Lifetime achievement award - Bill Winters

The JP Morgan stalwart is a key figure in the firm’s pre-eminence in the derivatives market

Bill Winters is one of an increasingly rare breed in modern investment banking – a one-firm man throughout his career.

That career, at JP Morgan, has seen him help guide the bank to the pinnacle of the derivatives industry over the past 20 years, and keep it there. In that time, Winters has held many key positions, from European head of fixed income to global co-head of rates and credit, and is now co-head of investment banking, reporting to Bill Harrison and Jamie Dimon.

Colleagues and competitors alike recognise him as one of the key figures in JP Morgan’s continuing pre-eminence in the derivatives market. Those who have worked with him comment on Winters’ intellect, his ability to spot market opportunities and his management ability. In a wide-ranging interview, he reveals how challenges early in his career shaped his view of investment banking and the major influences on his career. How did the firm meet challenges such as major mergers with Chase and Bank One, and landmark events such as the collapses of Long-Term Capital Management and Enron? How did JP Morgan make derivatives fundamental to its business, and how does it address regulators’ concerns about the concentration of risk that are a result of its strength?

Winters is a worthy recipient of Risk’s Lifetime Achievement Award for what he has already accomplished – but as he looks to new opportunities for JP Morgan in 2005 and beyond, it is in some ways a career that continues to evolve as dynamically as the industry in which he works.

Q: How did you get into finance?

A: I was not really looking to. I studied international relations and history at a small liberal-arts college in New York State called Colgate. I had every intention of becoming a diplomat or something related. I had been accepted to a couple of international policy schools but then realised the course cost $15,000 a year, which was $15,000 a year more than I had.

Q: So then you switched your attention to finance?

A: At my college we had an auction system for corporate interviews, where students could bid for an interview slot with a firm such as GE, JP Morgan, Morgan Stanley or Dow Chemical. You could bid a total of 400 points for all of your interviews. By the time I realised that I could not afford my master’s degree, I had not used any of my points and only one major company had not yet visited campus: it was JP Morgan, which would use up all of my 400 points in one go. So I secured a slot. I was interviewed by a wonderful woman who saw beyond my lack of banking knowledge, and for that matter lack of prior interest in banking. I suppose that she saw my potential. JP Morgan brought me back for a second round of interviews. I did my homework, read the annual report and built a general idea about how banks operated.

Q: When you found out more about the firm, what attracted you to it?

A: It was a very international organisation. They ran a great training programme for all new starters. It presented an opportunity to meet people from different regions and walks of life. Many already had work experience, a lot had MBAs, many were from overseas, and they were all sent to New York for the training programme. I spent three months in pre-training, six months in the training programme and three months doing credit analysis.

Q: What options did you have at the end of that year?

A: It was 1983. I really wanted to work in project finance because I was mathematically inclined. I was rejected for that job, but I got the consolation prize of working in banking. My initial patch was energy, covering small oil and gas companies in Texas and Oklahoma. I went back and forth from New York to Houston, Dallas and Oklahoma City, pretty much every week for, for five years.

Q: What sort of deals were you working on?

A: The natural gas price in the US peaked in early 1983 and crashed later that year. 1984 was the beginning of a long period of work-outs in the industry. The first loan I made was to a silver-mining company that bought a gas-producing company in Texas. It was a perfectly structured credit, but there was one problem: the silver-mining company declared insolvency only three months after we funded the loan. So then I had to work-out my first loan, and it was a superb experience. I played a central role in the work-out: I saw the best and worst of business and learned how people work differently under stress. I was too naive to panic. As part of the work-out we took a bunch of warrants in the silver-mining company. About a year later, the price of silver surged, and the warrants became extremely valuable. We got our loan repaid, and a whole lot more, on the back of the warrants’ value. It was my first exposure to derivatives.

Q: Did you keep an interest in derivatives from then on?

A: Five years later, I reached a fork in my career path. The logical extension was to stay in oil and gas and move into mergers and acquisitions. But derivatives had become a growing area at the bank. In 1988, Connie Volstadt, one of the pioneers and true legends of the derivatives industry, had built a great team, but many left with him when he moved Merrill Lynch. Many on the team were good friends of mine because we had gone through the training programme together, but the desk was left somewhat empty and taking any able-bodied footmen to rebuild our swap business. I was taken on as an experienced vice-president from another division.

Q: Was it a sharp learning curve?

