Killing People Is a Bad Habit

Chamberlain's wife: "You glisten too brightly."
Sanjuro: "Glisten?"
Chamberlain's wife: "Yes, like a drawn sword."
Sanjuro: "A drawn sword?"
Chamberlain's wife: [Nods] "You're like a sword without a sheath. You cut well. But the best sword is kept in its sheath."

— Tsubaki Sanjuro

In the highly stylized Kabuki world that is investment banking, there are few documents more abstruse and impenetrable to common understanding than the engagement letter.

This is the contractual document, prepared by the investment banker and his or her legal department and ultimately co-signed by the client, which encompasses the terms under which the banker will work for the client on one or more particular transactions. As such, and as one might reasonably expect, the business terms of such an engagement are relatively straightforward:

• Exactly what would you like us to do for you?
• How long will we work on this for you?
• How many shiny simoleons will you pay us for working on it?; and
• What do we do if things go wrong?

In addition to the usual inclusion of a promise that the bankers won't sell your company's data down the river at the first opportunity—the hallowed confidentiality provision—there really isn't much need for a hell of a lot more in the letter. Find a deal, do it, get paid, and play nice along the way. Simple, right?

* * *

Sadly, we no longer live in prelapsarian times. Ever since the first in-house compliance lawyer slithered down the tree in the Garden of Eden carrying an apple and an Indemnification Provision in its mouth, investment banks' engagement letters have suffered the same legalistic blight that has afflicted every other area of business documentation. Now they are almost comically bloated and opaque fugues of defined terms, parenthetical meanderings, comprehensive itemizations of minor variations on picayune themes, and "provided, howevers":

This letter, when executed by the parties thereto, will constitute an agreement (the “Agreement”) between Company XYZ (the “Company”) and The Devil's Rejects, LLC (“Advisor”), pursuant to which the Company agrees to retain Advisor and Advisor agrees to be retained by the Company under the terms and conditions set forth below.

Responsibility is neatly encapsulated and evaded:

Neither Advisor nor any of its affiliates (nor any of their respective control persons, directors, officers, employees, or agents) shall be liable to the Company or to any other person claiming through the Company for any claim, loss, damage, liability, cost, or expense suffered by the Company or any such other person arising out of or related to Advisor’s engagement hereunder except for a claim, loss, or expense that arises primarily out of or is based primarily upon any action or failure to act by Advisor, other than an action or failure to act undertaken at the request or with the consent of the Company, that is found in a final judicial determination (or a settlement tantamount thereto) to constitute bad faith, willful misconduct, or gross negligence on the part of Advisor.

A close reader of such a contract might begin to wonder just which services exactly the investment bank is supposed to provide under its engagement:

The Company will furnish to Advisor such information as Advisor reasonably requests in connection with the performance of its services hereunder (all such information so furnished is referred to herein as the “Information”). The Company understands and agrees that Advisor, in performing its services hereunder, will use and rely upon the Information as well as publicly available information regarding the Company, the Target Company, and any other potential acquisition candidates and that Advisor does not assume responsibility for independent verification of any information, whether publicly available or otherwise furnished to it, concerning the Company, the Target Company, or any potential acquisition candidates, including, without limitation, any financial information, forecasts, or projections considered by Advisor in connection with the rendering of its services. Accordingly, Advisor shall be entitled to assume and rely upon the accuracy and completeness of all such information and is not required to conduct a physical inspection of any of the assets or liabilities of the Company, the Target Company, or any other entity. With respect to any financial forecasts and projections made available to Advisor by the Company and used by Advisor in its analysis, Advisor shall be entitled to assume that such forecasts and projections have been reasonably prepared upon bases reflecting the best currently available estimates and judgments of the management of the Company.

And that, by the way, is not the worst I have seen, not by a long shot.

Of course, engagement letters are written this way because they are authored and negotiated by lawyers. Lawyers whose job it is to maximize their own client's options, deniability, and wiggle room under the contract at the expense of their counterparty's. The businessmen and bankers who strike the original deal usually have a far more optimistic (some would say naive) view of the relationship, and high hopes the investment bank can help the company strike an attractive, well-priced deal in a reasonable amount of time. It is only when things go bad and the shit hits the fan that the parties begin to point fingers at each other, and the entire mess devolves into a particularly nasty cat fight. Lawyers draft and negotiate engagement letters with just this sort of scenario in mind. I suppose one shouldn't complain: that's what we pay them for.

