http://www.amazon.co.uk/Gathering-Storm-Lee-Robinson/dp/836262700X
From the book “The Gathering Storm”
John Veals is the villainous hedge fund manager in Sebastian Faulks’ best-selling credit-crunch novel “A Day In December.” He is a man with no friends, no culture, no interest in anything other than making money. His nefarious machinations lead to the failure of a major British bank, enabling him to make huge profits from his short positions. Other characters in the novel include Gabriel Northwood, a virtuous lawyer, and Roger Malpasse, a retired banker of the old school.
My name is John Veals. You may not have heard of me, but I used to run High Level Capital, an outfit which shot the lights out in the credit crisis. I’m going to use the space I’ve been allotted here to give you my take on what happened and why.
I expect you’re wondering about my reaction when I saw what Sebastian Faulks wrote about me in that book. First, anger and disappointment. Second, disappointment and anger. Third, more anger and more disappointment. Fourth – well, you get the picture.
If he’d only listened to me, the book could have been so much better. He could have written The Great Gatsby of our age. The movie would have been a smash too, with Jude Law or Clive Owen playing yours truly.
Whatever. It’s not my nature to dwell on what might have been. Jobbing backwards never gets you anywhere, does it? But what I’ve been pondering is why he got me so wrong and why he got the financial crisis wrong too. Because it’s not just our Sebastian. Nobody really gets it.
As it happens I’ve always been a big fan of Seb. Birdsong, Charlotte Gray, Human Traces, The Fatal Englishman – quite a track record, isn’t it? After that streak his literary Sharpe ratio must have been off the charts. I also rate Engleby , which is a story about a weirdo at Cambridge in the seventies. It took me back some, did that book. After all, that was my era, more or less.
You see, naughty Seb has distorted quite a few facts about me. The real John Veals is somewhat older than the “John Veals” in the book, somewhat better-looking too, if I do say so myself. And he didn’t study law at a grey-brick university and quit halfway through. Nor does he have an undertaker for a dad and an alkie for a wife.
Not to worry – I understand the requirements of financial fiction. It’s not that different from fictional finance, which is something I came across a lot in my career as a hedge fund manager. Yeah, cooking up a story must be something like cooking up a CDO squared or some other exotic derivative. It’s not whether it reflects the fundamentals that counts. It’s whether you can get people to think it the reflects the fundamentals.
Have you read Seb’s James Bond book? Not much alpha there, in my view. You might say a minor drawdown, even. Maybe he’s just too nice a guy to get his brain around Bond and Fleming. Not nice, those two. Bastards and proud of it, just like me. And as for all the hoopla at the book launch – speedboats down the Thames, helicopter escorts, blonde bimbo in red jumpsuit – that was loadsacredit Britain at its pre-crisis naffest. Stunts like that may be okay for Dan Brown, but surely not for a grand man of literature.
It was that kind of nonsense that made me so bearish about the way things were heading. Monumental excess, delusion, every kind of bullshit and drivel – it was like a tide that was getting higher and higher, month by month, year by year. . And you know what happens to things that are unsustainable? They stop. That’s why I was shorting all the overpriced rubbish I could lay my hands on.
See, it wasn’t just investment bankers who were dancing to the music. Footballers, TV chefs, brain-dead celebrities, freeloading politicians, conceptual artists flogging traffic bollards, drunken berks on stag nights in Prague, middle-class plonkers installing heated swimming pools in their gardens, shopgirls hiring stretch limos for a Saturday night on the town. The smart-arse at the office who accumulated a couple of dozen buy-to-let apartments. Your own dear wife who was so ecstatic at the rise in house prices that she took to doing her Christmas shopping in Manhattan. In other words, almost every bloody person in the entire bloody country – all hooked on funny money, all living the big lie. Famous writers were no exception – instead of bonuses they had advances. They could have refused the dosh or donated it to charity, but if they did nobody told me.
When it all went tits up, I made a stonking profit – how stonking I leave to your imagination – and now I’ve retired to Lucerne where I manage my own money without having to justify what I’m doing to whingeing clients and out-to-lunch regulators. I have a new wife, a beautiful baby daughter, and a lakeside villa designed by a well-known architect. Sickening, you say? That’s your problem, mate, not mine. Best of all, everything panned out just as I expected. I was proved right on the biggest trade of my life. And that’s better than sex, better than money, better than any drug that’s ever been invented.
Now it’s just me, though. I got rid of the others when I shut down High Level. Most of them I kept around for appearances. All the big decisions were mine and mine alone. Not one of them was capable of coming up with the ideas, let alone putting them into action. Do I miss living in London? You must be joking. I pass my days in peace and quiet, taking long walks in the mountains, even learning to ski, which no picnic with my dodgy knees. I also have time to catch up on my reading, for the first time in years.
