By John Lippert, Edgar Ortega and Josh Fineman
Aug. 4 (Bloomberg) -- Dominick Mondi, who joined Bear Stearns Cos. at age 25 in 1979, remembers how then Chief Executive Officer Alan “Ace” Greenberg called him every Feb. 10 -- his birthday.
The collegial spirit began to fade when Bear went public in 1985. The firm grew into the largest U.S. underwriter of mortgage-backed debt, piled on leverage and topped 14,000 employees. Bear’s risks became incalculable, Mondi says. By 2005, the birthday calls to Mondi stopped.
He kept working 10 hours a day on the 10th floor of Bear’s Madison Avenue headquarters. Mondi says he traded more municipal bonds than anybody at the firm for 25 of the 28 years he was there. He never sold his shares, even at their January 2007 peak of $172.61. When Bear collapsed 14 months later and new owner JPMorgan Chase & Co. didn’t offer him a job, Mondi suffered what he calls a devastating loss, financially and emotionally. His first thought when his car was stolen was, “what else can they take from me?”
After living through the best and worst of Wall Street, Mondi, 55, packed up himself, his wife, Cynthia, and their three children and moved from Darien, Connecticut, to Winnetka, Illinois, 17 miles north of downtown Chicago. He’s resurrecting his career at Mesirow Financial Holdings Inc., a 72-year-old firm that started as a one-person brokerage in the waning days of the Great Depression.
‘Starting to Change’
Today, Mesirow sells insurance and develops real estate along with managing investments. Revenue climbed to $467 million in the fiscal year that ended on March 31, more than doubling from 2003. Mondi has already contributed a slice of his former Wall Street glory. Mesirow traded $10 billion in municipal bonds in the 7 1/2 months ended on March 31 compared with $500 million in the year-earlier period.
“Mesirow wasn’t a factor in the sales and trading end of municipal finance,” Mondi says. “That’s starting to change.”
Mondi, who stuffed ads into the Sunday New York Times to work his way through St. John’s University in Queens and then spent more than half of his life at a single company, became something last year he thought he’d never be: unemployed.
In the worst upheaval in more than 70 years, financial firms have eliminated 326,000 jobs worldwide since the end of June 2007, according to data compiled by Bloomberg.
Disappearing Wall Street
Companies firing these traders, salesmen and brokers are gone too. Lehman Brothers Holdings Inc. is bankrupt and liquidating; Merrill Lynch & Co., with its trademark bull, was subsumed by Bank of America Corp. in Charlotte, North Carolina.
After enduring dislocation and doubt, Wall Street refugees are surfacing well beyond the firms that dominated pre-crash banking.
Sixty percent of those who have found jobs have landed at midsize companies such as Mesirow, says Jason Kennedy, CEO of Kennedy Associates, an executive recruiter for Wall Street and the City of London.
Investment bankers define midsize firms as those with a market capitalization of between $250 million and $5 billion, says Peter Majar, a Freeman & Co. investment banking analyst in New York. Twenty percent have gone to Goldman Sachs Group Inc. and other surviving giants; an equal number have quit the industry, Kennedy says.
Mesirow CEO James Tyree and chiefs of firms like his are targeting fixed income and wealth management.
“Very senior people, with years of experience and meaningful Rolodexes, are moving to the boutiques,” says Lauren Smith, an analyst at investment bank Keefe, Bruyette & Woods Inc. in New York. “Business will flow with them.”
The Great Migration
For some of the transplants, the move is around the corner in New York to Jefferies Group Inc., a Madison Avenue- headquartered investment bank for midsize companies, and to Pali Capital Inc., with its trading floor a block north of Rockefeller Center. Others are crossing the Hudson River to Jersey City, New Jersey, home of Knight Capital Group Inc., the biggest U.S. stock trader. Still more are migrating west of the Mississippi to 119-year-old Stifel Financial Corp. in St. Louis and beyond.
“The carnage of last year is going to open up the playing field for all of these guys,” says Charles Mercer, a fund manager at Todd-Veredus Asset Management LLC, which oversees $3.5 billion in Louisville, Kentucky, and owns Jefferies and Knight stock.
Mesirow, which makes most of its money by managing clients’ investments in stocks, bonds, currencies and commodities, has outgrown its seven-story headquarters, originally a bakery for a chain of cafeterias. In November, it will take over a third of a 45-story skyscraper that looks out on the Chicago River.
