Alamedia of "Unfogged" Is Puzzled by Investment Banker Compensation Levels

She writes:

Unfogged: The Mysteries of Chet: I have here a special, economics-type query which I direct to Brad DeLong, among others. Here's the thing: I have known many investment bankers in my day. Hell, I'm related to plenty of investment bankers, even if only by marriage. Many of these men are stand-up guys, fun to be with, always up for smoking a few bowls and playing golf. Others are asshole blowhards....

All of them, however, have the same basic character type, which I will call 'Chet'. Chet is a hail-fellow-well-met sort, cracking jokes all the time (some of most of which may be 'politically incorrect', because he doesn't care about things like that). Chet is tall, probably tan, and has big white teeth like a mouthful of chiclets.... Chet is a member of country clubs, and has a thin wife, and two adorable kids, etc. etc. If you close your eyes and imagine a picture in a silver frame on an end table in an apartment on 84th and Park, then you know what Chet's kids look like (super cute!).

Finally, Chet has an incredibly high opinion of himself. He is confident to the point of arrogance, but friendly, outgoing. There is one thing Chet is not, ever, in my experience, and that is particularly bright. Really. Not an intellectual powerhouse, is where I'm going with this. Not, in all likelihood, able to perform complex mathematical operations. Given that this is so, I have a few questions:

1. Is the role of these guys just to schmooze clients for their banks?... [A]re there wonky types behind the scenes, making the actual money decisions? Strangely enough, I take it that there are not, otherwise there would be all these rich, but wonky, investment bankers. As far as I know, there aren't any.
2. So let us say that my sucessful Chet friends at Lazard Freres and whatnot are actually deciding stuff about money. The question is, why them given that they aren't the brightest bulbs on the chandelier? (But can be perfectly nice!)
3. Is this a market failure caused by suceeding generations of Chets selecting other Chets?... [C]ould someone clean up by having a bank with a front office of Chets and a back office of Brad DeLongs? But maybe the colossal failure of LTCM, one of the only times I ever heard of anyone trying to have smart people who knew about economics in charge of a hedge fund, has scared people off Brad DeLongs and back into the welcoming, hearty hug/back-slap combo of Chet?
4. If it's not a market failure, and Chets do just as well as brainiac PhD's in Economics at making decisions about hellishly complex derivatives, then is the whole thing just random?...
5. Why do they all have to be irritating Republicans who are convinced there is some very real sense in which they have earned a multi-million-dollar bonus, when it's so clear to anyone that they cannot possibly, ever, have done enough work to 'deserve' all that money (which is not to say that you can't structure a semi-sucessful company on this basis). It's so very tedious of them. Oh well, they're probably less-overpaid than Fortune 500 CEO's, I'll give them that.

There are a lot of investment bankers who are not "Chets" and who are very smart as I define smart: my brother's bosses Frank Brosens and Ken Brody; Robert Rubin and Roger Altman; the late Fischer Black. Read Emmanuel Derman's My Life as a Quant to get the idea of what life is like for the very antithesis of Chet-hood.

But there are a lot of investment bankers who are "Chets." Indeed, a very smart quant like Emmanuel Derman is (from one point of view) a Chet-enabler: he constructs models and writes programs so that the Chets can, with three keystrokes, know what they have to charge their clients in order to make money for the firm. So Alameida's question is a good one: why are the Chets paid so much?

Part of the answer is that they are sitting at a nexus: a huge amount of money blows past Wall Street, and if you can sit in the right place with a large net, unbelievable quantities of money will be trapped by it.

A bigger part of this answer is that there are four relevant human capabilities here: the ability to master details, the ability to quickly grasp what the salient issues are and follow them through to their conclusion, the ability to work like a dog, and the ability to size up people--figure out quickly who will actually produce something useful and who will not, who will hang tough and who will easily bid more, who will soften if wooed and who will stay hard-nosed. Next to nobody has all four or even three of these capabilities in world-class measure. Fewer people than you think have even two. And for someone who has one of the other three--mastery of detail or skill at analysis or the ability to work like a dog for ungodly periods of time--mastery of Chet-hood is a very valuable and lucrative skill.

Consider Felix Rohatyn, running the auction of RJR-Nabsico in the 1980s. Rohatyn tells the bidding syndicates that there will be only one round--that they will have no opportunity to rethink their bids and raise them, so that they had better choose their bids carefully. The competing syndicates bid. Rohatyn says, "Thank you." And then:

the board, Atkins said, was willing to give Kohlberg Kravis one final opportunity to bid. "If you haven't already done so, this is the time to put in your best bid."

Silence.

Kravis and Roberts were too startled to speak. Beattie and Cogut exchanged a glance of amazement. *One final bid? Hadn't they been through this five hours ago?*

Felix Rohatyn's voice filled the void: "This is a serious offer. You should do your best to respond to it." Then, looking Kravis square in the eye, Rohatyn said: "We want your highest and last offer."

"This is the craziest thing I've ever seen," Kravis said. "We gave it to you five hours ago!"

A half hour later, Beattie and Cogut emerged from the aquarium room.... Kohlberg Kravis has two conditions before it will place its final bid on the table....

Kravis went around the room one last time. What should we bid?... Fifty cents a share too much or too little could be the difference. Already the bidding had reached heights all but the foolhardy were uncomfortable with.... The verdict seemed unanimous. They would throw in one last raise, just fifty cents a share in cash, roughly $115 million. "Is everybody comfortable with that?" Roberts asked....

"No, I'm not." The voice was Jamie Greene's.... "I don't know if we should do it at all" Greene said. "But if we do, let's do it with a dollar in cash. We've come this far. We want to win this deal."

"I think he's right," Roberts said. "That's exactly what we should do. We've gone this far. We've made up our minds we want to own this company. Let's not get shortsighted now."...

From Bryan Burrough and John Helyar (1990), Barbarians at the Gate: The Fall of RJR-Nabisco (New York: HarperCollins).

By being Chets--knowing when to push and when not to, and how far KKR could be pushed--Felix Rohatyn and company gained their clients an extra $230 million dollars with fifteen minutes' worth of work. You need people who know what the big things that affect fundamental values are. You need people who know how the details of contract provisions interact. And you need Chets--lots and lots of Chets--if you're going to squeeze anything like the best prices out of your counterparties. As Rohatyn did with KKR. KKR made a fortune, but it and its backers took on a huge amount of risk in doing so. Rohatyn made his clients a fortune, and did so by shedding risk rather than bearing it.

