As Wall Street's largest banks have suffered losses and shrinking capital positions, they have been unable to prevent widespread turmoil throughout the municipal market. As a result, the relationships between Wall Street banks and their issuer clients appear strained. That reality, and staffing changes, have led bankers to seek other alternatives.
Most recently, ex-Morgan Stanley banker Andrew Garvey joined Cain Brothers & Co. to run its municipal capital markets business. Garvey, the head of Morgan Stanley's tax-exempt unit before abruptly leaving last May, said he chose Cain because of its entrepreneurial spirit and "client-first" mentality.
Garvey said he believes that a fundamental change is occurring in the markets, shifting from what had been a very commoditized business back to one where an understanding of credit and issuers is at a premium.
"Fundamentally, it is a sea change right now in terms of what is going on in the markets," Garvey said. "It's unprecedented."
Garvey joins the New York-based Cain Brothers, which specializes in health care investment banking and advising, as a managing director, a member of the capital markets committee, and a director at the employee-owned firm. He will be one of 33 shareholders at the closely held 80-person firm.
"It is a small shop where he can be involved at the absolute highest levels as opposed to being in a small group at a large firm," said a banker who used to work with Garvey. "He will be at the top of Cain Brothers as opposed to being in a little section of a Morgan Stanley."
With broad experience in the capital markets and municipal derivatives, Garvey will be working with health care issuers, some of the market's most capital intensive organizations. As an underwriting firm and financial and strategic adviser, Cain Brothers is well-placed to help clients navigate the many pitfalls of the current market, Garvey said.
"There's a yearning for people in the business to get back to the old client-comes-first relationship banking which existed when I came into the business in the 1970s," said James Cain, one of the two brothers who founded Cain Brothers. "These clients look to you as an adviser not necessarily as a swap counterparty or an underwriter but to help them understand their issues and their options."
Lately, Wall Street banks' unwillingness or inability to act as buyers of last resort on auctions and remarketings has sparked issuer anger and frustration. Issuers' borrowing costs spiked on securities they were led to believe offered the ultimate in low rates and liquidity. In some cases, banks have also stopped supporting variable rate demand obligation remarketings which has caused draws on issuers' liquidity facilities. In other situations, the downgraded corporate ratings for the banks themselves has brought their ability to serve as swap transaction counterparties into question.
David Brown, the executive director for the Dormitory Authority of the State of New York, has been vocal about the role the banks have played in the latest auction-rate crisis.
"This has not been the investment banks' finest hour," Brown said in a conference call last week. "We are looking at the performance of these investment banks in their role as brokers very carefully, and we are going to keep it in mind going forward as we allocate future investment banking business."
In the banks' defense, one banker said the auction rate problems are related to the tattered ratings of the bond insurers and not the banks' choice to leave issuers in the lurch.
In what may be the leading edge of staffing challenges in a turbulent market, Bank of America Corp. in January fired a number of public finance bankers in Chicago and St. Louis, and dismantled its affordable housing group. In February, Bank of America's head of public finance, Phil Smith, left to take a position at rival Wachovia Corp.
Garvey's departure from Morgan Stanley last spring took many in the market by surprise. He was seen as an insider with great skill in marketing and sales, who became head of tax-exempts after leading the firms' derivatives group for several years. Before that, he led the derivatives business at Lehman Brothers for seven years.
"He's a seasoned professional with experience on the banking side and on the derivatives side," said Nat Singer, managing director at Swap Financial Group. "It's good to have somebody like him back in the business."
Singer also left Wall Street banking behind - after 21 years as a derivatives specialist at Bear Stearns & Co. - when he joined Swap Financial late last year.
Last year, Cain Brothers ranked 14th among health care senior managers, underwriting 24 issues totaling $922.6 million, according to data from Thomson Financial. In 2008, thru Feb. 29, the firm has managed six issues totaling $262.4 million.
