Nov 1, 2022

Brian Friedman, a legend of Wall Street, is well-placed to comment on why Jefferies grew by 15 times over the same period that Credit Suisse shrunk to almost a 10th of its size. Nov 1, 2022 – 7.33pm Share As president of Jefferies Financial Group, Brian Friedman is better placed than just about anyone else on Wall Street to explain why Credit Suisse couldn’t make it in the United States, except for Jefferies CEO Rich Handler. Friedman and Handler were the brains behind the strategy developed in 2001 to make Jefferies a full-service, global investment banking firm. At the time Jefferies was a leader in high-yield debt trading and had carved out a niche as a trader of listed securities directly between institutions. Jefferies Capital Partners’ president Brian Friedman says the global investment banking pecking order has materially changed. David Rowe The strategic shift at Jefferies to become a global investment bank came soon after Credit Suisse had emphatically declared similar ambitions through the purchase in September 2000 of Donaldson, Lufkin & Jenrette (DLJ) for $US11.5 billion. Friedman, who spoke to Chanticleer during a trip to Sydney to visit clients, made it clear that he would rather not have Jefferies’ “good work and good fortune defined by their (Credit Suisse’s) challenges”. But he was willing to provide some historic context for the latest example of a European bank abandoning Wall St and retreating to its home market. Advertisement He says regulatory changes made by the US Federal Reserve Board in 1996 opened the way for commercial banks to get into investment banking. “Until that moment, they essentially were limited to investment grade bond underwriting – there was a little bit of latitude, but that was the essence,” he says. Next level of consolidation This was the catalyst for a slew of deals including Bankers Trust buying Alex Brown and Chase Manhattan buying Hambrecht & Quist. Société Générale and ING made acquisitions and Deutsche bought BT while JP Morgan bought Chase. Friedman says the Fed’s regulatory change triggered a period of structural change and amalgamation in the market similar to what had happened in other American industries such as oil and steel. “There was really a next level of consolidation driven by that Fed decision and it kind of blew off with the DLJ acquisition – it was the last big acquisition in this whole story,” he says. Advertisement “There really hasn’t been much of a premium acquisition since of any note.” Friedman says the DLJ acquisition by Credit Suisse made sense because it gave the bank ownership of “the leading middle market firm in America”. “They were the leaders in what I call growth in America. They kind of owned a lot of the space that wasn’t the Fortune 1000 or whatever metrics you want to use for big.” This was the same market that Jefferies made its own between 2000 and 2022. The larger problem for Credit Suisse and the man chosen to run its new Wall St investment banking arm, John Mack, was that the technology crash happened within months of it buying DLJ. “The world changed markedly, the bubble burst in tech, there was an industrial recession in 2001 – things got pretty ugly, and they stayed ugly for a while,” he says. Advertisement “John (Mack) was basically faced with one and one isn’t going to equal close to two,” Friedman says. “That was the essence of the mistake. It would have been a miracle to get even close to two out of that combination because there was meaningful overlap. “And it’s always difficult when you make an acquisition and go straight into a downturn. He made the best of it, but did a lot of chopping, and do a lot of cutting and, in a way, a lot of value was destroyed on the deal. ‘It’s just reality’ “It’s like in the world of M&A, in good deals value is made on the deal. And in bad deals value is lost on the deal before you get to the second and third steps. It’s just reality.” Today Jefferies has a market capitalisation of $US7.5 billion compared to $US500 million in 2001 when it ranked 40th in the investment banking league tables. Advertisement It now ranks fifth in latest Dealogic quarterly investment banking revenue league table, as measured by mergers & acquisitions, equity capital markets and leveraged finance. Credit Suisse is today worth 10.9 billion Swiss francs compared to 80 billion Swiss francs in 2000 when it was a top 10 investment bank, thanks to its DLJ purchase. It now ranks eighth in the Dealogic IB league table using M&A, ECM and leveraged finance. The European assault on Wall St was struck a heavy blow in 2008-09 when the global financial crisis prompted the Fed to impose on banks the intermediate holding company structure. This ring-fenced the international operations of banks from their home markets but also added another layer of cost and complexity. Friedman says Jefferies’ spent several days in late 2008 discussing whether to put in place a bank holding company structure. But it rejected the idea and stuck with its status as a broker dealer. These days competitors complain that Jefferies’ broker deal status gives it a structural advantage, particularly because of the looser capital requirements in its leveraged finance business. Advertisement “I believe that what it gives us is a cultural advantage,” Friedman says. “Wall Street and all the business of investment banking and capital markets for 100 plus years was built on people serving other people. That’s who we are. That’s what we do. That’s what drives us every day. And our trade is in ideas. “Commercial bank holding companies – their trade is in money and rightly so because they have a lot of risk and large balance sheets. They’re typically intertwined with the economies they serve and the governments that are above them. “That’s why I say I think the difference is cultural. We wake up as a pure rendition of what investment banking and capital markets was always and should be.” Friedman says that over the next three to five years, Jefferies along with the other Wall St investment banks will entrench their dominance, partly because the US will remain the source of more than half of capital markets activity. He says this trend will be accompanied by changes in the leading financial centres with London at risk of slipping lower and Hong Kong losing its chance of becoming one of the top three to four financial centres in the world. Advertisement “There seemed to be good momentum some years ago toward Hong Kong being another broadly global financial centre,” he says. “A combination of forces now would suggest that is less likely. One force is the stronger hand that China is playing in governance and involvement in Hong Kong . “The second is the prospect that the Chinese economy and perhaps capital markets, which now might be read to include Hong Kong, are going to be more inward facing than outward facing.” Friedman says this could play well for Australia as “the arc of growth in the world, perhaps will now run from South-East Asia, through India to the Persian Gulf”. “I’m not suggesting Sydney is about to take its place in the top two or three capital markets,” he says. “But you have arguably more upside than downside depending on the efforts that are made and government policy – and it’s an attractive place for the Hong Kong tycoons.” He says that in the next three to five years, Jefferies we will be “meaningfully more successful” in Australia. Advertisement “The dynamics around the world that we see is a meaningful change in who are the market leaders, and that’s creating market share opportunity for us in virtually every market that we operate,” he says. “It’s a fairly comparable opportunity. In other words, the way we’re seeing the path forward here in Sydney, and Melbourne is not meaningfully different than the way forward for us, in the US, across Europe, in India, in Tokyo.” Tony Boyd is the Chanticleer columnist. He has more than 35 years' experience as a finance journalist. Connect with Tony on Twitter . Email Tony at tony.boyd@afr.com Save