Shadow Banking

by C. M. Albright

  On those increasingly rare moments when he questioned himself as to the wisdom of choosing a career in the City, he would console himself that this was all just one giant social experiment that he was subjecting himself to in the name of art. For a writer it doesn’t matter whether the experience is good or bad, it’s all research. Everything. Right from the skull-crunching hangovers and the accompanying self-doubt to the best of the good times out with his new friends in the pubs and bars of the City and the West End. One day, all this would be validated in a piece of art. Fergal enjoyed the feeling. It always made the hardships of life seem more easy to deal with and excused his sometimes overly exuberant and overly alcoholic behaviour too. He was pushing the envelope of his own existence and in so doing creating drama from which he could mine inspiration for his great work.

  Luckily for Fergal, it appeared that time spent in the pub was an important part of the fabric of Trenchart Colville. He had been particularly impressed by the Head of Credit, an immaculate Frenchman called Marcel, who, after arriving late for a class he was giving on credit analysis due to a rather over-enthusiastic Bordeaux first growth wine tasting the night before at Berry Brothers, proceeded to announce at five past eleven that the best credit analysis is always done down the pub and had taken all the graduate trainees there to continue the lesson. For Fergal, this was his sort of class.

  Since the debrief sessions had started in the Golden Hind, Fergal had treated Al Denham as his partner in crime. Al didn’t mind; Fergal was a star, and at least he got to spend time with Imogen. He knew he didn’t stand a chance – or at least he kept telling himself that he didn’t as a sort of safety mechanism in case he really didn’t – but there was no getting away from the fact that she enjoyed his company. She enjoyed Miles’s and Fergal’s too – especially Fergal’s who she found hilarious – but he hoped that there was a hint of intimacy with him that was lacking in her relationship with his other new friends. Whether he stood a chance or not, he liked being with her; it would take a long time until he grew bored of having Imogen in close proximity. He had promised himself that he would stay single when he started in the City. But all bets were off with Imogen. Normal rules no longer applied.

  When Al looked at Rob Douglas who had spent so much time with them during the training programme and saw him with Imogen’s sister, George, he couldn’t help but feel a sense of longing for his life. There was Rob, twenty-eight years old, earning good money – Al didn’t like to think how much – and happy and in love with George – Gorgeous George – as Al had learned she was known as around the Trenchart Colville trading desk when Rob was out of earshot. But to Al, Imogen was more gorgeous than George. There was no competition. George was probably more classically beautiful but there was a vulnerability to Imogen that made him want to protect her. Al couldn’t help his primeval instincts and that these instincts had been aroused was testament to his feelings for her.

  Al was enjoying the training programme. He found the mathematical analysis tricky at times but he found he was learning so much – the concept of efficient markets, the combination of mathematical analysis aligned with an appreciation of supply and demand. They spent time discussing the philosophy of risk taking, trying to appreciate why markets behave in the way that they do. There were two sessions in particular that had pricked his imagination. The first was hosted by David Welling, the head of research at the bank, who had explained the different techniques employed when studying the movement of financial markets.

  'There are three main approaches to market analysis which we will focus on in much greater detail over the coming days,' said Welling with a faint estuary accent as he gave his introductory address. 'The first is fundamental analysis. What is the value of an asset in real terms? For a stock, what is the value of its discounted future cash flows? For a bond, what is the expectation of interest rates going forward? For a currency, what is the balance of payments for the country, its trade and fiscal positions, its relative interest rate differential compared to the rest of the globe? Fundamental analysis takes rigour and a mathematical approach. The second approach is technical analysis which is the study of price charts. Analysing the price action in many different ways of any asset class provides insights into why they trade the way they do. In essence, this is more a measure of sentiment highlighting when a market may be over-bought or over-sold. Remember that the chart won’t always tell you what you want to hear and you must approach it with total dispassion. Often, when fundamental analysis gives the same conclusion as an impartial technical approach, this signals great trading opportunities. In addition, the chart will help you to know when you should get into a market and, as importantly, when you should get out. It will help you to know when to take profit and when you should stop out and accept that you were wrong.'

  Welling had paused almost for effect, taken a drink of water, and then continued speaking to the graduates, who were giving him their undivided attention.

  'The final approach is an appreciation of positioning in a given market. Who is long or short? Why? How well funded are they? How long can they sustain losses when their positions start to turn against them? At what price do people have to start liquidating?'

  Welling had emphasised that all trading is about planning and above all about timing. Al learned that however great an idea might be, if it is poorly timed, the chances are that it will fail. Emotion should be left at the door; a constant reanalysis of the facts, employing total impartiality was critical. Traders had to constantly ask themselves: How much am I willing to lose? How much do I stand to gain? Where’s my stop relative to my entry point? Behind every decision they made, they had to have a plan. And the more that these ideas and concepts were picked up and expanded on by other speakers on the training programme, the more Al felt that this was wise advice, not just for a life working in banking but for life in general.

