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Euromoney 30th anniversary: Remember this?

Over the years Euromoney has reported on the events that shook the market, described the innovations that went on to become standard market features and profiled the most influential individuals and institutions in the world of finance. We also dropped a few clangers. Michael Peterson spent an afternoon trawling through the archives in the dusty vaults of Euromoney HQ and offers a selection of judgements and predictions, some wildly wrong, some amazingly prescient.

Euromoney 30th anniversary: Heroes and villains

A single currency for Europe: The Eurco - jury still out 
April 1974

Von Clemm brings us the bought deal: The bravado of the bought deal
August 1980

Costa Rica's near-default experience: Race of shame in the Euromarkets
December 1981/January 1982

The Japanese are coming: Now the Japanese attack the world's financial markets
October 1985

Turning LDC debt into junk: Can this dream come true?
September 1987

Restructuring corporate Europe: Wake up, corporate Europe - it's time to restructure
June 1989

The dangers of derivatives: Exorcise your derivatives demons
September 1992

Comeback kid: Is Citi back from the dead?
December 1992

Why Asia will keep booming: The only show left in town
February 1995

Cost-cutting at the EBRD: August 1993

Flying high: February 1995

International bonding in Cannes: July 1996

Russia gets it right (editorial): December 1996

Bowie bonds: January 1997


A single currency for Europe:
April 1974


In 1974 the latest bold attempt to create a single European currency was faltering. Perhaps the main problem was the name. No bond salesman could pronounce Eurco. A slip of the pen in our introduction to this article by M van den Adel of the BIS made it the Euro - now that does have a certain ring to it

The Eurco - jury still out

The introduction of the Eurco in September 1973 was the latest of a series of experiments with a composite unit of value to minimize exchange rate risks in international bond dealings, and to diminish the dollar's domination of the international capital market. The value of the European Unit of Account (EUA), introduced in 1969, can only be modified if all the reference currencies change in value and if two-thirds of the basket change in the same direction. So for the creditor, the advantages of this type of loan are limited and the return on the investment is somewhat arbitrary.

By contrast, the value of the European currency unit (Ecu), introduced in 1970, was irrevocably fixed for the whole life of the loan. The bondholder had the right to choose the currency most advantageous to himself when interest or redemption payments were made. Inevitably, the loans turned increasingly into Deutschmark loans and for this reason none have been floated since early 1972.

In view of the fading appeal of these types of loan, a third abstract monetary yardstick, the Eurco, was created. As it is to serve as the forerunner of a western European currency, its value is based on the currencies of all the EEC member states. Each of the currencies is tied, in a fixed ratio weighted by the size of the nine countries' GNP, to the unit of value.

The Eurco basket is composed as follows:

1 Eurco = Dm0.90 (28.9%) + Ffr1.20 (22.3%) + £0.075 (14.6%) + Fls0.35 (10.1%) + L80 (9.9%) + Bfr4.50 (9.5%) + Dkr0.20 (2.7%) + I£0.005 (1.0%) + Lfr0.50 (1.0%).

Although the composition of the Eurco is fixed in terms of national currencies, its value can at the moment change continuously according to the exchange rate fluctuations of the currencies on which it is based. Only when the exchange rates of all component currencies are fixed against one another would value changes be eliminated and then changes would occur only against non-European Community currencies.

An issuer in Eurcos has the right to decide the currency of issue as well as that of interest and redemption payments. One peculiarity of the Eurco is that the dollar is also considered a possible payment currency besides the reference currencies.

So far the new loan variant can only be appraised with some reserve owing to the limited experience and to the specific conditions of two of the issues made. Both Eurco loans issued by the European Investment Bank - the first one for 30 million in September 1973 and the other for 60 million in January 1974 - were exempted from the Italian exchange regulations. These require a 50% non-interest-bearing cash deposit to be made at the central bank in respect of foreign assets acquired. These two loans thus represented almost the only opportunity for Italian residents to invest abroad profitably. As a consequence the second loan was placed almost entirely in Italy.

The third Eurco loan, which enjoyed no special privileges, met with a somewhat cool reception. Continental European investors in particular were reluctant at first to subscribe to the 8.75% 20 million Eurco loan of the British Metropolitan Estates Property Company which was floated in October 1973 and represented the first use of the unit for company finance in the private sector. Only after the issue price had settled at 97 was the loan fully subscribed.

During the first two months of its existence the Eurco was affected by the turbulence on the exchange markets. Clearly, fluctuations of between 3% and 4% in the value of the Eurco expressed in Deutschmark, Danish krone and guilders, and between 6% and 8% expressed in French francs, sterling and lire, will run counter to the fundamental aim of the unit.

