$29.95 USA / $32.95 CAN A confl ict of epic fi nancial proportions has begun on Wall Street and will continue to rage on in the coming years. The opposing forces are the sellers: an army of commercial and investment bankers; and the buyers: an army of hedge fund managers and private equity groups. It is a battle about power—and about winning the hearts, minds, and wallets of the investment community. In The Battle for Wall Street, twenty-fi ve-year Wall Street veteran Richard Goldberg analyzes the struggle for power between traditional sell-side fi nancial institutions— who have seen their dominance upended during the 2008 fi nancial crisis—and buy-side newcomers, and tells what it means for you and your fi nancial future. Goldberg explains how, for over 100 years, the sellers held all the power. They made markets, controlled information about markets, and largely managed markets, while buyers were participants with limited power or infl uence, or none at all. He shows how, with the revolution in information technology, buyers gained access to the same data as the sellers and quickly became an equally powerful force in the marketplace— just as the numerous new pools of liquidity made money more readily available. The author examines the various drivers of large-scale trading technology, the “agents of change” that include private equity, hedge funds, endowments, sovereign wealth funds, and the major exchanges that are fast becoming global fi nancial supermarkets. With an insider’s eye, he looks at the various strategies and initiatives currently under way as a wide range of powerful fi rms fi ght to manipulate this new generation of fi nancial technology to their advantage. Throughout the book, he draws on the experiences of many of the sell- and buy-side “generals” in the battle. With prominent sell-side players either out of business or humbled into restructuring as commercial banks, Goldberg offers dire predictions for some and success for others. And as Goldberg reveals the factors that will create future winners, those who stay ahead of these changes will profi t in their careers and their investments. This book will be your guide. (CONTINUED FROM FRONT FLAP) (CONTINUED ON BACK FLAP) Jacket Design: Paul McCarthy Jacket Imagery: Composite of © Getty Images RICHARD GOLDBERG is a twenty-fi ve-year Wall Street veteran with Lehman Brothers, Lazard, and Wasserstein Perella. He has been a banker to the banks and advised on a number of transformational fi nancial services transactions. He is also a faculty member at Columbia University’s School of International and Public Affairs and has taught at Boston College’s Carroll School of Management and Brandeis University’s International Business School. BEHIND THE LINES IN THE STRUGGLE THAT PUSHED AN INDUSTRY INTO TURMOIL BEHIND THE LINES IN THE STRUGGLE THAT PUSHED AN INDUSTRY INTO TURMOIL GOLDBERG k k An insider’s look at the changing balance of power on Wall Street A monumental battle is raging in the ever-shifting, always tumultuous world of Wall Street. The Battle for Wall Street follows the struggle for power between two giants: the sellers, traditional commercial and investment banks; and the buyers, upstart hedge funds, private equity fi rms, and the like. Richard Goldberg—who has spent thirty years working with fi nancial industry leaders—gives you a detailed understanding of what is going on in this dynamic arena and the forces behind the shift of power from the old sell- side gatekeepers to the new buy-side players. The Battle for Wall Street examines the instruments of change—liquidity and fi nancial technology—and the agents of change: hedge funds, private equity, fi nancial entrepreneurs, endowments, exchanges, and sovereign wealth funds. Even more importantly, it outlines the strategic implications for the winners and losers. Goldberg describes all this against the dramatic backdrop of the subprime mortgage and credit crisis and the resulting capitulation of global fi rms such as Bear Stearns and Lehman Brothers. Goldberg’s unique access to major players brings this book to life with fascinating anecdotes and stories about the fi nancial generals who have left their mark in the battle for Wall Street. ffirs.indd ivffirs.indd iv 11/22/08 4:24:11 PM11/22/08 4:24:11 PM The Battle for Wall Street Behind the Lines in the Struggle that Pushed an Industry into Turmoil Richard Goldberg John Wiley & Sons, Inc. ffirs.indd iffirs.indd i 11/22/08 4:24:10 PM11/22/08 4:24:10 PM Copyright © 2009 by Richard Goldberg. