Adhoc Rescues, Global Coordination, and the Superclass

I just finished Superclass and while it initially sounded like exactly the kind of book I don’t like to read, after hearing Rothkopf in person and seeing Chris Blattman recommend it (in a hilarious post titled ‘Midway Down the Intellectual Food Chain) I decided to get the audio book. It was definitely entertaining and pretty interesting at times but definitely not a must-read. I was, however, struck by a conversation Rothkopf  had with Timothy Geithner (remember him?) on how he helped resolve a crisis in the derivatives market (the book doesn’t give any further information) that I think really captures the way many complicated (and extremely urgent) problems are addressed in our increasingly complex world:

What we did is, we got the fourteen major firms in a room down the hall here with their primary supervisors [..] and we said to them “You guys have got to fix this problem, tell us how you are going to fix it and we will work out some basic regime to work out there are no free riders to give you comfort so you know that if you move individually, everybody else will move with you” and there is nothing written, no guidance, no regulation, no formal process, [...]

These fourteen firms he continued, accounted for something like 90% of the all the activity in this market. The Fed, the SEC, the FSA, the Swiss and the Germans were there, and hose were the principals, each firm brought three people, they had an executive committee of four firms that had almost weekly a conference call among the four firms. And the best thing about the process was that it was efficient, there was nothing written except letters from the firm laying out their commitments, there’s no formal mechanism we could have used to force this on anybody so we had to invent it.

You have to have a borderless collaborative process, it does not mean it has to be universal every jurisdiction or every institution it just needs a critical mass of the right players it is a much more concentrated world, if you focus on the limited number of the ten to twenty large institutions that have some global reach, then you can do a lot.

Geithner is right, the world is becoming increasingly international but there are very few effective (and quick acting) international governing bodies and these adhoc meetings work very well. You don’t need to be a believer in World Government to realize that closer international coordination on finance and the economy (if nothing else) will be important in the future. The problem with doing things on an adhoc basis by getting the most powerful people and organizations in one room is that the concerns of the wider populace will be underrepresented (or not represented at all). The hurried actions of the US Treasury and Federal Reserve during the failure/bailout of Bear Stearns, AIG, and Lehman Brothers showed that personal contacts and informal meetings can help ensure quick action in an unforeseen crisis but they also show the dangers and resulting unfairness of the outcomes reached in such meetings. In the years ahead we will have to figure out how to build more effective coordinating (and potentially regulating) bodies on both the national and international scale. That should be a fun challenge.