With US broker dealers looking shaky, now’s the time to be working for a bank with a balance sheet – unless, of course, it’s Dresdner.
Where Bear went, the danger is that other broker dealers will follow. The most immediately exposed is clearly Lehman, whose stock seems set to slide – despite securing a $2bn credit line on Friday.
Goldman, Lehman and Morgan Stanley are all due to report first-quarter results this week. The Wall Street Journal points out that all are highly leveraged, with Morgan Stanley – whose leverage ratio at the end of last year was 32.6:1 – the most highly leveraged of the lot. By comparison, Bear was leveraged 32.8:1, Lehman 30.7:1, Merrill 27.8:1. Goldman, which is leveraged at 26.2:1 and expected to write down $3bn in Q1, is also starting to suffer some serious slippage of its halo.
In the circumstances, banks with balance sheets are starting to look like the better bet (assuming, of course, that you have a choice).
“Right now, you’re better off working for a universal bank rather than a pure investment bank,” says Simon Maughan, banking analyst at MF Global. “Investment banking is a confidence trick – you borrow money from the wholesale markets, buy assets with it, package them up and sell them on. If people stop lending that money they’ll go under very quickly, as Bear has just proved. By comparison, universal banks have balance sheets and deposits they can call on.”
Maughan isn’t the only one blowing cold on the broker dealers. Chris Whalen, of consultancy Institutional Risk Analytics, told the Times last week (ie, before things got as bad as they are now) that broker dealers risk becoming an endangered species and will have to shrink. And Brad Hintz of Sanford Bernstein is predicting “sharply increased” funding pressures for the broker dealer species in the near term.
Obviously not every bank with a balance sheet is looking good at the moment – both UBS and Citigroup are looking very bad indeed.
However, the FT‘s Alphaville blog draws attention to some research by Keefe, Bruyette & Woods, which identifies Deutsche Bank and Credit Suisse as the stronger players in the current market.
The Dresdner dog
The other dog-eared house to avoid for the foreseeable future is probably Dresdner, which is apparently being sized up for sale by owner Allianz.
Maughan, who worked there until last year, says it’s the beginning of the end. “Who’s going to buy them now? Absolutely no one. They’ve toddled along for the best part of a decade now so there’s no sense in Allianz closing it down – they’ll just keep chipping away and chipping away until it’s back to being a pure German brokerage business.”