Excellent book written for a general audience explaining why big, highly leveraged banks are bad for the economy. Then they assert that requiring banks to raise more capital by issuing stock and less through borrowing will be extremely beneficial for the financial system.
This seems too simple to be true and the most helpful negative review has called it "overly simple". I strongly disagree. I think it is just simple enough. Simple is good. Complicated rules, such as the Volcker Rule, will be gamed, evaded and lobbied to irrelevance. The presentation in the book is somewhat oversimplified but there are lots of footnotes that go into greater depth and elaborate the point plus references that support them.
Why hasn't such simple logic been followed already? The authors describe how bankers benefit from the current system of extremely high leverage and from the implicit promise of taxpayer bailouts. They also argue that their proposal -- which they have been making academically and to regulators and politicians for a few years -- has been opposed by entrenched banking interest. Also, the general public doesn't understand these issues or of banking in general. They argue that this in part because bankers promote confusion. This book is written to combat that. "We want to encourage people to form and to trust their opinions, to ask questions, to express doubts, and to challenge the flawed arguments that pervade the policy debate. If we are to have a healthier financial system, more people must understand the issues and influence policy."
I think they do a great job of explaining the problem in very clear and understandable terms to people with no prior knowledge without oversimplifying. For readers who want to delve more deeply, they have excellent footnotes and references. I am involved in the field and find the references and excellent compendium of sources, some of which I already knew but some which I am very glad they have pointed me to.
Their central premise is that a simple measure -- requiring banks to raise more funds as equity capital -- issuing stock instead of borrowing -- would greatly improve the stability of the banking system. They also address the "bugbear" that doing so would reduce economic growth. Essentially, we can have our cake and eat it too.
In their words "if banks have much more equity, the financial system will be safer, healthier, and less distorted. From the society's perspective, the benefits are large and the costs are hsrd to find: there are virtually no tradeoffs."
The message is quite strong and they seem quite alarmed about the current state of affairs "Today's banking system, even with the proposed reforms, is as dangerous and fragile as the system that brought us the recent financial crisis." But their writing is quite dry and matter-of-fact. I think they do a wonderful job of explaining the essence of banking and the problems leverage creates to people without a lot of financial knowledge.
I found their message to be quite persuasive and compelling.
Addendum: Many of claims in negative reviews are refuted by the authors in this (fairly short) document.
http://bankersnewclothes.com/wp-content/uploads/2013/06/parade-continues-June-3.pdf
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Audible sample Sample The Bankers' New Clothes: What's Wrong With Banking and What to Do About It Hardcover – February 24, 2013
by
Anat Admati
(Author),
Martin Hellwig
(Author)
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Purchase options and add-ons
hardcover
- Print length416 pages
- LanguageEnglish
- PublisherPrinceton University Press
- Publication dateFebruary 24, 2013
- Dimensions7 x 1.25 x 10 inches
- ISBN-100691156840
- ISBN-13978-0691156842
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Editorial Reviews
Review
"Anat Admati, One of Time Magazine’s 100 Most Influential People for 2014"
"Winner of the 2013 PROSE Award in Business, Finance & 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"
"Insightful."---Floyd Norris, New York Times
"[I]mportant."---John Cassidy, NewYorker.com
"Crucial."---Jim Surowiecki, NewYorker.com
"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
"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 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
"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
"[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
"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
"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
"Admati and Hellwig offer a simple prescription for this complex world."---Thomas G. Donlan, Barron's
"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
"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
"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." ― Finance & Development
"An excellent new book."---Matthew Yglesias, Slate.com
"[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."---Christopher Matthews, Time.com
"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."---Randolph Walerius, Roll Call
"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
"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."---Nick Dunbar, NickDunbar.net
"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
"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."---Richard Saunders, Financial News
"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."---Peter Morris, Financial World
"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." ― Economist
"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
"[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
"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
"[T]hought provoking."---Heather Stewart, Observer
