Is this a cyclical downturn, a correction after an exceptional boom year for the capital markets, or a sign of something more ominous?
One American investment banker said yesterday he was puzzled but delighted at the British reaction to this week's news. Last year it was difficult to lose taking a punt on just about anything, but when interest rates rose the markets plunged.
'The American investment banks reported dreadful first-half figures for 1994, the Swiss banks also took a bath at half way - and now that the British are talking about poor results, everybody's shocked,' he said. 'It's great because it take some of the heat off us in London.'
These words should smooth the ruffled egos in the hierarchy at Warburg and Hambros. The profit warnings have also sparked off speculation that, coupled with unprecedented competition from the likes of Goldman Sachs and Swiss Bank Corporation, falling profits will push UK houses into new alliances, provoking a mini-Big Bang Mark Two.
Some City observers think these conditions could spur a strategic rethink for a number of venerable houses, such as Cazenove and Schroders, reinforced by the emergence of the mighty Deutsche Bank as a potential partner.
Might not Schroders, say, feel the need to find a London distribution arm of its own, as it already has with Wertheim Schroder in New York? And might not Cazenove consider a link with, say, Deutsche or Smith New Court?
Such speculation brought snorts of derision from the older merchant bank houses yesterday. One source said: 'I've been dancing around that particular mulberry tree for 29 years - it won't happen.'
Another said: 'Old chestnuts, old chestnuts. I would think this week's warning from Warburg would put anyone off going down the integrated route.'
Sir Chips Keswick, chairman of Hambros, insisted on the value of the traditional patchwork of independent London houses, which provide flexbility to the system.
'I am convinced that there is a role for the intermediary between the savings markets and the users of capital. Monolithic institutions are not needed for this.'
Barings' chairman, Andrew Tuckey, also thinks that people have already made their long-term strategic arrangements and a new wave of mergers or takeovers is unlikely.
'Merchant or investment banking is a cyclical business, and perhaps people should be less surprised when it is shown in such stark terms as in recent days.'
There have been no serious job losses at the securities houses so far this year, but there is no doubt that last year's feast of bonuses will be replaced by a famine come Christmas. The international capital markets have become so volatile that boom years can be as problematical as bad ones, as firms are forced to take people on and increase their cost base. They then find it difficult to cut costs in the bad times.
'Last year it was very difficult other than to go with the flow,' one US investment banker in London said. 'The key question is reallocating resources within the bank. Traditionally investment banks have not been well managed. Teams or departments may work well, but putting them together into a larger organisation is the problem.
'And when conditions change it's very difficult to change your cost base. You can't retrain an equity trader as a debt trader, or switch someone from stock- lending into mergers and acquisitions.
'The clearing banks with investment banking arms will discover that this year. There are still two cultures, the clearers and the merchant bankers.'
On the positive side, the great boom market of 1993 came to the rescue of Kleinwort Benson, sweeping it from its management difficulties into what now looks like a healthy recovery strategy, based on international M&A and fund management.
The American giant Lehman Brothers almost shut up shop in London following the crises of the late 1980s. The 1993 boom also gave it vital breathing space in which to sort itself out - just in time for it to absorb the impact of this year's appalling bond markets, in which it is an important player.
The juiciest rewards for securities houses in the medium term lie in the massive appetite for privatisations worldwide, particularly on the Continent, and in the general appetite for capital in the developing countries.
According to Alex Robinson, an analyst with Smith New Court, European privatisations are set to gobble up over pounds 150bn in the next two years alone, raising fears about the market's ability to absorb such gargantuan amounts of capital.
Michael Marks, chairman-elect of Smith New Court, is confident that this global appetite for capital will keep adaptable securities houses like Smiths in good business for years to come. But he warns that people still do not understand that the securities business has always been cyclical, and will get more so.
'The next boom will be bigger than the last, and the next bust bigger as well,' he said.
As for the independent-versus- integrated debate, Mr Marks is convinced that the integrated route will win out in the end.
'Look at the realignment in the media industry, in pharmaceuticals, in oils. I don't think the securities business will escape the larger conglomerates. But these things take longer than you think.'
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