Tag Archives: Tom Wolfe

Episode 10. Where real men make real money



Stories shape our world, and stock markets are no exception. This episode explores the entanglements of fiction and finance, from Robinson Crusoe to American Psycho. We discover how Tom Wolfe cut a deal with Wall Street, making finance male, rich and white, and see how the concept of ‘smartness’ perpetuates elitism and discrimination in Wall Street recruitment. A better stock exchange is going to need a better story; in this second half of my podcast series we’ll be discovering just that.

 

Transcription

Imagine the financier. What does he look like? It’s going to be him, for reasons I’ll come to shortly. He’s white, of course. I wouldn’t be surprised if he has a striped shirt and braces – suspenders if you prefer – a perma-tanned face and slicked back hair. He opens his mouth, and you know what’s coming. Yes, greed is good…

It’s Gordon Gekko, a face and a speech burned into our collective imaginings of finance by Michael Douglas’ spellbinding performance. It’s not even a very good film, but it hit the cinemas just a few weeks after the crash of 1987 – where I wound up the last episode at the beginning of the summer – and captured the popular imagination. Gekko, Master of the Universe. We all know that phrase. It comes from Tom Wolfe and his Bonfire of the Vanities. You remember Wolfe’s description of the trading room at Pierce & Pierce, behind the faux English fireplace and club armchairs:

‘a vast space… an oppressive space with a ferocious glare, writhing silhouettes, and the roar. The glare came from a wall of plate glass that faced south, looking out over New York Harbor, the Statue of Liberty, Staten Island, and the Brooklyn and New Jersey shores. The writhing silhouettes were the arms and torsos of young men, few of them older than forty. They had their suit jackets off. They were moving about in an agitated manner and sweating early in the morning and shouting, which created the roar. It was the sound of well-educated young white men baying for money on the bond market.’

This is where men made money, where real men made real money, a supercharged, 1980s version of the heavy industry that had defined a previous generation of masculinity: blue collars and half-moons of perspiration seeping through the shirt, but the shirts are Brooks Brothers, and the rivers in the background run with money, not molten steel. The trading room Wolfe visited for his research was none other than that of Salomon Brothers, where the biggest of all ‘big swinging dicks’ hung out. That phrase is from Michael Lewis’s celebrated Liar’s Poker, his first person account of the buccaneering heyday of Salomon trading in the decade of greed.

These icons of finance are fixed in our collective narrative imagination.

Ironically, true greed doesn’t seem nearly as glamorous as Douglas, Wolfe and Lewis make out. A more fitting exemplar of contemporary elite finance would be the lovable, Latin-quoting everyman Jacob Rees Mogg (described by my friend, an actual classicist, as a ‘faux aristocratic, xenophobic, hedge fund… well, I’ll let you guess the last word), a walking self-parody seen lounging on the front bench of the House of Commons as if it were his private sofa.

Or Martin Shkreli, the former fund manager, self-styled bad boy ‘Pharma Bro’, and capitalist provocateur, who shot to notoriety for buying the rights to an essential HIV medicine and putting the price up by 5000%. Shkreli disgraced himself further by refusing to answer questions in a Congressional hearing and instead leering like a teenager given detention at school but determined not to lose face.[1]

Here he is, interviewed by Forbes, explaining what he would have done differently next time.

——

Shkreli voice [2]

——

That’s right. He would have put the prices up more. It was his fiduciary duty to go to 100% of the profit curve, because that’s what they taught him in MBA class. It’s worth watching the video (and you can find the link via the transcript on the podcast website) to see Shkreli hunched over in his hoodie, unable to make eye contact with anyone in the room. This is a man who spent $2 million at auction to buy a one-off Wu Tang Clan album only to have it repossessed by the Federal Government. Who wound up with a prison sentence for fraud, having swindled his investors, and was then – allegedly – slung in solitary confinement for running his hedge fund from prison using a contraband mobile phone. Master of the Universe he is not.

Rees Mogg and Shkreli are characters that you couldn’t make up, or at least you wouldn’t bother doing so. The real stories here are something else, the narratives working in the background, a dream of buccaneering Britain in an ocean of free trade, or the fiducary duty to shareholders, right to the end of the profit curve, no matter what cost. These are the fictions that shape our world. Stories matter.

—-

Hello, and welcome to How to Build a Stock Exchange. My name is Philip Roscoe, and I teach and research at the University of St Andrews in Scotland. I am a sociologist interested in the world of finance and I want to build a stock exchange. Why? Because, when it comes to finance, what we have just isn’t good enough.

If you’ve been following this podcast – and if so thank you – you’ll know that I’ve been talking about how financial markets really work, and how they became so important. I’ve been deconstructing markets: the wires, and screens, the buildings, the politics, the relationships, the historical entanglements that make them go, all in the hope of helping you understand how and why finance works as it does. In the second part of this podcast series, I’ll be looking at the stories we tell about the stock market. You might be surprised how much influence stories have had on the shape and influence of financial markets from Daniel Defoe to Ayn Rand. I’m trying to grasp the almost post-modern nature of finance, post-modern long before the term was invented, the fact that finance is, most of all, a story. Start-ups are stories, narratives of future possibility; shares and bonds are promises based on narratives of stability and growth. Even money is a story, circulating relations of trust written into banknotes, credit cards and accounts. Stories set the tone, make the rules, determine what counts and what does not. A good stock market needs a good story, so if we’re serious about rebuilding financial institutions then we need to take control of those stories.

Stories matter.

In previous episodes I have suggested that the evolution of finance was driven by erratically developing technologies and political struggles and alliances. This is true, and helps us understand the chaotic history of stock markets and undo neat linear histories of economic and technological progress that lead inexorably to the world of digital high finance, as though there were no other possibility. A sort of Francis Fukuyama does finance, if you will. But it underplays the enormous role played by writing in the development of finance we know today. The literary scholar Mary Poovey has written extensively on the topic, and her 2008 book Genres of the Credit Economy is undoubtedly a masterpiece. Her basic claim is that from the seventeenth century onwards imaginative writing – and there was not, back then, stark demarcation between fact and fiction – helped people to understand the new credit economy and the kinds of value that operated within it. Financial markets are underpinned by styles of writing, and a primary function of writing was to help people get used to the idea of finance. For example, take such mundane financial objects as banknotes and cheques, ledgers and contracts. These are things we use every day. They are written things, but we don’t see that. Money has been so thoroughly naturalised that its identity as writing has disappeared, embedded instead in social processes. Even the written promise to pay is disappearing from banknotes – you can still find it on Bank of England notes but the euro carries only a serial number.

