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Why did you leave Merrill Lynch?
The firm was asking me to take responsibility for equities. I was beginning to think a bit about what I really wanted to do over the rest of my career in investment banking.
You must have had a shot at becoming chairman of Merrill. Didn't you give up a lot by leaving?
No. I made the move for reasons I'm very comfortable with. I'd rather not speculate about what could have been. I very much enjoyed my years at Merrill; it's a great firm. But I am happy to have made the move.
What was your perception of Deutsche Bank?
That it had tremendous potential with the combination of Morgan Grenfell's culture and entrepreneurial spirit and Deutsche's global customer reach, reputation and balance sheet. I thought that was a really powerful combination. It represented one of the few remaining institutions that could aspire to be a world-class investment bank.
But wasn't one yet?
Exactly. Deutsche or Morgan Grenfell were not institutions I had run into much as a competitor. Of course, Deutsche Bank was active in global bonds, but I really had not come across them in swaps or structured private placements or any of the other businesses I was responsible for at Merrill Lynch.
Why did you take the job?
I was impressed with all the people I met, Mike Dobson [chief executive of DMG] in particular. He was the person I would be reporting to. This seemed to be a very exciting platform with people who appeared committed, and an institution that had global reach and the resources to be successful. So it was the lure of building a business with a very interesting starting-point. It wasn't as though there was nothing here to start with. But the pieces were not working together as well as I, and the bank itself, thought they could.
You made your mind up to move in a very short time less than two weeks.
The process happened very quickly. Merrill wanted to announce at an upcoming board meeting that, as part of a whole series of management changes, I would be taking over equities. I was not comfortable with that if there might be an alternative I wanted to pursue. That accelerated the process.
When was your first day at Deutsche Morgan Grenfell?
I took a week off, and then started. It was May 1 last year.
What did you do first?
I met the DMG people, and the Deutsche Bank people in Leadenhall Street. Then I went to Germany and spent time with people there. I travelled to the US, Tokyo, Hong Kong, Singapore and the main places where we had offices.
The idea was to go around and see everyone?
I wanted to see what we had. There were some things that needed doing immediately. We had no global head of sales, for example. We had nobody running capital markets in the US. There were some other obvious spots that needed filling. So I immediately went into recruiting mode .
Who did you hire first?
Michael Phillip [from Merrill to head fixed-income sales], and then Anshu Jain to run relative-value sales. We didn't have that position filled either. We also recruited Grant Kvalheim [from Merrill] to run capital markets.
That all happened quickly?
In the space of two to three weeks.
You already had your eye on these people?
I had no discussions with anyone before I left Merrill. All these conversations took place after I joined. But I had worked with these people for a long time. Grant had come over from JP Morgan to work with me at Merrill in building capital markets. He's one of the best capital markets people in the world. I'd known Michael [Phillip] for a long time too. He came to Merrill from Goldman Sachs. Then I hired Rob Stein [from Merrill] for Japan. We didn't have anybody running Japan, which is a critical position. He had worked with me for 12 years either in London or in Asia.
Then David Campbell came from JP Morgan to run fixed-income trading in London. That position had been vacant for more than 18 months. It was critical to bring in some leadership on the trading side in London, where the firm had been struggling for several years. We also recruited a number of other key people from different firms.
It sounds as though the business had been allowed to run down.
Some of the businesses had but certainly not all of them. There was never really a sales culture at Deutsche, it was very focused on trading. I don't think there was ever a global head of sales, even though every investment bank has one. The US operation was run as a separate North American entity rather than as part of capital markets.
Who came next?
They were quickly followed by Colin Grassie [from JP Morgan] as head of sales in Asia, and Paul Spillane [from Goldman]. Paul came in to run sales in the US. Both have worked out spectacularly well.
Is it true Spillane gave up a Goldman partnership to take that job?
I have heard that.
The market believes you paid way over market rates to hire all these people.
Not at all. We were able to bring many of the early people in at compensation that was either flat to what they were making, or for just a small premium. In some cases, though, we had to compensate the people for loss from restricted stock or long-term incentive programmes.
