In Washington, DC, a bipartisan effort is underway to chip away at the 2010 Dodd-Frank financial reform law, which is supposed to prevent the type of economic meltdown that brought the world to the brink in 2008.
Wall Street banks are lobbying to defang sections of the law related to derivatives — the complex financial contracts at the core of the meltdown. One deregulation bill, the “London Whale Loophole Act,” would allow American banks to skip Dodd-Frank’s trading rules on derivatives if they are traded in countries that have similar regulatory structures.
“It keeps being weakened and weakened,” economist Anat Admati, co-author of the book, The Bankers’ New Clothes, says of the Dodd-Frank legislation. “We have some tweaks. We have messy, unfocused efforts. But we haven’t really gotten to the heart of the matter and really managed to control this system effectively,” she tells Bill.
Banks are indulging in the same behaviors, such as having too much debt, that got us into serious trouble in 2008. According to Admati, “…the financial system continues to be fragile and the banks continue to live dangerously. And when you speed at 100 miles an hour, you might explode and harm other people.”
While Americans get talked into subsidizing and supporting the banking sector, Admati says, real reform is the only answer or the next meltdown could be fatal. She believes banks should be forced to use more equity funding — the unborrowed money to which shareholders and owners are entitled.
“No healthy company, unless it’s on its way to bankruptcy, maintains on a regular basis less than 30 percent equity,” Admati tells Moyers. But in banking, the amount is closer to five percent, Admati says.
“I’m not saying it’s the silver bullet and the only thing. But it’s the no-brainer thing to do.”
BILL MOYERS: This week on Moyers & Company, banks and regulators: are they up to their old tricks?
ANAT ADMATI: We are encouraging them to live more and more dangerously. And they tell us it's for our benefit. But we are the ones paying.
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BILL MOYERS: Welcome. It's been six years this summer, believe it or not, but I’ll bet you remember how disastrous the financial meltdown was in 2008, how scared we were -- and angry -- at the banking industry’s blatant negligence, arrogance, and greed. And remember all the guilty CEOs who went to jail for their wrongdoing? Yeah, neither do I.
But maybe you do remember our broadcast last week on which the Nobel prize-winning economist Joseph Stiglitz compared how the government responded during the financial crash to the police mollycoddling a drunk driver:
JOSEPH STIGLITZ: What we did was analogous to we take the perpetrator, the guy who was the drunk driver to the hospital, but we leave the guy that has been hit on the street.
And then we say, oh, by the way, you don't have to pay for any damage that you've done. So even after they paid back the government the real question is who's responsible for all the damage that's been done to our economy? The people have lost their job, that lost their home? The banks haven't paid back a cent of that liability. And that's a real corporate responsibility.
BILL MOYERS: My guest this week is just as outraged as Joe Stiglitz and just as great an advocate for reform – banking reform. Anat Admati teaches finance and economics at Stanford University’s Graduate School of Business and has been at the forefront of the debate on how best to regulate our banks to make them more responsible to the public interest. “Time” magazine named her one of the most influential people for 2014, in part because of this book,“The Bankers’ New Clothes.” Co-authored with Martin Hellwig, reviews have described it as “powerful,” “crucial,” “a call to arms” and “the most important [book] to emerge from the crisis.” Anat Admati, welcome.
ANAT ADMATI: Thank you.
BILL MOYERS: Can what happened six years ago happen again?
ANAT ADMATI: Yes. Because the banks continue, the financial system continues to be fragile and the banks continue to live dangerously. And when you speed at 100 miles an hour, you might explode and harm other people.
BILL MOYERS: And that's what they're doing, 100 miles an hour, despite the fact that we thought after the crash that we had learned some lessons; we were going to have a discussion and institute some reforms that would prevent it from happening again?
ANAT ADMATI: We have a tweak, is what we have. We have some tweaks. We have messy, unfocused efforts. But we haven't really gotten to the heart of the matter and really managed to control this system effectively.
BILL MOYERS: But as you surely know, the bankers tell us, not only do we have a safer system, but it's getting even better as reforms are put into place. You look skeptical.
ANAT ADMATI: Well, they are truly trying to confuse people with their narratives. They just-- either speaking a language that nobody can understand, or they say things, sometimes, that are completely wrong. And sometimes they're just misleading.
