Fiction and Finance

Programming note: Bits about Money has been a bit irregular recently.

I’ve recently booted up the Complex Systems podcast. It is now up to more than a dozen episodes, including interviewing my dad on real estate development (which is something of a BAM deep (curb) cut). The podcast features Bryne Hobart and other guests you’d probably enjoy on a weekly basis. Since I am more of a writer and very plausibly you are more of a reader, being here and all, note that I include fully edited transcripts (with inline commentary) on all episodes.

I also took my hand at bespoke engineering work wildly outside my expertise with a complex capital stack, and the managerial attention required has been significant. Or: we bought a house and it needs work.

I hope to get on a more appropriate cadence soon, and beg your forbearance (and also understanding that when Factorio: Space Age drops I am unlikely to get much writing accomplished for a week or two). 

Fiction is underrated as a means for concretely impacting the real world and learning about it.

The Social Network is substantially made up, more a source for vibes rather than a source for facts. Even the vibes fail to cohere with reality. And yet it convinced many proto-founders to put in YC applications. This matches the previous experience of Michael Lewis (who purports that Liar’s Poker was basically factual, but meant as a cautionary tale), who launched many careers in finance.

And sometimes fiction doesn’t just give you vibes; it gives you models. The Phoenix Project is actually assigned at some infrastructure companies, because the narrative makes the pedagogy about project management go down more easily. (Often compared with The Goal, which does similar for manufacturing.)

In that spirit, I have a few highly opinionated choices for works of financial fiction that more people should read.

I’ve avoided listing some very worthy books which mention finance. The Iron Bank is balderdash with a nonsensical business model (if you’re bad at credit analysis and rely on winning wars to make up for it, you are not a bank, you are a private military contractor), and while Thorin’s Company does temporarily collapse over a contractual dispute caused by insufficiently clear demarcation of rights between share classes, that is a tiny detail.

The Big Short (book and film) — Written before Michael Lewis started his career in financial-inspired fiction, the Big Short is a dramatization of a gang of outsiders (and insiders who are presented as outsiders for narrative convenience, a theme Lewis will return to frequently, not always with self-awareness) who correctly predict the mechanism and course of the global financial crisis. The work is basically accurate (though it could stand to talk a lot more about repo funding, which is the bit about the crisis that non-specialists are most likely to miss). Congressional testimony, industry analysts, and dinner conversations with people who were in the room all mostly align with it.

For people who have limited facility with mortgage finance, the Jenga scene in the movie is a much better primary on collateralized debt obligations than most formal primers on them. And it matches the actual pitch deck Deutsche Bank used for the proposed trade, which is one of the best tours de force of financial writing ever seen, made even better by the reader’s knowledge that the authors of it end up being absolutely right. (Much of the best writing in the world sits eternally below the waterline; the only reason you perceive this tip of the iceberg is because it was evidence in the Congressional investigation.)

Both book and film also spend time on a crucial insight: it is not enough to merely be right and contrarian, not if you want to make money. You also need an instrument to encode your bet, a source of capital, and substantial operational chops. This includes counterparty risk management, which is particularly important when you’re predicting the end of the world as we know it.

Margin Call (film) — Margin Call is a fictionalized extrapolation of what it was like to be on the inside of could-have-been-anyone, absolutely-not-Goldman-Sachs investment bank during the later stages of the financial crisis. Although it covers much of the same procedural ground as the Big Short, it is not a particularly good way to learn about the mechanisms.

What it is stellar at—almost unmatched in fiction—is depicting archetypes that are both dramatically compelling and reasonably true to those working at various levels in the industry.

The two most important scenes in the film are both meetings, and the film respects its audience a lot more than Big Short does; at no point does anyone need to get into a bubble bath to hold your attention. Those scenes have an entire subgenre on YouTube of commentators explaining the subtext, about which characters are (with a very-well-calibrated spectrum of convincingness) disclaiming knowledge about things they actually certainly knew, about the power dynamics between executives near the heights of capitalism, and similar.

