"From Bubble to Trouble: The Financial Crisis of 2008"-The Fate of Wall Street
Thursday, November 27, 2008PAUL KANGAS: Even without a government crackdown, the financial sector has already paid a high price for taking on too much risk. In fact, the crisis has reduced the American financial establishment -- better known as Wall Street -- to only a shell of its former self. That's raised the question: is Wall Street dead or will it rise again to its former spot at the pinnacle of international finance? We turn once again to Erika Miller.
MILLER: Take a walk down Wall Street and you'll still see all the familiar landmarks. But the banking landscape has been forever changed. Eight months ago, there were five standalone 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, 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 upside.
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. 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 (INAUDIBLE) to exchanges in London and elsewhere. (INAUDIBLE) systemic changes in the U.S. banking model have set the country back another notch.
AWAD: You 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 were 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.
