MASTERS OF THE UNIVERSE, S L AV E S O F T H E M A R K E T MASTERS OF THE UNIVERSE, SLAVES OF THE MARKET Stephen Bell & Andrew Hindmoor Cambridge, Massachusetts London, England 2015 Copyright © 2015 by Stephen Bell and Andrew Hindmoor All rights reserved Printed in the United States of America First printing Library of Congress Cataloging-in-Publication Data Bell, Stephen, 1954– Masters of the universe, slaves of the market / Stephen Bell, Andrew Hindmoor pages cm Includes bibliographical references and index ISBN 978- 0- 674-74388-5 (alk paper) Banks and banking Financial crises Global Financial Crisis, 2008–2009 International fi nance I Hindmoor, Andrew II Title HB3725.B45 2015 332.109'0511—dc23 2014028185 In memory of Robert Harold Bell and Fan Austin Contents Abbreviations ix Introduction 1 Masters of the Universe Bank Performance in Australia and Canada Getting It Right: Australia and Canada 15 “Slaves” of Markets and Structures 36 Bank Performance in the United States and the United Kingdom 74 126 US Banking: Exciting but Not Very Safe 156 The United Kingdom: Banking and Bankruptcy 198 The Survivors: Why Some Banks in the United States and the United Kingdom Avoided the Carnage 235 259 Bank Reform: Winning Battles but Losing the War? Conclusion 332 References 343 Acknowledgments 383 Index 385 289 Abbreviations ABS asset-backed security ANZ Australia and New Zealand Banking Group APRA Australian Prudential Regulation Authority BCBS Basel Committee for Banking Supervision BMO Bank of Montreal BNS Bank of Nova Scotia CBA Commonwealth Bank of Australia CDO collateralized debt obligation CDS credit default swap CEO chief executive officer CIBC Canadian Imperial Bank of Commerce CLO collateralized loan obligation CMBS commercial mortgage-backed security CRO chief risk officer ED executive director FCIC Financial Crisis Inquiry Commission FDIC Federal Deposit Insurance Corporation FICC fi xed income, currency, and commodities FPC Financial Policy Committee FSA Financial Ser vices Authority FSOC Financial Stability Oversight Council HI historical institutionalism HUD Department of Housing and Urban Development 376 References Syal, Rajeev, Jill Treanor, and Nick Mathiason 2011 “City’s Influence over Conservatives Laid Bare 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“The Ideational Shaping of State Capacity: Winning Battles but Losing the War,” Government and Opposition 49(3) (2014): 342–368, used in Chapter 10; and “Taming the City: Power, Structural Ideas and the Evolution of British Banking,” New Political Economy (forthcoming 2015), also in Chapter 10 Our families learned to live with our fascination with bank balance sheets, credit default swaps, and the intricacies of capital regulation, although, on occasions, we suspect that they sometimes have been humoring us in the hope that we would, eventually, fi nish Which it now seems we have Index Ackerman Josef, 123, 204 Admati, Anat, 313, 314, 325, 326 AIG Financial Products, 122–123 Alexander, Lou, 172 Antoncic, Madelyn, 174 Archer, Margaret, 24, 68 Asset bubble, 3, 73, 93 Asset Protection Scheme, 67, 107 Australia and New Zealand Banking Group (ANZ), 138–140, 155, 260, 262, 263, 273 Australian Prudential Regulation Authority (APRA), 140, 261, 276, 278–285 Bacon, Kenneth J., 161 Bailouts of banks, 66, 126, 314, 321 Balls, Ed, 29, 229, 300 Bank