Greed Can Be Good : Why Investment Banking May Be Broken But Doesn't Need Fixing 9781908739995, 9781908739742

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Greed can be good

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“Tells it the way nobody should.” US Treasury official “Hart will never work in this town again. But I suppose he doesn’t need to.” Anonymous British banker “I really don’t think we’re ready for this.” Association of Investment Bankers

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Greed can be good Why Investment Banking May Be Broken, But Doesn’t Need Fixing Dave Hart*

Published in association with the Institute for Financial Understanding

*as told to David Charters

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Elliott Thompson 2

Elliott FirstThompson published 2013 by Elliott and Thompson Limited 3

27 John Street, London wc1n 2bx www.eandtbooks.com ISBN: 978-1-908739-74-2

© David Charters 2013 Elliott TextThompson The Author has asserted his right under the Copyright, Designs and Patents Act, 1988, to be identified as Author of this Work. All rights reserved. No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted, in any form, or by any means (electronic, mechanical, photocopying, recording or otherwise) without the prior written permission of the publisher. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. 9 8 7 6 5 4 3 2 1 A CIP catalogue record for this book is available from the British Library. Designed and typeset in Minion by MacGuru Ltd Printed and bound in the UK by CPI Group (UK) Ltd, Croydon cr0 4yy

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contents

Foreword vii Introduction xiii What’s it all about: is there any value in what we do? 7 Human capital: it’s the people, stupid 13 Conspiracy theories: was there a master plan? 19 Virtuous spending: why bonuses matter to the economy 25 Giving back: the next Big Lie 31 Friends and allies: we did not do it all ourselves 37 Bankers, lawyers, accountants: are we equally bad? 45 The future: it’s the market, stupid 51 Banking and the environment: do we care? 57

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Do clients matter? 61 The new City: an ocean of diversity 67 So what is our legacy? 73 The London effect 79 Where do we go next? 85 Postscript 95 Index 97

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Foreword

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foreword

Privilege should always carry responsibility. As a senior investment banker I have been fortunate in leading an extraordinarily privileged life, the culmination of which was my elevation to the Lords. I hope you will forgive me if I sound just a little pleased with the way things have gone. At least for me. There are quite a few of us bankers here – perhaps more than you might think, and sitting on all sides of the chamber because we like to spread ourselves around. The upper house of the British Parliament serves as a repository of all kinds of expertise, which is made available for the benefit of the nation. You can find anyone here, from a convicted felon at one end of the scale, to a retired senior banker such as myself at the other. Or perhaps it is the other way around. So when the chancellor suggested that I really ought to share my views – I think he said ‘Come clean’ – on the credit crunch and in particular on the role played

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by investment banks, I answered the call to action and did what any self-respecting former banker would do when faced with a similar task. I took myself off to the Caribbean with Gisela, 24, from Brazil, and Tatiana, 23, from the Ukraine – my personal assistants for the duration of my stay – and slaved away furiously for anything up to an hour a day on the text that you now have before you. The Institute for Financial Understanding supported me in my endeavours, and various senior colleagues from the investment banking industry joined me for some or all of my time there, sharing freely of their insights and expertise, and bringing their own personal assistants, who were happy to rotate between us and lend a hand, a shoulder or indeed whatever was most appropriate at the time. It was an exhausting trip. We were relentless in grinding through all that lay before us, nailing everything in the no-holds-barred approach at which investment bankers excel. The result is a simple essay that seeks to shine a light into an area so often misunderstood and misrepresented: the City of London and the global investment banking industry. It goes without saying that the opinions expressed here are my own, and that I take full responsibility for any errors and omissions. Perhaps the only time an x

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investment banker ever took responsibility for anything – so far anyway.

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Lord Hart of Hartless Common, House of Lords, London, January 2013

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introduction

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introduction

Is that it? The credit crunch not exactly over, but at least sufficiently boring and familiar that we’ve all just moved on, with our ever-shorter attention spans, to the Next Big Thing? Quite possibly. And yet we should not allow ourselves to forget the lessons of the most expensive financial crash  in modern history. The music nearly stopped for good. It cost the global economy trillions. It is no exaggeration to say that it changed the world. Generations to come will still be paying off the debts that it created, and millions of people have already paid the price – in unemployment, social dislocation, busted banks and businesses, shrinking economic opportunities and all the ills of a world unnecessarily impoverished and which must now pick itself up, dust itself down and, above all, not forget what happened and why. As an investment banker – and a very senior one – I was part of the privileged elite that brought this about. We benefited enormously from decades of artificially inflated prices, a bonus-driven culture based on ‘me

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now, and I want it all’, and torrents of cheap money that we thought would last forever. We thought we knew best. We had to be smart. Look how much we were taking home. You don’t earn that kind of money for being average, do you? Not only that – we actually created money. We hired bright young things with PhDs in subjects that no one really understands, let them loose with computer programmes and enough computing firepower to win a war. And yes, we let them loose to swing your money around, because they were winners. Except they lost. Massive miscalculations that should have been picked up by checks and balances in the system, by older, wiser heads, even by regulators and government – please, don’t laugh – were not only missed but wilfully ignored, until the computer-gaming generation of geeks let loose on trading floors learnt that when things go wrong in the real world you can’t press Restart, and all those extra zeroes on the end do matter after all. We had a hell of a party, and the rest of the world had our hangover. The bank of which I had the privilege to be chairman, Erste Frankfurter Grossbank, was at one time the largest bank in the world. I joined it from Bartons, one of the UK’s oldest, most traditional names. In the game of life, I was a winner. 2

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introduction

I was paid millions of pounds a year, even in bad years when things went wrong. When they went well – generally because of market conditions rather than anything we did – I was paid tens of millions. But did it make me happy? Of course it did. I loved every minute of it. Money isn’t guaranteed to buy you happiness, but it sure helps. I’d be a hypocrite if I said I didn’t enjoy the lifestyle: the fine wine, the expensive, easy women, the drugs, the accumulation of material possessions – property, art, fast cars, the travel in helicopters and private jets (we called them ‘smokers’) to exclusive resorts where the great unwashed who eventually bailed us out didn’t even get to press their noses against the glass. Still don’t, in fact. If it is true, as someone once said, that politics is show business for ugly people, then high finance is show business for rich ones. Either way, we got the pussy. And I loved it all. As a matter of fact I still quite enjoy it, because I got out early and kept my stash. That’s why I’m writing this now from the terrace of a villa on St Barts looking out at a crystal-blue ocean, and you’re probably reading it on the Tube. And so far no one’s managed to take it away from me. But was it right?

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This essay is an exploration of what we did and why we did it and, most importantly, where we go next. It is not a chest-beating polemic from an ex-banker on a guilt trip. I don’t do guilt, and anyway, I wasn’t guilty. We were probably the greatest villains never to be prosecuted. Because we weren’t criminals. So what were we? Misguided? No – we weren’t that naive. Selfish and cynical? Of course. Faced with the risks and rewards that we had to deal with, who wouldn’t be? But were we evil and corrupt? Certainly not – we were pillars of the Establishment, a fundamental part of the global economy and too important to be allowed to fail, which is why the rest of you picked up the tab. And of course we were very close to the politicians. The law can only provide a limited guideline for people as bright and motivated as investment bankers. It represents an intellectual challenge, a conundrum, a hurdle to leap over elegantly and flawlessly in the quest for profit, rather than an absolute moral authority. And of course laws are made by regulators and legislators – badly paid, unmotivated low-flyers who are never the smartest men in the room. Do we need a new code of ethics, a different approach to the way we do business – or should we just repackage the old one and carry on? It may not have worked for you, but it certainly suited us. There are no 4

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introduction

definitive answers here, and clearly no easy alternatives for an industry used to getting its own way. All I can offer is the insight of an insider and my reflections for the future. Plus my assurance that whatever happens, bankers will still come out on top. We always do.

