1997: JP Morgan’s US$700m Bistro bond: the first CDO

IFR’s 2000th special issue would be incomplete without recognising the achievements of Hans-Joerg Rudloff, the man at the centre of many of the key developments in the Euromarkets since the formation of IFR. He spoke to Keith Mullin. The Eurobond market owes its history of largely unbroken success to no single individual. The formative period of the 1960s and 1970s followed by the phase of explosive growth, globalisation and breathtaking innovation of the 1980s and 1990s have their hallowed lists of progenitors, progressive thinkers, inventors and pioneers. Few people have straddled both periods and can legitimately lay claim to having their name on both lists. Fewer still remain at the forefront of capital markets today, standing ready to help marshal the industry towards its next adventure. One man who can make those claims, though, is Hans-Joerg Rudloff, now chairman of Barclays’ investment bank and senior adviser to Barclays’ CIB executive committee. Rudloff’s banking career spans almost 50 years yet he shows no signs of slowing down, continuing to exude passion and boundless energy. He doesn’t focus on career high or low points. “I’ve always been happy,” he said simply. But he’s also convinced that in his time the capital markets have done their job. “Capital markets have steered capital to all corners of this world and have lifted billions of people out of poverty,” he said. “Without the pioneering spirit of the investment banks in the 1990s and at the beginning of this century, emerging markets would not have been able to finance their reforms and their growth. I think that’s where investment banking was really tested and it proved its worth, just as it did in 19th century America.” Start of a journey Rudloff originally joined Credit Suisse in Geneva after graduating in 1965. In those very early days, he got to know the man who would become his mentor and watch over his career: Rainer Gut, undoubtedly Switzerland’s foremost investment banker – now in his 80s – and honorary chairman of Credit Suisse. In 1968, Rudloff moved to New York and jumped ship to Kidder Peabody, one of Wall Street’s largest investment banks, where he stayed for 11 years. Kidder had a small Eurobond department and Rudloff’s moves to Zurich to head Kidder’s Swiss operations and then to London as syndicate manager gave him the chance to observe the burgeoning market up close. Rising quickly through the ranks, Rudloff became chairman of Kidder Peabody International, and, in 1978, a board member of Kidder Peabody Inc. Of the very early days, Rudloff credits Stanley Ross, another market legend, for giving him his early vision. “Stanley moved to Kidder from Strauss Turnbull, a typical London trading firm, trading everything under the sun, including international bond issues. I witnessed Stanley’s passionate appeals, describing the extraordinary potential this new international capital market would offer,” Rudloff said. “He had a vision of how it would develop and being a pretty young guy at that time, I was impassioned by his outlook that capital would once again flow freely across borders and would be a bridge into a more united and better world. “ To realise his and the market’s potential, though, Rudloff needed a bigger platform. Gut gave him the opportunity he needed. In 1971, Gut had joined Swiss-American Corporation (Credit Suisse’s US investment banking and securities subsidiary) as president and CEO following three years as a general partner at Lazard Freres in New York. By the late 1970s, he had returned to his native Switzerland and was appointed chairman of Credit Suisse’s executive board. He had observed Rudloff’s impressive rise so it was not long before Gut had engineered a move for Rudloff to join CSFB in 1980. Michael von Clemm had recently taken over as chairman and

The creation and growth of the private-label mortgage-backed securities origination and trading business on Wall Street in the late 1970s and early 1980s at Salomon Brothers in New York is legendary. It was also a critical turning point for Wall Street, ushering in a 30-year era where the bond market was king, bond traders became the most highly rewarded heroes of investment banking, and securitisation became one of the most lucrative and innovative pockets of finance. Of course, the “revolution” that took place at Salomon Brothers in the spring of 1978, when the very first mortgage finance department on Wall Street was formed, also arguably led, 30 years later, to the worst recession in the US since the Great Depression. How closely the two historical events are linked has been hotly debated. Lewis Ranieri, the “godfather of securitisation”, who led that very first Wall Street mortgage department, has gone on record in recent years as saying that it was not the concept of securitisation itself, but the new exotic mortgage loans, lack of liability, and growth of the subprime industry that ultimately sealed the fate of the pre-crisis housing/credit bubble. Either way, the invention of MBS without government backing was a seminal event in the history of Wall Street. Immortalised in the best-selling 1989 book “Liar’s Poker” by Michael Lewis, the story of MBS typically focuses on the brash Ranieri, a Brooklyn-born, hard-nosed utility-bond trader plucked from obscurity at Salomon to lead the brand new mortgage department because of his street smarts, drive, and aggression. Liar’s Poker focuses on the ascension of Ranieri’s powerhouse mortgage-finance business, whose profits accounted for more than half of Salomon’s overall profits by 1981. The creation of the first collateralised mortgage obligation in 1983, for Freddie Mac, only served to spread the wealth as other banks got in on the lucrative MBS industry. Salomon