The Harder They Fall

Investment bankers are having trouble getting used to life as failure prone mortals

Investment bankers are having trouble getting used to life as failure prone mortals

You’ve heard the one about the investment banker. The plane had run out of fuel, and all he had was his new Wall Street wits and old college rucksack. He strapped it on, scribbled out a futures contract to have it swapped for a parachute, tore it into strips to spread the risk around as a safety measure, had it rated ‘AAA’ by an old pal, and jumped off.

The real world can be quite cruel. Even to those with the biggest brains and bucks. Take the case of AB, a banker with a sterling career record. In 2007, he took over as managing director of the Indian operations of one of the world’s biggest investment banks. His annual pay was a cool $2 million, around Rs 10 crore (for the benefit of the nobodies who still assessed such figures in rupees). Then, out of the blue, in mid-September last year, it all went whamoosh. His bank was gone and so was his job.

Dazed, AB hit the bottle. It was not as if he did not try to get another job. He was invited to an interview for the CEO’s post of an infrastructure fund; few had heard of it, but still, these were lean times, and he decided to go. It’s just that he slipped himself a couple of bracers just before the interview and arrived tipsy for the dinner meeting at The Oberoi. He ordered a few more drinks, and by the end of it, he was sozzled and his interviewers were left shocked by his incoherence.

Investment banking was once full of fairy tales. Now it has only ghost stories. Till early 2008, investment bankers commanded the awe of mortals near and far.

The best of them worked for the Big Five. Others aspired to such celestial heights, where the big saw the small as mere flecks, to be killed for their sport. In 2007, JP Morgan alone had over $1.5 trillion in assets, a good bit more than India’s entire gross domestic product (GDP). It was a life in which discussing deals under a billion dollars was something to smile indulgently upon, as you would a four-year-old telling a poem.

Being wooed was an everyday state of existence. Retail banks, mortgage firms, insurance companies, credit card companies, you name it, their top executives were privileged to have their numbers in their phonebooks—and they were careful never to talk too long. Investment bankers were nothing if not busy. Financial modelling was a high-energy game of guts and glory.

The efficient allocation of resources. If that’s what an economy is supposed to achieve, investment bankers saw themselves on top of it. After all, they were the elite who crunched all the hard numbers and made the all-so-crucial decisions that sent money gushing one way or another.

This they did at many levels. At the most basic, banks exist for businesses that need to raise funds. “They do it through debt or equity,” says a former Edelweiss Capital banker, “Debt needs to be returned with interest. To raise money which need not be paid back, companies can take the equity route by selling a part of their stock.”

In India, this ‘underwriting’ is a big chunk of the business for which investment banks compete. The task involves raising capital by selling the company’s shares or bonds to investors large and small. Another lucrative field is mergers & acquisitions (M&As), deals in which are typically put together by investment banks on behalf of corporate clients.

It’s hard work. “Usually, manufacturing and sales are two separate entities,” says an investment banker, “Not so for an investment banker. He tailors a product according to his client’s needs. If the product catches on, it’s a hit. If the client rejects it, he’s stuck with a turkey. That’s why a banker works 14 to 15 hours a day. He’ll be lucky to get off in less time, especially when working on a deal. He’s busy racking his brains, drumming up ways and means to get the deal going. His future depends on it.”

Of course, a multi-billion dollar deal also means a fat commission for deal makers. Says a senior finance officer at IDFC, a company that finances infrastructure projects, “Fees, profits, bonuses, sports cars, five-star holidays all contribute towards the cost of a deal.” But, on the flip side, deals are not easy to come by, especially in lean times. Moreover, a deal can take as long as six months to close. Once done, you’re quickly onto the next. A big incentive, then, to push deals through no matter what.

So long as the market was booming, all deals came good. There was little to worry about. “How do you let go of something that means revenues and more importantly, the recognition that fuels your growth?” asks an investment analyst with Shree Capital, a local firm, “An investment banker is known by the deals he has done. The more complicated it gets, the better for him as this could be an incentive to raise the fees.”

In the US, finance became so complicated that everybody lost track of risk. An asset mania had set in. Ordinary loans were bundled up as assets, and their streams of expected cash payments were turned into securities, rebundled and resold, even graded by default risk, traded and swapped. It was all highly lucrative. “True,” says the ex-investment banker, “And that’s what did them in when they got into the subprime mortgage act. Long before they realised it would turn into the biggest Frankenstein man ever created, they ploughed on in an attempt to make money at any cost. Investment bankers don’t need to be happy—they just need to make money.”

It all went bust once asset prices, which rose too high because so much extra ad hoc money was chasing them, came crashing down in 2007 and 2008. Lehman, Merrill Lynch, Wachovia, Goldman Sachs and Morgan Stanley. They were all humbled, having to either shut down or turn into regular banks. “The products that were sold had flaws in them,” says the ex-banker, “They overcame it by spinning solutions which turned out to be temporary gimmicks. More problems meant spinning more solutions. But ad hoc solutions rarely work, and only diluted the purpose of those products.”

Not everyone misses investment bankers. “They got too greedy,” says a senior manager at Reliance Capital, “They threw caution to the wind. They paid themselves in excess. They took clients for a ride. Is it any wonder that they’re cornered like rats?” Those who couldn’t become investment bankers seem gleeful too. Says Sundeep Shah, a 29-year-old equity research analyst, “Investment banks hire only those with a foreign MBA or are from an IIM. What’s wrong with an MBA from Somaiya? If fundamentals are the same, why discriminate? What standards were they maintaining? It couldn’t save them. Where is Lehman today? They deserve every bit of what they got.”

Despite his vehemence, Shah still aspires to the celestial reaches—the very top echelon—of investment banking. “I like working on deals, working with clients, and in time I can move to the ‘buy’ side,” he says.

As curious bystanders, maybe we err in speaking of investment bankers in the past tense. But we aren’t given to rucksack skydiving either.

About The Author

Clement Augustine