our lead story today mr john or resign and accountability now in march of two thousand and ten john cores on the former governor of new jersey and ousted head of goldman sachs announced he would become the new c.e.o. of m.f. global now as soon as corazon arrived he began a radically revamping the company into a full service service brokerage firm one that would buy and sell stocks and bonds for clients as well as use its own money to help clients trade and to place its own bets however corps runs ambitious plans all came crashing down in october twenty seventh when moody's downgraded m.f. global to jump status this after a six point three billion dollar bet on the bonds of some of europe's most indebted nations but the forty billion dollar company bankrupt bankrupt now of course on try to sell off what was left of the firm but all that ended with all that all of that ended when accounts discovered that around six hundred million dollars worth of

client money simply went missing missing lost now fast forward to the present and a federal judge this week said that he will allow a lawsuit seeking to hold course on and other m.f. global executives responsible for the brokerages collapse now clients claim that more than one point six billion dollars worth of their funds which should have been segregated went missing transferred to another part of the company during this whole liquidity liquidity crisis now customers are accusing m.f. executives of failing in their oversight and the due sherry duties the suit is one of several involving the collapse of m.f. global pending before u.s. district judge victor. the judge has also denied bids by correspond to dismiss those cases as well morris says it's reasonable to quote infer someone did something wrong yes moreau someone did do something wrong.

now recent events have made it clear how destructive a banking crisis can be on a society it is seven years and that's it's been seven years rather this month this very month since h.s.b.c. recognized that previously unknown subprime bad debt launched us into a crisis and we're still dealing with those consequences our next guest has written a best selling book called the bankers new clothes which warms the banks are there woefully under capitalized and that they need to urgently become more capitalized if our financial system is to be saved now stanford finance an economics professor a knot of money joins us now from our new york city studio to discuss now and not i have recently been looking forward to this interview for some time now and

particularly because i like talking about the banking system and i think there's lots of flaws and you know all about this and i want to start a very basic level here kind of philosophical level if you will here we go how do banks benefit society as a whole that's the big question and what is the social purpose of a bank if nothing else. well you asked a very good question isn't paul volcker said you know the a.t.m. was the latest innovation that helps society so one thing in fact one of their part of their business that's being challenged these days is the payment system right we put our deposit there we entrust the bank with our money and supposedly we can write checks they call it cool money creation but in fact you know the money that they owe us back on our deposit we trust so much that it's there that we write a check on it and so we're basically using the bank's iou was as if they were money from our perspective so that's one thing that's helpful although maybe with the with the improvements in payment system you know that that thing can be we become

more efficient but then the other thing we're hoping that they would do would somehow have some competency in doing otherwise you know anybody else can do it is they can lend again do they feel like lending or not they can do a good job of deciding who to lend to how to set the right rates for lending and lending is good because many people in the economy can't fund what they want to do without borrowing and so they need somebody to lend to them and ideally do a good job of lending so we're kind of hoping and there's a potential that the banks would benefit the economy by lending that's of course what they want you to always believe they do in fact. in a room full of bankers you could ask what's the difference between a hedge fund and a bank these days at least with the big ones and the answer would be the bank is more highly leveraged that's really there were there yes really different is. the main difference now like you said banks they're very leveraged much more levered

than normal companies or even hedge funds of matter and they use a lot of debt compared to their equity base now could you explain how bank capital is measured and how the resulting leverage compares to normal companies. well how things are measured is a whole can of worms because oftentimes it's an accounting measure and then once you start talking about accounting measures you know who puts the numbers on the assets and how what are they allowed to keep off the balance sheet you know how do you do all kinds of risk weights and all of those things are just numbing to most people but you know in most balance sheets again if you look by market values which is sort of the way for most companies you'd measure sort of what they're worth most companies without any regulation don't choose to borrow very much and many companies in my part of the world hardly board at all why even though the tax code encourages boring over a funding with you know retained earnings or equity for the banks however we're talking about depending on how you measure sort of single digit sort of equity to

total. value of assets in basel three you know the leverage ratio is three percent in the tough tough tough for you lation that the u.s. is talking about is still five six percent these are just under real numbers nobody come in lives like that and nobody needs to live like that but they just like it that way right now i have to quickly as you say my part of the world where is that . in silicon valley and that area in other words and i think a lot of risk i don't mean exactly our set i mean it's i'm very. well actually in israel as well which is where originally i'm from so in israel too there's a lot of innovation and you know venture capital and this is mostly equity funding and you know when an internet bubble burst with much larger then the any correction in housing markets and then taken down the whole world obviously a lot of people lost a lot of money but it was mostly equity money now i want to turn back to banks in your view how is the banks ability to perform its social function undermined by its

