We are meeting one November morning in a Starbucks near Bank Station, in the heart of the City. In his late 20s, this investment strategist at an investment bank is of Asian descent, the son of immigrants of modest means. He is the sort of person to text you when running five minutes late. Dressed in a suit ("my only one") and a shirt he talks exhaustingly fast, while you suspect his thoughts go faster still. He will interrupt his speech and ask 'am I going too fast?', then resume firing off one observation after another. He says his superior maths skills got him a scholarship for one of the best private schools in the land, followed by a place at a top university ("I was very bored there"). He orders an Earl Grey tea and says, almost apologetically: "I am not lacking in confidence."
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"There's no loyalty in this industry, either way. I was with another company when my son was born. He needed extra support that the NHS couldn't provide of £2-3,000 a month. I was on £70K back then, plus £20-40K in bonuses, so around £4,000 a month after tax. I went to my boss and offered to forgo my bonus for £10K extra on my salary and he said no. In my current job I can pay for my son.
"Back before I became a father, money was not an issue. One year I would be making under £100K while the guy to my right took home over a million – even though I was generating way more profits for the fund than he was. I didn't care back then. Now I do because of my son.
"I am an investment strategist focused on emerging markets. You learn to be humble. A while back a firm put out this very good report, and on page five they wrote: 'Whoever rips this page out and sends it to us gets £50.' I believe they ended up paying out only £250. Apparently few of their other clients had gotten as far as page 5 of the report as investors are deluged with information daily. I was late for our meeting because I had to send out this note to investors about a development in my region.
"As a strategist I go over a range of possible outcomes and see if they are appropriately priced. For example, in the US you could look at so-called median wage growth, roughly the average increase in salaries. You discover it's been essentially flat, people make the same year on year. Then you look at consumption, which was growing every year. You ask, how is that possible? Answer: debt. Is that sustainable? No, you cannot live beyond your means indefinitely. New question: has the market priced this in – meaning, do prices reflect that this can't go on? Answer: no, they haven't, even after the dramatic falls we've seen. You can then look at historical precedent, how does a country return to a sustainable course, and how painful is that going to be?
"Basically I am supposed to have a view on everything, and argue how confident I am about predictions. I provide views rather than news. I thoroughly enjoy my job as it is all about understanding how the world works and helping others understand it, too. What could be more fun?
"Clients read my 'notes to investors' and when they act on it, they direct trades to my company – and we take a commission. Larger clients also vote on the best research, and we get a proportionate share of a pool of money set aside for this purpose. In my case it's rare for a client to act directly on my advice, as I am not saying things like: buy Intel. I may say: it might be a good idea to buy consumer companies at current levels. Or: be careful on geopolitics in the Middle East.
"On a typical day I have a call at 7am with the other members of the research team, sales people and traders. We all provide our interpretation of recent news, and discuss potential short-term developments and thoughts. On an average day I spend 60% of my time reading and talking to my sources, 20% writing and analysing data and 20% talking to clients. Basically I work every waking hour, always reading stuff. It can drive my wife mad … but she still loves me.
"Sometimes I travel on what we call roadshows where I meet clients around the world to give them my input on my specialist areas. I also travel around the countries 'under my coverage' meeting companies, government officials and other experts to develop my own perspectives. This can be hard. If you are Goldman Sachs you can get a meeting with anyone. I am not with Goldman Sachs. I have to rely largely on my own reputation.
"In big banks and asset management companies it's very difficult to be negative about the future. The reason is simple: they make their money from optimism. If you are going to tell investors that the economy is going down, they will move their money somewhere safe and reliable such as cash. It is tricky to charge fees for trading or managing cash. It also becomes more difficult to convince investors to purchase riskier products.
"Pension funds have all this money on their hands. People working there want to outsource risks so they give the money to asset and hedge fund managers. If things go wrong, they have somebody to blame.
"Fund managers make their decisions in part on the basis of historical trends. But their data set doesn't go back further than 20 or 30 years. What if something is happening now that is literally unprecedented, meaning it never occurred during the period covered by the data set? If you have been socialised into mainstream fund manager thinking, it's very hard to conceive of developments outside that dataset. I like to think I am not hampered by this due to my irregular background, but it is an easy trap to fall into.
