Has investment banking changed for the worse? Jonathan Knee answers your questions below on his time at Goldman Sachs and Morgan Stanley.
Being a veteran investment banker, what is your view the on the recent LBO boom? Particularly a lot of buy-out firms have moved to Asia with higher and higher debt-to-ebitda? Do you think the bubble will burst pretty soon?
Kaili Jen, Taiwan
Jonathan Knee: Much of the boom period I describe in The Accidental Investment Banker was driven by irrational equity markets. The equity markets during the current “boom” by contrast seem quite rational and selective in accepting new issues. As you point out, however, the debt markets, and in particular the markets of junk securities do not feel completely rational.
Something about CCC credits being able to borrow money at rates not that different than I get on my home mortgage seems wrong. And the fact that banking firms are busy bulking up their bankruptcy practices reflects the general view that it can not last.
Would you advise young people today to choose a career in corporate finance? What is the future for the profession?
Sarah Butcher, Dorset, UK
Jonathan Knee: I dedicated the book to my godchild who thinks he wants to be an investment banker. My goal was not to dissuade him but educate him. If it is something you love you should do it. You should not do it because it is expected or you think it will position you socially or financially. Those who did it for the wrong reason and lost their jobs during the downturn - and there are always downturns - were personally devastated.
Was the deeply entrenched partnership culture at Goldman at odds with that of the publicly owned Morgan Stanley, even during the heady days of the dotcom boom?
Ali Hussain, Watford, UK
Jonathan Knee: Remember that Goldman went public basically during the boom. Although there have been dramatic changes at Goldman - in the early 90s outsiders were almost never hired, now the firm is largely run by people who came in laterally at some point - it is remarkable the extent to which Goldman has been able to retain an internal culture of communication and teamwork. It is nothing like it was but it is still better than any other firm in my estimation.
The currently prevailing investment banker’s approach to business (advisory plus principal investing) often results in conflicts of interest and increasingly destroys the investment banker’s reputation as trusted advisors. Do you think that good old relationship banking will soon be back en vogue again among the bulge bracket players - albeit not as genuine principle of theirs but as a slogan in image campaigns? And is it economically feasible for boutique banks to strictly pursue a relationship banking approach (one client per industry only)?
Thomas Tengler, M&A advisor, Salzburg, Austria
Jonathan Knee: The increase in market share of boutiques in recent years is clearly a symptom of some of the pheneomena at buldge bracket firms that I describe in my book. Boutiques to not, however, represent a solution to the problems described. That must come from these large institutions themselves. And although some structural changes make it impossible to go back to “the good old days,” there are still plenty of opportunities to make significant changes for the better.
With the greater drive for profit coming, probably, at the cost of professional ethics (to the extent that there ever was a distinct ethical code of conduct for investment banking), have the abilities and professionalism of the average investment banker decreased in the last decade or so?
Eddie, Glasgow, Scotland
Jonathan Knee: One of the reasons I wrote the book is that most investment bankers have not been in the business for more than five years and have little to no sense of the historical context - or historical values - of their industry or their institutions. My hope is that some of what has been lost can be found.
What was the worst day of your life in investment banking and why?
Lei, London, UK
Jonathan Knee: Having to fire people who had done everything I had asked of them. I felt like I had betrayed them and I felt helpless and ashamed.
What would your advice be to individuals entering into the investment banking industry today?
Mark Simmons, London
Jonathan Knee: Be honest with yourself about what aspect of it attracts you and then do serious due diligence - talk to people who worked at the firms you are considering and people who used to work at the firms you are considering - to match your interests with both the cultures and strengths of the respective firms.
After years of pretty good market conditions, the big investment banks have been very profitable. In addition, they have consistently ranked at the top of the league tables regardless of whether it was M&A, ECM, DCM or loans. How do you see the industry evolving over the next five years? Do you see the same players dominating the same league tables? Or are you expecting a shift similar to the one that occurred in the late 80s and early 90s?
Arnaud Humblot, London, UK
Jonathan Knee: It has only been a few years since the end of the “bust,” but your observation is fair in that many in banking have joined since then and have never known a different world. The dramatic changes in the mix of business of these firms - away from traditional investment banking towards proprietary trading and principal investing - will I believe have follow on effects on market share.
There is clearly a lag, however. Goldman is still number one in M&A, yet investment banking is around 10 per cent of its business. I don’t believe that is sustainable forever, although it may be sustainable for a long time. It is a very well run firm with very strong relationships and professionals.
Is it possible to add value today for shareholders of a company you are advising, or is that even in the picture, after scandals like Parmalat and others where there seemed to be an interest of many investment bankers to act in a way the destroyed shareholder value and protected the interests of a corrupt management. Are management in investment banks so cynical that all that matters is how much revenue you have generated for the firm?
Philip Corsano Leopizzi, Rome, Italy
Jonathan Knee: It is absolutely possible and actual. Talented professionals manage to give good advice every day around the world. My book points out some structural challenges to providing that service, but these are not insurmountable.
As a recent graduate of college I would like to know what makes a good investment banker today. Is it the quantum physics major who can sit at a desk and slave for 150 hours a week crunching numbers or is it the networker who can maintain constant social relationships with clients? What personality traits will get one to the top? I would like to hear an honest answer from someone who has seen behind the smokescreen.
Jonathan Knee: As I said in response to an earlier question below, technical skills are a necessary but not sufficient requirement of success. Sales ability is the key. Many look down on mere “sales,” but the key to effective sales is being able to put yourself in the shoes of your customer and understand their world and give them good advice. If your customer is a CEO, that is a pretty important role.
