As we enter a new year, I've done some reflecting on what I've written since becoming a blogger. A lot of stuff about a pretty wide range of topics. That said, I noticed a conspicuous gap in an area that I know a bit about and about which I feel quite passionately: Wall Street. I spent 17 years there, after all, and on both sides of the "fence" - Investment Banking and Sales & Trading - which puts me in a somewhat unusual yet favorable position as a commenter and analyst. With that realization, I decided to embark on what I'm calling the Wall Street Series. How many posts this will encompass I have no idea, but they will share a common theme: observations, perspectives, commentary and possibly recommendations concerning what I personally experienced while on Wall Street. Hopefully you will find this interesting and even helpful. If not, I tried, ok?
Deutsche and Citi - Born of Mergers, with Massive Cultural Consequences
So, I was at Citi from 1987-early 1999, and at Deutsche from early 1999-late 2004. In each case I lived through two disruptive and transforming mergers, the Citicorp/Travelers deal in 1998 which created Citigroup (NYSE:C) and the Deutsche (NYSE:DB)/Bankers Trust deal in 1999 . One deal drove me away (Citi) while another drew me in (Deutsche). Now why is that?
Citibank - I Knew You Once
Citibank was a unique place with a very distinct culture prior to its merger with (read: being subsumed by) Travelers/Salomon Brothers. It was a very international firm. I worked with Japanese, Malaysians and Australians in my first M&A job, Israelis and Chinese in my corporate finance structuring assignment, and Indians, Iranians, Saudi Arabians and Pakistanis during my time in derivatives. I was based in New York during my entire tenure at Citi, though many of my foreign colleagues had worked for Citi in a variety of locales during their careers, with New York simply being their latest stop. While one might think that this would make for a contentious, fractious environment, there was an underlying "Citi culture" that served as the glue to keep people together and focused on the common goal - winning. It is hard to articulate exactly what this glue was but there was definitely a pride that came along with working at Citi. Though there wasn't a manual that outlined a "Citi Way," somehow it seemed to exist.
Like any bank, there were the classic battles between the relationship areas and the product areas - who owned the accounts, who was responsible for the P&L, blah, blah, blah. But the balance of power was really, well, balanced, which is pretty unusual for most Wall Street firms. There was a shadow credit system that enabled relationship bankers to have pretty good transparency with what was being made on the product side, with the battle for hard dollars (between banking and products) being fought at the highest management echelons away from the troops. This worked quite well. And for all the crap about Citi not being Goldman, Morgan Stanley, etc., they somehow trained some of the brightest and most talented people that eventually landed all across the Street, so they were clearly doing something right. The point is, post the Wriston melt-down in the emerging markets, the real estate loan debacle, etc. in the early 1990s, and after Prince Al-Waleed stabilized the place with his prescient $590 million investment, Citi did very, very well. Solid commercial banking. Excellent products. While it never was quite able to crack the nut of mainline investment banking, Citi was great place to learn, to grow, to make money, and to be a stockholder.
Then one day it was announced that Citicorp and Travelers were merging. And there would be Co-CEOs. HA! We all know how that movie ended - Sandy Weill, the consummate operator, completely outmaneuvered the brilliant yet introverted and apolitical John Reed, and the Co-CEO thing ended pretty quickly. Travelers/Salomon Brothers had won, and Citi had been vanquished. So what did this mean in the trenches? Full disclosure: I thought the merger sucked. I was part of the Institutional Investor #1 ranked derivatives shop in the world two years running at Citi, yet was part of a team relegated to taking a back seat to people staffing the #17 ranked derivatives shop on the Street? This didn't feel very good or make a whole lot of sense. I could see the merger killing one of the unique cultures in one of the most unique and important financial institutions in the world - which, in fact, it did. But how? But why?
Illusions of equality and fairness. Duplicate functions were preserved on the relationship side, with Citi commercial bankers and Salomon investment bankers covering the same accounts. There was supposed to be transparency, sharing, etc. Bullshit. It was a confusing, painful mess, especially for the Citi bankers who were relegated to second-class status and the Citi product people, who had once ruled the roost (and who were loved by the bankers who made lots of money by supporting their efforts). This duplication carried on for years and years, long after my run at Citi had ended. It would have been better, in my opinion, to make the hard and painful changes upfront, get everybody in banking and the products following the same strategic plan and GET AFTER IT. Otherwise, immense time is wasted on internal politics, positioning, and basically a whole lot of non-revenue generating activities. Life is too short and shareholders can't wait. Get on with it.
