Tuesday, June 23, 2009

Ask Mr. Dealmaker

EDITOR'S NOTE: In our neverending quest to inform, entertain, and titillate our Devoted Readership, the editors of this publication have decided to inaugurate an exciting new series on this site, entitled "Ask Mr. Dealmaker." Designed to encompass the educational brilliance of Ask Mr. Wizard, the career savvy of Lucy Kellaway, and the psychological sensitivity of Dear Abby, this new feature will appear at irregular intervals according to the unpredictable whims of our senior writer and the volume of interesting mail in our mailbag.

Should you have a question about the nature of today's global capital markets, the real, unvarnished life of a practicing investment banker, or just exactly how tall Steve Schwarzman really is, please send a stamped, self-addressed e-mail to epicureandealmaker [at] hushmail [dot] com. Should our columnist detect any redeeming value whatsoever in your query, he will respond to it in these pages as soon as he wipes the tears of laughter off his face. Unless you have a burning wish to see your identity splashed all over the worldwide interweb, the Editors strongly recommend that you use an alias in your correspondence.1

* * *

Well, I can't believe those bastards in the Editorial Office have pushed yet another harebrained scheme onto Your Hardworking and Underappreciated Correspondent. I guess the publisher is getting a little freaked out by the relentless approach of The Permanent and Irrevocable Death of Journalism As We Know It.

He's such a pussy.

Anyway, we found one dusty letter at the bottom of the mailbag, so let's go.


Dear Mr. Dealmaker —

I am an MBA student who is graduating from [redacted] Business School this year.

I am concerned that the recent financial crisis and turmoil in the global economy has tarnished the perception of an MBA degree in the eyes of the public. I have worked hard to complete my degree, and I want to make sure that people view my accomplishment in the proper light.

As you may know, some of my colleagues here at [redacted] have published a code of business ethics for managers under the title "The MBA Oath." Several commentators I respect have written favorably about it.

Do you think it would be a good idea for me to sign the Oath to show my allegiance to proper business conduct principles?


Confused on the Charles
Cambridge, MA

* *

Dear Confused on the Charles

Don't bullshit me, son. You're not worried about your reputation; you're worried about getting a job.

And given that MBAs are about as welcome in corporate America as an international tax audit, you should be. You and your MBA peers are struggling desperately to come up with some gimmick that will make the thirteen firms across the country who are still hiring trust you enough to offer a second round interview. So some cleverboots at HBS came up with the MBA Oath and stole somebody else's lunch money to print up a bunch of laminated cards for your wallets. Good luck, I say.

Here's the deal: as a marketing gimmick, the Oath is pretty slick, but as a way to generate trust among others, it sucks. For one thing, it is voluntary and self-selected. Attila the Hun, Joseph Goebbels, and Caligula could all have signed the Oath, and for all anyone knows their modern-day MBA equivalents did, too. In fact, bad guys with zero ethics have the greatest incentive to sign up to such schemes, because they hope whatever good juju accrues to the thing will rub off on them and blind victims to their misdeeds until it is too late. Everyone pays lip service to good ethics, you know, especially the bad guys. Just wait until a signatory blows up the next Enron or Madoff Securities, and then see what your precious honor code is worth.

For another thing, it suffers from the drawback that it was written by MBA students. These, as everyone knows, are formerly intelligent individuals who have been exhaustively retrained to generate clotted, jargon-ridden bureaucratese in place of straightforward, honest prose whenever possible. The thing sounds like a Fortune 100 company mission statement. (That, if you need to ask, is very low praise indeed.)

I am not opposed to public codes of behavior for functional elites. I think they can be useful reminders to their members of shared principles and values that should be cultivated. But the shorter and more general they are, the more powerful they become. Semper Fidelis, Ars Gratia Artis, and "Eat at Joe's" are good examples of this. Reconstituted along these lines, the MBA Oath would probably sound a lot like "Don't do bad things," or "Be good."

Put this way, you can see just how empty and/or disingenuous such pablum really is. Be good to whom? When? How? Under what circumstances? To whose detriment? Unlike loyalty to your comrades, artistic integrity, or even devotion to your neighborhood beanery, ethical behavior in a business context is never straightforward or simple. A businessman constantly makes decisions which harm some real or potential stakeholders, because business is composed of and affects a staggering number of people who have different and often competing interests. Business ethics are situational, which is merely to say that they depend most heavily on the particular set of circumstances and decisions at hand, rather than on some inflexible itemization of principles printed on a playing card. Often, a business decision which triggers ethical thinking is a choice among lesser evils, or one which minimizes harm, rather than maximizing good. And you have to pick and choose which oxen are going to get gored—shareholders, employees, taxpayers, etc.—because somebody has to take it in the neck.

