Monday, November 12, 2007
Investment banks and risk
Investment banks should not be public companies. We will put aside the most important reason, namely, that investment banks were far more prudent when they were putting partnership capital, rather than other people's money, at risk, and the costs of having investment banks play with other peoples' money are turning out to be awfully high. They can and are creating messes whose costs extend well beyond their shareholders and employees.I wish I had time to really dig into this topic in depth today, but I'll throw it out there for discussion in the comments, for those interested.
Investment banks are composed of multiple businesses with demanding requirements for managing them. Historically, the businesses have been overseen by people who grew up in them and knew them intimately.
It isn't acceptable in a modern public company to have a board composed largely of insiders, but that's what you need to have effective oversight of securities businesses, although that also puts the foxes in charge of the henhouse (the whole point of having external directors is to act as a check on insiders). And the few recent high profile retirees, or say heads of institutional investors that might some relevant knowledge would often be perceived to be cronies rather than independent.
But here's another point that might be of interest only to TH himself: Where does Sarbanes-Oxley come into the equation, and does it raise issues for investment banks that it doesn't for other public companies. Yves Smith again, this time on why Robert Rubin as Chairman of Citigroup failed to challenge the policies that lead to last week's massive write-off:
But to Stein's point about Rubin's failure to act: it seems likely he chose not to know about the trouble spots. With Sarbox, I would not want to be on the finance or audit committee of a sprawling financial institution like Citi. And Rubin wasn't.
1 Comments:
By 
, at
Mon Nov 12, 02:05:00 PM:
Betting against Goldman doesn't seem like a winning strategy to me, but hey, go ahead...
Ordinarily I'd agree with the premise that investing in anything other than levels 1 or 2 assets should only be done by private funds instead of public firms. But capital markets activities, like fixed income, block trading, market making activities and even equities underwriting, is a different problem in my book. I have a hard time understanding how anyone could argue that capital markets activities like those could be done by anything other than a public firm, given the enormous scale necessary to compete globally.
Maybe we should confine capital markets to banks, with their enormous and liquid balance sheets, even while letting hedge funds, privet equity firms and investment banks fight it out on asset investing.
Andrew
