Sunday, March 27, 2016

Putting the Client Last: A Former Investment Banker Explains How Clients are Being Systemically Sucker-Punched

Friday, March 25, 2016

“It is when our clients are the most fragile that we make the most money.” Part two in a series of columns by anonymous sources that reveal how industries work from within.

As a former London employee of a major investment bank, I am often puzzled by the tone that top managers of investment banks use when speaking to the public. There is indeed a striking gap between the official communication and the internal behaviors I have observed (and taken part in). To me, banks are experts at exploiting asymmetries of information. Furthermore, they often amplify this asymmetry themselves by complexifying the products they offer or by disclosing only fractions of the information they have.

Of course, investment banks’ clients are the principal target of this type of strategy. While banks typically claim as their main value that their clients’ interests always come first, the reality is usually quite different. Therefore, banks will routinely increase the complexity of a transaction to make it difficult for the client to understand where the bank makes money or to make it difficult to compare to transactions proposed by other banks. A major step in this direction by my former employer was to develop proprietary financial indices.


Another classic strategy was to take advantage of our clients’ weaknesses. Thus, during an annual internal keynote in 2007, the global head of corporate finance said bluntly to our division that “it is when our clients are the most fragile that we make the most money.” It worked like this: if a client desperately needed something from us—say, some funding—you would provide it only if the client agreed to an additional transaction that he did not necessarily have an appetite for but that was much more profitable.


I sometimes went further: for instance, on the recommendation of my head of desk, I asserted to credit officers that we were not making any money on a given transaction, although this was incorrect (the markup was close to a million euros). This supported the argument that the transaction was in the client’s interest. My superior had assured me that the credit officers did not have direct access to the markup reports and that they only relied on the information we were providing them.


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