Three’s a Crowd

In politics, the tripod is the most unstable of all structures.

— Frank Herbert, Dune

Today, O Dearest of Long-Suffering and Put-Upon Readers, Your Temperate and Even-handed Critic of All Things Vampyromorphida was led by circuitous paths to an interesting post by a former denizen of that penumbrous region of the abyssal plain known as Goldman Sachs. Said exile, Jacki Zehner, wrote a long, rambling, but ultimately fascinating disquisition entitled “Why I Left Goldman Sachs” in response to Greg Smith’s now-famous self-immolation last week in The New York Times.

By her own description, Ms Zehner was the first female trader promoted to partner at the Squid, a 14-year veteran of the firm, and a proud member of both the Executive Office and the all-powerful Partnership Committee. In other words—and in addition—she was a self-described “culture carrier” of the firm. This, as you may suspect, is very important at Goldman Sachs.

Since she joined in 1988 and left in 2002, Ms Zehner was witness to the transformation of Goldman from pre-IPO partnership into globe-straddling colossus. In her later years, she participated firsthand in the all-important deliberations of the Partnership Committee, that august body entrusted with the consideration and elevation of those found worthy for entry into the pantheon of pecuniary and socioeconomic greatness. She enjoyed, as it were, a perch in the catbird seat.

So what was my story? In my later years at Goldman I was promoted to a position wihin the Executive Office where I was responsible at some level for the people processes of the firm. As mentioned, I served on the Partnership Committee, which was a HUGE honor. I witnessed people getting promoted who were not positive “culture carriers,” and I knew exactly where people were ranked and what was said about them by their bosses, peers and more. I also knew what every managing director got paid. I sat and listened to arguments about how commercial people HAD to be promoted despite being poor team players, downright jerks or much more. That really pissed me off.

I also heard business leaders fight passionately for their people who were amazing positive culture carriers and less strong commercially. These same leaders fought against promoting the commercial animal/jerks and often won. That made me happy. For both categories of people, there was frequently a fight and the more powerful leaders’ candidate often won. Not surprisingly, partners who were great culture carriers generally had people working for them who were as well and vice versa. What made the firm GREAT for so long is that one held the other in check. You need people who are very commercial but they cannot dominate or you risk the outcome that Mr. Smith described.

During my time at the firm, there were a lot of people in that optimal category who were both great commercially and culturally, and those were the people who were quickly and unequivocally promoted. If you were to ask me, “Did people get promoted who should not should not have?,” I would say yes. There was always tension but, more often then not, the right decisions were made. Great people got deservedly promoted. Was it perfect? Of course not, but it was pretty damn good.

In retrospect, it seems clear Ms Zehner was present at the beginning of the end of the firm she knew and loved as Goldman Sachs. She just didn’t know it at the time.

* * *

Your Dedicated Bloggist has emphasized time and time again, O Dearly Beloved, that culture in an investment bank matters. More to the point, he has argued that the first and last line of defense of a firm’s culture against the necessary and ineluctable stresses and strains working against it is the executive management of an investment bank. If they do not enforce the principles and aspirations of their firm’s culture, that culture dies, and it is replaced by the lowest common denominator substitute: every man for himself.

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.

The amazing thing is that Goldman Sachs was known for years for not caving on its principles. This, while simultaneously running one of the most successful and storied investment banks on the planet, was no mean accomplishment.

Ms Zehner’s story is fascinating for what it reveals of the stresses and strains Goldman contended with in trying to perpetuate its traditional culture in the face of changing markets. Cognoscenti have always likened managing an investment bank to herding cats. It is an apt analogy. Senior bankers, from corporate finance to M&A to sales and trading, each run little businesses focused on tiny segments of the global financial markets, whether it be healthcare M&A, mortgage-backed securities trading, or investment grade debt underwriting. Most of these businesses have very little to do with each other, and each requires a different focus and business model for success. Strange as it may seem to the uninitiated, a giant, trillion dollar asset business like Goldman Sachs, when properly understood, looks a lot like a very large, very awkward aggregation of hundreds if not thousands of tiny little cottage industries. And Ms Zehner is correct in characterizing the trading businesses within investment banks as far more driven by zero-sum, counterparty relationships than the client-focused, service-oriented businesses on the corporate finance and M&A side of the house.

