The alchemists of finance
by
Tim McKeough
AT LEAST since 1823, when Byron's Don Juan described "Jew Rothschild, and his fellow Christian Baring" as the "true Lords of Europe", investment bankers have inspired awe, envy and, rightly or wrongly, a measure of disdain. Exactly 100 years ago the undisputed patriarch of the modern industry, J. Pierpont Morgan, stemmed the Panic of 1907, a financial crisis caused by unregulated trusts (the hedge funds of their day). Acting, in effect, as lender of last resort from his Wall Street office, he was briefly feted before Americans realised the danger of having such power vested in one man. Cartoonists then mercilessly mocked him. After his death in 1913 the Federal Reserve was set up.
The investment-banking industry was further constrained during the Depression of the 1930s, when Wall Street firms such as that founded by Morgan were split into commercial banks and securities houses. The latter today's investment banks underwrite stocks and bonds and advise companies on mergers and acquisitions, rather than collect deposits and make loans. In the 1980s and 1990s they developed a reputation for gluttonous excess. But a lot has changed since then.
Intensely private partnerships have become publicly traded companies. Commercial banks such as Citigroup and JPMorgan Chase have muscled back into investment banking. And European warhorses such as Deutsche Bank, UBS and Credit Suisse have joined the race for global supremacy. The bets, and the profits, have got bigger, though investment banks are trying to keep quiet about that, for several reasons.
First, they are under more scrutiny. Wall Street firms had their wings clipped by Eliot Spitzer, New York's former attorney-general, for plugging worthless shares during the dotcom era. Being publicly traded companies has tamed some egos, too. Star traders do not enjoy the same headroom on salaries (albeit very large salaries) as they did when they were partners in the business. At UBS, a Swiss bank which in 2000 moved into the American equity markets by merging with PaineWebber, a brokerage, "fiefs" are explicitly banned. Richard Fuld, boss of Lehman Brothers, a fast-growing Wall Street firm, imposed a "one-firm culture" when it was spun off from American Express in 1994. Now, says Scott Freidheim, a top executive, Mr Fuld uses "culture" in speeches more often than any other word except "the".
Meanwhile another group has overtaken the investment banks in the excess stakes: their money-spinning clients in the private-equity and hedge-fund industries. Already they throw the biggest parties, do the boldest deals and launch the most celebrated initial public offerings. The IPO of part of Blackstone, a private-equity group, might well raise more money than Goldman Sachs's did in 1999, when even the company's doormen and drivers became extremely rich.
