Founding fathers and 35-year-olds
Euromoney celebrates its thirty-fifth birthday this month. We look back on the capital markets of 1969 and forward, through the eyes of pioneers of that era and those born in that year, at today's markets and looming challenges.
SUPERFICIALLY, THE SUMMER of 1969 hardly looked propitious for the launch in London of a new monthly magazine dedicated to coverage of the international capital markets. US equities would spend most of the year on the slide as speculation grew that America would start the 1970s in recession. In June, the month of Euromoney's launch, that had prompted Fortune magazine to describe 1969 as a "lost year" for the US economy, with obvious implications for much of the rest of the world.
Granted, in Europe the German economy was racing along, growing at almost 8% in 1969. But Britain, which by now was establishing its credentials as Europe's foremost financial centre, was still reeling from the sterling crisis and devaluation of November 1967. For the British economy, things were about to become a good deal worse.
For the young bankers whose careers were then being shaped by the evolution of the Eurobond market, with London at its centre, did any of this matter? Paradoxically, probably not. In the 1970s they would be subject to crippling tax rates, disruptive industrial action and power cuts but the misfortunes of the UK economy were largely irrelevant to their career prospects or, by extension, Euromoney's.
"The year 1969 was interesting for being a time when the City's position as the capital of the Euromarket was completely unaffected by the trials and tribulations of the UK economy and of sterling, because it was a market that was denominated largely in dollars and Deutschmarks," recalls Stanislas Yassukovich, then a partner at White Weld in London. That focus, he adds, probably did little for the City's public image in the UK. "There was perhaps a sense that certain sections of the City were becoming too concerned with their international functions and not sufficiently interested in raising capital for British industry," he says.
Kari Nars has read Euromoney since its launch, and would come to prominence in the 1980s as one of the world's most respected borrowers during his first stint as the director of finance and head of treasury management for Finland. In 1969, he worked at the IMF, and he recalls an era that stood at the threshold of far-reaching change. "In 1969, capital markets were narrow and underdeveloped and the international currency market was highly regulated," he says. "I believe that the founders of Euromoney had a vision that markets would open up and develop very rapidly, and they were right. Two years later we had the first Big Bang with the untying of the dollar from the fixed gold standard. That was something that very few people could have foreseen in 1969 but it really opened up a new world in terms of currencies and innovations in banking."
Several other influences made the timing of Euromoney's launch felicitous. At the start of 1969, Minos Zombanakis had opened the new London office of Manufacturers Hanover, having persuaded his bosses that he had a revolutionary idea for mobilizing short-term deposits into medium-term loans. Soon afterwards, the Kingdom of Iran became his guinea pig for an $80 million facility that was 50% oversubscribed and acted as the curtain raiser for the syndicated loans market, which would emerge as an important area of coverage for Euromoney.
It was, however, the Eurobond market that served as the raison d'être for the new monthly, stealing a march on other publications. Although survivors from the late 1960s say that the magazine's title was a stroke of brilliance, it was not just Patrick Sergeant who was playing with the words "euro" and "money" in the late 1960s. So too was Eric Roll, who had joined SG Warburg in 1967 after a distinguished career in academia and public service, and who today – aged 96 – continues to work for UBS, arriving each morning at about 10 am. In the late 1960s, Roll had toyed with the idea of inventing a new currency unit, which he named the moneta. "That was an early attempt to think in terms of a common currency for most of the European currencies, so I suppose it would have been the forerunner to the euro," is how Lord Roll recalls the project today.
The Eurobond market, meanwhile, was becoming more diverse in terms of currencies. The early 1970s with rising issuance in denominations ranging from the European Monetary Unit (EMU) to the Dutch guilder, Canadian and New Zealand dollars and even Lebanese pounds and Kuwaiti dinars.
Formalizing a fly-by-night adventure It was not just rising Eurobond volumes that called out for a new publication chronicling the market's expansion. In 1969, Richard Weguelin of Rothschild had written to competitors in the dealing community suggesting that they should meet to consider solutions to the increasing chaos surrounding settlement and delivery of Eurobonds. His initiative resulted in the formation of the Association of International Bond Dealers (IABD), the forerunner of the International Securities Market Association (Isma), which has overseen the functioning of the Eurobond market ever since. This marked the transition of the Eurobond market from a fly-by-night and ill-disciplined adventure into a formally structured part of the international financial system.
