Some outlines of regulatory changes are starting to take shape. My guess is that US investment banks will see increased regulation in return for the Fed’s intervention in the case of Bear Stearns and its decision to allow investment banks to borrow from it.

The Fed’s approach will be to that the cowboys of finance are really on their own. So Timothy F. Geithner, president and chief executiveof the Federal Bank of New York, told The Economic Club of New York, that he doesn’t see a need to extend capital requirements to hedge funds or private equity firms – the cowboys.

But the cowboys can’t be allowed to threaten systemic risk, which means the brokerage firms will be monitored for their exposures…Regulated firms will probably carry more capital.

Geithner again: “Supervision has to explicitly focus on inducing higher levels of margin and collateral in normal times against derivatives and secured borrowing to better cover the risk of market illiquidity.”

Writing in the NY Times, Louise Story asked around the industry for predictions.

“They are going to have to build a new business model,” Richard X. Bove, a financial services analyst at Ladenburg Thalmann and Company, said of investment banks. “I do not believe those businesses have the ability to generate the kind of profit they did in recent years without all the leverage.”
Some analysts predict that independent brokerage houses will merge with commercial banks, if the government begins regulating them. That uncertainty leaves executives at these companies unsure of how to plan for the future, said David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, who is predicting bank consolidation.

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