US Investment Banks Research Articles

The eurozone crisis: how banks and sovereigns came to be joined at the hip

The eurozone sovereign and banking crisis evolved in three phases. Following the onset of the subprime tremors in July 2007, the risk premia (spreads) on bonds issued by eurozone sovereigns rose from historically low levels; but they rose largely in tandem across the eurozone membership along with global banking stresses. The rescue of the US investment bank, Bear Stearns, in March 2008, oddly enough, marked the start of a distinctively European banking crisis accompanied by increased differentiation of countries within the eurozone. With the greater expectation of public support for distressed banks, the spreads that a sovereign paid tended to rise following evidence of stress in its domestic financial sector. This was especially so in countries with lower growth prospects and higher debt burdens. But there was as yet no feedback from banks to sovereigns. Finally, as the limits of fiscal support for domestic banks became clearer, and coinciding with the nationalization of Anglo Irish in January 2009 but gathering steam with evidence of the Greek sovereign’s distress in May 2010, sovereign weaknesses also came to be quickly transmitted to a more pessimistic assessment of the financial sector’s prospects, creating the potential of mutual destabilization. — Ashoka Mody and Damiano Sandri

When Complexity Impairs Disclosure – A Critique of SFC’s Proposal to Strengthen the Disclosure Regime after the Lehman Minibonds Incident in Hong Kong

The shockwaves from Lehman Brothers' demise in September 2008 are still reverberating through the world of retail structured financial products in Asia. The retail buyers across the region, in particular, those in Hong Kong suffered losses from complex structure financial products linked to the failed US investment banks. The regulators in Hong Kong have proposed to tighten up the disclosure regime providing sufficient information regarding the risks involved in structured securities to the end customers. This article reviews potential problems pertaining to this regulatory move.

US Financial Regulations Circa 2010: The Coup De Grace of Dodd and Frank's Legislative Careers?

US government authorities permitted extensive financial sector de-regulation in the two decades prior to the 2007–2008 financial crisis. The last step in this de-regulatory trend was the switch to risk-weighted captial adequacy from fixed leverage ratios for US investment banks in 2004. Combined with a highly decentralised government regulatory structure that is lauded for the regulatory competition it allows, this de-regulation created considerable scope for regulatory arbitrage. Political compromise de-railed several important reform initiatives in the wake of the crisis. The reform failed to consolidate US regulatory institutions in any material way, backed away from original intentions to mitigate the ‘too big to fail’ problem and limit banks’ investment activities, and left the clean up of the mortgage giants, Fannie Mae and Freddie Mac, for further study. The greatest change came in the reform of consumer protection, derivatives trading and macro-prudential oversight.

The End of Investment Bank Capitalism? Financial Jobs and Power in the Securities Industry

Media often portray investment bankers as the culprits of the global financial crisis, while mainstream scholarly accounts blame government failures and global trade and financial imbalances. This paper investigates the role of investment banks in the global financial crisis and the US economy, by focusing on employment patterns and power relations in the financial sector between 1978 and 2008. It demonstrates that investment banking plays a central part in the securities industry, which has been by far the most expansive segment of the US financial sector, and a significant contributor to growing income inequality. The power of investment banking has risen over the last 30 years in the conditions of growing demand for investment services, technological changes, deregulation and globalization. Investment banks were at the heart of the shadow banking system, inventing many of the products used by it and often disguising its operation. With leading US investment banks converted into bank holding companies, and the threat of re-regulation, the future of investment banking is uncertain. One area of uncertainty is their relationship with Sovereign Wealth Funds, which involves both opportunities and challenges. The paper finishes with a call for more research on investment banking as an industry, which is a key to understanding the dynamics of contemporary world economy, including insights into the trajectory of commodity and carbon markets, as well as the shifting landscape of financial centres.

