­Gary Perlin, treasurer of the World Bank: Perlin switches the focus

That, says Perlin, is a neat example of the change in emphasis he wants to bring to his department. "Historically," says Perlin, "treasury considered the World Bank's balance sheet to be its only client. I want to shift the focus to our end-clients, the borrowers." That could force changes in the way investment bankers service the World Bank.

Perlin brings to the job an unusual perspective. He is the first World Bank treasurer who has also been treasurer at another financial institution: he held the post at Fannie Mae from 1985 to 1993. He is also the first World Bank treasurer to have worked on the asset side of the organization: until March he was director of financial sector development where, among other initiatives, he developed programmes for lending via commercial banks in emerging markets.

Perlin says he wants to use his experiences to rethink fundamentally the role of the department. "I'm undertaking a complete review of treasury operations in the light of what I know from elsewhere: everything from financial instruments and liquidity to organizational structure and borrowing strategy."

The first big change Perlin has to cope with is the expansion of single-currency loans. In future, eligible borrowers will be able to choose which currency to borrow in (and whether the interest rate will be floating or fixed); previously they were lent a basket with an fixed proportion of dollars, yen and Deutschmarks. Full implementation of single-currency loans was speeded up by what Perlin calls "the Jim Wolfensohn effect".

Since July 1 all new loans have been available under the new arrangement. And, this month, the treasury starts the more complicated process of giving borrowers the option to switch existing loans into a single currency. Borrowers will able to exercise this option only once, however: they won't be allowed to switch continually between currencies. The World Bank will discourage borrowing in a particular currency if it thinks this would be unwise ­ if, for example, a borrower wanted to shift all its liabilities into yen (to take advantage of low nominal interest rates), although little of its trade was in yen.

The loan-conversion programme will make a big difference to the way the World Bank funds itself. "We will need to reconfigure our borrowing pool through refinancings and swaps," says Perlin.

He agrees with bankers who argue that the bank may have over-analyzed its issues in recent years. "We should be able to bring global bonds to the market much faster. There's no need to spend quite so long finding just the right lead manager or market price. It just doesn't take that long any more." Perlin still expects to do globals on the basis of negotiated pricing ("we want our global bonds to be well-received"), but price discovery need not take two or three weeks. "We can negotiate the price overnight."

As an example, take the $1 billion global bond the bank announced on August 14 with Merrill Lynch and sbc Warburg as lead-managers. The bookrunners were mandated late on the evening of August 13 and the deal was marketed in Asia overnight.

Another benefit of the streamlined approach to borrowing is that it will give Perlin time and resources to concentrate on his new priorities. He plans to reallocate some staff to give advice on liability management to the World Bank's borrowers. "We're not going to tell countries which currency to borrow in, but we do want to help them think through the decision," he says. He also intends to spend more time investigating new markets and currencies; and to review the treasury's portfolio management.

Perlin does not, however, want the World Bank to lose its reputation for professionalism in the capital markets. The bank's borrowing requirement for the current financial year (beginning July 1) ­ $12 billion to $13 billion ­ is little different from that of a decade ago. "It's a sign of what an excellent job my predecessors did at maintaining our relationships with banks," says Perlin, "that we still get serviced as though we were the biggest borrower in the world." Garry Evans

US ELECTION

Voting with their wallets

With Democrats slashing the deficit under president Bill Clinton, abandoning traditional liberal programs like welfare and becoming economic conservatives in just about every other way imaginable short of scrapping the capital gains tax, it appears the time has come for Democrats on Wall Street.

In a presidential election that is expected to be the most costly ever, donations to the Democrats are catching up on those to the Republicans.

By the end of June the securities industry had given $7 million to Republicans, whereas Democrats managed to pull in $5.9 million, according to the latest figures available from Common Cause, the public interest group that monitors campaign financing. Banks and lenders gave an additional $1.3 million to the Democrats and $1.6 million to the Republicans.

Asked to explain the reasons for their political contributions, most firms declined to comment. But Steven Rattner, a Lazard Freres partner, and an up and comer in the Democratic party claims: "Wall Street appreciates the Democrats are friendly to business and believe in a balanced budget, fiscal responsibility and deregulation." By contrast, he argues, Republican candidate Robert Dole's economic policies "don't make sense to people on Wall Street" ­ specifically his call for a tax cut, without specifying spending cuts as well.

