Allow me first to set out my credentials for addressing this issue. Between 1983 and 1997 I worked at or around Director level in the Investment Banking Divisions of six different banks based in The City of London.

I have watched the latest banking crisis unfold over the last few years from my little farm on the Rutland-Leicestershire border where I have spent my time since 1997 building a small diversified farming business, and a farm shop with outlets at London’s Borough and Broadway markets.

On every single occasion on which a financial institution has made a negative announcement, I have felt it in my bones that there was far worse to come. I have listened to, watched and read the opinions of a wide range of pundits, some self-styled, some appointed; some, like Robert Peston, knowledgeable, many, if not most, woefully out of their depth.

The so-called ‘Banking Crisis’ has raised one simple question more than any other. That question is:


I have just read an anecdote which comes close to the answer. Andrew Rawnsley in The Observer of Sunday 1st July 2012 relates a tale told by Ed Balls, City Minister in the Brown Government. Balls was being shown around the trading floor of a financial institution by its Chairman. Balls pointed to a group of traders and asked his host what they did. The Chairman confessed that he did not know. Apparently at the time Balls thought little of the answer. It should, of course have alerted him to the fact that something was terribly wrong.

I moved from bank to bank during my fourteen years in the City for a variety of reasons. Such job-hopping was partly the ‘hired gun’ nature of my job. Moving was learning. Moving was a way of moving quickly up the pay scale. I was poor at playing the political game necessary to stay put and advance my career.

My first banking employer was Nomura International. Nomura was then the largest and fastest moving of the Japanese Investment Banks. I was very young, but fell quickly into a position of huge responsibility which involved underwriting substantial financial risks for my employer. Our Chairmen, however, during my time there, were regular visitors to the trading floor. I can still feel the force of their respective hands on my shoulders on the many times when they would come down and stand behind me as I sat at my desk managing positions of hundreds of millions of various currencies in the International Bond Markets. These Chairmen, in sharp contrast to the one remembered by Ed Balls, knew and understood what was going on. They may not have been experts in each and every of the products we were involved in, but they understood the principles involved and, most importantly, they understood the risks undertaken. They would appear without warning and quietly walk around the trading floor stopping at each department. If they had entered on the other side of the floor the earliest sign of their approach would be of a sea of people jumping to their feet and bowing. In the early days we normally had a Japanese head of department who worked along -side or nominally in seniority to a non-Japanese (Gaijin) head of department. The Chairman would normally talk first to the Japanese person and then to the Gaijin. In the case of the International Bond Syndication desk, that was me. Of the six banks I worked for, a major cause of my departure was my inability to stand by and play the political game when members of senior management put their organisation at unnecessary risk because they did not understand the business of which they were in charge.

I remember Nomura International’s Chairman speaking to a group of graduates early in their careers. The most important message of his presentation was for us to understand that despite our different jobs and titles we were essentially all doing the same job. That job was to represent the institution that employed us. We were all, in effect, salespeople.

At the heart of what I learned at the beginning of my time in Banking was an understanding of risk. The meaning of risk was taught like a religion, it underlined, underpinned and pervaded everything I did.

As I rose through the ranks, I took on more and more responsibility and with responsibility came more and more risk.  In time I became one of the key people who priced the risk which the bank took in certain areas. As I learned more, so the market took on what were viewed as greater and greater levels of sophistication in terms of the structuring of deals. I was never the greatest fan of the derivatives market as its products became more and more esoteric and complicated. In part this was because I found the structures proposed more and more difficult to understand. In many cases I simply could not see how the structure could possibly do what was claimed of it. Now we know that in many cases, the structures did not do, could not do, what had been intended. Ultimately I formulated a very simple rule based on an assessment of my own capabilities. I reckoned that I was in the middle of the stream of intellectual ability and so, where the decision was mine, If a deal was proposed that I could not understand, it did not get done unless it could be explained fully and properly to me.

That simple rule, call it the ‘rule of clarity’ began to be ignored by senior bankers in the late 1990s, and as Ed Balls’ tale demonstrates, a massive lack of contact between the top of these financial institutions and the shop floor, coupled with lack of understanding made for very, very bad decision making.

Enhanced by Zemanta

STEPHEN HESTER – An Alternative View

I know this subject seems miles away from my normal area of expertise, but please have a look & let me know what you think.

I am so sickened by the whole Royal Bank of Scotland bonus debate. It is a small, almost irrelevant, part of a much larger and infinitely more important question which is that of the real responsibility of banking and bankers for the current global misery of recession.

I spent fourteen years as an Investment Banker working for seven different so-called global banks. I was based in London, but travelled extensively during that time.

The year was 1982 or ‘83. I applied for my first job in banking in part because I did know what else to do. I had a law degree and was heading for a rather dull, but thoroughly respectable job in a small North London Solicitor’s firm. I applied for a Graduate Trainee job with the then rising house of Nomura. Much to my surprise, I was invited to attend an interview. I knew nothing about Japan and even less about Investment Banking. Realising that this interview could be a massive opportunity for me, I needed a crash course in Investment Banking, and in matters Japanese, if I was to have any chance of landing a job away from the world of Law.

I had two weeks to prepare for my interview.

