Well, that was fast. Just two years after Wall Street almost bought the farm and had to be bailed out by taxpayers, Wall Street firms are raking in the dosh. In fact, revenues are at record levels in the first three quarters of the year,
. Can it last?
Regulatory pressure is expected to weigh on Wall Street's ROE, says Brad Hintz in a recent note. Their proprietary trading and derivatives desks will suffer under Dodd-Frank, says Hintz. "Based on the historical performance of trading units and the inherent relationship between leverage and ROE, we estimate these capital changes [the Basel Committee's new mandates that impose higher capital and etc.] by themselves should reduce the ROE of Wall Street's trading units by 45% to 50% and push the ROE of sales and trading below the banks' cost of capital."
On a happier note, Hintz says Morgan Stanley's retail wealth management business (now bolstered by its JV with Smith Barney) will allow MS to "command premium pricing for access to its channel and profit from the scale of economics of its larger retail business." He adds, "Nearly one half of Morgan Stanley's normalized revenues will be generated by Wealth Management." Alas, Hintz says, "2011 should continue to be a challenging environment for MS' GWM business. Retail trading volumes ae weak, pricing is being pressured by the discounters, interest rates are low and ETFs are constraining sales of mutual funds." Oh, and then you've both the major integration issues and disgruntled legacy Smith Barney FAs to deal with too. (At least that is what our Annual Broker Report Card Survey revealed.