Weekend reading: What might Wall Street become?

East Coast is experiencing a heavy snow storm. Washington and Philadelphia metro areas got more than 20 inches. Power is down for some areas. My area is relatively light. We had about 5-6 inches today, but more is on the way. Not very enjoyable, for sure. Can't really go out, so I have more time to read.

I have a few things to look into this weekend, but let's talk about Wall Street, because Barron's has a cover story about Wall Street's Rising Stars. No, it's not the top-prized bankers in the remaining bulge-bracket firms like Goldman, JP Morgan, etc., but the up-and-coming small- to mid-size banking and trading firms that are filling the void left by the collapse of firms like Lehman and Bear Stearns. These much smaller outfits saw a great opportunity amid the turmoil between 2007 and 2008, and they acted on it by recruiting talents away from the big firms that they normally would not have a chance to do.

It was step-up time. And these smaller firms are flying under Washington's radar screen. They don't have the legacy problems the big guys have: Look at the public outrage on bonuses.

A good friend of mine who used to work at Bear has been telling me how tiring it has become at JP Morgan, and lamented about the days when Bear was just about the right size for a senior professional like him. Perhaps opportunities are on the way, if they have not already arrived.

During the credit crisis, Washington took control. But even after the firms paid back the bail-out money, the politicians still don't want to let go of their heavy hands. Wall Street has become a very political place. Well, it is so only if you're too big.

The reality is, for the economic recovery to take hold, financial services will need to come back in a big way. Credit needs to flow more, and more freely, to the most productive places and the most credit-worthy individuals and businesses. The shadow-banking system will somehow need to be repaired or replaced. You can curse about CDS and CDO, but they play an important economic function by redistributing credit risks. The issues for regulators are probably not so much about limiting size and lines of businesses, but more about measuring and regulating the aggregate risks, and promoting competition.

The "too-big-to-fail" problem can't be solved by the "Volker Rule." Size per se is unlikely the issue, the  concentration of credit risk is. Concentration of risk can happen within a small firm too, for instance, LTCM. By breaking up the remaining banks, regulators may very well get more lost as to where the risks are actually concentrated.

Regardless of what the politicains are going to do, Wall Street is rebuilding itself. Yes, the "fat cats" must get leaner and serve the shareholder interests better. But, that should be done via more competition and shareholder activitism.

The age of more diverse players on Wall Street should be good for the economic recovery and good for the industry. May be.