Byline: Graeme Davies
IT IS the sheer scale of the numbers in focus courtesy of the Goldman Sachs "scandal" that is interesting, not the activities. Numbers like the $45 billion exposure of Royal Bank of Scotland to the debt insurance world and the $841 million it lost in the single trade that is at the centre of this affair.
In the days of "merchant" banking (before that title got lost in the American "investment" banking model), "God's work" required both a great many banks and a great many bankers. It also took a great deal of time. Goldman, interestingly, was particularly good at this.
The absence of very large-scale companies and their huge financial demands, meant that the sort of equally huge trading volumes and transaction sizes commonplace in today's markets were rare. There were few economies of scale. The market -- and therefore its risk -- was spread much more broadly than it is now.
Then suddenly technology appeared. Banks quickly realised that the newfangled computers and mobile phones permitted them operating gearing on an unprecedented scale. While the world's major industries struggled with the mind-boggling reality of going global, the banks expanded rapidly and successfully.
They gobbled up enormous swathes of the banking landscape in vast greedy mouthfuls, swallowing complex, service-based customer networks whole. The absolute number of banks reduced dramatically leaving a handful of global mega banks, into whose slavering maws vast pools of funds of every description had been sucked.
Whole functions disappeared. Stock jobbers, trading exchanges, local banking, back offices by the hundred.
Mortgage authorisations, which were formerly the result of individual judgments and in-depth client knowledge, became a function of one person's work on a computer model. The finest example of "computer says no" (or rather "yes") you will see.
Where once a trader might have invested a few million dollars on behalf of his employer, he might now casually wield billions.
Gullible graduates, grateful for their company BlackBerries and corporate gym memberships, readily sacrificed their young lives to 14-hour days, six- or seven-day weeks and 51-week years -- in return for the telephone number salaries of popular myth. Salaries which actually amounted to an hourly rate of little more than a London cleaner.
Best of all, there were few diseconomies to compensate for the vast economies of the banks' new scale. …