It’s a Wonderful Life: thoughts on banks and ethics

Our annual Christmas Eve ritual: escaping Pottersville to spend 90 minutes in Bedford Falls.  We join the audience packing the Philharmonic Hall to watch It’s a Wonderful Life, a film that has gained resonance since the banking crash of 2008.

But wait – isn’t the hero of this film a banker? Ah, yes, but the Scrooge-like villain,  Henry F. Potter is a banker, too – albeit of a rather different cut. But what kind of banker is George Bailey?  Watching the film, I found myself musing on this, perhaps as a result of having just finished John Lanchester’s brilliant account of the origins of the credit crunch in 2008, Whoops!: Why everyone owes everyone and no one can pay.

Because what lies at the heart of Frank Capra’s film – dressed up in the admittedly sentimental Christmas angel story – is the same question that Lanchester pursues in his book: What are banks for and what social purpose do they serve?

Potter represents the malignant, rapacious side of banking, while Bailey Building and Loan is a bank that is responsible and benevolent, and serves the needs of the local community. This dichotomy is presented most clearly in what is, perhaps, the best scene of the film and the one that most people recall most vividly: the bank run.

George Bailey has just married his childhood sweetheart Mary. As they are leaving town for their honeymoon, they witness a run on the bank that leaves Bailey Building and Loan in danger of collapse. The couple quell the depositors’ panic with a personal bail-out –  the $2,000 earmarked for their honeymoon. George gets up and makes a speech that defines the ethics of socially responsible banking:

Now wait…now listen…now listen to me. I beg of you not to do this thing. If Potter gets hold of this Building and Loan, there’ll never be another decent house built in this town. He’s already got charge of the bank. He’s got the bus line. He got the department stores. And now he’s after us. Why? Well, it’s very simple. Because we’re cutting in on his business, that’s why. And because he wants to keep you living in his slums and paying the kind of rent he decides. Joe, you had one of those Potter houses, didn’t you? Well, have you forgotten? Have you forgotten what he charged you for that broken-down shack? Here, Ed. You know, you remember last year when things weren’t going so well, and you couldn’t make your payments? You didn’t lose your house, did you? Do you think Potter would have let you keep it? Can’t you understand what’s happening here? Don’t you see what’s happening? Potter isn’t selling. Potter’s buying! And why? Because we’re panicking and he’s not. That’s why. He’s picking up some bargains. Now, we can get through this thing all right. We’ve got to stick together, though. We’ve got to have faith in each other.

In a little lesson on balance sheet accounting, George explains to the crowd that their money isn’t at Bailey Building and Loan:  it’s invested in another person’s house and another’s loan.  ‘You’re thinking of this place all wrong’, he says. ‘Your money is in Joe’s house, that’s right next to yours and in the Kennedy house and Mrs. Macklin’s house and a hundred others. You’re loaning them the money to build and they’ll pay it back’.

Bailey Building and Loan survives because George and Mary and all the depositors of Bailey’s Building and Loan stick together; the bank is saved by contributions from ordinary townspeople. In the 2007-8 remake, it was pretty much the same thing, but on a vaster scale: governments bailed out the banks, using taxpayers’ money. When the big banks required a ‘guardian angel’, they got a bailout, but they were not George Bailey nor are they any longer an integral part of local communities like Bailey Building and Loan was in Bedford Falls.

Remember how it all kicked off, back in September 2007?  The UK’s 5th largest lender Northern Rock experienced a good old fashioned bank-run. People expecting Northern Rock to become insolvent camped outside overnight. The Bank of England had to step in and promise to provide liquidity to Northern Rock, which was taken into public ownership.

It’s pertinent to recall that moment, because Northern Rock was, like  Bailey Building and Loan, a former building society (they call them Savings and Loans in the States), with its roots in the 19th century heyday of building society formation.  Savings and Loans or building societies emerged in the 19th century as small banks that accepted cash deposits from customers and made loans to borrowers in the community, replacing the extended family as a source of capital.  They were democratic in a way that banks were not since they were ‘mutual’ – the depositors controlled the investment strategy deployed by management.  In their UK heyday, there were hundreds of building societies, with just about every town in the country having a building society named after the town.  In contrast, equity investors (such as Potter), usually with no connection to the deposit community, controlled the management of banks.

