She Blinded Me with Science

Science has not changed the laws of social growth or betterment. Science has not changed the nature of society, has not made history a whit easier to understand, or human nature a whit easier to reform. It has won for us a great liberty in the physical world, a liberty from superstitious fear and from disease, a freedom to use nature as a familiar servant; but it has not freed us from ourselves. It has not purged us of passion or disposed us to virtue. It has not made us less covetous or less ambitious or less self-indulgent. On the contrary, it may be suspected of having enhanced our passions by making wealth so quick to come, and so fickle to stay.

— Woodrow Wilson, A Commemorative Address, October 21, 1896

No matter what technology and science bring us, the dystopias of our future will always be of our very own, all-too-human design.


© 2011 The Epicurean Dealmaker. All rights reserved.

You’re Doing It Wrong

And he sampled the time-winds, sensing the turmoil, the storm nexus that now focused on this moment place. Even the faint gaps were closed now. Here was the unborn jihad, he knew. Here was the race consciousness that he had known once as his own terrible purpose. Here was reason enough for a Kwisatz Haderach or a Lisan al-Gaib or even the halting schemes of the Bene Gesserit. The race of humans had felt its own dormancy, sensed itself grown stale and knew now only the need to experience turmoil in which the genes would mingle and the strong new mixtures survive. All humans were alive as an unconscious single organism in this moment, experiencing a kind of sexual heat that could override any barrier.

— Frank Herbert, Dune

There is something deeply wrong with this country, O Dearly Beloved.

We seem to have painted ourselves into a corner from which we cannot escape. Grass roots movements as diverse as the Tea Party and Occupy Wall Street implicitly recognize this fact and have sprung up in response to it. People from a broad spectrum of Americans less committed, strident, and/or crazy than these activists have shown themselves to be largely sympathetic to their discontent. Depending on where you stand, and which hobby horse you happen to be riding at the moment, our predicament can appear in any number of guises: corrupt crony capitalism, grossly overbearing and inefficient government, a broken financial system deeply riddled with self-interest, or a society-wide breakdown of personal responsibility and uprightness.¹ Our so-called leaders—the very men and women we elected to get us out of this mess—cannot seem to tie their own shoes, much less offer a solution or even a direction in which to begin marching. Politicians are the only group of individuals more despised and less respected than investment bankers nowadays. Believe you me, as one of the latter, I can attest that that is a pretty damning indictment.

A common feature of many of our ills is the unmanageable size and complexity of our institutions and practices. This is certainly true of the government itself, our regulatory and tax systems, and our financial system. Part of this problem—size—may be an ineluctable outgrowth of the sheer mass of our nation and economy. One can certainly argue that size itself can lead to myriad ills. One can credibly entertain the notion that perhaps governing over 300 million people and managing a $14 trillion economy may be beyond the collective ability of any group of people, however intelligent or dedicated. Size certainly seems to have flummoxed the captains of my industry and their regulators in the most recent crisis.

But the bigger culprit, in my opinion, is complexity. Complexity makes things more difficult to manage. Complexity imposes substantial extrinsic costs, which must be expended simply to deal with complexity itself, apart from any underlying issues at hand. Complexity increases uncertainty, introduces distortions, and encourages mistakes. Want examples? Just think of the tax code, or the current state of the global financial system.

And yet we cannot seem to hit the rewind button on complexity. The latest example of this is the appalling complexification that the Volcker Rule—which was included in the Dodd-Frank financial reform act in order to prevent risky proprietary trading by government-backed depositary institutions—has undergone at the hands of those drafting the final regulations. The Beltway rulemaking sausage factory has turned what was a three-page initial proposal and a ten-page section in Dodd-Frank into a 300-page monster. A monster which, by all accounts, nobody loves.

