Ex-Drexel Chief Talks Crisis
In an exclusive interview with IDD, Frederick Joseph says of Dick Fuld, 'I guess I am probably sympathetic to him more than anyone else because I’m the only other guy that has had to bankrupt a security firm holding company of size.'
By Aleksandrs Rozens September 22, 2008
Last week, IDD caught up with Frederick Joseph, former chief executive of Drexel Burnham Lambert, who is now a managing director at mid-market investment firm Morgan Joseph. His firm has completed over $27 billion worth of transactions since June 2001 and has 160 employees.
Until its bankruptcy in the late 1980s, Drexel was a pioneer and a leading force in the development of the high yield bond market.
Joseph characterized the Lehman Brothers deal as a great opportunity for Barclays because of Lehman’s tremendous talent pool. Also, he counseled investors and Lehman employees not to second-guess Richard Fuld or judge his decisions too harshly. "I guess I am probably sympathetic to him more than anyone else because I’m the only other guy that has had to bankrupt a security firm holding company of size," he says.
Frederick Joseph
Joseph has more than four decades of experience on Wall Street. Prior to his work at Drexel, the Harvard Business School graduate was chief operating officer of
Shearson Hammill.
IDD: What is your reaction to Lehman’s bankruptcy? Does every investment bank need a depository?
Joseph: For the bulge firms that are dealing with the Fortune 500 where the competition went from all-but-five having balance sheets to all-but-two having balance sheets and one of them looks like they’ll get one, you think it goes that way. But Goldman is so big and powerful but maybe it turns out that they buy a balance sheet instead of selling to a balance sheet.
IDD: How do you respond this last week? You’ve been doing this for a long time.
Joseph: Well not long enough. If I was doing it twice as long as I have been doing it I still wouldn’t have seen anything like this. Basically, I think its bad for the economy because you cut in half the number of gate keepers in terms of capital raising at that level. Now, I think there is clearly a second level of investment banks in the middle market, the advisory firms. There are two kinds of us: the mid-size boutiques that are advisory firms for large M&A--a Greenhill or a Perella. Unlike them, we are a full-service firm. We have debt an equity capital markets. I think this is going to be a terrific opportunity for us because these mega institutions are not going to come down in terms of the size of the deals they’ll want to do and size of clients they’ll want to work with. Our strategy has always been to mid-market right up to where we are competing with the bulge firms. I think that room above our head just got wider.
IDD: When the large firms merge, there will be a point where--for them--it no longer makes sense to go after some of those clients that normally would have been on the lower end of their call lists.
Joseph: Yes.
IDD: How quickly do we see these changes?
Joseph: I think pretty quickly. Over the next few weeks Merrill and BofA will figure out what their target audience is. I think Barclays may have made the best buy in history if they keep the Lehman franchise together. Lehman has a relatively new mid-market effort and I don’t know if that is going to interest Barclays or not.
IDD: I'd imagine you got some calls this week from corporate treasurers saying 'Hey, no one is paying attention to me this week I need to go out and raise some money. Or I need to complete a merger.' Did you get any calls of this nature?
Joseph: What we got, which was more interesting and frightening, were calls from guys saying 'I was doing this acquisition I thought I had the financing and they told me their commitment committee has gotten much tougher and they're not going to go [to the] committee, and they’ll get back to me in a few weeks.' We have had two or three of those guys who thought they were set who suddenly were told they were not set.
IDD: Would these be private equity firms or would these be strategic buyers?
Joseph: Of the three I know two are PEs and one strategic. I'm sure we have got others, but these are three either I have talked to or my guys have talked to me about them.
IDD: We have heard anecdotally that some people at Lehman were unable to stay in touch with clients.
Joseph: If I was at Lehman I'd start talking about Barclays. If it doesn’t happen you don’t lose anything. If you don’t talk to the client you are already starting to lose something. So, try to stay in business. Tell them the truth. 'There is some uncertainty, the Barclays guys did this deal in 24 hours, they haven’t come around to talk us and we haven’t refined our strategy but my guess is they bought us because they want us to be in business. As long as they are fair to me, I'll be here and it is going to give us more global strength. And, I'll keep you informed.’
IDD: Going back to the world of the investment banks, we'll always have need for brokerages and investment banks, correct?
