The age of the bond desk

From Wall Street to Washington, a surprising number of famous industry figures were schooled in the bond departments of banks. Many of these high-flyers have gone on to achieve great things; others flew too close to the sun, as Alan Gersten discovers

During the stock market bubble of the last decade, equities traders unquestionably ruled the roost, generating vast revenues—and a degree of notoriety—by latching onto an economic raging bull. But although their colleagues on the bond desk may shun the limelight, it is they who consistently make their way to the top spots on the Street and beyond.

For many, the bond desk is an important stop on the path to power on Wall Street. Lloyd Blankfein is a former bond trader who recently became president of a major Wall Street firm. William Simon and Robert Rubin are other bond traders who became US Treasury secretaries while Jon Corzine, another bond trader, is now a US senator.

“Senior management is drawn from that function,” says David Beim, a professor in finance and economics at Columbia University’s Graduate School of Business. Beim, who worked for 25 years on Wall Street, continues, “The issue is focusing on sales and trading. As the balance sheets grew in the 1980s and 1990s, that created an opportunity for Wall Street firms to invest in trading activities.”

Though riskier than fee-based services, sales and trading tend to provide a lot more profit potential, and thus the individuals who manage that side of the firm move up through the ranks quicker. But this trend is especially true on the fixed-income desk. Stocks and bonds are both part of the trading matrix, but the bond market is far broader and deeper than the stock market. Since the bond markets are so huge, it is “natural that they will dominate,” says Beim. “You’ll see Wall Street firms controlled by people who can understand the risk and rewards of the balance sheet. That will be a bond trader.”

If Virginia is the mother of presidents, then the bond desk is the father of senior managers on Wall Street. For instance, Blankfein, who became president of Goldman Sachs last year, ran the fixed income group and was a champion of electronic trading. Earlier, Warren Spector, another successful bond trader, became president and co-chief operating officer at Bear Stearns.

In general, people have shifted assets into fixed income away from equities, says Robert Gartland, managing director of fixed-income infrastructure at Morgan Stanley. With the surge to bonds and electronic trading, Morgan Stanley has reorganized to put more people on electronic trading, though the overall count among fixed-income traders has stayed at 400 globally. The firm says its equities division is “lean”.

When technology stocks faltered, bonds became a much more attractive investment, as investors shifted their assets into more conservative sectors. Profits in the fixed-income sector grew, and so did the reputation of many bond traders. Accordingly, fixed income became a profit center for investment firms, which helped propel many bond traders up the corporate ladder.

In 2004, Goldman laid off 50 traders and sales executives in its equities division. During the technology boom years, a lot of these stock salesmen were making hefty commissions and bonuses, which are now difficult to find. Stocks have rebounded in the past two years, but they remain cooler than the frenzied market of the 1990s.

Before the boom in fixed-income securities and the ascension of people like Blankfein, there were names such as William Simon and Robert Rubin, two bond traders who advanced on Wall Street and then each became Treasury secretary—one for a Republican and one for a Democratic president.

Rubin, who was Treasury secretary for Bill Clinton, served as co-senior partner and co-chairman from 1990 to 1992 at Goldman Sachs. He invested billions in bonds as well as working in equities. Now, he is chairman of the executive committee at Citigroup and advises Democratic presidential nominee John Kerry.

Simon, yet another seasoned bond trader, was Treasury secretary under Richard Nixon and Gerald Ford, both Republicans. Before entering the government, Simon was the senior partner in charge of the government and municipal bond departments at Salomon Brothers, where he was a member of the seven-man executive committee of the firm. He died in 2000.

Bond traders have also shown an ability to excel outside of the Street, as well. In 1975, Jon Corzine was hired as a bond trader at Goldman Sachs and became a partner in 1980. In 1994, he became Goldman Sachs’s chairman and chief executive officer. He left Goldman in 1999, and the next year won the senatorial election in New Jersey. A Democrat, Corzine used the millions he earned at Goldman Sachs to help finance his campaign.

Not all successful bond traders, though, become Treasury secretaries or senators or keep their jobs. John Mack, whose love of cost-cutting earned him the Wall Street nickname of ‘Mack the Knife’, used his expertise on the bond desk to become president of Morgan Stanley. However, after a contentious power struggle three years ago, Mack left Morgan Stanley and went to work at Credit Suisse Group as co-chief executive officer. His tenure there, however, came to an abrupt end in June, and he left for a long-planned African safari.

Also, during the 1970s–80s, Michael Milken, king of the junk bond, gave the entire industry first a lift and then a bad name. Milken used a combination of high-yield bonds, stocks and hybrids to build a capital structure for his clients that many called “brilliant”. In 1989, the federal government charged Milken with securities and reporting violations. He admitted improper conduct in five instances and was put in prison for 22 months, in addition to paying $600 million in fines and restitution. Since his release, Milken has devoted himself to philanthropic pursuits and has been forced to keep a distance from the securities industry.

More than ever, Wall Street needs bond traders today. Foreign central banks have aggressively bought billions in US Treasuries, partly due to trade imbalances between their countries and the United States, which supplies foreign countries with billions of dollars in cash. These nations still see American debt securities as a good investment. In the past year, Japan has purchased about $20 billion a month in Treasuries. All this dictates more business and a greater need for bond traders, who accordingly become more likely to rise through the ranks.

But there are two sides to this T-bill. Bond traders may possess the kind of abilities that allow them to become big shots on Wall Street, but they also have the ability to bring Wall Street to its knees. John Meriwether—a former bond trader at Solomon Brothers—drove the market to the edge of the precipice when his Long-Term Capital Management fund unraveled in 1998.

RESUMÉ

ROBERT RUBINROBERT RUBIN

Education
Harvard College, Yale School, LSE
Employment history
1966:
Bond trader, Goldman Sachs
1995:
Treasury secretary to Bill Clinton

JOHN MACK JOHN MACK

Education

Duke University
Employment history
1972:
Bond salesman, Maorgan Stanley
2004:
co-CEO of CSFB until June

JON CORZINEJON CORZINE

Education
University of Illinois
Employment history
1975: Bond trader, Goldman Sachs
2004: US Senator for New Jersey (Democrat)

JOHN MERIWETHERJOHN MERIWETHER

Education
Northwestern University, MBA from University of Chicago
Employment history
1974: Associate on Salomon Brothers repo desk.
1994: Founder of Long-Term Capital Management. LTCM famously collapsed in 1998.

MICHAEL MILKENMICHAEL MILKEN

Education
University of California at Berkeley
Employment history
1973: Fixed-income trader, Drexel Burnham
1989: Charged with racketeering and fraud. Sentenced to 2 years in prison

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact info@risk.net to find out more.

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here