As one person said to us recently, the forward-thinking leaders know that the secular change underway is going to unfold on their watch.
Four years after the Dodd-Frank financial law became reality, Washington's regulatory machine is altering Wall Street in fundamental ways. Banks are selling off profitable business lines, pulling back from the short-term funding market, cutting ties with businesses that could attract extra regulatory scrutiny, and building up defenses to help weather future crises. While profits are up as firms slash costs and reduce funds set aside to cover future losses, their traditional profit engine—trading—is showing signs of weakening. Goldman announced it trimmed $56 billion, or roughly 6%, from its balance sheet during the second quarter, the sharpest quarter-over-quarter reduction since the depths of the financial crisis. Morgan Stanley has cut assets by one-third since the 2008 crisis, downsized its fixed-income trading operation and increasingly focused on wealth management. Citigroup Inc. has shed nearly $700 billion in noncore assets, including the sale of more than 60 businesses and recently said it would sell its consumer businesses in Spain and Greece. Bank of America Corp. has shed more than $70 billion worth of businesses and other assets since 2010. It has also eliminated 746 legal entities—a 36% reduction since the end of 2009. Among the assets jettisoned: private-equity investments, some credit-card businesses and big chunks of its mortgage business.