Celebration of Excellence:

Sponsor’s Foreword

June 2003

EuroWeek

www.euroweek.com

be the ability to leverage this human capi-tal with powerful technology and infra-structure that will differentiate the bestfirms.This does not mean simply throwingmore powerful servers and fatter pipes atthe front,middle and back offices butinventing completely new organizationalconventions and workflows in order toharvest an entirely new set ofopportuni-ties and circumstances.Firms in our industry are constantly reshaping themselves:merging this busi-ness and that,creating new teams and silos,breaking down walls on one hand andbuilding up new ones on the other.For the most part this combinatorial bal-let has avoided real innovation and has yetto break free from the chains ofpast expe-rience.It is a classic example ofturkeys notvoting for Christmas.But clinging to thestatus quo only avoids the inevitable.Thedeath ofthe salesman.And the trader.Andthe syndicate manager.Etcetera.The job titles may yet survive as a pri-mordial reminder ofour evolutionary antecedents (think ofit as our reptilianbrain) but the functions themselves willchange beyond recognition.(Imagine thecaptain ofa 16th century galleon trying tocaptain the space shuttle…) Although hisstar may now be somewhat tarnished,JackWelch’s “destroyyourbusiness.com”initia-tive at GE was prescient in its underlyingphilosophy:ifyou don’t engineer the obso-lescence ofyour business model someoneelse will.

Daunting challenge

The current model ofinvestment bankingrelies on the judicious management andmanipulation ofinformation,confiden-tiality and relationships.Stripped down to itsbarest facets it relies onarbitraging a heretoforescarce commodity

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information

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againsta privileged positionwithin the population of actors.Information,however,is no longerscarce and is increasing-ly difficult to ration orarbitrage.One commentatorevery year using only a telephone and atelex machine? The examples are endless.Yet due to the continuous,incrementalnature ofthe adoption ofnew technologiesmuch ofthis massive increase in productiv-ity and capacity has gone relatively unno-ticed by most industry professionals.However,every so often a number offac-tors accumulate and precipitate a quantumshift in behaviours and organizations.Ibelieve we are in the early stages ofjustsuch a phase.A giant asteroid struck the earth millionsofyears ago,wiping out the dinosaurs andsetting the scene for the emergence ofanew wave ofevolution and allowing a newlifeform,mammals,to thrive.The disloca-tions and turbulence ofthe past two yearsin the financial markets may be a similar

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extinction level event

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.Set against the massive increase in thepower ofcommunication and informationtechnologies,it has set the scene for theemergence ofa new model for investmentbanking.Only three basic ingredients are involvedin a capital markets business:financial cap-ital,information technology and infra-structure and human capital.Until recent-ly,only the former and the latter were seenas relevant to competitive advantage,withtechnology seen only as a (necessary) utili-ty.Going forward this relationship will beturned on its head.While all three elementsare needed,financial capital will increas-ingly be seen as a pure commodity

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valu-able and scarce but no longer in and of itselfa driver ofcompetitive advantage.Human capital will continue to play apivotal role in creating value however notin the current or traditional sense.It will

Everything you can imagine is real

—Pablo Picasso

would imagine that for those bankersinvolved in the birth ofthe Eurobondmarket,the global capital markets andtheir workings would seem to harbour only vestigial similarities with their own early endeavours.Forty years is a long time at the turn of the 21st century.I wonder ifour reality bears resemblance to their vision.Globalization,Moore

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s Law,the end oftheCold War,the Euro

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did they imagine?In the end,all visions are necessarily reflections through the kaleidoscope ofthepresent.With respect to the financial worldthis is doubly true:for despite the self-attributed importance given to them by bankers and financiers,financial marketsare no more than the grease that oils themachine ofhuman progress.They are ameans not an end.The markets reflect the world they existto serve;envisioning their future involves acorrespondingly complex escheresquereflection upon a reflection.Heisenberg

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suncertainty principle states that you cannotknow both the position and momentum of a particle at once as the very act ofobserv-ing one will change the other.Financialmarkets follow a similar principle:askingwhere we are today inevitably and inex-orably changes where we will be tomorrow.So in the full knowledge that the laws of nature are aligned against any prediction Imay make,I nevertheless will hazard toproject a vision ofhow the future ofcapitalmarkets banking will develop in the com-ing years.Much has been written (by people emi-nently more qualified than I) about theproductivity miracle

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or lack thereof

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brought about by the revolution in infor-mation technology.Without re-openingthis debate and ignoring any quantitativedata,it would seem anecdotally obvious tomost in the industry that the impact on thefinancial services industry has been enor-mous.Can you imagine trying to publish realtime prices (and spreads and yields) onthousands ofbonds simply using an AIBDcalculator? Or pricing and distributing thetrillions ofeuros ofnew securities issued

Minority report:

Capital markets in the 21st century

InformationConfidentialityRelationshipsDataTransparencyCustomer ServiceOld modelNew model