New York Times, February 19, 1994
On Wall Street, Masters of Innovation
by Susan Webber
Imagine an industry that is chock-full of risk and keen competition.
Customers are fickle. Markets are volatile. There's no patent protection.
New product designs are publicly disclosed. Now imagine that to survive
in this rough-and-tumble industry, companies have developed hundreds
of new products, some of which have grown into major businesses.
Wouldn't corporate America be eager to study this industry, to see how
it came upon its innovative ways?
Welcome to Wall Street.
Although most executives may be skeptical, Wall Street beats Main Street
hands down when it comes to innovation. Consider wrap accounts, an investment
product that gives wealthy individual investors access to money managers
who normally handle only institutional accounts. Started in 1985, this
inventive financial product has attracted $90 billion in assets; with
fees of 3 percent a year, the wraps represent $3 billion in revenues
for Wall Street.
Or consider asset-backed commercial paper. Devised as a financing tool
for companies with low credit ratings, these instruments now account
for $45 billion outstanding. There are many inventions Wall Street has
devisedcredit swaps, inverse floaters, down-and-out options, synthetic
securities. The names are Wall Streetese, but, in any language, they
satisfy the criteria for innovations. They identify unmet needs, create
novel ways to satisfy them and then pay off handsomely.
These products are not accidents. Wall Street is simply highly innovative.
Compare the very model of an innovative industrial company, 3M, with
a like-minded Wall Street aspirant, Bankers Trust. 3M tries to earn
20 percent of its revenue from products developed in the last five years.
But Bankers Trust takes this goal one better. It has a policy of abandoning
products as they mature in order to focus on young, highly profitable
What is Wall Street's secret? How does it innovate at a pace that makes
the biotechnology industry look Model T by comparison? There are several
On Wall Street, making money takes precedence over all else; there are
no sacred cows or secure fiefs. Elsewhere, vested interests often come
before profits. For example, Citibank pioneered swaps, a lucrative financial
product, in 1981. But even though Citibank is undeniably a hungry and
profit-minded bank, it wouldn't pay its swaps sellers in proportion
to what they generated. Why? Because then they might earn more than
top Citibank executives. Predictably, the swaps talent left for firms
with more enlightened pay policieson Wall Street.
In most industries, interdepartmental efforts are either infrequent
or low-level. They're also politically charged events, avoided by the
astute. But not on Wall Street, where several major activities
underwritings, mergers and acquisitions and real estate financings
require interdepartmental cooperation. On Wall Street, egos and politics
don't stand in the way of business.
Even the most senior executives on Wall Street work regularly with clients.
This means that top managers know customers and market conditions, and
can evaluate new business opportunities.
Can we say the same of any other industry? One thinks of General Electric's
Jack Welch as a skilled executive who sets goals and supervises his
top managersnot as someone who meets with customers. But one thinks
of Felix Rohatyn as a premier dealmaker who lavishes attention on clientsnot
as someone who manages the Lazard Freres mergers and acquisitions department.
Wall Street is Darwinian. Very often, even for higher-ups, pay depends
not on seniority or title but on performance. Internal competition is
intense, and no one can live on past success. To compensate for this
institutionalized insecurity, top performers can earn huge sums
Michael Miliken is the most famous but not the only example of this.
Take Lawrence Hillibrand, head of the Salomon Brothers bond arbitrage
unit, who earned $23 million in 1991. Before Mr. Hillibrand's boss,
John Gutfreund, left Salomon in August of that year, he was paid only
As American companies study team dynamics, Oriental philosophy and Silicon
Valley entrepreneurs in the search for innovation's secrets, they should
look closer to home as well. Insecurity and opportunityalso known
as fear and greedon Wall Street may hold the answers they seek.