The year that just ended was one of the most remarkable on record for the financial services industry. Bear Stearns and Lehman Brothers, are no more. Freddie Mac and Fannie Mae were seized by the government, Bank of America has absorbed Merrill Lynch, and Goldman Sachs and Morgan Stanley are now bank holding companies. Housing has imploded, government is clamping down, and investors are downright spooked.
How all this plays out for the industry is still an open question, of course. What follows are predictions from editors of SourceMedia Inc.'s publications. All standard disclaimers apply: Last year made all too clear just how perilous the business of prognosticating can be.
REGULATION, REGULATION, AND MORE REGULATION
Credit card practices, mortgage disclosure, suitability standards, loan modifications, executive compensation, ratings agency status, overdraft guidelines, Basel II deadlines — there may be no area of financial services where rules do not get tightened in the coming year. And it won't just be regulators leading the charge; leading members of the newly elected Congress have made it clear that they'll be pushing for change, either in tandem with agencies or with an eye to filling what they perceive as gaps in oversight. Even if certain areas of regulation stay the same, the disappearance of vast swaths of unregulated (or lightly supervised) financial services means a much bigger piece of the industry is now under the watch of the Federal Reserve Board. A corollary to this prediction: Reg-relief campaigns get back-burnered for a long, long time.— American BankerINVESTMENT BANKING
In a year when nearly every aspect of the capital markets was turned upside down, perhaps no industry was more impacted than this one. Besides the crumbling of household names on Wall Street, events conspired against the remaining firms in a way that will leave them less able to take on risk. At the same time, they'll find themselves more beholden to regulators. Earnings from investment banking operations will be down dramatically, not only in some of the more exotic sides of the business. While the bulge-bracket banking universe has shrunk, Wall Street is beginning to see consolidation among middle-market firms — a trend likely to continue.— Investment Dealers' DigestBANK AND THRIFT CONSOLIDATION
Many who keep an eye on banking M&A — and here you can count some banking CEOs, not just wishful investment bankers — think 2009 could be one of those years that alters the landscape, taking out hundreds of companies, if not more. The factors playing into that forecast are obvious enough, the current recession's severity and length foremost among them. Another catalyst could emerge as it becomes clear who won't be getting access to Tarp (and $700 billion only goes so far). And where once perceived sellers carried takeover premiums, market prices are now much lower. A trend that began late last year is likely to continue as government plays matchmaker with failed or near-failed institutions, with Tarp playing a role in financing.— American BankerCREDIT DERIVATIVES
Credit derivatives took a reputational beating in 2008, receiving much of the blame for the financial crisis. Next year, however, the much-maligned sector will become far more transparent, and systemic risk will be greatly reduced. Though dealers have long resisted exchanges' efforts to gain a foothold in credit-default swaps, regulatory pressure and concerns about counterparty risk have made it inevitable. At least four major market centers will launch central counterparty services this year, and regulators, who will mandate price reporting, will prod the industry to trade the more standardized swaps on exchanges or other venues. For firms that operate screen-based trading platforms, that will prove a boon.— Securities Industry NewsMUTUAL FUNDS
Investors are likely to continue fleeing to fixed-income and money market funds, and some firms will have no choice but to continue laying off staff. Large firms with stellar reputations, strong fixed-income and money market lineups, and deep pockets will win market share, while smaller companies or asset management units will be acquired or face share erosion.— Money Management ExecutiveNONFINANCIAL M&A
Industries such as retail, publishing, energy, manufacturing, and home building could be marked by distressed activity, while a few select areas, such as health care, could experience more traditional interest from both strategic acquirers and private-equity buyers. Alongside the uncertainty facing dealmakers is a financing market that remains essentially shut down. Deal pros, by and large, don't anticipate debt markets to begin to show signs of life until there is more clarity about the economy. That means the market for M&A in many sectors will likely remain stalled in 2009.— Mergers & AcquisitionsGSE MASH-UP
Look for Fannie Mae and Freddie Mac to be merged in 2009, in advance of being divided into a number of mini-GSEs specializing in niches such as mortgage-backed securities, affordable housing, or portfolio holdings. The two GSEs once had separate identities but are now practically interchangeable, so there is no necessity to keep them as separate brands. Merging them, and combining their assets into categories, could be a preliminary step toward dissolving them into smaller, manageable entities to dilute the huge risks that caused the government to nationalize them.— National Mortgage NewsHOUSING
The home price collapse that triggered the financial crisis will bottom out, setting the stage for a mortgage sector recovery in 2010. It is said that housing leads the economy into recession and then back out of it. That is certainly true this time, at least on the front end. Real estate went into recession in 2006, followed by the mortgage industry in 2007 and the national economy in 2008. It should be true on the back end, as well. If long-term rates stay low, a combination of refis and purchase loans will act to lift the mortgage market out of its prolonged funk.— National Mortgage NewsCREDIT CARDS
Expect issuers to pull back on the number of cards they issue and amount of credit they offer. Add investor skittishness spreading to card asset-backed securities and new federal rules that strictly limit how issuers can set and charge interest on credit card accounts, and you have a recipe for cutbacks in card offers and credit availability. Analysts predict chargeoffs will continue to increase into mid-2009. But while the credit card industry retrenches, look for growth in the debit card market as consumers more frequently turn to the cards as a way to control their spending and debt.— Cards & PaymentsISSUER OUTSOURCING
New federal rules, such as one requiring issuers to apply cardholder payments to higher-interest charges first, and the need to comply with regulations designed to boost transaction security will put added pressure on some issuers to farm out processing challenges to third parties. Smaller financial institutions will likely continue to sell or farm out their processing operations to raise capital or save money. The effect of turmoil in the banking and retail sectors will not be a one-way street for third-party processors, though. Bank consolidation has meant some lost accounts for processors.— Cards & PaymentsPRIVATE EQUITY
Private-equity firms are expected to be largely focused on restructuring their own portfolio companies, because of the recession and crippled debt markets. A lack of credit, coupled with continued high seller expectations, will reduce the number of leveraged buyouts. Industry observers expect financial sponsors to structure transactions that aren't dependent on debt, as well as to look toward investing in distressed debt, restructuring, and bankruptcy acquisition opportunities. Corporate acquirers and sovereign wealth funds, meanwhile, will gain the upper hand in the M&A business.— Investment Dealers' DigestSECURITIZATION
It remains a bleak picture for asset-backed securitizations, with issuance expected to be focused on credit cards and autos, with a smattering of student loans. However, in each of these areas problems remain. In credit cards, for instance, the industry is facing high chargeoffs in the coming year. For autos, headline risk is still a key factor, because of the financial troubles faced by the Big Three.— Structured Finance NewsTRADING
A number of long-standing trading issues, such as soft dollars and dark pools, are likely to be addressed. Also, expect hedge funds to come under greater regulation, which will certainly affect brokers' trading and prime brokerage services. Brokers have geared their business toward hedge funds for the last several years, and their bottom line would definitely feel the impact of a shrinking hedge fund universe.— Traders MagazineTECHNOLOGY
IT executives will be watching their budgets when it comes to nonessential hardware but they will spend on technologies and services that make their organizations more efficient. This includes server virtualization products, on-demand (hosted) software services, green IT initiatives, and data management improvement efforts — including predictive analytics, and business intelligence projects.
Other technologies that will be increasingly deployed in 2009: Web services, enterprise mash-ups, unified communications, and social networks.— DM Review