The Bankers' New Clothes: An interview with Stanford's Anat Admati
New bank failures prove you were naive to believe banks were reformed after the Global Financial Crisis and that we’d never again have to choose between massive bailouts and financial system havoc.
On February 27 I took the train to Princeton to hear my friend Anat Admati talk about the new edition of her book, The Bankers’ New Clothes. Anat R. Admati is the George G.C. Parker Professor of Finance and Economics at Stanford Graduate School of Business (GSB) and a senior fellow at Stanford Institute for Economic Policy Research. She is also the Faculty Director of the Corporations and Society Initiative at the GSB, whose mission is to raise awareness and increase understanding of the complex interactions among people, corporations, and governments.
She is the co-author, with Martin Hellwig, of the award-winning and highly acclaimed book, The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It (Princeton Press 2013).
This is the 10th-anniversary update that has recently been published. The completely new section IV is great!
PART IV, Undermining Democracy and the Rule of Law
Chap 14 Too Fragile Still
Chap 15 Bailouts and Central Banks
Chap 16 Bailouts Forever
Chap 17 Above the Law
My work was cited in the original edition, Chapter 8.
I am also cited in the new Chapter 14 (n.87) about bank auditors and in Chapter 17 (n.84) in the part about auditors more broadly.
One neat thing about the book is this add-on guide: The Parade of Bankers’ New Clothes Continues: 44 Flawed Claims Debunked. Some of the most popular spins created by bankers and their lobbyists, intended to promote disinformation, are debunked.
Banks are special because deposits are ‘money’.
Equity funding is expensive. Therefore, equity requirements must not force banks to have too much equity.
It is an invaluable guide for journalists, researchers, and anyone writing about these issues.
And it is sorely needed. The news just keeps on coming. Although I am not writing my weekly column, Accountable, in American Banker anymore, I am being quoted there. Just yesterday AB’s Polo Rocha, writing about the latest issues at New York Community Bank, plugged this in:
KPMG faces fresh questions over audits after New York Community turmoil
By Polo Rocha
The facts over KPMG's audits aren't public, making it hard to gauge whether auditors rightfully pushed back as New York Community quickly grew in 2023. But the bank's disclosures of weaknesses are the latest headache for KPMG, which audited all three of the regional banks that failed last year: Silicon Valley Bank, Signature Bank and First Republic Bank.
"There's no excuse for it," said Francine McKenna, a former KPMG consultant whose The Dig newsletter focuses on accounting issues…
Last year, Castonguay wrote an op-ed arguing that while scrutiny of auditing processes is warranted, the failures of Silicon Valley, First Republic and Signature banks may have been solely due to "poor management" rather than anything within an auditors' control.
Others, such as McKenna, have been far more critical and argued the failures reflect auditors failing to take a hard look at all the assumptions that make up a bank's financial statements. McKenna also criticized the "revolving door" between KPMG and bank leadership, noting the CEOs of both First Republic and Signature both held top roles at KPMG.
"It seems like we've got a little cottage industry in audit partners thinking they can run banks," McKenna said. "And clearly, they're not doing a very good job."
Professor Admati and I sat down at the Nassau Inn at Princeton to talk about the new edition of her book and a few other things we are both interested in.
© Francine McKenna, The Digging Company LLC, 2024