Of Greed and Jealousy

The inspirations for this post are the original post by Amitabh Iyer where he points out this article in the Live Mint by Vir Sanghvi. Other unlikely inspirations are the question that I had in an Investment Banking interview [Yes they are still being held, contrary to popular perception], the Corporate Finance class by Aswath Damodaran and the general bad press that Investment Banking has received in this past year.

Disclaimer 1: I am a business school student, worked with a 'bulge-bracket' firm and will hopefully enter the industry again.
Disclaimer 2: None of my colleagues or recruiters are likely to ever read this or trace it back to me. So it is not for their interest and therefore for mine. :D

Picture Courtesy: www.LeveragedSellOut.com
"Greed is good" - Gordan Gekko

I remember a statement from one of the senior Investment Bankers at Goldman Sachs: "People hate us for what we are and what we earn... But, boy would they want to be one of us."

Now, while the statement was from a pompous righteous ass who probably thought no end of himself and his own brethren, he may not have been too far from the truth. For years now, there has been a carefully cultivated aura about an Investment Banker and his [unfortunately, it remains a majority type-A male driven industry] trade. When and how it started is difficult to point out. Nevertheless, it is difficult to dismiss this as a non-existent phenomenon.

For a career that is extremely hard to get into [that may not have to do with mere merit and other academic skills] and stay, it is a fairly popular one. For a career that is extremely brutal in terms of its hours and its reputation as a strain on personal self-respect, it is a fairly popular one. For a career that is known to be filled with many righteous ass-holes who think they are gods greatest gift to mankind [and womankind if you know what I am talking about], it is a fairly popular one. For a career that is known to not be rocket-science and to not be stimulating at most times, it is a fairly popular one.

First, let me try and address the hatred aspect of the story. People do not like other successful people. Period. In a capitalistic economy like the United States, where success is often measured either by the number of ex-wives or by the cut of the suit, it is not difficult to understand why there is an universal hatred for those who have these material things in life. And with money comes the trio of power, extravagence and arrogance.

Picture Courtesy: www.wikipedia.org

Most of the developing world and parts of the developed world love to hate the United States of America. There are multiple reasons for this, all funneling themselves to the basic tenets: power and arrogance. The United States has the power, thanks to its military hegemony status, that allows it to dictate terms to the world. And it has the arrogance that it is the best [arguably true] that the world has to offer.

Ask any [well, the vast majority] American whether they subscribe to this view and they will resonate with a thumping yes [understandably so]. Try and ask this very question to someone in China, Russia or Turkey and they may not share the same view. They might go to the extent of saying that the Americans are good for nothing, extravagant and arrogant. For them, the Americans happen to be their favorite punching-bag and the cause of all evil in the world. And yet, given a choice, most would kill to work in the US and live there.

As a second example, let us consider the software giant Microsoft. Love it or hate it, Windows has the largest OS market share in the world. Apple and Linux fans, check the figures and then take a hike. Bill Gates is depending on the day, the richest person in the world. They are not the best innovators, yet they know how to mass produce and market products. Let us face it, they did not develop the Windows idea, Apple did that. The Internet Explorer I believe was based on the Netscape Navigator and it was Lotus 1-2-3 that came up with the first integrated spreadsheet and word processor suite and not the Microsoft Office suite.

Picture Courtesy: Time Magazine archives

Microsoft is like McDonalds. They may not make the best burger in town, but they darn well know how to market one in order to make the sale. People love to hate Microsoft. And this is not just the Apple folk. Those who believe that Microsoft is a piece of crap. Those who very happy when the Yahoo! deal did not go through for Microsoft. Just take a look at the number of worms and viruses that aim to attack Microsoft. While Google has overtaken as the best techie firm to work for, techie geeks will still kill to work in Redmond, WA.

Finally, let us consider the case of two sporting giants. One is the Australian Cricket team under Steve Waugh. The other is the Scuderia Ferrari team with world champion Michael Schumacher, Jean Todt and Ross Brown at the helm. For those who do not know what either of these were, consider the ultimate dream team in a sport that you love. These guys dominated their arenas in such a manner that there was no competition for miles. People loved to hate them. Why? Because they were that darned good. And the rest were jealous of what they had managed to achieve. They were the team to beat, they were the team to hate. And they were arrogant as hell. It was my way or the highway. When the champion spoke, they expected people to sit up and listen. And the rest of the world did not like that.

Before you scorn in disgust, let me tell you that these are mere examples. I have no intention of suggesting that Investment Bankers are high and mighty like the US of A, brilliant in market strategy and penetration like Microsoft or rock-stars like Michael Schumacher. Rather, the point is to demonstrate the hatred and spite that people may have for others, most of which is not grounded on sound ideas. This is not limited to Investment Banking. Hardly so. This is applicable to the Real Estate developers, Diamond merchants and others as well.

