D r i v e n
b y
c o n t e n t
players I platforms I technology I legislation & regulation I hedge funds I lifestyles I education I recruitment
Volatility Victor
Brazil Booms
Beyond BRIC
Banking Refugees
in Hedgefundland
november/december 2008 marketsmediaonline.com
D r i v e n
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c o n t e n t
november/december 2008
players I platforms I technology I legislation & regulation I hedge funds I lifestyles I education I recruitment
cover story
41
The credit storm that wiped out the bulge bracket supermarket model
has landed the same players in different roles as private equity and
boutique firms ride the new wave of investment. The surviving securities
giants will bulk up as bigger banks while new firms sprout to tap talent
from the busted behemoths. Once the dust settles, those left standing
are sure to prosper and rebuild the foundering financial sector.
I By Natasha Gural, Editor-in-Chief
features
Volatility Victor
14
On a chilly October Monday, marred by a worldwide equities
slump that wiped out more than $2 trillion in market value,
Howard W. Lutnick is the epitome of Old Wall Street calm.
Lutnick shares his sage opinions on the $700 billion bailout
package, the causes of the credit crisis and the common thread
in all of Cantor’s businesses. I By Natasha Gural, Editor-in-Chief
Banking Refugees
in Hedgefundland
36
“Don’t get a job with a hedge fund,” your mother always told you.
“They’re too risky. Get a nice, safe job with one of the big investment
banks.” Perhaps you shouldn’t have listened to Mom so closely when
it came to career advice... I By James Armstrong, Hedge Fund Correspondent
Brazil Booms Beyond BRIC
56
Brazil, a major player in the global commodities markets, has
made all the right moves to graduate from BRIC status, but there’s
still some room to grow. Markets Media talks to international
exchange analysts and decision-makers at Brazil’s exchange
to examine how it measures up to other global commodities
platforms. I By Karla L. Yeh, Reporter
marketsmedia magazine I november/december 2008
5
editor’s view
Stocks Go Up and
Down; Investing World
Comes Full Circle
M
arkets Media makes a vigorous team play, tackling the new wave of investing in an ambitious
cover package that scrutinizes and forecasts the ever-evolving financial marketplace. Senior
Reporter Riley McDermid places the new order of banking in historical context, revealing
a return to old ways after the colossal collapses of Bear Stearns and Lehman Brothers. Reporter
Karla L. Yeh dives back into the battle for liquidity, revisiting a very different pool from the one that
splashed the front cover of our July/August issue. Regulation Correspondent Ed Zwirn reflects on
the new regulatory paradigm, while Sherree DeCovny outlines efforts at mutual recognition. Vanessa
Drucker demystifies the role of gold, and John Hintze assesses the new era of prime brokerage
The oscillating markets make uncertainty the only constant. Nobody is ready to call a bottom,
but many are quick to claim we haven’t seen the worst of it. “The tsunami hasn’t even hit yet,”
Robert Shapiro, executive director of trading and execution analysis at Morgan Stanley Investment
Management, said at a Baruch College conference in October.
Volatility has taken plenty of victims, but victors emerge as the transformation creates opportunity
for entrepreneurs and the middle market continues to thrive and grow. Cantor Fitzgerald’s passionate yet imperturbable Chairman and CEO Howard L. Lutnick is one of those winners. Lutnick, who
spared more than an hour to chat with me in his office after one of the most frenzied days in the
markets, breaks down the debacle that’s cut confidence and stoked fears: ”The problem we face
is the classic pendulum, and I think we will deal with the consequences much better than in the
Great Depression.”
As this issue goes to press, the nation and the world ponders the potential of a new presidential
administration, while Congress is charged with reforming the regulatory system that lags behind
the dynamic markets. The government’s unprecedented intervention in the financial system further
complicates the role of Wall Street and its impact on Main Street.
Markets Media extends its world view, with our Dec. 10-11 Global Markets Summit serving
as a springboard for coverage from other major market centers. Global markets have been battered
by the credit crunch, as consolidation spreads woes across borders.
Even as hedge funds implode and liquidate, plenty of firms are hiring as talent dumped by
the big banks flocks to new opportunity. In addition to profiling a manager who averted losses,
and offering insight into reduced fees, Hedge Fund Correspondent James Armstrong serves up
a lighter look at how hedge funds are eager to hire generalists.
As always, Markets Media probes the issues and events that affect our readers, while offering
a dedicated Lifestyles section to balance our publication’s hard-hitting profiles, features and
forward-looking analysis.
