Saturday, March 30, 2013

How Can We Know the Dancer from the Dance?

Henri Matisse, La Danse, 1910
Henri Matisse, La Danse, 1910

πόλλ' οἶδ' ἀλώπηξ, ἐχῖνος δ'ἓν μέγα

The fox knows many things, but the hedgehog knows one big thing.


Science is the characteristic product of our culture. Similarly, understanding where science fits in – metaphysically, epistemologically, morally, aesthetically and otherwise – is our characteristic philosophical problem; we’ve been working on it since Descartes. As of now, the hardest part is to reconcile a physicalistic ontology with the apparently ineliminable multiplicity of discourses that we require when we try to say how things are. Wilson thinks this appearance of tension is unreal. He suspects that if we resist consilience, that’s because we’re suffering from pluralism, nihilism, solipsism, relativism, idealism, deconstructionism and other symptoms of the French disease. Well, maybe, but I for one plead not guilty. It seems to me that scientific Realism is quite compatible with the view that events fall into revealing and reliable patterns not just at the level of micro structure but at many different orders of aggregation of matter. The heterogeneity of our discourse would then correspond to the heterogeneity of levels at which the world is organised, and both might well prove irreducible.

Everything is physical perhaps, but surely there are many different kinds of physical things. Some are protons; some are constellations; some are trees or cats; and some are butchers, bakers or candlesticks. For each kind of thing, there are the proprietary generalisations by which it is subsumed, and in terms of which its behaviour is to be explained. For each such generalisation, there is the proprietary vocabulary that is required in order for our discourse to express it. Nothing can happen except what the laws of physics permit, of course; but much goes on that the laws of physics do not talk about. It would not be entirely surprising if the explanatory apparatus that our higher-level theories require in order to say the sorts of thing that physics doesn’t, cross-classifies the taxonomy that physical explanation employs. Maybe this kind of picture is a viable alternative to consilience. Or maybe it’s not. Or maybe both are wrong. Or maybe it’s still too soon to tell.

— Jerry Fodor 1

However, the point which is most significant in the present context is that all these laws of nature contain, in even their remotest consequences, only a small part of our knowledge of the inanimate world. All the laws of nature are conditional statements which permit a prediction of some future events on the basis of the knowledge of the present, except that some aspects of the present state of the world, in practice the overwhelming majority of the determinants of the present state of the world, are irrelevant from the point of view of the prediction.

— Eugene Wigner 2

Physics in particular and the natural sciences in general constitute a remarkable intellectual accomplishment of the human race. While they are by definition neither invulnerable to challenge nor complete, they allow us to describe and predict a broad range of physical phenomena with astonishing accuracy and precision. They have enabled tremendous industrial and technological development, as well as allowing us to express the baser part of our natures with distressing power and efficiency.

But as Eugene Wigner explains, their success in large part depends on laserlike focus on only those phenomena which can be described with the explanatory apparatus they possess. Physics and the natural sciences succeed by ignoring particulars they deem irrelevant to their purpose and focusing on a limited number of real or hypothesized invariances which they can understand and manipulate. The present location of a carbon atom does not matter to particle physicists’ prediction of its mass, regardless of whether it resides in a coal seam thousands of feet underground, an air molecule exhaled from an athlete’s lung, or a patch of pigment on the surface of a Matisse painting.

And yet, outside the laboratory, factory, and classroom, the class of particulars which physics and its brethren ignore make up the vast body of phenomena and things which human beings experience every day. Variance is the main concern of our waking lives, not invariance. Variance is what most of us seek to understand, explain, and manipulate most of the time.

The natural sciences’ ability to describe the infrastructure of the world—what matter and energy do, and how we should expect them to behave—is a triumph of our species, and undeniably useful. But physics and chemistry and cosmology stand mostly mute before a painting or a concerto. They reveal the physical origin, composition, and interaction of the components, and how certain photons or sound waves propagate from the pigment or instruments, but they can explain almost nothing that really matters 3 about a work of art. Nor, what is more, about an election, a culture, or a civilization.

* * *
Science is our best shot at explaining the constraints of our universe: what is possible, and what we should expect when events occur. Science may even be able, one day, to explain the origins and functioning of consciousness. But unless you believe the entire history of the universe, including all the thoughts, decisions, and actions of conscious beings everywhere, is completely and ineluctably predetermined by the physical facts of our universe, science will never be able to predict or explain the workings of our will. And our will, arising in an as-yet unexplained fashion from electrochemical reactions inside the spongy matrix of our physical brains, is what in turn affects and even alters the physical universe itself. Physical Matisse assembled physical objects to create that painting, then, in that fashion. Why? What does it mean to us? To you? How will that historical fact about that created physical object affect you? What are you going to do about it?