Now, without a doubt a substantial portion of blame for this complexification can be laid squarely at the feet of industry lobbyists and banks themselves. They were the ones who lobbied so expensively and extensively for exemptions and extensions. They were the ones who no doubt insisted that the simple premise of the Volcker Rule was too simplistic to impose on a complex, interconnected industry without causing unacceptably expensive and potentially dangerous disruptions to established business practices.² I’m sure they offered all sorts of eminently reasonable objections to straightforward implementation of a separation between proprietary trading and depositary lending, while simultaneously missing or pretending not to understand that THAT IS THE VOLCKER RULE’S ENTIRE FUCKING POINT. That these dickwads and their hired guns were able to impose their will to neuter this piece of legislation you may credit to another virulent contagion in our polity: the pervasive and poisonous influence of corporate and individual money on politics and regulation.^{3, 4}

* * *

But the more general contributor to this legislative abortion is a structural one. Too many (all?) of the people writing these rules—both on the regulatory side and the industry itself—are lawyers. And lawyers have strong professional and cognitive biases against simplicity when drafting rules, laws, contracts, or indeed any sort of document designed to govern behavior. In all such situations, it is lawyers’ job, objective, and desire to minimize interpretation. They do this because they want to forestall future disputes and potentially expensive litigation by exhaustively codifying behavioral rules and spelling them out under every conceivable circumstance. Since when have you not seen a lawyer sorely tempted to insert a “provided, however” phrase into the simplest contract? Yeah, me neither.

A charitable reader like yourself might understand this impulse as a natural outgrowth of the pervasively litigious culture in the United States. For whatever reason, this tendency to sue first and ask questions later has led to a preponderance of rule-based, as opposed to principle-based regulation in this country. Nevertheless, codifying a principle as clear and straightforward as the Volcker Rule into a 300-page cookbook of recipes for what is and is not allowed in the financial sector is a wrongheaded exercise in futility. For one thing, exactly no-one can possibly anticipate how the financial markets and their constituent banks will change over the forseeable future. The global financial system is just too dynamic, and the likelihood that a piece of regulation penned in 2011 will be able to effectively anticipate and regulate financial market developments over the next several years is simply ludicrous. Investment banks themselves don’t know what kind of opportunities and threats they will face—and hence what they’re actually going to be doing—next quarter, much less in 2012 or 2015. How can we expect a static document drafted by a bunch of underpaid, cover-your-ass government lawyers who couldn’t recognize a proprietary trading desk if they were sitting at it to do so?

Because of this, regulators must have the ability to flexibly interpret and respond to changing conditions in the financial markets and the businesses of their regulatees.⁵ The relentless, rapid evolution of finance requires that financial regulation be principle-based, not rule-based. Reformed quant Emanuel Derman makes the case persuasively that we cannot understand financial markets using rigidly codified models. If that is true, how, then, can we ever hope to regulate them with a framework based on rigid, over-codified rules?

No points for guessing: we can’t.

* * *

So what does that mean for the Volcker Rule and financial reform in general? Well, one might argue that the best solution is to scrap that overlawyered piece of toilet paper and go back to the author of the eponymous rule’s own suggestion:

“I’d write a much simpler bill. I’d love to see a four-page bill that bans proprietary trading and makes the board and chief executive responsible for compliance. And I’d have strong regulators. If the banks didn’t comply with the spirit of the bill, they’d go after them.”

Of course, this would be principle-based regulation. As Mr. Volcker points out, such a regulatory regime would require strong and well-informed regulators. I have made the same point, too many times to link to here, over and over in the past. Professor Derman is with me too. You would want ex-bankers, experienced in sales, trading, structured finance, and derivatives, who would work closely with regulated banks to monitor, understand, and control the changing nature of risks, activities, and opportunities in the markets. You would create performance incentives which completely insulate them from the results of their regulatees, and you would impose strict prohibitions on them returning to the industry before their active market and industry knowledge has gone stale.

