TED’s Greatest Hits of 2010

For a long time I felt without style or grace
Wearing shoes with no socks in cold weather
I knew my heart was in the right place
I knew I'd be able to do these things.

— Talking Heads, Houses in Motion

It has been a volatile year here at the Volcano Lair, Dear Readers. The more attentive among you may have noticed that Your Formerly Dedicated and Recently Only Intermittently Industrious Bloggist has been on again, off again in terms of his attention to these pages. At one point, I even announced my temporary retirement from blogging.¹ There are many reasons behind this, but if I told you any of them I'd have to kill you. Normally, this would not bother me, but frankly there are just too many of you nowadays to make mass assassination practical anymore.

That being said, it appears that the occasional pearls I have thrown into the pig sty this year have received some attention from readers who are either too bored or too indiscriminate not to read them. Google, in its Infinite Goodness^® even tells me how many times each post has been summoned to the screen. So, based on this simplistic stochastic calculus, I offer up for those of you who have not paid attention, those of you who would like to read only my most popular posts, and those of you with an unhealthy obsession with ordered lists [ahem, Joe Wiesenthal] the following five most popular posts published during 2010 at this humble opinion emporium.

Use this list wisely. As my amanuensis and confidential secretary Natasha always says, "A little TED goes a loooonnng way."

* * *

1. The Mouth of Sauron — My take on Lucas van Praag, chief spokesman for the Great Evil Vampire Squid of Markets, Goldman Sachs, and his employer. Excerpts:

This is just not a country where you can use words like "egregious," "febrile," and "chimera" in public without running the risk of being lynched for general asshattery.

And

The Japanese have a saying: the nail that sticks up gets hammered down. Right now, Goldman Sachs is the biggest fucking nail on the board. And Lucas van Praag is the miniature douchebag standing on top of the nail yelling, "Nyah, nyah! Go ahead, hit me! I dare ya!"

2. On Bullshit — A characteristically moderate and even-tempered response by Yours Truly to the assertion by some of my industry confrères that bigger banks are both better for their clients and less risky. Needless to say, I disagree:

But the point of my previous tirade stands: large, integrated, multi-line commercial and investment banks with fingers in almost every financial pie around the globe do not reduce systemic risk in the slightest. Instead, they comprise both the source and the pathway of contagion for systemic risk and potential breakdown.

3. I'm Dancing as Fast as I Can — Your Friendly Industry Tour Guide explains that, while investment bankers indeed tend to be rather smart individuals, with few exceptions we are not a reflective or introspective race. Viz.:

You will almost never find an investment banker "sicklied o'er with the pale cast of thought." It's just not in their genetic makeup to be reflective, introspective, or speculative in an intellectual sense.

And

Don't look to investment bankers for answers on how we got here. We don't know and we don't care. We take the world as we find it and try to make money.

4. Conventional Wisdom — Derivatives, liquidity, John Maynard Keynes, and Winnie the Pooh. You know, a classic:

Naturally investment banks swelled like a tick on a dog in this environment. Increased liquidity begat increased volume, which begat more investment bankers earning more money for moving value from one pocket of the global economy to another. (Productivity in terms of volume of deals per banker always lags overall market growth.) It didn't matter to them where the money was going, or if it was doing anything truly productive on the way. That wasn't their job to worry about. They just had to make sure the moolah got from column A to column B intact and on time.

And, of course, take their cut off the top.

5. A Client Is Not a Counterparty — I tease apart a recent Goldman Sachs transaction to help illustrate the difference between traditional market making and proprietary trading:

The major point you should take away from the dissertation above is that everything an investment bank normally does in securities markets requires it to put capital at risk. Low-risk, agency type businesses like underwriting and traditional market making lie on the same spectrum as full-blown proprietary trading, if only at different ends.

And

But the blurry line between market making and proprietary trading doesn't mean we can't identify proprietary investing—or, more specifically, acting like a principal investor—when we see it.

* * *

If you're lucky, maybe I'll spit out a few more beauties like these for you next year. But then again, maybe not.

Happy New Year.

¹ If you still needed a reason, this rapid reversal should convince you never to trust another word I put on these pages. I am nothing if not mercurial.

© 2010 The Epicurean Dealmaker. All rights reserved.

What He's Really Thinking the First Time You Have Sex

It's almost year end, so it's just about time for the annual festival of wrap up articles in the financial media. These are published to remind us what happened in 2010, how we are supposed to think about it, and why we should run out immediately and buy that fetching luxury item prominently displayed next to the articles in our favorite mainstream media outlet. I, for one, am thankful the journalists and editors of our crack fourth estate work so selflessly after a tiring year to fill the blank space between Mercedes and Rolex ads with such informative and helpful copy:

Lorem ipsum dolor sit amet, consectetur adipisicing elit...

