence and image. Tonight at 9 p. M. Eastern on cspan and cspan radio. I think really is the longest and best form of media that is left. What were doing right now is an hour long conversation is unprecedented. Only cspan does long form conversation anymore. Its tremendously revealing when an author has had the book read these days because they dont get many people who have actually read the books and know what theyre talking about with page notes and did so rewarding to them. I get a great deal of satisfaction when an author says to me, guys, but is thats the best interview ive had on this book tour. Just got it from charles, and loved the interview on things that matter, whose new collection of essays, some of which are old