Financial Planning

The face of Wall Street has changed by the current economic melt down, possibly forever. The energy in the market has been continuously taken over by the investment bankers, but even then in the last few months series of shocking incidents happened in the market which changed the entire scenario of the US markets. Goldman Sachs and Morgan Stanley got converted in to banking holding companies just stay in the business, Lehman Brothers went bankrupt, Bear Sterns was taken over by JP Morgan chase and lastly Merrill Lynch was sold to Bank of America.

These were the best FIVE investment banks and now none. This is how the scenario changes in the US market.

As per the survey, these five best investment banks values the total market value in the beginning of the year up to $250 billion, Goldman Sachs being at the top with $90 billion market value and today these top banks which is now boutique of small firms combines with market value of only $12 billion.

In the era of Universal banking the economic meltdown has ushered the major financial firms of USA to offer conceivable investment products and services only. Not only these five top firms are affected but because of these small brokerage firms are badly affected too.

Let’s have a look on the realignment of the industry

It was the time when Goldman Sachs and Morgan Stanley decided to be only banking holding companies which marked the historic realignment of the banking industry during the Great Depression. But the question is why did they make a change?

The answer is very simple that is with this change they had an access to Federal Reserve’s discount window and that also on the same line of credit which was opened to other smaller institutions at a lower interest rate. Their major advantage during this period was that they could easily tap into deposits from retail customers.

But Federal Reserve was a smarter person. It imposed tighter regulation on all the banking holding companies which were directly subjected to Federal Deposit Insurance Corporation or FDIC.

Independent investment banking has been ruling the banking industry since ages. Investment banks are kind of small private partnerships that earned most of their money by offering corporate financial advices as well as broking and some other small services. If you just walk in to one of the investment banks, I am sure you would mistake it with a large law firm of any kind.

Why these investment banks have such a strong business model? Simple, they built strong long term relationships with its customers. These firms operated with its partner’s money and that is the reason the risk was too less in the earlier days. With excessive leverage there were fewer sums to gamble. But the lack of working capital forced these banks to go public in the late 90s.

And then the downfall begins

With growing access to lower costs and more capitals in the pockets these investment managers started to make riskier capital bets mostly in the cases of mortgage-backed securities. Investment banks were far different from traditional banks now. This marked the entrance of big global banks like Citigroup and JP Morgan. These institutions started competing with Wall Street which forced Wall Street to expand their services. They started using more leverages and also started taking more risks.

Ultimately these risks started turning into profits and as a result of this the dealmakers were awarded with huge bonuses and the wheels were set for making bigger risks. This was a complete recipe for disaster.

Investment banks, in the mid 2008 which marked the beginning of financial crisis got permission from Federal Reserve to discount funds. As soon as credit crisis hit the market, firms like Bear Stearns and Goldman Sachs found themselves in to bigger troubles. They suffered huge loss with their hedge funds and the credit crisis stripped them off to raise the additional capital which they needed badly to survive.

The Wall Street Outlook

The outlook was simple. No more huge bonuses to the dealmakers and on top of that it became an unanswerable question that whether USA can remain its power status high in the global financial system?

We have to wait and watch the year 2010 for the above question. With good transparent financial system and a stronger business model there might be a chance of promising outlook in the coming year with more stable and consistent growth.