How I Caused the Credit Crunch: An Insider's Story of the Financial Meltdown

Preface

It was over a game of poker with my closest friends soon after I was fired from my investment banking job that I was given the idea of writing this book. Most around the table were non-finance professionals – in the media, fashion and the civil service – and, out of sympathy for someone who had lost their job, they asked me why I was fired. Usually at this point, most people just switch off despite their best efforts to stay focused and look attentive. But this time it was different. The more I told them, the more intrigued they were to hear about the clichéd high life I had been living while creating and selling billions upon billions of these securitisation and credit derivative products, now better known as 'toxic assets'.

'You should write a book called How I Caused the Credit Crunch,' one of them said, 'because it sounds like you did.'

This passing remark inspired me to write almost as soon as we had finished our poker game. In fact, even during the game, I had formed a vision for the book. That vision was galvanised by the paucity of the press coverage, which simply highlighted the sheer complexity of the products at the heart of the credit crunch. Having understood the products, known most of the players and played my part in the credit bubble and subsequent crunch, I felt that only a better understanding of the causes would help us learn from our mistakes and progress more constructively.

So I started writing a book which was very detailed, technically comprehensive and highly informative, but which explained things simply enough for even my mother to understand. I even gave the first few chapters to the friend who suggested writing the book.

'Informative,' he complimented me, 'but fucking boring. What about all the other shit you did? Your Brazilian stripper, the whores, the drugs, the booze. That's the shit people want to know.'

That didn't inspire me, especially because stories of drugs, whores, alcohol and the general excess of bankers were not new. But I had got the wrong end of the stick. What had made him suggest the idea in the first place was that he found my human story, and not the credit products, interesting. To him, the products were vaguely interesting but they would be locked away in the innermost corners of his brain after a few minutes. What he did care about was what drove us to these products in the first place.

So back to the drawing board. I knew I would keep the technical aspect of the book – the products – because even if they are at times complex, it's important to understand what drove us to create them the way we did, perhaps more so than the products themselves. (There is a glossary at the back of the book if you need it.)

I then mapped out everyone I had met in my career and their stories so I could piece the puzzle together. But before long I had run out of paper. There were thousands of real people at thousands of firms that were involved. Well aware of the orgy of scapegoating that the world had embarked upon, I didn't want to blame anyone, let alone run the risk of over-burdening some and under-burdening others with responsibility for the crunch. After all, I'm not one to say who's guilty or not, and ultimately it doesn't help us to move on anyway.

In any case, I was already thinking about a fictional construct for the story because it had its own merits. The creation of the fictitious Andrew Dover allowed me to take you through all the corners of the credit universe in a way that best explained how the credit crunch really did come about. Moreover, using real names and firms to explain the credit crunch would not only have apportioned blame unfairly but fuelled the frenzy of scapegoating, which would have distorted the lessons we can learn from this crisis. To that end, any resemblance to actual firms or persons in this book is entirely and genuinely coincidental. Hearing that may disappoint some of you, but if gratuitous naming and shaming is the ultimate goal, then the internet is a much better forum.

That is not to say that the individual events in this book didn't happen, even if a handful are out of context. After all, no story of the credit crunch would be complete or accurate without the specific sequence of events that unfolded. But as a result some will inevitably try to draw parallels between my fictional firms and characters and those in real life. To this, I can only say that this is futile, since I have at no point started my thinking with an actual firm or person, then thought of all the events that they were associated with, and then written about them. Quite the opposite: I have thought of all the relevant events that I knew happened, and assigned them to the fictional firms and characters with the sole purpose of telling the real story of the credit crunch – a story that I now believe, more than ever, needs to be told.

It's important to understand this, because I don't believe in the act of scapegoating at all. Nor do I believe in gratuitous exposés that serve no purpose. Instead, I believe that we all need to take responsibility for our own actions. I am genuinely apologetic for the part I played in causing the credit crunch, but without a collective recognition of all our failings, we as a society will never truly understand why we are where we are today. I hope the admission of my failings brings this to light so that we can rise from the ashes heeding the real lessons to be learnt.

