Swimming with the Sharks by Joris Luyendijk: Book Review

In his book ‘Swimming with the Sharks’, the author Joris Luyendijk tries to find out what were the real reasons for the 2008 crash, and if sufficient measures have been taken post the crisis to prevent such instances from happening again.

When Luyendijk starts on this assignment, the first thing he notices is that the world of finance is governed by a code of silence; unlike other industries, people in finance are reluctant to share information about their world.

The first person who spoke to him managed his own brokerage and was his own boss. As more people started coming forward to meet the author, he noticed that almost everyone felt they were doing something useful and were not responsible for the 2008 crash.

The author then digs deeper into the working of the bank, the structure and the designations.

In a bank, the Traders and M&A bankers (known as the front-office) comprise about 5% of the workforce; they are the ones who hog all the limelight.

The Middle office consists of Risk and Compliance. Compliance people are responsible for internal controls and they try to ensure things are done by the book; risk managers monitor the risks that investment bankers take and interfere and say no if they see any reckless plan.

Then there is the back office that provides all the support functions such as Legal, internal accounting, IT service, human resources, PR and communication.

The megabanks have several people working under various heads, and they have sub-cultures, and the sub-cultures further have more sub-cultures within. People have fancy designations, and the rank is usually a mix of rank, activity, sector, region. For example, Vice President, Equity Derivatives Structurer, Europe.

Also, there is intense competition among the staff; it’s common to see 1000 Vice-presidents running after 10- MD posts in most banks.

Further elaborating on the culture, the author says that those in the front office look at middle office and back-office as losers, and they are almost never challenged by the front-office. He also realizes that the back and middle office staff paid far less, compared to the front office guys.

So, while the Investment banks and the financial lobby try to portray that each disaster is because of a few rotten apples, the author thinks it’s more about the culture where risk and compliance people are not confronting the front office people enough.

Just like hefty pay packets are common in this industry, redundancy are also very common in investment banking. People dread getting calls from HR, as it usually means you have been made redundant. At times, even entire teams are made redundant and the most common reason provided by the company is “the challenging work environment”.

Those who are laid-off are given a nice severance package, and one is made redundant with immediate effect; they are not allowed to touch their computer and their phones, their emails are blocked right away.

The author says that the way redundancy takes place makes, it is difficult for people to focus on their jobs. This is also the reason why people are reluctant to share information with others out of fear.

Almost people seem to be working in silos; every person seems to be managing their own world, and people seem to work for their bosses and not really for the bank.

Much before the crash, investment bankers were liable for fines, if things went wrong. However, with passing years, the ownership structure in the banks changed and the risk has now shifted to the shareholders, instead of the partners.

And eventually, it means the taxpayer ends up bearing much of the risk. Those who take the risks are no longer the people who bear the risk, and it is a big change from the days when the partners would fear a disastrous loss. This is why the sector now regularly uses the term OPM (Other People’s money).

Conflict of interest was also one of the reasons for the internet bust, as banks were helping companies raise IPOs and also recommending their shares to other companies, and since then investment banks and investment banking divisions have been ordered to have Chinese walls between their activities.

However, the author says that is not a fool-proof mechanism and sensitive information can still be easily shared. The author says there is a conflict of interest with the credit rating agencies also as many of them get paid by the same banks for various consultancy services whom they are meant to judge independently.

In the real world, buyers are protected by various consumer laws, in the finance world, ‘caveat emptor’ or buyers beware is accepted among professional players. It means the client himself is responsible if things do not go their way.

Most bankers are extremely professional with no room for emotions, and that is why they are okay to find loopholes to help big corporations and rich families evade taxes. ‘Ethics’ in the industry usually means absolute obedience to their bosses, and the only thing that is considered taboo is breaching confidentiality.

Because of the huge size and the complex finance products these banks produce, nobody really understands the banks completely, including the CEO and other insiders. People can lose billions using activities that are too complex to monitor and understand.

Because banks usually do not grow organically, even the tech systems are varied and many, and it always takes more time to find the root-cause because no one has complete and in-depth knowledge of all the systems.

Regulators usually rely on the information provided to them by the bank’s internal management; But the problem is that in most banks, internal management themselves are not sure what’s going on because of the scale and complexity.

The author says investment banks are huge and create (and sell) very complex financial products. Most Investment managers just assume that because the financial products are complex, the risks are spread across many points and the system is stable, but it is not the case.

The author talks about all kinds of people in the bank.

• Masters of the Universe who are the superstars; they like to win, they believe they are the best and hate to be called gamblers.
• The teeth grinders see things that are going wrong but are not able to do anything because they are stuck – due to their lavish lifestyle.
• Then there are the neutrals who like what they are doing and have made peace with the system.
• The blinkered bankers are those for whom their work is the only world that exists and they have no connection with the world outside of it.
• The delusional ones who have lost touch with society and also with reality and gives examples of how delusional people can cause immense damage (Libor and FX scandals).
• The author also talks about the ‘cold fish’ types who are extremely calculating and eliminate all emotions from the decision making.

The author then gives an example of how things usually play out in an investment bank. Some cold fish comes up with a complex financial product, the regulator finds it difficult to judge the risks completely. Masters of the Universe, blinkered and delusional bankers start selling this product left, right and center. The middle office is intimidated, remain aloof, or look the other. The author says this is how another crash could potentially happen

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To sum it up, the author says that people have no idea how much damage the financial sector can do to a society, and how close we were to a total collapse in 2008. Despite that, things haven’t changed structurally a lot; banks continue to be governed by a system of incentives that encourages short-termism.

Investment banking is a game of addiction where the rewards are very high but uncertain which makes it exciting to many. There is no job security, no loyalty towards company, entire teams can be poached, traders are fine with going against their own bank, there is high level of amorality, people are bothered about short term careers and bonuses.

Risk and Compliance are intimidated and disparaged, and unable to take on the front office people. Even the journalists who work in financial journalism have limited knowledge, they usually focus on the same things – bonuses, latest results and numbers.

The author says that nothing drastic has changed after the crash; there are endless new rules now but the underlying pattern remains the same. Banking today is like playing Russian Roulette with someone else’s head.

The author says that the following should ideally happen:

• Big banks should be chopped off so they are no longer too big or too complex to fail.
• Banks should not have all activities under one roof that creates a conflict of interests (for example between trading, asset management and deal-making).
• Banks should not be allowed to build or sell very complex financial products.
• The bankers taking the risk, and getting the bonuses, should also face monetary penalties if found guilty.

For this to happen, the politicians need to play a bigger role. The problem is that while megabanks operate globally, politics and regulations can only work nationally. It’s very easy for the big financial institutions to pit countries against each other and they do it shamelessly all the time. So literally there is no one managing these institutions, which the author refers to as the empty cockpit. A transformation of this scale is an immense task, but politicians can do it, says the author. In the past, they have tackled bigger issues such as the abolition of slavery and the liberation of women.