Borrowers and depositors seem to have genuinely respected these institutions, because the interests of the bank were at one with the local community on which it depended. But It’s a Wonderful Life reminds us that not all banks are so constituted.  Potter, the greedy banker, stokes the run on Bailey Building and Loan, by offering depositors 50 cents on the dollar for their shares (and, later in the film, causes the second, climatic crisis by stealing some of Bailey’s cash).  Unlike Bailey, Potter sees Bedford Falls as a resource to exploit for his own gain.  If he could eliminate Bailey’s, he would  monopolize both the local banking and housing markets and use his market power to grind the faces of the poor.

George has earlier established Bailey Park, an affordable housing project. The residents no longer have to pay extortionate rents to slum landlord Potter, who as the majority shareholder in Bailey Building and Loan, tries to persuade the board of directors to stop providing home loans to the working poor. George talks them into rejecting Potter’s proposal, but it’s at the cost of his dream of leaving Bedford Falls to pursue a college education.The board agree only on the condition that George himself run the Building and Loan.

This episode, too, has its parallels in the events of the credit crunch.  In Whoops! John Lanchester describes in the most intelligible and entertaining manner how the creation by financial engineers of new mathematical formulas underpinned the explosive growth of credit default swaps that seemed to magic away any risk involved in advancing mortgages to people without the means or inclination to repay.  Without the risk, these sub-prime loans, with their high interest rates, became deeply attractive.  In the book, Lanchester quotes a lawyer trying to protect home-owners caught up in the American foreclosure hurricane:

Remember It’s a Wonderful Life?  It’s not like that any more.  They don’t care about you.  If they did, they wouldn’t give you a $300,000 loan if you didn’t have a job and had no chance of paying it back’.

Except Potter would have – if credit default swaps had existed back in the 1930s; and, if they had fallen behind on their repayments, he’d have foreclosed:

– Times are bad, Mr. Potter. A lot of these people are out of work.

– Then foreclose!

– I can’t do that. These families have children.

– They’re not my children

– But they’re somebody’s children, Mr. Potter.

– Are you running a business or a charity ward?

But there is one crucial way in which it’s not like the film any more: there are very few building societies left.  In explaining the roots of the present crisis in Whoops!, Lanchester winds the clock right back to 1980s. In that decade, the end of the Cold War and the collapse of communism, coupled with the re-emergence of a virulent form of free market economic promoted by Thatcher and Reagan,  produced a climate – ‘a victory party of free market capitalism’.  That climate underpinned the deregulation and privatisation mania of the following two decades – one notable feature of which was the demutualisation of the building societies, now free to offer any of the banking services provided by normal banks.  As John Lanchester puts it in Whoops!:

It began with Northern Rock, done in by Britain’s first bank run in 150 years. The bank was a demutualised former mutual society. It had adopted a groovy, go-go financial strategy: only 27 per cent of its funds came from money deposited in its accounts by savers; the rest came from short-term borrowing, on an as-and-when-needed basis, from the international money markets. When those markets choked up the Rock sought emergency funding from the Bank of England, which acted too slowly and by doing so triggered the run on the Rock, which led, after a certain amount of governmental faffing about, to its nationalisation on 17 February.

Note that the Rock wasn’t destroyed by risky lending. Some of its loans were risky: a banker contact of mine told me that there was trouble with a ‘book’ of mortgage loans for 120 per cent of the value of homes. (Why would any sane person want to borrow 120 per cent of the value of the thing they wanted to buy? I can just about answer that question: because they want to do the place up, or spend the extra on a new car, and because all parties involved are mortally certain that the price is going to go up. But it’s still crazily reckless. Why would any sane lender lend the money? No idea.) But while loans like this did nothing to help the Rock, what ruined the bank was its exposure to the now malfunctioning money markets.

If you want a book that will explain derivatives, leveraging ratios,the difference between a CDO and a CDS, the significance of the Var statistical tool, and many other arcane mysteries of the banking stratosphere that contributed to the great crash of 2008, in a highly readable and often humourous manner that even enumerate people like me can grasp, then Whoops! is the book to read. Lanchester’s book reveals clearly how the mathematical models that the ‘quants’ working for the big banks developed in the 1990s were a mistake that ultimately led to the 2008 collapse. They were a mistake because they violated practical common-sense rules of risk management; they proved a disaster because neither the bankers themselves nor the regulators properly understood them.

