Investment Bankers Get Public Flogging...the Death of Investment Banking as we Know It???
Yesterday the CEOs of a bunch of investment banks (you can look up the specifics on your own) lined up in front of a special session of Congress to discuss what they had done with the Federal Bailout money their banks were given late last year. Well, at least that was the ostensible purpose of the gathering. The real reason the bankers were called before Congress was for a good, old-fashioned public flogging.
If this were the Middle Ages, or Revolutionary France, they may have been hung or guillotined. As it is, they were basically paraded in front of Congress like a bunch of misbehaving schoolboys and questioned, upbraided, even sort of taunted, by various members of Congress including Mike Capuano (D-Mass) and Maxine Waters (D-Calif).
I must confess, the whole thing was kind of fun to watch: these one-time Masters of the Universe squirming before the irate questions of grandstanding Congressmen. It was funny to hear the Congressmen apply normal, real-world reasoning as they questioned the bankers about their world; the normally opaque and mysterious world of Investment Banking.
It is truly its own world, quite different from most others. It is a hyper-competitive industry, where people work 12, 18, 24 hours a day, where employees are judged and ranked by number, all the way to the very last one...and where they can make multi-million dollar bonuses that can sometimes be four times larger than their annual salaries. All of which is part of a storied and well-developed tradition and a system that has helped finance this country for the past century and longer. Quite simply: the rules of normal every-day civilization do not apply.
That is why some of the bankers at the podium yesterday had a tough time explaining why they gave out however many billion in bonuses while their firms lost billions of dollars, and explaining what exactly they did with the "taxpayer" money that was disbursed to them last year. Even when they explained it, the answers were still befuddling. Like the following example, which I paraphrase from my (faulty) memory...
Congressman: "Why did you use the money the Government gave you to give out bonuses?"
Banker: "We didn't use that money, we used different money."
Congressman: "Wait, you're telling me that money is fungible everywhere else in the world, except at your institution??"
I guess what mostly caught my ear was the word "fungible*," which I've never been able to properly absorb into my arsenal (just as well, because nobody understands it anyway).
BUT, I digress...
Though this whole scene was terribly fun to watch, I don't know what immediate good it accomplished, other than to sate the bloodlust of the wounded and ailing masses, and keep the Congressmen in good stead with their constituents.
But, one of the bankers, I think it was Morgan Stanley's John Mack, said something interesting.
[Paraphrased] "The bonus system has been around since the earliest days of investment banking, when most of these firms were small partnerships staffed by as few as six or eight people, long before they became public companies..."
In fact, Mack went on to say, Morgan Stanley was not even a public company when he arrived. It only went public in 1986, not too long ago, in the whole scheme of things.
It makes sense that these companies have traditions and institutional cultures left over from the old days when Investment Bankers wore top hats and tabulated their accounts with fountain pens. But, it also makes sense that now, when these companies are public corporations receiving money from the government, many of those traditions are going to have to go by the wayside.
I'm not really saying (as in the title of this post) that Investment Banking as we knew it is dead; private firms can still do things their own way, and there will always be a level of secrecy about how things get done at these investment banks. The high-performers will still be rewarded, and the Top Dogs will still try to grab as much as they can, whenever they can. And, of course, the Market will come back one day, and people will start making money again...and when that happens, you can bet that the spectre of the "Evil Money-Grubbing Banker" will fade ever so surely from the public eye...because when everyone has a job, when everyone's making money, who cares what a few conivving bankers are up to? It's only when the fun stops that these types of things get thrust into the public eye. It happened in the aftermath of the Tech Bubble, when I first became a financial journo, and it'll happen after this bubble is cleaned up.
I guess what I'm saying is, life at THESE investment banks is probably never going to be the same. The day they accepted the TARP money, or whatever of the bzillion bailout programs it was, was the day they signed away their rights to run their investment banks like the hallowed Houses of Finance were run in days gone by. In the near future, banks like Citigroup are going to become quasi-government entities, and that means, essentially, the High Times are over. In a few years, having a job at Citigroup will be as cool as having a job at the Postal Service (No offense, of course. What I do isn't very cool either).
I'm not one of those people who blames this crisis on the investment banks, or mortgage brokers, or any one particular group. I think it's just interesting that these guys have finally been singled out as ONE of the causes of the whole thing. As a financial journo, I've had to write about all of these firms over the years, even once had the thankless job of trying to talk to these guys themselves. I guess it was just funny, after all these years, to see them lined up, as if at a firing squad, all for the sake of some political theatre. A kind of Rogues Gallery of Greed. Truth be told, I have an admiration for what these guys do; the hours they put in, the analytical nature of their work, and the raw intelligence most of them possess. But that doesn't mean I didn't enjoy seeing them take their lumps...
If this were the Middle Ages, or Revolutionary France, they may have been hung or guillotined. As it is, they were basically paraded in front of Congress like a bunch of misbehaving schoolboys and questioned, upbraided, even sort of taunted, by various members of Congress including Mike Capuano (D-Mass) and Maxine Waters (D-Calif).
