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September Song For Wall Street

29 December 2008 Jose D. Roncal www.financialspeculation.com

29 December 2008

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Jose D. Roncal

www.financialspeculation.com

It wasn’t just autumn leaves that started falling last September; it was the entire investment banking system. When Lehman Brothers got into deep financial trouble and the U.S. government said “no deal” to their bailout request, the official unraveling began.  

That was in September, but if anyone had been paying attention, they could have seen the early warning signs as far back as March when internal hedge funds at Bear Stearns got crushed under the weight of too many bad subprime bets.

For decades the energy in the market had been fueled by high-rolling investment bankers, but look what’s happened in the last nine months: Bear Stearns, snapped up by JPMorgan Chase; Lehman Brothers, gone; Merrill Lynch, bought out by Bank of America; and Goldman Sachs and Morgan Stanley, converted to bank holding companies just to stay in business—although it means they’ll have to operate with the strict regulatory shackles of the banking industry. Five major investment banks … and then there were none. 

Essentially, the global economic crisis has ushered in the era of universal banking where massive financial firms offer every conceivable kind of investment product and service. Even smaller brokerage firms face being herded under the umbrellas of big banks, or else risk becoming irrelevant.

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And what’s going on with those big banks? Taxpayers are still waiting to see the positive fallout from the TARP bailout, if indeed there will be any.  We gave the banks our money, when will they tell us what they’re doing with it?

Our Predictions for the New Year

What’s the outlook for Wall Street now? As the year draws to a close, we’re all asking the same question. Will things continue to deteriorate, or have we reached the bottom?

Even wearing rose-colored glasses, it’s hard to find much optimism. When the economy does bounce back, we may find ourselves back at the same level we were five years ago.

We predict tighter restrictions imposed by both regulators and legislators, as well as by the Feds, although they may strive to seek a balance between innovation and stability.

With the number of IPOs cut in half since last year, those that are still hanging on will continue to be underemployed and those that are fully employed had better be expecting smaller and fewer bonuses.

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The next big news could be the legal trouble facing the big firms. Expect to see huge settlement costs—Merrill and BofA could be looking at a price tag of up to $5 billion related to collateralized-debt obligations.

When things do stabilize, Goldman Sachs and Morgan Stanley may be tempted to break loose of the banking shackles and revert to their high-risk practices.

We foresee more bank losses and write downs as commercial loan losses and credit card defaults will hit them hard. Furthermore, other defaulting loans from bankrupt companies as well as individuals could well continue into Q2, if not Q3 of next year.  Regional banks will feel the pinch and some may collapse.

Citigroup has already received a Fed cash infusion of $25 billion and expects another $20 billion. Taxpayers will be on the hook if their massive portfolios of mortgage, credit cards, commercial real-estate and big corporate loans keep going downhill. Citigroup is hoping to shore up their financial bases and just injected $800 million of new capital into its South Korean banking arm, Citibank Korea.

We expect big changes with the SEC, and it will be more than a wrist slapping for their gross negligence. There is pressure building to fold the whole agency, along with those who are supposed to be overseeing the derivatives market, into a single policing arm of the Fed.

The future of Hedge funds is harder to predict. Will they be allowed to continue running rough shod under the regulator’s radar? Or will the funds even survive? Redemptions are at an all-time high and returns are down 20% this year. Since Madoff proved that losses are easy to hide, look for some much needed regulations.  

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And our final prediction includes a glimmer of hope.  If there is any good news in this economic fiasco, it’s this: Main Street stands to eventually benefit from a better-regulated Wall Street.  With a more transparent financial system, a firmer foundation, an encouraging new administration and a stronger business model, there might be a promising outlook for more stable and consistent growth.

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About the author

José D. Roncal is a truly global executive with over 20 years of experience in international business and finance, having worked and travelled frequently in six continents

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