This Is Not a Blog Post

Thomas Jefferson: "Hi, Ben!"
Benjamin Franklin: "Tom."
Jefferson: "Ya got a minute?"
Franklin: "Well, I tell you the truth, heh... we were just going out of town for the weekend. Heh-heh."
Jefferson: "But it's only Wednesday."
Franklin: "Yeah... Well, you know: 'A penny saved is a penny earned.'"
Jefferson: "What has that got to do with anything, Franklin?"
Franklin: "I dunno. It's the first thing that came into my head. Heh. I was just making conversation. 'An idle brain is the Devil's playground,' you know."
Jefferson: "Say, you're pretty good at that, aren't you?"
Franklin: "Yeah, they're some new wise sayings I just made up."
Jefferson: "Wise sayings?"
Franklin: "Yeah, I call 'em 'Wise Sayings.'"

— Stan Freberg, Stan Freberg Presents The United States of America: Volume 1, The Early Years

I hereby proffer my humblest apologies to those Loyal Readers among you who forlornly frequent these pages in search of trenchant commentary and analysis on all things financial. You might have noticed that such has been rather thin on the ground for some time now, replaced instead by desultory pontificating on divers topics social, philosophical, and non-numerate. Some of you may even view this to be a case of false advertising, given the banner emblazoned at the top of this site.

There are a number of reasons for my reticence. The primary and best one is that I am actually busy doing my day job of raising funds and merging companies. This gainful employ not only cuts into the time I would otherwise selflessly employ to educate and entertain the masses huddling on the other side of this computer screen but also prohibits it. For, if you could find anyone at the SEC not otherwise engaged in surfing porn sites or persecuting $25,000-a-year brokers in Wichita, Kansas, they would no doubt tell you that anything concrete I might say here about my current transactions would be looked upon with a very unfriendly eye. In a word, spilling the beans about ongoing deals is considered very naughty. (Not to mention being harmful to the interests of my clients and the contractual promises of confidentiality I have made to them.)¹ Sadly, from your perspective, those confidential beans are about the only financial legumes I have to spill at present.

Entirely aside from these impediments, I make it a practice to shy away from too much specificity in my scribblings here, for reasons both competitive and personal. My ilk are a secretive bunch, since we have learned from long experience that the slightest clue, in combination with a host of other apparently trivial data, can enable a bitter competitor to sniff out the client, deal, or opportunity we are working on at the moment and therefore jeopardize it. For such reasons our personal assistants never volunteer our whereabouts to incoming callers, but rather say "Mr. Dealmaker is traveling" or "out of the office." Even the name of a city can—under the right combination of circumstances—reveal critical intelligence about a pending transaction or opportunity I would not want my competitors to discover.

By the same token, illustrating my remarks with too many details or personal anecdotes is guaranteed, over time, to allow the curious and ill-intentioned to suss out my identity. This is an outcome I resolutely oppose, for reasons too obvious to mention to you delightful and intelligent people. Furthermore, if secrecy begets tyranny, its opposite must surely engender banality. This is a state of affairs too horrible for Your Humble Diarist to even contemplate.

* * *

In summary: I have no time to write thorough, well-thought-out dissertations on general finance topics or issues; I have no license, right, or permission to write about specific transactions or clients I am involved with; and I have no interest in airing my personal laundry before a hostile and indifferent world. It's a bit of a pickle, since this means I must violate the primary precepts of interesting writing: write about what you know and use specifics.

Instead, I scratch my intermittent writing itch here by excerpting interesting bits from the great works of others and nattering on about topics over which I hold no special command, intelligence, or authority. I refuse to be too apologetic, however. After all, blogging is and always has been at least partially a exercise in vanity and self-indulgence. Anyone who tells you otherwise is self-delusional.

Upon reflection, the cynic in me does find it ironic that it's easier to write about wider ideas and social issues than the daily substance of my own life. One of these days I just might have to write a blog post about that.


¹ Naturally, I listed the regulatory impediments to disclosure before the legal, contractual, and (implied) moral and ethical ones, since I do not want to disabuse anyone reading these words of their prejudice that all investment bankers routinely flout and ignore all but the first of these. Heaven knows I do not want to tear anyone away from their fondly held preconceived notions.

© 2011 The Epicurean Dealmaker. All rights reserved.

Stranger in a Strange Land

There was so much to grok, so little to grok from.

— Robert A. Heinlein, Stranger in a Strange Land

Simon Kuper has a lovely little piece in the weekend Financial Times today, talking about his experiences as an expatriate living in Paris these past nine years. He captures beautifully the freedom that someone living in a culture not natively their own naturally enjoys:

As an expat, you are freed from two blights that afflict people who live in their own countries: the “status dance” and the “media bubble”.

As Mr. Kuper points out, the media bubble works largely to report on and support what he calls the status dance—where everyone stands in relation to everyone else in a particular, bounded society—so they are different aspects of the same thing.