Remember, it is a lot easier for a competitor to say a high-quality employee left because of compensation, rather than because the opportunity at DMG was more exciting. If you look at our cost structure which I do a lot it is remarkably lean for the size and scope of our operation. It compares very favourably to all our major competitors.
But isn't that just because you have more of your employees in Europe, where pay is less, than your US competitors?
That explains some of the difference, but not all. Compensation levels in Europe are rapidly catching up with the US anyhow. We benefit from a very lean hierarchy. Many of our top managers still cover clients. I am also fortunate that many of the key people I hired early on are persuasive recruiters. That has helped us significantly. It has been a point of pride among these guys that we do not have to pay a risk premium.
There have been cases where people have gotten significant increases because they are coming into a more senior job than at their previous firm. But I can give you dozens of cases including cases from some of those firms that have criticized us where firms have matched or exceeded the compensation we offered in an attempt to keep people. In addition, we have lost people to the competition for levels we were not prepared to pay.
Have you guaranteed bonuses for two years, as competitors claim?
Very rarely.
How rarely?
There have been some cases where the second year has a floor significantly lower 40% or 50% lower than the first-year guarantee. But, even if you count those cases, the number of two-year guarantees is certainly less than 25%. I have never gone beyond two years. In May 1995, some of the people came in with two years, but since the start of 1996 I have been able pretty much to limit it to one year.
If you have a substantial percentage of staff with one- or two-year guarantees, isn't there a risk they'll leave once the guarantee period ends?
Every firm faces that problem, since this is an industry with mobile people. But if you look at all our key people, including the people already at DMG and Deutsche Bank, their history has been to stay at firms for long periods of time. I am very sanguine that these people all feel there's a lot to accomplish, and want to be part of it. There are many things I worry about, but that's not one of them.
The people you hired are mostly paid better than existing staff. How much of a problem was that?
It was an issue, clearly. It's a natural human reaction to feel a bit upset with different compensation levels, but many of the existing staff saw this as an opportunity to be part of a global investment bank paying competitively.
So you had to raise a lot of people's compensation?
Some went up, some actually went down. At the same time, overall compensation levels across Europe and in Germany have been under upward pressure. The comp level would have had to rise with the market, regardless of whether the investment bank was formed in the way it was and whether I came here or not.
How many people have you hired altogether? I've heard 200.
No, the number is closer to 500. And we have had quite a few people leave: our net increase in head count is only about 10%. But the hiring is 90% done now, and we're turning our energy to graduate recruiting.
Did you plan from day one to hire as many as 500 people?
We knew we needed substantial resources. I came up with a head-count budget in the late summer of last year. We have stuck to that strictly. After two or three months we had a good sense of what was needed in stage one.
When you interviewed people for jobs, what did you look for?
We wanted people who were still enthusiastic about the business, highly motivated, and who looked at this as a long-term commitment. Most of the people we hired had been with their firms for a long time. David Campbell was 13 years with JP Morgan, Rob Stein 12 years at Merrill and Paul Jacobson [head of fixed income in New York] spent almost his entire career at Goldman Sachs. In our group there are very few capital market butterflies flitting from flower to flower.
You've hired more than 50 from Merrill Lynch. Aren't you just trying to create another Merrill?
You've got to remember that Merrill is number one in market share in many of the areas we wanted to build in. The fact so many people came from Merrill should not be a surprise. But I've got more people reporting to me who didn't come from Merrill than those that did.
We are not trying to create another Merrill. Merrill has unique strengths and challenges that do not necessarily mirror ours. This is a different institution. The environment is different, and the strategy we're pursuing is different to that pursued by Merrill in building its fixed-income operation in the 1980s.
What from the Merrill model would you want to improve on?
No, I'm not going to go down that path. Merrill is a very good firm. But there are things we can learn from all our competitors. We are not trying to mimic any other firm, we're trying to come up with a strategy that fits our institution.
Did you expect to lose as many as 200 people?
It is certainly higher than I expected, and some of the people we would have preferred to stay. But with this amount of change, it was inevitable. Some of these people had joined a very different organization. For example, in New York the aspirations of the fixed-income group were very different two years ago. Now we want to be, and will be, a significant player. We're in the top 10 in the US league table but a year ago we were number 40.
