Ask people where they were on 9/11, and most have a memory to share. Ask where they were when Lehman Brothers collapsed, and many will struggle even to remember the correct year. The 158-year-old Wall Street bank filed for bankruptcy on 15 September 2008. As the news broke, insiders experienced an atmosphere of unprecedented panic. One former investment banker recalled: “I thought: so this is what the threat of war must feel like. I remember looking out of the window and seeing the buses drive by. People everywhere going through a normal working day – or so they thought. I realised: they have no idea. I called my father from the office to tell him to transfer all his savings to a safer bank. Going home that day, I was genuinely terrified.”
A veteran at a small credit rating agency who spent his whole career in the City of London told me with genuine emotion: “It was terrifying. Absolutely terrifying. We came so close to a global meltdown.” He had been on holiday in the week Lehman went bust. “I remember opening up the paper every day and going: ‘Oh my God.’ I was on my BlackBerry following events. Confusion, embarrassment, incredulity ... I went through the whole gamut of human emotions. At some point my wife threatened to throw my BlackBerry in the lake if I didn’t stop reading on my phone. I couldn’t stop.”
Other financial workers in the City, who were at their desks after Lehman defaulted, described colleagues sitting frozen before their screens, paralysed – unable to act even 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 country.” As they recalled those days, there was often a note of shame in their voices, as if they felt humiliated by the memory of their vulnerability. Even some of the most macho traders became visibly uncomfortable. One said to me in a grim voice: “That was scary, mate. I mean, not film scary. Really scary.”
I spent two years, from 2011 to 2013, interviewing about 200 bankers and financial workers as part of an investigation into banking culture in the City of London after the crash. Not everyone I spoke to had been so terrified in the days and weeks after Lehman collapsed. But the ones who had phoned their families in panic explained to me that what they were afraid of was the domino effect. The collapse of a global megabank such as Lehman could cause the financial system to come to a halt, seize up and then implode. Not only would this mean that we could no longer withdraw our money from banks, it would also mean that lines of credit would stop. As the fund manager George Cooper put it in his book The Origin of Financial Crises: “This financial crisis came perilously close to causing a systemic failure of the global financial 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 added – meaning supermarkets have very small stocks. With impeccable understatement, he said: “It is sobering to contemplate the consequences of interrupting food supplies to the world’s major cities for even a few days.”
These were the dominos threatening to fall in 2008. The next tile would be hundreds of millions of people worldwide all learning at the same time that they had lost access to their bank accounts and that supplies to their supermarkets, pharmacies and petrol stations had frozen. The TV images that have come to define this whole episode – defeated-looking Lehman employees carrying boxes of their belongings through Wall Street – have become objects of satire. 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!
In reality, those cardboard box-carrying bankers were the beginning of what could very well have been a genuine breakdown of society. Although we did not quite fall off the edge after the crash in the way some bankers were anticipating, the painful effects are still being felt in almost every sector. At this distance, however, seven years on, it’s hard to see what has changed. (...)
Perhaps the most terrifying interview of all the 200 I recorded was with a senior regulator. It was not only what he said but how he said it: as if the status quo was simply unassailable. Ultimately, he explained, regulators – the government agencies that ensure the financial sector is safe and compliant – rely on self-declaration; what is presented by a bank’s internal management. The trouble, he said with a calm smile, is that a bank’s internal management often doesn’t know what’s going on because banks today are so vast and complex. He did not think he had ever been deliberately lied to, although he acknowledged that, obviously, he couldn’t know for sure. “The real threat is not a bank’s management hiding things from us, it’s the management not knowing themselves what the risks are.”
He talked about the culture of fear and how people are not managing their actions for the benefit of their bank. Instead, “they are managing their career”. He believed that the crash had been more “cock-up than conspiracy”. Bank management is in conflict, he pointed out: “What is good for the long term of the bank or the country may not be what is best for their own short-term career or bonus.”
If the problem with finance is perverse incentives, then the insistence on greed as the cause for the crash is part of the problem. There is a lot of greed in the City, as there is elsewhere in society. But if you blame the crash on character flaws in individuals you imply that the system itself is fine, all we need to do is to smoke out the crooks, the gambling addicts, the coke-snorters, the sexists, the psychopaths. Human beings always have at least some scope for choice, hence the differences in culture between banks. Still, human behaviour is largely determined by incentives, and in the current set-up, these are sending individual bankers, desks or divisions within banks – as well as the banks themselves – in the wrong direction.