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Dave Hart St Barts. Christmas 2012

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What’s it all about: is there any value in what we do?

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what’s it all about?

I have often said that investment banking is the triumph of form over substance. Very little we do ever adds value to anyone other than ourselves. We take other people’s money, typically in very large quantities, and we move it around, doing clever things with it that they don’t fully understand and which, over time, generally make it grow less than it would if we had left it alone, and sometimes reducing or even destroying it altogether – although never before we have taken our cut. We do the same thing with entire businesses. We call it Mergers and Acquisitions – M&A – and the people who do it are among the most cerebral, distinguished, plausible people in the investment banking industry. They devote their lives to disrupting existing corporate structures; taking successful businesses and carving them up, pushing them together, loading them with debt, distracting successful management teams from what they are successfully doing already, and generally causing mayhem. Imagine if a happily married couple were told they had to move in with another couple, get

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rid of the husband or the wife and make a ménage à trois, because the three remaining partners would have complementary skills and eventually form a stronger unit – oh, and a large fee would be charged by the family counsellor recommending it. That’s M&A. Over the course of the average economic cycle M&A professionals are one of the biggest drags on prosperity. Don’t think value destruction. Think value Holocaust. And they’ve been doing it for decades. Is this valuable? Well, it is to us. Just look at the fees. To understand the investment banking industry, you have to remember that whatever you are told, it is all about money. People with a strong moral compass become teachers or social workers. People with a strong sense of greed become investment bankers. They work hard because they are motivated. They can make more in a single year than a social worker or a nurse makes in a career. Their work is very competitive, the hours are long and their elbows are sharp. Sudden death lurks at every corner – and believe me, they cut a few of them. Make one slip and you’re fired. Make two and you’re out of the industry. Make three and you can get re-employed as a regulator – just kidding. On the other hand, get lucky, claim enough credit for successful business done by other people, and you can pick up a life-changing bonus in a single year. 10

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what’s it all about?

Judging investment bankers by the standards of ordinary people is unfair. The pressures are different. The rewards are so much higher. And of course the kind of people who opt to spend their lives in an environment like that are going to be difficult to relate to if you work in a factory or a school or a hospital. Sympathy, rather than criticism, might be a better starting point for critics of the City. Most of them have no idea what they are talking about and probably would not know what to do with a multimillion pound bonus even if they were given one. Let alone ten million. Big money is not for little people. Look what happens to lottery winners. No one ever heard of an investment banker going off the rails because he was paid too much. So in answer to my own question I have to say ‘no’, I don’t think anything I ever did was of any benefit to anyone except myself and my colleagues. But more importantly, with the coming of wisdom that you only achieve after a crisis such as we – or at least you – have all endured, I now understand that this is not the right question. You don’t ask a casino owner what social benefit he has brought about. We’re investment bankers. We just are. It is that simple.

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Human capital: it’s the people, stupid

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human capital: it’s the people, stupid

If I am right, and there is no deeper question to ask about what we are there for, maybe we should ask instead who exactly ‘we’ are. One of the criticisms frequently levelled at the City is that we take the best and brightest of each generation of graduates, put them through a brutal boot camp of a training programme, spit out half of them after two years, burnt out and broken, and turn the rest into shallow, one-dimensional, avaricious stormtroopers who care for nothing beyond material reward. All of this may be true, but again the perspective is flawed. Ask the ones who make it whether they enjoy living in large houses in Chelsea, owning two or three holiday homes, a few fast cars, and a Damien Hirst. Do you think they enjoy taking their trophy wives – probably their second wives – to smart restaurants dressed like designer Christmas trees? You bet they do. They get the same satisfaction as anyone else who finds a quick route to fast money and it is a natural human reaction to want to flaunt it. Let

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us not be hypocritical about this. Footballers and rock stars do the same. Even criminals do it. Investment bankers are human too. It is not as if the kind of people who work in the City would have ended up as charity workers if investment banking did not exist. Think horses for courses. There are some of us who are born to be close to money, and some who are not. Luckily for us, we are the ones who are, and you are the ones who are not. Personally, I have never accepted that disparities in income and wealth are unreasonable. They happen for a whole variety of reasons, and when they do, you just have to make sure you are on the right side of the imbalance. It is a source of pride that I always have been. I also make a point of never worrying about money the way ordinary people do. Obviously it is easier for me to say that than it is for some people, because I have spent the last twenty years getting paid millions of pounds a year. But the British in particular suffer from intense discomfort when talking about anything to do with their personal finances. I have no such inhibitions. I left them behind, along with a whole lot else, when I first entered the industry. Investment banking has allowed me to grow beyond them and I am a more effective, higher-achieving, in fact better human being as a result. 16

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human capital: it’s the people, stupid

By contrast, the entitlement culture has led millions of people to feel justified in living off benefits paid for by taxes levied on their harder-working and more successful contemporaries. Yet when those same contemporaries pass ‘Go’ each year in the City and collect substantial sums of money, the less well off feel entitled to complain, as if it were somehow unfair. Politicians start grandstanding and proposing higher rates of income tax, tycoon taxes, mansion taxes and other ‘social justice’ measures. My view is: do nothing. This is not a time for action, but for healing. We just need to talk about things. The reality is that we are not some strange race of alien invaders who hijacked the global economy and ran it off the rails. We are the same as the rest of you. Only luckier and, above all, richer.

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Conspiracy theories: was there a master pl an?

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conspiracy theories: was there a master plan?

One of the most tedious rumours surrounding the crash is that it was somehow orchestrated in the interests of global capitalism: that the banks needed to let the steam out of an overheated global economy that had been building up pressure for years while they systematically milked it. Making all the pain come in one go would force governments – and therefore taxpayers – to take the hit, underwrite the cost of fixing it and, in a situation that unfolded in Wall Street rather than Whitehall time – i.e. where decisions had to be taken in a matter of hours – shore up the status quo in the banking world, rather than giving anyone the chance to rethink it. The result: decades of overindulgence by greedy, reckless bankers were paid for overnight by other people and that those same bankers were left in place to start again in their old ways once the dust had settled. If only we were that smart and that coordinated. What the conspiracy theorists miss is the fact that we are just as selfish, egotistical and chaotic as the rest of you. Getting the heads of half a dozen major investment