There were a lot of mediocre people?
There was mediocrity in some places. But there were also many areas of excellence for example, European syndicate. Deutsche has traditionally been strong in this area, with Walter Henniges in London and Roman Schmidt in Frankfurt.
After you'd been here six weeks and travelled around, did you sit down then and write a strategy paper saying what you wanted to do?
Yes, we put a strategy together and said: here are our overall objectives, here's the strategy we want to pursue, here are the short-term tactics, here's what resources are needed, here's the return we think can be produced, and here's how it fits in with what DMG as a whole is doing. This was then presented to our colleagues in London and Frankfurt.
What was the main strategy?
One of the key planks was to act quickly. We felt there was a window of opportunity that would close, and that we needed to act fast to get up to critical mass in these key areas as quickly as possible.
Why would the window of opportunity close?
In early 1995 many of our competitors were in a state of disequilibrium, but we believed that would end which it has to some extent. We thought that clients around the world were looking for another strong global markets firm, because many of our competitors were pulling capital out of client business and shifting it into proprietary trading. We knew there were a number of good people available who I thought we could get excited about our vision. But would it sound as exciting in a year or two?
So the strategy developed was: "Act quickly, get critical mass, fill product and geographic gaps, and develop a sales culture." Developing that sales culture was key, not only for us in global markets but for the investment bank as a whole. We were relying too much on proprietary trading. Now we place a lot more importance on sales.
But isn't the trend for banks to shift towards proprietary trading and away from sales?
That is why we thought clients were anxious to have a firm focused on client business. Look at our competitive advantages: a huge number of clients, global reach we have branches all over the world good research, strong balance-sheet, triple-A rating. With those ingredients, client business is a natural. The quality of earnings should be better too.
That sounds very like Merrill Lynch's approach.
Look, in and of itself, there's nothing particularly virtuous about being client-driven. If we felt we could improve shareholder value by being a proprietary firm, that is what we'd have recommended. But we thought that, for DMG, the best approach was to be customer-focused, with 80% of revenues from customers, and 20% from proprietary. We're not saying no proprietary trading, because that's a way to stay in pace with some of our most sophisticated clients. But we don't want it to dominate: it should be the turbo-charger on the engine, not the engine itself.
The choice must have been made easier because Deutsche had such a terrible year in proprietary trading in 1994.
It had been a bad year but, even if it hadn't, the decision would have been the same. But 1994 was further confirmation of how poor quality of earnings in proprietary trading can be.
Deutsche Bank's management structure was very geographically based. You wanted to change that?
The bank had already made the decision to change to a more global approach. Bringing me in was one of the results of that decision.
Before, capital markets in London and New York were run separately?
Yes. There was some interaction, but not a lot. The swaps group did their government hedges with competitors rather than deal with our government desk. Our private placement group would do swaps with competitors and nobody was particularly upset about it. That was ended very quickly.
Deutsche Bank was always said to be riddled with fiefdoms. Did you find that?
To some extent, but it was not as pervasive as some people said. The way the bank had evolved was very much geographic, which was true of most commercial banks. When the markets were compartmentalized when the Deutschmark was basically a domestic German product, for example a geographic set-up was logical. But as markets became globalized, and international investors made up a bigger part of the Deutschmark market, the structural flaws became more evident. Deutsche Bank recognized this.
But Deutsche was a leading arranger of global bonds. That must have involved co-ordination.
Some things were working very well syndicate was probably the most global of the functions. But, even in the new issues business, Deutsche had traditionally done a wonderful job covering sovereigns and supranationals, but was not as strong with corporate issuers as it wanted to be.
Why not?
A variety of historical reasons. The salesforce was used to selling triple-A and sovereign credits. The bank lacked a strong capital markets group in the US where a lot of big corporates are. There was a lack of co-ordination between capital markets and the derivatives group.
Deutsche was also over-dependent on Deutschmark products.
Yes. It wasn't a major player in dollars and it had no yen capability at all. In some markets, such as Swiss francs, it wasn't where it should be. Merrill got to be number four in Swiss francs. That should have been a natural, and will be a natural, for Deutsche. For Merrill to be ahead of Deutsche Bank in Swiss francs seems a bit peculiar.