But if you step back and look at the system, it's very fragile. It's one of those systems that's like a big house of cards. You touch it, stuff can happen fast. And it's far from any system that we would think of as reasonably stable, able to support the economy, all of that.
BILL MOYERS: You made that point in your TEDx talk. That the average US corporation relies on 70 percent equity and earnings. A company like Google, however, maintains 94 percent equity and borrows little. Banks, on the other hand, live on borrowed money and maintain very little equity— five percent. So when banks are over leveraged, and interconnected, and loans go bad, everything can topple, and there is poor old Uncle Sam trying to keep whole system from collapsing. And are they still taking these risks?
ANAT ADMATI: Oh, enormous. And by any measure of exposures to derivatives and the amount of debt versus their own money that they have, by most of these measures, it's incredibly distorted and dangerous.
BILL MOYERS: I learned from you that two years before the financial crisis, the average size of the top 28 banks was $1.35 trillion five years ago. The average size last year, $1.7 trillion. And you say these too big to fail banks are particularly reckless and dangerous.
ANAT ADMATI: Look at them. They've basically become above the law. The people in them are able to do things that most other corporations would worry more about them doing because they can benefit from upsides all through the chain. And their creditors don't worry enough, as much as other creditors would worry. And the downside eventually is everybody. So, by just taking the risk, they're able to pass on some of their costs to other people. That's kind of how it works for them.
BILL MOYERS: Paul Krugman writes that our economic policy has been “governed by the implicit slogan, 'Save the bankers, save the world.'" That's the argument that banks have been making. Meaning that if we restore confidence in the financial system, prosperity will follow. And you're skeptical?
ANAT ADMATI: I'm very skeptical because there are very unhealthy corporations. The notion that what happens to them, all the Geithner spin, you know, we were just here to save them so that they'll save you, yes. So most people, including myself, don't argue with the fact that you don't want the system to implode because it'll be very disruptive, the way it was in the Depression. But it does not mean that you get back in the car and drive it 100 miles an hour. And right now, as we speak, the regulators are making the same mistakes they made right before the crisis.
BILL MOYERS: What do you mean?
ANAT ADMATI: They're allowing the banks to remain incredibly opaque and-- indebted and interconnected so that they can harm us again.
BILL MOYERS: You mentioned Tim Geithner a moment ago. Jon Stewart interviewed the former Treasury Secretary last month, and Tim Geithner tells Stewart that the mistake that led to the economic crisis wasn't in the toxic mortgages and the sub-prime loans the banks were hustling. Here's what he says.
TIM GEITHNER in The Daily Show with Jon Stewart: There was a lot of fancy stuff that people didn't understand […]Yeah, sure, at the margin it made things a little worse. But it wasn't central to it. The central was the core--
JON STEWART in The Daily Show with Jon Stewart: I would suggest that that drove the entire boom--
TIM GEITHNER in The Daily Show with Jon Stewart: No. It's not-- it's not true--
JON STEWART in The Daily Show with Jon Stewart: When guys start bundling this and making the money, so the subprime loans, there's a rush to get in on that business.
TIM GEITHNER in The Daily Show with Jon Stewart: Look--
JON STEWART in The Daily Show with Jon Stewart: You don't believe the money people were making in derivatives and securities drove people to make more of these subprime loans, bundle more of them into derivatives and securities, collateralize it, and continue and start to swell this thing out. That was the bubble.
TIM GEITHNER in The Daily Show with Jon Stewart: That happened. A lot of premature lending happened, a lot of bad stuff happened. And--
JON STEWART in The Daily Show with Jon Stewart: Yes.
TIM GEITHNER in The Daily Show with Jon Stewart: --that was, I mean, sure, making it worse, but it wasn't the core cause. The core cause of this was a much more simple thing.
JON STEWART in The Daily Show with Jon Stewart: Which is?
TIM GEITHNER in The Daily Show with Jon Stewart: Which is that a level of confidence that it's safe to take on this risk and leverage because people did not assume it was possible for this country to face the risk of a great collapse and recession and panic. People didn't think house prices would fall. ANAT ADMATI: He's wanting to blame some confidence and all of that. In fact, a lot of risk was taken. Bad decisions were made. And he allowed that. Should've watched this system, where the risks were so obvious, so obvious to so many people, except for these blind regulators. And to just say, oh, it was just panic, just panic. Well, the panic was for a reason.
