Many people seem to have so little interest in issues that directly affect their interests. Is it indifference and apathy, or have many subjects simply become too complicated for outsiders to understand?
Tell someone their money is not safe and you have their full attention; say the words ‘financial reforms’ and people switch off.
The financial sector in London employs between 250,000 and 300,000 people.
Employees of banks and other financial firms risk losing their jobs, being sued and suffering severe damage to their reputation if they are caught speaking to the press. Try finding a new job in the City after that.
This strict code of silence suppresses what outsiders get to see of the City.
I had to wait for volunteers to come forward to reveal the details of their job and working life.
These volunteers took the risk because they wanted to challenge a particular stereotype about the world of finance, for example, the assumption that all of finance is horribly complicated.
‘The sad reality in finance is that perhaps 5 per cent really make a lot of money. The rest do make more than those with similar levels of education in other industries. But they also put in longer hours.
The 95 per cent know that only a small percentage make the huge sums. But you are exposed to that category of people, every day and up close. It plants the idea in your head: this could be me.’
Many interviewees said that when meeting new people at parties or at the school gates, they had learnt to keep where they worked to themselves, fearing negative reactions.
I also began to learn new things – first that the sector is far larger than the banks and second about the deep divide between investment bankers and those in retail or commercial banking.
The world of banking is so much bigger than the dealmakers and traders who dominate the public’s idea of us.
There are three kinds of economists: those who can add up and those who can’t. Economists correctly predicted seven out of the last three crises. Half of economics is actually very useful – too bad economists can never agree which half.
I asked about the biggest taboo in his job, the worst possible misstep for someone like him. He didn’t hesitate: ‘Breaching confidentiality.
As an outsider in 2008, it had looked like a genuinely serious crisis, but not end-of-the-world serious - what could very well have been an unimaginable catastrophe.
Financial experts do not seem to know what exactly could have happened except that it would have been beyond our wildest nightmares.
Bankers were actually stocking up on guns, ‘ready to bed down in bunkers if civil society collapsed’
‘It is sobering to contemplate the consequences of interrupting food supplies to the world’s major cities for even a few days.’
No more than a few thousand people need go out plundering and the police are essentially powerless. Now imagine that hundreds of millions of people worldwide all hear at the same time that supplies have stopped to their supermarkets, pharmacies and petrol stations.
Let’s imagine what a map of Planet Finance would look like. Firstly you would see three enormous and contiguous continents: asset management, banking and insurance.
Thanks to its sheer size, the last of that trio catches the eye first.
Insurance partly overlaps with banking, the second huge area of finance. The biggest players here are so-called commercial or retail banks.
People who do enjoy huge sums of money need someone to invest it for them, which brings us to the third and last vast continent: asset management. There are overlaps here, too, when banks offer asset management services.
Insurance, asset management and banking dominate Planet Finance, but there are lots of islands scattered around them, providing services.
As we zoom out we can also see the central bank and the regulators circling Planet Finance like satellites, trying to make sure from afar that everything is going according to the rules.
And now for the crash and the people who caused it.
Fortunately, we now have a broad consensus about what happened – though not about who is ultimately to blame.
Two things already stand out. First, ‘the bankers’ were clearly not the only ones responsible. Second, most people working in the banks, as well as entire areas of ‘finance’, had absolutely nothing to do with all of this.
I remember a sense of relief, almost, when I began to understand just how few people were directly involved in the crash. At least this had not been a comprehensive conspiracy on the part of the entire sector.
Until you turn it on its head. If you think about it, isn’t it all the more alarming if virtually nobody in the sector realised how dangerous these complex financial products could be?
It was plain to see that investment banks and investment divisions of megabanks had played a key role in the crash. So, I decided to start digging into those investment banks.
It took months to get a good sense of the architecture and culture of investment banks, and what surprised me was how unhelpful economists were – the very body of experts you’d think would be able to shed light on the world of high finance.
The more investment bankers I met the more I learnt to see this type of bank as consisting of a complicated cluster of islands that operate under one flag.
When asked about their responsibility for the crash they could join all those others in the City in saying: ‘It wasn’t me.’ That even applies to most of the ‘structurers’ who invent or build complex financial products.
So huge have investment banks become that they can give rise to subcultures, and even subcultures within subcultures.
The quants seem to form a caste of their own, cutting across all ranks, job titles, activities and hierarchies.
Quants typically have PhDs in maths, or theoretical physics or chemistry, and many would describe themselves simply: ‘I am a quant’ – as if that was all I needed to know about them.
If quants and non-quants seemed mostly to ignore each other, the antagonism between traders and dealmakers in mergers and acquisitions was palpable, as rivalrous as two local football teams.
