Twofish's Blog

September 22, 2008

And then there were none…..

Filed under: finance — twofish @ 3:41 am

The American investment bank is no more.  Goldman and Morgan Stanley look like they are going to no longer be independent banks but rather commercial banks with investment branches.

One thing that is interesting is to look at the consequences of the Gramm-Leach-Billey Act which removed the wall between investment banking and commercial banking.  At the time, the belief was that by removing the walls, it would allow financial conglomerates to offer integrated financial services at the retail level.  You go to one bank, and have your checking account, stockbroker, and insurance all handled via one stop shopping.  This actually didn’t happen because the difficulties in integrating different financial services into one integrated firm turned out to be more than the amount of useful that integration would provide.

However, the one thing that has happened, and this is almost unintended is that by attaching an investment bank to a commercial bank one allows the investment bank to survive economic storms that would kill the investment bank if it was on its own.  Also it allowed investment banks to take advantage of the stability and safety that comes with stricter government regulation of commercial banks.  So it turns out that systems integration wasn’t that useful, but balance sheet integration was.

What I think may end up happening is that banks are going to start looking and acting like public utilities.  Huge and somewhat boring corporations that are very highly government regulated designed to bring cash in the same why that the power company brings power.

This I suppose will bring in some big cultural changes to Wall Street.  You really don’t think of the people that run the power company as brash, larger than life, cowboys.  But on the other hand, you really hope that the people that run the power company *aren’t* cowboys.

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3 Comments »

  1. Twofish,

    My question for you is, how does one remain a principled Austrian during such turbulent times?

    Comment by Qi Fu — September 23, 2008 @ 12:37 pm

  2. “Grandpa, what was an ‘Investment Bank’?” 🙂

    Comment by Murph — September 24, 2008 @ 3:17 am

  3. And then someone will have the bright idea “let’s specialize” and will re-invent the investment banking 😉

    Comment by bloody_rabbit — September 27, 2008 @ 12:39 pm


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