The Banker's Blog Watch

A product controller discusses being gay and working in finance, as well as his role in the 'middle office' of his firm

o This monologue is part of a series in which people across the financial sector speak to Joris Luyendijk about their working lives

He wrote in to the blog offering insights on being gay in finance and on his work in product control, a role he helpfully described as "an accounting, risk and compliance function which independently verifies traders' profit or loss, and also helps prevent rogue trading", adding "I'm not very good at making my job sound sexy, am I? Perhaps this is why I never end up talking about work at parties".

"There are handicaps to being gay in finance, if you want to call them that. For example, the sports thing. I have tried to take an interest, after noticing that not knowing anything about football cut me out of a lot of conversations. But it's so time-consuming! There are all these teams, and they play so many matches, and you're expected to know all the results and all the players. Basically, I've given up on that.

"The kids topic ... I know of older gay bankers who find themselves shut out of many conversations because they don't have them. However, people in product control are quite a young population. Most tend to move jobs before having kids. It's a pretty pyramidical structure and by the time you're in your mid-30s there's nowhere to go in the bank and you move elsewhere. We're all accountants so it's not difficult to change industry.

"Generally I have encountered no homophobia at work. In university it was different. When I told people there, a good 90% was completely confused. It was clearly their first encounter with a gay person.

"In the workplace, it's best to come out quickly. You don't get terrible homophobic jokes but it's a trading floor environment so there is a lot of banter. This is one reason to come out quickly, to prevent people from embarrassing themselves with a homophobic joke.

"The best way to go about it is to slip it into a conversation, very soon into your new job. I would drop the word 'my partner', then see if there was this moment of confusion in the other's eye, indicating they had understood and they are frantically asking themselves how to react. Given that some people now talk about their wives as 'my partner', it's probably best to include your boyfriend's name, too. The best approach is to find somebody who is a bit of a gossip. They'll spread the news for you. You really don't want somebody who is really discreet for this.

"I have always been very relaxed about it all. I remember when I told people there was one guy who froze. I could tell that he was thinking to himself 'and you seemed so normal'. What's the picture across the industry? In my group of friends all have told at least one colleague. But two in five are not out. The thing is, if you've been there for a while, it becomes harder and harder to suddenly say: look, by the way, I am gay.

"Are there areas in finance where gay people are over-represented? Well, the regulators are full of them, don't know why really. Maybe the public sector ethos? In our bank the marketing department has quite a few. There is a gay network in the bank, but it's not championed in the same way as, say, women's networks. There's a lot of talk about the percentage of women in executive positions. No such things exists with gays, ha ha: 'We need at least 10% gay people in the board room.' No. You see very few, if any, gay people in trading front office positions. Discrimination? I am not sure. I would say that the front office appeals to a certain type of person, and it's an environment that, as a gay man, I don't find particularly welcoming or appealing. You just really don't wanna work there.

"I have also worked in the public sector where you get none of this. But in banking you are definitely expected to get shit-faced with your colleagues every once in a while, then make something of a tit out of yourselves. It's about creating a shared, slightly shameful experience. I remember going to this strip club one time, and how we clearly formed a group by doing that. It's less titillation than bonding.

"Although a qualified accountant I'm not from a particularly quantitative background and I still get intimidated sometimes by the jargon. It's like people deliberately talk in riddles. I really wasn't prepared for how sophisticated many traders are.

"Drugs and strip-clubs? I don't think that happens with the traders I deal with. At least not to a greater extent than in other industries. 'My' traders just aren't like that. They are in it to make money, not spend it. They are not smartly dressed or something - again, very different from the stereotype. The atmosphere is macho, and there are very few women in front office (where the traders work - product control is known as middle office). There are more and more women in finance, but not as many in front office.

"The public stereotype of them is these private-school assholes gambling the day away. In my experience that's doubly incorrect. One, traders are held by very strict risk limits; that is, they cannot take risks beyond a predetermined level. If they do, they get fired. Second, most traders by now are geeks, people with a head for maths.

"They are obviously very intelligent, and have this confidence bordering on arrogance. I don't have that - but they must have it, or they'd fall apart. They have to make so many snap decisions that they cannot allow for doubt, or self-doubt. Myself, I am much more aware of my weaknesses. When I have to work something out, I like to sit down and think it through, even if that takes time. Also, traders often hold 'positions' overnight, meaning they have bought something and haven't sold it yet. What this means is that they are running a risk of that thing losing value. Again, I really wouldn't deal with that very well. I like to go home after I've done my job and switch off, rather than worry about what the market is going to do the next day.

"Some people in product control have a game-plan, in that they hope to advance to front office and become a trader themselves. Obviously, after a few years you really get to know the products that are traded, you get to know the market, and you are often the first to hear about job openings. I have no ambitions in this regard. Also, job security is worse. One guy I know moved to front-office only to be made redundant six months later.

"Before the crisis traders had lots more power. Now there are many more control functions and they are under much more scrutiny. Also, there's a focus now on the balance sheet. The focus is no longer simply on how much money you make, it's on the risks you took to make it, and the capital you used to make it.

"What's the hardest thing to explain about my job to outsiders? I wouldn't know. As soon as I tell people that I am accountant in product control, the conversation stops. I don't mind, I am not very interested in talking about my work outside work.

