On a steamy summer weekend last year, Bank of Boston Corp. and CoreStates Financial Corp. watched their blockbuster merger plan unravel under scalding criticism.
In the past, the bank companies would have only had to convince themselves and their regulators of the deal's merits. But this time, there was a new power broker - the investor - who simply couldn't be persuaded to accept the plan.
The episode would have been unimaginable 20 years earlier, said Harry Keefe, chairman of Keefe Managers Inc. and one of the merger's most vocal critics. At that time, many banks were "controlled by trust companies, insurance companies, none of whom voted against management," he said. But today, "those guys don't show up" on a list of top bank shareholders.
A new breed of bank institutional investor has emerged in recent years, pressing executives to improve returns, bolster efficiency, and manage capital better. Some make their influence felt by working quietly behind the scenes. Others are firebrands, practicing an in-your-face style of activism.
In all, institutional owners controlled 48.5% of shares of publicly traded banks at March 31, up from 44% at yearend 1990, according to SNL Securities. But their impact is much greater than those numbers would suggest.
Through interviews with shareholders, bankers, and those who advise banks, American Banker identified five investors who are seen as having profoundly influenced the industry's course in recent years.
In addition to Mr. Keefe, other members of this exclusive group are: Michael Price, president of Heine Securities; Nicholas Adams, manager at Wellington Management; Remy Trafelet and David Ellison at Fidelity Management; and Orin Kramer of Kramer Spellman.
"Banks worry far more about these large shareholders today than they did three or four years ago," said H. Rodgin Cohen, a partner in the New York law firm of Sullivan and Cromwell who has had a seat at the table in nearly every big bank merger of recent years.
To be sure, some investors not included on this list carry considerable weight in banking circles. John Hancock Investors, for instance, has one of the oldest and most successful bank funds, under the guidance of James Schmidt. But because the fund is owned by an insurance company, it is inhibited from initiating shareholder actions.
Warren Buffett's high-profile investments in PNC Bank Corp. and Wells Fargo & Co. have attracted considerable attention in the market. But as a passive investor, Mr. Buffett tends not to try to influence management about corporate strategy.
While shareholders are wielding more power throughout corporate America, the trend is especially pronounced in banking.
One reason: Until the late 1980s, most banks were steady, plodding performers that peacefully coexisted with passive investors. But as banks like Fifth Third Bancorp and State Street Boston Corp. broke from the pack to produce strong returns and stellar valuations, investors in the companies left behind began demanding similar results.
Those investors, in tandem with changing regulations and market practices, have made their presence felt.
Banks that once offered shareholders scant information on how business lines were performing now give detailed breakouts. Banks that once seemed lackadaisical in managing their capital have become so concerned about shareholder returns that they are buying back stock. And mergers that once seemed to be entered into perfunctorily now have to be justified by quick additions to earnings.
"Five years ago the industry was a little bit more reactive with investors," said Eugene Putnam, director of investor relations at Crestar Financial Corp. "Now we are much more proactive in terms of thinking what is important to shareholders."
And John Thornton, chief financial officer of Norwest Corp., said: "We would all get complacent if we could write our own report card, so it is good that we have shareholders who are challenging financial managements to maximize value."
In the rapidly changing banking industry, where investors hold more power then ever, complacency is a mortal sin - particularly for hedge fund investors, where performance demands from their own investors are high.
Financial services hedge funds, which before 1990 did not exist, appear to be at the forefront in changing banks.
"With investors today, it is very difficult for a bank to do a dilutive acquisition and to expand into a market that is not consistent with their past approach," said Thomas Marisco, who manages Janus Capital Corp.'s Growth and Income Fund.
"I liken investors' effects on bank managements to the discipline that the bond market vigilantes have put on the budget deficit," he said. He was referring to bond traders' pressure on politicians to shrink the federal deficit.
This was the case for Chase Manhattan Corp., which for years resisted entreaties to improve performance.
The bank, which was once controlled by the powerful Rockefeller family, initially shrugged off Mr. Price's purchase of a stake in April 1995, not to mention the Heine Securities president's pleas to improve performance. But under Mr. Price's relentless assaults, Chase fled into the arms of Chemical Banking Corp.
"Chase viewed performance as a very long-term contest and felt they could take years to evaluate and try different things," said Raymond Garea, a Heine manager who advises Mr. Price on banks.
In the end, he said wryly, "they realized they did not have the luxury of that kind of time."
Today, the mere suggestion that Mr. Price may have a stake in a bank can cause management to tremble and spark a stock price rise as other investors pour in.
"Clearly Michael Price and Heine Securities have changed the industry and have shown that a dissatisfied institutional shareholder can make a difference in determining the future of a bank," said Mr. Cohen of Sullivan and Cromwell.
Following in Mr. Price's footsteps are the likes of the $131 million Kramer Spellman hedge fund in Fort Lee, N.J. While its small size would seem to inhibit the fund's influence, not every fund has a cigar-chomping, former Carter White House aide and major Democratic Party contributor helping run the show.
Orin Kramer, a principal in the firm, reflects the emergence of the financial services hedge fund: aggressive, daring, and uninhibited by the genteel customs of bankers.
Other hedge funds like Tiger Management and Odyssey Partners, and smaller ones like Genesis Partners and MidAtlantic Partners have also shaken up the banking industry.
"Specialty financial service hedge funds did not exist seven years ago," Mr. Kramer said; "today they are significant players in financial services."
Mr. Kramer's firm was said to be active with a group of investors this year in pressing for improvement at GreenPoint Financial Corp., the nation's ninth-largest thrift.
One of Mr. Kramer's partners in that campaign, according to market sources, was Wellington Management. There, Nick Adams runs a closed-end thrift and bank fund and a $100 million hedge fund, Bay Pond Partners.
"Nick is terrific stock picker," said a peer of Mr. Adams at a rival hedge fund. "He manages to get into the names that are pretty cheap and where change is taking place for the better."
Another top bank investor is Fidelity Investments, which controls billions of dollars in financial services stock.
In terms of performance, it has some of the top managers in Remy Trafelet and David Ellison. Mr. Trafelet is Fidelity's youngest fund manager, and in the first six months of 1996, his fund outperformed nearly all other bank funds.