David Kuo talks to author and an ex-investment banker David Charters.
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David:
This is Money Talk, the weekly investment podcast from the Motley Fool. I'm David Kuo, and today I am joined by author, venture capitalist and former investment banker, David Charters. Now David is here to spill the beans about what really goes on in the City, why we're in the mess we find ourselves in today, and can we ever trust those City types ever again? Welcome to Money Talk, David.
DavidC:
David, good morning, thank you.
David:
Good morning to you. Now, you've written four, what I would consider to be very revealing books about life in the City, you tell them through the life of a man called David Hart, who leads what can only be described as a very colourful and a very testosterone-charged life. Now, can you tell us a little bit about David Hart for those people who haven't come across these books yet?
DavidC:
Dave Hart is the archetypal investment banker, he combines all of the worst aspects of all of the worst people I ever worked with over 20 years in the City, and he's not based on a single character, but he does, in a sense I guess he's my alter ego, he does all the things I would never dare to do, and does them outrageously, and the subversive part of it all is that, from time to time, he takes on even wickeder people and you actually want him to win.
David:
Now, David Hart's name bears a very close similarity to your own name, there are only three letters difference between the two names – do you in some ways want to be David Hart?
DavidC:
No, I don't think anyone would, he is a thoroughly wicked, driven …
David:
He leads a very exciting life, though.
DavidC:
… it was a very exciting life, and he certainly gets around a lot.
David:
Yes he does, I mean any youngster who's actually reading this book will think, "I want to be David Hart" – I mean, all the things that he gets up to.
DavidC:
He's intended to be a terrible warning, rather than an inspiration, so maybe it's all gone terribly wrong.
David:
Maybe it has gone wrong with me, because I just think, I've wasted 30 years of my life – if only I'd been David Hart 30 years ago, everything would be so great for me. Now, in your book, "At Bonus Time, No-one Can Hear You Scream", you make a very big play about how City workers are driven by the big carrot, otherwise known as the annual bonus. Now what are your own personal views about these obscenely large bonuses that are dished out every year?
DavidC:
It's a very tricky one, because I don't think that bonuses and the bonus culture are ever going to go away in the City; the City is a fantastic talent magnet, it draws in immensely hard-working, motivated people, it puts them to work, it empowers them, and in the good times they can do fantastically well, and they expect to be rewarded, and the notion that politicians and regulators and other people can come along and change that, I think is naïve – it's great for politicians to indulge in soundbites about national Kick A Banker Week, and it gets MPs' expenses off the front pages, but as a practical matter, these very talented people will carry on working in the City and will expect high levels of remuneration.
If they don't get it, they'll go elsewhere, 40% of the people who work in the City are non-British, they're mobile, and the people who are British would be, I would imagine, many of them would be very happy to contemplate moving to Dubai or Hong Kong or Singapore to carry on preserving that way of life.
David:
The thing about your books, and also this thing about the bonus culture, is that David Hart believes that money can buy just about everything, and that includes the affections of women – he believes that money is the root of all pleasures. Now, is that the motive, you believe, for all City workers?
DavidC:
I think sadly there are an awful lot of people who work in investment banking who would go along with the motto that, "He who dies with the most toys wins", and the way they benchmark success is very much based on material success – everyone has their kind of mental trophy cabinet that they seek to fill with those things by which they will judge relative success or failure, and they tend to be material things, it tends to be the big house in Notting Hill, it's the yacht, it's the cars, it's the holidays, it's the art, and at the end of it, Dave Hart's life actually is pretty empty and unsatisfying, and he has occasional …
David:
In your view, it's unsatisfying!
DavidC:
You're obviously very envious of him!
David:
I am a little, yes – I mean, many of the things he gets up to, I think are the kind of things that you read in Boys' Own novels, that you think, "I wish I could do that as well – I wish I could fly in a plane and go anywhere in the world I want to."
DavidC:
And some of these things are very much rooted in reality, whether it's the private jets, the fine restaurants, the fine wines, the way he indulges pretty much all of his whims – as long as he's doing well, as long as the great money-go-round keeps on going, then he will carry on prospering.
David:
Now, the other thing is, there's a woman banker in your book. Now, she goes by the name of Laura 'Two Livers' MacKay – can you tell us a little bit about Laura? Does she exist, by the way?
DavidC:
She doesn't, I have had no end of people asking me, because she is in some ways perfection.
David:
I'm actually quite disappointed now.
DavidC:
And again she is a combination of a number of women I worked with in the City who were very successful, and also managed to be very feminine and very attractive, and in one sense they come close to having it all, which is very difficult. I feel a degree of sympathy for women in the City, because I think that to achieve any given level, they actually have to be better than the equivalent men; I think life is genuinely tougher, and certainly combining family life with the pressures of a City career is a big challenge – a lot of families, and lot of marriages get sacrificed on the altar of the firm.
