Wednesday, December 21, 2011

Getting Real: Opportunities for 2012

Let's get real. As we turn the corner and head toward an uncertain 2012, where are the real opportunities for MBA finance professionals?

What's the real scoop? In an environment where some tip-toe when they project better scenarios next year, but where every other day large banks announce lay-offs by the thousands, what's the real story?

Who's  hiring? Who's promoting solid performers? Who's luring those interested in finance and promising long-term career paths? Where are the sectors or institutions that will harbor finance pros and allow them to grow, contribute and thrive over the the next few years?

Let's take a glance and gauge vibes and signals across the sectors.

1.  Investment banking, corporate finance.  From now until about mid-2012, you know banks won't commit. Uncertainty forces them to be hesitant. They'll want to see sustained trends in an economic recovery. Until then, banks will resort to old-time habits of firing rashly and excessively, but hiring too aggressively when signs point to more deal flow. Some banking sectors (Asia, financial institutions, e.g.) are thriving more than others. But even those change from quarter to quarter.

But old habits mean when the tide picks up (or when deals rush through the door), the doors of banks open, and they welcome new contributors at all levels. 

2.  Investment banking: equities, fixed-income. Who knows?  Groupon, Facebook, Zynga, and Linkedin IPOs or projected IPOs were supposed to kick-start the equities sector. Low interest rates were supposed to encourage companies to refinance and get comfortable with debt levels.  But regulation (especially from the new Dodd Frank rules) is forcing banks to restructure their trading desks and the complementary role investment banking plays.

Some analysts project fixed-income sectors will diminish in importance because of the lingering damage from the mortgage castastrophe and banks not being able to offset declines in fixed-income revenues with fixed-income banking fees. Some project equities units will soar and thrive, when markets improve, because of higher fees from deals.

2.  Investment banking, mergers & acquisitions.  Read between the lines or current deals. All depends on the industry sector. Many industries wait for entrenched signs of growth before they acquire companies or merge with a peer. Other industries, because of business conditions, must consolidate, restructure, or sell off divisions to survive. M&A groups stand ready to advise on any kind of corporate reorganization that exists.

New regulation won't tarnish this business too much, since it's fee-based and doesn't often require banks to use too much of their balance sheets. Opportunities for M&A pros in selected areas will always exist, as long as they're comfortable with a lifestyle of few holidays and weekends and arduous travel.

3.  Bank sales & trading.  Expect few opportunities. Profit opportunities are disappearing. Regulation, compliance, and market volatility have combined to become an avalanche. And banks, after careful analysis, are choosing to get out of the way. Expect gradual reductions in staff across the board. Some are deciding that trading requires too much effort, pain and compliance just to squeak out a few basis points of revenues or tiny profit margins.

Banks are restructuring their trading desks, because they must. Some will depart from all trading activity, except from bare-bones customer-flow transactions. Many (J.P. Morgan, e.g.) have already reduced staff in commodities substantially. The new Volcker Rules will change the game, guidelines and profit dynamics.  Some will rationalize maintaining a presence in certain trading areas if they can offset declines with gains in business elsewhere, if that's possible.

They know their best traders will flee for hedge funds and take entire desks with them, and there's not much they can do about it.

4.  Risk management. Right after the financial crisis, this was the "growth area" in most financial institutions. Banks, firms, and funds hurried to ensure they had experienced, wise risk managers in place. They reviewed governance policies and rewrote them to give risk managers sufficient authority to confront the next crisis.

They even re-branded risk units to attract and keep talent. Risk management would be a destination unit, not a temporary stop-off between corporate finance assignments. Since then, the rush to reorganize and re-emphasize risk management has slowed down, but few institutions will want to be seen as reducing risk staff or risk support during challenging times.

At many firms, you seldom hear about drastic cuts in risk staff. Risk management, you can argue, is the glue that keeps Goldman Sachs in order. The lack of a strong risk organization, some argue, is why MF Global failed.

5.  Corporate banking.  Corporate banking, or old-fashioned relationship banking and corporate lending, regained prominence in recent years. Big banks, fatigue from the ups and downs of investment banking, rediscovered the benefits of corporate banking:  a stable revenue base from lower-risk products and a loyal, committed client base that rewards banks for service, not for dramatic board-room pitches.

 Many banks continue their renewed emphasis on corporate banking and project hiring experienced bankers. They are also designing new paths for new MBAs, especially for those who never contemplated such a career while in business school. 

6.  Bank treasury services, funds transfer, custody and cash management.  The other half of nuts, bolts, blocking and tackling of service banking. Big firms re-emphasizing corporate banking must also have superior service products, too.  Banks in the past were often careless in their efforts to attract strong product managers or marketing experts from the outside or from within.

Lately, however, some (J.P. Morgan, e.g.) have successfully convinced former investment bankers to transfer into these areas to energize mature (and sometimes moribund) business units.  Banks, nonetheless, haven't yet rationalized a comparable compensation program for those ex-investment bankers and may not be able to.

7.  Corporate treasury, financial management, financial analysis.  Ah, breaths of fresh air. Amid all the market turmoil and difficulties at financial institutions, blue-chip companies are quietly reporting strong earnings, investing in new markets, and projecting reasonable growth. The finance units in these companies continue to recruit aggressively at business schools; some have convinced top graduates to by-pass Wall Street.

They promise more stability, opportunities to work in foreign countries, and worthwhile management experience. A financial analyst job at Ford or General Motors (popular destinations for many Consortium graduates) might have become fashionable again.  Or a position in corporate strategy at Eli Lily or Pepsico is a desirable first job.

8.  Private wealth management. Almost every bank in the country has decided to devote capital and attention to this sector.  Almost every bank is attracted to a business model of aggressive accumulation and gathering of client assets, which lead to stable revenues, steady growth, and fewer headaches from market risks, regulatory threats, and an uncertain corporate clientele.

