Monday, December 30, 2013


Ansel Adams, Oak Tree, Snowstorm
Whose woods these are I think I know.
His house is in the village though;
He will not see me stopping here
To watch his woods fill up with snow.

My little horse must think it queer
To stop without a farmhouse near
Between the woods and frozen lake
The darkest evening of the year.

He gives his harness bells a shake
To ask if there is some mistake.
The only other sound’s the sweep
Of easy wind and downy flake.

The woods are lovely, dark and deep,
But I have promises to keep,
And miles to go before I sleep,
And miles to go before I sleep.

— Robert Frost, “Stopping by Woods on a Snowy Evening

Happy New Year, my friends. May you find satisfaction in your duties, joy in your pleasures, and sufficient occupation in both.

© 2013 The Epicurean Dealmaker. All rights reserved.

Tuesday, December 24, 2013

Greatest Hits of 2013

Okay, so maybe they’re not all masterpieces.
Tho’ much is taken, much abides; and tho’
We are not now that strength which in old days
Moved earth and heaven, that which we are, we are;
One equal temper of heroic hearts,
Made weak by time and fate, but strong in will
To strive, to seek, to find, and not to yield.

— Alfred, Lord Tennyson, from “Ulysses

Once again, O Dearly Beloved, it is time to look back on the year just ending to see if we can draw any useful lessons. As usual, I am drawing a blank. I tend to find such annual retrospectives uninteresting, since in my experience that which is meaningful in life does not come prepackaged in neat, calendar-year-sized chunks. Nevertheless, through the page ranking magic of Google Analytics, at least I have the ability to share with you those ten posts which you, My Most Attentive and Discerning Audience, have anointed the most popular of my works in Anno Domini Two Thousand and Thirteen.1

This is the seventh year I have maintained this site, with greater or lesser diligence as the spirit moves me and non-blogging obligations allow. Seven years is a long time in any relationship, as marital psychologists and Tom Ewell alike can tell us. We will see in the coming year whether you and I can sustain our little pixellary romance, or whether like all good things this relationship must come to an end. I make no promises other than to be myself.

But do not think of that now. Look back on 2013 and revisit the year’s greatest hits, as determined by you. Enjoy.

THE CANON, 2013 Edition:

1) Curriculum Vitae
(March) — Your clear favorite. A career précis for young investment bankers which lays out the path from wet-behind-the-ears tyro to grizzled old veteran in corporate finance and M&A, with summary descriptions of the roles and responsibilities at each step along the way. Any silly young fool who wants to join my industry after having read my scribblings over the past seven years should absorb this piece as a final gut check. If you still want to become a banker after that, well, then you are beyond my emendation.

2) The Invention of Leisure (November) — Goldman Sachs, Great Vampire Squid of yore, confused many an observer when they recently instituted a policy which for all intents and purposes appears to treat its most junior investment bankers as a species of near-human. I explain why this is neither as humane nor as sustainable as it may appear, and remind my attentive readers that, in my industry, “it is always the human beings who are taken out behind the woodshed and shot first.”

3) Go Ask Alice (September) — In which Your Ever Patient Guide to Financial Markets uses the occasion of an impending IPO for an obscure ornithologically-themed message service to explain, for the umpty-goddamnedth time, just how initial public offerings work. I’m sure it had no effect on the bullheaded financial commentariat this time, either, but I published it anyway. Call me stubborn. I’ve been called worse.

4) Mr. Indispensable (May) — Wherein I propose with animated language that the Grand Poobah of überbank J.P. Morgan, Jamie Dimon, be stripped of his Chairmanship for having done an absolute crap job at it. A few of you read it, but absolutely none of you did anything about it. Story of my life.

5) In Praise of Jargon (April) — In which I take the occasion of a sneering, uncomprehending excoriation of business jargon to “reach my hand across the gaping divide between those who work for a living and those who cannot understand why they have to to proffer a little gentle education.” I also seize the opportunity to take a few cheap but deserved potshots at British English, while I’m at it. Chomskyan giggles all around.

6) Go Ahead, Live a Little (May) — Do investment bankers take sabbaticals? Hell. The fuck. No. This piece explains why not.

7) To Whom It May Concern (August) — “Most of what happens to individual investment bankers can be boiled down to being in the right (or wrong) place at the right (or wrong) time.” Luck favors the prepared, but preparation is no guarantee. Good luck, children.

8) A Photograph, Not a Circuit Diagram (January) — Wherein Your Humble Correspondent attempts to puncture some recent hysteria about bank accounting and explain that, no, the impression it conveys that banks are scary, opaque, and complex is exactly correct, salutary, and entirely the point. I suspect my missile sailed far over the heads of its intended target, but hey, it gave me a chance to string together some more words. As I do.

9) Skin in Which Game? (February) — Apparently unsatisfied with picking twitter fights with economists, financial commentators, and other riffraff, a certain author and aficionado of heavy rock lifting and public attention decided to attack Yours Truly for the veil of pseudonymity which I bear in this public forum. I responded with a balanced explanation of my longstanding rationale, which no doubt failed to satisfy the aforementioned interlocutor. Upon reflection, I discover that I could not give a rat’s ass whether it did or not.

10) Our Glassy Essence (October) — Wherein Your Friendly Would-Be Epistemologist turns his skeptical eye upon scientists, specifically those who claim that science has killed philosophy. I explain that no, Philosophy is not dead, but rather is sneaking up behind Science at this very moment to kick it in the balls.

* * *

Finally, lest you think me concerned solely with popularity, here are a couple more cognate posts published this year which the procrastinators and neurotically obsessive among you might find entertaining, notwithstanding their failure to pierce the top ten. Given the weakness in the overall market, I’m afraid this is all the bonus most of you are going to get this year. And no, you can’t sell it for three years.

Bonus Twaddle, Time Wasters, and Suchlike:

10 Reasons I’m Not Posting Anymore (August) — About as detailed an explanation as My Loyal But Disappointed Readers will ever receive for the paucity of my posting in this opinion emporium, sadly. Innumerate, too.

Wherein Your Droll, Semi-Victorian Bloggist Jumps the Shark (January) — Some eager young beaver from the seething cesspit of the cultural avant-garde—Brooklyn, New York—interviewed me on behalf of his bearded, literary, plaid-shirt-wearing audience for some inexplicable reason. While the experience is unlikely to get me to trade my lion skin for skinny jeans and a goatee, you might find it amusing.

Pip-pip, and all that. Happy 2013.

1 As I have explained before, the Google Analytics data is necessarily incomplete and potentially unreliable, as they miss the actual eyeballs harvested by each respective post from the far greater numbers of people who simply visited the home page of this humble opinion emporium when they were first posted. But let us presume, entre nous, that this ranking is fit enough for purpose here, shall we?

© 2013 The Epicurean Dealmaker. All rights reserved.

Saturday, December 7, 2013

The Parting Glass

Georges de la Tour, The Magdalen with the Smoking Flame, 1640
Happy families are all alike; every unhappy family is unhappy in its own way.

— Leo Tolstoy, Anna Karenina

To the living we owe respect, but to the dead we owe only the truth.

— Voltaire

Curatio funeris, conditio sepulturae, pompa exsequiarum, magis sunt vivorum solatia, quam subsidia mortuorum.

— St. Augustine, Civitas Dei 1

* * *
Michel de Montaigne writes of the duty we owe to princes:2
We owe subjection and obedience equally to all kings, for that concerns their office; but we do not owe esteem, any more than affection, except to their virtue. Let us make this concession to the political order: to suffer them patiently if they are unworthy, to conceal their vices, to abet them by commending their indifferent actions if their authority needs our support. But, our dealings over, it is not right to deny to justice and to our liberty the expression of our true feelings, and especially to deny good subjects the glory of having reverently and faithfully served a master whose imperfections were so well known to them, and thus to deprive posterity of such a useful example. And those who out of respect for some private obligation unjustly espouse the memory of a blameworthy prince, do private justice at the expense of public justice.
One could say the same about parents, with minor modifications. Part of growing up is becoming aware that one’s parents are human beings, with all the flaws attendant thereto, not the omnipotent and omniscient gods of our infancy. This, speaking from my personal experience, can be quite a blow, especially if the revelation is received early enough in one’s life.