But journalism is a competitive business nowadays, resembling nothing so much as a high-speed game of musical chairs (where the internet calls the tune), so we should not be surprised that some practitioners are early out of the gate. Today's contribution to year-end gun-jumping comes from The Wall Street Journal. There, Dana Cimilluca and Anupreeta Das report the absolutely gobsmacking news that Wall Street firms are deeply engaged in their annual brawl over M&A league table rankings.

Now, if you are like me, Dear Reader, you are absolutely shocked, shocked that this hoary old chestnut still merits the time of day, much less seven column inches. This tale is older than dirt, and dustier than Cher's bustier. It was already old and dusty over three years ago when I took respite from my busy schedule of rapine and slaughter to pen an explicatory aperçu to a lament by Dennis Berman on the topic at the same broadsheet.

At that time, Mr. Berman did pen a couple of bons mots worth repeating:

The [M&A league] tables have become home to the most petty and wheedling impulses of the industry's most-respected institutions, which are rabid about staying high in the rankings. If you want to understand the Street at its absurd best, watch men in Rolexes grub for credit for deals they barely worked on for clients who probably won't pay them.

Cimilluca and Das offer comparatively little in the way of insight in the current piece, other than a few reported nuggets on AIG and other deals where credit is being contested. Missing from their piece, and from Berman's 2007 article, is an explanation why Wall Streeters act so petty over league tables. Indeed, watching entitled plutocrats scratch and claw over billions of dollars of profitless business may indeed engage the disinterested observer's sense of humor and/or schadenfreude, but I suspect many of my Dedicated Followers would in fact like to know the reasons behind it.

So, in the spirit of selfless public service for which Your Bountiful and Beneficent Correspondent is so widely and aptly known, I offer up a few select nuggets from my prior piece which should shed some illumination on the subject. (In consideration of those Long Faithful Readers who may have read the original piece in full, and those new readers who have something better to do than to wade through my fulsome juvenilia, I have chosen to edit my remarks to the meat of the matter. All of you are welcome.)

I quote my earlier self:

M&A league tables, in contrast, are and always have been a farce. There are no uniform reporting requirements concerning advisory roles or fees for M&A transactions. In order to be given credit for advising on a deal, all a bank has to do is persuade a client to confirm to the reporting services that it worked on it. No real work need take place, and no real money need change hands. Hence, you get examples of highly-discounted or no-fee "services" being "performed" by five, six, or eight otherwise totally uninvolved banks solely in order to claim credit for a big or high profile deal. It is not unheard of or even rare for a bank to deliver a last-minute "fairness opinion" for no fee at all in order to get full credit for "advising" on a $30 billion transaction.

But if, as Mr. Berman reports, everyone knows these league tables are crap, why does Wall Street spend so much time and energy gaming them?

Well, for one thing they are good recruiting tools. All those eager university and business school graduates who are aching to rub shoulders with John Mack, Stan O'Neal, and Henry Paulson What's-His-Name are massively impressed by league tables that show which of their preferred future employers has bragging rights in particular business areas. ...

Second, the published league tables, which tend to appear in the general financial press every quarter and often with higher frequency in the i-bank trade rags, are a nifty form of free advertising. Who, I ask you, does not like free advertising?

But third—and perhaps most surprising—at the end of the day investment banks spend enormous energy and real money on league table positioning and presentation because their customers want them to.

[That is your cue to ask why.]

M&A, for most companies, is a rare thing, a once in a lifetime event fraught with all sorts of terrors and confusions. Furthermore, it is not trivial to say that every M&A situation is truly different, so even if you are in the minority of corporate managers who have actually been involved in a deal, it is almost certain you will not be completely prepared for the next one. Lastly, very few corporate executives are capable of judging the quality of advice given to them in the course of a deal, since (a) they usually cannot figure out exactly what is going on in the room at any particular time and (b) the outcome of any deal depends on an extremely complex interaction of numerous factors, only one of which is the skill of their advisor.

Mergers and acquisition advice is an archetypal example of what Charles Green over at The Trusted Advisor calls "complex intangible services." M&A advice is hard to deliver, impossible to evaluate ex ante, difficult to evaluate ex post, and embedded in a deal process where the criteria for success are multifaceted and highly variable across deals. It is widely viewed as expensive, although at around 1% of aggregate deal value (and declining as a percentage the larger the deal gets), M&A fees are trivial in relation to the value at stake, whether you consider that value to be the future health of the company, the reputation and personal financial condition of the senior executives involved, the net worth of the company's shareholders, or the lives and livelihoods of its employees, vendors, and other stakeholders. This is one reason why everyone pays what in absolute terms look like obscenely large advisory fees even as they complain loudly about having to do so. As many an investment banker has asked a reluctant client during fee negotiations, "You wouldn't pick your brain surgeon solely on the basis of who offers the lowest price, would you?"