Markets Media is here to help you navigate through the market mayhem, providing the news
and views that redefine market structure. As we prepare to ring in our first full year, Markets Media
is evolving and expanding. Web traffic has exceeded our expectations, and we plan to take the
magazine monthly and our conferences overseas in 2009. We’re already busy planning our final
issue of 2008, along with a special project on global exchanges. The markets may continue to sink
and soar amid dizzying developments, but Markets Media is here to stay strong and focused.
°
I Natasha Gural, Editor-in-Chief
8
marketsmedia magazine I november/december 2008
EDITORIAL
Editor-in-Chief: Natasha Gural
Senior Reporter: Riley McDermid
Reporter: Karla L. Yeh
Hedge Fund Correspondent: James Armstrong
Regulation Correspondent: Ed Zwirn
Reporter: Nina Schmir
Contributing Writers: John Hintze,
Bruce W. Fraser, Vanessa Drucker,
Sherree DeCovny, Karen Nuccio
Content Consultant: Michael Maiello
WEB SITE
Editor: Natasha Gural
Senior Reporter: Riley McDermid
Reporter: Karla L. Yeh
Hedge Fund Correspondent: James Armstrong
Regulation Correspondent: Ed Zwirn
Cover Design
Ryan Durney, Illustrator
www.ryandurney.com
MAGAZINE DESIGN & LAYOUT
Trungale, Egan & Associates
www.trungaleegan.com
PUBLISHER
Publisher: Mohan Virdee,
CEO, Markets Media LLC
Associate Publisher: David Griffiths,
Managing Director, Markets Media LLC
Markets Media LLC
121 East 18 St.
New York, NY 10003
Fax: 646-839-2947
Legal Notice
©2008 Markets Media Magazine. All rights reserved.
No part of this publication may be reproduced or used
in any form of advertising without the prior permission
of Markets Media LLC. Markets Media LLC would like
to stress that the contents, opinions and sentiments
expressed in the articles and features contained in Markets
Media magazine do not represent Markets Media LLC’s
ideas and opinions. The articles represent only the ideas
and opinions of the contributing writers and editors. All
information is provided for information purposes only.
Every effort is made to ensure that all information given
in this publication is accurate, but no responsibility or
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errors or omissions or for any loss arising from use of
this publication.
players
Volatility Victor
Howard Lutnick’s Old Wall Street Ways Keep Cantor Clear of the Credit Crisis
By Natasha Gural, Editor-in-Chief
T
hree hours after the markets closed down on a chilly October
Monday marred by a worldwide equities slump that wiped
out more than $2 trillion in market value, Howard W.
players
Lutnick is the epitome of Old Wall Street calm. Lutnick is quick to
share his sage opinions on the $700 billion bailout package and
the causes of the credit crisis, but the latest Wall Street rollercoaster doesn’t rattle the chairman and chief executive officer of
“Everybody does business with
us because we’re a specialist. Do
we move the easiest things in the
world? No, we move the most difficult, the least liquid. But we don’t
do it for our own account.”
– Howard Lutnick, chairman and chief executive
officer of Cantor Fitzgerald
privately-held Cantor Fitzgerald, one of the biggest and best
known players in global equities.
“We don’t make more money on the market’s way up nor
do we lose money on its way down. Cantor makes money when
the capital markets are busy or times are uncertain. And right
now, it is really busy, and times are really uncertain, so Cantor is
doing very well because we help people move their stock,” Lutnick
told Markets Media on Oct. 6, the day the Dow Jones Industrial
Average plunged to its biggest intraday drop since Black Monday.
Earlier in the day, Morgan Stanley, Citigroup and Goldman
Sachs all shed more than 8.2 percent after BNP Paribas scooped
up chunks of Fortis, Belgium’s largest financial-services company,
and the German government bailed out commercial property lender
Hypo Real Estate Holding. The S&P 500 sank to its lowest level
since October 2003, while the CBOE VIX rocketed to a record high
of 58.24. (It seemed bad at the time.)
As one of the few remaining private partnerships on Wall
Street, Cantor moves giant blocks of hard-to-move shares and
does business with all the top players: the biggest banks, money
managers, insurance companies, hedge funds and pension funds,
including California Public Employees’ Retirement System, the
nation’s biggest.
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marketsmedia magazine I november/december 2008
“We pay relatively small broker fees to Cantor Fitzgerald ... We
own around 284,000 shares of eSpeed,” said Clark McKinley,
information officer for CalPERS’ Office of Public Affairs.
Lutnick stays focused on the interview in his sprawling Park
Avenue office, glancing occasionally at the Thomson terminal
mounted between his desk and conference table. It’s clear when
he wants you to pay special attention. He leans into the table,
grabbing the back of a supple, rich brown leather Herman Miller
chair, and makes eye contact to command full attention. His
style is a mix of sophistication (bold cuff links punctuate his
crisp white shirt) and old-school Street savvy.