My father was a brilliant engineer, troubled by his blue collar origins. He struggled to make his way through life with, as he put it, one foot in the world he came from and one foot in the present. His family did little to help him. My mother was brilliant, too, in her own way, and struggled with different demons incubated in the privileged upbringing of her family. Their marriage early produced me, too early really for a man and woman not far removed from childhood themselves. It did not last long. I was raised an only child of divorced parents who struggled separately to be parents, and who only partially succeeded. The timeline and details do not matter here—for my life is not a commonwealth I share with others to whom I owe a duty of honesty, outside my immediate family—but suffice it to say I became estranged from both my parents. Age and distance, sadly, did not improve our relationships.

My father died many years ago, succumbing finally to the demons he never fully escaped. My mother died within the past two weeks. I have not been overwhelmed with grief, for estrangement acts as a kind of grieving itself, sapping the heart of love, delight, and admiration in slow anticipation of the final separation of death. I am sad she is gone, of course, because she was my mother. You cannot help but love your mother, no matter how worthy you think she may have been as one.

* * *
They say as you grow older you become your parents. I am no spring chicken, but I have not seen this yet. Of course I have some of their flaws (or at least those flaws I am aware of) in addition to my own, but I have spent a great deal of effort trying to become a better man and father in reaction to the mistakes I saw my parents make. Let us say, then, that one grows in reaction to one’s parents, good or bad. My efforts, good or ill, will be judged in time by my own children.

In the meantime, I have made peace with my parents in my heart. If nothing else, they meant well, and they tried to do what they thought was right. We can ask little more, even of ourselves.

I am not here to render public justice. And as for private justice, there is only love.
But since it has so ordered been
A time to rise and a time to fall
Fill to me a parting glass
Good night and joy be with you all.
So good night and joy be with you all.

— Traditional, The Parting Glass

Goodnight, Mom and Dad. May flights of angels sing thee to thy rest.

1 “The arranging of funerals, the conditions of burials, the pomp of obsequies, are rather a consolation for the living than any help to the dead.” (Trans. Michel de Montaigne, “Our Feelings Reach Out Beyond Us.”)
2 “Our Feelings Reach Out Beyond Us," The Complete Works, Trans. Donald M. Frame. New York: Alfred A. Knopf, p. 10.

© 2013 The Epicurean Dealmaker. All rights reserved.

Friday, November 29, 2013

Holiday Weekend Interlude

Pieter Bruegel the Elder, Hunters in the Snow, 1565
The kingfisher rises out of the black wave
like a blue flower, in his beak
he carries a silver leaf. I think this is
the prettiest world—so long as you don’t mind
a little dying, how could there be a day in your whole life
that doesn’t have its splash of happiness?
There are more fish than there are leaves
on a thousand trees, and anyway the kingfisher
wasn’t born to think about it, or anything else.
When the wave snaps shut over his blue head, the water
remains water—hunger is the only story
he has ever heard in his life that he could believe.
I don’t say he’s right. Neither
do I say he’s wrong. Religiously he swallows the silver leaf
with its broken red river, and with a rough and easy cry
I couldn’t rouse out of my thoughtful body
if my life depended on it, he swings back
over the bright sea to do the same thing, to do it
(as I long to do something, anything) perfectly.

— Mary Oliver, “The Kingfisher”

© 2013 The Epicurean Dealmaker. All rights reserved.

Friday, November 22, 2013

Turning to Fresh Tasks

Carson River, Nevada, via the U.S. Department of the Interior
Out walking in the frozen swamp one gray day,
I paused and said, “I will turn back from here.
No, I will go on farther—and we shall see.”
The hard snow held me, save where now and then
One foot went through. The view was all in lines
Straight up and down of tall slim trees
Too much alike to mark or name a place by
So as to say for certain I was here
Or somewhere else: I was just far from home.
A small bird flew before me. He was careful
To put a tree between us when he lighted,
And say no word to tell me who he was
Who was so foolish as to think what he thought.
He thought that I was after him for a feather—
The white one in his tail; like one who takes
Everything said as personal to himself.
One flight out sideways would have undeceived him.
And then there was a pile of wood for which
I forgot him and let his little fear
Carry him off the way I might have gone,
Without so much as wishing him good-night.
He went behind it to make his last stand.
It was a cord of maple, cut and split
And piled—and measured, four by four by eight.
And not another like it could I see.
No runner tracks in this year’s snow looped near it.
And it was older sure than this year's cutting,
Or even last year’s or the year’s before.
The wood was gray and the bark warping off it
And the pile somewhat sunken. Clematis
Had wound strings round and round it like a bundle.
What held it though on one side was a tree
Still growing, and on one a stake and prop,
These latter about to fall. I thought that only
Someone who lived in turning to fresh tasks
Could so forget his handiwork on which
He spent himself, the labor of his ax,
And leave it there far from a useful fireplace
To warm the frozen swamp as best it could
With the slow smokeless burning of decay.

— Robert Frost “The Wood-Pile

How many wood-piles, carefully cut and stacked, will we leave behind once we finally turn to the last of our fresh tasks? Perhaps it is not such a small thing to warm a forgotten corner of a frozen swamp with the decay of our life’s work. There are worse legacies to offer.

Happy weekend.

© 2013 The Epicurean Dealmaker. All rights reserved.

Tuesday, November 12, 2013

The Invention of Leisure

Yes, that's right, children: It's all downhill after sophomore year.
“Get a job.”

Famous chorus from a popular song

O Dearest and Most Beloved of All Indiscriminate Internet Content Consumers (that’s you), I fear Your Humble and Most Retiring of All Econoblogosophists (that’s me) has some terrible news to impart:

Goldman Sachs has finally and irrevocably jumped the shark.

And no, I reluctantly interrupt your quiet enjoyment of reality television this sad evening not because the favorite whipping boy of every published journalist and his or her small dog has decided to stop ripping the faces off muppets, repackaging toxic waste for sale to blind widows and orphans on life support, or kicking German Landesbanken in the testicles for the sheer joy of listening to them shriek in agony. No, in each of these respects I believe the Ur-Squid of the Western Capitalist World is still now as it ever was: unrestrained, unrepentant, and not just a little bit naughty.

No, whereof I speak (although Lloyd would rather I were silent) is the horrible, earth-shattering, mind-boggling reality that Goldman Sachs—evil poster cephalopod of tendentious, horse-semen-throwing pseudo-Marxist demagogues pontificating from the decaying soap boxes of musico-cultural mouthpieces long past their prime, relevance, and peak circulation levels1—has apparently decided to treat its junior professional employees like human beings.

I know, I know. I will pause here a moment to let you collect your dentures from the floor.

* * *

The sad and shocking truth is that Goldman Sachs has apparently decided to require its cannon fodder (excuse me) valued junior professionals2 to do something so shocking, so transgressive to the norms of civilized society in the concrete canyons of Wall Street and the City of London that I am loath to describe it here without due warning: take Friday nights and Saturdays off. There is other nonsense associated with this new policy, which admits of few or no exceptions, like uninterrupted week-long vacations for Analysts and Associates and a prohibition against gaming artificial weekend idleness by telecommuting via Blackberry, smartphone, or laptop, but I will not sport with your intelligence by elaborating upon it. The material point is these clowns seem hell-bent upon preventing their junior investment bankers from engaging in one of the few, hallowed activities which has differentiated them from their slacker cousins and co-graduates of elite universities who have traditionally enjoyed their weekends fresh out of school by trying not to contract virulent STDs or end up on a slab in the county morgue deceased of alcohol poisoning. Namely, work.3

I can only say: Lloyd. Gary. WTF?

There has been some attempt from certain quarters of the blogosphere to understand the rationale behind this ludicrous pandering to all that is unholy in Human Resources political correctness, and the consensus seems to be that Goldman is taking this ill-advised step reluctantly, in order to compete for its fresh meat valued junior resources with other, currently more glamorous employers like social media companies and other purveyors of popular masturbatory aids. As part and parcel of this facile narrative there is copious pointing toward the alleged demand for and attraction to the “best and brightest” of our youth by said employers. Since Goldman Sachs is purportedly in direct competition with such archetypes of socioeconomic desirability as Google, Facebook, and Twitter for the most intelligent, ambitious, and driven of the flower of our culture’s young people, of course (the argument goes) they must relax the traditional salt mine labor characteristics of entry level investment banking jobs in favor of “work-life balance” and uninterrupted cocaine benders on Friday and Saturday nights.

