Crains New York Business: The New Kings of Wall Street

One Year After Lehman's Demise, New Elite Rises
By Aaron Elstein

On Sept. 16, 1920, at precisely one minute after noon, Wall Street was literally shaken to its foundations when a massive bomb exploded outside J.P. Morgan's headquarters, killing dozens and injuring hundreds more. Pockmarks from the blast are still visible.

On almost the very same day, 88 years later—Sept. 15, 2008—Wall Street was rocked again. Shock waves reverberated around the globe as Lehman Brothers collapsed into bankruptcy, a teetering Merrill Lynch raced into the arms of Bank of America, and two days later, American International Group was taken over by the federal government. The financial system ground to a virtual halt.

Only now is the industry beginning to regain its footing. Capital markets are starting to revive as investors rediscover a taste for risky bets. Companies are starting to acquire competitors, the market for initial public offerings has reopened, and it's getting easier for consumers to—how quaint is this?—buy a house.

From the wreckage of last year's calamity, a new power elite is starting to emerge. These players, each in their own way capitalizing on the distress of rivals, are some of the new era's Kings of Wall Street.

ROBERT DIAMOND, chief executive, Barclays Capital

The past year's greatest achievement in vulture investing took place even before the carcass of Lehman Brothers turned cold. Two days after the investment bank collapsed, Barclays swooped in and grabbed its best parts for a song. The price: $250 million for the firm's North America investment banking operations and $1.5 billion for Lehman's midtown headquarters. The acquisition immediately transformed the British bank, which had operated on Wall Street's fringes for years, into a major force. For example, Barclays ranked 65th in M&A advisory work in 2007 and sixth in the first half of this year, according to Bloomberg data. Barclays used Lehman's historic strength in bonds to propel itself into a spot as the world's top bond dealer in the first half of this year.

JAMES GORMAN, chairman, Morgan Stanley Smith Barney

Morgan Stanley responded to its near-death experience last fall by emphasizing less risky lines of business. That's been good news for Mr. Gorman, who runs the division of the firm that serves individual investors. His portfolio expanded massively earlier this year when Morgan Stanley acquired a majority of Smith Barney from ailing Citigroup.

The move puts Mr. Gorman, an austere Australian, in charge of the industry's largest retail sales force—about 19,000 brokers who manage $1.4 trillion in assets. His job is to cull the least productive, keep the best, and grow a business that has traditionally ranked a distant second in assets to Merrill. Still, he has a singular opportunity to narrow the gap in light of the turmoil at the newly merged Merrill and BofA. If Mr. Gorman can pull it off, he has an excellent shot at succeeding John Mack as Morgan Stanley's chief executive.

THOMAS JOYCE, chief executive, Knight Capital Group

Mr. Joyce isn't well known outside of Wall Street circles, but in the past year Knight Capital has surpassed giants like Citigroup and UBS to become the largest equity trader in the U.S., according to Bloomberg. Indeed, Knight appears to be the only publicly traded financial institution to show earnings growth over the past 12 months in addition to a rising stock price. The key to Knight's success: Its pristine balance sheet, with lots of cash and little debt, which gave it the flexibility to hire its rivals' best people—head count is up 15%, to 1,000—and capture market share from bigger rivals that it hadn't been able to get in years of trying. The calamities that hit the rest of Wall Street “presented us with a jump ball,” Mr. Joyce says, “and we went for it.”

KARL WELLNER, chief executive, Papamarkou Wellner Asset Management

Karl Wellner has been managing money for more than 25 years. The $2 billion his firm currently has under management makes it small fry compared with the BlackRocks and Blackstones of the world. But it's a major player in its niche serving the ultrawealthy, and now that some of the biggest players have hit the rocks, such as the Swiss banks and bailed-out U.S. institutions, Mr. Wellner is moving to grab clients and build his firm. Last month, he relocated the headquarters from the GM building to a space nearly double the size on Park Avenue. Early signs suggest his growth push is working. The firm has attracted new clients, and existing clients are investing more, including one who recently wired in $30 million. His customers are up 6% this year, which is a bit less than the stock market's 11% gain. Then again, his customers lost only 12% last year, on average. As Mr. Wellner puts it, his clients are already rich; his job is to make sure they don't become poor.

DON BROWNSTEIN, chief executive, Structured Portfolio Management

Mr. Brownstein coined big money betting against mortgages, the very instruments at the heart of Wall Street's crisis. A former philosophy professor who specialized in logic, he was struck in 2006 by how irrational housing had become and how oblivious people seemed to the looming trouble. His $1.6 billion hedge fund started shorting mortgages in a big way and stayed cautious throughout the painful downturn. His largest fund has generated a 74% return this year through July, according to Morningstar.

Now he believes housing is close to or at its bottom, but he thinks it's unlikely to recover anytime soon, so he's positioned his portfolio to benefit from a continued slowdown in mortgage prepayments.

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Sunday, September 6, 2009