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banking firms together and asking them to trust each other with something as colossal as causing the global credit crunch would be an impossible undertaking. Just getting them and their egos in the room at the same time would be a challenge. These men – there are no women – have reached the pinnacle of Establishment respectability. They know prime ministers and presidents. Most have invested in knighthoods. They all have a huge amount to lose. And all of them would see it as a unique opportunity, possibly never to be repeated in their careers, to position their own firm as the ultimate insider, trading ahead of their peers. The only certainty would be that all of them would betray the conspiracy by breaking ranks and selfishly seeking advantage from it, and then everyone would know. What applies in banking applies in society as a whole. In the UK some one hundred or so people control around £400 billion of the country’s wealth. Should we worry that they are too influential? Could they somehow combine their influence and start to pull the strings in a way that goes against the common good? If only. Society would be a lot better run, taxes would be cut, benefits eliminated, law and order would mean something again, we would find market-based solutions to 22

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conspiracy theories: was there a master plan?

everything, and a properly deferential social hierarchy would be established, much like during Victorian times. But it will never happen, because people with monstrous wealth have monstrous egos, and will always be too selfish and egotistical to cooperate. Nobody runs the world. Politicians have limited power to mess things up, which they use remarkably often, but other than that there is no one in charge. Stuff happens, market forces do their thing, and, on the whole, technological advances and population growth make enough of us richer over time that we can call it progress. Sort of. But at the human level: the level of real individual people doing whatever it is that people like to do in their lives, there is no plan, no strategy – just a vague direction of travel where they get randomly chewed up and spat out, and of course democracy, the ‘right’ to put a cross next to the name of whichever politician seems least objectionable on a specific day once every four or five years – whatever that achieves. And thus we have chaos. Not surprising in the least. The only approximation to a ‘real’ statement of opinion is the market. Only in the market do you have instantaneous transmission of information, combined with the intellectual firepower and the motivation – okay, the greed – to respond immediately, second by second,

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without prejudice or inhibition. If only the institutions of government could claim to be as responsive and as reflective of underlying realities. But then again, unlike the markets, so-called democratic government rests on a giant lie. We – whatever ‘we’ are – are not equal. Never have been, never will be. By contrast, dictatorships, like investment banks, are refreshingly honest. There is no doubt who the top dog is and he stays on top until he is deposed, and in the meantime people can stick their opinions. But that is just a personal perspective, and nothing to do with the way bankers behave or how investment banks are actually run.

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Virtuous spending: why bonuses matter to the economy

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virtuous spending

Amidst the chaos, where do we find consolation? I find it in money, and lots of it, though when I say this people react as if they find it hard to relate to me, and perhaps with reason. If people haven’t experienced real money then they can’t possibly understand. One of the aspects of the investment banking industry least easily grasped by the masses is the bonus system. Even the most sophisticated commentators fail to get the critical point about bonuses: they are not just good for the City, they are good for everyone. When I order a £500 bottle of champagne in a nightclub I’m creating employment. Not just for the bar staff who serve me, but also for the cleaners who clean up the mess in the morning, the men on the door, the taxi driver who takes me home in the early hours and the young ladies who come home with me. Those young ladies are a testament to the success of the global economy. Who would ever have imagined that beautiful, impoverished young women could come from all over the world in their thousands, from Brazil

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or Ukraine or Thailand, entering the UK on student visas to work for escort agencies and lap-dancing bars servicing people like me? They earn great money for short hours and can support entire villages back home. Globalisation makes money flow around the world, and talent follows the money. That is progress and it makes me proud to be playing my part in it, as often as I can and to the fullest extent of my abilities. And that is another thing – we do our bit without complaining. When we max out on over-consumption to entertain our clients and come into work with alcohol oozing from every pore on our bodies, noses perpetually running and dark shadows round our eyes, we remain stoical in our silence and composure. While other groups of workers complain about the burdens they bear, demanding compensation for miner’s lung or whatever medical disorder is associated with their chosen profession, no one ever hears a word about broker’s dick or banker’s septum. Our dedication to our clients and our industry is selfless and silent. From time to time I muse that somewhere in a French vineyard there is a humble grape-picker, an old man with a wizened face, who is grateful to me, even though we will never meet. This is the beauty of capitalism. The goodness flows far and wide, from the top of the food chain – me – all the way down to the bottom 28

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virtuous spending

– the workers who do the mundane everyday things that keep the whole system going. And our pleasures define us. Investment bankers don’t do cheap. We do sublime. The reason is the money. When I arrive at a top hotel I like to check in not with a girlfriend, but with several beautiful young women, dressed to kill, all of them paid so much that they never even make eye contact with anyone else. I like the other people in the lobby – lesser men with their wives or girlfriends – to observe me checking in, carelessly, with three or four companions of such beauty that they can only dream about them. And they do, while their wives hiss their resentment. It gets worse when we relax by the pool and I am being pampered, indulged and pandered to. Any man who spends his time shamelessly with several stunning beauties at a time is clearly in a different league to those who can’t. And that is only the beginning. I have often said that compromise is the enemy of achievement. When I indulge, I do it properly, whatever I happen to be doing, and you really don’t need to know the detail. Playing a part in a system as magnificent as global capitalism is surely a worthy goal for all those who aspire to greatness. When we are successful, the impact of the investment banking industry goes far beyond

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pushing up house prices in Chelsea or providing buyers for luxury car manufacturers, art galleries, jewellers and fashion houses. The wealth that we accrue – and spend – from every part of the global economy gets recirculated, pushed back into – and down – the system. When I spend, I help someone. If I spend enough I help a lot of people. And most of them I’ll never know and they will never have the chance to thank me. So don’t be critical of me and my bonus, or of any of us in the super-affluent elite. I’m helping people. We all are. We’re truly in the happiness business. Not just our own, but everyone else’s, too, even though it starts with ours.

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Giving back: the next Big Lie

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giving back: the next big lie

But times change. The spotlight is sharper now, the focus keener, as the green-eyed commentariat in the media vent their spleen and politicians briefly enjoy an uncharacteristic moment in history when they are not the most loathed and despised species on the planet. Banker-bashing is the new national sport. If it lasts long enough it could actually become quite tedious. We are used to commanding at least envy, if not respect. Of course, part of the reason so much energy has gone into the hate campaign is because people do envy us. But whereas once that gave me satisfaction, I now find it vaguely troubling. I say this not because I personally have anything to fear. It is true that I wanted to be rich – and I am – but it was enough for me to win. I had no desire for the rest of you to lose as well. That just happens to be the main consequence of what we did, not the original intention. Perhaps it is time to give a little back. Infuriating though it may be, perhaps we can no longer ‘live big’ and simply ignore the little people.

