In the latest edition of the Open Finance: Lessons From History series, Martin Upton explains what happened on Black Wednesday - and why, in retrospect, it might not have been all bad:

"From quite early on it became clear that the Bank of England was going to have to intervene quite regularly to keep the pound within its permitted range against the deutschmark within the ERM, and at times  - in terms of the foreign currency intervention which was required - this was costly. In addition, at the time, interest rates in Europe and even in Germany, which was dealing with reunification, were high, and that meant that UK interest rates had to be high because otherwise a differential between the interest rates in Germany and the rest of Europe and in the UK would have led to more pressure in terms of the value of the pound. There would have been downward pressure on the pound if the UK had cut interest rates at the time when European interest rates were high."

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One year on from their moment of meltdown, rescued institutions are again riding high, while the politicians who rescued them are paying the electoral price. The scale of the mess suggested, at the time, that banks had got onto their crash course through euphoria, miscalculation and madness. Now, the speed and low private cost with which they escaped that mess raises the equally scary likelihood that they were being rational all along.

The Great Escape

Aside from Lehman, banks have bounced back with their businesses and bonuses intact. Many have already returned to profit, with their investment banking units – whose speculative gambles were at the heart of last year’s problems – now helping to support the commercial side as it writes down its bad mortgage debt.

Lloyds, which looked to have bitten off more than it could chew by acquiring HBOS, is now a legally sanctioned giant that controls around one-third of UK mortgages and current accounts and a quarter of its business banking. Barclays, once viewed as perennially ripe for acquisition by a larger group, has now joined their ranks by cherry-picking Lehman at minimum cost. Fortis, facing bankruptcy a year ago, has announced a major UK expansion in alliance with Tesco. Merrill Lynch and Citibank continue to issue their uncompromising analysis of other firms’ finances, having buried the obituaries that were being written on their own a year ago.

Houses of Parliament at dusk.

Most of the management teams that presided over near-bankruptcy are still in place, enjoying undiminished performance and retention bonuses. Many of those dramatically turfed out of their Canary Wharf offices in September 2008 already have their feet under a comparable desk on someone else’s trading floor. And of the bosses who bet their banks and lost, there is none whose golden parachute failed to open. Even Lehman ex-CEO Dick Fuld is on hire as a consultant, just round the corner from Wall Street. Sir Fred Goodwin’s RBS pension, big enough to be a one-man stimulus package, attracts powerless resentment but continues to flow.

Meanwhile, the governments whose quick thinking made this possible are condemned, for the budgetary cost and for the scale on which their bailouts and loan guarantees seem to have feathered high-financial nests. Ironically, the more successful their rescue plans and the faster the financial world returns to normal, the worse is the electoral fallout. Gordon Brown, architect of last September’s global rescue, enjoyed a ‘bounce’ when turmoil and recession were at their worst and now sees his ratings fall with every sign of economic recovery.

Incumbents are being punished without regard to political stripe, so the by-election reversals are as bad for Angela Merkel’s Christian Democrats as for Brown’s New Labour. Bankers have become, like Ronald Biggs and Abdelbaset al-Megrahi, once unspeakable prisoners who walked out of jail, leaving condemnation raining down on those who let them out.

Sowing the Sense of False Security

Were bankers just lucky? Sadly, past crises showed a similar pattern. The biggest banks basked in the knowledge that they were ‘too big to fail’, even before the recent deepening and widening of their global interconnections. Many were emboldened in their retrospectively reckless gambles – on mortgages, securitisations and derivatives – by assurance that the state and its regulators would step in if their luck ran out.

emboldened in their retrospectively reckless gambles

With their deposits insured, their liquidity underpinned by a central bank, and their riskier loans apparently underwritten by credit default swaps, banks would have been foolish if they hadn’t taken increasing risks in pursuit of higher returns. Indeed, the management of HSBC – the only ‘Big Four’ bank to ride serenely through last year’s storms – had endured years of onslaught from activist shareholders aghast at its refusal to run down its capital, raise its leverage and gamble like the rest.

Bicycle helmets can prevent head injuries in many common accident situations. Yet their increased use is not associated with a reduction in such injuries – because helmet wearers take more risks, and are treated less carefully by other road users. Similarly, traditional banking safeguards encourage borrowers and lenders to take more risks. We’re usually grateful that they do. There were few more reckless gambles than building the first horseless carriage, microcomputer or oil-well, but lives were transformed for the better by those who did.

