No individual has had more influence on the derivatives business than Allen Wheat. The 51-year-old CEO and chairman of Credit Suisse First Boston was there at the birth of both the interest rate swaps and equity derivatives markets. He made Bankers Trust a force in OTC derivatives in the 1980s, and turned CSFP into the pre-eminent derivatives house of the 1990s. He is the first recipient of Risk’s Lifetime Achievement award

Derivatives lie at the heart of what any investment bank has to do: link its clients worldwide. That’s an accepted wisdom in the era of the super-league of global investment banks. But it wasn’t always so. The idea of the globally managed investment bank had to be championed. So did the derivatives business which, when Allen Wheat started working at Bankers Trust in 1982, took place only on the fringes of the trading floor. Neither Wheat nor Bankers Trust invented swaps, but they were the first to realise the important role derivatives would have in globalising capital markets. Wheat coupled that vision with a management style that ensured innovation could flourish.

Among Wheat’s great strengths have always been his ability to spot talent and command a loyal following from his staff. “He was always a smart dresser and had the habit of flicking his silk tie over his shoulder when he was on the trading floor,” recalls a colleague from Bankers Trust. “Whenever he did that, one or two of his team would be guaranteed to do the same thing as a reflex.”

In 1990, Wheat took more than 20 Bankers Trust people with him to CSFB, including his lieutenant, Chris Goekjian, now co-head of fixed income and derivatives at CSFB. Derivatives were making about a quarter of Bankers Trust’s global net profits at the time.

At CSFB, Wheat created Credit Suisse Financial Products (CSFP), the model of what he thought a global derivatives business should be. The idea of CSFP and its independent management was sold to the board of Credit Suisse by Hans-Jörg Rudloff, who was running CSFB. Wheat’s master stroke, say his colleagues of the time, was to negotiate an unprecedented slice of the revenues for the people who ran CSFP under his command. Between 1990 and last year, when it was folded into the main body of its parent, CSFP was both a hugely profitable ($409 million net in 1997, an 18% increase on the previous year) and highly creative operation. CSFP took quanto swaps, leveraged executive share schemes, credit-linked notes and created new synthetic products. It was the envy of the emerging super-league of investment banks. CSFP also developed its own credit risk framework, CreditRisk+, which it then released on the Internet. CreditRisk+ has become established as one of the top three banking risk models.

When Allen Wheat joined CSFB after eight years with Bankers Trust – latterly as chairman of Bankers Trust International – his reputation as an innovator was already well established. In the 1980s, Bankers Trust had decided to transform itself from a commercial bank into a merchant bank. Wheat built up the firm’s swaps business and then created a new equity derivatives operation.

Wheat gives full credit to Charles Sanford, Bankers Trust’s chairman at the time, as the impetus behind the revolution at the bank. But Wheat argued with Eugene Shanks, the bank’s global head of trading, later to become its president. He was also reported to be frustrated that Bankers’ loan provisions were eating into its profitability.

Although its derivatives continued to flourish, Bankers Trust never really recovered from the departure of Wheat and his team. In the 1990s its management lost touch with its sales force – both Procter & Gamble and Gibson Greetings sued the bank in 1994 for mis-selling them derivatives.

CSFB wasn’t an easy proposition either. CS First Boston – the structure created in 1988 when Credit Suisse increased its stake in First Boston after First Boston was weakened by some bad bridge financing decisions – was a fraught alliance. First Boston in New York and CSFB in London had their own management teams, with competing salesmen in each other’s territory and in the Pacific region. CS First Boston became famous for its infighting.

But while CSFB wasn’t as good at swaps as it wanted to be, it had Credit Suisse’s triple-A rating behind it. Wheat saw the opportunity. He also had the all-important support of CS First Boston’s chairman and CEO, Jack Hennessy, who was fighting to keep the group’s internal rivalries from destroying the full merger he wanted. “CSFP felt like Bankers Trust did at the beginning,” says Wheat. “Jack Hennessy kept the establishment away from us. That was crucial because derivatives touch everything; government bond trading, foreign exchange, equities. When all these groups are allowed to impact on how a new business is organised and operates, you end up killing it because they say: ‘You can’t do that this way, you have to do it that way.’ We were fortunate to be able to operate at CSFP without a lot of internal politics to deal with.”

The fact that CSFP has now been integrated within the main body of CSFB shows the extent to which the firm as a whole has found its global identity. “When we first started at CSFP, the other basic trading areas were unfamiliar with derivatives,” says Wheat. “Now our government traders hedge themselves with derivatives. They have a book that looks like a swap or an option book.”

Having struggled for years to create a true Euro-US alliance, Credit Suisse is now the only European bank to have established itself as a force on Wall Street. Ironically, it is only Deutsche Bank’s acquisition of Bankers Trust last year that threatens that exclusivity.

