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The party seems far from over for imprudent bankers
By Wan Lixin |
August 8, 2009, Saturday
|
Print Edition
Print Edition
IN "Hard times for Asian expats" (August 5, Shanghai Daily) it is observed that financial professionals in Hong Kong are feeling the pinch.
For top bankers the standard HK$200,000 (US$25,640) per month housing allowance "is gone or going."
Judging by how corruptive and destructive these bankers have been, I am astonished that one year after the financial crisis we are hearing of scaling back of their perks, not bankers killing themselves or starved to death.
One important factor that these bankers are willing to take excessive risks is that they are sure they need not pay for it.
And they turn out to be right, again.
In "Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe," financial journalist Gillian Tett tries to trace the development of credit derivatives.
"As with most intellectual breakthroughs, the exact origin of the concept of credit derivatives is hard to pinpoint," she observes.
But she tends to attribute that distinction to a 1994 party for J.P. Morgan bankers at a hotel in Florida.
At that alcohol-fueled retreat some young financiers talked of profiting from derivatives which are essentially wagers on future values.
At that time, the currency derivatives market had already grown to US$12 trillion, thus J.P. Morgan's bankers tried to create innovative, new products to reap more profits.
There had been misgivings about derivatives, but subsequent attempts at regulation failed.
"In the absence of regulatory oversight, the eventual innovation frenzy would later fuel a boom beyond all bounds of rational constraint -- or self-discipline," the author remarks.
Soon after the 1994 party, the J.P. Morgan began to think of using derivatives to offload credit risk without actually selling the loan itself.
In 1996, with Fed approval, J.P. Morgan began to bundle pools of loans and selling the bundles to special-purpose vehicles (SPVs) that were paid to insure against the risk of default.
With the same spirit of innovation, home mortgages was securitized.
"Unbeknownst to the J.P. Morgan bankers, and against their better judgment, the two booming businesses of mortgages and derivatives were about to become fatefully intertwined," Tett observes.
Rating agencies readily blessed such deals, for fear of losing the revenues to rivals.
But even J.P. Morgan's top experts could not understand how other banks could manage mortgage-related risk and still make profits.
"Faced with a financial system that few people seemed to understand anymore, the G8 did nothing -- other than hope that the losses ... in the US subprime mortgage world would be absorbed quickly," the book says.
The fact that few laymen -- or experts -- can understand the real risks of financial derivatives can be seen from another perspective.
From a philosophical point of view, trying to determine future risk is in itself a stupid move.
The future is to be feared, prayed for, hoped for, but not to be plotted against. Men are acting godly in trying to quantify, not to say outsource, future risks.
A considerable portion of the financial dealings today would be simply wiped out if market discipline is allowed to take its course against imprudent bankers.
Unfortunately, governments quickly step in, competing with one another in announcing more aggressive bailouts, dashing all hope for the needed corrections.
That investment bankers are again reporting good profits and pocketing fat bonuses suggests that they will be playing their old game again.
The glamour associated with their life -- grand mansions, condominiums, yachts, clubs -- will before long reassert its dominance over the social psyche.
For top bankers the standard HK$200,000 (US$25,640) per month housing allowance "is gone or going."
Judging by how corruptive and destructive these bankers have been, I am astonished that one year after the financial crisis we are hearing of scaling back of their perks, not bankers killing themselves or starved to death.
One important factor that these bankers are willing to take excessive risks is that they are sure they need not pay for it.
And they turn out to be right, again.
In "Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe," financial journalist Gillian Tett tries to trace the development of credit derivatives.
"As with most intellectual breakthroughs, the exact origin of the concept of credit derivatives is hard to pinpoint," she observes.
But she tends to attribute that distinction to a 1994 party for J.P. Morgan bankers at a hotel in Florida.
At that alcohol-fueled retreat some young financiers talked of profiting from derivatives which are essentially wagers on future values.
At that time, the currency derivatives market had already grown to US$12 trillion, thus J.P. Morgan's bankers tried to create innovative, new products to reap more profits.
There had been misgivings about derivatives, but subsequent attempts at regulation failed.
"In the absence of regulatory oversight, the eventual innovation frenzy would later fuel a boom beyond all bounds of rational constraint -- or self-discipline," the author remarks.
Soon after the 1994 party, the J.P. Morgan began to think of using derivatives to offload credit risk without actually selling the loan itself.
In 1996, with Fed approval, J.P. Morgan began to bundle pools of loans and selling the bundles to special-purpose vehicles (SPVs) that were paid to insure against the risk of default.
With the same spirit of innovation, home mortgages was securitized.
"Unbeknownst to the J.P. Morgan bankers, and against their better judgment, the two booming businesses of mortgages and derivatives were about to become fatefully intertwined," Tett observes.
Rating agencies readily blessed such deals, for fear of losing the revenues to rivals.
But even J.P. Morgan's top experts could not understand how other banks could manage mortgage-related risk and still make profits.
"Faced with a financial system that few people seemed to understand anymore, the G8 did nothing -- other than hope that the losses ... in the US subprime mortgage world would be absorbed quickly," the book says.
The fact that few laymen -- or experts -- can understand the real risks of financial derivatives can be seen from another perspective.
From a philosophical point of view, trying to determine future risk is in itself a stupid move.
The future is to be feared, prayed for, hoped for, but not to be plotted against. Men are acting godly in trying to quantify, not to say outsource, future risks.
A considerable portion of the financial dealings today would be simply wiped out if market discipline is allowed to take its course against imprudent bankers.
Unfortunately, governments quickly step in, competing with one another in announcing more aggressive bailouts, dashing all hope for the needed corrections.
That investment bankers are again reporting good profits and pocketing fat bonuses suggests that they will be playing their old game again.
The glamour associated with their life -- grand mansions, condominiums, yachts, clubs -- will before long reassert its dominance over the social psyche.
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