David:
So are you saying that women who want to succeed in the City shouldn't be married?
DavidC:
Not at all, and the most exceptional ones that I've seen have managed to combine everything, but hence my comment that they actually need to work harder, run faster, be smarter than their male equivalents.
David:
So what, in your opinion, are the kind of attributes that makes a successful woman? – because women find it very difficult; in an earlier podcast we had City Girl, who's real name is Barbara Stcherbatcheff, now she came in and talked about what life was really like for women in the City, and I think in her estimation, I think she only had one or two colleagues that were on the same trading desk as her, the rest were all were all men. Why is it so male-driven, the City life and the City culture?
DavidC:
I think the trading floor in particular is very aggressive, it's very direct, the pressure's there. On the one hand, you have the potential for huge financial rewards - the pot of gold is at one end, sudden death in career's terms is at the other end, because no matter how well you do in one year, you can be fired the next, so the pressure is intense, and that tends to expose the fault lines in human nature – people don't behave at their best on the trading floor, and that has traditionally created what's seen as a male environment. In fact, I think that women can succeed on the trading floor just as well as men, but they need to be very single-minded, very thick skinned and very determined.
David:
But are they as driven by money as men, do you think?
DavidC:
Oh yes, I think now, I'm afraid that my idealism about women doesn't extend that far, I think that when it comes to the annual bonus round, their elbows are just as sharp.
David:
Now, the other thing that I got from your book was that greed and vengeance and personal egos play a huge part in some of the deals that are done in the City. Now some of the deals even border on what I would consider to be slightly illegal – are we to believe that financial reasoning in the City plays second fiddle to emotional drives and emotional desires when it comes to deal making?
DavidC:
I certainly think emotion and ego have a big part to play, and shouldn't be underestimated, and sometimes, when things fall apart, major mergers or acquisitions, and you scratch your head and wonder why – there was great commercial logic, why didn't it happen? – I think egos in the boardroom, egos amongst the advisors, can certainly play their part.
David:
In one chapter in your book, David Hart almost fires the entire board of directors at Grosse Bank, and he does so because he just feels that he needs to do something – I mean, is that what drives what goes on in the City? Do people just think, "I don't really like this lot, so let's get rid of them all"?
DavidC:
He's an extreme case, it has to be said, but there have been, and I can think of examples, where firms have merged in the City, where there's been consolidation of the industry, where you hear about whole teams being basically taken out and shot.
David:
Yes, exactly, yeah.
DavidC:
And you think, are they talented? – yes, are they hard-working? – yes, are they successful? – yes, but they were on the wrong side of the political divide, and out they go.
David:
So was David Hart just lucky, being promoted through the various banks? I mean, in your very first chapter, where he gets into trouble when he's on holiday, and it just sort of turns around, and everything falls at his feet.
DavidC:
He does have some of the most extraordinary strokes of luck, he clearly has a guardian angel who's looking out for him, but equally he makes his own luck, as people do in the City – it's very easy these days to complain about bankers, to criticise them, but the fact is that most of them are immensely hard-working, they're very talented, they're very bright, and they live a life where there is constant pressure, constant competition, where weekends are interrupted and holidays are cancelled, and it's a tough life, but they're tough people, and that's one of the reasons why I remain optimistic about the future of the City, even after what we've been through.
David:
So are you still involved in some ways in the City yourself, or have you sort of divorced yourself completely from that kind of life?
DavidC:
I've left that very largely behind, and happy to do so, and I must say that …
David:
You don't miss it?
DavidC:
You miss some of the adrenaline, that's certainly true – walking out on the trading floor and announcing that you're launching a billion dollar bought deal, there's a huge adrenaline rush, and very little can compare with it, and a great deal of excitement, and people who work in the City and that kind of environment for a very long time I think develop short attention spans, they need those fixes of adrenaline, and it develops a certain kind of character. Having said that, now that I've left it behind, and look back on it, I think that the industry, the investment banking industry, has changed in a way that makes it much less attractive to work in today than it was say even ten years ago.
David:
In what way?
DavidC:
It comes down to consolidation, and I think that what you have now, at certainly the biggest firms, are, I've referred to them as gigantic, rather soulless finance factories; I think if you could stand on the trading floor at one of the major firms, close your eyes and be transported Star Trek like to half a dozen other major firms, every time you opened your eyes you'd look around – they'd be pretty much the same, and that's rather sad. The individual characters of the firms has been almost morphed into a lookalike, one-dimensional version of the same firm, and that's a great pity, it's a loss to the City.
