Sunday 5 August, 2007

wrt: NYT Aug 5th Andrew Sorkin

So what's the big deal about investment banking anyway. Do they deserve the astronomical fees that they command? Last year, Wall Street took in $8.5 billion in fees. The average bonus for a Goldman Sachs employee was $650,000!

So, in theory, companies hire investment banks for their insight, superior business acumen and what they hope will be a profit-maximizing strategy. How much of this happens in practice?
Perhaps the critic would choose to focus on the fact that a good $20-$30 million in a multi-billion dollar deal can hardly be considered significant enough but then, that's just really not the point is it?

Before you ask yourself the inane question of determining a quantitative method to judge advice, ask yourself this.How can you justify that amount of money for advice, when there remains every chance that the bank's strategy might not even be heeded in the long run. Never mind that, when AOL and Time Warner merge (or was that supposed to be about one acquiring the other?), is the deal based on what the hired investment bank wants? Apparently not.

Both the companies' chairmen, Steve Case and Gerald Levin had already agreed on the basic principles of the deal. So that relegates the bank's role to simply figuring out the execution (quite literally). The $164 billion deal had the country's top investment brains working behind it. When the strategy was already decided upon, does that justify the small percentage but astronomical amount that they receive as fees?

So the bottom line is to figure out what the primary role of the investment bank is, i.e: to strategize or to execute. It is only fair that accordingly then, the fees should be determined.
Needlessly running up the numbers, deal sizes and various commissions should not be the priority of a bank.

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