Shock and Awe

What the hell did I ever do to piss Steve Randy Waldman off?

I tell you honestly, Dear Readers, my afternoon conversation with this genial and intelligent gentleman started unremarkably enough, with a little playful banter in the Twitterverse on this and that. (I called myself a squirrel; he revealed himself to be a slime mold.) But then, something went horribly wrong. After trying to out me with an hurtful photograph of me wearing a hat I haven't owned in years (and an extra 20 pounds I have subsequently shed), he upped his attack on Your Peaceable and Equable Correspondent by trying to pick a fight between yours truly and the fearsome Economics of Contempt.

Now, I have to tell you I consider this very bad form. For one thing, my physical constitution and pugilistic skills are far better suited to being the spotty faced provocateur shouting "Fight! Fight!" from the perimeter of an altercation than being one of the principals. For another, I make it a practice never to get into a fight with a lawyer, unless I can attack him unexpectedly from behind with a lead pipe, preferably in the dark. Furthermore, my unwelcome opponent in this imposed brouhaha was none other than a structured finance lawyer, which every six year old knows is the most dangerous specimen of that deadly species. Heck, I work with structured finance lawyers all the time, which is why I count my fingers every time I shake one's hand and go through six liters a month of hand sanitizer.

So, suffice it to say I clicked through Mr. Waldman's incendiary link to EoC's post with a maximum of trepidation, calculating in advance just how many Russian hookers I might have to ply my opponent with to elicit mercy. But when I arrived, I breathed a virtual sigh of relief, for I discerned my opposite was far less formidable than I feared.


* * *
For one thing, Mr. Contempt's main purpose seems to have been to tie hedge fund principal and commentator Janet Tavakoli to a post and whip her decisively with a wet noodle. This he accomplished admirably, and I have nothing to add to the central thrust of his argument; namely, that Ms Tavakoli overstated her case and overplayed her hand. I also have nothing to add to his speculation on the exact size and nature of Goldman Sach's exposure to AIG in the troubled days of last Fall because, frankly, who the fuck cares?

However, I did note that Mr. C and I do in fact have a basic disagreement about the relative negotiating power at that time of Goldman Sachs and the other AIG counterparties, on the one hand, and the Federal government as owner of AIG, on the other. This, I think, is the core of his argument:

[T]here's no way Goldman would ever have agreed to a "bankruptcy-like settlement" — why would they? As someone who has actually been involved in these kinds of negotiations, let me explain how the AIG/Goldman negotiations would have played out:

AIG: Would you be willing to accept, say, 70 cents on the dollar?
Goldman: No.

THE END

Seriously, what could AIG have threatened Goldman with? If they didn't accept a haircut, AIG would file for bankruptcy? Fine, Goldman would've just seized the $7.5 billion in cash collateral, and collected the remaining $2.5 billion from its counterparties on the now-triggered CDS on AIG (on which more below), covering Goldman's full bilateral exposure to AIG. That's what it means to be "hedged."

(This is also why the Fed paid Goldman and the other counterparties 100 cents on the dollar to terminate their CDS contracts with AIG, which this Bloomberg article portrays as some sort of gift to the banks. But the Bloomberg article also relies on the Immaculate Negotiation argument — how, exactly, was the Fed supposed to get the counterparties to agree to take a haircut? The Fed had just demonstrated to the entire world that it wasn't willing to let AIG file for Chapter 11. How do you suppose those negotiations would have gone? The Fed couldn't say, "You can either take a haircut to 70 cents or AIG will file for bankruptcy and you'll only get 50 cents," because everyone knew the Fed wasn't willing to put AIG in bankruptcy.)

He then finesses Tavakoli's argument that Goldman wasn't adequately hedged in such circumstances because AIG's collapse would have engendered widespread systemic disruption and called into question not only the capability of any counterparty to satisfy its obligations under a hedge but also the health and solvency of every participant in the financial system. He does this by saying: 1) Oh yes they could, because the hedges were adequately collateralized, and 2) the potential for total systemic meltdown wasn't the scenario Goldman's CFO was talking about when he said they were adequately hedged. While neatly parrying Ms Tavakoli's principal charge that Goldman lied about its exposure, you must see that this argument almost entirely begs the question.

Mr. C also disagrees that Goldman—and, presumably by extension, the other counterparties to AIG's CDSs—faced any reputational pressure in these negotiations. He writes:

Finally, Tavakoli argues that Goldman's exposure to AIG included "reputation risk." Yes, I'm sure that if AIG had failed, Goldman's reputation for having prudently managed its counterparty risk would've been devastating.

While comprising an admirable example of sarcastic snark, this remark completely mischaracterizes the circumstances surrounding AIG's near death experience last year. All one need do is read a few pages in Andrew Ross Sorkin's hour-by-hour account of the collapse of Lehman Brothers and its aftermath to realize that "reputation risk" encompassed far more than each individual firm's performance of its fiduciary duties alone. More to the point, the CEOs and Boards of the principals involved were very well aware that business—or fiduciary duty, or contract law, or corporate governance—as usual was completely and utterly out the window:

On the surface, Goldman looked like one of AIG's biggest counterparties, but earlier that morning, Goldman's Gary Cohn had boasted internally that the firm had hedged so much of its exposure to AIG that it might actually make $50 million if the company collapsed. The firm's decision to buy insurance in the form of credit default swaps against AIG beginning in late 2007 was starting to seem like a smart investment. The firm had conducted what it internally called a "WOW analysis"—a worst-of-the-worst case scenario—and it was quickly coming true. Even though Goldman had hedged its direct exposure to AIG, [Lloyd] Blankfein appreciated the larger problem: The collateral damage to its other counterparties and the rest of the market could expose the firm to untold billions in crippling losses.¹ [emphasis mine]

So, let us not be legalistic, or simplistic, or disingenuous here. Under normal circumstances, I would completely agree with my professional better and, indeed, would and have paid him and his kind mucho dinero to advise me on the way structured finance does and should work when all is right with the world. But virtually nothing was right with the world in the fourth quarter of 2008. Cats laid down with dogs, Paris Hilton matriculated at Oxford, and the thundering hoofbeats of the Four Horsemen could be heard in broad daylight throughout the canyons of Wall Street. The system was on the knife's edge of chaos, and everyone with half a brain—including Goldman Sachs and all of AIG's other counterparties—was very well aware of that.


