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Bye, bye broker dealers, hello universal banks

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.

Safe havens

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.”

Comments (12)

  1. Quite simply…it’s “goodnight Vienna” for Dresdner too (as well as bear)…

  2. Allianz’s sudden decision to dump DK only serves to underline how totally out of touch they are. Want to earn wads of cash flogging an investment bank? Choose the moment when an infinitely better institution has just been sold for a quarter of the value of its HQ. Nice.

  3. The only for stopping the rot is for the Fed to face up to how bad things have really become – exchanging high quality mortgage collateral for treasuries for 28 days at a time is simply not enough. They need to start accepting low grade mortgages as collateral for periods of three months or more. Wake up Bernanke or we’re all screwed.

  4. Why don’t you all take a break and drive buses, or make lattes for two years, instead of begging the Fed to buy res mtges ? Give us a break.

    Give_Me_a_Break Reply
  5. The Fed is pathetic, the British Government was even more pathetic when they rescued Northern Rock, but the Oscar for the most pathetic actor goes to … Bear Stearns’ management. They paid themselves and the front office hefty bonuses less than 3 months ago, and then they ran out of money to keep the business afloat: there should be a criminal investigation

  6. What about BNPP? AA+ rated

  7. Heard that Lehman employees themselves are getting their money out of the bank, closing accounts with the private wealth division for example, and selling all the stocks they can sell, thus creating a self-fulfilling panic which will just backfire them!!

    Ex-Lehman Guy… Reply
  8. Funny that MF Global guy is quoted talking down Dresdner in this article when MF Global stock fell 75% today…

    Dresdner defender Reply
  9. The truth is finally out — investment bankers live large and loud, AND, more shame to them, expect taxpayers earning peanuts doing non-‘glamorous’ work to take up the tap.

  10. Lehman Brothers is the next victim of the credit crunch. They have always been proud of lending funds (including mortgage loans) and afterwards reselling them to the third parties. Now they can’t. So they are a direct applicant for next crunch

  11. Strage, none of you thinks oil/energy has anything to do with all this?

  12. I laugh balls off every time I hear of investment bankers hitting hard times. But I don’t look back at replies. Welcome to the real world.

    Voice of Reason Reply

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