Euromoney helped in that formalization. "There was constant talk about how unregulated and dangerous the market was," says Yassukovich. "But people mistook lack of regulation for an absence of reliable information and statistics. Euromoney immediately made an important contribution by being the market's publication of record and compiling information on its size and depth."
Although that increasingly formalized market was dominated in 1969 by a few players, it was also attracting a cornucopia of banks from Europe and the US. When, for example, an announcement appeared marking the sale at the end of May 1969 by Standard Oil of $50 million of bonds due in 1984, the tombstone named 111 banks below that of the deal's lead manager, Morgan & Cie International.
The smaller underwriters played an important role. Charles McVeigh, now co-chair of European investment banking at Citigroup, explains that in the retail-dominated Eurobond market of the late 1960s and early 1970s, underwriters were crucial. "If there were 100 banks in a syndicate, even the last on the list would have been likely to have had its demand filled on a typical issue," he says. "Smaller European private banks participated as underwriters in the Eurobond market because they would have been confident that they could sell $25,000 here or $15,000 there, and spreads were wide enough to earn them a decent turn. Junior underwriters were considered vital players in the new-issue market, which is why you saw such big syndicates."
Others on the Standard Oil tombstone are gone but remain the subject of fond memories. Strauss, Turnbull & Co, for instance, was where the young Stanley Ross had found himself at the right time and in the right place in 1963, reading a translation of A la recherche du temps perdu when Julius Strauss was making one of his routine tours of inspection. Strauss, one of the founding fathers of the Eurobond market, was so impressed by this show of intellect that he promoted the bus driver's son to Strauss Turnbull's Eurobond department. From there, Ross would have a sparkling if sometimes controversial career, first at Kidder Peabody, and then at his own firm, Ross & Partners, where he would stir up a hornets' nest by initiating a grey market in Eurobonds.
Also on the Standard Oil tombstone was White Weld, where individuals such as David Potter and David Reid-Scott arrived in 1969 to work alongside Euromarket luminaries such as Bob Genillard, Yassukovich and David Mulford. "I remember 1969 very well because that was the year when White Weld hit the top of the league tables for the first time," says Yassukovich. "But it was also the year when we restructured the White Weld group, creating a European holding company called WW Trust, which would become autonomous from the New York house. That ultimately led to the creation of Credit Suisse First Boston."
Firms such as the White Weld of the late 1960s were at the cutting edge of new product development. It would be a while before the World Bank began to pioneer swaps but a number of other products or asset classes had either emerged (such as sterling CDs, which had taken their bow in 1968) or would do so over the first few years of Euromoney's life. Others would have to wait.
A meaningful international equity market, for example, was in 1969 no more than a twinkle in the eye of Yassukovich. Today, he is the first to concede that the predictions he made at about the time of Euromoney's foundation of the rapid emergence of a euro-equity market (as a first cousin to the Eurobond market) were at least two decades premature. That explains why a house like Salomon Brothers did not set up shop in London until 1971.
"In those days Salomon was a powerhouse in the US equity block trading business and our international operation involved distributing North American equities to non-US clients," McVeigh recalls. But it was not the potential of international equities that prompted Salomon to become more involved in the global capital markets. The nudge for that came with regulatory change in the US, principally the abolition by the Nixon administration in 1974 of the Interest Equalization Tax (IET) which opened the way for overseas borrowers to tap the US institutional account base via yankees.
If the US had been behind the curve in terms of the evolution of the Eurobond market, by the late 1960s it was starting to develop other products and ideas that would later play a pivotal role.
