Friday, March 2, 2007

Clothes Make the Man

Damn! I forgot how good that dusty old tome "Doing Deals: Investment Banks at Work"1 really is. Full of juicy nuggets, still fresh from the literary oven after 19 years.

Attentive readers will know that Dennis Berman's recent article on underappreciated investment bankers in The Wall Street Journal triggered a post from me yesterday, and after I went back to the Doing Deals book for reference I could not put it down until late in the evening. It almost made me late this morning for a conference call on the high speed rail project in Mogadishu. (We are trying to decide between Steve Cohen of SAC Capital and Warren Buffett of Berkshire Hathaway as lead investor, although they have agreed to share the role.)

Anyway, this little jewel of a book explains so much about The Life, which is surprising given its provenance from Harvard Business School.

On the topic of relations between i-bankers and their corporate customers:
The vast disparity in compensation between investment bankers and their customers exacerbates the tensions between them.

. . .

It is difficult to explain the differences in rational economic terms. Instead, investment bankers and their customers have developed an implicit contract based on rhetoric and behavior that enables each side to rationalize the differences in income among people performing similar tasks but on different sides of the transaction.

The basis of the contract is that investment bankers are trading quality of life for money. Both they and their customers emphasize how hard investment bankers work, both in terms of total number of hours and a willingness to have these hours interfere with their personal lives, to serve the customer and get the deal done. Stories of "all nighters," weekends in the office, canceled vacations, abandoned families, divorces, heart attacks at a young age, and burnout contribute to the belief that investment bankers make substantial and dreadful sacrifices to earn their lavish compensation.

. . .

The stories may well be exaggerated in their telling: the greater the extent to which customers believe investment bankers work under combat conditions, the less concerned they will be about differences in income. Customers can rationalize the discrepancies by telling themselves, "No amount of money is worth this kind of sacrifice."2

Of course, this does not explain the tensions or behaviors between i-bankers and their even better-compensated private equity customers, but cut the authors some slack: back in 1988 private equity guys couldn't get the time of day from the girl at the Tiffany watch counter if they handed her a Rolex.

Continuing on, the authors explain why obnoxious, overdressed investment bankers ("designer-suited legions," in Dennis Berman's parlance) behave the way they do:

The rhetoric about a superior quality of life [outside i-banking] does not reconcile corporate staff to the enormous wage differences. Both investment bankers and their customers need to believe that they are different in fundamental ways in order to justify the differences and the anomalous fact that the power balance favors the customer.

This belief is created and sustained mainly through differences in dress and behavior, which convey differences in status. Investment bankers are artists at managing image and presentation of self by wearing expensive clothes and the ubiquitous suspenders [soo 1988], traveling first class [definitely 1988], demanding access to the CEO, simultaneously conveying an impression of aggressive self-confidence and obsequious servitude, and demanding an explanation from a customer for why another firm got the deal.3

So there you have it: the micro-sociology (or is it anthropology?) of i-banker-customer relations wrapped up neatly in a bow for you, as true today as it was 19 years ago.

And you thought that i-bankers are just obnoxious assholes with too much money and too little clothes sense. Aren't you ashamed?

1 R. G. Eccles and D. B. Crane, "Doing Deals: Investment Banks at Work," Harvard Business School Press, 1988. Go ahead, buy the book: I have arranged a nice kickback from HBS, and I may need the money if the damn Somalis don't approve the maglev rail link through the heart of Mogadishu.
2Ibid., pp. 66–67.
3Ibid., pp. 68–69.

© 2007 The Epicurean Dealmaker. All rights reserved.