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TWST: Let’s begin with a look at the convergence between investment banks and money center banks. Why are they now considered together within your coverage area?

Mr. Mitchell: If you look back over the last few years, starting from the big banks’ perspective, a large part of their business has been intermediated by the investment world. On the retail side, you’ve seen mutual funds and retail brokerage take share of wallet from the retail deposit-taking business of the banks. On the wholesale side of the business, you’ve seen capital markets and underwriting infringe upon the corporate lending side of the equation. At the same time, spreads have come down in commercial banking as banks compete on price, in order to capture more volume to offset some of the business lost to the investment banks. As this disintermediation occurred, the big banks saw that the most profitable parts of their customer relationships — underwriting and asset management –- were being captured by the investment banks. That led to a wave of consolidation. As the Fed loosened its “10% rule” — by increasing to 25% the amount of investment banking revenue as a percentage of total bank revenue allowed — that opened the door for more acquisitions of brokers by banks to take place. The large foreign banks, particularly the Swiss and German banks, saw the same trends, and saw the returns in their commercial lending business as pretty subpar relative to what they saw in the investment banking world.

TWST: Who do you have at the top of the list today? Give us a quick summary of what you see as your expectations for them over the next 12 months.

Mr. Mitchell: In the brokerage space I really like Lehman Brothers (NYSE:LEH). Near term, their exposure to the fixed income markets is going to benefit them. They have an excellent management team that really knows how to execute a growth strategy. They are in the middle of this five-year growth plan. They increased headcount 27% last year, but at the same time were able to increase margins. A lot of the people they added last year were investment bankers from DLJ and CS First Boston, who didn’t really produce last year, but are coming on line in 2001. Even though we’re in a tougher environment, the increased productivity from the new hires should be a benefit to their investment banking margins this year. You’re already seeing it in the results: year-over-year announced M&A volumes are down about 50% in the market in general, but Lehman’s announced volumes are actually up 15%. When you’re in this growth phase and are executing well, there’s a bit of an offset, and Lehman is going to show that this year by outperforming its peers.

TWST: For the investor, where do these companies fit into their overall strategy today?

Mr. Mitchell: We’ve been talking about the near term, but if you look at the investment banking business, it is a very long-term positive fundamental business. There are a lot of structural changes going on in Europe and elsewhere overseas, including privatization and individuals moving into the market, which is a trend that has been taking place in this country over the past 10 years. You’re getting more liquidity from what I would call the demand or money management side. You’re also seeing, as more and more countries open up their markets and privatize industry, the supply side and liquidity increase in these markets. There are more companies looking to go to the capital markets to raise funds, as opposed to going to their local bank to raise funds. That’s a long-term positive trend in this industry.