As to why the ones whom Alameida knows are all Republicans who believe that they generally deserve all their wealth. It is very annoying, but it's inevitable given what humans are: all our successes are due to our skills and industry, and all our failures are do to bad luck, right? (And there are a bunch I know--not a majority of those I know, but a bunch--who are Democrats, in a plurality of cases because being told once a year that you were slaves to Pharoah in Mizraim influences how you think about a whole bunch of issues.)

Comments

[Adam W. Foley]

Brad's example of ultimate Chet-hood (Felix Rohatyn) sort of conflicts with the assertion that all of these people are Republicans, doesn't it?

[Tom Maguire]

...all our failures are do to bad luck, right?

Not oppression by the capitalist overlords?

Anyway, if all the "Chets" are Republicans, I have met plenty of class traitors.

[Karl]

I used to work at a Wall Street firm. What Brad did not mention is that the Chet's are also like idiot sevants, they have mastered an arcane and narrow field that may not sound like being intelligent to outsiders but sounds brilliant to fellow idiot sevants.

The example that brad gave of the upping the bid on Nabisco is part of it doesn't hurt to ask, after all if you don't ask you won't get laid to put it plainly. Investment Bankers are salespeople, pure and simple. They have the right connections, some are Republicans and some are Democrats, Robert Rubin and Robert Altman are Democrats, so is Felix Rohayton and George Soros. Some are bright and some are stupid but all are rich.

There was an interesting article in the Times last week about the difference between successful business people and criminals...there were none it just the level of psycopathicness they are willing to utilize and their ability to at some level know right from wrong and not be willing to cross that line. Look at Rissia and the Oligarchs for an example of not knowing right from wrong.

[ed_finnerty]

re: RJR. Of course you need chets on the other side of the deal for the system to return irrational bids.

I remember reading in Market Wizards many years ago about one of the big houses - I think it was Morgan Stanley - about the trading desk. The traders were virtually always wrong (they sounded like a bunch of Chets) and lost $200 million annually on trades. However they grabbed $650 million on commissions by being chets with butterfly nets. The only traders making money were currency traders front running on big currency trades by reserve banks.

[sd]

First, a word of context: I know many investment bankers, largely through school (I attended business school at the University of Chicago, which produces i-bankers like Kansas produces wheat), though also through work (I am a management consultant, and so my work has me crossing paths with i-bankers from time to time).

My thoughts:

1) I'm not sure what Alamedia means by "not very bright." Investment banks, at least the bulge bracket variety that defines the ethos and culture of i-banking, recruit almost exclusively at places filled with uncommonly smart people. They then weed out all but the very best of their applicants. As a result, they take in a new crop of analysts and associates every year that is, on average and probably even at the 10% percentile, smarter than 99% of the population, especially on things quantitative. Some boobs make it through the process, sure - but very few. Now, if you yourself are smarter than 99.99% of the population, then you might well regard i-bankers as a universally "not bright" set, but that's certainly not common usage.

That being said, I can think of two reasons why one might regard i-bankers as not very bright. First, i-bankers do tend have an intelligence that lends itself to "competence" more than "creativity." The industry's hiring filters are geared toward finding people smart enough to not fuck up, not people smart enough to advance breakthrough thinking. Its a very different intellectual skillset - much more akin to a brain surgeon than a molecular biologist. Second, and relatedly, the culture of i-banking does not encourage the same kind of intellectual showmanship as do other intellectually-demanding fields peopled by ivy-league types. Indeed, the i-banking culture is distrustful of the "ivory tower" and enthusiastic about less intellectual pursuits. For example, a relatively high proportion of i-bankers I've known have been into SCUBA diving - and not the namby-pamby Carribean resort type of diving either. Serious, life-imperiling dives in deep water and dangerous conditions far off the beaten path. Its a hobby that, quite frankly, demands much more intelligence and thinking than absorbing the latest Margaret Atwood novel. But its also not a hobby wrapped in the trappings of self-consciously "intellectual" culture. And to the extent that i-bankers try to impress each other by "looking smart," its much more likely to take the form of doing square roots in their heads during a meeting than dropping the name of the latest NYROB darling in cocktail party chatter.

2) This leads me to think that perhaps Alamedia has her terms messed up. The term "investment banker," which properly refers only to banking professionals in things like M&A, IPOs, debt underwriting, etc., has been bastardized in popular parlance to refer to anyone who works in the securities industry, including the ubiquitous nice-suburban "stock broker" who is in fact a salesman / financial planner and nothing more.

3) As I noted, I myself am a management consultant. We take great fun in taking potshots at i-bankers - saying they are lazy, shallow, shady (compared of course to the exhaulted Us!). That being said, I think sometimes i-bankers get a reputation for being stupider than they are because people take statements from them at face value when they ought to damn well know that its not in their best interests to show their cards. We rag on analyst reports from the i-banking shops and roll our eyes at the "logic" in i-bank pitch books. But i-bankers don't make money by putting their best ideas on paper for all the world to see or by pitching deals using any other tactic than appealing to egos of corporate CEOs. The business press likes to write articles about how i-bankers are fools for proposing the AOL-Time Warner deal. But the banks earned their fees, regardless of the ultimate outcome of the deal. The bankers are laughing all the way to the, um, bank.

4) As to why i-bankers get paid so much, I'd say that inefficiencies, some market-based and some regulation-based, in the structure of the capital markets allows i-banks to earn rents in excess of the economic value they create. They hold the keys to the kingdom, and if a company wants to issue some stock or float some debt, then that company must pay for the privledge. The staggering size of the pie on Wall Street allows i-banks to pay huge salaries, and if you think Banker X is even the tiniest fraction better or smarter than Banker Y, then its makes sense to pay Banker X millions of dollars a year rather than lose him to the competition.

By the way, the choice of the name "Chet" seems suggestive. The stereotype is of course that i-banking is a lilly-white, WASPy profession filled with Groton grads from Newport families. And there is certainly some of that culture left over in the industry. But walk the halls at Goldman or Morgan or any of the other top shops and you'll see a helluva lot more people named Pankaj and Sameer than named Chet, and a helluva lot more Tim Chens than Tim Brightons.

