Synopses & Reviews
"More than four years after the financial meltdown devastated the economy, our banking system remains resistant to reform and riddled with risk. The Bankers' New Clothes challenges us to question the status quo and to think anew about the transformative changes in banking that are needed to serve the public interest. This work should spur a long-overdue debate on real banking reform."--Phil Angelides, chairman of the Financial Crisis Inquiry Commission
"Providing a sound analysis of the role of banking and its regulation in the public interest, The Bankers' New Clothes is free of technical jargon and widely accessible to all policymakers and all who are concerned about banking's future, which is virtually everybody. The book's clear exposition conveys a deep understanding of the pervasive place of banking in the economy and stands in opposition to the self-interested forces of obscurity."--Kenneth J. Arrow, Nobel Laureate in Economics
"The Bankers' New Clothes underscores that there is perhaps no reform more important and central to a stable financial system than capping the ability of financial institutions to take excessive risks using other people's money."--Sheila C. Bair, author of Bull by the Horns and former chairperson of the U.S. Federal Deposit Insurance Corporation (FDIC)
"The Bankers' New Clothes accomplishes the near impossible by translating the arcane world of banking regulation into plain English. In doing so, it exposes as false the self-serving arguments against meaningful financial reform advanced by Wall Street executives and the captured politicians who serve their interests. This revelatory must-read shreds bankers' scare tactics while offering commonsense reforms that would protect the general public from unending cycles of boom, bust, and bailout."--Neil Barofsky, author of Bailout
"Anyone interested in the past, present, or future of banking and financial crises should read The Bankers' New Clothes. Admati and Hellwig provide a forceful and accessible analysis of the recent financial crisis and offer proposals to prevent future financial failures. While controversial, these proposals--whether you agree or disagree with them--will force you to think through the problems and solutions."--Michael J. Boskin, former chairman of the President's Council of Economic Advisers
"With extraordinary clarity, Admati and Hellwig explain why the banking system is reckless and distorted, what can be done to tame it, and how the politics of banking has failed the public. A must-read for all, The Bankers' New Clothes educates and empowers citizens to demand a better system and tells policymakers how to deliver it."--Jeff Connaughton, author of The Payoff: Why Wall Street Always Wins
"This entertaining book is an accessible exposé of the myths that financial firms use to perpetuate the advantages they get from government guaranties of their debt. A must-read for concerned citizens, The Bankers' New Clothes should be studied and memorized by lawmakers and regulators so they won't be duped by these false claims in the future."--Eugene F. Fama, University of Chicago
"Bankers have sold us a story that their risky practices are the necessary cost of a dynamic system. Admati and Hellwig expose this as a misguided and dangerous lie, and show how banks can be made more stable--if less profitable for the bankers themselves--without sacrificing economic growth. This brilliant book demystifies banking for everyone and explains what is really going on. Investors, policymakers, and all citizens owe it to themselves to listen."--Simon Johnson, coauthor of 13 Bankers
"At last! Two eminent economists explain in plain English what is wrong with banks and what needs to be done to make them safer."--Mervyn King, governor of the Bank of England
"This excellent book should be read by everyone concerned with banking systems. Legislation has not removed too-big-to-fail financial policies, continuing the mistake of making innocent citizens responsible for bankers' errors. The Bankers' New Clothes makes the case for increased equity capital and answers bankers' arguments."--Allan H. Meltzer, author of A History of the Federal Reserve and Why Capitalism?