Freedom from a society's status matrix can be immensely liberating:

I can still see if someone is good-looking or nice or funny, but I don’t know what it means if they live in a certain neighbourhood or went to a certain school or know someone who is purportedly famous in France. Here, I can only dimly infer somebody’s status from their self-importance, and from the reactions of other people. I see who people look at during a conversation, whose jokes they laugh at, and I presume that’s where status lies. But I don’t care.

Nobody in Paris knows if I have status either (though they can probably guess). I think that’s what the American writer James Baldwin meant when he said he was always grateful to Paris for the utter indifference with which it treated him.

In addition, I can testify from the time I spent in London as an expat that standing outside the defined social structure makes one that much more approachable by those within it. The Brits have a well-earned reputation for being highly sensitive to class and status, and they are stereotyped as extremely reluctant to socialize outside the tight circle of friends and acquaintances they grew up with. Yet my family found most locals friendly and approachable, and we developed lasting friendships with a number of British families. Of course, it's easy to overstate this: the majority of friends we made during our stay were non-American expats, rather than Brits or other American families. It's just easier for everyone involved to establish new relationships when there are no status preconceptions or consequences on either side.

* * *

Of course, no state of social utopia can last forever. Human beings are social animals. All of us want, sooner or later, to be able to understand both our own place in society and those of the people around us. I had far more social mobility and freedom as an expat in London that I did or do in New York City, but had I stayed longer it would have dissipated. Novelty wears off. Most people prefer, over time, to discard the frisson of intercourse with the unranked and free-floating and replace it with a settled view of just exactly where everyone belongs in the social structure. I am somewhat amazed Mr. Kuper seems to have avoided this for nine years, although he may simply have become marginalized in Parisian society in ways even he is not aware of.

Newly formed social groupings follow the same dynamic. The beginning is all freedom and lack of restraint, high talking to low, strange talking to stranger. It is very exciting and liberating at first, if a bit unsettling. But sooner or later members sort themselves out, and social interactions become routinized according to proclivity, preference, and rank. Status emerges as a—if not the—dominant organizing principle of any social group, and people behave accordingly. You can see it happen to incoming freshman classes at university, new recruits at large corporations, and military inductees. You can even see such principles driving the evolution of online virtual communities like Facebook and Twitter.

It's all a bit sad, really, at least for us novelty junkies. But the social niceties must be observed.

Or so Mother told me.

© 2011 The Epicurean Dealmaker. All rights reserved.

Leaves

Leave a lover with his thoughts for twenty-four hours and this is what will happen: At the salt mines of Salzburg, they throw a leafless wintry bough into one of the abandoned workings. Two or three months later they pull it out covered with a shining deposit of crystals. The smallest twig, no bigger than a tom-tit's claw, is studded with a galaxy of scintillating diamonds. The original branch is no longer recognizable. What I have called crystallization is a mental process which draws from everything that happens new proofs of the perfection of the loved one.

— Stendhal, De l'Amour ¹

And yet the crystalline bough is no longer the leafless branch. Reaching out for his beloved, Apollo feels Daphne turn to living tree under his very fingertips at the moment of his touch. Captured, the beloved disappears.

She leaves.

¹ As quoted in Anne Carson, Eros the Bittersweet: An Essay, Princeton, 1986, p. 64.

© 2011 The Epicurean Dealmaker. All rights reserved.

Devotions upon Emergent Occasions

"[T]here are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don't know we don't know."

— Former United States Secretary of Defense Donald Rumsfeld

The recent earthquake and tsunami in Japan—and the consequent crisis developing at several of its nuclear reactors—has raised the concept of tail risk to widespread attention once again. Comparisons are being drawn with the BP Gulf disaster, Chernobyl, and the financial crisis. As befits one of the most earthquake-prone countries on Earth, it appears the Japanese built their nuclear reactors to withstand the tremors adequately. It seems, however, that they might not have adequately planned for the ancillary effects of a tsunami.

Failure to foresee and plan for all potential threats to a nuclear power plant—where the consequences of failure can be catastrophic—is indeed blameworthy. We should not misinterpret Donald Rumsfeld's apt characterization of the state of our knowledge to excuse us from paying attention to known known risks and known unknown risks. For denizens of an island nation, tsunamis should come as no surprise. But make no mistake: no tail risk can be completely mitigated. That is the nature of the tail: there is no upper limit to the magnitude of the potential threat. And just because we estimate that an event of certain magnitude should only occur once every 10²⁴ years does not mean it will not happen tomorrow. Or this evening at 6:53 pm.

More generally, we cannot defend ourselves against even all the potential threats we are aware of or suspect. Such protection could only come at unconscionable cost. Do you want to avoid accidental death?: Don't drive, or cross the street, or use a gas stove, or live on a planet subject to earthquakes, tsunamis, and the occasional killer asteroid. The analogy is exact with our polity and economy, too. Every good and financial return we enjoy is associated with a host of risks, many of which, in the assumed unlikely event they occur, would cause most of us to question why we wanted them in the first place. And those are the ones we know about.

