Chase: Back in the bulge-bracket

The US Labor Day weekend, the first one in September, is usually the last gasp of summer for Wall Street investment bankers, a time of lazing on the beach at their Hamptons homes as they store up energy for the gruelling autumn calendar ahead. Of course last year's holiday, coming on the heels of Russia's debt default and a near 20% drop in the Dow, was relaxing for no-one.

But few faced it with as much glee as James Lee, the Chase Manhattan vice-chairman who oversees the New York bank's global investment banking effort. "It felt just like 1990," says Lee, who told his troops to pull together everything they had done during that earlier period, when a similar flight to quality occurred. "Drexel exploded, highly leveraged transactions were investigated by the regulators, real estate collapsed and we went into a recession," he recalls.

Then, Lee and his team filled a void, providing bank loans when the junk bond and equity markets imploded. Their efforts became a turning point in the transformation of what was then Chemical Bank into the world's dominant syndicated loan house - and the building block for all the progress made in building the investment banking franchise since. "The environment we prospered in was so similar to this. I said to our clients: 'let's go right back to what we said then, and what we did then.'"

Rescuing deals

Last year, as soon as they returned to work after the long weekend, Chase's bankers put together their pitch books, hoping to convince hundreds of CEOs that, as Lee puts it, "we have a team that's been there before, we know what's going on, and we can access liquidity when no-one else can." Within weeks, he proved the point when Chase moved in to help rearrange one of the autumn's messier financings: leveraged buyout firm Welsh Carson Anderson & Stowe's acquisition of Centennial Cellular. On October 12, Merrill Lynch walked away from the bridge loan portion of its commitment of $1.56 billion to finance the deal and threw the acquisition into disarray. With Chase's assistance, it was restructured and finally closed in January.

While the rest of the capital markets stalled last autumn, Chase used its prowess in the syndicated loan market to pull off a number of difficult financings in both the United States and Europe, where it financed the $1.6 billion buy-out of UK insurer Willis Corroon by Kohlberg Kravis Roberts, Europe's largest LBO so far.

And when all the bodies were counted at the end of the year, it was clear that Chase was one of the few financial institutions left unscathed by the fracas. Investment banking giants Merrill and Goldman Sachs had suffered huge trading losses, the merger of Citicorp with Travelers/Salomon Smith Barney had turned into open warfare, and one of Chase's key competitors in the profitable high-yield area, Bankers Trust, was being taken over by Deutsche Bank.

Chase, on the other hand, reported record earnings for both the fourth quarter, of $1.15 billion, and for the entire year at $3.78 billion. "There may only be a few global financial institutions whose survival is semi-assured in today's world, and now Chase is one of them," reckons Donald Layton, vice-chairman who oversees global markets.

Chase's strong showing was no small triumph for a financial institution which over the past two years appeared at risk of being left behind as what one Chase executive calls "mergeritis" engulfed the industry. "Two or three years ago, Chase was thought of as someone that wants to be a big boy but probably won't make it," says one senior banker. "Whereas now the thinking is that they'll most likely make it."

Analysts' favourite

Certainly, Wall Street analysts have become newly enamoured of the bank. Susan Roth, bank analyst at Donaldson Lufkin & Jenrette, says that "the 'new' Chase has emerged as one of the most powerful players in the global banking and financial services arena. Indeed, it has already accomplished what many of 1998's mega-mergers are striving for - scale in core business."

However, as regulatory barriers between commercial and investment banking began to fall - Bankers Trust became the first commercial bank to buy an equity house, merging with Alex Brown in 1997 - Chase started to seem to many hopelessly mired in commercial bank stodginess.

The story was a bit more complicated. Wanting to avoid a pricey acquisition, Chase decided to build the business but could not find the right person to head the effort. Former Morgan Stanley equities chief Neal Garonzik talked to the institution for months, but in the end did not join up. Key executives began to think it was unwise to pay to build an operation only to have to merge a fledgling equities department with a bigger brokerage firm later. Soon Chase abandoned the building effort altogether.

During this period, virtually every brokerage that ended in another's hands was first shopped to Chase, according to those familiar with the situation. But Chase executives didn't think any of them would add much to the firm's franchise. And the results, so far, seem to prove their judgement accurate. Many executives of the brokerage firms that were purchased have since walked out or were fired, and the combined institutions are in turmoil. "Rarely do CEOs get credit for the transactions they haven't done," says Lee. Chase is starting to get credit, however. Largely because of his restraint, chairman and CEO Walter Shipley was the sole banker named as one of the top 25 US business executives of 1998 by Business Week.

Shipley knew Chase's own size, and its ambitions, would require a much bigger institution as a partner. Having gone through several mergers already, he wanted to avoid as much of a culture clash as possible, which meant at the very least a link-up with a New York City firm. However, none of the institutions that Chase desired - from Merrill Lynch, Morgan Stanley Dean Witter and Goldman Sachs to Donaldson Lufkin & Jenrette - have been put up for sale yet. "It is need that drives these mergers," says one banker close to the situation.