* * *
So, in the spirit of Mr. Contempt's entertaining post, I would like to propose an alternate transcript for what I think might have occurred during those dark days had I or one of my professional counterparts been in charge of negotiations with Goldman Sachs et al. Normally, I would not reveal a potential negotiating strategy such as this in public without an enormous and frankly obscene fee already marinating nicely in my personal bank vault, but I am feeling inexplicably charitable. Also, it is clear from the underwhelming response to my previous offer of assistance that the Federal government has the backbone and intestinal fortitude of an earthworm, so I'm not worried I am giving away potentially lucrative advice to a client who might actually hire me.

Anyway, let's proceed:

TED, as representative of the Federal government and AIG: Welcome, gentlemen. Please take a seat, and let's begin.

Senior representatives of Goldman Sachs, SocGen, BAML, et al., as counterparties to AIG: Thank you.

TED: Now, you all realize we are here to resolve the payments which the government of the United States of America, as majority and controlling owner of AIG, proposes to make to each of you to cancel the credit default swaps from AIG you each hold. Before we begin, I would like to make a few opening remarks.

Counterparties: Uh, okay.

TED: First, let me remind you that we are here—and the federal government is here—because our country and indeed the entire world stands upon a knife's edge. We took control and injected tens of billions of dollars of taxpayer money into AIG because we did not want to see this company collapse in an uncontrolled fashion. We believed then, and still believe, that such a collapse would threaten the entire global financial system and indeed the entire global economy. I do not need to explain to you gentlemen the effect such a collapse would have upon each of you, your firms, your employees, and your capital providers. I do not need to explain to you the effect such a collapse would have upon our society, our political system, and indeed the very social order upon which we depend to live our daily lives. We in the government do not have a crystal ball in this regard, but I have been authorized from the very highest level to convey to you that we are scared shitless. You should be too.

Counterparties: [Uncomfortable silence; shifting in seats; coughs]

TED: I have also been authorized to inform you that we are fully aware of the legal rights and fiduciary duties which constrain each of you to do what you think is best for your firms and your stakeholders. Under normal circumstances, we would be entirely supportive of these obligations. However, these are not normal times. Furthermore, and because these are not normal times, I would like to inform you that the government of the United States of America will take an extremely dim view of any individual or institution which chooses to pursue simply its own interest and its own duties without regard for the consequences to the broad economy, this country, and indeed the entire world. This government has a fiduciary duty too, gentlemen, and I am afraid that it trumps yours.

Counterparties: [Angry murmurs, outbursts, shock and outrage, etc.]

TED: Gentlemen, gentlemen, please. Let me continue. I am not finished.

Now, this discussion is a voluntary one. None of you have been compelled to attend this meeting, nor indeed can be compelled to give your acquiescence to what we intend to propose. Some of you here represent companies which are headquartered in foreign countries, and which derive their corporate authority and obligations from the laws of other lands. Be aware that the United States government has already discussed the settlements we will propose here today with ranking representatives of your countries' governments, and we have received their approval and acquiescence.

We previously requested that all of you arrange whatever entities you may need to authorize the corporate and board level approvals your bylaws may require to be standing by, so there is no further delay in resolving these critical issues. The decision point is now, gentlemen. It is today. It is in this very room. The government of the United States of America will brook no further delay.

Counterparties: [Wilting, sweating, uncomfortable silences]

TED: And before we get to brass tacks, gentlemen, allow me to make a personal observation. I have known and admired many of you for many years, and I personally respect the power and dignity of each of your individual institutions.

But I am not your friend today. I am not your fucking friend. As far as you are concerned, you should view me as the Angel of Fucking Death. Because the time has come for each of you to do what is right for the greater good. It is time to think about survival, gentlemen—your own and that of your institutions—both now and in the future. For let me assure you that the decisions you make in this room today will be remembered. They will be remembered, gentlemen, as long as there is a United States of America. And if, God willing, we all come through this terrible crisis to a safer and more stable world, those people who helped us get there will be remembered. And, perhaps more importantly, those people and institutions in this room which did not help us, which put their own narrow personal and corporate interests before the interests of this nation and its people, will be remembered as well.

And let me tell you something, gentlemen, banker to banker: you do not want to be on that list. That list will be a world of pain. That list will be Death. That list will be populated with people and institutions which will have the full weight, power, and authority of the government of the United States of America brought down on them in the most thorough, comprehensive, and legal way you could possibly imagine. That list will be the proctology exam from Hell, and it will never end.

So, having set the stage, you should each find before you a term sheet with a proposed haircut for the AIG CDSs your institution currently holds. In each case, this is the government's best and final offer. I would like each of you to retire from this room with your team, talk it over amongst yourselves and with your Board, and bring the signed term sheets indicating your firm's acceptance of these terms back to me in this room. You have one hour.

Any questions? No?

Then I thank you for your attention. You may leave.