leverage and risk. everything about their leverage is counterproductive the levels of leverage we're talking about so it's not to say that they should be like apple one hundred percent equity but they can be twenty or thirty percent equity which they used to be or even they used to be fifty percent equity when they were partnerships with unlimited liability and they would be able to take the positives and lend and do everything that they're doing actually better so everything that they do including their desire or ability to make loans or which loans they want to make is distorted they love risk so they might over lend in some cases and under lending in other cases and everything is distorted by both their leverage and the way they were given framed like risk weights whenever the risk weight is sort of low meaning there were gators think it's not risky but it actually is like aaa security like greek that that's where they go there you go now you go i want to look at some specific issues were over five years away from the panic of two

thousand and eight which ushered in a crisis deeper than anything we've seen since the great depression banks are back to making record profits and big bonuses are being handed out and i want to ask you do you think the u.s. banking system is safe today given what we know. i can't it's not it's not then look back at two thousand and six two thousand and six was the record year who would have thought that starting in two thousand and seven everything would start slowly and then and then like implode you know go down like that so you know it's very misleading to look at these profitability measures when you take a lot of risk you know and it works out for you just like if you speed at ninety miles an hour as long as you don't crash you know your reach fast in profits or magnified and all of that because you have very little base and but you're taking a lot of risks so in all these profits there's a lot of risk hidden now you mentioned. and i actually want to ask you new balance

of three accounting rules they would permit banks to borrow up to ninety seven percent of their assets would you explain how that's even possible. well you know that before in basel two there wasn't even the leverage ratio to kind of some kind of a total everything that they asked for was risk weighted where certain risks were allowed to be zero weight as if it was as good as cash so anything aaa or you know your own government bond so it encourages them to lend to governments which in the euro zone is not that safe an investment was counted as if it was cash under the mattress even though as it's paying junk interest rates so you saw the cyprus banks how is that possible politics is the answer the short one or the answer it's possible because some of the german and french banks really hate equity and their governments also want them to. do to be fragile and somehow. lead the rest of the world into that in this race to the bottom there you know in

regulation and happily rules they seem very complicated now is this rest waiting interior really necessary even. you know it's necessary when you know it's somewhat necessary if you're skating so close to the edge it's because there were the levels of solo becomes the it starts mattering because if i tell you do you know three percent of total maybe you're going to try to game it in this way or that way you know in their review of our book john cochrane said how much equity until it doesn't matter the point is to move the risk to the balance sheet like normal companies so that they start making decisions that are kind of you know as as we teach in corporate finance positive net present value as opposed to you know having appetite for things like that the way they talk is if you know this thing up and it's so tasty and you just want more and more of it or not please stick around we have to take a quick break but you out there in t.v. land stick around as well because we have more with not at maadi when we return

plus edward harrison and i are talking about the recent lawsuit challenging the government's thirteen billion dollar settlement with j.p. morgan you won't want to miss it but as we head to a quick break here's a look at some of today's closing numbers at the bell stick around.

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welcome back now just a couple months ago former fed chair alan greenspan was on the daily show plugging his latest book when asked by host jon stewart how much regulatory capital banks should have in place in order to keep them from failing greenspan had this to say. you know the reluctant percent. right i think there would be twice or so twenty two percent that kind of thing are they going to do it you know. now and not after seeing that clip i want to know is what do you think and specifically i mean because just yesterday fed chair yellen said that the fed is working to strengthen leverage ratio standards what the level of equity capital would be you see it in your view ten fifteen twenty what do you think. you know all of these numbers are subject to accounting rules so you always have to be talking about what the. what's off the balance sheet what's allowed what's not allowed

what's the risk weights even the eleven percent he was quoting well i mean you know it depends i mean there were there there were a good nation is sort of five or six that if they see one six they say five for bank holding companies and that's supposed to be tough in europe they're talking about three again right. to what kind of total there's not enough digits in this number and these numbers i mean they love and has two digits he said twice as much yes i've asked for about five years since i started looking at it what's wrong with twenty five percent equity as kind of lure it keeping it in a range between twenty and thirty percent of some kind of a good total like a really big total you know that as much derivatives you know look at look at all the exposures which are just all over the place what's wrong with that why can't a company live like that that's kind of minimum you'd want from company who was distressed homes other people and there is actually that has never been given a good answer if the banks can't live like that because they must have their

