It’s 2020. Charlie Sanford is 83. His vision of finance, revealed to us in the mid-1990s, has become a reality. The financial sector no longer thinks in terms of dollars and cents, but in units of risk: one Cat (catastrophe) equals 20 fat tails equals 250 SDs (standard deviations), equals 150 Vars (values-at-risk) or a 50-50 chance that the price will go either up or down.
Everyone is a risk manager: the bus conductor, the fireman, the librarian or deep-sea fisherman, they must come to terms with a level of risk that they are comfortable with, and pass the rest on to someone else.
La Banque Imaginaire (the virtual bank) is there to lay off those layers of risk with which they are not comfortable, or to add some more, according to their appetite. For example, the bus conductor may wake up one morning and decide he doesn’t want to go to work on his boring old bus. He calls the Banque Imaginaire: 0100 0100.
Banquier Imaginaire (BI): Good morning, how can I help you?
Conductor: I don’t want to go to work this morning.
BI: Excellent, sir, I have just the thing for you. I can structure you a nice instrument that protects you from the hassle of going to work.
Conductor: What exactly does it do?
BI: It gives the net present value of your worth to your employer and pays that out to him, in the event that you don’t show for work.
Conductor: How much will that cost me?
BI: One standard deviation, plus a small cover charge that we make, of 2 Vars.
Conductor: And how much does it pay out?
BI: Looking at your details on the screen here, er, nothing.
Conductor: Nothing? How can that be?
BI: You’ve just been fired.
The Banque Imaginaire has no capital, no reserves and no permanent staff. Its permanently outsourced chairman, Jean-Baptiste LeGrand, 20 years ago reached the conclusion that every risk position can be expressed as an option, or as an option on an option. “If I have an option to pay in capital,” he is famously remembered as saying, “then I can decide to pay in no capital at all.” The bank has optional shareholders and optional premises at the Savoy Hotel, but it resides in no jurisdiction and is unregulated. That hasn’t prevented it from being extremely popular, since its assets and liabilities are expressed in optionalities, not hard cash. It can be contacted by voiceline 24 hours a day and its address is www.bancimaginaire.com.
Lateral thinking is a hallmark of the bank, and of its founder LeGrand. A company that needs fresh capital to launch a new product or expand its premises may find itself required by the Banque Imaginaire to take on some unusual risks such as the risk that between 14 and 18 earth tremors will be felt in the Sapporo region in 2026. The premium, measured in fat tails, raised from this assumed exposure, should pay for the firm’s new investment. In six years the company will be indifferent to the worst-case outcome in Sapporo, or so it believes. The genius of the Banque Imaginaire is to find a market for such risks. LeGrand won’t give too much away. But he hints that trawling the internet reveals many risk-takers willing to exchange one risk for another, to alter their risk profile in accordance with their risk appetite, on the basis of optional capital, allocated or not allocated.
LeGrand is careful to distinguish his operation from that of La Banque des Pyramides which came to grief after heaping risk on inappropriate risk in a scam of colossal proportions. Nor is he happy when any comparison is made with the Banque des Invalides, whose operations he dismisses as those of “grandiose illusionists and faith-healers capitalizing on the blind trust of sick and dying people the bottom-feeders of the risk-pool”.
The Banque Imaginaire is a caring bank.
For example, the fireman’s needs are not exactly material but he wants some greater certainty about his future as a fireman and the hazards that he faces every day. A job for the Banque Imaginaire.
BI: Good morning, how can I help you?
Fireman: I want to know, should I bother to book a holiday in Biarritz next year?
BI: Excellent, sir. I can arrange a Monte Carlo simulation for you. And the time-horizon in this case would be nine months, if I’m not mistaken. Bear with me for a moment [even in 2020, Monte Carlo simulations take a few minutes]. Yes, I have an answer for you here. The lognormal probability distribution suggests that you will die in a bush fire before next Easter. You can save yourself the holiday.
