Finance & Business World

Last year’s market meltdown loosened Wall Street’s decades-old grip on the prime brokerage business, and ferocious competition over supporting hedge funds means the old ranks may be shaken up for good.

The collapse of Bear Stearns and Lehman Brothers sparked a run on Morgan Stanley and to a lesser extent Goldman Sachs Group Inc, prompting hedge funds to move cash and securities to more stable appearing banks like Credit Suisse, Deutsche Bank and JPMorgan Chase & Co.

Goldman and Morgan Stanley quickly righted this year as markets snapped back, yet the second-tier players have no intention of giving up their newly won premier status, according to a series of interviews with Wall Street’s top prime brokerage executives.

“You had an industry that changed at a glacial pace for 20 years go through two years of rapid change,” said Barry Bausano, a Deutsche Bank co-head of global prime finance. “Over the past few months, the cement has set.”

Behind every hedge fund is at least one prime broker, which lends cash and securities as well as provides custody and other services. It is a high-margin business, one that will generate an estimated $8 billion this year and $10 billion next year, according to the research firm Tabb Group.

Hedge funds also taketh away, as seen last year when anxious fund managers fled the struggling Bear and Lehman and accelerated their collapse. In the darkest days of September, hedge funds worried Morgan and Goldman would be next.

Global Custodian magazine said 44 percent of hedge funds reduced balances with Goldman and 70 percent pulled back from Morgan Stanley.

According to Hedge Fund Intelligence, Goldman earlier this year was top of the heap with $108 billion in Americas hedge fund client assets, followed by JPMorgan at $97 billion, with Morgan Stanley slipping to third with $66 billion cash til payday loan.

What emerged was a new order, where JPMorgan, Credit Suisse, Deutsche and Swiss bank UBS AG which picked up meaningful market share in 2008.

“There is much more of an even distribution of business,” said Glen Dailey, head of prime brokerage at Jefferies Group Inc, a middle-market firm that also picked up share.

JPMorgan, which acquired a nearly bankrupt Bear Stearns in March 2008 and emerged as a Wall Street leader, gained a top domestic U.S. prime brokerage business that was gutted when hedge funds fled Bear. By the end of last year, JPMorgan says it had lured back many clients and gained new business.

“We had a tremendous amount of new business come in as a result of the flight to quality.” said Louis Lebedin, JPMorgan’s co-head of prime brokerage. “In terms of exposure to the top 100, the $1 billion-plus funds, we’ve tripled our share to the highest it’s ever been.”

Now that most fund managers maintain accounts with two or three prime brokers, partly as a result of last year’s collapses, Lebedin said JPMorgan is promoting iSophis, a technology that lets fund managers monitor positions across the various brokers. The big bank also is expanding into Europe and Asia, markets where Bear had little presence.

Another winner of the financial crisis, Credit Suisse, has cautiously added assets from about 70 fund firms, giving it 470 clients, global prime services head Philip Vasan said.

“The lion’s share of the business we took in came from existing clients, clients who knew us and felt we had maintained a steady hand,” he said. 

Read more