Gleacher Stung by Defections as Cuts Fail to Stanch Losses

As Thomas Hughes prepared to run Gleacher & Co. in 2011, he vowed to cut costs and transform the brokerage into a “substantial force.” Now the stock is down 66 percent as he grapples with losses and worker defections.

Gleacher, beset by $159.8 million in losses in the past two years, is struggling to find a working strategy as Wall Street recovers from a 2008 financial crisis that had once opened the way for smaller firms to vie for deals and trades shunned by bigger competitors. Hughes shut the equities division, fired the head of corporate debt and this month said he wouldn’t seek a sale or merger.

The debt-brokerage business, Gleacher’s most profitable, has been hemorrhaging staff, and the company said in a filing yesterday that four directors plan to step down. At least 20 people out of fewer than 100 in the credit unit have defected since mid-February. The exits probably will have “an adverse impact” on revenue, according to a Feb. 19 regulatory filing.

“The solution of cost-cutting is a race to the bottom,” said Lee Fensterstock, who led Broadpoint Securities Group Inc., the bond brokerage that bought Gleacher, from 2007 to 2010. “You have to attract the best people and you have to pay them in a way that allows you to retain them.”

The brokerage, which now makes most of its money trading bonds, carries the name of founder Eric Gleacher, the merger banker known for advising Kohlberg Kravis Roberts & Co. on its record-setting $30 billion buyout of RJR Nabisco Inc. in 1989. Gleacher employs about 250 people, Hughes said earlier this month, compared with 342 three years ago.

Compensation Costs

While revenue almost tripled in 2009, pay consumed 69 percent of the money that came in that year and 90 percent in 2010, a regulatory filing shows. Hughes brought in third-party consultants the year he became CEO to increase returns for shareholders and “reshape our compensation-to-revenue ratio,” he said at the time. Andrew Siegel, a spokesman for Gleacher, declined to comment for this article.

Gleacher, the former head of mergers and acquisitions at Morgan Stanley and Lehman Brothers Holdings Inc., sold his boutique four years ago for stock and $20 million in cash to Broadpoint, which eventually took on his name.

The 72-year-old ex-U.S. Marine, the company’s second-biggest shareholder with a stake of more than 11 percent, resigned from the board of directors last month, saying he planned to strike out on his own.

Founder ‘Frustrated’

“It was alluring to him, it just didn’t work out,” said Peter Solomon, a friend of Gleacher’s who founded New York-based investment bank Peter J. Solomon Co. “He just wasn’t in control. I think that’s what frustrated him.”

Smaller brokerages are struggling amid a slowdown in trading that led to the closing of Gleacher competitors, including ThinkEquity LLC, Rodman & Renshaw LLC, WJB Capital Group Inc. and Ticonderoga Securities LLC. Others, such as Citadel LLC and Chapdelaine & Co., have shuttered or scaled back credit-brokerage units since 2010 as the biggest banks regain their dominance over debt markets.

Gleacher was among about 70 small and mid-size firms that expanded amid the crisis as Wall Street gutted corporate-bond inventories and cut the money used to facilitate debt trading.

The brokerage doubled the size of its debt capital markets division in the 18 months after Bear Stearns Cos. and Lehman Brothers collapsed. In March 2008, it hired Joseph Mannello and a team of credit brokers from BNY Capital Markets Inc. It expanded its mortgage- and asset-backed securities and so-called rates group under Robert Fine.

‘Good Opportunity’

Gleacher sought to match the size of New York-based Jefferies Group Inc., with $500 million of revenue and a $1 billion market valuation, Fensterstock said in a June 2009 interview.

“If we can achieve that, there is a very good opportunity that we can go well beyond that,” he said then.

Gleacher shares exceeded $9 in October 2009, a year in which the firm posted a $54.9 million profit. The stock has since plunged 93 percent, closing today at 61 cents.

The success of Gleacher’s trading businesses depended on Fine and Mannello, Fensterstock said in an interview last week, adding that he lured top brokers partly by agreeing to pay them based on how much money they generated for the firm. Fensterstock said compensation was part of the reason he left in 2010.

“They wanted to move to a much more subjective form of compensation,” he said. “The thinking was that they should be much more like Goldman Sachs than an eat-what-you-kill environment.”