There are no cookbook approaches to this kind of stuff. You either have ethical principles and try to apply them to the best of your ability, or you don't. If you do, the most important resources you will need are integrity and courage. If you don't, then, well, we'll probably see you on the cover of Fortune magazine one of these years.2

Sadly, for your purposes, integrity and courage are not attributes that translate well to a resumé or a job interview. But realizing that they are what matter, and saying so honestly to whomever asks, will generate a hell of a lot more credibility than reciting a laundry list of politically correct business ethics bromides. It will be up to you to prove you have the stuff—both to yourself and others—when circumstances dictate.

In the meantime, if you want my advice, here it is: Leave the Oath, take the cannoli.

Ta for now,


1 Incoming letters will be edited for length, content, style, and in any other way TED feels would contribute most to general hilarity and malicious ridicule. You have been warned.
2 Whether as a hero or a goat (or both), I will leave as an exercise for my readers.

© 2009 The Epicurean Dealmaker. All rights reserved.

Thursday, June 18, 2009

A Mighty Wind

I wash my hands of this shit.

I have stated my case about the prospects and proper outlines for reform of financial regulation in this country before. Apparently, no-one with any scratch or power to do anything either a) read those pieces, b) agreed with me, or c) gave a rat's ass what I think. Fine, have it your way.

As you already know, Obama, Geithner, Summers, and crew have released their 85-page white paper outlining the Administration's proposed reforms. The most I can say about it on a family website is that it appears to have been composed with the objective of winning an obscure federal competition for the white paper which uses the largest number of capitalized initials and incomprehensible acronyms in a single document. There certainly seems to be little actual policy content of interest discernible in the mess. (Although I have sent a copy to NSA cryptographers to see whether it is really a cleverly disguised instruction manual for the conversion of sugar beets into synthetic diesel oil. It does sort of look like organic chemistry.)

Of course, everybody else in the commentariat and his hamster has already weighed in on the plan. Feel free to expose yourself to this spectrum of opinion, if you will. For those of you with limited time or tolerance for having your face sanded with a cheese grater, however, let me offer up my comprehensive, unbiased summary instead: [ white noise ].

It just doesn't fucking matter.

* * *

Many members of the punditocracy, including your Frustrated and Increasingly Irritable Correspondent, have commented at length on what is charmingly known as "regulatory capture." This is the phenomenon—most aptly demonstrated by the historical relationship in this country between the financial sector and its regulators over the last several decades—whereby the regulatee worms its way into the mind, practices, and governing philosophy of the regulator to such an extent that it effects something like a reverse Stockholm syndrome. The regulator adopts the objectives, goals, and mindset of its supposed charges, and becomes hostage to the institutions it is supposed to regulate.

Let me suggest here that this conception, while empirically valid, is at once both too narrow and incapable of explaining why the current Administration, with the mighty wind of a once-in-a-generation financial system collapse and the massed voices of millions of pitchfork-toting Americans at its back, has been unable to deliver a policy document which is worthy for use as anything other than toilet paper in the visitors' restrooms on Capitol Hill. Rather, in order to understand this epic regulatory fail, we need to broaden our concept to encompass the idea of complete inside-the-Beltway capture.

Forget the no doubt significant fact that substantial portions of the Administration's regulatory proposals were authored by products of a government-to-industry-to-government merry go round like Hank Paulson, Larry Summers, and Tim Geithner. Forget the fact that the Administration is said to have consulted heavily with industry participants and lobbyists for input on proposed regulations. No, what really matters at the end of the day is that the Commodity Futures Trading Commission is overseen by the House and Senate Agriculture Committees.

"Agriculture committees?," you say, "You're shitting me, right?"

Sadly, no, I am not shitting you.

* * *

You see, the story goes that the West Wing politicos read the tea leaves and figured out that the most important and effective thing they could do to reform financial regulation in this country—consolidate the current alphabet soup of ineffectual, overlapping, squabbling bureaucracies into a coherent, unified agency that would be able to regulate entities across markets and industry subsectors according to what they do, as opposed to what they are—was politically impossible to get through Congress. Too many Congressmen and Senators have made a lifetime meal ticket out of the industry lobbying and political contributions that come from the financial sector, and too many have accumulated meaningful institutional leverage within their legislative bodies by virtue of membership on powerful regulatory oversight committees. Through various historical accidents and parliamentary shenanigans over the years, oversight of the grab bag of financial regulators has gravitated toward a host of separate and often competing Congressional committees. There is no way on God's green earth that any Congressman in his or her right mind (or the rest of them, for that matter) would give up that kind of political power voluntarily.

