Frank “F.I.A.S.C.O.” Partnoy has a column in today’s FT pointing out that you’ll probably be replaced by an iPhone app pretty soon:
In the future, improved technology will reduce the number of human beings needed to allocate capital, as it has done in other service industries. People will also play a smaller role in dealmaking and trading, just as they do when we board a plane or shop for clothes. HSBC is downsizing so dramatically because its leaders look at technology companies and see their bank as a dinosaur that must shed weight or become extinct. …
Facebook and its peers also play an allocative function, just as banks do, except they help people move content instead of capital. Social network firms and banks both allocate information; in one case it is personal data and in the other it is money. As with Google, though, the employment numbers differ starkly. Facebook’s equity is worth more than that of most banks, yet it has just 2,000 employees.
Imagine the following thought experiment. If all of the world’s major banks had failed during 2007-08, and regulators had permitted Apple, Facebook, Google and Microsoft to take over the economy’s capital allocation function, how would employment numbers have changed? Surely any neo-bank would hire smart lenders, traders, analysts and advisers, the people who have the strongest relationships with, and knowledge of, the institutions that demand or supply capital. But would they have hired all of them? Half? How many people would a new bank really need? Hedge funds take on traditional bank functions with a fraction of the employees.
And sometimes that doesn’t work out!
It’s kind of hard to argue with a lot of what Partnoy is saying. The financial industry is big on path-dependency, and a lot of what big banks do would probably not have been your first choice if you were designing yourself an ideal financial system. Reuters today has an article about bankers complaining about low fees from equity sales by U.S. government-owned companies and, as a former capital markets banker, I’m all for fee discipline but come on:
At 0.75 percent, underwriters earned $136 million in fees from the common stock portion of GM’s IPO. Out of these proceeds, banks pay attorneys and internal staff, as well as roughly half of investor roadshow expenses such as hotels, meals and jets. … “The GM IPO at 75 basis points was essentially uneconomic for the firms that spent all the time doing it, given how many man-hours went into it,” the banker said.
Er, right. If you really can’t figure out a way to sell shares of an iconic American company while spending less than $136 million on private jets, maybe you do need to take another look at your cost structure.*
Still it’s not entirely fair to ask what Google would do if it were reinventing the capital allocation process from scratch (though, yes, it would involve fewer bankers). Actual Google and Facebook, as opposed to imaginary Google Sachs and Bank of Facebook, make the bulk of their money on basically unregulated online advertising. Banks don’t have that luxury. Jamie Dimon will be happy to tell you about how regulation and capital requirements add to banks’ costs. If you don’t believe him, ask his friends at Main Street Bank of Kingwood, Texas, for whom the Journal yesterday shed a tear because they’re packing up shop and becoming a non-FDIC financial company rather than deal with FDIC capital regulation. That is unlikely to happen to LinkedIn.
The costs of being in a regulated, “systemically important” industry probably explain a lot of why banks do less with more people than high-tech companies. It also may explain why hedge funds can do bank functions with fewer employees. That’s not necessarily a good thing – a couple of fascinating and important recent papers (by Zoltan Pozsar at the IMF, via Marginal Revolution, and by Morgan Ricks at Harvard Law School) delve into the explanations for why non-bank entities have taken over traditional bank money creation functions, and remind us that they arguably pose more systemic risks than banks with less regulatory oversight.
It’s probably a good thing that banks whose mistakes can bring down our entire economy get more regulatory attention than the companies that are re-configuring our souls. We didn’t need those anyway. But as long as that extra scrutiny is there, banks may continue to be less efficient than, y’know, the most efficient companies in history. Which may be good for your job security. Especially if you’re checking Facebook all day when you’re supposed to be pitching mergers.
* Yes I realize that that $136 million was split among approximately 236 million banks (http://www.sec.gov/Archives/edgar/data/1467858/000119312510262471/ds1a.htm) but still – that’s an inefficiency too.
TLDR
Agreed
no, yes, yes, no
I disagree.
L to R
Yes, Yes, No, Yes, Yes, Yes, emphatic NO.
MLDR
I don't have time to get granular on the GM deal but the economics are below market at 75bps. When you take into account comp and number of groups touching the deal, on top of Roady costs (printing alone is probably $10k!) and the carefully billed law hours- it's hard to get too constructive on the cost controls of $140m. I guess supposedly you were an IBD analyst so you figure empathy would be in store, especially with regards to comp from the deal- I know I felt shafted getting $7.25 an hour to switch verdana 9 to Arial Narrow 8.5.
