And we thought that the Federal Reserve was the gang who couldn't shoot straight. To the defense of Barron's and the author, this weeks' story reflects the collective prevailing views of how industry leaders and participants think the current downturn will play out. The magazine also included a powerful counter-story (unlike when they ran the Commodities story on March 31) titled, "Why the Rout in Financials Isn't Over," packed with convincingly strong technical trend data from the highly-regarded Louise Yamada who postulates that price levels of investment banks have much further to plunge.

The popular belief, however, is captured well by this week's Barron's cover story: First, there will be more layoffs, pain, and suffering but a turnaround will inevitably come. Second, The De-securitization and De-leveraging processes are underway and will eventually play themselves out. And third, products will become simpler, and less customized.

There have also been a slew of stories making the case that the Manhattan real estate market will escape the steep declines encountered in other markets around the country. Andy Sewer wrote a commentary which appeared in last Sunday's Washington Post titled, "The Street Sleep, the City Shrugs," stating "...in fact, Manhattan is still very much in the swim." One of Sewer's strongest points is that the decline of the US dollar relative to the Euro will entice Europeans and other foreigners to continue to shop in Manhattan and buy real estate there. That alone should provide a considerable bid on prices. His second point, that "so much profit has been made on Wall Street over the past 2 ½ decades that the amount of money sloshing around is likely to keep the price afloat indefinitely," might not hold up as well if there is any sustained plunge in asset prices (stocks and bonds).

So basically the view is there will be layoffs and tough times, perhaps even tougher for the more highly-paid segment this go around, but, just as had occurred in the past, the industry will learn from its excesses, innovate and reinvent as necessary, and layoff too many people which will result in another boom and feverish hiring once the industry turns around. Sorry, but that sounds a little too complacent for me. In the past I think there was more of a sense of fear and that the jobs would not be coming back.

I think that the industry is missing two major points. One, there is an under appreciation for the longer term effects of cutting back on securitization and deleveraging. Two, alternative financial markets and centers are springing up in different parts of the world. London is already recognized as being on par with Wall Street. I expect that both will cede supremacy to China over the course of the next couple of decades.

Regarding the first point, in an April 28 Bloomberg article titled, "Danger Ahead: Fixing Wall Street Hazardous to Earnings Growth," the authors opine:

Wall Street's money-making machine is broken, and efforts to repair it after the biggest losses in history are likely to undermine profits for years to come...No one is sure the model works anymore. While Wall Street executives and regulators study what went wrong, there is no consensus solution for restoring confidence. Under review are some of the motors that powered record earnings this decade -- leverage, off-balance-sheet investments, the business of repackaging assets into bonds through securitization, and over- the-counter trading of credit derivatives. Without them, it will be difficult to generate growth.

There are solutions on the drawing board, but they will be tough medicine for banks to swallow and lead to substantially lower profits. In a June 27 Financial Times editorial by Gillian Tett ("Swiss look to leverage ratios in quest to go back to basics") she observes, "the Swiss National Bank urged the country's banking regulator to change the rules it imposes on banks, partly in reaction to the UBS shock. And this initiative is worth watching closely since it puts Zurich in the unusual position of blazing a trail that others might follow, most notably in America." In an effort to restore adequate methods to judge capital adequacy Tett reports that "what the SNB now wants to see is a ‘back to basics' campaign in the form of a bank ‘leverage ratio'. This would essentially require banks to keep core capital at a predetermined percentage of the total balance sheet (likely to be about 4 or 5 per cent) - in addition to meeting the Basel metrics. Unsurprisingly, the banks loathe this idea since it would probably force them to cut their balance sheets."

A more heavy-handed Fed and Congress may impose further regulations and restrictions that will shackle the sector for years. In a MarketWatch article, "Brokers threatened by run on shadow banking system," Alistair Barr presents the case for a "Super Fed:'

Next year, Congress likely will pass legislation forcing big brokerage firms to be regulated fully by the Fed as financial holding companies, Brad Hintz, a securities analyst at Bernstein Research and former chief financial officer of Lehman, said. Legislators will probably also call for tighter limits on the leverage and trading risk taken on by large brokers, while demanding more conservative funding and liquidity policies, he added. Restrictions on these firms' forays into venture capital, private equity, real estate, commodities and potentially hedge funds may also follow too, Hintz warned. This may undermine the source of much of the surging profit generated by big brokerage firms in recent years. A newly empowered "super Fed" will likely encourage these firms to arrange longer-term, more secure sources of borrowing and even promote the development of deposit bases, just like commercial and retail banks, the analyst explained. This will make borrowing more expensive for brokerage firms, undermining the profitability of businesses that require a lot of capital, such as fixed income, institutional equities, commodities and prime brokerage, Hintz said.

