Bloomberg News

Citigroup Debt-Sales Team Defects to Sterne Agee After Pay Shift

August 07, 2013

Sterne Agee & Leach Inc., the Alabama-based brokerage, hired five credit salespeople from Citigroup (C:US) Inc. after the third-largest U.S. bank stopped paying them commission on what they earned for the firm.

Edward LaScala, who started his career at the former Salomon Brothers in 1984, Cindy Hellman, a 27-year veteran of Citigroup and its predecessors, Mike Maresca, Paul Cappelli and Christopher Sanford, have joined Sterne Agee in New York, according to a new-hire announcement from the Birmingham, Alabama-based firm.

Some of the group left as Citigroup changed the way the middle-market debt-sales group was paid starting July 1, moving to salaries and bonuses from a so-called eat-what-you-kill model that had given them a proportion of their sales revenue, LaScala said. Hellman and Maresca left in April when the bank closed their office, Hellman said.

Privately held Sterne Agee, which traces its roots to a securities firm founded in 1901 by former Birmingham Mayor George B. Ward, has more than doubled its credit trading, sales and research team since 2010 as Wall Street’s biggest banks fire thousands of employees and reduce compensation in the face of new risk-curbing rules.

At the same time, rivals Gleacher & Co. (GLCH:US) and Knight Capital Group Inc. (KCG:US) have closed or sold credit-brokerage units, with profit margins shrinking as debt yields fall to about record lows and volatility wanes.

‘Falling Away’

“A lot of our competitors are falling away,” said Eric Needleman, Sterne Agee’s head of fixed income. “We’ve gained market share.”

Citigroup, which required a bailout in 2008 by U.S. taxpayers as mortgage-debt values plunged, reduced investment bankers’ bonuses by 10 percent to 20 percent globally, the firm told staff members in January. Starting in July, the New York-based firm merged its middle-market debt-sales unit, which caters to smaller or less-active buyers of new corporate bonds, with its institutional debt-brokerage group, LaScala and Hellman said in telephone interviews.

Scott Helfman, a Citigroup spokesman, declined to comment.

Citigroup’s transition to a salary-bonus system from a commission-based plan was “yet another example of a firm narrowing its focus to the top 100 clients and away from medium and smaller-sized investors,” LaScala said in an e-mail.

Sales Drivers

Large investment firms such as BlackRock Inc., which managed $3.86 trillion in assets as of June 30, or Pacific Investment Management Co., which runs the world’s biggest bond fund and oversees about $2 trillion, are the ones that help drive debt issuance and the accompanying revenues, not the smaller buyers, he said.

Sterne Agee, which started expanding its presence in New York in 2006, had about 75 people in its credit trading, sales and research team at the end of last year. The group is part of a fixed-income division that now includes about 260 people, Needleman said.

Last month, Sterne Agee hired an emerging-markets group from Gleacher, which said in April it was shuttering its fixed-income unit. The team is led by traders Mario Rappoport and Harry Wool and includes salesmen Mike Santiago and David Cortes, Jon Walker, a senior managing director at Sterne Agee, said in an e-mail.

The firm also hired Kevin Maxwell in July from Oppenheimer & Co. for fixed-income sales. He previously worked at Lehman Brothers Holdings Inc. for more than 20 years, mostly brokering investment-grade credit, Walker said. In May, it hired Robert Dudley, a corporate bond, leveraged loan and emerging-markets salesman, from Gleacher.

Dodd-Frank

Sterne Agee is expanding its credit brokerage business after the market for the dollar-denominated corporate bonds expanded 66 percent to $5.3 trillion since 2008, according to Bank of America Merrill Lynch index data. Investment-grade bond trading volumes on average have risen to $12.9 billion a day this year, 7 percent higher than during the same period in 2012, Trace data show.

“The revenue impact from a middle-market business is less and less important to the major banks, but for the regional guys it’s a significant source of revenue,” Needleman said.

Gleacher and Knight also sought to take advantage of the expanding market and pullback by banks that are curbing trading with their own money in the face of the Dodd-Frank Act, passed by U.S. Congress in 2010, and tougher global capital requirements from the 27-country Basel Committee on Banking Supervision.

Shrinking Inventories

The 21 primary dealers that trade with the Federal Reserve cut their corporate-debt holdings by 76 percent from the peak in 2007, according to Fed data through the end of March, when the central bank revamped the way it reported the data. The dealers have cut their holdings of investment-grade bonds by 31 percent to $7.8 billion on July 24 since the Fed started reporting the new data on April 3.

Gleacher, the New York-based brokerage that’s lost about $200 million since 2009, decided to shutter its fixed-income unit in April. Knight agreed to sell its debt-brokerage unit to Stifel Financial Corp. (SF:US) earlier this year after the Jersey City, New Jersey-based firm’s computers generated a flood of errant equities orders that brought it to the brink of bankruptcy.

Yields on investment-grade corporate bonds in the U.S. have plunged to 3.35 percent, 0.7 percentage points from the all-time low in May, Bank of America Merrill Lynch index data show. That compares with a 10-year average of 4.93 percent. The yield decline is shrinking potential profits that brokers capture on the difference between bid and offer prices.

Cutting Bonuses

Citigroup Chief Executive Officer Michael Corbat is among global banking leaders who are reducing bonuses as slow economic growth squeezes revenue and European lawmakers put curbs on compensation. Profit at the lender’s securities and banking unit slumped 10 percent in 2012.

“You have commission salesmen in middle-market groups that make more money than the institutional salesmen,” said Michael Maloney, president of the New York-based recruitment firm Maloney Inc. “There are obviously going to be problems. All of these banks are taking away the ability for people to get paid a set percentage of their revenues.”

To contact the reporter on this story: Lisa Abramowicz in New York at labramowicz@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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Companies Mentioned

  • C
    (Citigroup Inc)
    • $54.4 USD
    • 0.74
    • 1.36%
  • GLCH
    (Gleacher & Co Inc)
    • $7.25 USD
    • -0.10
    • -1.38%
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