The reason why I still kinda like working in a bank is because there is always something new to learn. Today, at the team department meeting, we learned about Snowballs. Not the white fluffy things you play with on ski trips, but rather, they look something like this:
Every week at our team meeting, the 10 of us take turns to go around the table to talk about current legal risk issues in the respective lines of business we support. One week we might learn about standby letters of credit, another week about american depositary receipts, yet another, interest rate swaps. The idea is that we would share our knowledge in the areas we individually specialize in, and collectively come to a better understanding of how the bank works as a universal enterprise. I like these sessions as they tell me how the various financial products "click" together in banking business.
So this week, we learned about Snowballs, a financial derivative product. It is essentially an interest-rate or quanto swap structure that can be locked in for 5 to 10 years. The structure is a step-up, where the first coupon is a fixed rate, and subsequent coupons are determined by the previous coupon benchmarked against Libor, so making it sensitive to interest rate movements. Such a product allows the end-user to take a view on where they think interest rates are heading in the long term.
My colleague, the derivatives expert, tells us although a snowball looks simple (okay, if he says so), it is actually a highly risky financial instrument. It doesn't take a genius to see that to predict the next move from US Federal Reserve chairman Alan Greenspan over the long term is an extremely difficult, if not impossible, thing to do, since we all know that global interest rate movements are based on a complicated entanglement of micro and macro economic factors.
Because a snowball works on a cumulative formula, if one was not so lucky, one could see a snowball melt completely in a very short span of time. For instance, over a period of 9 weeks, a counterparty has been known to lose more than US$20 million as a result of one single trade. That could mean total bankruptcy for a medium-sized company in 2 months.
Learning about this sort of thing always puts me in a sober mood about how much is at stake daily in the financial world, and why companies can crash overnight if people take extreme risks with money. A lot of it is driven by greed on the buyside of course, but one also need to think about the way sells-side promoters go about their business. There is no small amount of aggression going on. What does it take to instill a culture of integrity in an organization? Should you sell products to CFOs who may not actually understand them? Will people dare to call an inappropriate trade what it really is? It is a formidable task I think, because one is often up against individual greed and hyper-shortsightedness in a very money-crazed world.
