The following is an excellent excerpt from the January 21 – January 27, 2013 issue of Bloomberg Businessweek titled “Cantor Fitzgeralds’ Investment Banking Goes Awry” by Zeke Faux on Page 41 and I quote:
“Markets & Finance”
Cantor Fitzgerald’s Investment Banking Push Goes Awry
By Zeke Faux on January 17, 2013 Tweet
Story
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Go Steven Kantor, then head of investment banking for Cantor Fitzgerald, gathered his staff about a year ago for a holiday party in his 82nd-floor apartment in Trump World Tower. Kantor had stepped up his hiring in prior months, and the bankers discussed the renewed push into underwriting and merger advice while drinking Avión, a tequila in which Kantor personally invests, according to five guests. Within about 10 weeks, more than half of his 50 bankers had been fired or reassigned. In August, Kantor was gone, too—transferred to Cantor Commercial Real Estate, a venture he helped create.
Chief Executive Officer Howard Lutnick’s drive to turn Cantor Fitzgerald, one of the largest independent U.S. brokerages, into a rival to Wall Street’s investment banks has been pocked with dismissals and defections. Industry records show that 41 percent of the 158 traders and bankers whose hiring Cantor announced in news releases from 2009 through 2012 have left.
In interviews, 19 current and former Cantor Fitzgerald employees blamed the turnover on lack of investment and pressure to turn a profit immediately. Cantor executives dispute that characterization. “We have a very simple business philosophy,” says Anthony Orso, CEO of Cantor Commercial Real Estate. “People who don’t produce don’t stay with the firm.” Lutnick declined to comment for this story.
STORY: Big Banks Rediscover Money Management
In the decade since terrorists killed 658 Cantor employees in the Sept. 11 attacks on the World Trade Center, Lutnick has rebuilt the brokerage, which has said it gave more than $180 million to families of the dead. The private partnership now employs 700 salespeople who earn commissions by matching buyers and sellers of stocks and bonds. “They’re known for hustle,” says Turney Duff, a former hedge fund trader and author of The Buy Side, about his experiences on Wall Street, due out in June. “They come in early and stay late, and they’re constantly hitting the phone.”
With commissions declining across Wall Street, Cantor has expanded into investment banking as well as real estate, emerging markets, and even casino gambling. The company has lost or fired senior executives involved in those efforts, too, and the diversification hasn’t produced much profit, according to Moody’s Investors Service (MCO), which lowered Cantor’s credit rating to junk in October. “It’s very difficult to turn a bond house or an equity trading house into an investment bank unless you’re playing with big money,” says Roy Smith, a finance professor at New York University’s Stern School of Business and a former Goldman Sachs Group (GS) partner. “This is a very constrained market, and the guys already in it are already competing pretty hard.”
Payments to partners have fallen in recent years, according to two who have been with the firm for more than a decade. Cantor’s total profit increased in the first nine months of 2012 from a year earlier, as earnings in the bond business helped offset a decline in stock trading revenue, according to Mohak Rao, an analyst at Fitch Ratings, which warned on Jan. 8 that it may downgrade the brokerage. The partnership isn’t required to report financial results publicly.
VIDEO: Cantor Fitzgerald’s Shawn Matthews on Growth Strategy
Lutnick and Shawn Matthews, the head of Cantor’s main brokerage unit, have said on television and in interviews that the struggles of other firms benefit their own. “We’ve grown pretty much everywhere in lock step,” Matthews said on Nov. 15 in an interview at Cantor’s New York City headquarters. “We’re going to grow right through it.”
Cantor made forays into investment banking—working on mergers and acquisitions and helping companies raise money by selling stocks and bonds—as early as 2000. The latest push started in 2009 when Kantor was hired from Credit Suisse (CS), where he was a head of global securities and ran the commercial real estate unit. Kantor told the bankers he hired that Cantor’s financial resources and sales force would be selling points as they sought assignments, according to 10 former employees. Despite his promises, Cantor executives refused to put the firm’s money at risk by lending to facilitate deals or committing to underwrite clients’ securities offerings, they say. “The barriers to entry in investment banking are high,” says Charles Geisst, a Wall Street historian at Manhattan College in Bronx, N.Y. “Even those who are throwing money at stuff, who have the capital to do underwriting or M&A, even they have to give it time.”
As the bankers sought to win business from CEOs, resentment built about Kantor’s lifestyle, according to some of the former employees. In addition to his stake in Avión, a tequila company known for its appearance in the HBO television series Entourage, Kantor is listed as a principal on the website of Philippe, a chain of clublike Chinese restaurants. Two former Cantor employees say they were embarrassed when Kantor told the New York Times about his custom Mercedes-Benz van—furnished with a couch, massage chairs, and big-screen TVs—for a November article. Three say they didn’t understand why Kantor hired his 80-year-old father, Ed Kantor, as vice chairman of investment banking. The elder Kantor, who declined to comment, had been a senior executive at Drexel Burnham Lambert until he was suspended from the industry in 1993 for failing to supervise junk-bond pioneer Michael Milken.
Orso says Kantor should be credited with the success of the commercial real estate venture, which made $3.1 billion in loans last year, packaged them into securities, and sold them to investors. Kantor doesn’t run Avión or Philippe, and his investments don’t distract him, Orso says.
At the 2011 holiday party, Kantor displayed an ice sculpture advertising Avión, the guests say, and spoke optimistically about his group’s prospects throughout the night. Then Moody’s in February warned that it might downgrade the firm, saying it was “only modestly profitable” in 2011 and that market conditions were getting more difficult. On Feb. 28, Cantor fired the majority of its Los Angeles-based bankers, and the next day about half of those in New York were told to pack their things, former employees say. That afternoon, Cantor put out a press release titled “Cantor Fitzgerald & Co. to Boost Its Investment Banking Business.” It didn’t mention the cutbacks.
VIDEO: Cantor Fitzgerald: How and Why We Got Back to Work After Sandy
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BLOG: What’s Wrong With Bankers? Money
STORY: Wall Street Bonuses Cut
VIDEO: Lengthy Restructuring Ahead for Investment Banks
STORY: Global Banking: Regulations Force a Retreat
VIDEO: What Does 2013 Hold in Store for Financials?
STORY: Bank Shareholders Benefit From Wall Street’s Shift
BLOG: For MBAs, Wall Street Loses its Luster
The bottom line: Former employees say a lack of investment and pressure for short-term profits hobbled Cantor Fitzgerald’s expansion efforts.” (INFORMATION IS IMPORTANT IF YOU’RE LOOKING FOR A PLACE TO INVEST YOUR HARD-EARNED MONEY. INVESTING YOUR MONEY IN CDS IN A COMMERCIAL BANK DOESN’T PAY MUCH BUT AT LEAST IT’S SUPPOSED TO BE SAFE AND FEDERALLY INSURED. ON THE OTHER HAND STEVEN KANTOR’S SO-CALLED INVESTMENT BANK, THAT DEALS IN DERIVATIVES, IS NOT FEDERALLY INSURED, SINCE HE MADE LOANS WHICH WERE PACKAGED INTO SECURITIES AND SOLD TO INVESTORS. THE ONLY EARLY WARNING SIGNAL YOU HAVE IS IF MOODY’S IS UPGRADING OR DOWNGRADING ANY FIRM. THEY SHOULD HAVE NEVER ALLOWED A BANK TO SELL CDs AND INVESTMENT PRODUCTS IN THE SAME BUILDING. IT CONFUSES PEOPLE AND THEY THINK EVERYTHING IS FEDERALLY GUARANTEED. THAT’S WHY CONGRESS SHOULD HAVE KEPT THE GLASS-STEAGALL ACT. BANKS SHOULD BE RUN SEPARATE AND REGULATED BY THE GOVERNMENT AND THE STOCK MARKET SHOULD BE A SHINING EXAMPLE OF WHAT FREE ENTERPRISE IS DOING AND NOT BE GUARANTEED BY THE GOVERNMENT BECAUSE FREE ENTERPRISE IS SO ABOVE REPROACH AND HONESTLY RUN THAT THEY FEEL THEY DON’T NEED ANY GOVERNMENT BAILOUTS, WHEN IF REALITY, THEY ARE GETTING A LOT OF TAXPAYER BAILOUTS. IN FACT, THE ONLY PROTECTION THE CUSTOMER HAS IS HOW MOODY’S OR STANDARD & POOR’S IS RATING A PARTICULAR INVESTMENT, IN THIS COUNTRY, AS WELL AS THE WORLD. THE PROBLEM IS, WITH ALL THE TAXPAYER BAILOUTS, IT LOOKS LIKE THEY HAVE GONE AWRY. I HOPE PRESIDENT OBAMA, IN HIS SECOND TERM, REALLY STRENGTHENS THE DODD-FRANK BILL.
LaVern Isely, Overtaxed Independent Middle Class Taxpayer & Public Citizen & AARP Members
isely 