That is what I’ve been hearing lately. Are you telling me that the independent Investment Bank was able to thrive from the early part of the 20th century through the Great Depression, WWII, and end in the year 2008? Less than two years ago they had record profits. I understand they have trouble with their mortgage assets. But shouldn’t they be fine given they weather the storm currently in their portfolio?
same question here, or is it that when they need billions more of equity to cover losses they cant survive because of lack of funding ?
Independant investment banks were not levered 30-40x back in the day. That’s the heart of the problem.
The deeper funding facilities of a solid balance sheet bank makes deal financing cheaper in both good and bad times, but in bad times the potential losses at IB’s can quickly deteriorate profits for the bank. Look at UBS, they tried it with poor results. It’s kinda the catch 22 right now
LEH has a ROE of around 20% the last three years, but was leveraged 28:1, or somewhere around that number. Take a look at WMT, same 20% ROE with leverage a fraction of that. It’s a risk reward thing, sure you can be super profitable but at what level of risk, I guess we just found that out.
When did they start leveraging themselves so high? What was the typical leverage say in 1988, 1998?
Wow. I guess that’s why looking at ROA is useful too.
The model of using high amounts of leverage to facilitate proprietary risk positions and stockpiling illiquid assets in support of an originate to distribute model is probably dead. But providing corporate finance advisory, capital raising services, and using balance sheets judiciously to facilitate client trading is still a viable model. It may not generate the returns that the equity markets have gotten used to out of the IBs, however. Or the bonuses. MS and GS might not have time to adapt to the new reality without drastic action though. The market is extremely fickle, remember just a few short months ago the market was screaming that the universal banking model was fundamentally broken.
Big Nodge Wrote: ------------------------------------------------------- > The model of using high amounts of leverage to > facilitate proprietary risk positions and > stockpiling illiquid assets in support of an > originate to distribute model is probably dead. > But providing corporate finance advisory, capital > raising services, and using balance sheets > judiciously to facilitate client trading is still > a viable model. It may not generate the returns > that the equity markets have gotten used to out of > the IBs, however. Or the bonuses. > > MS and GS might not have time to adapt to the new > reality without drastic action though. The market > is extremely fickle, remember just a few short > months ago the market was screaming that the > universal banking model was fundamentally broken. This is absolutely right. It isnt that the IB model is outdated, its that no BB banks are following the model. When Ibanks went from focusing on servicing clients, to focusing on proprietary profits, thats when the issues arose. I personally think the traditional roles of IBanking will be handled in a larger scale by boutiques. Hopefully they will go back to doing what they are best at, even if they make less money. I for one dont think traditional banks should do hardly any prop trading or investing. That should be left to hedge funds, PE firms or other AM firms. But that will never happen probably.
Isn’t trading what killed Salomon Brothers?
i would go so far as to say that prop trading constitutes a conflict of interest and temptation for criminal breach of fiduciary duties to clients. when goldman makes money betting against securities it helped create and sell, something smells very illegal to me.
rohufish Wrote: ------------------------------------------------------- > when goldman makes money betting against > securities it helped create and sell, something > smells very illegal to me. That’s fishy. What’s even fishy is this one hedge fund that issued a CDO and then shorted it in the marketplace almost simultanously. At least Goldman can claim that different “desks” were involved in the issuing and shorting.
> That’s fishy. What’s even fishy is this one hedge > fund that issued a CDO and then shorted it in the > marketplace almost simultanously. can you clarify?
Article from back in Jan. http://www.portfolio.com/views/blogs/market-movers/2008/01/14/how-a-bullish-trade-on-subprime-cdos-made-good-profits
that would be fishy, but not exactly what the article said… they didn’t issue the CDOs… they bought them 
“Magnetar was instrumental in bringing a lot of these CDOs to market in the first place, because it was willing to buy the lowest-rated equity tranche.”