Remember days of yore--when an MBA in finance accepted an offer from an investment bank, commercial bank, brokerage house, trading firm or insurance company in the spring of second year and thereafter embarked on a long career with one firm, one employer? Shortly after arriving at the firm, the MBA started a training program or entry position--with the expectations of earning promotions every few years and with sights on becoming a senior manager (at the same firm) at the apex of a productive, memorable career.
In those days, you had the luxury of failing or slipping up in performance (a few times, not often), as long as you showed drive, loyalty, commitment and some promise. Now and then, you could fail to win a deal, could lose a major client, or could report a decline in revenues. You were reprimanded slightly, gently coached, and learned from experience. You were confident you would get a second chance, and you envisioned a career lasting, oh, 15, 20 or more years.
What happened to those days? Times changed. The environment changed. Competition among financial institutions grew fierce. Regulation loosened some of the rules and guidelines. Commercial banks infringed on the turfs of investment banks. Insurance companies, boutique firms, and hedge funds butted heads among themselves and with bankers. Shareholders, boards of directors and investors, accustomed to 10-15% returns, suddenly sought 20-25% returns, even with dwindling opportunities. They demanded revenue increases, soaring earnings and steady upticks in share prices.
And they demanded it from quarter to quarter every year. From the chairman of the firm to the sector managing director to the vice president in a client unit or on a trading desk all the way to the newly hired MBA only a few months out of Stern, Darden, Haas, or Tuck, the mantra became: "What have you done for me lately?"
How can and how do MBAs, including those from Consortium schools, confront such daily pressures? How should they and how can they handle a culture where you are only as good as the last deal you've done, the last client you brought to the firm, the last trade you put on the books or the last investment you analyzed and endorsed?
The topsy-turvy environment of 2011 makes matters worse. While financial institutions of all kinds scramble to win business, keep clients and cut costs to remain profitable, uncertainty about markets, global issues in Europe, and a start-stop recovery in the U.S. heightens the pressure. Banks, in particular, still sit in frustrating meetings brainstorming on how to make money with Dodd-Frank and Basel III regulation whipping them from behind. In the midst of all this uncertainty and week-to-week chaos, somebody is always peering over everybody's shoulder to ask: What have you done lately to justify your existence here?
Will this be the norm going forward? Will this be common practice to manage professional talent? Will bankers, traders, researchers, salespersons and managers be evaluated from quarter to quarter based on their current contributions to earnings (and not based on a long-term value to the firm)? Will employees at financial institutions approach each work day as one to confront threats, hardships and enormous pressures to perform and achieve?
Or when market stability turns, along with some certainty of a sustained recovery, will financial institutions settle down and nurture long-term career paths for those who truly want to be around for a long time? There is risk in not doing so.
In unsettled markets and high-pressure situations (where compensation is too uncertain to offset daily anxiety and turmoil), talented professionals seek solace elsewhere. If the environment is unsatisfying and too threatening, they move on. They flee to smaller firms or more specialized outfits. They contemplate going on their own, setting up their own shops, boutiques or funds. Many bring their clients, strategies, and colleagues with them.
Others shop around for more comfortable roles or environments. If they go to work plastered with constant rumors of lay-offs or spin-offs of business units they work in or if they are subject to harsh demands to meet extraordinary business targets, they reach out to peer firms. They go where expectations are reasonable and where pressures are tolerable (or compensated for). They go across the street to the "other bank."
Younger professionals and newly minted MBAs may not have networks or contacts to pursue other opportunities yet. Many also want to stay put, because they want to spend the first few years learning and getting experience--in doing deals, in negotiating with clients, in tackling financial models, in managing people and in making tough business decisions.
Yet in an environment where some will tap them on shoulders and ask what have they done lately, it helps to have a survival plan. What can they do?
1. Keep, maintain and update a personal scorecard of accomplishments, achievements, deals, business wins, and successful projects. Be ready to present and explain it at any time, because, yes, in these times, your value to the firm is always under review.
As others assess your value (whether formally in appraisal meetings or informally in chatter during a coffee break), you want the review to be fair, objective, and up to date.
2. Understand what your weaknesses are and how they are perceived by others. Develop a short- and long-term plan to address them, and be ready to share the plan with supervisors and mentors. As others evaluate you, they may overlook what might be regarded as a glaring weakness, if they know you have plan to improve.
3. Always assess "what you bring to the table." Make sure to the table, you bring something important, useful, possibly money-generating, or valued highly in the short- and long-term. That may be access to clients, people and contacts. It may be specialized knowledge, new ideas, or an astounding understanding of financial models, markets, products, or regulation. For many recent MBA graduates, it may also be an intense, consistent work ethic, a willingness to get the job done no matter the obstacles (and of course during all hours of the night or weekend).
There is no fail-safe response to the question: What have you done for me lately? Sometimes a 20% increase in revenues won't do. Or winning the mandate from a new client to do a big, headline-garnering deal won't create a buzz among senior managers. Or creating a new product that clients will swarm toward may still be insufficient for those who ask these types of value questions.
But it still helps to be prepared and be ready to present your case.
Tracy Williams
Wednesday, September 28, 2011
Wednesday, September 14, 2011
Market Volatility: Can You Stand It?
Summer, 2011, has marked a rambunctious time of swirls and volatility in equity markets. It feels like 2008 all over again. Can you stomach it?
No, you can't stand it. Nor can you explain it, follow it, track it, quantify it or tolerate it. A day when equity markets slide 2, 3 or 4 percent is followed by days when they surge, soar or promise that a new bull market is around the corner. And then comes the nose-dive again, another day when selling begets more selling, which contributes to panic and wonder. It churns the inside.
Can the old finance texts explain it? Can market watchers and pundits project it? Many think they do. Do hedge funds and high-frequency traders profit from it? Certainly they try. Are hedge funds and high-frequency traders responsible for it? They certainly contribute to it. Do technical trend-followers try to quantify it or forecast it? Yes, when they unveil graphs, present variance analyses, or analyze "VIX" (market-volatility) indices.
