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How the Massive Upheaval on Wall Street Will Impact the Investment Management Business

Published by: TowerGroup

Published: Sep. 22, 2008 - 10 Pages


Table of Contents


TowerGroup Take-Aways

The unprecedented restructuring under way on Wall Street as big independent brokerage firms disappear will have a major impact on the investment management industry as well.

With the elimination of two of the top four stand-alone investment banks last weekend and three of the top six in six months, there will be much less capital commitment and risk assumption and a decline in services the buy side receives from the Street.

Investment management firms will need to carefully reassess their reliance on Wall Street brokerage firms for research, trade execution, market insight, and back-office services and prepare to possibly do without the service levels they were used to.

Now that fewer brokerage firms facilitate over-the-counter (OTC) derivatives trades and structured products, asset management firms may reduce their use of the products (at least temporarily) and instead make greater use of exchange-traded instruments.

Intense scrutiny of the use of derivatives and structured products will force asset management firms to reassess their use of these products, the way they are valued, the way firms manage risk related to them, and counterparty exposure related to them.

TowerGroup expects to see a decline of 3-4% in technology spending across the investment management industry in 2008 and 2009 as firms are forced to cut expenditures amid declining assets under management and growing pressure on fees.

Report Coverage

How Wall Street Changed Forever Within Seven Months

Exhibit 1

Eight Ways the Buy Side Will Be Impacted

Exhibit 2

The Impact on IT Spending at Investment Managers

Exhibit 3

Summary

Abstract

Within a week, the bankruptcy filing of Lehman Brothers, the acquisition of Merrill Lynch by Bank of America, and possible acquisitions of Morgan Stanley and Goldman Sachs by larger entities means a wholesale restructuring of the US capital markets industry. These major events in US capital markets will have a major impact on the investment management business. This Note examines the effect the changes on Wall Street will have on the investment management business in the services to managers, including trade execution, securities lending, and capital commitment. It also analyzes the effect on IT spending at asset management firms, examining where budgets will be cut or may even grow.

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