And if you don’t think a primitive figurative painting by a long-dead Frenchman matters much in the scheme of things, consider the atom bomb. Men and women decided to make that, too. Science tells us virtually nothing about why they did so, other than the relatively trivial fact that they could.

Many scientists scoff at philosophy, psychology, and cognate disciplines as empty gibberish, obscurantist mumbo jumbo.4 This is a mistake. Such disciplines are humans’ attempts to describe, explain, and, on occasion, even predict the constraints, facts, and nature of our consciousness and how it interacts with the world. This is not a trivial or misguided undertaking, for our consciousness affects the world, too.

Writing on science, Thomas Henry Huxley said,
To a person uninstructed in natural history, his country or sea-side stroll is a walk through a gallery filled with wonderful works of art, nine-tenths of which have their faces turned to the wall.
Do not make the same mistake about the life of the human mind. Otherwise, you will pass through life incapable of actually seeing any of the paintings turned toward you.

Related reading:
Sovereign Triviality (November 19, 2011)
Pixels Don’t Breathe (May 17, 2011)

1Look!,” London Review of Books, Vol. 20 No. 21 (29 October 1998), pp. 3-6.
2The Unreasonable Effectiveness of Mathematics in the Natural Sciences,” Communications in Pure and Applied Mathematics, Vol. 13, No. I (February 1960).
3 Yes, that is a value judgment. Explain value judgment to me using science. Comprehensively. I’ll wait.
4 Mind you, some of it is. There is bad philosophy and bad psychology, just like there is bad science. It comes with the territory of being human.

© 2013 The Epicurean Dealmaker. All rights reserved.

Sunday, March 10, 2013

Curriculum Vitae

An investment banker without a cigar is like a day without sunshine.
Such a clever Toad.
Nec species sua cuique manet, rerumque novatrix
Ex aliis alias reddit natura figuras.
Nec perit in toto quidquam, mihi credite, mundo,
Sed variat faciemque novat: nascique vocatur
Incipere esse aliud, quam quod fuit ante; morique
Desinere illud idem; quum sint huc forsitan illa,
Haec translata illuc; summa tamen omnia constant.

No species remains constant: that great renovator of matter
Nature, endlessly fashions new forms from old: there’s nothing
in the whole universe that perishes, believe me; rather
it renews and varies its substance. What we describe as birth
is no more than incipient change from a prior state, while dying
is merely to quit it. Though the parts may be transported
hither and thither, the sum of all matter is constant.

— Ovid, Metamorphoses, XV, 252–258

It occurred to me the other day while trimming a pensive cigar, O Dearly Beloved, that, while I have slain (or hopefully at least severely incommoded) many dragons in these pages and sacrificed many billions of pixels on the Altar of Knowledge for the benefit of your education and illumination, I have perhaps been remiss in one important respect. I have written at length as to how (and why) a hopeful supplicant might enter the grand and glorious vocation of investment banking, and I have dilated at even greater length on what grizzled old veterans such as myself do once we have achieved our cushy sinecures therein. But I have distinctly overlooked the steps by and through which an eager young tadpole fresh from the leafy groves of academe transforms him or herself into a hoary old bullfrog barking orders and swilling scotch from a gilded lily pad.

This, I freely confess, is a lamentable oversight. For the metamorphosis through which said tadpole transforms itself into said bullfrog is neither simple, obvious, trivial, nor pain-free. Many (most, really) are the novitiates entering the holy precincts of my industry who never take their final vows, and few indeed are those who manage not only to climb the slippery pole to the even slipperier platform of Managing Director but also, mirabile dictu, to stay there. A young tadpole, just starting out, would be wise to learn the path lying ahead of her before she chooses to undertake such a harrowing journey. Let this post, then, serve both for my penance and your edification.

* * *

So, let us say our aspiring tadpole has done everything right in her first 22 years, developing sufficient proof of intelligence and superhuman extracurricular talents and activities to have persuaded both an elite university and subsequently a prestigious investment bank to welcome her into their ranks. She, being both a clever reader of these pages and allergic to onion cheeseburgers for breakfast, elects to join the corporate finance and M&A department of her bank, rather than the boys’ locker room on the sales and trading floor.1,2 After submitting to the usual hazing rituals of fingerprinting and her bank’s formal training program, our heroine collects her building pass and makes her way to her cubicle as a newly minted


Now the actual specifics of our novitiate’s duties and day-to-day activities will depend quite heavily on her bank’s organization and practices when it comes to Financial Analysts. Some will put her directly into a dedicated product group, like mergers & acquisitions, where she will be tasked with supporting senior M&A bankers in executing transactions alongside other bankers. Others will place her in an industry group, like Healthcare or Energy & Power, where her job will be to support industry-focused bankers who originate and execute all sorts of deals for their clients, including M&A, capital raising, and the like. Still other banks will put her in a large analyst pool, where she will be one of many analysts loaned out on a case-by-case basis to support bankers from different groups across all of corporate finance and M&A.

