Gillian Tett
38 μ£¥³¤ ¬μμ¬
sophisticated endeavor, full o cutting-
edge computing power and analysis,
but it ran on a pattern o trust that, in
retrospect, looks as crazily blind as the
faith that cult members place in their
leaders. It should not have been sur-
prising, then, that when trust in the
underlying value o the innovative
Ãnancial instruments started to crack,
panic ensued.BANK
Why did nobody see these dangers?
To understand this, it pays to ponder
that third word, “bank,” and what it (and
the word “company”) says about the
importance o social patterns. These
patterns were not often discussed before
the 2008 crisis, partly because it often
seemed as i the business o money was
leaping into disembodied cyberspace.
In any case, the Ãeld o economics had
fostered a belie that markets were almost
akin to a branch o physics, in the sense
that they were driven by rational actors
who were as unemotional and consistent
in their behavior as atoms. As a result,
wise men such as Alan Greenspan (who
was Federal Reserve chair in the period
leading up to the crisis and was lauded
as “the Maestro”) believed that Ãnance
was self-correcting, that any excesses
would automatically take care o
themselves.
The theory sounded neat. But once
again, and as Greenspan later admitted,
there was a gigantic Áaw: humans are
never as impersonal as most economists
imagined them to be. On the contrary,
social patterns matter as deeply for
today’s bankers as they did for those
Renaissance-era Italian Ãnanciers.
Consider the major Wall Street banks
on the eve o the crisis. In theory, theyan investor would need iÊ he or she
wanted to assess the price and risk o a
²£. He calculated that for a simple
²£, the answer was 200 pages o docu-
mentation, but for a so-called ²£-
squared (a ²£ o ²£s), it was “in excess
o 1 billion pages.” Worse still, since a
²£-squared was rarely traded on the
open market, it was also impossible
to value it by looking at public prices, as
investors normally do with equities or
bonds. That meant that when investors
tried to work out the price or risk o
a ²£-squared, they usually had to trust
the judgment oÊ banks and rating agencies.
In some senses, there is nothing
unusual about that. Finance has always
relied on trust. People have put their
faith in central banks to protect the
value o money, in regulators to ensure
that Ãnancial institutions are safe,
in Ãnanciers to behave honestly, in the
wisdom o crowds to price assets, in
precious metals to underpin the value o
coins, and in governments to decide
the value o assets by decree.
What was startling about the pattern
before the 2008 crash, however, was
that few investors ever discussed what
kind o credit—or trust—underpinned
the system. They presumed that share-
holders would monitor the banks, even
though this was impossible given the
complexity o the banks and the prod-
ucts they were peddling. They assumed
that regulators understood Ãnance,
even though they were actually little
better informed than shareholders.
Financiers trusted the accuracy o credit
ratings and risk models, even though
these had been created by people with
a proÃt motive and had never been
tested in a crisis. Modern Ãnance
might have been presented as a wildly