QUOTES

21 " Captain Renault: I’m shocked, shocked to find that gambling is going on in here! [a croupier hands Renault a pile of money] Croupier: Your winnings, sir. Captain Renault [sotto voce]: Oh, thank you very much. Captain Renault [aloud]: Everybody out at once! CASABLANCA, Warner Bros, 1942 We were all appalled and shocked when we heard about these allegations yesterday. I have to tell you that I am sickened that these events are alleged to have happened. Not just because I was editor of the News of the World at the time. REBEKAH BROOKS, chief executive, News International, in a memo to staff, 8 July 2011 After "

― , Other People's Money: The Real Business of Finance

22 " David Viniar, CFO of Goldman Sachs, claimed as the global financial crisis broke in August 2007 that his bank had experienced ‘25 standard deviation events’ several days in a row. But anyone with a knowledge of statistics (a group that must be presumed to include Viniar) knows that the occurrence of several ‘25 standard-deviation events’ within a short time is impossible. What he meant to say was that the company’s risk models failed to describe what had happened. Extreme observations are generally the product of ‘off-model’ events. If you toss a coin a hundred times and all the tosses are heads, you may have encountered a once in a lifetime statistical freak; but look first for a simpler explanation. For all their superficial sophistication, the masters of the universe had no real understanding of what was going on before them. "

― , Other People's Money: The Real Business of Finance

23 " Figure 1: The incidence of banking crises Source: Own calculations, based on the reported numbers of major bank failures in OECD economies, from Reinhart and Rogoff (2010) "

― , Other People's Money: The Real Business of Finance

24 " Why should I care about posterity? What has posterity ever done for me? attributed to GROUCHO MARX, but also credited to various eighteenth-century English figures "

― , Other People's Money: The Real Business of Finance

25 " The payments system is the heart of the financial services industry, and most people who work in banking are engaged in servicing payments. But this activity commands both low priority and low prestige within the industry. Competition between firms generally promotes innovation and change, but a bank can gain very little competitive advantage by improving its payment systems, since the customer experience is the result more of the efficiency of the system as a whole than of the efficiency of any individual bank. Incentives to speed payments are weak. Incrementally developed over several decades, the internal systems of most banks creak: it is easier, and implies less chance of short-term disruption, to add bits to what already exists than to engage in basic redesign. The interests of the leaders of the industry have been elsewhere, and banks have tended to see new technology as a means of reducing costs rather than as an opportunity to serve consumer needs more effectively. Although the USA is a global centre for financial innovation in wholesale financial markets, it is a laggard in innovation in retail banking, and while Britain scores higher, it does not score much higher. Martin Taylor, former chief executive of Barclays (who resigned in 1998, when he could not stop the rise of the trading culture at the bank), described the state of payment systems in this way: ‘the systems architecture at the typical big bank, especially if it has grown through merger and acquisition, has departed from the Palladian villa envisaged by its original designers and morphed into a gothic house of horrors, full of turrets, broken glass and uneven paving.’6 "

― , Other People's Money: The Real Business of Finance

26 " France and Germany are, among the countries with large financial sectors, the ones where anti-market rhetoric is strongest. But they are also the countries that have done the least to implement substantive financial reform since the global financial crisis. The principal reason is the instinctive corporatism of both countries, which equates the national interest in financial services with the interests of large national financial services firms. Thus the voice of Deutsche Bank is transmitted as the voice of Germany, not just in domestic German policies but also (and especially) in German positions in international financial negotiations. Germany’s policy positions are also compromised by the local political links of its many regional and community banks (links that have positive as well as many negative aspects). In France the homogeneity of an elite that glides easily from boardroom to cabinet table and back reinforces the sense that its state and its national industrial champions are one. And since France and Germany are the two most influential members of the European Union, the corporate influence extends to the conference rooms of Brussels. Little "

― , Other People's Money: The Real Business of Finance

27 " Yet it is intrinsic to oligarchy that oligarchs are a small minority, a point graphically made in the ‘Occupy Wall Street’ slogan of ‘We are the 99 per cent’. But it is easier to identify what the 99 per cent are against than what they are for, an incoherence typical of the swell of unfocused public anger that followed the global financial crisis: anger with the finance industry and with the political failure to anticipate the crisis or respond effectively to it. Most countries ejected the governments—whether left or right—that had held office during the crisis. But that made no material difference to public policy towards the finance sector. In the absence of any intellectual framework for such policy beyond a call for ‘more regulation’, how could it? Perhaps "

― , Other People's Money: The Real Business of Finance

28 " People who applaud traders for providing liquidity to markets are often saying little more than that trading facilitates trading "

― , Other People's Money: The Real Business of Finance

29 " Yet perhaps the most surprising source of high fees for corporate advisory work is in the new issue market, since the percentages are not small and the money often comes from the pockets of founders and early shareholders. In the USA, 7 per cent is a standard fee for an IPO (initial public offering), and rarely discounted (European fees are typically lower and more variable).5 But no evidence of a cartel has been produced, and probably none exists—there is simply a strong perception of collective interest in maintaining the status quo. Regulation "

― , Other People's Money: The Real Business of Finance

30 " But simple consumer reluctance to switch providers is a major obstacle to competition in retail financial services. It is a well-known joke in the industry that customers change their spouses more often than their banks. They all seem the same: why transfer your loyalty from Tweedledee to Tweedledum? This inertia on the part of retail buyers is common across all financial products. Credit cards have consistently been one of the most profitable retail banking products. Bank of America, ‘first mover’ in this industry, continues to hold a strong position, despite aggressive attempts by entrants to solicit new business. Many people just do not like buying financial services, and minimise the time and effort they devote to their purchase as a result. The days when retail customers of financial services were rewarded for their loyalty are long gone. The replacement of a relationship-based culture by a transaction-based one means that the best deal is almost always obtained by shopping around aggressively rather than by building trust. Customer perceptions have lagged behind this harsh reality. But "

― , Other People's Money: The Real Business of Finance