"Before I became strategist I was at a couple of hedge funds. I had read a lot about investment theory, in particular the efficient market hypothesis [the theory that markets are essentially rational and impossible to beat]. I decided that this hypothesis was hog. You need to look at markets from a behavioural perspective, its mass psychology.
A hedge fund is essentially a compensation scheme. When you set up a hedge fund you charge a management fee, typically 2% annually of the assets [money] you manage and a performance fee, historically around 20% of any profits you make above an agreed level. The strategy your hedge fund employs can be anything from investing in technology companies long [betting on the price increasing] and short [betting on prices declining] to investing in fine art. They also have a threshold, meaning that if the value of their investments goes below a certain number, they get a warning. If the value goes down even further, they're fired.
"If someone runs a billion dollar hedge fund they might get $20m a year in management fees and another $20m for every 10% the fund returned above its agreed level or 'benchmark'. The founders of the hedge fund usually take the lion's share of these fees and it's quite common to hear of less senior analysts coming up with trades that make millions of dollars for the fund and then receiving a miniscule fraction of this.
"The top calibre people in hedge funds set up their own. They have their own investment strategies, which we call 'religions'. Some hedge funds can be testosterone driven, you're always on. Others are cerebral. People go sit two weeks inside a company they consider investing in. By that time they may know it better than most people working there.
"Let me talk you through the hierarchy at larger investment banks [known as the bulge bracket], in broad strokes. Graduates come in with the rank of analyst. They make £40-45K, plus as a bonus about 20% of that – in good years, of course. You are an analyst for two to three years, then become an associate – sometimes after you do an MBA in between. Now you are making £70-80K plus 50-100% bonus. Again two to three years later, you move on to vice-president, with an income of a £100-130K plus a bonus that is 50-150% of that. Three to four years later you become director, taking home £150-200K plus anywhere up to 300% of that in bonuses. Finally there's the managing director, when you manage people, that's between £200-400K plus potentially a million (also known as a "bar") or more in bonuses. After MD there's head of region and then the C-positions [CEO etcetera] whose compensation you read about in the press. All of these numbers have increased by 30-100% since the new bonus rules. Smaller banks pay lower salaries, as do fund managers, and if you get a 0% bonus you're either out or the market is awful.
"I'm in the middle of the director-level pay I just mentioned. Some of my bonus (if I get one) is deferred, some of it is in company stock. It's become a lot more complicated than when they just paid cash.
"How people advance and skip a year as an analyst is by jumping back and forth between banks. Or they threaten to leave just when someone else on the team has left – it is expensive and laborious for a bank to hire someone new – recruitment agencies take as much as 30% of a year's salary. Much easier to give the job to the next guy.
"I'd say most recruiters are useless, 'fillers' we call them. The good ones don't advertise. You have to get to know them, put in the time. I'd say 75% of promotions come from networking, not how good you are at your work. I am a horrible networker. I can speak to big crowds but I feel very uncomfortable in one. I have mild Asperger's and though I am working on it, small talk is still very difficult for me. Plus, I don't drink alcohol.
"There's a great deal of fatalism in the industry these days. MF Global, the financial firm that collapsed recently … one guy brought it down. Everybody knows this can happen to you. I'm relatively young, I'll find something new should my firm go bust. But older people with very specialist skills, they may have a really hard time. Imagine you have four kids at Eton, at £30,000 each per year. They're stuck and will feel they have failed their kids.
"I am very optimistic about people, their ability to adapt. I am very pessimistic about the markets. Up until the crisis people in finance seemed to think they could hedge out risk, that you could design this risk-free environment. But when things went bad, they wouldn't let capitalism run its course. The banks were saved, because of systemic risk – failing banks could bring down the whole system. My view: a bank that is too big to fail is a bank that is too big to exist.
"Some of the emerging markets I have particular expertise in are quite small. If you run a really big fund, at some point your share in that total market becomes so large that you begin to 'move the market', as it's called – share prices are directly affected by your investment decisions, meaning that if you buy a share, this very action could raise the share price, creating its own dynamic. Obviously this creates room for mischief.
