Less than four months after JPMorgan bought Bear, Stearns & Co., executives in JPMorgan's municipal group have brought the Bear employees into the fold and are now concentrating on cementing the investment bank's role as one of the top-tier firms in the market.
Through July 9, JPMorgan ranked third among senior managers, underwriting 193 deals for $21.3 billion in volume, and vaulting three places up the league tables from last year's sixth place finish, according to Thomson Reuters. In 2007, JPMorgan underwrote 343 issues for volume of $25.5 billion. The numbers illustrate the ambition of the firm's public finance department and the benefits of the Bear Stearns merger.
"We are going to be one of the top two or three investment banking firms in this business," said Mark Melio, head of investment banking for the tax-exempt capital markets division. "Our goal is clearly to be one of the top underwriters."
To do so, Melio and the co-heads of tax-exempt capital markets sales and trading, Hugh Nickola and Jeff Bosland, will have to match forces with Citi and Merrill Lynch & Co. Citi continued its reign at the top of the charts through the first sixth months of the year, according to Thomson Reuters, while Merrill in late June said it had hired about 30 former UBS Securities LLC employees, signaling an expanding commitment to the market.
And yet JPMorgan seems well placed to fulfill its ambitions. With the purchase of Bear Stearns in mid-March, tax-exempt executives had their pick of employees at two of the top 10 firms in the market. In many cases, JPMorgan brought Bear Stearns employees and teams into the fold in areas where its own efforts were fledgling or lagging the market leaders.
"Bear had a lot of senior talent and was very focused," Melio said. "[We] had been reinvesting in [our] talent for some time and this was a once-in-a-career opportunity. We were able to get the best of both firms and build out areas that would have taken years to build out."
Market participants agreed.
"JPMorgan strengthened certain areas in this merger and that was important to them," said Robert Lamb, president of Lamont Financial Services Corp. "They have the additional benefit of having a strong bank that they can do liquidity facilities with and they have strong derivatives as well. They are more of a complete package in many sectors than they were before."
Among those sectors, JPMorgan took the best of Bear Stearns' housing group, led by Kent Hiteshew, choosing to shelve its own fledgling team started last October. Since the merger, JPMorgan has senior managed more than $1 billion of housing bonds and kept "virtually all" of Bear Stearns' state housing finance agency clients, Melio said.
JPMorgan has added strength in other areas as well, including in the Northeast and the West, and in the tobacco and lottery securitizations, transport, power, and health care sectors. On the sales and trading side, JPMorgan added a senior underwriter and a number of research and trading staff on the high-yield desk.
Among Bear managers, JPMorgan has hired Steve Dworkin and some of his staff in the West region, Nora Ostrovskaya and Jerry Solomon in tobacco banking and research, respectively, and transport banker Michael Lexton, to name a few.
The merged tax-exempt capital markets group now consists of just under 300 people, roughly two-thirds of which are public finance bankers. The total represents a 10% reduction in the size of the department before the merger, as senior managers looked to streamline the department. It compares to a department at Citi that sources say is as large as 500 people, including as many as 250 bankers.
And according to the three executives, the integration of the staffs has gone smoothly. While Bear Stearns staff members have shown excitement about joining a firm with a strong balance sheet like JPMorgan - and a much more global footprint and a greater distribution network - JPMorgan employees have reportedly been happy to welcome the Bear Stearns professionals, many of whom have extensive experience in the municipal market.
"Prior to the merger people might have had some questions about culture, but I would say the integration has gone very well," Bosland said. "Of course there is a human element and they went through a difficult time. But from our chairman on down, we have made it extremely clear that we are now all JPMorgan employees and part of the same team."
And former Bear Stearns clients are also likely to do well if they choose to remain with JPMorgan, sources said.
"I think the Bear clients are likely to come out ahead," said Robert Fuller, principal at Capital Markets Management LLC. "When it comes to negotiated underwriting, JPMorgan clearly brings more to the table than Bear did in terms of capital, talent, cross-selling opportunities, and swap capabilities."
And a firm with a broad platform and strong balance sheet is needed in today's capital-constrained environment. JPMorgan has picked up the pace in providing 364-day liquidity facilities to issuers in need of variable-rate liquidity facilities and has committed more than $50 billion of the balance sheet to the credit business, Melio said.
In addition, the needs for transport and energy infrastructure needs could approach $1 trillion in the next five years, according to Melio, while a slowing economy could lead issuers to look for more solutions for deficit financing.
To that end, the executives said they expect new-issue volume to remain robust.
"One of the unique aspects of the muni business is that it is a counter-cyclical business - in tougher times, if you look at the past, you'll see that our volume actually increases, driven by more deficit financings and lower interest rates," Melio said. "Our market and industry is transforming itself away from a monoline-dominated business and into a credit business and a lot of our clients are struggling to find solutions. They are rewarding balance sheet and strength and creativity."
And with the merger and integration behind them, JPMorgan executives feel like they are poised to provide all three.
"We feel good about the direction we're headed," Nickola said.