Decisions based on power and not on merit. Wall Street is supposed to be a meritocracy. This is why we have this objective thing called money to help keep score. But in the Citi/Travelers merger there was a winner - Travelers/Salomon - and these people were given the keys to the best rooms in the castle. Why? Because they won. This concept completely undermines the fabric of what makes Wall Street work, which is why some of the best people I knew at Citi left. Who wants to stand for this crap? While I am admittedly speaking in broad generalities (I also know people who have thrived in the post-merger entity), the gist of what I'm saying is certainly true. And it hurt. Both people and the stock price, in the long run. Why Sandy didn't see this is beyond me.
Added size, exponential increase in complexity. Citi was a large, complex organization. Travelers was a large, complex organization. When you smash them together what do you get? A business model that is still being tinkered with to this day, almost nine years later. This was a bold stratagic move with far-reaching consequences, but a necessary outcome of this marriage was a wicked hangover of epic proportions. How many scandals and problems has Chuck Prince been dealing with since he took over? I'd argue that a good many of them are due to the sheer breadth and complexity of the firm he is running, that is a patchwork of deals and cultures sandwiched together over the past two decades. Call it the anti-Citi - there was certainly no unifying force drawing people together and getting them to, shall we say, "Do no evil?" Should non-essential pieces of the Citigroup colossus been pared off more rapidly, leaving only the desired core with the ability to form a new culture and get people aligned and excited about their new firm? Possibly.
Anyway, you get the point. I think a lack of attention to culture made integration of Citi/Travelers much more difficult, the repercussions of which are being felt to this day.
Deutsche - Entrepreneurship in Action
I came to Deutsche at a very intresting time, shortly after the closing of the Bankers Trust deal. Make no mistake, unlike the Citi/Travelers deal, this was not marketed as a merger of equals. This was an acquisition. The Germans bought the Americans. That said, once inside, I found a very international firm that had much more power located outside of Germany than I had initially thought. And because of its comparative weakness in banking, much of the power was concentrated in the products - derivatives of all stripes (equity, fixed income, credit, commodity, etc.), foreign exchange, securitization, etc. And as Deutsche was in growth mode, particularly in New York and London, top people from across Wall Street were being hired to build, grow and augment businesses. So there really wasn't a Deutsche "culture" as such - it was in the process of being developed. If anything, I'd classify the culture as that of the entrepreneur - nobody was going to give you anything, but if you had the brains and the guts to go out and get it, you could have it. And get paid for it. And this was pretty cool and exciting.
There was also the sense of being an underdog - not Goldman, not Morgan Stanley. But hungrier. And craftier. And more focused. And maybe even smarter. "Screw them. We'll kick their ass." We had big balance sheet and could take big risks, and as the products became ever-more successful they could demand increasingly large allocations of balance sheet, VaR, whatever. These weren't stupid risks, just sometimes big risks with big returns, that many other firms, particularly the less-capitalized investment banks, just couldn't handle. This product-centric approach was very successful, as it often enabled Deutsche to leverage product strength and capital into banking relationships that could develop over time. This made sense. It was a very exciting place to be, where entrepreneurial instincts and performance were rewarded, and politicians with little P&L by their names got, well, little compensation. True pay for performance. True alignment of motives. No ambiguity in the merger scene - winners, losers, tears shed and then moving on. A much better formula for success.
There's just not as much to write about Deutsche because there wasn't this profound embedded culture outside Germany when I joined. It was in development. And it is still developing today. But based upon the continued success of the Deutsche product groups, I'd have to say that they're doing something right. And if you look at the three dimensions across which I criticized the handling of the Citi/Travelers merger, it is easy to see how these three are not present in the Deutsche/BT deal. There were no illusions of equality. And performance - rather than politics - did guide most of the decisions I witnessed from a manpower perspective. And BT, while certainly not a small firm, was a minor integration task relative to Citi/Travelers. So Deutsche/BT represented a less ambitious, less bold step with a much higher likelihood of success - and I'd say this is pretty much how it has played out.
If I've said it once I've said it a thousand times - it's the culture, stupid, It just is. And where cultural issues are not given their due, as in a merger, woe be to those trying to make it work. Because it will be a nightmare. And it has been.