Saturday, December 27, 2014

Greatest Hits of 2014

I’m always happy to show you people a little leg
“I think it’s just elegant to have an imagination. I just have no imagination at all. I have lots of other things, but I have no imagination.”

— The Seven Year Itch

Yes, O Dearly Beloved, it’s that time of year again. Time to dust off the circuit boards of the dedicated Google Analytics server farm for this two bit opinion emporium and determine which of my 37 beautiful children attracted the most attention from you delightful readers, spambots, and web crawlers in the Year of Our Lord Two Thousand and Fourteen. As I have explained before, this may be the last year I bother to conduct such a shameless exercise of self-congratulatory back patting—and I have already graced these archives with an All Time Greats victory lap—but I am nothing if not attentive to the proclivities of the three obsessive compulsives among you who could not rest if I did not. (And of course that little jolt of ego gratification I receive from enticing a few hundred more of you to click on these links one more time.)

Anyway, the way these things work should not be a mystery to you by now, so I will stand discretely in the back while you explore TED’s very own People’s Choice awards. I hope you enjoy them, but if you do not, well, you’re probably not my demographic anyway.

THE CANON, 2014 Edition:

1) A Fine Disregard for the Rules (January) — A cabal of the largest investment banks on the planet joined together this year and last to institute policies designed to limit and control the near-legendary workloads imposed on their most junior professionals. In this post, your Guide to All Things Workaholic, Finance Edition explains just why it is these poor slobs work such long hours. I won’t give away the punchline here, but you may safely assume it has something to do with client service.

2) Where Did He Learn to Negotiate Like That? (August) — There are right ways and wrong ways to employ investment bankers when you want to sell your company. The idiot savants at online real estate company Trulia gave us a master class in the latter, while simultaneously demonstrating that it can be dangerous to negotiate with professional negotiators.

3) A Cure Worse Than the Disease (August) — A lawyer took to the pages of to explain, among other things, when and why to hire a mergers & acquisitions advisor to sell your private company. I took to my own to provide what I believe to be a more comprehensive, helpful, and only mildly self-promotional gloss.

4) Touring Test (June) — A tendentious screed prompted by more idiocy emanating from the incontinent bowels of Silicon Valley, some of whose boosters and visionaries continue to argue, against all evidence and two decades of wasted technology spending to the contrary, that in-person business meetings can and should be dispensed with in favor of remote, virtual, “telepresence” substitutes. I calmly remind my readers that meetings—and indeed business itself—still actually do involve those pesky entities known as people, most of whom continue to prefer to interact with their counterparts in person, rather than in the pixellated confines of World of Warcraft. For good reason.

5) This Situation Absolutely Requires a Really Futile and Stupid Gesture (March) — Gawker editor Hamilton Nolan Is Full of Shit, Part 572. I think it had something to do with hedge fund managers and their earnings this time. Moral: populist polemics based on a fundamental untruth may1 attract page views, but they only make you look stupid to the people who matter.

6) Even Cowgirls Get the Blues (February) — Two of the dead horses I most like to beat in these pages—junior banker working hours and women’s career challenges in my industry—come together in one convenient pile of moldering horseflesh for me to flail away at. You may watch the proceedings with amusement from the sanitary safety of your virtual armchair.

7) You Go First (July) — The private equity industry has always acted like a tick on the dog of investment banking when it comes to sourcing and hiring its junior professionals. Now that the tick is approaching the size of the dog, the old accommodation between the two symbionts is breaking down. I object.

8) All Hail and Farewell, the Trophy Kids (August) — Apparently the cream of America’s youth is spurning Wall Street for the glittering garages of Silicon Valley. I say good riddance, and helpfully explain why.

9) The School of Hard Knocks (April) — That’s the transcript I want to see from my job applicants, not a 4.0 GPA meal ticket from a degree mill on the Charles River. I fear I am fighting an inexorable tide, however.

10) Oop. Time, She’s Up (September) — That’s right: after almost eight years of an on-again, off-again tempestuous relationship with you Darling People, I am bored. As you might suspect, even my breakup texts are overlong. Time to stop phoning it in.


Previous entries in this series:2
TED’s All Time Greatest Hits
Greatest Hits of 2013
TED’s Greatest Hits of 2012
TED’s Greatest Hits of 2011
TED’s Greatest Hits of 2010
Greatest Hits of 2008
More Works to Look On and Despair (August 2007)
Look On My Works, Ye Mighty, and Despair! (May 2007)

1 Sigh, I know: they do. But let me entertain my cherished illusions, please. It’s my blog, after all.
2 Apparently I never did a greatest hits collection for 2009. Sorry.

© 2014 The Epicurean Dealmaker. All rights reserved.