May I bring up a slightly delicate subject? In the book Seb has made me Jewish. Though he takes pains to show I don’t give a toss about religion or culture and don’t mind showering racial abuse on other Jewish people. Deracinated, that’s what he makes me. The latest in a long line, stretching back to Shylock, Fagin, and Trollope’s Melmotte. If you must know, the real J.V’s mum is Liverpool Irish and his Dad was a car-worker from Birmingham.
Does any of this matter? It shouldn’t, but all I’m saying is I come from an ordinary background and am just an ordinary bloke in most respects. But not all. I look and I listen and I form my own opinions and stick to them. Sounds simple, doesn’t it? It isn’t. Being a dyed-in-the-wool contrarian, immune to the zeitgeist, treating other people’s emotions as nothing more than data points – for that you need a certain kind of mind, one that can shut down any twinges of empathy. Because if you do empathize, if you do see other people’s point of view, then probably you’re going to think like other people and act like other people. And in the investment world that means you’re going to get the same results as other people. Which is a recipe for mediocrity. Come to think of it, the mentality you need to be a good investor is pretty much the opposite of what you need to be a good novelist.
So, yeah, let’s admit it. I am a bit anti-social, borderline Asperger’s, as my ex-wife used to say. Market mood-swings don’t affect me a jot, nor all the gossip and the blather of so-called expert commentators, muppets the lot of them. That’s my strength. I doubt everything and everybody. I follow the chain of events to its logical conclusion.
Does that make me evil? Not at all. It’s the detachment that makes me useful. Socially useful, to use a phrase that makes my skin crawl. An ex-management consultant came up with that one, and what could be more socially useless than a bloody management consultant.
The “John Veals” in the book is supposed to be a nasty piece of work. Remember how good old Roger Malpasse tore me a new one in that dinner party scene? I didn’t answer him at the time. He was drunk, and anyway Seb wouldn’t allow me to stand my ground. Which is a pity. I wanted to give the tosser both barrels. As for Gabriel bloody Northwood – he shouldn’t even have been there. He should have been red-carded by the end of chapter three for the offence of being a sanctimonious twat. To my mind there’s nothing virtuous about a closed-minded, back-to-the-fifties, anti-commercial, anti-foreign mentality. And there’s nothing bad about prosperity as such, or technology as such. They give you more freedom, which of course includes the freedom to be stupid.
As for scapegoating the financial industry, I don’t agree with that either. It’s like blaming the pub for your hangover. That’s not to deny that some of the barmen were idiots and some of them gave you the wrong change. But they didn’t force the drink down your throat, did they? You were gulping it down as fast as you could. As were the barmen themselves, of course.
You don’t agree? You think the UK should downsize financial services, get back to making things, instead of just moving money around? In the words of John McEnroe, you CANNOT be serious. Have you forgotten the nineteen seventies? Manufacturing didn’t work out so well then, did it?
And now the Chinese, the Vietnamese, the East Europeans, the Turks – in fact, three quarters of the population of the entire planet are in the manufacturing game. You think we should compete with that lot? Are you having a giraffe? The UK downsizing financial services would be like the Saudis downsizing oil or the Eskimos downsizing fishing.
Ah, the bonuses. Obscene, you say? Look, you’re mixing up two completely different things here. Those wallies who ran their banks into the ground while picking up knighthoods and sitting on government committees and sponsoring sports clubs and all that crap. Regular pillars of the community, right? Well, it might surprise to learn that I totally agree with you. The money they trousered wasn’t earned. They should give it back, and more. The same goes for the regulators, the rating agencies, the accountants, the politicians who stitched up rotten deals that impoverished hundreds of thousands of pensioners, just to save their own miserable hides. They should all be on trial for financial crimes against humanity. But nobody wants to go there, right?
That’s got nothing to do with me, though. I earned my money fair and square. The only people with a right to complain are the people who paid me, my investors – and they were satisfied with what happened, very satisfied indeed. It’s nobody else’s business, is it? And there are thousands and thousands of others like me too – though they don’t operate on the same grand scale. Do a good job of work and you get paid what was agreed. What’s wrong with that? Isn’t it what your tell your kids when they clean the car?
In the middle of the crisis the regulators suddenly banned shorting. We had archbishops in funny hats ranting and raving about how evil speculators were targetting perfectly sound banks and wrecking the lives of ordinary working people. That was a nice Monty Python-type touch. If you want a proper witch-hunt, why not bring in the crew who originated the concept?
I had a good chuckle about that. Not because I don’t give a stuff about ordinary working people – I do actually, though I don’t make a fuss about it – but because of the total misunderstanding of what was going on. I didn’t force this mortgage lenders and real estate companies into bankruptcy. They did it all by themselves. I was the little boy in the kids’ story pointing out that the emperor had no clothes.