A: It was great rebuilding JP Morgan’s swap business, which never died, but certainly declined when Connie and his team left. I used to love hearing in 1988 that there was probably only one year left to make money in the derivative business. Sceptics said that margins were 12 basis points but going down to 10bp; there’s not much juice left in the interest rate swaps orange, so enjoy it while it lasts. I have heard similar forecasts almost every year since from some knowledgeable person. The fact is that derivatives are changing constantly, and there is always a cutting edge. As long as you are defining innovation, there is always an opportunity to serve clients and profit.

Q: What products were you selling?

A: My primary job at the time was marketing, and I also priced the swaps and executed the hedges. Around that time we introduced dedicated traders, so I did not actually trade. My boss at that time, through to the late 1990s, was Peter Hancock. He’s a great friend and if any single person is my mentor in this business, it’s him.

Peter took over the swaps business in New York during the late 1980s, and then assumed global responsibility a couple of years later. He also joined from energy banking as did many others. He said to me: “With your energy background, we want to take a look at whether we can make anything out of commodity trading.”

Q: Was it a success?

A: I took on commodity trading as a project for a while, in addition to my other tasks, and spent a lot of time on it, but made no progress making money. After a while Peter said: “Time to fish or cut bait. Either you believe in this, in which case you should do it as a job, or you don’t believe in this, in which case you should stop doing it altogether.”

I believed in it, so assumed the job full time. Two colleagues quickly joined me, one from swaps and one from bullion. We struggled at the outset, and then volatility from the Gulf War occurred. Suddenly, people uncovered risks previously unknown to them. We had built a reasonable-sized trading team at that point, so were able to trade the full range of swaps and options, and we built a nice business. By the time I came to London to run European swaps at the end of 1992, we had about 50 people in commodity trading globally with a nice, profit-making business.

Q: Was that a good time to come to Europe?

A: The 1990s were a fascinating time to be in the European fixed-income business because of interest-rate convergence, currency convergence, and of course the maturing of the derivative markets.

Q: It was also during this period that JP Morgan made some fundamental changes to its business…

A: I’ve been involved in three major mergers during my career: most recently Bank One and JP Morgan, before that JP Morgan and Chase and first of all swaps and fixed income. And merging swaps and fixed income internally was the most difficult one, by far. We had two groups of people that knew each other well, didn’t dislike each other, but didn’t have a whole lot to do with each other and were culturally very different. And they had to be merged at a time of strength in our swaps business and relative weakness in our fixed-income business.

But we got through it, and went from having a good swaps business and a good fixed-income business to a very good combined business. We were at the forefront of an integration wave.

Q: Was this the point derivatives became central to JP Morgan’s business?

A: A turning point in JP Morgan’s derivatives business arrived in 1992, when we undertook a fundamental strategic review. The derivatives business at that point was a very isolated, self-contained business group. We emphasised cross-asset class marketing and trading with little connection to the underlying cash business.

In 1992, we engaged in what now seems like an over-simplified debate: do we pursue the Credit Suisse Financial Products route, trying to get bigger in a completely walled-off derivatives business, or do we try to create a new model, which is leveraging the rest of the organisation to a far greater degree?

When we chose the latter, we effectively spread the derivatives talent into every other part of the bank where they fit – such as moving the head of North American swaps into mortgage backed securities. By 1998, almost every major business at JP Morgan was run by somebody who had worked in swaps at some point in time.

Q: What did this mean for the business?

A: At the time, you got a particular breed of person that tended to be more quantitative, more analyticaland in some cases not as long term in their outlook as you may have wanted them. But it gave us a platform to do something better at JP Morgan.

Q: After the Chase takeover quite a few of your peers at JP Morgan left. What made you stay on?

A: After the merger in 2001, some turnover occurred, but primarily on the banking side. In cash equities, for example, we integrated the talents of Chase, JP Morgan, Robert Fleming, and Hambrecht & Quist. But we experienced only isolated pockets of turnover in our derivatives business.

We subsequently had some turnover at the most senior level in 2002 and early 2003 when the firm experienced credit-related earnings problems.

It was hard to see these people go, but in each case it was a personal decision about what they wanted to do with their lives, and I had an opportunity within the firm that worked for me.

Q: What has been the impact of the Bank One merger?

A: The impact has been on the whole corporation rather than on the investment bank itself. [Bank president] Jamie Dimon could not be more hands-on in terms of the way that he runs the business. He holds very strong and clear views about what he wants to see, what is good practice, and how we as the managers of the investment bank relate to our shareholders.

Q: Has this changed a manager’s accountability?

A: Before the merger, accountability was more anecdotal and intuitive, and less mechanical and prescriptive. The added rigour gives us more information, which is good for the business. It is a process that we started on before the merger, and Jamie has absolutely accelerated it.

Q: What lessons have you learned from the mergers?

