In the financial news today was an article about three investment bankers getting charged for running an insider trading scheme. The bankers worked at Goldman, Moelis and Centerview, and the scheme ran from 2012 to 2018 targeting M&A deals mainly in the pharma space. Along the years there’s been many other similar cases, ranging from a Lazard managing director who passed on tips to fund his affair with a mistress, to SAC Capital’s gigantic insider trading operation.
In a general sense I can understand the urge to engage in insider trading. It’s simple. Greed is a basic instinct. But it’s difficult to understand why certain people can’t suppress that urge given that the risk/reward seems unfavorable. I use the word “seems” here because there is a chance that my assumptions are wrong; perhaps only a fraction of people get caught and that the smartest ones end up making a crazy amount of money consequence free.
I will use today’s news as an example to illustrate my point. While I’m not sure what positions the three bankers held, as a former investment banker in a prior to transitioning to the buy side, I’m aware that even the lowliest analyst gets paid maybe $150,000 all-in for being an Excel monkey, in the first year straight out of college (don’t quote me though). Four years into the gig, he’s getting paid $300,000 as an associate. By year 7 or 8, he’s printing half a million bucks as a VP, and if he sticks it out and things work out, he’s clearing a million dollars easily as an MD after a dozen years, flying first class being comfortable. My point is, investment bankers live comfortably (extremely comfortably in many cases) so why would they risk everything to illicitly generate what is not that big of a sum relative to what they make legally. The three bankers sold insider tips to middlemen. Two of the bankers were in a romantic relationship; together they received $1 million in cash plus trips and luxury watches over the 6 year period. That averages out to $167,000 per year, a life changing number for someone living in poverty. But investment bankers working at top tier shops don’t live in poverty, so why would they risk their careers, relationships, wealth and jail time for what is not a life changing sum of money. It just ain’t worth it, no?
The second point I would make is that financial professionals should be able to generate decent returns from legitimate investing activities without resorting to illicit methods. Investment bankers should know how to make financial models, break apart 10-Ks, analyze business models, and do DCFs and comparable companies analyses on companies. They are flooded with non-insider financial and business information everyday. They have access to Bloomberg terminals and can set up brokerage accounts. They can buy individual stocks if they go through the proper compliance procedures. The U.S. stock market has compounded at 7 or 8% over the long term, so even without skill they could make a lot of money.
So it boggles my mind that some bankers can’t resist the urge to engage in insider training in a world where surveillance technology improves continuously. At the end of the day, I guess for some people greed trumps common sense and moral integrity; there will always be bad apples.