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I say ‘give a little’ because I do not believe in excess – at least not in this field, and excessive giving would suggest we had something to atone for, which we don’t. But a little never did anyone any harm, although I have generally favoured the firm doing the giving (corporate donations on the collective behalf of all the employees) rather than self-indulgent personal advertising. Perhaps it is time to do our bit to make the world a better place. A good starting point seems to me to be culture: exclusive, elite and high-end. When we sponsor a season at the opera, it is not about ourselves. Our support for the arts or indeed for sport is a sign of a vibrant, giving spirit running through our firm. You may see a bunch of toffs swilling expensive champagne and hogging the best seats with the best views at Covent Garden, Glyndebourne, Wimbledon, Twickenham or Wembley. I see business being done – clients being entertained with their wives or girlfriends – in a socially responsible manner that supports the best of British sport and culture, and stays just on the right side of the Bribery Act. Once again we find ourselves as an industry misunderstood, judged out of context and from the wrong perspective, not for the first time or the last. Our problem is our openness: we look like what we are, which is to say wolves in wolves’ clothing. The fact is that we operate at the very top end of everything 34

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giving back: the next big lie

– the size of the transactions we execute, the money we manage, the pace at which things happen, and of course the fees that we charge – and that will inevitably be reflected in every aspect of our lives, from the homes we live in to the lifestyles and the leisure pursuits that we indulge in. There is no moral aspect to any of this: the numbers are bigger for us than they are for you and so we scale up accordingly. The question is whether there is merit in these extraordinary times in going further and changing well-established practices from the past. There have always been individual City figures who have indulged in philanthropy. Many reach the end of their careers, still at a relatively young age and with plenty of energy and ambition, but with a dagger sticking out between their shoulder blades from whomever it was they did not spot coming up the greasy pole beneath them. For them, personal giving can turn out to be an expedient route forward to their next Big Thing. Spray a few million pounds – the equivalent of a couple of years’ money, probably less in the high-earning years – around enough high-profile good causes and slip in half a million to one of the big political parties, and you could be looking at a knighthood or a peerage, a place on some public body or whatever other baubles are in the gift of the nation.

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Because that is what it is all about. He who dies with the most toys wins. What are the toys? Of course, all the material ones. But other covetable assets count too. The game is about relative positioning. The pleasure I get from seeing my name listed in the programme at some cultural event as a Platinum donor is only enhanced further by seeing yours listed as Gold. And how much better to be listed as a Life Patron? Being seen to do the right thing – as opposed to doing it for its own sake, which many of us would regard as pointless – is very much an issue of the moment. Appearances count. In fact, in this shallow, fickle age, they may be the only things that do. So we have to get them right. We need to bring our giving out of the closet and make sure the broader public understand how usefully we are recycling their wealth. We certainly do it more effectively than government. And at the same time we need to nail the lie that this is the least we can do under the circumstances. In a free country there is always a choice. My choice right now is to be in the Caribbean island of St Barts, but I have no doubt I shall be back in the UK for the start of the season, bringing my spending power with me. I would never ignore my country, the place of my birth. It is where I made my money and it will always have a special place in my heart. 36

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Friends and allies: we did not do it all ourselves

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friends and allies: we did not do it all ourselves

An awful lot of people in the City tried to plead the Nuremberg defence when the music stopped: they were only obeying orders. I for one have never met a single banker who had anything to do with the credit crunch. They were all doing other types of business, had never heard of sub-prime, and were just trying to do an honest day’s work for what most would consider an honest year’s pay. So who was to blame? And who was, if not actually to blame, at least complicit? When I am asked about this, I have several lines of thought I like to pursue. Here goes. The good news is that it was a collective failure. In other words everyone was to blame, and so no one is responsible. It was not just the risk takers – let us say the proprietary traders who loaded up the positions – who were to blame, also but the risk managers, the regulators, the board of directors of the bank who were paid to oversee our business, and the legislators who created the framework within which we operated.

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Ultimately, therefore, it was the government, which is of course democratically elected, and that means you, the poor sucker who voted for them, are to blame. The credit crunch was down to you. Alternatively, it was a systemic failure. The system failed, not the people. The system should have had checks and balances. Disproportionate risks should have been ruled out by mechanisms that spotted threats and required pre-emptive action before anything bad could happen. In the same way that a teenage mugger can blame his upbringing, his genes, his environment, his parents, schoolteachers or social workers, in fact anyone but himself, the investment banking industry is a victim of ‘the system’ that not only failed to prevent the build-up of excessive risk, but facilitated and even encouraged it. There is an interesting comparison here with executive pay. As chairman of Erste Frankfurter, my ‘compensation’ – that is to say the money I was paid in return for giving up my time to show up at the bank each day – was fixed by a remuneration committee. The committee was part of the system. I chose the members of the committee, highly respected, credible figures from outside the industry, appointed them to a wellpaid and relatively undemanding position, and ensured their contracts were renewed, as long as they did a fair and reasonable job in return. 40

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As a leading firm we had to match industry-wide standards for pay in order to attract and retain the best talent. At the top of the firm, by definition, the very best talent was me. So they had to ensure I was paid not just in line with industry standards, but an amount that could set a new standard for the industry, and which fully reflected our standing and success as the leading global firm. They had to do this whether I wanted them to or not, and I really had little choice but to accept what they decided. It would certainly have been improper to attempt to influence them. Some years this compensation was twenty or thirty million euros. In good years it was even more. I could have worked for less, but that was not the point. The point was that the system demanded that I should be paid this much and my own wishes were frankly irrelevant. The question is whether these people, who were intimately involved at the heart of the firm (there is nothing more intimate to me than my pay) were complicit in the failure that ultimately led to the downfall not just of our bank, but of many others as well. My answer is ‘no’. The average non-executive director of a major bank could not recognise a credit derivative if one bit him on the arse. They were not paid to understand the detail. If they were asked to explain how their firms had lost so much in sub-prime, they would have done guppy

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impressions. They were there to provide reassurance to shareholders, a sanity check to the executive management of the firm on matters of strategy – big picture stuff, the view from 90,000 feet – and to ensure that proper procedures were duly followed. (Whatever they were.) I don’t think those people necessarily did a bad job. So where should the finger of blame be pointed? There is a view in the media that because investment bankers profited the most from the problems that caused the crunch, they must have been the principal architects and therefore carry most of the blame. At this point the regulators keep their heads down, the way they always do, mostly because they are not smart enough to be investment bankers – why would they be earning a fraction of a banker’s package otherwise? – and anyway any regulatory system works on the basis of ‘rubbish in, rubbish out’: if the banks fail to say what risks they are running, how can anyone outside the firm second-guess them? Politicians can generally be blamed for most things. They used to be our best friends, and privately still are, because they know where the money is, and they want some of it, both personally and for their party treasurers. But of course they are not experts. They do the best with the information they have, and if that is not good 42

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enough, they call for an inquiry. That is all they can do. So in this case they are not to blame either. As so often when I reflect on the crunch, it comes back to the point I made earlier – you, the public, are to blame. People get the governments they deserve. Government sets the regulations and regulations set the tone. Human nature is what it is and people behave accordingly. So if something goes wrong, it is everyone’s fault. We are all in this together. Or at least you are. I hope this helps you understand. You want to know who was really to blame for all the chaos, who silently went along with it, sleepwalking into disaster and allowing it to happen? That is right. It was you. You may not have realised it at the time, but that is what you were doing. You are all guilty and it may be some time before I can find it within myself to forgive you.

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Bankers, l awyers, accountants: are we equally bad?

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bankers, lawyers, accountants

To the ill informed, ‘the City’ is one large amorphous mass of men in suits, baying loudly for money. In practice, of course, we are different. The key line that I would draw is between bankers and ‘the professions’. A lawyer friend of mine once told me at the end of a long lunch that he had never lost a case. I knew this was untrue and challenged him on it. He winked at me over his glass of port and said, ‘It’s the clients who lose. I always get paid.’ The reason for his confidence is that he is an adviser, not a principal. He is brought in to offer his professional expertise and is paid for it by the hour, the same as accountants, PR advisers, and indeed the young ladies I was talking about earlier. Bankers have always been different. In the good old days we offered advice to our clients, and were paid a retainer for our services, sometimes a daily rate, but mostly a success fee – typically a percentage of the value of the transaction that we advised on. This was good for us, but bad for our clients, because we always wanted them to do a deal, even if it made no sense.

