Such a Gift!

As we near the end of two weeks with four grandchildren, I am once again overwhelmed with the woman that I reference as my friend and my wife.

Often, we are grouped as “grandparents” when, in fact, only one is “grand” and the other as the fortunate beneficiary of such goodness and love. For me, it has never gets old to be a participating witness to a story that never quits. The scene may change and the actors are different, but the storyline remains so vibrant, if the same.

I recently analogized the negotiations surrounding the selection of a movie that would meet the expectations of these four grandchildren as comparable to negotiating peace between Israel and Gaza. Obviously, the comparison limps badly since our negotiations were successful and there was no blood. Possibly, the talents of this woman could be utilized by the United Nations to weave a path to peace.

While we cannot recall clearly our earlier experience with our own children, this version of history triggers so many happy feelings of yesterday when we were parenting our three children. The earlier story turned out well because of this woman’s talents and love.  All of the past rushes into my present experience as I see her weave her magic over another generation.

"The Bankers' New Clothes

Anat Admati  (Professor of Finance and Economics at Stanford) and Martin Hellwig have written “The Bankers’ New Clothes” to advocate for more protection to the public by reducing risks associated with banking. 

The book is densely written with 106 pages of notes (that I did not read). She agrees with those who consider that banks that are so big that the public cannot allow them to fail are, in fact, too big.

She deftly contrasts how public corporations that are financed with relatively little or no leverage promotes progress designed to minimize risk. Most of public corporations advance their business model by attracting investments. Wealth is promoted by developing plans that use the equity of investors who clearly agree with the model or they would not have made the investments.

In contrast, the major banks generally have approximately 3% of their assets based in equity! The authors advocate that banks should have 20-30% of the assets in equity. This ratio will promote a banking system what will reward the shareholders by increasing the value of the bank. The value of their investment will increase.

The authors are convinced that more regulations are needed and are concerned that the political will for advancing more regulations are sabotaged by the benefits politicians achieve in the present system. One needs look no further than the amount of money used by bank lobbyists to promote their objectives that focus on minimizing regulations.

Until banks are required to have more equity and are regulated more tightly, there are no incentives to change the model that facilitates the possibility of great financial gains with no personal downsides (losses are subsidized by the government).

I agree with the authors that requiring more equity will not lessen the opportunities of growth but( will reduce risk since potential losses will be borne by the shareholders.

Banks are essential to any nation. The public should be able to rely on them. The business model should be designed to protect the public.

More equity, greater transparency in trading, and stronger regulations will lessen risks and increase the security of the system.

Per chance anyone is interested, Bill Moyers interviewed Anat Admati: http://billmoyers.com/episode/full-show-too-big-to-fail-and-getting-bigger/