Often over the past two months, it has felt like 2008-09, like 1999-2001 when technical stocks bounced around and then burst, like 1998 when the collapse off Long-Term Capital caused a month or two of panic, or even like the long-ago days after crash of 1987.
Everybody has a reason to explain volatility. Many say they can see it coming. Not many, however, agree on the specific causes. Others quietly try to make money from it. Others are squeamish, and yet others bolt.
The suspected causes are as broad as the number of market participants. The most common blame is uncertainty. Markets are engulfed in too many unknowns about where the economy is heading and how companies will fare in uncertain conditions. Amid widespread uncertainty, market participants separately try to determine what economic trend is dominant. And the outcome might be violent swings in market values.
Others blame high-frequency traders, the large segment of traders who buy and sell thousands (millions?) of shares electronically in time frames measured by seconds. They don't value companies, project cash flows, or analyze the long-term fortunes of companies. They use technology prowess to get in and get out, faster than all other participants--including mom and pop on Main Street.
Among themselves, they race to see who can respond and act on market signals most quickly. They buy in certain markets and geographies and sell in others. They buy options in one market, sell equities in another. To them, a decline in profitability at a manufacturer because of an increase in costs of raw materials doesn't matter. They look for signals, trends, and momentum. And often they replicate the activity or trading patterns of their peers and competitors (a phenomenon now known as "crowded trades"). If one is selling, others do, too, and an equity market dives 2 percent without reason.
Panic among retail investors contributes to volatility. They call their financial consultants to order them to sell because they can't bear the fluctuations. How often have we heard when seasoned investors give up on stock investing and send instructions in sell all equity holdings immediately, so they can sleep better at night?
Why wouldn't a succession of hundred-point declines in markets cause even the most experienced investor to give up? Who wouldn't feel the urge to sell and reduce all risks when portfolios in 2008 plunged by 20-plus percent?
One segment blames short-sellers. Short-sellers do exist. Not necessarily those who sell equities short as a hedge for a long-term portfolio of stocks, but those funds and traders whose primary purpose is to investigate and analyze the bad fortunes of companies and profit from a possible decline in their stock values. Some say short-sellers spur doomsday moods by broadcasting the vulnerabilities or downturns of companies, which lead to sell-offs. Meanwhile, they quietly profit from such declines after establishing short positions.
The continual effort to guess at or measure what government entities or regulators are thinking or will say, do, enact, or support (or what they won't do) contributes to wild swings in markets. All the guessing leads to conflicting views about whether to buy or sell.
In the past decade or so, leveraged hedge funds will swear they don't contribute to volatility. But whn they must sell assets to reduce borrowings, they often must sell the most liquid assets (Treasuries and exchange-traded equities) to raise cash. As a result, they contribute to sell-offs in markets.
Traders, investment managers and economists now agree there exists something called world-wide contagion: What happens in Greece has impact on markets in Chicago and New York. What happens in Tokyo influences activity in the U.S.--for many reasons. Economies and markets are intertwined. Companies have global operations and sell in global markets. Investors and traders have diversified portfolios with exposures around the globe. When they buy or sell equities and sniff out opportunities or fear downturns, they have their eyeballs on emerging markets, as much as they watch trends in the U.S. and Europe.
What is the long-term impact of all this market madness? How will we learn to handle market turbulence, occasional market panic, and unrelenting uncertainty?
Business leaders and bankers fear volatility leads to lack of trust and confidence in capital markets. Investors shy away, preferring to invest in money-market funds or Treasuries, feeling disadvantaged or uncomfortable with equity portfolios. Others seek shelter in fixed-income investments and commodities (and, yes, even gold). Sophisticated investors look to "alternative assets": hedge funds and private equity.
Others wait it out. They return when measured or observed volatility (from, say, "VIX" indices and the like) decline to tolerable, bearable levels. They jump back in when market swings can be rationalized, explained or when market indices follow a pattern.
And often in the long term, memories tend to be short. When confidence and a degree of certainty are reintroduced, market participants (investors, traders, researchers and mom and pop) somehow tend to forget treacherous days and once again set off to chase opportunity and profits.
Tracy Williams
No, you can't stand it. Nor can you explain it, follow it, track it, quantify it or tolerate it. A day when equity markets slide 2, 3 or 4 percent is followed by days when they surge, soar or promise that a new bull market is around the corner. And then comes the nose-dive again, another day when selling begets more selling, which contributes to panic and wonder. It churns the inside.
Can the old finance texts explain it? Can market watchers and pundits project it? Many think they do. Do hedge funds and high-frequency traders profit from it? Certainly they try. Are hedge funds and high-frequency traders responsible for it? They certainly contribute to it. Do technical trend-followers try to quantify it or forecast it? Yes, when they unveil graphs, present variance analyses, or analyze "VIX" (market-volatility) indices.
Often over the past two months, it has felt like 2008-09, like 1999-2001 when technical stocks bounced around and then burst, like 1998 when the collapse off Long-Term Capital caused a month or two of panic, or even like the long-ago days after crash of 1987.
Everybody has a reason to explain volatility. Many say they can see it coming. Not many, however, agree on the specific causes. Others quietly try to make money from it. Others are squeamish, and yet others bolt.
The suspected causes are as broad as the number of market participants. The most common blame is uncertainty. Markets are engulfed in too many unknowns about where the economy is heading and how companies will fare in uncertain conditions. Amid widespread uncertainty, market participants separately try to determine what economic trend is dominant. And the outcome might be violent swings in market values.
Others blame high-frequency traders, the large segment of traders who buy and sell thousands (millions?) of shares electronically in time frames measured by seconds. They don't value companies, project cash flows, or analyze the long-term fortunes of companies. They use technology prowess to get in and get out, faster than all other participants--including mom and pop on Main Street.
