to them, are background. If a product isn’t selling, then it isn’t selling. If the line needs to be axed, it needs to be axed. What is to be done about Jake, Jenny, and the others becomes a secondary problem to be sorted out once the primary decision is taken.
The breathtaking simplicity of this approach is something most of us find uncomfortable, because it relegates to the sidelines all our human emotionality and complexity. That conflict, between business goals and human complexities, lies at the heart of almost every drama about tough businesspeople, from Dickens’s Hard Times to contemporary TV drama like Mad Men. It’s also why businessmen have a reputation for crassness, and an addiction to numbers and facts. The addiction to numbers is certainly there, but that’s only because numbers don’t lie about profits and profits are all that ultimately matter. It’s not crassness that’s to blame, but a frightening simplicity of goals.
Yet for all the discomfort that we may feel around formidably successful businesspeople, there is almost always a respect that goes with it. Martyn Rose’s factories made all those tins of waterproofing gunk. Rockefeller’s refineries turned crude oil into usable fuel. Felix Dennis churns out his magazines. Michael Mastromarino – well, it’s hard to like the fellow and I’m not even going to try, but even he found ligaments for those in want of ligaments, skin for those in want of skin. However complicated our reactions to entrepreneurial success, we can at least see the stuff that’s produced as a result of their endeavours, or the difference made by the services that they’ve provided. Our respect may be grudging, but it’s usually there, however buried.
No such sympathy, however, shelters bankers and investors, traders and hedge fund managers, the dark magicians of all things financial. They’re doubly or trebly cursed: Cursed once for being richer than we are. Cursed twice for their inhuman intensity of focus. Cursed three times for practising an art apparently both magical and pointless. King Edward I of England expelled the Jews because he owed them money and because there is no good PR to be enjoyed by a usurer. Philip IV of France disbanded the Knights Templar and tortured many of their members for the same two reasons. The modern hedge fund manager is unlikely to be expelled or tortured, but governments still tremble at their power. It’s to that power, and to the people who exercise it, that we turn next.
Why did I rob banks? Because I enjoyed it. I loved it. I was more alive when I was inside a bank, robbing it, than at any other time in my life. I enjoyed everything about it so much that one or two weeks later I’d be out looking for the next job. But to me the money was the chips, that’s all.
– WILLIE SUTTON, Where the Money Was: Memoirs of a Bank Robber
When I was a baby investment banker, my employer, J.P. Morgan,* was a baby of sorts as well. Although the company had a huge balance sheet, a mighty reputation, and offices all over the world, it was a business in transition. It had made its name as one of the world’s biggest and best commercial banks – that is to say, a bank which takes deposits and makes loans but doesn’t do all the crazy, sexy things that Wall Street investment banks get to do – but its core business was rapidly changing.
Big firms, the sort of firms who had long made up J.P. Morgan’s global client base, were increasingly borrowing direct from investors, by issuing bonds and other types of security, thereby cutting J.P. Morgan out completely. The bank had two options. It could keep hold of its existing clients and try to sell a whole new range of products to them. Or it could do less and less business with its old clients and move down the food chain to smaller corporations which were (and are) more reliant on bank borrowing.
Needless to say, ‘moving down the food chain’ is not an appealing prospect to any self-respecting Wall Street ego, and since J.P. Morgan was a firm whose power had once made governments tremble and stock markets blanch, that option was never likely to appeal. So it went for option one. The firm wasn’t about to give up its existing profitable business, but it wanted to supplement it with a full range of investment banking services as well. Because the regulatory hurdles were higher in America than they were in Europe, it was Europe which acted as laboratory for the New Way.
But what exactly was the New Way? No one quite knew. There wasn’t so much a master plan as a determination to grope profitably towards a new business portfolio. Experiment was in the air and that meant a willingness to take risk, which is where this particular story begins. This was the time of ‘Barbarians at the Gate’ – the era-defining deal which saw a private equity firm, KKR, acquire an American conglomerate, RJR Nabisco, for an eye-popping $25 billion.* It was a deal that had Wall Street’s finest crawling all over it and was therefore presumably the sort of deal that the new look J.P. Morgan should be getting involved with. So J.P. Morgan duly decided that it should do Leveraged Buyouts (LBOs) too.
People were hired, budgets agreed, targets set. Before too long, a deal presented itself, and it was a strange beast. A Swedish company, Stora, had a consumer products division which boasted two main arms. One arm made matches, such as you might use for lighting cigarettes or bonfires. The other arm comprised the Wilkinson Sword shaving products company. Stora itself, however, was a paper company, turning Swedish trees into reams of photocopy paper.
The whole set-up was a mess. The match business had nothing to do with making paper. Making paper had nothing at all to do with making razor blades, and razor blades and matchsticks only go well together in the hands of teenage hoodlums and arsonists. The commercial logic for separating all those disparate businesses was compelling.
The strange bit, however, was that Stora’s consumer products division was to be bought by a consortium led by none other than Gillette, Wilkinson Sword’s major competitor. Because Gillette was already a dominant force in world shaving, the competition authorities in Europe were never going to allow it simply to snap up one of its main rivals, so Gillette said that it would minimize its involvement. Roughly speaking, it promised to put up a big chunk of the money and then stand well back. The whole deal was to be very heavily reliant on bank borrowing.
The question that was put to the buyout team at J.P. Morgan was simply this: did the firm want to help? The total transaction amount was to be a shade over $600 million, of which about $400 million was to be made up of senior debt. That phrase, ‘senior debt’, has a nice reassuring ring to it, somehow suggesting the responsible, grown-up sort of debt that wears leather patches on its sleeves, smells of pipe-tobacco, and has a perfectly manicured lawn. Alas, all it actually means is that, in the event of bankruptcy, the senior lenders get paid out before the junior sort. And there was going to be plenty of junior debt as well: approximately $138 million of it. Alert mathematicians may already have noticed that $138 million of junior debt added to $400 million of senior debt amounts to – a lot of debt, especially when the total transaction size is just $600 million or so. You might think that a venture financed by piles of borrowing tottering on top of a teeny sliver of good old-fashioned cash was asking for trouble.
Maybe so. That’s certainly what the competition authorities believed, because they took a highly sceptical view of Gillette’s motives in backing the transaction. After all, if Wilkinson Sword was struggling underneath a mountain of debt, it would hardly be the feistiest possible competitor to Gillette.
That, however, was not the question which faced J.P. Morgan. The question which faced us was: would we lend the money? On the one hand, it wasn’t the kind of deal that the bank had financed often in the past. On the other hand, this was surely a lovely stepping stone towards the New Way. It was a deal that still involved lending money – the bank’s old business – but in a high risk, high fee, very Wall Streety sort of way.
As the baby banker involved in the deal, I was assigned the task of building the spreadsheets. I did my job and the spreadsheets grew. I developed the kind of ratios that bankers liked