Brady Dougan, promoted to chief executive officer of Credit Suisse Group yesterday, will be the first derivatives trader to run one of the world's biggest banks. There may be more on the way.
William Winters, who helped design some of the first credit-default swaps, is co-chief of JPMorgan Chase & Co.'s investment-banking unit. Anshu Jain used derivatives to make Deutsche Bank AG the world's second-biggest debt trader and now oversees more than half the company's revenue. Derivatives specialists run investment banking at BNP Paribas SA and Societe Generale SA.
Dougan's rise at Switzerland's second-biggest bank reflects the transformation of derivatives into the fastest-growing financial market. Derivatives -- instruments whose value is based on underlying stocks, bonds, loans, currencies and commodities -- account for $370 trillion in over-the-counter trading, 10 times more than in 1998. Deutsche Bank's revenue from credit derivatives alone was at least $3 billion in the first half of 2006, more than double its investment-banking fees.
``Those who make the money are the ones who have the power to be in charge,'' Scott Moeller, a finance professor at City University's Cass Business School in London and former banker at Morgan Stanley and Deutsche Bank, said in an interview.
Trading Gains
Dougan, who succeeds CEO Oswald Gruebel in May, followed Allen Wheat to the securities unit then known as Credit Suisse First Boston in 1990 after helping set up the derivatives business at Bankers Trust Corp. As head of investment banking at Zurich-based Credit Suisse since 2004, Dougan, 47, has been responsible for more than half of the company's revenue. He produced most of his share from trading.
In the fourth quarter, pretax earnings at Dougan's unit surged to a record 2.34 billion francs ($1.86 billion) from 286 million francs a year earlier. Revenue from fixed-income trading climbed 76 percent to 2.76 billion francs, while income from equities trading jumped 57 percent to 1.6 billion francs.
Derivatives, first developed in the early 1980s to help companies and investors hedge against risks such as changes in interest rates, revolutionized finance by giving banks a means to set aside less money to cushion potential losses.
``The birth of derivatives gave the industry a mechanism to better manage financial risk,'' said Mark Brickell, a derivatives pioneer who spent 25 years at JPMorgan and now runs Blackbird Holdings Inc., an electronic trading firm in New York. ``Once they understood how to manage the risk, they then could commit more capital to their trading activities, of which derivatives is a large chunk.''
Surging Swaps
Salomon Brothers did the first public derivatives deal in 1981, helping International Business Machines Corp. and the World Bank exchange debt payments denominated in Swiss francs and German marks for dollar obligations.
Over-the-counter derivatives now are used for hedging or speculation on everything from oil prices to weather. Trading in credit-default swaps, created to offer insurance against bond and loan defaults, has expanded so quickly that there is more than five times as much in contracts as the $5 trillion of debt outstanding in the global bond market.
The growth in derivatives has had its costs. California's Orange County declared bankruptcy in 1994 after its treasurer racked up $1.7 billion in losses because of wrong-way bets using derivatives, and the same year Bankers Trust agreed to pay $10 million to settle with regulators over fraud allegations related to derivatives sales. Last year, Credit Suisse lost about $120 million on South Korean derivatives in the third quarter.
Familiarity With Risk
Dougan's background sets him apart from other banking CEOs, most of whom started in finance before the derivatives market took off. Gruebel, 63, traded bonds; Goldman Sachs Group Inc. chief Lloyd Blankfein, 52, joined as a gold salesman; Deutsche Bank's Josef Ackermann, 59, was an investment banker.
``Derivatives span the difference between the investment- banking side and the trading side,'' said Brad Hintz, an analyst at Sanford C. Bernstein & Co. and former chief financial officer of Lehman Brothers Holdings Inc. ``If you're a derivatives person, you're familiar with risk and also with client service.''
Dow Kim, 44, joined Merrill Lynch & Co.'s debt-derivatives team in 1994 and now is co-head of its global markets and investment-banking division. Jonathan Moulds, a 41-year-old derivatives trader, is president of Bank of America Corp.'s European, Middle Eastern, African and Asian businesses, as well as chairman of the International Swaps and Derivatives Association.
Like Winters, 45, Blythe Masters, 37, had an early role in credit-default swaps at JPMorgan. The New York-based company, the third-largest U.S. bank, promoted her to run commodities and currencies last year. Deutsche Bank's Jain, 44, started his career as a salesman in fixed-income futures and options.
`Next Generation'
BNP Paribas made Jacques D'Estais head of corporate and investment banking in November 2005 after he helped set up its derivatives business. Jean-Pierre Mustier, 46, who holds the same position at Societe Generale, was a stock-options trader in the U.S. and Asia before taking charge of debt finance.
``The next generation who will run the banks will need to understand the derivatives world,'' said Sebastian Walker, head of business intelligence at Coalition Development, a financial- services consultant with offices in New York, London and Mumbai. ``Ten years ago it was the M&A bankers that ruled the roost, but now the money is in the markets area.''
At a University of Chicago Graduate School of Business event last May, Dougan, an alumnus, said he migrated toward derivatives six months after arriving at Bankers Trust in the early 1980s. It was ``a brand new business,'' and Dougan recalled that the department did about eight swaps in his first year. Credit Suisse, he estimated, now does as many every four seconds.
Turnaround at CSFB
Once at CSFB, Dougan became co-head of bond underwriting and origination and by 1994 had lifted the firm to No. 2 in U.S. debt offerings from fifth in 1992. He then turned around CSFB's equities unit, producing $1 billion a year in pretax profit, not including bonuses, by 2000.
Dougan took over the investment bank in 2004 following John Mack's departure as co-CEO of Credit Suisse. Mack, a former bond salesman, now is chief of New York-based Morgan Stanley, the second-largest securities firm by market value after Goldman.
To boost profit, Dougan last year ordered bankers to cut back on offsite meetings, staff parties and color photocopying. He also stepped up trading with the bank's own capital.
``He's an unusual guy in that most people who come from that background go on to be CEO of a hedge fund,'' said Gary Goldstein, who runs the Whitney Group, an executive-recruiting firm in New York. ``Personality-wise they tend to be more introverted, more comfortable sitting in front of screens on the trading floor.''
source:www.bloomberg.com
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