"[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."---David Wilson, South China Morning Post
"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." ― Worth
"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
"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."---Noori Passela, The National
"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."---Hazel Henderson, Seeking Alpha
"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."---Douglas French, Freeman
"[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."---John Plender, Financial Times
"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."---Christopher Whalen, National Interest
"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."---Emre Deliveli, Hurriyet Daily News
"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
"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." ― Shanghai Daily
"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."---Nina Roehrbein, Investment & Pensions Europe
"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 book deserves to be read by both bankers and policymakers as it debunks many of the myths that have been used to justify excessive leverage in banking." ― Economic & Political Weekly
"This excellent volume provides an invaluable lens through which to view modern banking and the ways it has evolved to privatize returns and socialize risks. . . . Admati and Hellwig provide an accessible explanation of the inherent risks in the current banking system and propose sensible rules and reforms to make the system stable without damaging bank lending or economic growth." ― Choice
"This accessible look into complex financial theory is a must-read for anyone interested in the ongoing debate over regulatory reform and 'too big to fail.'"---Jeanine Skowronski, Deputy Editor, BankThink
"[The] Bankers' New Clothes makes a powerful case for why banks should stop borrowing so much."---Rana Foroohar, Time
"[B]uy this book; read this book; give this book to your friends; discuss this book; act on this book."---Carol Hunt, Irish Sunday Independent
"The book is terrific." ― Enlightened Economist
"[T]he Bankers' New Clothes is an important book that identifies correctly the central problem of government protection of banks."---Charles Calomiris, Barron's
"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." ― World Book Industry
"Admati and Hellwig have given us a clear roadmap to sensible banking reform but, given the hold that key banking interests have over politicians in most major economies, little change in either policy or attitude towards essential bank functions can be expected any time soon."---Joel Campbell, International Affairs
"Admati and Hellwig's book is a major contribution toward this goal, as it clearly lays out the essential case for requiring banks to have more equity. . . . Anat Admati and Martin Hellwig have done an enormously important service in this book."---Roger B. Myerson, Journal of Economic Literature
"Winner of the 2013 PROSE Award in Business, Finance & 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"
"Insightful."---Floyd Norris, New York Times
"[I]mportant."---John Cassidy, NewYorker.com
"Crucial."---Jim Surowiecki, NewYorker.com
"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
"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 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
"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
"[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
"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
"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
"Admati and Hellwig offer a simple prescription for this complex world."---Thomas G. Donlan, Barron's
"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
"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
"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." ― Finance & Development
"An excellent new book."---Matthew Yglesias, Slate.com
"[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."---Christopher Matthews, Time.com
"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."---Randolph Walerius, Roll Call
"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
"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."---Nick Dunbar, NickDunbar.net
"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
"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."---Richard Saunders, Financial News
"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."---Peter Morris, Financial World
"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." ― Economist
"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
"[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
"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
"[T]hought provoking."---Heather Stewart, Observer
"[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."---David Wilson, South China Morning Post
"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." ― Worth
"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
"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."---Noori Passela, The National
"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."---Hazel Henderson, Seeking Alpha
"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."---Douglas French, Freeman
"[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."---John Plender, Financial Times
"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."---Christopher Whalen, National Interest
"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."---Emre Deliveli, Hurriyet Daily News
"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
"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." ― Shanghai Daily
"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."---Nina Roehrbein, Investment & Pensions Europe