Among themselves, they race to see who can respond and act on market signals most quickly. They buy in certain markets and geographies and sell in others. They buy options in one market, sell equities in another. To them, a decline in profitability at a manufacturer because of an increase in costs of raw materials doesn't matter. They look for signals, trends, and momentum. And often they replicate the activity or trading patterns of their peers and competitors (a phenomenon now known as "crowded trades"). If one is selling, others do, too, and an equity market dives 2 percent without reason.
Panic among retail investors contributes to volatility. They call their financial consultants to order them to sell because they can't bear the fluctuations. How often have we heard when seasoned investors give up on stock investing and send instructions in sell all equity holdings immediately, so they can sleep better at night?
Why wouldn't a succession of hundred-point declines in markets cause even the most experienced investor to give up? Who wouldn't feel the urge to sell and reduce all risks when portfolios in 2008 plunged by 20-plus percent?
One segment blames short-sellers. Short-sellers do exist. Not necessarily those who sell equities short as a hedge for a long-term portfolio of stocks, but those funds and traders whose primary purpose is to investigate and analyze the bad fortunes of companies and profit from a possible decline in their stock values. Some say short-sellers spur doomsday moods by broadcasting the vulnerabilities or downturns of companies, which lead to sell-offs. Meanwhile, they quietly profit from such declines after establishing short positions.
The continual effort to guess at or measure what government entities or regulators are thinking or will say, do, enact, or support (or what they won't do) contributes to wild swings in markets. All the guessing leads to conflicting views about whether to buy or sell.
In the past decade or so, leveraged hedge funds will swear they don't contribute to volatility. But whn they must sell assets to reduce borrowings, they often must sell the most liquid assets (Treasuries and exchange-traded equities) to raise cash. As a result, they contribute to sell-offs in markets.
Traders, investment managers and economists now agree there exists something called world-wide contagion: What happens in Greece has impact on markets in Chicago and New York. What happens in Tokyo influences activity in the U.S.--for many reasons. Economies and markets are intertwined. Companies have global operations and sell in global markets. Investors and traders have diversified portfolios with exposures around the globe. When they buy or sell equities and sniff out opportunities or fear downturns, they have their eyeballs on emerging markets, as much as they watch trends in the U.S. and Europe.
What is the long-term impact of all this market madness? How will we learn to handle market turbulence, occasional market panic, and unrelenting uncertainty?
Business leaders and bankers fear volatility leads to lack of trust and confidence in capital markets. Investors shy away, preferring to invest in money-market funds or Treasuries, feeling disadvantaged or uncomfortable with equity portfolios. Others seek shelter in fixed-income investments and commodities (and, yes, even gold). Sophisticated investors look to "alternative assets": hedge funds and private equity.
Others wait it out. They return when measured or observed volatility (from, say, "VIX" indices and the like) decline to tolerable, bearable levels. They jump back in when market swings can be rationalized, explained or when market indices follow a pattern.
And often in the long term, memories tend to be short. When confidence and a degree of certainty are reintroduced, market participants (investors, traders, researchers and mom and pop) somehow tend to forget treacherous days and once again set off to chase opportunity and profits.
Tracy Williams
Thursday, September 1, 2011
Is I-Banking Still Hot?
Does investment banking still have the same attraction? Do MBA students still swarm toward investment-banking roles? Do many have dreams of joining a top firm, hitting the ground running doing deals and anticipating big year-end bonuses?
After the industry turmoil and a series of setbacks and embarrassments, is investment banking still a hot area?
There have been upheaval, backlash and calls for reform since Lehman Brothers and Bear Stearns disappeared from the scene. Yet since 2008, trends suggest (a) i-banking is still attractive to many MBA students in finance at top schools and (b) the industry has evolved, but not yet gone through the major overhaul and transformation many predicted or hoped for.
Despite public pleas for changes in how banks conduct business and pay bankers and despite sluggish economic recovery and stomach-churning markets, deals are getting done. Companies are going public, issuing long-term debt, or acquiring other companies. Not necessarily at levels from 2006-07, but there is activity, enough so for banks to continue recruiting and for MBAs to pursue careers.
In this year's entering class of Consortium MBAs, at least 90 new students (about a third) have indicated an interest in finance--a number that is about the same or slightly higher from previous years. Of the 90, as many as 30 (about 10 percent of all Consortium students) have expressed a specific interest in investment banking, corporate banking or corporate finance. The actual number interested in i-banking could be higher, as many students will indicate a general interest in financial services, but have not yet acknowledged an interest in banking.
(Ten students say they are interested in investment managent, and a handful express specific interests in media finance, private equity, venture capital or real estate.)
Most students understand they will probably revise plans as they proceed through a grinding recruiting process. Banks, as they did before, put prospects through rounds of interviews, including tough technical sessions. Some students don't survive the process. Some change their minds, while others switch to other industries. Some become even more charged with enthusiasm about i-banking.
Interest in i-banking, therefore, has not disappeared. The actual number that will be recruited and hired in 2012 has yet to be determined, especially as banks struggle to make sense of this summer of volatility and uncertainty. Those who are committed and will pursue banking will encounter an evolving industry, but one that reflects familiar traditions and practices.
Over the past three years, the players and leading firms have changed. The sudden departure of Lehman and Bear Stearns and the absoprtion of Merrill Lynch by Bank of America left gaping holes in the "bulge bracket" lists. Goldman Sachs, JPMorgan, and Morgan Stanley continue to jockey for the top spots in equity and bond finance and merger activity. However, foreign banks, especially international banks with large investment-banking operations, have shoved themselves into the big picture: UBS, Deutsche, RBC, and of course Barclays, which bought the U.S. operations of Lehman.
Firms like Jefferies and Lazard Freres, once comfortable in their own mid-tier niches, took advantage of industry shake-out and expanded their reach and business. Jefferies is a more diversified, comprehensive bank than it was a decade ago. Some regionals--mostly the i-banking units of commercial banks--have also stepped up where they could.
Smaller "boutique" firms have picked up pieces and grabbed business that bulge-bracket firms once kept among themselves. Bulge brackets are now "bank holding companies," subject to banking oversight by the Federal Reserve an often weighed down--in their eyes--by onerous capital requirements and ominous regulation.