I must confess, the whole thing was kind of fun to watch: these one-time Masters of the Universe squirming before the irate questions of grandstanding Congressmen. It was funny to hear the Congressmen apply normal, real-world reasoning as they questioned the bankers about their world; the normally opaque and mysterious world of Investment Banking.
It is truly its own world, quite different from most others. It is a hyper-competitive industry, where people work 12, 18, 24 hours a day, where employees are judged and ranked by number, all the way to the very last one...and where they can make multi-million dollar bonuses that can sometimes be four times larger than their annual salaries. All of which is part of a storied and well-developed tradition and a system that has helped finance this country for the past century and longer. Quite simply: the rules of normal every-day civilization do not apply.
That is why some of the bankers at the podium yesterday had a tough time explaining why they gave out however many billion in bonuses while their firms lost billions of dollars, and explaining what exactly they did with the "taxpayer" money that was disbursed to them last year. Even when they explained it, the answers were still befuddling. Like the following example, which I paraphrase from my (faulty) memory...
Congressman: "Why did you use the money the Government gave you to give out bonuses?"
Banker: "We didn't use that money, we used different money."
Congressman: "Wait, you're telling me that money is fungible everywhere else in the world, except at your institution??"
I guess what mostly caught my ear was the word "fungible*," which I've never been able to properly absorb into my arsenal (just as well, because nobody understands it anyway).
BUT, I digress...
Though this whole scene was terribly fun to watch, I don't know what immediate good it accomplished, other than to sate the bloodlust of the wounded and ailing masses, and keep the Congressmen in good stead with their constituents.
But, one of the bankers, I think it was Morgan Stanley's John Mack, said something interesting.
[Paraphrased] "The bonus system has been around since the earliest days of investment banking, when most of these firms were small partnerships staffed by as few as six or eight people, long before they became public companies..."
In fact, Mack went on to say, Morgan Stanley was not even a public company when he arrived. It only went public in 1986, not too long ago, in the whole scheme of things.
It makes sense that these companies have traditions and institutional cultures left over from the old days when Investment Bankers wore top hats and tabulated their accounts with fountain pens. But, it also makes sense that now, when these companies are public corporations receiving money from the government, many of those traditions are going to have to go by the wayside.
I'm not really saying (as in the title of this post) that Investment Banking as we knew it is dead; private firms can still do things their own way, and there will always be a level of secrecy about how things get done at these investment banks. The high-performers will still be rewarded, and the Top Dogs will still try to grab as much as they can, whenever they can. And, of course, the Market will come back one day, and people will start making money again...and when that happens, you can bet that the spectre of the "Evil Money-Grubbing Banker" will fade ever so surely from the public eye...because when everyone has a job, when everyone's making money, who cares what a few conivving bankers are up to? It's only when the fun stops that these types of things get thrust into the public eye. It happened in the aftermath of the Tech Bubble, when I first became a financial journo, and it'll happen after this bubble is cleaned up.
I guess what I'm saying is, life at THESE investment banks is probably never going to be the same. The day they accepted the TARP money, or whatever of the bzillion bailout programs it was, was the day they signed away their rights to run their investment banks like the hallowed Houses of Finance were run in days gone by. In the near future, banks like Citigroup are going to become quasi-government entities, and that means, essentially, the High Times are over. In a few years, having a job at Citigroup will be as cool as having a job at the Postal Service (No offense, of course. What I do isn't very cool either).
I'm not one of those people who blames this crisis on the investment banks, or mortgage brokers, or any one particular group. I think it's just interesting that these guys have finally been singled out as ONE of the causes of the whole thing. As a financial journo, I've had to write about all of these firms over the years, even once had the thankless job of trying to talk to these guys themselves. I guess it was just funny, after all these years, to see them lined up, as if at a firing squad, all for the sake of some political theatre. A kind of Rogues Gallery of Greed. Truth be told, I have an admiration for what these guys do; the hours they put in, the analytical nature of their work, and the raw intelligence most of them possess. But that doesn't mean I didn't enjoy seeing them take their lumps...
The whole thing isn't necessarily THEIR fault, they're just the ones that got caught. These couple of investment banks are like the last naked revellers who stayed too long at some midnight orgy: it was fun when everybody was doing it, but when day broke, and the janitor came in, they found they were just naked people standing in the middle of a room.
As I alluded to earlier, these guys are lucky this is 2009 and not 1709, because in those days, they might have been dealt with a lot more harshly. In fact, what is going on right now could be called kind of a mini-revolution, but I'll save that rant for another time...
* Adj.: Freely exchangeable or replaceable
As I alluded to earlier, these guys are lucky this is 2009 and not 1709, because in those days, they might have been dealt with a lot more harshly. In fact, what is going on right now could be called kind of a mini-revolution, but I'll save that rant for another time...
* Adj.: Freely exchangeable or replaceable
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