OwenBloggers: Colleen - MBA '09

Finance and Gender

A new study came out that the Washington Post featured about traders, exposure to testosterone while in the womb and it's effect on the risky trades they took. Not surprisingly the article goes on to say that the more testosterone the riskier, and sometimes more successful, the trader. However, as we all are keenly aware, the bigger the risk, the bigger the loss - the article even lists testosterone as one of the culprits for the subprime mortgage mess.

The article got me thinking about a study that came out in the beginning of the summer that studied groups of men, women and co-eds working together. The most successful, efficient and highest-performing groups? The groups that were half women and half men, across the board. It is no secret that the number of women on Wall Street is small, and has even fallen in the past few years. That also makes the number of women on Wall Street in leadership positions even smaller. There are many reasons for this that banks have no control over, including women deciding not to go into banking or removing themselves after a few years on the Street for personal (or family) reasons. But there are also many reasons that lie within the bank, PE firm, hedge fund, etc., that drive women away from these careers, or sticking with these careers. It's not that I think they should hire a woman for the sake of meeting an equality quota. But, perhaps once banks see that a more diverse gender mix can positively effect their bottom line, particularly if a woman is in a leadership position and her voice can be heard when making an important business or risk decision, they would focus a little harder on retaining the women at their firm.

While watching CNBC the other day they were discussing China and the problems that lie ahead for it - including an exaggerated amount of 21-44 year-old men in the population, many of whom will be without a job, angry at their government and where their life has led them. The commentator also noted that due to the one-child law in China, "There will be a large number of 21-44 year-old men without the stabilizing force of women." Hopefully, Wall Street is paying attention.

"I don't think I can take another day of this."

"You're getting out of a Mercedes to go to the New York Federal Reserve - you're not getting out of a Higgins Boat on Omaha Beach." -- conversation between a Goldman Sachs aide and CEO Lloyd Blankfein from the stellar article "The Weekend That Wall Street Died"

Back To Work

Sadly, Thanksgiving break is over and we're back to school. The break this year was very different from last year - last year I was in NYC going on informational interviews trying to secure an internship before heading home to VA. This break I got a full week in VA relaxing and doing a lot of nothing. Ahhh, the life of a second-year.

Like most students, undergrad/law/med/etc., we usually come back to a lot of work. I have two papers and two finals looming ahead. As a finance concentrator I'm happy to have two papers, though. Usually it's many more finals. In both HC Innovation and Negotiation I have final papers. For HC Innovation my paper is going to be about a company, US Oncology, and the innovation they have used and will use in the future. I still find my experience this summer incredibly useful and easy to apply to schoolwork. I was able to work with and research many companies, and learn what factors and data are important to look at to asses companies in different sectors of health care. It definitely makes an assignment like this paper easier to tackle and one less thing to worry about in the final weeks of Mod 2.

Healthcare Immersion

I spent my fall break doing our healthcare immersion program - spending a week in various facilities across Nashville to get an idea and a feel of what our healthcare system is about, what's working, and what's not working. Some of those activities were:

Spending a morning in the OR watching surgery
Spending a night in the PICU
Visiting a dialysis center
Going on rounds with nurses and doctors
Visiting the Vanderbilt billing office
Going to a minute clinic

...and the list goes on. It was a great week - I learned a lot, was able to experience things I will never have the chance to sit-in on again, got to talk to and hear the views of many different players in the space and was able to see many of the discussions and theories I learned this past year actually enacted. This will definitely be one of my top experiences at Owen. It was one of the most exciting and hands-on learning experiences I've ever had, and it was truly a novel and exciting way to learn - Owen took advantage of being part of Vanderbilt and the Nashville area and has come up with a great way for Healthcare students to get a taste of the industry. It's opportunities like these where I think my tuition is justified and it again confirmed why I'm going to Owen, a school that takes the time to come up with such an exciting opportunity for students.

Below, fellow second-year Ed and myself check out the LifeFlight operations at the Vandy Hospital.