In most sectors, however, competition puts limits on risk-taking. Customers will go elsewhere if the firm’s product becomes too dangerous, and shareholders will desert it if the way it makes profit becomes too dangerous. Tragically, competition in financial services seems to have the opposite effect, driving companies to take more punts and fewer precautions. Customers flocked to Ice-Save because of its improbably high interest rates, shareholders to Lehman because of its impressive rates of return.

Counterproductive Competition

Alerted in 2000 (by the Cruickshank Report) to banks’ unusually high and consistent profitability, the UK government made a fundamental and possibly fatal choice. It didn’t want to regulate banks’ rates of return, as it traditionally did with highly concentrated, highly profitable utilities like electricity, gas and telecommunication. So it decided to make banking more competitive; and to encourage the combination of commercial banking, investment banking, brokerage and insurance so that big financial groups could compete along more dimensions.

In retail banking, competition meant narrowing the gap between savers’ and borrowers’ interest rates, and making up for the consequent loss of profit by offering more commission- and fee-based services. From this came banks’ substantially increased use of wholesale financial markets to raise funds, using collateralised debt as security, and the high-pressure selling tactics that led to serial mis-selling episodes. In investment banking, competition meant an erosion of low-risk trading profits, based on identifying and amending asset price misalignments. It led banks to preserve those profits by borrowing (‘leveraging’) more heavily to multiply the diminishing margin, and to supplement them with more investment in purely speculative asset-price movements.

no government can afford to jeopardise the financial sector’s profit recoveryno government can afford to jeopardise the financial sector’s profit recovery

Competition in insurance, and derivative markets, meant that bankers could often buy cover for adverse price movements. They didn’t realise (or didn’t like to mention) that the cover was ultimately underwritten by another part of the same group, or that it couldn’t possibly pay out if a general asset-price downturn caused the risks to become systemic.

Competition for the apparent expertise required to design and trade these exotic new instruments led to a steep inflation of banking and insurance salaries, topped by an even greater explosion in performance bonuses and executive share options. So banks’ profits underwent the desired moderation – but due less to competition than to the diversion of cashflow from shareholders to bonuses, and the large sums that had to be set aside for potentially non-performing investments and debts.

With banks still in delicate health until their mortgagees recover, and businesses under strain until banks can resume normal lending, no government can afford to jeopardise the financial sector’s profit recovery. So the grand regulatory schemes of a year ago, to change the rules and rebuild firewalls between financial activities, have been quietly put aside.

Banks that once, as a cosy cartel, enjoyed big private profits and got the state to subsidise their losses, have now shown that they can pull off the trick even more successfully as a competitive, deregulated industry. No wonder the politicians who pulled the world back from the brink, a year ago, are now being pilloried for letting those who pushed it there off-the-hook.

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Alan Shipman is lecturer in economics at the Open University, and a former financial journalist. His books include The Globalization Myth, The Market Revolution, and Transcending Transaction. He is involved in OU's new courses on personal finance, and research on insurance pools, 'chaos pricing' and Eastern Europe.

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The guru of central bankers, Alan Greenspan, calls it a once in a century event. Other bankers, regulators and economists who spoke to The Love of Money describe the September 2008 crisis, and developments before and after it, as the most dramatic of their lifetime. While there have often been recessions, and stock market crashes, there has been no comparably global and brutal combination of crash and recession, at least not since the Great Crash of 1929 and Great Depression that followed. . .

Yet Nassim Nicholas Taleb calls it a Black Swan, an improbable event that occurs far more frequently than we expect – partly because wrongly confuse the improbable with the near-impossible. Those who study the London, New York and other major stock markets find that ‘extreme events’ happen with unnerving regularity.

Hazard of banking: risk of falling.

How we answer this question will have a profound effect on how we now approach financial regulation – and the regulation of many other activities with unpredictable and potentially damaging effects. Until now, we have tended to take a ‘risk-based’ approach to future contingencies. This means, crudely, calculating the financial impact of what could go wrong, and the probability of its going wrong, and multiplying the two to put a monetary value on the cost if things go wrong.

The Taleb view leans in favour of a ‘hazard-based’ approach, which focuses on the impact of the disaster when it occurs. This means paying more attention to extremely unlikely events that have serious consequences. If such ‘Black Swans’ had been taken more seriously, the calamitous events of 2007-9 would have been better prepared for, or detected and averted at a far less damaging stage.