"The short answer of what I do: I tell traders how much money they have made that day. It's called the Profit & Loss, or P&L.

"I am in derivatives. Traders buy and sell derivatives all day, and at the end of that day we need to know two things: how much money they have made (or lost) and how much money is at risk if the market moves one way or another (their "risk position").

"Derivatives can be pretty complex, and 'illiquid', meaning they don't get traded a lot, or at all, so it's harder to determine their value. Compare it to a very rare painting. To figure out how much they are worth, you cannot just consult a market, as there is no functioning 'liquid' market for them. So we use models, and observe similar trades.

"Usually traders have a good sense of what their P&L is, but sometimes we arrive at a very different number and you get a massive bollocking. Any trader worth their salt should know how much money they have made or lost at the end of the day, and should not need you to tell them. So if the final number you're giving them is totally different to what they were expecting, it means they don't understand their risk position, their own books, properly. Which, understandably, can make them quite upset. Thankfully this sort of thing is pretty rare.

"Product control is an interesting part of banking because on the one hand you are reporting for the regulators, the auditors, the shareholders and you're trying to stop the rogue traders who could bring down the bank. But on the other you are answerable directly to the front office, whose interests lie in the other direction. It can be an extremely difficult balancing act - particularly in the world of investment banking where traders don't particularly like to be told what they can and cannot do.

"You ask about rogue traders. There is now a big focus on this, after all the scandals. Rogue trading is not about greed. It's about desperation. They know they are going to be discovered some day. But they are just postponing the inevitable. Rogue traders are people who made a mistake or lost money, then tried to cover that up.

"Truth is that the scale and complexity of a major bank's trading operation makes for opportunities. Every trader runs one or more so-called 'books' with all his trades. But when a trader leaves for another job, the book usually stays on the system. So you have thousands of old books from traders who stopped years ago. Somebody with intimate knowledge of the systems might try to squirrel away some trades. Another way is to cancel and rebook a trade every few days so it never gets processed properly, and flagged up.

"If product control were a beast in the animal kingdom? Hmm, what sort of animal goes around lots of other animals but doesn't get eaten? Also, there's lots of us, and we are engaged in an activity that in and of itself makes no sense but which is indispensable in the greater scheme of things. Maybe bees? Or ants?"

o To comment on this interview, please visit the accompanying blogpost

A product control worker tells Joris he doesn't face real homophobia, but that he doesn't see gay people in front-office trading positions. Join him in the thread

What's it like being gay in finance? It appears that investment banks hunger for talent, and fear of lawsuits or bad publicity makes them bend over backward to create an open environment for "minorities". An earlier interviewee even said: "In my mind [the big banks] are really trying too hard. There's always some scheme or stand over-promoting the next workshops for mothers-to-be. One week it's diversity week, the next it's I-don't-know-what week ..."

At the same time the higher echelons of the mega-banks are still overwhelmingly occupied by white straight males. Today's interviewee is in the so-called middle office, a support function for traders (in the front office). This is his experience as a gay man and it would be terrific if other gay insiders in finance could join the conversation in the comment thread below.

"Generally I have encountered no homophobia at work. In university it was different. When I told people there, a good 90% was completely confused. It was clearly their first encounter with a gay person. In the workplace, it's best to come out quickly. You don't get terrible homophobic jokes but it's a trading floor environment so there is a lot of banter. This is one reason to come out quickly, to prevent people from embarrassing themselves with a homophobic joke."

The interviewee confirms that in his bank "you see very few, if any, gay people in trading front office positions." Is that due to discrimination?

"I am not sure. I would say that the front office appeals to a certain type of person, and it's an environment that, as a gay man, I don't find particularly welcoming or appealing. You just really don't wanna work there."

The full interview is here, and below the line the interviewee is taking your questions and comments. It would be terrific if other insiders could join the conversation, gay and straight, on what it's like for gay financial workers. Are some banks more friendly to them than others? When I asked the interview whether he believed gay people were over-represented in some areas in finance, he said:

"Well, the regulators are full of them, don't know why really. Maybe the public sector ethos? In our bank the marketing department has quite a few. There is a gay network in the bank, but it's not championed in the same way as, say, women's networks."

Finally, the interviewee has some genuinely important things to say about his work in "product control", one of the functions in a bank tasked with monitoring traders and the risks they take. One quote to whet your appetite:

"Every trader runs one or more so-called 'books' with all his trades. But when a trader leaves for another job, the book usually stays on the system. So you have thousands of old books from traders who stopped years ago. Somebody with intimate knowledge of the systems might try to squirrel away some trades."

In particular, if you are thinking about leaving a comment, please read the full interview first. Since this is a normal working day for the interviewee it may take a little bit of time before he can respond.

Read on

o This banking blog features interviews with by now more than 80 insiders across the world of finance. Here is a guide to help outsiders find their way. For insiders there is this index of interviewees ranked by activity. Are you by any chance working in human resources in a bank, or are you a trader in government bonds? Please help this blog: jlbankingblog@gmail.com. Anonymity guaranteed.

This derivatives trader sits on the other side of what today's interviewee describes: "Why trading? There was the glamour of it. You know, the money, the girls, rock and roll without the guitars."