"A clearheaded antidote to the ill-advised snap reactions to the financial crisis, The Bankers' New Clothes carefully counteracts arguments that the banking system is now more secure. With direct and rigorous analysis, Admati and Hellwig lay bare the ongoing misinformation about modern banks, and show what remains wrong with banking. This book is the voice shouting that the bankers are still not wearing any clothes. We should listen."--Frank Partnoy, author of Infectious Greed
"Almost subversive in its clarity, The Bankers' New Clothes is the most important book about banking in a very long time. It argues that as long as implicit taxpayer guarantees incentivize banks to raise funds almost exclusively through issuing debt, the global financial system will be subject to periodic destructive crises. The most effective remedy is to force banks to strike a better balance between debt and equity, but there have been many obstacles to implementing this improvement. Future efforts to regulate the financial system should start here."--Kenneth S. Rogoff, coauthor of This Time Is Different: Eight Centuries of Financial Folly
"With a knack for explaining complex concepts in a very straightforward fashion, Admati and Hellwig take readers on an immensely rewarding and often surprisingly amusing journey. Their brilliant book has much to offer everyone, from novices to experts."--Stephen Ross, Massachusetts Institute of Technology
"Admati and Hellwig are on a mission to teach citizens, policymakers, and academic economists about the principles of sound banking practice and regulation, as well as the pitfalls and immense social costs of failing to abide by those principles. Much economic pain--such as the U.S. savings and loan crisis of the 1980s and the 2007-2009 financial crisis--could have been avoided had policymakers and the economists who advise them understood and implemented crucial fundamentals."--Thomas Sargent, Nobel Laureate in Economics
"I like this book. The Bankers' New Clothes explains in plain language why banking reform is still incomplete, contrary to what lobbyists, politicians, and even some regulators tell us."--Paul Volcker, former chairman of the U.S. Federal Reserve and the U.S. Economic Recovery Advisory Board
"I regard The Bankers' New Clothes as the most important contribution to the analysis of banking regulation in the past twenty five years. . . . This book should be required reading for bank regulators, bankers, and legislators; it should also do a lot to demystify banking for the concerned public. It is beautifully written and forcefully argued. . . . [T]his is a terrific book. It took courage, a deep understanding of banking and finance, and first-rate expository skills to write."--Morris Goldstein, Senior Fellow, Peterson Institute for International Economics, from event introduction speech on February 11, 2013
Review
"An important book for readers interested in what has been done, and what remains to be done, when it comes to safeguarding financial institutions."
--Kirkus Reviews
Review
Crucial . . . Jim Surowiecki
Review
"Ms. Admati and Mr. Hellwig, top-notch academic financial economists, do understand the complexities of banking, and they helpfully slice through the bankers' self-serving nonsense. Demolishing these fallacies is the central point of
The Bankers' New Clothes."
--John Cochrane, Wall Street Journal
Review
"This book's aim, decisively achieved, is to de-mystify the public conversation about banking so we can all understand how threadbare the industry is."
--Diane Coyle, Enlightened Economist blog
Review
"This title is a must read for management and human resource professionals within the banking industry as well as government policymakers. With its clear explanations, many examples, and analogies, the book is accessible to readers who do not have business backgrounds and who want to better understand banking."
--Library Journal
Review
"[P]owerful. . . . The authors persuasively argue that the solution is higher levels of equity capital throughout the banking industry to offset the impact of the implied government protections against failure."
--Economist.com's Free Exchange
Review
"Ms. Anat 'gets' banking, and gets it better than most. The fact that she is ruffling feather relates more to the fact that she is questioning deeply held--yet hardly ever challenged--belief systems within the industry, than any lack of understanding."
--Izabella Kaminska, FinancialTimes.com's Alphaville blog
Review
"Admati and Hellwig have done something extraordinary. They took [banking] frustration and all its complex details and gave it a simple narrative, one that both explains what banks have been getting away with and what we might ask that Congress do about it."
