Saturday, December 02, 2006



Jonathan A. Knee, The Accidental Investment Banker (Oxford University Press, 2006).

In 1996, Jonathan Knee left United Airlines to join Goldman, Sachs, then and now the preeminent investment bank. Knee joined the London outpost, for one partner in particular. After a few years there and a transfer to the New York office, Knee left for Morgan Stanley, which would let him develop business in the publishing sector. He had some good years there, but the economic downturn in Bush's first term hit Morgan Stanley hard. Knee was a witness as Morgan bankers fought to avoid the axe.

Knee slipped into this line of work through the side door, and kept something of an outsider's perspective. The book sheds some light on what investment bankers do and on internal politics at Goldman and Morgan Stanley, including some background on former Goldman CEO and current Treasury Secretary Hank Paulson. (White House chief of staff Josh Bolten rates a quick mention as a friend in Goldman's London office, but does not make the index. Obviously, the book was written before Paulson and Bolten assumed their present positions.) But this is not Liar's Poker. Knee is more interested in the banks' institutional decline in the last decade.

In the 1980s, investment banks were the center of the financial universe, but these days the hot talent heads for the hedge funds. Knee's focus is "[t]he fundamental shift in investment banking to a more aggressive, opportunistic, and transactional business model from one rooted in long-term client relationships and deeply held business values." As a result,
many of these institutions became unrecognizable from their former selves in the space of a few short years.

At one time, the investment bank viewed his interrelated obligations as to the client, the institution, and the markets. The client might have been with the firm for generations. The institution's reputation was viewed as its most important asset. Internal standards went well beyond any regulatory requirements to protect investors. And investment bankers advanced based largely on their success in simultaneously serving the client, preserving the franchise, and protecting the public.

In place of this idea a culture of contingency emerged, a sense not only that each day might be your last, but that your value was linked exclusively to how much revenue was generated for the firm on that day -- regardless of its source. . . .

The bankers who pressed . . . questionable telecom credits at Morgan in their quest for market share, fees, and internal status coined an acronym that could well be a rallying cry for what the entire investment banking industry had become more broadly. "IBG YBG" stood for "I'll Be Gone, You'll Be Gone." When a particularly troubling fact came up in due diligence on one of these companies, a whispered "IBG YBG" among the banking team members would ensure that a way would be found to do the business, even if investors, or Morgan Stanley itself, would pay the price down the road. Don't sweat it, was the implication, we'll all be long gone by then. (pp. xvi-xvii)
Some of the reasons for this shift were external -- in particular, the repeal of the Glass-Steagel Act in the mid-1990s left Goldman and the others with new, formidable competitors. But Knee suggests that the bigger problem was that the banks' culture shifted, that the banks suffered as bankers placed made themselves stars at the institutions' expense. With the riches to be made in the late 90's, i-bankers were no longer willing to subordinate personal short-term gain to their employer's long-term interests. These temptations surely were always been there, but the cultural and institutional antibodies to them were no longer up to the task.

Unlike the mercenaries who grew the most famous and rich, Knee was drawn to investment banking less for the money than by the prospect of advising senior executives, a doubtless rewarding role which is not nearly as lucrative for banks as the selling of the banks' various other products and services. As his account of these conflicts of interest continues, it becomes increasingly clear that Knee would have to leave Morgan Stanley, and the reader sheds no tears for him when he finally cuts the cord. Knee apparently has landed at a boutique investment bank, where perhaps he can give the sort of advice that Goldman Sachs and Morgan Stanley built their reputations on.

In this excerpt, Knee explains how Goldman kept all of its bankers thinking that they were outperforming their peers.

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