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Transcription of interview with Anat Admati on March 18, 2013.
Douglas Goldstein, CFP�, Financial Planner & Investment Advisor
Anat Admati is a professor of finance and economics at Stanford University. She just
came out with a new book called The Banker�s New Clothes: What�s Wrong with Banking and
What to Do about It. She got her undergraduate degree at the Hebrew University and her PhD
at Yale.
Douglas Goldstein, financial planner & investment advisor, interviewed Admati on Arutz Sheva
Douglas Goldstein: Who�s the book for?
Anat Admati: The book is written for everybody because we realized at some point that talking
just to the banking expert and to those involved is not going to get us fine off and we need
to get a few more people involved in this debate to kind of get those involved to pay
more attention to what they need to do about this system.
Douglas Goldstein: For those people who are not yet involved in the debate, what are the
key issues that people are arguing over?
Anat Admati: The question is how to make the banking system kind of work for the economy
so that it�s healthy and does not create too much danger for other people, the rest
of us.
Douglas Goldstein: The danger you�re referring is what we saw 5 or 6 years ago?
Anat Admati: Yes actually it is a little bit beyond that. If you have a crisis obviously,
we�re still living the consequences of that crisis. Europe might yet implode, its banking
system is very unhealthy as is of course its entire system, but beyond that, we�re still
looking the wounds from the previous ones, both in the banking system and in the rest
of the economy in terms of recovering from the crisis that was greatly caused by this
fragile system. The question is, is the system better now and the answer is actually no.
Douglas Goldstein: You don�t feel that banks are being more cautious about how they lend
and not letting people borrow so much money to buy a property?
Anat Admati: Actually lending is only a part of what the banks do and it is a part that
they can take risk in, but they take lots of other risks and they�re very highly interconnected
so the whole system is a very fragile system. That�s the problem and the thing is that
there�s something to do about it and the frustrating thing is that not much actually
is done to have guarantee a better system. The other thing is that banks don�t always
make the right kind of loans. They might make too few or too many so they�re not healthy
corporations as corporations, that�s basically our main point.
Douglas Goldstein: Do you feel that there�s a lot of transparency when someone puts his
money into the bank, he knows what�s actually going on behind the glass doors?
Anat Admati: It depends how you put your money in the bank. If you put the money in the bank
as deposit then usually you�re insured in most countries and that�s part of the problem,
the depositors don�t really care but then the question is who does care about the risks
that the bank take or as we emphasized about how much borrowing overall they do which is
a lot.
Douglas Goldstein: If the banks are borrowing like any business might borrow, they�ll
either make it or break it. Lots of companies go out of business because they�re over
leveraged and then they go bust, but that�s a problem for the investors whereas the depositors
in the bank as you pointed out are insured and no one lost any money as the result of
banking crisis if he simply had bank deposits and CDs, right?
Anat Admati: Much more than that, actually nobody lost money who had the bank promised
them anything even if they were supposed to be absorbing losses, they were kind of a cold
capital and the regulator thought that they would participate in losses. The banks just
want to make a lot of promises and then somehow when they got into trouble, then somehow those
who made promises, do still pay. The only people who lost were shareholders of the banks
but that who should lose because the shareholders make the money. Actually, the people who won
the most are the bankers themselves, they did a lot better than the shareholders because
the shareholders lost the rest of their portfolio and that�s part of the economy.
Douglas Goldstein: What exactly is the problem you�re defining?
Anat Admati: The problem is the collateral damage of their defaults. The problem is they
needed bailouts in order not to harm even worse and the problem is that if this happens
again and they run into trouble paying their own debts then they harm other people and
they harm the economy and they get credit crunches and all these problems that is why
they end up being bailed out.
The issue is can they be a healthier corporation and here is the problem, there�s no healthy
corporation or healthy industry that is so indebted in the banks and nobody could become
as indebted as the banks if they didn�t have so much safety net, if the creditors
wouldn�t agree.
Douglas Goldstein: Is that because the governments are always there to back them up?
Anat Admati: The depositors really don�t care and in fact even beyond deposit limits
the government ended up paying, money markets ended up being guaranteed and especially for
the large banks somehow it gets paid and even for the smaller banks when the industry tends
to fail at the same time then somehow the creditors are not as worried as creditors
would�ve been with the same kind of balance sheets elsewhere.
Douglas Goldstein: Because the government was there to bail out the banks, the banks
were completely free to take whatever risks they wanted knowing that it really wouldn�t
hurt them in the end which would suggest therefore that the government should make a policy not
retroactively, but going forward that maybe they wouldn�t bail out the banks in such
situation and that would force the reform.
Anat Admati: The dilemma is that there are bad choices at a situation. In other words,
if you get there, your choices are to bail out or huge damage. They let Lehman brothers
fail and it triggered a huge contagion and problems. Now, you have banks that are multiple
times bigger than Lehman, will they be allowed to fail? The government seems to be afraid
of a Lehman moment and there is your problem. The question is are stuck, is it like an earthquake,
we just have to sit back and put ambulances by the road where it was illusion mechanism
or can we prevent this financial crisis.
