Didja Miss Me?

The President: "Jiminy Jumpin' Jesus, I can't believe we're gonna pay that madman! I got nukes up the ying-yang. Just let me launch one, for God's sake!"
Commander Gilmour: "Sir! Are you suggesting that we blow up the moon?"
The President: "... Would ya miss it? [looks around the table] Would you miss it?"

— Austin Powers: The Spy Who Shagged Me

1.) For those of you who haven't noticed, I've been missing lately. Sorry. Been busy. Day job, you know.¹

2.) I have continued to be amazed by the sheer number of visits to this site during my bloggy hibernation. Either all your RSS readers are set to auto-refresh, or a hell of a lot of you need something much better to do. Don't you have jobs? Or homes? Or at least demanding girlfriends?²

3.) I have been reliably informed that something scandalous has recently been unearthed which involves a recurring target of Your Formerly Diligent Blogosopher's ruminations. I even believe the word "fraud" has been bandied about liberally.

Given that a) I have been occupied elsewhere, and b) I really couldn't give a flying fuck in a rolling donut whether the Great Vampire Squid of West Street (new digs, natch) vanishes into the singularity or not, I frankly have not paid much attention to the scandal beyond a cursory perusal of the headlines and a couple of blog posts. Honestly, life is just too short.³

However, in the spirit of duty which compels Your Humble Servant to satisfy every bloggy whim my Peremptory Audience demands of me (and also because Natasha has temporarily left the hotel room to get more caviar and ice cubes), I will make the following brief observations:

i.) The parties which Goldman supposedly defrauded were large and supposedly sophisticated financial institutions. The managers of these institutions were or should have been paid quite large sums of money to, among other things, protect their stakeholders from fraud, unethical sales practices, and general office supply stealing. I have no sympathy whatsoever for the knuckleheads at ACA or IKB. And, frankly, neither should you.

B.) Whether the alleged fraud rises to the level of an actionable civil claim or simply represents unethical behavior is a question for a court of law. I am not qualified to judge, but the criteria which ultimately determine the nature of Goldman's alleged offense will be legalistic ones, akin to judging exactly how many mortgage CDO investors' brains can be fitted onto the head of a pin. While the answer may be definitive, it will not be particularly revealing to the vast majority of us who live outside the cloistered halls of Americus Litigalis.

4.) I must agree with Felix Salmon and others, who claim that the real damage to Goldman Sachs has already been done, with its formerly venerated name being dragged publicly through the mud with an accusation of fraud. While this may have little effect on the majority of Goldman's business on the sales and trading side of the house—where counterparties are generally too smart to raise a stink about the 800 pound gorilla of the global financial markets (and often too unprincipled themselves to care)—⁴ it should and will have an effect on Goldman's extensive investment banking business with governments, corporations, and other entities.

The Squid has been living for years off the simple fact that, like the fabled IBM of yore, no-one ever got fired (or sued) for picking Goldman Sachs. That calculus has been changed, and I and every one of my red-blooded peers in the industry who is not currently drawing a paycheck signed by David Viniar are making damn sure that CEOs, CFOs, government officials, and Boards of Directors know it. For those of you who were wondering, this is the real reason why Goldman's market capitalization has taken the vapors to the tune of more than ten billion dollars in response to an action likely to cost it no more than a tiny fraction of that amount: its reputation premium is quietly and rapidly evaporating. There is no shortage of competent investment banks and adequate investment bankers available to conduct the financing and M&A business of the global corporate and government economy. No longer can Goldman rest assured that it will win mandates simply because it is Goldman Sachs. In fact, it may lose many for that very reason.

The playing field has been leveled to a material degree. I and others like me could not be more pleased.

* * *

Now, if you'll excuse me, I must get back to disparaging Lloyd Blankfein's appalling taste in neckties to his former clientele. It's a dirty job, but somebody's got to do it.

Cheerio.


¹ This condition is likely to persist for the indefinite future. The good news is that this means things are looking up for M&A deal lawyers, Ukranian hookers, and purveyors of overpriced French champagne. The bad news is that, well, you won't get to read about these things quite so much as before. I suspect most of you will manage.
² It is my firm belief that more than 97% of my readership consists of unmarried, overworked males, a figure which matches the composition of my chosen field of employ. To the extent I am wrong, and any of you reading this now are female, I will of course demand proof. An 8" by 10" glossy photo of you in lingerie or a thong bikini, along with a detailed description of any identifying birthmarks, verbal tics, and favorite fetishes, should be mailed to the address listed on this site. Upon receipt, my trusted amanuensis Igor will contact you with further instructions.
³ If you agree with this sentiment, stop reading now. Go back to snorting coke or washing your dog or walking your gerbil, or whatever it is you do in your spare time. I will join you shortly.
⁴ Although just wait and see what happens if enough of them sense that Goldman is mortally wounded. They'll gang up and rip it to shreds without a second thought, just like they did to Bear Stearns and Lehman Brothers and almost did to Morgan Stanley. Live by the sword, die by the sword, baby. Booyah!

© 2010 The Epicurean Dealmaker. All rights reserved.

Poachers Turned Gamekeepers

As the slow-motion train wreck which was Lehman Brothers unfolds once more before our eyes, if not in the pages of our mainstream media—who continue to proclaim against all available evidence that they really, really do perform a valuable function in democratic society and hence should continue to be paid more than bupkis for it—then in the febrile, overheated backwaters of the econoblogosphere, Your Oft-Ignored Pontificator has been inspired to venture a few modest observations.

