Who are merchant bankers
Special report on National leader John Key
He used to work hand in glove with the foreign bankers who led raids on the New Zealand dollar. Now John Key a man who has spent most of his career out of the public gaze wants to run the economy. In a special report, London's Financial Times and the Sunday Star-Times shed new light on Key's former life as a London currency trader.
John Key wants to be running New Zealand by the end of the year because, like all other politicians, "I believe the future of our country can be really great."
But 20 years ago, he worked closely with a famed currency trader who mounted a brutal speculative attack on the Kiwi dollar. The attack, which has entered forex (foreign exchange) trading legend for its scale, audacity and profitability, prompted Reserve Bank alarm that the currency would collapse.
It was a world in which Key moved easily, swimming with the financial sharks. And while every other contender for the job of prime minister in New Zealand has lived their life on the public stage, either as a politician or on the margins of public life, Key's pivotal adult years have been entirely offstage. More than any other contender in modern political history, he is an unknown.
Now he has emerged looking not so much like a shark as a friendly dolphin. He is the pollsters' favourite to be the next prime minister. But what did this bland and amicable fellow really do during his wonderful career? What were his values? And what does it tell us about his ability to lead the country?
Key's spin doctors are keenly aware that the public feel they still don't really know Key. Hence a Meet John Key promotional DVD (later recalled over music copyright breaches).
In it, the 46-year-old glosses over his past as a money trader before he entered parliament in 2002. Instead he talks vaguely about having had "some pretty senior managerial jobs here and overseas". No mention there of daring currency raids.
His critics say the number-crunching, daredevil skills of his old job will not necessarily transfer to politics. However former colleagues say that what made Key an outstanding success in the brutally Darwinian business of banking was not his foreign exchange skills although they were more than acceptable.
Instead what set him apart were essentially political and managerial skills. He was unusually good at charming colleagues and clients, and rallying staff around him.
"He is a real people person very sociable. We would send him in to deal with the hardest and most difficult clients," recalls John Kelly, a blunt American who was one of Key's bosses when Key was head of global forex for investment bankers Merrill Lynch in London.
While most successful traders in the financial world tend to be introverted, extremely brainy or thrive on taking crazily big bets, Key had never been a "typical" trader.
"He is one of the most balanced people I know. He doesn't flap around under pressure," says Steve Bellotti, Key's immediate boss at Merrill Lynch.
"I suppose a lot of FX [foreign exchange] guys do tend to be inward looking, but John is a lot broader than that. He has real leadership skills. That was what made him really stand out."
Leadership in this environment has parallels with politics. Careers can be over in a flash. Backstabbing is rife. And forex is replete with swaggering male egos and self-regarding adrenalin junkies.
But unlike politics, the monetary rewards are immense. Yearly bonus payments for top traders are worth many times the base salary. In London, industry sources say, Key would have been earning $US2.25 million a year ($5m at 2001 exchange rates around $96,000 a week).
Key's colleagues say his ability to hold a demoralised team together was most evident in 1998 and 1999 when Merrill suffered big losses as a result of the Asian crisis. Morale plunged, and the bank risked losing many of its best staff to rival firms.
Key rallied his team in London around him and kept them inspired enough to stay at the bank rather than bolting for the door. He still sacked dozens fewer than 100 as Key recalls it but in banking terms that was considered trifling.
At that time, says Kelly, Merrill Lynch was facing losses of about $1.5 billion to $2b in just three months.
"It became clear that our bonus pool was going to be pennies. But John really rallied his FX groups around him. He was a real champion a big reason we were able to move forward. He was one of the few people [at that level] we kept on," says Kelly.
Again, the parallels with politics are interesting. Under a series of leaders, National in opposition has been undisciplined, divided and demoralised. Under Key, discipline and focus has tightened.
Key's relentless climb to the top has been well documented. He started his career in forex in 1985 with Elders Merchant Finance in Wellington. It was the year the New Zealand dollar was floated, putting him in at the ground floor for profits from what became one of the world's hottest currencies for speculators.
These were heady times, and the "kiwi" was a new, small and untested currency, vulnerable to the vast washes of capital circling the globe. The Reserve Bank was unsure how much volatility the kiwi could withstand.