In view of the massive international financial flows that will be connected with this year's estimated $50 billion to $65 billion current-account surplus for oil-producing countries, the recurrence of abrupt exchange-rate movements can't be ruled out. The desire of all non-speculating participants in capital movements to protect themselves against such risks may therefore be further strengthened.

Since this is also the motivation behind the Eurco, it's likely to be with us quite a while.

Von Clemm brings us the bought deal: August 1980

Of all the innovations the Euromarkets have seen, the bought deal is perhaps the simplest and boldest. With aggressive tactics such as these, the late Michael von Clemm built CSFB into the preeminent Eurobond house of the 1980s. By Nigel Adam

The bravado of the bought deal

One Tuesday in April 1980, Thomas Patton, executive vice-president at General Motors Acceptance Corporation, took a phone call from London. He listened in amazement. The chairman of a major investment bank was offering to buy from him outright $100 million of GMAC bonds. The terms were 13.375% for a five-year deal but the banker wanted a fast answer.

Patton asked for a little time. But in half an hour he was back on the phone. "I accept," he told the banker. The deal was done.

The man who had made the offer was Michael von Clemm, chairman and chief executive of Credit Suisse First Boston. His proposal was aimed, in his own words, at blowing open a window in the Eurobond market and getting hold of badly needed paper.

That GMAC issue constituted the first of a new type of bought deal. It differed from previous fixed-price transactions in two respects. The bank had held no discussions at all with the borrower before the offer was made; and the borrower had no say in the formation of a co-management group for the issue. CSFB could do whatever it liked with the GMAC paper. That also meant, of course, that it was carrying $100 million of bonds on its books. A reversal of the bond market rally that week could have meant disaster.

The decision to take the $100 million on CSFB's books was von Clemm's own. But before he made it he'd taken a careful reading of the market temperature. White Weld Securities chief, Oswald (Ossie) Gruebel, had given his assessment of the outlook for dollar bonds. Steven Licht, the managing director in charge of CSFB's Eurocurrency trading, had contributed his advice. And Hans-Joerg Rudloff, the most recent recruit to von Clemm's team, was monitoring the views of institutional buyers on the syndication side.

"I'm glad I didn't have to shoulder that risk," says one investment banker of the GMAC deal. "CSFB may have had total control of the issue, but that wouldn't have provided much comfort if the market had headed south."

What CSFB eliminated with its new-style bought deal was the risk of the bonds being dumped. Issue managers dream of inventing a foolproof method to prevent underwriters and co-managers from dumping their paper in the grey market. Lead managers in the Eurobond market are reluctant to admit it publicly, but the worst perpetrators of this particular offence are often co-managers. "In a competitive market your co-managers are also the most frequent offenders," says a senior investment banker acidly. "In a fixed-price deal the situation can be even worse, because four or five banks have collected the entire issue. If one loses his nerve and throws the paper into the grey market the deal may be ruined."

If the borrower insists on having a say in the formation of a management group, the lead bank may be forced to bring in a co-manager whose placing power is suspect. "We weren't prepared to go out and discuss with the issuer which banks should be included in the management group," says von Clemm bluntly.

Costa Rica's near-default experience: December 1981/January 1982

Now it is a well-liked second-tier sovereign borrower which last month successfully issued $300 million of bonds on the international markets. But, as Tim Anderson and Alan Robinson wrote, in late 1981 Costa Rica came within a whisker of becoming the first sovereign to default on a Eurobond. The country was cut off from the international markets and agreements with the IMF had foundered. Costa Rica owed a total of $2.7 billion, most of it in loans. And that was a lot of money in those days

Race of shame in the Euromarkets

To the casual eye, Poland and Costa Rica have little in common. But to the Euromarkets, they have one basic similarity. They are the only two runners in a race that neither wants to win: to be the first sovereign borrower to reschedule a Eurobond.

The task force which represents the 501 banks with Polish exposure is pushing for the country's bonds to be rescheduled along with the bank debt. But reluctantly, even members of the task force admit that there is a "high chance the bonds will be repaid".

Costa Rica, on the other hand, seems powerless to defy the banks holding its commercial debt. Its net international reserves were $130.7 million in deficit at the end of September. And what angered bankers most was the discovery that Costa Rica had quietly transferred what remained of its external assets to the Panama branch of its state-owned bank, Banco Nacional. Quips a Costa Rican official at a European embassy: "You try cashing your pay cheque when it's drawn on an unknown bank in Panama."

The country's debt crisis has been building for some time. With less than six months of office left in it, the government of President Carazo is a lame duck with barely a quack left in it. "He made decisions, reversed himself, sometimes reversed the reversal, and then reversed that," says an opposition member of the legislative assembly. A tiny gold-coloured coin worth five céntimos is popularly called a Carazo, because: "It's blond and worth nothing," complains a San José citizen.