My aperçu of the day was inspired by readings among several of the more rational and composed voices in said bloggy peanut gallery, including David Merkel, Mike Konczal, and Felix Salmon. It was Felix's piece which offered the most direct spur to my reflections, with the following remarks:

In other words, the Fed has the ability to regulate; all that’s needed now (and was missing in 2008) is the willingness to do so and to bare teeth once in a while.

A good way to institutionalize that is to implement what David Merkel calls “dumb regulation” — once you put simple rules in place, it becomes much more difficult (although never, of course, impossible) to override those rules or to ignore them. The problem with Lehman was that there were no simple rules, and that no one at the Fed or the SEC felt comfortable making up new ones on the spot, like “you’ve got to be able to pass the stress test which we invented five minutes ago”. I, for one, wouldn’t want to be the regulator who had to receive the phone call from Dick Fuld after implementing a rule like that, using dubious legal authority.

One of the problems with giving lots of supervisory authority to the Fed is that the Fed is run by economists who care primarily about setting monetary policy, as opposed to being run by bankers who care primarily about bank regulation and systemic risk. The base-case scenario is that unless and until we start staffing the Fed with a bunch of poachers-turned-gamekeepers, the biggest banks are likely to be able to smooth-talk their way past the Fed’s regulators.

Like Felix, I agree with David that "dumb regulation"—or, in less pejorative language, simple and relatively inflexible regulation—is far more likely to do the trick than the kind of complex, encyclopedic, tick-all-the-boxes regulation exemplified by the bloated pig currently wending its way through the legislative python in Congress. But I also agree with Felix (and, so it would seem, with David) that simple regulation will only work if it is overseen, enforced, and modified as necessary by extremely intelligent and motivated regulators.

I have argued in these pages before that delivering regulations which are comprehensive, detailed, and complex only encourages the institutions being regulated to immediately try to engineer their way around them. Simple, broad-brush regulations have a much better chance to operate as a set of principles which are well understood by both regulator and regulatee alike. But having such principles-based regulation is not enough. They must be enforced, as financial collapse in the face of a decidedly principles-based regulatory regime in the United Kingdom amply demonstrated. Not only does this mean, in Felix's example, that regulators must have the authority to make up rules, tests, and procedures on the fly on behalf of preserving systemic stability, they must also have the balls to take that phone call from Dick Fuld. And, moreover, to tell him in no uncertain terms to go fuck himself if he doesn't like it.

* * *

Now Dick Fuld, at least in his prime, was a forceful and scary man. It takes a certain kind of personality to tell such a man to go fuck himself to his face. Fortunately, we just happen to have a substantial supply of brass-balled, take-no-prisoners, kill-'em-all-and-let-God-sort-'em-out people ready to hand. By happy coincidence, these individuals also happen to be intimately familiar with the ins and outs of the global financial system, the nature and construction of the myriad securities and engineered products polluting financial markets, and the numberless tricks and stratagems large financial institutions use to end-run rules and regulations designed to keep them in check.

These people are called investment bankers.

That's right, boys and girls: It's time for the chickens to band together and hire themselves some foxes to guard the chicken coop.

I have made this argument before. Forgive me while I indulge my present lassitude and quote myself at length:

Many observers of the smoking wreckage which now passes for our banking system have opined that, in addition to being hobbled by a fragmented regulatory system riddled with overlapping and ill-defined responsibilities, the regulators who were supposed to be watching the chicken coop were woefully overmatched by the foxes. Staffed primarily by lawyers, on government pay scales, the SEC almost by definition is not up to the task of monitoring Goldman Sachs, JPMorgan, or anyone else, if by "monitoring" we should expect true informed oversight and control. If Harry Markopolos couldn't get the SEC Enforcement Division to understand and investigate what appears to have been a particularly simple—if breathtakingly successful—Ponzi scheme, how can we possibly get comfortable that our government watchdogs can effectively oversee the hugely complicated, mind-numbingly sophisticated, globally distributed trading operations of a modern investment bank?

This shortfall in regulatory intellect has been exacerbated by what the Japanese call amakudari, or "descent from heaven": from time immemorial, a steady stream of former regulators has resigned their posts to assume positions on Wall Street, sometimes at the very firms they had been charged with overseeing. There is very little incentive to push a little harder or dig a little deeper into a question if it irritates a powerful firm that might be your future employer. Furthermore, this practice provides a steady stream of inside knowledge on current regulatory focus, practice, and ignorance that is of tremendous value to oversight-minimizing investment banks.

The answer, of course, is obvious, if politically difficult to put into effect. Staff the SEC, or whatever "Super Regulator" the government decides to deputize to oversee this mess, with a bunch of highly-paid, tough-as-nails, sonofabitch investment bankers. You will have to pay them millions, just like regular bankers. (You can tie their incentive pay to improvements in the value of securities held under TARP and TALF, if you like.) Pay them well, and investment bankers won't be able to treat them like second-class citizens at the negotiating table. Pay them like bankers, and your regulators won't hesitate to read Jamie Dimon or Lloyd Blankfein the riot act, because they won't give a shit about getting a job from them later.

