June 2012 - Page 3 of 3 - Bankers Anonymous

June 7, 2012November 14, 2013

Book Review: The House of Morgan

Since the beginning of the Great Recession, JP Morgan’s Jamie Dimon has played the role of the United States’ Alpha Banker: snatching Bear Stearns’ franchise at bargain basement prices, modeling superior risk management,[1] and publically pushing back against government regulation of his industry, all the while acting as Obama’s BFF when it suits him.

So it takes a great book like The House of Morgan to see Dimon’s Mini-me status compared to the original John Pierpont Morgan. In sweep of history, stretching from the original J. P. Morgan to Jamie Dimon, the former looms like the Atlas statue outside of Rockefeller Center over Dimon’s diminuitive Oscar statuette.

Size matters in this story. Even in paperback form, The House of Morgan arrives bigger than a breadbox. And Ron Chernow can write big. The one-hundred-year epic sweep of the bank’s rise and evolution tracks the United States’ rise as the world financial center, a position wrestled from the Brits in the first half of the 20^th Century.

J.P. Morgan himself, a giant of a man with his 19^th Century prejudices and a horrifyingly bulbous, pockmarked nose, shaped the entire world through force of will and unerring capital deployment. In contrast to today’s mega-banks, saved from the brink by massive government intervention, the House of Morgan intervened to prevent government collapse. In 1907, one hundred years before our own 2008 Credit Crunch, Morgan single-handedly engineered a market-saving trust merger.

Here are a few more essential reasons to read The House of Morgan.

First, if you work on Wall Street and don’t understand the original deep divide between Jewish and Gentile banking worlds, start here. JP Morgan, the ultimate white-shoe firm[2], fought bitterly and ultimately unsuccessfully to keep the likes of Kuhn, Loeb; Lehman Brothers; and Goldman, Sachs from competing on equal footing for banking assignments.

In the latter half of the 20^th Century, cozy relationship banking gave way to a competitive world that required top intellectual talent and drive. Morgan and its (predominantly) Protestant brethren often chose family pedigree over talent, a choice that put them at a disadvantage when sons didn’t exhibit the same drive as their fathers. The traditional Jewish Wall Street firms, by contrast, tended to welcome a variety of backgrounds into their ranks, based on intellectual and personal qualities, rather than limiting their employees to those of Jewish heritage. By the 1980s, Goldman Sachs, Salomon, Bear, and Lehman began to out-compete Chase, PaineWebber, Merrill Lynch, Morgan Stanley and First Boston. The white shoe firms reluctantly adopted a meritocracy approach to talent acquisition, by necessity.

Second, although Chernow’s story ends in 1989,[3] he captures the evolution from wholesale merchant banking of the early 20^th Century to the aggressive M&A takeover and trading culture with which we associate Wall Street now. Wall Street’s reputation as a rapacious casino, in which profits accrue privately to the few while the public picks up the unlimited liabilities after the bust, is a relatively new phenomenon.

Third, it’s fascinating in the age of TBTF[4], to contemplate a single banking behemoth so much bigger in importance than any one bank today. The original JP Morgan, split forcibly in 1933 to comply with the Glass-Segall Act, lives on in its descendants Morgan Stanley (originally for investment banking) Deutsche Bank[5] (originally the UK Branch) and JP Morgan (originally for commercial banking). Imagine those three banks re-merged[6] and even then you probably don’t get the sense of the scope of the original JP Morgan Bank’s influence, nor of the man himself.

Jamie Dimon, you’re pretty huge. Does it bug you that there’s always someone bigger?

Please also see related post, All Bankers-Anonymous Book Reviews in one place.

[1] With the obvious notable exception of missing the London Whale’s trades until it was too late to save a few $billion. But really, in my mind, that episode highlighted Dimon’s solid reputation. We’ve come to expect BNP Paribas or UBS to periodically blow giant holes in their balance sheets via rogue trading positions. It was quite another thing – and quite a surprise, when it happened on Dimon’s watch.

[2] Along with its successor firm Morgan Stanley

[3] Wall Street’s image frozen in time with the image of Michael Douglas’ Gordon Gekko suspenders!

[4] Again, Too Big To Fail.

[5] The UK bank Morgan Grenfell became Deutsche’s investment bank in London.

[6] As they contemplated doing in the 1970s

Post read (6536) times.

June 5, 2012July 23, 2013

Facebook IPO Bust? Not To Your Banker!

