Wall Street After the Apocalypse

Here’s a heretical thought to contemplate along with the morning’s coffee: Despite all the partisan wrangling and unforgivable selfishness on display on Capitol Hill last week, the revamped $700 billion bailout bill that Congress finally passed on [Friday] will play only a marginal role in the re-shaping of the new world order on Wall Street. Rather the market itself—along with the not so invisible hand of the Treasury and the FDIC—has already parted the choppy economic waters and carved a new path forward for American capitalism.

In the six months since the collapse of Bear Stearns, Wall Street has undergone its most substantive transformation since the back-office crisis of the early 1970s caused many Wall Street partnerships to fail or to be merged out of existence. This time around, the failures and the mergers have been exponentially larger, as have the headlines about them around the world. What remains in the wake of this tsunami on Wall Street will be somewhere between three and five “national champions,” global behemoths capable of providing capital to any client, at any time, anywhere in the world. There will also be a surfeit of M&A boutiques, such as Lazard and Greenhill, which have had no involvement in this crisis except to advise on its denouement.

It all seems so very French, an irony not lost on Sen. Richard Shelby, Republican of Alabama, the ranking minority member of the Senate Banking Committee and an opponent of the bailout. “I think we’re going down the road of France now,” he said, “in all due respect for my French friends.”

While the earth has indeed been scorched during the past two years to an almost unrecognizable state, if you look closely, amid the charred landscape and hulking carcasses, a green sprig of hope has arisen.

Once the dust settles—and regardless of whether the bailout actually succeeds in removing toxic assets from Wall Street balance sheets, a big unknown—there will be a race of super-banks, much like what Sandy Weill envisioned when he created Citigroup a decade ago. Wall Street has come full circle, all the way back to the days before the passage into law of the Glass-Steagall Act separated investment banking from commercial banking in 1933. Bank of America has agreed to swallow Merrill Lynch. JPMorganChase has already digested Bear Stearns and the retail-banking network of Washington Mutual. Citigroup and Wells Fargo are fighting over Wachovia.

Also among the survivors—at the moment—are Goldman Sachs and Morgan Stanley, who together took the extraordinary step on September 21 of transforming into bank holding companies. They will now become like the other three national champions – both highly regulated and less leveraged. They will also be less profitable. But at least they will live to fight another day. The others are all gone or in the process of going.

And whither the Kings of The Street—Jamie Dimon (a ghost of Weill-past), Ken Lewis, Lloyd Blankfein, and John Mack—who deftly maneuvered these acquisitions and transformations? All will be reduced in stature, compensation, and, most importantly, prestige. Perhaps private equity will regain its footing—in which case Steve Schwarzman and Henry Kravis emerge triumphant. But the era of the big swinging dick is over.

Nipping at the heels of the five surviving institutions— parlez vous Francais?—is a wide array of scrappy, smaller competitors. The remnants of the defunct Lehman Brothers are now in the hands of Barclays in the United States and Nomura in Europe and Asia. If these two firms are clever enough to keep the shell-shocked Lehman employees in their seats—where else can they go?—they will, over time, take some market share away from the Big Boys. Then there are the M&A boutiques. They are much in demand these days, lauded for both their independence and for having avoided the pitfalls that befell the rest of Wall Street.

While the earth has indeed been scorched during the past two years to an almost unrecognizable state, if you look closely, amid the charred landscape and hulking carcasses, a green sprig of hope has arisen, propelling itself toward the sunlight.