American Scandal - Lehman Brothers | Too Big, Still Failing | 5

Episode Date: February 10, 2026

Like many Americans, the 2008 financial crisis left Anat Admati furious. A professor at Stanford, she became one of the country’s leading voices calling attention to how confusion, complexity and misleading claims allowed major banks to load up on dangerous amounts of debt. Today, she argues that little has changed. In this conversation, we discuss the faulty arguments bankers use to fight oversight, how corporate power has expanded in the years since the crisis, and what can be done to create a fairer and more stable economy.Be the first to know about Wondery’s newest podcasts, curated recommendations, and more! Sign up now at https://wondery.fm/wonderynewsletterListen to American Scandal on the Wondery App or wherever you get your podcasts. Experience all episodes ad-free and be the first to binge the newest season. Unlock exclusive early access by joining Wondery+ in the Wondery App, Apple Podcasts or Spotify. Start your free trial today by visiting wondery.com/links/american-scandal/ now.See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

From Wondery, I'm Lindsay Graham, and this is American Scandal. In the fall of 2008, the collapse of Lehman Brothers sent shockwaves through the global economy. Within only days, markets crashed, and millions of people watched their jobs, homes, and savings vanished. It was the worst financial disaster since the Great Depression, and regular people bore the brunt of the pain. But the banks that caused the disaster were rescued, and the executives at the helm escaped without meaningful consequences, and their wealth intact. In the years since, the financial sector has only grown larger, more complex, and more powerful. Corporate influence has expanded, while the gap between the wealthy and everyone else has widened dramatically. For many Americans, the sense of economic

security that vanished in 2008 has never truly returned. My guest today is Anat-Madmati. She's a professor at Stanford University and one of the most outspoken critics of the banking industry. Her work focuses on financial regulation, corporate governance, and the dangers of an economy increasingly shaped by debt, opacity, and unchecked corporate power. Our conversation is next. You're listening to the first episode of this American scandal season. With Wondery Plus, you can binge the remaining episodes, listen to new episodes early, and explore more exclusive seasons completely ad-free. Start to a free trial of Wondry Plus in the Wondry app, Apple Podcasts, or Spotify, today. Anadmati, welcome to American Scandal. Thank you for having me. Your book about the banking system

is called The Banker's New Clothes. The title, of course, is a play on the folk tale, The Emperor's New Clothes. But what does the analogy mean to you? So there are different types of bankers new clothes, different types of flawed claims, what we call. So that's what this refers to. And what it means is what they say has no substance, is flawed in some way, is wrong. So in the story of the Emperor's new clothes, you know, the tailors that are defrauding, the emperor, are saying that, you know, these clothes will be beautiful and anybody who can't see the clothes is incompetent or stupid. And so because what they say in banking, and this is the bankers, you know, the policymakers, other people, the public doesn't understand.

Then they are afraid to expose it because they feel like they're incompetent. So the book that we wrote was written for the public. That's because I encountered along the way in my first year of lobbying on this subject and from reading the media and reading other things, a lot of misunderstanding. So I would have to tutor every journalist, ever staffer in Congress, everybody I encountered, whose didn't have the background at all to know the vocabulary and to understand these issues. And that was sort of my textbook for any lay person, anybody of your listeners, you yourself, you can become enough of an expert to understand a lot. about banking, about corporations, about the legal system, and some of the policy issues that we focus on there. So it's not that hard. That's the point. So your primary criticism of the banks is that the levels of debt they take on are too high. But is debt a bad thing? Why would they

want to take on so much debt if it is? So here is what we explain in the book. We start with a mortgage. Okay. You have 5% in the mortgage. You invest $20,000, you buy a $400,000 house, right? If the house price goes up by 5%, that is by 20,000, and you invest at 20,000, you double your money. That's 100% return. So that's why homeownership, you know, when house prices go up, people build their wealth because you make all this money on your small investment. And the rest is the debt, okay? So as long as you can pay your debt, if you invest in something big with a very little money,

