Tom Wolfe, writing in Bonfire of the Vanities (1987), coined the term Masters of the Universe: “He considered himself part of the new era and the new breed, a Wall Street egalitarian, a Master of the Universe, who was only a respecter of performance.” Wall Street bond trader Sherman McCoy, the original Master of the Universe, came to personify the avariciousness and self-aggrandizement of financiers. In the 1980s, the true masters were merchants of leveraged buyouts and investment bankers; more recently, they were hedge fund managers and derivatives traders.
Photograph: Robert Caplin / Bloomberg
The rise of financiers is intimately linked to this financialization of the global economy. Finance inexorably displaced industry, with trading and speculation becoming major activities as financial engineering replaced real engineering.
Financial innovations such as securitization (the packaging and sale of loans) and derivatives (effectively risk insurance) were designed to enable banks to extend more credit. Banks could magically increase returns for their investors literally by increasing throughput (the rate of earning revenue), making more loans and selling them off to eager investors.
All of this, of course, meant increased earnings for the banks and their star performers. In itself, the ability to earn high rewards only becomes a problem where the promise of a share of profits encourages excessive risk-taking and a focus on short-term earnings. It also becomes a problem where the basic measure of performance is vague and can be systematically gamed. Unfortunately, the earnings proved to be the result of wildly inaccurate models, accounting tricks and risks that had not been accurately captured.
Finance is also problematic when it comes to dominate the economy. Gordon Brown, the UK’s chancellor of the exchequer under Tony Blair and then prime minister, harboured secret dreams of a Scandinavian-style social welfare state with low taxes funded by the growth of financial services in the City of London. In 2007, he told bankers: “What you have achieved for the financial services we…now aspire to achieve for the whole of the British economy.” Alistair Darling, Brown’s successor as chancellor, was no less loquacious when describing financial services as “absolutely critical” to the economy.
The golden age would come to an end with the global financial crisis. Bankers lost their jobs by the thousands. They lived with the psychological fear of getting fired by text message. In New York, bankers confessed it was hard to live on less than $500,000—after all, the children’s private school fees, the maid, the Pilates lessons for physical fitness, all cost money. They economized by buying cheaper cuts of meat. In London, families deferred moves to more expensive suburbs. The effects of belt-tightening were seen in a fall in bookings at luxury hotels, holiday resorts and sales of super yachts—some of the plutocrats were down to their last billion.
There was a sense of schadenfreude as the Masters of the Universe received their comeuppance. Unfortunately, the “financial” crisis quickly spread to the “real” economy—jobs, consumption and investment—becoming everybody’s problem. “Too large to fail” financial institutions had to be bailed out by governments.
There was briefly hope that the power and influence of finance and financiers would be reduced. Finance would revert to being a facilitator rather than the central driver of the economy.
Unfortunately, those hopes were misplaced. Low or zero interest rates, heavily managed markets, reduced competition and state underwriting of solvency have helped surviving banks to prosper. Bank risk levels have increased to and, in some cases, gone beyond pre-crisis levels. The higher levels of risk-taking reflect central banks’ increasing comfort to support financial institutions’ liquidity and their ability and willingness to intervene in financial markets to limit price risks.
In 2008 in Canary Wharf, the financial district in London’s docklands, I met two affable recruiters from the English Teachers Union who explained that there was “a bit of financial crisis”. Well-educated and highly motivated bankers who were losing their jobs by the thousands might like to consider a new career in teaching. I questioned the adjustment in salaries that the change in careers would necessitate. One recruiter responded: “If you haven’t got a job, then it’s not relevant, is it? It was never real money and it wasn’t going to ever last, was it?” Over the last 30 years, talent has increasingly been lured from productive professions into finance and the speculative economy. The rewards available mean that the brain drain into these professions is unlikely to stop.
The Masters of the Universe who have survived the carnage are back to their old tricks. The “fight for talent” means that bonuses and remuneration guarantees for new employees are all back in vogue. Financiers have proved exquisite masters in the game of privatization of profits and socialization of losses. Many countries now practise Chinese socialism with Western characteristics.
A year after the collapse of Lehman Brothers, the near collapse of AIG and the grand mal seizure in financial markets, the Masters of the Universe are still firmly in charge. As Giuseppe di Lampedusa, author of The Leopard (1958), knew: “Everything must change so that everything can stay the same.”
Satyajit Das is a risk consultant and author of Traders, Guns and Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006). Comments are welcome at firstname.lastname@example.org