How the masters avoided meltdown


 
I have just finished reading an excellent novel written by an old friend of mine from British journalism – Meltdown, by Martin Baker. It is a fast-paced tale of intrigue and conspiracy at the top echelons of international finance, and could not have been better timed.

The plot – I will not give it all away – centres on a gigantic insider dealing scandal at a French bank that tips the global financial system into crisis. Does that sound familiar?
 
As the world teeters on the brink of meltdown, financiers and business people in general become the targets of universal anger for causing such chaos – in Europe, traders are attacked in the street, and in America there are shootings and lootings at the Wall Street HQs of the country’s leading financial institutions.

It makes for a great read, especially in the current atmosphere of financial fragility, but should we regard it as anything more than a work of fiction?

I ask the question because over recent days there seems to have been a distinct shift in the way the public perceives the financial community.
 
From being “masters of the universe” when the markets were soaring upwards, bankers, brokers and traders suddenly appear as a bunch of reckless, incompetent gamblers, frivolously squandering away our livelihoods on nothing more than a series of casual hunches.
 
And not just business people – the authorities were suddenly portrayed as participants in this gigantic fraud. In Baker’s book, the French Government takes part in a massive exercise to “fix” the financial markets involving a web of international conspiracy from Sydney to New York.

When the chairman of the Federal Reserve ordered the fire-sale of Bear Stearns just a few days ago, at one tenth the value the market had previously put on the shares of the troubled bank, it seemed as though the whole stock market was in the land of make-believe – how could any values be taken seriously if the authorities could suddenly step in and set a derisory price for such

an asset?

The Fed seemed to be confirming that the whole thing was a huge charade, and that values previously regarded as the calculated judgement of the market – the “invisible hand” of economist Adam Smith – could be shredded without a second thought. So the whole exercise was a fraud and the participants in the scam were to be derided and ridiculed, even attacked.

Is this fair? I do not think so. Since the Bear Stearns debacle we have seen some rationality restored to global markets, partly through the concerted efforts of the financiers and bankers themselves, and partly through the actions of the authorities.

In America, where it all began with the sub-prime time-bomb, the system has re-asserted itself. Leading Wall Street bankers have acted decisively to halt the panic; the Fed has made liquidity available to the financial markets, and the slide in share prices has been halted.
 
It was significant that the shareholders of Bear Stearns unilaterally decided that the terms forced on the bank by the Fed in its eagerness to sell it to JP Morgan Chase were just too unrealistic, and a better price was forced out of the buyer.

In Britain, the other market most vulnerable to a credit crisis, the Financial Services Authority acted promptly when one bank, HBOS, became the target of an apparently concerted campaign of short selling, that knocked its share price by almost 30 per cent in a morning’s trading.

Order was restored when the FSA announced it was to launch a serious probe into the HBOS situation. This does not mean we are out of the woods, though the equities markets – the barometers of a financial system’s health – have begun to regain some of the ground they lost since the start of the year.
 
Gulf markets too were on the rise yesterday, partly because foreign investment came back in after weeks of hesitation, but also because the region’s investors are taking seriously the proposition that the Middle East is a safe haven in volatile global markets.

There is a telling line in Meltdown that sums up what has happened to the financial system, its participants and the people who write and broadcast about it: “Funny how commentators discovered a conscience when things went belly-up.” That is what has taken place in the past month of mayhem in the global financial system – we have all discovered a conscience.

 

(Meltdown by Martin Baker is published by MacMillan)


 

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