A meaty problem for Wall St carnivores

Michael Lewis, the author of Liar's Poker, looks at how commercial lenders are muscling in on investment banks' traditional services. His latest book, Next, will be published next month

ABOUT a year ago, Bloomberg News reported a small but telling event in financial America. Ford Motor Co had asked its favourite investment banker, Goldman Sachs, to extend $250 million (173 million) in short-term credit in exchange for underwriting Ford's more lucrative bond deals.

I do not know if this was the first time a big company had demanded commercial banking services from its investment bankers, but it might well have been.

Only a year before, Congress had eliminated the laws that prevented commercial banks from underwriting securities.

The people who did the lucrative investment banking work were, in theory, exposed to new competition, not only from fellow investment bankers but from an entirely different species. And it was unclear at first what that meant.

No longer. What appeared at first to be an unreasonable demand from Ford is rapidly becoming the price of doing investment banking business.

Two months after Goldman turned up its nose at Ford's request, it acceded to similar demands from stores chain Wal-Mart on the condition the latter did not disclose the terms of the deal.

Wal-Mart was a far bigger Goldman customer than Ford.

Wal-Mart also had on its board a former chairman of Goldman Sachs, Stephen Friedman, who must have known that his old firm, if pressed, would succumb to the new unpleasant reality.

Since then, the investment banking resistance has collapsed. In the past year, such bankers have routinely offered the draining and unprofitable (at least to them) credit lines to their corporate customers.

When they have been slow to do so, they have been shoved aside by commercial bankers who are not.

Bank of America has become the fifth leading underwriter of junk bonds - ahead of Merrill Lynch and Lehman Brothers - and the financial news is peppered with other commercial bankers stealing business by offering cheap short-term credit in the bargain. The commercial bankers have gained investment banking market share largely because they have, in effect, been cheaper.

There are technical accounting reasons why. Unlike investment banks, commercial lenders are not required to carry the loans on their books at market value. If a borrower's business goes south, the investment bank must mark down the loan, while the commercial bank can continue to carry it at face value. Goldman has complained about this to the Financial Accounting Standards Board.

But the biggest advantage commercial bankers have over investment bankers is that they are not as greedy. What looks like an unthinkably rotten deal to Goldman Sachs looks like the most exciting piece of business in the history of the universe to Bank of America.

By itself, Bank of America's insistence on extending credit lines only to companies that give it investment banking business is a tiny financial event.

But it nevertheless suggests a much bigger shift taking place in the money culture: the struggle for survival between two species. At more than 10 paces, commercial bankers and investment bankers are indistinguishable - people who wrestle each morning with the decision of whether to wear a suit.

But people who look essentially the same at a distance could not be more different up close.

The commercial banker is a bundle of fears designed mainly to survive for just long enough to pass on his genes. The investment banker is a bundle of greed made to maximise the amount of red meat he hauls back to his cave before dying a bloody death.

The herbivore and the carnivore are ill-suited for intermarriage and even less suited for interbreeding. They will not blend. When thrown into the same habitat, one or the other must triumph. The future of this struggle is now a bit clearer. The commercial bankers' price-cutting tendencies will undermine large chunks of the investment banking business.

Stock investors have already begun to pick up on it - sending up the shares of the more aggressive commercial banks while sending down those of the investment banks that stand to lose most from price competition .

No doubt investment bankers still believe no commercial banker, with his decent family values his nine-to-five attitudes and his pathetically low financial expectations, can pose a threat to an investment banker.

Even the commercial bankers seem to believe the more rarefied and profitable investment banking services such as advice on mergers and acquisitions cannot be bought. Not long ago, a spokesman for Bank of America was quoted as saying that "You don't win an M&A engagement by providing capital." But, of course, you can.

Bloomberg News

Copyright 2001
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