Citicorp (CCI), Chase (CMB), NationsBank (NB), Merrill Lynch (MER), Salomon Smith Barney and BankAmerica (BAC). Looks like a list of financial service mergers past, present and yet to come. But it's also something else. All those firms are primary dealers, the banks and brokers that trade government securities with the Federal Reserve and place competitive bids during Treasury auctions. But now, with massive consolidation sweeping the financial services sector, once-precious primary dealerships are starting to shrink in number. That means less competition at Treasury auctions and may mean higher spreads and a bond market dominated by a smaller group of large players. "It reduces competition in the market," says Richard Gilhooly, senior bond strategist at Paribas Capital Markets. "It reduces the number of players. Presumably, the spreads can widen out a bit." That's not necessarily a bad thing, according to Gilhooly. "The market was overbroked in the first place," he says. Being a primary dealer was, for some time, a prestige position. But as volatility and volume have diminished in the Treasury market, the once-sought-after primary dealerships have become less profitable, and therefore less desirable. "It's a hugely mature market with extremely low spreads," says one Treasury trader, referring to the narrow range between the bid and ask prices in the Treasury market. "It used to be that you could sell a primary dealership for a lot of money. That hasn't been the case in years." Indeed, both NationsBank and Nippon Credit Bank put their primary dealerships on the block last year. So far, no takers. Bankers Trust (BT), rumored last year to be selling its government bond business, has apparently taken a different tack, running a skeleton crew on the desk, according to traders. Citicorp is also said to be running a light desk. Compare this to 10 years ago, when there was an outcry about Japanese firms being allowed to own primary dealerships because U.S. firms had limited entry into the Japanese government bond market. (What next, the Seattle Mariners?) Or, in the same period, recall one of the criticisms of Revlon's (REV) apparent desire to take over Salomon -- that it would give Ron Perelman a primary dealership. These days, primary dealerships don't spark the same kind of regulatory fervor. A year after the merger that made Morgan Stanley Dean Witter (MWD), Morgan Stanley and Dean Witter still operate as separate primary dealers. They bid against each other in Treasury auctions. Each, theoretically, could take the 35% maximum of paper made available at an auction. Morgan Stanley Dean Witter, for its part, says "there are no immediate plans to merge to one broker/dealer." (Salomon and Smith Barney, which merged when Travelers (TRV), Smith Barney's parent, took Salomon over last year, also continue to act as separate primary dealers, but they plan to roll into one dealership by the end of this year.) Morgan Stanley Dean Witter's primary dealerships maintain extensive firewalls -- apparently they don't discuss anything with each other. But still, it seems a little odd "to have different desks within the same functional balance sheet," notes Jim Griffin, international economist and strategist at Aeltus Investment Management. Treasury officials say that, so long as the Fed is assured that two affiliated primary dealerships have sufficient firewalls between them, it's fine for them to bid separately in Treasury auctions, even if together they have bid for more than 35% of the securities being offered. If there's anything wrong with that, it's up to the Fed to sort out. "I got the feeling it would work the other way," says a New York Fed spokesman. "That if it was more than 35% in the aggregate, the Treasury would kick it out." A grassy knoll? More likely an indication of how the landscape has changed. Being a primary dealer isn't as important as it used to be, and everybody's playing it by ear. But as banks and financial services companies continue to merge, some issues may come up, says Mike Cloherty, senior market economist at Credit Suisse First Boston. If there are any problems, they will first show up during auction time. "Where it does matter is when you have auctions where certain dealers have quarter-end constraints," he says. "Year-end reports make some dealers not want to step into the breach. That's when it's important to have other dealers step into the breach." The recent merger activity may affect the market in other ways, as well. "As far as the smaller transactions, we're well away from the efficient oligopoly," says Cloherty. But investors like hedge funds could see added costs. "There will be fewer firms that can handle very large transactions," notes Cloherty. "That's important for people that hop in heavily and then jump out. The continued consolidation will be more difficult for them."
More from Opinion
Morgan Stanley Looks Like a Buy Following Impressive Q3 Execution
In the third quarter, Morgan Stanley provided evidence that it can deliver strong results, even when the macroeconomic landscape seems far from ideal.
Goldman Sachs: Should You Bet on Its Business Transformation?
Goldman Sachs is a higher-risk, higher-reward play that bargain hunters looking for a potentially successful business model transition story might want to consider.
PepsiCo: The Unlikely Growth Story Continues to Roll
Given the combination of solid execution, strong fundamentals and the diversification benefits of the stock, PepsiCo looks like a compelling buy following the company's strong third quarter earnings report.
There Will Be No Economic Collapse From a No-Deal Brexit
The EU can have Brexit and keep zero tariffs, which ought to be obvious.
Citigroup: Tread Carefully Around Bank Stocks Ahead of Earnings Season
Citigroup will probably have the robustness of global consumer activity to help it support financial results in the third quarter. But the current interest rate environment and a soft institutional services business pose significant challenges for the New York City-based mega bank.