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The Mystery Man Of Finance


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THE MYSTERY MAN OF FINANCE

It is Friday afternoon at the Republic Bank Tower on 40th Street in Manhattan, and the deepening winter shadows signal the approach of the Sabbath. Soon, it will be forbidden for devout Jews to transact business, to do work of any kind, or to ride--even in an elevator. For 24 hours, Edmond J. Safra will cut himself off from his worldwide banking empire--a $50 billion colossus whose granite strength, explosive growth, and almost Merlin-like avoidance of the troubles that have beset the banking world make Safra the envy of global finance.

Edmond Safra does use elevators on the Sabbath, but it bothers him. Not doing so, however, would be difficult. A private elevator, its carpet inscribed with the Safra family emblem, rises to the 28th floor of the Republic Bank Tower. Yet another elevator carries him to his private sanctum on the floor above. He takes his place at the head of a 200-year-old mahogany table in his private dining room. Hanging above it is an 18th century crystal chandelier, and on the wall is an oil-on-canvas from 1843, The Judge and Jury Society in the Cider Cellar by A.S. Henning.

The painting is a suitable metaphor for Edmond Safra, here at the headquarters of his U.S. holding company, Republic New York Corp. Safra is neither chief executive nor chairman, merely the "honorary chairman." But titles are a chimera in the world of Edmond Safra. In this building, Safra rules. He is the higher authority to which all defer, on matters great and small--the judge and the jury, if you will.

All this power and wealth--a personal fortune approaching $2 billion--are embodied in a somber man of stocky build and medium height, 61 years old, with a pallid complexion and sad, black eyes. He talks slowly and moves slowly. Today, as always, he is in no great hurry, even though the hour grows late, another appointment lies ahead, and after that, the Sabbath.

Placing a black felt skullcap on his head, Safra recites the Jewish prayer of Hamotzi, placing salt on a crust of bread. A waiter wearing a tuxedo serves a Glatt Kosher meal of veal and asparagus. Then, a white-coated aide brings Safra a small cup of black coffee. He fingers his reading glasses gently as he turns to a guest and talks softly in a deep, Arabic-tinged voice.

TIME AND MONEY. The subject is excess: wasteful executive compensation, the plague of stock options and--above all--the curse of leverage in commercial real estate and Third World loans, which has left some of his competitors choking on their own balance sheets. And then there is speed, the sour handmaiden of excess. "They wanted to make money too quickly," says Safra, peering intently at his guest. "I'm in no hurry to make money. I want to build a bank that will last 1,000 years."

Time. Edmond Safra spends time the same way he spends money--deliberately, but with the knowledge that he has vast quantities of it. To Safra, time is an ally, not an enemy. "The book on banking," he tells his guests, "was written 6,000 years ago." Banking is, he insists, "a simple, stupid business." First and foremost, you safeguard depositors' money--you, the banker, not the Federal Deposit Insurance Corp. You invest it safely and pay your depositors a little less than the interest you receive. You keep your expenses low.

When you lend money--and he doesn't do much of that--you are careful. You look the borrower in the eye. Can he be trusted? Even then, you do not pour money into his pockets. In Nineties financial lingo, that's called excessive leverage. Safra puts it this way: "My father taught me that if you loan a man too much money, you turn a good man into a bad man."

GUNSLINGERS. But don't confuse Safra's caution with timidity. He is engaged in his most daring venture since the ill-fated sale of his Geneva-based Trade Development Bank to American Express Co. in 1983. Safra is taking a bold foray into Wall Street, and he is doing so by latching on to its hottest component: hedge funds. These are partnerships for the wealthy, and they are the gunslingers of the investment world--unregulated, freewheeling, and often far better as investors than their conventional counterparts. To head this new venture, Safra picked his old cohort, former Shearson Lehman Chairman Peter A. Cohen (page 105).

Cohen's Republic New York Securities is quintessential Safra. It stands to profit handsomely from the hedge funds' hunger for credit but without much exposure to Safra's great nemesis--risk. He will not make the mistake that has dogged all too many securities firms, which have plunged into market-sensitive businesses when the market has risen--only to "downsize" when the market cools. Instead, Republic Securities will provide a range of services for hedge funds--from clearing trades to margin lending and arranging for short-sales--and can profit whether the market goes up or down.