So Long, Farewell

Well, it seems as though the old model of investment banking has seen it's last days. On Sunday, both Morgan Stanley and Goldman Sachs decided to become "bank holding companies". What does this mean? It means they're becoming a little more like BofA. They'll take deposits, decrease their leverage, not take on as much risk, etc. GS Bank of USA anyone?

The change in title and it's effect on the industry has yet to be seen. But let's look at some of the differences it will bring, or at least what I think is important.

1. Leverage - MS is around 30x. GS is around 23x. BofA? Around 15x. Bank holding companies have different restrictions and regulations put on them from the Fed, and are not allowed to go above a certain leverage, unlike big investment banks. This leverage and risk-taking helped banks pull in some of their most astronomical profits. It is also what led to their demise. Without being able to do this, the model of investment banking will change. A lot depends on how these companies are run, how well they separate the commercial bank from the investment bank and so on. But they've definitely got to find a new way to do business.

2. Deposits. They're federally insured. It stops a "run on the bank". Investors don't question liquidity and capital needs. That's all there is to it.

3. Compensation. Everyone on Wall St. is getting up in arms over the fact that we will never see the type of bonuses we saw the past few years. Unlike the normal world, Wall St. makes the bulk of their paycheck in their bonus, not their base salary. Like GS' CEO who had a bonus of $67 million. (Although, many of these bonuses came in the form of stock, so it's not $67 mil anymore). If they can't make the kind of profits they made in the past, it can greatly change compensation. First, I don't think we'll see the kinds of bonuses we saw the past few years because, well, the past few years were a little ridiculous and those incredible profits have all been wiped out by the write-downs we've seen. Second - maybe some smaller bonuses wouldn't be too bad. Perhaps the inflated prices of NYC will have to adjust and, something smaller than $67 million? I assume that banker will find a way to get by. Third - how low can they really go? Bankers get these bonuses for a reason. The higher-ups - they bring in millions of dollars of fees in good years; the lower levels - they work hundred+ hour work weeks to help make those million dollars of fees happen. You can't give someone a $10,000 bonus when they consistently have hundred-hour work weeks - they won't last long. But we'll see what happens in the future of bank holdings companies - maybe lower fees and more manageable work weeks are on the horizon.

So Wall St. basically changed overnight (or within a week). But next in line to have their years of huge profits - PE firms and hedge funds. Who knows what fun they might bring us.

"The whole glamour of investment banking is that you're going to earn so much money that in the end it's going to be worth it. If you get rid of the bonus, then there's basically no point." -- 22-year-old former JPM analyst

Goldman Stanley?

John Mack has to be pissed. Not only does he release earnings a day early, he releases pretty damn good earnings for these times. The numbers were above estimates and for one of the hardest Q3's Wall Street has seen in awhile, they were fairly impressive. Along with the AIG bailout (we'll get to that in another post) and Goldman's fairly decent earnings, you think this would calm the market down. But as we've seen, Wall Street is a changing place and the market is behaving completely irrationally.

As of this post, Morgan is down 38% (!!!) and the spreads on their 5-year credit default swaps are now at 750 basis points. As we all know by now, (first-years, Jacob Sagi should have laid down the law about this by now since he is the man), the higher the spread, the riskier it is. Why do investors think Morgan's debt is so risky it needs to be insured at 750 bps above the base? I have no idea. Neither does John Mack I'm sure (what does the man have to do to make ya'll believe?!). In a statement released to employees he seems to agree with me as who is to blame here - investors. Short-selling, rumors and fear are ruling these markets - facts are paid no heed anymore, leaving what seems to be liquid and solvent companies, like Morgan, in trouble they don't deserve.

Goldman was also down 23% today, but they are not near Morgan's crisis. Rumors have been going around that Morgan and Goldman would merge, but I think it's not true and, quite frankly, stupid. Investors wants i-banks to have a commercial bank linked to them, not a bigger i-bank. So will Morgan merge with a commercial bank? As of last night, Mack made it clear that option was not on the table. That, however, was last night. As this market is showing us, a day can make all the difference.