* * *
Would this approach have recovered all 40% of the original discount AIG tried to obtain? Probably not. Tough talk or no, the assembled banks would balk at completely unreasonable demands by the government. And if they balked, they would have time to mobilize their vast lobbying apparatus to try to counteract the government's bid through Congress. Delay would be deadly. You could not allow the counterparties to regroup, or even collect their thoughts.

You've gotta drop a daisy cutter on their ass, and roll the tanks in immediately thereafter. Shock and awe, baby.

But you know why this could work? Because all those bank CEOs and CFOs would look across the table at me and realize: this guy is a mercenary, heartless, psychopathic bastard just like me. And he is getting paid to run a Roto Rooter up my ass. Let's get it over with, and then I can plan my revenge on this bastard later on.

I'm an equal opportunity asshole, baby. I'll screw anyone over. Investment banks can deal with that.

¹ Andrew Ross Sorkin, Too Big to Fail. New York: The Viking Press, 2009, p. 383.

© 2009 The Epicurean Dealmaker. All rights reserved.

Never Send a Boy to Do a Man's Job

Interesting article over at Bloomberg.com this morning. Did you see it?

Oct. 27 (Bloomberg) — In the months leading up to the September 2008 collapse of giant insurer American International Group Inc., Elias Habayeb and his colleagues worked nights and weekends negotiating with banks that had bought $62 billion of credit-default swaps from AIG, according to a person who has worked with Habayeb.

Habayeb, 37, was chief financial officer for the AIG division that oversaw AIG Financial Products, the unit that had sold the swaps to the banks. One of his goals was to persuade the banks to accept discounts of as much as 40 cents on the dollar, according to people familiar with the matter.

Among AIG’s bank counterparties were New York-based Goldman Sachs Group Inc. and Merrill Lynch & Co., Paris-based Societe Generale SA and Frankfurt-based Deutsche Bank AG.

By Sept. 16, 2008, AIG, once the world’s largest insurer, was running out of cash, and the U.S. government stepped in with a rescue plan. The Federal Reserve Bank of New York, the regional Fed office with special responsibility for Wall Street, opened an $85 billion credit line for New York-based AIG. That bought it 77.9 percent of AIG and effective control of the insurer.

...

Beginning late in the week of Nov. 3, the New York Fed, led by President Timothy Geithner, took over negotiations with the banks from AIG, together with the Treasury Department and Chairman Ben S. Bernanke’s Federal Reserve. Geithner’s team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps—insurance-like contracts that backed soured collateralized-debt obligations.

...

Part of a sentence in the document was crossed out. It contained a blank space that was intended to show the amount of the haircut the banks would take, according to people who saw the term sheet. After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them par, or 100 cents on the dollar. The content of its deliberations has never been made public.

Uh, okay.

* * *
I must admit, Dear and Long-suffering Readers, that my first reaction to this news was of a kind with several of the sources quoted in the article: white-hot, scalding rage.

I mean, what the fuck?! Tim Geithner and pals left up to thirteen billion dollars of taxpayer money just sitting on the table? Why?

[B]ecause some counterparties insisted on being paid in full and the New York Fed did not want to negotiate separate deals, says a person close to the transaction.

Oh, that's a good reason. No, really, I mean it.

Dumb fucking cocksuckers.

* * *
Now, to be fair, I am not willing to swallow the Bloomberg article hook, line, and sinker. For one thing, none of the numbers I have been able to glean either from it or from other sources add up. I suspect the high-speed, real-time negotiations over cancelation of the credit default swaps, purchase of the "super-senior" CDOs underlying AIG's CDSs, and coincident payment by AIG of increasingly frequent, strident, and large collateral calls by its counterparties during the frantic days of mid-September a year ago make it damn difficult for anyone to reconstruct exactly what happened and who paid how much to whom and when, much less a bunch of underpaid, slightly innumerate financial reporters.

And you definitely need to read between the lines. Just because Elias Habayeb intended to persuade Goldman Sachs, SocGen, Merrill Lynch, Deutsche Bank, and several other representatives of The Great Deceiver Here on Earth to accept 40% haircuts doesn't mean he had a snowball's chance in hell of doing so. In fact, the GAO's September 2009 report on the AIG fiasco unequivocally states his efforts failed prior to the government takeover (p. 17):

AIG’s negotiations with counterparties and creditors to reduce the outstanding obligations through contract renegotiation had proven unsuccessful.

But this selfsame GAO report clearly outlines the issue with the Fed's subsequent precipitate actions (p. 18):

Critics of the government’s assistance have noted that by providing assistance to AIG for the purpose of providing or returning cash collateral to counterparties, the government was indirectly assisting the counterparties, and they questioned the efficiency of this approach. Some noted that banks that had bought CDS contracts from other failed insurers were paid 13 cents on the dollar in deals mediated by New York’s insurance regulator, whereas AIG’s counterparties were paid market value. They said that new capital to AIG in effect served as direct infusions to the counterparties, including foreign financial institutions. Conversely, Federal Reserve officials believed that if AIG had failed to pay the collateral amounts due, it would have been in default of its agreements, which could have resulted in AIG’s counterparties forcing it into bankruptcy. Moreover, they believed that the unfolding crisis warranted swift action to prevent total collapse of the financial system given its fragile state at that time.

