Investment Banking Model
October 2nd, 2008 by cbaxter.The decision by Goldman Sachs and Morgan Stanley to convert into bank holding companies was one of the final blows to the traditional investment banking model. The massive losses from trading floors (traced to falling home prices and asset-secured holdings) were too much to carry for the stand-alone broker dealers. As the flight to quality continued to constrict liquidity, these banks became short on cash needed to sustain operations — cash that traditional banks could tap from an existing deposits base.
Although currently in turmoil, where will the new investment bank settle? Clearly, new structures and increased regulatory oversight will add sand to the once flowing gears, translating to lower risk and capped leverage requirements. Although stability will be improved, it is likely that profits will never reach those unprecedented levels again.
Looking to advisory, it was often a strong competitive advantage to tap one’s own balance sheet to finance a deal; but in this market, the accompanying conflicts of interest and red tape (not to mention lack of any real capacity) have all but evaporated the advantage. At the end of the cycle it will likely be the boutiques, whose advise is not conflicted or distracted, that will continue to gain market share – although of a smaller pie.
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