The man most responsible for inventing and introducing the swap to Citibank was Peter Eccles, a Harvard Law graduate. After stints with a top law firm and with Goldman, Sachs, Eccles joined a small merchant banking firm seeking to get into the pockets of big US multinationals. There Eccles made the discovery that global companies often had local currency reserves in certain countries that were blocked by exchange controls in the same way that Citibank's own profits in some countries were blocked at one time or another. A big elevator company, for example, with operations in Brazil and Argentina might have $5 million in blocked Brazilian cruzeiros and no way to put it to use locally. At the same time, that company might lack pesos in Argentina, where it would like to construct a plant. To solve the problem of this elevator company, Eccles would seek out another big company, say a construction equipment manufacturer, with exactly the opposite problem: no Brazilian cruzeiros but lots of Argentinean pesos. He would then negotiate a currency swap between the elevator company and the equipment company.
In fact, Eccles's first currency swap involved buyers and sellers on opposite sides of a deal done in U.S. dollars and Australian dollars, which were then subject to exchange controls.
The basis for the currency swap was the fact that multinational companies enter into long-term foreign exchange obligations around the globe that leave them with large assets and liabilities denominated in foreign currencies. These assets and liabilities pose serious earnings risks from currency fluctuations when there is no long-term forex market. An American company, for instance, might incur $20 million in ten-year fixed rate debt, denominated in (80 million) French francs, in order to buy a ship from a French yard. But the company does not want to owe $30 million ten years later because of foreign exchange fluctuations. To guard against that, the American company could obtain a commitment from a counter party - say a French company issuing $20 million in ten-year debt in the U.S. capital markets - to pay it 80 million in French francs ten years later. The American company would receive the francs, the French company the dollars, and the bank a fee for arranging the transaction. In effect, the intent of a swap is to make sure that each party comes out whole. In foreign exchange markets that operate free of exchange controls, short-term transactions, such as the purchase and sale of grain, oil, and other commodities, these risks can be hedged with forward contracts in currency bought at a stated rate good for a certain period. The swap market, however, emerged because there was no want to hedge long-term foreign exchange risks or to hedge in currencies subject to controls. "Where we were operating is where the foreign exchange market had no activity," said Eccles.
Chief financial officers threw out the welcome mat for Eccles and his swap men. Trouble was, his small firm could execute such transactions by acting as an intermediary only with the world's largest and most creditworthy companies, because each one would have to approve the other's credit. Another factor that made the deals difficult was that the different parties in such transactions were typically represented by different investment banking firms. "Every deal was extremely tough. We could only do it when it was the only way a company could solve its problem," Eccles said. He concluded that the one institution in the world that could bring together both parties was Citibank....
For Eccles, however, arriving at Citibank was like taking a cold shower. Whereas Goldman was driven by an obsession with closing deals, Citibank was bogged down in bureaucracy and profit centrists. The first transaction, a sterling dollar swap for less than $20 million between Corning Glass and a British firm, took nearly eight months to complete. Eccles couldn't understand why the transaction couldn't be closed quickly. He thought it was because the Citibank International Bank Limited in London didn't have investment banking experience. He later learned the real reason: London thought he was trying to steal their profits on the transaction. Eccles' proposed solution shocked the folks in London. "You can have all the profits," he informed his dumbfounded colleagues. "Just let me close."
Shortly after that swap, Eccles closed on a $100 million swap between two top-rated companies, earning Citibank a cool $2 million fee and a personal visit by Wriston. The swap, Wriston told Eccles, reminded him of the negotiable CD. Like the CD, the swap demonstrated once again that "thinking big makes big things happen," Wriston said. To Wriston, global utopia is a world without boarders or barriers, where information and goods flow freely from one nation to another. The very existence of different currencies for different countries is an impediment to trade and, as Eccles put it later, "an anachronism in a global world. In a sense we were curing the anachronism."
..."Once you had created this way of working together globally, you tended to think about the business on those terms," said Eccles. Next to syndications, swaps became the single most profitable part of investment banking at Citibank.
...Account officers, said Eccles, tended to approach customers to sell them money, not to find out how they could solve a problem. Citibank swaps specialists soon devised a variation on the theme: the interest rate swap. Just as big corporations might have too little of one currency and too much of another, they also might wish they had more floating rate debt and less fixed rate, or vise versa....
Early on Citibank dominated the interest rate swaps business, handling perhaps 80 percent of the activity, according to one former officer. In 1982 the market amounted to about $3 billion in nominal terms. By the mid-1980s, Citibank's share amounted to some $17.5 billion.
For a while, Citibank managed to keep its new technology mostly to itself. Swaps were being done by investment banks, but they couldn't compete with Citibank, which had access to all of the counter-parties. According to Eccles, "It wasn't clear to others what we were doing, and we weren't making it clear either." Customers knew and cared only that Citibank could do a ten-year forward contract, say, on the pound sterling. Said Eccles, "All they knew was that Citibank could solve the problem, not how it was done." By the early 1980s, swaps specialists were among the hottest tickets on Wall Street, with twenty-six-year-olds often commanding upward of $500,000 a year.
Eccles Associates was founded by Peter W. Eccles (1936-1996), an international investment banker credited with devising landmark products in his field. Mr.Eccles, whose varied career traversed both law and banking, worked as a lawyer at the World Bank and at the New York City law firm of Cleary, Gottlieb, Steen & Hamilton. He later joined Goldman, Sachs & Company before moving to Ultrafin International Corporation. In the late 1970's, he joined Citicorp, where he devised the currency swap, which is now widely used to hedge risk in the foreign exchange market. The development of the swap was a landmark in the globalization of Citibank, and over the years it generated hundreds of millions of dollars in earnings. While heading international securitization activities at Prudential Bache Securities, he devised a