From 2001 to 2005 I wrote a series of investigative articles for Risk magazine, a specialist financial trade publication. Helped by my technical knowledge of derivatives and access to key players, the articles explored the ramifications of the boom in financial innovation that took place during this period, highlighting problems that would be widely discussed in the wake of the financial crisis. The articles helped shape The Devil’s Derivatives and are all cited in the book’s bibliography.
1) Goldman & Greece
What if Europe had a currency union with strict fiscal rules and a member state fiddled the numbers using derivatives? In 2001, Italian economist Gustavo Piga published a paper alleging this was happening without naming any names. It took me until July 2003 to identify Goldman Sachs’ mega-deal for Greece and the rest is history.
2) JP Morgan’s Italian corporate clients
‘Doing first class business in a first class way’ was the proud slogan of JP Morgan, but by 2003 the firm was pushing complex interest rate products in Italy that some clients appeared not to fully understand. Gruppo Editoriale Espresso and Poste Italiane were two companies I wrote about at the time—the latter ended up suing JP Morgan. These were the first articles to suggest that swap hedging products might be being mis-sold in Europe.
Imagine you’re a German mittelstand bank with a conservative reputation—what do you do? Underwrite an unregulated offshore vehicle that buys $20 billion of CDOs funded in the commercial paper market is the answer. That’s what IKB did, and in February 2004 I reported on what was everyone’s biggest client, including an estimate of the revenues the banks were making. In July 2007 IKB’s collapse heralded the start of the global financial crisis, highlighting the systemic risk of shadow banks. Michael Lewis would later interview me about the story for his book Boomerang.
4) CDOs and the European retail structured products market
Collateralised debt obligations proved so compelling from a bank balance sheet and trading desk perspective that bank structurers and salespeople were incentivised to the hilt to find new types of buyers for the products. Deutsche Bank and JP Morgan were fierce rivals in Europe and scoured the continent looking for regional backwaters and regulatory loopholes permitting CDOs to be sold with the help of ratings agencies. My articles showed how retail customers were unwittingly being sold CDOs in Spain and Italy. The second article, about Poste Vita, is notable because I worked with quants to analyse the up-front profit that JP Morgan booked on a synthetic CDO trade.
5) Trade magazine awards
In 2000, when the editor of Risk and I devised the magazine’s annual awards for derivatives bankers and risk managers, the idea was that the incentive of a prize would encourage them to provide us with journalistic scoops. And indeed it worked out that way, although not always in the manner that the bankers intended. This award article I wrote in 2004 reveals how Deutsche Bank benefited from customer ignorance of CDO pricing. However, winning a prize turned out to be a contrarian indicator—in 2008, this same risk management department recorded over 35 value-at-risk exceptions, showing how useless its models were.
6) JP Morgan and Greek pension funds
I had written my 2003 story about Goldman and Greece without leaving London. But by 2007 I had visited Athens and saw at first hand the country’s chaotic approach to investment and borrowing. Things came to a head with Greek pensions. A broker persuaded the funds to pay €280 million for structured bonds that were issued by an obscure military procurement office via a chain involving a London hedge fund and JP Morgan. The bonds were worth €20m less than the pension funds paid, and the ensuing scandal claimed the jobs of Greek ministers, a junior JP Morgan banker and ultimately led to prison sentences for some of the participants.