While commercial bankers continually complain about their inability to compete head-on against securities companies, at least one prominent investment banker is preparing for a reversal of fortunes.
"In the next five to 10 years, and maybe sooner, commercial banks will dominate the U.S. investment banking business," said Stephen Robert, chairman and chief executive officer of Oppenheimer & Co.
"I fully expect that most of the investment banks of significant size in the United States will be owned by commercial banks," he added, though some of those owners may come from abroad.
Mr. Robert made the comments last week at the annual financial services conference sponsored by the Jerome Levy Economics Institute at Bard College, Annandale-on-Hudson, N.Y.
He said major commercial banks have established momentum even prior to formal repeal of the Glass-Steagall Act. U.S. banks are successfully recruiting talent that used to go to firms like his, Mr. Robert said, and the trend has already played out in countries where laws permit both forms of banking under a single corporate charter.
Also at the Levy gathering, J.P. Morgan & Co. vice chairman Roberto G. Mendoza predicted there will be room for only three truly global wholesale banks.
Out of only five currently in that category, according to his definition, Mr. Mendoza confidently placed J.P. Morgan among the survivors. He didn't name the other two from his multiple choices: Bankers Trust New York Corp., Goldman Sachs & Co., Merrill Lynch & Co., and Morgan Stanley & Co.
Easy access to technology and information threatens "commoditization," Mr. Mendoza said in a dinner speech last Friday. In many aspects of lending, securities distribution, and foreign exchange, "one can only do well as a low-cost provider with enormous scale."
The opportunities for a global wholesale bank lie in what Mr. Mendoza termed "mediation of risk," trusted judgment, and the flexibility "to be constantly able to reinvent itself" as markets change.
Banks have lost their historical "information advantage" because "everybody has access to financial information just about everywhere," Mr. Mendoza said, citing as an example the portable computers given to subscribers of the Bloomberg service. "On the other hand, the need for disinterested judgment has increased."
Only a few firms will emerge with the global reach and credibility to command the fees such expertise will bear, Mr. Mendoza predicted.
Still, the three global firms would control "a small market share of total transactions," the banker said. "They would be unique in being able to exact a higher price than thousands of other competitors because they do it better."
Mr. Robert, speaking about the investment banking part of the market, broadly agreed with commercial bankers' arguments that their entry would increase competition, lower prices, and spur innovation.
Oppenheimer's chairman described an "economic logic" favoring commercial banks because of their strong balance sheets and ability to cross-sell and deepen relationships with corporations.
"When we go out to pitch an offering, the company will often go with Chase or J.P. Morgan because of a high-yield loan or some other relationship," Mr. Robert said. "That can give banks a tremendous advantage."
"It makes sense for commercial banks to be in investment banking," he said, "and when in it to dominate."
He said London - the No. 2 financial center after New York - has recently been overrun by commercial bank acquisitions: Deutsche Bank of Morgan Grenfell, Dresdner Bank of Kleinwort Benson, Swiss Bank Corp. of S.G. Warburg, and ING Group of the failing Barings Bank.
Commercial banks took full advantage of their freedom to own the principal investment banks in Canada, Mr. Robert said, and in Latin America, "aside from other investment banks, we compete largely with Morgan and Bank of Boston."
Eugene A. Ludwig, the comptroller of the currency, said U.S. banks have proved their ability to underwrite securities in overseas markets that permit it - but ironically cannot do so through branch offices. He sees that as one of many arguments to scrap the "holding company model" in favor of "simpler corporate structures," allowing banks to be directly engaged in historically separated activities.
Glass-Steagall reform will open the domestic floodgates, Mr. Robert said. Several banks have already established themselves on league tables: five of the top 15 in investment grade debt, four of 15 in high-yield debt, five of 15 in collateralized and mortgage-backed securities. Because of Section 20 limits, only J.P. Morgan made the grade in common stock offerings, at No. 14.
Mr. Robert noted the stock market has not built a takeover premium into investment bank shares. "Investment firm stocks have done well" due to earnings growth, but their returns on equity are "surprisingly low" - he estimated the Wall Street median last year was 15%.
But he sounded as confident as some commercial bank lobbyists that the end of Glass-Steagall is near.
J. Mark Leggett, NationsBank Corp.'s director of government relations, said Glass-Steagall reform will be enacted "this year or next year," despite getting bottled up in the bank-insurance controversy.
"After Glass-Steagall, the next major issues for the banking industry are technology and privacy," Mr. Leggett told the symposium.
Endorsing positions stated earlier by Comptroller Ludwig, Mr. Leggett supported "broad modernization" of the banking charter, allowing "as much as possible in the bank" rather than in separate, holding company affiliates.
Additional powers would "make the industry more competitive" but not necessarily better, he said. Banks will then have to prove they can "provide the better services, competitive prices, and creative products that affiliation will permit."
