Mack knifed

Former Morgan Stanley CEO John Mack has a biography out. We asked Huw van Steenis, formerly Morgan Stanley lead financials analyst and now vice-chair at Oliver Wyman, for his thoughts.

This is not an obvious time to be glorifying financial crisis-era bank CEOs. But John Mack’s autobiography does give some useful insights into how much Wall Street has changed.

The former Morgan Stanley supremo gives his account of his ascent, fall, rise again and near crash, all whilst making an extraordinary amount of money. It has many of the elements that made the ultimate Wall Street book, Liar’s Poker, sparkle — rivalry, camaraderie, japes and high stakes — but sadly told without the style or irony of Michael Lewis.

Like most Wall Street memoirs, Mack wistfully recounts his youthful exploits and trading-floor antics. He is a self-confessed “incorrigible prankster”. One time he puts a piece of salmon sushi into the mouthpiece of a trader’s phone for several days so he and the floor could see the trader getting “worried sick” about halitosis. “Every desk is a place to hide under” he recounts.

 Mack is all too aware of his non-Ivy League background, lacking the “Mayflower manners of previous hires” and delighted to put the fear of God into “frat-house charm balls who needed a motivated kick in the ass”. (This reminds me of venture capitalist Josh Wolfe’s dictum “chips on shoulders put chips in pockets”.) 

The red thread of the book is one of wild self-belief and persistence to overcome any obstacle, or sack anyone. There’s a reason why he earned the nickname “Mack the Knife”. One of the more revealing point in his story is when Mack tells us of a serious injury he took whilst on a football scholarship at Duke. “Son your playing days have come to an end” he was told whilst some of his contemporaries went on to play in the NFL. More fuel to his fire.

At times it’s like reading Tom Wolfe given the fixation on objects and money. He gets suits made at Henry Poole (“in business since Napoleon”), driven in a silver Audi and dines at San Pietro whilst his nemesis Phil Purcell, who fired him from Morgan Stanley, annoyingly traded up from a Falcon to a Gulfstream. Even more fuel to the fire.

The best parts are the story leading up to and during the financial crisis. The executives at the centre of the crisis have often been portrayed as supermen or cartoon villains. But Mack gives colour on how senior executives dealt with the stress and risk of ruin. One executive goes into hospital fearing a heart attack. Another just leaves one day and never returns. As losses piled up, he even fires one of his best friends who he believes should be held accountable.

To be fair, I remember Mack’s undeniable charisma and titanic self-belief being instrumental in securing new funding and rallying the troops when Morgan Stanley was on the ropes. On the eve of Lehman failing, as he is feverishly negotiating to get an infusion of equity from Japanese bank MUFG, Treasury secretary Tim Geithner was calling repeatedly for updates and imploring Mack to consider a merger with JPMorgan. Stuck on the other line negotiating, Mack [famously] tells his assistant to “tell Tim to get fucked”.

But even his account shows Mack’s hunger to catch up with other firms. meant he missed the signals leading up to the financial crisis. He recounts that didn’t realise Merrill Lynch was so vulnerable until the Sunday before Lehman failed. Also he says that unlike Goldman he had not studied the benefits of becoming a bank to take advantage of the Fed being the lender of last resort.

Having had a front-row seat at this time as the company’s co-head of banks research, I know the signals were there My friend and former Morgan Stanley colleague Steve Eisman — of Big Short fame — was literally shouting at top management that things were going down.

The Thursday before the Lehman weekend, I met with hedge fund John Paulson in New York to discuss the best shorts among European financials. At the close of an intense hour he said thanks but then asked me why I wasn’t writing up my resume as Morgan Stanley would probably be bankrupt in a month or two. In my debrief later that day, I told Mack about the tone of my meetings and some investors’ conviction of Morgan Stanley’s imminent failure. Mack had absolutely zero doubts that his bank would somehow be fine.

Maynard Keynes wrote that “worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally”. Mack seems has made peace with himself — if he ever had any doubts — that he failed to foresee the financial crisis like many other bank CEOs and leaders. If even Fed chair Ben Bernanke “saw no serious broader spillover”, nor should he be expected to, is Mack’s view “I have fucking killed it. I knocked the cover off the ball in the financial world,” Mack says in the epilogue.

But the stories he tells underscore how much Wall Street has changed. The collapse in trading costs have squeezed intermediaries’ margins. Bank prop desks are dead, leaving asset managers, hedge funds and private equity firms to benefit. Long gone are boondoggles in Hawaii, buying drinks for government employees of pension funds and the absolutely endless golf games that Mack recounts. Tech-like winner-takes-most economics mean only the top handful of investment banks can make good returns, and early 2000s profit levels will probably never come back. Network economics, scale and analytics matter more than “all-in” salesmanship.

But the single biggest change during Mack’s career was around risk management. Huge losses “exposed structural weaknesses in our risk management”, he ruefully admits. As brokers went from partnerships to listed companies, bad gambles didn’t come back to “bite partners in the same way”, and firms took more risk without such close oversight. This was an enabler of the crisis which has been largely been addressed through far stronger balance sheets, diversification and stress testing. Risk management has been put back at the centre of bank management — where it always should have been.

But the best finance industry CEOs think like investors and move strategically. John Mack’s successor James Gorman acquired a series of investment firms to become the world’s largest wealth manager. Jamie Dimon’s understood a fortress balance sheet was essential to seize the opportunities and withstand crises. Larry Fink bet the firm on several outsized acquisitions, notably Barclays Global Investors and its crown jewel iShares.

I sometimes get asked what books folk should read for a career in finance. Liars Poker, More Money than God and Barbarians at the Gate normally top my list, but Mack’s book reminds me that these personal accounts aren’t enough. Understanding financial history is more important.

Niall Ferguson Ascent of Money, JK Galbraith’s The Great Crash, Roger Lowenstein’s When Genius Failed or Adam Fergusson’s When Money Dies are essential reading to really understand banking busts. Alas I wont be adding John Mack’s new book to aspiring financiers’ reading list.