The hedge fund, for example, had started to creep into the lexicon of the financial press by the end of the 1960s. The Economist was sceptical about these newcomers in February 1969, when so-called hedge funds in the US were the subject of an SEC probe, pointing to speculation, rigging and insider knowledge. John Morrell of Robert Fleming was more forward-looking. Writing in Investors Chronicle a month earlier, he referred to the "mystique [in the US] surrounding what has, on admittedly brief evidence, been a highly successful concept". Morrell attributed that success at least in part to the remuneration structures used by hedge funds, in which managers were entitled to as much as 20% of the capital gain posted in any given year. Portfolio managers with incentives of that kind, Morrell wrote, "try harder... and those that try harder do better."
With considerable foresight, he added that in the US "the high rewards promised to the successful hedge fund managers have attracted an array of brilliant young men to this field", and he concluded that the development of these new funds would have "far-reaching implications".
Also just around the corner would be the emergence of securitization in the US, which would give rise to the vast market for asset-backed securities. By the time of Euromoney's launch, in the US the Federal National Mortgage Association (FNMA) was split into two parts – the new FNMA (Fannie Mae) and the Government National Mortgage Association (GNMA, or Ginnie Mae). But it would not be until 1970 that the first pass-through certificate was developed, or that the Federal Home Loan Mortgage Corporation (Freddie Mac) was chartered by Congress. In 1970, less than $500 million of mortgage-backed securities would be issued in the US; by the end of the decade there was close to $100 billion outstanding.
At the end of the 1960s, London was cementing its position as Europe's financial metropolis, and most of those that were tumbling into the City – many by accident – were enjoying every minute of it. There was unquestionably a joie de vivre about the City of the 1960s and 1970s that many would argue is now increasingly lacking. That is certainly the view of Philip Ellick, who arrived in the City at almost exactly the same time as Euromoney, leaving his grammar school in Hertfordshire with a few O-levels to join the government broker Mullens & Co at its office at 15 Moorgate in 1969. Mullens offered him £725 a year – £25 more than another suitor, Vanderfelt & Co – and soon he worked his way from the investment trust research department to the floor of the stock exchange. From there, Ellick became a dealer, before moving on to Rowe & Pitman and, latterly, serving as managing director of the equity capital markets group at UBS Warburg. "Being a blue button on the floor of the stock exchange, or acting as a kind of runner for the dealers, was the lowest of the low," he recalls. "But it was a fascinating time, and when I was a dealing partner at Rowe & Pitman I couldn't wait to get to work every day. I literally couldn't get up early enough in the morning, and that went for most of my colleagues. There was an atmosphere and a camaraderie about the place that I think has been diminished a great deal now."
Others agree. "There was a very strong sense of belonging to a team," says David Scholey, who had joined SG Warburg in 1964 and who by 1969 had seen personnel and premises added to his corporate finance and credit responsibilities. That meant that Scholey knew everybody in the company, from Siegmund Warburg and Henry Grunfeld at the top to the waiters and messengers – with whom he used to play darts – at the bottom of the bank's hierarchy.
So much for the London of the late 1960s. What of New York? Jacques Bouhet had started his career in 1965 in the economics research department at Société Générale in Paris and in 1969 relocated to the US as assistant vice-president of Sogen International Corporation in New York, the French bank's first step into investment banking.
The gentlemen of New York
Aside from recalling that 1969 was the year of Oh! Calcutta! – "it was a time when New York was losing its puritanical streak and going a little wild," he says – Bouhet's abiding memory of New York at the end of the 1960s is of a club-style market, in which everybody knew everybody else.
Fred Joseph has been working on Wall Street since 1963 and has seen some spectacular ups as well as some demoralizing lows, none more so than in 1990 when Drexel Burnham Lambert collapsed while he was chairman. More than 40 years after taking up his first job at EF Hutton, he is now co-head of investment banking at Morgan Joseph & Co in New York. He recalls an altogether smaller, quieter and more gentle-paced financial centre. "There was much less competition in the late 1960s," he recalls. "Everybody knew each other and the Street was much more gentlemanly than it is today. If you went after a mandate at a company that was banked by a competitor you would always telephone the other bank to ask permission, and if there was a deal to be done you'd make sure you invited it to participate. That began to break down in the 1970s and the process accelerated in the 1980s."
