James Forese

He started off at Salomon Brothers at a time of momentous change in the bond markets, one of the Class of 1985 immortalised by Michael Lewis in Liar’s Poker. Now James Forese is head of Citigroup Global Equities at a time of momentous change in the equity markets. He has no illusions about what is at stake: with pressure on volumes as well as margins, and against a backdrop of intense regulatory scrutiny of the entire industry, these are Darwinian days. “Quite literally only the strongest will survive,” says Mr Forese. “The strongest will be the most efficient, the most automated; they will gain market share. And, in time, the weak players will be shaken out. As markets consolidate, we expect the leaders in the market place to gain a bigger share of the wallet.” Mr Forese took over the equities job in May 2003, to bring, in the words of Citigroup chief executive Chuck Prince, a “new strategic direction” to the firm’s equity business. Some Wall Street analysts see Citigroup as having somewhat missed the boat in certain key growth areas – such as prime brokerage (servicing hedge funds) and equity derivatives – as the profitability of the bread-and-butter cash equities business has dwindled for banks across the board. According to Mr Forese: “I think our senior management wanted to see our equities business positioned better for the future. The last several years have seen a great secular change in the equities business, and they felt our business wasn’t fully prepared – it’s prepared in many parts but not fully – to address the future.” If Mr Forese has something to contribute, it is not a magic formula (“If I had magic I’d already have waved the wand and fixed all our problems,” he jokes) but management discipline, learned from years of experience running a successful fixed income business. “I’m a big believer that if you can figure out what needs to get done, which usually isn’t all that complicated, and then make sure that you stay disciplined and focused on getting it done, you will substantially improve your market position by just sticking to your guns and executing the plan,” he says. Technology gain Mr Forese is fresh from announcing a major acquisition: Lava Trading, a supplier of direct access electronic trading software and services – a dominant player in the direct-access trading space. With margins down, banks are moving to transact as much trading as possible electronically – and technology remains the buzzword. “Technology is an easy word to throw around,” Mr Forese says. “And of course everybody says ‘We’ve got to have state-of-the-art technology’. But specifically what do we need our technology to do? We really feel there’s two things that we want to use technology for: one is for execution, both for our own benefit and for our customers; and the other is for risk modelling and risk management.” According to Mr Forese, the Lava acquisition, for which analysts speculate Citigroup paid upwards of $500m, “catapults us to a leading position in the electronic-execution arena”. Prime brokerage In prime brokerage, Mr Forese says the key is figuring out where Citigroup’s comparative advantage lies, even as it plays catch-up with the likes of Goldman Sachs and Morgan Stanley, which were quicker to see the potential of that business. “The prime brokerage business has exploded on the back of the growth in hedge funds, and now we’re all trying to develop and grow businesses in that area,” he says. He sees three possibilities where Citigroup could excel: “One is in difficult-to-borrow securities, two is in our systems and three is in the integration of that with their systems, or with the Lava technology. An institution like Citigroup certainly has the ability to distinguish itself in that area, even if we are coming from behind.” The equity derivatives plan In the other high-growth, high-margin business, equity derivatives, Mr Forese seems confident that it is just a question of investment. “Broadly speaking there are three client segments in derivatives: the institutional investor base, the retail investor base and the corporate clients. Obviously, we know the largest institutional investors around the world, so if we put more resources against those clients, we really think we can monetise that. We’ve also got a terrific set of retail distribution networks to lever. “And we have a very good reach into the corporate client base as well, through our investment bank, through our capital markets activities and through our corporate banking footprint. So we can get to all the customers: we know all the players in the derivatives market. And if our business is not as strong as it should be, that’s because it’s just not as well developed as a lot of our competitors. So we intend to invest in derivatives over the next several years as well,” he says. Thoughtful and soft-spoken, Mr Forese hints that there is still some way to go. “We’re one year into a several-year project,” he says. After nearly 20 years on the bond side, he does not seem too fazed by the shift to equities. “At one level, it doesn’t matter; we do the same things [in equities as in bonds],” he says. “But when you get into the detail, the marketplaces are very different. The market structure, liquidity, risks are all different and that does take some time to get used to. But it’s a steep learning curve and you get that pretty quickly, you appreciate the differences.” Mr Forese is not the only one to make the leap. In an environment where investment banks are shifting from mainly executing client trades to putting their own capital at risk to make money, the equities business is starting to look more like a bond business. Former fixed income executives are now in charge of equities at Goldman Sachs and Lehman Brothers, as well as Merrill Lynch. Volatility strategy Citigroup has tended to lag behind more aggressive players like Goldman on the proprietary trading side, partly because risk-taking was discouraged by former chief executive Sandy Weill. But since Chuck Prince took over last year, the bank has made no secret of its plans to take greater risks. Mr Forese says: “We are beginning to grow our statistical arbitrage activities, we’ve developed some fledgling long or equity relative value trading desks, we’re expanding our volatility arbitrage activities. We’ve basically started in a host of areas.” Still, he underlines that it is early days yet. “It’s not something you can just jump into,” he warns. “There are a whole host of proprietary strategies: capital structure arbitrage, statistical arbitrage – there are several statistical arbitrage strategies, such as volatility arbitrage, long/short strategies – the list can continue. And frankly, we’re evaluating all of them. And we’re really looking to see whether or not we, Citigroup, have any distinct advantage over anyone else and, when we feel we do, we will start to develop those trading strategies,” he says. Still, in contrast to some players, Mr Forese is convinced that the traditional research-driven equities model is still a valuable one. Commenting on the separation of Smith Barney into an independent research unit in the wake of last year’s settlement with regulators over tainted research, he says: “At Citigroup, we took the most proactive stance in creating independence in research, and we removed it entirely from the corporate and investment bank. Our research is independent of thought; analysts are not pushed around by anybody. We didn’t have to take steps as drastic as that – others didn’t. But for us the model works and we think that it creates just that much more confidence in the independence and autonomy of research.” Profitable research While some other players have essentially written off research as unprofitable since the global settlement with regulators necessitated its split from investment banking activities, Mr Forese argues that it was worth it. “Research is very important to the institutional equities business – it’s a very valuable resource to us and to our customers. We talk to Smith Barney all the time.” Nor is it unprofitable, he says. “We use research and, as a result, we pay [Smith Barney] for the research that we use. We use research as a lever to drive business, so research for us is a profitable enterprise. We earn a return on the research that we consume and that our customers consume.” Citigroup embodies a different view of the role of research than that of some of the other investment banks. Only time will tell whether one, both or neither models will work. Mr Forese, low key in general, does not make much of his connection with Salomon Brother’s heyday as depicted in Liar’s Poker. “I am not profiled in the book in any way, shape or form. I was just an unnoticeable, in the middle of the class: not the front row, not the back row.” Career history 2002-2003: global head of EM local finance at Citigroup, responsible for the local lending and related activities of the corporate bank in Asia, Latin America and CEEMEA 2001-2002: managing director and head of interest rate and derivative products for global fixed income at Citigroup’ Corporate and Investment Bank, responsible for activities in government and agency bonds, interest rate derivatives and credit derivatives 1995-2001: managing director of Schroder Salomon Smith Barney, based in London, and head of European fixed income and international capital markets 1992-1995: head of the US fixed income syndicate desk at Schroder Salomon Smith Barney 1985: joins Salomon Brothers on the fixed income syndicate desk 1985: graduates from Princeton University summa cum laude with a BSc in Electrical Engineering and Computer Science