Vikram Pandit heads Citigroup, one of the world's largest and most powerful banks. Writing in the Financial Times Thursday morning, with regard to the higher capital standards proposed by the Basel III process, he claims
There is a point beyond which more is not necessarily better. Hiking capital and liquidity requirements further could have significant negative impact on the banking system, on consumers and on the economy.
Mr. Pandit is completely wrong. To understand this, look at the letter published in the Financial Times earlier this week by finance experts from top universities -- the kind of people who trained Mr. Pandit and his generation of bank executives.
The professors write,
Basel III is far from sufficient to protect the system from recurring crises. If a much larger fraction, at least 15%, of banks' total, non-risk-weighted, assets were funded by equity, the social benefits would be substantial. And the social costs would be minimal, if any.
The point is that "bank capital" just reflects the choice between debt and equity -- to "have more capital" simply means to rely more on equity relative to finance. From the professors again, and remembering that these people also have a great deal of practical experience,
High leverage encourages excessive risk taking and any guarantees exacerbate this problem. If banks use significantly more equity funding, there will be less risk taking at the expense of creditors or governments.
Bankers warn that increased equity requirements would restrict lending and impede growth. These warnings are misplaced. First, it is easier for better-capitalized banks, with fewer prior debt commitments hanging over them, to raise funds for new loans. Second, removing biases created by the current risk-weighting system that favor marketable securities would increase banks' incentives to fund traditional loans. Third, the recent subprime-mortgage experience shows that some lending can be bad for welfare and growth. Lending decisions would be improved by higher and more appropriate equity requirements.
Mr. Pandit is a smart individual and he knows all this -- he has a Ph.D. in finance from Columbia University. Why then does he advance such obviously specious arguments in the pages of the Financial Times?
The answer is straightforward.
a) He can get away with it. Modern financial CEOs float in a cloud above the public discourse; they can spout nonsense without fear of being contradicted directly in the pages of a leading newspaper.
b) Officials listen to bank CEOs and an op ed gets their attention. Perhaps they think Mr. Pandit knows what he is talking about -- or perhaps they know that these arguments are completely specious. In any case, they are deferential.
c) Mr. Pandit is communicating with other CEOs and, in this fashion, encouraging them to take recalcitrant positions. There is an important element of collusion in their attempts to capture the minds of regulators, politicians, and readers of the financial press.
Mr. Pandit is engaged in lobbying, pure and simple. Ask the people who invented modern finance theory and figured out how it should be applied (second to last paragraph),
Many bankers oppose increased equity requirements, possibly because of a vested interest in the current systems of subsidies and compensation. But the policy goal must be a healthier banking system, rather than high returns for banks' shareholders and managers, with taxpayers picking up losses and economies suffering the fallout.
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Jargon is often used to hide meaning. The club Vikram belongs to is a small elite. That should be scrutinized even more and the public fully involved in this. The financial sector's madness must never occur again.
They will never go to jail, but they are the greatest thieves and have done the most egregious harm to their society - out of massive, unrepentant, unbridled greed - of any group in recorded history.If there were a real heaven and hell, they would have already gone down, still living and quivering, to serve their sentences of eternity.
The political consequences of their predation may be permanent harm or possible devastation of the very ideas and ideals of democracy.
The Republican plot to bankrupt the government that was undertaken in the 1980s is a pale, amemic wannabe compared to these guys' destruction of their society.
Oh, but that's right, like Margaret Thatcher famously averred, there is no such thing as society, and nothing is owed by those who profit in the world to those from whose lives and resources they make their profits.
These guys are beneath contempt and beyond acknowledgment of what they are.
Peace, to the peaceful, confound the exploiters.
Friedrich Nietzsche
and the ineffectiveness and corruption in our government. These big banks make money by ripping people off and as we have seen some of their activities are fraudulent. They make no products and just shift wealth around. I wouldn't be interested in working in the financial industry in ten lifetimes. Boring!
Lowering the value of the dollar will help increase exports as it makes arms cheaper for foreign countries to buy, but we were already the worlds leading exporter of arms.
Your analysis is spot on-our economy has been economically terrorized and the politicians have co-opted this great transfer of wealth.
Given that the government recently took over the student lending program-we'll have to eat those losses and there will be losses. The question is when will all of this hit the fan-right now you can almost receive unlimited deferments on student loans but once republicans realize this I'm certain they'll want to change the rules. And POTUS will likely capitulate