Looking at the fallout on Wall Street, there has been great change in the financial industry and, in turn, some unintended consequences. The hedge funds that once numbered over 7,000 (my unofficial estimate as I couldn’t find a substantiated number) are now pared down to around 3,000. Venture Capital has retreated to higher ground by doing larger deals and more 2nd, 3rd and 4th rounds into existing portfolio companies. Private equity houses have largely been untouched, but they are suffering from the lack of exits. Three of the largest investment banking firms have gone under or been absorbed by larger traditional banks.

What are the unintended consequences of this current market upheaval for the financial sector? The most glaring one follows the first law of thermodynamics (and I paraphrase) which portends that nothing is ever created or destroyed but merely shifts forms. The shift I am alluding to is the movement of talent and deals at these former large tier investment banking firms to new firms, or to more aggressive mid tier boutique investment banks or specialty M&A houses.

This shift takes time, which is probably a contributing reason for the lack of IPO’s, PIPE transactions or any other type of liquidity events for the private equity/VC market.

Need proof? According to Price Waterhouse Coopers (PWC) the VC activity for the first quarter is down to levels not seen since 1997. VC and private equity funds have to consider the types of deals and companies they are willing to invest in based primarily on the extended holding time. The only current exit for a privately backed company is through an M&A transaction and those deals will be done at increasingly smaller multiples as this is a buyers’ market. The events of the past 12 months have really made professional investors and funds alike re-examine their investment model, pricing and exit strategies. The unintended consequence of these events are a boon to M&A boutiques that concentrate on buyside representation or that have top tier clients looking for bolt on acquisitions.

The market needs time to readjust to the new landscape in the capital markets. Deals will be under much heavier scrutiny from all sides, the accountants, VC’s, private equity groups, valuation firms, investment banks etc. This shift in due diligence on transactions will be significant. There will be a natural growth of service providers bringing additional transparency to the “deal” business. A true and needed unintended consequence.

The IRS and the Treasury want to repeal the cell phone tax. The 1989 law says workers are supposed to count the value of personal calls on a a company cell phone as taxable income.

Really?

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The special purpose vehicles allow banks to stash things like asset-backed securities and other unwanted assets, reducing the amount of reserves they need to hold. The QSPEs also are a great way to hide losses.

Citigroup (C Quote) had $822 billion in QSPE exposure last year, according to its annual report. That’s tops among the four largest banks.