It was an almost inevitable mistake, for a beginner. I had thought of the nancial world as essentially a single entity, in which everyone was basically the same. So I’d spread my net far and wide; if the sector as a whole was behind the crash, then everyone working there seemed worth interviewing.
This broad approach helped build my rst impressions of the City. But questions like
‘How can you live with yourself?’ and asking interviewees about their responsibility for the crash aroused responses that came close to hilarity. If they had not already volunteered to make the point that someone with their job had nothing to do with the crash, interviewees pointed out that their understanding of ‘2008’ came from the media and from books by journalists. Some people were strikingly ignorant about the crash, and a few even seemed indi erent—for example, the foie-gras fan in data-management services.
It was becoming increasingly clear that my beginner’s phase was over; even more so because by now I had heard stories that scared the hell out of me. The crash may have been as much of a surprise to the interviewees as it was to the rest of the world, but unlike outsiders they did understand the stakes. They talked about the hours, days, and weeks after the Lehman Brothers’ collapse on September 15 as the most harrowing period in their careers, if not lives. They spoke of colleagues sitting frozen before their screens, paralysed, unable to act even at moments when there was easy money to be made. Things were looking so bad, they said, that some got on the phone to their families: ‘Get as much money from the ATM as you can.’ ‘Rush to the supermarket to hoard food.’ ‘Buy gold.’ ‘Get everything ready to evacuate the kids to the countryside.’
When they talked about those dark days, there was often a note of shame in their voices, as if they felt humiliated by the memory of their vulnerability. Even alpha-Sid spoke in a grim tone: ‘That was scary, mate. I mean, not film scary. Really scary.’
As an outsider in 2008, it had looked like a genuinely serious crisis, but not end-of-the- world serious. The images that have come to de ne that episode—defeated-looking Lehman employees carrying cartons of their belongings through Wall Street—convey a certain lightness. As if it were only a matter of a few hundred overpaid people losing their jobs: look at the Masters of the Universe now, brought down to our level. It turns out, however, that those carton-carrying bankers were the beginning of what could very well have been an unimaginable catastrophe. I mean this literally, in the sense that nancial experts do not seem to know what exactly could have happened except that it would have been beyond our wildest nightmares. They draw analogies to the nancial equivalent of a nuclear meltdown, or to Armageddon, the biblical end time. In Masters of
Nothing: How the Crash Will Happen Again Unless We Understand Human Nature, former economist at the Bank of England, Matthew Hancock, and pollster Nadhim Zahawi—
now both members of parliament for the Conservatives—report that bankers were actually stocking up on guns, ‘ready to bed down in bunkers if civil society collapsed.’
What was everyone so afraid of? In his book The Origin of Financial Crises, British fund manager George Cooper explains it like a simple domino e ect: the collapse of one major bank could cause the global nancial system to come to a halt, seize up, and implode. Not only would this mean that we can no longer withdraw our money from banks but also that trade nance stops. As Cooper puts it, ‘This nancial crisis came perilously close to causing a systemic failure of the global nancial system. Had this occurred, global trade would have ceased to function within a very short period of time.
Remember that this is the age of just-in-time inventory management,’ Cooper adds, meaning supermarkets have very small stocks. With impeccable understatement, Cooper concludes: ‘It is sobering to contemplate the consequences of interrupting food supplies to the world’s major cities for even a few days.’
These dominos had come so close to falling down in 2008, and I had just witnessed rsthand what could be the next tile in that line. The summer of 2011 saw massive riots across London. These lasted only a few days and had nothing to do with the banks, but the mechanism was there for all to see: no more than a few thousand people need go out plundering and the police are essentially powerless. Now imagine that hundreds of millions of people worldwide all hear at the same time that supplies have stopped to their supermarkets, pharmacies, and petrol stations.
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Al-Qaida utterly failed to break down life as we know it in the September 11 attacks on the World Trade Center in 2001, but the nancial sector itself almost achieved it about seven years later. Now I saw what the next question was: can this happen again?
Step one had to be getting a grip on the ner detail of the sector. Where were the people who caused this? Fortunately, the layout of the nancial world is not di cult to grasp. So let’s imagine what a map of Planet Finance would look like.
Firstly, you would see three enormous and contiguous continents: asset management, banking, and insurance. Thanks to its sheer size, the last of that trio catches the eye rst. Not only are hundreds of millions of lives, cars, and holidays insured, but also ships, coal power plants, footballers’ legs, and financial products.
Insurance partly overlaps with banking, the second huge area of nance. The biggest players here are so-called commercial or retail banks. They o er insurance products—
hence the overlap—but generate most of their revenues from activities that our grandparents would still recognise: the payment systems, savings accounts, mortgages, and loans to small and medium-size companies as well as major corporations and institutions. ‘Commercial’ is where the project nance banker works who loved driving through the country thinking, That is my toll bridge.
