2003 Hall of Fame

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Induction Of Jack V. Malvey, CFA

Inducted November, 2003
By Andrew Kalotay

Good evening ladies and gentlemen. My name is Andrew Kalotay, and I have the privilege tonight of inducting Jack Malvey of Lehman Brothers into the Hall of Fame. Jack introduced me when I received the same award in 1997 and now it’s my turn to return the favor.

I cannot think of a more deserving candidate than Jack. In a time when the headlines are filled with villains, Wall Street could use a good guy. I contend that Jack Malvey is one. His blend of intellect, ingenuity, and tenacity mark him as an American classic.
To my mind, Jack is much more than a specialist in fixed income. He combines intelligence with a remarkable ability to work as a team and draw out the best from his cohorts. And he has the rare tenacity to see that ideas get implemented.

Long ago, Alexis De Toqueville remarked on the penchant of American communities for using voluntary associations to solve problems. Well, the securities industry is no different. FIASI has provided a valuable forum for the cross-fertilization of ideas and approaches, even in the most competitive of environments. And Jack Malvey has been in the forefront of this organization since 1986, sitting on committees too numerous to mention and serving as its President in 1996.

In fact, without Jack Malvey we would not have a FIASI Hall of Fame. He came up with the idea almost a decade ago, and these annual presentations have since become the central event of our association. Ceremonies like this help us to rededicate ourselves to the higher goals and objectives we started out with when we came to Wall Street, but may have lost sight of in the competitive fray.
Jack moved to Wall Street following a stint in the Air Force. He received his grounding in utility analysis at Moodys, starting in 1978. Five years later he joined Kidder Peabody, occupying there a closet-sized office.

This was in the heyday of the 80’s, when utilities still dominated the fixed income markets. According to Tony Vignola, who was Jack’s boss at Kidder, Jack made all the great calls on companies going into and emerging from bankruptcy. Gulf States Utilities, El Paso Electric, and Public Service of New Mexico were all standouts. Jack recognized the hidden value in cumulative deferred dividends of distressed utilities, and his insights contributed to Kidder’s very profitable activities in this area.

But where Jack has really made his mark is at Lehman Brothers, starting in 1992. Part of Lehman’s allure for Jack, I am told, was the opportunity ”to get his hands on” the Lehman Aggregate Bond Index. Back then this index, while important, was not nearly as dominant as it is today.

At Lehman, Jack was initially a corporate bond strategist and then rose to his current position of Chief Global Fixed-income Strategist. He is best known for his insights on relative value, published every Friday. Jack is a great lover of baseball; no doubt this explains why he refers to his annual research summary as the “Playbook” for fixed income. Several people have observed that this voluminous and meticulous piece of research has no equal on the Street. However it is not the quantity, but the quality of his sector and strategy calls that has earned Jack his reputation.

People familiar with Jack’s recommendations inevitably comment on his outstanding batting average. He has been on the Institutional Investor #1 All-star team 11 years in a row —the first times 5 as a corporate bond analyst and the last 6 as a general fixed income strategist. This outstanding achievement needs no further comment.

Jack also possesses a good measure of grit. When the major rating agencies came under stinging criticism by the SEC in 2002, Jack was one of the few senior Wall Street executives who spoke up on their behalf. He did not forget his beginnings at Moody's.

As with most successful people, Jack is a great communicator. He is very adept at using the media to get his message across, both within and outside the firm. He has his own web-based so-called Bond Show, and organizes frequent conferences worldwide, including the annual “Relative Value Workshop” and the prestigious “Global Fixed Income Workshop.” But some of Jack’s biggest contributions are made behind the scenes. For example, he came up with the idea of an advisory committee for the Lehman indices, which gives instant feedback from major institutions prior to making contemplated changes. He was also instrumental in expanding the indices into Europe and Asia, and as Chief Strategist, he constantly reminds his colleagues that the Index is the cornerstone of success in fixed income research. In recent years the Index has become the true benchmark for institutional performance, and Jack’s efforts have undoubtedly been instrumental in making Lehman Brothers the number 1 fixed income research house for the last four years.

As much as he loves the Index, Jack’s real passion happens to be baseball, the great American game. I have to admit that this completely escaped me until I contacted some of his friends and colleagues in preparation for my comments this evening. Without exception, they all mentioned his love of the game. Now that I recall, he would often open a conversation by saying “Andy, being a statistician you must be fascinated by baseball…”, and he would be visibly disappointed as I quickly shifted the conversation to interest rate volatility, default experience, or mortgage prepayment rates.

I’m told that baseball is very much like Wall Street research, because it has whole phalanxes of people churning up statistics but very few actual players. Jack is decidedly a player, and one with considerable staying power. The fact that he pitched well into his forties shows an enviable knack for longevity. According to Tony Vignola, Jack in his later years knew well how experience and wile could triumph over youth and enthusiasm. He says, “Jack is deceptive as a pitcher—a little like David Wells.”