Trust me, these are the kind of people you will need on your team: highly educated, financially sophisticated, psychotically hard-working, experienced professionals who know or can figure out CDOs, SIVs, balance sheet leverage, and credit default derivatives just as easily as the idiots who created and trade this shit. Leading your enforcement and supervision teams you need a bunch of smooth, smart, plausible, grandiosely self-confident senior bankers who will not hesitate to tell Vikram Pandit to go fuck himself, his mother, and the cow she rode in on if he ever tries to fuck with the United States government, the US taxpayer, or the pizza delivery boy again. You know: psychopaths.

This is not a new idea. For yonks, the Brits have known that the best person to hire as gamekeeper on your ancestral estate is a former poacher, someone who knows what they know, how they think, and where to punch them in the genitals to get maximum negotiating effect.

* * *

Of course, my initial reflections on this topic this morning were inspired by an eye-opening and dispiriting exposé of the well-meaning, dedicated, but patently overmatched bank examiners of the Philadelphia Fed by Dennis Berman of The Wall Street Journal. I think the lines which caught my attention most effectively were

The Fed has a peashooter to the AK-47s of Wall Street.

and

[Fed bank examiner] salaries range from about $40,000 to $140,000.

To which my reactions can best be summarized as: 1) No shit; and 2) What the fuck?

Just to put things in context, the best-paid examiners which the Federal Reserve Bank of Philadelphia relies upon to audit, inspect, and guide the financial institutions under its charge get paid less than a good personal assistant at an average Wall Street firm. Fed examiners make less than Dick Fuld's secretaries, for Christ's sake. Go ahead, tell me that doesn't strike you as a problem. It strikes me as a big fucking problem.

So I rattled away on Twitter this morning, laying out my poachers-turned-gamekeepers theory for the umpteenth time in rapid 140-character bursts. Among other details, I fleshed out my proposal by suggesting regulators get hired from Wall Street banks, big law firms, and elsewhere. An effective wholesale financial regulator ¹ should be comprised of forensic accountants, corporate and securities lawyers, investment bankers, derivative structurers, and the like. They should all be paid market rates for their services, which will make their compensation much, much closer to that of the people they regulate. They should be prohibited from accepting positions in private financial industry—and, most especially, at any individual firm they ever directly or indirectly regulated—or firms working for financial firms (law firms, accountancies, etc.) for a minimum of at least three years after they leave government service. Five would be preferable.

While individually expensive, I don't believe you would need to hire many such people to make this kind of regulatory regime work. Given that you really only need high-powered regulators for the very biggest institutions, I am guessing you could get away with fewer than 100 to start. In fact, it might be less, because you really only need these people to direct and train their junior staff, and to interface directly with senior executives of the regulated entities. Fully loaded, I imagine you could fund a financial regulatory SWAT team like this for less than $150 million per year. That's a drop in the bucket compared to the financial losses these supposedly regulated institutions have already inflicted on the American taxpayer, not to mention in comparison with the normal run rate of your average stodgy, inefficient, and ineffective government bureaucracy.² Even better, you could fund such an agency with a levy indexed to the size of each financial institution under its jurisdiction. The larger and more complex a bank, the more fire-breathing, table-throwing, nail-spitting investment bankers and lawyers you could afford to throw at it. Talk about an incentive to shrink your balance sheet.

* * *

No plan is without its drawbacks, however, and I knew I could rely on my intelligent and well-meaning interlocutors on Twitter to supply some. Among the more cogent of these, Graeme Hein noted that "Smart regulators can always make more money in [the] private sector." This has always been true, and always will be so, but my plan could be structured to minimize this defect. For one thing, you do not need "the best" investment bankers, traders, or lawyers—whatever that's supposed to mean—on the regulatory case. All you really need is good ones, and there are plenty of those. A certain doggedness, and a commitment to preserve systemic stability and enforce rules and regulations regardless of the wealth, prestige, or lung power of their charges would be necessary as well. Remember, you are not looking for the best traders, or the best M&A advisors, or the best derivatives structurers out there; you are looking for people who can understand what those people do and who can stand up to their counterparts across the negotiating table.³

For another, while pay should be very attractive, and likely many multiples of current front-line regulators' salaries, it does not need to equal that of industry practitioners. It can be paid 100% in cash, which dramatically shrinks the gap with nominally much bigger pay packets stuffed to the gills with unvested, restricted funny money. It can also be far less volatile than industry pay, since it should not depend on the vagaries of market performance the way real investment bankers do. Add to that the psychic compensation from working at a powerful, elite organization which generates fear and respect among its regulatees, and you will have a potent package. You might just be surprised how many top flight industry professionals apply for the job.

Now some people might object to the prospect of a federal agency staffed with lots of employees pulling down half a million dollars or more a year, as loadeddice observed. But the answer here is simple: for socially critical functions, money has never been an object when it comes to government spending. Just look at the military. By the same token, I would find it very easy to argue that the cost of a several dozen government employees earning more than the President of the United States is a very reasonable price to pay for financial and economic security. Unlike the military, however, you don't need to spend millions or billions on hardware to do the job. Instead, you spend millions on the software walking around in wingtips and Gucci loafers.