This risk analyst in a retail bank talks about her experiences as a transgender PhD quant: "When I came out as gay at work, my boss was really supportive and so were my colleagues. There has been only one idiot so far. But friends who work in the City tell me it's different there."

According to the latest update on the FDIC’s website, the pace of the agency’s filing of failed bank lawsuits picked up considerably in the last month. According to the agency’s website (here), which the agency updated on May 22, 2013 the agency has now filed a total of 63 lawsuits against the directors of failed banks, an increase of nine new lawsuits since the agency’s last update in April. With the latest lawsuits, the agency has now filed a total 19 new lawsuits so far this year, compared to 26 during all of 2012.

The agency’s quickened pace of lawsuit filings since its last website presents quite a contrast to the period preceding the agency’s last website update. As I noted at the time of the April update, the agency had filed only one new lawsuit since its prior update and had filed only four new lawsuit overall since February 1, 2013. I had noted in posts since the FDIC’s last website update that the agency had been filing a number of lawsuits. However, the agency’s website update contains a number of new lawsuits I had not previously noted.

First, on April 26, 2013, the FDIC filed an action in the District of Puerto Rico in its capacity as receiver for the failed Eurobank of San Juan, Puerto Rico, against nine of the bank’s former directors. A copy of the FDIC’s complaint can be found here. Regulators closed the bank on April 30, 2013, so the FDIC filed the action just before the third anniversary of the bank’s failure. The action seeks to recover over $55 million in losses the bank incurred on twelve commercial real estate loans approved between March 6, 2006 and December 22, 2008. The complaint alleges that the nine director defendants “failed to properly oversee Eurobank’s lending practices and approved 12 high-risk loans with glaring underwriting deficiencies that violated prudent lending standards as well as the Bank’s own credit risk management policy.”

Interestingly, it its lawsuit against the former Eurobank directors, the FDIC also named as defendants the spouses of several of the directors: the conjugal partnerships of several of the directors; and the bank’s D&O insurers, with respect to which the agency seeks a judicial declaration that the carriers’ policies cover the losses the agency seeks to recover. These additional defendants are named as defendants pursuant to Puerto Rican law. The insurers are named as defendants in reliance of Puerto Rico’s direct action statute. (The FDIC’s prior failed bank lawsuits in Puerto Rico also named spousal and insurer co-defendants, in reliance on the provisions of Puerto Rican law, as discussed here.)

Second, the FDIC filed an action on April 29, 2013 in the Eastern District of Missouri in its capacity as receiver of the failed Champion Bank of Creve Coeur, Missouri, against ten former directors and officers of the bank for negligence, gross negligence and breach of fiduciary duty, for approving “sever high-risk out-of-territory commercial real estate loan participations and two business lines of credit resulting in damages of at least $15.56 million.” A copy of the FDIC’s complaint can be found here. The bank failed on April 30, 2010, so the FDIC filed its suit just before the third anniversary of the bank’s failure.

Third, on May 13, 2013, the FDIC filed an action in the Southern District of Indiana in its capacity as receiver of the failed Irwin Bank and Trust Company and Irwin Union Bank against four former officers of the banks. Regulators closed the banks on September 18, 2009, which suggests that the parties may have previously entered into a tolling agreement. As reflected in the FDIC’s complaint (here), the FDIC asserts claims against the defendants for negligence, gross negligence and for breach of fiduciary duty, for approving nineteen “poorly underwritten” loans between May 27, 2005 and April 12, 2009. The agency seeks recovery of damages of “no less than $42 million.”

Finally, on May 20, 2013, the FDIC filed an action in the Northern District of Iowa against eight former directors and officers of the failed Vantus bank of Sioux City, Iowa, which failed September 4, 2009. Again, the fact that the complaint has been filed so far beyond the third anniversary of the bank’s closure suggests that the parties may have entered a tolling agreement. The FDIC’s complaint (here), asserts claims against the directors and officers for negligence, gross negligence and for breach of fiduciary duty. The FDIC bases its claims against the defendants for allegedly causing the bank to use $65 million (120% of the bank’s core capital) to purchase “high risk collateralized debt obligations back by trust preferred securities without due diligence and in disregard and ignorance of regulatory guidance about the risks and limits on purchases of such securities.”

All signs are that the number of failed bank lawsuits will continue to accumulate in the months ahead. Indeed, as has been the case for some months now, once again the FDIC has adjusted its website as part of its monthly update to reflect the increased numbers of authorized lawsuits. In the latest update, the FDIC has indicated that as of May 21, 2013, the agency has authorized suits in connection with 114 failed institutions against 921 individuals for D&O liability. These figures are inclusive of the 63 filed D&O lawsuits naming 488 former directors and officers, so the implication is that there is a backlog of as many as 51 approved but yet unfiled lawsuits in the pipeline.

At least by reference to bank closure dates, the assumption would seem to be that we should be near the high water mark for failed bank lawsuits, owing to the fact that the peak numbers of bank failures occurred in the last two quarters of 2009 and the first two quarters of 2010. The suggestion would seem to be that the number of failed bank lawsuit might start to begin to taper off as 2013 progresses. However, the presence on the latest filed lawsuits of several banks that were well past their third anniversaries suggests that there could be factors that prolong the filing curve into the future.

