Thursday, November 27, 2014

His Dark Materials

Wondrous are the works of Man, but more wondrous still are those of Heaven.
Joseph Wright, Arkwright’s Cotton Mills by Night, c. 1782
The best one can hope for as a human is to have a relationship with that emptiness where God would be if God were available, but God isn’t. … He’s not available because he’s not a being of a kind that would fit into our availability. … If God were knowable, why would we believe in him?

Anne Carson

* * *

All religions [have] at least one common commandment: “Thou shalt not disfigure the soul.”

— Frank Herbert, Dune

* * *

Seems to me the place you fight cruelty is where you find it, and the place you give help is where you see it needed.

We have to build the Republic of Heaven where we are, because for us there is no elsewhere.


— Philip Pullman, His Dark Materials

Do not forget to build the Republic of Heaven where you are, my friends, starting with your family and friends this holiday season. Most of us have no more important work, and most of us will leave no more lasting legacy than this.

Happy Thanksgiving.

© 2014 The Epicurean Dealmaker. All rights reserved.

Sunday, November 23, 2014

Regrets, I’ve Had a Few

Don’t look back
Auguste Rodin, Orpheus and Eurydice, 1893
Martin Blank: “I’m sorry if I fucked up your life.”
Debi Newberry: “It’s not over yet.”

— Grosse Pointe Blank

Why do we regret life choices? In retrospect, some are decisions with serious and long lasting consequences we make carelessly, hastily, or without due consideration to relevant factors clearly available to our decision making process at the time. They are important choices poorly made. These are good candidates for regret, because we think to ourselves, “If only I had thought more clearly, or taken more time, or investigated my options more carefully, I could have accomplished something important I would have wanted at the time and perhaps still do.” These are the kind where our overwhelming impulse is to kick ourselves for being so stupid, blind, or rash. And we are right to do so. If you are like me, Dear Readers, these are the decisions I cringe to remember, and for which my ears burn with embarrassment.

Others are choices we make deliberately, carefully, with all due attention to the facts as we know them, but that turn out to be wrong, or have unanticipated negative consequences which would have made us choose differently had we foreseen them. These regrets take the form, “If only I had known…” But these are properly weaker regrets, because they hinge on counterfactuals which we instinctively if not explicitly realize were not in our control: information which would have made us change our minds was hidden or unavailable to us, or—a special case of the foregoing—future conditions which we relied upon in making our decision changed after we decided, thereby undermining our intent. Human beings operate with bounded rationality, and even the best and most conscientious decision maker can be foiled by unknown (and perhaps unknowable) data and the vicissitudes of an uncertain future. The consequences may be just as bad, in retrospect, as those arising from a bad decision poorly made—or even worse—but it is pointless to beat yourself up too much for choices you made without considering information completely unavailable to you. Someone who gives more than a passing shrug of regret for the abandoned winning lottery ticket they failed to pick up off the street has their priorities and sense of the possible all messed up.

Still others are good decisions, carefully made, incorporating a complete set of relevant data and good anticipation of future developments, that we later come to regret because we discover we no longer want what we thought we did at the time. Perhaps these are just another subset of the second kind, where the unknown facts we did not incorporate into our decision process are future changes to our values or priorities. But these regrets are often the most troubling, because we are stuck with bad consequences we did not anticipate for which we can blame no-one but ourselves. Nobody hid any data from us, we weighed the pros and cons carefully, and the future played out just as we expected, but now the successful results of our decisions prevent us from realizing other desires or values that are just as or more important to us. This kind of regret often is a natural consequence of the normal process of aging, as young people make important and often irreversible life decisions they later come to regret as older individuals.

* * *
And so we get examples like this, where a 46-year-old banker complains on Reddit that his choices as a young man—for security, wealth, and a successful career—have resulted in a broken marriage, estrangement from his son, and the abandonment of cherished dreams of writing, travel, and adventure he had when he was young. According to his story, he did not make choices rashly or irresponsibly; if anything, his complaint seems to be based in part on his opinion that he chose too cautiously. I will not judge this man’s life choices or his current situation, other than to observe that perhaps his real faults are blindness and inattention.

Why should anyone expect that decisions once made should never be revisited or reexamined in light of changing circumstances or changed desires? Even in our blessed state of deferred decision making in the developed world, many of us begin to pick mates, careers, and life paths while we are still in our twenties, when maturity-wise we are little more than children. Not only should we expect our values and priorities to change with age and circumstance, we should be alert to the fact that many of the decisions we make will be impossible or very difficult to undo. This is naturally hard for young people—I speak from experience, having been one—since the general existential assumption of youth is that time is unlimited and life is one endless series of sequential possibilities. The notion that, for example, having and raising children will impose dramatic limitations on one’s freedom and possibilities for personal fulfillment for decades in one’s young and middle adulthood doesn’t even occur to most twenty-somethings, except in some sort of intellectual sense, which is to say: not at all.

