In The City

Of model monkeys and bond jockeys

In amongst the vast number of articles written recently about the much-exaggerated demise of the structured credit market, In the City found reference to a term we thought had died out many moons ago: the 'F9 model monkey'. Its re-emergence tells us something about the state of the market, so please bear with my etymological investigation a little longer: I trust you will find it interesting.

In the City first heard the expression used by an Asian-based interest rate swap manager many years ago. The manager, having been asked to give a large portion of his P&L to a London-based hybrids group which used their mathematical prowess and financial modelling skills to build complex, highly profitable products, was heard to exclaim: "Why should I give them zillions of dollars? All they do is wave their arms around in the air and press the F9 key on their keyboards."

The London-based hybrids team, replete with mathematical degrees and a nerdy sense of humour, proceeded to decorate their desks with clumps of bananas, and the expression "F9 model monkey" was born.

Until relatively recently, quantitative modellers or structurers (a less controversial term for F9 model monkeys) were rare in the credit market. The dominant species was the syndicate manager. The syndication of new bond issues was the main driver of P&L, and a good secondary trader was one who didn't lose money.

The business was run by 'bond jockeys' who could perform amazing feats of memory to recall which customers had bought what bonds at what price. All of these bond jockeys traded Ford and GM and "knew the credits". Quants were an irritating expense forced on them by visionary senior management or overstaffed interest rate swap businesses

But then credit derivatives happened. All change. Load up on quants, let product innovation begin.

The bond jockeys watched with bemusement as derivative structures became a bigger and bigger driver of P&L. They were incredulous when the highest-paid person in the credit business was a Russian nuclear physicist who thought Whirlpool was a structure not a company, and they were apoplectic when bond syndication was made to report into the head of CDO origination.

May's events, however, gave the bond jockey a chance for revenge. With a beady eye on the continuing deterioration of Ford and GM, the bond jockey and all his friends were short the market, and began to talk of "downgrade to junk" and even "default". Model monkeys and their customers began to focus on the dramatic moves in these two stalwarts of CDO structures. It was one of the rare occasions in recent years when the monkeys needed to talk to the jockeys to form a view on a credit which was dominating their risk management decisions. Perceiving a constituency long and wrong, the jockeys didn't wait to understand the maths before driving spreads wider and watching the pain develop.

Of course In the City is not suggesting a nefarious conspiracy. This process is an unconscious or subconscious one. It is rarely personal, but it does in our view accurately describe why the market experienced the violent move in May. The "F9 model monkeys will be toasted" comment was probably uttered by a long-suffering bond jockey enjoying having, for the first time in many months, the best P&L on the trading floor.

But don't fret too much about the monkeys. Bananas were seen reappearing on trading desks around the world last month. It would seem that the monkeys live to fight another day.

In The City is a senior participant within the credit markets