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Old 02-16-2002, 10:18 AM
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Default Re: firsthand information



Ok, where do i begin? Like you said, as your arguments are quite theoretical and broad, its hard to take issue with anything specific.


So, i'll try to tackle some of the more practical points. First, i don't think this is an industry where 4 mediocre people can replace 1 bright person. 4 bad traders will not make as much as 1 good one, 4 bad salesmen will not bring in any more business... if anything they'll destroy reputational value, and 4 bad strategists aren't of much use either.


There is certainly room for the 2nd tiers and niche players in this industry, but for bulge bracket firms 90% of the revenues are generated by the top 10% of the clients... which means you really do need good people.


Which brings me to my second point. You simply can't automate the process with regards to these clients because thats not what they want. Even for the simplest of products, no one is going to do a billion dollar transaction over the internet. But the other issue is that the nature of the transactions are too complex to automate. Say you have a large UK insurance company which sold guaranteed return investments at 6% when rates were much higher. Now they're in trouble and come to you for help(in reality, they don't come to us, we go to them). So then we have to come up with a solution that would best meet their needs.


Or lets say that you think corporates bonds are a great bargain and you try to sell that idea to fund managers. They agree with you but having been burned by Enron, they don't want short term default exposure... that is they like coporates medium to long term but they can't be seen holding a bond which defaults in the short term(it is important to note that appearances are crucial, often fund managers can't do what they really want because they run the risk of being embarrased in the short term altough they may be right in the long run). So we structure a basket of 50 corporate bonds which has default protections against any 3 names for 6 months... securitize the whole thing, establish a special purpose vehicle in the Caymans and sell the bonds.


These are some typical deals which happen everyday and it is not possible to automate them. The transaction itself is only a small part of the entire process and whether you automate that or not is really of no consequence.


I think the point i want to make is that most clients in fixed income are actually not that price sensitive. You are not going to get pennied to death if you can provide real value added in your client relationship. Have to go now, more thoughts on it later.



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