Tuesday, May 17, 1994

May17/94 - On How J.P. Morgan got into the Banesto Mess

This article has been posted here since some who have Googled me write to enquire about my role in the 1993 JPMorgan-Banesto mess. This story that was written without my involvement tells part of the truth of what was a complex situation. High principles was what attracted me to JPMorgan, those where temporally compromised by two individuals that promptly departed the firm after Banesto was intervened by the Bank of Spain. The CEO of Banesto was sentenced to 20 years for his role in the collapse of the bank. The outcome was not unexpected, but it could have been avoided. I am just sorry I did not do even more to stop this lunacy from soiling the reputation of a great firm like JPM. PMB

The Wall Street Journal

Capital Risk: How J.P. Morgan Fell Into the Banesto Mess, Risking Its Reputation

Flamboyant Banker Pushed One Big Deal Too Many; Clients Loved Her Work --- Under Vice Chairman's Wing

By Steven Lipin
Staff Reporter of The Wall Street Journal
17 May 1994
(Copyright (c) 1994, Dow Jones & Co., Inc.)

NEW YORK -- No one doubts that Violy McCausland can bring home the goods.

In her 14 years at J.P. Morgan & Co., the diminutive, Colombian-born investment banker generated hundreds of millions of dollars in advisory fees. Her Latin-American heritage and aggressive style, combined with Morgan's blue-chip reputation, opened doors at big companies in Latin America and Spain.

Just one deal -- Bermuda-based Bacardi Ltd.'s $1.4 billion purchase of Martini & Rossi in 1992 -- brought Morgan an estimated $70 million in fees, people at the bank say. The 40-year-old banker was at or near the top of the bank's earnings pyramid that year.

But her style!

At a bank that prizes discretion, teamwork and quiet anonymity, Ms. McCausland was anything but a discreet team player. She was flamboyant. Pictures of her with clients were splashed across Spanish magazines, and her three children were quoted in the Spanish press. Her expense accounts often hit six figures, people at Morgan say. If trans-Atlantic airline schedules weren't convenient, she chartered a flight.

After closing a big deal, she would throw unusually lavish parties, such as one last year at the New York Public Library for Cemex SA, the big Mexican cement company. Latin American musicians and dancers entertained more than 300 guests. Champagne flowed freely; caviar was abundant. Guests danced until 3 a.m. and many received Swiss army watches and Tiffany pens when they left. Few other Morgan dealmakers have the clout -- or nerve -- to put together such spectacles.

Then again, few others bring in such money. The fees she earned for the bank last year are estimated at $50 million. Morgan officials call that too high; her supporters call it too low. But either way, she was widely respected and liked by clients.

She worked extraordinary hours -- "the most of everyone I know," says Gustavo Caballero, chief financial officer of Cemex. She often put in 18 hours a day and brought her children to her office on weekends to spend time with them. She had three secretaries and demanded long hours from subordinates.

Yet it is her last deal for which Violy McCausland will long be remembered at Morgan. As adviser to Banco Espanol de Credito, Spain's fourth-largest bank, she with her mentor, Morgan Vice Chairman Roberto Mendoza, laid the groundwork that led to Morgan's effort to bail out the ailing Banesto. Morgan's Corsair Partnership, a $1 billion fund set up last year to enable the bank and certain prized clients to take stakes in ailing financial institutions, invested $162 million in Banesto. In addition, Morgan raised about $500 million more from other investors.

The effort ended in ignominy last December when the Spanish government, fearing a run on Banesto, seized the bank and unceremoniously dumped its board of directors, including the 48-year-old Mr. Mendoza. The 7.9% stake held by Corsair Partnership has been badly diluted.

Spanish regulators recently sold Banesto to Banco Santander, a big Spanish bank. Morgan, Santander and regulators are now negotiating some sort of remuneration that could at least partially salvage Corsair's investment. Morgan has threatened legal action against Banesto because it believes it was given bad information by the bank's management. As part of the negotiations Corsair is considering making an additional investment in Banesto that would reduce the average cost of its stake. But Banesto's caretaker management has filed a civil-liability suit in Spain against Mr. Mendoza and other directors, alleging that mismanagement by the board brought down the bank. A Morgan spokesman says he believes Mr. Mendoza won't be held responsible because he was elected to the board only last summer.

The Banesto affair has pained J.P. Morgan, a company so pre-eminent in global banking that it values its gilt-edged reputation above all else. "Next to Rothschild, it's the most valuable brand image in finance in the world," says Samuel Hayes, a professor of investment banking at Harvard Business School.

