What kind of fiction do they read at Goldman Sachs? A trader I know there recently recommended In the Light of What We Know, Zia Haider Rahman’s debut novel. I could see why he was intrigued when I picked the book up. Its two main characters study mathematics and physics in the late 1980s and end up on Wall Street trading and structuring derivatives – just like him.
The lead character is an Anglo-Bangladeshi mathematician-trader called Zafar whose affair with an upper-middle class English NGO official leads to an explosive climax in post-Taliban Kabul. A fragile man with a rich internal life and a love of Gödel’s incompleteness theorem, Zafar turns up on the doorstep of the narrator, an Anglo-Pakistani old Etonian banker whose job and marriage are collapsing in the wake of Lehman Brothers.
The third key character, Emily, is seldom heard in her own voice but rather emerges via her destructive effect on Zafar and the narrator. Zafar tells his story to the narrator (we never learn his name) who tells it to us, but he proves to be unreliable both as a narrator and a friend to Zafar.
Amid the thriller plot about Af-Pak espionage and the musings on Bangladeshi history and identity, the novel’s title is a tip-off that epistemology is a fundamental theme. People are unknowable, Rahman is saying, but we have to act in relationships based on what others tell us, along with our impulses and social codes. The fact he mentions Daniel Kahneman a couple of times hints that he knows that behavioural psychology offers one way out.
Within that context, the hero’s love of Gödel’s theorem is a cruel metaphor. After all, pure mathematics is about proving true statements within a system of axioms. Gödel’s theorem says that within any such system, some true statements can’t be proved. Note that it doesn’t say truth is unknowable – to prove the theorem you actually construct a statement you know is true but can’t be proved. Obviously, questions in real life – Does she love me? Is he lying? – can’t be proved or disproved mathematically. If the metaphor means anything, it is that Zafar thinks he can get at life’s truths axiomatically and the effort drives him mad.
Some of the novel’s pathos comes from its unreliable narrator, who withholds vital information from Zafar. With a career that takes in the invention of credit derivatives and the trading of securitised subprime mortgages, the narrator is also an unreliable financier who misdirects the reader.
He tells us things like:
“Regulators, who, in theory at least, are looking out for customers and the industry, step in here and require a bank to set aside capital, every time it lends – just put it in a reserve account where the bank can’t touch it”
How is this unreliable? As Anat Admati and Martin Hellwig pointed out in The Banker’s New Clothes, describing bank capital – a liability of the bank – as a reserve account is “nonsense”. After I read the words of Rahman’s narrator I began to wonder if I had heard his voice somewhere before. Indeed I had, in Gillian Tett’s book Fool’s Gold:
“The Basel I accord of 1988 stipulated that all banks needed to hold capital reserves equivalent to 8 per cent of the corporate loans on their books … keeping $8 of reserves for every $100 lent out seemed a complete waste of resources”. (Tett)
A few pages on, Rahman’s narrator talks about a real-life historical default swap deal between JP Morgan and the European Bank for Reconstruction & Development described in Fool’s Gold, in language that closely follows Tett’s:
“If JPMorgan ran a credit line to Exxon, it would be huge, and JPMorgan would have to reserve a huge amount of capital, capital which could not be put to any use, not even to earn interest”. (Rahman, page 288)
“Like so many of J.P.Morgan’s corporate loans, it would produce little, if any profit, and yet would gobble up credit, pushing the limits, and would require a large amount of capital reserve”. (Tett, page 54)
Here Rahman introduces a fictional character, Payne, who seems to be based on former JP Morgan banker Blythe Masters, the architect of the EBRD deal.
“[Payne] negotiated a deal with EBRD under the terms of which EBRD would cover JPMorgan in the event that Exxon failed to meet any payments once Exxon began drawing on the credit line. EBRD would effectively insure JPMorgan against the credit risk posed by Exxon, and in return JPMorgan would pay EBRD a modest annual premium”. (Rahman)
“Masters proposed that J.P. Morgan pay the EBRD a fee each year in exchange for EBRD assuming the risk of the Exxon credit line, effectively insuring J.P. Morgan for the risk of the loan”. (Tett)
So why did Rahman take the trouble to fictionalise Tett’s writing in such a faithful manner without citing it as a source? Then I remembered that the narrator is unreliable. And what better way to convey unreliability in finance than to borrow the language of JP Morgan? Tett perfectly conveys the authentic JP Morgan sales pitch (bank capital is a wasted reserve, financial innovation is virtuous) that has since been profoundly discredited.
As a sourcebook for fiction, Fool’s Gold provides a reliably unreliable banker’s voice that gives Rahman a neat solution to the epistemic puzzle at the heart of his clever novel – one which is clever enough to be appreciated even at Goldman.
