SBC: The Marcel Ospel interview

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Over the past three months Euromoney editor Garry Evans interviewed Ospel for a total of five hours, twice in Ospel's office in Basel and once last month, the day after the bank announced its 1996 results, by video link-up between London and Basel. The full 15,000-word text follows.

The Ospel style
The road to the top
The future of Switzerland
Swiss banks and the holocaust

It's hard to think of a bank that has changed so much in so short a time.

In 1990, Swiss Bank Corporation was the weakest of the big three Swiss banks, and had a decidedly mediocre international business. The previous year, for instance, it had ranked only 36th in the Eurobond league table.

But that year the bank set in motion a far-sighted programme to reinvent itself as a top international investment bank. Within five years it made three startling acquisitions. In 1992 it bought O'Connor Partners, the Chicago-based derivatives boutique; in 1994 the large US asset manager Brinson Associates; and in 1995 SG Warburg. The three acquisitions brought new blood to the firm. The old-fashioned Swiss bankers were sidelined and replaced by younger, technically more competent Americans and Britons.

The success of this campaign is unarguable. In 1996, SBC ranked in the top three in the league tables for both international debt and equity issues. It's also a major player in derivatives, European corporate finance and international equities. Profits are up: post-tax return on equity was over 10% last year, and is targeted to reach 15% by the end of the decade.

One man is behind this extraordinary turnaround. Marcel Ospel began the 1990s as SBC's head of international. He had a short spell as the first chairman of SBC Warburg. And last summer he was appointed chief executive of the whole group.

As you might expect, he's not a typical Swiss banker. He loves flamboyant clothes and office furniture. Having spent part of his career at Merrill Lynch, he's closely attuned to the US investment banking style of management. But neither is he an aggressive or flashy larger-then-life character. Colleagues describe him as thoughtful, quietly-spoken, considerate. He prefers to delegate and encourage, rather than domineer. He also has a perceptive understanding of how financial markets work, and an intuitive feeling for strategic planning and managing a large organization.

Over the past three months Euromoney editor Garry Evans interviewed Ospel for a total of five hours, twice in Ospel's office in Basel and once last month, the day after the bank announced its 1996 results, by video link-up between London and Basel. The full 15,000-word text follows.

Your life has changed drastically in a short time. Two years ago you were just head of international operations at SBC. You can't have imagined that within six months you'd take over SG Warburg, and two years later become chief executive of the whole group.

I was expecting big changes. Towards the end of 1994 we were planning a move on Wall Street. As you'll remember, 1994 was a difficult year for a product-focused bank, which we were at the time. We decided to accelerate our strategic development and I called my colleagues on the international side together to reassess the situation. Was an acquisition on Wall Street still the right thing to do? Should we go for an aggressive build strategy? Or perhaps something else?

We concluded that north America was no longer so attractive in the short-term. The restructuring of the US corporate world was already well advanced, the underwriting syndicate of bulge-bracket firms remained active, the premium you'd have to pay to buy an investment bank was too high. On the other hand, we thought Europe was about to enter a period of significant corporate restructuring and privatization. We concluded that the right thing to do was to expand in Europe, although we didn't specifically think of SG Warburg at that stage.

We brought all these ideas back home and discussed them at board level. The board gave us the green light to expand investment banking in Europe - either by building aggressively, or buying, or a combination of the two. Then we looked at the European and UK investment banking scene. Warburg had just fallen out of bed with Morgan Stanley. We decided to go and talk to Warburg.

So we were primed to do some type of a corporate deal, either in the States or in Europe. I knew that would completely change my professional and personal life. I might have ended up in London or New York. But I'm a mobile person and flexible about these sorts of things.

You looked at the option of hiring a lot of good individuals and building internally?

We assessed that option. We even tried to quantify it by working out how much it would cost. I have to say it would have been a multiple of the premium we ended up paying for Warburg, and might have been significantly more risky.

Where did the idea of buying Warburg first come from?

The idea was widely discussed. Amongst other colleagues, I talked about it with Hans de Gier [now chairman of SBC Warburg], who was then based in Singapore. We've been allies throughout our careers and joined the board of the bank at the same time, he as a corporate financier, I in capital markets.

He knew the Warburg people. I didn't, at least not to the extent that I could have picked up the phone to them. We decided we should make it a Swiss initiative. So I asked Georges Blum [then SBC chief executive] to join me and meet David Scholey [chairman of SG Warburg].

At that first meeting I explained to David what we could bring to the party. The idea was that we'd add capital, technology, products and more focused management to Warburg's franchise. SBC would also gain from Warburg's investment banking culture. Scholey asked for 10 days to think about it. In fact, he came back a bit earlier, and suggested we should continue the conversation. I then went back to London with a few colleagues. I remember we sat together for a weekend in a hotel close to Heathrow Airport. It took just a few more weeks to conclude the deal - it made sense.

Was anyone at SBC wary?

No, there was a consensus that this was the best solution for us - not only from a financial perspective but because we would start right at the beginning with critical mass. That would accelerate things dramatically. In only a few weeks we concluded the deal in principle and then prepared a tight schedule to complete it. We brought in an external advisor.

Why did you use Hambro Magan?

Our other adviser was conflicted. Hambro Magan did an excellent job for us.

You bought Warburg cheaply - for almost no premium over book value.

It was £63 million.

Why was it so cheap?

We invested more than just this premium. We invested in a retention package of about the same magnitude. It was our view that both shareholders and staff should get a premium. But you're right. In terms of what Warburg is notionally worth today, or compared to other tickets, it was certainly inexpensive. If you compare it to premiums that prevail in north America, it was very cheap. That had something to do with the fact that the deal with Morgan Stanley had just fallen through, and because we had something to bring to the party, besides price.

They couldn't have been very good negotiators.

On the contrary, they were fairly tough in their negotiations, but so were we. I don't think it would have been much better for the shareholders if they'd done the Morgan Stanley deal. And the Barings crash helped - the fact that the deficiencies in English merchant banks were becoming apparent.