New York, of course, had effectively handed London its grand chance as the centre of gravity for the Eurobond market several years earlier, when the introduction by president John F Kennedy of the IET effectively raised the curtain for the new market in 1963. For very different reasons, Germany did its financial centre no favours in helping it to prepare for the competition that would gather momentum over the next three a half decades. By 1969, Rainer Stephan, now head of Barclays Germany in Frankfurt, had served his apprenticeship at Deutsche Bank and was teaching at the University of Frankfurt. He rejoined Deutsche in 1976. He has very good reason to have vivid recollections of 1969 – the year in which expectations of a dollar devaluation and Deutschmark revaluation (which materialized in October) led to a huge influx of money to the German capital market.
In tandem, new issuance in Deutschmarks soared, topping the $1 billion equivalent threshold for the first time in 1969, compared with less than $150 million in 1966. That in turn laid the foundations for a meteoric ascent of the lead managers' league tables by Deutsche Bank, by far the most internationally oriented of the German banks. As early as 1969, as Stephan points out, as well as dominating the Deutschmark sector, Deutsche was lead managing dollar-denominated bonds with warrants attached for German corporates.
But the growing importance of the Deutschmark sector internationally also highlighted over-protection of the German capital markets by the Bundesbank that was to last well into the 1980s. "At that time the German banks fiercely protected their monopoly on lead managing Deutschmark bonds," says Stephan.
Frankfurt was almost certainly not conscious, at the end of the 1960s, that this over-protective attitude would ultimately be counter-productive. "In 1969 I don't think anybody was discussing the issue of whether or not Frankfurt could or would become a European financial centre," says Stephan. "It was accepted that London and New York led the way, but to protect the German financial fortress the Bundesbank implemented a number of small hurdles and hindrances that made it difficult for foreign banks to compete in Germany. I think that marked the beginning of German banks' loss of competitiveness."
It also meant that Frankfurt remained inward-looking at a time when London opened up. "The British took a very cosmopolitan approach," says Stephan. "But when I rejoined Deutsche Bank it was still a very German affair. There were still virtually no Americans or Englishmen working in the Frankfurt banking sector."
It was not just international competition that the Bundesbank discouraged throughout the 1970s. "The Bundesbank was mistrustful of certain short-term instruments, such as CDs, FRNs or anything linked to commodity prices or inflation," says Stephan. "That is why Germany always lagged behind in areas like swaps and derivatives. There was always this strange, subtle link between the Bundesbank and the German banking industry which did not help to promote the development of a financial centre in Frankfurt." Stephan thinks that Frankfurt is probably still paying for that insularity, with German banks still generally lagging behind their Anglo-Saxon competitors in terms of innovation.
How founding fathers see today's markets
At a broader level, however, the Warburgians of the late 1960s appear to be at ease with the way in which their industry has evolved. David Scholey first reported for duty at 30 Gresham Street in 1964 and oversaw the opening of SG Warburg's first office outside the UK in New York in August 1965. By 1967 he had been made a director and in 1980 he would assume co-chairmanship of the firm. In 1995, in the wake of the collapse of the negotiations that would have brought SG Warburg and Morgan Stanley together, he handed over the chair of SBC Warburg to chair the SBC International Advisory Board following the British bank's acquisition by Swiss Bank Corp. Today, Scholey continues to act as a senior adviser to UBS, where he keeps an office adjacent to Lord Roll's.
"I think there has been a continuous process of improvement over the last 35 years," he says. Scholey has spent the best part of the past decade watching the investment banking industry from the other side of the fence. "Since retiring from executive responsibility I've been on the receiving end of the talents, abilities and idiosyncrasies of investment bankers and I see every bit as much concentration on client relationships as there was in the 1960s and 1970s." Perhaps. But others say that the loyalty of the ties that used to bind clients and their merchant or investment banking advisers has been eroded over the past three decades. Ellick says: "If you were to ask me what the most fundamental change in the market has been I would say that the general levels of trust in the City have diminished over the last 35 years. It may sound antediluvian, but the fact is that when you were a broker or an adviser to a company you acted as broker or adviser for life, and you gave that advice freely. That doesn't happen any more. These days you can give your advice freely for five or 10 years and then along comes a competitor and does a deal for your client. Corporate loyalty has been lost."
