What Will The NEW Wall Street Look Like?
A: I would love some reader participation here, and some opinions on what the new wall street or the new credit world, whatever you want to call it, may look like after regulation? Speak up all, especially if you work on wall street. How is the industry changing before our very eyes?
I'll get the ball rolling:
1) LEVERAGE - the use of leverage for risky investments will fall from 30:1 & 40:1 to 10:1 or so as the last two investment banks, Morgan Stanly & Goldman Sachs, changed to bank holding companies regulated by the fed. With leverage drawn down to such a level, returns on investment/equity and speculative trading are both going to return to more normal levels which means less profit potential for executives, employees, clients and shareholders.
2) STRUCTURED CREDIT JOBS/TRADING - for the most part, gone. With the extinction of the securitization model (that is bundle --> securitize --> slice/dice --> sell), comes the extinction of many jobs tied to this model. The use of credit derivatives went parabolic sending us into a credit boom never seen before. The desire for high yielding structured investment products will never be the same, at least for a long while. These include CDOs, CLOs, and other tranched credit products.
3) WALL STREET BONUSES - greatly diminished from peak levels of 2006. For the trading year of 2006 (given Jan-March 2007), wall street gave out $33,900,000,000 worth of bonuses. For the trading year of 2007 (given Jan-March 2008), wall street gave out $33,200,000,000 worth of bonuses. I expect this number to be closer to $16-$18Bln given out in 2009, for the trading year of 2008. Even that number is astonishing considering that wall street was mired in heavy losses, shareholder destruction, bankruptcy, and forced marriages. A 'retention of talent' event may also influence this years bonus season as wall street consolidated.
4) CREDIT DEFAULT SWAPS - these financial weapons of mass destruction will be regulated in some, way, shape or form. What arguably brought down AIG, Bear Stearns, and who knows what role they played in Lehman, Fannie Mae, Freddie Mac, and WaMu, will be moved to an exchange where they could "employ daily mark to market pricings that liquidates positions of traders who can't pay their margins" (via Bloomberg). NakedCapitalism reports that key members of the CME don't want CDS trades on their exchange.
5) ASSET MANAGEMENT - one side effect of less leverage, a hurt reputation, loss of confidence and declining markets, is a likely hit to asset management deposits and fees. With heavy regulation upcoming that will affect banks and hedge funds, I would expect the asset management sector to see it's share of shrinkage as well, but it may be shallow & temporary. THIS IS THE ONE AREA THAT I COULD BE WRONG & COULD GROW IN THE LONGER TERM! Perhaps wall street will use asset management, private equity funds and hedge funds to bypass upcoming regulation, and find loopholes in an effort to find any way to increase profit potential. I would love feedback on this sector of the financial industry please, looking ahead of course!
One thing is for sure, wall street is forever changed! The question is, how will this wall street city with its wall street tax revenues and its wall street homeowners adjust in the years to come? Thoughts?
Posted by paul.b
Fri Oct 24th, 2008 10:59 AM
Noah, how many jobs were cut already on wall street? I don't care about what is coming, I want to know right now? How many people got their pink slips and are unemployed and/or on severance right now on wall street?
Posted by Fred
Fri Oct 24th, 2008 11:11 AM
1) there will be an attempt to regulate insurance much in the same vein as ERISA did for pensions in the early 70s.
2) full service brokerages are done, as are all of the prime brokerage services.
3) Family offices will rise in the place of traditional asset managers and the traditional guys will aggressively move into retirement and pension management, but there will be like 3 or 4, not a 100.
4) Because the size of the pot will be much smaller, mid tier public companies will not be able to afford to stay in business (i.e. SOX is very expensive) and as such there will be a profound shift into the private space for quite some time. If Dems get their super majority, i also feel we'll see a wave of offshore.
5) Private Placement and club deals will be the next bubble (some would argue that PE already is in a bubble).
Posted by anonymous
Fri Oct 24th, 2008 11:14 AM
I don't understand the call for insurance regulation. AIG's insurance unit had nothing to do with their collapse. I haven't heard of a major insurance company going insolvent during this crisis. It seems like state regulation is working pretty well thus far.
Posted by Fred
Fri Oct 24th, 2008 11:26 AM
if State regs worked, AIG would be solvent. what failed is there was zero regulation of the parent whose activities placed the insurance subs in jeopardy of becoming insolvent. AIG was run like Greenberg's private little investing black box. he used the AAA rating to get involved in anything that made money.