The most frequent objection among those who deigned to comment, however, was simply that—regardless of the attractiveness of my proposal—such a radical change "would never happen." Perhaps these naysayers are right. It certainly would ruffle a lot of feathers, both in the finance industry itself and in Washington, D.C. But I tend to think that is a good thing, and a reliable indicator of the value and importance of the plan, rather than a defect.

At the end of the day, I do believe most Americans actually prefer their government bureaucrats to be slow, bumbling, and ineffective. It reassures them they can stay one step ahead of City Hall, which, as we all know, you ordinarily should not try to fight. Smart, aggressive, and committed government employees terrify most people, because they have so many natural advantages without such personal qualities. The only solution to this, of course, is constant oversight, which is a sine qua non of my proposal.

* * *

So anyway, I'm excited about all this. When do we get started? Mrs. Dealmaker is already calling moving companies to price out the transfer to Washington. And between you and me, I never like to keep her waiting.

She scares the shit out of me.


¹ "Wholesale" means big commercial, investment, and universal banks, and any other systemically important financial entity. As opposed to retail oriented firms, which should be regulated by the CFPA or whatever bastardized, emasculated entity the political meat grinder decides to come up with. My focus here is on institutions which can bring the system down, not on the ones trying to screw Grandma out of her last $50,000.
² Even less in comparison to the tens of billions of dollars in compensation the systemically important financial institutions pay their own employees. A pittance, I tell you.
³ Sadly, given the revelations coming out of the Lehman examiner's report and other sources, this may actually be a very low bar. Perhaps we need regulators who are better than the "best" investment bankers.

© 2010 The Epicurean Dealmaker. All rights reserved.

A Corporate Finance Bestiary

M

is for Managing Director:
Crafty, elusive
Kowtows to clients; but to juniors abusive

Sleek and well-groomed, he
Swans about like a diva
Steal clients or credit?
He attacks with a cleaver

Pompous, self-loathing
His wife and kids hate him
Knows everything and everyone:
You can't educate him

* *

V

is for Vice President:
Long-suffering, put-on
Screwed by MDs and clients, otherwise no-one

Chubby, disheveled, he
Rues weekends spent downtown
And longs for the day he
Can call in from the Hamptons

Bossy, intrusive
Associates hate him
Lusts for the VP in Bond Sales
But she just won't date him

* *

A

is for Associate:
Feckless and eager
Thinks he's Felix Rohatyn but his skills are too meager

Hair-slicked, suspendered, he
Wanders the 3:00 am hallway
Boasting how little he's slept
Since a week ago Tuesday

Loud-mouthed, annoying
Hot young models despise him
No matter how many bottles
With which he plies them

* *

F

is for Financial Analyst:
Bitter, exhausted
Never fucks, sleeps, or earns as much as his boss did

Tousled, unshaven, he
hunches over a keyboard
While vacations and nights out
Flash past like waves on a seashore

Rueful, uncertain
He ponders his Faustian bargain:
"For two years of this shit
I skipped screwing my girlfriend?"

* * *

With apologies to Guillaume Apollinaire. And everyone else, for that matter.

© 2010 The Epicurean Dealmaker. All rights reserved.

Psychiatric Help 5¢ – The Doctor Is In

Carmela Soprano: "He's a good man. He's a good father."
Dr. Krakower: "You tell me he's a depressed criminal, prone to anger, serially unfaithful. Is that your definition of a good man? ... You must trust your initial impulse and consider leaving him. You'll never be able to feel good about yourself. You'll never be able to quell the feelings of guilt and shame that you talked about, so long as you're his accomplice."
Carmela Soprano: "You're wrong about the accomplice part, though."
Dr. Krakower: "You sure?"
Carmela Soprano: "All I did was make sure he's got clean clothes in his closet and dinner on his table."
Dr. Krakower: "So 'enable' would be a more accurate job description for what you do than 'accomplice.' My apologies ... Take only the children—what's left of them—and go."
Carmela Soprano: "My priest said I should work with him, help him to become a better man."
Dr. Krakower: "How's that going?"

...

Carmela Soprano: "I thought psychiatrists weren't supposed to be judgmental."
Dr. Krakower: "Many patients want to be excused for their current predicament because of events that occured in their childhood. That's what psychiatry has become in America. Visit any shopping mall or ethnic pride parade, and witness the results."

— The Sopranos, "Second Opinion" (2001)

Stephen Gandel has a post up at The Curious Capitalist about the inherent biases of financial planners. In addition to the already widespread suspicion that planners pad their paychecks in preference to meeting their clients' needs, he reveals that a new study appears to indicate they only tell their clients what their clients want to hear:

So the problem that the study points out is that when individuals hire people to give them advice, the advisers they have a strong incentive to tell you what you want to hear. If they don't do that, then you probably won't hire them. No matter how impartial we think we are. We come to every topic with some inherent beliefs. If someone tells you something that doesn't jive with those beliefs, you are likely to think they are either incompetent or just not smart.

In other words, Mr. Gandel worriedly concludes, financial planners and advisers of every stripe in our capitalist society are Yes men.

My reaction to this bit of news was twofold: 1) this is news?; ¹ and 2) Oh Christ, some knucklehead is going to try to apply this to investment bankers. So, before number 2 has a chance to come true, I thought I would head that stagecoach off at the pass with the following ruminations.