As my interviewees pointed out, commercial banks are fundamentally di erent beasts
to investment banks. In the latter, you’ll see the traders on their trading oors, the dealmakers who get companies listed on the Stock Exchange, those who work in corporate nance or mergers and acquisitions, and also the ‘structurers’ who invent and build nancial products—for instance the collateralised debt obligations (CDOs) we heard so much about thanks to the crash. Lehman Brothers was a ‘pure’ investment bank and Goldman Sachs still is; you cannot open a savings account with Goldman Sachs.
There are purely commercial banks, and banks that are active in both areas, known as
‘megabanks’; Bank of America, Citigroup, Deutsche Bank, BNP Paribas, Société Générale, HSBC, and Barclays cater to customers who want a current account as well as entrepreneurs looking to get their company listed (‘have it taken public’). The internal accountant who omitted her job from her online dating pro le was working for a megabank, and had to get ‘the numbers’ both from investment and commercial bankers.
These are broad strokes, obviously, and zooming in you would nd rms operating in the same markets without being a bank: mortgage providers compete with commercial banks, so-called boutique rms are in the same business as mergers and acquisitions dealmakers and brokers o er services also provided by trading oors in investment banks. Sid worked at one such brokerage rm, as was the interdealer broker who made the point that only a few per cent in the City make ‘the huge sums.’
Most people who do enjoy huge sums of money need someone to invest it for them, which brings us to the third and last vast continent: asset management. These rms charge a fee for investing the money entrusted to them not only by wealthy people (‘high net worth individuals’), but also from pension funds, rich oil countries, and insurance companies, who have to put their premiums somewhere. There are plain asset managers who tend to invest in relatively straightforward bonds and shares. In addition, there are private equity rms that use their investors’ capital to take over companies in order to sell them at a pro t later on; hedge funds that follow
‘unorthodox’ investment strategies with high risks and rewards; while venture capitalists employ their expertise and clients’ capital to help promising small companies and entrepreneurs grow. Nothing is ever simple in nance and there are overlaps here, too, when banks o er asset-management services. The head of marketing who chose a career in the City because she had to raise a child on her own worked at her bank’s asset- management division.
Insurance, asset management, and banking dominate Planet Finance, but there are lots of islands scattered around them, providing services. Accountancy rms audit the books of companies and institutions, while credit-rating agencies classify the nancial health of countries, companies, and nancial products—from ‘junk-status’ to signify that something is extremely risky to the widely known ‘AAA’ for super safe. There are the nancial law and consultancy rms, the recruitment rms known as ‘executive search,’
nancial IT companies, data-management services in mergers and acquisitions, and so on. As we zoom out we can also see the central bank and the regulators circling Planet Finance like satellites, trying to make sure from afar that everything is going according to the rules.
And now for the crash and the people who caused it. Since 2008, dozens of
parliamentary commissions across the West have listened to witness testimonies and hundreds of reconstructions have been written by scientists and academics—in English alone the count is well past 300. This somewhat daunting tally of books would put o even the most dedicated of researchers. Fortunately, we now have a broad consensus about what happened—though not about who is ultimately to blame.
The short version is that in the years before the crash, commercial banks and mortgage providers lent far too much money to people who could not a ord such debts, primarily in the United States and the UK, mostly for mortgages. This lending continued over a long period of time because the easy money drove up house prices, making many people feel richer than they were. Also, commercial banks and mortgage providers had less reason to worry about the risk of default on these loans because they could sell them on to investment banks, which then chopped them up and repackaged them into ever more complex nancial products. Asset managers at pension funds and other investors were keen to buy them because central banks were keeping interest rates low and these new instruments o ered better returns. For protection, pension funds and others relied on the American insurance giant AIG, which insured many of the products. In turn, AIG trusted the credit rating agencies’ triple-A ratings.
As time went on, the products became more and more intricate and ‘exotic’ but the triple-A ratings kept coming. Meanwhile, the banks kept some of these complex products on their own balance sheets—often hidden in deliberately complicated
‘vehicles’ in o shore tax havens. The accountants either failed to see any of this, or thought it was fine, or looked the other way, as did regulators and politicians.
In 2007, the Labour prime minister, Gordon Brown, praised a gathering of bankers and asset managers in a speech at Mansion House: ‘The nancial services sector in Britain, and the City of London at the centre of it, is a great example of a highly skilled, high value-added, talent-driven industry that shows how we can excel in a world of global competition. Britain needs more of the vigour, ingenuity, and aspiration that you already demonstrate that is the hallmark of your success.’