capital, 10, 34, 290–294, 313, 315, 326; capital buffers, 71, 227, 293–294, 298, 307, 312–313 See also Basel capital agreements Bank for International Settlement, 32, 305 Bank of America, 89–90 Bank of England, 48, 102, 106–107, 224, 228, 230–231, 298, 327 Bank of Montreal (BMO), 149–150, 155, 265 Barclays, 66, 79, 84, 103, 116–118, 155, 204, 206, 216, 218, 219 Barwell, Richard, 57 Basel capital agreements, 32–33, 34, 49, 189, 271, 279, 293–295, 296, 305–306 Basel Committee on Banking Standards (BCBS), 312–313 Battellino, Ric, 268 Bear Stearns, 59, 65–66, 86–87, 163, 168, 173, 177, 178, 183 Behavioral fi nance theory, 15–21, 70–73, 184, 298, 335; bounded rationality, 18, 34, 70, 184, 197, 334–335; irrational exuberance/euphoria, 18–20, 164, 308, 326, 334, 340; herding, 19–20, 61–62, 68–69, 326, 340; prospect theory, 19 Bernanke, Ben, 58, 122, 191, 60, 168, 172 Bischoff, Sir Win, 293 Blair, Sheila, 34, 316 Blair, Tony, 229 Blinder, Alan, 83 Bloomberg, Michael, 103 Blundell-Wignall, Adrian, 123 Blyth, Mark, 64, 336, 339 Blythe Masters, 241 BNP Paribas, 59 Board of directors, 180, 185, 199, 217–220, 295 Bond, John, 250 Bonuses and remuneration, 17, 39, 178, 179–180, 215–217, 289, 231, 293 Born, Brooksley, 194 Bosworth, Edward, 272 Bowen, David, 176 Bretton Woods, 4, 31 British Dilemma, 11, 303 Broadbent, Ben, 103 Broderick, Craig, 96 386 Brown, Gordon, 82, 105, 107, 229, 232–233, 292 Buffett, Warren, 169, 206, 240, 244, 245 Buiter, Wilem, Bushnell, David, 171, 176 Cable, Vince, 60, 301, 326 Callan, Erin, 170 Cameron, David, 293, 303 Cameron, Johnny, 111, 201, 208–209, 216–217, 221, 226, 251 Canadian Imperial Bank of Commerce (CIBC), 150–152, 265, 270 Capel, James, 252 Cassano, Joseph, 122, 176 Cayne, Jimmy, 177, 180, 183 Citigroup, 7, 54, 87–89 Clark, Ed, 147, 275 Clegg, Nick, 301 Cohan, William, 96, 168, 177, 235, 249 Cohn, Gary, 180, 250 Coles, Adrian, 200, 202 Collateralized debt obligations (CDOs), 44–49, 54, 56, 62, 140–141, 162, 169–176, 184–185, 189–190, 313–314 Collective action, 69, 302, 309 Commodity Futures Modernization Act, 194 Commonwealth Bank of Australia (CBA), 135–136 Competition in banking markets: competiveness, 3–4, 30–31, 36, 38–39, 127–128, 158–162, 199–200, 202, 204–205, 261–265, 302, 304–308, 328–338; four pillars policy in Australia, 128, 142, 262–264, 287–288; mergers and acquisition, 159, 186, 200, 260 Congdon, Tim, 102 Costello, Peter, 277 Cox, Christopher, 194 Credit default swaps (CDS), 49–50, 122, 207, 241 Credit rating, 44–45, 62–63, 188–189, 334; AAA rating, 17, 189–191, 207–209; credit rating agency, 61–63, 170, 189–191, 296; bank credit rating, 132–133, 269 Crittenden, Gary, 176 Crosby, James, 202, 210 Culpepper, Pepper, 300 Cummings, Peter, 114, 204, 210, 216, 219 Daniels, Eric, 115, 255–257 Darling, Alistair, 115, 225, 233, 292, 293 Index Dawson, Jo, 214, 219 Del Misser, Jerry, 206 Department for Housing and Urban Development (HUD), 195 Depository and Monetary Control Act, 76 Derivatives, 12, 40, 49–52; exchange, 50, 103, 318; interest rates, 50 See also Collateralized debt obligations (CDOs) Diamond, Bob, 116, 118, 206, 209, 211, 219 Dickson, Julie, 281–283 Dimon, Jamie, 237, 238–242, 333 Dodd-Frank Wall Street Reform and Consumer Protection Act, 295–297, 303–325 Dodge, David, 267 Duhon, Terry, 241 Economic Growth and Regulatory Paperwork Reduction Act, 76 Edwards, Jeffrey, 