In the Light of What We Know (37 page)

And why is that?

Foresight, I think.

Come now. There has to be more to the explanation.

Hapgood wanted detail, and I could not see how to escape obliging him.

Let’s say you own a house. You’ve bought it with the help of a large mortgage, but you also have other debts. A personal loan to finance a car, perhaps. And, crucially, debts on your credit cards. Let’s say you’re currently meeting the minimum repayments on the cards, but you’re stretched, and if your repayment obligations were to rise you’d be in trouble. What do you do if interest rates rise and you can’t meet all your obligations?

You’d fail to meet them, said Hapgood.

We did some research and formed the view that most people would want to hold on to their homes as long as they could; they would rather default on other things—first and foremost on credit card debt—than fall behind on mortgage repayments. So we kept an eye on credit card repayments, and when we saw a marked increase in defaults on credit card debt, we saw that mortgages were not far behind and so we pulled out of that market.

What do you mean by “pulled out of that market”?

I mean we eliminated our exposure to mortgages.

You weren’t holding on to mortgages?

Exactly. Make sense?

Was it really that simple?

It was really that simple.

Why didn’t other firms do this?

A few did. My firm, Goldman Sachs, and a couple of others.

Hapgood seemed to digest all this, but he wasn’t done. I should have known.

Do you think bankers are paid too much?

Oswyn! Oswyn’s wife, Maud, interjected.

Oh, dear, I’m sorry, he said.

Oswyn Hapgood, the classics professor, looked ridiculous. My father had dubbed him Oswyn Hapless. Of the two and for the two, Maud was evidently the social compass, if she intervened in time.

No, no, I said. It’s a perfectly reasonable question. Not all finance professionals are paid big bonuses, I said, addressing Hapgood, but when my firm does pay those bonuses, it does so because those bankers would otherwise run off to other firms.

Do we really need all this financial wizardry?

Finance does a lot of good—

Yes, but does there really have to be so much of it?

Some people ask how much we need classics professors and how many we need. I happen to think we need them a lot. But that’s not much help when you’re trying to figure out how much to pay professors, and it certainly doesn’t tell us what we have to pay to keep them from heading off to American universities.

Nathan Littwack had been silent until then.

How do we know that? he asked.

How do we know that we don’t know how much to pay professors?

No. How do we know that we have to pay bankers the bonuses we pay them in order to keep them at their firms?

When we don’t pay them enough, I replied a little wearily, we see them leave. It happens quite often.

When I joined the firm in July 1993 as an associate in sales in the fixed-income division, I believed—and I still believe this, notwithstanding what Zafar says—that I was hired because Zafar put in a good word for me. He had already been with the firm for some time, joining them in their headquarters in New York not long after Harvard, when I was beginning to look into finance while finishing my master’s thesis. I had other friends in the industry already, two of them from Eton, but they were all in European investment banks—the Eton boys at very staid English ones, not one of which, as it happens, would survive the 1990s American onslaught in the financial services sector, the aggressiveness of the U.S. banks and their innovativeness. It seemed to me in those days, as it still does today, that the most exciting names in finance were American: my firm, Goldman Sachs, Morgan Stanley, and the rest. So I sent Zafar an email. He suggested I write to Doug Hendricks in Structured Products, a rising star whose group, he said, was talking about some intriguing new ideas. Doug replied that he needed to hire more people in London and that he was going to be there the following week. I was called in for “just a couple of interviews,” but I faced a barrage of bankers over five hours, partners and senior professionals, before I met Doug.

A few days later, I asked Zafar if he’d heard anything. I called him from London, and I can now picture him, as he must have been, sitting there at work, leaning back in his seat, facing an array of screens, with his headset on, the microphone hanging by the side of his mouth. He explained that Doug had come over to him that morning and had asked him what he, Zafar, thought of me.

What did you say?

I said I wouldn’t recommend the work to you if I didn’t think you’d take to it.

What did he say?

I’ll tell you what he said: If that’s what you think, then it’s good enough for me.

Wow. They must think highly of you.

He’d already decided to hire you. He was just banking a favor from me.

That’s a bit cynical, don’t you think?

He’s a banker. It’s a free option.

If he was at your desk, everyone could have heard him.

He’s a smart guy. He doesn’t want people to think he can’t judge a good hire from a bad one and has to rely on a relatively new recruit.

Exactly. So why say it?

Because he knows that everyone else knows what he really means; everyone knows how stupid it would be to rely so much on the word of a newbie, and a friend of the applicant to boot. He wants me to think he’s doing me a favor. And he thinks I’m naïve enough to buy that or smart enough not to show I’m offended because I don’t.

You make the place sound like some kind of psychological theater.

Know a place that isn’t, do you? Anyhow, you got the job because he wants you.

Thanks.

Don’t thank me. I get a thousand dollars from the firm because I introduced a successful applicant.

Two weeks later, when I arrived in New York for orientation (before returning to join the London office), Zafar and I had supper in the West Village, around the corner from his apartment, at an Italian restaurant where he seemed to be known to the waitress. Once he’d answered a few questions I had about the firm, a silence opened up between us. Zafar seemed to drift off, his eyes apparently settling on the waitress, who smiled at him. But when he failed to return her smile, I perceived that he was somewhere else altogether.

How about you?

How about me?

How did you get into it?

Interview, like you.

But what was the process like? What put you on to it?

Call from a headhunter in the final year at Harvard, interview with a banker, and a job offer.

Interview with a banker? Doug Hendricks?

Zafar seemed to consider his response.

Not Hendricks. A huge man—he’d been a linebacker in college—this huge man strode into the office, fell back into the sofa, and looked at me for an eternity without saying a word. I’ve seen your résumé, he said, and you can do this shit. Question is, do you have the fight in you? Do you?

