Capital Markets

On the Record: Bruce Van Saun, Part II

How, and why, Bank of New York traded its 338 retail branches for J.P. Morgan Chase's global corporate trust business. A exclusive.
Ronald FinkJanuary 10, 2007

Editor’s note: Before its merger with Mellon Financial took over the news, the Bank of New York pulled off a complex asset swap with J.P. Morgan Chase. In this interview, which appears only on, vice chairman Bruce Van Saun explains the details of the smaller, but more complicated, deal.

Bank of New York Co.’s agreement to merge with
Mellon Financial Corp.
— a blockbuster $16.5 billion deal that would create the world’s largest securities servicing and asset-management firm followed a smaller but significant deal that Bruce Van Saun saw through last year, a rare type of transaction called an asset swap. The swap traded BNY’s 338 regional retail branches, valued at $3.1 billion, for J.P. Morgan Chase’s global corporate trust business, valued at $2.8 billion. An asset swap can be an attractive alternative to a traditional acquisition since it makes it possible to avoid tax on any gain in value, but the assets must be similar enough to satisfy the Internal Revenue Service. Van Saun, who recently moved up to vice chairman after nine years as CFO (and will become CFO again of the merged BNY/Mellon organization), explains how and why the swap was done.

Instead of the asset swap, why didn’t you
simply sell the retail branches?

We looked at whether we should pursue an outright sale.
We certainly knew there were players besides Chase that
wanted to further their position in the tristate market
[New York, New Jersey, and Connecticut]. We also
looked at a spin-off. We thought a swap was our best
alternative, because we gained a very attractive asset and
reinvested in our core business in the process.

What did you like about Chase’s trust

There are two interesting aspects of the corporate trust
pieces. One is the increasing sophistication in the debt
markets, where there are more-structured products like
CDOs [collateralized debt obligations] and CLOs [collateralized
loan obligations]. There’s a need for sophisticated
trustees to be able to handle the administrative
services that go with that. It’s high growth, so that’s an
attractive part of the business. The second part we like is
the international dimension that Chase has. We’re picking
up an additional 15 overseas locations.

What’s happening overseas is analogous to what
happened here in the United States 15 or 20 years ago.
We used to have banks providing 80 percent of debt
financing and the capital markets providing 20 percent.
Today, that has flipped. Internationally, we [still] have
banks providing 80 percent of debt financing. As that
moves to more of an intermediated market, it increases
the demand for trustee services. So we see a lot of
growth potential outside the United States.

Didn’t you have to press for the structured-debt
piece of corporate trust from Chase?

[At that time,] Jamie Dimon was taking over the reins at
Chase. And we knew that when Jamie was at Bank One,
he had sold the corporate trust business to Chase. So we
thought that with Jamie taking over, there was a ripe
opportunity to see whether corporate trust was something
he would be willing to part with again.

Then we had to agree on what was, roughly, a balanced
trade. Chase would put up certain businesses, and
one thing they initially held back on was this CDO business.
But in order to get balance in the trade in terms of
growth and size, we needed that business to be included.
Ultimately they were willing to do that.

Given the large number of moving parts
involved in a swap, how long did this deal

It really was an incredibly complex deal, and it took us
the better part of a year. Each of the businesses [involved
in the swap] is a net liability provider. The balance sheets
are lopsided. A lot of the value of a business depends on
what you ascribe to be the value of those liabilities. So
we ended up spending an awful lot of time just level-setting
the numbers and our view of what the P&Ls of both
businesses were.

A Bank of New York spokesperson said the
swap not only accelerated the bank’s growth
process but also strengthened its risk profile.
How did it do that?

The retail middle-market business had an $8 billion loan
portfolio. The business that’s coming back to us in corporate
trust has approximately the same deposit base,
but the asset side of the balance sheet is just short-term
investments. So we’ve replaced a good chunk of loans
with short-term investment securities. We’re making the
pro forma earnings while taking less risk.

One of the beauties of the corporate trust business
is that it’s highly diversified. There are four major
elements to the business: corporates, munis, structured,
and global. If one element is dragging, there’s
usually some other element that’s picking up. If the
economy weakens, there might be less issuance, but
then there might be a pickup in default activity, and so
you’re making money in servicing those defaults. The
diversification has meant that our corporate trust business
is one of our steady Eddies in terms of its growth

From being a traditional commercial bank,
the Bank of New York has undergone a radical
transformation over the past 10 years.

If you go back to when Tom Renyi took over as CEO, in
1997, we’ve sold our credit-card business and our asset-based
lending and factoring business. We’ve significantly
reduced the size of our credit portfolio, and now we’ve
sold the retail middle-market business. We’ve done significant
acquisitions in the custody business, the corporate
trust business, the clearing business, and the asset-management
business to completely reshape the franchise.
Today, 90 percent of our business is in servicing,
and 10 percent is in asset management. We really like
our business mix, and now it boils down to execution.