Reflections on my time in the City (pt. 3)

In part 1 and 2, I evaluated the financial system as I see it. This part will look at potential solutions to some of the issues raised. They are not complete solutions, but areas where I think the most effective impact can be made.

Note: for a more academic exploration I would suggest the following: the Kay Report, the Vickers report, Basel III and New Economics Foundation. They do the proper work – I am merely offering opinion based on anecdotal experience!

Contain the locusts

 

 

As discussed in part 2, one of the problems with the finance system is that it creams off too much in fees for the value it creates. Rent-seekers (the locusts) need to be treated as if they were monopolies and face some form of regulation. Rent seekers are fund managers, m&a bankers, bulge bracket lawyers etc. To re-iterate, the vast majority of the people are good at their job: committed, diligent, energetic with strong interpersonal skills. They should be rewarded – the problem is the level of reward. The best analogy I have is that of the US doctor, who does an amazing job and is one of the best doctors in the world. However, because of the closed nature of the system and the information asymmetry (people in the system know more than people outside of the system) the US has the most expensive healthcare system in the world.

 

The question of how to combat these fees this is difficult – surely we let the market decide? Some ideas are

1. Accepting recommendations from Kay report i.e. that rewards for executives should be based on more longer-term measures (stops short term fee creaming)
2. Adopt the Scandinavian system whereby everyone’s income is published. Whilst initially uncomfortable, over time this would lead (indirectly) to more awareness of the fees that certain people and businesses are able to charge and get away with.
3. In the end I think the most effective and sustainable solutions are market based. Educating people about personal finance – about where one’s savings go and the fees charged can go a long way. Movements such as moneysavingexpert.com are good examples. If people shop around and don’t let financial institutions get away with high fees, the system will be forced to adapt.

Filling the gaps – effective, visionary sources of funding

I talked in part 1 about the difficulties that the current finance system has in supporting long-term (risky) investment. Some finance systems, such as found in Rhine capitalism, seem to address such gaps. The following are ideas I think could be utilised to reform the Anglo-Saxon model:

 

1. Development banks are banks that have more than the financial returns of their investors, depositors etc in mind. There are traditionally found in emerging market economies (e.g. the World Bank, the Asian Development Bank, the China Development Bank). In the UK, institutions such as the European Investment Bank (EIB) and the Green Investment Bank (GIB) provide important funding for long-term investments that the private finance sector will not fund. Such banks need to be better supported and have a wider mandate. Vince Cable’s business bank is one such idea. In addition, NEF have some interesting ideas about how central banks can provide an important source of funding for such banks. Whether RBS or Lloyds could be re-shaped to become more like Germany’s KfW (Germany’s development bank) is another avenue to explore.
2. Trusts and Academic Institutions (and Government) – it's not just the financial system that can write big cheques. Institutions such as the Wellcome Trust fund billions of pounds of scientific research. Our great Universities are a great source of research and development as well as venture capital. Finally, the government (even though it has its own short term stakeholders, i.e. the public, to please) is vitally important for innovation and de-risking long term investment for the private sector. In short, I think Vince Cable’s idea for reinvigorating industrial strategy has a lot going for it.
3. Peer-to-Peer lending – although in its early stages, I think this source of lending which cuts out the middle-man (e.g. fundingcircle.com) could solve several issues, including being an important competitor to banks. Although some teething problems will need to ironed out

We also, however, need to be pragmatic. The fact is that the technology that allows the world economy to function is largely in the hands of large corporates.  Furthermore, as Cambridge's Professor Peter Nolan points out in this article our technological progress is ultimately tied to these large corporates: “one hundred giant firms, all from the high income countries, account for over three-fifths of the total R&D expenditure among the world’s top 1,400 companies". These companies are funded through the “mainstream” financial system. As a result we cannot just rely on creating alternative forms of funding – we also need to make sure that our main system of finance can fund and steward these companies and not bring them down with its short term behaviour. John Kay's report on short-termism in the city has a good set of recommendations of how we might go about this.

 

Banking needs a re-brand as a public utility and other industries need to “speak out”

 

In my view, the rest of the economy needs to do a PR dress down of finance. This, ultimately, would be the benefit of the wider economy. The aim of such a campaign would be to disassociate a career in finance with the ‘glamour’ of the city lifestyle.  As a result we might those who are part of the academic elite might be concerned less with financial excess  and more with public service and advancing human understanding in the hi-tech, civil engineering, care or teaching professions (as well as many others). The "how" is difficult, but the following are interesting avenues:  

 

1. My blog has advocated an increase in well-being and philosophical education so people make more progressive life choices.
2. More needs to be invested in the PR of other industries when attracting young graduates (in the same way Teach First, Silicon Valley and the Civil Service Fast Stream have done).
3. Some of the change can only be a result of evening up pay levels (I still do not understand why, for instance, teachers are paid so little when they are basically responsible for the future human capital of the country). The high and low pay commissions have some interesting ideas.

It would also be nice if working in the industry is a more stable, progressive and positive place to work. But this might be more to do with the nature of work in general.

 

Be prudent - let’s not ever pretend we’ve fully understand the world (and its risks)

 

One of the mistakes of the system has been its belief that it understands the risks it is taking when investing money. I don’t want to offer any detailed solution, as this is a technical area that I have not addressed in this post. Suffice to say the system should always err on the side of caution, and we see this in the reforms included in Basel III and the Vickers reports e.g. on capital adequacy (well thought out ideas, but too boring / detailed for a blog of this nature). This will also need to be tempered so we do not create more gaps in our finance system.