And, notwithstanding concerted efforts by certain elements of the conservative press to the contrary, Congress has largely escaped blame for the situation we find ourselves in. Sure, there are good arguments that political and legislative agendas over the past decades helped contribute to the financial sector pile-up we have just lived through. But let's face it: no-one in this country honestly believes their Congressman or Senator knows anything about finance, derivatives, or the capital markets. Based on recent evidence, it would take a heroic effort to convince them otherwise (and you would still have to explain Maxine Waters). No knowledge, no culpability. Congress has gotten off largely scott-free.

But this is the problem. If the voting public truly believed Congress had been an integral part of the problem, the Administration would have a legitimate political rallying point and enough momentum to push through a regulatory plan that entails a parallel shake-up in the committee oversight apparatus in Congress. We might have ended up with a plan that combined the regulation of securities with the regulation of their siamese twins, derivatives, in the form of a merged SEC and CFTC. Instead, the only existing regulator to get the axe is the pathetically underpatronized and unprotected Office of Thrift Supervision. Good riddance, I say, but it's sad that it has to take the pipe alone.

So here we are, with a proposed Administration reform which leaves the regulation of derivatives—the most complicated, sophisticated, and dangerous financial instruments we have, and ones which have enjoyed the least supervision and created the most havoc of any such instruments out there—firmly under the purview of an agency which is overseen by a bunch of tobacco-chewing, cowboy-hat-wearing hayseeds. Hayseeds, by the way, whose brilliance and incorruptible devotion to economic welfare and the public good has been demonstrated by their support of corn ethanol and agricultural subsidies. Fucking socioeconomic geniuses, these guys.

* * *

I have said it before: if you want to regulate financial geniuses, you had better employ some of your own. It'll cost you, but it will work. Otherwise, you are stuck with trying to control international drug dealers with helicopters, numbered Swiss bank accounts, and high-powered machine guns by using broken-down beat cops with bad knees and rusty six shooters. Law enforcement and the military have figured it out: you need elite units with state-of-the-art training, weapons, and esprit de corps to tackle the nastiest, smartest villains. When will it occur to the dim bulbs charged with supervising our financial system that they need the same set-up?

Apparently that is a bridge too far for these times. From all indications, whatever political momentum the Administration anticipated for financial reform has already begun to dissipate, even for the pathetically watered down trash they offered up yesterday. Barring some additional financial catastrophe, it appears that we will be stuck with even more ineffective bullshit regulation in the future.

Which, frankly, is just fine by me. As I said, I would have much preferred a more streamlined, effective, and efficient financial regulatory regime. Better regulations and rules not only would have helped create a healthier financial system for all of us, but also would have made the regulatory burden for the majority of us in the industry who try to make an honest living less stupid, inefficient, and nettlesome. Smarter and more effective regulators would be quicker and easier to deal with, and could actually speed and guide industry innovation for everybody's benefit. Enlightened and knowledgeable Congressional oversight could help regulators adapt and respond to inevitable changes in industry structure and environment. And actually appearing like we know what the fuck we are doing for a change might inspire other countries around the world to cooperate more closely with us in developing coherent international regulatory regimes.

But investment bankers adapt. Change is the water we swim in, the air we breathe. We will adapt to whatever stupid new regulations and incompetent, undertrained, overmatched new regulators you throw at us. And we will come out on top, as always.

It's just too bad we're gonna have to charge you extra for the added headache.

© 2009 The Epicurean Dealmaker. All rights reserved.

Saturday, June 13, 2009

Weekend Math Lesson

Try to imagine the awful meaning of this. You have often seen the sand on the seashore. How fine are its tiny grains! And how many of those tiny little grains go to make up the small handful which a child grasps in its play. Now imagine a mountain of that sand, a million miles high, reaching from the earth to the farthest heavens, and a million miles broad, extending to remotest space, and a million miles in thickness; and imagine such an enormous mass of countless particles of sand multiplied as often as there are leaves in the forest, drops of water in the mighty ocean, feathers on birds, scales on fish, hairs on animals, atoms in the vast expanse of the air: and imagine that at the end of every million years a little bird came to that mountain and carried away in its beak a tiny grain of that sand. How many millions upon millions of centuries would pass before that bird had carried away even a square foot of that mountain, how many eons upon eons of ages before it had carried away all. Yet at the end of that immense stretch of time not even one instant of eternity could be said to have ended. At the end of all those billions and trillions of years eternity would have scarcely begun. And if that mountain rose again after it had been all carried away, and if the bird came again and carried it all away again grain by grain: and if it so rose and sank as many times as there are stars in the sky, atoms in the air, drops of water in the sea, leaves on the trees, feathers upon birds, scales upon fish, hairs upon animals, at the end of all those innumerable risings and sinkings of that immeasurably vast mountain not one single instant of eternity could be said to have ended; even then, at the end of such a period, after that eon of time the mere thought of which makes our very brain reel dizzily, eternity would have scarcely begun.

