I promised in the first newsletter that I would try to write about culture, namely movies and books. What follows is a waystation between the economics and policy I will mostly write about and the art I would like to: HBO’s Industry. This isn’t so much concerned with the show’s aesthetics, but instead is trying to connect soap opera to reality. I imagine some of you have much more direct knowledge about both television and the financial services industry than I do, and I would love to hear your thoughts on the show or my writing about it. If you’re going to comment, please avoid big spoilers.
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One persistent subplot in the first three episodes of HBO’s latest high-end soap opera Industry is that a young graduate trainee named Harper at the prestigious and fictional London based investment bank Pierpoint & Co. thinks the economy might be about to plunge.
The SUNY-Binghamton graduate (although her academic credentials have an air of uncertainty) thinks the housing market is overvalued, and that a Chinese military incursion into the South China Sea will lead to yields of U.S. Treasuries (government debt) spiking up as the Chinese unload their considerable holdings of it. What does she do with this information? She doesn’t trade her firm’s considerable assets on this view, she instead sells it to others.
Industry follows around a half dozen young investment bank employees as they begin their careers in London. They do premium-cable stuff — drugs, sex, etc. (the series premiere was directed by Lena Dunham) — but they also spend a lot of time at work. And what do they do at work? Sure, lots of staring at Bloomberg terminals and Excel but, really, it’s sales.
The first episode’s dramatic climax is not Harper cashing in on her view of the geo-financial entanglements confirmed by the market. China does not invade the South China Seas, and in real life, Treasury yields have been heading towards zero. But rather she convinces a hedge fund manager to buy what’s essentially an insurance policy that will pay out if such an event were to occur. She made a big sale, and it’s a signal moment for her development compared to her elite-pedigreed peers in the same trainee program. It all happens over the phone.
But high finance is glamorous, right? It’s supposedly populated with the best and brightest of our most elite institutions, including literal rocket scientists. In The Big Short, Ryan Gosling anticipates the actual housing crash and hangs outs with models. Chieftains of banking go on to populate Treasuries, finance ministries and central banks the world over, and they’re all in a high-end version of Glengarry Glen Ross?
Well, to a first approximation, yes, and it’s only become more so since post-financial-crisis regulations tried to push the companies out of more lucrative and self-interested lines of business. Banks are still perfectly capable of buying a financial asset low and selling it high, but they at least have to say that they’re doing it on behalf of their clients (from whom they buy and to whom they sell).
Our ambitious young Industry-ers end up working in either “cross-product sales,” (CPS) where, according to the Wall Street Journal, “the goal is to sell multiple financial products to existing clients”—you can see why the showmakers picked it—or, in Yasmin’s case, foreign exchange, a portion of the industry known for its huge trading volume, trader aggression, and scandal. Her boss is a short-tempered and short-statured Irishman whose greatest fear is that other desks are picking off his clients. In Industry, picking up the phone is a privilege, not something to be fobbed off on underlings.
Even the more academic Theo, who analyzes the housing market, is tied to the work of the sales team. CPS’s boss, the Bullingdon-Club-alumnus and amiable alcoholic snob Clem, decries his work for being not commercial, i.e. not doing enough to induce trading activity from the bank’s clients.
Clem, who is mocked by his younger coworkers for being so old fashioned as to read the Financial Times in print, is useful for directly saying what the rest of the crew only implies. In one case, he addresses why the investment banking industry looks the way it does. If it’s just sales after all, why do they have to hire such fancy people? Well, he has a view on this: he asks Robert, the beanpole Oxford graduate from a working class background: “How do you expect to sell financial products if you sound like a miner?”
A bit on the nose for dramatic license? Perhaps. But it gets at something important, when conducting business worth millions or billions of dollars, clients may have a certain expectation that they will be treated in a way that befits their own conception of their status.
That work, what’s called sales and trading, can be quite profitable for these banks but is not literally “investment banking.” The most prestigious business in these firms is the least ostensibly commercial. They even call it “advisory,” and it’s a high-touch business where money doesn’t trade hands until sometimes after years of doing “free work,” once the client takes itself public, buys another company, spins-off a division, etc. This is where the priggish Oxonian Etonian Gus begins his tenure at Pierpoint.
Bankers who work in advisory tend to see themselves as trusted counselors of chief executives who advise on make-or-break deals for large corporations and shepherd the giants of tomorrow from privately owned to publicly traded. One Goldman Sachs “commandment,” a literal list of principles drawn up by its former senior partner John Whitehead, instructs its bankers to go after “first rate” business and to always sell to the CEO, not the “assistant treasurer.”
When the paydays come, especially from mergers and acquisitions, they’re large and, importantly, not directly attributed to the variety of actual work the banker subordinates do for the client (they don’t bill by the hour). As usual, Matt Levine has the best description of how this works:
The basic model of financial advisory work is that you never charge clients the correct value of the work. You do lots of quite substantive work for free: You come to them with good ideas for mergers and financings and restructurings, you give them frequent market updates, you bring in a robot economist to answer their economics questions and a tax specialist to help them with thorny tax problems, you help them with their financial modeling, you recommend good people for jobs at the company, and you never send them a bill for any of it. Then one day they do a merger and you send them a bill for $30 million. You understand, they understand, everyone understands that the $30 million isn’t just for the work you did on the merger. It’s the payoff for the whole relationship.
While sales and trading happens hour-to-hour or day-to-day, advisory happens on a timescale of years. And in investment bank sales and trading, the more “bespoke” the financial product being sold to a client is — maybe a combination of bets on currencies with options on an index of stocks and an insurance policy on an index of bonds — the more profits, typically, accrue to the bank for putting it together. And there’s nothing more bespoke than taking a company public in an IPO or arranging its merger with a rival.
This, ironically, is why investment banking per se has the worst reputation for putting its low-level employees through hellishly long hours: the deals they’re working on are make-or-break, not just for the client, but for the banker in charge of the relationship. While the ambitious and nervous Hari’s reaction to a layout error in a presentation may be over the top, the show’s creators were not entirely wrong about the stakes — or at least how they could be perceived to those at the bottom of the totem pole who desperately want to climb up.
There are lots of criticisms of the financial services industry. One that tends not to be heard as loudly as the obvious ones (they get paid too much, they destroyed the economy, they restructure the economy in their own hyper-competitive image, etc.) is the one voiced by the people who are actually paying the billions of dollars of bid-ask spreads, fees, and commissions to these companies. Namely, that they are getting ripped off. That these trusted advisors are actually looking out for their own interests, and that they could probably do some of the stuff they pay bankers for on their own. In short, that they’re dealing with salesmen.
The traders and their bosses will sometimes say that they’re not obligated to look after their clients’ best interests; that they’re working with sophisticated stewards of billions of dollars of capital, not widows and orphans. They’re all just counterparties, right? Stuff like this typically gets said in court or sometimes under the pressure of a congressional subpoena, not to the clients who are supposed to buy what they have on offer.
After all, who wants to buy from a salesperson? Maybe we’ll find out in the next five episodes of Industry, or maybe we already know.
If you have any takes about Industry, the collected works of Lena Dunham, or the business of high finance, please write me, comment here, or share this post on the social media network of your choice.