Conclusion
 

Let me conclude by saying I still stand by my original assertion -  on the whole, I think the our finance system compares well to other systems. However, this does not prevent the need for reform to make sure the finance system (i) is not self-serving; (i) fully supports our wider economic system; (ii) is not a brain drain on the rest of the economy and (iv) is stable and does not succumb to the idea that we have fully mastered risk.

Reflections on my time in the City (pt. 2)

In part 1, I set out the key aims of the finance system, the central pillars of the Anglo-Saxon model which is the predominant school of thought on how this system should be governed and a brief discussion on whether this system was effective. In this post, I will explore whether, even if the system became more effective,  it is fair (and in particular whether it is regressive) and whether as a career it can be conducive to the good life.

Too many locusts, not enough bees

Let me start by saying that is very rare to meet someone in the city who is not clever, diligent and energetic (in some cases almost as good as teachers, doctors and engineers!) . That is not a criticism that can be fairly attributed to city workers. The real problem is that various mechanisms mean that they cream too much out of the saving-investment-return system I described above. Geoff Mulgan raises this in his book The Locust and the Bee: Predators and Creators in Capitalism’s Future. In the book Mulgan argues that there are two categories of cog in the capitalist system, namely the bee, who creates value, and the locust who tries to cream off value from things that already exist (rent-seekers) or off the back of the bee. The problem with finance is that there are too many locusts. Between you depositing your money into a savings scheme, and the money being invested and earning a return and then being returned to you, the fees earned by the finance system are staggering. In a typical cycle your savings will be charged a fee by an asset manager, a fund manager, a broker and the company’s management before being invested into something useful (and that’s an example of a short route). On the way back a proportion of any returns will be paid to the company’s management, to the fund manager, to the asset manager and only then returned to you.  Examples, which from my experience would not be uncommon, include:

• Mergers and Acquisitions (M&A) - an investment bank will often advise a company on how much it should pay to buy another company. In the chain I describe above, this is essentially another link in the chain where a company invests in another company rather than investing directly in something useful. Typically, advisors (including an investment bank) may earn 3-4% of the total price paid for the company. Whilst the work required from the investment bank may be arduous and detailed, there is no reason why M&A advisers should be earning these fees. Indeed the benefits for the individuals involved could be ridiculous. If you’re working on a deal for a company worth £1bn (not unusual) £30-40m could be paid out in fees. Say one bank is responsible for the majority of these fees (50%, the rest going to consultants, lawyers and accountants) and employs 10-15 people during the deal. In the worst case this would be £15m shared amongst 15 people. Assuming the bank gets its cut (50%), this would be c. £500k per employee over a 4-12 month time period. The senior managers would get a greater share – essentially setting themselves up as millionaires for simply doing their job (and remember they are not creating value, simply taking a cut of a stream of money)
• Private Equity - Without going into the same level of detail, I know of fee structures for private equity funds where similar groups of people will make similar returns on an annual basis for essentially sitting on a stream of money passing back to the original savers.
• CEOs - Another cog in this system who is more locust than bee are the executive management teams of big business (say worth >£500m). Again these are people who will be paid a six-figure salary and bonus of upto 100% of their current salary and a long term incentive plan often running into the millions if they hit various long term targets. Again I would say that these people are rare in terms of their leadership skills, understanding of a sector and experience. However, they are not the source of value for businesses. In the area I have worked in I’m not really sure how they could be. The infrastructure sector is about big bits of kit (water pipes, electricity networks, trains, oil storage facilities, schools and hospitals) which basically earn a return because they are there and are maintained to a reasonable standard. The CEOs of big water companies and energy companies simply cream off value that they do not themselves create – there is not other way I can put this. When I asked the firm I worked for, who own some of these companies and who sit on some of the remuneration committees that set levels of pay for management, why such high levels of pay were tolerated I more or less got a shrug of the shoulders. The reason they gave was that my company had its hands tied in terms of what it could do - we were simply at the mercy of the "market".

Brain Drain

One of the city’s most insidious impacts on society has been its ability to attract the brightest and best from Britain’s education establishments. I must admit at the age of 16 I weighed up whether to study engineering or economics / finance. A mixture of monetary incentive and prestige drew my young self to think of finance as the more worthwhile and rewarding. I do not know whether this dilemma has impacted other young, ambitious people – my concern is that it is quite a few. The cleverest (across the subject board) two people I knew at school / university ended up being a trader and a corporate tax lawyer respectively. In a recent visit to Cambridge I bumped into a young man, with a string of 1^st behind him who had just been to the Pitt club (Cambridge’s answer to the infamous Bullingdon Club). In a brief conversation he claimed he would soon be ‘a rainmaker in the city’ and ‘rolling in it’. Apart from the fact that over the next few years of his life he will finding himself filing legal documents at 3am on more than one occasion, and also that this was a decidedly toffish and arrogant thing to say, it is also a great shame that this bright individual saw this city lifestyle as the pinnacle of aspiration. By all means be a lawyer, but don't close off many types of law outside of corporate / finance law.

If indeed the city does deprive other parts of society and other industries bright, ambitious individuals, then beyond being a massive obstacle to having a healthy, balanced economy it can only lead to a more elitist, London-centric and culturally separated society.