Costa Rica's currency has collapsed from CRc8.6 to the dollar to nearly CRc40 in four years. Its shops and restaurants are full of tourists from other Central American states taking advantage of the low prices. They throng the sidewalks with armfuls of clothes and compare prices at the tops of their voices. It is possibly the greatest and nosiest shopping spree San José has ever seen.

Every day from 8am immense lines form outside the four national banks as people try to change a bizarre basket of currencies. The banks buy but don't sell dollars. Inside the central bank a teller pops up over his grill. "We are not taking Salvadoran currency," he shouts at the queue. A young woman with a fistful of bills from El Salvador bursts into tears.

"We are going through a profound, a very serious crisis," says Costa Rican finance minister Emilio Garnier. "For 12 years we have lived beyond our means. Now it is time to pay."

But pay whom, and in what order? This is the question dividing three furious groups of creditors: holders of Costa Rican notes and bonds; the banks which are negotiating over the $1.1 billion they are owed; and the banks, including Libra Bank, which have stopped arguing and started suing.

In October, Costa Rica made a partial payment of interest on its floating-rate notes, greatly displeasing the participants in syndicated credits. But a group of 22 international banks feel equally strongly that bonds and FRNs should not be included in any restructuring.

Until November, Costa Rica insisted that a rescheduling of its bonds would destroy creditworthiness and must be avoided. "About 5% of our total debt is in FRNs and bonds," said Raúl Fernández, first director of the country's department of external financing, in early November. "It's a relatively small amount. These are bearer securities and it is difficult to identify the holders. We are paying so little via that route it doesn't seem worth the trouble."

But the steering committee of bank creditors threw out Costa Rica's rescheduling proposals on November 12. Four days later Costa Rica met the five bond lead managers (Singapore Nomura, BNP, DG Bank, European Banking Company and Banque Gutzwiller Kurz Bungener) at the offices of SG Warburg in London and told them the bonds would be rescheduled. Despite a heated two hours trying to persuade the Costa Ricans to change their minds, the lead managers left with a message ringing in their ears. "You will receive a telex immediately confirming Costa Rica's decision."

But the telex was never sent. At least one lead manager was given the impression that the announcement of the bond rescheduling was made to satisfy the ears of the steering committee and that the notes would be serviced.

In the race to be the first country to reschedule a Eurobond issue, Costa Rica and Poland are neck and neck. The investment bankers who brought Costa Rica to the Eurobond markets complain that, after repeated urgings by the World Bank to open up the securities markets to LDCs, they have been kicked in the teeth for doing so. The commercial bankers, on the other hand, feel that, when the chill winds of rescheduling blow, investors shouldn't be any more sheltered than they are.

Firsts of the year: September 1985
Issuer Bookrunner
First use of private auction Exxon Capital Corporation Merrill Lynch
First use of sale-by-tender mechanism Kingdom of Sweden Morgan Guaranty
First income rights package Kingdom of Sweden Morgan Guaranty
First flip-flop T-bill-based perpetual FRN World Bank Morgan Guaranty
First mini-max Kingdom of Denmark Goldman Sachs
First adjustable spread over Libor Ente Morgan Guaranty
First T-bill-priced FRN with coupon mismatch Svensk Exportkredit Merrill Lynch
First securitization of interest rate cap Banque Indosuez Shearson Lehman Brothers
First securitization of standby facility BNP CS First Boston
First Eurobond tap issue Svensk Exportkredit Goldman Sachs
First glimpse of Stags - -
First multi-component facility Kingdom of Sweden Citicorp, Morgan Guaranty, Chase, Bank of Tokyo, Svenska Handelsbanken
First Euro-commercial paper Société Nationale Elf Aquitaine Banque Indosuez/LehmanBros
First Truf (transferable underwriting facility) Electrolux Merrill Lynch
First use of continuous tender panel Malayan Banking Berhad Dean Witter
First convertible Euronote facility to FRN Korea Exchange Bank Bankers Trust
First global note facility Elders Capital Corp Salomon Brothers, Chase
First use of issuer-set margin Bank of Baroda Merrill Lynch
First use of interest-rate swap tender panel Efic Morgan Grenfell
First sterling intermediate-term notes ICI Citicorp
First foreign-exchange tender panel Associates Corporation CS First Boston

The Japanese are coming: October 1985

Most big US brokerages and European banks have long since gone bust. They lost most of their business around 1990 to the Japanese firms that now rule the world. You should have seen it coming. Neil Osborn predicted it in 1985

Now the Japanese attack the world's financial markets

By this time, the world should be accustomed to assaults from the islands of Japan. First came the warplanes and the soldiers, then the automobiles and the video machines. Now Japanese banks and securities houses are preparing to invade the global capital markets in much the same manner as Honda and Sony have attacked and penetrated the world market for manufactured goods. When they have finished, perhaps around 1990, the Japanese will control vast areas of the financial services business in Asia, Europe and America.