You've said since that you had no illusions about what you were buying. You wanted Warburg's franchise and corporate finance business so you could push your products through. Were you that blunt at the time?

On the day we announced the merger, Warburg called together their 200 key professionals - some via electronic links - and I was absolutely open. I said: "We have a story that will fly. We'll do the merger quickly, but it will be stressful at the outset." I told them what I thought were Warburg's strengths, and what they could expect we'd bring to the equation. I don't think it took the organization long to accept that. In some businesses they were quicker at leveraging the combination; others took a bit more time, which is fine. In many respects it was a success right from the beginning. But for many it was also very painful.

I underestimated the reaction of our UK competitors, which was frustrating. We weren't the most popular guys in town. So the press wasn't too nice about us: the newspapers were keen on getting out bad news and neglected the positive side. I believe the merger is good for the City and the whole financial industry.

What worried you most at the time of the merger - the difference of culture?

No, that wasn't a great concern. After all, SBC opened its first London office in 1898. We have always had an affinity for the UK and its financial markets, and we'd had some experience with UK-type investment banking from the 1980s. We've been Euromarket players for years. So we were pretty confident about our ability to manage the cultural differences.

You didn't think Warburg was well managed?

I felt it wasn't managed the way an ambitious investment bank should be these days.

What was wrong?

Investment bankers are good at advising corporates on strategy. Because of that, they're often charismatic and outspoken individuals. It's sometimes easy to let them - from a perhaps limited perspective - advise your own organization on how it should be run. At Warburg, that led to too many different voices being heard, and too many committees. They didn't seem to be able to agree on anything. And, when they did reach an agreement, the next day somebody might question the decision and they'd start all over again. It was well-intentioned, but you can't run an organization like that.

There was no leadership?

There was leadership, but it was too diverse.

My impression of Warburg people was that they would only operate in groups.

They're a very skilled group of professionals, with powerful intellects - a charismatic breed. However, experience suggests you can cope with a campus-style environment only if you have less than 50 people whereas, after that, you need structures. SBC Warburg has about 9,000 staff. You need structure to keep the organization efficient and properly oriented towards its objectives. I believe in flat structures and lean communication channels. Good communications need to operate alongside a strategy of sticking to the right track and executing an agenda. You should listen to the views of your employees - but not every day.

Hans de Gier was a surprising appointment as chief executive of SBC Warburg when you came back to Basel...

Was he? Why?

People thought he'd been sidelined when he was posted to Singapore.

Not at all. We felt we needed a strategic turbo-charger for the Far East. He accepted the option of going there and looking at how we could leverage our business.

When senior management was reshuffled early last year and I became CEO, he was an obvious choice for SBC Warburg. Internally, at least, it was no surprise.

Some people say David Solo [now chief operating officer of SBC Warburg] would have been a better choice, but that you couldn't appoint him as chairman because he was too young and too O'Connor-ish.

No, it was simply that David Solo is the perfect COO and Hans is the perfect CEO.

Is Hans hands-on?

From what I see, he is hands-on to just the right extent. But don't forget, we have very flat management, so you don't want to be too hands-on. Supporting him, he has 20 or so very professional managers. As CEO, he can't interfere left, right and centre - he needs to be involved only in managing the exceptional situations.

What's David Solo's role as chief operating officer?

He looks after all of the support areas, technology development, business processes. He also assists Hans de Gier as number two in running the investment bank.

He must be a phenomenal character to reach such a senior position at the age of 31.

It's all relative. He started very early in the business.

Didn't he write the programming language for the O'Connor risk model?

For one of the key models - I believe it was for rates. He joined O'Connor from MIT and gained exposure to trading and technology straight away.

He's tremendously publicity shy.

Is he? Well, we all are.

He more than others.

Do you think so? We don't need a high profile. We're in a business where you don't need to spend time publicizing yourselves - that's a politician's job, not a banker's.

At the start you left Warburg's corporate finance alone and let the existing managers run it. You soon discovered that wouldn't work?

In corporate finance SBC didn't have much to add - a bit of emerging markets exposure but not much beyond that. That was the backbone of SG Warburg. Compare that to the equities business, where Warburg bought a very significant element to the party but where it was more obvious that SBC could help and turbo-charge what Warburg had.

In corporate finance, I was very cautious at the outset because that franchise was fragile - not only because of the merger but also, in my judgement, because of earlier problems. In autumn 1995, I put George Feiger in to run the department and structured it differently. We forced it to be sector-focused, for instance, which I'm convinced is the right way to go.

Isn't it strange Warburg hadn't done that before?

Warburg saw how these markets were going to develop, but it still had a long way to go. Still, we were very careful about pushing the issues and forcing new directions on the corporate finance professionals. Today we have almost completed the redesign. We've pulled in more senior management resources. As an example, Roland Wojewodzki, who we hired a few years ago from JP Morgan, is taking over the country teams, which will give George more time to focus on sectoral matters.

Didn't George Feiger come from McKinsey?

I first met him at the end of 1994 when I thought we needed to conduct due diligence on our strategic agenda. I called McKinsey and asked them for their best guy in investment banking. That's how he came on board. He did the McKinsey study. Soon afterwards we bought Warburg. He's extremely bright and I felt he fitted in well here. So, after talking to some colleagues, I decided to ask him about his future.

It was a brave decision to put him in charge, when he had no experience of corporate finance.

He'd never done the execution work on M&A transactions, sure, but he's been involved in corporate finance as a strategic management advisor. It wasn't a new topic to him, even if the angle was a bit different.

Did you think very carefully about how you would get these two very different firms to integrate their cultures?

I don't believe you can force a change of culture on anyone. We wanted people to adjust at their own pace, but most of all we wanted them to see, and be excited by, the new SBC Warburg culture.

I know some people at Warburgs who were very pleased by the takeover because they had felt repressed by the Warburg system.

You had it both ways. We also had some Swiss Bank Corporation people who were depressed by what SBC's culture did to them and who were relieved by the arrival of Warburg.

