We are meeting one wonderful spring morning in the centre of the City. He is a well-dressed man in his mid-30s, speaking in a considered, intense sort of way. He orders a flat white.
Joris Luyendijk speaks to a former structurer who got ground down by the ethics of the job, but remains pro-free market
"There's a reason we have all this martial language on the trading floor. 'Rip someone's face off', 'working in the trenches', take no prisoners'. A rule of thumb in trading that I learnt very early on, says: there is a fool in every trade. You have to know who the fool is, because if you don't, then you are the fool. The financial markets are a shark tank, it's in the nature of the beast. Trading is a zero-sum game. Either you win, or you lose. There's no middle ground.
"It's a very small world, equity derivatives, and there were at the time maybe only a hundred people in London in my line of work. Very specialised. We are going to have to keep some things vague. I was in equity derivatives structuring for about a decade and got out some time after the crisis. I'll tell you later why.
"Structuring is a bit like project management, in a way. You need to work out what it is that your client, often a corporation, wants, because they often come to you with rather vague ideas. Then you break it down into pieces and work your way down the list of what needs to be done. Figure out which financial instruments they need, work down the legal and tax aspects, and so on.
"We might have an airline worried about higher oil prices, and not really knowing what to do. Would they want a hedge – a kind of insurance to protect them against price rises?
"All the Greek stuff that happened, where investment banks helped the Greek government move many of its debts off balance so their budget would look better – that was typically the job of structuring.
"Lots of the derivative business is tax-driven. There is the so-called stamp duty tax of 0.5% on particular financial transactions. Banks and other members of the London Stock Exchange are exempt. You may structure a derivative for a client in such a way that technically it's the bank doing the transaction, saving you the stamp tax.
"A corporation may operate in a country where they pay different tax rates depending on whether they hold certain assets longer or shorter than twelve months. A derivative may help them get the best tax rate.
"Generally, I'd say that 80-90% of all derivatives are morally ambiguous, to say the least. It's mostly to do with accounting, legal or tax needs, with greed or fear or with gambling. Wow, that doesn't sound very good. To be sure, I have no axe to grind. I am not complaining about my years in the industry.
"There is value in some of this. Derivatives can help you eliminate certain risks, for example price fluctuations. The textbook example is of farmers who could sell their harvest months in advance for an agreed-upon price with a future.
"Great example. Except my own grandparents were farmers. They never used futures because they considered them too complicated.
"So why did I quit? It was like the story of Dr Faustus, where you sell your soul to the devil. I sold my soul for worldly riches. The price the devil demanded was my moral bankruptcy.
"For a long time I was OK with that, until I wasn't. What triggered this change of heart? There was not one particular moment. You have to look yourself in the mirror every morning. I imagined a future son or daughter ask me, daddy what do you do for a living? What was I going to say? 'Well, sweetie, daddy rips clients off?'
"I began to wonder what people would say at my funeral speech. I am an atheist you know, I believe that this life is it.
"Obviously I read the Greg Smith resignation letter. He raises valid points, but I take issue with the idea that the toxic practices he describes are that different from what went on in the past. The main difference is that it's now much bigger, and even more complex. Smith and I both started at around the turn of the century. Back then there were still some so-called 'barrel boys', real working-class men who had worked their way up from the mail room. These days it seems almost as if everyone has a PhD from a grande école.
"Were things more ethical in the 70s and 80s? Maybe. From what I understand back then banking was more of a community. People all knew each other and so you couldn't go around screwing people over. It was so much smaller, so it could be self-regulating. Having said all that, it was also very clubby. Working-class people like me would never have gotten a chance in that world.
"The advisory part of investment banking, mergers and acquisitions and corporate finance, are still more like the banking of old. There it's about nurturing relationships with clients over many years, very refined and working on trust. The trading floor is more like a poker table. People look at odds instead of trust. Put simply: the advisory part of investment banking is about clients who need money, the financial markets-part about clients who have money. That's the difference.
"As I said, I am from a humble background. Everyone else in my family could expect to spend their lives on the assembly line. I was the first to go to university, and then the financial sector gave me all these opportunities.
"I suppose I have Thatcher to thank for that. She broke open the City and allowed working class people like me into the game. There's a whole category of bankers like me: smart, poor, hungry. We had the brains and the will to make it as we come from very humble backgrounds.
"I started out as a real neoliberal. I read Ayn Rand, absorbed the idea that markets were great, that there was nothing else that worked. Then over time, I got more critical.
"These days I believe regulators need to become much, much firmer. I have been thinking about joining them, in fact. My sense is that regulators have good intentions, but the complexity of the industry makes it very difficult. And there's the lobbying. The Dodd-Frank act in the US is supposed to prevent another Lehman Brothers-type crash. It is over 2,000 pages long by now.
"This financial crisis has crippled the western world, and the consequences will be with us for another ten years, at least. It is really big, and something like that can happen again. I'm sure that in four or five years, some smart structurer will find a clever way to get around this regulation, and God knows what will happen then.
"There are always unintended consequences of any new regulation. Do we need all this complexity? I kind of agree with the joke making the rounds among bankers that the last useful financial innovation was the ATM machine – and that was 40 years ago.
"Don't be taken in by the titles, by the way. I was always the head of something. Looks great on your business card. How it works in investment banks: people enter as analyst, or as associate when they have an MBA or PhD. You are an analyst and then an associate for three years. Then you become vice president or executive director, so there are thousands of those at a bank. It's like an onion, with lots in the middle but very few at the top. The top is the next level, managing director, and then even more exclusive, partner.