But if banking is a stupid business, Wall Street is not. Republic Securities is taking on some of the savviest and most successful firms on Wall Street. Its principal competitors are the cream of the Street: Bear, Stearns & Co. and Morgan Stanley & Co., as well as lean-and-mean smaller outfits such as Neuberger & Berman, the founding father of the hedge-fund-financing business, and Furman Selz Inc.

Safra's strategy is to compete with Wall Street on his own terms. He has committed $100 million in capital--a fly-speck-size dent in Republic's holdings but more than adequate to give that business a flying start. And it certainly has flown: Republic Securities' assets have grown almost twentyfold in just a year's time. Still, it remains an open question whether or not the brash Cohen can flourish in the risk-averse culture that Safra has nurtured at Republic. Cohen is many things--but conservative is not one of them.

Yet conservatism is the underpinning of Safra's ethos. It is a philosophy that was handed down to Safra by his father, Jacob, and handed down to Jacob by his uncle Ezra, whose bank in Aleppo, Syria, Safra Fr res, financed camel caravans and traded gold during the heyday of the Ottoman Empire. To Safra, it is almost a mantra: Conservative. Conservative. Conservative....

UP FROM FIFTH AVENUE. It sounds almost too simple, a palpably false modesty. But it is a mistake not to take Safra at his word--not when the numbers are so impressive. Republic New York has just released its 1993 balance sheet, and it is a financial Rembrandt, more impressive in its dry way than the 19th century DeCourville watercolors of Middle Eastern scenes that cover one wall of his antique-furnished office and sitting room. No other major U.S. bank has so overpowering a capital position or so razor-thin a cost structure. And few approach its stellar share-price performance over the long term (charts, page 102). In 1993, earnings climbed to $301 million--a 16% gain over 1992, and 50% higher than as recently as 1990.

No other major banker since the era of the Morgans and Rockefellers has been so successful as an entrepreneur--perhaps because none has quite so direct a stake in his bank. Starting virtually from scratch in 1966, Safra built Republic Bank of New York from a single townhouse on Fifth Avenue into the 20th-largest bank in the U.S., with 69 branches in New York, Florida, and California. Safra owns 28.7% of Republic's stock, a concentration of ownership unparalleled for a major U.S. bank. Again starting almost from scratch in 1988, Safra built his Geneva-based Safra Republic Holdings--20.7%-owned by Safra, and 48.8%-owned by Republic New York--into an $11 billion private-banking network (chart). Safra's stake in his banks totals $1.1 billion, and his total net worth is probably twice that.

Over the past two decades, Safra has begun de novo in businesses as diverse, reliably profitable--and deceptively humdrum--as factoring, currency-shipment, middle-market lending, and precious-metals storage. "We are a conglomeration of startups," says Walter Weiner, Republic's chairman and chief executive officer and a longtime Safra friend and adviser.

It's a compelling story--and if Safra had his way, it would not be told. He shuns publicity and has rebuffed attention even to his philanthropy, which, intimates say, includes supporting hundreds of destitute Syrian Jewish refugees. To Safra and his insular inner circle of bankers and Middle Eastern-born Jews, media attention is as much an enemy as time is a friend. In the Syrian Jewish community, modesty is not a virtue--it is a necessity, lest one run afoul of the evil eye, the ayin harah. One tempts the evil eye by drawing attention to one's good fortune. It is a world where men carry blue stones to ward off evil. "He is very deeply concerned about the evil eye," says Safra's friend Abraham Hecht, rabbi of the largest Syrian congregation in New York. And calling that a "superstition" is to trivialize a key facet of Safra's persona--the mystical side. The secretive side.

Safra's loathing of publicity was intensified by the protracted feud with American Express in the 1980s. Since then, Safra has granted fo interviews, talking to the press only in brief telephone conversations at slightly less than solar-eclipse frequency. Until now, that is. Safra granted BUSINESS WEEK rare interviews, access to bank officials and his associates in the U.S. and abroad--most of whom would not speak on or off the record without a nod from Safra.

"BIG CLAN." The picture that emerges from those interviews is of a unique, brilliant, jarringly idiosyncratic man and institution. The two, Safra and Republic, are all but interchangeable. And that is not hard to understand. Safra has no offspring--his ownership of the banks will revert to his brothers after his death. But make no mistake about it. The banks are, in his words, "my children, my life."