"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 book deserves to be read by both bankers and policymakers as it debunks many of the myths that have been used to justify excessive leverage in banking." ― Economic & Political Weekly
"This excellent volume provides an invaluable lens through which to view modern banking and the ways it has evolved to privatize returns and socialize risks. . . . Admati and Hellwig provide an accessible explanation of the inherent risks in the current banking system and propose sensible rules and reforms to make the system stable without damaging bank lending or economic growth." ― Choice
"This accessible look into complex financial theory is a must-read for anyone interested in the ongoing debate over regulatory reform and 'too big to fail.'"---Jeanine Skowronski, Deputy Editor, BankThink
"[The] Bankers' New Clothes makes a powerful case for why banks should stop borrowing so much."---Rana Foroohar, Time
"[B]uy this book; read this book; give this book to your friends; discuss this book; act on this book."---Carol Hunt, Irish Sunday Independent
"The book is terrific." ― Enlightened Economist
"[T]he Bankers' New Clothes is an important book that identifies correctly the central problem of government protection of banks."---Charles Calomiris, Barron's
"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." ― World Book Industry
"Admati and Hellwig have given us a clear roadmap to sensible banking reform but, given the hold that key banking interests have over politicians in most major economies, little change in either policy or attitude towards essential bank functions can be expected any time soon."---Joel Campbell, International Affairs
"Admati and Hellwig's book is a major contribution toward this goal, as it clearly lays out the essential case for requiring banks to have more equity. . . . Anat Admati and Martin Hellwig have done an enormously important service in this book."---Roger B. Myerson, Journal of Economic Literature
Review
"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
"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
From the Inside Flap
"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
"Th
From the Back Cover
"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 readThe 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 ofThe 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 of13 Bankers
"At last! Two eminent economists explain in plain English what is wrong with banks and what needs to be done to ma
About the Author
Anat Admati is the George G. C. Parker Professor of Finance and Economics at Stanford's Graduate School of Business. She serves on the FDIC Systemic Resolution Advisory Committee and has contributed to the Financial Times, Bloomberg News, and the New York Times. Martin Hellwig is director at the Max Planck Institute for Research on Collective Goods. He was the first chair of the Advisory Scientific Committee of the European Systemic Risk Board and the cowinner of the 2012 Max Planck Research Award for his work on financial regulation.
Product details
- Publisher : Princeton University Press; unknown edition (February 24, 2013)
- Language : English
- Hardcover : 416 pages
- ISBN-10 : 0691156840
- ISBN-13 : 978-0691156842
- Item Weight : 1.58 pounds
- Dimensions : 7 x 1.25 x 10 inches
- Best Sellers Rank: #1,620,677 in Books (See Top 100 in Books)
- #1,131 in Banks & Banking (Books)
- #1,638 in Theory of Economics
- #59,117 in Politics & Government (Books)
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Customers find the book well-written, easy to follow, and strong with a great reading experience. They also appreciate the solid analysis, detailed background material, and excellent primer regarding risk and leverage.
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29 customers mention "Content"22 positive7 negative
Customers find the book excellent, with solid analysis and detailed background material. They also say the authors do an outstanding job explaining financial theory and regulatory policies. Readers say the argument is proceeded from first principles so that they can follow it step by step. They say the book is an excellent primer regarding risk and leverage, and provides solutions to help prevent banking failures.
"...I am involved in the field and find the references and excellent compendium of sources, some of which I already knew but some which I am very glad..." Read more
"...the only one that proposes a simple, realistic and workable solution to prevent future crisis...." Read more
"This book is an important milestone in banking literature. Broadly speaking, banks need to have adequate capital and adequate liquidity...." Read more
"...The book is a thought-provoking read regardless of financial experience and one that will hopefully lead to significant changes in the regulation of..." Read more
26 customers mention "Comprehensibility"26 positive0 negative
Customers find the book very clear and understandable. They say it's well written, and provides specific guidance on corrective steps. Readers also mention the message is strong and they seem quite alarmed about the current state.
"...The message is quite strong and they seem quite alarmed about the current state of affairs "Today's banking system, even with the proposed reforms,..." Read more
"...The book is very well written, and clear...." Read more
"...on one of the primary causes, and is probably the only one that proposes a simple, realistic and workable solution to prevent future crisis...." Read more
"...The book is very accessible...." Read more
16 customers mention "Reading experience"16 positive0 negative
Customers find the book a great read.
