It is an open secret on Wall Street that the sell side competes aggressively to win the business of the buy side.
Clients = fees and revenue that turns into profit.
So how do they do it?
Some of the tactics they use are totally legal, like offering clients box seats at sporting events, which are typically reserved for the firm’s best clients. Others are… well, we’ll let you decide.
CDR Financial allegedly engaged in a kickback scheme in which the company schemed state budgets to collect better fees from banks. Here, according to Bloomberg Markets Magazine, is how it worked:
CDR was supposed to be finding the bank with the best interest rate in which to invest the money that certain states use on parks, roads and/or pensions. Instead, CDR was setting up a plan to give the business to a company in exchange for a kickback, an under the table (illegal) payment that is usually some portion of the fee the bank will collect as a condition of their investment. So CDR got a fee from the bank it colluded with, and it also collected a transaction fee from the state, for advising them on which firm to do business with.
The most classic, and illegal, method of winning a deal is to pay a kick-back.
The sell-side wants a deal because it will pay high fees, so it offers the buy-side a deal: a cut of those fees, in exchange for their business. Both sides benefit.
One kick-back urban legend we've heard involves Bank of America bankers, a suitcase of cash, and a table at Nobu.
One trader we spoke to regaled us with the story of a former Lehman broker who was notorious for his earl summer golf outing.
While such events are frequent occurrences in the World of Wall Street, the unnamed trader (who are source has not stayed in contact with since Lehman's collapse) would turn individual holes into 'Prize Events' with guests, mostly traders and private clients, 'winning' items like Rolex watches, flat screen TVs and privately pre-paid Caribbean vacation packages.
'And everyone walked away a winner,' says our source.
Well, these days, you'd have to ask Dick Fuld what 'everyone' means...
Silicon Valley i-banker Kelly Porter makes his living raising capital for burgeoning tech companies.
Of course, he gets a cut of whatever he raises. So, as Bloomberg reported last summer, Porter has created an opulent, investment-oriented tech 'salon' to draw the money.
In order to woo them into becoming or staying clients, Porter hosts his guests in a pool-side tent that reminds one of a travelling sultan, where he pours luxuriously-priced wines and serves gourmet meals.
Fidelity target clients were flown around in rented private jets to pitch meetings and expensive lunches across the country and most often to Fidelity's home-base in Boston.
According to a 2009 article in Investment News, Fidelity brokers admitted they felt pressured bty their management to heighten the experience of selling for their prospective clients.
When i-banker Charles Millard was chosen to run a governmental fund called the 'Pension Benefit Guaranty Corporation,' he found himself to be the sudden object of affection from many of Wall Street's biggest players, each of whom took unique shots at landing the business of his agency's roughly $50 billion in retirement plan money.
Uber-hedge fund BlackRock made a pitch to Millard that included inviting him, free of charge to one of New York's toniest charity galas where they sat him next to Black Rock's founder and resident 'Obi-Wan Kinobi,' Laurence Fink.
Goldman took a different route with Millard and put him up at luxury hotels like The Ritz and Mandarin Oriental while trying to illuminate him on the great realities of putting his money with the world's most powerful financial services company.
Goldman also tried to sweeten Millard's deal by discussing his life after government service. So did JPMorgan.
Millard was wooed by both Goldman and JPMorgan Chase with potentially high-level jobs after his time at 'PBGC' ran its course.
An oil broker says that in the late 90's, his boss foot the bill for a Geneva-based hooker on behalf of a potential investor, according to an interview conducted by Reuters last year.
While prostitution is legal in Switzerland (honest), the moral vagaries surrounding getting a trader 'laid' are intricate, even without the added issue of the complicated role that the Swiss play in human sex trafficking.
In 2005 a Fidelity broker apparently paid over $160,000 for a three-day, Miami-based bachelor party that covered all the myriad costs for a group of revelers that included Fidelity managers and the very traders to whom the broker and his bosses/guests needed access.
While the mind boggles at what all those 'myriad costs' could have been with that that outlay of scratch, it would stand to reason that a bill that large must have paid for some for some 'big fish' to have some outrageous times on South Beach.
We hope the groom closed some deals...
The US Open is a veritable client event for many New York City-based brokerage firms. Goldman Sachs has had prime seats at the event for many years and JPMorgan Chase is a name sponsor of the entire tournament.
Many of the seats filled during the tournament are done so by traders in the wooing process of those banks.
(In fact, former 'Tier 1' Goldman client Raj Rajaratnam, who was at the US Open in September 2008, might have been sitting in the firm's box seats just days before the height of the financial crisis!)
An incongruously immoral activity, many brokers will donate money to charities they know certain traders support in order to curry favour with potential clients.
One charity that seems to act as a nexus for brokers, traders, investors and large companies is Britain's Greenhouse, a sports and recreation charity for underprivileged youth that offers them fields, equipment and training. Greenhouse was founded by a Maltese banker named Michael de Giorgio and has a Board of Trustees comprised of corporate financiers, hedge funders and traders. It's list of supporters is another collection of brokers, hedge funds, and financial services companies like Goldman, Credit Suisse and KKR.
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