At least for now, before too many banks chase too few clients or too little in assets (or clients get too frustrated with market performance), everybody agrees this is the hot hiring growth spot in the year or two to come.

9.  Community banking and development, retail banking. Some institutions see long-term growth in brick-and-mortar banking. Some don't.  J.P. Morgan Chase and Bank of America have seen it. Citi sees it overseas. HSBC or BNY Mellon didn't see it.

Those that do will continue to acquire branches, hire more managers and staff, and provide more face-to-face banking services, even if it's not always easy to justify the efficiencies of such expansion.  As long as they attract more and more customers (especially those who prefer a personal touch) and as long as those customers bring their deposits and their ongoing personal needs (mortgages, car loans, credit cards, e.g.), they can justify it.

Not many MBAs from top schools (including many from Consortium schools) have conventionally expressed interest in retail or community banking, but many with experience have eventually turned toward these sectors when opportunities arise.

10.  Hedge funds. Hedge funds stumbled through a tough 2011. They have admitted to their investors they were caught off guard with troubles in Europe and U.S. budget-deficit fuss. But funds tend to forget the past. Or at least they try to.

Others close up shop and reopen in a different incarnation. They move on and start anew.  They know, too, they'll benefit from banks being forced to downsize proprietary trading.  There will be opportunities, but the industry, as always, will still be difficult to break into. Hedge-fund managers hire cronies, classmates, former colleagues from other trading experiences, graduates from the schools they attended, and sons and daughters of  classmates.

11.  Venture capital and private equity (financial sponsors). This is the industry of home-runs and American-dream stories of earning millions inside the proverbial five-year window. Opportunities for firms and funds to make money exist in good times (new markets and mature markets) and in bad times (distressed assets, bargain-basement prices, and restructurings). There are some (KKR, e.g.) who have even discovered ways to make investments in battered Europe. But the doors to get inside this industry are difficult to penetrate. Now, next year, and for years to come.

Some (Blackstone comes to mind) have tried to be open-minded about opening their doors to a wider array of talent and backgrounds, partly because a few have become public institutions or have been contemplating going public. 

12.  Asia, Europe, South America, China.  Of course, Europe is in turmoil, and experts project the likelihood of continued problems. Banks there are besieged with issues and capital challenges. Few European institutions (UBS, RBS, Deutsche Bank, HSBC, e.g.) are heralding opportunities while the continent tries to right itself.

Meanwhile, financial institutions everywhere continue to have expansion eyes on parts of Asia, South America (especially Brazil), and China.

13.  Diversity initiatives. When institutions struggled to remain alive after the Lehman collapse, many initiatives and much enthusiasm for diversity slipped. You could hardly get a CEO or sector head to discuss the topic, much less attend a meeting or conference call on the topic.

Some enthusiasm has revived since then, partly because some institutions see the long-term benefits and genuinely believe it's a way to hire top talent.

We've reached the corner and are headed toward the new year. Uncertainty prevails, but the mood isn't one of hopelessness or disenchantment.  It's about caution and picking the right spots, the right places, and the most optimistic and resourceful institutions.

Tracy Williams

Monday, December 12, 2011

Approaching 2012

Trying to project 2012 is like reading tea leaves. Who's willing to make an informed, detailed forecast and be comfortable and confident about it? The variables are too numerous, too complex, too bewildering.  If you are a finance professional, an MBA student or a Consortium alumnus, how do you brace and prepare for next year--a year of turning points and pivots with Europe unable to make up its mind about a corrective course and with U.S. elections hovering?

By now, we have grown weary of the tail end of 2011 and are ready for the year to get going. Early in 2011, business and financial signs were uplifting. We were poised for a sustained upturn until we fell off a cliff in August. Since then, we've feared a repeat of the fall, 2008, with a different set of plots, twists and finger-pointing.

The plot this time revolved around the bickering in Congress about budget deficits and debt levels and bickering in Europe about debt levels and budget deficits. The collapse of MF Global and its unexplained loss of a billion dollars of customer funds caught everybody off guard. Jon Corzine, its CEO, was supposed to have brought Goldman magic to the struggling futures brokerage. Insider-trading scandals, pending financial reform, and general economic malaise complicate the plot.

Markets meanwhile swooned out of control, with a mind wandering on its own, reacting irrationally to whatever announcement, statistic or trend happened to be the worry of the day. 

Financial institutions, rebounding with a blaze with 2010 profits and gearing up to hire in large numbers, began to stumble. Trading losses hurt their bottom lines, and many are still crippled from mortgage-related businesses. It didn't help in late 2011 when the public perceived big banks were creating fees (ATM fees, checking-account fees, debt-card fees, whatever) out of the blue, unnerving retail customers.  Financial institutions around the globe continued to duck slings and arrows from critics, pundits, politicians, and economists.

Nonetheless, amidst this apparent mess, lately there has been a quiet seepage of good news on employment fronts, retail spending, and general confidence. Facebook still wants to proceed with its public offering, and major banks everywhere continue to push hard in certain areas--wealth management, community banking, e.g.

What do finance professionals--both the MBA student and the experienced, senior executive--make of this confusing environment? How then do they approach 2012, when many expect a market holding pattern as Europe endures a few more scuffles before it figures itself out?

For MBA students, including Consortium students across the country, the environment seems like a whirlpool--enticing, but constantly stirring. Students are unsure when and how the waters will calm down. They are forced to adopt a Plan A, then a Plan B, and likely a Plan C.

Financial institutions are sending mixed signals. They want to hire more interns and first-year associates in private wealth management, in corporate strategy, in treasury, in corporate banking, in risk management, and in spots in Asia. But then they change their minds, reduce their expected hiring numbers, or announce large-scale cutbacks in the areas they previously promised to emphasize more.

