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.