Now back to Jack’s well-deserved reputation for tenacity. I had a chance to speak with Doug Randall, Jack’s one-time coach with the Tenafly Indians. Coach Randall vividly recalls that the day after meeting Jack for the first time, he asked him to come out of a 20+-year retirement to pitch against the Park Ridge Rangers in the Bergen County seniors league. As coach Randall put it, “Malvey accepts and goes out onto the mound. Each of the first 5 batters get a hit off him, and Jack is shell-shocked. But he hangs in and squeaks out a win.” Coach Randall still talks about the game as if it were yesterday, and about the grit that kept Malvey on the mound. The coach says he’d seen lesser men scurry for the dugout unable to bear such pressure. And I also contacted Mark Van Overloop, the league’s current president. Mark immediately consulted the record books and found that in 1997 Jack won 2 games, saved 1, and lost none, with a 4.0 ERA and a 316 batting average.

Because he couldn’t dig up any data beyond 1997, I put on my statistician hat to estimate Jack’s lifetime average. By combining the information provided by Randall and Van Overloop with the 11 consecutive all-star awards, I was able to conclude that with a probability greater than 95%, Jack won every game he has ever pitched in! I have a picture here of Jack from his younger days. Apparently, even then he dreamed of great things. And with that I would like to congratulate you on your induction today into the FIASI Hall of Fame.

Jack Malvey, an American classic. Thank you from all of us.

Jack Malvey's Induction Speech

Thank you very much, Andy for those glowing comments.  For a moment, I was afraid that you were going to suggest that I also rested on the seventh day.

Even as late as my teens, when I discovered that I could not throw a fastball at 90 miles per hour, I dreamed like millions of becoming a major league baseball player and someday being a Hall of Famer.  This isn’t Cooperstown, but this career has been even more satisfying.  Although a huge baseball fan, it’s easy for me to say:  I wouldn’t trade Cooperstown for tonight.

I’m incredibly honored, still amazed, and very much humbled by the decision of my colleagues at the Fixed Income Analysts Society to bestow this great and quite unexpected honor on me.  I’m also delighted to be paired with Leo O’Neil, a genuine industry legend, who has done so much, not only for Standard & Poor’s, but also for the advancement of our profession.

I have a very long list of people to thank for making this evening possible.  Before turning to this list in a few minutes, I would like to begin by thanking an incredibly special person.  I wouldn’t be here tonight without the continuous support of my wife, Connie, who’s graciously tolerated my long hours and extended road trips for over two decades.

One of my colleagues teased me that my comments this evening should focus on all the wrong calls that I’ve made over the years.  I did consider this excellent suggestion; there’s no shortage of material.  Unfortunately, we have to be out of this room by midnight.  And as another colleague noted, “It’s a good thing, this isn’t a roast.  We’d need at least a full day.”

I have long felt truly blessed.  Not all can blend their personal interests into a successful career.  Thanks mainly to good luck, this has happened for me.

A lover of history, economics, writing, and trying to make predictions, I was inspired by my graduate school professor and great economic historian, Robert Heilbroner, author of The Worldly Philosophers; by the novelist James Michener to try to be an interesting writer and intrigued by a character in his work, The Drifters, who was a global investment sage; and by David Ricardo, the trader who turned classical economist in the early 19th century.  Once upon a time, I wanted to be a historian and macroeconomist.

Sidetracked for the better part of two decades by micro pursuits in the U.S. credit markets, I feel that my career has come full circle on a global basis.  Thirty years ago at this very moment, I was stationed at Osan, South Korea, in the service of the U.S. Air Force.  Last week, I was several hundred miles away from Osan at a Chinese investor seminar in Hangzhou, China, having bridged that unimaginable gulf from the Cold War era to the New World Order.  In between, I’ve journeyed from Alaska to Alabama to Argentina, from Singapore to San Francisco to St. Louis to Stockholm to Sintra, Portugal, in the pursuit and sharing of capital market knowledge. 

I would like to use this occasion to address our wonderful profession of security analysis, particularly debt security analysis as you would expect from the name of our organization.  We all play a role in guiding the successful channeling of pooled savings to constructive debt investments.

These have been trying times for the analyst profession.  Our equity colleagues have been called to task by regulators, legislators, investors, and the media for their perpetually laudatory prophecies.

A few equity analysts, none holding a CFA charter, apparently did cross the integrity boundary, sacrificing objectivity in the pursuit of issuer gratitude.  And the investment ranking schema was fundamentally flawed.  By inspection, all investment choices cannot be ranked as market outperformers.

While our equity analyst colleagues have weathered a major storm, I am persuaded that our profession has never been sounder and strategic prospects have never been brighter.

