Bank District in London, flickr image from Peter Pearson
Ideally, investment bankers are supposed to help move money from investors to investments (in the form of new businesses, roads, government projects, etc.), but more often than not these bankers are solely concerned with amassing personal fortunes—not with increasing net value for society. They play the games needed to earn a profit, value be damned.
This is the takeaway from an amazing series from the Guardian of 73 interviews with people who worked in "the City" (the British equivalent of Wall Street). The series paints a compelling—and largely unflattering—view of investment banking, solidifying our belief that investment banking is a corrupt world.
For example, one of the interviewees, a former compliance officer, told about a time when investment bankers intentionally hurt the Italian government. Italy had decided to increase the flow of foreign money into their country by giving a subsidy to foreign investors. When the investment bankers learned about Italy's plan, they figured out a way to game the system by getting foreigners to buy shares (thereby getting the subsidy) and then selling those shares through a derivative trade to Italian investors for a profit (a process vaguely similar to ticket scalping, in that a middle man slows down a transaction to get a cut for himself).
"Sounds great, doesn't it?" says the compliance officer. "Except of course for the Italian government. So what happens when the government catches on: they create a massive backlog for any tax claims ... The only winner is the trader, who pocketed his bonus when the trade went through and who probably moved on to another bank years ago."
In other words, these traders didn't add value for society. Instead, they sucked value away from society, creating a less efficient marketplace in order to amass a larger bonus for themselves.
Again, investment bankers make big money not because they're necessarily adding enormous value to society. They make big money simply because they're trading from a pool of trillions of dollars (consisting of money from wealthy investors, governments, corporations, etc.). They get a fee or fraction from each trade they make.
These traders rationalize that what they do is worth big money because they work hard (60-100 hours per week). But the main reason they work so hard is because they're competing with lots of other traders around the world who are also playing in the giant pool of money. They have to figure out new ways to "rip the client's face off" in order to successfully compete and keep their jobs, and that requires long hours. It's what they do:
If we want to improve society, we could start by pushing for a much smaller, simpler, and fairer investment banking world. We need to break up these banks and reform a corrupt Wall Street culture.
See more excerpts (below) about the decrepit world of investment banking straight from those who were interviewed by the Guardian:
Ex-mid/back-office support worker:
"What makes front-office on the trading floor so attractive? You're in the frontline, get to make snap decisions, you have instant visibility of your performance and that performance is completely binary, you win or lose. I liked the environment, too. Totally non-PC. During that internship, if I got the breakfast order wrong, I'd be called the c-word. They use that all the time, the worst word in the English language. The first time I got called the c-word, I remember being quite shocked, thinking: that's a bit of an overreaction. But that's the trading floor and that's what I loved: no politics, and you can speak without a filter.
"There's also the client entertainment, doing all the classy stuff. Where brokers take clients out to expensive clubs, restaurants, Wimbledon, strip clubs, prostitutes… A dangerous, addictive world? I wouldn't mind those things. And I wouldn't get addicted."
Junior in sales trading:
[About why he chose to work for an investment bank:] "Corporations came to deliver pitches, and it was simply a matter of the highest bidder. Those were the banks, by a long shot. I was quite naive, had no real idea of what a job on the trading floor might be. I just saw the figure, realised I was twenty thousand in student debt, and there I went."
"The CEO of Moody's in the run-up to the fiasco in 2008 is now … still the CEO of Moody's. Last year his compensation was $6m, in line with his five-year average. Rating agencies make so much money … Moody's has never had a losing quarter. This is why analysts who follow Moody's for investors really like Moody's. Moody's always makes a profit.
"I have asked people at Moody's: why didn't you fire those responsible? But that would be an admission of liability, I was told. Worse, precisely the managers responsible for the instruments that blew up have been rewarded and promoted. I don't believe in conspiracies but here you really have a small cabal of people doing this."
Former Investment Banker:
"Theatrics should not be overlooked. Over drinks a senior banker once recommended I be more aggressive and swear at the littlest oversight. "People will see you as highly motivated to make money and they'll want to keep you," he said. Half of his time on the phone was spent yelling to get things done faster. He cursed like Al Pacino in Scarface. Others would comment "man, that guy is committed to the job". My senior banker also said if I wanted to get paid real money, I needed to look like I wanted real money. If I wore a cheap watch they'd think I'd be happy with a 100-dollar bonus."
Former rating agency worker:
"What's making me even angrier is that we don't seem to have learned from the crisis. It's back to business as usual. ... I am genuinely frightened. What are the ratings agencies missing at the moment? What are the companies that they're rating developing? What's the next miracle financial product and how badly is it being misunderstood?"
Fortunately, a healthier society is possible. We've been here before, and we can start reforming the system by breaking up the big banks and supporting local lenders.