BILL MOYERS: He seems to be saying, well ordinary people took part in this bubble. They had confidence that the loans they were taking out, they'd be able to repay. And they're partly to blame.
ANAT ADMATI: Well, for every borrower, there's a lender. And in the case of the homeowners, you have to ask, why did the banks lend them so much, and with what money did they lend them? As it turns out, they lent on mountains of borrowed money themselves. And they, themselves, as borrowers, we didn't have anybody watching over them, as they're all watching, supposedly watching, over the other borrowers. So standing in the middle of this system, they-- if they want to, they can be tough lenders. But, as borrowers, they're completely reckless and nobody does anything about it.
BILL MOYERS: In another part of that interview Jon Stewart reminded him, as you have said, that the bankers haven't really been penalized for their sins. Here's the exchange.
JON STEWART in The Daily Show with Jon Stewart: They have yet to pay any price for it. Forget about Old Testament justice, they haven't paid new age justice for it yet.
TIM GEITHNER in The Daily Show with Jon Stewart: I'm agreeing with you, it's unfair. I'm agreeing we didn't give the measure of justice against that. But I am--
JON STEWART in The Daily Show with Jon Stewart: Complete fairness--
TIM GEITHNER in The Daily Show with Jon Stewart: --I am completely confident, I'm completely confident that the alternative strategy that would've been more comfortable to you at the beginning, you would've cheered us for, you would've loved us for, would've been devastating to the people you're most worried about.
ANAT ADMATI: I'm going to agree with both of them. I'm going to agree with both of them. That's not the right question. So what was the alternative? That's the problem. That's a hostage situation. What are you going to do at the moment? The problem then is, okay, you let the trucks drive at 100 miles an hour and they imploded. And now, you know, there's collateral damage.
The point is, why not a speed limit? Why are we here? Why did we let-- what Geithner is ignoring is that he, as a regulator and as a policy maker, allowed this under his nose, and then didn't do anything about it afterwards. That's the bigger problem there, is that's the people I blame. I watched Occupy Wall Street. And I thought to myself, they don't know where to put their tent. Put your tent in front of the New York Fed. They failed.
BILL MOYERS: How do you get justice when it was a mistake and not a crime?
ANAT ADMATI: Well, there's no-- you can't always get justice. That's the problem. What you need to do is try to prevent the harm. That's my focus. And you can. What's maddening about this situation is how we're accepting this as if it’s some kind of natural disasters have happened to us and we have to live with them. And that's the image they try to portray, that the earth just opened and we were-- we had to send the ambulances. That's the way they tell is. That's the wrong way to view it.
BILL MOYERS: When, in fact, preventative medicine, if the regulators had been doing their jobs--
ANAT ADMATI: Exactly.
BILL MOYERS: --would have avoided this calamity.
ANAT ADMATI: They divert attention from their own failure before incidents. That's what's so outrageous about this, is that you can make mistakes, but you must learn. And they did not. And they're still failing.
BILL MOYERS: I'm persuaded by your book, you and Martin Hellwig argue that banks should risk more of their own money and less of everyone else's. Why would they want to do that?
ANAT ADMATI: They wouldn't want to. This is not going to happen voluntarily. This requires regulation. What you have is, for other industries, if you look around, without any regulation and despite the tax code rewards debt over equity for corporations and for buying homes too.
Despite that, no corporation and no regulation gets anywhere near the kind of indebtedness that the banks do. And the banks don't have to be so indebted. Yeah, some of their business is in taking deposits, which is debt. But to get to have 90 percent or 95 percent of the money you're spending be money you made promises on to live on like a tiny equity margin, no corporations live like that without regulation.
In my part of the world, Silicon Valley, a lot of risk is taken. More risk than making loans. Risk in innovation. Risk is taken by manufacturers of all kinds of new industries. And they may have total losses with them. But they don't fund it with so much borrowed money. And so, the banks should if they were just more like normal corporations, they might begin to even make more reasonable decisions. Right now, they live entirely on the edge and are all distorted and inefficient. And somehow, for them, it still works.
BILL MOYERS: They live entirely on the edge, you just said.
ANAT ADMATI: Yes.
BILL MOYERS: But we're there with them.
ANAT ADMATI: We are there with them. They take us all down. But they--as they drive through the edge or they live on the edge, it works for them--
BILL MOYERS: Yeah, they--
ANAT ADMATI: --to live on the edge.