Such regulation would demand close, realtime cooperation and consultation between regulators and industry participants. But if it is done properly, it should work out to everyone’s benefit. Regulators would get realtime information on risk exposures and market practices from their regulatees, and regulatees would receive realtime feedback and guidance from regulators on overall market developments and trends in risk management. Done properly, this model would not stifle innovation or profit-making. It would enhance it, while simultaneously reducing systemic risk and giving regulators early warning of developing threats to global financial security.

* * *

The Dodd-Frank legislation at over 2,000 pages is an abortion. The Volcker Rule at 300 pages is an abortion. They cannot succeed. If we cannot empower intelligent, experienced regulators to monitor and control the wholesale financial system using heuristic principles, we are fucked. Under the current financial regulatory system, and its proposed rules, we are all fucked. I will leave it to my Loyal and Long-Suffering Readers to decide whether that is a state of affairs which can be corrected. I suspect these pearls will be trampled like all the others into the muck of the pig wallow. Only time will tell.

In the meantime, we need to reinvent our rulemaking processes. Currently we make laws and regulations like oysters make pearls, except instead of starting with a tiny grain of sand and covering it with precious nacre, we start with a tiny pearl of sensible principles and cover it with layer upon layer of sand, grit, and detritus. This makes for ugly pearls, and lousy legislation.

When are we going to wake up?

Related reading:
Paul Kingsnorth, This economic collapse is a ‘crisis of bigness’ (The Guardian, September 25, 2011)
Grains of Sand (August 10, 2007)
James Stewart, Volcker Rule, Once Simple, Now Boggles (The New York Times, October 21, 2011)
Emanuel Derman, Maybe markets need more principles and less regulation (Reuters, October 21, 2011)


¹ For the avoidance of doubt, just in case you do care, I believe all of these things to be true. In my opinion, we are in deep doo-doo, and I see no-one on the horizon with a shovel.
² The premise behind these shenanigans is faulty. It is not the obligation of regulators to adapt, weaken, and modify regulations to minimize disruption to regulatees’ current business practices. It is the obligation of regulatees to modify their fucking business practices to comply with regulation. Jesus.
³ There is a part of me that hopes the Volcker Rule is implemented in its currently bastardized form so mega-banks will be forced to expend ridiculous amounts of shareholder money and management attention complying with the Frankenstein’s monster they have helped create. Karma can be a bitch.
⁴ As an aside, SCOTUS’s decision in Citizens United was an abortion of American jurisprudence. Just sayin’.
⁵ My focus throughout this piece is on regulation of the wholesale financial sector; that is, investment banks, commercial banks, and other entities which provide services to corporations, institutional investors, hedge funds, and other such non-retail customers. I have nothing to say about retail financial regulation, since that is neither my area of expertise nor my day-to-day concern. Perhaps more rule-based regulation makes sense for consumer finance, since I suspect that field is less changeable and dynamic than the wholesale sector. But I defer to others with better knowledge on that topic.

© 2011 The Epicurean Dealmaker. All rights reserved.

The Land of the Free

“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 Fischer 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 Fact¹

* * *“What we have here, is a failure to communicate.”

I wonder whether Dearborn will ever understand that rats are not delicious in Detroit.


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

© 2011 The Epicurean Dealmaker. All rights reserved.

If the Phone Don’t Ring, You’ll Know It’s Me

As a dashing, handsome, witty, and debonair man-about-town, you might well imagine, Dear Readers, that I receive copious quantities of correspondence begging a minute of my precious time to address some issue or other. Often, it is some tyro who has read my work here, soaking up the reflected glory and excitement of the world of high finance while simultaneously eliding the irony, sarcasm, and disgust which naturally comingle therein. Said tyro is almost always looking to “break into” my industry, after having read my semi-ironic paean to investment banking (but missing the irony) or talking with his shell-shocked peers who already cling tenuously to 100-hour-a-week waterboarding slots at überbanks.

