Occupational Hazard
Despite the important role they play in keeping the global economy humming, investment bankers just can't catch a break.
By Joshua Hamerman March 13, 2009
When Tim Skeet was having his passport checked upon arriving at John F. Kennedy International Airport several weeks ago, he was asked what he did for a living. He told the airport official he worked in the fixed-income division of a large investment bank, and the official responded, "Do you have anything to do with mortgage finance?"
Skeet, the International Capital Market Association's regional chairman for the United Kingdom and Ireland, explained that he does, but not the part of mortgage finance that blew up.
He had a similar encounter last year with an airport official checking his passport in Toronto. And he was recently cross-examined about the financial meltdown and investment banks' role in causing it by a cab driver in rural Northamptonshire, England. "That's where we are right now," says Skeet, who has been a banker in the City of London for 28 years. "You feel like a marked man."
Skeet's experiences illustrate a broad problem: the lack of understanding about the financial meltdown and the investment banking industry by nonbankers in the general public, government and news media, as well as the industry's lack of initiative to change those misperceptions.
"At the heart of this is the fact that the public doesn't understand the role of the investment banker, how capital formation happens, or how it relates to their own economic progress," says Peter Verrengia, the president and a senior partner at Fleishman-Hillard's Communications Consulting Worldwide. "This has been fine in the past. Periodically, when the market blew up, bankers would come in for some finger-pointing, but the public, having little understanding of what they really do, tended to move on to other targets that they understood a little bit better, like brokers or individual companies that have failed to perform."
For the investment banking industry, it's about more than just a bad image.
"If it's just an image problem, you need a new suit of clothes, and everything will be fine," says Paul Argenti, a co-founder of Communications Consulting Worldwide with Verrengia and now a corporate communication professor at Dartmouth College's Tuck School of Business. "In this case, the entire industry is perceived as responsible for everything that's gone wrong in the financial system and everything that's wrong with America. It's hard to fix your image when everyone hates you and thinks you're responsible for all the evil in the world."
Mainstream news coverage and politicians' statements on both sides of the pond do not help the situation.
"The media and politicians are trying to ease these elements of the crisis into pre-digested sound bytes, but in reality everything is more complicated and technical than that," says Skeet. "All of us -- the media, politicians and bankers -- have a duty to communicate to the public that this is a very complex situation that cannot be reduced to sound bytes."
The details surrounding the meltdown make it difficult to explain to nonbankers.
"There are so many pieces to the investment banking process, so when you talk about things that worked, compared to things that didn't work, you're already in a deep swamp of details that don't add up to a full and positive picture," says Verrengia.
Investment bankers who try to speak up are quickly silenced.
"The CEOs are trying, but anytime anyone sticks their head up, they get vilified, because right now it's open season on the banking community," says Skeet.
Verrengia says some firms foolishly think silence will protect them. "They'll communicate the minimum and hope not to be noticed, but if they don't talk about their values, processes, intellectual capital and what's going to make them competitive in the future, as well as their willingness to be scrutinized and stand up to a high international standard of performance, they won't have a place."
Every organization under pressure, regardless of sector, wants to say as little as possible to protect its reputation, but this ultimately hurts the at-risk party, because the audience wants as much information as possible. This leads to uncertainty and friction, which can only be solved by finding third parties who can define what went wrong and how to fix the problems.
"In this case, the investment bankers don't feel they're on safe ground to participate in that conversation, so everyone else fills the vacuum," says Verrengia. "This has moved too fast from a position of no information to a position of condemnation, and now there's almost no role for the traditional investment banking voices to speak in their own defense in this process."
Another hindrance is the lack of effective communicators and critical thinkers in the banking community. "We have far too many people with economic, mathematics and science backgrounds who are linear thinkers, but we need a fair smattering of liberal arts thinkers who are interested in communications and expressing themselves, and are trained critical thinkers," says Skeet. "A lot of bankers are good at linear thinking, but the evidence is before us that many bankers also didn't have the ability to see the problems and then think around, over and under them, and they accepted faulty models seemingly unquestioningly."