Students are wooed by major institutions, but they know they must be purposeful and diligent in finding the right spot at the right place.

More experienced finance professionals are thankful they are in substantive roles. But the memory of 2008 is haunting. They endured the crisis, many survived it, some repositioned or rebranded themselves and landed elsewhere. However, they know what can or might happen. Although 2011 is not 2008, they can't help but wonder whether a Euro collapse could be more devastating than a Lehman downfall. How do we, they must ask, prepare individually for what could happen in a way that we weren't prepared before?

Experienced MBA graduates (including many Consortium alumni in finance) know better this time around they should take efforts to manage the uncertainty around them or shrewdly insulate themselves from career risks that may or may not happen.

Experienced professionals, however, could be the ones who guide younger MBAs who are unsure if a financial hurricane or financial sunshine looms ahead. They can compare the current scenario with other periods in recent finance history. Is this a scaled-down repeat of 2008? How do these times compare to periods of market upheaval or market confusion during the dot-com blow-up of the early 2000s or the maddening sequence of Long Term Capital, Russia and Asia defaults in 1998? How is the industry better prepared now (or less so) than in struggling times in the past? Are we in the midst of a real recovery, but we don't see it because we are blinded by the turbulence across the Atlantic?

More senior professionals, in a mentoring role, can advise younger professionals and students on how to focus on daily, immediate tasks and have confidence in what can be controlled--the next project, the next presentation, the new opportunity to learn.

Approaching 2012 is like turning a corner. Perhaps around the bend lie opportunities, optimism, profits and improved times--not the daunting signals of a crushing, long-term slowdown.

Tracy Williams

Tuesday, November 22, 2011

First-Year MBAs: Internships and Recruiting

What are current sentiments, trends, and outlook, as MBA students prepare for a tough job market in 2012-13? What are the best tools, advice, and guidelines to get ready?

The Consortium Finance Network hosted a webinar Nov. 22 for first-year Consortium MBAs in finance to discuss strategies for recruiting and securing internships for the summer, 2012.

Panelists included Consortium graduates Eddie Galvan, Denzil Vaughn, and Enoch Kariuki. CFN founding members Tracy Williams and Camilo Sandoval (also a Consortium alumnus) and the Consortium's D-Lori Newsome-Pitts organized the webinar.

Fortunately for students, the hiring environment for 2012 is not as discouraging as it was in 2008-09, when financial institutions worried more about survival than bringing aboard new MBAs.  Yet with announcements every other day from banks about rounds of lay-offs, finance students know the task of winning an offer for a meaningful internship will be tricky.

Market volatility in recent months, frenzied discussions about U.S. debt reduction, a stumbling economic recovery and persistent rumblings from Europe all have impact even in hiring MBA students.  The webinar provided strategies for new students.

Panelists said there is some optimism--despite all.  Financial institutions are in better shape now than they were in 2008. They have stronger capital cushion and are flooded with cash reserves, although they momentarily are suffering from trading losses or slow deal flow.  They are, however, hopeful they'll get over a late-2011-2012 hump, endure a long election year and want to be prepared for 2012-13.

Many large firms, panelists said, are optimistic and hopeful, but cautious. There are areas of opportunity (private banking, risk management, middle-market banking, e.g.), but there are also areas of decline or little hope (some sectors in trading).  Financial reform, not just economic conditions, will also affect recruiting trends. 

For now, financial institutions this fall made the rounds at Consortium and other top business schools, as they usually do, no matter the environment. A few canceled planned presentations on campus--still unsure about deal flow, new clients, new business, and costs to support business efforts in the short term. Most institutions are struggling to count how many spots for MBA internships it will offer.  The same institutions have a decades-long history for not getting the number right (over-hiring, under-hiring, and doing so too quickly). They certainly have a habit for changing the expected number throughout the process.

MBAs, nonethless, throughout the post-crisis fracas, continue to have degrees of interest in finance. Over 80 students in this year's Consortium first-year class expressed interest in financial services, banking, sales & trading, investment research, and asset management.

Panelist during the webinar provided a road map for students.  How do you take advantage of networks? How do you choose the right finance sector, culture and fit?  Why is it important to keep up with current topics?  How do you confront technical interviews?  Will you succeed in certain environments? How do you impress an institution where you prefer to work? How do you control and master rounds and rounds of interviewing?

Panelists shared stories of how they chose to work at a certain firm, why they chose one firm over another, or why they took a detour and went into a non-banking role.  They showed, too, how they tapped networks to find opportunities.  They advised on how students can manage academics, recruiting and keeping up with trends and events in markets. They reminded students to handle technical interviews with confidence and preparation.

They discussed trends in diversity. Are the major institutions still committed? Will institutions be committed in all times--good times, downturns, booms?

And once you have the offer, how do you negotiate and accept it? How do you make sure the summer internship leads to a full-time offer?  Panelists shared their experiences.

CFN, upon request, will share details of the presentation to Consortium students and alumni.

Tracy Williams

Venture Capital: Diversity Update

If you were to peep inside the corridors of most venture capital firms, including those in pockets of Silicon Valley or those scattered about Manhattan or in the Boston suburbs, would you see encouraging signs of diversity? Would you see a diverse environment, an inclusive culture, or a setting where those from under-represented groups are deeply involved in investment discussions, analyses, presentations, and decision-making?

In those same venture capital firms, would you see women, blacks and Hispanics in prominent professional roles?

Not really, says a survey from the National Venture Capital Association ( Would you be surprised? Not really, the survey also shows.  The business of venture capital (investing in promising start-ups, nurturing new ideas, coaching young entrepreneurs, and facilitating financing in second and third rounds) has a long way to go.