In the seventeenth century, however, these kinds of abstractions were problematic for a population that had always dealt in coinage, in specie. The developing genre of fiction, says Poovey, helps readers to practice trust, tolerate deferral, evaluate character and believe in things that were immaterial, all essential skills for negotiating this market world.

Three hundred years ago, Defoe published Robinson Crusoe. I read this for the first time just a few weeks ago, and cor-blimey, it is not the tame story we learned in primary school: there’s slavery and cannibalism, white supremacism and European-Christian expansionism. Even here we see a pecking order – though Crusoe is not too keen on Catholics, he has no time for them being eaten by heathens. Crusoe gets religion in a big way. And he just shoots everything! No sooner does an endangered beast lumber or roar into view than Crusoe has bagged its hide as a trophy, or as the story progresses, perhaps a hat. He is a model industrious citizen, an archetype of the petty bourgeoisie. He etches a calendar on a post and keeps books of account in a ledger scavenged from his shipwreck. In sum, Crusoe imposes the worldview of any good seventeenth century Englishman on his tiny island dominion, where he eventually becomes king over a growing and hard-working population. No wonder Marx had such fun with him!

Daniel Defoe did not just write Robinson Crusoe. Defoe was a central figure in an era sometimes called the ‘Age of Projects’. A prolific author of fiction and non-fiction, one of the first to earn a living from his pen and shape the world as he did so. Valerie Hamilton and Martin Parker, scholars who work in my own field, have drawn attention to the parallels between Defoe’s fictions and the rash of corporations that emerged in the same period.

‘The figure of Daniel Defoe,’ they write, ‘inventor, businessman, writer, politician and secret agent, characterises the age. His first published work, An Essay upon Projects (1697) bottles this energy. It is a series of proposals for the social and economic improvement of the nation – on banks, lotteries, women’s education and many other topics. Defoe explains that the richness of ideas at this time was generated from ‘the humour of invention’, which produced ‘new contrivances, engines, and projects to get money’’. Defoe defined a project as a vast undertaking, too big to be managed, and therefore likely to come to nothing.  Crusoe’s task is a project, the unlikely, implausible but ultimately fruitful endeavour of turning brute nature into a well-disciplined, productive domain.

For Hamilton and Parker the project is epitomised by corporations, and particularly the Bank of England, which grew from the chatter of a few traders in Jonathan’s coffee house, as we saw in episode three, into a building of, as they put it, ‘timeless rusticated stone’, solid and substantial in the heart of the City of London.[3] I should say, by the way, that you will find full references in the transcript on the podcast webpage.

For Poovey, Defoe’s project was nothing less than the attempt to incite belief through print. ‘In the realm of fiction,’ she writes, ‘the negative connotations associated with invalid money were neutralised by the claim that imaginative writing did not have to refer to anything in the actual world; in the realm of economic theory, the fictive elements intrinsic to credit instruments were neutralised by the introduction of abstractions, which would claim simultaneously to be true and not to be referential.’[4] More plainly, as novelists like Defoe sought to distinguish themselves by refusing to be held to account for the factual content of their stories, so money rode on their tail-coats. A growing cadre of financial journalists aimed ‘to demystify the operations of the city and make even the arcane language of finance familiar to ordinary Britons helped make economic theory seem relevant to everyday life and, not incidentally, make investing in shares in acceptable thing to do with money.’ Walter Bageshot (pronounced badshot) was the exemplar of these men, an early and influential editor of the Economist magazine. Last of all came the experts, the economic theorists, like Stanley Jevons (a distant cousin of mine) whose flights of marginalist fancy and economic scientism, depended both on the existence of dispassionate, factual writing and the availability of abstraction, even the suspension of disbelief, tools assiduously cultivated by the novelists.

We can push the argument further. Marieke de Goede argues that the very existence of the economy, or ‘finance’, as a zone separate from the political and amenable to scientific analysis, is the result of enormous storytelling, narrative work. For her, finance is ‘a discursive domain made possible through performative practices which have to be articulated and re-articulated on a daily basis’. Her examples include the construction of the Dow Jones index, a process that took considerable narrative work. The Dow Jones, or the FTSE, or any other such index, give us a way of talking about stock markets as if they were cut off from the rest of society, distilling them down to a single number, abstracted from all other concerns. As we saw in episode eight, these new narratives – these new numbers – are quickly wrapped up in the wires and screens of the market, forming a sealed, self-contained and self-referential whole.

Or even further: Max Haiven, the Canadian cultural critic, has written about the fictitious nature of money and the role of finance as ‘capital’s imagination’: ‘we are already making a mistake when we take umbrage at the staggering gap between the imaginary world of financial values and what we imagine to be a more real monetary economy. Finance is only a more complicated moment of the capitalist extraction of value. But this abstraction of value is always already at work whenever we speak about resources, social processes, and society in monetary terms.’ [5]

—–

So we can start to see why this all matters. Stories persuade us that some things are normal, and that others are not; that some things matter and that some things do not. They can even persuade us that certain things are inevitable, when they need not be. The cultural critic Mark Fisher quipped that it is easier to imagine the end of the world than it is the end of capitalism. You only have to watch Spielberg’s Ready Player One to see such a vision in action: society collapsed, but the online retail of high-tech goods amazingly unaffected.