A friend of mine who bought Facebook shares in the IPO complained last week about its miserable performance post-pricing, and I began to get flashbacks to my time on Goldman’s bond sales desk on new issuance days. I wanted to tell my friend our old bond sales new issuance motto,[1] But, to spare his feelings, I kept my cynical tongue firmly in check.

A not-uncommon new issuance timeline went like this:

10:00 AM: Goldman’s bond syndicate desk would issue hotly oversubscribed bonds to our institutional clients, who would yell at us for not giving them more securities at issuance.

10:01 AM: Sample Dialogue

Favorite Institutional Client: “I’m a *&^% BIG SWINGING [client], and you gave me this *&^#$% allocation? You guys suck!”

Me: “Um, ok.”

Favorite Institutional Client: “Seriously, you @#$%-Heads, lose my number!”

Me: “Would you like to sell them back to us?”

Favorite Institutional Client: “No way, I’m buying more on the open.”

10:05 AM: Quite frequently, the flippers who obtained hotly oversubscribed bonds sold immediately[2] after issuance, driving the price down.

10:20 AM: The same institutional clients who didn’t get enough bonds would then yell at us for selling them such a terrible piece of shit in the first place and why didn’t we support (i.e. commit Goldman’s capital to prop up) the newly issued bonds in the aftermarket?

In the face of such mental artillery fire, we built blast-resistant concrete bunkers around our consciences.

The senior bond salesman would turn to the junior salesman having pangs about his clients losses.

“You know,” he’d say, “Today the issuer made money, and Goldman made money, and clients lost money.”

…beat…

“But hey! Two out of three ain’t bad!”

That always made us smile.

Look, I’m not saying my friend deserved to lose money for participating in a hot IPO. I’m also not saying, as some have, that the issuing bank’s only duty is to pump the new issue price to its maximum saleable level, investors be damned.

In fact, issuing banks know they have both an implied ethical duty to their purchasing investors, as well as long-term financial incentives, to issue new securities at a compromise level that satisfies the issuer’s need for capital yet allows long-term investors to also earn a return on their capital. As is quite nicely articulated here.

But, let’s just say that in the heat of battle and the excitement of a new issue, ethics and long-term interests occasionally take a back seat. To say the least.

To my friends who lost money in the Facebook IPO, Meatloaf said it best:

Your banker wants you, and he needs you, but there ain’t no way he’s ever gonna love you. But don’t be sad, because two out of three ain’t bad.

[1] Hint: It’s in the Meatloaf graphic above

[2] Seconds. Sometimes minutes. Rarely hours.

Post read (6144) times.

June 4, 2012April 23, 2013

Arrest Jon Corzine Right Now

Why is Jon Corzine still a free man?

As the WSJ points out, investigators still have not located $1.6 Billion of supposedly segregated customer money that disappeared three days before the firm declared bankruptcy October 31 2011.

In the history of CEO falls from grace, Corzine’s MF Global debacle ranks far worse than Lehman’s Dick Fuld or Bear Stearns’ Jimmy Cayne. In the latter case, Fuld and Cayne stand guilty of poor risk management combined with horrific timing. Their worst crime was failing to reverse course in the face of a financial storm, which frankly, most executives in their position also failed to anticipate properly. Fittingly, Fuld and Cayne and their cohorts suffered a significant financial setback and some brutal whipping of their reputations in the public square.

To my knowledge, however, Bear Stearns and Lehman never misplaced customer money, the primary and original fiduciary sin. In the disorderly chaos of March 2008 (Bear’s shotgun purchase by JP Morgan) and September 2008 (Lehman’s Bankruptcy) managers properly segregated customer money, which was later returned to customers in due course.

Not so for MF Global customers, who still await word on the fate of $1.6 Billion of their money, originally held in custody by the now bankrupt firm.

At this point the proper CEO comparison with Corzine’s failure, unfortunately, is not Fuld and Cayne but Stanford and Madoff.

I should back up from my heavy condemnation here and explain what I mean. Corzine ran Goldman in the early years I worked there. While many or most fault him for having an outsized appetite for trading risk,[1] nobody has accused him in his career of actively seeking to defraud customers like Stanford and Madoff.

In my wildest paranoid fantasies I do not believe Corzine meant to permanently abscond with $1.6 Billion of customer money.

