Now that the smoke has cleared....: B.E. investment bank overview.

SUNDAY EVENING, SEPTEMBER 29: NAPOLEON Brandford III meets Muriel Siebert over dinner.

There is little time, but much to consider. Brandford, the competent, albeit less-celebrated, half of the renowned Grigsby Brandford & Co., was scrambling to salvage the firm's crumbling client base and credibility. The founder, Calvin Grigsby, had just resigned under fire--the target of a federal investigation probing several Miami municipal bond transactions in which he was involved. And Siebert--founder of the first woman-owned securities firm and the first woman to hold a seat on the New York Stock Exchange--is smelling opportunity among the chaos.

Monday, September 30: Siebert Brandford Shank & Co., L.L.C. is born.

The synergy is clear. Siebert's firm, a Charles Schwab-esque concern based in Manhattan, has more than 80,000 retail accounts. Brandford, a 20-year veteran of the muni-bond market, has a roster of institutional clients throughout California and the Northwest. Suzanne Shank, formerly Grigsby Brandford's CEO, has built a similar base in the firm's Midwest division based in Detroit. Brandford and Shank together hold a 51% stake in the new venture; Siebert, the remaining 49%.

With 16 offices around the country, the new firm has participated in 39 transactions worth more than $6.1 billion in muni-operations. Weeks after its inception and in the face of Proposition 209--which abolished affirmative action in the state of California--SBS was appointed senior manager of one of the California State Treasury's largest negotiated bond issues for the state this year. Bear Stearns, J.P. Morgan and several others serve as co-managers on the $175 million deal. Earlier this year, the firm was named co-financial advisor on San Francisco's $2.9 billion airport project and sole financial advisor in St. Louis $1 billion airport.

"There is still money to be made in bonds," says Brandford. "But the economic realities require a broader base, and black firms must change with the times."

While Brandford's is a story of survival, for many African American-owned investment banking firms--which have traditionally used the municipal bond market to gain a foothold in the finance industry--1996 was a jolting reminder of just how harsh the winds of change can be. Just as profits in the once-lucrative muni-market tumbled more than 65%, two of the country's leading black firms--Grigsby Brandford and Pryor, McClendon, Counts & Co.--were rocked by scandalous probes. And others were forced to scramble for crumbs left from a dwindling muni-bond pie. Big players were forced to exit the business. But black-owned firms, smaller and less diverse, were especially hard hit. Today, a new political and economic landscape finds the African American finance community forever changed.

NEW APPROACHES, NEW MARKETS

Not unlike the makeup of Siebert, Brandford, Shank & Co., for many firms, the muni-industry's downturn has meant a departure from the traditional forms of black firm ownership. The way these black-owned firms conduct business is changing as well. The industry demands more innovative cooperation between investment banks. Expect to see more joint ventures between black and white firms that would rather get a smaller piece of action than no action at all.

And while some black-owned firms may continue to go it alone, struggling to hang on to their share of a shrinking pie, the recent changes have helped other firms shed some light on fast-growth areas such as asset management. Industry observers note that the continuing growth of the black middle class will mean increased opportunities for African American firms with the savvy to serve them and their increasing wealth. In areas such as pension investments and college and retirement funding, asset management promises long-term growth. The prospect of tapping into these new markets was enough to convince Atlanta-based Ward Bradford & Co. and Clementon, New Jersey-based Sturdivant & Co. to abandon the investment banking business for asset management opportunities--hence they no longer appear on the BE INVESTMENT COMPANIES list.

Charles A. Bell, CEO of Charles A. Bell Securities Corp. (No. 12 on the BE INVESTMENT COMPANIES list), says some firms are sticking it out in the municipal bond arena, but are slowly making the transition to other areas of asset management. "We have, to a degree, tried to diversify, but that's going to take time," says Bell, who opened Charles A. Bell Asset Management Corp. about 18 months ago. But he adds that entering new markets without a track record can be rough without "the relationships with corporate people that are necessary to become a major player."

For black investment banks, making the transition will be hard, but not impossible. "The muni-bond market doesn't signal the death of blacks in finance, by any means," says Ernest Green, managing director of Lehman Brothers in Washington, D.C., and chairman-elect of the National Association of Securities Professionals. "It's just one index."

To be sure, blacks are making inroads in other segments of finance. Indeed, thriving young firms such as Utendahl Capital Partners (No. 1 on the BE INVESTMENT COMPANIES list), the Williams Capital Group (No. 11 on the BE INVESTMENT COMPANIES list)and Blaylock & Partners (No. 6 on the BE INVESTMENT COMPANIES list) have been building their businesses on taxable deals--including equity trading and fixed incomes.

"There are going to be downturns in every sector from time to time," says Christopher Williams, chief executive of the Williams Capital. "As smaller firms, we can't be all things to all people. The key is to find areas of growth, pick a niche and offer the best service." Williams is betting that his strategy of offering institutional investors targeted research, sales and trading services in the equity- and fixed-income markets will give him an edge over other firms.

REBOUNDING FROM THE MUNI BUST

The immediate future does not look bright for the muni-bond industry, especially with interest rates slowly beginning to creep higher. In addition, the hotbed of competition for the country's fast-dwindling number of issues makes it questionable that many minority firms will be able to compete effectively against larger firms for business if they continue to operate as they have in the past.

Part of what makes the muni-bond crash so alarming is the swift and furious blow it dealt to blacks in the industry. Just a few years ago, muni-bonds were booming. And black-owned firms for once had a seat at the table. But 1994 changed all that. Municipal bond volume dropped by more than 50%. Then Congress legislated strict bans on political contributions in the industry, prompting well-established firms like CS First Boston and Donaldson, Lufkin & Jenrette to exit munis for more profitable lines of business. Easy for them. But the country's black-owned bankers are still feeling the effects of the loss of what had been for many the cornerstone of their firms' very existence.