You see, none of this happened because of me. It would have happened anyway, whether I was there or not. It was baked in the cake, a long time ago. Historical inevitability is one way to put it. Most trades are questions of probability. There’s always some doubt in your mind, some margin of error. Sometimes you lie awake at night wondering if you’ve missed something important. Not this time. I had total conviction, right from the start. Didn’t another John, John Keats, say something about truth being beauty and beauty truth? Well, my trade was the truest trade I’ve ever done – it went straight to the heart of the matter. And in my eyes, that makes it a thing of beauty.
If you want to do some real good in this world, as opposed to just giving yourself a self-righteous glow, you should show these ordinary working people how to protect themselves against bubbles. You should make new easy-to-understand financial instruments available to everybody. Instead of banning shorting, you should teach everybody how to do it. Courses in financial self-defence. Yeah, I’d be up for that. Though I don’t suppose anyone would ever ask old J.V.
Here’s what really gets my goat. You have a bubble, and everyone thinks the world is lovely. Not me, though – I see it for what it is. The bubble bursts, and the economy goes down the bog. Now everyone blames me for being right. They say I’m the cause of their misery. Malpasse even accuses me of syphoning off other people’s money, like some sort of Madoff-style fraudster.
Sorry, Roger, old pal– you’ve got it arse over tit, as usual. If there were more people like me, if there had been more shorting of the banks and the property market from day one, the bubble would never have grown to the scale it did. But everyone loved that bubble, didn’t they?. The politicians preening themselves on their brilliant economic management, the regulators so proud of their light touch regulation. And let’s not forget those fine people, the general public. You can’t have a proper bubble without their full and enthusiastic participation. Getting richer and richer by the simple expedient of going to sleep every night in your own bed – of course they loved it, bless their little cotton socks.
Okay – let’s cut to the chase, shall we. The biggest distortion in Seb’s novel, the one that really got me fuming, concerns my methods. The fictional J.V trades on insider information, spreads false rumours, manipulates and blusters and threatens people. That’s how he gets his results. Comforting, isn’t it? Flattering to the readers, I would say. It tells them that the only difference between them and me, the only reason they got stuffed in the credit crunch while I hit the jackpot, is that they are good honest blokes while I am a conniving crook. Sorry, folks. That’s not the way it was. The difference between them and me, the only difference that counts, is that they were living in la-la land and loving it. I wasn’t. They believed in fairies and I didn’t.
The real John Veals doesn’t break the rules. For one thing he doesn’t need to. For another it would take away the thrill, the existential vindication, of being right about the deep structure of the world we inhabit. Let me pause there for a moment. I’d better apologize for the abrupt change in register. In the book Seb forced me to talk like a man in a fish-and-chip shop queue, but keeping up the facade has become too much of a strain. From now on, I propose to use my normal diction. You may be surprised to learn that I’m at least as articulate and well-read as Seb’s pet characters, Northwood and Malpasse. This isn’t mentioned in the novel, but I was actually at university with Malpasse. He got a third in Land Economy and spent all his time swilling real ale at the JCR bar. Amusing enough in his own way, but hardly un homme serieux.
Anyway, as I was saying, my methods are perfectly above board. Obviously I go through the relevant corporate and macro-economic data with a fine-tooth comb. I also try to apply a context to contemporary events by studying the patterns of the past. Economic and social history is a much under-utilized resource in the investment business. Human nature drives markets, indeed all social phenomena, and human nature doesn’t change. The arrogance of the present leads us to believe that the men of the past were foolish and backward, that we have outgrown their obvious errors and misjudgements. The men of the future will probably think the same of us.
The first book of what we now call behavioural finance was written by Dickens’ friend, Charles Mackay – the classic Extraordinary Popular Delusions and the Madness of Crowds. Mackay’s key insight, rarely appreciated today, is that financial bubbles are merely a subset of the greater category of manias – what he calls moral epidemics. These he saw as deeply rooted in human nature. As he put it, “men , it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”
My copy of the book runs to over seven hundred pages, but only the first one hundred concern financial matters. The rest deals with other examples of delusive thinking – alchemy, fortune-telling, the crusades, the witch trials, belief in prophecy and fortune-telling, belief in the imminent end of the world, and so on. According to Mackay, his entire work is “a chapter only in the great and awful book of human folly.”