While recent events have been something of an oil slick to the Black Swans argument, hazard-based thinking risks extreme caution and conservatism. The chemical industry is currently up in arms over an EU switch towards hazard-based assessment, which would grade compounds according to their toxicity – what they can do if people are exposed to them – without regard to the likelihood of such exposure. It’s like taking the impact part of the risk-based calculation, but leaving out the probability part.

paying more attention to extremely unlikely events that have serious consequences

Critics say it is an intolerably strict implementation of the precautionary principle: the sort of approach that would ban all cars because of the fatal consequences when they hit pedestrians at speed, or disconnect all houses from piped gas because of the occasional explosion. But there may be factors that justify its application to financial services, even if it’s a retrograde step regarding fertilisers and detergents.

The risk-based approach may have fallen down by underestimating the likelihood of extreme events, and the severity of their impact when they happen. Both underestimations arise from the extreme interconnectedness of the financial system compared with other sectors. Instead of spreading and transferring risks so that mismanaged financial institutions can fail in isolation, globalisation and financial innovation appear to have heightened interdependence so that a few misguided players – Northern Rock and Lehman Brothers in 2007-8, Long Term Capital Management in 1998 – can rapidly jeopardise the whole global economy. When the costs of retrieving the situation run into billions if not trillions, the case is made for preventing the hazard, however remote its likelihood of occurrence seems to be.

Defenders of the risk-based approach would say that this is still too cautious. In curbing hazardous practices (like high leverage, securitisation, derivatives trading and credit default swaps) because of the immense damage when something goes wrong, we would forgo the equally immense benefits these confer most of the time, when everything goes right. We still risk the financial equivalent of keeping all cars behind a red flag because of the occasional road death if they travel at normal speeds.

curbing hazardous practices of the immense damage when something goes wrong

But are the benefits really so immense? This question has long been asked by those in the ‘real economy’ mystified by the source of bankers’ and brokers’ vast wealth, and was raised in August by none other than the chair of the Financial Services Authority, one of the regulators at the centre of the recent banking crisis. Lord Turner admitted that some banking activities may be ‘socially useless’, and some financial innovations simply complications introduced to give intermediaries extra profit, like a roadblock at which highwaymen extract their toll from honest traders.

Turner is not the first to point out that, if financial services are supposed to grease the wheels of commerce and reduce transaction costs, then it is not obvious why the financial sector grows rather than shrinks as an economy grows richer. The bonus-fuelled bankers say they are promoting investment and growth by letting enterprise raise funds more cheaply, get higher returns and reduce or insure against risks.

At root, though, the most useful contribution of banking is the very basic one: channelling short-term savings into longer-term investment and supplying liquidity to businesses that must buy before they sell. These operations can be – and until recently were – run and regulated separately from those of higher-risk investment banking. If the growth of exotic ‘wholesale’ operations in London and New York is not essential to – and now endangers - the safety of ‘High Street’ borrowers and savers, then a hazard-based approach to the financial sector may be justified. Less like banning the car than fitting compulsory anti-lock brakes.

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Alan Shipman is lecturer in economics at the Open University, and a former financial journalist. His books include The Globalization Myth, The Market Revolution, and Transcending Transaction. He is involved in OU's new courses on personal finance, and research on insurance pools, 'chaos pricing' and Eastern Europe.

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As next year’s general election approaches, politicians on both sides are likely to curse the financial sector for absorbing precious funds that could otherwise have gone towards healthcare, education and other social services. The complaint is not strictly fair, since the headline rescue packages – £250bn of loan guarantees, £50bn of capital injections and £200bn of special liquidity assistance – greatly exceed the amounts of public money the misadventurous banks will actually absorb in the longer term. Most will return to the Treasury once the banks revive, and private owners can shoulder their risks again.

Even so, the consequent short-term rise in public borrowing – to a projected (and likely exceeded) £175bn in the UK this financial year, from £30bn in 2008/9 – puts a strict cap on what can be afforded for the NHS, schools, universities, and the rising numbers in the real economy who lost their jobs when banks lost their capacity to lend.

For years, Britain’s financial firms – especially those clustered in the City of London – justified their stratospheric pay and comparable political influence through their disproportionate contribution to the economy. According to Reforming Financial Markets, the Treasury’s response to recent troubles published in July, financial services generate 8% of our national output, employ more than a million people, and finance our otherwise unsustainable appetite for imported food and manufactures, contributing £38bn to the balance of payments even in the crisis year of 2008.

Bank of England, London.

