The global financial crash of 2008 was meant to have put an end to dangerous risk taking by bankers.But five years on BBC World News tells the story of the risks some bankers are prepared to take in their pursuit of profits. With high level interviews and expert analysis:Bankers – Risking it all explores risk in the post-crash world.
In the second episode of this three part series, BBC World News explores two multi-billion pound trading disasters–one involving former Goldman Sachs Chairman and New Jersey Governor Jon Corzine of MF Global and the Whale Trades at JP Morgan.
Interviews include: former Co-CEO of JP Morgan Investment Bank, Bill Winters (2004-09), former Managing Director of JP Morgan, Till Guldimann (1974-95), Nobel Laureate Daniel Kahneman (2002), Senator Carl Levin, Chairman of the Permanent Subcommittee on Investigations, Martin Wheatley, Chief Executive of the Financial Conduct Authority and Gary Gensler, Chairman of the US Commodity Futures Trading Commission.
In the programme, Till Guldimann, former Managing Director at JP Morgan talks about risk in banking: “Capitalism is all about risk taking. Whenever you want to make money or earn a return on capital, you have to take risks. Without risks there is no return.”
But thirty years ago, Till Guldimann was asked to create a mathematical paradigm, a single number, to measure the amount of risk taken by traders at JP Morgan to help avoid dangerous risk, called Value at Risk – or VAR.
Talking about Value at Risk, Martin Wheatley, Chief Executive of the Financial Conduct Authority tells the programme: “Value at risk became the all-pervasive model that every financial institution used. The executives in banks liked it because it meant they had to hold less capital and they therefore could take bigger bets with their bank, and regulators like it because it convinced us that banks had a system in place which was allowing the banks to understand risk.”
Nobel laureate Daniel Kahneman highlights the variable nature of risk: “You have a number that stands for risk, it’s a number, and so people have an incentive to play with that number, this is human nature. You have to anticipate that this will happen.”
Jon Corzine, former Head of MF Global, in a bid to save his company, sought to find profit in Europe’s debt crisis by telling staff in London to buy billions of dollars of risky European bonds, behind the back of the British Chief Executive. Butwhen the Wall Street Journal revealed the regulators became aware of MF Global’s $6 billion risk, in a post-crash world the markets panicked and the company was left bankrupt.As Bethany McLean, Author of The Smartest Guys in the Room commented:
“I don’t think Corzine was wrong essentially about the risk and this debt. What he was wrong about is that’s it’s not always the real risk that does you in it’s the perception of risk.”
The global giant JP Morgan survived the global financial crash seemingly unscathed; after all Till Guldimann had defined the risk paradigm for JP Morgan to measure risk. But the story of how a London team of JP Morgan traders lost $6 billion through lucrative Whale Trades – vast bets made on the prospects of hundreds of companies – shows how even a well-run bank can take ever more risky gambles.As Bill Winters, Co-CEO of JP Morgan Investment Bank (2004-09) stated:“Any sense that existed before that JP Morgan was somehow infallible of course is gone and I don’t think that will probably ever come back.”
Senator Carl Levin tells the programme what he sees as a possible solution going forward:“We have a choice; we’re either going to have to put the cop back on the beat; get some regulations in place, to reduce the risks to these banks or they’ve got to be broken up; it’s one or the other. We cannot allow them to be too big to fail or too big to manage.”
Gary Gensler, Chairman of the US Commodity Futures Trading Commission adds:“What we have to ensure as regulators is that failure doesn’t spill out to the rest of the economy, that the customers aren’t hurt and also that no institution is so large that it’s not allowed to fail.”
Bankers is a three part series which brings together bank bosses, regulators and politicians to explore what went wrong in an industry that is central to our societies.
Episode 2 ‘Bankers –Risking it all’ will be broadcast on BBC World News on Saturday 16th November at 8.40pm and on Sunday 17th November at 2.40pm.