This is third in a series called “Prime Brokerage Stories,” real life experiences from a close family member who worked in this area of the Street for 30 years. For an introduction to PB so it all makes sense, see here: //www.wallstreetoasis.com/blog/what-is-prime-brokerage
Even though the money in PB can be very good, let’s just say that sometimes I wish the compensation was tied to the amount of money and embarrassment you save the firm…on an “I told you so” basis.
In the late 90’s, I had moved on from the white glove brokerage firm from the previous two stories and was working as a vice president in the newly minted prime brokerage group at a major non-US bank. Some referred to us as “the inter-galactic bank.” My team and I were tasked with building the prime brokerage unit from the ground up.
PB was but a twinkle in senior management’s eye. The bigwigs saw a well-established business that they wanted a part of. Like the children in ‘The Night Before Christmas,’ visions of stock loan and margin loan fees danced in their heads. Clients frequently asked if the bank could ‘facilitate’ prime, but despite all the outlays to consultants the bank could never quite figure it out. That was where we came in.
We were a small but experienced group cobbled together after this non-US bank purchased my old firm. Our strengths were that we know the hard stuff. Unfortunately, we had nothing to sell but ourselves. My boss once quipped, “We put out a great glossy magazine but we can’t clear a trade!’
We scrambled to put together a department, because after all we knew what it should look like. The bank was clueless but supportive, helping us reach out to the regulators for all the necessary approvals.
Our swap sales group put us in touch with some clients who wanted to do prime brokerage as well, and we were off to the races! This may be hard to understand today, but we had fun. I trusted and liked the members of my team.
At first, the clients we signed up already had close relationships with the bank, what they call ‘low hanging fruit’. People in the firm were getting excited about the PB business – “We can do this!” attitude prevailed. We grew, and we began to stretch. There was ‘spin’ in the air.
Then we were introduced to a highly sophisticated potential PB client.
My job was to cover risk and margin, and when I saw the projected portfolio I knew right away we simply did not have the sophistication to handle it. This firm was cross margining all kinds of fancy products, with futures, swaps, options, and equities, and they specialized in the energy sector.
Believe me, this account was enormous and it was a ‘step up’ – the big time. Serious, serious money.
My presentation that I worked on all week did not impress the client in the slightest, because it seemed I did not understand the sophistication of the clients ‘hedging’. After we heard the news that we were not going to get the client, some were quite indignant, and we utterly lost the management mandate. It was NOT a good day.
The lead sales manager (to whom I did not report) felt obliged to walk into my office and inform me that I was ‘mentally fired’. Fortunately my boss did not see it that way, and there were many more years of success to follow.
Back to my original point—I wish compensation was tied to the amount of embarrassment you COULD have saved the firm.
The account was Enron.
PB Story 1: “Big Mack and the Phantom Pricing” //www.wallstreetoasis.com/blog/prime-brokerage-stories-big-mack-and-the-p…
PB Story 2: “Thank You, Nick Leeson” //www.wallstreetoasis.com/blog/prime-brokerage-stories-thank-you-nick-lee…
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