The investment banking spell is broken

In an earlier article I argued that what really separates investment bankers from the rest of humanity is their uncanny ability to convince others with their 'bullshit'. And this 'skill', combined with their growing influence and power has had increasingly dire consequences for the rest of the economy, and us.

For the past year it has looked like the 'investmentus bankitus' species had done it again. Having shepherded the global economy to the edge of the cliff; then watched a few economies such as Iceland and Greece actually fall over it, not to mention millions of American households. The species had not only survived, it had returned to doing what they do best – making millions.

Or so it seemed. Except someone forgot to tell all those out of work and bankrupted US voters. They're mad as hell and want heads to put on pikes. Reacting to this, US politicians are demanding sweeping regulatory reform to ensure the GFC never happens again. That is the last thing investmentus bankitus wants. So they have deployed their considerable financial resources to lobby against all but the most basic re-regulatory efforts. To date their extensive and well-funded lobbying efforts have so far prevailed and meaningful regulation is yet to surface.

But investmentus bankitus has failed to grasp one essential element in their success. They are only in business at the pleasure of the wider community. If they lose that wider franchise, they lose their legitimacy. The US people want reform. The US government wants reform. It is only investmentus bankitus who are opposing such efforts. They appear to think that if they just keep doing what has worked so well over the last two to three decades, everything will be fine. In short that strategy has seen the front office mint money, while back door lobbying stalls the politicians.

It is an essential lesson of history that you do not take on the US government. Nazi Germany, Imperial Japan and communism all found this out the hard way. Unless investmentus bankitus wakes up to sniff the new breeze they could find that the Washington show trials of Goldman execs in late April, are just the beginning of a very uncomfortable future.

The US government appears to have initially targeted the 'alpha male' of the species by taking on Goldman Sachs. Perhaps the US government decided if they can roll Goldman, they can roll the rest of the industry as well. So during April we had one surprise after another. Civil proceedings against Goldman. Then the show trials. And at the end of the month the announcement of criminal charges against Goldman. This has kicked on into mid May with reports the SEC in the US is investigating up to eight other investment banks and their role in the GFC.

At this stage the industry is giving every indication of toughing it out. Judging by the performance of the Goldman's executives during the April show trials they still don't get it. For most observers this was a stunning revelation. Here was the supposedly "smartest guys in the room” appearing tone deaf to the demands of the wider community. Despite all that has happened the species truly believes they have no culpability for what happened and therefore the market should be allowed 'to do its work, unfettered (mostly)'. What is really on show here is the flip side of the same DNA that allows investmentus bankitus to convince others to believe their bullshit. Because this DNA also means the species really is tone deaf whenever the operating environment changes suddenly and abruptly.

My instinct tells me Goldman is probably guilty of nothing more than being very good at their 'job'. In court they may (in years to come), be vindicated. But the real question is whether society wants to continue sanctioning their 'job'? Because being good at your (once legal) 'job' won't stop the government conducting show trials of more investment bankers every other month, uncovering embarrassing emails after embarrassing emails. What if they start on expense accounts? They might find some pretty interesting revelations there as well. Investmentus bankitus should read up on the McCarthy era to see what a focused US government can do, when motivated enough. And the GFC has left plenty of motivation.

Back in Australia this is all more than good theatre. Re-regulation of the finance industry has a growing global impetus. Even if our finance houses were 'not at the party, let alone drunk', overseas re-regulation efforts will more than likely be picked up as a theme here.

And the backwash from the Washington show trials has merged with the resources super profits tax to lead some pundits to suggest Australian banks might be subject to a similar super profits regime. That thought, along with no frills first-half results, saw the share prices of all the Australian banks under pressure in early May.

Mike Mangan is a portfolio manager at 2MG Asset Management. His career includes 13 years working for investment banks.