--Brendan Greeley, Bloomberg Businessweek
Review
Admati and Hellwig offer a simple prescription for this complex world . . . Brendan Greeley - Bloomberg Businessweek
Review
Anat Admati and Martin Hellwig are academics with a gift for taking the mind-numbing minutiae of banking and presenting it in a way that the average reader can understand. One by one, the self-serving protests of the banking industry against tougher regulations are lined up and struck down in The Bankers' New Clothes. . . . The authors map out the regulatory flaws that make it easy for debt-junkie bankers to get rich when times are good, and leave them hanging around protesting when times are worse thanks to their own recklessness. Thomas G. Donlan - Barron's
Review
Admati and Hellwig explain, in layman's terms, some of the silly arguments bankers make for keeping to the status quo and preventing any new regulation of the banks from ever being enacted. And they do a great job. . . . Admati and Hellwig have made a gift to you. You don't have to go wrestle with banks' financial statements or their annual reports or their 10Q's. You don't need to pull out your old accounting textbooks or call your college economics teacher to have her explain to you again why debt leverage increases risk. Admati and Hellwig have done all the hard work for you. But, you have to read their book. Susan Antilla - Bloomberg News
Review
The Bankers' New Clothes is wowing critics of fragile banks with a simple and attractive message: Force banks to have much thicker cushions of capital and you can make them safer without paying any cost in terms of higher interest rates, less lending, or lower economic growth. John R. Talbott - Huffington Post
Review
Financial regulation has become a hot topic in the wake of the recent crisis; many complex proposals have ensued, and a dizzying array of new acronyms and agencies has emerged. But in their new book, Admati and Hellwig make a forceful case for a classic and simple solution to excessive, unregulated lending: higher capital ratios for banks. Peter Coy - Bloomberg Businessweek
Review
An excellent new book . . . Finance - & - Development
Review
Maybe regulators will finally listen to Admati and Hellwig after the next financial crisis. Matthew Yglesias - Slate.com
Review
[A]n important new book called The Bankers' New Clothes . . . offers what the Dodd-Frank legislation mostly lacked: a simple and elegant solution to the problem of financial stability. They argue that banks should fund themselves with more equity and less debt--or, to put it bluntly, that banks should risk more of their own money, and less of everyone else's. Matthew Yglesias - Slate.com
Review
Admati and Hellwig don't just criticize bankers. The real strength of their book is that they walk their readers through the balance sheet and to a regulatory answer to the banking problem, an answer that's elegant in its simplicity and far-reaching in its potential to prevent and manage financial crises. Christopher Matthews - Time.com
Review
The most important [book] to emerge from the crisis. . . . The authors achieve three things. First, they explain basic financial theory with simple examples that any moderately numerate individual can understand. Second, they show that these basic ideas apply, with modest differences, also to banking. Finally, they prove that, in opposing them, bankers and their apologists have spun intellectual raiment as invisible as the emperor's new clothes. . . . Read this book. You will then understand the economics. Once you have done so, you will also appreciate that we have failed to remove the causes of the crisis. Further such crises will come. Randolph Walerius - Roll Call
Review
The Bankers' New Clothes (Princeton University Press) is a book that lays out the problems in banking revealed by the crisis and asks how to solve them. The authors, Anat Admati and Martin Hellwig draw upon accounts of the crisis and come up with some clear prescriptions based on what they see as the biggest problem--that banks are over-leveraged. Martin Wolf - Financial Times
Review
Insightful . . . Floyd Norris
Review
Crucial . . . New York Times
Review
"Professor and journalist Admati and economic researcher Hellwig argue that it is possible to have a well-balanced banking system without any cost to society; weak regulations and lax enforcement is what caused the buildup of risk unleashed in the crisis. Here, they aim to demystify banking and expand the range of voices in the debate; encouraging people to form opinions and express doubts will ensure a healthier financial system as people understand the issues and influence policy. . . . The authors push for aggressive reform by outlining specific steps that can be taken to change our banking system for the better."
--Publishers Weekly
Review
Admati and Hellwig's analytical rigour is convincing. . . . The value of The Bankers' New Clothes is that it sets all out in clear and accessible terms over little more than 200 pages, without cutting corners. Nick Dunbar - NickDunbar.net
Review
Increasing capital is the most sure-fire way of improving financial stability. Indeed, a new book--The Bankers' New Clothes--cogently argues that equity/debt ratios in banks could and should be increased drastically to levels more like those of ordinary businesses. George Hay - Reuters Breakingviews
Review
One can only hope that non-financial readers who want to improve the focus of their frustration will find their way to this book. Perhaps, then, policy-makers will start to feel pressure for smarter change. Richard Saunders - Financial News
Review
Many readers may feel their stomachs sink at the mention of capital ratios and systemic risk. But Anat Admati, a finance professor at Stanford University, and Martin Hellwig, a director at the Max Planck Institute for Research on Collective Goods, have done an admirable job in explaining how capital in the banking system works to absorb shocks, and how too little of it makes banks unstable. Peter Morris - Financial World
Review
The authors have written the book for the enlightenment of the average reader who has no background in economics, finance or quantitative fields. But it can be read by anyone interested in banking--bankers, policy makers and researchers. Economist