We simply got carried away with finance and easy money. Companies came to rely on generating more profits from the lending and finance arms of their businesses than on sales of their actual products and services. The best physicians, scientists, and engineers were being scoffed up by hedge funds for their expertise. And they could pay them a whole lot more than they would have otherwise earned, even being at the top of their professions. There was a surplus of students pursuing degrees in financial engineering and a dearth of students majoring in petroleum and metallurgical engineering. Is it any wonder we are in such a mess? In an April 28th Wall Street Journal titled, "Has the Financial Industry's Heyday Come and Gone?" Justin Lahart quotes one chief investment officer who cogently points out, "The role of finance in the economy is going to come down significantly in coming years...From a societal standpoint we got carried away with finance."

Later in the article Lahart draws on the expertise of NYU economist Thomas Philippon "who argues that the surge in financial activity that began in 2002 created an employment bubble that is now bursting. His model suggests total employment in finance and insurance has to fall to 6.3 million to get back to historical norms. The means losing an additional 700,000 jobs in the sector." Goldman Sachs and Citigroup's recent announcements of laying off 10% of their workforce is likely a mere harbinger of what is to come. In Manhattan it is generally agreed that the financial industry drives the economy and that for every job lost in the industry results in three other jobs being lost. They are going to become increasingly reliant on foreigners to prop them up. This is one group who won't be rooting for the US dollar to rally any time soon.

Perhaps the most worrying aspect of seeing light at the end of the tunnel for an improved leaner and meaner industry is the fact that we aren't out of the woods yet. With stock market indexes plummeting to new mutli-year lows and warnings from highly prescient analysts like Meredith Whitney of Oppenheimer --"... [I] believe that what lies ahead will be worse than what is behind us...after years of inherently flawed underwriting, banks face the worst yet of the credit crisis - over $170 billion in write-downs and charge-offs from consumer loans" - we might be better served bracing for more fallout than trying to predict what the turnaround will look like.

There will be an industry rebirth; it is just going to take longer than most people expect. And when it does occur, look for many of much of the industry to migrate to where the world's wealth and centers of commerce have been migrating for the past decade-to Asia and China. A McKinsey Global Institute study poses that the US might have already lost its financial leadership due in part to the recent credit turmoil. While the study (written last year) lists Europe as assuming the mantle of leadership, it also mentions that the Chinese market is gaining as a result of booming exports and new wealth creation. In Tomorrow's Gold: Asia's Age of Discovery, written by Marc Faber in 2002, he contends that the shift in the movement of international capital flows will continue eastward and that "No other country in the world has ever developed, in such a short space of time, such a large financial market as China."

A report on the top 75 centers of commerce commissioned by MasterCard just included Shanghai in its "Top 25" with an eight-position jump, the largest of any city in the top 25. According to a Financial Times article, it earned its new place for being "[a]mong the world's most populous and fastest-growing cities...bolstered by its economic stability, its legal and political framework, and increased quality of life and China's booming economy." There are no assurances that Shanghai will be the top financial hub in China, never mind the rest of the world. The Chinese smell the opportunity to knock Wall Street off of its perch and three cities within China itself are vying to grab the mantle-Shanghai, Beijing and Shenzhen. All three cities have a legitimate case to make. My money is still on Shanghai but don't count the other two out.

Just last week Hong Kong announced plans to create its own commodities exchange. The next article I write might be, "Escape from Chicago." The Wall Street Journal informs that:

The new Hong Kong Mercantile Exchange, set to open as soon as the first quarter of next year, will sell U.S. dollar-denominated contracts for delivery of fuel oil to mainland China, where it is often used as a power source. From there, Hong Kong hopes to expand into commodities that could range from soybeans to iron ore. The exchange fits into the larger designs of Hong Kong officials, who are looking to bolster the Chinese special administrative region's standing as a regional finance hub. It faces a growing challenge from China's mainland, which has grown in importance as a new investor class arises and as Western companies grow more comfortable doing business there.