True to his word, Lutnick sat down with Markets Media, keeping
a promise he made when we met briefly in March, to explain
the common thread in all of Cantor’s businesses. The franchise
includes investment banking, private equity and asset management.
The Equity of Equities
“Our equities business is extraordinary because it’s theoretically
what everyone on Wall Street would really like. All the big buyers
of the world call you up and tell you what they want to do, and
all the big sellers of the world call you and tell you what they want
to do. You work with large blocks of stock, meet in the middle
and cross all the stock. It’s really not about the up 1 cent, down
1 cent,” says Lutnick.
Established in 1965, Cantor Equity Capital Markets has
been ranked first among the top 50 U.S. securities brokers
for execution and cross-ratios for five years, serving more than
5,000 major institutional investors and corporations worldwide.
“Cantor Fitzgerald is really a sales organization, so our
salesmen are called sales traders. They don’t trade in
the traditional sense since Cantor doesn’t really take risks.
They are here to work for our clients,” Lutnick says.
“Obviously you have to have tremendous market savvy. You
need to know the markets dead cold so you can find sellers,
find buyers and bring them together and be a matchmaker.”
The Equity Capital Markets business is focused on “third
market equities,” says Lutnick, with initial public offerings as
the first market, retail exchange as the secondary market and
the third being “where big pros trade blocks.”
“This is the marketplace for huge blocks of stock, for example,
100,000 or a million shares. How would you sell a million shares
players
Volatility Victor
of stock when the average daily volume of a stock is 200,000
shares? You’d call Cantor and our professionals would find the
other side of the trade,” he says. “But you can’t go around telling
people you have a million shares for sale. Otherwise the stock
would just go down. You have to keep it private, you have to do it
in the right way. That’s our expertise. For example, we’d call around
and say we have
an interest in X, Y or Z stock but we won’t tell you
players
if we have a buyer or a seller and that might mean finding another
seller. So, in this case, if we find another seller, and we find a
buyer, we may put the buyer together with the two sellers. There is
a whole art in how you do that so everybody is treated fairly.”
“There is a whole art in how
you do that so everybody is
treated fairly.”
– Howard Lutnick, chairman and chief
executive officer of Cantor Fitzgerald
The financial crisis puts Cantor’s philosophy in the spotlight,
as the strengths of the middle-market are revealed under the
fallen framework of the bulge bracket model.
“Our business model is not the same as the big banks’
because, with their tens of billions of capital, they have to take
more risk,” he says. “When you take more risk, you have more
upside and, of course, you have more downside.”
“Two or three years ago, if I was describing our business to
you, you’d say, ‘Wow – it’s not really that exciting compared to
all the banks that are printing money and doing all these great
transactions,’” Lutnick says. “Now, when times are much more
difficult, people say this is a great spot to be in, and the answer
is, it’s the same spot.”
16
marketsmedia magazine I november/december 2008
I continued
Debt Bet: Fannie and Freddie Bring “Explosive” Business
Launched in 2003, Cantor’s DCM business serves more than
4,000 customers worldwide – the same big banks, pension funds,
insurance companies and hedge funds – with more than 200 sales
and trading professionals who “do the exact same thing for bonds”
as with ECM, says Lutnick.
“Think of the difficulty now in selling a mortgage-backed
security, ‘Oh my god! The markets are frozen!’” he says, poking fun
at the muddled mentality that mobs the markets. “No they’re not!
Buyers only want to buy at cheap prices but the sellers somehow
have yesterday’s price on it, so there’s a gap between the price that
sellers want to sell at and the buyers want to buy at. That’s where
we come in. We try to show the buyers why they should be paying
more because the value’s there, and help the sellers come to the
reality that if they don’t move, someone else will move a product
that is comparable but priced to move.”
“Everybody does business with us because we’re a specialist.
Do we move the easiest things in the world? No, we move the
most difficult, the least liquid,” he says, pressing the point.
“But we don’t do it for our own account. We’re not here
betting. We’re not taking the other side of the trade, and
therefore both the seller and the buyer can trust us. If
we were buying for our own account, you might be afraid
to sell to me because you’d think, ‘Wait a minute, if he’s
buying for his own account, he’s trying to get it from me
too cheaply.’”
Cantor makes the same amount of money regardless of
the cost of the trade, Lutnick says. “We don’t want the seller
to be upset and we don’t want the buyer to be upset, so if we
determine one side isn’t going to get a fair deal, we’re not going
to do it.”