"This book was an interesting read. I bought it to learn more about how banking works, and I found it did that...." Read more
"...great primer for those wanting basic understanding of problems in banking regulation, and cutting through the semantic nonsense that bankers promote" Read more
"The basic idea of this book is sound...." Read more
"This is the best book yet covering the issues involved in trying to avoid another financial catastrophe like the one of 2007 - 2008...." Read more
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Top reviews from the United States
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Reviewed in the United States on February 16, 2013
Reviewed in the United States on April 4, 2016
This book was an interesting read. I bought it to learn more about how banking works, and I found it did that. I bought the Kindle edition, and that is the only reason I did not give it 5 stars. Since about 44% of the material is footnotes, References, and Index - the potential of hitting a hyperlink in the text caused me to relocate my position in the book multiple times and frustrating to read that way. Research is a key part of this book, and I would have preferred to have the print if I was going to use all the references.
The book is very well written, and clear. Not everyone is interested in knowing about this topic - I wish people were more aware of this book and more about the way the financial industry works in our world. The financial crisis bill is something that everyone will have to pay for - perhaps the knowledge here can help prevent it occurring again.
The book is very well written, and clear. Not everyone is interested in knowing about this topic - I wish people were more aware of this book and more about the way the financial industry works in our world. The financial crisis bill is something that everyone will have to pay for - perhaps the knowledge here can help prevent it occurring again.
Reviewed in the United States on January 8, 2014
I've read a number of highly rated books on the crisis. Most try to provide explainations and insights, and some even blame China (too much savings leading to low global interest rates...)! This book focuses on one of the primary causes, and is probably the only one that proposes a simple, realistic and workable solution to prevent future crisis. Despite Frank-Dodd, Volcker and other new regulations, the amount of leverage in the financial system remains as high as prior to the crisis- extremely high and built on layers and layers of derivatives and debt. Much of it goes to unproductive speculation and gambling instead of real and productive business financing. The reason is explained in the book- by the lax capital requirements on banks- 3% with Basel III!- as well as the asymmetric risk/reward, perverse incentives and culture (of gambling) in the investment banks. Worse still, the top 5 banks have a much larger market share than before the crisis! So the world is still very vulnerable to another crisis. The real test of the proposed solution is whether it would have prevented the financial crisis. I believe it may not have prevented the collapse of the housing bubble, but it would have greatly reduced the impact around the world and on the real economy. I think the proposed solution would reduce much of the unproductive speculation/gambling, channel more money to productive investments and make the global economy stronger and safer.
Top reviews from other countries
Jose Luis Marrazzo
5.0 out of 5 stars
Excelente
Reviewed in Spain on June 17, 2022
Explicación sencilla de cómo funcionan los bancos y se aprovechan del sistema.
Ian Robertson
5.0 out of 5 stars
A Clearly Written Prescription for What Ails Our Banks
Reviewed in Canada on March 23, 2013
Many books have tried to explain the origins of the 2008 financial crisis, and many more have offered advice to prevent a recurrence. The Bankers’ New Clothes is the clearest prescription yet to address the central cause of the crisis: the financial system itself, and in particular modern (overleveraged) banking. An outstanding book that should be read by everyone: politicians, regulators, bankers, and those with an interest in a stable financial system (i.e. anyone with a bank account, who pays taxes, or has a job).
The authors share their motivation in the preface; they had “hoped that the lessons of the crisis would be learned ... but ... were disappointed. There [has been] no serious analysis of how the financial system might be made safer.” They follow with a caution, and then their goal; “The banking system, even with proposed reforms, is as dangerous and fragile as the system that brought us the recent crisis. But this situation can change. With the right focus and a proper diagnosis of the problems, highly beneficial steps can be taken immediately.”
While the motivation for the book was the recent financial crisis, the authors focus much more on the structure of financial institutions and the financial industry than they do on the recent sub-prime meltdown. In one set of examples, Admati and Hellwig link the 1980s US savings & loan debacle and the recent “rogue” traders at Barings Bank, Credit Lyonnais, and JP Morgan to the risk and oversight structure of banks, and the perverse incentives for individual and corporate risk taking - the same structural issues at the heart of the recent crisis. They also expose the repeated obfuscation of banks and lobbyists, highlight the complicity of politicians, and on occasion correct misinformation promulgated by individuals who should know better (former Federal Reserve Governor Frederic Mishkin).