The survey was taken in mid-2011 and follows a similar survey from 2008. The survey was sent to investment professionals and to those in a variety of administrative roles.  About 600 responded, providing answers to questions related to race, ethnicity, background and education. Whether optimally scientific or not, the responses weren't surprising. Women, blacks and Hispanics still do not have significant roles in venture capital--at least at the big, world-shaking firms. 

What did the survey tell us?

1.  Women are not prominent in major roles at venture-capital firms.  Only 11 percent of those in investing roles are women, a decline, in fact, from 2008 (14 percent).

2.  Women are more involved in life sciences and clean technology (18 percent), less involved in non-high-tech businesses (8 percent).

3.  There are signs of progress. Women (both investing professionals and administrators) comprise 28 percent of those under 30.

4.  Blacks and Hispanics are virtually invisible in the industry, and there has been little or no progress the past three years. African-Americans and Hispanics (combined) comprise 2 percent of all survey respondents (both investors and administrators)--down from 3 percent in 2008.

5.  There are few signs of progress among Blacks and Hispanics. They comprise 3 percent of investing professionals who had less than five years of experience (those who are among the most recent hires).

6.  Asians and Asian-Americans have a greater presence at venture-capital firms, but not in significant numbers:  9 percent of all respondents this year, 17 percent of all investing professionals with less than five years of experience.

7.  Alumni from prominent graduate schools are present in large numbers at top venture-capital firms.  Almost 80 percent have master's, J.D., or Ph.D. degrees; about half have MBAs.  Graduates of Harvard, Stanford, Yale, Penn, MIT, Berkeley, Duke, Norwestern, Michigan, and Columbia comprised about half of all the respondents.

8.  More than half of respondents had spent some time in their careers as consultants, investment bankers or attorneys, suggesting that one of the best ways to enter the field is to have started out first and gained meaningful experience in one of these roles.

Why are the numbers for under-represented groups woefully low? 

Why hasn't there been progress? Is there something that keeps or discourages blacks, Hispanics and women from large-scale entrepreneurial activity and from participating in expected profits and large windfalls from sales of private stock or IPOs?

As most know, the top venture-capital firms tend to be concentrated in hotbeds of entrepreneurial activity, where firms have close access to new ideas, innovation, and eager entrepreneurs, but also access to capital and investors.  Silicon Valley and the greater San Francisco area are well-known homes for top ventures firms, but so are Boston, Chicago, and New York.

Top firms, based on the number of deals they've done over the past few years and the amount of capital they manage, include Sequoia Capital, Andreesson Horrowitz, Draper Fisher, Kleiner Perkins, General Catalyst, Accel, Charles River Ventures, Khosla, Oak Investment, and Greylock--many of whom are members of the NVCA and likely had employees and investing professionals who participated in the survey.

Why are those from under-represented groups not intimately involved in the promise, innovation and profit-sharing of venture investing?

1.  The venture-capital world is private, clubbish.  "Members" know each other well from previous deals, affiliations, and experiences. They know each other in previous roles as bankers, lawyers, and consultants. They may, in fact, know each other from school. They invest in deals and funds within the club; they hire among each other or tap investing talent they know among themselves.

Some firm leaders might have been entrepreneurs before. They benefited from financial support and industry guidance from other venture firms.  The survey said more than 15 percent of investing professionals at venture firms were CEOs or heads of other start-ups.   Many managed start-ups through early stages, reaped large benefits from the sale of their enterprises, and then invested the wealth in new venture funds. Marc Andreessen, a Netscape founder, and Peter Thiel, PayPal's founder, are now widely known as venture investors.

2.  Venture firms are narrowly focused on the next deal, the next new idea, and the next entrepreneur who has a "disrupting" vision. They are seldom motivated by or caring enough to ensure diversity among their professional staff. Institutions, investors, and funds that provide capital for the venture fund don't hold firms accountable. Because transactions and relationships are private, they aren't likely to push  to make firm's culture inclusive and or push to provide opportunities for those from a variety of backgrounds.

3.  Venture firms, not held accountable and operating in closed-door environments, are likely to be unaware, uninformed or unperceptive of diversity's benefits.

4.  Venture firms tend to be marginally staffed. They include investor professionals, principals, partners, analysts, and researchers. They also include attorneys, administrators, and financial staff.  They are not likely to have personnel who pursue diversity-related initiatives and programs, who hold the firm's leaders accountable to fairness, opportunities and diversity, or who prompt the firm to catch up or keep up in related issues.

5.  Venture firms aren't likely familiar with diversity pipeline programs or aren't aware that blacks, women, and Hispanics in numbers are interested in venture capital, private equity and fund investing and attend the same top business schools that their leaders did.  Blacks, Hispanics, Asians and women who find their ways into the sheltered cultures are likely to have attended the same schools and found a pathway from school ties, summer internships, or experiences in investment banking or consulting.

Despite the dismal numbers, some African-Americans, Hispanics and women have punctured the closed doors.  Some have started their own funds or have found a way into top spots at the bigger venture capital or private-equity firms (Ronald Blaylock's GenNx360 Capital, e.g.).

Nonetheless, applaud the NVCA.  First, it dares to conduct such a survey and report its results widely, even if there isn't yet much to celebrate while progress is stiflingly slow.  Second, it states it has objectives to improve the numbers.  Its president Mark Heesen said in a recent release, "Ideally, we would like to see a professional base that reflects the entrepreneurs in which we invest, one that is robust and diverse in terms of gender, ethnicity, nationality and age."

In other words,the NVCA is daring to hold the industry accountable, if it doesn't do so itself.

Tracy Williams

Tuesday, November 8, 2011

MF Global: Too Small to Save

Not the same impact as Lehman
Late last month the world of finance, brokerage and trading experienced a hiccup--beyond the daily eruptions from Europe.  It wasn't yet another day of market swoons or showdowns in Europe.  It wasn't yet another day of a nose-dive in the Dow or headline disagreements on how the economy should recover.

