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By Root 642 0

lay in the fact that, since our dealings were not public and transparent, the CDO investors onto whom we were passing some of the Sunderland loans would only know as much about the risk involved as we were prepared to tell them. The riskier they thought the loan, the more they would charge us for it and the more our profit on the whole deal would be eroded, so there was a temptation for us to massage the information a little. Of course, if things went wrong and our secondary lenders suspected us of hiding the true risk, then BBK’s name would stink. To Lionel, this, like all moral problems, was just another risk management issue. It was clearly important that the board of BBK in general, and Sir George Henderson—the director charged with oversight of the RMU—in particular, be shielded from some of the trickier details so that, if worst came to worst, they could honestly deny all knowledge of any moral hedging. This, of course, is a risk management technique perfected by our political leaders in recent years.

For a while things went very well in Venezuela, so much so that BBK offered Sunderland further and larger loans, quietly offsetting them with more synthetic CDOs. Then one spring day, four years after I had answered that fateful email from Gary McCall urging me to come to London, things went abruptly wrong in Venezuela. It was a political rather than an engineering problem, but its financial consequences were just as devastating. Sunderland Petchem, massively overstretched, collapsed, and BBK was faced with huge unpaid debts, which it promptly passed on to a cascading series of CDO investors. As the Sunderland story became public, its history painstakingly revealed by investigative reporters, the investors became more and more belligerent and the BBK Board increasingly defensive. There were whispers of legal action, fraud and criminal charges.

Once again, Lionel recognised this as a risk management problem, the logic of which he explained to Gary and myself over a rather tense lunch at an excellent little restaurant overlooking the river. The bank was wounded, Lionel explained, and surgery would have to be performed before gangrene set in. There were really only two options. Option one entailed the removal of the whole RMU, including its board supervisor. Criminal charges would be brought against Lionel, Gary and myself, and very possibly Sir George. There would be a nasty public trial in which, to demonstrate the bank’s innocence and resolve, our names would be dragged through the mud before we were given exemplary prison terms. Option two was the discreet route. It would be quietly explained to the secondary lenders that the bank would cover their losses after the discovery that two of its staff (reckless antipodean colonials, naturally) had bypassed internal controls and procedures.

The board was in a bloodthirsty mood, Lionel explained, and currently favoured option one. But he had carried out a very detailed worst-case scenario analysis calculating all the possible eventualities of both courses of action, and he was confident that cooler heads could persuade board members to go for option two. That, of course, would depend on Gary and myself making a full confession of sole responsibility for the debacle, making token reparations to the bank (basically everything we owned), signing a binding confidentiality agreement, and returning to the far side of the world, never to be seen again.

But what would happen to you, Lionel, we asked, and Sir George? Solemnly, and without a hint of shame, he explained the irresistible logic by which it would be necessary for the bank to demonstrate the limited nature of the breach by rewarding those who had isolated it.

We really had no choice. Within a couple of weeks Gary and I were boarding a plane at Heathrow, all risks neatly managed, moral hazards expunged.

‘So you didn’t even make any money out of it?’ Anna said.

‘That’s right. Then on the plane, just before we reached Bangkok, Gary mentioned that Lionel had been screwing my girlfriend all along. He thought I must have