Review
[The Bankers' New Clothes is] a clearly written, sensible analysis of problems and cures for the U.S. banking system. . . . Admati and Hellwig take a lot of time to clearly explain the problems with depending too much on borrowed money . . . Business Standard
Review
The Bankers' New Clothes is a lucid exposition of the intellectual falsehoods deployed by banks to justify the ways in which they went about growing their business beyond any reasonable assessment of risk in the run-up of the crisis of 2008 and which they continue to peddle today. Admati and Hellwig cut through the debates about whether it was too little or too much regulation that was to blame, whether central banks could and should have acted faster, and the rights and wrongs of securitisation or separating commercial and investment banking, and go to the heart of the matter. Dale Singer - St. Louis Post-Dispatch
Review
[T]hought provoking . . . Will Hutton - New Statesman
Review
[Admati's and Hellwig's] case that the banking industry still needs a shake-up is persuasive. And you have to admire their nerve in tackling the lobby head-on because, like the emperor in the Hans Christian Andersen fairytale, it wears a smokescreen of competence and confidence. Attacking the illusion takes courage. Heather Stewart - Observer
Review
A clear and detailed call for banking reform. Arguing that the system is no safer today than before the financial crisis, the authors reject some bankers' and politicians' fears that further regulations would be too expensive and instead call for extensive change. Their starting place: Make banks responsible for their own mistakes. David Wilson - South China Morning Post
Review
One of the greatest strengths of this book is that it clearly explains the issues for the ordinary reader. Financial reform shouldn't be left solely to Wall Street bankers and their captured policymakers in Washington, D.C., to decide. Regular citizens must make their voices heard, and this book will help them understand the basic terminology and concepts. I encourage everyone with an interest in effective financial reform to pick up a copy today. This just might be the most important book of 2013. Worth
Review
Offering a unique insight into banking from both an insider's and layman's perspectives, The Bankers' New Clothes is a welcome source of information in these unstable times. John Reeves - Motley Fool
Review
The Bankers' New Clothes . . . is critical and refreshing. Anat Admati and Martin Hellwig are a formidable pair and systematically demolish all the bankers' arguments on risk, capital buffers, reserve requirements and the claims that no further reforms are required. Noori Passela - The National
Review
Admati and Hellwig walk banking neophytes slowly through how banking works, framing examples in a way that most people can understand: borrowing on a home. In very simple terms the authors explain how excess leverage is dangerous. Ironically, bankers are quick to point this out when examining someone else's credit prospects but not necessarily their own. Hazel Henderson - Seeking Alpha
Review
[T]he banks' argument that equity capital is expensive and that increasing equity capital would force them to pass up otherwise attractive lending opportunities has been systematically demolished, most notably by the academics Anat Admati and Martin Hellwig. In a new book they argue . . . that both the equity and debt of well capitalised banks are safer and thus cheaper, while a lower return is perfectly acceptable to investors in exchange for lower risk. Douglas French - Freeman
Review
Since the 2008 financial crisis, there has been a continuing conversation on large banks and the idea of institutions that are 'too big to fail (TBTF).' Anat Admati and Martin Hellwig have provided a valuable contribution to the debate in their new book, The Bankers' New Clothes. . . . This is a timely and interesting book and one that is squarely in the middle of the debate over the future of the nation's largest banks. John Plender - Financial Times
Review
I've read almost all the major books on the financial crisis, and what makes this one of the best, if not the very best, is its simplicity and accessibility. Christopher Whalen - National Interest
Review
The book pounds quite the drumbeat here: Force banks to borrow less (they should make up the difference through issuing more equity stock) and so inject sanity into the system. Emre Deliveli - Hurriyet Daily News
Review
In simple and accessible terms, the authors show convincingly that banks are as fragile and destructive as they are, not because they must be, but because they want to be--and they get away with it. Katharine Whittemore - Boston Globe
Review
The Bankers' New Clothes . . . stands out from the crowd. For one, it does not beat around the bush--it is clear and straight to the point in an industry usually heaving with jargon. By using language the man on the street can understand, this bold book leads quite literally by example as it reveals insights into the banking industry and why it is in such a mess. Shanghai Daily
Review
Shortlisted for the 2013 Spear's Book Award in Business
Review
"Insightful . . ."--Floyd Norris, New York Times
Review
"Crucial . . ."--Jim Surowiecki, NewYorker.com
Review
"[I]mportant . . ."--John Cassidy, NewYorker.com
Review
Anat Admati, One of Time Magazine's 100 Most Influential People for 2014
Winner of the 2013 PROSE Award in Business, Finance and Management, Association of American Publishers
Co-Winners of the 2014 Bronze Medal in Economics, Axiom Business Book Awards
One of Bloomberg/Businessweek Best Books of 2013, selected by Jason Furman (chairman of the U.S. Council of Economic Advisors)
One of Choice's Outstanding Academic Titles for 2013
One of Financial Times (FT.com) Best Economics Books of 2013
One of The Wall Street Journal's Best Nonfiction Books of 2013
Shortlisted for the 2013 Deutsche Wirtschaftsbuchpreis (German Business and Economics Book Award), sponsored by Handelsblatt, the Frankfurt Book Fair, and Goldman Sachs.
