How Much Loss Can a Firm Take?

The attack has Keefe Bruyette testing the limits

On Sept. 22, 11 days after the terrorist attack on the World Trade Center, John G. Duffy had to miss the memorial service for his long-time business partner, Joseph J. Berry. It was held at the same time as the funeral mass for his 23-year-old son, Chris.

That agonizing conflict highlights the tough days ahead for Duffy, co-CEO of Keefe, Bruyette & Woods Inc., as he struggles to rebuild the elite investment banking firm once headquartered at Two World Trade Center. "On a personal level," he says, "you rely on other family members and your faith to get through this. Professionally, it's not a whole lot different. You rely on your other employees, and if they have the right kind of resolve, I think we can rebuild this thing."

Few firms have been so deeply and irrevocably devastated by the World Trade Center attack as KBW. In all, 67 of the firm's 172 New York-based employees died or are still missing. They accounted for nearly a third of KBW's 224 employees. In a stroke, the firm, which specializes in the financial-services industry, lost more than 400 years of professional experience and much of its leadership. Gone are five of nine board members, including KBW's directors of equity trading, bonds, and research, along with its most prominent and influential financial analysts. Those missing or dead were responsible for 40% of KBW's annual revenues, which reached $125 million last year. In addition to the human loss, the firm lost its headquarters and every shred of paper documentation that existed there.

The magnitude of KBW's troubles raises questions of how much a single company can lose and still retain a strong enough core to regenerate itself. The survivors are determined to remake the firm and stay in New York. In the midst of incredible stress and trauma, they are forced to make key decisions on almost every front, from choosing new office space to interviewing scores of candidates to rebuilding their operations. If the firm is to resume anything like its old scope, those decisions must be made as quickly as possible. Meanwhile, almost every day brings a new funeral or memorial service. "Nobody's been through anything like this," says Duffy. "There isn't a rule book to tell you what you should or shouldn't do."

EARLIER REBOUND. Until Sept. 11, the firm had been well on its way to a turnaround of sorts. Duffy, 52, and Berry, 55, became co-CEOs 2 1/2 years ago after former CEO James J. McDermott Jr. resigned amid an embarrassing investigation into insider-trading charges. McDermott eventually pled guilty to tipping off his mistress to bank mergers the firm was working on. In the past two years, KBW expanded its workforce by some 30% and doubled revenues. In this year's first half, KBW was a key player in 21 bank and thrift mergers, more than any other I-banker.

That rebound is a testament to the firm's tightly knit culture. Many staffers had worked together for decades. Turnover was exceptionally low. KBW's policy of not paying commissions kept the culture from being cutthroat. Some 130 of the 224 staffers are shareowners of the privately owned firm. "The business will regenerate itself almost organically or naturally," says Vice-Chairman Andrew M. Senchak. "The hard part is going to be the emotional toll on individuals and social relationships."

Since the attack, the firm's survivors have been working out of borrowed space in midtown Manhattan, struggling to keep up with the flow of business and trying to come to grips with the loss of life. Some operations are now housed in cluttered conference rooms at its law firm, Wachtell, Lipton, Rosen & Katz, while the trading desk is at a client bank, BNP Paribas. Other New York-based employees are working from KBW's offices in Hartford and Boston.

NO RETURN. The issue of office space is disheartening because the firm moved into lavishly refurbished quarters a year-and-a-half ago. Its new offices on the 88th and 89th floors in Tower Two, a few floors up from its old digs, were a symbol of sorts--of the stature the firm had attained and its aspirations for the future. Now it hopes to find space for a year or two while it looks for permanent quarters. Duffy and Senchak started looking almost immediately. They are open to any midtown neighborhood. Downtown is off limits. Duffy says KBW will never return to the financial district, even though it will have to pay nearly twice the $34 per square foot it paid in the World Trade Center.

The real estate problem pales in comparison to the personnel issues. Although the firm's engineers had the computer systems up and running in time for the market's reopening on Sept. 17, KBW waited an extra day before trading. "The systems were ready, but the people weren't," says Thomas B. Michaud, executive vice-president for equity sales. To keep the firm going, KBW's leadership has reshuffled its remaining employees to plug some gaps. But Duffy says its equities-trading desk is probably operating at no more than 25% of its previous capacity, while research is at something less than half. Senchak fears the increased workload, combined with the emotional fallout, could cause some employees to break.

Yet many seem emboldened to move forward. "I don't think we should bow down and let anyone take this away from us," says Joseph Berry Jr., 27, an investment banker whose father, the co-CEO, was killed in the attack. "A lot of the junior people here are being asked to step up, and we will."

Duffy also is hopeful that the firm can recruit newcomers from the ranks of Wall Street's unemployed and lure small teams out of the larger brokerage houses to restock its decimated trading desk and research department. Two weeks after the disaster, KBW began scheduling interviews with job candidates. It's a huge job, and KBW knows it doesn't have the luxury of time. "Over 40 years, we think we've built up enough goodwill in the marketplace that our clients will give us time to come back," says Michaud. "I think we have at least two months."

It's still too early to estimate the financial impact. Some $23 million in insurance coverage may offset a good deal of the losses, including the $18 million it cost KBW to renovate and furnish its Trade Center offices. Meantime, KBW says the lull in the economy actually helps it--there are fewer deals to lose.

Tougher still is how to lessen the emotional trauma of the survivors and the families. Many of those trapped in the doomed building spent their last minutes describing their harrowing circumstances to loved ones by phone. Kevin Szocik, 27 and recently promoted to vice-president, reached his mother in Massachusetts on his cell phone. He said he was calling from a stairwell. He had made it down seven floors from his office but said the smoke had become impossibly thick. "I can't see anything," he said. The line then went dead.

HORROR. Employees who made it out witnessed unimaginable horror. Lauren Smith and Linda Rothemund were in an elevator with colleagues Dean P. Eberling and Russell Keene III when the second plane crashed into their building. Immediately, the elevator went into a free fall for some 15 floors. With the doors jammed shut and flames lapping at the elevator floor, they escaped after the men shoved them through a six-inch gap where the wall and floor of the damaged elevator had separated, an opening too narrow for the men. Minutes after the women reached the plaza outside, the tower collapsed.

In the immediate aftermath of the disaster, KBW assigned two of its senior officers to counsel affected families. It hired an outside counseling firm to offer guidance to employees and relatives and set up a suite at the Plaza Hotel for grieving families to take refuge. The firm is still paying the salaries of its missing employees, who also have company-provided life insurance of up to $200,000 each. A KBW Family Fund has been established to provide financial assistance to victims' families.

The day after the attack, a few employees gathered in the Wachtell offices to put the firm back together. It was pure bedlam. The group was inundated by phone calls from relatives of missing employees, friends, and concerned clients. Then, a cleaning woman from the firm's old offices, Paula Scantlebury, showed up and began fielding calls and taking messages. "She became the emotional center," says Senchak. "Other people have coped much differently. A lot of people haven't been able to come back yet. Some of these kids are babies, one or two years out of college. They've seen some horrible things."

Can the firm make it back? The survivors think so, if only because they're motivated to make sure the firm's stock retains its value for the grief-stricken families of their fallen colleagues. "I just couldn't walk away from the rest of the people or what has been my lifeblood," says Duffy. "I'm not ready to hang it up." Neither are his colleagues.

By John A. Byrne in New York

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