Until the late 1990s, before the repeal of Glass Steagall, you had a sharp distinction between investment banks (GS, MS, Leh, BSC, Solly, DLJ plus mid market firms like Alex Brown, Furman Selz, Robby, H&Q) and commercial banks (JP Morgan, Chase, Citibank, Bank of America).
Everything changed in the late 1990s and 2000s. Every investment bank other that GS got bought or went bust (even Morgan Stanley was effectively bought by Dean Witter). By the time I started, true investment banking seemed to be destined to die at the altar of the universal banks.
But somehow out of the ashes…
Independent advisory firms have prospered (once there was just Lazard) and former nonentities like JEF, Blair, Baird, Piper, Houlihan have become forces to reckon with.
in my view bulge bracket firms are the spiritual heirs of the commercial banks - solid institutions, deliver important services, pay ok but not particularly well, bug and bureaucratic
The spiritual heirs of the investment banks are the independent advisory firms and the MM firms where bankers can actually get paid and are culturally a lot more similar to the old Morgan Stanley, Lehman, DLJ, etc
Goldman remains Goldman, a breed apart
Interesting times. The more things change, the more they stay the same
Curious why you say Goldman remains Goldman? They operate very similarly to (for example) Morgan Stanley, so why are you classifying Goldman as a different breed?
Goldman has survived whereas Morgan Stanley didn’t (the name did, but Morgan Stanley was bought by Dean Witter in a merger of unequals) because Goldman is uniquely effective in managing risk and making money in proprietary trading and in principal investments / asset management.
Their investment banks superficially look similar but Goldman is much more than that - and much more successful in making money for its partners
For those who are interested
GS is GS
JPM is actually Chenical Bank which bought Manufacuters Hanover, Chase (which bought Hambrecht & Quist and Robert Fleming), JP Morgan, US Bancorp and Bear Stearns
MS is actually Dean Witter which bought Discover and Morgan Stanley (I remember the day Morgan Stanley bankers were given Discover credit cards as their corporate cards)
Primerica acquired Smith Barney and Shearson and Salomon Brothers before merging with Travelers Insurance and Citi
Barclays is the combination of Barclays Investment Bank (whose foundations are De Zoete Wedd and Lehman
DB bought Bankers Trust (which bought Alex Brown) and Morgan Grenfell
BofA bought Montgomery Securities and Merrill Lynch
UBS acquired Swiss Banking Corporation which acquired SG Warburg and Dillon Read and Paine Webber
Wells Fargo acquired Wachovia which had acquired Wheat First and Prudential Securities (which acquired Kidder Peabody from General Electric)
Credit Suisse acquired First Boston and DLJ
RBC acquired Dain Rauscher
CIBC acquired Oppenheimer
and that’s how investment banks almost died
Just wanted to add that Credit Suisse acquired First Boston and Donaldson Lufkin Jenrette, and DLJ inherited the core of Drexel Burnham Lambert.
Although it's a prestigious ancestry, it seems the strong legacy of fucking up is carrying through to today!
Wow CS picked up like half the 80s bulges
Wow fantastic recap. Wonder what the next decade of acquisitions and consolidations will look like
Great post. Lots of consolidation on the London side of things as well like JPM buying Cazenove and Citi buying Schroeders.
Great thread, love the wonky history of finance, especially investment banks. IMO, you can understand a lot of our current economic/financial malaise by understanding the change in the structure and function of major financial institutions.
My one gripe is that you left out the most important part! The evolution of dealers and their integration with investment banks. For those interested, the bank holding company act of 1956 was in many ways a spiritual predecessor to Gramm-Leach-Bliley in 1999. In most of the ways that mattered, we had the universal bank long before the 1990s.
"Under the terms of the original 1956 act, one-bank holding companies were not required to register with the Federal Reserve, and thus, their non-banking and non-financial activities were tacitly allowed. However, the 1970 amendments brought one-bank holding companies under the control of the Federal Reserve, as well as allowed multi-bank holding companies to participate in selected non-banking and non-financial activities. Hence, the 1970 amendments not only effectively constrained the permissible non-banking and non-financial activities of one-bank holding companies, but also effectively extended the permissible non-banking and non-financial activities of multi-bank holding companies, all at the same time.
The BHC Act Amendments of 1970 made several significant changes. Most importantly, Congress amended the statutory definition of “bank,” which reduced the reach of the original 1956 act. The BHC Act Amendments of 1970 added a second prong to the test of what was a “bank,” which required an institution to both accept demand deposits and make commercial loans (i.e., loans for business purposes, not for personal purposes) to be called a “bank.”
The 1970 amendments had a significant, practical, yet largely unforeseen influence/impact on the development of the US banking industry in the next few decades. Basically, the 1970 amendments created a crucial new opportunity for legislative and regulatory arbitrage, whereby a company could establish a so-called “nonbank bank” and effectively supply banking services without becoming a BHC. Functionally, these “nonbank banks” were very much like regular commercial banks. While they had their own bank charters, they did not fall within the classification of “bank,” because they limited their activities to either accepting demand deposits or making commercial loans (one or the other, but never both). Because these companies technically did not meet all the requirements to be called “banks,” these companies ultimately were not subject to the same consolidated regulation and supervision as were applied to true “banks.”
Consequently, the BHC Act Amendments of 1970 paved the way for future financial legislations/regulations, culminating in the passage of the Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Act of 1999 further amended the BHC Act, allowing a BHC to register with the Federal Reserve as a financial holding company (FHC), thereby allowing such a firm to engage in an even wider range of financial activities, including securities underwriting and dealing, insurance underwriting, and merchant banking activities."
I wish they taught this in school
Why IB history? It makes sense to teach things like personal finance and Econ but highly doubt curriculum creators would want teach the history of banks. It's definitely important but most kids would at least give a shit about credit cards and student loans rather than this.
stuff like 1933 Glass Steagall Act (and repeal), 1999 Gramm-Leach-Bliley Act, BHCs and IB revolution were taught in one of my econ course about the banking system
Really cool thread! Thank you both. Am fascinated by Wall Street history, so want to keep this thread going with any nuggets folks may have.
Am more interested in the people stories and the clashes of egos. Stuff like the Group of 8 / Purcell saga at MS, Sandy Weil / Dimon at Citi and Dimon's subsequent rise. Any other such stories?
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