and First Boston completed that first deal. But while Ranieri is often given all of the credit for creating the mortgage “monster”, as some might say in hindsight, it was actually his original boss at Salomon, Robert Dall, who was the brainchild behind the very first private MBS. Dall, one of the few master-traders of Ginnie Mae MBS securities in the early 1970s, created the first private issue of mortgage securities (working with fellow trader of Ginnie Mae securities Stephen Joseph) for Bank of America in 1977, almost a year before Ranieri was even in the picture. The deal was for US$100m. That first private MBS deal was “something that just came out of my head and happened”, Dall told the New York Times in 1986. Ginnie Mae had been securitising government-guaranteed mortgages since 1970, but its bonds suffered from a serious flaw: an embedded prepayment option. Mortgages could be paid back in full at any time, leaving investors with a heap of cash to reinvest. Moreover, refinancing risk meant that investors would get their money back when interest rates were at their lowest – something investors were unhappy about. Dall and his peers begged Ginnie Mae to offer some type of protection to bond investors, but the GSE did not want to. The BofA deal of 1977 changed everything. It was the first that tried to address the prepayment issue – by introducing a nifty technique called “tranching”. The simple transaction had specific maturities and credit characteristics that would appeal to a much broader array of investors. However, the prepayment conundrum persisted throughout the initial years of the nascent MBS market, spawning MBS research and trading desks that sought to understand the complex mathematics behind predicting mortgage prepayments and taking bets on which maturities/credits to buy. With that initial 1977 private “pass-through” MBS deal, however – as simple as it was – Dall and Joseph for the first time persuaded insurance companies and pension funds to share some of the risk of American borrowers. That had ne

Donald Last, the man who typed the first issues of what became IFR, remembers the foundation of what was then the Agefi Bondletter – and the man who started it all. Every Friday evening Christian Hemain would come down to Sevenoaks with his Eurobond notes stuck in his pocket and catch a cab up to my small publishing office in the high street of this small town in Kent, southeast of London. After a cup of coffee and without further ado we would sit ourselves in front of an IBM “golf ball” correcting typewriter – an essential and crucial piece of equipment given our time constraints and my typing – and in his fractured Franglais Christian would dictate the week’s Eurobond issues. “Ze deal of ze week was IBM Eurodollar US$100m seven-year wiz ze cinq … err … 5% coopon, prix 99, lead banque Citi and ze selling group ABN AMRO, SocGen and Banque Lux. The issue sold ‘plus vite’. Rating Triple A. Terms: bearer bond, pari passu, ‘lois Anglais’…” And so we continued in those early days in March 1974 working through the night until sun-up – with me converting the dialogue into a spare and compact English prose, a style that was the essence of my own business newsletter, the Transterra Brief, and that emulated that of my German backers and partners in Detmold, the Schmitt-Brief. Such was the parentage of Christian’s Bondletter, a newsletter, by Sevenoaks out of Detmold, Germany – a suitably “Euro” debut for what was to become the beacon of the Euromarkets. The notion behind the style was simply this: take any random newspaper story and a highlighter pen and go through colouring the key points and you probably end up with four or five lines – the essence of the story. And that is how we wrote the Agefi Bondletter; and that is why, after six months in Sevenoaks, Christian was ready and able to write his own copy in London. As he said himself, he didn’t pretend to be Shakespeare, though he was certainly polished in French. Building on that base, Christian later expanded and enriched his English prose but in those early days simplicity was crucial. When finished, the waxed four pages of copy went down to the print room for the printer who came in around 6am to produce 200 four-page newsletters (a folded sheet of A3 paper), which he inserted into ready-stamped envelopes and took them to Sevenoaks’ post office to arrive on readers’ desks on Monday morning. Later, when there was a large Continental clientele, Christian used to hire a Mercedes to take copies to Paris for posting – so there was also a free ride up for grabs to Paris for the weekend. Christian would pick up his copies and return to London and without pause would then use his Bondletter to dictate his weekly report on the Euromarkets for Agence Economique et Financiere in Paris. Hence the Bondletter’s name, Agefi Bondletter, a title that puzzled and bemused quite a few Anglo-Saxon bankers in the City, who discovered for the first time that Paris produced a financial newspaper roughly equivalent to the Financial Times. This description, while accurate, flatters Agefi as much as it profanes the FT, for while the FT was typically replete with features, pundits, comment and editorials, Agefi was written and produced like a railway timetable. As such, it was admirably suited to its purpose: to keep investors throughout France, Belgium and Luxembourg fully informed each morning on French, Continental and world financial markets, plus forex, metal and commodity prices. Agefi was sent to bank branches throughout these countries and posted up in bank foyers each morning.Manna from heaven The newspaper was owned by the “Patronat” – a group of top-tier French companies – and the absence of editorial and a Lex-type column was for them Agefi’s chief merit: there would never appear a comment on, for example, Mi

