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Answer - NO. It's Us versus Them. It always has been and it always will be, given the structure of the Street and the chemical differences among the species in question. And the issue is, in fact, much more textured than Banking vs. Sales & Trading - what about Sales vs. Trading? This conflict is older than time itself, and sometimes even more electrifying that Banking vs. S&T. Ah, Wall Street is such an interesting (and contentious) place. Where else can you find such an amalgam of smart, highly motivated, self-interested, egocentric and combative people? It's a good thing my wife (whom I've been with since college) has her Ph.D in Clinical Psychology - believe me, it often came in handy during my tenure on Wall Street. So why are these species frequently at each other's throats when it is often the case that cooperation can yield a better overall outcome? One word: MONEY. Not "our" money. Not shareholders money. MY MONEY. It is really that simple.
Banking vs. Sales & Trading - It's that "We're from Venus, You're From Mars" Thing
At a macro level, governance of a Wall Street firm is kind of like Congress - "Who's in power, is it the Democrats or the Republicans?" And it changes over time. Simply replace "Democrats" and "Republicans" with "Banking" and "Sales & Trading" and you get the picture. Remember when Goldman was run by bankers? Well that certainly has changed, hasn't it? And this shift back and forth has happened in each and every firm on the Street, altering the balance of power and the divvying up of spoils at year-end. Given the ability to control bonus pools and to influence the spreading of cash, this is power worth fighting for. And it sucks if you lose.
But getting down into the weeds, the issue, at its core, is that Banking feels they own relationships, and that any money resulting from these relationships is theirs (or at least a big chunk of it should be theirs). Why? Because the Banking worldview is: Revenues resulting from client transactions don't arise because of the firm's brand or the quality of its products, but the quality of the Bankers. Bankers generate advisory assignments. Bankers generate capital markets issues. Bankers generate IPOs. Bankers lean on Research to write the stuff which helps the stock which helps Institutional Sales and generates commission flow. Right. If you are a Banker and drink your own Kool-Aid. And this self-centered perspective works really well if your party is the one in power. But if, say, Sales & Trading is in power, it is doubtful that you will get as receptive a hearing at bonus time as you might if your own species were in power. Too bad.
This stands in sharp contrast to the Sales & Trading view of the world, which is more akin to: We're smart. We're creative. We know how to monetize an asset. Bankers are stupid and weak, bending over backwards to kiss the client's a** while jamming us. Screw them. We deserve the big cash. Sales & Trading says things like, "You got that deal because the client wanted to expand the syndicate to diversify financing risk" or "The Equity Trading desk took on a load of principal risk to get that block trade done for your client" or "The creativity of the Tax Structuring team was the catalyst for getting that buy-side assignment that saved a client $20 million on a cross-border acquisition." In essence, Bankers are overpriced pieces of sh*t in suits that benefit from the creativity, capital and risk-taking skill of those in S&T. And it gets really complicated when you have client-type guys in Sales & Trading who, in fact, have better relationships with the clients than the Bankers themselves. This really, really pisses Bankers off. This is just too in-your-face for these guys to tolerate. And it just turns up the volume on the systematic conflict that already exists.
I could write about this in gory detail but I will spare you. The bottom line: each side has an over-inflated opinion of themselves, and it is to their benefit to maintain this posture in order to fight to get credit and, therefore, the cash. And at the end of the day, this is all that matters. To them.
Sales vs. Trading - The Mother of All Embedded Wall Street Conflicts
This conflict makes all others look like Romper Room. Now why is this? Sales creates the asset for Trading to monetize, so why can't we all just dig each other? One couldn't exist without the other, right (except in proprietary trading where traders are, in essence, running an internal hedge fund with no salespeople to worry about. This has its pros and cons for the trader - and really is a separate topic for a future post)? Well, let's say a trade makes $1 million (not that Sales would ever really know what a trade made because Trading has no incentive to tell them, unless the outcome truly sucked so they can bitch about it and hold it over Sales indefinitely). Was the money made because of the quality of the trade and the relationship brought by Sales, or the risk management and trading expertise delivered by Trading? Excellent question with no clear answer. Does a trade get marked at mid? At bid? At what level does Trading take over the risk and rewards of the position and begin recognizing their own P&L?
