The thing that Vikram Pandit remembers most about joining Morgan Stanley in 1983 is the way a small firm preserves its culture.
“Modern finance theory was just beginning to be put into practice,” says Pandit.
He soon found himself in the equities business, building a modern equity capital markets department, with product specialists knowledgeable about cash and derivatives markets covering issuers and dealing with syndicate.
US firms were exporting their way of organizing capital markets to the rest of the world.
“I remember working with David Mayhew at Cazenove, a wonderful and very clever man, but Europe was still dominated by its commercial banks as providers of finance to companies and by the Eurobond market, and we American firms were pioneering a new equity market with a new kind of underwriting contract,” he says.
While Pandit recalls the big European privatizations, it was the ground-breaking sale by Wellcome Trust of a big stake in the eponymous pharmaceutical company, Wellcome PLC, that stands out now.
“The tradition had been in Europe that banks underwrote equity offerings at a fixed price, whereas the US firms used book building as a means of price discovery. Wellcome Trust went for a global book building that helped set European capital markets on a new course.”
He also recalls the electronification of US equities in the 1990s, a change that he sees other markets still grappling with today.
“The difference with equities is that it was always exchange driven, unlike swaps or fixed income or FX. And of course, dealers always have an incentive to resist market structure change. But market structure is a policy issue and regulation is driving all markets towards greater transparency. Transparency tends to open access and reduce costs. For example, that is what has led to the creation of large, low-cost index funds for the average individual that wants exposure to the stock market.”
Pandit loved the markets and looked as if he could be a candidate to head Morgan Stanley, but he eventually set up a hedge fund. He will always be remembered for selling this to Citigroup, joining its senior ranks just as the enormous institution created from serial mergers by Sandy Weill lurched into crisis at the end of 2006.
He found himself appointed chief executive at an extraordinary moment after the ouster of Chuck ‘gotta get up and dance’ Prince.
Euromoney covered Pandit’s work to revive Citigroup in great detail.
“I am extremely proud of what we achieved,” he says now. “It was an existential issue for a storied bank that had simply run out of control. We had to get it back on a sound financial footing in a structure that allowed proper controls over a sustainable mix of businesses.”
He was chief executive until 2012.
“In hindsight we got it done extraordinarily fast,” he says.
Pandit now is chairman and chief executive of Orogen Group, a private equity investor in the technology of financial services. He is still driven by a vision that echoes his arrival on Wall Street as the computer age took over.
“The fundamental lesson of the financial crisis was that by the end of the 20th century the financial architecture had come to rest on a great capital arbitrage – with banks running on low regulatory capital instead of appropriate economic capital – and that could not persist. That capital arbitrage had driven the search for scale. But the architecture of the 21st century will see much greater differentiation in financial business models and much greater disintermediation.”
Euromoney points out that for all the emergence of new middle-market lenders, payments innovators and specialist providers in foreign exchange, the big banks still dominate the scene.
“Give it time,” Pandit says. “The need for financial services has gone up since the crisis, but banks’ revenues have stayed the same. This will be a generational shift. Banking is a bit like software. There are two business approaches: either bundle or unbundle. Capital arbitrage in banking led to scale and bundling. But companies now have to ask: ‘Does what I provide offer value to a client and am I the best provider in a world where my costs and charges are increasingly transparent?’
“There will be new providers. And often products, like credit cards, that may stay the same and look unchanged to the customer will have the entire process behind them transformed.”
Orogen has investments in Virtusa, an IT consultant and outsourcer; Fair Square Financial, a new credit card provider; and in EXL, an operations management and analytics company.