In general, however, these minor details don’t matter for our purposes here. A Financial Analyst’s job is to support senior bankers, from Managing Director on down, and to do whatever they ask her to do. Most of the time, this involves doing research, maintaining and updating various databases, creating or modifying financial models for specific transactions or a range of related companies (known as “comparables”), and editing and producing tons and tons and TONS of presentation books. Analysts work under close supervision by Associates (the next rung up) and sometimes Vice Presidents, who supply the content of each presentation or related work product (at the direction of their superiors) and who check the Analysts’ work for completeness and correctness. Analysts, being bright-eyed, intelligent, but largely clueless young things who usually look like deer in headlights or zombies on Adderal, almost never travel and rarely get to attend client meetings. When they do, they virtually never speak and are only there to hand out the presentation books to other attendees. At the biggest banks, an Analyst may only see her Managing Director once a year in the distance, like some mythical unicorn, and only read about her clients in The Wall Street Journal.

Analysts tend to work the longest hours, are in the office late every weeknight and most weekends, and rarely see the light of day. If shit flows downhill, Analysts are the ones at the bottom collecting and processing it every day before they hand it back up the chain of command, hopefully prettier and less aromatic than when they received it. Analysts are cannon fodder.

Now, because of this, you can see that a successful Analyst must have several important traits. She must be intelligent, patient, hardworking, relentless, unflappable, diplomatic, self-sacrificing, and forbearing. She must always maintain her equanimity, even in the face of a spittle-flecked Associate berating her for not correcting his misspelling of the client CFO’s name in a presentation book or a Managing Director who looks at her blankly when she asks how the meeting she skipped Christmas Day with her family to prepare the book for went (the client cancelled). It helps if she is a wizard with Excel or Powerpoint or Capital IQ and is a great stickler for detail (like saving her misspelling Associate’s ass). It is extra good if she is innovative and comes up with new ideas for doing things, better financial models, or even a clever suggestion for something even her MD has not thought about on a deal. Taking initiative and asking for more work is like whipped cream with a cherry on top.

What she is not expected to do is come up with the ideas her seniors pitch, cold call new potential clients, manage transactions, or sell. Most Analysts are hired for a specific stint of two years, after which they are encouraged to move on. Most do: some back to business school for an MBA, some to clients or other industries, and a few—usually the most proficient modelers and most eager deal junkies, natch—directly to private equity, where they will trade client service kneepads for a spot on the bottom rung of a financial sponsor and the dream of becoming another Steve Schwarzman or Leon Black. Increasingly, many banks have begun to encourage their top Analysts to stay on for a third year, and sometimes even a fourth plus a field promotion to Associate, if both they and their seniors are willing. It makes sense: why lose your best-trained, most competent people to business school or the competition?

* * *

The next rung up the investment banking ladder for our aspiring tadpole is


In large part, the Associate’s job is very similar to that of the Analyst, with the exception that the Associate has both the authority to delegate and direct Analysts in their work and the responsibility to get the output right. Associates tell Analysts what to do, when to do it, and check their work when it is done. They take their marching orders from Vice Presidents and above. Associates are, to mix another metaphor into my bloggy blender, the corporals of the investment banking world. Sure, they have authority over the privates, but they spend their lives taking fire in the same foxholes the Analysts do. If an Analyst is not available or cannot do the work, the Associate does it herself. Associate hours look almost indistinguishable from Analyst hours. They spend their early years neck deep in the same shit.

The difference is that most Associates are hired into banks straight from business (or other graduate) school. This often leads to the amusing situation where a newly-minted MBA without prior banking experience, like Yours Truly in his early years, is supervising a highly-trained second-year Analyst who knows approximately 500% more about every topic, tool, and method we are supposed to be using for an assignment than I do. In such cases, a certain humility and facility for fast learning is indispensable. An Associate must also learn to manage up as well as down. It is the Associate who has to tell the frantic Vice President or imperious Managing Director that, no, spreading the entire S&P 500 over the weekend is neither possible nor a good use of overstretched junior resources, no matter what they think Warren Buffet might like to see (if only they could get him on the phone). Associates are also expected to participate in more client meetings and the occasional travel, while still keeping their mouths shut, so they can begin to absorb industry knowledge and sales tips and tricks from their betters. Plus carry their superiors’ bags.

