September 18, 2008

"The past six months have shown that the tipping point has passed and the stand-alone, 'bulge-bracket' brokerage firm is a thing of the past," said Rob Hegarty, managing director of TowerGroup's Securities & Investments practice. "TowerGroup believes that the large, universal banks acquiring these businesses are positioning themselves to become the wealth management firms of choice. As subsidiaries, these brokerage businesses may ultimately flourish. But it will be under the watchful eye of a more conservative and more risk-averse overseer."

TowerGroup expects that the demise of the stand-alone investment bank will lead to a sharp, long-term decline in the creation and use of structured products " leaving few firms with the size and risk appetite to take on such an industry. There is also the bigger question of whether the "financial supermarkets" is the wave of the future " again. TowerGroup believes that the large number of failed attempts at building a financial supermarket (e.g., Citigroup, UBS, Morgan Stanley, Credit Suisse) compared with the few successes (e.g., JPMorgan Chase) demonstrates that executing the supermarket strategy is difficult at best " irresponsible at worst.

TowerGroup also expects IT spending in the Securities and Investments sector to decline sharply from 2008 to 2009, led by a 14 to 16 percent decline in sell-side IT spending. The combined IT budgets for Lehman Brothers and Bear Stearns totaled nearly $2 billion annually " most of which is virtually disappearing overnight.

TowerGroup's Hegarty's new report, titled "Realigning an Industry: New Structure of Capital Markets After Demise of Lehman and Sale of Merrill," assesses the implications for the capital markets industry of the bankruptcy filing of Lehman Brothers and the acquisition of Merrill Lynch by Bank of America.