by Jerome a Paris
Mon Oct 6th, 2008 at 06:35:17 PM EST
Note: you can find the name of my employer in a few seconds of basic googling, but I never mention it explicitly in my theads and I hope you can extend the same courtesy
In 12 years of investment banking, I've already gone through 4 boom-and-bust cycles, with the same behaviors repeating themselves (that's why it's called a cycle, duh). My job hasn't changed throughout, but how it's been seen by management and markets has swung wildly, in the same predictable way. This time is a bit different, though.
My job is project finance. You can find a basic definition here
, or go look some of my old diaries like here
, but suffice it to say that it's a job where your goal is to understand all that could possibly go wrong with a project, find ways to mitigate each, and then make sure that legal contracts are in place that reflect the solutions found and the allocation of responsibility.
It's old-fashioned banking, where the banks actually lend the money and hold the risk for the long term (ie no securitisation to cycle money), and where your core competence is analysing risk - understand it, allocating it, and pricing it.
As such, it's not a very attractive job for high-flyers. It pays well, but not extravagantly more than you'd get in industry for a similarly high qualification expert/consultant position. It's very specialised, and thus not really a useful step in a fast-track career. More inconveniently, it's hard to bullshit one's way forward.
And so it happens that it enjoys regular periods of disgrace, as bankers find more interesting things to do. "Real" investment banking, ie mergers and acquisitions or bond origination and distribution is seen as a lot more prestigious, especially when it can become "structured" like project finance is - and not just by the bankers that do these jobs, but by top management, who suddenly find it more exciting to brag about their mastery of the "noble" investment banking markets - and can enjoy the bonuses that come along.
Emerging market bonds were all the rage in the mid 90s. Dotcoms were the big thing at the turn of the century. Merchant power plants were it in the early 2000s. And of course, securitization was the place to be in recent years. You could say that commodities are the new new thing today. Each time, project finance was dismissed as stodgy, uninteresting and has-been (and as much less attractive, financially, for participants).
Until, of course, the new activity blew up. They inevitably blow up because there is no free lunch. Any activity that generates lots of easy money does so because it carries bigger risks. These are always obvious in retrospect to all, and usually are visible from the start, but they are easy to ignore when the profits are so tempting, and the prestige from participating to the activity so obvious (the Masters of the Universe thing).
And stodgy project finance comes back to the fore. Boring it may be, but at least it it reliable and consistently profitable.
Except that this time, the Masters of the Universe have blown up so spectacularly that they are taking down not just their own mindless activities, but also the whole banks with them, leaving no money for normal lending activity.
And here I am, the sorry worker of a bank that has already benefitted form one bailout and is going to get a second one (likely including outright nationalization and/or dismantling), having been told that I should tell my clients that there is no money for them for the rest of the year. No money for wind farms. No money for lending - in a commercial bank!
I won't tell that to my clients, of course - after all, the management that is now desperately trying to scrounge cash by preventing its staff from making loans is unlikely to be around in the near future, and who knows what the new management will say. But in the meantime, I'm severely limited in what I can do, and it's not really a consolation to have predicted that this would happen, to have told colleagues that all the fancy capital allocation systems put in place by banks were extraordinarily expensive and sophisticated, but obviously useless Cover-Your-Ass machines that distracted from the real job of assessing risk.
So I blog.