Rocket Scientists with Attitude

Rice Financial carves out a profitable niche in the municipal interest-rate swaps market

As a competitor for municipal derivatives deals, J. Donald Rice Jr., president of Rice Financial Products Co., wants to beat the big boys at their own game and on his terms.

For Rice, 41, it’s meant building his firm into an operation specializing in municipal interest-rate swaps, one of several types of securities known as derivatives.

A derivative is a financial instrument whose value depends on the characteristics of an underlying asset or instrument, and includes such securities as futures and options. In the case of Rice Financial, founded in 1994, that value is based on the difference between interest rates as in a fixed-rate to floating-rate swap.

Like some other African American-owned financial services firms, in fields ranging from investment banking to asset management, New York City-based Rice Financial wants to be judged solely as a derivatives expert and not as a minority enterprise.

“We are recognized for the nature of our transactions, not because we are an African

American-owned firm. We do this one thing and we do it well,” asserts Rice, a 14-year veteran in the securities industry. “We’re able to provide in the swap market the same level of expertise as other [majority-owned] firms.”

That knowledge base means that Rice Financial is in head-to-head competition with the municipal derivatives operations of such Wall Street titans as Merrill Lynch & Co., Rice’s former employer, and Goldman, Sachs & Co. Since opening its doors nearly six years ago, Rice Financial has executed well over $5 billion in derivatives transactions.

“We’re one of fewer than 10 investment banks that have a significant presence in the municipal derivatives market and the only firm that is not a major money-center bank,” notes Rice from his office on the 52nd floor in the World Trade Center.

FROM ROCKET SCIENTIST TO ENTREPRENEUR
Before striking out on his own, Rice, originally from Hot Springs, Arkansas, was a founding member of Merrill Lynch’s municipal derivatives products group, joining the brokerage and investment banking powerhouse in 1985. He structured such deals as a $300 million floating-to-fixed interest rate swap for a District of Columbia General Obligation refunding bond issue, a complicated transaction involving the refunding of more than 200 separate loan obligations; and a $148 million floating-to-fixed rate swap for the City of Philadelphia, the first done by a major city government, in 1990. Rice also did a stint at Bankers Trust in its derivatives department.

But Rice-and later, his future colleagues-began to chafe under the bureaucracy of large investment banks, where introducing an innovative new financial instrument would become bogged down by procedural issues.

“If you come up with a new product, it goes to a new product committee, then another committee, then it’s three weeks later before it comes out,” says Rice. “If it’s successful, a lot of other people take credit, but if it fails, you get the blame.”

The science of structuring derivatives and other related securities is often referred to as financial engineering. And Rice’s education-a B.S. in engineering from

Kettering University and an M.B.A. with distinction from Harvard Business School-helped shape his

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