Will hedge funds be where all the leverage goes?

Nouriel Roubini thinks hedge funds are toast. A friend of mine in the business e-mails a different view:

RE: MS and GS becoming banks and the SEC's role: the SEC, if it has not permanently discredited itself w/ lack of action (perhaps not wholly its fault), may get a new lease on life by regulating hedge funds.

Think of the following chart, moving from "low leverage, stable funding" to "high leverage, unstable funding":

Asset managers----Insurance Companies----Banks----Brokerages----Hedge Funds

Interestingly, the prime brokerage business, a source of enormous fees, pitted brokerages against banks in the chase to finance hedge funds' levered bets for fees. Suddenly, when hedge funds realized all their securities could get tied up in bankruptcy proceedings, GS, MS, MER, etc. found their prime brokerage business fleeing to Deutsche, BNP, JPM, etc.

In fact, GS, MS, etc. in many ways were 2 businesses: big hedge funds (GS's prop trades make a majority of their revenues) AND financial market intermediation. So now, if the business you're going to be in is intermediation, you have to have more capital. So the new leverage chart of the US financial system is now:

Asset managers----Insurance Companies----Banks----Hedge Funds

Late next year (once fear of having no job dissipates and disillusionment w/ 2008's and likely 2009 compensation sinks in), I forecast there will be massive exodus of staff from GS, MS, and MER to hedge funds. Ultimately, brokerages were an unstable hybrid of securities intermediation and leveraged speculation; it is safer, and makes more sense, to have highly leveraged speculation take place in a hedge fund structure.