A to Z of bad banking
Since 2007, the world's financial institutions have never been far from the headlines. But, asks James Moore, how much of the jargon and the personalities have you absorbed?
James Moore is the Independent's Associate Business Editor and writes the Outlook City comment column from Tuesday to Friday. He also has a keen interest in disability issues and when not attempting to further injure himself playing wheelchair basketball.
Sunday 10 June 2012
Asset Backed Security: Or one of the things responsible for the mess we're in. You bundle together assets that are otherwise difficult to sell or trade, such as mortgages or car loans. You then sell shares in them to a variety of investors around the world such as banks, pension funds, even local councils (this was done with US sub-prime home loans, contaminating the globe when they went pop).
Adoboli, Kweku. The London-based UBS trader accused of fraud and false accounting over a $2bn trading loss, charges he denies.
Bonus: The prospect of which is what gets bankers out of bed in morning.
And Bad Debt. Loans, or other forms of credit, which don't look like they will be repaid. Lots of the Asset Backed Securities sold prior to the financial crisis count as this now.
Credit Default Swap: Or CDS. Derivative that is very similar to insurance. The buyer pays a premium and receives a pay-out if a company, or a country, goes bust. Neither buyer nor seller need to have any connection to the company (or country) concerned, which makes it look not so much like insurance as it does a bet: hedge funds and banks often buy them when their analysts think that a company (or country) is set to go belly up.
And Collateralised Debt Obligation or CDO. A type of Asset Backed Security (See Bad Debt).
And Chief Investment Office. The JP Morgan unit now showing losses of more than $3bn (and rising). JP says that its job was Hedging. Critics allege that its activities look rather more like Proprietary Trading.
Diamond, Bob: The chief executive of Barclays who has become the lightning rod for the controversy over Bonus(es) in Britain on account of his £17m pay package in 2011. Most of this came in the form of bonuses despite Barclays missing the financial targets he set.
And Derivatives. Lots of which are traded by investment banks. A derivative is a contract between two parties. Payments between them depend on the performance of an underlying variable. That variable can be a share price, or a currency or even the weather. Named because the contract is derived from the underlying variable. The number of these in circulation has been growing rapidly. You can even get derivatives of derivatives. Things get really interesting when an unexpected event, such as the credit crunch, throws the trading positions that banks take in derivatives into a spin.
Excess: Which is what the banking industry indulged in with wild abandon before the credit crunch got under way in 2007.
Fabulous Fab: Or Fabrice Tourre. The 31-year-old Frenchman and former Goldman Sachs employee is awaiting trial for fraud in the US where regulators allege that he failed to disclose that a hedge fund helped pick the debt that was bundled up into a CDO that he created with the intention of betting that it would blow up (with the help of CDSs). Goldman settled fraud charges for $550m without admitting liability after it did indeed blow up. Mr Tourre, whose lovelorn emails to a co-worker were published as part of the case, was earning $2m a year by the age of 28. His thirties have been harder. The New York Post has described him as a "weenie" and he's recently been doing volunteer work in Rwanda while studying for a PhD.
And Financial Conduct Authority, which will take over the job of Britain's chief financial watchdog from the Financial Services Authority, although the Bank of England's Prudential Regulation Authority will keep tabs on the financial health of banks.
Glass-Steagall Act: A US law dating from the 1930s' Wall Street Crash which was designed to control financial speculation and separate retail banks from investment banks. No longer in force. Which shows just how little we have learnt from history.
Hedging: A hedge is an investment position taken by a financial company with the intention of covering losses from another position. For example: Some brokers allow clients to take out Contracts for Difference (CFDs), which are bets on whether a share price will rise or fall. If a client places a bet with his broker that BP will rise, the broker then buys enough BP shares to cover the bet (this is the hedge). If the share rises, the broker can pay the client with its BP share profits. If the share falls, the client pays. The broker makes money either way by charging a fee. Hedges usually involve Derivatives and can get much, much more complex than the above example.
Inter-broker Dealer (IBD): These companies allow banks to trade all sorts of financial instruments with each other, anonymously. They are regularly involved in court battles with other IBDs over staff poaching. These tend to be quite colourful. Previous examples have featured revelations of cocaine use, strip clubs, and lots and lots of booze. The City at its most raw. Examples include ICAP, BGC Partners, Tullett Prebon.
Jamie: The nickname favoured by James Dimon, the boss of JP Morgan. A New Yorker who seemed to walk on water while steering an (apparently) smooth course through the financial crisis after which his bank emerged as the world's biggest. He was leading the industry's attack on banking reform until it emerged that JP had lost $2bn after a single London-based trader was allowed to build up huge positions in Derivatives. Oops.
Kerviel, Jerome: Another French rogue trader who racked up €4.9bn in losses at French bank Société Générale. A native of Britanny, he briefly became a counter-culture icon and is now appealing a conviction for breach of trust. The bank said he was a rogue trader who acted alone. This has been greeted with a degree of scepticism.
Lloyd, Blankfein: The boss of Goldman Sachs and crown prince of casino capitalism. A former lawyer turned financial trader, he joined Goldman when the latter bought J Aron & Co. Paunchy, bearded and with a fondness for conventional gambling (on the Las Vegas gaming tables) in an earlier life, he smartened up his act and became a master of the financial casino. Made $72m in 2007, according to Forbes magazine, which gave him the number one slot in its "Biggest CEO Outrages of 2009" after he told The Sunday Times that he was "just a banker doing God's work".
