NYTimes.com Article: Making Sure the Rich Stay Rich, Even in Crisis

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Making Sure the Rich Stay Rich, Even in Crisis

October 7, 2001 

By GERALDINE FABRIKANT


 

Maria Elena Lagomasino was giving a speech to private
bankers in Geneva last month when she was interrupted with
the news that hijacked jetliners had plowed into the World
Trade Center. As soon as she learned of the terrorist
attack, Ms. Lagomasino, chairwoman of the J. P. Morgan
Private Bank, raced to Morgan's office to check on
colleagues in New York, then started calling her wealthy
clients there and in Hong Kong, Buenos Aires and elsewhere
around the world. The clients - individuals and families
worth $100 million, on average - rely on Morgan to help
them manage and protect their fortunes. 

"We felt it was important to force the issue and to think
about what would happen," Ms. Lagomasino, a petite and
elegantly tailored woman, said in an interview last week.
"We wanted them to think about how this would affect the
economy and the market. 

"Since our clients were rich, our No. 1 concern was their
staying rich," she said. "We wanted to make sure we put in
place whatever defensive actions they need to do that." 

Ms. Lagomasino knows her territory. Her charges are people
and families with net worths of at least $25 million, and
they include more than one-third of the people on Forbes
magazine's list of the 400 wealthiest in the world. The
private bank, a part of J. P. Morgan Chase that oversees
$300 billion in assets, is the largest such institution in
the United States and second in the world only to UBS
Warburg Private Banking. 

J. P. Morgan is a mainstay of the rapidly growing industry
of advising the superwealthy - a group whose purchasing
power has been known to inflate overall consumer spending,
a significant part of the economy - and Ms. Lagomasino is
perhaps the most visible of the world's growing ranks of
private bankers. 

"What you want from a banker is pure, unadulterated, honest
opinions," and she is "an honest broker," said Gary
Winnick, the embattled chairman of Global Crossing, who is
both a client and a friend of Ms. Lagomasino. Earlier this
year, he asked her to join the board of Global Crossing. 

Private banking was once denigrated as "walking the dog,"
or "taking care of people with inherited wealth who don't
have the capability to do anything themselves," as one
banking executive put it recently. 

But during the 1990's, as the world's wealth soared, J. P.
Morgan and other top banks pushed to attract the growing
number of multimillionaires as clients, especially those
who own their own businesses, have sold businesses or run
big public companies. 

There are 60,000 families worldwide with net worths of $30
million or more, according to a report released in May by
Cap Gemini Ernst & Young, a consulting firm. At the time,
the number of superrich people was growing 5.8 percent
annually, although recent market declines may have slowed
or even reversed that rate. 

Even if the number of very wealthy families does not grow
as rapidly as it did in the 1990's, private banking will
remain attractive because banks can earn returns of 20 to
25 percent on their investments in the business, according
to a person close to the J. P. Morgan Private Bank. 

Both Chase Manhattan (news/quote) and J. P. Morgan were
active in private banking before their merger last year,
and the combined operation became even more of a
powerhouse. In August, Ms. Lagomasino inherited sole
control of the private bank after her co-head, James E.
Staley, who had run J. P. Morgan's private banking
operation before the merger, was made head of the combined
bank's private banking and investment management
operations. Ms. Lagomasino reports to him. 

She says roughly 70 percent of the Morgan bank's clients
made their own fortunes, rather than inheriting them. In
some cases, that has presented special problems because the
World Trade Center tragedy increased the risk of extending
and deepening stock-market declines. A number of Morgan's
customers had taken loans against their stock holdings, and
a precipitous market decline could set off margin calls. 

"You have business people who have borrowed from their
personal wealth to fund business investments," she said,
her soft voice suffused with a slight accent reflecting her
childhood in Cuba. "When the market looks good, they say:
`I will take stock and borrow against it for business.' "
For some of these clients, she added, there could be "a
problem with liabilities." 

After 25 years in the private banking business, Ms.
Lagomasino can talk at length about such transactions. 

Ms. Lagomasino was born in Havana in 1949 and emigrated to
the United States with her family when she was 11, to
escape the revolution led by Fidel Castro. Her family left
behind her parents' properties and her grandparents' cigar
and cigarette business. "We went first to Connecticut, and
we were the only Cubans," she said. "It was difficult but
wonderful." 

Business was not an obvious career choice, but after
majoring in French at Manhattanville College in Purchase,
N.Y., and working in the library at the United Nations, she
took an aptitude test that suggested she had business
skills. Friends got her an interview at Citibank, where,
after being hired, she was intrigued by private banking.
"My clients were like my family," she said. "I always felt
that if my grandfather, who lost his money, had had a
private banker like me, somebody would have protected him."


Ms. Lagomasino, who eventually earned an M.B.A. at Fordham
University, was running a Citibank private banking
operation in southern Latin America in 1983 when she left
to join Chase Manhattan. At Chase, she rose to become
managing director and then the executive in charge of
global private banking by the time Chase merged with J. P.
Morgan. 

Though Ms. Lagomasino is extremely secretive about her
client list, it is said to range from prominent heads of
public companies to families that control privately owned
businesses. The private bank says it has clients in 36
countries; about 30 percent of Ms. Lagomasino's clients
live outside the United States. 

