Comments on: Three down, two to go … or is it four? http://bla.nointrigue.com/blog/2008/09/20/three-down-two-to-go-or-is-it-four/ my random thoughts Sat, 04 Jun 2011 03:04:03 +0000 hourly 1 http://wordpress.org/?v=3.2.1 By: Who’s who in the financial crisis | kewpid.net http://bla.nointrigue.com/blog/2008/09/20/three-down-two-to-go-or-is-it-four/comment-page-1/#comment-37775 Who’s who in the financial crisis | kewpid.net Mon, 30 Nov 2009 16:39:38 +0000 http://bla.nointrigue.com/blog/?p=59#comment-37775 [...] many of the top earners are now embroiled in the fin­an­cial crisis™ unfold­ing in Amer­ica (here’s Tommy’s suc­cinct sum­mary of it all). Hedge funds galore, Leh­man, Mer­rill, JPMor­gan and even the cur­rent Treas­ury [...] [...] many of the top earners are now embroiled in the fin­an­cial crisis™ unfold­ing in Amer­ica (here’s Tommy’s suc­cinct sum­mary of it all). Hedge funds galore, Leh­man, Mer­rill, JPMor­gan and even the cur­rent Treas­ury [...]

]]> By: jimy327 http://bla.nointrigue.com/blog/2008/09/20/three-down-two-to-go-or-is-it-four/comment-page-1/#comment-2261 jimy327 Wed, 01 Oct 2008 09:14:32 +0000 http://bla.nointrigue.com/blog/?p=59#comment-2261 Is this the same blog as you had back in high school? Looks much more sophisticated now... Anyways, was wondering the same thing about the over-turn of glass-steagall Act. Funny how both the promulgation of the Act and the over-turn of the Act are both triggered by financial turmoils on Wall St. I've also wondered though why is it that the US govt relaxed the provisions of the Act so that retail banks can provide IB services, but IBanks weren't allowed to provide retail bank services until now. Wasn't that situation a bit bizarre? Is this the same blog as you had back in high school? Looks much more sophisticated now…

Anyways, was wondering the same thing about the over-turn of glass-steagall Act. Funny how both the promulgation of the Act and the over-turn of the Act are both triggered by financial turmoils on Wall St.

I’ve also wondered though why is it that the US govt relaxed the provisions of the Act so that retail banks can provide IB services, but IBanks weren’t allowed to provide retail bank services until now. Wasn’t that situation a bit bizarre?

]]> By: Dan http://bla.nointrigue.com/blog/2008/09/20/three-down-two-to-go-or-is-it-four/comment-page-1/#comment-2199 Dan Sat, 20 Sep 2008 01:03:53 +0000 http://bla.nointrigue.com/blog/?p=59#comment-2199 Wow, this is such a clear summary! Wow, this is such a clear summary!

]]> By: Tommy Chen http://bla.nointrigue.com/blog/2008/09/20/three-down-two-to-go-or-is-it-four/comment-page-1/#comment-2198 Tommy Chen Sat, 20 Sep 2008 00:35:35 +0000 http://bla.nointrigue.com/blog/?p=59#comment-2198 If a bank does not distinguish between the investment bank and the retail bank, there can be conflicts of interest. By way of illustration: let's say BigBank's retail department has $1 million in deposits that it needs to invest. It *should* act in the client's best interest by investing in the best shares or bonds or whatever. Let's say the market is as it is now - the best thing to buy is government bonds, and not buying any shares whatsoever. Now let's say BigBank's investment banking department is doing an IPO for CrapCompany: selling CrapCompany's shares onto the market for the first time. It *should* act in the client's best interest by maximising the price and volume of shares sold. That would mean BigBank earns the biggest fees. But CrapCompany's shares aren't that good - they could well go down in price this year. If there is no strict separation between the two departments, the tempatation is there for BigBank to direct that $1 million to buy shares in CrapCompany, running the risk of losses for the retail clients. But the bank might not care: CrapCompany could be paying it a much larger fee than what it earns from the retail clients. The Glass-Steagall Act took a very Neanderthal approach to the problem, by mandating that the investment banking and retail banks separate. Today, we use "Chinese wall" mechanisms policed by government regulators. An illustration of the operation of a "Chinese wall" within an investment bank: with the proposed Qantas sale, the UBS investment banking department was advising Qantas, and they wanted the sale to go ahead (so that they could earn more fees). But the UBS equities department, which held a small part of Qantas but more importantly had great influence over market opinions, refused to sell. This was instrumental in derailing the deal. http://www.theage.com.au/news/business/qantas-bid-killer-walks-from-ubs/2007/05/22/1179601384317.html If a bank does not distinguish between the investment bank and the retail bank, there can be conflicts of interest.

By way of illustration: let’s say BigBank’s retail department has $1 million in deposits that it needs to invest. It *should* act in the client’s best interest by investing in the best shares or bonds or whatever. Let’s say the market is as it is now – the best thing to buy is government bonds, and not buying any shares whatsoever.

Now let’s say BigBank’s investment banking department is doing an IPO for CrapCompany: selling CrapCompany’s shares onto the market for the first time. It *should* act in the client’s best interest by maximising the price and volume of shares sold. That would mean BigBank earns the biggest fees. But CrapCompany’s shares aren’t that good – they could well go down in price this year.

If there is no strict separation between the two departments, the tempatation is there for BigBank to direct that $1 million to buy shares in CrapCompany, running the risk of losses for the retail clients. But the bank might not care: CrapCompany could be paying it a much larger fee than what it earns from the retail clients.

The Glass-Steagall Act took a very Neanderthal approach to the problem, by mandating that the investment banking and retail banks separate. Today, we use “Chinese wall” mechanisms policed by government regulators.

An illustration of the operation of a “Chinese wall” within an investment bank: with the proposed Qantas sale, the UBS investment banking department was advising Qantas, and they wanted the sale to go ahead (so that they could earn more fees). But the UBS equities department, which held a small part of Qantas but more importantly had great influence over market opinions, refused to sell. This was instrumental in derailing the deal.

http://www.theage.com.au/news/business/qantas-bid-killer-walks-from-ubs/2007/05/22/1179601384317.html

]]> By: enoch http://bla.nointrigue.com/blog/2008/09/20/three-down-two-to-go-or-is-it-four/comment-page-1/#comment-2197 enoch Sat, 20 Sep 2008 00:22:32 +0000 http://bla.nointrigue.com/blog/?p=59#comment-2197 "This sought to address the issue of conflicts of interest..." I didn't understand that part - what conflicts of interest? “This sought to address the issue of conflicts of interest…”

I didn’t understand that part – what conflicts of interest?

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