With lawsuits authorized in connection with 114 failed institutions, the agency has now authorized lawsuits in connection with just about 24% of all failed banks. In other words, the percentage of failed institutions for which lawsuits have been authorized is approaching the 24% of failed institutions that were involved in failed bank litigation during the S&L crisis.

Though the bank failure rate has clearly slowed during 2013, some banks nevertheless are continuing to fail. As reflected on the FDIC failed bank list (here), three banks have been closed so far in May 2013, bringing the 2013 YTD number of failed banks to 13.

The early returns in the Libor-scandal related litigation have not been favorable for the claimants. As noted here, on March 29, 2013, Southern District of New York Judge Naomi Reice Buchwald substantially granted the motion to dismiss in the consolidated Libor-scandal antitrust litigation, and as discussed here, on May 13, 2013, Southern District of New York Judge Shira Scheindlin granted the motion to dismiss in the Libor-related securities class action lawsuit filed against Barclays.

Notwithstanding these setbacks for claimants seeking to recover damages from the Libor benchmark rate-setting banks, on May 20, 2013, certain claimants filed yet another Libor scandal-related lawsuit against the banks. The latest lawsuit, which was filed in the New York (New York County) Supreme Court, is filed as an individual action, not a class action, and may represent a new approach calculated to overcome some of the hurdles that the prior claimants have faced.

Alison Frankel has an interesting May 21, 2013 post about this latest Libor-scandal related lawsuit in her On the Case blog , here.

The latest complaint, a copy of which can be found here, was filed on behalf of two investment firms and two investment failed funds that they represent. In late 2007 and early 2008, the funds had entered into a type of complex financial transaction called a corporate bond basis package. One of the critical components of the transaction was an interest rate swap that, among other things, was designed to provide a floating-rate interest payment to the funds. The plaintiffs investment strategy assumed that as the banking crisis worsened, the Libor rate would increase, as (it was assumed) the crisis would force the rate-setting banks themselves to pay higher interest rates. The investment was designed to provide increased interest payments as the Libor benchmark increased.

Instead of making money as the Libor benchmark increased, the funds lost money, and actually had to make increased levels of collateral commitment, as the benchmark stayed basically level. Ultimately the funds were forced to unwind the transactions on very unfavorable terms, including, among other things, locking in artificially suppressed levels of Libor for the remaining periods of the swap transactions. Ultimately, the funds failed as a result of these problems. It was only later, when the details of the manipulation of the Libor benchmark rates emerged, that the plaintiffs understood that the investment performed so poorly because the Libor benchmark had been suppressed, as the participating banks sought to mask their true financial condition. Many of the Libor rate-setting banks that are accused of manipulating the benchmark rates were parties in the financial transactions that are the basis of the lawsuit.

Against the six banks with whom the plaintiffs had a direct financial relationship with the now-defunct funds , the plaintiffs have filed claims for breach of contract; breach of the implied covenant of good faith and fair dealing; and unjust enrichment. Against all of the rate-setting banks, the plaintiffs have filed claims for common law fraud; aiding and abetting fraud; tortious interference with contract; tortious interference with prospective business advantage; and civil conspiracy. The plaintiffs claim damages of $250 million.

By asserting common law claims, the claimants in this action avoid the statutory defenses that have led to setbacks for the claimants in the Libor-scandal antitrust and securities lawsuits. And while the assertion of these claimants of common law fraud claims will require the claimants to establish reliance, the nature of the relationship that these claimants had with the banks as a result of the transactions increases the likelihood that they will be able to establish reliance.

There have been prior Libor scandal-related cases asserting common law fraud claims (refer for example here). Nevertheless, this latest lawsuit may represent something of a new front in the Libor-scandal litigation wars, and may suggest a way for prospective Libor-scandal related to circumvent some of the obstacles that prior claimants have faced. That is, the claimants may avoid the problems prior claimants have confronted by proceeding individually rather than in the form of a class action, and by asserting common law claims rather than federal statutory claims.

The question is whether other prospective claimants individually have sufficient damages to warrant proceeding individually, and in addition whether the prospective claimants had sufficient direct contact with the Libor benchmark rate-setting banks in order  to be able to try to substantiate the common law claims  -- for example, to allow the claimants to satisfy “reliance” requirements. According to comments from the counsel for these claimants that Frankel quoted in her blog post, there “are lots and lots of investors who dealt directly with the banks “ and that have sufficient damages to warrant individual claims.

It may be, as these claimants’ counsel is quoted as saying in Frankel’s blog post, that “this is where the future of Libor litigation exists, if it exists.” While the Libor claimants may have hit some early setbacks in the prior cases, there may be future cases that avoid the hurdles that the prior claimants faced and that prove to be more productive for the claimants.

It is far to early if this alternative approach to Libor litigation will bear fruit, but there is at least the suggestion that Libor litigation still has much further to go. Despite the early setbacks, it may be a while yet before we can assess overall how claimants are faring in this litigation. 

In Defense of “No Admit” Settlements: For some time now, settlements of SEC enforcement actions in which the defendants neither admit nor deny wrongdoing have been under attack. These kinds of settlements were first and most publicly attacked by Southern District of New York Judge Jed Rakoff, who, in a November 2011 order, questioned the SEC’s no admit settlement with Citigroup. (That ruling is currently on appeal to the Second Circuit.) More recently, on May 14, 2013, Senator Elizabeth Warren sent the heads of several federal agencies, including the SEC, a letter questioning the practice of entering into settlements without an admission of guilt.