As with all banks, bulge brackets must address a laundry list of issues since TARP rolled out in 2008. Dodd-Frank regulation will force them re-engineer their businesses. They can no longer rely on surges in trading revenues to offset the cyclicality of i-banking. While big banks tend to internal restructuring and worry about declining returns, boutiques have slipped in and swiped a few lucrative deals away from them.
Boutiques absorbed experienced bankers who were dismissed by bulge brackets let go or were demoralized by the crisis. The new bankers brought clients, deals, relationships and junior staff with them. Boutiques, meanwhile, have remained steadfast in being experts in special areas (M&A, media finance, technology finance, restructuring, capital-raising, or strategic advisory).
They didn't venture to foreign lands or create hard-to-manage bureaucracies and processes. And they seldom need to scratch their heads managing conflicts of interests, "tail" risks, or burdensome capital requirements. They just do deals.
And they've done more than their share over the past year. Centerview and Qatalyst, boutique banks, had primary advisory roles in the recently announced Google-Motorola merger. Sandler O'Neill, adamant about remaining small, is one of the top banks for financial institutions. Moelis, Evercore, Allen & Co., Greenhill, Keefe Bruyette, and Perella Weingberg are all respected, if not envied, players.
Some challenges and issues continue to stifle firms these days, big and small--enough to frustrate senior managers and deal-doers who wish they could focus on clients and deals and enough to discourage some MBAs from pursuing a career.
The turtle-crawl economic recovery has a direct bearing on i-banking activity. Corporations are reluctant to grow their busineses or consider acquisitions. They hesitate to issue new capital (debt or equity) to invest in new business or innovative products. They let cash reserves sit around because they are engulfed in uncertainty. In the end, investment banks can't convince corporate CFOs or CEOs to take their advice or proceed with financings that at least make sense in Excel spreadsheets. Deals ready to go to market are suddenly shelved.
Thus, fees and revenues from mergers, acquisitions, underwritings, lending, and new products fluctuate unpredictably, while senior bankers figure out how to endure uncertainty and MBAs ponder whether they should pursue a dream.
Pending regulation and reform are looming challenges. Banks try to interpret new rules and anticipate what they will be once regulators write them up more formally. Then they huddle in backrooms to reorganize their business to make them operate profitably with the new restrictions. The 25% return on equity some bulge brackets could count on in the glory days of the mid-2000s or late 1990s might become an unreasonable target. Disgruntled shareholders may need to become accustomed to, at best, 15% returns under new models.
Risk management at all banks has gotten much attention. Banks have increased risk staff and force deal-doers to assess, probe, analyze, and measure the worst-case risks in doing a deal or bring in a new client. Risk-vs.-reward exercises are more prominent than ever.
Derivatives once attracted Ph.d. graduates and quant jocks and spawned floods of profits over the past decade or so. Going forward, regulation will force most of them to be traded on exchanges and through designated dealers. Investment banks aren't sure what the new profit dynamics will be or whether it will be worth the effort to encourage quant jocks to create new forms of them. Quant jocks aren't sure they will be welcome or will flee to hedge funds. I-bankers haven't yet figured out what they should say to clients on a consistent basis.
Work-life balance in the industry was supposed to have improved, if only to attract graduates who fear that lower bonus payouts in the future won't make it worth spending 12-14-hour days in the office, six days a week. Anecdotes suggest work-life balance is often discussed and mulled over, but when deals must be done, it's back to back-breaking, suffocating hours in the office.
The current environment with uncertainfy, regulation, and dwindling profitability will add more pressure to bankers to find new clients, win more mandates and get more deals done. Expectations by management and the public have risen the past three years. Competition from other banks is just as fierce, and clients are demanding more from banks. The pressure has not waned.
Yet the attraction to i-banking is still apparent. Despite the nervous environment, Consortium numbers suggest new students still want a shot at doing deals, helping clients borrow money or go public, or advising them on how to expand and grow.
The adrenaline from participating in a headline-grabbing transaction or a billion-dollar bond issue still exists. The satisfaction of deriving and negotiating the fair value of a targeted firm is still there. The thrill in traveling all over the country or globe to meet new clients in new industries continues. Of course, compensation--even if it has become as volatile as markets--is generally still attractive.
One tradition has not changed. I-bank recruiting and the campaign to win a spot on a bank's interview list start the first week MBAs get to campus. Those who have ambitions of securing a spot in 2012 must get going now.
Tracy Williams
After the industry turmoil and a series of setbacks and embarrassments, is investment banking still a hot area?
There have been upheaval, backlash and calls for reform since Lehman Brothers and Bear Stearns disappeared from the scene. Yet since 2008, trends suggest (a) i-banking is still attractive to many MBA students in finance at top schools and (b) the industry has evolved, but not yet gone through the major overhaul and transformation many predicted or hoped for.
Despite public pleas for changes in how banks conduct business and pay bankers and despite sluggish economic recovery and stomach-churning markets, deals are getting done. Companies are going public, issuing long-term debt, or acquiring other companies. Not necessarily at levels from 2006-07, but there is activity, enough so for banks to continue recruiting and for MBAs to pursue careers.
In this year's entering class of Consortium MBAs, at least 90 new students (about a third) have indicated an interest in finance--a number that is about the same or slightly higher from previous years. Of the 90, as many as 30 (about 10 percent of all Consortium students) have expressed a specific interest in investment banking, corporate banking or corporate finance. The actual number interested in i-banking could be higher, as many students will indicate a general interest in financial services, but have not yet acknowledged an interest in banking.
(Ten students say they are interested in investment managent, and a handful express specific interests in media finance, private equity, venture capital or real estate.)
Most students understand they will probably revise plans as they proceed through a grinding recruiting process. Banks, as they did before, put prospects through rounds of interviews, including tough technical sessions. Some students don't survive the process. Some change their minds, while others switch to other industries. Some become even more charged with enthusiasm about i-banking.