"Because things are frankly getting out of hand! Ridiculous rumors are being repeated, rumors that if I wrote them down today and read them tomorrow I'd think I was dreaming." -- Colm Kelleher, Morgan Stanley CFO, in response to why they released their numbers early

My Dear John (Thain) Letter

The first time I met John Thain I was headed off to an intern dinner when I got onto an elevator he was riding. He immediately struck up a conversation with myself and another summer associate - asking about our summers, our work, the events we attended and our impressions of the firm. The only time he paused was to greet the other Merrill employees getting on the elevator. On Wall Street, where egos are as big as one's bank account (yet don't seem to shrink as fast, now do they), I was genuinely surprised to find what seemed to be such a down-to-earth, high-ranking and powerful CEO.

As the events of this weekend unfolded, and reputations were made and lost, Mr. Thain lived up to his as a "Mr. Fix-It". Brought into ML just 10 months ago, he did the most he could to clean up an insurmountable mess that Stan O'Neal left behind. He raised capital, he issued equity, he took toxic assets off the balance sheet, he sold Bloomberg - but as we know, no solution seemed to stick. The sale to BofA was the lesser of three evils, the other options seeming to be a possible bankruptcy (a la Lehman), or being bought at a bargain basement price (a la Bear's $2 a share). Quite simply, it was damned if you do, damned if you don't.

In an employee Q&A Monday morning, Mr. Thain sounded as though he were fighting back tears when his voice wavered as he explained the situation, the decisions he made, and the sadness he felt in selling the firm - but ultimately that he felt it was the right decision to keep Merrill from meeting a worse fate. At one point an employee listening in spoke up - not to ask a question, but merely to say thank you. As a stockholder and employee, he explained, he expressed his appreciation for Mr. Thain's quick actions to save the firm and, while not a perfect outcome, leave many employees with a fate very different and better than their counterparts at other firms. When he finished saying thank you, the employees John Thain was in an auditorium with broke out into a thundering applause. Choked up again, and attempting to quiet the crowd, it took a minute or so for the applause to die down.

Here at Owen we are learning to be leaders - those who take positions that require them to put the needs of employees and stockholders ahead of their own and do the best for their firm. Unfortunately, as Wall Street has shown, pride, greed and a host of other emotions cloud this simple definition of what a true leader is. After an emotional and tiring ten months that ended in a place I'm sure he never imagined, it makes sense for Mr. Thain to feel the way he did. But he can sleep easier than others knowing that with the livelihood of 60,000+ employees in his hands, he acted swiftly and decisively to save as much of the firm as he could. In times as trying as these, that is as much as we could ask. So I echo the sentiment of others when I say thank you, too, Mr. Thain - your time at Merrill may have been short, but it will be a long time until it is forgotten.

"You didn't think that maybe he's only telling me the good news. You knew you could trust what John Thain said." -- William W. George, HBS teacher, and former CEO of Medtronic and Goldman Sachs board member

Next Up To Bat: AIG

The world watches with bated breath to see if AIG has what it takes to make it through the day - specifically, 70 to 75 billion in cash to ensure it's liquidity. Of course, the rating agencies are breathing down it's neck, creating another nightmare for the world of finance. What are the rating agencies basing their cuts on? A valuation of the company, of course. Oh wait, no, I'm sorry, the ratings are now based on stock prices. (I know, wtf).

A 30,000 foot view: As stock prices go down, the agencies will cut your rating because this shows that investors don't trust your liquidity, your ability to raise capital dwindles along with your stock price, investors then start short-selling the stock and it is driven down further. The agency watches all this happen and then decides to cut your rating further, your stock price then hits rock bottom and guess what? Starts with a 'b' and ends with an 'ankruptcy'. The catch-22 of this system and the blatantly obvious way that investors can manipulate the fate of companies, knowing what these agencies base their ratings on, is inane. Why this hasn't been changed or they haven't gotten in trouble (...yet, I say with hope), is beyond me. Keep it up rating agencies - don't do any actual valuation, just downgrade the company and watch the fireworks. (When WaMu was recently downgraded the report actually said they were "financially sound", but they were downgraded anyways. AWESOME.)

