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The Deal: Post-Lehman Wall Street Remains Gun-Shy

More immediately, however, Quintanilla warned that the industry's profitability had peaked and was vulnerable to rising interest rates.

Some bankers said they believe that the pendulum has swung too much.

"Before the crisis, we had gone too far in terms of risk taking and there was an agency [responsibility] problem where a bank may originate an ugly mortgage asset," said Wells Fargo managing director of financial institutions, Brian Moon. "But if others were willing to buy it, buyer beware."

But Moon said markets need liquidity and capital leverage for optimal functioning, and with that circumstance comes inherent risk. That mentality is missing now.

"If banks are forced to keep so much capital that they can't effectively lend money, then we have moved too far," he continued.

Indeed, in a Sept. 17 memo leaked on the Internet, JPMorgan CEO Jamie Dimon outlined for the bank's staff the company's approach to ongoing regulatory disputes: simplify its business and bulk up on risk and compliance staff.

The aversion to risk and flight from high-return businesses has led banks' return on equity to nosedive. Before Lehman collapsed, ROEs for investment banks were 15% to 20%. Post-crisis, large bank ROEs are only in the high single digits.

Former CFO at Lehman and now a senior analyst at Sanford Bernstein & Co., Brad Hintz, noted that while the "easy answer" to new regulation may be to reduce or exit capital intensive businesses, the fixed costs of re-entering a trading business will be "very high."

Hintz conceded the near-term outlook for ROEs is difficult but remains optimistic on the long-term prospects for investment banks, noting their adaptive nature to client demands, market dynamics and regulatory developments.

-- Written by Jane Searle in New York
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