Cultural and Structural Shifts Rise Out of Risk-Taking Titans' Hard Fall
Sunday, September 21, 2008
The credit crisis shaking the global economy is forcing a dramatic reconfiguration of Wall Street, where the financial industry in recent years has been driven to take ever-greater risks on increasingly esoteric investments.
The fragility of Wall Street's architecture was exposed this week when two icons of investment banking and the world's largest insurance company were fed into the maw as their competitors pushed for a historic government bailout to help salvage their own shaky businesses.
It is too early to tell whether Wall Street has truly been transformed by the series of upheavals or is simply witnessing a shuffling of its players. But as dealmakers and policymakers now sift through the debris, some shifts are already evident, both in the structure of high finance and the culture of those who practice it.
"The competitive landscape of finance is changing before our eyes and the losers are the investment banks," said Roger Leeds, director of the Center for International Business and Public Policy at Johns Hopkins University. "What we're having now is a fundamental correction, not only of the market but of the institutions themselves."
Three of the five free-standing investment banks have fallen. Bear Stearns was sold at a fire sale, 158-year-old Lehman Brothers went bankrupt and Merrill Lynch is being acquired by Bank of America. The surviving titans, Morgan Stanley and Goldman Sachs, remain under pressure and have been weighing their options.
As financial analysts survey the horizon, they see the emergence of a handful of giant, global firms that manage a wide range of business activities alongside several boutique advisory firms that court blue-chip clients. Newer players will remain on the scene, including hedge funds and private-equity firms -- both lightly regulated entities that manage pools of money for wealthy investors and often buy large holdings in securities or sometimes directly invest in companies.
These changes could be accompanied by a cultural shift as the sheen comes off a longtime career destination for those with the brains, ambition and fortitude to place high-stakes wagers in return for outsize paydays.
Already, the shakeout is costing jobs and ruining fortunes. New York Mayor Michael Bloomberg estimates 40,000 workers in New York state, including many well beyond Wall Street, could lose their jobs as a result of the financial crisis.
Whether these changes portend a permanent remaking of Wall Street remains uncertain. The answer could turn in part on whether the government's rescue plan announced Friday succeeds. If the massive bailout fails, the destruction wrought on global financial markets could be staggering, ultimately clearing the way for the birth of a new system.
If the federal plan works, most of Wall Street could be spared and the business model that has powered it in recent years -- centered on complex securities, tremendous borrowing and opaque dealings -- could resume much as before. That is, unless the inevitable excesses are tamed by new regulation.
The fall of the investment bank was of its own making, analysts said. Starting in the 1980s, investment banks began straying from their traditional roles as intermediaries to mergers and acquisitions, investment advisers to corporations and individuals, traders of securities and portfolio managers for wealthy clients.
Driven by competition and the hunger for bigger profits, they began to aggressively push exotic products like asset-backed securities and other derivatives.