So who will rescue AIG? The government? NY State? Goldman and JPM? The latter two beg the question though - where is Morgan Stanley in all of this? Goldman and JPM have been called upon by the government to create a $70-75 billion loan for them. Goldman is an obvious choice - the most stable bank right now and Secretary Paulson is a Goldman alum. Sometimes friends in high places also mean big favors. JPM is being tapped since the government lent them a hand and backed up the $29 billion loan it took to buy Bear. Scratch my back and I'll scratch yours. Morgan, however? Oh, well Morgan is taking an advisory role to the Fed here, just as they did with the Fannie deals. How nice - looking like they're involved and trying to help but not having to pony up the cash to do it. Well done John Mack. Perhaps as the firms around you fall and you see that your position isn't so bad after all, that firing of Zoe Cruz last November might seem a little pre-emptive. Water under the bridge at this point I guess.

"If we're going to do this deal, where does it end?" - John Mack, CEO of Morgan Stanley, on a potential bailout of Lehman

The Blame Game

As with most things in life, whenever something catastrophic happens there is blame to placed - Black Sunday on Wall Street is no different, so let the games begin...

Stan O'Neal: The obvious choice at ML. A CEO who served the firm for many years before steering the ship, but was often known as having a chip on his shoulder. In businesses like financial services, your employees are the only asset you've got. Stan showed his disdain for them, however, by taking executive elevators to move around the building and, when he needed to take the "common" elevators, shut them down so he could ride in peace. Heaven forbid he actually come face to face with those who made him millions. But that, of course, was the least of our worries. As he piled CDO's and other mortgage-backed assets on Merrill's balance sheet, he began to fire and demote those who told him he was taking on too much risk or refused to buy more CDO's on their bosses' orders. One of John Thain's first order of business upon taking the reins last December? Bringing those very same people back. Perhaps the feelings for Stan are best summed up by Winthrop Smith, Jr., the son of one of those who helped found Merrill:

Maria (CNBC interviewer): How are you feeling?
Winthrop Smith Jr: Angry. I'm feeling a lot of anger. Toward Stan O'Neal.
Maria: When do you think things went wrong?
Winthrop Smith Jr: Day One.

Yup, that pretty much sums that up. (The above was taken from Dealbreaker, a must read to get the best news, the fastest, along with a bit of humor). Does Stan deserve all the bad feelings headed his way? Well, perhaps not, as it takes more than one person to do this much damage, but the fact of the matter is "the buck stops here" - and all this damage piled up on his watch.

Richard Fuld: Oh Dick Fuld, you poor thing. A teeny, tiny sliver of my heart really does go out to Dick. A Wall Street titan and leader of the firm since 1994, Mr. Fuld has seen Lehman through many a storm and proved through this his loyalty and commitment to employees. Yet his pride, assuredness, and some may say, greed, got the best of him. In his quest to write off the inevitable, slowness to shore up his balance sheet with enough capital and what seems an absolute disregard for reality, he drove his coveted firm to where it stands today - bankrupt, trading at 21 cents and making a last ditch effort to have Barclay's buy something, anything, of what is left. He spent years encouraging Lehman employees to trust the firm, invest in it and inspired fierce loyalty - yet he left most of them with pennies through the way he's navigated the rough waters of Wall Street this past year, leaving much anger and blame, rightly so, headed his way. But I feel for Dick because, quite frankly, the man really seemed to believed in his message and loved Lehman Brothers. As of Saturday morning he had lost $650 million of his own wealth, and that was still when LEH was trading near a high price of 3 to 4 bucks. At the end of the day he has lost the firm he loved so much (and started to work at in 1967!), his lasting reputation on Wall Street will be forever changed (and not in a good way), and former employees will forever blame him for this perdicament. The fact that he's hired an extra security detail to keep him safe in the next few weeks does not come as a shock. Last, but not least...