1974: Citicorp/First National City Bank’s US$650m FRN – first floating-rate note in the US As many innovations are, the US$650m floating-rate note issue for First National City Bank (through holding company Citicorp) was controversial when it arrived in July 1974. US laws at the time banned banks from paying more than 7.5% on long-term deposits and more than 5.5% on passbook accounts. Rival banks, worried that the new structure would divert funds that would otherwise be deposited with them, argued vehemently that the new issue violated those laws. The issuer, and its underwriter First Boston, countered that issuing through the holding company meant that the deal didn’t violate the law. After rival lobbying efforts, the latter view prevailed. The interest rate on the notes floated at one percentage point above US Treasury bills after an initial period when they were guaranteed to pay 9.7%. As Associated Press reported at the time, the concept was designed to offer small investors a high yield, but with an assurance that the yield would increase when rates rose. Investors loved the issue, snapping up the paper on the morning they became available for sale. The impact was immediate, with New York Bank of Savings immediately following suit. The scene was set for all the floating-rate bond issues that followed.1976: New York City Pension Fund US$1bn block trade – then largest ECM deal It was by far the largest block trade in history. When the New York City Pension Fund decided in January 1976 that it wanted to sell US$500m of stocks and purchase another US$500m to create what was in effect an index fund, it turned to the only firm that could execute the trade: Goldman Sachs. As detailed in “The Partnership”, Charles Ellis’s history of the bank, Goldman was asked to bid a single price to buy the existing portfolio and to create the new portfolio specified by the pension fund. And it had to do the whole thing “on-risk”, which meant a total exposure of US$500m. Head of block trades Bob Mnuchin prepared to get approval from the firm’s management committee. He expected a barrage of questions. “They only asked five questions,” he later told Ellis. “And each question was laser-like in its focus on a key trading factor. We answered the five questions and there was a moment of silence and then everyone agreed. It was a go!” Acting in great secrecy, Mnuchin’s team executed myriad trades, but ended up charging the pension fund just US$2.9m – for transactions totaling US$1bn. It was a remarkable result, properly reflecting Goldman’s prowess in the block business.1977: US$100m deal for Bank of America: the first private-label MBS The creation and growth of the private-label mortgage-backed securities origination and trading business on Wall Street in the late 1970s and early 1980s at Salomon Brothers in New York is legendary. It was also a critical turning point for Wall Street, ushering in a 30-year era where the bond market was king, bond traders became the most highly rewarded heroes of investment banking, and securitisation became one of the most lucrative and innovative pockets of finance. Of course, the “revolution” that took place at Salomon Brothers in the spring of 1978, when the very first mortgage finance department on Wall Street was formed, also arguably led, 30 years later, to the worst recession in the US since the Great Depression. How closely the two historical events are linked has been hotly debated. Lewis Ranieri, the “godfather of securitisation”, who led that very first Wall Street mortgage department, has gone on record in recent years as saying that it was not the concept of securitisation itself, but the new exotic mortgage loans, lack of liability, and growth of the subprime industry that ultimately sealed the fate of the pre-crisis housing/credit bubble. Either way, the invention of MBS without government backing was a seminal event in the history of Wall Street. Immortalised in the best-selling 1989 book “Liar’s Pok

‘A special deal’ - Not many bond issues enjoy such iconic status as to warrant a party to mark their redemption. But that is exactly what happened when the “Canada Nines” matured in February 1996 after a 10-year lifespan that had seen it become easily the most liquid Eurobond. Not many bond issues enjoy such iconic status as to warrant a party to mark their redemption. But that is exactly what happened when the “Canada Nines” matured in February 1996 after a 10-year lifespan that had seen it become easily the most liquid Eurobond. The event was hosted by ScotiaMcLeod, although Deutsche Bank had been lead manager on the deal. Such was the syndication process in pre-pot 1986, however, that a myriad co-leads, co-managers, sub-underwriters and selling group members felt they had equal reason to celebrate the bond’s passing, as did a swathe of traders and investors for whom it had become a quintessential part of their day-to-day business. “It became obvious pretty early on that it was a special deal,” said Stuart Young, who was head of trading at Deutsche when it was launched. “The sales people were going crazy, with demand coming in globally in a way we had never seen before.” “It was an extraordinary thing. Sometimes deals just work, everything clicks,” said Robert Stheeman, now chief executive of the UK Debt Management Office, but then on the syndicate desk at Deutsche in Frankfurt. Such was the weight of early orders that the issue, originally launched as a US$750m offering, was upsized to US$1bn – at the time a significant increase. “It was a US$1bn deal in the context of a US$250m–$300m market, maybe US$500m,” said Martin Egan, global head of primary markets and origination at BNP Paribas, who was then trading the paper at UBS. “The