RSS feedsWhen a Republican administration effectively nationalised half the US mortgage market by bailing out Freddie Mac and Fannie Mae, many people clearly thought (judging by the surge in share prices) that some sort of nadir had been reached. It couldn’t get any worse than this, it seemed, because there simply wasn’t anything else as big as this that could go wrong.
Not quite right. If Fannie-Fred was the biggest plate to fall off its stick and go spinning towards the ground, it sure as hell wasn’t to be the only one. The Fed chose to catch this one, because – and here’s a phrase that will get on your nerves – they were deemed too big to fail.
Those of us in the UK less familiar with the whole concept of Fannie-Fred can but shake our heads in amazement at what appears, with perfect hindsight, to have been a fundamentally warped mechanism – entities created by Congress to support the US housing market, yet having private shareholders and a Wall Street listing. Heads I win, tails you lose.
The biggest debate regarding Lehman Brothers wasn’t whether it could be rescued by the market (it couldn’t) nor even whether it should be rescued by the US government (it shouldn’t), but whether it’s pronounced ‘Lay-mans’ or ‘Lee-mans’.
One newspaper columnist wrote about how ordinary folk watched tearful bankers with something akin to “horrified delight”. As one Daily Telegraph reader put it, who are the Masters of the Universe now? Economist Diana Choyleva of Lombard Street Research told Newsnight that it was good news that the American authorities allowed Lehmans to fail, and that seems about right. It would have come as a real shock to them, though, given the earlier rescue of Bear Stearns. Tough.
AIG – another one that was too big to fail – is probably best known over here as lead sponsor of Manchester United (which reminds me: office rhetorical question of the week has to be, why is Her Majesty’s Government continuing to give taxpayers’ money to Newcastle United so that they can sew Northern Rock’s logo on their shirts?). It’s an unholy mess, intricately entwined in the sub-prime shambles by way of its insurance contracts that pay out when sub-prime mortgages go phhht. Nobody reckoned on almost all of them going phhht.
The downfall of our own HBoS – an organisation that, at heart, ought to have been a big old-fashioned paternalistic building society and a dour, conservative Scottish bank – is ironic, given the business is being rescued by a combination of a clearing bank (Lloyds) that lost its shirt in Latin America 25 years ago and a one-time mutual organisation (TSB) that came undone when it waded into the business of the Square Mile by acquiring merchant bank Hill Samuel.
The veteran commentator Christopher Fildes – one of just a handful of people who consistently makes sense, decade after decade – is fond of saying that giving capital to a bank is like giving a gallon of beer to a drunk. You know what will come of it, but you don’t know exactly which wall he’s going to do it against. Latin America, dotcoms, hedge funds, pre-Depression Wall Street speculators – take your pick. I think of bankers as people who forget, but never forgive. They make the same, greedy mistake and burn their fingers time and time again, but each time on a different stove and with increasingly impressive degrees of sophistication.
But it’s still the same mistake. It’s the mistake of thinking that their own greed can be sated. It can’t, so they keep lusting for more. It’s the mistake of thinking that making money is easy. It isn’t, as any FD in any real world business will tell you. It’s the mistake of thinking that once risk is squared away on a rocket-science spreadsheet then there isn’t anything else to worry about. There is. And it’s the mistake of being so vaingloriously arrogant as to think that, if you make a big enough mistake, then you will be in the luxurious position of simply being too big to fail. Don’t count on it.
A few years ago, we asked HSBC finance director Douglas Flint what was the cleverest question ever put to him by an institutional investor. He thought for a minute and said, “What are you doing today that we won’t see the benefit of for ten years?” It prompted us recently to think up another few questions: How are your dominoes laid out? How do they connect to everyone else’s dominoes? And what’s going to make the whole lot tip over?
