But something was not quite right. I had become confused by what seemed to be unreasonably low LIBOR quotes by some banks that quite obviously could not raise funding in the interbank market. After all, the benchmark was also supposed to reflect this. But it didn’t. Something told me that LIBOR understated the problem quite substantially and that the whole process was flawed, from start to finish.
‘You can almost argue that LIBOR is but a fictive number upon which many decisions are made, and that it makes economic sense for banks to manipulate it,’ I wrote in a Word document at some point during the crisis.
I never thought I would be proved right, though.
CHAPTER 2
‘WHY DID YOU DO IT?’
My first bonus as a trader seemed large to me at the time, but was not as extraordinary as people might expect. ‘You can buy a new sofa,’ my boss said to me encouragingly. And that was exactly what I did with the money. It was second-hand, greyish blue and very comfortable. A year or two later, in 1995, I carried the sofa outside in the middle of a winter’s night and left it in a nearby park. It was way too large to be shipped from Stockholm to London. While the snow was falling, I sat on the sofa one last time, thinking about the future. I couldn’t wait to leave.
The next morning the sofa was gone, and so was I.
A few years after that, I suddenly got paid eight times my yearly salary as a bonus. This time, I strode excitedly through Regent’s Park to Resurrection Records, my favourite record shop in Camden Town. I wanted to celebrate and pictured myself carrying home bags full of CDs. In the end, however, I could not find anything I really wanted. I remember holding a copy of The Head on the Door by The Cure in my hands (an album I loved but only had on vinyl), but then putting it back when I realised I didn’t really need it. I returned home with only two or three CDs. A few days later, I flew back to Finland, went into Merita Bank, and asked if I could pay back my student loan. The bonus had allowed me to write off all my debt in one go. I was now free of ‘debt’, and also free of ‘guilt’, as my native langue does not distinguish between the two words in English.
Earlier, I had made a triumphant phone call to my father to inform him of the good news. However, I think he was more in shock than happy for me.
‘I hope you won’t change,’ he said, apparently worried I might become obsessed by money.
‘Of course not. Why would I?’
Throughout the next ten years, I was convinced I hadn’t changed. That I was the same old down-to-earth Alexis I had been before my ‘glory days’ as a trader. But maybe I was wrong.
***
I loved my father, and ever since I was a boy he had acted as a kind of inner voice – not by telling me what to do, but by listening and asking me the right questions. If I faced a difficult problem I would call him, or sometimes just imagine that we were sitting down to have a conversation. The topic could be anything – from mathematical equations and difficult bosses to the latest asthma medicine or how to get babies to fall asleep on aeroplanes. In February 2009, in the midst of everything that was going on, I was overcome by a desperate urge to call him. I felt way out of my depth and needed his advice. But although I still had two of his numbers on my mobile phone, I knew there would be no answer.
I would probably have started the conversation along the lines of ‘I have some bad news’ – similar to the words he had used when he called me during the late spring of 2004. We both cried, but otherwise did not say much. As he was a Professor of Medicine, I knew he had no illusions about the seriousness of his illness. What he did not know already, he could find out by asking one of his colleagues who were experts in the field. I naturally wanted to see him as much as possible, but as we lived 18 hours away from each other it was not that easy. However, I remained optimistic, or perhaps in denial. Everything, I told myself, would be fine. But during the autumn his condition deteriorated. I decided to call my brother, who was also a doctor, and he gave me the medical version of the truth I did not want to hear. The dark reality then began to sink in.
2004 had started off as a very good trading year for me at Crédit Agricole Indosuez. But my thoughts had started to drift elsewhere. To succeed, I needed to be 100 per cent focused, which no longer seemed possible. My trading performance suffered. I say this with hindsight; at the time I felt that I was giving everything. Nonetheless, after having talked to my brother, I decided to ask my manager about taking time off to spend with my father.
Such a request was untypical for me; this was due to an experience I had had at Citibank back in late 2000, when Maria was having a very difficult pregnancy with our first child. The doctor at the hospital in Tokyo informed us that the chances of the unborn baby surviving were slim. As a result, Maria decided to fly back to her home town in Sweden to give birth, and I, having already used up my holiday allowance for the year, asked if I could use my forthcoming allowance for 2001 to take time off to be with her. My manager in New York, however, was against such a plan, as the trading budgets had to be decided during the week I wanted to be off. ‘Can’t she be induced instead?’ he asked, as if we hadn’t thought it through rationally. I can’t recall how I responded, but I remember feeling like I had been handed an ultimatum. In the end, I ignored his instructions, flew to Sweden, and, thankfully, the birth went well. My relationship with my manager, however, was no longer the same.