Which areas of new issues do you want to be in?
We want to be a leading player in any new issue market that matters.
In any currency?
In any currency that matters. And we will be. Of that I have absolutely no doubt.
What's your goal?
We want to be a top-three player within three to five years, as measured by market share, profitability and reputation.
Including profitability? Rumours have it that your mandate is only to break even for a couple of years...
That's rubbish. We were quite profitable last year. We hope to double it this year. Deutsche Bank's annual report singled out the improvement in trading income in 1995 compared to 1994. We've gone from a poor performance in global markets in 1994, to solid profitability in 1995 and significantly higher profitability in 1996.
This is pay as you go. We're not saying, "Give us two years. We're going to re-tool this and then go back into the race." We're doing this while we're building relationships with clients and generating revenue. That presents a whole set of challenges.
You've got 90% of the people in place now. Is that beginning to pay off?
I would say we are 30% or 40% of where we want to be. It will take another couple of years to get there. Now that we have hired most of the key people, stage two is to focus on businesses we are not in but we should be: high-yield in the US, for example.
What evidence is there your strategy is working?
I'll give you an example. Our salesforce is much stronger now. For example, we outsold Merrill Lynch on the $1 billion Fannie Mae dollar global in January. Merrill outsold us in the US but not dramatically; we outsold them in Europe, by about the same amount as they outsold us in the US; and we outsold them in Asia. I think we've got the best distribution force now of any firm in Europe. Our objective is to be as strong in the US as our American competitors are in Europe.
Any other examples?
Foreign exchange. The poll Euromoney did last year showed us at number 23. This year we're number 9, and next year I think we'll be higher than that. A recent survey in Corporate Finance magazine showed us at number four among corporates.
Another example is Italy. We are now number one by market share in Italian government bonds.
Let's look at it business by business. First, derivatives. Deutsche Bank was always dismal in derivatives.
That's a bit harsh, but it's true we weren't top-tier. Saman Majd came from Salomon to run the derivatives group. He's a good manager and a very competent businessman. He has made a tremendous difference. The quality of our research is much better, earnings are significantly higher than they were, and the group is well integrated with the rest of the business.
Which derivatives businesses do you want to be in?
All the key geographic areas and all the key businesses. We can not be a boutique. We're just getting involved in credit derivatives. In emerging markets derivatives, we've done some, but we're not nearly where we should be. We want to be able to price and hedge any type of transaction, any type of risk our clients want either to assume or avoid.
Again, that will be a client sales approach?
Yes. To use an analogy, we want to be the doctor not the pharmacist. We've made good progress. I think you'll see us going up the polls in derivatives. And we've protected our franchise in Germany where we had come under pressure. The competition in Germany has gotten tougher. Many of the German banks are staffed with ex-Deutsche people, and the American banks have moved aggressively into Germany.
Next, MTNs. Deutsche was never strong there either.
We're not where we should be, and we'll correct this. We didn't even have an MTN trader here, just one person originating. I'm changing that and getting our processes to work better. Results have been encouraging.
You'll have a dedicated MTN desk?
Yes.
You're still recruiting for that?
That's part of the 10% we have remaining. We know we're not where we should be our clients are telling us that. We've been very successful getting on programmes, particularly European programmes, but not as successful at delivering.
But I've got to tell you this. An official from one of the big supranationals called me recently. He had been complaining a month before about our MTN execution. Our share of deals off his programme had been dropping. I told him it would improve as our Japanese placement started to click in. He called the other day to say he'd noticed a tremendous improvement in our structured note placement. It was good to hear that.
We're probably in the top eight globally in terms of placement off MTN programmes. But we are not content to be there.
How are you doing in the US?
Our basic premise is that, for a firm to be successful globally, it's got to have a strong presence in the US. And we've made very good progress there. Carter McClelland, the CEO of DMG North America, has been a big help.
You've won some deals in the US but not many yet.
We're doing some agency deals, and a few yankees. It takes longer to win corporate business. Last week I met with one of the big corporate issuers, and the CFO said: "You guys are doing a great job. You're covering us well, you're doing all the right things, including debt buy-backs and showing us smart ideas. But you'll have to continue doing this for several more months before you even have a chance at a mandate." Nonetheless, we should be in the top 10 this year in the US league table.
