Risk and the City

Not so many decades ago, the City—London’s financial district—was deadly dull compared with Wall Street, with its Milkens and black swans. It’s been catching up in a hurry. JPMorgan’s $3 billion–and–­counting loss, partly caused by trader Bruno Iksil, who was known as “the London whale,” follows the $60 billion that ­evaporated from AIG’s London-based credit-derivatives unit at the start of the 2008 financial crisis. In between those two scandals, the City produced Kweku Adoboli, a UBS trader accused of going rogue, and “Fabulous Fab” Tourre of Goldman Sachs, who faces fraud charges. Greg Smith, the Goldman trader who bowed out in spectacular fashion in March, had just resigned from the firm’s London office when he wrote in his much-dissected New York Times op-ed: “I have worked here long enough to understand the trajectory of its culture, its people, and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.”

Just what is going on over there? The answer traces partly to changes made to London’s financial sector 26 years ago. After Wall Street bond and equity brokerages were deregulated in the seventies, which was followed by the leveraged-­buyout boom, Prime Minister Margaret Thatcher instituted a set of reforms in 1986 that opened the parochial City, then still dominated by former public schoolboys, to the outside world. As London’s banks went global, they became even more of a melting pot than Wall Street, attracting young, highly educated hotshots from across Europe. (Those implicated in the losses at JPMorgan’s chief investment office in London include Greek head of trading Achilles Macris; Javier Martin-Artajo of Spain; the French-born Mr. Iksil.) In some ways, the City of today is like Singapore or Dubai. “London is an offshore financial center that happens to be onshore,” says Peter Hahn, a lecturer at City University’s Cass Business School.

It’s not the bankers’ nationalities that make them reckless, of course. But perhaps it comes from the fact that they’re working far from home, in a place that’s become a hub for dicey transactions. Thatcher’s reforms were meant to spark innovation, and that they did: Credit derivatives were created in London by a team of ­JPMorgan bankers in the early nineties, and by one measure, the City has controlled nearly 40 percent of the trading in them, including the indexes on which ­JPMorgan came to grief. The combination of new, riskier deals and expat, risk-seeking bankers has turned London into a kind of high-stakes casino, where the gamblers bet with other people’s money.

“The old City had an entrepreneurial culture, and there were some pretty aggressive characters. But the constraint was that if the firm lost money, the partners had to stand behind it,” says Philip Augar, author of several books about London banks. In that way, it’s very much like Wall Street, which has managed to lose quite a few billions itself during the past four years. But what’s surprising to those who knew a more staid City is the growing evidence that its traders can now be as wild with the dice as their counterparts in New York.

Gapper, a Financial Times columnist, is the author of the forthcoming novel A Fatal Debt.

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Risk and the City