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Changing Of The Guard In Banking

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A new generation of bankers has taken charge of three of the biggest financial firms to survive the industry apocalypse.

Will

James Gorman James Gorman , Brian Moynihan Brian Moynihan and John Stumpf John Stumpf be able to do any better than their predecessors?

Facing pressure from regulators, politicians and a public eager to chasten them for past misdeeds, bankers are in a cautious mode. Consumers already face rising interest rates on loans, assuming they can get them, and an abundance of account fees. Among many popular consumer banking offerings expected to fall by the wayside: free checking, as banks try to make up in fees what they are losing in bad loans.

Instead banks will focus more on traditional commercial banking, rein in risk-taking, and get smaller by divesting businesses that don't add a lot to the bottom line. Regulators seem to be pushing them in this direction. Congress is debating whether to reverse some of the late-1990s laws that repealed the Great Depression safeguards that prevented commercial and investment banks from intermingling.

Such a repeal would undo much of what the government has been pushing the industry into over the crisis: pairing weak investment banks with bigger, relatively stronger commercial banks.

Add to these changes a new generation of bank leaders. As of Jan. 1, Morgan Stanley and Bank of America have new chief executives and Wells Fargo has a new chairman who is also a relatively new chief executive, all successors to longtime bankers who are heading off into retirement.

At Morgan Stanley, James Gorman takes over from John Mack, who is staying on as chairman. At Bank of America, Brian Moynihan takes over from Kenneth Lewis, while Walter Massey continues on as chairman. And at Wells, John Stumpf takes the chairman title from Richard Kovacevich. He succeeded Kovacevich as chief executive in June 2007.

The changing of the guard comes after a tumultuous two years for the industry during which Bear Stearns, Lehman Brothers , Merrill Lynch and Wachovia, among others, disappeared as independent companies. Of the 10 big commercial and investment banks that existed before the financial crisis began in 2007, only JPMorgan Chase and Goldman Sachs have the same chief executives as before. Citigroup named Vikram Pandit chief executive in late 2007 as the crisis got under way.

Technically there aren't even any big independent Wall Street firms anymore. Morgan Stanley and Goldman ran for the cover of bank holding company status in the fall of 2008, right after Lehman succumbed to bankruptcy and Merrill forced itself into a shotgun marriage to Bank of America.

Some question whether Wall Street has truly learned its lesson, or whether a return to stability is leading to complacency. In the early years of the last decade, the markets were in a state of collapse after a bubble in technology and telecom stocks. Seventeen of the 20 biggest corporate bankruptcies ever came in the last decade. In the financial sector, according to analysts at CreditSights, nine of the biggest 20 bankruptcies came in the last two years.

Since the 1980s, Wall Street has waxed and waned through derivatives scandals, trading blowups, emerging markets lending disasters, real estate bubbles and underwriting frenzies, CreditSights notes. "What transpired since does not prove reassuring to the concept that behavior is easy to modify."

That attitude is just what the new generation of bankers now has to fix. Bank of America's Moynihan, taking over from Lewis after the latter suffered heavy criticism for his stewardship of the company in the last year, put out a conciliatory message Monday. He was quoted in a speech in North Carolina saying, "We as an industry cannot avoid the simple fact that we caused a lot of damage, and we have to help make sure it doesn't happen again."

The problems aren't entirely over, though. In the waning days of December, Bank of America, Wells and Citi managed to pay back $90 billion they borrowed from the government under the Troubled Asset Relief Program, joining Morgan Stanley, JPMorgan and Goldman in getting out from under the government's thumb.

Wells expects losses from consumer loans to accumulate this year. It took on billions of new consumer mortgage and other loans when it bought a faltering Wachovia Corp. last year. Bank of America sees loan losses stabilizing, but now has to restore confidence that it can return to strong profits.

Analysts estimate Wells could lose $100 million, or 2 cents a share, in the fourth quarter and Bank of America could lose $4 billion, or 51 cents a share. Morgan Stanley is estimated to be on track for fourth-quarter profits of about $700 million. Earnings begin coming out in mid-January.

Like the last real estate lending crisis 20 years ago, the new generation of bankers is likely to learn from the mistakes of their recent predecessors, or so one would hope, says Richard Bove, an analyst at Rochdale Securities. "You can be sure that none of the new CEOs will do that again."