The Coming Year: Wall Street Upgrades Its Rating on Human Capital

Big mergers have changed the battlefield for new franchises and old powerhouses.
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Thom Weisel, who built

Montgomery Securities

, is shopping for analysts and bankers to staff his new firm. Jamie Dimon, who ran

Salomon Smith Barney

, is sifting through layers of job offers. And the folks at

BT Alex. Brown

are getting ready for their third set of business cards in two years and wondering where the

Deutsche Bank

tag will fit.

Two years of consolidation have created more than simply larger firms and unwieldy corporate monikers. These years have created a battlefield on which new franchises such as

Citigroup

(C) - Get Report

,

BankAmerica

(BAC) - Get Report

and Deutsche will challenge traditional bulge-bracket powers such as

Goldman Sachs

and

Morgan Stanley Dean Witter

(MWD)

. To compete, both sides will need to pay top dollar to their key bankers and star traders. With corporate identities and traditions torn asunder, firms may have little choice: Human capital may be Wall Street's most valuable asset in 1999.

"Beyond the brand name, the major asset at any Wall Street firm is its people," says Samuel Hayes, a professor at

Harvard Business School

. "But some firms have jettisoned people as if they are throwing babies off the sled to keep the wolves away."

This volatile hiring and firing environment has created a free agency for top-performing bankers and analysts, Hayes notes. Like an

NFL

franchise operating under a salary cap, securities firms have dumped the second-stringers to pay the stars. The stars realize it, of course, and in turn are securing better deals for themselves.

Credit Suisse First Boston's

star tech banker Frank Quattrone is at his third firm in three years, with his wallet fattening each time he's changed jobs.

"I don't know when, but the cost structure that's been created by these firms will catch up to them," says one former high-ranking

PaineWebber

executive.

The consolidation of the past two years heightens the anxiety, according to brokerage analyst Dean Eberling at

Putnam Lovell de Guardiola & Thorton

. Eberling notes that many of the mergers during the past two years came with retention packages that kept people in place, he says. But those deals are expiring, which alone will create tumult. "There's no doubt in my mind about the flight of human capital in 1999. These golden handcuffs become a lot less binding. That final year will carry a less burdensome cost of leaving," Eberling says.

Toss in the emergence of three heavily capitalized, newly formed entities -- BankAmerica, Citigroup and the firm to be formed from Deutsche Bank's pending purchase of

Bankers Trust

(BT)

-- that are planning to make a run at Wall Street's entrenched top tier, and it's clear that bigness remains in vogue.

"If you factor in earnings and capital, these firms dwarf those in the securities industry," says Charles Miller, managing director at

Alex Sheshunoff

, an Austin, Texas-based boutique that specializes in financial-sector mergers and acquisitions. "They have the capacity to mount a great effort."

BankAmerica, for instance, has bigger plans. Carter McClelland, BankAmerica's investment-banking chief, says he has added to the firm's partnership ranks and already is discussing 1999 compensation to keep talent content. As part of his pitch, he says, "This is one of the most fascinating places to be. We're going to compete with Goldman and the rest of the bulge bracket."

Part of that challenge, however, is generating revenue. BankAmerica was just one of the industry's behemoths to suffer losses from hedge-fund activity through its connection to

D.E. Shaw

. Goldman Sachs posted trading losses, as did Solly, which is now part of Citigroup. With Citi and Deutsche, "they run risk-management capability really well," says Eberling. "Losing money on the trading desk usually reverberates throughout a firm." It's crucial for these firms to maintain profitability in the trading arena so they don't run up big losses and lose their top talent, he explains, adding that if firms are capable of paying their people, they get a huge competitive advantage.

The same goes for investment banking, where the deal flow has relied more on emotion (re: Internet hype) than on blowout deals. John Keefe, a financial-industry analyst at

Keefe Worldwide Information

, sees a firm's mass as only one aspect of what these banks need in order to make a run at Wall Street's traditional powers.

What it comes down to again is human capital. "The personnel's history of deal-making and the bankers' connections are much more key," he says.

Still, there is evidence that the tenor of Wall Street may be changing because of these new players. One anecdote making the rounds is that in the wee hours of a recent Sunday morning, BankAmerica decided it didn't need to play nice with Wall Street anymore.

Montgomery, now a BankAmerica subsidiary, was slated to underwrite a secondary stock offering for highflying

Flextronics

(FLEX) - Get Report

along with a stable of co-managers, including

Merrill Lynch

(MER)

, Morgan Stanley and

Donaldson, Lufkin & Jenrette

(DLJ)

.

But on the morning of Dec. 14 after huddling with Flextronics' management, BankAmerica scrapped the secondary and moved the stock itself as a block trade, selling $270 million of Flextronics' stock to its institutional clients. Block trading is a risky business and can require a hefty capital commitment to work successfully. It's a sign of playing in the big leagues, but it left the co-managers out of the deal and out of the fees.

"We learned about it around 2 a.m. that Sunday," fumes one member of the excluded underwriting team, who requested anonymity. "BankAmerica was just throwing its money around and buying the business." The angered underwriter says it was action that Montgomery by itself had never had the capital or the

cojones

to do before.

Richard Smith, the head of Montgomery's syndication desk, denies the firm is playing hardball, but admits that such a tactic was something Monty couldn't have done before. "Everybody who's aggressive will do this option," Smith says of the block trading. "It's the way business gets done, and now we can do these things because we're bigger."