The financial services industry has changed so much that Lazard is now the largest securities firm regulated by the Securities and Exchange Commission, Lazard's Parr said with a laugh. "Who knew? That shows how dramatically the world has changed."
In the next 12 to 18 months, Parr believes that financial institutions will not be positioning themselves strategically. Rather, these institutions will be just "fighting to live another day," he said. In five years or so, Parr believes the entire industry will transform. He believes that the sector will consolidate, whittling down to four to eight global full-service financial institutions as well as smaller securities firms with an array of services. "They will sort, and the bigger will be the best. Firms are not deciding if they can be global full-service companies, and if not, they have a strategic dilemma," Parr said.
Parr added there there will be increased regulation and transparency in the financial industry sector going forward and strategy will move from creating mark-to-market to creating transparency. "There was a cushion in the system, but the system has run out of capital. There is scale-back lending and a scale back the balance sheets. With the lack of lending in the economy, plus there is still so much deleveraging that needs to take place, transparency going forward will be important," Parr said.
On the other hand, Cohen believes that financial institutions business will not change due to the crisis, but regulation of financial institutions will change and in the long term will alter the landscape. "Regulation does not change the fundamental business banks conducted. When this all settles down, leverage will be a lot less strategic, and it will not be the issue, but survivability will be the strategy. In the long run, the financial system will be more consolidated and more focused," Cohen said.
Over the next six-to-eight months, Cohen said there will be more transformation of financial services regulation to help deleverage the industry. "There is tension between the need for capital and leverage. First, PE can be an investor in financial services. There needs to be a change that allows PE to invest in financial institutions. Also, we have to be realistic; $700 billion is not enough. Realistically, it is the trillion word, and we have to recognize that we have to get the capital in the system to deleverage and promote lending. Last, I do think that unless we have a federal policy dealing with foreclosures we will have a serious problem. Ad hoc solutions are helpful, but they are not the future," Cohen said. - Maria Woehr
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