What did you say? I asked.

I have more fight than anyone needs for any job, I said. I’ve come a long way, from a mud hut in the rainy season in a part of the world you only know as a basket case of misery. I spent a year of childhood in the basement of a derelict house in two rooms and an outside lavatory, and when I try to remember the kitchen, I can only picture the half that didn’t have rats. I’ve grown up in some of the worst projects in London. I’ve been kicked and spat at because of my race, I’ve had teachers send me to remedial classes because they thought I was stupid when I was just silent, I’ve been beaten black and blue my whole short life and I’ve made it here. Have I got the fight? You tell me.

I was astonished. Once again, I felt, as I have often felt in his company, a strange feeling of envy. It doesn’t make sense to envy another human being for his hardships, but envy is what it was. I can find nothing heroic in my own story.

Did you seriously say that? I asked.

Zafar was smiling.

No.

What did you actually say? I asked.

Well, he didn’t actually ask me much. Instead he wanted to show me some things about his work, so we talked finance for a couple of hours.

A two-hour interview?

More like a tutorial.

You mean he was trying to sell it to you?

Not really; he was testing to see if I could pick up the stuff.

*   *   *

Within three years, Zafar left the bank and returned to Britain, in order, he explained, to practice law. He had made up his mind, even if it meant training for the English bar. I admired that in him, the speed with which he made and executed life decisions.

*   *   *

Oswyn Hapgood was certainly tiresome, to put it mildly. A year earlier, I would happily have discussed the question of bankers’ pay without the slightest discomfort. But this was the end of September 2008, the markets were in turmoil, and the effects of the financial crisis were spreading into the economy. My firm, though by no means the worst affected, had suffered some losses, and not just in the United States. As was the case at a number of American firms, almost all European business was dealt with through London. It was London, in fact, that picked up most of the work outside the Americas and Asia, and all that added up. The U.K. had witnessed significant bank failures and, in ways I could never have predicted, much of the distress came back to my desk and the group I headed, though by then only nominally; effective control had passed, against my protests, to the head of the division, to the firm’s chief financial officer and the firm’s risk officers.

There are at least two questions here, explained Nathan Littwack.

When not speaking, he sat perfectly still, his elbows resting on the table, his hands clasped together and, it appeared, his thumbs pressed, nail-side, against his lips. I did not know this young man, but I knew already certain things about him. When Nathan Littwack listened, you knew that he was listening to your every word. When Nathan Littwack spoke, his words were inseparable from his body language. And when he articulated something that he had obviously considered carefully, I saw what others in that room would have seen—the precision of a certain kind of academic, one like my father.

The first, he said, is whether any given bank needs to pay what it pays in order to keep its staff. We have the answer to that, he said, nodding my way. I might be wrong, but it seems to me that that’s not the right question, he continued, not when governments are looking to increase regulation.

What is the right question?

Does the
industry
need to pay its staff what it currently pays them in order to keep them from leaving the
industry
?

But, Nathan, I said, it’s not the industry that pays staff but firms.

So what about a tax on firms, said Nathan, dependent on what the firm pays out in salaries? A flat rate. Wouldn’t that push down bankers’ pay across firms?

Lauren came in here.

Have you seen those graphs of bankers’ pay and average pay in the rest of the economy? The NBER, I think, or was it Shiller?

Not Shiller, Nathan corrected her.

NBER? said Hapgood.

National Bureau of Economic Research, explained Nathan.

Where the hell would bankers go? she asked me. Bankers’ pay was always higher than pay in the rest of the economy, she continued, but not by much until the eighties, when it started to climb steeply. Not coincidentally, median average income in the U.S. is less now than in 2000. Less! The majority make three hundred dollars less now than in 1980, and all the gains in the last thirty years—all the gains!—went to the top zero point one percent. That’s zero point one percent. The top one percent own forty percent of the wealth of America! Today, you’d have to cut bankers’ pay by eighty percent before their jobs were remotely comparable to other jobs. Can you think of an industry where all those bankers can get paid anything like what they get in finance?

Hapgood, less hapless now and more emboldened by the Americans, piped in.

Does it not stand to reason, he asked, that the financial industry should foot the bill for getting us into this fine mess?

That’s a horse of another color, said Nathan.

Hapgood’s bushy eyebrows leaped up like startled rodents, but I couldn’t tell if this was because he was unfamiliar with the idiom or because he understood that he’d just been told that what he was saying was irrelevant.

The conversation carried on in this vein for part of the evening, and I am forced to admit that my responses weren’t the most robust. Bankers generally, I think, are not given to considering the wider context of things, just as, I’m sure, most busy doctors do not give much thought to the national state of health care and the problems of insuring a whole society. People by and large go about their work, and where hard work is called for, they go about that work to the exclusion of concerns that do not, in the final analysis, further the work at hand.

Nathan was a very smart young man who evidently had the nous to figure things out for himself, but I daresay he was following the financial news rather more carefully than did most people outside finance. What he was talking about were the same things being reported in the financial press, including a tax on banks to create a reserve for bailouts, a tax on certain financial transactions, and a tax linked to salaries and bonuses but paid by banks. Each of these had its own rationale. All of them drew ultimate justification, however, from the cascading failures of those financial instruments that had come to dominate the financial world.

These instruments are not understood by most people and, in fact, they are so widely
misunderstood
that the first thing a journalist writes about them is that they’re widely misunderstood. I can’t be alone in noticing that until recently, even the august
Financial Times
gave the derivatives and bond markets little more than a passing mention, always regarding it necessary to point out that most trivial fact: that the price and yield of a bond move in opposite directions. Nobody outside the business—and not everyone inside—could get their heads around the new products.