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Some of my best friends are bankers

This entry was posted by Sam Jones on Wednesday, January 16th, 2008 at 9:22 and is filed under Capital markets, People. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.

1. Jan 24   21:10 Posted by Christmas is Over and Banking is Banking | Prince of Wall Street [report]

   […] FT Alphaville "Some of My Best Friends are Bankers" - January 18, 2008 […]

2. Jan 19   7:47 Posted by Tim Price [report]

   Fine, but if footballers don’t do their job properly, they merely disappoint their fans. They don’t break the real economy.

3. Jan 18   17:43 Posted by Boz [report]

   Gentlemen

   Two very interesting points of view. Both sides accusing each other of extremism and there is some truth in that. Like too many things in life the truth lies somewhere in the middle. What happened and how; there are many versions of that. In some cases, I believe, even the bankers who were creating such fairy tale CDOs had no clue what on earth they are selling. If it looks good, and everyone else is in the party and as Chuck Prince suggested ‘dancing’ then why get left behind. So one slightly less intelligent banker sold another one with the similar mental capacity a product. The professional institutional buyer who bought that product got insurance from a seemingly decent AAA grade monoline to protect him against the risk. Everyone in the Western banking world seemingly ended up playing that game, some to a lesser extent, since it was very enticing and very very rewarding indeed. Banks risk department filled with mere mortals with cynical minds who can not dare to disagree with the star banker on the risk or shoddy risk protection purchased to fill the files.

   The problem with the above is that everyone thought this 24/7 money making scheme is a going concern, pretty much like other secondary markets aka stock exchanges. If we think for a second what will happen if all buyers pull out of any of our stock markets, the twenty times P/E ratio valuation will evaporate into thin air and all our confidence will go to the deepest ditch. But stock exchanges work because majority of the instruments they are trading has some value and underlying activity which created profits. Unfortunately that can not be said about CDO or CDO of CDOs etc.

   Sometimes we just give too much credit to bankers for being smart. My experience has been quite the contrary. Intellectually there is not much difference between Mr Alchemist Banker and Mr Chav Bling Bling. Both would like to earn through any means, and then spent that money to buy strange looking designer goods or collector items they rarely appreciate (the boom in the crappy modern art prices is a very good example of this).

   Like footballers, this class of post teen adrenaline rushed youngsters has been paid immense amount of money since they are appreciated in their own world (banking – all ordinary bankers in branches are paid just a salary and nothing more) for the marvels they can achieve; mainly creating value from nothing. Alas in the last twenty years or so majority of the Alchemists hired created fake pieces of paper worth nothing and swindled and destroyed the very banks they were suppose to take to the new heights of monetary greatness.

4. Jan 18   16:19 Posted by Tim Price [report]

   Yes, in the interests of brevity I may have conflated a number of comparably guilty parties. But I challenge your analogy of chauffeurs and passengers. That analogy only works if the chauffeur also built the car, and had every interest in offloading it without maintaining any responsibility for its wheels subsequently falling off and it bursting into flames. The days of ‘originate and distribute’ certainly seem numbered, but then the days of quasi-monopolist ratings agencies conniving with Wall Street seem numbered too. And since many of the ultimate holders of crappy debt are less sophisticated institutions (local authorities and public fund pools, for example) - the word is “mis-selling” - the resultant litigation is shaping up to be way higher than the $10bn Danegeld forked over by Wall Street to salve the egos of, yes, naive and greedy investors who bought into dotcom fairy dust. We don’t need to speculate as to what happens when transactional finance and leverage are allowed to metastasize unchecked because we’re living with the aftermath already. The problem I have with Wall Street interests is that individual executives reap huge rewards out of all compass during the boom years, and in the bust years the poor old taxpayer, who was never a stakeholder, gets to pick up the tab. That isn’t capitalism, but a particularly tawdry version of socialism for the rich.

5. Jan 18   13:46 Posted by The Epicurean Dealmaker [report]

   Mr. Price — Surely, mistakes have been made. I can guarantee you that some of them were made by bankers, of whatever stripe, and some of those mistakes were indeed not honest ones. As an investment banker myself, I say hunt the evildoers down and gut them like fish. The health and reputation of my business–like that of any other–depends on regular weeding of the garden.

