Fuld and Ben, the bust-a-bank men
Sep. 3rd, 2010 08:18 am![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksThe Financial Crisis Inquiry Commission in Washington is beginning to remind me of the Truth Commission in South Africa, except that it will, I hope, be somewhat shorter. Yesterday we had Dick Fuld saying, with a straight face that can only be possessed my those with no internal insight whatsoever, that the failure of Lehman Brothers was a matter of lack of liquidity and an "old-fashioned run on the bank". This was disingenuous in the extreme. Sure, it was a run on the bank that fucked Lehman (and Fuld) good, but there are panic runs on sound banks and justified runs on unsound banks. The evidence from other players about Lehman Bros activities in the months, nay, years, leading up to its collapse -- shifting debts "off-book" by dubious use of repos — lead one to think that September 15 2008 was more a case of "when, not if".
Ben Bernanke's testimony yesterday was fascinating in what it hinted at for the future, rather than what Bernanke said about yesterday. However, his "yesterday" stuff was interesting enough. He basically said that the central bank had no authority to save Lehman Bros — a statement somewhat at odds with what Bernanke said in testimony shortly after the collapse. Bernanke said that "I regret not being more straightforward".
What Bernanke is now effectively saying is that he had to lie in that earlier testimony because if he had told the truth (that Lehman Bros was "unsalvageable") it would have caused further panic in the markets, just as the collapse of Bear Stearns did. I'm not sure why he now "regrets" this lack of candidacy. He could equally argue that his misleading statement (which was that the Treasury had "declined" to rescue Lehman Bros) was an unfortunate necessity. But, hey, that's politics and politicians for you.
But it was Bernanke's hint for the future that I found fascinating. He said that "if the crisis has a single lesson, it is that the too-big-to-fail problem must be solved". He added that governmental promises that it would not intervene (this with the intention of eliminating the "no-lose bet" moral hazard situation an investor possesses if he or she knows that the government will step in if a bank goes tits up) "in and of itself will not solve the problem".
To my eyes, this indicates an old American solution to a new American problem. If companies get too successful at capitalism, break 'em up. Anti-trust legislation in the US, one of the most anti-capitalist set of laws anywhere in the developed world, came about because the US has a particularly old-fashioned and moralistic view about capitalism. It likes to pretend that it believes in "free markets", but it doesn't really, because it soon discovered that free markets often lead to unfree markets, with the "winners" developing monopolistic or monopsonistic powers. And so the US introduced the paradoxical situation of government intervention to maintain a "free" system.
This is so ingrained in the US culture that most Americans don't even see the paradox. The US football system is structured in just such a way to stop the best teams remaining the best. And so it is in private enterprise. You can "win", but you can't "win big", because, if you do (see the oil industry at the turn of the 19th century, the phone industry in the mid-20th century) then the government will bust you.
This, it seems to me, is what Bernanke is hinting at. In a hint that would be taken up eagerly by much of the Labour Party and which would be met with horror by the likes of the Barclays board, he seems to be saying that banks will no longer be allowed to get sufficiently large to become vital to the economic system. He is also, it seems to me, giving a stark message that investment banking and retail banking should be run by separate companies. The days of Barclays and Barclays Capital, JP Morgan and Chase Manhattan, might well be numbered.
Once again, we will hear all of the old clichés from both sides about why it would be "good" or "bad" for the country, which is nearly always a synonym for "good" or "bad" for me (or my constituency). But I tend to side with the "splitters" here. Just because the investment side can pull the retail side out of a temporary sticky patch (see RBS in the past year for a startling example of this), doesn't make it an intrinsically good system. Far better, one might equally say, to force the people running the retail side not to fuck it up in the first place. I strongly suspect that much of the gung ho lending on the part of RBS rested at least in part on strong profits being generated on "the other side". In other words, a purely retail operation would not have been encouraged to go so mental in the first place.
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Ben Bernanke's testimony yesterday was fascinating in what it hinted at for the future, rather than what Bernanke said about yesterday. However, his "yesterday" stuff was interesting enough. He basically said that the central bank had no authority to save Lehman Bros — a statement somewhat at odds with what Bernanke said in testimony shortly after the collapse. Bernanke said that "I regret not being more straightforward".
What Bernanke is now effectively saying is that he had to lie in that earlier testimony because if he had told the truth (that Lehman Bros was "unsalvageable") it would have caused further panic in the markets, just as the collapse of Bear Stearns did. I'm not sure why he now "regrets" this lack of candidacy. He could equally argue that his misleading statement (which was that the Treasury had "declined" to rescue Lehman Bros) was an unfortunate necessity. But, hey, that's politics and politicians for you.
But it was Bernanke's hint for the future that I found fascinating. He said that "if the crisis has a single lesson, it is that the too-big-to-fail problem must be solved". He added that governmental promises that it would not intervene (this with the intention of eliminating the "no-lose bet" moral hazard situation an investor possesses if he or she knows that the government will step in if a bank goes tits up) "in and of itself will not solve the problem".
To my eyes, this indicates an old American solution to a new American problem. If companies get too successful at capitalism, break 'em up. Anti-trust legislation in the US, one of the most anti-capitalist set of laws anywhere in the developed world, came about because the US has a particularly old-fashioned and moralistic view about capitalism. It likes to pretend that it believes in "free markets", but it doesn't really, because it soon discovered that free markets often lead to unfree markets, with the "winners" developing monopolistic or monopsonistic powers. And so the US introduced the paradoxical situation of government intervention to maintain a "free" system.
This is so ingrained in the US culture that most Americans don't even see the paradox. The US football system is structured in just such a way to stop the best teams remaining the best. And so it is in private enterprise. You can "win", but you can't "win big", because, if you do (see the oil industry at the turn of the 19th century, the phone industry in the mid-20th century) then the government will bust you.
This, it seems to me, is what Bernanke is hinting at. In a hint that would be taken up eagerly by much of the Labour Party and which would be met with horror by the likes of the Barclays board, he seems to be saying that banks will no longer be allowed to get sufficiently large to become vital to the economic system. He is also, it seems to me, giving a stark message that investment banking and retail banking should be run by separate companies. The days of Barclays and Barclays Capital, JP Morgan and Chase Manhattan, might well be numbered.
Once again, we will hear all of the old clichés from both sides about why it would be "good" or "bad" for the country, which is nearly always a synonym for "good" or "bad" for me (or my constituency). But I tend to side with the "splitters" here. Just because the investment side can pull the retail side out of a temporary sticky patch (see RBS in the past year for a startling example of this), doesn't make it an intrinsically good system. Far better, one might equally say, to force the people running the retail side not to fuck it up in the first place. I strongly suspect that much of the gung ho lending on the part of RBS rested at least in part on strong profits being generated on "the other side". In other words, a purely retail operation would not have been encouraged to go so mental in the first place.
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