Notwithstanding its own not-insignificant challenges and the social opprobrium currently attached to investment banking by society at large, it’s hard to blame the poor dears:

Unlike, say, 99.6% of all other jobs available to a wet-behind-the-ears idiot in proud possession of little more than an expensive college degree, becoming an investment banker fresh out of college is a huge rush. Depending on what role they perform, new entrants just weeks into the job can participate in billion dollar underwritings, multi-billion dollar mergers, complicated cross-border restructurings, or devilishly complex trading programs, all the while possessing a level of experience formally known in the industry as “jack shit.”

In what other industry, I ask you, can a 22-year-old who just stopped wetting the bed three weeks ago participate in a deal which runs for weeks on the cover of The Wall Street Journal or the Financial Times? To be sure, he is probably doing little more than making copies, getting coffee, and trying not to look as stupid and lost as he feels, but at least he is in the room. Contrast this, if you will, with a fresh McKinsey recruit tasked with interviewing shop floor supervisors to develop a human resources inventory for a ball bearing manufacturer in East Bumfuck, Illinois. Or a pre-law student who spends 80 hours a week in a windowless basement cross-checking sale-leaseback contracts for a patent dispute in Moldavia. On average, young investment bankers spend less time traveling that management consultants and more time sleeping than corporate attorneys. Plus, they get to tell their friends and family that they carried Bruce Wasserstein’s bags. What could be better?

Unfortunately, from their perspective, many of the youngsters who contact me fear they do not possess the “right” degree from the “right” school which they believe will magically open the secret door into this wonderland of fun. Often they have tried and failed to pursue the standard on-campus recruiting paths or have come up short with the fearsome Human Resources harridans who guard the gates to Analyst or Associate recruiting. And so they reach out to Yours Truly, pleading for fifteen minutes of my time on the telephone or in person to give them the key to investment banking Valhalla.

For the avoidance of doubt, and for the benefit of the 20 hapless supplicants feverishly typing emails to me in response to this post, let me make this perfectly clear:

No. Nope. Unh-unh. HELL NO.

I don’t do phone calls or meetings. Haven’t any of you seen Enemy of the State?

* * *

By the same token, it is a waste of electrons to send me your resumé. To whom would you suggest I send it? “Oh, uh, hi, Jerry at Goldman Sachs. I, uh, just happened to find this fascinating resumé lying on the fax machine. Would you mind taking a hard look at it? Wait. What do you mean? No, I don’t know anybody named ‘TED’. Why do you ask?” Consider my carefully defended pseudonymity an impermeable barrier to contact, referrals, or recommendations in the real world. Sorry, but that’s just the way it is.

However, as partial recompense for your pains, and to show I am not a completely heartless bastard, I am happy to share with you here the same advice I give aspiring applicants to my industry under my own identity.

First of all, having a degree in finance or economics from a top-ranked college or business school is not a sine qua non to get hired into investment banking. But I’ll not kid you: it helps. Especially now, when the industry is under severe pressure to retrench. Why? Because it acts as an easy screen for harried recruiters to winnow down the hundreds if not thousands of job applications they receive to a more manageable horde. Taken separately, a degree from a top school shows that other demanding institutions have deemed you worthy in the past, and a degree in finance, economics, or accounting shows you have an understanding of (and possibly a love for) the basic tools and concepts of our trade. Beyond that, they tell us almost nothing about whether you have the drive, passion, and capacity for our business. The only way we can find that out is by throwing you into the fire itself.

For I have seen dozens of top-ranked Ivy League graduates flame out (or worse, fizzle) over the years, mostly due to lack of energy, drive, or commitment to do what has to be done. Not because they weren’t smart enough; no, they were just too lazy or too entitled to get down in the mud and wrestle with the alligators, which is why we hire young cannon fodder like you in the first place. Survive the alligators, and you have a chance to rise into the haughty position of power, influence, and respect you feel you deserve. Don’t survive, and we’ll toss your mangled corpse out the back door onto a trash heap like a used Kleenex.

Did I mention investment bankers are heartless bastards?

