April 9, 1996. Dawn is breaking over London. Down by the Thames in Vintners Place, weary technicians, who've worked 28 hours non-stop, are coaxing into normality the last of a bunch of temperamental computer feeds. Eight months of planning and a four-day Easter weekend of frenetic activity are about to reach their climax.
The trading-room is switched on almost without a hitch. Worldwide, the integration of 28 trading centres of the former Chase Manhattan and Chemical Bank passes off smoothly as foreign-exchange dealing starts. By 8 am the most serious remaining problem involves two traders who find themselves sharing an intercom. And chief economist Robin Marshall discovers that the logo on his wall - the important backdrop for television interviews - is from pre-merger days. This is the new Chase, reborn in the old Chase Manhattan's London foreign exchange headquarters.
But observers might be forgiven for thinking they had stumbled into the former Chemical Bank operation. That's because most of the bosses in London now are Chemical alumni. Few former Chase Manhattan personnel are left on their old trading-floor. Many of the traders and salespeople had gone before the Easter break, some of their own volition, others victims of the cost-cutting exercise that had driven the merger. The combined front-office staff of 800 has been cut by one-fifth. A poster placed on the men's toilet door before Easter and featuring a forlorn-looking giraffe - a spoof of a British Airways advertisement - summed up the situation with the question: Where is everyone?
It was never going to be simple to put together two foreign exchange operations so different in their styles. Chemical was the trader-driven top player in the interbank market, Chase a sales-driven outfit dedicated to corporate relationships. Nevertheless, the opportunities for the combined businesses are huge and Citibank now has a forex competitor worthy of the name. The markets can look forward to a battle royal between these two powerhouses.
The trend in foreign exchange markets is toward ever bigger one-stop shops able to service customers in everything from dollar/yen to four-year Polish zloty options. By the millennium only a handful of megabanks are predicted by many in the industry as likely to have survived the unrelenting pressure. Chase-Chemical has positioned itself to be one of those survivors, bringing together the corporate client list of the white-shoe Chase and the high-volume trading abilities of what even Chemical's rivals grudgingly have acknowledged as the world's greatest liquidity machine. Chase also brings with it a global custody franchise that generates - via dividend repatriation, for example - a steady stream of forex revenue that pre-merger was estimated to account for around 40% of the whole.
The merged institution, as can be seen from the Euromoney forex poll (starting on page 62), puts it with Citibank in a super league of two that leaves the competition trailing. For the new Chase, there's also the carrot of overturning Citi's 18-year reign at the top.
But heads of foreign exchange at other institutions appear not to be quaking - at least, not yet. Some even see an opportunity created by what they describe as the indistinct client bases of the merged US money-centres banks. Euromoney's poll shows that 25% of those who voted for Chemical also voted for Chase. "People keep asking me if I'm scared," says one rival forex chief. "I say, 'Sure, it's going to be a megabank, but I think we should all wait and see how things fall together'."
That coming together is down to two men who, reassuringly for the new bank, have seen it all before: Don Layton and Don Wilson. They managed the 1992 merger of the forex operations of Manufacturers Hanover and Chemical. In that merger, the two banks also had different foreign exchange strengths, Manufacturers Hanover, like Chase, having better corporate relationships. Headhunters retain vivid memories of that time: "Within six months, 99.1% of the trading floor was Chemical," says one.
Wilson and Layton have brought to the latest venture the knowledge that in terms of integration, speed is of the essence. "We've both done this before and I see no reason why we can't make it work again but you try not to make the process destructive," says Wilson, who has been with Chemical Bank since 1973 and keeps in the new set-up the title he held at Chemical: head of global trading. This means he's also head of forex.
The merger, it seems, is an educational, integrational, organizational, psychological and behavioural event. "You give people a notion that the pain of the merger delivers big gains in success," says Layton, who entered Chemical via Manufacturers Hanover and is head of capital markets in the new venture. "You do off-sites to get the merger angst out on the table and get some of the myths out of the way. Yes, it's difficult now but it is very much worth it - that's the theme."