It is clear that some banks were in deep doo-doo as AIG spiraled ever more quickly toward its predestinate sticky end (p. 22):

Finally, the Federal Reserve and Treasury stated in separate reports and testimonies in the fall of 2008 and early 2009 that the failure of AIGFP could have led to billions of dollars of losses at bank counterparties that bought CDS contracts from AIG.²⁹ Because many banks used these contracts as credit protection, following losses to CDS contract holders, if any, AIG’s failure could have led to mounting losses through sudden, unhedged, uncollateralized exposure as market conditions worsened and underlying assets continued to decline in value. Banks and other counterparties could have faced declining capital bases because of these unrealized losses. Moreover, counterparties with unfulfilled derivative contracts could have faced difficulties in offsetting balance sheet exposures through replacement derivatives, and they would have had to confront the possibility of entering into new contracts at a time when market participants had become increasingly risk averse and unwilling to execute new transactions.

Of course, not all of AIG's counterparties would have faced wrack and ruin had it defaulted on its obligations. Most notably, Goldman Sachs crowed loud and long at the time that it was fully hedged against AIG's untimely demise, and that it couldn't give a rat's ass whether Bob Willumstad's company took the pipe or not. This has led more than one market observer to speculate that the $11 or $12 or $13 billion in cash which the Federal Reserve presented to Goldman on a silver platter represented a particularly fetching and unexpected gift from the pockets of the American taxpayer direct to the bank accounts of Goldman's employees. It certainly encourages me to believe that whatever difference between a realistic haircut Goldman could have expected to endure on AIG's CDSs and the no-haircut they did receive represents a particularly large and tasty helping of frosting on an already delicious and unexpectedly rich cake.

Taking, for argument's sake, the 40% figure bandied about, that would be about five billion dollars worth of buttercream for Lloyd and his buddies. Or, as a point of reference, a figure approximately equal to the entire compensation and benefit expense Goldman recorded in its most recent fiscal quarter. Sweet, huh?

* * *
So, what's my point?

Just this: Tim Geithner and the Federal Reserve got royally played. And you and I, my friends, paid dearly for the privilege.

Sure, the Fed was worried that AIG's uncontrolled collapse could lead to a complete and utter meltdown of the global financial system. Even now, with the worst of the crisis behind us and plenty of time to reflect, it is hard to criticize this worry as hysterical. It is also true that things were moving way too quickly to sit down and think them through logically, so we should not superimpose unreasonable expectations of measured, rational thought on the Fed's negotiators. It is also even remotely possible that some of AIG's counterparties were so inept and unprepared for the insurance company's troubles that they truly might have blown up themselves if it went down. (Although AIG's train wreck was so long coming and so well telegraphed that any bank so blind to the obvious and unprepared for the inevitable probably should have been shut down purely on principle.)

But Christ, people, think about it.

What moronic financial entity—fully hedged or not—would really risk global financial catastrophe by throwing AIG into bankruptcy, even if it had the contractual and legal right to do so? Because it insisted on receiving 100% of the proceeds due to it by contract? Even though parties to financial contracts renegotiate existing terms under normal market conditions all the time? What good, for example, would those extra five billion clams—not collected, by the way, until the bankruptcy judge wound the company down, if ever—have done Goldman Sachs if it, Morgan Stanley, and every other major investment and commercial bank were in liquidation too?

Furthermore, what foreign or domestic bank CEO in his right mind has the balls to threaten the government of the United States of America with financial meltdown if it doesn't cough up another couple billion dollars out of the public purse? Are you fucking kidding me?

AIG's counterparties had no leverage whatsoever. None.

Of course, Geithner and Bernanke were over a barrel, too, because they didn't want to do anything stupid to trigger Armageddon either. Among other things, I believe it is in their brief to prevent just such annoyances. I do not claim they should have been able to get all 40% of the target discount from the banks. But nothing? Not even from the guys who claimed not to care?

Give me a break.

* * *
Now, I am sure I will catch flak from the usual suspects—ignorant twenty-somethings who have never renegotiated a contract in their lives and disingenuous ideologues who have and should know better—for suggesting it, but I think the Fed has a good case for clawing back some of AIG's payments. I think a couple of quiet words with the CEOs and Boards of Goldman Sachs, SocGen, BofA, and Deutsche Bank could go a long way toward encouraging a "voluntary" return of some of these monies to the public purse. Consider it, if you will, a generous donation from the assembled titans of finance for the benefit of the regulators who pulled their testicles out of the fire a mere thirteen months ago. A grateful gift, so to speak, from the money men to the people and officials who make their very existence possible.

Of course, history and common sense tell us that a mere bureaucrat will lack the credibility to deliver such a threat message to the Masters of the Universe. Even now, as Secretary of the Treasury, Mr. Geithner is more likely to inspire giggles of disbelief from Lloyd Blankfein et al. than deferential respect.

No, what you need is a professional psychopath, a highly trained and expert negotiator, who will tuck his Hermes tie into his shirt and slap the offending CEOs silly before emptying their firms' bank accounts. Someone who can run roughshod over the rights and expectations of self-interested plutocrats in the name of Life, Liberty, and the Pursuit of Happiness, or at least a balanced budget. Someone who can make assembled onlookers squeal in horror as he tramples precedent, custom, and noblesse oblige into the mud alongside all the other tired, self-righteous pablum capitalists and free marketeers have been reciting like Holy Writ for nigh on thirty years.

Someone who isn't afraid to negotiate hard. Someone who isn't afraid to scream, and yell, and threaten all sorts of horrible consequences, real and imagined, for anyone who doesn't accede to his demands.

And, since Steve Rattner is no longer in the picture, I guess it'll just have to be me.

Lloyd, you are so fucked.

© 2009 The Epicurean Dealmaker. All rights reserved.

Primus inter Pares

No! I am not Prince Hamlet, nor was meant to be;
Am an attendant lord, one that will do
To swell a progress, start a scene or two,
Advise the prince; no doubt, an easy tool,
Deferential, glad to be of use,
Politic, cautious, and meticulous;
Full of high sentence, but a bit obtuse;
At times, indeed, almost ridiculous—
Almost, at times, the Fool.

