Forget the Bailout - Let the Market Adjust

[rayboyusmc]

Do not exaggerate investment banking’s death
By Philip Augar

Published: September 22 2008 19:45 | Last updated: September 22 2008 19:45

Did the eight days between Sunday September 14 and Sunday September 21, 2008 mark the death of the investment bank? Lehman Brothers went bust, Merrill Lynch gave up and Goldman Sachs and Morgan Stanley became regulated banks. It was part of the most catastrophic shift among investment banks since the event that created them, the Glass Steagall Act of 1933. In future, familiar terms such as the bulge bracket, the tag for elite US investment banks, will need to be redefined, end-of-year league tables will have a different look and clients and executives will need to adjust to new ground rules. But despite these changes and provided they survive the current crisis, it is likely that investment banks will exist as recognisable entities within their new organisations and investment banking as an industry will emerge with enhanced validity.

In one sense not much will change. The firms we regarded as investment banks had already become large financial conglomerates. Morgan Stanley ceased to be a stand-alone investment bank in 1997 when it merged with the consumer finance company Dean Witter. Goldman broadened away from investment banking when it expanded its trading and principal investment activities after it went public in 1999 and by 2007 less than 15 per cent of its pre-tax profits came from investment banking. The truth is that pure investment banks ceased to exist long ago. The absorption of some famous old names into banks and the redefinition of some others will make little difference to client service or market dominance. In respect of their performance as investment banks it is a matter of semantics whether such financial conglomerates include or exclude banking alongside their many other businesses.

The disruption in the market will, however, give an opportunity for other institutions to move into the investment banking space. In recent years there has been a convergence of financial services involving private equity firms, hedge funds and investment banks. Goldman Sachs, with its private equity and hedge fund businesses, is no more an investment bank than Blackstone, with its advisory experts and alternative investment funds, is a buyout firm. The blurring of such distinctions has already led alternative investment firms into investment banking territory. Firms such as Blackstone, KKR and others coming from the hedge fund end of the spectrum will no doubt see further opportunities as the existing investment banks readjust.

Much depends on the regulators’ response to the investment banks’ problems. The bail-out is so large and public opinion is so inflamed that new rules are inevitable. However, it is unwise to underestimate the industry’s powers of survival. The last time Wall Street was in the mire was between 2001 and 2003 when the dotcom bubble burst. President George W. Bush pledged “to end the days of cooking the books, shading the truth and breaking our laws”, but instead a patsy settlement with the investment banks was reached in 2003 that imposed trivial fines and minor rule changes but left their business model intact. What happened then was the industry argued that the investment banks were essential to oiling the wheels of global capitalism. They will be hard-pressed to use such arguments this time round but Washington and Whitehall are still pro-market and the investment banks, whether independent or part of larger financial conglomerates, may yet receive more lenient treatment than seems likely today.

Far from bringing about its downfall, the beating that the investment banks have taken in the market could even restore investment banking to what it once was. In the past decade advising clients on corporate finance and investment matters has been subsumed in a dash for profit involving principal investing and proprietary trading. In the hurly-burly of the bull market investment banks got mixed up between what they were doing for themselves and what they were doing for clients. While they are licking their wounds, the investment banks may well eschew some of the more esoteric structured finance products that have caused them such problems and refocus on what they used to regard as their core business. While we may have seen the death of the investment bank I would be very surprised if we have seen the death of investment banking as an industry.

FT.com / Comment & analysis / Comment - Do not exaggerate investment banking?s death

 

[DiamondDave]

"Forget the bailout"

That's what a lot of us have been saying all along

But... I did profit on the panic with the Fanny Mae stock over the past 24 hours

 

[Paulie]

Interesting times we live in when even the liberals are suggesting letting the market correct itself.

 

[editec]

I'm inclined to take very seriously, the warning of Barnake regarding outcome of doing nothing.

He mentioned something like " the worst economic circumstance in American history"

Now he could be wrong, but I rather doubt it.

I am NOT saying I like their plan, though.

I think it's probably gonna stink to be honest.

 

[Paulie]

I'm inclined to take very seriously, the warning of Barnake regarding outcome of doing nothing.

He mentioned something like " the worst economic circumstance in American history"

Now he could be wrong, but I rather doubt it.

I am NOT saying I like their plan, though.

I think it's probably gonna stink to be honest.

Politicians and bankers, and their buddies are all scum as you've never been shy about saying around here.

So why now all the sudden, would you be inclined to trust a man like Bernanke? He, and Paulson, and Bush, etc, have vested interest in this getting passed. Interest beyond what is best for us.

When there's this much fear being used, you have to question the motivation. You just HAVE to.

 

[dilloduck]

Politicians and bankers, and their buddies are all scum as you've never been shy about saying around here.

So why now all the sudden, would you be inclined to trust a man like Bernanke? He, and Paulson, and Bush, etc, have vested interest in this getting passed. Interest beyond what is best for us.

When there's this much fear being used, you have to question the motivation. You just HAVE to.

Amen--as if I'm going to trust what Bernanke says THIS time.

 

[OohRah Mama]

Why 700 BILLION dollars? Why all at once? Why right this minute? And for pete's sake - WhyTF no oversight/examination/court review?

If there was truly concern to fix things, Bush wouldn't be threatening to hold his breath and veto the whole damn thing if he doesn't get his way...

It's the same juvenile "I'm gonna take my ball home & tell my Daddy on you" tactic he did with funding for the Iraq war. There was no genuine concern for what our sons needed. Otherwise, he'd have gotten them exactly what they needed regardless of where it had to come from. More crocodile tears and finger pointing to draw attention away from the greed and stupidity.

 

[Paulie]

Like 700 billikon dollars is going to fix anything, anyway.

We're literally talking about TENS OF TRILLIONS. It goes far beyond just the bad debt.

