As large commercial banks continue to use their ability to lend credit for the purpose of dominating the ABS league tables, investment banks that are not able to provide lines of credit to issuers are having difficulty matching the volume of business that the likes of Citi/Salomon Smith Barney and J.P. Morgan Chase can engender. In response to this overall trend of "pay to play" occuring in debt underwriting, Standard & Poor's released a report last week revising its outlook to Negative for Morgan Stanley, Goldman Sachs and Merrill Lynch.

Not coincidentally, this is particularly relevant for the ABS market, as the aforementioned firms - none of them aligned with a major credit provider - have gradually fallen in league table rankings after being top-ten contenders throughout the 90's. Both Morgan Stanley and Goldman Sachs fell out of the top ten for year-to-date 2001, and Merrill dropped to No. 8, according to Thomson Financial.

"The world has changed for institutional investment banks," said the S&P report, written by Tanya Azarchs. "No longer can they always expect to merely pitch their underwriting prowess and advisory expertise to win attractive fees from their corporate clients...These industry developments, which S&P believes will persist and grow, occurred when large corporate banks - notably JPMorgan and Salomon - reached a level of credibility in the underwriting business to be able to influence the way transactions got done."

While Azarchs is referring to a broader trend in debt underwriting, the asset-backed component cannot be denied; the growing strength of primary lenders such as Bank of America, JPMorgan and Citicorp. is evident, as these banks use their balance sheets and liquidity to lure clients.

However, Goldman Sachs, which ranked No. 14 in the 2001 year-to-date ABS league tables, believes that volume of deals and league table rankings do not always reflect a firm's profitability or importance. Instead, the bank insists that its aptitude in ABS innovation and technology particularly in the areas of CDOs, rate-reduction bonds and risk securitizations - has made it a constant force in ABS, with the "intellectual capital" to remain vital.

"It is hard for us to deny that the [commercial] banks are using their credit extension product as a tool for winning business," said Phil Darivoff, co-head of debt capital markets at Goldman. "Though our firm does not have a league table orientation, we do have an orientation towards excellence. We would rather be the best than the biggest, and we do not want to sacrifice excellence in any way in a search for trying to look like we're big."

Contrary to rumors on the Street that the Goldman ABS department is washed up, Darivoff and managing director Dan Sparks insist that the group's head count has probably doubled since the firm's ABS league-table heyday in the mid-90's. The department has simply been organized differently, they said. Last year, the ABS group was folded into the portfolio credit businesses in the mortgage department so that activity could be concentrated in that client area.

Still, other market observers say that the S&P revision released last week is a sign of things to come.

"If I'm a Lehman, Goldman or Morgan Stanley, I've got to be thinking that I don't like any of these trends," said one ABS veteran.

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