There have been countless models tested in this area with no clear winner. The key problems: (1) lack of transparency; (2) lack of trust; (3) MONEY. The incentive, of course, is for Trading to moan and groan about the crappy position being brought by Sales, how hard it is to hedge, etc., and to make a lousy price, while Sales is motivated to say, "Hey, trader a**hole, give me a f*cking real price or I'll check with my friend over at Bear." And it is really hard because Sales doesn't really understand how Trading is monetizing a position - it doesn't generally happen instantly but happens over time through hedging delta, vega, gamma, etc. So how can Sales really ever know? Answer: they can't. This is a dialogue that happens at every shop on the Street, and is a dance that is danced every single day. At the end of the day the firm makes the same amount of money, unless the firm is so dysfunctional that a trade is missed because a trader makes such a bad price that by the time sales layers on their target profit the trade is done away. But in the scenario where this doesn't happen, all you are doing is fighting over who gets the bigger slice of the pie. And this is the point. And this is the source of the pitched battles because the dollars at stake are huge, almost all comp is a function of year-end bonus and "G-dammit, I'm just not going to get screwed again this year by those a**holes." And let me tell you, this movie gets really boring over time. By the time you are an MD in S&T it is something like "Bonus Hell VII: From Tears to Eternity." You get the picture.
Conclusion
Is there an answer to these structural conflicts on Wall Street? Not an easy one, that's for sure. The degree of cultural change that would be required to fundamentally alter the system would be tectonic. And as long as the key term of trade - MONEY - is really all that matters to the key players, it is hard to see this conflict abating without Senior Management starting to rate people on teamwork, and paying people based upon the intersection of teamwork, team profits and individual performance. This requires substantive, tough, detailed evaluation, unlike any system that I've either witnessed or become aware of on Wall Street. But the catalyst has to be Senior Management, with real teamwork modeled and displayed every single day, with economic consequences to match. Because without this degree of buy-in and putting your money where your mouth is, any fundamental change in the current system has no chance of happening. No chance.
Link Information Arbitrage: The Wall Street Series Part II: Investment Banking vs. Sales & Trading - Can't We Be Friends?
Banking vs. Sales & Trading - It's that "We're from Venus, You're From Mars" Thing
At a macro level, governance of a Wall Street firm is kind of like Congress - "Who's in power, is it the Democrats or the Republicans?" And it changes over time. Simply replace "Democrats" and "Republicans" with "Banking" and "Sales & Trading" and you get the picture. Remember when Goldman was run by bankers? Well that certainly has changed, hasn't it? And this shift back and forth has happened in each and every firm on the Street, altering the balance of power and the divvying up of spoils at year-end. Given the ability to control bonus pools and to influence the spreading of cash, this is power worth fighting for. And it sucks if you lose.
But getting down into the weeds, the issue, at its core, is that Banking feels they own relationships, and that any money resulting from these relationships is theirs (or at least a big chunk of it should be theirs). Why? Because the Banking worldview is: Revenues resulting from client transactions don't arise because of the firm's brand or the quality of its products, but the quality of the Bankers. Bankers generate advisory assignments. Bankers generate capital markets issues. Bankers generate IPOs. Bankers lean on Research to write the stuff which helps the stock which helps Institutional Sales and generates commission flow. Right. If you are a Banker and drink your own Kool-Aid. And this self-centered perspective works really well if your party is the one in power. But if, say, Sales & Trading is in power, it is doubtful that you will get as receptive a hearing at bonus time as you might if your own species were in power. Too bad.