David:
So, say for instance somebody was interested in investing in the banking industry – I mean, would you advise against that then, or would you say that it's a great money-making machine, and you should put all your money in there?
DavidC:
As it happens, I think at the moment financials are pretty interesting, because they are going to stage a comeback, and they have been bailed out, and they will be a lot more cautious and a lot wiser in the future, and some of the real problems which the City has, which haven't been the things that politicians have highlighted, are actually now about to be addressed, and there were some major failings, and I think that now people have woken up.
David:
So can these banks be too big to fail?
DavidC:
Yes they can, and if one goes down, it can drag so many others down with it, that you almost have to stand there, and there is no choice, but if you look at what went wrong before, and these things unfortunately don't make glamorous soundbites for politicians, but I think there were two disconnects within most of the major firms: one was between the people who were taking on risk on behalf of the firm, and the risk managers, who were meant to be in charge of them, and they were meant to be monitoring what was going on, and in fact the scale of those risks, and worst case scenarios, really hadn't filtered through, people weren't aware of just how big a party they were having, and therefore how big the hangover might be when the party stopped; and secondly, there was a huge disconnect between the boards of those banks and the organisations they were meant to be in charge of, and I think in particular a lot of the non-execs didn't understand the business fully enough, they weren't sufficiently involved in the business, and they probably weren't sufficiently challenging to the executives – one of the roles of non-execs in the future, I think, will be to make everybody feel a little bit more uncomfortable.
David:
Has the banking industry become too complex now for people to understand? – because again, in some of the earlier podcasts, we've had people who've worked on the trading desks, and they say they go into work, they're confronted by about six different screens, and they're trading all different things all at different times. Has it become too complex now for the human mind to get its head around?
DavidC:
I think it genuinely is, one of the things that I enjoyed writing most in "Where Egos Dare", the most recent one, was where Dave Hart is genuinely bewildered about what's going on in his own firm, in theory he's in charge, but he says, "Why should I take responsibility – I genuinely don't understand most of what's going on here?", and sadly I suspect that, in particular with the non-execs of some of the banks that failed, that lost, for example, fortunes in the CDO market, if you were to take the non-execs on one side and say, "Explain to me what a CDO is?" – they wouldn't be able to, it's reached that level of complexity where it's beyond their skill.
David:
Now, in another one of your books, "The Ego Has Landed", David Hart accidentally announces that the bank will give away 10% of its profits to good causes. How often do you think bankers make mistakes? – obviously not to this kind of extent, but how often do they make mistakes that aren't even uncovered by the rest of the banks themselves?
DavidC:
One of the key things in terms of maintaining confidence is to maintain this façade of infallibility, which is why I'm absolutely certain that a lot of the time, when things do go wrong, it's much easier to take the hit, take the pain internally, not publicise it, and hope that your reputation remains intact. Sadly, from time to time, we do hear about things that go wrong, the most famous being the fat finger trades, where the trader trades the wrong way round, and suddenly he's dropped tens of millions of dollars.
Dave Hart has his moments, but on the whole he manages the PR aspects of the banks superbly, and that's the one thing he gets right. His triumph, if there is one, and in this he's probably different from many City firms, is the triumph of form over substance – he actually gets the appearances right, he presses the right buttons publicly, even though internally he's utterly worthless and doing terrible things.
David:
Now, I want to go back to things that are happening today, and one of the issues that the governments around the world, or particularly here in the UK, Alistair Darling is suggesting that banks write these things called "living wills" – what is your view about a bank writing a living will, in other words how the bank is going to unwind itself when it gets into problems?
DavidC:
I think it's a ridiculous idea, and sadly I don't have much confidence in either politicians or, to a lesser extent, regulators, to come up with new format, new blueprints, that they can impose on the banking system without damaging it. The City remains a great success story for this country, and yes, we've been through a terrible time, and no-one wants to stand up for the City or speak on its behalf at the moment.
David:
I'm willing to stand up for the City and speak on its behalf.
DavidC:
Well, there are two of us at least then! But I think that the cultural issues that need to be changed, reconnecting those disconnects I mentioned between risk-takers and risk managers, between boards and their companies – those are cultural things; the City's had a fantastic wake-up call, and I think they will now be addressed. Letting the City heal itself is much better than someone coming in from the outside, like some old-fashioned quack surgeon, saying, "Here's my new wizard wheeze – I'm going to cut off a limb and I'm going to bleed the patient, and we'll see how he gets on in a couple of years' time". It isn't the way to heal the financial services industry for this country.
David:
So are you saying that the banking industry cannot be regulated?
DavidC:
No, it certainly can be.
David:
So who's going to regulate them?
