How The City Gains From Others’ Pain

The Evening Standard  –  8 April 2011

It was over cheese and biscuits that the conversation took an unexpected turn. Up until then my three ex-clients and I had been chatting about the usual things that four men who hadn’t seen each other for several months would discuss: holidays, their snotty-nosed offspring and various recent British sporting failures.

Up until the Stinking Bishop appeared there had been no indication that these characters were about to thrash out how best to make money out of the Japanese tsunami and North African bloodshed.

I shuffled awkwardly in my seat as the three hedge-fund managers I used to deal with chatted amiably about the best way to profit from the disasters that were destroying peoples’ lives thousands of miles away.

One guy was selling short the yen, which he felt was likely to weaken further due to economic turmoil, and buying oil futures as the supply disruption caused by the “Arab spring” was bound to keep pushing prices up. Another was selling short stocks with exposure to uranium production and buying futures in gold, a traditional safe haven in times of geopolitical uncertainty. The third cunning member of this evil triumvirate was shorting shares in the European nuclear generators and, somewhat counter-intuitively, buying bonds in Tepco, the company that owned Japan’s beleaguered nuclear power stations. His logic was that they’d “cratered” (literally) and that if the company got into serious difficulties it would be nationalised and then its debt would fly because it was government guaranteed.

There is a long and inglorious City tradition of making money from other people’s misery. The legendary financier Baron Rothschild famously declared “buy on the sound of cannons; sell on the sound of trumpets” (on victory). This may seem peculiar but it makes sense when you realise that the City hates uncertainty and asset prices tend to factor in the worst-case scenario until things are clarified. Hence, in the run-up to the March 2003 Iraq war equity markets suffered terribly but as soon as the first shot was fired they recovered fast in what became known as the Baghdad Bounce.

Interestingly, certain naysayers claim the Rothschilds cemented their fortune through nefarious means during the Battle of Waterloo. Apparently, this banking family owned super-fast homing pigeons that bought home news of Napoleon’s defeat before anyone else in London had heard anything.

Upon hearing of Wellington’s triumph, the Rothschilds allegedly spread false rumours that the French had been victorious. They then bought every share they could get their grubby mitts on as stock markets tumbled, all of which invariably appreciated dramatically once the truth had been established.

Ten years ago, I witnessed first hand a similarly callous approach in the aftermath of 9/11.

While my City colleagues and I were as horrified as anyone else by the repeated footage of those aeroplanes smashing into the Twin Towers our “basic training” meant that within hours of that despicable act, savvy analysts were telling fund managers they should short airline and insurance shares and invest in construction and armaments companies.

I wish I could say that I had never been caught up in this grotesque heartlessness. But I’m afraid the fires were still raging in Manhattan when my team of analysts and I composed a blast email to send to our clients detailing exactly which of the companies within our sector would fare best in the new world order.

We were merely minutes away from sending out this appalling email when our usually taciturn secretary pointed out that what we were doing was not only horribly insensitive but potentially very damaging to our reputation should the media pick up on it. Each of us quickly realised how startlingly right she was. We shelved the incriminating email and instead spent September 12, 2001 informing our clients over the phone.

The US stock market was closed for several days in the aftermath of 9/11. There was a lot of speculation that when it finally opened it would go up as a result of “patriotic buying”.

Funnily enough, such hopes were quickly shown to be dreadfully naive because “irrational” motivations like patriotism or sympathy never paid off anyone’s mortgage.

I’m afraid that the only emotions that have ever had any truck in the City are fear and greed and that’s why every human disaster, no matter how horrendous, is seen as just another profit-making opportunity.

I suppose my ex-clients’ world view shouldn’t have shocked me, but it did. It seems it takes only a few years out of the heart of the beast to become almost human again!