Too Big To Fail - The British Brains Behind the US Response to the 2008 Financial Crisis

I’ve recently read Andrew Ross Sorkin’s book on the Global Financial Crisis, “Too Big To Fail,” often described as the definitive account of how the events unfolded. It starts with the emergency rescue of Bear Stearns in March 2008, then plots the series of decisions which ultimately led to the collapse of Lehman Brothers, the takeover of Merrill Lynch by Bank of America and the bail-out of the banking system.

While I lived through these events and followed the press coverage eagerly at the time, the book sheds a fascinating light on the behind-the-scenes manoeuvring of the Wall Street CEOs and the government regulators. It has changed my perspective on some of the decisions that were made and reminded me of the magnitude of the task that was asked of the leaders in the banks, the regulators and the government.

One of the biggest changes in my view on the matter is a new-found respect for how effectively the British regulators reacted to the crisis, in comparison to their American counterparts. On a long list of issues, the British government and regulatory bodies took decisive action that the American regulators would not stomach – yet in many cases were later forced into copying.

• US regulators were strongly resistant to a ban on the short selling of financial companies’ shares, until they saw the positive effect it had in the UK.

• In the weekend before Lehman Brothers collapsed, Barclays was in negotiation to take it over. I didn’t realise before that this was blocked by the UK government. If a deal had gone through, Barclays could ultimately have been jeopardised, so it seems in hindsight to have been the right call.*

• In late 2008, when it became clear that wide-scale action was needed to help banks survive the write-downs on bad debts, the US government was planning to buy the poor-quality loans directly from the banks. This was the plan that was ‘sold’ to Congress. However, in practice it is barely workable – the government just does not know how much to pay for the loans. The solution was instead to make capital injections directly to the banks in exchange for an equity stake: the US chose this route after it had been successfully implemented in the UK.

• In a twist of irony, the UK bail-out was optional and several banks (including Barclays) were sufficiently strong they did not need to take government funds. In the US, which loathes government interference with ‘free enterprise,’ the top nine banks were forced to take bail-out funds (so that the weaker among them didn’t look bad).

The UK has a long history of showing leadership in the fields of economics and finance (I’m thinking in particular of the great economist J.M.Keynes). Reading this book made me realise that the UK still has an edge in these fields – one that will be required going forward as the country faces continuing challenges from fiscal tightening at home, the Eurozone debt crisis, and many other problems on the horizon.

Note
*Barclays later acquired the US broker-dealer unit of Lehman Brothers out of administration, getting the bit of the business they wanted at a knock-down price

Why we shouldn't follow America's lead, as far as "justice" is concerned

A series of pieces in the media have focussed my attention in recent weeks on the shockingly high proportion of US citizens who are incarcerated. It started with an article in The Economist about high rates of repeat offending:

“One in every 100 American adults is in prison or jail, one in 31 is under correctional supervision – and after their release, most will find themselves back behind bars. According to a new Pew report, 43% of American offenders are returned to their state prison within three years of their release.”

The article goes on to describe a number of programmes which are having varying degrees of success at cutting re-offending rates. It also points out the enormous cost of the prison and jail system - $60 billion per year: “a year’s stay at a state prison costs about $45,000 – Harvard would be cheaper.”

A few weeks later I noticed this fascinating documentary by Louis Theroux, in which he visits Miami’s biggest jail and interviews several of the inmates. This is the establishment where alleged criminals are held prior to trial, so from a legal standpoint every inmate is innocent (until proven otherwise). Nevertheless they are subject to abysmal living conditions with twenty people to a cell, and a brutal dog-eat-dog culture where beatings are an everyday occurrence. Those convicted then face a further stint in prison. Given the casual aggression which is part of the daily life in jail, it is easy to see why parolees trying to re-enter society have trouble fitting in.

Another facet of the ‘prison dilemma’ was described in a cover article in last weekend’s Financial Times. Economist Martin Wolf wrote about a new report by the Global Commission on Drug Policy which calls for an end to the escalating, destructive war of drugs and adoption of a policy of treatment rather than criminalisation.

“The policy on which the world has engaged for decades, at the behest of the US, is a disaster. While failing to reduce the ills of drug use at which it is addressed, [the ‘war on drugs’] has created massive collateral damage: the spread of avoidable diseases; use of drugs in dangerous forms; mass criminalisation and incarceration; a gigantic waste of public resources; corruption; creation of a cross-border network of organised crime; and the subversion of states.”

Prohibition, he points out, simply doesn’t work: where there is demand, there will be supply, and waging a war against the supply chain is pointless when the root of the problem is in your own back-yard.

Clearly something is amiss with the American system of so-called justice. As Martin Wolf, Louis Theroux and the Economist make clear, the system which the US has constructed is not one which the rest of the world ought to imitate. And it is one that, over time, most Americans will surely realise is economically and socially unsustainable.