Shortlisted for the 2013 Spear's Book Award in Business
Review
“A thoughtful, modern exploration of a pernicious problem: excessive risk-taking in banking. Better Bankers, Better Banks offers an original and path-breaking perspective to the problem, including a brave remedy to reestablish professionalism and personal liability.”
Review
andldquo;Political Standards is a timely and important addition to the literature on standard-setting and how a few self-interested specialists, with little opposition, are able to andlsquo;captureandrsquo; the process and weaken the foundation of free-market capitalism. Ramannaandrsquo;s command ofandmdash;and passion forandmdash;accounting standards brings this otherwise sterile topic to life through a series of teachable stories and concludes with a clarion call to the moral fiber of managers to act ethically and in the interest of competitive capital markets instead of lobbying to advance theirandmdash;and their shareholdersandrsquo;andmdash;self-interest.andrdquo;
Review
“Hill and Painter have the historical sensibility, financial and legal competence, and literary skill to elaborate the most important, unanswered question facing contemporary banking: How best to curb the individual and institutional corruption that has emerged over the past decade? Their answer, carefully laid out with all its merits and potential criticisms, is rooted in the sensible notion that ‘responsible’ banking can be best served when senior bankers are held personally liable for a portion of their banks’ debts, fines, and settlements. This is not as easy a remedy as it might seem, and the authors take the reader through all the fascinating details of this seemingly intuitive proposal. This is a provocative book. It will interest the general public, Congress, and concerned regulators, as well as many bank executives who are currently at work redefining what responsible banking means for their organizations and trying to induce constructive changes in corporate culture.”
Review
“Why have bankers so often behaved so badly? Two eminent legal scholars lead us on a grand tour of recent financial catastrophes to demonstrate how a shift in legal structure—from partnership to corporate form—transformed staid banking institutions into unscrupulous gambling houses. The cultural shift occurred once bankers realized how to impose downside risk on shareholders while still retaining upside gains through lavish compensation packages. Fortunately, the authors’ diagnosis comes with a cure—personal liability. Instead of allowing bankers to hide behind entity shields, the authors’ prescribe 'covenant banking,' a form of contractually imposed personal liability, as a means of aligning banker behavior with socially optimal risk-taking. This is a compelling policy proposal, cogently presented.”
Review
“Hill and Painter have thrown down the gauntlet, challenging the leaders who run modern banks to embrace a new approach they call ‘covenant banking.’ They argue, with abundant passion and compelling evidence, that current modes of banking regulation and litigation have failed, and that the financial markets require that bankers undertake substantial and new forms of cultural responsibility. Their book aspires to place those who work on Wall Street in a new role in society, that of the true professional instead of the scoundrel. Both authors are well-equipped experts and their arguments are among the most provocative to emerge from the aftermath of the global financial crisis.”
Review
“Better Bankers, Better Banks is a game-changer for the financial regulatory reform. Its proposal for ‘covenant banking’ is a serious formula for restoring trust in the financial services industry by requiring bankers to have skin in the game. Hill and Painter have figured out how to recreate the reputational benefits of general partnerships in an age of giant incorporated banks. This book should be required reading for anyone concerned with restoring a fair and stable banking system.”
