Foreign Firms Stalk A Weaker Wall Street

Wall Street’s great investment houses have never faced a serious foreign challenge in their own backyard. But as tectonic shifts reverberate through the banking industry, their overseas rivals are edging into some of the most lucrative corners of American finance.

Oliver Quillia for CNBC.com Passerby's in front of the New York Stock Exchange.

The Swiss, Germans, British and Japanese are grabbing business from once-swaggering American banks by taking companies public, underwriting new bonds and advising corporations on mergers and acquisitions. And they are hiring more of their rivals’ bankers and traders to continue their winning streak.

And while big American banks still tower over global finance, the latest shift, although subtle, is raising some uncomfortable questions, including the big one: Could foreign banks one day do to Wall Street what Japan once did to Detroit?

“There is evidence of traction in market share, and you can see that these banks have leapfrogged,” said Fiona Swaffield, an analyst at Execution Ltd., a brokerage firm based in London. “The issue is, how long can this last, and can anyone re-emerge?”

For the last decade, the strongest overseas rivals have tried to climb above their American competitors, often with mixed success. Credit Suisse of Switzerland sought to become a universal banking powerhouse with its purchase of the United States investment bank Donaldson, Lufkin & Jenrette in 2000, only to see the merger sour. Deutsche Bank of Germany tried to do the same with a 1998 merger with Bankers Trust, and met with similar troubles.

At the same time, foreign banks have become increasingly aggressive in such activities as debt and equity underwriting and mergers and acquisitions. Ten years ago, for instance, only one bank, Credit Suisse, ranked among the top 10 debt underwriters. This year, four foreign banks crowd the field. Similarly, Barclays Capital , Deutsche Bank, Credit Suisse and UBS now list among the top 10 global M.& A. advisers. A decade ago, the only non-United States firm was Dresdner Kleinwort.

More recently, overseas banks have hoped to capitalize on the turmoil convulsing the financial industry. The demise of Bear Stearns and Lehman Brothers, two of the oldest names on Wall Street, gave them a rare opportunity to press for advantage. So did messy distractions like Bank of America’s fraught takeover of Merrill Lynch. Meanwhile, many foreign banks have fortified their finances at their regulators’ behest, while avoiding the restrictions and stress tests required of many American rivals.

And even as American banks start to return to health, efforts by the Obama administration to rein in the industry are likely to shift the competitive landscape in new ways — a development closely watched by foreign contenders.

“What worries me is the competitive edge that non-U.S. banks have vis à vis U.S. banks,” said Eugene A. Ludwig, the comptroller of the currency under President Bill Clinton, who now runs the Promontory Financial Group, a Washington bank consultant group. “Non-U.S. banks generally operate under more coherent regulatory structures than U.S. banks do, which creates imbalances that non-U.S. banks can exploit, especially at a time when their U.S. counterparts are operating under extraordinary constraints.”

In the nine months since it snapped up Lehman’s core operations at a bargain-basement price, Barclays Capital, already one of the biggest risk management and financing firms in Europe, has jumped from a minor player to a major firm in the capital markets business.

The transaction was a rare chance for Robert E. Diamond Jr., the American president of Barclays, to take on rivals like Morgan Stanley . It brought the British bank business it never had in equities, M.& A. and equity research, while shoring up its debt underwriting and trading business.

Since Barclays almost doubled its United States work force overnight by buying the remnants of Lehman, the British bank has jumped to second place in global debt underwriting. It is No. 4 in America, with nearly a tenth of the market, more than Goldman Sachs or Morgan Stanley. This year alone, Barclays advised on $90 billion of mergers and acquisitions on this side of the Atlantic, more than Citigroup and on par with Bank of America, although it still trails the most powerful players, JPMorgan and Goldman Sachs .

“We are one of the few Wall Street firms focused on building this year versus consolidating,” said Jerry del Missier, president of Barclays Capital, based in New York.

Deutsche Bank, the biggest German bank, has had expansion in the United States “in sight since we bought Bankers Trust in 1998,” said Seth Waugh, chief executive of Deutsche Bank Americas. “We expect to win market share” in mergers and acquisitions, capital markets, trading and wealth management, he said.

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Recently, it has gained lucrative prime brokerage business from hedge funds. And it has made strides in mergers and acquisitions, moving to fifth place globally in the first five months of this year, although it is still in only 11th place in the United States, according to Thomson Reuters. The bank recently added 90 new senior employees to its United States staff of more than 12,000 to broaden operations.

Credit Suisse has also wrested prime brokerage business from rivals while stepping up its United States activity in investment-grade corporate debt, earning $20 billion in the first five months, compared with $29 billion for Goldman Sachs. The second-largest Swiss bank gained ground after cutting costs, curbing risky activities and selling billions of dollars in problem assets to cleanse its balance sheet.

Brady W. Dougan, the chief executive, said the bank’s decision to refuse Swiss government support had given it strategic flexibility compared with its American competitors, which might remain restrained in how they expand or spend their money overseas.

Still, the bank has slipped in at least one field it used to dominate: high-yield capital markets, where it fell to seventh place in the first quarter behind JPMorgan and Bank of America, according to Thomson Reuters. But Mr. Dougan is continuing his push to bolster Credit Suisse’s overall business by aggressively hiring top talent from the investment and private banking divisions of Bank of America Merrill Lynch, Lehman, Citigroup and Goldman Sachs. The bank is also considering a “tactical acquisition” in private banking to siphon even more business from rivals, he added.

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“Now we have an opportunity to increase, to really, really increase our position,” said Mr. Dougan.

Even the Japanese are muscling in on Wall Street’s turf. Nomura has added about 135 people in the United States since October, mainly in its equities division, augmenting its American work force by 10 percent and moving its global business head to New York, in a sign of the potential it sees.

This story originally appeared in the The New York Times