***
‘No,’ was the curt answer I got when I asked the manager at Crédit Agricole Indosuez whether I could take time off to see my father in 2004. ‘Who’s going to take care of your trading books when you are away?’ Market making had to be prioritised, and there was nobody around who could step into my shoes at such short notice. I am not sure why, despite the fury I felt inside, I meekly obeyed. Was I afraid of letting my manager, or the bank, down? I told myself that my father would live until Christmas at the very least, and then I could travel to Finland without having to ask for permission. Perhaps my brother’s diagnosis was too negative. In the middle of the night on 10 December I was woken by a phone call. It was my mother calling to tell me that my father had passed away. The next day I decided that I was going to leave Crédit Agricole Indosuez.
I wasn’t angry with the bank at the time. Rather, I was angry with my manager, so angry that for many years I kept telling myself I would never be able to forgive him. To me, that moment captured the complete lack of empathy that sometimes got the upper hand in the dealing room environment within which I worked. It was as if the job I loved, and truly believed served a positive purpose, came with an undetectable virus. It was impossible to know in advance who had been infected and who, if any, were immune to it. In fact, it was impossible to know if you had caught it yourself.
I had interviews with Barclays, Lehman Brothers and ABN AMRO. But when Merrill Lynch came along, I immediately knew that they were right for me. The desk chief dealer seemed highly intelligent and was a good listener. The most senior manager wanted to get things done, but also had a good sense of humour. The dealing room looked fabulous. Everything was just ‘professional’. It was love at first sight.
Four years later, in October 2008, I decided that I was going to leave Merrill Lynch. But this time it was different. I was not only going to leave the bank, but also the industry. I was tired of everything that was going on. Most market makers I knew specialised in one or two currencies. I did five. Most traders I knew specialised in one, two or three types of derivatives. I did six or seven. I was working too much, trading too much, all without any time to catch my breath. Having cancelled or cut short at least ten attempts at taking a short break since the financial crisis had erupted, I was now physically and mentally exhausted. Perversely, though, I retained a strange kind of loyalty towards the bank. Merrill Lynch was bleeding money, but some of us were being pushed (or allowing ourselves to be pushed) even harder to make up for the disaster seemingly caused in other areas of the bank. Despite my best intentions, I told myself I couldn’t leave. Not now.
I still regret that I didn’t stick to my decision to leave I made in October 2008.
***
In early January 2009, I was promoted into a position running a small trading group. I was never asked whether I was interested in the job; I was simply expected to accept the challenge of becoming the leader of a team that included one person who was about to be fired, a second person who wanted to leave, and a third person who was openly unhappy. The financial crisis was the worst in generations and impacted millions, perhaps billions, of people. Although traders were by no means ruined (instead, many of their banks were), many had begun to feel demoralised. Motivating such a group, not to mention myself, to work harder, to make more money, felt like an impossible task. When the discussion gravitated towards trading budgets, I optimistically said to my manager that I would try to make $150 million in 2009. He burst out laughing.
‘I expect much more than that.’
A common trading budget for a market maker was something between $3 million and $10 million. This was roughly what I was expected to make when I joined the bank. In the major currencies such as euros, dollars and yen, the budgets were somewhat higher. Because I had done well, my budget had increased exponentially. However, I had never heard of a market maker having to aim for $250 million, perhaps even a half a billion US dollars when the other team members were included. To have any chance of achieving this, I would have to put on the biggest bets I had ever laid down, seen or heard about in the markets in which I traded. It would have to be done in the middle of the worst financial crisis in generations, in an extremely illiquid and volatile market. Not only that, my bets would have to turn out to be the right bets.
Something inside me must have screamed that it was an impossible task. The bank was underestimating how difficult the markets were. They were also overestimating my ability to perform miracles. But I avoided such thoughts. I had to keep my act together – especially now, given that we were in the middle of the financial crisis. I convinced myself that it was the right thing to do, and in doing so made a spectacular error of judgement.
Because of the level of risk I took on behalf of Merrill Lynch, even the tiniest price move came to have an enormous impact on the reported value of my trading book. During my early years as a trader, $10,000 could easily turn a good day into a bad one or vice versa. Later, the crucial number became $100,000, and then $1,000,000. Simply put, a large amount of risk is more likely to result in large gains or losses than a small amount of risk. I took a lot of risk.
The trading books were ‘marked to market’: that is, they were valued according to where the market was – or was perceived to be – immediately after the market closed. Following the financial crisis, this process had become increasingly difficult. First, prices in the market moved around a lot. LIBOR-indexed cross-currency basis swaps, for instance, used to be remarkably stable before the crisis. Now, prices in them could move more in one hour than they used to in a whole year. Second, markets became less liquid and the bid–offer spreads often ballooned. For some FX swap prices, two or three basis points (0.02–0.03 per cent) had been standard. Now they could be 10, 25 or 50. Moreover, indicative prices on Reuters and Bloomberg screens, or on those provided by interdealer brokers, could be highly unreliable. Sometimes, the prices had not been updated for weeks. There was simply no market out there. Third, the credit situation had worsened. Prices quoted in the market involving a substantial amount of credit risk were often not tradeable for banks that were perceived to be at risk. Fourth, some markets that had acted, at least theoretically, as a backbone to almost everything I traded – the actual money market – had disappeared. LIBOR, EURIBOR, NIBOR, STIBOR and TIBOR had become highly unpredictable and often, I thought, made no sense whatsoever.