The buzzword was meritocracy. We were determined to create a meritocracy across all businesses. Not, let me make clear, that this was the situation at SBC before we merged - we weren't there at all, although we were perhaps a bit more advanced than Warburg. But the integration was a unique, valuable opportunity to make this huge leap forward.

How did you decide which people to keep and which to fire?

We said we had to be very quick in identifying the top 100 managers, then the next 500. We were ready in July, when the merger came into effect, with the top 500 in place. I'm not saying we'd achieved the goal of having one chief in every senior management position. There were some where we still had two. In some cases, we wanted to give ourselves time to make sure we picked the right one from those two. Generally it was one from SBC and one from Warburg. But, by and large, before July 1 we'd completed the very difficult process of identifying those key people.

We designed a format to help us choose - a form with detailed criteria. Then we conducted interviews. That led to the final decision. Naturally, there was a reasonable amount of subjective judgement behind the process, particularly when we had to make so many decisions in such a short time.

How many did you fire?

We were clear at the outset how many professionals we would let go. We said 1,000 in early July, and that we'd decide by the end of July who would be affected. That happened. We got through that very quickly.

Then clients started to react. Here and there they perhaps felt the effect of changes in coverage. Competitors piled the pressure on too. They read in the paper about our upheavals, and they found it convenient to put a question-mark over SBC Warburg. We had to address that as a matter of urgency, to protect the franchise.

Did you lose more clients than you expected?

No. The problem was that, in the first week, many clients put us on the watch-list. Most of them came to the conclusion that they'd stick to SBC Warburg, that the merger was good for them. There were a few defections - for all sorts of reasons. In most of the cases the reason they decided to drop us was not the integration, it was something different.

Often that the individual they'd dealt with had left?

In some cases that was the cause, but frequently it was just an excuse to hide another reason that sat a bit deeper than just a change of personalities. But many put us on the watch-list, and that was worrying. We had to defend our position. We had to focus. But that forced us into making some compromises. In some cases there was an individual who didn't really qualify to stay and didn't have a bright future with us, but who controlled an important relationship. That was a difficult situation. We were preaching meritocracy but had to make these concessions, even though we knew it was only a temporary phase.

Did you consider a gradual approach to integration such as that which Dresdner Kleinwort Benson, for example, used?

No, we felt it was worth taking the risk of losing a small part of the franchise and some people we didn't wish to lose, in order to be ready quickly with a fully-fledged operation that had a clear mandate and clear direction. We felt that was fair to our staff and shareholders - and that it would also allow us to give the Americans a run for their money.

How much has the acquisition of Warburg added - how much does one plus one equal?

If you look across a few league tables, then the factor is something like three or four. In terms of profitability, SG Warburg didn't make a profit in 1994 so it's difficult to say. I believe we can comfortably argue it's way beyond two.

Is the integration complete?

There are still a few changes taking place in London, in corporate finance in particular. But these are marginal adjustments. By and large, we're through. We're established everywhere we want to be, although perhaps not to the extent we eventually want. But we should be pleased with what we have today. North America is clearly a weakness, though.

What can you do about North America?

Continue to excel in areas where we're a leader, such as risk management or Latin American business. We are also strong in "into-America" business - sales of European and Asian stocks into North America. We also have a strong asset management business in North America.

There are rumours buzzing around the market that SBC is about to do something big in North America. Any truth in that?

I haven't heard those rumours. But I can confirm there are no such plans. The market for US investment banks is vastly over-priced. The on-going dilution of the regulatory environment will change the landscape for investment and private banking in north America. We want to know more about what will happen before we consider anything. However, if there was an opportunity here and there - in particular to buy a franchise or expertise by acquiring a small boutique - we'd consider it.

You're not even one of the top foreign banks in the US; you trail Deutsche Morgan Grenfell and UBS...

It depends on what you look at. In costs per capita yes, but not on profitability.

Before the acquisition, Warburg was making some progress in US domestic equity new issues. Will you continue those efforts?

We think we're among the top firms in equity derivatives. That gives us some exposure to equity cash markets, but we're certainly not in the bulge bracket. We have no ambitions, at least not in the short term, to join this club - and to do so would require a strong US partner.

Will the coming changes in Glass-Steagall make a difference?

The dilution of Glass-Steagall will continue to change the landscape of US investment banking dramatically. I believe this will take place over the next three years. That may coincide with a turn in the cycle of the investment banking business which will depress margins and make it easier to headhunt good people or make an acquisition. Once these things happen, we may reassess our strategy.

You could do with a big crash in US stocks to reduce the price of investment banks.

Yes, but I'm not sure whether that would be enough. If you look at 1994, which was a difficult year for the Americans, it didn't much reduce the premium you'd have to pay to buy an investment bank.

In 1994 you negotiated to acquire Prudential Securities...

That's not true. It might have been that people confused SBC with Smith Barney Corporation which, if I remember properly, was rumoured to be interested in Prudential at the time. We never attempted anything like that.

Didn't you talk to any American firms about an acquisition?

Not in 1994. There was a bit of schmoozing with some firms in the early 1990s. And in the 1970s we were offered a few interesting things but, unfortunately, my predecessors turned them all down.

I heard you could have bought Merrill Lynch for $100 million.

I don't know whether that was the price but, in hindsight, it certainly would have been an attractive proposition.

Are you confident that, if you bought a US investment bank, you'd be able to manage it?

I don't think it would be that sort of takeover. If we ever made such a move, it wouldn't be just to buy a franchise, there would have to be other aspects to it: for instance to get a cultural infusion, such as when we acquired O'Connor.

SBC is quite an American-style firm. Wouldn't it be easier for you to integrate with a US investment bank than for most other banks?

We think so but, you know, management of an investment bank is a very delicate science. It wouldn't be realistic for a European firm to suggest it could just walk in and manage a Wall Street bulge bracket firm.

Could you be satisfied with a second-tier firm, such as Prudential or DLJ?