Dealmakers described traders as ‘street fighters’ and in turn traders called dealmakers a ‘pure waste of office space’ who peddle ‘reputation insurance’.
How would London fare without bankers? Do you think that all those world-class museums, parks and football clubs could exist without their sponsors in the financial sector?
Investment bankers themselves seem decent enough people, so why would their organisation not be decent enough, too?
It stands to reason that in such vast organisations every now and again something goes wrong and an incident happens. As for the crash, well, how many people predicted the tsunami in Fukushima? Fortunately the blogs with investment bankers triggered reactions from unexpected corners. And those interviewees told very different stories indeed.
The code of silence was going to make it very difficult to arrange interviews with middle-office employees who had given the green light to the toxic financial products that became world-famous in 2008.
Investment banks and the financial lobby try to portray each disaster as the work of a few rotten apples, much like they had characterised the crash as a one-off accident. What did the middle office think?
Bankers look at the compliance department the way footballers look at linesmen, ‘Losers running back and forth along a line, stopping players from scoring or doing great things.’
Just because in theory the middle office has the power to stop wrongdoing, it does not mean that they can do so in practice.
The big difference is that in the past these risk managers had far more power.
Historically, investment bankers in the City and on Wall Street worked in small partnerships, where management and owners mostly overlapped.
From the mid-eighties these partnerships began to list on the stock exchange, or were taken over by publicly listed commercial banks who wanted to take advantage of deregulation.
The risk lies with shareholders rather than partners, while bankers are paid partly in shares and options.
‘Too big to fail’ really means is that the taxpayer will bear much of that risk. There is an expression in the City for this new state of affairs: ‘It’s only OPM’ – Other People’s Money.
You often hear that the problem with banks is that they take excessive risk. The real problem is the ownership of that excessive risk. Those who take the risks are no longer the same people who bear them.
The easier banks can get rid of people in bad times, the more likely they are to hire them again when the economy swings back. That is the commonly accepted argument in favour of zero job security. In all the interviews, virtually no front-office bankers made the case for employment rights or any form of job protection.
One risk and compliance officer spoke without reservation of a ‘climate of fear’.
Arse-covering is a major element if you want to survive in finance.
‘This job involves in some part selling your soul for a good salary.’
Many interviewees from the back and middle office came to the same conclusion: my bank suffers from a climate of fear. Fear of being tripped up, blamed, found out or fired.
Looking back I sometimes wonder how I could have held on to the idea for so long that the investment banks in their current form are basically OK. Perhaps it was a deep need for denial.
In the City you do not ask if a proposal is morally right or wrong. You look at the degree of ‘reputation risk’. Using loopholes in the tax code to help big corporations and rich families evade taxes is ‘tax optimisation’ with ‘tax-efficient structures’. Financial lawyers and regulators who go along with whatever you propose are ‘business-friendly’, cases of proven fraud or abuse become ‘mis-selling’ and exploiting inconsistencies between two countries’ regulatory systems is ‘regulatory arbitrage’.
Hence the biggest compliment in the City is ‘professional’. It means you do not let emotions get in the way of work, let alone moral beliefs.
‘It was all too much,’ Smith concludes in the final chapter of Why I Left Goldman Sachs. ‘We had advised Greece all those years ago how to cover up its debt by trading a derivative. Now that the chickens were coming home to roost, we were showing hedge funds how to profit from Greece’s chaos; and on the other side of the Chinese wall, our investment bankers were trying to win contracts from European governments to advise them how to fix the mess.’
The response from the sector was one of relief or even boredom. Smith had merely described perfectly legal practices
What was shocking here was how little anyone within the industry was shocked.
What opportunities for abuse – legal as well as illegal – exist within banks? How does the architecture of today’s megabank make abuse so easy and likely?
Complexity vastly increases the scope for misuse and even abuse. Whether the crash of 2008 was ultimately down to that or to a huge misunderstanding is still the subject of heated discussion.
In the spring of 2012, a trader at the London offices of JP Morgan by the name of Bruno Iksil managed with his small team to run up a $6.2 billion loss. Iksil didn’t break any laws and has never been prosecuted.
The fewer people who understand what is going on, the more room there is for misunderstanding, miscalculation and abuse.
Potential losses on some complex financial products are almost limitless.
The problem remains that ‘nobody really understands the banks any more, and that includes insiders.
Your readers would be shocked if they realised just how crap the IT organisation is in many banks as well as corporations and government ministries,’said a man with a decade of experience in a software company.
One consultant even said: ‘The next global financial blow-up will begin with an IT crash.’
Truth is that the scale and complexity of a major bank’s trading operation makes for opportunities.’
Banks are very good at creating the impression of being run like an army.
