Admati: Deutsche Bank Has Made Itself More Systemic

in Washington. I'm here in our New York studios and we are looking at kind of an off day in markets. We're waiting for Christine Leguard, who will be speaking with Tom a little later in the program. Maybe she can turn things around. But right now, SMP futures off by three, down futures by twenty four. The stock six D is a point lower in Europe. Interestingly, uh FED fears have still got the U S YELD curve elevated. We're at eighty four basis points of a two year to h

one point seven on the ten years. So we'll keep an eye on that oil prices. UH the hurricane, and we should mention this is the forecast has gotten worse for Florida and it definitely looks like it's going to come in with Category four strength along the whole coast, which is not a good thing. West Texas at eighty

three unchanged. Brent crude is up on the day by about a tenth, neither of those really being affected by the storms, and of course Tom has been pointing out the breakdown in the British currency cable going for one fifty eight down three quarters of a percentage point, still concerns about what the potential for a hard Brexit might mean.

We are joined now by one of our favorite people, because we've been talking all morning about the impact of the banking system in Europe on the rest of the world, a not At Mandi, finance professor from UH Stanford University and the author of the Banker's New Clothes, which explains everything you need to know about banking, in debt and capital at all, things like that. So if you're confused by what Tom and I are talking about, pick up

that book. We we urge you. Um. And the timing is perfect because yet again today more revelations about Deutsche Bank, and this time UH some cooking the books on some deals with Blanka Banti depasti um. What kind of is fascinating to me is that we went through the financial crisis. We put in all kinds of regulations. Not granted these are European banks, but they can see what's happening in the United States. We've raised capital levels and they're still

doing this stuff. When we raise capital levels, but with these accounting tricks, the capital levels become meaningless. So that's a problem right there, and that connects to all kinds of other Friday issue consumer issues. We had been was far ago and all of that. So good morning Deutsche Bank now, and I don't think it's in a vacuum.

How do you perceive the decades of management of Deutsche Bank and the business strategy and the mergers that they've been through, including Alex Brown of Baltimore and the rest. How do you fold the history of Deutsche Bank into the immediate process a prospect of contagion. Well, Deutsche Bank has made itself more and more and more systemic in chasing returns, in becoming a champion of investment banking. In the book, we take Ackerman, one of the previous CEOs,

for saying he thinks, Oh, he's sort of appropriate. For when I show this to a finance mentor of mine is like, huh, they don't listen to what the seal say. Is that what he really said? That's unconscionable. How do you get You got to take enormous amount of risk, obviously and be good at it. So the history of Deutsche Bank is is one of basically taking a lot of risk expansion, you know, the ultimate of becoming too

big to faith system. From New York in Washington this morning, Bloomberg Surveillance Folks, Michael McKinnon, New York on Tom King and Washington. Later on our conversation with Christine Lagard. Bloomberg Surveillance this Morning brought to you by Colna Residec Accounting, Tax Advisory, look Ahead, Gain Insight, Imagine more of the professionals at Colne Resnick can help your business breakthrough. Find

out more at Coln resnec dot com. Michael, we did, uh see a lot of additional regulation put in place after the financial crisis, and banks are better capitalized now, maybe not as much as you would like, but certainly better capitalized than they were. And yet when you look at share prices and I'm not just talking Deutsche banker Wells Fargo, which have had been in the news, but for all banks, you know, I states in Europe. There their shares are lower, they've never really recovered, and it

seems like investors still consider them extremely risk. While they are risk, he didn't Larry Summer recently say that as well, they're very risk in this thing is that they're very highly leverage still in real measures, not in these capital measures. They added a lot of regulations, but not cleverly so, so their regulations very complex, more complex than they need to be, and of course that raises compliance costs and

other things like that. So between the fines and and all the regulatory compliance and and and of course because of risk that investors of having a lot of trouble assessing because of disclosures are so poor. You see that in the stock crisis. So when you have so much leverage, price fluctuates a lot. So a tiny bit on the downside is a lot on the downside. And the way this way it works on the app side, this is

basic leverage. Everything gets magnified. Well. John Cryan, CEO of Joutche Bank, suggests this is deliberate on the part the volatilities delivered on the part of investors hedge funds who are trying to manipulate the price. People can't see your face, but but that that was that was an interesting face you just made, didn't anyone see? Also blame short sellers. It's deliberate on his part that he stuck is so risky and so poorly say there's some poor such more

information about it, that investors are scared about. What the skeleton that he has in the closet and the risk of of of Deutsche Bank. So that's what's the deliberate part, the deliberate parties their conduct. Is there the type of business model that they have, that's the part that that that he should look at instead of blaming investors an automotive. How do you look at negative interest? Rich You've always had a different prism, a different filter. How do you

look at where we are with chronic negative race? Well, I right not to talk about things that I don't fully understand. And if most of your guests are saying that they really understand all these monetary policy things, I think you know to take it with a grain of salt, but I'll say it's clear that it's harder in some respect to to to make money. It's certainly harder on on on many institutions that need returns, like pension funds, endowments, UH,

insurance companies. It's very difficult and it's such a long period of time to have these liabilities, so that I think it introduces a lot of fragilities, and uh, it's problematic when it goes on so long. I understand that you know, there might be really negative really interest right to understand that the need to stimulate, But it gets to a point where I think, you know it really is the overall impact is beginning to not quite do what you wanted to do. Well, is the risk risk

reward calculation tilting now towards too much risk? And are central banks working against them selves by keeping rates so low or using negative rates so that banks can't earn their way out of trouble. Well, I think that some banks, you know, shouldn't earn their way out of trouble, should just be put out to rest. So I think there are a lot of zombie banks in Europe. I think there's excessive excess capacity in this industry and that if it shrinks some it's Okay, the fact that you need

