Wall Street's New Line-Up of Merged Banks

Mergers and Acquisitions Have Left Fewer Choices

Feb 11, 2009

Toxic assets and major losses have resulted in forced marriages between investment and commercial banks, producing a new roster of bulge-bracket financial institutions.

The combination of illiquid, highly leveraged and "toxic assets" along with major write-offs and now government bailouts has resulted in a wave of mergers and acquisitions. Consumers and businesses alike will have fewer choices, not to mention major layoffs of bankers.

Consumers in general and business in particular cannot afford to sweat out the current financial crisis in order to shore up their financial condition. One aspect of our current market malaise is certain; the choices for both businesses and consumers for financial services are becoming larger but fewer. To what degree this will manifest itself in pricing and availability is an unknown at this point.

Business in particular will be impacted as the list of so-called "bulge-bracket" firms has changed. Witness the following mergers so far:

While consumers are more or less at the mercy of these new entities, business is being forced to choose what combined firm will be their new "lead bank" since what used to be six is now three with no doubt more mergers in the offing in the months if not years to come.

There are, however, other major firms that are ready, willing and able to step in and fill the gap to create a new list of bulge-bracket firms since they already have a major presence and have the resources to effectively compete. A sampling of these firms would include Citicorp, Goldman Sachs, Morgan Stanley, Deutsche Bank, UBS and Credit Suisse.

It is also reasonable to expect smaller "boutique" firms to compete for corporate business. Again, to what extent these smaller firms can fill the void is unknown. What is important is that any future combination of firms be executed well by senior management. The quality of service in investment banking is the bottom line to business.

To extent that these firms can dictate prices for extending credit for operations will be just as important as their ability to provide access to the equity and debt capital markets to shore up and restructure their balance sheets.

The disparity between sovereign debt and corporate debt is evidence of the markets reluctance to buy term corporate debt but is also a function of their credit worthiness along with investment banks ability to bring issues to market at an effective price. If the debt is too expensive for the corporation, business will suffer and jobs will be lost.

Likewise, failure to bring an equity issue to market will have a very negative effect on a company’s market capitalization and the resulting impact on their ability to borrow to fund operations.

Government lead, taxpayer funded bailouts may be perceived as treating the symptom rather than the cause. One can only hope that the world’s financial community gets it right for the benefit of everyone.

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