I’ve grappled with whether or not I should reveal one of the City’s spookiest, most scandalous secrets. Savvy bankers learn it early in their careers, when the most promising are pulled aside and taught how to trade with 'smoke and mirrors'.
Real magicians come in and share their techniques to us on the blackest of arts: how to spin financial black magic. Of course, it’s not immediately obvious how balancing a deck of cards would relate to balancing a balance sheet. So I’ll explain.
The truth is that bankers have needed the misdirection, deception, and illusory skills of magicians to make their billions over the past couple decades. Securitisation, for instance, was a hoax taken from that age-old trick where the magician turns a 2p coin in his hand until it becomes £2. In the world of finance, we took subprime mortgages, sold them to investors God knows where, and distanced the lender from the borrower as much as possible, until a 2p loan actually did look like a £2 one. Our investor audience could not believe their eyes, and could not think of an explanation. Pure magic.
Abracadabra accounting was another celebrated transforming ruse. When those subprime mortgages became, well, sub-paying, we hid that 'toxic debt' in SIVs - off-balance sheet investment vehicles that changed our P&Ls from red to green - as easily as magicians change the colour of a silk handkerchief. We didn’t even need a magic wand.
And speed is an easy tool to fool. By innovating financial products at a mind-boggling pace, we overwhelmed the capacity of both regulators and financial institutions themselves to assess the risk. They don’t call it 'pulling a fast one' for nothing, right?
But there is an unspoken agreement between real magicians and their audience about what is going on. We pay magicians to be sneaky, to 'pull a fast one' on us. But when scams defraud the innocent, entertainment turns to resentment. The public trusted cunning, wealthy bankers not to take advantage of them, yet this is exactly what happened. Now that the financial crisis has unveiled their wizardry, investment banks are in danger of losing their supernatural powers. Our tricky houses of finance are on the verge of failure as fewer and fewer investors, regulators, or everyday taxpayers will be fooled by any hocus pocus.
If the magic stops, it’ll be the worst thing that could happen for those sneaky financial fat cats - and the best thing that could happen to us.
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