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 year 24/7 two and the debate. in the face of well with some

difficulty feeling any impact when people didn't want an impact. the book is basically going to a broader audience to say here's what the story is. you judge whether they are doing it right or something more needs to be done. here is our story how we want to teach it created. >> host: professor anat admati who is this book written for? this is an academic textbook? >> guest: is written actually at multiple levels at the same time. this is a pretty serious book about banking and get you don't have to read it that way. you can read it as -- you don't need to know anything. after a lot of struggle with how to enter it was the mortgage. we need a few language terms and people need to understand what

it means and what to do and what happens with the notion of its solvency and liquidity. we unpack a lot of the lingo around it that we avoid the jargon as much as possible. all of the terms are known and i would refer to the footnotes and endnotes which are expensive. everything else is essential for reading through and getting an understanding of the underlying forces that are play here. why are people wanting to do this and what are the motivations of the different people involved? we go to the heart of it and it's not a crisis. what i want to avoid was to start with the story of the crisis. of course i had to read a lot of crisis books and i'm so sick of it that i can't stand it. it's not about crisis. it's about a system that is the

story every day because it's not a healthy system. every day they can look okay and is still not a functional system. it still doesn't have its right place in the economy. i think a lot of things are wrong with banking and there's a lot we can do about it but there's a lot of nonsense. >> host: historically in your view has banking ever been rice sized or rightly position did our economy? >> guest: there is an efficiency and banking. i think it is basically fundamental. sometimes people say banking was always fragile so it's nothing new. it's true that banking has always been fragile and you can understand that and try to get a flavor for why that is. it does not follow that because it was always fragile that it was ever really efficient as an industry because really what happens if you want me to start with the teaching, is start with

the positives. the positives are like a road system like infrastructure. we want to have a payment system and not carry around cash so that is how it started, giving money to the banker. in the trade shows in europe, the banker, there's not a suitcase that you leave for safekeeping. you just want your money back at some point so we deposit in the bank money. so bankers have this money and they thought -- so let's also make loans and let's invest that money. of course there was a little spread they could take in the question was whatever it is they do with the money, some risk is taken. all kinds of risk which were we go over, what can go wrong?

what can go wrong? well, things can go wrong in the question is what happens then? whose problem is it then? the word and crips he actually has the word bank unit and it means broken bench. when the deposit 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 because the borrower takes the upside with the lender who the depositor asks and on the downside it's everybody's problem. we all suffer but so does the creditor in particular. lots and lots of things happen. sometimes banks are told by politicians -- and so they might

sometimes be fragile because they are not diversified and sometimes they are fragile or other reasons but if you look at the history of banking first of all there weren't for 150 years there weren't even limited corporations, the kind of corporations where they can only use what they invested to anybody who lent money or the collateral damage that happens. they are all private partnerships with the owners being liable for everything and they have 50% of their funding for their own owners money and only 50% for deposits. this is the middle of the 19th century. they weren't corporations and is as the 19th century developed more corporations to place. everybody understood it banks where liability they could walk away then deposits wouldn't be as safe.

but the banking crisis in glasgow the shareholders were broke. the shareholders have to cover it and even in the u.s. going into the 20th century there was depending on the state one limited liability for bank holders and even shareholders they could actually lose as much as you have invested or double that or your own viable for your own assets that you could pay for. this was before the central bank and then there was a central bank. in any case than then we have the depression. then there were a lot of big huge problems and banking. bank holidays and banks didn't open and lots of runs on banks. all the movies, it's a wonderful life, mary poppins, everybody standing in line and all that.

and so then we established deposit insurance so the depositor's kind of felt secure. over the years going back to the topic of development of the banking they stopped putting their own money in blood to your original question our view is that the banker never wanted to put enough of their own money and the way we tell the story certainly the guarantee is that somebody else can share so you wanted to a little bit more on edge. once the debt is in place the creditor -- on the upside in the upside gets

magnified. >> host: all that said have we put in reform since the 08 crisis and what would you like to see primarily in reform? >> guest: our analysis is the system is fundamentally very fragile. one manifestation of the problem that everyone talks about in this country is too big to fail. we explain how this comes about and it comes at about because certain institutions would have have -- they would drop a lot of dominos that would spill over into the rest of the economy. we saw lehman failed and it was a relatively small bank compared to the ranks of today. does that answer your question? no. there was this effort that the banks will tell you the results of tripling of capital requirements. the tripling of capital requirements they like to say how much bigger it was the last time infractions. they were so ridiculously low that as martin wolf said