Chapter 1

'Please can you go in to see Zoe? Room 3G.'

I put down the phone. Faye, my secretary, still refused to walk the four-metre divide between our desks after a year of working for me. Like other secretaries, she reserved this honour for those with the revered status of a Managing Director. Ultimately, though, it was Faye's ever-expanding backside that suffered, and it made me smile to know that today I'd be doing it a favour. Today was going to be the last day she would be calling me.

I had just taken the first bite of my muesli, part of a concerted diet to be healthy again after seven years of neglect and abuse to my once ripped body, a function of working hard and an irresponsible lifestyle. Usually I would peruse the emails I had received overnight, but with the credit crunch in full swing I didn't have any emails to look through – not this morning, nor any other morning for the last three months. Getting out of bed was harder and harder these days, completely deflated as I was by the prospect of having nothing to do. My BlackBerry was now just a play console with its one solitary game, BrickBreaker.

How I missed the days when I would wake up in the morning with a list of a hundred things to do, all of which would be profitable, and would frantically deal with as many emails as possible on my BlackBerry before reaching the office. Now I was getting fewer emails in a day than I used to receive in a minute. I missed the constant adrenalin rush of doing business, at the very least because it helped maintain some degree of order over my ever-growing waistline. The only other thing I could do was perhaps read some news articles, but I had got bored with that a long time ago, quickly realising that the only contribution made by the press was popularising the term 'credit crunch' with no idea what it was really about. Instead, I was thinking of a new job title to give to myself – Chief Websurfer, Chief Wikipedia Reader, Chief Movie Review Follower, Chief Bum.

Without the pleasure my breakfast usually gave me when it consisted of a crispy bacon butty, I gladly walked over to room 3G. I didn't care too much that I was about to be fired. There was no bitterness, no sense of 'why me', no regrets. I had enjoyed my seven years working in credit and I had profited well from it, but the journey was over. The journey was beginning to end as early as 2006 and by the time so-called financial experts had called the credit crunch in August 2007, those in the credit markets had already seen events unfolding for a very long time. With declining house prices, redundancies being commonplace (if anything, it was amazing I wasn't fired earlier) and the global economy heading into recession, it was perhaps only right that I was getting fired. Yet, walking through the trading floor on my way to room 3G, I saw my soon-to-be ex-colleagues still slogging away in self-denial, hoping that things would get better again soon.

The last year had been a soul-destroying time. Apart from a few exceptional individuals who had done very well during the credit crunch, almost everyone I knew hated their jobs. We were no longer building skyscrapers but using our bare hands to clear the rubble after every mighty tower we had ever built had collapsed down to its foundations. Moreover, I had begun to wonder how low I had stooped when I saw the credit crunch bringing out the worst in bankers. The drugs, prostitutes, strippers, booze and general excessive nightlife that many bankers were engaged in behind the respectable façade was one thing – despicable but harmless to others – but what I saw around me now was another: the office politicking to protect their own jobs at the expense of others; the even greater sense of self-importance that bankers adopted to protect their diminishing status in the industry and the world; the inevitable lack of support for clients who once bought the credit products that enabled the wealth creation that many bankers benefited from during the bubble, and who were now struggling to hold on to their much more modestly-paid jobs. We had moved on to hurting others in our quest for self-preservation.

I had had enough of the bullshit, the lack of honesty with ourselves. It seemed ridiculous to me that bankers who had profited so handsomely during a bubble were not prepared to take the pain when the bubble burst. In fact, I had already begun to positively despise those bankers who couldn't see a life beyond a job in the finance industry, no matter what. It was almost as if their existence was justified on them being able to call themselves an 'investment banker' so they could sit on the high ground with the respectability it supposedly brought. What respectability, I was wondering? That was it – any bitterness I felt was only for people I wasn't going to be seeing any more, not at losing my crap job. And that made me smile.