MF Global, the futures brokerage firm, filed for bankruptcy.  It was deemed too small to save. MF Global was not a household name (but so wasn't Bernard Madoff before the world found out about that fraud). Few outside the industry knew much about MF Global. Some knew that former New Jersey Governor Jon Corzine was its CEO. And they knew Corzine had been the head at Goldman Sachs in the 1990s.

MF Global was known as a major player in futures and commodities brokerage. It had institutional client accounts with hedge funds, pension funds, corporations, banks, other brokerages, and other trading firms. It facilitated futures and commodities trading on all the important derivatives exchanges around the world and special trading over the counter.

For the most part, it acted in intermediary roles, a broker for clients who wished to engage in futures and commodities trading for hedging purposes or for taking a bet or view on interest rates, crude oil, foreign currencies, or stock indices.  Clients deposited funds at the firm, and the firm facilitated trading at futures and commodities exchanges or "over the counter." It earned commissions (or "mark-ups"). Client funds not yet deployed for transaction purposes were supposed to be deemed "safe" and "segregated."

MF Global was supposed to be somewhat insulated from virulent swings in markets, as long as there was some activity or some transaction for which it could charge a commission. While clients try to hedge against market swings, MF Global is supposed to thrive in market volatility, not suffer inexplicable trading losses that lead to bankruptcy.

Entered Corzine, recovering from a devastating loss for reelection for a gubernatorial term in New Jersey and perhaps hoping to write a thrilling second chapter to his career on Wall Street.  He felt he could be the catalyst to wake up a sleeping MF Global, which had stumbled through a few performance and risk-management issues before he arrived.

To provide earnings spark and improve performance, Corzine felt he needed to reinvent MF Global. It wouldn't move away from its core brokerage expertise, but it needed to be more daring. It would take risks in the same way Goldman evolved to become a trading powerhouse under his helm in the 1990s.

MF's demise has caused ripples in markets, not a Lehman-like thunderous roar. Its disappearance won't be a threat to the global financial system. But many market participants wonder whether other medium-sized brokerage houses are similarly vulnerable or could be next. Who could be next? Unfortunately, too, at MF Global, regulators are scrambling to locate hundreds of millions of dollars of missing customer funds. Many experienced brokerage personnel at the firm must look elsewhere for work. (Over 900 were let go this week.)

What happened at MF? What hastened its demise?

1.  Corzine likely tried to hard too fast to replicate parts of Goldman and had a stubborn belief in his old, successful ways. About a year after Corzine had settled in, MF Global started to suffer substantial losses from leveraged bets on Europe sovereign debt this year (exploiting its access to "repo" markets and credit-default swaps, but stumbling soon thereafter).

2.  Risk management lacked a voice or authority to restrain the trading and the firm's piling up of risks. It certainly lacked authority to second-guess Corzine. He presided over a risk-management structure that didn't allow risk managers to say "no" or "slow down."

3.  MF was non-responsive to regulators' persistent requests to increase its capital base.  Capital might have been adequate for a pure-brokerage role, but it wasn't when it began to engage in proprietary trading on a large scale. Instead of boosting capital to comply with requests, Corzine and team would lead arguments for why it felt new capital wasn't necessary.

Are there lessons to be learned from the MF Global mini-crisis?

1.  Leveraged trading is still risky, even if it involves trading government securities.

2.  Risk management within financial institutions must have an authoritative voice to be effective.

3.  Old, successful ways of making money in trading may not be magical and profitable at a different firm in a different era in apparently different market scenarios.

4.  Plain-vanilla brokerage and banking businesses may not always lead to stellar returns, but can help ensure long-term survival.

What happens over the next year or two?

1. The bankruptcy will run its course. It will continue to be a business headline, because customer funds and deposits are missing and can't be accounted for. Regulators, market watchers, and business media will persist in asking how that could happen. They will blame woefully inadequate operations, and some will suspect fraud.

2.  Exchanges and regulators will ponder rules changes to discourage futures brokerages from taking big proprietary-trading risks. As with other financial reform, new rules will be thoroughly discussed, but won't be implemented soon.

3.  MF Global will become a broker/dealer-industry footnote like Rothshild, Hutton, Refco, and Drexel. That it will become a footnote in the history of finance is probably good. It meant it was too small to save, just a market ripple.

Tracy Williams

BE's Who's Who on Wall Street, 2011

Chris Williams of Williams Capital
After financial turmoil in 2008-09, Black Enterprise magazine decided to wait a year or two before presenting its occasional list of the most powerful blacks on Wall Street. It figured it needed to watch the shake-out in the industry and observe the impact on African-Americans.

In its latest issue (, it decided now is a good time to update its list, although Wall Street, banking and trading have experienced many bumps and bruises in 2011.  It failed to answer conclusively whether African-Americans took unfair, backward steps in diversity progress among top banks, brokers and financial institutions.  Everybody took hits during 2009-10, all groups and genders, including African-Americans in entry and middle-level roles. We all saw the industry reduce staff by the thousands during the crisis.And we saw how some on their own fled the industry to avoid stress and uncertainty or to explore other opportunities with less strain.

With signs of an upturn in 2010 and with institutions recommitting themselves to older diversity initiatives, it's not yet clear whether blacks are returning to Wall Street in the same numbers as before. Banks are reaching out to hire African-Americans interested in banking and finance, but like many in the population, blacks may not be raising their hands as they did in the 1990s and early 2000s. Many don't want to confront anxiety, possible layoffs, and going to work not sure where the industry is headed in the next year. Many on the inside confront that now, as we head into bonus and appraisal season.

