Barometer of Fear

by Alexis; Stenfors

  When you take away colleagues, customers, vendors, data, products, services, methods, systems, business plans, marketing methods, strategies, costs and other confidential, secret and proprietary information, what is there really left to talk about? If banking were an industry producing bicycles and the trading floor the factory floor where the assemblage and production took place, you would never be able to tell anyone what was going on inside. You could describe the colour of the walls and the air-conditioning system, and you could elaborate on the selection of drinks in the vending machines, but that would be it. You could never explain how the bicycles were made, how many, for whom and how working on the factory floor affected you and others around you. You could only speak about the bicycle industry. But nobody is employed by the ‘bicycle industry’.

  Secrets can be very valuable, or, as Professor George Simmel wrote in the American Journal of Sociology in 1906, ‘what is withheld from the many appears to have a special value’.1 Secrets are almost like commodities. Let us say that Max tells Rupert in the playground ‘I know something that you don’t.’ This immediately elevates Max’s status, whereas Rupert is demoted. Regardless of whether there is any truth in the secret or not (maybe Max is just pretending that he knows something), jealousy and admiration kick in almost inevitably. On the other hand, unless there is value (or perceived value) in secrets, there is no point in collecting secrets like stamps.

  In the old days, pricing and valuation spreadsheets and various risk management systems could be saved onto floppy disks and then slipped into a suit pocket. These days, banks are more sophisticated in protecting trade secrets. Downloading something to a USB flash drive or emailing a large attachment is rather difficult from a dealing room computer. However, information is still smuggled out because the human brain is like an enormous memory stick. Client contact lists, for instance, easily emerge in the dealing rooms of competitors.

  I did not pay much attention to the small print about secrecy when I signed these contracts. I doubt many other traders did. However, in August 2009 I contacted 20 or so ex-colleagues and ex-competitors to ask whether they would be willing to act as character references should the FSA want a few unbiased opinions about me. I only got in touch with people I trusted and who knew me well enough as a trader working inside the bank. Whereas a few were kind enough to show support, the majority found my request highly problematic. One potential reference initially confirmed that their whole company was ‘happy to be associated with me’, only later to stop responding to emails, phone calls or text messages. Two supported me wholeheartedly and wished me good luck, but wanted nothing to do with me in writing. In fact, they did everything they could to distance themselves from me formally, and even openly told me how they were seeking reassurances from their own banks that their previous connection with me would not become a hindrance to their future careers. A couple who had left the industry altogether were afraid that commenting on former colleagues might jeopardise their right to exercise their stock options. Writing a statement about me (which I would then be able to show to the financial regulator) meant that their pensions might end up being in danger. And so on. The task was much harder than I had ever imagined, as everyone, of course, had signed similar agreements to me. Everyone had sworn secrecy to the banks. Breaking the agreement to keep secrets came at a price that was measurable in money. And the price was very high.

  ***

  In some respects, confidentiality agreements are broken almost by default. This is particularly true when it comes to the hiring process of traders and sales people. Players in the market are not like football players, where everyone is able to assess who is talented and who is not simply by watching a game. Because dealing room expertise (often defined in terms of the ability to make money) is difficult to verify, sales people might exaggerate how closely connected they are to important clients and how instrumental they were in generating those enormous trading profits for the bank. Traders, likewise, often brag about their know-how, how much money they make and how powerful they are in the market. Therefore, with so much money and prestige at stake, the kind of jealously, admiration and Schadenfreude that exists in a children’s playground is probably even more common on a trading floor.

  ‘My last game tomorrow at Parc des Princes. I came like a king, left like a legend,’ the Swedish football player Zlatan Ibrahimovic´ posted on Twitter before moving from Paris Saint-Germain to Manchester United. I was nicknamed both ‘The King’ and ‘Legend’ by some traders, but, equally, I know I was called ‘Stealth’ and a range of other much less flattering things by others. Legends are born, heroes fall, and myths are created all the time in the financial markets – and secrecy plays an important role in this.

  When Citi agreed to pay $425 million to the US authorities in May 2015 for its involvement in benchmark manipulation, the transcripts revealed that a senior derivatives trader was described by managers thus: ‘This guy has forty percent of the market, and he knows where all the fixes are, he knows everybody on the street, he’s a real fucking animal, this guy owns it.’2 As a trader, it is difficult to get a more ringing endorsement than that. If such a reputation slips out, competitors soon take notice and the headhunters begin to call. Even though I usually ignored headhunters, they were instrumental when I joined both Citi and Merrill Lynch. In the former case, London and the reputation of the bank persuaded me. In the latter, I was attracted by the bank’s investment bank status and attitude to risk. After all, banks hiring senior traders and sales people are ‘buying’ a specialist skill and expertise that those individuals have acquired at another bank. As there is no free trial period or returns policy, banks have to rely on promises, hearsay and open secrets. Bonuses, in particular, are the sort of open secrets that induce respect and jealousy in equal measure. Whereas well-paid traders, sales people and managers are happy to let others know how much they are worth (their ‘market value’), this information is by no means supposed to reach the wider market – especially not the customers of the bank or the general public.