you get this leverage, you get it magnified. So it's very fun to juice up the returns on the upside. However, if you bought a house with very little equity and the value went down, then you very quickly will get wiped out. And that's what people saw. When people took first mortgage and then they took a second mortgage and then they'd borrow another more and more and more. When the house price went down, by just a little bit, the homeowners became underwater

and we had a housing crisis. The bank, however, as a borrower, life is good for them. Because on the upside, they take the upside, just like the homeowner. And on the downside, you know, deposit insurance pays or the taxpayers pay or, you know, their bailouts. So on the upside, it's great. On the downside, they walk away. Now, living dangerously for banks is supposed to be mitigated by this idea of capital requirements, that you can't just invest or take risk on all of the deposits you hold. And you seem to think this is one of the most persistent fallacies. Explain this debate and the misunderstandings around capital requirements. So there are a lot of misunderstanding. So again, when they use the word capital, it's the beginning of how they want to confuse you. They're not talking about how much equity they have. They use things like capital reserves, hold capital, which suggests that what we're forcing them to do is to kind of set some money aside in a lockbox. But that's not what it's about. The debate is about what fraction of their investments should be funded with equity. Are they solvent? Can they pay? all the debt that they took, do they have any ability to absorb losses by having shareholder money there? Equity, which many companies have tons of and don't borrow as much. So just to draw a quick parallel and probably a two basic one, a capital requirement for

an average American buying a home would be the 20% down payment, right? That's... Exactly. It's like down payment. Equity is like down payment. So the question is whether banks are special in the sense that they somehow should be allowed to have... have single-digit levels of equity. The kinds of numbers we're talking about in banking are so ridiculous that companies outside banking with no regulations at all, companies in Silicon Valley, all the companies in the economy, nobody, unless they're on the way to bankruptcy, has so little equity.

But the banks live with very little equity and don't go into bankruptcy and don't default, because nobody, none of their creditors, the depositors and other people, does anything about it, including the regulators, who are supposed to keep our deposit money and the system as a whole, safer and healthier, and they're not. They're just failing. The problem is that when they bore so much, then they hide a lot of risk that is not even reported in their financial reporting. It's hidden in off-balance sheet, you know, special purpose vehicles or whatever they call them, or it's in derivatives, these kinds of financial instruments that they kind of eliminate all the assets

and the liabilities from their disclosures. Then there is a lot of risk lurking, that is very, very hard to see and evaluate. So these are opaque institutions and extremely indebted unhealthy corporations. They're probably one of the most unhealthy sector from the perspective of finance in the economy. The banking system you're describing does sound incredibly complicated, terms like derivatives and collateralized debt obligations and all sorts of other things that most people just don't understand. But I'm also hearing from you that this complexity might actually not be necessary to a function system. Are these really just tools to sow more confusion, to hide what's going on?

Well, the complexity sometimes is sort of the nature. It's not rocket science, but, you know, some of it enables the system as a whole to do what it needs to do. And what it needs to do is allow people to invest and to fund. But then it also allocates the risk, spreads the risk, allows diversification of the risk. All of those things are supposedly good things. The problem is it's a very distorted system, but in general, it's supposed to do these things. And some of these instruments, even derivatives to some extent, allow better crafting of the sort of the sharing of risk. You know, a derivative is like an insurance contract. We like insurance contracts.

They allow an insurance company to spread my risk of a car accident across, you know, its shareholders or reinsurance or whatever. However, it's, and indeed what you said, some of it is to confuse because buy people not understanding their jargon by saying, oh, there's this and there is that that you don't understand. Then they can sell you any kind of, you know, blood claim, any kind of these bankers, new clothes, flawed claims. During this financial crisis, the regulators chose to bail the banks out, deeming that they were too big to fail, that they were too important to the financial system to let them go bankrupt. Do you believe bailing out the banks was the right decision? given the failure of the regulation, you know, it may have been better than alternatives,