A: That first impressions are often right. Take JP Morgan Chase: JP Morgan had a great business, Chase had a great business, and there was little overlap except in a few areas like emerging markets. Our sense was that we could make one plus one equal more than two, and I think we were right. The biggest challenge was figuring out how to take two cultures, two client bases, two approaches to a market, and bring them together without destabilising one or the other. I liked the people I was working with. I got on very well with Don Wilson [post-merger Winters’ co-head of credit and rates, now the bank’s chief risk officer]. I have a lot of respect for people like Bill Harrison [current JP Morgan Chase chairman and CEO], who took a real interest in the people and in the firm’s culture of leadership.

Q: What new opportunities exist for a bank such as JP Morgan?

A: We have been at the forefront of the credit derivatives industry since its birth. The industry has outgrown infancy now, and is more like a young adult: it is fully mature but still has a lot to learn and a lot of growing to do. To see that market evolve into its next stage will be very rewarding.

The exotics and hybrids markets continue to fascinate me. In music, you may reach a point where all the notes have been written and arranged in every way possible so that you cannot compose any new songs, but of course you always do write new songs, even if it’s the same notes in the same pattern, but with a different accent. The same phenomenon is happening every day in the exotics and hybrids business. In addition, some new tradable underlyings are coming to the market in a more robust way.

Q: How do you make sure clients understand these new areas?

A: We built a well-staffed derivative research group that in a lot of ways is the glue that binds us across different derivative areas. It’s an extraordinarily strong team, in terms of talent and quality: all of the senior team have worked in at least two asset classes, some of them three.

Our derivatives business is embedded into respective cash businesses, the technology is well integrated into the businesses, derivative research is very well integrated, and many of the marketing functions cut across the asset classes. Despite the fact that we are very big in this business, it gives us the ability to spot opportunities across the natural boundaries that other people set for themselves. We continue to harvest those opportunities for our clients.

Q: How does the bank eliminate potential conflicts of interest?

A: For anything complicated, we have a technical expert who is also very knowledgeable about the client at the front-end of the process. And for anything particularly complex, we have an off-line review system to ensure comfort with all the risk inherent in the transaction. But, like the market, we don’t see any potential conflict in the high-volume businesses.

Q: How do you address concerns about concentration of risk in financial markets, and notably in derivatives?

A: We work closely with the Bank of England, the Federal Reserve and other regulators to offer access and ensure that they understand the market. The first thing we try to do is separate measures of stock from flow. The flow of derivatives trades should be of concern, not the notional outstandings [that is, stock]. Stock is a measure of how much flow volume. We have been a leader in derivative markets over time, so our stock is big. Our flow is also big, but not in the sense of market concentration.

We also have to ensure that we defend the market appropriately. You can look at the market in interest rate swaps only, or you can look at the market in interest rate swaps, euro/dollar futures and government bonds combined. Since they are substitutes to varying degrees, you really need to look at both. Our conclusion is that we enjoy good, healthy market shares in most markets, and we – together with the two or three other major players – do not represent a worrying over-concentration. But it is worth looking at, particularly in the unlikely event that the market goes through a bad time and a number of key players withdraw liquidity that could hinder the market’s ability to handle a risk transmission. I have not seen that yet.

Q: What about the role of hedge funds?

A: The question is: are they consumers of liquidity or providers of liquidity? Of course at different times they are both. Look at the US dollar interest rate market in August 2003. Hedge funds were exiting their positions, and drove an unusually large interest rate move. The market dislocated, but was brought back quickly into line by the hedge funds themselves (especially if you include bank prop desks in this definition). When the markets dislocated and a real opportunity presented itself, there was so much capital just waiting to come in that it brought the market back into line quickly, without any Long-Term Capital Management-style systemic event taking place.

Q: How has the market evolved since LTCM?

A: When LTCM collapsed, people focused on survival and not on taking advantage of great trade opportunities that arose. Today, while some people would focus on survival, others would spot the trade opportunity, take it and the market would soon stabilise. That has been the experience in every market dislocation since LTCM. It is a fundamental change in the market. A much broader pool of liquidity exists than before, as well as much better quality of talent working in the hedge funds.

Q: It’s been a bad year for the trading desks of many banks, including JP Morgan. Why?

A: We reported a weak third quarter, and made a number of management changes on the back of it. We did not suffer major losses, rather we failed to generate the expected gains. Our proportion of earnings derived from risk-taking traditionally ranges from 0% or a slight loss to a high of 40%. In the third quarter it was a slight loss, so not out of the range, but still a terrible performance. I see no impact on our market franchise as our client business has gone from strength to strength with growing market share, and that is satisfying.