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Why hedge funds should love @GSElevator

September 1, 2015 Leave a comment

Hedge funds should love @GSElevator and not just gselevatorfor the funny tweets.  John LeFevre, the man, the myth behind @GSElevator is beginning to comment more broadly on the implications of the culture he ascribes to Wall Street.

First topic up:  women in the workplace.  In a recent article, he dismisses the notion of a pay gap between men and women, but acknowledges a “work environment that is subtly exclusionary.”  Expect LeFevre to publish more commentary about the state of investment banking and it’s sure to make the industry squirm.

From the beginning, what made @GSElevator compelling was its pitch perfect capture of the culture of highest tiers of Wall Street.  To outsiders, it was shocking for its materialism, Machiavellianism and misogyny.  To those on the Street it was a captivating example of how fiction is truer than fact.

Of course, @GSElevator is not the first to examine the world of investment banking.  Bonfire of the Vanities coined the phrase Masters of the Universe.  Wall Street showed us one tried and true way to make it in finance.  What’s different this time around?  Timing.  Things have changed since the 1980s.  Banks are bigger and more interconnected.  Many more Americans are directly invested in the markets.  The health of the stock market and the health of banks contribute to the health of the broader economy.

If banks are more important to our economy and individual prosperity, what are the implications of the Wall Street culture John LeFevre chronicles?  If the culture results in bad outcomes for banks and the economy we are all at risk.  LeFevre realizes this and he will continue to write about the consequences of Wall Street culture.

For hedge funds, the key question is:  If the Master of the Universe culture is rooted in ultra-high compensation, what does that say about the business relationship between banks and their clients (hedge funds and other types of institutions)?  Is everyone a “muppet” getting “their faces ripped off?”  Certainly in fixed income trading, the massive asymmetry of information between sell and buy side is slow to change.  LeFevre should address this, to the delight of hedge funds and all institutional investors.

In many ways, the unmasking of @GSElevator has liberated him to embrace a wider and more important mission in our market: truth telling about what Wall Street mentality means for all of us.

And now for my favorite @GSElevator tweet:

gstweet

Bank problems are bigger than PR

December 2, 2012 Leave a comment

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Are banks “un-PR-able?”  In the wake of Lehman, subprime, AIG, TARP, TBTF, feasting at the discount window, Libor and the London Whale (the list could go on and on), the answer is probably yes.  The complexity of financial products and the scope of the large banks’ operations means that it is not a question of if another scandal will emerge, it’s a question of when.  From standpoint of reputation, there is no way to effectively assess and mitigate the multiple risks inherent to global banks.

So what’s a PR guy at [insert name of global investment bank] to do?

Lucas van Praag, former head of corporate communications at Goldman Sachs recently spoke with PR Week about the options.  He suggests says that banks need to fight off the instinct to withdraw into the bunker and just focus on corporate social responsibility initiatives.  “CSR is important, but [banks] shouldn’t rely on it to repair reputation,” he tells PR Week.  Explaining, Goldman’s sometimes confrontational media strategy, van Praag explained that the common link between the firm’s key audiences, including shareholders and regulators, was that “all got most of their information from the media,” meaning that a do-nothing approach was out of the question for Goldman.  He goes on to say that “culture is driven from the very top.  Banks need to take the initiative to reset the moral compass, and do it often.”  The Financial Times echoes this in a recent column, but was more direct, saying it might be “necessary to retire this flawed generation of [bank] leaders.”

Clearly, not all banks have the stomach to spar with media like Goldman once did.  In the November 16 issue of Levick Weekly, Candi Wolff, EVP Global Government Affairs at Citi, suggests that the image of banks it tied to  the economy and because people believe that banks caused the recession, they will forgive and forget when things improve. “As the economy improves, I think you’ll see an automatic rise in confidence or at least support for banks,” she states.  Citi appears to be keeping its head down and focusing on basics.  A couple of years ago, it was among the first financial institutions to begin blogging in order to communicate directly with constituents, so it gets the CSR thing, but, for now, is content to play defense.  Perhaps the new CEO will change that.