— T.S. Eliot, The Love Song of J. Alfred Prufrock

Bruce, you sneaky bastard.

By now, most of you in the hermetic little world of finance have discovered that Bruce Wasserstein passed away Wednesday. He snuck out of the theatre early, making some excuse or other about taking a phone call or smoking a cigarette or something, and never returned. He left so quickly and quietly it feels like he skipped out on a debt. He was 61.

It is a measure of how much the world has changed from the days when the so-called "Father of M&A" bestrode the financial markets like a colossus that the ripples from his passing have already begun to dissipate. He has already disappeared from the front page of The Deal.com, the online version of the M&A newspaper of record which he conceived over a decade ago and supported until his death, hurried off by the bustle of current deals and events. From my admittedly narrow vantage point atop a skyscraper deep in the heart of the least American part of America, I cannot tell whether his passage even registered with the country at large. "Bruce who?," most people probably asked, "Wasn't he the boy who got trapped in the balloon?" Sic transit gloria.

In some respects, I think Bruce would have wanted it this way. Dealmaking is a guerrilla war that never ends, fought in both sunlight and shade, in clamor and in silence. When your captain is killed, you pause to recite a hurried prayer, then you step over his cooling body and move on. There are no battlefield monuments in this war. Nor should there be.

On the other hand, there was part of Bruce—a big part—that loved the limelight and craved being the center of attention. In this way, he was completely unlike T.S. Eliot's attendant lord. During his heyday in the 1980s, Bruce intentionally broke the mold of the modest, retiring consigliere to become a prime mover himself. He abjured the merger advisor's traditional place behind the throne of the CEO or the private equity mogul to become a kingmaker, a catalyst, and a decision maker in his own right. He grabbed the spotlight away from companies and firms actually doing the deals and shone it upon himself. In the process, he shone a light into the heretofore obscure and recondite universe of M&A bankers, and he helped raise awareness of them and their trade far beyond the claustrophobic little world of central and lower Manhattan and the boardrooms of major corporations. Bruce became the story.

And some people never forgave him for that.

* * *

Like most complicated men, Bruce Wasserstein leaves a complicated legacy.

He was brilliant and precocious, sure. He was also loud, arrogant, and overbearing, but he could sweet talk a pit bull off a juicy bone. He was principled and opportunistic. He could be simultaneously disheveled and as smooth as glass.

As the mainstream media has done the rounds of his peers, clients, and competitors, many have come to call him an innovator in the field of M&A. I think this misses the mark. Sure, Bruce was smart as hell, and thought up some pretty tricky maneuvers in his day, alongside a pretty long list of other people. But it's not like he made the kind of enduring contribution that, say, über-attorney Marty Lipton did when he invented the poison pill. There is no M&A Heimlich Maneuver with Bruce's name on it. It would be foolish to look for one.

Being smart and effective in M&A requires being able to apply techniques, approaches, insight, and analysis to an ever-shifting set of contingencies and personalities in the context of a potential deal. At base, it is a tactical art, and Bruce was a master tactician. Virtually no deal is exactly like another, just as no client, deal rival, or competitor is like another. You need to be able to sense shifting strengths, weaknesses, threats, and opportunities and craft an approach to deal with them in real time. It is an art that requires quick, perceptive, deep, and supple thinking. Like chess, it encourages you to think several moves ahead. Unlike chess, legal moves are practically unlimited, and each of your pieces has a sometimes distressingly unique personality and often requires tremendous persuasion just to get off its ass and move already.

Unlike many M&A bankers, however, who are good in the trenches of individual battles, Bruce proved himself capable of waging a war as well. Like the best generals, he could think not only tactically but strategically. This, for me, is most clearly demonstrated by his masterful campaign to wrest control of the storied investment bank Lazard from the iron grip of Michel David-Weill. By the time David-Weill hired Wasserstein to help bolster his firm's sagging fortunes, Bruce had already made a large fortune pawning off his old boutique to Dresdner Bank. It is not clear to me he was looking for much more than a comfortable perch to while away the twilight of his career and enjoy his newly monetized wealth. However, soon after he arrived, Bruce must have sensed an opportunity to gain control of the factionalized firm from its imperious owner, and he set about doing so. Long story short, he totally remade the firm by hiring tons of expensive new bankers, which had the simultaneously happy effect of stacking the ranks with Wasserstein loyalists and draining so much cash from Lazard's coffers that David-Weill and the other absentee owners ultimately had to agree to take the firm public. In the midst of these maneuverings, Bruce executed a neat judo flip and defenestrated the fearsome David-Weill from the firm which had been his lifelong legacy. It was a masterpiece of strategic dealmaking and boardroom Realpolitik.

But Bruce could often be his own worst enemy. He famously detested the moniker "Bid 'em up Bruce" which rival dealmakers painted him with early in his career, but the label stuck, and for good reason. Furthermore, his determined cultivation of the limelight and naked pursuit of his own self interest severely colored most corporate and private equity dealmakers' perceptions of him. Shortly after he achieved notoriety on Wall Street—and, later, in the broader corporate and dealmaking world—people began to view Bruce as a form of plutonium. In other words, a really powerful substance that was extremely effective in limited—often hostile—circumstances, but one which could poison the unwary user if not handled with extreme care.

