Crisis has not altered Wall Street
You’d hardly know that Wall Street giant Morgan Stanley is struggling through the chaotic aftermath of the global financial crisis sparked a year ago by the collapse of investment banking rival Lehman Bros. Holdings Inc.
At least not from the way Morgan executives are paying themselves.
Despite a large second-quarter operating loss, Morgan earmarked $3.9 billion for bonuses and other compensation. That was almost three-quarters of its quarterly revenue, far more than firms typically shell out.
A year after Lehman’s record-setting bankruptcy sent shivers through the global financial system and sparked predictions of a wholesale reordering in the way Wall Street operates, one old saw remains: The more things change on Wall Street, the more they stay the same.
At first glance, Wall Street appears different in some major ways. Three marquee firms vanished, as have thousands of jobs and some of the abuses that took hold in the bubble.
But on the whole, Wall Street has recovered more quickly than expected with little difference in how it does business. And the unapologetic pursuit of money remains as deeply rooted as ever.
Bellwether firms led by Goldman Sachs Group are churning out mouth-watering profits. Risk-taking and aggressive securities trading are mounting a comeback. And compensation -- the lifeblood of Wall Street -- is pushing back toward pre-crisis levels.
“Certainly the greed on Wall Street has not changed and will never change,” said Richard Bove, an analyst at Rochdale Securities. “People come to Wall Street to make money.”
Lehman’s fall over a nerve-racking weekend a year ago pushed the financial crisis, which had begun months earlier with the subprime mortgage meltdown and the rescue of Bear Stearns Cos., to a terrifying new level.
Lehman’s bankruptcy, the largest in U.S. history, shocked investors who had expected the federal government to step in with a Bear-like 11th-hour rescue. Its fall unleashed fears of a depression triggered by a domino-like toppling of battered financial institutions.
Wall Street titan Merrill Lynch & Co. was pushed into the arms of Bank of America Corp., for example, and the federal government would end up rushing billions of dollars in aid to prop up dozens of other financial institutions.
It appeared at the time that permanent change was being forced upon Wall Street. For months, trading and deal-making grounded to a near-halt. Banks were so skittish they were even afraid to lend money to one another.
The credit markets have improved markedly amid intensive government recovery efforts. But lenders remain wary of disbursing credit to all but the highly rated borrowers.
And some of the riskiest practices -- such as bundling home or auto loans for sale to investors, a practice that critics blamed for contributing to the crisis -- are far off their pre-crisis highs.
Only $169 billion of mortgage loans, for example, have been packaged this year. That’s down from $775 billion at this point two years ago, according to researcher Dealogic.
Lehman’s downfall has led to bigger winners and losers.
For top firms such as Goldman Sachs and sought-after traders and bankers, the good times are back.
Goldman notched its most profitable period ever in the second quarter, earning $3.4 billion, thanks in part to pricing power it gained with the disappearance of rivals. It’s also been helped by furious securities trading by clients as the markets have rebounded.
The investment banker also amassed $11.4 billion in the first six months to pay for bonuses, a pace that would yield a record-setting average payout of $770,000 per employee if sustained the rest of the year.
Meanwhile, the fall of Lehman and others has helped bulk up operations at such smaller investment houses as Broadpoint Gleacher Securities Inc. They have snared clients and coveted executives from those troubled larger firms.
“The crisis has created an enormous opportunity for us,” said Lee Fensterstock, Broadpoint’s chief executive.
Broadpoint’s share price has more than quadrupled since February, closing at $8.64 a share Friday.
The recovering stock markets also are showing that investors are willing again to take risks.
Hedge fund manager Simon Mikhailovich tried to launch a new fund last fall to capitalize on the credit-market turmoil after Lehman’s demise. Mikhailovich specializes in structured credit, one of the riskiest areas of the market, and had hoped to snag investments at deeply battered prices.
Shellshocked investors told him they were too fearful to jump in. With financial markets now rallying, however, investors have poured in $130 million in the last two months.
“When your kitchen is on fire, you don’t talk about remodeling the bathroom,” Mikhailovich said about the fear that permeated Wall Street after Lehman’s collapse.
“People were worrying about protecting their money, not making money,” he said. “And now they’re worried about missing out on the rally.”
The picture is less rosy elsewhere.
Wall Street has lost 29,800 jobs in the last year, or 10.5% of its workforce, according to Moody’s Economy.com, which predicts that an additional 20,000 jobs will be cut through mid-2012.
“The fact is those jobs aren’t coming back,” Fensterstock said. That’s because there is less business overall and firms will have their pick of top talent, he said.
Morgan Stanley, meanwhile, is shelling out big bonuses because it doesn’t want to lose bankers and traders to competitors that also are paying top dollar. Yet those payouts could strain its resources.
Unlike Goldman Sachs, which continued to trade aggressively during the financial crisis, Morgan became extremely risk-averse and failed to seize on trading and business opportunities that arose as the markets recovered. It eked out a profit of $149 million in the second quarter, and that came mainly because of a one-time $319-million gain on the sale of discontinued businesses.
Its chief executive, John Mack, said last week that he would step down in January and be succeeded by the head of Morgan’s brokerage operations.
Pain also is still acute for some who specialized in the most complex and troubled corners of the market.
Three years ago, for example, Sylvain Raynes was turning complicated products into securities. One product paid investors a cut of the stud fees that thoroughbred horse breeders receive when their animals sire offspring.
But he became an early critic of the excesses in the so-called structured-finance market. Now, instead of creating the products, he helps investors analyze the complex securities they already own and consults for law firms that are suing Wall Street over the money-losing investments.
The structured-finance business is down dramatically, Raynes said.
“We used to be more relaxed and now we’re a little more anxious,” he said, “like everybody else is.”
Jeff Matthews, a hedge fund manager in Greenwich, Conn., voiced the skepticism of many about any changes wrought from the Lehman experience: “In the grand picture, nothing much has changed.”