subsidized funding then maybe we shouldn't have as much banks we should have them we should have a smaller banking system so the new york can use some shrinking and wait to potentially have a banking system that's probably bloated beyond what we what we need blood it is a very bloated if you will now is that person in there addition to fission is the problem is the inefficiencies my problem is they're not efficient organizations they can tell you big is beautiful but they're not efficient look at them pay all these fines and flow all these lawyers and then the rest of us spending all this money on these regulation why why all this hassle why can't they be like more normal like a normal company that takes its own risks you know we should regulate them but these regulations are just such a mess as it is now regulation that leads to inefficiency yes or no. depends how you do it it depends you defective regulation it's not a self-correcting system it's a system that has flawed incentives within it and were giving it all kinds of backstops and therefore we have to counter the fact that for example depositors are

not are not giving them any conditions like normal creditors would the fact that they have a big normal creditors that allowed them to get away with so much of it now banks would say that our regulation and capital rules on banks just pushes riskier behavior into more unregulated parts of finance is this true. you know the reason we have the shadow banking system as was that we have is it was a lot of it was invented to get around regulation so this is a perverse way to frame it the way we kind of say the book is imagine that we say oh you know we can't have laws against robbery because the robbers go to the dark alleys and the police is only in the lighted streets own you know so therefore we can't have laws against robberies that's ridiculous you give the policeman flashlights right and you want them to go to the dark alleys and you have laws against the against robbery the shadow banking system the most dangerous part of it

are directly related in like like inability cords to the banks themselves the s.p. vs s b e's via e's a special v. purpose vehicle all of those they were highly leveraged because they were getting support from the regulated banks and all the risk and backstop that they give to entities in the shadows that's the risk that we all end up being in as distress a choice you know i'm glad you brought up shadow banking because i want to ask you this directly what is the shadow banking system and i mean what kind of financial institutions are part of this system. i will explain i'm very glad you asked that question because that's always this sort of bug bear that they want to scare us with when they run out of other rate things to say the shadow banking system basically is various institutions that are just not called banks but they do things sort of like bank thinks money market money market funds there's like your prime example there are bodies familiar with the money market money market fund is

a shadow bank it's sort of acts like banks that pretends to be like big but he doesn't want to be regulated like a bank so they would say oh no no no we're a mutual fund but we're promising a dollar so we're mutual fund except that you know we have these people who count on us for a dollar and we're going to go invest it in dexie zero in other short term things that supposedly a liquid until they're not or supposedly they're safe until they're not and then opes you know we have panic and runs and all of that so you know you have all these ways to introduce what's kind of fragile about banks in the shadow banking system but the way to deal with so basically these are institutions that are operating and doing things out there which represent the way that everybody in the system just wants to chase a little bit more return and kind of hope that their risk is not too large and just kind of hope for the best with them the key is that this shadow banking system introduces distortions into the pricing everybody thinks they're safe and sound and then they're not and then this whole system runs to rely on implicit guarantees the

way to deal with it is to sort of look at this whole system always chase where the risk is going so not believe that if the bank tell you the risk isn't you know in a geo or in some other deceived yes or something then it's gone because it's gone somewhere and watch that and to regulate effectively so that so that so that we have a better system and starting with the ones that are currently regulated in following the money to where it's going well the force of the given on the thing well said and i've asked many people to define shadow banking and this is the best definition i've heard so far and i want to ask you do you think it will take another crisis for banks to be forced to raise more capital. the p.r. is that way i'd get all the way have other agenda items so if they don't like capital we need to do other things the dodd frank title one for example says that they have to fly living wills and the living wills are supposed to answer the question can they go through bankruptcy code the way we have it right now. without

hard without causing harm and i think without knowing all the details of these living was the answer is no for some of these banks so much bigger than me my brothers and really really complicated in you know all over the world and all of that there's no way j.p. morgan chase can really go through a bankruptcy and not destabilize the system if the answer to that is no then the regulation laws give authority to regulators to do any number of things and so well now we can talk about how to restructure and how do and how to simplify this them and you know there are other things that we should be looking at will it happen greenspan said no i'm. trying my best who were rattled people to realize that we have it still a dangerous system and we don't want to wait for the next crisis but i don't know if we'll succeed well i'm glad that you're out there doing what you can and important and that was stanford finance an economics professor and author and not