If you take one thing away from Margin Call, take the character of Carmelo. He has one line in the movie, delivered after the CEO requests a particular task after a well-compensated executive has reported it impossible: “It is done.” Some commentators believe the point is that Carmelo is a ruthless, willing-to-use-violence henchman waiting in the wings of an investment bank. These commentators do not understand the point of Carmelo being in this meeting, and fail to understand why Carmelo achieves success in the film. He is a dramatic convenience embodying agency and willingness to work outside the normal process in abnormal times. Carmelo is not any particular person, but many organizations have Carmelos, and probably more should.

The Dragon’s Banker (book) —  sometimes, a title has you at hello, and then goes on to underpredict the actual work. That’s the Dragon’s Banker in a nutshell. How could one possibly spoil this? It has dragons. They need banking. Their banker banks the heck out of them. It turns out that banking dragons is difficult due to their diverse needs and demanding expectations of their bankers. Nothing in the book would surprise a private banker.

But most of us aren’t private bank bankers, and the book is one step ahead of even a very genre-savvy reader. I caught myself saying “Hah, brilliant idea, but of course the dragon is going to fail KYC and AML screening” about a page before the banker unspools his plan for defeating (somewhat anachronistically advanced levels of) KYC and AML screening.

It’s not a bad plan, given the setting. Also, somewhat self-indulgently, no character in fiction has ever more caused me to feel more represented than the banker did around the “I love my job.” line. (Though, if I were actually in the text, I would certainly not take his approach with respect to pricing services. If you’re not comfortable charging market rates for financial services to rich clients, private banking is a bad field to be in. No client incapable of burning you to cinders is worth talking to!)

The Dagger and the Coin (book series) — let the name of capitalism never be besmirched with allegations that it has only a single dragon/banking crossover. This is a worthy entry in the genre. It suffers a bit from extensive plot not about banking and characters who barely speak to dragons. But all of that irrelevant fluff makes it one of the most underrated fantasy series I’ve ever read. (It has the best twist in fantasy, which almost recharacterizes the work as understated cosmic horror.)

More relevantly, we get a fairly extensive look at a not-quite-Medici-but-it-rhymes merchant bank. Unlike the Iron Bank, this one has a plausible business model and clientele, focused primarily on distributing risk among merchants for sea voyages and on capital development for land-based productive enterprises. Merchant banking is heavily under-understood by people interested in finance, but is critical to the history of it (and still practiced, in derivative forms, in the present day).  

Bonus entry: Shylock’s Children (Japanese film) — The subtitled version exists and is licensable—I watched it in in-flight entertainment once—but it was a relatively minor release in Japan and may not be conveniently findable on streaming services. This is a pity, and if you can find it, it is very worth your time.

The plot centers on fraudulent shenanigans at a Tokyo bank branch. One imagines the pitch meeting: “Another police procedural, maybe?” “Overdone, but perhaps the world really needs some salaryman-on-salaryman hardcore banking action. I want gritty realism like a crisp fold on the inkantourokushoumeisho (document attesting to the registration of a personal or corporate seal with the responsible local government agency) to compare the specimen with the presented version of a company’s stamp to verify authenticity.”

“Not too much realism, though, for it to work there will need to be a nation’s worth of fraud happening at this one branch. But we’ll populate it with characters so true-to-life that salarymen will think we had a spy camera in their offices, set design that will give them flashbacks, and a really moving meditation on moral culpability and the difficulty of choosing righteousness after being tempted into compromising one’s principles. It will complement texts on the fraud snowball, like Lying for Money, very well. And of course we’ll use Shakespeare as framing device for this narrative, because these characters would of course attend a Shakespeare production in Tokyo, which our audience doesn’t have to be told is a very normal thing to have happen.”

If you have the opportunity, it’s sublime.

See you next time, and do check out Complex Systems if you haven't already. It is in your podcast-delivery-vehicle of choice or at the website.