The financial sector – with important centres in Leeds, Edinburgh and the south-west as well as London – is also credited with paying over £250bn in tax and National Insurance since 2000. The tax on financial incomes was, as The Love of Money Programme 2 showed, a significant contributor to the revenue boom that allowed the new Labour government to spend more on hospitals and schools after 1997.

But now that it’s absorbing rather than enlarging the nation’s wealth, people are bound to ask if finance can still justify its unusual size and influence. Even the chairman of the Financial Services Authority, Lord Turner, has been forced to raise the issue. Turner stunned the City on the 27th August by wondering out loud if our bankers, brokers, insurers and investment managers have moved from dynamism into sclerosis. He actually dared suggest that the industry the FSA regulates has grown too large – and that it promotes too many financial transactions, making the case for a Tobin Tax to slow the flows and stop investors chopping and churning so frequently.

Is Turner right? The argument that Britain’s finance has grown too big for its bonuses goes much wider than its recent implosion and the budgetary black hole. Even in the good times, critics argued that the City starved UK industry of capital through its century-old preference for investing abroad – and starved it of skilled labour by sidetracking top minds from real into financial engineering. Policies designed to make the UK attractive to foreign money were accused of holding back domestic enterprise – by keeping interest rates and the exchange rates too high, demanding short-term profit, and regulating so lightly that excessive risk-taking and fraud were bound to arise.

The big City ‘s usual defence is that its growth reflects success, caused by Britain having a comparative advantage in financial services. We therefore don’t just produce them for ourselves, but sell them to the rest of the world – capturing a useful chunk of other nations’ savings, which we can usefully invest in our own industries, infrastructures and public services. But there’s a darker side to this expansion, which Turner was already raising in speeches earlier this year. Being a financial hub makes the UK unusually exposed to risk, and contagious loss of confidence, when the wheels fall off the banking wagon. And some (if not most) of the sector’s recent profit may have come from adding to financial costs – by extracting a ‘rent’ from the real economy – rather than reducing those costs, and assisting industry, as an efficient financial sector is meant to do.

Finance is 8% of Britain’s GDP and is still a lot smaller than manufacturing’s 14%. The finance share has dropped from a peak of almost 11% in 1986, not least because that year’s Big Bang substantially cheapened many of the services it sells to other sectors. That deregulation was followed by an investment boom which helped some of those sectors (especially IT and other non-financial business services) grow substantially larger.

UK stock market data on a computer.

True, our major banks (and, in America, the biggest insurance company as well) have been given substantially larger assistance than the car, steel, coal or textile industries could have dreamed of during their consequently more protracted and painful structural upheavals. And whereas these industries had to shrink to survive, finance has been supported so it doesn’t have to downsize. That’s because bank collapses can send much bigger shock waves through the economy than any factory or mine closures.

On the other hand, UK agriculture – contributing less than 1% of GDP and half a million jobs – receives an ongoing subsidy of over £3bn per year. Farmers say a continued flow of home-grown food, and a working countryside, are essential. Bankers maintain (with economists’ support) a continued flow of credit is equally vital; and that we wouldn’t get on affordable terms without the investment instruments and risk transfers that financial markets provide.

Of course, most household saving and small business investment is done through commercial ‘High Street’ banks, which for most of history were separated from the City-based investment banks, and could be so again. But Turner’s FSA has, instead, sanctioned a deeper integration between commercial and investment banking, passing over the chance to re-impose a separation. The investment side, leeching capital a year ago, is now propping up continued losses on the commercial side. So it looks as if your High Street (or internet) bank will remain securely fastened to a very large, and still poorly understood, financial reprocessing unit in the backstreets of east London - whether the regulators believe it’s an essential extra limb or just a peacock’s tail.

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Here’s a little two-part test for you. When was the last time you heard someone in your company or organisation talk about change? Changing strategies, changing business models, changing culture, changing attitudes... yada yada yada. I’ll bet it was recently and I’ll bet the time before that wasn’t too long ago either. Modern management philosophy seems obsessed with change. Now here’s the second part. If you have been around long enough, say five years or more, to look at what has actually changed in your organisation, how much real change do you see? Discount the superficial stuff like titles, organisation charts and so on. How much of the essence of what happens in your place, the good and the bad, has changed? If you work in an organisation that is typical of the ones I study, the answer is “Not that much really”. The French, as ever, have an expression for this. Plus ça change, plus la même. The more things change, the more they stay the same.