* * *

As far as an investment bank goes, the truly important thing in an M&A deal is to get paid. Huge quantities of verbiage are shoehorned into engagement letters to delineate details on exactly when this will happen and how many greenbacks need to change hands. It is so important that many banks demand the client pay a fee upon completion of a deal substantially like the one contemplated in the agreement letter even if the bank's engagement has been terminated. This is called a fee "tail," and investment bankers will bargain hard for a tail of up to two years after termination of the original engagement. You can see their point of view: they want to get paid if their former client completes a deal like the one they advised them on within a set period of time. That way, the client is not tempted to get close to agreement, fire the banker, close the deal, and then refuse to pay just because the contract is dead.

You just can imagine how tickled this makes most clients (and their lawyers) feel when they see that little gem. The fee tail and the indemnification provisions—wherein the bank asks the client to protect it from any and all third party claims over the deal come Hell, high water, or four scary looking guys on horseback—are usually the most hotly negotiated terms in an engagement letter. Those are the areas where most disputes, if they do come, will come.

But here's the rub.

Lawyers for investment banks try to draft airtight, ironclad engagement contracts so, if worse comes to worse and the client breaches the agreement, they can sue them for specific performance and/or damages. But I ask you: what kind of fool of a service provider regularly sues its clients? A damn fool, that's who.

The ability to sue your client over breaches in an engagement contract is a nuclear option, at best. For one thing, you better have a pretty airtight legal case, or you are going to look like seventeen kinds of idiot when the judge throws your suit out of court. For another, clients talk, and you can rest assured the fact you are suing Bobby Joe for a little ol' M&A fee on some pissant acquisition is going to get around the Dallas Petroleum Club damn quick. You better hope everyone there thinks Bobby Joe is a lying prick and a complete dickwad, or you can bet your M&A workload in the energy sector is going to suffer a nasty spill going forward.

The only time it makes sense to sue a client over an engagement letter is when the client's behavior is clearly fraudulent, the client is disappearing or doesn't matter in some way, or the money involved is just too big to let go. For that reason, I have seen very few instances over my career where investment banks have taken their clients to court to enforce an engagement contract. (I actually testified on my employer's behalf in one such case years ago, but that client was a complete dickwad, so it made sense. We won.) Usually, the better part of valor—and the better business decision—is to tear up the engagement letter and chalk it up to experience. Most of the time that is the only effective way for an investment bank to buy its way back into the good graces of a frustrated and unhappy client anyway.

* * *

None of these motivating conditions apply in the case of recovering alcoholic struggling insurance company AIG or its majority owner, the Federal Reserve Board, however. Hence, I have to respectfully disagree with Michael Corkery at The Wall Street Journal. In an article today describing how AIG's new CEO is slowing down or postponing the raft of asset sales his predecessors initiated in an attempt to repay taxpayers and how this threatens a huge fee backlog for Wall Street, Mr. Corkery seems to take comfort that some of those fees are protected under contract:

To be sure, the banks may have pocketed many of these fees already or have contracts that AIG and the Federal Reserve, which is heading the restructuring effort, have to keep.

Fortunately, I do not work for any of the firms Mr. Corkery lists. If I did, I would find the existence of any such signed engagement letters very cold comfort indeed.

The prospect of suing the Government of the United States of America to collect a contracted fee on a nonexistent deal strikes me as one of the least intelligent decisions any major Wall Street investment bank could possibly consider nowadays.

And, given recent history, that is truly saying something.

© 2009 The Epicurean Dealmaker. All rights reserved.

Fooled by Fabulousness

Herewith do I present you, Dear Readers, 17 minutes, more or less, of Alain de Botton nattering on about meritocracy, justice, luck, envy, snobbery, and other foibles from the "human anthill," via that unnamed media organization which still refuses to pay lucrative royalties to Yours Truly for the use of his patented, copyrighted, and thoroughly well-known global sobriquet.