[praktike]

There are lots of smart Chets on Ivy League crew teams whose families have been iBankers for generations. They know exactly what they're doing, and the industry wants them for a reason.

[Cranky Observer]

> the bulge bracket variety that defines the ethos and
> culture of i-banking, recruit almost exclusively at
> places filled with uncommonly smart people. They then
> weed out all but the very best of their applicants. As a
> result, they take in a new crop of analysts and
> associates every year that is, on average and probably
> even at the 10% percentile, smarter than 99% of the
> population, especially on things quantitative.

Followed by

> As I noted, I myself am a management consultant.

Funny, the big-dollar management consulting firms do the same thing. And yet throughout the 1990s (and perhaps the 'oughts as well) they destroyed company after company, even whole industries, with utterly unrealistic and unimplementable "advice".

Of course, the partners got very rich doing it. Perhaps the real answer is in the Wall Street Journal article on class movement last Friday: wealth begets wealth, and position determines wealth. If you are in the right place at the right time you can scoop up a lot of money, then help build a structure that cements your control of money, status, and power in place. And of course claim that it is all due to your brilliance.

Cranky

[teacherken]

only one problem - wasn't good old Felix R. a Democrat?

[Rebecca Allen, PhD]

Actually, Brad, that last bit applies to men much more than to women, and is part of why men get paid more. Men are likely to do what you said: attribute success to personal attributes, and failure to bad luck. Women, however, tend to do the opposite. This makes women less likely to push hard for big money: deep down, we tend to feel we don't deserve it. Of course, I'm sure that the overwhelming majority of "Chets" are male.

[Robert Waldmann]

Damn straight your success is due to your talents and skills my success (which is plenty for me) likewise.

That is it is due to your talents, skills, and generosity in sharing credit for Noise Trader Risk in Financial Markets.

I think the problem with Chets' Republicanism is not just human nature. It is key to being a Chet that you have to think you deserve more. People who think they have been unfairly lucky can't drive good bargains. The sence of entitlement is key to being a good Chet just like self confidence.

[Abby]

Chet is a new term for me. I was too intellectual for the investment banks. I grew up wanting to be an equity analyst (on the buy side), but I studied Classics, and the people who were doing the hiring just couldn't compute that.

What I'd like to know is how everyone rates himself on 1, 2, 3 and 4.

I can do 1, given time, but frankly, I'm not that interested in the intricacies of specific social security proposals. I'm interested in the broad types of proposals, but I don't feel the need to master then in excessive detail. So, I'm not really meant to structure public finance initiatives.

I'm best at 2 and 4. Getting to the essential question is my specialty. The problem is that I get bored with the details.

[pat]

My personal observations on Asian immigrants let me to believe that lucky people are more likely to be Republicans and unlucky ones are more likely to be Democrats, which is consistent with both Brad's comment about viewing success as reward to personal traits and Rebecca's comment about it is more a man thing.

[Randolph Fritz]

The questions come up--and these are the central questions: (1) is this a healthy way to order the productive activity of a world? and (2) can a world whose productivity is ordered in this way be accurately called democratic?

There aren't very many salespeople I've met who I'd want running my life.

[Emma Anne]

sd: "I think sometimes i-bankers get a reputation for being stupider than they are because people take statements from them at face value when they ought to damn well know that its not in their best interests to show their cards. "

Good point. The example Brad gave of the RJR/Nabisco deal also highlights the fact that Chets can't be embarrassed or reticent about going back on their word. A certain shamelessness, both to saying things that sound stupid and to ignoring what they just said when it is convenient, seems to be an important characteristic.

[tom n]

First of all, Chet is that "good natured" "portly" "boy" who is friends with the young sleuths Frank and Joe Hardy. (I'm reading the series again with my 8 year old, reading my old versions and the cultural nuances are hilarious).

My preffered terms would be "Skips" instead of "Chets", although Biff, Chip and Ned aren't bad either. Proably unfair picking only on the WASPs because there are plenty of Sandy's and Morey's in banking too I'd guess.

I wouldn't generaliz with the stereo type as dumb...not in the least bit...most are quite bright but they are by nature conformists (or their eccentricities tend to follow tribaly defined rules such as tequilla shots, helicopter skiing, and their wives tend to wear fashions that are...well fashionable...no do it yourself stuff.

Being conformists they will tend to pick up on the "generally accepted" acacemic theory of the day...some of which are quite fine theories and some tend to be taken to extremes.

Efficient walk, just in time inventory, leveraging finacial stucture....not terrible concepts in the least bit but when they're taken to extremes they confront common sense and enable some really dumb decision making that inevitably results in more banking fees.

What is realy sick is when, after any trends or finacial fad has progressed for a while, they inevitably get taken to extemes, and the sick part about it is that many of the skips know better, but thier compeitive pressure (and threat of job loss home default etc) let the smart ones overplay things, actively using their intellect, education and social connections to sell things that they KNOW (or at least doubt) are not in the best interest of the party they are pitching too.

Its probably true that one or two "dumb chets" can get the smart guys pitching the deal because "everyone else is doing it".

But I certainly wouldn't Tar Kohlberg Kravis with that sort of label...they almost always had sizable equity interest of thier own in deals which kept a good deal of honesty from the incentive structures. I also think Michael Milikin gets a bad rap for most of his activities which generally were worth the risk premium in the junk bonds and finacial stucture he worked out (not sticking up for Bozesky) and it was well late into the game the excesses came in and Milikin had little part in them.

[Julian Elson]

I have the feeling that if we can induce Daniel Davies to comment on this thread, he'll say something really funny.

I think I knew a Chet, or an aspiring Chet: my roommate: Cuban American guy, played lots of Counterstrike, had lots of books by Ann Coulter, Dinesh D'Souza, and Sean Hannity, had long conversations with his girlfriend in Miami about how one day he'd get really rich and she could stay in the kitchen and tend to him (really), cheered whenever we bombed something in Iraq.

