DELEVERAGING AND WALL STREET
Jan 12, 2009
Posted by Jody Eisenman | Filed under Uncategorized
After a promising start to January, the market has sold off again and the DJIA is now down for the year. There is talk about Morgan Stanley and Citi merging their brokerage units. Both firms are in lousy shape financially, but continue to exist to a great extent thanks to TARP money. The reality is, revenues are down all across the street, and I don’t see them improving much for the first half of 2009. There is very little investment banking work being done, and retail brokerage commissions are down with the rest of the market. Firms have made a big push toward managed accounts, where clients pay a fixed fee to have their accounts run by professionals. These managed fees have by and large continued, albeit on a lower asset base. However, I am skeptical as to how long investors will continue to pay fees of around 1-2% of their assets while their accounts are losing money. I think Citi is trying to move more toward traditional commercial banking with this move. Let’s see what happens.
I was recently asked as to whether or not our current situation resembles that of the depression of the 1930s. Although our story has not completely played out yet, there is one scary scenario we have that is unlike the 1930s. One of the major reasons for the market sell off has been the deleveraging story. Simply put, thanks to the easy credit available, as well as the ability for firms to leverage their balance sheets at unheard levels, led to an extremely risky portfolio. Now that housing prices and bonds like CDOs and CMBS have declined, these firms have taken enormous losses. Of course, thanks to the Federal Reserve, we the taxpayers have bailed them out. As I have stated many times, what we are seeing is a massive deleveraging in many financial instruments. As losses mount, firms are forced to mark assets to market. The question is, “Can the economy handle all this?” In other words, if all these firms must drop their leverage ratios by selling off assets, can the economy handle the stress of these sales? I honestly don’t know. This is just another reason why I remain extremely cautious today.