Over the past 30 years, there has been a proliferation of new debt asset classes from financial futures through CMOs, ABS, public emerging debt, and credit derivatives.

This progress often has been accompanied by the painful administration of costly “learning lessons.”  The tragedy: most of these lessons are hardly new.  They usually are a function of newer generations relearning old lessons.

For example, newer asset classes almost always will be stress-tested.  Initial assumptions about project costs, expected default rates, investment performance, volatility, correlations, and prepayments inevitably are not perfect.  The real surprise would be no surprise.

As the cycle of innovation spawns new instruments, there’s no singular technique that ensures perpetual periods of painless performance.

But I do have two suggestions for all of us that can help.  First, too many are inadequately steeped in economic, capital market, and industry history.  At a minimum, such historical guidance can reduce risk.

Second, industry lore holds the blind pursuit of yield as ultimately the greatest destroyer of long-term wealth.  I’d submit that the invariant application of a singular investment strategy, often underpinned by a non-dynamic analytical methodology, poses an even greater risk.

Over the years, I’ve often observed forecasters with significant “outcome biases.”  Some economists are perennial optimists; some are perpetual pessimists.  Some equity strategists always love their asset class; the same holds for some fixed-income strategists.  Too often, equity and debt analysts ironically become blinded by their familiarity with the industries and issuers that they cover.  It is comforting to know well the management of a large public firm.  After all, how can these folks ever steer anyone wrong?

At root, the problem is philosophy.  Generally, efficient capital markets also are objective.  There’s no room for personal bias, either overt or subconscious.

This problem’s not unique to economics and finance.  Harvard biologist Edward Wilson addressed this topic in his wonderful book, Consilience.  The best way to guard against “outcome bias” is to deploy a multi-disciplinary approach to decision-making.

Although the proud members of various disciplines may disagree, no one approach can lay claim to extended superiority.  Investment decisions must reckon with political, macroeconomic, microeconomic, industry, issuer, issue, quantitative, and technical considerations.  Siloed decision makers can prosper when their views happen to coincide with the trajectories of markets.  But like the weather, markets have distinct and changing climates.

Recently, an esteemed practitioner friend observed to me that the “end of finance” was at hand.  In his view, there was nothing really new.  This was an era of model tweaking.  I can partially emphasize with his observation.  Indeed, the annual FMA (Financial Management Association) conference that Andy Kalotay just attended last month seemed to sponsor fewer panels than I recall back in the 1980s. 

But the “end of finance,” the “end of fixed-income evolution?”   Nothing could be further from the truth.

Just think of the likely changes over the next 30 years.  The global debt capital markets have not fully matured.  Plain-old vanilla corporate debt origination will expand sharply as large developing economies, like China and India, reach full maturity.  The process of securitization has not been fully deployed around the world.  Debt markets have not been fully indexed, a shortfall that we hope to erase.

New tools, models, technologies will allow us to better handle these innovations for the benefit of institutional and retail investors.  Real-time debt indices and new derivative contracts are just around the corner.

This is a noble profession.  We are not quite “Doctors without Borders,” but we are promoting economic efficiency.  In turn, global economic progress, with fewer wars and healthier populations, will be swifter.

In the spirit of consilience, I’d like to express my gratitude to all the people who have played a major role in my professional development.  A part of each one of you joins me in entering the Hall of Fame tonight.

The list is long because I’ve had the good fortune to work with so many outstanding individuals over the years.

In chronological order, Lin Franklin, Rich Maxwell, and Tom Scherer from Foreign Credit Insurance Association, who reinforced the value of teamwork and shared an appreciation for basic security analysis.  Along with them, I also had my first experience with bogus financial statements, when a major client showed us his “real financial statements,” handwritten in pencil on green-lined accounting paper.  And how did this analyst rookie react?  Although slightly skeptical, I’m ashamed to admit that I was delighted that we now have these “pencil bona fide statements.”

Bob Burke and Peter Jadrosich from Moody’s.  During his nearly four-decade career at Moody’s, Bob presided over much of the ratings arena, especially utility ratings.  With his unmatched diplomatic skills, Bob could make a downgrade sound like an upgrade to an issuer.  And contrary to the shorter horizons of other forecasters, Bob seriously could suggest that our ratings were based on the life of the issue, usually extending out to 30 years. 

Bob also taught me about “circularity” in finance.  When I once asked him the derivation of Moody’s prescribed optimal capital structure for utilities:  50% debt, 15% preferred, and 35% common stock.  He said that it came from the legendary John Childs at Irving Trust, the dean of utility corporate finance and the proprietor of a semi-annual program on corporate finance that was attended by the Who’s Who of Corporate America for decades.   When I joined Kidder, Peabody, I was delighted to finally meet this legend, now in his late 70s, who ran the same corporate finance program at Kidder.  I timidly asked him, “Mr. Childs, I heard at Moody’s that you were the source of the recommended capital structure for utilities.  How did you arrive at these ratios?”His unforgettable response: “Me?”  I didn’t come up with these ratios.  I got them from Moody’s when I started out back in the 1930s.”

