London Vice-Whale Blames His Boss
Five years and like I dunno forty hours after Lehman Brothers' bankruptcy filing it is still fashionable to try to identify potential future banking crises, so in that spirit I will tell you what keeps me up at night, which is that I worry that some day in the near future banks are going to have to stop calling their tens of thousands of vice presidents "vice presidents." And since like half of bankers are vice presidents, the consequences of that change will be far-reaching and hard to predict. I recommend that you go long business-card-printing companies though.*
The root of the problem is that banks use the term "vice president" as a thinly but adequately disguised code for "callow twentysomething whom we want clients to think has more power, responsibility and experience than he actually has." Every client's problems are important to their investment bank; it's just a question of whom at the bank they're important to. Twitter's problems are important to the CEOs of the banks chasing its IPO. Other companies' problems are important to some guy. Wait sorry no, they're important to the Vice President and North American Head of Software Services M&A Banking. Ahhh that is so much more soothing.
But that racket has to end because you keep getting stuff like this:
In a statement on Tuesday, a day after the government formally indicted [former London Whale deputy Julien] Grout and another trader in connection with their roles in a trading loss that cost JPMorgan more than $6 billion, Mr. Grout’s lawyer returned fire on the government’s case. ...
[The lawyer, Edward] Little indicated, the defense will depict Mr. Grout as a low-level employee who was simply following orders. Or, as Mr. Little put it, Mr. Grout was a “junior trading assistant acting under the direct instructions of his managers.” Although the government described him as a vice president, the bank has tens of thousands of employees of that rank.
Vice President and Junior Trading Assistant is an awkward thing to put on a business card. But this sort of thing is becoming a trend: Grout follows close on the heels of Fabrice Tourre, who was sued by the SEC and who in July told jurors about "his former life as a 28-year-old Goldman Sachs Group Inc. vice president, working until midnight, six days a week on a vast trading floor, supervising no one," poor dear. And then of course there is Greg Smith, who before quitting Goldman to muckrake was simultaneously "executive director and head of Goldman’s U.S. equity derivatives business in Europe, the Middle East and Africa" and a "vice president, a relatively junior position held by thousands of Goldman employees around the world" and "the only employee in the derivatives business that he heads."** So, yeah, investment bank VPs in the news supervised, on average, 0.0 people.***
Eventually clients will catch on, and will no longer be mollified to learn that the nervous kid in the ill-fitting suit is a vice president. I posit that title inflation is a one-way ratchet so that kid will have to be bumped up to ... Managing Director? President? A lot of words could be rendered meaningless and pressed into service.
What were we talking about?
Oh right Julien Grout. I mean ... you can sympathize with him a little, no? Basically the story is that there was a whale, and that whale was actually a JPMorgan synthetic credit trader named Bruno Iksil, and that whale bought just tons and tons and tons and more tons of index credit derivatives, and that trade went horribly wrong, and when it all went wrong, let's say, mistakes were made re: covering up how much money the trade had lost, and now the Department of Justice has indicted:
- the whale's boss, Javier Martin-Artajo, for demanding that the losses be covered up, and
- the whale's assistant -- Grout -- for actually keeping the spreadsheet that covered up the losses, but
- not the whale, who is cooperating with prosecutors, and who also expressed some contemporaneous misgivings about the cover-up.
Sort of rough on Grout, who as a junior trading assistant had to follow orders and relied on the more senior traders for advice. Per his lawyer:
“It is astonishing that the prosecutors are relying on Iksil’s testimony when he is the one who taught Mr. Grout how the bank was marking the portfolio, gave specific instructions on where he should mark positions, and personally approved the marks on a daily basis,” Mr. Little said. “Mr. Grout was totally dependent on Iksil’s instructions and relied in good faith on his expertise.”
Fair enough. Grout also didn't have the leeway to complain that Iksil had: Whereas Iksil occasionally disagreed with Martin-Artajo in front of their bosses -- including by daring to tell more senior executives the truth about the losses -- Grout pretty much just grumbled passive-aggressively to Iksil about how he was "trying to keep a relatively realistic picture here – ig9 10y put aside." (IG9 10Y was mis-marked by $300 million.) Also, he kept a spreadsheet of how inaccurate his marks were, which I guess he thought would protect him? It seems to have had the opposite effect. "See, I'm pretty honest, at least I knew I was lying" doesn't go over as well with prosecutors as people sometimes expect.
Also, unlike the more senior traders, Grout wasn't richly compensated in exchange for putting his neck on the line. Would you believe that in 2011, while working as the junior trading assistant on these whale trades, Grout was paid only one million dollars?****
I'm being a little sarcastic but I do feel for Grout; there are no great options when your boss demands that you cook the books. But you can see the prosecutors' side too: They can't let banks get away with too much division of labor. You filter the book-cooking through enough layers and pretty soon you won't be able to find anyone with both a knowledge of how wrong the books are and the power to change them. So to deter misconduct, prosecutors sometimes have to go after the little guy. And the little guy is usually a VP.
* Oh, I'm new here, so I guess I should say that nothing in this blog is, was, or ever will be investing advice, except the remainder of this sentence, to wit: NEVER TAKE INVESTING ADVICE FROM A STRANGER ON THE INTERNET. That is investing advice, though it contains a subtle paradox, see if you can spot it.
Anyway I don't even know if "business-card-printing companies" are an actual thing so you're probably safe.
** Goldman uses "executive director" as a synonym for "vice president." (VP in the US, ED elsewhere.) Other banks sometimes use them to mean different things.
*** I topped out at VP too, since you ask, but I usually supervised someone. I mean I supervised them pretty loosely, but still.