Bob Diamond first came to Wall Street as a technologist in 1979. He had been working in the IT department at US Surgical, a medical company, when his boss was recruited to build the new systems Morgan Stanley needed to compete against scrappier firms using their trading smarts to win client mandates.
“Salomon Brothers had won its first lead manager role for IBM, and that was a shot across the bows of the established firms,” Diamond recalls.
These had good client relationships, but they were not powerhouses. “Morgan Stanley had maybe $25 million in capital and employed roughly 1,000 people,” Diamond says.
For over two years, he worked in the back office, becoming fascinated by the business of Wall Street. “I asked my new bosses if they could give me a trading job after we had completed our IT work – and the good news was that they kept their promise,” he laughs. “The bad news is, it was the most junior trading role in overnight repo.”
These were one-day loans, but he was dealing in billions of dollars’ worth a day. He was soon doing term repo, taking a little more risk, and rose to running all money markets until the day in 1988 when John Mack, chief executive of the firm, asked him to move to London and run all non-dollar fixed income trading there for Morgan Stanley.
“That sounded fantastic,” he says, “until I got to London and discovered there basically was no non-dollar fixed income trading.”
He remembers: “The Eurobond market, which was dominated by figures like Hans-Joerg Rudloff at Credit Suisse First Boston, was a sovereign bond business with a lot of floating-rate notes, trading on thin margins and not even great volumes.”
Diamond arrived realizing the need to go to work on the infrastructure of the underlying markets in German bunds, Italian BTPs, French OATs, and UK Gilts.
“Mack had come to me at the end of 1986 and asked me to work out how the traders in Europe thought they had had such a great year but still not delivered much profit,” says Diamond. “I discovered that they would often be selling through Euroclear and buying through Kassenverein, and that because one worked on two-day settlement and one on seven-day, there was a big financing cost to cover short positions.”
Diamond set up a repo trading desk. “Because we had the best financing operation and the best trading desk, we could trade higher volumes than the other investment banks at a time when there were huge pools of capital – not least at the central banks – that needed to be put to work.”
All the other European banks saw us making profits every quarter. And yet none of them copied us- Bob Diamond
Diamond recalls the first bond issue in ECU, the forerunner of the euro. The issuer, ironically, was the Bank of England.
“Ian Plenderleith was organizing it and he knew the importance of sophisticated underlying repo and financing for European capital markets and recognized the work we had done,” Diamond recalls. “I remember the meeting when he announced that Morgan Stanley would be the lead manager. I was watching Hans-Joerg Rudloff, who had just lit a cigarette. He crumpled it up in his fist.”
“It never made a penny of profit outside the UK in any year,” recalls Diamond.
He knew from the outset he could not compete with the US investment banks in the marquee business of strategic advisory and equity raising. So instead he built up a financing and risk management firm, developed bond and currency trading, debt capital markets and risk management, working with growing investors in emerging markets and only expanding in Europe with the advent of the single currency.
There were early setbacks. It had substantial exposure to Russia when it defaulted on its domestic bonds and was a large counterpart to LTCM. Diamond survived but learned a lesson. He closed proprietary trading.
For the next 10 years the firm delivered 20% compound annual growth in revenue and profit without a single losing quarter. When the financial crisis hit in 2008, it was positioned to pick up the US broker-dealer arm of Lehman Brothers and Diamond had the strategic advisory and equities business he had always craved in the world’s biggest investment banking market.
Forced out over the Libor scandal in 2012, he didn’t have long to enjoy it. What strikes him looking back?
“All the other European banks saw us making profits every quarter. And yet none of them copied us,” he says.