Investment Banking Had Already Changed

Last week, Reuters published a story with the headline Storied banks abandon Wall Street model. How about this headline: Reuters abandons news model in favor of 8 year old stories? Anyone who thinks it’s news that Goldman and Morgan abandoned their traditional business model has been asleep since 2000. Here’s the real story.

The traditional Wall Street model was providing advice to companies, providing ideas to investors and liquidity to both. This was done via Sales, Trading, Research and Investment Banking. These services were lucrative for Wall Street firms, but they were also critical to the formation of growth capital in the economy. Some would argue that this was our country’s greatest competitive advantage!

This traditional business model was severely wounded by the Internet, which created both a huge speculative bubble and the impression that the best transactions were free and anonymous. When the dotcom bubble burst, investors were reasonably pissed at the Wall Street firms and convinced that transactions should be free.

So it’s the autumn of 2001, you are CEO of a traditional Wall Street firm and here’s the situation: Investors are still pissed, don’t want to read your research and don’t want to pay you more than $1 per trade. The government wants you to go directly to jail for buying your client an obnoxiously expensive bottle of wine. Companies know you can’t raise capital for them so they go see Bob Greenhill for advice.

In other words – the traditional business won’t pay the rent. So what can you do when no one else will take your investment advice? Either you can just go away like Roberston Stephens, H&Q, AlexBrown, etc. — or maybe you can become a hedge fund!

Check out the post-bubble P&L’s of the ”traditional” Wall Street firms and you’ll see that they have moving away from their “traditional” businesses and turned themselves into highly leveraged hedge funds over the last 8 years. And why not? It worked for Long Term Capital.

So much information – so little understanding…

Chris is the founder of Bulger Capital, before which he spent three years at Needham & Co. as a senior partner and head of technology banking. He also is a Robbie Stephens vet, having run its Boston office and its global technology banking group.