David Ellis asks who might "fill the hole" in the investment banking world left by the collapse of Bear Stearns. The usual names get bandied about: Blackstone, JC Flowers and Citadel are the top contenders. All three have expanded into areas traditionally dominated by investment banks. And, as Ellis points out, in the not-so-distant past we've seen smaller firms--Lehman Brothers, for instance--grow into Wall Street powerhouses.

This kind of speculation is fun but it's important to remember that the brokerages and investment banks as we know them are largely a child of regulation that split commercial banking and investment banking. Many of those regulations have been reversed, which has helped lead to the consolidation we've seen in the past decade or so. What's more, investment banks may now face even greater regulation--and therefore higher barriers to entry--in the form of new regulations in exchange for access to the Federal Reserve's borrowing window. New capital requirements and leverage limits could reduce the profitability of investment banking, making it less attractive to new entrants. Ironically, the problems of the investment banks could wind up shoring up their market positions by stifling competition.

Perhaps the best case scenario is a that the coming regulatory schema could allow for a division of investment banks--with some opting for access to the Fed window in exchange for increased regulatory supervision and leverage-lowering capital requirements while others--perhaps up-and-comers like Citadel--opting to operate with more risk, more leverage and less oversight.

Filling the Bear Stearns void [CNN Money]

Few now believe that Northern Rock has any chance of continuing as an independent entity. Its executives are scrambling now to find a way to keep the rock floating while a deal to sell the bank or find a cash-rich partner can be put together.

Over the weekend, rumors began spreading that several hedge funds might bid on Northern Rock’s mortgage book, hoping to pick up the home loans at a significant discount. Chris Flowers, a former Goldman Sachs banker who now runs his own shop called JC Flowers, may be joining with Citadel and Cerberus to bid on the assets, according to a report in the Sunday Telegraph. may join with hedge funds Cerberus Capital Management LP and Citadel Investment Group LLC to split up the U.K. lender, The Sunday Telegraph reported, citing an unidentified person familiar with the proposal.

Flowers first came to public attention when he lead the consortium of new creditors that bailed out Long Term Credit Bank, and in the process made a hefty profit. JC Flowers led the consortium of investment firms and banks buying Sallie Mae. Citadel has gained a reputation for picking-up the assets of financially strained companies at a steep discount. Last year it bought Amaranth’s assets as that hedge fund collapsed and this year it bought assets from Sowood.

King of the dealmakers [Sunday Telegraph]