As you might have gathered, much of this cultural criticism has a Marxist bent, but it has been equally perceptive on gender and race. When Michael Lewis talks about the big swinging dicks of the forty-first floor, he does more than make us laugh. Lewis’ book is one of those all too common morality tales that end up eulogising the thing they set out to censure. It is no surprise that scores of undergraduates, keen to make their way into the ritzy world of investment banking, took up Liar’s Poker as a kind of how-to guide; even though, as Lewis makes plainly and comically clear, his own intro into that world comes entirely through personal connection and lucky chance. At the beginning of this episode I suggested that the financier we imagined would almost certainly be a he, and there is a reason for this. In the stories, it’s always he: from those Big Swinging you-know-whats, to the well-educated young men of Pierce & Pierce, baying for money in the bond market.

——

Traders shouting[6]

—–

Tom Wolfe is a particularly bad offender here. Literary scholar Leigh La Berge argues that Bonfire of the Vanities, released days before Black Monday, helped to ‘cement an aesthetic mode that captured the way a new financial class was beginning to identify itself and its economic object.’ The book’s historical realism self-consciously mimics the great realist novels of an earlier era, of Dickens or Balzac: a new city, a new age, with all its vanities and perils, needing a new chronicler.

Wolfe paints finance as complex, a world of leverage buyouts, bond yields, and other such exotic, risky, dangerous creatures; a world accessible only to the ‘masters of the universe’ who inhabited it, and needing the intermediation of a white-suited literary giant to make it legible to the rest of us.

Wolfe makes clear the difficulties involved in representing an exclusive, elite financial world. And yet, says La Berge, ‘Bonfire includes a careful cataloguing of the difference between styles of town cars, codes of cordiality and comportment on the bond trading floor, rules for private school kindergarten admission, and how to hold the Wall Street Journal in public space… What those who had allowed Wolf to observe them received as compensation was a conception of finance as complicated, difficult, hard to define, and reserved for wealthy white men.’ La Berge suggests that Wolfe made a pact with Wall Street. In return for the access he needed, he would take their performances of finance at face value. his prose is littered with exclamation marks, onomatopoeic grunts and groans: ‘Wolfe records sensations of speed, sexual excitement, anxiety and pleasure. In this world of masculine sensation, finance finds its form. Men understand it. As he glares at his wife across the table, alternately planning a bond sale and justifying his affair to himself, Sherman thinks: “Judy understood none of this, did she? No none of it”.’[7]

Wolfe got his ‘masters of the universe’ slogan, from Michael Lewis, and the two wink at each other in their texts: the great interpreters of the excesses of 1980s finance capitalism. Two decades on, and Lewis is still banging the same drum: another crisis, another translation needed, another reproduction of finance as gendered and complicated. The film version of Lewis’ The Big Short, directed by Adam McKay, is even more overt in its presentation of men as cool, rational and in command, and women as distracting and dangerous. Think of the scene where the leading short seller interrogates a topless dancer in a private room as to the viability of her mortgage payments. By the end of the conversation she has stopped dancing, her voice cracked with panic, while our hero calls the office to strike a deal. ‘There’s a bubble’, he says. Gavin Benke, who points this out, notes the very old conceptions of who should and should not participate in the market, concerning not just gender but also class and smartness, all circulating under the surface of the narrative.[8]

The problem is that life imitates art. Literature is too clever, too self-aware to fall into the trap. It tears apart such realist simplicity – think American Psycho’s gruelling banality as non-descript bankers chat about consumer goods and endlessly re-articulate the social mores of which Wolfe is so proud – how to wear a pocket square, for example – interspersed with almost unutterable depictions of depravity and murder. Who could write realist fiction on finance now? But finance self-consciously reproduces these tropes: meetings conducted in strip joints and clients entertained by prostitutes, foul mouthed masculinity and a repertoire of bodily metaphors involving penetration, the steely disposition of the screen trader who pukes in the bin after taking a particularly bad loss and goes on scalping without further pause. All these are examples collected by empirical sociologists, things observed or stories heard in the field. Such narratives police who and who may not enter the market: ‘The stories that they tell and the heroes that they consequently install recreate a world where risk remains unruly and untamed, and stewards’ dreams of stability are there to be exploited,’ write Simon Lilley and Geoff Lightfoot, ‘The steward is seemingly driven to the market by a desire to minimise the potential disruption resulting from the market’s movements. The speculator, however, chooses to go there and to go only there, making their living through better understanding their home than visitors.’[9] Remember, from episode two, Jadwin, the buccaneering speculator in Norris’ great Chicago novel, locked in combat with the market as monster, all maw and tendrils; such metaphors tell how we place ourselves in relation to the world around us. Perhaps financiers better conceive of themselves as hunters, the aboriginal inhabitants of the stock markets. After all, a common expression for those working on a commission basis is ‘eat what you kill’.

Whichever way, no girls allowed here.

These norms are inculcated in financiers before they even get hired. The anthropologist Karen Ho documents the Wall Street recruitment process on the Princeton university campus, seen from her peculiar insider-outsider perspective of Princetonian, but postgraduate student, female and Asian American. She finds these old ideas of who should and who should not participate in the market very much alive. They fasten around the notion of ‘smartness’. Potential recruits are constantly reminded that they are the smartest of the smart, but Ho sees through any claim to intellectual resources. Instead, it means something quite specific:

‘such characteristics as being impeccable and smartly dressed, dashing appearance, mental and physical quickness, aggressiveness and vigour reference the upper-classness, maleness, whiteness and heteronormativity of ideal investment bankers…the specific elitism that is the key valence of smartness…’

And it helps to have been educated at Harvard or Princeton too. Being British, I don’t recognise the fine distinctions between elite American institutions, but Wall Street recruiters do. If you go to Yale, for example, you need to be studying economics; at Penn State it has to be the Wharton School of Business.

