"Fixing the Financial Crisis"-Wall Street
Tuesday, November 11, 2008SUSIE GHARIB: Fixing the financial crisis will top the agenda of President- Elect Barack Obama in January. From regulatory changes to Wall Street's new landscape, there has been a seismic shift in the nation's financial system. So this week, we're bringing you a three-part series looking at just how to repair that system. Tonight, Erika Miller takes a look at Wall Street, where experts tell us things will never be the same.
ERIKA MILLER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Take a walk down Wall Street and you'll still see all the familiar landmarks. But the banking landscape has been forever changed by this unprecedented financial crisis. Eight months ago, there were five stand-alone investment banks; now, there are none. Lehman Brothers went bankrupt. Bear Stearns and Merrill Lynch were forced into the hands of giant commercial banks and Goldman Sachs and Morgan Stanley had to convert to bank holding companies in order to stay in business. Long-time Wall Street observer Robert Albertson says 2008 marks the end of an era.
ROBERT ALBERTSON, PRINCIPAL & CHIEF STRATEGIST, SANDLER O'NEILL: There is no more Wall Street. It is eviscerated. If you want to look at what Wall Street will look like, go to Europe. We now have universal banking.
MILLER: Universal banking means giant financial firms offering a vast array of products under one roof. For years, Citigroup was the poster child for this model. Although Citi has size and scale, it has been widely criticized for being too bloated to manage growth effectively and for lacking innovation. Making the universal banking model work is not the only challenge facing surviving financial firms. After years of lax oversight, Washington is certain to tighten regulations. Wall Street veteran Jim Awad says that will curtail profit growth, although there could also be some upsides.
JAMES AWAD, INVESTMENT STRATEGIST, ZEPHYR MANAGEMENT: It's going to be a little less exciting, a little bit less of a thrill, a little bit less of people making huge amounts of money. But it will be a stronger, more regulated, transparent system, with a more durable business model and more consistent growth.
MILLER: One of Wall Street's traditional profit centers -- merger and acquisition activity -- has been decimated this year, a victim of the weak stock market and tight credit conditions. S&P's Richard Peterson says the depth of the financial crisis makes recovery in M&A unlikely anytime soon.
RICHARD PETERSON, DIRECTOR, MARKETS, CREDIT & RISK STRATEGIES, STANDARD & POOR'S: We're probably going to see our expectations of about a 40 percent drop in deal proceeds this year. It changed the personnel. It changed the composition. It changed the entire perspective of deal-making, not only for the year ahead, but for the foreseeable future.
MILLER: However, there is at least one area where experts expect to see more consolidation -- the financial sector. For example, Awad predicts smaller brokerage firms will be forced into the arms of big banks or risk becoming irrelevant.
AWAD: The brokerage model is going to be regulated, less levered and as a result of that, will not be able to compete with those with more capital. And it will not be able to compete with those for talent, because they're not going to be able to make as much money on the upside. And if I were the independents, I'd be looking for strategic partners.
MILLER: That's not the only possible change on the horizon. There is growing debate over whether the U.S. will lose its super power status in the global financial system. Even before the crisis, the New York Stock Exchange was losing listings to exchanges in London and elsewhere. Now, some experts believe the systemic changes in the U.S. banking model have set the country back another notch.
ALBERTSON: We have to have a competitive edge. We probably won't now, because we are degrading it to a level that is more like a 1980s model. And guess what? We're in 2008, headed for 2010. It's not going to have the credit creation function and capital distribution capability it once had.
MILLER: The tilting of power away from Wall Street also has social implications. The people that worked here where known for being smart, aggressive risk-takers, with oversized egos and bonuses. Now, many are walking more humbly, just grateful to have a job. Erika Miller, NIGHTLY BUSINESS REPORT, New York.
