The Wall Street money-making machine looks to have malfunctioned badly in the last quarter as nervous companies and investors stayed out of the capital markets. Troubles in Europe and on the trading desks also contributed to what could be a loss-making quarter for some of the Street's biggest names.
Bank analysts finally got the memo last week and drastically slashed their rosy earnings expectations, sending banks shares down sharply. This should have been no surprise given all the changes happening on Wall Street. The banking sector will continue to face headwinds this year as the crisis in Europe persists and the banks tinker with their new "risk-light" business models. But regulatory clarity and new growth opportunities could help Wall Street get its mojo back sooner rather than later.
The fourth quarter of the year is usually slow for Wall Street given all the holidays and year-end activities. Asset managers usually ratchet back their trading, while companies tend to put off announcing new deals until after the New Year.
But the fourth quarter of 2011 seems to have been even slower than usual. Global investment banking revenue is expected to total just $13.9 billion for the quarter, down 37% from the same period last year, according to data from Dealogic. The equity side of the business is expected to have brought in just $2.6 billion, down a whopping 67% from last year as companies decided to put off IPOs and secondary offerings. Revenue from mergers and acquisition is also expected to be down markedly in the quarter, generating an estimated $4.3 billion for Wall Street, down around 23% from last year.
The muted activity in investment banking is expected to be accompanied by an equally weak showing in the banks' trading divisions. Analysts see the banks lowering their risk profiles in the quarter in order to comply with higher capital mandates. The spinning out of the banks' lucrative trading desks, due to new regulations, is also expected to have had a negative impact on the banks' bottom lines last quarter.