The brightest spot for investment banks and brokerage firms this year was sales and trading of corporate bonds as issuers and investors capitalized on the Federal Reserve Board's repeated lowering of interest rates. But the Fed is almost out room to ease interest rates any further.
The biggest firms are pinning their hopes on a resurgence of demand for stock underwriting and advisory services.
They got a glimmer of one when the first few initial public offerings of stock after Sept. 11 rose in their first days of trading. But the heady days of the Internet stock boom of the late 1990s are just a fading memory.
"It's one thing to expect a rebound and another thing to think that business activity levels can get back to where they were in 1999 or early 2000 in any reasonable time frame," Guy Moszkowski, an analyst at Salomon Smith Barney, said.
With the arrival of a new breed of American megabanks, led by Citigroup and JP Morgan Chase, the investment banking business requires the use of more capital for lending to the corporations that pay the fees. That trend is squeezing the profit margins of the major investment banks.
Moszkowski estimated that the returns on equity for big Wall Street firms at the next peak in the market would be in the range of 20 percent to 25 percent, down from 30 percent and higher two years ago.
"The kinds of returns on equity that we saw at the last peak of the cycle will not be repeated for a long time -- if ever," he said.
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