It’s Prime Time For A Change

Date: Tuesday, August 21, 2007
Author: Hedge Fund Daily

Investment banks are sustaining a major body blow as hedge funds are deserting them and taking their business to commercial banks that have heftier balance sheets and better credit ratings, Financial News reports. Even the giants in this area, such as Bear Stearns and Goldman Sachs, have seen their hedge-fund generated prime brokerage business cut down. Sources told FN that Bear Stearns has experienced the greatest net outflows of assets held as collateral for loans. A spokesman for the firm said in an interview, however, “Given the market environment there are a lot of flows both ways,” adding that the bank is writing new business and that “balances are up year on year.” Benefiting from the moves, says FN, are Deutsche Bank, UBS and Citi, which after four years of working to get a slice of the business, are finally seeing their efforts pay off. The main attraction: commercial banks have higher credit ratings, and therefore can offer credit at a lower price. Last week, the cost of insuring debt against default hit a 52-week high for nearly all investment banks in the U.S.  Among them, Lehman Brothers saw its credit default swap spread shoot up 50% to 182 basis points, while Bear Stearns’ spread rose 44% and Goldman Sachs’ climbed 22%.