From a KKR Perch, More Scrutiny Ahead for Wall Street

Photograph by Jin Lee/Bloomberg

Vikram Pandit, chief executive officer of Citigroup Inc.

Vikram Pandit’s abrupt departure from Citigroup today is yet another reminder that Wall Street, while healing, is still in a state of existential crisis.

Big questions abound about the future of the big banks in the face of a sluggish global economy and governments across the world looking at those institutions like a teenager who’s just been handed the keys to the car after a long punishment.

Henry McVey, KKR’s head of global macro and asset allocation, put out a 15-page analysis of the financial services industry yesterday and it’s a good read. The observations come from what he dubs his “macro perch” at the well-known private-equity firm that’s more recently branched into real estate, hedge funds and lending.

McVey drops in some amazing stats about Wall Street’s outsized role in the economy five years ago. In the first half of 2007, Citi, Bank of America and JPMorgan had profits of $31.3 billion — a total that was just slightly smaller than the entire materials, telecom and utilities sectors combined.

Today, he sees “an unsettled environment where many of the underpinnings of the sector’s advance are being called into questioned…while deregulation has been replaced by re-regulation.”

McVey takes the last point a step further, in a way that may send chills down the spine of bankers already leery of Washington. He predicts regulation will get more intense still, noting that real implementation of the Volcker Rule — which limits banks’ ability to take risk with their own money — would mirror the schedule of heightened regulation after the stock market crash of 1929.

While McVey doesn’t address it directly, KKR and competitors like Blackstone and Carlyle are among the firms that stand to benefit from more regulation on traditional Wall Street players. KKR, founded more than 35 years ago and long the premiere private equity deal shop, now is in the business of underwriting stock and bond offerings, and even has its own long/short hedge fund.

One of the last sections of the report especially resonates in light of the Pandit news, as McVey zeroes in on what he sees as the key intangible of “leadership.”

New Citi CEO Michael Corbat may arrive with an advantage under the McVey school of thought. He says, “Great leaders inspire their employees to ‘wear the brand,’ using their actions and words to continually reinforce the culture and vision of the organization.”

Corbat, who’s worked at Citi and its predecessors since 1983, described himself in a memo today as “a true believer.”

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