Samizdata

I recently finished reading Jonathan Knee’s book, The Accidental Investment Banker, chronicling the period of 1994-2003 during which time our slightly jaundiced writer was working for two of the leading practitioners of mega-mergers and initial public offerings (IPOs), Goldman Sachs and Morgan Stanley. As someone who has worked on the fringes of this world here in London, I could relate to quite a lot of Knee’s account. At the heart of it is his argument that investment banks have gone from being supposedly impartial providers of advice for long-term clients to mercenary hired guns willing to pump up any stock, sell any junk bond, to the highest bidder. He wishes to see investment banking give up this sordid activity and resemble the ideals (please try not to laugh) of the legal and medical professions.

This is all written with passion and a lot of detail; if you want to know how Philip Purcell, the former head honcho of Morgan Stanley, plotted to remove rivals or vice-versa, or how investment banks can be open to conflicts of interest, this is the book for you. But at the end of this volume I had no real clear answer to the question as to why a self-declared liberal (in the American usage) like Knee soiled himself working for these ghastly banks doing their ghastly IPOs and mergers at all (sorry for my sarcasm). Or maybe those mega-buck salaries eased the pain a bit (now you are being very sarcastic, Ed). Frankly, to be rude, Knee comes across as a bit of a prig; also, I find his naivete about the world of modern finance frankly a bit hard to take. Banks want to make money and this should hardly be a shocker; if you expect Olympian standards of objectivity from an analyst about a stock that the same bank might be underwriting in an IPO, you should not be investing at all and make sure to get a second or third opinion first. And yes, while there was a lot of hubris in the 1990s IT boom, remember that without the entrepreneurial gusto that that “bubble” made possible, I would not now be typing these words on a laptop and putting them onto a blog. It would not have harmed Knee to have mentioned that point. One might as well write about the supposed evils of the 1840s railway boom in Britain while overlooking that it did, after all, make possible loads of fanstastic railways.

In fact, although there are delusional dreamers, shysters and dullards in any walk of life, I tend to find that investment bankers or hedge fund managers or private equity partners tend to be pretty straight folk on the whole; personally, I find such people to be more honest, hard-working and clever than politicians, although just as prone to the error of sometimes believing their own propoganda. I don’t think any of the people that Knee writes about could be as guilty of financial crookedness as the Britsh government has been over its shamefully under-priced bid for the London Olympic Games, for example, which have turned into the mother of all money pits. And Gordon Brown’s handling of public accounts while he was Chancellor, putting PFI projects’ liabilities off balance sheet, would have landed him in disgrace, as happened to Stan O’Neill, former head of Merrill Lynch, who was kicked out after his firm suffered massive write-downs over the US sub-prime mortgages fiasco. When things go wrong in investment banks, people get fired; in politics, they get another cabinet post.

To be fair to Knee, he does not offer any concrete solutions to the ills he claims have gripped investment banks and he also expresses doubt about the need for yet more regulation; in fact, he even concedes that the legislative reaction to the implosion of the 1990s stock bubble and various accounting frauds have arguably made the job of investment banking even worse in ways that are unlikely to benefit clients. On the other hand, he is far too gentle on Eliot Spitzer, who’s bout of lawsuits against financial players, while not without some justification, went too far and have played a part in damaging New York as a competitve place to do business, to the benefit of London.