   However, what continues to irritate me is that the jumping and yelling and fingerpointing to date all seems to be directed at bankers, and I detect no difference in your comment. Do not forget that, yes, the chauffeur drives the limousine, but the passenger in the back tells him where he wants to go. It was the willful ignorance, greed, and practiced stupidity of legions of so-called professional investors–who appeared to unlearn everything they ever learned about the connection between risk and return–that created the demand for the products which are now blowing up in all our faces. They are not the only ones culpable: ratings agencies, central banks, and–yes–even investment bankers all played their part. But they were central.

   The current kerfuffle is playing out just like the dot-com bust, with investors scrambling eagerly to assign blame anywhere but at their own doorstep. Politicians, being what they are, cannot help themselves but join the scramble and milk this witch hunt for all it’s worth. What I find despicable is that this time it is supposedly professional investors who are joining in and even leading the charge. Shame, Mr. Price, shame.

   Never forget: Bulls get rich. Bears get rich. Pigs get slaughtered.

   Sounds like the knacker’s van is pulling up the driveway.

6. Jan 18   10:21 Posted by Tim Price [report]

   A wise investor recently reminded me: never forget the ability of politicians to do extraordinary things to save their own hides. Anyone who read yesterday’s WSJ will have seen the lead article, “Financiers’ pay incentives add to global financial crisis”. More to the point, they will have seen the letter sent to Stan O’Neal, ‘Chuck’ Prince and Angelo Mozilo from Henry Waxman of the House Committee on Oversight and Government Reform. It contains the following language:

   “You should plan to address how (your pay package) aligns with the interests of.. shareholders and whether this level of compensation is justified in light of your company’s recent performance and its role in the national mortgage crisis.”

   It just isn’t good enough to say let the market work these things out for themselves. Wall Street and City executives, and ratings agencies, have turned a blind eye to venal revenue generation at the expense of the long term stability of the entire credit and banking process. Bond traders and salespeople shouldn’t get to wreck the banking system and the real economy in pursuit of the next bonus payment. The implosion of the credit bubble has real world impacts - on investors, on consumers, on homeowners. If banks want to retain their privileged position at the centre of the modern economy they’re going to have to rein in the more unfettered tendencies of some of their greedier and self-interested staff, or at least align their interests with shareholders over the longer term.

   Taxpayers have a genuine grievance here. The forces of protectionism, socialism and regulation are all enjoying a secular tailwind thanks to Wall Street’s uncanny ability to poison all wells.

7. Jan 17   18:05 Posted by Boz [report]

   I have thoroughly enjoyed the article, the posting and the comments. Brilliant!

   The only sad thing is nothing is going to happen. I am quite young but already have seen dot com bubble bursting, asian crisis, stock market crashes and now subprime woes, and I have to admit that Masters of the Universe (aka investment bankers) had lot to do with them. Recently I saw an article where an ace dot com era investment banker was ‘not found guilty’ of losing billions and then also walked off with an additional $100 million cheque from the investment bank he had to leave because of these allegations.

   I look forward to see FSA or SEC response to this. Chances are that we will never hear from them - who are FSA current bosses, any city links I wonder .

8. Jan 17   0:39 Posted by pegnu [report]

   oh nonsense. People give money to banks to look after it - not to lend out to any old idiot with no prospect of it ever being paid back.

   Banks aren’t supposed to lose huge amounts of money! How can a bank fail to make money unless it has been extraordinarily incompetent.

   Anyone can lose money by handing it out to fraudsters. Most of us assumed that robbing a bank was a bit more difficult. Furthermore, the whole system of securitization encouraged this behaviour for the short term gains.

9. Jan 16   18:47 Posted by crookery.blogspot.com [report]

   Here’s another couple of Martin Wolf quotes from an earlier article

   “Those who borrowed the money to buy houses may, however, be deemed innocents. Whether this applies to people who exaggerated their earnings in applying for loans is an open question.”

   and

   It took foolish borrowers, foolish investors and clever intermediaries, who persuaded the former to borrow what they could not afford and the latter to invest in what they did not understand.

   Rightio. It’s an “open question” whether plainly fraudulent borrowers are innocents, and we should be attacking bankers pay because their investors are dumb. Is that it? Really?

