Sunday, February 20, 2011

Investment Banks Have Conflicts of Interest? (Was World War II A Conflict?) - Part II

Last April I blogged here about personal experiences in two M&A deals in which investment bankers' hunger for fees transformed potential conflicts of interest into actual conflicts of interest.  The actual conflicts of interest motivated bankers to engage in questionable conduct in one deal and deceptive conduct in another.

Those two example deals, which just scratch the surface of the ways enterprising investment bankers can think of to collect fees, occurred before the Sarbanes-Oxley and Dodd-Frank reform acts and the sweeping public criticism of American investment banking in the aftermath of the 2008 financial crisis.  Recent news suggests anecdotally that investment banker behavior hasn't improved -- and won't improve* -- when advisory fees and financing fees are in the offing:  the Delaware Chancery Court's opinion (available here) in the Del Monte Foods Company shareholder litigation tells a remarkable short story of a Name Brand Investment Bank's use of deception against its own client, of a Name Brand Private Equity Sponsor's aiding and abetting the sleight-of-hand, and of the client's board's accommodation of both Name Brand firms.

That accommodation was part witting and part unwitting. 

Quantifying the increased investment costs indirectly borne by a company's shareholders as a result of the company's banker's conflicts of interest -- which in many situations is classic principal-agent non-alignment -- is difficult.  But those costs are often significant.   

*Investment banker conflicts of interest in M&A arguably have increased since the 2008 financial crisis including because the fewer number of surviving Name Brand Investment Banks has resulted in more situations involving potential or actual conflicts of interest among those banks' clients. 

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