Wall Street Melts Down: The End of an Era
As a college senior in 1986, I vividly remember the Wall Street investment banks coming for on-campus recruiting. The purpose of their visits was to advertise their “investment banking analyst program,” which was really a two-year stint of indentured servitude but, on the other hand, almost guaranteed admission to a top five American business school. Typically, the Wall Street firms would send employees back to their alma maters to hype the glamour and challenge of working on “the Street.”
I remember seeing recent grads, who previously had dressed like the rest of us on campus, transformed into veritable “Masters of the Universe,” clothed in smart Brooks Brothers suits, clad with French cuffs, and heeled in Johnson and Murphy wingtips. Wow, these guys seemed pretty impressive! Yet, the two things that I remember most from that time were the terms “bulge bracket firm” and the “Glass-Steagall Act,” both of which I had not the faintest idea what they meant.
The first term was pretty straightforward. “Bulge bracket firm” meant that an investment bank was one of the top five or so on Wall Street that commanded a lion’s share of underwriting activity of securities (back then just stocks and bonds) and enjoyed a diverse and deep-pocketed client base of institutions and individuals to sell securities. The other term was a little harder to understand. As the investment bankers explained to us, following the stock market crash of 1929, the Glass-Steagall Act mandated that financial institutions be split into their underlying businesses.
For example, the storied JP Morgan & Co became a pure commercial bank and had to divest is investment bank, which was renamed Morgan Stanley & Co. This distinction did not seem to be all that important to me at the time, but clearly I had no clue.
But a few weeks later, when the Morgan Guarantee Trust Company folks came to visit campus (JP Morgan merged with Guarantee Trust in 1959), and they appeared to lack the swagger of their investment banking counterparts. These commercial bankers seemed to be much more serious and very much annoyed that they could not engage in the more profitable activities of underwriting securities and providing merger and acquisition advice.
In the end, I managed to obtain a job at PaineWebber, which was not one of the bulge bracket firms of the day, but then went on to business school and afterward, managed to land a job with the trading powerhouse of Salomon Brothers in Tokyo. Japan was the latest quarry for the bulge bracket US firms and the Wall Street Journal was abuzz about the Japanese after they took a stake in Goldman Sachs, bought Pebble Beach and acquired Rockefeller Center. However, through regulation and cultural suasion the US firms at that time were shut out from the choice underwriting mandates of bringing NTT (Nihon Telegraph and Telephone) and other prestigious companies to market.
As a result many firms began to bolster their proprietary trading operations in the Japanese market, which was arguably much less efficient than its US counterpart. Over the 1990s Goldman Sachs, Morgan Stanley and Salomon Brothers all made hundreds of millions in proprietary trading profits in Japan, which gave rise to a trend of greater use of firm’s capital to take risk and develop new markets like equity, fixed income, commodity, and eventually credit derivatives.
By now it was the mid-1990s and Wall Street had already seen a number casualties of following the stock market crash of 1987 such as the demise of Drexel, Burnham, Lambert and its junk-bond king Michael Milken, along with EF Hutton’s distressed sale to Shearson Lehman,; Smith Barney’s sale to Primerica; General Electric’s purchase of Kidder Peabody; Credit Suisse’s acquisition of First Boston; and Salomon Brothers’ government bond trading scandal, which forced Warren Buffet to assume leadership of the company. In the case of Salomon, the firm never really regained its former top-tier status and in 1997 was acquired by Sandy Weill’s Traveler’s Group (an insurance company) and merged it with the old Smith Barney to form Salomon Smith Barney. By this time, Sandy Weill and his lieutenant, Jamie Dimon (now CEO of JP Morgan Chase), had begun to pressure the Clinton administration to repeal the Glass-Steagall Act so that Weill could create a banking, brokerage, foreign exchange, insurance, research, securities trading, and underwriting powerhouse, i.e. the so-called “universal bank.”
