Wall Street whistles in the wind

The relationship be- tween Wall Street and Silicon Valley is right at the heart of the US stock market boom. Securities firms - and especially Goldman Sachs and Morgan Stanley Dean Witter - have made fantastic sums overseeing the great internet bonanza, first by taking companies public at high stock market valuations and then by advising those companies on what to buy with their highly valued stock.

Silicon Valley companies may have benefited more than any industry in history from Wall Street's ability to get the whole of American capitalism moving in the same direction. Wall Street has a gift for organising America's greed, and in the late 1990s it has organised this around the internet. Some combination of heavy breathing by stockbrokers and heavy suspension of disbelief by analysts has helped to turn what might have been a nice little growth spurt into one of history's great money grabs.

And so, on the surface at least, Wall Street and Silicon Valley seem lucky to have found each other. But below the surface the marriage has problems. It turns out that the West Coast technologists and the East Coast financiers didn't know one another as well as they should have.

The problem is that Silicon Valley has been groping its way into Wall Street's line of work. The internet specialises in replacing intermediaries who charge more than they are worth. Amazon.com replaces bookstores, Priceline.com replaces travel agents, and Bloomberg.com replaces the stock quotes in the financial journals.

To a West Coast technologist, the more an intermediary is paid, the more can be made by replacing him; which leads the West Coast technologist to think about Wall Street. The first Wall Street intermediary who will be replaced, of course, is the ordinary stockbroker. The market boom has helped to mask the underlying trend in the market away from human brokers towards electronic ones. Every day some newly educated investor decides that a stockbroker's advice is not worth paying for.

The analyst is the second kind of intermediary - an intermediary in the distribution of information - who will be displaced by new technology. Without stockbrokers, the analyst finds himself preaching to empty pews; as the broker fades from the financial scene, the analyst will fade with him.

The selective disclosure mess, which the Securities and Exchange Commission has more or less promised to clean up, is just one sign of his growing desperation. The analyst scrambles for any informational advantage because, deep down, he knows he needs it to survive.

The coming shake-up in the brokerage business suggests a larger shake- up in Wall Street. Firms such as Merrill Lynch that depend on their stockbrokers are threatened. Morgan Stanley made a colossal mistake when it bought Dean Witter Discover in the belief that it needed hordes of brokers to peddle products created by investment bankers.

Goldman Sachs, which purchased a 22 per cent stake in Wit Capital Group, an on-line broker that helps companies sell stock on the internet, seems better positioned to create the investment bank of the future. This will consist of a smaller number of hot-dog deal makers wrapped in a thick warm roll of technology.

For this reason, the hottest dogs on Wall Street probably don't feel threatened by the demise of the customer's man. Even the people atop Morgan Stanley probably feel somewhat insulated from the internet boom. If the fortunes of their firm suffer because it stupidly bought a lot of stockbrokers, they can always extract their value from the market by moving to another firm.

But it seems more likely that they are ultimately as threatened by the internet as the ordinary stockbroker. If you can replace one of the people who stands between borrowers and lenders you can replace them all. Practically no one who uses the services of top investment bankers believes they are worth what they are paid.

Investment bankers belong to the blessed class of people who are paid whatever they can get away with charging. But even if their corporate customers wished to pay them their huge fees they will be prevented from doing so by their shareholders, once there is an alternative.

There are, of course, barriers to the internet taking over the market for initial public offerings: SEC regulations, investor habit, the desire of corporate CEOs to blame someone when things go wrong. But it is a short step from selling stocks over the internet to raising money for a company over the internet, and then to raising all money that way.

Which is to say that it's only a matter of time before computers stand between borrowers and lenders. And where will that leave Wall Street bankers, except with no place to stand?

n Michael Lewis, author of `Liar's Poker', `The Money Culture' and `Trail Fever', writes for Bloomberg News.