FT Obituary : Fred Joseph (1937-2009)
Saturday, December 12, 2009
People liked and trusted Fred Joseph. That was why he rose to the top of Wall Street investment banks and why, after the bankruptcy of the most notorious one, Drexel Burnham Lambert, many forgave him. Joseph, who has died aged 72, ran Drexel when it became caught up in an insider trading scandal involving Ivan Boesky that led to Michael Milken, head of its high-yield (“junk”) bond department, being jailed for securities violations in 1990. By that time, Drexel had gone bankrupt, despite Joseph’s efforts to rescue it from the aftermath of the scandal. Joseph was later barred from running an investment bank for three years by the Securities and Exchange Commission for failing to supervise Mr Milken properly. It was the largest Wall Street failure until the downfall of Bear Stearns and Lehman Brothers last year. Like them, Drexel focused on one area of business – in its case high-yield bonds – and could not survive a crisis in that business. Yet Joseph, unlike other heads of Wall Street banks brought down by financial scandal, bounced back. Even those who thought he had been naive in his handling of Drexel’s junk bond traders did not think he had realised what was going on.
Joseph, the son of a Boston cab driver, was known for giving younger employees a chance to prove themselves and for his genial treatment of all those around him. “If you were in a room with him, he gave you all the time in the world. He would pay attention to you, not be looking at his BlackBerry or his computer screen. He made everyone feel valued,” says John Sorte, chief executive of Morgan Joseph, the bank at which he worked until his death. Joseph’s ability to gather a loyal team, and his insight that there was business to be done outside the blue-chip companies on which the big Wall Street firms focused, made him a force in the democratisation of finance in the 1970s and 1980s. He led a shift to providing finance to medium-sized companies and leveraged buy-out funds, which continues. Many bankers and traders who got their first job from Joseph went on to head banks, hedge funds and private equity firms. “Fred was an unassuming man, but he set up a culture that accomplished extraordinary things. We were not a technology company but we had the instinct that it was OK to take a chance on what you believed in,” says Ken Moelis, chief executive of Moelis & Company, an investment banking boutique.
Joseph, who is survived by his wife Sara and five children, went to Harvard University on a scholarship and, after the Navy, also attended Harvard Business School. He joined E.F. Hutton in 1963, later moving to Shearson Hammill, where he became chief operating officer. After Shearson merged with Hayden Stone in 1974, he moved to Drexel Burnham, a small bank formed from a merger that had left the two sides wrangling. Joseph became chief executive in 1985 and cast around for a strategy to give Drexel a competitive edge. He found that in Mr Milken, a young employee who was trading in the debt of “fallen angels” – companies that had lost their investment grade. Lehman Brothers became the first Wall Street bank to underwrite a high-yield bond issue but Drexel then came to dominate the field. Mr Milken, who has since become a philanthropist, persuaded investment institutions to invest in growing companies while Joseph’s bankers raised bond finance for entrepreneurs such as Steve Wynn and Ted Turner and corporate raiders such as T. Boone Pickens. In an interview with IDD magazine this year, Joseph said of Mr Milken: “He was the smartest guy I ever worked with. He is the hardest working guy I have ever worked with . . . The combination of that brain power, that work ethic, that knowledge and that sales ability was overwhelming.” Yet their partnership, although dazzlingly successful for a time, ended in disaster. Joseph struggled to keep Drexel going in the midst of the scandal – it pleaded guilty to six felonies and paid $650m in 1988 – but it eventually went bankrupt. He was not accused of wrongdoing but his failure to prevent the scandal led to his own punishment. He later called it a “fair shake”, telling colleagues he had to take responsibility, and some believed his tendency to trust others had been his downfall.
After Drexel, Joseph returned to Wall Street with Clovebrook Capital and then ING Barings. In 2001, he and some partners bought an investment bank focused on mid-market companies, renaming it Morgan Joseph. Despite these travails, Joseph retained his sunny disposition and interest in others. “When you went to see him, even when he was sick, he would have a big smile, and he would want to talk about you. You worked for his smile, not to avoid his whip,” says Mr Moelis. “He still enjoyed doing deals and mentoring others, the same things he enjoyed 40 years ago. He liked to sit and talk to young people coming into the firm and see them grow from young associates to managing directors,” says Mr Sorte. By the standards of today’s Wall Street, and even by past standards, Joseph was not wealthy. He refused to take part in investment partnerships within Drexel’s high-yield bond department, which allowed traders to place their own money in deals the bank was doing. Joseph believed it would be a conflict of interest, even though other employees were becoming richer than him by doing so. Most of his wealth remained in Drexel shares, which became near-worthless on bankruptcy. Joseph denied himself the biggest rewards while accepting responsibility for his mistakes. It is an example from which others on Wall Street could learn.
Reference : Financial Times (Dec 12th 2009)