By Michael Lewis
One of my favorite memories of my brief life on Wall Street in the late 1980s is of Mervyn King’s visit. A year after Professor King -- as I still think of him -- had been my tutor at the London School of Economics, he was tapped to advise some new British financial regulator. As he had no direct experience of financial markets, either he or they thought he’d benefit from exposure to real, live American financiers.
I’d been working at the London office of Salomon Brothers for maybe six months when one of my bosses came to me with a big eye roll and said, “We have this academic who wants to sit in with a salesman for a day: Can we stick him with you?” And in walked Professor King. I should say here that King’s students, including me, often came away from encounters with him feeling humored. He was gentle with people less clever than himself (basically everyone) and found interest in what others had to say when there was no apparent reason to. He really wanted you to feel as if the two of you were engaged in a genuine exchange of ideas, even though the only ideas with any exchange value were his.
Still, he had his limits. The man who a year before had handed me a gentleman’s B and probably assumed I would vanish into the bowels of the American economy never to be heard from again saw me smiling and dialing at my Salomon Brothers desk and did a double take. He took the seat next to me and the spare phone that allowed him to listen in on my sales calls. After an hour or so, he put down the phone. “So, Michael, how much are they paying you to do this?” he asked, or something like it. When I told him, he said something like, “This really should be against the law.”
Roughly 15 years later, King was named governor of the Bank of England. In his decade-long tenure, which ended in 2013, the Bank of England became, and remains, the most trustworthy institutional narrator of events in global finance. It’s the one place on the inside of global finance where employees don’t appear to be spending half their time wondering when Goldman Sachs is going to call with a job offer. For various reasons, they don’t play scared. One of those reasons, I’ll bet, is King.
Professor King -- or, if you must, Baron King of Lothbury -- has now written a book. “The End of Alchemy” isn’t a personal memoir of his tenure at the Bank of England. Actually, King seems disturbed by the idea that he or any other public servant is meant to be the hero of his own tale. “Many accounts and memoirs of the crisis have already been published,” he writes in his introduction. “Their titles are numerous, but they share the same invisible subtitle: ‘How I saved the world.’ ” Instead, King’s book draws on his experience of running a central bank -- and of managing a financial crisis -- to diagnose the ills of modern finance. Oddly enough, if his book gets the attention it deserves, it might just save the world.
King’s starting point is that the 2008 crisis wasn’t an anomaly but the natural consequence of bad incentives that are still baked into money and banking -- and so quite likely to create another, possibly even greater, crisis. “The strange thing,” he writes, “is that after arguably the biggest financial crisis in history nothing much has really changed in terms either of the fundamental structure of banking or the reliance on central banks to restore macroeconomic prosperity.” The limited liability of shareholders still incentivizes them to allow the banks in which they invest to take greater risks than they would if they were forced to live with not just the gains from financial risk-taking but also the losses. Small depositors, whose funds are being turned into risky investments, are still covered by deposit insurance, so they could care less what the bankers do. Big depositors and anyone else who extends credit to banks still believe the bigger the bank the better, as the bigger the bank the greater the likelihood that the central bank will bail them out if things go wrong. (JPMorgan Chase today, King notes, has the same market share as the top 10 banks did collectively back in 1960.) That isn’t to say that nothing has been done, just that what’s been done is disturbingly beside the point.
The financial system, King reveals, is still wired so that a handful of well-connected people capture the benefits from risk-taking while the entire society bears the cost. Complexity was once used to disguise the risk in the financial system. Now it’s being used to disguise how little has actually been done to fix that system. Or, as King puts it, “Regulation has become extraordinarily complex, and in ways that do not go to the heart of the problem. … The objective of detail in regulation is to bring clarity, not to leave regulators and regulated
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