Thursday, March 11, 2010

Psychiatric Help 5¢ – The Doctor Is In

Carmela Soprano: "He's a good man. He's a good father."
Dr. Krakower: "You tell me he's a depressed criminal, prone to anger, serially unfaithful. Is that your definition of a good man? ... You must trust your initial impulse and consider leaving him. You'll never be able to feel good about yourself. You'll never be able to quell the feelings of guilt and shame that you talked about, so long as you're his accomplice."
Carmela Soprano: "You're wrong about the accomplice part, though."
Dr. Krakower: "You sure?"
Carmela Soprano: "All I did was make sure he's got clean clothes in his closet and dinner on his table."
Dr. Krakower: "So 'enable' would be a more accurate job description for what you do than 'accomplice.' My apologies ... Take only the children—what's left of them—and go."
Carmela Soprano: "My priest said I should work with him, help him to become a better man."
Dr. Krakower: "How's that going?"


Carmela Soprano: "I thought psychiatrists weren't supposed to be judgmental."
Dr. Krakower: "Many patients want to be excused for their current predicament because of events that occured in their childhood. That's what psychiatry has become in America. Visit any shopping mall or ethnic pride parade, and witness the results."

— The Sopranos
, "Second Opinion" (2001)

Stephen Gandel has a post up at The Curious Capitalist about the inherent biases of financial planners. In addition to the already widespread suspicion that planners pad their paychecks in preference to meeting their clients' needs, he reveals that a new study appears to indicate they only tell their clients what their clients want to hear:

So the problem that the study points out is that when individuals hire people to give them advice, the advisers they have a strong incentive to tell you what you want to hear. If they don't do that, then you probably won't hire them. No matter how impartial we think we are. We come to every topic with some inherent beliefs. If someone tells you something that doesn't jive with those beliefs, you are likely to think they are either incompetent or just not smart.

In other words, Mr. Gandel worriedly concludes, financial planners and advisers of every stripe in our capitalist society are Yes men.

My reaction to this bit of news was twofold: 1) this is news?; 1 and 2) Oh Christ, some knucklehead is going to try to apply this to investment bankers. So, before number 2 has a chance to come true, I thought I would head that stagecoach off at the pass with the following ruminations.

* * *

It is true that investment bankers market themselves publicly 2 as "trusted advisors" to their clients, good listeners who apply decades of experience, boatloads of integrity, and shitloads of cleverness to their clients' unique and pressing problems for the benefit of management, shareholders, and the Greater Good of All Mankind. Nevertheless, I know of few individuals outside the mainstream media, the U.S. Congress, or the assembled buy-side investors of the world who actually believe such horseshit. It is certain that neither investment bankers nor their clients do.

For one thing, investment bankers cannot afford to offer pure, unbiased advice to their clients, even in the unlikely and rare event that their clients are willing to pay for it. The opportunity cost is just too high. It takes time, energy, and sustained attention to a client's situation, opportunities, and challenges to provide good, balanced advice. Depending on the size and complexity of a client and its issues, and the frequency of its need for consultation, an experienced senior investment banker might be able to act as a true consigliere to maybe five or even ten corporate clients over the course of a year. What would they be willing to pay him for that service? A million dollars a year? (Sounds steep, don't you think? Most clients do. A banker usually feels pretty accomplished if he can get a couple clients to cough up general strategic retainers in the neighborhood of $200,000 per.)

In contrast, a senior banker in a revenue generating role at a large investment bank is often expected to deliver $25 million or more in transaction-related revenues to the bank each and every year. Below that, senior management just doesn't think he's producing enough. (Among other things, there's a hell of a lot of infrastructure to pay for in a big bank.) But you can't do that unless you are doing deals: mergers and acquisitions, stock and bond underwritings, derivatives. Do you see the problem? It just doesn't pay to offer good advice. A banker could and should be doing deals instead. 3

In addition, you must understand there just isn't a lot of latent demand in corporate America for general strategic advice from investment bankers. It's not like we are experts in information systems technology, management and organizational structure, executive compensation, or marketing and market positioning, like many management consulting firms are or pretend to be. We don't have deep sector expertise in highly specialized business functions or areas of concern like intellectual property rights, cross border taxation, or environmental regulation and litigation. These are issues and challenges which are not only deeply embedded in the day-to-day workings of your average mid- to large-size corporation but also so arcane that few, if any, companies can afford to have executives or employees on staff who specialize in managing them. These types of issues are tailor-made for outside advisers, whether they be management consultants or specialist lawyers.

In contrast, investment bankers are really experts in only two things: mergers and acquisitions and financial markets. But M&A is a core component of corporate strategy, which focuses on how to grow the organization, optimize its reach and capabilities, and compete in the marketplace. Formulating and executing strategy is a core responsibility and function of the senior management of any firm. M&A is the CEO's job, and the job of the Board of Directors. By the same token, financing—obtaining growth capital, optimizing the debt-equity mix, and funding the day-to-day operations of the firm—is the CFO's job, and the job of the corporate treasury department.

In both financing and M&A, therefore, corporate executives rarely need or want advice thinking about the What or the Why of doing something (buy Company XYZ, because it would be a perfect fit for our European strategy; raise outside investor funds, because the firm needs growth capital). Instead, they need and want help figuring out How and When to do a deal, and then executing it. I have made this distinction before, and it is worth repeating here: investment bankers are not—no matter what we might say in public—"idea men." We are tacticians, not strategists. You don't hire us because you want help figuring out what you want to be when you grow up. You hire us because you've picked a horse, you've entered it in a race, and you want us to figure out how to win. Perhaps you even want us to ride the nag to the finish line for you. We can do that.

