unfortunately. >> you open the book with the emperors new clothes clothes story. why? >> when people say something with a straight straight face and they're dressed nicely and they have here like they know what they're talking about people think they might be missing something or they might not understand or it's just not good business to say something. it's just more convenient not to challenge what they say. we try to actually do the opposite to expose the flawed arguments so it refers to a whole collection of -- >> host: a major reason for the success of bank lobbying is the permissive myth that banks are special and different from all other industries of economy. anyone who questions the claims are at risk of being declared

incompetent to participate in the discussion. >> guest: yes, it's true. >> host: how strong is the banking lobby lobby the states? >> guest: very strong. after the crisis of 2009 it was senator durbin who said frankly wall street owns the place. the politics is a little different.there is a good political problem and that is what i learn more and more as they became involved. it's not about making that argument. it's not necessary or sufficient to be successful in policy debates. >> why? >> well because there are narratives that people prefer to have and there seems to be some entrenched misunderstandings shockingly held by all kinds of people who you would think should know better. it's hard to sort out sometimes why people say what they say.

some people say to me they just don't understand these subtle things but i think that's really weird. sometimes we are talking about part of the mystique. somehow when you go into banking you suspend all judgment. it's all different so here in the rest of the economy have a lot of companies and a lot of corporations. they fund what they do. the bank somehow are different. they are allowed to say things that you would wouldn't make any sense and other corporations. somehow it's inferred that that's okay. >> host: one of the arguments you make in your book is about equity and capital and first of all you define those for people. what are the arguments you make? >> well i mean one of the most insidious things that is going on is everybody uses this word capital and everyone talks about

capital, capital, capital and it turns out most people don't know what it means. because of the way the words used around it and the way the discussion is framed you are taken into an entirely different debate which is not a debate that is relevant. so you would read oftentimes that the banks hold the capital, set aside capital and the analogy is often made are the implications made this like a rainy day fund like a pile of cash that sits idle. we are only talking about how the banks fund what they do and whether they do it with your money or with money that most companies use to retain profits in the owner or shareholders money which is used by the rest of the economy. we don't force anyone to avoid our wing but the banks, people don't discuss this.

almost everything they do is with borrowed money and you take a risk with our money sometimes it doesn't work out and you can't pay your debt and you become distressed. that is fundamentally what's wrong with banking, is the pervasiveness of essentially the borrower and a creditor. >> host: professor anat admati you write that bank is 95% plus of the banks assets. is that too much? >> guest: that's way too much. we don't see companies fund that way and there's a reason for it. it's very unhealthy. someone who borrow so much and the corporation borrows so much, in fact any private borrower or government borrowers and there's a difference. they have other ways may be to try to fund their payment but of

course were not going to go into that in this discussion. any borrower that gets so highly indebted starts being constrained in what they do or just distorted in the way they make decisions about what they do with the risk they take in about distorted decisions. some of the downside of the decision is worn by the creditor and if there've are aware of the corporation can walk away from those deaths were may have deposit insurance payer the government pay or the central bank gets central bank gives him support or whatever than the creditors are nicer to them than they would have been two other borrowers and that's how the banks get to borrow as much as they do. other people wouldn't be able to her wooden shoes to end their creditors would tell them not to. fundamentally what is pushing them is their basic tendency are borrowing to become addictive

and the fact that we feed on that addiction and encourage them to do it by so doing encouraging harmful things as if we were to subsidize somebody polluting the river when they have an alternative. it's really a perverse system. >> host: professor anat admati what role in your view to the banks play in the 2008 crisis? >> guest: well and a major role. day or other financial institutions, so it's not just what you might call the bank but whatever, investment banks, holding company, insurance companies like aig various financial institutions were connected to one another and i explain in the sort of how that is very interconnected, got themselves to take a risk in all

the various different ways to fool the regulators about what was actually going on there and to meanwhile do very well for themselves and put the rest of us at great risk. the regulators are complicit and the politicians because they like the good days when they lasted and light -- that ended up being very harmful. the reason i wrote this book is because they kept doing this. we are still in danger so with great urgency and great concern we have the system that's just about as bad. even at the time for good now, they looked good in 2006 too.