In its latest list, however, Black Enterprise observed that many senior African-Americans in the industry continue in senior roles.  The latest list includes familiar names, people who have been top players in investment banking, investment management, and private equity for the past 10-15 years; some more than 20 years.

Many on the list include top executives of familiar black-owned firms:  Chris Williams (above) of Williams Capital, John Rogers of Ariel Investments, Bernard Beal of M.R. Beal, Tracy Maitland of Advent Capital, Donald Rice of Rice Financial, James Reynolds of Loop Capital, and Calvin Grigsby of Grisby Associates.

The list also includes known investment bankers, managing directors or senior advisers at top banks--those prominent in mergers and acquisitions, corporate finance, municipal finance or corporate advisory: Raymond McGuire at Citi, Rodney Miller at JPMorgan, Carla Harris and Melissa James at Morgan Stanley, and William Lewis at Lazard.

It includes an impressive number who have made their marks in private equity:  Ronald Blaylock, founder at GenNx360 Capital, Terry Jones of Syncom Venture Partners, Raymond Whiteman of Carlyle, and Adebayo Ogunlesi at Global Infrastructure (a GE venture).

Most of the above have had long careers on Wall Street (more than 20 years); many started at major banks and moved on to start their own firms after gaining experience, contact and access to capital. 

The BE list includes a couple who made their names elsewhere, but turned to Wall Street in the latter parts of their careers:  Robert Johnson of BET fame and fortune is on the list for having started a middle-market private-equity firm.  Vernon Jordan, best known for his roles at the National Urban League and as a Clinton presidential insider, is a senior managing director at Lazard.

The list, for some reason, excludes Roger Ferguson, CEO of TIAA-CREF, the large retirement fund with over $480 billion in assets. Ferguson is also a former governor at the Federal Reserve.  And it excludes Kenneth Chenault, CEO of American Express, arguably more powerful than all 75 on the current list. Black Enterprise couldn't have forgotten him, since it has featured him often on covers and in articles over the past two decades. 

Black Enterprise's list shows where there might be gaps on Wall Street, segments of financial services where blacks have virtually no role, are negligible in numbers or have not been able to penetrate at all--even if they have desire and interest. The list, for example, doesn't include many blacks who are sufficiently senior to be included in equity research, industry analysts who present their financial views of companies publicly and whose opinions about specific companies or macroeconomic trends can move markets in minutes.

Notably, the list doesn't include many African-Americans who are senior traders at prominent hedge funds or high-frequency trading firms or who are partners at Silicon Valley venture capital firms. That might not be an accident. Market-influencing hedge funds, high-frequency trading firms and ground-breaking venture firms are private. They operate in hush-hush environments. They tend to hire among small circles in tight networks and are indifferent to the benefits of diversity. Young African-Americans learn about these firms at business school, in exploring opportunities in finance, and from networks.But they have tough times when they knock on those doors--at least in junior positions.

Black Enterprise's list, once again, shows there are indeed many blacks--even post-crisis--who aspire to careers on Wall Street, who want to trade, invest, do research, manage portfolios, advise companies and finance start-ups, who want to help companies and municipalities fund operations, and who want to consider starting their own boutiques and shops when they are ready.

Tracy Williams

Thursday, November 3, 2011

Here They Come, the Volcker Rules

Like it or not, the Volcker rules are coming. Ready or not, banks confront the new reality. Banks reported a gush of trading-related revenues in the 2000s. Going forward, they will not be permitted to engage in proprietary trading in the way they have done successfully the past decade.

Banks, including old commercial banks and investment banks that turned into bank holding companies,  maintained trading units and ran them like internal hedge funds. They were allowed to use capital to support trading in most any instrument they felt they had expertise in or perceived profit opportunities. They  traded equities, held positions long or short, traded equity derivatives, and traded equity-linked swaps. Big banks, like JPMorgan, Citi, or Goldman Sachs, reported profits, had substantial roles in all markets, and attracted talent. Small community banks shied away.

They could execute "black blox" trades, high-frequency algorithms, or deal in"exotics." Analysts described Goldman as a trading firm or hedge fund disguised as an investment bank. Morgan Stanley, for many years, operated a closed-doors proprietary trading group, featuring traders with doctorates with complex ideas about exotic trades and statistical arbitrage.

Banks organized and managed desks in bonds, structured notes, mortgages, foreign currencies, convertible bonds, options, and high-yield debt.  They traded in every imaginable derivative--from currency swaps to credit-default swaps and asset-backed indices. They took positions, took risks in market trends, and bet in the long term or short term.

And none of this trading was required to accommodate customers, although selling to or buying from investors who were clients was a significant part of the business.

Dodd-Frank and other bank regulation around the globe are curtailing prop-trading at commercial banks, at bank holding-companies, and at any financial institution that has a deposit-taking business in its vicinity.  For months, banks have been re-engineering their operations to comply with expected rules changes. More important, they are scrambling to figure out how they will replace profits from trading with other revenue sources to generate similar returns on equity. The clock is ticking.

Or perhaps they will learn to settle for lower returns on equity, but more stable performance from quarter to quarter.

Banks knew the rules were coming, ever since the frantic aftermath of 2008-09 when former Federal Reserve chairman Paul Volcker proposed the abolition of prop-trading at banks. He, as well as politicians, regulators and the public at large, reasoned prop-trading contributed to or exacerbated the crisis. A year after the passing of Dodd-Frank legislation, banks are hustling to offset expected loss revenues, make sense of the rules, and figure out what they can and cannot do.

The rules permit client-flow trading. Banks won't be forced to shut down their trading operations.  They can maintain trading positions if they exist to accommodate a client wishing to buy or sell securities or derivatives. That's not as easy as it sounds.

