Lebenthal, in her Upper East Side apartment, relaunched Lebenthal & Co. in 2007. Her firm is now the country’s largest woman-owned stock and bond underwriter.
Chris Buck for Fortune
By Shawn Tully
December 12, 2012

The history of Wall Street is marked by the rise and disappearance of famous firms and the loss of their proud traditions. In the past two decades Salomon Brothers, E.F. Hutton, and Paine Webber, to name a few, were absorbed by megabanks that retired their names. The trend quickened in the financial crisis as the likes of Lehman Brothers and Bear Stearns collapsed. And just this year, Morgan Stanley ended the half-century-old Smith Barney brand.

The legendary municipal bond franchise Lebenthal & Co. suffered the same fate when Merrill Lynch bought the firm in 2005. And that appeared to be the end of the story for one of the quirkiest, most colorful brands in the annals of finance. If you’re close to middle age (or older), you may remember the parade of TV ads featuring tweedy pitchman Jim “Built-by-Bonds” Lebenthal, who for decades lectured America’s investors from landfills and subways in his clipped, staccato tone, announcing that “bonds are my babies!”

But—in a remarkable, odds-defying turn of events—Lebenthal & Co. has recently been reborn as a thriving independent firm. The CEO and principal owner is Alexandra Lebenthal, 48, Jim’s daughter and the third generation to head the firm founded by her grandparents in 1925. She’s now arguably the highest-profile woman on Wall Street. And a typically sober-suited, buttoned-up female financial executive she is not.

Lebenthal (pronounced Lay-ben-tholl) is an extraordinary networker and a fixture in the Manhattan society pages who counts as clients or mentors the likes of J.P. Morgan Chase (JPM) bond king Jimmy Lee, Morgan Stanley (MS) brokerage chief Greg Fleming, and former Oxygen Media CEO Geraldine Laybourne. Lebenthal is also the unofficial matriarch and lead recruiter for a rowdy secret society called Kappa Beta Phi, whose members make up a who’s who of the financial world. And she has assumed the family mantle as a leading spokesperson and champion of the municipal bond industry.

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As an entrepreneur, Lebenthal has overcome the financial crisis to build a money management and capital markets boutique from scratch at a time when small players have been vanishing. To do so, she has shrewdly exploited a lucrative area of opportunity on Wall Street—the trend of awarding part of the underwriting business for new issues of stocks or bonds to “diversity” businesses, including woman-owned firms.

The proof that she is good, not merely entitled, is that she’s outpacing all her rivals. Since she relaunched Lebenthal & Co. in late 2007, it has grown into the largest underwriter of both equity and corporate debt of any woman-owned firm in the U.S., handling some $1 billion in securities in 2012. For Lebenthal, that’s just the start. “The opportunities in this niche are huge, because issuers want to sell to woman-owned firms, and few have stepped up or performed well,” she says. “It’s one of the few fast-growing businesses on Wall Street, and we intend to dominate it.”

The original Lebenthal & Co. was founded 87 years ago in a two-room office on lower Broadway. Louis and Sayra Lebenthal helped democratize muni bonds, which had long been almost an exclusive province of the insurers and the rich. Louis died in 1951, but Sayra kept working until her retirement at age 93 in 1992. The 4-foot-11 Sayra was a dynamo who peered over a giant, horseshoe-shaped cherry desk that Alexandra uses to this day. She’d spend her days calling storeowners, Florida retirees, and dentists to sell $20,000 or $30,000 “odd-lot” batches of muni bonds.

Alexandra lunching with her father, Jim, who was a magazine reporter and an adman before joining the family business.
Chris Buck for Fortune

Jim Lebenthal spent his early career on a quest for glamour and adventure—determined, it seemed, to escape the family business. He first worked as a Hollywood correspondent for Life magazine in the 1950s, then as a Mad Men-era Madison Avenue advertising copywriter. A wiry 137 pounds, Jim, now 84, still exudes manic energy and humor, regaling visitors with stories about being thrown off a movie set by Frank Sinatra or lunching with Humphrey Bogart.

When Lebenthal joined his parents’ firm for good in 1967, the former copywriter deployed highly creative campaigns to get the phones ringing with new orders. His ads were a study in constantly risking the ridiculous to reach the sublime. In one 30-second spot, he declared, “Munis are a cash cow.” Then he said, “I was weaned on munis, not milk,” while brandishing a bond certificate molded to the shape of a miniature cow. Later, Alexandra would star in her own TV spots.

Alexandra inherited a passion for the family business, though she would shape it to a new vision. As a student at Princeton (class of ’86), she met her future husband, Jay Diamond, in a congressional politics class. Diamond still marvels at what he calls his wife’s force of will. “Her leverage isn’t that she runs a big company, but that you don’t want to say no to her,” says Diamond, chief of research at Annaly Capital (NLY), a real estate investment trust. (The couple have three children, ages 8 to 19.) She joined Lebenthal & Co. in 1988 at age 24, working as an assistant to her irascible grandmother and as a salesperson on commission. Her father handed her the reins in 1995, but six years later the family accepted a $25 million offer from brokerage firm AdVest, a unit of insurer the MONY Group.