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Whereas lawyers and accountants could only ever earn money for work they had actually done, and were relatively agnostic as to the outcome, we could earn millions more from getting the deal – any deal – done. Naturally this meant that on balance, having considered all of the relevant factors, weighing up the pros and cons, and bearing the client’s strategic goals and long-term interests in mind, we were always inclined to capitalise on the natural momentum of any deal situation and advise the client to go ahead – in his own best interests. In the even better days that followed, we made even more money. The even better days were superior to the good old days because we started competing with our clients. We used the money deposited with us – let’s call it your money – to buy companies ourselves rather than showing them as acquisition opportunities to other companies or buyers. We developed our own expertise at going in and cutting costs, selling assets, raiding the cash pile, firing people, piling the business with debt and then selling it on via a stock market flotation to a group of greater fools – the investor community, who bought the shares and were left holding the baby when the music stopped. For us, it was a huge value-creation process. We had similar success in the stock market, where 48

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our proprietary traders took first dibs on all the great ideas from our research department. Of course we still did advisory business, but it somehow mattered less when we were making so much money elsewhere. Who needs clients? Why be a mere facilitator of someone else’s wealth creation when you can keep it all yourself? I think of this as financial Darwinism. Lawyers and accountants work in partnerships. They pay out the profits every year, leading a comfortable lifestyle as long as they have work. But they never accumulate capital or create a financially muscular business. Bankers take other people’s money, use it, and as long as they do not lose all of it, accumulate capital which they can then swing around as aggressively as they want. In rising markets, which until the crunch had remained more or less unbroken in any meaningful way for decades, they made out like bandits. That is why bankers live in Chelsea and lawyers live in Fulham. So my short answer is ‘no’, the City is not the same. It is in fact highly differentiated. There is a food chain, a success ladder, a pinnacle of achievement. And guess who sits at the top?

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The future: it’s the market, stupid

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the future: it’s the market, stupid

Part of my confidence for the future lies in the sheer ingenuity of investment bankers in the face of adversity, and that in turn is based on the power of markets. When on occasion my detractors called me a moral vacuum I took it as a professional compliment. Bankers do not actually believe in anything, any more than markets do. We certainly would not fight for anything, except perhaps next year’s bonus. We are above all that. When actual fighting is needed – as in the use of physical force, sadly occasionally necessary – we prefer to delegate it to professionals who specialise in putting their lives on the line (and who of course are not paid the way we are). Markets in themselves are not ‘for’ or ‘against’ anything. They just are. If a bunch of hedge funds and proprietary traders short the shares of a particular company to such an extent that it is unable to raise the capital it needs to stay in business, loses the confidence of its customers and suppliers, and ultimately goes bust, that is a great profit-generating event for those with

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the foresight to have taken part in the short-selling. But it is not a moral event. It is a mathematical consequence of a certain weight of money in a given context, and whoever first did the calculation and acted on it deserves a bonus. Mathematics is not good or bad, it is just mathematical. The beauty of this approach – the market-based approach to valuation and indeed values – is that it can be applied to anything. If rich countries want the right to pollute, we step in and create a market in carbon credits to allow them to buy notional means of compensating the planet for their continuing filthy habits. The market is hugely profitable and allows us, by actively trading in it, to spread happiness among the beneficiaries of the carbon credit system – generally poorer countries who appreciate the scraps we toss their way – as well as the big corporations that buy their way out of trouble and feel virtuous while continuing to spread their…well, whatever it is they spread around that makes them feel uncomfortable. It is not as if we are actually complicit in anything. We are neither good nor bad. We just intermediate. One of my last and greatest achievements at the bank was establishing a life insurance company – Erste Frankfurter Lebensversicherung – a snappy name for a snappy game. EFL traded portfolios of life insurance 54

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policies with other market players. We hired a bunch of actuaries who devised computer programmes predicting the value of particular policies based on the policyholders’ age, health, occupation and so on. The price we paid, either to the policy holder if he wanted to cash in early, or to other third parties who held policies, was based on average life expectancy, with a margin built in to ensure a profit. But the real potential of this business lay in the early payouts we got if people died sooner than expected. Every time I picked up a newspaper and read about a plane crash or a rail disaster I knew someone somewhere had got lucky. We went massively long of this market on the first news of a possible swine flu pandemic, but sadly it petered out and we had to unwind our positions. We then came up with an even better investment proposition: impaired life policies. These are policies held by people who have been diagnosed with some dreaded illness, like cancer, AIDS or heart disease. We hedged our bets by having a broad mix of conditions in the portfolio, to protect us so that even in a worst possible case – let us say they discover a cure for cancer – we could still look forward to a healthy return. Is this callous? Is it inhumane? It gives us a financial interest in other people dying, so surely that must make

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us morally uncomfortable? Not a bit of it. People die. Get over it. It has been happening for millions of years. It is not as if we go out there and kill them. Whatever happens to them would happen anyway. So if you can make a profit at the same time, why not? Let us just say we are less emotional than the rest of you. And richer. And of course, we don’t make moral decisions – the markets do.

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Banking and the environment: do we care?

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banking and the environment: do we care?

Imagine a rare Siberian fox. Only ten breeding pairs survive. And it would take all of them to make a beautiful fur coat for your wife or mistress. What would you do? Some people would do nothing. They would turn all green and ethical and say how wonderful it is that these wonderful creatures have a chance to survive in the wild at all and they should be left well alone and indeed protected. Let’s forget about people like that and focus instead on what some of us might do – hypothetically speaking, of course. One approach – let’s call it ‘old-style Wall Street trader’ – would be to slaughter all of the foxes, and have an amazing coat made, which because of its rarity – there will literally never be another one like it – will be immensely valuable. Clearly this is a deeply flawed perspective. The right perspective – call it ‘twenty-first-century City of London’ – would be to capture all the foxes and fence them in, and then finance a fox-farming operation that ensures there is always a regular but limited

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supply of foxes to keep rich women in glamorous coats, which would still be reassuringly rare and expensive, but whose purchase was ensuring the maintenance of a breeding programme and thus the future viability of the species. In other words, look good, make money and save the planet. Kind of. The reality is that in the modern age we are no longer free to push the edge of the capitalist envelope the way we once did. But, fundamentally, the environment is a commodity like any other. Leave us to establish a market in it, and if we can make it valuable enough, we will ensure it survives. Market forces are a wonderfully self-regulating mechanism. Whether it is the rainforest, endangered species, rare habitats or the purity of the air or the ocean, we can trade it. Give me half a dozen PhDs in string theory and I’ll design a market to achieve anything you want. Or at least anything the market wants. Because an efficient market is always right. I care about the environment. When I go on holiday I pay a premium to go to places that are unspoilt, beautiful, spectacular to behold, and above all not full of the rest of you. When I settle my bill at the end of my stay I’m subsidising the planet. And keeping exclusive places free of the tourist masses who would spoil them. Does that make me an environmentalist? I guess it does. In fact, on that basis, all bankers are. 60

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Do clients matter?

