IT'S THE LAST OFFICIAL DAY of a New York winter that has dragged on for way too long, and Harry Poulakakos is standing outside the steakhouse he opened 42 years ago, monitoring the noonday crowds that are bundled up and hustling past on a cold, gray day.
Jim Cahill spots the restaurateur from half a block away. "You're in for a treat," he says, as we walk toward the short staircase that leads down to Harry's, a Wall Street institution and a constant for Cahill, who has worked on the fixed-income desks at firms including Salomon Brothers, Lehman Brothers and Keefe, Bruyette & Woods.
He calls out to Poulakakos as we get nearer. "We're coming in for lunch, Harry!" The restaurant is owned by Poulakakos' son now, but its founder still works the door and the dining room regularly. Handshakes are exchanged, introductions are made. ("Oh my god, the American Banker!" Poulakakos exclaims in his warm Greek accent.)
We are waved inside to the coat check and seated at a semicircle booth in the back. Our waiter is friendly and attentive. He quickly takes and brings out our order of salads, burgers and iced tea. That doesn't stop Poulakakos from coming by our table multiple times to check on us. Were we doing ok? Was everything good? Did we need anything more? "Doin' good, Harry," Cahill tells him each time.
As Poulakakos sets off on his rounds once more, Cahill nods appreciatively in his direction. "Harry is hands on. He knows," Cahill says. "If you're going to run a business, you have to be hands on."
Which is why at the age of 76, Cahill is going full throttle at Drexel Hamilton, the small broker-dealer he has led for the past four years.
An avid golfer who has tried retirement twice, Cahill knew from start that calling in from the links wasn't going to cut it not with the breadth of business lines he hopes to build and the intense demands of the firm's other underlying objective: to put military veterans, and especially those wounded in combat, into stable jobs with sound career prospects.
Half of Drexel Hamilton's 96 employees are military veterans, 22 of them wounded.
Most of the other staffers are, like their boss, veterans of Wall Street, and knew Cahill either from his 14 years at Salomon, where he managed sales groups during the firm's bond market heyday; from his work at Lehman, where he covered large institutional clients in the late 1980s and '90s; or from the job that brought him out of retirement the first time around, to help rebuild the fixed-income department at KBW after 9/11. KBW lost 67 employees in the south tower of the World Trade Center; Cahill and his wife, Kathleen, had lost one of their five children, Thomas, a securities trader for Cantor Fitzgerald who died in the north tower.
Cahill stayed at KBW until 2008. When he came out of retirement a second time to join Drexel Hamilton in 2010, he quickly set to work assembling a team of seasoned traders and senior managers. Lured with nothing more than the promise of commissions on the business they bring in, they have joined Cahill not only to underwrite equities, trade bonds or advise clients on interest-rate risks, but to train and mentor the former servicemen and servicewomen who sit at their side in firm's unassuming office space on Water Street, in lower Manhattan. (The veterans, along with a small handful of administrative staffers, are the only employees to draw a salary from the firm, which also has smaller offices in eight other cities around the country.)
Drexel Hamilton's double-barreled mission has served it well enough so far. The industry connections of its trading floor veterans and the appeal of its emphasis on helping military veterans has helped it produce a foothold in the commercial mortgage-backed securities market, for example. The firm is frequently brought in as a co-manager by larger players such as Bank of America or Morgan Stanley. Last year it was involved in nearly $12.8 billion of CMBS issuance, enough to crack the top 10 on Commercial Mortgage Alert's annual list of the top global CMBS lead- and co-managers, up one slot from No. 11 in 2012.
Now the firm is setting its sights on the bank sector, with plans to build a full-service institutional depository group involved in capital raising, deal arranging and advising on balance sheet risks. William Weber, who worked with Cahill at KBW and later ran the financial strategies group at Guggenheim Securities Group, joined Drexel Hamilton in December to head up the group.
The firm's equity research department, which covers the aerospace and defense sector and the telecommunications-media-technology space, also has two bank analysts. The group recently hired David Bishop, formerly with Stifel Nicolaus and MLV, to cover regional and community bank stocks. David Hilder, the senior bank analyst at Bear Stearns from 2001 to 2008, who later worked at Putnam Investments and Susquehanna Financial Group, covers big banks and other large-cap financial services stocks.
All that's missing now is the strong deal flow that many in the bank industry had predicted would be here by now.
BANK MERGERS AND ACQUISITIONS certainly have picked up since 2012, when the industry's three busiest lead advisers based on the number of deals announced arranged just 74 deals in total, according to SNL. By the end of that year, KBW, the No. 2 adviser, agreed to a buyout by Stifel after losing money in five of the six previous quarters.