After running her own shop, Alexandra was miserable as part of a brokerage bureaucracy. “It was as if I’d been put in a little box,” she recalls. “I was pulled away from the revenue-generating businesses I was supposed to be running, and pushed into typical ‘girlie’ roles in human resources and marketing.” In 2005, Merrill Lynch bought AdVest to expand its ranks of financial advisers. Alexandra departed the day the deal closed.

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Her dream was to build a business, but on a model far different from the old family specialty of selling munis to retail customers. Alexandra wanted a much more institutional firm that managed money for wealthy families and participated in underwritings not just for munis but for all types of stocks and bonds. Her reasoning was basic: The new firm wouldn’t be dependent on large numbers of brokers vulnerable to leaving for larger players, and the capital markets arm would expand enormously with a relatively small staff, creating a highly profitable franchise.

As part of the AdVest deal, Merrill kept the rights to the Lebenthal name, even though Merrill wasn’t using it. So when Alexandra created her new firm in late 2006 she called it Alexandra & James for herself and her father. “If I couldn’t use our last name, at least I could invoke the family tradition,” she says. But she was also determined to regain the old Lebenthal & Co. brand. Her first attempts went nowhere. Then she called her friend Greg Fleming, at the time the firm’s co-president, who wasn’t even aware Merrill owned the Lebenthal brand. To her delight, he saw no reason to mothball a venerable Wall Street name. Alexandra proposed a token price of $1,000, and Merrill accepted. The check is now framed in her office.

Though she’d won back the family name, the business she’d created came nowhere near matching Lebenthal & Co.’s former glory. When the financial crisis struck in 2008, the firm had just 10 employees and had exhausted its startup capital. For months Alexandra covered salaries from her own checking account, taking extra shares in exchange.

Alexandra’s grandmother, Sayra Lebenthal, sold muni bonds until she was 93.

As markets rebounded, a new crisis erupted for Lebenthal’s signature product. In a 60 Minutes interview in late 2010, Meredith Whitney, the analyst who’d gained fame by correctly predicting the rash of banking failures, forecast a big wave of defaults in the traditionally sleepy but safe muni markets. Muni bond prices tanked. Alexandra stepped in as the industry’s defender, a role once occupied by her father, who’d championed munis after New York City’s financial crisis in 1975 tarnished their image.

In interviews on CNBC and other networks, Alexandra energetically explained that most munis are backed by dedicated revenues from tolls, subway fares, and landing fees, or have first claim on all state or local taxes and hence remain safe even if states and cities encounter budget shortfalls. In time, the panic passed. Muni prices rebounded sharply in mid-to-late 2011, and have continued their strong performance.

Lebenthal stands out in the still largely male world of Wall Street by embracing—in fact, reveling in—her femininity. Her pet hobby is managing the guest lists for galas honoring New York charities, among them the Rita Hayworth Gala for the Alzheimer’s Association and the Fashion Institute of Technology. Her wardrobe at such events is always couture. She loves recounting how she wore an antique Valentino dress to the New York City Ballet gala, and the great designer instantly recognized his creation, shouting, “The Patmos Ball, 1968!” Her business wardrobe consists of wild plaid suits and chunky costume jewelry, concocted to distinguish herself in a roomful of male bankers. “Accessories are my armor,” she declares.

She is not afraid to speak her mind—or to share her observations in print. Two years ago she published The Recessionistas, a satirical novel chronicling how the financial crisis had upended the lives of egomaniacal bankers and their trophy wives. The book, which sold a respectable 13,000 copies, is distinct in the chick-lit genre for having no sex scenes but providing detailed descriptions of the anatomy of such financial products as CDOs.

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A natural networker, Lebenthal has made the most of membership in the secret society Kappa Beta Phi. Established just before the 1929 crash, the Wall Street mock fraternity was for decades an all-male organization. Lebenthal was inducted in the second group to include female members, in 1990, and became the first woman to run the society a few years ago. Its roster comprises the financial power elite, from New York Mayor Michael Bloomberg to AIG (AIG) CEO Robert Benmosche. Lebenthal declines to comment on Kappa Beta Phi. But several members who spoke on background confirmed that absolutely no one mines the organization for contacts more energetically and effectively than Alexandra Lebenthal. Buyout billionaire Wilbur Ross did speak to Fortune about how he met Alexandra through Kappa Beta Phi. “I headed it a couple of years ago, and Alexandra has been instrumental in bringing in many of the best new members,” he says. Since then, “I’ve done lots of business with her,” says Ross, who regularly purchases new issues of muni bonds for his personal account from Lebenthal & Co.

