Swimming With Sharks, Part Five: Other People's Money

June 08, 2017

Last week we left off with an insight on the “Code of Silence” that exists within the world of finance that often prevents those within the system from speaking out against what is wrong on the inside. This week we cover a fundamental shift that occurred in the banking industry decades ago that has profound implications today and going forward.

In Swimming with Sharks:  Inside the World of the Bankers, author Joris Lujendijk states that in the 1980’s a fundamental change began occurring in the ownership of investment banks.  This change in ownership of the banks meant also a change in the ownership of the risk that investment banks undertook.  Prior to the mid-1980’s, individual investment firms were owned by a relatively small number of partners whose personal fortunes were on the line based on the success of their banking and trading activities.  The partners of these firms were therefore very cautious about the level of risk and complexity they were willing to take on – it was their money on the line after all.  This exerted a lot of influence on the employees who were coming up with the financial products and the traders who were buying and selling them on behalf of the firm – they felt tangible, personal pressure not to do anything too risky or stupid.  

However, as these firms grew and as markets grew, they began to be listed on the public stock exchange or were swallowed up by large commercial banks who were already listed on the stock exchange.  Ownership thereby changed from the hands of a small group of partners with their personal fortunes on the line to a broad base of faceless and nameless shareholders.  

Lujendijk writes, “There is an expression in the City [the London banking district] for this new state of affairs:  ‘It’s onlyO.P.M.’ – Other People’s Money.”[i]  People in the banking district in London literally say those words when speaking about whose money they are playing with.  It’s just Other People’s Money – O.P.M.

No longer are traders sitting in the same office as their boss who is also the man whose personal fortune is on the line.  Yes, the upper levels of management of today’s investment banks may have a substantial holding in the shares of their bank, but by and large they are not at risk of going personally bankrupt if the bank they are managing collapses.  There is no personal connection for the traders who are daily taking positions at varying risk levels that affect the shareholders’ stock price at the end of the day.  In reality, it is now the shareholders who are bearing much of the immediate risk.  If the bank they own shares in loses money, then the shareholders lose because the market value of their shares drops. 

However, now even more dangerous than that, because of the precedent set in the 2008 crash with government bailout of banks, we know that it is not only shareholders, but now all taxpayers who bear the risks that the banks are taking – if a big bank begins to fail, governments use YOUR tax dollars to bail them out.  Even if you own no shares in any investment banks, YOU are now bearing the risk of failure. 

As Lujendijk writes, the problem is not so much that banks take risks, the problem is the ownership of the risk.  When the bankers and the banks themselves don’t really own the risk, it becomes much, much, much easier for them to be comfortable taking riskier and riskier positions.  After all, it’s just O.P.M.

One of the ideas we are building to through the Century Silver Exchange “Swimming with Sharks Series” is that the whole structure of the financial system has become corrupt.  It’s not just a few bad apples or rogue traders out there wreaking havoc on your life’s savings.  The “Code of Silence” from last week’s article and the ownership structure described above are parts of the systematic framework that no courageous individuals, no government regulations, no good intentions are going to correct. 

We look forward to next week’s part of the series.  We also have an exciting announcement about Swimming with Sharks we’ll send out to you either tomorrow on Friday or early next week.  Be on the lookout for it.  God bless you.

Century Silver Exchange

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