For a long time, investment banks felt they did not need to market themselves to outsiders. The firms mostly had a cavalier attitude about external communication in the 1980s. That changed when Warren Buffett took over Salomon Brothers, says Argenti. Until then the firms had "rudimentary marketing staff and unsophisticated communications departments," and the attitude was "who cares about this stuff?" By the late 1990s firms such as Goldman Sachs Group (which Argenti advised for eight years as a consultant) and Morgan Stanley had sophisticated marketing and communication staffs to counter a new wave of criticism.
However, even great communicators can only do so much if the organization's values are not up to par. "It's hard to build a reservoir of good will and fix your reputation after you've completely screwed up, been cavalier in attitude and treated people like dirt," Argenti says. "Some of these organizations had no consideration for anyone but themselves."
That arrogance also affects the quality of the communication. "Bankers are good at communicating their victories and their place in the league tables, but they've never been good at explaining things that haven't gone well," says Verrengia. "It's always someone else's fault -- the person who uses the capital is the problem, not how much was raised or what structure, for example."
In some ways, investment banks never needed to market themselves to a general audience before. "It's a very different industry than a consumer product category inasmuch as their audience is pretty rarefied in CEOs and policymakers, so it's not for a mass audience," says Matthew Harrington, CEO of U.S. operations at Edelman. "But in this period of time they are being splashed across the newspapers, so their visibility is now a mass audience, whereas historically it hasn't needed to be and hasn't been."
Michael Kempner, the CEO of MWW Group, which represented IndyMac Bancorp. during its collapse and continues to represent small firms, says historically, investment banks have been defined by a lack of transparency, a lack of effort to build trust and arrogance about their role in society. "The institutions have to work very hard to create trust, which is going to be very difficult, and they need to be open and transparent and act in a way more consistent with understanding what people are going through in this economy."
What now?
Despite the well-publicized problems, the investment banking industry has done a lot of good, particularly in this country, Kempner says, but "they've done nothing as companies and as an industry to work to present that face and that part of the argument."
Some criticism of investment banks and other finance firms is also unreasonable, such as chastising players like GMAC for spending millions of dollars on Super Bowl sponsorship and commercials, Kempner says. "It seems simplistic to a member of Congress or an owner of a local store to ask how they can spend money sponsoring the Super Bowl, but to be critical of marketing makes no sense, although it scores great political points and is an easy sound byte on television."
The moment of truth, according to Verrengia, was right after the collapse of Bear Stearns last year, when each of the other big investment banks was saying either "That doesn't apply to us" or "They deserved it."
"I haven't spoken to anyone who, looking backwards, is happy that Bear Stearns went first, but at the moment it went, the industry did not speak with one voice. No third parties came in to defend the investment banking function itself, and there was not enough of a consensus generated regarding the fact that the investment banking function was a creator of value at that time," he says. "Then, when we got to Lehman Brothers, there was already too much negative momentum for any one person to come up with all the good things that investment banks have done well."
The failures of Bear and Lehman, coupled with government objections to Bank of America and Merrill Lynch & Co. bonuses, means "it hasn't been the right environment to tell a positive story," Harrington says. "As long as the Merrill Lynch/BofA issue plays out, it's hard to have a counterstory to put forward."
Verrengia says investment banks need to rework their definitions and roles, as well as what the expectations should be from investment bankers.
"When the markets come back, there will be investment bankers in them, so who will lead that charge? There are so many institutions fighting for their lives, and many bankers who are not practicing at the moment, but there are also a lot of organizations with a stake in the future of investment banking. It's time for them to get together and recreate a way of describing the function and its benefits that will give it a future."
The industry also has to remind the public that many bankers themselves have been hurt in the downturn, having lost their jobs and savings, Skeet says. "The media portrays every banker and finance industry professional as a self-serving muppet, and that's not healthy. There are a lot of good, hard-working folks in our industry who are equally victims of this downturn. We're not all perpetrators of some dreadful crime."
An industrywide initiative is also critical, because of the debate in Congress.
"There are issues in the coming months where all these institutions could take a leadership role, such as the conversation about executive compensation and the regulations D.C. may place on the industry," says Harrington. "Absent engagement, the agenda will be defined by others, and that is never a good thing."
(c) 2008 Investment Dealers' Digest and SourceMedia, Inc. All Rights Reserved.
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