Tuesday, December 2, 2014

Show Me the Money

I don’t like the way Ulysses S. Grant is looking at me
“Money changes everything.”

— Some guy, probably without any money

Andrew Ross Sorkin, access journalist extraordinaire and alleged shill for the Great and Good,1 put up a sensible op ed this morning to which I thought I would contribute a few brief supporting remarks. It seems Mr. Sorkin has taken somewhat of a shine to Antonio Weiss, a successful Lazard investment banker whom the current Administration has advanced as its candidate for under secretary of the Treasury for domestic finance, and he has been defending this paragon of sharp-dressed competence against detractors great and small.

Today’s fresh character assassination outrage comes from the capitalist shills [sic] at the AFL-CIO, who have apparently addressed a letter to the boards of several Wall Street banks which takes umbrage at the policy, to be enjoyed by Mr. Weiss among others, that employees leaving their firms for government service can take their unvested pay with them:
Why, the letter asked, do banks routinely pay out special compensation packages to executives who leave to take government jobs when those packages were intended to retain them?

“Unless the position of these companies is that this is just a backdoor way to pay off a newly minted government official to act in Wall Street’s private interests rather than the public interest, it is very difficult to see how these policies promote long-term shareholder value,” the letter declared.
Now Mr. Sorkin waxes poetic and high minded in response to this challenge, nattering on primarily about how we should encourage banks and other employers of bright, shiny, would-be technocrats to doff their gilded yokes of service to Mammon and don the austere chains of public service to the rest of us. He assures us that the interlocking web of influence, conventional group think, and apparent if not actual conflict of interest such revolving door practices engender are indeed problematic, but that the net gain of brilliant, accomplished, successful financiers to the government payroll is worth it, and the aforesaid conflicts can be managed with an unburdensome modicum of care and attention. This is all well and good, and even Your Altruistically Challenged Correspondent can recognize the merits of this argument in the chilly chambers of his frozen heart, but it does not go far enough. As a result, Mr. Sorkin has no compelling response to Big Labor’s additional complaint—bless their capitalist-friendly hearts—that such policies represent a squandering of shareholder value. The thrust of his reply seems to be, yes, these policies cost shareholders money, but they probably help attract some additional members of the Best and Brightest who might have a few public-service-inclined bones in their sleekly coiffured bodies, so that must be a non-numerically-quantifiable Good Thing.

This is unnecessarily weak sauce. Let me explain.

* * *

The principal issue seems to be that our intrepid financial journalist and the shrill harridan of special pleading for labor share a common confusion concerning the payments in question to Mr. Weiss and other would-be servants of the public good. For one thing, they are not special payments at all, as in, “Well done you. Here’s a couple of million or so leafy simoleons to stack alongside your Rembrandts and ill gotten bearer bonds in reward for your selflessness. Remember us kindly.” Rather, when Lazard hands Mr. Weiss a check for twenty million smackeroos give or take on his way out the door, it will be releasing into his sweaty hands money he has already earned.

The distinction which Ms Slavkin Corzo draws between this and what Mr. Weiss, e.g., would receive should he instead choose to decamp from the mahogany clad offices of Lazard for some other investment bank—bupkis, plus a swift kick to the seat of the pants—while correct, misses the point. As Your Tireless Explicateur of All Things Compensatory has often explained on this site, investment bankers are commonly paid substantial portions of the mouthwatering bonuses you read about in the form of what is affectionately known in my industry as “funny money” or “toilet paper”; i.e., deferred compensation. Such deferred compensation usually takes the form of restricted stock which vests over some period of time, phantom stock units, stock options, deferred cash payments, or some other such bullshit which replaces freely spendable legal tender with a conditional promise by one’s employer to pay one the money one has earned in the past sometime in the future, depending.

To illustrate a simple case, a modestly successful senior banker might get “paid” $2 million for her moneymaking efforts over the year, but receive only $250,000 of that in the form of biweekly salary, $500,000 in a cash lump sum payable shortly after the turn of the year, and the balance of $1,250,000 in the form of restricted shares of stock in her employer which vest in equal installments over the next three years.2 Now, should she be so rash as to decide to jump ship from her existing employer to a competitor before the stock she earned by making money for the firm and its shareholders vests, in almost every case she loses it entirely. Given that most bankers stay with their employers for several years and have this or similar pay regimes inflicted on them every year, you can understand that most senior bankers tend to have quite a substantial “nest egg” of deferred pay locked up in restricted shares that are subject to forfeit in such circumstances. This explains why, unless a banker is desperate to switch employers (or, like most Lehman bankers post crash, has unvested stock which is largely worthless anyway), she is likely to extract a large payment from her new employer which is designed to replace the deferred compensation she is giving up by jumping ship. Sadly for her, such replacement payments are almost always granted in the form of—you guessed it—restricted shares with deferred vesting. So, no matter whether she hops from bank to bank like a Mexican jumping bean or stays with one her entire career, a successful senior banker is likely to have accumulated several if not tens of millions of dollars of deferred pay for her pains. The only way off this treadmill is to die, retire completely from investment banking, or, yes, join the government or some other non-competitive corporate entity.