There clearly will continue to be debate on this issue. I have long thought that if the SEC is prohibited from entering into “no admit” settlements, among the possible consequences would be that fewer cases would settle, more cases would go to trial, and the SEC’s resources would be stretched, meaning even less enforcement in the end.

In a May 21, 2013 op-ed piece in the Wall Street Journal entitled “Why the SEC needs ‘No-Admit’ Settlements” (here), former SEC Enforcement head and current King & Spaulding partner Russell G. Ryan adds some additional concerns that might arise if the SEC were barred from entering into “no admit” settlements.

First, Ryan notes that an obvious alternative for the SEC, rather than pursuing civil enforcement actions in which it would be barred from entering into “no admit” settlements, the SEC would logically seek to pursue more cases through its administrative process, which requires no oversight by the courts. The administrative proceedings are viewed as less severe that federal court enforcement proceedings. In addition, because of the absence of judicial scrutiny, cases in the administrative process “invite the potential for reduced transparency and accountability when compared with settlements that require the imprimatur of an independent federal judge.”

Second, Ryan argues that if the agency were barred from entering “no admit” settlements, the outcome would be “weaker settlements overall.” Ryan points out that settlements are the result of protracted negotiations characterized by give and take by both parties. Ryan notes that:

Among many terms negotiated in an SEC settlement, the no-admit clause is one of the most important to the defense. A policy change requiring an admission of wrongdoing would, in essence, take this settlement term off the table. It would therefore force the SEC to compromise elsewhere in the bargain to maintain the fragile equilibrium that would have prevailed without the admission.

It is “naïve” to think that the SEC would be able to bargain for the exact same settlements as they are now if the SEC is not able to offer the possibility of a “no admit” provision in the bargain. Ryan contends that “the inevitable end result” if an admission of wrongdoing is required would be “lighter overall sanctions in a less accountable venue.”

GSE Reform: One analyst suggests that anyone investing in Fannie or Freddie right now is making two bets: one that the GSEs will remain profitable, and two that real GSE reform is not going to happen any time soon. Senator Bob Corker has introduced a bill that would leave shareholders with nothing: “If Treasury were [...]

The post Bank Notes: GSEs, 90/10 Rule, Sequestration appeared first on Bank Talk.

In a sector where relative differences in competing products can range from bad to really bad, World Acceptance has a payday loan product that uses accounting tricks to mask where its consumer installment loans fit on that spectrum. World Acceptance keeps the books on its high-cost loans using an unusual accounting device known as the [...]

The post World Acceptance Updates its Rule of 78ths Accounting Trick appeared first on Bank Talk.

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WATCHING makers of Italian furniture at work is a welcome reprieve from these disembodied digital times. They caress wood as if it were a living being and treat it with essences from the far corners of the world. Carefully, they cut leather for a couch. But Italy's furniture industry could do with some polishing. The domestic market is smaller than it once was and manufacturers are trying to enter emerging economies. The firms boast exactly the kind of workmanship and attention to detail coveted around the world, but many are family-owned and lack the size and the skills to sell abroad. 

Help is at hand from an unusual source for Italy's steeped-in-tradition furniture-makers from Formabilio, an Italian start-up (quite a rarity in the universe of internet projects). Italy's bureaucracy and chronic lack of venture capital make it difficult for new companies to get going. So to launch their firm, Andrea Carbone and Maria Grazia Andali, who are married, had to take more of a risk than many entrepreneurs elsewhere: they quit their jobs, sold their house in Milan, moved to Cison di Valmarino, a little town north of Venice--and put all their savings in their venture.

The founders don't dream of a big "exit", as tech entrepreneurs often do by selling their company to a bigger one for a lot of money or taking it public. "We want to have an ethical soul, but not only for the sake of being good: attention to CSR brings good returns," explains Ms Andali, who used to work in corporate social responsibility at a multinational. Most important, however, Formabilio doesn't have only one group of customers, but three. It is a "platform" that allows furniture designers to share their ideas, consumers to comment and vote on them and manufacturers to build and sell the winning designs.

The heart of this platform is themed contests, for instance for the design of clever containers or furniture that lets people fit more into small apartments. Designers are invited to upload projects to the site, where consumers are then able to suggest changes and pick their favourite design. At the end of a contest, a panel of experts put together by Formabilio chooses the winning designs. It includes a representative of a company that will later make the piece of furniture.

The idea is to ensure that everybody gets a good deal: consumers can buy furniture they like; manufacturers learn what markets want; and designers earn more money. Formabilio gives them 7% of the retail price, compared with an industry average on the wholesale price of 2%. "In Italy this is unheard of. But it's also a good commission abroad," says Mr Carbone.

Take the "Rolle", a clever stool that when laid on its side doubles as a stepladder. Its designer, Mario Palmieri, an architect from Salerno in southern Italy, will receive almost EUR10 ($13) for every piece sold (its retail price, excluding VAT, is about EUR150). It would be easy to find a cheaper stool online, but Formabilio wants to make sure each link in the manufacturing chain gets properly rewarded.