Opaque Metrics
Knight Capital is pushing into fixed income, once the hallmark of Bear and Lehman. Stifel, founded the same year that slumping commodity prices led to the panic of 1890, is adding wealth managers as Zurich-based UBS AG retreats. Jefferies, which stumbled when markets seized up, has hired 170 people since the beginning of 2008 for fixed-income trading.
Among them is Daniel Markaity, a former executive in Merrill’s government debt division. Markaity, 54, likes that Jefferies ties his pay to the performance of his group rather than to the work of thousands of employees scattered worldwide.
“The metrics for determining your bonus became more and more opaque,” Markaity says of his days at Merrill. “Nobody was happy.”
Small Fries Gain
Investors have reason to cheer for the small fry after shares of Citigroup Inc., Bear, Lehman and Merrill collapsed last year.
As the KBW Capital Markets Index tumbled 61 percent in 2008, Stifel climbed 31 percent for the best performance among the index’s 24 financial companies. Knight was the second best, with an increase of 12 percent. This year, Stifel gained 9.4 percent to $50.18 on Aug. 3, Knight rose 15 percent to $18.59 and Jefferies soared 64 percent to $23.08.
Such companies may capture 15 percent of the $140 billion in commissions that went to investment banking and trading firms in 2008, Keefe’s Smith predicts.
Mondi, the displaced muni trader, says he likes Mesirow’s policy of investing its money in every deal it recommends to clients. He planned to spend as much as $500,000 in August for a stake in his new firm, where shareholder equity has doubled in five years to $250 million in March. Mondi says he’s adopted CEO Tyree’s skepticism toward leverage. At Mesirow, the ratio of assets to shareholder equity is 2.8-to-1 compared with Bear’s 33-to-1 in 2007.
‘Skin in the Game’
“Having your own skin in the game means you look at risk differently,” Mondi says loudly enough to startle customers at a Starbucks near his office. “It’s passion. You didn’t work like that at Bear. At some point, you started to lose your passion.”
The off-Wall Street crowd may not have to leave their big paychecks behind. Tyree says that at a place like Mesirow, traders might generate $5 million in business and make $2 million or more.
Mesirow and its ilk have fewer senior executives and can give top performers a larger chunk of the revenue, says Michael Maloney, president of New York-based recruitment firm Maloney Inc. These firms can allocate 50 percent of their commission pool directly to employees, he says.
Goldman, the strongest of Wall Street’s survivors, devoted 49 percent of revenue to compensation in the second quarter. The number was 60 percent for Jefferies and 70 percent for Mesirow.
“If people are good enough, they’re going to these firms,” Maloney says, referring to Jefferies and the others.
Capital Concerns
Mesirow and others may move up in rank if they can hang on to new clients.
“For the next five years, the boutiques are on the rise,” says Charles Geisst, a Manhattan College finance professor and author of “The Last Partnerships” (McGraw-Hill, 2001), a profile of top investment banks. Still, Geisst predicts midsize firms will never match the giants.
“They’ll have to remain as boutiques because they won’t have the capital to compete with Goldman and Morgan Stanley,” he says.
The advantages of a Goldman -- being large and well capitalized in spite of cutbacks -- will reassert themselves over time, says Samuel Hayes, professor emeritus of investment banking at Harvard Business School.
“I just don’t see how the small-size, boutique focus is really a winning hand,” Hayes says.
Three Giants
Goldman trimmed its leverage, or ratio of assets to shareholder equity, to 14.2-to-1 in the second quarter from 22.4-to-1 a year ago. It cut total assets by 18 percent to $890 billion. Even so, Goldman is still almost 150 times bigger than Mesirow.
Net income at Goldman soared 65 percent to a record $3.44 billion as trading and stock underwriting hit all-time highs. Goldman shares climbed 94 percent this year to $164.10 on Aug. 3.
Goldman, JPMorgan and Morgan Stanley have also strengthened their grip on investment banking. They captured 36 percent of merger advisory business through May, up from 24 percent last year, according to Bloomberg data. In equity underwriting, the three New York banks control 41 percent of the global market this year compared with 31 percent in the first six months of 2008.
In June, Goldman, JPMorgan and Morgan Stanley joined seven banks in repaying the U.S. Treasury $68 billion they’d accepted to repair toxic assets on their balance sheets.
‘Size and Stability’
“The financial crisis has made people much more conscious of the need for size and stability,” says Felix Rohatyn, 81, a 49-year veteran of Lazard Ltd. and former vice chairman of investment banking at Lehman who’s now president of advisory firm Rohatyn Associates LLC. “In many ways, this crisis was more positive for the big firms than for the little ones.”