— James Joyce, A Portrait of the Artist as a Young Man 1

You can't see the stars in New York City. But you still have your imagination.

And James Joyce.

1 James Joyce, A Portrait of the Artist as a Young Man. New York: The Viking Press, 1978, pp. 131–132.

© 2009 The Epicurean Dealmaker. All rights reserved.

Friday, June 12, 2009

Calling Cloud-Cuckoo-Land

Tereus: "So why have you come here? What do you need?"
Euelpides: "To talk to you."
Tereus: "What for?"
Euelpides: "Well, you were once a man, as we are now.
You owed people money, as we do now.
You loved to skip the debt, as we do now.
Then you changed your nature, became a bird.
You fly in circles over land and sea.
You’ve learned whatever’s known to birds and men.
That’s why we’ve come as suppliants to you,
to ask if you can tell us of some town,
where life is sheepskin soft, where we can sleep."

— Aristophanes, The Birds

I suppose I do admire Evan Newmark on some level.

I mean, the former Goldman Sachs investment banker and current Mean Street commentator for The Wall Street Journal certainly sticks to his guns. Free markets, in his opinion, are the ne plus ultra for allocating and distributing economic goods, government interference in free markets is always and everywhere bad or doomed to failure, and government officials, while occasionally smart and/or well-intentioned, can't help but make things worse by their officious intervention. (Unless, of course, such officious, high-handed interference is directed by the former CEO of his previous employer, in which case he judges the man and his actions to be unqualifiedly "heroic.")

But on a more important level I find the man remarkably out of touch. To my experienced ear, he sounds like nothing so much as a throwback to another era, an investment banker of the 1990s and early 2000s who was raised, trained, and promoted in an industry environment which has gone the way of the Dodo bird. I find his fire-breathing defense of untrammeled markets and breathtaking sense of personal entitlement sort of charming, really, like an awkwardly posed sepia portrait from another age. It makes me feel warm and fuzzy inside, like any good piece of nostalgia.

But nostalgia usually makes for bad policy. And, in Mr. Newmark's case, some sadly risible commentary.

* * *

My thoughts turn this direction this afternoon in response to a piece Mr. Newmark penned concerning the appointment of Kenneth Feinberg as the Treasury's “Special Master of TARP Executive Compensation.”

Mr. Newmark does offer a couple nods to Mr. Feinberg's presumed intelligence and demonstrated experience in tackling thorny compensation issues. But he is skeptical that this experience will serve as adequate preparation for the task at hand:

Now, if there’s anybody who can figure this out, it should be Mr. Feinberg. He managed the unmanageable in his 33 months doling out $7 billion of the September 11th Victim Compensation Fund.

But setting pay for the TARP executives will prove much trickier than dispensing monies to the families of 9/11 victims. And that’s because — pardon my bluntness — the execs are living and the 9/11 victims were dead.

In the case of the 9/11 Fund, Mr. Feinberg applied a rigorous quantitative method to come up with a pretty generous payout to each victim’s family. It was largely a static calculation of an extraordinary, one-time payout.

Now, if Mr. Newman means to imply that having almost unlimited power to divvy up a fixed and unchanging compensation pool one time is an easier task than working with the management of TARP banks to set ongoing compensation for their executives, I have to say I agree with him. But that is a trivial and obvious point, and I do not think he means to limit himself to just that objection. He clearly thinks setting compensation for senior executives in the banking industry is a whole other order of magnitude more difficult than that.

He is supposed to determine “appropriate” pay — but good luck defining that.

Of course, Mr. Feinberg will try and come up with some formulas. But the permutations are endless. Look at all the differences in job responsibilities, titles, reporting lines and lines of businesses among the top 700 execs.

Then look at all the existing differences in the size and mix of compensation — the endless variations in salary, bonus, benefits, tenure, lockups, termination clauses, mixes of cash and stock and multi-year vesting schedules.

Finally, consider that this is annual compensation set in an ever-changing competitive marketplace for high-priced talent.

You see, Dearly Beloved: setting compensation for the most privileged and highly compensated executives of one of the most hated industries in America is so much more complicated than communicating the monetary value of a life to the very much alive and grieving relatives of a bunch of publicly lionized terror victims.