‘It is precisely these differentiations between ‘always already smart’ and ‘smart with qualifications,’ between unquestioned, generic and naturalized smartness and smartness that must be proved, that enact and solidify the hierarchies on which elitism is necessarily based.’[10]

Nothing is without purpose in these stories. Ho suggests that this endless recruitment of the smartest of the smart, even when more established employees are being laid off in shrinking markets, serves to bolster the position of Wall Street relative to its clients in corporate America. For if the smartest of the smart are hired by investment banks – even if they do arrive to a drudgery of all-night shifts in rundown and non-descript offices – by definition those hired by corporate America must be less smart. By an easy logical extension, they must do what they’re told and pay the bankers fees. More than this, the stringent selection process, combined with toxic and insecure working conditions persuades bankers that such macho environments need to be spread elsewhere. This, argues Ho, offers a moral justification for the endless corporate manoeuvres, takeovers, and restructurings that Wall Street imposes on its clients across the nation. Paired with the notion of shareholder value, the ‘origin myth of Wall Street’, these fictions licence investment banks to do what they do best: make money. As we saw from Shkreli’s self-justification, the fiduciary duty to shareholders mandates any course of action, however morally despicable.

—–

Stories shape the way we see the world. They underpin stock markets and everything that flows from them. Many of the problems we face, from populist politics to environmental degradation to the structural inequalities that beset the developed world today, flow from the stories of markets. They flow, for example, from the astonishingly persistent and corrosive narrative of shareholder value that we have just seen at work, taking medicines out of the reach of those who need them and creating insecurity, unhappiness and unemployment worldwide. We desperately need a new narrative of finance and markets: a narrative of building, mending, and making. We need institutions able to support this kind of activity, to pursue new modes of organisation that are not quite so wantonly destructive as the global corporation beholden only to its shareholders. So let me tell you another story, a set of stories in which I am myself caught up. They’re not exemplary, but they might be illuminating and even amusing. It’s a project, as Defoe might have said: a vast, uncertain, unmanageable and even foolhardy endeavour. I’m sure you’ll let me know what you think, but be kind: it’s a risky business, sharing.

I’m going to tell you the story of two stock exchanges, started in 1995, and how they did so much to create the world into which I tumbled as a naïve, cub reporter: the grimy underbelly of one of the greatest financial centres on earth.

I’m Philip Roscoe, and you’ve been listening to How to Build a Stock Exchange. If you’ve enjoyed this episode, please share it. If you’d like to get in touch and join the conversation, you can find me on Twitter @philip_roscoe or email me on philiproscoe@outlook.com. Thank you for listening, and see you next time.

 

 

 

[1] https://time.com/4207931/martin-shkreli-congress-turing-pharmaceuticals-hearing/

[2] https://www.youtube.com/watch?v=NS9blbLrKv4

[3] Valerie Hamilton and Martin Parker, Daniel Defoe and the Bank of England: The Dark Arts of Projectors (Zero Books, 2016), 11.

[4] Mary Poovey, Genres of the Credit Economy (Chicago: University of Chicago Press, 2008), 89.

[5] Max Haiven, “Finance as Capital’s Imagination? Reimagining Value and Culture in an Age of Fictitious Capital and Crisis,” Social Text 29, no. 3 (108) (2011): 94.

[6] Traders shouting, under creative commons licence from https://freesound.org/people/touchassembly/sounds/146320/

[7] Leigh Claire La Berge, Scandals and Abstraction: Financial Fiction of the Long 1980s (Oxford: Oxford University Press, 2015), 88f.

[8] Gavin Benke, “Humor and Heuristics: Culture, Genre, and Economic Thought in the Big Short,” Journal of Cultural Economy 11, no. 4 (2018).

[9] S Lilley and G Lightfoot, “Trading Narratives,” Organization 13, no. 3 (2006): 371.

[10] Karen Ho, Liquidated (Durham: Duke University Press, 2009), 41, 66.


Episode 7. The New Deals



1980s Wall Street was as inventive as it was ostentatious. New kinds of deal turned the relationship between finance and society on its head: collateralized mortgage obligations made homeowners into raw material for profit, while the leveraged buyout allowed corporate raiders to tear up companies in the name of shareholder value, all this backed by the new science of financial economics. This episode takes a random walk around some of finance’s most rapacious innovations.

Transcript

The investment-banking firm of Pierce & Pierce occupied the fiftieth, fifty-first, fifty-second, fifty-third, and fifty-fourth floors of a glass tower that rose up sixty stories from out of the gloomy groin of Wall Street. The bond trading room, where Sherman worked, was on the fiftieth. Every day he stepped out of an aluminum-walled elevator into what looked like the reception area of one of those new London hotels catering to the Yanks. Near the elevator door was a fake fireplace and an antique mahogany mantelpiece with great bunches of fruit carved on each corner. Out in front of the fake fireplace was a brass fence or fender, as they called it in country homes in the west of England. In the appropriate months a fake fire glowed within, casting flickering lights upon a prodigious pair of brass andirons. The wall surrounding it was covered in more mahogany, rich and reddish, done in linen-fold panels carved so deep, you could feel the expense in the tips of your fingers by just looking at them. All of this reflected the passion of Pierce & Pierce’s chief executive officer, Eugene Lopwitz, for things British. Things British, library ladders, bow-front consoles, Sheraton legs, Chippendale backs, cigar cutters, tufted club chairs, Wilton-weave carpet were multiplying on the fiftieth floor at Pierce & Pierce day by day. Alas, there wasn’t much Eugene Lopwitz could do about the ceiling, which was barely eight feet above the floor. The floor had been raised one foot. Beneath it ran enough cables and wires to electrify Guatemala. The wires provided the power for the computer terminals and telephones of the bond trading room. The ceiling had been lowered one foot, to make room for light housings and air-conditioning ducts and a few more miles of wire. The floor had risen; the ceiling had descended; it was as if you were in an English mansion that had been squashed.

This is Tom Wolfe, of course, from his remarkable Bonfire of the Vanities, as we first encounter the workplace of the protagonist – I won’t say hero, for he’s certainly not that – master of the universe, possessor of a Yale chin – Sherman McCoy. It turns out that this kitsch Englishness is just the drapery on something much more primal. Wolfe continues…

No sooner did you pass the fake fireplace than you heard an ungodly roar, like the roar of a mob. It came from somewhere around the corner. You couldn’t miss it. Sherman McCoy headed straight for it, with relish.