To understand Safra and Republic, one must understand his background, which is rooted in the Sephardic Jewish community of the Middle East. For generations, the Safras were bankers and gold traders in Aleppo, a major trading center. "There is no Jewish community in the diaspora that resembles Aleppo in the closeness of its members. It's like they are one big clan. To this day, they are all closely connected," observes Yigal Arnon, a leading Israeli lawyer and Safra's personal representative in Israel.

Edmond's father, Jacob Safra, was born in 1891. After World War I, he took his family to Beirut. There, Edmond Safra was born in 1932. As a teenager, Safra started working at his father's side and never received much formal education--which was not uncommon in that era. It was a youthful Safra who brought the family business out of Beirut in the late 1940s, when anti-Semitic riots swept the city after the establishment of Israel. Safra established the banking business first in Italy and then, more or less for good, in Brazil, where he set up shop in S o Paulo--which, not by coincidence, was a major refuge for Aleppo Jews fleeing Syria. In 1956, Safra joined the onrush of foreign bankers to Switzerland, where he established the Trade Development Bank. He moved to Geneva in 1962, selling the Brazilian bank, Banco Safra, to his brothers Joseph and Moise. Still, Safra never abandoned his Brazilian citizenship, and he still maintains a home there, even though he lives primarily in Geneva. He also has residences in the south of France, London, and on New York's Fifth Avenue, two dozen blocks north of the Republic Tower. In 1976, he married a Brazilian widow, Lily Monteverde, who is of Russian-Jewish descent. The marriage to a non-Sephardi upset some tradition-bound Seph-ardim, Safra wryly recalls.

HAT AND A BANK. It was in the early years that Safra solidified his client base--wealthy Sephardic refugees from the Middle East. Another lasting source of clients is, then and now, the Arab world, including members of the royal families of Saudi Arabia and the Persian Gulf states. Like the Sephardim, many were customers of Safra Fr res in bygone days. Indeed, through the decades of war, Republic has kept an office in Beirut. And it has never been a target of terrorism--even though that branch, like all the Safra offices, displays at its entrance a mezuzah--which contains a fragment of the Torah.

Safra opened his first U.S. bank in New York in 1966, establishing operations in the former Knox Hat Co. townhouse on Fifth Avenue. "He went there to buy a hat, liked the building, and bought it," an aide recalls. Unlike the Swiss and Brazilian banks, which engage primarily in private banking, Safra's U.S. operation has long concentrated on various niche businesses, especially New York retail banking.

Safra started slowly, buying existing branches in solid, middle-class neighborhoods. He also began building the intensely loyal management team that works with him to this day. It now includes Walter H. Weiner, his longtime lawyer; Jeffrey C. Keil, a former investment banker who is president of Republic New York Corp.; and Israeli-born Dov C. Schlein, president of Republic National Bank of New York, his U.S. commercial bank.

Safra went into retail banking in a big way in 1971, when he bought Brooklyn's Kings Lafayette Bank. It was the deposits, not the assets, that appealed to him. Unlike more conventionally trained bankers, who are driven by the desire to profit from making loans, Safra is distinguished by a single-minded emphasis on that most boring--and least costly--of liabilities, the deposits. Whether they come from wealthy private-banking clients in Geneva or less-well-heeled depositors in New York, he makes his money the same low-risk way: from the spread between the interest taken in and interest paid out. "We've always been drawn to investment savers--people who have saved up their money over the years and have enough to worry about," says Keil.

OLD GOLD. As Safra expanded, he always did so "incrementally," as the Safra people like to say. He never built a branch. He let other bankers do that. Then, when the time--and price--was right, he bought the branches or the banks themselves. Safra's two biggest acquisitions were Williamsburg Savings Bank in 1987 and Manhattan Savings Bank in 1990. But the major growth took place in dribs and drabs--a few Bankers Trust branches here, a minor savings bank there.