What measures of luck and judgement did it take Allen Wheat to get where he stands now? He has had his fair share of breaks and his early career was “not really thought out”, he is happy to admit. The son of a nuclear physicist, Wheat started his career in banking on the retail side of the business, as a trainee with Chemical Bank.

After three years at Chemical he moved to the treasury department of General Foods, in White Plains, New York in 1974. Working under General Food’s treasurer, David Brush, Wheat worked on his first financial derivative trades, hedging the company’s interest rate exposures. He spent eight years with the company, rising to the position of international treasurer.

A college friend turned head-hunter lured Wheat to Bankers Trust to build the bank’s US swaps business. “It was a job,” says Wheat. “The money was good and it was an interesting business. We’d done a couple of swaps at General Foods, but the truth is I had not the slightest idea what the other side of the transaction was. Pricing the swap was something I had to learn.”

Bankers Trust, which was still headquartered on Park Avenue in those days, with investment banking run by David Beim, was only just branching out into what was then called merchant banking – making its first leveraged loans, for example. “I thought I was going to work with a whole bunch of people in swaps,” recalls Wheat. “When I got there I found that the guy who’d been running the swaps business was moving over to real estate and I was on my own. They said: ‘Don’t worry, you’ll be fine.’ ”

Bankers Trust was too small to compete with the other commercial banks in the wholesale markets. Glass-Steagall legislation meant it could not compete with the bulge-bracket securities firms in underwriting. So it had to develop derivatives, investing heavily in the technology needed to price them, and developing its revolutionary measure of risk-adjusted return on capital to set capital-adequacy levels.

“At the start, the swaps business was a very customised, drawn-out process,” Wheat recalls. “You’d find a customer, say the World Bank. Then you’d have to wait a month to find a counterparty for the swap. Then another month while you sorted out the pricing to suit both sides. “We then became the first bank to stand in the middle and warehouse the deals so you didn’t have to wait for a counterparty. And the margins were very good. Because we had deep books we found we could do more and more structured deals.”

Among the products Wheat and Goekjian created for Bankers Trust was the TOPS (trust obligation participating securities) structure, which repackaged fixed rate paper trading at discounted levels as floating-rate paper, using a special purpose vehicle for the underlying swap transactions.

After a spell running Bankers’ global capital markets business in Tokyo, Wheat moved to London. At the start of 1988 he began Bankers Trust’s push into equities. Equity derivatives were a poor relation to fixed income at the time and colleagues didn’t exactly see the move as a promotion.

Again, Wheat saw the opportunity. The bank had money to invest in new businesses and Wheat was convinced that what it had learned about financial engineering in the fixed-income and currency derivatives businesses could be used to manufacture equity products. The strategy was to make Bankers Trust “different from the 20,000 other houses that are doing the same sort of thing”, Wheat told Risk at the time.

The Japanese bull market was raging. Wheat and Goekjian had particularly good contacts in Japan. There were spreads to make in equity derivative trades, even without sophisticated models. “These guys [Wheat and Goekjian] weren’t equity experts by any means,” recalls a First Boston colleague. “But they were the first to stumble on how to customise equity derivatives with quantos and so on. They had the insight.”

When news leaked out of the money Wheat was making for Bankers Trust with his new business, other firms quickly set up their own equity derivatives desks.

Wheat was also showing how a global business should be run, so that ideas and opportunities could be bounced around between desks in Asia, Europe and the US. This was the model on which he was to build at CSFP, a firm whose life-span saw the true integration of derivatives into the mainstream of investment banking.

The secret of management, he says, is a sense of balance. “There has to be a balance between control – knowing exactly what’s going on – and innovation and new thought. A lot of firms have died because they got that balance wrong. If you have it too tight, businesses suffocate. You are going to get occasional foul-ups and you have to keep going. The key is to take calculated risks.”

So when did CSFB’s sense of balance ever go awry? “Russia – we totally got that wrong,” he offers. “We were too greedy and stupid in thinking we could keep a 30%, 40% or 60% market share. In hindsight, more firms in that market would have helped liquidity. Instead, we tried to defend our market position and keep them out. And we were also very naive in our calculation of what the worst case was.”

The lesson to be learned from the Russian market crisis of last autumn, says Wheat, is that there is a natural limit to the amount of business any single investment bank can manage. We’ve had a very good year in Russia in 1999 – although that business is on a completely different scale now.”

And looking back on his own career over 20 years, would he recommend a career in banking to someone starting now? “There are certain jobs in investment banking I wouldn’t advise my kids to do,” says Wheat with a smile. “But I’m sure the next 20 years will be exciting. In particular, I get excited about the e-channels and what they will let us do. The investment bank’s role as the aggregator of assets will be pre-empted by the Internet. But at the same time the Internet will make access to whole new groups of clients cheaper, and it will make the ability to add value all the more important.”

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