Joseph: What really happened when they eliminated Glass-Steagall, the rule was that they could not tie the sale. They couldn’t say 'I'll give you a loan if you give me investment banking business.' But they did it every day. It was just a joke. And the only way bulge [bracket] firms could compete with them was to essentially bulk up themselves and get into the lending business so they, too, could commit. That has not come down very much to the mid-market. Almost none of us do staple financings, at least nobody is doing them this week. There are really two tiers in investment banking: the bulge firms and the others. The bulge firms were the ones who were getting the competition from the banks and had to look as capable of committing as the banks were. They had to bulk up and that bulking up gave them the big balance sheets. The mid-size firms, none of us take very large positions. None of us have much exposure on our balance sheets. That’s pretty typical of mid-size firms. So for us, the world is not changing that much. I think there will be more demand for independent advisory work.
IDD: Are you getting a lot of resumes coming your way from people on the Street?
Joseph: We are.
IDD: Where would you like to bulk up?
Joseph: We don’t have an energy department which we should have. We are thinking about a FIG operation which we don’t have. And we need a PIPEs team. Then, any really good top-notch banker we’d want.
IDD: What would you tell people at Lehman? How do you keep them calm and collected?
Joseph: What I'd say is ‘Look guys you get a free option to stay for a few weeks and see what Barclays has to say.' If I were Barclays, you have bought the Lehman investment bank for maybe a quarter of a billion dollars above the real estate value. I'd commit another substantial amount, incentives, to keep the guys in the firm. It’s a terrific investment bank and you have to keep it together. What Barclays has to understand [is] they may be a global bank but in Lehman Brothers the assets go down on the elevator every night. I'd say 'Guys you have a free option to see what Barclays has to say. And if you don’t like it, you are no worse off two weeks from now then you are now. You haven’t changed jobs for nothing. See what they have to say. Just relax and keep your clients informed. Talk to your clients and see what Barclays has to say. They might make this a very attractive place for you to stay.'
IDD: Looking back to your days at Drexel, when your firm filed for bankruptcy did you do anything to calm people down? Go out there to boost their morale, so to speak.
Joseph: Actually not. We had been boosting morale very successfully under great duress for about three years. When we filed, we did file the holding company first, but within hours it was apparent to us, nobody was going to buy us. It was apparent to us, there was no way to have a viable brokerage operation under a bankrupt holding company. So we just did what we could to help guys get place themselves as group. Ken Moellis took 20 or 30 guys to DLJ [Donaldson Lufkin & Jenrette]. We helped facilitate that. We helped the guys figure out what they were going to do and the guys were terrific on helping us unwind. They stayed to do it. From the moment we realized we had to file, we were told to file by the Fed, Treasury and SEC and the stock exchange. We knew we were not going to have a viable or saleable business.
IDD: Do you think Mr. Fuld should have gone with a different option? Should he have tried to sell the firm sooner?
Joseph: I think that’s unfair. Everybody in the world is going to say that and they have 20:20 hindsight. When he was making those decisions you know what you know when you know it. When he was making those decisions, he didn’t know the bottom would be this steep ... with people saying they don’t want Lehman exposure ... prime brokerage acounts decided to pull out, clients stopped trading to them, the firms stopped wanting to have exposure. That all happened within three or four days. I thought the plan he announced ... would have worked if he had time because there’s no question Neuberger Berman is a saleable asset. I guess I am probably sympathetic to him more than anyone else because I’m the only other guy that has had to bankrupt a security firm holding company of size.
IDD: Should the Fed have come in and helped Lehman out? It has become apparent that Lehman has extensive contracts in different derivatives markets. Maybe it would have been better to give him a backstop ala AIG, no?
Joseph: You can argue both sides of that. The Fed ... was under immense pressure to stop bailing people out. Only the guys in senior management of Lehman, the Fed and maybe the SEC know the extent of the systemic risk. You and I can't judge it. Clearly they thought it was much worse with AIG than it was with Lehman. So, they drew the line in the sand and they had to step over the damn line for AIG anyhow. You know, they are in Washington. Washington is all politics. They had to show they were not a bottomless pit to save Wall Street’s wildmen. Lehman was a victim of that effort. Merrill saw the handwriting on the wall. They were going to be next. And, I think [John] Thain did a terrific thing in turning around and getting the BofA deal done.
Find out more information about people mentioned in this article from our People Database:
Richard Fuld, Jr.
John Thain
Frederick Joseph