10. Jan 16   18:28 Posted by Peter Caritato [report]

    Epicurean writes:
    “2) Since when in bloody hell are the intermediaries in any financial system supposed to tell investors “they couldn’t have these [high] returns without taking on substantial additional risks,” as you say? Are we supposed to assume that every institutional investor out there is completely ignorant about the absolutely primary, fundamental fact about financial markets: that risk is inextricably entwined with return?”

    Let us be specific. For example, the Postal Savings Fund of Greece is now asking Citi Global Markets for compensation, regarding a 40 million Euro structured bond which it bought in 2005, which is now worth 4 million, according to today’s “Ta Nea” newspaper.

    So what have we here? A high-powered team of bankers - their very name a guarantee - convinced a savings bank to put the deposits it collects in one of their structured bonds, and thus gain about 2-3 percent above the market rate, for an “inextricably entwined” downside risk of about 90 percent.

11. Jan 16   17:46 Posted by The Epicurean Dealmaker [report]

    I will address Mr. Wolf’s comments point by point.

    1) I am delighted and honored to confer hono(u)r wherever and whenever it is deserved. I am afraid, however, that Mr. Wolf appears to confuse my sarcasm, humor, and frustration with his article with the hysterical ranting I accuse him of. I concede that Mr. Wolf wrote a serious opinion piece in a serious publication, rather than a sarcastic hatchet job in a little-read, self-published weblog, but for that very reason I–and I assume many others–did and should hold him to a higher standard of argument than he demonstrated in his piece.

    Really, Mr. Wolf, an unbiased observer (if he or she could be found) would find it hard not to conclude from a reading of your article that its tone and language is highly intemperate and inflammatory, given the facts at hand. Had I the time, energy, and inclination, I could write a lengthy response to your original article rebutting almost every statement you make, based on the facts as I know them, if for no other reason than to disabuse the less-informed among the FT’s readers of the facile exaggerations, elisions, and half truths scattered throughout.

    2) Since when in bloody hell are the intermediaries in any financial system supposed to tell investors “they couldn’t have these [high] returns without taking on substantial additional risks,” as you say? Are we supposed to assume that every institutional investor out there is completely ignorant about the absolutely primary, fundamental fact about financial markets: that risk is inextricably entwined with return? Do not forget: it was supposedly sophisticated institutional investors which piled into “AAA”-rated CDOs, ABMSs, etc. 2007 is not 2000, when arguably clueless retail investors bought dot com fantasies based entirely on the recommendation of Wall Street analysts.

    If these investors were too bloody stupid, or too bloody greedy, to wonder how and why supposedly AAA securities could consistently deliver market-beating returns, then I say it serves them right. Your comment smacks far too much of the unfortunate tendency among many investors to blame anyone but themselves for their own mistakes, and I for one won’t have it.

    3) Well, yes, if you actually stopped to think about what I wrote in my two posts on the subject. First, yes, most major financial institutions already have long-term compensation schemes which tie bankers’ economics to the long-term health of their organizations. Second, and therefore, why would you propose to insert the government into a system which is already in place?

    Government regulators, by your own example, have historically tried to regulate the financial services industry from the rear, and in many cases have worsened perceived problems by their very intervention. You may have faith in the perspicacity and effectiveness of regulators, but I have serious doubts. I would point out that it was your otherwise excellent FSA and the BoE which helped greatly to turn Northern Rock into a shambolic mess, and I would venture that both institutions lead by miles over our own SEC and Fed.

    Furthermore, if you concede the fact that long-term compensation schemes already exist in the industry, I wonder that you still think they would be a panacea for the system’s current ills. Unless you are proposing–I shudder to think–that bankers’ compensation should be tied somehow to the performance and long-term health of the financial and economic system itself. If so, you should be receiving inquiries shortly from Vladimir Putin and Wen Jiabao about new openings in their Ministries of Finance.

    4) I am all for regulation, believe it or not. I am firmly of the opinion that abandoning all regulation of the financial system would be a catastrophic error, as it would be for abandoning regulation of any significant part of the global economy. I just want to see sensible regulation, done with a light hand, that responds to and guides change and innovation in the industry in a measured manner. This has less to do with my (real) mistrust of the effectiveness of regulators than with the incontrovertible fact that no-one, including the bankers at the heart of it, knows how the global financial system will continue to evolve.

    For now, I say everyone should take a deep breath, identify and acknowledge the mistakes that have been made (especially by oneself), and work together in a sensible, measured manner to find our collective way out of this.