Making matters worse, heavy-handed enforcement of the ban on political contributions has strangled leading black-owned firms, like the former Grigsby Brandford, in a web of investigations and controversy. Although Grigsby was not formally charged, Brandford--sweating under the glare of public scrutiny--knew the situation could well be the firm's undoing. "Why should so many suffer for the alleged actions of one?" asks Brandford, who was able to retain roughly two-thirds of the firm's 60 employees.

In fact, firms are suffering through investigations that have yet to yield any wrongdoing. Unfortunately, the mere mention of a black-owned firm's involvement in anything questionable has been enough to cripple or kill. Investment banking veteran Bernard Beal of M.R. Beal & Co.(No. 3 on the BE INVESTMENT COMPANIES list), lost business last year when he was unjustly accused of paying a politician under the table to receive a municipal bond deal. His firm has come back stronger than ever, but surviving such scrutiny while battling a tumultuous industry takes leadership that most firms don't have.

Such concerns are one reason Marianne Spraggins was tapped last fall to rescue WR Lazard & Co. (No. 14 on the BE INVESTMENT COMPANIES list) Spraggins, who is no stranger to controversy, became the first black female managing director in 1990 at Smith Barney, then left the securities industry in 1993. Proclaiming that she is "on mission," Spraggins says Lazard has scaled back the firm's muni-underwriting business to focus on more profitable areas like consulting, equity trading and investment banking.

At WR Lazard, a firm whose capital base had slipped from $4 million to about $1 million in the wake of founder Wardell Lazard's 1994 death, Spraggins has had to work quickly. She has aggressively moved to cut costs--slashing salaries at a time when firms on the Street were paying record bonuses. She has also recruited new talent. More importantly, she developed a strategic partnership with Prudential Securities Inc. which included a $500,000 capital infusion.

"That loan is part of a much larger relationship with Prudential," Spraggins says cryptically. "There are a lot of synergies that relate to our day-to-day operations." When pressed for details of the partnership with Prudential, Spraggins refused to comment further. Insiders say as part of the deal, Lazard would use Prudential to clear its trades.

SECURING A FUTURE

While such innovative moves may be necessary to secure the future of blacks in finance, right now muni-bonds are the most visible signs of African Americans' presence on Wall Street. Since the peak of 1993, municipal underwritings by minority firms have plunged 42% to roughly $16 billion, according to Securities Data Co. And while there is clearly a need to diversify, many firms remain committed to mums. Only this time around, firms are approaching the business with a keen awareness of its economic realities.

Clearly, the worst thing any firm can do is stand still. Jim Beard, first vice president of Miami-based Howard Gary & Co. (No. 8 on the BE INVESTMENT COMPANIES list), puts it bluntly: "That minority slot many of us counted on is going the way of the dodo bird," he says. "You simply change or get out of the way."

While the rule of thumb for other businesses, product differentiation is a concept muni-bond firms didn't need in the salad days. Now it has become one of the most important ways Howard Gary aims to thrive. By cutting costs and focusing more tightly on business development efforts, the firm hopes to win issues by doing jobs quicker and at lower fees than the competition. "When it comes to golf outings at expensive country clubs, we're not the one," Beard says. "We won't use our resources in that way." What's more, the firm is concentrating more on its Southeast home base than other areas of the country where the travel expense versus the chance of landing an issue don't add up.

In spite of the changing environment, M.R. Beal remains heavily involved in municipal bonds, but it can no longer afford the luxury of waiting for business to come knocking on the firm's door. Beal does more consultant banking than pure transaction banking today. And rather than look for requests, he says he tries to generate proposals and ideas. Recently, the firm senior-managed a pension obligation fund for Alameda County, California.

"Look, the muni business will continue to contract and the margins will be thin," says Beal. "But capable people can still make a living at It.

Like several of his peers, Brandford maintains that the "muni-panic" is way overblown. He insists that just because the rules have changed doesn't mean the business is dead. As an industry veteran, he remembers the climate in 1981 when the prime rate was at 20.5% and industry volume was at less than a quarter of its current levels. "People still made money," he says.

That's encouraging news. But a trip down memory lane is of little use to firms whose recent past is so bruising. Whether Grigsby is guilty of any wrongdoing remains to be seen. He didn't return repeated phone calls. But the federal government's intense spotlight on black-owned bond firms makes it clear that, unlike their more established white-owned counterparts, African American concerns live a precarious existence on the Street. Pryor, McClendon, Counts & Co. stands as another illustration of the vulnerable nature of black-owned firms. As the target of a Securities and Exchange Commission inquiry into how PMC brokered 70% of Atlanta's $10 billion in 1993 trades, the firm has suffered the loss of several top executives as well as several of its pension fund clients. In February, one of the firm's chief rainmakers, Ray McClendon, jumped ship for Chicago-based Mesirow Financial, which handles nearly $3 billion in diversified assets. The move will likely boost McClendon's career, giving the new executive vice president of the investment banking division entree into private deals that eluded his former black-owned firm. But it couldn't have come at a worse time for his remaining partners, Malcolmn Pryor and Allen Counts.

Though saddened by the tumult of black bond firms, Spraggins has little use for modesty. She says she is hopeful that she can help build enduring, African American-owned institutions, rather than founder-dependent firms. And she is unsympathetic to those who can't cut it. "This, to me, is the final frontier for blacks in America," she says. "And we must succeed."