Key proved a successful "price maker", setting Elders' price for the kiwi from moment to moment, and attracting large flows of orders to buy and sell. He was headhunted by Bankers Trust to head their 30-strong dealing room in Auckland in 1988. Sources say Key was soon earning $1m each year in salary and bonuses, more than 30 times the average wage at the time.
He formed what was to be a lucrative relationship with 32-year-old currency trader Andy Krieger, based at Bankers Trust in New York, who began putting hundreds of millions of dollars of business through Key's dealing room.
Krieger was the man who a few months earlier had entered forex legend with a massive speculative raid on the kiwi. As Krieger later explained in his book The Money Bazaar, he believed the kiwi was overvalued, and began betting on a fall, selling the New Zealand dollar heavily. Once the currency had found what he believed to be a floor, he bought again at a much lower price, making a profit on the transaction.
This is standard stuff, but Krieger staked so much on the bet, it was said to be more than the entire money supply of New Zealand. And the size of his sell orders, hundreds of millions of dollars at a time, allied with the relative scarcity of New Zealand currency in circulation, meant he was able to push the kiwi down.
The "play" sent the kiwi plunging 5% in a single day. Krieger claims he helped trigger a fall in the New Zealand dollar against the US currency from 66c to 59c, before getting out with his profits. In a 2004 article The Economist listed Krieger's speculative attack as one of the best financial trades in history.
Krieger's outrageous bet made hundreds of millions of dollars for Bankers Trust, but in New Zealand, Reserve Bank officials were alarmed by the yo-yoing of the dollar.
"The bank was concerned whether the relatively fledgling foreign exchange market might be damaged with negative consequences for the economy," a former senior Reserve Bank official told the Sunday Star-Times.
"It appeared to us there was a person taking positions in the New Zealand dollar, probably with a view to collapsing the currency at some point, or at least making it drop sharply," he said.
What happened next is the stuff of forex lore. Traders around the world still delight in retelling the story of the trader who frightened a government of a New Zealand politician ringing Krieger's bosses in New York to yell, "get the f--- off our currency, you little f---er!" This is seen as the worst thing a government could have done. A government must never show fear it only convinces traders they are on to a sure bet.
A phone call was made, but it may not have been quite as colourful as the legend. The finance minister of the day, Sir Roger Douglas, says he never made a call. But the Reserve Bank official clearly remembers staff taking the unusual step of ringing New York, asking why Bankers Trust "seemed hellbent on creating instability in New Zealand by the activities of this dealer".
So what does Key think of the swaggering trader seen by the Reserve Bank as a threat to the national interest? Asked if he admired Krieger at the time, Key says, "yes, I think at the time, yes, he was a very intelligent guy.
"He was a pioneer, in the sense he was one of the few people in the world who understood the options market before it was really established. He blazed a trail and that gave him a strategic advantage early on."
Key says he does not believe a moral issue arises for the traders who make these speculative attacks on currencies, or for the dealing rooms that carry out their orders. "I don't really see it as a judgemental business. You're simply executing orders for people.
"I can't remember whether Andy Krieger was buying or selling, it might have been selling with me, but at the time it would have reflected the economic fundamentals at play in New Zealand. The markets are ultimately too large for any one individual to manipulate.
"There is much more good gained from having a fully functioning financial market than there ever is not having that. We provided liquidity, we provided stability.
"There would be plenty of exporters today who would be cheering from the sidelines if Andy Krieger came in to sell a whole lot of New Zealand dollars. And equally if he was buying it there would be plenty of importers who would be cheering from the rafters. So it's not as clear-cut as some people might think," says Key.
While Key can't remember whether he actually executed some of the sells for Krieger's 1987 speculative play on the kiwi, the timing suggests he did not. But Krieger continued his high-rolling punts on the Kiwi dollar after his big win, often placing $50m buy or sell orders with Key and his dealing room. The huge flow of business from Krieger and others at Bankers Trust in New York soon turned the local branch into the number one dealing room in New Zealand, cementing Key's
success and fattening his bonus packets.