Many CEOs and Boards of Directors held their noses when hiring Bruce, and kept their hands on their wallets at all times when he was in the room. A common complaint of dealmakers at the time was that there were always at least five competing motives at play when a client discussed a potential deal with Bruce: the client's own, Bruce's own obvious self-interest, and three other motives percolating in Bruce's head which might or might not become apparent over time. The only thing most clients were certain of was that Bruce's motives were only coincidentally aligned with their own. Often, companies which had already retained advisors would hire Bruce's firm as well, just to prevent him from working for real or potential competitors on the deal. They would then pointedly fail to invite him to meetings. Bruce probably took umbrage at this kind of behavior, and I am sure some of it was unfair, but you can be sure he cashed the fee checks anyway. I certainly would have.

* * *

I do not have a strong handle on Bruce Wasserstein as a person. He was neither mentor nor friend to me, and we crossed paths only a few times over the course of my career, and not meaningfully.

But I did admire how he aged over time. He seemed to lose some of his rough edges and arrogance with age and success, and he developed a personal gravitas that was both pleasing and impressive in recent years. Some of the most heartfelt tributes to him I have seen have come from the field of journalism, which he had a lifelong passion for, and which he supported with money and influence for decades. It appears he could stay in the background, in a supporting role, where his media properties were involved. This does him great credit.

His peers and rivals have lined up to offer praise and remembrance as well. I suppose I am too cynical, but my investment banker's radar has picked up far too much preemptive posturing and self-aggrandizement in most of these supposed encomia. Even in death, Bruce's competitors feel the need to measure themselves against him. Which, I suppose, is a fair measure of his stature.

At an industry conference in Cambridge today, David de Rothschild said

he was “extremely sad to see someone of that caliber go” and that “no normal banker should feel any different to see such a competitor go.”

Methinks this smacks of too much protest. Every senior investment banker—and hundreds of senior executives outside the industry all over the world—is perfectly justified in having mixed feelings about Bruce Wasserstein's passing. On the one hand, a brilliant and tremendously influential industry figure—one who arguably did more than anyone else to transform the M&A industry—has passed away, and the industry is the poorer for it. On the other hand, Bruce was a fearsome and clever competitor and adversary to many of us, and I am sure a substantial number of people around the world breathed a somewhat guilty sigh of relief at the news of his passing.

After all, I do not recall any of the leaders of Europe suffering particular regret at the news of Napoleon Bonaparte's death, either.

* * *

For the dead, we owe only honesty and respect. For the living, we owe our sympathy.

In closing, let me acknowledge that Bruce was also a human being, with family, friends, and others who cared for him. I extend my personal sympathies to each and every one of them for their loss.

Exalted and sanctified is God's great name
in the world which He has created according to His will
and may He establish His kingdom
may His salvation blossom and His anointed near
in your lifetime and your days
and in the lifetimes of all the House of Israel
speedily and soon; and say, Amen.

© 2009 The Epicurean Dealmaker. All rights reserved.

Wherein I Go Mosquito Hunting with a Howitzer

I guess James Kwak ate a bad oyster or two at the Yale Law School cafeteria this evening. He rants:

Further Proof That Nothing Has Changed

Overheard on the streets of New Haven, just ten minutes ago:

Two young women, almost certainly Yale undergraduates, are walking down York Street, discussing their efforts to get jobs as bankers.

Student #1: “Why does everyone want to go into banking?” [Note: When an Ivy League undergrad says "banking," he or she invariably means "investment banking," meaning underwriting or trading.]

Student #2: “We should advertise – ‘Being a lawyer is so much better than banking.’”

Student #1 (after a pause): “Seriously, everyone wants to go into banking.”

End scene.

Also further proof that no one does campus recruiting better than a Wall Street investment bank. Or do undergrads these days want to work in industries that are best known for torpedoing the entire economy through a combination of greed and incompetence (and abusing their customers along the way)?

At least, after the last twelve months, no one can claim that he didn’t know what kind of business he was getting into.

By James Kwak

I mean, seriously, Jim, what the fuck?

* * *

Let me respond to Mr. Kwak's apparently throwaway anecdote with a few of what I hope will be corrective observations.

First, unlike Mr. Kwak, I do not pretend to know what Yale undergrads mean by "banking" or "investment banking." But as a practitioner with almost twenty years in the business, I can most reliably assure him there is more to investment banking than securities underwriting and trading. Depending on which kind of investment bank we are talking about, its business can comfortably encompass not only these, but also mergers and acquisition advisory, restructuring advisory, corporate lending, leveraged finance, derivatives, structured finance, proprietary trading, and even private equity investment. These are all very different businesses, with different career paths, different duties and responsibilities, and different cognitive and personality requirements for individuals who might choose to enter them.

An individual who might make an excellent corporate financier is almost certainly incapable of being an outstanding trader, and vice versa. I should bloody well hope that any Wall Street recruiter worth his or her salt has identified the different career paths available at his or her firm for the benefit of the wide-eyed young undergraduates and clarified their different requirements. If not, they should damn well be fired.

Perhaps it would bolster Mr. Kwak's understanding if I were to draw an analogy with his current career path. Saying that investment banking consists solely of underwriting and trading is almost exactly analogous to saying the practice of law consists of no more than intellectual property management and environmental litigation. (Which, for those of you not well versed in the intricacies of the legal industry, is fucking preposterous.)

I don't know how current Ivy Leaguers think, Mr. Kwak (and I suspect you don't either), but if you're going to presume to talk about my industry in a public forum, I suggest you get it right.

* * *

Second, Wall Street investment banks do do campus recruiting better than anyone else, or at least they used to. Part of this can no doubt be attributed to the fact that successful investment bankers like me are devilishly charming, stunningly handsome, scathingly brilliant, and in every other respect fucking paragons of the best and brightest an Ivy League education has to offer. Of course, even those nattering nabobs of negativism like Mr. Kwak who would deny the preceding have to admit upon examination of the facts that Wall Street's recruiting efforts on university campuses have been massively successful for the simple reason that—for a certain type of Ivy League individual—these jobs are fucking awesome.

