Leaves

Leave a lover with his thoughts for twenty-four hours and this is what will happen: At the salt mines of Salzburg, they throw a leafless wintry bough into one of the abandoned workings. Two or three months later they pull it out covered with a shining deposit of crystals. The smallest twig, no bigger than a tom-tit's claw, is studded with a galaxy of scintillating diamonds. The original branch is no longer recognizable. What I have called crystallization is a mental process which draws from everything that happens new proofs of the perfection of the loved one.

— Stendhal, De l'Amour ¹

And yet the crystalline bough is no longer the leafless branch. Reaching out for his beloved, Apollo feels Daphne turn to living tree under his very fingertips at the moment of his touch. Captured, the beloved disappears.

She leaves.

¹ As quoted in Anne Carson, Eros the Bittersweet: An Essay, Princeton, 1986, p. 64.

© 2011 The Epicurean Dealmaker. All rights reserved.

Devotions upon Emergent Occasions

"[T]here are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don't know we don't know."

— Former United States Secretary of Defense Donald Rumsfeld

The recent earthquake and tsunami in Japan—and the consequent crisis developing at several of its nuclear reactors—has raised the concept of tail risk to widespread attention once again. Comparisons are being drawn with the BP Gulf disaster, Chernobyl, and the financial crisis. As befits one of the most earthquake-prone countries on Earth, it appears the Japanese built their nuclear reactors to withstand the tremors adequately. It seems, however, that they might not have adequately planned for the ancillary effects of a tsunami.

Failure to foresee and plan for all potential threats to a nuclear power plant—where the consequences of failure can be catastrophic—is indeed blameworthy. We should not misinterpret Donald Rumsfeld's apt characterization of the state of our knowledge to excuse us from paying attention to known known risks and known unknown risks. For denizens of an island nation, tsunamis should come as no surprise. But make no mistake: no tail risk can be completely mitigated. That is the nature of the tail: there is no upper limit to the magnitude of the potential threat. And just because we estimate that an event of certain magnitude should only occur once every 10²⁴ years does not mean it will not happen tomorrow. Or this evening at 6:53 pm.

More generally, we cannot defend ourselves against even all the potential threats we are aware of or suspect. Such protection could only come at unconscionable cost. Do you want to avoid accidental death?: Don't drive, or cross the street, or use a gas stove, or live on a planet subject to earthquakes, tsunamis, and the occasional killer asteroid. The analogy is exact with our polity and economy, too. Every good and financial return we enjoy is associated with a host of risks, many of which, in the assumed unlikely event they occur, would cause most of us to question why we wanted them in the first place. And those are the ones we know about.

No, tail risk and periodic resulting disasters cannot be fully avoided or even reduced at tolerable cost. The existence and ineluctability of tail risk should teach us two things: radical humility, and the imperative to live life now, while it is still in our grasp.

For we all know we're going to die sooner or later. We just don't know whether it will be before the arrival of Chicxulub II or not.

No man is an Iland, intire of it selfe; every man is a peece of the Continent, a part of the maine; if a Clod bee washed away by the Sea, Europe is the lesse, as well as if a Promontorie were, as well as if a Mannor of thy friends or of thine owne were; any mans death diminishes me, because I am involved in Mankinde; And therefore never send to know for whom the bell tolls; It tolls for thee.

— John Donne, Meditation XVII, Devotions upon Emergent Occasions

© 2011 The Epicurean Dealmaker. All rights reserved.

The Mailman Cometh

Emperor Joseph II: "My dear young man, don't take it too hard. Your work is ingenious. It's quality work. And there are simply too many notes, that's all. Just cut a few and it will be perfect."
Mozart: "Which few did you have in mind, Majesty?"

— Amadeus

We receive mail at the Volcano Lair:

TED,

First, I am a huge fan of your blog. While some may say it is needlessly verbose, I find lofty English to be tantalizing.

Second, I wanted to get your opinion on the Oscar winning documentary, "The Inside Job." It seems like you think of traders as weenies and I would be interested to hear whether you believe the film made an adequate distinction between the various parts of the investment banks (i.e. M&A vs. sales/trading).

Third, I'm assuming you work at an international bulge bracket bank and I was wondering what your thoughts are vis-a-vis mid-market investment banks. Do you tend to turn your nose up at them because the size of their deals are smaller in a monetary sense?