Associates, of course, are the most junior investment banking professionals who have actually taken final vows. Unlike Financial Analysts, many of whom sign up for a two-year stint to get a prestigious job on their résumé, make some money, then light out for the territories never to be seen again, Associates are expected to be lifers. Unlike Analysts, they usually start their careers specializing in a particular product area (like M&A or Leveraged Finance) or industry coverage group. They are expected to learn not only how to make flawless pitch books and financial models and manage the Analysts supposedly doing the work, but also the ins and outs of their groups’ business, clients, competitors, and transactions. Depending on the size and staffing of their banks, they may be asked to interact directly with lower-level employees at their clients’ companies on routine relationship or deal matters. They normally take first-line responsibility for making sure all the endless minutiae of investment banking transactions, both internal and external, move as planned.

In order to succeed, our Associate must make sure everything she is asked to do comes out perfect and on time. She must take the initiative to look for more work, since there is always more work to do, and she must begin to learn enough about her profession to offer intelligent, insightful observations and suggestions when they are helpful. She must learn to manage a very wide range of high-strung personalities under conditions of extreme pressure. The Associate must aspire to be (and be seen as) the ultimate safe pair of hands. Associates do not have responsibility for maintaining existing client relationships or developing new ones, and they have no sales or revenue responsibilities, but they are attached to the success of their group and their department in a way no Analyst is. The Associate is responsible for both her performance and the performance of her subordinates, but Associate is the first role in my industry where a professional is expected to grow out of her role and into the next one. Being an Associate is the first real step on the ladder of apprenticeship in my business.

* * *

If all goes well with our tadpole’s development, sometime within four to six years she should be promoted to


Vice President, as the rather pompous title implies,3 is the first time a banker is truly expected to become a real expert in something: an industry, a product type, a set of clients. In exchange for insulation from the day-to-day grind of shit farming in the trenches with the Associates and Analysts, a Vice President is expected to start coming up with ideas for her group’s clients, start writing most of the group’s presentation materials, and start supporting her Managing Director much more closely in sourcing and originating deals. A Vice President is expected to attend most client meetings and begin to contribute meaningfully in many. A VP is also expected to take lead execution responsibility in-house and out for active deals, and is usually the point person a client CFO interacts with daily during a live transaction. While it is unusual for Vice Presidents to source new client relationships or live deals, it is entirely expected they will assume an increasing share of the burden of maintaining existing ones. Vice Presidents often become the glue for their groups and act as clearinghouses for administrative tasks as well as growing into more of a sales role in support of their MDs.

Vice Presidents are not expected to do basic research, program or update financial models, proofread presentation materials, or nitpick production details like fonts, color schemes, or graphics formats. In other words, they are not expected to do Analyst and Associate work. However, like all investment bankers, they are responsible for the work produced under their watch, so if a VP’s Analyst and Associate produce crap work, it is up to the VP to fix it, even if that requires her to pull an all-nighter doing so. (In which case, the Associate and Analyst better watch their asses.) Vice Presidents are also not expected to generate revenues independently, although their performance getting and executing deals in support of their MDs is important enough that they can begin to enjoy meaningful performance bonuses in line with the group’s success.

Because the nature of the job shifts so dramatically from anal-retentive, in-the-weeds detail mongering to actual independent thought, interpersonal relationship cultivation, and growing sales responsibilities, the transition from Associate to Vice President is the most fraught for many investment bankers to manage. The very intellectual and personal qualities which make you an attractive and effective candidate for Analyst or Associate become increasingly irrelevant, only to be replaced by interpersonal skills and predilections which are often fundamentally at odds with your prior role and responsibilities. For this reason alone, we see substantial attrition, both voluntary and involuntary, in Vice President ranks across my industry. It is not for nothing my fellow Associates and I made fun, shortly after we arrived, of an aging Vice President at my first firm, who could not seem to make the transition. We dubbed him amongst ourselves a “very, very good Associate.” He did not last long.

I have said it before: the higher you get in my business, the more it becomes pure sales. Vice President is when a banker really begins to see the truth of this remark for herself, and it is when she (and her bank) must make the determination whether she has the goods to continue.