Wilson, who trained as a corporate banker, says the trading rooms are the only places in the new Chase that would know just one week after the merger how they performed. "Very quickly you get a sense of shared economics," he says. "And you get that team beginning to mould itself together pretty quickly." So how did they do after week one? "Just fine."
The two institutions, says Wilson, have complementary strengths. "On the margin, the former Chemical had a stronger emphasis on market-making, and professional and semi-professional users. On the margin, former Chase had a much better link to the custody product line, the private banking side, and on the margin a bigger emphasis on sales as opposed to trading. But, naturally, both banks could not have achieved what they had independently without successful emphasis on trading and sales." In other words, the potential is large if the two sides can be brought to work in harmony.
On the Chase side the merger came as a huge surprise. In London, the night desk was the first to see it come over the wire. A joke, the night deskers thought, and not a very pleasant one. In New York, so the story goes, Chase chairman and chief executive officer Tom Labrecque was booed out of the dealing room a couple of weeks after the announcement. Perhaps with the Manufacturers-Chemical merger still fresh in the mind, Chase's traders had the feeling they would not have their seats for long. "Chemical FX survives in all but the name," says one now. Soon after the reported incident, Labrecque moved into Chemical Bank's old Park Avenue headquarters, now head office for the new operation, as president and chief operating officer of the merged institution.
Chemical imbalance
Most of the senior positions have gone to former Chemical managers, starting at the top with Layton and Wilson. The London head is Thomas Hoppe (Chemical). The head of trading in London is Marc Rimmer (Chemical). The head of New York is David Puth (Chemical). The head of Tokyo is Yukuo Takahashi (Chemical). The head of international treasury and general management for Europe - described by one headhunter as "the matrix head of everything that's going on in London" - is Bruce Hannan (Chemical). The New York and London business managers, whose duties include co-ordinating the front and back offices, are from Chemical. And when the senior middle-management positions were announced, of the New York trading room's five heads of desk, only one was from the old Chase.
Not a single member of Chase Manhattan's senior forex management team received a promotion. David Adamson, former head of global forex in London, was made head of options and sales co-ordination, a greatly reduced portfolio for the man to whom everyone reported in the former Chase. In New York, former US head James Borden was made head of New York sales, reporting to Puth. He previously had been global head of foreign exchange before Adamson. Kris Dasgupta, former Chase New York head of sales, is now in charge of the US multinationals desk. Yoshinobu Hashimoto, former Tokyo head, was given options trading and sales in Asia. Bashir Gazla, former Chase head trader in London, became the new combine's deputy forex trading manager but left, taking a team of five to Scotia Capital Markets.
Adamson's reduced role, announced last October, was the biggest shock. A legendary, cigar-smoking spot trader, he had been at the centre of the Chase Manhattan culture, summed up by a customer as: "It seemed like they enjoyed working in that place and with each other." Ex-Chase staff express great personal loyalty toward Adamson, described as a good man-manager. Now in his late forties, he has been at Chase since he was 16 and would find it hard to leave - if only because of new UK pension contributions legislation.
The number of former Chase Manhattan people who have gone suggests a none-too-happy ship. London accounts for more foreign exchange turnover per day than New York and Tokyo combined. Chase had 75 front-office staff in the City: 40 traders, 35 sales. Post-merger, the former Chemical trading machine dominates. Of the current traders, say sources, just seven are from the old Chase operation. And only 12 remain from the sales team.