Up until now New York's been a black hole for European banks. Why have they all failed?
Wrong people, wrong strategy, wrong structure.
Why did they go wrong?
Who knows. But I'll tell you what you have to do to make it work: the firm has got to be global. Bringing a global perspective to areas such as distribution, trading ideas, and swaps is vital. And having first-rate people. In the end it comes down to the people who are talking to clients. Do they have good ideas? Are they helping the portfolio manager or the treasurer do his job better?
The target is to be in the top 10 in the US?
Top 10 in new issues. We feel we can be better than that in other businesses. We think we can be in the top seven or eight in US treasuries, top three or four in FX, top five in derivatives, top five in money market and repos and reasonably quickly. The toughest business is the most visible: the league-table business. And many of our US competitors have had a good year and are prepared to spend money to maintain market share.
Isn't the public new issues business old hat?
No, it's important.
But it doesn't make much money.
No, it doesn't. But it's integrally connected to lots of other pieces: secondary trading, derivatives, MTNs. Our view is that market share does matter. I'll say that when we're not number one, so it's more credible when we do become number one.
What is stage two of your strategy?
There are probably four or five areas we need to fill in. That's significantly fewer than a year ago, and it becomes easier to fill in when you have critical mass. It won't involve adding so many people, just a few here and there. We're at the point now where we can start to leverage our existing resources. The incremental value of adding another salesman is much higher now.
A priority is to leverage the bank's relationships better. For example, when we do an equity trade now, we ask for the FX business too. In the past we never did. We have set up a cross-products group that just promotes business with other parts of the bank.
What does it do?
For example, they go to the M&A bankers and say: "We know you're thinking about an M&A deal. Maybe we can do a hedge for you." They do the same with project finance. A lot of it is just educating other departments. Meeting with associates and saying: "Be alert to this; bring us in, we'll help with your clients." It's been an unmitigated success. We want to expand it, and the next step is to find better links with the commercial bankers. Some of that's already happening on an ad hoc basis, but we want to make it more systematic. The commercial bank has wonderful relationships around the world. We want to make sure we're leveraging them as much as possible.
This doesn't happen already?
It was hard when we didn't have the product capability. For example, a year ago we had no ratings advisory capability. If one of our clients was concerned Moody's was going to drop their rating, they had to go to JP Morgan or Goldman. Now we can offer them a very high-quality service.
How do you create a culture at DMG when you've hired so many staff from so many firms so quickly?
A precondition to a culture is some degree of success. We first have to produce a winning team. That is true throughout the investment bank.
In terms of blending people together, we took a great deal of care whom we brought in. While they come from a variety of firms, there are common denominators. Everybody we brought in was already well known by a number of people here. Many had worked with me or with other people I'd hired.
What are the strengths of the old Deutsche you'd want to incorporate?
The reputation for long-term relationships, consistency, solidity, the pride that a lot of people had in working as part of Deutsche. Those are all things we want to retain.
What sort of culture would you like to see evolve here?
Throughout the investment bank, we want high-quality people, working in a global environment. We want a good balance in how we approach the business, not having sales dominate trading, or trading dominate sales. A sense of humour is important taking our jobs and responsibilities seriously, but not taking ourselves overly seriously. We're trying to balance the importance of the individual with the need to work within a team.
What are you doing to get these people to work together?
In global markets we've arranged a number of off-sites. Mike Dobson has done the same for the whole investment bank. They are a big part of pulling things together. In global markets, we met in Spain for three days in June. Next will be in Hong Kong in October.
Who goes?
The top 100 or so people in global markets basically all my direct reports and the people that report to them. I try to rotate too. Say we have a new vice-president in our Frankfurt syndicate, we'll bring that person along. We also invite senior members of the Deutsche group management. It's been extraordinarily helpful, particularly as we go through a period of rapid change.
The point is to let people know what other parts of the group are doing?
Exactly. We also leave time for people to get together. We mix people around at dinner, and set up a time when nothing is scheduled where people can just get together and have informal discussions. A fair amount of time is spent preparing for these off-sites. People are expected to have good-quality presentations. There is peer pressure on them to do that.
