Wall Street Goes Back to Basics

Hit hard by mortgage-related losses, Wall Street is returning to less risky transactions and focusing on tried-and-true practices like selling stocks and bonds to investors, according to the Wall Street Journal.

Mounting losses and write-downs at Merrill Lynch & Co. and Citigroup Inc. have forced big banks and brokerages to take fewer risks and focus on less-profitable but more reliable businesses.

Last week, Merrill CEO John Thain announced write-downs totaling $11.5 billion, with a fourth-quarter net loss of $9.83 billion, compared to a net income of $2.3 billion a year ago.

“We are still going to have a trading component to our business, but it is not going to be of the same nature,” Thain told the Journal. “We will continue to take risks.”

Big banks like Citigroup are undergoing similar shifts by holding on to more of the loans they make, rather than selling them off to investors.

Banks and brokers are more likely to see their profits fall to the “mid-to-high teens in good years and high single digits in the bad years,” said David Hendler, senior analyst at CreditSights. “They’re going to see less transaction volume and less complexity; there will be more of a focus on generic product lines.”