to gamble in order to survive all the time. It's not a healthy industry that way. So I'm not the you know, the banks die with such such little frequency despite their conduct and despite living so dangerously that it's something's wrong there. So I'm not I'm not shedding too many tears on if if some banks are unwound, not in a crisis like like you know, in these kinds of day, and if they can't make it. But um,

what do our banks do? What do our banks do given sustaining type of GDP if we believe we're not going to get back to three percent real GDP? Does that just demand consolidation nationwide? Well, the issue with banking is the issue of the need for intermediation. What's the business of intermediation because the banks are not you know, producing you know, realist if they're just allocating the savings

and all of that. So, you know, there have been questions in in finance, even finance academics are beginning to wonder just how much given that we have, you know, certain technological capabilities, but they still need for for that human uh intervention in intermediation, how much of it we need so. Yes, if if the economy is smaller than maybe the banking sector needs to be smaller as well. But I don't you know, I don't think I think

it should be more natural. My problem continues to be that there are so many distortions in this in this system that it's bloated because it can be because it wants to be. Well. Let's come back with an automotive from Stanford University and continue our conversation about the banks. Wells Fargo shares right now are off just a few

sets in early morning trading. We're looking at the Banco de Monte de Pasky off three percent today on these revelations of uh some book cooking with the Deutsche Bank. Deutsche Bank shares up three tenths twelve eleven euros right now twelve twelve euros, eleven cents s andp features off by four down features by thirty four. The stock six hundred is down a point. This is Bloomberg Tom Keene

in Washington for the I m F meetings. Michael McKee here in the studio in New York, along with a not at Madi, Stanford finance professor and noted banking analysts. Shall we say the other of the book The Banker's New Clothes, along with Martin Hollick uh in Germany and uh she and we are have been talking about the troubles of the banking system lately and how they have

impact did Um the rest of the world. And I want to go back to what we were, what you and Tom were talking about just before the break, when you were mentioning net interest margins and how that is hurting their ability to earn higher regulatory costs also take a toll Um. The markets for investment banking are shrinking. You've got the shadow banking system getting bigger all the time. Are we seeing a a sea change, a secular change

in banking? Are we going to get the utility model that people have talked about for so long because you just can't make money in the traditional banking sense. I don't. I think that there's a lot of business that is

not quite net interest margin. When you invest in derivatives and you start how you can still do a lot of you know, merchant banking and private equity and hedge funds, and when you you you start buying up all these fintech companies and the shadow banking system is just sort of owned or directly related to the regular banking industry. So it's not like that there's no bright light there at all, right line there at all between you know,

this banking and that banking. They're all the same. So I don't think we're headed to a utility model in the sense that I don't think the banks will voluntarily become utilities. Whether regulations are going well, you know, my view,

my views that the regulation is unfocused. I'd like to remove complicated regulation that doesn't bring as much as benefit for the cost that on everybody that it takes, and bring in straightforward regulation that's going to keep viable banks kind of healthier and get rid of some unhealthy banks that are just kind of trying to stay in And in my view, I you know, the banks are showing symptoms of kind of the way in solvent of highly

distressed companies behave. They just are able to stay that way because I don't have the creditors to push to sort of tell them that they're sick. So anyway, regulators, unless they flex muscles and insist at the banking system's

got to be healthy and stable. We're going to continue a man, a little long, a lot of body with us of Stanford University, Bloomberg Surveillance this morning from Washington and the offices of the International Monetary Fund their annual meetings, and from New York, brought to you by Investco to the day's headlines. Have you searching for more investment views? Investcos high conviction portfolio managers can help find the latest

at the investco blog. Visit investco dot com slash us to subscribe an a body give us an update on almost some microeconomics of financial repression and the enthusiasm for loan demand. I think there's a lot of ambiguities within the certitude of the media and the coverage of this. If we're financially repressed, we're gonna stay financially impressed. How does that full back into the air almost spirit of

our middle loan? Well, when people need loans, if you talk about micros, you know, foundations of all of this, the question is what are they need a loan for? And so you can get people too. You can dangle alone in front of somebody and they might take it and they can't pay it back. So we've seen a lot of that in the UH sub prime, you know,

liar loans and all of that. So you know, demand for loans is you know, there's sort of the good demand for loans for productive things, for investing in you know, good education, small businesses that will do stuff. If the economy is not not working, then you don't have the kind of good demand for loans. And then if you have a lot of credit or credit boom, then it doesn't end well usually. So you know, there is landing and there's landing, there's credit and there's credit. I make

a distinction there. If it's very cheap to to borrow, then maybe people will, but it's the it alone and it still is money that that somebody gets today and promises to pay later. We can't let you go without asking you. Should you come from Stanford out in the San Francisco Bay area about the San Francisco Bay areas,

Big Bank, wells Fargo. Uh, what happens next with it? Well, what's interesting about What's Fargo is that among the numerous scandals, this one resonates with people because it's a simple consumer issue and so the magnitude of it is like people are wowed. A lot of there were there have been a lot of scandals here. You mentioned, you know, disclosures of well of the bank, and every single day there is something credits with now is still dealing with the

sec Well. This is interesting because it got a lot of attention from a lot of stakeholders. For example, the treasurer of my state's California has gotten piste off it was Fargo and pulled aways business, which a few other states treasurers have uh done. And so you ask yourself, Okay, can the state of California do something about was Fargo? And I think that there's some feeling in my state that they want to do something about it, like you know,

putting a state law something or whatever. We'll have to watch for that and unfortunately have to leave it here, but come back again because it just seems like these thanks stories never end. Keeps anat mighty employed, right, that's professor at Stanford University. Thanks for joining us today here on surveillance. This is Bloomberg