Today, Lebenthal & Co. stands on two sturdy legs, just as Lebenthal envisioned. The first is asset and wealth management. The firm acts as a “multi-family” office, providing both money management and additional services to a clientele she calls “the lost affluent.” That group is composed of families and individuals with investments ranging from $2 million to $20 million. The major high-net-worth managers, such as U.S. Trust, aim for bigger numbers, especially if those rich folks want extra help with tax preparation and estate planning. Lebenthal has concocted an original approach in which the firm provides extra “concierge services” and bills for time—$95 an hour for bill paying, for example, and $450 an hour for tax work—instead of relying on asset management fees to cover the cost.

The firm offers two in-house portfolios to its clients—an equity fund and a tailored choice of muni bonds. Overall, Lebenthal & Co. oversees $500 million in its managed accounts. Running the stock portfolio is Alexandra’s brother James, known as Jimmy. He’s a quiet, analytical type who’s the antithesis of his dashing sister. A former lieutenant on nuclear submarines, Jimmy is a value-oriented manager who relishes tearing apart balance sheets. He runs a portfolio of 20 stocks of all sizes. In the difficult years since the start of 2008, his fund has returned 3% annually after fees, two points better than the S&P.

Her father, Jim, became the industry’s most enthusiastic cheerleader.
Harvey Wang

The bulk of client assets is placed in the firm’s traditional specialty, munis. Each client gets a customized portfolio orchestrated by Greg Serbe, a veteran of the old Lebenthal. A main reason clients need different parcels of munis is that New York State residents, for instance, must pay state and local tax on most out-of-state issues, and hence should own mainly in-state or, even better, locally issued munis. The firm’s fees are low by industry standards: 0.5% for portfolios from $500,000 to $2 million. Once again, the results are strong. Serbe’s picks have produced annualized returns of 4.5% over the past five years, compared with 3.8% for the Barcap index of bonds of comparable ratings and maturities.

The second leg, and Alexandra’s new passion, is capital markets. Lebenthal & Co. is registered as a MWBE (for Minority and Women Owned Business Enterprise) firm with the licensing authorities in several states, including New York, New Jersey, and California. “It’s enormously helpful, and it’s our niche in the capital markets,” she says. The reason is that more and more corporate issuers of both stocks and bonds reserve a portion of their offerings (frequently as much as 5%) for diversity firms that hold the MWBE designation. Today, two-thirds of the Fortune 100, including companies like McDonald’s (MCD), Kraft (KFT), and AT&T (T), mandate that diversity firms participate in their new issues. Traditionally, “minority firms,” typically those owned by African Americans, totally dominated the diversity universe.

But that’s changing—in part because Lebenthal & Co. is exploiting the “woman-owned” label so skillfully. In 2010, Lebenthal & Co. participated in the Treasury’s sales of its stakes in General Motors (GM) and AIG, deals that were co-managed by J.P. Morgan’s Jimmy Lee. The firm has also joined in a dozen debt deals managed by J.P. Morgan, including several by America’s largest issuer of fixed income, General Electric (GE). It was also the sole woman-owned firm included earlier this year in the sale of real estate brokerage firm Realogy (RLGY) by the private equity group Apollo.

The firm appeals to issuers and investment banks for two special capabilities. First, it targets a group of investors that issuers covet but normally have problems reaching: “family offices” that manage money for America’s wealthiest clans. Since Lebenthal & Co. keeps a “Chinese wall” between its capital markets and asset management sides, it typically doesn’t sell the shares or bonds that it underwrites to its own family office clients. But Lebenthal has nurtured her relationships with other asset managers. “The issuers want diversity not just in the underwriters, but who buys the shares,” she explains. “We bring in orders from investors that never before bought GE debt, from wealthy families. That’s what differentiates us.”

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The second edge is the firm’s record of reliably placing absolutely all the shares or bonds in its allocation. For an underwriter, the most difficult part of managing an issue is making sure that the smaller firms that sell to individual investors don’t get more shares than they can sell. “The smaller firms often exaggerate the demand for the shares,” says Timothy Main, an investment banker at Evercore Partners, and an old friend of Lebenthal’s from their Princeton days. “Then they can’t sell enough shares, so their managers call a big institution and say, ‘I can get you 100,000 more shares.’ That’s a problem for an IPO.” When that happens, the big institutions doubt the quality of the deal, and the stock often falls after the opening, as the firms dump their excess shares. “Alexandra stands out because she never overestimates her demand for an offering,” says Main. “That’s the way you build a franchise on Wall Street.”

It also helps to have her endless enthusiasm. Earlier this year Lebenthal visited her old Princeton classmate Lisa Podos in San Francisco. As Lebenthal was hailing a cab, her cellphone buzzed with the news that Lebenthal & Co. had been chosen to participate in the IPO of fashion outfit Michael Kors (KORS). “Alexandra starts jumping up and down and shrieking with joy,” recalls her pal. For Alexandra Lebenthal, scoring a new deal never loses its thrill.

This story is from the December 24, 2012 issue of Fortune.


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