This week, we speak with Anat Adamati, professor of finance and economics at the Stanford Graduate School of Business. He specializes in corporate governance and regulation. In addition to being a senior fellow at the Stanford Institute for Economic Policy Research and a director of the Corporations and Society Initiative, Adamati is the co-author of “The Banker’s New Clothes: What’s Wrong with Banking and What to Do About It” with Martin. Helwig.
He discusses why banking is inherently risky, especially how it is practiced in the United States. Banks tend to be undercapitalized and overleveraged. Single-digit equity percentage capital is a very high-risk approach to managing bank capital. By emphasizing debt and not having enough equity, banks are both more profitable but riskier to society.
Adamati explains the classic problem of “other people’s money” (OPM): Once banks borrow, they shift their focus away from capital efficiency and toward risky returns. As an example of how dangerous this approach is, combining low equity, high leverage and OPM, he points out that the Lehman Brothers bankruptcy is still ongoing 15 years after the financial crisis.
Prof. Adamati noted that while banking is tied to the government through regulation, the tech sector has been left largely unregulated. The result has been a number of problems that have led to technical backlash. His research in Internet and technology led him to become a consultant on the HBO show Silicon Valley.
Here is a list of his favorite books; A transcript of our conversation on Tuesday is available here.
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Be sure to check out our Masters in Business next week with Ken Tropin, Chairman and Founder of Graham Capital Management, a multi-strategy quantitative hedge fund managing $17.2 billion. Previously, he was at hedge fund John W. Was president and CEO of Henry & Company, working with legendary businessmen such as John Henry and Paul Tudor Jones.
The book of Anat Adamati
Bankers’ new clothes: What’s wrong with banking and what to do about it By Anat Adamati and Martin Helvig
Anat Adamati’s favorite book
The Cult of We: WeWork, Adam Newman, and the Great Startup Delusion By Elliott Brown and Maureen Farrell
little gold By Antoine de Saint-Exupéry
The World for Sale: Money, Power, and the Traders Who Exchange Earth’s Resources By Javier Blass and Jacques Farchie
Sickness: How Big Pharma Broke American Health Care and How We Can Fix It By John Abramson
American Kleptocracy: How the US Created the World’s Largest Money Laundering Scheme in History By Casey Mitchell
Who Killed Jane Stanford?: A Gilded Age Story of Murder, Deception, Spirits, and the Birth of a University By Richard White
Freezing Order: A True Story of Money Laundering, Murder, and Surviving Vladimir Putin’s Wrath By Bill Browder
The Bond King: How One Man Made a Market, Built an Empire, and Lost It All By Mary Childs
Direct: The rise of the middleman economy and the power to source By Catherine Judge