Review
andldquo;Generally accepted accounting principles (GAAP) was one of the most important financial innovations of the twentieth century. By tracing political influences on accounting, this important book shows that, if war is too important to leave to generals, accounting is too important to leave to accountants.andrdquo;
Review
andldquo;In this fascinating book, Ramanna shows how the design of key market rules is captured by vested interests. The pro-market lobby is overwhelmed by the power of the pro-business one, and we all lose as a result. A must-read for anybody interested in economics, politics, or more simply the health of our economy.andrdquo;
Review
andldquo;When it comes to financial regulation, average Americans compete at a disadvantage on a tilted political playing field where Wall Street interests set the rules of the game.andnbsp;This book is a must-read for anyone who wants to understand why the American political system keeps failing to make capitalism serve the public interest.andrdquo;
Review
andldquo;In Political Standards, Ramanna explores anandnbsp;extremely important matter for the efficient functioning of capital markets in a very methodical manner with penetrating analysis. I am sure this book will generate much needed discussion in public policy circles to address theandnbsp;issues raised.andnbsp;The subject matter covered is not only relevant to accounting standard setting but to all areas of public policy.andrdquo;
Review
andldquo;All too often, important decisions are disproportionately influenced by interested parties and ideological biases. The result can be flawed and ineffective rules, distortions in our system of market economy, and great harm to society. Ramannaandrsquo;s thought-provoking book challenges us to tackle this critical problem.andrdquo;
Review
"Insightful."
--Floyd Norris, New York Times
Review
"[I]mportant."
--John Cassidy, NewYorker.com
Review
"Crucial."
--Jim Surowiecki, NewYorker.com
Synopsis
Why our banking system is broken--and the reforms needed to fix it
What is wrong with today's banking system? The past few years have shown that risks in banking can impose significant costs on the economy. Many claim, however, that a safer banking system would require sacrificing lending and economic growth. The Bankers' New Clothes examines this claim and the narratives used by bankers, politicians, and regulators to rationalize the lack of reform, exposing them as invalid.
Admati and Hellwig argue we can have a safer and healthier banking system without sacrificing any of the benefits of the system, and at essentially no cost to society. They show that banks are as fragile as they are not because they must be, but because they want to be--and they get away with it. Whereas this situation benefits bankers, it distorts the economy and exposes the public to unnecessary risks. Weak regulation and ineffective enforcement allowed the buildup of risks that ushered in the financial crisis of 2007-2009. Much can be done to create a better system and prevent crises. Yet the lessons from the crisis have not been learned.
Admati and Hellwig seek to engage the broader public in the debate by cutting through the jargon of banking, clearing the fog of confusion, and presenting the issues in simple and accessible terms. The Bankers' New Clothes calls for ambitious reform and outlines specific and highly beneficial steps that can be taken immediately.
Synopsis
What is wrong with today's banking system? The past few years have shown that risks in banking can impose significant costs on the economy. Many claim, however, that a safer banking system would require sacrificing lending and economic growth. The Bankers' New Clothes examines this claim and the narratives used by bankers, politicians, and regulators to rationalize the lack of reform, exposing them as invalid.
Admati and Hellwig argue we can have a safer and healthier banking system without sacrificing any of the benefits of the system, and at essentially no cost to society. They show that banks are as fragile as they are not because they must be, but because they want to be--and they get away with it. Whereas this situation benefits bankers, it distorts the economy and exposes the public to unnecessary risks. Weak regulation and ineffective enforcement allowed the buildup of risks that ushered in the financial crisis of 2007-2009. Much can be done to create a better system and prevent crises. Yet the lessons from the crisis have not been learned.
Admati and Hellwig seek to engage the broader public in the debate by cutting through the jargon of banking, clearing the fog of confusion, and presenting the issues in simple and accessible terms. The Bankers' New Clothes calls for ambitious reform and outlines specific and highly beneficial steps that can be taken immediately.