* * *

What does it take to succeed in my business? You have to be really smart (don’t kid yourself on this one: it’s a high hurdle), determined, aggressive, and indefatigable. You have to be quick on your feet, too, because change is ever present in investment banking, and you have to be able to adapt to wildly different situations and volatile personalities. You have to learn how to work with financial statements, accounting concepts, and spreadsheets. You have to be good with people. You have to be a quick learner, because no school can teach you what you need to know and how to do it: investment banking is and always will be an apprenticeship business. And you have to (learn to) love the business. If you don’t, you’ll burn out: it’s just too hard and demanding.

Nowhere in that litany, you will notice, did I say you need a finance degree or an Ivy League diploma. Those help getting in the door, but they tell us little about whether you will be a good hire. So, what do you do if you don’t have the kind of credentials which almost guarantee you will get a first round interview? You have to be creative in your approach, flexible and clever in your campaign, and you have to convincingly demonstrate the traits of successful investment bankers I have enumerated above when you get in the door.

Reach out to people you know, ask for recommendations to senior bankers from your friends and family, request informational interviews with these bankers (but not unreliable, curmudgeonly pseudonymous bloggers), and go show them you have what it takes. Don’t give up. It will be very hard. But if you can get in the door, you will have proved to yourself and your employer that you have all the tools you need to make a positive impact.

And maybe one day, if you are smart, hard-working, and very, very lucky, you’ll be kicking some prissy Princeton prima donna the HR geeks sent you to interview out on his ass because you can’t trust him to bring back your coffee order from Starbucks correctly.

Good luck, campers.

* * *

(Oh, and one more thing. If you really want to stand out, it helps to be a girl. Just sayin’.)


© 2011 The Epicurean Dealmaker. All rights reserved.

A Hard Rain’s Gonna Fall

“Have you ever stood and stared at it? Marveled at its beauty, its genius? Billions of people just living out their lives. Oblivious.

“Did you know that the first Matrix was designed to be a perfect human world, where none suffered, where everyone would be happy? It was a disaster. No-one would accept the program, entire crops were lost. Some believed that we lacked the programming language to describe your perfect world, but I believe that, as a species, human beings define their reality through misery and suffering. The perfect world was a dream that your primitive cerebrum kept trying to wake up from. Which is why the Matrix was redesigned to this: the peak of your civilization. I say your civilization, because as soon as we started thinking for you it really became our civilization, which is of course what this is all about.

“Evolution, Morpheus, evolution. Like the dinosaur. Look out that window. You’ve had your time. The future is our world, Morpheus. The future is our time.”

— Agent Smith, The Matrix

Things must be getting pretty ugly on the trading floors of big investment banks worldwide, O Dearly Beloved. If you still have any friends or acquaintances desperately clinging to such formerly gainful employ, you would be kind to spare them a tear or a LinkedIn invitation or two. I am sure they would appreciate the gesture.

You wanna know how I know that? Well, if the constant drumbeat of articles trumpeting the death of proprietary trading and its enabler, mountains of cheap capital, weren’t enough, how else could one explain this?:

One of the mysteries of investment banking is why M&A is held in such awe. Advisory bankers swan around like they own the place. They have the nicest suits. The senior ones are also difficult to fire, insisting they nurture the crucial relationship with corporate clients (in spite of perhaps not having done a deal in years). M&A activity in 2011 could fall 5 per cent below last year’s volumes despite a strong start, according to Keefe, Bruyette & Woods. Against a backdrop of declining activity, there are three good reasons why M&A should be brought back to earth.

Or this?:

Meanwhile, [M&A] prima donnas take home bank. But do they make profits for their firms? Or is the big money in the deal add-ons, like providing financing to pay for takeovers? We’ll never know for sure, but our money is on the drones and not the guys in pinstripes.