* * *

Finally, after four to seven years of flogging herself and her bank as a Vice President, the successful frog finally breaks through and becomes a


At this level, which is mine, the job morphs completely into pure commodity sales. Managing Directors’ one and only responsibility is to bring in revenue, in the form of deal fees, and they do it any way they can. Some of us become product experts, like M&A or Leveraged Finance gurus, who have no clients of our own but who are indispensable to MDs who do have clients that want our products. We execute transactions which generalist MDs cannot, and we get to split the fees and the credit for our efforts. Some of us get to know an industry backwards and forwards, making ourselves better informed about the strategy and operations of that industry’s participants than any one of them could possibly become themselves (since competitors, duh, don’t talk to each other). Others of us cultivate and maintain new and existing relationships with paying customers, wining, dining, and schmoozing the drunken sailors who weave across the landscape, dispensing dollars, pounds, and euros for transactions large and small. Such MDs’ highest and only purpose in life is to be relationship bankers. At the biggest banks, these MDs act as concierges for the product and industry experts in their ranks, introducing their clients to the people who can actually execute the deals in question. At smaller banks and boutiques, relationship bankers usually pick up the tools and execute the deals themselves, as well.

It doesn’t matter. The only rule for Managing Directors is to bring in the simoleons. That is our job.

As you might expect, we don’t pay attention to the details of our presentation materials or the day-to-day minutiae of live transactions. As soon as we land a new deal, we are off, looking for the next one. We don’t get paid for hand-holding, relationship building, deal-doing, or advice-giving until and unless said activities result in legal tender clearing our employer’s bank account. Of course, some of us do pay attention to such non-revenue trivialities, if only because we play a long game in which delivering on your promises, providing good quality service, and sticking to your word actually affect your ability to make money in the future. But the point is we do not proofread our presentation books the night before the big pitch, unless something is seriously wrong. The best investment bankers don’t need presentation books to win deals. The best meetings I have had have been ones where I did not even open the book. Yes, I am that good, but, no—too—the printed materials really aren’t that important. After all, if I wanted to sell glossy presentation books I’d work for Kinkos.

* * *

Of course, above my rank there are Group Heads and Department Heads and Division Heads and the Executive Committee of the bank—not to mention the C-suite—but that is not an arena in which I am really interested in playing. Above the revenue-generating Managing Director level, your job becomes one of politics first and foremost, not finding, developing, and serving clients. Some people love that shit, and some are very good at it. Not me.

But if you are one of those people whose life ambition is to become Jamie Dimon, you don’t need or want my advice anyway. In fact, it was probably you who slipped the knife between my shoulder blades while I was writing this.

I thought I felt a twinge.

Related reading:
A Corporate Finance Bestiary (March 13, 2010)

1 Those among you who are in fact fond of onion cheeseburgers or who have other reasons to prefer the generally faster-pace and shorter hours of the trading floor will likely have to look elsewhere for your education on what the evolution of a new recruit into a senior salesman or trader looks like. While the titles and the raw material are largely the same, the day-to-day job and career paths are foreign enough to my experience that I would do you a disservice if I pretended to know what they are like. Sorry.
2 By the way, I’m not making up the bit about onion cheeseburgers for breakfast just to be a prissy corporate finance asshole (although I’m probably that, too). Michael Lewis relayed it as a key plot point in describing Lew Ranieri and his mortgage-backed securities traders in Liar’s Poker. Look it up. To be fair, I haven’t smelled one on a trading floor in years, so those dietary habits may no longer exist. You never know, though. And it is a great dig.
3 It is no coincidence that the investment banking role which first entails meaningful client contact bears the title Vice President. After all, VP actually means something in the real world of non-financial corporations, where Vice President posts tend to be relatively rare and occupied by seasoned professionals. It is my industry’s sop to the poor 55-year-old Chief Financial Officers who have to talk daily with our 30-year-old VPs in the course of billion dollar IPOs and ten billion dollar mergers. At least they can kid themselves that they have the ear of a senior officer of their bank. (There are approximately umpty billion Vice Presidents in my industry, and approximately none of them have signatory authority.) We learned this trick from the commercial bankers, by the way.
4 Often (usually? why would I care?) there is a transition step between VP and MD entitled Director, Executive Director, or Principal. All you need to know is that this role is a hybrid between Vice President and MD, with hybrid responsibilities and characteristics. Just mix the two in your mind, and I’m sure you will be able to follow the plot. After all, you’re a clever person: just interpolate.

© 2013 The Epicurean Dealmaker. All rights reserved.

Saturday, March 2, 2013

She’s Trading Her MG for a White Chrysler LeBaron

I'm not saying this is true, and I'm not saying it isn't true. I'm just saying you might want to check.
Path dependency is a bitch.