On the sales side, it was expected that Chase would dominate, although Wilson says: "The notion was never to populate the trading side exclusively with Chemical people, the sales side with Chase people." Nevertheless, when the sales team leaders were announced, three out of five in London were former Chase Manhattan staffers. But the senior appointees did not stay long. Team leader Brian Dobson, who was to run the flow desk (incorporating custody and some central banks), went to Deutsche Morgan Grenfell and Guy Zabelle, another senior corporate sales person, went to Morgan Stanley. Both must have been flooded with déjà vu: both had left Manufacturers Hanover after its merger with Chemical. Others to leave the new Chase were Sara Sullivan, who ran options sales, Mel Mayne, who ran European sales and John Gillies, who reported on a "dotted line" basis to softly-spoken sales head Warren McLeland but decided to retire. The only appointed team leader on the sales side to remain from the former Chase is Julie Jakobek, who runs UK corporate sales.
Global custody sales - the key Chase franchise in both the old and new operations - is run in New York and London by former Chemical people. "I would be surprised, at the end of the day, if there are any Chase people left," says one headhunter. Lehman Brothers and Smith Barney are known to be on the prowl for sales heads.
A retention rate of 32% of the salesforce in a big global hub is not encouraging - especially as the former Chase Manhattan sales people supposedly are an asset. If a commercial bank bought an investment bank and produced such a number, analysts would be sending out research notes warning of goodwill write-downs.
In New York the personnel situation overall has not been as difficult as in London. From a total of 68 former Chase Manhattan people only 25 have left, and they are thought to be mainly on the trading side, though among the departees have been some high-profile personalities, including Mark Veale - described by a rival salesperson as a "top corporate producer" - who went to BZW.
Wilson is realistic about the staff situation: "We know. We're in a trader's world. One of the challenges in the new Chase is that we will be a preferred shopping centre for jobs." But he adds: "Some locations have been less lucky." He means London.
Susquehanna, the Philadelphia-based options group with which the former Chase entered into a partnership in March 1992, is another casualty. The partnership was forged by Mark Grier, now long gone from Chase Manhattan but then head of global risk management. The move was designed to boost the bank's presence in both plain-vanilla and exotic options. It did just that. Overnight, Chase became a major player. The salesforce was keen on Susquehanna because its eight traders in London and six in New York were able to offer tight prices in very large volumes.
But Susquehanna was expensive to run. It had, for example, about 10 people dedicated to systems, all Chase employees, working with traders and required to look after their specialized technology. And though never disclosed, Susquehanna's cut of profits, negotiated with Grier, was rumoured to be in the region of 50%, not dissimilar to the deal that derivatives house O'Connor had when linked to First Chicago before subsequently being bought by SBC. A former Chase Manhattan staffer says that Susquehanna was brought in at a time when the Chase options effort was in such disarray that the game plan was to create a presence rather than make extraordinary money - the true fear being that spot FX clients might defect if they could not get the "full service". Despite this, he says, profits displayed healthy growth.
New philosophy
Susquehanna had begun negotiations with David Adamson to renew the agreement for a further five years when the Chase-Chemical merger was announced. The negotiations shifted from London to New York and were soon taken over by Layton and Wilson. But both had other priorities and Susquehanna appears to have become frustrated by an increasingly drawn-out process. It was not short of offers and eventually signed up with Bank of New York in a five-year deal.
This means new head of options Adamson will be managing Chemical traders with whom he has not previously worked and who certainly have not enjoyed the same profile as Susquehanna. The Chase options sales team (reputedly given a guaranteed bonus to stay) will have to adapt too.
Of the epidemic of departures, a New York banker who used to work at Chase proffers the following reasons: "The salespeople don't feel comfortable with the new philosophy. It's no longer a customer-friendly pricing machine, so much as 'this is the price - take it or leave it'."
About 80% of income at Chase Manhattan was generated through customer business. Trading was less dominant. In trading-orientated Chemical, however, much of the customer business was connected with hedge funds and investment banks. Chemical had a much bigger middle office, almost three times the size of that at Chase Manhattan - high volumes in the interbank market meant that Chemical's traders needed a lot of input and error-checking support. At Chase, the salesforce was also involved in reversals and cancellations - typically middle-office functions and mundane tasks but very important to the customer, who preferred the salesperson doing it quickly as opposed to the process becoming bogged down elsewhere. Chase Manhattan regarded this activity as part of the customer service. Some of the new Chase's trading centres adhere to this system, some do not.