In my day, we used to call such patently bought and paid-for hit pieces “advertorials.” I hope the FT’s Lex team and DealJournal’s writers got nice honoraria for their troubles, or at least a couple of beers or so. Because as reporting goes, both pieces are complete and utter bullshit.

* * *

Not that I disagree with most of the facts and assertions both articles present,¹ mind you. Mergers and acquisition revenues have always been volatile and highly cyclical; they are tightly tied to the business cycle and trends in financial markets. They are also without doubt tiny in relation to the enormous revenue from the sales and trading (capital markets) side of the house at integrated investment banks. This has been true for more than a decade, ever since the capital markets divisions of global investment banks looked at the tsunami of cheap liquidity flooding the world financial system and decided they would like a taste. No M&A or corporate finance banker in the business longer than six months would attempt to deny this. Why else do you think so many major integrated investment banks—the Great Vampire Squid preeminent among them—are run by short-sleeve-wearing, onion-cheeseburger-eating troglodytes from the trading floor?²

But given this very power and earning disparity between the advisory and capital markets sides of the business, why did the leading organs of financial journalism on both sides of the Atlantic feel compelled to chew up column inches with snarky attacks on M&A bankers? Why pick on the little kid? Whence also the frat bro sniping at “nice suits” and “pinstripes,” as if knowing how to knot a tie or deigning to wear nice clothes more than twice a year were somehow sins against “authenticity” or some such puerile bullshit? What’s the fucking point?

I’ll tell you what the fucking point is: everyone on the trading floor of every leading investment bank is about to get fucking fired.

* * *

Now of course that is untrue, and a gross exaggeration (although one my rough-hewn compatriots on the turret phones can appreciate). But it is no exaggeration to say that the capital markets gravy train of the past ten years or so is coming to a rapid, screechy, and highly painful end. The Volcker Rule, Basel III, and the re-emergence of actual, functioning risk management from the bowels of the Chinese opium den where it has been languishing for the last decade will see to that. Gone are the days of 60-to-1 leverage, compliant regulators, risk-loving shareholders, and politicians who could afford to turn a blind eye to an industry which used implicit government backstops as collateral in the global casino. This will put massive pressure on revenue, profits, and compensation in capital markets divisions everywhere. And if there’s one thing senior investment bank executives know how to do when faced with compensation pressure, it’s fire people. Lots of people.

The other thing senior managers know how to do is fight for a bigger share of the bonus pool, especially when said pool is shrinking faster than homeowners’ equity in Nevada. Hence the perennial resuscitation of tired old arguments and clichés about bankers on the advisory side of the house—that they are prissy peacocks who add no value and steal credit for revenues properly earned by sales and trading—in order to preserve one’s own subordinates’ share of the compensation pie. Of course, when sales and trading was demonstrably bringing in many multiples of the revenue that advisory was, capital markets executives had little need for such arguments. They could just point to their profit and loss statements and tell senior management how much they expected to keep. As far as they were concerned, the midgets in M&A could suck it. But now that the worm has turned, and steroid-fueled sales and trading profits from structured products and proprietary trading are evaporating in the noonday sun, capital markets managers have been reduced to jawboning and badmouthing their colleagues in the press.

So congratulations, Lex and DealJournal, you’ve just been reduced to shills for traders in their internal bonus discussions. You might want to check your sources’ business cards to see which division they work for. As if you don’t already know.

* * *

The other major criticism or insinuation our beloved fourth estate sock puppets parrot for their sales and trading overlords—that M&A and corporate finance bankers’ claim to add value via access to corporate clients is untrue—is no more than tendentious, uninformed bullshit. For one thing, the reason so many of us wear nice suits and ties is because we actually meet with real, live clients on frequent occasion. This is in strong contradistinction to most of the denizens of the trading floor, whose primary contact with people outside their own firm consists of punching a preprogrammed button on their turret phone and talking to their similarly Dockers™-clad counterpart over a Plantronics headset. Unlike the hedge fund and institutional investor counterparties investment bank traders deal with—who trade promiscuously with everybody on Wall Street and who don’t give a rat’s ass whether they like or even trust the trader in question, as long as he completes trades as he said he would—getting corporate clients to do transactions requires building trust and rapport over many years. This is absolutely the case in pure M&A, where no capital markets financing or derivative transactions are involved, but it is also true in more general corporate finance contexts.