I think that one thing that may be a factor is that Chets want money from their careers (as opposed to intellectual challenge, a sense that they're helping humanity, political power, a relaxed, lazy working environment, artistic creativity, or any of the other myriad factors that influence career choice in addition to money). This happens to be very well suited to investment banking, which pays well, isn't very intellectually challenging, doesn't give people a sense that they're helping humanity (they may be, in their indirect ways, but whatever benefits to humanity come from managing a successful merger seem far more distant than the help to humanity that a doctor probably feels she's given by saving a patient's life), doesn't bring great political power, is tough, grinding work, and doesn't give you much room for self-expression, at least on the job. A person who is as educated and intelligent as an investment banker, but goes into something else, say politics or medicine, is compensated in ways that an investment banker is not. An investment banker's only compensation is money, so he gets a lot of it, and people who think the main goal of life is to get a lot of money become investment bankers.

[jasper emmering]

With CEOs I usually have the impression that the qualities you need to get to be a CEO aren't necessarily the same as the ones you need to be a good CEO.

From what I've read it seems to me you can't be stupid if you want to become an investment banker (they won't hire you), but once you are one it's far more important to be sly than to be smart.

[Julian Elson]

I have the feeling that if we can induce Daniel Davies to comment on this thread, he'll say something really funny.

I think I knew a Chet, or an aspiring Chet: my roommate: Cuban American guy, had lots of books by Ann Coulter, Dinesh D'Souza, and Sean Hannity, had long conversations with his girlfriend in Miami about how one day he'd get really rich and she could stay in the kitchen and tend to him (really), cheered whenever we bombed something in Iraq.

I think that one thing that may be a factor is that Chets want money from their careers (as opposed to intellectual challenge, a sense that they're helping humanity, political power, a relaxed, lazy working environment, artistic creativity, or any of the other myriad factors that influence career choice in addition to money). This happens to be very well suited to investment banking, which pays well, isn't very intellectually challenging, doesn't give people a sense that they're helping humanity (they may be, in their indirect ways, but whatever benefits to humanity come from managing a successful merger seem far more distant than the help to humanity that a doctor probably feels she's given by saving a patient's life), doesn't bring great political power, is tough, grinding work, and doesn't give you much room for self-expression, at least on the job. A person who is as educated and intelligent as an investment banker, but goes into something else, say politics or medicine, is compensated in ways that an investment banker is not. An investment banker's only compensation is money, so he gets a lot of it, and people who think the main goal of life is to get a lot of money become investment bankers.

Also, another thing is that Chets may hide some of their intelligence to put people more at ease. Probably it helps to be underestimated in negotiations. They might not be being intentionally deceitful when they play down their intelligence: it's probably ingrained manners, and they'd think of themselves as being rude and arrogant if they showed off how smart they really were about everything.

[trostky]

Hmm ... Ivy League undergrad and MBA ... top of the world ... respected and admired by the press ... yet accused of being a dim bulb.

Are we talking about Wall Stree or the White House?

[tom n]

I think you've hit it Julian...

Basically most investment bankers are commisioned salesmen but commissioned salesmen in a high pressure high demanding field which requires ardous commitment, at least an intellectual verbal dexterity, sence of cool under pressure, a buch of cow-towing, face time and consoling with clients they might not like, a need to consistently look the part and walk the walk to make their firm look good.

But some of them get to be finaciers and those guys tend to like their jobs, as do many traders, fund managers and others who take a sportsman like joy from the competition. To be fair the best salesmen live for the deal too and the money is just trapping to the sucess in the blood sport that they play....but those guys that are getting paid only on sales and not on their savy of creating value...I do think you and the "chet" sterotype is more on than off.

And I do think Brad is 100% correct in the general notion that they play an important role that does require their attributes that many of us find irritating or maybe amusing.

I get a kick and perhaps an irritation, with a guy who'll smile and shake my hand and act like he agrees rather than giving me the time of day to tell me why he thinks I'm wrong.

[WH]

'The stereotype is of course that i-banking is a lilly-white, WASPy profession filled with Groton grads from Newport families. And there is certainly some of that culture left over in the industry. But walk the halls at Goldman or Morgan or any of the other top shops and you'll see a helluva lot more people named Pankaj and Sameer than named Chet, and a helluva lot more Tim Chens than Tim Brightons.'

Yes and No. You will see a lot of Indians, but many will be working on IT or as quants (on the fringes of I Banking). Some will be working in I Banking, but they're still outnumbered by the number of WASPs. A lot of this has to do with career paths that 1st generation Indians follow when they come to the US. Also, a lot of I Banking is simply cultivating personal connections and the like, and its harder for people not born or raised in the US to have such contacts (below the grad school level in any case).

I agree though that the notion that Wall Street is dominated only by WASPs is inaccurate.

[Julian Elson]

P.S. Tom Maguire: it's luck that makes someone an oppressed prole rather than an oppressive capitalist overlord. It's skill and industry that makes someone a productive, enterprising businessman rather than a parasitic welfare drone.

[raul]

Felix Rohatyn is not a good counterexample because in addition to being a Democrat, he is an intellectual and speaks more than one language. Among other things, in the 80's and 90's he wrote several thoughtful articles in the NY Review of Books. Rohatyn is no 'Chet.'

[TexasToast]

In a professional service context (like a law firm), its the "chets" who go to the country club for the afternoon, and after the third martini, land the client that allows them to go to the country club for the afternoon, play a little golf, and meet the next client that allows them to go to the country club.......

One of my old partners was a man who could sell refrigerators (scratch that, refrigeration equipment thermostatically controlled to deal with global warming)to Eskimos. Wanna guess who’s vote counted in partner’s meetings?

[theorajones]

Whatver. Chets seem to have no special skill that any decent salesman wouldn't have. They just happen to have the luck that they can ply their skill in the tiny, tiny sales market of the elite. Very few people and lots of money moving...and respectable people suggest they're ending up rich because they're somehow possessed of individual qualities that make them uniquely deserving of it?

And please spare me the "they only want money, therefore, they get a lot of it" crap. That explains why they're not doctors, but it doesn't explain why they get to be Chets. Pieceworkers in front of a sewing machine are only there for the money. Secretaries in an office are there for the money. Guys in the mailroom are there for the money. Wal-mart workers are there for the money. Just wanting money doesn't mean you get it, unless you happen to be a Chet. For example, you've got to be able to afford nice teeth, too.

http://www.washingtonmonthly.com/archives/individual/2005_04/006096.php

Reminds me of the goddam fashion industry. Ridiculous.