The securities and investments industry has been the top contributor to both parties, out-distancing such prominent lobby groups as tobacco ($4 million to the Republicans) and the entertainment industry ($2.9 million to the Democrats). Bulge bracket firms, leveraged buyout houses, and hedge fund operators are among the big spenders in both camps. President Clinton's huge lead in the polls may have given the Democrats a boost. Many firms hedged their bets by giving to both sides, with the occasional internal split among executives.

Among investment banks, the long-time Democratic Goldman Sachs, whose former co-chairman Robert Rubin is now treasury secretary, was the biggest single contributor to the Democrats, donating $525,000. Among the party faithful were chairman Jon Corzine, forking out $195,000; Peter Mathis, $100,000; Robert Menschel, $100,000; David Silfen, $15,000; and Barrie Wigmore $100,000. But Goldman also helped out the Republicans to the tune of $63,100. Former chairman Stephen Friedman ­ briefly co-chairman along with Rubin ­ gave $5,000, partner Peter Sacerdote gave $25,000 and the firm chipped in $33,100.

Next in line among Democrats was Lazard Freres, giving $290,000. Senior partner Felix Rohatyn, an unreconstructed liberal, and long-time party loyalist and public service activist whose candidacy for Federal Reserve Board vice-chairman this year was nixed by Republicans, gave $125,000. Close on his heels, in party financing and elsewhere, is Rohatyn's one-time protégé, partner Steve Rattner, who donated $85,000. Rattner is widely seen as Wall Street's rising star in Democratic circles, which has been a source of tension within the firm. Lazard's Michael Blumenthal gave $30,000. Rounding out their liberal Democratic credentials, both Rattner and Blumenthal are former New York Times reporters. Among the Lazard partners, it's a family affair. Rohatyn's wife Elizabeth, added another $30,000 from the family, while Rattner's spouse, Maureen White, tossed in $20,000.

Other investment firms supporting the Democratic incumbent were em Warbug Pincus, which gave $190,000; venture capital firm Patricof & Co, $110,000; Bear Stearns, $107,500; m&a boutique Gleacher Natwest, $75,000; and Lehman Brothers, $65,000. Although cs First Boston vice-chairman David Mulford was a treasury official during the Reagan administration, the firm now seems to prefer Democrats, giving them $100,000 and only $70,350 to the Republicans.

Silicon Valley's senior banker, Sanford Robertson, chairman of Robertson Stephens, gave the Democrats $130,000. Another West Coast bank split its donations: Montgomery Securities investment banker Richard Fredericks gave $100,000 to the Democrats, while the firm's ceo, Thomas Weisel, gave $50,000 to the Republicans.

Other individual Democrat supporters included aig Trading's Robert Rubin, $80,000; the Blackstone Group's Glenn Hutchins, $80,000; Stanley Shuman, executive vice-president of top entertainment industry boutique Allen & Co, $65,000; independent banker Peter Solomon, $50,000; hedge fund operator and former Drexel executive Leon Black, of Apollo Investments, $50,000; and
James Cramer, money manager and magazine columnist, $50,000.

Republicans tended to garner larger single contributions. Buyout firm Forstmann Little topped the list of supporters, giving them $309,000, of which Republican stalwart and partner Theodore Forstmann donated $200,000. Next on the list was brokerage house PaineWebber, giving the Republicans $290,000 and the Democrats $85,000.

While George Soros may prefer to give his money to the former Communist world, Soros Management's chief trader Stanley Druckenmiller gave the Republicans $250,000. Buyout firm Kohlberg, Kravis Roberts & Co gave $185,000, of which Henry Kravis gave $125,000. Kravis also flexed his political muscles by firing the editor of the traditionally pro-Democrat New York magazine, in which he is a major investor, after reading a critical article on Dole.

Another hedge fund operator, Caxton's Bruce Kovner, donated $125,000 to the Republicans; Salomon Brothers trading chief Dennis Keegan gave them $75,000; and Trust Company of the West chairman Robert Day offered Republicans $90,000. American Express gave Republicans $138,000, offering only $70,300 to the Democrats.

Morgan Stanley's largess was more evenly split. It donated $75,000 to Republicans and $60,250 to Democrats. Fidelity Investments gave $155,000 to the Republicans and only $50,000 to the Democrats.

Back in Clinton's home state of Arkansas, it seems the folks have tired of their favourite son, or at least all the bad press he has brought the state's incestuous political and business elite. The state's major power broker, the Little Rock securities firm of Stephens Inc which had backed Clinton in the past, switched horses and gave $160,000 to Republicans. The firm's president and chief executive Warren Stephens says the firm has had a "longstanding relationship with Bob Dole. To characterize that support as a change of heart might be inaccurate." He notes that some Stephens executives "have and will continue to support some Democrats".