Yositoko Chino, chairman of Daiwa Securities, wants to become a world-class securities trader. "We will be one of the biggest dealers in international bond markets." IBJ president, Kaneo Nakamura, would like his institution "to be considered a worldwide bank, in a real sense of the word, in five years' time". And Sumitomo Bank president, Koh Komatsu, has declared he wants Sumitomo to be, quite simply, "like Citibank".

The most formidable weapon the Japanese will be wielding in the international markets is their rapidly expanding placing power. Japan is sucking in cash extraordinarily fast, and whoever can control the way it's invested will be in a position of increasing power. The Japanese will not hesitate to use this placing power to the full. They will expect favours done for issuers in Tokyo to be repaid in London and New York. It is scarcely surprising an intense battle is being fought in Tokyo in money management. This year several commercial banks - Fuji and Sanwa, for instance - have formed asset-management arms.

Most houses will boost their underwriting activities by using their in-house funds as repositories, and will therefore become highly effective, since those repositories will become very large indeed.

The west can comfort itself with the thought that the Japanese have a number of weaknesses that could slow down their advance. But the most disturbing element of events in Tokyo from a western banker's stance is the diligence with which the Japanese are trying to solve these weaknesses. Many foreigners are being drafted into bond trading departments in Japanese firms - units which have been regarded until now with contempt by western bankers. The Japanese don't breed traders, so the thinking goes, because the habit of taking group decisions is so ingrained. "Initially, we were weak compared with the American firms, but we are gaining experience and we're catching up," says Yoshio Tokota, president of Yamaichi Securities.

Besides their weaknesses, the Japanese will have some significant advantages when they enter the coming battle. They can claim, with some justification, to have special knowledge of Asia, particularly China. And Japanese executives pay glowing tribute to the joys of cooperation with the financial institutions of other countries. Sumitomo Trust, for example, is now picking up a few tips about western-style money management from Security Pacific, since the banks began exchanging investment advice last June.

This may have a familiar ring to executives in the European ship repair industry, the US television manufacturing industry and the British motorcycle industry. They might recall the days when the Japanese weren't a factor - with their second-rate, imitative products. What did it matter if a few insignificant, smiling Japanese came round to tour the plant?

Perhaps in finance, the prospects won't be so bad for the west. But this is no time for European and American banks to rest easy. The Japanese are coming, and they are quite convinced they will win. One managing director puts it succinctly: "We try harder."

Turning LDC debt into junk: September 1987

Distressed Third World bank loans should be repackaged as high-yield bonds, argued Neil Osborn in 1987. The trillion-dollar market envisaged by Michael Milken never materialized, but maybe Nicholas Brady took a few pointers from this article

Can this dream come true?

The dream is simple. Why not take the $300 billion of Latin American debt, convert it into junk bonds and sell it to junk bond investors? In the corridors of this year's World Bank meeting, dozens of wise men will shake their heads and say this is an impossible dream. But the wise men will be wrong.

Within a year a new international market for Latin American bonds will make its debut, Euromoney predicts. No-one is saying that it will be a big market, at least not in the beginning, but together with debt-for-equity swaps and the secondary market in Third World loans it will be a significant move towards removing the wet blanket that has covered Latin America and the world economy since Mexico hit the wall in 1982.

Salomon Brothers, Merrill Lynch, Citibank and Shearson Lehman are searching for a magic formula that will induce insurance companies and pension funds to take Third World obligations off the hands of commercial banks. And joining these forces are First Boston, First Interstate, Drexel Burnham, Schroder, Bankers Trust and dozens of others. These players know that the right junk-bond alchemy will produce a new high-margin business at a time when many more traditional investment banking activities - underwriting for example - are growing less lucrative.

At the moment the numbers behind the busted-loans-into-junk-bonds notion don't equate. There is no shortage of demand for high-yield bonds - $47 billion of new issues was placed in 1986 in the US. But these bonds yield around 13%. A loan from Mexico, with interest set at, say, Libor plus 13/16, purchased at between 50% and 60% of face value, would not yield very much more - perhaps 14%.

These difficulties might be eased by credit enhancement - a World Bank guarantee of some description slapped on the new security - but the World Bank is unlikely to risk its credit rating in this way. In the absence of a guarantee the only route is higher yield - much higher.