On this particular morning, as on every morning, it resonated with his very gizzard. He turned the corner, and there it was: the bond trading room of Pierce & Pierce. It was a vast space, perhaps sixty by eighty feet, but with the same eight-foot ceiling bearing down on your head. It was an oppressive space with a ferocious glare, writhing silhouettes, and the roar. The glare came from a wall of plate glass that faced south, looking out over New York Harbor, the Statue of Liberty, Staten Island, and the Brooklyn and New Jersey shores. The writhing silhouettes were the arms and torsos of young men, few of them older than forty. They had their suit jackets off. They were moving about in an agitated manner and sweating early in the morning and shouting, which created the roar. It was the sound of well-educated young white men baying for money on the bond market.

The sound of well-educated young white men baying for money.

Wolfe, already a famous long-form journalist, did his research properly. This isn’t just any trading room, but the forty first floor of Salomon Brothers, New York: the biggest and most brash of all the 1980s investment banks. It’s the same trading room that Michael Lewis uses as the background for his extraordinarily popular debut, Liar’s Poker. The two writers were there at the same time, and their books tip a symbolic wink to each other. There is such a lot in this passage, and we will be back to some of it in another episode: Wolfe’s careful presentation of toxic masculinity, class and racism, especially. He takes delight, over the next few sentences, in showing us the mixture of profanity, youth, and privilege exhibited by these traders, pumped and sweating, cursing, even at the very beginning of the working day.  But for now, I’ll just take the room as it stands, and as Wolfe intended it: as the emblem – and engine – of everything that was wrong with 1980s Wall Street.

Hello, and welcome to How to Build a Stock Exchange. My name is Philip Roscoe, and I teach and research at the University of St Andrews in Scotland. I am a sociologist interested in the world of finance and I want to build a stock exchange. Why? Because, when it comes to finance, what we have just isn’t good enough. To build something – to make something better – you need to understand how it works. Sometimes that means taking it to pieces, and that’s exactly what we’ll be doing in this podcast. I’ll be asking: what makes financial markets work? What is in a price, and why does it matter? How did finance become so important? And who invented unicorns?

In this part of the series I am getting to grips with finance and its role in society. If we want to build a stock exchange worthy of the future – and without wanting to give too much away too soon, I’ll bet that’s going to be small scale, local, and politically respectful – we need to understand how finance got where it is today – vast, global and politically invasive. I’ve suggested its present form is largely the result of changes in the 1980, when the Wall Street financiers became, as Wolfe put it, the ‘masters of the universe’. In the last episode I explored how exchanges were shaped by changes in global political economy and a rethinking of the social contract under governments that embraced the newly fashionable free market ideology. It was during the eighties that the UK’s national industries were sold off and a new class of everyday shareholder was born. He rapidly became known as Sid, inspired by the advertising campaign – under eighties capitalism, even nicknames had to be the produce of corporate endeavour. In the next episode I’m going to explore the automation of stock markets, the move away from open outcry trading pits or the ambulatory trading of London’s Gorgonzola Hall to the miles of wiring described by Wolfe: from the huge open spaces of the Board of Trade’s specially designed hall or the dome of London’s Old House to squashed and cramped, shabby, trading rooms like that of Pierce & Pearce. In this episode, though, I’m going to look what these masters of the universe bought and sold and the deals they concocted, and in doing so I’ll explore the birth of a new kind of social contract, one where finance sits very much on top of the heap. I’ll show a change, too, in the very nature of capital, as it tears itself away from its roots in production and seeks ever higher returns through a proliferation of financial contracts.

—- Trading sounds—[1]

So what were they doing, these traders. What were they trading? What, indeed, were – and are – bonds? The short answer is that a bond is simply a loan contract promising that interest will be paid at a given time until a particular date, when the bond is redeemed and the loan paid off.  Pension funds, governments and corporate treasuries are big holders of bonds, institutions that hold money and need some sort of return but need absolute (or relative) safety too. The notion of safety is itself a highly interesting and problematic one, as we all found out in 2008, and we are going to come back to it in episode nine.  Prices move up and down, driven by sentiment and alternative sources of risk-free interest, usually central bank rates: bonds pay their interest at a predetermined rate, so if interest rates go up, bond prices go down in order to bring those predetermined returns into line. Investors demand higher returns the longer the length of the bond, to compensate for their money being tied up; conversely, as the redemption day nears, prices fall to reflect the limited future yield. This is the yield curve, another central device for plotting the future of markets. If markets are crystal balls, and we only have to open the newspapers to see how many think they are, then the proliferation of bond contracts can only be a good thing. So are the Masters of the universe, pure speculators, trading nothing more concrete than the promise of future returns, but in doing so making this crucially important market happen. That’s the theory, at least.

These perfect market imaginings suppose – yet again – that new markets or goods just appear. It is never that simple. Take the mortgage bond, the instrument at the base of the financial Jenga-tower that decomposed in 2008. In the late 1970s and early 1980s, Wall Street’s eyes lighted on mortgages as a source of possible opportunity. For people whose business was buying and selling debt, the cumulative amount owed by America’s homeowners – following post-war decades of suburban growth that saw home ownership as a crucial part of the American dream – must have been mouth-watering. But there were certain problems. Government regulation during the same period had been heavily skewed towards the interests of the borrowers. According to Lewis Ranieri, the Salomon Brothers trader who pioneered commercial mortgage bonds, the “mortgage instrument becomes so perfect for the borrower that a large economic benefit is taken away from the other participants, including the long-term investor”.[2] That didn’t especially matter because mortgages were owned by small-scale savings banks, known as thrifts in the United States, or building societies in Britain, whose business was conservative, low risk lending to homeowners. Moreover, two giant government-sponsored bodies, Fannie Mae and Freddie Mac, underwrote a portion of these loans with the intention of expanding the pool of eligible borrowers and thus broadening home ownership. These institutions also provided mechanisms through which loans could be resold by the thrifts in order to increase the supply of money into the sector. They bought up loans and resold them in bundles as bonds, but the results were attractive only to specialist investors. You see, as an investment, the mortgage had several problematic characteristics. It was small. It was attached to an individual, and therefore inherently unpredictable. Mr and Mrs Smith might lose their jobs, or die, or remortgage. The last was a particular issue.