The rules that explain client-related flow trading are difficult to interpret and even harder to comply with:  If a bank purchases equities from a client and hold them for a week, is that client-related trading? If a bank purchases corporate bonds in anticipation of clients wanting to buy them, is that client-related trading? If a bank purchases securities and re-sells them for an above-normal profit within a day, is that client-related trading?

Banks are huddling among themselves to understand what the rules will permit or prohibit. Banks also are puzzled to determine what is an infraction. The rules, for example, let regulators infer that prop-trading exists if banks report excess trading revenues or volatile trading revenues, even if it appears all trading is tied to a client request.

Trades for hedging purposes will be permitted. Yet hedges are hard to interpret. When is a hedge really a hedge? What if equity positions are hedged 100 percent one day, but market movement causes the same position to be hedged 90 percent the next week? The rules are subject to interpretation. But no bank wants to be subject to a penalty or subpoena. Some banks will not want to absorb unusual legal costs to interpret every aspect of the rules. 

Some major banks (such as JPMorgan, Bank of America, and Morgan Stanley)--especially those with significant institutional and hedge-fund clients--will dig in, continue to maintain trading desks for client flows, and learn with difficulty to live within the rules.  They anticipate declining trading revenues, but hope other client business (e.g., equity IPOs, M&A mandates or cash-management services) will offset the declines.

Other banks--especially those that weren't major traders or those with negligible success in prop-trading--will abandon trading altogether.

The big banks that stick it must invest in systems and hire compliance people to monitor trading activity to make sure they obey rules. They prefer to invest in other revenue-generating projects, but if they choose to retain trading desks, they will learn to live with constraints, limits, and compliance costs.

Banks don't broadcast all the repercussions of limited trading, but there are other implications. Some analysts rationalize the disappearance of prop-trading revenues could push ROEs, customarily above 15%, down to 10% and below, even in the best of times, unless they find offsets or new products and services.

Bank trading arms attracted smart, talented traders, researchers, and black-box theorists. This group will now seek to work for hedge funds, private-equity firms, and broker/dealers.  Cynics argue that's fine, since the same group might have contributed to the exotic products that led to the crisis.

Bank trading units have long been centers of innovation, new ideas, and new products.  Hedge funds and private-equity firms spawn ideas, too. But the Goldmans and Morgan Stanleys with global networks, securities distribution arms, research groups, market intelligence, investing clients and capital often acted as incubators for new products or ways of trading. Lower profitability will discourage them from devoting resources to new products or trading ideas.

Again, cynics, regulators and many in the general public say that's fine. New trading products and ideas should be, they say, developed slowly, and their risks and impact on markets analyzed and studied in depth.

Bank trading units may scale down their market-making and dealing roles. Banks had capital and resources to act as market-makers across multiple products. They provided vast amounts of liquidity in derivatives, bonds, and currencies.  Will liquidity be jeopardized if banks de-emphasize trading? Will banks be less willing to assist institutional clients in hedging strategies or if it wants to avoid penalties lest regulators misinterpret the position?

Tough questions for big banks, but with solutions that might make them uncomfortable for a while.

 Tracy Williams
For more on the Volcker Rules, see also CFN post of June-2010:

Sunday, October 16, 2011

The MBA: Remaining Relevant in 2011

It's nothing new that top graduate business schools across the country stretch themselves to keep up with the times, remain relevant, and enhance the quality of a student's two-year stint in school. Over the past two decades, they have responded to financial crises, evolving corporate needs, questions of ethics, and a global economy. They've even responded to the cries of students who want lavish facilities and daily comfort on campus to justify steep tuition costs.

Once there was a time when a student could leave b-school and sidestep courses related to Asia or Europe business, emerging markets, regulation, ethics and technology. Students today can't avoid these topics and typically don't want to.

Insider-trading scandals from the 1980s and 1990s and accounting and financial fraud at Enron and other companies spurred schools to address ethics in business.  The Internet explosion of the 1990s and 2000s encouraged schools to examine technology and online business models. The financial crisis of 2008-09 has encouraged schools to cover topics in regulation, derivatives, financial reform and "asset bubbles." Emerging economies from India to China and Brazil meant schools needed to become international in scope, experience and research.

Business schools today are more accommodating to students with multiple interests or more more specialized interests.  For a long time, top schools have encouraged or permitted students to pursue joint MBA and JD degrees. Others today pursue joint degrees in business and any one of the following: public policy, public administration, international studies, and communications.

Similarly, they have encouraged (and required) students to focus or concentrate on a specific area of interest:  real estate, energy, industrial management, operations, entrepreneurship, non-profit sector or finance.  Students don't just take core courses and a broad array of general business topics in pursuit of a "generalist" MBA degree. They can pursue in more depth what they are interested in or what they think is relevant and important.

If students are interested in the MBA and green technology, the MBA and developing economies, or the MBA and the music industry, b-schools today at least try to find a way to accommodate them.

In its annual assessment of MBA education, the Economist reports  ( that some schools are exploring all kinds of ideas of MBA concentration, not just the familiar sectors of  marketing and finance. Some schools are responding to business trends or corporate needs. Others are responding to students' interests and a sluggish economy. Many are willing to be creative, as long as they can maintain high quality and attract exceptional students.

The Economist suggests how it makes sense for a school like Washington University with respected schools of business and medicine to offer a special program in, say, "medical-sector management," comprising students and faculty from both schools and with specific disciplines in health-care management and related issues.

Long-time Consortium supporter Joe Fox tells the magazine that ideas such as that are welcome, but are not easy to implement.  Fox, the director of Washington-Olin's MBA program and a Consortium board member for many years, agrees a joint medical-business-school program is attractive and relevant. He contends, however, that while such joint efforts make sense on paper or in concept, they are difficult approve and implement, because they involve cooperation from many--faculty, deans and others. (Washington University's Olin is one of the original Consortium schools.)

