Editor’s note: This article was first published in November 2013, when the LIBOR, FX and ISDA Fix investigations were under way. The scandals mentioned have since led to fines and prosecutions.
In the financial industry, having ethical or moral qualms can hold back your career. Most Wall Street firms are clear about it: you have to be a wolf ready to devour. Even so, sometimes people with good intentions enter this industry, eager to develop their skills in this lucrative profession. That is the case of an anonymous former Wall Street employee who told his story to The Guardian, from his innocent arrival on Wall Street to the point where the pay cheques began to ease his sense of guilt.
His account also contains comments that should leave no one indifferent, because, perhaps innocently, some of his words cut like blades at banks in general and at Wall Street in particular.
My first year on Wall Street was 1993. I was paid 14 times more than I had earned the year before and three times more than my father earned in the best year of his entire life. For that money I helped my firm create financial products that were disguised to look simple but that required complex mathematics to understand properly.
That first year, because of my good work, my bosses rewarded me with a $20,000 bonus on top of my salary. They told me I was very clever.
We sold the products to lots of investors who didn’t fully understand what they were buying. Those investors were what we called “clueless Japanese”. My firm’s profits were huge. The main product our firm made a fortune from for almost five years was what we called a YIF, or Yield Indexed Forward.
Over time the investors got smarter and realised that what they had bought was complex and loaded with hidden leverage, and that it became even more dangerous in times of distress.
I never met the buyers; that was someone else’s job. My job was to try to extract as much value as possible through mathematics and clever trading. Japan would fax us documents from our competitors, who were selling even stranger products, and in bigger volumes than our firm.
If we wanted to keep many of our Japanese clients, “we couldn’t back down”.
When I asked, somewhat naively, whether all this was “acceptable”, I was assured that lawyers and managers approved these kinds of sales.
Late one night, a veteran trader at the firm told me: “You’re playing in the big leagues now. If a client wants a red suit, we sell him a red suit. If that client is Japanese, we charge him double the price.”
… I assumed they would eventually face legal charges, or at least public shame, but they didn’t. What’s more, they were paid better, praised as true risk-takers and offered bigger fees to run other similar large deals.
Being so well paid helped ease many of our worries. The guilt disappeared when you received a big cheque. Besides, for the first time my mathematical skills were being properly valued. There I wasn’t a nerd; I was a genius.
… After a few years on Wall Street it was very clear to me: “the smarter you were, the more ingenious your ability to exploit a loophole in a law or regulation”.
… It was like driving over the speed limit, where others overtook you even faster and you never saw anyone pulled over.
… Wall Street stalled regulators’ requests. Every employee had to complete annual compliance training, which covered updates on things like money laundering, insider trading and which financial products were suitable for clients. By the early 2000s, compliance training had sunk into a once-a-year farce designed, quite literally, just to tick a box.
… By 2007, the very idea of ethics had fallen even further. As Wall Street grew, driven by that culture of unchecked risk-taking, investors became bolder and bolder, and corruption spread more and more widely through the system. By 2006 you could open up any major business, look at its internal accounts and find some “wrongdoing”.
After the 2008 crisis, regulators finally did exactly that, and the result was a series of scandals with strange names: LIBOR fixing, FX collusion, ISDA Fix… which to many people may look like anomalies on the dark side of Wall Street. But they aren’t. LIBOR, FX and ISDA Fix sit at the heart of finance, are part of the daily flow of billions of dollars and were probably standard practice in the many businesses operating in the grey zone.
… the Wall Street guys were doing what everyone else was doing, perhaps more aggressively and more recklessly. They were doing what they had been trained to do: break the rules and beat their competitors. They had been applauded in the past for taking those risks, without a doubt. Now they’re getting the lashes.
Where does the real responsibility lie? Wall Street got out of control.
According to this former employee, the story that nobody knew the danger of what they were doing is not true. Ask anyone who works at an investment bank and they will tell you they knew; and if someone on Wall Street really hadn’t known what was going to happen, the problem would be even bigger.
“They did know, but instead of following the rules, they looked for ways to profit from breaking them.”
Further reading
Featured image: Kidfly182, CC BY-SA 4.0, via Wikimedia Commons.
