Analyst Bove says Wall St firms need new plan

By Joseph A. Giannone

NEW YORK (Reuters) - Wall Street investment banks will emerge from the credit crunch as smaller, less profitable companies now that the old sources of wealth have vanished, veteran Ladenburg Thalmann & Co banking analyst Richard Bove said on Monday.

Until the credit markets seized up last summer, Wall Street banks had delivered several consecutive years of record profits fueled by five businesses: mortgages, credit derivatives, private equity, prime brokerage and international.

Trading the firm's own capital, bolstered with big dollops of debt, became a bigger money maker than such traditional businesses as advising on mergers or initial public offerings.

Yet with credit markets broken, these businesses are in for a long slump and some may never return, Bove said.

"They're going to have to find a new base on which to build a business," Bove said at the Reuters Investment Outlook Summit in New York. "One of the core elements of the broker model of the past few years has been to take proprietary risk. If you have to shoot the balance sheet, you can't take proprietary risk."

After the Internet bubble burst in 2000, investment banks rode a boom in mortgages, corporate lending, leveraged buyouts and debt trading to generate record profits. Yet last year the mortgage markets crumbled as U.S. housing prices stopped rising and the economy weakened.

Bove said Wall Street needs to look outside the United States for new business. Investors and regulators are pushing banks to ratchet down risk taking, after lenders globally suffered more than $350 billion of losses from mark-downs.

Meanwhile, the U.S. economy has slowed and may remain in a funk for an extended period.

"The old model is broken," he said. "They've got to do more stuff overseas -- wealth management, commodities, currencies and private equity. That's where the action is going to be."

The problem, however, is these new activities are not enough to replace the earnings generated by the old.

"Wall Street firms will be scraping around at very low earnings levels for the next several years," Bove said.

Brokerage stocks have been hammered in the past year by investors worried about the amount of leverage applied by firms, which have tried to carry risky assets on top of a small base of equity.

"They're bringing down those numbers. it's obviously going to come down dramatically," Bove said.

Reducing leverage will reduce risk and minimize losses, but it also will make Wall Street firms less lucrative, he said.

Even so, Bove said while investment banks are shedding business, commercial banks with stronger balance sheets, such as JPMorgan Chase (JPM.N: Quote, Profile, Research, Stock Buzz), will benefit.  Continued...