Boston assesses financial fallout

Money managers gird for change in Wall St. landscape

Security was in place at Lehman Brothers on High Street yesterday before the 158-year-old investment bank filed for bankruptcy. (George Rizer/Globe Staff)

Boston's shaken money managers are struggling to gauge how the city's financial sector will be reshaped by yesterday's Wall Street meltdown.

"No one ever thought they'd see a day like this," said Michael A. Greeley, managing general partner at IDG Ventures in Boston, who worked on Wall Street early in his career. "To think that two of our largest investment banks are now history is unfathomable."

The crisis could mean jittery investors, more stringent regulations, tighter credit, and, potentially, job losses at the local offices of Lehman Brothers Holdings Inc. and Merrill Lynch & Co., which together employ as many as 1,000 across Massachusetts.

"When the dust settles, there are going to be some people let go," said Scott M. Black, president of Boston investment firm Delphi Management Inc. "The real impact will be a shrinkage in available credit. Borrowing rates for individuals and corporations are going up."

But business and government leaders were hoping the Boston area will escape the brunt of the fallout. Many of Boston's financial giants are "asset managers," such as mutual fund, private equity, and wealth-management firms, thought to be somewhat insulated from the effects of the Lehman collapse and the fire sale of Merrill, industry insiders said. More vulnerable are the New York investment and commercial banks that are deeply entangled with Lehman and Merrill, and weighed down by risky portfolios of mortgage-backed securities.

"Fortunately for us, Boston is not known primarily as the banking or investment side of Wall Street," said Samuel L. Hayes, finance professor emeritus at Harvard Business School. "It's stronger on the money-management side, which is a more stable business."

Still, money may flow out of mutual funds, which anchor Boston's financial industry, as spooked investors switch from stocks to bonds and cash. And, if the US financial brand is tarnished, affluent foreigners could pull money out of Boston investment firms.

For venture capital and private equity houses, tighter credit in the wake of the crisis could further slow the pace of deals - and delay the recovery of an initial public offering market that's been frozen for the past year. Some firms in Boston, moreover, may have to cancel deals in which Lehman was a partner or unwind financial transactions in which Lehman acted as a broker or insured loans on bonds.

"This contagion continues to spread," said Peter Falvey, cofounder of Revolution Partners, a Boston investment bank that had a deal-sharing arrangement with Lehman. Falvey said he didn't expect his company would be financially hurt by Lehman's demise but was more concerned about the overall financial environment. "We can't see the bottom right now," he said. "That's the most worrisome thing."

In many cases, the extent of the fallout wasn't clear yesterday. Massachusetts pension fund officials said they were still calculating losses on investments in Lehman Brothers. And the state treasurer's office, anticipating Lehman's problems, said it had shifted control of $850 million in variable bonds last Friday from Lehman to Goldman Sachs Group Inc. and Morgan Stanley.

Merrill's acquisition, meanwhile, figures to take some capital off the street, which could drive up the cost of borrowing. When Merrill and Bank of America are combined, "I don't expect them to have the same level of capital" each had before the merger, warned Kevin M. Cronin, investment chief at Putnam Investments in Boston.

The worsening credit crunch is also likely to pinch the broader state business community. "What we're going to see is a period of time where we have a lot of financial paralysis," said David Begelfer, chief executive of the Massachusetts office of the National Association of Industrial and Office Properties. "This just throws another monkey wrench into an already fragile financial machinery."

Although the Wall Street implosion was the talk of nervous financial executives gathered in corner offices and boardrooms around Boston yesterday, downtown in Post Office Square some financial district workers had a more fatalistic attitude. "Businesses will go out of business - it's what they do," said Poorna Dharmasena, 27, an employee of the PricewaterhouseCoopers accounting firm.

But some industry professionals said there could be opportunities for Boston in the Wall Street implosion. The takeover of Merrill Lynch by Charlotte, N.C.-based Bank of America Corp. may signal a dispersal of investment banking from New York to other financial centers. "That could create an opening for Boston," said Whitney L. Johnson, a Wall Street veteran who is president of Boston hedge fund Rose Park Associates.

The city might capitalize if Bank of America merges Merrill's wealth-management operations in New York into its own Boston-based business, a decision the company has not yet made. "We see the acquisition of Merrill as being a potential positive for Massachusetts," said Dan O'Connell, secretary of housing and economic development for the Commonwealth.

O'Connell said he did not expect the Merrill takeover or Lehman bankruptcy would result in any immediate job losses in Massachusetts. Merrill Lynch said it has about 700 employees in the state, while Lehman wouldn't disclose its state payroll. Merrill has 9,666 registered broker dealers in the state, and Lehman has 855, but not all of them are based here, according to the secretary of state's office.

Over the past year, the number of financial services jobs in the state climbed from 180,800 to 181,100, while slipping from 155,600 to 155,300 in Greater Boston, according to figures from the Massachusetts Executive Office of Labor and Workforce Development.

"Up until this point, we've been remarkably stable," said Paul Guzzi, president of the Greater Boston Chamber of Commerce. "But I don't think any of us fully knows where this is going to end up."

Boston might also benefit from a brain drain from Wall Street, where tens of thousands of high-paying jobs are expected to disappear, suggested Andrew W. Lo, director of the Laboratory for Financial Engineering at MIT's Sloan School of Management in Cambridge. "One potential positive is there's going to be a lot of people looking for jobs, and that could bring some talented people to Boston," Lo said.

Robert Weisman can be reached at wesiman@globe.com. Globe staff reporters Beth Healy, Casey Ross, and Ross Kerber and Globe correspondent Jonnelle Marte contributed to this story.