Wall StreetRICHARD DREW/The Associated Press
Two years after the week that changed Wall Street forever, the top financial firms in the United States are in the throes of a new transformation.
A wave of government regulation - the most significant in 70 years - is bearing down on the nation's money-making machine.
The reforms, which are unfolding both at the national and global levels, touch every aspect of the financial industry, curbing banks' abilities to take risks and pumping up the powers given to regulators.
Two years ago, major financial firms were in a battle to survive - now their challenge is less existential: how to keep minting profits even as they're pushed toward a more conservative mode of doing business. Indeed, they're already angling for ways to hang on to some of their most lucrative activities.
"Wall Street is a very creative place with a lot of very smart people," says Michael Driscoll, a professor at Adelphi University and a former senior banker at Bear Stearns. As the rules are spelled out, its bankers "will figure out how to play by them and as close to the regulatory edge as they dare - that's what they do."
At major financial institutions, there are massive efforts under way - sometimes in the form of dozens of internal task forces - to gauge the impact of the new U.S. reforms, says Thomas Vartanian, a Washington-based partner at law firm Dechert LLP. The extent of the shifts and the different timelines for implementing them will translate into "at least a five-year period of significant change in the financial services business," he says.
So far, big banks are adopting a two-pronged approach. Where the new financial law appears clear, they're jettisoning businesses that are no longer permitted. But in areas where there is ambiguity - and there are many - they're holding off in the hopes that regulators can be persuaded to take a more accommodating approach.
Goldman Sachs Group Inc., for instance, is quietly disbanding a unit that made bets in various markets using the firm's own capital, an activity known as proprietary trading. Such activity will be prohibited once certain elements of the new financial reform law take effect. JPMorgan Chase & Co. and Bank of America, too, are reportedly engaged in ways to wind down or sell their proprietary trading arms.
But these firms are also prepared to exploit any potential gaps in the law, particularly when it comes to hanging on to lucrative activities. At Goldman, there's another arm - called the "special situations group" - which also invests the firm's own money and has snapped up everything from airplanes to shopping centres to South Korean bonds, with spectacular results. Goldman's top brass believes, according to a recent report from a Citigroup analyst, that the special situations group will be exempt from the new curbs because it invests mostly in bonds, making it a form of lending, rather than trading.
How regulators parse such distinctions promises to be a major source of contention. They'll also have to decide how much risk banks can take on when executing transactions for clients, something financial institutions argue is indispensable to their role as intermediaries in markets.
For some experts, such jockeying is a dismaying sign. They consider it proof that Wall Street hasn't changed very much despite its near-death experience two years ago, when Lehman Brothers Holdings Inc. filed for bankruptcy, sending financial markets into chaos.
Trying to change Wall Street's behaviour through legislation has a poor track record, says Charles Geisst, a finance professor at Manhattan College who wrote a history of the industry. "The traditional way to [get around it]is just to devise new financial instruments that aren't covered under the regulations," he says.
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BANK STOCKS IN POST-LEHMAN WORLD
The world has changed radically for the major U.S. investment banks following Lehman Brothers Holdings Inc.'s implosion two years ago under $613-billion of debt. The stocks of the 10 biggest players are down 23 per cent on average, more than twice the drop of the Standard & Poor's 500 index, as investors have reined in their expectations for the future of the sector.
Goldman Sachs Group Inc.
Shares traded at $154.21 on the eve of the Lehman collapse.
Closed at $152.66 on Tuesday
JPMorgan Chase & Co.
Shares traded at $41.17 on the eve of the Lehman collapse.
Closed at $40.81 on Tuesday.
Citigroup Inc.
Shares traded at $17.96 on the eve of the Lehman collapse.
Closed at $3.94 on Tuesday.
Bank of America Corp.
Shares traded at $33.74 on the eve of the Lehman collapse.
Closed at $13.72 on Tuesday.
The S&P 500 index, a benchmark of U.S. equity performance, closed at 1,251.70 points on the eve of the Lehman collapse. It ended the day Tuesday at 1,121.1 points.
Simon Avery