"By the end of my time at the bank I was making around £800,000 a year. That's a lot of money, a lot. I saved it all, never went for the expensive car etc. As a result I am in my mid 30s and I never have to work again in my life. Stoicism holds great appeal to me, as a philosophy. No matter how much stuff you have, you will always get used to it and want more. So it's much smarter to imagine you have much less, and then enjoy what you have. Under the shower this morning I imagined what my life would be like without running hot water. That's reality for 5 billion other people on this planet. I ended up thoroughly enjoying my shower, deeply grateful.
"It's strange. Bankers are so smart, yet they get this thing wrong. They spend their lives in an office when the only truly valuable thing in life is time. It is the only thing that is not replenishable. You can always make more money, but you can never get more time. Maybe it's because death is such a taboo in our society; that people live in this illusion that their life will go on forever. Or maybe they are afraid of the time, if they'd take it, if they'd stop working those insane hours.
"I want to emphasise, I am not complaining. I have no respect for people in finance who complain. They have a choice to do this. If you are some poor guy in some war-torn country, living off $2 a day, then you can complain. Then you can't choose.
Have I considered giving back the money I made, given my misgivings about the work I did? Well, I am morally ambiguous about that. Everyone is greedy, look at the average person in the west. When they borrow a lot of money to buy a bigger house, that's over-leveraging for you right there. When you buy a T-shirt for £3, do you think of the guy in Bangladesh who made it, working 12 hours a day for a shit salary?
"In the first world we all live at the expense of the other 5 billion. So if I am to give back my earnings, we should all do so. How did the bible express that? He who is without sin, cast the first stone.
"I understand that the people in your comment section are going to explode at this. Ah well, every era has seen its scapegoats, and today it's the bankers. I can live with that stigma.
"I am still pro-free market, no mistake about that. Companies need to raise money to invest, innovate, expand. Ordinary people need returns on their savings so at some point they can retire. This should be the raison d'etre for the financial sector. But by now the sector has grown so much in size and complexity ... And as a result the opportunities to abuse the system have multiplied by many times. Many times.
"A term like 'derivatives' puts people off but it's not terribly complicated, once you get beyond the lingo. Equity is roughly the same as shares. Equity derivatives are products that derive their value from them.
"There are options, when you can buy or sell shares for a particular price at a particular moment. There are futures, when you oblige yourself to buy or sell something for a particular price at a particular moment. My favourite example: When I order pizza delivery, I agree to buy a product for a particular price at a particular time. That's how a future works. There are swaps when you agree to exchange something at some point in the future.
"A big thing in derivatives is figuring out the value of these contracts. You don't know what the price is going to be of a certain share in three months time. So what is the contract worth that allows or obliges you to buy that share in three months time? There are complicated simulations for determining the value. The problem lies with the assumptions underlying those simulations. For instance the assumption there will always be buyers and sellers. In times of crises, that is not the case.
"Everything we built was bespoke, specifically designed for the client. Now, the trouble was that such a bespoke product would be sold on, and then it would be sitting somewhere in the financial system. But where?
"This doesn't really matter, until you have a major event like the collapse of Lehman Brothers, and suddenly everybody worries about so-called counterparty risk. Who is holding what financial obligations to whom?
"Imagine there's a contract between you and me, in which I agree to pay you a certain amount in three months time. Then I walk home and get hit by a bus. Now, who is going to pay you that certain amount? Nobody besides me might even know that I did this trade with you. That's an example of counterparty risk.
"If you don't even know who the counterparty is, well, it gets very tricky. This is one of the reasons why people call derivatives 'weapons of mass financial destruction'. In equity derivatives there are different categories of clients. You have got retail customers, ordinary people if you will, who are pretty well protected. There is also the class of professional investors or market counterparties and with them it's anything goes, really. The assumption is that professional counterparties should know what they are doing, caveat emptor and all that.
"Now there are very sophisticated parties out there. But there are also smaller players who basically have no idea what they're doing. Some small Spanish savings bank perhaps or some municipality in Sweden. What got to me after a while is how I'd be lying in the faces of these less sophisticated parties. And I'd be thinking, wow, this is my parents' pension money down the drain.
"Actually, the term 'muppets' for clients is very old. It's London slang for fools, for stupid clients. Some guy working for a small bank in Belgium would be called 'muppet', that's very likely.
"The other person in equity derivatives you speak to, he is in flow trading. That is a completely different animal. They make their money from commissions on trades for clients.
"You want me to find analogies in the animal kingdom? I'd say the flow people are like baboons. They can be aggressive but they are nice most of the time.
"Structuring people would be like snakes. We were structuring the products, and salespeople sold them to clients. 'Sales' is a wide and somewhat confusing term. In equity derivatives a salesperson is somewhat like a broker, who is going back and forth between two parties until they agree on a price. The difference is the type of clients. A broker goes back and forth between traders in banks. The salesperson between a trader and a client.
"As salesperson you are the client's ambassador on the trading floor, in a sense. And that can be tough, obviously, if senior people tell you to push products that you feel are not in the clients' interest. Because you need that trust to maintain the relationship.
"It's the famous difference between short-term greedy and long-term greedy. Short-term you make money off the client. Long-term you make it with the client. Do salespeople in equity derivatives understand what they are selling? They would say yes, we would say sometimes.
"Well, they needed to understand enough to talk intelligently to their clients about it. Then again, if they really got it, they wouldn't be in sales. They'd be in structuring or trading. Because this is where the real big bonuses are paid. Fundamentally, sales in equity derivatives is not different from selling jeans in a Diesel store. You build rapport with a client and then you close the deal. It's a relationship job."
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