Industry associations also entered the fray. Perhaps hoping for another Reagan era round of deficit-induced financings under a Republican president, the Public Securities Association donated a whopping $240,000 to the Republicans, while giving just $70,031 to the Democrats. The American Stock Exchange gave $66,000 to the Republicans, and the Chicago Mercantile Exchange donated $57,500 to the Democrats.

The commercial banking industry was less generous, but is predominantly Republican. BankAmerica topped the list of bank donors to both parties, giving $228,600 to the Republicans and $178,050 to the Democrats. Citicorp gave $80,000 to the Republicans. Regional banking groups were decidedly Republican as well. Southwest Bancorp gave $77,100; NationsBank gave $51,600; Barnett Banks gave $50,000, as did Wells Fargo. The American Bankers Association gave $62,600 to the Republicans, while Americas' Community Bankers, a lobbying group of small bankers, gave a total of $66,500.

A spokesman for Citicorp, one of the few financial institutions willing to discuss its campaign contributions, says: "We are a heavily regulated industry and the political issues we are involved with are frequently very complicated. When we find candidates willing to make an effort to understand these issues, we try to support them."

Under us campaign financing law, no more than $5,000 may be given to any one candidate. But "soft money" donations, directed to parties, enable donors to get round this. Michelle Celarier

EUROPEAN MONETARY UNION

Banks scrap over Target

Forgetting that they're all supposed to be part of a single friendly market, European banks are split on who exactly should have access to Target, the future payment system for euros.

The row is over which banks should benefit from direct access to euro funding facilities to be operated by the European Central Bank (ecb), when the single currency is introduced in 1999. Should banks from non-Emu countries have equal access to Target, the system that will link Emu members' real-time gross settlement systems and be the mechanism for high-value payments in euros?

Some European bankers, mostly from banks likely to be inside Emu (the "ins") believe that non-Emu European banks (the "outs") should have only limited access to the ecb's discount window ­ or at least should pay more for access than the ins. That would present a huge disadvantage to the outs, for example in trading euro-denominated bonds. As the euro bond market is likely to include the present French, German, Benelux, Austrian and Irish government bond markets, it will initially be 40% of the size of the huge us government bond market. With other large sovereign bond markets possibly to be included later, such as Italy's and Spain's, that's a big business to be handicapped in.

Frankfurt and Paris are keen to take trading volume from London, even more so if the uk stays outside Emu. The single currency project does not spell the end of nationalism. One French banker sees the issue as a threat to the introduction of the euro: "We want to define conditions for Emu membership so that as many countries as possible join. But joining requires efforts and sacrifices. Therefore there must be advantages for the ins and disadvantages for the outs. It would be so unfair for countries to be able to enjoy all the advantages of being in, while actually staying out, that such a state of affairs might threaten the entire single currency project."

Banks from the likely in-countries have their own worries. If Emu banks are required to deposit non-interest bearing minimum reserves with the European central bank ­ still an open possibility ­ London might become an offshore centre for euro trading, as it is for dollars and Deutschmarks.

It seems unlikely that, somewhere in the small print of Target, London will lose its status as Europe's ­ and arguably the world's ­ leading financial centre. Its offshore dollar business has thrived without London banks' access to the Federal Reserve's discount window. But banks in what is supposed to be a single European market are understandably huffy about talk of limited or more expensive access to Target. A source at one uk bank argues: "As one of the aims of Emu is to produce a global reserve currency with a great share of money and capital markets, it doesn't make much sense to put restrictions on its use, especially in such an important financial centre as London."

London-based bankers concede that countries joining the single currency are genuinely concerned that the ecb should maintain control over euro monetary policy. They accept that this control might be compromised, if the outs enjoy unfettered access to overnight liquidity. But intra-day borrowing ­ a central support for banks' trading in other currencies ­ would not increase money supply. Therefore control over monetary policy does not justify denial of access for such funding to the outs. Peter Lee

GERMAN BONDS

Seven dwarves felled at one blow

The Wrst jumbo bond issue brought jointly by several of Germany's federal states (Länder) was an ignominious start to a promising new issue market. Ambition to rival the Bavarians, by launching a dm4 billion 10-year deal in August, resulted in the humbling of seven Länder, and alienated nearly two dozen German and international banks.