Synopsis
"I like this book. The Bankers' New Clothes explains in plain language why banking reform is still incomplete, contrary to what lobbyists, politicians, and even some regulators tell us."--Paul Volcker, former chairman of the U.S. Federal Reserve and the U.S. Economic Recovery Advisory Board
"Bankers have sold us a story that their risky practices are the necessary cost of a dynamic system. Admati and Hellwig expose this as a misguided and dangerous lie, and show how banks can be made more stable--if less profitable for the bankers themselves--without sacrificing economic growth. This brilliant book demystifies banking for everyone and explains what is really going on. Investors, policymakers, and all citizens owe it to themselves to listen."--Simon Johnson, coauthor of 13 Bankers
"Almost subversive in its clarity, The Bankers' New Clothes is the most important book about banking in a very long time. It argues that as long as implicit taxpayer guarantees incentivize banks to raise funds almost exclusively through issuing debt, the global financial system will be subject to periodic destructive crises. The most effective remedy is to force banks to strike a better balance between debt and equity, but there have been many obstacles to implementing this improvement. Future efforts to regulate the financial system should start here."--Kenneth S. Rogoff, coauthor of This Time Is Different: Eight Centuries of Financial Folly
"Anyone interested in the past, present, or future of banking and financial crises should read The Bankers' New Clothes. Admati and Hellwig provide a forceful and accessible analysis of the recent financial crisis and offer proposals to prevent future financial failures. While controversial, these proposals--whether you agree or disagree with them--will force you to think through the problems and solutions."--Michael J. Boskin, former chairman of the President's Council of Economic Advisers
Synopsis
What is wrong with today's banking system? The past few years have shown that risks in banking can impose significant costs on the economy. Many claim, however, that a safer banking system would require sacrificing lending and economic growth.
The Bankers' New Clothes examines this claim and the narratives used by bankers, politicians, and regulators to rationalize the lack of reform, exposing them as invalid.
Admati and Hellwig argue we can have a safer and healthier banking system without sacrificing any of the benefits of the system, and at essentially no cost to society. They show that banks are as fragile as they are not because they must be, but because they want to be--and they get away with it. Whereas this situation benefits bankers, it distorts the economy and exposes the public to unnecessary risks. Weak regulation and ineffective enforcement allowed the buildup of risks that ushered in the financial crisis of 2007-2009. Much can be done to create a better system and prevent crises. Yet the lessons from the crisis have not been learned.
Admati and Hellwig seek to engage the broader public in the debate by cutting through the jargon of banking, clearing the fog of confusion, and presenting the issues in simple and accessible terms. The Bankers' New Clothes calls for ambitious reform and outlines specific and highly beneficial steps that can be taken immediately.
Synopsis
"I like this book.
The Bankers' New Clothes explains in plain language why banking reform is still incomplete, contrary to what lobbyists, politicians, and even some regulators tell us."--Paul Volcker, former chairman of the U.S. Federal Reserve and the U.S. Economic Recovery Advisory Board
"Bankers have sold us a story that their risky practices are the necessary cost of a dynamic system. Admati and Hellwig expose this as a misguided and dangerous lie, and show how banks can be made more stable--if less profitable for the bankers themselves--without sacrificing economic growth. This brilliant book demystifies banking for everyone and explains what is really going on. Investors, policymakers, and all citizens owe it to themselves to listen."--Simon Johnson, coauthor of 13 Bankers
"Almost subversive in its clarity, The Bankers' New Clothes is the most important book about banking in a very long time. It argues that as long as implicit taxpayer guarantees incentivize banks to raise funds almost exclusively through issuing debt, the global financial system will be subject to periodic destructive crises. The most effective remedy is to force banks to strike a better balance between debt and equity, but there have been many obstacles to implementing this improvement. Future efforts to regulate the financial system should start here."--Kenneth S. Rogoff, coauthor of This Time Is Different: Eight Centuries of Financial Folly
"Anyone interested in the past, present, or future of banking and financial crises should read The Bankers' New Clothes. Admati and Hellwig provide a forceful and accessible analysis of the recent financial crisis and offer proposals to prevent future financial failures. While controversial, these proposals--whether you agree or disagree with them--will force you to think through the problems and solutions."--Michael J. Boskin, former chairman of the President's Council of Economic Advisers
Synopsis
Taking risks is a valid part of the business banks do, but Claire Hill and Richard Painter, both prominent experts on banking law and behavior, point out that its not really clear where the line is between appropriate and irresponsible. Starting with an expertly curated collection of the most poignant examples of bankers gone wild, Restoring Responsibility in Banking presents an accessible history of banking in the past few decades and shows exactly how banks became such risk-takersand how they started creating and investing in dangerously complex securities. Hill and Painter then delve into banker behavior, going beyond just a simple pursuit of money, and look into the culture, need for status, and other factors that contribute to how success is defined in banking. They show how the most effective solution is for banks to give individual employees more personal liability for the risks taken by the bank as a whole, and they step back and say that, actually, greed is not good, and theres no reason the entire culture of an industry should ride on it. Restoring Responsibility in Banking is a refreshing yet authoritative call for banks to return to the idea that theirs is a noble profession that serves society as well as themselves.
