Too Big to Fail, Yes. Too Small to Fail? Never.
Forget JP Morgan and Goldman Sachs for a second. Let’s look at the little guys.
Regions Financial, the midsize bank that owns Morgan Keegan, is putting it up for sale. Morgan Keegan, based in Tennessee, is an investment bank that advises states and companies. Most people in the rest of the country may not have heard of it, but it’s big in its home state. Nancy Bush puts it nicely:
“What have you got in Tennessee? FedEx, Elvis and Morgan Keegan. That’s about it,” said Nancy Bush, a long-time banking analyst.”
Regions Financial is a midsize bank, which is still trying to pay off its TARP loans from the government. Morgan Keegan is one of the few remaining small investment banks left.
It is also probably one of the best examples of the post-crissi trend in investment banking and brokerages: the big are getting bigger, and the small are struggling on their own to survive.
Around 500 investment banks are expected to close this year. You can have your pick of reasons. If you ask them, they will blame excessive regulation and compliance costs for their troubles. Others would say that the small guys don’t get the same federal subsidies and support them. No matter what the reason, we may end up with a world in which companies have fewer options than ever to raise money or sell themselves.
These small investment banks aren’t necessarily holier or smarter than big banks. Morgan Keegan, for instance, just paid a giant fine to settle charges that it mispriced some subprime securities.
But what firms like Morgan Keegan provide is choice and competition. Not every company is a Home Depot or Facebook. Goldman Sachs may advise GM or GE on multibillion-dollar deals. It’s probably not going to bother with the small clients who raise $20 million or $30 million through banks like Morgan Keegan.
One of Wall Street’s favorite words this year is “bifurcated,” a word which means “split in two,” but in almost every context means “there are some haves and there are a lot of have-nots.”
(“Trifurcated” is also a popular term – for instance, commercial real estate is trifurcated into office buildings with prestige, which are doing well; normal office buildings, which are just maintaining the status quo; and strip malls, which are doing badly. Note that “haves and have-nots” is still the theme.)
One seriously bifurcated market right now is investment banking. That’s the business where banks can take risks because they’re dealing with more sophisticated clients and investors. For instance, when a bank advises a company on a merger, that’s investment banking. When a bank helps a company raise money by selling stocks or bonds, that’s investment banking. When a bank lends a company money, that’s just plain old commercial banking.
There aren’t many investment banks left. The big ones – Goldman Sachs, Morgan Stanley, Bear Stearns, JP Morgan Securities, Deutsche Bank Securities, Bank of America Merrill Lynch – all sit inside giant commercial banks.
That’s even true of the little ones: Thomas Weisel Partners, a small investment bank founded by one of Silicon Valley’s giants, fell on hard times after the tech crash and, after stumbling for years, sold itself to Stifel Nicolaus.
Susquehanna analyst David Hilder says Morgan Keegan may command as much as $1.75 billion in a sale. That would cover the costs of Morgan Keegan’s acquisition – Regions Financial bought the bank for $780 million in 2001.
And what would Regions do with that money? Hilder suspects the mid-size bank would pay down more of what it owes to TARP. He speculates that Regions may have to raise even more money even after it sells Morgan Keegan. Regions declined to comment on its plans – but here’s the bank’s boilerplate on its TARP plans.
The company’s position of repaying the government’s TARP investment in a prudent manner, on shareholder-friendly terms, remains unchanged. The company continues to believe a return to sustainable profitability and continuing improvement in asset quality are key conditions that will enable repayment of TARP.
A struggle to find enough money to pay back TARP and keep up profits? That’s something the big banks haven’t had to deal with for a long time.