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do clients matter?

One of the positive changes that people hope to observe in the caring, sharing approach taken by the banking industry post-crunch is a new focus on client business. In other words, that bankers will adopt a more traditional approach to relationship banking – getting to know their clients, understanding their needs, giving them the best advice and prospering slowly over time alongside them. There is a particularly naive school of thought that even believes we will actually start lending money to clients and go out of our way to help the smaller ones – small businesses that typically provide the growth and the jobs when the economy bounces back. All I can say is that these people know nothing at all about the margins the banks get on loans and how much you need to lend to produce a half-decent bonus pool for people who are used to living well. And small companies are really tedious. A lot of them fail, particularly when the banks won’t finance them, and as a banker you need an awful lot of them to match the size of deal you can do with

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a single, large, easy-to-understand, well-established company. Far better to put the firm’s capital to work in complex derivative trades with sky-high margins that no one comprehends but which allow us to book a huge paper profit and enlarge the bonus pool. But when you do have to deal with clients, what do you do? I know all about clients. Believe me, there are only two types of client: those you ‘seduce’ and those you ‘rape’. Rape makes sense if you honestly never expect to do business with a client again. Overcharge them, underdeliver, walk away and fail to support them when things get tough or go wrong – because who cares? Well, they do, obviously, because that is not what they were expecting, or what they hired you for, but there are an awful lot of clients in the world. When I was at Grossbank, by my reckoning there were ten thousand major investing institutions and five thousand corporates with whom we were aiming to do business. Even if we burnt a dozen clients a week, every week of the year – which realistically even we could not do – we would all have retired a decade or so before we ran out of clients. But there is an easier and more effective alternative: seduction. If you seduce a client, rather like a woman, you can keep going back for more. It does not mean you respect or even like them. You just accept that simple 64

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expediency and the desire to make next year’s bonus mean that you take the nastier edge off your treatment of them, smile and grease and ooze even though you may inwardly despise them, and guess what – you can keep on f*cking them. They might even like it. My prediction for the coming year is that we’ll see a lot more of this. With capital constraints on proprietary trading and principal investment, there’s nowhere to go but back to the clients. Remember us? We’re investment bankers, and have we got a deal for you…

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The new Cit y: an ocean of diversit y

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the new city: an ocean of diversity

If men behave like this, what about women? Women are different. I know this, and I am hugely appreciative of the differences. Traditionally in the Square Mile women found employment as secretaries and mistresses, leaving men to do the less serious things. Today the sheer pressure of competition means that every firm needs to fish in the biggest possible talent pool. In my day at Erste Frankfurter we hired beautiful blonde women from Russia, stunning very tall black women from Ethiopia and Somalia who looked like supermodels, short, mignon French women with hair in bobs and pert breasts, super-fit bikini models from the beaches of Australia, and quietly deferential young Asian women with long dark hair to their waists from Thailand and the Philippines. Our diversity programme was the envy of the City, because I took care of it myself and did not delegate. I knew every one of these women and I made sure they were very highly paid. Some I knew better than others, it is true, but I honestly think

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there was not one on our Advanced Entry Programme who slipped through my net. Their sheer impact in client meetings should not be underestimated. When I entered a meeting room flanked by these women, the conversation stopped. We got everyone’s attention, and I did the rest. Anyone can be average. My firm, with these women, was not. Which is not to say that men have no place in the modern City. They form the mass ranks of expendable foot soldiers, essential in the financial carnage of the last few years, which called for major sacrifices. ‘Erste Frankfurter announces ten per cent job cuts in response to crisis’. Of course we did. We were getting bailed out by the taxpayer so we had to be seen to take some pain. We got rid of our poorest-performing ten per cent every year anyway. But can you imagine me firing any of my turbo-babes? That’s where men come in. Especially junior and middle-ranking ones. They can take the pain – ‘When I blow the whistle, climb out of the trench and walk slowly towards the machine guns. I’ll be right behind you and you won’t feel a thing.’ That’s leadership, investment banking style. The reality of a firm the size of Grossbank is that you have to seek out talent wherever you can find it. You need high achievers who will work like dogs, never rest or complain, and go anywhere at the drop of a hat. In 70

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my time, we looked everywhere, in every country, every culture, every city and halfway decent university, not because we were liberal-minded and keen on outreach, but because we had to. If we did not find these people, one of our competitors might. We just wanted the best. What we did to them after that is a different story. Of course we mistreated them. Investment banking does not do ‘kind’. We do results, internal politics, and arbitrary mass executions of our people. The key thing is not to be in the wrong place at the wrong time, and if you are, then don’t complain. In the high-stakes casino of financial services, no-one complains when they win, and they should lose with dignity, too. Although, sadly, they don’t. They sue. Anyone with any kind of victim angle sues like it’s going out of fashion, egged on by parasitical employment lawyers working on ‘no win – no fee’ arrangements. Ethnic origin, religion, sex or sexual orientation, disability, ginger hair – anything can be a reason. Of course, as a principled organisation underpinned by a firm moral code and a strong sense of ethics we did exactly what you’d expect – we settled. It’s a cost of doing business, which we can afford. It is the rest of you – indirectly – who pick up the tab. We make the kind of money that means we can afford to settle. Other businesses don’t. So when the same kind

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of madness spreads from the City to more rational parts of the economy, there is a broader cost to the country. But I guess that is someone else’s problem. In fact the beauty of being a banker is that most problems are someone else’s.

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So what is our legacy?

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so what is our legacy?

I had to ask the question. I pose it because it is the kind of question that reasonable-minded people would expect serious, intelligent professionals to be able to answer. If I devote my one unrepeatable life to flying around the world first-class, staying in luxury hotels, meeting the world’s top businessmen from hundreds of companies and dozens of cultures, is it all just about money? Or is there something else? In private, most investment bankers will tell you they do have certain memories that they will carry with them to the grave: moments to savour and cherish, times that they still recall as if they were yesterday. These are memories shared only with a few of their closest friends, not because they are embarrassed or are afraid of showing weakness – we are all human – but because they could be, well, sued. I once flew a whole plane load of hookers to a private Caribbean island for my birthday. Champagne, caviar, Colombian marching powder and a private jet – plus I’d taken the precaution of booking the whole resort. Do

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you know how much it cost? Nothing. It was free. The firm paid. You can do that when you’re in charge. Even more so when you sign off your own expenses. Why do I talk about this now? Because it is important to be open and honest about the past. Secrets are bad for you. And of course I signed a comprehensive settlement with the firm when I finally left, and they have no comeback against me for anything I say or do now. That might make you angry. It might seem unfair, or just plain wrong. But the fact is that however much you despise us, we will always dazzle you. Obviously the things I did were on a grander scale than some of my less high-flying contemporaries, but everyone who has worked in the industry has a tale or two or three to tell. Some of them have hundreds. And that is part of what makes us special. We push the envelope. As I said earlier, anyone can be average. When Alan Greenspan famously accused us of irrational exuberance, he was of course right. Who wouldn’t be irrationally exuberant when he gets to play with trillions of pounds of other people’s money with no consequences if it goes wrong? But is this all we leave behind? Is our legacy purely material or is there something else? I think you know the answer. We make a lot of money, and we should 76