Zoe greeted me with an uncomfortable smile. She was my boss, the Global Head of Credit Sales at Irwin May, a genuinely kind and maternal figure who had an unnerving ability to clinically pick off her rivals one by one to move up the ranks. She was also the one who had hired me on a $3m guaranteed bonus the year before to do a job that didn't really exist by the time I had started. In all fairness, Irwin May had paid me a lot of money to cover clients that started folding from the day I joined. I had done nothing for them, yet it was a great return no matter how you looked at it.

'As you know, we've been resizing our business in this market downturn and we've had to make some harsh decisions.'

A human resources lady sat next to her, observing proceedings to make sure that only the lawyer-approved speech rolled off her tongue. What she really wanted to say was: 'You're expensive, you're not producing, and I don't particularly care how much of a superstar in credit we thought you were, there's nothing for you any more – you're out.'

'We'll endeavour to place you in another job at Irwin May as we have been expanding greatly in other regions, such as Dubai and Mumbai.' I just laughed. We both knew she was spouting total and utter crap, but she kept a straight face because of human resources, who probably did think I would relocate to Mumbai so I could work in a call-centre for the sake of having a job at an 'investment bank'.

'We do have to ask you to go back to your desk, collect all your belongings and leave the office immediately. Your security pass is no longer operational as of now and we ask that you leave all work-related documents and materials in the office.'

As the charade finished, I shook hands with Zoe, stood up, turned round and let off a big grin. Perhaps it was the realisation that my last seven years had been one big charade, and with it all over, I could now rediscover my true self. Yet walking back to my desk, it didn't seem like my epiphany was shared by many. There were some packing up their desks looking disappointed, others who seemed to accept it matter-of-factly. Some just looked angry, but no one seemed happy – truly happy. And then I saw one structurer crying, the emotional toll of being fired too much to handle. A few days earlier, he had been telling me there was no loyalty or integrity in the business. The sheer hypocrisy of this just stank. He had spent the last five years going after the next client that might buy his products, strangling them until they squealed 'I buy', before watching them get hurt by the credit crunch from afar, totally uninterested in their predicament. How many people did he get fired from their modest jobs, I wondered? He conveniently ignored the luxury that his six-figure salaries and bonuses had brought him for the last five years, even though one of his three Aston Martins was still waiting to be driven home to his drug-filled penthouse riverside apartment, a plethora of escorts waiting to be called from his phone book. What did he have to complain about?

As I got back to my desk, my muesli looking even more like bird droppings now that the milk had been soaked up, Jeff Nordberg came to my desk. He glanced at the muesli before deciding perhaps it might not be appropriate to comment. Jeff was the Global Head of Sales at Irwin May, or in layman's terms, the man who was responsible for all the firm's clients globally and who had pushed through my hire the previous year.

'I'm sorry,' he started sombrely, 'but we didn't have much say in this matter. We think there are still a lot of opportunities in this market and we need people like you, but we just had to let people go, and the decision was made by the CEO.'

'Jeff, I understand,' I replied unconvincingly. Look around us, Jeff! What opportunities? All the clients we ever made money off had either folded or were in such a bad state that we didn't even know if they were going to be in their job the next day. Sure, we could make some money helping those clients restructure the deals we sold them so they looked aesthetically better, but this was only going to make things worse in the future. Of course Jeff knew this, but he was first and foremost a very well-paid employee of Irwin May.

'I want you to know that personally, I was marking you out as a star of the future, so I'm sorry you've become a victim of this credit crunch.'

And that was it. My moment of clarity. I wasn't a victim of the credit crunch. None of us on that floor were victims of the credit crunch. Victims are those who get caught in the crossfire when they're minding their own business. The victims of the credit crunch were out there, everyday people who were unaware of what was unravelling, the general public who had been taken advantage of through a system that fed the credit bubble so that bankers like us could become rich. We weren't victims. We were the cause. Very much the cause. And it was this that made me so at peace with myself. This was why I was so happy to be fired. I had deserved it.