I covered the Japanese element in a number of what now look like rather amusing ways. I had a hair-cut at a Japanese Barber’s shop, I went for my first meal in a Japanese restaurant and I read the novel Shogun from cover to cover, writing down any Japanese phrase and words, their English meanings and committing them to memory.

To address my shortcomings in financial knowledge I read the Financial Times every day and I devoured any copies of The Economist I could get hold of. I needed more. As I concentrated more on the interview, I became more and more determined to do anything I could to acquit myself well. I needed to meet someone on the inside. Not someone inside Nomura, but someone who really understood how the world worked inside The City, especially for graduates new to that particular world.

I remembered having met, a few months previously, a friend of one of my fellow students at Law College. The friend of my friend had been at Oxford with him and was generally regarded as a rising superstar. He had always had a clear vision of working in a top league bank in The City of London and, I believe, was offered a job by all but one of the dozen or so banks to which he applied. Of his many offers, he had chosen to work for Credit Suisse First Boston, known as CSFB and had started there at around the same time that I had started my one year course at The College of Law. CSFB was the London based subsidiary of the then Swiss banking giant, Credit Suisse.

I telephoned Stephen Hester at his workplace and explained that I needed his help if I was to stand any chance of success in my impending Nomura interview. Hester, whom I had only met briefly before, checked his diary and said that the only way he could help was if I could collect him at nine O’clock the following Friday evening, from his office. Already the consummate banker, he knew that his advice had a serious market value. We struck a deal that I would buy a Chinese Takeaway for us both which we would eat at his flat in return for his crash course in Investment Banking.

Buying a Chinese Takeaway for Stephen Hester was without doubt the wisest investment I have ever made. Hester and I stayed talking in his small flat until the early hours of Saturday morning. I suppose I was there for around six hours in total.  Hester was without doubt the cleverest person I had ever met and possibly remains so. He gave me, in a few short hours what amounted to a passport into a totally new world. Calmly, and with extreme patience, he led me through the workings of international debt and equity markets. He furnished me with a list of questions to ask at my interview which would simultaneously educate me and impress my interviewer. He answered my own list of questions gathered from my week and a half of deep enquiry into banking. I remember Hester as a very serious person, but someone who had a clear view of a wider world outside his workplace. I remember him as humorous, patient and very, very bright. Even then he had a rare combination of presence and lightness of touch.

I sailed through the Nomura interview process and, in due course, was offered one of twelve jobs out of 600 applicants. My new employers were so impressed with me that they took me out of the Graduate scheme and put me straight into a front line position in the New Issues Bond Syndication Team. The extent to which I lived up to their expectations is a whole other story.

I think I met Hester perhaps a couple of times in the next few years. I hope I was well-mannered enough to write to him by way of thanks, I honestly cannot remember. Despite not having had any contact with him for many years, I have always remained, and always will remain, grateful to him.

Hearing and reading the constant bleating of pundits on whether or not Hester should be paid a bonus, and if he should, how much, sickens me. It sickens me because it is a distraction. It is a distraction from the real issues which are destroying communities, destroying businesses and destroying lives. The RBS bonus debate, focusing mainly on Hester, cloaks the real issues behind the financial mess, what caused it and what can be done to resolve it.

Now that it has been decided to award Hester with an almost £1 million share-holding in RBS by way of bonus, the debate has exploded again.

I certainly do not have all the answers, I doubt whether any single person has. I am certain though that unless Hester has become a very stupid man in the nearly thirty years since I knew him, in which case he should not have been hired to run RBS, he is likely to be worth all he is paid, bonus included, and probably considerably more. I am far too busy trying to survive as a farmer, restaurateur & shop keeper to be able to research this properly but Hester seems to have managed to stabilise RBS.

Stand back for a moment and think about it. Even in my banking days more than fifteen years ago RBS was regarded as a basket case on the Investment Banking and Derivatives side. Structures it came up with and deals it won regularly left other experts scratching their heads in wonderment at how the numbers worked. Obviously we know the answer now. They didn’t work, the numbers did not add up. Add to that, the most extraordinary chaos in financial markets in living memory. Saving, running and then resuscitating RBS is a job way beyond most people. RBS is a huge publicly owned asset. It is central to the financial future and well-being of us all. As I understand it Hester’s bonus is made up of shares. This is surely the best way to continue to motivate him to succeed. If RBS collapses, his shares will be worthless, as will those that we, the people, own. If RBS recovers and its share price recovers, Hester will do extremely well, as will all its other shareholders, some 80% of whom are The Great British Public.

If the ongoing job of reviving RBS can be done by a Muppet, let’s find that Muppet, pay the going rate for Muppets and say goodbye to Hester. On the other hand, unless Hester has become a dribbling useless fool, the decision is fairly simple.

Who is the best person for the job? If Hester is still that person, let’s pay him the going rate, give him the support he needs and let him get on with what is a near impossible job.

This government is at serious risk of falling into the same traps which caught out the last government. It needs to recognise value where it lies. It needs to analyse risk where it lurks and it needs to get on with freeing up the clogged wheels of business, productivity and innovation.


Jan McCourt

Northfield Farm

27th January 2012

Enhanced by Zemanta