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leave a handsome pile for the next generation. We can also send our kids – whom we may hardly know, but that is not necessarily a bad thing – to the best schools. We can indulge our wives, whom we may also hardly know, and our ex-wives, whom we know even less than we did, and our mistresses, whom we know a little from time to time. The thing about bankers is that we don’t necessarily need to know a lot of people to get what we want out of life, at least not intimately. Does this mean we are undemanding? Quite the opposite. Ask anyone who has ever lived or worked with one. Are we in fact cold-hearted? Perhaps, though I prefer to call it ‘focused’. And we are certainly good hosts. As hosts we can indulge our friends. In fact we give the best parties and so are good people to know, providing you in turn indulge our natural desire for one-upmanship. An invitation to dinner is not really a desire to share your company, more the need to put you in your place, making clear to you that in our newly acquired/renovated/extended homes we really do have the latest, biggest, most expensive…well, everything, really. And perhaps that is it. Our legacy will be resentment, but out of resentment will come inspiration, and determination to do even better than before. The next generation of investment bankers will rise out of the

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ashes of the first; greedier, more determined, more ruthlessly materialistic and ambitious and intent on making an even bigger impact on the world than we did. A career as a banker at a top firm is still the greatest prize that any alpha male can claim. Imagine you are a general looking out at the wasteland of the Somme. Let’s call it not the Somme but the dot-com boom, which led to a terrible bust and put a massive dent in the savings and pensions of many millions of people across the world. What are you dreaming of at that precise moment as you survey the devastation? There is a twinkle in your eye. What do you see? Something truly dazzling. Hiroshima. It’s going to be the next big thing. Except rather than atomic bombs it was credit derivatives. As soon as one over-inflated bubble bursts, even before the dust settles, smart teams of investment bankers at all the major firms start working out how to pump up the next one. Call it resilience, stamina or just plain opportunistic greed, we have it by the bucket load and we will never be defeated. That is the real legacy of investment banking. Survivability. We’re better than cockroaches. The world will never be without us.

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The London effect

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the london effect

Guess what the Number One city in the world is. There was a time when I might have said ‘New York’, but London has leapt into the lead and become top dog, not just in the European time zones, but globally. A lot of people would like to claim the credit for this: politicians of all types, business leaders, the cultural elite and so on. But do you know who is really responsible? That’s right: bankers. It’s the money, stupid. No-one can do anything without the ultimate lubricant. Money truly makes the world go round, and we design the machinery and pull the levers that make it work. Wherever I go in the world the business elite, the oligarchs, the tycoons, the newly enriched dictators trashing the developing world all want the same thing: a little – or not so little – piece of London. They want a bolt-hole, relatively free of corruption – at least in the conventional sense (our corruption is more than skindeep and generally quite subtle). They want an environment that is peaceful and secure, with great shops, cultural and sporting lives, healthcare and education,

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and they have the money to pay for them. Of course, a lot of home-grown Brits can no longer afford those things, but that really does not matter. In a free, open society the biggest wallet gets the place at the front of the queue. If residential real estate goes through the roof and the only Brits who can afford to live in Chelsea are bankers, who cares? If whole areas of London turn into Richville for foreigners, we, the Brits, with our traditional tolerance, will meekly accept the new status quo and quietly get on with our lives – while the Russians and the Arabs and the Chinese and the Indians roar past in their supercars and limos. Does it really help the UK that London has been turned into the place where the super-rich recycle part of their newly acquired wealth? Of course not. For most people it does not make a positive difference at all. The money does trickle down, but not necessarily to the people of the host nation. The super-rich employ their own staff from overseas, pay no taxes in the UK and disdain the natives amongst whom they find themselves – at least if they have not managed to insulate themselves sufficiently in their ghettoes. So it is the Brits who have their faces pressed against the glass in their own country. But as a senior banker I can relate to these people. I love them. The way I love anyone who pays me a fee. 82

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Should we worry that much of their wealth comes from seizing state assets in their own countries, exploiting the poor, or any of that other liberal-minded, guilt-tripping stuff? I don’t think many bankers focus too much on that sort of thing. As long as they can get through money-laundering procedures somewhere in the world and get their money into the banking system, they are fine with me. My view on client selection has always been that pretty much anyone with money will do, as long as they won’t get me into trouble. It is not my job to police the world. I’m just a banker. I do money, not morality. You might wonder what does make me lose sleep? Partying. That is why I always opposed the introduction of movement-sensitive light switches in our building. If I nodded off in the afternoon I didn’t want the lights going out to save energy in my giant, glass-sided corner office and letting everyone know I’d passed out after another wild all-nighter. So London, once the centre of a mighty empire, is now a rich people’s hospitality facility that has little to say to the rest of the country. That’s no bad thing. Trust me. Just ask any rich person and they’ll tell you: they’re fine with it.

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where do we go next?

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where do we go next?

If we accept that investment bankers will always be with us, what does the future hold? My first observation is that some things will be different. After an event as cataclysmic as the credit crunch, changes will be forced upon the industry – to some extent they already have been. You can’t burn through trillions of dollars of other people’s money and expect no comebacks at all, although at one point I must say I thought we might pull it off. People don’t like us. We have to face it. There was a time when that would have surprised me, because we had generally managed to shield ourselves from the great mass of the public such that they did not think about us in any meaningful way at all. Not that they think much about anything in any meaningful way, except football and EastEnders. But when the crunch came they did briefly get the point that we had gone through hundreds of billions of pounds of their money and if the numbers had not been so staggering that they found them hard to relate to then they would have got

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quite angry about it – at one stage I really wondered if there would be furious mobs with pitchforks and flaming torches in Sloane Square or Leadenhall Street. Luckily it was all so big it was beyond their comprehension and they soon got bored. Thank god for zeroes. Next time we lose a trillion all the banks will be much more media-savvy. If half a dozen high-street banks are going to declare themselves insolvent unless the taxpayer bails them out, we’ll make sure it coincides with breaking news about the prime minister and the chancellor having been schoolboy lovers and still slipping along the corridors of Downing Street for secret trysts. Believe me, if you need to find a way to surface an eye-catching story without leaving fingerprints on it, you just need to speak to the right people and there is always a way. If we are truly facing financial Armaggedon we’ll press the nuclear button and leak some real news. Clear the front page and get this dull finance stuff onto page five. So disregarding the substance of what we do – the actual business – we will get the presentation right, or at least the non-presentation. Staying out of the press for a while will be one clear objective, and we will spend a lot of your money on the kind of advisers who take care of that sort of thing. Elsewhere there are obvious changes already from both the good old days and the even better days that 88

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where do we go next?

followed. We can no longer prostitute our equity research as obviously as we used to – there has to be at least a semblance of independence in what our analysts write. When we allocate hot new share issues to investors we can no longer give them just to our friends and to our own traders. Capital requirements are tougher now so we have to be a little less reckless in the way we swing the balance sheet around. And we have started paying risk managers more than we used to. It cannot be that long before we start actually listening to them as well. I thought the ‘pay peanuts, get monkeys’ approach to hiring regulators would change, but government spending cuts – required as a result of exactly the kind of crisis that halfway decent regulators might have prevented – mean that good people are still too expensive. No change there. But to understand fundamental change we need to reflect on the essence of revolution: a real revolution does not involve the little guys overturning a privileged elite and living happily ever after. It involves the little guys overturning a privileged elite, only for the circle to keep turning so that eventually it goes through a full revolution and a privileged elite are once more on top. That is the essence of revolution. Nothing really changes, and there is no happy ever after, although some of us just seem to keep on getting richer.

