The final business that’s catapulting the I-bankers’ bottom lines is the profits from what I call the private-equity aftermath. An I-banker takes in huge fees to do a private-equity deal, but the big gains are in the financing the banks provide—stupendously large high-yield bond deals that allow the fixed-income departments of these firms to generate still more cash.
What could go wrong with the scenario I foresee? A worldwide economic slowdown could hurt the big I-banks’ business, but everywhere except the United States seems to be getting stronger, not weaker. A big change in Washington might cause more scrutiny and higher taxes, but the I-banks aren’t dumb; they’re equal-opportunity political donors. Finally, there’s Citigroup. It is a well-known punch line around Wall Street that earnings are so high at the five major banks because of one key player: Chuck Prince, the man in charge of Citigroup. If he were to be fired or decide to spend more time with his family, Citi could reassert itself both domestically and globally as a margin-slasher of Big Five profits. Don’t laugh; he’s so incompetent that he helps everybody else’s bottom line.
To me, though, those concerns can’t derail these five I-banks. Well-run, unchallenged franchises, with growing markets and new businesses, undervalued because of a recent hiccup in a tiny part of their operations, these banks may be the single best group of investments in the world. Buying shares in them won’t make you Blankfein money ($54 million last year in salary and bonuses). But this could be your best shot at profiting from Wall Street’s latest big party.