Markets & Finance

Cantor Fitzgerald's Investment Banking Push Goes Awry


Cantor Fitzgerald CEO Howard Lutnick

Photograph by Mike McGregor/Contour/Getty Images

Cantor Fitzgerald CEO Howard Lutnick

Steven Kantor, then head of investment banking for Cantor Fitzgerald, gathered his staff about a year ago for a holiday party in his 82nd-floor apartment in Trump World Tower. Kantor had stepped up his hiring in prior months, and the bankers discussed the renewed push into underwriting and merger advice while drinking Avión, a tequila in which Kantor personally invests, according to five guests. Within about 10 weeks, more than half of his 50 bankers had been fired or reassigned. In August, Kantor was gone, too—transferred to Cantor Commercial Real Estate, a venture he helped create.

Chief Executive Officer Howard Lutnick’s drive to turn Cantor Fitzgerald, one of the largest independent U.S. brokerages, into a rival to Wall Street’s investment banks has been pocked with dismissals and defections. Industry records show that 41 percent of the 158 traders and bankers whose hiring Cantor announced in news releases from 2009 through 2012 have left.

In interviews, 19 current and former Cantor Fitzgerald employees blamed the turnover on lack of investment and pressure to turn a profit immediately. Cantor executives dispute that characterization. “We have a very simple business philosophy,” says Anthony Orso, CEO of Cantor Commercial Real Estate. “People who don’t produce don’t stay with the firm.” Lutnick declined to comment for this story.

In the decade since terrorists killed 658 Cantor employees in the Sept. 11 attacks on the World Trade Center, Lutnick has rebuilt the brokerage, which has said it gave more than $180 million to families of the dead. The private partnership now employs 700 salespeople who earn commissions by matching buyers and sellers of stocks and bonds. “They’re known for hustle,” says Turney Duff, a former hedge fund trader and author of The Buy Side, about his experiences on Wall Street, due out in June. “They come in early and stay late, and they’re constantly hitting the phone.”

With commissions declining across Wall Street, Cantor has expanded into investment banking as well as real estate, emerging markets, and even casino gambling. The company has lost or fired senior executives involved in those efforts, too, and the diversification hasn’t produced much profit, according to Moody’s Investors Service (MCO), which lowered Cantor’s credit rating to junk in October. “It’s very difficult to turn a bond house or an equity trading house into an investment bank unless you’re playing with big money,” says Roy Smith, a finance professor at New York University’s Stern School of Business and a former Goldman Sachs Group (GS) partner. “This is a very constrained market, and the guys already in it are already competing pretty hard.”

Payments to partners have fallen in recent years, according to two who have been with the firm for more than a decade. Cantor’s total profit increased in the first nine months of 2012 from a year earlier, as earnings in the bond business helped offset a decline in stock trading revenue, according to Mohak Rao, an analyst at Fitch Ratings, which warned on Jan. 8 that it may downgrade the brokerage. The partnership isn’t required to report financial results publicly.

Lutnick and Shawn Matthews, the head of Cantor’s main brokerage unit, have said on television and in interviews that the struggles of other firms benefit their own. “We’ve grown pretty much everywhere in lock step,” Matthews said on Nov. 15 in an interview at Cantor’s New York City headquarters. “We’re going to grow right through it.”

Cantor made forays into investment banking—working on mergers and acquisitions and helping companies raise money by selling stocks and bonds—as early as 2000. The latest push started in 2009 when Kantor was hired from Credit Suisse (CS), where he was a head of global securities and ran the commercial real estate unit. Kantor told the bankers he hired that Cantor’s financial resources and sales force would be selling points as they sought assignments, according to 10 former employees. Despite his promises, Cantor executives refused to put the firm’s money at risk by lending to facilitate deals or committing to underwrite clients’ securities offerings, they say. “The barriers to entry in investment banking are high,” says Charles Geisst, a Wall Street historian at Manhattan College in Bronx, N.Y. “Even those who are throwing money at stuff, who have the capital to do underwriting or M&A, even they have to give it time.”

As the bankers sought to win business from CEOs, resentment built about Kantor’s lifestyle, according to some of the former employees. In addition to his stake in Avión, a tequila company known for its appearance in the HBO television series Entourage, Kantor is listed as a principal on the website of Philippe, a chain of clublike Chinese restaurants. Two former Cantor employees say they were embarrassed when Kantor told the New York Times about his custom Mercedes-Benz van—furnished with a couch, massage chairs, and big-screen TVs—for a November article. Three say they didn’t understand why Kantor hired his 80-year-old father, Ed Kantor, as vice chairman of investment banking. The elder Kantor, who declined to comment, had been a senior executive at Drexel Burnham Lambert until he was suspended from the industry in 1993 for failing to supervise junk-bond pioneer Michael Milken.

Orso says Kantor should be credited with the success of the commercial real estate venture, which made $3.1 billion in loans last year, packaged them into securities, and sold them to investors. Kantor doesn’t run Avión or Philippe, and his investments don’t distract him, Orso says.

At the 2011 holiday party, Kantor displayed an ice sculpture advertising Avión, the guests say, and spoke optimistically about his group’s prospects throughout the night. Then Moody’s in February warned that it might downgrade the firm, saying it was “only modestly profitable” in 2011 and that market conditions were getting more difficult. On Feb. 28, Cantor fired the majority of its Los Angeles-based bankers, and the next day about half of those in New York were told to pack their things, former employees say. That afternoon, Cantor put out a press release titled “Cantor Fitzgerald & Co. to Boost Its Investment Banking Business.” It didn’t mention the cutbacks.

The bottom line: Former employees say a lack of investment and pressure for short-term profits hobbled Cantor Fitzgerald’s expansion efforts.

Faux is a reporter for Bloomberg News in New York.

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