COMMENTARY

Peter Burgess

Early in the new millennium the investment banks were on their knees. Beaten by the boom and bust of the dot.com bubble, mixed up in corporate scandals and accused of uncontrolled and rampant conflict of interest, the game seemed over for the masters of the universe. Then the bounce back came. New rules, promises to be more vigilant and rising markets took the heat off. Having learned their lesson and paid their dues, the investment banks could be relied upon to oil the wheels of capitalism in this best of all possible worlds. Philip Augar's cutting critique challenges this consensus. By being able to act simultaneously for buyers, sellers and themselves, they can generate huge returns at their customers' expense. This book explains how this systematic and legal transfer of wealth occurs and answers some important questions. Do the investment banks add value through their advice? Is there a cartel? Are there any alternatives? What will happen next?

An extract from The Greed Merchants by Philip Augar

It was a good time to leave. I had become increasingly doubtful about the industry I was in and its role in the economy. During my time, the profession appeared to have moved from putting the client first to putting itself first. We exerted enormous pressure on clients to transact. We helped to raise and recycle lots of capital, yet we employees seemed to benefit more than our clients and shareholders. We never seemed to face up to the truth about what we were really doing.

To start with I thought this was a London problem. My first book, The Death of Gentlemanly Capitalism, described how the City of London’s investment banks and brokers had lost out to foreign, mainly American, competitors in the years after Big Bang in 1986. I expected that this book would end my interest in finance, but I kept a weather eye on investment banking. Some firms used me as a consultant; others asked my opinion informally; friends in the business kept me in touch with what was happening.

It was hard to ignore: the media was full of the most extraordinary goings-on: the boom and bust of the dot-com bubble, corporate scandal in recession-hit America and lay-offs on Wall Street and in the City. To cap it all, the exposure of uncontrolled conflict of interest at the heart of investment banking came not from the regulators who were meant to be in charge of the investment banks but in the unlikely form of the New York State Attorney General, Eliot Spitzer.

For a year in 2002, Wall Street was on its knees. Then new rules, promises to be more vigilant and rising markets eased the pressure. The investment banking industry regained its equilibrium and the whole episode came to be seen as an unwelcome but inevitable consequence of the 1990s bubble. The consensus appeared to be that Wall Street had received its rap on the knuckles and that capitalism could once again move fairly and squarely forward.

I was less sure. The new rules left intact a business model riddled with conflicts of interest. These are sometimes – in my view incompletely – acknowledged, but even so they are notoriously difficult to manage. I wanted to know whether the integration of so many related activities explained the high profits and regular scandals that have been a feature of the industry for the last twenty years. If so, tackling the symptoms but not the cause of the latest crisis would merely perpetuate the problem.

I wondered where all the money was coming from. I had a sneaking suspicion that if the chain was followed to its logical conclusion Joe Public would emerge as the provider of the rich rewards garnered by the investment banks’ employees and shareholders. If so, further questions would need to be asked abut how it is all being done and whether capital is finding its most productive home as it passes through the financial markets. I decided to seek the answers, and this book is the result.

Problems in the investment banking system are often seen as an American issue and much of the evidence in this book comes from the USA. Most of the world’s top investment banks are American, most investment bankers work in the United States and that’s where the most obvious problems have been. But when America sneezes the rest of the world catches a cold and every country with a large capital market is dominated by American investment banks, their business practices and their values.

Britain and other countries that follow the American business model have avoided the most egregious examples of misbehaviour, but do not for a moment think that they are immune from America’s cold. If you look hard enough the games that are played in American capital markets can be found wherever you live. And if you look hard enough you will find that you too are paying the price