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Four analysts and top management from twelve sector firms examine the brokers & asset managers sector in this special 57-page Brokers & Asset Managers issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info538.htm

TWST: Lauren, what happened to earnings for the brokers in the second half of 2001, and how do they look for the first quarter of 2002?

Ms. Smith: If we look at the second half of 2001, the operating environment progressively deteriorated relative to the first half, particularly in the equity markets, which was compounded by what is typically the seasonally slower period for the brokerage sector. Then there was September 11, which needs to be viewed as an exogenous event that disrupted virtually every business and weighed on some firms more than others. We’ve seen an improvement in the recently reported first quarter results relative to the fourth quarter, fueled by a surge in fixed income businesses, given lower interest rates and a steep yield curve, with strength witnessed across most, if not all, products. From where we stand now in the early stages of the second quarter and moving out into the second half of this year, I think the first quarter was almost as good as it gets for the fixed income business, with most firms posting record results in fixed income capital markets. Activity levels appear to be holding in there, and I guess it really remains to be seen whether we can mirror that kind of performance with the long end of the yield curve creeping higher and some probability that the Fed raises rates over the next several months. I think we are still in a relatively tenuous equity environment from an origination standpoint, and M&A activity still looks pretty bleak. So I think as we transition into the second half of the year, we will see that we’ve probably seen the worst, but I don’t think we’re going to see some radical snap-back in top-line growth or earnings with the equity markets still choppy and M&A still weak.

TWST: Let me ask you the next question then, Lauren. Is there an ongoing role for the specialist boutique?

Ms. Smith: Yes. The traditional boutiques were gobbled up during an unprecedented consolidation wave and now we are left with the dichotomy of franchises: you are either really big or you’re really small and there are very few of the in-betweens. So I think a lot of the middle of the ground business gets lost in the fray, and that presents a real opportunity for the smaller boutiques to move upstream. I think there is an opportunity for some of the smaller firms, that penetrate specific industries and have a very well-defined niche focus, whether it’s financial institutions or healthcare, to prosper. I also think there could be a wave of emerging technology boutiques because the big firms have really backed away from that business and have pared back and de-emphasized those sectors. I think that, going forward, there could be some void left for smaller firms to pull together people, skill sets, and contacts and make a go of the boutique model again.

TWST: Is there one, if there were to be a catalyst or a pullback, that could become attractive?

Ms. Smith: At this juncture, given all that we talked about, in terms of the environment, I would favor the capital markets-oriented firms. I think that’s where the leverage is. I think we’ll see a recovery there before we will in the retail business. So looking at the names that we cover currently, that would not include a Merrill or a Morgan Stanley but could potentially favor Lehman (NYSE:LEH), Goldman or Bear. In the past, we’ve recommended Lehman, and I still think there are probably legs to that story. We would note their successful sea change and business diversification efforts and the focus on cost management and all those things that should help them close the valuation gap relative to some of their larger competitors. So that would be the name, under the right circumstances and valuation parameters, that we have liked in the past and could probably like again.

This special issue includes:

1) Brokers & Asset Managers - In an in-depth (12,000 words) Analyst Roundtable, Mark Constant, Senior Vice President/Senior Equity Research Analyst at Lehman Brothers, James F. Mitchell, Managing Director, Securities Brokerage & Banking at Putnam Lovell Securities Inc., Lauren A. Smith, Senior Vice President in the Research Department at Keefe, Bruyette & Woods, Inc., Joan Solotar, Managing Director at Credit Suisse First Boston Corporation, examine the outlook for the sector including outlook for IPOs, retail investors and share specific stock recommendations.

2) CEO interviews (average 2,500 words). Top management of twelve sector firms examine the outlook for their firm and the sector.