Wall Street Melts Down: The End of an Era

As a college senior in 1986, I vividly remember the Wall Street investment banks coming for on-campus recruiting. The purpose of their visits was to advertise their "investment banking analyst program," which was really a two-year stint of indentured servitude but, on the other hand, almost guaranteed admission to a top five American business school. Typically, the Wall Street firms would send employees back to their alma maters to hype the glamour and challenge of working on "the Street."

I remember seeing recent grads, who previously had dressed like the rest of us on campus, transformed into veritable "Masters of the Universe," clothed in smart Brooks Brothers suits, clad with French cuffs, and heeled in Johnson and Murphy wingtips. Wow, these guys seemed pretty impressive! Yet, the two things that I remember most from that time were the terms "bulge bracket firm" and the "Glass-Steagall Act," both of which I had not the faintest idea what they meant.

The first term was pretty straightforward. "Bulge bracket firm" meant that an investment bank was one of the top five or so on Wall Street that commanded a lion's share of underwriting activity of securities (back then just stocks and bonds) and enjoyed a diverse and deep-pocketed client base of institutions and individuals to sell securities. The other term was a little harder to understand. As the investment bankers explained to us, following the stock market crash of 1929, the Glass-Steagall Act mandated that financial institutions be split into their underlying businesses.

For example, the storied JP Morgan & Co became a pure commercial bank and had to divest is investment bank, which was renamed Morgan Stanley & Co.  This distinction did not seem to be all that important to me at the time, but clearly I had no clue.

But a few weeks later, when the Morgan Guarantee Trust Company folks came to visit campus (JP Morgan merged with Guarantee Trust in 1959), and they appeared to lack the swagger of their investment banking counterparts. These commercial bankers seemed to be much more serious and very much annoyed that they could not engage in the more profitable activities of underwriting securities and providing merger and acquisition advice.

In the end, I managed to obtain a job at PaineWebber, which was not one of the bulge bracket firms of the day, but then went on to business school and afterward, managed to land a job with the trading powerhouse of Salomon Brothers in Tokyo. Japan was the latest quarry for the bulge bracket US firms and the Wall Street Journal was abuzz about the Japanese after they took a stake in Goldman Sachs, bought Pebble Beach and acquired Rockefeller Center. However, through regulation and cultural suasion the US firms at that time were shut out from the choice underwriting mandates of bringing NTT (Nihon Telegraph and Telephone) and other prestigious companies to market.

As a result many firms began to bolster their proprietary trading operations in the Japanese market, which was arguably much less efficient than its US counterpart. Over the 1990s Goldman Sachs, Morgan Stanley and Salomon Brothers all made hundreds of millions in proprietary trading profits in Japan, which gave rise to a trend of greater use of firm's capital to take risk and develop new markets like equity, fixed income, commodity, and eventually credit derivatives.

By now it was the mid-1990s and Wall Street had already seen a number casualties of following the stock market crash of 1987 such as the demise of Drexel, Burnham, Lambert and its junk-bond king Michael Milken, along with EF Hutton's distressed sale to Shearson Lehman,; Smith Barney's sale to Primerica; General Electric's purchase of Kidder Peabody; Credit Suisse's acquisition of First Boston; and Salomon Brothers' government bond trading scandal, which forced Warren Buffet to assume leadership of the company. In the case of Salomon, the firm never really regained its former top-tier status and in 1997 was acquired by Sandy Weill's Traveler's Group (an insurance company) and merged it with the old Smith Barney to form Salomon Smith Barney. By this time, Sandy Weill and his lieutenant, Jamie Dimon (now CEO of JP Morgan Chase), had begun to pressure the Clinton administration to repeal the Glass-Steagall Act so that Weill could create a banking, brokerage, foreign exchange, insurance, research, securities trading, and underwriting powerhouse, i.e. the so-called "universal bank."

Even before overturning this legislation, in April of 1998 Weill and Citibank's John Reed decided to transform Wall Street by announcing the merger of Traveller's Group and Citibank to form what is now known as Citigroup. Although the cultures of the various firms were very different and there were innumerable integration issues, I remember the incredible power of the overall platform. For example, Citigroup soon acquired a stake in Nikko Securities in Japan and suddenly the old Salomon Brothers platform was winning mandates to sell shares of NTT, NTT Docomo, and other highly prestigious underwriting and advisory assignments. To me it seemed that the universal bank model did indeed make sense.

As we entered last summer, only five of the 12 largest independent Wall Street investment banks at the start of my career remained: Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley.