Choose a different title name

[ThatHawaiiGuy]

Bond Trader at Merrill Taps the Firm's Bank to Spin Gold
By LANDON THOMAS Jr.


espite the recent management turmoil at Merrill Lynch, its profit from bond trading has been the envy of rival firms. Propelling the performance has been a group led by Barry Wittlin, a star derivatives trader who has quickly garnered attention as one of the top traders on Wall Street.

But Merrill's bond-trading successes can be attributed to more than Mr. Wittlin's technical mastery and steely nerves. Recently, Merrill's traders have also benefited from a new pool of capital from an unusual source: the firm's internal bank.

The bank was established in the late 1980's as a means for collecting deposits from Merrill's clients. In June 2002, Merrill announced the formation of a unit within the investment banking and global markets division that gave its star traders increased access to the bank's $68 billion in deposits. The unit reports to John C. Qua, who heads the bank, and Dow Kim, Mr. Wittlin's boss, who was promoted this week from his position as head of the firm's debt division to co-head of Merrill's institutional banking business.

The success of Mr. Wittlin and the creation of the unit underscore the extent to which Merrill Lynch has begun to rely more than ever on bond trading to drive its financial performance.

Such a high-risk, high-return strategy is common to many Wall Street firms, especially Goldman Sachs, which makes no bones of the fact that when the market trends are in its favor, it will support the big bond bets that its top traders make with fresh money. Merrill, however, has tended to be more hidebound in this respect. Unlike Goldman, its top management has historically come from the ranks of its brokerage and investment-banking businesses.

There has, in fact, never been much of a cult surrounding the trader at Merrill. Part of it comes from the elephantlike memory of top Merrill executives: in 1987, a bond trader lost $287 million on a series of trades. Then, in 1998, Merrill bond traders lost a bundle when the bond markets collapsed in the wake of problems at Long-Term Capital Management.

"In the fall of 1998, Merrill Lynch shrunk its bond business more than its competitors," said Richard Strauss, a stock securities analysts at Deutsche Bank. "Since then, the firm has made an impressive comeback in recent quarters by rebuilding its bond-trading business."

In the second quarter of this year, principal transactions, which are made up mostly of derivatives and debt trading, increased 51 percent, to $1.1 billion. Mr. Wittlin's prowess and the fresh source of capital coming from the bank have been the main contributors to this profit boom, Merrill bankers said.

Merrill executives say its approach to bond trading changed once Arshad R. Zakaria took control of the institutional-securities business. One of his first moves was to appoint Mr. Kim — who was a standout trader for the firm in Japan in the mid-1990's — to run the firm's debt division in November 2001.

Mr. Kim and Mr. Wittlin were also close associates, having worked together as derivatives traders at Manufacturers Hanover in the early 1990's. Mr. Kim was quick to give Mr. Wittlin some increased leeway, naming him co-head of the firm's global interest rates product group, which has now become a trading engine room for the firm. In February, Mr. Wittlin's responsibilities were expanded when he assumed sole authority for the group.

In recent months, Mr. Wittlin's trading successes have raised eyebrows across Wall Street, as has his salary. According to one banker who has worked with Mr. Wittlin, he was paid close to $10 million last year, making him one of the most highly paid executives at the firm. Merrill declined to comment on his salary.

"Barry is an extraordinary trader," said a former Merrill executive who has worked closely with him. "He makes bets and then cuts his position when they go wrong. He never lost money in any single month while I worked with him."

Mr. Wittlin declined to comment on his trading responsibilities.

An unassuming man with a professorial mien, Mr. Wittlin, who is 45, defies the classic picture of the Wall Street bond trader: described as a steely technician by his peers, he traffics in a wide range of complicated financial instruments, ranging from interest-rate swaps to Bermuda options. He graduated from Cornell and has an M.B.A. from the Wharton School at the University of Pennsylvania.

Many bond traders who take a multimillion-dollar position on a given day are notorious for releasing their stress by breaking phones or hurling objects, but Mr. Wittlin's demeanor is more reserved. Traders who have worked with him say he rarely shouts.

Traders say Mr. Wittlin made his reputation in the months after the Sept. 11 attacks when he made some big bets that interest rates would decline and booked considerable profits for the firm when they did.

While his trading exploits have been crucial to Merrill, just as important has been the decision to allow traders within the bank's institutional-banking unit to make more aggressive use of the bank.

In 1999, the bank became insured by the Federal Deposit Insurance Corporation, and by 2002 its deposits had grown to $68 billion. Traditionally, the bank's assets had been managed conservatively and the profits had gone to the private-client division.

However, in 2001, once Mr. Zakaria had been appointed to run the investment banking and global markets division, he lobbied to have the bank's assets be managed by traders within his division. Merrill bankers say that since 2002, the bank's portfolio of assets has been traded more aggressively, resulting in more profits for the unit. Merrill executives say that 50 percent of the bank's profits go to the institutional-securities business; the other half goes to the private-client division.

These bankers say that it was part of an attempt by Mr. Zakaria to increase the profitability of his division and thus enhance the prospect that he would be appointed president and the eventual successor to E. Stanley O'Neal, Merrill's chief executive. That part of his plan failed. He was forced out on Wednesday.


http://www.nytimes.com/2003/08/08/business/08WALL.html?ex=1061346638&ei=1&en=1b60c8c29e6b502...