Investors: Yes, investors. While the lack of trust and confidence in Wall Street has many reliable reasons, until they start to support the banks they used to love so much, there will be no bottom to this crisis. So go ahead S&P, downgrade AIG as much as you want. Do a run on Bear Stearns. Take out LEH. When you're done with those two, move on to Mother Merrill and make her feel some pain. Heck, why don't we bring down Goldman's stock 20%, too - no sense in letting everyone else have all the fun. Some of the punishment is called for, but as more banks and companies fail the only thing left to blame will be your shotty nerves and quick, off-the handle reactions to rumors, short-sells and gossip. You make Serena Van der Woodsen's version of the Upper East Side look as boring as nails. Keep up the good work.

"Are they going to take my Blackberry?! Come on, come get it!!!" -- Former Lehman employee, yelling, while at a local watering hole in NYC this past Sunday night

The Demise of Wall Street

So. Here we are. After a long 24 hours, we stand here Monday morning with two independent brokers gone (LEH bankrupt and MER bought) and two left - Morgan and Goldman. In what is likely to be considered one of the most historic days on Wall Street I can't help but think - do these banks deserve the fates handed to them?

In a world where risks are rewarded very highly, it's clear that they are punished even harsher. The amount of risk some of these banks took on was astronomical, and, for awhile, led to astronomical returns. They seemed to forget the age-old lesson that if something seems too good to be true, it most likely is. Merrill, a 94-year old firm with 60,000+ employees, it's been said that a few hundred people flew the company into a mountain. To have gotten, as of now, a $12 premium in a shotgun deal, they are lucky to not be dealt Lehman's fate. As Lehman's stock was drilled this week, the option of raising capital dwindled and potential buyers walked away this weekend as the government gave Wall Street a lesson in tough love by refusing to back-up any deal. With this reality staring John Thain in the face, he made a bold and decisive move to sell the firm to Bank of America - a move I can't say I disagree with. Are the mistakes these firms made being punished fairly - or are investors who not so long ago treated these firms as if they were their best friends driving these companies into the ground? I'm not sure what the answer is to that, and while punishment was due, it's hard to stomach when you think of those who are effected here - the thousands of employees and their families.

For those of you in b-school, finance majors or not, what's going on is fascinating, exciting and, of course, nerve-wracking. At the heart of all of these firms are it's employees - the only assets it owns. Obviously, I hold Merrill near and dear to my heart, and it is upsetting to see such a storied firm filled with intelligent, hard-working and, from my experience, supportive and caring people be thrown into uncharted waters where their job security becomes a question mark. I'm thinking of everyone up in NYC and who work for these firms and I can only hope that when the dust is settled, most likely years from now, Wall Street can dust itself off and continue on in the new financial world it has helped create.

"It has always interested me that the word 'credit' comes from the word 'credere', which means 'to believe'. It only works if people believe in it." -- Tom Wolfe, on the fate of Wall Street firms, July 2008

Getting To Know You

One of the top priorities of anyone entering a MBA program should be getting to know their fellow students, 1st and 2nd years, and alumni. As a Peer Coach, I've met with a few first years and given them some basic advice on how to tackle Mod 1, including the fact that no matter how much work you have it's essential to go to social events to get to know your fellow classmates. Many times last year I turned to my classmates and 2nd years for advice, connections, mock interviews, resume reviews, etc. This also goes into getting to know your alumni. When I came back to school this year and accepted the offer my company gave me at the end of the summer, I made sure to e-mail essential alumni who I spoke with along the way last year in order to update them on where I stood. These were alumni who gave me advice, interviewed me and so forth. While I wasn't able to work with them over the summer, they are great contacts who are working in the industry I will soon be joining. I'll be able to catch up with them when they're back here in the fall for recruiting and as my career moves forward and changes it will be great to still turn to them for advice and help.

While meeting fellow classmates in your grade is a bit easier, there are also ways to start to meet those in the other class. This past Friday the WBA put on an opening event - a wine social at Cabana. Below are a mix of 1st and 2nd years: Ashley, Lauren, Shannon, Ashley, Jenna, Eleanor, and Trisha. So work hard this mod but don't forget to have fun every now and then!