The good news is you can actually prevent a lot of it and the problem is that you just
have to sort of counter their incentives to take all these risks and the fact that the
safety net that was created through the positive joints and through the sort of implicit guarantees
that just people believe are there is precisely as you said enabled more risks to be taken.
It�s kind of paradoxical.
Douglas Goldstein: What�s your proposal for preventing these problems in the future?
Anat Admati: You have to go to the heart of the problem and the heart of the problem really
is that borrowing in general tends to have the addictive properties, in other words a
heavy borrower tends to be biased in favor of more borrowing as they fund which for the
banks that becomes really difficult because they�re enable to borrow more. The solution
is first and foremost to make them a lot less intelligent. So we�re talking about what�s
called the capital requirements. Sometimes it�s misunderstood that that�s what these
requirements are about, they�re not about reserve, they�re about the funding of the
banks and the level of borrowing relative to other funding that they do and our solution
is immediately to strengthen them by having them fund with much more equity so that there�s
more lots of absorption. It�s like increasing the liability of an owner basically.
Douglas Goldstein: They will have less money that they are able to lend out but that will
also make them with the stronger balance sheet?
Anat Admati: It would prevent them. The only reason that this would make them less profitable
is because they would be able to enjoy less of subsidies that are basically given to them
only when they borrow. So if you remove the subsidy from somebody who pollutes, that�s
not a cost to society because I might save 2 million dollars and it cost you 20 million
to clean up after that. So that doesn�t make any sense where subsidizing something
is harmful which subsidizing and borrowing is supposed to they are healthy funding.
Douglas Goldstein: You�re against to subsidizing the banks, is that correct?
Anat Admati: I guess yes because they�re against funding advantage which also gives
them [proper] incentives to borrow and take advantage of the subsidy because it�s a
kind of subsidy that they can make bigger.
Douglas Goldstein: Should the government ultimately be there to backstop the banks if they go
through such a traumatic experience again?
Anat Admati: We�re not judging the bailouts. The government should do what�s best in
a given situation. We�re trying to put this banking system much more on its own feet so
it�s a little more normalized and therefore cares about the downside as much as it�s
crazy about the upside of their best.
Douglas Goldstein: Do you think the banks are simply following what the lessons they�re
learning from the government which would appear to be out of hand borrowing as well?
Anat Admati: The bankers are responding to their own incentives. We complain as well
about systems of risk wait and others that distort the bank�s decisions in terms of
in particular but I think and even against borrowing business lending and into other
things that the regulators might view as less risky but they�re actually risky because
they chase returns and therefore take risk. The problem is they harm other people. It�s
a private corporation, they have other funding. Government borrowing is a little bit different
but in fact, part of the banks problem is they lend to government sometimes too much.
[Risk] borrowed as much or even home borrowers borrow as much because the banks lend them.
Douglas Goldstein: Is the solution to this is regulatory solution meaning the government
should just change the way the rules are done or is this something you would hope that the
market would force the banks to do by saying we�re not going to do business with unstable
banks?
Anat Admati: This got to be the regulation. There is no way this is going to self-correct
because incentives are not there. There�s basically a fundamental conflict between what�s
good for the banks and if you think about them as being owned by one person or the people
who are most concentrated in the banks so the overall public is in a polluting situation.
Think of a car driving fast and the competition between them says you want to drive faster,
otherwise, you don�t survive. I�m talking
about speed.
Douglas Goldstein: How can people follow your work?
Anat Admati: We have a website for the book called www.bankersnewclothes.com. If you search
Admati on Google, you will find the writings from the last two and a half years even a
list of story from a couple of years ago or a year and a half ago and that�s where a
lot of the action is right now. The book just came out and it should be available in Israel
also in English and I hope people read it.
Douglas Goldstein, CFP�, is the director of Profile Investment Services and the host
of the Goldstein on Gelt radio show (Monday nights at 7:00 PM on www.israelnationalradio.com.
He is a licensed financial professional both in the U.S. and Israel. Securities offered
through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA, SIFMA. Accounts carried
by National Financial Services LLC. Member NYSE/SIPC, a Fidelity Investments company.
His book Building Wealth in Israel is available in bookstores, on the web, or can be ordered
at: www.profile-financial.com (02) 624-2788 or (03) 524-0942.
Disclaimer: This document is a transcription and/or an educational article. While it is
believed to be current and accurate, divergence from the original is to be expected. The original
podcast can be heard at https://sites.google.com/site/goldsteinradioshows/. All information on this website is purely
information and should not be used as the sole basis for making financial decisions.
The opinions rendered herein are those of the guests, and not necessarily those of Douglas
Goldstein, Profile Investment Services, Ltd., or Israel National News. Readers should consult
with a professional financial advisor before making any financial decisions. Please see
the complete disclaimer at https://sites.google.com/site/goldsteinradioshows/.