Perfect material for wasting time on a slow summer Tuesday and/or stimulating unused centers of reasoning within your brain, depending on your personal capabilities, receptivity, and preferences. I find de Botton's critique of the cult of meritocracy from the importance of happenstance in individuals' lives to be one of the more insightful nuggets within his talk. In this manner, his perspective is not unlike what I find to be one of the few useful strains of argument still emanating from that vast edifice of megalomanical pontification which used to go by the name of Nassim Taleb.



Notwithstanding any other bits of educational or morally enlightening value, I think one of the more entertaining parts was the fake headlines de Botton got the cheesy UK tabloid Sunday Sport to compose based on famous tragedies from the Western tradition. My favorite: the editors' catchy summation of Sophocles' Oedipus Rex as "Sex With Mum Was Blinding."

(Hat tip: A Fistful of Euros, via Dealbreaker. Yes, really: Dealbreaker. It must be a slow month for ridicule in the financial sector.)

© 2009 The Epicurean Dealmaker. All rights reserved.

The Limits of Sympathy

The utility of biography, Dr. Johnson argued, rests on the fact that we can enter by sympathy into situations in which others have found themselves. Parallel circumstances to which we can conform our minds shape every life. Even the great are not removed from the factors common to all: "We are all prompted by the same motives, all deceived by the same fallacies, all animated by hope, obstructed by danger, entangled by desire, and seduced by pleasure." I must confess that twenty years devoted to the biography of Newton have not in my case confirmed Dr. Johnson's dictum. The more I have studied him, the more Newton has receded from me. It has been my privilege at various times to know a number of brilliant men, men whom I acknowledge without hesitation to be my intellectual superiors. I have never, however, met one against whom I was unwilling to measure myself, so that it seemed reasonable to say that I was half as able as the person in question, or a third or a fourth, but in every case a finite fraction. The end result of my study of Newton has served to convince me that with him there is no measure. He has become for me wholly other, one of the tiny handful of supreme geniuses who have shaped the categories of the human intellect, a man not finally reducible to the criteria by which we comprehend our fellow beings, those parallel circumstances of Dr. Johnson.

— Richard S. Westfall, Never at Rest: A Biography of Isaac Newton ¹

Lest you be overawed by the towering, alien intellect of Mr. Westfall's great subject, O Intelligent and Humble Reader, do not forget that it was this same Isaac Newton who is known to have invested a large sum in stock of the South Sea Company near the peak of its bubble in 1720² and who was reported by his niece to have lost £20,000 (or £3 million in today's money) upon its ultimate collapse.

Or, as the great man himself is reputed to have said:

I can calculate the motions of the heavenly bodies, but not the madness of people.

* * *

With all due deference and respect to my learned colleagues in the study and practice of quantitative finance, I will side with Sir Isaac and state that we still have a great deal of work to do before we can confidently predict the madness of our markets.

But then, I'm just an old fogey who finished math at linear algebra and differential equations. What do I know?

¹ Richard S. Westfall, Never at Rest: A Biography of Isaac Newton. Cambridge: Cambridge University Press, 1983, p. x.
² Ibid., pp. 861–862.

© 2009 The Epicurean Dealmaker. All rights reserved.

Andrew Cuomo Is a Cheap Pander, and Other Observations

Carol Connelly: "Hey, we all have these terrible stories to get over, and you—"
Melvin Udall: "It's not true. Some of us have great stories, pretty stories that take place at lakes, with boats and friends and noodle salad. Just no-one in this car. But a lot of people, that's their story: Good times, noodle salad. What makes it so hard is not that you had it bad, but that you're that pissed that so many others had it good."

— As Good As It Gets

Envy, Dear Readers, is an ugly thing.

It may be a powerful, ancient motivator for people to improve their station and situation in life—as real estate brokers, car salesmen, and cosmetics companies from time immemorial can attest—but it is corrosive, base, and potentially destructive as well. It can transform a person who otherwise feels content with his life into a shrill, grasping, dissatisfied shrew, just because he notices that someone else has something he does not. It can lead to all sorts of chronic social ills, like celebrity magazines, reality shows, and regularly recurring profiles of Donald Trump on national television.