Chapter 3 : Failure of, and Un-Constitutionaility of the 'Restoring American Financial Stability Act' of 2010 ('Rafsa')

RAFSA is critical and worth examining because it was the first set of statutes in any country, that attempted to simultaneously address the Global Financial Crisis, the securities law framework in the US, the structure of the executive branch of the US federal government, and delegation of powers to federal government agencies (to the detriment of state governments). Furthermore, the effects of RAFSA will be felt in many countries because US investment banks are very active in many foreign markets, many foreign investors own US securities, and mnay foreign companies are listed in US stock exchanges. In July 2010, the US Congress enacted the Restoring American Financial Stability Act of 2010 (RAFSA) , which consists of several individual distinct statutes and substantially changes the nature and effects of Federalism and preemption in the US – the RAFSA grants more powers to the federal government to regulate more financial services, but because the statute leaves critical details up to the US SEC and the US Federal Reserve System, sections of the RAFSA may be challenged in court on constitutional grounds as void for vagueness.

The Great Recession – A Transformative Moment for Planning

The global financial and economic crisis that started in 2007 has challenged fundamental assumptions about the role of markets, public policy and planning in the provision of wealth and public goods. This special issue sets out to explore the meaning of the crisis for planning, looking into various areas that represent a broad concept of planning as public policy: urban development and governance; housing and urban design; international development and poverty reduction; transport and mobility; and environmental policy and planning. The special issue links reflections on the changing economic and financial environment, on shifting attitudes towards markets, governance and planning, and on practical and policy implications, with conceptual and theoretical considerations. Without claiming to fully exhaust the content of the contributions, this introduction resumes the arguments and findings with regard to three key questions: the nature of the pre-crisis regime as exposed during the crisis; planning and public policy responses to the crisis; and likely scenarios for the future of public policy and planning. The background of these questions is the observation that the Great Recession marks a crisis that will potentially transform key institutions and the wider ideational framework of planning. The sequence of events that unfolded since mid-2007 was breathtaking. The crisis that was to become the Great Recession first emerged in the US subprime mortgage market, quickly spread throughout financial markets globally and then caused vast damage in the real economy, which saw the worst slump since 1929. While a globally coordinated Keynesian response of unseen proportions helped to stop immediate panic in financial markets, it did little to prevent a major rise in structural unemployment, left public budgets with huge deficits and brought several countries to the verge of a sovereign debt crisis. Indications of a structural transformation abound: two years after the collapse of the US investment bank Lehmann Brothers, despite record-low interest rates, many asset values remain depressed, capital supply limited and credit tight. Many economic forecasters expect a long period of sluggish growth at best. Many regions saw key factories and businesses close down, probably forever. Moving towards post-stimulus politics, governments have cut back public services and announced a decade of austerity. The overall scenario is subdued and there seems no easy return to pre-crisis conditions that in hindsight appear like a happy era – for planning and beyond. But were they?

Bank activity and funding strategies: The impact on risk and returns

This paper examines the implications of bank activity and short-term funding strategies for bank risk and return using an international sample of 1,334 banks in 101 countries leading up to the 2008 financial crisis. Expansion into noninterest income-generating activities such as trading increases the rate of return on assets, and it could offer some risk diversification benefits at very low levels. Nondeposit, wholesale funding in contrast lowers the rate of return on assets, while it can offer some risk reduction at commonly observed low levels of nondeposit funding. A sizable proportion of banks, however, attract most of their short-term funding in the form of nondeposits at a cost of enhanced bank fragility. Overall, banking strategies that rely prominently on generating noninterest income or attracting nondeposit funding are very risky, consistent with the demise of the US investment banking sector.

The Political Economy of the Subprime Crisis: The Economics, Politics and Ethics of Response

Media and policy discourses on the subprime crisis and the ensuing credit crunch have been dominated by historical analogies, whereby a sense of how bad things have been since the autumn of 2007 arises from comparing the situation directly to other notable moments of financial meltdown. Typical of this approach is the measured insistence of the Chair of the US Federal Reserve, Ben Bernanke, that the spiral of illiquidity which engulfed the banking sector in September 2008 provided the most serious threat of systematic bank collapses since the Great Depression. Such constructions are clearly not without justification. Commercial banks have been nationalised at a rate unprecedented in recent memory; the once seemingly omnipresent giant US investment banks have failed to survive in their extant form; the UK has witnessed its first genuine run-on-the-bank dynamics since the middle of the nineteenth century; the interest rate spread between inter-bank lending and government bonds has reached record highs almost worldwide; and the drying up of mortgage lending has led to record annual falls in house prices in many countries. However, as an explanatory device, inference by historical analogy alone places unnecessary and unhelpful restrictions on attempts to understand how events surrounding the sub-prime crisis and its associated credit crunch have unfolded.

