Morning Coffee: An army of ex-investment banking analysts will crash the financial system. A former Morgan Stanley banker only spends a short time in his new job

Leverage piled up on leverage, debt built up on debt … the Financial Times dataviz explainer on financing structures in the private equity industry starts off pretty simple, but quickly turns into something of a nest of snakes, as it keeps drawing arrows showing the many and various ways in which financial sponsors can add another couple of turns of gearing to improve their returns.

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As Matt Levine points out, the number of ways private equity firms add leverage is myriad. They borrow money to buy a company, secured by the assets of the company. They can also borrow money to buy the company, secured against commitments of their partners to put in money in the future. Once they've bought the company, they might take out a margin loan, secured against their stake. Or they might take out a net asset value loan, secured by various stakes in various companies. They might borrow to pay dividends. The partners themselves might take out some loans....

Levine observes that there’s nothing intrinsically new here; the whole business of the financial system is the slicing and dicing of cash flows from “real” businesses, to divide them up into safe and risky bits, the better to match them to different investors’ appetites. 

On the other hand, it’s hard not to notice that it’s also pretty normal for the financial system to blow up every couple of decades.  And when it does, this is often a result of having made mistakes in the slicing, dicing and leveraging-up process. A lot of debt will be hanging around that looked like it was very safe but actually wasn’t.  The overwhelming sensation is one of “I hope everyone involved knows what they’re doing”. 

Do they?  It’s always a cause for concern when financial claims are structured and traded by investment bankers with no first-hand experience of the underlying business that’s generating the cash flows.  A lot of private equity employees not only lacks that experience, but don’t have much first-hand experience of investment banking either. 

Many people working in private equity were hired straight from the analyst program of a bulge bracket bank, in some cases without even having got their business cards and security passes.  Then they spent a couple of years hanging around doing “pls fix” on PowerPoint decks and experimenting with the human body’s tolerance for sleep deprivation.  Then they were let loose, into an unprecedented boom, with historically low interest rates and huge inflows.

Now they have to deal with a potential economic downturn, in which attractively priced refinancings are no longer guaranteed.  How will they do?  Maybe very well.  After all, these are, by definition, the most elite graduates of the most elite universities in the world – that’s what the PE recruiting process has selected for. But outsized intelligence and ambition don’t always correlate well with common sense.  It’s worth remembering that the phrase “The Best and the Brightest” was originally meant to be ironic; it’s the title of a book about how the US State Department screwed things up so badly in Vietnam.

The proverb always has it that a crisis happens exactly when the last banker to remember the previous one retires.  On that basis, Jamie Dimon is still around, so we’re safe for the time being.  But it’s a sobering thought (to bankers of more advanced years, anyway) that the collapse of Lehman Brothers happened in 2008. When it happened, the cohort of impressive young people joining the private equity this year were just leaving kindergarten.

Elsewhere, one of the many Jefferies MD hires of the last few years appears not to have taken.  After less than a year at the firm, former Credit Suisse and Morgan Stanley leveraged finance specialist Alessandro Mazza has left, heading for the advisory arm of Lone Star.

There are no details given as to the reasons behind this move, but it’s not uncommon for someone to simply find out after a big job move that they don’t fit. Sometimes the role isn’t quite how they’d understood it, sometimes another big hire made shortly afterwards alters their position on the pecking order, and sometimes the vibe just isn’t right. Luck also plays an outsized role – the first few deals for a new employer will often set the tone for your perceptions there, and if a couple of balls bounce the wrong way, it’s easy to get in a situation where moving swiftly onward seems like a more attractive option than digging in to change people’s minds.

Either way, something clearly encouraged Mazza to move on. We wish him longer tenure in his new job than in his last. 

Meanwhile …

Another new sheriff in town for Chinese bankers – Wang Weidong has moved from a supervisory post in Tibet to head up the Central Commission for Discipline Inspection, with a promise to “promptly discover deviations” and “vigorously implement rectification” in the financial sector. (Bloomberg)

Great news for misanthropes – companies are cutting back on office birthday parties and trying to make them less annoying. (WSJ)

If you can keep a straight face while calling your boss “Your Majesty”, then there are good ESG jobs out there.  The CEO of Crown Estates has been paid £1.9m as a reward for assiduously managing the royal real estate assets.  These include the King’s ownership of the seabed around England, which became very important when people wanted to build wind farms on it. (Guardian)

“The impossible we can do today – miracles take a little longer”, as a popular desktop slogan used to have it.  Hiromi Yamaji, who went from Nomura to the Tokyo Stock Exchange, can take a lot of the credit for making Japan a hot investment market again for the first time in decades. (Bloomberg)

On Wall Street, junior investment bankers’ lives have been made a little more hellish recently by the fact that many of them are addicted to “Zyn” nicotine pouches, and there’s a national shortage. (Business Insider)

The welcome and unfortunately rare sight of one of the titans of finance putting his hand in his pocket – George Weiss, of the eponymous hedge fund, is extending a $1m line of credit to pay remaining staff and expenses as the firm is wound down. This is, of course, in the context of quite a lot of litigation, but even so. (Bloomberg)

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