Behind the stories of dragons, white walkers, and warfare, there is a story of risky investments in HBO’s hit series Game of Thrones. And the economics of these investments tell much of the story of what has occurred in King’s Landing. This policy proposal is for Cersei Lannister to strengthen the Seven Kingdoms, but also strengthen the position of the Lannister family. We propose a three pronged strategy:

create a bond market for the debt of the Iron Throne — to the best of our knowledge the first in Westeros or Essos;

institute financial regulation of “too big to fail” banks operating in the Seven Kingdoms, e.g., the Iron Bank of Braavos; and

begin a propaganda campaign to get money out of politics.

Background

The War of the Five Kings has ravaged much of Westeros. The people of the Seven Kingdoms, desiring safety, have been streaming into King’s Landing — as starving refugees (cf. Season 2 Episode 6). The Tyrells curry favor with the populace by providing protection and, more importantly, food (cf. Season 3 Episode 1). Cersei Lannister already recognizes the risk involved with this to her position (cf. Season 3 Episode 1) and as an extension her family’s position — her children are officially recognized as Baratheons and not Lannisters.

Additionally, though the Lannister family has seemingly inexhaustible gold reserves (cf. Season 1 Episode 5), as with any resource — even in Westeros — there is a finite supply. Tywin Lannister said as much (Season 4 Episode 5): “Our last working mine dried up three years ago.” On top of this the Lannisters have lent large sums of gold to the Iron Throne (cf. Season 1 Episode 3). As the Lannisters are not able to pay off the loans called in by the the Iron Bank of Braavos (Season 5 Episode 4), we can rightfully assume that the loans the Lannisters have made to the Iron Throne constitute a large fraction of their wealth — an estimated $1.8 Billion in 2013.

Recognizing that repaying the loans due to the Iron Bank is not tenable and thus a threat to the safety of Cersei Lannister and her house, she dispatched Mace Tyrell to renegotiate (Season 5 Episode 4). On top of that, she received forgiveness of the debt the Iron Throne has with the Faith of the Seven, and in exchange she grants the Faith the right to create its own military once more — the Faith Militant.

Proposal

Given the financial situation of the Lannister family and the Iron Throne, we propose a three part strategy that helps King Tommen and the entire Lannister family. First, the creation of a bond market for governmental debt. Second, the proposal to institute stricter financial regulation within Westeros. And third, the beginning of a propaganda campaign against money in politics.

A bond market would serve a threefold purpose.

First, by creating a market for buying and selling debt in the Iron Throne it would allow for more transparent accounting. As such Eddard “Ned” Stark would not have been surprised by the financial situation at the time of his appointment to be Hand of the King (Season 1 Episode 3). This would also keep the Master of Coin, e.g. Petyr “Littlefinger” Baelish, honest. It has been speculated that Littlefinger was debasing the currency by “coin clipping.” The mere threat that this might be true could cause even more chaos to the Seven Kingdoms and harm the Iron Throne.

Second, as discussed, the Lannisters have a significant portion of their family wealth invested in loans to the Iron Throne. In the terminology of modern banking, this is a single, undiversified and illiquid, portfolio. Such an investment would be considered unwise by financial analysts. It is undiversified because Tywin has placed all eggs in one basket. It is illiquid because the Iron Throne is not capable of paying the funds back in the near future. In order to diversify their investment, the Lannisters need to be able to exchange their future debt obligations (loan repayments) for Gold Dragons.

Third, as the Iron Bank of Braavos lent millions of Gold Dragons to the Iron Throne and it is said, “the Iron Bank will have its due.” Tywin Lannister acknowledged as much and more (Season 4 Episode 5): “If you owe [the Iron Bank] money, and you don’t want to crumble yourself, you pay it back.” In financial parlance, this is counterparty risk: the risk that the other participant in a contract (the Iron Throne) may not fulfill their obligations (because they must pay the Iron Bank of Braavos first). Following this logic the Iron Bank owns the senior tranche of debt (i.e., paid back first) and the Lannisters (and any other lender) owns a junior tranche. Owning the junior tranche means the Lannisters have a riskier investment than even they might suspect. (This is reminiscent of the Collateralized Debt Obligations [CDOs] that partially drove the 2008 financial crisis. Before 2008 investors were buying the junior tranches of mortgage backed securities, but not calculating their risk properly.) The creation of a bond market would allow for legal structure to be put in place so that various tranches could be bought — without unspoken prioritization of obligations.

As the Iron Bank of Braavos would not want to renegotiate their contracts, nor receive lower interest rates than they were previously winning, we propose a new policy of financial regulation. Since the Iron Bank is able to single-handedly finance a coup or war in order to change the rulers of a city or kingdom, its failure would surely be a cataclysmic event within Westeros and Essos. We would thus classify the Iron Bank as a systemically important financial institution [SIFI]. King Tommen should be advised of the risks that a failure at the Iron Bank would cause, and use his position of power to communicate this this throughout the Seven Kingdoms. Thus for them to continue to operate within Westeros they must begin paying taxes that could be used for a bailout in the case of financial panic or a bank run (i.e., everyone wishes to withdraw their money at once, which would push the Iron Bank into bankruptcy). Additional requirements could be enacted as well. As the Iron Bank of Braavos is much larger than other institutions that exist within the Seven Kingdoms, e.g., lending by the Faith of the Seven, the rules could be written as to be specific to the Iron Bank alone. Of course if the Faith of the Seven becomes too powerful they can be classified as a SIFI as well. Though having the debts of the crown to the Faith greatly reduces the size of the Faith as a financial institution.

Finally, the Iron Bank would surely turn against the Lannister family and King Tommen for implementing new financial regulation. This is where the third policy becomes important: winning the hearts and minds of the people. The smallfolk generally do not follow the going-ons at court, nor do they care who their king is (Season 1 Episode 4). However, the common people seemingly enjoy seeing the nobles brought to “justice” (cf. Season 5 Episode 10). And with the religious reawakening of the Sparrows along with a revived Faith Militant, surely rooting out usurers would be in the list of sins. Thus the Iron Bank of Braavos would be demonized for attempting to overthrow the King Tommen, and any noble fighting to take the Iron Throne would be seen as corrupted by money and unfit to rule by the High Septon and Sparrow. The smallfolk would follow as their suffering could be blamed on the financiers.