Bear Stearns? Gone. Lehman Brothers? Gone. Merrill Lynch? Gone. What next? I had the pleasure of hearing Nouriel Roubini speak at a planning dinner for the 2009 Money:Tech Conference, and he more than a few thoughts on the topic. I respect Nouriel and his analytical thinking a great deal, and he and I have had similar views of the inevitable credit-driven storm dating back quite some time. But on the issue of what will happen to the surviving investment banks, and what should happen, he and I have differing viewpoints.

According to Nouriel, the "Axe of the Apocalypse" as I like to call him, Morgan Stanley and Goldman Sachs are close behin Lehman and Merrill. His argument? Investment banks are largely financed with overnight funding, creating a massive asset/liability mismatch, and are heavily levered. In the wake of Lehman's collapse, a run on the investment banks will continue, pushing them into the arms of banking acquirers with large, stable deposit bases. This will create a universal bank that is better positioned to weather the market turmoil. While Nouriel has a valid argument, I believe his view is simply wrong, strategically, tactically and ethically.

The problem with the investment banks is that they've generally financed themselves for the good times, not the bad times. This means an excessive dependence on short-term funding and high leverage. This generated high ROEs in good times, supporting large payouts for employees and shareholders alike. But when times turned bad, compounded by poor risk management and mind-bogglingly stupid investment decision, such a capital structure has come back to haunt many a firm. Nouriel says solve the problem by joining investment banks and commercial banks, and using core deposits as a vehicle for extending the duration of the investment bank's liability structure. I say no. I say that Goldman Sachs and Morgan Stanley should materially alter their financing strategy, lengthening duration by issuing different tranches of preferred stock, subordinated debt and term debt, de-levering in order to weather the storm and accept lower ROEs in the process. This also means that these firms, their culture and their employees won't be destroyed, which is what invariably happens when investment banks do M&A deals.