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So the new paradigm will be the same as the old paradigm. Which in one sense is bizarre, because by now most people have kind of got the idea that whatever the question, investment banks are not the answer. Normally we learn from errors, evolutionary blind alleys and disasters. But not here. The people running the financial services industry will still be the same, the people working there will not change, the pay will still be great – far better than you can get doing almost anything legal, at least without some specific, rare talent, like kicking a football or singing for a living – and dinosaurs will still rule the earth. I guess that in a complex society, we need specialisation, and each specialist area gets its perks. Our ­military are professionals. They are dedicated, courageous, and can be identified by the uniforms and medals they wear. Bankers are no different. We do the finances and we can be identified by the money we get to keep, and which we wear about our person so proudly. And most of all, because money is so fundamental – we can no more do without it than electricity or water – we will always be underpinned by the rest of you. And that is right. Trillions of dollars are out there, sloshing around the system, moved about by people like me. It is not even worth asking what it is for. It just is. And those of us who are charged with looking after it need 90

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only skim off the tiniest fraction to lead lives the rest of you can only dream about. Not that we do. We skim off quite large amounts, relatively speaking, but that is because this stuff is so complex and demanding that the rest of you really don’t know what is going on – nor should you. Just leave it to us. Could we actually fix the banking industry? Of course we could. We can fix anything if we want to. The question is: who wants to? I certainly don’t. We could separate out the basic everyday lending and deposit-taking business from the investment banking side. That everyday part of the business is truly part of the fabric of any developed society, so why jeopardise it by mixing it up with a high-risk roller coaster of a business where the only certainty is that from time to time the wheels fall off? If the board of directors of your average electricity or water company announced they were going into the casino business – presumably because they were bored and maybe just a little envious of the kind of pay and perks casino directors got – you’d probably fire them. Actually, on reflection, you’re so gullible that maybe you wouldn’t. You didn’t stop large, safe, boring, well-capitalised high-street banks and building societies doing exactly that, so why would you be different next time? Of course bankers will always argue – extremely

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eloquently, because we are pretty convincing with words – that it isn’t as easy as all that. These large, globally integrated businesses are interconnected, mutually dependent. We can’t just rip them apart, we’d lose all the synergies, and if we do try to impose change then we risk whole firms offshoring to some place with a more enlightened, benevolent climate and probably better sunshine too. Oh really? How many investment bankers’ wives really want to move to Dubai or Hong Kong or Monaco? The Royal Borough of Kensington and Chelsea is, well, the Royal Borough. There is only one King’s Road, only one Sloane Street, and, darling, the schools are marvellous – what would happen to young Hugo and ­Arabella if they couldn’t go to Eaton Square or Wetherby? Investment bankers, at least the senior ones, are not as mobile as they’d have us believe. Structurally, if you wind the clock back a few decades, there was not only separation of boring banking from the sexy stuff, but the sexy stuff was tightly controlled as well. Investment bankers and stockbrokers worked in small partnerships where their own money was at risk in the firm and they could only serve one set of clients – stockbrokers worked for the betterment of the institutional investors they served, rather than their own proprietary traders with a bad position to shift. 92

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Big Bang changed all that with a momentous wealthcreation opportunity. It brought all kinds of conflicting interests together under one roof, facilitating the creation of hugely powerful firms that served the interests of … well, themselves, actually. Conflicts of interest? Clients? Don’t mention those ‘c’ words again. If there had been time to look carefully at the banking industry while it was on its knees and desperate for help, then it might have been changed for ever – much against the will of the people who run it – but time was short, almost nobody outside the industry understood it, and, since turkeys don’t generally vote for Christmas, the advice given to government by those of us who understood these things was to work with what we had rather than doing anything radical or unpleasant or even dangerously commonsensical. If it isn’t broken, don’t fix it. It was catastrophically broken, for all to see, and nobody fixed it. Time marches on, people get bored, especially with dull finance stuff, and the moment has now passed. Phew. So the future, for us, at least, is good, and as I have explained above, what is good for us is eventually good for you too. Only less so. The time for recriminations is past. Let us draw a line. We need to move on into the future, learning from what we have done and ensuring that we never

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get caught doing the same things again. Bankers learn fast. Believe me, it’s going to be much harder to catch us next time.

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Postscript

Finally, and to end on an upbeat note, let me just add that if I have provided some perspective on what has happened, and what will happen next, that alone will be reward enough for me, although it would be wrong to finish without recording my thanks to the officials who ensured that my own share options were not cancelled in the bailout of Erste Frankfurter. In fact none of my colleagues’ options were either, which goes to show how even in adversity the public can be generous beyond their own comprehension. No matter how much we have, we can always use a little more. And even we can’t, it’s still nice to know it’s there. That’s a comfort that some of us have – and some of you don’t. So thank you, once again, for your generosity and support, from the bottom of my wallet.

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Index

accountants 48, 49 Bartons 2 Big Bang 93 blame for credit crunch 39–43 bonuses 10, 17–8, 27–30, 63 Bribery Act 34 capitalism 21, 29 clients 47–8, 63–5, 83, 92–3 computer programmes, banking 2 conspiracy theories 21–3 credit crunch 1–2, 21–2, 39–43 consequences for bankers 87–94 directors, banking industry 39, 41–2

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disclosure, regulatory 42 dot-com boom and bust 78 environmental issues 59–60 Erste Frankfurter Grossbank 2–3, 40, 64, 69, 70, 95 Erste Frankfurter Lebensversicherung 54 escorts 28 foreign super-rich, the 82–3 ‘giving back’ 33–5 government 2, 21, 40, 43, 89, 93 graduates 15 Greenspan, Alan 76 honours, British 35

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investment bankers 1–5, 9–11, 15–7, 21–4, 29, 42, 47–9, 53, 75–8, 87–94 consequences of credit crunch 87–94 see also blame for credit crunch; bonuses; clients; ‘giving back’; markets; recruitment knighthoods 35 lawyers 47, 48, 49, 71 legacy of investment banking 75–8 legislators 4, 39 life insurance 54–5 loans 63 London 81–3

proprietary traders 39, 49, 53, 65, 92 public anger 87–8 public blame for credit crunch 43 recruitment of staff 2, 15, 69–71 regulators 2, 5, 39, 42, 89 remuneration committees 40–1 risk managers 39, 89

market forces 23, 60 markets 53–5, 60 media 33, 42, 88 memories as legacy 75–6 Mergers & Acquisitions 9–10

salaries 16–7, 40–1 see also bonuses shareholders 42 small businesses 63 spending bonuses 27–30 staff recruitment 2, 16, 69–71 stock market 48–9 stock market flotations 48 stockbrokers 92 sub-prime 39, 41 suing 71–2 the ‘system’ 40–1

non-executive directors 41–2

taxes 17, 18, 22, 82

peerages 35 philanthropy 35 political parties 35 politicians 4, 17, 23, 33, 42–3, 81

voting 23 women in the City 69–70

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