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Samizdata, derived from Samizdat /n. - a system of clandestine publication of banned literature in the USSR [Russ.,= self-publishing house]

An unsatisfactory tale

I recently finished reading Jonathan Knee’s book, The Accidental Investment Banker, chronicling the period of 1994-2003 during which time our slightly jaundiced writer was working for two of the leading practitioners of mega-mergers and initial public offerings (IPOs), Goldman Sachs and Morgan Stanley. As someone who has worked on the fringes of this world here in London, I could relate to quite a lot of Knee’s account. At the heart of it is his argument that investment banks have gone from being supposedly impartial providers of advice for long-term clients to mercenary hired guns willing to pump up any stock, sell any junk bond, to the highest bidder. He wishes to see investment banking give up this sordid activity and resemble the ideals (please try not to laugh) of the legal and medical professions.

This is all written with passion and a lot of detail; if you want to know how Philip Purcell, the former head honcho of Morgan Stanley, plotted to remove rivals or vice-versa, or how investment banks can be open to conflicts of interest, this is the book for you. But at the end of this volume I had no real clear answer to the question as to why a self-declared liberal (in the American usage) like Knee soiled himself working for these ghastly banks doing their ghastly IPOs and mergers at all (sorry for my sarcasm). Or maybe those mega-buck salaries eased the pain a bit (now you are being very sarcastic, Ed). Frankly, to be rude, Knee comes across as a bit of a prig; also, I find his naivete about the world of modern finance frankly a bit hard to take. Banks want to make money and this should hardly be a shocker; if you expect Olympian standards of objectivity from an analyst about a stock that the same bank might be underwriting in an IPO, you should not be investing at all and make sure to get a second or third opinion first. And yes, while there was a lot of hubris in the 1990s IT boom, remember that without the entrepreneurial gusto that that “bubble” made possible, I would not now be typing these words on a laptop and putting them onto a blog. It would not have harmed Knee to have mentioned that point. One might as well write about the supposed evils of the 1840s railway boom in Britain while overlooking that it did, after all, make possible loads of fanstastic railways.

In fact, although there are delusional dreamers, shysters and dullards in any walk of life, I tend to find that investment bankers or hedge fund managers or private equity partners tend to be pretty straight folk on the whole; personally, I find such people to be more honest, hard-working and clever than politicians, although just as prone to the error of sometimes believing their own propoganda. I don’t think any of the people that Knee writes about could be as guilty of financial crookedness as the Britsh government has been over its shamefully under-priced bid for the London Olympic Games, for example, which have turned into the mother of all money pits. And Gordon Brown’s handling of public accounts while he was Chancellor, putting PFI projects’ liabilities off balance sheet, would have landed him in disgrace, as happened to Stan O’Neill, former head of Merrill Lynch, who was kicked out after his firm suffered massive write-downs over the US sub-prime mortgages fiasco. When things go wrong in investment banks, people get fired; in politics, they get another cabinet post.

To be fair to Knee, he does not offer any concrete solutions to the ills he claims have gripped investment banks and he also expresses doubt about the need for yet more regulation; in fact, he even concedes that the legislative reaction to the implosion of the 1990s stock bubble and various accounting frauds have arguably made the job of investment banking even worse in ways that are unlikely to benefit clients. On the other hand, he is far too gentle on Eliot Spitzer, who’s bout of lawsuits against financial players, while not without some justification, went too far and have played a part in damaging New York as a competitve place to do business, to the benefit of London.

4 comments to An unsatisfactory tale

  • Paul Marks

    Death to Goldman Sachs!

    Of course I do not really mean that – but this firm has long struck me as such an example of the alliance between financial industry megabucks and leftist polititcs that it is almost a parody.

    My memory of events my well be warped by my natural bigotry, but I seem to remember the name “Goldman Sachs” associated with everything from that “economist” with a beard who used to appear on the B.B.C. a lot (and who got various government jobs), to Long Term Capital Management, and the guy who bought himself the Governorship of New Jersey, to young Miss Clinton being given a good job.

    Actually the leftist politics would fit with Mr Knee’s point (whether he knows it or not).

    If one believes that there is no honour in business – that “capitalists” are corrupt scum always out to lie and cheat people – then why not act that way oneself?

    Why not take money from one person, money for advise, and give him a lot of spin to lead him to buy a stock someone else is paying you to sell?

    After all if “capitalism is evil” and one’s impression of how businessmen act was formed early in life by watching television and reading school text books and watching Hollywood films, that is how one would logically act.

    And to still feel good about oneself, one would then give X zillion Dollars to various leftist causes.

    Some money from Wall Street may go to the Democrats because of threats from the senior Senator from New York “if you do not pay us contributions, we will push up Capital Gains Tax even higher” and so on (extortion seems to be legal in politics), but a lot of it seems to be because people really feel that supporting the left (not just the Democrats) is the correct moral thing to do – making up for their “evil” business activities.