DavidC:
The best regulation, and the most forceful regulation, comes from a strong internal culture. The first firm I worked at when I started my City career, S G Warburg, now absorbed within UBS, had an immensely powerful culture of responsibility, it had a culture internally amongst the executives of growing rich slowly over time; yes we'd all grow rich, but we didn't make American kind of bonuses, but we had security, we had a culture that we were very comfortable with. Those firms have sadly very largely disappeared.
David:
But in one of your books there, I talked about David Hart, where he goes into Grosse Bank, and he fires all the old fogeys, and the old fogeys say, "We are here because we remind you of what was happening in the past. We are the connection between the past and the present". Now, what you're suggesting there is that the bank can regulate themselves by remembering what they were doing previously, but surely, when you get a new breed of people coming in, like David Hart, they'll say, "Let's get rid of all these people, because they are just obstacles rather than people who are going to allow us to move forward." How do you square that?
DavidC:
Dave Hart is very much the, what I think of as the two year job hopper, he's the person who will go from one guaranteed package of two years with a sign-on bonus at one firm, store up, cause all amount of trouble that doesn't get noticed, move on to the next guarantee and leave his successor to pick up the mess, and along the way, people who represent, if you like, the tribal memory of a firm, as in the case of Grosse Bank, have to be swept aside, because they're the people who could ask the awkward questions, they've been around long enough to remember, they know where all the skeletons are buried, and they may well come forward and challenge him, and of course he can't accept that, because the only way is his way.
David:
So what is your advice to young people? I mean, my son is just going to university now, and he has indicated that he might be interested in a City life at some later stage, so what is your advice to people like that who want a career in the City?
DavidC:
I think you have to be prepared for a couple of things.
David:
He could be my pension plan, by the way.
DavidC:
I was going to say! – I wouldn't necessarily count on it. First of all, I think that pay is going to change somewhat in the City, in the sense that much more of the bonus will be paid in shares, in some kind of equity, that aligns the interests of the employees with the owners of the business, and it will vest slowly over time, you may have three, four, five year vestings of shares, and then maybe some kind of clawback mechanism, so in that sense the bonus culture, the way the bonus has worked, has changed.
Secondly I think anyone going in now, the young people going into the City, have to be prepared to go through a gruesome kind of boot camp. I used to do the graduate recruitment in the old days, going around Chicago and Kellogg, business schools and Harvard, Oxford and Cambridge, and you would see these bright young things, the most talented people of their generation, highly motivated, achieving all kinds of things in different fields as students, journalists, politicians, sportspeople; they'd come into the bank, and after a couple of years they'd be pasty-faced, they'd have put on weight, they were living off pizzas at ten o'clock at night, and it's boot camp, and they've got to be highly motivated to get through that.
David:
So what kind of people are best suited for going into the City? I mean, is it the university graduate? Is it the people who have done the MBAs, or is it the barrow boys from the East End?
DavidC:
I think the barrow boys probably are seen these days as a thing of the past, because trading has become so much more sophisticated, so the simple trading instincts have been overtaken by the quants and the PHDs in string theory, and all of those fine fellows who got us into this great mess that we're in now. I think that in terms of characteristics, single-mindedness and determination are absolutely vital; it's a tough, testing business.
David:
Now, you've written four books so far – are there any more on the way? – because we've got people who have read all four books already, and they're waiting for the fifth and the sixth and the seventh?
DavidC:
Well, at the end of each one I've either put Dave Hart in a desperately bad situation from which there can be no escape, or he looks as if he's about to die. At the end of this one, he appears to be going off into the sunset, but I'm told that he well be making another appearance in the future.
David:
Are the fees too tempting then, yes? Have you accepted the retainer already for the next book?
DavidC:
The next guarantee.
David:
Now, before we end this podcast, I have to say that we have two sets of David Charters' books to give away this week. Now, to win one of the two sets, well two sets will be given away, you need to answer this very very simple question: Laura 'Two Livers' Mackay's favourite drink is tequila – can you tell me, from which country does tequila come from? – don't answer that, David, you probably know the answer. Please e-mail your answers to: moneytalk@fool.co.uk, and thank you very much for coming in today, David, it was an absolute pleasure. I've read two and a half books so far, I'm waiting to read the other one and a half very shortly.
DavidC:
David, thanks very much, my pleasure.
David:
Now, I end each podcast with a quote. Today's quote comes from a man called Mahatma Ghandi – I'm sure you know him. Now, Mahatma Ghandi said: "There is sufficiency in the world for man's need, but not for man's greed". This has been Money Talk, I have been David Kuo, and my guest has been David Charters, if you have a comment about today's show you can post it on the Money Talk blog, which you can find at fool.co.uk/podcast, and if you have a suggestion about future topics, you can email me at moneytalk@fool.co.uk, and have a great week everyone.
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