The Bankers New Clothes: Whats Wrong with Banking and What to Do about It - New and Expanded Edition

(Paperback)

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Why our banking system is brokenand what we must do to fix it

As memories of the Global Financial Crisis have faded, it has been tempting to believe that the banking system is now safe and that we will never again have to choose between havoc and massive bailouts. But The Bankers New Clothes shows that reforms have changed littleand that the banks still present serious dangers to the world economy. Writing in clear language that anyone can understand, Anat Admati and Martin Hellwig explain how we can have a healthier banking system without sacrificing any benefits. They also debunk the false and misleading narratives of bankers, regulators, politicians, academics, and others who oppose real reform.

Reviews

"Indispensable."---Jesse Eisinger, New York Times
"Crucial."---James Surowiecki, The New Yorker
"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."---Martin Wolf, Financial Times
"Powerful. . . . 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." * The Economist *
"Excellent."---Matthew Yglesias, Slate
"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
"An 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. [Admati and Hellwig] argue that banks should fund themselves with more equity and less debtor, to put it bluntly, that banks should risk more of their own money, and less of everyone else's."---Christopher Matthews, Time
"Insightful."---Floyd Norris, New York Times
"Important."---John Cassidy, The New Yorker
"Anat Admati and Martin Hellwig convincingly make the case for much stronger and simpler borrowing limitations for banks."---Roger Alcaly, New York Review of Books
"In a year of important books about the recent economic crisis, the most important one told us simply how to stop the next one." * Wall Street Journal *
"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."---Katharine Whittemore, Boston Globe
"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
"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."---Susan Antilla, Bloomberg News
"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."---John R. Talbott, Huffington Post
"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 heldyet hardly ever challengedbelief systems within the industry, than any lack of understanding."---Izabella Kaminska, FinancialTimes.com's Alphaville blog
"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
"Admati and Hellwig offer a simple prescription for this complex world."---Thomas G. Donlan, Barron's
"The Bankers' New Clothes makes a powerful case for why banks should stop borrowing so much."---Rana Foroohar, Time
"Buy this book; read this book; give this book to your friends; discuss this book; act on this book."---Carol Hunt, Irish Sunday Independent
"This is the most important book to have come out of the financial crisis. It argues, convincingly, that the problem with banks is that they operate with an order of magnitude too little equity capital, relative to their assets. Targeting return on equity, without consideration of risk, allows bankers to pay themselves egregiously, while making their institutions and the economy hugely unstable." * Financial Times *
"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."---Peter Coy, Bloomberg Businessweek
"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."---George Hay, Reuters Breakingviews
"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."---Will Hutton, New Statesman
"[Admati and Hellwig] 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." * The Economist *
"The 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."---John Plender, Financial Times
"[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."---Dale Singer, St. Louis Post-Dispatch
"Thought provoking."---Heather Stewart, The Observer
"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."---John Reeves, Motley Fool
"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." * Business Standard *
"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 *
"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 *
"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 *
"Admati and Hellwig don't just criticize bankers. The real strength of their book is that they walk their readers throug

Author Bio

Anat Admati is a professor at the Stanford Graduate School of Business. She has written for the New York Times and the Financial Times and has been included in Times 100 Most Influential People and Foreign Policys 100 Leading Global Thinkers. Martin Hellwig is director emeritus at the Max Planck Institute for Research on Collective Goods in Bonn and former chair of the German Monopolies Commission and the Advisory Scientific Committee of the European Systemic Risk Board.