It was around that time, in the late 1960s and early 1970s, that Safra gained fame by giving customers color televisions in return for buying long-term, low-rate CDs. The TVs were worth a lot less than the interest that depositors would lose by buying low-rate CDs. That was no secret at the time, but usually smart, streetwise New Yorkers nevertheless snapped up the TVs--and the CDs--hand over fist. John Duffy, director of corporate finance at Keefe Bruyette & Woods Inc., first encountered Republic when he was a student moonlighting as a cab driver. "Once, I picked up this fare on Park Avenue, and he was rushing down to the [Republic] bank on Fifth Avenue to get a TV," Duffy recalls. "I remember saying to myself at the time, 'What is this Republic Bank? Who are these guys?' They were different."

One way Republic was--and is--different was in its gold trading. The Safras are old hands at gold and have been since the days of the Ottomans. The word "safra" in Arabic, Safra points out, means "yellow." In New York, as well as Geneva and S o Paulo, Safra is a premier dealer in gold and other precious metals--mainly silver. But the Safras are not "gold bugs" and never have been. Like their currency-trading operations, Schlein notes, the Safra's gold trading is purely a matter of spreads. As a dealer in gold and currencies, he makes profits from the bid-ask spread, whether gold prices go up or down.

Safra also makes a market in long-term, over-the-counter gold options, carefully hedging to minimize its market exposure. Again, that is a spread business. Its customers in the gold business include mining companies, jewelers in the Diamond District on nearby 47th Street, commodities traders, and hedge funds, which often take large positions in precious metals. Safra's supremacy as a gold dealer for hedge funds took a quantum leap at the end of 1993, when Republic New York completed its acquisition of Mase Westpac Ltd., a leading British gold-bullion bank. Mase is most widely known as a member of the London Gold Fixing, which sets the benchmark gold price twice daily. The firm also has offices around the globe, and Republic's chief gold trader, Managing Director Frederic S. Bogart, notes that the new Republic Mase Bank Ltd. will allow the firm's clients to trade gold 24 hours a day--a service vital to global hedge funds and commodity traders.

SMEAR TACTICS. If the 1970s were the decade of consolidation in the U.S. for Safra, the 1980s were, more or less by default, the era of American Express. Memories of those days still rankle Safra, who views the sale of Trade Development Bank as the biggest mistake of his life. It's an old story now: The sale of the bank to AmEx, Safra's disillusionment with AmEx--and vice versa--and the subsequent breakup and feud. Safra successfully reestablished himself in Geneva, opening Republic Safra in 1988, after his noncompetition agreement with AmEx expired. But AmEx fought the Safra bid to reopen in Geneva--and things got out of hand. Anti-Safra articles were planted in overseas newspapers by AmEx operatives.

When the smoke cleared, AmEx CEO James D. Robinson III apologized to Safra for the smear campaign--which he claimed the company did not know about or authorize. A symbolic sum of money changed hands--an $8 million contribution to charities selected by Safra. In some of the negotiations between Republic and American Express, a mutually trusted middleman was the Shearson chairman, Peter Cohen. A longtime friend of Keil, Cohen had worked briefly for Safra in the late 1970s. He returned to Shearson, rising to leadership there in the 1980s, after it was acquired by American Express.

By the time Cohen resigned from Shearson under pressure in early 1990, after travails at the firm led to a final rupture with Robinson, Cohen was not winning any popularity contests on Wall Street. But to Safra, he was an undervalued human asset. Despite his missteps in investment banking, Cohen is, by all accounts, a talented executive. According to Cohen, discussions with Keil and Safra about a move to Republic took place as early as January, 1990, while Cohen was still at Shearson. The talks intensified in the fall of that year, and this time Cohen was accompanied by another ex-Shearsonite, Louis B. Lloyd, who was head of institutional equities at Shearson.

Lloyd became Republic Securities' first employee in 1991. Lloyd came up with the business plan--to position Republic in securities lending, margin lending, and "prime brokerage" for hedge funds. Because they are private partnerships, federal law limits their clientele to mainly "accredited" investors--in

other words, millionaires. Despite the limited clientele, hedge funds are a fast-growing phenomenon--their uncounted numbers and assets growing rapidly in recent years.

