Financial crisis signals end of an era in Wall Street IT world

Financial collapse brings on data center grab, clash of cultures

The financial crisis wrought by the credit crunch pushed Wall Street giant Lehman Brothers into bankruptcy, with London-based Barclays Bank stepping in to scoop up some assets, including its New Jersey data centers and New York headquarters building, at a bargain price. Facing its own troubles, Merrill Lynch agreed to be acquired by Bank of America, a move that analysts say appears to end the era of the reign of the Wall Street securities titans, as the world wonders what might happen to the two left standing, Goldman Sachs and Morgan Stanley.

Wall Street’s financial meltdown promises to forever change the way information technology spending is handled in the securities industry as the old giants of the capital markets stumble and banking behemoths move in to devour them whole or in part, scooping up technology assets.

Lehman Brothers last week tumbled into bankruptcy, sparking London-based bank Barclays to pounce at choicest morsels that include two Lehman’s data centers and its New York City headquarters building, at a fire-sale price. At the same time, Merrill Lynch & Co., facing its own troubles, agreed to be acquired by Bank of America for about $50 billion in a stock-swap deal. These stunning developments signal a new era in which more often banks will be in control of IT spending for securities trading technology, and analysts foresee a culture clash coming.

See just how much Wall Street's fat cats earned before the industry meltdown.

“Banking tends to not need real-time information as much as capital markets,” points out Sean O’Dowd, senior analyst at Financial Insights, an IDG Company. “Banks do batch overnight. Capital markets do millions of transactions processed in milliseconds. It’s a different type of culture.”

“It’s the cornerstone of what the next generation of this industry is going to look like,” says Robert Iati, partner at TABB Group, a research firm that closely watches the North American securities industry.

And changes may be in store for Wall Street’s last two standing investment houses, Morgan Stanley and Goldman Sachs, which are fighting the most severe market meltdown since the 1930’s because of the credit crunch.

In this new era, banks buttressed by their core lending will be taking the lead as “one-stop shops,” says Iati, with Bank of America possibly becoming a global powerhouse like Citibank, UBS or JPMorgan.

But what are the implications for jobs and spending on IT assets in the securities industry accustomed to lavishing fabulous sums on ultra-fast networks to compete in electronic trading, where today even a nanosecond may count?

Bar chart showing securities industry spending on IT assets and staff

“Merrill last year spent between $3.5 and $4 billion on people and technology,” says Iati. “Lehman’s outlay was $2.5 to $3 billion.” But TABB Group, largely as a result of last week’s events, predicts a sharp decline in IT-related spending for the North American securities industry, from $24.2 billion last year to $21.9 billion this year and down to $17.6 billion next year.

Jobs are uncertain at best in a financial-services world facing such unprecedented upheaval, especially where securities trading is increasingly automated, with brokers less needed than in the past.

Lehman last counted about 26,200 employees worldwide. Barclays, the London-based bank, says it’s stepping in to acquire Lehman’s North American investment banking and trading operations for $250 million, as well as Lehman’s two data centers in New Jersey (where a New York Stock Exchange electronic hub also discretely exists) and Lehman’s New York headquarters for $1.75 billion. This is seen as a bargain-basement price for a firm valued last year at $10 billion.

“This is a once-in-a lifetime opportunity for Barclays,” said Barclays President Robert Diamond in a statement issued this week, which said Barclays expects to be able to hire up to 10,000 Lehman employees. The Barclays deal, subject to approval of a bankruptcy court, has to be completed by Sept. 24.

Financial Insights analyst Sean O’Dowd says that Lehman, now in bankruptcy, faces a critical period in which it’s uncertain whether jobs in IT or business divisions will exist.

If the Bear Stearns collapse is any guide, O’Dowd says, there can be a “great loss of faith by your client base and they’re running to the door. You’re losing business. And the competitive vultures are looking to pick off departing traders, even offering them sign-on bonuses.” This may happen to IT staff, too, but it’s clear Barclays is intent on gaining Lehman’s technology assets.

While analysts often use the word “synergy” to describe the Bank of America bid to acquire Merrill Lynch because the business lines of these two companies have little overlap, the merger is expected to bring some friction in culture and technology.

“At Bank of America, it’s a different type of culture,” says O’Dowd, noting Bank of America has historically been inclined to do more software applications development in-house, while Merrill Lynch will more readily turn to outside vendors. Banks put more focus on batch-processing, while securities trading is about ultra-fast network speeds.

A Bank of America spokesman said the bank couldn’t discuss IT operations prior to the merger with Merrill Lynch, which is expected early next year.

Iati and O’Dowd don’t see how there won’t be IT job losses and reduced spending at Merrill Lynch and Lehman, if only because of some technology redundancies. Other analysts agree somewhat but are more optimistic.

Gartner analyst Ken McGee argues that demand for IT services and products for major financial institutions is fairly inelastic because investment in technology is so crucial for remaining competitive and for keeping data secure.

“There are more toys on trading desks per person than on any other industry,” McGee says. “Our position has been despite problems in the economy, we would not have a recession in America, and that has proven to be the case so far.”

But are such perks reaching their limit?

Independent analyst Richard Stiennon says just last week he witnessed an investment bank cancel a security project for 8,000 desktops for traders and executives working from home because of cutting back of IT spending. But he said in spite of this, he does expect to see an uptick in outlays next year.

Forrester research analyst Ellen Carney notes that procurement departments at major financial institutions have likely known for two years that their companies could be in trouble due to the meltdown in the sub-prime loan market. Because of this, she expects that many of them have budgeted their IT expenses accordingly.

If anything, Carney says, IT vendors could see some expanded opportunities. She says the federal government is likely to create a host of new regulations in the aftermath of the crisis, and firms specializing in complying with new reporting requirements could get a particular boost.

Paul Polishuk, president of Information Gatekeepers research group, says the increasing number of mergers and acquisitions will boost the market for IT firms that specialize in integrating networks.

“Because Merrill Lynch is going to be bought by Bank of America, their assets are going to have to be upgraded,” he says.

“And since Bank of America and Merrill Lynch are two very different businesses, a good deal of work will have to be done to get them integrated.”

But Polishuk and Carney see a negative impact in the short term for IT workers, since all mergers and bankruptcies inevitably result in layoffs. “There could be a lot of IT people in Manhattan out of work,” says Carney. “Any way you slice it, there are going to be redundancies.”

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