It is usually blind and farcically selective, as well. We envy our neighbor's new Ferrari without realizing he bought it with life savings after learning he has six months to live. We envy the thin, wealthy, and fabulously connected Upper East Side socialite without knowing her hedge fund manager husband is an abusive, philandering stranger and her children hate and despise her. We envy the famous, the rich, the beautiful, and the better or more [insert your preferred adjective here] than us without understanding either the price they pay for such gifts or the gaping holes in their lives where we possess advantages they can only dream about. We envy advantages for which we do not understand the price, and we envy possessions and qualities which we would not be willing to sacrifice what is necessary to achieve them even if we knew what it was.

Envy is the weak and lazy sister to its hardworking sibling, ambition. It is a futile, foolish, and low emotion. And it is a favorite target for populist demagogues and pandering politicians alike.

Which brings me to the Attorney General of the State of New York, the Honorable Andrew M. Cuomo.

* * *

Writing as The Deal Professor at The New York Times today, Steven M. Davidoff takes gentle umbrage at Mr. Cuomo's laughably obtuse report on the 2008 bonus compensation of the nine largest banks receiving TARP bailout funds:

I thought that this was the hard-hitting government study we needed into investment bank compensation and its relationship, if any, to the financial crisis. But I was ultimately quite disappointed.

Instead of an in-depth report on the compensation practices at Wall Street firms, both past and future, the only thing we got was compensation porn.

And uninteresting porn at that.

Echoing Professor Davidoff, I have to admit that I was similarly unimpressed. Although I realize most lawyers have difficulty writing numbers larger than "$500 per hour" on paper, I was staggered to see that over three quarters of the 21-page report were devoted to double spaced itemizations of random bonus trivia and cursory historical financials for each of the nine banks. This is the type of work a suitably trained investment banking Analyst—or, for that matter, a slightly brain-damaged monkey—could have knocked out in one evening after downing a couple of Red Bulls and some Adderall.

For this we waited nine fucking months?!

Anyway, the Professor correctly criticizes the Attorney General for failing to investigate or address key elements of his self-proclaimed brief, namely the relation of 2008 bonuses to compensation in prior years, the methodology the TARP recipients put in place to determine 2008 bonuses after they received government support, and the banks' justification for any bonuses they did pay last year. Other than collecting numbers from each bank in arbitrarily defined buckets—why, for example, look at the aggregate bonuses for the top 14 executives, exactly?—and doing a rudimentary and meaningless comparison of total compensation at each of the banks in relation to their historical net income, of all numbers, it doesn't look like the crack troops at the AG's office did much of anything with their vaunted access and limitless powers of subpoena.

But this is ridiculous. These are all empirical questions, questions which could have been investigated and addressed with each of the banks in turn without so much as breaking a sweat. It's not like the AG didn't have enough time, or his steely-eyed investigators couldn't get access to the trembling CFOs and Human Resource heads who were busy pissing their pants in fear of having Mr. Cuomo and his minions up their asses with a flashlight for the next ten years. Where are the answers to these simple questions? Did you just not do the work, Mr. Cuomo, or did you just decide to omit these results from your report, in fear they might portray a more nuanced and less politically marketable picture of Wall Street greed and excess?

* * *

I, for one, would have been very interested to learn exactly what percentage of these bankers' pay was granted in the form of non-cash compensation, like shares and options. It would have been even more illuminating to learn how much of the non-cash pay took the form of deferred compensation, pay which was locked up in the stock or options of the employing bank and which could not be claimed for years after its grant. Pay which, in my experience, a banker usually forfeits if he leaves the bank voluntarily before it vests, and pay which exposes a substantial portion of the banker's net worth to the risk and fluctuation of his employer's stock price. Risk the banker shares equally with public shareholders, with the niggling little exception that shareholders can sell their stock at any time, and the banker cannot. Of course, it would have been more illuminating to see this data broken down by level of pay, too, since it is usually the senior bankers making the big bucks who get stuffed with toilet paper, not the lowly-paid worker bees.

