Investment banks cheap at the price

THERE MAY NEVER have been a better time to buy a US investment bank on the cheap, and Wall Street is buzzing with rumours of imminent deals.

Deutsche Bank's alleged talks with Bankers Trust are simply the latest development in what bankers are calling the fire sale of the century.

The shares of investment banks, whose earnings are notoriously volatile, often veer quite wildly but it is not often that the entire sector hits the buffers with such a resounding whack. Vast losses in Russia, excessive leverage, silly loans to hedge funds, a slowing US economy and other factors have driven some investment bank share prices down as much as 70%. A year or so ago, in the midst of the bull market, an investment bank such as Salomon Brothers cost more than twice its book value to buy. Now at least four big names are on the auction block at considerably lower multiples. Bankers Trust's shares at $45 are only a third of their highest price and the bank could probably be picked up for book value or less. It is not clear what Lehman Brothers might be worth as it fights off rumours of its imminent demise. Its shares have plunged 67% from their July high to $28, wiping $6.8 billion (GBP 4 billion) off the bank's market value. JP Morgan is also cheap after its precipitous 69% drop in third-quarter earnings. And Paine Webber is undoubtedly for sale to the right buyer with its shares down more than 50% to $20. Diane Glossman, Lehman's bank analyst, says that JP Morgan's expenses are far outrunning revenues and profits. "This is not a situation a company can sustain," she says ominously. Ironically, the one bank not looking for a deal is Goldman Sachs, which was so eager to float on the stock market. Gold-mans pulled the share issue because of poor market conditions rather than its performance, which is about the best on Wall Street. It has escaped major market losses and its partnership structure gives it the luxury of taking the long view. With so many investment banks available potential buyers should be queuing like customers at a Harrods Sale. But there is an absence of bidders. Japanese and Swiss banks are too shell-shocked or weak to think of purchases, and the British have foresworn US investment banking. French banks have also been inconspicuous on Wall Street lately. Deutsche Bank is certainly the most serious buyer in the market. Its rumoured talks with Bankers Trust follow previous discussions with JP Morgan and Lehman. It has also been in talks with Merrill Lynch about forming a possible mega-banking and securities powerhouse. Another likely buyer is Dresdner Bank, which has been sounding out Paine Webber as a possible partner. Big US commercial banks, such as Chase Manhattan and Bank of America, are interested but as cautious as the Germans. Chase has already tried and failed to interest Merrill in a merger, but may have little interest in smaller investment banks such as Lehman. Despite the rock-bottom share values there are too many uncertainties surrounding investment banks, particularly in their proprietary trading and lending operations, that are scaring off potential buyers. Another discouraging factor is the gaping cultural divide between investment bankers and commercial bankers. The idea of freewheeling Bankers Trust, for years Wall Street's Bad Boy, working smoothly with buttoned-up Deutsche is simply bizarre. So although shares such as those of Bankers Trust bounced upwards on news of Deutsche's interest, there is scepticism on Wall Street that any investment bank will necessarily do a deal soon. As one veteran investment banker put it: "This may turn out to be the fire sale of the century in which nothing was sold."

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