Synopsis
Prudent, verifiable, and timely corporate accounting is a bedrock of our modern capitalist system. In recent years, however, the rules that govern corporate accounting have been subtly changed in ways that compromise these core principles, to the detriment of the economy at large. These changes have been driven by the private agendas of certain corporate special interests, aided selectivelyandmdash;and sometimes unwittinglyandmdash;by arguments from business academia
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With Political Standards, Karthik Ramanna develops the notion of andldquo;thin political marketsandrdquo; to describe a key problem facing technical rulemaking in corporate accounting and beyond. When standard-setting boards attempt to regulate the accounting practices of corporations, they must draw on a small pool of qualified expertsandmdash;but those experts almost always have strong commercial interests in the outcome. Meanwhile, standard-setting rarely enjoys much attention from the general public. This absence of accountability, Ramanna argues, allows corporate managers to game the system. In the profit-maximization framework of modern capitalism, the only practicable solution is to reframe managerial norms when participating in thin political markets. Political Standards will be an essential resource for understanding how the rules of the game are set, whom they inevitably favor, and how the process can be changed for a better capitalism.
Synopsis
Taking financial risks is an essential part of what banks do, but there’s no clear sense of what constitutes responsible risk. Taking legal risks seems to have become part of what banks do as well. Since the financial crisis, Congress has passed copious amounts of legislation aimed at curbing banks’ risky behavior. Lawsuits against large banks have cost them billions. Yet bad behavior continues to plague the industry. Why isn’t there more change?
In Better Bankers, Better Banks, Claire A. Hill and Richard W. Painter look back at the history of banking and show how the current culture of bad behavior—dramatized by the corrupt, cocaine-snorting bankers of The Wolf of Wall Street—came to be. In the early 1980s, banks went from partnerships whose partners had personal liability to corporations whose managers had no such liability and could take risks with other people’s money. A major reason bankers remain resistant to change, Hill and Painter argue, is that while banks have been faced with large fines, penalties, and legal fees—which have exceeded one hundred billion dollars since the onset of the crisis—the banks (which really means the banks’shareholders) have paid them, not the bankers themselves. The problem also extends well beyond the pursuit of profit to the issue of how success is defined within the banking industry, where highly paid bankers clamor for status and clients may regard as inevitable bankers who prioritize their own self-interest. While many solutions have been proposed, Hill and Painter show that a successful transformation of banker behavior must begin with the bankers themselves. Bankers must be personally liable from their own assets for some portion of the bank’s losses from excessive risk-taking and illegal behavior. This would instill a culture that discourages such behavior and in turn influence the sorts of behavior society celebrates or condemns.
Despite many sensible proposals seeking to reign in excessive risk-taking, the continuing trajectory of scandals suggests that we’re far from ready to avert the next crisis. Better Bankers, Better Banks is a refreshing call for bankers to return to the idea that theirs is a noble profession.
About the Author
Claire A. Hill is professor and the James L. Krusemark Chair in Law at the University of Minnesota Law School, where she is also director of the Institute for Law and Rationality and associate director of the Institute for Law and Economics.Richard W. Painter is the S. Walter Richey Professor of Corporate Law at the University of Minnesota Law School. He is the author of several books, including, most recently, Getting the Government America Deserves and has served as Associate Counsel to the President in the White House Counsel’s office.
Table of Contents
Preface ix
Acknowledgments xiii
1The Emperors of Banking Have No Clothes 1
PART I Borrowing, Banking, and Risk 15
2How Borrowing Magnifies Risk 17
3The Dark Side of Borrowing 32
4Is It Really "A Wonderful Life"? 46
5Banking Dominos 60
PART II The Case for More Bank Equity 79
6What Can Be Done? 81
7Is Equity Expensive? 100
8Paid to Gamble 115
9Sweet Subsidies 129
10Must Banks Borrow So Much? 148
PART III Moving Forward 167
11If Not Now, When? 169
12The Politics of Banking 192
13Other People's Money 208
Notes 229
References 337
Index 363