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Financial Services business models

Page history last edited by PBworks 15 years, 5 months ago

 

 


 

 

 

Impact of the credit crisis: changed business models

 

Bye bye (US style) investment banks:

 

9/2008:

 

Is this the end of the "independent broker dealer model"?  Many would say yes!  We see an end to the era of (1) lightly capitalized, (2) lightly regulated, (3) highly leveraged model of US investment banks.  In the future, they will need more access to more stable capital and funding like retail deposits, but thier business models will need to be completely reshaped, turning them more into commercial banks.  

 

This business model will need to change.  The old model was of using short-term collateralised loans in the repo market as a means to finance long term operations is clearly exposed as too risky in this operating environment.  Being reliant on fund raising of short term funds now seems too risky.  In response, many agreee now that having access to reliable deposit base is the key to being able to weather a financial storm as we have seen in the credit crisis in recent months.

 

Recently announced over the weekend, investment banks such as Goldman Sacs and Morgan Stanley will become "bank holding companies", meaning they can take deposits like a commercial bank, and use stable bank deposits to fund operations.  They key question now is how they will go about making this transition (as quickly as possible).  Will they try to grow the deposit business organically?  Or, will they look to purchase (or be purchased by) a commercial bank (such as Merrill did with Bank of America).  My bet is that they will seek to purchase a commercial bank quickly.

 

The benefit of becoming a "bank holding company" is that they will have more access to the lending window of the Federal Reserve. 

 

 

Wall Street business model in question:

 

The Wall Street business model used to be a wide margin business.  Back in the 60’s and 70’s there was an information arbitrage advantage to being in New York City, but with the development of the internet, the spread of Bloomberg terminals, and the rise of cable business news networks such as CNBC…that information advantage dissipated.   As a result, the business on Wall Street became a much narrower margin business, and there emerged a split between two popular business models.  On one hand, there was the high volume business such as Charles Schwab, and on the other was the hedge fund - high risk, high leverage model.

 

 

Impact on Private Equity?

 

"Goldman Sachs and Morgan Stanley announced early this week their decision to become bank holding companies. The change of business structure may place new limits on their private-equity business practices. Wall Street Journal (09/23)

 

 

Background: How did we get here?

 

The Fed did all they could to try and save this business model.  First, they extended access to the lending window (temporarily) to these banks.  This was done to reassure investors.  Then, the US central bank tried to backstop the repo market, which was the main short-term funding market for these investment banks.    The trouble was that the repo market was traditionally funded in large part by money market mutual funds, which saw investors fleeing in droves (heading to the safe haven of US treasuries).  What happened is that investors thought the money market funds would not be safe, so the pulled money from them in record numbers, and poured money into Treasuries.  But, as they did so, this threatened Goldman and Morgan. 

 

 

Boutique Banks to Cash In

With the collapse or conversion of big banks, smaller competitors stand to scoop up talent and M&A business. Some of their stocks are up sharply

 

 

Kooky Plan links to other financial business models:

 

Hedge Fund 

asset management

alpha fund manager

 

 

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