Making It Happen: Fred Goodwin, RBS and the Men Who Blew Up the British Economy by Iain Martin

Making It Happen is the story of the crash of RBS (née Royal Bank of Scotland), momentarily Britain’s largest bank. Iain Martin tells a peculiarly Scottish story in Making It Happen (Martin himself is a Scot): the expansion of RBS was driven by a blend of Scottish pride and insecurity. He takes us through the life history of the Royal Bank (though RBS, as of this writing, is not yet dead). The bank is founded in 1727 in the aftermath of an earlier Scottish financial misadventure, the Darien enterprise: a failed outpost located in present-day Panama. Chastened by this experience, the early masters of the Royal Bank of Scotland exercised prudence of a Presbyterian kind (caution and care) in growing the bank, yet remained open to innovation (such as the use of the joint-stock company) that the English ignored. RBS quietly prospered in Edinburgh, and then the financial world shifted. In short: the Scottish economy was too small to support independent Scottish banks, and so, for RBS to survive, it would need to vault itself to a much larger scale (first UK-wide and then global). Two absolutes are then fixed for RBS: the bank must remain independent and it must be directed from Edinburgh. And this is where the Fred Goodwin story starts.

Fred Goodwin is (if nothing else) devoted to Scotland and hence to building RBS as a Scottish national champion. Goodwin did this is a fairly straightforward way -- he bought other banks (including quite large banks) and proceeded to meld them into the RBS structure. Gains to RBS shareholders -- prototypical raider profits -- resulted from the ensuing ‘rationalizations.’ Goodwin’s fame at slashing employment earned him the nickname ‘Fred the Shred.’ Those who were lucky to remain employed remained exposed to Goodwin’s brutal management style -- such as the daily “morning beatings.”

The Billionaire’s Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund by Anita Raghavan

Forgive me for being thick: after reading Anita Raghavan’s book I had to think a moment in order to name the billionaire’s apprentice. The apprentice has to be Rajat Gupta -- himself a humble multi-millionaire -- who services the only billionaire in view: Raj Rajaratnam, founder of the Galleon hedge fund. Raghavan recalls Goethe’s Sorcerer’s Apprentice in her title to capture Gupta’s doomed adventure. But it is the sorcerer Rajaratnam, and not his apprentice, who brings Galleon crashing down; Gupta is destroyed in the process.

So what did Gupta do? The government taped a compromising phone call by Gupta to Rajaratnam where
Gupta reports the confidential discussions of the Goldman Sachs board (Gupta was then a Goldman director). Gupta was only one of Rajaratnam’s many sources, and it is not clear that his information was that useful. (Rajaratnam argued that he traded on a ‘mosaic’ of information; no one item served as the basis for his actions).

It is hard to dispute that Rajaratnam regularly traded on inside information.  But was all (or most) of Galleon’s fortune built on inside information? I asked the same question in my review of The Buy Side, a tell-all by Galleon-insider Tyler Duff. My question is scientific in spirit, not legal.

The Entrepreneurial State: Debunking Public vs. Private Myths by Mariana Mazzucato

From start to finish of this superb book, I want Mariana Mazzucato to be right. In The Entrepreneurial State, Mazzucato suggests that the state has had a much more powerful role in stimulating innovation that the dominant narrative admits. The state pushes the key breakthroughs; private firms enter the game quite late (though they often capture an inordinate amount of the social gains from innovation).

Mazzucato’s book is timely (indeed, it has had a considerable impact in Brussels), as countries shift away from austerity policies and look towards Keynesian-style spending to get their economies moving. Keynes famously suggested burying a treasure in an abandoned mine as a make-work project (his point, of course, was not to endorse pointless exercise; rather, he meant to show that pure make-work could act as a stimulus). Mazzucato argues countries can improve on Keynes by spending on state entrepreneurship. In a best-case outcome, state-sponsored innovation will shock the economy back to expansion and will lead to frontier-shifting welfare gains.

And maybe it would - if the political class could be convinced by Mazzucato’s account of the hidden state-centric nature of innovation. Her recent historic examples involve pharmaceuticals and information technologies. The private drug development narrative is deliberately cultivated by Big Pharma: bold firms undertake massive R&D in their laboratories, to be rewarded (in the event of success) by patent monopolies. Big Pharma asks to be ‘left alone’ by the State: no tort liability and quick market approvals are the best policies. In fact, Mazzucato observes, it is the state that undertakes the greatest risks in developing new approaches and active agents, through public funding (such as NIH grants in the United States) of medical research. Left to their own devices, Big Pharma would undertake little research; indeed, the current trend among large pharmaceutical firms is to reduce R&D expenditure and to look to smaller, research-oriented firms to do later-stage development work, then in-licensing or acquiring fairly proven projects. But without the substrate of state-funded science, even this system would grind to a half.