The authors’ explanations of how banks work, in particular leverage and capital requirements, is exceptional. They start with an example everyone will understand - a home mortgage - and link it to the gain or loss the homeowner would experience if their home rose or fell in value over the course of a year. The same methodology is then used to show how a bank would fare given a similar rise or fall in the value of its assets; gains and losses are magnified due to the bank’s leverage. An illuminating real world example is highlighted in their diagram of JP Morgan’s self-described “fortress” balance sheet. Using US (GAAP) accounting principles the very high leverage is apparent, but using European (IFRS) accounting principles the leverage is almost double again!
The global regulatory response to over-leverage is set out in an agreement called Basel III, which phases in over the coming years a new global agreement on banks’ reserve requirements. The authors ridicule the effort as as wholly inadequate: too vague; too easy for banks to manipulate (what exactly are “risk-weighted assets”?); too lax (3% equity to total assets); and too slow to implement (2019 for the risk-weighted assets portion). Their prescription: issue equity immediately or stop dividend payments (i.e. preserve capital within the banks) until the capital equals 30%. Harkening back to the authors’ initial example of a home mortgage, the banking system would move from a 3% “down payment” to a 30% “down payment” margin of safety.
Alarming, disheartening, and a call to action, The Bankers’ New Clothes could not be more timely or better written. Written for a general audience, the book explains issues and industry terminology very well, features outstanding examples and analogies, and concludes with specific remedies and an estimate of associated costs. As an added bonus the book features an unparalleled notes section, which at over 100 pages is a worthy read in itself. A truly outstanding effort.
The authors share their motivation in the preface; they had “hoped that the lessons of the crisis would be learned ... but ... were disappointed. There [has been] no serious analysis of how the financial system might be made safer.” They follow with a caution, and then their goal; “The banking system, even with proposed reforms, is as dangerous and fragile as the system that brought us the recent crisis. But this situation can change. With the right focus and a proper diagnosis of the problems, highly beneficial steps can be taken immediately.”
While the motivation for the book was the recent financial crisis, the authors focus much more on the structure of financial institutions and the financial industry than they do on the recent sub-prime meltdown. In one set of examples, Admati and Hellwig link the 1980s US savings & loan debacle and the recent “rogue” traders at Barings Bank, Credit Lyonnais, and JP Morgan to the risk and oversight structure of banks, and the perverse incentives for individual and corporate risk taking - the same structural issues at the heart of the recent crisis. They also expose the repeated obfuscation of banks and lobbyists, highlight the complicity of politicians, and on occasion correct misinformation promulgated by individuals who should know better (former Federal Reserve Governor Frederic Mishkin).
The authors’ explanations of how banks work, in particular leverage and capital requirements, is exceptional. They start with an example everyone will understand - a home mortgage - and link it to the gain or loss the homeowner would experience if their home rose or fell in value over the course of a year. The same methodology is then used to show how a bank would fare given a similar rise or fall in the value of its assets; gains and losses are magnified due to the bank’s leverage. An illuminating real world example is highlighted in their diagram of JP Morgan’s self-described “fortress” balance sheet. Using US (GAAP) accounting principles the very high leverage is apparent, but using European (IFRS) accounting principles the leverage is almost double again!
The global regulatory response to over-leverage is set out in an agreement called Basel III, which phases in over the coming years a new global agreement on banks’ reserve requirements. The authors ridicule the effort as as wholly inadequate: too vague; too easy for banks to manipulate (what exactly are “risk-weighted assets”?); too lax (3% equity to total assets); and too slow to implement (2019 for the risk-weighted assets portion). Their prescription: issue equity immediately or stop dividend payments (i.e. preserve capital within the banks) until the capital equals 30%. Harkening back to the authors’ initial example of a home mortgage, the banking system would move from a 3% “down payment” to a 30% “down payment” margin of safety.
