The New Reality is Clearly ...

... well, unclear.

Who could have foreseen at the start of 2008 that we would be here today.  Being an overachieving Goldman alumnus, Hank Paulson clearly wanted to run more than just Goldman, so his master plan turns out to be that he wanted to run the entire US banking industry!

The world of Prime Brokerage is a very different one.  We started the year with Morgan, Goldman and Bear the dominant players.  Bear has been swallowed up by JP Morgan and the uncertainty amongst hedge funds caused by the failure of Lehman has had a well-reported knock on impact on the other prime brokers.  Fitch Ratings has recently made the following comment on Morgan Stanley's outlook: 

"Customers are migrating away from its premier prime brokerage business due to deleveraging and concerns around the protection of client assets." 

While to an extent this is MS specific, it is also a comment on the concerns and issues facing the PB industry as a whole. 

It will be critically important to see how the new world of government intervention in the banking community sits with the business of service provision to hedge funds.  Time will tell how much control and influence the US, UK and other governments will exert on the specific business lines of their partially, or completely  nationalised banks.  How will it sit with the average American now that the US government has an ownership stake in firms that provide leverage and services to hedgies?  This is the very industry comprised of evil short sellers that many in the media, corporate America, and even the financial industry have blamed for the crisis in the first instance?  Strange bedfellows indeed! 

Further, what opportunities will arise for the banks that don't have government interference ruling their lives?  Many of the European banks anecdotally have been winners of PB mandates over the past year.  Will that continue, accelerate or level off?  I have my views, what are yours?

N.B.  Jim Chanos reports in this Bloomberg Video that "We have the least amount of financials short in our portfolio that we've had in four years ... our view is the risk-reward is not great on the short side ... We're looking elsewhere"  This expert opinion reinforces my previous comments that more opportunities exist in rising markets than in falling ones.