New technology brings stability Some would argue that there is nothing wrong with that if it reduces companies' borrowing costs and keeps the banking market on its toes. So what if the relentless march of technology has reduced the importance of human interaction? If it has bolstered efficiency and productivity, more power to it.
Take the foreign exchange market. Mark Warms, general manager for Europe of FXall, says that since its foundation in May 2001, electronic FX has grown from a fledgling business into one that has turned over in excess of $8 trillion. "The result is not only lower costs and greater efficiencies but also lower risk in the market as whole," he says. That is a far cry from the late 1960s, when the most technologically advanced piece of equipment bankers had at their disposal was the telex machine, which would remain the focal point of the reception desk at Euromoney – spewing out the identities of thousands of lead and co-lead managers – well into the 1980s. David Reid-Scott, who by the early 1970s was at White Weld in New York, has a vivid recollection of the importance of telex, and of managing the information it provided as efficiently as possible. "Yards and yards of these telexes would come pouring in," he says. "In our New York office we had a lovely man called Charlie who would come in at 6am every day and spend his first two hours cutting up the telexes, copying them, stapling them together and putting them on the desks of the four or five people who needed to know."
Scholey believes that technology has clearly been crucial to the more efficient management of risk. "Technology has transformed the trading process and made it far more transparent than it was in the 1960s and 1970s," he says. "It has also allowed for a much faster response to fluctuations in foreign exchange or commodity prices, so I would say that it has allowed the global financial system to become more rather than less stable."
The personal touch was very much to the fore in the late 1960s at a bank like Warburg. Sir Siegmund was famously fastidious about the people he recruited, generally sending samples of their handwriting to a Swiss graphologist to check for character defects. But he also favoured what a former colleague describes as "controlled democracy", discouraged his staff from staying in the office late for the sake of it, and approved of the word and concept of "fun".
Others in the late 1960s were also trying to persuade prospective employees that a career in banking could be "fun" and exciting, if a recruitment campaign by Barclays Bank is any guide. "Whatever happened to the bowler [hat]?" it asked in an advertisement in June 1969. "If you think working in a bank means being a cheerless young man in a bowler hat complete with a briefcase and a rolled umbrella, you obviously don't know any bank men," it advised. "Things happen in banking, big things, important things.... It is not enough for today's banker to be equipped for an amiably quiet business life. He must have a flair for the cut and thrust of high speed finance, the financial needs of the new affluent society and above all a taste for adventure."
The bowler is long gone, but there are plenty of other much more important ways in which the human element of the market has moved on and will continue to evolve over the coming 35 years. One obvious difference between those who will staff the City in 2039 and those who were there in 1969 will be their nationalities. True, the London of 1969 was considerably more cosmopolitan than most other financial centres – Moorgate was renamed by some as the City's "Avenue of the Americas". But the London of 2004 is infinitely more so. "If I look down the row of colleagues," says one banker in his mid-thirties, "I see a Frenchman, an Indian, a Sri Lankan, a South African and a Welshman, as well as a couple of Englishmen."
There will be increasing diversity in other ways by 2039. At a simple level, advertisements of the sort placed in The Times by the banks of 1969 – "SG Warburg & Co Ltd wish to appoint a man of sufficient maturity to take charge of a number of important portfolios" – would be illegal today, and will probably be viewed as comical historical sexist cameos by 2039. But other groups that have traditionally been under-represented in the City will becoming increasingly prominent. "We think that to be successful, the men and women we hire must reflect the diversity of the communities and cultures in which we operate," is the view of Callum Forrest, head of recruiting for Goldman Sachs in Europe.
With political correctness, however, has come an intrusiveness in the City's affairs that many believe has already been taken much too far. True, the long arm of external regulation had started to poke its way in by the time Euromoney was founded, with the creation the previous year of the Takeover Panel. But it would be a long while before the panel was able to wield much power. Today, however, some bankers in their thirties express the concern that regulation might become self-defeating. Individuals are generally reluctant to criticize the regulator on the record. But one says he is especially disturbed about the potential of growing pressures from ratings agencies on one side, the Basle guidelines on another, and idiosyncratic local regulations on a third to lead to virtual paralysis of commercial banks. "There comes a time when banks need to be allowed to understand that they are in the business of taking risk," he says. "Regulators can't de-risk a bank, because a bank is by its very nature a leveraged, risk-taking institution."
