Conclusion 4-5 Investment banks and private equity are arguably two of the most controversial components of our financial markets. We have learned that investment banks evolved from being conserva tive financial market gatekeepers into large, global financial service providers. These very old financial institutions have created a great deal of controversy, especially in recent years, in terms of their incentives and their impact on public policy Private equity funds, while much younger than investment banks, also have created much controversy. Many in the private equity industry have tried to shun the public spotlight and undertake their long-term investments in relative anonymity. Over the past few years, however, as some former private equity executives have run for public office, more attention has been given to the waterfalls and carried interest in private equity transactions. In addition, larger questions of how exactly these returns are earned have been raised. These two important yet controversial financial institutions will most likely continue to play an important role in the future development of our financial markets. It will be interesting to see how public perceptions of these institutions affect future government regulations of them. IN THE NEWS The Vampire Squid Strikes Again: The Mega Banks Most Devious Scam Yet neilo Banks are no longer just financing heavy industry. They are actually buying it up and inventing bigger, bolder and scarier scams than ever Matt Taibbi Roling Stone February 12, 2014 Call it the loophole that destroyed the world. It's 1999, the tail end of the Clinton years. ... Congress is feverishly crafting what could yet prove to be one of the most transformative laws in the history of our economy -a law that would make possible a broader concentration of financial and industrial power than we've seen in more than a century... A tiny provision in the bill [that would become the Financial Services Modernization Act of 1999, or the Gramm-Leach-Bliley Act] also permitted commercial banks to delve into any activity that is "complementary to a financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. Complementary to a financial activity. What the hell did that mean?... "Nobody knew the reach it would have into the real economy, says Ohio Sen. Sherrod Brown... Today, banks like Morgan Stanley, JPMorgan Chase and Goldman Sachs own oil tankers, run airports and control huge quantities of coal, natural gas, heating oil, electric power and precious metals. They likewise can now be found exerting direct control over the supply of a whole galaxy of raw materials crucial to world industry and to society in general, including everything from food products to metals like zinc, copper, tin, nickel and, most infamously thanks to a recent high-profile scandal, aluminum. And they're doing it not just here but abroad as well: In Denmark, thousands took to the streets in protest in recent weeks, vampire-squid banners in hand, when news came out that Goldman Sachs CHAPTER 24 Investment Banks and Private Equity was about to buy a 19 percent stake in Dong Energy, a national electric provider. The furor inspired mass resignations of ministers from the government's ruling coalition, as the Danish public wondered how an American investment bank could possibility hold so much influence over the state energy grid. .. nu This article points out that investment banks' activities in recent years have gone well beyond their traditional role of underwriting stocks and bonds. Investment banks (remember, most of them are now bank holding companies and thus are able to borrow funds from the Federal Reserve and get taxpayer-funded bailouts) are involved in a wide variety of "complimentary financial activities." What are the possible implications for financial markets as investment banks continue to expand their activities? Is this an efficient way for investment banks to diversify their activities? Or is it, as Taibbi suggests, an attempt by investment banks to corner markets that could result in the next global financial crisis?

Conclusion 4-5 Investment banks and private equity are arguably two of the most controversial components of our financial markets. We have learned that investment banks evolved from being conserva tive financial market gatekeepers into large, global financial service providers. These very old financial institutions have created a great deal of controversy, especially in recent years, in terms of their incentives and their impact on public policy Private equity funds, while much younger than investment banks, also have created much controversy. Many in the private equity industry have tried to shun the public spotlight and undertake their long-term investments in relative anonymity. Over the past few years, however, as some former private equity executives have run for public office, more attention has been given to the waterfalls and carried interest in private equity transactions. In addition, larger questions of how exactly these returns are earned have been raised. These two important yet controversial financial institutions will most likely continue to play an important role in the future development of our financial markets. It will be interesting to see how public perceptions of these institutions affect future government regulations of them. IN THE NEWS The Vampire Squid Strikes Again: The Mega Banks Most Devious Scam Yet neilo Banks are no longer just financing heavy industry. They are actually buying it up and inventing bigger, bolder and scarier scams than ever Matt Taibbi Roling Stone February 12, 2014 Call it the loophole that destroyed the world. It's 1999, the tail end of the Clinton years. ... Congress is feverishly crafting what could yet prove to be one of the most transformative laws in the history of our economy -a law that would make possible a broader concentration of financial and industrial power than we've seen in more than a century... A tiny provision in the bill [that would become the Financial Services Modernization Act of 1999, or the Gramm-Leach-Bliley Act] also permitted commercial banks to delve into any activity that is "complementary to a financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. Complementary to a financial activity. What the hell did that mean?... "Nobody knew the reach it would have into the real economy, says Ohio Sen. Sherrod Brown... Today, banks like Morgan Stanley, JPMorgan Chase and Goldman Sachs own oil tankers, run airports and control huge quantities of coal, natural gas, heating oil, electric power and precious metals. They likewise can now be found exerting direct control over the supply of a whole galaxy of raw materials crucial to world industry and to society in general, including everything from food products to metals like zinc, copper, tin, nickel and, most infamously thanks to a recent high-profile scandal, aluminum. And they're doing it not just here but abroad as well: In Denmark, thousands took to the streets in protest in recent weeks, vampire-squid banners in hand, when news came out that Goldman Sachs CHAPTER 24 Investment Banks and Private Equity was about to buy a 19 percent stake in Dong Energy, a national electric provider. The furor inspired mass resignations of ministers from the government's ruling coalition, as the Danish public wondered how an American investment bank could possibility hold so much influence over the state energy grid. .. nu This article points out that investment banks' activities in recent years have gone well beyond their traditional role of underwriting stocks and bonds. Investment banks (remember, most of them are now bank holding companies and thus are able to borrow funds from the Federal Reserve and get taxpayer-funded bailouts) are involved in a wide variety of "complimentary financial activities." What are the possible implications for financial markets as investment banks continue to expand their activities? Is this an efficient way for investment banks to diversify their activities? Or is it, as Taibbi suggests, an attempt by investment banks to corner markets that could result in the next global financial crisis?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

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Investment banks' activities in recent years have gone well beyond their "traditional" role of underwriting stocks and bonds. Investment banks (remember, most of them are now bank holding companies and thus are able to borrow funds from the Federal Reserve and get taxpayer-funded bailouts) are involved in a wide variety of "complimentary financial activities." What are the possible implications for financial markets as investment bans continue to expand their activities? Is this an efficient way for investment banks to diversify their activities? Or is it an attempt by investment banks to corner markets that could result in the next global financial crisis?

Transcribed Image Text:Conclusion 4-5 Investment banks and private equity are arguably two of the most controversial components of our financial markets. We have learned that investment banks evolved from being conserva tive financial market gatekeepers into large, global financial service providers. These very old financial institutions have created a great deal of controversy, especially in recent years, in terms of their incentives and their impact on public policy Private equity funds, while much younger than investment banks, also have created much controversy. Many in the private equity industry have tried to shun the public spotlight and undertake their long-term investments in relative anonymity. Over the past few years, however, as some former private equity executives have run for public office, more attention has been given to the waterfalls and carried interest in private equity transactions. In addition, larger questions of how exactly these returns are earned have been raised. These two important yet controversial financial institutions will most likely continue to play an important role in the future development of our financial markets. It will be interesting to see how public perceptions of these institutions affect future government regulations of them. IN THE NEWS The Vampire Squid Strikes Again: The Mega Banks Most Devious Scam Yet neilo Banks are no longer just financing heavy industry. They are actually buying it up and inventing bigger, bolder and scarier scams than ever Matt Taibbi Roling Stone February 12, 2014 Call it the loophole that destroyed the world. It's 1999, the tail end of the Clinton years. ... Congress is feverishly crafting what could yet prove to be one of the most transformative laws in the history of our economy -a law that would make possible a broader concentration of financial and industrial power than we've seen in more than a century... A tiny provision in the bill [that would become the Financial Services Modernization Act of 1999, or the Gramm-Leach-Bliley Act] also permitted commercial banks to delve into any activity that is "complementary to a financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. Complementary to a financial activity. What the hell did that mean?... "Nobody knew the reach it would have into the real economy, says Ohio Sen. Sherrod Brown... Today, banks like Morgan Stanley, JPMorgan Chase and Goldman Sachs own oil tankers, run airports and control huge quantities of coal, natural gas, heating oil, electric power and precious metals. They likewise can now be found exerting direct control over the supply of a whole galaxy of raw materials crucial to world industry and to society in general, including everything from food products to metals like zinc, copper, tin, nickel and, most infamously thanks to a recent high-profile scandal, aluminum. And they're doing it not just here but abroad as well: In Denmark, thousands took to the streets in protest in recent weeks, vampire-squid banners in hand, when news came out that Goldman Sachs

CHAPTER 24 Investment Banks and Private Equity
was about to buy a 19 percent stake in Dong Energy, a national electric provider. The
furor inspired mass resignations of ministers from the government's ruling coalition, as the
Danish public wondered how an American investment bank could possibility hold so much
influence over the state energy grid. ..
nu
This article points out that investment banks' activities in recent years have gone well beyond
their traditional role of underwriting stocks and bonds. Investment banks (remember, most
of them are now bank holding companies and thus are able to borrow funds from the Federal
Reserve and get taxpayer-funded bailouts) are involved in a wide variety of "complimentary
financial activities." What are the possible implications for financial markets as investment
banks continue to expand their activities? Is this an efficient way for investment banks to
diversify their activities? Or is it, as Taibbi suggests, an attempt by investment banks to corner
markets that could result in the next global financial crisis?

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