Talking Sausages and Derivatives with Gillian Tett

Gillian Tett

Key people should have listened to this journalist back in the mid-noughties.

The Financial Times’ Gillian Tett is still getting used to being on the ‘wrong’ end of a microphone. As the Press Association’s current Journalist of the Year, hard on the heels of her award as the 2008 British Business Journalist of the Year, she is more used to asking questions than answering them.

But Tett’s is a voice worth listening to in the month that European markets are feeling the knock-on effects of Dubai World asking for its huge debt to be restructured, and the Greek bond and stock markets having exposed their vulnerability. In fact, had the world listened to her years ago, when she was predicting the credit crisis, many would be better off today.

Such was the resistance to her warnings – she was denounced as a scaremonger from the stage at the World Economic Forum two years ago – that she even began to doubt herself.

“I went off on maternity leave in October 2005, and I was so alarmed that I told my colleagues at the time that I would probably miss the big crash,” she told me. “When I came back in the spring of 2006, there was still a dramatic boom going on. I spent a lot of time thinking ‘Well, maybe I’m wrong; maybe they are right.’ It’s very hard to keep fast to your convictions or your fears, when you are swimming against the tide.

“I used to get a lot of pressure from the bankers and from some policy makers – and quite a lot of criticism. I pulled a column in May 2007 at the last minute, because I lost confidence in what I was saying,” she admitted. “Frankly, I look back at what I wrote in 2006-2007, and there were a number of occasions when I totally wimped out. I’m not proud of some of the things I didn’t write.”

Despite being shortlisted for the Journalist of the Year award, she must have had little faith that she would win it, as shortly before the announcement, she texted her babysitter to tell her that she would be home in fifteen minutes.

This time though, she was not mistrusting herself as much as doubting that the British media could ever give the award to someone from such a “really dull, boring, geeky area” of journalism, rather than for celebrity scoops.

Her predictions of crisis had actually been correct. While humbly confessing that she did not predict the scale of the crisis, Tett recalled, “What I did point out was that there was this big revolution going on in finance, which had potentially dangerous implications, that wasn’t being properly covered. So I did write about that quite a bit.”

While bankers discuss ‘collateralized debt obligations’ and ‘credit default swaps,’ she talks about sausages.

Tett is passionate about de-mystifying the worlds of business and finance. While bankers discuss ‘collateralized debt obligations’ and ‘credit default swaps,’ she talks about sausages.

“To a certain extent,” she explains, “the slicing and dicing process that’s happened in terms of lending and banking is a bit like making sausages. Banks were taking loans from lots of different sources, chopping them up, re-packaging them – a bit like a butcher dealing with meat from different cows – putting them in new casings, to be like sausages, and then selling those new financial products as new sausages.

“The theory behind it was that if banks re-packaged their loans, mixed them up and sold them to different people, it would diversify their exposure to risk.  So instead of having a concentrated exposure to one type of risk, they’d be sharing that risk between them, making them stronger. In reality, though, they also realised that every time they chopped up those loans and repackaged them, they’d take a fee and so they were collecting fat fees.

“It took me a long time to work out what was going on. Initially I was faced with a wave of rhetoric about the benefits of diversification. Then I began to ask questions, saying, ‘Hang on a sec, if you’re slicing and dicing, doesn’t that create new risks?’”

Unlike most financial commentators, Tett has studied anthropology, in which she gained a PhD from Cambridge University in the early 1990s. The travelling involved helped her to see societies objectively, while her studies gave her the nuanced view of her protagonists.

“I’ve always been interested in trying to get inside how other societies tick, and communicate that to other people. It’s far too easy just to use the stereotype of evil, greedy bankers, as if somehow they are an alien species. The reality is that for the most part, it wasn’t greedy bankers at all; it was human beings hitting on an idea which could have brought about great good, and ended up bringing about terrible harm.”

She agreed that understanding human motives in business gave her some insight, “I think it’s critical for two reasons. One is that it teaches you to take a holistic view of society, and how the bits join up. Secondly it teaches you to take a fairly cynical view of dominant intellectual frameworks and to recognise that there are always power relationships, power structures; and that elites tend to capture the intellectual framework.

“In banking, you had a free market de-regulation framework that was dominant for many years, and it served the banking industry very well. Most people swallowed that rhetoric pretty blindly, and it turned out to be pretty flawed.”

In a remarkable set of coincidences, Tett’s background placed her in a unique position to recognise the warning signs. Firstly, in the early 1990s anthropology took her to Tajikistan, where the community that she worked with was caught up in a “very brutal” civil war. “In the space of a few months,” she recalled, “the country collapsed and some horrific things happened, which would have been completely unthinkable before.”

“In Japan, I spent three years eating, breathing, sleeping financial crisis. When I left, I told colleagues I would never use any of this ever again!”

Shortly afterwards, the Financial Times posted her to Tokyo, where she became bureau chief and experienced the nation’s economic failure. “It’s extraordinary how things come together. When I was in Japan, I spent three years of my life eating, breathing, sleeping financial crisis, and when I left, I told colleagues I would never use any of this ever again!”

These two experiences of collapse have protected her against assuming that things will always be safe, just because we live in the West. She appreciates that we are “profoundly blessed” in terms of our freedom and wealth, knowing that these things can be fragile. This assessment helped to tune her antennae to signals that others either could not or would not foresee.

Now that the crisis has impacted so deeply, does her insight help her to predict how the major players will react?

“There is a big power struggle going on between the banking elite that has been shaken by the crisis and which are trying to hang on to power, and some politicians and others who are calling for change. It’s not clear to me now which one’s going to win.”

But looking forward, she did have clearer ideas on what has to happen next. “The first thing that needs to be done is for the city to tell the population that we are faced with a very grim outlook right now.

“Debt levels on a national basis are very, very high; there’s a lot of deleveraging of government debt that needs to be done, both on a personal level and a national level – and that’s going to be brutal. I think that a number of the banking practices need to change. Banks need to become subject to a lot more oversight and they may need to be broken up. We need to re-think how we do central banking. Above all else, we need to recognise that what has happened over the last ten to fifteen years has been a completely illusory boom that cannot be repeated.”

In his September appearance on BBC2’s Newsnight, which assessed the aftermath of the Lehman Brothers’ demise, the Archbishop of Canterbury picked up the ‘illusory’ theme. He spoke of the need to recognise the industry’s “idolatry, that projecting (of) reality and substance onto things that don’t have them,” commenting that ”economics is too important to be left to economists” and that there was a role for ”awkward amateurs” in examining the way the City operates.

Following the programme, even 61% of Guardian readers voted in a poll for more leadership from the Church during the crunch. Tett had her own opinions on the role of the Church in such matters.

“There has been a tremendous tendency from part of the Church to see business and money as dirty – understandably, because parts of business and money are dirty – and to keep out of that area in recent years; and to avoid asking hard questions about things like derivatives, taxation, that kind of stuff. So to a certain extent the church has managed to sideline itself.

“Secondly, I think the Church needs to recognise that if it’s going to have a voice in talking about these issues, it needs to get real and organise itself. It needs to get people on board, who can address these issues, both in terms of having knowledge and expertise, and a common background.

“You need suits to fight suits, and I would love to see churches actually trying to use people who have been working in the financial industry in the past and are maybe part of the Church now, and try to mobilise them, because a lot of those people have got a lot to add; some of them have retired early and many of them are keen to go back.”

This is the ‘Director’s Cut’ of an interview that was printed in late 2009 in the Church of England Newspaper.

Thanks to Gillian Tett for her permission to reprint this piece.

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