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4.7 out of 5 stars
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on 2 June 2013
The editor must have persuaded the authors to write for a five year old with an absorbing interest in finance, a wholly imaginary character. As a result, the first sixty pages are taxing to the reader's patience. However, once the authors get down to business and drop the pretence of guiding the five-year-old through the intricacies of banking, the book becomes interesting, Of course, both authors are extremely knowledgeable professionals. Both have come out strongly against banks' reluctance to increase capital, and have made their arguments known. The book restates them in very readable form. I would think this should be of interest to economists and economics teachers, perhaps even to economics students.
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on 10 May 2013
I am interested in the causes of the credit crisis and I am concerned at the lack of progress by the current (coalition) government in tackling the issues which caused it. The authors go out of their way to make all their points clearly. They show how bank propaganda is disseminated to favour the bankers own ends. It particularly deals with the obsession of many bankers to increase 'return on equity' and shows how this is achieved by high risk strategies. Essentially banks need more capital, My own view is that banks also need to be split (properly legally split) as well being made to have more equity capital. It is very well researched and the notes backing-up the contents and conclusions are extensive. I would rather subsidise something useful like the National Health Service rather than Bankers risk taking. The book shows how banks may borrow at preferential rates and take high levels of risk without having to pay the costs of the real risk because of the implicit knowledge that they are too interconnected to fail and will be bailed out by the government, which means us the tax payer. The fate of the banks and of the government are inextricably mixed. My own view is that the current government favours the banks over the electorate and are that they are not keeping the public informed of the continuing danger posed by banks, which are undercapitalised and effectively underwritten/subsidised by the UK tax payer.
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on 21 January 2014
If the now rarely-mentioned Paul Flowers of Co-op fame were to be given a book to read to catch up on his lack of banking skills, this would be somewhere near the top of the list of recommendations. With simple examples using the idea of someone buying a house with a mortgage the authors gradually take you through many of the complex issues that caused the 2007-8 financial crisis.
The only issue I have with the book is the repetition of the main argument: that in order to be more robust banks need to increase the amount of equity (capital) they hold. It's a very simple idea and, according to the authors, one which has no downside for anyone (banks, shareholders, borrowers or lenders), but I just kept asking myself if it's so good and so easy to put in place why haven't the regulators insisted on it. The authors do explain to some extent why it is advantageous to banks not to have so much equity (they get tax relief on debt, so they prefer to have more debt than equity), but even so...
I spite of this repetition, I would still thoroughly recommend to anyone vaguely interested in the financial markets and what can go wrong with them. It's enlightening and in short, clear sentences takes you through all the main issues to do with the role that banks played in the crisis.
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on 15 August 2013
In my view, this is an 80% correct book. It has some very questionable statements (like "more equity has no cost to society", or that Basel II internal models are to blame for the crisis - Basel II was implemented at year-end 2007 and the internal models only a couple of years later). But this book make us think!
The first chapters seem like "debt for dummies" (the notes, very inconveniently placed at the end of the book, are much better!). However, when the authors enter into questioning regulations, the book becomes very interesting. A must read!
I do not agree with most of the conclusions, but it is a pleasure reading the book: I have to rate it with 5 stars.
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on 10 April 2013
A fantastic introduction for anyone, regardless of pre-existing level of knowledge, who wants to know about:

- the real causes of the banking crisis,
- why arguments advanced by bankers against tougher regulation are bogus (the bankers' new clothes),
- why regulatory and governmental interventions so far, although a step in the right direction, do not go nearly far enough, and
- what can be done to improve the security of the banking system (and thus help to protect society from future crises), while not affecting banks' abilities to deliver all the serices to society that they do now.

This book should be compulsory reading for policy-makers, regulators, politicians and anyone else involved (or wants to be involved) in the debate around advancing banking regulation.
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The two authors "prove" that one of main causes of economic crises is the motivation of the bankers. It is not their intention. They are "blind" to the disconnect between their actions and their intentions leading to regular crisis with high levels of unemployment and large-scale reduction of prosperity.

The reason why this is so is very simple once you understand it. You have to read the book carefully because banking lobbyists make an enormous effort to complicate and confuse the issues. The authors explain in minute detail how they have arrived at their conclusions. One author is an American professor from Stanford University and the other the German director of a Max Planck Institute. Both are world level experts on this issue.

The simple answer is that Bankers try to keep the shareholder equity (cash paid by investors when the company sold shares and retained earnings, profits that were not paid out as dividends) as low as they can by preventing a regulation that would impose a thirty percent ratio between equity and total assets (the "capital ratio"). You need to understand what exactly are "real" assets and "real" equity, which is different in this book from the way bankers refer to these words. Understanding this difference is essential for understanding the message of this book.

Why are bankers motivated to minimize shareholder equity? They aim to maximize Return on Equity (ROE). This is the ratio between profit and equity. It is obvious that with the same profit and a lower equity the ROE increases. According to the authors, the total income of the senior bankers is in most banks based, to a large extent, on this ROE. This is illustrated by a statement of Bob Diamond when CEO of Barclays in 2011, "Barclays is counting in being able to fund part of its capital requirements with new contingent convertible instruments or co cos, which will not dilute ROE numbers."

Bankers argue that increasing equity is not of interest oh the public at large because it will reduce liquidity, reduce the amount of financing, increase the interest rates they have to charge, and refer to the "level playing field" where other countries accept lower equity levels and increase their costs unnecessarily.

The authors go into immense detail to prove that all these arguments are false and why this 30% ratio will radically reduce financial crisis, avoid bail outs and radically reduce the motivation of bankers to take excessive risks, earlier write down non-performing loans performing loans, will continue to award loans to small companies, even in a down turn and no longer search and develop risky innovations to increase bank profits. They also explain, again in detail, why Basel III, which deals with this issue, has been watered down to the point that the financial system to day and still after its implementation will as fragile as it was in 2007.

Why do governments not impose this 30% rule? The authors refer to the lobbying power of banks and their associations with as an example the statement of Jamie Dimon CEO of JM Morgan Chase (JPMC): " JPMC gets "a good return on the company's seventh line of business"-government relations." The authors also show that the capital ratio of JPMC with a "Fortress Balance Sheet" is 4.5% under international accounting rules and would still be considerably lower considering that total value of JPM in the stock market on December 30 2011 was 58 billion less that the shareholder equity in the accounts. The authors describe bankers' attitude as "Anything but equity" and "It very hard to get a person to understand a truth if understanding it would lead to a reduction in her or his income." The authors claim that increasing shareholder equity for successful companies is "easy" by issuing shares and/or not paying dividends until the 30% is reached.

The authors have tried in their important public activities and publications to convince governments to act and as they failed have published this book.
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on 1 January 2014
This book gives the reader a thorough and easily understood introduction to the bankers' world. A world of enormous importance to our community - in my opinion neglected by the politicians.
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on 28 February 2014
I feel like this book has the depth any such book requires whilst giving snapshot arguments which are easy to explain when confronted with arguments against this general trend.
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on 10 October 2014
If you want to understand what really happend during the - ongoing - crisis - read the book. The best explanation for anyone interested and willing to immerse themselves.
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on 5 May 2013
I have just start read this book, that is very interesting book with very deep and non-technical analyse to the banking system, even if you are not banker you should read this book.
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