Tuesday, September 23, 2008

The end of an era...


The era of the Investment Banking model has come to an end.... according to Goldman and Morgan Stanley.
Bloomberg story located here

"The Wall Street that shaped the financial world for two decades ended last night, when Goldman Sachs Group Inc. and Morgan Stanley concluded there is no future in remaining investment banks now that investors have determined the model is broken."

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Another look from the Economist... about what the future may hold... and how perhaps the alternative of universal banks may be less tasty than they really are..
The end of an era... spawns perhaps new more hilarious risks...
"By these lights, universal banks appear to offer clear advantages to both shareholders and regulators. Yet some of those advantages are illusory. For regulators, larger, diversified institutions may be more stable than investment banks but they pose an even greater systemic risk. “The universal bank is the regulatory equivalent of the super-senior mortgage-backed bond,” says one analyst. “The risks may look lower but they do not go away.” And deposit funding is cheaper than wholesale funding in part because those deposits are insured. Measures to protect customers may end up allowing banks to take on risks that endanger customers.

For shareholders, too, the universal bank may offer false comfort. A model that looks appealing in part because assets are not valued at market prices ought to ring alarm bells. Sprawling conglomerates are just as hard to manage as turbo-charged investment banks. And shareholders at UBS and Citi will derive little comfort from the notion that the model has been proven because their institutions are still standing. If the independent investment banks survive, they will clearly need to change. But they are not the only ones. "

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An interesting addition is this article "The curse of public investment banks"
From the article:
"Companies like Lehman and, earlier, Bear Stearns saw going public as an excuse to take on more risk and act more recklessly, when in fact becoming a public company makes caution more important, since the margin for error is smaller, and the punishment for failure swifter.

This is the main reason why there are still big question marks hanging over the future of Morgan Stanley and Goldman Sachs. If you're a private hedge fund, like LTCM, you have to actually lose money in order to fail. If you're a public hedge fund, like Goldman Sachs, all that's necessary for your stock to go to zero is that investors worry that you might lose money.

In Lehman's bankruptcy filing, its assets significantly exceeded its liabilities; I think it's fair to say the risk of going bankrupt while solvent was not something which Dick Fuld historically worried overmuch about.

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