Alarming, disheartening, and a call to action, The Bankers’ New Clothes could not be more timely or better written. Written for a general audience, the book explains issues and industry terminology very well, features outstanding examples and analogies, and concludes with specific remedies and an estimate of associated costs. As an added bonus the book features an unparalleled notes section, which at over 100 pages is a worthy read in itself. A truly outstanding effort.
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laurens van den muyzenberg
5.0 out of 5 stars
Bankers' motivation leads to economic crises
Reviewed in France on June 16, 2013
The two authors "prove" that one of main causes of economic crises is the motivation of the bankers. It is not their intention. They are "blind" to the disconnect between their actions and their intentions leading to regular crisis with high levels of unemployment and large-scale reduction of prosperity.
The reason why this is so is very simple once you understand it. You have to read the book carefully because banking lobbyists make an enormous effort to complicate and confuse the issues. The authors explain in minute detail how they have arrived at their conclusions. One author is an American professor from Stanford University and the other the German director of a Max Planck Institute. Both are world level experts on this issue.
The simple answer is that Bankers try to keep the shareholder equity (cash paid by investors when the company sold shares and retained earnings, profits that were not paid out as dividends) as low as they can by preventing a regulation that would impose a thirty percent ratio between equity and total assets (the "capital ratio"). You need to understand what exactly are "real" assets and "real" equity, which is different in this book from the way bankers refer to these words. Understanding this difference is essential for understanding the message of this book.
Why are bankers motivated to minimize shareholder equity? They aim to maximize Return on Equity (ROE). This is the ratio between profit and equity. It is obvious that with the same profit and a lower equity the ROE increases. According to the authors, the total income of the senior bankers is in most banks based, to a large extent, on this ROE. This is illustrated by a statement of Bob Diamond when CEO of Barclays in 2011, "Barclays is counting in being able to fund part of its capital requirements with new contingent convertible instruments or co cos, which will not dilute ROE numbers."
Bankers argue that increasing equity is not of interest oh the public at large because it will reduce liquidity, reduce the amount of financing, increase the interest rates they have to charge, and refer to the "level playing field" where other countries accept lower equity levels and increase their costs unnecessarily.
The authors go into immense detail to prove that all these arguments are false and why this 30% ratio will radically reduce financial crisis, avoid bail outs and radically reduce the motivation of bankers to take excessive risks, earlier write down non-performing loans performing loans, will continue to award loans to small companies, even in a down turn and no longer search and develop risky innovations to increase bank profits. They also explain, again in detail, why Basel III, which deals with this issue, has been watered down to the point that the financial system to day and still after its implementation will as fragile as it was in 2007.
Why do governments not impose this 30% rule? The authors refer to the lobbying power of banks and their associations with as an example the statement of Jamie Dimon CEO of JM Morgan Chase (JPMC): " JPMC gets "a good return on the company’s seventh line of business"-government relations." The authors also show that the capital ratio of JPMC with a "Fortress Balance Sheet" is 4.5% under international accounting rules and would still be considerably lower considering that total value of JPM in the stock market on December 30 2011 was 58 billion less that the shareholder equity in the accounts. The authors describe bankers' attitude as "Anything but equity" and "It very hard to get a person to understand a truth if understanding it would lead to a reduction in her or his income." The authors claim that increasing shareholder equity for successful companies is "easy" by issuing shares and/or not paying dividends until the 30% is reached.
The authors have tried in their important public activities and publications to convince governments to act and as they failed have published this book
The reason why this is so is very simple once you understand it. You have to read the book carefully because banking lobbyists make an enormous effort to complicate and confuse the issues. The authors explain in minute detail how they have arrived at their conclusions. One author is an American professor from Stanford University and the other the German director of a Max Planck Institute. Both are world level experts on this issue.
The simple answer is that Bankers try to keep the shareholder equity (cash paid by investors when the company sold shares and retained earnings, profits that were not paid out as dividends) as low as they can by preventing a regulation that would impose a thirty percent ratio between equity and total assets (the "capital ratio"). You need to understand what exactly are "real" assets and "real" equity, which is different in this book from the way bankers refer to these words. Understanding this difference is essential for understanding the message of this book.