Even before overturning this legislation, in April of 1998 Weill and Citibank’s John Reed decided to transform Wall Street by announcing the merger of Traveller’s Group and Citibank to form what is now known as Citigroup. Although the cultures of the various firms were very different and there were innumerable integration issues, I remember the incredible power of the overall platform. For example, Citigroup soon acquired a stake in Nikko Securities in Japan and suddenly the old Salomon Brothers platform was winning mandates to sell shares of NTT, NTT Docomo, and other highly prestigious underwriting and advisory assignments. To me it seemed that the universal bank model did indeed make sense.
As we entered last summer, only five of the 12 largest independent Wall Street investment banks at the start of my career remained: Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley.
My eyeballs are bleeding, but I made it through to the end. Thanks for the useful history lesson. Perhaps Wall Street could take up selling Amway products.
My eyeballs are bleeding, indeed.
I don’t have the benefit of a “Business School” education, however even the dimmest of us should know you cannot continue to create wealth from thin air. This is called building a pyramid upside down. Sooner or later, someone has to actually make something tangible (widgets?), that can be sold to another someone in the market place looking for bigger and better widgets. It’s called supply and demand, which is the principal which drive capitalist economies.
The smoke and mirrors game has built a house of cards, nothing of substance there. Why are we surprised it is all falling apart now?
What I would like to see is some hard accountability. The Barney Frank’s, the Chris Dodd’s,,, and the Obama’s, who have profited from this scheme should be prosecuted for their criminal complicity. The rules and regulations were put into place to prevent a crisis exactly like this. To prevent another 1929′ish crash. The Democrat leadership starting with Jimmy Carter are up to their eyeballs in dirty money. Of course, all of this is now being trotted out to make G.W. Bush and all Republicans look like incompetent ninnies.
Where are all the Special Prosecutor’s with their armies of accountants to follow the money trail? I suspect at the end of every rainbow they would find a Democrat with his hands in the “Pot ‘o Gold” up to his elbows.
Bad people need to go to jail over this. Pure and simple.
You make it sound like there’s no room for brash new cowboys to ride in and replace the dying breed. But why must that be so? Trading and taking risk will be legal for Joe Citizen, I assume, and there must be some willing to jump into the game while there’s a vacuum. Never say never!
As far as this Main Street guy is concerned, if you make bet that goes bust, you suck it up. These guys got wealthy by not creating wealth but convincing others that what they did somehow was value-added. Tough, but now we get to stablize your gambling losses. Good riddance to bad rubbish.
As they say on the Street, pigs get fat and hogs get slaughtered.
I dunno,,, I got some money by working my a** off. Why should I stand still and get raped by a slick politician? Obama wants to “tax the rich” and give it to the poor. I already pay 35+%, plus self employment tax,,, is that not enough? Should I just roll over and give my business away?
Where do I sign up for welfare?
Recently learned what GSE and MBS are and now they just about dissolved in the thin air of high finance. I attended a shareholders meeting in April. The CEO said the bank wrote off 25m worth of MBS in GSE. Bank still profitable but dividend less and stock price remain low or stagnant but better than Wachovia and on par with Citi.
Thanks for the history lesson of your life in high finance.
They may have lost their swagger, but I’ll bet a bunch have their ill gotten swag.
John: That’s my concern. Theese SOB’s have their $45m pads in Manhatten and all we get is the lousy paper they shilled.
Sorry but the loss of the swagger is due to the all to obvious and painful revelation that for all their top 5 business school talent, the so called masters of the universe didn’t have the financial acumen of my grandmother with her 5th grade education. Grounded in a bit of reality, she understood that the ability to repay was an, or rather the, important factor in borrower.
Now we all have to pay for the fact that brilliant education from a top school only permits you to fool yourself in much grander ways.
If Wall Streeters want to swagger they should, well you know, not let their new and improved methods reveal them as such utter and complete fools when the lies start to collapse.