Don’t blame me, but I did do my bit

With asset prices rising, Tetsuya Ishikawa couldn't lose. Then the finance bubble burst.

by Tomoko Otake

Born a son of a Japanese trading- company executive, and exclusively educated in Britain, Tetsuya Ishikawa got his first taste of life in the financial industry in the summer of 1998. That was during his pre-university “gap year,” when he worked on the foreign-exchange trading floor at the Tokyo branch of Chase Manhattan Bank, which is now a part of JPMorgan Chase.

Attracted by the industry’s prestige, and inspired by the meritocratic culture he experienced during his time with Chase Manhattan, he jumped into banking after graduating from Oxford University in 2001, joining the London office of the Dutch bank ABN AMRO. Though he didn’t know it then, in the following six years, as he worked as a “credit banker,” he would be taken to the very heart of the financial activities that helped create a credit bubble. But when the bubble burst, shock waves quickly spread worldwide. Several gigantic financial institutions were wiped out or driven into nationalization; Iceland’s economy virtually collapsed; and the world is now experiencing possibly the worst ever financial and economic downturn.

Though still a mere 30 years old, Ishikawa — who has also worked at Goldman Sachs and Morgan Stanley — came out last month with a thinly fictionalized account of what has happened to his life, the credit markets and the financial system he worked in.

Sensationally titled “How I Caused the Credit Crunch” (Icon Books), the book tells how a young university graduate with no grasp of terms such as “securitization” or “credit derivatives” turns into an overnight expert on investment products founded on such financial concepts.

In fact, as the book explains in straightforward language, securitization is a process in which assets such as mortgages and corporate loans are pooled together and then repackaged as securities according to their risk. These are then sold to investors who weigh the risks and likely returns before buying in — with rates and returns generally higher where the risk of debtors defaulting was higher.

The catch was that even financial products awarded a AAA rating by agencies specializing in such assessments were not risk-free. Nor could they be guaranteed to keep their rating indefinitely. We know now that as the bubble burst and U.S. housing-loan defaults started to skyrocket in 2007, ratings for many assets previously thought to be the safest went through downgrade after downgrade. The implosion, in fact, was painfully reminiscent of the bad-loans quagmire Japan experienced throughout the 1990s after the burst of its asset-inflated economic bubble.

Ishikawa, who was laid off by Morgan Stanley in May 2008 and now lives in London with his Korean wife and two young children, says it was not feelings of resentment or bitterness toward his former employers or the industry that inspired him to write the book.

“I actually don’t feel any sort of resentment,” Ishikawa said in a recent telephone interview, noting that it was the “paucity of the press coverage” about what exactly happened during the credit bubble and crunch that motivated him to tell it all.

His first attempt at writing has paid off, and the book gives a rare inside glimpse into the world of those credit bankers. But unlike many other writers on the credit crunch, due to legal and creative reasons he opted for a quasifictional approach in his book.

“If you look at all the credit crunch books, all the ones that are nonfiction have either been recent books by someone who is an outsider, or someone who has been out of the industry for a very long time,” he said. “The reality is, I have confidentiality agreements. Twenty years ago, I probably could’ve written a nonfiction book. Today, I can’t do that.

“The other reason is, it’s easier to explain the credit crunch in the fictional construct than it is in a real construct, because the market is pretty boring at the end of the day. Pretty complex and pretty boring.”

Sure enough, his book is full of racy episodes on how overworked, extremely well rewarded bankers in that male- dominated industry vented their stress at strip clubs and through thrilling trysts in the corner of their offices.

The lead character, named Andrew Dover, while busily conferencing with clients and turning to his BlackBerry as a round-the-clock assistant, also develops a long-term relationship with a Brazilian stripper he met on the night of his first day at work. Such details of life encompassing not only London, but New York and Tokyo, would have been practically impossible to publish as nonfiction.

But that’s not to say that the essence of the “cliched high life” the book describes didn’t happen, Ishikawa maintains, noting that he himself was married to a Brazilian stripper for four years.