But – and this is why he should be in jail – I do believe that in a moment of weakness he knew (he knew and authorized!) MF Global’s teensy tiny borrowing of customer money to satisfy (just temporarily, I promise!) margin requirements (just for few hours only!) from creditors demanding margin call money immediately. In that scenario, Corzine most likely believed, and caused his employee[2] to believe, that a one-day use of customer funds would save a lot of hassle on margin requirements.

The obvious penalty for improperly using customer money is jail. Which is why I simply do not believe a treasury officer at MF Global would have made an unauthorized transfer without running it by the head of the firm. Corzine undoubtedly had a plan for a sale or recapitalization that would have made all the MF Global liquidity-squeeze problems go away, if he could just get a brief respite from the margin calls. In the end, a suitable suitor could not account for all of the firm’s capital and customer money, the rescue failed, and MF Global declared bankruptcy.

I believe it is right and proper that equity investors in Lehman, Bear and MF Global suffer losses, as they took a calculated risk in the hopes of profit. We forgive the capitalist who invests for a profit but suffers a loss.

But the vanishing of customer money held by a fiduciary is unforgiveable. It’s the ultimate financial sin, for which heads must roll. Corzine was the head and I’m afraid should not be a free man.

At least Madoff had the decency to turn himself in.

Please also see: Another Corzine Rant

and Update on Jon Corzine from the MF Global Trustee

[1] For which he was pushed aside by his executive team of Hank Paulson, John Thain and John Thornton in the Fall of 1998. The parallels with Corzine’s 1994 fixed income losses as the head of Goldman’s bond trading department, and his limitless trading appetite during the 1998 Long Term Capital Management episode, are obvious. With that kind of history, the MF Global trading debacle brought on by Corzine’s European bond trades is not surprising at all.

[2] Whoever actually entered the transfer request

Post read (3682) times.

June 2, 2012February 4, 2013

Who’s Your Favorite Ex-Banker? I Know Mine

Here at Bankers Anonymous we have a preference, nay, a weakness, for ex-bankers. So nobody should be surprised by today’s shout out to Sheila Bair, the Ex-FDIC Chairman.

Now that she’s an Ex, you might expect a quiet life of cozy board memberships, charitable-event headlining, and the occasional ringing in of the New York Stock Exchange. You might expect that, but you’d be wrong.

Bair came out swinging yesterday, against federally-insured banks engaging in what frankly we know to be speculative trading, often masked as hedging.

When we open the “Ex-Bankers Who Rock” award nominations for 2012[1], Bair begins the Road to the Championship with a strong lead.

Why? A few exhibits:

This Washington Post letter is so hilariously sarcastic and spot-on,[2] it’s hard to believe a government bureaucrat wrote it. So much goodness in that letter, I’ll have to do a special post on it soon.

Second, she apparently played a major turd-in-the-punchbowl role during the massive TARP bailouts of 2008, refusing to go along with Paulson and Geithner’s plan to guarantee every banking creditor. She didn’t blow up their plans, but she foot-dragged and pushed back enough to make clear that expediency was the enemy of good in much of the TARP bailout.

Third, along with Paul Volker[3], she represents the Vanguard of Common Sense against the TBTF[4] crowd. Bair and her allies [5] argue logically that federal guarantees for banking deposits (via the FDIC) make for a terrible mix with proprietary securities trading activities, given the moral hazard, and given what we now know to be limitless public liability in the US and in Europe, in the event of failure.

Cheers to you, Bair.

[1] Not a bad idea, right?

[2] “Are you concerned about growing income inequality in America? Are you resentful of all that wealth concentrated in the 1 percent? I’ve got the perfect solution, a modest proposal that involves just a small adjustment in the Federal Reserve’s easy monetary policy. Best of all, it will mean that none of us have to work for a living anymore[…]Under my plan, each American household could borrow $10 million from the Fed at zero interest. The more conservative among us can take that money and buy 10-year Treasury bonds. At the current 2 percent annual interest rate, we can pocket a nice $200,000 a year to live on. The more adventuresome can buy 10-year Greek debt at 21 percent, for an annual income of $2.1 million. Or if Greece is a little too risky for you, go with Portugal, at about 12 percent, or $1.2 million dollars a year. (No sense in getting greedy.)”

[3] Whose name is shorthand for the fight, at this point.

[4] Too Big To Fail, but you already knew that.

[5] Worth a click through to the WSJ editorial from two weeks ago. This Texas bank chairman sums it up nicely, (even if he’s a bit hoky with the ‘Uncle Joe’ stuff.)

Post read (1840) times.