Of course this lesson—and many others which cranky oldsters like me try to impart on a regular basis to succeeding generations—is almost always only learned by personal experience. I remember having gauzy, exciting dreams of adventure and possibility as a twenty-something myself. Most of them, in retrospect, were pretty unrealistic, naive, or just silly. I don’t regret not trying to pursue them now because I realize they likely would have been a disappointing waste of time. In contrast, the adventure and excitement in my actual life have come from the commitments I have made, like marriage, children, and a career, because almost all of them required, in some form or another, a blind leap of faith into the unknown. Has it all been peaches and cream? Absolutely not, but it has been an adventure.

And, lest you sink into a youthful funk contemplating an endless vista of diaper changing, weekend soccer games, and college application trials as the entirety of your ineluctable fate, take heart. The good news about adulthood is that is doesn’t necessarily crush your dreams. It just gives you new ones. You just need to be alert to discovering them.

* * *

Of course, a looming sense of mortality can be salutary, too. There’s nothing like lagging energy, mysterious aches and pains, and strange growths discovered in the mirror to drum into your consciousness that your time here is limited and precious. Adventure and excitement can often be found right in your own backyard, if you know where to look:

Life is what happens to you while you’re busy making other plans.

— John Lennon

Hey, I warned you it all isn’t peaches and cream.

Related reading:
Turn the Page (December 31, 2011)
Walking Song (December 18, 2011)
Can’t Buy Me Love (April 29, 2012)

© 2014 The Epicurean Dealmaker. All rights reserved.

Tuesday, November 18, 2014

What Is It Like to Be a Banker?

Oh sure, blame the bat. What the heck, we’re easy targets.
Conscious experience is a widespread phenomenon.

— Thomas Nagel, inveterate optimist

Whilst conducting primary research into the ontological foundations of metaphysical epistemology recently, O Dearly Beloved, Your Dilatory and Shockingly Remiss Correspondent happened upon a previously unpublished draft of Thomas Nagel’s seminal paper, “What Is It Like to Be a Bat?” I found upon examination of the disintegrating foolscap moldering in dank archives that this eminent philosopher had initially attempted to frame his gedankenexperiment with an empathic exercise even more challenging than imagining himself to be a member of the genus Microchiroptera. Given its patent interest for the history of analytical philosophy and its relevance to issues of concern cognate to this blogsite, I thought I would share the pertinent excerpt with you:
I assume we all believe that bankers have experience. After all, they are human beings, and there is no more doubt that they have experience than that accountants or baristas or firemen have experience. I have chosen bankers instead of lawyers or politicians because if one travels too far down the phylogenetic tree, people gradually shed their faith that there is experience there at all. Bankers, although arguably more closely related to us than those other examples, nevertheless present a range of activity and a sensory apparatus so different from ours that the problem I want to pose is exceptionally vivid (though it certainly could be raised with other species). Even without the benefit of philosophical reflection, anyone who has spent some time in an enclosed space with an excited banker knows what it is to encounter a fundamentally alien form of life.

I have said that the essence of the belief that bankers have experience is that there is something that it is like to be a banker. Now we know that most bankers (investment bankers, to be precise) perceive the external world primarily by money sense, or moolah-location, detecting the reflections, from monetary instruments or securities within range, of their own rapid, subtly modulated, high-frequency shrieks. Their brains are designed to correlate the outgoing impulses with the subsequent jingling or rustling of exchangeable claims to value, and the information thus acquired enables bankers to make precise discriminations of denomination, fungibility, composition, and theft-prevention protections comparable to those we make by vision. But banker money sense, though clearly a form of perception, is not similar in its operation to any sense that we possess, and there is no reason to suppose that it is subjectively like anything we can experience or imagine. This appears to create difficulties for the notion of what it is like to be a banker. We must consider whether any method will permit us to extrapolate to the inner life of the banker from our own case, and if not, what alternative methods there may be for understanding the notion.

Fortunately for the history of analytic philosophy, Professor Nagel apparently abandoned this initial foray as unworkable and, frankly, too outrageous and incomprehensible for anyone but specialists in the study of Homo investmentbankerensis. His revised paper, reframed to less ambitious dimensions, seems to have gone on to some renown, notwithstanding his execrable timidity.

Fortunately for you and everyone like you, I am led to believe there is a minor blogsite located somewhere in cyberspace which tackles these recondite issues head on. Perhaps you can drop me a postcard if you find it.

By the way, is that a $20 bill in your pocket?

© 2014 The Epicurean Dealmaker. All rights reserved.