What other methods do you use to get your people to communicate?
It's quite remarkable how quickly people can make connections if they're working on transactions together or recruiting. People across groups within global markets are beginning to play athletic events with each other in their off-hours. They've set up a cricket team here in London not that I'm a member [laughs]. Things like that are quite helpful in getting people to know each other.
Handling relations with Frankfurt must be tricky. Don't people there resent you?
Nobody has said that directly, but I imagine there is some resentment. It has helped that a lot of the senior people in the investment bank in Germany have been advocating change too. While there is general support for the changes we've made, it's also important for all the new people to remember that Deutsche has been a successful institution for a long time. I think most people in Germany feel that, on balance, we're heading in the right direction.
Do you go to Frankfurt much?
Virtually every week that I'm in Europe, I try to spend a day or two in Frankfurt. Germany is our home market. We have tremendous strengths and excellent customer relationships there. I try to spend some time internally as well as time with clients.
The management style at German banks is very conservative and consensus-driven. You like to take decisions fast and show leadership. Don't you find that gap hard to manage?
Those stereotypes are exaggerated both Deutsche Bank's management style and mine. Deutsche is an institution that's been going through a tremendous amount of change. I've found senior management very willing to embrace change as long as they felt it well thought out and consistent with the overall objectives of the group. That's been much less of a problem than many people predicted.
Who do you talk to most at Deutsche in Frankfurt?
The investment banking board, which I am now part of, includes Dr [Ronaldo] Schmitz, Dr [Rolf] Breuer, and Mike Dobson so I talk to them a lot. I also have a lot of interaction with Dr [Ulrich] Cartellieri, who is responsible for risk management and Asia. Dr [Jürgen] Krumnow is responsible for internal controls, and so there's interaction there, and with Dr [Michael] Endres, who is in charge of operations and technology.
Do you talk directly to them, or do you go via Michael Dobson?
Mike is my prime vehicle, but also he encourages direct access.
You seem to have a good relationship with Dobson. But you're such different people. He's cautious, carefully-spoken and slightly shy. I find it hard to imagine how you get on.
Our backgrounds and personalities are quite a bit different, that's true. I don't know what to say, except that he's one of the people who most impressed me in the process of thinking about joining this firm, and he's somebody I very much enjoy working with.
Does he interfere a lot?
He's very interested in the overall objectives, allocation of resources, and integrating with the rest of the investment bank. And he's very involved in measuring performance against those objectives. But he also delegates well.
How do you see your role?
It's working with the management of global markets, setting the objectives, deciding strategy, making sure we have the right people in the right spots, thinking how to allocate resources whether they are risk resources, balance-sheet resources or people resources and making sure the groups are working together well. Recruiting has been a big part of it up until now. In addition, I also play a role, as a member of the board of the investment bank, in helping plan the overall strategy.
Of the 500 people the firm has recruited, what percentage did you interview?
A large percentage. I couldn't give you the exact number, but virtually all the senior people, vice-president and above.
It sounds as though your role is mainly internal.
No, I do quite a bit of client work too. I'm anxious to do more since it's something I enjoy. Over time the balance will shift towards external from internal. That's happening already. During the past six months I've done much more client work than in the first six months.
People say you're working far harder than you did at Merrill.
I thought I worked pretty hard at Merrill.
Let's talk about your style of management. People say you're good at wandering round and remembering people's names.
It's important to know the people who are generating the revenue, and to understand what they're doing, what their problems are, and to let them know you are interested. That is important in terms of deciding how to allocate resources, as well as understanding what clients we should be focusing on.
But I like to have strong managers underneath me and to delegate a reasonable amount of responsibility to them.
How have you structured the management? For example, do you have an executive committee?
We've been experimenting with several structures, but really haven't come up with the structure we are going to go with. I set up a management committee. We try to get together by telephone every couple of weeks or so.
How many people are on this committee?
Probably 10.
It's a conference call?
That's because they are all over the world: Rob Stein in Tokyo, Hal Herron in Australia, Detlev Bindert in Frankfurt and so forth. That has not worked so well, so I'm still experimenting. I want a forum where we can share information and discuss common problems, but at the same time I do not want these people tied up in endless telephone conferences and meetings.
