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The Wall Street Mind: Anxious...

Even if the banks pull off such gouging and invade the territory of Silicon Valley’s venture-capital funds, it is unlikely to make up for what they have lost. “They might take stakes in Facebook and clip the ticket several times with banking and investment fees, but the underlying opportunity is still smaller than the mortgage market. Everyone’s got a mortgage,” says one banker.

Which is probably why Wall Street hasn’t entirely given up on mortgages. Many bankers are hoping to play a bigger role in housing finance as the Obama administration tries to rein in Fannie Mae and Freddie Mac, the government-sponsored entities. “The reform of Fannie and Freddie is an enormous opportunity. It is the last brick in the Berlin Wall of official intervention in housing finance,” says one executive.

That may be true in theory, but Wall Street’s record in mortgage securitization is not going to encourage either borrowers or regulators to trust it in the future. Any efforts by Wall Street to offer “innovative” products related to mortgages and housing will be scrutinized very closely by Warren and other financial regulators.

The cynical view: “Leverage pushed up returns and encouraged excessive risk-taking, and then the government bailed everyone out, so why won’t it happen again next time?” asks one financier. “A lot of people think it’ll take time for us to figure out what to binge on next, but we’ll find something.” After all, as former TARP cop Neil Barofsky pointed out in an op-ed on his way out the door, ratings agencies assume that many banks today are just too big to fail and include that in their calculations.

In the meantime, many bankers are looking for a way out. Those who can will move to hedge funds and private-equity firms or to boutique banks such as Evercore and Greenhill that lack the costs, complexities, and regulatory headaches of the big banks.

Banking’s future is in reality not on Park Avenue at all but in emerging markets—especially Brazil, China, and India, where Goldman has been focusing attention. Banks need not scramble to find new revenues there because traditional activities are still flourishing. While the number of IPOs in the U.S. has been falling, for example, there are plenty in Asia. In 2009, the Chinese IPO market was four times the size of those in the U.S. and Europe combined.

Big banks are shifting staff to India and China. “When I started in Asia fifteen years ago, my friends teased me mercilessly for giving up a proper career for this emerging-markets lark,” says Euan Rellie, the New York–based 43-year-old British co-­founder of BDA, a boutique bank serving China and Asia. “Asia used to be all young adventurers and spivvy entrepreneurs, but that’s changed. Now everyone tells me, ‘You’re lucky to be exposed to India and China.’ ”

The shift out of what people used to think of as Wall Street—the big investment banks—into hedge funds and emerging markets could be viewed as simply its latest evolution: Wall Street now means something else, but it still has a future. “The alternative investment world is prospering. There is huge demand for all kinds of derivatives and options and ­exchange-traded funds in every flavor,” says one money manager.

The problem for New York is that a lot of that future lies in other cities. The name on the door may still be Goldman Sachs and JPMorgan, but the bonuses will be paid to residents of Shanghai, Rio de Janeiro, and Mumbai. New York used to worry about London taking over its crown, but that isn’t the big threat now. Deutsche Börse’s bid to acquire the New York Stock Exchange is only an attempt to counterbalance a far bigger shift to the East.

“A lot of friends of my age on Wall Street got a bloody rude shock in the downturn. It was quite profound, and I think that it altered the way they think about the future,” says Rellie. “They realized the old model of the big integrated banks was threatened in a way it never had been before, and they had a very strong sense of not wanting to be there anymore.”

John Gapper is a Financial Times columnist.


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