Launched in early January, it has grown fast and now has nearly 60,000 registered users; about 1,000 designers have already uploaded a project and three local manufacturers have signed up. There is no limit to how many users and designers can participate, though Formabilio wants to keep the number of suppliers small: the goal is to have about 20, each carefully selected not only for their ability, price and proximity, but also for their values.

Formabilio's concept is not without problems. Recently, a designer uploaded a project that had previously been presented elsewhere by another designer. Yet the site's community quickly flagged him--which is exactly what Mr Carbone wants to happen: no one, he argues, can police the many submissions as efficiently as a community of thousands of designers with a vested interest in keep the playing field level. And protecting intellectual property is another of Formabilio's goals. "Not many in the industry know this," he confides, "but European law says that any design work showed to the public benefits from the same three-year protection as registered products."

COMPANIES such as Apple and Google are renowned for their ground-breaking technological innovations. They have also put a great deal of effort into reducing the amount of tax they pay on the mountains of cash those innovations produce. Their tactics are now attracting the attention of governments, who have been putting tech firms' tax strategies under a microscope. Last week, Google came under fire from British politicians, one of whom publicly accused the internet giant of using unethical methods to avoid paying its fair share of tax. The company says it has done nothing wrong.

This week it is Apple's turn to feel the heat, but on the other side of the Atlantic. On May 20th, a day before Tim Cook, the company's boss, was scheduled to appear in front of the Senate's Permanent Subcommittee on Investigations, the committee's investigators unveiled a report that claimed Apple had used a complex web of offshore entities to pay little or no tax on tens of billions of dollars it had earned outside America.

According to the report, between 2009 and 2012 Apple avoided paying tax in America on at least $74 billion of profits by setting up subsidiaries in Ireland that had no purpose other than to ensure these profits were shielded from tax. The investigators did not find Apple had broken any laws, but they questioned its use of multiple subsidiaries in Ireland to report profits when those subsidiaries had no offices or other physical presence in the country. Carl Levin, the subcommittee's chairman, said Apple had "sought the Holy Grail of tax avoidance" by creating "offshore entities holding tens of billions of dollars while claiming to be tax resident nowhere".

One Irish subsidiary that the investigators singled out is Apple Operations International (AOI), which had not filed a tax return in Ireland, America or any other country for the past five years. Although it was incorporated in Ireland, AOI kept its bank accounts and other financial matters in America. Given the differing ways in which both countries assess whether a firm is liable for tax, this allowed Apple to avoid paying tax on AOI's income of $30 billion between 2009 and 2012.

Apple was clearly anticipating a hostile reception on Capitol Hill. Ahead of Mr Cook's appearance, the company released a copy of the testimony he plans to deliver to the subcommittee. Among other things, this notes that Apple paid nearly $6 billion in taxes in America in its 2012 fiscal year and claims that this probably makes the firm the country's biggest corporate taxpayer. It also says that its subsidiaries in Ireland, where it employs almost 4,000 people, play an important role in its international business activities. And it strongly objects to the implication that AOI is nothing more than a shell company. Also responding to the report Ireland's deputy prime minister, Eamon Gilmore, on May 21st vigorously rejected the charge that his country encouraged companies to set up operations there to avoid tax, and instead blamed the tax systems in other jurisdictions.

Whatever the outcome of the Senate's committee hearing, the issue of corporate taxation is likely to remain a controversial one. Sir Roger Carr, the head of the Confederation of British Industry, has warned David Cameron, the British prime minster, to stop moralising about companies' tax arrangements and to keep criticisms "grounded in fact". For its part Apple, which holds more than $100 billion of cash abroad, is likely to get further scrutiny. In his testimony, Mr Cook will call for an overhaul of the tax regime in America to encourage companies to repatriate more money. Eric Schmidt, Google's executive chairman, has urged policymakers to consider reforming international tax law, too. The OECD is due to deliver its thoughts on how to change the present system to the G20 in July. Its conclusions will be required reading in Silicon Valley.

"The cemeteries are full of indispensable men."

-- Attributed to several indispensable men

But all this is smoke and mirrors.

The entire point of separating the roles of Chairman of the Board and Chief Executive Officer is that they have different responsibilities and duties. They are different jobs. Now, perhaps at smaller companies with simple business models and uncomplicated objectives (grow revenues fast enough to meet payroll and pay the bank on time), there is no practical need to separate them. But the bigger a company gets--and I think we can all agree J.P. Morgan is about as big as a firm can get--the breadth and scope of duties each role properly possesses expands dramatically. The CEO is supposed to be the chief employee, leading his or her organization to deliver on the agenda and objectives the Board of Directors has set. The CEO is an operating executive.

The Chairman, on the other hand, is supposed to lead the Board of Directors in setting the agenda, strategy, and objectives of the corporation, in response to its employers, the shareholders, and all the other myriad stakeholders (employees, regulators, government officials, vendors, community members, and customers) which have a say or a stake in the activity of the firm. The Chairman and other directors of the corporation are stewards. They are not supposed to get down in the weeds, day to day, operating the various parts of the business. That is the CEO's job. But as stewards they are supposed to think about the what-ifs, the perils and opportunities that may or may not confront the firm in the future, and the problems and threats which may be festering beneath the glittering surface of excellent corporate performance. A properly engaged CEO doesn't have time to worry about such matters. He has a day job to perform.

