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  July 2015 - The Jerry Dowlen Column

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Jerry Dowlen on... Books about bailouts

Click here for previous articles by Jerry Dowlen from the Books Monthly Archives

 

Bandits, Blunderers and Borrowers = Books about Bailouts.

 

Nowadays whenever there is carnage in the global financial market you can bet your bottom dollar (if you still possess a bottom dollar) that a dramatic, attention-grabbing “tell all” book will quickly follow.

 

Bonfire of the VanitiesFool’s GoldLiar’s PokerRogue Trader … those book titles deliberately use the sort of powerful words that play to the emotions of anger, fear and confusion felt by the public when the bankers pay themselves obscene amounts of money, rewarding themselves for failure and leaving the rest of us feeling plundered.

 

Bailout

 

The one little word Bailout sufficed for his book title when Irvine H Sprague penned his memoirs in 1986. He was the retired chairman of the USA’s bank regulatory body the FDIC. He began by declaring: “Bailout is a bad word. To many it carries connotations of preference and privilege and violation of the free market principle.”

 

Mr Sprague knew what he was talking about, for in his eleven years at the helm of the FDIC he had presided over more USA bank failures than any previous officer. He was deeply uncomfortable with what he called The Too Big to Fail Factor. He wrote: “It is a bittersweet fact of life … that the largest banks are immune from failure.” He predicted too – with great accuracy – that inter-state and inter-global banking, an inevitable development of the future, would produce mega-combinations that would dwarf the biggest banks of his day.

 

Whoops!

 

Three decades later we can readily see that banks and other financial institutions have continued to fail: spectacularly, in some cases. But whether caused by greed, incompetence or bad luck the unpalatable fact has remained that for some of the very big banks, governments have been forced to make taxpayers ride to the rescue, to protect the wider economy.

 

Writing with exquisite lucidity and wryness, the British financial journalist John Lanchester offered us his book Whoops! in 2010. Surveying  the post-2008 carnage of the “boom and bust” banking crisis, Mr Lanchester ultimately found himself echoing Irvine Sprague: “The unfortunate fact is becoming unmissably clear: the consequences of the credit crunch are going to fall far more heavily on the innocent than the guilty. In the medium term, those consequences can be boiled down to a single word: cuts. Meanwhile, the politicians are happy to bash the banks with rhetoric but are finding it hard to effect structural change.”  

 

John Lanchester updated us on the “casino-banking” products and processes that hadn’t been invented when Irvine Sprague ran the FDIC. He traced that derivatives in effect were born as a financial product in 1973. Complex products such as the CDO (collateralised debt obligation) emerged from the original commodities markets where farmers had traded in options and futures. Warren Buffett, the Sage of Omaha warned that derivatives would become “weapons of mass destruction”.

 

“Fooled by Randomness

 

John Lanchester explained that the financial industry nearly got away with it … but the one mistake that downed them was the single word: Risk.  “The bankers made inaccurate calculations about the mathematics of risk.”

 

But in the 1990s even the 300-year old institution of Lloyd’s of London insurance had brought itself to the brink of financial collapse. Insurance is all about measuring and pricing risk: so how come Lloyd’s, with all its expertise and experience, was so badly up the creek? Answer: Lloyd’s was sinking under some self-inflicted blows of greed, miscalculation and skulduggery. But in large part, underwriters had succumbed to the process that in 2004 was described by author Nassim Nicholas Taleb as being Fooled by Randomness: The Hidden Role of Chance in Life and the Markets.

 

An unprecedented spike of major losses had hit the insurance market in the late 1980s: the Piper Alpha oil rig disaster, the Exxon Valdez oil spill; a UK “hurricane”; and other destructive storms in the UK, USA and Europe. Meanwhile, thousands of policies underwritten in the past, long-since filed away and accounted for as profit, rose suddenly from the grave to bite underwriters with unimagined claims for asbestos-related disease and environmental pollution.   

 

In 1993 the best brains at Lloyd’s engaged with talented consultants to devise an ingenious rescue plan that didn’t require going cap-in-hand to ask the government for a bailout. Even if they had needed a bailout, it would have been a drop in the ocean when weighed against the billion-dollar meltdown scale of the bungling banks that slashed and burned  the world economy in 2008.

 

The AIG Story: Thanks but No Thanks!?

 

Maurice R Greenberg and Lawrence A Cunningham are joint authors of the insurance-themed book The AIG Story , published in 2013. In truth, the book could be titled The Hank Greenberg Story: the memoir of the one-man human dynamo that built American International Group into the USA’s biggest and most powerful insurance company. (Think of Sir Alec Ferguson’s iron grip on his all-conquering  Manchester United football team, and you’ve likely got the right analogy).

 

Brought to its knees by an illiquidity crisis in 2008 – it had become involved in insuring credit default swaps – AIG was bailed out by the USA government. By then, Mr Greenberg was gone: hounded out by what he argues cogently in his book was an ill-founded smear campaign against him in 2005. His next argument in his book is that if he had still been in charge of AIG in 2008 he would have had the wits to save the company, just as Lloyd’s had done in 1993, without needing the so-called “help” of the government.

 

That “help” was no help at all, argues Mr Greenberg. And thus, with a twist of irony that Irvine T Sprague surely could never have imagined in his wildest dreams, Mr Greenberg proceeded in 2013 to sue the USA government on the grounds that the value of his personal shareholding in AIG had been unconstitutionally diminished by the terms of the bailout in 2008.

 

Hank Greenberg is evidently indefatigable, even at the ripe old age of 90, in remaining a combative and controversial character in world politics and finance. Henry Kissinger has described him as “A man of strong principles who never wavered in times of crisis.” So if Mr Greenberg has read the final and chilling chapter of John Lanchester’s book Whoops! does he  know of a way to save us, I wonder, from Mr Lanchester’s dire prediction that: “The sad truth is that the real fix [of the 2008 banking crash] is going to have to wait until after the next crash.”

 

Jerry Dowlen

May 2015

 

Previous articles by Jerry Dowlen in the Books Monthly Archives include:

 

Antony Sher: The History Man

Edmund Crispin, Crime Fiction Author

Computer Chess: The Imitation Game

P G Wodehouse

John Betjeman and Candida Lycett Green

Daniel Abse

Sherlock Holmes: The Seven Per Cent Solution

Wilfred Owen

Wolf Mankowitz

Bob Hoskins

Muriel Spark & Jane Gardam

The Story of Edith Nesbit

Anthony Gilbert and Michael Gilbert

Rebels With A Cause

Inspector Winter: Gwendoline Butler's First Detective

The Carlton, The Commodore, and the Embassy - Orpington's Three Cinemas

The Bergerac Police Adventure Series

It's All In The Mind - Margery Allingham and Graham Greene

Berlin: Cold War Spy Thrillers

The Life and Centenary of Barbara Pym

D H Lawrence: The Sniggering Legacy of Lady Chatterley's Lover...

 


 

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