Sunday, November 2, 2014

Quis Custodiet Ipsos Custodes?

For a watchman, he has remarkably few clothes. Or weapons.
Auguste Rodin, The Age of Bronze, 1876
“If you meet a thief, you may suspect him, by virtue
of your office, to be no true man; and, for such
kind of men, the less you meddle or make with them,
why the more is for your honesty.”


— William Shakespeare, Much Ado About Nothing

Francine McKenna of re: The Auditors recently expressed her dismay that the Big Four accounting firms have continued to be noticeably remiss about engaging reputable accounting firms to audit their own in-house broker dealer arms. The litany Ms McKenna recites of well-known and less-than-well-known failures and deficiencies public accounting firms have been accused of by the PCAOB and the SEC concerning audits of third party broker dealer clients is certainly eye-opening, and it does not give the casual reader much confidence they are sufficiently capable and diligent in this area. However, Ms McKenna’s central concern is a different one: in order to provide legally mandated audits of their own broker dealer units, the Big Four must hire unrelated third party audit firms, and the firms they have hired are tiny, no-name, no-account nobodies.

This, on its face, appears to worry Ms McKenna, and it is reasonable to presume it should worry the rest of us who are less informed about the ins and outs of public accounting than she. However, while I profess absolutely no expertise or credentials in the area of public accounting, I do have an insight into the facts of the matter which may allay some of Ms McKenna’s and her audience’s concerns.

For one thing, as a lawyer who read her post inquired, the curious among you Delightful People might wonder why public accounting firms have broker dealer subsidiaries in the first place. Well, the answer to that—notwithstanding the corporate doublespeak Ms McKenna cites from the firms in question—is quite simple: they like to do investment banking. They like the fees, they like the prestige, and they are often thrown into situations where clients do hire them to provide capital raising or M&A advice. In particular, the Big Four accounting firms have over the years developed a huge and thriving business providing financial due diligence, accounting, and audit services to private equity firms in connection with the latter’s frenetic buying, managing, and selling of companies. Private equity firms, the cognoscenti among you may recall, are paragons of corporate outsourcing, and because they normally consist of three ex-investment bankers, a part-time bookkeeper, and the bookkeeper’s dog, they must employ an army of outside lawyers, consultants, and advisors every time they want to do a deal. Chief among these, of course—save the ineluctable lawyers—are accountants, since virtually none of the private equity professionals are qualified accountants, either (nor can they be bothered to take time from dealmaking to tot up balance sheets, income statements, or other such trivia).1

Private equity firms are occasionally willing to hire accounting firms as deal advisors in addition to their accounting duties because 1) what the hell, they’re already neck deep in the numbers anyway, 2) they may owe the accounting firms some love for the last ten deals which blew up and for which the PE firm accordingly stiffed them on their accounting fees (“We’ll make it up to you next time”), and 3) they’re normally much cheaper than real investment bankers. So Big Four accounting firm partners are always wheedling and cajoling their financial sponsor clients to let their pet investment bankers “do something,” and sometimes the PE guys let them. By the same token, relationship managers at public accounting firms are always looking to soak their corporate audit clients for additional fees, and the occasional corporate client decides to use his audit firm’s in-house bankers to raise some financing or do some small acquisition or divestiture, often for similar reasons to the PE guys.2

* * *

Now the trick is, of course, that if you decide to offer M&A advice or capital raising services to anyone, including PE firms and corporate clients, the redoubtable SEC requires you by law to register as a broker dealer. This is based on the notion, as I have explained elsewhere, that such services normally entail recommendations concerning the purchase and sale of securities, which is the third rail of financial market regulation in this country. Unfortunately, the law currently makes no distinction between a small band of semi-retired corporate development guys who advise on one or two deals per year and a globe-straddling colossus like Goldman Sachs. The former can just as well operate out of a suitcase. The latter not only advises on billions of dollars of M&A and raises billions of dollars of capital for its institutional clients, but also maintains client accounts, handles funds, and does all sorts of other security-related things for a much broader range of retail and institutional clients. Both are, de jure, “broker dealers,” and both require annual audits.

But if all you do is agency business like advising institutional clients on M&A and raising private debt or equity funds from institutional clients, the types of things which the SEC wants to check you are doing or not doing are relatively few and uncomplicated. For example, they want to know whether you are taking custody of or handling client funds at any point (normally no) or, if you are raising funds from institutional investors, you have controls in place to make sure they are indeed qualified for the deals you offer. They want to make sure you have written policies and procedures and adequate capital to support the business you conduct. But the financial complexity of a pure agency advisory business is very low. You have fee revenue, compensation expense, unreimbursed marketing and T&E expense, and other general and administrative expenses. The balance sheet and retained capital you require to run such a business is minimal. From an auditor’s perspective, it is a pretty darn simple business to audit.