Interest in i-banking, therefore, has not disappeared. The actual number that will be recruited and hired in 2012 has yet to be determined, especially as banks struggle to make sense of this summer of volatility and uncertainty. Those who are committed and will pursue banking will encounter an evolving industry, but one that reflects familiar traditions and practices.
Over the past three years, the players and leading firms have changed. The sudden departure of Lehman and Bear Stearns and the absoprtion of Merrill Lynch by Bank of America left gaping holes in the "bulge bracket" lists. Goldman Sachs, JPMorgan, and Morgan Stanley continue to jockey for the top spots in equity and bond finance and merger activity. However, foreign banks, especially international banks with large investment-banking operations, have shoved themselves into the big picture: UBS, Deutsche, RBC, and of course Barclays, which bought the U.S. operations of Lehman.
Firms like Jefferies and Lazard Freres, once comfortable in their own mid-tier niches, took advantage of industry shake-out and expanded their reach and business. Jefferies is a more diversified, comprehensive bank than it was a decade ago. Some regionals--mostly the i-banking units of commercial banks--have also stepped up where they could.
Smaller "boutique" firms have picked up pieces and grabbed business that bulge-bracket firms once kept among themselves. Bulge brackets are now "bank holding companies," subject to banking oversight by the Federal Reserve an often weighed down--in their eyes--by onerous capital requirements and ominous regulation.
As with all banks, bulge brackets must address a laundry list of issues since TARP rolled out in 2008. Dodd-Frank regulation will force them re-engineer their businesses. They can no longer rely on surges in trading revenues to offset the cyclicality of i-banking. While big banks tend to internal restructuring and worry about declining returns, boutiques have slipped in and swiped a few lucrative deals away from them.
Boutiques absorbed experienced bankers who were dismissed by bulge brackets let go or were demoralized by the crisis. The new bankers brought clients, deals, relationships and junior staff with them. Boutiques, meanwhile, have remained steadfast in being experts in special areas (M&A, media finance, technology finance, restructuring, capital-raising, or strategic advisory).
They didn't venture to foreign lands or create hard-to-manage bureaucracies and processes. And they seldom need to scratch their heads managing conflicts of interests, "tail" risks, or burdensome capital requirements. They just do deals.
And they've done more than their share over the past year. Centerview and Qatalyst, boutique banks, had primary advisory roles in the recently announced Google-Motorola merger. Sandler O'Neill, adamant about remaining small, is one of the top banks for financial institutions. Moelis, Evercore, Allen & Co., Greenhill, Keefe Bruyette, and Perella Weingberg are all respected, if not envied, players.
Some challenges and issues continue to stifle firms these days, big and small--enough to frustrate senior managers and deal-doers who wish they could focus on clients and deals and enough to discourage some MBAs from pursuing a career.
The turtle-crawl economic recovery has a direct bearing on i-banking activity. Corporations are reluctant to grow their busineses or consider acquisitions. They hesitate to issue new capital (debt or equity) to invest in new business or innovative products. They let cash reserves sit around because they are engulfed in uncertainty. In the end, investment banks can't convince corporate CFOs or CEOs to take their advice or proceed with financings that at least make sense in Excel spreadsheets. Deals ready to go to market are suddenly shelved.
Thus, fees and revenues from mergers, acquisitions, underwritings, lending, and new products fluctuate unpredictably, while senior bankers figure out how to endure uncertainty and MBAs ponder whether they should pursue a dream.
Pending regulation and reform are looming challenges. Banks try to interpret new rules and anticipate what they will be once regulators write them up more formally. Then they huddle in backrooms to reorganize their business to make them operate profitably with the new restrictions. The 25% return on equity some bulge brackets could count on in the glory days of the mid-2000s or late 1990s might become an unreasonable target. Disgruntled shareholders may need to become accustomed to, at best, 15% returns under new models.
Risk management at all banks has gotten much attention. Banks have increased risk staff and force deal-doers to assess, probe, analyze, and measure the worst-case risks in doing a deal or bring in a new client. Risk-vs.-reward exercises are more prominent than ever.
Derivatives once attracted Ph.d. graduates and quant jocks and spawned floods of profits over the past decade or so. Going forward, regulation will force most of them to be traded on exchanges and through designated dealers. Investment banks aren't sure what the new profit dynamics will be or whether it will be worth the effort to encourage quant jocks to create new forms of them. Quant jocks aren't sure they will be welcome or will flee to hedge funds. I-bankers haven't yet figured out what they should say to clients on a consistent basis.
Work-life balance in the industry was supposed to have improved, if only to attract graduates who fear that lower bonus payouts in the future won't make it worth spending 12-14-hour days in the office, six days a week. Anecdotes suggest work-life balance is often discussed and mulled over, but when deals must be done, it's back to back-breaking, suffocating hours in the office.
The current environment with uncertainfy, regulation, and dwindling profitability will add more pressure to bankers to find new clients, win more mandates and get more deals done. Expectations by management and the public have risen the past three years. Competition from other banks is just as fierce, and clients are demanding more from banks. The pressure has not waned.
Yet the attraction to i-banking is still apparent. Despite the nervous environment, Consortium numbers suggest new students still want a shot at doing deals, helping clients borrow money or go public, or advising them on how to expand and grow.
The adrenaline from participating in a headline-grabbing transaction or a billion-dollar bond issue still exists. The satisfaction of deriving and negotiating the fair value of a targeted firm is still there. The thrill in traveling all over the country or globe to meet new clients in new industries continues. Of course, compensation--even if it has become as volatile as markets--is generally still attractive.
One tradition has not changed. I-bank recruiting and the campaign to win a spot on a bank's interview list start the first week MBAs get to campus. Those who have ambitions of securing a spot in 2012 must get going now.
Tracy Williams
Thursday, August 25, 2011
MBA Professors: The Most Popular 10
 |
| NYU's Damodaran, tops on the list |
Many will say the best professors are those who teach with passion, energy and excitement. The subject matter--whether it's first-year corporate finance or the mechanics of an intermediate-accounting course--comes alive. Those are the professors who present the principles of debit-credit accounting or the equations of Black-Scholes in a spirited way--as if they discover gold time and again.
