-Mark T. Williams, Boston University Finance & Economics Department

For several decades, the top four U.S. independent investment banks—Goldman Sachs, Morgan Stanley, Merrill Lynch and Lehman Brothers—have been instrumental to the growth of America’s power and gas utility industry. With the sudden shotgun marriage of Merrill Lynch, the bankruptcy of Lehman, and the transformation of Goldman Sachs and Morgan Stanley into bank holding companies, the investment banks are now history.

Additionally, Wall Street investment banking has been consolidated rapidly with “the Big Three” commercial banks—Barclays PLC, Bank of America and J.P. Morgan—taking advantage of bottom-feeding opportunities.

This dramatic reshaping of Wall Street has come too swiftly to fully comprehend, yet it will have an immediate and lasting impact on the utility sector.

With immediate job losses among investment bankers, a decline in their ranks will reduce competition for underwriting utility bond deals. Less competition will equate to higher fees. This might not be immediately visible in a weak economy, but it will show up as the economy eventually rebounds.

Significant investment banking consolidation and downsizing will result in a loss of institutional knowledge as older experienced investment bankers are forced to take severances.

Having a banker who knows the history of the utility, and the company’s management and its level of corporate risk-taking, can be invaluable when structuring and underwriting bonds, as well as providing M&A guidance. Utilities will need to begin building new relationships.

The recent market crisis, including the bankruptcy of Lehman, has resulted in significant market uncertainty. The proposed $700 billion Treasury Department bailout has raised additional concerns about how such a plan will be funded. Such events have placed increased pressure on interest rates, raising the cost of both short-term and long-term capital. In addition, as more of the investment banking business falls in the hands of fewer commercial banks, it remains uncertain whether utilities can count on the same level of service they enjoyed previously. The corporate cultures of investment and commercial banking can be quite different, and Wall Street’s reshaping might result in customers losing out.

Prior to the weekend shotgun wedding with Merrill Lynch, Bank of America CEO Kenneth Lewis was less than enthusiastic about how investment banking activities might fit inside his institution. Moreover, it’s unclear whether these banks will view serving the gas and power utility industry as a strategic priority. For example, although Barclays is buying Lehman’s defunct investment bank, the European bank reportedly hasn’t decided which divisions it would keep and build a franchise around.

In the weeks and months ahead, one trend to watch closely is whether the investment bankers who are able to find new homes will be randomly scattered around Wall Street, or whether the Big Three banks will make it a priority to keep these utility teams intact.

Now that the Big Three hold more of the cards, they should reach out to the utility industry and pronounce their intentions. What will be their level of commitment? Will they devote the capital needed to adequately service this industry? We might be in a recession, but the market will recover eventually, and the utility industry will continue to grow and prosper. Having a knowledgeable investment banker ready, able and willing to underwrite or structure a merger will be crucial.

So the message to Barclays, Bank of America and the other institutions that may be the future home to our power and utility industry investment bankers: Whatever you do, be good to them, as they are an endangered species, and vital to this industry’s future.

Editor’s note: Williams previously was a senior vice president of Citizens Power LLC, a Boston based energy trading company, and a vice president with Edison Mission Energy. Prior to that worked at the Federal Reserve Bank as a full examiner.

Posted: September 24th, 2008 under Uncategorized, bear market, credit crunch, finance crisis, investment banks, recession, subprime lending.
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