5 June 2024

Labour doesn’t know what caused the 2008 financial crisis


The Labour Party has released a viral attack video called The Big Short: Rishi Sunak. This video uses an amusing variant of the famous scene from the 2015 movie ‘The Big Short’ with Margot Robbie in a bubble bath drinking champagne, only this time it is Jon Richardson drinking beer. The claim of the video is that a hedge fund Sunak worked for back in the late-2000s (TCI), prior to his entering politics, played an important role in creating the financial crisis.

It argues that because TCI was in favour of the Dutch investment bank ABN Amro being taken over by RBS, it helped contribute to RBS’ collapse and thus the bank bailouts. TCI’s actions when Sunak worked there are described in the video as ‘amazingly profitable’ for Sunak but ‘bad for pretty much everyone else’ and as having ‘helped trigger the financial crash’.

Darren Jones, Shadow Chief Secretary to the Treasury, said to The Guardian that Sunak ‘essentially bet against Britain and may have profited off the back of it’, with The Guardian noting that TCI admitted to having ‘bet against British banks during the crash’, and said that:

There is a public interest in him fessing up about his role during this period of time and people understanding the fact that when they were having to suffer the consequences of austerity that followed under the Conservatives and Liberal Democrats in coalition years, that Rishi Sunak was at the heart of this.

I yield to no one in my criticisms of Rishi Sunak, but this is the most extraordinary nonsense. I am astounded that Shadow Chancellor Rachel Reeves, who as a former Bank of England economist must know this is nonsense, has allowed this argument to be aired.The idea that hedge funds ‘betting against British banks’ by going ‘short’ on them caused the financial crisis is like saying the cowboy got shot because he had a hole in his chest. It gets the causation precisely back to front. And indeed the correct analysis – that hedge funds went short on banks because they were bust, not the other way around – is precisely the theme of the movie Labour’s attack ad explicitly references.

In it, various smart finance players work out that mortgage-backed securities that had been bought by banks were going to default because US homeowners weren’t going to repay their mortgages. The ‘big short’ in the film doesn’t create the financial crisis and indeed some of the financiers who go short attempt to warn about the coming financial crisis and expose a number of dangerous conflicts of interest. The shorting hedge funds are the heroes of the movie, not the villains.

TCI is ‘accused’ by Labour of seeking to sell its stake in ABN Amro at a profit when Sunak worked there. That’s exactly what happened. TCI quite correctly anticipated that other financial institutions would be willing to buy ABN Amro, so it proposed ABN Amro be sold. There then ensued a bidding war between an RBS-led consortium and Barclays. No one forced RBS to buy ABN Amro and there are no suggestions of impropriety on the part of TCI.

It is absurd to suggest that TCI somehow created the financial crisis, or was one of a number of hedge funds that created the financial crisis. As the financial crisis got going from mid-2007 onwards, many banks (including RBS, Barclays and many US and Continental European banks) saw it as an opportunity to expand market share and acquire rivals or parts of rivals at knock-down prices.

At later phases, there was also considerable pressure exerted by the financial authorities on still-solvent banks to buy out less solvent institutions to try to stabilise the market. These acquisitions didn’t create the financial crisis. They occurred because the financial crisis was already here. And a key part of the reason there was a financial crisis was that there was going to be a big recession and a period of stagnant growth afterwards (it was the forthcoming recession and poor growth that caused the financial crisis, not the other way around).

Labour seems to have been captured by a narrative that financial speculators damage the economy and hedge funds are essentially destructive – the kind of wildly misguided thinking one sees amongst Continental leftists and populists. Think of what that will mean, once Labour comes to power, for the position of the UK finance sector.

Like many on the pro-market Right, I had been assuming I will vote Labour at this election. But if it is going to promote misconceptions about how the economy works that are as fundamental and damaging as this, I may need to think again.

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Andrew Lilico is an economist and writer.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.