  The second session that had particularly resonated with Al was the one in which Rob Douglas had expounded the philosophy of good trading. There he was, six feet two, athletic, speaking in that warm Edinburgh accent as he told them that: 'A good trader must have a sixth sense. He must have an ability to smell fear. He must know that the markets will always eventually move to the positions of most pain, that markets will oscillate between periods of greed and fear. A good trader will know the markets that they trade inside and out. Who are the players? Who’s doing what at any given time? And hopefully, why. They will also have access to great liquidity when they need it.'

  Al had a crush on Rob. It wasn’t a sexual thing – he had a crush on his life. His life was something to aspire to. Rob spoke as though the journey they were embarking on was somehow noble. There was something brave, fearless even, about what they intended to do: 'It takes a certain type of mind to become a good trader. You need to have confidence, resilience, you almost have to ‘not care’ – if that makes sense.' It made perfect sense to Al. 'To care without caring, to want without wanting.' Rob smiled. Al couldn’t help himself and smiled back. 'Some people are born to take risk and some aren’t. You can learn all the techniques and all the text book ways of trading effectively but the key to being a successful trader is the ability to control your emotions when things are going up and down – to not get too excited when you’re deep in the money and not too despondent when things go badly and you get stung. This is the difference between gambling and trading. Gambling is effectively a rational bet on an independent event. Trading isn’t. It’s all about risk reward. A trader’s job is devoted to dealing with risk, taking risk and managing it effectively.'

  While Rob spoke, Al glanced around the room at the faces of his fellow graduate trainees. They were rapt. Only Imogen looking anything other than absorbed in what Rob was saying. Maybe it was because she knew him; maybe her closeness to him via her sister meant that she found him less than riveting.

  'So that’s it for today. Now about tomorrow morning, I’m sorry to spring this on you – I wasn’t going to tell you at all but I thou
ght that that was maybe too cruel – but we’d like you all to deliver a ten minute presentation on a venture from your past. It can be anything, business-related, a trip, an event you were part of, something from your childhood, like delivering newspapers or running the haggis throwing at a fête. What I want you to do is explain what you learned from this experience and analyse the reasons for its success or failure. So, that’s it for today. I’ll see you all in the morning.'

  Rob’s announcement about the presentations soured the taste of the first couple of pints in the Golden Hind.

  'I’m not going to prepare anything,' said Fergal. 'I’m better off the cuff, I reckon. Sort of stream of consciousness, if you get my meaning.'

  'So you’re going to make it up then,' said Al. He could see that Fergal was justifying his desire to stay out and have a few more pints but Al could also tell that he was nervous. They all were, and when the third round of drinks was being consumed, the third round being, Al believed, the subtle dividing line between 'a quick one' and a session, everyone – even Fergal – was eager to get home.

  As they went their separate ways outside the Golden Hind, Al was witness to something that didn’t mean much to him at first. But as he climbed aboard a Westbound District Line train to Fulham Broadway, it took on a greater significance. When they had all been saying 'see you in the morning', Imogen had looked up at Fergal and said, 'I might give you a call later on.' Fergal had just nodded. It was as though this arrangement was nothing new. They behaved as though their talking after hours was a regular occurrence. So, they were talking on the phone in the evenings. What did it mean? Fergal was a great guy, one of the best, a giant of a man on all levels, especially with regards to his voracious pub appetites and sense of fun, but surely Imogen didn’t like him like that.

  Or maybe she did?

  On the way home on the tube, Al usually read the Evening Standard that he had bought from the bloke on the corner of Leadenhall Street, but that night, he just sat and stared at the advertising panels above the windows. Imogen was stylish, she couldn’t be attracted to a man whose suit might have been rejected from an MC Hammer video for being too tasteless. Could she? An unsettling thought came to Al. Maybe all the while that he had been admiring Imogen and day-dreaming about a possible relationship with her, she was becoming drawn to Fergal.

  No, it was ridiculous. Fergal and Imogen as a couple was just too absurd. There were always those men who seemed to punch way above their weight in the girlfriend department but Fergal wasn’t one of them.

  Or maybe he was?

  Al had never thought of Fergal as being boyfriend material for any woman. He was more interested in Guinness. But by the time Al had made it back to his flat he was beginning to think of Fergal as a sexual enigma. The suit, the stories, the sense of fun – maybe these were things that men found amusing but women – and one woman in particular – found attractive. But each time he piled conjecture upon conjecture regarding Fergal and Imogen, it would all come crashing down again, as it surely had to. Fergal and Imogen? No way, impossible.

  But then again, could they? Had they? Were they now?

  Al didn’t sleep well. His worries about his presentation in the morning and disturbing images of Fergal and Imogen had kept him squirming. He kept telling himself that the nervous sense of foreboding in the pit of his stomach was an over-reaction. It was only a ten minute presentation after all. Everyone else was in the same predicament. At least he had taken part in debates at school. Had done pretty well in them too. But the festering boil of fear in his guts throbbed all the harder when Al entered the meeting room that morning to find that they had been joined by a delegation from senior management. What the hell were they doing there? Ian Guthrie, Head of Banking; Timothy Devlin, Head of Corporate Affairs; Basil Dewinter, treasurer; JJ Pietersen, Head of Treasury; and Keith Peake, head of FX Trading. Al felt sick – there they all were, looking as though they had just 'dropped by'. These people never just dropped by anywhere. The presentations were clearly deemed to be of importance. The grandees at Trenchart Colville wanted to see what sort of graduate intake they had this year. These were clearly more than just some informal presentations.