[Ben M]

Perhaps we could make an analogy: "Chet":quant::poker-player:blackjack-card-counter. Poker, I am told, is very hard to quantify; there is *no* straightforward probabilities-based strategy. Winning depends on divining your opponents' psychologies from their bets, and manipulating their perception of you. Blackjack can be "solved" such that a purely quantitative thinker can do well at it, and keep all risk and exposure under control.

If banking were more like blackjack, Kravis and Roberts would have walked into the RJR deal with a pre-computed table of share prices, benefits, risks, etc.. They'd place the optimum opening bid and (perhaps) have some game-theoretical strategy for upping it. But no, they have to throw their money in and hope for the cards to come up right.

Here's a question. We know that a non-counting, "intuitive" human always loses at blackjack, while a card-counting computer always wins. A computer may lose a poker game at a table full of scheming humans. How does a human perform at a poker table full of inscrutable computers? What would i-banking look like if *all* of the actors were quants---would an isolated Chet succeed? The peculiar skill of the i-bankers in the RJR story has nothing to do with finance; it's their intuition for the psychology of other i-bankers.

[tom]

... I grew up wanting to be an equity analyst (on the buy side)

Nobody grows up wanting to be an equity analyst!!

[Tad Brennan]

I'm an intellectual, my brother is an investment banker.

He always has been smarter than me--he read a lot more existentialism than I ever did, and he read it in French, and that was before he got his Spanish good enough to live in S.A. for a couple of years and read a lot of Spanish literature, too. He still reads more high-brow novels than I do, even though I teach in a humanities field at a research university.

And he has been in a Manhattan i-bank for a long time (he's a managing director now), and now he's a lot richer than me, too.

And for the whole time he has been there, he has been making *exactly* the kinds of complaints about his co-workers that Alamedia makes.

White-bred Ivy-league bozos who have all the right connections and make more on the golf-course. Guys who can't tell a joke when it hits them over the head, who have no subtlety and no soul. He hasn't used the term, but I bet he'd be willing to call them "Chets".

Oh, and if any of you readers are i-bankers yourselves who work with a guy named "Brennan"--well, he told me that *you* are a completely different kettle of fish--a real bright spot in a field of dimness.

[brodix]

It seems that the better we get at massaging the system, the bigger the bubbles get before they pop.

The economy is a convective cycle of rising ideas, labor, material and precipitating wealth, civil order, social security. Supply side economics has created a situation where far more value is rising then is effectively invested or precipitating down. The result being large storm clouds of surplus savings over an increasingly parched economy. Does anyone think nature is not going to take the usual course?

In that case, their advocations may provide more useful skill sets then their vocations.

[derrida derider]

Nice thought, Ben. Yet as someone pointed out above, an industry composed wholly of Chets would be easy pickings for a good quant. I think there'd be an Evolutionarily Stable Strategy there somewhere ... anyone care to have a go at modelling it?

[Abby]

tom,

I really did. I saw a tv show about Warren Buffet, and I wanted to be him. I was a huge Peter Lynch fan.

I wanted to read and think and understand how business worked and make a lot of money without having to manage a real business. (I also wanted to manage the endowments of cultural institutions.)

[Lee A. Arnold]

Funny thing about Chets--their plumbers always win!

[Nick]

Abby,
So what did you end up doing instead? I hope you found a higher calling. I think it's unique that a person educated in something so noble would be drawn to... Wall Street.

[chris]

Security analysis done well can benefit a lot of people. I think the steady security analysist would be drowned out in a large financial or even a regional financial company. Dave Hickey does that independly with the High Tech Strategist out of New Hampshire for $125 a year for 12 issues. Saves me from a lot of mistakes.

[chris]

"If all you want is a job worth not doing, journalism may be your calling. But if you want to get rich in the bargain, you ought to at least consider running Morgan Stanley."

That quote should be money-good for pissing off some readers here. But, honestly, it's from "Could You, Too, Be Chairman of Morgan Stanley?", Michael Lewis, May 3 (Bloomberg), www.bloomberg.com/apps/news?pid=10000039&sid=aWZDxkuNExgc&refer=columnist_lewis.

Felix Rohatyn seems to be brillant and capable of following a career at a high level in other fields. Lewis seems to describe a Chet at MS in over his head.

[radek]

I don't know about investment bankers but in my experience there appears to be more Marxists in finance than in ye ol' regular economics for some reason.

[Movie Guy]

Alamedia -- "If it's not a market failure, and Chets do just as well as brainiac PhD's in Economics at making decisions about hellishly complex derivatives, then is the whole thing just random?..."

I'm still waiting for Brad or someone to address this question.

That was her technical point...

[Kimmitt]

Brad answered this in his "Chet-enabler" comment, I think.

I think that abilities (3) and (4) are the ones which are the least compatible. People who are good at sizing up people I think start to get a little lazy. Certainly, the reason I'm not a Chet is because (3) just isn't happening for me.

[qwerty]

Well, how about this: as usurers, the investment bankers are sure to end up in Hell. The life comforts are but a short-term compensations (temptations?) for boiling lead, hooks and the rest of the ugly stuff.

[anon coward]

I'm coming late to this debate, so these points may have already been raised in some of the above comments which I have not read thoroughly, but what struck me moving from an intellectual / academic environment into the City (sorry, banking), is how plenty of the academics / intellectuals I know overweight the value of their brand of intelligence. I was struck by just how good many of these "Chets" (I think the UK equivalent is a "rupert") are at knowing when to grin and eat shit, when to dig in their heels, how to steer people, mollify irrational CEOs, and most importantly knowing how to sell ideas and having a grasp of how "the market" is behaving etc. etc. Some of the super smart people, especially big brained economists, I know from my previous life would be worse than useless in the industry (unless doing something clever, locked away out of sight) and yet, I am sorry to say, some of these individuals I have in mind like to sneer at the intellectual lightweights that populate industry.

[rwc]

I've been to many a party in high-buck traderville. I know a fair share of brokers and their ilk. And they do "smoke a few bowls", but outback in the landscaping. Women in high heels, with paid babysitters at home, smokin' in the bushes. I wish these people would speak up politically about legalization.

[Bob DObalina]

Yep, anon coward, I've no doubt that Bob Nozick would have a field day with many of the commenters on this blog.