The fire sale on Freddie Mac and Fannie Mae meant “explosive” business for Cantor, Lutnick says. Treasury Secretary Hank
Paulson on Sept. 7 announced the government’s plan to seize control of the two largest sources of U.S. mortgage financing, which
had owned or guaranteed nearly half the $12 trillion in domestic
home loans.
Cantor Fitzgerald is “the people to call when you want to do a
transaction that’s tricky, more difficult or more complex,” Lutnick
says. “Mum’s the word, and because everyone knows that’s the
model, it works really well.”
“It’s fun and it’s a really fascinating business,” he says grinning. “But it’s never going to be gigantic; instead it’s a ‘right size’
business and has its place in he financial community.”
Trading Life Insurance
A year after DCM, the same core business model moved into
uncharted terrain, as Cantor LifeMarkets was created to trade life
insurance policies.
The LexNet online
marketplace promises
the same privacy and full
transparency of bids, offers,
commissions, fees and documentation. It seems morbid at first, but
Lutnick is quick to shed light on the bright business model.
“Let’s say you’re 35, you get married, you have kids, you
have life insurance to take care of your kids,” Lutnick explains.
“Fast-forward 30 years, you’re 65. Your kids are grown, married
and on their own, they have their own jobs. You’re still paying
premiums on your insurance policy, and in fact paying more and
more money because you’re getting older. In many cases, the
policy holder normally would let it lapse. In other words, you gave
that insurance company a present because you paid off the premium. But if you had sold it, what would it be worth to you?”
The wholesale offering is available only through insurance
brokers on systems capable of handling large volumes of trades.
“We’ll auction a life insurance policy so everyone can bid on
it and you get a good price. And we keep it confidential, so you’re
contributing your life insurance policy to this secret trust and that
trust will never give out your name,” Lutnick says. “Your information can’t fall into the wrong person’s hand.” The policies are
then auctioned to the buyers, and the buyers pool them.
“It sure sounds like a mortgage-backed security. It’s got the
same kind of prepayment, it’s got the same sort of flow and
mathematical characteristics,” Lutnick says. “But it’s different
because, as opposed to mortgages which can default, people
eventually are always going to die.”
“These will all pay off 100 cents on the dollar. They’re not
guaranteed by the government, they’re guaranteed by God.”
Lutnick says, delivering a punch line only he can get away with.
Bank Busts and Bailouts; Cantor Trumps Turmoil
Lutnick credits Cantor’s business philosophy for success across
its many subsidiaries.
“Cantor’s businesses are all different – ranging from stocks,
bonds, life insurance settlements, carbon emissions and others,
but they all have the same fundamental feature,” he says.
“People turn to us when they need real expertise to transact their
business, not capital. If you just have something big you want to
sell right now, you can call one of the big banks, since that’s what
they do. They have their capital available to buy and sell. Sometimes it works out great for them as it did in prior decades, and
sometimes it doesn’t work out well. It was the lending of money
that lost these banks lots of money. It wasn’t their trading.”
As the credit crisis dumps talent from the top firms onto the
uncertain Street scene, Cantor plans to bolster the ranks at the
flagship firm and its NASDAQ-listed majority-held unit, BGC
Partners, by
about 10 percent.
The move comes
as little surprise from a
firm led by Lutnick, who rebuilt – and
grew – the business in the seven years
since the Sept. 11, 2001, terror attacks
claimed two-thirds of his employees.
Cantor continues to flourish, even
as the credit contagion spreads across asset
classes and the globe. He explains how and why Cantor
navigated away from toxic vehicles like auction-rate securities.
The ARS Mess (a term coined by Markets Media in our last issue)
culminated in September when Brooklyn prosecutors charged two
former Credit Suisse traders with fraudulently selling corporate
clients more than $1 billion of ARS linked to sub-prime mortgages,
which they claimed were backed by U.S. guaranteed student loans.
“We didn’t participate in the auction rate preferreds, but you
could hire us if you wanted to buy them back,” he says. “Let’s
say you were an issuer and now the yield was too high, and you
wanted to buy them back, you could call us. It was difficult for
the people who participated in them. They owned so many, they
didn’t want to trade in them at a discount. That would not be our
problem because we don’t touch the stuff for our own account.”
The big banks go to BGC Partners for “every product in the
world, from government bonds to corporate bonds, to credit default
swaps, to interest rate swaps, to emerging market equities and
options,” Lutnick says.
“If the biggest banks in the world, wherever they are and
as far flung as they might be, whether Singapore or Mexico City,
want to buy or sell something, how are they going to buy or sell
with each other? Deutsche Bank is not going to call up Goldman
Sachs and say, ‘Hey, I was thinking of trading some CDS, what
do you say?’ because they’d be telling each other what they’re
doing,” he says.