a mahdi thank you so much for being on the show it's time now for today's big deal . and harrison edward mr edward harrison joins me now to discuss a dodgy deal of shady deals specifically the thirteen billion dollar deal that it conducted with one of its very favorite banks j.p. morgan i think it's fair and people would argue against that now yesterday we briefly mentioned the story but after some consideration we decided it warranted a more thorough look now to recap on monday the now. on profit group better markets filed a lawsuit against the justice department intended to block what it called an unlawful settlement with j.p. morgan over bad mortgage loans sold to investors before the financial crisis now the record settlement of thirteen billion dollars does not release j.p. morgan from potential criminal liability over the mortgages of packaged into bonds

however better markets said it was still shocked by the fact that the settlement here of the bank quote blanket civil immunity for its conduct without sufficient just speech without sufficient judicial review through some legal jargon for it now and have we ever seen a settlement of this type and on this grand scale for a banking slash financial institution you know the numbers sound good but you know you're looking to the details and i was looking at the details and how it's mixed up and basically what you have is six billion dollars in compensation for investors like pension funds that suffered from mortgage securities sold by j.p. morgan bear stearns while which are now part of j.p. morgan then you have so-called bauer borrower relief in the tune of four billion dollars and this is a sort of penance that they're doing for past sins but nothing specific that's related to specific lapses you know the wrongdoing or fraud things like wrong.

or foreclosure nothing related to those specific acts and then finally there's only a remaining two to three billion dollars that's the that they're actually pay ok so you know there's only two or three billion dollars in terms of actual mortgage settlement that goes too far and it's not going to specifically to the people who are wrongfully a victim or right or foreclosed upon but who does it go to just the d.o.j. that's right it's like a general settlement type of. you know the interesting bit for me is that you know jamie dimon he met face to face with the attorney general in order to plead his case in person. so how did the hours rate you know i got friday at seven most observers found that very. you know these are just indicative numbers that we're talking about here because in fact this is a secret deal that they've done you know it's you know it wasn't reviewed by

a judge it wasn't released to the public so we don't really actually know what's in there we don't even know how they came up with the the numbers you know how he was the arbiter exonerating you know how much did the counter parties that j.p. morgan dealt with lose in things that were associated with these with these deals you know how much did people lose in terms of their mortgages as a result of the actions performed associated with this settlement we have no idea who says this thirteen day maybe it's twenty maybe it's two example or team just seems i don't know lucky thirteen who now is now another person that have for you which is very simple but is it legal. find out whether you know whether or not this group has a legal standing whether they have standing in the court to be able to go through this process you know i have some interesting facts here which is interesting you know. one of the things that j.p. morgan did is they took over these are the kinds of deals that j.p.

morgan does with the government so they took over was while had forty billion of equity they wrote down about thirty one billion of that and then j.p. morgan only paid one point nine billion dollars for the company immediately it wrote the equity by two billion dollars then it said this deal is going to be immediately a creative to earnings in the tune of two point five billion dollars a year this is five years ago so here's the deal that they got for one point five bill one point nine they get two billion immediately in terms of equity and then they have over the last five years twelve point five billion dollars that they're earning and here's the kicker j.p. morgan is actually now suing the f.b.i. see. because of the funds that were left in receivership there are about two point nine million dollars left in the sea which if they want a portion of that money also i mean. that's a great deal. this isn't from the onion these are and this is what i'm saying this sounds ridiculous and i mean it love or hate jamie diamond you can't fault him for

being a bad businessman he sure it only if you can if you can negotiate that word documents deal you're going to your job. you know in this interesting you had mentioned that because i notice that jamie no i mean he got a seventy five percent raise to twenty million dollars of compensation right and they said the reason he got the raise was because of a bin or a government settled here up our government sounds crazy that's all the time we have for now as always thank you so much you can see all the segments featured in today's show on you tube you can also go to facebook and you can also tweet us at aaron aid at edward and h. from all of us here at r.t. thanks for watching come back tomorrow. there's a saying when you're in the arctic you have to untie

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