SUPERBROKER. Prime brokers provide pretty much all the services a hedge fund needs--clearing and execution of trades, computer systems, research, trade-reporting services, and, the main source of profits, margin financing and securities lending. Sometimes, they even rent office space to the funds. What they don't do, usually, is get newly minted hedge funds in touch with potential clients. And that's where E. Lee Hennessee comes in. The North Carolina native also came to Republic from Shearson, but there the resemblance to Cohen ends. She is no Safra cohort, and at Shearson, being a woman meant she was, as she puts it, "not part of the corporate culture." At Shearson, she was a "senior investment management consultant"--superbroker might be more descriptive. But her franchise was unique: hedge funds.

At Republic, as at Shearson, Hennessee acts as a matchmaker between wealthy clients and hedge funds, for a fee from the client. To that end, she maintains a data base of hedge funds--itself no mean feat, for the best hedge- fund managers are only slightly less publicity-shy than Safra. And there is an added twist to Hennessee's job. When she refers customers to hedge funds, those funds become natural candidates for Republic Securities' prime brokerage business. As Cohen delicately puts it, there is no quid pro quo--merely an expectation that having received clients via Hennessee, "the hedge funds will pay us back in [prime brokerage] business." Already, Cohen says, the Hennessee connection has led to the acquisition of one prime brokerage client since she came on board late in 1993.

In all, during its one year in operation, Republic Securities has become prime broker for 15 hedge-fund managers running some 47 funds--an impressive number, given the amount of time Republic has been in the business. Meanwhile, Cohen says, the firm's balance sheet has swelled from $100 million in November, 1992, when it began, to some $1.9 billion. With the balance sheet generating interest and fee income, Republic Securities has a target return on equity of 20%--an ambitious but reasonable profit expectation, even its competitors agree.

But despite its growth, Republic remains small, especially when compared with the industry behemoths. A well-placed industry source estimates that Morgan Stanley has prime broker relationships with 130 hedge funds, while Bear Stearns Securities Corp. and Furman Selz have about 200 apiece. And the obstacles may be tougher than Safra may have appreciated. Yes, prime brokerage is a profitable business. "It's a good business, a spread business, but people who call it an easy business are going to be disillusioned," observes Richard Portogallo, who runs the prime brokerage unit at Morgan Stanley.

Among small funds, moreover, personal service is already the selling point of such boutiques as Furman Selz and Neuberger & Berman. The latter boasts that it originated the prime brokerage business in the early 1950s. And Republic does not have proprietary software--a must for any prime broker, in the view of Louis Ricciardelli, head of hedge-fund consultants BPB Associates Ltd. and former chief operating mfficer of Julian Robertson's hedge-fund group.

Cohen may have yet another challenge at Republic Securities--its very non-Street-like culture. But so far, Cohen seems comfortable with Safra's management style--or lack of one. The atmosphere is informal, with an emphasis on teamwork and no strict lines of authority. Safra is not big on bureaucracy and doesn't hesitate to call a person far down the chain of command when it suits him. Such as, say, John Tamberlane, president of Republic Bank for Savings. Safra no longer visits branches--but he still closely tracks their profitability. "He won't focus on the best ones," says Tamberlane. "He'll focus on the worst. He asks me: 'What are you doing?'" Abd, Tamberlane adds wryly, "whatever I'm doing is never enough."

The Republic Bank Tower--which was built around the old Knox Hat townhouse--embodies Safra's approach to management. There is no executive floor. CEO Weiner is on the seventh floor in a modest-size office facing Bryant Park. Cohen is five floors above in an office that is exactly the same size as Weiner's. Schlein is two floors below Cohen. Keil is down on the second floor--close to the depositors, European style. Only Safra is in the traditional top-floor perch of the CEO.

YOUNG TURKS. In most companies, a non-CEO's intrusion would be unusual--and resented. But Safra has inspired a fierce loyalty among the executives that work for him--and he has returned the favor. Safra is notoriously loath to fire people, and the only executive he can recall firing is the man who removed the mezuzah from the doorway of the Beirut branch.

Ultimately, it will be customer demand--as much as Safra's Midas touch--that will drive Republic. Already, Safra's European customer base is evolving, as his oldest customers die off and their children demand higher yields--a far cry from the days when customers were willing to accept lower returns in return for the absolute safety of their money. A growing number of Safra's European private-banking clients are investing their money in higher-yielding fixed-income and equity accounts, managed, in return for a fee to the bank, by Alexandria-born Gilbert de Botton, a Safra friend for 30 years and head of Global Asset Management Ltd. A similar effort in the U.S., overseen by Cohen, is currently getting under way.

