Goldman Sachs Group Inc, Morgan Stanley and JPMorgan Chase & Co are making money from traditionally unprofitable corporate loans and trades for their customers, less than a year after the securities-industry shakeout eliminated three of their biggest competitors.
The gap between what banks pay to buy fixed-income securities and what they sell them for, the so-called bid-ask spread, has almost doubled to 19 basis points in six months, according to data compiled by Bloomberg. Firms that help corporate clients sell blocks of stock are buying them at discounts that are as much as three times deeper than a year ago, according to bankers who declined to be identified, while companies are paying more for new loans.
As Wall Street staggers from its worst year since the Great Depression, there are signs of a new pricing power that’s mitigating losses from asset markdowns and reduced trading. The firms with money to lend are charging more for it, and the banks that can line up investors or execute trades are winning bigger spreads. Traditional investment banking, overshadowed by debt- fueled proprietary trading and structured finance before the credit crisis hit, is suddenly regaining its old appeal.
“Some of the firms are making pretty good money in what they had viewed previously as unattractive, low-return, flow business,” said John Colon, a consultant at Greenwich Associates, a research firm in Greenwich, Connecticut. “People are really husbanding their capital, they’re using it much more carefully, so to the extent they are willing to put capital to work it’s become more expensive.”
Since the deregulation of financial markets accelerated in the late 1970s, opening the door to a wider array of competitors and depressing profit margins, securities firms relegated corporate lending and client brokerage to loss-leader status. Commercial banks vying with Wall Street firms sold the services cheaply to capture more lucrative underwriting and advisory business.
Now the competition has thinned. Three of the five biggest US securities firms — Bear Stearns Cos, Lehman Brothers Holdings Inc, and Merrill Lynch & Co — have been absorbed in the past year.
