Latin Finance - July 2008 - (Page 48)

Inside source Re-inventing Wall Street What does the end of Bear Stearns mean for global investment banks? It’s a sea change quite simply. As investment banks have had to do many times over the years, the industry will have to re-invent itself. Re-invention is a very important part of Wall Street history and this is simply just another example of that phenomenon at play. But the transformation will not be pain-free, none are. This could take years to accomplish and in the interim, the landscape could be bleak. Profits will be lower, business volume will be down, capital balances will be higher, return on equity will be lower. Wall Street can no longer fund itself using overnight secured and unsecured financing. Universal banks have the benefit of their customers’ deposits to use to operate. Wall Street doesn’t have this. This must and will change but the path forward is still unclear. That is why Lehman Brothers remains vulnerable. William D. Cohan. The global crisis forces investment banks to revamp and refocus. It may also undermine expansion into LatAm, says ex-banker William D. Cohan. the past few years; now gone. This is not going to be replaced by M&A volume that’s for sure. How will the use of balance sheet be affected? Use of the balance sheet to help clients is pretty much over at the moment. It will come back. But right now it is over unless you are Mars trying to buy Wrigley and that can be financed. The days of the mega buyout based on a sliver of equity and a mountain of debt are over. As usual, the pendulum swung too far in the direction of banks mispricing the cost of credit. Investment banks are reallocating resources to LatAm, especially Brazil. How might this process be affected by what is going on at the global level? Wall Street is very good at spotting where on the globe business is or likely soon to be. The problems in the US credit markets, while affecting global finance, have had less of an impact in emerging markets so far. On the other hand, there are a lot of institutions around the globe that bought these mortgage-related securities that have not come clean yet about their true value. This could cause a serious problem in the next year or so. The combination of this and a lack of revenue and profitability among US banks could spell trouble for expansion efforts overseas, or fledgling efforts in emerging markets. Will another bank fail? The chances of it happening again are both very high – the way Wall Street funds itself makes it susceptible to these crises of confidence, witness Lehman’s struggles despite its best efforts to shore up its balance sheet – and very low because Wall Street is generally very good at fighting the last war – solving a problem that it knows the answer to and can imagine. Now the Fed window is open and the possibility of a collapse is real so my bet is it won’t happen again, but there are very smart people out there betting it will. As new investment banks pile into Brazil and try to win business, what are the dangers for their prospective clients? That these firms are there one minute and gone the next. Or at least the products they offer are gone. Which banks are most vulnerable and why? The whole banking sector in the US is shaky because of the hard-to-value and impossible to sell inventory of mortgage related securities that these companies have on their balance sheet. Stated book values may mean nothing at all because the necessary write-downs, believe it or not, still have not been taken. Wall Street securities firms are vulnerable because of the way they fund themselves, because of the mountain – $65 trillion at last count – of CDS contracts that have been written and may come due and because business has come to a standstill. There are complete lines of business that have just disappeared like mortgage backed securitization and may not be coming back, certainly any time soon. This was a gravy train in How should new corporate participants pick their advisors and what should they most value in an investment bank? It depends on the assignment. For capital markets work, the balance sheet has to be primo. For M&A, it’s all about the brainpower. LF William D. Cohan, former MD in the M&A group at JPMorganChase, is writing a book about Bear Stearns. For more of this exclusive interview see www.latinfinance.com 48 LATINFINANCE July/August 2008 http://www.latinfinance.com

Table of Contents Feed for the Digital Edition of Latin Finance - July 2008

Latin Finance - July 2008 Contents Investment Banking Outlook Compensation Survey Colombia Investment Banking Borrowers vs. Investors Banorte Profile Braskem Financing Strategy Brazil Hydro Finance Peru Port Privatization Panama Money Flows Argentina Local Markets Guide to Banking Technology Who Said That?

Latin Finance - July 2008

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