The Invention of Leisure

“Get a job.”

— Famous chorus from a popular song

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

Goldman Sachs has finally and irrevocably jumped the shark.

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

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

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

* * *

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

I can only say: Lloyd. Gary. WTF?

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

But this is stupid on many levels.

* * *

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

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

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

* * *

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

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

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

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


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

© 2013 The Epicurean Dealmaker. All rights reserved.

Our Glassy Essence

Richard Diebenkorn, Knife and Glass, 1963

But man, proud man,
Drest in a little brief authority,
Most ignorant of what he’s most assured,
His glassy essence, like an angry ape,
Plays such fantastic tricks before high heaven
As make the angels weep.

— William Shakespeare, Measure for Measure

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

— Alasdair MacIntyre¹

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

— John von Neumann²

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

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

* * *

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

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

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

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

* * *

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

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

Related reading:
Sovereign Triviality (November 19, 2011)


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

© 2013 The Epicurean Dealmaker. All rights reserved.

Punished by Fate

Winslow Homer, The Gulf Stream, 1899

“Dans ce pays-ci, il est bon de tuer de temps en temps un amiral pour encourager les autres.”

— Voltaire, Candide

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

— Frank Herbert, Dune

Marxist rationalist C.J.F. Dillow recently published a short post illustrating a central contention of his: that ordinary people systematically misallocate praise and blame to others based on their misunderstanding of the importance of chance in human outcomes. In particular, he cites an interesting experiment:

[The researchers] split subjects into a principal and agent. The agent chose between a safe option and a lottery, and the principal then split a sum of money between himself and the agent after seeing the outcome of the lottery. They found that principals’ payments depended upon the outcome of the lottery, even though this was obviously out of the agents’ control. For example, agents who chose the safe option were paid less if the lottery won than if it didn’t.

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

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

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

* * *

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

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

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

* * *

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

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

* * *

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

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

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

This is also known as justice.

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


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

© 2013 The Epicurean Dealmaker. All rights reserved.

Mirror, Mirror

La belle et la bête (1946) – Jean Cocteau

“You’ve never seen death? Look in the mirror every day and you will see it like bees working in a glass hive.”

— Jean Cocteau

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

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

And that is when I check Twitter.

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

Ms Goldberg did not hedge her condemnation of the social medium in question, either:

In his essay, Franzen compares Twitter to cigarettes. This is inaccurate. Twitter is like doing cut-rate cocaine at a boring party where a lot of the guests dislike you. (As I said, I lived in San Francisco in the ’90s.) You’re not having any fun, but it’s really hard to stop.

And this:

Twitter began to seem like a machine that runs on rage. You see something that disgusts or infuriates you. Tweeting about it provides momentary relief, followed by the brief validation of the retweet. As you scan your feed, you take in other little microbursts of nastiness. So you get angry all over again and respond, perpetuating the cycle.

As I read these choice nuggets, my first thought was not that Ms Goldberg sounds like she had a pretty shitty time in San Francisco in the 1990s, which she apparently did, or that her description of Twitter and its uses sounds remotely like the one I’m familiar with, which it does not. No, my first thought was how thankful I was that I do not follow Ms Goldberg on Twitter. Or even, were I to be completely honest, have to interact with her regularly in real life at cocktail parties. Because I mean, what?

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

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

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

In any event, Twitter is nothing more than a silly messaging service. You are not required by God, Capitalism, or the Powers That Be to participate. Therefore, if Twitter is reflecting something unpleasant back to you (like rage), perhaps you should log off and do a little self-reflection instead. As someone I often engage with but do not follow on Twitter said,

“Twitter is a mirror disguised as a window.”

Just don’t ask me where (s)he got it from.

Happy tweeting.


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

© 2013 The Epicurean Dealmaker. All rights reserved.

Go Ask Alice

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

— Jefferson Airplane, “White Rabbit”

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

— Forrest Gump

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

We’ve confidentially submitted an S-1 to the SEC for a planned IPO. This Tweet does not constitute an offer of any securities for sale.
— Twitter (@twitter) September 12, 2013

Tools.

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

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

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

* * *

First, the famous IPO discount.

I have written:

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

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

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

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

* * *

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

And you would be right. We are guessing:

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

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

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

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

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

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

And it is the market which decides:

Re Twitter's IPO: you need to understand that a good firm, a profitable firm, and an attractive stock investment can be 3 unrelated things.
— Epicurean Dealmaker (@EpicureanDeal) September 13, 2013

Don’t like that? Have some cake.

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


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

© 2013 The Epicurean Dealmaker. All rights reserved.