Tax, Regulation and PPP

Some of the worst examples of greed I have seen in the city have been where the private sector takes advantage of the public sector – essentially taking social money (i.e. mine and yours) and transferring into rich, private hands. There are many examples a friend* of mine has witnessed, the following being stark examples

• The worst example of greed she saw was whilst working at an investment bank. The team she was working for had recently closed a deal whereby they had agreed to finance the building of a public hospital under a PPP contract. Essentially, the private sector (a builder and financier) agree to build a hospital and the government / nhs agree to pay a guaranteed rent once it is completed. The team at the time was congratulating itself for earning upfront fees and profit (legally) in the region of £20-30m (amongst let’s say 5-7 people) whilst the hospital is now struggling to stay open due to rental obligations. Now whilst part of the issue was bad procurement by the government, there is a sense of injustice here that I think is difficult to argue against.
• In another PPP project a company she worked for sold a set of schools for £19m that it had paid c. £7-8m to develop and build. What’s worse is that a few key individuals would have shared a bonus from this of between £500k to £1m (estimate). The government will still be paying a rent for these schools for another 20 years.
• This friend has now worked on three deals (of project worth £1-2bn) where fees made by lawyers, consultants, banks and accountants will have run to c. £30-50m per deal for c. 6 -18 months work. Again this will have been shared amongst a small pool of individuals with the potential to make 3-5 key people £250k+ in bonuses per deal and ensure that several individuals could survive on very healthy £50-100k pa salaries. Again the value creation in each of these cases will be spurious. All three deals will have involved the state or state-like bodies directly being worse off due to these fees.
• In his time in the city, she spent a good amount of time working on developing structures with the direct aim of reducing tax costs or avoiding new tax laws used to clamp down on previous loopholes that were targeted. What struck her was the sheer amount of time, effort and complexity that people were willing to engage with in order to achieve these outcomes. She was also astounded by how an investor would see a £ earnt from creating value (e.g. through investing in a new project) as worthy as a £ from an elaborate new tax structure. She, for instance, was staggered when she witnessed a scheme whereby a company was looking to make a further £3m profit by re-structuring its tax affairs on a c.£45m investment.
  
  

Is this the good life?

Within the city there are a variety of different types of job associated with making the saving-investment-return cycle work. At the top end of this spectrum in terms of pay will be corporate and finance lawyers, traders (sales, trading and research), m&a bankers, asset managers, fund managers, consultants, accountants, insurance brokers, actuaries and tax professionals. I cannot talk for many of these professions, but in relation to the two organisations I did work for (a bank's M&A team and private equity fund) I would say the following

1. The career path for a graduate is great in terms of early responsibility
2. The people you work with will be very smart, diligent and energetic (sometimes overly so). There will be a spattering of the arrogant and mean, but at the same time there will be some genuinely warm characters who simply want to do good for themselves and their dependants and take no pleasure from putting down others.
3. There are several factors which would detract from living a happy life, namely
• Anxiety due to the hire and fire nature of the world
• The areas I worked in demanded very long hours (think 9am to 2am for at least 3-4 months of the year, settling down to 9am-10pm for the rest). You may be able to convince yourself otherwise, but personally I thought this made it very difficult to live a happy life that is healthy, contains strong relationships, allows for some pleasures and allows you to develop your thoughts and understanding of the world around you.
• I think the career and the legal / commercial mindset you develop whilst in the industry encourages aggressive individualism and a lack of trust. You are taught to see every person as a self-interested, rational profit maximising agent who cannot be relied upon. Whilst I think such a mindset may be appropriate for business, I found it increasingly difficult to differentiate my work and social mindset.
4. The high wage at a young age has the potential to develop patterns of frivolous consumption – I have no real problem with this except (i) it is not necessary for the good life, it can only merely be a component of it and (ii) until we can say the industry is not regressive, such behaviour remains extremely perverse.

Conclusions

The piece above is very anecdotal and I'm sure some good arguments could be put forward as to how the various cogs involved in the savings-investment-return chain are merely participants in a competitive market place, and that the fees they earn are a simple function of supply and demand. I suspect, and part 3 will explore this further, that this sort of analysis is not quite right when you have a closed system (it is unlikely that one highly paid person will have a go at another highly paid person for fear of being labelled a hypocrite) and where the real monopoly power is with people (CEOs, city rainmakers, 'superstar' traders, city firm partners) rather than companies.

The other drawbacks: the city's brain drain, the (legal) predatory behaviour and the city life's conflict with the good life fit less squarely into a traditional economic framework. If we want to look to change these behaviours, a more creative approach will be required.

* All characters appearing in this work are fictitious. Any resemblance to real persons, living or dead, is purely coincidental

Reflections on my time in the City (pt. 1)

Seeing as the hamster will be leaving the City in a couple of months, I thought I would share some reflections on my short time in the City / in finance . Rather than a City Boy-esque critique of conspicuous consumption, the aim of these pieces is to compare my (totally fictitious for legal reasons) experience with some of the broader critical themes that have played out in the press of late. I will write in three parts. Part 1 will be more a technical critique of the system (for my own piece of mind), whilst part 2 will be more along the lines of good ol’ fashioned banker bashing. Part 3 will explore some potential solutions. Read as you desire.

To start with I will need to lay out the key pillars, governing our financial system, which I shall refer to as the “Anglo-Saxon” system. I want to then evaluate this, through the lense of my experience, against three criteria namely:

1)    Is the system effective in achieving its aims? (part 1)

2)    Is the system fair? (part 2)
3)    Is a career in the city conducive to living the good life? (part 2)

Whilst not a complete set of criteria, these are the questions that I believe are most pertinent.