* * *

It is true that investment bankers market themselves publicly ² as "trusted advisors" to their clients, good listeners who apply decades of experience, boatloads of integrity, and shitloads of cleverness to their clients' unique and pressing problems for the benefit of management, shareholders, and the Greater Good of All Mankind. Nevertheless, I know of few individuals outside the mainstream media, the U.S. Congress, or the assembled buy-side investors of the world who actually believe such horseshit. It is certain that neither investment bankers nor their clients do.

For one thing, investment bankers cannot afford to offer pure, unbiased advice to their clients, even in the unlikely and rare event that their clients are willing to pay for it. The opportunity cost is just too high. It takes time, energy, and sustained attention to a client's situation, opportunities, and challenges to provide good, balanced advice. Depending on the size and complexity of a client and its issues, and the frequency of its need for consultation, an experienced senior investment banker might be able to act as a true consigliere to maybe five or even ten corporate clients over the course of a year. What would they be willing to pay him for that service? A million dollars a year? (Sounds steep, don't you think? Most clients do. A banker usually feels pretty accomplished if he can get a couple clients to cough up general strategic retainers in the neighborhood of $200,000 per.)

In contrast, a senior banker in a revenue generating role at a large investment bank is often expected to deliver $25 million or more in transaction-related revenues to the bank each and every year. Below that, senior management just doesn't think he's producing enough. (Among other things, there's a hell of a lot of infrastructure to pay for in a big bank.) But you can't do that unless you are doing deals: mergers and acquisitions, stock and bond underwritings, derivatives. Do you see the problem? It just doesn't pay to offer good advice. A banker could and should be doing deals instead. ³

In addition, you must understand there just isn't a lot of latent demand in corporate America for general strategic advice from investment bankers. It's not like we are experts in information systems technology, management and organizational structure, executive compensation, or marketing and market positioning, like many management consulting firms are or pretend to be. We don't have deep sector expertise in highly specialized business functions or areas of concern like intellectual property rights, cross border taxation, or environmental regulation and litigation. These are issues and challenges which are not only deeply embedded in the day-to-day workings of your average mid- to large-size corporation but also so arcane that few, if any, companies can afford to have executives or employees on staff who specialize in managing them. These types of issues are tailor-made for outside advisers, whether they be management consultants or specialist lawyers.

In contrast, investment bankers are really experts in only two things: mergers and acquisitions and financial markets. But M&A is a core component of corporate strategy, which focuses on how to grow the organization, optimize its reach and capabilities, and compete in the marketplace. Formulating and executing strategy is a core responsibility and function of the senior management of any firm. M&A is the CEO's job, and the job of the Board of Directors. By the same token, financing—obtaining growth capital, optimizing the debt-equity mix, and funding the day-to-day operations of the firm—is the CFO's job, and the job of the corporate treasury department.

In both financing and M&A, therefore, corporate executives rarely need or want advice thinking about the What or the Why of doing something (buy Company XYZ, because it would be a perfect fit for our European strategy; raise outside investor funds, because the firm needs growth capital). Instead, they need and want help figuring out How and When to do a deal, and then executing it. I have made this distinction before, and it is worth repeating here: investment bankers are not—no matter what we might say in public—"idea men." We are tacticians, not strategists. You don't hire us because you want help figuring out what you want to be when you grow up. You hire us because you've picked a horse, you've entered it in a race, and you want us to figure out how to win. Perhaps you even want us to ride the nag to the finish line for you. We can do that.

Investment bankers are deal jockeys. We do deals.

* * *

Now, it is true that investment bankers can opine on strategy, markets, valuation, and all the other things that impinge on the strategic and financial issues which confront our clients. We really are experts in this stuff, and we really can give good advice. The best of us ⁴ actually do try to steer reluctant or stubborn clients in directions which we believe are best for their firms and their shareholders. Normally, however, we must employ substantial diplomacy and tact to do so, for at the end of the day, it is our clients who employ us, and our clients who get to make the decisions. I have been on the losing end of a few of those discussions, where my best and strongest advice conflicted in the event with my client's desires, and where my conviction was strong enough that I was willing to part ways with my client. While I may have come out of such trials with a sense of pride in my own integrity, I usually lost the deal. It was no satisfaction to have my advice proven correct later, either, nor did that make my superiors or partners any happier. I suppose you might conclude from this that I am not that good an investment banker. You may be right. A really good investment banker would have persuaded his client around to the correct point of view. (Dr. Krakower, for example, would have made a lousy investment banker.)

And this does not even begin to address the wiggle room which exists at the core of much of what investment bankers do, either. For one thing, valuation is an entire kettle of fish worthy of its own post(s), and even reasonable and well-meaning investment bankers can disagree whether a particular transaction value or structure is appropriate or "fair" five times out of three. But do not let the unavoidable ambiguity at the heart of what we do distract you from the honest fact that investment bankers are hired guns. Like lawyers in a courtroom, our objective and role is not to discover the "truth"—if such a hackneyed concept can even be said to exist in M&A or financial contexts—but rather to argue our client's position and, in the end, to help him win.

That is what we get paid for. And everybody I know and work for knows it, too.

* * *

So, Mr. Aggrieved Shareholder, don't coming crying to me the next time your company's investment banker steers it into a ditch with a lousy acquisition or failed financing. Ninety-nine times out of a hundred, he only did what your goddamned company management wanted him to do. After all, they were the bastards who hired him.