Chemical's traders, widely recognized as among the finest in the business, are said to see salespeople as providing customer flow to aid their own position-taking. This does not always lead to a spirit of co-operation between the two groups. The opposite was true at Chase, where the traders and salespeople were part of the same profit centre and a trader's bonus was based only in part on financial performance. Trust between traders and salespeople generated efficiencies too. For example, rather than the salesperson shouting for a price from a trader, getting that price, recording it in his own responsibility account then transferring responsibility to the trader to allocate the trade to his book electronically, as at Chemical, the Chase system allowed the price to be agreed and for the salesperson to allocate it directly to the trader's book.
(Even Chemical's system wasn't foolproof. Only days before the trading floors merged, Chemical had one of its traders arrested for fraud on 12 counts of making false entries in bank records, which he allegedly had done to ensure he received his $105,000 bonus. The trader allegedly lost $70 million in December 1994 on the Mexican peso.)
The reason that many sales staff left was that without the Chase traders they found it much harder to operate. But at least in the merged operation there are more salespeople than in the former Chemical team, which surely signals a change in direction.
At old Chase the strategy was sales, sales, sales. The goal was to become a top-three bank for any given client, because, on average, the three leaders took as much as 75% of that client's business. Individual salespeople drew up business plans because they were encouraged to think of their area as a Chase franchise. One such plan ran to 65 pages. Clients were visited six times a year - at the very least - and bonuses were linked to intangibles such as the level of input on a project finance deal and the ideas generated to win the mandate, such as structuring currency options.
A rival head of sales says that while Chemical appears to have taken over Chase Manhattan, the reverse might seem more appropriate: "Personally I think Chase is a better bank today. Chemical's been struggling to keep in the top six in recent surveys. It's not in the top three like it used to be."
Chase revenues had been growing rapidly in recent years and when figures for forex profits at both banks were produced it appears that neither institution had been markedly ahead of the other. But at the old Chase, Adamson did not have responsibility for generic derivatives - short-term interest-rate swaps and such like - which for the past seven years Chemical has grouped with forex. Their inclusion boosted Chemical's figures, especially since the bank has been very good at trading them. New Chase organizes itself like Chemical. It no longer has a head of global forex, only a head of global trading: the Chemical structure which incorporates generic derivatives.
Wilson, the head of global trading, will be based in New York and will visit London six times a year. This decision apparently is based on the fact that New York is where he lives; it is denied that New York will be the global centre. There isn't one, it seems.
Certainly the new management structure is less "global" than before and also less global than that of competitors such as Citibank where everyone reports to Guy Whittaker in London. In new Chase, major hubs report direct to Wilson while the likes of Frankfurt and Milan do not - they report to Bruce Hannan, who is general manager of branch and representative office functions in Europe. As a result, the geography of a trade's execution is an issue. Suppose, for example, a corporate has a branch in London and Madrid. In the old Chase it would not have mattered where the trade was booked. In the new Chase, the head of London foreign exchange, Hoppe, gets the trade for his profit centre if it is booked in London but Hannan gets it if it is booked in Madrid.
Despite this, Layton made the decision in November to use Chase's global settlements and payments technology, probably because it is cheaper and Chemical did not have a unified system, instead using technology that varied around the world. However, New York and London already are entering their trades differently - London in the old Chase way and New York in the manner of the old Chemical. The system is most cost-effective when it is used uniformly and though it can cope with being adapted, that rather defeats the point.
But the new management is not guilty of complacency. Wilson is frank about the challenges: "If we put these two institutions together properly, if we rededicate ourselves to aggressive market-making, if the customer stays as important in the new institution as the old, if we continue to invest in technology and if we can manage and lead ourselves properly, then we've got a very good chance of being exceptionally good at what we do. But, the last thing I would want to do is set a number one ranking as a goal. This will follow from exceptional professional execution of our strategy."
