When the music stops

Now that the party is over, a crisis of confidence will lead to a crisis of credibility for many of the world's high-flying bankers.
ôWhen the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, youÆve got to get up and dance. WeÆre still dancing,ö Chuck Prince, chief executive of Citi, the worldÆs biggest bank, said in July 2007, three months before he was sacked.

There have been plenty of occasions in the past 25 years when the music has paused and bankers, brokers, traders and fund managers have sat down for a rest. This happened in the 1987 crash amid insider dealing scandals, and again in the recession in the early 1990s and the emerging market crises at the end of that decade.

Then there was the telecom and dotcom boom and bust at the turn of the century, when Wall Street analysts pretended to give impartial advice to investors, while corporate financiers lined their pockets with fee income given for advising on deals that were economically pointless but pushed a companyÆs share price higher. For at least a decade, there has been a focus on shareholder value which aligns corporate pay with stock price performance.

In fiction, these financial masters of the universe have been lampooned by Tom Wolfe in The Bonfire of the Vanities, demonised by Bret Easton Ellis in American Psycho, and epitomised by Gordon Gekko in Oliver StoneÆs Wall Street. These masters of the universe have rarely been admired or praised, except by proud parents, aspiring new entrants or a colluding or gullible financial press. Instead, they have been parodied or despised as pretentious yuppies, scheming snake-oil salesmen, automated number fixers, forked-tongue con-artists, heartless destroyers of local communities and national economies, or simply braying or smug but always self-obsessed tossers.

Yet, each time they survive. Bad apples are apparently discarded, new business models are paraded, fresh visions are revealed and new heroes emerge. Their wealth and power intimidates. It invites envy and an uncomfortable feeling that maybe they are what they say they are or at least imply: alpha men and women, winners, a warrior Aryan race reaping financial rewards as they make the world a more efficient and therefore better place.

But this time itÆs different. The lights have been switched on, sobering them up, making them wonder if theyÆve made fools of themselves. And then they notice the partner theyÆve been shimmying in front of or, worse, gyrating against, is actually a bit of a trog. But worse, far worse: they have an audience.

EveryoneÆs watching: from the people who serve them in or have been priced out of their cities, to the countries theyÆve lectured to about discipline and hard choices, while pleading for no restrictions on their own 24-hour partying.

How can you believe it when they next come round selling a structured product, giving investment advice based on probability-based risk models that have certainly failed, touting stock picks or asset allocations backed by often arbitrarily chosen discount factors or finger-in-the-wind macro forecasts, claiming credit for betting red rather than black, writing explanatory guides about esoteric financial instruments or evangelical tracts on the path to management success.

This loss of confidence within the financial system must surely mean a loss of credibility for many of its practitioners.

There are the articulate salesmen û experts at bluffing through half-digested briefs, who spin persuasive stories, earning status within the bank and six- or seven-figure sums from its shareholders by closing deals that shift unwanted positions from his traderÆs books to a softened-up punter, while pretending to be honest advisers.

Then there are the preening, vain investment bankers who search for the corporate killing as globe-trotting mercenaries, earning vast fees for advising on mergers and acquisitions based on company synergies when it suits, or diversification benefits when it doesnÆt.

There are the analysts who are under pressure to produce papers, interpretations and forecasts û weekly, daily or even hourly. How thought out, reflective or even objective are these reports? ItÆs easier to decide your conclusion first, then work backwards. On a holler-box driven trading floor in a Bloomberg world, a message, a view is all important û at least until the next one a few seconds later.

And finally there are the fund managers who go through the motions of investment processes to win asset allocation mandates from US pension fund consultants, when itÆs always so much more ad hoc, where hunches are disguised by vapid power point bullet points or slipped by credulous colleagues with a chin-stroking display of conviction. Their self-importance is too often elevated by flattery, attention and entertainment from brokers and their sidekick analysts, wheeled out to provide gravitas as a counter-balance to the salesmanÆs good-old-boy levity.

If history repeats, as it often does, these well-groomed bankers and analysts with over-trained presentation voices will reappear. In fact they are still with us, explaining what went wrong and what should be done now. But how can you believe them? ItÆs like listening to drunk drivers responsible for a motorway pile-up giving advice about road safety while blaming the pub landlord for serving them.

ItÆs hard to be impressed. The bespoke suits of still aspirant bankers, the polo shirt and chino casuals of adolescent hedge fund managers or the crumpled affectation of billionaire old-timers now look like vulgar bling.

Nor can their cheerleaders be ignored. Financial journalists who struggle with a calculator but parrot phrases and words fed by bankers; admonished investors who had been too slow, hence too unsophisticated, to buy products (such as CDOs) they themselves couldnÆt hope to understand; or the academic type, proselytising for magazines and newspapers with a free-market agenda, issuing sage, world-weary advice predicated on theoretical models to businessmen, bankers, governments, multinational agencies. Yet, they often possess so little practical experience that tying up a shoe lace is the extent of their manual labour and finding a cheap copy of Freidrich von HayekÆs The Road to Serfdom on the internet is the limit of their entrepreneurial flair.

Of course, the problem has been the raising of financial jobs to a status they never deserved. ôA high-flying bankerö should be an oxymoron, when his world is made up of so much smoke and so many mirrors. Yet, spurious qualifications have sprouted to provide an appearance of professionalism. In reality they teach little beyond a superficial understanding of difficult concepts, and instead a holiday guide-book knowledge of an arcane language that other travellers can also pretend to comprehend.

In the past, the stockmarket crises have been blamed on rogue traders, unethical mavericks, parvenu broking or investment firms, or, desperately, computers. Even more desperate, and certainly egregious, itÆs been ôforeignersö û that is ôcorrupt spendthrift Asia, corrupt ill-disciplined Latin America or corrupt gangster-ridden Russiaö.

But western financiers are now struggling to find ônot usö scapegoats. There is the insidious undercurrent that it was the poor black and Hispanic house-buyers who started it all, despite the lofty pundit talk about the FedÆs loose monetary policy, global financial imbalances and layers of derivative securities that hid rather than spread risk.

The problem is that now the music stopped and the lights have come on, the grown-ups are also seen standing amid the detritus of the party. Regulators, central bankers, government officials and the normally shy multinational elite of bureaucrats who police and control the financial world have been caught in an embarrassing glare. Rather than bouncing undesirable intruders or throwing out drunks, they had been giving a welcoming wink and supplying the liquor. Yet now theyÆre calling for order. Perhaps theyÆll get away with it.
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