The next time you get a chance, take a gander in the proxy or other corporate filing at the engagement letter your friendly local investment banker signed when he did the deal you're complaining about. You'll notice in the disclaimer that he abjures any and all fiduciary responsibility to the shareholders or any other stakeholders of his client. It's there for a reason, buddy: your CEO and Board of Directors hired him, not you. He doesn't work for you. Given that, why would you ever expect him to look out for your interests?

If you want a cold-blooded shark on your side, looking out for your interests (and only yours), I suggest you get off your fat ass, pry open that dusty wallet, and hire your own goddamn adviser. In fact, if you can get shareholders of at least 75% of the S&P 500 to do the same, I would be more than happy to offer my own modest services at a very attractive bulk rate. Epicurean Dealmaker LLC would be delighted to comprehensively, exhaustively, and expertly second guess any and all transactions, strategic, financial, or otherwise, your companies' management propose to undertake for the modest fee of $5 million per company per calendar year.

Make it $10 million, and I personally guarantee I will reach across the negotiating table, grab Jamie Dimon, Lloyd Blankfein, or Vikram Pandit by the throat, and kick him sharply and precisely in the balls, twice.

And that, my hapless and confused friend, is a real bargain.


More on what investment bankers really do, when they're not fucking around:
My Kid Could Do That! (May 26, 2009)
With Friends Like This ... (July 22, 2008)
Penny for the Guy (February 26, 2008)
True Story (December 7, 2007)
Confidence Game (September 28, 2007)
Mine's Bigger Than Yours (April 14, 2007)

¹ It never fails to astonish me how many people seem to have a problem distinguishing between marketing and reality. For instance, car companies have made a decades-long practice of selling machines for transport as lifestyle choices, image enhancers, and facilitators of sexual conquest. It amuses me that many people who claim not to be fooled by such transparent manipulation continue to be shocked—shocked!—that stockbrokers and other financial transaction whores don't act like Mother Theresas when it comes to their clients' portfolios.
² Or used to market themselves as such, before the apotheosis of Goldman Sachs and other leading investment and universal banks as proprietary behemoths whose marketing message seems to be "Trade with us if you want, but don't expect us not to rip your head off and fuck your neck if we happen to be in the mood at the time. Sucker."
³ Not to mention the complications introduced by conflict of interest. You can just imagine that a banker on a hefty strategic retainer to Company ABC, deep in its most confidential deliberations, is going to have trouble getting hired by Competitor XYZ to do a potentially lucrative transaction. Not to mention ABC is likely to have serious objections to letting the banker do it. Mr. Banker is going to have a very difficult year-end conversation with his superiors when he tries to explain why he had to forgo a $15 million M&A fee from XYZ because he was on a $1 million retainer from ABC. While corporations would often love to tie up bankers with retainers so they can't work for competitors (e.g., Bruce Wasserstein), they usually can't afford the rates bankers would like to charge. It is investment bankers who pay the closest attention to opportunity cost. As we damn well should.
⁴ "Best" only in the sense of those of us who actually retain and occasionally exercise whatever remaining shreds of integrity decades of service on behalf of meretricious and despicable clients and employers have left to us. As opposed to "best" in the sense of most successful, or most effective, who are usually those bankers no longer encumbered with such inconveniences as integrity or a sense of honor. I know, I know: it's a value judgment. Sorry.

© 2010 The Epicurean Dealmaker. All rights reserved.

The Downside of Anger

An angry man opens his mouth and shuts his eyes.

— Cato the Elder

Anger is seldom without argument but seldom with a good one.

— Lord Halifax

Anyone can become angry — that is easy, but to be angry with the right person, to the right degree, at the right time, for the right purpose, and in the right way — that is not easy.

— Aristotle

I think Yves Smith needs a vacation.

In one of her normal link aggregation posts this morning, the impressively prolific blogger and newly published author remarked that:

I need to get on a different schedule, something that is less out of whack with normalcy, and this is going to necessitate a cutback in posts over the next few days.

Based on the disappointing riposte she made to the arguments I made in these pages this weekend, I must say I agree with her. Perhaps then she would think twice before putting out such desperately sorry pap as this:

Remarkably, the often-sound Epicurean Dealmaker defends the fantasy resolution authority. And his choice of metaphor undermines his argument. He uses both a “break glass” emergency image and the same expression in the article. Surely he must recall the Neal Kashkari “break the glass” memo mentioned in Sorkin’s Too Big Too Fail. It was well received by the higher-ups and was totally useless in practice.

ED offers two defenses, that the vagueness give regulators flexibility and discretion. Ahem, regulators always have those available to them. And the powers that be had that in spades during the crisis. They went around and did rescues that were widely criticized for their inconsistency and ad-hoc-ness. Why were Bear’s shareholders given anything at all? Why were WaMu’s sub bond holders crammed down (and worse, as John Hempton bitterly argues, a bank that he believes was not insolvent taken out and shot?). In fact, that very “flexibilty” meant that the authorities seemed to be constantly overcorrecting in response to whatever criticism they had gotten on their most recent salvage operation.

“Flexibility and discretion” is merely putting a happy face on “we’re going to have to improvise our way through this one yet again.” Now a certain amount of improvisation is necessary (an old saying has it that no plan survives first contact with the enemy). But for an completely untested and untrusted regime, the authorities need to convey the ground rules and key mechanisms in advance, both to prepare investors and counterparties, and more important, to debug the plan on paper as much as possible in advance.

