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June 19, 2014

Financial Reform Rising

The story so far on financial reform is not a pleasant one. Fortunately and perhaps surprisingly, in part through the efforts of a growing number of people – including Anat Admati and Sheila Bair, recently interviewed on Moyers & Company – there is now some movement in the right direction.

In the early and mid-2000s, US officials allowed large financial institutions to take on big risks – being persuaded that the people running those firms knew what they were doing. In particular, important parts of our financial system became highly leveraged, in the sense that they took out debts that were very large relative to their shareholder equity.

At that time, on average, the world’s largest banks had equity worth only around two percent of their total balance sheets. As asset values went up, so did bonuses – financial executives are typically paid based on their “return on equity,” unadjusted for risk.


“On Capitol Hill, Democratic Senators Sherrod Brown, Jeff Merkley and of course Elizabeth Warren are outspoken in favor of more equity for banking (as part of a broader reform package). They are picking up Republican support, including Senator David Vitter.

In civil society, Dennis Kelleher’s Better Markets has been an amazing advocate for sensible reform – not just in banking but for all financial markets, including the most complex derivatives.”


Read Simon Johnson’s full Bill Moyers & Co. article here

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