The Greed Merchants by Philip Augar

Author:Philip Augar
Language: eng
Format: epub
Publisher: Penguin Books Ltd
Published: 2006-08-20T16:00:00+00:00

Joining the Dots

The Edge sustains the investment banks’ profits and enables them to regenerate. Because they are in the know they can think, look and act smarter than clients, trading counterparties and any competitors in a less privileged position. It is difficult to quantify the effects. In the same way that proprietary trading is inevitably embedded into customer market making, the integration of product areas is so much part of the investment banks’ fabric that it is impossible to disentangle. A senior executive at a bulge-bracket firm told me that cross-selling, the explicit sale of one department’s products by another department, accounted for about 20 per cent of investment banking revenues. But integration is about much more than cross-selling. As Josef Ackermann, chief of Deutsche Bank, remarked when appointing the heads of corporate finance and sales and trading to co-manage the firm’s investment banking division, ‘The alignment of complementary businesses and streamlining of the bank’s management structure will unlock revenue and cost synergies.’34 The revenues from integration flow thick and fast and the modern investment bank would not exist without them.

These benefits are achieved perfectly legally. Blatant insider trading and front running are not significant to the industry’s profits and the large majority of investment banks and brokers respect client confidentiality and the law. But there is an awful lot of information flying around the integrated firms and news of what is going on seeps along the corridors of the tightest of organizations.

This helps to explain why share prices nearly always move in advance of significant corporate action. Between 1995 and 2002, the average run-up in a target’s share price in the month before the announcement was 4.1 per cent in the UK, 10.1 per cent in Europe and 11.3 per cent in the USA.35 Leaks could have come from a variety of sources: company executives in the know or any of the many professional advisers involved, whether investment banker, management consultant, lawyers, auditor or public relations experts. Some of these cases were coincidental, others were triggered by legitimate pre-bid market activity; but it is difficult to avoid the conclusion that someone, somewhere, was using the Edge.

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