Morning Coffee: The heroic age of investment banking is coming to an end. HSBC hasn’t cut as many top bankers as you think

Although “Industry” is the HBO series most directly relevant to the lives of young investment bankers, as your career progresses, you might learn more lessons by rewatching “Game of Thrones”. In particular, the way that the fantasy epic demonstrates and reinforces the message that neither success in battle nor the ability to form relationships with dragons are particularly well correlated to administrative ability in a large organisation.

For most of the history of financial services, the great franchises have risen and fallen to the recurring refrain of “our best banker just became our worst manager”. But is this era coming to an end? Looking at Blackstone, it seems that it might. 

With the retirement of Joe Baratta, Blackstone’s head of private equity, the company has confirmed that there will be no single executive replacing him, and the only executives left on the board will be founder/CEO Steve Schwarzmann and President/COO Jon Gray. Managing the company, and making morale-boosting videos, is now more important than being a rainmaker oneself.

Of course, Gray was a dealmaker not so long ago. The leveraged buyout of Hilton Hotels which he led is still regarded as being one of the most profitable private equity transactions in history. And Schwarzmann was only in a position to found a company like Blackstone because he’d had so much success doing deals in his banking career.

So it’s not so much that the investment banking industry is ever likely to draw its leadership from anywhere other than its own most successful bankers. It’s more that the days are over when people like John Mack or John Gutfreund were able to run the largest banks on the Street while also continuing to maintain their personal franchise. This is just about possible at a boutique, but in a larger investment bank, there are two fatal flaws with the “player-manager” model.

One is that although making transactions happen is the most difficult thing in banking, it’s not the only thing. Cost control and risk management matter too, and it’s not fair to the rest of the business to have someone in charge of these important functions when their head and heart are still on the front line.

And the other is that when the boss has a big personal franchise, it’s hard to tell anyone else that they ought to put the team before themselves. This isn’t just a problem for bankers; law firms always have problems negotiating the tricky balance between incentivising their partners, and building a business rather than a group of private practices which happen to share a roof.

The heroic age is not completely over - Rich Handler at Jefferies, for example, still deals personally with a lot of clients. And nearly every Wall Street CEO takes pride in being able to contribute to winning big transactions. But with every generational change of leadership, the importance of general managerial skills seems to grow, and the importance of big personal revenue production shrinks.

Elsewhere, one of the statistics which people used to understand the scale of the cost-cutting program launched by Georges Elhedery was the sharp decline in the number of “material risk takers” identified in regulatory disclosures. But according to Pam Kaur, the chief financial officer, this might have been a slightly misleading metric.

She says that “Every year we go back and take a look at the definition of a material risk taker. Some people cease to be MRTs because we have reworked that definition… you can have a rule that says that if you are sitting in certain meetings, by definition you are a material risk taker. That is what we have reworked”.

It’s certainly true that the MRT definition is flexible, and has always been subject to a certain degree of grade inflation. Bankers may have insisted on being designated as one simply because it used to be correlated with perceived importance, and with a high level of compensation. HSBC has made severance payments to quite a few highly paid bankers, but it seems that in many cases, it might have been more of a matter of telling them to get real.

Meanwhile…

Jefferies gave some reason for optimism about Q3 results, as its trading and banking revenues were both up double-digit amounts on last year. (Reuters)

A slightly unusual move from buy side to sell side, as Bennett Schachter goes from Elliott Management to lead the capital advisory practice at Centerview. He was previously a SPAC specialist at Morgan Stanley. (Bloomberg)

Graticule Asset Management Asia lost most of its AuM in 2023, when it was caught on the wrong side of short term interest rates during the Silicon Valley Bank collapse. But it’s now built its way back to $3bn under management, through a combination of separately managed accounts, use of AI agents to keep costs down and, presumably, very tactful conversations with clients. (Business Insider)

Goldman Sachs is introducing measures to make it easier for individual shareholders to vote their shares, to dilute the effect of activists objecting to the remuneration votes. (Bloomberg)

If you think that banking titles are confusing, try law. Kirkland & Ellis have “salaried partners”, “equity partners” and now “senior income partners”. Some of these titles are highly competitive and sought after while others are “glorified twelfth year associates”. It must be hard to work in an “up or out” culture when people aren’t even really sure what constitutes a promotion. (Financial News)

Do you think you can predict what the 2030s equivalent of the Patagonia fleece vest will be?  Jane Street is advertising for a “swag program manager” who not only has to have seven years of experience in putting logos on things, but needs to be “comfortable building models and forecasts”. The right person could earn up to $200,000 and will have the chance to create knickknacks and tchotchkes that today’s traders can only dream of. (Business Insider)

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