In a fourth-floor office filled with testimonial plaques, Mesirow’s Tyree says the advantages of size are overrated.
“Scale is not the be-all and end-all,” says Tyree, who’s been honored for his work as chairman of the Chicagoland Chamber of Commerce and the City Colleges of Chicago, home to 110,000 students.
Tyree, 51, says he grew up hungry in a one-room apartment on the city’s South Side. His mother was a department store worker and his father pumped gas and drank heavily.
Dead and Blind
The younger Tyree suffered diabetes so severe that his heart stopped while he was vacationing in Mexico in 1997. He has needed four eye surgeries. In 2006, he underwent a triple transplant, getting new kidneys and a pancreas. He started working from home a week later and now has 40 people reporting directly to him. He describes himself as cured of diabetes and says doctors tell him there’s no reason he can’t work 25 more years.
“I’ve been dead,” Tyree says. “I’ve been blind. So much bad happened by the time I was 10 that everything else became pretty easy.”
Tyree prominently displays two pictures in his office. In one, he’s standing with fellow Chicagoans Barack and Michelle Obama at a private reception in December for campaign donors. In the other, he’s with his favorite band, Earth, Wind and Fire.
Tyree says Mesirow will prosper because it offers an alternative to the model that caused Wall Street’s grief. He’s rejected dozens of pitches for financial innovations, among them collateralized-debt obligations that pool loans or mortgages and divide them into securities of varying risk.
‘Slicing and Dicing’
“The whole idea of slicing and dicing, I thought that was way far out,” he says.
Not everything has gone right in Tyree’s expansion. He was counting on Carole Brown, a former Lehman managing director, to build a municipal underwriting business with Mondi’s sales desk.
Brown, 45, has deep political roots as the chairwoman of the Chicago Transit Authority. She came to Mesirow in October and left in June to be a senior managing director at Siebert Brandford Shank & Co., a New York-based underwriter.
Last year’s upheaval was so wrenching that it permanently weakened workers’ loyalty, Brown says.
“You’d be hard pressed after what happened at Lehman and Bear to find anybody having all of their eggs in one basket,” she says.
Knight Capital CEO Tom Joyce is using the migration away from Wall Street to build his stock-trading firm in Jersey City, west of Manhattan.
“The upheaval sent clients and talent our way,” says Joyce, 54, a Harvard University Varsity Club Hall of Fame linebacker and baseball outfielder who spent 14 years at Merrill. “Without it, we would have taken three years to do the things we’ve done in the last six months.”
Jersey City
Knight set up shop in 1995, nine years before the 42-story Goldman Sachs tower came to dominate the local skyline as New Jersey’s tallest building. This year, Knight muscled past Citigroup, Morgan Stanley and UBS as the biggest U.S. equity trader by volume, up from No. 4 in the prior three years, according to Tradeweb Markets LLC’s Autex.
Knight handles daily stock transactions worth $21.3 billion. Instead of offering investors research or capital for large trades, Knight promises a pool of buyers and sellers for almost any stock.
Seated in a conference room overlooking his 370-person trading floor, Joyce says Knight may almost double annual profit to $3 a share by 2012. To help reach that goal, he’s going after bond trading -- an area of opportunity due to the demise of Bear and Lehman.
Luring Skeptics
In a year, he’s assembled 140 people for fixed-income sales and trading by paying $75.3 million for a Greenwich, Connecticut-based brokerage called Libertas Holdings LLC and by hiring from Goldman, Merrill and UBS. By next year, he wants to start underwriting stocks and bonds.
Joyce has even convinced skeptics like Al Lhota, former head of high-yield U.S. sales at Royal Bank of Scotland Group Plc. Lhota, 47, had worked at a Los Angeles firm now called Libra Securities LLC from 1998 to 1999. He was frustrated then by how boutiques couldn’t compete for talent. By last year, the situation had changed, he says.
At RBS, Lhota’s 10-person sales team shrank by half as the Edinburgh-based bank cut pay and took a 20 billion-pound ($32.7 billion) capital injection from the U.K. government.
“It made my job of running the sales force miserable,” Lhota says. “The big banks generally have lost focus or are in so much trouble they’ve disenfranchised many employees.” His new assignment at Knight is to spearhead sales of distressed debt and bank loans.
‘Entrepreneurial Types’
Knight Managing Director Neil Robertson plans to double fixed-income trading in Europe, where Knight had only a small stock-trading business three years ago. He joined Knight’s London office on June 1 to oversee the 22-member European fixed- income group, which includes 11 former UBS colleagues.