but this is like, you know, you're caught between a rock and a hard place. Because letting Lehman fail created all these contagion mechanisms. After that, they got so scared that everybody got bailed out. And some people say Lehman should have been bailed out. Now, I'm quoting now, you know, Michael Lewis, who wrote a book The Big Short, which then was turned into a movie. What he says in the epilogue of that book, the problem was not that they bade Lehman out, but that they had let Lehman succeed before. In other words, that they didn't prevent it. So we have to learn not to be stuck in this dark choices again. So the issue is, you know, an ounce of prevention, a pound of cure. Certainly today, when some of these institutions are ever bigger and at least as complex or more than they were before, then they'll bail out. The most recent example of that was Credit Suisse, the Swiss Bank,

even though they told us all these years since the financial crisis that it's not going to be any more bailouts. You know, Barack Obama said when he signed the Dodd-Frank Act, no more bailouts, period. We did see bailouts again, and we will see bailouts again. And when the system, which has trillions and trillions and trillions of dollars in debts, it's going to be scary. And by now, you know, there is a lot of private markets in there.

There's crypto now creeping into the system. It's scary. You know, it could be on the dimensions of 1929, which was a spectacular crisis with Great Depression to follow. Do you think, though, things would have been different had some top bank executives been put behind bars? My current research is really about that, you know, this idea of profitable misconduct, that you would, be reckless and you would even break the law with impunity. It's pervasive in banking. If you are too big to save, they will always bail you out. Then you become above the law. Above the law means that you break the law, you defraud money laundering, you know, and then if the executives

escape, then why would they ever obey the law at all, any law? So that's the problem. It has to be the case that people who are in charge of corporations, boards, executives in particular, have to bear enough liability that if some big harm happens under their watch, and they could have and should have but didn't prevent it, we should have a standard by which they could be found criminally liable. And in some cases in the financial crisis, you wonder whether they would have been found guilty if they tried to indict and prosecute them. For example, you know, the case of Mozilla from one of the mortgage companies that failed. That case was nominally given to the Department of Justice, and it's a mystery why they didn't prosecute them. There are a few books on that,

you know, too big to jail about how the authorities and the Department of Justice are dealing with executives, and it's not pretty. They could do better, and if they can't, then we have to change the liability bars so that they can, because otherwise I don't see how you prevent corporate misconduct. Hello, American Scandal listeners. I have an exciting announcement. I'm going on tour and coming to a theater near you. The very first first show will be at the Granada Theater in Dallas, Texas on March 6th. It's going to be a thrilling evening of history, storytelling, and music with a full band behind me as we look back to explore the days that made America, and they aren't the days you might think. Sure, everyone knows July 4th, 1776,

but there are many other days that are maybe even more influential and certainly more scandalous. So come out to see me live in Dallas, or for information on tickets and upcoming dates, go to American History Live.com. That's American History Live.com. Come see my Days That Made America Tour live on stage. Go to American History Live.com. In 1970, the economist Milton Freeman wrote a famous essay in New York Times about the social responsibility of business.

Describe his argument and what its impact had on the American economy. So Milton Friedman wrote this manifesto that was published in 1970 in the New York Times magazine. The title was the social responsibility of businesses to make money. However, he did have an important qualification to this. The full sentence is, the social responsibility of business is to make as much money as possible while obeying the rules of society, both those written in the law and those in ethical custom. This is the full statement.

Later in the article, towards the end, as he summarizes, he says, you know, play by the rules of the game. That means, you know, compete in markets without deception and fraud. Then you should make as much money as possible. It had major impact because what he was also arguing against is, at the time it was called corporate social responsibility, CSR. So he was saying corporate managers, the talk about corporate social responsibility, you know, will bring about the government bureaucrats. That was the way he was railing against the government.

He was saying that the alternative is, you know, communism, the state fixes prices. So he was making all kinds of false, you know, alternatives. However, his impact was that people said, okay, you know, let the government do what the government does. We will just be pursuing stock price optimization. We'll compensate managers with stock. You know, we'll just make as much money as possible and call it a day. And that is what we've been teaching in business schools for years and years. I was for 25 years teaching people,

maximize the stock price, and the implicit assumption was that the projects you do, that you choose and you get funded, are good for society. Because if there was something bad, then law would forbid it, you know, pollution or fraud or other things.