At the time of that statement there were already signs that millions of house buyers would not be able to meet their nancial obligations, particularly in the United States.
The nancial products that contained their mortgages began to lose value, or ‘exploded’
and became worthless. Investors had to take big losses but banks, too, had kept some of these products. They had to write o huge sums of money as well—but how much? Not only had many of the products themselves become mind-bogglingly di cult to value or understand but the same was also true of the ‘vehicles’ in o shore tax havens where the banks had placed many of them. Would the banks’ bu ers be big enough? At Lehman Brothers they were not, and when this bank had to announce bankruptcy, other banks and nancial institutions stopped lending each other money. Suddenly the nancial world was gripped by a paralysing fear: What would happen tomorrow? Who would be the next to go belly up? The domino e ect could cause the global nancial system to collapse in a matter of days. In response, governments reached deep into the state co ers and central banks not only lowered interest rates to levels not seen in centuries but also pumped unprecedented amounts of newly created money into the economy,
both directly and indirectly. These actions calmed the potentially debilitating distrust that had engulfed the nancial system. Politicians and central bankers posed as fearless financial firemen—they had ‘saved’ the system.
Obviously there is more to a debacle as epic as the 2008 nancial crisis and bailout but even this crash course is enough to bring out the number of parties involved: the consumers who borrowed far beyond their means, often by misrepresenting or lying about their nances; the mortgage providers who encouraged people to borrow and cheat, or misled borrowers about the true extent of their indebtedness; the credit-rating agencies and accountancy rms that went along with the mushrooming complexity of products; the nancial giant AIG, which had insured them without keeping su cient capital reserves. And how about the pension funds and other investors that had been clamouring for more complex nancial instruments to buy, since these promised a good return and they were only allowed to invest in AAA products?
The list of parties to blame is in fact considerably longer, yet two things already stand out. First, ‘the bankers’ were clearly not the only ones responsible. Second, most people working in the banks, as well as entire areas of ‘ nance,’ had absolutely nothing to do with all of this.
Most commercial bankers were lling their days operating the payment system, or nancing the construction of an oil rig, or dreaming up a new type of savings account for children under the age of twelve. The vast majority of accountants were at work auditing the books of energy companies, technology rms, or government institutions, while the overwhelming majority of credit raters were studying the nancial health of countries or corporations, far removed from nancial products. Anyone involved in the stock market was miles removed from the 2008 debacle. The same goes for those who were busy taking companies public in, say, the Middle East or South America. And so on, until you get to the sales manager for mergers and acquisitions data services who enjoyed his foie gras in that restaurant at Covent Garden.
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I remember a sense of relief, almost, when I began to understand just how few people were directly involved in the crash. At least this had not been a comprehensive conspiracy on the part of the entire sector. Indeed, the nancial sector PR machine insists for good reason that almost nobody had seen a disaster of this magnitude coming.
Not politicians, nor regulators, nor top economists at elite universities. Let’s be reasonable, nancial PR lobbyists would continue their argument: why would any banker deliberately run his bank into the ground? The crash of 2008 was a perfect storm, or rather a black swan: unique and literally unforeseeable. Since then the exploded products have been stripped of their risky elements, a mountain of extra rules and security measures have been implemented, while banks are working around the clock on cultural change. So … isn’t the time for ‘banker-bashing’ over?
A perfectly styled top banker or PR operative can make this argument sound quite convincing. Until you turn it on its head. If you think about it, isn’t it all the more
alarming if virtually nobody in the sector realised how dangerous these complex nancial products could be? The more I heard people declare that really, they had had no idea, the more I felt like someone who has woken from a nap on a bus only to be told by the driver that he has just managed to avoid plunging into a chasm that had suddenly opened up in the road. What an awful thing to hear, sitting at the back, ignorant and helpless. A feeling made worse when the driver adds: ‘Well, sorry, but hey, nobody knew that this hole would open up here …’
Because then you begin to wonder: what other chasms are you unaware of?
It was plain to see that investment banks and investment divisions of megabanks had played a key role in the crash. And it was also clear that this was not the rst time that investment bankers had had to say ‘sorry’ and promise to do better. During what came to be known as the dot-com bubble of the late nineties, investment bankers had praised and hyped worthless technology companies to investors and the nancial media, while their colleagues in dealmaking were taking these companies public for eye-wateringly lucrative fees. When this Internet bubble burst around the turn of the century, an estimated $4,000 billion went up in smoke. To cushion this blow, central banks had lowered interest rates, creating lots of cheap money—which in turn contributed to the housing bubble that followed.
So, I decided to start digging into those investment banks.
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