Argument against Universal Bank.
Recently, we have been hearing about how Goldman Sachs ("GS") and Morgan Stanley ("MS") should merge or acquire a commercial bank. That is bullshit. Sure, the experts say that it helps the banks liquidity and lessens the losses from crisises like this one we're experiencing now. It couldn't be further from the truth. Merging with a commercial bank is the last thing GS or MS want to do. People say the standalone investment bank is dead. All lies. Here's why:
1.Hypocricy- Hank Paulson says that big institutions shouldn't be allowed to fail. Well.. ummm it commercial banks merge with investment banks, they get BIGGER, not SMALLER. The government says it wants smaller companies, to avoid ripple-effect catastrophes in the financial world. The why did they help broker and finance the acquisition of Bear Stearns by JP Morgan?
2.It's just retarded- So, I think that if GS or MS merges with a commercial bank, investors will be happy, because they think that because the investment bank is merged with a commercial one, all their liqudity problems are solved because they heard on Bloomberg that "if an Investment Bank merges w/ a commercial bank, the losses will be stemmed if the investment banking half comes under fire or makes bad bets". Bullshit. If retail investors really believe this (they do), they'll start pumping money into banks again. And guess what the banks do with all that money? They make retarded bets in the markets again. This time, they feel more confident because they think the commercial bank will help immunize themselves against losses. But it doesn't. And soon, they start making bigger, more riskier bets. This time, the commercial bank's consumer deposits, and thus people's savings are at risk. If investment banks were all standalone, the crisis would only be at half strength, people's savings, IRAs, and 401(K)s wouldn't be at risk, because the INDEPENDENT investment banks would isolate the losses, and thus the shit wouldn't trickle down to the middle class.
So before you go and praise the idiots that came up with the Universal Bank, think about it.
You don't really think that when a certain company's stock goes up that means that company gets any more money do you?? If you do, I officially move to never let you talk again...
"If retail investors really believe this (they do), they'll start pumping money into banks again. And guess what the banks do with all that money? They make retarded bets in the markets again."
I second that
Benefits of a universal bank? (Originally Posted: 09/18/2008)
What are the benefits to the combined banking model vs I-bank only model?
Insured deposit base to fall back on instead of reliance on wholesale funding.
Edit: I guess that is only necessarily true in the US, not sure what deposit insurance is like in places like Europe, Dubai, China, Japan, et al.
It calms down IRRATIONAL investors. You can't use low cost, federally insured deposits to finance trading operations, so it is absolutely pointless. GS and MS will still have to roll out commercial paper.
Literally, the only good thing about being a universal bank is that it MIGHT lower the cost of borrowing, as commercial banks are considered more stable and the iBank will be considered part of the larger entity, therefore driving down borrowing costs.
However, those costs shouldn't be up in the first place, because MS and GS are very stable and well capitalized
on a response to this about what i see as a temporary infatuation (albeit necessary for ibanks) with universal banking activity...but the economist totally stole my ideas (tho they prolly did a better job of presenting them anyway).
Investment banking Is there a future?
Sep 18th 2008 From The Economist print edition The loneliness of the independent Wall Street bank
http://www.economist.com/finance/displayStory.cfm?source=hptextfeature&…
Benifits or not - just a few months back, people were calling Pandit to break up Citi as Reed said that the universal banking model simply does notwork.
UBS chairman Peter Kurer : Our review has clearly revealed the weaknesses associated with the integrated 'one firm' business model
... And in just a few months, universal banking is the way to go even for GS!?
Can't Wall Street make up its mind?? or has the situation changed so drastically in a few months? or am I missing something?
Universal Banks, Their Appetite for Risk and MM Proposition #1 (Originally Posted: 11/28/2013)
A thought entered my head while working on a project in one of my valuation courses. My group is tasked with valuing a 'systemically important' financial institution that engages in multiple lines of banking and extra-banking activities. It is well understood that deposits constitute a large portion of a banks debt, often accounting for a majority of its debt. It's also understood that the cost of this debt, unlike all other financial obligations, is not directly determined by the riskiness of that entity's operations. Rather, it is, at least in the short run (where the short run can extend beyond 5 or so years) determined by active policy decisions on the part of central banks.
In other words, banks can take on extreme leverage ratios and expand their operations into business activities that are extremely volatile without a corresponding increase in the yields on a major portion of their debt. There seems to be a disconnect between the riskiness of a universal bank's operations, therefore, and its cost of capital. This could explain their massive leverage ratios and their appetite for risk (they aren't proportionately penalized for this additional risk). The fact that these deposits are insured by the government also explains why investors, in this case, those that hold deposits at banks, are willing to put up with depressed yields that do not reflect the riskiness of their loans.
According to MM #1, the method by which a firm is financed is irrelevant with respect to its cost of capital. But does this proposition hold in a scenario where a large portion of its cost of capital is essentially arbitrarily fixed and determined by extra-economic conditions (exogenous monetary policy decisions)? Is it the case that this risk is shifted to other forms of financing, such as equity holders and to other owners of debt? Many of these large financial institutions have highly rated debt, often AA or AAA. The yields on those obligations, therefore, are extremely low as well. Is it the case that the cost of equity is accounting for this apparent disparity?
Based on our calculations, the cost of equity is quite high (around 18%), but the return on new equity is far higher. Due to the extremely high leverage ratios, and the fixed costs associated with a large part of their debt, the equity holders are earning massive returns (assuming that the returns are risk-adjusted and don't reflect some extreme form of banking competitive advantage that this institution may or may not posses), but it's not being reflected in the cost of that equity. In a free banking system, where the central bank does not engage in open market operations and where there is no FDIC, one would assume that a depositor would demand a higher yield in response to his/her bank engaging in highly volatile operations, such as prop trading.
Any thoughts? I'm probably overlooking an important factor.
This is pretty deep and rich subject matter. Have you looked at the work of Anat Admati? More specifically, this paper talks loosely about topics that may have bearing on what you're looking at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2344831
universal banking vs. traditional (Originally Posted: 07/31/2008)
Would you rather work for an investment banking arm of an universal bank or a pure investment bank?
This is actually a very good question. I am curious to know the pros and cons of each as well. Anyone care to give some input?
Probably depends on the specific opportunity set.
go where you like the people.
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