How so, you ask? Well, let me count (a few of) the ways.

For one thing, they are exciting.

Unlike, say, 99.6% of all other jobs available to a wet-behind-the-ears idiot in proud possession of little more than an expensive college degree, becoming an investment banker fresh out of college is a huge rush. Depending on what role they perform, new entrants just weeks into the job can participate in billion dollar underwritings, multi-billion dollar mergers, complicated cross-border restructurings, or devilishly complex trading programs, all the while possessing a level of experience formally known in the industry as "jack shit."

In what other industry, I ask you, can a 22-year-old who just stopped wetting the bed three weeks ago participate in a deal which runs for weeks on the cover of The Wall Street Journal or the Financial Times? To be sure, he is probably doing little more than making copies, getting coffee, and trying not to look as stupid and lost as he feels, but at least he is in the room. Contrast this, if you will, with a fresh McKinsey recruit tasked with interviewing shop floor supervisors to develop a human resources inventory for a ball bearing manufacturer in East Bumfuck, Illinois. Or a pre-law student who spends 80 hours a week in a windowless basement cross-checking sale-leaseback contracts for a patent dispute in Moldavia. On average, young investment bankers spend less time traveling that management consultants and more time sleeping than corporate attorneys. Plus, they get to tell their friends and family that they carried Bruce Wasserstein's bags. What could be better?

For another, investment banking jobs are challenging.

Excluding certain training programs for elite military units, there are few career choices available to a young person as emotionally and intellectually challenging as investment banking. The pressure is intense, the expectations of your bosses and clients completely insane, and you swim in a Sargasso Sea full of assholes who would as soon rip your head off as look at you. It is an environment, if you can survive it, that fosters an intense esprit de corps among your peers and immense personal pride in your own accomplishments. As such, it can be considered emotional crack cocaine to those hyperaggressive, intensely driven, super-competitive young psychopaths whose mommies and daddies have pushed them down the Deerfield–Harvard–Goldman Sachs path to Übermensch-dom from infancy.

Long gone are the days when investment banking was a quiet backwater for the idiot sons of wealthy WASPs. For decades now, socially ambitious families have been steering brilliant little Bobby and Sally toward positions at Goldman Sachs and Morgan Stanley as the pinnacle of social achievement. Bobby and Sally have drunk this goal in with their mother's milk. Surely you don't think a little recession or crisis is going to change that right away, do you?

And, finally, there is the money.

Surely I don't have to explain about the money.

* * *

Third, I really do take exception to Mr. Kwak's pusillanimous little swipe at my industry for "torpedoing the entire economy." Admittedly, several large investment and commercial banks utterly failed to cover themselves in glory during the recent crisis. I have said so myself, repeatedly, in these pages. However, notwithstanding Mr. Kwak's insinuation, investment bankers were far from alone in contributing to the epic clusterfuck we have just lived through. We had plenty of help from shortsighted and incompetent regulators, meretricious and ignorant politicians, and greedy and disingenuous investors, not to mention millions of ordinary Americans who apparently believed it was their God-given right to own a million dollar house and three plasma televisions, no matter how little money they made.

In fact, I think you might have to look long and hard to find someone who was not culpable in some way for what happened. I, for one, would not automatically exclude the other professional enablers of corporate and institutional idiocy in our economy: the management consultants and the lawyers. It is a well-known fact that Mr. Kwak's own alma mater, McKinsey, has been the strategic consulting firm of choice for almost every major Wall Street investment bank for decades. Bang-up job, Jim.

* * *

Anyway, I grow tired of shellacking Mr. Kwak's flimsy, ill-considered post with the Howitzer of Truth, so I will try to close on a more productive note.

For those youngsters still considering a career in investment banking, I would offer the following. On the positive side, the excitement, challenge, and relatively plentiful monetary rewards of a career in my business should remain. The fundamental nature of the business, and the need for our services in the economy, will not change. On the negative side—and diminishing somewhat the preceding attractions, at least for a time—the industry will shrink, and this will make it harder both to get and to keep a job. Some subspecialities on the trading side might disappear completely.

But if you are smart, aggressive, driven, and competitive, I can think of few industries better suited to your personality than mine.¹ (And, unlike elite military units, people rarely shoot at investment bankers. At least not yet.) You may not receive the kind of social admiration and approbation of your career that you and your parents were looking forward to, but the personal rewards of doing well in one of the toughest professions out there will remain.

And, in any event, you will always be able to sneer with impunity at the lawyers.

UPDATE: To his credit, James Kwak has removed the egregious crack to which I took offense, calling it "gratuitous," and replaced it with a more anodyne remark. I will let my comments stand, however, since his original swipe was of a kind with many of the ludicrous comments attending his post. It is also sadly symptomatic of a persistent knee-jerk tendency in the media and the populace at large to scapegoat investment banking for all our current troubles, whereas by my most recent calculations we can legitimately be blamed for only 16.27% of the crisis.

POSTSCRIPT: Some correspondents have taken exception to my apparent boosterism of entry-level career opportunities in investment banking. Should any of you be of like mind, might I gently suggest you reread my remarks with a more critical eye? You might detect a faint whiff of a commodity somewhat rare in these over-strident times: irony. Just a thought.

¹ Especially if you're a girl.

© 2009 The Epicurean Dealmaker. All rights reserved.

