Summer torpor shattered by the sound of distant gunfire. Of what do I speak? The unexpected hostilities in southern Lebanon? Wealthy hedge fund managers stalking grouse on the verdant Scottish moors? Chuck Prince exercising with his personal trainer? Of course not. I am referring to the recent putsch at Merrill Lynch. “Just when I thought it was safe to poke my head above the parapet,” a Lyncher moaned, “I realize I need to don a balaclava.”
Jeff Chandler, Doug DeMartin, Jeff Kronthal and Harry Lengsfield are out. Osman Semerci (pronounced the French way although Osman is Turkish) and Rohit D’Souza are in. My initial reaction was surprise. In a recent Euromoney interview, Merrrill’s chairman and chief executive, Stan O’Neal stated: ‘We have a global fixed-income business at the top of its game.’ In my humble opinion, if something is at the top of its game, it can’t get better. The personnel changes in the firm’s global markets division imply a need for improvement.
“The facts and figures didn’t lie,” Merrill’s chief administrative officer, Ahmass Fakahany said in the July issue of Euromoney, talking about the firm’s flabbiness in the early noughties. And maybe the numbers offer an explanation for this reshuffle. Merrill’s second-quarter profits were good but not as glittering as Goldman’s results. Net earnings were 1% lower than in the first quarter and debt markets disappointed. Net revenues from this area were down 18% on the first quarter because of weaker trading performance in credit, interest rate and commodity products – although Merrill was not the only one to suffer. But, as an Alpha female friend of mine put it: “If you’re not moving forwards, you’re moving backwards. Standing still in life just doesn’t work.”
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| Where should the power lie? Sometimes every eventuality is catered for but clarity is blurred. The next few quarters will show if Dow Kim has got the balance right |
And it seems that Dow Kim, Merrill’s co-president of global markets and investment banking agrees with Alpha Female. For these changes are all within Kim’s empire.
A source says that Merrill has underperformed significantly in two sectors – foreign exchange and non-cash equities – and these changes reflect this underperformance. For example: in the Euromoney 2006 FX poll, Merrill slipped from sixth to 10th position by overall market share. Someone caught up in the recent exodus sniped: “Does anyone senior last longer than two years in FX at Merrill?”
On the equities side, Merrill was always strong in cash but weak in other areas, such as portfolio trading and equity derivatives. D’Souza was hired from Morgan Stanley in October 2004 to remedy these deficiencies. And he is doing well: in the second quarter 0f 2006, Merrill reported that net revenues from equity markets had increased significantly to $1.9 billion – up 84% on a year ago and up 19% from the first quarter of 2006.
An insider proffers a different explanation for the upheaval along the lines of: Your face don’t fit any more. According to Insider, Lengsfield and company were “old school” Lynchers of the “hale fellow, well met” variety – as comfortable drinking beer in a bar as scrutinizing a Bloomberg screen. “That’s simply not Dow’s style,” insists Insider. “The new crowd ain’t leaving the building until 10 o’clock at night.”
It sounds distinctly dreary to me. But then I never quite got the whole long hours investment banking culture. When I was a graduate trainee at Merrill Lynch in the 1980s, my boss Knut Ramel wanted me to work through the night drafting an invitation telex. He was surprised when I refused, citing a dancing date at Annabel’s’ nightclub. But, perhaps because he also had maverick tendencies, he forgave my youthful arrogance.
Semerci and D’Souza at 38 and 42, respectively, are relatively young themselves. Under the new structure, Semerci will run trading and sales for fixed income, currencies, and commodities; D’Souza will head global equities sales and trading and also becomes head of Americas’ global markets. Semerci continues with his regional responsibility as co-president of EMEA global markets and investment banking and will be based in London. “Finally, we have a European running a global business from Europe,” a senior Lyncher said. Does this reflect Merrill’s desire to grow non-US revenues or is there a more prosaic lifestyle reason?
Pundits claim that both men are excellent professionals. I look forward to meeting them. But a part of me questions whether it needs to be so complicated. Investment banks are bipolar. They suffer from an inherent region versus product tension. Where should the power lie? Sometimes every eventuality is catered for but clarity is blurred. The next few quarters will show if Kim has got the balance right.
Young Turks might be the answer to Merrill Lynch’s prayers but Lehman Brothers sees things differently. And now comes news of another “sprightly senior” skipping gleefully in to Dick Fuld’s fold. Last week it was announced that 78-year-old Felix Rohatyn will join Lehman as a senior adviser to chief executive Dick Fuld and will chair the firm’s international advisory committees. “When I saw the headline on the screen, I assumed it must be the son Nick (a hedge fund manager), not the father,” quipped one of my colleagues. Devoted readers will recall that, in an earlier column, I applauded Lehman as a beacon of anti-ageism in an industry that is obsessed with youth. Half of Lehman’s board members are sanguine septuagenarians.
Rohatyn senior is of course a legend in his own breakfast, lunch and dinner time. “The Maurice Chevalier of investment banking,” a source chortled. Born in Vienna, raised in France, Rohatyn came to the US as a teenager. A friend who used to work at Lazards insists his nickname was “Felix the fixer”. And Rohatyn’s curriculum vitae reminds most of us that we are paltry pigmies in the commercial world.
His accomplishments are multifold: a partner at Lazard Frères for more than 30 years, US ambassador to France between 1997 and 2000 (there was no talk of freedom fries in his day), and vice-chairman of Manhattan’s prestigious Carnegie Hall. “He is one of those people who really spans the world. You can talk to him in any context. And he’s passionate about arts and education,” Sir Clive Gillinson, Carnegie Hall’s executive and artistic director, told me. The average punter, however, reveres Rohatyn for sorting out New York’s financial crisis in the 1970s. “The man who saved New York,” purred one commentator. A Lehman Brothers source boasted: “Rohatyn has a Rolodex the size of a football pitch. He will be the most senior of senior advisers.”
Undoubtedly, Rohatyn has excellent European business connections. He is on the board of several major French companies, including LVMH. Nevertheless, a redoubtable 60-something European chairman claimed their paths had never crossed: “Abigail,” he said firmly “I don’t know the man. That is another generation. And generation mattered to them.”
European Chairman might be right but cross-generation friendships can be wonderful, albeit combustible. Think about the recent business bust-up of 83-year-old Sumner Redstone and 44-year old Tom Cruise. Or the costly disintegration of 64-year-old Sir Paul McCartney’s marriage to 38-year-old Heather Mills. In some respects, wise experience will always vanquish youthful hunger. And as I believe much tougher times lie ahead for the investment banking industry, Fuld might find Rohatyn’s special advice invaluable. What do you think?
Labor Day looms: the American holiday symbolizes an end to lazy, hazy summer days. And in sympathy with this lighter touch, next week’s column will look at modern mores – the good, the bad and the ugly. And as bankers finalize their hectic itineraries for the IMF and World Bank annual meetings, I ponder my own experiences at the ‘see and be seen’ financiers’ fiesta. Please send news and views to abigail@euromoney.com.