BarCap trader explains how Barclays used derivatives to take advantage of clients

The Sunday Telegraph ran a must read article on how Wall Street, Barclays in particular, used its informational advantage and expertise in derivatives to benefit at their clients' expense.

A former Barclays Capital trader, who asked to remain anonymous, speaks about his job and the relentless pressure to achieve higher margins....

The problem with BarCap was that we were making so much money on FX products [hedges] we were constantly looking for structures to fling to clients. We were looking for higher margins. That’s where swaps came in. 

In 2008, we see crude go up and up and up. The hedges that we created left companies hugely exposed. There was really no insurance or hedge in there at all. Crude was over $110 and these clients found they had zero protection. 

With the hedges we created, the sales guys were making much more money. The margins were incredible. You were making $50,000 as opposed to $5,000 on the same quarter barrel. 

In 2008 we got a big lecture about leaving money on the table. The noise from the higher-ups was that we needed to be doing more – much more. 

BarCap was the Wild Wild West – that’s what we called it, that’s how it was. That year especially. 

Commodities was the big thing to be in. Barclays was this old great institution, but it had turned into a bucket shop. We hired a bunch of quants [quantitative traders] to just dream up these products. Layers of complexity in each hedging product. Each layer created a new angle to take a turn.

Regular readers know that complexity creates opacity and opacity was the foundation of profitability on Wall Street.

Suddenly at BarCap we were handed all the corporate clients to sell to. We all talked about it like it was lambs to the slaughter.... 

That's because corporate clients perceived the bank to be looking out for their interests and not as an adversary.

Before that, we were trading with people like BHP who knew everything about the market, the prices and the basis on which we set our prices. They knew all the reference points better than we did.

Suddenly our clients are people who know nothing about the business, nothing about trading, nothing about the products they should or shouldn’t buy.... 

People like BHP had transparency into the market and therefore couldn't be fooled by Wall Street.  The profit to be made off of people like BHP was much less because they had access to all the useful, relevant information in an appropriate, timely manner.

The BarCap mantra was that if at all you had a competitive advantage you ran all the way with it.

Please re-read the highlighted text as it nicely summarizes the culture on Wall Street.  Notice the emphasis on maximizing any competitive advantage and imagine the culture that surrounds this emphasis.

It is this type of culture that deliberately creates opaque products to take advantage of clients who see banks as business partners and not as counter-parties trying to maximize their profits at the client's expense.

It is this type of culture that deliberately creates opaque sub-prime mortgage backed securities to take advantage of investors who do not have access to current information and therefore don't know what they are buying.

It is this type of culture that sees the profitability in breaking the law to transfer cash for criminals and rogue states and doesn't think twice about do so.

It is this type of culture that manipulates Libor interest rates to take advantage of market participants on the other side of derivative contracts the bank has sold.

It is this type of culture that permeates all of the banks and is why each scandal is not the result of a few rogue traders, but is the personal responsibility of every employee of the banks.