The Greed Merchants: How Investment Banks Played the Free-Market Game

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By Philip Augar
Portfolio, 2005
258 pages, $24.95

Are investment bankers responsible guardians of free-market capitalism? Or are they a force of evil — a greedy conspiracy, with a long, checkered history of mouthing the virtues of the marketplace while doing their best to subvert its functions?

According to industry insider Philip Augar, the former head of Schroder Securities in the United Kingdom and now a full-time writer, the answer to both these questions is “Yes!” In 12 chapters, he reviews the history of the industry, chronicles the litany of abuses with which it has been associated, tries to identify how investment bankers really make their money, and suggests how the conflicts of interest endemic to the industry might be ameliorated.

Mr. Augar admits that trying to find exactly where investment bankers make their money is like chasing a bar of soap in a bathtub. But he points out some clues: Investment bankers are continually trying to de-emphasize commodity-type products such as equities, fixed-income securities, and common derivatives in favor of high-value-added offerings such as complex derivatives, sophisticated financings, and merger and acquisition work.

At the core of investment bankers’ ability to make themselves fabulous amounts of money is their immersion in the flow of markets, where their special access to information and their ability to “connect the dots” creates what Mr. Augar calls “The Edge” — a unique blend of knowledge and integration that also creates a formidable barrier to entry for would-be competitors. The other side of this spinning coin, however, is multiple conflicts of interest, including the glaring disconnect between dispassionate investment analysis and the bidding for lucrative initial public offerings, and the daily clash between the banks’ proprietary trading and the need to execute client orders. The author suggests that without the complete separation of advice from execution — both in securities trading and securities distribution in capital markets — these conflicts will continue. He also sees further trouble ahead, perhaps triggered by the complexity of poorly understood derivatives

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