US$250m upsize would in itself have constituted a decent-sized issue on its own in those days,” said Stheeman. Many in the market had an inkling that something momentous was in the air. “We were told to get in early that day, just like you would for your own new issue,” said Kevin O’Neill, currently executive director of debt syndicate at Daiwa Securities, who was then head of syndicate at CSFB, a co-lead manager on the deal. “So, up we turned, and out it came – the rest is history.” But if the primary experience was notable, it was the secondary performance that made the Canada Nines the most talked about Eurobond issue ever. “It injected new adrenalin into a market that had been developing at a steady pace,” said Egan. “It marked the beginning of a new benchmark market – we had never seen anything like it as far as liquidity was concerned.” “It remained liquid way beyond what you would have expected for a Eurobond, in time becoming the five-year, then the three-year benchmark,” said Stheeman. Most bonds end up being so tightly held that liquidity drains away. However, this was not the case with the Nines, which maintained its exalted position throughout its life. “It was just so easy to trade. It became the Eurobond benchmark and a Treasury equivalent, indeed a Treasury proxy to a large degree,” said Young. Back in 1986, the prevailing trading convention was still on a cash price basis, even though some had begun using Treasuries to hedge positions. The Nines not only persuaded more to think about spreads but also offered a ready-made, liquid, globally traded hedging instrument in itself. According to IFR data from the time, the paper came at a 15bp spread over Treasuries, tightening to 4bp as it outperformed, before drifting back out again. “It took the market to a completely different level: it traded on a tight bid/offer spread 24/7,” said Egan. “And that was across the globe; traders in Europe, the US and Asia all loved it. Investors had to have it and traders had to have

IFR columnist Anthony Peters recalls his time at the heart of the structured credit boom. What did it have to do with proper lending? Not a lot. But it is wrong to dismiss the value of structuring entirely, he writes. I have enjoyed a long and modestly successful career in the City. Had it been unsuccessful, I would have been spat out long ago and would now probably be teaching either economics or modern languages at a minor public school. Had it been highly successful, I would probably be retired due to excess wealth. In the event, I am neither, and therefore have been hanging around the street corners of EC1 from the rise of the Eurobond market to the disintegration of the structured credit market and beyond. How that I, who cannot add two and two, should have ended up working in structured credit during its boom years was a mystery. But my superiors at the US investment bank I turned out for probably never grasped the level of my innumeracy and so I found myself removed from the credit world I felt comfortable in and was cast as a hot-shot salesman in what was known as GSP – or Global Structured Products. As a trained corporate lender who had turned to banking in the late 1970s because I wasn’t good enough to get a proper job with BP, Nestle or Kodak, I was something of a fish out of water among the quants with PhDs in maths and physics and MScs in banking and finance who had fought to gain one of those highly valued graduate positions on Wall Street or in the Square Mile. I could never admit that the squiggles, arrows and integration formulae on meeting room white boards could have been Arabic as far as I was concerned. I certainly struggled to see what all this had to do with the lending process, which is what I thought banking to be about. In the fullness of time, I was proved right on that one – and all those clever chaps turned out to be wrong. They demanded and were paid millions. I didn’t and wasn’t. Who’s the fool? And yet, the notion that structuring credit products is downright stupid (and that the lousy reputation with which they exited the credit crisis of 2007–08 was fully deserved) is highly oversimplified and subsequently quite wrong. Old as the hills The process of abstracting credit risk from the underlying loan is as old as the Code of Hammurabi (a Babylonian law code, dating back to about 1772 BCE) and can be found in any old textbook on banking and finance under the title of “Loan Guarantee”. That the process of guaranteeing loans had to be “generecised” and packed into a 100-page document before re-emerging as a credit default swap is nobody’s fault in particular. Likewise, the truest of structured credit products – the collateralised loan obligation – is a shuffling of credit risk within a portfolio of loans that is, in my humble opinion, a creation of genius. Let me explain. Assume you have a portfolio of 100 Double B rated loans. Each one of them is imbued with X default probability over a period Y years. If X occurs as predicted, then, very simply put, 100 – (X x Y) will not default and that collective will therefore be rated higher than Double B. Looked at another way, imagine a field with a number of landmines spread across it and a fair probability that you’ll tread on one. The structuring process engineers a concentration of all the landmines in one corner of the field. The risks in that corner rise dramatically but the rest of the field is suddenly relatively safe. So long as someone is prepared to take the risk of navigating the dangerous corner of the field – for a substantial reward – then others can gambol about in the knowledge that they are fairly safe. Such ideas were fine and dandy until interest rates fell so low in the post-9/11 world that defaults melted into insignificance in all areas of the credit curve. With the need for yield hugely increased at the same time, the makings