The Banesto investment didn't come easy to Morgan. While Mr. Mendoza and Ms. McCausland were pushing the bank to plunge in, other Morgan executives warned that Banesto and its chairman, Mario Conde, would prove risky partners. In a memo to Morgan's corporate office in late 1991 about a possible investment in Banesto's nonfinancial holdings, Pedro Burelli, Morgan's senior executive in Madrid, wrote that Mr. Conde "has many of the characteristics of the classical definition of a megalomaniac." (A Conde spokeswoman says he declines to comment.) Mr. Burelli added, "I could no longer support or be associated with a transaction in which Morgan assumes ever-growing reputation risks while our expected financial returns get lower and lower."

Now, it is clear that the reserves Banesto needed to survive far exceeded Morgan's estimates. Mr. Mendoza was the architect of J.P. Morgan's broad merchant banking strategy, and is believed to have had a relationship with Banesto Chairman Conde dating back to at least 1991. Ms. McCausland, his protege and "right hand," as she calls herself, took the reins in taking the day-to-day relationship with Mr. Conde. Because of his prestige and role at Morgan, though, he was given the board seat on Banesto. But officially Morgan points out that Ms. McCausland was on the advisory and capital-raising side of the relationship, and a separate Corsair team decided whether to make an equity investment.

But despite the questions about how Morgan fell into such a mess and about Ms. McCausland's role, the Banesto collapse wasn't the cause of her departure from Morgan, people at the bank say. They say that she was pressured to resign and that only coincidentally was it announced one week before Spanish authorities seized Banesto.

Ms. McCausland won't comment on the circumstances of her departure late last year. But in late 1992, she borrowed, from a person who had done business with Morgan, money for the down payment to buy a Park Avenue apartment, people familiar with the situation say. By not disclosing the loan to the bank until 1993, after a senior executive broached the subject, she is believed to have violated Morgan rules, they add.

But Ms. McCausland denies any wrongdoing. Through a spokesman, she says she documented the loan properly and repaid it promptly. She showed it to the appropriate Morgan executive last year "when he asked about it," the spokesman says. He adds that the loan came from a friend who had invested with Morgan periodically but wasn't a client of the bank.

Morgan officials won't comment on her departure, either, except to say that she resigned and that her departure had nothing to do with Banesto. Speaking generally, Richard Mahony, Morgan's vice president for public affairs, says it holds its employees to high standards of conduct and that its rules prohibit financial arrangements that could give rise to a conflict of interest.

"An organization as large and diverse as Morgan has to accommodate a wide range of individual styles," he adds. "That's a continuing challenge. Violy de Harper {her name before a now-pending divorce} made a strong contribution here, and we wish her well."

Ms. McCausland now works as an investment banker at James D. Wolfensohn Inc., a New York investment bank. Mr. Wolfensohn, her new boss, says he is delighted to have her. "She was someone who obviously had some interpersonal difficulties at Morgan; my friends at the highest level said Morgan would be happy indeed if she joined us," he says, but adds that "her competence and integrity were never in doubt."

Although Morgan's financial loss in Banesto is less than the fees earned from the Spanish bank, the failure of that investment and Ms. McCausland's role take on outsized importance. For one thing, it opens a window into the hushed halls of a 156-year-old institution known for superb management of people. Although many executives are happy to see Ms. McCausland go, others at the bank regard her departure as a management failure. She clearly has immense talent and was one of Morgan's few "rainmakers" able to bring in big advisory deals.

J.P. Morgan should have been able to find "a way to accommodate someone like that within the overall structure of the firm," one Morgan banker says.

Ms. McCausland's spokesman comments that "Violy's problem was her phenomenal success. In investment banking, success often generates detractors; competitors often strike through anonymous hearsay offered to the press. Add a successful Latin American woman to the mix, and you have the elements for further envy."

The Banesto debacle also reveals a chink in Morgan's evolving strategy. Over the past several years, the once-staid commercial bank has transformed itself into a globe-girdling investment bank, an entity akin to the House of Morgan of a century ago. After Morgan built up a full-service investment bank, the final move in that transformation was merchant banking, the high-risk, potentially high-return business of using the bank's own money -- and its clients' -- to take equity stakes in other companies.

But merchant banking is fraught with potential conflicts of interest, illustrated, some say, by Ms. McCausland's role in the debacle. After all, she was being paid by Banesto to advise Mr. Conde, its chairman, while urging Morgan to invest in the Spanish bank. Now, a humbled Morgan is conducting its own internal review of how it stumbled so badly, while outsiders wonder whether merchant banking is worth the hassles.

