Characteristics of investment banks

[stormbind]

Something bugs me.

When viewed on a timeline, what are the changing characteristics of the investment banks? For example, how did their products differ in 2007 and 2010 respectively?

Are 'new' products really any different to those of 1980 or 1990?

 

[Bill3000]

Characteristics of investment banks

 

[stormbind]

What's in the pouch? If it belongs to an investment bank and they keep it covered up with a dirty rag, its probably something they have a short position in. I wouldn't want it.

I couldn't afford it either. You need a lot of spare change to open an account just to discover that the visible dirty rag holds a dirtier rag. They refer to that as complex

 

[Whomp]

Something bugs me.

When viewed on a timeline, what are the changing characteristics of the investment banks? For example, how did their products differ in 2007 and 2010 respectively?

Are 'new' products really any different to those of 1980 or 1990?

What's your timeline? In the US, Glass-Stegall changed structure altogether and much of what was private capital became public capital. The traditional lines became blurred.

The biggest change since the 80's are technologically driven (IE from fractions to decimals and from wire operators to mouse clicks).

 

[stormbind]

Well I'm keen to understand the financial products that are being offered to clients in 2010 and whether or not they have changed significantly in response to the last crisis. I think my timeline is limited to the last few years (but I'm not really sure as there could be long-term trend).

I understand that they have reduced proprietory trading. This does not influence products offered to clients. Yes, I know that clients are shy of credit default swaps so they aren't popular, but I believe they are still offered. And yes, I know that banks have even turned to zero-sum FX trading to cover their bases and that is hardly a new innovation.

For example, I could suggest that pre-crisis investment banks can be identified as institutions that relied on retirement accounts, cash managements and brokerage services to conduct a business. Isn't that intensified in post-crisis banking because of renewed emphasis on client creditworthiness?

That might change the demographic of their clients slightly, and consequently the products offered. For example, it suggests to me that banks will have new criteria upon to reject clients that they don't like - such as cautious investors who demand new transparent products. I get this feeling because the banks have not publicly announced changes of their own volition.

These points do not directly address my concern on the changing quality of financial products. Are we walking straight into a future crisis in which only the clients lose money?

I don't think the clients have really walked away from any banks. For example, UBS lost clients and star advisors to rival firms but FT.com suggests that a star advisor will take a portfolio of clients with them to their new employer. My point only being that I don't think clients weild much influence over the innovators of new products.

Don't ask me what I'm plotting

 

[Whomp]

I suppose the first thing we need to do is clarify who we're talking about. Investment banks are very different than wealth/asset management, commercial/personal banking and prop/client trading.

Typical wealth management clients would not be directly impacted by CDOs/CDS/hedge funds since they're not accredited investors like an institution or ultra high net worth client so they don't own these securities.

 

[stormbind]

I'm referring to the group of firms including but not limited to: Goldman Sachs, Lehman Brothers, JP Morgan, Morgan Stanley, Credit Suisse, Barclays Capital, UBS, HSBC Private Bank, Citi, Standard Chartered etc.

I didn't know they had fundamental differences. I thought clients with big bank ballances could open an account and have funds managed on their behalf by the bank's mentioned above. I thought prop trading was simply a case of the banks using their own funds in addition to their client's funds. Thank you for the clarification

I'm not sure of the difference between wealth management and private banking. You caught me there. I can wiki though... and wiki says wealth management is a high-end version of private banking. Commercial banks also offer private banking and I'm not focussed on those, although any overlap in services are interesting because commercial banks and investment banks are supposed to remain separate.

To narrow the focus, in 2010, what financial products can wealth management clients and hedge funds have access to?

 

[Whomp]

For the most part those firms you mention do not deal much with individual investors other than ultra high net worth (ie $20 million plus).

Morgan Stanley owns what used to be Dean Witter and recently bought Smith Barney from Citi. This segment traditionally deals with clients in the $250,000 to $5 million investable assets range. These type of clients are pretty basic investors (stocks, bonds, mutual funds, cash and maybe some alternative investments).

