*Winds of Change Buffet Small U.S. Investment Banks
By: PARITOSH BANSAL
Reuters
September 23, 2009

NEW YORK (Reuters) - Trading businesses, once considered a tremendous asset for Wall Street firms, are now seen as a potential liability, and could force small investment banks to put themselves up for sale. But boutique firms that focus mainly on providing merger advice - such as Lazard Ltd (LAZ.N), Greenhill & Co Inc (GHL.N) and Evercore Partners Inc (EVR.N) - are well positioned and may remain independent.

The U.S. financial system has gone through a radical change in a matter of days. The U.S. government has put together a $700 billion plan to help rid banks of toxic assets, and Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N), the last of the major U.S. independent investment banks, have received approval to become bank holding companies.

This could put pressure on smaller investment banks like Jefferies Group Inc (JEF.N), Piper Jaffray Cos (PJC.N) and FBR Capital Markets Corp (FBCM.O) to change, experts said. Like Goldman and Morgan Stanley, the three are full-service investment banks with trading, underwriting and research operations.

Goldman and Morgan Stanley saw their share prices drop in the middle of last week, not due to concerns about specific assets on their books, but amid broad questions about their business model and their ability to fund themselves. "Ultimately, what we are witnessing is the old model did not permanently work," said Michael Zuppone, head of the securities and capital markets practice of law firm Paul Hastings. "At the end of the day, winds are blowing in a different direction."

Firms like Piper Jaffray may be stuck in the middle, between small boutiques that do not need to finance trading positions, and large banks that can fund themselves with deposits and in the capital markets. "I don't think you can be kind of small but neither fish nor fowl," said Louis Bevilacqua, co-chair of the corporate department at law firm Cadwalader, Wickersham & Taft.

LIVING BY WITS

Firms such as Lazard, Greenhill and Evercore are gaining advisory business and snagging top-tier bankers now available amid the turmoil on Wall Street. Boutique investment banks focus on relationships and are perceived as stable and offering independent advice.

"The competition has been somewhat discredited," said Marshall Sonenshine, chairman of investment banking boutique Sonenshine Partners. Sonenshine said his small firm grew by about 25 percent this year, including hiring a former JPMorgan Chase & Co (JPM.N) banker, Grant Tolson, to head financial institutions banking.

Lazard, Greenhill and Evercore are among the top 20 financial advisers in U.S. deals so far this year. Jefferies was No. 25, according to Thomson Reuters data. Lazard shares are down less than 1 percent this year, outperforming the Amex Securities Broker Dealer Index (.XBD), which is down 38 percent.

"They live by their wits much as old-fashioned merchant bankers used to do," said Ray Soifer, a banking industry consultant. "There will always be a market for the advisory boutique firm."

PERSONAL DECISION

Full-service investment banks are in a tougher spot, in part because they lack access to deposit funding, which can be a cheaper source of funds. Partnering with commercial banks can also lead to introductions to new clients and offer product and income diversity, said Mark Kanaly, a financial services partner at the law firm Alston & Bird.

The banks themselves may not be convinced they have to change. Jefferies, which has posted losses in the first two quarters this fiscal year and is expected to post another in the third quarter, has been taking a contrarian approach, going on a hiring spree, snapping up traders and bankers laid off by others.

"We're not doing anything different than we did in 1990, '94, '98 or 2001," Chief Executive Richard Handler told Reuters earlier this month. "Each one of those periods was gut-wrenching, yet after each period we emerged bigger, more balanced, more important to our clients, and more profitable." Jefferies shares are down 5 percent this year, also outperforming the broker-dealer index. A Jefferies spokesman declined to comment.