The current financial meltdown has transformed the face of Wall Street, possibly forever. For many years the energy on the market have been fueled by high-rolling investment bankers but look what’s happened in the last eight months. Lehman Brothers went bankrupt. Bear Stearns was purchasing by JPMorgan Chase, Merrill Lynch got bought out by Bank or investment company of America, and Goldman Sachs and Morgan Stanley needed to convert to a bank or investment company keeping companies just to stay static in business.
Five major investment banks. Essentially, the global financial crisis has ushered in the period of universal bank where substantial financial companies offer every conceivable kind of investment product and service. Even smaller brokerage companies face being herded under the umbrellas of big banking institutions, or else risk becoming irrelevant. When Goldman Sachs and Morgan Stanley opted to become bank keeping companies it proclaimed a historic realignment of the financial services industry and the finish of a securities company model that experienced prevailed on Wall Street because the Great Depression. But why did they make the change?
Partly because it’s given both firms’ access to the Federal Reserve’s discount windows – the same credit line that is available to other depository establishments at a lesser interest. As bank holding companies, they can also tap into debris from retail customers. Even though Goldman Sachs and Morgan Stanley are actually classified as bank holding companies and are part of the universal banking model, they’ll still be able to take part in investment banking activities. But after years of loose oversight by the Exchange and Securities Commission, they’re now faced with tighter regulations imposed by the Federal Reserve, and they are subjected to the Federal Deposit Insurance Corporation oversight.
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A quick historical overview of investment banks will serve as a backdrop to the events that led to their downfall. Independent investment banking institutions have been around for a long time, but originally they were small private partnerships that gained most of their money from offering corporate fund, and investment advice, as well as some banking and other services. If you had strolled into one of their offices and appeared around, you may have mistaken it for a big law firm.
The success of their business design depended on the trust built through long-term associations. There wasn’t much money at risk in the early days because the companies operated mainly with the partners’ own money. That meant there weren’t vast sums available to gamble on risky ventures with extreme leverage. With more capital in the coffers and an evergrowing access to low cost, short-term debt, managers began to make larger, riskier capital recently those troubling and toxic mortgage-backed securities bets-most. The regulations that had once separated investment banks from traditional banks were no more set up.
That opened the way for big global banking institutions like Citigroup and JP Morgan to begin competing with Wall Street for what got typically been the site of the investment banking business. This compelled Wall Street firms to expand their services, to use more leverage, and to take even bigger risks.