Carsten Kengeter’s appointment as head of investment banking at UBS AG (UBSN), Switzerland’s largest lender, is one more sign that on Wall Street debt is king.
Kengeter, 43, who was head of fixed-income trading at the Zurich-based bank, joins Deutsche Bank AG (DBK)’s Anshu Jain, HSBC Holdings Plc (HSBA)’s Stuart Gulliver and Barclays (BARC) Plc’s Robert Diamond as executives with debt-trading backgrounds who have won recent promotions even after a global credit crisis that centered on fixed-income products such as mortgages, collateralized debt obligations and credit-default swaps.
“At first sight, it is quite surprising because the groups that lost all the money were primarily in fixed income,” said Philip Keevil, a senior partner at investment bank Compass Advisers LLP in New York and a former head of Citigroup Inc. (C)’s European mergers team. “But the people who get the top jobs ultimately come from the divisions currently making the money.”
Fixed-income markets are once again the biggest revenue drivers at the world’s 10 largest banks after the credit crunch cost financial companies worldwide $1.8 trillion in losses, forcing government bailouts from Dublin to Washington. The buying and selling of bonds, currencies and commodities accounted for more than half of total investment banking revenue in 2009 and in the first half of this year, according to data compiled by Bloomberg.
UBS, Frankfurt-based Deutsche Bank and Barclays and HSBC of London reported more than $24 billion in revenue from that area in the first six months of the year. That compares with almost $20 billion in losses in 2008, after a record deficit at the Swiss bank.
Return to Profit
UBS chose Kengeter, a former co-head of Goldman Sachs (GS) Group Inc.’s securities business in Asia, as sole head of its investment bank on Sept. 28. The move emphasized expertise in fixed-income markets, a business that helped UBS return to profit in the first half and that Kengeter previously ran.
Deutsche Bank’s Jain, 47, who helped build Germany’s biggest bank into a debt powerhouse, took over as sole head of the corporate and investment bank in July. His debt-sales and trading unit generated 52 percent of total revenue at the corporate and investment bank in the first six months of the year, helping the firm report its highest first-half profit since 2007.
Diamond, 59, who joined Barclays’s investment bank in 1996 to oversee its fixed-income business, was named chief executive officer in September. He led the bank’s purchase of Lehman Brothers Holdings Inc.’s U.S. operations in 2008 and boosted the investment banking unit’s revenue to 11.6 billion pounds ($18.4 billion) last year, up from 5.2 billion pounds in 2008.
Gulliver, 51, who gained experience with credit, currencies and rate products while running the bank’s treasury in Hong Kong, was named CEO on Sept. 24, after revenue at his global corporate, investment banking and markets unit almost doubled to $21.9 billion last year from 2005, making it HSBC’s fastest-growing division.
In each case, the promotions involved bypassing other executives whose backgrounds were in areas such as corporate finance or retail banking. Kengeter won the top job as co-head Alexander Wilmot-Sitwell, 49, who had overseen merger advisory and underwriting, was moved to help lead Asia, and Jain gained his position when co-head Michael Cohrs, 53, who had run merger advice and equity underwriting, opted to retire. Gulliver and Diamond were both promoted over executives with experience managing consumer-banking divisions.
“The big rebound in business came in fixed income, fueled by low interest rates, wide spreads and quantitative easing,” said Simon Maughan, an analyst at MF Global in London. “Any bond guys who had dug in during the crisis had a spectacular 2009 and redeemed themselves in the eyes of peers.”
The only big Wall Street investment bank whose recent management changes went in a different direction is New York-based Morgan Stanley (MS), which chose a CEO, James P. Gorman, with a brokerage and asset-management background. Gorman, 52, who took over in January, previously ran Morgan Stanley Smith Barney.
Goldman Sachs, the most profitable securities firm in Wall Street history, is still managed by CEO Lloyd Blankfein and President Gary Cohn, who come from the fixed-income and commodity-sales and trading divisions. Both men have been in their positions since 2006.
Fixed-income hasn’t always been the dominant business for Wall Street banks. In 2000, Goldman Sachs derived 18 percent of revenue from trading fixed-income, currencies and commodities, or FICC, and 32 percent from takeover advice and underwriting. Last year, by contrast, FICC supplied 52 percent of revenue, while advice and underwriting made up 11 percent.
Deutsche Bank, Barclays and HSBC all have in common that they didn’t require government money during the financial crisis, even as they wrote down billions of euros, pounds and dollars on debt products. UBS was rescued from near collapse in 2008 by the government and Swiss National Bank after it piled up $44.2 billion of writedowns and credit losses, at the time the most of any European lender from the global credit crisis.
