Banker’s tale chronicles technology’s role in 2008 crash: ‘Why Aren’t They Shouting?’
The latest memoir of an ex-banker who witnessed the 2007 – 2008 financial crisis first-hand may not change the minds of banker-bashers, but it provides an accessible insight into the inner workings of a major industry, David Roberts discovered
In the summer of 2012, Kevin Rodgers, then a managing director at Deutsche Bank in London, and running its global foreign exchange (FX) business, was persuaded to give a tour of the trading floor
to a group of managers of the company’s German retail branches.
During the course of the tour, he was asked the question that became the title of this book.
“Excuse me …” a woman in the group said, interrupting his spiel, “… why aren’t they shouting?”
She, of course, had a mental image of a trading floor of twenty years earlier, which would have been in full roar, with parallel telephone conversations, wild gesticulations and, certainly, lots and lots of shouting. But the 2012 reality was quite different: traders sat quietly in front of flickering screens, tapping away on keyboards. No shouting.
What had happened?
When Rodgers returned to that question after the group’s departure, he concluded that, above all, it was computers that had happened.
In Why Aren’t They Shouting? A Banker’s Tale of Change, Computers and Perpetual Crisis, Rodgers gives us an intelligent and perceptive examination of the dizzying changes that occurred over the course of his high-flying banking career, during which he comes to the conclusion that the present-day bank is “just people and computers; all the rest is nice to have, but not essential”.
And it is the astonishing development of computing, in terms of power, but more particularly in terms of speed that, in his opinion, not only enabled the development of ever more complex derivative products, but actively encouraged it.
These products, in the end so complex and multi-layered that few understood them, or the risks they entailed, were created because super-powerful, super-fast computing made them possible for the first time. They were created because they could be created, not because they were needed.
Fundamentally, he argues convincingly, the huge rise in the power of computers in the 1990s led directly to the financial crisis of 2008.
This is how he explains it. Driven by this massive increase in computing power, the market in derivatives grew exponentially. “Between 1990 and 1997, the total notional (value) of swaps outstanding rocketed from US$2.3 trn to US$23trn. By 2008, the year of the crisis, the notional was US$400 trn.”
In the competition-fuelled race to deliver enhanced return on equity, the great preponderance of these “assets” were financed by debt. Ill-fated Lehman Brothers, for example, at the end of 2007, had US$691bn in assets, and just US$22.5bn in shareholders’ equity – a leverage ratio of 30:1.
Indeed, the asset/equity ratio across the entire banking industry at the time was a staggering 40:1.
When the inevitable happened and the entire precarious edifice came crashing down, world financial markets froze, as trust evaporated. Unable to secure lending at any price, long-established companies paid the price and collapsed, were absorbed, or, in a few cases, were bailed out by the taxpayer.
Rodgers takes his reader on a reasoned and accessible journey, charting the astonishing changes which transformed banking in the space of a few short years from the world of so-called “voice trading” – humans transacting business with other humans over a landline – to e-trading, where computers trade with other computers in micro-seconds, free from human intervention.
He goes on to provide insight into foreign exchange dealing, with clear explanations of how the various businesses within a typical investment bank operate. The tone is light and understandable by any non-specialist; and for those who need a bit of help, there’s a comprehensive index, a glossary, and plenty of annotations in every chapter.
The introduction of colourful characters along the way helps to tell the story, and anecdotes are spun.
(Among them: in July 2007, just before markets went into free-fall, Rodgers was watching the Rolling Stones play. They had been booked to entertain at a major two-day Derivatives’ Conference, sponsored by Deutsche Bank. And so it was that on the very day that the Stones were belting out “Tumbling Dice” to this audience of five hundred of Deutsche’s most important clients and bankers, credit rating agencies in the US were issuing the first mass downgrades of investment products linked to mortgages.)
In short, this is an enjoyable, fast-paced yet informative book. Those who come to it pre-disposed to view all bankers as devils incarnate, motivated solely by greed and status, and responsible for all of the ills of present-day society, will probably not have their minds changed.
More open-minded readers will be absorbed and fascinated by the inner workings of an industry that is central to all our lives.
Why Aren’t They Shouting?
A Banker’s Tale of Change, Computers and
By Kevin Rodgers
Random House Business Books, 304pp