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As giving and receiving advice is fundamentally based on trust, it strikes me as odd why anyone wants to do business with the likes of McKinsey or Goldman Sachs

As giving and receiving advice is fundamentally based on trust, it strikes me as odd why anyone wants to do business with the likes of McKinsey or Goldman Sachs who have repeatedly shown a pattern of screwing over their clients. This is not a generic "all I-banks or management consultants are evil" - there are still plenty of specialized firms out there without these anti-patterns.

b_tterc_p 8y ago
Why do you think mckinsey has a pattern of screwing over its clients?
FabHK 8y ago
Regarding investment banking specifically, there was an interesting paper a while ago [1] basically arguing that companies want to hire assholes as their advisors (because you'd prefer to have them on your side). Here's the delicious summary from Matt Levine's "Money Stuff" Bloomberg column: > Incentives All else equal, would you rather hire an evil investment bank to underwrite your stock offering, or a good investment bank? I think there are good arguments both ways. An evil investment bank might do evil things to you, which you won’t like. On the other hand, it might do evil things to investors on your behalf, which you might like; if there is evil in the world, you might as well hire it so it’s on your side. Also an evil investment bank might hang out with all the evil investors, who have a lot of money and will buy your stock, while a good investment bank will only hang out with good investors, who have less money. Or whatever, I don’t know, it’s a model. More generally, if your model is “the whole financial system is evil,” then evil investment banks should be preferable and more successful, because they will be better plugged in to the (evil) networks of the financial system. Here’s a fun paper from Thomas Roulet of Cambridge’s Judge Business School, whose model really is kind of “the whole financial system is evil”; as the school’s blog summarizes it: The study concludes that negative coverage actually helped banks gain IPO business from corporate customers, as those corporates view certain banking practices widely criticised after the financial crisis (such as appetite for risk, short-termism and big bonuses) as consistent with industry norms, thus suggesting quality of service. “This study shows how divergence in audiences’ perception of typical industry behaviours can make wrongdoing beneficial,” says the paper authored by Dr Thomas Roulet, University Senior Lecturer in Organisation Theory at Cambridge Judge Business School. “Most audiences tend to disapprove of wrongdoings, but specific stakeholders may interpret this disapproval as an indication of the focal organisation’s level of adherence to professional norms.” The model is roughly that “professional norms,” in business, are evil, and so businesses looking to hire qualified professional investment banks tend to look for the ones who are most evil. And so winning IPO mandates is correlated with negative press coverage. What kind of negative press coverage? These delightfully specific kinds: The media coverage was evaluated based on a list of 204 words built on a qualitative analysis of a sample of opinion articles. The articles were then coded on the basis of how those words were associated with the banks. The words were grouped into four factors that have been heavily criticised since the financial crisis: Greed: words such as “obscene”, “excess”, “selfish”, and “shameless”. Violence as in a battleground: “assault”, “frenzy”, “vicious”, “fierce”. Opacity as in fostering secrecy: “covert”, “cryptic”, “dubious”, “hazy”. Risk-taking behaviours: “casino,” “tempt”, “daring”, and “gamble”. “This study suggests that the coverage of misconduct can actually act as a positive signal providing banks with incentives to engage in what is broadly perceived as professional misconduct.” It is broadly perceived as professional misconduct, but it is narrowly perceived—within the profession, and its target audience of businesses—as proper professional conduct. Obviously you can tell this story without using the word “evil,” and I am joking at least a little bit when I use it. The work of finance is esoteric, and its norms are specific and contextual; in many cases, those norms look bad to outsiders but are sensible and useful in their context. Trading ahead of a client order for a foreign-exchange fixing can be perfectly appropriate hedging, but looks like bad bad front-running when it is exposed as an FX scandal. Taking large risky positions in derivatives can be a perfectly appropriate way to facilitate clients’ hedges, but looks like bad scary prop trading when it loses money. Pricing and allocating an IPO so it is likely to trade up probably serves the goals of banks and investors and issuers, even though outside commentators regularly describe it as “leaving money on the table” for issuers. Sophisticated clients tend to understand what banks are doing and why, and not to take the criticisms too seriously, although I still find it a bit counterintuitive that they’d think more criticisms would be good. I used to work at Goldman Sachs Group Inc., including during a period when it was heavily criticized for being, um, “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” We did fine. There was a distinct sense that clients thought we were evil but smart, and that they’d rather have us on their side than against them. Also I would sometimes go pitch oil companies, and they would welcome us warmly and thank us for being so widely hated, because it made them look good by comparison. I suppose this is evidence for the “the whole financial system is evil” view. [1] https://journals.sagepub.com/doi/abs/10.1177/0018726718799404 https://journals.sagepub.com/doi/abs/10.1177/001872671879940...