Tens of thousands of trades had to be valued according to hundreds of ‘mid-market’ inputs, the average between the bid and the offer price in the market at around 4 p.m. It was not possible to close the trades at the mid-market point, because these were only hypothetical prices. However, it was not possible to eliminate them at the prevailing bid or offer prices either, because any such attempts would have caused the market price to move. It would either have scared the market away, or have prompted other players to anticipate that I was afraid.
Some prices were straightforward. Futures exchanges, for instance, were highly transparent as they showed where buying and selling actually took place. But this was the exception rather than the norm. Most of my trades were ‘over the counter’ (OTC) and therefore followed a convention which stated that whatever numbers were out there were ‘correct’. It did not matter whether it was possible to trade on the prices or not. It did not matter whether I believed that the various LIBOR benchmarks were dubious. They had to be treated as if they were objective and correct.
During the third week of January 2009, when the market stabilised somewhat, I began to doubt some of my valuations. However, the doubts were not serious enough to raise concerns or for me to discuss them with management. Rather, I saw them as being at the ‘optimistic’, rather than the ‘conservative’, end of the scale. Some valuations were perfectly ‘objective and correct’, whereas others were not.
I wanted to focus on reducing my risk, a gargantuan task considering that the financial crisis was far from over. What was worse, to achieve my budget I now had to take on more, not less, risk. My mismarking episode ultimately boiled down to this: I took matters into my own hands and ignored the dealing room compliance handbook I had signed when joining the bank. Even though the regulator later said that Merrill Lynch had failed to ‘supervise the trader’s activity’ and had an ‘inadequate month-end independent price verification process’, the fault was, of course, mine. Regardless of what my opinions were, my valuations ought to have been correct.
***
I never saw trading in the FX, money or derivatives markets as a socially useless activity, or something that might be considered as ‘wrong’ more generally. However, I never saw it as a means to become rich either. It was just something I had been tremendously interested in for a very long time. As a child, I was fascinated by the fact that coins from other countries had different people and landscapes on them. I was given a few coins here and there, and I exchanged a few using my pocket money or the occasional monetary gift. I kept track of my ‘positions’ in a tiny little unused bank book. The earliest record I have is from 1975, when I was just five years old:
Colombia
20 centavos
USA
6 cents
Canada
2 dollars 41 cents
Norway
23 kroner 66 øre
Belgium
1 franc
Spain
121 pesetas
Hungary
10 filler
France
30 centimes
Finland
2 markka 75 penni
Sweden
62 öre
Switzerland
6 francs 55 centimes
Austria
2 Schilling 50 Groschen
Denmark
2 kroner 15 øre
West Germany
80 Pfennig
It looks like the currency reserve of Lilliput’s central bank. I was heavily loaded with Canadian dollars at the time, thanks to my grandparents’ trip to see relatives who had emigrated to North America in the early 1900s. I had quite a few pesetas as well, but I also knew how little they were worth. So, years later, when I found myself being interviewed for the internship at Dresdner Bank in 1992, I could talk quite passionately about currencies and how different FX hedging strategies could help the bank’s customers. It felt natural.
Rather early on, though, I learned to accept that the rules of trading did not always apply to the rest of society or vice versa. Despite this, conventions within the dealing room felt logical and everybody seemed to accept them, so I never thought to question these social norms. In the absence of outside regulation, the banks simply wrote
the rules themselves, which were then accepted by the rest of the market as well. The environment might not have been pleasant, fair or honest all the time – but even so I did not think of trading as immoral.
***
During the 1939–40 Winter War between Finland and the Soviet Union, the Finnish army had a sniper called Simo Häyhä. Having killed 505 soldiers in fewer than 100 days, he came to be nicknamed ‘White Death’ by the Red Army. Some 40 years later, when Häyhä was asked whether he had any regrets about killing all those people, the former sniper answered: ‘I only did my duty, and what I was told to do, as well as I could.’1 Traders who showed no compassion for wounded competitors were sometimes also nicknamed ‘snipers’. Individuals who do their duty, what they are told to do, and as well as they can, are often considered perfect employees – no matter what their job description is.
I was once told by a senior manager to fire a Japanese employee in my team who had served the bank for two decades. The trader in question had done nothing wrong and had generated a stable revenue stream every year. But the trajectory was not steep enough for senior management and the trader had to go. I remember expressing unease about the assignment, not least because of the Japanese tradition of lifelong employment.
Barometer of Fear Page 6