No. Some players in the second and third brackets have been on the market for a while. If we'd intended to buy one, we'd have moved a few years ago.

The alternative in the US would be to build by hiring top people as UBS and Deutsche Morgan Grenfell have done. You've rejected that?

We tried that a bit, but gave up on it many years ago. In the current environment we don't believe it gets you very far. If you have bulge-bracket ambitions, this won't help you fulfil them.

But doesn't the strategy seem to be working for Deutsche Morgan Grenfell? They are beginning to win US agency business and to build up a US MTN business.

Fine. But what's attractive in the end is the franchise, and you don't build a franchise just with an MTN business. To do that you have to be part of the club for equity new issues, for instance; a syndicate that doesn't compete on price.

Why doesn't a foreign firm undercut the syndicate on an equity deal?

Would they be credible? You need placing power. It wouldn't work.

Is it true you're moving some senior people to New York?

Andy Siciliano, who runs the FX and rates business and has operated out of London for the past few years, is about to relocate to New York and will continue to run those global businesses from North America.

Why is he moving?

John Dugan, a board member of SBC Warburg located in Chicago, is retiring. We felt we should balance board powers across the major geographical areas by moving Andy to the States.

You're still in two separate buildings in London. How will you cope with that problem?

The client-facing businesses are concentrated in Finsbury Avenue, and the support functions in High Timber Street.

Isn't it inefficient to have people in different buildings?

It's a bit of an inefficiency. It can make a difference whether you just move from one floor to another to have a meeting, or whether it takes you 10 minutes to get across the City. But it's not really felt to be an issue, although I suppose the merger would have been a smoother process if we'd moved everybody into one building.

You're not attracted by Canary Wharf or somewhere similar?

We're not opposed to Canary Wharf, but it's more convenient to be in the City. That's what we hear from our staff too. At the outset, people were concerned that we'd move out to the Docklands to get everybody under one roof. From that we read that such a move wouldn't be appreciated. So there's no move in the pipeline.

You're moving your US head office to Stamford, Connecticut. Why?

When we made the decision, back in 1992, we were struggling with the problem of Chicago versus New York. It was inconceivable for the SBC group to leave New York and move to Chicago but, at that time, we probably had a more attractive set of skills located in Chicago [after the acquisition of O'Connor]. On the other hand, it was inconceivable that we could get Chicago skills relocated to Manhattan.

Chicagoans don't like the idea of living in New York?

Particularly not downtown Manhattan. So we tried to figure out what we'd do. We knew we had to move from a pure New York perspective, but we didn't want to leave the New York area. We looked at a few buildings and concluded that Manhattan couldn't offer enough space in the way we wanted it - in the form of an attractive setting that would create an environment to facilitate the right culture. So we figured we could kill two birds with one stone by moving out of the city into an area that could compete with Chicago to attract skills, plus allowing us to build facilities that reflected our taste. That brought us to Stamford.

When are you moving?

Later this year.

The people in Chicago will all move there?

Some will, but we'll keep technology, some trading capabilities and also front office staff in Chicago.

Will you close your New York office?

We're keep a small pied-à-terre in Manhattan for areas of the bank other than investment banking, and some facilities to entertain clients.

It's a radical decision. Don't you have worries?

We've checked carefully. All the senior staff will move. We asked them at the time how they'd react, and we asked them again recently. We've got everybody's commitment. We'll lose some people in the support areas. It's not going to be easy, but we feel we can manage it.

Will your clients, particularly those based in Manhattan, mind?

You know Manhattan. To visit a client in Midtown when you operate in Downtown may take as long to come from Stamford to Midtown - between 30 and 45 minutes. It's not far. And it's about as close to Kennedy and La Guardia airports as Manhattan is. It's also in a nice setting, right on Long Island Sound.

Does it surprise you that more banks haven't done something like this?

I'm sure we're going to be watched carefully. There are also tax advantages. That wasn't the driving factor for us, but it's nice to have. The space is cheaper, and that helps the bottom-line.

Creditanstalt has also moved to Greenwich, hasn't it?

That's close, just next door.

What's your objective in investment banking: to become the biggest European globally integrated player?

We're that already.

How far behind Merrill Lynch, Goldman Sachs and Morgan Stanley are you?

It depends which criteria you look at. In terms of profitability, we're right there already. We're already more profitable than some of those firms. In terms of transaction volume, they're well ahead of us.

You're already high in the league tables, number three in underwriting international equities and two in bonds last year.

In cross-border business, we're there already - up with the bulge-bracket firms. But in terms of US-originated transactions, we're not.

You must be pleased with your results for 1996?

Yes, both for the group and SBC Warburg. The change in the method of provisioning for risks in our asset portfolio led to a technical loss of Swfr1.955 billion. But, at the operational level we were up 26% for the entire group on the previous year. All four divisions contributed to the growth in earnings. That helps everybody: it pleases our shareholders, but also increases the morale of the staff and builds the confidence of clients.

Your ROE target is 15% by 1999. Are you on track to reach that?

We are. SBC Warburg is well above that target after tax and the group reached its ROE goals for 1996. We further expect to hit the targeted result for 1997. Last year ROE after tax was 10.1%; we expect it to be a little north of 12% this year, and then 15% by 1999.

At SBC Warburg, the results for corporate finance and M&A were noticeably poor. These areas made only $242 million.

In terms of revenue, corporate finance was very much on target. On the cost side, however, we overshot our budget, but we did so consciously. We invested in building up professional resources, which will improve the franchise and give us higher revenues in 1997 and 1998. So while the bottom-line result of corporate finance may possibly not impress you, revenue growth is good.

Why did you choose to make a capital repayment this year, rather than pay a dividend - is this the same as a share buy-back?

It's not a share buy-back. We don't believe the mandate we have from our shareholders is to pay capital back to them, but rather to deploy that capital and create a good return on it. With the technical change to our provisioning method, we made a loss last year and so can't pay a dividend. However, this is our 125th anniversary and, in this part of the world, shareholders expect a bonus pay-out on such an occasion. So we decided to pay back capital as a substitute for the dividend payment. It was relatively easy to digest since we have a bit of a capital cushion.

