Back to the bank?

from Peter Radford

Following on from the revelation that our impoverished banks are thinking off penalizing their staff for the rather obvious and rational decision to re-locate, along with their big city wages, to a low cost place to live, we discover that most are now trying to force those recalcitrant workers back to the big city offices.

My head is still spinning from the absurdity of the threat to cut the wages of enterprising workers.  Just how stupid, mean-spirited, and unnecessary is this?  Those workers are being exactly the kind of person the banks want to employ.  Self-interested, rational, aggressive in pursuing their goals, and intense.  The problem, I suppose, is that all those qualities make them difficult to control.  Whatever next?

Banks love, of course, to crow about the so-called “teamwork” and “spirit” that allows them to help their clients “realize their goals”.  Renting this teamwork is expensive.  Woe betide the unsuspecting client who falls into the grip of a hungry investment banker.  That spirited teamwork can appear gold plated at times.  Those partners have expensive lifestyles to uphold.  The army of grunts they bring along with them to crunch the numbers , work through the night, and generally play factotum to their every whim, is well paid, smart, and ambitious.  It is also expensive.  Having such an army allows places like Goldman Sachs and Morgan Stanley to earn enormous amounts of profit from what are fairly straightforward activities like trading, and giving advice.  This is not to diminish what they do.  It is just to remind us that those things are an enormous cost to be borne by the non-financial economy.

I wonder sometimes just how much all that savviness has added to GDP.  Are we all better off for the efforts of the overnight banker-grunt churning out spreadsheet in double time rather than, say by lunchtime the next day?  Has all that M&A advice really added to the economy?  If you believe Jan Eeckhout, in his book I mentioned recently, the answer is a resounding no.  Industry consolidation leads to the development of market power, which, in turn, allows dominant firms to under-produce, over-price, and thus hammer both workers and consumers at the same time.  All in the name of a few extra points in the return on equity and a few more millions for the CEO’s next bonus.  The world must bend to the will of shareholders.  Mustn’t it?  However the banks justify their existence, the real world consequences of their activities appear to have aided in the stagnation and malaise we were suffering through before the pandemic hit.

But about those ROEs.

I note that the banks did pretty well in 2020.  I love when a bank CEO talks about the “challenges” the organization faced in his or her notes accompanying the earnings report.  Challenges is such an anodyne word.  It is extraordinarily elastic.  It can mean a mild hiccup, or it can mean an existential disaster.  A pandemic is certainly a challenge.  Tens of millions of people lost their jobs, hundreds of thousands died, a multitude of small business went under, and our political system nearly sank under the weight iof partisan disagreement as to whether the entire thing was real or not.  Challenge seems to understate some of this.  But it is the preferred word of the public relations people drafting serious CEO statements.

And I also not that the banks appear to have risen to these challenges heroically.

You see, their ROEs rose.  It was a good year.  Goldman Sachs ROE was 11.1% for the year 2020.  It was 21.1% in the fourth quarter. The bank’s diluted earnings per share was $24.74 in 2020 compared with $21.03 the year before.  Its book value rose 8.1% on the year.  If these are hard challenging times I shudder to wonder at the sea of profits that must roll in during a less stressful year.  Morgan Stanley’s numbers are similarly bountiful.  Clearly being a big-city investment bank during pandemic must be a walk down easy street.

The point is not the excessive weight these profits are on the rest of the economy, but the fact that they achieved these results with most of their staff being remote.  That vaunted teamwork that now apparently depends on everyone turning up at the office, living in expensive big-city apartments, and absolutely not living in low-cost more pleasant lifestyles, managed to survive remotely.

So why the urgency in bringing people back?  The profits didn’t go away.  The business model appears to have survived.  I imagine the CEO was paid a good bit.  That’s all that matters isn’t it?  The entire enterprise did well.  More than well compared to the destruction in the less rarified sectors of the economy where the challenges were real rather than the subject of PR word-smithing. The cash rolled in.  Just how much more do the banks need?

Let me repeat: so why do they now all need, urgently, to force their workers back to the office?  Why does the head of Morgan Stanley need to sound like a complete idiot by using overly tough language to threaten his own staff?

Is this simply a clash between generations, with the old guard uncomprehending of the younger set’s ability to work more flexibly? Is it that having survived the notorious hazing of those overnights stints and foregone family moments that the old guard is begrudging of the youngsters desire not to go through the same?  The pandemic and its enforced remote working proved that many of the ironclad rules of investment banking behavior are incorrect.  They are nothing but antiquated and unnecessary norms to justify the excessive pay that the bankers receive.  There must be better ways to sort the wheat from the chaff within each annual intake from the top business schools.  Perhaps not.

But if not, then we have to suspect the culture that needs such an old style management process.  If, having performed well during crisis, a firm needs to abandon all it might have learned from the flexibility enforced on it, why would we trust the progressiveness of its advice?  Is that firm truly a cutting edge source of thinking?  Or is it simply an obsessive deal maker, intent on cutting deals whether good or bad?  If it cannot walk away from its own old style methods in the face of newly acquired knowledge, how can it advise others to do just that?  It can’t.

The alternative is, of course, that the cultures of the banks are so rotten that they need their staff in close quarters for supervision.  Traders can go rogue.  They often do.  That’s risky.  It’s best to bottle them up where you can keep an eye on them.  Perhaps the Morgan Stanley CEO is right: his bank is so riddled through with poor morale, full of cultural contradictions, inequities, and other distortions that he needs to have those incorrigible workers on site where he can bash them into shape.  Clearly he can’t trust them if they remain offsite. That he doesn’t trust them is obvious.

The more intriguing question is: why should they trust him?

Why should his clients?

Why should we?