The New York Times-20080127-What-s --36-34 Billion on Wall St--
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What's $34 Billion on Wall St.?
Full Text (2115 words)UNDER the stewardship of Dow Kim and Thomas G. Maheras, Merrill Lynch and Citigroup built positions in subprime-related securities that led to $34 billion in write-downs last year. The debacle cost chief executives their jobs and brought two of the world's premier financial institutions to their knees.
In any other industry, Mr. Kim and Mr. Maheras would be pariahs. But in the looking-glass world of Wall Street, they -- and others like them -- are hot properties. The two executives are well on their way to reviving their careers, even as global markets shudder at the prospect that Merrill and Citigroup may report further subprime losses in the coming months.
Mr. Maheras, who left his job as co-president of Citigroup's investment bank this fall after being demoted, has had serious discussions with several investment banks, including Bear Stearns, about taking on a top management position, people who have been briefed on the situation said. And he has also been approached by investment firms willing to back him to the tune of $1 billion or more if he decides to start his own hedge fund, these people said.
Mr. Kim, who until this spring was a co-president at Merrill Lynch with oversight of the firm's trading and market operations, has been crisscrossing the globe in recent months raising money for his new hedge fund, Diamond Lake Capital.
The ease with which Mr. Maheras and Mr. Kim have put themselves back in play is a reminder that for many top Wall Street executives, humiliation and defeat need not result in a professional exile. And they aren't the only ones. Zoe Cruz, the Morgan Stanley co-president who was forced to leave her job after $10.8 billion in subprime losses, has been approached by investment banks, hedge funds and private equity funds about a senior management role, people briefed on those discussions say.
It is always an assumption on Wall Street that it is not the individuals that lose money; it's the system, said Charles R. Geisst, a Wall Street historian and a finance professor at Manhattan College. You can fail big time, but you can also succeed big time.
They think it's bad luck, he said, so the attitude is let's give them another chance.
The quick comebacks of these executives stand in stark contrast to the plight of the hundreds of investment bankers who have received pink slips in the last two weeks. They also illuminate a peculiar aspect of Wall Street's own version of a class divide. Senior movers and shakers often land on their feet, no matter how egregious the losses tied to them. The industry rank and file, however, from mergers-and-acquisitions bankers at Bank of America to sales executives in Citigroup's hedge-fund servicing business, see their jobs eliminated despite being far removed from the subprime crisis.
Perhaps the most notorious example of failure leading to prosperity is John Meriwether. Ousted from Salomon Brothers in 1991 for his role in a bond trading scandal, he became a co-founder of Long Term Capital Management, the hedge fund that nearly collapsed in 1998, rattling markets worldwide. He has since founded a second fund, JWM Partners, with assets of around $3 billion.
More recently, Brian Hunter, the energy trader at Amaranth Advisors whose disastrous bets led to the disintegration of that $9 billion hedge fund, is now advising a private equity fund called Peak Ridge on starting a hedge fund. Howard A. Rubin, a trader at Merrill Lynch, who lost $377 million in 1987, quickly landed a job at Bear Stearns, where he had a successful career.
But last week, as markets worldwide gyrated, lower-level bankers braced themselves for bad news. Bank of America, whose profit fell 95 percent last year from mortgage-related exposure, has said it would pare down its trading and investment banking operations and cut more than 1,000 positions. Citigroup has also laid off investment bankers in recent weeks and has said it would cut 4,200 jobs, with more expected to follow. Morgan Stanley said Thursday that it would cut 1,000 operational jobs, and Merrill Lynch was expected to reduce its staff.
With a recession looming, the deal-making and underwriting environment is looking stagnant. Banks are cutting costs and taking a hard look at their head counts. All these developments do not bode well for bankers' chances of landing another job anytime soon.
MR. KIM and Mr. Maheras, both 45, took different routes to the top at their respective banks. Born in South Korea, Mr. Kim received an elite education in the United States, attending the prep school Phillips Academy in Andover, Mass., and earning undergraduate and graduate degrees from the Wharton School of the University of Pennsylvania.
In 2001, Merrill's new leader at the time, E. Stanley O'Neal, plucked him from his job as a bond derivatives expert and put him in charge of the firm's bond business. A promotion followed just two years later, and he became president of Merrill's overall markets and trading operations. In taking the job, he was given a mandate by Mr. O'Neal to enhance Merrill's risk profile, and in the ensuing years, Mr. Kim's business became a prime generator of profits. One area Mr. Kim leaped into with the encouragement of Mr. O'Neal was the market for collateralized debt obligations, complex pools of securities tied to assets like subprime mortgages. Under his watch, Merrill's exposure to these securities climbed to $52 billion in 2006 from $1 billion in 2002, making the firm the top underwriter of C.D.O.'s on Wall Street.
Always interested in running his own fund, Mr. Kim left Merrill in May 2007, just a few months before his big C.D.O. position collapsed, causing the largest losses in Merrill's history and pushing it into the arms of foreign investors.
In a statement, Mr. Kim said that in late 2006 he and his team put in place a program to reduce Merrill's mortgage-related securities exposure. He said that after his departure in May, he had no authority over Merrill's risk management, trading or other operations and was not consulted on those issues.