The trend among US and British banks is toward share buy-backs. Why don't you do that? With a BIS ratio of more than 11%, you could afford to.

At this juncture we have no such plans but I wouldn't exclude it for the future if our capital cushion is large enough and there were not opportunities to deploy it elsewhere.

Apart from North America, where else do you need to improve?

There's room for improvement in south-east Asia. We're clearly among the top three non-Asian firms, but we feel convinced we can do better.

You've appointed Luqman Arnold [from Paribas] to run Asia.

He's going to be the driving-force in realizing our ambitions there.

Since he arrived, you've bought a stake in a stockbroker in Thailand and a seat on the Philippines stock exchange. Did he instigate these moves?

They're the result of an agenda we developed some time ago. Obviously, since Luqman took over as the board member in charge of Asia, he's very much been focusing on it and is responsible for the execution of it.

Anywhere else?

We're also determined to do better in Europe in terms of market share in corporate finance. And we want to continue to expand carefully in emerging Europe.

You're not a top player in eastern Europe.

Well, it depends on what you look at. We were a bookrunner on the debut Eurobond for Russia. We're involved in some of the most important advisory mandates in these countries. If you look at pure investment banking, we're clearly on the map there. If you look at banking per se, we're not among the top organizations and we won't attempt to be. That's not our remit.

Globally, there are several products you're weak in: spot foreign exchange, syndicated loans, project finance, for example.

Yes, you're right. This is a deliberate strategy. We deploy our cheque-book very carefully. In project finance, for instance, we focus on the advisory side. In the currency business we're happy with our position. Over the past two years there's been a collapse in volatility in the FX markets that has squeezed out a number of players and we've benefited from that. But our strategy in currency is focused on value-added support for our clients and that tends to be in the area of risk management and high-volume transactions where capital is key. In those businesses we're right there. But other areas of FX are less important to us because they're not very profitable.

Let's go back a bit. How did the connection with O'Connor come about?

I came back to Swiss Bank Corporation from my sabbatical at Merrill in 1987 as a managing director in charge of securities trading and distribution. It was just 10 days before the stockmarket Crash. I remember I was on a trip to Hong Kong when the Crash happened. That was when risk management first started to become really fashionable.

Had you been involved in risk management before?

I was familiar with derivatives. But they was fairly new, particularly in European eyes. Then came the Crash and everybody cried out for derivatives. At the time SBC still had a decentralized structure so it wasn't easy to set up a functionally-integrated risk management operation here.

And that led up to the tie-up with O'Connor?

The schmoozing with O'Connor started in 1988.

Initially in Switzerland?

They came and had a look at Soffex [the Swiss futures and options exchange] and that's how we got together. It was very informal at the start - just some loose cooperation in Switzerland was contemplated. Only a year later we started to look at cooperating globally.

O'Connor was a most unusual firm, full of young people in jeans. What was your first impression?

The level of skills was striking, I'd never seen that before. I was highly impressed. The culture of the firm was also almost painful in its intellectual honesty.

When did you see that O'Connor could be used to revolutionize SBC?

The late 1980s were turbulent years: the 1986 Big Bang, the 1987 Crash and deregulation starting in 1988. The SBC Group was struggling a little. The CEO at that time asked Hans de Gier and myself to rewrite the bank's strategic remit for the international business. What we needed to do was obvious: get O'Connor in and reshuffle the whole international organization. A year later the bank appointed me to the board.

It was that obvious?

We had no investment banking franchise. I saw that the future, in global terms, was not in commercial banking, but in investment banking. The dual culture we had at the time - emphasizing alternatively commercial and investment banking depending on where we were in the cycle - gave us no chance to get anywhere. We had to change our basic cultural set-up, and had to do something about the whole professional and product skill-set. O'Connor was a marvellous catalyst towards achieving that.

Obviously we knew that this combination wouldn't, in itself, become a top investment bank - for that, the franchise wasn't there. But we always envisaged that something had to happen: either we invest like crazy to build a franchise or we acquire a franchise. But first we had to have the organization properly set up in terms of culture, management processes and structure. We had to move away from the old decentralized structure to one that was functionally-driven.

The idea of buying O'Connor must have horrified a lot of people in the bank.

Yes, but we segregated it. The tie-up with O'Connor was mainly on the international side, with a bit in Zurich. So it wasn't that difficult. Anyway, in Basel things were working well: the domestic and private bank were extremely successful. There wasn't the same pressure as on the international side, where the bottom-line looked just awful.

Doesn't the O'Connor culture dominate SBC now?

It hasn't significantly affected the domestic bank. If you look at our board, there are bits of that original culture left. And anyway the new culture is not just O'Connor: it's perhaps 70% theirs and 30% the old SBC culture that got melded together and then further diluted by Warburg and Brinson. It's now a melting-pot of cultures, and a very creative process.

Your trading-floor in London looks very different to that at any other investment bank, with everyone in T-shirts and jeans. Is that dress code important?

No, but it's convenient.

I was most disappointed you were wearing a suit today.

You were just unlucky, because I have some external meetings today.

But seriously, at the end of the day, substance is much more important than form and I convinced myself, early in the process, that the dress code doesn't add any value. It was interesting that, when we merged with SG Warburg, the first day most of the ex-Warburg professionals came in without a tie. It's just more comfortable: we all know that.

There's a story that, on day of the merger, you turned up at Warburg without a tie and the receptionist refused to believe you were really Marcel Ospel.

It's not true. The newspapers made that incident up. But there's a funny story about it. I was once in a restaurant in London. There were two chaps at the next table and one was telling the story to the other: "Did you hear the latest about Ospel?" he said, and then he related the story. The other guy asked him: "So what did Ospel do?" His reply was: "I don't know, but he should have given the receptionist a raise."

