History As Farce

“Gibberish,” concluded Floyd Norris, the financial reporter for The New York Times, summing up the “London Whale’s” description of his disastrous strategy to the JPMorgan group charged with overseeing investments.

According to the report of the Senate committee investigating the bank’s huge losses, this is how he described his plan: “sell the forward spread and buy protection on the tightening move,” “use indices and add to existing position,” “go long risk on some belly tranches especially where defaults may realize” and “buy protection on HY and Xover in rallies and turn the position over to monetize volatility.” It seems that no one understood him, but they approved his strategy, nonetheless, probably because they were afraid of seeming stupid. As a result, the bank ended up $6.2 billion in the hole — at least that’s the figure they eventually owned up to. (See, “Masked by Gibberish, the Risks Run Amok.”)

Nick Leeson, the rogue trader whose outsized trades brought about the collapse of Barings Bank in 1995, described a similar situation in his memoir. According to Norris: “When auditors and bosses asked how he was making all that money . . . he responded with meaningless but impressive-sounding jargon.”

Leeson noted: “Luckily for my fraud, there were too many chiefs who would chat about it at arm’s length but never go further. . . . And they never dared ask me any basic questions, since they were afraid of looking stupid about not understanding futures and options.”

Karl Marx wrote that history repeats itself, first as tragedy, then as farce. And nothing illustrates his point better that the behavior of these bankers. In the past, traders could offer real explanations to their supervisors, not gibberish. But financial markets had gotten too complex for many bankers to grasp. As Gillian Tett pointed out in her book, Fool’s Gold, many traders did not understand the complex derivatives based on mortgages that they were selling and buying in the credit bubble that led to the crash of 2008. They trusted their colleague to know what they were doing.

But now, the lesson has been learned. Traders now only have to counterfeit the appearance of arcane financial knowhow. Just talk fast enough, use a lot of jargon, act confident and it seems that you can get away with almost anything.

Norris makes the point that, as a result, banks can no longer be trusted to act sensibly. He actually put it more forcibly, and referred to “the sheer incompetence and stupidity documented in the report.” So, he argues, if they can’t be managed properly, it’s best to get rid of them – or, at least, reduce them to a size where their failures will not bring down the whole system.

It is such an obvious point one has to wonder why it has to be made over and over again. Are the bankers still too embarrassed to admit their own ignorance and incompetence? Has banking gotten too complex for bankers themselves to handle?