Zia Rahman - In the Light of What We Know

Not really; he was testing to see if I could pick up the stuff.

* * *

Within three years, Zafar left the bank and returned to Britain, in order, he explained, to practice law. He had made up his mind, even if it meant training for the English bar. I admired that in him, the speed with which he made and executed life decisions.

* * *

Oswyn Hapgood was certainly tiresome, to put it mildly. A year earlier, I would happily have discussed the question of bankers’ pay without the slightest discomfort. But this was the end of September 2008, the markets were in turmoil, and the effects of the financial crisis were spreading into the economy. My firm, though by no means the worst affected, had suffered some losses, and not just in the United States. As was the case at a number of American firms, almost all European business was dealt with through London. It was London, in fact, that picked up most of the work outside the Americas and Asia, and all that added up. The U.K. had witnessed significant bank failures and, in ways I could never have predicted, much of the distress came back to my desk and the group I headed, though by then only nominally; effective control had passed, against my protests, to the head of the division, to the firm’s chief financial officer and the firm’s risk officers.

There are at least two questions here, explained Nathan Littwack.

When not speaking, he sat perfectly still, his elbows resting on the table, his hands clasped together and, it appeared, his thumbs pressed, nail-side, against his lips. I did not know this young man, but I knew already certain things about him. When Nathan Littwack listened, you knew that he was listening to your every word. When Nathan Littwack spoke, his words were inseparable from his body language. And when he articulated something that he had obviously considered carefully, I saw what others in that room would have seen — the precision of a certain kind of academic, one like my father.

The first, he said, is whether any given bank needs to pay what it pays in order to keep its staff. We have the answer to that, he said, nodding my way. I might be wrong, but it seems to me that that’s not the right question, he continued, not when governments are looking to increase regulation.

What is the right question?

Does the industry need to pay its staff what it currently pays them in order to keep them from leaving the industry ?

But, Nathan, I said, it’s not the industry that pays staff but firms.

So what about a tax on firms, said Nathan, dependent on what the firm pays out in salaries? A flat rate. Wouldn’t that push down bankers’ pay across firms?

Lauren came in here.

Have you seen those graphs of bankers’ pay and average pay in the rest of the economy? The NBER, I think, or was it Shiller?

Not Shiller, Nathan corrected her.

NBER? said Hapgood.

National Bureau of Economic Research, explained Nathan.

Where the hell would bankers go? she asked me. Bankers’ pay was always higher than pay in the rest of the economy, she continued, but not by much until the eighties, when it started to climb steeply. Not coincidentally, median average income in the U.S. is less now than in 2000. Less! The majority make three hundred dollars less now than in 1980, and all the gains in the last thirty years — all the gains! — went to the top zero point one percent. That’s zero point one percent. The top one percent own forty percent of the wealth of America! Today, you’d have to cut bankers’ pay by eighty percent before their jobs were remotely comparable to other jobs. Can you think of an industry where all those bankers can get paid anything like what they get in finance?

Hapgood, less hapless now and more emboldened by the Americans, piped in.

Does it not stand to reason, he asked, that the financial industry should foot the bill for getting us into this fine mess?

That’s a horse of another color, said Nathan.

Hapgood’s bushy eyebrows leaped up like startled rodents, but I couldn’t tell if this was because he was unfamiliar with the idiom or because he understood that he’d just been told that what he was saying was irrelevant.

The conversation carried on in this vein for part of the evening, and I am forced to admit that my responses weren’t the most robust. Bankers generally, I think, are not given to considering the wider context of things, just as, I’m sure, most busy doctors do not give much thought to the national state of health care and the problems of insuring a whole society. People by and large go about their work, and where hard work is called for, they go about that work to the exclusion of concerns that do not, in the final analysis, further the work at hand.

Nathan was a very smart young man who evidently had the nous to figure things out for himself, but I daresay he was following the financial news rather more carefully than did most people outside finance. What he was talking about were the same things being reported in the financial press, including a tax on banks to create a reserve for bailouts, a tax on certain financial transactions, and a tax linked to salaries and bonuses but paid by banks. Each of these had its own rationale. All of them drew ultimate justification, however, from the cascading failures of those financial instruments that had come to dominate the financial world.

These instruments are not understood by most people and, in fact, they are so widely misunderstood that the first thing a journalist writes about them is that they’re widely misunderstood. I can’t be alone in noticing that until recently, even the august Financial Times gave the derivatives and bond markets little more than a passing mention, always regarding it necessary to point out that most trivial fact: that the price and yield of a bond move in opposite directions. Nobody outside the business — and not everyone inside — could get their heads around the new products.

As I think about this lack of understanding, I am reminded of something Zafar said concerning the teaching of mathematics in schools; it was an obvious point, so obvious I was left wondering why it had never occurred to me, who had also studied mathematics. One bad maths teacher, he explained, can wreak havoc. A bad history teacher, when you’re twelve years old, say, might mean you don’t acquire a very good grasp of the First World War or the Potsdam Conference. It leaves a hole in your education. The next year, you manage. The early deficiency doesn’t hinder you very much when you later study the Russian Revolution, not in those years when you’re not studying any of these things in any great depth anyway. But mathematics is different. If you fail to digest the material prescribed for that year, then everything that follows, in every subsequent year, is next to impossible to take in. Right from the beginning, mathematics education is accretive, a pyramid, each layer of brickwork building up carefully on the last. You can’t understand trigonometry if you haven’t grasped the idea of similar triangles. You can’t grasp calculus if you haven’t understood areas and velocities. And you can’t understand anything at all if your basic algebra is poor. It’s why mathematics professors have such a hard time explaining their work to the public. The great majority of students are vulnerable to one bad teacher. It isn’t enough for a child’s mathematics teachers as a whole to be generally just as bad and just as good as his history teachers. In fact, even if mathematics teachers were generally, which is to say as a group, better than history teachers, the presence of one bad maths teacher early on hampers him mathematically if it doesn’t doom the child to mathematical ignorance.*

General incomprehension of derivatives, from the bus driver and waiter to the classics professor and newspaper editor, is understandable: Any decent exposition requires a fair bit of mathematics. My father tells a story about Richard Feynman, who’d been dubbed the Great Explainer because of his talent for explaining theoretical physics. When a journalist asked him to describe in three minutes what he’d won the Nobel Prize for, Feynman replied that if he could explain it in three minutes, it wouldn’t be worth a Nobel Prize. Feynman, I think, is making the wider point that an explanation of something by reducing it and simplifying it over and over, until all that’s left is some familiar metaphor that is actually without content, helps no one’s understanding of the thing itself and is only the repetition of a familiar image.