Bigger and scarier

I have just completed reading a carefully written and somewhat scary evaluation of the recent global financial crisis. Simon Johnson and James Kwak’s 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (Pantheon, $26.95) is a powerful exposé of how Wall Street bankers systematically dismantled controls on their activities so that they could run huge risks at the expense of the taxpayer while taking all the profits themselves. It uncovers evidence describing how the regulators were co-opted by inducement and active lobbying to relax the controls on financial activity.

The financial sector also created a discourse in which to challenge their self-serving orthodoxy was akin to being both stupid and square. An orthodoxy according to which regulation inhibited innovation in financial services, which was critical to the vitality of the US economy. This thinking got so embedded that it did not permit serious challenge. The best — many of whom were from the financial industry — like Robert Rubin, Hank Paulson, Larry Summers and even Alan Greenspan supported it. Those who challenged it were made to look stupid or pushed aside.

Risk controls were systematically relaxed, controls on the extent of leverage, capital and oversight were reduced. All this was cloaked in the veil of pursuing the greater good, while basically profiting the financial industry and its managers. Initially, the smart guys made millions of dollars, than hundreds of millions and then the best made billions. The banks grew to such a size that they were seen as too big to fail; so they made choices in which they took the profits and left the risk to the taxpayer.

The authors really cavil at the bailout, arguing that it did not punish the risk-takers, whether by getting the managers sacked or by punishing the shareholders. They argue that the Obama administration has let pass a historic opportunity to take power back from the industry, and that this will lead to the next financial meltdown, which will be even worse — because the 13 bankers are now six, and they are bigger, and so it is even more difficult to let them fail.

This book is important reading for policymakers of all hues and for the lay public to understand what is going on.

Janmejaya Sinha Chairman, Asia-Pacific, Boston Consulting Group
The views expressed here are personal