In 2013, the number of bank deals managed by the three league-table leaders (Sandler O'Neill & Partners, KBW and Commerce Street Capital) increased 40 percent. But with new regulations effectively capping most banks' assets at either the $10 billion or $50 billion level, the sizes of the deals getting done today are, to investment bankers, frustratingly small. Announced values for the 103 deals arranged by last year's top three lead advisers averaged $102 million per deal. In 2006, when the top three advisers arranged 130 deals, the average deal size was nearly $460 million.
Even banks with little risk of crossing the asset thresholds where new regulations would kick in have been consolidating at a slower-than-forecast pace. In the immediate aftermath of the crisis, problem banks were frequently deemed to be more trouble than they were worth. Now the holdup is more likely to stem from a disagreement over pricing, with buyers and sellers far apart in their valuations. And increasingly, some bankers say, as the recession starts fading farther into rearview, even banks that are still not generating their cost of capital are deciding in certain cases that having made it through the worst of the economic downturn, they are prepared to stay independent rather than sell.
The dynamics have created a bottleneck for bank executives like Steven Gardner, the president and CEO of the $1.7 billion-asset Pacific Premier Bancorp in Irvine, Calif., which is aggressively hunting acquisition targets with $200 million to $750 million in assets.
"We're certainly hungry," says Gardner, whose company has raised capital twice since 2009 specifically to fund acquisitions. "We've done five deals in the last three years and M&A is very much a part of our strategic plan."
That's just the sort of appetite that has Drexel Hamilton's Weber believing that demand for M&A advisory services will continue to strengthen. And because spreads are so narrow and competition for quality borrowers is so fierce, Weber argues the accretive value of acquisitions has generally shortened from a five-year horizon to a two-year horizon, which could send buyers back into the market faster to look for more, or bigger, targets. "You're seeing a lot more institutions that have done a deal two years ago already looking at their next deal," Weber says.
But will any of those prospective buyers also be in the market for a new adviser?
Presumably that's the thesis of the seasoned dealmakers behind other boutique investment banks to have arrived on the scene.
In the October news release announcing the formation of Kimberlite Advisors, co-CEO Thomas O'Neill, a co-founder at Sandler O'Neill, says his new firm is "excited about having a platform for delivering high quality advice... to regional banks, community banks, and specialty finance companies that are typically underserved by traditional investment banking firms."
But Gardner, who has relied on the advice of bankers from Sandler O'Neill and D.A. Davidson in recent deals done by Pacific Premier, is skeptical that new players in the industry will find many investment banking opportunities that are up for grabs.
"It's relationship-based first and foremost, and of course you also want to be with a firm that has the size, the depth and the breadth internally to be able to assist you," says Gardner, who was unfamiliar with Drexel Hamilton. "The market is fairly well saturated now with firms that are committed to this business and know this business and have the platform to be able to deliver."
Then he pauses, seeming to reconsider the possibilities for new entrants in the market, even if they aren't with his bank specifically.
"But that's what capitalism is, isn't it?"
GROWING UP ON THE WEST SIDE of Manhattan near Chelsea Park, a hip area now but historically an industrial section of the city, Cahill never much thought about a career on Wall Street. His father was a truck driver; his mother, a homemaker. The oldest of their six children, Cahill mainly was focused on playing fast-pitch softball in cement parks all around the city.
It was a lucrative pastime. In the early 1950s, when his father was making $90 a week, Cahill took home $30 a game to windmill the ball underhand at speeds that he says topped 90 miles per hour.
During a game on Randall's Island, a small dot of land under the Triborough Bridge connecting Manhattan, Queens and the Bronx, he met a young man who played for The New York Trust Co. He wanted Cahill on the team. "They were tired of losing to JPMorgan and Citibank," Cahill explains. What New York Trust needed was a pitcher.
Cahill got the gig, along with a back-office job counting securities; later he moved to the trading desk. "I'm happy to report, we won the league," Cahill says. The bank also covered his tuition at Fordham University, which he attended at night.
Cahill's pedigree, or lack thereof, would have made him an outsider at many other banks. Most of the white shoe firms that dominated the industry then would have written off a young trader who showed up for his first Bond Club of New York gala in a rented, powder blue tuxedo. Cahill blushes over the incident, which he says he almost never speaks of, and begs me not to write it about it. He relents when I point out that his rookie mistake is a culture clash lesson that any newcomer to Wall Street a recent military service member, for instance might learn from, or at least appreciate.
