Question 5
Yes I believe Bear Stearns failure coupled with Merrill Lynch’s acquisition by Bank of America and Lehmann Brother demise put a negative spin on pure play investment banks whilst highlighting the benefits of the Universal Bank model.
Pure play investment banks face multiple concerns about their model. Regarding their source of funding, they typically relied on short term funding, especially repo transactions, when this source dried up in the case of Bear Stearns, it led to serious problems. Pure play investment Banks have had to utilise unsecured long term financing, which in turn leads to increased cost of capital.
Concerning increased cost, this adversely affects profitability. Pure play investment banks are facing a reduced demand
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Reduced short-term interest rates caused the cost of borrowing to be cheaper for everyone, financial institutions and individuals alike. With Tech stocks valued very lowly, investors flocked en masse to the booming real estate sector, coupled with a huge amount of cheap credit and the Federal Government’s deep seated policy of home ownership for low income families, there was an explosion of commercial and residential loans being taken out by almost everyone (Oregon Law Review, 2011).
I am citing the dot com bubble because the Feds kept interest rates at a low rate for too long, with the Federal funds rate at below 2% until almost 2005, which fed the development of the housing bubble.
The Feds eventually started raising rates but by then it was already too late, the Federal funds rate eventually hit 5% in 2006 and the bubble burst (Federal Reserve, 2010).
The Feds also played a critical role in the evolution of the financial crisis. Back in 2007, the Feds identified the issue of bursting the housing bubble and the rebound it would have on banks but wrongly assumed the markets problem was one of
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This law is usually blamed as being one of the critical deregulatory factors that led to the financial crisis. The important bits of the GLB act are that it repealed huge portions of the Glass Steagall Act (NY Times, 1933), an act that was passed in response to the Great Depression. The Glass Steagall act made the separation of commercial and investment banks compulsory. It has been argued that the repeal of this act through the GLB allowed banks get too big and the credit crisis might have been averted if the GLB had not being enacted (NY Times, 1933).
Without the GLB act, Bank of America and Citigroup would not exist today in their current model. Although, European Banks which are arguably more firmly regulated and have their version of the Glass Steagall Act, were not immune from the financial crisis either. All that is to say, the credit crisis might have still occurred even if Glass Steagall was in place, over/under regulation is not the answer, allowing an efficient market to correct itself is much more
The Glass-Steagall Act effectively built a Chinese wall between commercial and investment banking wherein the commercial banks were not allowed to trade securities or take part in the insurance business. It also prohibited the commercial banks from payment of interest on demand deposits and from engaging in inter-state operations. The act implemented Regulation Q which put ceilings on the interest rates the banks could pay on their time deposits say savings deposits. Regulation Q prevented the competitive interest rate wars that didn’t allow rates to reach unreasonably high levels. If rates had not been regulated then the banks would have been forced to lend at higher rates to remain profitable which would have led to riskier investments by them and failure problems would have followed. Looking at the evidence we see that from 1930 to 1933 more than 9000 commercial banks failed whereas, from 1934 to 1973 only 641 U.S banks were closed.[1] The act
Investment banking is a field that is still growing and there is still room for improvement and the job prospects are one of the best. However, in the last few years, there have been also some jobs cuts in the industry. For example, as Bloomberg reported, Goldman Sachs
The Glass-Steagall Banking Act was passed to insure people’s money if a bank fails. FDR reassured the nation about the banks by broadcasting a series of “fireside chats”. The Securities and Exchange Commission law was passed to regulate stock market.
According to the book Security policies and procedures: Principles and practices states, “On November 11, 1999, the Glass-Steagall Act was repealed and the Gramm-Leach-Bliley Act (GLBA) was signed into law by President Bill Clinton. Also known as the Financial Modernization Act of 1999, GLBA effectively repealed the restrictions placed on banks during the six preceding decades, which prevented the merger of banks, stock brokerage companies, and
Research has shown that a very loose monetary policy impacted the developments in the housing market in the early to mid 2000’s by creating the housing bubble which eventually burst, causing housing process to plummet after peaking in 2006. A steep decline followed, with the market bottoming out and housing prices collapsing, creating a significant recession and impacting the global economy. Economist Robert Gordon (2009) stated that is was the principle of the Fed maintaining short term interest rates too low for a too long of a period of time, go on to say that the Fed policies on interest rates did in fact contribute to the housing bubble (Gordon, 2009)
The Glass-Steagall Act came into existence largely due to the stock market crash of 1929 and the Great Depression. The crash and its aftermath caused Americans to lose faith in the banking system. Glass-Steagall attempted to restore the public’s faith in banks by separating commercial banking from investment banking and providing insurance on bank deposits. The Act worked as intended but its effects slowly diminished over the next 67 years and deregulation in the banking industry culminated with the enactment of the Gramm-Leach-Bliley Act in 1999 by then President Bill Clinton.1 The GLBA gutted Glass-Steagall and ended restrictions on intermingling between commercial and investment banking.1 Many believe the GLBA was a major cause of the financial crisis that erupted in 2008.
