Neil Collins

Who’s the mug at the table?

Once upon a time there was an investment banker. He was hardly today’s stereotypical WASP smoothie, but an overweight, sweaty trader from the Bronx who shouted a lot, ate pizza at his desk when he wasn’t standing on it, and treated colleagues as imbeciles.

issue 08 September 2007

Once upon a time there was an investment banker. He was hardly today’s stereotypical WASP smoothie, but an overweight, sweaty trader from the Bronx who shouted a lot, ate pizza at his desk when he wasn’t standing on it, and treated colleagues as imbeciles.

Once upon a time there was an investment banker. He was hardly today’s stereotypical WASP smoothie, but an overweight, sweaty trader from the Bronx who shouted a lot, ate pizza at his desk when he wasn’t standing on it, and treated colleagues as imbeciles. Lewie Ranieri was, according to Michael Lewis in Liar’s Poker (1989), a fat slob.

He was a hugely industrious slob, though, and made piles of money for Salomon Bros, his employer. He traded US government bonds, or derivatives of those bonds, then and now the biggest securities market in the world. But one day he noticed a market that nobody else had looked at — the millions of domestic mortgages which, while individually much too small to attract attention among investors trading billions of dollars every day, added up to serious money.

Why not, he thought, bundle them and sell them in packets which would be big enough to interest the big boys? Instead of simply sitting on the books of the bank that had lent the money, here was an asset that could be sold, freeing up the lender’s capital to make further advances. Having put the bundle together, Ranieri’s traders could carve it up again, to offer more security (and less income) to some investors, or more income (and less security) to others. Thus, in essence, did he invent the market in collateralised debt obligations (CDOs).

A quarter of a century and $5 trillion on, the wind Ranieri sowed has become the whirlwind which is now threatening to blow away forests of financial businesses with shallow roots.

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