In the last few years, U.S.-based investment banking units of foreign banks have spent hundreds of millions of dollars to build up their operations.

And while these units have gained a 10% share of total underwritings, most have little to show for their efforts.

As earnings fail to materialize, speculation is growing among foreign bankers that a sustained downturn in the stock and bond markets, combined with growing concern over high expenses, could force some banks to shutter capital markets operations they only recently set up.

That, bankers said, is because many foreign institutions lack the client base and distribution capabilities of their U.S. competitors, as well as the routine services that sustain other Wall Street firms when activity slackens.

"Wall Street isn't all cookies and cream, and foreign banks don't have what Wall Street lives on," said Harrison F. Tempest, chairman of the North American operation of Dutch giant ABN Amro. "The show will end six months after Merrill Lynch announces its first decline in earnings."

At least one foreign bank's U.S. investment banking arm, Credit Suisse First Boston, a subsidiary of Zurich's Credit Suisse, has built an investment banking operation that can go head to head with the best on Wall Street. The Swiss bank was the only foreign institution that ranked among the top 10 banks this year in underwriting stocks and bonds, based on data through Oct. 15, according to Securities Data Co., an affiliate of American Banker.

But many others, more recently arrived, have not done nearly as well. And despite years of effort, foreign banks still come fairly low on the league tables that measure investment banks' business.

Natwest Markets, a unit of National Westminster PLC, ranked 14th, with $12.8 billion underwritten, and Deutsche Morgan Grenfell, a unit of Deutsche Bank, ranked 15th with $11 billion. That's well below the $157 billion underwritten by Merrill Lynch, Salomon's $113 billion, or the $111 billion at Morgan Stanley, Dean Witter, Discover & Co.

Executives at several foreign banks acknowledged that they have yet to post any profit on their investments. And those that said they are making money declined to offer any figures. One senior foreign banker cast doubt on their claims, adding that neither his own bank nor any of the others has yet shown a profit on investment banking.

Moreover, two banks, Britain's Natwest and Barclays Bank PLC, have already decided to drop out of investment banking in response to strong complaints from shareholders over rising costs and low earnings.

"Foreign banks are at a disadvantage as narrowly based players," said Andre Cappon, president of CBM Group, a New York consulting firm. "They really need to take a hard look at what they have of value in their operations here."

One banker at a foreign institution, who declined to be named, said: "This is a lot like the 1980s, when foreign banks paid hundreds of millions to buy up U.S. commercial banks and then pulled out with large losses.

"You won't see anything as dramatic," he added, "but little by little, many of the foreign banks setting up capital market operations will probably quietly close them down in a couple of years."

Others, however, such as Germany's Deutsche Bank, Canadian Imperial Bank of Commerce, and Swiss Bank Corp., are still hiring U.S. staff and acquiring U.S. investment banks. Four foreign banking companies, Swiss Bank Corp., Canadian Imperial Bank of Commerce, ING Group, and ABN Amro, have also made multimillion-dollar acquisitions.

Some banks have paid up to $20 million in legal fees just to get approval from U.S. regulators to expand their investment banking operations, bankers said. Many are also handing out multimillion-dollar contracts to hire veteran Wall Street professionals.

U.S. banks were barred from engaging in full-fledged investment banking under the Glass-Steagall Act. Seventeen foreign banks, however, were allowed to operate both commercial and investment banking subsidiaries under the International Banking Act of 1978.

In the past five years, 12 foreign banks have opened so-called section 20 subsidiaries, which let them engage in limited investment banking, and three have converted their investment banking subsidiaries into section 20 units.

Foreign banks have found that they risk losing their corporate customers if they cannot underwrite and distribute a broad range of securities in the United States.

"What we're seeing is a global consolidation rather than an expansion of foreign institutions into the United States," said Michael Rulle, chairman and chief executive of CIBC Wood Gundy, the investment banking arm of Canadian Imperial Bank of Commerce.

"It's logical for foreign banks to build a base here to serve their clients," he said.

Foreign bankers argue that even if investment banking does not yet pay for itself it has become a necessary link in a broad range of services banks must offer. They also maintain that they can hardly be expected to show profits on what are still start-up operations.

"It goes without saying that the expenses begin to appear in advance of the revenues when you build a business," said George Fugelsang, chairman of Dresdner Bank North America. "But I don't think people would be doing this is they didn't think it had appropriate risk-return potential."

Still, bankers noted that the recent arrival of foreign banks on Wall Street is a lot like London's Big Bang, when commercial banks in Britain were allowed to take over investment banks. Few succeeded, and several U.S. banks that bought British merchant banks soon either shut them down or sold them.

"Merging two institutions of different backgrounds, be it wholesale with retail, or stock brokerage with commercial banking, is the most challenging condition of managing a business," said Kurt F. Viermetz, vice chairman of J.P. Morgan & Co., in an interview this year.

Analysts, casting still more doubt over the likelihood that investment banking will pay off for foreign banks here, pointed out that returns on equity from investment banking have traditionally been lower than from commercial banking.

"A lot of people are under the illusion that investment banking is a hugely profitable business," said Piers Brown at UBS Securities in London. "But it's not, and the cost of getting into that business is very high."

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