What does it mean to be a professional banker?
We hear so often in the news that big fat cat bankers are running amuck and are akin to a plague on society. The label of banker is just so broad as there are many different types of banks I don’t think the news organizations that use the terms understand bankers and I know that most people who don’t work in banking understand it either. Definition of terms is of crucial importance to understanding any topic so I want to clarify my understanding of the various types of bankers.
- Investment Banker: These are the bankers that arrange mergers and acquisitions, debt and equity origination and trading activities. These are the fat cats. They have incentive pay schemes that pay out millions and their incentives are not always aligned with their customers.
- Broker/Dealers: The bankers are basically salesmen, they want more and more transaction volume but don’t take a position, no risk taken by the bank, if the customer trades doesn’t work out the bank has no loss and if the customer has a massive gain there is generally no direct upside for the bank. These bankers not exactly fat cats but make a lot of money, much less deserving then investment bankers as they are not able to predict market moves as they claim. Many people don’t have the time or desire to learn about markets so they do provide some value for these people but not enough to warrant the fat cat bonuses. These are not the bankers that people complain about nor should they.
- Commercial/Retail Bankers: These bankers are just salesmen, not a whole lot of difference between picking the right mattress and the right credit card or cash manager. They don’t make bonuses in the range that any complains about nor should they.
The bankers that are salesmen often don’t really understand the products they sell. They are taught how to sell them and how to use them, product A give you x type of risk exposure, etc. but they don’t really understand them. There is a small group of people in headquarters who decide how to sell the products and they don’t have any interaction with actual customers so there can be quite a disconnect and customers are routinely misguided by salesmen trying to make targets or get higher commissions.
I have worked at banks where the sales staff didn’t understand the meaning of fractional reserve banking, velocity of money and why it matters, didn’t know the reserve requirement determined by the central bank and didn’t understand derivatives all that well. These concepts aren’t necessary to understand when selling a bond that a client has asked for but when considering what’s best for a client based on risk tolerance, preferences, market trends and plans for the investment proceeds it plays a factor. When conditions change understanding why products were appropriate allows you to determine if they continue to be appropriate. Prior to the housing collapse if bankers truly understood mortgage backed securities they would have understood that leverage was too high and we would not be in the low growth command economy that we find ourselves today.
So what does it mean to be a professional banker? It means understanding how the products work, why they are valuable to clients and under which conditions they would cease to be valuable and in fact being to harm the client. Most banks believe it’s not practical to train sales people to this level so they have a small group to do the thinking and salesmen just pump out the sales and damn the consequences.
The fat cat group, they understand the details of what they do and generally what they do has less to do with financial products and more to do with hype. The deal makers just find companies to match that investors would back/buy. They are looking for what they can hype/sell. Predator’s Ball, the Michael Milken story, outlines this very well. Milken just designed a way to build a network of investors and debtors where he extracted a commission on the money circulating through the network. As long as there was a market for debt that could be repaid then the network could survive. It ultimately failed when they day came so you need enough professional bankers with the right incentives to keep each other honest.