In a world where living by the credit card has been the shape of things for as long as I can remember, it is hard to grasp the fact that overnight funding markets have seized up sending shockwaves beyond the financial markets and into every household this side of the Big Waters. While the AIG crisis has been averted for now Morgan Stanley is not having a pleasant day in spite of great earnings in its last quarter. All eyes are on Morgan and Goldman Sachs, the two big I-banks left standing. Will they go next? Panic! Panic! Panic!
Investment Banking has always been the career with ‘cache.’ When I graduated from Williams College in 1993, most of my classmates had secured jobs with various Wall Street firms well before graduation day. Those of us who opted for other professions were considered ‘lower’ on the scale of common sense (don’t even think about people’s reactions when I tell them about my career path from Williams to advertising to Ayurvedic Medicine!).
Investment Bankers are the entrepreneurs of Wall Street: sure they take the risk but then look at the return that they bring and in a capitalistic society, who doesn’t respect the work of an entrepreneur? In the glory days of Wall Street, investment bankers were regarded to kings with ‘chocolate and champagne’ lifestyles…but not at the cost of the rest of society. For as we all know, building solid business does wonders to boost the economy.
So where did the problem arise? How did we lead ourselves to this state of panic? Investment banks have financed themselves for the good times rather than bad. So they depend excessively on short-term funding and high leverage. While this might have generated high returns in good times (supporting large payouts for employees and shareholders), in bad times this kind of capital structure has come back to haunt the firms. Given Lehman’s collapse, the only choice for the remaining investment banks might just be acquisition by commercial banks with large, stable deposit bases. 2008 has seen it happen with Bear Sterns-J.P.Morgan, Merrill Lynch-Bank of America and now with Lehman Brothers-Barclays. All three deals create universal banks that are better positioned to weather market turmoil. Will this be the way for Morgan and Goldman? Or will they change their strategies to actually weather the storm of the credit crunch?
Much as ‘I-Banking’ might be a bad word right now, I will personally be sorry to see the collapse of an industry that has supported my household for all of my adult life. The Investment Banker has a unique personality and skill set that gives him/her a peculiarly stron apetite for risk and reward: a good friend left Lehman NY, just a month ago to build the next phase of her career in Asia. It is an awfully exciting time, I remember her saying as she fervently packed her life into a forty foot container headed to Hong Kong. There are deals happening in Asia almost round the clock. It’s like the very nascent phase of Wall Street! Alas, she went from Wall Street to the pavements of Hong Kong. Had she hung on a few weeks, she would have been saved by the clutches of Barclays!