Look beyond the facade at the perverse incentives, at the silos and the climate of fear, at how zero job security breeds zero loyalty and at their unmanageable size and complexity and you do not see a rationally organised command structure.
The issue is not whether outsiders can be made to understand how these complex products worked but rather why, before the crash, so few insiders took an interest.
In his memoirs, Alistair Darling writes about the top bankers he had to negotiate bailouts with in the dark days of the crash: They didn’t understand what they were doing, the risks they were taking on, or, often, the products they were selling. The top management in banks both here and in the US failed to understand – or even ask – what was apparently making them so much profit and what were the risks.
Banks selling these products make huge short-term profits and will see themselves celebrated by shareholders and the financial media.
In a probably inadvertent moment of candour the highest boss of the megabank Citigroup summarised this dynamic as: ‘As long as the music is playing, you’ve got to get up and dance.’ He then added: ‘We’re still dancing.’ That was July 2007.
Why did credit rating agencies assign triple-A or ‘super-safe’ ratings to so many CDOs and their ever more complex varieties?
Credit rating agencies are paid by the very banks whose complex financial products and instruments they are meant to judge independently.
Imagine the Michelin-guide inspectors getting paid by the chef whose food they had come to taste? How many stars would that restaurant get?
The world of City accounting, like that of ratings agencies, is dominated by a handful of firms. They even have a nickname: the Big Four.
Not only do the Big Four audit the big banks’ books, they also have immense consultancy arms selling highly priced advice to … those same banks!
The auditor is acting like a health and safety inspector who not only rates the kitchen hygiene but also makes big sums on the side advising the cook how to increase revenue.
In two years I did not meet a single banker or banking staff member who spoke respectfully about external accountants.
‘How can they make independent judgments of us when we are their biggest clients? Given how unintrusive external auditors are we could have a whole separate accounting system without them knowing.’
A trader had asked, rhetorically, in his interview: ‘Do we, as a society, want 25-year-old traders making £1 million a year? If not, you need regulation.
Twenty-four hours later, two regulators had come forward: one junior and one senior. The senior regulator had been right in the thick of it.
Ultimately, regulators rely on self-declaration: what is presented by a bank’s internal management.
The trouble is, he said with a perfectly calm smile, a bank’s internal management often don’t know what’s going on themselves because banks today are so vast and hugely complex.
‘Recruiters get hold of your CV and make offers on behalf of banks.’‘That’s the true test of character, if you can say no to earning three, four or five times your current salary.’
I suppose that until meeting that senior regulator I had a sliver of hope of hearing some good news, and a convincing reason that everything had been done to avoid a repeat of the last crash. ‘Has the sector been fixed after the crisis?’ I asked him straight out. His answer: ‘I don’t think so.’
My impression is that very few people outside finance are even aware that in 2008, life as we know it had a near-death experience.
I had had no idea just how much damage the financial sector can do to society let alone how terrifyingly close to the brink we were in 2008.
Who wants to live in a world where problems of this magnitude are not even public knowledge, let alone in the process of being solved?
And far worse: it could very well happen again.
Former Labour prime minister Tony Blair is making at least £2.5 million a year as adviser to JP Morgan. Hector Sants, who as chief regulator saw his sector suddenly collapse in 2008, was offered a top job at the megabank Barclays. His estimated ‘compensation’ was £3 million a year.
It is hard to overstate the fear and confusion that insiders felt when events were unfolding. This inarticulate terror went all the way up the chain of power.
‘If you had told people at the height of the crisis that years later we’d have had no fundamental changes, nobody would have believed you. Such was the panic and fear.’
For typical ‘blinkered bankers’, work is not the ordeal it is for teeth grinders. It is not ‘just a job’ like for neutrals nor the glorious championship Masters of the Universe make out of it. For blinkered bankers their work has quite simply become their world.
I have found that many outsiders are deeply reluctant to accept that to an important degree the financial world isn’t populated by people wilfully doing evil but by conformists who have simply stopped asking questions about right and wrong.
‘When you make $100,000 a month, you basically don’t have common interests with your friends any more.’
To think that blinkered bankers will one day wake up and decide to change finance from within is wishful thinking.
Alongside neutrals, teeth grinders, Masters of the Universe and blinkered bankers, I found in the City two more groups of people.
The first group might be called the delusional bankers, as they have lost touch not only with the rest of society but also with reality.
They are addicted to their work, they don’t acknowledge there is a problem and there is no longer a coherent perspective underpinning their views.
In the Libor and FX scandals, traders at big banks and brokerages manipulated crucial interest and currency rates for their own gain over years and years. This was illegal and the traders must have known this, as they must have known that all their internal communication was being recorded and archived.