Post-crisis challenges to bank regulation

The current crisis has swept aside not only the whole of the US investment banking industry but also the consensual perception of banking risks, contagion and their implication for banking regulation. As everyone agrees now, risks where mispriced, they accumulated in neuralgic points of the financial system, and where amplified by procyclical regulation as well as by the instability and fragility of financial institutions. The use of ratings as carved in stone and lack of adequate procedure to swiftly deal with systemic institutions bankruptcy (whether too-big-to-fail, too complex to fail or too-many to fail). The current paper will not deal with the description and analysis of the crisis, already covered in other contributions to this issue will address the critical choice regulatory authorities will face. In the future regulation has to change, but it is not clear that it will change in the right direction. This may occur if regulatory authorities, possibly influenced by public opinion and political pressure, adopt an incorrect view of financial crisis prevention and management. Indeed, there are two approaches to post-crisis regulation. One is the rare event approach, whereby financial crises will occur infrequently, but are inescapable.

Balance sheet exposures leading towards the credit crunch in global investment banks

This paper examines the effect of the 2007-8 predicament in the investment banking sector from a balance sheet perspective. The main factors that led to the crisis are identified and discussed, along with how an investment banking sector searching for high yields got involved in mortgage-related securities. Data from the five major US investment banks between 2004 and the second quarter of 2008 is used to argue that the predicament is the result of the combined effect of the subprime crisis and the credit crunch. The main focus of this paper is an analysis of the effect of leverage and liquidity factors on the balance sheet during the crisis, using data from Goldman Sachs and, more importantly, Lehman Brothers from 1999 to the second quarter of 2008. The two investment banks are compared and analyzed to assess whether the balance sheet argument is holding as the crisis deepens.

What Went Wrong? An Initial Inquiry Into the Causes of the 2008 Financial Crisis

The 2008 financial crisis was the direct product of a supply-driven bubble in which a new financial technology (asset-backed securitization) failed. In the US, this failure seems attributable in large measure to two under-recognized causes: (a) excessive reliance on a gatekeeper—the credit rating agency—which became increasingly subject to client pressure as competition increased in its market; and (b) a shift toward more self-regulatory rules that permitted US investment banks to increase leverage and reduce diversification under the pressure of competition. The policy lesson seems clear: competition is not a substitute for regulation, and the case for prudential regulatory supervision of financial institutions becomes stronger as the relevant market becomes more competitive.

Post Crisis Challenges to Bank Regulation

The current crisis has swept aside not only the whole of the US investment banking industry but also the consensual perception of banking risks, contagion and their implication for banking regulation. As everyone agrees now, risks where mispriced, they accumulated in neuralgic points of the financial system, and where amplified by procyclical regulation as well as by the instability and fragility of financial institutions. The use of ratings as carved in stone and lack of adequate procedure to swiftly deal with systemic institutions bankruptcy (whether too-big-to-fail, too complex to fail or too-many to fail). The current paper will not deal with the description and analysis of the crisis, already covered in other contributions to this issue will address the critical choice regulatory authorities will face. In the future regulation has to change, but it is not clear that it will change in the right direction. This may occur if regulatory authorities, possibly influenced by public opinion and political pressure, adopt an incorrect view of financial crisis prevention and management. Indeed, there are two approaches to post-crisis regulation. One is the rare event approach, whereby financial crises will occur infrequently, but are inescapable.

