Where next for AIG? Who is John Galt?
I am writing this on a train from NewYork to Washington. I have just reported on Newsnight that the US government is considering "taking AIG into conservatorship". There is a pink sky over New Jersey. The brakeman on the Amtrak is whistling Richard Halley's Fifth Concerto.
Actually this last detail cannot be true because, as all afficionados of Ayn Rand know, Richard Halley did not write a Fifth Concerto. He retreated to Colorado like the rest of America's disgruntled capitalists and creatives until the great art-deco rebellion described in Atlas Shrugged took off.
Think I am hallucinating? Well I blame Dagny Taggart for what's going on with AIG. Dagny Taggart is the heroine of Atlas Shrugged; and Atlas Shrugged (1957) is a kind of Lord of the Rings for people who dont like heavily-regulated business. In it Dagny single handedly takes on the forces that are holding back American entrepreneurship: sloth, bureaucracy, unions, intellectual property theft and over-regulation.
All unionists, sloths, regulators, IP sneaks and bureaucrats are portrayed as sympathetically in Atlas Shrugged as are the Orcs in Tolkien. Rand was one of the authors who inspired Alan Greenspan and a whole bunch of other people who helped shape the current financial architecture.
For much of today I have been slinking around in my trenchcoat and trilby (this bit I made up) outside the distinctly Dagny-esque HQ of AIG corporation (think Gotham City with Wi-Fi). AIG is in such deep trouble that it is seeking a 75 billion dollar bailout from JP Morgan or failing that, from the US government (this bit I did not make up). Inside that amazing Jugendstil tower on New York's Pine Street, clad with aluminium plate, lit like the set of a Bogart movie, they have been fighting for survival all day.
AIG has been brought down to earth by the subprime crisis, into which it threw itself with the same reckless abandon as, er, Dagny herself shows in Chapter 8 with Hank Rearden.
...Arriving at Washington's Union Station, with the yellow light streaking down the windowpanes and the click heels of a hundred weak and tired executives echoing through its marble opulence, a cab driver opened the door.
"What's happened to AIG?" I asked.
"Who is John Galt?" he answered, before slipping silently into the shadows.
Somewhere between there and the sultry decadence of New Hampshire Avenue Paul Mason, lean, haggard and exhausted, learned that Hank Paulson has indeed bailed out AIG, to the tune of 85 billion dollars. It is not in conservatorship - ie quasi-nationalisation - but Paulson has had to go to Capitol Hill to get the OK for it, as it is just as good as state controlled right now. Mason sighed. Once again he would have to pick himself up and pull his trench coat around his haggard neck, tipping the brim of his trilby hat low into the night...
Actually, once again, the US authorities have proved capable of a bit of that human greatness that Ayn Rand celebrates in the novel: they have improvised and, against all ideological prejudice, saved a major institution with timely and unique government action. What we don't know yet is if it will work long term.
So why do I blame Rand, Dagny and Atlas Shrugged? Answer: for making regulation a matter of dogma, for and against, instead of a matter of technique and creativity. It is now clear that, instead of light-touch regulation, what was needed over the decade of financial innovation was something in another dimension: the pro-active pursuit of rectitude and transparency, leaving behind the old rules of "regulate-deregulate". How AIG can be valuing its Alt-A debt at 67 cents per dollar when Lehman went bust valuing Alt-A at 39 cents is, frankly, an indictment of the regulatory regime on Wall Street. It's not a problem that I don't know who's valuation is correct: it is a problem that nobody can know.
In the book the ultimate hero/wise man figure, John Galt, proclaims: "I swear by my Life and my love of it that I will never live for the sake of another man, nor ask another man to live for the sake of mine." I find this credo a challenging counter-argument to the co-dependent culture of our times, but as a shaper of business strategy it has brought great corporations to their knees in days that had lasted more than a century.
As a creed it is being rapidly and publicly disowned by both parties: Obama and McCain are, as I speak, knocking lumps out of each other on the networks over the failure to properly regulate; and CNN is doing an explainer on FDR's New Deal.
In the next decade the debate over regulation will not be over strong versus weak regulation, but clever versus dumb: it's a global system and the light touch regulators have a point in that heavy handedness simply drives the problem offshore. But American capitalism was, today, teetering on the brink of a really serious business failure - manifestly because AIG's activities had slipped through what now looks like pretty ineffective regulation.
There are some very serious people who swear by Ayn Rand's book: I've seen it handed out for free like Chairman Mao's Little Red Book at venture capital seminars. I respect those people, and I know why the book inspires them; likewise it stuns me that loads of clever people in the internet generation have never read it, and will only know it through Angelina Jolie's upcoming film. Its worth reading.
But the masters of the financial universe have, seriously, got to move on from Dagny Taggart. She's a great human role model, but guys it's just a book! Running the real economy, as Hank Paulson has proved tonight, you have to put behind you romanticism and ideology of every kind.