  ***

  On 15 September 2008, the day when Lehman Brothers filed for bankruptcy, financial markets panicked and became paralysed at the same time. Share prices in banks and other financial institutions collapsed, whereas the money markets froze completely. For many banks around the world, the day of the largest corporate collapse in history will probably remain their worst for years to come. Having put very large bets on a worsening financial crisis, the day will also go down in history as the best day ever in my trading career. Trading-wise, I had managed to remain calm throughout a marathon poker game that had lasted since August 2007. When it was time to reveal our hands, I was the one with the royal flush. But now the game was over, and rather than being a day of celebration, this was the day on which I began to have very serious doubts about the industry, Merrill Lynch and myself.

  Without outside help, Merrill Lynch would also have gone under on 15 September 2008. Like a number of other banks, my employer had kept on writing down the value of its sub-prime mortgage-related assets throughout the crisis. With Lehman Brothers gone, the word on the street (and on the trading floor) was that we would be next in line. The newsflash that Bank of America had agreed to buy Merrill Lynch was met with a feeling of relief and resignation. We did not want to be escorted from our high-tech office next to St Paul’s Cathedral carrying brown cardboard boxes containing the very few personal and non-secret belongings we kept in the dealing room (toothbrushes, family photos, business cards, crime novels, etc.). However, Bank of America was a dinosaur. Merrill Lynch was, as the famous company logo illustrated, a charging bull. We were strong and aggressive. It did not matter that managers tried to convince us how lucky we had been to be thrown a lifeline just before drowning. The attempts at improving the mood were half-hearted at best. You could almost smell the humiliation.

  But it could, of course, have been much worse. Many of us had friends who worked at Lehman Brothers or had traded with them – if n
ot daily, then at least frequently enough to get a sense of how they must have been feeling. It was like a close cousin had died.

  But the mourning process was very short. The cousin had no widow or children to look after the estate (yet), so within a couple of days Lehman Brothers was surrounded by vultures looking to eat whatever pieces were left of them. Trades had to be unwound and all ties had to be cut to a 150-year-old investment bank with which, it seemed, every trader and every bank had managed to enter into deals. It was one of the ugliest scenes I remember having seen in the market.

  When Merrill Lynch announced its results in mid-January 2009, it turned out that the fourth quarter had been terrible. Losses ultimately exceeded $15 billion during the period, more than twice as much as Bank of America shareholders were led to believe when they approved the merger on 5 December 2008.3 Despite such huge losses, the bank had still managed to pay bonuses amounting to $3.6 billion to an army of traders, investment bankers and managers. Rather than having a traditional bonus day during the early spring, after the results had been announced, a more convenient date had been chosen: 31 December 2008, which just happened to be the day before Bank of America formally took over Merrill Lynch. At that point, I had no idea how bad the situation was for the bank as a whole, but it did not feel right. I remember beginning to feel sick when I was quietly told which day had been picked as the bonus day.

  The announced losses were so huge that the Federal Reserve had to step in and outline an emergency package to Bank of America. A large majority of the toxic assets the bank now had on its books came, as the press release stated, ‘as a result of its acquisition of Merrill Lynch’.4 If the public was not already furious with bankers by then, the Merrill Lynch bonus saga truly came to symbolise what the financial crisis looked like from the outside. Andy Stern, the President of the Service Employees International Union in the US at the time, neatly summarised it as follows: ‘Bank of America took taxpayers’ money and allowed Merrill Lynch to hand out bonuses at the same time as it was preparing pink slips for 35,000 employees.’5

  On 5 March 2009, the New York Times published an article with the headline ‘Undisclosed Losses at Merrill Lynch Lead to a Trading Inquiry’.6 It was about me. However, most of the story related to the takeover by Bank of America, the huge fourth quarter losses reported by Merrill Lynch, and those bonus payments. The timing of the article was extremely unfortunate, as, although it did not state so specifically, a reader would automatically draw the conclusion that the two stories were connected. For me, the situation turned Kafkaesque. Merrill Lynch had suspended me, pending the outcome of an internal investigation. Depending on the outcome, I would then most likely be contacted by the FSA, the UK financial regulator. During this stage of the process, any discussions surrounding me would be held between Merrill Lynch and the FSA without my involvement. The fact that I was ‘co-operating’ with Merrill Lynch meant I was assisting them as much as I could during the investigation. It also meant I was still employed by Merrill Lynch and had to adhere to the contract of employment I had signed. In addition, I was requested not to come into the office, not to speak to the press, and not to speak to any colleagues at Merrill Lynch or in the market. I wasn’t even allowed to reply to emails or text messages.

