The old model for Finance is dead

The collapse of this twenty-five year credit bubble made 2008 a year for the history books. I never thought I would see the day when the likes of Citigroup, AIG, Royal Bank of Scotland, UBS and B of A, the biggest names in the banking world, had to be bailed out by their respective governments and partially nationalized – to forestall collapse.
I never thought I would see the likes of Merrill Lynch, Wachovia, Washington Mutual, and Countrywide Mortgage, all huge financial institutions, being forced to sell to forestall bankruptcy. In particular, the five big investment banking firms in New York, which a year ago had total assets of $4.2 trillion, blew themselves out of the water.
- Bear Stearns, with total assets of $350 billion, forced to sell out for a pittance and Lehman, with assets of $700 billion, bankrupt.
- Merrill forced to sell to Bank of America which over-reached itself and is now in trouble.
- Morgan Stanley and Goldman forced to raise equity at distress prices and convert to bank holding companies to get federal aid.
For these five big investment banks, this has been a complete and unmitigated self-inflicted disaster.
As I said in my book, Money Magnet, the old model of investment banking for these five big firms on Wall Street is dead. The new era will have private equity race ahead with its focus on relationships and its manageable size.


Michael @ nCompass said...

Buried next to the financial model is the manufacturing model....I've worked in operations for years, mostly for multi-nationals and now concentrating on private firms.

From an operations perspective the model, in my opinion, died because of first year psychology 101, cognitive dissonance..."the more we are committed to believing something is true the less likely we are to believe the opposite is true". It is also the number one reason people resist change. Ah! Resisting Change. Maybe if the operations model's output wasn't so closely tied and driven by the financial model's input then one of these two models would have been able to survive. Doing the right thing from an operations model doesn't alway 'jive' with what the finacial model is looking for.

If these two models can be redefined in parallel we will rebound quicker than if they are reborn in sequence.

It would be nice if both models could find a way of complimenting eachother...both contributing to the better good.

Wait a minute, they do - at least in the Private Equity world they do. There they seem to be better in tune with eachother.


J. B. Loewen said...

REsisting change is the human race's biggest issue -it's why they gave Socrates hemlock to drink. Too change oriented, to high risk. Then there's Gallilao and we could go on and on.
Yet after all these centuries, these men are shown to be right. I hope there is a heaven and a hell to justify this terrible treatment!

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