The Swiss bank hired former Credit Suisse Group AG (CSGN) CEO Oswald Gruebel in February 2009 out of retirement to revive UBS. Gruebel, 66, a former Eurobond trader, hired more than 850 people to rebuild the bank’s debt and equity units and boosted capital and tried to stop outflows from the wealth business.
“Anyone who’s survived the financial crisis has gathered a lot of experience that’ll be needed in the coming years,” said Konrad Becker, a Munich-based analyst at Merck Finck & Co. “Banks aren’t going to return to their riskier pre-crisis business model just because these guys are coming out of fixed income. It’s no longer affordable under new regulation.”
Regulators have been tightening capital rules and introducing new measures such as liquidity requirements after coming under political pressure to rein in banks’ risk-taking amid taxpayer bailouts. The Basel Committee on Banking Supervision in September reached an agreement for rules that more than double capital requirements.
Steps by governments and central banks to stabilize the financial industry have failed to stop the spread of the crisis to public debt. European leaders set up a 750 billion-euro ($1.03 trillion) financial lifeline in May to backstop the region as the fallout from Greece’s near default raised concerns of contagion. Ireland is trying to stave off financial ruin by rescuing its banks, measures that may cost the country as much as 50 billion euros, the government said on Sept. 30.
Next Brady Bond
“The recovery of this whole process, which is only partly accomplished so far, is going to depend on some extraordinary new fixed-income developments,” said Roy Smith, a former Goldman Sachs partner who’s now a finance professor at New York University’s Stern School of Business. “Somebody’s going to have to come up with the next Brady Bond plan for Greece and Ireland” for instance, he said. Brady Bonds are named after former U.S. Treasury Secretary Nicholas Brady, who sponsored the effort to restructure emerging-market debt instruments.
Kengeter, named head of UBS’s debt business in September 2008, helped rebuild the unit following the bank’s losses.
Jain, who took over debt sales at Deutsche Bank after his mentor Edson Mitchell died in a plane crash at the end of 2000, more than doubled the division’s revenue by 2009. After the investment bank reported a record loss in 2008, he cut assets at the trading unit by 47 percent, reduced jobs by 25 percent and scaled back proprietary trading. The division returned to profit in 2009 and generated 78 percent of the bank’s pretax earnings in the first half of this year. Jain is considered a candidate to succeed CEO Josef Ackermann.
Diamond, an American, rose up through fixed-income trading ranks at Morgan Stanley and Credit Suisse First Boston before leading Barclays’s investment banking expansion. He was beaten to the CEO job by John Varley in 2003 and became president of the bank in 2005.
Gulliver worked his way up at HSBC over 30 years from treasury department roles in London and Asia, where he learned to manage funding, liquidity and interest-rate holdings. That training in risk helped him steer HSBC’s traders through the Asian financial crisis of the 1990s and allowed the securities unit he oversees to survive the subprime bubble with smaller losses than competitors, including Barclays Capital.
Executives with fixed-income trading backgrounds haven’t been rewarded at U.S. banks to the same degree they have been at U.K. and European banks. That may be partly because management changes at U.S. banks occurred nearer to the credit crisis.
JPMorgan Chase & Co. (JPM) ousted William “Bill” Winters, who had a background in fixed-income derivatives, from his role as co-CEO of the investment bank in September 2009 and replaced him with James “Jes” Staley, who worked in equity capital markets before running JPMorgan’s private bank and asset management units.
Bank of America Corp. (BAC), the largest U.S. bank by assets, tapped Brian Moynihan, 50, a former lawyer who was running its consumer-banking division, as its new CEO in December 2009. Citigroup CEO Vikram Pandit, 53, who won his job just as the credit crisis was gaining steam in 2007, has a background running equity trading at Morgan Stanley.
Morgan Stanley, which was the second-biggest U.S. securities firm before converting to a bank in September 2008, has done the most to deemphasize fixed-income trading as it shifted to a focus on providing financial advice to individuals.
John Mack, 65, who ratcheted up trading and risk-taking at Morgan Stanley when he re-joined the firm as chairman and CEO in 2005, turned over the CEO role to Gorman at the end of 2009. Gorman has never run a fixed-income trading floor.
Still, until instituting a hiring freeze in September, Gorman stuck to the firm’s plan to try to rebuild its sales and trading desk by hiring about 400 people.
The promotions of Jain and Diamond at Deutsche Bank and Barclays come as both firms are trying to cut their dependence on investment banking, which generated more than three-quarters of profits in the first half. Diamond has pledged to boost the British bank’s consumer unit, while Deutsche Bank CEO Ackermann, an investment banker, is buying Deutsche Postbank AG to bolster retail banking.
Smith, the NYU professor and former Goldman Sachs partner, doesn’t think changing direction will be easy.
“You cannot underestimate the desire and the willingness of these firms to continue to do in the future what they did in the past,” Smith said.