Tuesday, October 27, 2009

Guido the Banking Lobbyist

An unfortunate consquence of being a political activist is that I have to indulge Paul Staines' ego by actually reading his blog. What I read today made me angry.

UPDATE : Labour's Lord Myners, who really ought to know better, is now (Thick of It style) pushing a rival plan this morning. Forcing investment banks to reduce their fees for capital raising. He seems to want to further erode bank profits. How are the banks expected to rebuild their balance sheets?
Does Guido actually understand how investment banking works? Investment banks shouldn't need to rebuild their balance sheets because they don't provide the money themselves, they act as facilitators matching those with cash to those who want it and take fat fees for this job.

Now, it's true that in these times the traditional "investment bank as an agency" model is a rarity with most banks being a larger banking conglomerate. However, it should be still be noted that the purpose of the investment bank is to find capital to fund it's customers, if it is charging excessive fees in order to shore up it's parent bank's balance sheet that smacks of an absolutely massive conflict of interest.

From what we can read into Guido's post, it seems clear that he either does not understand what in investment banking is or he is not worried about this conflict of interest. If it's the latter then he's being little more than a political lobbyist demanding that that the banking gravy train continues unabashed.


Guido Fawkes said...

I think I might have picked up something during my decade in investment banking.

If you think investment banks don't need strong balance sheets you are an idiot. The better the balance sheet the higher the credit rating. Crap credit rating and you're out of many games because they become too expensive to play.

Andreas Paterson said...

Ok Guido, I'm happy to accept your argument that an investment bank needs a decent balance sheet to get in on certain bits of the action. So let me follow up with..

My impression of the bits of investment banking such as that have to do with raising capital seem (relatively) low risk, while I can see that underwriting might be risky, once a deal is done it seems like it's cash in the bank. This, I thought, was the reason why around 40-50% of investment bank income goes on pay.

It seems to me that the problems that have developed in investment banks have come about because of the other activities that these banks have been undertaking. I'd have to ask what gives the banks the right to gouge their customers in order to make up for problems that developed inother areas of the bank.

I'd also have to ask, given that investment banking profit seems on the up and bonueses are back how exactly this squares with the whole "we need to rebuild our balance sheets" argument. It seems to me the banks want to have their cake and eat it.