Corporate culture in investment banking: an inside look

A former investment banker examines the culture that motivates people in the industry to put their interests above those of their clients. Part three in a series of columns by anonymous sources that reveal how industries operate from the inside out.

In March, we published an anonymous account from a former investment banker, who agreed to share some thoughts on the inner workings of the industry. “As a former London employee of a major investment bank, I am often puzzled by the tone that senior investment bank executives use when addressing the public,” he wrote , referring to what he described as a gap between how the investment banking industry presents itself and how it actually operates. “For me, banks are experts in exploiting information asymmetries. In addition, they often amplify this asymmetry themselves by making the products they offer more complex or by disclosing only a fraction of the information at their disposal, ”he added.

In his article, the former investment banker detailed several methods by which investment bankers put their interests before those of their clients. Investment banks, he argued, deliberately obscure their products, marketing products that are too complicated in order “to prevent the customer from understanding where the bank makes money or to make it difficult to compare the transactions offered by the bank. other banks “, thus protecting banks from competition. They also regularly try to “take advantage of their clients’ weaknesses.” “It is when our customers are the most fragile that we earn the most money,” he quoted, citing his former boss.

Below is the second part of the former investment banker’s report on the industry in which he worked. This time, the focus is on the culture that enabled the behavior he talked about in his previous article.

During my past experience in a leading investment bank, I had the opportunity to observe the specificities of the corporate culture in this sector and how it influenced the behavior of employees in terms of taking risk.

It may sound tautological, but the majority of my colleagues worked in investment banking to make money. Compensation was therefore at the heart of their motivation and shaped their daily attitude, as well as their long-term goals. My employer’s workforce could in a way be compared to a bunch of mercenaries, who fight while they’re paid well but can quickly switch sides if a better offer from a competitor comes in.

Although this looks like an efficient labor market, one of the limitations of this model is that it encourages employees to take risks, as they are unlikely to bear the costs in the long run while enjoying the benefits. immediate (because they will have moved to another bank when the risks materialize). The high churn rate of the workforce also has an impact on interactions with employees, as people are less eager to invest in long-term relationships and build trust than in other industries. . This model also encourages workers to focus on the most transferable skills, as these will be easier to monetize with an outside supply.

It is well known that bankers are paid by bonuses. What is less known is that bonuses are usually first allocated at the business unit level, known as the bonus pool, and then distributed among team members at the discretion of the manager, in total opacity. Employees are familiar with this system and therefore “locally” compete for the premium. This means that bankers have no interest, if not negative incentives, to help their colleagues, for example by sharing knowledge with them. As we were all sitting in an open space at a very close distance from each other, this lack of communication could reach extreme levels. My office neighbor, who sat two feet away from me, usually ignored me completely and only spoke to me when he was trying to get information about the transactions I was working on.

While this competition for the bonus pool was not in play when interacting with people outside the business unit, the lack of incentive was usually enough to prevent knowledge transfer as well. I remember a conversation I had with a structured credit trader that abruptly ended when I couldn’t convincingly answer the question “Where can I make money there -” inside ? This monetization of interactions was favored by the existence of an internal currency, “production credits”, or PCs, which corresponded to the P&L of transactions, and which were distributed among the participants of a transaction. Individual annual performance targets were usually expressed in PCs.

Another important dimension of human resources policy is the heavy use of layoffs. Banks lay people off massively during a crisis, but they also usually do an annual “cleanup” and let the poorest performers go. This creates a feeling of insecurity which can also promote risk transfer, for example for workers who are behind in their objectives. It also contributes to having fragile working relationships.

An anecdote of a wave of layoffs in the midst of the financial crisis shocked me. When you’re made redundant, you usually get a call on your landline, go to a top-floor meeting room, and then straight out of the bank without going back to your office, so you can’t get revenge by creating losses on your trading portfolio or steal valuable information. Your assistant usually collects your personal belongings, such as your jacket, and brings them to you outside the bank. A worker from the shift working next to mine received this treatment. Once his (well-paid) colleagues learned this information, their reaction was to go through his office stuff to see if there were any things they could take, like a pair of scissors, a desk awl, etc.

Another key feature of corporate culture was the use of some form of Social Darwinism. Internal competition has been encouraged to stimulate the workforce. Thus, the scope of activities and the targeted clients of the different teams were generally defined in a vague manner and open to negotiation. This “law of the jungle” regularly led to conflicts between workers or teams, which had to be arbitrated at a higher level of command.

This atmosphere of internal competition was deliberate, as illustrated by the dual appointment model. It was indeed quite frequent that when a manager was replaced, for example the European manager of an activity, the role was initially shared between two co-managers. “Survival of the fittest” would then decide which of the two would get the job in the long term. These power relations also played out between front office employees and the middle office staff responsible for overseeing them. I remember a colleague of mine threatening a middle office manager for getting approval saying, “I could lose my job if we don’t get this deal done, but I’ll make sure you lose your job as well.” . “

These types of behaviors may be less pronounced in banks today as compensation and internal processes have evolved. However, they are likely to have migra
towards financial institutions less supervised by the regulator.

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