The Morgan Stanley segment works with the ultra high net worth segment and institutions. Here you will see more complex transactions along with the basic investing.

Institutional is segmented typically by middle market (less than $100 million ebitda or say $500 million in sales) and institutional (greater than $100 million) includes but is not limited to corporate, municipal, sovereign, hedge fund/private equity and asset mgmt clients. These clients do, amongst many other things,financing, M&A, cash mgmt, restructuring, investing etc.

 

[stormbind]

In other words, leading investment banks are doing nothing clever. In fact, you could argue that the banks are predictable and quite stupid. What makes them significant is only that they influence things on very large scales.

The sale of complex derivatives has collapsed, and there is talk of new 'innovative' products. However, I have seen and heard nothing that is actually innovative.

Except, for example, there was an attempt to create a new market for betting on the success of culture producers. For example, speculators could buy shares in future films. This would allow a director to sell his stake, buy shares in rival films, and tank his own product in that order

You can really see that bankers came up with the idea and given the sums of money involved, film directors would replace bankers overnight. Consequently, bankers remind me of lemmings. However, I'm sure that market won't materialise.

In all fairness, the discussed investment banks have failed to impress me and that's why I really want to know their new products. Banks may provide advice to clients on restructuring and acqusitions etc., however, services of that kind can be studied and copied - its just a lot of backoffice numbercrunching and that's done by computers. For example, I have studied AI and path prediction algorithms, etc.

What is the (idealistic) role of investment banks if they can't innovate?

 

[Whomp]

Capital formation will continue to be where these firms do most of their work.
I'm not sure innovating new products is their primary objective nor should it be ours. The main objective is matching needs with wants.

It often takes a long time and history to create liquid and accepted products (ie ETFs and junk bonds) and in the case of CDOs a disaster in innovation.
Structured products would be a case of innovation but liquidity is still an issue for sellers before maturity. Thus they still fall in the alternatives category. Illiquid, long term but often non correlated type of investment vehicle to stocks and bonds.

Creating financing to fund movies, through private equity (alternative investment), has gone on for a long time and isn't appropriate for investors who are small, risk averse and need liquidity so tends to be offered in the institutional space only.

A good example is the city of Chicago leased their parking meters to a Morgan Stanley private equity partnership. The meters generate cash flow back to its investors that's not an IOU from a borrower like a bond would be. This might be an attractive investment because it doesnt correlate to what a more traditional bond investment may produce for a income investor(ie pension fund). Illiquid but higher cash flow and little correlation to interest rates and likely economic trends. Financing like this goes into all kinds of private deals (IE Google, biotech/alternative energy start ups etc).

 

[aelf]

Something bugs me.

When viewed on a timeline, what are the changing characteristics of the investment banks? For example, how did their products differ in 2007 and 2010 respectively?

Are 'new' products really any different to those of 1980 or 1990?

What bugs me is that you are bugged by the history of establishments that thrive on futures.

 

[stormbind]

With century-long investments, history is also the future.

 

[aelf]

With century-long investments, history is also the future.

So how much is a stake in the past worth?

 

[stormbind]

So how much is a stake in the past worth?

All contracts are signed in the past: How much is a contract worth?

Besides, history repeats itself. Nothing done at Lehman Bros or Fanny Mae or Goldman Sachs is new - all their errors are repeated from history and so knowing history is powerful

 

[aelf]

All contracts are signed in the past: How much is a contract worth?

Besides, history repeats itself. Nothing done at Lehman Bros or Fanny Mae or Goldman Sachs is new - all their errors are repeated from history and so knowing history is powerful

As they say, forgive and forget.

At most we'll have a revolution to cancel our debt

 

[The Imp]

Well, the prime characteristic is an almost sociopathic ill-regard for anything but profit.