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April 14th, 2009

The Wall Street Crisis: A Good Thing?

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The Wall Street crisis encapsulates several issues occurring more or less at the same time. The crisis came to a head with the collapse of Bear Stearns and the failure of Lehman Brothers. The remaining few (but very large) investment firms were operating on the brink of failure, imposing substantial systemic risk to not only this country, but to others around the world.

As the government stepped in to take control of the problem, its influence grew and its rules began to tighten the belt of the industry. Amongst massive job cuts and mounting government control, a fair majority of Wall Street’s top talent was canvassing the job market — looking for something newer and far more entrepreneurial.

Smaller investment or “boutique” firms have been gobbling up Wall Street’s top talent since about 2007. The brand new dichotomy of these smaller, even foreign firms, and the massive, global ones, has become less about seeking the largest paycheck, than it has been about forging a new financial landscape on Wall Street — one with an added opportunity for growth:

Sensing a shifting tide, talented bankers who fear a dimmer future at banks that have taken taxpayer money are migrating to brash boutique firms like Aladdin, which are intent on proving their critics wrong by chasing fast profits and growth in hopes of one day rising up as challengers to the old guard.

This “shifting tide” could potentially work out better for all parties involved, including taxpayers. As more and more of these smaller investment firms emerge, the fear of systemic risk is diluted:

The country may be better off if the banking industry is less concentrated, they say.

“If the risk-taking spreads out to these smaller institutions, it is no longer a systemic threat,” said Matthew Richardson, professor of finance at the Stern School of Business at New York University. “And innovation is spreading out too. This is a good thing.”

The same business that was once only being done by large, all-encompassing investment firms is now being done by the smaller, more independent ones. The crisis on Wall Street has created a new opportunity for many highly-talented, out-of-work Wall Street veterans, less opportunity for systemic risk, as well as created rivals and competitors for the quasi-government-controlled institutions many feel could shake up the industry for the worse.

Could the crisis on Wall Street end up being a good thing in the long run?

(hat tip: pajamas media)

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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