John Paulson Ditches Banks, Drums Up Some Business For Them

I think everyone who's ever worked at an investment bank saw at least a little something of themselves in the Journal'sfat asshole article this morning. My own feelings are mixed since, for me, investment banking was a lifestyle improvement over a previous job that left me partially paralyzed from overwork (true story! I got better). So in a sense I don't have that much to complain about, but I did, and do, constantly and loudly and now on the internet.

Part of what sucks about banking - that I think the Journal article missed - is the frequent pointlessness of your activity: you get on a plane, go see a guy, tell him about this awesome merger or financing or whatever you've got planned for him, shake hands, and fly away never to see him again. And by "never" I mean "not until six months later, after he's printed a deal away from you, when you go and do the same thing, but this time maybe you don't shave." You'd probably still be a fat, stressed, overworked cabbie-puncher if most of your ideas actually got executed, but you'd perhaps be less suffused with metaphysical dread. That's how I'd feel anyway. Then, I blog now.

Anyway, a thing that I don't know anything about, and never ever want to know anything about, so don't tell me, is the proper price-to-book trading multiples of life vs. P&C insurance companies and whether there's a conglomerate discount for being in both businesses. So with that as a disclaimer I found this pretty damn convincing:

That's from John Paulson's presentation about how The Hartford should spin off its P&C business because both life and P&C should trade at higher multiples than the current mixture. That presentation serves as sort of the launch party for his new career as an activist investor, which is a follow-up to his old career as a guy who had terrible timing re: bank stocks, which in turn was a follow-up to his career as a gold bug, which in turn was a follow-up to his career as a guy who hates America/mortgages and loves Goldman Sachs/shorting mortgages, which in turn was ... um, was there merger arbitrage in there somewhere? Let's say yes. Anyway:

The moves ring of activism, a strategy practiced by many a hedge fund manager, from the old school raider Carl C. Icahn to his figurative heir, William A. Ackman. But it is a new strategy for Mr. Paulson, who has largely stuck to merger arbitrage and is best known for his credit bet against the subprime mortgage market that earned him billions of dollars.

Early days yet but it looks like Paulson is pretty good at this activism thing, with HIG up 3ish percent today, supposedly on JP's efforts. And that deck is ... I mean, to me, as just some guy who knows nothing about the insurance industry, it's fairly convincing. On the other hand, it's a little slim on analytics, and it lacks a certain visual panache that the finest banking PowerPoints can provide. Remember, though, that people in banking are actually going around trying to add visual panache to their PowerPoints, and that is a terrible way to live.

But it's a way to live because maybe that panache gets you a deal. On the other hand, this paper claims "a success rate of about 60% in accomplishing activists’ original objectives." This one says 41 or 67% success depending how you count. Those are JUST STAGGERING NUMBERS if your point of comparison is success rate of investment banking pitches.

There are fairly obvious reasons for the discrepancy and they aren't about PowerPoint skills. They're about the difference between, on the one hand, a dozen investment banks chasing a company to churn up business for fees - "sell stock! buy back stock! buy another company! sell yourself" - and, on the other hand, one or two shareholders betting their own money that the company can create more value for shareholders. When John Paulson, not known as a greenmailing saber-rattler, pitches you on a spin-off, you've got to take him seriously - or at least explain to his satisfaction why you're blowing him off. When some banker shows up and gives you an unsolicited pitch for a spin-off, your obligations extend no further than letting him use your bathroom before heading out to the airport.

So it's no surprise that people leave banking - the study cited by the Journal finds that one in five bankers left over the six-year study, which, what?, there were days where it seemed like one in five bankers had quit - to try to find a way to the buy side. Not only because of the often better money and hours, but because there's a so much better chance that if you have a good idea you can actually convince someone to carry it out. And, on the flip side, banking refugees at places like Paulson have the training and desire to flog corporate restructuring ideas to their investments - and a much improved chance of making those ideas happen.

This is good for their former employers, of course. If HIG actually does a spin-off there's work in it for a bank - hopefully, for irony's sake, one of the banks that Paulson has sold out of - but even if they don't this is good for business. Activist hedgies are convinced that investment banks use them as a boogieman to scare companies - "I hear Icahn was buying calls on your stock, you'd better hire us as your anti-raid advisor and maybe do a buyback to head off activism." Paulson has never been much of a name to threaten companies with - rather the reverse; he's typically a good solid supportive owner of your gold mining / terrible banking concern. Expect a lot of bankers to be getting on planes to see those gold miners next week to warn them about Paulson's newfound activism - and recommend just the transaction to head it off.

Hedge Funds Switch Positions, While Paulson Switches Investing Style [DealBook]
The hedgies’ tool of choice [FT]
Hazard of the Trade: Bankers' Health [WSJ]