even in the u.s. we are not out of the crisis. we see mortgage loan foreclosures, still a mess so we are not down with that. one of the things in the book is that when you borrow so much even if you do a little bit okay it looks great because leverage borrowing tends to identify the upside and the downside. that's the nature of risk. it's often too late. >> host: your koether is martin hellwig. who is martin hellwig? >> guest: martin hellwig was someone i met is a graduate student and on a completely different topic he was just a little bit ahead of me. our paths had parted sometime in the late 80s. he was from germany originally.

he was at the max planck institute for research on the public goods or something like that and what happened was after the crisis i started wondering what was going on in the financial system and why it created all these problems and was there something to do about it or was it like in earthquake that we had to live through it the perfect storm? i started reading the narrative then the policy proposals. the more i looked, the more disturbed i was. i started talking about academics and there's a whole part there i didn't get into but i didn't like what i heard and i didn't like what i didn't hear. the fact that i wasn't hearing certain things seemed obvious to me and i started asking questions. when i read i came across a

lecture that martin hellwig gave about the crisis and that made sense to me. so as i they enter this and started writing i established content -- contact with martin in early 2010. we started exchanging ideas. what he said made sense to me whereas what a lot of other people said did not. it was like i'm a newcomer and come from corporate governance looking into banking saying that's a really strange industry, very strange. so whoa, whoa, whoa to the point where i would open a textbook and say whoa and i would say to my students in my class which is a chapter in here called -- to gamble.

it was shocking. anyway so in the spring of 2010 towards the summer i decided that basically i had heard enough nonsense and i was just going to say something in the office and kind of complaint to my friends and just go out there. fortunately i couldn't be scared into it and into keeping silent. anyway i called martin and i was alerted actually that there were some flawed things going on which is where the negotiations were taking place foreign international agreement on these capital regulations. i was alerted by people involved once i started speaking up a little bit. the questions that somebody needed to kind of ride out what

the issues are around the debate and why what people were saying was wrong so i decided to include more what people were saying in there. it manifests over the summer and i put it out there and that was the start. the book after that try it for a trying for a year with 24/7 to enter the debate and impact it and in the face of well, even for someone from stanford some difficulty feeling in the impact when people didn't want to have an impact. the look is basically going to a broader audience to say here's here is what the story is. you judge whether they are doing right or whether something more needs to be done. here is our story, how we want to teach it. >> host: professor admati who

is this book written for? is this an academic textbook? >> guest: part of it is an academic textbook it's written at multiple levels at the same time. this is pretty much a serious book about banking and yet you don't have to read it that way. so you can read it as a layperson. you don't need to know anything. the entry point we decided after a lot of struggle was a mortgage. everybody is familiar with that and we need a certain language terms. people need to understand what it means to take that and what you do with that of what happens when you don't pay that and the notions of solvency and liquidity problems. we unpack a lot of the lingo around it that we avoid the jargon as much as possible so everything is in terms that you know pretty much or whatever is new we explained. then footnotes and endnotes

which are extensive everything that is not essential for getting an understanding of the underlying forces that are at play here. why are people wanting to do this? what are the motivations of the different people involved so we go to the heart of it. what i wanted to really avoid is to start with the story of the crisis because i have had to lot lot -- read a lot of crises books. i am so sick of it and i can't stand it. it's really about the financial crisis that is also not about a crisis. it's about a system that is distorted everyday because it's really not a healthy system. every day can it can be muddling along or looking okay. it still is not a functional system. it still doesn't have its right place in the economy so i think a lot of things are wrong with banking and there is a lot we can do about it but there's a lot of nonsense that prevents it >> host: historically in your view has banking ever been