[Now for the money shot]:

[But] unlike for many other complex intangible services like accounting, law, and consulting—where a client has a good chance of being able to "test drive" its advisors before it hires them—potential consumers of M&A advice are thrown back on two primary sources of information to use in choosing an advisor: public brand or reputation, and what the investment bankers tell them. Now, most corporate executives are clever enough to perceive when they are being sold, and most investment bankers are pretty effective salesmen and women, so being able to point to some sort of external validation of a bank's skills and reputation is a valuable thing. (Remember how no-one used to get fired for picking IBM? Well no-one gets fired for picking the #1, 2, or 3 M&A advisor, either, even if the deal goes completely pear-shaped.) Hence the continued reliance on published league tables.

The fact that these league tables are widely known to be manipulated does not dissuade the average client, either. You can argue that the fact that a bank is able to persuade big clients to give it public credit for work it has not done is a pretty good indication of decent client relationships and persuasive negotiating skills, both of which are important M&A advisory skills in their own right. And, the mere fact that i-banks so obviously scrap, struggle, and expend copious resources they could otherwise use in their main business trying to reach and stay at the top of the industry league tables month after month is reassuring to clients that the bank in question (a) has surplus resources to devote to an apparently noneconomic activity and (b) cares about its reputation. This is analogous to what naturalists would call a marker of genetic or reproductive health: the same reason peahens look for the gaudiest peacocks with the most energetic courtship dances, even though such activities and energy expenditures on the part of the male are wasteful and even dangerous from a pure survival perspective.

Finally, it is important to remember that investment banking is at its core a network business. Investment banks' skills and capabilities derive from the extensive personal and business relationships of its professional employees, and this is arguably the most compelling value proposition any investment banker brings to a client. What better way to demonstrate the strength of your network, and the extent of your connectivity, than a league table showing how many deals you worked on and how many clients you served? Even if some of them are fake.

So there you have it, children: investment banks scrap like toddlers over league table rankings because, at the end of the day, their clients want them to. After all, investment banking is a service business. And the client is always right, n'est-ce pas?

* * *

Notwithstanding my potshots at the Journal and its confrères above, I fully understand why the financial press has to trot these silly league table articles out on a regular basis. For one thing, the investment banks would scream bloody murder if they didn't get their quarterly free advertising. For another, most people who read the financial press couldn't care less about understanding Wall Street and its silly rituals and business models. They just like to imagine Lloyd Blankfein and James Gorman locked in a mud-wrestling match at a dive bar in Hoboken over who gets bragging rights to the #1 slot in 2010 M&A. Good fight stories sell newspapers.

Finally, just as in those highly successful infotainment marketing vehicles known as women's magazines, it does not do for a periodical to demystify a recurring topic like sex or league tables by explaining it too deeply. For if you do, who will buy the next issue to read the same reheated crap all over again?

By the same token, what woman really wants to know that the true answer to the question posed in this post's title ¹ is:

"How soon after I'm done can I go home and watch the football game?"

¹ And, no, I did not make that question up. I strive for authenticity in everything I do. It is the genuine article.

© 2010 The Epicurean Dealmaker. All rights reserved.

H.R. 4173

One Hundred Eleventh Congress
of the
United States of America

AT THE SECOND SESSION

Begun and held at the City of Washington on Tuesday,
the fifth day of January, two thousand and ten

An Act

To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘‘too big to fail’’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

* * *

"At pet stores in Detroit, you can buy
frozen rats
for seventy-five cents apiece, to feed
your pet boa constrictor"
back home in Grosse Pointe,
or in Grosse Pointe Park,

while the free nation of rats
in Detroit emerges
from alleys behind pet shops, from cellars
and junked cars, and gathers
to flow at twilight
like a river the color of pavement,

and crawls over bedrooms and groceries
and through broken
school windows to eat the crayon
from drawings of rats—
and no one in Detroit understands
how rats are delicious in Dearborn.

If only we could communicate, if only
the boa constrictors of Southfield
would slither down I-94,
turn north on the Lodge Expressway,
and head for Eighth Street, to eat
out for a change. Instead, tomorrow,

a man from Birmingham enters
a pet shop in Detroit
to buy a frozen German shepherd
for six dollars and fifty cents
to feed his pet cheetah,
guarding the compound at home;

and a woman from Bloomfield Hills,
with a refrigerated Buick
wagon, buys
a frozen police department Morgan
for thirty-seven dollars
for her daughter who loves horses.