  When, the next day, the New York Attorney General sent a letter commanding me (and presumably others) to ‘testify in connection with an investigation concerning executive compensation’, my situation became precarious. The US government wanted answers about what was really going on inside Merrill Lynch. Bank of America shareholders wanted answers about what was really going on inside Merrill Lynch. US taxpayers wanted answers about what was really going on inside Merrill Lynch. Lawyers for Merrill Lynch and Bank of America, however, argued that the names of those traders, investment bankers and managers should remain secret. Bonuses were discretionary and a private matter between employer and employee. Revealing them to the public could also affect their security (some people were that angry). Moreover, it was claimed that bonuses could be seen as ‘trade secrets’. Somehow, competition for talented staff would be harmed if everyone knew the compensation structure at Merrill Lynch. This would be unfair. Neither John Thain (the ex-CEO of Merrill Lynch) nor Ken Lewis (the CEO of Bank of America) wanted to speak out. On the other hand, they were unable to pinpoint an exact policy stating that compensation was supposed to be kept secret at all costs. In fact, when asked if he ‘had an understanding of whether Merrill’s employees routinely disclosed compensation information during the recruitment process’, Thain answered ‘Yes’. Ken Lewis testified as follows:7

  Q: Have you ever given anyone instruction to keep their compensation confidential?

  A: No.

  Q: In the 40 years that you have been at Bank of America?

  A: Not that I recall.

  In my naivety, I was rather keen to speak openly about what I knew and what I didn’t know. It was ‘a misunderstanding’. My instinct was similar to what it had been a few weeks earlier, when suggesting to my lawyer that it might be better to talk to the FSA directly, rather than leaving everything up to Merrill Lynch. As I had never met a financial regulator in person, I had not given much thought to how the process worked in reality. Now I knew that although I had a form of trading licence issued by the FSA (which quickly switched from ‘active’ to ‘inactive’ on their website), it was the banks, not the regulator, that ultimately regulated the traders. Traders were not supposed to talk to regulators.

  By speaking up, I would obviously be breaking an unwritten rule. Having committed to being co-operative just a few weeks earlier, suddenly going rogue (again) would be unwise. And perhaps I did not know anything that was of interest? But who knew what I knew or what I didn’t know? The end result was that I continued to pay the lawyers who were working on my behalf in relation to having going rogue in the first place, whereas the bank paid for an extra team of lawyers that were working on my behalf to prevent me from going rogue again, but in a rather different manner.

  ***

  In a democratic society, transparency and public awareness are normally seen as good things. Every citizen should be informed about facts and relationships that matter to them. Although financial markets are in no way democratic, a somewhat similar logic is often applied. Without transparency, markets become less efficient – and efficiency is seen as something good. In financial markets, therefore, transparency is also seen as a good thing.

  Central banks illustrate how important transparency has become in financial markets. Until only a few decades ago, central banks tended to be highly secretive. Acting on behalf of the state, they often took the markets by surprise and did so deliberately. Since the 1990s, however, the opposite strategy has been adopted. Economic theory gave support to the idea that surprises generally resulted in a welfare loss for society, whereas certainty and openness were beneficial. The new ideas made sense and led to a range of changes in the way central bankers communicated with banks, and ultimately with traders who were betting on what their next actions would be. Whereas monetary policy committee meetings used to be held on an ad-hoc basis, central bankers began to announce their exact meeting schedule, often a year or two in advance. The discussions in these meetings used to be secret. Now, central bankers began to disclose the minutes on their websites. The same happened to their interest rate forecasts. Before, a trader needed to scrutinise every single word they said in order to get clues about the direction in which interest rates were heading, how fast, and by how much. Recently, several central banks have gone so far as to publicly announce their own projections or interest rate ‘paths’, and some even their own LIBOR forecasts. All in all, this transparency has resulted in the increased predictability of central bank policy. This fits well with the idea that societies aim for greater transparency. However, as the LIBOR scandal has shown, not only was this openness one way (from central banks to banks), but communication remained secretive and deceptive the other way round (from banks to central ba
nks). Therefore, unless central banks were consistently aware of the problem (which I don’t think they were) and were able to quantify that problem (which they could not), policy decisions that were supposed to work towards a ‘social good’ would inevitably be distorted. Manipulated quotes would result in a deceptive market signal, which in turn would then have been picked up by the central bank. In other words, a decision would be made based on a lie. A rate cut, for instance, might have been delayed, or the ‘wrong’ kind of liquidity might have been injected into the banking system.

  Individual rights to privacy should, of course, be protected. This also applies to secrets that belong to corporations. Trade secrets have an economic value precisely because they are secret. If, through industrial espionage, they are revealed to a competitor or to the wider public, the value of the secret to the firm is diluted. The corporation suffers. Societies therefore try to find the right balance between transparency and secrecy. The LIBOR scandal is a perfect example of where this balance was wrong.

  Although I had not been involved in industrial espionage, my mismarking episode in 2009 had publicly exposed some of the bank’s failures with regard to supervision, financial control, and risk management. However, these failures were described in just 65 words in the bank’s settlement with the Irish Financial Regulator. Despite the fact that the bank was praised for having been ‘open and transparent throughout the examination’,8 the 65 words did little to reveal what these failures actually were. This is not surprising. As I mentioned previously, banks have an inherent desire to appear good and sound. No bank wants failures. Therefore, if failures do materialise, no bank would want the details of them to be revealed to the wider public.