    For I assure you, Sir, that the old saying coined by one of the leaders of my country’s secession from yours so many years ago rings as true now as it did then:

    “We must all hang together, or assuredly we shall all hang separately.”

12. Jan 16   16:32 Posted by Martin Wolf [report]

    I really enjoyed Epicurean Dealmaker’s “hysterical and ranting” contribution.Indeed, to be called hysterical or ranting by this person is almost an honour.

    I think he makes only one point that is worthwhile: investors desired high returns. How surprising! But, of course, the institutions made next to no effort to tell them that they couldn’t have these returns without taking on substantial additional risks.

    Yet the heart of his contribution contains the following logic: Wolf’s proposal is unnecessary because it already happens; Wolf’s proposal is a mistake because it will impose massive and costly intervention in these institutions.Does this make sense to anybody else?

    If we could abandon regulation of the financial system, that would be wonderful. But we can’t (for compelling reasons). So surely we must focus on incentives facing decision-makers, instead.

13. Jan 16   15:25 Posted by pegnu [report]

    CB - sorry misunderstood!

14. Jan 16   14:48 Posted by Carlomagno [report]

    pegnu, I know. NB that I made a distinction between alarming and alarmist.

15. Jan 16   14:13 Posted by David [report]

    Looks like Martin Wold has touched a nerve here. According to some of the posts, he is alarming, risible, hysterical … It seems the bankers can offer little justification for this unreasonable criticism of a very reasonable viewpoint.

    What do the bankers do to justify their bonuses? Underperform the market, create damaging derivatives, cream off a generous percentage of the huge money flows that pass through their fingers? Some - a few - may genuinely create value. Most in my view just benefit from their privileged position in the trough.

16. Jan 16   13:14 Posted by Paul Murphy [report]

    i must recommend reading ED’s post, linked to below. Extract:

    “I don’t know, maybe we should be grateful that the Brits have their own crotchety curmudgeon spewing forth half-baked nonsense in the financial press. That way, we do not have to feel so embarrassed when Ben Stein proposes to nationalize our banking system in The New York Times.”

17. Jan 16   12:26 Posted by pegnu [report]

    CM - yes somewhat worrying, but this is the point - if we keep having these crises eventually one will be serious enough to lead to political instability and the possibility of brownshirts stamping all over Europe again.

18. Jan 16   12:22 Posted by The Epicurean Dealmaker [report]

    Pace Yves Smith, I believe Mr. Wolf’s recommendation is so hysterical, rambling, and contrary to common sense (and a fine regard for the facts) as to be risible.

    In an unusual instance of the Yanks beating you all to the breakfast table, I posted my counter to Mr. Wolf’s tirade yesterday, after his piece appeared on FT.com:

    http://epicureandealmaker.blogspot.com/2008/01/armageddon-rag.html

19. Jan 16   11:49 Posted by Lurker [report]

    And what, pray, have we heard from the F.T. all these years about this and all the other obscenities?

20. Jan 16   11:24 Posted by Paul Amery [report]

    The remuneration system in the financial sector has become massively distorted in favour of employees, at the expense of shareholders, depositors and the system itself. As the system currently rewards employees by effectively awarding them a call option on the company’s profits (ie a share of any upside, with no responsibility for losses), it is entirely rational for those employees to create a net short volatility position in their business activities - ie to generate short-term profits while incurring significant tail risks. This then sets the scene for multiple Ponzi-type schemes to create short-term profits, as the current debacle in the credit markets is making clear. A move back to partnership structures and, dare I say it, unlimited liability, is the only sensible outcome. The momentum for this is only likely to happen after the current banking and insurance system has been devastated - a scenario which appears increasingly likely.

21. Jan 16   10:49 Posted by Carlomagno [report]

    The following setence taken from Martin Wolf’s artile makes my hair stand on-end:

    
    I now fear that the combination of the fragility of the financial system with the huge rewards it generates for insiders will destroy something even more important – the political legitimacy of the market economy itself – across the globe.
    

    Coming from Martin Wolf, this is truly alarming (NB: not alarmist). When was the last time such a statement could have been made without sounding somewhat ridiculous? Wouldn’t that be a few years before the brownshirts started stamping all over Europe in the last century?

22. Jan 16   10:20 Posted by pegnu [report]

    At the risk of annoying people, I agree fully with his analysis of the problems with the bonus system in light of recent events.