Where is Dwight Sipprelle? He’s at home.
The facts are as follows. Last Thursday, Morgan Stanley Dean Witter & Co. released a brief statement announcing the 42-year-old Mr. Sipprelle’s retirement–effective the next day. Mr. Sipprelle had been with Morgan Stanley for 16 years, most of them as co-head of its high yield (read: junk) bond department. “Mr. Sipprelle has been a driving force in developing our high yield business from its very modest beginnings to a true powerhouse in the industry and was considered to be one of the most successful and influential traders in the secondary markets,” said Kenneth deRegt, worldwide head of bonds, commodities and foreign exchange at the firm on Oct. 6.
Mr. Sipprelle–perhaps the biggest risk-taker on Wall Street’s riskiest market–went home to suburban New Jersey last week because he finally took one risk too many. He invested a large chunk of Morgan Stanley’s proprietary book in telecommunications junk bonds, and they seem to have blown up in his face. He is not the only Morgan Stanley executive who is retiring, though.
Oddly enough, the 44-year-old Mr. deRegt had himself announced his retirement–effective the end of the year–two weeks before. And a month before that, Peter Karches, president and chief operating officer of Morgan Stanley’s institutional securities and banking group and a member of the firm’s exclusive management committee, had announced his retirement as well. Also in the mix: the stepping down in early September of Morgan Stanley’s chief risk officer, Lisa Polsky, to take a different job at Merrill Lynch.
A Morgan Stanley spokesman asserts that all the retirements were voluntary. But the fact that the retirements came just months before the firm’s November year-end was curious. Investment bankers leaving their jobs, even en masse, is not unusual; doing so just prior to the year-end and bonus time is.
Why then is Morgan Stanley killing its young? Because when investment banks get scared, they start “retiring” people. “Morgan Stanley has a history of shooting people up and down the line for losses,” says securities industry analyst Guy Moszkowski of Salomon Smith Barney. “Good people are often sacrificed on the altar of risk management.”
And why is there fear in the air these days? The days of easy money are over, and the losses are big. The dot-com battlefield has been bloody: Priceline has closed its WebHouse Club division; WebMD is laying off 1,100 employees; Kibu.com has shut down; so has Wiredempire.com, Powerdime.com, DeepCanyon.com … and the list goes on.
But there’s something else: The extent to which the culture of lax money has inflated the junk bond market to the point that it, too, has deflated. The epicenter of the carnage has been the telecom sector where, over the past three months, deal after deal has unraveled. Junk bond yields are skyrocketing, and Moody’s estimates that corporate defaults could hit 8.4 percent by next year. ICG Communications’ epic collapse–its stock is now trading around 33 cents, a far cry from its $28 level, when an investment group led by Liberty Media’s John Malone and including Thomas Hicks of Hicks, Muse, Tate & Furst and Eric Gleacher of Gleacher & Co. invested $750 million in the company–is just one example. Other telecom operators have also crashed–Viatel Inc. and GST Inc. Telecommunications, to name two more.
The common denominator: Morgan Stanley has been an aggressive junk bond underwriter for all three companies and now, according to sources, has losses “north of $500 million” on its books, due to marked-down positions on these companies’ debt. Morgan Stanley has said that this claim is greatly exaggerated.
Not coincidentally, Morgan Stanley’s stock has been on a downswing of late–off 32 percent in the last month. And in a conference call with analysts on Sept. 21, the company itself blamed trading difficulties with high-yield telecom bonds for its lackluster third-quarter results.
The ICG debacle seems to have been the final straw, and Morgan Stanley president and No. 2 John Mack is now taking action. Indeed, all of the upheaval–starting with Mr. Karches’ on Aug. 29–has quickly followed from the just-as-abrupt retirement of J. Shelby Bryan as chief executive from his troubled ICG Communications on Aug. 22. A Morgan Stanley spokesman denies a link between ICG and the retirements.
As for Mr. Sipprelle–well, Mr. deRegt added in his brief statement that he would now be free to pursue “a number of personal interests” as well as staying on, together with Mr. deRegt, as an advisory director to the firm.
The extent to which Mr. deRegt and Mr. Sipprelle were directly responsible for the ICG fiasco remains unclear, but what is known is that the aggressive underwriting of ICG high-yield debt occurred under their watch and that both of them were very close to the departing Mr. Karches. Indeed, it was Mr. deRegt who succeeded Mr. Karches as fixed-income head in 1992. Mr. Karches himself was very close to Mr. Mack, who ran the company’s fixed-income division from 1985 to 1992, when he handed it over to Mr. Karches.
Mr. Sipprelle’s departure was a quick one. On Friday, his Morgan Stanley voicemail picked up his number; by Sunday, someone named Matt Sandschafer’s voicemail picked up instead. He did spend the weekend at his home in Englewood, N.J. playing tennis with his kids, although he declined numerous requests to talk about his story.
“I feel old,” Mr. Sipprelle had told Forbes magazine this July. Perhaps he did–this and last year have been terrible years for a junk bond market that had boomed through 1998. With interest rates on the rise and corporate defaults manifold, the market for risky debt has withered. And his job was a brutal one. Due to his global purview, he was at his desk at the very crack of dawn and then stood on his feet all day.