Seen in this light, the forfeiture of unvested pay which a banker suffers when she leaves for a competitor is not the avoidance of further payment but rather the recapture or clawback of previously earned and allocated compensation. Little Muffy got “paid” those two million clams because she made, let’s say, ten million clams for her firm and its shareholders. Those ten million clams were real, deposited and cleared cash money,3 which paid real creditors and light bills and lap dance club dues and which, after said normal course operating expenses and the government’s rake were creamed off the top, were distributed to shareholders in the form of dividends and/or retained capital. Little Muffy only got $750,000 of that munificence and was forced, mutatis mutandis, to extend the balance as a long term interest free loan to the company.4 Sure, the shareholders face eventual dilution when and if Muffy’s shares vest, but until this happens they haven’t really fully paid her for her services. Other things being equal, shareholders should be delighted when bankers resign to work for competitors, because all those unvested share awards are cancelled and they retroactively get all those bankers’ revenue production for below market rates.

Of course, other things often are not equal, and investment banks usually have to replace the departed bankers with new ones, sometimes from other firms for which they have to allocate a lump sum of restricted shares out of treasury that negates all the wonderful savings shareholders got from the resignations. In this respect, deferred banker compensation is sort of like a hot potato: you can pass it around, but somebody is going to have to hold it as long as the banker is working in the business.

* * *

Ergo, paying Mr. Weiss and any other loyal bankers who decamp from our industry’s fetid shores for the sweetness and light of public service (or some other employment which does not try to take money out of the mouths of investment bankers) harms shareholders virtually not at all. It does normally accelerate payment of any unvested shares or other deferred compensation, which eliminates the present value discount of deferral which shareholders otherwise enjoy, but in point of fact all such payments do is give their departing employees the pay the firm has promised them for work already done. It is a greedy and incontinent shareholder who cannot agree to that.

In fact, politically ambitious investment bankers who have a notion they might like to try public service eventually usually negotiate explicit conditions in their employment agreements up front to pay all unvested compensation in just such circumstances, and banks are happy to agree to them. It is no skin off their shareholders’ noses, it renders contractual the right thing to do, which is to pay your employees what you have agreed to pay them, and it may even generate some goodwill or at least friendly feeling in someone who might be leaning over the dais at a future Senate probe or showing up to your Executive Suite with a raft of burly auditors on Christmas Eve. It’s not bribery. It’s just good business. Plus, as Mr. Sorkin avers, it’s probably socially constructive as well.

Only an ungrateful son of a bitch of an investment bank shareholder cannot appreciate that. But I’m being redundant.

Related reading:
Andrew Ross Sorkin, Encouraging Public Service, Through the ‘Revolving Door’ (New York Times DealB%k, December 2, 2014)
Defending the Indefensible (September 22, 2012)
Five Pound Box of Money (February 9, 2009)

1 Hey, even the Great and Good need positive PR. Besides, notwithstanding populist firebrands’ complaints, it does add materially to the public weal to have someone reporting directly from inside the belly of the Beast, and the Beast needs to give someone access to his belly for that to happen. What, you think John Mack was going to recount his conversations with Tim Geithner during the financial crisis to Yves Smith?
2 Don’t get hung up on the bigness (or smallness, bless you Executive Committee members) of these numbers, children. Yes, even modestly successful investment bankers can make what in normal circumstances can rightly appear to be a metric shit-ton of money, but that is not the point of this illustration. Think about all that money tied up in restricted shares which little Muffy Megabucks thinks is rightfully hers for revenues and hopefully profits she already earned for her employer. Can’t do it? Never mind, then, you might as well switch over to BuzzFeed.
3 For clarity and simplicity I am assuming these revenues were really earned funds, like fees from closed M&A transactions or security underwriting. The same argument carries less force when the money a banker “earns” for the firm is, e.g., the calculated and booked net present value profit for a long-term trade which remains at risk for the entire term of the trade, as my colleagues on the sales and trading side of the industry are so fond of claiming.
4 The “principal” of which, by the way, is tied to the actual, fluctuating stock price of her employer’s shares, which can work either to her benefit or to her lasting despair (Lehman Brothers). Deferred stock is calculated as a number of shares at the time when compensation is set, not when the shares vest. The holder is exposed to changes in the firm’s stock price over the entire vesting period.

© 2014 The Epicurean Dealmaker. All rights reserved.