And London Whale. The Nickname of Bruno Iksil, yet another French trader. He built up huge trading positions, largely in debt, for JP Morgan's Chief Investment Office. They have now started to show huge losses.
Market abuse: In simple terms this is using knowledge you have but which other people don't have – either deliberately or by accident – to make a profit from shares, bonds, or anything else covered by the Financial Services & Markets Act. Also covers share ramping (spreading rumours to push up the price of shares that you hold) and various other nefarious practices. The FSA has become quite serious about policing it of late.
Non-status lending: Another way of saying sub-prime lending. It means lending to people with poor credit ratings. People who have previously defaulted on debts, or who don't have much of a credit history, for example. A major cause of the financial crisis. With interest rates low, banks started looking around for ways of generating higher yields. They thought non-status lending was the answer. By packaging up parcels of loans to these people you create a product with a potentially handsome yield because non-status borrowers have to pay very high interest rates whatever the base rates set by central banks like the Bank of England do. While more non-status borrowers tend to default than is usual with "prime" borrowers, this was supposedly factored into the way the products (Asset Backed Securities) were set up. Worked fine until nearly all the borrowers started defaulting.
Options: No not the Derivative of that name. Options as in share options. A way of paying executives and bankers by allowing them to buy shares at a fixed (low) price with the intention of selling them on at higher prices. Rather fallen by the wayside in favour of restricted shares, which are bought by the bank and handed over as a bonus at a later date if certain (usually rather simple) performance criteria are met. Regulators have demanded such shares be clawed back if banks make losses attributable to particular bankers. When Lloyds Banking Group clawed back shares from former executives in charge at the time of the Payment Protection Insurance scandal the squeals from the City could be heard in Outer Mongolia.
Proprietary Trading: Banks tend to have a lot of money sloshing around. They can either hold it safely in low-risk places, or they can use it to trade, taking bets on how markets will perform usually through the use of Derivatives. Can generate huge profits for banks and huge bonuses for bankers. Can also generate huge losses for taxpayers if things go wrong (But Bonus(es) tend not to be too badly hit).
Queen of Wall Street: The nickname given to Ina Drew, who has been dethroned thanks to being in overall charge of JP Morgan's Chief Investment Office when it started racking up big losses. Ms Drew will take the crown jewels with her: she made $15m a year before "retiring" and her pension plan is likely to be eye-popping.
Regulation: There wasn't much of this in the run up to the financial crisis. Bankers now claim the pendulum has swung too far the other way with ever higher capital requirements being imposed to cover banks against future losses and the European Parliament considering measures to force ever-lower bonuses. And Royal Bank of Scotland. Too little of that Regulation allowed its chief executive Fred Goodwin to steer the bank on to the rocks requiring a multibillion pound bail out.
Squid, Great Vampire, Wrapped Around the face of Humanity, Relentlessly Jamming its Blood Funnel into Anything That Smells Like Money: The memorable description of Goldman Sachs made by journalist Matt Taibi in Rolling Stone magazine in a lengthy evisceration of the company.
And SAS. The legendary regiment of which JP Morgan's top London dealmaker Ian Hannam is a veteran. After his discharge he turned to finance and transformed the face of the FTSE 100 index of Britain's biggest companies by filling it up with Kazakh copper miners and other assorted natural resources operations. This is controversial largely because their only connection with this country, aside from being listed here, is that their chief executives occasionally drop into London for a spot of lunch. Currently fighting an attempt by the FSA to fine him £400,000 for Market Abuse.
Trader: The boys, and occasionally girls, who take the big risks for banks and pocket the really big Bonus(es). They are also the people who make the really big losses but, until regulators forced a change in the rules, only after those bonuses had been banked.
Up the Creek: Which is where an economy like Britain's, which is horribly over-reliant on the City and financial services, has been left as a result of the financial crisis.
Volcker Rule: Named for Paul Volcker, a former chairman of the US Federal Reserve who proposed it. The rule is part of the US Dodd-Frank reforms which are designed to stop banks from making certain speculative investments and indulging in Proprietary Trading. Mr Volcker has suggested that such activities don't do anything to benefit customers but played a key role in the financial crisis. Jamie doesn't seem to like him very much and has been quite rude about him. However, some nasty people have suggested that the activities of the Chief Investment Office operated by JP Morgan rather proves Mr Volcker's point.
Wall Street: America's financial centre and where most of its big banks and brokers have their headquarters. Bitterly resented by Main Street, which is coda for pretty much everyone who suffers when it makes mistakes. Republicans have sought to exploit this resentment even though they receive quite a lot of money from Wall Street.
X Factor: Simon Cowell's TV show is often cited alongside the Bonus(es) lavished on bankers as a social ill. Some conservatives blame them for fostering a (possibly mythical) get rich quick or sulk about it mentality among Britain's youth.
Yesterday: The Beatles song, the lyrics to which are rather appropriate. It does seem like "Yesterday all our troubles were so far away". Thanks to the bankers and their financial crisis, swiftly followed by the eurozone crisis, they're pretty sure to be here to stay. Sir Paul McCartney said he believed in Yesterday. It's not a sentiment that's widely shared given what bankers were allowed to get up to then.
Zoo: A place where animals are held captive for people to go and see. The behaviour of said animals tends to be rather more civilised than that of the species frequenting the trading floors of big banks, and much of the rest of the banking industry, for that matter.
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