Senior management for the new Chase Manhattan sees tremendous cross- selling potential in the giant derivatives group being pieced together by Don M. Wilson 3d and Jeffery R. Larsen.
By linking the derivatives operations of Chemical Banking Corp. and Chase Manhattan Corp., management is hoping that Mr. Wilson, who will head the generic derivatives business, and Mr. Larsen, as head of structured and specialty products, will create a springboard for the bank's efforts in securities underwriting.
Securities underwriting and derivatives are "inextricably linked," said Mr. Larsen. "That's what is pushing the development of structured derivatives."
Mr. Wilson said the bank is hoping to use its skills in the structuring and trading of derivatives as a stepping stone into the underwriting business.
Competitors say that for this strategy to be successful, Mr. Larsen and his staff in structured and specialty products must expand the bank's relationships with its corporate customers. And some are skeptical.
"Good luck," one Wall Street competitor said. Over the years, investment banking companies have gained the confidence of these same corporate clients in setting corporate and financial strategy. It will be difficult, therefore, for a newcomer like the new Chase to even get an audience.
But others say the strategy is necessary, both because of the bank's strength in derivatives as well as the declining barriers between this business and securities underwriting.
Robert Glauber, a Harvard University lecturer on business and government who was under secretary for finance in President Bush's Treasury Department, said the strategy is reasonable, so long as the bank is willing to invest in the systems necessary to ensure the business is run safely.
Key to the success of this strategy is the ability of the bank to get its derivatives house in order.
Initially following completion of the merger, the bank will have separate trading floors in midtown and downtown Manhattan. The two operations will be combined at Chemical's headquarters in Midtown in the first quarter of next year.
The bank is trying to make its operations appear seamless both to its customers worldwide, and to its derivatives professionals in London, Tokyo, New York, and elsewhere.
"We organize for our own convenience, so that we can have the most efficient use of our capital," said Mr. Wilson. "You've got to be very careful so that the lines of demarcation between businesses don't keep people from working together. I worry less about being too big than about being well run."
The combined operation promises to dwarf any of its commercial banking rivals in the derivatives business. The combined book of business could come close to $5 trillion in notional amount of outstanding contracts. J.P. Morgan & Co., whose contracts totaled approximately $3 trillion in notional value as of Sept. 30, would rank a distant second.
"The challenge is to put the two halves together to make an even bigger whole," said Mr. Wilson.
To fulfill their mandate, the two Chemical veterans and Chase's Fred Chapey, who will act as Mr. Larsen's deputy, are attempting to retain the best of both banks' derivatives businesses.
"Conjunctive is the key word here," said Mr. Wilson. "We want to be good at providing big-time liquidity and at the same time we want to be able to service our customers with structured and negotiated products."
One factor that should help them in this goal is the increased efficiency many people expect from the merger. Mr. Glauber said the model for such gains was set when Chemical merged with Manufacturers Hanover Corp. at yearend 1991.
"My bet is that at some level you will see the same kind of economies of scale here," he said.
Melding of the banks' two separate derivatives strategies is seen by some as an especially tricky part of Mr. Larsen and Mr. Wilson's task.
Chemical has developed expertise in execution and liquidity in low- margin generic products, largely in the professional interbank market. Chase's focus on customer service, on the other hand, has produced a specialty in higher-margin structured products.
But Mr. Wilson said the differences should actually benefit the combined bank. For one thing, he said, there was very little overlap in customers and products. As a result, the merger will provide "more breadth in clients, more economies of scale, and more diversity in products."
The enthusiasm over the benefits of the merger is tempered, however, by the uncertainty many professionals at both Chase and Chemical are feeling currently. Final decisions have yet to be made as to which products and employees will be retained.
"It's incredibly complicated," said Mr. Larsen. "But there's no question it can be done and if you really do it in a fair way, you can get the best of both companies."
Both Mr. Wilson and Mr. Larsen say the combination of derivatives units is further along than at a similar stage of the Chemical-Manufacturers merger. And despite the troublesome aspects of having to deal with new systems, business forms, and management styles, they think the derivatives business will thrive.
"We all know this business can be very humbling," said Mr. Wilson. "But I think our customers take comfort in knowing that they are working with a team. And if we do things right, we have a strong possibility for a durable business here."