All the best,

[Sender Redacted]

* * *

Dear SR –

First, thank you for being a fan. I have few enough of those in the world not to appreciate the ones I do. However, I think you might need to hang out with a better class of friend and acquaintance. Any putz who thinks my stylings here are "needlessly verbose" clearly hasn't lifted his or her head from Time magazine or the latest John Grisham thriller since they first learned to read. Such ignorant, poorly-educated, tin-eared boobs should be beneath your contempt, as they are mine.

Second, no, I have not yet seen Inside Job. Nor has that film's anointing as the best documentary of the year by the Great and Good of that most rigorous, nonpartisan, and perceptive academy of sociological criticism—known as the American Academy of Motion Picture Arts and Sciences—encouraged me to correct my ignorance. I tend to find exercises led by the Smug and Self-righteous in persuading the Already Convinced and Credulous of something they already believe to be tiresome, tendentious, and not worth my time. Perhaps I will get to it sometime down the road, but I wouldn't hold your breath. Even if said film were known to be the most evenhanded analysis available, I suspect I would learn little new or truly interesting about the sources of the financial crisis from it. I hold the apparently unfashionable view that the sources of same were so multifarious, interconnected, and obscure as to defy well-balanced characterization in a mini-series documentary of 20 hours duration, much less one of only two.

But, yes, you are correct: I do think traders are weenies.

Third, I never turn up my nose at any piece of profitable business. It is true that the smaller deals and smaller companies which mid-market and regional investment banks service usually yield fees which are simply too small to offset the opportunity cost of doing them at larger banks. Most bulge bracket Managing Directors—to paraphrase my first girlfriend of the 1980s, supermodel Linda Evangelista (the saucepot pictured above, for you benighted 20-somethings)—won't get out of bed in the morning for less than a $3 million fee. Most mid-market M&A deals or capital raisings simply cannot support such fees, but big banks need such or larger in order to pay for their enormous fixed and variable cost infrastructure. (Weenie traders and their fancy trading turrets cost a lot of money, especially when you have them scattered across high-priced financial centers all over the world.)

But smaller and medium-sized deals can have all the interest, complexity, and drama of bigger ones, and sometimes more. They certainly do not require any less effort to complete. In fact, given the relative dealmaking inexperience and unsophistication of small to mid-sized clients, they often require more, and more focus on the psychology of the deal, rather than the technical and mechanical aspects of it. Smaller deals can be a lot of fun. You just have to do them at an investment bank where the cost structure can support it. As a junior banker, moreover, you have a much greater chance of playing a meaningful role on smaller deals, with more hands-on experience and client exposure, than you do as Sub-Sub-Analyst #3 on a $20 billion mega-deal staffed with six bulge bracket banks. In those cases, you'll be lucky to be tasked with getting the coffee for the 2nd-year Analyst running the copying machine on the lobster shift.

Anyway, I hope this was of some help to you. Thanks for writing, and for giving me an excuse, however flimsy, to post a picture of Linda.

Cheerio,

TED


© 2011 The Epicurean Dealmaker. All rights reserved.

Sympathy for the Devil

Please allow me to introduce myself
I'm a man of wealth and taste
I've been around for a long, long year
Stole many a man's soul and faith

...

Pleased to meet you
Hope you guess my name
But what's puzzling you
Is the nature of my game

— The Rolling Stones, "Sympathy for the Devil"

I recently received an inquiry from an unnamed Professor at an anonymous law school, Dear and Long-Suffering Readers, who requested I grant his charges an interview or appearance. Demurring on the latter, since the effects of surgery to remove horns, tail, and cloven hooves have not completely healed, I elected to do the former. What can I say? After Charlie Green plied me with peyote and Balinese dancing girls, I appear to have gone all soft in the head, and am granting interviews left and right. I worry for my long-term reputation.

Anyway, Herr Professor Doktor steered his chicks toward my most recent post but two, on the vagaries and trials of travel as one of the Übermenschen, and suggested they ask me questions to their little hearts' content. HPD collected and transmitted said queries, which I have represented here, in lightly reordered and edited form, along with my discursive replies. Perhaps these nuggets will answer one or two unresolved questions in your own befuddled brains, or even while away some dull hours of a Sunday evening. I wish you joy of them.

What else were you gonna do tonight? Watch the Oscars?

* * *

Q: Do you hate your life, and if you do, do you simultaneously realize how good you have it?