But I guess I see why you didn't publish that data for all the banks. It would have diluted the message to disclose for everyone what Goldman Sachs insisted you report for them: that 953 Goldman employees earned bonuses of $1 million or more, but no-one at the company took home more than $885,000 in cash. Sorta undercuts the image of fat cats dining freely on the shareholders' and taxpayers' dime, doesn't it? Joe Sixpack might not get so worked up about a banker's $10 million bonus when he learns that over $9 million of it is tied up in his firm's stock for up to five years, huh?

And while Professor Davidoff also expressed disappointment that you did not address bigger issues surrounding investment bank compensation, like the tension between individual performance and the performance of his or her firm or the potential mechanisms for clawing back previous pay, learning just how much bankers' and executives' pay is tied to the share price performance of these TARP banks—how many billions of dollars of employees' wealth is at risk along with that of shareholders and taxpayers—might just have answered both of those questions. Heaven forbid that we find investment bankers have been "playing the casino" with their own money, in addition to ours. Kinda muddles the populist message of outrage, dontcha think?

* * *

Anyway, I cannot get too outraged about this, I guess. After all, you are only a politician, and as such still reside somewhat lower on the scale of public approval and trust than investment bankers and other pond scum. In addition, your role as Attorney General makes you the chief prosecutor for the State of New York, and hence an advocate for the pursuit, discovery, and punishment of all criminals, real or perceived. It is not in your remit to be balanced and fair, or to use your powers of subpoena and investigation to discover the truth about anything. It is your job to build a case, and throw the bums in jail if you can. It is up to defense lawyers to offer up an opposing interpretation, and for judges and juries to arrive at a more nuanced and balanced vision of the truth.

And you are following a long tradition in New York, from Rudy Giuliani to Eliot Spitzer and beyond, of pursuing your version of justice—and a promising and lucrative political career, as well—in the kangaroo court of uninformed public opinion. Why befuddle the poor people with unsightly and confusing facts, when you can wrap yourself in the cloak of sanctimony and popular outrage to pelt a few fat cats in the stocks of public opinion? It's worked before, and you seem to be doing an excellent job.

So, while we are on the subject of accountability and pay for performance, Mr. Cuomo, I guess I would be interested to learn just exactly how much of my New York State income taxes was used to produce this disingenuous excuse of a marketing pamphlet for your upcoming gubernatorial campaign.

The fine and upstanding people of the State of New York deserve to know.

© 2009 The Epicurean Dealmaker. All rights reserved.

The Fish Stinks from the Head

Benedick: “And, I pray thee now, tell me, for which of my bad parts didst thou first fall in love with me?”
Beatrice: “For them all together; which maintained so politic a state of evil that they will not admit any good part to intermingle with them.”

— William Shakespeare, Much Ado about Nothing

Heidi Moore ¹ published an interesting counterpoint to all the recent Goldman Sachs-bashing at Slate’s The Big Money yesterday, entitled “Will Everyone Please Shut Up About Goldman Sachs?” Notwithstanding its title, the article seems to be less a defense of the orcish vampire squid threat to humanity everybody loves to hate and more of an encomium to its unique culture.

Ms Moore points out the fact that, for all its reputation as “a devastating hive mind that can control any institution it touches, including the U.S. government,” and as a gathering of the smartest minds, human and machine, on the planet, Goldman Sachs employees have proved singularly inept outside of the hive. I have made a similar argument—characteristically with fewer examples but many, many more words—in the past.

I have also described in these pages my experience of Goldman bankers over the course of my career and their almost uniform, as Ms Moore terms it, “lack of magic or voodoo.” For such a successful firm, Goldman Sachs seems to have a remarkable dearth of superstars, whether in my exalted realm of corporate finance and M&A or the sordid cesspits of sales and trading. Almost no-one there dazzles you with their sheer genius, overwhelming salesmanship, or scintillating personality. Nevertheless, the firm has a preternatural ability to persuade past, current, and future clients that it is the best of the best on Wall Street, no matter how badly it may have fucked up any one client’s particular transaction in the past. This is a truly admirable capability, and one which I and many other Goldman competitors continue to try and replicate, so far with less than complete success.