— Unattributed

Diligent readers of these pages will recall I first addressed the relative paucity of women in investment banking (and the related area of private equity) well over five and one-half years ago. I addressed a number of commonly-held arguments why this might be so, and I rejected most of them for the assertion, based upon my own experience and perception, that there are few women in my industry because most women are simply not interested enough in becoming or remaining an investment banker. Acknowledged in my argument were the indisputable facts (to me, at least) that a) those women who did stay and make careers in corporate finance or M&A were at least as tough, competent, and successful as their male peers and b) the often impossibly demanding nature of the job made me wonder why anyone of any gender would want to stay in it if they did not have to.

I also pointed out that the mostly American investment banks I’ve belonged to have made sustained and (in their eyes) heroic efforts to redress this imbalance ever since the mid-1990s, if not before. While sustained attention and encouragement to boosting the hiring of women and other minorities1 did increase their uptake of female university and business school graduates into entry-level analyst and associate classes, it seemed most banks simply could not hang onto the women they hired. Additional measures were taken, including outreach through corporate and extra-corporate affiliation groups like 85 Broads, more aggressive recruiting on business school and college campuses, and internal sensitivity programs geared toward eliminating sexist and other discriminatory behavior as well as dampening down the traditional frat house atmosphere common in many parts of banking, especially the trading floors. Unfortunately, from what I can tell, none of these measures seems to have had much success. In fact, there seems to be approximately the same number of women in investment banking now that there was at the beginning of the 1990s, before the industry itself began to swell like a tick on a dog and (related, maybe?) investment banks began to realize they better increase the diversity of their professionals.2

Now we have actual data out of the United Kingdom which confirm the lack of progress in this area:

For every woman in a UK Financial Services Authority controlled function at a top global bank operating in the City of London there are, on average, five men in similar positions, according to Financial News analysis. FN looked at the gender split at the top-10 banks operating in the UK, based on the Thomson Reuters league table for global investment banking fees in 2012. This group comprised JP Morgan, Bank of America Merrill Lynch, Goldman Sachs, Morgan Stanley, Citigroup, Credit Suisse, Deutsche Bank, Barclays, UBS and Wells Fargo.

A few things are worth noting about this report. First, while the bankers being tallied all work and/or are registered in the UK, virtually every bank on the list is domiciled in America or Europe. Only little old Barclays, after its ingestion of Lehman Brothers in the U.S., flies the Union Jack for Britain. So, while we might guess some of this stasis could be put down to the allegedly less evolved attitudes toward women in the UK banking sector,3 we cannot ignore that the culprits in question are global banks with robust global diversity and recruitment policies which are supposed to militate against such outcomes. Second, the FSA controlled function filter is a good one. It captures most everyone who actually qualifies as a “front office,” client-facing investment banker or trader, as opposed to file clerks, IT support people, and other back office and staff drones who can only legitimately claim to be an “investment banker” when they are buying a £300 bottle of vodka for clueless university co-eds at a Soho nightclub. This is important, for the presence of women in non-client-facing, staff positions in investment banking is disproportionally high.4 Last, the proportion of women in FSA-controlled positions in investment banking is disturbingly unchanged at only 18% from the first time the FSA collected these statistics in December 2001.5

These figures are broadly consistent with my own anecdotal experience over the course of my career. I cannot and will not speak for the sales and trading side of the house, or proprietary trading, but in my hermetically sealed world of corporate finance and M&A the gender balance has stuck roughly in this neighborhood for the last 20 years or so I have belonged to the investment banking guild. At each firm I have belonged to, the number of women in middle-level or senior client-facing or money-making roles has always amounted to ten percent or less of their peer group. The ones with seats are good, aggressive, successful bankers, just like almost every one of their colleagues, but they were and are scarce, notwithstanding almost two decades of determined efforts by most of these banks to boost their number.

The burning question, of course, is why.

* * *

The easy answers—that investment banks actively discriminate against women, that the investment banking “boys’ club” constitutes an unreconstructedly hostile environment for women, or that investment banks are indifferent to improving their gender balance—are demonstrably wrong. Just reading that Financial News article should disprove the first and last of these. I can assure you from personal experience on recruiting and hiring committees that the banks I’ve worked at have gone out of their way to recruit and hire more women, even to the extent of favoring them over other, equally talented male candidates. If you are a smart, driven, aggressive woman, you have an advantage getting into investment banking. Trust me: every bank from Goldman Sachs on down will put its thumb on the scale on your behalf.