Thirty-five-year-olds look forward
For European investment bankers in their mid thirties, another source of anxiety is the persistence of competitive pressures. To date, says Hans Lentz, head of the FIG syndicate at BNP Paribas in London, landmark developments such as the launch of the euro, the EU's ruling on state guarantees for German Landesbanken, and the introduction of the pot system have not had the effect of flushing out some of the weaker competitors in the industry. "What I would like to see happen in Europe is for the number of banks involved in the underwriting game to be reduced by half," says Lentz. "The ideal situation would be one that is closer to the US market which is controlled by a smaller number of banks. In Europe there are still too many banks prepared to buy market share for league table purposes."
Another challenge facing the investment banking practitioners of the future is the increasing sophistication of their clients. In the London of the late 1960s and 1970s, a symbol of the relationship between merchant banks and their clients was that companies were generally expected to visit their banks, rather than the other way around. That relationship has since been reversed, with competing investment bankers now often forming orderly queues outside clients' offices with a view to persuading them to buy new structures or products – which was a development that began in the US in the 1980s and is as conspicuous there as it has been for the last two decades. "Thirty years ago, there was very little financial sophistication in the corporate sector," says Fred Joseph, who started his Wall Street life as the "third or fourth" member of EF Hutton's corporate finance department. "If a company liked the ideas you suggested it would generally appoint you to arrange it. That has changed completely. Recently I talked to a company about doing a high-yield bond, an idea no other banker had suggested to it. A week later it emailed me to say I must have been right because 14 other firms were suggesting the same product. In 1969 that would have been inconceivable."
Sean Park, global head of debt syndicate at Dresdner Kleinwort Wasserstein (DrKW), agrees that corporate borrowers are far more sophisticated these days, so bankers might need to be increasingly humble in their dialogue with clients. And that process is not restricted to the bond market. Jean-Marc Legrand of the loan syndicate desk at Société Générale in Paris – who was born in the same month as Euromoney – says that a similar trend has been emerging in the loans market. "In the transactions we are working on today we are seeing fewer financial covenants and generally weaker documentation," he says. "Finance directors are clearly talking to each other more and pushing more aggressively in terms of pricing and conditions. They are also finding more strategic arbitrage opportunities between loans, plain-vanilla bonds and asset-backed securities."
Whether or not the increased power of the client is a short-term phenomenon or one that will gather more momentum over the coming three decades is open to question. But there appears to be a belief among today's thirty-something bankers that if their industry is to continue to deliver value to its clients, it will need to continue to innovate at least as quickly and consistently as it has done over the past 35 years. Those that fail to do so, suggests DrKW's Park, will find themselves sucked into a middle ground that will be more akin to a factory, churning out commoditized plain-vanilla structures for virtually non-existent margins. "The basic premise of building a book has not changed in 100 years," says Park. "After all, the expression 'bookbuilding' came from people with leather-bound books laboriously writing down where orders had come from. That was why a deal for a Russian railroad would take four or six weeks to complete. Ten years ago the same deal would have taken a week or two. Now it takes an hour or two. And in 10 years it will be done so quickly that the market will probably be able to accommodate five times as much volume with fewer people."
More competition among banks. More sophisticated and demanding clients. More automation in syndication and distribution. Machines becoming more important than human initiative. Time, surely, for the best graduates to start shopping around for careers in areas other than investment banking?
But JPMorgan's co-head head of debt capital markets origination, Sjoerd Leenart, another banker born in 1969, is anything but downbeat. "Of course more commoditization and more banks is good news for issuers, because it has made tapping markets easier and less costly," he says. "But I think that is encouraging more innovation in the investment banking industry rather than discouraging it. The survivors will be those that can stay at the cutting edge by recycling ideas into new products."
To check up on those survivors, be sure to read Euromoney in June 2039.