Cold Pastoral

Heard melodies are sweet, but those unheard
Are sweeter; therefore, ye soft pipes, play on;
Not to the sensual ear, but, more endeared,
Pipe to the spirit ditties of no tone:
Fair youth, beneath the trees, thou canst not leave
Thy song, nor ever can those trees be bare;
Bold Lover, never, never canst thou kiss,
Though winning near the goal —yet, do not grieve;
She cannot fade, though thou hast not thy bliss,
For ever wilt thou love, and she be fair!

...

O Attic shape! Fair attitude! with brede
Of marble men and maidens overwrought,
With forest branches and the trodden weed;
Thou, silent form, dost tease us out of thought
As doth eternity: Cold pastoral!
When old age shall this generation waste,
Thou shalt remain, in midst of other woe
Than ours, a friend to man, to whom thou sayst,
"'Beauty is truth, truth beauty,' —that is all
Ye know on earth, and all ye need to know."

— John Keats, Ode on a Grecian Urn

Enjoy your weekend.

© 2009 The Epicurean Dealmaker. All rights reserved.

Res Ipsa Loquitur

Subsequent to my recent half-hearted cudgeling of the Shaggy Horse of Shareholder Governance as an important contributor to the excessive pursuit of risky returns by publicly-owned financial institutions, my argument received overwhelming reinforcement today in the pages of the The New York Times Dealbook from the person of scarily smart and excessively erudite Delaware corporate jurist Leo E. Strine, Jr.

Not only did Herr Professor Doktor Strine take the heretofore only slightly bruised nag out back and decisively beat it to death, he skinned it, deboned it, rendered its fat for glue, and gilded its hooves into four rather fetching ashtrays for the Court of Chancery's waiting room. In short, in your Humble Correspondent's considered opinion, he nailed it.

In a nutshell, the Esteemed Vice Chancellor most assuredly does not agree with those who believe that all public shareholders were innocent dupes taken along for a ride by evil, greedy, grasping investment bankers and their bosses in the recent run-up to the crisis:

Whatever the possible causes of the recent financial debacle, it seems clear that there is one cause that can be ruled out: that the directors and managers of the failed firms were unresponsive to investor demands to take measures to raise profits and increase stock prices.

Rather, to the extent that the crisis is related to the relationship between stockholders and boards, the real concern seems to be that boards were warmly receptive to investor calls for them to pursue high returns through activities involving great risk and high leverage.

He continues:

During the last 30 years, it is indisputable that: (1) regulatory standards have been greatly relaxed, giving the financial industry free rein to leverage itself to the hilt and to engage in a wide range of speculative and increasingly opaque, complex activities, often without rigorous safeguards; (2) the power of stockholders to influence the composition of corporate boards and the direction of corporate strategy has been markedly enhanced; (3) institutional investors who hold stocks, on average, for a very brief period of time and are highly focused on short-term movements in stock prices have become far more influential and prevalent; and (4) “pay for performance” compensation systems were implemented to align the interests of managers with stockholders by giving managers incentives to pump up corporate profits in a manner that will increase the corporation’s profits and stock price immediately, rather [than] durably.

This is consistent with my view, that public shareholders of investment banks, as a group, did not act to brake the risk taking of their employees at all, but rather encouraged and rewarded it, or—what is perhaps more pertinent—punished any executive who did not embrace such activity wholeheartedly.

* * *

What I find most interesting about Mr. Strine's remarks is the salient distinction he draws among the motivations and behavior of different kinds of public shareholder. To the best of my admittedly limited knowledge, this is the first instance I am aware of where anyone has focused on this issue to this extent. He draws from it some useful policy prescriptions:

Therefore, if the correct policy balance is to be struck regarding regulation of the financial industry and other industries that pose large systemic and societal externality risks, policy makers cannot continue to avoid the obvious alignment problem that now vexes our corporate governance system.

Most Americans invest with a rational time horizon consistent with sound corporate planning. They invest with the hope of putting a child through college or providing for themselves in retirement. But individual Americans don’t wield control over who sits on the boards of public companies. The financial intermediaries who invest their capital do. These intermediaries have powerful incentives — in important instances, not of their own making — to push corporate boards to engage in risky activities that may be adverse to the interest of long-term investors and society. That is, there is now a separation of “ownership from ownership” that creates conflicts of its own that are analogous to those of the paradigmatic, but increasingly outdated, Berle-Means model for separation of ownership from control.

Unless these incentives and conflicts are addressed, it should be expected that corporate boards will continue to face strong pressures to manage their enterprises in a manner that emphasizes the short term over the long term, and that involves greater risk than is socially optimal. As a result, more stringent than optimal prudential regulation will have to be in place to bar the financial sector from taking risks that endanger society as a whole, rather than simply the capital of their investors and the employment of their employees.

Of course, this analysis and argument applies more broadly than just to publicly owned financial institutions. However, given the extreme sensitivity said financial institutions have proved to have toward excessive risk taking, and the genuinely calamitous negative externalities they have inflicted on society at large as a result, I think the Honorable judge's recommendations have particular force in their case.

In any event, I believe Mr. Strine's analysis should conclusively disabuse participants in the current debate over financial regulatory reform of two related notions. The first is the red herring that somehow stronger corporate governance by public shareholders over investment bank Boards and executives would have prevented the kind of reckless risk taking that brought these firms—and the global economy at large—to the brink. The second is the canard that all public shareholders are alike, and they all share the same interests and motivations.

Realizing that the second of these is false, and that Fidelity Investments and SAC Capital do not have the same investment timeframe and objectives as Aunt Millie or even the Ohio Teachers Pension Fund, would have a highly salutary effect on the beliefs and behavior of truly long-term shareholders.

If nothing else, getting Aunt Millie to realize she is the only one in the shark tank without a safety cage should do her a world of good.

© 2009 The Epicurean Dealmaker. All rights reserved.