Posted by Noah
Fri Oct 24th, 2008 11:34 AM
Fred is right. The call is to regulate credit default swaps, for which AIG issued contracts to those seeking protection. They were on the wrong side of a very big trade that blew up on them. They have many great businesses outside this. CDS caused this, plain & simple.
Regulate CDS, and the problem probably wouldnt have unfolded the way it did.
Posted by brenda
Fri Oct 24th, 2008 11:37 AM
Fred,
I too have heard that we can expect Federal regulation of insurance and reinsurance companies within a year. It certainly makes sense in the case of insolvencies and regulator-mandated run offs. A state-by-state approach is insane. Also, you're absolutely correct in saying that insurance has become inextricably linked with banking and investment companies. Look up the major insurance companies, their corporate structures. Citibank/Travelers is the most obvious, but many large insurance companies are tied to major banking concerns and large diversified companies.
Posted by AvnerUWS
Fri Oct 24th, 2008 11:51 AM
Noah,
I think your estimate of bonuses is too high. I don't want to sound bearish when I say they will go down, merely do the calculation. If jobs on the street drop only 20% and bonuses to the remaining drop only 40% that means (.8 x 33.2 bill x .6 = $15.9 bill) the number is already in your range and using only conservative drops in bonuses and jobs. An additional 10% loss of jobs brings bonuses to $14 billion if they only drop 40% (per person).
I know these are rough numbers, but then again there are now whole firms and departments that no longer exist and that will not be getting bonuses.
Posted by Noah
Fri Oct 24th, 2008 11:55 AM
paul - Im hearing different numbers from people I know and trust ranging from 65,000 to 125,000 jobs already cut as of today on wall street. I would prob be in the 85,000-95,000 range and this includes all financial services jobs!
Its not pretty.
Posted by Noah
Fri Oct 24th, 2008 11:56 AM
avner - your probably right!
Posted by Fred
Fri Oct 24th, 2008 12:10 PM
A pause for levity -
Q: How do you know the Manhattan rental market is softening?
A: Sol Goldman Properties shells out for CAPEX.
Posted by anonymous
Fri Oct 24th, 2008 12:56 PM
AIG is a financial conglomerate. It owns insurance companies and plenty of other operations. The 'other operations', specifically their financial products group, made huge bets that have gone bust. The parent company is anything but solvent. However, their insurance subsidiaries do not have these solvency issues, as they have no CDS exposure.
Policyholders are safe. AIG's blowup is not an insurance issue, it is a CDS issue. I don't understand how the failure to regulate the CDS market is indicative of a failure to regulate the insurance or reinsurance market.
Posted by Jose R
Fri Oct 24th, 2008 01:05 PM
It seems Boston based State Street will be using its TARP money to pay bonuses:
http://marginalizingmorons.blogspot.com/2008/10/unfreaking-believable-main-streets.html
It was my understanding that the money for re-capitalization under TARP was to be used as economic stimulus.
My bad.
Posted by Noah
Fri Oct 24th, 2008 01:19 PM
Jose - this cant be trusted. Its just some guy saying he had a conversation with some other high up guy. I want a real source confirming this and also this is probably what prompted Frank to call for a moratorium on bonuses, to make sure these funds are not used so that all bonuses can now be paid out.
Posted by EV
Fri Oct 24th, 2008 01:48 PM
Noah -
seems like most of the financial assets have been repriced to 2002/2003 levels. S&P is trading near its 2002 lows of 775, similar case with Dow. Even my emerging market funds are back to their 2002/2003 numbers. My question - what was manhattan real estate (sq/ft) rates in that time frame? secondly, should we expect manhattan real estate to reprice at those levels or even lower, considering that manhattan is just a levered play on global growth.
thanks
Posted by Fred
Fri Oct 24th, 2008 01:54 PM
Anon - CDS is the tip of the iceberg at AIG. Financial Products is shut down but the rest of the non-core businesses are still there. The notion that the individual insurance subs are separated to an extent does mean that ultimately policyholders are fine but you are missing the big picture - AIG the Holding had the AAA rating and as such its insurance subs benefit(ted) from that in myriad ways, including its policyholders. Take any one of the individual insurance subs and give it a standalone rating, and you end up with a different animal. In short, AIG Holding managed the assets of the subs (directly and indirectly). 80% of AIG Global Investment's assets were insurance company liabilities. Do you think management decisions around investing play a role in the solvency of the insurance subs liabilities? You betcha. You will see all sorts of funky stuff come I imagine, including the questionable marking of assets used for statutory reserve requirements. AIG is not only an example for Federal regulation of insurance, it is THE example DC needs to kickstart it. When they do, premiums are heading north. Insurers will completely exit lines of business because it will start to look like NJ for everyone.