The question of environment is a more nuanced one. It cannot be questioned that investment banking—even in the supposedly hushed, buttoned-down precincts of corporate finance and M&A, where I work—is a tense, aggressive place marked by high stakes, intense pressure, and occasionally treacherous infighting. In the not-so-distant past, it also cannot be denied that this environment, dominated as much as it has been by men, often degenerated into cursing, yelling, and fratboy-ish misbehavior likely to offend women, or worse. Overt sexism and sexual harassment were prevalent, just as they were in many industries in this country, and men in positions of power made fools of themselves at women’s expense. But it has been many years since investment banking management has been willing to ignore such hijinks. Now, every bank of size has extensive formal diversity programs and sexual harassment policies in place. These policies have put an end to all kinds of subtle and overt discrimination and behaviors that women and other minority groups might find offensive. Gone are the days when banks turned a blind eye to bankers entertaining clients at strip clubs, Managing Directors hitting on their subordinates, or employees emailing pornography around the corporate intranet. These things still happen every now and then, of course, but when they do the victims have a ready and willing ear for their complaints and the offenders are often fired on the spot.

The tension and aggressiveness of the business remains, however. Given the stakes and money involved, that will never change. But anyone who thinks women cannot succeed in an environment characterized by high pressure performance expectations, political jockeying, and the occasional streak of bad language obviously does not know a lot about women. The successful women bankers I know give as good as they get. What remains can only be characterized as “hostile” by people who cannot tolerate high pressure work environments. That applies to most people, regardless of gender. If that applies to you, we in the industry continue to invite you not to apply for a job in our pressure cooker, no matter what form your personal plumbing takes.

* * *

It is true, as the FN article states, that the number of women who join corporate finance and M&A straight out of college or business school has climbed to a substantially higher percentage than it was in the past. (It remains well short of parity, though.) As I look around my floor, I see women comprising much more like 30 to 40% of the junior bankers below the level of Vice President. I get the sense that this is common across the industry.

We hire less than half of our incoming analyst classes from among women, notwithstanding equal or near-equal gender balances in university populations, because fewer qualified female candidates apply than men. Part of this is due to fewer women enrolling in business, finance, and economics majors, which puts them at a comparative disadvantage relative to men from those same programs. While I have stated in the past that I think extensive prior exposure to finance and accounting is highly overrated as a job qualification for corporate finance or M&A—and I still believe it—I cannot deny that not having those qualifications when everybody else does reflects poorly on a candidate’s demonstrated interest in my profession. It is hard to trust a potential employee has the drive and ambition to spend 100-hour weeks, weeks at a time, modeling and preparing financial presentations when they have not demonstrated significant commitment to similar work in their coursework. And the key criterion we select for in my business, alongside general intelligence and drive, is a burning desire to be an investment banker. Speaking from experience, you have a much higher hill to climb to convince a bank recruiter you have this when the most extensive exposure to numbers you can relate is the time you indexed a professor’s monograph on 19th Century Catalan poetry.

Even in business school, where credentials are more evenly distributed, it seems fewer women in each class apply to investment banks than men. In the dark ages when I got my MBA, there were lots of women in my class, but virtually none of them applied to banks. They opted for marketing, international business, or general corporate roles instead. Perhaps that has changed in the interim, but we can’t hire women if they don’t apply for a job in the first place.

But the real question, nowadays, is why, having hired women into a third or more of our junior professional positions, less than half of them stay as they rise in the ranks.

* * *

One answer could be that, notwithstanding banks’ mostly successful efforts at eliminating overt sexism and discrimination, women get tired of dealing with and/or get shown the exit early due to covert, subconscious, or institutionalized sexism. In other words, senior male colleagues and peers discriminate against women without even knowing it, say, by assigning them lower quality projects, more difficult clients, or impossible bosses. It is certainly possible. Women are scarce in investment banks, so few male investment bankers get to work with, for, or opposite them and thereby have any conscious or unconscious prejudices proved wrong. If embedded sexism exists, it may well be self-reinforcing. But this ignores the project-based, episodic nature of our work, which is very hard to manipulate, the extraordinarily important influence of luck on real and perceived success, and the fact that an important skill in investment banking is learning how to make lemons into lemonade. At a junior level, superior performance is measured by a relentlessly positive attitude, hard work, attention to detail, and an eagerness to do anything and everything your superiors want and need. At more senior levels, where a banker begins to manage clients and deals directly, performance is measured directly by monetary results, which depend not only on effort and intelligence but also on luck. Both of these sets of criteria are largely in the control of each individual banker, and their evaluation is public enough that it would be very difficult to consistently manipulate it in a sexist or discriminatory fashion.6

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.