Ms Zehner is also accurate in describing the essential tension that an investment bank must balance and sustain between its more commercial, “rip-the-faces-off-your-counterparties” side and the “oh-mr-client-i-couldn’t-possibly-dream-of-charging-you-for-this-strategic-advice” relationship-building approach in order to be successful. Investment banks require both of these attitudes and skill sets, if for no other reason than they straddle markets, serving both buyers and sellers, and are uniquely positioned to intermediate between liquidity providers and seekers in the trading side of capital markets and capital providers and seekers in the investment side of same.

The tension arises from the fact that it is often more profitable to rip a customer’s face off in the short term than to defer potentially larger profit opportunities with the same client in the long term. When bankers whose personal franchises, careers, and compensation depends on the former are evenly balanced with bankers whose interests are aligned with the latter, an investment bank perches profitably if precariously on the knife’s edge of sustainable profitability. Notwithstanding industry critics’ perception that all investment bankers are all looking for a quick and easy score, those of us who actually work in the relationship side of the business know that our best personal outcome depends on a sustained career success lasting over a decade or more. Unlike, perhaps, traders who transact daily with equally ruthless hedge fund counterparties on a no-regrets, no-grudges basis, bankers like me in corporate finance and M&A transact with the same limited universe of clients year-in and year-out. We simply cannot afford to screw them over, because they do hold a grudge.

* * *

So how does an investment bank maintain this essential tension? Well, one way is how you promote bankers to positions of power and influence, like Ms Zehner did on the Partnership Committee. Another, equally important way is how you pay them. But, as Ms Zehner’s account demonstrates, these are highly contentious decisions. Ambitious, driven people like the ones who populate the exalted regions of Goldman Sachs fight hard for their own interests and the interests of their loyal subordinates and lieutenants. Who will cast the deciding vote, in the case of irreconcilable differences? Senior management, of course.

Which is why, at the end of the day, the conversion of Goldman Sachs and other investment banks from private partnerships owned and run by their employees for the benefit of their employees to publicly-traded corporations beholden to third party shareholders permanently and irrevocably upset the historical balance at the core of my industry. For all of a sudden, a third party was introduced, one whose interests were firmly and irrevocably aligned with the short-term perspective of the more “commercial” (i.e., sales and trading) side of the house. Public shareholders care for nothing but the present value of their holdings. They don’t really care what the share price of Goldman Sachs will be in five or ten years. And, unlike the high-paid bankers whom they employ, shareholders can exit their investment and exposure to the firm at any time. Why should they care about the long-term franchise of Goldman Sachs? Especially if selling that toxic CDO, squeezing that last drop of fees from an underwriting client, or discounting conflicts of interest to weasel your way into two or more sides of an M&A transaction can boost profits—and, presumably, the stock price—in the near term.

And the kicker is that senior management of the firm, now that it is owned by the public, has a fiduciary duty to maximize value for the shareholders. Even executives who might otherwise be inclined to preserve long-term franchise value at the expense of short-term profits will be persuaded to sign onto the short-term game, because it is their legal duty to do so. Introducing public shareholders into the capital mix inevitably tilts the tenuous balance between short-term and long-term orientations critical to a balanced investment bank decisively toward the former. Add to this the structural changes in the global financial markets over the past decade, which presented huge opportunities to exploit structured products, derivatives, and proprietary trading to bank enormous current profits at the expense of increasing numbers of former clients, and you have the institutional incentive structure which led to our current pass.