172 Edwards, John, 131, 273 Eisman, Steve, 169 Ellis, Mike, 202, 208 Emanuel, Rahm, 292 Eslake, Saul, 268, 273 Fakahany, Ahmass, 185 Falcon, Armando, 195 Fannie Mae and Freddie Mac, 42, 43, 48, 49, 59, 78, 93–95, 160, 161, 194–195 Farrell, Greg, 185 Federal Deposit Insurance Corporation (FDIC), 34, 75–79, 91, 296, 316 Federal Reserve, 41, 57, 78–79, 194, 297 Financial complexity, 25, 60–61, 186–187, 308–320, 330–331 Financial innovation, 24–27, 42–45, 302–304 Financialization, 4, 26 Financial Policy Committee (FPC), 294, 295, 314, 316 Financial Services Act, 102 Financial Services and Markets Act, 225 Financial Services Authority (FSA), 199, 200, 203–230, 298, 316 Financial Stability Oversight Council (FSOC), 297 Financial transactions tax, 329–330 Fischer, Stan, 222 Fish, Larry, 221 Fisher, Richard, 324 Fleming, Greg, 163 Index Flint, Douglas, 253 France, 9, 302, 329 Franks, Julian, 220 Friedman, Paul, 167, 168, 183, 196 Fuld, Dick, 84, 159, 163, 165, 169, 172, 174, 175, 181 Garnaut, Ross, 131–132 Garn–St Germain Act, 76 Geithner, Timothy, 66, 179, 192, 299, 306–307, 320 Gelband, Mike, 174, 175, 184 Geoghan, Mike, 250 Germany, 302, 304, 336 Gieve, Sir John, 105, 115, 205, 231, 251 Gilleran, James, 194 Glass-Steagall Act, 76–77, 322–323 Godley, Wynne, 170 Goffman, Erving, 174 Goldman Sachs, 46, 95–98, 161–163, 246–250 Goode, Charles, 139, 263, 269 Goodhart, Charles, 64, 321, 328, 330, 331 Goodlet, Clyde, 261, 277 Goodwin, Fred, 110, 204, 207, 209, 211, 214–215, 218–219, 221 Government/sovereign debt, 67, 336, 338 Gowan, Peter, 102, 328 Grafton, David, 263, 272, 280 Gramm-Leach-Bailey Act, 76 Greece, 68, 336 Green, Stephen, 84, 250, 251, 253–255 Greenspan, Alan, 18, 20, 28, 39, 54, 57, 63, 164, 167, 187, 191, 193, 197, 206, 289 Greenwich Capital Markets, 103 Gregory, Joe, 174 Haldane, Andrew, 39, 41, 52, 69, 167, 201, 221, 223, 232, 299, 304, 306, 308, 314, 321–322, 325, 339 Hampton, Phil, 256 Harper, Ian, 273–274, 281 HBOS, 7, 106, 112–114, 202–204, 208, 210–211, 213, 216, 218, 219 Hedge funds, 38, 55–66, 297–298 Hellwig, Martin, 34, 39, 43, 312–314, 324–326 Hester, Stephen, 218 Hickman, Peter, 218 Higgins, Benny, 203 Hodgkinson, Phil, 208 Hong Kong, 118, 121, 263, 300–301 Hornby, Andy, 210–211, 216 387 Housing: subprime mortgages, 37, 42–45, 56–64; real estate market/housing market, 45–49, 285; housing regulatory policy, 78, 279, 285–286; bubble, 85, 156, 233, 335 Housing and Economic Recovery Act, 78 HSBC, 118–120, 250–255 Huang, Rocco, 66, 153, 269 Huertas, Thomas, 228 Independent Commission on Banking (ICB), 295, 300, 310, 321 Institute for International Finance (IIF), 312 Institutionalism, 6, 21–22, 24–25, 338, 196, 287; agent-structure interaction, 6–9, 16–17, 22–27, 68–70, 260–261, 335; historical institutionalism (HI), 6, 15, 21, 288, 334, 338–340; institutional constraint, 16, 196, 338; agent-centered HI, 17, 20, 73, 288, 340; constructivist, 17, 22; interconnectedness, 26, 62, 72, 306, 315, 328, 330; interdependencies, 26, 62, 306, 334–335; institutional conditioning, 287 Interest rates, 31–32, 27, 28, 41, 43, 57–58, 76, 102, 285 International Monetary Fund (IMF), 28 Investment banks, 40, 51, 77, 78, 159, 160–162, 260, 274, 293, 297–298 Israel, 9, 222, 263 Italy, 68, 336 Japan, 9, 93, 302, 336 Jenkinson, Nigel, 231 Johnson, Simon, 29, 267–268 JP Morgan Chase, 33, 66, 87, 98–99, 237, 238–243 