Continental Bank: Pioneering Desk Launched Market, Careers

After there was a run on Continental Bank in 1984, Walt Bloomenthal, then in capital markets, was charged with selling $1 billion of loans, although Bloomenthal admitted, only about $500 million was sellable. This was the very beginning of what would become the Continental Bank trading desk. A few years later, in 1989, Bloomenthal and Jo Ousterhout began discussing the idea of a more established loan trading desk. Loan syndication was an established practice, but no one was really trading loans and the notion of trading was not looked upon too favorably by borrowers, or even by some bankers.

"It was going to be a new ballgame. I didn't think it was going to be an easy sell to bankers or borrowers, and it took several months just to receive the necessary internal approvals to begin trading," Ousterhout recalled. She hired Tom Hendrick from the banking area and placed an ad in the Wall Street Journal to which John Urban, who was then working in Texas, replied. The last member of the team, Ellen Luntz, moved over from the syndication side.

The team began trading loans in April or May '89, Ousterhout said. She laughed as she recalled one of the biggest trades where the desk made $250,000.

Around that same time Citicorp and Security Pacific were setting up desks, although at first there was not a lot of inter-desk trading. "In 1989 there were many fewer counterparties than today ­ both in types and sheer numbers of institutions. We traded with S&L's, some banks and then a handful of prime rate funds, which had just been established to buy loans," Ousterhout, who is developing a business scheduled to launch next year, said. "There was a natural tension between the bank's account officers and risk managers who wanted us to do riskless trades and the counterparties, who were only concerned with one side of the trade." A couple of trades a week was considered a lot back then.

Luntz, now a saleswoman in primary and secondary loans at BNP Paribas, said, "I remember when Jo said, 'You know, loans won't always trade at 100 cents on the dollar,' which is funny to think about now and it sounds ridiculous, but this was the early days. There were just a few people, we were very cutting edge. It was very entrepreneurial."

Without standards or documentation -- there was no Loan Syndications and Trading Association -- the desk was also left to set up its own accounting systems and draft its own documentation.

After Ousterhout and Hendrick left to form the desk at Merrill Lynch, Urban ran the Continental desk until he left to set up the desk at Goldman Sachs. Hendrick now works at Strategic Value Partners and Urban at Urban Capital.

There was then a long line of successful salesmen and traders who ran and worked on the Continental floor. The list includes: Don Pollard, co-head of global leveraged finance at Credit Suisse, Grant Pothast, par salesman at CS; Pete Vaky, former head of loan syndications at SunTrust who recently left the bank; Jon Kitei, head of U.S. loan sales at Lehman Brothers; Ed Hamilton, head of par loan sales and trading at Bank of America; Howard Tiffen, managing director and portfolio manager at Van Kampen Investments; and Eric Rosen, head of credit trading at JPMorgan.

It is due to Continental's contribution, not only by setting up one of the first trading desks, but by developing some of the best talents in the business, that the legacy of the bank is awarded the 2007 Outstanding Contribution Award.

After Continental Bank suffered heavy losses in the failure of Penn Square Bank of Oklahoma City and then the run on the bank in 1984, it needed to be creative. "It was out of necessity that we got into the business," Bloomenthal said. "The bank failed and we couldn't be an agent of LBOs, and buying and selling retail was hard to make money. Now we could get some market intelligence and stay in the game."

Kitei said he and Hamilton were probably only trading about three to five names and were sometimes helping to close all their own trades with just one other person helping them. Axes were slim and often only included Time Warner, RJR, HCA and Lexmark. "For a long time that was one of the only names we traded," he said of Lexmark.

Rosen echoed that sentiment. "It was a much different environment in the early days. It was not like a day recently when we had 250 trades or the peak day last year of 490 trades," he said. "Back then we could do one trade a day and it was not uncommon where we did zero. In addition, there was not as clear of a division of labor. We acted more as a salesman/trader/analyst/trading assistant and were actually involved in settling trades."

The bank also ran a very successful distressed business. "We started par first, we always wanted to get into distressed but they wouldn't let us. You could make money in distressed but [it was] hard to make money in par," Bloomenthal said. "But it was really a by-appointment business; no one really knew about it. We were audited by about three people on the outside and three people on the inside. The [Federal Reserve] was interested because they hadn't seen it. They were worried we were just taking bad loans and putting them in a trading account, but we weren't allowed to talk to the bank."

It also developed the precursor to the modern day collateralized loan obligation. FRENDS was a collection of loans taken off the balance sheet. It was designed not to be managed so as not to attract U.S. taxes and was different than CLOs of today because it could not buy or sell loans. "It was like a unit trust in today's parlance," Tiffen explained. "The fund just ran down as the loans were repaid or defaulted. It just ran down to the point where all of the different liabilities were paid off." Mike Woodhead was also one of the individuals that helped developed the structure.

One of the biggest problems, however, was that traders continually got picked off by the bigger investment banks in New York that paid more. It was even a joke that towards the end Continental didn't want to name a trader for fear that would mean an I-bank would swoop in and hire them. Bank of America bought Continental in 1994.

But the small bank left a big mark. "Continental was one of the leaders in developing a more liquid market," Hamilton said. Kitei agreed. "We were a small bank competing with much larger banks that were leading with their balance sheets," he said. "We had to be more aggressive, more entrepreneurial. We all learned at an early stage that we had to be able to distribute risk and re-use our capital. There was a large group of us that learned this approach and many of us have stayed in the business."