Temptation:  The theme that runs through Nest of Vipers is ancient, modern, ubiquitous: from Adam and Eve to the Lord’s Prayer’s wonderfully poetic Lead us not into temptation, it’s always been there….

I wrote Nest of Vipers twenty years ago in what now seems by comparison almost an age of innocence.


Has anything changed?


I have changed.  I escaped investment banking to write full time.  I got married, had three children, lived in Peru, London and the Middle East, spent two weeks as a hostage in Iran, was mercifully released, and now live in the wilds of the countryside.


The financial landscape has changed.  It’s been an eventful 20 years.


The most shocking and tragic change has been in the physical landscape with the terrorist attacks on the two towers of the World Trade Centre in New York City in 2001.   The felling of those twin symbols of Wall Street and global financial power revealed how very fragile and vulnerable it is.


The Global Financial Crisis in 2008 then revealed how fragile and vulnerable the financial system is to attack from within, to contagion.  It’s been shrunk now to the GFC: a tame acronym for something that devastated the lives of millions of people and cost the global economy a cool $7,380 billion (£4,473 billion) of taxpayers’ money according to the Bank of England.


Perhaps this is the financial equivalent of the military’s collateral damage in referring to innocent deaths caused by military action.


As a result of the GFC, many of the behemoths that strode the world financial stage imploded due to their own greed and incompetence.  The largest banks to be acquired were Merrill Lynch by Bank of America, Bear Stearns by JPMorgan Chase, and Countrywide Financial also by Bank of America.  Lehman Brothers filed for Chapter 11 bankruptcy protection and is no more….

In the United Kingdom, Her Majesty’s Treasury gained the power to acquire failing banks under the Banking (Special Provisions) Act 2008.  Amongst those bailed out by the UK taxpayer were Lloyds, Royal Bank of Scotland and Northern Rock.

Interestingly and somewhat bizarrely, the UK Government also used Anti-terrorism legislation to seize assets of failed Icelandic banks, the Government of Iceland and the Icelandic central bank in the UK.

All is fair in love, war and counterterrorism.

Why did the GFC happen?  Albert Einstein has the answer.

Einstein observed that: ‘Three great forces rule the world: stupidity, fear and greed.’


First off, let’s lay out the blame for the GFC with some degree of even-handedness.


Let’s start with Governments.

In the US, the politicians happily presided over the explosion in credit.  Low interest rates and Ninja (No Income No Job) mortgages created a perceptible rise in the standards of living of the American middle and working classes who had been squeezed for decades.  Thing is, it was not real, sustainable wealth.   It was a temporary illusion of it and when the spell broke the consequences were terrible: millions of foreclosures, homelessness and broken dreams.  But while the magic trick lasted, those votes kept coming.  The financially literate politicians must have known that sometime, somewhere down the line someone would have to pay, but, hey, they knew too that it wouldn’t be them…


In the United Kingdom, Politicians looked the other way while the explosively risky collateralization of dodgy debts proliferated.  Pre GFC, the City of London in its finest hour was contributing 27% of the UK’s tax take.  So the politicians were disinclined to interfere.  Why mess with the Golden Goose?  They were more than happy to let the bankers play on.


In Europe, the politically motivated construct of the Euro largely eliminated the price signals that would have warned of impending disaster.


Then come The Regulators.  They are meant to break up the party before it gets too wild, but like over-indulgent parents, they just looked the other way.  For years.  Did they really have no clue what was going on, or did they just not want to know until the collateral damage became so widespread that even they had to focus in.  Now they are pursuing various actions against the investment banks for negligence.  What about adding themselves to the list of suspects?


Next up, The Rating Agencies.  They were competing for business. They were all too eager to grant (wholly inappropriate as history has proven in case there were ever any doubt) ratings that helped create and legitimise a toxic menu of highly leveraged, collateralized products, knowing that the investment banks would come back to them again and again with more such paid business.


Then comes the Man or the Woman on the Street: the individuals who succumbed to temptation and borrowed money that they knew in their heart of hearts they would never be able to repay.  I feel sympathy for them that I do not feel for the other far more culpable players who personally, corporately and governmentally (albeit temporarily in the case of the latter) gained almost infinitely more.


Why and how did the bankers do it?  Greed, facilitated by globalisation and securitisation.


Why is greed so timeless?  Perhaps Gordon Gekko, in the 1987 movie, Wall Street, best expresses the evolutionary imperative of greed:

‘Greed is right.  Greed works.  Greed clarifies, cuts through and captures the essence of the evolutionary spirit.  Greed, in all its forms – greed for life, for money, for knowledge – has marked the upward surge of mankind.’

Gekko sanctifies greed, gives it a Darwinian justification.


The Wolf of Wall Street, a real-life Gordon Gekko, is proof that obscene greed is as prevalent and in some cases as celebrated as ever.  Cheered on by audiences of investment bankers and wannabees during private viewings in packed movie theatres, Jordan Belfort, the eponymous Wolf, has become the poster boy for greed and excess.


Bernie Madoff and his pillaging of fortunes is another example: a man who singlehandedly devastated thousands of lives whilst enriching himself beyond the dreams of Midas.


We have seen too the rise of the Hedgies with their billion-dollar fortunes. They have made the former Titans of Wall Street look like paupers.  In 2006, hedge fund manager John Paulson (and a few other ballsy contrarian investors) began to bet heavily against sub-prime mortgage instruments and the financial companies heavily exposed to them.  Initially they took heavy losses as these asset prices continued to soar.