This stands in sharp contrast to the Sales & Trading view of the world, which is more akin to: We're smart. We're creative. We know how to monetize an asset. Bankers are stupid and weak, bending over backwards to kiss the client's a** while jamming us. Screw them. We deserve the big cash. Sales & Trading says things like, "You got that deal because the client wanted to expand the syndicate to diversify financing risk" or "The Equity Trading desk took on a load of principal risk to get that block trade done for your client" or "The creativity of the Tax Structuring team was the catalyst for getting that buy-side assignment that saved a client $20 million on a cross-border acquisition." In essence, Bankers are overpriced pieces of sh*t in suits that benefit from the creativity, capital and risk-taking skill of those in S&T. And it gets really complicated when you have client-type guys in Sales & Trading who, in fact, have better relationships with the clients than the Bankers themselves. This really, really pisses Bankers off. This is just too in-your-face for these guys to tolerate. And it just turns up the volume on the systematic conflict that already exists.
I could write about this in gory detail but I will spare you. The bottom line: each side has an over-inflated opinion of themselves, and it is to their benefit to maintain this posture in order to fight to get credit and, therefore, the cash. And at the end of the day, this is all that matters. To them.
Sales vs. Trading - The Mother of All Embedded Wall Street Conflicts
This conflict makes all others look like Romper Room. Now why is this? Sales creates the asset for Trading to monetize, so why can't we all just dig each other? One couldn't exist without the other, right (except in proprietary trading where traders are, in essence, running an internal hedge fund with no salespeople to worry about. This has its pros and cons for the trader - and really is a separate topic for a future post)? Well, let's say a trade makes $1 million (not that Sales would ever really know what a trade made because Trading has no incentive to tell them, unless the outcome truly sucked so they can bitch about it and hold it over Sales indefinitely). Was the money made because of the quality of the trade and the relationship brought by Sales, or the risk management and trading expertise delivered by Trading? Excellent question with no clear answer. Does a trade get marked at mid? At bid? At what level does Trading take over the risk and rewards of the position and begin recognizing their own P&L?
There have been countless models tested in this area with no clear winner. The key problems: (1) lack of transparency; (2) lack of trust; (3) MONEY. The incentive, of course, is for Trading to moan and groan about the crappy position being brought by Sales, how hard it is to hedge, etc., and to make a lousy price, while Sales is motivated to say, "Hey, trader a**hole, give me a f*cking real price or I'll check with my friend over at Bear." And it is really hard because Sales doesn't really understand how Trading is monetizing a position - it doesn't generally happen instantly but happens over time through hedging delta, vega, gamma, etc. So how can Sales really ever know? Answer: they can't. This is a dialogue that happens at every shop on the Street, and is a dance that is danced every single day. At the end of the day the firm makes the same amount of money, unless the firm is so dysfunctional that a trade is missed because a trader makes such a bad price that by the time sales layers on their target profit the trade is done away. But in the scenario where this doesn't happen, all you are doing is fighting over who gets the bigger slice of the pie. And this is the point. And this is the source of the pitched battles because the dollars at stake are huge, almost all comp is a function of year-end bonus and "G-dammit, I'm just not going to get screwed again this year by those a**holes." And let me tell you, this movie gets really boring over time. By the time you are an MD in S&T it is something like "Bonus Hell VII: From Tears to Eternity." You get the picture.
Conclusion
Is there an answer to these structural conflicts on Wall Street? Not an easy one, that's for sure. The degree of cultural change that would be required to fundamentally alter the system would be tectonic. And as long as the key term of trade - MONEY - is really all that matters to the key players, it is hard to see this conflict abating without Senior Management starting to rate people on teamwork, and paying people based upon the intersection of teamwork, team profits and individual performance. This requires substantive, tough, detailed evaluation, unlike any system that I've either witnessed or become aware of on Wall Street. But the catalyst has to be Senior Management, with real teamwork modeled and displayed every single day, with economic consequences to match. Because without this degree of buy-in and putting your money where your mouth is, any fundamental change in the current system has no chance of happening. No chance.
Link Information Arbitrage: The Wall Street Series Part II: Investment Banking vs. Sales & Trading - Can't We Be Friends?