27 de septiembre de 2008

"Investment Banking: the Power of Chaos"

Análisis de The Economist sobre la “crisis de los grandes bancos de inversión”:

“THE radical overhaul of the City of London in 1986 was dubbed the Big Bang. The brutal reshaping of Wall Street might be better described as the Big Implosion. The “bulge-bracket” brokerage model—the envy of moneymen everywhere before the crunch—has collapsed in on itself. Even more humiliating for the Green Berets of the markets, the new force in finance is the government.

The last remaining investment banks, Goldman Sachs and Morgan Stanley, sought safety by becoming bank holding companies after last week’s run on the industry, which sent Wall Street scrambling for loans from the central bank (see chart). After Lehman Brothers collapsed, the markets could no longer stomach their mix of illiquid assets and unstable wholesale liabilities. Both will now start gathering deposits, a more stable form of funding. Signing up strong partners should also help. Mitsubishi UFJ Financial Group (MUFG), a giant Japanese bank, will buy up to 20% of Morgan. Goldman has gone one better, coaxing $5 billion from Warren Buffett.

Mr Buffett, no idle flatterer, describes Goldman as “exceptional”. But some doubt that it will be able to adapt and thrive. As a bank, it faces more supervision from the Federal Reserve, tougher capital requirements and restrictions on investing. Universal banks, such as Citigroup and Bank of America, long dismissed as stodgy, argue that their vast balance sheets and wide range of businesses, from credit cards to capital markets, give them an edge in trying times. The head of one bank suggests that the golden years of risk-taking enjoyed by investment banks in 2003-06 were an “aberration”, fuelled by the global liquidity glut.

Private-equity firms and hedge funds spy opportunity, too. Blackstone’s Stephen Schwarzman is keen to take advantage of Wall Street’s disarray. Kohlberg Kravis Roberts, a rival, has ambitions to create a financial “ecosystem”. The buy-out barons got good news this week, when the Fed relaxed its rules on their ownership of banks. One of them, Christopher Flowers, bought a small lender in Missouri, which he may use to hoover up other troubled financial firms. Citadel, a hedge-fund group that is already an options marketmaker, is reportedly mulling a move into the advisory business. Hedge funds have stepped up their financing of mid-tier firms that cannot get loans from Wall Street.

These investors are also going after the “talent” in investment banks. Morale there is not high. One executive admits that becoming a bank “does little for our cachet”. Hedge funds will be particularly keen to get their hands on cutting-edge risk-takers, particularly the Goldman crowd who used to thrive on leverage.

Power may shift in two other directions: abroad and, to a lesser extent, to boutique investment banks. MUFG will be joined by others. After a brief wrangle in the bankruptcy courts, Britain’s Barclays has taken over Lehman’s American operations and quickly put its logo on the fallen firm’s headquarters. “Global financial power is becoming more diffuse,” says Andrew Schwedel of Bain & Company, a consultancy. Merger boutiques, such as Lazard and Greenhill, will emphasise their stability to pick up business. Their shares have done relatively well this year.

But all is not lost for the former investment banks. For one thing, they may not have to cut leverage by as much as feared. Though their overall leverage ratios are high, their risk-adjusted capital ratios under the Basel 2 rules are stronger than those of most commercial banks. They acknowledge, however, that they may have to raise these even higher for a while to assuage market concerns about hard-to-sell assets.

Brad Hintz of Sanford Bernstein, an asset manager and research firm, reckons regulatory shackles will cut Goldman’s return on equity by four percentage points over the cycle. The bank disputes this. Either way, even if it is forced to tone down its in-house proprietary trading it can make up for this by, for instance, launching more hedge funds. And it faces no immediate pressure to sell its large private-equity or commodities holdings. It will continue to co-invest in projects alongside clients, a key Goldman strategy.

Moreover, there are some advantages to becoming a bank. Goldman and Morgan should be able to amass deposits cheaply and easily, because dozens of regional lenders are expected to fail. Almost one-fifth have less capital than regulators consider a safe minimum. However, the new banks will be under scrutiny to ensure they do not put those deposits at great risk.

As sharp distressed-debt investors, they will also be looking to buy assets from the government’s giant loan-buying entity when it gets going. This is likely to be more helpful to them than to commercial banks, which have marked down their mortgage assets less and will not benefit as much when clearing prices are set.

Given the acute stress that remains in money markets, however, the accent for the time being is still on survival. Morgan Stanley’s debt with a maturity of four months was trading to yield as much as 37.5%. Maybe it should consider using credit cards instead.

Financial firms fear further fallout from the recent, potentially catastrophic run on money-market funds, after several of the supposedly ultra-safe vehicles saw their net asset values slip below the sacrosanct $1 level at which investors break even. Only when the government stepped in to guarantee that no more funds would “break the buck” did a semblance of calm return. But “prime” money funds, which are big buyers of corporate debt, are still pulling away from anything deemed risky. This is a big problem for banks, since some $1.3 trillion of their short-term debt is held by such funds, and they may have to turn to longer-term (and dearer) sources.

Once markets stabilise, Wall Street will start to wonder if it is better or worse off without its stand-alone investment banks. Some think they were no more worth saving than Detroit, another once-iconic industry caught up in its own battle for a public rescue. Perhaps even less so: the securities Wall Street packaged were the financial equivalent of slick-looking cars with no brakes. But they may leave a hole. As broker-dealers, regulated more lightly by the Securities and Exchange Commission, they were free to put large dollops of capital to work, providing liquidity, making markets and assuming risk. As banks, they may find the Fed takes a more restrictive view.

It seems implausible that the investment bank will make a comeback, given the speed with which it has unravelled. Yet, 75 years after the legal separation of commercial and investment banking, America has made a full return to the one-stop-shop model practised by John Pierpont Morgan. Another black swan in 2083, and who knows?”

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