Proudly Private, a Wall Street Bank Marches On

On Wall Street, most bankers are paid a convoluted formula of cash and stock that’s determined by committee. At the boutique brokerage firm Sandler O’Neill, it’s old school: Everyone gets cash and one opinion matters most: Jimmy Dunne’s.

Earlier this year, Emmett J. Daly, one of the firm’s bankers, met with Mr. Dunne, a senior managing principal of the firm, in his office. “So tell me,” Mr. Dunne said, raising his left hand in the air, thumb out and fingers unfurling as he posed the question he asks every partner each year: “Do you think you are grossly overpaid, just overpaid, fairly paid, underpaid or grossly underpaid?”

The halls of Sandler O’Neill are filled with stories of bankers who dared to claim they were grossly underpaid. But there is little wiggle room with Mr. Dunne, 56, who comes to every compensation meeting armed with a detailed list of the partner’s production over the previous five years, down to the nickel. “We eat what we kill here,” he said. “And I know what everyone has killed.”

Sandler is not a typical investment bank. The firm is a throwback to a different era, a vestige of a time that all but ended in 1999 when Goldman Sachs’s partners decided to take their firm public. As one of the last major private partnerships on Wall Street â€" the other notable one is Brown Brothers Harriman â€" Sandler plays by different rules. Most important, it takes fewer risks than other firms. A big trading loss would have very personal implications for its 52 partners, who would have to pick up the tab. In fact, Mr. Dunne says, Sandler has never had a quarterly loss.

In an age of government bailouts and London Whales, Sandler may be relatively small â€" it has just 309 employees â€" but it’s also relatively untroubled. It has been fined by regulators just three times in its 25-year history, according to regulatory filings. While JPMorgan Chase was recently fined $410 million to settle allegations that it manipulated energy markets, the largest fine that Sandler has paid, $28,000, came in 2001 after a Sandler salesman gave a client poker chips during a trip to Atlantic City.

“A partnership involves people realizing that it’s their own money and it can be lost in market speculation and fines and a lot of other ways,” said Roy C. Smith, a former partner at Goldman Sachs who now teaches finance at New York University. Of course, there is a price to doing business the old-fashioned way. “It’s a good structure if you are happy to stay a small niche player,” Mr. Smith said.

Sandler’s niche is trading stocks and bonds for clients and advising small and midsize banks looking to go public or to merge. Its annual profit in recent years has exceeded $100 million, according to people briefed on the matter but not authorized to speak on the record. That amount is dwarfed by the billions made annually by larger banks like Goldman and JPMorgan, leaving some to wonder if Sandler can maintain its traditions much longer.

Rumors that the firm might sell itself to a bigger player, or try to raise the capital needed to expand by going public, have become increasingly persistent since 2010. That’s when Sandler sold 40 percent of itself to the private equity firms Kelso & Company and the Carlyle Group for $250 million. Private equity investors generally have an investment horizon of five to seven years, and may then look to sell their stakes or try to force a public offering. All of which raises the question of whether there is still a place on Wall Street for the likes of Jimmy Dunne and Sandler O’Neill.

The firm’s culture is all about Mr. Dunne, an old-school trader whose values include shunning debt, both at Sandler and in his personal finances. At a recent lunch at Oceana, a Midtown Manhattan restaurant, he emptied his pockets on the table, and the contents included a silver money clip bursting with more than $2,000 cash.

Mr. Dunne, who is obsessed with golf, smokes cigars and stocks his office with cases of Diet Turbo Tea, a drink that claims to provide “anytime energy.” He has an intense, sometimes explosive personality. “He used to say, ‘If I am not yelling at you, and I am nice to you, it’s because I don’t like you,’ ” said a former colleague who asked not to be identified because his current firm does business with Sandler.

Another Wall Street banker, who also asked not to be identified, interviewed for a position at Sandler in 2009. He asked Mr. Dunne for a guarantee, a set amount of money for one year, to come to the firm. “What will you guarantee me?” he recalled Mr. Dunne screaming. Mr. Dunne has given only a handful of guarantees during the 12 years he has run the firm.

The next day, the banker said he received a call from Mr. Dunne, who apologized. “You got the full Jimmy,” the banker recalled Mr. Dunne saying sheepishly. Still, the banker said, he was not extended a guarantee, and he wound up taking a job elsewhere â€" with a guarantee.

Mr. Dunne’s own compensation is a closely guarded secret within Sandler, but people in a position to know say that in recent good years he has made more than $10 million annually â€" in the same league as the heads of Bank of America and Morgan Stanley, though they are paid a mix of cash and stock. He says he is Sandler’s highest-paid partner because he is its top producer, an assertion that no partner has contested, at least not publicly.

It would be unusual for partners to contest Mr. Dunne. There has never been a partnership vote at Sandler, and even his new private equity partners don’t have a say in the firm’s day-to-day operations.

Last year, Mr. Dunne appointed Jonathan J. Doyle to run more of those operations, but he still has a finger in every aspect of the firm’s work. He does things his way, and one thing he likes to do is to hire people who have just been fired. “I have been at my best just after something has gone wrong,” he said. “You come back humbler and stronger.”

