US investment banks are under siege. Competitors have long tried to force open the doors to the lucrative world of US investment banking. In 2000, when Congress repealed the Glass-Steagall Act, which prevented banks from offering both commercial- and investment-banking services, the final barrier to integration fell. Today, commercial and universal banks, such as Citigroup and J. P. Morgan Chase, as well as European-owned banks, including Credit Suisse First Boston and UBS, are a formidable competitive threat.

Spurred on by the fact that investment-banking services are far more profitable than commercial-banking ones (Exhibit 1), universal and commercial banks are grabbing an increasing share of the investment-banking market. Their strategy for winning new business in it is often to give clients credit facilities as well—something that investment banks traditionally haven't done.

Still more worrying for investment banks is the fact that some clients now demand credit in return for M&A and underwriting business. In the spin-off of the microelectronics unit Agere Systems, for example, Lucent Technologies did business only with banks that were willing to provide credit too; J. P. Morgan Chase and Citigroup each committed as much as $1.25...