Many will say the best are those who share details, memories and stories of having been on the front lines of business, those who were involved in heavyweight corporate strategy, major acquisitions and tense negotiations. They might be adjunct professors who can convey decades of experience within the outlines of a core course. They may have spent years on Wall Street, in boardrooms, or in Europe or Asia in special assignments.
Others will say the best are those who encourage and spawn new ideas. They have new theories or are preparing to unveil a batch of new ideas. They nurture innovation and clever ways of thinking. They have new ways of looking at stagnant business models. They offer new ways to value corporations or manage large organizations. They cheer for and support students who have entrepreneurial instincts and interests.
A few weeks ago BusinessWeek tried to identify who might be the top (or favorite? or preferred?) professors in top business schools. (See http://www.businessweek.com/bschools/blogs/.) It polled over 3,700 students at 30 business schools to come up with a top-10 list. Students were asked to name a favorite or popular professor on campus--not much more than that. No criteria, no explanations.
At least 60 students from a school needed to respond to allow that school's results to be included in national polling. A professor who made the final list received at least 20% of all votes on that campus. Students weren't required to explain why they preferred a professor, but could provide commentary.
Eight of the top 10 professors were from Consortium schools (and suggest the high probability that Consortium MBAs have had some interaction in the last few years with some of the country's most popular professors). BusinessWeek presided over a popularity contest and promoted it just as that. Students approach the MBA program and learning seriously, so they likely voted fairly. Not necessarily based on the grade they received. Or maybe the final grade spurred them to participate and vote.
Aswath Damodaran, a finance professor from NYU-Stern, topped the list. His specialty is corporate finance, more notably the equity valuation of companies. He's so popular that he has over 4,000 followers in Twitter. He has a Ph.d. degree from Consortium school UCLA-Anderson and taught at Consortium school UC-Berkeley-Haas before joining the staff at Stern.
Damodaran writes a popular blog of corporate-finance topics, helpful for both students and practitioners on Wall Street (http://aswathdamodaran.blogspot.com/). In the past month, he blogged on such topics as "trapped cash" in corporations and the "equity risk premium." This week he offers rambling, reasoned "musings" on the share price of Bank of America. It's not just the topics he blogs on, but the enthusiastic, ponderous ways he shares ideas in finance.
Finance instructor Jim Nolen from Texas-McCombs was third on the popularity list. Students say they like him because he's a story-teller with a Texas accent. Nolen is an expert in small business and new-venture financing. He teaches a popular course in financial management of small enterprises. Texas students say they are entranced by his stories and experiences in business. According to BusinessWeek, they adore--most of all--how he has helped placed students in lucrative roles in finance.
Emory's Raymond Hill, a finance professor, was sixth on the list. Hill brought years of business experience before he joined Goizueta. He spent 11 years in investment banking at Lehman Brothers and over a decade at the utility Southern Company. He started out in academia, switched to investment banking and business, but returned to the campus. (He has a Ph.d. from MIT.)
At Lehman, he spent seven years in its Hong Kong office managing banking activities in Southeast Asia. At Emory, he specializes in energy finance and project finance. Students cited his ability to relate arcane, difficult theory from texts (macroeconomics, e.g.) to current events and trends.
Sharon Oster, an economics professor from Yale-SOM and its dean until a few weeks ago, was seventh on the list. As a woman in economics and business management, she has long been regarded a pioneer, having been at Yale for 37 years. She specializes in economic competition, competitive analysis, and labor economics. She has written extensively on regulation and non-profit management.
Students highlight her devotion to Yale's program and its students. Some say she tries to keep ties to every student she has taught while at Yale-SOM and can often prove it.
Other Consortium-school professors on the list include Gautam Ahuja, a strategy professor at Michigan-Ross (2nd on the list); Terry Taylor, an operations and technology management professor at UC-Berkeley-Haas (5th); Neil Morgan, a marketing professor from Indiana-Kelley (8th), and Eric Sussman, who specializes in real estate and accounting at UCLA-Anderson (9th). That Sussman is known to sing 1980s pop songs in class doesn't hurt his popularity.
BusinessWeek all but apologized that Oster from Yale is the only woman on its list. Students don't necessarily prefer male professors. The scarcity of women is likely due to the fact that women still comprise small numbers of experienced faculty members at business schools. And that is likely due to the lagging percentages of women at top business schools and women who pursue doctorates in finance, economics or business.
Being male isn't sufficient to be on the list, but it surely helps to have passion about the subject matter. And it helps to have an ability to tell stories, share experiences, write colorful blogs, keep the material relevant, be an unabashed promoter of the school, help in career placement, and maintain ties to most students who pass through the doors.
Tracy Williams
Wednesday, August 17, 2011
One Thing for Certain....
Uncertainty. It drives equity markets insane, causing them to swoop, surge, nose-dive and rumble upward, only to swoop and surge again. Investors can't figure out whether to ignore, reallocate, hold or sell. Speculators and high-frequency traders find ways to thrive, often spurring markets toward a plunge and or meddling to make them bounce like ping-pong balls.
Such is the way it has been in this August of market turbulence. It has felt too much like autumn, 2008.
At financial institutions--especially at large banks, investment firms or trading houses--uncertainty in the marketplace leads to a degree of certainty in-house. When markets bounce all over the place and when ongoing threats to a reviving economy slow it down, there are predictable, certain patterns within banks' walls. Examples?
1. When markets turn downward or signal a downturn of any kind, even if momentary, financial institutions "circle the wagons." They assume worst-case scenarios in revenues, business, outlook, and opportunities. They hope for a prompt upturn, but plan for the worst.
They examine deals in the pipeline and business and transactions not yet closed. They go through business or balance-sheet "stress tests" to see how they can withstand a collapse in markets or business activity.
