Tryst with I-Bankers

Almost a year ago, the newspapers were ga-ga with losses due to sub prime mortgage crisis in US. Every day, their came a new estimate of possible losses. It kept on increasing from a few billions to a few hundred billions to trillions of US Dollar. All this while, investors and press repeatedly asked Fed to come up with their estimate of losses and Mr. Bernanke simply ignored this demand and went ahead with his plans of cutting interest rates at an unprecedented rate.

This was really hard for me to understand. Why these investment bankers are unable to build a concensus among themselve for the possible losses due to mortgage crisis?

Then, only recently, I read that a leading bank is firing more than 10% employees of its I-banking division as the management think that its only the greed of I-bankers which has caused the whole world to go through this difficult phase. Now is the pay back time and they should pay for taking high risks. This perplexed me even more. Only some time back, they were being hailed for their role in generating capital so necessary for increased economic activities.

In last couple of months, I was working on a project where we had to finalize the re-investment strategy for more than a few hundred millions of US dollar. And this led to an opportunity for me to work alongwith some of the leading I-Banks of the region.

During my association with them, I could understand one thing for sure, that at least the Fixed Income division of I-banking is all about "trading" various possible risks.

For most of the I-Bankers, large percentage of their salary is in the form of bonus, attached with the volume of businesses they generate for their employers, and this leads to a situaton where they are forced to trade whatever risk that can exist. With one underlying bond, they form dozens of structures, all of whose return depends on the performance of the bond.

Fixed income being one of the oldest division, all possible simple structures has been exhuasted and the new ones coming up are really complex and innovative. This was one of the reason why it was so difficult to estimate the damage caused by mortgage fiasco.

Whatever others may say, I'm in awe with the innovations that I-bankers have done in the realm of financial engineering and for that reason I believe that they truly are the worthy owners of title, "Master of the Universe".