Boutique banking

Observations on millionaires

The City is supposed to be cowering in disgrace and shame, rudely awakened to the real world as angry G20 protesters roam the streets and punters attack Fred Goodwin’s houses. Except it isn’t. This year it’s all about setting up your own boutique bank and making a small fortune.

In January, the US-based Aladdin Capital embarked on a hiring spree in London as it switched from fund manager to boutique bank. In February, Michael Tory, previously head of UK investment banking at Morgan Stanley and then Lehman Brothers, founded a boutique operation with the hedge fund manager Benôit d’Angelin. That same month, UBS lost at least three energy bankers to the boutique firm Lexicon Partners; two of its senior investment bankers had already left for Close Brothers.

The term “boutique bank” generally describes an operation with between five and 50 staff that offers a “bespoke service”, usually in corporate finance, research and trading. Due to their size they are, in effect, unregulated, and can pick up almost any piece of business, often nabbing small- and medium-sized clients from bigger banks that have slashed staff and services.

The boutiques can, however, also trade on their own behalf, and this is where the shocker comes. The first bankers to lose their jobs were the debt departments – the people who bundled up prime mortgages, sub-prime mortgages and government loans to trade on the open market. When that market crashed, out they went. But they knew something the headline writers didn’t.

Because these debts were all bundled up together, some extremely bad debts – sub-primes, for instance – were tied up with some extremely good debts – say, a factory in Brazil borrowing to expand. These bundles of debt were all rated AAA by agencies such as Standard & Poor’s. When the sub-prime market crashed, these bundles slipped a couple of rungs down the ratings to AA-.

But because many pension funds and investment vehicles are only allowed (by their own rules) to own AAA grade investments, they started unloading these debts as fast as they could. In a market flooded by panic sellers, their price became, in effect, zero.

Yet within those bundles were healthy loans and mortgages that will keep on paying out over five, even 25, years. Boutique banks have no shareholders. They can play a long game, and they are starting to buy up these debts for a fraction of their initial value.

“The next round of millionaires is already on its way,” says Bill Park, a trader at a large multinational bank. “They’re the ex-securitisation guys who took their pay-off bonuses and set up boutique banks. They’re going to make an absolute killing.”

Exactly the same thing happened in the 1980s and 1990s. The boutiques started trading in the slump, made the partners wealthy beyond the dreams of avarice, and then sold themselves to major international banks for a small fortune. It’s enough to outrage any Stop the City protester. Except that these guys are smart. They’re nowhere near the City – they are just out there, somewhere, making cash from all the chaos.

This article first appeared in the 20 April 2009 issue of the New Statesman, Who polices our police?