It needs to be cleansed.

 

[Toro]

I'm all for letting the market correct itself, but many people here will be adjusted out of a job if the system collapses.

The investment banks were part of the problem but they are also symptomatic of a larger one. If liquidity dries up in the credit markets, we're fucked.

 

[Zoomie1980]

Why 700 BILLION dollars? Why all at once? Why right this minute? And for pete's sake - WhyTF no oversight/examination/court review?

If there was truly concern to fix things, Bush wouldn't be threatening to hold his breath and veto the whole damn thing if he doesn't get his way...

It's the same juvenile "I'm gonna take my ball home & tell my Daddy on you" tactic he did with funding for the Iraq war. There was no genuine concern for what our sons needed. Otherwise, he'd have gotten them exactly what they needed regardless of where it had to come from. More crocodile tears and finger pointing to draw attention away from the greed and stupidity.

That tactic worked for drilling. We now have unfettered rights to drill everywhere because the President threatened a veto of what the dems passed. Wanting to get some sort of energy bill out they caved. They'll do the same on this because they HAVE to do something even it is something they otherwise would never do.

Of course, after Obama wins, they can add court and congressional oversite to the Treasurer or just rescind the unsavory parts.

 

[editec]

Politicians and bankers, and their buddies are all scum as you've never been shy about saying around here.

I try to be a little more specific than that, but I get your point.

So why now all the sudden, would you be inclined to trust a man like Bernanke? He, and Paulson, and Bush, etc, have vested interest in this getting passed. Interest beyond what is best for us.

Because I understand how things unravel in situations like this.

When there's this much fear being used, you have to question the motivation. You just HAVE to.

I understand the motivation...they want to put the taxpayer on the hook for the bad paper, but allow the banks to keep the good.

this is the part of their plan that makes me think we should start forming firing squads, to be honest.

Fuck the banks, fuck the bond holders, too.

If we bail out those banks we OWN those banks.

That incidently, is how we dealt with this problem 70 years ago and the USA ended up doing quite well when we did.

Thos banks screwed up their capitalization, they have ZERO net worth because of it.

It is the duty of the government to step in and TAKE THEM OVER, including the assets that are working and the assets that are not working, too.

In the long run, if the government works with the homehowners, it can prevent this crash.

If they do what I think they're planning on doing the only people who aren't screwed are the people who caused the problem to begin with.

 

[Dirt McGirt]

Can you imagine how much more this would have been if we had switched from Social Security to privatized accounts?

I was for privatized accounts too.

I was losing money before but now I'm scared as shit to even look at my IRA and my TSP.

 

[editec]

Can you imagine how much more this would have been if we had switched from Social Security to privatized accounts?

I was for privatized accounts too.

I was losing money before but now I'm scared as shit to even look at my IRA and my TSP.

You know it took nearly thirty years for people invested in the market in Oct 1929 to break even, don't you? (and by break even I mean have the same amount of money, minus the loss in purchasing power to inflation, BTW)

We liberals were right when we pointed out that privatizing social security was a scam.

Nice to see that some of you are catching on to the fact that you've been lied to your whole damned lives.

 

[RetiredGySgt]

Politicians and bankers, and their buddies are all scum as you've never been shy about saying around here.

So why now all the sudden, would you be inclined to trust a man like Bernanke? He, and Paulson, and Bush, etc, have vested interest in this getting passed. Interest beyond what is best for us.

When there's this much fear being used, you have to question the motivation. You just HAVE to.

Wait, I thought all Bush's mney was in Oil? Wasn;t that the reason we invaded Iraq after all? To give Bush more money? Now why would he be worried about the housing market, it has nothing to do with oil at all?

You guys need to keep your stories straight, makes it better to pass off your idiotic statements to the unsuspecting.

 

[RetiredGySgt]

You know it took nearly thirty years for people invested in the market in Oct 1929 to break even, don't you? (and by break even I mean have the same amount of money, minus the loss in purchasing power to inflation, BTW)

We liberals were right when we pointed out that privatizing social security was a scam.

Nice to see that some of you are catching on to the fact that you've been lied to your whole damned lives.

We liberals? Aren't you always claiming you are not FOR Liberals when you bad mouth Conservatives?

 

[Care4all]

Wait, I thought all Bush's mney was in Oil? Wasn;t that the reason we invaded Iraq after all? To give Bush more money? Now why would he be worried about the housing market, it has nothing to do with oil at all?

You guys need to keep your stories straight, makes it better to pass off your idiotic statements to the unsuspecting.

He's gotta take care of his family, who have always been involved in the banking industry...

Harriman Brown brothers bank, Prescott Bush, and don't forget the Savings and Loan Scandal with his brother Neil Bush.

they need some place to put their oil money....hahahahahahaha!

 

[Paulie]

Wait, I thought all Bush's mney was in Oil? Wasn;t that the reason we invaded Iraq after all? To give Bush more money? Now why would he be worried about the housing market, it has nothing to do with oil at all?

You guys need to keep your stories straight, makes it better to pass off your idiotic statements to the unsuspecting.

Whenever Bush is on the spot, expect RGS to chime in with his scripted, tired responses. This one without even putting any thought into it.

RGS, I never made stupid accusations such as Bush going into Iraq for oil money. I certainly don't deny that I think it had to do with stabilizing the petrodollar, but that does not in any way, shape, or form mean I think he's stealing oil.

I'm on your side on just about all political positions except foreign policy. You would think you would just take what you could get and enjoy it, but no. Any chance to come in and suck Bush's dick, and you're right there.

Not to mention, your post makes no sense. No one was talking about oil. If anything, you should be outraged that he would be requesting that kind of absolute power without judicial review. But of course, you were conspicuously absent when that was being discussed here, weren't you?