Another happy customer. The Banque Imaginaire aims to optimize the risk/reward ratio, not in dull financial terms, but in terms of wish fulfilment and quality of life. That goes from the lowliest retail customer to the loftiest corporate client, such as the Russian army.
In the early 21st century the Russian army decided to overhaul its risk-profile completely. Those former Soviet marshals and generals, who were floundering in the new world order, looking for a wider, peace-keeping role, needed reassurance and advice. How wise of them to call the Banque Imaginaire. By arranging a series of armaments-for-non-aggression swaps LeGrand and his team were able to reconfigure the security landscape of the entire CIS region, emptying the former Soviet arsenals of much unstable hardware for which good homes were found all over the world.
Beware of false imitations. Several multinational banks INGCommerz and DLJDresdner have attempted to break into this market with similar inspired leaps of the imagination. But they have simply been unable to break the mould. A simple telephone call will show that they are still hidebound by traditional financial conventions such as credit limits and security. That is not the spirit of 2020. The Banque Imaginaire rejuvenates itself daily from experience at the grass roots level.
For example, you might think that the everyday life of a librarian is not very fertile ground for the risk manager. On the contrary, the librarian’s day is actually full of tiny raised hopes and dashed expectations which play havoc with her soul. The Banque Imaginaire can naturally lend a hand:
BI: Good morning, madam, how can I help you?
Librarian: Young man, I have dropped my handkerchief several times this month by the desk of a tall, dark stranger who has ordered up every book in print on late Merovingian love poetry. My heartbeat goes up to 160 every time I see him.
BI: Excellent madam, I think we might be able to smoothe out this volatility for you.
Librarian: Wonderful. But how on earth can you do that?
BI: It requires very exact and careful modelling. We can create for you someone who is short, blond and extremely familiar to you, someone who, when you see him, makes you practically comatose with loathing and ennui. Sit him right next to lover boy and you have in place the perfect hedge.
Librarian: I love you.
The Banque Imaginaire has wings and will fly. One of its early admirers was sexagenarian Jacques Attali who almost got the same concept off the ground a decade earlier. Unfortunately his project became bogged down in material matters such as Carrara marble and first-class air tickets. The Banque Imaginaire, as its name suggests, requires a leap of imagination into the second half of the 21st century, to a time when the concept of money is moribund and value is measured in expectations.
Its activity in the wholesale market is no less imaginative. It has put together virtual syndicates for some of the most spectacular projects so far this century the dismembering of the Millenium Dome for reassembly on the Moon (2 Cats); the underwriting of the 2018 Tirana Olympics (14 Fat Tails); and the 25-Cat reconstruction of the city of Tokyo.
LeGrand is a modest, quietly spoken, former professional snooker player. “I often see life in terms of billiard balls,” he says. “They cannon off each other. They make all kinds of pretty patterns. You think you can predict and even determine where they will end up, and many times you can. But Lady Chance plays a role, even on such a level playing field, and the best player can screw up.” To illustrate the point he scrunches up a sheet of paper, drops it on his foot and kicks it towards a 21st century-style waste-paper basket. It misses.
Nine times out of 10, however, the Banque Imaginaire will apply its skills quantitatively or qualitatively in a totally original way and leave the customer wiser if not happier.
In one final example: the deep-sea fisherman has a risk appetite second only to that of the blind downhill racer. What can the Banque Imaginaire possibly provide for him that he can’t find already in the finny wastes off Newfoundland? The fisherman would like to test his boat in a 100-year storm but doesn’t want to hang around for another 47 years for the next one to come along. Such are the advances in non-linear mathematics that the Banque Imaginaire can certainly help him.
BI: Your upfront fee of one Cat or 25 standard deviations will pay for the release of a single butterfly off the coast of Pangkor in northern Malaysia. By our calculations this will create exactly the conditions to bring next year’s hurricane Ernest into collision with a storm front off the Georges Bank in late October. Be there.
Fisherman: Yiii-haaa!
