High-risk, big-bucks era wanes
Ever since corporate raiders, multibillion-dollar buyouts and the catchphrase “Greed is good” burst into the national consciousness in the 1980s, Wall Street has been a larger-than-life economic and cultural force in America, with its top professionals both exalted and condemned as “masters of the universe” who orchestrated mega-mergers and led opulent lives.
But the financial upheaval that has been shaking the country and capsizing century-old investment banks is likely to fundamentally alter the fabric of Wall Street, changing the way it does business, its role in the economy and the lifestyles of its famously well-paid practitioners.
“Conditions are more severe than anything I’ve seen in my 35 years on the Street,” said Michael Madden, managing partner at BlackEagle Partners, a New York-based private-equity firm. “Almost all of my Wall Street compatriots think this marks a sea change in the fortunes of the financial community and especially of Wall Street.”
The industry has been remarkably resilient over the last 25 years, overcoming any number of scandals and market downturns. Each time a boom era seemed to be ending -- the 1987 stock crash, for instance, or the collapse of the dot-com bubble early in this decade -- Wall Street came back stronger than ever.
It has been the heart of a financial industry that employs about 7% of U.S. workers and accounts for one-fifth of the country’s economic output, according to research firm Moody’s Economy.com.
But last week’s bankruptcy filing of Lehman Bros. Holdings Inc. and shotgun engagement of Merrill Lynch & Co. to Bank of America Corp. -- after the demise of Bear Stearns Cos. in March -- signal the most dramatic reordering of Wall Street since the Great Depression.
Even if the huge government intervention announced late last week succeeds in stemming the current crisis, Wall Street’s basic business model will be revamped, many in the business say, with its earnings, workforce and appetite for risk greatly reduced and its swashbuckling ethos ratcheted back.
The new era of subdued expectations is likely to affect not only traditional investment banks but also hedge funds and private equity firms, which gained high profiles in recent years.
“The Wall Street of 2009 will not resemble the Wall Street of 2007,” said Ari Bergmann, managing principal at hedge fund Penso Capital Markets in Cedarhurst, N.Y.
With the sands shifting underfoot, financial professionals are struggling to make sense of what is happening to them.
“People are still in shock and somewhat dumbfounded and trying to get their bearings,” said Jonathan Knee, a veteran investment banker at Evercore Partners in New York. “I don’t think anybody has processed the full implications of what life on Wall Street will be, and how it will change how we are seen and what our role is.”
The most obvious change is that at least three of Wall Street’s five stand-alone investment banks -- storied institutions nearly as old as Wall Street itself -- are likely to have gone by the wayside.
Bear Stearns was bought in a fire sale by JPMorgan Chase & Co. Lehman’s core is being acquired by British bank Barclays and the rest liquidated. Merrill agreed to be gobbled up by Charlotte, N.C.-based commercial-banking giant Bank of America.
Many expect Morgan Stanley and Goldman Sachs Group Inc., the two remaining independents, to eventually sell out to commercial banks, whose diversity of businesses -- including taking deposits, issuing credit cards and making consumer and small-business loans -- tends to make them more financially stable. Morgan Stanley last week was weighing a takeover bid by Wachovia Corp., another Charlotte-based commercial bank.
But the relatively conservative nature of commercial banks could sap some of the allure of the Street.
“I wouldn’t want to work for a commercial bank after having worked on Wall Street,” said Andy Kessler, a hedge fund manager and author. “The risk appetite is a lot lower. Part of the Wall Street glamour is that you do take risk.”
But no matter how many independent investment banks survive, Wall Street almost certainly will be taking on less risk.
In recent years, amid lackluster prospects in some of their traditional businesses, investment banks made increasingly dicey bets, often with big helpings of borrowed money -- known as leverage because it magnifies what you can do with the assets you invest.
Encouraged until last year by the easy availability of debt financing, investment banks often owed more than 25 times their net worth. With so much debt, even slight reversals could multiply into huge losses.
“That’s just asking for trouble,” said Ryan Atkinson, chief market analyst at hedge fund Balestra Capital in New York. “There’s no room for error when you get to that point.”
Private equity firms are finding it hard to borrow the cash they need to buy public companies. That has sharply curtailed such buyouts since last summer. Hedge funds, lightly regulated investment pools that have been perhaps the biggest risk takers, are facing similar constraints.
Even after the credit crisis subsides, Wall Street firms are unlikely to be able to borrow as much as before -- and probably won’t want to.
“The leverage . . . and the risk-taking that went on on Wall Street is going to be gone for a long time,” said Dan Alpert, managing director at Westwood Capital, a New York-based investment bank.
Also not coming back any time soon: a collection of complex financial instruments -- with cumbersome names such as collateralized debt obligations and auction-rate securities -- that blew up when the mortgage market unraveled and the credit crunch took hold.
Wall Street’s new aversion to risk could constrain the economy in the long run because less credit will be extended to consumers and businesses.
“Our economy thrives on the creation of credit,” said Jane Caron, economist at Dwight Asset Management in Burlington, Vt. “We’re anticipating a number of years of reduced economic growth and a lower standard of living.”
Decreased leverage also is likely to mean reduced earnings for Wall Street firms -- once they return to making a profit -- and smaller pay packages for their employees. Last year, compensation in the securities industry averaged $385,000, according to the New York City Independent Budget Office.
“There will always be rainmakers and people who can make profits, and they will get paid a lot of money,” Bergmann said. “But as a general rule just going to work on Wall Street, and it being a ticket to riches, is, in my opinion, over.”
The lowered expectations on Wall Street aren’t lost on those aspiring to get there in the face of its worst job market in years.
Dean Van Tassell, a 27-year-old MBA student at Pace University, a few blocks from Wall Street, is trying to figure out what jobs he can land in finance if he can’t work on Wall Street after he graduates this year.
“Six months ago if you asked me I would have said, ‘I don’t have a contingency position, and I’m going to pound the street to get on a trading desk come hell or high water,’ ” Van Tassell said. “Today you have to make contingency plans.”
Even Wall Streeters with secure jobs are trimming their conspicuous consumption, in part because it’s suddenly gauche to visibly indulge, said Adam Zoia, founder of New York-based Glocap, a financial industry recruiting firm.
One of his neighbors decided to scale back a major renovation of his Manhattan apartment.
“If your friends have lost their jobs at Bear Stearns or Lehman, it’s in bad taste to flaunt your ability to keep spending,” Zoia said.
Not everyone believes that Wall Street’s extravagance will remain in check for long.
The best and the brightest always have come up with new ways to enrich themselves and will do so again after today’s trauma recedes into the past, said Jeff Arricale, manager of the T. Rowe Price Financial Services mutual fund.
“Greed will return again in some corner of the market, just like it always does,” he said. “This is capitalism.”
--
