Читать книгу Stuff Matters: Genius, Risk and the Secret of Capitalism - Harry Bingham - Страница 13

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 to look at: interest coverage, gearing, debt to equity, cash flow coverage. All good solid concepts, most of which would have made sense to a medieval Italian banker.

My spreadsheets, inevitably, announced all the right things. Interest would be covered and gearing would come down. All would be for the best in the best of all financial worlds.

At the same time, everyone involved in the deal knew that spreadsheets are simply the world’s most complicated way for converting Garbage In to Garbage Out. They’re a way, if you like, not so much of predicting the future as specifying exactly what would happen if various different futures unfolded. And nobody knew what the future held.

The J.P. Morgan team divided two ways. On the one hand, there was the group of people putting the deal together, the Structured Finance team, who were representatives of the New Way. They were young, smart, driven, and they wanted to make money. The fees that banks can earn on transactions of this sort are huge, and although I forget what the precise percentages concerned were in this instance, quite likely there was an entire percentage point available to play with, probably even more in the case of the junior debt. The interest rate on the debt would also generate large annual margins for the bank. If all went well, there would be big bonuses for the bankers who had put the package together.

On the other side of the divide stood just one person: the Chief Credit Officer, Europe. He didn’t look anything like an investment banker. He wasn’t young and wasn’t hungry. He looked, indeed, exactly like what he was: a middle-aged British banker, complete with dark suit, receding hairline, big old-fashioned glasses.

When my spreadsheets were completed, and the Structured Finance team was ready, a meeting was set up at which credit approval would be formally requested. The Chief Credit Officer, I assumed, would be a kind of spreadsheet dynamo, ripping into suspect figures, attacking inappropriate ratio calculations, challenging my working capital assumptions. I couldn’t have been more wrong. I imagine he knew how to turn his computer on in the morning, but I wouldn’t be totally surprised if his secretary had performed that chore for him. Certainly he’d never created a complex financial spreadsheet in his life. His career had begun long before such things came along. Nor was he chock full of the kind of faux-expertise that investment bankers rapidly acquire about any new industry. The Chief Credit Officer didn’t have a headful of difficult facts about the shaving industry: frightening new data about the popularity of beards in Germany or the rise of disposable razors in Scandinavian bathrooms.

On the contrary, his technique was simpler and more dazzling. He listened to the rest of us make our case, armed only with common sense and a kind of relentless scepticism. Any team working hard on a major project goes through waves of communal emotion before settling on a consensus position. In the case of this project, the Structured Finance team had come to be Believers and individual doubts faded away in the presence of so much confidence. The Chief Credit Officer, however, hadn’t been a part of the project team and even if he had been he was genetically inoculated against flightiness. He just sat and listened and disbelieved. In his presence all the stuff which had looked so good in a spreadsheet or loan prospectus simply sounded contrived and implausible.