Business October 2009

Why Goldman Always Wins

What do investment bankers, wedding planners, funeral directors, and movie-trailer voice-over artists have in common? High fees for high-stakes, once-in-a-lifetime deals.
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Peter Arkle

In the summer of 2000, David Poor, a direct descendant of a founder of Standard & Poor’s, flew me to his family’s Nantucket home on a private jet.

I am sure he will not remember having done so. At the time, he was the head of Merrill Lynch’s technology investment-banking group, and I was a summer associate serving out my internship in his department. The only time I got more than a glimpse of him was during that Nantucket weekend, when we larval M.B.A.s tried to impress the boss with the panache with which we donned ugly chintz sundresses or crisp new Nantucket Reds. Bunked at his mother’s “cottage” with the few other women in the group, I spent the weekend gingerly sipping gin-and-tonics and trying to fade into the couch.

Weeks after this WASPish ordeal, I remained puzzled by it. Why were David Poor, and presumably Merrill Lynch, spending so much money on us? We were all fine Americans, I am sure, and attended top business schools. But that summer, and every summer, tens of thousands of young M.B.A.s would have slaved away happily in Merrill Lynch’s beige corridors without being wined and dined. If Merrill had lost a few of us to JP Morgan or Goldman Sachs, we could have been effortlessly replaced. Yet the company was not only treating us to trips and fancy dinners, but also paying us $25,000 for 10 weeks of work.

I use the word work somewhat loosely. My summer-associate class had been flown in for orientation the previous spring, only to spend the day in the lobby of the training room, watching the NASDAQ plunge 300 points. By the time we reported for duty in mid-June, the tech-heavy index had lost about 1,300 points from its March peak of 5,132. Before the crash, eager recruiters had told us that Merrill Lynch’s bankers would be okay no matter what; in the bull market, they had done initial public offerings, or IPOs, and in a bear market, they would do mergers and acquisitions and stock repurchases instead. This prognosis turned out to be as delusional as the Pets.com prospectus. The office was a well-upholstered tomb. We spent most of our days—and nights—performing a kind of kabuki, pretending to do work for bosses who must have known that they had no work for us to do. Yet still the dinners, the trips, and the lavish paychecks continued.

Why? The question was resolved for me during an August cocktail hour at P. J. Clarke’s, the financial district’s version of a meat market. There another associate pointed out, a trifle owlishly, the explanation: “Seven percent.”

That was where a new analysis had pegged the average “gross spread,” or fees, on an IPO, which was the only kind of live deal I had worked that summer. To be sure, Merrill Lynch was splitting those fees with other banks. But when offerings ran into the hundreds of millions of dollars, as they easily did, a few percent was a lot of money. Sure, a competent bookkeeper or legal secretary could have done most of our work. But in the banks’ fees, our salaries were a rounding error.

Still, why not compete down our salaries, if they could? I’m sure that if David Poor and his fellow managers had hired M.B.A.s from Georgetown and Notre Dame instead of Harvard and Chicago, they could have found something to do with the money saved.

These days, that question seems more pertinent, and more mysterious, than ever. With laid-off bankers flooding the job market, you would think that salaries in finance at long last would come down. But even a coven of angry Congress members seems to have had only a limited effect on what the financial industry is willing to pay its employees. Hearings and diatribes have succeeded merely in forcing firms to pay more compensation as salaries rather than as bonuses—as if the main issue with lavish paydays at bailed-out banks were the timing of the checks.

To understand why banker pay seems so persistently outlandish, consider another industry that skims off the top of a vast well of cash: the business of making movie trailers.

Unless you’re deaf, or have been living in an ashram for the past four decades, you’ve heard the voice of Don LaFontaine, known in the trailer industry as “the voice of God.” LaFontaine’s gravelly baritone popularized the phrase In a world where … and seduced us into movie after movie, from Dr. Strangelove to The Simpsons Movie. When he died last year, at the age of 68, one obituary reported that at his peak, LaFontaine was making $30 million a year voicing trailers and commercials.

That’s quite a wage, especially when you break it down to an hourly rate. Over a long career, LaFontaine voiced more than 5,000 trailers and hundreds of thousands of commercial spots. But top voice-over artists frequently work out of their homes and record the spots, which usually run about two minutes, in no more than five takes. It’s one thing to pay Tom Cruise $25 million per movie; he makes perhaps one movie a year, to which he brings his built-in fan base. But no guy asks a date if she’d like to go see the new Don LaFontaine trailer.

Nonetheless, trailers have grown into a nearly $100 million industry, whose companies continue to give work to a coterie of well-paid veterans, rather than bidding jobs out to the legions of starving actors haunting the streets of L.A. And if you look at the economics of the movie industry, this behavior starts to make sense.

Don LaFontaine’s 40-year career began as the old Hollywood studio system breathed its last. The forces that killed the studio cartel also smashed the monopoly of the National Screen Service, which had produced virtually every movie trailer for more than 40 years. In its wake, independent firms began competing for the lucrative business, gradually supplanting those stilted spots you see on Turner Classic Movies, where Bob Hope appears on the screen to tell you how great his next picture is.

Over the years, changes in the movie business conspired to make trailers and television ads more and more important. First TV, then VHS, and finally DVD reduced the number of times people went to see a movie in a theater. As a small child, I saw Star Wars something like 17 times on its first run. But I’m hard-pressed to name a single movie I’ve seen twice in theaters since graduating from college.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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