Drexel Hamilton's veteran recruiting efforts are intertwined with the work of the nonprofit Wall Street Warfighters Foundation, which trains disabled veterans for jobs in finance. Both entities were co-founded by Lawrence Doll, a Washington-area real estate developer. (He also is on the board of United Bankshares, an $11.5 billion-asset institution with dual headquarters in Washington and Charleston, W.Va.)
Doll, who was wounded in the Marines during the Vietnam War and says he still has shrapnel in his legs and back, was approached a number of years ago by friends from Philadelphia who wanted to start a disabled veteran-owned broker-dealer. "And they said, 'We want you to be the disabled veteran,'" he says.
Many states and federal agencies have carved out set-asides for disabled veteran-owned businesses. The contracts at stake have spurred startups, but also scams involving businesses that are owned by veterans in name only and primarily operated for the benefit of nonveterans hoping to profit from their firms' special status.
According to the Department of Veterans Affairs, from 2008 to July 2013, the investigations office of the VA's Office of the Inspector General had indicted 31 individuals or companies for alleged frauds involving service-disabled veteran-owned small businesses. In that time there were 27 arrests, 16 convictions and $10 million in fines and court-ordered forfeitures. There were another 109 open investigations as of July 15 of last year, according to the VA Inspector General's website.
"If I had my druthers, I'd change the rules and they'd say you're going to have 'X' amount of service-disabled [employees] to qualify for an entitlement," says Doll, who says he agreed to put up the startup funds for a firm so long as it hired other veterans, particularly those returning from post-9/11 combat.
Drexel Hamilton (the moniker is a nod to one of Philadelphia's most important names in philanthropy and to Alexander Hamilton, the first U.S. Treasury Secretary and a hero of Doll's) was launched in 2007. The build-out went poorly at first. But after Doll met Cahill over lunch in New York, essentially recruiting him on the spot, business picked up considerably.
The firm had five employees when Cahill joined. Early on, Cahill occasionally would appeal to his son Thomas and the two close friends killed with him on 9/11. "I would talk to them and say, 'Come on, you guys, we need some help here.'" Sometimes he wore his son's golf vest, hoping it might bring some luck. It worked often enough, Cahill says, that sometimes Doll would ask him before an important meeting, "You got the vest on?"
But mostly Cahill credits Drexel Hamilton's progress to the senior executives he has brought into the firm, including John Glynn, formerly JPMorgan Chase's head of dollar-denominated credit trading; Steven Ivcic, at one time the head agency trader at Donaldson, Lufkin & Jenrette; Tom Mead, a longtime municipal finance executive and a financial advisor to the New York City Municipal Water Finance Authority for the past 20 years; and Roger Elsas, who worked in syndicates at LF Rothschild & Co. and Lehman and later was part of the senior leadership team at Oppenheimer & Co.
The lineup gave Drexel Hamilton the credibility it needed to get the attention of industry players like Ken Cohen, the head of commercial real estate structured finance at Bank of America Merrill Lynch. Cohen, who worked with Cahill at Lehman, was with UBS when Cahill called a couple of years ago to tell him about Drexel Hamilton. Soon the startup was co-managing CMBS deals with UBS, and other major issuers.
"Jimmy's been around a long time, and the other folks he has there have also been on Wall Street for a long time and have pretty deep relationships," says Cohen. "I think that as much as technology [has] minimized relationships, at the end of the day, in many parts of the business, it's still a person-to-person way of doing things. If you're trading Treasuries, that is more of a technology thing on a screen. If you're trading mortgages or corporates or high yield, there's still very much an element of human relationship there."
Another of the firm's relationships on Wall Street is with Elizabeth Robinson, the treasurer of Goldman Sachs, who Doll says was instrumental in helping Drexel Hamilton find a suitable replacement for the drab, windowless office where the group started out. "I couldn't have these professional Wall Street men and women come in there," Doll says of the original office space, referred to around the firm as "the submarine."
Doll says Drexel Hamilton is profitable, "but every dollar we make, we just hire another veteran." He'd be happy to see the firm double or triple in size, but that's a long-range goal that even he sometimes questions.
"As we grow, the expenses grow, and I haven't taken a dollar out of the firm because that's not why I'm doing it," he says. "We have to make this work where we are right now. And I don't know what's going to happen in this economy."
His main hope, he says, is that the young military veterans at Drexel Hamilton will build prosperous careers whether at his firm or elsewhere and extend similar opportunities to other veterans. "If we stop supporting them, I honestly believe they're going to stop volunteering," Doll says.
Joseph Krulder, who was serving in the Army's 101st Airborne Division when it invaded Iraq in 2003, heard about Drexel Hamilton from someone at a VA office in New York. A father of four, he had left the service in 2004 with physical injuries and post-traumatic stress disorder, and had come home to the East Coast to find employment after losing his job as a plant manager in California.