Lost in the hand-waving are a few facts:

1. Many of these maligned bankers come from Wharton and Columbia, where they managed to find a spot (and lose $130,000) thanks in no small part to their impressive work histories, undergraduate educations, and 99th percentile GMATs (which don't even come close to _guaranteeing_ admission). For some reason, banks aren't bending over backwards to recruit at, say, Haas.

2. If you really want to find stupid rich people to mock, I'd suggest taking a trip to Orange County, swinging a dead cat, and counting all the mortgage droids that you hit.

3. Of every 100 first-year associate monkeys, how many will become millionaire MDs? One?

4. John Corzine is another fantastic example of a Democrat IBer.

5. A lot of Chets work 100 hours a week. Many seamstresses and Wal-Mart employees can't (and probably wouldn't).

6. To be a successful banker, it helps to have balls.

[anne]

Think of the worth of a wild flower....

http://www.nytimes.com/2005/05/17/science/17flow.html?8hpib

Forest's Colorful Jewels in a Fight for Their Lives
By BARBARA WHITAKER

Inside a 10-foot-high fence at the Meadowlark Botanical Gardens in suburban Washington, woodland wildflowers have been putting on a carefully choreographed show since mid-March.

The bloodroots took the stage first, unfurling white petals around their yellow hearts, and were followed by delicate Virginia bluebells and dainty pink spring beauties. Over the last week, red, white and yellow trilliums joined blue dwarf-crested iris and a handful of pink lady's slippers on a simulated mountaintop.

But outside such meticulously cultivated gardens, these jewels of the forest, which include cherished flowers known as spring ephemerals, are under siege. 'They're being devastated,' said Keith P. Tomlinson, manager of Meadowlark, in Vienna, Va.

As an example he used the Mather Gorge trail in Great Falls National Park a few miles away on the Potomac River. There, bluebells, golden ragwort and trilliums are being crowded out by invasive plants and ravaged by deer. 'They're fighting for their lives,' he said.

In deciduous forests from Maine through South Carolina and stretching to the Midwest, the story is much the same. Although in some areas, spring-blooming wildflowers have other enemies, including housing developments, changes in forest densities, pollution and even nonnative worms.

'I'm concerned about many of the spring wildflowers of our woodlands through the northeastern America, where their abundance is being significantly decreased,' said Dr. Robert K. Peet, a professor of biology and ecology at the University of North Carolina.

The trend would be easy to miss. True spring ephemerals like Dutchman's breeches, Virginia bluebells, trout lilies and spring beauties flower and die in the few weeks after winter's freeze has broken and before the trees have fully leafed out and blocked the sun. The ephemerals live the rest of the year underground and are believed to have life spans of tens to hundreds of years like the trees around them.

While often lumped in with those spring ephemerals, other woodland spring wildflowers like trillium lose their blooms but keep their foliage above ground throughout the summer....

[anne]

Thinking again of the worth of flowers:

http://www.calvorn.com/gallery/photo.php?photo=5400

Magnolia Warbler Feeding
New York City--Central Park, The Pool.

[anne]

And, again :)

http://www.calvorn.com/gallery/photo.php?photo=5399&u=17|4|...

Magnolia Warbler
New York City--Central Park, The Pool.

[anne]

Again, on value :)

http://www.calvorn.com/gallery/photo.php?photo=5347&u=17|4|...

Yellow Warbler Taking Flight
New York City--Central Park, Harlem Meer.

[Ginger Yellow]

The ideal investment banker is a "rainmaker", someone who goes out and makes deals happen. These people tend to be good salesmen - they're either selling a deal to investors, making it happen that way, or pitching the concept to a company (or government). People who are good at this are the people who get paid the most and the people who get promoted. Sometimes they are good at the quantitative side, but it's just a bonus. What matters is finding and closing the deals. This is one reason why invesment banking has such a herd mentality - everyone piles into tech IPOs or emerging market bonds because that's where the deals are to be had, regardless of whether they make sense. So any "market failure" in investment banking is just a reflection of wider market failures, in my opinion.

[Davis X. Machina]

A Chet would not know the word 'banausic'.

Felix Rohatyn would know it, but not care.

[Barry]

"A lot of Chets work 100 hours a week. Many seamstresses and Wal-Mart employees can't (and probably wouldn't)."

Riiggghtt. You've never heard of second jobs?

[David Yaseen]

I have the impression that the "Chets," the people selected for Brad's Skill #4, make a lot more money than those holding up the other three corners of the IB table. In each case, these are recruited from the best of the best, but the Chets are (to my uneducated eye) rewarded all out of proportion to their contributions. Perhaps this perception provokes some of Alamedia's perplexity?

[anne]

The "best of the best" of my students have happily gone in any number of interesting and lovely directions.

[John Thacker]

In each case, these are recruited from the best of the best, but the Chets are (to my uneducated eye) rewarded all out of proportion to their contributions. Perhaps this perception provokes some of Alamedia's perplexity?

Yes, certainly it contributes. The interesting question, though, is how much they are rewarded all out of proportion to their contributions versus how much their contributions are devalued by people who don't possess the same sort of talents. Most people I've met tends to overrate what they themselves are good at, and denigrate the contributions of other types. People who are intuitively smart without having to work dismiss the grinds who merely work hard; people who work hard dismiss the unfairly lucky ones who were born smart and don't deserve it. The details oriented people are convinced that it would go to hell without them; the people who look at the big picture know that they're necessary for the organization to have any sort of goal. The physics people know that the arts are totally useless and a waste of money which have never benefited society in the practical ways that science has; artists always know that they're undervalued.

It is, I think, very difficult to get past all that bias in order to discover who is truly being overrewarded and who is being ignored.

And yes, Bob DObalina, whenever the topic turns to resentment between perceived value and compensation, I'm reminded of Robert Nozick's Why do Intellectuals Oppose Capitalism?
( http://www.cato.org/pubs/policy_report/cpr-20n1-1.html )

[hyh]

Stories about investment bankers are always colorful. My favorite is a friend's brother who retired at 30 and is now occupied with trying to open a brothel in Argentina. Okay, so it's officially a backpacker's hotel, but who's kidding whom?

In any given field, by any measure, there are people who excel. Investment banking is no different; there are brilliant people and average people. Just like there are brilliant professors and average professors, brilliant doctors and average doctors, brilliant writers and average writers. For every Rohatyn there are dozens, if not hundreds of "investment bankers" doing smaller, less significant and less lucrative deals down-market. I have former classmates who can attest to the lack of glamour and money in some parts of investment banking.

