Investment bankers dedicated to the financial institutions sector are making an extra effort to work closely with their debt capital markets teams in order to win a greater share of client business. In many instances reporting lines are getting switched around, ostensibly in the hope of spurring cooperation between the two groups.

Recently this happened at Wachovia Securities, which just retooled its financial institutions group (FIG), sending several fixed-income specialists to the division and giving it an additional reporting line to fixed-income chief Curtis Arledge.

Lehman Brothers made a similar move in December, putting Jeff Weiss who had overseen fixed income capital raising as co-head of global finance, in charge of FIG, according to Dow Jones Newswires. He replaced Dave Sherwood who was made chairman of the group.

Credit Suisse also moved to integrate FIG and fixed-income in 2005 when it hired Vikram Gandhi from Morgan Stanley as head of global FIG, reporting to Eric Granetz and Marc Varvel, the co-heads of corporate and investment banking, as well as fixed income chief Jim Healy.

"Traditionally when you said FIG from a product standpoint that meant equity deals and M&A because those are the highest margin and most profitable, but now all these shops are trying to develop what they call their flow businesses: things like custody, derivatives, valuation services - these don't knock your socks off like an M&A deal will, but they generate big numbers at year end," said one U.S.-based headhunter.

The reason for the shift is the increasing sophistication of structured finance and its increasingly widespread use among financial services clients. Often, CEOs and CFOs have to sign off on these transactions and they need someone who can explain it to them in plain English.

"There are times when the most interesting new business ideas require sponsorship from the CEO and the CFO to get implemented, so you ultimately need to bring in the (debt capital markets) technologist to have that conversation. But shock therapy doesn't work very well, so a trusted relationship banker might be a better choice to hold that initial discussion, rather than a structurer the client may never have met before," said Jorge Calderon global head of FIG investment banking at Deutsche Bank.

Calderon, it should be noted, took over as head of FIG at Deutsche Bank a year and a half ago, after having advanced through the firm's securitization business. As a result, he was well qualified to pitch products to clients that are anything but plain vanilla.

An example of these products, Calderon notes, are sidecars, which are structured notes that allow reinsurance companies to underwrite more business while using third party capital-a surrogate for reinsurance or equity capital. The bank has found success underwriting these products and was the lead in financing XL Re's sidecar, Cyrus Re, in 2005.

"That was a transaction that required investment bankers to approach [XL Re] senior management and say As an alternative to raising equity why don't we look at this capital markets hybrid solution?'" said Erich Mauff, Deutsche Bank's Americas head of debt capital markets. "It's a trade that would never have been done had investment banking and global markets not been integrated. Credit traders are among the few people on Wall Street who understand these products, but they are not looking for what their applicability is to the big, old school institutions. It is the job of people like Jorge and myself to try and bridge the gap."

Mauff said the integration of markets and investment banking was critical to convincing another client, a large US financial services company, of the merits of synthetic risk transfer, which freed up capital by hedging the equity and mezzanine tranches of mortgage securities it held on its balance sheet.

"Application of CDO technology for balance sheet relief and capital optimization is becoming a very high-level discussion that has to happen at the CFO and CEO level. But it starts with global markets people who can educate the investment bankers who can then run the numbers to demonstrate how you can effectively leverage up your balance sheet without adding additional risk."

Calderon believes hedge funds are the next wave of clients that can be won over by a well-coordinated pitch from investment bankers and capital markets professionals. "They're behaving like asset managers looking for permanent capital and issuing equity in some cases to support management companies. That group of clients represents a good nexus between markets and banking and it won't be long before they're looking for strategic advice on consolidation. After all, there are over 8000 hedge funds in the world right now. That's many more than there are banks in the world," he said.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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