But Mr. Sipprelle just does not seem to be the retiring type. He may have sold about $14 million worth of Morgan Stanley stock in late March, but with the stock flying earlier this year, other firm executives made similar moves. And that was, in all likelihood, just a fraction of his net worth: Market sources suggest that his salary over the past four years has consistently been in the $10 million to $20 million a year range. Since 1984, he has worked in Morgan Stanley’s junk bond division and drove its fitful growth up through its brief moment of glory in the first quarter of 1998, when Morgan Stanley briefly bumped perennial high-yield champ D.L.J.–stuffed full of former Michael Milken-trained wizards from Drexel Burnham–from its long-occupied perch atop the league underwriting tables. It was rumored that Mr. Sipprelle made $20 million that year and $500 million for the firm.
“Dwight is extraordinarily smart–he basically built up Morgan Stanley’s high yield operation from scratch,” says Jerry Paul, a portfolio manager for the Invesco High Yield Fund and a long-time junk bond investor. “I think it is a real loss for the market. Unlike many other firms, what Dwight and Morgan Stanley did was show a willingness to commit capital–to do whatever it took to get a deal done.”
Mr. Sipprelle’s goal was single-minded: to pump up the junk bond business for Morgan Stanley, as he himself said in an interview with a trade publication in early 1998.
As a trader, Mr. Sipprelle took no prisoners–”He would fight me on a lot of stuff,” Mr. Paul recalled with a laugh–but he commanded market-wide respect. He was purposeful, if not brash, in his quest to make money for the firm, some of his peers at rival firms say. “He was not really viewed as a team player within Morgan Stanley,” said one. “It was just him and his book [Morgan Stanley's proprietary capital], which was the biggest on the street. His job was to make money for Morgan Stanley, and he was very good at it.” Even so, he kept a fairly low profile and was not known as someone who palled around much with his peers. “I never saw much of him,” one trader said. “Those guys at Morgan Stanley pretty much stuck to themselves.”
Morgan Stanley and Mr. Sipprelle carved out a niche in the non-rated junk bond market (i.e., the debt floated by companies that is of such a risky nature that the rating agencies, if given the chance, would assign it their lowest CCC investment grade). For example, much of the $1.5 billion-plus in ICG debt that Morgan Stanley underwrote was unrated. Between 1995 and 1998, demand for high-interest-bearing debt was so high that for Morgan Stanley bankers, it became merely a question of timing–if investors cared little about a seal of approval from Moody’s, fine, then just get the paper out the door.
Which is what Mr. Sipprelle and his team did. For such a large operation, his ship was tight. He shared his office on the trading floor with his co-head Michael Rankowitz–who now becomes the division’s sole head–and oversaw not only U.S. high-yield bonds but emerging market debt as well. The son of diplomats, he grew up in far-flung lands such as Turkey and Haiti and was instrumental in making sovereign emerging-markets debt a respectable investment product.
But given the emphasis on speed, it was inevitable that short cuts would be taken. And that, in some cases, that very need to get the deal done would override any concern that someone with a more objective eye might raise with regard to the fundamental fiscal health of the company involved–ICG being the perfect example in that regard. As Morgan Stanley raised over a billion dollars for the company, its research side–in theory separated from the bankers by a Chinese wall–aggressively recommended the stock up until only a week before Mr. Bryan’s resignation.
In early 1999, Mr. Sipprelle and Mr. Rankowitz were quoted as saying the wall was not always impregnable: “Vines snake back and forth between various departments.” Now those vines look to have sealed Mr. Sipprelle’s fate. The seeming purge brings to mind the last time a major Wall Street house began firing its senior fixed-income people for bad credit exposure. In October of 1998, Merrill Lynch’s then-president Herb Allison axed 20 percent of his fixed-income staff in response to losses incurred during the Russian bond default that summer. The retrenchment turned out to be premature–bond markets quickly bounced back and Merrill was, by all accounts, caught short. Less than a year later, Mr. Allison was forced to resign when C.E.O. David Komansky made it clear that Mr. Allison was not going to succeed him.
Now, it seems, Morgan Stanley President John Mack is pulling his own version of a Herb Allison. But the difference in the investment environment today and two years ago is stark. Mr. Allison panicked–he had never worked the trading desk before and, as an accountant, was horrified at the Russian losses that confronted him then. When Federal Reserve chairman Alan Greenspan bailed the markets out with his rate cuts, Mr. Allison was caught on the wrong end of the trade.
Mr. Mack seems to have gotten his market call right, though. Trading desk veteran that he is, he is now in the process of coldly cutting his losses as well as taking future responsibility for them. His reasoning seems simple: What the ICG affair looks to have taught him is that the days of easy money are over. Times were different five years ago, when Mr. Bryan started his borrowing binge–interest rates were low and investors were eager to invest in risky telecom debt. Mr. Sipprelle and his desk were happy to not only underwrite his business, but bet the firm’s capital on his paper.
Said one senior trader at a competing firm: “Sipprelle and Morgan Stanley relied a lot on their balance sheet when doing these deals. They always took very large positions. That’s a dangerous business in such risky markets. They certainly led the league in arrogance.” Now Mr. Sipprelle looks to be taking the fall.
In an interview in June 1999, Mr. Sipprelle said: “To be a good trader, one has to have the burning desire to be successful and let the electricity of the market run through their veins without getting shocked.” It could very well be that Mr. Sipprelle himself was not personally responsible for propping up Mr. Bryan’s house of cards, but this much seems true: As the master of his desk, going long or short a security was sure to be his call. With ICG, he went long and looks finally to have gotten shocked.