The sure, sure thing

Last Updated: Fri, Nov 04, 2011 19:40 hrs

Satyajit Das takes on his peers in Extreme Money, his forthcoming book on the “financialisation” of the economy and the people who did it and profited from it. Excerpts from the chapter “Masters of the Universe”.

During the Great Depression, finance was unfashionable: “Don’t tell my mother I’m a banker, she thinks I play piano in a brothel.” Now, the best and brightest business school, mathematics, science and computing graduates took jobs on Wall Street: “When it’s profit you’re after, why go after it the hard way? I intend to be a stockbroker… One attempts to make the most money with the least work.”

In Lucy Prebble’s play Enron, the character Jeffrey Skilling, Harvard MBA, CEO of Enron and soon to be convicted felon, outlines the basis of the new economy: “the only difference between me and the people judging me is they weren’t smart enough to do what we did.” Money and brilliance became synonymous: “One of our culture’s deepest beliefs is expressed in the question, ‘If you are so smart, why ain’t you rich?’… people in finance are rich — so it logically follows that everything they chose to do must be smart.” [...] John Kenneth Galbraith’s caution would prove well founded: “Nothing so gives the illusion of intelligence as personal association with large sums of money. It is also alas an illusion.” [...]

* * *

The ritual theatre of campus recruitment, the hunting season, is dominated by words like “smart”, “intelligent” and “challenging”. It is the idealised vision of bankers: “They are the elite of Wall Street. Their offices are furnished with expensive antiques and original works of art. They… are as quick to place a telephone call to Rome or Zurich or Frankfurt as most Americans are to call their next door neighbour… His art is arcane.” [From Michael Jensen, The Financiers, 1976.]

New recruits rapidly discover a different reality. Banks don’t even trust the skills of recruits, putting them through extensive training programmes: “You are perfect, now could you please change?” Then, there’s the work.

Investment banking is coverage or product. Coverage is constant client meetings and spending 24/7 preparing thick, glossy, spurious pitch books, glanced at cursorily and thrown into waste bins. Reams of analysis are only to persuade clients to do something, anything, which results in fees for the bank.

Product means mergers and acquisitions or fund raising. Mergers involve endless research, positing what a company should do. Dense, stupefying valuations are prepared, showing how every proposed transaction will boost share prices. Fund raising is proposals to raise more money, more cheaply, via the latest opportunities and market windows.

Trading is selling or speculation. Selling is endless cold calling, puffery or inane chatter, masquerading as market colour (commentary) or trading ideas. No one can provide what everybody is really interested in — the sure, sure thing. Traders chafe under the relentless pressure of making money or not losing money.

In risk management, you learn that you are irrelevant, despite everybody saying you are vital. In the back office, you are chained to the oars of the banking trireme, processing an avalanche of paper. If you are not a producer then you are a cost centre, expected to perform magic tricks daily to keep the machine going. [...]

* * *

Gaining an edge is crucial, sometimes involving unusual initiatives. A trader at Steve Cohen’s SAC Capital was allegedly forced by his boss to take female hormones and wear articles of women’s clothing at work, leading to a sexual relationship between the men, one of whom was married. The bizarre behaviour was to eliminate the trader’s aggressive male attitude, making him a more obedient and detail-oriented trader.

Amar Bhide, a professor of business at Harvard, coined the phrase hustle as strategy. Banks have no strategy, only hustle. One bank decided its strategy was to have no strategy. Instead it hired smart people and backed them. Imitation is the only real strategy.

The culture does not create leaders, instead producing tyrants and dictators. Richard Fuld, CEO of Lehman Brothers for almost two decades, was “neither a leader nor a dazzling intellect”. In the culture of the deal, banks endlessly copy each other’s strategies or products, chasing the same customers, competing on price and the ability to take risk. Complex systems of fealty exist within firms. Fiercely secretive, bankers are reluctant to share information, seeking an edge over their internal and external competitors. People eat what they kill.

* * *

French philosopher Michel Foucault identified a carceral continuum, the system of cruelty, power, supervision, surveillance and enforcement of acceptable behaviour affecting working and domestic lives. Banking has its equivalent. [...]

In Liquidated, anthropologist Karen Ho documented the culture of modern banking. Instead of the expected royal treatment, the best and brightest must work like indentured slaves for up to 140 hours a week. Lacking job security and facing constant performance pressure, bankers survive by trading things or cutting deals. [...] Bankers made assets liquid or tradable. As highly liquid assets themselves that could be easily liquidated, they lived in constant fear. They learned the truth of an old Wall Street saying: “Never tell anyone on Wall Street your problems. Some don’t care. Most are glad you have them.” [...]

* * *

The pay was the only thing that made it all tolerable. As Jeffrey Skilling knew: “all that matters is money… You buy loyalty with money… touchy feely stuff isn’t as important as cash.” The character Jeffrey Skilling in the drama Enron says: “Money and sex motivate people… money… gets their hand off their d**k and into work.”

In 2006 investment banking accounted for just 0.1 per cent of all US private sector jobs (173,340 out of 132.5 million jobs), yet accounted for 1.3 per cent of all wages. The average weekly wage of investment bankers was $8,367, compared to $841 for all private sector jobs. In Fairfield County, Connecticut, where many hedge funds were based, the average pay was $23,846 a week. In 2007 the combined remuneration at the five major Wall Street investment banks alone exceeded the world’s total foreign aid budget of $850 billion.

The leading 20 hedge fund and private equity managers earned $657.5 million in 2007 — $12.6 million a week or $210,737 an hour (assuming a 60-hour week). [...] Bankers get paid a base salary, $35,000 to $500,000, but performance based bonuses can total up to 100 times that. The structure makes compensation costs variable, matching the volatile nature of investment banking.

While senior bankers everywhere were well paid, the über bonus is a recent phenomenon. Until the mid 1990s, multi-million dollar bonuses were unusual. Traditionally, investment banks were partnerships where gentlemen worked together, sharing profits. For employees, the golden ring of partnership was the prize. At “Goldmine” or “Golden Sachs”, becoming a partner was winning the lottery, every year. As investment banks became publicly owned or part of commercial banks, the promise of the partnership was lost and bonuses became important in compensating and retaining staff.

Large bonuses and increasing profits went hand in hand. Traditional partnerships had limited capital, confining themselves to primarily arranging deals. Access to more capital from shareholders (where publicly held) or commercial banks (who owned them) allowed investment banks to trade on their own account and take greater risks.

Excerpted with permission from Penguin Books India

The Masters of the Universe and the Cult of Risk
Author: Satyajit Das
Publisher: Penguin Portfolio
Pages: 536
Price: Rs 699

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