What have you done to get this mix of several cultures to work together - do you have offsites, golf weekends?

We had all sorts of gatherings where we made sure everybody gave their views. We encouraged intellectual honesty. When opinions are properly aired, it creates a shared view on how we should run the business and who we want to be. From the outset, we were ambitious. We had aggressive targets. The story is so compelling that it was easy for everyone to accept, at least intellectually. Emotionally, maybe it was harder because traditions made it difficult for some people to jump on board. That's why we lost some people along the way, although fewer than expected.

Really, fewer than you expected?

In terms of numbers, we never expected many to leave. We've not lost a single senior O'Connor or Brinson partner. With very few exceptions, we've not lost significantly from Warburg either.

What about Mark Seligman who went to BZW as head of corporate finance a few months after you took over Warburg?

I was asked to help prevent his departure and I saw him. I asked: "What is making you consider such a move?" He said: "The firm's not English enough for me any more." We concluded the discussion immediately.

A lot of ex-Warburg people I spoke to said they didn't feel comfortable working there any more, but that Ospel had probably done the right thing for the firm.

That's fair. From the outset, we were clear about what we wanted. But we realized it wasn't everyone's cup of tea.

Corporate finance must have been the hardest to integrate. Warburg was very focused on maintaining relationships, but less on doing transactions - not your style.

The very reason for the combination was to access that franchise and gain clients. From that perspective, we were keen to protect relationships and continue to service them - but better because of our superior products, skills and, to some extent, capital. The problem was that some Warburg bankers couldn't build that bridge - some lacked skills and determination.

They would say that SBC was too trading-oriented and that just didn't suit the Warburg corporate finance style.

I can understand that view. The Warburg people with whom we planned the integration advised us that would be a stumbling-block. We certainly were perceived as a product-machine, as opposed to Warburg which was focused on established relationships. But to make the merger work it was critical to link those two strengths together and not have one dominate the other. And we had defections on the trading side too. Some people figured that the bank was going to become too relationship and client driven for their liking. They didn't feel at home any more, and so they left.

You bought both O'Connor and Brinson partly to incorporate their management styles. Was there anything of the Warburg management style you wanted to introduce?

Yes, relationship management. That was impressive and valuable. In other areas of management, we were more advanced.

At any bank, compensation is a major topic. Don't you have a system whereby senior managers get paid 50% in shares?

The criterion for this is not how senior you are, but the level of your compensation. After a certain threshold, an employee gets 50/50.

When did you introduce that?

It was 1993.

Is your compensation structure just right?

We have a highly competitive comp scheme. There are significant elements of deferred comp in it, but it's only right to get a significant proportion of our professionals onto the same agenda as our shareholders .

What about yourself - do you have options or is your salary linked to the share price?

My compensation is linked to the bottom-line, and includes equity and equity-linked elements. That also started in 1993.

Who among your colleagues do you rely on most?

All my colleagues on the group executive committee and on the board.

How often does the executive committee meet?

On average every 10 days. The executive committee has eight members. The full board meets four times a year.

Does the executive committee meet in Basel?

No, only those who happen to be in Basel sit around the table and we link up by video with other locations, London, Chicago or wherever.

What language do you use?

English. The board switched to English in 1995, and the executive committee last year.

What do you discuss at the executive committee?

All sorts of things: from strategy issues and formulating our direction all the way down to compensation issues and individual transactions.

Does it work satisfactorily to have the meeting via video link?

The video technology could be better. I've been promised that it will improve within a few years. Today, the picture is slightly delayed. But, no, it's all right. It works. There are no complaints.

What type of personalities do you like to work with?

I have to be assured that my people are intellectually honest. I don't like to be in a political environment - who does? I've always been determined to identify the most capable for any particular job. I take absolutely no risks on people's ethics. Success - success of individuals and of units of the firm - turns me on. That's what I like to be associated with. It's not only a monetary thing.

A lot of your senior managers are strong personalities. Do you like people who challenge you?

I need to be challenged. Given the roles I've had over the past 10 years, it's an institutional requirement to build in proper checks and balances. You have to make sure that a system is established to allow debate. It lifts the dynamism of the organization. Debate is intrinsic and healthy. You need to introduce it into the management process too.

With strong personalities, the danger is that you develop prima donnas. How do you avoid that?

By making sure that they are singing from the same hymn-sheet. Take our assessment scheme. It's a 360-degree assessment. You assess your subordinates, but you also get assessed by them, by your peers and, in some cases, also by your clients, internal and external. I think that's healthy, and keeps the place clean of political viruses.

When you're a merger of four firms, it must be tough to avoid political battles.

I don't believe we suffer from that. People need to be treated fairly, but that comes automatically with this type of organization.

Did you expect to run SBC Warburg for longer? You were there for only a year.

My appointment as group chief executive came a bit early. The fact wasn't a surprise, but the timing was.

Why did it come sooner than expected?

The bank and its strategy had changed dramatically. We needed to adjust our structures and that led to an adjustment in terms of the people running the bank. Our chairman, Walter Frehner, deserved a break after 40 years with the bank. It was obvious that Georges Blum would succeed him. And I seemed to be the candidate the bank wanted as CEO.

Did you find it daunting to come back to Basel? You'd spent most of your career in international business, so couldn't have known the Swiss market that well.

I knew the Swiss market, but not the Swiss retail and corporate banking market. So it was daunting. It's different.

It's a huge job.

Yes, but this organization is run from the top by a team. I had a view on what needed to be done in Switzerland, and had taken part during the previous few years in the discussions about reform of the domestic bank. The parts of the bank outside investment banking had been on my radar screen. That may be one reason why they wanted me as chief executive. Also, I have a bit less patience than some people. Maybe I'm more determined than others, who have been affected by the cosy environment in Switzerland.

In other words, what needed to be done was clear, it just needed somebody tough to do it.

I'm not sure it was so clear. I had a lot of work to do once I came to Basel to convince the organization. But the broad direction soon became apparent.