The Anglo-Saxon model of finance

The principles and objectives of the finance system (the middle bit in the diagram above) are pretty straightforward. It starts with people having excess income and depositing this money in banks; saving in investment schemes and pensions; or paying national or private insurance premiums. These institutions (banks, pension funds, insurance companies) will try to preserve their clients’ cash whilst at the same time earning some sort of return. They will try to do this by giving the money to companies via the stock market; to you and me via mortgages, small business loans and credit cards; to the government; or to other funds (e.g. hedge funds, private equity funds) who come up with innovative way of ensuring some return. In the end, the idea is that this money goes to fund something productive and useful that otherwise could not have happened. This is a process I like to call writing big cheques – sums of money used to pay for things upfront (e.g. factories, agricultural equipment, hospitals, houses and home improvements, new businesses, roads) that we benefit from over a long period of time.

As the things bought with these big cheques are put to use they earn a return (of smaller cheques) that eventually work their way through the system back to a bank account, saving scheme or insurance claim.

The above system is not rocket science, however, there are many ways to govern it. The Anglo-Saxon model argues the system should be governed in three ways. Firstly, it argues that there is no need for strong oversight. The belief is that every little cog (saver, bank, fund, company) will want to act sensibly in their own self-interest. Depositors will leave their money at the institutions with the best track record, investors will only survive if they are competent and companies and individuals will only be lent to if they can show they are able to return on their big cheques. In this ‘only-the-fittest-survive’ model, this virtuous cycle of saving-investment-return evolves, with little intervention, into a robust system.

Another Anglo-Saxon belief is that no one cog in the whole cycle should either be the state, like the state or too big. The argument is that the state or big institutions are so entrenched and powerful that the ‘only-the-fittest-survive’ system of regulation breaks down and leads to either (i) the survival of the incompetent; (ii) the competent creaming off much more than they deserve or (iii) the whole system breaking down if one cog fails. As a result, the Anglo-Saxon model advocates a system made up of small, competitive cogs.

The third Anglo-Saxon belief is that everyone in the system should be allowed to innovate to make the system more efficient. Examples of such innovations include (a) the stock market, which allows money to flow quickly to where it needs to go, (b) various specially designed contracts (often known as derivatives)  which allow investors to make agreements with other investors to artificially pre-agree when and how their money is returned and (c) certain innovations which make it easier for you to forecast returns e.g. commodity futures markets that allow you to set the price of something well in advance.

The key interrelationship here is that Anglo Saxon pillars one (self-interest) and two (many small companies) mean that the outcomes of feature three (innovation) will ultimately be useful for the saving-investment-return system and not be money-making ends in themselves.

Compared to the past and the developing world, the system is doing alright..

On the whole, I think the system compares well to other systems. I say this mainly in relation to the context of history and our geography. I won’t go into history – the Ascent of Money by Niall Ferguson is a good summary of the development of finance in the last few hundred years. Set against this context, today's system, where big cheques are largely written based on commercial merit, is generally better than historic systems where investment was based on the fleeting whims of a clique of wealthy philanthropists, opaque family businesses, East India Companies and populist states. 

The other context, geography, is also important. Across the world there are markets that suffer from a patchy and inefficient finance system. Two examples that come to mind are the Indian economy where excess wealth often does not find itself in the financial system, but often invested into (socially useless) gold. The other is the example of smallholder farmers in Sub-Saharan Africa. NGO’s such as the One Acre Fund, have demonstrated that by providing finance, smallholder farmers are able to buy essential equipment and working capital (seeds, fertiliser) and increase their yields significantly. In his book, Roger Thurrow describes how without such finance, smallholder farmers may be limited to cultivating only a quarter of their available land, condemning themselves and their families to a hunger season every year. Compare this to a financial system in the UK which, for better or worse, will send you a credit card in the post that you can sign and use in the same day!

However, enough of the defence. My time in the industry raised several alarm bells that made me think, despite its successes, there are some features that tend to lead to perverse outcomes. I break these into the following categories:

The system is only as good as its savers, and their horizons

As set out above, the bedrock of the system is individual people’s savings (as opposed to say a trust fund of a nation’s wealth). People often want to deposit their excess wealth in savings accounts to preserve the value of the cash and earn a return. People also want to be able to access that cash should any short term need arises. This is in direct contrast to the investment horizons of big cheques, which will often only earn a return over a long period of time. This creates a tension in the system between the money supplied (short term, risk-averse) and the money demanded (often longer term and risky). Finance theory has two solutions to this problem, namely: 

1. You can use some short term money (deposits) for long term investments if you assume that people will not try to withdraw their cash en masse (this failure is very much at the centre of most financial crises and there is not enough space in this blog to explore it!)
2. A good system will have a variety of ‘savers’, who will place their money according to their own attitude to risk. As a result, you will have a wide pool of money with different time-horizons and risk requirements.

Fine in practice, but in my experience this leaves huge gaps. In particular, there tends to be a gaping whole in long-term, risky investment. What I mean by this is that the system is not very good at producing big cheques for projects or businesses that do no begin to reap rewards for 10 to 30 years and where there is an element of uncertainty attached. Again and again this means important investment in big long-term useful activity e.g. in upgrading trains, expanding social housing, backing heavy industry, developing green energy, funding research and development or investing in preventative healthcare is either not made or requires considerable help from the state or state-like institutions.

