In the wake of the securities industry's recent convulsions, in which Bank of America
According to this view, banks will now need to offer one-stop shopping for a global customer base, requiring a scale and scope large enough to facilitate transactions and maintain a global infrastructure. This argument also holds that the conversion of Goldman Sachs
This is a short-sighted view.
The bigger trend
In the long run, the major forces likely to determine the contours of the industry are the decreasing cost of computing power and communications, the increasing dispersion of intellectual capital -- away from both historical geographic hubs and from traditional investment banks -- and the reduced friction with which capital flows from investors to entrepreneurs.
The result will not only be an increased formation of small partnerships, but also increased instances of rapid growth as well-run small firms quickly become magnets for human and financial capital. The importance of geographic hubs such as downtown Manhattan and the City of London will continue to decline; businesses will move to the human capital instead of the other way around, be it Greenwich, Conn., or university towns such as Boston or Austin.
The conventional view mistakes transient aspects of the recent crisis for the longer term forces that are reshaping the industry. Against these forces, trends that are driven by cyclical factors are just statistical noise.
For example ...
The history of bank consolidation offers an analogy. Over the long term, market share has tended to accrue to the best-managed companies -- in recent years, for example, to JPMorgan Chase under Jamie Dimon, and to Wells Fargo
But this long term trend was retarded by factors such as geography. The emergence of Charlotte and Birmingham as banking centers was to a large extent an accident of history -- the 1989-1991 crisis left the Southeast relatively unscathed, which had the effect of giving strong acquisition currencies to the region's banks. Had real estate prices collapsed before oil prices in the 1980s, it may well have been banks in Texas, rather than North Carolina, that emerged as industry behemoths.
But such flukey advantages pale next to the disadvantage of poor management. So it is that of the two Charlotte-based giants, First Union/Wachovia finally succumbed and Bank of America came closer than once seemed possible.
Being in the right place at the right time is no substitute for good long-term management in finance either. The universal banks emerging out of the wreckage of 2008 may not prove any longer-lived than the Southeastern superregional banks that looked like comparative world-beaters in the early 1990s.
There is a reason why the U.S. market has not been dominated by universal banks, and it is not for lack of trying. What Bank of America is attempting with Merrill Lynch was tried by Citigroup
Spoiler alert
Maybe this time will be different, and Jamie Dimon and Brian Moynihan will succeed where everyone since John Pierpont Morgan has failed.
Maybe, but that's not how the smart money would bet.
Instead, as capital markets continue to normalize, look for well-run middle market investment banks to gain share and grow into a sub-bulge bracket tier. Look also for the secular shift of candlepower from investment banks to hedge funds and private equity firms to resume and even accelerate, pushing investment banks toward the lower-margin role of "hired help" that Wall Street law firms have long occupied.
The bottom line is that merit in the securities industry is more easily quantified and rewarded than in perhaps any other sphere except sports. As a result, rewards will increasingly flow to organizations structured to permit intellectual capital to flourish. Sprawling, bureaucratic institutions have never been well-suited to this and secular trends seem more likely to amplify than mitigate their shortcomings in the future.
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