How Wall Street Reinvented the Investment Bank

With President Obama’s speech to mark the one-year anniversary of the fall of Lehman Brothers, we had the opportunity to evaluate the progress over the last twelve months. Many of us are wondering what has changed, and if the changes to Wall Street have been substantial enough to stabilize a market.

Knowledge@Wharton spoke with Jeremy Siegel and Richard Herring, finance professors at the Wharton school, to analyze the situation. Surprisingly, their point of views are not similar.

When asked how Wall Street has changed, Siegel responded with:

We saw the whole concept of the investment bank totally changed. It killed itself as a standalone institution. It had to be absorbed by a commercial bank, as was the case with Bear Stearns, or in the case of Lehman, liquidated or take on a commercial-bank holding company status to get federal [funding] access … Even Goldman Sachs, the most successful of the investment banks, [did that].

By definition of a standalone entity, the investment bank may never return. Herring, however, questions if any existing entities will take its place, such as hedge funds. He also serves as an example that not everyone in the financial industry agrees the environment has changed much as it has to.

It’s changed surprisingly little … Some institutions will be paying record bonuses again. In fact, the U.S. government has set up a situation where [bonus systems] can be very easily arbitraged by institutions getting essentially federal money [while] taking risky positions and making easy profits. In one sense, we’ve made the situation worse.”

While the public has been watching to see how the financial industry will fix itself, the proposed reform from the President may deserve the most attention. And even if Wall Street has both supporters and critics of the Obama administration’s proposal, its likely that the most significant changes still lie ahead.

Photo credit: jpellgen

Finding the Next Bubble

Following dot com failures, oil and corn, investors are asking themselves where they can jump on the next bubble. Matthew Lynn writes for Bloomberg:

One thing we know for sure about today’s global economy is that there is always an investment bubble somewhere. If you get in early enough, you can make a fortune riding the boom.    

Investors are quick to spot a perceive trend. They pile on in swarms, weighing down the possibility of the trend becoming a success before jumping on to something else. Lynn argues the next bubble could appear in five segments, and none of which are particularly surprising.

• Automobile industry
• Old Europe
• The United States Dollar
• Stockbroking
• Private islands

Lynn adds by reminding us that while many companies fail to generate much of a revenue in these bubbles, few actually move to become incredibly profitable.