Paulson doubled up and waited.  By the end of 2008, his gamble had netted him $15 billion, the most lucrative trade of all time.  In this case, fortune did favour the brave, but did it adequately punish the stupid?


Use and arguably abuse of the Black-Scholes financial model meant the uber-bankers thought that they had conquered the future.  Via the model, they could quantify it, risk assess it, price in the risk premium.  They could hedge themselves, protect themselves against the vagaries of tomorrow.  And where the marble and glass-palace players led, so Main Street followed.  Whether or not the bankers really believed, deep down, that they had conquered risk, captured the future, could deal with whatever vagaries it threw at them, they behaved as though they did.

Intoxicated from decades of gambling with what’s known in the trade as Opium – OPM – Other People’s Money, it was supremely easy for them to succumb to greed, to make that trade and not worry about the risk when it was other people’s money they were risking.   A world without consequences removed the brake of self-interest from greed.


What about Einstein’s fear, what role did that play in the GFC?


In the new millennium we have seen the spread of algorithmic trading.  The nightmare scenario of trading by machines.  This was portrayed vividly by Robert Harris in his Fear Index. The supremely intelligent novel portrays a world where computers control investing decisions based on an index measuring fear (and where the mind of the machine takes over…).


The role of emotion, of sentiment in leading markets has always existed and will always exist despite the theorising of Ivory Tower economists.


One theory though seemed to capture the essence of what was going on. Nassim Nicholas Taleb and his brilliant Black Swan theory.  A Black Swan occurrence is a high-impact, hard-to-predict, rare event that is beyond the realm of normal expectations.  Taleb captures it beautifully by referencing the experience of turkeys in the United States in the 364 days leading up to Thanksgiving.  Every day they are lovingly fed grain and tended well.  Every day their life is a pleasant interlude of eating and sleeping.  Then, on the morning of the 365th day, someone comes along with a machete and chops off their head.  Nothing in their prior experience had suggested this outcome.


So when the Black Swan event hit, when investors finally began to question the viability of all those Collateralised Debt Obligations they had bought, they panicked and began the sell off that created more fear and more panic and more sell offs across all asset classes.   Fear begets fear, spawning contagion.  The GFC was the mutant offspring of that contagion.


As Einstein might say, QED.


So, the environment has changed, the physical landscape has changed, what about the players and their psychology?


The most visible change is that there are many more female investment bankers than when I joined Bankers Trust in 1985.  Back then, I was the first woman ever to work in Corporate Finance in their London office.


Despite the happy march of women, I think the prevailing ethos and psychology remain the same.


Michael Lewis in his seminal book Liar’s Poker, described the excesses of the 1980s in financial services.  He says he intended it in some ways as a cautionary tale.  He has subsequently noted that in many cases a whole new generation of budding bankers have used it as a how-to manual.  During the three years preceding the GFC, there was an almost psychopathic obsession with becoming rich, an unbridled sense of entitlement which revealed unprecedented levels of human greed and remuneration.


It’s fair to say that the weakness and the guiding passion of investment bankers is money.  It’s also fair to say that in many cases, they let their passion get the better of them.   It does not just lead them into temptation, it lures them headlong into it, viz the Wolf of Wall Street


For many reasons in the world of investment banking, it’s not too big a leap from the legal to the illegal. First of all the boundaries are blurred, secondly, the perceived consequences of that leap are minimal.  No-one lies bleeding in a dark alleyway and there is very little chance of the financial mugger being caught.


As writer Anthony Trollope noted in his The Way We live Now in 1875:

“If dishonesty can live in a gorgeous palace with pictures on all its walls, and gems in all its cupboards, with marble and ivory in all its corners, and can give Apician dinners and get into Parliament, and deal in millions, then dishonesty is not disgraceful, and the man dishonest after such a fashion is not a low scoundrel.”

Trollope’s voluptuous description of fraud captures the supreme elegance with which the financially literate have stolen their money.  They have no need of the glinting knife or the raised fist.  A champagne glass raised in a salute to greed at the dinners of the great and good is a far more powerful weapon for them.  And where is the harm?  And to whom done?  The victims of fraud are very often not known or identifiable to the perpetrators, and the impact of the fraud often not felt for years after the commission of the crime.  What a wonderful crime.  How much easier is it to commit if guilt is some way off and non specific and there are no visible victims.


Given the type of people who are drawn to investment banking and the ease with which they can commit financial fraud and the very favourable odds against them being caught, I do not believe that either attempts to self police, or that moves by the authorities to tighten regulation and oversight will have a material affect on reducing the incidence of fraud.


I am a firm believer in the partnership structure of investment banking whereby the long-term and short-term interests of the decision-makers and the potential decision-makers are very closely aligned.  But in 1999, Goldman Sachs, the last of the great Wall St partnerships went public and that era has sadly passed.


The concept of the person in the darkened room faced with temptation and an almost certain lack of consequences, remains.  The chief difference now, the interconnectedness of the financial system, means that the potential effects of their misdeeds are much greater.


Motive continues to meet opportunity.  Nest of Vipers is as relevant now as it ever was.


I hope you enjoy reading it as much as I enjoyed writing it.


Linda Davies, January 2014