Now the bankers’ triumph is complete
The UK release this week of the Oscar-nominated The Big Short, based on Michael Lewis’s book of the same name, is a fitting bookend to a time when we still believed that the broken financial system might be fixed. But the banks have won. Not a single “top banker” has been jailed and few, if any, have had to return undeserved bonuses. Measures taken since 2008 are being watered down before our eyes and, most dangerous of all, the deeper causes of the crash remain essentially intact. The Occupy movement should call a reunion so we can have a ceremony to bury all remaining hope.
The Big Short uses the story of a handful of US finance geeks to explain the 2008 crash. In the preceding years they gradually work out that the most senior managers in most banks have no idea what is going on in their organisations. The geeks focus on one small unit where ever more complex financial products are being built, sold or left on the banks’ balance sheets. The products are lucrative but they are also far more risky than top management are being told or understand. Seeing their warnings to regulators and other “experts” ignored, the geeks decide to make a fortune from the coming implosion of those complex financial products: the Big Short.
Hollywood blockbusters such as Wall Street, American Psycho and The Wolf of Wall Street painted a picture of bankers as coke-snorting psychopaths and greedy gambling addicts. But as The Big Short makes clear, the problem was less greed than wilful and culpable incompetence on the part of the most senior bankers. Someone who is greedy knowingly takes risks in order to satisfy that greed. That is giving far too much credit to top management in almost all the major banks before 2008.
Alistair Darling was chancellor in 2008 and got a close look at top management in the big British banks. In his memoirs Back from the Brink, Darling has this to say: “They didn’t understand what they were doing, the risks they were taking on, or, often, the products they were selling … The top management in banks both here and in the US failed to understand – or even ask – what was apparently making them so much profit and what were the risks.”
Or even ask. That is the key to understanding why the causes of the crash remain unaddressed. Why would top management not even ask? Two words: personal liability. Traditionally, the truly risky activities in finance happened in firms organised as partnerships. Top management were personally liable, meaning that if things went well, managers might get to buy a wonderful extra house – the bonus. But if things went wrong, they might have to sell their house – the malus.
This system exerted a powerful discipline. Management had every incentive to be on top of what its people were doing, to not let the organisation grow to an unmanageable size and to give lots of power to its risk and compliance officers – those with the task of blocking reckless or illegal plans. There was an equally strong incentive to reward and encourage loyalty: the Thursday after-work celebration to mark staff members’ 15, 20 or 25 years of service was a fixture.
But in the 80s and 90s waves of deregulation hit. Firms were allowed to list on the stock exchange or be taken over by a publicly listed bank, putting an end to personal liability. Even worse, in this new set-up the bonuses stayed but the risk of being ruined personally when the firm went down was shelved.
Now risk and compliance staff stopped being the eyes and ears of top management. They became, in current City and Wall Street parlance, “box tickers”, “cost centres”, “linesmen” or “business blockers”. Meanwhile the “20 years’ service” parties have become a thing of the past, as loyalty has been replaced by “liquidity”. Within five minutes, and without prior warning, banks can get rid of bankers and do so all the time: “executions”, they call this process in the City, or “waves” and “culls”. On the other hand, banks know that competitors can poach their people at any time. Zero loyalty cuts both ways.
This blueprint for short-termism defines the modern, publicly listed megabank. The biggest are global empires with hundreds of thousands of employees, engaged in widely different activities, often of great complexity. The Big Short makes clear that before 2008 the top people had no idea what was really happening down the ranks. And why would they? They were not personally liable and as long as things went well they were cashing in life-changing rewards. At worst they would lose their jobs and stock options. What kind of deterrent is that?
And now? The major banks are still publicly listed, and bankers as well as compliance staff can still be fired in five minutes. There was some reason for hope when the UK government promised a new law making it possible to prosecute top bankers for reckless behaviour. But in May 2015 the Conservatives won the election and George Osborne quickly moved to dilute the measure. It was fatal. He went on to declare “a new settlement” with the banks, forced out his toughest regulator and scrapped a review of banking culture.
The Big Short is well worth seeing. But when you leave the cinema you find yourself back in the UK, where the banks are still being given exactly what they want. It might as well be 2006.
- Swimming With Sharks by Joris Luyendijk (Guardian Faber, £12.99). To order a copy for £6.99, go to bookshop.theguardian.com or call 0330 333 6846. Free UK p&p over £10, online orders only. Phone orders min. p&p of £1.99.