Bankers vs Management Consultants

Another article to fan the flames of war between Bankers and Management Consultants (needs subscription to McKinsey Quarterly).  According to the article:

"A shortage of strong internal candidates for critical positions will force European banks to overhaul their talent-management efforts in order to stay competitive and ensure strong growth."

Bankers will point out that this article (a) is stating the bleeding obvious, and (b) simply contributes to the already-low employee morale by vaguely referring to some of them as 'second-tier talent'.

Consultants will point out that (a) hey, they're just telling everyone what bank executives told them, and (b) they added value by stating the bleeding obvious in prettier pictures.

LINK DUMP!!

CBA looking to acquire Australian arm of ABN AMRO.  From what I've seen for some time now, CBA has been a relatively distant thought in the corporate finance arena (with possible exceptions in project finance and equity sales), while competitors NAB, ANZ and Westpac have been relatively known quantities due to broader and more aggressive offerings.  This, along with the Westpac/St George merger (which is still unfinished, by the way) will tilt the game somewhat.

A new race for the North Pole is born.  Polar bears ponder shaving and migrating to more tropical regions.

Nick Moore at MQG must have put on a great song-and-dance number to get the 12% one-day bump up yesterday.  Disclosure 1: Rockett Fuel has MQG shares.

Via Dealbreaker: amusing job ad.  Even more amusing are the commenters all trying to out-geek and out-quant each other over a simple "heads or tails" exercise, while simultaneously failing in basic counting when trying to respond to each other. 

Will be back in Sydney by this time next week... 

London!!

In the rush leading up to the London trip, I haven't had a chance to write Part Two of the Conference.  In any case I will have to revert back to my notes (conveniently still on my work desk), so that will have to wait a little longer.

I had lunch with a contact based in London, who confirmed what I've only read about to date; essentially, the London market is stuffed.  Deal volumes are down, only mild improvements in debt overhang, with recession prospects and a depreciating sterling likely to magnify the problems.  While the investment banking employment market is not entirely dead, you do need to look harder for the right opportunities.  It was certainly a very informative chat over a couple of beers (plus some free advice on the London lifestyle), and certainly someone worth staying in touch with.

An interesting development in London (and one more than likely to be repeated in Australia) is the increased use of mezzanine debt and equity/quasi-equity to take up the slack from senior debt.  While more expensive, the non-cash nature of the costs means that it improves the cash conservation of a deal, improving debt serviceability to make the deal palatable for senior and subordinated debt investors.  

We are seeing a slow but steady move towards mezz debt in Australia; in fact this was one of the key topics discussed at the conference.  How well it gets accepted I think will depend on arriving at terms that maintain the right risk-return metrics as well as the senior ranking against equity.  Will mezz holders get pro rata benefit from dividend recaps?  Are equity kickers the way to go?

Overshadowing all this (and may possibly render it all moot) is that the credit crisis has not fully unravelled, and it is now widely accepted that it is impacting hugely on the economic fundamentals.  Combined with higher commodity prices feeding into higher inflation expectations, the questions will need to move from "how long will the credit crisis last" to "how long will the slower growth in the developed economies last".  One imagines that economic fundamentals will take far longer to turn around than declines in the debt or equity markets, but one that feeds back to the prospects of those tradeable securities.

Conference, Day One

I got back from the team offsite conference just a few hours ago. It was interesting finally getting to meet the rest of the team in Melbourne and New Zealand, as well as a lot of other people from other units (Credit, Syndications etc) who I have spoken to on the phone regularly but haven't properly met face-to-face.

The two-day conference went well enough. The first day was essentially the "team building" day and the second was the "strategy" day. Some observations which I thought were relevant or amusing:

Double Agent
With the right type of information and appealing incentives, mistrust and accusations skyrocket at the slightest hint of unexpected behaviour. The "right type of information", of course, being a lie.

Weak Links
Team-building activities tend to have the ironic effect of revealing that, as much as we like to think that we work best as coordinated teams, we can actually derive just as much value by being a loose collaboration of individual performers.