In 1982, he was fired by UBS for not properly reporting a trading error that resulted in a loss of roughly $100,000. “It took a trading issue and turned it into an integrity issue,” he said. “Now I have a rule: when you screw up, you need to own up to it and tell the hardest person to tell.”

After that, he found himself at Bear Stearns, another firm that had a reputation for hiring people who had been fired. In 1988, though, he left Bear along with Herman Sandler, Thomas F. O’Neill and a handful of other executives to start Sandler O’Neill. He immediately set a competitive tone.

Sandler and another boutique firm, Keefe, Bruyette & Woods, dominate the business of financing small and midsize banks. Both had offices in the World Trade Center, where Mr. Dunne would sometimes find himself in the elevator with James J. McDermott Jr., then C.E.O. of Keefe, Bruyette. Mr. Dunne says he could not bring himself to speak to his rival. “Herman would say hi and chat,” he said. “I just couldn’t. I would just nod, but we never spoke.”

Even today, John G. Duffy, vice chairman of Keefe, says Sandler calls attendees at Keefe’s annual banking conference, offering tee times at high-end golf clubs in the hope that they will spend less time at the conference. “They really do view us as the evil empire,” Mr. Duffy said.

Not at all, Mr. Dunne responded. Keefe, Bruyette is “obsessed” with Sandler, he said. “Are we aware of them? Of course, but that’s it.”

ON Sept. 11, 2001, some 66 Sandler employees and partners were killed in the attacks on the twin towers. Among the dead were Herman Sandler and Chris Quackenbush, who was the firm’s head of investment banking and Mr. Dunne’s best friend. Mr. Dunne had been at the Bedford Golf and Tennis Club that day, trying to qualify for the United States Mid-Amateur Championship.

Suddenly, at 45, he found himself running a firm that was devastated. But Sandler rebuilt, and by a year later had grown from 105 employees to 183. The firm is now in Midtown Manhattan, on floors low enough to be reached by fire ladders.

Six years after 9/11, the financial crisis hit. At the time, Sandler was committed to selling $250 million of so-called trust-preferred securities, a popular instrument used by banks to pay for expansion. These securities would become hard to sell during the crisis because of investor concern about banks’ creditworthiness, and some firms lost tens of millions of dollars on them.

While $250 million is a relatively small sum for some banks, it was big money for Sandler. One day, Mr. Dunne and Edward D. Herlihy, a law partner at Wachtell, Lipton, Rosen & Katz, were driving back to New York from playing golf in the Hamptons when Mr. Dunne’s cellphone rang.

It was Mr. Doyle, Mr. Dunne’s second-in-command, calling to say he had assembled a list of some of Sandler’s problematic positions. The trust-preferred notes were at the top of the list. “It’s going to get ugly,” Mr. Dunne said to Mr. Herlihy after the call ended. As they made their way back, Mr. Herlihy encouraged him to sell the notes.

During the next four months, Sandler sold its entire position, losing roughly $15 million in the process. It was a fraction of what the firm would have lost had it waited â€" and a fraction of what other Wall Street banks were losing at the time.

Over the years, Sandler turned down numerous offers to merge or to go public, a move that would transfer millions of dollars into the hands of the firm’s partners. But that stance softened in 2010, when Mr. Dunne and Mr. Doyle got a call from Eric J. Gleacher, head of Gleacher & Company, who expressed an interest in merging the two firms.

At the time, Mr. Dunne was concerned that capital gains taxes on long-term investments, then 15 percent, were likely to rise. (The top rate is now 20 percent.) A sale of Sandler would allow partners to lock in a lower tax rate on their gains.

The Sandler executives agreed to talk. Weeks later, Mr. Dunne called in his partners to announce what they thought would be a deal â€" only to learn that at the 11th hour, Mr. Dunne had changed his mind. He told them that while a merger was attractive from a capital gains perspective, the two firms didn’t have much in common.

Mr. Gleacher declined to comment about why the talks fell apart, except to say, “Sometimes things don’t work out, that’s all.”

Soon after, Mr. Dunne got a call from Thomas R. Wall IV, a longtime friend and golfing partner who works at Kelso, the private equity firm. He asked whether Sandler would be interested in having Kelso as a partner.

In November 2010, Sandler announced that it had sold roughly 40 percent of the firm to Kelso and the Carlyle Group. The stake was valued at roughly $250 million, putting a $625 million sticker price on Sandler. The firm put some of the $250 million aside for future growth, and all the partners got some cash, based on ownership stake and payable over five years on the condition that they stick around. Three years in, none have left.

The two private equity firms have no managerial control, having handed it to Mr. Dunne and Mr. Doyle along with the rest of the partnership, but they do get an annual payout. While Kelso is in no hurry to exit the investment, Mr. Wall said, it does have limited partners who will eventually want their money out. Carlyle is in the same position, said Olivier Sarkozy, managing director and head of the global financial services group.

That sets up what seems to be an all-but-inevitable confrontation. But Mr. Dunne says the private equity firms will not compel Sandler to follow the herd on Wall Street and go public. At least not on his watch.

“I don’t care what some analyst who has read about the company for four minutes has to say,” he said. “Shareholders? They can buy or sell shares, but I don’t care and I don’t want to talk to them about it. As long as I am in charge, this company won’t go public.”