Goldman, Morgan Between Rock and Hard Place
And nine other predictions for 2009.
1. The Brand-Name Investment Banks Caught Between a Rock and a Hard Place.
And they'll find themselves with talented people operating riskless businesses departing for larger payouts, on the one side, and less talented people operating capital-dependent businesses on the other.
It's no secret that the world has dramatically changed for Goldman Sachs (GS) and Morgan Stanley (MS) (that's right - they're the only 2 "brand-name" banks left, all due respect to Ken Lewis and Jamie Dimon). In 2009, we will realize just how dramatic that change has been.
While dealing with impaired capital markets, becoming bank holding companies, and their own de-leveraging process, they'll face perhaps their biggest challenge: Keeping the right people. Look for groups of talented individuals who run desks to leave these firms en masse in 2009 and go to smaller, regional shops like Raymond James and Jeffries.
And they'll do so for one reason: pay. Cutting bonuses on Wall Street isn't as simple as it may seem. It is easy to decry CEOs as overpaid, because they clearly didn't understand the risks their firms were taking. But when you cut the payout of a profitable desk, it causes problems.
If a group trading, say, government securities has their share of the desk's profits cut too severely, they can pick up their bat and ball and go home. And they'll do it right after bonus season (or what's left of it), so… Right about now.
What the banks will have left are those individuals whose productivity depends on the availability of capital. Good luck with that.
2. The Short Sale Uptick Rule Returns.
This one is fairly self-explanatory. Short selling is an essential ingredient to any healthy market. The ability to pile onto the downside of a stock, and to augment that process by blowing out the credit default swaps, will come to an end this year. We may not be the best regulators in the world, but this one we will figure out.
3. Leveraged ETFs Lose Popularity, Ultimately Leading to Their Demise.
ETFs have followed the road most traveled by the majority of Wall Street innovations: Fundamentally, they're a value-added concept with merit for a certain class of investors. Unfortunately, Wall Street has this habit of overdoing things. The leveraged ETFs -- ie, 2 times long or short -- are a perfect example.
Simply put, these leveraged ETFs don't deliver the returns they're supposed to, and they incur far more risk than their plain-vanilla brethren. If 2008 has taught us anything, it's that unsustainable things eventually collapse. Look for a collapse of the leveraged ETF in 2009.
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