Key remembers getting a call from Krieger soon after he started at Bankers Trust. The New York trader's first question was about New Zealand's GDP and money supply.
"It was really the management of that relationship on behalf of the dealing room that John had responsibility for," says Gavin Walker, former chief executive of Bankers Trust in New Zealand. "He knew everything that was going on in terms of the orders that Krieger was executing on our desk."
As Bankers Trust reaped fat profits, Key's renown across Asia grew. He was headhunted by Merill Lynch, first to head the bank's Asian forex operations in Singapore, then soon after as head of global forex operations in London, where he remained until 2001.
What is unusual, for a profession in which loathing is the standard social currency, is that it is hard to find any traces of enemies that Key may have made. His career appears to be devoid of the scandal, bitter feuds or outrageous ego-flaunting incidents that are typical of the profession.
Finance Minister Michael Cullen famously called Key "a rich prick" late last year. He was right on the first point, but if Key were a prick, you'd expect him to have collected a few more enemies on the way.
The high stakes and tribal nature of investment banking mean the head of a successful team, such as Key, is often hated by others in rival teams. And those with sufficient character to rise to the top are often aggressive, forceful individuals with polarising personalities.
But Key managed to make himself appear relatively inoffensive to the widest possible number of people. Perhaps this makes him bland, indeed, one former trader describes him as "a bit of a clone".
He is likely, too, to have gained an extra layer of blankness from his training as a trader. Traders must learn the art of the poker face, to show no emotion even in extreme situations, and to guard their inner self.
The only tangible sense in which Key asserted a persona of his own was in his accent. "We sometimes felt he would lay on his Kiwi accent so thick in meetings that none of us could understand what he was saying it was kind of deliberate," says Kelly.
In London Key lived, with his family, in Barnes an affluent leafy suburb that tends to attract hardworking sensible families rather than flashy types. And unlike many of the high-earning young men in banking, Key was not known to indulge in any vices such as visits to London's racier quarters.
At least some of this impeccable behaviour may have been due to the knowledge that one day, what was off-stage would be on public show.
"I always had a long-term view of going into politics, so I suppose I was always careful," says Key. "I mean, I got offered all these rinky dink tax deals, but I always paid my taxes. I am naturally quite conservative."
Safe and bland perhaps, but the very fact of Key's survival and success in investment banking suggests he is tough. It is a competitive and brutal business, in which the weak are kicked out early.
During Key's brief spell for Merrill Lynch in Sydney in 2001, he helped fire 500 staff as part of savage worldwide retrenchment by the bank. In the past, Key has appeared proud of his ability to sack without feelings. He told Metro magazine: "They always called me the smiling assassin."
These days he insists these were not cheerful sackings.
"In the end I had to carry out wider responsibilities, but I think I'm fundamentally a nice guy, but have to follow instructions," he says.
Will Key's blandness prove a political obstacle, making it hard for voters to feel they know him and what he believes in?
Labour's Bill Rowling was a leader whose blandness proved fatal in contest with the much more vivid and pugnacious Rob Muldoon. However, Key is no Rowling. He has a stronger presence. And Clark, whatever the critics say, is not as suffocatingly dominant as Muldoon was.
Australian PM John Howard and National PM Jim Bolger were both initially dull politicians who the public grew to trust for their steadiness. Most tellingly, their victories showed a dull opposition leader can win against an unpopular government.
And spin doctors can cleverly plug holes in a candidate's image: expect more passion, feeling and bite from Key in future.
In many ways Key's inoffensive persona provides National with just the reassuring message it needs. One of National's chief obstacles with swinging middle voters is the fear National will be too hard-line, too toxic. But the pleasant Mr Key allows National to pass the message, "we aren't going to hurt you".
Will Key's days spent climbing the slippery career pole at Merrill Lynch in London help him be a good prime minister?
Unsurprisingly, Key insists the background will help. "I think there are a lot of similarities between the world of finance and politics both worlds require broad perspectives on things; in both you need to see how trends are changing; and in both you have to think on your feet, to trust your instinctive judgement."