Too many cooks
Having two Global Heads, plus a known extrovert, in your corporate games team is a surefire way to see a leadership struggle unfold.

Does this mean anything Part I
I was in the same team as the Global Kahuna of Leveraged Finance, and the Global Head of Syndications. In the first game we played, they both participated, and we lost. In the second game we played, we were running behind halfway through the game; but then both Global Heads left during the game to take phone calls. The team (sans Heads) managed to catch up and almost steal the second game.

Does this mean anything Part II
There were six games played all up. We won two games: one involved throwing bags at numbers, the other involved finding and touching scattered numbered cards in ascending order. In classic Rockett Fuel geekdom-inspired dry humour, I went up to the Global Kahuna after winning the last game and deadpanned: "So we can win games that involve numbers." It was the first time he laughed during the games.

I overheard him repeating my lame joke at the bar later that night.

Unsure if this is a compliment or a hex
Global Kahuna talking to Director, No Credit: "There's two really hard workers in our team; Rockett Fuel is one of them."

On that note, I will keep my mobile turned off during my London holidays.

Serendipity?
My new line manager (after my previous one left to join the Dark Side), on me securing a seat at the geek table that just happened to have all the bigwigs in it: "Nice work getting into the head table."

Not that I planned it; when I walked into the dining room, I was just thinking "crap, I forgot my glasses. Now I have to sit at the front".

The relatively more informative Day Two commentary will be posted later.

Frustration

One of the frustrating aspects of my job is that, because we are the key point for the transaction, all the peripherals that were previously attached or have since been attached to our transaction becomes MY problem. Disregard the fact that the silly bilateral facility out to a tiny JV in south Kazhakstan is 0.000001% the size of the leveraged transaction I continue to manage (God knows why when we can easily be free of the problem for 70c on the dollar). The seemingly harmless note that it is unsecured is enough to send the Credit Chain Gang into a frenzy, and demand reams of useless information simply so they can "assess" whether it's better to demand refinance of the pimple facility now (assuring no payment and the ire of the borrower), or give them 30 days to do it. Geez guys do you really need the 5-year forecast to make a decision?

In other news, I continue to lose money on all the stocks that I have not yet been banned from trading. Which unfortunately consists almost entirely of financial stocks, because our silly "Four Pillars" policy and the fact that no one wants to touch them with a barge pole virtually guarantees no deals... for now.

Career-wise, we have had some pretty heavy losses - a very experienced director has switched to the Dark Side (PE), and another manager has gone to the Land of the Long Lunch (Syndications). Interesting since finance is supposed to be seeing a slowdown in hiring. There is now an unofficial ranking table on the biggest flight risks in the office, which would probably work better if people weren't such rampant liars about the interviews they are going to.

For what it was worth, I told my new director exactly what had been discussed with my old one, where I thought I was heading, by when, and my key development points before the deadline. It is an unfortunate irony that, while every team would love to have a stable core, in reality it creates serious problems of its own. Excluding our graduate/model monkey, everyone on the team has been there around 15-18 months or more. Naturally, this bunch of overachievers will all be angling for promotions by end of the year. In a high-octane, tight-knit group, promoting one person over another will inevitably cause serious disruption to the team's chemistry. It makes for a very interesting analysis of the Flight Risk Table rankings. It would be funny, I think, to find out that someone believes my eerily normal behaviour, coupled by steadily increasing number of coffees per week, translates to multiple interviews each week. (My coffee meetings are all legitimate business, by the way.) Overanalysis is fun to watch.

I will be off to London in a couple of weeks for some R&R. Hoping to catch up with old friends, I'm sure some of them will have plenty of time to spare, given the wrath of Bernstein's Gods is on a rampage over there. I will of course endeavour to get a feel for the situation there (as much as I can get a feel for in between pints of beer, anyway), and write about it here. See how we go!

