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Ex-MD in equity capital markets: 'It's a bit like insurance fraud'
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Ex-MD in equity capital markets: 'It's a bit like insurance fraud'

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Ex-MD in equity capital markets: 'It's a bit like insurance fraud'

Joris speaks to a former investment banker about stress, disillusionment and the strategies behind the Facebook flotation

• This monologue is part of a series in which people across the financial sector speak about their working lives

He is an inconspicuous man with an easy laugh, English, in his mid 40s. He orders a cappuccino.
"Much of investment banking is not about being a brilliant fisherman. It's about muscling into a spot on that riverbank where you can throw your net out. Getting into the money flow. Have you watched the Sopranos? Making managing director is like being made captain. Instead of a patch of New Jersey, you are given a product area where you get to collect the rent.

"Are investment bankers bothered by this? I was. That's one reason I left. I'd say many suppress it. It's a bit like insurance fraud, it can feel like victimless crime. Everyone around you is doing it. You are under enormous stress working your balls off, so it doesn't feel like easy money, either. Group dynamics are strong. Basically dissenters get trashed, or ascribed an ulterior motive for voicing opposition. It's weird how some people feel attracted to the dark side. Once they are cast as a bad guy, they relish it rather than feel guilty or troubled.

"Investment banking is a trap, a game and an addiction. The reward is big, but uncertain, which makes it exciting and keeps you coming back for more. Once the money starts flowing it's very, very hard to take yourself away from it. There are these people queuing up behind you, eyeing your job. Doing a deal is like scoring a goal, or maybe for journalists, getting a scoop. The game element is in the rivalry with other equity capital markets (ECM) teams, winning the mandate, legging over the competition … Also the emptiness that comes with addiction; I have read athletes' accounts describing standing on the podium after they won, feeling nothing at all.

"In the years before I quit I made around a million a year …. My successor, he got a lot more. When I heard that, I remember thinking: fuck, I should have stayed. Ha ha!

"When you go in for your yearly bonus … Crucial is not to let any indication emerge you're happy with the number. Extreme disappointment is better, even fury. Go in po-faced, come out po-faced. Then, inwardly, I would think: I cannot believe I'm going to be handed so much money for one year's work. The elation doesn't last. It must be what Philip Larkin called in another context 'fulfilment's desolate attic'. I also felt this was dirty money.

"You are paid a huge amount, but there's a trade-off. You have signed away your right to respect, fulfilment, gratitude, admiration for a job well done … It's all expressed and monetised in that bonus number. How dare anyone complain? Your boss will say hundreds out there are dying to get your job. You wonder: if that's the case, why am I so miserable?

Most of us were hopeless with the money. Some were of the gambling disposition, others saw themselves as great traders. Both ended up making rash investments. Also spending it on new houses, cars, wives … The wife's vanity project was another sink hole.

"I quit because the work was depressing me, literally. For others, it's not that easy. Boarding school can be over 30k a year, per child, after taxes. People have bought into the lifestyle, knowing they won't find anything nearly as well paid in other industries. They are married to someone who may not have chosen them for the money, but it's certainly part of the picture.

"I have known so many middle-aged men who went to private schools, well educated, and yet they were working in this horrible environment, putting in the hours, travelling on the tube, rarely seeing their family … For what? So their children can go to private school, too, and the cycle continues. Nobody wants to be the generation that slips. Of course, this is a particularly English trap; banking's not dominated by private-school types any more. You'll find every nationality under the sun. But they all share a high regard for money.

"I just lost interest in saying the same bullshit over and over again. Or the shouting with salesmen and analysts – cajoling them to flog their clients the deal I was doing. Shouting, that's right. It was a bit like a parent-child relationship with some; they'd have their tantrums, calm down and do the right thing.

"The job. ECM is about managing large share offerings; companies raise money through issuing new shares, or vendors sell down existing stakes. Sometimes it's a combination: In the Facebook deal, some of the money is going to Zuckerberg and his backers, some into the company itself. Our job is connecting those companies to institutional parties with money to invest; pension funds, insurance funds, investment funds, hedge funds, and the like. Amounts range from $100m to multi-billions. We receive a percentage fee.

"Issuing shares for the first time is called 'floating' a company or an Initial Public Offering (IPO). You can also issue more shares – a secondary offering. As a bank you are in charge as the 'book-runner', or a member of the syndicate of banks brought together by the book runner.

"There are two reasons for syndicates. Banks have different client bases – relationships with particular investors and more banks means more coverage. Two, each bank has research analysts writing reports for investors recommending them to buy or sell a share. With all the top analysts on board, you won't get dissenting voices – it's an open secret that the majority of recommendations by research analysts are 'buy' and any deal-related research is always positive, of course.

