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

NEW YORK ( The Deal) -- The collapse of Lehman Brothers sent a seismic shock through Wall Street, but the wrath it incurred among Main Street and the regulators entrusted to protect its denizens continues to change the business of banking five years later, especially when it comes to institutions whose size and interdependence with the global economy make them systemically important.

Amid the crisis of 2008, the superficial structure of banks changed quickly. Lehman filed for bankruptcy, Bear, Stearns & Co. failed and was bought by JPMorgan Chase ( JPM), Bank of America ( BAC) bought Merrill Lynch ( ML), Wells Fargo ( WFC) scooped up Wachovia and Citigroup ( C) suffered losses that would trigger the sale of its Smith Barney business to Morgan Stanley.

Now the "systemically important" designation under the Basel III accords has almost become a curse for the survivors. Following the flurry of crisis mergers, a fear of becoming a "too big to fail" financial institution has politically handcuffed large banks from undertaking weighty acquisitions.

Instead, they continue to look inward, overhauling their businesses and moving away from high-risk sectors such as proprietary trading, fixed-income and commodities, which have become operations that either no longer return their cost of capital because of stricter regulatory demands or pose too high a litigation risk. Wealth management and other fee-generating businesses are favored now for their stable revenues and lack of additional capital requirements.

Even the ever-charging, go-go culture of Wall Street, once a badge of honor, has changed as banks bow to public perceptions about how they operate. One senior banker pointed to the regulatory and media scrutiny of working hours after a BofA intern was found dead in the shower after reportedly working 72 straight hours and of hiring practices in the wake of JPMorgan allegedly hiring the children of powerful Chinese officials. Such practices ¿ grueling work hours and nepotism in hiring ¿ were viewed as standard until the credit crisis, the banker notes.

This newfound sensitivity has affected large banks' willingness to participate in certain businesses. Witness JPMorgan's exit of the student loans sector. While declining profitability and stiff competition have been cited as reasons for the bank's departure, industry pundits point to the bad impression that would be created by chasing down students who are unable to meet payments.

Some observers said they believe this perception issue will lead banks to move so cautiously with new businesses and products that they could come to resemble utility-type operations, with greater financial innovation occurring at less-scrutinized private equity and hedge funds.

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