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifi cally disclaim any implied warranties of merchantability or fi tness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profi t or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: Goldberg, Richard (Richard S.) The battle for Wall Street : behind the lines in the struggle that pushed an industry into turmoil / Richard Goldberg. p. cm. Includes bibliographical references and index. ISBN 978-0-470-22279-9 (cloth) 1. Investment advisors—United States. 2. Investments—United States. 3. Finance— United States. 4. Stock exchanges—New York (State)—New York. I. Title. HG4928.5.G65 2009 332.64'273—dc22 2008038662 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 ffirs.indd iiffirs.indd ii 11/22/08 4:24:11 PM11/22/08 4:24:11 PM To my wife, Jill, and my children, Brett and Nikki For their love, encouragement and endless patience. ffirs.indd iiiffirs.indd iii 11/22/08 4:24:11 PM11/22/08 4:24:11 PM ffirs.indd ivffirs.indd iv 11/22/08 4:24:11 PM11/22/08 4:24:11 PM v Contents Acknowledgments vii Introduction: Let the Battle for Wall Street Begin ix Part One: Instruments of Change 1 Chapter 1 Sea of Liquidity 3 Chapter 2 Financial Information in a Digital Age 17 Chapter 3 Prime Brokerage Meeting Hall 37 Part Two: Agents of Change 47 Chapter 4 Hedge Funds: Buy-Side Player, Sell-Side Foe 49 Chapter 5 Private Equity: Buy-Side Player, Sell-Side Friend 67 Chapter 6 Entrepreneurs to Endowments: Buy-side Catalysts 87 Chapter 7 Exchanges: Sell-Side Voice, Buy-Side Electronics 107 Chapter 8 Sovereign Wealth Funds: Sell Side Today, Buy Side Tomorrow 123 ftoc.indd vftoc.indd v 11/22/08 4:25:14 PM11/22/08 4:25:14 PM vi contents Part Three: Implications of Change 135 Chapter 9 Sell-Side Casualties, Buy-Side Implications 137 Chapter 10 Buy-Side Casualties, Sell-Side Implications 155 Chapter 11 Regulatory Implications 171 Chapter 12 Future Implications 191 Notes 205 About the Author 235 Index 237 ftoc.indd viftoc.indd vi 11/22/08 4:25:15 PM11/22/08 4:25:15 PM vii Acknowledgments M y ineffable gratitude to James Mossman, a brilliant tactician and a better friend, Michael Kraines, an instrumental col- league in bringing this book to life, and Ed Hajim and Bruce Wasserstein, the driving infl uences of my Wall Street career. I will always be indebted to Dean John Coatsworth, Rob Garris and Katharine Morgan from Columbia University; Dean Andy Boynton, Edie Hotchkiss, and Hassan Tehranian from Boston College; and Edward Bayone from Brandeis University for making my dream of a “second act ” come true. My deepest appreciation to Kelly O ’ Connor, the hardest - working development editor; Dave Pugh, a reassuring senior editor; Stacey Fischkelta, a patient senior production editor; and Alan Horowitz and Neil Plakcy for their guidance in navigating me through the rocky ter- rain of pushing a book forward. Matthew Berninger, Jessica Hunt, and Christopher Kaminker also provided invaluable assistance in research. I am humbled and inspired by Steve Begleiter, Buzzy Geduld, Jeff Lane, Greg Meredith, Ben Phillips, Lou Ricciardelli, Gary Talarico, Catherine Taylor, and Mark Utay for sharing their fi nancial pearls of wis- dom which substantially increased the book ’ s intellectual heft. flast.indd viiflast.indd vii 11/22/08 4:24:40 PM11/22/08 4:24:40 PM My loyalty and admiration to a cadre of friends who endured my obsessing over writing and rewriting this continually evolving drama: Ricardo Gomez Acebo, Reuben Auspitz, Joe Carson, Steve Feldman, Phil Friedman, David Goldhill, Matt Kissner, Barry Klein, Sherri Mahne, Bill Manning, Peter Marber, Jeff Silver, Joe Stein, and Joe Yurcik. I would be remiss to exclude a special thanks to my wife, Jill, for being an invaluable set of eyes and ears, John Prior for his time and practical expertise, Chris Toro for her kind gestures, and Father James Woods for making the world a better place. Finally, my parents and my in - laws instilled in me the value of a good education, specifi cally the importance of studying history and learning from it. To the above mentioned and many more, thank you for helping lead the charge of The Battle for Wall Street. viii acknowledgments flast.indd viiiflast.indd viii 11/22/08 4:24:40 PM11/22/08 4:24:40 PM [...]