I also do not wish to point out that Investment Bankers are rocket scientists. Rocket scientists are found where they are likely to be found: NASA and ISRO. The guys at Google, the guys at Intel, the gals at Pfizer and Genentech, these are the people who are the brilliant minds in this world. Yet to claim that Investment Bankers are pathetic and of no real value-add is to make an unfair suggestion. Some of the bright minds start with IB as a career right out of undergrad college, MBA or PhD programs. Finance and Accounting is an art, rather than a science. The very fact that it deals with money reflects the need to have smart minds in the industry.

The industry has had its share of genius. Unfortunately, I am not the best person to comment on them, given my own limited knowledge. I will try and highlight a few.
- Warren Buffett - Widely regarded as the single biggest genius when it comes to identifying investment opportunities.
- Michael Milken - The father of high-yield debt, before he got mired in insider trading and manipulation.
- John Meriwether - The man behind LTCM
- George Soros - The man who broke the Bank of England.

Picture Courtesy: Business Week archives

Barring the first, you would question my choice of identifying stalwarts in the industry. The integrity of Michael Milken, John Meriwether and George Soros has been questioned at some point in history. In fact, Milken was sentenced to imprisonment for his role in some real shady deals at Drexel Burnham Lambert. The fact remains that they were indeed great financial innovators. Well, the problem that beset them was a simple one: GREED.

If we circle back to the current crisis, it is unfair to blame merely the Investment Bankers. Of course, they have a pivotal role to play and this cannot be ignored. Take a step back. Let us say that tax is a totally voluntary thing. You pay if you want to and can evade it if you so wish. Hypothetical case, chimeric case. Consider it. How many would really end up paying the tax. My guess would be none. Show me a good deal and I will take it.

The Investment Bankers did a similar thing. They saw an easy way to make easy money. I believe at some level, everyone realized that this bull run in real estate prices was not sustainable. Sub-prime lending was not sustainable. It would fall on its face. But, here is what they also thought.
- Let us make hay while the sun shines. Bad idea, the sun sets faster than you realize.
- We are the smart ones. We can do better than the others. Wrong idea. On average, you perform average.
- Things have been good. Why worry? They looked at the statistics and convinced themselves that all was right. They did not realize that their glasses were colored.

While we blame the Investment Bankers, take a moment to think about the following
- Sub-prime home owner: You don't have the money. You buy on credit. You know you cannot afford it. What were you thinking?
- Mortgage Salesman / Mortgage Lender: You don't check the client. You pick people on the street to buy them houses in a weird sense of socialism. You give this to Investment Bankers. You take your cut. You could not care about the rest. Dude, what were you thinking?
- Investment Bankers: You buy all the mortgages you can. Try to sell all you can. Keep the risky ones for self. Can you be more GREEDY? What were you thinking?
- Government: What on earth were you doing? Do not blame poor Dubyaman, he didn't even know what was happening.
- Economists and Finance geeks: What were you doing? Why was this so difficult to predict. Barring the great Dr. Doom - Roubini himself that is.

Moving back to the topic, a common argument against Investment Bankers and Consultants questions their value addition to the system, the industry and the world in general. At face value, this may seem to have some credence. The Investment Banker does not create anything of true tangible value. He does not innovate cutting-edge technology like the i-phone, hybrid cars or sources of alternate energy. Nor does he work towards creating a life-saving drug for the eradication of the hepatitis virus, the human immuno virus or for that matter even a common cold.

Yet, he raises money for those who perform just these tasks. All the Google, Wikipedia and Genentech of the world are all dependent on raising capital. Well, without the Investment Banks, this would still be possible. Not easy, but possible. Besides this, the Investment Banks help create liquidity, a ready market for trading securities and help structure complex products to reduce risk.

Reduce risk you would ask with your eyes and mouth wide open. Is that for real? You would think that I am kidding you. Well, it is true. These are difficult times. The intention was to diversify risk. GREED got in the way. Unusual and unlikely probabilities got in the way. Two firms down and a complete mess later, we still do not know how it happened and who is to blame.

Spare a thought for the Investment Bankers. See what their absence is doing to the markets. Firms cannot raise capital. Capital spending is down. Recession in progress. Houses have lost their equity. All those who were screaming that Lehman Brothers be forced to go down [like it did] did not realize the sort of systemic spiralling effect it would have on the entire eco-system. With their 401[k] now suddenly in dire straits, people suddenly wished LEH had not gone down after all.

Alas... if only we could turn back time.
LEH, rest in peace.