"There's another problem with this: the main purpose of financial markets is price discovery – transparent transactions between buyers and sellers setting a 'fair' market price. This allows companies to raise capital in equity markets, sell bonds in bond markets or buy commodities in commodity markets. But if you put enough money into any market it stops being an informational source and moves far away from 'fair' prices.
"If you take an honest look at the financial sector today, you see banks can borrow money almost for free on what is called the short-term market, then lend that money to governments for 2% or 3%. Now why would they lend to small businesses if they can make money so easily? This is what 'zero interest rates' are doing to our economy, as well as taxing savers with inflation at over 5%. You take on new debt to pay off your old debt. It's like drinking your hangover away with ever more drinks. You are destroying your liver. That's what's currently happening."
Comments
3 January 2012 9:07AM
Rabbit sneezes "MF Global !!!"
3 January 2012 9:09AM
No. Big Banks has hedge their BETS in such a way, they make their money from MISERY and OPTIMISM.
3 January 2012 9:22AM
No mention of the families whose annual income of less than £30,000 that your gambling has put on the street.
The terms of the Trillion pound bailout was to support small business, who support their employees, who in turn pay TAX (you may need to Google this term) which funds the bailout.
At least we agree on the last 30+ of government policy.
3 January 2012 9:41AM
So, what is it you actually produce?
And don't dare say you keep my pension fund healthy, despite being in one for 38 years, I'd have been better stuffing the money I've paid in under a mattress...
3 January 2012 9:42AM
that should be 28 years... not 38
3 January 2012 9:51AM
This is probably the most interesting and revealing article in the series, thank you. I imagine it will get ripped to pieces by the usual posters, though...
3 January 2012 10:03AM
All sounds like a bookies to me.
3 January 2012 10:10AM
Intriguing views, but it does make me think that nothing has changed in the financial industry, so another bang could happen anytime.
3 January 2012 10:17AM
@Sidfishes - What does he produce? Analysis - the collection and curation of information, about the world, its finances, its money supply, its risks. In that respect, he's not that different to a business journalist or an academic economist, except that his audience is largely people who work in finance, rather than the public at large or the academy.
@JorisLurendijk This series of articles has been some of the most enlightening and interesting stuff CIF has done. This one particularly interesting. Thanks.
3 January 2012 10:26AM
Some excellent points here, especially near the end.
'a bank that is too big to fail is a bank that is too big to exist'.
Funnily enough that is what I thought at the very start of the process that has unfolded over the last few years.
The ultimate paragraph is both a statement of the obvious and a terrible indictment of our politicians and the travesty of democracy that propagates an irredeemable group of supine, shit-sucking reptiles that pass for our political class. The longer we go on without a resolution that embraces some attempt at social justice, the higher the likelihood of a cataclysmic breakdown of the basic social structures. It is a matter of perception and there should be no doubt that understanding is spreading.
Let's be honest here. These comments by the banker have been made many times already by commentators well outside the world of banking and have been reviled and condemned as agitating rhetoric or hysterical nonsense by political and government insiders who pretended they knew how to deal with something as big as this issue but have merely wasted what little resources were available in a futile attempt to shore up a discredited and dysfunctional system. They have knowingly chosen to feed the cancer.
Truly, failure on an epic scale, which may yet lead to epic consequences.
3 January 2012 10:35AM
Getting people to believe that markets are free, that neoclassical analysis can predict future markets, that investment isn't really a substitute word for gambling, is this so far away from being what a confidence trickster does?
Keynes was accurate in many aspects. (Keynes 1937, pp. 215-222)
3 January 2012 10:46AM
Big banks make their money from scams and fraud
Endowment mortgage - scams and fraud
PPI - scams and fraud
Pension -scams and fraud
Investment - scams and fraud
There have been so many financial scandals the FSA cannot keep up
Thatcher, Blair, Cameron - deregulate and make financial scams easier -
3 January 2012 10:49AM
that investment isn't really a substitute word for gambling
Fair enough, but there are different kinds of gambling - making an informed investment is more like picking a winner on the basis of form and all available info, than just going up to a roulette table and putting all your money on red.