JumpCrisscross 8y ago
> the likes of McKinsey or Goldman Sachs who have repeatedly shown a pattern of screwing over their clients Goldman has a history of doing terrifically by their clients. They aren’t the best counterparty to trade against, however, in the same way that one would rather play poker against a bad player than a great one. (McKinsey, on the other hand, is a consistent dumpster fire.)
staticautomatic 8y ago
In the case of Goldman it could be deal flow.
- leroy_masochist 8y ago
  In the case of Goldman it's because they do better work than other firms on behalf of their investment banking clients and keep getting rehired, which is why they've had the world's strongest IB franchise for several decades
  - staticautomatic 8y ago
    Unless you count Goldman taking the other side of those same IB deals against their own clients...
    - FabHK 8y ago
      Yeah, when the trading side rose to power at GS (vis-a-vis the (client-focused) IB side), the gloves came off.
    - leroy_masochist 8y ago
      That wasn't banking, it was sales and trading. While Birnbaum and the other individuals involved in Abacus acted especially douchey in front of Congress, the point that was apparently lost on many people was that when a market maker sells something off their prop books, they are inherently short that thing
      - FabHK 8y ago
        Plus, when they make a big deal, the trading desk will naturally hedge themselves (that's their job!), so they'll "take the opposite position of what they recommended their client". Sounds bad, but is normal and appropriate business practice.
      - staticautomatic 8y ago
        It's funny that you write are if they're separate companies.
adam 8y ago
Hiring these firms is a major "cover your ass" move. If you're a CEO and you hire McKinsey, your board is going to likely approve as they are from the same East Coast/West Coast Ivy League fraternity as McKinsey consultants. And because they only hire people from those schools or recruit former executives from their clients, there is a strong signaling mechanism that you're hiring "the best and the brightest." Then if things ever go wrong, you always have the out of "I hired the best, what did you want me to do?"
- brootstrap 8y ago
  100% of my experience with McKinsey has been trash. Just started working with new company and they wanted us to talk with these guys. We are reviewing some database systems and this guy is a literal joker. His suggestion to speeding up our database "well we can use REDIS, REDIS is fast because it's in-memory". So we want to put how many TB of data into REDIS? We are talking about tons of historic data that never changes. And we are going to load it ALL into REDIS because it's fast. These McKinsey folks spend months talking about the data lake and it turns out data lake just means a bunch of shit on s3. It's like if you paid someone $50,000 to help you find a good car. Client wants a fast car. Oh you want a fast car? Buy a ferrari they have big engines and can generate tons of horsepower. Job done, can i collect my 50k now? Mind you this guys linkedIn and resume read like a CEO wet dream. AI and machine learning data science all over... We spent months dilly dallying with different tech before they just left cold turkey , havent heard from em since. And our 20% complete projects experimenting with all kinds of DB tech have done nothing.
  - ackbar03 8y ago
    This is hilarious. Did they site the falling cost of ram at least
  - pradn 8y ago
    Somewhat related: as I've been interviewing candidates for SWE jobs, I've found that many will talk about their recent machine learning projects. And the way they can talk about that problem has no bearing on how well they do on a simple programming question I give them later. You've gotta view big data/ML/AI expertise with extreme scrutiny given how hot that stuff is. Best to just ignore the candidate's assertions.
ritchiea 8y ago
You don't get fired for hiring McKinsey. And if there's a scandal 5 or 8 or 10 years down the line where your company loses boatloads of money and McKinsey's hedge fund made money betting against you, 99% of the people involved when you hired McKinsey in the first place will have new jobs. Likely at other companies.
sonnyblarney 8y ago
I don't think in this case McKinsey was necessarily bad for it's clients. It may very well have simply done research on drugs for Valiant as requested. Valiant was making ultra-risky moves in buying up things it shouldn't have. Even if there were 'insider moves' in the McKinsey fund (which I doubt but maybe it's true in some indirect way), it's easy to see independant investors somewhere else seeing that Valiant is doing some dumb things. Goldman was involved in helping the Greek government clean up it's balance sheet in order to get into the Euro. It'd seem that in this case, it was the Greek government that likely hired Goldman due to their very prowess in 'doing whatever it takes' to get the job done. In this particular scenario, my hunch is that Goldman probably told Greek officials that the presentation of the information in such and such a way would likely cause problems, but 'the client' did it anyhow. Also note that McKinsey in particular is not a highly centralized entity, it's almost like a 'franchise brand' with a lot of fairly independant entities that operate differently. Not exactly Subway sandwiches but it's not like Amazon either. I'm not really defending GS or McKinsey, it's just that these things aren't black and white. Maybe it's better to think of them as 'consiglieres' for the powers that be.

b_tterc_p 8y ago

Why do you think mckinsey has a pattern of screwing over its clients?