writes eyster rightly positioned in our economy? >> guest: there's inefficiency and banking. i think it's basically fundamentfundament al. sometimes people say banking was always fragile so the it's nothing new and it's not this and it's not that. it's true banking has always been too fragile and we try to give a flavor for why that is but it does not follow that because it was always fragile it was ever really efficient as an industry because really what happened if you want me to start with the teaching is start with the positives we all know. the positives are like a road system like infrastructure. we want a payment system and we want to not carry around cash or mold or something like that. and that is how it started. we gave the money to the bank or in the tradeshows and in europe and the banker you know it's not

a suitcase that you leave for safekeeping you know. you just want your money back at some point so we depositors lend the banks money. so from that point on bank or scab this money and they thought well you know those people need to know so let's make loans and invest that money. of course there was a little spread they could take in the question is when they make loans or whatever it is they do with their money, some risk is taken. all kinds of risk which we go 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? so the word bankruptcy actually has the word bank in it and bankruptcy means broken bench. when the depositor came in the money wasn't there all they could do was break the bench of

the banker and that shows you the control problem between the borrower and the lender has the borrower takes it when he comes and doesn't chat with the lender who the depositor asks of the creditors and on the downside it's everybody's problem. they both suffer but so does the creditor. now move forward. lots and lots of things happen. sometimes they are told by politicians to invest in only a particular area and there's always some agenda or other because the banks of on the money. they might sometimes be fragile as they are not diversified. sometimes they are fragile or other reasons but if you look at the history of banking first of all their warrant even ever for a long time more than 150 years their warrant limited liability corporations where they can only lose what they invest in an too bad for anybody who lends money or collateral damage that

happens but there were private partnerships with the owner being liable for everything and they had 50% of their funding from their owners money and only 50% from deposits. this was the middle of the 19th century. there weren't corporations have been as the 19th century developed and more corporations took place banks were actually not in that because everyone understood that the banks had limited liabilities and if they could walk away than the deposits wouldn't be safe. but still in the banking crisis in glasgow as we describe it to shareholders for broke, not the depositors because the shareholders had to cover and in the u.s. going into the 20th century there was depending on the state double, triple quadruple liability for the banker so you could actually lose as much invested or double that are even be liable for your

assets if the bank lost money couldn't pay the notes. this was before the central bank and then there was the central bank. in any case then we had the depression and there were a lot of huge problems in banking. bank holiday, lots of runs on the banks. the movies, it's a wonderful life, mary poppins. everybody is standing in line at all that. and so the banks -- then we'd established deposit insurance. so the depositors kind of felt secure. over the years going back to the topic of development of the banking they stopped putting their own money or their owners money in but our view to your

original question is that the banker never wanted to put enough of their own money in and the way we tell the story certainly with the guarantees is that you know somebody else can share in the bank. in other words the board becomes a little bit biased towards wrist take in their ford towards more boring and at first to say things because once that's in place the creditor bears this portion of it from the outside and the upside it's magnified. >> so all that said heavily put in reform since the 08 crisis and what would you like to see primarily as of reform? >> our analysis is that the system is fundamentally very fragile. one manifestation of the problems that everyone he talks about in this country is too big to fail. but we explained how this comes

about. it comes about because certain institutions would have a lot of systems. in other words they would drop a lot of dominos to lower the rest of the economy if they fail. we saw lehman failed and it was a small bank comparison to the banks we have today. does that answer your question? no. there was this effort that banks would tell you it was tripling up capital requirements. my favorite line on the tripling of capital requirements they always like to say how much bigger it is the last time and fraction. the previous were so ridiculously though that tripling was nothing. it doesn't give you a very large number, and so it was 2% of something called risk-weighted assets. they ignore bunch of them and now it's between 4.5 and seven. these numbers just don't begin to have the right number digits and the backstop that's new is 3% you do not find any healthy

corporation or any industry and there's no reason that banks need to live like that. for example if they did what warren buffett did they could immediately start building up their equity. >> what do you mean? >> what i mean is if you take a second mortgage on your house you complete your equity on the house, if you keep investing and you do not take any money out as a corporation if you retain all of your their earnings then you build up your equity. banks borrow from depositors and part of what they do is to borrow but that is not to say they can't back up their liabilities without needing deposit insurance and they can be a more normalized like other corporations. they can't even have a minimum that they would demand from their borrow worse of 20 to 30%