The relative successes and failures of that Act are becoming more apparent with time, and the shortcomings are subject to intense partisan criticism. As discussed below, Dodd-Frank seeks to address the highly sensitive and controversial notion that Wall Street banks have been designated by the Federal Reserve as too-big-to-fail. In fact, during the most severe moments of the crisis, the voices of free market proponents could be heard advocating that these troubled big banks, suffering massive losses due to their own bad bets, and if weakened to the point of failure, should be allowed to fail. Hindsight shows that allowing just one to fail, Lehman Brothers, had serious and lasting detrimental effect on the US and global financial system and markets. Had Lehman been saved, it would have been the most effective agent to unwind all of the transactions and trades to which it was a party, and likely in a rapid manner. However, being thrust into bankruptcy, and thereafter receivers were appointed to unwind the business, took months upon months and vast resources to settle Lehman accounts. Had Citibank, Bank of America, Bear Stearns, or AIG been allowed to fail, it may have been possible that the US financial system would have melted down completely. So these super banks, and non-banks, cannot be allowed to fail in crisis, due to the system-wide risk. Notwithstanding, such an implicit assurance, that they will always get a bailout, no matter how toxic
The real cause of the crisis was not in the housing market but in the misguided monetary policy of the Federal Reserve. While the economy started to downsize in 2008, the Federal Reserve concentrated on solving the housing crisis yet it was just a distraction from the entire thing. By its self, it might have caused a small downfall. As the Federal agency released the financial institutions at a risk from a number of bad mortgages, it disregarded the main cause of a serious crisis (FEDERAL RESERVE BANK of NEW YORK, 2017) A decrease in the Gross Domestic Product (GDP) which entails the total value of all commodities and services produced in the United States, was not adjusted for inflation. Such a decline began the unplanned crisis in mid-2008, and once it happened, the damage had already
The Glass Steagall Act was passed on 1933, which is also known as The Banking Act to tighten regulation on the way banks did their business. This act was written as an emergency measure when about 5,000 banks failed during the Great Depression. Banks mostly failed because of the way they would invest with money. The act prohibits banks from investing money on investments that turn out to be risky. Banks could no longer sell securities or bonds. The act also created Federal Deposit Insurance Corporation (FDIC) to protect the deposits of individuals, which is still used to this date. The FDIC in this era insures your deposits in your bank up to $250,000. This gave the public confidence again to deposit their money in the bank. In 1933
Glass-Steagall Banking Reform Act was important, because it ended the disgraceful epidemic of bank failures.
Since at least the 1980s, the financial industry wanted the repeal of Glass Steagall (Shanny). The Glass-Steagall Act of 1933 separated commercial and investment banking in the United States. This passed shortly after a series of bank failures and was supposed to restore confidence in the banking system by prohibiting banks from taking excessive risks. Concerned that commercial banking systems were incurring losses from speculative investments, specifically the stock market, they felt that completely prohibiting them from making these investments was the necessary measure to take. This meant that commercial banks were no longer allowed to deal in or underwrite securities, while investment banks were no longer
The banking industry as a whole after the stock market crashed was going bankrupt due to not being able to carry the “bad debt” that was created from using customer money to buy stock. Because the banks were out of money, they were unable to cover customer withdrawals from their bank, causing many bank customers to lose all of their savings. With the uncertainty of the future of the banking industry, many people withdrew all of their savings, which caused more than 9,000 banks to close their doors and go out of business (Kelly). Due to the effects of the Great Depression, and the collapse of the banking industry, the government created regulations to prevent similar failure in the future. For Example, the SEC, (or Securities Exchange Commission), which regulates the sell and trade of stocks, bonds and other investments was created as a result of The Great Depression. The FDIC (or Federal Deposit Insurance Corporation), was created to insure bank accounts so that that the consumer would be protected if the bank were to go out of business (Kelly). The Great Depression's effect on the banking industry led to many useful changes to the banking industry and helped restore confidence in banks in the American people.
During this time period, homeownership typically required a 20 percent down payment (Melicher & Norton, 2014, 168). Lending institutions were very careful about whom they lent money to, and credit standards were high (Melicher & Norton, 2014, 168). Melicher & Norton (2014) called this the “save now, spend later” philosophy, and it would change in the coming years (p. 168).
Extensive research has determined that the banking industry is in an unstable state. The industry’s profits have
In relation to the increase in house’s price, the rise of financial agreements such as mortgage-backed securities (MBS) and collateralized debt obligations (CDO) encouraged investors to invest in the U.S housing market (Krugman, 2009). When housing price declined in the U.S, many financial institutions that borrowed and invested in subprime mortgage reported losses. In addition, the fall of housing price resulted in default and foreclosure and that began to exhaust consumer’s wealth and