The idea that has captured the imagination of many bankers is the conversion of the debt into high-yield bonds. It has the support of the junk bond king, Michael Milken, senior executive vice-president in Drexel Burnham Lambert's high-yield bonds and corporate-finance department. In a recent interview he acknowledged the political and financial problems but said he believed high-yield Third World debt bonds could be a trillion-dollar market, 10 times the size of the present junk bond market.

Restructuring corporate Europe: June 1989

In 1989 Peter Lee and Garry Evans promised a revolution in corporate Europe. In anticipation of the single market, companies were starting to restructure, leverage their balance sheets and embrace shareholder value. That revolution turned out to be a damp squib. So unlike today, when, in response to the single currency, companies are starting to restructure, leverage their balance sheets and embrace shareholder value...

Wake up, corporate Europe - it's time to restructure

Look around. The smartest European corporations are restructuring. Some of the vogue is simple mergers and acquisitions, often triggered by the single marketconcept. But there are lots more sophisticated deals happening too: recapitalizations, taking companies private, rejigging holding company structures, floating subsidiaries and joint ventures.

For the CEOs and corporate treasurers of Europe, what's going on is revolutionary: for the first time, how capital is allocated and used is becoming what it should be - priority number one. In the final analysis it's all about value - how to get the maximum out of a company before a predator snatches the value for himself.

Many Americans are convinced Europe is where the action will be in the next few years. In the US, LBOs have already unearthed many undervalued (and mismanaged) corporations. "The smart money around the world is looking at Europe because there is a substantial number of undervalued companies," says Tom Swayne, head of capital markets products at Chase Manhattan in London.

Among the "smart money" investors is James Goldsmith, who has set up an LBO fund with Jacob Rothschild. Ascher Edelmann has arrived too. Rupert Murdoch is reportedly putting together a $5 billion fund to make acquisitions in the media industry.

Because European companies are undergeared compared to the US, they can improve their returns to shareholders by pure financial engineering. Debt is not bad per se, it's a means of reducing cost of capital.

Another solution is to tap new shareholders, particularly overseas, who might value your company more highly than the market now does. One way is to list on another stock exchange; the more sophisticated way is to float off part of your business. For example, when Racal Electronics sold part of its cellular phone subsidiary, Vodafone, the share offer was aimed mainly at the US. "The day the partial spin-off was announced, Racal's market cap went from £1.4 billion to £1.9 billion," says a London-based US investment analyst who was involved in the deal.

There is a fad for divesting non-core businesses. Even Italy's infamous conglomerates are realizing the sense in concentrating on the one or two businesses that the group does best. Feruzzi and Fiat, for example, have both recently sold unwanted non-Italian holdings.

The more brutal form of restructuring is the hostile buy-and-bust-up takeover. These will become more common because the growing availability of finance in Europe, particularly mezzanine finance, will allow small companies or management buy-in teams to make multi-billion-dollar bids for public companies. The UK bid for Isosceles is a good example of this.

The trend among companies to make strategic acquisitions and to sell unwanted divisions coincides with a rise of entrepreneurial spirit among the European management class. Buy-outs used to be small beer and were dominated by specialized venture-capital firms. They are getting bigger and are at last being treated as serious business by the corporate-finance departments at the big investment banks. Some of the biggest European MBOs are now over the $1 billion mark: the MBO of Darty in France in May 1988 was worth Ffr7.1 billion ($1.2 billion).

A lot more MBOs are going to come from family-owned companies founded soon after World War II, where the owner wants to retire but has no successor. There may be 15,000 such companies in Europe.

Where are the deals going to happen? The UK is still streets ahead of the rest of Europe. West Germany will produce a stream of deals this year. Many bankers think Spain has the most potential for LBOs. Indeed, one of the leading US banks claims already to be working on a buy-out of a public Spanish company with a $1 billion market cap. France too has possibilities. Even in sleepy Norway, Chase Manhattan Bank last month advertised in the financial press, inviting managements interested in buying out their firms to contact it.

The dangers of derivatives: September 1992

Senior managers have little concept of the horrors that lurk inside their derivatives departments, warned Peter Lee in 1992. How they scoffed at such naivety

Exorcise your derivatives demons

When Gerald Corrigan, president of the Federal Reserve Bank of New York, told bankers this January that "you had all better take a very, very hard look at off-balance sheet activities", the world turned upside down for dealers in over-the-counter derivatives. Until now swaps and options teams have been able to beaver away quietly on their financial technology unsupervised by regulators and, often, uncontrolled by senior management which had only a sketchy grasp of what they do.