As recently as a month ago, Mr. Kim was telling investors he planned to raise about $2.5 billion, and he highlighted his abilities as a business builder and risk manager, people briefed on his plans said. But the turbulent markets over the last month have forced Mr. Kim to scale back his ambitions, and he is no longer discussing such a sum, said people who have spoken with him.
He has established headquarters in Midtown Manhattan but has not hired any portfolio managers, a person who had knowledge of his plans said.
While respected for his intelligence, Mr. Kim has never been a money manager, and hedge fund experts say that his experience at Merrill could be an impediment to raising money. He has no track record, and the business he built wrote down billions in losses, said Tim Cook, the president of Kailas Capital, an investor in hedge funds. He has some questions to answer.
Mr. Maheras, the son of a Greek immigrant, is a Notre Dame graduate who got his first taste of markets as a runner on the Chicago Mercantile Exchange. He started out at Salomon Brothers in 1984 and by the early 1990s had become one of Wall Street's top traders of junk bonds. By 1996, he was running Salomon's bond trading business, and after the 1997 merger of Travelers and Salomon, became a favorite of Sanford I. Weill, rising to co-president in 2007 with oversight of Citigroup's trading and bond operations.
As the head of its large capital markets division, Mr. Maheras had broad oversight for all aspects of trading and investment.
IN 2004 and 2005, senior executives at the bank, including Robert E. Rubin, Citi's influential director, urged it to become more actively involved with in-vogue areas like structured credit, pools of securities backed by different assets, and commodities. The buildup in C.D.O.'s began at this time, several reporting layers beneath Mr. Maheras. By 2006, Citigroup had become the second-leading underwriter of C.D.O.'s.
Mr. Maheras declined to comment for this article, but a person who worked closely with him said that Mr. Maheras had been aware of the broad exposure, but that he, along with others, had been caught by surprise when some of the most highly rated securities imploded so quickly.
As the size of the write-downs grew, so did pressure on Charles O. Prince III, then the chief executive, to hold someone accountable. In October, he demoted Mr. Maheras, who then chose to leave the only firm where he had ever worked. It was a move that still irks James Dimon, the chief executive of JPMorgan Chase, who worked closely with Mr. Maheras while they were at Citigroup and who has counseled him in recent months.
The great shame is that people are often never as good or as bad as they are held up to be, Mr. Dimon said. Tom is a class act personally and professionally.
Mr. Maheras has told friends that he feels horrible about the recent events. A direct, ingenuous man who lacks the guile and gloss of most bankers who have reached such a high position, he has told colleagues how upset he is that he did not discover the scale of the losses sooner, though he has not pointed fingers.
I wish I could turn back the clock, he has told peers. But it happened on my watch.
He has said that he expects to take 6 to 12 months to weigh his next move. However, he has been courted by Wall Street firms, which may push him to take a new post sooner than he might have thought. Since leaving Citigroup, he has had conversations with chief executives at most of the large banks, people who have been briefed on his plans say. At Bear Stearns, the talks have centered on his heading the firm's trading operations, a job formerly held by the co-president, Warren Spector, who was pushed out last summer.
What explains such an interest? To some extent, it is personal: Mr. Kim and Mr. Maheras have a web of relationships with Wall Street's top executives. And many seasoned investors think that surviving such a crucible gives a person a degree of savoir faire and understanding of risk.
People develop relationships that transcend the professional role so that they can rationalize away performance, said Clayton S. Rose, a former senior executive at JPMorgan who now teaches a course on corporate leadership at Harvard Business School. There is also a view that they have learned from their mistakes and have now figured it out.
RIGHTLY or wrongly, there is not likely to be such a generosity of spirit for Jean Larkin, who until recently was a sales executive in Citi's prime brokerage division. Mr. Larkin was a 17-year veteran of the firm and was coming off a profitable year for the unit, during which it increased its market share. Last week, just days before getting news of his bonus, he was laid off. Mr. Larkin, who is 43 and lives in New York, would not comment on his departure, but people who have spoken to him say he had no idea that his job was at risk. People who know him say he does not hold out high hopes of finding another job anytime soon.
More recently, Stefan Gerhard, a mergers-and-acquisitions banker for Bank of America, was told Wednesday that his San Francisco job was being eliminated. Mr. Gerhard, 35, also declined comment on his departure, but a person who knows him said the news came as a shock -- he had been promoted from principal to managing director in December after a successful year in which he worked on several major technology deals.
He received the news just two days before getting notice of his bonus and, people who have spoken with him said, he was offered a severance package of just 10 percent of the amount that he had been expecting to receive as his bonus. His career outlook, these people say, is gloomy, and he does not expect to make any serious effort to find work given the current industry conditions.
Wall Street firms are downsizing considerably, said Leah Peskin, a recruiter at Cromwell Partners. It will be a hard year for many of those who get downsized.
[Illustration]PHOTOS: Thomas G. Maheras; Dow KimILLUSTRATION (ILLUSTRATION BY PETER ARNO (1941) THE NEW YORKER COLLECTION); CHART: STREET CLEANING: More people are working in the securities industry than ever before, but some analysts are predicting that job cuts, especially on Wall Street, may gfollow the recent market volatility. (Sources: Securities Industry and Financial Markets Association; Bureau of Labor Statistics)