The Elves and the Loanmaker

Once upon a time there was a young banker, who had followed his dream of making a fortune in the financial markets. He worked very hard and was very honest but he could not earn enough to live upon – at least, not to live to upon in the most expensive city in the world. 

The young banker knew that he wasn't making enough loans for the bank, and that the loans he made were not very exciting. Very soon, he would lose his job and with a mortgage and no savings, he had no idea what would happen then. 

So the banker laid out his loan proposal paper-work tidily on his desk, put his blackberry in his overcoat pocket, and stopping for just one half-pint of shandy with his friends, headed for the small Docklands flat he shared with his wife, who had prepared for him a simple meal. They didn’t know what to do, as there were no more jobs available in the banking industry, particularly not for hard-working and honest bankers. And the skills he had learnt in his time in finance didn't set him up very well for anything else. So, the banker and his wife ate their meal, watched X-Factor, said their prayers and went to bed.

In the morning, the banker joined the trudge to work long before the sun came up. He could no longer afford the ruinously expensive Financial Times to read, not could he visit Starbucks for his morning beverage. A copy of the Sun and a cup of tea from the local greasy-spoon had to suffice.

But when he got to his desk, the young man found that his loan paperwork had been re-structured into a proposal of awesome complexity and beauty. On the front of the file, he read the word ‘CRAPPY’, which stood for Collateralised, Rate Adjusted Principle Protected Yield. The good man looked at the workmanship, and while he didn't really understand how the thing was put together, he knew it was wonderful. It was a masterpiece. So good, in fact, that when he showed it to a Ratings Specialist, he was so impressed with its sub-clauses and margin-adjustments, that he declared it to be a ‘Sure Thing’ which offered the elusive ‘Money for Nothing’ of investment.

The wonderful new product was sent to the sales force at the bank –a brash group of young men and women who mostly drove fast cars and drank imaginatively-named cocktails after work. And pretty soon, there was demand for the CRAPPY product. A wealthy investor from the Far East even came in and bought some, at above the market price.

The honest banker went home happy for the first time in ages. His share of the credits from the sale would be enough to keep him and his wife clothed and fed for many weeks and now he had a little more time to work on the next loan product. He had once again started, and laid out his file on his desk before going home, but this time he had done so with a spring in his step.

The banker bought the Telegraph and a cup of coffee – not quite the FT and Cappuccino favoured by the sales force, but he still didn't want to trust his luck had turned. But when he got to his little cubbyhole of an office, he was amazed. Once again, on his desk, all his work had been most awesomely transformed.

This time,  the file read ‘Uncorrelated Synthetic Enhanced Leverage Equity-Sourcing Strategy’ Or USELESS.

Once again, the young banker could only stare and marvel at the workmanship, the detail, the acronyms, the legal jargon and the overall beauty of the thing. He signed the bottom and sent it to the head of sales after completing the necessary PIMP (product implementation) form. And once again, the sales force rejoiced and the investors loved it. Everyone was so impressed that the young (honest) banker was taken out to drink cocktails by exotic credit sales people who flattered his ego and whetted his appetite for the finer things of life.

And so it went on. The poor young banker got a bit less young and lot less poor. The pied-a-terre was a bijou residence in Mayfair, the frugal wife was magnificently adorned in Jimmy Choos and Dolce & Gabbana. 

The banker was still honest however that he wanted to know where his good fortune had come from. So one evening he arranged to meet his wife after work, and they had a tete-a-tete."Darling", he said, "tonight I think we should go back to the office and sneak into my (rather opulent) office on the 43^rd floor. I want to see who or what it is that has brought us such good fortune".

So that is what they did. They went to his office and hid behind a plasma TV. And in due course, they were amazed to see two elves sneak into the room. They sat at his desk and they worked for several hours, structuring incredibly brilliant credit products, and then left.

"Wow", said the banker. "Cute" said his wife, "but we must do something for them". The elves, she pointed our, did not look very opulent. They were wearing very few and very old and very torn clothes, and they didn't have shoes at all.

Now the banker’s wife had been,( before the previous recession when there was still a manufacturing industry in the country" a very talented seamstress. So when they got home, she set to work. She took down some curtains and made a set of glamorous velvet suits for the little elves. And then she cut up a leather jacket to make some little boots. And the next night, her husband left the bundles on his desk before he left for the night.

The next morning, there was no new exotic product on the desk. Just a note, saving "Thanks".

The banker’s act of kindness didn't do his career any good. Without the help of the elves, his next few ideas were for more conventional lending. He was, in any case, beginning to understand that all the products the elves had designed depended on borrowers increasing leverage and on investors selling the correlation of default probabilities between different parts of the global economy. This seemed dangerous, for reasons the honest (but, frankly, not very clever) banker couldn't quite put his finger on. Anyway, he decided to focus on helping companies reduce leverage, and on helping the bank lend rather less money than they had before.

The sales force couldn't see any point in this and o could the management. The honest banker’s bonus shrank and after a while, he decided enough was enough,.

The banker invested in a dress design business for his wife, and while she was at work, he became a house-husband, looking after their new child and studying for a degree in economics.

His ex-colleagues were not so lucky. Those pesky elves had appeared to help them but got everyone into a whole heap of trouble. Everyone ended up defaulting on the super-complicated loan products and sued the banks for not explaining them properly. The King of the country had to come in and buy all the credit products, handing over money newly-printed by Santa Claus in his workshop at the North Pole, in a Quantitative Christmas experiment. this did mean that there was enough money for some most Christmas presents, but the cocktails with fancy names, the designer shoes and the glamorous frocks were out of reach of everyone but footballers and their friends.