I have stated time and time again that, notwithstanding the delusions of so many of my peers, there is no service or product on Wall Street which is not completely commoditized. This is true of M&A advice, but it is particularly true of any product or service flogged from a capital markets desk. Proprietary products can be and are reverse-engineered within weeks, if not days, and plain vanilla shit like high yield bonds, interest rate swaps, or initial public offerings are a dime a dozen. There is literally almost nothing Goldman Sachs can do that Morgan Stanley, JP Morgan, Bank of America, or even short-bus rider Citigroup can’t do equally as well.

Hence, Lex’s assertion,

Perhaps clients would buy other products because they are excellent in their own right and not because of an introduction from advisory.

is on its face ludicrous. First, because no bank has any monopoly on excellent products for any length of time. Second, because there is no-one on the capital markets floor of any big investment bank who has close, proprietary relationships with corporate issuers which would encourage said issuers to agree to do deals with him directly. That is not his job. It is the job of the corporate finance or advisory banker to make the introduction to the product guy. It is the product guy’s job to structure, issue, and sell the resulting product. They work together.

In a similar vein, Lex’s uncritically repeated assertion that some M&A “standalone cost-income ratios... can be as high as 400 per cent” is just dumb. If any coverage or advisory banker truly got paid four times the actual revenue he or she brought in, rather than getting fired on the spot, he or she must have some really indiscreet photos of the CEO with a well-oiled goat. Part of the advisory banker’s job—as opposed to, and often in addition to, pure M&A advice—is to give his or her client access to the entire range of products and services the bank offers. If that client transacts capital markets deals with the bank, the coverage officer who made the introduction deserves some of the credit (and pay). Saying otherwise is like saying a Boeing salesman doesn’t deserve to be compensated for selling planes because he doesn’t actually build them. That’s just stupid.

* * *

In any event, my entire industry faces a very painful restructuring as the high-octane profits of structured products, proprietary trading, and massive trading volumes driven by global uncertainty ineluctably dry up. In such an environment, where capital is no longer either cheap or plentiful, business lines which can make money using minimal capital necessarily acquire greater power and prominence. Given that pure M&A uses exactly no capital, it is only natural that M&A bankers will reacquire some of their old influence within investment banks. When financing is tight, it’s hard to argue with an infinite return on capital.³

Of course, I continue to maintain that integrated investment banks live or die by the inextricable cooperation of their advisory and capital markets arms. We are tied together at the hip, and that which hurts one of us will hurt the other, too. So I take no particular pleasure in noting the imminent demise of thousands of my capital markets brethren across the industry. I just take care to note that my fellow sentient programs and I expect a rather larger share of the pie than before.


¹ Chronologically, the Lex article appeared earlier, and it provides the meatier substance of the two. The DealJournal piece does little more than parrot Lex and toss in a few jejune Americanisms (“take home bank”) favored by the 20-something tyros who staff the nether regions of big banks, presumably for the benefit of native readers unfamiliar with language heard outside the lacrosse field. Not that I’m judging or anything.
² I kid, I kid. But, really, I have to get some digs in of my own, don’t I? You should know by now that I’m no saint.
³ It is also no matter of indifference in today's environment that when an M&A banker screws up or fails to close a deal, he loses only time and a potential fee. When a prop trader or structured products banker screws up, he can blow a hole in the side of his bank larger than all the revenues earned by all of his compatriots all year. And when a whole industry of capital markets bankers screw up, it can blow a trillion dollar hole in the side of the global economy. Or so I hear.

© 2011 The Epicurean Dealmaker. All rights reserved.