Chapter 2

'It's all about leverage!!'

Ben stormed into my room, excitedly waving the copy of Richard Branson's autobiography that I had given to him a few days earlier in hospital.

'It's all about leverage!! Leverage!! Leverage!! Leverage!!'

I was working frantically to get my politics essay done in time for my tutorial the next morning. This was a weekly ritual – I'd pick up some textbooks the day before from the New Bodleian which I'd speed read even though I couldn't speed read, get some ideas and rattle off an essay, all in eighteen hours.

'Andy, you have to listen to me. This guy is a genius.' I listened but pretended to ignore him, knowing that even if he had just come out of hospital and most people would expect a big hug and a nice cup of tea, he wouldn't take offence.

'The guy can't read or write but what use is that when there's leverage? Whether he knew it or not, he leveraged all over the place, investing small amounts of money and making millions. Actually, even better! He borrowed that money, multiplied it, paid back the original amount and walked off with the profits. I think it's genius.'

He waited for a response. It actually sounded great but I still needed to get my politics essay done.

'Let's do it. You and me. We can borrow, what, ­£2,000 between us and play the stock markets. If we can make ­£10,000 by the end of the year, we would have made £8,000 from nada!'

Ben Carrington had always been a perfect student before Oxford. He was not only bright and had never failed to get the top grade possible in any test he had ever taken, but, unlike most boarding school yuppies, he didn't smoke, had never done drugs and only drank modestly in respectable social circumstances such as family dinners, galas and balls. He sang in the choir at school – as a soprano until he was sixteen, so late did his voice break, and then as a tenor – although a major throat infection meant he missed out on the chance to be a choral scholar at Oxford.

Ben was the first person I met at Oxford. We were together when we interviewed for our places, and he told me of his vision to be in the clergy, to bring support, light and comfort through the teaching of God to many. He was one seriously committed seventeen-year-old, and that was the issue. He didn't know any better about how good that apple really tasted. But we became friends nevertheless; I was only too happy that there was some purity in my life.

Whether our friendship ultimately led to the infiltration of life's temptations into his purity or whether it would have happened regardless because his purity lacked inner conviction, I never figured out. But it didn't take long into our freshers' week at Oxford to realise that his purity was being undermined in a major way. Before the week was up, he had lost his virginity, gained one enormous hangover, and was on his way to becoming a reformed man.

The clergy was no longer part of the plan, his theology degree now nothing more than a nuisance. He just wanted to make money and get lots more of the sex he had just tasted for the first time. By virtue of humbly thinking small his entire life, his revised life plan was outrageously oversized. We went through the career possibilities. Modelling? Not good-looking enough, though money could change that. Acting? Couldn't act, but then Arnold Schwarzenegger got rich and got an acting tutor, and look where he was. Sportsman? Not talented enough. Start a business? Yes, but need money. Actually, for everything we talked about, money was the means to that end, or was it the end in itself?

Ben's father was a senior banker who had done very well for himself, even if he drove a four-year-old Volvo. But when Ben speculated that he made at least ­£5m a year, I guessed he must have been a senior investment banker, something I had only recently learnt was very different from a commercial banker. Commercial banks did the boring business that we deal with every day – provide bank accounts and make loans. Most commercial bankers earned a healthy but modest salary. Investment banks, on the other hand, were in a much more lucrative game, brokering deals for companies in 'corporate finance', and providing research and trading capabilities for investors in 'sales and trading'. Both businesses dealt with billion-dollar-plus deals and, accordingly, the fees that these investment banks reaped were enormous. Only investment bankers could earn as much as Ben thought his father did.