The regulators' main concern is that some firms, unless they improve their controls, are going to take huge hits from derivatives. And the regulators are right. What is more, everyone in the derivatives business knows it.

Rumours of a string of embarrassments at major banks are part of the derivatives market's folklore. None has threatened the survival of the institution concerned. What causes concern is that these hits were taken at some of the most advanced firms in the business, including Citibank, Chase, Chemical, Bankers Trust and First Boston.

The regulators are expressing concern just as the derivatives market is facing a number of tests. First, more and more banks and securities firms are trying to build up or expand derivatives operations, creating the danger that mediocre individuals under pressure to produce revenues to justify their salaries will take excessive risks. Second, firms that have grown their derivatives operations in recent years are struggling to keep technology and management systems developing apace. Leslie Rahl, a consultant who worked for 20 years at Citibank says: "I wonder how many senior managers can actually read the reports their derivatives teams give them." Third, some established dealers have written so much business with each other they are straining credit limits. "Somebody is going to get zinged," says the chief executive of a derivatives boutique.

The largest component of the derivatives market, and by far the simplest products, are interest rate and currency swaps. Here credit risk is the most important element. If you deal with counterparties you are sure will honour their obligations it is difficult to go wrong. The best dealers constantly monitor their credit exposure and act when warning signals start to flash: they look for a third party with a different view of the credit risk or they look at other options such as repricing or demanding collateral.

What distinguishes derivatives from other financial products is the degree to which exposure may vary with market risk. For some derivatives portfolios the worst thing that can happen is that nothing happens at all. It may be that the trader has bought both put and call options and is taking a bet on the degree of interest-rate volatility not the direction of interest rates.

Many sophisticated traders in options have already gone a stage further, trading not delta (sensitivity to underlying rate), nor gamma (sensitivity to volatility) but vega (sensitivity to changes in volatility). Take out the Greek and the esoteric options wizardry becomes a sensible position on a likely course of events. To a derivatives dealer, this is all so obvious it scarcely seems worth explaining.

Derivatives dealers argue that other instruments are better suited to speculating on outright market movements. This is true. But the implication that derivatives traders are not taking positions is false. The portfolio of perfectly offsetting risks is something of a myth. Anyone running a perfectly matched book in, say, dollar interest-rate swaps would find the margins too thin to cover the cost of capital required to run the business.

Integration of systems is one of the challenges that derivatives firms now face. All firms would love to have systems that could contain swaps and options positions and measure the sensitivity of those positions to changes in underlying interest rates, currencies, equities and commodities. That is a monumental task which no firm has yet achieved.

The only solution is for managers to carry around in their heads a sense of any complex trades or positions particularly sensitive to unfolding events in underlying markets. "Too often people have a vision of global, real-time information derived from a machine," says Michael Davis, deputy global risk management executive at Chase Manhattan. "There is no substitute for senior management walking around the trading floor, talking to traders and asking what is going on."

Most firms claim they put their control systems in place first and only then start trading. Inevitably, most firms do the reverse. Headhunters report that those firms which have expanded fastest in derivatives over the last two years are now desperate to hire technology and back-office experts.

Another important role of firm-wide risk managers is to prepare contingency plans for major shocks: a sudden spurt in inflation, a major currency realignment, a global stock-market crash, a five or six times standard deviation move in rates, sudden high currency or commodity volatility resulting from events such as last year's attempted coup in the Soviet Union or the invasion of Kuwait.

The real management challenge is to analyze the return traders produce against the risks taken to produce them. Four traders each earning the same gross amount from four separate $100 million swaps in equities, currencies, interest rates and commodities, will show very different returns on a risk-adjusted capital cost basis.

Comeback kid: December 1992

Things couldn't get much worse for Citibank in 1992. Was this the beginning of the end of the country's biggest bank? Peter Lee stuck his neck out and said that John Reed had turned the corner

Is Citi back from the dead?

On October 5, Citicorp seemed to have hit a new low. It announced the departure of Richard Braddock, its president, chief cost-cutter and second-in-command to chairman John Reed. "I was shocked, even alarmed, when I heard the news," says one fund manager.

This year a series of mishaps has distracted attention from Citicorp's operating improvement. In August the bank revealed that the New York Fed and the Office of the Comptroller of the Currency had required it to sign a memorandum of understanding with them. This confirmed what was generally known, that the regulators were - if not exactly camped outside the boardroom - keeping a close eye on the nation's largest bank.

In August Citicorp was required by regulators to restate second-quarter net income to $143 million, down from the originally stated $171 million. The regulators were concerned Citicorp had not sufficiently allowed for future mortgage prepayments. The bank had already acknowledged problems at the mortgage unit, which had pursued high-volume growth by offering low-documentation mortgages.

