Friday, February 13, 2009

To Catch a Thief

I'm very well acquainted with the seven deadly sins
I keep a busy schedule trying to fit them in
I'm proud to be a glutton, and I don't have time for sloth
I'm greedy, and I'm angry, and I don't care who I cross

I'm Mr. Bad Example, intruder in the dirt
I like to have a good time, and I don't care who gets hurt
I'm Mr. Bad Example, take a look at me
I'll live to be a hundred, and go down in infamy

— Warren Zevon, Mr. Bad Example

Watching Barney Frank and the House Financial Services Committee attempt to grill the heads of the eight largest bank recipients of TARP funding in front of the cameras recently, I was reminded of a conversation I had with the Chairman of a very large and prestigious private equity firm several years ago.

It transpired at a small dinner party, held at the Chairman's summer home in the Hamptons. Wives, children, and sundry other non-combatants were present, so the occasion was strictly social. Nevertheless, amidst the introductory chit-chat, Your Humble Correspondent revealed the slightly tawdry fact that yes, he was indeed employed at a certain not-to-be-named investment bank and therefore responsible for all sorts of reprehensible behavior. The Chairman chuckled indulgently at that—being, by virtue of his own profession, no stranger to unarmed robbery—and turned the discussion toward those individuals at NTBN Bank whom we might know in common.

Naturally, being a relatively lowly worm in the vast and ever-expanding bowels of NTBN at the time, I could not profess close acquaintance with many of the senior grandees the Chairman was familiar with—people he knew from their frequent trips to his Midtown offices to lick his shoes—but I offered a diplomatic comment or two on a couple of them. I ventured that one particularly poisonous specimen was indeed extremely bright, successful, and ambitious, and we both agreed that he was blessed with quite a remarkable quantity of self confidence.

Apropos of nothing, the Chairman turned contemplative for a moment. Then, looking straight at me, he remarked that, in all his many years in the business, he had never met anyone who had risen to head an investment banking operation who possessed the least measure of humility. I think, in retrospect, this was his kind way of warning me away from ambitions above my station, given my deplorable failure in our conversation to claim sole credit, as a junior investment banker, for more than 50% of NTBN's annual earnings.

* * *

Since that evening, Dear Readers, I have become older, wiser, and more traveled in my industry, and I have seen nothing or no-one that disproves my old friend's comment.

In fact, I will go further and say that I have yet to encounter a senior executive manager at a large investment bank who does not demonstrate a very substantial number of the commonly accepted markers for psychopathy.

From Wikipedia:

Common characteristics of those with psychopathy are:
  • Grandiose sense of self-worth
  • Superficial charm
  • Criminal versatility
  • Reckless disregard for the safety of self or others
  • Impulse control problems
  • Irresponsibility
  • Inability to tolerate boredom
  • Pathological narcissism
  • Pathological lying
  • Shallow affect
  • Deceitfulness/manipulativeness
  • Aggressive or violent tendencies, repeated physical fights or assaults on others
  • Lack of empathy
  • Lack of remorse, indifferent to or rationalizes having hurt or mistreated others
  • A sense of extreme entitlement
  • Lack of or diminished levels of anxiety/nervousness and other emotions
  • Promiscuous sexual behavior, sexually deviant lifestyle
  • Poor judgment, failure to learn from experience
  • Lack of personal insight
  • Failure to follow any life plan
  • Abuse of drugs including alcohol
  • Inability to distinguish right from wrong

Looking back over my career, I can recall encountering individuals who were clearly destined from a very tender age for greatness in investment banking. With the exception of the tendency toward physical aggression and violence—investment bankers, as a rule, are the wimpiest and most cowardly of creatures, when it comes to nonverbal violence—and sexual promiscuity and deviancy—for which one only has the self-reported "evidence" of these supposedly superhuman young Lotharios—I find it hard not to ascribe some measure of all these characteristics to those individuals I know who have risen to high management responsibility within an investment bank.

As I have written elsewhere, investment banking is a business which both attracts and rewards individuals with cast iron egos who can stab their closest ally in the back minutes after buying them a drink. (Not everyone in the industry is like this—in fact, the vast majority are not—but the ones who claw their way to the top either are that way to begin with or become that way on the climb up.) People outside the industry decry its participants as slaves to greed, but the real truth is that money is primarily a measuring stick and an enabler for an investment banker's self worth. This is entirely consistent with behavior at the top, where we have seen senior executives grant themselves bonuses and guarantees so large as to be effectively meaningless, except as a way to keep score. This is narcissistic personality disorder writ large, and the nastier aspects of psychopathy are simply the tools necessary to survive and thrive in the free-for-all cage fight that is the executive suite of a major investment bank.1

* * *

But if this is true, it poses a particularly tricky challenge to the government's new program to rescue and regulate the financial industry from the current economic crisis.

