The Benny (on the) Hill Show

• Print
• E-Mail

Merrill Lynch & Co.Morgan Stanley, Goldman and even Lehman Brothers Holdings Inc. , before its demise were cutting leverage and reducing loan exposure to customers. The change in regulatory status is happening at the holding company level. Investment banking arms are alive and well.

"They're not disappearing at all," said Fred Joseph, former chief executive of Drexel Burnham Lambert, now managing director of the advisory firm Morgan Joseph & Co. They will act more like advisory firms and underwriters and lenders. They'll act a little bit more like banks, and less like hedge funds."

In their absence, hedge funds, private equity firms and boutique investment banks have been picking up the slack. Earlier this year, Citadel Investment Group reportedly had a loan agreement with Fortress Investment Group Inc. As the recent spate of hedge fund closings suggests, not everyone is prospering. Hedge funds that rely on securities loans, or what the industry calls margin, are hurting, according to Matthew Simon, a research analyst at Tabb Group, Wall Street research and advisory firm.

For bigger firms, "The market will find a way to prevail," Simon said "Investors that need capital will find a way to get to the capital."

Tougher Wall Street

So, while it's true the credit picture is getting momentarily tighter as players seek new partners, there's hardly some new paradigm shift taking place.

The industry-leading prime brokerage business at Bear Stearns is still cranking, only now it's under the name J.P. Morgan Chase & Co. . Goldman's in-house, but off-balance sheet hedge funds have not been shuttered. Proprietary trading will diminish, but it won't disappear unless there is "some future restriction on leverage that doesn't exist right now," Smith said.

If risk-takers don't like tighter controls they will be free to launch their own trading businesses -- hedge funds or even the $10 billion a year prime brokerage business. Private equity firms might be comfortable with the risk those businesses take. "They're sitting on cash waiting for the right opportunity," Saluzzi said.

It may not come. Merrill can be Merrill, Goldman can be Goldman. The people at the top really have to cut the power if they want change. Federal oversight will mean more transparency, but without new laws, we might not like what we see.

After all, commercial banks fail too.

In the absence of a "P" Plan resolution, we would personally opt to remain sidelined as anything is possible. This, right here, and right now is an October surprise that is big enough to alter many a timetable and priority list. On Wall Street, as well as on Main Street. Your own street as well. Not to mention the one at 1600 Pennsylvania Avenue.

Happy Channel Surfing.