Länderschatzanweisung No 1, as it was oYcially known, marked the Wrst time that the traditional rivalry between the German regions spilled into the capital market. Each of the 16 Länder ­ which enjoy considerable Wnancial autonomy from Bonn ­ has long carried out its own issues, but these were restricted mainly to non-syndicated domestic paper ­ too routine for rivalry.

For months many Länder had been considering the idea of a large-volume bond issue which would have liquidity and appeal to international investors, rather like the jumbo Pfandbriefe which have transformed the market for German mortgage-backed issues over the past 18 months. The Länder reasoned that by adding liquidity to a strong credit rating they should realize cost savings.

Bavaria, the largest and richest of the Länder, now says it was about to come to market in the autumn of 1995 with a jumbo bond of its own, when an unexpected cut in Deutschmark rates changed the market's mood. This July, the Bavarians took half measures with a dm500 million syndicated issue which fell short of true jumbo status.

A group of seven rival Länder seized their chance to upstage the Bavarians. With indecent haste, the dm4 billion issue was put together and aimed directly at foreign investors. Banks were awarded bookrunner status only if they promised to make a market for tickets up to dm25 million on a 10 basis point spread throughout the 10-year period. German units of abn Amro, Banque Paribas, hsbc and ubs joined leading German banks in a 10-strong bookrunner group.

For the borrowing states ­ Berlin, Hamburg, Hessen,
North Rhine-Westfalen, Rheinland-Pfalz, Sachsen-Anhalt and Schleswig-Holstein ­ cocking a snook at Bavaria, home of German Wnance minister Theo Waigel, appeared to be as much on their minds as achieving liquidity and favourable pricing. Bankers say that regional pride overwhelmed the seven dwarfs.

Since the earlier Bavaria issue had been launched at 17bp over Bunds, the seven were determined to achieve the same pricing, even though the banks warned it was unrealistic ­ the Bavarian issue had quickly widened to between 19bp and 20bp. But the Länder simply announced several days before the launch that their jumbo would come to market at 17bp over. Even that Wgure was a compromise ­ some of the seven had apparently campaigned for 16bp or less.

Although the issue apparently sold well to foreign investors, it was a loss-maker for the 10 bookrunners. So keen were they to get the business that the banks cut the bid price to the re-oVer level, eliminating their own margin. As market-makers, they were then obliged to accept the huge volumes that were returned almost immediately after sale. "We hoped right up to the last moment that the market would turn the corner, but it didn't turn out that way," says a representative of Deutsche Morgan Grenfell, one of the bookrunners.

"This was the Wrst bond issue where the bookrunners rang to congratulate us on not having taken part," adds Antonio Keglevich, head of non-frequent borrowers at Bayerische Vereinsbank, which was conspiciously absent from the syndicate.

The chaos of Länderschatzanweisung No 1 will not end the rivalry between the Länder. The real prize for them all, as they prepare for a series of regular jumbo issues, would be narrower spreads between Bunds and bonds issued by the Länder.

As public-sector issuers, the Länder reason that their spread to Bunds should not be so great. Even with pricing at 17bp over Bunds, their pricing is still closer to jumbo Pfandbrief issues, from the many triple-a mortgage banks. German bankers say that the Länder will fail to achieve such favourable pricing the next time anyhow.

The most obvious way to reduce new issue spreads would be for certain Länder to trumpet their superior credit quality, thus raising the rivalry to new heights. By tradition, the Länder have always avoided seeking separate credit ratings, yet it has been a simple matter for the market to diVerentiate between them. The rating of any German Landesbank reXects the strength of its guarantor ­ the Land where it is located. While Bayerische Landesbank is triple-a because of the Wnancial strength of the state of Bavaria, Westlb is only aa+ because North Rhine-Westfalen is deemed slightly weaker by Moody's and Standard & Poor's.

Georg Schwarz, head of debt management at the Wnance ministry of Rheinland-Pfalz, dislikes investors who make distinctions between Länder. With good reason ­ Landesbank Rheinland-Pfalz has a aa+/aa1 rating. "All the Länder are fundamentally triple-a," he claims, arguing that no Land which got into Wnancial diYculties would stand alone because of the LänderWnanzausgleich system of redistributing tax revenues between all 15 states so that per capita tax revenues are roughly similar.

But there is a diVerent view in Bavaria or in Baden-Württemberg, whose Landesbanks are also triple-a. All eyes are on Manfred Stegmüller, head of the budget department at the Bavarian ministry of Wnance. "The question is whether it is better in the long term for all the Länder to act in unison, so that we create an enormous market, similar to the Bund market," Stegmüller says, "or would it be more
perspicacious if the triple-a states issue together?"