But this is stupid on many levels.

* * *

For one, as I have stated unequivocally before, investment banking neither seeks out nor requires the allegedly “best and brightest”—whoever the fuck they are supposed to be—for its employees. All we seek are aggressive, ambitious, smart enough young kids to process our ridiculous pitch books, update our standardized models, and generally take our shit while we senior bankers do whatever is necessary to bring in enough revenues to ensure our continued employment and the consequent support of our dependent wives, children, mistresses, and bartenders. For another, the majority of youngsters who are attracted to investment banking are, contrary to the general prejudice of investment banking critics everywhere, surprisingly risk averse and non-entrepreneurial in nature. The tender young shoot who aspires to Lloyd Blankfein’s beard and pay package is almost never the same sort of soul who wishes he or she were staging a Lord of the Rings-themed wedding in the Pacific Northwest woods on the back of technology company stock options. They hold completely different life ambitions. This can be seen by the perhaps surprising absence of former investment bankers among the massively rich and successful entrepreneurs of the world.4

Finally, the implicit coddling and tender concern for the delicate sensibilities of young investment bankers’ boy- and girlfriends which are encoded in Goldman’s new policy are completely and irrevocably at odds with the core premise of my industry, which is uncompromising customer service. The entire fucking point of working 24 hours a day, for days on end, and canceling weeknight dates with Kate Upton, Las Vegas bachelor parties with George Clooney and Brad Pitt, and Christmas holidays with the Pope of all Christendom at the last possible minute is that the entire investment bank works at the pleasure and whim of clients who pay us a small fortune to do so. That is why successful senior bankers never tell the client no. That is why we agree to impossible deadlines for ridiculous requests at the last minute. Why we therefore ruin our junior bankers’ lives with all-night and all-weekend work on a regular basis. Because that is the fucking job.

So telling some pissant college graduate or wet-behind-the-ears MBA she can futz off and take in a Broadway show, art gallery opening, or all-night drinking session in the East Village or West End from Friday night through Sunday morning does that person absolutely no good whatsoever. Because it is telling her, incorrectly, that she should expect clients and bosses to respect the life-work boundaries of normal human beings in her life too. But none of these ever will, and if she wants and expects to make a success of herself in my industry, she better reconcile herself to that fact as soon as fucking possible.

* * *

I am old enough, O Dearly Beloved, to remember the last time big investment banks tried to pander to junior professionals, during the first dot com boom of the late 1990s. Then we tried fruit baskets, casual Fridays every day, and in-house concierges to pick up and deliver dry cleaning, Broadway tickets, and other bullshit in a desperate and ultimately fruitless attempt to prevent our most ambitious young Turks from joining such guaranteed future world beaters as Webvan or None of it worked, since the true entrepreneurs (or reckless idiots) among our ranks lit out for the coast anyway, and the risk-averse remnants who stayed behind got utterly ruined by our coddling. For believe you me, when the dot com boom imploded, the work-life balance perks and privileges disappeared on Wall Street faster than you can say “Bernie Ebbers.” And the poor young knuckleheads who had embraced the kinder, gentler Wall Street as their birthright could not adjust to the harsh light of workaday reality. It is no exaggeration to say an entire generation of potential investment bankers was ruined by such nonsense.

But that is the nature of large scale corporate investment banking nowadays. Human Resources weasels rule the roost in times of weakened revenue generation and secular decline, and the Executive Committee is more than happy to throw a sop to the political correctness police who claim such nonsense is the only way Goldman Sachs will ever hire another person from Princeton University or Harvard Business School ever again. It doesn’t really cost anything, and it is an easy way to separate the oh-I’m-only-here-for-the-resume-building chaff from the yes-I-really-want-to-be-an-investment-banker wheat.

I’d suggest the junior bankers of Goldman Sachs and elsewhere keep that in mind as they adjust to this brave new world of investment banking with a human face. For in my industry, it is wise to remember that it is always the human beings who are taken out behind the woodshed and shot first.

Related reading:
Molon Labe (September 1, 2008)
If the Phone Don’t Ring, You’ll Know It’s Me (October 1, 2011)
In the Nation’s Service (December 29, 2011)

1 Yeah, he’s a dick. A talented dick, but a dick nonetheless.
2By which corporate bureaucratese is meant the wet-behind-the-ears tyros who join investment banks straight out of college (known, grandiloquently, as “Financial Analysts”) or business school (known, similarly, as “Associates”) to provide the blood, lymphatic fluid, and gristle which lubricate the grindstones of a large, multinational investment bank such as Goldman Sachs. Note that the moniker “professionals” is applied only to those naïfs who join an investment bank with some pretense or ambition of making widow and orphan cheating their long-term career, rather than the far more numerous, better-treated, and far less dispensable folks known as “support staff” who actually make the world go around.
3 I speak throughout, by the way, as is my wont, of the junior professionals who work in the corporate finance and M&A arms of investment banks, not the knuckle-dragging denizens of the sales and trading floors. For only the former tend to be on call at the whim of the clients of their investment bank 24/7, whereas the latter knock off at reasonable hours on Friday evenings and only return, bleary eyed and hungover, early Monday morning, to devour onion cheeseburgers and rip off hapless portfolio managers of Landesbanken. Perhaps it is revealing that Lloyd Blankfein and Gary Cohn come from the sales and trading side of Goldman Sachs and hence have little understanding, respect, or appreciation for the traditional work hours of their corporate finance colleagues which they have so unwisely attempted to curtail.
4 Counterexamples, like Mike Bloomberg and Jeff Bezos, prove my point. They worked at investment banks, but they were not investment bankers. They were technology geeks. Staffers. Q.E.D.

© 2013 The Epicurean Dealmaker. All rights reserved.

Thursday, October 17, 2013

Our Glassy Essence

No, the light you are looking at is not refracted.
Richard Diebenkorn, Knife and Glass, 1963
But man, proud man,
Drest in a little brief authority,
Most ignorant of what he’s most assured,
His glassy essence, like an angry ape,
Plays such fantastic tricks before high heaven
As make the angels weep.

— William Shakespeare, Measure for Measure

* *

The central epistemological problems of philosophy do not arise primarily from within philosophy at all, but from the recurrence in every area of human thought and practice of rival interpretations, and rival types of interpretation, of events and actions. It is for this reason that every academic discipline is to some degree ineliminably philosophical. The literary critic, the historian and the physicist presuppose, even when they do not explicitly defend, solutions or partial solutions to the problems of representation and justification. Shakespeare and Proust, Macaulay and Charles Beard, Galileo and Bohr cannot be read and responded to adequately without epistemological inquiries and commitments. Moreover, the philosophical problems and solutions in each particular area have a bearing on those in other areas; often enough, indeed, they are the very same problems. Hence the need for a synoptic and systematic discipline concerned with the overall problems of justification and representation...

— Alasdair MacIntyre1

* *

The sciences do not try to explain, they hardly even try to interpret, they mainly make models. By a model is meant a mathematical construct which, with the addition of certain verbal interpretations, describes observed phenomena. The justification of such a mathematical construct is solely and precisely that it is expected to work.

— John von Neumann2

Press a practicing scientist, O Dearly Beloved, to explain what she does for a living and you will often (usually?) find her describing an extremely elaborate, well-constructed, and beautiful intellectual apparatus built to great height and breadth upon subtly shifting sands. As a von Neumann prediction machine, it is remarkably successful, at least in certain well-defined domains (e.g., quantum physics, astronomy), which she will no doubt point to with pride. Look a little closer, however, and you will begin to see lacunae, cracks, and jury-rigged joints papered over with vagueness and contradiction, especially at the gaps between different scientific disciplines or within the same discipline at different scales. Certain sections of the apparatus (like cosmology) seem to have abandoned their purported identity as prediction machines entirely and devolved into nebulous hypothesizing and vague handwaving. Others barely seem to merit the designation “science” at all. Look longer, and you begin to notice that virtually every section of the beautiful edifice is covered with permanent scaffolding and safety netting, with slightly dusty, battered “Under Construction” signs creaking forlornly in the breeze.

