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Morning Coffee: The bank that still takes its people on extravagant offsites. Another Goldman Sachs business that’s rapidly shrinking.

There are not many firms who would be prepared to pay for hotels, flights and restaurants for 750 bankers to have a get-together, even in the best of market conditions.  In the current environment, Macquarie Capital’s biennial conference in Tokyo looks quite surreally lavish.  The invitations have gone out to more or less the entire firm, so as well as the travel and accommodation bills, the Australian investment bank is prepared to give up almost an entire week’s revenue generation.  (The only people who haven’t been invited are those working on the public-facing equities business, and they will presumably be telling themselves that this is because that’s one business line where you really can’t leave the desk for days at a time).

It's not at all because Macquarie are indifferent to costs; six months ago they made the headlines by banning their bankers from eating at some expensive restaurants.  But they have decided that cutting the conference would be a false economy.  It’s a kind of “investment” in building and maintaining the culture of the firm, something that a lot of banks only talk about as a half-hearted justification for their back-to-office policies.  Spending an extended period of time in each other’s company, with all ranks and geographies mixed together, builds relationships and esprit de corps.  These are important anywhere, but according to the book “The Millionaires’ Factory” they are particularly vital at Macquarie, which has a business model heavily dependent on employees taking initiative and trusting each other.

Of course, it could be argued that it’s just as possible to build relationships and culture over curly sandwiches in a conference room in head office as it is in fancy bars in Tokyo.  But that probably underestimates the importance of the signal sent out by the ostentatious consumption itself.  Like Citadel putting its interns into some of the world’s best hotels, the simple act of spending a lot of money on your people is one of the best ways to make them feel valued.

Which matters, because the industry cliché is true – glum bankers don’t win mandates.  By the nature of the job, advisory bankers need more than natural levels of self-confidence; how else can you walk into the office of the CEO of a global company and tell them what to do with their business?  If a week in Tokyo every few years keeps the bankers in the mood to make deals, it’s cheap at the price; conversely, if the cost of cancelling it would be a collective sulk, it would be a ruinously expensive way to save money.  When it comes to bankers and their junkets, the biblical advice is correct – you should not muzzle the mouths of the oxen that tread out the corn.

Elsewhere, Goldman Sachs is continuing to shrink its principal investment portfolio.  This has been a consistent part of the New Goldman strategy under CEO David Solomon, to shift capital away from things which bring volatility to the earnings and to make more use of outside investors’ capital to generate fee income.  In the last quarter, the portfolio reduced in size by $3.6bn, as some commercial real estate assets were sold.

The financial logic is hard to fault.  Although it could strongly be argued that volatility and cyclicality are intrinsic to the business, and that anyone who wants a bank like Goldman Sachs to deliver a smooth path of quarterly results doesn’t understand a thing and ought to go off and play with meme stocks instead, Solomon’s job is to get the share price up, and at present, that means giving the shareholders what they want, rather than what might be good for them.

It must be hard for what was previously one of the highest-status teams in GS, though.  The clever and hard-working bankers who pick the long-term investments for the firm’s own balance sheet must know that you can’t judge a five year investment on the basis of 90-day mark-to-market.  They will also be aware that you make more money out of a good deal by owning 100% of the equity, not by taking a 2-and-20 management fee.  They will still be some of the highest paid and most prestigious people in the firm, but simply knowing that you’re not getting more capital and leaving money on the table might be tough to bear for a while.

Meanwhile …

The biggest US banks spent more than $1bn on severance costs during the first six months of 2023. (Financial Times)

James Gorman of Morgan Stanley points out a fact about trading businesses that’s obvious when you think about it; just as it doesn’t cost anymore to open a $150 bottle of wine than a $10 bottle of wine, it’s no more difficult to fill a $10m order than a $5m order most of the time.  Consequently, he doesn’t see much likelihood for headcount growth to come back in line with training revenues. (Bloomberg)

Always interesting to get some insight into the process of firing a client; the internal dossier on Nigel Farage compiled by NatWest/Coutt’s makes a point of emphasising that whatever other reasons they had to dislike his business, he had always been polite and professional to their staff. (Daily Telegraph)

Christian Sewing makes the case for the “national champions” at his Banker of the Year acceptance speech, suggesting that strong domestic banks are an issue of national sovereignty. (Euromoney)

Morgan Stanley has had to move as many as 200 technology employees from China to Hong Kong and other financial centres, because of new regulations on the transfer of data out of China.  It seems likely that other firms will have similar issues and need to build separate infrastructures. (Bloomberg)

A new state law in New York requires any AI tools being used for hiring purposes to be audited to make sure they’re not introducing sexism or racism into the process. (New Scientist)

It’s “ridiculously overhyped” and it might be “a hat, not a title” but every firm seems to be appointing a “head of AI”.  We will know the cycle is reaching a peak when they start asking people to call them the CAIO. (Vox)

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AUTHORDaniel Davies Insider Comment

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