So if you satisfy the rules of society, which we implicitly assume you do, then let's go make money. That's how, you know, generations of business school students and executives were trained. And we were just blinded, or maybe we're willfully blind, to the possibility that corporations will interfere with laws and distort this system while trying to make as much money as possible. How does this interference, this meddling in the laws and regulations of industry, how does that relate to one of the topics of your recent papers, profitable misconduct, which you mentioned earlier?

Yeah, so what it does is it basically says the following. on top of the corporation is kind of society as a whole setting the rules of society, like the law. The corporation is a legal person. The corporation exists in the law separate from all the humans. So J.P. Morgan Chase, you know, Meda, Boeing. The corporation is a person in the law. So how do we enforce laws on the corporate person? Obviously, we can't put the corporation in jail.

So usually the way this happens is, you know, you have a settlement, you have a deferred prosecution. You know, we can talk about Boeing and maybe we should. And how that plays out when the corporation engages in fraud, you know, when it gets people addicted and misleads doctors like Purdue Pharma, you know, look around at corporations that cause harm or broke law or even cause, you know, had manslaughter, like the utility around your PG&E. What do you do? Well, you can give them a fine. You can give them maybe a monitor or you can enter all kinds of agreements with them. You could also go after the executives. mention that. But here's what happens. So you go after the corporation, but then you worry about

collateral harm. The employees will be harmed. How much can you find them? All the authorities in the U.S. consider the ability to pay of corporations. They don't consider that for people, by the way. You know, if you can't pay certain fines, you'll go to jail. But the corporation, oh, it employs people. It produces things we like. So there are all kinds of tricks to avoid all kinds of liabilities. Law enforcement is insufficient to deter the corporation, meaning that misconduct is profitable. In other words, the shareholders still want to engage in the misconduct because they make money from it. So what will happen when you interact ineffective law enforcement that doesn't deter misconduct with the incentives managers get to maximize profits,

you get all kinds of results that show that the corporations will do ever more to undermine law enforcement. For example, they will ensure the manager. They will make it so that the manager can have deniability on the misconduct. They will pay their legal bills. They will give them more stocks, so they have more incentives to engage in the profitable misconduct. And then what often happens

in law enforcement and corporations is they do this as a private-public collaboration. They say, oh, if you self-report, there's recently a speech by the head of the criminal division in the Department of Justice, today's current Department of Justice, saying, if you do money laundering or any of these, just tell us you did it. And we'll say, thanks for letting us know and no enforcement. So basically,

suppose you who were driving fast on the highway. And they say to you, you know, if you self-identify yourself and you just put the flag on your car saying, oh, I'm declaring that I'm driving too fast. And they'll say, okay, your fine is only $5. Then you'll say, okay, cost of doing business. You know, I want to drive. I'll pay the $5 because the fine is not deterring. That's what's going on. So we explore how corporate governance interacts with an effective law enforcement to make law enforcement even worse. And the idea of going after executives is made more difficult by the corporation shielding its executives from consequences that they might bear. Your example of putting a flag on your car indicating that you're speeding is absurd, of course, because most people absolutely understand that that wouldn't work for them. but it works for these companies.

So I need to ask, are we a democracy or an oligarchy? Corporations get special treatment in the law, and the people who lead them have also privileges, or they become rich and they have privileges. And that is sort of, you know, people refer to as oligarchy. It's certain symbiotic relations between powerful people and powerful organizations

in the government and in the private sector. democracy gets eroded by a number of, you know, practices in our democracy, say in the U.S., since you're American scandal, it is a scandal, the amount of money that goes into politics and the way corporations are able to write laws at the state level, at the federal level, at all levels, because they overwhelmed our democracy. So I wrote an essay quite recently, 22, something like that, where I was asked what's going wrong with capitalism and how to fix it. And my answer was, The forces of capitalism, like this Milton Friedman, focus on making as much money as possible, overwhelmed and undermined our democracies because they can fool the regulators and the politicians

