From the Editors - Investment Banks & Financial Maths
Time to call the bankers’ bluff
the result of the credit crunch, most workers in the UK are watching their real
incomes fall and their pension rights eroded. Those out of work have little
prospect of finding a job in the foreseeable future. There is a big squeeze in
expenditure on education, health, welfare, and almost every essential service
we have come to expect the state to provide. Worst of all, young people
finishing their education are finding it very hard to get started in the jobs
market. In the three months to December 2011, unemployment among 16-24 year
olds was 22.2 %. By the end of the first quarter in 2012, UK is back in
recession. Meanwhile, the bankers largely responsible for what has happened,
and who would be out of business if the taxpayers hadn’t handed over £90 billion
to bail them out continue to draw huge salaries with bonuses on top.
should those who are the most responsible for the financial disaster continue
to see their standard of living rise year by year when the rest of us get
poorer and poorer?
answer is simple if unedifying, so we are told. Ever since the deregulation “Big
Bang” of 1986, the UK economy has become more and more dependent on financial
services. Successive governments have talked about promoting industry but it
has been the City that got what it wanted, including the “light touch”
regulation that encouraged the bubble to expand so dangerously. That doesn’t
seem as good an idea today as it did at the time, but the hard fact is that now
we have to give the investment bankers everything they want or they’ll pack
their bags and go, taking what remains of our economy with them.
will they? According to the financial pages of the London papers at the end of
February 2013, the UK division of the international recruiting agency Hays lost
£3 million in 2011. A major reason was the recruitment squeeze in banking, not
just in the UK but around the world. Hays’ chief executive Alistair Cox told
the press: “A year ago we said that a lot of bankers were looking for jobs out
in Asia. We still see that, but the banking sector has slowed down globally.
Banking started to get worse four to five months ago. I don’t think it will get
any better soon.” He added, “It’s quite uniform
worldwide, not just focused on the UK. We see the impact in Hong Kong and
Singapore and particularly in investment banking, as opposed to retail
That is good news for the vast majority of ordinary people that do
not make their living gambling with other people’s money as investment bankers
do. We need a return to high street banks and cooperatives that serve local
communities and the real economy of goods and services (see New Economy Now, SiS
It is now clear that if those self-styled masters of the universe really
do leave the City, they’re not going to better jobs abroad because there aren’t
any. Their threats are bluffs, something we would expect people in investment
banking to be good at.
While Hays’ UK division lost money last year, the company as a
whole made a profit of £60 million for the six months up to December 2011. That
is because it earns 70 % of its fees outside the UK, and recruitment in
professions such as engineering is holding up well in Germany, the US, the
Middle East and East Asia, again, a sign that those countries
are taking the real economy very seriously. It looks like it will be better
making things rather than just pushing money around. And if sanity ever returns
to the world of finance, the banks may well move to the Far East, not to avoid
taxes and regulation but because that is where the centre of the world’s
economy will be.
In the end, that might not be such a bad thing for the UK, which
has become too dependent on the financial services sector and not on the real
economy. That had made it especially vulnerable in the crash following the sub-prime
mortgages collapse, and also to any threat by the banks to move.
Characteristically, the government’s reaction to the credit crunch
was to pour massive amounts of money into the banks. They apparently believed
this would somehow trickle down into the real economy, but it has simply disappeared
into the banks’ coffers (see “Shut Down Wall
Street!” SiS 53). With healthier balance
sheets, the banks have felt able to continue to pay massive bonuses, but not to
lend to the small and medium enterprises (SMEs) who need the money to build up
the industrial strength that the government says it wants.
The UK needs to focus its attention on the real economy, a move
that has already started to some extent in the US, at least at state and local
Is financial maths to blame?
It is ironic that at a time when there is high unemployment
especially among young people, industries are complaining of skill shortages.
Too few young people are graduating as engineers and too many of those (almost
half, according to the Institution of Mechanical Engineers) move into other
careers. In contrast, there are far too many being trained to do ‘financial’
mathematics for devising and manipulating the complicated derivatives that were
a major cause of the crash, and
serious questions have been asked as to whether financial maths and
mathematicians are to blame as much as investment bankers.
Are financial mathematicians responsible?
Incredibly, the ‘blame’ is limited to losing trillions. The debate
focussed on whether the mathematical models or data they used as input were
good enough; the question of whether it is ethical to provide the mathematical
instruments for creating credits out of repackaged debts and to gamble with
people’s live savings and livelihoods never entered into consideration. As one
investment banker was quoted saying: “Banks need high level maths skills because that is how the bank
makes money.” Those deals that spiralled so badly out of control would not have
been possible in the first place without the collusion of financial maths and
financial mathematicians, known affectionately and awe-inspiringly as “quants”
in the trade, commanding salaries typically in millions and above.
no use saying, as Professor William Perraudin, Chair of
Finance at Imperial College London’s Tanaka Business School did to the BBC:
“The quants are a fairly innocent part of all this. It is the senior people who
make decisions about taking on risk who bear the responsibility.” Perraudin even
went as far as to laud what the quants do as a great favour to society: “The
quants have enabled financial institutions to behave in a super-efficient way,
committing as little capital as possible to their activities.” This has allowed
relatively small competitors to take on the larger institutions in the
provision of financial services and led, in turn to cheaper loans, he
explained. Of course, that was also precisely responsible for the financial
Similarly, Chris Rogers, Professor of Statistical Science and head
of the Quantitative Finance Group at the University of Cambridge, told a
journalist: “The role of mathematicians in a bank is essentially a subordinate
one, they are the servants of the business imperative.”
Tim Johnson, Academic Fellow in Financial
Mathematics based at Heriot-Watt University and the Maxwell Institute for
Mathematical Sciences in Edinburgh, said in his own defence: “I was drawn into
financial maths not because I was interested in finance, but because I was
interested in making good decisions in the face of uncertainty...One of the key
objectives of financial maths is to understand how to construct the best
investment strategies that minimise risks in the real world.” But he has not
asked himself: minimise risks for whom and for what purpose that would serve
humanity, or at least do them no harm.
However much the doyens of financial mathematics like to absolve
themselves from blame, they bear major responsibility for providing the tools
that enable one group of people (themselves included) to get prodigiously rich
and beggar the rest of society.
It is time for aspiring mathematicians to wake up
and consider their social responsibility and ideals as well as the beauty of
mathematics. If financial bankers are losing their jobs, there certainly are
not going to be many more jobs in financial mathematics either.
Fully referenced versions of this editorial and all
articles are available on ISIS members website: http://www.i-sis.org.uk/sismembers.php