That means she has a heavy travel and social schedule, here
and abroad. Mr. Winnick recalled that he met Ms. Lagomasino
over dinner with David Rockefeller, the retired chairman of
Chase, at Le Bernardin in Midtown Manhattan. 

"I was impressed with her from Day 1," Mr. Winnick said.
"She is the personification of what makes America great.
She was an immigrant and rose through the system to the
chairmanship of Chase private bank, working against
whatever obstacles to succeed." 

She also has the experience to help Mr. Winnick protect his
fortune, which is still tens of millions of dollars even
after his Global Crossing holdings have fallen to 83 cents
a share, from a peak of $64.25 in May 1999. 

"I wanted to talk to someone who was smart and understood
it from a generational perspective," he said. "For me, I
wasn't looking for a money manager. It was a person to tell
you what other families were thinking: how they were doing
things. 

"It's like having a shrink," he said. "You don't have to
give them the keys to your house, but you have to know they
will give you advice based on your needs, not their needs."


In 1999, when Mr. Winnick was host for a dinner at the
Claridges Hotel in London for a who's who of Britain's
social and business elite, including Margaret Thatcher,
King Constantine of Greece and Lord Saatchi among others,
he seated Ms. Lagomasino next to him. 

Some private banking clients turn over their investing
decisions to J. P. Morgan. Others, including Mr. Winnick,
do not. Mary Erdoes, a Morgan managing director at the
private bank, said that of the $300 billion under
supervision, the bank makes investment decisions on about
$160 billion. For the balance, it helps advise the clients
Its overall track record is almost impossible to evaluate
because the bank releases no performance numbers. Some
money is managed in-house, and some is delegated to outside
managers. 

The performance in various asset categories varies greatly.
The bank's equity fund, for example, is off about 18
percent so far this year. "The fund is geared to outperform
the public equity markets, and both have continued to do
so," Ms. Erdoes said, citing the 19 percent decline in the
Standard & Poor's 500-stock index. 

Wealthy families, however, want services beyond straight
money management. Sometimes they want help for their
businesses, too. For example, J. P. Morgan does not handle
Mr. Winnick's investments, but Mr. Winnick's investment
company, Pacific Capital, was part of the restructuring
group led by the Softbank Corporation that acquired the
Japanese bank Nippon Credit. 

"Pacific Capital paid in dollars but it was a yen company,"
a person close to Mr. Winnick said. "That is fine if the
yen and dollar remain in place. But his private bank would
come back and say, `You should provide some type of hedge
against your yen exposure.' " This person recalled adding
that Mr. Winnick "made as much money in the yen hedge as he
made in the investment." Chase had arranged the hedge for
Mr. Winnick, borrowing yen in an amount equal to what he
had invested in the Japanese company, then selling them
immediately for dollars. When the yen weakened, the bank
bought back the currency at the lower exchange rate, and
Mr. Winnick pocketed the difference. 

Another client "wanted a Jack Kerouac manuscript more than
anything," Ms. Lagomasino recalled. "We helped him figure
out what it was worth, and we bid on it for him, although
he didn't get it," she said. The bank also makes loans
against art collections and private jets. 

The bank also provides myriad other services. For instance,
Morgan has worked with William Zabel, a trusts and estates
lawyer at Shulte Roth & Zabel, to create charitable lead
trusts. These allow clients to leave "a huge amount of
assets to children without triggering a gift or estate
tax," Mr. Zabel said. 

At the same time, Morgan is ready to offer traditional
advice about asset allocations. Here, even before the World
Trade Center disaster, Ms. Lagomasino had been pushing
clients to take a more conservative stance in United States
equities by shifting from small caps to blue-chips.
Afterward, she pushed even harder. "Our clients are very
successful people, and they want to be sure that they feel
smart and feel they are in control," Ms. Lagomasino said.
"We had conversations with clients who wanted to do things
to protect themselves." 

Clients with a lot of their wealth in cash were cautioned
against rushing back into the equity markets. Other clients
who had large positions in a single stock and had borrowed
against them were advised to protect themselves. 

"Several clients who had loans that were collateralized by
stock put collars on the stock they had so they could
protect themselves against margin calls," said Cornelia
Spring, Morgan's product manager for derivatives. A collar
involves a set of transactions that lets a stockholder
protect the value of his stock, so that even if it
declines, he or she does not face margin calls. After the
World Trade Center catastrophe, clients "put on collars in
spades," she said. 

Thomas H. Lee, who heads the leveraged-buyout fund that
bears his name and is a J.P. Morgan Chase (news/quote)
national advisory board, said he believed that after the
stock market rout of 1987 and the market turmoil caused by
the collapse of the Long- Term Capital Management hedge
fund in 1998, rich people became more cautious about
equities and diversified into alternative investments like
hedge funds. 

"Those were really shots across a lot of people's bows," he
said. "I think people are more diversified." 

Even so, Ms. Lagomasino is still cautioning her clients to
diversify and warning them that the rapid growth of the
1990's is over. But the most important message has been
about when to act and when to wait. "We wanted them to
understand how this would affect every piece of what they
did," she said.  


http://www.nytimes.com/2001/10/07/business/yourmoney/07RICH.html?ex=1003460626&ei=1&en=1ba47451fa0092e6



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