about capital regulations and other things so that the bad laws get written, and then you get to the enforcement part of any law. So the law can be bad and the enforcement can be poor. And that's the kind of, you know, bad democracy we live in when some people have, undue impact on the way the law is written, on the way the law is enforced. In your answer just then, you used the phrase symbiotic relationship. What did you mean? I meant symbiosis is where, you know, the two parties can benefit each other. So the politician might say, you know, risk in banking, it won't come to bite me. Meanwhile, I can get

a donation, for example, or I can tell the banker to make this loan or to do this or that. In other words, once a robber was asked, in a joke that I thought was very lame, but now I think it's very deep, why did you rob a bank? And he said, because banks are where the money is. So there is symbiotic relationship between governments and all kinds of institutions. Today, it's also with, you know, I don't know, AI or certainly crypto. And banks, you know, on crypto is where the money is for the politicians oftentimes or for the causes that the politician cares about. So they enter bargains.

I'll give you light regulation and you will do this for me. A bargain. So with every new administration comes new rules, new ways of doing business in Washington. Recently, we've seen some of the leaders of the biggest tech companies attend the inauguration, be called to the White House. There's a lot of more familiarity with business leaders and the White House these days. What do you think that that says about not just the influence of corporate leaders on our government, but perhaps the other way around? Well, it's a great question. I just want to say, you know, there is a lot we see today, but it was there before.

I mean, I think that tech, you can associate Barack Obama with tech. It was very close to Google, Obama. And some of the laws that were written in the 90s and the 2000s were very allowing a lot of freedoms to, you know, social media companies like the Section 230 of the Communication Act that gave them impunity on content, even when they curated, all kinds of things like that. And now, of course, it's open AI, et cetera. The president today, our president right now, had a change of heart, for example, about crypto. And in general, he's very unique in that he really. views everything very transactionally. So he really act as a, you know, somehow the government is a business. And all that matters is, you know, to have some transactions, oftentimes that

benefit him, his families, his friends. Okay. That's a certain abuse of power that is more blatant, I believe, today than we've seen in other administrations. And yes, the president all of a sudden wants, you know, to be paid, wants the government to own parts of sectors, medals more with markets. I don't know what people mean when they say free markets, when, you know, the government intervenes as much. And of course, you know, he's got other policies that many people don't like, tariff and other things, but they are also afraid to speak.

So big business has impact to the extent that this particular government or this particular executive branch of the government sees, benefit to itself or its causes or its audiences that they care about. You mentioned you wanted to bring up Boeing earlier, and I'm going to give you your chance, because we've covered many corporate scandals on this show, including one on Boeing, and just last month, a judge ruled to dismiss the case. What does that reveal about our ability to hold corporations accountable? It's bad. I mean, right now, this is across corporate sector, but it's also in other things.

For example, the president's ability to pardon or to direct the Department of Justice not to enforce certain laws or other agencies not to enforce certain laws. So we right now have a situation where in the last year, law enforcement has become really, really bad in a lot of fronts. Law enforcement became more selective, more political. I mean, we see this in, you know, cases there were obviously retribution like, you know, Comey or Letitia James. And we see this in corporate enforcement. as well. So, for example, we're no longer enforcing as much, or we're taking pauses on enforcing the Foreign Corrupt Practices Act, which is about bribery. There was a new law called the Corporate Transparency Act that had, you know, removed a little bit of the opacity of corporate

beneficial owners, pause all enforcement of it so that there could be more and more opaque corporations, which, by the way, often bring dirty money from outside the country. All the kleptocrats around the world, including Russians and others, bring their money here because they just buy stuff here. In the case of Boeing, you ended your ear series, which I listened to, with them agreeing to plead guilty. After they were told that the deferred prosecution that they originally got, which the victim's families didn't like, they violated that because at the time of the deferred prosecution agreement, no executive was charged with anything. they were promising to be good to improve their risk. And after that came a lot of other safety problems.