It is an open question whether investment banks can ever return to their prelapsarian partnership structures. For many reasons, I have severe doubts on that score. But it is important to realize just how much Goldman Sachs—and other investment banks—sold their legacy, franchise, and long-term value down the river by offering shares to the public.¹ Conversion from partnership to publicly-traded investment banks was not a sufficient cause for the recent financial crisis or our ongoing struggle with the proper form and function of the industry, but it certainly was a contributing factor.

Greg Smith and Jacki Zehner may be too polite to say this, O Public Shareholders of Goldman Sachs, but I am not:

I blame you.

Related reading:
Jacki Zehner, Why I Left Goldman Sachs (March 16, 2012)
The Fish Stinks from the Head (June 30, 2009)
Hypocrisy as a Business Model (March 15, 2012)


¹ Of course, they were in actual fact monetizing, or cashing out, the long-term accumulated value of their franchises for cold, hard cash. Think about that for a minute, and I believe you will see what I’m getting at.

© 2012 The Epicurean Dealmaker. All rights reserved.

Beauty Is Nothing but the Beginning of Terror

Wer, wenn ich schriee, hörte mich denn aus der Engel
Ordnungen? und gesetzt selbst, es nähme
einer mich plötzlich ans Herz: ich verginge von seinem
stärkeren Dasein. Denn das Schöne ist nichts
als des Schrecklichen Anfang, den wir noch grade ertragen,
und wir bewunderen es so, weil es gelassen verschmäht,
uns zu zerstören. Ein jeder Engel ist schrecklich.

Who, if I cried out, would hear me among the angels’
hierarchies? and even if one of them pressed me
suddenly against his heart: I would be consumed
in that overwhelming existence. For beauty is nothing
but the beginning of terror, which we still are just able to endure,
and we are so awed because it serenely disdains
to annihilate us. Every angel is terrifying.

— Rainer Maria Rilke, Duino Elegies ¹

Beauty is the beginning of terror. Love is the beginning of loss. Great emotions are tangled up in our own dissolution or the loss of those we cherish.

Life is a vale of sorrow. But sometimes—sometimes—our most sublime experiences happen just at the edge of tears.

Happy weekend.


¹ Stephen Mitchell (Ed., trans.), The Selected Poetry of Rainer Maria Rilke. New York: Vintage International, 1989, pp. 150–151.

© 2012 The Epicurean Dealmaker. All rights reserved.

Hypocrisy as a Business Model

Dear Employees of Goldman Sachs:

Words, words, words.

The world is full of words this morning, words that have spilled out furiously from every quarter in reaction and response to your former colleague’s very public and very inflammatory resignation letter. I will not add to your burden—those few of you who are reading me—by dilating at my usual length about your troubles. Instead, let me explain something to you.

I’m sure you have many questions. We all do. I very much doubt the public relations pablum your fearless leaders pulled off the shelf yesterday did much to answer these questions or assuage your concerns. It is hardly persuasive to respond to criticisms of your treatment of clients by replying “But we think we do a great job for our clients!” Of course you believe that. You are Goldman Sachs. Most of us just no longer agree.

Chief among your questions must be “Why do so many people hate us so much? Why does everybody pick on Goldman Sachs?” Surely part of the reason is due to the fact that you are a rich and powerful organization. Wealth and power attract envy and spite. This is just human nature. Another important element is that, whether you or your leaders believe it or not, many of us outside the shimmering walls of 200 West Street believe you have done or been deeply involved with some very naughty things: AIG, ABACUS, Greece, self-dealing, tortuous (and tortious) conflicts of interest, and the like. You have not been alone among financial institutions in being connected with misbehavior; far from it. And you have not been involved in every naughty episode of financial malfeasance, either. But you must admit that, to the outside observer, the fact that smoke keeps breaking out so frequently in your vicinity is highly suggestive of the presence of fire.

And it is not, as some muppets in the financial media would have you believe, that the general public has confused your firm’s mission with that of a nonprofit. Of course your bloody objective is to make money. You’re a bloody investment bank, for pete’s sake. We’re not stupid.

No, the real problem is that you’re special.