‘Substantial Force’

Hughes took over as CEO on May 2, 2011, after a Wall Street career spanning more than 25 years. He led mortgage-backed securities trading at Merrill Lynch & Co. and headed global asset management for Deutsche Bank AG, Gleacher said in a statement announcing his appointment.

His goal was “to accelerate the evolution of Gleacher & Co. into a substantial force in the financial-services industry and a value-creator for its shareholders,” Hughes said in the statement.

Eric Gleacher’s boutique had advised on more than $250 billion of deals from its founding in 1990 through Broadpoint’s purchase of the brokerage, according to a March 2009 statement. That included American Home Products Corp.’s $9.3 billion acquisition of American Cyanamid Co. in 1994.

Goodwill Writedown

Gleacher had sold his firm once before. In 1995, London-based National Westminster Bank acquired Gleacher & Co. for $135 million. NatWest, now part of Royal Bank of Scotland Group Plc, sold the business back to him four years later for about $4 million after deciding to exit investment banking, said a person familiar with the matter who requested anonymity because the information wasn’t made public.

“Eric was very good at buying and selling his company,” said Solomon, who worked with Gleacher at Lehman Brothers. “He was better at it than anybody else.”

Hughes opted to cut back on the investment-banking business in 2011, firing 32 people and writing down goodwill by 95 percent to $3.73 million, according to a regulatory filing in November of that year. Goodwill is an intangible asset on a firm’s balance sheet representing the premium paid over the market value of assets in an acquisition.

Pretax income from investment banking had fallen to $2.5 million in the nine months ended September from $3.5 million a year earlier, the company said in a November regulatory filing.

Mannello Fired

Gleacher fired Mannello, 55, last February, said two people familiar with the departures who requested anonymity because the reasons for the exits haven’t been made public. Fine, 50, left two months later.

Fine became CEO of Brean Capital LLC last year and has hired about 60 of the 75 people who were working at Gleacher’s MBS and rates group at the time of his departure, one of the people said.

Fourth-quarter revenue at Gleacher’s credit-products division declined 15 percent to $16 million from the preceding three-month period because of “tightening spreads, partially offset by higher volumes,” Controller Bryan Edmiston said in a Feb. 15 conference call. The mortgage-backed securities and rates division posted a drop of about 30 percent “due to lower market spreads and lower volatilities,” he said.

The brokerage paid 2012 bonuses in cash, including $1.2 million in the fourth quarter that mainly stemmed from efforts to rebuild the MBS and rates unit, Edmiston said.

Top Shareholder

Last year, Gleacher hired Credit Suisse Group AG to solicit offers for some or all of its businesses amid pressure from its top investor, private-equity firm MatlinPatterson Global Advisers LLC, people familiar with the matter said at the time. After a six-month review, the firm decided against a sale or merger, it said on Feb. 15.

A junk-bond team departed that day, including five high-yield debt salesmen and two analysts, people with knowledge of the move said at the time. Members of the group have told colleagues they are joining Milwaukee-based Robert W. Baird & Co., the people said.

“They were hanging on because they were being told by management that they were in talks to merge,” said Michael Maloney, president of New York-based recruitment firm Maloney Inc.

Board members Henry Bienen, Robert Gerard, Bruce Rohde and Robert Yingling said in a Feb. 23 letter that they intend to resign. They cited the “virtual certainty” that they wouldn’t be re-elected amid opposition from the biggest shareholders, including MatlinPatterson and Eric Gleacher, according to yesterday’s filing. The four board members comprised the special committee that reviewed Gleacher’s strategic options.

‘Seem Confident’

Gleacher is replacing the traders and salesmen who left and is in the process of fixing its business model, Hughes said on the Feb. 15 conference call. The mortgage business is growing again and using less of the balance sheet, he said.

“Any time you have defections of good people that’s a negative,” said Joseph Jolson, co-portfolio manager of hedge fund Harvest Opportunity Partners II LP, which owns Gleacher stock. “They seem confident that they’re going to be able to attract top producers to their platform and earn money this year.”

If the company can become profitable, its shares will be worth slightly under $1.50, more than double their current price, Jolson said.

“If they lose money every quarter, they’re frittering away that value,” he said.