“After all, I am just another heartless Wall Street bastard myself.”

I want to give a quick shout-out to The Epicurean Dealmaker, one of best and funniest blogs about Wall Street, for making it into John Cassidy’s article in the most recent New Yorker:

Given the code of silence that Wall Street firms impose on their employees, it is difficult to get mid-level bankers to speak openly about what they do. There is, however, a blog, The Epicurean Dealmaker, written by an anonymous investment banker who has for several years been providing caustic commentary on his profession. The biography on his site notes, “I facilitate, justify, and advise parties to M&A transactions, when I am not advising against them.” In March, 2008, when some analysts were suggesting that the demise of Bear Stearns would lead to a change of attitudes on Wall Street, TED—the shorthand appellation the author uses—wrote, “I, for one, think these bankers will be even more motivated to rape and pillage the financial system in order to rebuild their ill-gotten gains.” Seven months later, on the eve of the bank bailout, TED opined, “Let hundreds of banks fail. Let tens of thousands of financial workers lose their jobs and their personal wealth. . . . The financial sector has had a really, really good run for a lot of years. It is time to pay the piper, and I, for one, have little interest in using my taxpayer dollars to cushion the blow. After all, I am just another heartless Wall Street bastard myself.”

In September, TED and I met at a diner near my office. He looked like an investment banker: middle-aged, clean-cut, wearing an expensive-looking gray suit. Our conversation started out with some banter about the rivalry between bankers and traders at many Wall Street firms. As the traders came out on top in recent years, TED recalled, “they would say, ‘You guys are the real parasites, going to expensive lunches and doing deals on the back of our trading operations.’ ” He professed to be unaffected by this ribbing, but he said, “In my experience, the proprietary traders are always the clowns who make twenty million dollars a year until they lose a hundred million.”

In September, 2009, addressing the popular anger about bankers’ pay, TED wrote that he wouldn’t “attempt to rationalize stratospheric pay in the industry on the basis of some sort of self-aggrandizing claim to the particular socioeconomic utility or virtue of what I and my peers do,” and he cautioned his colleagues against making any such claim: “You mean to tell me your work as a [fill in the blank here] is worth more to society than a firefighter? An elementary school teacher? A combat infantryman in Afghanistan? A priest? Good luck with that.” The fact was, TED went on, “my pay is set according to one thing and one thing only: the demand in the marketplace for my services. . . . Investment bankers get paid a lot of money because that is what the market will bear.”

While not inaccurate, this explanation raises questions about how competition works in the financial industry. If Hertz sees much of its rental fleet lying idle, it will cut its prices to better compete with Avis and Enterprise. Chances are that Avis and Enterprise will respond in kind, and the result will be lower profits all around. On Wall Street, the price of various services has been fixed for decades. If Morgan Stanley issues stock in a new company, it charges the company a commission of around seven per cent. If Evercore or JPMorgan advises a corporation on making an acquisition, the standard fee is about two per cent of the purchase price. I asked TED why there is so little price competition. He concluded it was something of a mystery. “It’s a commodity business,” he said. “I can do what Goldman Sachs does. You can do what I can do. Nobody has a proprietary edge. And if you do have a proprietary edge you’ll only have it for a few weeks before somebody reverse engineers it.”

After thinking it over, the best explanation TED could come up with was based on a theory of relativity: investment-banking fees are small compared with the size of the over-all transaction. “You are a client, and you are going to do a five-billion-dollar deal,” he said. “It’s the biggest deal you’ve ever done. It’s going to determine your future, and the future of your firm. Are you really going to fight about whether a certain fee is 2.5 per cent or 3.3 per cent? No. The old cliché we rely on is this: When you need surgery, do you go to the discount surgeon or to the one you trust and know, who charges more?”

I asked him how he and his co-workers felt about making loads of money when much of the country was struggling. “A lot of people don’t care about it or think about it,” he replied. “They say, it’s a market, it’s still open, and I’ll sell my labor for as much as I can until nobody wants to buy it.” But you, I asked, what do you think? “I tend to think we do create value,” he said. “It’s not a productive value in a very visible sense, like finding a cure for cancer. We’re middlemen. We bring together two sides of a deal. That’s not a very elevated thing, but I can’t think of any elevated economy that doesn’t need middlemen.”

Posted by on November 22nd, 2010 at 9:36 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.