Robertson, 44, says he decided to leave the Swiss bank after nine years because he didn’t expect a swift improvement from a devastating 2008. UBS losses from the credit crisis topped $53 billion, and the bank reduced its bonus pool by 78 percent to less than $2 billion.
“It wasn’t as great a difficulty to hand in my notice and say, ‘I’m going to work at a boutique that is well on its way to become a decent-sized player because it’s full of entrepreneurial types who are motivated to come to work,’” Robertson says.
Muhammad Ali
At Pali Capital, where a life-size photograph of boxer Muhammad Ali keeps watch over the trading floor, President Kevin Fisher, 38, is branching out from equity trading and sales into fixed income. Fisher says he wants to triple annual revenue to $500 million by 2012.
Pali got its start in 1995 when founding partner Bradley Reifler was also running institutional sales at Refco Inc. He left the New York futures broker in 2000, five years before it filed for bankruptcy after announcing its CEO had hidden $430 million in bad debts. Reifler resigned as CEO of privately held Pali in October 2008, spokesman Russell Sherman says. Pali is looking for a new chief executive, Sherman says, declining to comment further.
Nathaniel Ginor, a Pali sales trader who generates orders based on the firm’s research, is a Fisher recruit. He joined in April after three years at Bank of America. The previous September, the bank had unveiled what at the time was a $40.45 billion deal to buy Merrill, stunning an already teetering Wall Street.
$35,000 Commode
Ginor, 34, started looking for a new job in January, on the day many of his colleagues at Bank of America’s Bryant Park office were dismissed. Merrill officials, who by then were running the combined company’s sales and trading, had interviewed his friends to determine whom to retain.
On the same day, cable television was flooded with news of Merrill CEO John Thain’s office renovation, including a $35,000 commode.
Ginor says Merrill focused on top institutional accounts and had little interest in his specialty: identifying smaller clients such as startup hedge funds with the opportunity to expand trading.
“To leave potential market share on the table with up-and- coming firms, I couldn’t deal with it,” he says.
Plus, if Ginor stayed, he figured he might not get a bonus in 2009 and would have to wait until 2011 for the payout of his 2010 bonus. That may have meant an 80 percent pay cut that might have forced him to move out of New York. He decided to resign.
Now, on a June morning, Ginor is at his desk at 6:30 a.m. Analysts step up to a microphone on the trading floor, one by one, to describe their research. Ginor listens and then works the phone to alert clients. Other days, he takes customers to lunch or dinner, arriving home three nights a week at 8:30 p.m.
Pros and Cons
Ginor says he misses the days when Bank of America employed 40 analysts in New York, four times more than Pali. He doesn’t miss watching a third of them get fired.
“At Pali, maybe we don’t have the huge funds to build up really quickly, but then, we don’t have to cut in such a dramatic fashion when times get tough,” he says.
As Wall Street banks start to recover, they’re fighting to keep employees who may jump to a Pali or a Jefferies. One way is through multiyear salary guarantees.
“A year ago, it was much easier for us to hire quality people,” says Tim Cronin, head of fixed income at Jefferies.
The competition spilled into the open on June 22. UBS sued Jefferies, claiming that the New York firm used the bank’s proprietary data to recruit at least 34 bankers and poach clients after hiring Benjamin Lorello, who had been head of investment banking for health-care companies at UBS.
UBS and Jefferies
Lorello’s division ranked among the top three worldwide, with $1 billion in revenue since 2005, UBS said in the complaint. Lorello helped Jefferies draw bankers from London and New York, including nine managing directors, which crippled UBS’s health-care-banking division, according to the complaint.
The suit was later “amicably resolved,” spokesmen from the companies said on July 10. Robert Anello, a lawyer for Lorello, didn’t respond to a message seeking comment. Jefferies, which appointed Lorello chairman of investment banking on July 21, declined further comment on the lawsuit.
Jefferies’s Cronin says that attracting another top hire, Merrill’s Markaity, helped persuade the Federal Reserve Bank of New York to add Jefferies as an underwriter of U.S. government debt. Jefferies may boost profit to $1.20 a share in 2010, up from an estimated 89 cents this year, even if it captures just 1 percent of the $24 billion in annual commissions available to government primary dealers, Keefe’s Smith says.
‘Much More Prudent’
“They very well can be a company the size of Bear Stearns,” says Jonathan Vyorst, senior vice president at New York-based Paradigm Capital Management Inc., which owns 700,000 Jefferies shares. “However, management is much more prudent.”