The result of this is in the past has been serious underinvestment. With the rolling back of the state beginning with Thatcher, Britain’s private finance back sectors have been slow to invest in several areas. This article, explores why, for instance, no-one has invested to upgrade trains in the UK for decades. In my experience, I have seen rolling stock companies backed with this "wrong" type of finance unable to invest in something society knows is important i.e. the replacement of knackered, inefficient, unreliable, 40+ year old trains (designed for retirement at age 30). In a damning reflection of the systems failure, I worked on a project to buy rolling stock which was originally called T'link 2000; the contracts were signed in 2013, in part due to dithering and ridiculously high levels of risk aversion amongst financing parties.

A particularly fashionable solution to short termism is for the state to de-risk investments by saying they will effectively guarantee any return or wear the costs should a project not complete. This is done to try and attract long-term, low risk money, which to some extent exists through pension funds etc. Whilst this solution, epitomised by Public Private Partnership (PPP), was effective at refreshing the UK’s stock of schools and hospitals, it also lead  to a big bonanza for the City during the New Labour era. I will I expand on this in part 2.

The ‘innovative’ solutions to the above problems are so complex that they either lead to instability or get captured by those in the know..

Although it was not the part of the city I was involved in, I believe certain innovations have become so complex, so critical to the system and understood by so few that any defence of their use has become spurious. Short selling, default swaps, options and packaged securities were all more-or-less created to solve the problem of matching up savers who have different preferences to the returns actually generated by their big cheques. But they have evolved into something else. The securitisation of  US subprime mortgages that effectively triggered the financial crisis is a striking example of an innovation that ultimately failed. What’s more, at the same time as destabilising the system and having little social use, these innovations were responsible for making a lot of people a lot of money. This is covered in part 2 of this posting.

High pay = odd incentives

Not only does the Anglo-Saxon system have shortcomings because there is not enough of the right type of money, there is also not enough of the right type of people! A big gripe of mine in my time in finance was the entrenched high level of pay and the knock on impact of this. Before looking at the merits of a project or the wider impact, I guarantee any finance institution will first ask how it can pay a partner or director a six figure salary, with annual bonus expectations of 2 to 3 times that amount. I’ve cringed several times when colleagues have joked that ‘"Mr. big shot director" will not get out of bed for any thing less than £50 million’ meaning that unless a project is big enough it will not even be worthy of attention. This leaves another gaping hole in our finance system and it is no wonder that banks struggle to lend to small and medium size enterprises.

The problem is that the city has developed to crowd around big cheques. A big cheque allows people to justify big pay. Say, for instance, you were a lender and you took a 1% upfront fee when making a loan. The natural pull will be either to (i) make big loans, rather than work through a myriad of smaller ones (if the time required to make small and big loans is similar) or (ii) make a series of small loans that require very little work. The result is that big money (lending to big corporations or projects) or dumb money (lending to say mortgage applicants based on online applications) are favoured. This leaves a whole swathe of the economy either:

1. ignored (a comparison of the history of my former institution and its current strategy to focus on big established companies is case in point);
2. subject to too much attention; or
3. subject to mechanistic, "computer-says-no" decision making processes (e.g. US sub-prime mortgages).

Model assumes that we know how to judge performance

Pillar one of the Anglo-Saxon model argues that little regulation is required in finance as Darwinian competition continually weeds out the weakest cogs in the system. One of the key metrics for understanding whether a cog (i.e. an investor) is successful is risk-adjusted return. Put simply, risky investments are expected to earn higher returns. Investors who make risky investments and low returns are deemed to be no good. Conversely, low risk investments that earn excessive returns are expected to be short-lived.

The problem with this is that finance is not like a goods market where people know if a product is any good or if people are charging too much. Finance is different in that it is very difficult to identify a bad product (i.e. an investment that delivers inappropriate risk-adjusted returns) . Even worse people can be deluded for very long periods of time and these bad products have the potential of destabilising a whole economy. The following are reasons why this is a feature of finance:

• Some people may just be lucky. Consider the analogy of an investor going to a roulette table with the strategy of choosing red everytime and re-investing all the money on every bet. Now say they were lucky in winning three bets in a row. In finance this person would regarded as having a good track record and someone who you should bank your money with. However, this does not take away from the fact that the next bet is still 50:50. In my time in the industry, there were several people who rode the wave of the good times (pre 2007) and now remain in the industry (and prosper), despite poor outcomes since, purely because of the ‘experience’ they were able to gather when they were (by luck) deemed to be good investors. These people do earn six figure salaries and large annual bonuses, but will have personally have been involved in investments that returned nothing or lost millions of pounds.
• Financial risk is not really that well understood as it pre-supposes you understand all future possible outcomes and are able to assign a probability to each. As we have seen, in this crisis certain unknown unknowns can completely destabilise the system. Further, even the stuff we do know may be highly influenced by factors we have little understanding of e.g. artificially low interest rates or the exuberance of traders.

That said, some parts of finance have learnt their lesson..

Earlier on my career I did used to get quite frustrated with the level of red tape in the business, often having to spend hours filling out various forms for compliance and regulatory purposes. In hindsight, such regulations are probably the product of reforms that have been fought hard for and for which the finance system (and in my particular experience private equity and commercial lending) should be proud. Without going into detail I think the system is very good at

• Corporate Governance – ensuring business are governed in a clear, transparent way
• Anti-Bribery policies
• Environmental, Health & Safety – I have seen investors very active in this place, pushing companies to go above and beyond what is expected of them and fighting entrenched lax cultures (e.g. in Finland or India). In western countries today I would be very surprised if investors allowed their companies to get away with environmentally damaging activities or neglecting safety standards for their workerss
• Applying due diligence and due process – despite some poorer investment decisions seen in the crisis, I have seen people go through very thorough processes (when writing big cheques). This means our system avoids, for instance, the c. 40% bad loan provision that the Chinese development banks had towards the end of the 1990’s.

