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An Audacious 20 Alpine Assault


Finance: BANKS

AN AUDACIOUS 20ALPINE ASSAULT

`I consider myself a hard man. Perhaps that's why I drive the people around me so hard," says Swiss Bank Corp. CEO Georges Blum. "I suppose that is why I am occasionally typecast as a tough guy."

"Occasionally" is putting it mildly. Ever since he took over from his reserved predecessor, Walter G. Frehner, in 1993, Blum has been pushing through a cultural revolution that's shaking his $170 billion, 123-year-old bank to its core. He is trying to shock it out of decades of lethargy and build an American-style global trading and investment bank from scratch. With the likes of J.P. Morgan & Co. and Goldman, Sachs & Co. as his models, Blum's audacious goal is to vault Swiss Bank into "the top bracket" of 10 investment banks he thinks will dominate global finance by the decade's end.

YANKEE TRADERS. With the global bond market ailing, this isn't the easiest time to try to make a big splash in investment banking. But Blum, 60, is taking a novel tack. He is betting he can leapfrog other big banks, some with more capital and others with closer client relationships. To pull this off, Blum is turning to a high-tech SWAT team of American traders, quantitative analysts, and bare-knuckle investment bankers to perform a "radical transformation," says CFO Peter A. Wuffli, a 37-year-old former McKinsey & Co. banking consultant.

To many observers, such a transformation was long overdue. In the 1980s, the bank seemed to lose its way amid intensifying competition and a slew of bad real estate and takeover loans. Even then, says international banking chief Marcel Ospel, 44, "we wanted to be a different kind of animal." That realization drove the bank in 1991 to purchase one of the top U.S. options-trading groups, Chicago-based O'Connor Partnerships. Blum built on that plum by shelling out $750 million in stock late last year to purchase Brinson Partners Inc., a $36 billion global asset management firm that also hails from Chicago. With staffers from O'Connor and Brinson now assuming responsibility for huge portions of the bank's international business, the acquisitions are quickly making the bank "more American than it is European," says Deputy Chief Executive Johannes A. de Gier.

The Yank influence on the bank's culture has become so pervasive that some have begun referring to the moves as a reverse takeover by the Chicago traders and money managers. The Americans do little to refute that notion. "It hasn't been a takeover," says former O'Connor chief John Dugan. "It's a makeover."

Still, Swiss Bank has managed to retain its foundation of Old World gold. Based in the ancient Rhine River city of Basel, the bank boasts a rock-solid capital base, a AAA credit rating, steady streams of revenue from as much as $300 billion in private-banking accounts, and a roster of blue-chip commercial banking customers on both sides of the Atlantic. Many investment bankers believe that if anybody can muscle into the investment-banking turf dominated by Americans, it will be the big Swiss banks. But doing so is exposing Blum's operations more than ever to the mood swings of the global money market.

Lately, these swings have taken Swiss Bank's profits on a wild ride: After a huge surge in profits during 1993's global bull market in bonds and derivatives, earnings collapsed in 1994 when U.S. interest rates soared. Some analysts expect that when the bank releases its results on Mar. 15, profits will be down by 35% or more. Other big players in trading and derivatives such as Goldman Sachs, J.P. Morgan, and Bankers Trust also were battered by higher rates. But international banking chief Ospel warns that going head to head with these and other top U.S. competitors will be "a costly, bloody exercise for the next three to five years." And that's making investors nervous.

Swiss Bank's profits are already back to where they were five years ago, and its shares are now trading at only 80% of book value, estimates analyst Hans Kaufmann of Zurich's Bank Julius Baer. Ospel says he is not worried about share prices, as long the bank is profitable and able to finance its investments in new technology. But Swiss analysts say the bank could now be vulnerable to a takeover--something that would make mincemeat of Blum's grand design.

DENIM BRIGADE. Blum, a 34-year Swiss Bank veteran who converses comfortably in five languages, appears to be unfazed. He pledges to double the bank's anemic return on equity to 15% within four years, period. "Some say we should fix goals of 10 to 20 years," he says during an interview in his office bedecked with Abstract Expressionist art. "But when you do that, you have no action. And I need action."

Action is what he is getting. Blum scrapped the bank's 6,500-person international division's regional fiefdoms in favor of a worldwide management structure organized around product lines. As O'Connor's young, blue jeans-clad partners have taken up posts in Zurich, London, Basel, and other cities, a startling culture change has taken root. Along with new products, the Americans have brought new ideas on using derivatives in investment banking. They have also injected a much-needed dose of entrepreneurial spirit into the loan-oriented international division. And they have moved into many powerful jobs.

All 28 O'Connor partners joined the bank as managing directors or better. Half of the seats on the board that runs the bank's international division--the focus of Blum's transformation efforts--have gone to Americans. And two of the Windy City imports--Dugan and Brinson Partners founder Gary P. Brinson--were named to Swiss Bank Corp.'s 15-member executive board.

