rather supine politicians. However, it's still irks to hear
exactly how it was done, from an insider. It is however
like turning away from a car accident. It's not easily done.
checkit: theguardian.com
What
I saw as a Wall Street trader: a culture of bad behaviour
'It's
amazing how quickly gold can turn into shit' was the lesson long before the
financial crisis, Tarp or the megabanks
Chris
Arnade
Tuesday 1 October 2013 13.30 BST
My
first big trade on Wall Street was approved by a fat man smoking cigarettes in
a stairway littered with the butts from past conversations. That man, John, was
the head of trading at Salomon Brothers, on the executive board, and only one
step below the CEO. It was 1994 and he had been with the firm twenty years as a
trader. I had been there just one.
I
was meeting with him because my boss, and my
boss's boss, did not feel comfortable approving my trade, an investment of
$200m in Brazil's currency, the real. I believed the currency had a brighter
future than many others thought, and John and I met up to talk about it. The
smoking ban, only enacted six months before, had pushed us into the fire escape
outside his corner office.
I
made my pitch. He smoked, belched and listened, before asking me a volley of
questions. Most focused on how, when and if I could get out of the trade. Some
were amazingly naïve about culture as well as finance: "Can you read
Spanish?"
He
approved half the trade I wanted: $100m.
He tossed his butt on the ground and left, saying, "It's amazing how
quickly gold can turn into shit."
Two weeks later, my trade was, in fact,
starting to act more like shit than gold. To the untrained eye it still looked
good, and it was making money, but many of the arguments that had justified the trade were turning out poorly. As
I would put it on the trading floor, "the forwards are acting
squishy." That meant that the market's confidence in the Brazilian real
was starting to dwindle.
After
a particularly bad day, I was riding the elevator down to the cafeteria when
John got on. For most of the ride he chatted with friends about weekend skiing
plans. Near the end he turned to me and asked about the trade: "You
thinking of getting out?" I pointed out that the trade was still making
money. He pointed out what had changed. It was clear he now knew more about Brazilian currency than I did.
Later,
when I told my boss that I was surprised someone so senior knew so much about
my trade, he laughed:
"That's his money you
are investing.
The old managing directors, they still act like partners who own the
firm."
After
a restless night I unwound the trade the following morning at a small profit. That saved us a loss about $10m. Two weeks
later, Brazil blew up. A currency crisis had started.
12
years later, I was working in a different world. Citibank, a firm of roughly
200,000 employees, had digested Salomon Brothers, then a firm of roughly 4,000,
and I had moved to the giant bank's proprietary trading department, a special
group tasked with placing bets using the banks own money. John, my old boss at
Salomon, had moved on to skiing in Colorado.
In
my final years many of my last trades were approved by – well, I don't really
know what they looked like, since most conversations were held over the phone.
Sometimes it would be a gentleman with an Indian accent. Sometimes it was a
nervous-sounding man in a satellite office somewhere. For six sweet months it
was nobody: I had fallen between administrative cracks in a reshuffle. I set my
own limits for trades.
No
matter who the risk manager on the telephone was, I always liked to imagine him
in a faraway stairwell, smoking cigarettes, like John.
How
many people were between the CEO and me at Citigroup? That's also hard to say.
There were many different lines of reporting. Some weaved through maybe 10
people before getting to the CEO, others maybe 15. When I had that first
conversation in 1994 at Salomon about the Brazilian real, there were only three
people standing between me and the CEO.
Salomon
in the early 90s, like most investment banks at that time, still had the
culture of a private partnership, even though it went public in 1981. Gone were waiters bringing china plates and
silverware to trader's desk. Soon to be gone were cigars and open smoking
on the trading floor. What was still barely hanging on was a sense of
collective ownership, a result of employees having most of their money
reinvested in the firm.
Investment
banks behaved like a federation of
financial businesses, united by joint ownership of the risks and the
rewards, with each business run by a partner whose money was invested in his
and his friends' businesses. (Yes, almost all male.)
The
result was that risk management – or, making sure the bank didn't lose more
money than it could afford – was everyone's business. If your friend messed up
a trade, then you yourself lost. Consequently, firms were judicious about what
businesses they entered and how quickly they grew, often preferring to stay
small and keep risk within limits they could understand.
They
still made mistakes – which is the nature of taking risks. Salomon messed up
royally in 1991, when it was almost brought down by a bid-rigging scandal that
required Warren Buffett to save the bank. Yet the smaller size of the banks at
the time kept their mistakes from
infecting the broader markets.
By
2000, the culture of Wall Street had changed dramatically, driven largely by
deregulation and the move towards publicly owned investment banks – the kind
with stock listings on the New York Stock Exchange and financial filings with
the SEC.
What
the banking industry had evolved into was an army of megabanks, such as
Citigroup and JP Morgan. They had employees numbering in the hundreds of
thousands, and a bureaucracy in place to manage their diverse businesses, which
spanned the entire globe.
With
so many employees and businesses, it was hard for many of the people working
inside to feel any real sense of ownership of the firm.
The
result? Investment banks turned into a loose confederation united not by the
understanding that their risk was jointly owned, but by a common source of
cheap money: bank deposits and government-subsidized debt.
If
you ran one of those businesses in the early 2000s – let's say making
short-term business loans in Ghana – how you, as a banker, got paid was by
growing your particular business. That's where your bonus came from. It did not
come from making sure the larger bank made sustainable profits. The incentive
was therefore to push the limits of every risk
and grab as much cheap funding as possible.
Every
manager wanted a slice of the pie, and with easy money available in the early
2000s, senior management hit on a clever
idea: make the pie bigger. Soon, the balance – which measured the total assets owned by the bank – was immense, close to
$2tn at some institutions.
This
quick money helped make some investment
banks "too big to fail", by sheer size, yet they were filled with
assets of dubious quality that increased
the chances they would, indeed, inevitably fail. A few of those assets were
rotten to the core, and in 2007, they infected the whole lot, generating a
financial crisis that brought Wall Street to the brink of collapse. …