2. Financial institutions begin to reassess, retrench and respond. All of a sudden, with revenue declines looming, they look to cut costs. And personnel costs are the easiest and first to slice. With certainty, they reassess recruiting and hiring and lower projections for how many they plan to bring in over the next year.
3. With the prospects of a diminished flow from deals, clients and new business, they huddle up to reassess bonus payouts. They outline cost-cutting and layoffs. Shortly thereafter, they communicate to employees, analysts, and media the cost-cutting campaigns that will come from lower bonuses and planned staff reduction. While investors applaud their efforts to retrench, employees and new recruits begin to worry.
Unfortunately this atmosphere of anxiety becomes a distraction from winning new business, planning new products or bringing in new clients. The managing director who normally flies off to Chicago to see a client is now forced into morning sessions to decide how much year-end bonuses should be scaled back and what group should be hit the hardest. The vice president who gathers a team to explore a new business strategy now wonders whether senior managers will have time to pay attention to the new idea.
4. Often with uncertainty and volatile markets, banks get risk-averse. With the prospects of lower revenues, they don't want to worsen troubled times with bad investments, bad loans or bad business decisions. A deal, transaction, or investment that was smoothly approved in good times is shelved, pushed back or ignored in times of uncertainty.
Some institutions promised they would carry lessons from other crises, especially the lesson of being disadvantaged by acting too quickly or too rashly at the hint of a downturn. Does it make sense, they wonder, to retrench and retreat too swiftly, only to be forced to gear up, ramp up and rehire when business begins to flow again? Some retain the lessons; many others follow the familiar pattern of gear-up, retrench, lay off, rehire, expand and are comfortable with bearing the related administrative costs.
Experienced MBAs and professionals in finance know these patterns well and have learned how to adapt to them, even if they aren't comfortable going through them. New professionals and recent graduates learn fast that this is often the way of the world of volatility and instability.
Both the old and new understand the importance of concentrating on what they can control--working hard and performing at high levels. They also realize that underneath the piles of spreadsheets, projects, and presentations and in the midst of attending non-stop meetings on confronting the worst case, they must have a Plan B.
Tracy Williams
Such is the way it has been in this August of market turbulence. It has felt too much like autumn, 2008.
At financial institutions--especially at large banks, investment firms or trading houses--uncertainty in the marketplace leads to a degree of certainty in-house. When markets bounce all over the place and when ongoing threats to a reviving economy slow it down, there are predictable, certain patterns within banks' walls. Examples?
1. When markets turn downward or signal a downturn of any kind, even if momentary, financial institutions "circle the wagons." They assume worst-case scenarios in revenues, business, outlook, and opportunities. They hope for a prompt upturn, but plan for the worst.
They examine deals in the pipeline and business and transactions not yet closed. They go through business or balance-sheet "stress tests" to see how they can withstand a collapse in markets or business activity.
2. Financial institutions begin to reassess, retrench and respond. All of a sudden, with revenue declines looming, they look to cut costs. And personnel costs are the easiest and first to slice. With certainty, they reassess recruiting and hiring and lower projections for how many they plan to bring in over the next year.
3. With the prospects of a diminished flow from deals, clients and new business, they huddle up to reassess bonus payouts. They outline cost-cutting and layoffs. Shortly thereafter, they communicate to employees, analysts, and media the cost-cutting campaigns that will come from lower bonuses and planned staff reduction. While investors applaud their efforts to retrench, employees and new recruits begin to worry.
Unfortunately this atmosphere of anxiety becomes a distraction from winning new business, planning new products or bringing in new clients. The managing director who normally flies off to Chicago to see a client is now forced into morning sessions to decide how much year-end bonuses should be scaled back and what group should be hit the hardest. The vice president who gathers a team to explore a new business strategy now wonders whether senior managers will have time to pay attention to the new idea.
4. Often with uncertainty and volatile markets, banks get risk-averse. With the prospects of lower revenues, they don't want to worsen troubled times with bad investments, bad loans or bad business decisions. A deal, transaction, or investment that was smoothly approved in good times is shelved, pushed back or ignored in times of uncertainty.
Some institutions promised they would carry lessons from other crises, especially the lesson of being disadvantaged by acting too quickly or too rashly at the hint of a downturn. Does it make sense, they wonder, to retrench and retreat too swiftly, only to be forced to gear up, ramp up and rehire when business begins to flow again? Some retain the lessons; many others follow the familiar pattern of gear-up, retrench, lay off, rehire, expand and are comfortable with bearing the related administrative costs.
Experienced MBAs and professionals in finance know these patterns well and have learned how to adapt to them, even if they aren't comfortable going through them. New professionals and recent graduates learn fast that this is often the way of the world of volatility and instability.
Both the old and new understand the importance of concentrating on what they can control--working hard and performing at high levels. They also realize that underneath the piles of spreadsheets, projects, and presentations and in the midst of attending non-stop meetings on confronting the worst case, they must have a Plan B.
Tracy Williams
Wednesday, August 10, 2011
A Summer Reading List?
In finance the past few years, there has been an explosion of published accounts of the financial crisis. Just when we think there is nothing else to report or analyze as it relates to the collapse of Lehman, Bear Stearns or AIG, out comes another 300-pager.
Then comes the summer of 2011. Just when we thought it might be safe to escape for vacation and tote copies of what's on our reading list (in duffel bags or imbedded in a Kindle), the circus of Washington becomes more frenzied. And the markets behave as if it's 2008 all over again.
A summer reading list at a time like this? With the daily chaos of global markets, political fisticuffs over sovereign debt levels, S&P punishing politicians and the U.S.'s lackluster recovery, will there even be time to go on vacation before fall arrives?
Is there any point to combing through an old analysis of the Madoff scandal, Goldman Sachs' "big short" on mortgage markets, or Countrywide's massive buildup of subprime assets when nobody knows what today's markets and business confidence will look like next week? When much of the industry had hoped to be gazing at the horizon from a vacation rental?