Students, too, must decide whether the special programs (including joint degrees or special concentrations) will require more time and, as a result, more expenses.  Will the special program or the joint degree mean three or four years in school (instead of two)? Will there be a sufficient return on this investment, especially in current uncertain times, even if the student has the passion, time and energy to pursue a special program?

Most students, of course, will ask (and are asking) whether there will be meaningful opportunities after they have completed a course of study--any course of study, whether it's a traditional MBA, joint degrees or a MBA with a unique concentration. Will there be opportunities to do what they want to do within the realm of their interests and studies?

MBA corporate recruiters typically don't require joint degrees or special concentrations. But candidates who have pursued unique degree programs can stand out from the large pool of students. They show expertise in a specific area, perhaps ingenuity and a way to contribute right away in an entry-level job. The finance MBA graduate with specialty in, say, "medical-sector management" would be attractive to the health-care finance unit of an investment bank or consulting firm, if not to those who manage hospitals and medical centers.

Business schools keep adapting, as if that's the way it will always be. And the way it should be.

Tracy Williams

Friday, October 7, 2011

UCLA Anderson: Going It Alone?

UCLA's Anderson business school is exploring going it alone. No, it won't completely separate itself from the rest of the university. It wouldn't be an outright secession. It won't relinquish the UCLA name. It has decided there might be greater benefits in becoming a self-funding, stand-alone institution at UCLA. In the process, it is studying how it can rely less on the "parent" university or the state for financial support. In turn, it will request the right to determine tuition and fees, set academic standards, and hire and pay what they wish for top faculty talent.

Anderson, a Consortium school, has decided that if it can control its finances, preside over all fund-raising and decide what value to put in the cost of an MBA degree, it will attract even greater numbers of high-quality students and improve the MBA experience at UCLA.  There is intrinsic value in being affiliated with the greater UCLA, and it is willing to pay a "tax" for that. It would also pay for other services the parent provides (administration, infrastructure, etc.). But it figures that Anderson would be an even better business school, offering exceptional experiences and resources, if it decides to go it alone.

For prospective students and for alumni who experienced and benefited from Anderson, is this the proper course of action? Will there be notches of improvement in the school, but with substantial increases in tuition? Will alumni, supporters and other benefactors be more willing to become large donors?

Moreover, is there a risk in making itself inaccessible to some portions of the population interested in attending a top business school?

This isn't the first time a business school untangled itself from the rest of the university. Virginia's Darden, also a high-quality, public business school, has done something slightly similar. UCLA-Anderson is studying Darden's blueprint and claims to be somewhat self-sufficient already. It says it doesn't rely on state funding as much as many would think.

What will going alone mean for future students and applicants? While this move may permit it to hire the best professors it can find or launch unique, innovative programs of study, will Anderson price out bright prospects (including those from under-represented groups) who won't be able to rationalize "private school" tuition?

The move is still under review. No doubt it is contemplating these questions and studying all implications and more:

1.  Will other first-rate public business schools follow the same? Will it set tuition and fees based on cost and value of a UCLA MBA, or will they (as many schools do) set it by matching rates at other well-known top private schools? Will a San Diego resident be required to pay the same to attend UCLA for an MBA as that at Cornell's Johnson school or Dartmouth's Tuck school?

Will it be able to provide scholarships and financial aid to select students just as much as it has done before? Or will it argue that self-sufficiency permits it to raise more funds earmarked for scholarships and financial aid?

2.  Being somewhat detached and having authority to set its own agenda (including curriculum, expansion, and forays into online learning), will there be tension with the rest of the university?

3.  Will there be inconsistencies with the rest of the university in how it manages itself? Many business schools, including Anderson, exist with appropriate levels of autonomy already, although all business schools must answer, in some way, to a university president and board of trustees. Will conflicts of interest arise because one graduate school within the university operates in a vastly different manner from others?

3.  Will there be impediments or barriers for students interested in joint programs or degrees (MBA and JD, or MBA and MPA/MPH)? Will business-school students still be able to cross-enroll smoothly in other courses in other parts of the university (international relations, law, communications, engineering, e.g.)?

4.  What happens at the business school, if the school's vision becomes too ambitious (too expensive) such that there funding shortfalls? Must the "parent" university promise to step in to ensure the school is always healthy enough to remain self-sufficient? Or will the parent permit it to sustain and prove itself financially viable (and even fail)--alone?

5.  After UCLA, who would be next? Would other top public business schools hop on board and attempt to do the same? UC-Berkeley (Haas), Indiana (Kelley), Wisconsin-Madison, Texas-McCombs, all Consortium schools?

5.  Does this in any way jeopardize its relationship with the Consortium and other diversity pipeline programs? UCLA-Anderson is one of the newest schools in the Consortium, having joined within the past three years (along with Cornell and Yale).

The last item, in fact, might be the easiest to address. Most, if not all, top-tier business schools are proving a commitment to diversity and ensuring their school rolls include people of all colors, backgrounds and countries. A more independent Anderson will likely strive just as hard to be a better and more desirable Anderson. It knows to be better and more desirable, it must also be attractive and accessible to women and those from under-represented groups.

Tracy Williams

Wednesday, September 28, 2011

"What Have You Done for Me Lately?"

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 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

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

Thursday, August 25, 2011

MBA Professors: The Most Popular 10

NYU's Damodaran, tops on the list
What makes an outstanding business-school professor? Ask a few MBA students, and you might get a dozen answers, a dozen criteria, and many examples. 

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 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 (  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

Wednesday, August 10, 2011

A Summer Reading List?

Summer reading lists.  Everybody tends to have a list of books they want to read, they need to read, or they prefer to read, when the days and weeks before Labor Day mean half-hearted attempts to focus on work or dreamy moments of a planned vacation.

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