If she has any intellectual honesty, your scientist will acknowledge these defects with a slightly embarrassed shrug and an assurance that she and her colleagues are “working on it.” Pressed further, she will admit that the entire, vast apparatus—and every component section of it—is arguably only temporary, a stand-in theoretically ready to be torn down and discarded at a moment’s notice as soon as a more effective replacement is found. You will notice, however, that despite her protestations to the contrary she seems rather emotionally attached and intellectually committed to the existing bits, especially the ones she has devoted her career to understanding and perhaps improving. She also seems somewhat irrationally fond of the beauty of the apparatus—or what she claims to be its beauty, even though you may be unable to see it—and has real difficulty articulating why she believes the beauty of the machine makes it more fit for purpose, which is predicting future events.

* * *

Now far be it for me, a humble dilettante in all matters scientific, to deny the power, efficacy, and success of Science writ large. Without it—and without the legions of practical engineers and technicians who translate the pristine Platonic forms of pure science into messy, approximate, “good enough” directions for the construction of machines which actually work in the real world—you would not be able to read these words on your computer or mobile device and, more importantly, most of what you and I enjoy as perks of an advanced technological society would not even exist. As a cookbook, modern science is amazingly effective.

But it is important to guard against the notion, so often merely assumed by working scientists but occasionally trumpeted affirmatively by certain mouthpieces thereof, that the instrumental effectiveness of particular sciences provides prima facie proof that their underlying theories correctly describe the underlying reality of the world they purport to. For pace John von Neumann, rare is the scientist (or science writer) who can resist adopting the position that scientific theories actually describe that which is. Rare is the theorist who can treat her pet theory as merely a model which enables her to predict certain outcomes. Rarer still is the scientist who is content to ignore underlying reality (entities, causes, and effects) as a black box which doesn’t matter to the efficacy of her theorem. Such a perspective requires an intellectual rigor and discipline which is both rare and, as a matter of fact, practically unnecessary. Someone once quipped that most scientists are instrumentalists on Sunday and scientific realists the rest of the working week. It is simply easier to believe something like the Higgs Boson exists—or behave as if it does—than to practice particle physics as a mystifyingly effective physico-mathematical game.

The undeniable strength of science as a domain of human thought is that it embeds skepticism and contingency at the very root of its self-justification. Science is not science if it does not consist of theorems and hypotheses which are only—always and forever more—taken as potentially true until they are proven otherwise. And science itself declares its ambition to constantly test and retest its theories and assumptions for completeness, accuracy, and truth, even if this happens more often in theory than in fact. This is a highly admirable thing.

But science is not immune to the challenges of representation and interpretation which all human attempts to discover and describe the nature of reality are subject to. Science cannot finesse the influences and distortions which its practice by real human beings in real social contexts impose on it. Science cannot evade the problems of justification raised by choices driven more by aesthetics and intellectual convenience—like the preference for theories which are beautiful or which satisfy Occam’s Razor—rather than any a priori necessity. Science possesses no special defenses against the radical skepticism which calls into question our very relation to the world and each other. Science, in other words, does not hold a privileged position outside the core intellectual puzzles of human cognition and relation to reality.

* * *

All of which is simply to say that a scientist who claims that philosophy is dead and science has killed it is a fool. He or she is blind to the fact that philosophy is a discipline and way of addressing radical (from radix: root) mysteries and dilemmas at the core of our relationship to the world that science does not even touch. That science takes for granted. Such a scientist lives in a sort of intellectual Flatland, where the two-dimensional inhabitants are either incapable or terrified of grasping the notion they may be embedded in a universe which operates on them with constraints, causes, and effects they cannot even begin to comprehend. Such a scientist literally doesn’t have a clue what he or she is talking about.

The only cure for this, of course—now and always—is a healthy helping of humility. I struggle to remember mine every day.3

Related reading:
Sovereign Triviality (November 19, 2011)

1Alasdair MacIntyre on the claims of philosophy,” London Review of Books, Vol. 2 No. 11, pp. 15–16.
2 Cited in Derek Abbott, “The Reasonable Ineffectiveness of Mathematics," Proceedings of the IEEE, Vol. 101 No. 10, pp. 2147–2153.
3 Those among you who have read this far only to be disappointed I did not offer stock tips or inside dirt on the size of Jamie Dimon’s washroom may take this post as either self indulgence or self-directed therapy, as you will. Given that this is my blogsite, after all, I couldn’t care less.

© 2013 The Epicurean Dealmaker. All rights reserved.

Saturday, October 5, 2013

Punished by Fate

Bad luck
Winslow Homer, The Gulf Stream, 1899
“Dans ce pays-ci, il est bon de tuer de temps en temps un amiral pour encourager les autres.”

— Voltaire, Candide

Then, as his planet killed him, it occurred to Kynes that his father and all the other scientists were wrong, that the most persistent principles of the universe were accident and error.

— Frank Herbert, Dune

Marxist rationalist C.J.F. Dillow recently published a short post illustrating a central contention of his: that ordinary people systematically misallocate praise and blame to others based on their misunderstanding of the importance of chance in human outcomes. In particular, he cites an interesting experiment:
[The researchers] split subjects into a principal and agent. The agent chose between a safe option and a lottery, and the principal then split a sum of money between himself and the agent after seeing the outcome of the lottery. They found that principals’ payments depended upon the outcome of the lottery, even though this was obviously out of the agents’ control. For example, agents who chose the safe option were paid less if the lottery won than if it didn’t.

The researchers choose to explain this finding as the allocation by the principals of “unjustified blame” to the agents. Mr. Dillow finds this outcome

consistent with research... which has also found that people just can’t distinguish between luck and skill even in the elementary conditions.

I find neither of these interpretations satisfying or persuasive. In fact, I think they both fail because they severely underestimate the complexity and sophistication of ordinary people’s implicit understanding of risk, chance, and justice.

* * *

Take the experiment at hand. Consider an ordinary person’s perspective: as a principal, the experiment forces him to cede decision-making authority over whether to take a chance on a lottery or a safe option to an agent. If the agent chooses the lottery, the principal is exposed to the (presumably remote) chance of a large payout or the more likely outcome of a loss. If the agent chooses the safe option, the principal will enjoy a much smaller but far more certain positive payout. So far so good. But the experiment encourages principals to allocate “payment” to the agent with the hindsight of actual results: principals are both informed of the results of the lottery, whether they participated or not, and they have the discretion to award payment to their agent as they see fit. In other words, “payment for services” (the agent’s ex ante judgment) is rendered contingent, rather than contractual: it implicitly depends on the actual outcome of the experiment. And, from the perspective of hindsight, the agent who selected the safe option when the principal could have won much more money had he selected the lottery has made a bad decision. Ex post, the agent’s action has materially harmed the principal. Why should he not be punished for his mistake? Or, if you prefer to think of it this way, why should he not suffer some portion of the principal’s bad luck? It’s only fair.

Note, mind you, that nothing I have related above depends on the principal’s correct or incorrect understanding of the role of chance in the experiment’s outcome. Nevertheless, I find it hard to envision any group of participants the researchers were able to assemble being so dense as to fail to understand that the lottery drawing central to the experiment ties its outcome ineluctably to chance. Of course the outcome of a lottery depends on luck. That’s what lotteries are. Everybody knows this. Accordingly, if you asked them, every principal would acknowledge that the agent’s choice of lottery or safe option has absolutely no causal bearing on the eventual outcome and, therefore, that the agent can in no way be blamed for a poor result.

And yet principals in the experiment punished agents who chose wrong. What is going on here? How can we tie these seemingly contradictory understandings together?

* * *

One way to gain greater insight into this dilemma is to examine the motivations and incentives for agents in this experiment. As an agent, one bears no downside risk for making a decision on behalf of the principal. The agent will get paid one way or another. But the agent understands the contingent, ex post nature of his payment for services, too. Why would an agent not believe that, if he put the principal’s money at risk in the lottery and the principal won, the principal would not reward him with a greater payment than otherwise? Give him a big tip? Share the luck? Of course, if the principal loses the lottery, the agent should have every expectation of getting paid nothing, but this should not matter. The agent who chooses a fair lottery for his principal is also choosing to tie his payout (at least via the mechanism of normal human psychology) to chance as well.