Death and reanimation

RIP Bear Stearns. One day, when the "behind the scenes" book about your demise is written, it will sit proudly next to my copy of "When Genius Failed". Delicious irony.

Anyway, Rockett Fuel is alive and relatively well, and will AGAIN try to blog more regularly. I just had to mark the occasion.

JP Morgan and Bear Stearns

Just a very quick post on the very interesting deal that is JP Morgan's offer to buy each Bear Stearns share for 0.05473 JPM shares.

At close on 18/03/08, JPM closed at US$42.71 (notional value of the offer is $2.338), while BSC shares closed at $5.91 (and I'm sure the hedge funds have already taken their positions to arbitrage this).

Does this really improve BSC's chances of attracting a higher bid (from JPM or someone else)?

And with Goldman Sachs, Morgan Stanley and Lehman Brothers announcing results better than or in line with expectations, will there be someone out there thinking we might be out of the woods, and the window of opportunity is slowly narrowing?

Brain teasers

Some brain teasers (along with other interview questions) kindly posted here. Apparently these are used in interview with investment banks. I have heard some get used, but most interviews I've gone to were either very technical (discuss DCF, how do you get WACC, why are AA-rated CDOs great investments for local councils with little to no sophisticated investment expertise), or very personality-based (what did you do when someone got all the credit for all your hard work? [hint: if you say "I hid his body in the river", remember to laugh]).

Anyway.

With graduate interviews coming up, here are the brain teasers and my attempt at answering them (quiet night at the office):

1. What is the present value of a zero-coupon perpetuity?
   [Ballsy answer] There are two key variables: are you selling it, and who are you selling it to.
   If you are the one tasked with selling this bond, the PV will be equivalent to the arranging fees you managed to charge the CLO into which the bond is going to be stuffed into before being on-sold to abovementioned local councils.
   If you are the buyer, and a local council as well, then simply put a "-" sign in front of the above calculation. But at least you learned that there is a high correlation between investment returns from local unemployed liars and returns from overseas unemployed liars.
   
   [Real but boring answer] Zero. A zero coupon perpetuity bond will give you zero cash flows forever. Although just the fact that you called it something fancy like a "perpetuity" would have probably been enough to sell it to some poor sap.
   

2. It’s 9:45 pm, how would you go about finding the angle between the minute and hour hand?
   [Ballsy answer] I would turn on the light, look at the clock, then point at the angle.
   
   [Real but boring answer] At 9.45pm, let's use the minute hand (pointed at "9") as the starting point. At 45 minutes, we are 3/4 of the way to 10pm, so the hour hand should be 3/4 of the way between "9" and "10". We know that the angle between hours is 30 degrees (360 degrees / 12). So the angle between the hands should be 3/4 * 30 = 22.5 degrees.
   

3. Two boats are going at 10miles/hour. They are 5 miles from one another. How long before they hit?
   [Ballsy answer] Depends on whether he chickens out.
   
   [Real but boring answer] Trick question. Which direction is each boat going?
   

4. What is the sum of all the numbers between one and one hundred?
   [Nerdy but wrong answer] 5,050. An old trick is to go (1+100) + (2+99) + (3+98) +...+ (50+51), which is basically 50 sets of 101.
   
   [Real but very correct answer] 4,949. Note the question said "between one and one hundred".
   

5. If this table was full of pennies, do you think they could stack up to measure this building?
   [Ballsy answer] Well, some guys might think their penises could stack up to measure this building, but they're delusional because none of them would even stack up to measure a ruler. Except me. [Whisper whisper.] Oh. Wait. Oh right. Sorry. I have mild dyslexia. I was telling the truth though.
   
   [Really ballsy answer] Sorry I don't know what pennies look like, can we use $100 bills instead?
   
   [Real but boring answer] Another trick question. It depends on the area of the table, how much weight it can support, and in fact how many layers of pennies does "full" mean (i.e. is covering the entire area of the table with one layer of pennies considered "full", or is it as many pennies as you can stack on the table until it buckles under).