In summary, Lanchester’s analysis is that ‘the credit crunch was based on a climate (the post-Cold War victory party of free market capitalism), a problem (the sub-prime mortgages), a mistake (the mathematical models of risk) and a failure, that of the regulators’.  He is explicit about the crucial importance of contemporary banking culture – Potteresque in its brutal, money-grubbing lack of ethics:

Doctors don’t, for the most part, pride themselves on saying, ‘What the hell, nobody’s looking, so I’m just going to reuse this dirty needle.’ … But the culture of modern banking is not like that; in fact, it’s close to the opposite of that.  The bankers’ slogan is something closer to ‘We’re not that fussed about safety, because if we have an accident, it’s you who pays’.

Lanchester illustrates this point with the most spectacular example:

Goldman Sachs … went from having to end its status  as an investment bank and take federal support, in September 2008, to declaring all-time record profits – with bonuses to match – in July 2009.  The bank which would have gone under without government help, and had to borrow $10 billion from the taxpayer, was less than a year later setting aside $16.8 billion in pay, bonuses and benefits for itself.

He concludes that the Anglo-Saxon model of capitalism has failed – it only survives because of the huge government bailouts.  ‘The amount of state intervention in the US and UK at this moment is at a level comparable with wartime.  We have in effect had to declare war to get us out of the hole created by our economic system. … It is a 100 per cent pure form of socialism for the rich’.  Two decades after the end of the Cold war, capitalism, Lanchester says, ‘has found a deadly opponent; but the problem is that the opponent is capitalism itself’.

Back in the 1940s, there were some who perceived that It’s a Wonderful Life amounted to more than a syrupy, feel good Christmas film.  The May, 1947 FBI memorandum to the McCarthy committee concerning Communist infiltration of the motion picture industry stated:

In addition, [redacted] stated that, in his opinion, this picture deliberately maligned the upper class, attempting to show the people who had money were mean and despicable characters. [redacted] related that if he made this picture portraying the banker, he would have shown this individual to have been following the rules as laid down by the State Bank Examiner in connection with making loans. Further, [redacted] stated that the scene wouldn’t have “suffered at all” in portraying the banker as a man who was protecting funds put in his care by private individuals and adhering to the rules governing the loan of that money rather than portraying the part as it was shown. In summary, [redacted] stated that it was not necessary to make the banker such a mean character and “I would never have done it that way.”

In Whoops!, Lanchester kicks around some ideas about where we go now. Tighter regulation of banks, splitting ‘casino banking’ off from what he calls the ‘piggy bank’ role (something like the service provided by George Bailey), transparency with regard to pay and rewards and the ratio of pay between top and bottom, and so on. Perhaps most dramatically he argues that if a bank receives any taxpayers’ money, the existing shareholders should be wiped out. That’s what happens, he argues to investors in other institutions: if the firm you’ve bought shares in goes broke, you lose your money.  At the moment, it doesn’t happen with banks (because of the ‘too big to fail’ problem).  But, Lanchester argues, this simple and  brutal change in the law would ensure that banks managed their risks properly.

Maybe, I thought as I watched James Stewart fight to save his community bank, we should have a re-mutualisation process, re-establishing the concept of the building society.  Or, as Will Hutton proposed in his 1995 bestseller The State We’re In, a German-type system of regional banks that would demonstrate commitment to local industry by investing for the long term, rather than for short term profit. Then there’s the credit union model: cooperative financial organisations that are owned and controlled by their members, providing credit at competitive rates, and often furthering community development. At the end of 2010 there were 52,945 credit unions in 100 countries around the world. Collectively they served 188 million members and oversaw $1.5 trillion in assets.

In the end, in It’s a Wonderful Life, George Bailey represents the triumph of  ‘good’ capitalism over the predatory capitalism of  Potter, who espouses the philosophy of the rampant free market at its most rapacious. Potter almost succeeds. But Bailey’s customers recognise that his loyalty to them and their families and to the community of Bedford Falls means more than the get rich at any cost philosophy of Potter. In the memorable closing scene they flock back to the bank with their deposits.  The film’s closing line – ‘to George Bailey, the richest man in town’ – appeals to something buried deep within us – an understanding that real wealth cannot be measured in terms of money.