But what of the agent who chooses the safe option on behalf of his principal? He is explicitly choosing to deny his principal the remote chance of a large payout in favor of a low risk, safe return. He is choosing a small, low risk payout for himself over a much riskier payout profile tied to the good or bad fortune of his principal. And the principal knows it. Hence, one might argue that a principal who pays an agent who chooses the safe option less if the lottery wins is punishing the agent for risk aversion, because it is the agent’s risk aversion which has, in retrospect, forced the principal to forgo a windfall of good luck.1

* * *

Unlike Mr. Dillow,2 I believe most people do have a solid if inarticulate understanding of the role of chance in their lives. Most ordinary folks can see the effects of good, bad, or indifferent luck in their own lives and the lives of their families and acquaintances very clearly, and most people understand that good and bad luck is relatively rare. They understand in a way that lucky people cannot that luck has absolutely nothing to do with talent, character, or “just deserts.” They think if only they’d had that lucky break, they could have been as successful and happy as the rich and famous people they see on television. They know that bad things can happen to good people, and good things can happen to the undeserving. They understand that they live in an indifferent or even hostile universe, and that they can fall prey at any moment to bad luck which can ruin or blight their lives or the lives of those they love. They are fatalists.

And because they are fatalists, most people have an instinctive ethos which says that because we cannot avoid the influence of luck in our lives, and good and bad luck happen for no rhyme or reason, therefore we must all take our chances. And, because we are all exposed to chance, and none of us fully deserve what happens to us because of it, we should share the burden or benefit of chance when it is suffered or enjoyed. This is why, I believe, we have so many stories like those of the executed Athenian generals Mr. Dillow recalls, so many examples through history of leaders and commoners alike punished (or rewarded) for things literally out of their control. These are sacrifices, yes, to an indifferent fate, but they are also methods of spreading the terrible burdens and benefits of ineluctable chance from the literally undeserving shoulders of the people it falls upon onto the broader shoulders of the community.

In other words, I think most of us believe, deep in our bones, that none of us blessed or cursed with fickle chance deserves to enjoy or suffer it alone. It is our common burden, because it is our common condition.

This is also known as justice.

Related reading:
C.J.F. Dillow, Misallocating blame (Stumbling and Mumbling, September 27, 2013)
Occupy Galt’s Gulch (May 8, 2012)
To Whom It May Concern (August 31, 2013)

1 I suspect there is an entire other blog post to be written following on from these remarks concerning their implications for principal–agent relations, risk aversion, and Wall Street. I will spare you it for the nonce.
2 Who is focusing on this example of “unjustifiable blame” because, methinks, he is so concerned with the phenomenon of unjustified reward; that is, the rewards and benefits accruing to (mostly socioeconomic) elites from good luck. But my intuition tells me, as I have attempted to articulate above, that most people are willing to let the lucky enjoy most of the fruits of their luck—perhaps because they hope they will have the same chance themselves one day—but not all of them. How much of the good and bad luck accruing to individuals should be redistributed to the larger community—and in what fashion: progressive taxes, social welfare systems, charity, etc.—is of course the central political question, and one which each society answers differently at different times.

© 2013 The Epicurean Dealmaker. All rights reserved.

Thursday, September 26, 2013

Mirror, Mirror

What do you see?
La belle et la bête (1946) – Jean Cocteau
“You’ve never seen death? Look in the mirror every day and you will see it like bees working in a glass hive.”

— Jean Cocteau

Much of an investment banker’s1 life, O Dearly Beloved, consists of spurts of feverish activity interspersed with agonizing stretches of boredom, an activity often characterized as hurry up and wait. We get called by potential clients to come present our credentials for their pissant deals on scandalously short notice, we mobilize a small army of overworked child laborers to produce voluminous pitch materials of ludicrous length and specificity, and we cram ourselves into economy class cattle cars to East Bumfuck, Nowhere, where we subsequently cram ourselves into plywood-paneled boardrooms decorated in early J.R. Ewing or late Bernie Madoff style—along with several other small armies of supplicants from our competition—to simper and grovel and polish the shoes of our would-be client millionaires with our Hermes ties. Then we wait anywhere from 48 hours to four weeks to hear whether we have won the assignment, at which point—assuming the answer is yes—we have to scramble back out to the weeds to kick off the real work with an organizational meeting.

The situation does not improve in the midst of a deal, either. Investment bankers are always scrambling to pull together materials for somebody or other—client, counterparty, or our own internal counterparts in capital markets or leveraged finance—which always seem to be due immediately and which are invariably returned, commented on, or revised by said somebody or other at a noticeably more leisurely pace while we sit counting ceiling tiles with our thumbs up our asses. It’s just the nature of an episodic, project-centered, client service job. Of course, we always hope to have more than one iron in the fire at a time, and we hope even more that all our active deals don’t decide to heat up at once and require our immediate, in-person attendance in Sacramento, Atlanta, Minneapolis, Dallas, and Düsseldorf this coming Saturday at 10:00 am local time. Failing that, I suppose I should be thinking clever thoughts about the next stunningly original M&A deal or financing technique I can spring upon an unsuspecting client base, or figuring out ways to wheedle my way into favor with the firms I don’t already do business with. But even after all that, and after I have rearranged my snowglobe collection for the sixth time into reverse alphabetical order based on the last letter of their purchase location, there are occasionally dead spots in my job where there is. Absolutely. Nothing. To do.

And that is when I check Twitter.

* * *
Which led me today, as it so happens, to an article by one Michelle Goldberg entitled “In Defense of Jonathan Franzen,” in which Ms Goldberg defends said literary lion’s rambling and apparently much maligned attack2 on social media and the internet by claiming, in a phrase, that Twitter Is Horrible. Well this, I said to myself, said I, is interesting. Because I couldn’t disagree more.

Ms Goldberg did not hedge her condemnation of the social medium in question, either:
In his essay, Franzen compares Twitter to cigarettes. This is inaccurate. Twitter is like doing cut-rate cocaine at a boring party where a lot of the guests dislike you. (As I said, I lived in San Francisco in the ’90s.) You’re not having any fun, but it’s really hard to stop.
And this:
Twitter began to seem like a machine that runs on rage. You see something that disgusts or infuriates you. Tweeting about it provides momentary relief, followed by the brief validation of the retweet. As you scan your feed, you take in other little microbursts of nastiness. So you get angry all over again and respond, perpetuating the cycle.
As I read these choice nuggets, my first thought was not that Ms Goldberg sounds like she had a pretty shitty time in San Francisco in the 1990s, which she apparently did, or that her description of Twitter and its uses sounds remotely like the one I’m familiar with, which it does not. No, my first thought was how thankful I was that I do not follow Ms Goldberg on Twitter. Or even, were I to be completely honest, have to interact with her regularly in real life at cocktail parties. Because I mean, what?

Ms Goldberg has fallen into the trap—common to many with an unreflective view on life—of damning an entire cultural phenomenon on the basis of her own, particular, idiosyncratic relationship with it. Telling me that you believe Twitter runs on rage tells me much more about you—that you are likely to be a person full of rage or very susceptible to feelings of rage—than it does anything useful or universal about Twitter. It is also empirically untrue. My Twitter stream and experience does not run on rage, and I am observant and interested enough in other peoples’ use and experience of Twitter to know that it does not run on rage for many, many others either. From what I can tell, while admittedly not being a Twitter expert, I would venture to guess there are as many uses and forms of Twitter as there are types of people, personalities, and imaginable uses: Cat Pic Twitter, Celebrity Stalking Twitter, Sports Twitter, Investing Twitter, etc., etc., ad infinitum/nauseam.

This is not to say that I and many others do not occasionally fall into the trap of becoming enraged by something we see on Twitter—or, more broadly and correctly, the Internet—and spiraling into an anger-soaked argument or tirade on some issue or other. I certainly do (and usually regret it afterward). But this does not mean such a relationship with this medium is either inevitable or necessary, as Ms Goldberg seems to imply it is for her. This is too bad, but it is easily remedied. If you are following people who enrage you regularly, stop following them. If certain people troll you or constantly try to engage you in energy-sapping arguments, block them. Nowhere is it written that you have to listen to or engage with angry people. Not even on Twitter. If Ms Goldberg is in fact trapped in Rage Twitter, perhaps it would not be presumptuous of me to suggest she try following some different people. Or try to find something in her experience and use of the medium other than rage.

