The Economist UK - 16.11.2019

70 Finance & economics The EconomistNovember 16th 2019

I

n the vaultsof Monte dei Paschi di Si-

ena is a torn and yellowing sheet of pa-

per: a death sentence from the 15th century,

handed down for trying to steal gold from

what may be the world’s oldest bank. Mon-

te Paschi’s archivists now have another his-

toric sentence for their files. On November

8th a court in Milan convicted former exec-

utives for hiding vast losses from deriva-

tives transactions a decade ago, in collu-

sion with bankers from Deutsche Bank and

Nomura. It was one of the harshest penal-

ties imposed anywhere relating to the fi-

nancial crisis.

Thirteen people were convicted, in-

cluding Michele Faissola, Deutsche Bank’s

former global head of rates, and Sadeq

Sayeed, Nomura’s former chief executive

for Europe. Giuseppe Mussari, Monte Pas-

chi’s former chairman, received the heavi-

est sentence, of seven years and six

months. Deutsche Bank and Nomura were

fined a total of nearly €160m ($176m). Mon-

te Paschi, which was nationalised in 2017 as

its losses spiralled, had already settled.

Judges ruled that the former bankers

had hidden hundreds of millions of euros

at Monte Paschi between 2008 and 2012 us-

ing a “two-leg” bet on interest rates. This

flattered its current accounting position,

but led to several years of losses as it repaid

Deutsche and Nomura. Deutsche is review-

ing the ruling; Nomura has said it is con-

sidering an appeal. Giuseppe Iannacone, a

lawyer for the former Deutsche bankers,

said his clients would be appealing against

the “shocking” sentences.

Taxpayers who have stumped up for

three state bail-outs for Monte Paschi in

less than a decade may rejoice—at least

briefly; sentences in Italy are often cut, and

convictions overturned, on appeal. Never-

theless, these ones signal a shift in senti-

ment. Italian bankers used to be seen as

pillars of the community, not least because

of the community projects they funded. No

longer. In an ipsos poll published in Sep-

tember, Italians ranked bankers as among

the most untrustworthy professionals.

Part of the reason is scandal—at Monte

Paschi and, allegedly, several other banks.

Moreover, past reckless lending and politi-

cal interference have created a mountain of

problem loans, worth €340bn at its peak in

2015. Monte Paschi remains weighed down
      by €14.5bn of bad loans, complicating the
      government’s plan to sell its stake by 2021.
      As the Milan court was reaching its ver-

dict, a group of lawyers met in Venice to

discuss the social costs of banks’ attempts

to rid themselves of bad debts and non-per-

forming loans. One of them, Andrea Ar-

man, has joined the populist Five Star

Movement—because of his anger at bank-

ers’ corruption, he says. He cites locals who

receive letters daily from debt collectors.

Matteo Salvini, the leader of the nativist

Northern League, who is plotting in oppo-

sition, also spies opportunity in popular

anger at the fallout. During a recent rally he

gave the stage to a retail-banking investor

who lost money after the crisis. Italian

bankers like to say their crisis is over. But

their clients—and the politicians courting

them—are not ready to move on. 7

MILAN

Stiff sentences for bank fraud capture a

sour public mood

Italy’s banks

The reckoning

continues

T

he best investors’ strategies often

sound simple. “Whether it’s socks or

stocks, I like buying quality merchandise

when it’s marked down,” says Warren Buf-

fett. Betting big on the fallout from epoch-

making events, like the fall of the Berlin

Wall, is George Soros’s preferred tactic. Jim

Simons, the founder of Renaissance Tech-

nologies, a hedge fund, spots patterns.

Mr Simons is less famous than Mr Soros

or Mr Buffett, but no less successful. He

founded Renaissance in 1982, aged 44, after

a successful career in mathematics and

code-breaking. Its flagship Medallion fund

has earned $100bn in trading profits since

1988, mostly for its employees. The average

annual return of 66% before fees makes Mr

Simons one of the most successful inves-

tors of all time. He is now worth $21bn.

A new book, “The Man Who Solved the

Market” by Gregory Zuckerman of the Wall

Street Journal, asks how he did it. It is a

compelling read. Mr Simons started invest-

ing in 1978 by looking for patterns in cur-

rencies. He had early successes with sim-

ple “reversion to the mean” strategies,

buying when a currency fell far enough be-

low its recent average. A decade later René

Carmona, another mathematician, con-

vinced him that rather than searching for

such patterns themselves, they should

hand over the job to an algorithm, and

trade even when the logic was unclear to its

human minders. In the 1990s Robert Mer-

cer and Peter Brown, formerly of ibm, de-

veloped a “self-correcting” version of this

trading approach that would double down

on successful strategies and cut losing

ones. These techniques, now called mach-

ine learning, have become widespread.

There were missteps along the way. Ear-

ly in his career Mr Simons unintentionally

almost cornered the market for Maine po-

tatoes, only realising when regulators rep-

rimanded him. For months the team strug-

gled to make money from trading shares,

until a young programmer spotted that Mr

Mercer had typed a fixed value for the s&p

500 index in one of half a million lines of

code, rather than getting the program to

use the index’s current value.

As Mr Zuckerman lucidly explains, such

strategies have limitations. One is that

their scale is limited. Medallion, which

trades on short-term price signals, has nev-

er held more than $10bn. The narrower the

time frame, the larger the market ineffi-

ciencies and the greater the chance that an

algorithm’s choice of trade will succeed.

But short-termism reduces capacity. Re-

naissance now has funds, open to outsid-

ers, that trade over longer horizons. But re-

turns have been less impressive.

Other firms now try to copy Renais-

sance’s trades. Insiders say it tries to trade a

pattern “to capacity”, moving prices so that

other firms cannot spot the same signals—

rather as if a bargain-hunter, upon learning

that a favourite shop was holding a sale, ar-

rived early and bought up the entire stock

so that no one else even realised the sale

was on. Others on Wall Street often de-

scribe Renaissance as a money-printing

machine, but Mr Zuckerman shows how it

has had to keep adapting its model to stay

ahead of the competition.

The book’s only disappointment is that

the man at the centre of it all features rela-

tively little. That is perhaps unsurprising.

Mr Simons studiously avoids publicity.

After all, keeping its funds’ strategies se-

cret is a big part of Renaissance’s success.

Having solved the market, he is hardly

about to give away his edge that easily. 7

Investing

Rich rewards

The Man Who Solved The Market.By

Gregory Zuckerman. Penguin Random

House; 359 pages; $30