Yeesh.

* * *

Let me address Ms. Smith's arguments, such as they are, point by point.

First, in what way does my use of the metaphor and phrase "break the glass" undermine my argument? Smith makes no observation more telling than the fact that Neel [sic] Kashkari used it to title an emergency plan which the Treasury never used. By what I assume to be Ms. Smith's implied "argument," then, does every sentence in German become pernicious because a certain Austrian housepainter used it? My use of the phrase dovetailed seamlessly into the larger metaphor I used later in the piece comparing the regulators responsible for executing resolution authority to firemen. It was neat, apt, and pertinent. Perhaps Ms. Smith was too exhausted to read that far.

Second, she dismisses my argument that any resolution authority should be vague because it will offer regulators valuable flexibility and discretion by pointing out that regulators always have those available to them. Uh, sorry, Yves, I read Too Big to Fail, too. And I distinctly remember several critical occasions when desperate officials from the Fed and the Treasury debated and then discarded potentially effective solutions to the crises of Lehman and AIG for the very reason that they believed they did not have the legal authority to execute them. These solutions, if memory serves, included among others the ability to abrogate or suspend contracts and securities provisions, which is one of the discretionary capabilities I specifically mentioned in my piece.¹

Third, Ms. Smith objects that the often counterproductive and disastrous interventions which regulators made in the financial system during the dark days of 2008 argue against granting untrammeled flexibility and discretion to regulators. But the entire point of the Panic of 2008 (in government as well as the economy) was that regulators were operating without a plan, or even ground rules. That is why their actions were so inconsistent, uncoordinated, and haphazard. There was no agreed and accepted mechanism for dealing with the sequential failure or imminent collapse of several multibillion dollar financial institutions. That is what a resolution authority is supposed to be: a plan, a guide map, and a set of legal and regulatory tools and procedures to authorize and enable designated regulators to stem contagion and prevent economic collapse by systematically winding down large, highly-interconnected financial institutions. By stumping for regulatory flexibility, I am not advocating a return to the uncoordinated clusterfuck that Hank Paulson and Ben Bernanke presided over, for Christ's sake. Whatever species of knucklehead would think I was?

Next, Ms. Smith retreats slightly from her attack on regulatory flexibility to admit that "a certain amount of improvisation is necessary," but she wants "ground rules and key mechanisms in advance, both to prepare investors and counterparties, and more important, to debug the plan on paper as much as possible in advance." Ground rules and key mechanisms are fine. Investors and counterparties should be aware that regulators can swoop in, under carefully defined circumstances of heightened risk, and systematically demolish their contractual claims and obligations to preserve the integrity and functioning of the financial system. But I continue to maintain that the law authorizing the resolution authority—as opposed to the confidential working documents, plans, and intentions of the authority itself, which can and should be as specific as possible (and subject, of course, to constant review and revision in response to changing circumstances)—should be drafted at a very high and determinedly vague level.

I do not want legions of investors, lenders, and counterparties, much less financial institutions themselves, structuring their way around highly specific laws and procedures to evade the prophylactic and remedial powers of a resolution authority. And, whether she knows it or not, neither does Ms. Smith. The lawyers who work in and for my industry are just too good, and their job is to protect and advance the interests of their employers, the financial institutions, not the regulators, the government, or the taxpayers. For regulatory purposes, we must view them as the enemy. And if there is one universal rule of combat, Dear Readers, it's that you don't share your detailed battle plans with the enemy.²

Finally, Ms. Smith misstates and misunderstands my argument completely when she asserts

Another ED argument in favor of flexibility amounts to, "markets evolve too quickly, you can't really plan."

This restatement bears such little relation to what I wrote that it really makes me wonder how awake Ms. Smith was when she read my piece. What I did say was this: Because markets evolve quickly, and because the nature of each financial crisis appears to be different enough from its predecessors to make detailed planning in advance fruitless, the legislation authorizing a resolution authority should not attempt to catalogue in exhaustive detail the tools, procedures, and conditions under which said authority should operate. That doesn't mean that regulators should not keep track of "the evolution of markets, monitor exposures aggressively, and update emergency plans frequently," as Ms. Smith recommends. My article addressed Bob Teitelman's remarks, which focused on the legislative and political backdrop to the issue, not the day-to-day working brief of regulators in Washington, D.C.

* * *

In any event, I suspect Ms. Smith really objected to my post because it does not jibe with the regulatory proposals she has advanced in her own work, including in her newly published book. From her brief summary (I have not yet read the book), Ms. Smith appears to advocate "root and branch reform" of the system, which makes her, by definition, more radical than me. As befits my nature as an investment banker, I am a pragmatist and an incrementalist. I think the prospect of true root and branch reform of the domestic financial system—not to mention the global one with which it is inseparably interconnected—is such a vast and daunting task to undertake in our current sociopolitical environment as to be unlikely at best. Notwithstanding the theoretical attractions of radical reform—which I personally would favor, by the way—I would much rather cobble together a partially effective, imperfect resolution authority today than wait the ten or twenty years serious reform might take. If for no other reason than I think we cannot wait. The next financial crisis is just not going to loiter demurely offstage for a couple of decades until we get our act together.

