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We could see it coming

September 20, 2010

"Pennies" by walknboston. Some rights reserved.

The New York Times writes today about the deceleration of the Wall Street Money Machine this summer, one that many did not see coming. Stock offerings, mergers, and other transactional activities that yield massive fees for investment banks and law firms have dipped below last year’s plunge, providing further evidence that even Wall Street is not recession-proof. Revenue from Wall Street’s core businesses is expected to fall from $56 billion in 2009 to $42 billion in 2010. The banking industry could lay off up to 10 percent of its workforce in the next year.

We did see this contraction coming. The revival of Wall Street fortunes this spring was a classic Dead Cat Bounce. Wall Street traders like to imagine themselves as Masters of the Universe. But they are no longer Masters on their own Street. Here’s why.

  • US debt owned by foreign countries shifts financial power overseas.
  • The era of liquid access to capital – stretching from the early 1980s – has ended.
  • Financial regulation – self-imposed, federal, and cross-border – further tightens the handcuffs.

No power, no capital, and more oversight equals fewer deals, smaller deals, and lower fees on deals for bankers. We expect this to be the new reality for the indefinite future, with enormous implications for the banks and law firms that have built their businesses around transactional services.

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