Thierry Naudin, a former associate editor of IFR, recalls the early days of the journal that became IFR – and the phenomenon that was founder Christian Hemain. Probably the best accolade IFR received over the course of its first four decades took the form of a casual remark by a Paris-based bond dealer, who thought IFR was the official gazette of what was then known as the Euromarket, instead of a profit-making publication compiled by professional journalists. The bond dealer’s fantasy about some sort of governmental “invisible hand” points to the core raison d’etre of IFR, which has endured to this very day: publicising the cost of money on the international market, whatever the currency, the instrument (loan, bond, etc), the borrower or the maturity, and based on the most reliable sources. Forty years on one could be forgiven for taking this basic rationale for granted. But building on it did take some vision – the rare mix of acumen and deep, broad-sweeping intelligence that characterised IFR founder Christian Hemain. Why did it fall to a French correspondent with a Paris-based daily financial newspaper to set up in London a publication that, initially, focused on a market that was the purview of the then-almighty US dollar? The short answer is: that’s the transnational Euromarket for you. The fact is that on top of his enterprising spirit and superb professional connections, Hemain kept an eye on broader trends in the financial sphere. The US dollar had become the world currency even before the lifting of post-war currency market restrictions in Europe in the late 1950s. The Continent became flush with greenbacks, not just because increasing numbers of large US industrial groups set up subsidiaries there. Rather, much as everyone around the world was keen to hold claims on the US (the world’s supreme economic powerhouse at the time), not everyone was as inclined to put their trust in Uncle Sam. Weary as they were of the potential for their US dollar assets to be too closely monitored for comfort or frozen in New York or even London, Communist countries instead stored them on the Continent, in Paris for the main part, or in Geneva. A similar pattern emerged with African commodity-exporting countries after 1960, and with Arab oil-producing countries a decade or so later. The Eurodollar was born. Now, what about a market for it? The problem with any government is that it can be heavy-handed, too. For all the efforts deployed by US bank branches in Paris and their major local counterparts at the turn of the 1960s and 1970s, French authorities denied the fully fledged liberalisation that the UK government, however grudgingly, came to concede for foreign exchange transactions. London’s luck France’s mistake was London’s luck. The big offshore-dollar game has hardly changed since then, with borrowers and investors alike ever happy for fresh opportunities to diversify, with fee-reaping banks in the middle. Those countries with massive claims on the US today keep looking for ways to on-lend those dollars as profitably as they can (with the pursuit of ever-higher yields posing the threat of speculative bubbles, but that is another story). For the sake of its own geo-strategic security, Uncle Sam has from the start taken a benign view of what, in effect, amounts to the recycling of its own perennial external deficit as long as the process remains largely in the hands of American banks. And London, with its privileged location, stood in the middle, and has remained largely there to this day. As London correspondent for the Paris-based Agefi (short for Agence Economique et Financiere) and its Swiss, Belgian and Luxembourg offshoots, Hemain understood the game early on. The price of money on national markets was publicised in national media, including official gazettes as in France. In this set-up, and by definition, offshore transactions fell in the middle of nowhere, an

If some interpretations of the events of the past few years were to be believed, an alternative headline for this story would be “something wicked this way comes”. But the truth about CDS is more complicated, writes Christopher Whittall. Towards the end of the 1980s, one large lender approached Bankers Trust with a thorny problem. The bank in question was extending a multi-billion dollar lending facility to one of its most important blue-chip customers and was going to struggle to warehouse the entire loan. There was a catch, too: it didn’t want to syndicate the loan to other banks, but instead keep it on its balance sheet and sell on the exposure synthetically. This was music to the ears of the nascent swaps desk at Bankers Trust, which was then housed in a no-man’s land between trading and banking, trying to convince clients of the exciting potential of derivatives. “For me, that was the start of the credit derivatives market,” said Gay Huey-Evans, a member of that team, who later went on to chair ISDA and head the UK FSA’s markets division. “That transaction never took off, but it got people thinking.” It was a familiar problem after all. Internal limits curbed banks’ ability to lend to companies, spurring a search for ways to free up capital without damaging relationships with key clients. Moreover, the Bankers Trust swaps team had spotted a natural client-base for these exposures. In the days before monetary union, large US companies were deterred from tapping European capital markets due to the fragmentation of currencies across the Continent. For their part, European institutional investors balked at the notion of holding US dollar-denominated assets, but were frustrated that they couldn’t gain any real exposure to high quality US companies. This presented