Hedge Funds Could Fill I-Bank Void

Now that the titans of Wall Street have moved toward extinction, some hedge funds are interested in taking over the lucrative deals those firms are no longer able to shepherd.

Only a year ago, several investment banks were competing to perform a variety of tasks in the capital markets, including underwriting, lending, public offerings, buyouts, brokering and advisory services. But now Bear Stearns and Lehman Brothers are gone, and Merrill Lynch's unexpectedly large losses have sent shocks though its new owner, Bank of America (BAC).

Goldman Sachs (GS) and Morgan Stanley (MS) are less able to engage in big deals and risky trades because of their transfer to bank-holding companies -- a move they were forced to make in order to receive funds from the government to stay afloat.

The financial industry at large has been holding tightly on to capital that once greased the wheels of the economy, freezing the credit markets and impeding consolidation across just about every industry.

The number of leveraged M&A deals dropped by half last year, according to Dealogic, while the value of such pacts dropped 54%. Of the top 10 leveraged deals announced from the start of 2008, only three of them came after the Lehman bankruptcy, which exacerbated the credit crisis.

Pfizer's (PFE) announcement of a $68 billion move to acquire Wyeth (WYE) last week may have seemed like the permafrost was finally thawing, but the deal only occurred because Pfizer has top-notch credit ratings and the banks involved secured stringent and lucrative terms for their $22.5 billion loan.