Investment bank

From MarketsWiki

This page needs a sponsor.

Put your logo here!

Email us for information
on how to support MarketsWiki.

Investment banks were once considered solely institutional investors, bankers and financiers to high-end individuals and groups, much like Goldman Sachs. But in recent years, financial giants with large retail operations like Citigroup have eaten into their territory, which in recent months has also meant sharing investment-bank losses in the subprime mortgage-backed securities sector. An agreement in mid-2008 between U.S. market and banking overseers will in future give the Federal Reserve more regulatory control over investment banking, which will in turn likely accelerate the recent trend towards investment banks allying with traditional bankers to expand their financial range.

Recent woes

Throughout 2007 and into 2008, major U.S. investment banks have taken a hammering as the market for subprime mortgage-backed securities they had invested in heavily dissolved. One investment bank (Bear Stearns) collapsed and another (Lehman Brothers) barley hung on while a string of investment/retail giants like Bank of America and Citigroup booked big losses. Nonetheless, recently-formed financial supermarket JPMorgan Chase & Co. took the honors in Institutional Investor magazine's inaugural ranking of the world's best investment banks, although the accounts of runner-up UBS have since been mauled by the subprime meltdown.^[1]

Investment banks' fortunes have declined to the point that another well-known annual ranker of investment bank quality, Global Finance magazine, recently had to postpone by several months its deadline for 2008's nominations. In an April 2007 memo,^[2] the magazine explained that the previous six months had been "a time of extraordinary upheaval" in the industry and so would put off publication of its Global Finance Best Investment Bank Awards 2008 until its September 2008 edition.

On September 22, 2008, financial newspapers announced "the end of an era on Wall Street"^[3] as the Federal Reserve gave permission for the last two major investment banks — Goldman Sachs and Morgan Stanley — to become bank holding companies in order to stay in business, after Lehman Brothers and others went under.

Congressional reaction

Securities industry regulator the SEC and retail banking regulator the Federal Reserve agreed in mid-2008 to give the Fed greater regulatory oversight of investment banking following the recent credit crunch, which some blamed on poor judgement by investment banks. That means the Fed could enforce stricter capital ratios on investment banks, which have typically resisted such change, and could force them to merge with deposit-taking institutions that already comply with Fed regulations, one analyst predicted.^[4]

The decision could also create moral hazard if investors believe the U.S. government effectively stands behind investment banks in fear of heavy market losses, another argued.^[5] This would likely erode market discipline even further, the piece argued, and encourage even more risk-taking in markets - something the regulations are intended to discourage, he added. At the same time, Federal Reserve chairman Ben Bernanke said the Fed would extend its emergency lending facility, established in the wake of the April 2008 collapse of Bear Stearns, to investment banks beyond the end of 2008.^[6] The decision helped bolster troubled Wall Street investment bank Lehman Brothers, whose demise had been predicted for months prior.

Latest news

But Congress called investment bankers back the next day (July 10, 2008) for a grilling over rapidly rising oil prices, which Democrat representatives have blamed on lack of regulation over investment-bank structured products - much as they did over mortgage-backed securities.^[7] Representatives had earlier heard complaints from large oil consumers like airlines that "speculators" in OTC swaps markets often run by investment banks are driving up prices of exchange-listed oil futures.