Fallout: The Financial Crisis

A requiem for big investment banks

Stephen Beard Oct 17, 2008
Fallout: The Financial Crisis

A requiem for big investment banks

Stephen Beard Oct 17, 2008


Kai Ryssdal: These are difficult times to be an investment banker. The big names in your chosen profession have either failed, turned themselves into regular old commercial banks or been swallowed up by the competition. Just today the Justice Department gave the green light to Bank of America’s acquisition of Merrill Lynch. And worse, prosecutors are poking around. Subpoenas have been issued to an even dozen former executives at Lehman Brothers.

So there you have it — the kings of Wall Street are dead. Long live the Kings?

From London, Stephen Beard reports.

Stephen Beard: [sounds from a parade] The contrast could not have been more vivid. On the street, a victory parade, London saluting the Brits who won gold at the Olympics. While in an office nearby, somber reflections on an industry that has just met an inglorious end.

Michael Mainelli: September 21, 2008. That’s the date that’s written on the tombstone of investment banking. That was the day investment banking died.

Professor of Finance Michael Mainelli says on that day Goldman Sachs and Morgan Stanley applied to turn themselves into deposit-taking institutions. They were the last of the massive, standalone investment banks that dominated markets in the last decade.

Mainelli: They are no more. This is the end. The question is what will take their place?

The big independent investment banks failed for two fundamental reasons: they borrowed too heavily. And they dealt too much in complex securities that proved impossible to value. Now they have morphed into commercial banks, they’re going to get a lot more conservative, says John Moulton of private equity group Alchemy Partners.

John Moulton: I’m sure that we’ll end up with the investment banking activities within the likes of CITI becoming very, very restricted in what they can do. And I think that’ll be good.

He thinks the big investment banks will now be forced re-focus on their traditional business, organ ising takeovers and mergers, underwriting IPO’s. They won’t be allowed to borrow anything like the amounts they borrowed before. The regulators may not let them trade heavily in derivatives nor get entangled with highly leveraged hedge funds.

Moulton: Let those nice exciting things take place outside with different stakeholders, people who are prepared to take the risk for the reward and can afford to do so without ns bringing our economies to their knees.

The humbling of the former titans of Wall Street seems to leave a gap in the market. So who will step in to fill that breach?

Moulton: I believe this is the most fantastic opportunity that I’ve experienced in my lifetime in building our business, and we expect to expand our staff and therefore our business as we go forward.

Ed Wedbush of Wedbush Morgan. The Los Angeles-based firm is a middle tier investment bank with a net worth of around $250 million. Wedbush reckons that with Lehman Brothers gone and with Goldman, Merrill and the others at bay, he’ll now pick up a lot more investment banking business. But don’t look for explosive growth.

Ed Wedbush: Our growth has been steady. And I believe at this point in time it will continue to be steady, And they’re may be an occasional spurt here or there but it’s not going to be aggressive to the point where it disrupts our ability to perform.

Wedbush doesn’t like high octane products like derivatives. This doesn’t sound like another Goldman Sachs in the making.

In fact, says Professor Michael Mainelli in London, it sounds more like the old British merchant bank model. The small teams of bankers who financed railways and canals and other projects in the 19th century. Most disappeared in the 1980s, gobbled up by big American institutions. Mainelli thinks in the new financial landscape the merchant bank could make a comeback.

Mainelli: Projects need energy. They need connections. They need commitment. And these small merchant banks are far more likely to bring that than some faceless bureaucracy of 40, 50, 60,000 spread around the globe.

Whatever form investment banking takes now, it seems likely to be lower key, on a smaller scale and much less dangerous.

In London, this is Stephen Beard for Marketplace.

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