Your thesis is that the industry has lost integrity. We are seeing a correction (of sorts) driven by regulatory action (particularly in the US). Is there also likely to be a market response (perhaps even an ‘over-correction’ - as the market is wont to do) driven by a flurry of exposures such as yours?
Bill Galvin, UK
Jonathan Knee: Regulatory action is always a blunt instrument to solve a problem, and it always has unintended consequences. But the reason that regulatory action is required in the first place is the the industry failed to right itself, so it has only itself to blame. I would not have written the book if I did not believe that the day-to-day choices of individuals in the industry still have the ability to make things better - or worse.
Investment bankers are more concerned about the deal and less on the long-term benefit to the clients. I wonder if this short term view is only endemic to investment banking or, rather, is part of the change in the US capitalist structure. Do you think that business in general has changed - whether it is lawyers, CPAs, marketers, manufacturers, politicians (even doctors) that have lost a vision of making a positive impact and instead are more concerned about ‘me and now’ - and what if anything can sway the pendulum in the opposite direction? In your opinion what are the causes for this change?
Frederick G. Ferraro, New York, US
Jonathan Knee: I think the level of interest in my book - which at the end of the day is a sentimental call to recapture lost values of the investment banking profession - must reflect a broader yearning for a return to the standards and values of an earlier time. It is hard to pinpoint the source in the decline of standards that has been observed in a number of domains. In the case of investment banking it was driven by the internet frenzy that forced firms to lower market share or lower standards.
I think the creation of personal wealth during that period - and the public adulation of that wealth creation - had an impact far beyond banking. And I think the general culture of celebrity which implicitly values the individual over the community has had very destructive effect. I do not believe that is exclusively a US or US capitalist phenomenon. The culture of celebrity is global.
What does it take to be a successful investment banker? Why did you quit? Would you do it again?
Jonathan Knee: The dirty little secret of investment banking - and indeed all service professions - is that it is primarily a sales job. It is great to have fantastic technical skills - and this is as true for lawyers, accountants or consultants - but if you can’t sell it is very hard to get a window office.
Is M&A worth the cost in the majority of cases? What in your opinion is the major risk to the global financial system excluding unknown geopolitical events?
Bill Ivens, Surrey, UK
Jonathan Knee: I think the evidence is pretty consistent that in M&A the sellers do well, the buyers do poorly, and the net impact on the economic system (due to transaction costs, loss of management focus etc.) is a negative. This is not always the case, but looking at the data as a whole it is hard to conclude otherwise.
I have a degree in finance and have worked as an analyst for about ten years and currently work as an investment adviser. How hard would it be to start a small investment banking boutique that would provide a sophisticated level of service in raising capital by taking small international companies public? Where can you learn enough (SEC registration, legal side) to be able to over time pick up the business that is of no interest to The Wall Street firms? I have been told that I am now too old to become an investment banker but when I was young, I was told that I had neither the credentials nor the experience to become an investment banker. I remain competent and in good shape, and I am still willing and able to work 100 hours per week.
Mitch Lewis, Dallas, Texas, US
Jonathan Knee: Most boutiques are started by bankers who are not focussed on the capital raising side of the business. The regulatory and capital requirements of being an underwriter of securities are substantial. But simply providing advice can be done with a phone and a rolodex. To be able to do that effectively, however, you need have already established close relationships with decision-makers who are willing to pay for your counsel regardless of where you work.
Do what degree do you think that lawyers advise bankers to tread close without stepping over the line to illegal behaviour?
Jonathan Knee: I really need more context to answer that. Lawyering is all about knowing where the line is and keeping your client on the right side of it.
I used to work for Chase Manhattan in India. Now that I’m 41 and that firms like GS/Lehman/UBS are making a beeline for India, what is your honest view of pursuing an investment banking career and do you think guys like me stand a chance at all with Goldman Sachs? More specifically, what is your view on a career in the investment banking business in Asia for the next 2-5 years ?
Harish Prabhu, Mumbai, India
Jonathan Knee: All of these firms are hungry for growth and Asia is where the lion’s share of that growth will be. Finding talented local people who understand the both local culture and the culture of western institutions is key to all of the investment banks’ strategies in these regions.
Would you agree that far from investment banking having lost what you see as meaningful, the industry now simply provides a broader range of market services, and that really what needs to change is clients understanding of what banks can offer, and who can give the impartial advice you see as important, rather than there needing to be change in the banks product/service offerings?
Peter Everest, London
Jonathan Knee: Being a CEO is a lonely job: you don’t know who to trust, either internally or externally. Given the important role CEOs play in our world, allowing them to feel safe that they are receiving unbiased advice in something we should all care about.
If every time a CEO asks his or her trusted adviser to help him out on an opportunity there will be an internal debate at the investment bank as to whether to allow itself to be hired or to try to pursue the same opportunity for its own account, then that adviser will no longer be “trusted.” Some institutions balance these competing pressures better than others and the key has to be transparency.
Jonathan Knee worked as an investment banker at Goldman Sachs and Morgan Stanley during the 1990s and into the 21st century, giving him a front row seat for the boom and subsequent bust at two of the biggest firms on Wall Street. Now working for a finance boutique investment and teaching at Columbia University, Knee has written a book, The Accidental Investment Banker, which goes behind the scenes during an era of fast-paced deal-making, followed by catastrophe when the bubble burst.
As well being entertainingly indiscreet, the book chronicles the transition of an industry that once aspired to impartiality and trust above almost all else to a time when “your value was linked exclusively to how much revenue was generated for the firm that day - regardless of its source”.
In this transition, Knee argues, “something meaningful has been lost”.
Has investment banking changed for the worse?