"I don't have time to get granular on the GM deal"
Well, running Greenlight takes up a lot of time
Can Bess please edit Matt's posts for length, humor, and relevance?
i find it quite educational
gj, matt
KYS inside a chain restaurant in TX.
kids, please stop being so hard on matt. he's trying his best to establish an alternative editorial style here at dealbreaker–its just basic diversification. matt is a nice jewish boy who means no harm. just give him a chance.
-matt's mommy
Are you related to Kouwe's mum?
But I have too much to live for. I haven't heard everything about printing costs yet.
I find Matt's posts rather short.
~M. Proust
Yes, maybe, yes, already done.
-Edwardo Saverin
Short summary for the ADHD afflicted: Banks suck, their employees get paid too much and they contribute little to society. Hence they can be replaced with alternatives.
THIS FUCKIN GUY WITH THE FUCKIN LONG POSTS!
You will never work for twitter Matt. Never!
-Jack Dorsey
Thanks for the summary Matt.
- guy who is on Adderall and/but still values his time
Welcome back Mrs. Durden
Totally agree with the basic premise: computers can allocate capital far better than humans.
- Server #1507, Long Term Capital Management
Dealbreaker is still the greatest website on the planet. It was the first decent financial blog on the planet. They have the best content. God bless all the readers all around the world. Those who have read and those who are reading today. They have the best editors, best humor, best commentors, most pictures of Lloyd, the hardest eating challenges of all. Those thing will be here for decades. They aren’t going away. The strength in this blog will blow your socks off when it gets out of this malaise we’re in.
Har har. Real funny, dicknose. Beep borp.
-Star
Too soon, bro.
- Ken Griffin
so yesterday the market tanked and matt's posts were short. today the market rebounds and we get a novel. correlation?
- guy who is hoping for a MASSIVE sell off tomorrow
No, no, no…depends upon how big my Facebook allocation is
If apple allocated all the capital in the economy then AAPL would have to become the de facto currency, since no one would ever receive interest, dividends, or wages, just dilutively issued AAPL shares
I'm going to assume you are drunk or went to the ivies. Those chicks are busted, especially for a billionaire.
Dartmouth WASP
The blonde – gosh, i would do her till hackers killed facebook.
Agreed.
-L. Tolstoy
And there would be 50% unemployment because everything possible would be outsourced to Chinese slave laborers earning a nickel a day.
He's finished already?
-George R.R. Martin
As stated, the GM IPO fee structure is an anomaly as all of the bankers just wanted to have their imprimatur on the front cover of the prospectus and be able to mention their involvement in future pitch meetings. US IPOs generally pull in between 5-7% of the offering size in fees.
I imprimatured once, your mom was quite nice about it though
Elite Sarcasm. Bravo .+1
Proust is elite sarcasm, Tolstoy merely pretentious high school sarcasm
Bess, please send a Larry David from the Carnegie Deli to my pal B.O. in Martha's Vineyard. It will save me the fucking trip.
Partnoy's idea sounds ok on paper but is not realizable at this point at least. He has not consider several major bugs that could compromise everything. Principally, today's technology does not have the longevity, willingness to get it in the a** or ability to be brainwashed like analysts and associates such as myself. Facebook would need to make those important fixes or the software would not be able to overdeliver for its MD.
The software would malfunction and burn out without being allowed shut down to rest or to download updates. So Partnoy shouldn't be shocked when the human capital replacement technology begins to:
- Start throwing other software under the bus and BCCing VPs on things;
- Copy sheet+paste valuing others' completed models;
- Roll its eyes at VPs;
- Threaten to quit among co-workers if bonuses come in low;
- Shop buyside opportunities under the radar and brag about PE phone interviews;
- Take too many computer equivalents to adderrall +redbull;
- Hate life and wonder whether IB is worth it in the big scheme of things;
- Feel the need to explain to any remotely attractive piece of female software that you are not just another another platform, but an investment banking platform, and so you bring way more to the table than any lazy 8am-6pm technology out there, at least until buyside software comes out.
Please add these items to the challenges slide in the technology roadmap deck and for fucks sake use Helvetica 10 point not Arial you goalless, non-detail oriented peon, tx.
Nice