tripling almost nothing doesn't give you a very large number. so it was 2% of the risk-weighted effort. they ignore bunch of them. it's between 4.5 and seven in these numbers don't tend to have the right number of digits. 3% say if you don't find -- if they did what warren buffett does they would immediately start building up their equity. >> host: what do you mean? >> guest: what i mean is if you take a second mortgage on your house do you change the equity in your house? if you keep investing and her husband goes out and you did not take any money out as a corporation you retain all of your earnings and then you about the equity.

banks must borrow because the oral from depositors and part of what they do is to borrow but that's not to say they can't back up their liabilities without the deposit insurance and they can't be more normalized another court rations and can't have the minimum that they would demand from their bar or worse 20 to 30% equity. instead they allow three or four times these numbers. they are so fragile that just a small loss start getting people nervous or getting them to be less able to land. they get into a situation where we see credit crunches and that is when we have to start investing and saving and all that. the reason they don't land is when they have lost previous investments. it only makes them better prepared so when they lose next

time it's somebody else's problem. >> host: are banks fundamentally different than other corporations? >> guest: there you go. [laughter] they would like you to think that. they are not that different actually. they respond to the incentives they are given and what is a loud them to do. they are corporations who are different from other people in that we need them to be safe. therefore we end up providing them safety nets that make them more risky because it gives them incentives to take more risks and borrow more so they can get more the downside to others. the politician's job is to counter that addiction instead of feeding it and unfortunately this has been missed. we are putting ourselves in a lox.

if you think the financial crisis is like a disaster that happens totally by having a living wage and all that well an ounce of prevention is worth a pound of cure. you can go in and tell them what to do but first and foremost whatever you do you have to straighten out their funding max which is completely and utterly unnecessarily and healthy. allowing them to do everything more consistently and the reason we are not doing it is because they somehow refuse every decision-maker that somehow it's the way should be. it's just wrong. >> host: anat admati serves on the systemic advisor committee which is what? >> guest: this is part of the dodd-frank act. this is called title ii of dodd-frank. what it does is it creates an alternative to bankruptcy for

more corporations. right now for more institutions that are systemic. right now and all along since the creation of the fdic, the fdic knows how to take over failed small banks. the biggest was maybe washington mutual, $50 billion or whatever. now the fdic is in charge in theory with taking down -- we are asked to trust that in a crisis or not in a crisis they have authority to do this and it's best to have this authority when actually basically it creates some kind of a process by which the creditors will somehow be paid and essential functions will be maintained

somehow and likely to for the small banks where they deposits are made and they kind of sellout the pieces, it bankruptcy which is dragged on for four years and we have wasted almost everything that was there. whoever is deemed systemic and we are not there yet but it can be any time the fdic is charged with resolving it. i am on a committee that is meant to advise on this process and this committee with esteemed people like paul volcker, john breed and a number of other people. so we meet frequently. we have full meetings in which we are presented with progress on this issue. it's very good to be there because we get to ask a bunch of questions and 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 ask the question could we eliminate the problems by being able to allow these companies to go into bankruptcy which is a normal thing that a failed company does. if you have too much debt usually and you can't pay your debts you go into bankruptcy. can we create something equivalent for banks so they won't have collateral damage? that's the issue. it's very problematic. they have-somethings some things in title and that are supposed to help. there are all kinds of issues there and supposedly title i there will be great supervision and cooperation. let me just say the fdic is doing a great job trying to do this but it is not a point you want to get to. just a trigger by itself is already too late.

when you get to that point when you're going to trigger this, -- when we were presented with what fdic would have done if they had the authority to resolving bankruptcy would have done great. paul volcker's question was what would you do that too, three and four after he the first day. it took months to do this and of course with the crisis at the same time. the policymakers would be tempted to whatever law they made yesterday change it. we don't want to get there so the question is how do we stop this? the strong message of our book is this is not an earthquake. this is not a natural disaster. this is something that we can do huge amount to avoid and prevent and while we do that also get a better and safer system, less loaded with subsidies. just about everything you think about as good.

>> host: we have been talking with anat admati who is a professor of finance and economics at stanford university and the co-author of this new book,