Reviews:
“How can these people live with themselves?” Joris Luyendijk is a Dutch journalist with a degree in anthropology and with a prior post in the Middle East. Luyendijk, without any prior knowledge, was assigned by the Guardian to try to understand the people that populate the City. After discussing with friends and searching for a theme, the initial angle was to understand how these people who had inflicted so much pain on the world by causing the 2008 financial crisis and receiving bonuses meanwhile could live with their evil selves.

In the first half of the book we get to follow an exploration of the people of finance. A journey more complex than the author had realized. In the second half Luyendijk wrestles with what can be done to right faulty system features. The first half is the more entertaining one; the second is the more important. However, without understanding the illness of the people the effectiveness of various prescriptions cannot be understood.

After breaking through an initial wall of silence the first lesson learned was the diversity and size of the sector. People in finance make up a vast collection of tribes that perform very different tasks and where the tribesmen are recognizable to each other by subtle codes in clothing, language, behavior and titles. A second realization was that basically no one had anything to do with the financial crisis or had even understood that it was brewing. When the crisis came they had however contrary to outsiders realized what was at stake and how close the world was to freezing. If the system collapses there are no payments. Then there are no salaries and no food in the stores. Then there will be riots and military tanks on the streets. A further lesson was that most people in the City were really normal and many even actually quite nice. So, there was no evil conspiracy by a whole sector!

Now starts a quest to understand the incentives of people and the structure of investment banks. What emerges is a sector immersed with fear where people are fired on 5 minutes notice if they don’t live up to ever escalating profit targets, an amoral trading culture where it is okay to dupe customers (or “rip their face off”) as they should be able to take care of themselves and where zero job security and amorality leads to an extreme short-sightedness – everybody for himself. If you can be out in 5 minutes, then your time horizon becomes 5 minutes. Investment banks are ripe with conflicts of interest and compliance officers with very low internal status police these. There is also a seriously asymmetric risk/reward structure where profits go to employees and managers while losses fall on shareholders and in the worst case the taxpayers, as the banks are “too big to fail”. Further, banks and their products have become so complex that no one really understands them –including their managers and the regulators.

People seemed to have a number of reasons for putting up with all this where some felt that they were trapped to keep up a lifestyle and without alternative skillsets, some had institutionalized and normalized the practices, others enjoyed the permanent competition as it gave them their self-worth and under constant scorn from the rest of the world the people closed ranks and received few alternative views. “[…] greed seemed a highly inadequate explanation for their behavior. In fact I have come to believe that our focus on greed is the biggest mistake outsiders have made in the aftermath of Lehman’s collapse.”

The author in easy writing hits the mark on many of the characters of the financial markets even if to describe what distinguishes them they unavoidably become caricatures. He comes to understand most of the issues but by focusing on people and incentives Luyendijk’s text somewhat misses to describe how the explosiveness of the fragile system arises from leverage and the dependencies in derivate contract counterparty relationships. Banks are too interconnected to fail.
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Dutch journalist Joris Luyendijk spent two years interviewing people working in London’s financial heart (the “City”). He wanted to find out how it all works, and if there have been any improvements since the 2008 crash.

One problem was that a lot of the people working in financial world were afraid of losing their jobs if they spoke to a journalist. But in the end he managed to speak to around 200 people in a variety of positions. His finding is that nothing has really changed since before the crash in 2008. The same problems that existed then (and caused the crash) still exist.

The major problems he identifies are:

Too big to fail: the banks make profits and its employees are rewarded with bonuses when risk-taking pays off. However, when the risks taken are too big, and the whole bank might collapse, the bank is rescued by the government (ultimately the tax payers). The bank is so important that a collapse endangers the whole economic system – i.e. it is too big to fail. This asymmetry rewards excessive risk-taking, because the banks, its shareholders and lenders don’t share in the downside of the risk. This is also called “other people’s money”, and to me it seems like the biggest issue contributing to the problems

Hard to get the whole picture: the major banks are so big, and sell such a variety of complex financial products, that it is hard to understand the full risk implications even if you want to. This is further complicated because of silo:ed departments that only specialize in one specific area. Also, many risk models may have underlying assumptions that may not hold in a crisis, for example an assumption that markets are liquid, or that housing prices will keep rising. So the risk models break down when they are most needed – in a crisis.

Zero job security: there are many stories of how people are fired without warning and having to leave immediately. This culture of zero job security means there is very little loyalty to your employer. This in turn encourages short term thinking and risk taking (to pull in enough profits so you are not fired).

Caveat emptor: with the continuous pressure to make money, the prevailing attitude seems to be what Luyendijk calls “amoral”, which simply means that whether an action is moral or not is not even considered. If a customer ends up losing money because they didn’t read or understand the fine print of the deal, then it is entirely their fault. The “buyer beware”-principle rules. If there is a legal way of taking advantage of somebody, it should be done.

Information leakage: some functions that were previously handled by different companies are now done by one big bank. For example, one part of the bank may be negotiating a merger between two companies. This information could affect the stock prices of several companies. Another part of the bank may be recommending customers whether to buy or sell those companies. To avoid information “leaking” between departments, there are supposed to be “Chinese walls” within the bank to stop this, but it is hard to be sure they work perfectly.

Most of the book is spent explaining how the banks work (including all the problems), based on the interviews. However, an equally interesting question is: what should be done to correct the problems the author discovers. Unfortunately, there are only about 10 pages at the end of the book on this topic.

First off, Luyendijk observes that none of what he uncovers is previously unknown. Instead, it is public knowledge. So he concludes that in order to do something about the problems he lists, people first must understand how the banks work, and why this is a problem. This book does a good job on that front.

Next, he observes that the people best suited to make changes, politicians, often have a problematic relationship with the financial industry. Many ex-politicians and regulators go on to work as highly paid advisors to the banks. Furthermore, there are well-funded lobbyists making sure the banks interests are protected.

Yet another problem is the global nature of finance. If one country enacts rules unfavourable to a bank, they may move some of their operations elsewhere.

All this makes change hard, and Luyendijk admits that he doesn’t have a solution for the problems he uncovers. But at least his book is an attempt to start the debate by highlighting many of the problems.

The writing is sometimes a little “choppy”, and several times I had to reread a sentence to understand what he was saying. But overall, I learnt a lot about how the banking industry works, and I think this is an important book that deserves to be widely read.