Then there’s Peter Jadrosich, who helped me become a real analyst.  He shared and reinforced my insatiable curiosity, the lodestone of real security analysis.  He was a non-stop fountain of ideas, and to this day, remains the most creative credit analyst that I’ve ever met.  In the last several years, corporate structure arbitrage has been touted as a brand new methodology.  During his distinguished tour as head of investment-grade and high-yield credit research at Paine Webber, Peter was doing this by the early 1980s.  Although looking back, it’s clear that the Hall of Fame Committee fortunately never read our primitive comments on optimal capital structure while at Moody’s.

Next, there’s Tony Vignola from Kidder,Peabody, who introduced me to sell-side research.  Tony’s broad reach spanned academia, the U.S. Treasury Department, and Wall Street.  At Kidder, he founded financial futures research, fixed income research, and then went on to become the firm’s Chief Economist, which prepared him well for his current role as a successful hedge fund manager for the past decade.  Most important, in recent years, Tony has taken on the daunting task of becoming my golf mentor.  For those of you who have been on a course with me, his mission has not been completed.

Opportunities often come in strange ways.  I also would like to thank Nomura’s Bob Levine for my first opportunity to serve as a Board member of FIASI.  As Bob and I stood side-by-side in the men’s room one afternoon at Kidder, he asked me if I was a FIASI member.  I said: “Yes.”  Bob replied: “Good.  How’d you like to become a board member?  I’m the next president, and we are short of a seat.”  How could anyone reject such an auspicious invitation in such a glamorous environment?

My Kidder credit research team, who’ve all gone on to distinguished careers: Leo Kelser in utilities, Anne McDermott in financial institutions, and Charles Bishop, Joe Labriola, and Jim Nelson in credit research and portfolio management.  Indeed, when Jim joined Wamco, they only had $7.0 billion of assets.  In just 12 years, the assets have skyrocketed 20- fold to id="mce_marker"40 billion, helped by Jim’s guiding hand and clearly his ability to forget my suggestions.

My greatest debt goes to Lehman.  A strong commitment to research and indices preceded my arrival by many years.  This commitment to a research culture has grown through time.  I’d like to thank Bart McDade, who brought me to Lehman, while he headed the global credit business.  As he has risen over the years to head our global debt division and soon to become the next Chairman of the Bond Market Association, his dedication to strong and independent research has been absolutely invariant.  How else would Lehman allow someone of my less-than- tactically-focused ideas see the light of day for so many years?

This research-centric culture was underpinned by a relationship and sales franchise that understood, valued, and communicated the virtues of strong research.  Bill Cronin, Tom Humphrey, Mark Lahey, and Chal Taylor all provided strong support.  This commitment was echoed and reinforced by my trading colleagues, like Rick Rieder.  He cares so much that he’s the only trader that actually marked his index positions to 0.5 basis points.

How can a strategist not look good in the midst of such long-term veteran colleagues like Dexter Senft, Jim Asselstine, Mark Howard, and Andy Sparks?  Directly, I’ve been aided by folks like Steve Mandl, Arang Varadhachary, Ollie Radakovic, and Joe Di Censo, all of whom made terrific contributions.

But saving the best for last, over all the years, my most rewarding professional and personal collaborations have been with our director of indices, Steve Berkley, and our director of quantitative research, Lev Dynkin, along with their teams represented here tonight.  Working together, we have extended Lehman’s mapping of the U.S. debt capital markets to pretty much across the planet.  Over the past seven years, we’ve introduced more new indices than in the entire preceding two decade plus history of our index franchise.  We built and highlighted the virtues of new indices like the U.S. Universal and the Global Aggregate Index.  And in so doing, we have contributed to the evolution of fixed-income investing around the world.

Realistically, I know that the hundreds of thousands of words of flow research that I’ve written over the years, like yesterday’s newspaper, will be consigned to the dust bin of history.  Over a longer interval, the same holds true for the most extended horizon-intended shelf research.  But I’m comforted by the notion that the data that Steve, Lev, and I and our teams have collectively created is destined for a kind of capital market immortality.  Decades from now, there will be legions of new academics, plan sponsors, consultants, and strategists who will sift through these data sets in the ultimate pursuit of a better way to understand capital markets.  Our collective epitaph: we were “the ultimate capital market data collectors, providers, and hopefully analyzers.”

In professional sports, induction into the Hall of Fame often follows the end of a successful playing career.  In contrast to the playful suggestion from one former colleague, tonight does not imply mandatory retirement.  I hope to contribute for many more years to this noble profession.

Thank you all for sharing this ultimate career highlight with me this evening.

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