Lanchester concludes Whoops! on a similar note, re-emphasising his argument about the cultural roots of the crisis. But though he makes the point that a tiny minority of rich people were directly responsible for financial shenanigans behind the crash, and that everyone else is having to pick up the bill, he goes further.  He quotes ‘the greatest economist who ever lived’, John Maynard Keynes, in an essay he wrote in 1930 ‘Economic Possibilities for our Grandchildren’:

The love of money as a possession – as distinguished from the love of money as a means to the enjoyments and realities of life – will [in a century’s time] be recognised for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disorder.

For himself, Lanchester concludes:

Free-market capitalism’s victory party lasted for two decades: now it’s time to slow down, calm down and decide how to make the finance industry back into something which serves the rest of society, rather than predating on it.  And the level of our individual response is just as important. On that level, we have to start thinking about when we have sufficient – sufficient money, sufficient stuff – and whether we really need the things we do, beyond what we already have.  In a world running out of resources, the most important ethical and political and ecological idea can be summed up in one simple word: ‘enough’.

As we file out from It’s a Wonderful Life, it’s this truth, I think, that Frank Capra’s film speaks to – and to a yearning by its audience for life in 2012 to be a bit more akin to Bedford Falls and a lot less like Pottersville.  But here’s the rub: Potter keeps the $8000 he stole!  At the core of a film some regard as sentimental is a cold, hard, harsh truth.

See also

7 thoughts on “It’s a Wonderful Life: thoughts on banks and ethics

  1. Watching ‘It’s A Wonderful Life’ is our Christmas Eve ritual, too!

    My, but that Banksy image is powerful.

  2. Gerry, thank you for all the wonderful stimulating blogs that I have read so far, there is a lot more for me to go at and digest, but just how do you find the time to do such a great job? It’s good to know that there are people out there who share a somewhat similar view of the world and yet find such diverse and yet cohesive subjects that can throw in a curve ball and yet see human beings and the world for what it really is, even if the view is murky and somewhat frightening, as much as it is for us, more so for generations to come.

    There are a million and one books, essays, TV and motion picture films, radio programmes and any number of papers and discourses, all eloquent and relevant to the times we live in, 99 per cent of which I will never read, see or hear and many of these strive to show who we are, where we have come from and with trepidation, but perhaps with hope, where we are going. The really revealing ones peel back the shallow skin of our everyday lives and seek to scrape out the underbelly of who and what we are, to reveal universal and enlightening truths.

    Perhaps I may be allowed to add a few meagre thoughts, though original and mine they are not.

    I was fortunate this year, to attend a writing course, at which one of the tutors was Jay Griffiths, the author of ‘Wild’ and she has a view on the world which is perhaps odd, strange, maybe even radical to some, but she is an advocate of wildness, the wildness in the outside world, the very real wild world and the one within, in our wonderful brains, and she holds the view that we must cling onto these and retain them, even utilise them before everything we value is homogenized and lost, though the inevitability of time will surely wipe out all that nature and man has built. We chatted often about the connections between us all, as in the Chinese proverb,

    “An invisible red thread connects those who are destined to meet regardless of time, place or circumstance. The thread may stretch but it will never break”,

    and how, when writing, we should strive to reflect the universal in the personal, by following your idiosyncrasy and not to be put off by those who would mock and belittle you. History is littered with people who were persecuted for their beliefs, some here on these pages, but who were later proved ‘right’. As Schopenhauer said, ‘All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.’

    To that end there are a few pieces from which I would like to take some ideas, to perhaps offer something both hopeful and yet practical in seeing a way forward.

    One is from a book called, ‘The Philosopher and the Wolf’ by Mark Rowlands, a wonderful story of his relationship of 11 years with a beautiful wolf called Brennin. Mark brings to life through this relationship, our inner demons, our inner workings, our motivations and the drive within us. He quotes from Milan Kundera’s book ‘The Unbearable Lightness of Being’,

    ‘True human goodness can manifest itself, in all its purity and liberty, only in regard to those who have no power. The true moral test of humanity (the most radical, situated on a level so profound that it escapes our notice) lies in its relations to those who are at its mercy: the animals. And it is here that exists the fundamental failing of man, so fundamental that all others follow from it’.

    We are simian and seemingly can never escape our apelike, competitive, sometimes warlike ways and as such we seek out weakness in others in order to exploit them and feather our own nests at the expense of those who we regard as inferior. I’m not demonising the human race here, I am just trying to acknowledge who I am and seek like many, to find a way through the carnage of the beauty and wreckage we have created, for a more peaceful existence that we know instinctively is within us and which we grasp just fleetingly when our aim is good and true.

