He is in his early 40s, non-English and prone to self-deprecating chuckles. At his suggestion we meet at a posh hotel in the Mayfair area, home to many hedge funds.
We end up talking for over four hours, sustained by sandwiches and tea.
"A few years into my first job at an investment bank I made more in a year than my father in 25. How did he respond? I couldn't tell him, could I? My background is blue-collar, my father worked on the shipping yards. Had I told my friends, they'd think I had committed fraud. This is how private banking works, the area where I started out. 'Your' clients have funds under management at the bank. The bank charges fees and you receive a set percentage. I had a lot of clients with a lot of money. So I made over a million. Simple arithmetic.
"After private banking, a major investment bank in London recruited me to come and work in fixed-income. Initially they put me up in this hotel. I had never been back here. What would I say to the person I was 15 years ago? I don't know … enjoy it?
"Before you sign on investment banks treat you like a star. Then your job starts and you're one of many. I remember the first time I got onto the dealing room. Between 500 and 1,000 people on one floor … I realised, this is the heart of the machine. The 'client-facing' side of investment banks is impressive. Expensive suits, excellent catering, antiques on the walls. But the dealing rooms are factories. You've got a computer, phone and Bloomberg terminal with financial data and that's it. London investment banks do everything to make you as productive and focused on making money as possible. There's a dentist in the building, a doctor. Dry-cleaning, a travel agent, restaurants, fitness. There was even a guy going around the trading floor polishing your shoes for a few pounds.
"I found out that my investment bank often hired two people for one role, to see who'd survive. That was bad [laughs]. Worse: the manager who had hired me left for another bank almost as soon as I started. I really was on my own. The bank had promised me a client segment all to myself. But that very first day I sat down at my desk to discover that, actually, several others also worked on that segment. Basically I was not allowed to call anyone in that segment. Banks divide up the world in a matrix; by product and by country.
'There was always at least one person on whose toes I stepped. 'Where does an 800lb gorilla sit? Answer: wherever he wants to sit.' This summarises an investment bank pretty well. A newcomer is the opposite of an 800lb gorilla. You have to fight your way in. Nobody has time. Nobody cares who you are. But you have been brought in with 'a budget'. This is the money you have to make for the bank or out you go.
"I took a deep breath: OK, this is going to be harder than I thought. Over time, I'd learn that success in an investment bank is very much to do with defining, claiming and defending your niche or segment; what kind of products are you licensed by the bank to sell to clients and in what geographical area?
"I realised I had to do something. Before I came to London I knew next to nothing about so-called CDOs, collateralised debt obligations. I was hired purely for the clients I had serviced before in the segment I was specialised in. Anyway, I have a good head for maths and read up as fast as I could. CDOs are products containing a combination of financial instruments. Some CDOs proved toxic in the crisis, which gave them a bad name. It all depends on what you stick into them. A CDO is simply a product tailored to the needs of a client.
"I got an idea for something called a hybrid synthetic CDO; I knew a particular client's portfolio of investments was exposed to a particular risk which I thought this new CDO could address. Would it? I'd have to ask a structurer, the people designing and actually putting together the complex instruments, and doing the calculations behind it.
"Now, it's not like you can just go up to these guys. Everybody is extremely busy, all the time. I remember when on one of the TV screens, there was a silly Bloomberg item about the latest Sports Illustrated swimsuit issue. I didn't mind looking at pictures of beautiful ladies but nobody around me was taking any notice. Glued to their screens.
"In the end, I had a really special sandwich delivered to the desk of one structurer. I went up to him and said, while you eat that, let me tell you about this idea. Perhaps the structurer thought that was ballsy, and he listened. Then he said: who is it for? And of course I gave an evasive answer because someone else on the floor may know that client too and try to steal the idea from me.
"My idea worked, the client liked it and suddenly I was this new guy who did a €2m (£1.7m) P&L (profits and loss) deal. People were taking an interest. So it goes. Later I was recruited by another bank. Again they promised me the whole of the country I'm specialised in. Again it turned out many others were already working on that. So again I had to fight. I suppose I am a slow learner [laughs].
"This is how it works in investment banks. You sit there among 1,000 other guys, constantly thinking about your clients – institutional investors to call with an idea. That idea must be a solution to their needs, so you need to know as much as possible about these needs. The products you come up with must be competitive compared to other banks. Meanwhile at the back of your mind you think: I have to hit my P&L or there's no bonus and basically redundancy.
"An investment bank 'gives out franchises'. There's very limited middle management or anything like that. It's a huge machinery for executing transactions and deals but you're effectively on your own to make those happen. Everybody and I mean everybody is focused on business. The term is 'revenue responsibility'.
"My former boss was the head of western Europe. Even he had a budget, meaning he had to bring in revenue. For him it was between £10m and £20m. How much time do you think he had for managing? He knew he'd be in trouble if he didn't make his budget.