3 January 2012 10:54AM
'Big banks make their money from optimism'
Well they'll go broke in UK PLC because we're pretty low on optimism but there's plenty of misery and woe ................ courtesy of present policies and protection of City interests at the expense of those of the Citizen.
3 January 2012 10:55AM
This is by far the most insightful report in this series. Congratulations to the interviewee.
I have got a lot of abuse from Tory trolls since the crisis for pointing out that bankers bonuses come out of hidden taxpayer subsidies, much as described above.
It doesnt take much brains to borrow at close to zero and then lend back to the government for example, but the "traders" get paid millions for "trading" this way anyway.
A lot of senior bankers knew the game was up in 2009 so have been busy trying to raise their base salaries and grab as much as they can in bonuses before either the euro crisis or the double dip finally stops them sucking milk from the taxpayer teat.
RBS is a classic case. For the past few years they have continued to pay out billions to investment bankers so they don't lose "talent" - and then, lo and behold, they realize their investment bank is a crock of sh*t so are going to pretty much close it down.
Come on you Tory banker trolls - where are you now? On the dole? You've all been remarkably quiet since the euro crisis started and the banks began making layoffs...
3 January 2012 11:00AM
Horses rarely pay dividends investments unlike equities and bonds. Buying shares in the likes of Glaxo, BP, Rio Tinto with the intention of holding them long term is clearly investment. People investing in venture capital were they believe a company has a good chance of growing fast and becoming profitable is investment. I would agree that specualtion of commodities looks a lot more like gambling and quite a lot does go on in the city.
Still the person who abused the word 'investment' more than any other was Gordon Brown when he pissed away billions on unproductive non jobs in the public sector and called it 'investment'.
3 January 2012 11:03AM
"Investment strategist" - rather egotistical!
Surely, you mean 'punters'.
Financial TV channels use the language of to 'bet' on commodities, 'bet' on currencies,'bet' on sovereign debt and 'bet' elsewhere. It's more like the language of the betting shop where the bookie sets the odds.
Is not selling 'short' manipulating the 'market' a dishonest practice?
It;s time these 'markets' were subject to the Betting Levy Act - plus Tobin!
3 January 2012 11:07AM
it is no use condemning bankers and their 'financialisation' products as scams and fraud. Of course they are but they are also just the inevitable product of a probably cyclical-(i.e. a stage in the cycle) ) process of capitalism and technological innovation, with globalisation of labour at the heart of the process.
For an insight have a look at the article about Chinese investment in Mugabe's Zimbabwe elsewhere in today's Graun,
then have a look at David Harvey's comments here
3 January 2012 11:13AM
British people are losing around eleven billion pounds a year by not being active enough in moving their money in to better paying accounts. It isn't made easy by the way accounts are structured but surely they could get some satisfaction in putting some of the banks profits in their own pockets.
3 January 2012 11:25AM
This is a particularly excellent contribution to the series. The interviewee sounds switched on and entirely free of 'master of the universe' banking hubris.
In general this series has been notable for the contributors being more human than one would expect, though. I suppose that's a result of it being driven by voluntary contributions - certainly the yes-men management consultants I work with would never dream of interviewing for the Guardian, or even risking their preconceptions by reading this blog.
He's right about the 'too big to fail' banks as well, of course. Even a child could see that. Bizarre, therefore, that the banks are succeeding in brushing the issue, and accompanying moral hazard around the bailouts, under the carpet.
3 January 2012 12:14PM
It really is no different to betting on sport though.
For all the language of analysis, mathematical modelling etc it all comes down to people selling betting tips.
The entire point of financial markets it the efficient allocation of capital to productive enterprises but that point seems to have got lost.
What we have here is an extremely bright and personable person simply producing documents nobody reads. What a shame his talent can't be put to good use inventing something that makes the world better.
3 January 2012 12:17PM
Oh and on the salary point - with graduates starting on £40k + 10k bonus - I know a nobel prize winning chemist who earns less than that from his day job!
