My history of British Manufacturing

My history of British Manufacturing
My history of British Manufacturing

Wednesday 1 July 2009

Broken Bonds

Broken Bonds is a novel about a man who sought to prove himself and was prepared to give anything in order to do so. He failed and sank. His wife Ally, as principal narrator, now seeks to make sense of what has happened. 

Ed Smith was among the first great rush of bright young men and women who flocked to City jobs with the promise of fat bonuses. Ed, though, viewed it as an opportunity to prove a point: that markets should be free from governmental interference, but that they can be modelled mathematically and beaten. He was a designer of Bonds, which were, in effect, investments in mortgages. The high return these offered was achieved by investing in mortgages which charged very high rates of interest after an introductory period with enticing low rates. These mortgages tended to be granted to people who were at a higher risk of failing to make repayments. In order to make the Bond marketable, these high-risk, high-return ‘sub-primes’ had to be mixed with more secure mortgages. Sophisticated computer models were used to evaluate the risk within the Bonds; however these models failed  to highlight the fundamental risk of a collapse in confidence. A key element in the plot is that Ed discovered that he could crack the model and so deliberately trick it into awarding a top rating to his Bond.  

Ally watched Ed being driven to prove himself, as they listened to his generation of banker being damned by comparison with her great Victorian banker forbear. He was prodded further on this quest for self-worth in a service at the church they attended, when they were also reminded that mankind already had all it needed, provided resources were shared and not wasted. Ed was struck by the contrast between this and the church’s appetite for ever-increasing income to pay for good works, and also his parents-in-law’s need for a retirement fund. 

Ed set out to create a Bond that genuinely provided high returns at minimal risk. However, all this effort ground to a halt with the crash of Northern Rock, an event that prompted his Bank to beef-up its internal regulation. His new boss, Jane, sat provocatively and critically as each new design failed the test of the new regulation. Ed began to wonder whether he could cheat the model mathematically.

Ally and Ed’s son, Paul, was in trouble at school. Ed was too busy, and a surprise invitation from her old college lecturer and lover, Martin, caused Ally to delay meeting his teacher. The Head summoned them both when Paul was excluded for bullying. Ed couldn’t be contacted, so Ally went alone. She knew that it was Paul who was being bullied and not vice-versa, yet her pleas fell on deaf ears. 

Ed came home to find Ally in despair. She was blaming herself for being at lunch with Martin, rather than pre-empting the problem with Paul. Ed decided to confront the victim’s parent. Through this encounter, he witnessed just how the sub-prime mortgages underlying his Bond were exploiting ordinary people. 

Ally found out that her parents had real money problems. She discovered that the charity, she worked for, was increasingly desperate for more income. The charity provided a refuge for girls and Ally discovered that a number had came to London to feed the appetites of bankers. All the time, Ed was becoming increasingly illusive.   

The Bank applied pressure on Jane for her team to produce the Bond that beat the model. She goaded Ed, but he had become reluctant having seen what he had. She preyed upon his pride and arrogance, and Ed created the sought-after Bond that appeared risk-free, but only because it mirrored the assumptions within the regulator’s model; it was in fact completely vulnerable to a market collapse, and Ed knew this. Jane lured him into talking up the positive side. They visited key customers and the Bank’s own head office. Ed was lauded by all. Finally, he gave into the temptation of Jane’s bed.

Ally heard from Ed’s friend and colleague, Tristan, what had happened. She opened her heart to her best-friend, Katie. In the conversation she found that Katie had also bought her house with a sub-prime mortgage. Ally heard more and more about her parents’ and her charity’s anxieties. She was being hounded by Paul’s victim’s mother. With Tristan, she visited a lap-dancing club, the haunt of bankers, to try to understand what Ed had been doing. 

The plan, which, unbeknown to Ed, the Bank always had, was to offload into the Bond all its most risky assets. It succeeded in doing this and Ed became a key member of the marketing team. The Bond secured a top credit rating because of Ed’s artful modelling. The market welcomed it, and individuals and charities piled in with their money. Ed achieved celebrity, but they were all riding far too high. Ed saw the signs of disaster, but his hands were tied; he had sold himself to the Bank.

In September 2008, Lehman Brothers collapsed. To everyone’s shock the Bond crashed too, bringing everything down with it, and Ed was left to sink. He had broken the bond of marriage, the bond of trust on which banking was built and had fallen into the bondage of selling all he believed. Ally was the recipient of the cries that should have been directed at Ed, not even at Ed, but at the bank’s management, perhaps not even at them. She turned to Martin in desperation. He was the rock she needed. He could see what has happened and counselled Ally. She confronted Jane and began to discover the chain of power and pressure that ran through the banking world.

Ed was living in a bed-sit also striving to make sense of what had happened. He had discovered that the market was a beast that demanded intelligent and strong regulation, a task to which he was ideally suited. He rediscovered himself and began to rebuild his life with the values he had discarded. Ally takes him back (or does she?)