tag:blogger.com,1999:blog-5389144729834496735.post3442003092441189455..comments2024-03-17T05:15:55.634-04:00Comments on The Brooklyn Investor: Wall Street Firms Only for Employees?Unknownnoreply@blogger.comBlogger3125tag:blogger.com,1999:blog-5389144729834496735.post-19362454080646282912012-07-18T12:13:38.827-04:002012-07-18T12:13:38.827-04:00Oops, also forgot to mention; Einhorn talks about ...Oops, also forgot to mention; Einhorn talks about the 50% compensation ratio as being more egregious than the hedge fund model (20% incentive), but again, if you look at book vaue growth (plus dividends), that is already *after* the compensation expense. <br /><br />So yes, a 2%/20% fee structure looks better than a 50% comp ratio, but if you look at hedge fund returns, many of them are 10-15% return *gross* (before fees). Yes, some have done 15-20% over time net of all fees. <br /><br />So to be fair, you have to look at it that way; what is the total return after fees (or compensation expense in the case of banks) over time? <br /><br />And my point is that GS, JPM, WFC have done really well in that regard.kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-38836551825988121962012-07-18T12:01:40.383-04:002012-07-18T12:01:40.383-04:00Good article, as usual. I like Einhorn, but I ten...Good article, as usual. I like Einhorn, but I tend to disagree a little with that. I actually think the fee + b/s model is actually good. The reason why investment banks when managed well tend to have great ROE's over time compared to say, the returns of hedge funds, is precisely because they have fee income that helps stabilize the business.<br /><br />This was the secret to why John Merriwether at Salomon was able to make so much money while he couldn't do it (or blew up) as an independent hedge fund (where he had no access to the steady stream of fee income that can be used to offset bad times in his mark-to-market portfolio). <br /><br />This is true in many cases. Actually, my next blog post might be why GS ROE is so bad and JPM's so good right now. Is JPM's investment bank so much better than GS's? I think it's because of the diversity of the JPM business model that allows it. But that cuts both ways. I am still not sure I will make a post about it or not, but we'll see. <br /><br />In any case, he is right that maybe the b/s usage of investment banks dilute the high ROE nature of the advisory business, but the advisory fee income stream can be highly volatile too (just look at the listed independent advisory firms). This is why they are getting into asset management to smooth out that boom-bust cycle of fees. <br /><br />In any case, as proof of how good the IB business model is when done right is just look at the book value growth of GS or JPM in the last few years and compare that to the growth in the S&P 500 index. It says something when they can outdo the S&P in this kind of environment. <br /><br />Also, the fact that 50% of the revenues goes to employees doesn't really matter; if you look at ROE and growth in book, that already accounts for the high cost of employees. <br /><br />And besides, employee/labor is obviously the big cost factor in this business. <br /><br />You can say the same about your accountant or lawyer. Those companies aren't listed, but I bet that a high percentage of the costs of those law firms/accounting firms are labor costs. Sure, they use no balance sheet so ROE might also be high. <br /><br />Anyway, it's an interesting topic. <br /><br />I don't mind disagreeing with people I highly respect. Charlie Munger, who is a hero of mine too, put out a really disparaging article about Wall Street. He hates just about everything about it. <br /><br />And I understand his viewpoint, and I respectfully disagree and that's totally fine. <br /><br />There are so many amazing, brilliant minds with vastly divergent views so I don't worry about being on the other side of these geniuses. I can only say what I think and believe. (and nobody is going to agree with anyone on every single issue). <br /><br />Anyway, interesting topic, thanks for posting!kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-85494008020370812412012-07-18T11:44:21.257-04:002012-07-18T11:44:21.257-04:00Not that I disagree but as a counter how about Ein...Not that I disagree but as a counter how about Einhorn's VIC speech on Nov. 2006 at least for Goldman - http://manualofideas.com/files/blog/einhornspeech200611.pdfAnonymousnoreply@blogger.com