Lehman Brothers last week tumbled into bankruptcy, sparking Barclays to pounce at choicest morsels that include two Lehman's datacentres and its New York City headquarters building, at a fire-sale price. At the same time, Merrill Lynch & Co., facing its own troubles, agreed to be acquired by Bank of America for about US$50 billion in a stock-swap deal. These stunning developments signal a new era in which more often banks will be in control of IT spending for securities trading technology, and analysts foresee a culture clash coming.
"Banking tends to not need real-time information as much as capital markets," points out Sean O'Dowd, senior analyst at Financial Insights, an IDG Company. "Banks do batch overnight. Capital markets do millions of transactions processed in milliseconds. It's a different type of culture."
"It's the cornerstone of what the next generation of this industry is going to look like," says Robert Iati, partner at TABB Group, a research firm that closely watches the North American securities industry.
And changes may be in store for Wall Street's last two standing investment houses, Morgan Stanley and Goldman Sachs, which are fighting the most severe market meltdown since the 1930's because of the credit crunch.
In this new era, banks buttressed by their core lending will be taking the lead as "one-stop shops," says Iati, with Bank of America possibly becoming a global powerhouse like Citibank, UBS or JPMorgan.
But what are the implications for jobs and spending on IT assets in the securities industry accustomed to lavishing fabulous sums on ultra-fast networks to compete in electronic trading, where today even a nanosecond may count?
"Merrill last year spent between $3.5 and $4 billion on people and technology," says Iati. "Lehman's outlay was $2.5 to $3 billion." But TABB Group, largely as a result of last week's events, predicts a sharp decline in IT-related spending for the North American securities industry, from $24.2 billion last year to $21.9 billion this year and down to $17.6 billion next year.
Jobs are uncertain at best in a financial-services world facing such unprecedented upheaval, especially where securities trading is increasingly automated, with brokers less needed than in the past.
Lehman last counted about 26,200 employees worldwide. Barclays, the London-based bank, says it's stepping in to acquire Lehman's North American investment banking and trading operations for $250 million, as well as Lehman's two datacentres in New Jersey (where a New York Stock Exchange electronic hub also discretely exists) and Lehman's New York headquarters for $1.75 billion. This is seen as a bargain-basement price for a firm valued last year at $10 billion.
"This is a once-in-a lifetime opportunity for Barclays," said Barclays President Robert Diamond in a statement issued this week, which said Barclays expects to be able to hire up to 10,000 Lehman employees. The Barclays deal, subject to approval of a bankruptcy court, has to be completed by Sept. 24.