Remember, you're only as good as your last deal.
"I remember the first time I got on to the dealing room. Between 500 and 1,000 people on one floor … I realised, this is the heart of the machine.
"The 'client-facing' side of investment banks is impressive. Expensive suits, excellent catering, antiques on the walls. But the dealing rooms are factories."
This is from today's interviewee who was right in the middle of fixed-income at two of the biggest banks in the world.
"London investment banks do everything to make you as productive and focused on making money as possible. There's a dentist in the building, a doctor. Dry-cleaning, a travel agent, restaurants, fitness. There was even a guy going around the trading floor polishing your shoes for a few pounds."
From the outside investment banks may look like monoliths but as the past two years of interviews have made clear, they are not. The world of dealmaking is fundamentally different from trading, and even trading breaks down into very different sub-cultures.
The most despised and even hated of those sub-cultures today is probably "fixed-income", financial instruments built around assets with "fixed" returns such as mortgage loans and bonds. Fixed-income is where many of the gargantuan bonuses were paid out, and it was also where the sub-prime mess happened.
The full interview is here, offering a riveting description of what it's like to plunge into that world. Two other major insights stand out. One is an accounting measure called NPV, or net present value. As the interviewee explains:
"The sort of instruments we were selling ran over many years. NPV means you calculate the total revenue for your bank over those years and the total number goes to your profits & losses account for that year. Obviously if you can book the NPV off future revenue of the next seven years in one go, that's a huge number. This is one of the reasons why bonuses shot up the way they did in fixed-income."
The other really interesting point is about the impossibility of patenting in finance. Fixed-income in a major investment bank goes like this, according to the interviewee:
"You sit there among 1,000 other guys, constantly thinking about your clients – institutional investors to call with an idea. That idea must be a solution to their needs, so you need to know as much as possible about these needs. The products you come up with must be competitive compared to other banks. Meanwhile at the back of your mind you think: I have to hit my P&L or there's no bonus and basically redundancy."
This drives innovation, clearly, for good or worse. But that's not all:
"There is no such thing as patenting in finance. This makes it incredibly hard to protect an invention and keep a competitive edge. The big clients talk to all the major banks so news spreads fast. All investment banks have systems and infrastructure of similar quality – when the margins are still fat. Meanwhile you know that soon enough other banks will offer the same product. Margins come down, things get standardised and commoditised. How other banks catch on? They copy your product. Or they poach some of your colleagues to set up a desk. They poach you."
If there are any readers among you in fixed-income it would be brilliant to hear more, both more about NPV and patenting as well as anything else you think is relevant. If you choose to comment, please read the full interview first, here.
This banker is in equities (shares) rather than derivatives (most of which are in fixed-income): "Think of the difference between a restaurant catering to regular clients, and one in a tourist area."
And this banker has some harsh things to say about office politics and "real banking": "More and more, success in investment banking amounts to being able to game the rules and get capital. Trading floor politicians, I call them."
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