How hard would it be to change those incentives? From the viewpoint of those I interviewed, not hard at all. First of all, banks could be chopped up into units that can safely go bust – meaning they could never blackmail us again. Banks should not have multiple activities going on under one roof with inherent conflicts of interest. Banks should not be allowed to build, sell or own overly complex financial products – clients should be able to comprehend what they buy and investors understand the balance sheet. Finally, the penalty should land on the same head as the bonus, meaning nobody should have more reason to lie awake at night worrying over the risks to the bank’s capital or reputation than the bankers themselves. You might expect all major political parties to have come out by now with their vision of a stable and productive financial sector. But this is not what has happened.
by Joris Luyendijk , The Guardian | Read more:
Image: uncredited
A veteran at a small credit rating agency who spent his whole career in the City of London told me with genuine emotion: “It was terrifying. Absolutely terrifying. We came so close to a global meltdown.” He had been on holiday in the week Lehman went bust. “I remember opening up the paper every day and going: ‘Oh my God.’ I was on my BlackBerry following events. Confusion, embarrassment, incredulity ... I went through the whole gamut of human emotions. At some point my wife threatened to throw my BlackBerry in the lake if I didn’t stop reading on my phone. I couldn’t stop.”Other financial workers in the City, who were at their desks after Lehman defaulted, described colleagues sitting frozen before their screens, paralysed – unable to act even 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 country.” As they recalled those days, there was often a note of shame in their voices, as if they felt humiliated by the memory of their vulnerability. Even some of the most macho traders became visibly uncomfortable. One said to me in a grim voice: “That was scary, mate. I mean, not film scary. Really scary.”
I spent two years, from 2011 to 2013, interviewing about 200 bankers and financial workers as part of an investigation into banking culture in the City of London after the crash. Not everyone I spoke to had been so terrified in the days and weeks after Lehman collapsed. But the ones who had phoned their families in panic explained to me that what they were afraid of was the domino effect. The collapse of a global megabank such as Lehman could cause the financial system to come to a halt, seize up and then implode. Not only would this mean that we could no longer withdraw our money from banks, it would also mean that lines of credit would stop. As the fund manager George Cooper put it in his book The Origin of Financial Crises: “This financial crisis came perilously close to causing a systemic failure of the global financial 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 added – meaning supermarkets have very small stocks. With impeccable understatement, he said: “It is sobering to contemplate the consequences of interrupting food supplies to the world’s major cities for even a few days.”
These were the dominos threatening to fall in 2008. The next tile would be hundreds of millions of people worldwide all learning at the same time that they had lost access to their bank accounts and that supplies to their supermarkets, pharmacies and petrol stations had frozen. The TV images that have come to define this whole episode – defeated-looking Lehman employees carrying boxes of their belongings through Wall Street – have become objects of satire. 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!
In reality, those cardboard box-carrying bankers were the beginning of what could very well have been a genuine breakdown of society. Although we did not quite fall off the edge after the crash in the way some bankers were anticipating, the painful effects are still being felt in almost every sector. At this distance, however, seven years on, it’s hard to see what has changed. (...)
Perhaps the most terrifying interview of all the 200 I recorded was with a senior regulator. It was not only what he said but how he said it: as if the status quo was simply unassailable. Ultimately, he explained, regulators – the government agencies that ensure the financial sector is safe and compliant – rely on self-declaration; what is presented by a bank’s internal management. The trouble, he said with a calm smile, is that a bank’s internal management often doesn’t know what’s going on because banks today are so vast and complex. He did not think he had ever been deliberately lied to, although he acknowledged that, obviously, he couldn’t know for sure. “The real threat is not a bank’s management hiding things from us, it’s the management not knowing themselves what the risks are.”
He talked about the culture of fear and how people are not managing their actions for the benefit of their bank. Instead, “they are managing their career”. He believed that the crash had been more “cock-up than conspiracy”. Bank management is in conflict, he pointed out: “What is good for the long term of the bank or the country may not be what is best for their own short-term career or bonus.”
If the problem with finance is perverse incentives, then the insistence on greed as the cause for the crash is part of the problem. There is a lot of greed in the City, as there is elsewhere in society. But if you blame the crash on character flaws in individuals you imply that the system itself is fine, all we need to do is to smoke out the crooks, the gambling addicts, the coke-snorters, the sexists, the psychopaths. Human beings always have at least some scope for choice, hence the differences in culture between banks. Still, human behaviour is largely determined by incentives, and in the current set-up, these are sending individual bankers, desks or divisions within banks – as well as the banks themselves – in the wrong direction.
How hard would it be to change those incentives? From the viewpoint of those I interviewed, not hard at all. First of all, banks could be chopped up into units that can safely go bust – meaning they could never blackmail us again. Banks should not have multiple activities going on under one roof with inherent conflicts of interest. Banks should not be allowed to build, sell or own overly complex financial products – clients should be able to comprehend what they buy and investors understand the balance sheet. Finally, the penalty should land on the same head as the bonus, meaning nobody should have more reason to lie awake at night worrying over the risks to the bank’s capital or reputation than the bankers themselves. You might expect all major political parties to have come out by now with their vision of a stable and productive financial sector. But this is not what has happened.
by Joris Luyendijk , The Guardian | Read more:
Image: uncredited