When I was a young graduate trainee, I sometimes wondered how it felt to be one of those senior guys who always talked about change. I imagined the feelings of power and authority and looked forward to the day I’d get there and would be able to put things right. . When I got reached that level, those memories seemed innocent and naïve as my dominant feeling, and those of my senior peers, was that of frustration. Everything we tried came to a fizzle, rather than a big bang. Why, I wondered, was it so difficult to get anything done? I got an echo of those frustrations just the other day when I read about Adair Turner, Chairman of the Financial Services Authority, was talking about changing the “bloated” and “socially useless” sector that he’s in charge of regulating. Now there’s a man with a change-management challenge.

all the good stuff is wrapped up in jargon

When I moved into academia, I was surprised and, to be honest, a little irritated that there existed a whole body of research that spoke directly to these frustrations of senior managers. Surprised because I considered myself a pretty well-read executive and irritated because if I’d known this stuff earlier it would have helped me get things done. The problem is, as with much management research, all the good stuff is wrapped up in jargon and published in journals that managers never get to read.

A good example of this hidden but useful work is institutional theory, generally acknowledged to be the creation of Selznick. In essence, this body of work describes organisations like the big banks as being confined by the values of their external environment. Dimaggio and Powell expanded on this, describing three sets of pressures: coercive (legal), normative (cultural) and mimetic (seeking to imitate). Their paper’s title “The Iron Cage Revisited” is a pretty good description of how many of my management colleagues felt. When I first read this work, the scales fell from my eyes. Some of the pressures were obvious in my job (e.g. coercive legal and regulatory pressures) but others only became understandable when I put my experience in the context of institutional theory. The hassle I had gotten from research and development, for example, or from the sales team, were obvious examples of normative pressures stemming from the sub-cultures of their professions. And mimetic pressures were clearly seen in all the pressure to adopt “industry best practice” that, whilst we justified it in rational terms, often seemed a senior management whim that we were forced to serve. This rationalisation of emotional whims is also discussed by the institutional theorists, who talk about “rationalised myths” as a way firms maintain “social legitimacy” in their business environment.

I now use institutional theory in my work trying to understand how firms compete. I’ve discovered that the jargon and journals aren’t the only reason this valuable knowledge isn’t used much by practising executives. The other reason is that they usually prefer simple, quick answers and institutional theory doesn’t do quick and simple easily. It needs thought and careful application. Take, for example, the question of how to reform the banks which, as I write, the G20 finance ministers are grappling with. If they understood institutional theory they would seek and answer that addressed the three sets of pressures that “cage” that market and make it act the way it does. But this sophisticated approach would be difficult and wouldn’t make for good, politically useful, sound-bites. So I predict they’ll take a simplistic approach and shout about bonuses, which is easy, politically popular and practically useless.

So, whilst I try not to have regrets, I do regret that that I’d not learnt about institutional theory earlier. It would have made me a more effective, and rather less frustrated, executive. Still, if you’re an executive reading this, there’s still time for you. Brave the jargon, throw out your suspicion of the academic and learn some more about institutional theory. Or of course you could create a rationalised myth for why you don’t. And stay in your iron cage.

Find out more

The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organisational Fields’
by P DiMaggio & W Powell
in American Sociology Review, 48

Leadership in Administration: A Sociological Interpretation
by P Selznick, published by Harper and Row

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Dr Brian D Smith is a Visiting Research Fellow in The Open University’s Marketing and Strategy Research Unit. He is the author of over 100 books and articles and runs PragMedic, a specialist strategy consultancy.

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In a brand new weekly podcast from The Open University Business School, our experts explore moments of major financial crisis in the past, and ask what we can learn from them.

In the first episode of Open Finance, Jane Frecknall-Hughes explains why we're still paying for the Napoleonic Wars through Income Taxes. Listen to programme one online.

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Tragic heroes always give film-makers and novelists a richer tapestry than the ultimately triumphant ones. There is a morbid fascination with weak-willed people in positions of power who, like King Lear, are slower than the audience to see the looming disaster their mistaken choices led to. But even more compelling are those of stronger will, buoyed and emboldened by past successes, who take on greater and greater challenges until the inevitable, fatal over-reach. The Tommy Simpsons and Ayrton Sennas, pushing the limits until they overstep one too many, ultimately engage us far more than the Buster Mottrams or Luca Badoers who just couldn’t rise to the biggest occasion.