BILL MOYERS: Because they know the government is their backstop?
ANAT ADMATI: Exactly. And--
BILL MOYERS: The taxpayer?
ANAT ADMATI: --their creditors know. And so, they're able to get people to let them use money that, if they were anybody else, they couldn't. If you just kind of erased all the labels and you just presented their balance sheets or their disclosures to a prudent investor, they couldn't borrow a penny. Given how opaque their disclosures are and given how much risk is in there all over the place, nobody would bother. But they get away with it.
BILL MOYERS: And you’re saying if we require banks to increase their equity to a third or--
ANAT ADMATI: Yup. Twenty percent, thirty percent, yeah.
BILL MOYERS: --that will make them safer?
ANAT ADMATI: It would make them safer. And everything you can think about is going to be better. So I'm not saying it's the silver bullet and the only thing. But it's the most no-brainer thing to do, because it would only reduce all the distortion and would correct what's wrong now. And almost everything that's wrong basically comes down to too much bank borrowing and bad regulation.
BILL MOYERS: So how do we get them to use more of their own money for the great risk they take?
ANAT ADMATI: There is nothing except make them stronger and get rid of the ones that are not viable. In the crisis, quite clearly, many claims, anyway, and it's quite reasonable to think, that Citigroup and Bank of America too, became insolvent. If you were to try to liquidate them on that minute, they wouldn't. They just had negative equity, call it, okay? They're under water. Which, for a corporation, usually forces a bankruptcy or restructuring.
Instead, they were nursed back to life from zombies, as you call it. And so, the thing to do is any corporation, normal corporation, that becomes, that lives on the edge and has creditors breathing down their neck, is going to be forced to go to ask shareholders for money and show them what their business is. I want the banks to go to shareholders, to investors, to equity investors.
First of all, retain all their earnings. They should back up their liabilities and their deposits and everybody else that they're harming. They should use them for lending. Should use them for anything but to pay them out so they can keep borrowing.
And then my stress test is a very simple market test, that all even, you know-- all in this country, all the capitalists should like. Go sell your investments to some shareholder that bears the downside and see what they'll give you for your investment. If your stock price goes down, well, then it may be corrected to the right price. Maybe it's too high right now because of the subsidies that you're-- And let's see. If you cannot raise equity at any price, that might mean you can't live without subsidies.
BILL MOYERS: So you're saying, raise more capital, more equity—
ANAT ADMATI: More equity.
BILL MOYERS: --of your own, and take your risks with--
ANAT ADMATI: With that.
BILL MOYERS: With it. Was there a positive step in that regard in April? Regulators issued a new rule that required the big banks to maintain overall equity of five percent, up roughly from three percent, and six percent for federally insured subsidiaries. Is that a significant improvement?
ANAT ADMATI: Five percent? Who lives like that? That's ridiculous.
BILL MOYERS: What do you mean?
ANAT ADMATI: No corporation lives on five percent equity on a regular basis. Certainly not corporations that can harm other people when they go down. Even into distress that everybody starts getting nervous. The more credible they're going to make the notion of letting them fail, the more everybody's going to scare you before that. And you're going to get all these runs and instabilities just at the thought of it.
That's what we saw with Bear Stearns, with Lehman Brothers. That's what you could read in the financial crisis inquiry commission. That the instability started before Bear Stearns went under, before Lehman Brothers went under. That's the problem is you want to keep them way in a different range. And there's no science, I assert to you, no science behind any of these numbers. None.
It's just that we got here and the banks hate to move from here. But it’s nothing about what we can do and should do and should focus on because, if you did that, then you might have to do less of some of the other stuff. And the rest of the regulation is very technical, with all these very complex risk measures. It goes thousands of pages that nobody can decipher.
And so, a lot of the regulations just got so complicated, instead of focusing on basically, sort of your basic speed limits, being able to measure things and see things more clearly, so that you can maintain this system-- it can do for the economy on good times and bad times much more consistently. And much-- without fear of distortions.
BILL MOYERS: So the takeaway is that as long as we are subsidizing these banks, as long as we guarantee them that they are too big to fail, we're not safe?
ANAT ADMATI: That's right. And we're subsidizing perversely, the harm. Because we are encouraging them to live more and more dangerously. And they tell us it's for our benefit. But we are the ones paying. So it's as if you subsidized somebody to pollute the river when they have a cleaner alternative.