FabHK 8y ago

Regarding investment banking specifically, there was an interesting paper a while ago [1] basically arguing that companies want to hire assholes as their advisors (because you'd prefer to have them on your side). Here's the delicious summary from Matt Levine's "Money Stuff" Bloomberg column: > Incentives All else equal, would you rather hire an evil investment bank to underwrite your stock offering, or a good investment bank? I think there are good arguments both ways. An evil investment bank might do evil things to you, which you won’t like. On the other hand, it might do evil things to investors on your behalf, which you might like; if there is evil in the world, you might as well hire it so it’s on your side. Also an evil investment bank might hang out with all the evil investors, who have a lot of money and will buy your stock, while a good investment bank will only hang out with good investors, who have less money. Or whatever, I don’t know, it’s a model. More generally, if your model is “the whole financial system is evil,” then evil investment banks should be preferable and more successful, because they will be better plugged in to the (evil) networks of the financial system. Here’s a fun paper from Thomas Roulet of Cambridge’s Judge Business School, whose model really is kind of “the whole financial system is evil”; as the school’s blog summarizes it: The study concludes that negative coverage actually helped banks gain IPO business from corporate customers, as those corporates view certain banking practices widely criticised after the financial crisis (such as appetite for risk, short-termism and big bonuses) as consistent with industry norms, thus suggesting quality of service. “This study shows how divergence in audiences’ perception of typical industry behaviours can make wrongdoing beneficial,” says the paper authored by Dr Thomas Roulet, University Senior Lecturer in Organisation Theory at Cambridge Judge Business School. “Most audiences tend to disapprove of wrongdoings, but specific stakeholders may interpret this disapproval as an indication of the focal organisation’s level of adherence to professional norms.” The model is roughly that “professional norms,” in business, are evil, and so businesses looking to hire qualified professional investment banks tend to look for the ones who are most evil. And so winning IPO mandates is correlated with negative press coverage. What kind of negative press coverage? These delightfully specific kinds: The media coverage was evaluated based on a list of 204 words built on a qualitative analysis of a sample of opinion articles. The articles were then coded on the basis of how those words were associated with the banks. The words were grouped into four factors that have been heavily criticised since the financial crisis: Greed: words such as “obscene”, “excess”, “selfish”, and “shameless”. Violence as in a battleground: “assault”, “frenzy”, “vicious”, “fierce”. Opacity as in fostering secrecy: “covert”, “cryptic”, “dubious”, “hazy”. Risk-taking behaviours: “casino,” “tempt”, “daring”, and “gamble”. “This study suggests that the coverage of misconduct can actually act as a positive signal providing banks with incentives to engage in what is broadly perceived as professional misconduct.” It is broadly perceived as professional misconduct, but it is narrowly perceived—within the profession, and its target audience of businesses—as proper professional conduct. Obviously you can tell this story without using the word “evil,” and I am joking at least a little bit when I use it. The work of finance is esoteric, and its norms are specific and contextual; in many cases, those norms look bad to outsiders but are sensible and useful in their context. Trading ahead of a client order for a foreign-exchange fixing can be perfectly appropriate hedging, but looks like bad bad front-running when it is exposed as an FX scandal. Taking large risky positions in derivatives can be a perfectly appropriate way to facilitate clients’ hedges, but looks like bad scary prop trading when it loses money. Pricing and allocating an IPO so it is likely to trade up probably serves the goals of banks and investors and issuers, even though outside commentators regularly describe it as “leaving money on the table” for issuers. Sophisticated clients tend to understand what banks are doing and why, and not to take the criticisms too seriously, although I still find it a bit counterintuitive that they’d think more criticisms would be good. I used to work at Goldman Sachs Group Inc., including during a period when it was heavily criticized for being, um, “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” We did fine. There was a distinct sense that clients thought we were evil but smart, and that they’d rather have us on their side than against them. Also I would sometimes go pitch oil companies, and they would welcome us warmly and thank us for being so widely hated, because it made them look good by comparison. I suppose this is evidence for the “the whole financial system is evil” view. [1] https://journals.sagepub.com/doi/abs/10.1177/0018726718799404 https://journals.sagepub.com/doi/abs/10.1177/001872671879940...