A: No, I don't hate my life. Compared to most people, I know I have it pretty sweet. Could it be better? Of course. Is my job all fun and games? No, but overall I would not trade it for any other means of making a living I am aware of. A cushy retirement, on the other hand...

Q: What percentage of your job/income is built on intelligence, and what percentage of your job/income is built on bullshit?

A: Your question appears to presume that intelligence and bullshit are mutually exclusive. That has not been my experience in the real world at all. There is such a staggering quantity of bullshit floating around in the spheres of commerce, culture, and politics, that I find the occasional example of intelligent bullshit to be a pleasure and a relief. I pride myself on trying to increase its stock in the world, for others' entertainment and amusement. This applies to work, as well, where I would estimate the ratio to be 75%/50%.

Q: If your clients are constantly owning you bankers, when do they have time to own their lawyers?

A: Clients appear to have a practically unlimited capacity to own (or feel they own) their professional advisors. It's almost magical. The fact that one owns me does not impinge on his ability to own his lawyer too. On the other hand, bankers like me typically only swoop in for periods of limited duration, usually in connection with a transaction, so a client really only rents me. His lawyers, on the other hand, he owns outright in perpetuity: lock, stock, and barrel.

Q: Of the investment bankers you've worked with who are also attorneys, how do they add typically add value, if any, by virtue of having a legal education?

A: First of all, you can't bank and practice law at the same time. Regulators tend to frown on such things. However, bankers who have legal training and who have practiced law before can be quite effective in certain capacities. A trained mergers and acquisitions lawyer tends to be more technically proficient at M&A, and a trained securities lawyer can be more effective in arcane areas like structured finance than your average non-lawyer banker. But technical proficiency alone is not enough. Among other things, you need to be a good salesman. In my experience not all lawyers have that personality or skill. Those who do, and who can make the transition to a business predicated on eating what you kill, rather than slaving away at a sinecure, tend to do very well.

* * *

Q: Since you are apparently dissatisfied with the efficiency of your chosen line of work, what suggestions would you have for improving the efficiency?
– and –
Q: Would you say this seemingly inefficient client relationship model is where most of the “fat” is in investment banks, or some other traditional way of doing business?

A: I am not sure I agree with your premise that a client service business can be "efficient." There is a lot of sucking up and relationship building to do with my clients, in addition to actual deals, and sucking up in my experience is relatively time-inelastic. There is much wasted time, and many false starts, but those come with the territory of any business predicated on large, intermittent transactions. Like the Army, investment bankers do a lot of hurry-up-and-wait.

Unlike the Army and many other businesses, however, there usually isn't an enormous amount of bureaucratic fat or organizational sclerosis in an investment bank. We tend to recreate and retool ourselves too often in pursuit of the almighty buck to let much moss grow. When it does, however, it tends to happen at the biggest universal banks. Citigroup is perhaps the poster child for what happens when bureaucracy and inertia are allowed to take over an investment bank. It isn't pretty.

Q: You focus on the "pressing the flesh" aspect of your job mostly in this post. Is this what you spend most of your time at work doing, or is there another aspect of your job that you spend more time on?

A: It's important to understand just exactly what I mean in this regard. I do spend a great deal of my time with clients, traveling to them, and working on deals in their presence. But I do comparatively little of the traditional client entertainment—wining and dining, golf outings, $50,000 "bar" tabs at Scores—that you might think I do. In fact, I would guesstimate that investment bankers on average do less of this than many other professionals.

However, we do spend a lot of face time with clients both selling and doing deals, because when the future of your company, your career, and your net worth is on the line—as it often is in M&A deals and major capital raisings—the client justifiably wants to see the whites of his banker's eyes. Very little of what we do can be done solely by conference call or email. The client wants to meet us, look us in the eye, and shake our hand before he puts his fate in our hands. In large part, it is an issue of personal trust.

Q: Given [your heavy travel] schedule, how does a senior level banker adequately digest all of the research and information necessary to provide the client with a researched and informed pitch? It seems as though this working situation does not lend itself to a quality work product.

A: One word: subordinates. Seriously, I and every senior investment banker out there relies heavily on junior bankers for research, facts, financial analysis and modeling, and pitch preparation. We could not do our jobs without them.