As Blum's reorganization has gained momentum, executives from top to bottom have begun following an American management maxim: Offer shareholder value. Wuffli has launched an investigation to determine how each of the bank's businesses might be priced by such shareholder value proponents as maverick Zurich financier Martin Ebner, who has tried to force changes at Union Bank of Switzerland by purchasing large blocks of its stock. Wuffli wants to use his exercise to see where Swiss Bank could obtain maximum returns.

The makeover has boosted the bank's market strength in crucial areas. Already a leading Eurobond underwriter, it has used its O'Connor ties to move to the top ranks of dealers in foreign exchange options--a mainstay of corporate currency hedging programs. However, it has been in what de Gier calls "the gray area" between traditional equity markets, derivatives, and corporate finance that Swiss Bank has most intently focused its high-tech firepower. Nothing illustrates this better than the bank's current efforts to help Trafalgar House PLC, a British real estate developer that's mounting a $2 billion hostile takeover bid for Northern Electric PLC, a large utility.

Swiss Bank made it easy for Trafalgar to accumulate its initial stake in Northern Electric by selling the developer call options on shares of Northern and several other utilities. The options contracts gave Trafalgar the right to buy the utilities' stock at a fixed price. The deal also avoided tipping the market that a takeover was on the way. When Trafalgar announced its bid for Northern on Dec. 19, electric utility share prices jumped across the board, enabling Trafalgar to walk away with a $12 million profit as it exercised its options. But the deal raised howls from other traders. They complained that Swiss Bank's market-makers, who sold the options to Trafalgar, had also been secretly accumulating huge stakes in the utilities for the bank's own account.

Whether these purchases were designed to further Trafalgar's bid or reap big profits for the bank is now the subject of controversy. The London Stock Exchange had previously cleared the options contracts. And the bank notes that its traders, as market-makers in active stocks, were not required to publicly disclose their holdings. But the Securities & Futures Authority, which regulates the bank's securities unit, is now considering whether its traders violated insider-trading rules. In a statement, Swiss Bank says that "there is no question of any breach of insider trading legislation."

HELPFUL HAND. Whatever the outcome, a willingness to employ novel techniques is destined to become a hallmark of Swiss Bank's approach to corporate finance. Well aware of the roasting Bankers Trust New York Corp. has taken for flogging high-risk derivatives to unwary treasurers, Ospel is pushing his bankers to open their computer models to chief financial officers in need of sophisticated advice.

Every two months, for example, the top financial executive at one U.S. conglomerate runs his roster of $3 billion worth of derivative contracts through the model Swiss Bank uses to evaluate its own portfolios. The object: to find hidden risks he might not discover on his own. "This is the kind of analysis someone our size just doesn't have access to," says the CFO. "I've asked other banks--even J.P. Morgan--and they couldn't do it."

Despite such plaudits, more widespread gains are proving harder to come by--especially in the U.S. Swiss Bank's American investment banking ambitions had been held back while the Federal Reserve Board spent 17 months reviewing its application for permission to underwrite debt and equities. The Fed finally gave approval in December. Now, Blum is building. Even before the approval came through, the Swiss announced plans to shift most of their U.S. headquarters staff from New York to a 575,000-square-foot complex to be constructed in Stamford, Conn.

More big moves are likely. Senior bank executives, pointing to J.P. Morgan's decade-long successful drive to build a global investment bank, argue that one year of disappointing earnings is hardly enough reason for them to abandon their own quest. "We have redesigned the bank," says Ospel. What has emerged is a formidable combination of European capital and U.S. technology. Now comes Georges Blum's biggest challenge: making the redesign pay off.

Blum's Achievements, and the Hurdles Ahead

DOMESTIC RETAIL BANKING

ACHIEVEMENTS With the Swiss market stagnating, Blum has slashed costs and introduced new products to boost revenues.

CHALLENGES That may not be enough. Some say he'll have to buy a smaller private bank to secure higher returns.

GLOBAL INVESTMENT BANKING

ACHIEVEMENTS The Federal Reserve in December gave Swiss Bank the nod to do full-scale debt and equity underwriting in the U.S. Blum envisions a flood of new products--and steady growth.

CHALLENGES Derivatives have a bad name lately; Wall Street is in a severe slump. The bank has drawn allegations of insider trading in London. It denies wrongdoing.

TRADING

ACHIEVEMENTS Blum bought Chicago's hottest options house, O'Connor Partnerships, and spread its staff around the world--making Swiss Bank one of the world's most technologically savvy traders.

CHALLENGES Even the Chicago PhDs could not overcome the weight of last year's bond-market collapse and emerging-market rout. Trading volume and earnings are sagging.

MONEY MANAGEMENT

ACHIEVEMENTS Blum wound up 1994 by purchasing Chicago-based Brinson Partners, one of America's most successful global asset managers. Brinson will take over Swiss Bank's own international money management business.

CHALLENGES Critics say Brinson's hefty $750 million price tag means the deal will take several years to pay off.By Bill Javetski in Basel and William Glasgall in New York, with Paula Dwyer in London and bureau reports


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