Prof. Anat Admati takes the fight to Jamie Dimon of J. P. Morgan. She has written an open letter to the Board of J. P. Morgan asking them to do the right thing by their own bank, by the sector, by the nation and by the world. This is admirable. She is logical. She correctly says that whether the funding is through equities or through loans, it does not affect one bit what the banks do with the funds on their asset side. She is right. But, a higher E in the E+D mix means a lower leverage ratio and that means lower profits. She is also right to say that risk-adjusted profits are, perhaps, the same or better. But, the bankers are paid in risk-unadjusted dollars and to them, the nominal value of earnings matters and not risk-adjusted earnings. Until Boards wake up to that aspect in the matter of compensation, the Dimons of the world would keep complaining about higher capital and lower leverage ratios.
While you are at it, please check out this Felix Salmon blog post on Dimon and Geithner.
This post originally appeared at The Gold Standard and is reproduced here with permission.