* * *

Taking her cue from the “current and former Goldman bankers and officials” she interviewed ² for the article, Ms Moore lays credit for the firm’s success firmly at the feet of its vaunted culture. Goldman encourages their bankers to express their opinions and disagree freely over important decisions, she says, but discourages dissent and second-guessing once decisions have been agreed. She notes that bankers are rotated freely among positions and functions, as part of developing general management experience. She cites the legendary Goldman focus on dense and high frequency internal communication via voice mail, and she posits that the firm's system of “360-degree reviews,” wherein “everyone is evaluated not only by their managers but also their underlings and peers,” not only encourages homogenization but also discourages some of the more disagreeable political shenanigans found at many other banks.

The interesting thing about this litany—which is widely known across the Street—is that few of these practices are unique to Goldman Sachs. In fact, I can confidently assert that the only really unusual practices at the firm are the near psychotic intensity devoted to communication by voice mail and the rotation of bankers through different areas and positions. While many banks are indeed noted for surface consensus belied by subversion, undermining, and open backstabbing, managerial decision making by open disagreement is not that unusual.

The fearsome old troglodytes at Salomon Brothers, for instance, prided themselves on a culture which encouraged open and voluble disagreement among bankers in pursuit of robust and thoroughly examined decisions. A correspondent remembers Solly bankers proudly explaining at an NYU recruiting function years ago that the firm did not tolerate backstabbing. Instead, if someone disagreed with you they promised to “break down the door and come at you [directly] with an axe.” Friends and colleagues from the house of Liars Poker confirm this tale: bankers would beat the crap out of each other over important decisions, and then go grab a beer or ten together afterwards. The system worked remarkably well.

Likewise, 360-degree reviews are now common across Wall Street. They have been almost universally adopted because they make sense, for all the reasons Ms Moore relates. However, I have worked at two big banks which used 360-degree review systems, and I can tell you from personal experience that they did not make a damn bit of difference. At both shops, bankers went through the motions of reviewing bosses, subordinates, and peers, but everyone knew that top management paid no attention to them. Banker pay and promotions were determined the old-fashioned way, through political patronage, budgetary infighting, and whoever screamed the loudest and most convincingly over deal revenues. No-one had any incentive to give honest reviews or constructive criticism, because anything negative could be seized upon by one's enemies or schemers among senior management as reason to reduce a bonus or even fire someone. Accordingly, all reviews became subject to massive grade inflation, and the category comprising bankers who were supposed to be rated in the top 10% of their peers magically grew to include 40 to 50% of everyone at the firm. It was a joke.

Now, maybe Goldman Sachs has figured this out, and these systems actually work for them. But if so, it is not due to the processes and procedures they have in place. It is the firm’s culture, and senior executives’ complete commitment to that culture, which makes these mechanisms successful. 360-Degree review systems, 24-hour response voice mail, and rotation of bankers through different departments only work when senior managers refuse to make exceptions to the rules. There are a nauseating number of investment banks which profess an undying commitment to teamwork and a dedicated focus on cultivating client relationships rather than chasing transactions. But these banks fall short time and time again because they do not enforce these principles. If Mr. Big Swinging Dick Managing Director who brings in a billion dollar IPO or a ten billion dollar merger throws a hissy fit and threatens to stomp out the door if he has to share credit, or a successful M&A banker refuses to manage a group in Capital Markets, or a Group Head inflates the review scores of all his subordinates to boost their pay and his power, senior management can either hold firm and preserve the culture, or they can cave. If they hold firm, everyone else at the bank hears about it, and they learn that the rules and the culture will be enforced. If they cave, everyone knows that too, and it’s off to the bad old races of “what’s in it for me.” Sadly, most investment bank executive teams cave.

* * *

Now, for all the folderol in the press about how “brilliant” this or that banker or group of bankers is, I have always maintained that individual talent and originality are highly overrated in investment banking. With few exceptions—which always have extremely limited shelf lives, as competitors reverse engineer innovations within weeks or days—there is almost nothing new under the sun in my business. Notwithstanding what they like to tell you, investment bankers don’t really sell “ideas.” They sell connection, and access, and they are successful to the very extent they can maintain themselves in the flow of market information. Investment banks derive their market power and importance by maintaining dense and robust information networks across the numerous markets they participate in. This makes them better traders, better investors, and better advisors.