No, tail risk and periodic resulting disasters cannot be fully avoided or even reduced at tolerable cost. The existence and ineluctability of tail risk should teach us two things: radical humility, and the imperative to live life now, while it is still in our grasp.

For we all know we're going to die sooner or later. We just don't know whether it will be before the arrival of Chicxulub II or not.

No man is an Iland, intire of it selfe; every man is a peece of the Continent, a part of the maine; if a Clod bee washed away by the Sea, Europe is the lesse, as well as if a Promontorie were, as well as if a Mannor of thy friends or of thine owne were; any mans death diminishes me, because I am involved in Mankinde; And therefore never send to know for whom the bell tolls; It tolls for thee.

— John Donne, Meditation XVII, Devotions upon Emergent Occasions

© 2011 The Epicurean Dealmaker. All rights reserved.

The Mailman Cometh

Emperor Joseph II: "My dear young man, don't take it too hard. Your work is ingenious. It's quality work. And there are simply too many notes, that's all. Just cut a few and it will be perfect."
Mozart: "Which few did you have in mind, Majesty?"

— Amadeus

We receive mail at the Volcano Lair:

TED,

First, I am a huge fan of your blog. While some may say it is needlessly verbose, I find lofty English to be tantalizing.

Second, I wanted to get your opinion on the Oscar winning documentary, "The Inside Job." It seems like you think of traders as weenies and I would be interested to hear whether you believe the film made an adequate distinction between the various parts of the investment banks (i.e. M&A vs. sales/trading).

Third, I'm assuming you work at an international bulge bracket bank and I was wondering what your thoughts are vis-a-vis mid-market investment banks. Do you tend to turn your nose up at them because the size of their deals are smaller in a monetary sense?

All the best,

[Sender Redacted]

* * *

Dear SR –

First, thank you for being a fan. I have few enough of those in the world not to appreciate the ones I do. However, I think you might need to hang out with a better class of friend and acquaintance. Any putz who thinks my stylings here are "needlessly verbose" clearly hasn't lifted his or her head from Time magazine or the latest John Grisham thriller since they first learned to read. Such ignorant, poorly-educated, tin-eared boobs should be beneath your contempt, as they are mine.

Second, no, I have not yet seen Inside Job. Nor has that film's anointing as the best documentary of the year by the Great and Good of that most rigorous, nonpartisan, and perceptive academy of sociological criticism—known as the American Academy of Motion Picture Arts and Sciences—encouraged me to correct my ignorance. I tend to find exercises led by the Smug and Self-righteous in persuading the Already Convinced and Credulous of something they already believe to be tiresome, tendentious, and not worth my time. Perhaps I will get to it sometime down the road, but I wouldn't hold your breath. Even if said film were known to be the most evenhanded analysis available, I suspect I would learn little new or truly interesting about the sources of the financial crisis from it. I hold the apparently unfashionable view that the sources of same were so multifarious, interconnected, and obscure as to defy well-balanced characterization in a mini-series documentary of 20 hours duration, much less one of only two.

But, yes, you are correct: I do think traders are weenies.

Third, I never turn up my nose at any piece of profitable business. It is true that the smaller deals and smaller companies which mid-market and regional investment banks service usually yield fees which are simply too small to offset the opportunity cost of doing them at larger banks. Most bulge bracket Managing Directors—to paraphrase my first girlfriend of the 1980s, supermodel Linda Evangelista (the saucepot pictured above, for you benighted 20-somethings)—won't get out of bed in the morning for less than a $3 million fee. Most mid-market M&A deals or capital raisings simply cannot support such fees, but big banks need such or larger in order to pay for their enormous fixed and variable cost infrastructure. (Weenie traders and their fancy trading turrets cost a lot of money, especially when you have them scattered across high-priced financial centers all over the world.)

But smaller and medium-sized deals can have all the interest, complexity, and drama of bigger ones, and sometimes more. They certainly do not require any less effort to complete. In fact, given the relative dealmaking inexperience and unsophistication of small to mid-sized clients, they often require more, and more focus on the psychology of the deal, rather than the technical and mechanical aspects of it. Smaller deals can be a lot of fun. You just have to do them at an investment bank where the cost structure can support it. As a junior banker, moreover, you have a much greater chance of playing a meaningful role on smaller deals, with more hands-on experience and client exposure, than you do as Sub-Sub-Analyst #3 on a $20 billion mega-deal staffed with six bulge bracket banks. In those cases, you'll be lucky to be tasked with getting the coffee for the 2nd-year Analyst running the copying machine on the lobster shift.

Anyway, I hope this was of some help to you. Thanks for writing, and for giving me an excuse, however flimsy, to post a picture of Linda.

Cheerio,

TED


© 2011 The Epicurean Dealmaker. All rights reserved.