Jefferies’s leverage was 9-to-1 in the first quarter.
Even with big names under his roof, Jefferies CEO Rich Handler is fighting a head wind. The recession hurt one of his strongholds: underwriting and M&A advisory in midsize deals in the range of $100 million to $5 billion. Fees in that area fell by a third to $38.7 billion last year, Freeman & Co. says; Jefferies’s revenue tumbled 35 percent to $1.02 billion.
A month after Bear’s collapse, Handler, 48, sold a 14 percent stake to New York holding company Leucadia National Corp. for $433.6 million. Leucadia later doubled its stake.
“There’s no doubt in my mind the system was in cardiac arrest and we were at the brink,” he says.
Working With Milken
Handler has lived through highs and lows before. After graduating from Stanford University with a Master of Business Administration in 1987, he started at Drexel Burnham Lambert Inc. in Beverly Hills. At age 28, he worked with Michael Milken on Kohlberg Kravis Roberts & Co.’s 1989 purchase of RJR Nabisco Inc., then the biggest leveraged buyout.
He landed at Jefferies two months after Drexel’s 1990 bankruptcy. He says the demise taught him that market fears about liquidity can be more damaging than actual weakness on a balance sheet.
Handler is starting to turn things around. After five straight unprofitable quarters, Jefferies earned $38.3 million in the January to March period on revenue of $347.3 million. It earned $61.9 million for the three months ended on June 30. In 2009, 51 percent of revenue will come from fixed income, up from 20 percent during the past decade, Michael Hecht of JMP Securities LLC forecasts.
“We like the fact that we’re competing with people who are smaller and less diversified than us, and that there are fewer people who are larger and more diversified,” Handler says. “Great people aren’t always available on the Street, but in a crisis they are.”
Thriving in St. Louis
Stifel CEO Ron Kruszewski has lured people all the way to St. Louis.
By the end of the year, his company will swallow 58 UBS offices in a $51.1 million deal, boosting financial advisers by 25 percent to 1,744. Stifel plans to break ground by next year on a 15-story headquarters three blocks west of the Gateway Arch. To Kruszewski, that’s another milestone in Stifel’s growth, with revenue more than tripling from the beginning of 2005 through 2008 and net income more than doubling to $55.5 million. Employees more than doubled to 4,335 during the same period.
‘Ahead of Itself’
Kruszewski, who spends enough time on the golf course to sport a deep tan, started expanding his company before the worst of Wall Street’s woes. In 2005, he tripled Stifel’s revenue from underwriting and trading with the $95 million purchase of Legg Mason Inc.’s capital markets business. Four other acquisitions propelled Stifel into the top 10 retail brokerages by number of advisers. Kruszewski kept the ratio of assets to shareholder equity less than 6-to-1.
“We take risk by adding people, not by leveraging the balance sheet,” says Kruszewski, who keeps 11 putters in his office that he says don’t work.
Stifel may suffer if the economy doesn’t pick up soon, says Steve Stelmach, an analyst at FBR Capital Markets Corp. in Arlington, Virginia.
“If we don’t get a recovery in 2010, Stifel may have gotten a little bit ahead of itself,” Stelmach says about the hiring binge. “If we get a broad recovery, the question is whether they’re able to retain the talent they built up.”
Kruszewski says Obama’s proposed reforms to reduce risk will force Goldman and Morgan Stanley to cut leverage, shrink and focus on top clients at the expense of smaller ones. Even so, he says, Stifel has just a two-year shot to step into the vacuum created by Wall Street’s upheaval.
‘Sleep Like a Baby’
As much as he worries about whether he’s doing enough to expand, he’s concerned about taking on too much.
“I sleep like a baby,” he says. “I wake up every four hours crying.”
Plenty of signs point to the growing ambitions of off-Wall Street firms.
On a June Friday, Mondi, the bond trader who spent almost three decades at Bear Stearns, mans his desk at Mesirow. The room, which was two-thirds empty last year, is bustling with 45 people, most of whom he helped hire.
Mondi says he spends 14 hours a day here because that’s what it takes to build the municipal finance business. He says his Mesirow pay now matches his best years at Bear.
When Mesirow relocates to its $450 million skyscraper, Mondi’s new desk will be on the ninth floor. He’ll look out over the Chicago Loop, 800 miles from his old Wall Street perch. That’s okay with him.
“When you’ve been through the devastation of a dream, you have this burning desire to rise above the ashes,” he says as he picks up the phone.
It’s a potential customer, and he has to get back to work.
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