Investment bankers are deal jockeys. We do deals.

* * *

Now, it is true that investment bankers can opine on strategy, markets, valuation, and all the other things that impinge on the strategic and financial issues which confront our clients. We really are experts in this stuff, and we really can give good advice. The best of us 4 actually do try to steer reluctant or stubborn clients in directions which we believe are best for their firms and their shareholders. Normally, however, we must employ substantial diplomacy and tact to do so, for at the end of the day, it is our clients who employ us, and our clients who get to make the decisions. I have been on the losing end of a few of those discussions, where my best and strongest advice conflicted in the event with my client's desires, and where my conviction was strong enough that I was willing to part ways with my client. While I may have come out of such trials with a sense of pride in my own integrity, I usually lost the deal. It was no satisfaction to have my advice proven correct later, either, nor did that make my superiors or partners any happier. I suppose you might conclude from this that I am not that good an investment banker. You may be right. A really good investment banker would have persuaded his client around to the correct point of view. (Dr. Krakower, for example, would have made a lousy investment banker.)

And this does not even begin to address the wiggle room which exists at the core of much of what investment bankers do, either. For one thing, valuation is an entire kettle of fish worthy of its own post(s), and even reasonable and well-meaning investment bankers can disagree whether a particular transaction value or structure is appropriate or "fair" five times out of three. But do not let the unavoidable ambiguity at the heart of what we do distract you from the honest fact that investment bankers are hired guns. Like lawyers in a courtroom, our objective and role is not to discover the "truth"—if such a hackneyed concept can even be said to exist in M&A or financial contexts—but rather to argue our client's position and, in the end, to help him win.

That is what we get paid for. And everybody I know and work for knows it, too.

* * *

So, Mr. Aggrieved Shareholder, don't coming crying to me the next time your company's investment banker steers it into a ditch with a lousy acquisition or failed financing. Ninety-nine times out of a hundred, he only did what your goddamned company management wanted him to do. After all, they were the bastards who hired him.

The next time you get a chance, take a gander in the proxy or other corporate filing at the engagement letter your friendly local investment banker signed when he did the deal you're complaining about. You'll notice in the disclaimer that he abjures any and all fiduciary responsibility to the shareholders or any other stakeholders of his client. It's there for a reason, buddy: your CEO and Board of Directors hired him, not you. He doesn't work for you. Given that, why would you ever expect him to look out for your interests?

If you want a cold-blooded shark on your side, looking out for your interests (and only yours), I suggest you get off your fat ass, pry open that dusty wallet, and hire your own goddamn adviser. In fact, if you can get shareholders of at least 75% of the S&P 500 to do the same, I would be more than happy to offer my own modest services at a very attractive bulk rate. Epicurean Dealmaker LLC would be delighted to comprehensively, exhaustively, and expertly second guess any and all transactions, strategic, financial, or otherwise, your companies' management propose to undertake for the modest fee of $5 million per company per calendar year.

Make it $10 million, and I personally guarantee I will reach across the negotiating table, grab Jamie Dimon, Lloyd Blankfein, or Vikram Pandit by the throat, and kick him sharply and precisely in the balls, twice.

And that, my hapless and confused friend, is a real bargain.

More on what investment bankers really do, when they're not fucking around:
My Kid Could Do That! (May 26, 2009)
With Friends Like This ... (July 22, 2008)
Penny for the Guy (February 26, 2008)
True Story (December 7, 2007)
Confidence Game (September 28, 2007)
Mine's Bigger Than Yours (April 14, 2007)

1 It never fails to astonish me how many people seem to have a problem distinguishing between marketing and reality. For instance, car companies have made a decades-long practice of selling machines for transport as lifestyle choices, image enhancers, and facilitators of sexual conquest. It amuses me that many people who claim not to be fooled by such transparent manipulation continue to be shocked—shocked!—that stockbrokers and other financial transaction whores don't act like Mother Theresas when it comes to their clients' portfolios.
2 Or used to market themselves as such, before the apotheosis of Goldman Sachs and other leading investment and universal banks as proprietary behemoths whose marketing message seems to be "Trade with us if you want, but don't expect us not to rip your head off and fuck your neck if we happen to be in the mood at the time. Sucker."
3 Not to mention the complications introduced by conflict of interest. You can just imagine that a banker on a hefty strategic retainer to Company ABC, deep in its most confidential deliberations, is going to have trouble getting hired by Competitor XYZ to do a potentially lucrative transaction. Not to mention ABC is likely to have serious objections to letting the banker do it. Mr. Banker is going to have a very difficult year-end conversation with his superiors when he tries to explain why he had to forgo a $15 million M&A fee from XYZ because he was on a $1 million retainer from ABC. While corporations would often love to tie up bankers with retainers so they can't work for competitors (e.g., Bruce Wasserstein), they usually can't afford the rates bankers would like to charge. It is investment bankers who pay the closest attention to opportunity cost. As we damn well should.
4 "Best" only in the sense of those of us who actually retain and occasionally exercise whatever remaining shreds of integrity decades of service on behalf of meretricious and despicable clients and employers have left to us. As opposed to "best" in the sense of most successful, or most effective, who are usually those bankers no longer encumbered with such inconveniences as integrity or a sense of honor. I know, I know: it's a value judgment. Sorry.

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