* * *

No, really, I’m not pulling your leg: you are special. You have been the most successful investment bank in the world for decades because you have been able to reinvent yourself as markets changed, to lead from the front, and to maintain a share of mind among your clients and customers far in excess of either your native abilities or actual market share. In part, you are special because you have been proclaiming yourself to be such ever since Gus Levy encouraged your predecessors to be “Long-term greedy.” And dedication to client service—putting your client’s needs above your own—has been absolutely central to your value proposition and mystique. There it is: enshrined in your business principles, parroted on every page of your annual report. Client service is Goldman’s brand.

But we no longer believe you. The slide from “client first” to ripping the faces off muppets has been a gradual, slow one, but it has been happening for a long time. There was a time when Goldman Sachs would not advise aggressors in hostile takeovers. There was a time when Goldman would not use its own private equity funds to compete for deals with its private equity clients. There was a time when Goldman Sachs would turn down transactions which it did not feel were in its clients’ best interests. All those times are long past. And yet your firm still pretends that you put your clients’ interests first. Bullshit. You are a giant fucking hedge fund which has been trading for its own account for years. The rot has even extended into one of the last presumed bastions of client service left at your organization: M&A advisory. You don’t have clients anymore; all you have are counterparties.

And hey, bully for you. That’s where the money is. Proprietary trading, structured products, and principal investment have been the engines of growth and profitability for investment banks for over a decade. Dusty old client advisory and agency underwriting have shrunk to pimples on the ass of modern finance. Since you consider yourself the best investment bank, why shouldn’t you have transformed yourself in this way? It is a measure of your success and cleverness that you have succeeded so well.

But here’s the rub: Continuing to paint yourselves as client centric when you are the opposite rankles. It is rank hypocrisy. It is bad public relations, because sooner or later people figure out you have not been telling the truth. Certainly there is nobody among your counterparties in the trading world who is under any misapprehension as to whose interests you put first. And increasingly, there are fewer and fewer muppets left elsewhere who believe the old line. It may in fact have the highest currency and belief among your own junior employees, whom you entice to join you in God’s work.

And there is a darker side to this hypocrisy. It serves the purposes of the great proprietary profit engines of your firm to ensure a steady supply of muppets and saps into the meat grinder. Trading with big, sophisticated hedge funds is hard work. More often than not, they’ll rip your face off instead of the reverse. So what could be better than a smooth-talking salesman, spouting client service and trusted advisor platitudes into the unsuspecting ear of a chicken ripe for the plucking as he leads him into the lions’ den? How else do you think you were able to book a complex trade with the Greek government with over $600 million of embedded profit without having them check the market for competing bids? Everyone knows there are sophisticated clients and “sophisticated clients.” Your client trust shtick is tailor made to fleece the latter.

So, why doesn’t your top management just come clean? Because that would defeat the purpose of maintaining your client service fiction in the first place: it makes money for your firm.

Just not in the way you claim it does.


© 2012 The Epicurean Dealmaker. All rights reserved.

Welcome to the Sausage Factory

The Squid has finally hired a new mouthpiece.

One’s first reaction is, “Poor, misguided slob.” But, upon reflection, one must admit that this Tin Man’s employment history reads like the résumé of a pathetic young striver who has been desperately chasing the poisoned chalice all his young life:

• humanities graduate from an obscure vocational school in the slums of New Haven, Connecticut;
• first line of defense to a serial philanderer from the Deep South;
• counselor to a known tax evader and professional wet noodle;
• and, in between, bag carrier for all the worst jobs imaginable at a company known for abetting the most appalling scourge possible upon the life and spirit of the modern age: aluminum siding.

I ask you: Communications? Human resources? Business development? The soul shudders.

This is someone clearly unafraid of the dirty jobs whence an ordinary, respectable citizen runs screaming in the other direction. Like giving pedicures to Courtney Love. So perhaps it is a match made in heaven, after all.

