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.