Sunday, November 2, 2008

[Not so] Funny: How the Markets Really Work

Like in America, some of the greatest British journalists and analysts also happen to be comedians. Watching The Last Laugh with John Bird (in the guise of investment banker, George Parr) and John Fortune (together known as the Long Johns), the same can certainly be said in Britain as well.

This is a transcript of this insightful comedian team who brilliantly and accurately describe the mindset of the investment banking community in this satirical interview. It was especially insightful considering this was recorded last year.

The second video at the end of this entry is the same as the first but it's subtitled in Spanish.



Here's the script:


John Fortune: George Parr, you are an investment banker.

John Bird: I am yes.

Fortune: And as such, you have your fingers right on the pulse of the financial markets.

Bird: Yes, very much so yes.

And during the summer, there’s been a great deal of turbulence, some volatility in the market.

Yes. A tremendous amount

Yes. What has caused that?

Well, you have to remember two things about the market, one is they are made up of very sharp and sophisticated people who are some of the greatest brains in the world. And the second thing you have to remember is that financial markets–to use the common phrase, are driven by sentiment.

What does that mean?

What does that mean. Well the thing is, let’s say things are going along as normal in the market, and then suddenly, out of the blue, one of these very sharp and sophisticated people say, “My GOD! Something AWFUL is going to happen! [Grasps face in despair] We’ve lost EVERYTHING! My God, what are we going to do, WHAT ARE WE GOING TO DO?

Shall I jump out of the window?

Shall I jump out of the window. EXACTLY! Let’s all jump out of the window! SELL!

SELL!

SELL!

SELL!

SELL!

SELL! SELL!

Sell. Yes. Precisely. And then a few days later, this same sophisticated person says, (calmly and pleasantly) “You know, I think things are going rather well.” And everybody says, “You know actually I think I agree with you.” “You know, I think we’re rich.” “We’re rich.” “Yes!”

Rich! Yes! BUY, BUY, BUY!

BUY, BUY, BUY! Yes. And that is what we call market sentiment.

Yes. Well, surely we are exaggerating just a bit, aren’t we?

Well, I don’t know. IN August of this past year, when the market actually plunged in London, the well-known city firm, the State Streets Global markets issued a statement in which it said, and I quote, “Market participants don’t know whether to buy on the rumor and sell on the news, do the opposite, do both, or do neither depending on which way the wind is blowing.”

Yes. And this is the kind of rigorous analysis we’ve come to expect and we’ll pay huge salaries for.

Exactly.And a few days later when the markets have gone up a little bit, the senior equities advisor on ABM Ambro Morgan said, “We’re back to happy days again.” [Smiling pleasantly]

Well, no price is too high for that kind of mature wisdom.

Certainly. This kind of people are paid millions of pounds in bonuses.

Yes of course. There have been actual causes behind the volatility in the markets Specifically and especially in America, granting vast numbers of mortgages to people who can’t afford them on properties which are diminishing in value.

Yes. This is the so-called, sub-prime market.

How does that work in fact?

Well, imagine if you can, let us say an unemployed man, sitting on a crumbling porch somewhere in Alabama in his string vest, and a chap comes along and says “Would you like to buy this house before it falls down and won’t you let me lend you the money?”

And is this chap who says this, is he a banker?

Oh no, no, no. He’s a mortgage salesman. His income depends entirely on the number of mortgages that he can arrange.

So his judgment to arrange mortgages is completely objective.

Completely objective. Yes. Absolutely, yes. Yes.

And what happens next?

Well then this debt, this mortgage, this debt is taken, bought up by a bank and packaged together on Wall Street with a lot of other similar debts.

Without going into much detail about what is actually…

Without going into any detail. No, that’s far too boring. And so this is put into a package of debt and then it’s moved on to Wall Street and this is, it’s extraordinary what happens and somehow, this package of dodgey debts stops being a package of dodgey debts and starts being called a Structured Investment Vehicle.

An SIV?

An SIV, exactly.

Yes I see, and then someone like you, comes along and buys it.

Yes, I buy it yes, and I’ll ring up somebody in Tokyo and say, “Look, I’ve got this package, do you want to buy it?” And they’ll say, “What’s in it?” I’ll say, “I haven’t the faintest idea.” And they say, “How much do you want for it?” and I’ll say, “I want $100 million dollars,” and then they say, “Fine.” That’s it. So that’s the market.

And presumably this package–that kind of thing can happen several times to the same package.

Quite possibly yes.

And, every time it does of course then you or someone like you would get a fee, and a mark up and–

And a profit, yes. You don’t expect me to do it for nothing. It’s hard work…

In view of the fact that in these packages is a lot of dodgy debt, what is it about it that attracts the financial risk takers?

Well, because these hedge funds as they’re called which specialize in these debts–they all have very good names.

You mean they’re responsible companies.

No no. It has nothing to do with their reputation. They have actually very, very good names–the names they think up are very good. I’ll give you an example. There’s a very well-known American Wall Street firm called Bear Stearns, who have two of these hedge funds which specialize in these mortgage debts and they lost so much money, well, lost so much of the value that Bear Stearns announced they would have to put in $3.2 billion dollars into one of the funds to try to keep it afloat.

$3.2 billion dollars?

$3.2 billion, yes. And even then, they said the investors couldn’t get any money out of it, and they were going to let the other fund go. BUT, one of these funds was called The High Grade Structured Credit Strategists Fund, and the other was called the High Grade Structured Credit Enhanced Leverage Fund.

Well that sounds very good. That sounds very trustworthy.

This is the magic of the market. What started off as loaning a few thousand dollars to an unemployed man in a string vest has become the High Grade Structured Credit Enhanced Leverage Fund.

I like the sound of it.

It is good. It sounds very trustworthy. It’s got good words in it. It’s got words like High.

High is good.

High is good. Better than low anyway, and structured is another good word.

Very good.

Enhanced.

I love enhanced. I’d buy anything if it said ‘enhanced’.

Absolutely. It might have been different if you’d have said the Unemployed Man In A Stringy Vest Fund, but–

Well, yes because then alarm bells might sound…ring. Despite these very plausible names, surely the reality is that the people that lent all this money are being incredibly stupid.

Oh, no. NO, no. The reality is what’s stupid is at some point someone asks how much money these houses are actually worth. If they hadn’t bothered to ask that question, then things could have gone on as perfectly normal, but unfortunately they did.

I see, but now people you see are saying the crisis is likely to turn into financial meltdown, I mean can that be avoided?

It can be avoided, provided that governments and central banks give us, the financial speculators back the money that we’ve lost.

But isn’t that rewarding greed and stupidity?

No. No. It’s rewarding what Prime Minister Gordon Brown called the ingenuity of the market. We don’t want this money to spend on ourselves. We want this money just to go into the market so that we can carry on borrowing and lending money as if nothing had happened, without thinking too much about it.

Yes, but if the worse came to the worse and you didn’t get this money, what then?

Well, then there’d be another market crash and then I’d say to you what I always say to people I meet–that it’s not us that will suffer. It’s your pension fund.

Thank you very much George Parr.

Pleasure.



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