"Everything in my investment bank was vague and up for grabs. How to claim deals, meaning are you allowed to do them? How to claim 'production credits', ie get your name mentioned as contributor to a successful deal. This is where office politics comes in. Say, you are short on your year budget. Now your pal books a few of his 'production credits' on your 'run', something called 'puffing'. Next year you return the favour. Of course there's scope for mischief.
"The office politics extends to the bonus pool. Investment banks are a bunch of pockets. You belong to one and your revenue goes into that pocket's joint bonus pool. Who gets what? That's far more subjective than in private banking. Some people bring in a lot but aren't good at the office politics. They may end up with less than they deserve.
"A major factor with bonuses in fixed-income is net present value (NPV) off P&L. The sort of instruments we were selling ran over many years. NPV means you calculate the total revenue for your bank over those years and the total number goes to your P&L for that year. Obviously if you can book the NPV off future revenue of the next seven years in one go, that's a huge number. This is one of the reasons why bonuses shot up the way they did in fixed-income.
"I know people who achieved financial independence for life on the back of no more than a few deals. First they did a few huge deals in NPV terms. Next they let another bank recruit them for a huge guaranteed bonus. The thinking at that bank went like: if this guy can make £15m in a year we can pay him a few million.
"Now you can see how NPV could make people aggressive. No longer do you need to maintain a relationship with a client over many years. Sell them one product and bang you're there. Compare again to private banking. I've got a client and every year this client decides to stay with my bank, we pocket a 1% management fee. See how that breeds a different culture? Compliance is also hugely different. In private banking, clients are assumed to be 'unsophisticated' so you have to inform them abundantly well about risks or they can sue. Compliance is very strict. In 'institutional' the clients are by definition professionals and supposed to be 'sophisticated'. There are far fewer rules protecting them. It's caveat emptor – buyer beware. They are supposed to know what they're doing. Some of them aren't, obviously. I could tell you stories about the German Landesbanken …
"I said NPV can make people aggressive. Say this year you got a huge bonus, thanks to NPV. How about next year? That's right, you need to keep selling these products year in year out to maintain that bonus size. This was one factor driving innovation and the development of ever more complex products.
"Another thing driving innovation is that there is no such thing as patenting in finance. This makes it incredibly hard to protect an invention and keep a competitive edge. The big clients talk to all the major banks so news spreads fast. All investment banks have systems and infrastructure of similar quality.
"To set yourself apart in this universe you need to be the first to come up with a new product – when the margins are still fat. Meanwhile you know that soon enough other banks will offer the same product. Margins come down, things get standardised and commoditised. How other banks catch on? They copy your product. Or they poach some of your colleagues to set up a desk. They poach you.
"I could have made a lot more money if I'd played the office politics better, and made more clever moves between banks. Then again, I may not still be enjoying finance if I had done that. I am probably not going back into investment banking. But I am staying on in finance. Got a few ideas. I'm a university dropout who ended up in banking by luck and found out I really enjoy banking and found out I am quite good at it. I'd do it for far less, too.
"Most of my colleagues were decent people. Some of them said about CDOs, no way, I'm just not getting into any of that. But as I said, CDOs are neutral instruments. If you fill them with toxic assets, of course it's going to get ugly. All 'my' CDOs have paid out principal plus projected returns. If fixed-income sales were an animal? Well, we work in groups and we do go out and hunt for clients. We share the spoils … Wolves, maybe?
"I also spent some time in advisory and dealmaking. There it's all about rankings and league tables. As an investment banker you sell safety, in the sense of reputation insurance. Say, you are a corporate CEO and you're going to do a big deal. You hire Goldman Sachs and everything goes wrong. Now, nobody is going to blame you for hiring the number one investment bank in the world. You're safe. There is more honour in being wrong with everybody else then to be right on your own.
"Again compare this to private banking. There clients want to look their banker in the eyes and decide if they trust him because it's their own money. How it works in private banking is that you build a reputation by managing the wealth of specific individuals respected by your prospective clients. It makes sense for banks to offer private banking for wealthy clients. Say, your bank helps somebody float his company on the stock market. Suddenly this individual is worth £50m. Makes sense to offer to manage that wealth for him.
"Coming into a fortune is often not easy. As they say in private banking: making money is the easy part, keeping it is very difficult. As a private banker you try to strip away the emotions. Let me manage your fear and greed, I'd tell clients. Everybody wants to buy low and sell high. But when the price is low people are terrified to buy, and when it's high they just can't get themselves to exit as they're hoping for even higher profits.
"What surprises me most, five years after the crisis? How everyone is again pontificating about the future like there never was a crisis that demonstrated just how little we know. We shouldn't project this image of certainty with predictions about the next quarter and what have you. I thought the crisis would force us to acknowledge that. But it's back to business as usual. Economics is an art, not a science."
• If you would like to comment on this interview, please visit the accompanying blogpostThis article was written by Joris Luyendijk, for theguardian.com on Thursday 19th September 2013 12.00 Europe/London
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