Regulation designed to protect homeowners allowed anyone to pay off a mortgage without penalty at any time. This prepayment risk made mortgages unattractive investments for pension funds, corporations, and governments whose primary objective was long-term stability: if interest rates went down, rather than holding a more valuable bond, investors will be left with cash returned by homeowners changing to cheaper deals, cash for which they couldn’t find a lucrative home. As a result, if interest rates went down the price of mortgage bonds changed little, as everyone knew the underlying loans would already be in the process of being redeemed. Michael Lewis chronicles the birth of the mortgage bond in Liar’s Poker. He writes:

‘The problem was more fundamental than a disdain for middle America. Mortgages were not tradeable pieces of paper; they were not bonds. They were loans made by savings banks that were never supposed to leave the savings banks. A single home mortgage was a messy investment for Wall Street, which was used to dealing in bigger numbers. No trader or investor wanted to poke around the suburbs to find out whether the home owner to whom he had just lent money was creditworthy. For the home mortgage to become a bond, it had to be depersonalized…At the very least, a mortgage had to be pooled with other mortgages of home owners. Traders and investors would trust statistics and buy into a pool of several thousand mortgage loans made by a Savings and Loan, of which, by the laws of probability, only a small fraction should default. Pieces of paper could be issued that entitled the bearer to a pro rata share of the cash flows from the pool, a guaranteed share of a fixed pie . . . Thus standardized, the pieces of paper could be sold to an American pension fund, to a Tokyo trust company, to a Swiss bank, to a tax evading Greek shipping tycoon living in a yacht in the harbour of Monte Carlo, to anyone with money to invest.’[3]

In 1977 Bank of America, in conjunction with Ranieri’s team at Salomon Brothers, launched the first private mortgage bond. The process, which Ranieri dubbed securitisation, was elegant in principle, if complex in actuality. Here’s Lewis, again, on the construction of the ‘collateralized mortgage obligation’ or CMO:

‘The CMO addressed the chief objection for buying mortgage securities, still voiced by everyone but thrifts and a handful of adventurous money managers: who wants to lend money not knowing when they’ll get it back? To create a CMO, one gathered hundreds of millions of dollars of ordinary mortgage bonds—Ginnie Maes, Fannie Maes and Freddie Macs. These bonds were placed in a trust.

The trust paid a rate of interest to its owners. The owners had certificates to prove their ownership. These certificates were CMOs. The certificates, however, were not all the same. Take a typical 300 million dollar CMO. It would be divided into three ‘tranches’ or slices of 100 million dollars each. Investors in each tranche received interest payments. But the owners of the first tranche received all principal repayments from all 300 million dollars of mortgage bonds held in trust. Not until first tranche holders were entirely paid off did second tranche investors receive any prepayments. Not until both first and second tranche investors had been entirely paid off did the holder of a third tranche certificate receive prepayments. The effect was to reduce the life of the first tranche and lengthen the life of the third tranche in relation to the old-style mortgage bonds. One could say with some degree of certainty that the maturity of the first tranche would be no more than five years, that the maturity of the second tranche would fall somewhere between seven and fifteen years, and that the maturity of the third tranche would be between fifteen and thirty years. Now, at last, investors had a degree of certainty about the length of their loans. (Lewis, 1989: 160–1)

—– market traders —-[4]

There is an interesting story in the background about the gentrification of finance over the same period. Ranieri had worked his way through the ranks of Salomon, from mailroom to the partnership. By the mid-eighties, however, the university of lifers were being squeezed out by the Ivy League graduates gleefully described by Wolfe. This was also the case in Britain. In 1982, the London International Financial Futures Exchange, or LIFFE. It was deliberately modelled on the trading pits of Chicago, and it offered London a first sight of the loudmouth, barrow boy trader that came to epitomise so much of the nineteen eighties. The LIFFE traders came from the county of Essex, a harsh, flat, damp, grey landscape north-east of London that had soaked up refugees from the city as industrial slums had been cleared. Those who lived there were Sierra Women and Men and more. They had made money, bought property, and they wanted the world to know: ‘the affluent, industrious, ruthless and caustic typical inhabitants of South Essex’, writes the anthropologist Caitlin Zaloom, quoting a British member of Parliament, were ‘the shock troops of the Thatcherite revolution, the incarnation of the new economic freedom she had bestowed upon a broadly ungrateful nation’.[5]  In London they didn’t disappoint. Their motto was spend, spend, spend: traders distinguished themselves by their flamboyant dress sense and their equally flamboyant expenditure. They shouted on mobile phones before anyone else even owned one. They became the archetypal figures for the new City, the poster boys of the early nineteen eighties. They were coarse, loudmouthed and abrasive, London’s counterpart to the mortgage bond traders of Wall Street. But these Essex boys who came to trade on LIFFE were rapidly displaced by university graduates qualified in economics and the hard sciences. One primary cause was the enormous increase in the complexity of the contracts that confronted market traders, and to get there we should trace another story, and the birth of another kind of contract.

You may recall from my second episode that the Chicago Board of Trade evolved organically as a means of providing a speculative market in the future prices of agricultural goods. You may also recall how disagreements over the legal and moral validity of futures trading found their way to the Supreme Court, where in 1905, Chief Justice Holmes declared that speculation ‘by competent men is the self-adjustment of society to the probable’. This debate still centred on agricultural goods, however, and although Holmes recognised the speculators’ practice of setting off, or settling deals in advance, the point remained that the goods could be delivered if so desired. This legal distinction separated legitimate, legal speculation from illegitimate, and criminal, speculation in the future prices of financial securities. Such things could never be delivered, containing nothing more tangible than the promise of future cash streams. Moreover, financial futures had been implicated among the causes of the disastrous financial crisis of 1929, still very much in the mind of American legislators. But times were hard in the late 1960s with regulated commodity prices leaving little opportunity for speculation: traders left sitting on the steps of the pit, reading the paper. The Board of Trade – alongside its junior counterpart the Chicago Board of Options Exchange, or CBOE – worked hard to make financial futures legal. Donald MacKenzie and Yuvall Millo trace this story. The CBOE employed lobbyists, lawyers and enrolled the new science of financial economics. This posited that stock prices moved in a random walk in response to news, the basis for today’s efficient market hypothesis. Such randomness could only mean uncertainty, and financial options could be deployed as a means of protection against this, just as they were in dealing with future weather changes and market conditions for agricultural products. None other than Milton Friedman wrote an account of the benefits of a currency futures exchange, for which he received $5000 from the CBOE, perhaps forty-thousand in today’s money.