Kahneman, Daniel, 18 Kaufman, Henry, 181 Keen, Stephen, 170 Kelleher, Dennis, 316 Kelly, Gail, 137 Keynes, J M., 328; Keynesianism, 26 Kim, Dow, 85, 162, 173 King, Bill, 241 King, Mervyn, 28, 42, 112, 215, 222, 227, 229, 231, 292, 295, 308, 310 Kirk, Alex, 175 Knight, Eric, 254 Kovacevich, Richard, 244–245 Kronthal, Jeffrey, 184 388 Krugman, Paul, 46, 143 Kurer, Peter, 208 Kynaston, David, 199 Laker, John, 273–274, 278–279 Lall, Ranjit, 312–313 Large, Andrew, 230–231 Lehman Brothers, 65, 82–84, 118, 151–152, 162, 163, 172, 174–175, 183–184 Le Pan, Nicholas, 152, 282 Leverage in banks, 4, 38, 39–40, 52–56, 64–65, 67, 78, 105, 129, 143, 282–283, 294, 296, 310, 313–314 Levin, Robert, 160 Lewis, David, 279 Lewis, Ken, 169 Lewis, Michael, 169 Liberalization and deregulation, 3–16, 25–26, 29–41, 126–128, 272, 336 Liquidity, 297; illiquidity, 4, 33, 42, 60, 231–232, 247; liquidity crisis, 8, 41, 64, 69, 71–72; liquid assets, 37, 113, 232; countercyclical, 298 Littrell, Charles, 278, 280–281 Lloyds Banking Group, 114–116, 200–201, 208, 255–257 Lobbying/lobbyist, 10–11, 32–33, 195–196, 309–319 Lockhart, James, 195 Long-Term Capital Management hedge fund, 86 Longworth, David, 266, 284 Lucas, Robert, 233 MacFarlane, Ian, 263, 269 Mack, John, 92, 159, 162, 171, 180, 187, 307, 333 Maheras, Tom, 171, 182, 187 Maines, Franklin, 195 Matthewson, George, 211 McAnulla, Stuart, 68 McCarthy, Sir Callum, 228–229 McDonald, Duff, 46, 48 McDonald, Lawrence, 82 166, 172, 175, 180 McGee, Suzanne, 51, 169, 175, 194 McKillop, Sir Tom, 206, 218, 223 McNab, Greg, 274–275, 283 Merrill Lynch, 47, 51, 63, 84–86, 162, 172–173, 177, 178, 180–181, 184, 185, 186, 188 Milne, Alistair, 59, 73 Index Minsky, Hyman, 38 Molinaro, Sam, 183 Moore, Paul, 213–214 Morgan, David, 273 Morgan Stanley, 92–93, 162 Mozilo, Angelo, 170 Mudd, Daniel, 161, 195 Myners, Paul Lord, 219, 224, 226 National Australia Bank (NAB), 140–141, 261, 270–271 Nestor, Stilpon, 211 New Century, 58, 146 Nixon, Gordon, 145 Obama, Barack, 292, 296, 303, 311 Office for Federal Housing Oversight (OFHO), 195–196 Office for the Controller of Currency (OCC), 175–176 Office of the Superintendent of Financial Institutions (OSFI), 261, 281–284 Office of Thrift Supervision (OTS), 193–194 Oman, Mark, 243 O’Neal, Stanley, 84, 162, 163, 177, 179, 181, 184, 185, 186, 188 Osborne, George, 11, 303, 323 Oster, Alan, 280 Palmer, John, 278 Pandit, Vikram, 181 Paulson, Hank, 58, 97, 192 Paulson, John, 170 Perman, Ray, 199, 202–203, 218–220, 223, 229, 277 Peston, Robert, 205, 208, 228 PIMCO, 235, 169 Portugal, 68, 336 Power, 68–70, 291–292, 300–301; ecosystemic, 68, 70; structural, 69, 299, 301, 330 Prince, Chuck, 89, 160, 168, 171, 181–182, 190, 237 Profit and return on equity (ROE), 39, 53, 77, 79, 104, 105, 107, 129, 133, 142, 143, 200, 202 Proprietary trading, 40, 49–51, 279, 297, 317–324 Prudential Regulatory Authority (PRA), 228, 294–295, 313 Purcell, Philip, 92, 162, 237, 333 Index Qatar Investment Group, 63 Ranieri, Lew, 42, 169 Ratnovski, Lev, 269, 66, 153 Regulation, 3–7, 29–32, 191–194, 260, 277–288, 308–311, 316–320; deposit protection schemes, 5, 30, 41, 75–76, 314; self-regulation by banks, 34, 224; light touch regulation, 199, 225–229, 278, 289, 293, 312; macroprudential regulation, 227, 284, 290, 298–299, 323–324 See also Basel capital agreements Reserve Bank of Australia (RBA), 