a great business opportunity for investment banks: lend money to high-grade US corporates, then sell slices of the credit exposure in synthetic format to European investors in their own currency. “European investors wanted more exposure to these American firms, so we syndicated a bit of a loan synthetically. This reduced the credit exposure to that specific corporate name, which would enable us to maintain an ongoing relationship with the corporate, and extend more credit when necessary,” said Huey-Evans. At this stage the documentation was very basic. The concept of default was not even included in most contracts given the high creditworthiness of the underlying companies – pay out events were linked to ratings downgrades instead. But the building blocks were all there for what would later morph into the credit default swap market. Bankers Trust had created a synthetic exposure to an underlying credit that could be sold on to investors as an alternative to holding the physical securities. “It wasn’t known as CDS – it was just a structured transaction. We’d ask investors what credit they’d like, and they’d say: ‘What credits do you have?’ It was very specific,” said Huey-Evans. The next year Bankers Trust began originating baskets of credits and also introduced financial underlyings, which were more liquid and therefore easier to hedge. John Crystal, who later switched to Credit Suisse Financial Products, took the reins of the new business, seeing the potential to build a tradable market. Enter JP Morgan He was not the only one. In 1994, a group of derivatives bankers from JP Morgan congregated in Boca Raton, Florida, to bounce ideas off one another about derivatives and how to better manage the firm’s credit exposure. Shortly afterwards, Blythe Masters and Bill Demchak, two rising stars based in the firm’s New York offices, began sketching out these ideas into a firmer structure, which eventually became the Bistro (see related story). Meanwhile, in the firm’s London offices, Bill Winters went about establishing a

Keith Mullin looks back on the era when Japanese banks surveyed the international markets from a position of apparently unassailable strength. Take a look at any broad yardstick of international investment banking achievement today. Four of the Japanese Big Five CIBs and investment banks – Mitsubishi UFJ, Sumitomo Mitsui, Mizuho, Nomura and Daiwa – are in the top 20 of global fee earners. Yet at the same time, it is probably fair to conclude that their positions in M&A as well as debt and equity underwriting are modest relative to their size and stature. Their combined market share is just 5% of the global IB wallet and that includes their domestic market exploits. But it was not always thus. During Japan’s modern-day financial Golden Era, whose zenith was between 1987 and 1990, the country’s Big Four securities firms (Nomura, Daiwa, Nikko and Yamaichi) came to dominate the combined Eurobond and Euroconvertible business. And they used the huge revenue streams they derived from their presence in Japan-related primary and secondary markets to build out their capital markets origination, distribution and trading platforms, and to broaden their product coverage outside of Japan after the asset-inflation bubble burst. In the years leading up to the real estate and stock market crash of 1989–90 and before the “lost decade” of economic stagnation and decline, the Japanese had the look of unstoppable world-beaters. During that period of rapid growth, their presence in London reflected their new-found stature: the Japanese houses became patrons of the arts, sponsoring high-profile classical music events, opera and theatre productions, museums and art galleries; moving and shaking with City glitterati; and rubbing shoulders with its leaders in the corridors of City power and influence. In short, the Japanese had arrived. But one particular arrival that was to become very significant in cementing the rise and influence of the Japanese in London in those days went largely unnoticed. “I arrived in London on New Year’s Eve 1987. It was a very strange day; nobody was working and the only restaurants that were open were Chinese,” recalled Takumi Shibata, chairman of Nikko Asset Management since July 2013 but before that a 36-year Nomura veteran and until last year chairman and CEO of the firm’s wholesale division and COO of Nomura Holdings. “Prior to my arrival in London, I’d been working in Tokyo as head of the American desk. That was the worst job you can imagine as Tokyo is in a completely different time zone and I didn’t really get much time to sleep. London was the perfect environment in which to operate an international business. It was like being in an amusement park. With the exception of the quality of restaurants, London was a globally diverse place so you could arrive as a foreigner and be accepted,” he said. Shibata did two stints in London for Nomura, the market powerhouse. During his first, he stayed for six years, initially running debt and equity new issues – keeping Nomura at the top of the Eurobond league table for four years – before gaining a broader role as head of investment banking. “My predecessor Hiroshi Toda had told me: ‘Hey, Shibata, you need to belong to the boy’s club’, which wasn’t a problem for me as I felt I was a fit from day one. But I asked myself: ‘Do I want to be a part of a club or do I want to form the club?’ I went for the latter and was one of the founders of a group originally called G7. We used to have dinner in Brown’s Hotel, where we would eat, drink lots of wine and criticise each other’s deals. We were a group of naughty boys. That’s when I realised that capital markets boys were by no means true gentlemen,” he joked. Typical of the environment of the time was Morgan Stanley’s ski weekends. “At Friday lunchtime, I

