Investment Banking Essay
1. Why were proponents of deregulation so successful in the late 1990s? How much can we blame deregulation for the meltdown in the investment banking industry, and how could the government have foreseen and/or stopped the domino effect before the crisis of 2008?s The gov could have decided to not back up what they were not regulating. They are partly to blame for the crisis because who knows if the banks would have issued the loans they issued and taken on huge amounts of risk if they didn’t have the guarantee of the banks behind them. 2. Could any one of the investment banks have remained competitive without following the industry trend of taking on increasing amounts of leverage to boost returns on investment? If so, how? It is not likely that an investment bank could have made the huge profits other banks were making with that leverage to boost returns. They could have possibly taken on less risk and been more profitable in the long run, but not likely that they could have kept up short term.
3. Why was Lehman Brothers allowed to collapse while Bear Stearns was not? The investment bank of Lehman Brothers played a different part in the market than Bear Stearns. The government didn’t want this bankruptcy spreading and so they were able to convince JP Morgan to buy out Bear Stearns while they let Lehman Brothers collapse and pick up the pieces. 4. Did the compensation structure of the investment banking industry encourage banking executives and employees to take on excessive risk to boost short-term profits? Why or why not? Banks were encouraged to take on huge amounts of risk because of the very high return. For a while, there were no consequences for defaults because risk was being transferred but they got to keep the money made off the loans and bonds issued.
5. How much of the industry-wide crisis stemmed from the investment banks’ financials and the current economic climate as opposed to investor panic and speculation? The investment banks are mostly to blame because their conditions caused investor panic and speculation. Banks should have anticipated their uninformed investors rash behavior because that is very hard to control. 6. Both Bear and Lehman bailed out their proprietary hedge funds. Did they have any other option? What would have happened had they not done so?
Investors and employers had a lot of skin in the game in the hedge fund market so they had a lot of pressure to bail out these funds. If they had chosen not to bail them out then their reputations would have gone downhill eventually leading to their investors distrust of the firm. 7. Could Morgan Stanley and Goldman Sachs have survived without becoming bank holding companies? What were the benefits and disadvantages of becoming bank holding companies? What does designation as bank holding companies mean for the way Morgan and Goldman operate going forward?
By becoming bank holding companies the power was put into very few hands. Becoming a bank holding company increases diversity so that you do not only play in one market. This lessons risk but perhaps also decreases high returns that can be made if you focus on the investment banking business. Perhaps they could have survived if they had been able to come up with a balance of risk to take. Morgan and Goldman needed to expand from solely investment banking and perform commercial banking operations as well.