Notwithstanding whatever Mr. Newmark's personal experiences were in the conference rooms where he learned of his bonuses over the years, I can guarantee him there is no more fraught and potentially contentious conversation you can have than putting a dollar value on the violently extinguished life of a spouse or a child with that victim's family. And Mr. Feinberg apparently had both the good sense and the intestinal fortitude to come up with a compensation plan that took into account age, relative lifetime earning power, and other distinguishing characteristics, rather than taking the easy way out and paying the relatives of a widowed 63-year old janitor the same as the family of a 28-year old bond trader with a wife and three kids. I do not think Mr. Feinberg will have trouble dealing with complexity, differentiation, and nuance in his job.

And that's another thing. Why would Mr. Newmark assume that Mr. Feinberg plans to cram the endless variety of job function, profitability, and management responsibility among these investment banking executives into some sort of formula(s)? What is to prevent him from discussing, negotiating, and codifying some set of broad principles instead? It's not like he has been given a $7 billion pot of money which he has to allocate to the last penny among a fixed number of claimants, for pete's sake.

Measuring the effectiveness of investment banking management is just not that complicated, when you cut through the crap. You make money, you risk capital, you supervise people, and you build culture. With the potential exception of the last item, all these tasks can be measured pretty easily. So measure them, and pay based on results. Then, overlay on top of annual compensation the idea of deferred pay, which serves the dual function of aligning the manager's interests more closely with those of shareholders and other stakeholders and strengthening the manager's ties to that organization. Bingo. Two principles, six objectives. Simple. Job sorted.

The "endless" permutations and variations in responsibility and pay which Mr. Newmark cites as reason for the impossibility of Mr. Feinberg's task are just bullshit. That is the traditional perspective of a traditional investment banker, who has spent his entire career screaming at the top of his lungs how he is unique, how he is better than his peers, and how he goddamn well better be paid 100% more than the next highest paid guy or he's gonna walk out the door stat. Bullshit, bullshit, and more bullshit. Investment banking is a commodity business, and investment bankers are almost always nowhere near as special as they would like themselves or their compensation committees to believe. They make lots of money because they are in an industry which makes a lot of money. The problem is, they quickly begin to believe they make as much as they do because they are worth it, they are that good. It's like the entire industry is comprised of squeaky wheels constantly squealing for more grease.

* * *

You know who I bet is most looking forward to the arrival of Mr. Feinberg on their doorstep? TARP bank Executive Committees and Boards of Directors, that's who.

These are the people who have had to deal with these overbearing prima donnas for years, and I can guarantee you that nobody likes that job. Wouldn't top management just love being able to tell Mr. Big Swinging Dick that he can't have a compensation package that falls outside the rules Mr. Feinberg has laid down? I know I would. Sure, you might lose a few good bankers to Deutsche Bank, or some other empire-building pack of yahoos who think buying a few dozen high-priced investment bankers will get you up to the level of Morgan Stanley or Goldman Sachs in a couple years. But a) there aren't enough seats in the shrinking industry for all the would-be BSDs to fill anyway, and b) the empire-building yahoos never pose as much of a threat as you fear or they hope. They may make some money for a few years, but they almost never build a sustainable culture, and they usually end up losing their shirts and firing all the washed up rainmakers they poached from their betters. By that time, of course, the bank Mr. BSD jumped from has filled his seat with a younger, cheaper replacement who is just as effective.

There is nothing a negotiator likes more than having a credible excuse that his hands are tied when it comes to certain items. "Sorry, man, I'd love to give you a 1/16 share of the company jet as part of your package, but those government bastards just won't let me. [Snicker]"

And, like most of his former peers in the industry, Mr. Newmark seems to be unaware (or in denial) that most investment bankers are price takers when it comes to compensation packages. Only the top guys get any leeway in writing their own ticket. The rest of us get stuffed with complicated tranches of deferred stock and options, incomprehensible termination clauses, and unconscionable lockup provisions because that's what our employer offers. Any system which could help simplify industry pay practices would not only benefit employees mightily, it would reduce the enormous clerical and legal burden investment banks carry simply administering their boilerplate gobbledegook.

Lastly, for someone who is as fierce an advocate of free labor markets in banking as he is, Mr. Newmark seems to have surprisingly little faith in their robustness. Else, how can he claim that

on Wall Street, decisions at the top flow straight through to the bottom. Compensation is a pyramid. Start tinkering with the pay of the CEO and his lieutenants, and soon the pay of the vice-presidents and associates gets cut.

Uh, no. Even if there are explicit limits set on the pay of senior executives, why would the market laws of supply and demand automatically be repealed for lower level bankers not subject to constraints? It strikes me that Goldman Sachs and Morgan Stanley had better pay competitive market wages for their Analysts, Associates, Vice Presidents, and non-executive Managing Directors—no matter how few millions Lloyd Blankfein and John Mack take home—or their precious franchises will begin to wither away pretty damn fast.