* * *
What is generally true—given that its members choose whom they follow and, to a certain extent, whom they allow to follow them—is that Twitter can easily become an echo chamber, reflecting and repeating back to you what you expect and want to hear. This is a well understood weakness of human nature, which has long pre-dated the internet or any of its more recent excrescences. I work hard to curate3 the list of people I follow on Twitter to exclude those who, like Ms Goldberg, seem to approach the universe in a permanent state of rage, or those who distract or annoy me with information or opinions that I have little interest in or use for. This does not mean that I want to follow only people with whom (I think) I already agree. I like having my opinions and preconceptions challenged. But when I find people who can engage in back and forth argument and edification without making bile rise in my throat, I cultivate them. Sometimes I persuade them to my point of view; sometimes they persuade me to theirs. I like to use Twitter to engage with people I would otherwise have little ability to engage. I also use Twitter to learn things, to have fun, and to occasionally make an ass of myself. From my personal perspective, this seems like a much more wholesome way to approach a trivial social media app than the Relentless Pursuit of and Flight from Towering Rage. But hey, that’s just me.

In any event, Twitter is nothing more than a silly messaging service. You are not required by God, Capitalism, or the Powers That Be to participate. Therefore, if Twitter is reflecting something unpleasant back to you (like rage), perhaps you should log off and do a little self-reflection instead. As someone I often engage with but do not follow on Twitter said,
“Twitter is a mirror disguised as a window.”
Just don’t ask me where (s)he got it from.

Happy tweeting.

1 I speak here, as is often my wont, of my form of investment banking: capital raising and mergers and acquisitions advisory, which center around intermittent projects for various and sundry clients. I do not speak of sales and trading, or capital markets, which tends to be a more uniformly frenzied activity (at least during market hours) interspersed with agonizing stretches of wining and dining counterparties. These are crude caricatures, but I trust regular readers of this forum know to expect such and have done with it. You novices can go sob quietly in the corner (or try to figure out the details from my back catalogue).
2 Yeah, I started reading it a while back. As the cool kids say: TL;DR. No link.
3 Sorry, I’ve been told I must use this word when discussing social media. Who told me, you might ask? The cool kids, of course.

© 2013 The Epicurean Dealmaker. All rights reserved.

Saturday, September 14, 2013

Go Ask Alice

Like a box of chocolates
One pill makes you larger
And one pill makes you small
And the ones that Mother gives you
Don’t do anything at all
Go ask Alice, when she’s ten feet tall

Jefferson Airplane, “White Rabbit”

“Life’s a box of chocolates, Forrest. You never know what you’re gonna get.”

— Forrest Gump

Well, Children, it’s silly season again. Yes, that’s right: Twitter just filed an initial registration statement (or S-1) for its long-awaited initial public offering. Confidentially.1 And commemorated it with a tweet on its own social media platform, of course:


* * *
This of course means every numbnuts and his dog are currently crawling out of the woodwork and regaling us with their carefully considered twaffle about what Twitter is doing, what it should do, and how much money we’re all going to make buying and selling Twitter’s IPO shares when and if they ever come to market. A particularly amusing sub-genre of said twaffle consists of various pundits of varying credibility and credulousness pontificating on what Twitter is actually worth, as if that is a concrete piece of information embedded in the wave function of quantum mechanics or the cosmic background radiation, rather than a market consensus which does not exist yet because, well, there is no public market for Twitter’s shares.2

But there seems to be something about IPOs that renders even the most gimlet-eyed, levelheaded market observers (like Joe Nocera, John Hempton, and... well, just those two) a little goofy and soft in the head. Perhaps they just can’t understand why such an obvious and persistent arbitrage anomaly as the standard 10 to 15% IPO discount on newly public shares—which everybody seems to know about even though they can’t explain it—persists as it does. Or why, given how many simoleons the evil Svengalis of Wall Street get paid to underwrite IPOs, there are so many offerings that end up trading substantially higher (e.g., LinkedIn) or substantially lower (e.g., Facebook) than the offer price they set once shares are released for trading.

So, out of the bottomless goodness of my heart—and a heartfelt wish to nip some of the more ludicrous twitterpating I expect from the assembled financial media and punditry in the bud—I will share here in clear and simple terms some of the explanations I have offered in the past.

* * *

First, the famous IPO discount.

I have written:

Now there is a longstanding tradition, rule of thumb, heuristic—whatever you want to call it—in IPO underwriting that issuers should sell their shares in an IPO at a discount to intrinsic or fair value. In normal, healthy markets, this discount is normally discussed in a range of 10 to 15%. ... The intended purpose of the IPO discount is twofold: 1) to help place the relatively large bolus of shares which an IPO represents with investors who have alternate potential uses for their money and 2) to bolster positive demand in the marketplace for follow-on buying. You see, an issuer of an IPO is not, unlike a company which is selling 100% of itself, trying to maximize total proceeds for existing shareholders (and fuck the newcomers). It is trying to attract a new set of shareholders who will be co-owners of the company for at least some non-trivial period of time. An IPO issuer only sells a minority of the total ownership position in the firm, and it wants to develop a positive, receptive marketplace for future stock sales in the public markets.

Now this is a critical point, so I’d like you to focus on it carefully. In virtually no instance I am aware of do the existing (pre-public) shareholders sell a majority of either i) the firm’s newly created, “primary” shares or ii) their own already existing, “secondary” shares in a IPO. For one thing the underwriters would strongly discourage it. Why? Because it looks bad. Here you have this brand new, shiny, exciting, expensive company coming to market, and the people who know it best, the insiders, want to sell out big time? Danger, Will Robinson! Institutional investors aren’t (usually) that stupid, for one thing, and for another we Wall Street underwriters typically have to deal with our clients on the buy side of the house much more frequently and for a longer time than our intermittent issuers on the sell side. We have no interest in intentionally selling Fidelity, Vanguard, or anybody else a lemon IPO, no matter how much Sleazebag LLC wants to pay us in underwriting spread. We are middlemen, remember? We have a reputation to uphold, believe it or not.

So in normal circumstances Wall Street banks encourage issuers to make primary company shares, which raise money directly for the company, the entirety or vast majority of its initial offering. That way, new investors feel they are coming into the ownership structure as relatively equal co-owners of the firm alongside existing insiders.3 If demand is strong enough, we can often slip a relatively minor slug of insiders’ secondary shares into the IPO also, usually in the form of the underwriters’ 15% overallotment option, or “green shoe.” In some instances, the company may not need any primary proceeds, and the IPO is actually done as a precursor to selling insider shareholdings over time (as, for example, in the case of a firm owned by a private equity investor). But even in such cases, investors are much happier to see the company raise primary proceeds by issuing new shares, even if the principal use of proceeds is to repay a loan taken out to fund a pre-IPO dividend to the inside shareholders. In any event, nobody—underwriters or new investors alike—likes to see senior company executives or large, controlling inside shareholders sell down much more than a modest percentage of their remaining holdings on the IPO itself. IPO investors want to see the rats invested in the ship they’re buying passage on, too.

And the reason for the discount itself is simple, as I stated before. You are selling a large slug (often hundreds of millions or billions of dollars) of a brand new, unproven investment to new investors all at once. Like most new product introductions, it should not be that surprising to see sellers offer an initial discount off the expected sale price to incentivize buyers to try their unproven product. And, as I hope I have explained to you above, the owners of newly public companies are trying to establish a receptive market for future share sales, whether primary or secondary. Surely a little dilution (eighty-five cents on the dollar for primary proceeds or a minor portion of your existing secondary shares) is a small price to pay to establish a healthy public market for your future fund raising activity, no? And the discount is not pocketed cost-free by investors, either. Underwriters make sustained efforts to allocate discounted IPO shares to investors who indicate strong demand to buy more in the aftermarket, and who promise to do so. And we do keep track, and punish backsliders and reward those true to their word in future, unrelated IPOs and security offerings. This is one of the core reasons to employ underwriters in the first place, no matter how sophisticated an issuer may be: we play a long game with the buy side, and we have the opportunity to enforce behavior helpful to our issuers by the way we play it. Intermittent issuers simply don’t have this kind of market power.4

* * *

Of course, all this focus on the IPO discount might give the naive observer a comforting sense of precision and predictability about the post-offering performance of the shares. But this is unwarranted. When I wrote that underwriters suggest a 10 to 15% discount to the “intrinsic or fair value” of IPO shares, the alert among you should have immediately cried, “Bullshit!”

