September 27, 2016

Out today: Among the Bankers

by

Among The Bankers whiteIn 2008, after banking elites had pushed the global financial system to the brink of collapse, Dutch journalist Joris Luyendijk turned his attention, and his training in anthropology, onto the City, London’s version of Wall Street. Actual bankers were sitting down to work there every morning, making the thousands of decisions that would collectively shape the new face of their industry, and Luyendijk managed to speak with more than 200 of them, convincing them to open up about what they’d experienced working in finance.

Today, Melville House is delighted to publish Among the Bankers, the book Luyendijk wrote to share his findings. It’s an eye-opening—sometimes jaw-dropping—account of the bankers’ experiences. If you thought the actors behind the financial crisis were nothing but amoral sharks, eager for any prey they could catch, this book will stop you in your tracks by revealing them as sympathetic human beings trapped in a system beyond their own control — one that may be even darker and more destructive than we’d feared.

Among the Bankers hits bookstores today. Here’s a passage from the middle of the book, after Luyendijk has just met with Peter van Ees, a childhood acquaintance and UBS banker who tells him that, during the 2008 crisis, “For the first time in my life, I called my father from the office to tell him to transfer all his savings to a safer bank. Which he promptly did. When I went home that day, I was genuinely terrified. I thought: So this is what the threat of war must feel like.

 


 

Godverdomme. If you’d have to capture my mood after the meeting with Peter, this Dutch version of ‘fucking hell’ comes closest. All of this has really happened. And far worse: it could very well happen again.

So many interviewees had said the same thing: ‘it is business as usual again.’ Since 2008 there has been a relentless flood of pious platitudes about ‘lessons learnt’ and ‘the need to regain the public’s trust.’ The parliamentary commissions into the crash dug laboriously into the causes and resulted in a raft of new rules and regulations that were designed to avoid it happening again. The middle office now has slightly more power and status, it has become more expensive for big banks to be big, and many high up in the front office have gone on costly ‘culture change’ courses. But the underlying perverse incentives in the financial sector have been left mostly unchanged.

Banks must now hold higher capital buffers, or rather they must finance a larger part of their risks with equity rather than borrowed money. The buffers are still much lower than for most of financial history, and while they are meant to go up further still, this restriction won’t be in place for years.

American banks are now banned from using their own capital to speculate and invest in the markets (‘prop trading’), more or less, and the European Commission has forced a few banks to shrink or sell their investment bank activities—with the unintended consequence of making it even easier for the remaining banks to divide up markets among themselves since there are no new banks joining the fray.

Though some have shrunk or dismantled their investment divisions, the banks have not been chopped up into units that are simple and small enough to safely fail. Instead, if a bank collapses, the European Banking Union is meant to step in and wind it down in an orderly fashion. Who is behind that European Banking Union should a real panic cause many banks to fail at the same time? That’s right: the taxpayer.

The de facto cartels and niches where a handful of banks make monster profits by cornering the market continue as before. The European Union has imposed a bonus cap but this has simply led the banks to raise the fixed salaries and lower the bonuses—effectively obscuring the monster profits from view.

The list of measures taken is longer but the underlying pattern remains the same: the regulatory response to the crash of 2008 has been to fight the symptoms instead of the cause. Instead of a fresh start with clear and simple laws there are endless new rules. Now it is even harder to set up a new bank because those rules require huge numbers of expensive risk and compliance staff and how is a new bank going to find the money to pay those?

Around 2000, the dot-com scandal revealed fundamental conflicts of interest between activities that used to be done by separate firms; taking companies public, trading and asset management respectively. So did the regulatory response to the dot-com scandal decree that investment banks must be prevented from having these conflicting activities under one roof? Not at all, they were merely forced to install Chinese walls— policed by their own risk and compliance staff.

In the crash of 2008, investment bankers at megabanks were found to be speculating with the savings that ordinary citizens had entrusted to the commercial division of that mega-bank. So have megabanks now been forced to break themselves up into two different parts—the high-risk investment division and the more traditional commercial division, which contains everyone’s savings accounts and the payment system? Not at all, there is merely going to be an ‘electrified ring fence’ between the two arms—at least in the United Kingdom, and not now but in a few years’ time.