So who is right?  I don’t think there is much choice to for banks to play defense and, frankly, pray. Van Praag calls for “structural, operational, and cultural change,” but other than what is mandated by Dodd-Frank and other regulation, change will be slow.  Banks simply don’t know when and where the next crisis will hit.  How can one realistically take on the skeptics in the media if one doesn’t know what self-inflicted problem is lurking around the corner?

Reputation is dead? Not!

Steven Davidoff, author of the Deal Professor column for the New York Times, wrote last week that “reputation is dead on Wall Street.”  Why does reputation no longer matter, according to Davidoff?  “The reason is unfortunate and partly attributable to why we got into the financial crisis. People simply don’t matter as much on Wall Street as they used to. Instead size and technology carry the day.”

Count me among the unconvinced.  Reputation does matter and will continue to matter.  The fact that there has been little individual culpability in the wake of the financial crisis, doesn’t mean that banks are free to blindly serve their own selfish purposes.  To the contrary, we have seen significant changes in the industry brought about by emboldened regulators and Congress.  Significant restrictions on prop trading, central clearing of derivatives, new capital requirements, new reporting requirements, and the threat of restrictions on pay have resulted in real structural change in the banking world.  Wall Street was unable to resist the wave of new regulation, in part, because its weakened reputation.

The reason banks have not suffered even pain has more to do with too big to fail than Davidoff’s notions about executives failing upward and the degree to which preserving corporate reputation should prevent bad business practices.  A small institution or hedge fund can be wiped out by a single scandal, impropriety or hit to reputation.  It simply takes more to penetrate the armor of a global financial institution.  That said, if we needed a TARP II, would it pass today?  No way.  Of course reputation matters, even for big, bad banks.

Update:  An analyst at UBS predicts management changes at Goldman Sachs.  Part of the cause:  reputation.  “GS’s management team is very strong; however, missteps on the public relations front have further tarnished the firm’s reputation.”

Update 2: A Bloomberg survey (of users of its terminals, I think) reveals that Goldman has the worst reputation among banks.

Banks blind to compensation risks?

The Dodd-Frank act is having profound effects on the the banking business.  Prop desks and internal hedge funds are being spun out.  Derivatives trading departments are scrambling to prepare for central clearing.  But one very imp

ortant fact of the banking business has survived all efforts at reform:  high compensation.

Analysis by the Financial Times shows that no major broker-dealer achieved ROE of 15% in the fourth quarter of last year.  How does ROE range from a paltry 5% to 13% for the banks studied?  It’s the compensation, stupid.  The FT estimates that banks wouldhave to cut annual pay 16% to 39% to get ROE to 15%.

Think that’s bad?  Consider this:  a new study by Deloitte found that only 37% of financial institutions it surveyed incorporated risk-management factors  into their compensation and bonus plans in a meaningful way.

Think that’s bad?  Here’s the kicker:  a new study shows that investment banks are lagging other financial firms in developing separate pay models for their chief risk officers.  In summarizing the study, the FT writes that “there was little consistency among investment banks, in spite of a growing consensus that CRO packages should be de-linked from short-term profitability and provide much more limited opportunities for bonus payments.”

Compensation is at the core of the single largest threat to their reputation faced by large banks. The FT has an annoying habit of fixating on an issue and writing about it at every opportunity. The banker pay stories linked here appeared within 10 days of each other.  Watch for more.

Consensus is that banking reform has not done much to end concerns that institutions are too big to fail.  If we find ourselves in another banking crisis and taxpayer dollars need to be used to bail out what are perceived to be “Wall Street fat cats,” voters will demand more drastic change.

The rising economic tide has lifted banks higher than most, but because of pay structures, danger could be lurking.

Update:  Don’t look now, but the SEC has proposed it be empowered to ban excessive bank bonuses.

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