The World Bank has always been at the forefront of the global debt markets, not just in terms of issuance but also in the leadership it has shown and its commitment to innovation, says John Geddie. Some 25 years ago a newly-recruited funding officer at the World Bank sat down and started to pen a note to its board of directors explaining how the bank had been trying to improve bond offerings for investors. For an entity whose main fiduciary responsibility was simply to get the best possible funding rates for its government shareholders, this may have seemed a somewhat extraneous exercise. But it was one that stuck with that funding officer through the years. “When I look back, this is what we have been doing all along and it is the foundation of our borrowing strategy,” said Doris Herrera-Pol, who is now head of capital markets at the bank. It has been the World Bank’s constant desire to find new and innovative ways to grow and service its investor base that, as a byproduct, has ensured it has always had access to the most diverse and competitive funding sources. It is its conscientious approach to a pioneering vision that has allowed it to shape the capital markets as we know them today, and will continue to break new boundaries for many years to come. The World Bank, as its name suggests, has always had a global outlook. Its first bond offering in 1947 was in US dollars, its second in Swiss francs in 1948, and by 1950 it had issued in sterling, Canadian dollars and Dutch guilders. Today, the World Bank has issued in 56 different currencies. But the one thing it has never taken for granted is market access, and its experiences from as far back as the 1960s have served it well. Under pressure Its commitment to funding diversity was not solely altruistic, though. With the balance of payments problems making the US government particularly nervous about World Bank raising and exporting US dollars out of the country, the bank was under huge pressure to diversify. The broadening of its funding sources was paramount to maintaining its growing loan commitments to developing countries, and Gene Rotberg was the man brought in to find a solution. “It wasn’t rocket science,” said Rotberg, who took up the position of treasurer in 1968 and is now retired. “We recognised early on that there were a lot of other central banks, outside of the US, beginning to accumulate dollar reserves, and they seemed eager to diversify outside of US government obligations,” he said. “We first went to Japan, which was booming because of its export market. With the consent of the government, we became the first foreign entity to borrow from the Bank of Japan.” This set the wheels in motion, and the World Bank started to tap into the savings of the country’s trust banks, commercial banks and eventually insurance companies. It then rolled out the same model in Germany, the Netherlands, Belgium, Canada and Austria, while also tapping the central banks of OPEC countries such as Iran, Saudi Arabia, Venezuela and Kuwait. “We were in a very favourable position because governments wanted to expand the investment opportunities for their citizens, and there was no better place than the World Bank,” said Rotberg. “It got institutions throughout the world, particularly in Western Europe, used to the idea of holding debt instruments other than those of their own government or industrials.” This attitude sowed the seeds for the expansion of the Euromarket from London, which would eventually allow the bank to issue its first Eurobond in 1980. Mutual respect But despite the rapid expansion of its borrowing programme, the World Bank always kept investor relations at the forefront of its strategy. Rotberg remembers one particular example of the World Bank’s good faith that involved a private placement with Societe Generale de Belgique, a five-year deal denominated in Belgian francs.

Markets, despite their collective expertise, are apparently destined to repeat history as irrational exuberance is followed by an equally irrational despair. Periodic bouts of chaos are the inevitable result. Financial crises have been an unfortunate part of the industry since its beginnings. Bankers and financiers readily admit that in a business so large, so global and so complex, it is naive to think such events can ever be avoided. A look at a number of financial crises over the last 30 years suggests a high degree of commonality: excessive exuberance, poor regulatory oversight, dodgy accounting, herd mentalities and, in many cases, a sense of infallibility. William Rhodes has been involved in the industry for more than 50 years and has lived through nearly every modern-day financial crisis, many of which are detailed in his book, “Banker to the World”. As he puts it, there is a common theme of countries and markets wanting to believe that they are different and that they are not as connected to the rest of the world’s economy. In his view, many aspects of the Latin American debt crisis of 1982 have been repeated a number of times and there is much from this crisis that we can apply to what is currently happening in Europe and beyond. LatAm sovereign debt crisis – 1982 This crisis developed when Latin American countries, which had been gorging on cheap foreign debt for years, suddenly realised they could not repay it. The main culprits, Mexico, Brazil and Argentina, borrowed money for development and infrastructure programmes. Their economies were booming, and banks were happy to provide loans to the point where Latin American debt quadrupled in seven years. When the world’s economy went into recession in the late 1970s the problem compounded itself. Interest rates on bond payments rose while Latin American currencies plummeted. The