Certainly Mr. Siewert has large shoes to fill. It is perhaps too much to hope that he will be able to fulfill his role with the same magnificent Victorian aplomb his predecessor did, spitting fire and nails at slow-moving journalists and regulators alike with the withering condescension only our long-sundered brethren across the ocean seem to manage. If he does not naturally dream in sepia tones and expostulate “egregious,” “febrile,” and “chimera” in the workplace cafeteria line, however, perhaps it is best he not even try.

Then again, some less interested in spectacle and more interested in returning his new employer to its previous obscurity and mystery—like the management, employees, and shareholders of Goldman Sachs itself—might wish that Mr. Siewert succeed by failure. I venture to imagine his employment would not be viewed unfavorably if he succeeded in rendering his institution as interesting and newsworthy as congealed oatmeal again. I think the denizens of 200 West Street have had quite enough public attention for the present, thank you very much.

So welcome to the sausage factory, Mr. Siewert. I suspect your colleagues have provided you with copious briefing materials to aid your communication of the actions and intentions of your firm to the pigs plebeians outside. In the spirit of friendship, I have included a few backgrounders of my own, in order to limn the dimensions of the task ahead of you. Feel free to reach out to me directly with any questions or issues of your own.

I promise not to laugh too loudly.

Corporate Communications briefing materials:
The Mouth of Sauron (February 17, 2010)
The Fish Stinks from the Head (June 30, 2009)
The Dirt Bag Chronicles (January 22, 2009)
Overheard at 85 Broad Street (June 18, 2008)

UPDATE, March 14, 2012: Oh dear. Dearie, dearie me. I am sure this is not how Mr. Siewert wanted to start his new position. I wonder if PepsiCo are still hiring...


© 2012 The Epicurean Dealmaker. All rights reserved.

Chesterton’s Fence

In the matter of reforming things, as distinct from deforming them, there is one plain and simple principle; a principle which will probably be called a paradox. There exists in such a case a certain institution or law; let us say, for the sake of simplicity, a fence or gate erected across a road. The more modern type of reformer goes gaily up to it and says, “I don’t see the use of this; let us clear it away.” To which the more intelligent type of reformer will do well to answer: “If you don’t see the use of it, I certainly won’t let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it.”

This paradox rests on the most elementary common sense. The gate or fence did not grow there. It was not set up by somnambulists who built it in their sleep. It is highly improbable that it was put there by escaped lunatics who were for some reason loose in the street. Some person had some reason for thinking it would be a good thing for somebody. And until we know what the reason was, we really cannot judge whether the reason was reasonable. It is extremely probable that we have overlooked some whole aspect of the question, if something set up by human beings like ourselves seems to be entirely meaningless and mysterious. There are reformers who get over this difficulty by assuming that all their fathers were fools; but if that be so, we can only say that folly appears to be a hereditary disease. But the truth is that nobody has any business to destroy a social institution until he has really seen it as an historical institution. If he knows how it arose, and what purposes it was supposed to serve, he may really be able to say that they were bad purposes, or that they have since become bad purposes, or that they are purposes which are no longer served. But if he simply stares at the thing as a senseless monstrosity that has somehow sprung up in his path, it is he and not the traditionalist who is suffering from an illusion.

— G.K. Chesterton, The Thing: Why I Am A Catholic

This is a salutary reminder for reformers, contrarians, and iconoclasts everywhere. I know from personal experience that it’s hard to imagine any of the billions of human beings who preceded us on this Earth might have been quite as intelligent, perceptive, sensible, and insightful as we are. But it is our failing if we do not try.

For rest assured there have been no new problems or solutions under the Sun since we crawled out of the slime onto dry land. None of us is as smart as we think we are, and the worship of originality is our culture’s most childish, shortsighted, and naive of pretensions.

So the next time you see a law, institution, or social practice which you perceive to be foolish and unjustifiable, stop and think. You just might avoid making a pathetic fool of yourself. And isn’t that an outcome devoutly to be wished?

A tip of the hat to Megan McArdle.


© 2012 The Epicurean Dealmaker. All rights reserved.