Is Your Firm 'Past It' ?

The debate about whether being all things to all men, like a Citigroup or a JP Morgan, is better than being a stand-alone investment bank, like a Merrill Lynch or a Morgan Stanley, continues to gather pace. Many are betting on the demise of the 'pure' investment bank, but others worry that the bigger, so-called Universal banks, are far from a perfect model.

Some point to the fact that Merrill Lynch and Morgan Stanley's market caps are significantly lower than they were in 2000 and that both firms' share prices are at least 20% off of 2004 peaks. They point to recent falling profits as evidence of decline and remark that Merrill, in particular, is a 'shrinking' firm. Under CEO Stan O'Neal's watch the firm is said by The New York Times to have 'scaled back its global ambitions' and axed 23,000 jobs.

Both Morgan Stanely and Merrill are said to be too big to be quick on their feet like nifty rivals Bear Stearns or advisory boutique Lazard. The Wall Street giants are said to be being squeezed by the big boys and the coming Brits like Barclays and Royal Bank of Scotland on the one hand and former regional banks like Bank of America on the other.

But those predicting the demise of the likes of Merrill Lynch and Morgan Stanley would do well to remember a few things. Merrill has enjoyed its best quarter for profits ever just this year. And Morgan Stanley is still riding high in the main investment banking league tables.

And can JP Morgan Chase and Citigroup really be held out to be such fine examples to emulate ? Just last week JP Morgan's President Jamie Dimon described his bank's third quarter profit's as 'terrible'. And for those who think that Citigroup is the way to go, remember that just a few days ago the firm had to rid itself of three key executives because of that debacle in Japan. Let's also not forget that both firms have had to write off billions of dollars this year because of exposure to the likes of Enron and WorldCom. So, big is not always better. Not everyone will agree with Barclays Capital CEO Bob Diamond, who is quoted as saying that 'the relevance of the stand-alone investment bank has diminished....The integrated banking model, which combines the best of commercial and investment banking, is better'.

Most of those who predict the demise of firms like Merrill and Morgan Stanley have a vested interest in doing so. The future path along which the global banking industry will tread remains unclear and it's simply too early to start calling the winners. But many still hold to the view that the best things come in the smallest (or smaller) packages.

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