crisis officially kicked off in August 1982 when Mexico’s finance minister Jesus Silva-Herzog said the country could not pay its bills. It took years to sort out the crisis, with Latin American nations eventually turning to the IMF for a bailout in exchange for pro-market reforms and austerity programmes. It also led in 1989 to the novel creation of Brady bonds, which were designed to reduce debt in these countries by converting distressed sovereign debt into a number of different types of bonds. Furthermore, banks could exchange claims on these debts for tradable assets, which enabled them to get the debt off their balance sheets. Rhodes recalls it as a tense period, but says that strong political leadership enabled them to get through the crisis. He laments, however, that the lessons of the crisis weren’t heeded. “Time and again, be it in the Asian crisis or the eurozone crisis, we have seen how governments have failed to draw lessons from the Latin American crisis,” he said. “They have repeatedly taken the view that their countries and regions are different and unique and, therefore events in other parts of the world cannot provide any relevant lessons for them. “And yet key developments seen in the Latin American crisis – the dangers of contagion, the need for urgent and bold political leadership, the risks of over-leveraged banks – have been characteristics of every sovereign debt crisis since then.” Savings and loans crisis – 1980s While the solution to the Latin American crisis was being put together, a domestic one was happening right in front of the US regulators. The so-called savings and loans crisis took place throughout the 1980s and even into the early 1990s, when more than 700 savings and loan associations in the US went bust. These institutions were lending long term at fixed rates using short-term money. As interest rates rose, many became insolvent. But thanks to a steady stream of deregulation under President Ronald Reagan, many firms were able to use accounting gimmicks to make them a

For some, memories of the Thatcherite 1980s are dominated by football hooliganism, the cavernous North-South divide and the ascent of Welsh miners to the surface and straight on to the dole queue. Among Thatcher’s many champions – more for economic achievements than social – are students of the equity capital markets for it was through her privatisation programme that global ECM took on its current form. “The British privatisations really set the stage for the globalisation of the equity markets,” said Eric Dobkin, founder of the ECM group at Goldman Sachs and acknowledged as the father of modern ECM. “They occurred in the immediate aftermath of ‘Big Bang’ in the UK, at a time when investors were starting to pursue more global equity investment strategies.” The UK government’s sales repeatedly broke records for the largest equity transactions ever, forcing the internationalisation of ECM and the development of new issuance structures. This provided a way in for US investment banks that could offer access to capital across the Atlantic. Each trade was a benchmark in its time – Britoil’s £627m IPO that went largely unsold in 1982, the £3.9bn float of British Telecom that nearly doubled on its debut in 1984, and the £4.3bn British Gas float in 1986, which came complete with a £28m-plus ad campaign. But it was an external factor – Black Monday – that made the £7.2bn selldown in British Petroleum the defining deal of its time. Voters – more specifically taxpayers – were a focus of all privatisations, so deals were highly publicised, slow-moving and priced well in advance. It was in March 1987 when the planned £7.2bn BP follow-on was announced – but the deal wasn’t due to close until October. As usual, pricing was set upfront to give retail investors certainty, but because BP was already listed, underwriters had to guarantee pricing for two weeks. They couldn’t have picked a worse time. “By malign coincidence, the world’s largest ever share sale collided with the world’s most dramatic stock-market crash,” wrote Nigel Lawson, then the UK’s Chancellor of the Exchequer, in his memoirs. The government was not looking to give shares away, so, with underwriters and sub-underwriters already signed up, pricing was set at 330p per share on October 14 versus a trading level of around 350p. Then Black Monday hit. That day, October 19, saw the worst ever single-day drop in both London and New York stock indices. Over October 19–20 London markets fell by more than 20%, leaving underwriters staring at heavy losses – with the ongoing BP trade the biggest contributor. By October 27, BP was trading at 262p, versus the 330p offer price. Fees of just 18bp did little to cushion the blow. For UK banks and brokers the pain was bearable as the process of sub-underwriting meant the risk was shared among more than 400 firms. Size and BP’s desire to increase North American representation on its shareholder register, however, meant the US and Canadian allocations were substantial and held entirely by the lead banks. Goldman Sachs, Salomon Brothers, Morgan Stanley and Shearson Lehman Brothers as US underwriters were on the hook for 22% of the deal. The prized mandate of sole lead in Canada went to Wood Gundy, which went out of business as a result. Bankers met at Rothschild’s offices on Friday, October 23 and discussed triggering the force majeure clause but could not reach agreement. Back at Rothschild’s after the weekend the view had hardened and UK banks – foreign firms were present but had no vote – sought to exercise the clause. The move was rejected, but the Bank of England did offer to buy partly-paid stock at 70p (versus the 120p initial payment) to avoid the apocalyptic events outlined by US underwriters – which cited an inabil