At the same time  a small group of academic economists – Fisher Black, Myron Scholes and Robert Merton – made a startling innovation, producing ‘options pricings theory’, one of the  most important contributions of twentieth century economics and for which Merton and Scholes scooped the Nobel Prize in 1997. I can’t explain it any better than MacKenzie and Millo, so I’m going to borrow their words, trimmed slightly. If one assumed that

‘the price of a stock followed a… random walk in continuous time… it was possible to construct a continuously adjusted portfolio of underlying stock and government bonds or cash that would “replicate” the option: that would have the same return as it under all possible states of the world. Black, Scholes, and Merton then reasoned that the price of the option must equal the cost of the replicating portfolio: if their prices diverged, arbitrageurs would buy the cheaper and short sell the dearer, and this would drive their prices together.[6]

Simple! Or maybe not. But that doesn’t really matter for our story because, as MacKenzie and Millo point out, the new maths played an important part in legitimising the new kind of trading:

Black, Scholes, and Merton’s fellow economists quickly recognized their work as a tour de force. It was more than a solution of a difficult technical problem: it showed how to approach a host of situations that had “optionlike” features; and it linked options to the heartland theoretical portrayal of capital markets as efficient and permitting no arbitrage opportunities. The whole weight of orthodox modern economics could now be deployed against anyone still claiming options to be disreputable.[7]

With the advent of options pricing theory, the yield curve, and other such mathematically complex methods of valuing trades, the barrow boys of Essex and street traders of New Jersey were no longer equipped to deal in the market. This bond trading was the province of young Turks, as Lewis calls them:

‘After the first CMO (writes Lewis), the young Turks of mortgage research and trading found a seemingly limitless number of ways to slice and dice home mortgages. They created CMOs with five tranches, and CMOs with ten tranches. They split a pool of home mortgages into a pool of interest payments and a pool of principal payments, then sold the rights to the cash flows from each pool (known as IOs and POs, after interest only and principal only) as separate investments. The homeowner didn’t know it, but his interest payments might be destined for a French speculator, and his principal repayments for an insurance company in Milwaukee. In perhaps the strangest alchemy, Wall Street shuffled the IOs and POs around and glued them back together to create home mortgages that could never exist in the real world.’[8]

These kinds of deals were only possible due to increasingly powerful methods of calculation. The new mechanisms of financial engineering, options pricing theory, implied volatility, various copula and log-normal distributions, none of which I can claim to understand, transformed financial markets. The confluence of entrepreneurial ambition, politics, and theoretical innovation backed up by advances in computing power and technical modelling takes us to a place where existing restrictions seem outmoded and regulation is swiftly changed. Economists, regulators and traders alike began to look towards free-market utopia where a proliferation of financial contracts could cover every conceivable trade and outcome. The road led, inexorably, to the crisis of 2008. But I want to emphasise the process by which our individual financial arrangements – and the terms on which they are offered – became of interest to, and then subject to the discipline of, high finance. The mortgage moved from being a policy tool designed to expand the reach of homeownership to being a financial instrument crucial in the construction of investment banks’ profits. This, in turn, makes the interests of homeowners and financiers widely divergent, a problem that underwrote the global crash. We might call this process, by which ever more of our everyday interests become subject to the purview of financial markets, financialization.

——–

At the same time as the traders of Wall Street were taking hold of our mortgages, another kind of financier was taking charge of our jobs. The corporate raider, epitomised by Gordon Gecko in Oliver Stone’s film Wall Street (a film premiered at almost the same time as The Bonfire of the Vanities), was a new species of financial practitioner, spawned by the 1980s. Raiders like T Boone Pickens, Sir James Goldsmith, and Tiny Rowland became renowned, even glamorised, as ruthless hunters on the cutting edge of capitalism. Their prey – the conglomerate.

Throughout the 1950s and 60s the conglomerate had become a fashionable organisational form. Companies bought other companies, creating empires of unrelated businesses, wherever managers felt that capital could be productively used. The conglomerate was a creature of its times, a product of managerial capitalism where business invested money in making and selling things, and the skills of managers were to do with organising production and generating effective returns on capital from doing so. Conglomerates benefited from a favourable legal environment and tax relief on debt which made borrowing to buy cash generative businesses a sensible choice. Investment bankers had, of course, been complicit in the growth of these conglomerates, eagerly encouraging chief executives to do deals and pay hefty advisory fees in the process. But now, the era was over. Conglomerates found themselves unfashionable, their share prices depressed. These lower share prices presented the corporate raiders with an opportunity. They could buy the business for a significant premium on existing share prices, and thereby claim that they are returning value to shareholders. But the amount they would pay would still be less than the asset value of the firm, and they could break the firm up, selling businesses and assets and keeping the difference. But how to raise the money for such an enormous purchase? Why, borrow it, of course…

‘In 1978 the firm Kohlberg, Kravis and Roberts’, writes Daniel Souleles, ‘then called an investment bank, now a private equity firm, bought a manufacturing conglomerate, Houdaille for $355 million dollars. Not only was this four times more than KKR had ever bid to buy a company’s stock and manage it privately but KKR only had 1/300th of the total price. The rest of the money they spent, the remaining 99.7% of the price of Houdaille, they made up with borrowed money, either in the form of capital from investors, or loans from banks.’