I have no idea what plans Mr. Feinberg may have regarding his position, and what principles or rules he may or may not impose. His admirably rational conduct during the highly public, emotionally fraught process of compensating the September 11 victims gives me great comfort that he is neither a wealth-leveling redistributionist nor a wild-eyed socialist bent on destroying the banking industry. If, however, he intends to undertake what Mr. Newmark calls "the thankless and impossible task of replacing the free market," then he is indeed a fool sent on a fool's errand. I see no evidence of that, but we will just have to see.

In the meantime, the fact that what comprises "competitive" wages is declining in the banking industry has nothing to do with regulation, and everything to do with declining industry profitability. In other words: supply and demand. Evan Newmark should be proud.

* * *

Just for fun, I will leave you on a provocative note. Those free marketeers who have stuck with me this far have the opportunity to get even more riled up over the weekend.

I would not suggest that Mr. Feinberg or anyone else in the Obama administration has such intentions, but I would note that broad based compensation principles might be used in a larger policy context than simply palliating voter anger and (hopefully) mitigating excessive systemic risk. For instance, much has been made of the concept of banks which are considered "too big to fail." If, in fact, there is an urge to limit the size and systemic importance of any one financial institution in the marketplace, perhaps the concept of an industrywide salary cap is worth exploring. I think it would have to have some tie to industry revenues, since presumably no-one wants to limit those ex ante, but it should also be tied to profitability. I am sure there are all sorts of unintended consequences which could arise from such a policy—of which the devoted sports fans among my audience could no doubt enlighten me—but properly structured it might be a very neat way to let free market forces operate relatively untrammeled within the confines of overarching economic policy limits.

Consider: Instead of one Goldman Sachs, one Citigroup, and one Wells Fargo, we could have 50 or 60 little Salomon Brothers, Bank Ones, and EF Huttons. Just think of the sponsorship opportunities!

I encourage fans of Ayn Rand, Karl Marx, and the New York Yankees to discuss this amongst yourselves. I would be happy to join you, but I am afraid I have a previous commitment.

© 2009 The Epicurean Dealmaker. All rights reserved.

Wednesday, June 10, 2009

Hammer and Tongs

Slumped by the courthouse
With windburned skin
That man could give a fuck
About the grin on your face
As you walk by, randy as a goat.
He's sleepin' on papers
But he'd be warm in your coat.

— Romeo Void, Never Say Never

The Supreme Court waved through the Administration's sale of Chrysler to Fiat today. For the moment, the pillars of the Republic seem to have withstood the blow. As of this morning, the secured lending market has completely failed to implode, and I am reliably informed that the sun ignored the hullabaloo and rose in the East according to plan. Meanwhile, all those wailing and gnashing their teeth these last few weeks about the onrushing juggernaut of creeping socialism and crypto-fascism seem to have swallowed their tongues and are busy inspecting their fingernails.

It is likely that this silence is simply a temporary reprieve, a pause for breath before the larger struggle looming over the reconstitution of General Motors. Call me naïve, but I would like to believe it also has some little relation to the fact that the conflict between government policy and the rights of private capital in this instance has had a full hearing under the rules set up by the Constitutional checks and balances of our tripartite political system. I also take comfort that the final decision not to forestall the Administration's actions came from a body of life-tenured jurists, none of whom owe their appointments or their ongoing authority to this selfsame Administration.

This will not satisfy the naysayers, however. I would be disappointed if it did. Genuine lawyers and law professors—as well as commentators whose credentials appear to have been gleaned from a cursory reading of Wikipedia or the Napoleonic Code—continue to differ on the legality of the methods the Administration used to rescue the automakers. I pretend no definitive expertise in this area. I will only note the oft-overlooked truism that our current legal system relies on opposing arguments by committed advocates to settle legal disputes. Said simply, lawyers argue. That is their job. They do not pursue some elusive and unchanging truth: they try to win.

Similarly, I have made the point before that dealmakers do not seek some elusive and unchanging truth about value, or its proper allocation among competing claimants: they negotiate. Strangely, this concept seems to be a difficult one for many people to grasp, even some who clearly should know better.

* * *

For what it's worth, I myself have severe doubts about the wisdom, sustainability, or eventual economic success of the Government's current attempts to rescue the US automaker industry. I tend to think it is bad economic policy. However, I also understand that economic policy is not what is driving the government's actions in this case. It is politics, pure and simple.

Preserving tens if not hundreds of thousands of jobs counts for a lot of votes in any Congressional or Presidential election, which is one very important reason why successive governments in this country—Republican, Democrat, and mixed—have not done more over the past four decades to fix the problem. Now that Chrysler and GM have driven themselves into a ditch, upside down with wheels spinning, I can only hope someone figures out how to prevent their rescue from becoming a permanent ongoing taxpayer-funded wealth transfer to the state of Michigan from the other 49.

