"Those were scary days. You think: we are in a new paradigm. Nothing works any more the way it used to. My department's potential losses were hundreds of millions of pounds and several billions across the whole of the bank.
We began to realise: this could sink the bank. In fact, we were bankrupt three or four times; our bank owed more than it owned. We were lucky to have a parent company with very deep pockets. I was struggling to keep it afloat. If the market had crashed further we would have gone down....Please re-read the highlighted text as it describes the risk that was and still is hidden on and off the balance sheets of the banks. Risk that was and still is being hidden by disclosure practices that leave banks resembling according to the Bank of England's Andrew Haldane 'black boxes'.
So long as the risk is hidden from the markets, it is impossible for the markets to exert discipline on the banks to get the banks to reduce their risk exposure.
This is why the former head of structured credit's description of the risk in his department's positions makes the case for ultra transparency.
Banks must be required to disclose on an on-going basis their current asset, liability and off-balance sheet exposure details. It is only with this data that market participants can assess the risk of the banks and exert discipline to have this risk exposure reduced.
"I was one of the few who had intimate knowledge of the products that blew up. In fact, in those last years they paid me more than ever. This was a bomb and I was basically the only one who could defuse it....
"When credit derivatives were still young, the Financial Times called people like us the 'F9 model monkeys', after the key you press to get the algorithm to tell you how things are going; what the value is of your portfolio. 'Monkey' alluded to the fact that some of us didn't understand what the algorithms did.
"In the years before, we'd know in our heads to within a few thousand what profit or loss we'd made for the day, then press F9 and have it confirmed by our systems. When the crisis hit we would press F9 and get a number that was totally unexpected. We'd ask: how can we have lost so much money? What happened?
"You can imagine that all of a sudden our department began to receive a lot more attention....
"This was enormously stressful. You really don't want to be caught out by a risk manager in HQ in the parent country with a mistake. Because that risk manager won't go back to you, they'll go straight to the board.
What was much more stressful still was that most in the bank didn't understand our products. Even the risk and compliance people who were supposed to be our internal checks and balances … We began to realise that we had to teach them how to monitor us.
Then there were the people I reported to, who were getting calls from the people they reported to. I learned that the people high up know just enough for the role they're in.
"'Just enough' is not enough in an emergency. I would be on the phone for hours explaining to people of increasing seniority what we were doing. And I realised, they don't understand, not on a fundamental level. They will not be able to spot a mistake, correct us when we fuck up, or take an informed decision....One of the benefits of requiring disclosure of the bank's exposure details is that it provides the information that the market participants need to ask questions.
Can you imagine how differently the financial crisis might have played out if the senior executives of the bank had answered questions about the bank's structured credit exposures? At a minimum, senior executives would have had to understand these products at a fundamental level.
"I learned about human nature in those days. The arse-covering … At one point we worked out a solution to the biggest of our problem positions. We'd have to take another loss but then the thing would be back under control. So we propose this and it gets shot down by the top.
The bank did not want to acknowledge more losses at that point, and chose to let it fester and face considerably bigger losses later on.Since the beginning of the financial crisis, this pattern of behavior has not been confined to bank management. It has also been adopted globally by policymakers and financial regulators through their embrace of the Japanese model for handling a bank solvency led financial crisis.
Suspension of mark-to-market accounting and regulatory forbearance are two examples of the unwillingness of financial regulators to acknowledge more losses today.
When we realised this, our team began to send emails, purely to cover ourselves: 'As discussed in meeting X, this is our proposal. I am strongly encouraging…' We knew they wouldn't go for it but we were not sending these emails to them. We were sending them to potential future investigators and prosecutors.
"It was during this time that I realised that all major banks and corporations are doing this.
They are burying and pushing back bad stuff till the books for that fiscal year close, just to make the numbers look better. I don't trust their annual reports at all any more. They massage them until they look the way they want them to look...Here is explicit confirmation on exactly how meaningless bank book capital levels are.
In addition, his statement about not trusting annual reports strongly supports the need for ultra transparency. With this type of disclosure, market participants don't have to rely on the management massaged annual reports and financial statements.