KKR hit on a winning strategy. ‘It is not often,’ says Souleles, that one can pinpoint and describe a new and durable way people get rich. But KKR’s purchase of Houdaille with very little of their own money, and quite a bit of borrowed money, affords one such moment. KKR’s innovation of the leveraged buyout [LBO] would set the standard the industry still follows today.’ The magic comes in the innovation that the target firm should borrow the money to buy itself. This makes perfect sense. There’s no way that a small investment banking boutique could borrow enough to buy a sprawling conglomerate. But the conglomerate can. It will offer bonds – and Wall Street traders led by Ivan Boesky pioneered low quality ‘junk’ bonds for just this purpose, risky and punitively expensive for the borrower.

The conglomerate’s new managers (or the existing managers who have cut a deal with the raiders, like the hapless protagonist in Wall Street) can, however, offset the exorbitant cost of the debt against profits. As Souleles says, KKR could see value in the firm that the market could not.

Raiders cut these conglomerates up and sold the pieces on. They closed down ‘underperforming’ (in scare quotes) firms. They restructured, moved employees around, or simply sacked them. Gecko is pictured threatening to expropriate the employees’ pension fund. Yet these moves were justified by the suddenly fashionable theory that only the interests of shareholders mattered. You will recall from the very first episode how two academics – Jensen and Meckling – posited that managers were the agents of shareholders and should be incentivised to work for them, rather than featherbedding their existences at the expense of profits. In all fairness, conglomerates were renowned for such practices. The classic account of one of these deals, Barbarians at the Gate, paints a picture of RJR Nabisco’s senior management as cocooned in a world of private jets and country club memberships, using the firm’s incredible cash flows to satisfy every whim. Plunging a firm deep into debt could be told as imposing financial discipline on these soft, pampered executives. At the same time those executives were likely to receive substantial holdings of stock as a reward for making such changes; Jensen and Meckling had argued that we can only expect chief executives to work for shareholders if we make them shareholders too. So the soft, pampered executives became wealthy, pampered executives, the corporate raiders became even richer, and the pain of meeting debt repayments was felt in the warehouses and factories, or perhaps in the places where the warehouses and factories used to be. The ethnographer Karen Ho argues that these narratives allow the shareholder to be ‘positioned as the victim, the victim, denied his rightful role in the modern corporation by manager-usurpers. It is partly this notion of the wronged owner reclaiming his just rewards that has fuelled such righteous (and moralistic) activism for shareholder value.’ The focus on shareholder rights helped to deflect scrutiny from the manifestly negative consequences of most LBOs in terms of ‘a decline in shareholder value itself to massive losses in profits, corporate morale, productivity, and jobs.’[9] After all, Milton Friedman had argued that the social obligation of business was to its shareholders, and Wall Street was all too happy to oblige, especially while it made a killing doing so.

Souleles warns that we shouldn’t fall into the trap of presenting wall Street as a homogenous whole. This is true. Even in this episode there are traders and private equity engineers, barrow boys and elite college graduates, people from ethnic minorities and Connecticut wasps. People have varied motivations, even if these all fall within the big tent of making money. Those inflicting great harm on people’s everyday lives can, as Ho shows us, remain convinced that they do so in pursuit of a greater good. It’s complicated. But if we step back to take in the big picture, we can see similar processes at work across the three interconnected domains I have explored: mortgage bonds, financial futures and the leveraged buyout structure. In each new politics, new kinds of deal, new arrangements slowly inverting the relationship between finance and society, so that stock exchanges – or bond or futures exchanges – no longer exist to serve society, but to exploit it. We see capital shaking off its chains and taking flight – a metaphor that is, as the great theorist Frederic Jameson points out – all too literal.[10] When, in the first episode, I described stock markets as pivotal in the mechanisms of contemporary wealth distribution, I was thinking of just this state of affairs. The young, privileged traders of the forty-first floor, baying for money, became masters of the universe through the sheer dislocated power of finance capital. Last week we saw the battles between the newly propertied Sierra men and women and the older forces of organized labour There’s the beginnings of another class war here, between the very rich and everyone else. This is with us today, in a world of offshore banking and fluid, stateless capital. The transition to a truly borderless, global capitalism, however, could only come about as a result of one final change that swept through markets in the 1980s: the transition from pit to screen, the automation and digitization of the exchanges. That’s the subject of our next episode.

I’m Philip Roscoe, and you’ve been listening to How to Build a Stock Exchange. If you’ve enjoyed this episode, please share it. If you’d like to get in touch and join the conversation, you can find me on Twitter @philip_roscoe or email me on philiproscoe@outlook.com. Thank you for listening, and see you next time.

 

 

 

[1] Sound recording from ‘touchassembly’ via freesound.org, under a creative commons attribution licence https://freesound.org/people/touchassembly/sounds/146268/

[2] Quoted in Donald MacKenzie, “The Credit Crisis as a Problem in the Sociology of Knowledge,” American Journal of Sociology 116, no. 6 (2011): 1792.

[3] M Lewis, Liar’s Poker (London: Coronet, 1989), 99-100.

[4] From www.freesound .org under a creative commons licence. https://freesound.org/people/deleted_user_1116756/sounds/74460/

[5] At the risk of an overcomplicated citation, this is Zaloom quoting Nicholas Farrell, writing in the Sunday Telegraph, 10 November 1991, himself quoting a Member of Parliament. It is a comment made nearly ten years since the event, but still a great line. Caitlin Zaloom, Out of the Pits: Traders and Technology from Chicago to London (Chicago: University of Chicago Press, 2006), 77.

[6] Donald MacKenzie and Yuval Millo, “Constructing a Market, Performing Theory: The Historical Sociology of a Financial Derivatives Exchange,” American Journal of Sociology 109, no. 1 (2003): 120.

[7] Ibid.:121

[8] Lewis, Liar’s Poker, 163.

[9] Karen Ho, Liquidated (Durham: Duke University Press, 2009), 190 and 128.

[10] Fredric Jameson, “Culture and Finance Capital,” Critical Inquiry 24, no. 1 (1997).