What emerges from this year's Euromoney poll is that the new Chase and Citibank have very different strengths. Chase wins London; nobody comes close to it in New York; in Tokyo it is the top non-Japanese bank. Citi is much better in Asia and Latin America and eastern Europe. In the main "liquidity" currencies - dollar/Deutschmark, dollar/yen, sterling/dollar, Deutschmark/yen - Chase wins. It also comes top in lira, peseta and Ecu. Citi leads in emerging-market currencies: Mexican and Argentine peso, Czech koruna, Brazilian real, among others. Indeed, Chase does not appear higher than Citi in a single emerging currency.
Size will out
Citibank's dominance in emerging markets is the result of its presence in 94 countries, almost three times the number in which the combined Chase-Chemical is found. Nor is Citi's $1.1 billion-plus of forex revenues anywhere near matched by the new Chase, which unfortunately does not publish a figure for pure forex trading revenues. The nearest approximation, according to a Chase source, is about $700 million but this includes the contribution of short-term derivatives.
In the longer term, perhaps, size will be more important than short-term teething problems such as a departing salesforce. Independent research published in March by George Salem of Gerard Klauer Mattison, a US brokerage, offers hope. Salem spoke to 21 treasurers among the leading 150 Fortune 500 companies. He found that 67% of companies would do materially more business with the new Chase (i.e. one plus one equals more than two) and the remainder would do approximately the same amount as at present. A sample of the treasurers' off-the-cuff comments was included, perhaps the most remarkable being: "Before the merger, Chase was our number two bank and Chemical number four. Now they will be tied with Citibank for number one. Corporations must now turn to Chase and Citi as their top banks."
Euromoney conducted its own series of interviews on the same theme. We asked whether one and one made two. That is to say, whether the votes cast in our poll for the separate Chase and Chemical would have been cast in exactly the same way for the new Chase. The bulk of the corporates who responded, from an oil major to a computer multinational indicated that they would do less. In the worst case, one plus one equalled 1.25 and on average 1.5.
A European corporate commented: "We used Chase more, but after the merger Chemical were very keen on pricing. I could tell they were touting for more customers." He continued: "Chase felt more or less like the underdog. But Chase were better overall. It seemed like the Chase people enjoyed working in that place, and working with each other."
Many respondents did reply that their relationship was with the institution - the former Chase - and not with the sales people who have left. Many, at the time the poll was conducted, were still talking to the same salespeople. But this should give Layton and Wilson grounds for optimism and suggest that in the short term, not much will change.
"Large corporations and institutions strategically like to direct their business to strong, surviving, growing, creative wholesale banks," says Layton. "They don't want to deal with guys on the C-list or B-list. Last time [after the Manufacturers Hanover-Chemical merger] we immediately moved up in people's estimation as a survivor and now it's happening again."
"What'll make it easier for Don Wilson's business to grow, in particular, is one of our strategic thrusts," says Layton. "We have put an added emphasis on multinationals that we did not have historically, designating them as a special industry group."
"The end," he says, "is the marriage of first-rate market-making around the world with a diversified clientele and the ability to understand well what's going on in the markets, to take a proprietary view."
Both men favour the middle ground, which they define as "great market-making, and strong client focus, where the objective is both to serve the client and the shareholder."
The new bank's ambitions are posted on the sidewalk outside the Park Avenue HQ - a 20-foot Chase logo, chiselled in granite, presumably for lasting qualities. Curiously, next to it is a garbage bin which the bank has chosen to sponsor. Surely there are no self-doubts here?
Not to hear Wilson and Layton. "You can have both," says Wilson of the two very different qualities that Chase Manhattan and Chemical Bank bring to the merger. "You can be very good at making prices and be very good at satisfying customers. I don't think they are mutually exclusive." Adds Layton: "There's absolutely nothing that says you can't be great at market-making and great at sales in FX."
It is clear that what both mean is that Citibank has not stayed on top for such a long time without excelling at both activities.
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