Memory numb to risk-taking

NEW YORK – Wall Street investment bankers got another lesson about the dangers of risk-taking this past week with the downfall of Bear Stearns Cos. The question now obviously is, how long will it last?

Those bankers, many of whom lived through market debacles like the dot-com bust at the start of this decade, turned out to have very short memories. And so analysts believe the sale of Bear Stearns to JPMorgan Chase & Co. for a stunning $2 per share ultimately won’t have that much of an impact on how Wall Street conducts business.

In fact, bankers and traders are under even more pressure to reap big returns because of the ongoing credit crisis, and risk is just part of the game.

“There’s an old saying on Wall Street that, for traders and bankers, you’d have to take a normal 30 year career and distill it to 15 years,” said Quincy Krosby, chief investment strategist for The Hartford. “This whole episode might change Wall Street for a little while.”

Krosby believes that Bear Stearns’ near-collapse, which followed the company’s investing too heavily in risky mortgage-backed securities, might force some bankers to change their ways in the short term. But it won’t be enough to temper the financial industry’s relentless pursuit of money.

Indeed, the past decade has seen a number of investing fiascoes that Wall Street doesn’t appear to have learned much from. Krosby noted the go-go Internet days – when untested high-tech companies reaped piles of cash in public offerings. The lesson then was, don’t put a lot of money into a venture that isn’t on fairly solid ground – but mortgages granted to people with poor credit are quite akin to high-tech firms that had never turned a profit. In both cases, investors gleefully looked past the risk.

Now investors are smarting from what happened to Bear Stearns. And traders are somewhat chastened, for now.

Erin Callan, the chief financial officer for Lehman Brothers Holdings Inc., said her firm has certainly become more wary about the risks it takes amid the credit crisis. However, the market’s gyrations also offer Lehman’s army of traders an opportunity to make money.

“We just try to come in, and run the business the best way we can,” she said. “But, you can’t survive if you take no risks at all. All we can do is plan in this environment, making sure we do all the things to optimize running the firm.”

But, investors shouldn’t get too comfortable – the investment banking industry, and Wall Street in general, still have a long way to go before they can be called healthy. It’s not just the credit market problems that are an issue, it’s also the struggling U.S. economy and its potential to hurt other countries.

“Until we feel more certain about the worldwide economies, we don’t see things picking up dramatically,” said Goldman Sachs CFO David Viniar.