I mean, I'd subsidize their equity if I had to subsidize anything. But we're subsidizing them only through debt. They only get the subsidies when they use debt. And so because when they use debt, their creditors give them very easy terms, depositors and other people who believe they'll be paid. And so they are able to, if they went to equity markets, they would be facing the same investors that everybody else faces. And so they have good investments to make, they should make them.
BILL MOYERS: But they don't want to do that?
ANAT ADMATI: Exactly. They just don't want to. So the point is--
BILL MOYERS: They've got a good deal.
ANAT ADMATI: They got a great deal. And so what they're going to do is, if they make profit, they want to pay them out and keep borrowing. And so there's nothing essential about that, or nothing good about that, except for a few people. And then who exactly wins and loses? They might tell-- pacify the shareholders by saying, here, we'll give you dividends, we'll give you dividends in good times.
And then when the bad time come, or when they have fines or anything else happens, the shareholders pay. And who are the shareholders? That's also all of us through our pension funds. And how did we do on the S&P 500? Very poorly. So the notion that these institutions by living dangerously somehow help us, that's completely nonsense. And so what we have is a really unhealthy system that we perversely get talked into subsidizing and supporting.
BILL MOYERS: This is, as so many people have said, a very important book. “The Bankers' New Clothes: What's Wrong with Banking and What to Do about It.” Anat Admati, thank you very much for joining us.
ANAT ADMATI: Thank you. Thanks for having me.
BILL MOYERS: A post script. "The Washington Post" reports that Bank of America is negotiating to pay at least $12 billion to settle several federal and state investigations into the housing mess that led to the 2008 crash. Around $5 billion of the fine would go toward mortgage relief or helping communities that were devastated by the banks’ reckless and immoral practices.
Here’s the paragraph in the Post story that blazons like a neon sign outside a sleazy motel thriving on one-hour rates:
“Bank of America, JPMorgan and others are accused of selling shoddy home loans to unqualified consumers, packaging those mortgages into securities — allegedly knowing they would eventually go sour — and selling them to investors around the world.”
A puzzled reader wrote to the Post: “Isn't this what a Ponzi scheme does?”
Last month, the managing director of the International Monetary Fund, Christine Lagarde, spoke bluntly about “scandals that violate the most basic ethical norms,” about how banks and other financial institutions had engaged in "risk-taking, leverage, opacity, complexity, and compensation,” including illegal foreclosures, money laundering, and the fixing of interest rate benchmarks. Quote, “While some changes in behavior are taking place,” Ms. Lagarde said, “these are not deep or broad enough.”
That’s putting it mildly. Name one big-time banker who’s been held responsible for his – yes, they’re all male – his role on wrecking crew. To the contrary, the banks that brought us down are riding higher than ever. Sure, some are paying fines, but even $12 billion is mere piggy bank change for Bank of America.
And those CEOs? Still shamelessly gorging on the spoils that flow from being too-big-to-fail-or-jail. The "Financial Times" reports that banking chief executives got an average pay increase of 10 percent last year and took home, on average, $13 million, compliments of benign and compliant boards of directors who are in on the racket. These “gentlemen” are among the leaders of the industry’s efforts to repeal, or water down, some of the tougher rules and regulations enacted in the Dodd-Frank legislation that was passed to prevent another crash. As usual, they’re swelling their ranks with the very people who helped to write that bill. More than two dozen federal officials have pushed through the revolving door to the private sector they once sought to regulate.
And then there are the lapdogs in Congress willfully collaborating with the financial industry. As the Center for Public Integrity put it recently, they are “Wall Street’s secret weapon,” a handful of representatives at the beck and call of the banks, eager to do their bidding. Jeb Hensarling is their head honcho. The Republican from Texas chairs the House Financial Services Committee, which functions for Wall Street like one of those no-tell motels with the neon sign. Hensarling makes no bones as to where his loyalties lie. “Occasionally we have been accused of trying to undermine aspects of Dodd-Frank,” he said recently, adding, with a chuckle, “I hope we’re guilty of it.” Guilty as charged, Congressman. And it tells us all we need to know about our bought and paid for government that you think it’s funny.
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Producer: Gail Ablow. Segment Producer: Lena Shemel. Editor: Rob Kuhns. Outro Producer: Robert Booth. Outro Editor: Sikay Tang.