Turning toxic debt into gold

John Lanchester’s Whoops! would be a wonderful piece of absurdist fantasy, were it not all so appallingly true. With sardonic humour, novelist and journalist Lanchester sets out on a modern day Gulliver’s Travels through the global investment and banking landscape. It’s a world turned upside down where bankers take theoretical models for reality and investors turn fantasies into piles of cash leading to ... well, you know how it ends.

Instead of relying on old-fashioned assessments of risk, such as whether clients would actually be able to repay their bonds, bankers believed they had discovered a philosopher’s stone, which enabled them to turn base investments into gold, thereby defying gravity: what went up no longer had to come down.

They had statistical formulae to back it all up. The only problem was, there were precedents to show that the maths didn’t add up. For example, after the Black Monday crash of 1987, economists calculated that it shouldn’t have happened, that “had the life of the universe been repeated one billion times, such a crash would still have been theoretically ‘unlikely’.” Yet it did happen. These same mathematicians dreamed up the models that were going to protect the banks from large-scale defaults resulting from the reckless lending they’d been indulging in. We know how well that worked.

It is hard to imagine the sheer scale of the crisis. It will cost the US alone $7.76 trillion to bail its banks out – greater, says Lanchester, than “the cost of the Marshall Plan, the Louisiana Purchase, the 1980s Savings and Loan crisis, the Korean war, the New Deal, the invasion of Iraq, the Vietnam war and the total cost of Nasa including the moon landings – added together”.

How was something this devastating allowed to happen? And did nobody see it coming? Well it turns out they did. In 2002, Warren Buffett had likened the new financial instruments that played a large part in bringing the system down to weapons of mass destruction. He was doubly right, observes Lanchester, “because they are lethal, and because no one knows how to track them down”.

Although greed played a role in the disaster, it would be far too glib to lay the responsibility for the whole bang shoot at the feet of bloated bankers. Yes, bankers do deservedly take a fair amount of flak from Lanchester, but his analysis is way more nuanced than that, which is what makes this book so worth reading. Others in the cast include compliant politicians, half-asleep regulators and over-eager borrowers.

As he picks through the smouldering ruins wreaked by derivatives, searching for the origins of the crisis, Lanchester covers a vast amount of territory, making connections between intellectual, social and political developments over the last fifty years. This is a book that goes far beyond the dry details of the market. Indeed, one of Lanchester’s most telling insights is around the culture that made it all possible – the culture of the City of London and of Wall Street, which could see value only in that which was measurable: money. This culture, he points out, has inappropriately come to permeate everything over the last 30 years, from journalism to education and healthcare. Lanchester is not upbeat about the financial collapse, either: he sees signs that, far from being chastened, the bankers are already stocking up for the next party.

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