3 January 2012 12:18PM
The key word you use here is 'believe', when the belief is based upon false methodology, as Keynes pointed out it is like having a faith in a god or gods.
As far as mentioning G Brown, why? Was I making any reference to him at all, why is he pertinent to your argument?
3 January 2012 12:20PM
This begs the question of how the subject can see that finance is stupid yet hasn't been fired for pessimism. Perhaps he mostly reports on growing markets.
3 January 2012 12:26PM
Look on the bright side. At least he didn't say 'Gordon B Clown'.
3 January 2012 12:33PM
American banking brought down the global system. 3 main issues - selling crappy mortgages, no regulation of derivatives trading and rating agencies pretending that risky debt was not risky. We suffered because we were exposed to risky debt (okay, let's call it toxic) because our banks have stakes in US banks (or are US banks or are owned by US banks). Our banks didn't assess risk properly. The problem was that individual bankers knew about these issues but chose to ignore them because they made huge short term profits either because they sold crap or persuaded politicians that regulation was wrong.
There are lots of things in banking that don't need to improve - such as this mans job. What does need to happen urgently is regulation of derivatives in the US and elsewhere and for banks to assess risk better.
3 January 2012 12:35PM
Timak, you are right. What needs to happen is to stop this betting causing massive problems to all but the person placing the bet - regulation and good risk assessment can do that (or at least improve on what we have).
3 January 2012 12:50PM
It would still have been irrelevant. Perhaps you consider I am a supporter of the Labour Party and it was a way of winding me up rather than debating?
3 January 2012 1:19PM
Vince Cable was regarded as wise for stating what is actually the bleeding obvious to those who study the basic mechanisms of finance. The subject here has provided some insight but is still stating the bleeding obvious. However, finance is in such a state, the bleeding obvious needs to shouted repeatedly. The subject should write a newspaper column or appear on TV.
3 January 2012 2:16PM
This waffle has since been superseded by the notions of rational and adaptive expectations which are by no means flawless but an improvement on the idea that 'we're all dead in the long run' so never mind about any inflation resulting from Keynesian interventionism.
3 January 2012 3:27PM
I was not aware that pension funds could use hedge funds. Hedge funds are unregulated and risky. Get burnt by one and you're on your own. Pensions should not be allowed to touch them. No wonder private pensions are collapsing.
3 January 2012 3:42PM
I would like to know what his son's illness is, that a cure or treatment for is not provided by The NHS.
The world recession they have created have caused the deaths of many children. It will continue to kill children for many years to come. For many life in poverty a certainty. Bankers did not invent poverty, although their irresponsibility has gone a long way to ensure millions the world over remain slaves to it.
This bleeding hearts story does not cut it with me. I am not surprised at the writers pro banker stance. I have read The Guardian's articles on banking and realise they have an agenda which largely promotes the cleaning up of their image.
3 January 2012 3:57PM
Amazing, optimism. Note that is amazing, optimism, not amazing optimism. Investment based on someones opinion and a following flock of sheep dictates exactly what will happen. That of course and the will to decimate or improve the market of your choice.
Sorry has to stop, bunch of idiots with will full intent and millions of people's futures at stake! Completely stupid! Ridiculous!
3 January 2012 4:56PM
What precisely has been superseded?
3 January 2012 4:56PM
Kudos for this guy, who not only has a thorough understanding of his business but also managed not to get himself seduced by the groupthink of the banking world, self-interest and glossy marketing. Inspite of being in the business for some time he still sees things for what they are. The earlier contributions to this series show that this is not to be expected.
3 January 2012 5:42PM
So LP, perhaps I can help as you seem to be shy:
You admit that the models of rational expectations and that of adaptive expectations are not 'flawless', good, as they are far from it. So you consider that these flawed models have superseded another model, yet they are flawed? I'm struggling with your logic, again.
Let's examine, briefly these models, and see if we can agree on the flaws shall we?
Adaptive Expectations, one of Milton Friedman's ideas that 'expectations' are formed by people of what will happen in the future based on their experience of what has happened in the recent past. It is these 'expectations' which cause prices to rise rather than any disequilibrium. What, I wonder, could possibly be wrong with that!
