Last Monday, just as Barclays began its integration of Lehman Brothers employees, the geography of Wall Street was once again changed dramatically.

Goldman Sachs and Morgan Stanley, the last independent US bulge-bracket banking firms left standing after a year of credit tumult, were given Federal Reserve approval to form bank holding companies. A day later, Warren Buffett announced a multi-billion dollar investment in Goldman Sachs. And amid all of this, the Fed changed its policy on equity investments, allowing hedge funds and private equity firms to increase their stakes in banks.

The rapid series of changes has many veterans of Wall Street still scratching their heads, but what has become evident is that a gilded age of readily-available and inexpensive capital may be over, a development that will impact not only the pace of mergers and acquisitions, but also the purchase price of those companies that do get bought.

For many corporations, debt will be harder to come by, setting the stage for more restructurings and corporate bankruptcies. Also, private equity and buyout firms--many crewed by exiled Wall Streeters--may take on some of the roles of bulge brackets. Smaller banking firms, meanwhile, may step in and expand their role in various investment banking activities.

"It is the end of an era or the beginning of an era. It depends on what comes out of Congress," says Charles Geisst, business professor at Manhattan College in New York and author of Wall Street: A History From Its Beginnings to the Fall of Enron.

"Recent history would indicate that periods of significant financial and economic turmoil act as a catalyst to increase awareness of the services that boutique firms can provide," says Timothy LaLonde, senior managing director and chief operating officer of Evercore Partners' corporate advisory business. "Companies, more than ever, see the importance of receiving independent and unbiased advice from firms that have partners averaging over 20 years of experience."

Geisst and Robert Korajczk, the Harry Guthmann Professor of Finance and director of the Zell Center for Risk Research at the Kellogg School of Management, Northwestern University, believe private equity firms will likely play a larger role in American finance.

Geisst believes they may try to "expand their activities a bit." But Korajczk warns against expecting too much from PE firms in the near term, noting that their cost of funding has also risen sharply.

"In turbulent times you do see some private equity firms playing a more active role, particularly in the subordinated piece of the capital structure," says Steve Smith, global head of leveraged finance and head of UBS' Americas financial sponsors group. "In effect, they're trying to help us by minimizing the risk that we take in backing a buyout. That's become an increasingly common theme."

Smith, however, doesn't expect that private equity firms will supplant Wall Street's bulge-bracket banking houses as the primary source of debt capital for leveraged buyout activity given the sheer scale of personnel and established syndicate banking networks the banks have in place. "It would require a big operation and an enormous investment," he says.

As LaLonde sees it, "The current market environment creates lending opportunities for some financial institutions that were not as active during the boom period ... because those institutions are able to loan money without the baggage of substantial amounts of bad loans on their books. It's possible that we may see some financial institutions previously perceived as second- and third-tier participants playing a more important lending role over the next six to 12 months."

Market observers generally believe that the thinning in the number of bulge-bracket firms will make capital more expensive for corporations, even when credit markets settle down. In recent weeks, short-term lending costs among banks have jumped and many corporations have seen their borrowing costs rise. Just last week, for example, investment grade and high-yield debt spreads widened to levels not seen in five years.

While anomalies in the credit markets are expected to dissipate, the cost of borrowing money to buy a business or borrow for a corporation is expected to climb. This, in turn, means there is a limit to how much prices of targets can be bid up.

"The cost of capital has gone up and capital providers have less" to lend and invest, according to Jeff Werbalowsky, co-chief executive of Houlihan Lokey.

Werbalowsky and his colleagues at Houlihan have already seen what that pullback in readily available credit means for the broader US economy. Businesses that may have been inefficient and were unprofitable could often skate by with the help of inexpensive loans. When loans became due the companies could readily find another lender to refinance their debt if they didn't have major operational problems. Now, that's not so easy.

As Werbalowsky puts it, "the cost of leverage and equity has gone up. Throw that together, shake well and you will get massive distress."

Some businesses under stress include specialty retailers, media, restaurants and manufacturers of discretionary items.

These companies are ailing because they have ridden on the coattails of a housing boon that is now a source of woe for consumers. The decline in spending on goods and services comes at a time when credit costs for a wide range of corporations has jumped. "Americans will have to invest more, consume less and save more. The ramifications of that new dynamic will ripple across the international marketplace," says Werbalowsky.

A New Era

Longtime veterans of Wall Street agree that the changes in Lower and Midtown Manhattan's finance industry are the most profound in the post-World War II era of Wall Street.

"The only thing this can be compared with is the period after 1933 when Glass-Steagall was passed and a year later the Securities Exchange Act was passed," says Geisst.

"The business is going to be very different from what it was two years ago. The environment has to be different because too many of the components have been eroded, shut or affected in such a way that the outcome is significant regulation and scrutiny," says Jonathan Biele, head of capital markets at Cowen & Co. "You've lost Bear Stearns and Lehman, and it's going to take a while for Barclays to regain the confidence of existing Lehman clients. Morgan Stanley and Goldman Sachs have changed their business model, and that's going to take a while, as is the BofA acquisition of Merrill Lynch. In the meantime, boutique investment banks can provide stability in an otherwise rapidly-changing market. The consolidation gives us greater opportunities because competitors leave the field and a lot of people are going to need jobs that smaller boutique banks can provide."