And you would be right. We are guessing:

Before they ever approach the market, investment banks do a lot of work evaluating new issuers to come up with a price which they think the company will be worth once it is trading normally in the marketplace. They do this based not only on the company’s own historical and projected financial results but also on the trading multiples and profiles of comparable companies already public. ... Now, you can see that this exercise is an art, not a science. Investment bank IPO pricing is the epitome of (very) highly educated guessing. We often get it wrong, but, on average, IPO pricing is normally pretty accurate. After all, it’s our job, and we do it well. The picture gets complicated, however, when the company in question, like LinkedIn, does not have any comparable peers among listed public companies. Our guesses become much less educated and much more finger-in-the-air type things. There is no cure for this but to go to market and see what investors themselves tell you they are willing to pay.

You see, investment banks try to guess what the market will pay for a stock. But, to be completely honest, we have no idea.

... once we go to market, the issuer and the investment banks essentially hand the steering wheel over to investors. We pitch, and wheedle, and cajole, and praise the company to the skies, but it is investors who set the price, initially in individual conversations with the underwriters’ salespeople—where they indicate the number of shares, if any, they want to get in the offering and any price sensitivities or limits they may have—next when the banks set the final price for the offering, and finally—and, by definition, definitively—when they bid up the price in the aftermarket after the shares are released for trading.

Let me make this perfectly clear: Investment banks do not set the ultimate price for IPOs; the market does.

And sometimes, as in the case at hand, you get what we call in the trade a “hot IPO.” Investors work themselves into a buying frenzy, the offering becomes massively oversubscribed (e.g., orders for 10 or more shares for every one being offered), and the valuation gets out of control. Underwriters have a limited ability to respond to these conditions, which typically emerge during the pre-IPO marketing or “bookbuilding” process, including revising estimated pricing up, like LinkedIn’s banks did (+30%), and increasing the number of shares offered. But eventually you just have to release the issue into the marketplace and let the market decide what the company is really worth.

Investment bankers are not idiots. We have tons of experience and expertise to bring to bear on valuation, and we are in constant contact with institutional investors on the buy side to gauge market demand. We work with the issuer’s financial and operating metrics (like the ones nobody has seen for Twitter) and the market trading multiples of comparable companies, which are similar social media darlings, to derive a normalized trading value for the firm. But we cannot say whether the market, in its infinite, obscure, unexplained wisdom, will agree with us or not.

And it is the market which decides:

Don’t like that? Have some cake.

Related reading on IPOs:
Jane, You Ignorant Slut (May 21, 2011) – The LinkedIn IPO kerfuffle, part 1
Dan, You Pompous Ass (May 22, 2011) – The LinkedIn IPO kerfuffle, part deux
Size Matters (March 21, 2012) – The JOBS Act and why we see fewer IPOs nowadays
As Long as the Right People Get Shot (May 30, 2012) – No, John Hempton (inter alia), underwriters do not have a moral or fiduciary obligation to get the sellers of an IPO the highest price

1 Which novel-ish practice is allowed under the JOBS Act for what the SEC characterizes as “Emerging Growth Companies,” or tender little start-ups with less than $1 billion in sales. The JOBS Act, by the way, has done virtually nothing to create jobs. Sic transit the Legislative Branch.
2 Yes, yes, I know there is some sleazeball outfit selling participation units backed by previously sold Twitter employee shares (all other shares being prohibited from trading in advance of the IPO). But if you think you can establish the post-IPO trading value of the company based on illiquid trading in such a derivative gray market, I encourage you to meet me next Tuesday at the Manhattan entrance to the Brooklyn Bridge. I will then and there be delighted to sell you the deed (or rather a deed to the Deed) to this magnificent cultural artifact for the bargain price of $200 million in cash. Small, unmarked bills, please.
3 Yes, I also know there is a disturbing tendency, particularly among hot technology issuers, to sell IPO investors second-rate stock which does not carry the same voting rights as insiders’ shares. This is a reprehensible tactic which guts the potentially important corporate governance function fully voting shares convey, but it is a bull market phenomenon many issuers love to take advantage of if they can. For what it is worth, most underwriters don’t like it, but we hold our noses all the way to market. Hey, nobody made you buy Google or Facebook shares, did they, bub?
4 This is why caviling by several of my previous interlocutors about the unseemliness of Wall Street dispensing favors to the buy side on IPOs is both shortsighted and dense. It is because we dispense favors, and try to make our buy side customers happy too, that we have the power to twist their arms when we need to, and attract their attention to those issuers which do not have every newspaper in Christendom bloviating about their offering plans. Middlemen, duh.

© 2013 The Epicurean Dealmaker. All rights reserved.

Wednesday, September 11, 2013

You’ll Rise as Smoke to the Sky

In memoriam, September 11, 2001:
• A Grave in the Clouds

• The Burning Ones

• A Good Death
Twelve years is a long time. And no time at all.

Salaam. Shalom. Peace be with you.

© 2013 The Epicurean Dealmaker. All rights reserved.

Sunday, September 8, 2013

I, Fembot

Wanna arm wrestle, Poopsie?
“I think personality is much more important than intelligence, don’t you?”

Bicentennial Man

I confess freely to you, O Dearest and Most Patient of Understanding Readers, that I have read Margo Epprecht’s Quartz piece “The real reason women are leaving Wall Street” front to back at least three times, and I still cannot discover a coherent answer therein to the article’s title. It is well enough written, with plenty of quotes from concerned characters and an adequate admixture of data and trend analysis to illustrate its principal empirical point: that notwithstanding a constant flow of women entering the industry over the past several decades and achieving some measure of success, it does not seem that many (enough?) stay. Nevertheless, I do not think it is confessing my own lack of sympathy or attention to assert that one searching for reasons for such a situation or even the author’s conclusions in this regard might remain just as nonplussed as I am.

There are allusions to Wall Street’s “hierarchical world” and “a specific culture of men” (whatever the hell that psychological gem, unelaborated and unexplained in the text, is supposed to mean). Ms Epprecht also points to the apotheosis of risk-taking over the past two decades, which, given the accompanying assertion that women shun risk more than their testosterone-addled colleagues, I suppose is intended to be dispositive. Anecdotes are offered of successful women on Wall Street who achieved high rank, power, and good industry reputation only to find, in vague ways left undescribed, that their achievement felt hollow, and the industry just didn’t offer the rewards they were looking for in exchange for their hard work and sacrifice.

Now, Mrs. Dealmaker Mère didn’t raise no fools. Having spent enough decades on this planet to be much closer than many of you to my AARP card, I am well aware that trying to determine what that mythopoetic, monolithic assemblage entitled “Women” wants is not only a mug’s game, guaranteed to relegate one to sleeping in a real or metaphorical doghouse for a week, but also empirically and epistemologically unsound. There is a huge range of capacity, preference, and personality among women—just as there is among men—and even without the personal examples known to me of women who are tougher, more aggressive, and bigger risk takers than the vast majority of men ever could be, I am certain there are more than enough women who would not only thrive but enjoy Wall Street culture without a second thought. By the same token, there must be plenty of smart, driven, and ambitious women who would look under the festering rock that is my industry and dismiss it completely with a judicious and decisive “Eww.” Frankly, the examples Ms Epprecht cites in her article support my prior point. The women she mentions are no cupcakes.