    And if they believe that a sense of honour has no place in business (indeed is the opposite of being a “capitalist”) of course their business activties will be evil – they will lie and cheat as much as possible.

    As for Eliot Spitzer – he would seem to be the opposite of what Mr Knee should want.

    Instead of a sense of honour, of “my word is my bond – even if it leads to a financial loss for myself” and “if you pay for my advise I will advise you to the best of my ability”, Eliot Spitzer represents total government control of all aspects of business behaviour – in a way making business enterprises just an extention of government.

    As for doctors and lawyers – government licences did not reduce corruption (in the United States doctor licencing advanced State by State, and the unoffical closed shop of Bar Associations and Law licences advanced in like manner) – indeed licencing was a corrupt tool to boost fees at the expense of the public.

    I am sure it is much the same in the world of finance.

    Of course, in the long term, even endless credit bubble finance from the Federal Reserve system (and the Bank of England and the Euro Bank and so on) can not replace a reputation for honest business dealings.

    And such a reputation has, in the end, to be based on reality.

    If people have no sense of honour – probity, no sense that investing other people’s money is a matter of moral responsibility – then, in the end, no one will do business with them.

    And if everyone in the system is hopelessly corrupt (indeed believes being hopelessly corrupt is somehow “natural”) then the whole system comes down.

    But given the poltical opinions of so many people in it, I doubt that this would bother them.

    If all the above sound like Ayn Rand (accept that it is very poorly, as opposed to very well, written) so be it.

  • I don’t think any of the people that Knee writes about could be as guilty of financial crookedness as the Britsh government has been over its shamefully under-priced bid for the London Olympic Games, for example, which have turned into the mother of all money pits.

    The financial numbers in the original bid proposal were outright lies, and the people who put it together knew they were lies, but they made them anyway because they knew that they could not win the games otherwise.

    Anyone who put out a prospectus or set of accounts that defrauded shareholders they way taxpayers were defrauded in this case would quite rightly go to jail for fraud. But as it was a government Olympic bid, it barely worth commenting on.

  • The other book to read, in a similar vein, is F.I.A.S.C.O. by Frank Partnoy, about his time selling derivatives for Morgan Stanley in the 1990s, where he learned how to “rip people’s faces off”. Frank by name, and frank by nature, this is the book Morgan Stanley tried to ban but couldn’t, due its being true in every regard.

    I also found it an extremely useful background read for working in Investment Banking, where I’ve now been for a little while (Hey, it beats window cleaning). I would say about 99% of those whom I’ve met have been very decent people, and best of all, mostly anti-government. Rather strangely though, virtually none of them have any idea how the fiat money system works, and really do think G8 sovereign bonds are, in their phrase, “riskless”, when in fact these are the rotten instruments causing all of the moral hazard and risk-taking in the first place, as the central banks just keep buying them back with fictitious media backed by no real physical goods, thus causing all the financial dislocations we suffer in the inflationists’ business cycle. But I digress.

    The other good books IMHO for those wanting to short-circuit a background to Investment Banking include The Black Swan, Fooled By Randomness, and Traders, Guns and Money. Get through that little lot, plus John Hull on derivatives, and you’ll be able to blag your way into the City with confidence! 🙂

    (Though unfortunately, in these credit crisis times, brought on by all of this fiat paper rubbish floating about, backed by nothing but fresh air, you may meet 50,000 people being sacked on the way out as the Investment Banks burn their furniture! 🙁

    But then again, I used to be an ace window cleaner – all cash, no tax, and as much tea as you can drink. What could be better for an ex-City chancer? 😉

    Right, back to watching the Ron Paul money counter…

  • Paul Marks

    Once men of business (not just manufacturers but investors as well) were known as “stuffed shirts” – people whose stiffness and probity were to such a high level that they might as well have been made of starch.

    No “fun” side, and no “cleverness”.

    You know what is comming next.

    Unless they go back to being like that – Civil Society is doomed.

    Of course there are endless “perverse incentives” today – with credit bubble finance, unpredictable taxes, endless regulations and a wildly distorted legal system, meaning that every one is out of the short term buck.

    “So what if I ruin my reputation for the long term – there is not going to be a long term” seems to be the attitude.

    Michael Jennings.

    The government bid for “the games” and so much other government stuff.

    As you say – it is not just the lies that are important, it is the fact that everyone assumes that the numbers are lies and DOES NOT CARE.

    This proves that the overworked line “we live in corrupt times” is actually true.

    There have always been corruption and lies in government, but we have come to a time when they are so normal so expected, that most people just yawn when they here the facts.

    That is a very bad development.