Banks have to tiptoe around the issue because they are prohibited by regulators from holding credit hostage for underwriting ransom, a practice known in the industry as tying. Investment bankers have long accused commercial bankers of tying but the charge is being heard much more often with the advent of the domestic mega-bank.
Until 1999, when Congress repealed the Glass-Steagall Act, a set of Depression-era laws, commercial banks were kept separate from investment banks. Merrill and other securities firms supported revisions of the laws because they said it was unfair that banks could buy brokerage firms, within certain limits, but brokerage firms could not buy banks.
Trend setters
Even before the laws changed, investment firm Travelers Group successfully merged with Citibank and combined the bank's corporate lending business with Travelers' investment banking unit, which itself was the product of a merger of the Smith Barney brokerage firm and the Salomon Brothers investment bank. The formation of Citigroup reverberated on Wall Street and spurred a raft of predictions of similar mergers between the remaining independents. But the closest thing to a copycat deal was Chase Manhattan's purchase of the J.P. Morgan investment bank for US$30.9 billion.
Before those combinations, the only commercial banks that owned major investment banks were foreign. While those foreign banks largely failed in their efforts to penetrate the US investment banking business, a few, including Credit Suisse and UBS of Switzerland and Deutsche Bank of Germany, have now developed into serious competitors after acquiring investment banks in New York and Europe.
That trio, along with Citigroup and J.P. Morgan Chase, is in the process of changing the competitive landscape and possibly the economics of investment banking, said Judah Kraushaar, an analyst at Merrill Lynch who follows bank and brokerage stocks.
"There is a creeping capital intensity to the securities business that's being propelled by a handful of commercial banks who come to the table with very large balance sheets," Kraushaar said. "These five banks have more opportunity to use their balance-sheet muscle to get into the business."
The progress is most evident in the bond business. Underwriting bonds is not as profitable as underwriting stocks or advising on mergers, nor is it as critical to the clients' long-term health, Wall Street executives argue.
A delicate touch
Mergers and acquisitions are "the brain surgery of investment banking and a large equity offering is the equivalent of spinal surgery in investment banking," said John Thain, co-chief operating officer of Goldman Sachs. "I don't think you do either of those with the guy who gives you the cheapest rate."
Citigroup already has established its bond-selling prowess. It has increased its leading share of that business to about 22 percent this year and it is vying for Merrill's crown as the leading overall underwriter of stocks and bonds.
The burning debate on Wall Street revolves around whether Citigroup and any of the other hybrid banks can parlay bond business into the initial offerings and merger assignments they lust after. And, if they do, will that success push the stand-alone investment banks to give up their independence?
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