FORMER MERRILL CHAIRMAN SPEAKS OUT: A Conversation with David H. Komansky

Dave Komansky’s 35-year career at Merrill Lynch included a stint as president and chief operating officer from 1995 to 1996, when he was named CEO. A year later, he became of chairman of the board, a position which he held through 2003. He has a unique insider’s perspective on the financial services industry during one of the most tumultuous periods in its history. At a Makovsky-sponsored breakfast on May 12 at the University Club in New York, Komansky fielded some tough questions about the current financial crisis from a small group of communications leaders from several of the top investment firms in the U.S.


Here are some highlights:

Self Regulation and Enforcement — “The industry is incapable of self-regulation, and therefore government regulation is inevitable. The question is: Do we need more regulation or do we need better enforcement of the regulations we already have? The government’s lax enforcement of what’s already in place is a driver of the problems we have now.”

Global Approach — “All regulations must be global; otherwise, the capital leakage will be instantaneous. Nevertheless, it will be extremely difficult to accomplish. It took near bankruptcy for Greece to be forced into reforms. The best hope is for a high-powered advisory structure that has the ability to guide but not enforce regulations. In the past, there has been talk about this but no action. We are at the edge of a precipice, so this time it may be different.”

Rebuilding the Industry’s Reputation —“In the past, no matter how much we killed each other for business, we would always unite in the face of a crisis. The problem now is that the industry’s leadership is going through a generational change and the great leaders have either retired or been disgraced. Right now there is no leadership within the industry, short of Jamie Dimon. Previously, the chairman of the NYSE used to be the spokesman for the industry, but its importance has waned and few can tell you who the current chairman is.”

On What Motivates Goldman— “What Goldman did was probably not illegal, but it might have been immoral. Goldman has always been known as a firm on both sides of a trade. The easiest way to address a public crisis is the hardest and most painful: deal with it up front and be open. In this respect, Goldman failed. But it is a closely held firm which maintains a partnership mentality, and its strategy reflected that.”

Glass-Steagall Observations — “Today I regret the repeal of the GSA, but it was understandable. Under the Act, foreign banks were able to operate as both securities firms and banks, but U.S.-based firms could not. And they lost business because of it. We wanted a level playing field, but did not anticipate the conflicts that arose once the fetters were removed (e.g., conflicts in proprietary trading, entry of players not prepared to handle it). What’s done is done. Once it’s out, you can’t put the genie back in the bottle. Perhaps some possible ways of accomplishing the same thing is by controlling leverage ratios and capital requirements, as well as setting up firewalls.”

Is Big Necessarily Bad?” — “I’d advise not to do stupid things, like limit growth under the principle that ‘bigness is badness.’ That’s ridiculous. Big banks do big things. But the government has to be the court of last resort with respect to the industry’s goliaths. The government must look at the different lines of business of these huge organizations and make sure they are properly managed and funded — and that they fully understand the products they are selling.”

Outlawing Derivatives — “Putting derivatives on exchanges is a ridiculous idea. Derivatives’ real value is that they solve specific problems for clients with complex needs. This requires a complex solution. Exotic derivatives can’t be traded, but if they were outlawed, London would be dancing in the street, because all the deals would go to the U.K.”

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