The other key duty of the Board, with the Chairman at its head, is oversight. The Board is supposed to monitor the performance of the CEO and his or her key executives: guide, correct, discipline, and incentivize him or her to perform in a way which achieves the objectives they have set and satisfies the other constraints the firm must operate under. Even the meanest intelligence can see that having the Chairman and CEO of a firm be the same person collapses this crucial function into irrelevance:

"Gee, Jamie, do you think you're performing adequately in the public relations part of your job?"
"Why, yes, Jamie, I think I'm doing a great job, don't you?"
"Sure I do! Have a cigar."

Of course, a soi-disant superman CEO could surely set his own agenda and monitor his own performance--just as his lesser peers can certainly contribute their valuable perspectives on such matters to their Boards--but such arrangements diminish the patently obvious benefit of involving more than one person's perspective in the issue. Not to mention short-circuiting the potential for meaningful criticism and disagreement over firm challenges, issues, and threats which merit serious discussion. I don't care how big your head is, two heads (or more) are always better than one.

The role of the Board as stewards of the firm and monitors of the CEO and his or her executive team naturally introduces a healthy tension into the governance of a large organization. A Board which is properly performing these duties will have occasion to challenge, correct, punish, reward, and occasionally fire a CEO. Find me a person who could legitimately do this to him or herself and I will show you a person who is temperamentally unsuited to the role of CEO. They just don't make psychopaths that way.

So much for principle and common sense.

The real reason to strip Jamie Dimon of his Chairmanship is that he has done a shitty job at it. He has failed to accomplish one of the most important, difficult, and basic tasks a Chairman is supposed to do: establish a succession plan for the CEO. Each and every Board worth its perks and compensation should make finding and grooming successors to the firm's current senior executives--especially the CEO--its most important agenda item. Not only has Jamie failed at this, he has actively fired key lieutenants and potential successors like Bill Winters and Steve Black, apparently on the basis that they posed too credible a threat to his own power.

The fact that certain people find Jamie's petulant whining that he may quit if shareholders vote to strip him of the Chairman role a credible threat is proof positive that the current Chairman of J.P. Morgan has done a lousy job preparing for the inevitable eventuality that Dimon will have to be replaced. The current Chairman has also done a lousy job cajoling the current CEO to delegate more of the minutiae of running a place as gigantic and complex as J.P. Morgan to trusted lieutenants, and to train and mentor those lieutenants into a position where they can ultimately replace him. That these are related issues, and practices which strike at the very heart of the purported indispensability of any Chief Executive Officer, is highly revealing.

Finally, the current Chairman has done a lousy job selecting his other Board members, particularly in the all-important area of audit and risk management. The risk oversight and monitoring function at a gigantic, staggeringly complex lending and trading bank like J.P. Morgan is arguably the most important one--after CEO succession--a Board has. Yet Jamie stacked his risk committee with a former lawyer and professional board member previously on the risk committee at AIG who currently heads a natural history museum, a rich kid whose life experience consists of managing grandad's money, and the CEO of a a flight controls company. I will wander way out on a limb here and bet these people couldn't evaluate the financial risks of a childrens' lemonade stand, much less one of the largest banks on the planet.

The current Chairman of J.P. Morgan has done a crappy job in almost every dimension that can be measured. And don't point me to his lead director Tweety Bird, either. I don't care how fearsome Lee Raymond's reputation as a former imperial Chairman and CEO was, it is clear he can't get Jamie Dimon to return his phone calls, much less address the critical areas of underperformance I have identified.

The agenda is clear: the current Chairman of J.P. Morgan should be run out of town on a rail. The current CEO can stay, assuming a new, effective, powerful Chairman thinks he's up to snuff. Clearly somebody needs to smack that knucklehead around a little.

Fortunately, Jamie, you will be relieved to hear I am not available.

Related reading:
To Catch a Thief (February 13, 2009)
J.P. Morgan and the Marlboro Man (May 20, 2012)


¹ Want to deny this? Envision, if you can, whether the US government would let anything happen to all of $2.4 trillion, 256,000 people strong J.P. Morgan if it got into serious trouble. Do you for a minute think they would let it crater like Lehman Brothers? That they would even consider it? I didn't think so.
² Or, say, $20 million.

© 2013 The Epicurean Dealmaker. All rights reserved.

I have worked in Global Markets for an investment bank since I graduated six years ago. I've recently been given the opportunity to go travelling with my boyfriend, but I wonder how long I can be away from the industry and still have a good chance of being re-employed on my return. Six months? One year? Three years? I'm also aware that when I get back, I'll be an attached, childless woman in her early 30s, which shouldn't affect my employment chances but I'm worried it will.

How can I manage this before we go to leave as many doors open as possible?