JumpCrisscross 8y ago

> the likes of McKinsey or Goldman Sachs who have repeatedly shown a pattern of screwing over their clients Goldman has a history of doing terrifically by their clients. They aren’t the best counterparty to trade against, however, in the same way that one would rather play poker against a bad player than a great one. (McKinsey, on the other hand, is a consistent dumpster fire.)

staticautomatic 8y ago

In the case of Goldman it could be deal flow.

leroy_masochist 8y ago
In the case of Goldman it's because they do better work than other firms on behalf of their investment banking clients and keep getting rehired, which is why they've had the world's strongest IB franchise for several decades
- staticautomatic 8y ago
  Unless you count Goldman taking the other side of those same IB deals against their own clients...
  - FabHK 8y ago
    Yeah, when the trading side rose to power at GS (vis-a-vis the (client-focused) IB side), the gloves came off.
  - leroy_masochist 8y ago
    That wasn't banking, it was sales and trading. While Birnbaum and the other individuals involved in Abacus acted especially douchey in front of Congress, the point that was apparently lost on many people was that when a market maker sells something off their prop books, they are inherently short that thing
    - FabHK 8y ago
      Plus, when they make a big deal, the trading desk will naturally hedge themselves (that's their job!), so they'll "take the opposite position of what they recommended their client". Sounds bad, but is normal and appropriate business practice.
    - staticautomatic 8y ago
      It's funny that you write are if they're separate companies.

adam 8y ago

Hiring these firms is a major "cover your ass" move. If you're a CEO and you hire McKinsey, your board is going to likely approve as they are from the same East Coast/West Coast Ivy League fraternity as McKinsey consultants. And because they only hire people from those schools or recruit former executives from their clients, there is a strong signaling mechanism that you're hiring "the best and the brightest." Then if things ever go wrong, you always have the out of "I hired the best, what did you want me to do?"

brootstrap 8y ago
100% of my experience with McKinsey has been trash. Just started working with new company and they wanted us to talk with these guys. We are reviewing some database systems and this guy is a literal joker. His suggestion to speeding up our database "well we can use REDIS, REDIS is fast because it's in-memory". So we want to put how many TB of data into REDIS? We are talking about tons of historic data that never changes. And we are going to load it ALL into REDIS because it's fast. These McKinsey folks spend months talking about the data lake and it turns out data lake just means a bunch of shit on s3. It's like if you paid someone $50,000 to help you find a good car. Client wants a fast car. Oh you want a fast car? Buy a ferrari they have big engines and can generate tons of horsepower. Job done, can i collect my 50k now? Mind you this guys linkedIn and resume read like a CEO wet dream. AI and machine learning data science all over... We spent months dilly dallying with different tech before they just left cold turkey , havent heard from em since. And our 20% complete projects experimenting with all kinds of DB tech have done nothing.
- ackbar03 8y ago
  This is hilarious. Did they site the falling cost of ram at least
- pradn 8y ago
  Somewhat related: as I've been interviewing candidates for SWE jobs, I've found that many will talk about their recent machine learning projects. And the way they can talk about that problem has no bearing on how well they do on a simple programming question I give them later. You've gotta view big data/ML/AI expertise with extreme scrutiny given how hot that stuff is. Best to just ignore the candidate's assertions.

ritchiea 8y ago

You don't get fired for hiring McKinsey. And if there's a scandal 5 or 8 or 10 years down the line where your company loses boatloads of money and McKinsey's hedge fund made money betting against you, 99% of the people involved when you hired McKinsey in the first place will have new jobs. Likely at other companies.

sonnyblarney 8y ago

I don't think in this case McKinsey was necessarily bad for it's clients. It may very well have simply done research on drugs for Valiant as requested. Valiant was making ultra-risky moves in buying up things it shouldn't have. Even if there were 'insider moves' in the McKinsey fund (which I doubt but maybe it's true in some indirect way), it's easy to see independant investors somewhere else seeing that Valiant is doing some dumb things. Goldman was involved in helping the Greek government clean up it's balance sheet in order to get into the Euro. It'd seem that in this case, it was the Greek government that likely hired Goldman due to their very prowess in 'doing whatever it takes' to get the job done. In this particular scenario, my hunch is that Goldman probably told Greek officials that the presentation of the information in such and such a way would likely cause problems, but 'the client' did it anyhow. Also note that McKinsey in particular is not a highly centralized entity, it's almost like a 'franchise brand' with a lot of fairly independant entities that operate differently. Not exactly Subway sandwiches but it's not like Amazon either. I'm not really defending GS or McKinsey, it's just that these things aren't black and white. Maybe it's better to think of them as 'consiglieres' for the powers that be.