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Saturday, October 27, 2012

Why Investment Banks Like Having Booms and Busts

"In an unstable economy, speculation dominates enterprise." -- Hyman Minsky, Stabilizing an Unstable Economy, p. 17

3 comments:

  1. Except investment banks have been doing pretty badly over the past five (unstable) years.

    Speculation-based trading is one segment of their market-making department, which is one single department of any investment bank.

    Investment banks largely earn their revenues from underwriting IPOs, helping stabilize IPO prices with a stabilizing mechanism, and arbitrating negotiations between merging companies. These are activities that directly channel funds to the real economy, rather than just shift funds between financial assets. So they are very vulnerable to the state of the real economy.

    The last time I checked Goldman Sach's financial statements, I saw that their revenue breakdown was 40% deal-making, 40% wealth management advisory, and only 20% trading in the markets.

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  2. I agree with Prateek. Read the comic "Alex" in the UK Daily Telegraph more often :)

    Also, who's to say that they know better how to speculate in unusual conditions than in usual ones? It's a myth the speculators can simply make more money from large price swings (it's intermediators who can do that). Speculators have to know which way things are going to go, and why should they know more during a boom or bust than in any other time.

    The best argument would be that intermediators have an interest in price swings. But Investment Banks do much more than that.

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  3. You are both wrong, wrong, wrong! A few bad years does not mean the overall cycle is not good for them.

    I've spent two decades around investment banks in one way or another: they thrive off of the cycle!

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