2008-10-14 23:09:04 -

www.tabbgroup.com - martinrabkinink Martin Rabkin, 914-420-5739 mrabkin@martinrabkinink.com Introducing a blueprint for the future of investment banking, TABB Group's founder and CEO Larry Tabb, the financial markets veteran industry analyst and author of "The Future of Investment Banking: Subprime and Its Impact on the Industry," published today, says that "the subprime crisis needs to be put into a more immediate perspective so banks, brokers, industry executives and the entire financial services ecosystem can begin adjusting their business models, support systems and strategies to react to the massive changes affecting the financial markets." He cautions, however, that regulators and legislators must also put these issues into perspective as they begin to implement changes that may inadvertently do more harm that good.

Moving through a statistical, forensic examination of how the subprime crisis was built on greed, not corruption, he describes in detail government initiatives, historically low interest rates, misaligned incentives, poor corporate governance structures, incorrect pricing of risk, an incomplete understanding of risk management, conflicts of interest and faulty securitization theories compounded by a faltering US economy. Pressure to make quarterly earnings forecasts put pressure on banks to keep these structures flowing, with risk managers unable to stop the runaway train, he says. "Who was going to tell the CEO to stop the goose from laying the golden eggs?"

While blame may be cathartic - Tabb says there is at least $840 billion of blame to go around - the real question is, what is next? With the independent investment-banking model temporarily on the shelf, once the markets stabilize, commercial banks, including Morgan Stanley and Goldman Sachs, now drawing on deposits and savings accounts as cheap money funding sources, will be forced by regulators, legislators and boards to become more conservative. Risk and compensation levels will drop and the more highly compensated and risk-tolerant people will leave, setting up or joining the investment banks of the future, which, says Tabb, will be structured as partnerships, be more adroit and nimble and take on much of the risky aspects of the traditional investment banks of the past. "The major difference is, they will be much smaller and less capable of instigating financial Armageddon; and because they will be set up as partnerships, more cognizant of risk levels, they will be hesitant to take risks to jeopardize their well being."

Devastated by the still unraveling securitization debacle, the push toward investing in transparently-priced and valued products in conjunction with banks' desires to get risk off their balance sheets will force investors to restructure the way products are issued, underwritten, distributed traded and cleared. Moving from an over-the-counter (OTC) to an exchange-traded, centrally cleared structure will enable banks to reduce risk, lower their balance sheets and provide more commission income. There are currently four major initiatives underway, he notes. As more products move on-exchange, the marketplace will need to apply advanced trading technologies, increasing demand for connectivity and order management, execution management and high-speed, low-latency market data solutions.

Unfortunately, Tabb says "the nature of the new regulatory structures place hedge funds at a distinct disadvantage." As a result, TABB Group believes that the second half of 2008 will see 700 to as many as 1,000 funds, or 15% of the industry, closing, but he adds, if market conditions continue to deteriorate and short-selling bans are reinstated, some of these shuttered funds will become self-capitalized market makers or broker-dealers. "From adversity and change comes opportunity."

Once the turmoil subsides, Tabb believes new regulations will "come from all directions and toward all players," including loan originators (prohibiting non-doc and possibly zero principal loans), credit ratings agencies and commercial banks (leverage restrictions) plus new Glass-Steagall-type legislation.

The 32-page research note can be accessed by TABB Group Research Alliance clients and all qualified media at www.tabbgroup.com/Login.aspx. To request an executive summary or purchase the report, please visit www.tabbgroup.com.

About TABB Group

TABB Group is the financial markets industry's only research and strategic advisory firm focused exclusively on capital markets. Founded in 2003 and based on the proven interview-based research methodology of "first-person knowledge" developed by founder Larry Tabb, TABB Group analyzes and quantifies the investing value chain from the fiduciary, investment manager, broker, exchange and custodian, helping senior business leaders gain a truer understanding of financial markets issues. For more information, visit www.tabbgroup.com.

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