"The ECM person makes the deal happen. Juniors (called analysts, associates and vice-presidents) do the research and put together the pitches and slick-looking presentations. As an MD you get on that plane, meet that client and sell yourself: our bank has the most influential research analysts, the highest-ranking equity sales people who – drawing on the work of those research analysts – call up investors and persuade them to buy particular shares. We have done the most deals in your sector, etc …

"I would spend half my time pitching deals, the other half doing them. Part is due diligence – going through the company's books, mostly by lawyers. There is convincing the risk committee at the bank: will this deal happen, will it go well, might this company harm our reputation? On the whole my experience is that the bar is low if the fee is high. If there are future fees to be had from the client, that counts for a lot.

"Part of the art of ECM is creating the impression the IPO is incredibly oversubscribed; you try to generate momentum however you can. If a share was really 'hot', we'd give it to big institutional players in exchange for favours. As I said, allocating 'hot shares' is essentially giving someone money – you know the stock price will shoot up once trading starts. The favours from big players were never explicit; they would give us business on the secondary markets, say, directing trades our way so the bank made commissions; or they'd help us out by placing an order on stickier issues. Institutional investors like pension funds are supposed to hold shares for a long time but many 'flip' hot shares. You can't blame them. They are also supposed to generate returns for their pension holders.

"Facebook is a classic example. Retail (individual) investors will be clamoring for stock, but they'll be shafted in favour of the institutions. The stock will probably 'pop' on the first day of trading, and many of those institutions will book an instant profit by selling them into the market. Retail investors will probably be left holding the baby if and when the price tanks.

"The system consists of skimming off everyone's pensions and savings: the banks make money taking a cut between the fund manager at, say, a pension fund, and the vendor (company issuing the shares) … The fund manager makes his money by charging a fee to the pension funds – ordinary people. You get corporations keeping an eye on the chocolate biscuit bill, then paying out huge fees to banks. If they saw how easy most of our work was, they would weep. Why do they put up with the fees? They have no choice, essentially. It's a cartel. And they'd rather pay up than go into business with somebody no one's heard of. Reputation is decisive.

"Everyone knows everyone is saying the same things in pitches. What's important for a CEO is getting the deal done, not keeping costs down; what's 50 million between friends? I suppose percentage points also make the amount seem less. There's an analogy with selling your house. In the supermarket you diligently compare the price of two packets of tea, with estate agents you suddenly put up with huge fees. You know they are all the same and do nothing special. But you just don't dare doing it without them.

"Another question is why bankers get so much. The lawyers do half of the work but might get one million, the bankers 15. In the USA, IPO fees have always been absurdly high. I remember when we secured a deal by offering a vastly reduced fee. A furious call came from America: 'You are destroying the fucking oligopoly'. Deals under US$500m would pay out 7%, bigger deals not much less. Facebook managed to knock the banks down to just over 1%. They will still make well over US$100m, so don't get your violin out.

"Why aren't more banks trying to get a piece of the ECM action? There are huge barriers to entry. You need an equity sales force, research analysts, long-term relationships with big investors. Then in most cases you need a capital base, as you are underwriting the issue. Usually that's counter-party risk; you have bought the shares, but only after having pre-sold them to your institutional investors.

"Big deals are quite a journey and you develop a kind of brother-in-arms friendship, with clients, with colleagues at other banks working on the same deal … You start out with the client and your own team looking pristine, presenting your slick-looking pitch. Then come the negotiations, stress, travel, late-night meetings … Months later you have been in a room together for 24 hours. Your shirt is unbuttoned, you stink, you plunge into the inevitable last-minute negotiations with the lawyers, it goes on and on, and then … You sign. It's real and dirty, a very masculine thing if you will.

"That moment when you order in sandwiches, go outside and decide now is the time to start smoking again. The war stories, 'you remember when the client said this, and you said that …?' Sometimes you never want to see the client again, but you have to go out for a celebratory dinner and make more deathly small talk when all you want is go home and see your wife for a change.

"I am painting an incredibly bleak picture. On the positive side, ECM does provide a genuine service. You can't just walk into a building and extract billions from sophisticated institutional investors. You need the infrastructure; technical, legal and negotiation skills, personal charm, stamina, judgement … My point: there is no sensible relationship between pay and skill.

"The work sometimes wasn't useless. We might float a company where the principal beneficiary planned to use the revenue for philanthropy. Sometimes we'd help a good business grow. Privatisations meant raising money for a government, not making an individual richer. Those privatisations would be for much lower fees by the way, made up by the prestige they brought. Most bankers argue they are oiling the wheels of the economy. Most outsiders wouldn't put it that way.

"It's been a few years since I left. I checked with this colleague who is still in the business if things had changed. Not fundamentally, he said. I asked, are you still finishing presentations at the last minute, and getting into planes? He laughed. Turns out, he had just finished a presentation at the last minute, and was getting ready for the airport. The hit-rate for pitches is quite low, a lot of work comes to nothing. Some colleagues would be in the office every weekend. The truth was, they'd rather be there, than with their families."


Ex-MD in equity capital markets: 'It's a bit like insurance fraud' | Comment is free | guardian.co.uk

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