Private-equity firms and hedge funds spy opportunity. The buyout barons got good news this week, when the Fed relaxed its rules on their ownership of banks. These investors are also going after the investment banks’ “talent”. Hedge funds will be particularly keen to get their hands on cutting-edge risk-takers who fret that new regulation will clip their wings.
Power may shift in two other directions: abroad and, to a lesser extent, to boutique investment banks. Mitsubishi is not the only foreign bank making a move. After a brief wrangle in the bankruptcy courts, Britain’s Barclays has taken over Lehman’s American operations.
But all is not lost for the former investment banks. For one thing, they may not have to cut leverage by as much as feared. Though their overall leverage ratios are high, their risk-adjusted capital ratios under the Basel 2 rules are stronger than those of most commercial banks.
Moreover, there are some advantages to becoming a bank now. Dozens of regional lenders are expected to fail in the coming months. Goldman and Morgan should thus be able to amass deposits on the cheap, and without the headaches that would accompany a merger with a big commercial bank. As two of the sharpest distressed-debt investors, they will also be looking to pick up assets from the government’s giant loan-buying entity when it gets going.
Given the acute stress in money markets, however, the accent for the time being is more on survival than grabbing opportunities. Banks continue to treat each other with suspicion in interbank loan markets.
Financial firms fear further fallout from the recent, potentially catastrophic run on money-market funds that prompted the government to step in with guarantees. “Prime” money funds, which are important buyers of corporate debt, remain under pressure and are pulling away from anything deemed risky. This is a big problem for banks, since money funds hold up to $1.3 trillion of their short-term debt. As the funds retreat, the banks will be forced to turn to longer-term (and more expensive) funding markets.