Asset management has long been anathema to Safra--because of the fear that clients will lose money and blame him. But he recognizes that, in this low-interest-rate environment, he has no choice but to go into that business. Meanwhile, Safra has not ended his quest for "investment savers." A recent bid for GreenPoint Savings Bank, the largest remaining independent savings bank in the New York area, was a failure, though--and an embarrassing one at that. When the GreenPoint board refused to accept Keil's offer to discuss a merger, Keil went public with a bid for the bank, offering a special interest payment to depositors. Republic's tactics were condemned by the New York State Banking Dept. as "illegal and improper"--a label that enraged Safra. "I was more hurt than angry," observes Keil, who believes there was not the slightest bit wrong with the bid for GreenPoint. "But Edmond was upset. Sure, his name was not associated with the offer. But it was as if his children had been accused of wrongdoing." Keil pauses. "Yes, he was very upset." The family's name had been sullied--unfairly or fairly is quite beside the point.

HAPPIEST DAY. Safra is a worried man. He worries about his banks--his "children"--but he is at least as worried about his place in the world to come. There is a phrase he uses often --Baruch Haschem--"Praise God." He tries to be a religious Jew, albeit with failings. His support of the Syrian Jewish community is, he says, a "duty." In Israel, largess by Safra and his brothers supports Sephardic religious institutions throughout the country. Safra has given more than 7,000 scholarships to Sephardic students in recent years. In the U.S., Safra is the quiet benefactor of the Syrian Jewish community, and he is believed to be supporting hundreds of destitute Syrian refugees in America. He also is a friend and financial backer of a leading figure in the U.S. Jewish community, the ailing Lubavitcher Rebbe, Menachem Schneerson, whose militance Safra much admires. But the Safras are careful to avoid becoming involved in Israeli politics--even though Edmond Safra, unlike many other Sephardim, is a supporter of the Israeli-PLO peace accord. Arnon recalls receiving an emotional phone call from Safra when the accord was announced: Safra called it the happiest day of his life. Safra is a friend of another supporter of the accord, Israel's former Sephardic chief rabbi, Ovadia Yosef, who performed Safra's marriage.

Despite its religious bent and philanthropy, the Safra clan was, until recently, very low key in its dealings with Israel--for fear of alienating its Arab clientele. Safra's intimates maintain that he used to travel to Israel incognito. But that has changed dramatically in recent years. In 1990, Joseph and Moise Safra purchased First International Bank. It is Israel's fifth-largest bank and is extremely profitable--but it had to prove itself. It was not until 1992 that the bank was allowed to use the Safra family emblem for the first time. Recalls Shlomo Piotrkowsky, managing director of the bank: "They made it clear that it takes a long time before the Safra family allows anyone to use their insignia. As they put it, their reputation is the most important thing they possess. We had to show that we indeed were qualified to be identified as a Safra bank."

Edmond Safra has no holdings in Israel himself. But that may change--and dramatically. He is considering putting in a bid for a controlling interest in Bank Leumi, Israel's second-largest bank, with assets of nearly $29 billion. Israel's M.I. Holdings, the state-owned company that is selling off the government's stake in Leumi and other banks, is asking for bids. A "controlling interest" in the bank would constitute at least 20% of the shares--which would cost some $500 million. That's not pocket money, but it's clearly within Safra's means.

And more than just sentiment would drive such a bid. Bank Leumi has extensive operations outside Israel, including offices throughout Latin America, a major Safra stronghold. And late last year, Republic bought Bank Leumi's money-losing Canadian operations.

But no matter how successful his "children" may become, Safra will see to it that he never becomes the largest banker in the country he has come to cherish--the U.S. It's not that the thought hasn't occurred to him, but to be No. 1 here is unthinkable. Not even when he had the opportunity--as he did when Chase Manhattan Corp. stock was at a low in 1990. "The market value was such that I could have afforded it," Safra recalls. But no Jew should own the largest bank in a non-Jewish country. "That is what my father taught me. I told that to my brothers in Brazil, too. Never become the largest bank."

Safra may have that opportunity in Israel, but in the rest of the world--never. There, he will always be an outsider.Gary Weiss in New York, with Neal Sandler in Jerusalem and bureau reports


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