Baudouin Richard does not remember exactly when the phone rang on the afternoon of Sept. 11. "I just know it was shortly after the second plane had struck the World Trade Center," he says. "The markets were a mess, and then Gianluca Garbi called."
Richard helps manage Belgium's national debt. By juggling the timing and the terms of bond issues, he can save his government billions in interest costs and that translates into more money for schools, roads and health care. The carnage in New York had sent investors into a frenzy, and market makers companies obligated to buy and sell weren't able to keep up with the swings. It was the kind of activity that tends to scare investors out of smaller, less liquid markets and into more predictable ones. That could force smaller countries to raise their interest rates in order to get people to buy their bonds, which in turn could weaken already shaky economies.
That's where Garbi comes in. The 31-year-old Italian runs a company called Mercato Telematico dei Titoli di Stato (MTS), which until three years ago was the sleepy bureaucracy that executed government bond transactions carried out by Italian banks. In 1998, it mutated into a sleek, for-profit, electronic operation that aimed to break up the logjams that were preventing capital from moving across Europe.
Established players like Goldman Sachs and Morgan Stanley also had their eyes on this lucrative business. Long dominant in the American bond market, they initially refused to join MTS and instead helped set up a rival platform called BrokerTec, figuring their sheer mass would attract the rest of the market. But smaller players, distrustful of a platform dominated by two American behemoths, flocked to MTS largely because of its unique structure. In each country MTS set up a separate corporation, which it owns jointly with the local market makers and the national debt agency. Establishing those operations from MTS Portugal to MTS Japan enabled it to work closely with local regulators while concentrating order execution in Milan to create a single, highly liquid market.
A critical mass of issuers and dealers settled on MTS' balance-of-power approach, and even the big boys soon agreed to play. The result is a fair and liquid pan-European "secondary" market for government and corporate bonds. That's where banks and dealers go to sell "used" bonds, as opposed to the primary market where governments and corporations issue "new" bonds. Just as new autos sell better when buyers trust their ability to re-sell them at a fair price, so newly issued bonds move better when buyers know there's a well-managed secondary market. "Liquidity is turning out to be more important than we ever thought," says Vasco Pereira, president of the Instituto de Gestão, do Crédito Público (IGCP), which issues Portuguese government bonds. "It's even more important than a good credit rating."
Eventually, the Americans asked to join MTS as well, and today the company handles 30-50% of Europe's government bond business, connecting 400 participants and turning over up to $42 billion a day. In 1999 the firm signed up the legendary Alexandre Lamfalussy, 72, to help run the operation with Garbi. One of the chief architects of the euro, Lamfalussy had become critical of Europe's inability to move capital around the Continent. "MTS is doing what I had been talking about," he says. "This is a chance for me to put up or shut up."
Philip Brown, managing director of Schroder Salomon Smith Barney's fixed income operations in London, says the governments themselves deserve much of the credit for the success of MTS. He points out that IGCP had to call in myriad bond issues maturing at various dates and replace them with issues coming due at the same time before MTS could offer a standardized market to investors. "Our traders and salespeople now feel confident offering Portuguese bonds to Japan or the U.S. because we don't have to worry about not being able to cover our positions later," he says.
Richard recalls Garbi's Sept. 11 conference call with regulators. "We agreed to halt trading, and then we came up with a plan to ease back into it." Given the threat to liquidity, the market makers agreed to take on more risk than normal, and regulators to extend more leeway than usual. MTS was back up and trading on Wednesday.