The Future Of Wall Street

Here’s the inside scoop on the current state of brokerages and investment banking, courtesy of one of our readers.  He explains:

• The firms most aggressively pursuing brokers are foreign banks UBS and Duetche Bank, neither of which is restricted by the compensation caps that come with TARP funds.
• Morgan Stanley and Citigroup’s brokerage joint ventue will attempt to avoid the TARP compensation caps through corporate structuring. The argument is that the JV didn’t take TARP funds, even though it was capitalized by corporate parents that took TARP. (This was actually our advice on how to avoid the paycaps.)
• The dominant players in investment banking will be Morgan Stanley, Goldman Sachs and JP Morgan, who will form a kind of new oligopoly. Margins will be lower but leverage will be as well. With so much risk taken out of the game, they may even trade at higher multiples to earnings.

That’s just the summary. Here’s the details:

It amazes me how so many clueless folks can drone on about stuff they know nothing about. The running assumption being that all precedents can be extrapolated to all new situations.

First, those that say with the shit shape the industry is in there’s no place to go, you clearly haven’t a clue. In the retail advisor space, the primary recruiting competition to the MSSB JV is UBS. They have the most aggressive bid in the market for talented brokers with current payments for jumping ship being 200-250% of trailing 12mos gross revenue. Since September, the reality for the average broker, is that each month that passes means his trailing 12 gross is decreasing due to market conditions. Thus, for MSSB, time is of the essence (MS lost dozens of FAs last week with the expiration of the February offers). The second most aggressive bid is Duetche Bank. Note that both are non-US firms and neither is subject to any restrictions, real or populist inspired, due to TARP dealings. Thus, these non-US firms have an unfair advantage in competing for talent if the domestic firms are having their hands tied by Congress, the media or internet no-nothings. Funny, but as an American, that would piss me off.

Second, under the plan announced Friday afternoon, the FA payments will be made in January 2010, not upon the closing of the JV’s formation. The payments will be made by the MSSB joint venture and will be paid out of the JV’s revenue from the time of the closing. Given the closing is expected for sometime in the third quarter (August?), there will be more than enough time for the $3Bn to be raised. Thus, with the new entity funding the bonus/award/incentive, there is no reliance on TARP dollars at all.

Third, both MS and Citi have had discussions with the appropriate parties in DC who have winked at them suggesting that this plan will not be subject to ridicule given the parameters described above.

Fourth, for all those that make the argument that TARP funds are fungible and there is no such thing as "separation" of TARP and non-TARP dollars, your argument has just been deflated. If the payments are funded with revenue dollars that have not yet been created, there is no conflict with taxpayers’ money.

Lastly, for those who cheer the death of the "business model" you are clearly not students of history. Yes, the highly leveraged games of the past five to eight years are over but the IBs made plenty of money before that in a field that had five to eight real competitors. With all that has happened, the new world order suggests an oligopoly of MS, GS, JPM and maybe on other with the various boutiques. There will be more than enough medium margin business to guarantee the survival of these franchises and future profits. Even better, these newly leaner firms with lower leverage and less risky revenue streams might actually garner a higher mulitple in the market than they have in recent years.

Yeah, I am on the inside and have drinken my share of the Kool-aid but if you are going to rant about what is going on, you should have the facts.

Thanks to our reader for giving us this inside look at the transformation of Wall Street. And, once again, we’re humbled by the intelligence of the commenters and readers at Clusterstock.

*****