Trust Amongst the Investment Bankers

And you thought it didn’t exist.

Well, pretty much it doesn’t. But it’s interesting to explore why.

A delightful blog, The Epicurean Dealmaker, dusts off an old paper by Harvard Business School academics Bob Eccles and Dwight Crane, which describes the path of trust failure in the investment banking world.

E.D. summarizes it nicely as follows:

1) Markets for capital and strategy get more diverse and complex, leading to more threats and opportunities

2) Formerly monogamous Company XYZ begins to talk with more than one investment bank to identify, analyze, and take advantage of these market threats and opportunities

3) Investment banks which have never had a shot at breaking into Company XYZ before gladly start lobbing in ideas and golf trips to get XYZ’s business

4) XYZ’s CFO and finance staff get smarter about the markets and cleverer at playing the i-banks off against each other for better deal pricing, better ideas, and better golf trips

5) I-banks begin to see they are getting played and begin to play back, lobbing completely unoriginal Ideas of the Week in on a regular basis on the chance one of them will hit and pestering XYZ’s CFO to let them visit the CEO with A Really Big M&A Idea

6) XYZ’s CFO realizes the i-banks are no longer really paying attention to him and gets pissed, doing everything he can to prevent the i-banks from getting into the CEO’s office and screwing them even harder in pricing negotiations

7) Both XYZ and the i-bankers start bitching to The Wall Street Journal and anyone else who will listen that the other is no longer interested in building relationships, but only wants to do deals

As E.D. suggests, skip steps 1 and 2 and you have the story of private equity.

For the prosaic rest of us, this is the script for your friends on who bemoan the dearth of relationships (and it’s not just women).

I have also seen this script play out in the paper merchant industry; the brokerage industry; the real estate industry; the commercial banking industry; the consulting industry; the auto supply industry; and a good deal more.

As Step 6 in the progression points out, the end-game is unhappy bitching about how short-term, transactional, and generally untrustworthy the other one is. A crummy ending.

Question 1: at which of the 6 Steps could the provider have done something differently, and turned the cycle toward trust?

Question 2: at which of the 6 Steps could the client have done something differently, and turned the cycle toward trust?

Hint 1: Questions 1 and 2 have the same answer.

Hint 2: The answer rhymes with “all of them.”

0 replies
  1. The Epicurean Dealmaker
    The Epicurean Dealmaker says:

    You’re right about when and who can stop the progression, Charlie. Unfortunately, in my experience it rarely happens when the investment bank involved is a diversified institution with capital markets, sales and trading, and advisory arms. There are just too many competing agendas within such an investment bank to allow senior management to empower their advisors to take the personal and institutional risks required to build true trust in the first place or to spend the time and energy to recover it if it has been lost.

    In fact, you might say that mainline diversified i-banks have evolved to operate quite happily in an environment where trust—as you talk about it in your work—is almost completely beside the point. The core "trust" fueling most i-banks today is the minimum kind required by typical sales and trading operations. In other words, these people operate daily in an environment resembling a quite rudimentary Prisoner’s Dilemma, where breaches of trust are dealt with by simple tit-for-tat punishment strategies: "Screw me on this deal and I will screw you on the next."

    This only works—if not prettily—because today’s capital markets are multi-round games with persistent players. Now, of course, this mindset and business model is anathema to the type of trusted advisory work most investment banking advisors would prefer to do. But they have little say anymore: i-banks make their money nowadays in sales and trading, and where the money is in investment banking, that’s where the power is.

    The situation has only been exacerbated by the recent growth in importance to i-bank profits of their own proprietary trading operations (read internal hedge funds). Now, much of their profits are generated in trades where they sit on the opposite side of the table from their (previous) clients. Talk about a threat to trust!

    The parallel development on the client side is the rise and rise of private equity, which has its own pressures and reasons to distrust i-banks. That is why you see so many experienced advisory bankers leaving the integrated i-banks to found or join pure-play advisory boutiques. There, you can hope to build a business where the clear and simple practice of earning and building trust with your clients can succeed. That was my rationale, anyway.

  2. Charlie (Green)
    Charlie (Green) says:

    Thanks, E.D. , great insights into that part of the world.

    For all Trust Matters readers who find themselves a little lost when talk turns to i-bankers, private equity, hedge funds and trading operations, let me offer a thought.  It’s worthwhile learning about it, and here’s a great way to do it.

    Buy Jonathan Knee’s book The Accidental Investment Banker.  He is a liberal arts kind of guy, scholarship to Oxbridge, who found himself at Goldman Sachs and Morgan Stanley in the hot period of the late 1990s.

    His tale of a (well, sort of) old-school genteel approach to helping businesses, morphing into an industry run by IBGYBG (I’ll be gone, you’ll be gone) mentality is exactly what ED is talking about here.   Fascinating stuff, and it behooves  all us soft-siders to know something about it.

    The fact that Knee’s book is ranked at 2,000 on Amazon, while The Trusted Advisor is only at 4,000 is of course a sad commentary on the state of business today, heh heh.  (Buy my books, reverse the trend!)


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