Careful watchers of the hearings this week will have noted that the US Congress came away from the proceedings at least as badly damaged as the investment and commercial bankers nominally on the hot seat. The hearing format—anodyne opening statements from the eight banks involved, followed by an apparently endless series of five minute time slots for Congressmen to fit moral outrage, political grandstanding for the constituents back home, and a couple of desultory questions into—was patently ill-designed to get to the root of the problems which have occurred and the culpability and behavior of the banks involved. Many Congressmen and women came off as woefully, even laughably ill-informed about the very basics of finance, much less the tortured intricacies of the securities, markets, and practices which led us into our current predicament.

In contrast, the bankers for the most part kept their cool, answered idiotic questions patiently, and avoided revealing any information that could be of real use magnificently. They came across as smooth, smart, and plausible.


* * *

Many observers of the smoking wreckage which now passes for our banking system have opined that, in addition to being hobbled by a fragmented regulatory system riddled with overlapping and ill-defined responsibilities, the regulators who were supposed to be watching the chicken coop were woefully overmatched by the foxes. Staffed primarily by lawyers, on government pay scales, the SEC almost by definition is not up to the task of monitoring Goldman Sachs, JPMorgan, or anyone else, if by "monitoring" we should expect true informed oversight and control. If Harry Markopolos couldn't get the SEC Enforcement Division to understand and investigate what appears to have been a particularly simple—if breathtakingly successful—Ponzi scheme, how can we possibly get comfortable that our government watchdogs can effectively oversee the hugely complicated, mind-numbingly sophisticated, globally distributed trading operations of a modern investment bank?

This shortfall in regulatory intellect has been exacerbated by what the Japanese call amakudari, or "descent from heaven": from time immemorial, a steady stream of former regulators has resigned their posts to assume positions on Wall Street, sometimes at the very firms they had been charged with overseeing. There is very little incentive to push a little harder or dig a little deeper into a question if it irritates a powerful firm that might be your future employer. Furthermore, this practice provides a steady stream of inside knowledge on current regulatory focus, practice, and ignorance that is of tremendous value to oversight-minimizing investment banks.

The answer, of course, is obvious, if politically difficult to put into effect. Staff the SEC, or whatever "Super Regulator" the government decides to deputize to oversee this mess, with a bunch of highly-paid, tough-as-nails, sonofabitch investment bankers. You will have to pay them millions, just like regular bankers. (You can tie their incentive pay to improvements in the value of securities held under TARP and TALF, if you like.) Pay them well, and investment bankers won't be able to treat them like second-class citizens at the negotiating table. Pay them like bankers, and your regulators won't hesitate to read Jamie Dimon or Lloyd Blankfein the riot act, because they won't give a shit about getting a job from them later.

Trust me, these are the kind of people you will need on your team: highly educated, financially sophisticated, psychotically hard-working, experienced professionals who know or can figure out CDOs, SIVs, balance sheet leverage, and credit default derivatives just as easily as the idiots who created and trade this shit. Leading your enforcement and supervision teams you need a bunch of smooth, smart, plausible, grandiosely self-confident senior bankers who will not hesitate to tell Vikram Pandit to go fuck himself, his mother, and the cow she rode in on if he ever tries to fuck with the United States government, the US taxpayer, or the pizza delivery boy again. You know: psychopaths.

This is not a new idea. For yonks, the Brits have known that the best person to hire as gamekeeper on your ancestral estate is a former poacher, someone who knows what they know, how they think, and where to punch them in the genitals to get maximum negotiating effect.

Or, as I like to think of it, the best person to send to kill a bunch of mercenaries is another mercenary:

Roland the headless Thompson gunner
Norway's bravest son
Time, time, time
For another peaceful war
But time stands still for Roland
'Til he evens up the score
They can still see his headless body stalking through the night
In the muzzle flash of Roland's Thompson gun
In the muzzle flash of Roland's Thompson gun

— Warren Zevon, Roland the Headless Thompson Gunner

Sounds like fun. Where do I send my resumé?

1 Fun fact: "According to DSM-IV (in a 1994 publication by the APA), Antisocial Personality disorder is diagnosed in approximately three percent of all males and one percent of all females." Hmm. Do you think this might help explain the persistent underrepresentation of women in investment banking? Come on, girls, get your freak on!

© 2009 The Epicurean Dealmaker. All rights reserved.