When BankAmerica Corp. brought $250 million in five-year notes to market recently, the bank turned to its own securities affiliate, BA Securities, to lead the deal.
A few days later, the bank returned to market with a 10-year deal of the same size. This time, it awarded the lead position to Goldman, Sachs & Co.
As large banks build their securities underwriting businesses, their treasurers are grappling with a thorny problem: Should they give their own capital markets businesses a vote of confidence by directing bond deals to them, or should they stick with the Wall Street firms that have long tended to their funding needs?
Like BankAmerica, other top banks are finding that there are no easy answers.
By feeding underwriting business to affiliates, banks can help build the track records and the heft needed to compete for business from other corporations.
But in doing so, banks risk rupturing long-standing relationships with investment bankers, who typically provide their best customers with such intangible services as speedy attention and informal consultations.
As a result, big banks are finding themselves in a balancing act. Citicorp, for instance, turns to its underwriting affiliate for about a third of its own funding deals.
"We cannot exclusively use Citicorp Securities for all of our deals because of the long-term relationships we have with all the Wall Street firms," a Citicorp official said. "It doesn't seem right to exclude a Morgan Stanley or a Merrill Lynch from participating in our deals after the service that they have provided for us over the years."
, said the bank likes doing business with its securities affiliate, but doesn't grant it special treatment.
"We have a preference to do a transaction with BA Securities," Mr. Peters said. "However, we look to get the best transaction done for the shareholder, and they need to be in a competitive position along with the other firms."
Because they accounted for approximately 9% of all corporate debt issuance in the first quarter, according to Securities Data Co., banks can be a significant building block in developing an underwriting shop.
Indeed, NationsBank Corp.'s capital markets team has used its substantial debt needs to break into the top 10 underwriters of corporate debt. In the first quarter, the Charlotte, N.C., banking company led $4.50 billion in deals, approximately 40% of which came from underwriting the parent company's debt.
NationsBank's treasurer John E. Mack is a firm believer in helping build the bank's capital market operation.
"The first question treasurers at other companies ask me is "Who do you use as an underwriter for your debt deals,'" Mr. Mack said. "How can I ask them to do business with my company if I'm not using my own people?"
Mr. Mack said he considers helping the firm build that business a part of his job. "I'm willing to help them develop their expertise," Mr. Mack said. "I continue to view that as a role that the parent company ought to have, and I'm glad to do it."
Indeed, Mr. Mack continued his preference for NationsBanc Capital Markets, tapping it to lead the underwriting for a recent $500 million, seven-year senior note issue.
Others, however, said there were considerable risks to such an approach.
Handing the underwriting assignment to in-house units could compromise long-standing relationships with investment banks that are accustomed to leading deals. And it can leave the bank little recourse if a deal doesn't go well in the market, compromising the reputation of the bank as both an issuer and a lead underwriter.
NationsBank's Mr. Mack said there are other ways to provide investment banks with business, and that he hasn't noticed a diminished interest in the bank.
He said plenty of firms have realized that they might not get the lead, but they will get to participate in the deal, allowing them to make a reasonable amount of money.
Additionally, Mr. Mack said the firms recognize that NationsBank's capital markets group can't meet all of the holding company's needs, such as issuing common equity.
"In many cases, we have an inside track into getting business from our customers," Mr. Mack said. "Wall Street firms who are willing to partner with us will benefit as we bring these customers to market."
Mr. Peters of BankAmerica said because the holding company does not use its own capital markets group for all its deals, it sends the market a signal when it does.
"When our group does a transaction for us, the market better appreciate that they were very competitive, very aggressive, and did a great transaction. They weren't handed the business," Mr. Peters said.
Some observers said the decision on whether to use the in-house capital markets team boils down to a combination of internal pressure and the strategic direction of the capital markets business.
"Our investment bank is there to provide a service to corporate issuers," said the Citicorp official. "It's not a stated goal to move up the league tables."
The official said that if Citicorp chairman John Reed established league-table prominence as a goal, "we would be giving them all the business."
Mr. Mack said NationsBank, on the other hand, has decided this is a strategically important business. "It protects our customer franchise. We want those customers to think of us first when they are doing something," he said. "If you're providing a service capability, it might translate into a different approach."
Executives at other companies said they expect banks to use their own subsidiaries. "If they don't use their subsidiaries, why should we?" said David Sokol, the chief executive officer of California Energy. "On the other hand," he said, "the fact that they do use them is not necessarily a positive."
