Wall Street drilling for Middle East riches

Earlier this year Morgan Stanley announced plans to form a Saudi Arabia banking venture with Saudi firm The Capital Group. It opened its Dubai office in March 2006 and secured a license in Qatar last October. Lazard Ltd also has set up shop in Dubai.

Goldman opened its Dubai office in March and is forming an investment banking venture with state-owned National Commercial Bank in Saudi Arabia, by far the largest economy of the region. Lehman Brothers launched its Middle East business in May, with bank licenses in Qatar and Dubai.

"It's a very hot market," Vathje said.

The scope of Wall Street's Middle East may also grow for these firms, leading to expansion in markets stretching from Morocco to Turkey.

At the same time, deep-pocketed Gulf investors are making a splash on the global M&A stage, comprising an important new source of deal activity at a time U.S. buyout shops have had to pull in their horns.

On Tuesday, Dubai International Capital, owned by Dubai's ruler, agreed to invest $1 billion into hedge fund company Och-Ziff Capital Management Group. Borse Dubai battled with Nasdaq before joining the U.S. exchange to buy Nordic stock market company OMX.

Saudi Basic Industries Corp's $11.6 billion purchase of General Electric Co's plastics business was the largest ever made by Gulf investors.

There are risks. These nascent markets don't offer the same level of transparency, and the broader region remains volatile, particularly for U.S. firms. The Gulf's fortunes also could change quickly if oil prices fall.

BCG's Vathje said a shortage of banking professionals in the region also has given rise to serious poaching, with as much as 25 percent of a bank's staff switching jobs each year.

Still, Wall Street firms are putting themselves in a position to benefit from an expected surge in bond issuance, Islam-compliant transactions, initial public stock offerings and mergers.