Posted by Noah
Fri Oct 24th, 2008 02:13 PM
EV - I'll tell you this. I signed the contract for my condo on E 93rd in NOV 2001, and closed in APRIL 2002, where the sale was counted in data; lagging.
I paid 500K for a 1093 sft JR4 with 650sft private terrace, unrenovated and in need of work although very nice building; 245 e 93, 2M.
It was a distress sale after 9/11 and the owners bought a place in CA and needed to sell fast. So I think it was a deal for that time, in a market that sold off fiercely after the attacks and took a year or so to recover. However, I figured I saved 100K on it, or about 15-17%, due to the attacks.
So, 600K for that product in NOV 2002 I would say is accurate. Right now I would say deals are happening closer to 2006 levels. But we seem to be on the path to 2004. Whether we correct 40%, to 2002 levels, is yet to be seen. Would take time and individual sell side distress
Posted by Donald
Fri Oct 24th, 2008 02:13 PM
Noah,
I see that you predict Wall St. bonuses to be $16-$18 billion this year, but I've been hearing that number is actually $70 billion:
http://www.guardian.co.uk/business/2008/oct/17/executivesalaries-banking
Posted by Noah
Fri Oct 24th, 2008 02:17 PM
cant be. This would cause such a stir and outrage in public if it turns out to be true. Last years bonuses were 33Bln, to see them more than double, is inconceivable.
Are you sure first this is wall street bonuses doled out JUST FOR NYC positions? I am talking about NYC bonuses, not worldwide. 33Bln is for NYC bonuses from financial services sector with jobs in New York City, where it goes to people who live/work here and who may put it towards local real estate here.
Please look into that.
Posted by Fred
Fri Oct 24th, 2008 03:48 PM
btw, just came out that Treasury may extend TARP to insurance companies.
Posted by brenda
Fri Oct 24th, 2008 04:16 PM
I bought a 1400 sf condo loft, with taxes and common charges combined of $850, for $800K, went into contract November 2000, closed February 2001. It was in prime Chelsea, near Flatiron area. I got a reasonable deal because it was a nice unit, but I still found it expensive at the time.
Posted by Noah
Fri Oct 24th, 2008 05:44 PM
CITADEL Liquidation rumors
http://dealbook.blogs.nytimes.com/2008/10/24/liveblogging-the-citadel-conference-call/
I heard this rumor around 1PM today. This is how runs start.
Besides, it seems CITADEL is considering lowering their fees for asset management, in line with todays discussion.
http://dealbook.blogs.nytimes.com/2008/10/07/citadels-griffin-finds-himself-on-the-defense/
"But with the entire hedge fund industry on edge, even Mr. Griffin is considering what once would have been unthinkable: reducing some of the lavish fees that investors pay Citadel to tend their fortunes."
Posted by brenda
Fri Oct 24th, 2008 08:24 PM
Noah,
I have an question that is definitely off topic. If you take a look at new listings on StreetEasy today there's a load of listings from Related. What I don't get is that a number of them are listed as having closed over the last couple of months, but are nonetheless being listed again by the developer. Do you know what gives?
Posted by Noah
Fri Oct 24th, 2008 09:04 PM
links? bldg?
Posted by monty
Fri Oct 24th, 2008 11:12 PM
@brenda I was focused on StreetEasy for a specific set of criteria for a long time and I noticed properties being delisted and relisted more than once. My "conspiracy theory" is that since the advent of StreetEasy, it is too easy for buyers to see that a property has been listed for months with multiple price drops which gives them leverage. The relisting could a way of gaming the system.
Posted by jt
Mon Oct 27th, 2008 03:03 PM
re: this year's bonuses . . . see the following article in Bloomberg - best discussion on the topic I've seen.
http://bloomberg.com/apps/news?pid=20601109&sid=aVann0.cv9Tw&refer=home
Posted by Noah
Tue Oct 28th, 2008 09:46 AM
JT - link doesnt work for me?