Still, prospective students in finance will ask what's appropriate to read as they prepare for business school or gear up for a tough semester of corporate finance 101. MBA alumni and other experienced professionals wonder what they can read to catch up on current issues.
What can they read to "stay ahead in the game" or have an in-depth understanding of specific topics? What should they read to comprehend the controversy of derivatives, CDOs, and mortgage-backed securities? What should they read to figure out what happened at Madoff, AIG, Merrill, and Goldman? Why did some hedge funds prosper during the old crisis? Could Bear Stearns and Lehman have been rescued? With pending reform, what will banking and finance look like in the next decade?
Publishing houses have flooded the book-reading public with new takes and versions on what happened in 2007-09. There are numerous viewpoints, analyses, and updated summaries of events. In the latest round, William Cohan follows his thorough accounting of the fall of Bear Stearns ("House of Cards") with a new book on Goldman Sachs, a book project he likely had in mind for years. But he might have updated his approach when Goldman suddenly became a symbolic punching bag as industry recovered from mishaps of the 2000s.
Cohan's "House of Cards" was an excellent, day-by-day account of Bear Stearns' fall and explained better than others how lack of funding, liquidity and perhaps wisdom and morals caused the firm to sink. His understanding of investment-bank operations, people, deals and history would make the new book "How Goldman Sachs Came to Rule the World" required reading. Goldman, of course, doesn't rule the world, even if it tried to, but Cohan provides a solid accounting of how a top firm manages to remain perennially profitable.
Last year, Suzanne McGee hopped on the Goldman story-telling bandwagon with her book "Chasing Goldman Sachs." She argues the crisis of 2008-09 is partly due to other firms and funds trying to "be like Goldman." Everybody wants to achieve similar returns and approach businesses and markets in the way Goldman does. And they think they can do so--whether or not they have the capital or people.
In doing so, we got the near collapse of the financial system in 2008. Her book, however, offers pages of solutions. She suggests an overhaul of investment banking and recommends the industry be operated as a public utility if it doesn't learn to manage risks. McGee knows she won't win fans in the industry with this idea, but hints this may be inevitable if more crises ensue.
Joe Nocera, a New York Times op-ed columnist, teamed with Bethany McLean to write the consummate book on how mortgage markets spurred the crisis: "All the Devils Are Here." They write fascinating accounts, for example, on the internal failings and politics at Countrywide, at Washington Mutual, at Merrill Lynch (before BoA acquired it), and among regulators. They spare readers some of the technicals. Instead they present the drama of bankers and mortgage brokers hustling to become rich from originating and selling subprime loans.
For just one summer, the list is almost too much to choose from. Gretchen Morgenson, a Times business columnist, and Joshua Resner paired up to pinpoint leaders who were responsible for the troubles at Fannie Mae and Freddie Mac in "Reckless Endangerment." Times business columnist Diana Henriques offers her account of the Bernard Madoff scandal in "Wizard of Lies." She was the first journalist to interview Madoff in prison. Roddy Boyd, not from the New York Times, jumped in to tell the tale of what happened at AIG, or more notably how its derivatives-trading unit contributed to the mortgage mess: "Fatal Risk."
One new book sought to explain the mechanics and virtues of high-frequency trading, although nobody has yet written the book on last May's "flash crash," a subject that might be too cumbersome for a general reading audience.
Even with the cascade of books, nobody has sufficiently tackled the pressing issue of how banks will evolve and be profitable in the face of new regulation and reform. Many argue that greater amounts of capital help banks survive or withstand tough times. But not many have figured out ways for banks to achieve reasonable returns, when more capital will be required. Banks themselves are struggling to figure this out.
And nobody dared to touch the impact of the crisis and subsequent upheaval on diversity? Have the events the past few years discouraged those from under-represented groups from becoming traders, bankers, investors and researchers? Why does it seem as if there are fewer women and people of color in top levels in financial institutions? Do banks, insurance companies, and hedge funds care as much?
For now, for this late-summer period of stomach-churning volatility, most will agree on one thing: Not many right now will want to read a book about bipartisan quarrels and political jockeying occurring on Capitol Hill.
Tracy Williams
Tuesday, August 2, 2011
Team from Tepper Takes ELC's Prize
A Carnegie Mellon quintet of MBAs faced challenging competition from teams from USC and Michigan, but managed to emerge as the winner of the Executive Leadership Council's (ELC) annual business-case competition in Alexandria, Va. in May. (See http://www.elcinfo.com/.) The USC and Michigan teams followed in second and third place, respectively.Exxon Mobil and ELC sponsored the annual competition. ELC has presided over the competition since 2002. This year the topic was energy and the reduction of greenhouse gases. Students from top business schools were asked to present a detailed business strategy outlining America's transition to lower greenhouse gas by 2030 in the most cost-effective way.
Carnegie Mellon's winning team from the Tepper School earned over $35,000 in scholarships. The team from Tepper, a Consortium school, included recent Consortium graduate Jacob Garcia. Other team members included Jesse Alleyne, Ian Buggs, Felix Amoruwa, and Richard Burgess. (USC and Michigan are also Consortium schools.)
Team captain Amoruwa told ELC organizers his group sometimes worked until 3 a.m. to work on the project and had follow-up meetings the next morning at 8 a.m. He said the group's effort "truly paid off for us."
The project was expansive. Teams had to outline plans for the nation to meet energy goals without incurring excessive costs. They had to identify areas of public and private investment and job growth. And they were required to specify ways to recruit more African Americans and other under-represented minorities to work in energy. Over 50 teams from business schools across the country participated.
The Carnegie Mellon team will be honored at the ELC's annual gala dinner in Washington, D.C., in October. The team will also participate in leadership activities in New York in the fall.
Consortium student Garcia graduated from Tepper in May, where he concentrated in marketing, strategy and quantitative analysis. Tepper student Alleyne, a rising second-year student, was also a winning participant in case competitions sponsored by McKinsey and Deloitte. Buggs, a recent Tepper graduate, was president of the school's graduate business association.
Tracy Williams
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