Certainly, decisiveness is a political strength which Key has already demonstrated on occasion. When he became leader he quickly put an end to National's endless dithering over the anti-nuclear issue, for instance.
Similarly, an ability to work with even the most difficult people would clearly serve Key well in politics, both in controlling warring factions within his caucus, and in building a coalition government with rival politicians, some of whom detest him on principle.
But contrary to Key's claim, bankers don't always take a broad view of things. They focus on money, and are not necessarily rewarded for taking a long view. There are clearly vast gaps in Key's own experience, too.
He has admitted in the past that he lacks expertise on foreign affairs, and his extraordinary claim that he had "no strong view" about the 1981 Springbok Tour at the time he was busy studying accountancy shows an amazing streak of blindness. On one of the most explosive issues of his generation, the young Key had no particular view.
Crucially, critics say they still don't know what Key stands for. While this week he announced new policies on youth crime, his overall vision for New Zealand is still fuzzy. The critics say that the bland exterior is actually a kind of vacuousness, or opportunism, or even worse, a mask for extremism. Labour has always tried to portray him as a right-wing extremist, a Brash in disguise, pointing to his sympathy for state asset sales as an example.
The world Key comes from is a mixture of opportunism and ideology. Dealers are the ultimate pragmatists, ready to change tack in an instant. But they also have a belief in the supremacy of pure, free markets to fix problems.
This pedigree suggests Key is part technocrat, and part free-market true believer, but in exactly what proportions no one is sure.
In Key's old world, the Andy Kriegers are the good guys, dishing out a type of rough natural justice which ferrets out economic weakness and forces governments to administer credible economic policies. New Zealanders concerned by the kiwi dollar's stormy ride through international money markets may not share that view.
When Key told the money men in 2000 he would be quitting to go into politics, they couldn't understand it.
His ultimate boss at Merrill Lynch, Kelly, "told me I was clearly having a midlife crisis", says Key.
Bellotti, Key's immediate boss, says Key was being lined up for his job. "But I think he felt that instead of trying to run a firm, he wanted to run a country. He had formed his own view that he just wanted to go and do something less materialistic."
It looked as though Key had abandoned the money ladder for another that led to power. But in his mind, he has been methodically climbing a single ladder since he was a boy.
Like some other successful politicians Ruth Richardson, Peter Dunne, David Lange Key aspired to political greatness from an early age. At 13 he wrote to then Prime Minister Bill Rowling and told him he wanted the job one day.
"I was really fascinated by politics. It always has been part of my view that politics really is a calling or you wouldn't go into it, because it's demanding and potentially has a toll on you and your family," he says.
But he wanted to make a bundle first.
"I always thought there was a sequence of events, part of it was going into business and me making some money. Actually it would be the same advice I would give someone today. It's better to go in with some financial independence, and you also have some real life skills."
Key still sometimes meets his former colleagues. In October, some of the most powerful fund managers in the City of London gathered in a smart conference room at Merrill Lynch's London office, in the shadow of St Paul's cathedral, to discuss the state of New Zealand's economy over breakfast.
The star of the breakfast was Key, the currency poacher now hoping to be elected gamekeeper.
"There was a lot of interest from the fund managers in New Zealand," Key says. "The main focus, though, was the kiwi they asked where that is going."
Key told the meeting he thought the kiwi was going to hit 80c against the US dollar.
Key may have given the fund managers some insights into New Zealand, but he would also have been gathering information in return. Traders habitually smell out the landscape and their adversaries before they act.
Many believe that in the next five years New Zealand and its currency will face a scary ride from the high-rolling crowd Key once belonged to.
Forex dealers may have their blind spots, but some observers think Key as prime minister might have the poker-faced skills to manoeuvre the currency to safety, skills the Reserve Bank lacked when faced with Krieger.
"The kiwi and the aussie are joint contenders for the dubious title of `peso of the South Pacific'," says Satyajit Das, the Australian expert on financial markets and trading culture.
"In the past attacks by luminaries such as Andy Krieger have moved the currency significantly. So it might make sense to have a FX trader running the country. At least, he should be able to defend the currency."
- Sunday Star TimesSource: www.stuff.co.nz