A Tale of Two Speeds of Bias Reduction: Recommendation Changes for US and Non-US Investment Banks

A Tale of Two Speeds of Bias Reduction: Recommendation Changes for US and Non-US Investment Banks

Stakeholder relationships in an international retailing context: an investment bank perspective

PurposeIn the stakeholder marketing literature, there have been calls by several researchers to expand the stakeholder domain to incorporate a broader array of stakeholders. In developing this argument in this paper the authors aim to explore a set of stakeholder relationships in an international retailing context, notably those which exist between retail firms and investment banks.Design/methodology/approachTheoretical ideas are subject to empirical scrutiny from 34 in‐depth interviews with investment banks and senior retail executives from two retail multinationals.FindingsExploratory findings suggest that US investment banks' ideals were at odds with European retail firms – and both occupied “different thought worlds”. It is concluded that the relationships between financial stakeholders and the retail firm cannot be explained simply by reference to stylised economic interactions, but must also be examined in the light of the cultural contexts and different forms of market system within which different firms emerge, operate and interact.Originality/valueNew strategies such as internationalisation stretch resources and capabilities to a point where retailers invariably will be exposed to different stakeholder issues and stresses. Towards this end, this paper contends that the significant international re‐orientation under way in retailing must be understood within the wider context of stakeholder theory. The paper argues that the full potential of applying stakeholder marketing theory to the internationalisation process of retailers has yet to be realised. From this exploratory research, five research propositions are put forward that might serve as a guide to future research in this area.

Reforming the US IPO market: lessons from history and theory

The current US IPO market is inefficient and unfair. To protect their own balance sheets, US investment banks systematically underprice offerings. To ration the cheap securities, the investment banks utilize various nefarious nonprice rationing techniques, including kickbacks. Regulators should reform the market by loosening restrictions against issuers. The early history of the market (1781-1861) shows that unregulated IPO markets can function efficiently. Early US corporations successfully sold equities directly to investors without the aid of intermediaries because they could overcome information asymmetry cheaply. Today, the Information Revolution is again decreasing the cost of reducing information asymmetry between investors and issuers. Regulators could improve upon the past, however, by allowing the market to price ration new shares via an auction method.

The Ties that Bind: Strategic Actions and Status Structure in the US Investment Banking Industry

We applied Giddens' (1979, 1984) structuration theory to investigate the US investment banking industry and found support for the notion that industry network structure impacts the strategic actions of the firms embedded in it, and that the status hierarchy component of the industry structure is reproduced by the dyad-level interactions of firms in this industry. Investment banks conform to the homophily phenomenon — they tend to transact with others in the industry of similar status. Status ranking also enables high-status banks to maintain an extensive exchange relationship with other banks, while status ranking constrains low-status banks to transact repeatedly with banks with which they have previously transacted.

Bids and Allocations in European IPO Bookbuilding

This paper uses evidence from a dataset of 27 European IPOs to analyse how investors bid and the factors that influence their allocations. We have the complete books for these deals - amounting to 5540 bids - and so can analyse directly how bids and allocations are related. All these deals are private sector IPOs where the bookrunner was a leading European investment bank. We make use of a unique ranking of investor quality, associated with the likelihood of flipping the IPO, as produced by a group of US and European investment banks. We find that high quality investors are consistently favoured in allocation and in out-turn profits. We also find that bids submitted via the bookrunner and large bids received better pro-rata allocations and higher average profits. We find that a very small proportion of all bids submitted during the bookbuilding contain price limits - especially in hot IPOs - and, in contrast to Cornelli and Goldreich (2001), we do not find that that such bids are favoured in terms of allocation.

The competitive dynamics of status and niche width: US investment banking, 1920-1949

By integrating the status-based model of market competition and the resource partitioning model, this paper develops the resource-status space imagery of markets and two propositions. First, the paper argues that the benefit that an organization derives from an increment in status is not independent of the organization's niche width. Second, the paper considers the implications of status-based stratification for the resource partitioning model's specification of the effects of increasing market concentration. Using the resource-status space imagery, this paper posits that if expanding generalists are reluctant to lower their status or are unable to increase their status, they will expand within their current status level. The expanding generalists will thus encroach on the niches of similar status generalists and specialists, rather than expand into the niches of generalists across the whole status spectrum. We discuss implications for the sociology of markets. Copyright 2000 by Oxford University Press.