* * *

There is a larger issue at hand, however.

As a theory of political economy and a socioeconomic ideology, financial capitalism is beating a hasty retreat all over the globe. The reasons for this should be clear: while it alone has not been responsible for all of the sources and effects of the late financial meltdown and the ongoing global recession, it certainly has taken a central role, and it has utterly failed to cover itself in glory during recent events. The countervailing forces of regulation, government control, and wealth redistribution have roused themselves from their long slumber, and they are both cranky and hungry. It would be hard to find anyone outside the cloistered confines of finance and investment who believes in free and untrammeled markets anymore.

More importantly, vast swathes of ideologically uncommitted citizens who were happy to drink the free market Kool Aid when it justified, encouraged, and helped pay for a standard of living they could not otherwise afford now view anyone from the finance sector with as much enthusiasm as a dose of the clap. The challenge for those of us who work in the ways and byways of the industry is that these former friends—added to the dyed-in-the-wool enemies of capitalism from the left and elsewhere—vastly outnumber our own relatively meager numbers. Politics, for those of you who need reminding, is definitely a numbers game.

I have argued elsewhere that the Administration's actions in ramming an accelerated sale of Chrysler down the throats of other creditors were not actually driven by a desire to change the rules of the game. I still believe this to be true, and I view both Chrysler and GM as special cases motivated by special circumstances which even the government has no intention of repeating. I could be wrong. Only time will tell.

But I may in fact be even less sanguine that some who have argued against me that the current rules of the game in our economy will remain unchanged. I believe there is great pressure from many quarters for a sustained reworking of the ground rules in this economy, with greater regulation, less financial freedom, and more equal distribution of wealth highest on the agenda. Equity, for a change, has come to replace efficiency as the most important god in our socioeconomic pantheon.

This is why I think the forces who are waging a rearguard action against what they see as unconscionable attacks by the government on (what they define as) the rule of law are completely missing the point. There is nothing fixed and immutable about the law, or its interpretation, or even the weight which a society gives to legal precedent in arbitrating important political and economic disputes. Law, and the rules of the game in general, are being reshaped as we speak. Nowhere is it written that they cannot be.

I stand with those who believe that both capitalism and democracy are each the least bad of a set of far worse solutions to organizing economic and political activity, respectively. But that does not mean that democracy and capitalism are completely compatible, or that they cannot become antithetical to each other under certain circumstances. We find ourselves in such circumstances now.

It is time for those of us who value both to stop whining about the good old days, engage with our critics, and help hammer out a new solution, before a new solution is hammered out for us.

I personally have no ambition to become an anvil or a nail.

© 2009 The Epicurean Dealmaker. All rights reserved.

Tuesday, June 2, 2009

These Dark Satanic Mills

And did those feet in ancient time,
Walk upon Englands mountains green:
And was the holy Lamb of God,
On Englands pleasant pastures seen!

And did the Countenance Divine,
Shine forth upon our clouded hills?
And was Jerusalem builded here,
Among these dark Satanic Mills?

Bring me my Bow of burning gold;
Bring me my Arrows of desire:
Bring me my Spear: O clouds unfold:
Bring me my Chariot of fire!

I will not cease from Mental Fight,
Nor shall my Sword sleep in my hand:
Till we have built Jerusalem,
In Englands green & pleasant Land.

— William Blake, Preface from Milton: A Poem

"You never want a serious crisis to go to waste. What I mean by that is it's an opportunity to do things you think you could not do before."

— Rahm Emanuel, interview, November 19, 2008

As a young investment banker coming up in the business, I remember absorbing industry maxims on the knee of my superiors and mentors, like a wolf cub suckling at its mother's teat. Many of these had to do with what Martin Luther King called, in another context, the "fierce urgency of now:"

"Make hay while the sun shines."

"Strike while the iron is hot."

"Opportunity has a short shelf life."

and (my favorite)

"It's almost always better to make a good-enough decision now than a better decision two weeks from now."

Of course, these maxims make sense in investment banking, where the pace of activity varies unpredictably between mind-numbing stretches of utter boredom and frantic, 72-hour sprints of panicked frenzy. Investment banking is a cyclical business, and windows of opportunity, for both capital markets and M&A, come at unpredictable intervals of uncertain duration. If you want to make money, you work like mad when there is work to do and chew your fingernails when there is not. Drycleaning, proper nutrition, and marital harmony be damned.

Being investment banking maxims, these clichéd little nuggets are also self-serving in the extreme. We always urge our clients to do the deal now: before the market window closes; before their competitors catch wind of their actions; before our engagement letter expires. It is always easier to convince a client to act when the pressure of opportunity or of events is plain for all to see. It takes a consummate salesman—and the right set of supporting circumstances—to get the client to commit when the proximate reasons to act are invisible to all but the investment banker.