So, is the system effective?

I still stand by the statement that relative to all historic systmens the anglo-saxon model is decent. However, it does have some sizeable shortfalls namely (i) it ignores vast parts of the economy and (ii) through its complexity and entrenched behaviour, it has the potential to de-stabilise a whole economy. In part 3 of this posting, I will look at possible remedies and see how alternative models e.g. Rhine capitalism and the Nordic model get around these issues.

Working People’s Clubs

I loved my time at university, I really did. Not the boozing and ample free-time (don’t get me wrong these were great) but the times spent in communal areas: the communal kitchen, the college gym, the sports field, the food hall, the bar, the library and the formal dinners. These were genuine communal spaces where you could enjoy other people’s company, interact with people outside of your direct peer group and have conversations that went beyond mere information exchange. What’s more, these were spaces not dominated by markets, your very presence there was not predicated on you having to buy drinks or food. These were communal spaces, free at the point of use and genuinely conducive to happiness – great!

Sadly, since moving to London I have only come across one place where this has been re-created. As a supposed left-wing hamster I am ashamed to admit it was during a visit to a member’s only club. The RAC club, apart from being an amazing example of early 20^th Century architecture, is a genuine communal space for its members with a gym, squash courts, a swimming pool, baths, a dining area with reasonably priced food, dining rooms, games rooms, several bars and quieter reading rooms. The club also had genuine sports clubs, societies and a series of events that mean it is a living, breathing organisation that goes beyond its bricks and mortar.

But here’s the catch, it’s not really open to the public. You have to know someone who is already a member to apply and the cost, according to Wikipedia, is an entry fee of £2,900 and an annual fee of £1,265. 

Society used to have something that was more affordable, not as fancy (but who needs it to be?) and arguably more embedded in their communities. These were Working Men’s Clubs, essentially a type of private social club first created in the 19th century in the industrial areas of the United Kingdom. Mentioning the term, I find, usually brings out two reactions: either unfamiliarity or a negative reaction, due to these places being perceived as hotbeds of –isms (racism, chauvinism, homophobia) and heavy drinking. I wanted to use this blog post to explore whether there is an opportunity to re-capture the idea of the Working People’s Club (i.e. a modern, fit for purpose, financially viable club that is accessible to all). I want to understand why we, as a society, haven’t invested in such communal spaces that could so obviously make us happier. Below, I present 4 reasons why today presents a great opportunity to re-introduce the idea. I also have a brief look at how we might go about doing so.

(1) Our communal spaces are not fit for purpose – today’s communal spaces include religious institutions, pubs, libraries, sports clubs, community centres and parks. But none of them are really fit for purpose. Religious institutions are irrelevant to those who don't hold religious beliefs (today religion is in decline in the UK, with 71% of people saying religion does not occupy an important place in their life). Our pubs, another traditional bastion of community focus, are closing at a rate of 18 a week, with 4,800 closing since 2008 . The ones that do tend to survive have formulaic business models that are financially sound but fall short of being positive communal spaces – and would definitely fall short of George Orwell’s idea of the ideal pub. The state provided community, leisure and youth centres are, in my mind, generally hit-or-miss and have suffered from years of underinvestment. They are indispensable in offering vital public services but they are not a communal space where people can flourish and mingle with a cross-section of society. That said, I do know several sports clubs and community arts clubs that continue to thrive e.g. my former local hockey club Indian Gymkhana in Osterly

(2) Austerity is an opportunity – every day we hear about the failure of high streets and the closure of our libraries, pubs and churches. These are easily reached spaces in the centre of our towns and cities, that have historically been used as communal areas and that are sadly sitting vacant today!

(3) Thatcher’s Britain has become a reality – my friends from the north tell me it is different up there, and that people still have a sense of community. In London, I cannot help feeling that Thatcher’s phrase “there is no such thing as society” (probably taken out of context) has become a self-fulfilling prophecy. I do not believe for a minute that strong-arming people into community activities is the way forward. However, I do believe that when we have conversations, when we share space and ideas freely we feel better connected with others (and hence happier) and feel part of something bigger (and even happier). Whilst we converse with friends, family and colleagues, these conversations can be fraught with complications due to hierarchies and dependencies and can mean that we never see the world from a different point of view!

(4) The rise of the member’s club (for the rich) – no need to go into detail here, but clubs for the rich are growing from strength to strength as this article highlights.

So, if you are with me at this point, you have seen how communal spaces have the potential to make us happier, how the well-off have access to such spaces and that today could be a really good time to reintroduce affordable communal spaces like Working People’s Clubs.

But what would these places look like? Who would run them? Were there valid reasons why they died out in the first place? Are people even interested in “community” today?

Let’s take the last question first. As someone who was very sceptical about the notion for a long time, “community” is a word I’ve only really been interested in recently. This is not through some high-minded ideal about engaging with my fellow citizen, but through a belief that it can help us pursue individual happiness. In fact, I would say there are dangers in trying to recreate the past instead of taking lessons from it. These two talks by philosopher Theodore Zeldin (Conversation in the Pub and Conversation Bus) tackle this exact issue. Past institutions including schools, clubs and small towns have not always been geared to the happiness of everyone. Zeldin suggests that this is because of over familiarity and everyone "knowing your business" as well as the innate social hierarchy linked to these “small” environments. Acknowledging this is definitely one part of the challenge in pioneering the new wave of Working People's Clubs. However, well run clubs which place emphasis on creating conversation amongst equals can tackle such concerns.

