Securities Finance Monitor had the unusual opportunity to interview Winthrop H. Smith Jr, most recently author of “Catching Lightning in a Bottle.” Mr. Smith has a 28 year history at Merrill Lynch, a firm co-founded by his father, as a senior executive and leader in the firm’s global expansion. Our conversation on banks, regulation and risk is below.
SFM: Why write the book?
Smith: There were several reasons. First of all it brought closure to my own time at Merrill Lynch. Second, I wanted the real story to be told; I didn’t want ML remembered by the fiasco of 2007-2008. Some Merrill Lynch families were so proud of their association to the firm and I wanted to bring those memories back.
SFM: How has the book been received?
Smith: The best breakeven has been the many nice notes from Merrill Lynch people. I’ve received a ton of good feedback and that makes me feel that I accomplished what I intended. The self-published book has also sold over 11,000 copies and I am in talks with a big publisher to take it over.
SFM: What is your opinion of new regulations reducing bank leverage?
Smith: I am always concerned that everything goes to the extreme. In trying to right the problems of history, regulators can be overly restrictive and overly tight. That’s what it looks like is happening now. Even for small businesses it is difficult to get credit. And even when they get it, it is a lengthy and cumbersome process.
SFM: Would these regulations have prevented Merrill Lynch’s collapse?
Smith: Probably not. Merrill Lynch got into a toxic business in an aggressive fashion. If regulators had forced the firm’s leverage ratio lower, Merrill might have been wounded but not mortally. But really this was a question of lack of oversight at the Board and executive levels.
Individual regulators can put a block in the path of leverage temporarily. But banks, like ivy on a wall, can always move around a block. Merrill Lynch went well ahead of the Glass-Steagall repeal by moving overseas to own a bank. You need a global regulator to really keep things in order.
SFM: What is your view on hedge fund leverage today?
Smith: Hedge funds are really just unregulated mutual funds. They have created tremendous wealth for a small number of people and in the process have helped damage Wall Street’s image with Main Street. Leverage isn’t a problem in and of itself but it has helped this problem grow along the way. This has worsened the have/have-not situation we see now.
It’s really not just hedge funds; all financial markets need to work to regain the respect of average people and to help them understand the importance of financial intermediation.
SFM: In a best case scenario, how should banks operate as service providers in financial markets?
Smith: First off, the old Merrill Lynch had it right: customer service needs to be the focus. Today’s banks are often run by traders and not client people. Once bankers stop talking about clients and start talking about counterparties, the client focus is not there. Banks are in a client business first.
Second, banks need a culture of integrity and the ability to admit mistakes.
Third, banks need to avoid a silo mentality – everyone is in this together.
Lastly, senior executives need equity to keep the whole thing together. Without a partnership structure, which is the best, then the focus should be on long-term, equity-based compensation.
SFM: Realistically, how do you expect banks to operate in the next several years?
Smith: The marketplace adjusts things, and if firms are to be viable they need a long-term approach. Unfortunately the focus on quarterly profit is too short term and investors don’t generally have long-term memory. CEOs need the support of their Boards to promote a long-term approach as best for shareholders and the firm. The more equity held by managers, the easier this is to achieve.
SFM: Anything else we should know?
Smith: The biggest thing to worry about is the words, “this time it is different.” Rarely is it different.
A link to Amazon.com for Mr. Smith’s book is here.