But it's important to realize that the value I bring to a potential client or transaction is not entirely dependent on facts or analysis. The secret sauce I bring is my extensive, two-plus-decade knowledge of an industry, its participants, the executives in it, and the dealmaking and capital raising scenarios possible within it. That is network knowledge, which is not limited to shareholder lists, valuation ratios, or CEO resumes. Those are facts. Facts are critical to get right, but facts are, in the most important sense, trivial. What matters more is the mental model you plug those into; it is the network map which spits out the interesting answers.

Along these lines, you may now understand that all the travel I and my senior colleagues do—the deal pitching, the flesh pressing, the occasional schmoozing—is actually critical to maintaining our network knowledge. A client visit isn't a waste of time. It's research.

* * *

Q: You said dealing with Private Equity professionals is not all peaches and cream. What are the typical tensions between Private Equity and Investment Bankers? Is it just two egos constantly butting heads?
– and –
Q: Is it that hard to move into a position where you would be dealing with financial sponsor coverage? Would you want to, and if so, why haven't you?
– and –
Q: How is dealing with private equity firms a curse?

A: Private equity professionals are their own breed. While many of them used to be investment bankers, the nature of their job is quite different. They are tasked with investing other people's money in long-term, illiquid businesses through leveraged buyouts and the like: they are investors, not bankers. Many if not most of them are quite smart, but they are usually nowhere near as smart about any particular subject or industry as they think they are. Like most people who come from a background which they are happy to have escaped, they tend to sneer at people who still work there. They tend to look down upon us lowly investment bankers as a necessary evil.

If they have a dominant personality flaw, it is overweening arrogance. The successful ones are far richer than the successful investment bankers, but, as in banking, the number of truly exceptional and successful private equity professionals is much smaller than they think it is, and usually does not include the person expressing the opinion at the time. As you might be able to tell, I am not the best banker to assign to stroking these individuals' egos, no matter how much money they tend to pay investment banks in fees. I have my own arrogance to contend with, and that is not a good personality trait for a sponsor coverage banker.

Q: Looking back, how many of your clients (as a rough percentage) would you say have a good understanding about corporate finance and what is "best" for their companies in terms of equity versus debt and which types of securities to issue?

A: Technical proficiency with the tools and techniques of corporate finance? About 50%, with most (although not all) of those at larger companies. Strategic competence and vision—i.e., top-flight Chief Executive and Chief Financial Officers who make a real positive difference to the health and future prospects of their firms? Maybe 30%, at best, distributed almost randomly across size, scope, and nature of client. For do not forget: true value is created on the left side of a balance sheet—the assets of a firm, and how they are deployed—not in financial engineering of the right. The latter is important, but it's not where the real shareholder value rubber meets the road.

Q: What are some of the larger factors that you typically look at in a company when deciding what sort of deal to present to them?

A: I may be somewhat unusual in this respect, but I tend to like to listen to what the client thinks and wants before I start offering ideas. Until I learn otherwise, I like to assume that the CEO and CFO know their business, their competitors, and their opportunities and threats better than I do. Perhaps this humility costs me lost deals, but it certainly raises me in most executives' estimation as something more than just one more goddamn investment banker.

* * *

Q: Did your educational background play a significant role in preparing you for the real-world experience, or has that been something that you have had to learn on your own?

A: Not really. My undergraduate degree was in something completely unrelated to business or finance. My MBA provided no more help than to open the door to investment banking: an entrance ticket, or table stakes. You have to be able to communicate in my business, and it's hard (but not completely impossible) to get by without some basic level of numeracy, but I have seen people from all sorts of educational background succeed and fail in this business. A lot of it boils down to sheer grit and determination.

Q: You speak of the negative attributes of the lives of investment bankers, but what positives attributes of the job (if any), other than the money entice someone to remain in such a high-paced and high-pressured field?
– and –
Q: You tell what you thought your career would be like and what it is actually like. Are you disappointed at all? Would you change anything about your career?
– and –
Q: If were feasible for you to start over, would you choose another career? If so, what?

A: Let me tell you something: unless you're raking in Lloyd-Blankfein-level bucks, the money just isn't enough for what I do. Especially when you try to keep up with the Blankfeins and the Schwarzmans in a crazy burg like Manhattan. But that's my choice; I do not expect or deserve any sympathy on that account.