Richard Fuld, the last chief executive of Lehman Brothers, clearly emerges from the first Love of Money (and the Last Days of Lehman drama) as a character of immensely strong will, with commensurate past successes. He cannot believe that his bank is heading for the rocks, because he is recognised – deservedly – as the man who turned it from a near-shipwreck into hammer-hulled icebreaker. He is equally stunned that none of his rival bank chiefs intends to come to his assistance.

Uncle Sam money bank.
[Image © copyright liquidlibrary (RF)]

It’s true he’s crossed swords in the past with these fellow masters of the universe, and spurned their takeover offers in better times. But in banking circles, that’s supposed to kindle respect for the warrior, not deny them the lift from the White Knight in their moment of need.

Some of the top bankers whose institutions collapsed into government-backed rescue in 2008 were victims of a new financial universe, in which they were genuinely out of their depth. They had channelled the assets to smart investment-banking teams whose exotic trades in complex products were beyond their understanding, but whose years of high profit told their own story. They could plead a genuine ignorance of the bank-breaking risks that went with those high returns, having been brought up in a world of simpler products and more restrained competition, where complicated bets and split-second trading weren’t essential for good quarterly results.

But Lehmans’ downfall was, as the Love of Money’s eye-witness accounts confirm, the result of much more ordinary mistakes with traditional, straightforward financial products. Under Fuld’s watch the bank ran up too much debt, and pushed too much of its assets into house construction and purchase in the United States. Compared with JP Morgan – a big winner in the acquisitions bloodbath of 2008 – its exposure to derivative contracts was tiny. But its leverage ratio – of loans to the realisable assets they were secured against – was over 40 to 1, far above its major competitors’. When banks started raising the cost of credit, even to other banks, Lehman quickly slid into the same situation as many of the homeowners it had dealt with: unable to pay the interest out of its much-diminished income, waiting helplessly for foreclosure.

Toy house on dollar bills.
[image © copyright Photos.com]

Investment banks routinely use leverage to multiply the profit when an asset rises in value. It’s the same technique that households use when they buy a house with a mortgage. If you buy it for cash and the price rises 10%, your capital’s made a 10% return (plus a little bit extra if you count the rent you avoided paying). But if you pay for only 20% and borrow the rest, that 10% price rise gives you a 50% return.

The downside of leverage, which many have experienced in the past year, is that it also multiplies the loss when prices fall. That needn’t hurt, if you can afford to hold on to the house until its price recovers and the capital gain returns. But for banks, which must regularly mark their assets to market and face margin calls from their creditors, it isn’t always possible to wait for good times that may be round several awkward corners.

Fuld, determined that Lehman should eclipse Wall Street’s other investment banks, had additional reasons for high leverage. Although he’d overseen substantial growth, his bank was still substantially smaller and less well capitalised than the giants it was taking on. It’s also possible that, as a master of grand strategy, he hadn’t been watching the accounting details and wasn’t fully aware how overstretched the balance sheet was. Visionary bosses usually work best when they’ve got a trusted, methodical second-in-command who can fill in the details and administer the reality-check. In Fuld’s case, it isn’t clear that anyone was close enough to play Baldrick to the runaway Blackadder.

Tragic heroes are rarely felled by circumstances alone. There is usually an opposing player who, if not actually plunging the knife, at least arranges the sword so the protagonist can fall on it. In the case of Lehman, two vultures were circling: Bank of America, run by the affable Ken Lewis; and Barclays, led by the quiet-spoken Group boss John Varley and the hard-driving investment banker Bob Diamond.

Did their rescue plans, on which Fuld was counting, genuinely come to nought, after genuine struggle for an eleventh-hour solution? Or did they, as some Lehman insiders suspect, deliberately withhold assistance until the bankruptcy allowed them to cherry-pick the assets at a fraction of the cost? Could Treasury Secretary Henry Paulson genuinely see no way to stop Lehman sliding into bankruptcy? Or was he still smarting from an earlier rivalry, when he was running Goldman Sachs and Fuld’s resurgent bank was threatening to eclipse it?

Commercial confidentiality, and the survivors’ code of honour, mean it may be a long while before we know the answer. But a character who does so little to be liked, by his rivals or his regulators, is almost certainly hiding many more cherubic chief executives in his long shadow.

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Alan Shipman is lecturer in economics at the Open University, and a former financial journalist. His books include The Globalization Myth, The Market Revolution, and Transcending Transaction. He is involved in OU's new courses on personal finance, and research on insurance pools, 'chaos pricing' and Eastern Europe.

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