Chris O’Malley: The dark arts of the syndicate
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Chris O’Malley started out at stockbroker Phillips & Drew in 1974 at a time when the debt side of the firm was dominant. In part, this was down to the winning of a big contract for the Mars pension fund, which insisted on a first-class gilts operation.
O’Malley started in short gilts, before moving into local authority bonds. But by 1977 he would be on the move.
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Chris O’Malley |
“I was in line to move onto the long gilt desk, but then the firm hired Philip Howard from Deltec, one of the original Eurobond trading houses, and I was offered the opportunity to join him to set up a new international bond business for the firm,” says O’Malley.
He describes the market in those days as a strange place. “What would happen is that I would get on to my clients, get an order and then go to an underwriter and get the paper,” remembers O’Malley. “But increasingly the underwriters were saying: ‘Why can’t we sell the stuff ourselves?’ I eventually became head of sales at Credit Suisse First Boston because of that.”
These were the days of invitations into huge selling groups and reams of telex paper.
“You would come into the office in the morning to find three or four metres of telex, with a list that started at Amsterdam Rotterdam Bank and finished at UBS,” says O’Malley.
Hot deal
If a deal was going to be hot, you knew it was unlikely the leads would give you anything, as O’Malley recalls: “As always, you would explain that you had excellent client demand for a particular number of bonds and ask could they at least offer a minimum allotment up front?
“This request for ‘protection’ was rarely accommodated, but if it was, it probably meant the issue was not in great shape.”
And that could land you in trouble. O’Malley remembers one occasion where by the time a deal finally appeared the market was in a shocking state – but the lead held him to his allotment.
The great thing about Stanley was that he started talking about screens and technology before anyone else- Chris O’Malley
The late 1970s saw a debate raging about the grey market for Eurobonds, something that was being pioneered by Stanley Ross at his own firm, Ross & Partners.
“The great thing about Stanley was that he started talking about screens and technology before anyone else,” says O’Malley. “He had the idea of putting up a page on a Reuters screen that would have the prices where he thought a deal should truly trade.
“It meant you might bring a new issue that you could open with 98¼ with fees and then Stanley would open at 97¼. The leads hated it, but he was debunking the market.”
The topic came to a head at a 1979 meeting of the Association of International Bond Dealers; Ross won the day. Nonetheless, lead banks continued to fight against it when they could. Armin Mattle at UBS famously set up a short squeeze on Ross in 1980 by hitting every price Ross posted while knowing that UBS controlled the entire issue and that Ross would therefore not be able to cover his position.
The grey market had partly been encouraged by the lack of discipline in early syndicates, whereby junior members might look to offload bonds as soon as possible. The introduction of the fixed price reoffer in the late 1980s, whereby the syndicate would agree not to sell away from the official terms until an agreed point in time, was an attempt to improve matters.
“The trouble was, deals were still bought far too tightly and co-managers struggled to sell paper,” says O’Malley. “On enquiring about the state of the deal from the lead manager, they were invariably told it was in good shape. The co-managers might reply: ‘Well, if it’s so good, why are you not breaking syndicate?’”
Breaking early
The result was that deals would often break earlier than they should have done.
“The lead manager would try to fool the market,” adds O’Malley. “He might know that over 50% of the bonds were unsold but still break syndicate to suggest everything was fine with the issue and just hope he could muddle through.”
O’Malley moved to CSFB in 1982 – where he would work under Hans-Joerg Rudloff – after being at Savory Milln since 1979, another stockbroker for whom he also set up a bond desk and that would end up being acquired by Swiss Bank Corporation.
He was at CSFB until 1985, when he was headhunted by Samuel Montagu as global head of bond sales. He would stay at Montagu until 1998, by which time the firm had first been taken over by Midland Bank and then Midland by HSBC, where O’Malley set up a team focused on the Middle East, India and Africa.
Since leaving HSBC, he has advised first the International Primary Market Association and then the International Capital Market Association, as well as teaching capital markets courses for Euromoney’s training division.