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)

The Always Impressive M.M. Lee Kuan Yew

Tuesday, October 27, 2009

One full hour on The Charlie Rose Show.  Oct 23 2009. 

Amid all the changes since I first went to Wall Street 40 years ago, basic investing principles have not changed at all.  Attractive opportunities still await those who do careful research; capital structure still matters; and the best investor is a social scientist who analyses markets from both macro and micro views.  The macro view sees the 21st century defined by global competition for the world’s most valuable asset, human capital.  Nations build this by strengthening education, healthcare, access to scientific knowledge, opportunities for women and incentives that attract skilled immigrants.  A continuous focus on education is driving the rise of the middle class in Asia.  That is one reason Asia’s growing economy is expected to reach at least half the world total by 2030, up from less than 30% today.  The return on investment in education is apparent in a comparison of Singapore and Jamaica, former British colonies that once shared many similarities.  In the early 1960s, each had a population of 1.6m and almost exactly the same gross domestic product per capita – about 2,200 current US dollars.  Then they diverged.  Jamaica stuck to agriculture, mining and tourism while Singapore focused on educating its people, who expanded manufacturing capacity and developed advanced technology.  Today, Singapore’s GDP per capita is nearly $39,000 (€26,800, £24,500) – more than seven times that of Jamaica.

Besides human capital, prosperity also requires social capital.  Macro-focused investors look for a strong commitment to private property rights and the rule of law in the areas where a business operates.  They ask if workers can aspire to more than a job and realistically dream of being owners.  Are companies encouraged not only to take entrepreneurial risk, but also to provide solutions to society’s needs?  In contrast to these macro perspectives, the micro view looks at financial markets, which once again this year have shown a remarkable capacity to recover from mistakes by investors, managements and governments.  Companies across the ratings spectrum have taken advantage of narrowing spreads and low interest rates to refinance more than $2,000bn of assets in less than nine months.  In this cycle, companies that fail to adjust capital structures by selling stock or pushing out debt maturities will miss a big opportunity.  Today’s environment mirrors 1973-1977, when markets first demonstrated the ability to heal themselves.  The mid-1970s recession created unprecedented problems for financial institutions.  Most banks could no longer consistently meet their customers’ financing needs.  But capital markets offered an alternative through debt obligations and other securities.  This allowed new forms of capital structure and assured economic expansion in the 1980s and beyond with reduced involvement by banks, whose role in financing corporate growth has shrunk ever since.  Properly applied and regulated, the market innovations of the 1970s disperse risk and create jobs.  The disruption of the past two years was caused by other factors, including unrealistic ratings that failed to reflect underlying credit risk, government encouragement of questionable investments, flawed underwriting practices and deployment of excessive leverage by financial managers who did not see the need for credit research.  As markets rebuild, cash available for investment has grown to record levels.  Companies with low capital costs will acquire those with higher costs and create investment opportunities. But markets’ future health requires investors to avoid errors that prolong and deepen global downturns.  These include inaccurate assumptions that loans against real estate are high-quality assets, interest-rate movements can be predicted, capital structure has little effect on a company’s value, emerging-market sovereign debt is without risk and high leverage is best for maximising profit.  Many investors have relied on another fallacy – that rating agencies accurately rate enterprises and securities across different sectors.  For much of the 20th century, AA-rated railroad bonds defaulted twice as often as single-B industrials.  Recent regulations provided incentives for investment in complex, AAA-rated mortgage-backed securities never close to AAA quality.  Ironically, investors will lose more money on AAA credits than on any other rating category.

This illustrates the myth that investments currently in favour are safe.  In two 1982 articles – “Nowhere to Go but Down” and “Nowhere to Go but Up” – I made the points that companies with few perceived problems tend to be priced for perfection; and conversely, that it is hard to bankrupt even weak companies, which nearly always rally when investors, management and labour co-operate to sustain them.  Like more than 99% of companies, these enterprises do not carry investment-grade ratings.  But non-investment-grade companies create virtually all net new employment.  Finally, as I said in an academic paper nearly 40 years ago, investors need to understand that capital-structure risk should vary inversely with business risk.  Companies with volatile revenue streams must avoid leverage and build their capital structure with substantially more equity than debt.  Some should have little or no debt.  If we are to keep from repeating mistakes that exacerbate boom-and-bust cycles, we will have to define the lessons of history more accurately.  The ongoing strength of capitalism depends on it.

Reference : http://www.ft.com/cms/s/0/27da5532-b112-11de-b06b-00144feabdc0.html

Hardly an awe-inspiring “Rest Of The World” team –

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Business people in Mumbai say the differences in India’s and China’s approaches to industry and the wider culture gap between the neighbours could hardly be greater, writes Joe Leahy in MumbaiChina has a single-minded focus on productivity and economic growth that India may never match, while India has a democratic, civil and legal culture that its autocratic neighbour is unlikely ever to grasp, they say.  “India will never catch up on that end and China will never catch up on this end and the world will go on,” said R.N. Mukhija, president of operations at Larsen & Toubro, one of India’s biggest engineering companies, which is active in China.  Business relations between India and China are often rocky.  Delhi distrusts Chinese companies for security reasons, particularly in telecoms and ports sectors, while Indian businesses complain that their rivals undercut them on prices.  But others, such as Mr Mukhija, have few harsh words to say about China.  One of the most striking aspects of working in China was the huge manufacturing capacity there, he said.  China’s industrial firepower might be 30 to 40 times greater than India’s, and it focused on welcoming investors – one-stop windows for investors at local government levels are common.

Reference : http://www.ft.com/cms/s/0/f7070dd0-59d0-11de-b687-00144feabdc0.html

The Towering Economist

Wednesday, June 10, 2009

A most engaging 50+ minutes with Mr. Galbraith –

Cause & Effect

Monday, June 8, 2009

Cool infographic from the Wall Street Journal –

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Economic Meltdown

Monday, May 18, 2009

A collection of awesome infographics illustrating the economic meltdown –



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