Why are bankers motivated to minimize shareholder equity? They aim to maximize Return on Equity (ROE). This is the ratio between profit and equity. It is obvious that with the same profit and a lower equity the ROE increases. According to the authors, the total income of the senior bankers is in most banks based, to a large extent, on this ROE. This is illustrated by a statement of Bob Diamond when CEO of Barclays in 2011, "Barclays is counting in being able to fund part of its capital requirements with new contingent convertible instruments or co cos, which will not dilute ROE numbers."
Bankers argue that increasing equity is not of interest oh the public at large because it will reduce liquidity, reduce the amount of financing, increase the interest rates they have to charge, and refer to the "level playing field" where other countries accept lower equity levels and increase their costs unnecessarily.
The authors go into immense detail to prove that all these arguments are false and why this 30% ratio will radically reduce financial crisis, avoid bail outs and radically reduce the motivation of bankers to take excessive risks, earlier write down non-performing loans performing loans, will continue to award loans to small companies, even in a down turn and no longer search and develop risky innovations to increase bank profits. They also explain, again in detail, why Basel III, which deals with this issue, has been watered down to the point that the financial system to day and still after its implementation will as fragile as it was in 2007.
Why do governments not impose this 30% rule? The authors refer to the lobbying power of banks and their associations with as an example the statement of Jamie Dimon CEO of JM Morgan Chase (JPMC): " JPMC gets "a good return on the company’s seventh line of business"-government relations." The authors also show that the capital ratio of JPMC with a "Fortress Balance Sheet" is 4.5% under international accounting rules and would still be considerably lower considering that total value of JPM in the stock market on December 30 2011 was 58 billion less that the shareholder equity in the accounts. The authors describe bankers' attitude as "Anything but equity" and "It very hard to get a person to understand a truth if understanding it would lead to a reduction in her or his income." The authors claim that increasing shareholder equity for successful companies is "easy" by issuing shares and/or not paying dividends until the 30% is reached.
The authors have tried in their important public activities and publications to convince governments to act and as they failed have published this book
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Bluesview
5.0 out of 5 stars
How we subsidise banks
Reviewed in the United Kingdom on May 10, 2013
I am interested in the causes of the credit crisis and I am concerned at the lack of progress by the current (coalition) government in tackling the issues which caused it. The authors go out of their way to make all their points clearly. They show how bank propaganda is disseminated to favour the bankers own ends. It particularly deals with the obsession of many bankers to increase 'return on equity' and shows how this is achieved by high risk strategies. Essentially banks need more capital, My own view is that banks also need to be split (properly legally split) as well being made to have more equity capital. It is very well researched and the notes backing-up the contents and conclusions are extensive. I would rather subsidise something useful like the National Health Service rather than Bankers risk taking. The book shows how banks may borrow at preferential rates and take high levels of risk without having to pay the costs of the real risk because of the implicit knowledge that they are too interconnected to fail and will be bailed out by the government, which means us the tax payer. The fate of the banks and of the government are inextricably mixed. My own view is that the current government favours the banks over the electorate and are that they are not keeping the public informed of the continuing danger posed by banks, which are undercapitalised and effectively underwritten/subsidised by the UK tax payer.
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S. Hare
5.0 out of 5 stars
To understand the crisis, a must read
Reviewed in Italy on April 26, 2013
Financial instability plunged the Western World in a deep recession. In many countries, banks were propped up with taxpayers' money. Mistrust of bankers is widespread. But how to react is unclear: protesters offer only slogans, or put forth proposals that are unworkable or dangerous; politicians and regulators adopt intricate reforms that do not seem to change much. This book explains to concerned citizens how banks work and how we can keep them working - giving credit to families and businesses - without causing damage. Its authors are academics, but write in everybody's language. Bankers' lobbyists beware.
