Michael Santoli offers up yet-another look at the future of Wall Street in this week's Barron's. He covers the current wasteland pretty well: Wall Street firms defensively seeking protection by doing deals with banks or emphasizing money management or returning to fee generation by serving as intermediaries (the latter a fine idea, but how many deals do you need to justify a remake of, say, Morgan Stanley into mostly an advisory shop, as opposed to a principal investor? Answer: A ton -- too much really for Morgan Stanley's capital base, and that's not dealing with the embedded conflicts or the culture issues). Santoli touches on themes that are suddenly ubiquitous: simplicity and transparency, subjects that thread through a recent op ed from Citigroup Inc.'s Vikram Pandit last Friday (transparency) and in a Tuesday Wall Street Journal story about hedge giant SAC Capital (simplicity) trimming its fixed-income operation. The trouble with both of these virtues is that they produce commodity-like products and commodity-like profits -- sort of like the big banks, which makes for a nice circular argument for seeking refuge within a big bank.
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What does make Santoli's speculation stand out a bit is that he offers up a rare fragment of optimism in a period paralyzed by gloom: He offers up the idea that Wall Street will eventually figure new business lines out, survive and prosper in its inimitable ADHD-way. Santoli actually gets his head off the table and suggests -- oh brave man -- that the markets will not always be a mess.
These days, that's a ringing endorsement of Wall Street. Still, the gloom remains thigh-high and is starting to smell. If, as the pundits are now muttering, Lehman Brothers Inc. has to sell itself or somehow fails, what will "Wall Street" consist of? Answer: three so-called independent firms, Goldman, Sachs & Co., Morgan Stanley and Merrill Lynch & Co. That might be a quorum, but just barely. Everything else is a big universal bank and a bunch of smaller firms everyone seems intent on ignoring right now.
This conjures up a scenario I discussed in a post last week. If simplicity and transparency rule the roost, then we've ushered in a return to a big-bank world with risk and reward wrung out of the market. Somehow I have my doubts about that over the long run, but then I'm a cynic. If the markets regain their balance and their animal spirits revive -- meaning their yen for complex, opaque strategies that may hit big -- they'll be plenty of room for real players. If independent Wall Street craps out, ala Bear Stearns Cos. or Lehman, or becomes more bank-like, it's a flat-out guarantee that talent will flow toward the smaller (some not so small), principal-investing, risk-taking firms, from the boutique investment banks, to the hedge funds, private equity shops or simply -- as we like to call them -- private capital operators. And investors will follow where they can.
How will Wall Street make money again? If I knew, I wouldn't tell; but of course I don't have a clue. Still, given the current climate, one does sense that the first sign of what that new activity is will come not from the "independent" firms, which are going to be busy dieting and taking instruction from the Federal Reserve on filling out paperwork, but from the mad scientists at those other firms who retain some freedom to experiment. Then the question becomes how fast the big boys (Goldman first) will pick up on it -- whatever "it" is -- and start the process of running it into the ground. And if greater transparency is truly in the cards, product cycles will spin faster, giving the advantage, in a market that one assumes will still reward growth above all else, to the fleet and the nimble. - Robert Teitelman