Meanwhile, the banks themselves have never offered full access to its staff to be interrogated about what went wrong and why, nor have banks said: we are kicking out everybody who in the recent past gambled with our capital buffers or our reputation. The banks have not broken with the accountancy firms that missed or chose to miss all the erroneous or misleading items on the banks’ balance sheets and the same is true of the credit-rating agencies. Banks have certainly not joined hands to fight for a globally enforced increase in capital buffers. Indeed, they have spent millions in lobbying to keep that inevitable increase in buffers as low as possible.

Virtually all big banks remain publicly listed or are doing everything they can to get back on the stock exchange as soon as possible. The system of zero job security continues to govern the City and so do caveat emptor and the code of silence. The three major credit-rating agencies have kept their de facto cartel, as have the four accountancy firms—who continue to do lucrative consultancy jobs for the banks they are meant to audit independently.

Former Labour prime minister Tony Blair is making at least $3.3 million a year as advisor to JP Morgan. Hector Sants, who as chief regulator saw his sector suddenly collapse in 2008, was offered a top job at the megabank Barclays. His estimated ‘compensation’ was $3.96 million a year.

Fucking hell.

I met a man in his late sixties who had recently retired after a long career at one of the smaller credit-rating agencies. He seemed like a genuinely nice person and only after our interview did I see that he had thoughtfully sent me a text to say that he’d be five minutes late.

I asked him what had it been like for him to see, on the eve of his retirement, the financial system very nearly collapse and take down the rest of us?

‘I still get so angry when I think about it,’ he said. Taking a job at a rating agency had seemed a perfect match for him when he was young: a good salary for a service of genuine value for society. ‘We need ratings to work out how safe a company or an investment bond is, what the risk of default might be. If you can’t trust it, you shouldn’t do business with it—it’s that simple.’

Then it was September 15, 2008. ‘It was terrifying,’ he said with genuine emotion. ‘Absolutely terrifying. We came so close to a global meltdown.’ He was 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.’

It is hard to overstate the fear and confusion that insiders felt when events were unfolding. This inarticulate terror went all the way up the chain of power. The New York Times described the ‘urgent and unusual’ meeting in Washington that took place during the crash, in which the Fed chairman laid out the ‘potentially devastating ramifications’ of the crisis to U.S. congressional leaders. As Democratic senator Charles E. Schumer recalled afterwards: ‘You have the credit lines in America, which are the lifeblood of the economy, frozen. That hasn’t happened before. It’s a brave new world. You are in unchartered territory, but the one thing you do know is that you can’t leave them frozen or the economy will just head south at a rapid rate.’ As he spoke, he swooped his hand in a downwards motion. ‘You know, we’d be lucky…’ he said, and trailed off. ‘Well, I’ll leave it at that.’ Or here is Nobel Prize-winning economist Paul Krugman, on what it must have been like for U.S. Treasury secretary Hank Paulson to look at the mayhem after he decided to let Lehman fail: ‘This is the utter nightmare of an economic policymaker. You’re sitting there, and you may have just made the decision that destroyed the world. Absolutely terrifying moment.’

Several years on from the events of 2008, the BlackBerry addict was as afraid and angry as he was then. ‘Each time I read about a new financial product, I think: Uh-oh. Every new product is described in those same warm, fuzzy phrases: how great they are and how safe.’ This is exactly how the banks first introduced CDOs [collateralized debt obligations] and their toxic friends.

Sometimes he felt as if finance has reacted to the crisis the way a motorist might after a near-accident. ‘There is the adrenaline surge directly after the lucky escape, followed by the huge shock when you realise what could have happened. But as the journey continues and the scene recedes in the rearview mirror, you tell yourself: maybe it wasn’t that bad. The memory of your panic fades, and you even begin to misremember what happened. Was it really that bad?’

At this point in the interview he was really angry, and when I pointed this out he became even angrier: ‘If you had told people at the height of the crisis that years later we’d have had no fundamental changes, nobody would have believed you. Such was the panic and fear. But here we are. It’s back to business as usual. We went from “We nearly died from this” to “We survived this.”’


 


Among the Bankers
 is on sale now. Buy your copy here or at your neighborhood independent bookstore.

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