It’s not hard to find parallels for many of the phenomena he described in today’s world. The peddlers of quack medicine deplored by Mackay now have their products on the shelves of stores in every shopping precinct. The mythologizing of outlaws like Dick Turpin and Jack Sheppard would find an echo in the films of Tarantino and Guy Ritchie. Instead of fortune-tellers and diviners we now have economists and futurologists. Little harm done, it might seem, but the same human failings can have dire consequences. In Mackay’s words –
We find that whole communities suddenly fix their minds upon one object, and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first. We see one nation suddenly seized, from its highest to its lowest members, with a fierce desire of military glory; another as suddenly becoming crazed upon a religious scruple; and neither of them recovering its senses until it has shed tears of blood and sowed a harvest of groans and tears, to be reaped by its posterity.
What I took from Mackay’s book is the proposition that financial market behaviour is just one aspect of the psychological state of society as a whole. It follows that excess and delusion in society is likely to be mirrored by excess and delusion in the markets. Furthermore such phenomena are dynamic and cyclical. Calibrating exactly where we are in the cycle is crucial to my investment approach.
Today’s conventional wisdom is that the global financial crisis was caused by fundamental flaws in the global financial architecture. Therefore, runs the thinking, if we make appropriate alterations to the architecture – splitting up banks, reducing bankers’ compensation, increasing the number of regulators and regulations – we can ensure there will be no repeat. Mackay would consider this a fundamentally ahistorical and mistaken view, and I would agree with him.
Financial bubbles and busts have occurred throughout history, in very different circumstances and under very different economic systems. The most extreme case in recent times was the Japanese real estate and stock market bubble of the late nineteen eighties. In its climactic phase, the Imperial Palace grounds in central Tokyo had a greater theoretical value than the entire state of California.
The interesting point, from a present-day perspective, is how different the Japanese system was from the Western systems that spawned our own recent credit bubble. Almost the opposite, in many respects.
Japanese banks had wafer-thin profit margins, and the compensation of senior executives was very modest. There were no stock options and bonuses. The financial system was strictly compartmentalized; securities companies were not permitted to conduct banking business and vice versa. Rather than a small number of “too big to fail” institutions, the Japanese system was made up of thousands of financial intermediaries, including hundreds of regional banks which were listed on the Tokyo Stock Exchange. Perched at the top of this structure was the all-powerful Ministry of Finance, which coaxed and bullied senior executives into carrying out its wishes for the sake of the national interest.
Let me put it another way. The financial system that gave birth to the greatest financial mania of the second half of the twentieth century contained many of the features that reformers are proposing as remedies for the defects of our own Western systems. That is an irony that Mackay would have relished. I fancy he might have considered the flood of new regulations, proposals, and taxes to be another example of delusionary thinking.
It is never the system that creates the bubble, but the people within it. The Japanese bankers, bureaucrats and corporate leaders were not venal. They believed they were acting for the good of Japan. Why did they let get the bubble inflate to such a preposterous extent? Because they had no understanding of the risks. To a man, they had bought the narrative of Japan’s inevitable rise to global supremacy. They fervently and sincerely believed what they wanted to believe, and there was no Japanese John Veals on the other side of the trade.
To quote Mackay one last time, “sober nations have all at once become desperate gamblers, and risked almost their existence upon the turn of a piece of paper.” He probably had Holland in mind, but he wouldn’t have been surprised about what happened to Japan three hundred and fifty years later.
You’ll never stop people reading horoscopes or using herbal remedies by making them study science. Likewise you’ll never put an end to financial bubbles by reforming the financial system. The tendency to mass delusion is hard-wired into the human brain, part of the same deep instinct for imitation that enables us to acquire language and feed ourselves with the right foods. The impulse to blame others for our own failings – the bankers, the politicians, capitalism itself – may be similarly hard-wired too. It makes the world more bearable, but also prevents us from learning from our mistakes.
There is only one way to alert society to the worst excesses of mass delusion – not just in finance, but in other areas that are potentially more destructive. That is to encourage the activities of aggressive contrarians like me, John Veals. For I’ m not just a character in a book. I am a feedback mechanism, a critique of the prevailing orthodoxy. I am the man in the New Yorker cartoon, sitting in the cinema laughing his head off while everyone around him is weeping. I am the hero of Ionesco’s “Rhinoceros”, the one man in town who does not turn into a rhino. I am Camus’ definition of a rebel: “the man who says ‘no.’” I am the outrageous stand-up comedian, the heretic, the mad scientist. A healthy society needs as many people like John Veals as it can get.
So there you have it. That’s my riposte. Take it or leave it – it doesn’t matter to me either way. I’ll be back, of course. When you create your next bubble, I’ll be there, following the logic of the situation to its inevitable denouement. And no doubt you’ll blame me then too. You always have done and always will.
For the time being I’ll stay here in Switzerland, enjoying the food and scenery, playing with the baby and listening to my wife practice her music. Maybe at some point I’ll set pen to paper in a more organized way. After all somebody has to set the record straight.
John Veals
Switzerland, summer 2010.