Wednesday, December 17, 2008

Some Cultures Don't Fit--And We Know It.

When I started on Wall Street in the Eighties, I first encountered the fashion of commercial banks purchasing asset management companies. You know the justifications: diversification and entry into a high margin, recurring revenue stream business. Walking past the Chemical Bank on Park Avenue in New York City on the way to work, I read about Chemical buying an outfit named Favia Hill. Bankers Trust, which was across the street, soon followed with their own announcement, and the trend started in earnest.

Not too long afterwards, rumors of tensions started surfacing. Asset management companies gave free rein to their senior portfolio managers regarding decision-making, and the compensation arrangements were quite generous. Of course, the commercial bank owners, who were used to heavy regulation and lots of bureaucracy, could not abide the free wheeling culture, but especially could not accept the compensation levels in their asset management subsidiaries. A few years later, most of the banks disgorged their asset management groups, while time, management focus and shareholders' monies were wasted.

Here we are decades later, and Bank of America buys Merrill Lynch. The press releases sound similar, except they are written more in the vein of "we've created a true financial bazaar, including advisory services and retail brokerage." Now however, the pay gap between the two executive cultures has narrowed, as C-suites in banks also have robust pay packages. However, the cowboy culture of investment banks and high-end wealth management groups has also become more extreme. Remember the Internet Bubble and "PO!" stocks rated "Strong Buy?"

The cultural mismatch is exacerbated today by SOX concerns, conflicts of interest, the uncertain role of equity research, and quasi-independent wealth management groups operating under a corporate umbrella. This was never a match made in heaven, and it's hard to see why it would be different in the markets of today and tomorrow.

No comments: