Goldman Sachs Group Inc. and Morgan Stanley have decided to pull the plug on investing and transition to deposit-taking lenders. Evidentaly they think the model is 'fundamentally broken', and it only took them $700 billion to figure that out.
I don't know much about Bob's two points above so I won't comment other than saying I believe the 1st point is accurate.
While I'm not sad to see most of these opportunistic vultures go, I do believe that the Investment banking model could still work very well and function as a great tool for selling risk and adding liquidity to the bond markets if:
1. There is satisfactory regulation at the mortgage origination level, and each of the sell off points up stream in order to eliminate
the downward pressure to give worse and worse loans and then bundle and sell them to the greedy fool at the next level up in the chain.
2. The bond rating agencies such as Moody's actually do their jobs and not give obviously weak mortgage bundles AAA ratings when they're crap, thus not giving a false sense of security to investors. Probably need some regulation on this industry as well...
While I'm not sad to see most of these opportunistic vultures go, I do believe that the Investment banking model could still work very well and function as a great tool for selling risk and adding liquidity to the bond markets if:
1. There is satisfactory regulation at the mortgage origination level, and each of the sell off points up stream in order to eliminate
the downward pressure to give worse and worse loans and then bundle and sell them to the greedy fool at the next level up in the chain.
2. The bond rating agencies such as Moody's actually do their jobs and not give obviously weak mortgage bundles AAA ratings when they're crap, thus not giving a false sense of security to investors. Probably need some regulation on this industry as well...
I need a little help understanding this. Everyone is talking as though this conversion means the Investment Banking Model is over, but I don't really see it. All I'm seeing is that they're taking advantage of the current market conditions (and probably a genuine need on their part) to get the Fed to OK their conversion back to banks that do both deposits and securities. I don't see anything here saying that they are going to cease operations in the bond market, just that they are going to being acquiring other bands to build a base of deposit capital.
That’s what it seems like to me also.
I do have to admit that the mix of all of the politics into this has definitely made it a much more complicated matter. To bridge off onto what we were talking about with the dolphins yesterday, both sides of the political spectrum are definitely out to make it look like a crisis at this point that they are ready to take on, and in doing so might be playing it up as a bigger crisis than it really is. I definitely think there needs to be a bill with tighter regulation put forth, but I’m not sure if a bail out is necessary at this point.
Maybe banks have been hit with the worst of it already, and the markets are going to start to rebound on their own, then again, with market psychology the way it is, if the gov’t doesn’t act now after pushing the panic button than maybe there really would be a crash?
I heard an interesting discussion on NPR between two economists who believed that Washington is acting as it always does, unwilling to endure a recession or deliver the American people any bad news of short term economic slow down, they feel the need to push for immediate action which might just makes things worse down the road.
I do have to admit that the mix of all of the politics into this has definitely made it a much more complicated matter. To bridge off onto what we were talking about with the dolphins yesterday, both sides of the political spectrum are definitely out to make it look like a crisis at this point that they are ready to take on, and in doing so might be playing it up as a bigger crisis than it really is. I definitely think there needs to be a bill with tighter regulation put forth, but I’m not sure if a bail out is necessary at this point.
Maybe banks have been hit with the worst of it already, and the markets are going to start to rebound on their own, then again, with market psychology the way it is, if the gov’t doesn’t act now after pushing the panic button than maybe there really would be a crash?
I heard an interesting discussion on NPR between two economists who believed that Washington is acting as it always does, unwilling to endure a recession or deliver the American people any bad news of short term economic slow down, they feel the need to push for immediate action which might just makes things worse down the road.
Do you mean like letting a housing bubble develop so that the .com bubble burst goes away faster? Is that the type of near-sided 'fix' that you're talking about?
I think that was a rhetorical question, but in case it wasn't...Yes, that would be a good example of what I mean.
My understanding is that the Glass-Steagall Act separated depository banks from investment banks, but that was repealed in 1999. So now the last two big investment banks are becoming investment/depository banks. This has two advantages:
1) They can take deposits, meaning less reliance on borrowing in the bond market. Having a base of capital from deposits grants them some immunity to credit crunches like the current one.
2) They can move a bunch of their assets over to their depository end where they don't have to answer to the SEC. So they don't have to mark the value of their holdings at market rates, which I think means that they can revalue them to closer match their actual value (accounting for "toxic waste", defaults, etc.)
Does anyone know if that's accurate?