These problems have concealed the achievements. Citicorp is back from the dead. Reed deserves credit for forcing through a two-year turnaround plan.

At some stage towards the end of 1990 it began to dawn on Reed what a terrible mess the bank was in. The ugly state of the commercial real-estate loan portfolio was becoming clear. Following its entanglement for much of the 1980s in LDC debt and its later flirtation with highly leveraged loans, the bank found itself fast running out of capital and friends. At the end of 1990 the bank's ratio of tier-one capital to assets stood at only 3.26%. The share price closed at $12.63, down from $28.88 a year earlier. It would later fall to $8.

Reed reworked his vision of banking. He concluded that, in the developed world at least, banking is a slow-growth, overregulated business with unfavourable risk-return characteristics in its basic component, commercial lending. The best management philosophy for the bank was to constrain growth within the limits of each market and to excel at the control aspects of the business: expenses and credit quality. Citicorp had to do the opposite of what it had been doing for the previous 20 years.

He drew up and enforced a five-point plan to improve the bank's operating earning sufficiently to absorb the coming credit costs. The bank would cut costs by $1.5 billion a year, trim senior management and raise $4 billion to $5 billion in capital.

Now, as 1992 draws to a close, Citicorp management can feel proud. They have delivered what they promised in the five-point plan in spite of much worse economic conditions than they conceived two years ago. In 1990 the bank's operating margin was $4.8 billion. By the end of 1992, on an annualized basis it will be $7.2 billion, bang on target.

Now - shareholders hope - that consumer credit costs have peaked, Citicorp will begin to deliver strong earnings figures, particularly from its overseas consumer and wholesale business. "I believe that the Citicorp franchise is an extraordinarily valuable one and that, cleaned up, it will be one of the best banking businesses in the world," says one fund manager.

While most US banks have been cutting back their international wholesale operations and abandoning consumer banking overseas, Citicorp has done neither. It has substantial consumer banking operations in 37 countries. Most significant of all, Citicorp's long established network in Asia places it right in the heart of the brightest growth markets in the world.

One former Citicorp executive is fond of comparing Citicorp to Brazil, not entirely kindly. "Twenty years ago, Brazil was the country of the future and Citicorp was the bank of the future. Today once again, Brazil is the country of the future and Citicorp is the bank of the future. And in 20 years time..."

Why Asia will keep booming: February 1995

In the aftermath of Mexico's forced devaluation, investors began to sell Asian currencies and stock markets. Garry Evans predicted that Asia would survive these attacks. Its strong fundamentals would make it the favourite of emerging-market investors for years to come

The only show left in town

In the first three weeks of 1995 withdrawals by foreign fund managers, spooked by the crisis in Mexico, pushed even the best Asian stock markets down. Seoul and Bangkok fell by 11%, Singapore by more than 12%. On January 12 the Thai baht dropped 3.7% during the day before recovering.

Bankers and economists in Asia are almost unanimous in declaring this sell-off irrational - and in expecting it to be short-lived. The sustained economic growth of China, India and possibly the Philippines may still be in doubt. But the other important economies of south-east Asia - Indonesia, Korea, Malaysia, Singapore, Taiwan and Thailand - look remarkably healthy. Government budgets are balanced or in surplus. Foreign debt is low. Saving rates are universally high. Nowhere has inflation been a serious threat.

But the key to Asia's economic stability has been the way it has financed its growth. Because of the high level of domestic savings, much investment has been financed internally. In addition, these economies have had great success in attracting foreign capital. Without exception, they have balance-of-payments surpluses.

Even more important is the form that the capital inflows have taken. Capital flows to Asia have been preponderantly long-term and taken the form of foreign direct investment. In Mexico 73% of foreign investment was short-term or portfolio investment, according to Baring Securities. By contrast, short-term capital was only 37% of total capital inflow in Indonesia, 16% in China and 39% in the Philippines.

The high savings rates and large capital inflows are reflected in the low real interest rates prevailing throughout the region. The spread between US and average Asian rates fell from 400 basis points at the end of 1993 to 60bp in December last year.

This is not necessarily good news. As JP Morgan points out in a recent research document: "The collapse of the interest-rate spread is largely the result of excess liquidity due to the strong external demand for local currencies borne of massive foreign capital flows."

What happens if that flow of foreign capital slows or dries up? Would this not push up interest rates or worse, cause Asian currencies to devalue rapidly thus further deterring foreign investment?

Such an outcome is unlikely for two main reasons. First, fiscal and monetary policy is generally loose throughout the region. Second, even though portfolio investment may stop, direct investment is unlikely to slow for the foreseeable future. Enzio von Pfeil, chief regional economist for SG Warburg, argues that, because Asian growth rates will be higher than those in the rest of the world for at least the next 10 years, capital will inevitably continue to flow to the region.

