It's Tuesday, and the M&A reporters have rolled out their wares. In The New York Times, Andrew Ross Sorkin grabs Tom Wolfe, just off the Hampton jitney, and interrogates him about a witticism Wolfe apparently offered up while visiting the New York Stock Exchange last year. On the day Blackstone Group LP went public, Wolfe muttered that this was the end of capitalism as we know it. At that point Sorkin, intermittently interrupted by Wolfe offering up various marginal comments (some of which have appeared elsewhere, including a recent Charlie Rose show), races off, despite the fact that the man in the white suit seemed to be joking. Sorkin argues that Wall Street will never be the same again, that buyouts and hedge funds are dead, that layoffs will descend upon it like, well, the '70s, which is when this last occurred. Wolfe effectively yanks the rug out from under the column when he tells Sorkin: "I didn't realize anyone would take me seriously."
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Three small quibbles. First, whatever Wolfe said at the Big Board, he did write a novel in 1998 about, well, an overheated real estate market, "A Man in Full" that Sorkin, caught up in "Bonfire of the Vanities" references, never mentions. Second, Sorkin suggests that '80s bond trader Sherman McCoy from "Bonfire of the Vanities" sprang from a different world than today's Wall Street. In fact, the bond trading boom fed the derivatives and structured finance wave, which, well, you know the rest of the story. There's a direct lineal descent here to subprime, LBOs and hedge funds. Third, the '70s were ugly on Wall Street, but built the platform for everything that's happened since -- good, bad, indifferent (including Wolfe's own career).
Wolfe has always had a preternaturally acute sense of cycles and zeitgeistian trends. But like a literary hedge funder, he can sometimes miss the turn, and his timing hasn't been so hot lately, maybe because he's 77. But a joke's a joke.
Over at The Wall Street Journal, Dennis Berman also has apocalypse on his mind. Berman has picked up talk that the Wall Street firms will have to take refuge with big deposit-taking banks to save themselves. Well, maybe. Because once he sets up this premise, he starts to take it apart. He also fails to engage with several aspects of this notion. First, a world of universal banks will be a world of lower leverage ratios and commodity margins. This world would produce a vast exodus of talent flooding to hedge funds, buyout shops and boutiques. The "independent" firm would almost instantly be replaced by new independents, some of which already exist: Blackstone, Cerberus Capital Management LP, Kohlberg Kravis Roberts & Co., Apollo Management LP, Carlyle Group, Citadel Investment Group LLC, Fortress Investment Group LLC. Others would arise. Those firms would arguably get a lot of attention from investors, which, in more placid times, favor growth over stability. Said another way: Investors crave growth, demand huge payouts.
From a regulatory perspective, you'd end up with the same situation you started out with. The Federal Reserve -- that's the assumption right now -- would have to decide how to treat these new independents. Discount window? Direct regulation? And the Fed might find itself forced to restrict firm growth, limit innovation, reduce globalization or otherwise meddle with the workings of "private" nonbank firms. That would create a firestorm, at the very least among institutions, which want to invest in risk. Otherwise, the Fed will always have to live with the specter of another Bear Stearns Cos. Hello, too-big-to-fail.
And what would be the economic ramifications of all this? The argument for the last few decades is that an untrammeled Wall Street is necessary to drive macroeconomic growth, not just through employment in New York City, but through credit and liquidity. How will the real economy react to a world dominated by just a small number of universal banks -- some of them more interested in bigger profits in, say, Asia, than a mature U.S.? Can regulators restrict speculation without creating other problems? Or would we be replicating a pre-1929 system on steroids?
Meanwhile, a small quibble for Berman. The merger that created Citigroup Inc. has not been a disaster from the day it was hatched. Its stock price stinks now, but for a few years under Sandy Weill (and John Reed) it did well enough to scare the crap out of Wall Street. Envy of the universal model didn't emerge just yesterday. - Robert Teitelman