For let us not kid ourselves. The decisions an investment banker encourages his client to take, and the actions he helps him complete, are almost always fraught with significant peril, as well as potential reward. Capital raising can go bad, due to general market swoons or issuer-specific calamities, and an M&A deal can devolve into a mud-splattered clusterfuck before or after the closing documents are signed. While the deals investment bankers do are routine to them, the clients for whom an IPO, a bond offering, or a sale or acquisition are not life altering events are few and far between. Every CEO who is not an incompetent yahoo has second thoughts, and it is the banker's job to stiffen the CEO's spine and polish his wingtips for the Monday morning speech announcing the deal to the Street.

Inertia is strong, O Dearly Beloved, and the temptation to leave well enough alone, to tinker around the edges of a problem rather than confront it head-on and tear it out by the root, is a universal human inclination. When a client finally decides to do something requiring our help, it is an investment banker's job not only to do the damn thing, but also to make sure our precious client does not chicken out. In such situations, I always find it helpful—if not a damn precondition—to have a conveniently looming crisis to point to as further spur to taking the irrevocable plunge.

* * *

All of which is to say that I agree wholeheartedly with President Obama's Rottweiler Rahm Emanuel that it would be shame to let the current crisis in our financial system go to waste, and not confront the hairy problem of reforming the financial regulatory system head on.

The mainstream media is full of stories outlining, in nauseating detail, the expanding dimensions of just exactly how fucked up our financial regulatory system was and is. The SEC is an understaffed, woefully overmatched collection of good-hearted nebbishes who have neither the skill, experience, nor political support to monitor the sharks on steroids nominally under their supervision, much less investigate and prosecute misbehavior if and when they find it. The rules they impose on capital markets and investment banking are not only laughably inadequate to the task of regulating the new markets and new securities which have sprung up in the 75 years since they were first written, but also ludicrously bureaucratic and nitpicking on the historical industry practices they do recognize.1

The ongoing existence of the SEC, which supposedly regulates securities, and the CFTC, which supposedly regulates derivatives and other financial investments, as separate entities has no ready explanation other than bureaucratic inertia and political turf wars in Congress. As a secondary notion, the idea of merging these two entities makes eminent sense, assuming, of course, one discards the best solution, which would be to burn each of these monuments to ineptitude to the ground and salt the earth they stand upon.

Meanwhile, the cleverboots in the banking industry have already picked themselves up and dusted themselves off from the 50-car pile-up they drove the economy into. They are sending an army of lobbyists and campaign contributors into the halls of power to make sure any new rules imposed on them are both toothless and rigged in their favor. Congressmen and -women, most of whom couldn't balance a checkbook if you gave them a fucking jeweler's scale, are no match for smooth-talking operators purring about the need to preserve "innovation" and "efficiency" in the market. This is not even to mention the inevitability of regulatory capture, when underpaid government bureaucrats try to supervise their former and future private sector employers who make, on average, about fifty gazillion times more money than they do.

So I am with Bob Teitelman, who worries that all this CNBC advertising budget-driven drivel about "green shoots" in the economy is letting a once-in-a-generation opportunity to craft a robust, long-lasting regulatory regime for the new financial reality slip away, and against those who urge slowness and caution. These latter argue that we should not rush into anything, since we are likely to make mistakes in forming a new regulatory system in haste, and generate all sorts of unintended consequences.

I say fuck it. Kill 'em all and let God sort 'em out. Wipe the slate clean and start over with some broad principles and some smart, well-paid technocrats and ex-investment bankers who can figure it out on the fly. Let them hire killers and mercenaries who are smart enough not only to enforce existing rules, but also anticipate those areas and practices that will require regulation in the future. How do you think the financial sector itself manages its own business?

Let us not forget that the perfect is the enemy of the good. And let us not kid ourselves that we have any chance whatsoever of creating a "perfect" regulatory system. This is an ongoing project, people: we will be allowed to remodel. The point is to get started now.

I do not expect a New Jerusalem on Wall Street. But I sure as shit would like to see something better than a Motel 6.

1 Explain to me, for example, why an M&A banker selling a corporate division of General Electric Corporation to private equity titan The Blackstone Group—two of the most sophisticated institutional entities you can possibly imagine—is subject to the same registration and reporting requirements as a stockbroker selling variable annuities to Aunt Millie in Little Rock, Arkansas. One-size-fits-all broker dealer requirements are a historical anachronism as well as a fucking travesty.

© 2009 The Epicurean Dealmaker. All rights reserved.