My guess was right. I soon discovered that he was a prominent TMT banker – one of the late-1990s banking masters of the universe who advised these telecom, media and technology companies into initial public offerings (IPOs) and mergers and acquisitions (M&A) which generated the highest fees in history – except he didn't act like a master of the universe. But he did know all the chief executives, presidents and board members of his clients and spent a lot of time with them playing golf and entertaining them in the trendiest restaurants, all in the name of winning business. And with the TMT bubble in full swing, Ben's father was at the forefront.

In contrast to his own career, his father was proud to see Ben wanting to go into the clergy – he always felt that banking was morally void, and even though he was now in a position of seniority, it was only the lack of opportunities in his childhood that spurred him on to give Ben a freedom of choice. Besides, he didn't want Ben to go through the hell of being a junior banker. With CEOs and Presidents not particularly keen on dealing with kids in their twenties, there was a distinct hierarchy where the junior bankers would slave away into the early hours of most mornings, drawing up Powerpoint presentation after Powerpoint presentation of possibilities and ideas that the senior guys would then pitch to their clients, often with no business to show for it and feedback consisting of a few typing errors.

Ben's take on investment banking changed considerably when I told him about the six months' work experience I had done on a sales and trading floor at an investment bank before our Oxford matriculation. Sitting alongside corporate finance as the other main business unit within most investment banks, sales and trading were involved in the financial markets – the 'movers and shakers' as it were of the equity, foreign exchange, interest rate, credit and commodities markets. Corporate finance bankers with important relationships were remunerated handsomely, but it meant waiting twenty years until reaching a position of seniority, whereas sales and trading bankers were remunerated on what they made through trading in their specialised market in any given year. Much more short-termist, it also had two major appeals for us. One, the easy measure of one's profitability to the firm meant that face time counted for nothing; and two, it was a truly meritocratic environment where 'kids' in their twenties would be running businesses or entire divisions, quite simply because it was not inconceivable that they would make ten times more than someone ten years their senior. After all, if a kid made $200m for their employers and they were not paid or promoted accordingly, someone else would happily pay the kid $30m so he could make the $200m for them instead. Our market value was much more easily defined.

The fact that corporate finance bankers had a degree of snobbery over the uncouth, low-class, uncultured business manner that sales and trading bankers seemed to epitomise, only spurred Ben on even more. Perhaps it was because corporate finance bankers, by the very nature of their work, were generally well-spoken and well-educated, while some traders had joined as apprentices at the age of sixteen or eighteen. Perhaps it was because corporate finance bankers worked late and had no life, while sales and trading bankers worked hard during the day, partied hard at night and slept with whatever else they could get. Ben wanted the lifestyle – sales and trading it was. Especially once I told him that from what I could see during my work experience, there were a ton of 'kids' in their twenties, living in phat pads in Chelsea and driving a Ferrari, Aston Martin or Lamborghini. Porsches were for the commoners.

And their jobs seemed simple enough. Research would analyse numerous stocks; sales talked to clients, who were usually an asset manager, pension fund, insurance company or hedge fund; and traders would 'make markets' for these clients whenever they wanted to buy or sell a stock, like a bureau de change but on a much larger scale. And in the same way bureaux de change made more profit by doing more transactions, so the traders that made most money were those that had the most 'flow', i.e. trading activity or volumes from clients. Research had to be creative and informative with trading ideas, which in turn helped sales to build strong relationships with clients to get as much 'flow' as possible.

With a new sense of purpose, Ben engrossed himself wholeheartedly in the lifestyle these bankers had, but without the job. After two weeks of champagne and cocktails, he found himself in hospital after a nasty bout of cirrhosis left him coughing up blood on a Tuesday morning. Warned by the doctors that any more alcohol might kill him, he was told to rest in hospital for a few days. Bored out of his mind, he begged me to bring him cigarettes and any bottle of wine. I agreed, but instead I took him a copy of the book that looked most interesting – Richard Branson's Losing My Virginity. This was to be the discovery of his guiding principle: leverage.

He was out partying the day he came out of hospital and within