Wednesday 22 June 2011

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.

  • 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.

*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

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