In the overall scheme of things, a successful bank should prefer to have strong networks, rather than strong bankers. Take a banker with excellent network connections out of his or her supporting environment, and he or she becomes dramatically less effective. Allow individual bankers to weaken the network by hoarding clients, refusing to communicate, or actively undermining their rivals within the firm, and you weaken the bank materially. Encourage the hiring and creation of “superstars,” and you shift power away from the bank into the hands of individual mercenaries. All of these things make an investment bank less valuable to its clients, as well.

So, a bank which can subsume individuals into a cohesive mass, which can preserve and encourage the development of internal and external networks, and which can build a stable platform has a long-term advantage. Maintain a stable platform, and you remain in the flow of information and deals over the long term. Remain in the flow, and you build a credible and trustworthy brand. Do it long enough, and you just might become Goldman Sachs.

Of course, Goldman Sachs is not unique in the history of investment banking for having developed a distinctive and stable culture. A long litany of culturally distinct and successful organizations graces the rolls, including such standouts from my early days in the industry as JP Morgan, Drexel Burham Lambert, First Boston, DLJ, Salomon Brothers, Morgan Stanley, Merrill Lynch, Bear Stearns, and Lehman Brothers. The distinguishing feature of almost all of these firms, however, is that they diluted, destroyed, or squandered their distinctive cultures through a series of ill-advised mergers or acquisitions, in the benighted industry-wide pursuit of growth.

Culture grows organically, and slowly, over time. Introduce a foreign culture into an existing institution—particularly one built entirely on the back of assets who walk out the front door every evening—and you almost always destroy what you have. The glue which binds colleagues and potential rivals into a cohesive whole dissolves, and the mantra becomes every man for himself. You can rebuild a culture, or build a new one, but it takes a long time and an almost superhuman dedication from the very top of the organization. JP Morgan is a good example of a firm with a formerly distinct and powerful culture which lost its way through acquisitions and which has now rebuilt itself to a near facsimile of its former self, largely on the back of Jamie Dimon’s personality. It is still absorbing the Bear Stearns virus, but early indications are that the House of Morgan will survive the infection.

* * *

All of which helps explain why Goldman Sachs enjoys such prominence in the industry and the broader financial markets today. If nothing else, they have succeeded by being too smart—or too timid, or too insular—to buy anybody else in the last two decades. They have thrived by remaining the same—while admittedly swelling like a tick on a dog—while everybody else engaged in an orgy of corporate combination and lost or weakened their distinctive identities, franchises, and platforms.

Goldman’s integrity and cohesiveness certainly make it admirable in my eyes. But that does not necessarily mean it is not evil. A powerful culture creates a powerful divide in the minds of its members between what is inside and what is outside. Goldman employees’ dedication to the firm does not necessarily extend to its clients, its regulators, or the society it operates in. One can legitimately question whether Goldman behaves like the traditional stereotype of the mainland Chinese: if you are on the inside, and connected, you will be treated with respect and honesty; but if you fall outside the inner circle, you are fair game to be cheated and taken advantage of.

In the realm of fiction, the Borg are admirably focused, cohesive, and successful, too. That doesn’t mean they are the heroes of the story.

“We are the Borg. Lower your shields and surrender your ships. We will add your biological and technological distinctiveness to our own. Your culture will adapt to service us. Resistance is futile.”

Remember, Dear Reader, that old saw: Just because you’re paranoid doesn’t mean that Goldman Sachs isn’t out to get you.

¹ Yes, that Heidi Moore.
² I have no idea what Ms Moore's experiences were in said interviews, but I suspect that her description of these immensely wealthy and powerful individuals as drab, colorless nebbishes may prove the exception to the rule of women interviewing powerful men I elaborated earlier. I have to suspect that interviewing your off-the-rack Goldman banker generates about as much sexual tension as watching oatmeal congeal.

© 2009 The Epicurean Dealmaker. All rights reserved.