Making It Happen: Fred Goodwin, RBS and the men who blew up the British economy by Martin Iain

Author:Martin, Iain [Martin, Iain]
Language: eng
Format: azw3, mobi, epub
ISBN: 9781471113567
Publisher: Simon & Schuster UK
Published: 2013-09-11T18:30:00+00:00

10

Safe as Houses

‘US house prices are not going to fall by 30 per cent. They just aren’t.’

Fred Goodwin

Thirty miles to the north-east of Manhattan, up the coast and overlooking Long Island Sound, lies Greenwich, Connecticut. Once the acme of New England affluence and privilege, by the late nineteenth century it was home and playground to some of America’s grandest families. The arrival of the railroad signalled a new influx, turning it into the perfect commuter town for those working in New York and wanting to reside somewhere sedate, monied and respectable. This is the land of country clubs, yachting, refined ‘preppy’ living and good schools. The family of the elder President Bush, father of George W. Bush, lived here when he was a young child. But by the late 1980s the blue bloods and WASPs, the White Anglo-Saxon Protestant ruling class that sat at the pinnacle of American society, started being elbowed aside in Greenwich by members of a new emerging elite. The place was flooded with vast amounts of wealth via the town’s recently arrived moneymaking machine: the cluster of hedge funds and related firms in Connecticut that grew to feed off Wall Street and the markets in nearby New York City.

When Vanity Fair’s real estate section investigated in 2006, at five minutes to midnight in terms of the approaching financial crisis, it found that the average – average – price of a house sold in Greenwich the previous year was $2.5m.1 And that wouldn’t buy you much of a property. The biggest hedge-fund bosses competed to pay tens of millions of dollars for houses, tearing down properties built just a few years before and building monster mansions with every upscale feature conceivable. A lot of people in Greenwich were, and are, making a lot of money.

Hedge funds began as a way for wealthy investors to protect themselves against the risk of markets turning down or commodity prices rising. They evolved into mechanisms which could deliver returns superior to traditional banks or investment firms. The ‘hedge’ involves buying shares, or options on shares, and other financial instruments. Essentially, those in charge of the fund are taking positions, making well-informed bets on which shares, commodities or currencies will go up and which will go down. These bets are placed using the vast sums that clients have entrusted to them in the expectation of a much better profit than is available with run-of-the-mill investment firms or banks. They can also leverage themselves massively, using borrowed money to do it. They operate across all sorts of markets, carry a lot of risk and when they get it right make much bigger returns than conventional financial firms. The pioneers were mathematicians and scientists who realised that with the application of serious brainpower, and computing, it was possible to beat the market far more effectively than testosterone-fuelled traders dealing on the basis of instinct or feel for the market ever could.2 Hedge funds gradually expanded into so-called ‘alternative investment’ firms, making all sorts of trades and buying and selling anything that offered the prospect of a large return.

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