    In 1894 a man called Ernest Thompson Seton lured trapped and killed a wolf called Lobo. He sat down later and with a heavy heart wrote many words about it, but the most significant word he wrote was the simplest yet the most profound. ‘WHY?’ He had an epiphany and went on to kill no more and in David Attenborough’s view become a founding father of conservation and the leading light in founding ‘The Boy Scouts of America’ and the preservation of Indian culture. Seton’s own thoughts he summarised thus,

    “Ever since Lobo”, Seton later wrote, “my sincerest wish has been to impress upon people that each of our native wild creatures is in itself a precious heritage that we have no right to destroy or put beyond the reach of our children.”

    Mark Rowlands perhaps offers an answer of some sort to that ‘why?’
    He quotes an old medieval philosophers phrase, which is ‘both beautiful and important’; ‘sub specie aeternitatis’ – ‘Under the gaze of Eternity’, in that we, rather like that first photograph of ‘Earthrise’ taken from the orbit of the Moon, should when necessary, have the foresight to be able to ‘draw back’ and seek to acknowledge our humbleness and humanity, both for ourselves, each other and the life on this planet that hangs in the balance and to recognise our place in the scheme of things. I think within that phrase there may also rest a warning.

    The other thought in contrast to the scale of the sweep of the previous one and yet in harmony with it, was used by the author Kurt Vonnegut in a speech he gave in 1982 at St. John the Divine Cathedral, New York in 1982. It’s a little dated in its references, yet still holds up in its intent, its dark humour and its search for a profound and beautiful truth.
    Here is the link to that speech.

    http://lacusveris.com/FatesWorseThanDeath/

    The phrase, at the risk of being a ‘spoiler’ for the whole speech, that Vonnegut quotes, is, in its infinitely small scale and everyday applicability and its simplicity, both startling and sublime, seeming to be Zen like and accepting of our human condition and is to be used when confronted by conflict, insult and the temptation to revert to our dark simian ways. It asks us to stop and consider and move on with grace.

    ‘Nothing is lost save honour’

    Simple and poetic and perhaps poetry should have the last word. Here is Robert Ardrey again,

    “We were born of risen apes, not fallen angels, and the apes were armed killers besides. And so what shall we wonder at? Our murders and massacres and missiles, and our irreconcilable regiments? Or our treaties whatever they may be worth; our symphonies however seldom they may be played; our peaceful acres, however frequently they may be converted to battlefields; our dreams however rarely they may be accomplished. The miracle of man is not how far he has sunk but how magnificently he has risen. We are known among the stars by our poems, not our corpses.”

    I thank you for your attention.

  3. Les – I thank you for your generous comments on the blog, and I’m truly honoured to host such a deeply-felt and thought-provoking response. You have given myself and other readers ideas to chew on and more to seek out from the ‘million and one books and essays’. Thank you.

  4. Err…thanks for even posting it Gerry…sorry..I think I got carried away….had a bee in my bonnet!
    The older I get the more I think, you know what, some of those feelings and thoughts I had when I was younger….well, they were pretty damn right…I couldn’t articulate them, its just an intuitive feeling sometimes and I know that those same feelings are present in many people, even those who would not dare to admit them to anyone but themselves.
    I suppose its reasonable to say that we are in a crisis, right across the board, but the Chinese symbol for crisis is in fact two symbols, one for danger, the other for opportunity.
    I am just happy that there are people out there who have the life experiences that reflect how a lot of us feel and thanks to Tim Berners Lee,bless him, we can all share them!
    Ok enuf already, one more thing, there is a website I stumbled across today about a film called ‘I am’, by director Tom Shadyac (Liar, Liar and many more) out in the US, dvd to follow next year. I won’t waffle here, but it looks stimulating and thought provoking. It asks two questions, ‘What’s wrong with our world and what can we do to make it better?’
    Phew! How long have you got?
    Thanks again Gerry for your patience and the space!

  5. Thanks Elizabeth, I’m happy there is something in the words of those I quoted which perhaps move and stimulate and maybe lead to further thought and investigation.
    Just heard a broadcast on Radio 4 ‘A point of view’ by Sarah Dunant, writer which seemed to encapsulate a lot of thoughts of many. Its available as a podcast, another broadcast at oo.15 later and perhaps on the I player. Worth a listen.

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