Know Your Customer
Posted by Larry Doyle on January 31, 2009 2:58 PM |
This piece is strictly a walk down memory lane and reflects on Wall Street interaction with overseas clients. A little something light for a weekend break. Enjoy!!
As a trader, salesman, and then sales manager, the most critically important factor in growing a business, and ultimately a franchise, was the development of deep, meaningful, and longstanding relationships. While I would try to be very customer friendly in all my roles, ultimately human nature dictates you will not get along with everybody. Simple business logic, along with strict rules of compliance, highlight the necessity to “know your customer.”
While the bulk of our mortgage business in the early to mid 1980s was located here in the United States, in the late 1980s Japanese investors became very active in our sector. This development presented some real challenges including:
1. time differential
2. type and level of engagement
3. impact of cultural differences
Allow me to expound. Given the twelve-hour time difference between New York and Tokyo, as traders we would have our Japanese sales representatives call us at home from 10PM to 4AM. If my memory serves me correctly, most of the calls came after midnight. I am a very sound sleeper, so it was indeed a challenge to orient myself and then ask our rep what the government market was doing so I could price my bid or offering on mortgage securities accordingly. More often than not, the transaction would not occur on the first call but took a few calls over the course of a half hour or so. If we executed the trade, then I would need to hedge myself by executing an offsetting trade in the government market, try to get back to sleep, and unwind the trade in the morning when I got to the office. After a month or so of this pattern, my wife wondered how long this was going to continue. From a business standpoint, I wanted to get woken every night. From the standpoint of marital bliss, hopefully not so much. As fate would have it, the business went in spurts.
As business with our Japanese clientele increased, it became very obvious that when one client entered into a transaction, a herd mentality developed and many clients would look to do the same trade. Certain bonds would get very expensive or very cheap as a result.
In the early to mid 1990s, the market got very volatile. As rates moved in large directions, both up and down, a lot of trading occurred and the business with the Japanese clients got very interesting. In executing trades, the Japanese would request and then mandate that the trade levels be adjusted to off market prices. I distinctly recall questioning management if we could do that. What about our accounting rules and the tax impact? We were then directed to execute the trade with a London counterparty at market and that entity would in turn execute with the Japanese client off market. I inquired what motivated the Japanese clients to do that? I was informed that they did not want to take a loss. Wow!! What a way to run a business.
Two other experiences with Japanese clients stand out in my mind that I would like to share with you. In one situation with a newer client, they did not perform in delivering securities that we purchased. I informed the representative of the need to perform so we could in turn deliver them to another entity. Speed was of the essence so we could minimize the expense involved with the “fail to deliver.” Despite my beseeching, a few days went by and the incurred loss increased to more than a small amount of money. At that point, our senior representative in Tokyo called me at home and informed me that I needed to get on a conference call with the client and apologize for this issue. I responded that he must be kidding and reviewed the series of events. He informed me that the major issue was not the client’s “fail to deliver” but my degree of “honor” in doing business with them and that I needed to apologize to them. I scratched my head and asked him to explain that to me again. I informed him of the specifics once again, after which he then educated me on the finer points of Asian culture and being honorable. I did not ask him, but I was thinking what kind of honor was involved in doing “off market” trades.
The second situation is both memorable and humorous. On one Thursday evening (actually Friday morning), I received a call from our Japanese representative asking me for a quote on a particular swap. After giving him the level, I went back to bed. He called back, not too surprisingly, a half hour later. This went on for another couple of hours. Somewhat bleary eyed at that point, I inquired why he was actually calling me instead of the trader who had the primary responsibility for that sector. The representative said, “John’s wife told me to call you because John’s loaded.” I chuckled at that. When I discovered the size of the trade, I realized this would be the single largest transaction that I would price in the course of my career and here I was doing it at 3:30AM from my kitchen table. When the trade was done, my adrenaline rushed like never before. I showered, shaved, and was on a train to the city within 30 minutes. I was at my desk at 5:15AM, knowing we were going to have a very good day. “John” rolled in at 8:30AM. Prior to informing him of the trade, I asked what he thought of the price level between those securities. He asked, “why?” I informed him of the multi-billion dollar trade. He sobered up pretty quickly. In the spirit of friendship, I shared a piece of the trade with him but he realized that for him those Thursday night drinks were VERY expensive.
In summary, the lessons I learned throughout my engagement with Japanese clients were the differences in culture and the need to adapt accordingly. Obviously, for anybody involved in trade of any kind, whether international or domestic, the necessity to “know your customer” is of paramount importance.