Domestic banking at Swiss Bank makes virtually no money. Your plan is to cut staff and close branches?

Exactly - 1,700 positions and 80 branches.

Isn't that difficult in Switzerland?

Yes, it's an aggressive plan. When we announced it, it wasn't easy for the system internally or externally to accept. But my job is to run a healthy operation with sustainable profitability, so there's no other way.

Have you cut enough?

I think so. There are key things I've embarked on: rationalizing the on-the-ground presence, reducing the number of jobs, and revaluing our loan-loss reserves according to statistical risk. I think this new system of reserves is very significant, and will help to discipline pricing.

With this new system, you take 0.5% as the average loan/loss ratio for the past, and in future you will adjust that figure depending on actual performance. Is that right?

The average today is a little high, because during the statistically relevant period we had the Latin American debt crisis, the US real estate crisis and now the European corporate restructuring wave that have added significant risk costs to the banking business compared to earlier decades - and probably compared to future decades.

Was the system thought up by your derivatives people?

It was certainly significantly influenced by the type of skill-set we've infused into our organization. In our foreign balance-sheet for the past three years we've operated with statistical reserves in our management information system to get proper pricing at the front office. But it's never before been transported into our financial accounts, or into the domestic market.

Were there any tax problems? Barclays Bank tried a similar statistical loan/loss reserve and the British tax authorities wouldn't allow it to be tax free.

We worked with the different tax authorities and came up with two ways of adjusting for this. One method results in our paying more tax in the short term and less long term; the other averages out the tax over a period. Different tax authorities picked one or the other option.

You will use this technique to price loans?

That was the driving issue. If you have to manage 4,000 marketers of loan products, you can't communicate with each individually. So one object of this exercise is to impose something on the pricing mechanism besides refinancing costs and the appetite for margin. This wasn't the case before.

Your published accounts are probably the most transparent of any bank's in the world. Why are you so open?

It's much easier to manage a bank if you're open about almost everything to your own people. And once you're open to 26,000 people, you're automatically open to the public. As a plus, it helps us get a fair evaluation of our stock. Transparency is the driving element behind that. We've learned that from the Anglo-Saxon world.

Couldn't you give too much away to competitors?

I've not felt that so far. I believe that our competitors have an intrinsic motivation to publish more transparent accounts too. They're already doing so. If you watch the Germans, they are on that track; so are the Swiss; the Dutch have been for a while.

Isn't it a temptation to pull out of Swiss domestic banking completely?

You have to separate Swiss business into retail and corporate. Retail is a profitable business for us already. We get a double-digit return on it after tax. That's not as good as you're used to in the Anglo-Saxon world yet, but we're confident we'll get there.

So what pulls down your Swiss business?

The corporate side, because of two sets of products. One is the loan business, with its high cost of risks. The other is the support products on the payment side, for which we're not sufficiently remunerated.

The problem is simply that there are too many banks in Switzerland?

Certainly. There are about 530 branches for every million people. There are worse markets such as Spain which has a ration of around 2,000. Restructured banking markets like the UK and the US tend to have 250 to 300. Yet, the international numbers are not quite the right benchmark for Switzerland because it is a big offshore centre with lots of foreign banks, which one shouldn't really count in such an equation. But there's plenty of room for consolidation.

But there's been a lot of consolidation already. BSI, Volksbank, Bank Leu have all been sold.

Absolutely. I think this will continue particularly in the regions, perhaps even with foreign banks involved. About 200 branches have closed over the past few years, 80 institutions have disappeared and about 20% of the jobs in the banking sector have been rationalized. 

Will the big three Swiss banks become the big two?

If you look at what happened last spring [when Credit Suisse tried to buy UBS], one might be tempted to think in those terms. But I think bank mega-mergers are more likely to happen in Europe outside Switzerland, once EMU harmonizes financial markets. If you look around, you see some banks positioning themselves for that already. All the big three banks in Switzerland seem to be on a downsizing track which will keep us busy for a while.

Nikolaus Senn, chairman of UBS, said he'd prefer to merge with you than with Credit Suisse...

Yes, we are attractive, and that was a nice compliment. These things always create speculation which I can't confirm, and probably wouldn't if I could. But the fact that they fell out of bed with each other, and still have desires for this kind of courtship, inevitably creates speculation. But there's nothing more to it.

Is it significant that all three banks have new, young, dynamic chief executives?

Cab [Mathis Cabiallavetta] at UBS was a natural succession, as it was in my case. At Credit Suisse, the appointment of Lukas Mühlemann was more of a surprise, perhaps a bit opportunistic.

What about insurance companies - could SBC merge with Zurich Insurance?

We are close in terms of leveraging each other's franchise domestically and selling each other's products. But we have no joint operations and don't have any intention of starting any.

Do you have a cross-shareholding?

They own a small percentage of our bank, but it's not a cross-holding.

You can't see the relationship developing?

At this juncture, no. It's our determination, as it is theirs, not to do anything that touches each other's strategic competence. It's very different running a bank and a bank's balance-sheet to running an insurance company. The maturities of an insurance company's transactions and exposures are so different. The regulatory environment is different. It's just not obvious how the two types of operation could be combined. The only exception is asset management. But that's so key for them - and for us - in strategic terms that neither of us would want to share it with anybody else.

You're only number three among the big Swiss banks. Can you jump over the other two?

We're not number three by every measure. We're certainly not number three in mutual funds, investment banking or risk management - and, most importantly, in profitability. Size is no longer so important although we must be careful not to get marginalized and to maintain critical mass across our four core businesses.

You're based in Basel, not Zurich. Is that a handicap?

No. It's even an advantage in that we don't have much competition here in the market for skills. But overall it doesn't mean much, especially as Zurich is so close it's almost irrelevant.

But aren't you isolated, being away from Switzerland's financial centre?

We have a big operation in Zurich. The more internationally oriented businesses are predominantly operated out of Zurich. SBC Warburg is run out of London, and SBC Brinson out of Chicago. You could say the same about Chicago - it's not New York. The Swiss business and most of the private banking business are run out of Basel. We're fond of our competitors in Zurich, but we don't have to see them everyday on the street.

