The horror investment banking war story that inspired Modano

4am

Fuck.

It's 4am and I've just come off a conference call with the bidder we're advising, and we decided we needed to add another debt facility to our bid model.

Fuck.

I know swearing doesn't achieve anything, but the same word keeps repeating in my mind as I rub my stinging eyes and wonder whether anyone has ever died from sleep deprivation.

Fuck.

The bid model I'm staring at on screen has been at the centre of my mind day and night for almost 6 months. At first it completely owned me, as I fought to understand the intricacies of everything from regulated assets modeling to hedging to WACC and DCF valuations, but more recently the tables have turned and I now take pride in this work of art that has cost me my personal life and quality sleep. But the model currently only allows for twelve debt facilities, and I've used them all.

Fuck.

For a moment my mind unleashes on the world. How the fuck can I be working at a Wall Street investment bank, brimming with the world's brightest and most ambitious people, and none of them have fixed this shit. Sure, there's some satisfaction in doing your time - a rite of passage as my more senior colleagues like to tell me - but surely there's a better way to do this that doesn’t require regular caffeine and pseudoephedrine to function?

No time for that now. I dive in, hacking at the model like I'm working my way through the Amazon forest with a machete. I'm running on adrenaline, the ceaseless by-product of extreme stress and sleep deprivation. I'll make it back after the deal closes and normality resumes. Like I said during my last deal, the one that rolled straight into this deal.

7am

I think I'm done. I check the balance sheet to ensure that net assets equal total equity, before working my way through the model analyzing the impacts of the change on our bid value. Fortunately, our bid value hasn't significantly changed, largely I presume due to the fact that we're using a complex hedging strategy and capital structuring approach which have together somewhat offset the increased leverage.

I debate heading home for a shower and quick sleep but instead choose to power through. I'm young and there's still some unexplainable pride and glory in pulling all-nighters. So I start copying and pasting the updated model outputs into a PowerPoint presentation for our client.

9am

My MD walks in shortly after 9am. His sprightliness irks me, but I figure he's done his time, so I hold in a range of smart-ass comments about quality REM cycles that have come to mind. He asks to see the updated numbers.

We walk through the numbers. Since starting at the bank I've proven myself adept at building financial models, and in doing so earned his trust, which was no mean feat. He's concerned about the limited impact of the additional debt facility on our valuation, but I walk him through the hedging and capital structure changes, and he seems satisfied. After all, we have a call with the client at 10am so time is not a luxury we currently possess.

10am

We're on a conference call with our client. We have multiple people dialed in from around the world, as this is a big transaction and it's less than a week until final bids. My MD walks the client through the updated numbers, and they raise the same concerns. He taps me in, and I explain them again. They seem satisfied. The reality is that this stuff is so complicated that none of them are even close to completely understanding it, so nobody is confident challenging the guy who's been deep diving into the model for 6 months.

The call goes well. Our client decides to slightly reduce their bid, and otherwise move ahead as planned. But then disaster strikes.

I'm playing around with the model and notice that the total interest expense on the income statement is almost identical to what it was a few days ago. I start doubting my explanations for the minimal change in valuation as I dig down into the model, and to my horror I discover that I haven't added the interest expense from the new facility into the income statement or cash flow statement.

Fuck.

Fuck.

Fuck.

This is not good. I think about running. We're still on the call with the client, with my MD exchanging pleasantries with them and expressing excitement about the upcoming bid. I'm worried I'm going to vomit. Or shit myself. Or vomit and shit myself.

I decide to hold off mentioning my discovery to the client on this call. I've learned many things in investment banking, and one of these things is to take a deep breath when something is fucked. Most things aren't deal-breakers unless you let them become deal-breakers.

The call ends and I head back to my desk. Seconds feel like minutes and minutes feel like hours. I'm sweating and shaking and start wondering how often investment banking analysts get fired. At least if I get fired I'll get regular sleep again and care about something other than work.

I fix the model, and our bid value drops $30m. This is not good, but it's not too bad either. One of the strange things about doing multi-billion dollar deals is that millions start to seem like dollars. $30m wouldn’t usually be a deal-breaker here but it's enough to tarnish my reputation with my MD and our client so I need to do something special.

An idea hits me. Interest rates have been extremely volatile recently, and in amongst the sleep deprived chaos of the past few days I've neglected to update the interest rate assumptions in the model. It's a long shot, given the hedging in the model, and the fact that the underlying asset is a regulated asset that technically shouldn't be overly impacted by forecast interest rates, but it's hope no less.

Touchdown! Interest rates have dropped significantly in the past 3 days. I update every interest rate assumption in the model and race to the valuation analysis section to see what I've clawed back. $15m. 50% back. It's not ideal, but it's palatable, so I saunter towards my MD's office.

He's on a call but tells me to wait. I sit in a chair feeling like I'm about to be dumped by a girlfriend I've cheated on, after she's loved me and believed in me. I can almost taste my shame.

My MD finishes his call and asks me what's up. I tell him, using the $15m figure rather than $30m, and he pauses to ponder the situation for a few seconds. I watch my investment banking career pass before my eyes. The apartment in New York fades out of the future photo albums, as does the model wife in the Hamptons summer house. There's nothing left, I'm surely done for.

I come back to reality and realise that my MD is speaking. He's quite calm, not happy, but quite calm. He says he's disappointed, but these things happen, and it's important that we communicate this issue to the client as soon as possible. He asks me to arrange another call at midday.

I apologize and ask if I'm going to be fired. He seems surprised and reiterates that he's disappointed but understands that these things happen. He's not new to this, and it's not a coincidence that he's made MD. This is a man used to dealing with unexpected fuck ups, without the slightest thought of vomiting or shitting himself.

I live to not sleep another night.

18 Months Later

I'm still pondering my fuck up 18 months earlier. There have been no further fuck ups, and I'm now more cocksure than ever about my financial modeling abilities. But I carry a scar from that experience that regularly leaves me thinking about how many other people around the world must be experiencing similar things every day.

Then I realise it's even worse than that. I'm a maths freak with an OCD level of attention to detail, from a family of maths and science academics, and I fucked up. So statistically there must be a lot of people fucking up financial models. And, I guess, many of them probably aren't even aware that they are fucking up. Ironically, I only discovered my fuck up because I was disciplined enough to review my work, which I know very few analysts do properly when sleep deprived on deals.

I keep thinking, why hasn't someone fixed this? I start speaking with colleagues at other investment banks, and their comments are all the same. Financial modeling is a painful rite of passage, often done on little sleep because it burns so many hours, and the main ambition of being an analyst is to move past having to build financial models so you can smash your analyst and proudly tell everyone that you don't do much modeling anymore.

But models are still a fundamentally important part of every deal. Without a model there's a much higher element of gambling in a deal, even where good comps exist, so it's not something that's ever going to be swept under the rug.

Then it happens. One morning I wake up and think Fuck It, I'll Fix It Myself. I'm going to start my own business, and when I'm done nobody will ever go through what I went through as an investment banking analyst. Financial models will be easier and faster to build, and the risk of vomit and shit inducing errors will be largely eliminated. Hell, investment banking analysts might even get some sleep during deals, but let's not get ahead of ourselves...

I resign shortly after and found Modano. That was 18 years ago, the rest is now history.

Onwards.

Michael Hutchens

CEO | Modano