Oh, they arrive all day, in their
locked cars, buying
schoolyards, bridges, buses,
churches, and Ethnic Festivals;
they buy a frozen Texaco station
for eighty-four dollars and fifty cents

to feed to an imported London taxi
in Huntington Woods;
they buy Tiger Stadium,
frozen, to feed to the Little League
in Grosse Ile;
they buy J. L. Hudson's, the Fisher Building,

the Chrysler Freeway, the Detroit Institute
of the Arts, Greektown,
Cobo Hall, and the Tri-City
Bucks Roller Derby
Team. They bring everything home,
frozen solid

as pig iron, to the six-car garages
of Harper Woods, Grosse Pointe Woods,
Farmington, Grosse Pointe
Farms, Troy, and Grosse Arbor—
and they ingest
everything, and fall asleep, and lie

coiled in the sun, while the city
thaws in the stomach and slides
to the small intestine, where enzymes
break down molecules of protein
to amino acids, which enter
the cold bloodstream.

— Donald Hall, Poem with One Fact ¹

¹ Donald Hall, "The Town of Hill," David R. Godine, Boston, 1975, pp. 13–15.

© 2010 The Epicurean Dealmaker. All rights reserved.

A Cautionary Tale

Women with hats like the rear ends of pink ducks
applauded you, my poems.
These are the women whose husbands I meet on airplanes,
who close their briefcases and ask, “What are you in?”
I look in their eyes, I tell them I am in poetry,

and their eyes fill with anxiety, and with little tears.
“Oh, yeah?” they say, developing an interest in clouds.
“My wife, she likes that sort of thing? Hah-hah?
I guess maybe I’d better watch my grammar, huh?”
I leave them in airports, watching their grammar,

and take a limousine to the Women’s Goodness Club
where I drink Harvey’s Bristol Cream with their wives,
and eat chicken salad with capers, with little tomato wedges
and I read them “The Erotic Crocodile,” and “Eating You.”
Ah, when I have concluded the disbursement of sonorities,

crooning, “High on thy thigh I cry, Hi!”—and so forth—
they spank their wide hands, they smile like Jell-O,
and they say, “Hah-hah? My goodness, Mr. Hall,
but you certainly do have an imagination, huh?”
“Thank you, indeed,” I say; “it brings in the bacon.”

But now, my poems, now I have returned to the motel,
returned to l’eternel retour of the Holiday Inn,
naked, lying on the bed, watching Godzilla Sucks Mount Fuji,
addressing my poems, feeling superior, and drinking bourbon
from a flask disguised to look like a transistor radio.

Ah, my poems, it is true,
that with the deepest gratitude and most serene pleasure,
and with hints that I am a sexual Thomas Alva Edison,
and not without collecting an exorbitant fee,
I have accepted the approbation of feathers.

And what about you? You, laughing? You, in the bluejeans,
laughing at your mother who wears hats, and at your father
who rides airplanes with a briefcase watching his grammar?
Will you ever be old and dumb, like your creepy parents?
Not you, not you, not you, not you, not you, not you.

— Donald Hall, To a Waterfowl ¹

¹ Donald Hall, "The Town of Hill," David R. Godine, Boston, 1975, pp. 10–11.

© 2010 The Epicurean Dealmaker. All rights reserved.

Merry Christmas, Baby

Merry Christmas baby
Babe you sure did treat me nice
Yeah! Merry merry merry Christmas baby
Babe you sure did treat me nice
Gave me a diamond ring for Christmas
And now I’m living in paradise

Oh! I’m feeling mighty fine this morning
I’ve got good music on my radio
Hey baby, I’m feeling mighty fine
I’ve got good music on my radio
I would love to hug and kiss you baby
While you’re standing beneath the mistletoe

Santa came down the chimney
About half past three
He got all of these presents that you’ll use
See, I’ll help you put on these

Merry merry merry Christmas baby
Oh! you sure been good to me
I haven’t had a drink this evenin’ baby
But I’m all lit up like a Christmas tree

Hey! Merry merry merry Christmas baby
I’ve got good music on my radio
I said, merry merry merry Christmas baby
I’ve got good music on my radio
I would love to hug and kiss you baby
While you’re standing beneath the mistletoe

— B.B. King, Merry Christmas Baby¹

Merry Christmas, everyone. Happy holidays.

Have fun!

¹ YouTube soundtrack courtesy of @juanviejo. Thanks, Jon.

© 2010 The Epicurean Dealmaker. All rights reserved.