Mind the Gap | Easy to call bankers crooks, but are they the only ones?

It’s all too easy to vilify bankers these days. Since the 2008 financial crisis the banking industry has been suffering from a prolonged pandemic of moral self-flagellation promoted by popular culture. Bankers are portrayed in film and television as leeches between crooked politicians and suicidal terrorists.

Saying the Oscar winning Big Short accurately portrays the reality of the zero-sum game, the immutable win-lose law of the markets obscures the true causes of the subprime crisis.

Market making and proprietary trading is creating a market or taking a position in securities that are not listed on an exchange (known as OTC trading). The two activities are interrelated. They require betting, hedging and leveraging the institution’s balance sheet to generate liquidity. It can result in big profits or as we witnessed during the crisis, catastrophic losses that can bring down entire economies.

The author of The Big Short, Michael Lewis, described the beginnings of proprietary trading culture in his first bestseller, Liar’s Poker. In the ’80s, banks tasted the seductive elixir of trading their own capital. Clients were not treated like customers, but as counterparties or “muppets” to be exploited.

Traders were overjoyed to score a profit, or, as Lewis described, “rip off a client’s face”. There was a lot of face ripping going on in the early days of market making until more computing technology arrived.

So when a bank says they are incredibly ‘client focussed’, what they really mean is that their employees are ‘top notch’ professionals and have good client service – not necessarily that the client comes first.