The ongoing financial changes ( I choose to not call it crisis) have lead me to follow the economic and the financial times. I have come across so many words which I have wikied ( now, I notice how easily that came to me, like googled!) and there was also the whole bit about what was investment banking, and then now what happened to it?
In my understanding, investment banking would entail raising funds in the capital market, assisting and advising on mergers and acquisitions, management of various securities for private investors and also pooled investors ( mutual funds). It will also encapsulate various associated streams which would serve as enablers to the success of their this core business. The distinct division of investment banks came about after the Glass - Steagall Act, prohibited a bank from accepting deposits and also underwriting securities ( assessing business customers for capital funding). Why? Because the bank might accept some huge deposits and then go on to provide more capital fuding to non deserving customers? I am not sure why would they do that though, in the end, wouldn't they be only hurting themselves? Anyone knows the exact reasoning behind this, please explain.
And, now what happened, all of them decided to shun their covetted statuses and step into a commercial bank status! That is almost the end of Wall Street many say, and many choose to differ also. They say, these banks will generate more help money from the government with the change in status, and offer new services to the general public, but still continue to work along their previous lines also. So this is almost like nothing much changed for the banks in terms of their functioning, but a tuck and a frill here and there, or is it more? Well their losses have changed a lot for them I guess!
In my understanding, investment banking would entail raising funds in the capital market, assisting and advising on mergers and acquisitions, management of various securities for private investors and also pooled investors ( mutual funds). It will also encapsulate various associated streams which would serve as enablers to the success of their this core business. The distinct division of investment banks came about after the Glass - Steagall Act, prohibited a bank from accepting deposits and also underwriting securities ( assessing business customers for capital funding). Why? Because the bank might accept some huge deposits and then go on to provide more capital fuding to non deserving customers? I am not sure why would they do that though, in the end, wouldn't they be only hurting themselves? Anyone knows the exact reasoning behind this, please explain.
And, now what happened, all of them decided to shun their covetted statuses and step into a commercial bank status! That is almost the end of Wall Street many say, and many choose to differ also. They say, these banks will generate more help money from the government with the change in status, and offer new services to the general public, but still continue to work along their previous lines also. So this is almost like nothing much changed for the banks in terms of their functioning, but a tuck and a frill here and there, or is it more? Well their losses have changed a lot for them I guess!
People have also been so actively moving into all the other sectors, like consulting, technology, construction etc. Many I believe are also looking at this chance to start on something new. Is this a good time to start something new? Where will all the money required be coming from, if the governments start to bail out company after companies! (I am not really sure how great is it to use the public taxation money for some company which is in a ditch.)
I am thinking I should get my hands on some goood reads regarding the financial systems across the world. Any suggestions?
Q. "The distinct division of investment banks came about after the Glass - Steagall Act, prohibited a bank from accepting deposits and also underwriting securities ( assessing business customers for capital funding). Why? Because the bank might accept some huge deposits and then go on to provide more capital fuding to non deserving customers? I am not sure why would they do that though, in the end, wouldn't they be only hurting themselves?"
ReplyDeleteA. Look at the argument from the other side. There will always be a bunch of institutions who would want to make more riskier bets and provide funding to less deserving customers. The idea was not to let these institutions get easy access to savings of the larger public and put them to risk.
The act came into effect in 1933, during the times of the Great Depression. Between the stock market crash of 1929 and 1933, a good chunk of US banks failed.
To quote further:
"Decisively, the Glass-Steagall Act forced institutions within the banking community to pick a side. If you want to deal with the population at large, take their deposits, give them a safe place for their savings and make reasonable loans for which you are as responsible as the borrowers -- terrific. As a commercial bank, you will have the newly established Federal Deposit Insurance Corporation (FDIC) backing your depositors. We, the federal government, will regulate you."
Thats a nice way of putting it. Makes sense too, the government had to take care of the voting public the most.
ReplyDeletePS: I started following the economist too.
Man you've been blogging quite a bit! I just never noticed :(
ReplyDelete