When I am king, this will be the only thing that can be described as a windfall. Photographer: Stephen Shepherd via Getty Images
When I am king, this will be the only thing that can be described as a windfall. Photographer: Stephen Shepherd via Getty Images

Senior executives at banks tend to get paid a lot of their compensation in stock, and sometimes that stock goes up. When the stock goes up, the executives tend to sell: They like money, after all; that's why they're in banking. And when they sell, newspapers tend to publish articles about their "windfall."

Here is a pleasingly sensible Wall Street Journal article describing recent profitable stock sales by some senior bank executives that does not -- I checked -- use the word "windfall." Instead, it describes the dynamics of deferred stock-based compensation, including that "regulators and investors have pushed banks to pay out greater portions of employees' compensation in stock and to defer the awards for longer periods, tying up more of employees' net worth in company stock" and also linking their fortunes more closely to those of their companies.1 The dynamics of the sale timing are similarly complex: On the one hand, the "timing may signify that the executives believe the shares are overvalued after the run-up." On the other hand, they might just need the money: "These people have expensive lifestyles," says a guy, accurately enough.

So I went happily about my windfall-free day and then, boom, I was hit on the head with a windfall:

Another Big Windfall for JPMorgan in Drug Maker Deal

Actavis’s deal to acquire the drug maker Forest Laboratories means significant fees for JPMorgan Chase, the bank’s second apparent windfall in less than a week from advising on a big-ticket deal.

The first windfall, since you asked, was JPMorgan's fee for advising Comcast on its agreement to buy Time Warner Cable. That deal has been cooking since before the invention of television, and Comcast has been involved for at least a year. Presumably JPMorgan hung around for some of that time, running models and updating board presentations and so forth.

Not that the Forest Labs deal hasn't been in the works for eons, either. Carl Icahn has been pushing for change since 2011, and JPMorgan seems to have been advising Forest Labs for most of that time: The 2011 shareholder meeting, for instance, which was the subject of Icahn's proxy fight, was held at JPMorgan's offices.

How much do you think Forest Labs paid to rent JPMorgan's office space for the day?2

Investment banking, as a business, consists of doing tons of free work -- tons of terrible, free work3 -- for lots of clients in the hope of getting a few big merger or IPO mandates. Some clients cheerfully milk this without ever paying off. For JPMorgan, Forest Labs and Comcast paid off. With windfalls! Or with, you know, the fees that JPMorgan earned by working for them for years and then advising on and financing their mergers, whatever.

There's a lot of this sort of thing in the financial industry: You work or pay to obtain a bunch of out-of-the-money call options, and then you hope that some of them pay off.4 Investment bankers fly to dozens of pitch meetings hoping to get one eleven-digit merger mandate. Venture capital firms invest in dozens of little companies hoping that one will invent Candy Crush Saga.

Viewed in isolation, the handful of options that pay out will look like windfalls. JPMorgan certainly isn't doing $55 million worth of work for Forest Labs,5 and it's hard to see how King Digital Entertainment's private equity owners, who are cashing out for hundreds of millions of dollars, have put anywhere near that much value into the company. Of course, in isolation is exactly not the way to view those things: JPMorgan's merger fees in successful deals subsidize all its work chasing other deals, and colossally rich IPO exits subsidize investments in companies that don't pan out.

Now, personally, I find the word "windfall" to be nails-on-chalkboard irritating, because I come from a place that was explicitly in the business of buying out-of-the-money options, and as a moral and aesthetic matter I believe that an option that you priced and paid for is very different from a "windfall." A windfall is luck; an option paying off is skill, or a skill-like thing, or at least a really classy form of luck. When a rich uncle you've never even heard of dies and leaves you an inheritance, that's a windfall. When a rich uncle whom you've assiduously cultivated throughout his long illness dies and leaves you an inheritance, that's investment banking.

But I recognize that my view is idiosyncratic. And I also recognize that this is an excellent business model for making people hate you. Not that the financial industry needs all that much help, but still, the payment model helps. The deals where you toil anonymously with no reward, you toil anonymously with no reward. No one writes about banking pitches that go nowhere.6 The publicity comes for the big wins: The eight-digit merger fees, the ludicrously top-ticking private-equity-backed IPOs. And looking at those wins alone, you always look overpaid, and you often look just a little like you're ripping someone off.

1 Technically, those of their companies' shareholders. You could quite plausibly believe that shareholders are the wrong stakeholders to link bank executives' fortunes to, since most of the money in a bank comes from creditors.

2 I mean, I'm quite sure the answer is zero, but there probably was some payment for the anti-raid advisory or whatever. This probably isn't strictly a case of "do work for free for a big paycheck down the road."

3 William Cohan:

Mine, too, was the glamour of a red-eye flight to a European capital to meet with the executives of a large corporation. There was no time for sleep because of the inevitable fiddling with the presentation. I remember biting the inside of my lip to stay awake in those late-afternoon meetings.

I lived in a constant fugue state, rushing from one meeting to the next, constantly hoping a chief executive would pursue the deal I was advocating. Getting hired for a new assignment, with its potential for a multimillion-dollar fee for the firm, was a rare moment of drug-free euphoria — to be followed by the long downer of sleepless nights as I toiled to make the deal happen.

4 Restricted stock compensation is not technically an out-of-the-money call option. It's stock, more or less. But since you only get it if both you and your bank stick around for another 3-5 years or longer, to a lot of bankers it feels pretty pretty out of the money. My rule of thumb was always to value unvested stock compensation at zero. Coincidentally I sold some of my stock compensation last month, and you know what it felt like? A WINDFALL.

5 I mean, at hourly rates or whatever. I don't want to argue about how much value they're adding; I have no idea.

6 No, hahaha, lots of people do. There's that William Cohan piece, and Kevin Roose's book about the miserable pointlessness of investment banking is out today. Makes a great gift!

To contact the writer of this article: Matt Levine at mlevine51@bloomberg.net.

To contact the editor responsible for this article: Tobin Harshaw at tharshaw@bloomberg.net.