A final answer may lie in the nature of my business itself. As I have explained many times before, corporate finance and M&A are extremely expensive, intangible commodity services. They are not sold or bought on the basis of superior service quality (which is effectively impossible to determine, either ex ante or ex post) or price (which is largely uniform across providers). The services we sell (mergers, IPOs, LBOs) tend to be extremely important and very frightening to our customers, who tend to be infrequent and inexperienced buyers of those services. Accordingly, they usually rely on two chief factors to choose their service provider: the bank’s own brand name and reputation, and their trust in the senior banker pitching for the business. Trust, and the relationship it is built on, can only be cultivated over time between a banker and a client who are in some important ways sympatico. Among the features which drive such sympathy, we must surely include personality, background, common interests, and compatibility. It is not unreasonable, at least to me, to think some clients would accordingly be more comfortable selecting an investment banker who happens to be more like them; that is, one who is also a man or woman. One would certainly expect this effect to be strong among sexist men.

To the extent this last factor has any effect on the selection of investment bankers by clients, which I would argue it does, at least at the margin, we might be able to explain why so few women succeed as high-powered corporate finance or M&A bankers. It may be because, as we all know, so very few of the CEOs and board members selecting investment bankers in this country tend to be women themselves, and so many of the men in those positions are sexist bastards.

In other words, the problem of too-few women in senior investment banking positions is likely to be much bigger than investment banking. You’re just not gonna be able to replace the QWERTY keyboard with another goddamn seminar.7

Related reading:
Richard Partington, Gender split little changed for a decade (Financial News, February 26, 2013)
Fingernails that Shine Like Justice (May 21, 2007)
Mine’s Bigger Than Yours (April 14, 2007)
Recipe for Success (October 19, 2007)
If the Phone Don’t Ring, You’ll Know It’s Me (October 1, 2011)

1 Relax. I mean minorities in my historically white, male, Caucasian industry. Just checking to see if you’re paying attention.
2 Economists and social scientists alike will be displeased to learn I am basing my perceptions of gender imbalance in my industry, then and now, on anecdotal evidence witnessed and collected firsthand by Yours Truly and trustworthy firsthand sources known thereto. That being said, however, I do get around. Also, if there has been a firm or two comprised primarily of Amazon warriors conducting distaff investment banking in relative obscurity for the past 20 years or any portion thereof, I must say they’ve kept a damn tight lid on it.
3 Alleged by a small number of female investment bankers who have lived and worked in both the US and the UK and not disputed strenuously by the males I’ve discussed it with. While attitudes have apparently changed, some of the stories I’ve heard from London trading floors in the 1990s would make the most determined American male chauvinist’s toes curl.
4 The difference between client-facing, revenue-producing or line positions and staff positions is critical. The former generate all the money; the latter, while critical, only support line workers as they make money. Line workers, like salespeople everywhere, make much more money that staff workers. Line departments are profit centers; staff departments are cost centers. Investment banking employment of women is dominated by staff positions: administrative assistants (almost 100%), human resources (almost 100%), legal and compliance (probably much more than 50%), finance, and administration.
5 From the Financial News article:

There were 16,034 individuals holding controlled functions at the top-10 banks at the end of January this year. Of these, the gender of 249 employees could not be identified due to unclear data. Of those who could be identified, 12,959, or 82%, were men, while only 2,826, or 18%, were women.

To add to the discomfort of this stark imbalance, FN analysis also shows that little has changed in more than a decade.

At the end of December 2001 – the first year in which the FSA kept a register of approved persons – the same 10 banks employed a total of 15,469 employees in controlled functions. The gender of 268 of those employees could not be identified due to unclear data. Of those who could be identified, 12,422 were men, or 82%, and 2,779, or 18%, were women.

As an aside, I find it intriguing how little changed the absolute number of controlled persons is from 2001 to present. I would be very interested to see a time series of this data over the intervening decade.
6 Perhaps some women get discouraged by the senior women already in positions of power in the industry, as a recent study of professional women in other industries suggests. I have not seen this in action (although why would I?). However, it goes contrary to the fact that junior bankers tend to work with a number of senior bankers, men and women, and talented bankers have more flexibility to find a satisfactory working relationship both within their own firm and at competing firms. Junior women do not get automatically assigned to female senior MDs.
7 Which isn’t to say, naturally, that we shouldn’t try. I’m on record for getting more women into the industry. We need the talent. I’m just saying we won’t be able to do it all by ourselves.

© 2013 The Epicurean Dealmaker. All rights reserved.