At Drexel Hamilton, Krulder has been assigned to Weber's institutional depositories group and is studying for the Series 7, 63 and 79 securities licensing exams. He loves the work, he says, but the test-taking sometimes bring out his anxieties.
RECOVERING FROM THE EMOTIONAL EFFECTS of war is not a linear process. There can be significant progress, but also plateaus and setbacks. There can be struggles in relationships at home, difficulty concentrating, instances where what Doll calls "tough love" is needed at the office. That's when Cahill might step in to recommend a head-clearing stroll on the nearby waterfront with its views of the Statue of Liberty; other times, he engages in intensely personal discussions about loss and suffering and moving on.
"I tell Jimmy it's like Boys Town and he's Father Flanagan," Doll says plainly, without a hint of humor or exaggeration.
It's not just the military veterans who rely on Cahill's advice. According to Doll, the firm's Wall Street veterans also routinely look to Cahill for guidance, be it about the markets, the clients or anything else.
"He never wants it to be about him," Doll says, "but when there's a serious question, they all come to Jimmy."
The young veterans on Drexel Hamilton's small trading floor have helped create an environment with a diverse mix of ethnicities, education levels and socioeconomic status. They are Latino, black, white, male, female. Some are the children of immigrants. Some have children themselves. They may have gone to West Point, they may have multiple masters' degrees or they still may be collecting undergraduate credits at a local school like Fordham. Many of them did not grow up in families of means.
The result is an atmosphere in many ways reminiscent of the environment Cahill encountered when he landed at Salomon Brothers in the 1970s. The firm was known for frequently eschewing the preference for Ivy League refinement common among many of its competitors and accepted bootstrappers so long as they performed.
While running sales teams in the bank group there, Cahill absorbed lessons about markets, and about client services, from Salomon's famous economist, Henry Kaufman. Known as Dr. Doom for his Cassandra-like predictions, Kaufman always seemed able to boil down a complicated bank balance sheet to a single sheet of paper, Cahill says.
"I used to have lunch with Henry once a week with a bank president, and Henry would know everything about the bank before we even sat down," he says.
Cahill tells me he still meets with bankers on occasion, usually to discuss their balance sheet positioning. He segues into a short monologue about the effects of the current rate environment, and the propensity for depositors to pull their funding when better returns come available elsewhere.
"So what am I saying to you?" he asks rhetorically. (It's a phrase he uses often to tee up his conclusions.) "Somewhere in here rates will rise, and you have to be sure you don't suffer from disintermediation."
The outlook for rates is just one of the wild cards affecting banks' balance sheet strategies these days. Looking to minimize swings in their capital base, Weber says, many larger institutions have reclassified a portion of their available-for-sale investments with the greatest potential for volatility, putting them in a hold-to-maturity bucket, where they aren't subject to fair-value accounting rules.
"The problem is, on your call report, you still do a fair value of your HTM assets," Weber says. "So the regulators, going back a few months ago, were concerned about the amount of duration risk being placed into an HTM." Mostly that's been an issue for banks identified as systemically risky, Weber says, but he suspects the matter, like other regulatory concerns, will trickle down to smaller institutions eventually.
Weber worked in the Federal Deposit Insurance Corp.'s division of resolutions from 1990 to 1994. Before making the move to Wall Street, he spent two years as vice president of investments at CrossLand Federal Savings Bank in Brooklyn (it had been seized by the FDIC in 1992) and six years as the New York-based treasurer of Banca Antonveneta, an Italian institution bought by ABN Amro in 2006. By then Weber had switched tracks, joining KBW in 2002 and co-heading the firm's financial strategies group, before moving to Guggenheim Securities in 2011.
KBW is where he met Cahill, who had left three years before Weber and was grappling with the boredom he experienced in retirement.
"What I found out is that if you play too much golf, it's not fun," says Cahill, who lives in New Jersey and spent much of his retirement time in Florida. "Florida is full of people who would love to do what they used to do and they don't have the opportunity to do it," he says.
Weber says he's often amused watching Cahill interact with the young military veterans at the office. The firm president sits on the desk with them, jokes with them, quizzes them on what they've learned on the job so far. It's much different, Weber says, than what a former soldier might expect from a boss. Unlike the classic military general, Cahill doesn't orchestrate from a distance and you won't often find him pulling rank. "Everybody who knows Jimmy knows how he works. He's boundless energy," Weber says.
"And the military veterans are tenacious by nature. That works out pretty well, because these guys are having a hard time keeping up with him."