130–131, 132, 135, 136, 278, 285 Riegle-Neal Act, 76 Ring-fencing, 295, 310, 317, 321–324 Risk: bank management of risk, 34, 166–189, 212–213, 239–252, 276; dispersal of risk, 47, 157, 197, 205, 231; systemic risk/systemic stability, 56–73, 156–157, 290–298, 325, 327–336; value at risk (VaR), 166–167, 207; credit risk, 192, 207, 231, 280, 305 Rixen, Thomas, 55, 302 Rogoff, Kenneth, 73, 317 Rosenberg, David, 184 Roubini, Nouriel, 41, 170 Routledge, Peter, 151–152, 265, 270 Royal Bank of Canada (RBC), 145–146 Royal Bank of Scotland (RBS), 109–112 Rubin, Robert, 97, 180–182 Salz, Sir Anthony, 204, 214, 218 Sancts, Hector, 225 Sawers, Rick, 44 Schapiro, Mary, 319 Secondary Mortgage Enhancement Act, 76 Securities and Exchange Commission (SEC), 54, 75 Securitization, 4–12, 42–46, 47–72; mortgage-backed securities (MBSs), 2–3; trading in securitized assets, 10, 40, 74–75; super-senior assets, 28, 45; asset-backed securities (ABSs), 42; originate and distribute, 46–49, 124, 181, 205–206, 210, 334 See also Collateralized debt obligations (CDOs) Seegers, Frits, 211 Semerci, Osman, 162, 184 Shadow banking system, 5, 54–55, 63, 128–129, 132, 290, 320–321, 328 389 Singapore, 121, 263, 300 Smith, Mike, 139 Snow, John, 193 Spain, 9, 336 Sparks, Daniel, 248, 250 Special investment vehicle (SIV), 33, 54–55, 86, 98, 121, 240 Spector, Warren, 173, 183 Standard Chartered, 121, 236 Stewart, John, 271 Streeck, Wolfgang, 6, 24, 25, 31, 40 Studzinski, John, 252 Stumpf, John, 243, 244, 245 Summers, Lawrence, 192, 194 Switzerland, 124, 304 Syron, Richard, 166, 195 Tarullo, Daniel, 327 Tett, Gillian, 49, 61, 169, 178, 182, 187 Thelen, Kathleen, 22–23 Thompson, Graeme, 278 Thompson, Helen, 195 Thurston, Paul, 253 Tookey, Tim, 115, 255 Toronto-Dominion (TD), 146–148 Tourre, Fabrice, 249 Troubled Asset Relief Program, 79 Turner, Adair, Lord, 32, 225, 227, 291, 293, 298, 303, 311, 321, 328 328 Turner, Dennis, 119, 251, 254 Turner Review, 293 Tyrie, Andrew, 322 UBS, 123–124, 212–216 Varieties of capitalism, 287–288 Varley, John, 204, 207, 219 Veverka, Mark, 100 Vickers, Sir John, 222, 295, 310 Viniar, David, 96, 248, 250, 318 Volcker, Paul, 169, 302, 322 Volcker rule, 297, 316–319, 321, 324 Wachovia Corporation, 90–92 Walker, Sir David, 201, 217, 225 Wallis inquiry, 128, 262, 273, 278 Walter, Elisse, 315 Warren, Elizabeth, 311 Washington Mutual, 66, 98, 99, 177 Weill, Sandy, 222, 322 Weir, Helen, 208, 255 Wells Fargo, 91, 100–101, 243–246 390 Westpac, 136–138, 272, 273 Whitney, Meredith, 170 Whitson, Keith, 250 Wholesale funding markets and bank borrowing, 66, 69, 78, 116–125, 126–136, 140–155, 211, 269, 306–307 Wigley, Robert, 293 Index Williams, Mark, 87, 163, 178 Winters, Bill, 240–242 Wolf, Martin, 313, 322 Wolin, Neil, 292 Wrobel, Marion, 265, 283 Zubrow, Barry, 239 .. .MASTERS OF THE UNIVERSE, S L AV E S O F T H E M A R K E T MASTERS OF THE UNIVERSE, SLAVES OF THE MARKET Stephen Bell & Andrew Hindmoor Cambridge, Massachusetts... Stephen Bell and Andrew Hindmoor All rights reserved Printed in the United States of America First printing Library of Congress Cataloging-in-Publication Data Bell, Stephen, 1954– Masters of the universe,. .. MBS mortgage-backed security NAB National Australia Bank NED nonexecutive director OCC Office of the Comptroller of the Currency OFHO Office of Federal Housing Oversight OSFI Office of the Superintendent