The Great Degeneration: How Institutions Decay and Economies Die by Niall Ferguson

The civilized world is falling apart in Niall Ferguson’s view. The world of Ferguson’s concern comprises the United Kingdom and the United States, which (in sequence) have enjoyed long periods at the top. In The Great Degeneration, Ferguson signals the decay afflicting our central and defining institutions. Ferguson mixes nostalgia with alarm: nothing is as it was. Unlike Acemoglu and Robinson, who give an institutional account of why poor countries remain poor in Why Nations Fail (reviewed here), Ferguson tells us why great nations decay, why ours is degenerating.

Although Ferguson distances himself from those who give a purely cultural account for the rise of British and American prominence, he celebrates the particular constellation of democracy, capitalism, rule-of-law and voluntarism found nowhere else. A sequence of accidents may have created our cheerful and wealthy societies. The reduction in the Great Divergence seems to concern Ferguson most: the ratio of our well-being to that enjoyed by the rest of the world (as if a more equitable distribution were a bad thing).

If great (though quirky) institutions served us in the past, their present ‘degeneration’ is a cause for concern. Ferguson divides The Great Degeneration into four short essays, each devoted to an institutional category displaying distinctly Anglo-American characteristics. These are democracy, capitalism, rule-of-law and a civil society marked by voluntarism. The book is a write-up of a series of lectures Ferguson presented on the BBC, summarizing and synthesizing his earlier work. Ferguson’s argues that institutions and not culture were the central determinants of the Great Divergence. Yet he also sees the ‘intergenerational partnership,’ the awareness and the willingness to act publicly on behalf of future generations, as foundational. The better democracy we practiced in the past was wiser; perhaps we didn’t think about our neighbor, but we certainly thought about our grandchildren. (Fear not - the last thing Ferguson will address is climate change - he supposedly believes it a hoax.)

The Buy Side: A Wall Street Trader’s Tale of Spectacular Excess by Turney Duff

The Buy Side is part tell-all, part movie treatment and part self-therapy. Turney Duff presents the rise and fall of a Wall Street trader (Duff himself, or a character resembling him) in the years leading up to the 2007/2008 financial crisis. Duff is well on the way to crashing long before the crisis hits; The Buy Side is a story of self-absorption, addiction and perhaps (though it does not arrive by book end) redemption.

Duff would have us believe that he was one of those Masters of the Universe - magically in touch with the hidden rhythms of the markets, knowing just when to hit the buy or sell button. And his sure-footed ascent is predictable. He deftly passes from sales to the Buy Side - the trading firms who engage the fawning brokers to execute their transactions. The Buy Side may or may not be where the big compensation is - but it’s certainly where the perks lie. And Duff relishes the Buy Side life: imagine buying six extra Yankees tickets in order to take out-of-park smoke breaks.

Duff claims no special savvy; he’s just a party guy who attracts other party guys (and party gals). Somehow this leads to universal admiration and a seven-figure bonus check. I wonder if Duff is calculating in his modesty: it makes a better film. Still he must have had some knowledge of the health-care sector (he was heralded as an expert).

The Lost Continent by Gavin Hewitt

The challenge with European democracy is its constantly shifting notions of demos - who are the people who should exercise political determination. The current Euro crisis - and the ensuing imposition of austerity policies on Greece and Ireland, Spain and Italy - demonstrate a democratic irony. As Gavin Hewitt points out, there is nothing democratic about the adoption of austerity; austerity is not a lifestyle choice struggling countries freely assume. The Euro crisis precipitated changes of government (left to right and right to left) in the affected Member States and fierce popular backlash. Yet Angela Merkel, the physician prescribing austerity to faltering countries, responds to democratic signals given by her German electorate (who balk on bailing out their neighbors). Hewitt constructs a story where the democracy of Germany is pitted against the democracy of Southern and Peripheral Europe. 

The Lost Continent focuses on national stories - and national leaders - and so at times has the feel of a tell-all. Silvio Berlusconi, to no-one’s surprise, comes off the worst. His cynical disregard for anyone’s interest saves his own marks, a new low in post-War Italian politics. Imagine how Angela Merkel felt upon receiving his ‘political’ advice to take on a lover. And even more respectable characters, such as Sarkozy, engage in behind-the-back smirkiness with regard to Merkel. But much of the focus falls on Merkel herself; we’re never quite sure whether she is (as she claims) acting just like a Swabian housewife, guided by common-sense and prudence, or whether she is the instrument of peculiar German obsessions outside her control.

And so The Lost Continent is to a great extent a German story of Europe (the UK barely figures). Germany is able to impose austerity on its EU partners because it is German resources that largely fund the rescue. Germany’s economic primacy permits it an outsized influence in contemporary European affairs - Hewitt and various of his informants note that Germany may be more powerful than ever. Germany has benefited from this new Europe; its products are consumed throughout. Its economic success permitted the reunification of Germany, an enormous political and social success (ironically, Merkel developed her political skills in the East).