Macaskill on markets: Cultural leanings mask conflict at heart of investment banking industry


Jon Macaskill
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Investment bankers frequently boast that their employer has a unique culture. There is a shared sense of purpose and responsibility for decision-making, normally allied with a common understanding of risk and the best way to pursue manageable growth. Often these cultural values are made explicit with a formal "One Firm" policy.


Jon Macaskill is one of the leading capital markets and derivatives journalists, with over 20 years’ experience covering financial markets from London and New York. Most recently he worked at one of the biggest global investment banks

Jon Macaskill is one of the leading capital markets and derivatives journalists, with over 20 years’ experience covering financial markets from London and New York. Most recently he worked at one of the biggest global investment banks


Two of the banks that most zealously promoted the unique nature of their culture were the two that had the highest level of employee share ownership: Bear Stearns and Lehman Brothers.

Bear Stearns was never able to shake its image as a firm of scrappy bond traders where sharp elbows were the main means of advancement.

But Lehman managed to convince both the bulk of its employees and much of the outside world that it had developed a culture to rival that of industry leader Goldman Sachs.

Lehman relentlessly promoted its One Firm mantra and pioneered such gimmicks as pasting the elevators at its New York headquarters with charts of its share price – at least until its stock collapsed.

Lehman and Bear are gone but Goldman still dominates the revenue rankings, and rivals remain obsessed with fostering a Goldman-style culture.

Barclays Capital is developing a partnership tier in its senior ranks, partly to differentiate genuine leaders from the massed ranks of managing directors and partly to improve collaboration across business lines.

Other banks are stepping up "Deliver The Firm" or "One Firm" initiatives by changing sales credit recognition to encourage cross-departmental deals and pushing young managers to shift across business lines rather than sticking to specialist functions.

The last move is an attempt to mimic Goldman’s longstanding policy of forcing fast-track employees to gain experience in different departments. A stint in a risk management role is also encouraged for managers on course for a senior position. Risk management experience was never a traditional prerequisite for advancement at any other investment bank and is a genuine differentiating factor that helped Goldman to come through the credit crisis in better shape than its rivals.

Many Goldman cultural quirks represent an acknowledgement of the conflict at the heart of investment banking, though, rather than an attempt to create a collegial spirit that sits oddly with the constant battle for a bigger share of revenue.

A policy of having multiple business line co-heads – often three to a group – can be presented as fostering teamwork, for example.

It also adds an extra layer of watchfulness for malpractice or underperformance, however. And as a side benefit, it can be used to downplay any air of disruption when a business head joins another firm or is dismissed.

Rather than encouraging pseudo-partnerships that have no real function, bank boards might be better off trying to monitor a culture of controlled competition among top executives.

Attempts to improve practice by formally upgrading risk functions have a mixed record at best. There was keen attention to the role of the chief risk officer in the approach to the credit crunch, for example. A position that was traditionally subordinate to the treasurer was upgraded at some banks to a nominal weight closer to that of the chief financial officer. Some experienced bankers were brought back from actual or semi-retirement to chief risk officer roles with a line to the chief executive.

But the Lehman bank examiner’s report underscored the extent to which a formally correct set-up can malfunction.

When the firm started to spiral out of control in 2007 it had a respected chief risk officer in Madelyn Antoncic. She was equipped with a PhD and 450 risk management staff monitoring positions across the firm but was easily sidelined by a domineering chief executive and president and supine chief financial officers in Chris O’Meara, then Erin Callan.

And applying effective checks and balances might not be as simple as hiring experienced bankers as chief risk officers. When UBS executed a 180-degree turn and started a push back into investment banking after more than $50 billion of losses it hired Tom Daula as chief risk officer. Daula, who is now a member of the investment bank executive committee and group managing board, has a PhD and is a former chief risk officer at Morgan Stanley.

Daula was replaced at Morgan Stanley by Ken deRegt after another risk management fiasco, however. A proprietary trading desk run by Howie Hubler and Joe Naggar made a credit derivatives bet of about $13 billion and was then able to successfully resist pressure to close the trade for months on end as the markets deteriorated, adding billions of dollars to Morgan Stanley’s eventual losses.

There is one potential upside for shareholders to what must have been a bruising experience for Daula. Perhaps he will be more resolute if similar issues emerge with any of the recent wave of new sales and trading managers hired by UBS.