If the assertion is that as a group, investment bankers are smarter or harder working or better at reading people or more visionary than other elite professions, then I would have to disagree. As human beings, we get very good at recognizing and applying patterns. This so-called intelligence is adaptable to any set of rules or behaviors, whether it's comedy writing or investment banking. As comments above have noted, more revealing about investment bankers than intelligence or people skills are individual character traits such as greed, competitiveness, the need to please, and diligence, as defined as capacity for hard work.

Someone, somewhere once said, "you call THAT a life?"

[Cranky Observer]

> This is highly unlikely. For one, the guys/gals who
> make the real money have put in five to six years of
> 80 hour weeks, minimum. For months at a time they can
> average 100 hour weeks. That is a LOT of human
> capital built up by the time you're a director making
> $1 mil a year.

A friend of mine is the world's leading expert on a little-known but widespread and very unpleasant tropical disease. To get there she had to work 18 years of 80-100 hour weeks and essentially give up any hopes of marriage or children (not to mention risk of contracting the disease; the first aid kit in her lab has some stuff that terrifies me). Her reward has been to be given a semi-mabye-tenure track position with a munificent salary of $42,000/year. Yeah, those i-bankers really work harder than /anyone/ to justify those $20 million bonuses.

Cranky

[Bob Dobalina]

Cranky-- maybe your friend should cure the disease. She'll make more money that way.

[anne]

Thank you, Cranky Observer. You are lucky in such a friend, and she in you.

[Cranky Observer]

Mr. Dobalina,
One hopes that that was just a quick, offhand joke - although not a very funny one.

Otherwise, I would have to classify you as a Chet-in-training, a type that I have waaaayyy too much experience with.

Cranky

[Bob Dobalina]

Well, I hope it was neither an unfunny joke, nor a chet-ism.

If your friend were to cure the disease, would she not be compensated? I don't know the scope of the disease, but it wouldn't surprise me if vast rewards (prizes, awards, licensing) awaited she who cured this disease.

So, just as it would a Wall Street speculator, the market will reward her if she is smarter than everyone else and/or gets lucky.

Otherwise, you must admit, it's quite possible that the world will award her compensation far greater than is warranted by her output. $42,000 a year over the length of a career for producing nothing useful isn't a bad deal for the earner.

Or maybe it is. I dunno. I'm not the one judging investment bankers and hurrumphing that they make too much money. I trust a market economy to better deliver just deserts than you or me.

If that makes me a Chet, so be it.

[Roy L]

It's very simple. The rich have the money. If you want any of it, you have to get them to give you some. That takes a certain shamelessness and innate sense of entitlement, but it also means making yourself the kind of person the rich are willing to spend enough time with to become willing to give money to when asked: attractive, personable, classy, agreeble. Essentially the same as highly paid escorts, but unlike them, investment bankers must also be able to talk plausibly about arcane financial matters, so they have to have a certain amount of smarts and knowledge.

The rich need to believe that they have earned and fully deserve all their money, no matter how they got it, so that's mainly what Chet tells them. That and the line that they are paying too much tax, no matter how little they are paying and no matter how large a multiple of that amount are the benefits they get from government and the community. And pretty soon Chet starts believing it all, especially about the money he accretes for himself. Of course, solid salesmanship skills and a rigid aversion to what normal people would think of as a sense of justice are also required. That's really all there is to it.

[APav]

Dobalina,
I'd say that puts you on the path to Chetdom. While one can say there are many IBers who don't make the big bucks but support this "productive" industry, I'd wager the monetary rewards for Salk and his staff have been far less than for the likes of Milken (and Salk's fame wasn't related to an obscure disease, nor do I want to get into claims about his self-promotion.) The Chet stereotype tends to lack humanity/sympathy and curiosity - that's not to say they can be useful tools, just not very useful humans.

[Ari]

"Otherwise, you must admit, it's quite possible that the world will award her compensation far greater than is warranted by her output. $42,000 a year over the length of a career for producing nothing useful isn't a bad deal for the earner."

What a foolish and mean comment to direct at a research biologist.

[Ari]

Any dedicated research-teaching biologist will earn what she makes many times over whether there are breakthroughs or not. Simply the teaching is enough.

[Randall]

Why are you being so nasty? Do you even have a clue what it is to be a scientist or a professor?

[Bob Dobalina]

Randall-- I hope you weren't directing that comment to me, as I don't believe that I have been mean or nasty.

I'm sure that being a professor and/or a scientist is hard work. I'm sure that bailing hay, teaching developmentally delayed children, and working in a burn clinic are other examples of hard work.

But as it stands, people are paid for meeting the demands of consumers. And I'm a lot more comfortable with that than I am with any other measuring stick.

Cranky's scientist friend may be a wonderful person, and I wish her the best. Her altruism and good nature don't necessitate that she "deserves" anything more than anyone else.

PS-- Mike Milken revolutionized American Finance. It's possible that his actions have benefitted more people to a greater degree than those of Salk. Of course, we don't know how history would be different had neither of them been born.

Now, if you want to argue that the intellectual-property and public-health regulatory schemes should be changed to further enrich the creators of health/biotech innovations, thereby encouraging more people to jump in that lottery, you may be able to make a good argument, and I'd enjoy reading it.

Aside from that, it's just a game of my-values-are-better-than-your-values, which doesn't really interest me.

[wkwillis]

That research biologist has an expensive hobby, a hobby that cost hundreds of thousands of dollars per year to keep her in test tubes.
The only reason we spend those hundreds of billions of dollars for those hundreds of thousands of scientists every year is that some of those scientists will eventually figure out how to cure those diseases and build contragrav flying saucers or something.
It's not the cost for one scientist, it's the cost for the unsuccessfull ones as well.
Hey, I'm an inventor. What does it cost society to support Stanford University so they give me (and any member of the public) free access to their tech libraries? I am not free and I haven't even been a successfull inventor with royalties yet.

[jc]

I agree with anon coward, for the most part - and then also with the rainmaker comment.

There are a variety of different type of intelligence. A friend I have, has zero interest, need or want to be intellectual.

