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Two years ago this month, Wall Street emerged from an unforgettable weekend shell-shocked and humbled.

In a matter of months, some of the industry’s most respected names, including Lehman Brothers and Bear Stearns, had collapsed in spectacular fashion. Others surrendered their independence, striking shotgun marriages with stronger rivals to stave off a similar fate. Dozens more clung to government support.

Predictably, the fallout was swift and brutal. President Barack Obama and the US Congress pushed through sweeping legislation that, depending on how regulators interpret the statutes, may yet set Wall Street on a new course. The economic slump that followed the crisis, along with banks’ stunning return to profitability last year, triggered a public furore that still smoulders.

One consequence of the crisis is that it has left the survivors bigger and more powerful than they were before. Institutions such as JP Morgan Chase, Goldman Sachs and Bank of America are almost ubiquitous: from commodities trading and retail brokerage to credit cards and cash management, there are few financial services markets that they do not dominate.

The massive scale these banks now enjoy will make it harder than ever for smaller, scrappier institutions to compete. Yet Wall Street steps gingerly into this new era still clouded by outrage at the events of the crisis.

“There is a disconnect between how we, as a firm, view ourselves and how the broader public perceives our role and activities in the market,” Lloyd Blankfein, chief executive of Goldman, said in May during the bank’s annual shareholders’ meeting. “I recognise that this is an important moment in the life of this institution.”

The capital markets revival that set in last summer has faded as renewed concerns for the global economy forced many investors to the sidelines. The dearth of client activity is expected to lead to a second straight quarter of lacklustre results from trading – among the industry’s most dependable profit engines in the past decade. Last month, Meredith Whitney, a closely watched banking analyst, predicted that Wall Street would shed 80,000 jobs globally in the next 18 months amid a prolonged revenue slump.

Even though Congress has passed landmark financial reform legislation, and the Basel committee has unveiled international bank capital rules, institutions still do not know how regulators will interpret these new structures.

“Although Congress has attempted to lay the foundation for long-term financial stability, most of the actual details and implementation of many key provisions of the [Dodd-Frank financial reform act] are reserved for regulators to divine in the coming months,” attorneys at Jones Day, the law firm, wrote last month in a white paper on the legislation. “The act is essentially a 2,300-page introduction to an eventual new financial regulatory environment – an incomplete road map for the regulatory financial future of the US.”

The US measure – which, the lawyers note, calls for 240 rule-making processes and almost 70 studies by 11 separate regulators – has left Wall Street no choice but to retreat from some businesses. So-called proprietary trading, or betting the bank’s own capital on transactions where there is no client role, will no longer be permissible for large banks. As regulators hammer out new rules, more of the banks’ businesses may lose their lustre, becoming less profitable even if they remain within the law.

Many bankers have already pledged to renew their devotion to clients, and taken steps to build out trading desks and coverage teams that address their needs. Morgan Stanley, for one, has already shifted resources to a wealth-management business that promises to leave the bank less dependent on more volatile securities businesses.

“Firms tend to react to a declining trend fairly quickly,” says Charles Geisst, professor of finance at Manhattan College and the author of several books on Wall Street. “They see activity slowing down. But they tend to implement slowly. They will gear themselves up. They’ll get staff together and wade into it.”

Banks have also fortified their risk-management systems, assisting risk officers in guarding their companies’ capital while investing in technology to help spot previously unforeseen exposures.

There is little doubt that in the coming years, Wall Street executives and their regulators will be tested once again. Bubbles will form and burst. “We need to ensure that nothing like the financial crisis of 2008 ever happens again,” James Gorman, chief executive of Morgan Stanley, wrote this year in his annual letter to shareholders.

But while the unknowable causes of the next crisis may have little in common with the last one, the impulses that led to the events of the past three years will endure.

“You need to have the roulette tables running,” says Mr Geisst, who argues that the financial services industry’s massive investment in technology will keep it a step ahead of the regulators.

And if the past century of financial history is any guide, it may take more than the spate of reforms that will emerge in the next several years to keep the industry from self-destructing.

“Long-run salvation by men of business has never been highly regarded if it means disturbance of orderly life and convenience in the present,” John Kenneth Galbraith, the economist, wrote more than half a century ago in his classic autopsy of the Wall Street crash of 1929. “So inaction will be advocated in the present even though it means deep trouble in the future ... It is what causes men who know that things are going quite wrong to say that things are fundamentally sound.”

Copyright The Financial Times Limited 2018. All rights reserved.

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