NEW YORK (AP) - Wall Street investment bankers got another lesson about
the dangers of risk-taking this past week with the downfall of Bear Stearns Cos.
The question now obviously is, how long will it last?
Those bankers, many of whom lived through market debacles like the dot-com
bust at the start of this decade, turned out to have very short memories. And so
analysts believe the sale of Bear Stearns to JPMorgan Chase & Co. for a stunning
$2 per share ultimately won't have that much of an impact on how Wall Street
conducts business.
In fact, bankers and traders are under even more pressure to reap big
returns because of the ongoing credit crisis, and risk is just part of the game.
"There's an old saying on Wall Street that, for traders and bankers, you'd
have to take a normal 30 year career and distill it to 15 years," said Quincy
Krosby, chief investment strategist for The Hartford. "This whole episode might
change Wall Street for a little while."
Krosby believes that Bear Stearns' near-collapse, which followed the
company's investing too heavily in risky mortgage-backed securities, might force
some bankers to change their ways in the short term. But it won't be enough to
temper the financial industry's relentless pursuit of money.
Indeed, the past decade has seen a number of investing fiascoes that Wall
Street doesn't appear to have learned much from. Krosby noted the go-go Internet
days -- when untested high-tech companies reaped piles of cash in public
offerings. The lesson then was, don't put a lot of money into a venture that
isn't on fairly solid ground -- but mortgages granted to people with poor credit
are quite akin to high-tech firms that had never turned a profit. In both cases,
investors gleefully looked past the risk.
Now investors are smarting from what happened to Bear Stearns. And traders
are somewhat chastened, for now.
Erin Callan, the chief financial officer for Lehman Brothers Holdings Inc.,
said her firm has certainly become more wary about the risks it takes amid the
credit crisis. However, the market's gyrations also offer Lehman's army of
traders an opportunity to make money.
"We just try to come in, and run the business the best way we can," she
said. "But, you can't survive if you take no risks at all. All we can do is plan
in this environment, making sure we do all the things to optimize running the
firm."
It seems there's little that will change an industry and a lifestyle
attached to Wall Street, which is thought of by Americans as more than just the
center of free-market capitalism. Its culture attracts men and women with a
swashbuckling mentality -- smart, aggressive risk takers with the potential to
become very rich.
And, their skills in trading and investment banking were proven this past
week -- even after news of Bear Stearns' buyout.
Chief executives at Morgan Stanley, Goldman Sachs Group Inc., and Lehman
Brothers pointed out that trading desks played a big part in offsetting massive
mortgage-backed asset write-downs, which have ticked past $156 billion for
global banks since last year.
As the three companies released first-quarter earnings data, Morgan Stanley
said equity trading revenue surged 51 percent to $3.3 billion. Revenue at its
fixed-income sales and trading group dropped 15 percent to $2.9 billion, but it
was still the firm's second-highest performance ever despite having to write
down $2.3 billion linked to subprime mortgages and leveraged loans.
And that pleased investors. Morgan Stanley had its largest gain in more than
a decade on Wednesday, climbing 18.8 percent to $42.86. Rival investment banks
also had their best week since 2001.
But, investors shouldn't get too comfortable -- the investment banking
industry, and Wall Street in general, still have a long way to go before they
can be called healthy. It's not just the credit market problems that are an
issue, it's also the struggling U.S. economy and its potential to hurt other
countries.
"Until we feel more certain about the worldwide economies, we don't see
things picking up dramatically," said Goldman Sachs CFO David Viniar. "We just
need to keep plugging away."
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