Banking after the kindness of strangers

By Francesco Guerrera

Published: December 31 2009 12:10

”Whoever you are, I have always depended on the kindness of strangers”. The last line of Tennessee Williams’ A Streetcar Named Desire – uttered by its desperate heroine to the doctor taking her to a mental asylum – is an apt summary of the US financial sector in 2009.

As the crisis abated, banks took maximum advantage of the kindness of taxpayers and regulators to return to their core business: making money for shareholders and employees.

Ultra-low interest rates, dwindling competition and pent-up demand for their services sparked a renaissance in profits and share prices of the financial institutions that emerged from the turmoil in reasonable shape.

The question is whether history will repeat itself, or even just rhyme, this year. Here are my ten, utterly personal and non-exhaustive, predictions for the year ahead in US finance.

1) Strangers will be a lot less kind. With banks boasting about their new-found health, regulators will pull the plug on most of the measures they introduced to drag the financial industry back from the brink. A host of acronyms (Tarp, Talf, PPIP, TLGP) will be forgotten but not missed.

2) Politicians’ influence over the financial industry will wane. As banks repay federal aid and the visible hand of the government retreats from capital markets, financial groups will become increasingly deaf to pleas for more lending and smaller bonuses and…

3) …banks will redouble their efforts to lobby against tough new financial rules. No longer required to show gratitude to taxpayers, the industry will launch an all-out attack against the new legislation. The planned Consumer Protection Agency and higher capital standards will be two favourite targets.

4) US manufacturing will experience an unlikely rebirth. Left for dead after the last recession, the industry of making things will benefit from a depreciating currency, an ample supply of labour and the country’s technological prowess to recover some of the ground lost to the service sector. The bad news is this will not be enough to trigger a lasting recovery throughout the country: the US economy will still need consumers and financial services to regain its footing.

5) Vikram Pandit will step down as chief executive of Citigroup. Either because the long-suffering company has repaid its government’s debts and is heading towards a brighter future as a smaller financial supermarket or because Citi has proven once again to be the messiest, most hapless of the big banks and has lost further ground to its rivals.

6) Goldman Sachs vs Morgan Stanley : something’s gotta give. Once as fiercely intertwined as Tom and Jerry, the two institutions formerly known as investment banks have taken opposite routes, with Goldman sticking to its advisory and trading model and Morgan Stanley going towards the retail business by assembling a big brokerage unit in expectation of regulatory curbs on its wholesale activities. Morgan Stanley’s profits have been lagging in 2009 but if it is right about regulation, the tortoise could overtake the Goldman hare.

7) New rivals to challenge the big boys. On three fronts. As regulators curb leverage and high-risk activities at too-big-too-fail banks, large hedge funds, such as Citadel and Blackstone, will try and supplant them. Big institutional investors (BlackRock, Pimco) will want in on the recent trading fees bonanza by setting up their own trading operations. Boutiques (Lazard, Greenhill) will keep making inroads in the takeover advisory business.

8) A new ruling class will emerge on Wall Street. After the crisis hastened generational change (farewell Stan O’Neal, Chuck Prince and Ken Lewis), the industry needs new leaders. James Gorman, who has replaced John Mack at Morgan Stanley, is a candidate but keep an eye on Goldman which could freshen up its traders-heavy top by appointing a investment banker as number three.

9) The year of the foreigners. Barclays Capital, Credit Suisse and Deutsche Bank have had a good crisis. Expect their newly-confident leadership to try and take market share and star bankers from weakened behemoths such as Citi and Bank of America. True to form, they could also launch into pricey, value-destroying acquisitions (Credit Suisse-DLJ or UBS-Paine Webber, anyone ?).

10) A little less Jamie Dimon, a little more action. Two books, a few magazine covers and “banker of the year” award. The JPMorgan chief has had plenty of personal exposure in 2009. This year, his bank should do the talking. If US consumers shake off their blues, by the second half of the year, Mr Dimon’s creation will really pull away from the pack.

Copyright The Financial Times Limited 2010