And then the Department of Justice of Biden decided to go back to them and say, you violated the agreement that we had with you, that you'll be good from now on. And now we're going to go after you again because we can prosecute it. It was a deferred prosecution. And instead, Boeing agreed to not be prosecuted, but to plead guilty. and there was that plea. And then they'll have a monitor on them, so it was going to be a little bit tougher on them.

But that didn't get kind of consummated. It didn't actually happen. And there were some issues around it. But then came this Department of Justice right now, and just last month, as you mentioned, basically said, okay, you know what? Never mind. Forget it.

We are dismissing. So they went even beyond the deferred prosecution to dismiss the case entirely. So no accountability, anymore. We're done. No more. So there was a declination. There was a dismissal of the case. And now Boeing doesn't have a criminal record and doesn't have a monitor. And the judge said in that decision that he sides with the victims and he sides with a statement that this is not good for the public and he disagrees with it, but he claimed that he couldn't do anything because the Department

of Justice decided to do it. So the court was incapable of discerative. with a request to dismiss the case. That's a very sad commentary on our justice system. Anyone listening to this conversation might come away from it so far pessimistic about the state of our economy, the state of our industry, the state of our governance. We are in an incredible moment of perhaps a bubble, an AI bubble, certainly financial uncertainty. What is the remedy ahead for us if there is one? The remedy has to be, you know, intelligent discourse to start with. So we can actually claim back a level of democracy, democratic institutions that we can trust. I think right now the state of our democracy is poor. We got to have a system of laws. We got to live in a system where you can trust courts and the government to do the right thing. It has to do with some.

civic engagement by people as opposed to just wanting to distance yourself from it, because if we leave a gap in our democratic governance, then it will be occupied by people, and they won't always want what's best. On a personal level, are you pessimistic? What keeps you motivated in your work? It's not good. It's not, we're going through hard times right now in our society, I feel. What keeps me going is impact on people that I can have, even conversations like this one with you, which, you know, I'm hoping get through to people. There are a lot of sensible good people that I interact with. You know, I have complaints about the way, you know, institutions, including my own, do things. But I am able to speak. So I'm very grateful for that and I feel privileged that I feel privileged that I've. I am a tenured professor at Stanford and can say whatever I want, pretty much, and that I have some opportunity to work with some young people, students, and some colleagues who want to make the world a better place.

And that's what keeps me going is collaborations with good people, some of the teaching I do, some of the writing I do, and just doing something that moves in the right direction. Well, Anad Madi, thank you so much for talking. with me on American Scandal. Thank you for having me. That was my conversation with Annot Edmati. She's a Stanford professor and author of the book, The Banker's New Clothes.

What's Wrong with Banking and What to Do About It? From Wondery, this is episode five of our series on Lehman Brothers for American Scandal. In our next series, in 1982, John Landis was one of the most successful young directors in Hollywood. When he began work on Twilight Zone the movie, he imagined this spectacular finale involving a helicopter explosions and the rescue of two small children. Everything would be done for real, at night, on location, even if it meant bending the rules.

But this commitment to authenticity would come at a terrible cost. American Scandal is hosted, edited and executive produced by me, Lindsay Graham for Airship. Audio editing and sound design by Gabriel Gould, music by Thrum. This episode was produced by John Reed, managing producer Emily Berth, development by Stephanie Jens, senior producer Andy Beckerman, Thank you, Executive producers are William Simpson for airship, and Jenny Lauer Beckman and Marshall Louie for Wondery. Wonderly Plus subscribers can binge American Scandal early and ad-free right now. Join Wondry Plus in the Wondry app or on Apple Podcasts.

If you enjoy American Scandal, be sure to give us a five-star rating and leave a review. I read every one of them. I also have two other Wondery podcasts you might like, American History Tellers and Business Movers. Follow American Scandal on the Wondry app, Amazon Music, or wherever you get your podcast. You can binge all episodes of American scandal early and ad-free right now by joining Wondry Plus in the Wondry app or on Apple Podcasts. And before you go, tell us about yourself by completing a short survey at Wondry.com slash survey. And to find out more about me, including my other podcasts, go to not thatlindsaygram.com. That's not that Lindsaygram.com.