Blood in the Water

It’s been a dramatic time for investment banking, and many people are anxious. We probably haven’t seen the bottom yet, but there’s no cause for panic. In fact, good things may come from this latest turmoil.

Take Lehman, the smallest of the four majors. They had tremendous exposure to real estate and their balance sheet was not particularly strong. Perhaps they could have weathered the storm but as so often, perception is reality. The perception here was that Lehman couldn’t pull through, and that made it very difficult for them to raise funds or attract new clients, so they went down.

Now the strong players smell blood in the water, and they are ready to seize on weaker prey. We see Merrill Lynch bought by Bank of America — it’s quite a shakeout. The negative in all this is a reduction in competition among the white shoe investment bankers. But there are positives, too.

We are seeing a breakdown in the old, stodgy way to doing investment banking. We can expect tighter regulation and more transparency in the markets. Clients will have a stronger hand in buying the services they want, rather than being forced into bundled products. More excitingly, I anticipate a new wave of creativity in the capital markets. Look out for new derivatives, greater fluidity, perhaps more tapping into foreign debt or alternative markets like AIM.

As a subsidiary of Bank of America, Merrill Lynch becomes part of a giant, and giants are inherently slow movers. So there are opportunities opening up for smaller, swifter niche players. Of course, there is pain in the transition, and the picture is by no means rosy. However, once the storm has passed we can look forward to new, fresh growth