The other parts of the challenge are how to create a place where people want to go on a weekly basis that is affordable, is convenient in our “busy” lives and genuinely improves levels of well-being. In my mind, such a club would have to have the following:

1. Rooms: a bar, a gym (or at least an affiliation with one) and a quieter functional space for debates, comedy and community or small business meetings; 
2. Governance: good full-time employed management and an active, local membership who make decisions about how the club is run;
3. Activities: membership-led sports and hobby clubs; societies; and events such as talks, debates, comedy and dinners;
4. Services: some link to local services that could make it more convenient to attend e.g. childcare, dry cleaning, provision of affordable and healthy meals, transport links.

It would be a place where people could go after work to fit in a gym session, or meet up with friends, or perhaps to watch a talk / debate instead of slumping in front of the TV for the evening. Members would run events and societies as a way of offsetting their membership fees. It could be a genuine place to network locally (not just for business types) and for the more experienced members to informally mentor less experienced members.

Of course this is not cheap. Hard work would need to go in to raising finance, choosing a suitable location and making upfront membership fees affordable and potentially variable according to income. That said, this is not impossible – it just needs action from a sufficiently thoughtful and committed group of people. Already, people are experimenting with some success. The Oxford Muse runs dinners and have taken over some High Street spaces and an atheist church in Islington is another pretty interesting idea.

The original working men’s clubs were steeped in ideological foresight – as can be seen in the pamphlet here. At the time, the cause was education and improving the lives of the industrialised masses. Now it is a much simpler cause – making the autonomous, isolated lives of city dwellers much happier. If you’re with me, I would be greatful if you could please take the time to answer my questions below. Who knows, maybe we can take this thing forward?

Questions

1. If a Working People’s Club, described as above, opened up locally would you go there on a weekly basis?
2. Would you want to be involved in the running and setting up of a Working People’s Club?
3. What rooms and functions do you think would benefit such a Club?
4. How much would you pay annually for such a club (in return for a gym, subsidised food and drink and the opportunity to hire rooms and partake in events)?

13 Insights into Happiness for 2013 (pt. 2)

As promised, the eagerly awaited follow up to last week's post.

7. Thinking strategically about happiness

If several years back someone had told me that I should apply insights from the world of work to how I live my life, I would have probably replied "go back to management school or America or your self-help blog and leave me alone". However, I am now about to advocate the very same insight. Working in finance / investment over the past three years has given me some exposure to what makes a good investment and some of that, for better or worse, pervades my thoughts on life and happiness. In particular, I now try to apply the following:

(i) Work learning: Using data and research to inform your budgets, plans and forecasts. 

Life lesson: Using data and research to inform how you plan and conduct your life to sustain happiness.

Budgeting, planning and forecasting are very time consuming activities, and often require either a prerequisite level of experience or technical expertise. When it comes to happiness,   there is no good reason not to apply the wisdom acquired through the ages and now, more excitingly, we have actual data on well-being and brain science. These reports by nef amalgamate some of the academic literature that analyses well-being statistics and summarise findings from the UK in the last year. Findings that have helped for me, for instance, are the near universal correlation between commute times and unhappiness (LH has since changed jobs in part due to this) and the U-shaped relationship between age and happiness - we tend to hit a trough in our 30s and 40s which is usually linked to raising children, taking care of parents and peak stress levels at work (it might help to start thinking about such things early!).

Other great sources of insight are the Action for Happiness website and understanding your own genetic dispositions - as they can determine up to 50% of your base level of happiness. In 2013 I am going to continue to analyse genetic studies that and see what they mean for my genetic material at 23andme.com.

(ii) Work learning: Think about risks as much as you think about your base case. 

Life lesson: Mitigate risks that are in your control, and build resilience so you can deal with things that aren't.

Risk-return is a bit of paradigm in the investment world, but it may seem a little boring / overly practical in the real world - I mean who really wants to do a risk assessment on their life and happiness levels? Thankfully, in the developed world, there are a lot of things that "automatically" protect us from bad external events (such as natural disasters, economic crises and decline, violence, illness) impacting our hedonistic happiness (remember this includes the absence of pain too). Examples of these automatic protections include property rights and policing (stopping people from taking our stuff), welfare, health insurance, the family unit, charity (e.g. Red Cross), democratic institutions (including a free press that allows us to highlight pain and suffering), environmental agencies and insurance markets. There are benefits to be had if you can force yourself to do a bit of planning in this regard too, e.g. making sure you have adequate contingencies, savings, insurance etc. As boring as they may seem, they probably do make your happiness more sustainable in the long run.

There are, of course, always things you cannot control - for consideration on that issue see my point on resilience below.

(iii) Work learning: Returns can be delayed - the amount you are prepared to wait is in part determined about how you value time. 

Life lesson: Understand what your time preferences are.

Some people can delay gratification for long periods of time in order to get a big chunk of gratification at the end (e.g. a medical student going through many years of training in order to obtain a job as a doctor). Others have shorter time horizons after which they need gratification. To some extent, you are who you are and you should explore what your preferences are but, at the same time, improving your will power can benefit you without causing you to be unhappy in the short run. Either way explore! This talk on willpower by Roy F Baumeister provides some really interesting insights.