How far is Zurich from Basel?

They've just opened a new motorway, so it's only about 45 minutes by car.

The flights to London from Basel are surprisingly convenient too.

The airport's very efficient. It's probably easier to travel around Europe from Basel these days than from Zurich.

What was the point of the restructuring of the bank into four divisions - SBC Warburg, SBC Brinson (institutional asset management), domestic and private banking - which began on January 1?

It will make us more focused, more results driven and more transparent.

Isn't there a danger that the divisions become compartmentalized so they don't work closely together.

There is that risk. There will also be competition for recognition and resources such as capital. Given where we were coming from, I view this as a healthy development. Three or four years down the road, the balance may go back the other way and maybe then we will want to do something more formal to pull the divisions closer together, but without losing focus and a clear division of responsibilities.

Is there much exchange of ideas between private banking and asset management?

Yes, all the discretionary money, including that of the private bank, is managed by SBC Brinson. Brinson looks at the private bank's assets as if it were one portfolio.

Doesn't that distance the private clients from the people who actually manage their money?

No, Brinson maintains operations in Switzerland, Britain and Germany, as well as in the US and Asia-Pacific. So the client relationship manager always has access to Brinson's resources and can pull in the portfolio manager who then communicates with the client. Nonetheless, these relationship managers - similar to the investment banking model - are supposed to stay sufficiently abreast of asset allocation issues to be able to maintain a dialogue with their clients, as well as understanding all sorts of tax and financial planning issues.

Was the acquisition of Brinson similar to that of O'Connor in that you wanted to bring a new culture to the firm?

Yes, a new culture around a set of products which are key for our future. This very focused asset-management expertise has developed much faster in the Anglo-Saxon world. There were two drivers behind the acquisition. One was to get access to this set of products, skills and disciplines; the other to access an institutional franchise, in the US and elsewhere. Before Brinson joined us, it already had many non-American institutional clients.

SBC Brinson is surprisingly small - its profits last year were only $50 million. How will you grow it?

The profits were better than we projected for 1996. We believe we've created a platform - an asset-management factory if you want - that can be leveraged into many other markets. Today it's heavily US and Swiss oriented. The numbers for last year predominantly reflect the US franchise. It's only from this January that we've added the former SBC institutional business into SBC Brinson. You'll see the impact that this has on results from this year. We plan to build on that platform without making acquisitions. We see plenty of room for growth particularly in continental Europe as pension schemes start to grow. We also plan to leverage the business into Latin America and Asia.

So you've ruled out acquisitions for the Brinson side of the business?

At this juncture, yes.

Is private banking a growth area?

We've always been an offshore player internationally but now we've embarked on a onshore strategy in private banking outside Switzerland. In both offshore and onshore private banking markets, there's increased competition. Everybody's moving in. The growth potential in both areas is not what it was a few years ago. You have to factor that in.

There's also increasing competition from family-office type structures. Particularly in north America it's become fashionable to establish such devices that take care of the family's wealth across all asset classes and sub-contract service providers.

It's key that we continue the tradition of strong, market-focused leadership in private banking. That's why I'm particularly pleased with the decision by Rudi Bogni, fresh from his academic sabbatical in London, to accept the post of global head of private banking and join the board and the executive committee.

Are you still on the acquisition trail in private banking?

We are. We'll continue to buy franchises, as we did when we bought businesses from Chase Manhattan and Standard Chartered during 1996. In some markets you can also expect us to buy smaller boutique-type private banks with strong franchise value. That will help us establish our onshore private banking business in these markets.

What is the purpose of your link with Perot Systems?

We figure that technological development, whether we like it or not, has to be a core competence of our organization. This business will become more and more computerized. There are all sorts of scenarios you can develop for the electronic disintermediation of businesses whether in investment banking, private banking or whatever. We have to stay on top of such skills.

But the actual project management and computer maintenance doesn't have to be a core competence of a financial institution. Why should it? There are other firms that do that much better and, on top of that, may leverage that into more than just one service relationship. That was the driver behind the relationship with Perot.

How does it work?

We started in 1995 in the international area, predominantly with SBC Warburg, to outsource project management and maintenance. A significant number of professionals moved to Perot. But it's early days to make any judgements about how successful it's been.

So if you're a trader at SBC Warburg in London and your computer breaks, you have to ring Perot to have it mended?

Not necessarily. There's a maintenance call-line, and it could in fact be that somebody from Perot comes and fixes your terminal.

Does Perot help you develop new products?

The development is still done in-house. For us, it's very important that we maintain that skill in-house and leverage it across all divisions, functions and regions.

Will the relationship with Perot get closer?

We may, over time, become an increasingly important shareholder of Perot as a result of this business combination. It's a question of leverage. No other financial institution would share enough information with us to be able to outsource to us, but they might form such a relationship with Perot. If we owned a stake in Perot, we'd be able to profit from that on top of the benefits we get from the service.

If technology did start to disintermediate banks, what role could you play to fight that?

It could be two-fold. We could be a node in any new system that disintermediates a traditional capital markets business or function. Or we could be so efficient, that we're one of the few left in the game, although we'd have to put up a lot of capital and develop the technology to do that. That is already happening in the global custody world, where accelerated consolidation is taking place. There are fewer and fewer providers. It's likely you'll see the same developments in capital markets, including the new issues business.

What is your next step, your next restructuring?

There is no immediate next step in our plans today.

What would you like to have achieved by the time you retire?

In investment banking, I'm determined that we further enhance our position as one of the top global firms and the most significant European-based investment bank. I want to be a leader in institutional fund management. I want private banking and the domestic bank to be successful too. That will keep me busy for perhaps another two years. By then we should have reached a return on equity of 15% after tax, bonuses and dilution. I'm convinced this is achievable.

By then I will have reassessed what our other ambitions should be for the following three years.