Sympathetic or not, however, I would also like to caution Ms. Smith. Like many radical reformers, I suspect she would be surprised how little common ground she has with other would-be radical reformers. It is always a revelation to discover, as revolutionaries always have, just how little agreement you have with your peers when it comes to deciding just exactly which roots and branches of the ancien régime need to be trimmed.³

* * *

In conclusion, I would like to redirect my remarks to a slightly different but related issue. Ms. Smith took weak exception to a metaphor I used in my recent post. I would like to take strong exception to one of hers.

Like many other econobloggers opining on the state of affairs in the world of finance, Ms. Smith has gotten into the nasty habit of using the term "banksters" to refer to members of the financial services industry. (It is in the title of yet another post of hers today.) The overarching metaphor behind this coinage—which, I emphasize again, is neither original nor limited to Ms. Smith—is that commercial bankers, investment bankers, insurance company employees, and presumably everyone else in the financial industry are uniformly engaged in a vast, intentional, and irredeemably criminal enterprise. Ms. Smith reinforces this metaphor often, including in the post dissected herein (with the crack of "financiers [looting] taxpayers"), and implicitly in the title of her new book, ECONNED.

Now, I am all for the charms of expedient exaggeration. (Although mine tend to be limited to sarcastic and humorous uses, rather than bitter and humorless character assassination.) It can be funny, and it can emphasize important points. But uniformly and universally excoriating millions of people who work in finance as gangsters, thieves, looters, and con men is just fucking dumb. It's like saying all management consultants are morons, or everyone from Iowa is a hick. While there certainly must be examples of moronic management consultants and hayseed Iowans among the myriad constituents of each of those groups, no honest or intelligent person would believe all of them are that way. Why, then, do so many bloggers writing today tar the entire finance industry with the same tired, thoughtless old brush?

These casual, unthinking insults would not bother me if I did not think they lower and coarsen the important conversation we are having in society and the blogosphere about financial reform. Sure, investment banking has its fair share of crooks, but we are no different than the rest of society. Some of us, closer to the top and more successful, perhaps, probably do have a more highly developed sense of entitlement and aggressiveness than your average bear. But we are not criminals. We work the system, hard, to advance our own and our families' personal and professional interests, but 99.9% of us are not out to rape and pillage the commonfolk of their daily bread.⁴ To think otherwise is just plain stupid.

At the same time, there are plenty of things wrong with investment banking and the financial system at large. Big, important, pressing problems that contributed to the last financial crisis and threaten to make the next one worse. Making grandiose, nonsensical pronouncements that all bankers are crooks just doesn't help matters, and it focuses attention and energy away from real problems which need to be addressed posthaste. It poisons the dialogue, it stifles voices it would behoove us to hear, and it lowers the conversation to the lowest, cheapest common denominator of untrammeled, impotent rage. This is not the kind of contribution bloggers should be making to a rejuvenated public discussion of financial reform.

* * *

Anger has a personal cost, too. Unless it is leavened with reason, and moderated by the acknowledgement that no-one is perfect, hate and anger can be highly corrosive. Justifiable anger is a wonderful source of energy, and a marvelous spur to action. But nurtured, coddled, and sustained overlong, anger can constrict the vision, dull perceptiveness, and calcify the brain. It can blind you to the good in others, to the alternatives available to you, and, in the end, to the truth. If left untreated too long, eventually others tire of your stridency and self-righteousness, and you sink back into justified and bitter obscurity, another valued voice in the debated stifled by irrelevance.

And that is an outcome none of us should be aiming for.


¹ And, to address immediately the potential objection that Paulson, Bernanke, et al. did indeed have authority to impose several potentially effective solutions but chose not to based upon an ideological bias against government intervention in free markets and their underlying principles, I would say this: Even good laws and good institutions can be corrupted or rendered ineffective by venal, cowardly, or pigheaded officials; that is to say, by politics. This is part of the human condition, but it is not a valid argument against trying to design good laws and institutions in the first place. If anything, it argues strenuously for the oversight and retrospective scrutiny of any government officials who exercise great discretion. This, careful readers may recall, was a key condition in my earlier proposal.
² I also find Ms. Smith's apparent faith that one can "debug" a comprehensive rescue plan to stave off systemic financial collapse "on paper" both touching and amusing, in a management-consulty sort of way. Suffice it to say that I do not think anyone has a credible chance in hell of "debugging" the next financial crisis before it arrives, but that is largely an epistemological point of view. I presume Ms. Smith does not agree with me.
³ And, like revolutionaries also discover, neither revolution nor root and branch reform repeals human nature. Think the Soviet Union, Animal Farm, etc. This is a problem revolutionaries and reformers alike have yet to solve. See footnote 1, above: "Meet the new boss, same as the old boss."
⁴ The average investment banker's or finance professional's sins are exactly those of Everyman: cowardice, laziness, a modicum of greed, somewhat over-flexible morals, and situationally uncertain integrity. You will not be able to effectively reform my industry—or indeed any other industry, government or regulatory entity, or social norm or behavior—until you realize and adjust for this universal and ineluctable fact. It is not the real criminals who cause massive societal breakdowns like the recent financial panic. (Compare, e.g., Bernard Madoff to Dick Fuld.) Like Pogo said, "We have met the enemy, and he is us."

© 2010 The Epicurean Dealmaker. All rights reserved.