Investment bankers enjoy a sweet deal. They collect lush fees that rarely seem to go down, no matter how apparently fierce the competition might be or how off-putting their charges may be for customers.
Now, finally, this far-too-comfortable situation is being questioned by someone in authority. The Organization for Economic Co-operation and Development (OECD) drew attention to the fat levies extracted by large global banks in its latest Business and Finance Outlook, published Tuesday.
Investment banks' high fees are "akin to tacit collusion," the OECD said. The Paris-based organization warned the high cost of going public deters smaller companies from raising cash and works against long-term investment.
Will the OECD's broadside shame global banks into revising their fees? Not a chance.
But it demonstrates that an issue once mulled only by finance geeks is now being debated by people who actually have the power to change the system.
Here's hoping the reformers will succeed.
The core issue is simple. Fledgling companies that want to raise equity in public markets have to rely upon an investment bank to bring their shares to market in an initial public offering (IPO).
The problem is that the all-in fees charged by big banks are surprisingly high – typically between 9 per cent and 11 per cent of the proceeds from IPOs of less than $100-million (U.S.), according to the OECD report.
In effect, underwriters and their teams of lawyers and accountants charge the value of one new company for every 10 they bring to market.
That's a lot of money for advisory work that is finicky and demanding but not particularly risky or inspired. Investment bankers may be well-spoken and intelligent, but they're not inventors, creators or visionaries.
Why investment bankers should be able to extract a tenth of the economy's entrepreneurial bounty for their work is an abiding mystery. Equally puzzling is why competition among investment banks doesn't drive down their fees.
Both issues are part of a larger puzzle known as the Volcker paradox. Back in 1997, the former Federal Reserve Board chairman Paul Volcker asked why commercial banking, which was supposed to be under intense competitive pressure, remained so immensely profitable.
This was not how markets were supposed to work. Competition is supposed to erode unusually high profits as firms fight to offer products and services at the lowest possible price.
So why were banks apparently exempt from this law of capitalism?
In a 2007 paper, James Crotty, an economist at the University of Massachusetts, pointed to several reasons, including rising concentration of big banks and increased risk-taking.
The subsequent financial crisis highlighted yet another factor – maybe, just maybe, many of the bank profits reported in earlier years were actually an illusion.
The OECD's report hints that price-fixing may also play a role in maintaining financial-sector profits.
Twenty institutions dominate global investment banking. This tiny group of financial institutions typically accounts for about two-thirds of all global transactions.
Despite supposed competition, investment banks in each region have been able to maintain or raise fees since the financial crisis, although there's no clear rationale for the level of charges in different locales.
Underwriting fees for IPOs, for instance, typically amount to 7 per cent in the United States, 8 per cent in Japan but only about 3 per cent in Europe. In China, fees have more than doubled over the past seven years and now stand at 7 per cent.
"High levels of fees and parallel pricing (akin to tacit collusion) appear to have increased," the OECD said.
"This increases the cost of equity and works against long-term productive investment."
The organization says the bite of big fees may be why a disappointingly small number of companies have gone public since the financial crisis. It warns the lack of new companies may have a chilling effect on economic growth.
The obvious solution would be for regulators to probe the level of investment banking fees and start asking why there's not more genuine competition.
As the OECD will tell you, such questions deserve an answer.