Anyone questioning Wall Street's commitment to commercial lending ought to speak with Robert E. Denham, chairman and chief executive officer of Salomon Inc.
Expanding in bank and bridge lending is one of the most important initiatives at Salomon Brothers today, he said. The idea is to be able to provide not just investment banking services but a full range of financing for corporate clients.
"We want to originate loans and have the capability to trade them," he said in an interview.
To that end, Salomon, like many of its Wall Street competitors, has lured several high-profile commercial bankers to its shop to launch a loan syndications business. It has also set out to raise a bridge loan fund, which market sources expect will total $800 million.
"We're not finding any real barriers to entry in the business," Mr. Denham said.
An attorney, Mr. Denham, 51, has been at the helm of Salomon Brothers' parent company since 1992. Handpicked for the job by investor Warren E. Buffett, Mr. Denham joined Salomon in 1991 as general counsel after a 20- year career at the Los Angeles law firm of Munger, Tolles & Olsen.
In a meeting with American Banker in his lower Manhattan offices, Mr. Denham talked about Salomon's lending effort in particular, and the convergence of commercial and investment banking in general.
"We don't see many commercial banks that are strong, across the board, in all areas of investment banking," he said. "But then, there aren't many investment banks that are strong across the board.
"We operate on the assumption that at least some of the commercial banks will become strong competitors. We assume some U.S. and non-U.S. commercial banks will succeed in investment banking."
What business have you identified in the United States as the most important for Salomon?
DENHAM: The biggest initiative perhaps has been developing our capability in bank and bridge lending so that we can provide a spectrum of financing choices. We want to originate loans and have the capability to trade them.
Is that an offensive or a defensive strategy?
DENHAM: It's offensive. It helps us extend our debt franchise and extend our activities in advisory work.
Salomon is one of the last of the investment banks to develop a lending capability. Is there a reason for that?
DENHAM: There's certainly no evidence that we waited too long. We're not finding any real barriers to entry in the business. I don't think our timing is a problem. We developed these businesses when we found the right people.
With financial modernization looming, there is some speculation that commercial and investment banks might combine. Do you have any interest in such a union?
DENHAM: I don't see any reason that Salomon has to combine with a commercial bank. We're not looking.
Do you expect mergers of commercial and investment banks?
DENHAM: Some commercial banks, instead of simply trying to build investment banking organically, may decide to move quicker and more aggressively and make acquisitions of investment banks in the states or elsewhere. Combinations between large commercial and investment banks would not be surprising.
Would combinations of commercial and investment banks work?
DENHAM: Sure. There are some that could work. It would depend a lot on the approach that the commercial bank has to the business. Investment banking is different from commercial banking and from most of the things that people that manage commercial banks have grown up doing. Any combination of a commercial bank with an investment bank would involve substantial challenges. But with the right approach and where the combination makes economic sense, you could certainly have successes.
What defines the right approach?
DENHAM: The commercial bank would need to control risks carefully without interfering with creativity at investment banks. The details of management would be very important-the way they manage trading and the corporate finance activities, and the compensation process.
Are any commercial banks successfully doing that?
DENHAM: We don't see many commercial banks that are strong, across the board, in all areas of investment banking. But then, there aren't many investment banks that are strong across the board.
We operate on the assumption that at least some of the commercial banks will become strong competitors. We assume some U.S. and non-U.S. commercial banks will succeed in investment banking.
What formula works for commercial banks that are trying to develop an investment banking business?
DENHAM: First, they have to build on areas which relate to their core franchise. Chase Manhattan has done that by building acquisition expertise around its strength in providing debt financing to financial buyers. The bank is grounded in that business, which is at the center of its banking franchise.
As you move out from there, the question becomes one of matching people with resources and opportunities, and that is tougher. I don't mean to denigrate the banks, but some areas of investment banking will prove tougher than others.
Many commercial banks are on an investment banker hiring spree. How do you keep key people in place at Salomon?
DENHAM: This year, we've been an island of relative stability in a sea of change. You keep your people by providing compensation systems and results that are perceived as fair. People also want to work for a firm that they think is succeeding and in an environment where they are being challenged to do better than the day before.
Does Salomon Brothers want to do a deal similar to Morgan Stanley's plan to merge with Dean Witter?
DENHAM: I don't think there's any such imperative for Salomon. Morgan Stanley has built a large investment management business, so retail distribution is of some importance to them. Investment management at Salomon is a good business and one that we're building, but not as rapidly or aggressively as Morgan Stanley.
Is Salomon's distribution alliance with Fidelity Investments a step toward a complete merger?
DENHAM: I wouldn't expect anything like that. I expect it to grow and become a very successful way of distributing equity securities. It doesn't mean it will lead to any broader combination.
Market conditions have largely favored the investment banking business in recent months. Do you think the markets are beginning to turn?
DENHAM: 1997 is not likely to be as favorable as 1996. That doesn't mean that you pull back. It does mean that you take a reasonably cautious approach. We've been doing that. We have not grown head count much, but we have had a significant shift in the ratios of employees in support and production. Five or six years ago, there were more people involved in support. Now, it's the other way around.
What is your biggest challenge?
DENHAM: To create on a global scale the kind of strong integrated capability in trading, capital raising, and advisory that we have in the U.S. In the U.S. all those businesses naturally reinforce each other.