Should bankers fly to China?

February 14, 2011
Here's TED:

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The advantage of being pseudonymous is that you can be honest. Here’s TED:

The most egregious example was the time I had to fly 18 hours, on short notice, from a mid-sized European city to Beijing for a two-hour pitch and fly right back to London for business the next day. In terms of cost-effectiveness, best use of senior bankers’ time, and sheer expense, this was pretty ludicrous.

And here’s James Gorman, showing what bankers have to say if they’re speaking on the record:

I pitched for 450 client meetings last year. I flew to China for a 20-minute meeting and then got on a plane and flew back. It was right for me to do it, and we got the deal.

It’s conceivable that both are true. I’m pretty sure that TED was flying commercial while Gorman was flying privately. That makes a huge difference in terms of productivity, especially while airborne. On the other hand, Gorman’s logic is pretty flimsy. He seems to think that if Morgan Stanley got the deal, then flying to China was obviously the right thing for him to do. But in fact it’s a bit more complicated than that.

As TED notes, the expenses incurred on Gorman’s trip were pretty big. Cash costs of course were huge, but opportunity costs were larger still: there was surely a significant number of meetings that Gorman didn’t make because he was stuck on a plane going to or from China, where he could have added value for the firm. On top of that is the basic probabilistic calculation: what is the probability that Morgan Stanley would have got the deal had Gorman not travelled to China? And what are the chances that Morgan Stanley might have lost the deal even after Gorman showed up for his 20-minute meeting?

Then there’s a bigger question still: what are the chances that getting the deal is going to end up being a good thing for Morgan Stanley? John Hempton has a post today about Guanxi — the way that Chinese business deals are generally based on personal connections and relationships.

In the United States the Guanxi guys will work for single-digit millions annually and think they are well paid. That is all they are entitled to. Such limitations on entitlement do not exist in Asia – and the Guanxi guys are likely to see Western funded private equity shops like Carlyle as piggy banks to loot… And the looting will not be a million or two dollars here and there – it will be for every penny they can extract…

The whole point of private equity is that by pooling capital you can get insider positions and you can run the company for cash – for the benefit of your investors. But if your “insider position” doesn’t even allow you to spot the business does not exist then your insider status is worthless…

Only after the collapse of network capitalism will the system be cleaned up and capital be allocated on the basis of analysis rather than connections.

It’s possible that the deal Gorman flew to China for was a purely advisory one which didn’t use Morgan Stanley’s balance sheet at all. But I doubt it. And as a result, no one will know whether the deal was a good one for Morgan Stanley for many years yet. If the likes of Hempton and Jim Chanos are right, then in hindsight just about every flight to China these days could turn out, with hindsight, to have been a very bad idea indeed.


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