“They want to keep it an absolute secret and keep their
identity an absolute secret. They want to trade huge size without
moving the market. They want someone who’s not going to side
with their competitor against them. They want someone who’s
going to be neutral and independent today when they’re a buyer,
and neutral and independent when they’re a seller. And you
need lots of technology to do that. BGC has invested over $1
billion in its technology system which integrates and connects
to all the banks in the world.” – continued on page 22
marketsmedia magazine I november/december 2008
17
players
Volatility Victor
I continued from page 17
Don’t Just Blame the Banks
What Makes Cents for Some
Lutnick has been vocal about the Treasury’s $700 billion program
to buy troubled assets, stressing it’s not a “bailout.”
“I think it’s excellent. I think it’s important. I don’t think it’s
a panacea. It will make a difference, not the difference.” Lutnick
says the banks alone are not at fault.
“I once was at a cocktail party at a large money manager’s house
and he was talking to an electronic salesman in equities at one of
the bulge bracket firms,” Lutnick recalls. “The man from the bulge
bracket firm was going on about how the money manager should
do business on his direct access machine for half a cent a share.”
“And I was just walking by and this gigantic money manager
grabbed me and said ‘By the way Howard, you guys moved 12.5
million shares of JDS Uniphase. It was the best 5 cents I ever
spent.’ He paid us a 5 cent commission because he just loved the
execution. Then he patted me on the back and he went back to
listening to that guy talk about his half-cent commission.”
players
“Everyone is to blame,” says Lunick. “The world provided
credit to everyone too cheaply. That credit is now due.
It’s everyone’s problem, not Wall Street’s problem.”
“If too-cheap credit was a drug, the world was addicted to it.
The problem we face is the classic pendulum, and I think we will deal
with the consequences much better than in the Great Depression.”
What’s Next?
“I think the big banks will get bigger. Goldman Sachs and Morgan
Stanley will start taking deposits and get bigger. Because the big
banks are becoming bigger, they tend to get further and further upmarket. If you’re super gigantic, the opportunity for you to do business in the middle market is less and less because you just won’t
move the needle. When you become so big, things that would have
been useful before just aren’t useful now because they are just too
small,” Lutnick says.
“There’s a whole range of things that Bear Stearns or Lehman Brothers used to do that their successors are not going to
be particularly interested in doing. Why? Because J.P. Morgan or
Barclays are bigger. It doesn’t mean the bank won’t have that Lehman expertise, it will just take that Lehman expertise and push it
upmarket to try to be bigger, stronger, better, and to try to compete
again at the highest echelon of banking. And so that leaves the
middle market as a real opportunity to take care of clients with
a very client-focused business.”
As the bulge bracket transforms its business model and begins
accepting deposits to re-bulk, Cantor and the other middle-market
banks can grow without remaking their model.
“If you took our returns and put them on some of these
investment banks’ capital, it would be unimpressive,” Lutnick
says.”We’re a certain size, so we play our hand without the kind
of risk that others took on. I think there is a great opportunity to
grow our franchises in places where the big banks are not inclined
to play because there’s no incentive for them.”
The spread size doesn’t matter for Cantor.
“We’re not trying to buy on the bid and we’re not trying to
sell in the offer, so we don’t really care if the spread is 2 cents
or $1.02. We’re not any more profitable if the spread is big …
we’re just trying to find the fair price down the middle.”
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marketsmedia magazine I november/december 2008
After The Bell
Lutnick’s weekdays go on for hours after the markets close, but
his weekends are dedicated to his family.
When asked how he spends his free time, Lutnick instructs
me to “turn around,” pointing to the framed portraits of his children and wife on the wall by his desk. His days off are spent on
the soccer field, where he coaches teams for two of his sons and
his daughter. His three-year-old “isn’t playing yet.”
Working late is a family affair. Lutnick’s sister Edie, who runs
the Cantor Fitzgerald Relief Fund, was in the office after 8 p.m.
The fund has distributed more than $180 million to the families
of the 658 Cantor victims who perished on 9/11, and has extended
help to many others including victims of natural disasters like
Hurricane Katrina. On their Annual Charity Day each Sept. 11,
Cantor and BGC Partners donate 100 percent of their global revenues to worthy causes, commemorating their employees who
were lost that day by reaching out to help others.
Lutnick, who lost his own brother on 9/11 and survived because he and his wife were dropping off their son for his first
day of kindergarten, steals more looks at those portraits than at
the Thomson.
“I have a great wife,” Lutnick says. “I tend to work long
hours, but weekends are for my family.”
°