But I see him with people. I see him immediately spot the way to put people at ease - immediately suss out what is needed to get a person to let down their guard, and also seem to know just how much he can get in a deal.

He really is amazing in this intelligence, and is generous with it. He will "advise" other people in the organization how to handle the difficult customers, and some of the people he advised are PhD's. And he is usually right.

There are a lot of different types of intelligence, if intelligence means being able to recognize and sucessfully operate on the surrounding environment. This particular type of intelligence (the brokering type) seems more a matter of emotional IQ, and the intelligence of power relationships - what buttons to press.

[Randall]

Bob Dobalina and Maestro

The explanations make sense, I would have been a sympathetic to any person who cared about the work the do and tried as best they can. I respect people who care for what they do, so caring for others. You are both right. There are times when a comment does not seem clear, and I should ask an explanation more often.

[Randall]

The comments here are interesting, but meanings do get lost now and then. I appreciate you both, and the others who wrote on the story.

[hyh]

"But as it stands, people are paid for meeting the demands of consumers."

For better or worse, only in America.

[jult52]

I think the skill, knowledge, energy and persistance needed to become a Managing Director in I-Banking on Wall Street is being SORELY underrated here. I mean by a long shot.

I graduated from one of those I-Banking MBA feeder schools back in the late 90s. The most successful Wall St friend from the class I have managed to get straight As while confined to a hospital ward with TB for all of his final semester. Most of the rest of them -- and many who'd be considered uncommonly bright by almost every reader here -- have been drummed out of the industry in various ways. Successful I-Bankers should be assumed to be exceptional.

About the compensation levels, I work for the dept in charge of contracting banking services for a large corporation. A good sales force with strong connections to the buy side (the managers buying the securities being peddled) are the platform on which all the big, successful banking firms are built. The salaries paid out are the result of a concatenation of different skills and services put together in a unique way.

[thibaud]

Perhaps the, distinguishing trait among those analytical, detail-oriented, people-savvy workaholics who choose investment banking is an uncommon level of greed. There are plenty of professionals who are detailed-oriented and analytical and workaholics-- lawyers, doctors, even some economists-- and some of these folks are even good at sizing up people. But no one enters investment banking unless he is motivated by an all-consuming desire to make scads of money, on an order of magnitude several times greater than what other highly-compensated professionals earn.

Another trait is the desire to get the better of others in transactional situations. As someone once put it, "It's not enough to win; others must also lose."

As to the supposed Dem-Republican distinction, it's rather funny that the great Democrat i-bankers no less than their Republican peers seem to have no compunction about rigging markets and plundering national treasuries (cf. Soros's recent conviction for insider trading), or colluding with corrupt kleptocrats to burden third world nations with debt, or helping management to bust unions and deprice workers of health insurance. How very progressive.

[Kyle]

No one's mentioned it, but might this just be a case of efficiency wages? Increasing the smallest marginal quality of a new employee is worth vast amounts of money, so it magnifies the typical information asymmetry in the hiring process. This is added to the fact that the type of person who would apply for the job (smart, extremely hard working, shmoozy, whatever) would also do very well starting their own business. That allows the labor pool to act on the asymmetric information in a way that most fields don't have to respond to. Therefore, Wall Street will pay a huge efficiency wage to ensure that the pool they do select from contains the highest quality applicants (even if they don't pick them, but they might).

I guess that would mean they are both overpaid and the economy is in equilibrium. It would also explain the extremely high levels of competition within the Ivy League for jobs and internships.

[thibaud]

More sad than funny, actually. I can recall a time when the Democratic Party was dominated by people who championed the likes of the Safeway workers rather than the Wall Streeters whose machinations caused those workers to lose what little security they had.

The party used to be led by the likes of Tip O'Neill. Now it's gazillionaires like Corzine and Rubin and Soros and Boxer and Nancy Socialite/InvestmentBankerWife who set the agenda and call the shots. Is it any wonder why blue-collar voters in Kansas and elsewhere are deserting the party?

[jult52]

thibaud: yes, I've noticed that the leadership of the Democratic party seems to have a considerable number of people who are so rich that they don't care how high taxes are (since they'll never notice it). But the same is true of the GOP, and the GOP is the anti-tax party. The two party's share of high-income people obviously will affect partisan dyanmics and positions but it isn't obvious in which way it will do so.

[Aav]

To characterize biological research as a hobby is to characterize every choice anyone makes as a hobby (sounds like the slippery slope of moral relativism). Now such choices are made based a lot on prediliction, and specialized talent but it is often motivated by sympathy/humanity, a large world view and a willingness to forgoe security.

How rare is the talent? A lot more biologists would make decent IBers than visa versa - technocrats are not all socially inept - a lot of us just find such dipsh*ts annoying.

I brought up Milkin because although there are reasons to laud him, I don't think his accomplishments are in the same Universe as Salk (even though Salk was admittedly a self promoter). There is a certain "tragedy of the commons" effect related to medical research and charity work and I think a case can be made that currently the tradeoff is deficient form both moral and economic efficiency aspects.

I've made a more than a decent amount of money persuing the profit and therefore security. I value justice and social service over tropical vacations and try to spend accordingly from a position of relative security and I find admirable that some go not for security first, especially given the current "your on your own society".

[Jennifer]

Aav

I like your thoughts on the topic.

[Dwight Cramer]

Anybody know of a blog where investment bankers thrash around trying to understand the economics of academics? Trying to figure out why this guy is a dead end post doc in Peoria and that woman is tenure track at Stanford--I mean, they're both Ph.D's, right? Guys in suspenders speculating on the differences between tournaments and tenure . . . and wondering, if the profs get their summers off, how come they don't have better golf games?

On that note, the famous behavioral psychologist Dr. Bob Rotella once suggested the availability of evidence that those who take credit for their successes but blame bad luck for their setbacks perform better, as measured by an objective benchmark. However, he published that in a book called Golf is Not a Game of Perfect, not a professional journal.

More seriously, perhaps investment banking and academics have more in common than practioners in either field would comfortably acknowledge. In both, style, credentials, reputation, relationships and so, appear to be determinative markers of value. In both, the stars are paid lavishly--albeit in different currencies--and produce nothing tangible, much less edible. And finally, both are housed in institutions that live and die on the strength of their relationships with enormous pools of capital, puddles of wealth, whatever.