“That gives you a sense of how close it is to reality,” he said.

But how did the credit bubble mushroom to the extent it did? How could so many people in the United States with next to no income, no job and no savings get mortgages? And how did investors get into their massive hunting and trading of products whose risks were so hard to gauge — products such as credit default swaps, which aimed to insure a loan/bond holder so they could cover the loss if a borrower defaulted?

One of the answers is provided in a section of the book where Ishikawa uses Dover to illustrate the insatiable appetite for risk from investors. After handling calls from clients fiercely cursing him for not allotting them more of these products, he writes: “(At) the end of the day, they (investors) needed us more than we needed them.”

And calls from investors came from all sides — not just in Britain and the U.S. but from Asia, the Middle East and “sovereign wealth funds,” too. Those latter bodies are investment funds established by national and regional governments to invest globally.

“You’d have Asian banks, which traditionally had very boring business models and suddenly they had a massive influx of funds, you’d have oil-rich Middle East companies and sovereign wealth funds, which suddenly had trillions to invest,” he said. “You’d have hedge funds that have remained, and you also had pension funds and asset management firms that were still growing as well. And they were growing because people were more intent on investing money than saving in regular savings accounts.”

And more fundamentally, Ishikawa argued, people’s “short-termist” attitudes toward life — and their desire to buy more when they didn’t have the means to do so — were at the root of the problem.

“Our generation is about buying stuff,” he said. “We got sucked into the situation of, ‘We can borrow money and pay it back by borrowing more money,’ whereas a generation before they used to think, ‘Well, I’m happy with one jacket, three pairs of jeans, five pairs of underwear and that’s it’ — they’d have a very simple closet.

“But nowadays, you have people who want to have four pairs of shoes, eight jackets and 20 pairs of jeans and whatever else — and basically it’s all about having a choice. And I think that created a demand to borrow money in a way not seen before.”

He added, however, that even when some people just kept their money in a bank, the banks themselves — bound, like any profit-making company, to maximize their profits — were pushed to invest more and more after financial deregulations allowed them to keep less money in reserve. This meant that huge amounts of “new” money poured into financial markets, where thousands of people like Ishikawa sought out where to invest it for the best returns. Still, he said, there were just not enough products available to match the investment demand.

“A lot of money, less investment opportunities, and the returns become less attractive,” he said, noting that people therefore went looking for ways to get higher returns. “And that just happened to be through securitization.”

As mind-boggling as many of the characters, practices and sums appearing in Ishikawa’s book may be, though, its central lesson appears to be that while bankers like him certainly played a part, so did every element of society — from greedy consumers to monetary authorities lagging far behind the learning curve, to politicians who felt no need to question a bubble as long as it lasted and brought prosperity and a social feel-good factor.

Even the Bank of International Settlements, which created the regulatory capital framework for banks, failed to see this huge imbalance of demand over supply. Indeed, Ishikawa declares toward the end of the book: “The political argument was even stronger, because if securitization played its part in driving house prices up, it was widely accepted because it was first and foremost a tool that successfully brought housing affordability to the masses in spite of rising house prices.”

Thus, Ishikawa concludes that instead of merely “scapegoating,” everyone, not just bankers, should seriously study what exactly happened and why — not just regarding the markets, but also their own individual lifestyles and values that caused the bubble.

“There were a lot of people who inadvertently played a part,” he said. “I do believe that there are kind of more fundamental societal problems that caused or contributed to it. Everyone is always happy to rely on the word of the ‘experts.’ I think there is a greater responsibility on everyone to identify or use their greatest faculty — which is to judge for themselves whether something is good or not; not to take extreme decisions, not to just do it because someone else is doing it. And not to follow the herd.”

That, in the end, would go a long way to making sure a disaster of this scale does not happen again, he said.

“I do feel personally accountable; I’m very sorry for the part that I played,” he said. “But at the same time it’s incredibly important to recognize that it’s not just the banking industry that was at fault, and that it’s not just a problem that needs to be fixed there.”