The Man Who Caused the Credit Crunch: Confessions of an investment banker
Wednesday, 15 April 2009 09:28
Tetsuya Ishikawa caused the credit crunch, or at least played a role in it.
The former banker - made redundant 11 months ago from Morgan Stanley - has written an exposé of life in the world of securitisation, investment banks, £1,000 tips and the very high life.
However, he explains in his book out this week, How I Caused The Credit Crunch, it is not about finding scapegoats.
Speaking to Daniel Barnes, Ishikawa explains the model of securitisation of debts will live on and the deals were not too complex to understand - either for those selling them or buying them.
"Yes I understood the deals and so did investors," he says. "And while I was at ABN Amro there were deals I would have invested in with my own money, but we were not allowed.
"However, there were some I would not have been happy to put my own money in."
The flaw in the system - that led to the breakdown and credit crunch and later crisis - were the assumptions behind the investments, he claims.
"The flaw was not the complexities, they are easy to understand if you put your head to it. I studied philosophy and politics, but I understood. The assumptions were flawed.
"It was as though the credit supply was an ocean. But that ocean was more like a lake."
How I Caused The Credit Crunch is a fictionalised account of life in the investment bank fast lane - centred around an Oxford graduate, Andrew Dover, aiming to reach the one buck club (those with a pay packet over £1 million) while still in his twenties and how he is seduced by the money and very high life.
"A lot of Andrew Dover the character is based on me, but there were a lot of personality traits that were fictional," the banker-turned-author explains.
"Simply by having a fictional construct, I could talk about the people but get away from the scapegoating.
"The whole point of the book was trying to get away from the scapegoating, take the attention away from the bankers and look at the real issues at the heart of the credit crunch."
The banking high life
Ishikawa explains many of the stories of the high life in How I Caused The Credit Crunch - from bankers entertaining clients at high class brothels and £15,000 bar tabs to sex and drugs in the office - are true.
"Some of the stories happened to me and some of the stories happened to other people. In Germany brothels are legal so it would be very naïve to think that sort of thing would not happen.
"All these things happened. Some of these things happen very hush-hush to avoid the risk of law suits.
"But it is fair to explain there are some bankers that were involved in the seedy side of life that banking can bring, but others are more family-oriented.
"Leaving £500 tips was an extreme scenario, when there instances of egregious spending in restaurants and £15,000 tabs. But tips were generous as they were part of corporate expenses."
But now that is changing. Government bailouts mean the fizz from the Cristal is flat.
His contacts still left in banking - and those not fired - recognise the flaws.
"The arrogance in the industry has gone out. There is a greater sense of humility. And people are realising when times are tough things are not nearly as fun as they used to be," Ishikawa explains.
"The remuneration system will go back to the way it was 20 or 30 years ago."
Failure in banks or society?
And at the centre of the crisis, Ishikawa sees a failure in risk management, which allowed the financial weapons of mass destruction, the term coined by Warren Buffet.
"On one hand you had consumers hungry for credit. People will argue the demand for credit has lasted forever, but in the last few years consumer behaviour has changed.
"Years ago you would have ordered something over the phone and as long as it arrived, you were happy. But nowadays you want something to arrive tomorrow.
"This trend towards a consumer society has grown the demand for consumer credit.
"On the other hand, there was a massive push of investment capital that came out of Asia, and a change in regulatory environment encouraging banks to invest more, along with hedge funds and pension funds.
"Along with this there was the hunt for the yield and the hunt for the return."
Through this background came securitisation - banks and lenders packaging up their loans and selling them on as investments.
At the time mortgages were seen as some of the safest loans - where defaults were low and parcelling together very many loans lowered the risk.
However, as different types of loans started to be securitised - such as company loans - and then of course the dreaded subprime loans the waters became murkier. Then mortgage brokers sprung up working purely to sell loans that would be securitised, the model Northern Rock took on.
And the new homeowners were offered low teaser rates for a couple of years to keep repayments low, on the assumption that a remortgage with a happy rise in house prices would be possible. But house prices failed to rise, mortgage holders started to default and the securitisation model fell apart.
Ishikawa says: "Securitisation was in fact an effective tool. But it got taken to such an extreme. We were encouraged not to question and keep going on and on."
He also hits out at the politicians at the time that pushed for more securitisation as it promoted homeownership.
"At any stage, or at any of those junctures, they could have stopped it and prevented the credit crunch. They could have reined in consumer demand for credit or the way these investments were made.
"Ultimately the problem was with risk management. It is the way that human beings look at risk management is they are running down the road and the last 100 miles have been fine so they assume the next 100 miles will be fine as well.
"But it is never quite like that. The inability to take into account about what will happen in an extreme scenario that has led us down this path."
Sales feeding crisis
But behind the fundamental flaws of the system, there was the sales culture - fuelled by mega-bonuses.
"On the day-to-day, we were very much caught up in the selling. We had an obligation to our shareholders to increase our profits, a massive pressure for every single individual in every single investment bank.
"The reward on the other side was obviously our bonuses."
However, Ishikawa admits doubts did begin to draw in, but the need to sell was greater.
"There was a time, I was thinking about a particular deal and thought, 'does this really make sense?'. At times we did look at things and thought this is crazy.
"I raised this question with a colleague and he said 'I understand everything you are saying but ultimately that is not what we are paid to do. That is not what we are legally obliged to do. We are here and have to sell this deal'."
He adds: "If you would have put you hand up and try and stop the system, you would have just been thrown off the bus."
However, he states in 2006 a lot of people did start to see a lot of things were wrong, with some taking positions against the subprime market. But few people paid credence to those issuing warnings.
"They thought it would not come to an end or that it was feasible that a market could come to an end. No-one cared and no-one wanted to believe it. But all the warning signs were there, but they not heeded.
"There was a certain euphoria that everyone got caught up in - from the bankers right down to the consumers - and the feeling the market would never end.
"There were arguments, but no one wanted to believe it. No one could afford to believe it, because they had so much of their personal interest behind it."
Capitalism gone barking mad
Despite the title of the book, Ishikawa explains he was not solely responsible for the credit crunch.
"We are all responsible in our small way. No one wants to take responsibility. It was a collective thing," he says.
The former banker claims capitalism was taken to an extreme where it was "barking mad", but that is the danger of capitalism that will return as people look at ways to make money.
"Was I responsible for it? Yes I was in the market. Bit the whole point of the title was to be ironic and say not one person could have caused such a failure on an unprecedented scale.
"I do think it can happen again. It is human nature to look for opportunities - one of the strengths and one of the worst traits. We can create a system and bring in legislation and for two generations we will be fine.
"But another generation will not have the understanding of what happened in the credit crunch and it could very well happen again."
And to the future of the securitisation markets at the root of the crunch?
"I think it is important to highlight that securitisation as a model has been extremely valuable. In principle is a very good way of distributing risk in the markets to people who could absorb them.
"But it has to be conducted in a certain way. The market will come back, but will not be as large and will have a role to play. It is not a wacky science."
He adds many of banking solutions issued by the world's governments are derivations from securitisation.
How I Caused The Credit Crunch by Tetsuya Ishikawa, published by Icon Books, is out April 16th.
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