8. The importance of being resilient

2012 cemented in my mind something I had being doing for many years but had never formalised - namely building emotional and mental resilience. Some would refer to this as the application of Stoic philosophy. In simple terms, I deem it the preparation of your mind for a variety of unexpected scenarios. In doing so you figure out, in advance, how you would derive happiness in an unexpected world (e.g. after the loss of a loved one, losing a job, winning the lottery, becoming disabled, being misunderstood). In 2012, I came across the work of ancient greek philosopher Epictetus and two quotes continue to stick with me (i) "It's not the [bad] event, but the belief ascribed to the [bad] event that troubles man" and (ii) the advice that man should be "sick and yet happy, in peril and yet happy, dying and yet happy, in exile and happy, in disgrace and happy". The difficulty is, of course, in doing these mental preparedness exercises and, for me, there are no hard and fast rules of success, except perhaps the willingness to indulge in some pretty morbid feats of imagination!

For me, the importance of the above is to prepare without allowing preparation to get in the way of progress. Yes you can adapt to being slightly cold, or slightly hungry, or slightly disillusioned, but you should still aim to correct all these in the long run. If misfortune means you end up in these situations then, and only then, take it into your stride.

9. Should well-being be taught in schools?

In 2012, I learnt that Wellington College (an independent, boarding school in Berkshire) has been teaching its pupils about well-being. This is a fantastic idea, and I would like to see it spread right across the education spectrum (especially the state sector). Education's purpose, in my mind, is simply to (i) give people the aptitudes required to take part in the productive economy and (ii) give people the knowledge and skills to lead a happy life. Somehow, we seem to fail at both and, even though this blog is mainly interested in (ii), for now I will be exploring how this can be improved only alongside (i).

In 2013, I will learn more about what Wellington has achieved by going through their course online, will read Learning to Ride Elephants by Wellington well-being teacher Ian Morris and hopefully I'll be placed as a school governor.

10. The Existential Crisis - and why society seems to do nothing about it

A thought hit me in 2012. I can occasionally lurch into a full blown fit of existential crisis - usually a bout of apathy and soul-searching brought on by a series of questions / revelations: "what's the point?" "why am I here?" "death is the only thing we have certainty over" etc etc. I have got better at dealing with these, but they still exist. For all the wonderful improvements in society, however, this seems like a universal problem that secular society has decided to universally ignore (or at least say it is the problem only for the individual). Libertarians would argue that's right, because philosophy and spirituality are personal pursuits in the West. 

However, I believe that the state or other parts of society have good reason to act where it can be shown to improve well-being. Examples of this, as yet unproven, are the introduction of rights to optional sabaticals / mid-career breaks and the beginnings of well-being education in schools (for more inspiration I would suggest Norwegian philosopher's Zapffe's "Last Messiah"). Further argument on this is provided by Alain de Botton in his book Religion for Atheists (or listen to the TED talk here). The central question explored is that, in a world where organised religion is retreating, where do we get our rituals and our spaces for connection and exploring the "big" questions from?

In 2013 I will be exploring whether policies or solutions could work - ideas welcome!

11. Development as Happiness

In 2012, I revisited Amartya Sen's seminal work on how we should frame international development, "Development as Freedom". One strand of the argument is that we should frame development as the increasing of individual freedoms and removal of societal unfreedoms whether they are economic (e.g. poverty), political (e.g. state control) or social (e.g. women's rights). As a book and theory I find it very hard to poke any holes in Sen's work as it is well researched and for a predominantly economics-based book, steeped in humanity and human values. However, at times (day-to-day) I do struggle with the way the argument is framed - I cannot relate to the idea of lack of freedom because I've never experienced it. But I can relate to happiness - and I think this is how we should frame development. At first reading, this may seem very woolly and western - what has happiness got to do with a starving child or torture. But, as my definition of happiness goes, it is all one spectrum; from pain, to comfort to release of anxiety to pleasure, self-realising and flourishing. Indeed, I previously used to think of happiness as a problem faced by only the developed world and other issues, e.g. poverty and repression, as problems of the South. Now I think we should see it all as part of the same issue.

And why? It's not exactly going to solve the issues is it? My answer is this - how issues are framed can have very profound effects on how people engage (as argued by Kahneman for instance). Understanding development as a universal search for happiness (more tangible than freedom) may be a more effective way to engage with the issue and to, therefore, go on to develop solutions.

12. Solitude and Mindfulness

In 2012, I took a great 3 day retreat to the Gladstone Library in Hawarden, Wales. My lesson learnt was simple: time away for reflection and solitude can be very important for de-cluttering your thoughts and reducing anxiety - so do it!

And I would recommend a stay in a library to anyone who is similar minded!

13. There's no such thing as a selfless gift..

.. and there's nothing wrong with that! It is shown that giving increases the happiness of the giver and receiver (if effective). I won't go into the evidence of why, as this resource is already a pretty good starting point: action for happiness on giving. Whilst we all tend to know this, one thing that stops us giving is that we are mentally unprepared - to the Big Issue salesman or to a friend or family who's indicated they have some difficulty coming up. Recently, LH changed jobs from the for profit sector to a not-for-profit (in fundraising). When asked what she learnt from this at a personal level, it was that most people tend to start with the mentality of "no" when asked for help and then try to justify why "yes". This can be taxing and means that we give less often than we expect we would. In 2013, as per this TED talk from the Acumen Fund, I will start with the mentality of "yes" when asked to help!