You could always assume that expectations are rational, like Muth, and that on average people's expectations about the future are accurate!
I expect that way only irrationality lies. So, I ask again, what has been superseded?
3 January 2012 7:04PM
Definitely one of the most interesting and informative of these articles / interviews.
This guy sounds like a genuinely decent and very intelligent person, with common sense, no less - what a huge shame that no one who needs to hear what he has to say (i.e., his bosses, the govt, the Bank of England) will listen or pay the slightest attention to such as he.
4 January 2012 9:06AM
Very good article, I think this guy is great - he seems very smart and rational. He clearly believes in what he does but doesn't make excuses for the shortcomings of his industry. That's a refreshing change from prior interviewees who either seemed scarred by prior negative work experiences or seemed to suffer from deluded self-confidence.
Tired of all the usual ranty, generalist banker hate comments. Its understandable but misguided and pointless. Realistically, we can't just wipe out the finance industry - like it or not, they play a role in society. The real question is: how do we create a solution that is mutually beneficial for everyone?
4 January 2012 10:51AM
Alan Greenspan used to call it “irrational exuberance”.
4 January 2012 11:26AM
Alan Greenspan used to call it “irrational exuberance” back in 1996, before he lost touch with reality.
He is now rumoured to be confined to a padded cell in a lunatic asylum as his delusional state has got progressively worse over the years. Things had got so bad that by the year 2000 he was convinced that Goldman Sachs were God’s representatives on Earth and that he and Robert Rubin (both ex-Goldman) were his chief disciples.
After the dot.com crash in 1999 any sane man would have realised that modern financial markets were no more sophisticated that the Dutch tulip markets of the 1600’s when Tulip Mania took hold. The markets had reacted in exactly the same way to the new internet companies as they did to the new Tulips in the 1600’s. Unfortunately, this was the event that snapped Alan Greenspan’s mind as he and Robert Rubin had done all the groundwork in paving the way for free and un-fettered financial markets. He just could not accept that he was wrong and this drove him into a delusional state where he believed the financial markets were always right and they could do no wrong.
5 January 2012 2:49PM
I agree, really interesting and enlightening this one. This is the first job described in these serials of articles where it actually sounds interesting, and takes a bit of lateral thinking rather than number crunching, mind numbing tedium or dick swinging chest beating egotism. Most of the articles have confirmed my prejudices about the city, nice to see someone working within it that has a bit of perspective on its role and what goes on in the outside world. His points on moral hazard and understanding risk has also confirmed my thoughts on why the city can’t be trusted to run itself.
6 January 2012 7:34PM
Very interesting comment. So interesting, that I would like to comment on it.
A. Actually all analyst work is like that. YOu have to understand the underlying "reality", let it be a model, an investment strategy or a industry branch analysis. If take your job seriously, you should always ask these basic questions this guy is asking.
In my case it boils down to number crunching, but I always try to tackle thing like this gut does.
B. About dick swinging. It is actually not equally present at every area. For example, the frontoffice guys tend to be more arrogant dick swingers than e.g. the risk not speaking of the compliance of backoffice.
C. On the prejudices. Yes, quite some people are arrogant. I think it is to be lead back to the following
(a) they are financially independent and as such they believe that they are the king.
(b) they are got used to quick decisions and it has an affect on their manner
(c) they want to justify their position and it would be hard with their skill sets.
(d) simply they are stressed and this takes all their energy to conduct themselves
And on the financial industry. I remember, the lecturer of physics explained the band structure of the gallium arsenide such, that in the C band the electrons are like money. They accumulate, where there is already a lot of them.
Such GaAs is life. Money accumulates where there is already much of it. Unless a general cataclism comes ( and brings powerty with itself ) finance ( with all its setbacks - bonuses, arrogant traders, etc ) will prevail. At the current number of population this is inevitable.
I think, that only a certain centralisation could only bring an end of this. But I also think, that this would not be welcome, since in general the same would continue, but we would have less insight into it. Just think on the Soviet Union during Stalin.