equity. he said requirements are three or four times these numbers. they are so fragile that just a small loss would start getting people nervous for getting them to be less able to lend as well as pay their debts. they get into a situation where we see credit crunches in them with we have to start investing and saving and all that that there's no reason for that. the reason they don't land is when they lost from previous investments why don't we make them better prepared so when we lose next time it's on not somebody else's problem. >> host: aren't banks fundamentally different than other corporations? >> guest: here we go. [laughter] well, they would like us to think that. they are not that different actually. they respond to the incentives that they are given and in an understandable way are given what we allow them to do. the problem is on this issue of

risk and indebtedness they are corporations who are different from other people in that we need them to be safe and therefore we end up providing them safety nets that many of them are risky because these are incentives to take more risk and to borrow more so they can get more of the upside in me the downside to others. the regulators job in the politician's job is to counter that rather than feeding it and unfortunately this has been missed. we are putting ourselves in the box of needing, if you think the financial crisis is like some disaster that happens you can solve it by having resolution and living wills and all that. an ounce of prevention was not a pound of cure was her epigraph of the chapter on what to do. you can go in and tell them what to do but first and foremost you have to straighten out their funding mix which is completely

and utterly unhealthy. this is just allowing them to do everything more consistently and the reason we are not doing it is because please confuse every decision-maker into thinking this is somehow issued in this is wrong. >> host: anat admati serves on the systemic resolution advisory committee which is what? >> guest: this is part of the dodd-frank act called the title ii of dodd-frank and what it does is it creates an alternative to bankruptcy for more corporations. for more institutions. right now since the creation of the fdic does the takeover failed small banks. the agassi did was washington mutual, 50 billion or whatever. now the ftc is in charge of it in theory taking down bank of

america if need be. we are asked to trust that in a crisis or not in a crisis, the fdic which now has authority to do this and this pop up with the best around to be having this authority will actually resolve basically create some kind of a process by which creditors will somehow be repaid and essential functions will be maintained somehow. like they do for the small banks where they sell off the pieces, they will create the safety of human bankruptcy which drags on for four years in europe wasted almost everything that is there. whoever is deemed systemic and we are not there yet but it can be any time the fdic has charged

with resolving it. i am on a committee that is meant to advise on this process. in this committee are esteemed people at paul volcker, and a number of other people. so we meets not that frequently that we have meetings in which we are represented with progress on this issue. it's very good to be there because i get to ask a bunch of questions and work with basically what i consider right now the best 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 something like an cropsey which is the normal thing that a failed company does. if you can't pay your debts you go into bankruptcy. can we create something

equivalent to bankruptcies were there won't be collateral damage and that's the issue? well it's very problematic. they have things like title i that are supposed to help like living wage. they're all kinds of issues there and supposedly in title i they would be great supervision and good cooperation. let me just say the fdic is doing a great job trying to do this but it is not the point you want to get to. just a trick or by itself is already too late. when you get to a point where you're going to trigger this as paul volcker said in our first meeting when we were presented with what would the fdic have done if they had the authority to resolve lehman brothers, paul volcker's question was what do we do on day three and four after the first day because of course we have months to redo this. of course in a crisis they are

all there at the same time. the policymakers will be turned into whatever law they made yesterday changing it because it's crisis time. we want to get there so the question is are we stuck or not in the strong message of barb voc is this is not an earthquake. this is not a natural disaster. this is something that would do a huge amount to avoid and prevent and while you do that also get a better and safer system to restore system is bloated with subsidies and just about everything you think about as good. there's hardly anything you can think about that is bad unless you're a banker. >> host: we have infants talking with anat admati a professor of finance and economics at the graduate school of business here at stanford university and the co-author of this new book, "the bankers' new clothes" what's wrong with banking and what to do about it. you are watching book tv on c-span2.

>> i think radio is the longest in the best form of the media that's left. what we are doing now with our ng