A long-time Deutsche employee in London told me the biggest change is that, before, he would not hear from his bosses from one week to the next. Now he gets two phone calls from you a day, two from Grant Kvalheim...
I'm interested in knowing what's going on, and Grant is as well. Yes, my style is to be very close to the dynamics of the business, what we are doing and what we are not doing. But I do not believe in micro-managing, and I make sure the business heads feel they are accountable for running their businesses. I hope they don't view my style as micro-managing. If they did, I hope they would tell me.
People say you prefer to build an operation, rather than run one. Is that true?
I plead guilty. Yes, I much prefer to build.
Merrill people say of you and you've admitted yourself that you were an empire-builder. You always felt you could run other departments better than the people actually running them.
That was a misquote. I never said I was an empire-builder, and I'm not. I like building, but that's different. If I feel I can add value in a particular area, then I'm anxious to be involved, but only to the extent people want me to be.
Your goal is to be in the top three in capital markets worldwide within five years. How do you rate your chances?
Do you want odds? It's very hard to predict. We're battling against highly motivated, high-quality, very competitive firms that have been developing their capabilities, in some cases, for decades.
And other firms are coming up, starting from the same position as you.
Yes. So it will be a fascinating period. I would just say that I like our chances.
Would it derail your plans if the markets turned down?
What we're trying to do, in reducing our reliance on proprietary trading, is to build a franchise that's not overly dependent on market conditions. When we do our budgeting, we don't make assumptions in terms of interest rates. Obviously, when markets are up, there's generally more issuance and more activity. But our approach is to try to build a business that's market-neutral.
Do you worry about running up more costs than you can cover with revenues?
I believe we have been very careful. I'm very confident that, if we give our people the right support and the right infrastructure, they will be successful. We spend a lot of time thinking about what cost structure makes sense. *
Mitchell on markets
How will financial markets change in the next five or 10 years?
The distinction between markets will blur: the distinction between the private placement market and the public market; or between listed and over-the-counter derivatives; or the blurring of distinctions between European currencies to the extent that EMU develops. The implications for the organizational structure of investment banks are significant. The nice, convenient boxes that made sense in the past no longer do so. We have to be much more flexible in our organizational structure, much more project-oriented, more taskforce-team oriented as opposed to having a rigid delineation of product responsibility. That's why it's so important for our managers to be on top of what's going on in the business in order to make the right organizational decisions.
Another trend I see is continued pressure on margins. You see that manifested in global bonds. The commission structure for globals is significantly lower than it would be for yankees. The continued pressure on spreads has lots of implications for our business. One is the continued concentration of intermediaries. I believe that, over the next five or six years, eight to 10 firms will come to control 70% to 80% of activity.
What are the forces driving that?
The institutionalization of savings, for one. The Belgian dentist doesn't buy bonds much anymore. He now has a mutual fund, or invests through a life-insurance company. Those investors deal in bigger sizes. The phenomenon of hedge funds is having a big impact. They will be a permanent feature of the financial landscape. Those big investors need counterparties that can execute in size. In the new issues market, a $500 million transaction used to be rare, but now nobody blinks at $1 billion.
What does this mean for your business?
One of the issues we'll have to think about is how big our salesforce should be. The industry is changing, and I'm not convinced we need a salesforce as big as our major competitors. You'll see many more joint ventures in our business, primarily on the distribution side. People will start to focus on how expensive it is to have a fully-fledged distribution system. At the same time, there are a lot of firms with distribution capacity, but which don't have the critical mass to originate and trade with all the attendant research and capital requirements that go with that. You could very easily see joint ventures that take advantage of those relative strengths.
Will technology disintermediate securities firms?
That is a risk, and it's been a risk for a long time. For instance, the MTN market in the US developed as a direct-placement market where the finance-company subsidiaries of the US car-manufacturers sold paper directly to investors. Then brokerage firms got involved and started adding liquidity. As long as the intermediary is adding value, there will be a role. The minute it stops adding value, it will be disintermediated. That value could be liquidity, trading ideas or relative-value analysis across markets. |