And yet, after successfully manipulating a particular rate they exchanged self-congratulatory emails or chat massages completely openly.
What sane criminal would congratulate his mates in public on the latest robbery?
Only when you realise these traders were living in a cloud of self-delusion do their actions make sense.
The Libor and FX scandals were scandals in the true sense of the word but the crash is of course the most important and urgent reason to closely study self-delusion among bankers. Which brings me to what must be the most terrifying interview of all.
For the financial sector to ever improve, he said, ‘you’d have to untangle the inherent tendency to amorality. And that tendency is embedded in the system. Regulation to keep the City in check? Don’t hold your breath. No matter what rules you put in place, they’ll always find ways around it. It’s like the Prohibition.’
‘If you shaft people and get a very good deal, that’s considered the greatest thing there is. That’s what it’s all about, isn’t it?’
This was the interview that pushed me from anger directly into despair and as I was writing up my notes I caught myself thinking a few times: please, don’t let this be true.
It might be possible to reform the incentive structure in banks so that bankers are no longer rewarded for lying to their superiors, to the middle office, to accountants, to credit rating agencies, to the regulator and to their clients.
But the point is that delusional bankers have by definition stopped responding rationally. How do you reach someone living in the mist of self-delusion and addiction?
This is why financial activists call for the radical shrinkage and simplification of banks. The aim must be to organise the world of finance in such a way that a collapsing bank cannot drag down the world economy with it. In a soundbite: too big to fail is too big to exist.
If the Masters of the Universe, blinkered and delusional bankers form the human powder keg at the heart of today’s financial sector, the final type, then, would be the fuse. This is the group that comes closest to the proverbial evil bankers: creeps who know exactly what they are doing.
Except that these ‘cold fish’, as I have come to call them, were not creepy at all. They are extremely calculating and seek to eliminate all emotions from their decision-making.
What I do for a living is legal, period. That is the cold fish mentality and this turns morality into a private matter, or rather one of the options available to human beings.
Attempts to debate what is right and wrong hit a brick wall for this type of banker.
Nobody taught me more about cold fish bankers than a recruiter I would sometimes take out for a drink.
‘My clients are not bad people. They are people who no longer think in terms of good and evil. Professionals.’
More people need to understand how dangerous the global financial sector still is, how in 2008 it took us to the brink and that the deeper causes of that near-catastrophe have not been tackled.
All the signs are pointing to the need for a complete overhaul of our financial and monetary system – not repairs or a major clean-up but a completely new DNA.
The first step is to be clear about the nature of the problem. If you blame all the scandals as well as the crash on individuals you imply that the system itself is fine.
The problem is the system and rather than angrily blaming individual bankers for acting on their perverse incentives we should put our energy into removing those incentives.
It is not rocket science, and you would expect all major political parties in all the western democracies to have come out by now with their vision of a stable and productive financial sector.
Why have western democracies failed to articulate solutions for one of the most urgent issues of our times – let alone competing visions that offer voters a choice?
In America, France and the UK, the law allows banks and bankers to buy political power – known in another fine example of obscuring language as ‘campaign donations’ rather than ‘corruption’.
Former Labour Prime Minister Tony Blair is not alone in making vastly more money as ‘adviser’ to a megabank than he was earning when serving his country.
Across the West, politics and public office are changing from being a countervailing power to the world of finance, to becoming a springboard for individuals to move into that world.
Political powerlessness in the face of global finance is infuriating and raises the question of whether globalisation is even compatible with national democracy.
How are we to bring the global financial sector under control, without a legitimate global government? And if you believe such a global government to be unfeasible or undesirable, does this not imply that globally operating financial institutions of a size and power that dwarfs national governments are untenable, too?
Thinking of how dangerous and explosively unstable the global financial sector has become, and how deeply embedded, I feel something close to nausea. How is this ever going to be put right, or at least brought back under control?
The United Kingdom and the rest of Europe are being reshaped in the image of the City and this is no conspiracy but a simple projection of existing incentives into the future.
The world of finance is not some far-away land that can be safely ignored.
Ignorance, denial or apathy is simply not an option when it comes to a problem of this magnitude and urgency.
Cynicism about the current crop of mainstream political leaders seems entirely justified. If they were planning to take on the power of global finance politics in a serious way they would have told us by now. To write off politics, however, seems the dumbest thing we could do. A democratic system is and remains the best opportunity for ordinary citizens to wrest power back from global finance through peaceful means. It is also the best opportunity for the sector itself to reform, before it is too late.
The abolition of slavery and the liberation of women demanded far greater and deeper changes than are now required with finance. Nobody is helped more by cynicism about politics than cynical politicians.