Jerry Dowlen on... Books about bailouts
Click here for previous articles by Jerry Dowlen from the Books Monthly Archives
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
Vanities – Fool’s Gold – Liar’s Poker – Rogue 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.
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
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
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.”
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
Sherlock Holmes: The Seven Per Cent Solution
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...
The small print: Books Monthly, now well into its eighteenth year on the web, is published on or slightly before the first day of each month by Paul Norman. You can contact me here. If you wish to submit something for publication in the magazine, let me remind you there is no payment as I don't make any money from this publication. If you want to send me something to review, contact me via email and I'll let you know where to send it.