It’s easy to forget the extent of change that has happened in banking and global markets over the past three decades. It’s also easy to ignore the fact that, despite the global financial crisis of 2008, and numerous peaks and troughs along the way, most of that change has been positive — not least in the way that technology has allowed the financial markets to enjoy an unprecedented wave of globalisation.
Through his career at Merrill Lynch, Bankers Trust and Deutsche Bank — at the latter, he ran the world’s most successful global foreign exchange business for a number of years — Kevin Rodgers had not just a front-row seat at but was also a principal actor in this era of seismic change. His book Why aren’t they shouting? documents the transformation of financial markets from his own first-hand experience.
The subtitle of the book, A banker’s tale of change, computers and perpetual crisis, barely does justice to wealth of information and insight that it contains. Rodgers splits his story into three distinct parts: first, the evolution of the FX markets, where Rodgers started out as an options trader, from the low cunning of the voice broker to the high technology of the code wars and an era in which every micro-second counts; second, how technology spawned an era of complexity that played a crucial role in creating the financial crisis; and third, Rodgers’ view — now from the comfort of retirement — on how bankers and regulators can harness the power of technological change but minimise the risk of creating conditions for another financial crisis on a global scale.
Rodgers concludes his concise but fascinating history of the evolution of FX markets in philosophical mode: “The FX market is a paradox. For all our efforts, for all the expense, has society benefited that much from a market that can turn over the entire value of the GDP of the world in two weeks? I am not sure…The Prisoners’ Dilemma caused by the power of computers prompted us all to push the market to a new, shaky equilibrium.”
One of the most interesting sections of the book is how Rodgers saw first hand, in his days as an emerging markets trader at Bankers Trust in the late 1990s, how the Asian, Russian and LTCM crises of that era were effectively dry runs for the much bigger sub-prime crisis of 2008 — and how the rise of technology played an important role in each.
But the warnings of LTCM in particular were not heeded. Banks thrust themselves headlong into a world where computers could generate all the answers through Monte Carlo simulations, Gaussian copulas, and VaR calculations. That led, inevitably, to the creation of ever more complex products — or, as Rodgers puts it, the need to create assets above all else, from weather derivatives during Munich’s Oktoberfest (which Rodgers himself oversaw) to collateralised debt obligations (which he did not). He writes: “There was a strong feeling in Deutsche’s investment bank, in common with most of our rivals, that complexity was good and that the cleverness needed to create it would be rewarded.”
As Rodgers nears his retirement in the summer of 2014, he understands but is nevertheless saddened by the new culture of oversight and compliance that the industry has had to adopt. Indeed, his very last task as global head of FX at Deutsche and is to go through the daily list of warning flags sent to him by compliance. “At some point, the regulators need to make it plain when a bank has done enough surveillance and when the burden of responsibility has passed to the employee alone,” he argues.
Of course Euromoney plays a prominent role in the book, as through the late 1990s and first decade of the new millennium Deutsche sought to establish itself as the leading global foreign exchange sure — which meant, more than anything, ranking number one in this publication’s annual FX survey.
When Deutsche — slightly to its own surprise — first wins the survey in 2000, Rodgers writes: “The win set off rejoicing the likes of which I had never witnessed. There were messages of congratulations from every senior manager up to and including the CEO. Beautifully designed posters went up all over the building saying ‘Deutsche Bank - Number One in FX’. ‘Bloody hell,’ said an ex-Bankers Trust friend of mine who, unlike me, was unused to such hoopla, ‘it’s like we all went to sleep and woke up in North Korea’.”
It’s just one anecdote in a book that is full of them from a talented writer whose work is a welcome addition to the panoply of must-read titles about banking before, during and after the crisis, such as The Big Short and Too Big to Fail — with the added bonus that it’s written by someone who was actually at the centre of the industry at the time.
Why aren’t they shouting?, by Kevin Rodgers, is published by Penguin Random House.