  'What the fuck are they doing here?' Fergal whispered to Al as he sat down next to him.

  'I have no idea. Have you prepared something?'

  'Not something I’d want these bastards to hear.'

  'Me neither.'

  It hit Al just how much the programme had been an assessment. The impromptu tests, the off-the-cuff remarks, the conversations over coffee – they hadn’t just been learning, their aptitude and abilities had been constantly appraised. Fuck, maybe he should have tried harder.

  They weren’t the only graduate trainees who were unnerved by the sheer quantity of senior managers seated at the back of the room. Al looked around the room at his colleagues and their nervous darting eyes and tense expressions. Only Miles appeared unflustered. He leant back in his chair, eyes to the front, his demeanour unchanged. Cool bastard. Al would have to remember to take the piss out of him about it when they got to the Golden Hind later. When Timothy Marchant – Mr Aramis – entered the room, he wasn’t alone. He was sharing a joke with a woman who had something of Joanna Lumley about her and despite his nerves, Al couldn’t help himself, his eyes headed south as she smiled in recognition at Rob and walked to the back of the room to take her seat next to JJ Pietersen whose eyes were heading in the same direction as Al’s as she approached. It struck Al that Rob, their mentor and friend, was also their examiner. This was a test for Rob too, a test of his management potential. Was there an agenda to everything?

  'OK guys,' said Rob, standing up and addressing the room. 'As I mentioned yesterday, I want each of you to deliver a short presentation about a venture that you have been part of, however minor, and to explain why it was successful or why it was a failure along with general ruminations thereof.' Al could see that even Rob was upping his game due to the presence of the senior management, enunciating more thoughtfully and projecting his voice to the back of the room to the people whose opinions and judgements counted for everything.

  'So, er …' He started looking around the assembled trainees. No one wanted to catch his eye but then again no one wanted to be seen to be avoiding his eye either. 'Miles, why don’t you set the ball rolling?' Al suspected that Rob’s pretence of looking around for someone to choose was a ruse. He had meant to choose Miles all along. His presentation was bound to be good. It would set the bar high and he was the least likely to screw it up. His would be a tough act to follow for the rest of the speakers but it might also mean that they upped their game too, all of which would reflect well on Rob who was nothing if not a clever tactician.

  Miles walked to the front of the class. To Al’s dismay he had no notes, not even a solitary index card with his key points on it by way of a comfort blanket as Al had. And he betrayed no sign of nerves.

  'When Rob mentioned that he wanted us to discuss a business venture that we had initiated, it was an easy choice for me. Growing up in Manhattan, I was never happier than when I was developing new and ingenious ways of relieving the good people on my crowded little island of their hard earned dollar, and never was I more successful at educating myself about business than when I went into partnership with my Uncle Joe who ran a bakery on Second Avenue. I loved it there. I loved watching him preparing the dough for the bagels and Challa and I loved listening to him. There was nothing going on in the Lower East Side that Joe didn’t seem to know about. But I was a kid on a mission. I thought I knew it all. I asked Joe why he didn’t do deliveries. Other bakeries delivered. He was missing a trick. Or so I thought. So I went to him with a proposition. How about I set up an operation to deliver his bagels? I took his disinterest in my idea to be an old-fashioned fear of change. But it was the eighties; in my own mind, I was the new breed. I was a hot shot going places. And I managed to persuade him.'

  Everyone in the room watched Miles. There was no stuttering, no p
ausing to think of the right word; he spoke with the confidence and ease of someone who had made a career of speaking to rooms full of people like this and had honed his speech as though he had delivered it a thousand times. He told them how he had set up the delivery business with a group of school friends on their bikes. His forecasts had predicted that a fleet of bicycles, vans and motor scooters would be required to keep up with the demand for his uncle’s bagels once he had put his marketing plan into operation. But ultimately, Miles’s bagel delivery company was doomed to failure.

  'What I had failed to realise about my Uncle Joe’s bakery business was that part of the experience of buying and consuming Uncle Joe’s bagels was going into the bakery and buying them from Uncle Joe himself. It was a business built on personal interaction, it was built on Joe’s gossip, his jokes, his love of life and the pleasure he took in running his bakery. And all these things were infectious. They actually made the bagels taste better to people. Of that I am certain. But when I started delivering the bagels to people who lived outside the immediate catchment area of the shop, the bagels were just, well, they were just bagels. They were good ones but there were loads of places that did good bagels and delivered quicker and cheaper than I could. I learned a lot from that. I learned that sometimes it’s not all about having the flashy ideas and looking for the clever angles but just understanding the intrinsic nature of why people do what they do. I had overlooked the fundamental reason why Joe’s bakery was so successful. It was Joe first and his bagels second. I learned that knowing your market completely is the single most important thing.'