How Investment Banking Fees Corrupt Wall Street:
Michael Lewis
By Michael Lewis
We are now living through one of the great cleanups in U.S.
financial history, second only to the one that followed the
Crash of 1929. A lot of the more sordid Wall Street behavior
of the recent past was the result of breakneck pursuit of
exorbitant banking fees.
A few days ago, for instance, New York State Attorney
General Eliot Spitzer released snippets of Merrill Lynch &
Co. e-mails in which analysts discuss their efforts to curry
favor with potential banking clients.
In one, former Merrill analyst Kirsten Campbell declared
flat- out that ``the whole idea that we are independent from
banking is a big lie.'' In another exchange, an investor
asked former Internet analyst Henry Blodget what was
interesting about GoTo.com Inc., which Merrill was then
plugging to its investors, ``except the banking fees.''
Blodget's response: ``nothin.''
Protecting the Fees
But we know all about that game. We also know that most
of what is being proposed by the regulators no longer
troubles the investment banks.
Wall Street firms don't care if they need to forbid their
analysts from owning stock in the companies they analyze.
They don't care if they are required to pay a lawyer to be
present when their analysts and their corporate financiers
meet. They don't care if they need to append a few more
lines of fine print to the end of brokerage reports, declaring
their investment banking interests. They certainly don't care
if they need to add even more disclaimers to prospectuses
that no one reads.
What they do care about is preserving their fees. And yet no
one has breathed a word about these.
Investment banking fees are a curiosity for anyone intimate
with the inner workings of a securities firm. Investment
banking is not rocket science and investment bankers are
nearly as plentiful and fungible as dollar bills. Yet while the
typical fee on a bank loan has been driven down to .01
percent of the total, the typical fee for arranging a securities
transaction remains stuck as high as 7 percent.
Full-Service Shops
Why? Why don't big companies such as, say, General
Electric, play Wall Street firms off one another and drive
down the fees? At first glance, this would appear to be a
good example of market failure.
But then you see what the investment banks do for the big
companies to get the fees -- lie to the investment public on
their behalf, extend them credit when they shouldn't get it
-- and it all makes a bit more sense.
The big fees are a tool used by big companies to manipulate
the investment banks. They are not ``earned'' so much as
``doled out.'' And because they are vastly in excess of what
the work is worth in a competitive market, they cease to
function as fees for honest service and begin to look more
like bribes.
Whether a business model based on a system of bribes and
kickbacks makes sense for Wall Street firms in the long run
I do not know. But in the short run, the firms seem to feel
that the fees are worth sacrificing their reputations and
balance sheets. Even Goldman Sachs in turning down GE
was not repudiating the system. Goldman officials were just
upset they weren't getting a big enough cut of the take.
You want to clean up Wall Street? You want to minimize
the number of future newspaper stories that expose
systematic corruption in high finance? There's an easy
solution: Regulate banking fees. |