And this, as I understand it, is what the broker dealer units of the Big Four accounting firms do. They are not taking custody of client funds, investing money on behalf of customers, or maintaining large sales and trading platforms which operate across multiple geographies and markets. Notwithstanding the size and complexity of the Big Four, their broker dealer platforms have got to be pretty trivial. Accordingly, it makes sense that they have chosen to hire pissant little audit firms to satisfy their SEC-mandated requirements because 1) their businesses are simple enough to be adequately audited by a couple CPAs operating out of a strip mall and 2) the strip mall CPAs are going to be a hell of a lot cheaper than a larger firm. This latter point is important since it is likely—and Ms McKenna confirms it in the case of PwC—that most of these broker dealer arms are either losing money or making a pittance.

Now if this is not true, and Ernst & Young is running a hedge fund like MF Global inside its broker dealer or selling restricted biotech warrants to unqualified widows and orphans, then obviously none of the above is true or adequate. But if that is the case, I think E&Y and the SEC have a much bigger problem than Ms McKenna has tentatively identified.

Related reading:
Francine McKenna, When Big Four Audit Firms Need an Audit They Choose Cheap (Medium, October 14, 2014)
Francine McKenna, Update: The Shoemaker’s Children… The Big Four And Their Own Broker-Dealers (re: The Auditors, October 27, 2014)
In Loco Parentis (April 13, 2014)

1 This is in sad contrast, regular readers of these scribblings will recall, to private equity firms’ endemic reluctance to hire M&A advisors like Yours Truly for the combined reasons that 1) PE professionals believe they can do deals themselves and 2) doing deals, unlike accounting, is fun.
2 In the UK and Europe, where I understand public accounting firms have a closer historical and statutory advisory relationship to their clients, they actually maintain a relatively robust position in the advisory league tables for mid-sized and smaller deals, unlike their poorer American cousins. When it comes to big public deals, however, investment banks dominate there as they do here.

© 2014 The Epicurean Dealmaker. All rights reserved.

Monday, October 27, 2014

Courtly Love

Nobody likes lawyers
Contrary to the cynicism that can pervade discussions of [mergers and acquisitions], many top level M & A advisors have a genuine concern about the integrity of large scale transactions and a desire for the fiduciaries involved to serve the interests they represent in a good faith and effective way. This is not to say that they do not seek to advance the interests of their clients in obtaining legitimate economic advantage, but they do want the game to be a fair one.

— Leo E. Strine, Jr., Chief Justice, Delaware Supreme Court 1,2,3

1 While I appreciate Chief Justice Strine’s sentiment and respect for the basic integrity and desire for fair play which does indeed hold sway among the large majority of professional advisor participants in M&A processes, I find his proposal that we make our lives—and those of our clients—before his and other benches easier by documenting in much greater detail the twists and turns of our recommendations and analyses in medias res of transactions to be both impractical and naive. Surely Chief Justice Strine, among all jurists, must appreciate the role accident, error, and chance play in almost every complex process such as a merger or acquisition and how, even when said twists and turns are faithfully and comprehensively memorialized the twin imps of imperfect memory and hostile interpretation can confuse and bedevil the faithful interpretation of the facts of the matter. I suspect Mr. Strine, being both professionally empowered and constitutionally predilected for the role of fact finder and detective, simply prefers a clearer trail of evidence to allow him to judge the facts of the case properly and render more equitable judgments. However, I also suspect virtually no internal or external investment bank counsel or deal lawyer of any kind will be remotely interested in providing more potential fuel for the fires of devious and aggressive plaintiffs’ counsel for the sole purpose of making Justice Strine’s and his colleagues on the bench’s jobs easier. After all, that is why they pay him the big bucks and solicit him to speak at ABA conferences: because his job is difficult. Plus, we never know when some bozo will relocate litigation jurisdiction away from the Halls of Justice and Light in Delaware to some one-horse hick town in Texas where the judges don’t even know how to read PowerPoint. I’ll go out on a limb and reckon his suggestion is not gonna happen anytime soon. It was a nice try, though.
2 This quote also reminds me of an excellent article by philosopher David Papineau, who wrote about the distinction which can be drawn between the rules of the game and the notion of fair play in both sport and politics. I think a similar analysis could be performed for the highly ritualized, rule bound competition which is mergers and acquisitions. Maybe if you’re nice to me and send me a fruit basket I’ll undertake such an explanation one day.
3 Does it count as a blog post if the chief substance of your remarks lies sequestered in footnotes? Does it count as a speech? Did Chief Justice Strine read each and every footnote as well when he delivered his speech? These are some of the mysteries which consume my restless nights.

© 2014 The Epicurean Dealmaker. All rights reserved.