Broader Implications of Lehman bankruptcy and Merrill Lynch acquisition-TowerGroup

With shockwaves still reverberating from the weekend's news of both the Lehman bankruptcy and Merrill Lynch acquisition, TowerGroup, believes that the industry is in the midst of the most fundamental restructuring of the capital markets since the 1930's.

TowerGroup analysts note the following:

This is a period of extraordinary change in the risk profiles for capital markets. With the elimination of two of the top four stand-alone investment banks this weekend - and three of the top six in just the part six months - there will be much less capital commitment, much less risk assumption, and far fewer deals being done than we have seen over the last several decades.

TowerGroup expects the markets to see a dramatic decrease in the use of derivatives and structured products. With fewer firms stepping up to facilitate these transactions, there will be much lower volume in these products.

As banks assume control of capital markets firms, they are positioning to become the wealth management firm of choice. TowerGroup has long postulated that banks were best positioned to deliver holistic wealth management. These events further this perspective, as a large US bank aligns itself to offer real private banking much like what has been seen in Europe for more than a century.

TowerGroup further expects to see a dramatic drop in technology spending across the capital markets industry - with several top spenders either exiting the business or reducing their overall commitment to IT investment.

In terms of Merrill and Lehman specifically:

The sale of Merrill Lynch and the eminent demise of Lehman Brothers represents the final nail in the coffin for the Glass Steagle Act - removing two of the "old guard" firms which represented the separation of banking and brokerage.

The culture of Merrill Lynch is distinctly different from Bank of America. As such, it is likely that every other large wealth manager will be vying for Merrill brokers - and that a large number of Merrill brokers will reconsider opportunities in the Independent broker or Registered Investment Advisor space.

This turmoil shines a spotlight on the stability of retail brokerage and wealth management divisions as contributors to topline growth, highlighting them as the crowning jewels within these organizations. TowerGroup considers this validation of the "Renaissance of Retail" in the brokerage industry.

(This is a release dated 15th September 2008 from TowerGroup)

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