Keglevich of Bayerische
Vereinsbank suspects that
Bavaria would refuse to issue a jumbo jointly with "weaker" Länder riding on its superior credit. An alternative way for the state to increase the liquidity of its issues, he reasons, would be for Bavaria to team up with Baden-Württemberg, although that would raise hackles in other states. "If they did that, they would highlight the north-south divide," says Keglevich. On average, the southern states of Germany are richer than the north.

That also has a political dimension: all seven issuers of the Wrst Länder-jumbo are states governed by the Social
Democrats (spd), or coalitions involving them, whereas Baden-Württemberg and Bavaria are "deepest black", the permanent domain of Helmut Kohl's cdu and its Bavarian sister party the csu, whose president is Wnance minister Waigel. So a joint bond issue by the "black" Länder would be seen as a direct aVront from Waigel to the opposition spd, which controls the Länder-based upper house of parliament.

Bavaria's most attractive option may be to issue its own jumbo. German bankers say Germany's largest and wealthiest state could easily organize an issue for dm2 billion to dm2.5 billion. The state has ambitions in this direction. Keglevich of Vereinsbank thinks 17bp to 18bp might be fair pricing. He hints that another Land ­ aside from Bavaria ­ is preparing to go it alone with a jumbo deal.

Stegmüller stresses the need for caution after the humiliation of the seven. Bankers suggest an elegant solution would be for Bavaria to issue a Wve-year bond, to avoid direct comparisons on price. Laura Covill

FLOATING-RATE DEBT

Mexico's $6 billion comeback

The completion, at the end of July, of the largest ever Eurobond for Mexico ­ a $6 billion floating rate note (frn) ­ was good news for Mexico, good news for the banks involved in the deal and very good news for us taxpayers who are no longer bankrolling their neighbour. Mexico could not have asked for a better vote of confidence in its economic recovery.

But despite the back-slapping, not everybody is happy at the way deal was handled ­ or his stake in it. The transaction began with approaches by jp Morgan to the Mexican finance ministry which, on June 18, announced that Morgan and sbc Warburg would be co-arrangers, lead managers and joint bookrunners for a $3 billion syndicated loan. The lead managers underwrote the loan with $500 million each and then signed up 10 banks to underwrite $300 million each, and a further 10 to underwrite $200 million, which generated $7 billion even before the loan was put out to general syndication with 100 banks.

But it was the investment-grade credit ratings given by Standard & Poor's (s&p) and Moody's that opened it up to institutions and fund managers worldwide, and prompted the Mexican government to upgrade the deal to a $6 billion syndicated loan/frn hybrid. The bbb- ratings from s&p and Duff & Phelps and the ba3 from Moody's were two notches higher than the bb and ba2 allotted to Mexico's sovereign debt because of the loan's security on export revenue from Pemex oil company, should the government default.

"When the investment-grade credit ratings came through it was the trigger for bringing in more investors and ensured that a huge pool of potential money was available," says Richard Luddington, global head of emerging market debt syndicate at jp Morgan. "Lots of people were interested in such a large liquid frn because there is a strong expectation that us interest rates will go up. With a $4 billion issue from the uk and other sovereign us dollar frns maturing shortly, there was natural demand for this instrument. The margin on the frn (200 basis points over Libor) was also relatively attractive given that it had an investment-grade credit rating."

About 300 institutions pledged a total of $9 billion. Allocations were severely limited, with the 20 original underwriters taking the biggest cuts, prompting officials at lead banks to complain that time and effort had been wasted. The leads expected $170 million each but got only $143.5 million; the first tier expected $123 million and got $104 million; and the second tier got only $83.5 million after expecting $100 million, Luddington says. "Jealousy and sour grapes from fellow syndicate members are often one sign of an extremely successful deal," he adds. "The largest orders came from the us but it was important to Mexico to have a geographical spread of new investors, so the us accounts took proportionally the largest cuts in allocation."

The unhappiness at the level of cut-backs may have been fuelled by losses taken from firms over-allocating to clients and then having to cover their short positions. The frns started trading at 99.50 and rose to around about 99.80.

The deal will enable Mexico to repay $7 billion of the $10.5 billion it borrowed from the us. The finance ministry predicts that it will save $125 million
a year from the restructuring
of debt.

David Robertson