Posted on 09/28/2008 10:20:48 PM PDT by TigerLikesRooster
Investment banking model is dead, says Roche
By Anette Jönsson | 29 September 2008
David Roche gives his view on what the financial sector will look like after the current credit crisis, which he says was created by excess liquidity and the shift to a "new monetarism" model.
The financial sector will look very different after the current financial crisis with a dramatic increase in regulation, slower credit growth and a forced return to a traditional relationship banking model where banks fund themselves primarily through deposits, argues David Roche, president of London-based global investment consultancy, Independent Strategy.
“The wholesale money markets are no longer going to fund financial sector balance sheets to the degree they did in the past on the basis of so little information. This together with new regulations and risk aversion will mean a much slower pace of credit growth,” he said in a luncheon speech at the CLSA Investors’ Forum on Friday. “Of course, securitised debt and all that will continue to exist, but it is going to exist in a way where banks remain responsible borrowers and set aside reserves against it – the investment banking business model is now dead and the market has pronounced it to be so.”
Roche also notes that the damage done to the capital base of the financial intermediaries will force them to focus on deleveraging for several years to come, which will have a further negative impact on global credit growth – the past few years of credit growing at five times the pace of GDP will be replaced by an environment where it is expanding more in line with nominal GDP growth.
(Excerpt) Read more at financeasia.com ...
Ping!
Thanks for the article. Can you please add me to your ping list? I always seem to get a lot out of your financial thoughts.
until the next scheme arises.
They have a brand new model now. It is called “Lets rob the taxpayers”.
So much for my business plan, right out the window.
QUOTE from the posted link:
...The most cogent comments with long term significance, regarding the financial crisis have been those which recognize that the model of the investment bank is itself flawed. This fundamental realization, if heeded will lead to needed restructuring. Indeed, we are at a cerebral crossroad when private financial institutions “too big to fail” can only be sustained by government bailout in a premier capitalistic system. This is uncharted territory; but it is essential that those charged with creating new models of financial engineering recognize the fundamental flaw in most of our social engineering projects, the failures of which do not collapse the nation’s economic system but which teach valuable lessons.
The theory of Cognitive Evolution holds that we demonstrate what we know. For example, “Most of the social engineering blueprints for educating the cognitively less able over the past four decades have failed to demonstrate improvement because they have assumed that learning can take place without the acknowledgement of a deficiency, that is a confrontation with ignorance, and that learning is painless. Models of success illustrate quite the opposite.” In social engineering these models are few and far between. The 2008 SAT and ACT scores for major racial and ethnic groups announce that for some populations measured competence is at a 20 year low point, establishing that the adopted social engineering model for academic progress among the disadvantaged is patently defective.
On Wall Street, the current crisis is different from that of the Depression era. We had not attempted the kind of finance engineering that we now know is flawed. “Learning requires a change from the state of not knowing to the state of knowing. The journey is fraught with anxiety, and unpredictability. The chance of failure increases, and self doubt is inevitable.” “At the end of the learning experience being and behavior have been altered.” “To remain as we are mandates that we do not learn. To learn demands that we change.”
” (There will be) a dramatic increase in regulation, slower credit growth and a forced return to a traditional relationship banking model where banks fund themselves primarily through deposits”
Sounds about right to me.
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