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Opinion

The Big Apple (or is it a Bagel?)

Last week was an interesting week to be in New York. It was the week of the double Bs and I’m not referring to cup size. Or to put it another way, the week of B-S squared: Blackstone and Bear Stearns.

“New York, New York, if I can make it there, I’ll make it anywhere,” warbled Frank Sinatra. And like all the best lines, it’s true. New York is bigger, better and brighter than any other metropolis – or at least that’s how it seems.

I was in the Big Apple (or should that be the Big Bagel?) last week. Commentators insist that the hub for high finance is migrating from New York to London. If that’s true, why can’t you find a decent bagel in London? (You can. Try Brick Lane: Ed) Everyone knows that bagels and banking are inextricably linked.

All the New York clichés are true: the horns, the hustle and the histrionics. It’s ‘Rags to riches’ writ large. The driver of the yellow cab that I hailed to go down-town stuttered in broken English that he had never heard of the World Financial Center. Whereas outside Merrill Lynch, the limousine drivers idled in the sun waiting for the kings of capitalism to emerge. On a sleepy Saturday morning in Little Italy, five cops had a black guy spread-eagled against a brick wall and were frisking him. I didn’t hang around to find out what came next.

Double-B-S

Last week was an interesting week to be in New York. It was the week of the double Bs and I’m not referring to cup size. Or to put it another way, the week of B-S squared: Blackstone and Bear Stearns. I sensed an ambiguity about the Blackstone flotation. It was a success, despite the jittery market. However, Wall Street worries that when Blackstone CEO Steve Schwarzman is a seller, it’s unwise to be the other side of the trade. And Main Street was disenchanted by the eye-watering compensation numbers bandied about. Savvy Steve made over $600 million from the sale: his stake in the company is now valued at approximately $10 billion. There was also some sniping about Goldman’s role in the deal. Initially, Goldman was not on the list of underwriters, but sneaked in later as a lowly co-manager. “Clients now recognise that Goldie is as much of a competitor as an adviser,” a source said truculently.

But when people talked about the floundering Bear Stearns hedge funds, I smelled raw fear. We’ve all been cocooned in a bubble that bears the caption ‘Easy money’. And how smart do you have to be to realize that a tiny needle can burst a big balloon? The B-S situation is a murky combination of lethal leverage and illiquid instruments. And yet again, many of Wall Street’s finest are involved. Barclays, Bank of America, Citi, Deutsche, JPMorgan and Merrill Lynch are all there. The flailing funds invested in collateralized debt obligations backed by bundles of sub-prime mortgages. And the sub-prime sector is sick. Will these B-S funds turn out to be a mere hiccough in a sunny summer (think Amaranth) or a tornado that threatens to bring the house down (think LTCM)? What do you think?

The name's Fleming. Greg Fleming

One man who probably knows the answer – even if he wasn’t sharing it with me – is Greg Fleming, Merrill Lynch’s recently appointed co-president. The 44-year old Mr Fleming is dashing, driven and dynamic. I liked him. In fact, I liked him a lot. Mr Fleming possesses a humility and self-deprecating humour that Wall Street titans rarely display. We had a wide-ranging discussion that covered economics, the financial industry and of course, Merrill Lynch. Greg talked more about clients than any other senior banker I have met. How refreshing in this age of: ‘Prop trading conquers all’.

Greg highlighted that non-US markets will be vital for investment banking: in the first quarter of 2007, 54% of the net revenues from Merrill’s global markets and investment banking division came from outside the US. He quoted another impressive statistic: 4 billion people are living under capitalism today, compared with 1 billion in 2000, so the potential for growth in financial services is huge. Greg described Merrill as “The momentum firm.” The phrase has a glibness about it that could curdle, but it also has a ring of truth. And that’s what great leaders do: they coin captions that line the troops up behind them. When Edson Mitchell moved to Deutsche from Merrill in 1995, there was suddenly a buzz about “being world class.” When Bob Diamond came to Barclays in 1996, the water-cooler chatter revolved around “breaking down silos.”

‘The king is dead, long live the king’ is as applicable to investment banking as it is to constitutional history. Mr Fleming strikes me as a highly credible successor to Merrill’s chairman and chief executive, Stan O’Neal. However, it may be rash of me to make a judgement before I have met the other Merrill co-president, Ahmass Fakahany, who, I am assured, is equally talented.

Our meeting had over-run, Greg gracefully said good-bye and left the room. I stayed behind for a few minutes chatting with one of his colleagues. As I went down the escalator leading to the main Merrill exit, I saw Mr Fleming again. He was standing, with his back to me, at the foot of the escalator, engrossed in conversation with Mr O’Neal. As I sailed past, resplendent in my cherry red espadrilles, Stan looked at me and wrinkled his nose. Maybe he recognised me (we have met once), or maybe he was horrified by the flamboyance of my attire. We may never know what caused the wrinkling of the O’Neal nostril but could it be that Stan and Greg were discussing the troubled Bear Sterns’ hedge funds? Merrill is a creditor with about $850 million of exposure. A source sniffed: “That number represents gross exposure and is obviously collateralized. Anyway, the press may be over reacting – in part because these are Bear Stearns funds.” More of Mr O’ Neal next time: Stan will be speaking at the Euromoney forum and I will be in the audience.

Wicked whispers

Which head of FICC, while visiting a hedge fund, complained that his firm didn’t value him sufficiently and that he could start his own hedge fund the next morning. The hedgehog responded: “Why don’t you?” Head is still at his desk at the European bank.

Of which investment banker is it said: “He loves being famous. He manages his press relations personally but employs an army of libel lawyers.”? And the lawyers were apparently on the warpath earlier this month.

Next week: The eagle has landed? Please send news and views to abigail@euromoney.com

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