New banks may be born out of wreckage

And regulations for banks are likely to change and may become more onerous.

"We're in uncharted territory when it comes to the future of regulation," said Jeffrey Morfit, a founding partner and chief executive of Lighthouse Financial Group, a boutique bank and trading firm launched in 1999.

But the rising cost of rescuing large banks such as Citigroup Inc -- which has received $45 billion in U.S. government funds -- leaves smaller players that have not needed bailout funds looking more attractive to regulators, as well as clients.

"Too big to fail is an enormous problem," said Federal Reserve Chairman Ben Bernanke in testimony to the House Financial Services Committee on Tuesday.

And even with the obstacles to starting a new business, many bankers may take the plunge for lack of a better option.

Close to 350,000 job cuts have been announced in the financial sector since August 2007, according to outplacement firm Challenger, Gray & Christmas.

Well-known banking heads and deal makers such as Alan Schwartz, former Bear Stearns chief executive, and John Thain, former Merrill Lynch chief executive, have yet to resurface in new roles. But they could follow the trail blazed by other former banking luminaries to a boutique start up.

Already, Frank Quattrone, the investment banker emblematic of the dot com era, and Ken Moelis, formerly president of UBS Investment Bank, have carved out major roles for themselves.

Quattrone's company is now opening an office in Europe and Moelis' bank was among those advising Anheuser-Busch Cos on InBev's $52 billion offer last summer.

"If these start-ups get smart people and good capitalization with transparent structures, then I think that's going to be the new investment bank going forward," said Anthony Sanders, finance professor at Arizona State University.