"How can a firm protect the interest of a buyer of securities when it is inextricably bound up with the seller?" Prof. Hayes asks. Although merchant banking can be an attractive stand-alone business, he contends it shouldn't be combined with other roles. Such a situation -- prevalent also at other Wall Street firms -- "is replete" with troublesome conflicts, he says.

While Morgan had done some merchant banking for itself in the 1980s, getting into the business in a big way required it to capitalize on its reputation for financial expertise. To do that, Mr. Mendoza helped create the Corsair fund, named after founder J.P. Morgan's luxurious yacht, to buy stakes in ailing U.S. banks. The fund's manager, Nicholas Paumgarten, had had extensive experience as a financial adviser to U.S. banks. But by the time Corsair had raised enough money to begin such forays, the domestic banking industry had rebounded. So, the fund began looking abroad.

Corsair's interest in Banesto wasn't the first time Morgan had considered an investment in the Spanish bank. As early as 1991, Ms. McCausland, backed by Mr. Mendoza, was recommending that Morgan buy a stake in Banesto's nonbank subsidiary, Corporacion Industrial y Financiera de Banesto SA, Morgan bankers say.

Her recommendation was sharply at odds with that of Mr. Burelli of Morgan's Madrid office. Besides questioning Mr. Conde's leadership abilities, Mr. Burelli pointed out in a 15-page memo that Ms. McCausland's analysis was too rosy. He also said Mr. Conde had given Morgan misleading information and failed to defend Morgan when a rival bank was criticizing it. Mr. Conde's spokeswoman says he won't comment. Ms. McCausland's spokesman says the matter is moot since Morgan's never made an investment in Corporacion Industrial.

"So much of this deal depends on the character of Mr. Conde," the Burelli memo stated. "We were dealing with individuals that do not share what I understand to be our bank's values and way of doing business."

At first, top officials at Morgan sided with Mr. Burelli and rejected Ms. McCausland's proposal, people at the bank say. (Mr. Mahony says the objections raised at Morgan weren't the reason the deal didn't go forward.) But soon after becoming Banesto's advisers, Ms. McCausland and Mr. Mendoza again recommended an investment, this time directly in the bank and not its subsidiary.

Again opposition arose, this time from Mr. Paumgarten. Although Corsair's manager won't comment now, Morgan insiders say he expressed reservations about the deal and about how it was brought to the bank. Nevertheless, after strong lobbying by Mr. Mendoza and Ms. McCausland, Morgan's senior executives gave the go-ahead, people close to the bank say.

Ms. McCausland says she didn't make the final decision on the Banesto investment but acknowledges that her team analyzed the bank's books.

However, John A. Mayer Jr., who heads world-wide corporate finance and also oversees merchant banking, says Morgan relied on her for advice about Banesto. "The Corsair team would get her thoughts, and her information as part of the process," he says, "but she wasn't a decision-maker."

Mr. Mayer denies any conflict of interest in Corsair's investment, contending that two separate sections of Morgan were involved in the deal. "We couldn't and wouldn't be sitting across the table negotiating an equity investment and sitting on the other side of the table advising the seller of the equity," he says.

Yet in 1992, Ms. McCausland did represent two sides in a transaction that unloaded Banesto's stake in a cement company. First, one client, the Unifund Group, purchased an option to buy Banesto's 62.3% stake in a Spanish cement company, a transaction structured and financed by Morgan. Three weeks later, Cemex, another client, purchased the option; the Mexican company was advised by Morgan, which also financed the deal. One Morgan banker says all parties were fully aware of Morgan's role but indicates that it was still unusual. Mr. Mahony says that Cemex had an ambitious acquisition program, which Morgan helped implement, and that Morgan didn't represent Banesto at the time or any parties with competing interests.

Even before that, Ms. McCausland had made use of her Latin American connections. After attending the University of Alabama, she had returned to her native Colombia to work for Avianca, the Colombian airline. In 1979, at age 25, she joined Morgan as an analyst. She began building up a big business of advising companies on cross-border merger deals, especially in Latin America, and eventually came under the wing of Mr. Mendoza, who set up a mergers team in the 1980s.

Mr. Mendoza and Ms. McCausland were aggressively courting potential clients in Mexico in 1989, "when nobody would come to Mexico," says Cemex's Mr. Caballero, who sent millions of dollars of business her way.

By the early 1990s, as Latin America emerged from a decade of debt crises, she was involved in Morgan's biggest corporate-finance deals and became one of its biggest moneymakers. Aside from Cemex, she had as clients such premier Mexican companies as Fomento Economico Mexicano SA (Femsa) and Grupo Industrial Minera Mexico SA.

