From Salomon to UBS, 21 Years on the Chopping Block

More than a decade ago, Credit Suisse shocked Wall Street by shuttering the municipal bond department it had acquired in its purchase of First Boston a few years earlier. Now, Switzerland's other major bank, UBS, says it will follow a similar course: Putting the vibrant muni group it acquired in its purchase of PaineWebber up for sale, and threatening to close the group if a buyer is not found quickly.

Who says the Swiss are neutral?

The muni market was quick to respond with explanations and rationalizations, in this case seizing on the idea that UBS' foreign owners did not understand and were not committed to the United State's unique municipal bond market.

But ever since the day in 1987 when Salomon Brothers, then the busiest underwriter in the nation, shuttered its tax-exempt bond department and laid off the staff, municipal securities groups have lived under the sword of Damocles. Strong performance is no defense when major financial institutions - foreign or domestic, institutional or retail - feel they have carte blanche to abandon the business at any time.

The fallout from these two decades spent living in fear could be heard in quiet conversations throughout the market last week. There were no celebrations over the demise of a rival, and few immediate plans to raid UBS' client base or talent pool. Instead, most bankers took a long look over their own shoulders. "It could have been us," was the prevailing sentiment.


There are reasons why the UBS muni department was particularly exposed to shifting corporate sentiments. The firm was built to generate large deal flow and feed it to PaineWebber's huge retail brokerage network. Unlike some competitors, who walked away from some low-spread business - and clients - in the fiercely competitive general municipal markets, UBS was ubiquitous across the market.

But the rules that gave rise to that model began to change in January 2006, when an internal restructuring shifted the group from UBS' wealth management division, where it was housed alongside the retail operations, to the investment banking unit.

The new leadership made it clear they were charged with boosting the unit's profitability, and quickly recruited a respected team of derivatives specialists and tender-option bond bankers from across the street, charging them with deploying the bank's balance sheet more aggressively and improving profitability by playing more roles within each deal.

And then they became the latest collateral damage from the subprime mortgage meltdown. With the parent bank's balance sheet rocked by bad housing investments, a strategy anchored in using that balance sheet to support swaps became unviable, and time ran out for the group, at least under the UBS umbrella.


The fact that UBS is willing to take at least a few weeks to seek a buyer for the muni unit does set the current situation apart from the more horrific shutdowns in market history. And you don't have to look far to find a precedent that suggests an acquirer could do quite well here: The modern UBS had its start at the same kind of moment, when General Electric jettisoned its Kidder Peabody unit in the wake of a non-municipal trading scandal and PaineWebber bought its muni assets.

A decade of consolidation in the financial services industry means the buyers are less plentiful today, but hopefully there will still be visionaries out there - perhaps, as noted in The Bond Buyer Wednesday, among the European and domestic banks that have expanded their presence on the commercial banking side of municipals.

The best news for the market and the professionals who work within it is that we're unlikely to see the kind of collapse in new-issue volume that marked the last period of severe retrenchment in the municipal market head count. The public attitude towards infrastructure - and debt - is far more positive than it was then. If it's not as profitable as some of the other things Wall Street does, it can still be counted on for a healthy cash flow, with less risk than some of those other lines.

Certainly, regional firms with a lower overhead cost structure will step forward to fill some of the gap, but other models are possible, too. The mid- and late 1990s were marked by innovators like Artemis Capital and Cambridge Partners. Some of those models proved more durable than others. Just as Warren Buffett has resurrected the business model for a municipal-bond-only credit enhancer, perhaps the time is right for a boutique muni-bond investment bank.

Last week's announcement was particularly personal for me: My first major article for The Bond Buyer as a cub reporter back in 1995 was an 80-inch Q&A with Terry Atkinson, himself a Salomon veteran, who was fresh from integrating the Kidder group.

The lesson Atkinson took from his Salomon experience was to link the public finance operations to his firm's broader mission - in this case, feeding PaineWebber's retail network. He stuck to that vision with remarkable consistency over the following decade, culminating with a perch atop the underwriting league tables in 2004.

The firm will be missed. Hopefully, an acquirer will step up and the firm's people will stay in the game.

Michael Stanton is the publisher of The Bond Buyer. He welcomes your comments at Michael.Stanton@sourcemedia.comor via our blog at blog.bondbuyer.com.


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