More importantly, money is not the only reason I have stayed in investment banking for over 20 years. The job is challenging, intellectually stimulating, and often a sheer blast. It's fun to work balls to the wall, day and night, for weeks on a big deal and see it hit the tape on Monday morning. It's fun to yell and scream at some numbnuts across the table at a negotiating session. It's fun to think up a multi-billion dollar transaction, initiate it, and see it to conclusion. And, notwithstanding what I said before, it's fun to fly home first class from Asia, swilling vodka tonics and watching Japanese films on DVD for 20 hours. My job can be a goddamn hoot.

Of course, it hasn't all been peaches and cream. If I could wish for one thing in my career, it would be for a few more big deals to have broken my way. On such serendipities careers—and true fortunes—are made. But I can't complain. It's been a good ride, and it's not over yet. If I started something new, it wouldn't be to make money. Maybe blogging...

* * *

Okay, kiddies. That's all for now. Happy lawyering, and if you meet me on the street one day, I suggest you tip your hat.

So if you meet me
Have some courtesy
Have some sympathy, have some taste
Use all your well-learned politesse
Or I'll lay your soul to waste, mmm yeah

© 2011 The Epicurean Dealmaker. All rights reserved.

Do You Trust Me?

When I ventured my first tiny, baby steps onto the internet over four years ago, O Dearly Beloved, one of the first sites I stumbled across was Trust Matters, the blog of my friend Charles H. Green, the Trusted Advisor. Charlie, as the cleverer among you might be able to discern, makes a living writing and consulting about trust-based selling in particular and the role and nature of trust in business and life in general. I have followed his site off and on over the intervening years, first because he addresses issues I find thought-provoking in and of themselves, and second because a good salesman—which is what I style myself to be—is always looking for tools and techniques to improve his results. I have always found what Charlie has to say on the subject worth a read.

Anyway, Charlie approached me recently to ask if he could interview me for a series on trust that he was running on his site. Having caught me in an uncharacteristically equable mood, I agreed. (I blame the peyote.) The result can be found here. Charlie asked me lots of questions, about my industry, financial markets in general, and the role of trust in both. I pitched my answers at a relatively general level, in order not to suffocate Charlie's regular audience of normal human beings with too much jargon or insider arcana. I should also warn my regular readers that I behave quite differently there than I do here. (I would not want one of you to click over there and have an aneurysm from my lack of outrageous language or behavior.)

* * *

There is one excerpt I thought would be useful to include on this site, since I do not think I have addressed this issue directly in these pages before, although I have done elsewhere: pseudonymous blogging. Here is what I have to say on that subject:

CHG: Let’s deal with one sideways issue, the question of anonymity. Some commenters on this blog have been critical of anonymous bloggers. I think anonymity can play some interesting roles, and in some ways can be critical. You’re an anonymous blogger; your view on the subject?

TED: Anonymity can indeed foster all sorts of bad, irresponsible behavior, and I am not in favor of it in general. But blogging (or even commenting on another blog) under a pseudonym, as I do, is very different. Anonymity means no identity; pseudonymity means a false or assumed identity.

For one thing, operating under a pseudonym allows one to build up a corpus of opinion that can be judged in toto. Third parties can develop an opinion of your credibility and the value of your opinions for the very reason that you present a consistent identity, that you do in fact have a name. That this name is false, and a mask, is more a matter of convenience and perhaps professional necessity than it is of deception.

If people judge my words and opinions interesting, provocative, and worthy, it does not really matter whether they know me as TED or Joe Smith. One can always worry that a pseudonymous commenter or blogger has an ulterior agenda, but I suspect that is both hard to conceal over a long period of time (I have been blogging for over four years) and, frankly, beside the point. I challenge you to find anyone commenting in public who does not have at least one unstated agenda. And yet we should be able to judge and evaluate each other’s contributions nonetheless.

I claim to be an investment banker with over 20 years experience in the business. I claim many other things besides. Neither you nor anyone else really knows this to be true or not, and yet I hope my words and opinions themselves have earned me a measure of trust in this respect that a resume or a photograph would not add to. Perhaps I am naïve, but I believe that, given enough time, trust can be built upon words alone. My entire career testifies to that belief.

There is much, much more on Charlie's site. Feel free to visit it and learn something. I know I did.

P.S. – Notwithstanding what I say in the interview, I am not really Joe Smith. He's just some guy who owes me money. And the picture Charlie used just doesn't do justice to me. I am nowhere near as tan as that guy.

Cheerio.


© 2011 The Epicurean Dealmaker. All rights reserved.