And investment banking is not a giant industry. Surely there are enough ambitious, tough-as-nails women who like money and social prestige sprinkled among the fairer sex to populate the cubicles and corner offices of Wall Street. Women who are not averse to sacrificing family, friends, and relationships—and the bulk of their normal childbearing years1—for the brass ring at Goldman or Morgan Stanley. Or maybe not. Maybe Wall Street gets all the women who can and want to fit into this culture already. Maybe the suitable portion of the distaff distribution just isn’t that big. Maybe smart, ambitious women have more real or perceived choices than men do, and they realize that investment banking is a tough, uncompromising way to spend your youth and health in exchange for a promise you will make it to the top which is just too uncertain. There is a perspective on my industry that, far from being Elysium, it is actually a pernicious and deadly trap which draws its victims in with unsupportable visions of endless riches and power only to chain them to a gold-plated galley oar. A devotee of this perspective might therefore look upon the relative dearth of women in investment banking and declare, “You go, girl. Smart move.” Perhaps the shortage of women on Wall Street is a good thing, and a marker of their superior judgment and perception.

I will let you decide. Given that this is a discussion about women and Wall Street, I suspect you already have a firmly held opinion.

* * *

Be that as it may, however, I would like to share a couple tidbits of advice inspired by Ms Epprecht’s article for any sharp-toothed woman currently plotting her way to the top of the Wall Street heap.

First, a perceptive reader will notice that many of Ms Epprecht’s examples—including herself, naturally—are of women who made their names and careers on the research side of investment banks. This is true even of the Poster Girl for Women on Wall Street, Sallie Krawcheck, who many fail to remember made her name as a highly respected bank analyst at Sanford Bernstein before Sandy Weill poached her to run Citigroup’s Smith Barney unit after Elliot Spitzer blew up Wall Street’s long-running game of using research analysts to promote clients’ stocks and new underwriting. This is particularly ironic, because the big boom in Wall Street sell-side equity research in the 1980s and 1990s which Ms Epprecht cites as a trend supporting the influx of women was driven by banks’ relentless promotion of equities to retail and institutional investors. The Eighties and Nineties were the zenith of Equity Research on the Street: analysts were never held in higher regard nor better paid than when they were used as the sharp end of the spear for distributing stocks. Analysts like Jack Grubman and Mary Meeker were rock stars, paid just like the investment bankers they helped to win underwriting assignments, and even better known.

But this, as you know, struck many in retrospect (like Mr. Spitzer) as an unacceptable conflict of interest, and the settlement he forced on Wall Street demoted research analysts from front line revenue producers back to the second class citizens they used to be. Once investment banks could no longer use nor pay analysts for winning lucrative business, they stopped paying and promoting them like investment bankers, and their numbers, pay, and prominence dwindled. Add the rise of hedge funds (who tend to disregard sell-side research completely) in the Aughts as Wall Street’s biggest and most lucrative trading partners—displacing large institutional investors like pension funds and mutual fund complexes—and the retreat of individual investors from meaningful participation in the equity market, and equity research departments transformed from profit centers and sales arms back into cost centers. And if there is one place in a sales- and profit-driven institution like an investment bank where the Board and Executive Committee do not look for senior executives, it is in staff divisions and cost centers.2 Sallie Krawcheck, ironically enough, made the leap to senior executive management just as (and largely because) the career platform she had risen to prominence on collapsed beneath her.

The rise and fall of female-friendly research departments as profit centers alone might explain the relative paucity of women among top executive ranks in investment banking. This plus the empirical tendency of women in finance to be attracted to other staff departments like legal, compliance, human resources, and information technology, like Ms Epprecht’s other example. Your chances of making it to the executive suite, except as the CFO (the ultimate staff position, held by Krawcheck and Lehman’s Erin Callan, for example) or head of one of the ”softer,” more boring divisions like retail banking or asset management, are materially hurt by building a career in one of your firm’s cost centers rather than a line position in a profit center. Is this fair? Does it make sense? I don’t know, but I guarantee you it is not limited to investment banking.

If you want to make it to the executive suite, don’t try to make yourself “useful” to your firm. Find somewhere where you can make a lot of money.

* * *

Second, the historical success of women in research in the 1980s and 1990s illustrates another point which I feel it is incumbent on me to make here. I will illustrate it with an example provided by Alison Deans (asset management):

As a manager, Deans noticed that one of her best female employees rarely sought her out. The men who reported to her often stopped in to ask about her weekend or to tell stories about business successes. The female employee didn’t take the time to nurture her relationship with her boss. “I realized that I was spending very little time with one of my most effective employees,” relates Deans. “She was so busy getting work done that the only time I saw her was when something got in her way. I started thinking like a male manager: ‘These women are always running in here with their hair on fire and the guys are all good guys.’”

This, in my experience, is all too often how women in my business mishandle the socialization aspect of the job. Ms Deans chose to make a special effort to engage her employee, and the article draws the conclusion that such organizational cultures must be changed to become more inclusive. But let me be blunt: expecting your firm to do this for you is stupid.

If you want to succeed and grow in any business, you have to manage up and sideways as well as down. Doing a great job is simply not enough. Part of succeeding in an organization involves establishing trust, and you cannot do that if you are 100% focused on just doing your job. Ms Deans’ employee was an idiot not to try to engage with her boss on a social level. Call this politics if you will, it is a critical element of career management in any organization: making friends and allies and cultivating networks of friendship, support, and acquaintance. The networking aspect is particularly critical in my business, where building and growing internal and external networks is practically the definition of the job. Research analysts, if they are any good, tend to be good at cultivating external networks among investors and clients, but the job itself—especially now given the new, hermetically isolated regulatory environment—discourages the development of internal networks. Just read Ms Epprecht’s admiring description of Maryann Keller’s workday: it is almost all externally directed.

In fact, equity research is particularly susceptible of supporting the tendency of many women who come to finance to focus on their jobs to the detriment of their careers. Schmoozing, shooting the shit, going to Chipotle with your group for lunch, discussing movies or TV shows or sporting events in the office at 3:00 am while you wait for Presentation Resources to turn that massive underwriting pitch are all indispensable parts of your job, if you want to make it anything but a short-term stint on the way to another industry. Women are not alone in making the mistake of ignoring these career management rules, but in my limited anecdotal experience a much higher percentage of female than male investment bankers tend to be highly intelligent, hyper-serious, relentlessly efficient robots. Perhaps they feel it necessary to behave this way in order to be taken seriously, I don’t know. In many respects they are better potential bankers than the middling-intelligent frat boys, lacrosse players, and oarsmen we seem to default to hiring. But those men often have far better political savvy, and they are naturals at swimming in the high pressure team environment that my business depends on. Nobody wants to work with (or for) a loner.

So keep this advice in mind, my would-be female colleagues and peers: Don’t be a fembot.

It may make you particularly effective at your job, but it also makes you that much easier to unplug.

Related reading:
Margo Epprecht, The real reason women are leaving Wall Street (Quartz, September 5, 2013)
Fingernails that Shine Like Justice (May 21, 2007)
Can’t Buy Me Love (April 29, 2012)
She’s Trading Her MG for a White Chrysler LeBaron (March 2, 2013)

1 I cite myself:

Another answer may be that the duration, timing, and demands of an investment banking career are simply incompatible with many women’s other important interests. In particular, while an analyst typically has a two- or three-year stint directly after college, after which most are encouraged to leave and get an MBA (and some elect to make the jump into private equity or hedge funds), a woman entering investment banking as an associate after business school can anticipate at least a decade before she can begin to exercise some measure of control over her life. Associates usually start in their mid- to late twenties, spend three to five years before promotion to Vice President, and then spend four to seven years or more getting to Managing Director. All during that time, they work incredibly long hours, travel like maniacs, and basically do not have any personal life to speak of. For many women, this span from their mid-twenties to their mid-thirties coincides with what they envision as the period when they will get married and start a family. While this is true for many men, also, I think most of us can agree that committing to a career in investment banking is a much more fraught and difficult decision for a woman than it is for a man. This stage is also one when junior bankers are not making enough money to make it feasible to hire full time help to care for young children. A female Vice President is certainly physically capable of having a baby while traveling 150 days a year and working upwards of 80 hours per week, but unless her spouse or partner is rolling in dough him- or herself (or willing to stay at home), she simply will not be able to afford to outsource its care.

2 The rare exceptions, like Sandy Weill’s designation of in-house lawyer Chuck Prince as his successor at Citigroup, demonstrate the wisdom of this practice. Sales-driven organizations look for leadership among their moneymakers.

© 2013 The Epicurean Dealmaker. All rights reserved.