... Let the Battle for Wall Street Begin The Battle for Wall Street I chose this phrase as the title for my book because, over the past two decades, a battle of major financial proportions has commenced on Wall Street, and as everyone is all too aware, it continues to rage as I write The battle is primarily between two giant armies the buyers, whose soldiers come from such places as hedge funds; and the. .. well-regarded sell-side bank held offsite, away from the clatter and hustle of the trading floor, for the members of its fixed income group The topic? How a classic sell-side institution like theirs should respond to the rising clout of the hedge funds The sell side is seeing what the students are seeing: They’re feeling the action crossing over to the buy side Not surprisingly, they’re searching for. .. classes, the driving force behind any firm or community is its people Therefore, throughout this book, I discuss many of those who have left their mark in the Battle for Wall Street Some are entrepreneurs who have created electronic markets or information technology or other products or services that have helped change the balance of power on the Street Others lead firms that were influential or otherwise... weren’t involved with the risky asset classes of the 2000s because they were navigating through their country’s own financial crisis during the 1990s While these liquidity players were entering the battle eld, the sell side didn’t exactly sit around waiting to be ambushed While many of the advantages of the Battle for Wall Street have gone to the buy side, the sell side has developed weapons of its own... whose armed forces come from such places as hybrid commercial/ investment banks In addition, other participants—like exchanges, sovereign wealth funds, endowment funds and financial entrepreneurs— have joined the battle along the way In 2008, the battle for the Street found its way into my classroom Just as the rise of the free agent changed the game of baseball, the new roles that aspiring Wall Street types... prices All of a sudden, they had access to more information than ever before Over time, the gatekeepers of information, the sell side, lost much of their power Others were providing large amounts of data the very thing that had given them the upper hand for so long Technology also put the power of computation at the buy side’s fingertips Complex algorithmic analyses that looked for exploitable flast.indd... xv As the financial sector was faltering, the U.S government joined the battle Congress approved an unprecedented multibillion-dollar bailout of the financial industry in late 2008, aiming to loosen up credit markets that had tightened up severely as the cascade of bad news unfolded Casualties in the Battle for Wall Street suddenly became heavier than anyone had imagined The Generals Leading the Battle. .. any definition These pensions and endowments boosted their returns by investing in buy-side asset classes like hedge funds and private equity firms— something unheard of 20 years ago The shift toward these unconventional asset classes helped fuel their growth and their wealth In turn, they fueled the growth of the buy side on one hand, while the sell side had to do battle with them on the other Sovereign... million seemed like the pot of gold at the end of the rainbow Today, the folks running these funds have become a professional match for anyone on Wall Street And in addition to brains and sophistication, they have more money than ever For example, at the end of fiscal 2007, Yale’s endowment had $22 billion in the till2—and there are other funds, like the California Public Employees’ Retirement System (CalPERS)—... from the sell side to the buy side, from the past to the future, we’ll draw a comprehensive map of the Wall Street landscape and drill down to the bottom line of each battle And at the end of each chapter, I will discuss the implications of each battle as well as declare which side seems to be gloriously winning So buckle your seat belts and get ready for an insider’s journey— you’re about to watch the . on Wall Street A monumental battle is raging in the ever-shifting, always tumultuous world of Wall Street. The Battle for Wall Street follows the struggle for power between two giants: the. It is a battle about power—and about winning the hearts, minds, and wallets of the investment community. In The Battle for Wall Street, twenty-fi ve-year Wall Street veteran Richard Goldberg. in this dynamic arena and the forces behind the shift of power from the old sell- side gatekeepers to the new buy-side players. The Battle for Wall Street examines the instruments of change—liquidity