"Her contacts in Latin America are, quite frankly, priceless," says Lorenzo Zambrano, Cemex's chief executive.

She also pushed the conservative bank into riskier deals, and most paid off handsomely. Bridge loans -- short-term business loans that badly burned Wall Street in the 1980s -- became Morgan's competitive edge despite some hand-wringing inside the bank. In 1991, when capital had just begun to flow into Mexico, Morgan provided a $950 million bridge loan to Femsa and a $1 billion loan for Valores de Monterrey SA's purchase of control of Grupo Financiero Bancomer, a big Mexican bank. Other deals followed.

Both clients and people who negotiated against her agree about her toughness. "She's like a bulldog; she takes up an issue until she has it resolved," says Eugenio Mendoza, president of Empresas Mendoza, a Caracas-based industrial conglomerate, and no relation to Roberto Mendoza. "She's very intense, very detailed."

For that, Morgan loved her. It had few dealmakers who knew how to cozy up to clients the way she did -- while demanding their business.

But she also could be difficult to work with and caused serious disruption within the bank. When Morgan won the job of helping Grupo Industrial Minera Mexico acquire Cia. Minera de Cananea SA, the state mining company, she was advising the company while another Morgan group was arranging the financing. Her attempts to do the whole deal sparked a feud, Morgan bankers say. The boss of both units, Jaime Yordan, had to battle senior executives to keep her in line. Mr. Yordan won the battle -- she was forced out of the unit -- but lost the war.

After all, she had often called on Mr. Mendoza to run interference for her, current and former Morgan bankers say. Tired of battling, Mr. Yordan resigned in 1990 to join Goldman, Sachs & Co., a major Morgan rival. The departure of Mr. Yordan, a classic Morgan banker widely respected inside the company, caused a rupture in the Latin America group and led to other defections. Mr. Yordan didn't return phone calls. Goldman and other investment banks have since hired a number of former Morgan bankers, who have built up formidable Latin American finance departments.

The Morgan people say Ms. McCausland would often invoke Mr. Mendoza's name and sign letters with his signature, sometimes without his knowledge. They also say she borrowed money from colleagues, especially at year end, until bonuses were paid. "It's one of those things that might not be written down anywhere, but you're not supposed to do it," one former banker says.

Ms. McCausland, through her spokesman, denies that Mr. Yordan's departure or that of any other executive had anything to do with her, and says Mr. Yordan didn't have project responsibility for Grupo Mexico. With regard to signing Mr. Mendoza's name, the spokesman says "she was his right arm in many matters" and in a few instances signed documents without his specific prior knowledge. She also says through the spokesman that on two occasions she borrowed money but that it was for official business and only because she needed to travel.

Eventually, the problems she caused inside the bank led some colleagues to begin trying to ease her out. She even had been told to leave the Latin American corporate-finance department in 1990 to become a private banker in the bank's midtown offices -- one way Morgan bankers are pushed aside -- but she flatly refused.

With Mr. Mendoza's help, she held her ground and wouldn't budge from her 28th-floor office. But later, she did move to the mergers and acquisitions group and continued to work closely with him. Morgan declines to comment on those changes; her spokesman says she was temporarily put on special assignment but denies that the bank was trying to get rid of her. Last year, she was supposed to be in charge of consumer-product companies such as Nestle SA and Coca-Cola Co., but Morgan bankers say she did very little of that because of Banesto.

Even friends say they aren't surprised that ultimately she left Morgan after years of run-ins. Speaking of the mortgage loan, one Morgan banker says, "If they wanted her to stay, it wouldn't have mattered."

Ms. McCausland's departure leaves Mr. Mendoza to take a lot of heat. People at the bank say his close ties with Ms. McCausland and the Banesto problems have made things difficult for Mr. Mendoza, a widely respected investment banker who had built Morgan's mergers and acquisitions department and over the years had scored huge gains for Morgan from investments in Hospital Corp. of America and Bermuda-based insurers. Mr. Mendoza declines to comment.

But he seems to be taking the pressure in stride. Friends say he is trying to salvage what he can of the Banesto investment. "One of the things Roberto says is that investing is not a science," says Richard Rainwater, a Texan who has often invested successfully with him and notes that everyone makes mistakes.

Yet when a friend called Mr. Mendoza to offer support and ventured a guess that Morgan executives were turning the cold shoulder to him, the vice chairman reportedly replied, "That's an understatement."

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