Banker, female, 28

Now, my first reaction on reading this tidbit was "Huh?" The emphasis, phrasing, and even question itself is all wrong. "Bloodless," Lucy calls it, and bloodless it is. Putting aside the apparent implications for this person's relationship with her boyfriend, it raises serious questions in my reptilian Managing Director's brain concerning the status of her employment. Certain clues, like "worked in" and "being re-employed" lead me to believe that, notwithstanding this supplicant's self-selected sobriquet, she is nothing remotely like a real, front office, revenue-generating "banker" and is instead a faceless, gormless member of the administrative, sales, or information technology support staff at her so-called investment bank. A real global markets banker worth the title would have 1) puffed herself up--"built a successful career in Global Markets for a leading investment bank"--and 2) crumpled the letter up and thrown it away before sending it to Lucy, because of course any bank in their right mind would hire a banker of her genius and ability no matter what the fuck she did for three years. People who are successful (and who have a sporting chance of success) in my business just don't undersell themselves the way this person does.

But, in the interest of charity (and producing a blog post more interesting than this might otherwise be), I will choose to put another spin on the affair. Perhaps her passive-aggressive boyfriend--who has had to listen for years to glowing reports of her fast-paced, exciting life among funny, brilliant, puissant young men who make many multiples of the pittance he brings in as a clerk at the Carphone Warehouse--sent the letter to Lucy in hopes of guilting her into quitting her job and paying for his beach vacation in Phuket for the next three years. Or perhaps this person really is a talented, driven revenue producer who eats nails for breakfast and spits iron filings for lunch but, like many in her industry, is simply incapable of writing her way out of a paper bag with a map and a blowtorch. Or maybe even this person makes £100 million per year trading Cadbury DairyMilk futures for her desperately grateful third-rate Spanish commercial bank but has been cowed by all the ex-Carphone Warehouse employees waving "Occupy Whoever Has Money" signs in Trafalgar Square into epic self-deprecation.

You get the idea. Let's assume the improbable and take this person's letter as sincere.

In which case, my next question is also "Huh?" For a person who has been working in the capital markets division of a major investment or universal bank for six years surely should have developed some horse sense about her industry. People just don't take sabbaticals in capital markets or investment banking. As Lucy rightly says, things change too fast. Markets change, securities change, customer relationships change. Disappear for one year, much less three, and nobody will remember your name, much less care what you have to say about anything.

I had a Managing Director tell me years ago, when I was a mere pup, wet behind the ears, that the best strategy to succeed in investment banking was to keep your seat. Success would come, and success would go, but you could never enjoy the fruits of good luck or a heated market if you weren't in a position where you could get paid. Young and naive as I was, I remember finding this advice rather cynical and dispiriting. Surely you kept your seat and made lots of money for your firm because you were really good, because clients respected and trusted you, because you gave them great advice. Because you were better than anybody else. This was stupid on my part. He was right.

Nobody is indispensable in my industry. Nobody. Ever. For every hotshot trader or investment banker glorying in her run of luck and outsized compensation, there are twenty waiting in the wings who could do just as good a job. And a hundred who would be willing to work for half pay to prove they could do so too.

I've said it a billion times: in investment banking or sales and trading, you're only as good as your last deal or your last trade. And your last deal or your last trade had much more to do with you being in the right place at the right time--being in the right seat--than with your charm, skill, or intelligence. And none of us know when the right deal is going to hit.

Everybody figures this out sooner or later. Senior management knows it by heart. So when a banker leaves the industry of their own volition, the message is very clear: "I'm never coming back."

Which is not to say you shouldn't do it. Hey, maybe you're tired of the grind. Maybe you've done your time in Hell, and it's time to enjoy life a little. Working investment banking hours, under investment banking pressure, with a bankful of aggressive, psychopathic assholes for six years until the age of 28 is enough to make anyone want to chill out on the beach with an umbrella drink for a year or three. It's your life.

Just don't have any expectations that your old job, or anything like it, will be waiting for you when you get back. Your experience will be stale and out of date: useless. And there is nothing about your charm or intelligence that will distinguish you from the line of a hundred identical eager valedictorians waiting outside our hiring office. If anything, they're probably hungrier and more naive (hence more malleable) than you. Intelligence is table stakes. What really makes an investment banker successful is drive and ambition. Will you still have it after traveling the world?

If so, feel free to reapply. But, take it from me, you better have some damn good stories to tell: why you left, what you did while you were away, and why you want to come back. Those are real assets. The rest of us poor slobs who stayed behind want to hear what the real world looks like. But more importantly, we want to believe if we give you one of the scarce seats we have to offer you're going to have the skill and the drive to make us--and yourself--a boatload of money. That's the tradeoff: our seat, and the opportunity to make ridiculous amounts of money if you're lucky, in exchange for your single-minded ambition to do so.

Investment banking is a jealous mistress. She does not suffer indifferent commitment gladly. And she has far too many suitors for her favors to dally with anyone who is not willing to give her one hundred percent.

You do the math.


¹ In contrast, say, to lazy dilettantes too eager to take cheap shots without doing the hard work of actually critiquing all too widespread management idiocies in an enlightening manner.

© 2013 The Epicurean Dealmaker. All rights reserved.

Huh?

If you started reading this post but are thoroughly confused by the title, I admire your inquisitiveness and vow to do my best to clarify the point. Some of you might not recognize the term "address discrepancy", so let's start there. In consumer lending when a credit report is pulled, an address discrepancy describes … Continue reading →

In evolutionary biology, a maladaptation is a trait that has become more harmful than helpful thanks to changes in an organism's environment. An easy example is polar bears in the arctic--forced to swim further and further distances to find food thanks to a warmer climate melting the arctic ice flows.

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