After the January sell-off, there are plenty of bargains for fund managers brave enough to come back. "Hong Kong stocks are almost at fire-sale prices," says Ian Boyce, managing director of Schroders Asia. The Indian market looks even cheaper.

How will Asian borrowers raise the large sums they need over the coming years? The market will continue to be dominated by banks. Last year Asian borrowers raised $62.5 billion in the international syndicated loan market compared with $43 billion in bond and equity issues combined.

One reason for the rapid growth of the syndicated loans market in the past two years is the increased participation of Japanese and European banks. "For European banks, Asia is their number-one priority," says Christian Zuegel, a managing director at JP Morgan in Singapore. "And that's not temporary."

In addition, the steady growth of local investment institutions will provide a fillip for Asian bond markets, and will further encourage the Asianization of capital flows. Peter Baumann, chief executive of Citicorp International in Hong Kong, is gung-ho about the potential of Asian investors. "We are sitting on the tip of a volcano which will erupt," he says. "The only question is when."

Cost-cutting at the EBRD: August 1993

The report of the European Bank for Reconstruction & Development's audit committee on the bank's overspending is an impressive tome. It is not just Jacques Attali's legendary indiscretions that it dwells on. In nearly 300 pages it details, warts and all, the overspending on the bank's new building, the lack of budgetary control, the flaws in the bank's procurement policy, the mystery of the bank's Paris office and the embarrassing facts about special flight arrangements.

Such sage advice comes at a cost though. The report itself set the bank back the small matter of £247,400. But before the bank's many critics get too hot under the collar, they might be reassured by the fact that accountants Coopers & Lybrand at least had to bid to win the lucrative contract to act as adviser to the bank. Geoff Dyer

Flying high: February 1995

For Hong Kong's more pukka financial institutions, Peregrine Investment Holdings is the house they love to hate. "They sail too close to the wind," says a senior manager at a British merchant bank in the colony. "They approach business like chancers."

The aspersions spring largely from the view that Peregrine is at its most entrepreneurial in those countries - China, Vietnam and Burma - where corrupt communist regimes are most entrenched. They got fresh fuel last December when the Hong Kong stock exchange ruled that Peregrine's brokerage subsidiary had helped clients to make false trades to manipulate stock prices.

None of this fazes Philip Tose, chairman of Peregrine. He brushes slurs and innuendoes aside: "When you are successful in Hong Kong, a lot of people get jealous and try to knock you. They want to see you fall apart." Tony Shale

International bonding in Cannes: July 1996

The International Securities Market Association returned to the South of France for its 28th annual meeting this year. Those who had been at the legendary two-day bash in Nice 12 years ago, where antique chairs were thrown through unopened windows at one member firm's twelfth-floor party, expected great things from Cannes.

Isma veterans reflected that this meeting was not quite so riotous, although it didn't lack its touches of excess. The Euroclear party provided the highlight of the conference: two glass cubicles raised 20 metres above the Hilton's foyer. Inside them, two robotic mermaids dancing with hairdryers blowing their long tresses.

The robots proved to be topless and soon one of them broke into giggles betraying the fact that she was a lowly human. One broker instantly made a beeline for the stairs, determined to check out these heavenly creatures by entering one of the cubicles. Fast-thinking security intervened.

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Russia gets it right (editorial): December 1996

It is very easy to be cynical about Russia. Its economy and political system don't yet work like those of a developed country. That makes it easy to poke fun at.

But give Russia its due. When it came to the bond market for the first time last month, its debut issue was probably the best ever by a sovereign borrower. That was, to a large extent, due to the professional way the Russian government handled the transaction; it also reflected the growing perception of investors that Russia is on the path to steady economic development.

The creation of a benchmark issue has its minuses too. It will be the chosen vehicle for many investors to take a view on Russia. Want to know how Russia is perceived? Just check the level of the 91/4 of 2001.

Bowie bonds: January 1997

Rock star David Bowie has thought of an ideal birthday present for himself. The singer turns 50 this month and is considering a $50 million bond issue to be arranged by Gruntal & Co.

The official line from William Zysblat, Bowie's business manager at RZO Entertainments in New York, is that the issue "is one of the many possibilities we are looking at". But the general feeling is that the deal is done: "As far as we can tell, the paper has been placed already - they're just waiting for the final go-ahead from the Starman himself," says one banker.

In an innovative deal, the paper is to be backed by the future royalties and commission which Bowie will earn as sole owner of the copyright to his work. As a result, the issue is expected to get an investment-grade rating, probably single-A. Antony Currie

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